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TMI Blog2013 (5) TMI 885X X X X Extracts X X X X X X X X Extracts X X X X ..... fore us. 4. From the record, we found that Assessing Officer has disallowed broken period of interest in the assessment year 2007-08, after having the following observations :- 6.1 The assessee has shown payment of broken period interest on purchase of securities of ₹ 163,40,68,939/-. The assessee was asked to furnish the details of purchases of securities under capital account and explanation on allow ability of interest on purchase of these securities. The assessee vide its reply dated 27/01/2009 and 03/03/2009 submitted that the bank is admittedly a dealer in securities and the securities are held as stock in trade right from the first assessment of the bank. In the past assessment interest on purchase of securities as business expenditure and interest received on sale of securities is held as business income. The departmental view in applying the decision of Hon'ble Supreme Court in Vijaya Bank Ltd vs CIT (Addl.) 187 ITR 541 (SC) is baseless. The true facts of the case of Vijaya Bank Ltd are mentioned on page 615/616 of 258 ITR in the case of American Express International Banking vs. CIT (Bombay), where at the Hon'ble Bombay High Court has also distinguis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ruing on those securities. Subsequently,. when these securities yielded income by way of interest, such income attracted section 18. A claim for deduction can be sustained only when the assessee is ill position to show that any reasonable expenditure had been incurred for the purpose of realising the interest on securities, The amounts claimed by the assessee as deduction are not shown to have been expended for 'the purpose of realising the interest and are, therefore, not allowable as deductible expenditure. 6.4 Considering the decision of the Hon'ble Supreme Court supra and the CBDT Instruction No.17 of 2008 dated 26.11.2008, the broken period interest amounting to ₹ 163,40,68,939/- is being disallowed and added to the income of the assessee. 5. By the impugned order, the ld. CIT(A) had deleted the addition after having the following observations :- 4.3 No ground no. 4 alongwith its sub ground directed against Broken Period Interest at ₹ 163,40,68,939/- is taken up for consideration. This issue has been a recurring issue in the case of appellant bank and the appellant has also included in its compilation, directions issued u/s 144A dated 23.03.200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the receipt of interest of these securities were offered and assessed as business income, there is no reason to disallow the same business expenditure. Further, similar issue has been decided even in earlier years by the ld.CIT(A) in favour of the assessee and revenue was not in appeal before us. 8. In view of the above ground taken by the Revenue in both the years are dismissed. 9. In the assessment year 2007-08, the assessee is aggrieved for the disallowance of contribution to Retired Employees Medical Benefit Scheme. The issue is squarely covered by the decision of I.T.A.T. in assessee s own case in the assessment year 2006-07, order dated 8th April, 2013, wherein after having the following discussion, the Assessing Officer was directed to allow the contribution so made for Retired Employees Medical Benefit Scheme :- 3. The brief controversy relates to disallowance of expenditure incurred on account of contribution to Retired employees Medical Benefit Scheme. Disallowance was made u/s 37(1)of Income-tax Act, 1961. Similar issue has been considered in the case of State Bank of Travancore in I.T.A.No. 861/Coch/2005 order dated 8.8.2007, wherein following was the obse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a specific bar for allowing the deduction u/s 40A(9) of the Act. 19. Per contra, the learned chartered accountant for the assessee submitted that the Associate Bank Officers Association has raised some demands on the management of the SBI and its subsidiary banks. One of the demands was formulation of medical scheme for the retired officers. He further submitted that for the settlement of the demands of the Associate Bank Officers Association, a meeting of the management of the associate banks and the office bearers of the association was held at Simla on 23rd June, 1997. In the said meeting, negotiations were held in respect of the different demands of the association and it was reduced into writing. The learned chartered accountant referred to the minutes of the bipartite meeting held on 23rd June, 1997 copy of which is placed on record. He submitted that as part of settlement of the demands with the bank officers association, it was agreed in principle for implementation of the scheme and as a part of settlement between the management of the SBI and the Associate Banks Officers Association/Union, it was decided to contribute ₹ 50 lakhs received for formulation of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in the case of Rassi Cement Ltd. (supra), the said decision is distinguishable on facts. The learned chartered accountant supported the order of the CIT(A). 21. We have heard the rival submissions of the parties. We have also given thoughtful consideration to the facts pertaining to this issue as per record available before us. For a better understanding of the facts in respect of the contribution made by the assessee bank to the medical scheme, we have directed the assessee bank to file the relevant documents. The learned chartered accountant of the Act (sic-assessee) has filed the copies of the following documents: Sr. No. Date Particulars 1. 15-91997 Letter from SBI to the assessee bank informing the minutes of the bipartite meeting held with Associate Bank Officers Association on 23-61997 at Simla 2. 23.6.1997 Copy of the minutes of the bipartite meeting held between SBI and Bank Officers Association 3. 