Income Tax Appellate Tribunal - Chennai
Indian Overseas Bank, Chennai vs Assessee on 4 February, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
'A' BENCH, CHENNAI
BEFORE N.S. SAINI, ACCOUNTANT MEMBER AND
SHRI VIKAS AWASTHY, JUDICIAL MEMBER
ITA No.1803/Mds/2011
(Assessment Year : 2008-09)
Deputy Commissioner of Vs. M/s. Indian Overseas Bank
Income Tax, 763, Mount Road,,
Large Taxpayer Unit, Chennai-600 002.
1775, J.N.Inner Ring Road, PAN:AAACI1223J
Anna Nagar Western Extn.
Chennai-600 101.
(Appellant ) (Respondent)
&
ITA No.1815/Mds/2011
(Assessment Year : 2008-09)
M/s. Indian Overseas Bank Vs. Deputy Commissioner of
763, Mount Road,, Income Tax,
Chennai-600 002. Large Taxpayer Unit,
PAN:AAACI1223J 1775, J.N.Inner Ring Road,
Anna Nagar Western Extn.
Chennai-600 101.
(Appellant) (Respondent)
Revenue by : Mr. Shaji P.Jacob, Addl. CIT
Assessee by : Mr. C.Naresh, CA
Date of Hearing : 4th February, 2013
Date of Pronouncement : 2nd April, 2013
ORDER
Per Bench :
The present set of cross appeals have been field by the Revenue and the assessee impugning the order of the CIT(A) LTU Chennai dated 30.08.2011. First we take the appeal of
2 ITA Nos 1803 & 1815/Mds/2011 the assessee for adjudication. The grounds on which the assessee has assailed the order of the CIT(A) are decided as under:-
2. The first ground of appeal raised by the assessee is with respect to depreciation on building including land. This ground of appeal has already been decided by the Tribunal against the assessee in ITA No.2412/Mds/2003 relevant to the assessment year 1994-95. The learned AR of the assessee has fairly conceded before us that this issue has been decided by the Tribunal against the assessee in earlier assessment years. This ground of appeal of the assessee is accordingly dismissed.
3. The second ground of appeal of the assessee relates to disallowance of bad debts written off relating to rural branches of the assessee. This issue has been decided by the Tribunal in ITA No.265/Mds/2005 relevant to the assessment year 1998-99 in the appeal of the assessee, wherein the matter has been remitted back to the Assessing Officer for deciding it afresh after taking into consideration the judgement of the Hon'ble Supreme Court of India in the case of Catholic
3 ITA Nos 1803 & 1815/Mds/2011 Syrian Bank Ltd. Vs. CIT reported as 343 ITR 270(SC). The relevant extract of the findings of the Tribunal is reproduced herein below:-
"The representatives of both the sides have stated that the present issue has been adjudicated by the Hon'ble Supreme Court of India in the case of Catholic Syrian Bank Ltd. (supra). The Hon'ble Apex Court while dealing with this issue has concluded as under:-
"To conclude, we hold that the provisions of sections 36(1)(vii) and 36(1)(viia) of the Act are distinct and independent items of deduction and operate in their respective fields. The bad debts written off in debts, other than those for which the provision is made under clause (viia), will be covered under the main part of section 36(1)(vii), while the proviso will operate in cases under clause (viia) to limit deduction to the extent of difference between the debt or part thereof written off in the previous year and credit balance in the provision for bad and doubtful debts account made under clause (viia). The proviso to section 36(1)(vii) will relate to cases covered under section 36(1)(viia) and has to be read with section 36(2)(v) of the Act. Thus, the proviso would not permit the benefit of double deduction, operating with reference to rural loans while, under section 36(1)(vii), the assessee would be entitled to general deduction upon an account having become bad debt and being written off as irrecoverable in the accounts of the assessee for the previous year. This, obviously, would be subject to satisfaction of the requirements contemplated under section 36(2).
Consequently, while answering the question in favour of the assessee, we allow the appeals of the assesses and dismiss the appeals preferred by the Revenue. Further, we direct that all matters be remanded to the Assessing Officer for computation in accordance with law, in the light of the law enunciated in this judgment.
S. H. Kapadia C. J. I.: I have gone through the judgment of my esteemed brother, Swatanter Kumar J. and I agree with the conclusions contained therein. However, I would like to give my own reasons.
