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TMI Blog2024 (11) TMI 1158X X X X Extracts X X X X X X X X Extracts X X X X ..... s was exchanged for another asset for Rs. 4.55 Crores and hence the loss of Rs. 3.29 Crores, which is nothing but a business loss and deserves to be allowed. The reasons for denial of the claim have been considered while deciding Ground Nos. 1 to 5 (supra) and for our detailed reasoning therein, this claim of loss is also allowed. Ground Nos. 6 to 8 are accordingly allowed. Disallowance u/s 14A r.w.r. 8D - shares were held as stock-in-trade - assessee claimed exempt income on which suo moto disallowance u/s 14 of the Act was computed by applying Rule 8D - HELD THAT:- The assessee while computing the income at Clause 8 of the notes to the computation of total income has made it abundantly clear that though the assessee has disallowed u/s 14A r.w.r. 8D out of abundant caution, the bank reserves its right to claim that provision of Rule 8D should not be attracted in their case. This was in line with the judicial decisions prevailing at the time of filing of the return of income. However, now that the Hon ble Supreme Court in Maxopp Investment Ltd. [ 2018 (3) TMI 805 - SUPREME COURT ] has settled the dispute, the assessee was not required to disallow any expenditure for earning the exe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee has raised the following grounds of appeal:- 1. The Commissioner of Income-tax (Appeals) - 56, Mumbai [herein after referred to as the CIT(A) ] erred in upholding the action of the Assessing officer ( AO ) in not allowing the deduction for bad debts written off of Rs. 427,46,46,000 net of sale consideration of the non-performing asset (NPA), under section 36(i)(vii) of the Income tax Act, 1961 ( the Act ). The Appellants submit that the bad debts written off of Rs. 427,46,46,000 ought to be allowed as deduction under section 36(1)(vii) of the Act read with section 36(2) of the Act. 2. The CIT(A) erred in applying the decision of the Supreme Court in the case of Southern Technologies (2010) 187 Taxman 346 (SC) without appreciating that the decision is not applicable to the facts of the case. 3. The CIT(A) erred in not following the binding decision of the Mumbai Tribunal in the case of Bank of India (ITA No. 2833/Mum/2015) dated 08 November 2017 4. Without prejudice to ground nos. (1) to (3) above, the CIT(A) erred in upholding the action of the AO in not allowing deduction of Rs. 427,46,46,000 under section 37(1) of the Act. 5. Without prejudice to ground nos. (1) to (4) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erve Bank of India (RBI), which includes corporate and institutional banking, retail banking, trade finance, transactional and treasury solutions. During the year under consideration, the assessee bank was operating from twelve branches in India. The bank was involved in wholesale lending (both loans and trade based) to its corporate customers. It also offered treasury solutions to its clients. The assessee was not involved in credit card services, auto loans, portfolio management and financial planning for clients. 7.1. While scrutinising the return of income, the AO noticed that the assessee has claimed a sum of Rs. 8,02,67,53,014/- as bad debt written off excess over opening provisions u/s 36(1)(viia) of the Act. The assessee was requested to explain and justify its claim for bad debts. The assessee furnished the following breakup of bad debts claimed in the computation of income:- Sl No. Particulars Amount in INR 000 1 Write Off of Bad Debts 43,66,698 2 Loss on Sale of NPA 42,74,646 3 Loss on conversion of Debt 32,868 4 Less: Adjsuted from Opening Balance of 36(1)(via) Proision 6,47,460 5 Net Bad Debt Claimed 80,26,752 7.2. After considering the aforementioned chart, the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relying upon the decision of the Hon ble Supreme Court in the case of Southern Technologies Limited vs. JCIT 320 ITR 577 (SC), the AO came to the conclusion that the claim of the assessee for bad debt on account of loss on sale of NPA are not bad debt written off as irrecoverable in the accounts and not allowable u/s 36(1)(vii) of the Act. 8. The assessee carried the matter before the ld. CIT(A) but without any success. 9. Before us, the ld. Counsel for the assessee reiterated the claim of write off as bad debt. It is the say of the ld. Counsel for the assessee that both the lower authorities have grossly erred in placing heavy reliance on the decision of the Hon ble Supreme Court in the case of Southern Technologies Limited (supra), which is totally on different context and, therefore, not applicable on the facts of the case in hand. Per contra, the ld. D/R strongly supported the findings of the ld. CIT(A). 