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TMI Blog2017 (4) TMI 566X X X X Extracts X X X X X X X X Extracts X X X X ..... ng income of Rs. 278,96,90,410/-. In the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee had claimed dividend income as well as certain interest income as exempt from tax. Claim of the assessee was that no expenditure was incurred for the amount invested in securities, shares and mutual funds which gave rise to such income. The Assessing Officer held that this was not acceptable. He applied Section 14A of the Act read with Rule 8D of Income-tax Rules, 1962. However, the disallowance was restricted to 2% of such income. Such disallowance came to Rs. 5,46,512/-. 5. Aggrieved, assessee moved in appeal before the CIT(Appeals). Argument of the assessee was that investments made were a part of its treasury operations. As per the assessee, the expenditure relating to Treasury Department was a necessary corollary to the banking operations. Claim of the assessee was that for the purpose of income- tax, entire portfolio of investments, including the tax-free securities, were treated as stock-in-trade. As per the assessee, since the investments were part of stock-in-trade, disallowance under Section 14A of the Act could not be made. However, Ld. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rding to Ld. A.R., there was no need for disallowance under Section 14A of the Act. 7. Per contra, Ld. Departmental Representative submitted that assessee was employing its Treasury Department for making investments and for taking decisions with regard to investments, which would yield in tax-free income. According to him, assessee had classified the shares under the head 'Investments' and not stock-in- trade in its balance sheet prepared in accordance with Banking Regulation Act. As per Ld. D.R., assessee was claiming such investments to be a part of stock-in-trade for the purpose of income- tax only. According to him, Section 14A of the Act clearly applied and the Ld. CIT(Appeals) correctly applied Rule 8D(2)(iii). 8. We have heard the rival contentions and perused the orders. Claim of the assessee is that shares/units held by it whether classified as "investment" or "stock-in-trade" in balance sheet, that has to be considered as stock-in-trade only for tax purpose, and Section 14A of the Act had no application. Circular No.18 dated 02.11.2015 of CBDT is reproduced hereunder:- "Subject: Interest from non-SLR securities of Banks - Reg. It has been brought to the notice of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supra), Hon'ble Punjab & Haryana High Court held as under:- "17. Under section 14A, an expenditure can be disallowed only if it is incurred by the assessee in relation to income exempt from tax. The dividend or interest from the assessee's stock-in-trade i.e. the securities was exempt from tax in view of sections 10(15)(iv)(h),(34) and (35). This was incidental to its business of banking. The business income on account of the assessee trading in the securities is assessable under the head "Profits and gains of business or profession". The expenditure incurred in relation to stock-in-trade arising as a result of investment in shares and debentures is deductible under sections 28 to 37." 9. Once holding of investment was considered incidental to the business of banking to the assessee, in our opinion, Section 14A of the Act could not have been applied. Para 26 of the very same judgment is also relevant and it is reproduced hereunder:- "26. What is of vital importance in the above judgment are the observations emphasized by us. Each of them expressly states that what is disallowed is expenditure incurred to "earn" exempt income. The words "in relation to" in section 14A must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by rural branches (as per Rule 6ABA) Rs. 52,75,51,880 TOTAL Rs. 76,84,72,154 13. However, Assessing Officer restricted the claim to Rs. 24,48,02,775/- being the actual provision made for bad and doubtful debts in its Profit & Loss account. Work out given by the Assessing Officer read as under:- (a) Aggregate average rural advances during the year 18,45,11,366/- (b) Deduction allowable on aggregate rural advances [@ 10% of (b)] 1,84,51,137/- (c) 7.5% of Gross Total Income before deduction under chapter VIA 26,39,18,480/- (d) Total of (b) and (a) 28,23,69,617/- (e) Provision made for Bad and doubtful debts by the Bank 24,48,02,775/- (f) Least of (d) or (e) allowable as deduction u/s 36(1)(viia) 24,48,02,775/- 14. Aggrieved, the assessee moved in appeal before the CIT(Appeals). Ld. CIT(Appeals) was of the opinion that the actual amount of deduction computed by the assessee as well as the Assessing Officer was very same. As per the Ld. CIT(Appeals), the ground was purely academic, since, according to him, for the impugned assessment year, the Assessing Officer though he followed a different method of computation, it did not effect the taxable in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m was for Rs. 16,25,20,366/- whereas only Rs. 13,22,62,398/- was allowable. 