4 ITA Nos 1803 & 1815/Mds/2011 XXX XXX .....However, the Revenue disputes the position that the proviso to clause (vii) refers only to rural advances. It says that there are no such words in the proviso which indicates that the proviso apply only to rural advances. We find no merit in the objection raised by the Revenue. Firstly, CBDT itself has recognized the position that a bank would be entitled to both the deduction, one under clause (vii) on the basis of actual write off and another, on the basis of clause (viia) in respect of a mere provision. Further, to prevent double deduction, the proviso to clause (vii) was inserted which says that in respect of bad debt(s) arising out of rural advances, the deduction on account of actual write off would be limited to the excess of the amount written off over the amount of the provision allowed under clause (viia). Thus, the proviso to clause
(vii) stood introduced in order to protect the Revenue. It would be meaningless to invoke the said proviso where there is no threat of double deduction. In case of rural advances, which are covered by the provisions of clause (viia), there would be no such double deduction. The proviso limits its application to the case of a bank to which clause (viia) applies. Clause (viia) applies only to rural advances. This has been explained by the Circulars issued by CBDT. Thus, the proviso indicates that it is limited in its application to bad debt(s) arising out of rural advances of a bank. It follows that if the amount of bad debt(s) actually written off in the accounts of the bank represents only debt(s) arising out of urban advances, the allowance thereof in the assessment is not affected, controlled or limited in any way by the proviso to clause (vii).
Accordingly, the above question is answered in the affirmative, i.e., in favour of the assessee(s). For the above reasons, I agree that the appeals filed by the assessees stand allowed and the appeals filed by the Revenue stand dismissed with no order as to costs."
22. In view of the above, we deem it appropriate to remand the issue back to the Assessing Officer to decide it afresh in accordance with the law laid down by the Hon'ble Supreme Court of India in the case of Catholic Syrian Bank Ltd. (supra)."
5 ITA Nos 1803 & 1815/Mds/2011 Accordingly, this ground of appeal of the assessee is allowed for statistical purposes.
4. The third ground of appeal of the assessee is regarding restriction of claim in respect of deduction under section 36(1)(viia) to the extent of provision made in the books. The A.R. for the assessee has conceded that this issue has already been decided against the assessee bank in the case of Bharat overseas Bank Ltd. in ITA No.1191/Mds/2012. This issue had also come up before the Tribunal in ITA No.818/Mds/2010 relevant to the assessment year 2007-08.
The findings of the Tribunal are reproduced herein below:-
"7. We have perused the orders and heard the rival submissions. The original claim, which was allowed by the Assessing Officer under Section 36(1)(viia) of the Act, was as follows:-
7.5% of Gross Total Income : ` 5,74,07,362 10% of Rural Advances : ` 2,72,65,099 (` 27,26,50,990/-) ` 8,46,72,461 Thereafter, assessee had moved in appeal against some of the additions made by the Assessing Officer on other issues and pursuant to the relief granted in such appeal, the gross total income which earlier stood at ` 76,54,31,493/- came down to ` 35,38,65,546/-. As a result of the reduction in gross total income, deduction under Section 36(1)(viia) was also scaled down from ` 5,74,07,362/- to ` 2,65,39,916/-. This sum when aggregated with 10% of rural advances coming to ` 6 ITA Nos 1803 & 1815/Mds/2011 2,72,65,099/-, resulted in the sum of ` 5,38,05,015/- being eventually allowed as deduction under Section 36(1)(viia) of the Act. In the books of the assessee, actual provision for bad and doubtful debts was only ` 4,01,44,027/-.
Assessee had also made a provision of ` 2.23 Crores on its standard assets. If the provision for bad and doubtful debts alone was considered, then the total allowance under Section 36(1)(viia) was in excess of such provision. However, if the provision for standard assets was also considered as provision for bad and doubtful debts, then the total provision could go up to ` 6,24,44,027/-. Then of course, assessee's claim as finally allowed was well within the limits specified under Section 36(1)(viia) of the Act. At this juncture, a look at Section 36(1)(viia) is necessary and this is reproduced hereunder, for brevity:-
"36(1)(viia) a scheduled bank [not being a bank incorporated by or under the laws of a country outside India] or a non-scheduled bank [or a co-operative bank other than a primary agricultural credit society or a primary co- operative agricultural and rural development bank], an amount [not exceeding seven and one-half per cent] of the total income (computed before making any deduction under this clause and Chapter VIA) and an amount not exceeding [ten] per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner."