10. We have given a thoughtful consideration to the orders of the authorities below. The undisputed fact is that Tecpro Systems Ltd. was a customer of the assessee bank since 2009 and started defaulting in servicing of the outstanding loans since 2014 and due to persistent defa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not allowable under section 36(1)(vii) of the Income-tax Act. The appellant claimed that the Provision for NPA , however, represented loss in the value of assets and was, therefore, allowable under section 37(1) of the Income-tax Act. This claim of the appellant was dismissed on the ground that the provisions of section 36(1)(vii) of the Income-tax Act could not be by-passed. ******************************************************************************** 25. Prior to 1-4-1989, the law, as it then stood, took the view that even in cases in which the assessee(s) makes only a provision in its accounts for bad debts and interest thereon and even though the amount is not actually written off by debiting the P L Account of the assessee and crediting the amount to the account of the debtor, assessee was still entitled to deduction under section 36(1)(vii). See CIT v. Jwala Prasad Tewari [1953] 24 ITR 537 (Bom.) and Vithaldas H. Dhanjibhai Bardanwala's case (supra ). Such state of law prevailed up to and including assessment year 1988-89. However, by insertion (with effect from 1-4-1989) of a new Explanation in section 36(1)(vii), it has been clarified that any bad debt written off a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax Act. One more aspect needs to be mentioned. Section 36(1)(vii) is subject to sub-section (2) of section 36. The condition incorporated in section 36 of the Income-tax Act, which was not there in section 10(2)(xi) of the 1922 Act, is that the amount of debt should have been taken into account in computing the income of the assessee in the previous year. Under the Income-tax Act, the emphasis is not on the assessee being the creditor but taking into account of the debt in computing the business income. [See section 36(2)]. In CIT v. T. Veerabhadra Rao, K. Koteswara Rao Co. [1985] 155 ITR 152 at 157 (SC), it was found that the debt was taken into account in the income of the assessee for the assessment year 1963-64 when the interest accruing thereon was taxed in the hands of the assessee. The said interest was taxed as income as it represented accretion accruing during the earlier year on the moneys owed to the assessee by the debtor. It was held that transaction constituted the debt which was taken into account in computing the income of the assessee of the previous years. ******************************************************************************** 40. Section 36(1)(vii ) pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xt in respect of the provision for bad and doubtful debts whereas the claim of the assessee is actually write off of bad debts and not provision and as mentioned elsewhere the provisions of bad and doubtful debts have been written back in the financial statement of the assessee. The relevant findings of the Hon ble Madras High Court read as under:- 4. Even though the assessee has raised a ground to the effect that the debts have been incurred in the course of business and the purpose for which the finance was used by the other party is not relevant for allowing the deduction of debts written off and hence, section 36(1)(vii) would apply, learned counsel appearing for the assessee has fairly submitted that the assessee is not entitled to deduction, in view of the Explanation to section 36(1)(vii) which says that the provision for bad and doubtful debts made in the accounts of the assessee is not an allowable deduction. 5. Further, the Commissioner (Appeals), on the facts of the case, found that merely because the Reserve Bank of India has directed the assessee to provide for nonperforming assets, that direction cannot override the mandatory provisions of the Income-tax Act contained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss on conversion of debt to equity share u/s 36(1)(vii) of the Act and in alternative claimed it as a loss incurred in the ordinary course of business u/s 37(1) / u/s 28 of the Act. Per contra the ld. D/R strongly supported the findings of the ld. CIT(A) and read the operative part. 17. We have given a thoughtful consideration to the orders of the authorities below. The claim of loss can be understood from the following chart:- A Loan Outstanding 7.84 B No. of Shares issued on 30 December 2014 30,15,380 C Value of Shares at the Preferential issue Price @ INR 26 each 7.84 D Date of Receipt of Shares by Bank in Demat Account 06th Feb, 2015 E Closing Price of Shares on 06th feb 2015 on NSE INR 15.1 each (Refer Annexure to this note) 4.55 F Loss on Conversion of Loan ('C)-(E) 3.29 17.1. On perusal of the aforementioned chart in a very simple analysis, the assessee had assets of Rs. 7.84 Crores (being loan outstanding). The assessee was assigned assets, market value of which was Rs. 4.55 Crores (being price of shares on NSE on the date of credit in the D-Mat account). Thus, the assets of Rs. 7.84 Crores was exchanged for another