21. In its appeal before the CIT(Appeals), argument of the assessee was that it was eligible for a claim of Rs. 20,00,00,000/-. Assessing Officer had reduced the claim by not accepting the deduction of non-cash expenditure. As per the assessee, it had created a special reserve of Rs. 20 Crores and was eligible for deduction of Rs. 20 Crores under Section 36(1)(viii) of the Act. Ld. CIT(Appeals) was of the opinion that the enhanced claim could not be allowed in an appellate proceeding. As per Ld. CIT(Appeals), assessee had not placed before the Assessing Officer the re-worked computation of profits from eligible business. Relying on judgment of Apex Court in the case of Jute Corporation of India v. CIT (1991) 187 ITR 688, Ld. CIT(Appeals) held that only a bonafide ground, which could not be raised earlier for good reasons, could be considered in an appellate proceeding. Relying on the judgment of Apex Court in National Thermal Power Company Ltd. v. CIT (229 ITR 383), Ld. CIT(Appeals) rejected the claim for enhanced deduction under Section 36(1)(viii) of the Act. 22. Now before us, the Ld. AR for the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal of the Revenue. 27. Revenue has raised 15 grounds. Ground No.1 and 15 are general needing no adjudication. 28. Vide its grounds numbered 2 to 5, grievance raised by the Revenue is on an addition made by the Assessing Officer for stale draft account which was deleted by the Ld. CIT(Appeals). 29. Facts apropos are that balance sheet of the assessee for relevant previous year disclosed outstanding liability of Rs. 8,82,15,584/- towards stale draft account. The above sum represented unclaimed money on demand drafts, which were issued more than three years earlier. As per the A.O., legally, such money which remained unclaimed for more than three years could no more be claimed by the creditor, since limitation period kicked in. He treated the sum as income of the assessee, but, restricted that addition to Rs. 2,68,97,833/- being the accretion relatable to the relevant previous year. Reliance was placed on the judgment of Hon'ble Apex Court in the case of CIT v. T.V. Sundaram Iyengar & Sons (222 ITR 344). 30. Challenging the above, assessee moved in appeal before the CIT(Appeals). As per the assessee, consideration for issuing bank demand draft, etc. were recovered by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dating the banks to transfer such unclaimed amounts to "Depositor Education and Awareness Fund Scheme". In our opinion, in such circumstances, Ld. CIT(Appeals) was justified in taking the view that the amount cannot be construed as income of the assessee. We do not find any reason to interfere in the order of the CIT(Appeals). 34. Ground Nos. 2 to 5 of the Revenue stand dismissed. 35. Vide its ground Nos.6 to 10, grievance raised by the Revenue is that the CIT(Appeals) deleted the disallowance for ex-gratia payment made by the assessee. 36. Facts apropos are that assessee had made ex-gratia payment of Rs. 8,12,68,024/- to its employees who were not covered under Payment of Bonus Act, 1965. Ld. A.O. held that it was nothing but appropriation of profits by senior employees who had income in excess of Rs. 10,000/- per month. As per Ld. A.O., there was no co- relation between the ex-gratia payment and the quality of work of these employees. Though assessee, claimed such payments to have been made for business expediency and to ensure smooth working and better relationship with its employees, this was not accepted by the Ld. A.O. According to him, such ex-gratia payment was not allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employees alone were eligible for bonus under Payment of Bonus Act, the assessee, in our opinion, was justified in taking a business decision as to how to treat those employees who were not covered by such enactment. Assessee cannot be faulted for making such payment so as to ensure smooth and better relationship with its employees. In any case, we find Hon'ble jurisdictional High Court in the case of Kumaran Mills Ltd. (supra) had held that ex-gratia payments could not be disallowed if it was found to be commercial expedient. Therefore, in our opinion, Ld. CIT(Appeals) was justified in disallowing this issue. 41. Ground Nos. 6 to 10 are dismissed. 42. Vide its ground No.11, Revenue is aggrieved on disallowance of entertainment expenses made by the Assessing Officer being deleted by the Ld. CIT(Appeals). 43. Assessee had claimed a deduction of Rs. 56,45,550/- as entertainment expenditure. It was clarified by the assessee that the amount has been spent in supplying of tea, coffee, etc. to the customers. Contention was that it was incurred wholly and exclusively for the purpose of its business. As per the assessee, though Section 37(2) was removed from the Act, it did not mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the extent to which interest had to be recognized. According to him, if no interest was being paid by a borrower for six months, then such sticky accounts had to be treated as bad and doubtful debts or in other words, Non-Performing Asset. Ld. A.O. noted that RBI had lowered the limit for recognizing an account as NPA from 180 days to 90 days. However, as per the Ld. A.O., there was no such change either in Section 43D or Rule 6EA. As per the A.O., interest was required to be offered for taxation on accrual basis on all NPAs which were more than 90 days old but were less than 180 days old as well. Ld. A.O. demarcated the additions to the list of NPAs made in the last quarter of relevant previous year since these fell under the category of accounts which were more than 90 days old but less than 180 days. He computed an accrued