It is clear from the above that it is not a standard allowance which is given, but, the allowance is subject to the actual provision made by the assessee, which in no case shall exceed 7.5% of the gross total income. Therefore, the argument of the assessee that whatever the provision it had actually made in its books, a provision of 7.5% of the gross total income had to be allowed, is not in accordance with law. Now considering the second aspect, whether provision for standard assets could be considered as provision for bad and doubtful debts, admittedly a provision on standard assets is not against any debts which had become doubtful. Standard assets are always considered recoverable, in the sense, bank 7 ITA Nos 1803 & 1815/Mds/2011 has no doubt of recoverability. When the bank itself has treated such assets as good and recoverable, any provision made on such assets cannot be considered as a provision for bad and doubtful debts. The debt itself being good, a provision made on good debt cannot be considered as a provision for bad and doubtful debts. May be, the RBI has made a regulation for 10% provision for standard assets also a prudential norm. This can however be considered as a measure prescribed in abundant caution, to deal with a situation where banks are not to suffer shock of sudden delinquency that could happen in future. There is always a possibility that an asset, which is fully recoverable, may not be so at future date. Nevertheless, possibility of happening of such a contingency cannot be a sufficient reason to consider a provision made on standard assets also as a provision for bad and doubtful debts. Therefore, claim of the assessee that provision for standard assets also has to be considered for applying the condition set out under Section 36(1)(viia) is not in accordance with law. If the provision for standard assets is not considered as provision for bad and doubtful debts, the actual provision for bad and doubtful debts made by the assessee in its books ` 4,01,44,027/- fall much below the sum of ` 5,38,05,015/- allowed by the Assessing Officer. In any case, a look into the original assessment order clearly show that but for the deduction allowed to the assessee as claimed by it in its return, there was no discussion as to how Section 36(1)(viia) was applied and whether the limits were corrected worked out. Admittedly, no question was asked to the assessee during the course of assessment proceedings also with regard to the claim made by it under Section 36(1)(viia), insofar as it concerns the quantum of such claim. This obviously show that there was no application of mind by the Assessing Officer at the time of assessment. Assessing Officer had not come to any conclusion at all having not considered the claim in the light of the conditions set out in Section 36(1)(viia) of the Act. We cannot say that he had taken a view which was in accordance with law. It is not a case where the Assessing 8 ITA Nos 1803 & 1815/Mds/2011 Officer had adopted one of the courses possible in law. Of course, a cryptic order of the Assessing Officer by itself may not show that there was no thought given by him on a claim of the assessee. However, here there was no enquiry made during the course of assessment proceedings. Therefore, the order which was silent on the claim made by the assessee, and allowing such claim, without any discussion, will definitely render it erroneous and prejudicial to the interests of Revenue. As held by Hon'ble Apex Court in the case of Malabar Industrial Co. Ltd. v. CIT (243 ITR 83), "prejudicial to the interests of the Revenue" is a term of wide import and not confined to loss of tax. An order without application of mind is definitely prejudicial to the interests of the revenue. We are in agreement with ld. CIT that the order of Assessing Officer was erroneous insofar as it was prejudicial to the interests of Revenue. No interference is required.
8. In the result, appeal filed by the assessee is dismissed."
In view of the aforesaid findings, this ground of appeal of the assessee is dismissed.