1.11.1999 Copy of Retired Employees Medical Scheme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discretionary trusts with absolute discretion to the trustees to utilize the trust property in such manner as they may think fit for the benefit of the employees without any scheme or safeguards for the proper disbursement of these funds. Investment of trust funds has also been left to the complete discretion of the trustees. Such trusts are, therefore, intended to be used as a vehicle for tax avoidance by claiming deduction in respect of such contributions, which may even flow back to the employer in the form of deposits or investment in shares, etc. 16.2 With a view to discouraging creation of such trusts, funds, companies, AOP, societies, etc., the Finance Act has provided that no deduction shall be allowed in the computation of taxable profits in respect of any sums paid by the assessee as an employer towards the setting up or formation of or as contribution to any fund, trust, company, AOP, BOI, or society or any other institution for any purpose, except where such sum is paid or contributed (Within the limits laid down under the relevant provisions) to a recognized provident fund or an approved gratuity fund or an approved superannuation fund or for the purposes of and to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reads as under : 40A(9). No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards the setting up or formation of, or as contribution to, any fund, trust, company, AOP, BOI, society registered under the Societies Registration Act, 1860 (21 of 1860), or other institution for any purpose, except where such sum is so paid, for the purposes and to the extent provided by or under c1. (iv) or c1. (v) of sub-so (1) of s. 36, or as required by or under any other law for the time being in force. On a bare reading of the said provision, it is very clear that any sum paid by the assessee as an employer towards setting up or formation of or as contribution to any fund, trust, company, AOP, BOI, etc. except to the extent provided by or under cls. (iv) and (v) of S. 36( 1) or required by or under any other law for the time being in force is not an allowable expenditure. 24. Sec. 40A(9) had come for consideration before the Hon'ble High Court of Andhra Pradesh in the case of Raasi Cement Ltd. (supra). In the said case, the company which was engaged in the manufacturing of Portland cement had made the necessary contribution to Raasi Cements Employee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nabove. The basic intention of the legislature for insertion of sub-so (9) to s. 40A is for discouraging the practice of creation of camouflage trust funds, etc. ostensibly for the welfare of the employees and transferring huge sums to such trusts by way of contribution. Some of the trusts are to be created or set up as a discretionary trust with absolute discretion to the trustees to utilize the trust properties in such manner without any proper scheme or safeguards. Moreover, the investment of the trust corpus was also left to the complete discretion of the trustees and it was seen that many a times, the contributions made by the employer used to flow back in the form of deposit or investment in the shares, etc. and to check said modus operandi on the part of the dishonest assessees using it as an effective device for avoiding the legitimate tax, sub-so (9) was inserted. At the same time, to avoid hardships in the case where such trust, funds, etc. had been bona fide set up wholly and exclusively for the welfare of the employees more particularly prior to 1st April, 1984, sub-so (10) was also inserted to S. 40A. In our opinion, the provisions of S. 40A(9) should not make any harm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee has paid additional gratuity to Shri Sunder Lal ₹ 1.17 lakhs. The Assessing Officer observed that conditions prescribed u/s 40A(7) has not been fulfilled as the contribution by the Bank was not made to approved Gratuity fund. It is not in dispute that in all the earlier years, premium was paid by the assessee to LIC was allowed by the Assessing Officer. It is also not in dispute that such contribution was not only provision but there was actual payment to the LIC. I.T.A.T., Hyderabad Bench in the case of International Ore and Fertilizers (India) Private Limited, reported at 3 ITD (Hyd) 593, has dealt with similar issue and allowed the same u/s 37(1), notwithstanding, the fact that gratuity fund established by the assessee was not recognized u/s 40A(7) of the Income-tax Act, 1961. In the decision, the Hon'ble Tribunal held that 5. We have carefully considered the records as well as the arguments. The assessee pays premium on what is known as 'Master Policy' issued by the LIC undertaking to honor the obligations undertaken in the trust deed and the rules of the International Ore and Fertilizer (India) (P) Ltd., Secunderabad, Employees' Group Gratui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty to meet the obligation. The trust deed becomes part of the policy merely for the purposes of defining the extent of obligation undertaken by the LIC. Such payment is clearly a business deduction u/s 37. As pointed out, what is contemplated u/s 40A(7)(a) is that there should be no deduction allowed 'in respect of any provision (whether called as such or by any other name) , if such a provision is made, in order that it may still be eligible. It has to satisfy the conditions mentioned u/s 40A(7)(a) which prescribes recognition as one P.F. the primary conditions. A payment due and actually paid under a policy issued by the LIC can not, by any stretch of imagination, be described to be a provision even if the widest meaning were given to the word 'provision'. The Supreme Court had occasion to consider the meaning of the word 'provision' in contradiction to the word 'reserve' in the surtax case, in Vazir-Tobacco Co. Ltd. Vis CIT (1981) 25 CTR (SC) 186 : (1981) 132 ITR 559 (SC). In the absence of a definition, in the statute, it held that the sense of