asset for Rs. 4.55 Crores and hence the loss of Rs. 3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e arises from such investments is attributable to business of banking falling under the head profits and gains of business and profession . On that basis, the Circular contains the decision of the Board that no appeal would be filed on this ground by the officers of the Department and if the appeals are already filed, they should be withdrawn. A reading of this circular would make it clear that the issue was as to whether income by way of interest on securities shall be chargeable to income tax under the head income from other sources or it is to fall under the head profits and gains of business and profession . The Board, going by the decision of this Court in Nawanshahar case, clarified that it has to be treated as income falling under the head profits and gains of business and profession . The Board also went to the extent of saying that this would not be limited only to co-operative societies/Banks claiming deduction under Section 80P(2)(a)(i) of the Act but would also be applicable to all banks/commercial banks, to which Banking Regulation Act, 1949 applies. 38) From this, Punjab and Haryana High Court pointed out that this circular carves out a distinction between stock-in-tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court. It is to be kept in mind that in those cases where shares are held as stock-in-trade , it becomes a business activity of the assessee to deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is, therefore, different from the case like Maxopp Investment Ltd. where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stock-in-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes up in o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the following key observations were made by Justice Sikri: 50. It is to be kept in mind that in those cases where shares are held as stock-in-trade , it becomes a business activity of the assessee to deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is, therefore, different from the case like Maxopp Investment Ltd. [Maxopp Investment Ltd. v. CIT, 2011 SCC OnLine Del 4855 : (2012) 347 ITR 272] where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stock- i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd.12 wherein this Court had held that investments made by a banking concern is part of their banking business. Hence the income earned through such investments would fall under the head Profits Gains of business. The Punjab and Haryana High Court, in the case of Pr. CIT, vs. State Bank of Patiala13 while adverting to the CBDT Circular, concluded correctly that shares and securities held by a bank are stock in trade, and all income received on such shares and securities must be considered to be business income. That is why Section 14A would not be attracted to such income. 23. The Hon ble High Court of Delhi in the case of PCIT vs. Punjab National Bank reported in [2022] 140 taxmann.com 131 (Delhi), had the occasion to consider a similar grievance and held as follows:- 19. The Supreme Court in this judgment upheld the decision of the High Court of Punjab and Haryana arising under section 14A of the Act with respect to an assessee bank. It further held that when the shares were held as stock-in-trade and not as investment particularly by banks, the main purpose was to trade in those shares and earn profits there from and therefore section 14A of the Act was not attracted and the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es below, we are of the considered view that this issue needs a fresh look qua the decision taken in AY 2013-14 by the appellate authorities. Therefore, this issue is restored to the file of the AO and the AO is directed to decide it afresh after considering the facts of AY 2013-14. 29. Ground No. 10 is allowed for statistical purposes. 30. Ground No. 11 is not pressed and, therefore, is dismissed as not pressed. 31. Now, we take up the revenue s appeal in ITA No. 4722/Mum/2023. 31.1. This appeal is barred by limitation by 47 days. Since no objection has been raised by the ld. Counsel for the assessee, the delay is condoned. 32. The first ground relates to the deletion of disallowance of Rs. 8,83,41,015/-. 32.1. The underlying facts in the issue show that during the course of the assessment proceedings, the assessee was asked to explain and justify the expenses claimed in the profit and loss account. The assessee was specifically asked to justify the payment of professional fees amounting to Rs. 8,83,41,015/- made to Mckinsey Co. Inc.. In its submissions, the assessee explained that the fees were paid for services connected with developing India 2.0 plan for the Bank with focus on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) and strongly contended that the fees were paid for services connected with developing India 2.0 plan for the Bank with focus on key areas like Macro and Regulatory Context, Potential partnerships and inorganic play. It was explained that India 2.0 plan was about understanding the current thinking of the Bank and detailing plan across business mix distribution strategy, digital approach to inorganic and PSL + financial inclusion and economic model. It was strongly contended that the end objective of the plan was to have an overall business plan and a high level implementation roadmap. It was submitted that consultancy services used by the Bank in its business right away once services were rendered and such tangible or intangible capital asset but for conducting the business of banking better and more efficiently, not in future but in present. 