interest of Rs. 74,60,000/- on such accounts having balance of Rs. 59.68 Crores, applying average interest rate of 10% per annum. An addition of Rs. 74,60,000/- was made. 51. In its appeal before the CIT(Appeals), argument of the assessee was that there were various types of categories mentioned in Rule 6EA, which were to be treated as bad and doubtful de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with 90 days. The addition, as per the Ld. D.R., was correctly worked by the A.O. 54. Per contra, the Ld. AR strongly supporting the order of the CIT(Appeals), submitted that this issue had come up before Kolkata Bench of this Tribunal in the case of DCIT v. The Royal Bank of Scotland N.V. 2016(11) TMI 665 and it was held that interest on loans should not automatically be recognized on accrual basis and this had to be in line with RBI prudential norms for income recognition. Reliance was also placed on the judgment of Delhi High Court in the case of CIT v. Vasisth Chay Vyapar Ltd. (2011) 330 ITR 440. 55. We have heard rival contentions and perused the orders. A.O. had refused to consider accounts on which principal and interest were outstanding for a period of more than 90 days but less than 180 days, as sticky. According to him, interest on such advances had to be considered on the basis of accrual. Reliance was placed on Section 43D of the Act. Section 43D clause (a) and (b) are reproduced hereunder:- SPECIAL PROVISION IN CASE OF INCOME OF PUBLIC FINANCIAL INSTITUTIONS, PUBLIC COMPANIES, ETC. 43D. Notwithstanding anything to the contrary contained in any other provision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business as a result of the slow or negligible turnover; 2. frequent requests for over-drawing or issue of cheques without ensuring availability of funds in the account; 3. bills purchased or discounted remain overdue for 3 months and more or the recovery of such bills from the borrower poses difficulties; 4. in the case of term loans, instalments which are overdue for 6 months or more; 5. unexplained delays by the borrower in submission of quarterly or half-yearly operating statements or stock statements or balance-sheets and other information required by the bank; 6. slow movement or stagnation of stocks observed during inspections; 7. low or negligible level of activity observed during inspections or suspension or closure of the business; 8. persistent delay in compliance with vital requirements like execution of documents, producing additional security when required or non-compliance with such requirements; 9. diversion of funds to sister units or acquiring capital assets not relevant to the business or large personal withdrawals by the borrowers; 10. intentional non-adherence to project schedules leading to substantial cost escalations and requirement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome recognition. This fine distinction has been duly considered in the decision of the Hon'ble' Delhi High Court in the case of CIT v. Vasisth Chay Vyapar Ltd. supra. When the account becoming NPA is not disputed by the revenue, the recognition of income is to be done only on receipt basis which is in consonance with the real income theory. In these circumstances respectfully following the decisions of Hon'ble Delhi High Court in 330 ITR 440 and various other decisions referred to supra, we hold that the interest income on NPA accounts should not be assessed on mercantile basis and the same is to be taxed only on receipt basis. Accordingly, the grounds raised by the assessee are allowed." 56. Therefore, in our opinion, CIT(Appeals) was justified in deleting the addition made on interest on NPAs. We do not find any reason to interfere with the order of the CIT(Appeals). 57. Ground Nos.12 to 14 of the Revenue stands dismissed. 58. Now, we take up the appeals of the assessee and Revenue for assessment year 2011-12. 59. Ground No.2 taken by the assessee for this assessment year is similar to the ground raised by it in its appeal for assessment year 2010-11. 60. We have a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous year, on dates falling between 22.05.2010 and 18.03.2011. The Ld. CIT(Appeals) was of the opinion that the assessee having disbursed Rs. 17,66,43,818/-, the claim was allowable. 66. Now before us, the Ld. Departmental Representative submitted that the CIT(Appeals) had believed the claim of the assessee regarding actual disbursement of wage arrears without giving any opportunity to the Assessing Officer to verify the facts. 67. Per contra, the Ld. AR strongly supported the order of the CIT(Appeals). 68. We have heard the rival contentions and perused the orders. The CIT(Appeals) had allowed the claim of disbursement of Rs. 17,66,43,818/- on actual payment basis. The provision made by the assessee for such wage arrears in earlier year was disallowed. Against such disallowance, assessee has taken no grounds before this Tribunal in its appeal for assessment year 2010-11. Accordingly, the claim of the assessee that it had to be allowed on actual payment basis was, in our opinion, rightly allowed by the CIT(Appeals). However, whether the assessee had actually disbursed Rs. 17,66,43,818/- requires to be verified by the A.O. For this limited purpose, the matter is remitted back to t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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