the meaning should be the one that is attributed to it by men of business, trade and commerce. The question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an allowable deduction u/s 40A(9) of the Incometax Act, 1961. The explanation furnished by the assessee in support of its contention was not accepted on the ground that the trust was not registered u/s 12A and providing of medical benefits to the Retired Employees is not the business of the assessee. Therefore, assessee s claim for the deduction u/s 37(1) that amount has been spent for business purposes was not allowed. Against the above disallowance, the assessee is in further appeal before us. As the issue is squarely covered by the decision of Coordinate Bench in the case of State Bank of Travancore, as stated above, we direct the Assessing Officer to allow assessee s claim of ₹ 50 lakhs towards contribution to retired employees benefit scheme u/s 37(1) of the Incometax Act, 1961. 6. In the result, the appeal of the assessee is allowed in terms indicated hereinabove. 10. As the facts and circumstances are same, respectfully following the decision of the Tribunal in assessee s own case, we allow the ground raised by the assessee. 11. The assessee also aggrieved for disallowance of ₹ 2 crores, which was contributed by the assessee as per direction of Apex Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies 94,92,792.25 b. Dividend on Shares 1,50,29,860.80 2,45,22,653.05 3.2 By reply dated 22.12.2010 the assessee submitted as under:- The assessee Bank submitted that the main business activity of the Bank is borrowing and lending on interest. Therefore, interest paid by bank is for business purposes and not for the investment purpose. Accordingly, the calculation of disallowances as per rule 8D is enclosed as annexure-1. However as discussed during the assessment proceedings, calculation of rule 8D after considering interest paid, is enclosed as annexure 2, under protest. Working as per Rule 8D (Under protest) S.No. Particulars Amount 2(i) Expenditure Directly attributable Nil 2 (ii) A Interest Paid (A) 16,538,390,310 Investment on First Day 385,606,465 Investment on Last Day 374,193,170 B Average Investment (B) 379,899,818 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relation to section 14A is to be encompass not only the direct but also the indirect expenditure which has any relation to the exempt income. 3.4 This issue has also been examined by the ITAT Delhi Special Bench in the case of Chem Invest Ltd. also and the Hon'ble Bench held as under: Cheminvest Ltd.Vs. ITO (ITAT Delhi Special Bench) The assessee gas borrowed funds for the purpose of investing in shares. The shares were held for capital purposes as well as for investment purpose. In A.Y. 2004-05, the assessee did not received any dividend on the said shares and so there was no exempt income. The Special Bench had to consider whether the interest expenditure incurred by the assessee on the said borrowing used for the purposes of investment in shares could be disallowed u/s 14A even though the assessee had not received any tax free income in respect of the said shares. HELD, deciding against the assessee. 3.5 In Rajendra Prasad Moody 115 ITR 522 the Supreme Court held that interest on monies borrowed for purchase of shares was allowable as a deduction u/s 57(iii) irrespective of whether or not there is any yield of dividend to the assessee to the assessee. It was held th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The appellant Bank submitted working under Rule 8-D under protest whereby the amount disallowable was worked out as disallowed by AO . The main contention of the appellant bank remained before AO that the business activity of the bank was borrowing and lending on interest and thus interest paid by bank was also for business purpose and not for investment purpose. The AO has extensively dealt with the objections of the appellant in para 3.3 to 3.7 of the assessment order and rejected the contentions advanced by the appellant, drawing support from judicial decision from Special Bench (ITAT ) Hon'ble Supreme Court as noted in assessment order. 4.2.1 In course of appeal proceedings, the appellant bank contended that according to their view only an amount of ₹ 18,99,499/- being cost attributable to earning tax free interest income being .05% of investment only was required to be added and reliance was placed on the Hon'ble ITAT Cochin Bench in the case of State Bank of Travancore vs. ACIT reported in 318 ITR (AT) (Cochin Bench). 4.2.2 The various issues pertaining to disallowance u/s 14A were examined in detail keeping in view of legislative history, legislative in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer was not justified in fully disallowing the claim of expenditure u/s 14A. 19. We have considered the rival submissions and have gone through the orders of the authorities below. From the record, we found that during the course of assessment proceedings, the assessee has furnished calculation of disallowance as per rule 8D, which has been reproduced by the Assessing Officer in his order at para 3.2. Accordingly, the Assessing Officer has made addition as per the calculation given by the assessee itself. In view of the detailed finding given by the Assessing Officer and CIT(A) and keeping in view the decision of Bombay High Court in the case of Godrej Boyce Mfg. Co.Ltd. (supra), the disallowance of interest as worked out by the assessee is correct in so far as expenditure was incurred in earning the exempt income. However, during the course of hearing before us, it was argued by the ld. Authorized Representative that in addition to the exempt income assessee was earning interest and which has been offered as business income u/s 28 and also profit on sale of such investment. As per our considered view, disallowance is to be made in respect of expenditure which is incu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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