34.1. Considering the facts and the submissions, the ld. CIT(A) was convinced that the said expenditure was of revenue in nature and allowed the same. 35. Before us, the ld. D/R strongly supported the findings of the AO and read the operative part. Per contra, the ld. Counsel for the assessee strongly supported the findings of the ld. CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a, commercial sence and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. But even if this test were applied in the present case, it does not yield a conclusion in favour of the revenue. Here, by purchase of loom hours, no new asset has been created. There is no addition to or expansion of the profit-making appar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fixed capital of the assessee. The permanent structure, of which the income is to be the produce or fruit, remains the same; it is not enlarged. We are not sure whether loom hours can be regarded as part of circulating capital like labour, raw material, power, etc., but it is clear beyond doubt that they are not part of fixed capital and hence even the application of this test does not compel the conclusion that the payment for purchase of loom hours was in the nature of capital expenditure. 10. The revenue, however, contended that by purchase of loom hours the assessee acquired a right to produce more than what it otherwise would have been entitled to do and this right to produce additional quantity of goods constituted addition to or augmentation of its profit-making structure. The assessee acquired the right to produce a larger quantity of goods and to earn more income and this, according to the revenue, amounted to acquisition of a source of profit or income which though intangible was, nevertheless, a source or spinner of income and the amount spent on purchase of this source of profit or income, therefore, represented expenditure of capital nature. Now, it is true that if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of revenue expenditure, even though the effect of acquiring additional power would be to augment the productivity of the profit-making structure. On the same analogy, payment made for purchase of loom hours which would enable the assessee to operate the profit-making structure for a longer number of hours than those permitted under the working time agreement would also be part of the cost of performing the income-earning operations and hence revenue in character. 11. When dealing with cases of this kind where the question is whether expenditure incurred by an assessee is capital or revenue expenditure, it is necessary to bear in mind what Dixon, J., said in Hallstrom's Property Limited v. Federal Commissioner of Taxation 72 CLR 634: What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process. The question must be viewed in the larger context of business necessity or expediency. If the outgoing expenditure is so related to the carrying on or the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d computation of income in the assessment order is as under:- Particulars Break-Up Amount Income of DBS Bank Ltd. Singapore 6,99,64,70,117 Income of DBS Bank FII 36,40,56,783 Gross Total Income As per the Return 7,36,05,26,900 Gross Income/(Loss) of India PE as per the Return (3,25,97,52,667) Add Provision for Doubtful Debts u/s 36(i)(viia) - Add : Head Office Expenses (as per computation) 25,94,68,089 Add: Bad Debt claimed by assessee 8,02,67,68,437 Sub Total 5,02,64,68,437 Less: Bad Debt Allowed (Refer para 3 of the Order) 4,36,66,97,957 Less: Opening provision of 36(1)(via) as per the Assessment Order of AY 14-15 -16,77,81,681 4,19,89,16,276 Add: Expenses disallowed as Capital Expense (Refer para 4 of the Order) 8,83,41,015 Adjusted total income 91,58,93,176 Less : Provision for Doubtful Debts u/s. 36(i)(via) being 5% of Gross Total Income 4,36,13,961 Less : Head Office Expenses u/s 44c being 5% of Gross Total Income 4,36,13,961 Assessed gross total income 82,86,65,255 Less : Eligible donation u/s 80G of the Act 1,00,000 Assessed Income from India PE 82,85,65,255 82,85,65,255 Assessed Net Total Income 8,18,90,92,155 40. It can be seen from the above that the issues raised vide G ..... X X X X Extracts X X X X X X X X Extracts X X X X
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