5. The fourth ground of appeal of the assessee relates to disallowance under section 14A based on Rule 8D. The AR for the assessee submitted that the assessee has not incurred any expenditure on the income earned therefore, no expenditure can be estimated as having been incurred on the earnings of the said income. On the other hand, the DR submitted that the assessee's claim is baseless, as many of 9 ITA Nos 1803 & 1815/Mds/2011 such investments were continuing from preceding years and the Tribunal has already confirmed the disallowance under section 14A as the assessee has incurred expenditure to earn the income. From the assessment year 2008-09 the provisions of Rule 8D have become applicable therefore, it is mandatory to compute disallowance under section 14A in accordance with computation provided under Rule 8D and there is no scope to make modifications as it is a deeming provision to make a fair estimate . The DR in order to support his contentions relied on the judgement of the Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co.Ltd., Vs. DCIT., reported as 328 ITR 81(Bom) and judgement of the Hon'ble Kerala High Court in the case of CIT vs. Dhanalakshmi Bank Ltd., reported as 344 ITR 259(Ker) and the judgement of the Hon'ble Delhi High Court in the case of Maxopp Investment Ltd. Vs. CIT., reported as 347 ITR 272 (Del). The DR also relied on the order of the co-ordinate Bench of the Tribunal in the case of Lakshmi Ring Travellers Vs. ACIT in ITA No.2083/Mds/2011 dated 2.3.2012, wherein the Tribunal has observed as under:-
10 ITA Nos 1803 & 1815/Mds/2011 "6. We considered the arguments of both the sides in detail. Sec.14A(1) declares the law that the expenditure incurred by the assessee in relation to the income which does not form part of the total income under the Act shall not be allowed as a deduction in computing the taxable income of the assessee. Sec.14A(2) provides for determining the quantum of such expenditure which shall not be allowed as a deduction. That is the machinery provision as far as section 14A is concerned. In that provision, it has been provided that if the Assessing Officer is not satisfied with the correctness of the computations made by an assessee, he shall compute the quantum in accordance with the method that may be prescribed. For this matter, Rule 8D has already been prescribed. Sub-sec(3) further provides that even in a case where an assessee claims that no expenditure was incurred, the assessing authority has to presume the incurring of such expenditure as provided under sub-sec(2) read with Rule prescribed. Therefore, it becomes clear that even in a case where the assessee claims that no expenditure was so incurred, the statute has provided for a presumptive expenditure which has to be disallowed by force of the statute. In a distant manner, literally speaking, it may even be considered for the purpose of convenience as a deeming provision. When such deeming provision is made on the basis of statutory presumption, the requirement of factual evidence is replaced by statutory presumption and the Assessing Officer has to follow the consequence stated in the statute. It means that even in a case where no expenditure is stated to have been incurred, the 11 ITA Nos 1803 & 1815/Mds/2011 assessing authority has to apply Rule 8D. As the statutory presumption substitutes the requirement of factual evidence, the question of enquiry does not arise. Therefore, we are unable to agree with the argument of the learned CA."
We find that the case of the assessee is covered by the order of the Tribunal in the case of Lakshmi Ring Travellers (supra).
Accordingly, this ground of appeal of the assessee is dismissed.
6. The fifth ground of appeal relates to allowablility of provision for leave encashment. The issue has already been adjudicated by the Tribunal in ITA No.818/Mds/2010 relevant to the Assessing Officer 2007-08 in the case of the assessee, wherein the Tribunal has held as under:-
"We have heard the submissions made by both the parties and have perused the orders of the authorities below and the judgements referred to by both the sides. The relevant extract of the provisions of section 43B(f) are reproduced herein below:-
"43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of--
a) xxxxxxxxxx
b) xxxxxxxxxx
c) xxxxxxxxxx
d) xxxxxxxxx
e) xxxxxxxxx
(f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee, shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income 12 ITA Nos 1803 & 1815/Mds/2011 referred to in section 28 of that previous year in which such sum is actually paid by him:
Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return."
21. The Hon'ble Calcutta High Court in the case of Exide Industries (supra) has held that the original enactment of section 43B of the Income Tax Act was to curb unreasonable deduction on the basis of the mercantile system of accounting without discharging statutory liabilities on the one hand and claim appropriate benefit under the Act on the other introduced the provisions of section 43B(f). Under clause (f) of section 43B any sum payable by the employer to its employees as leave encashment shall be deductible only in computing the income referred to in section 28 of that previous year in which the sum is actually paid by the employer to its employees." The Hon'ble High Court further held that "while inserting the clause (f) no special reasons were disclosed. Without such reasons the enactment is inconsistent with the original provisions of that section. Although the disclosure of the reasons was not mandatory, but in the interest of justice, it was incumbent upon the legislature to disclose the reasons. The legislature must disclose reasons which would be consistent with the provisions of the Constitution and the laws of the land and not for the sole object of nullifying the Supreme Court decision." The Hon'ble High Court further held that "section 43B(f) was liable to be struck down as arbitrary and inconsistent and de hors the decision of Hon'ble Supreme Court of India in the case of Bharat Earth Movers Ltd. (supra)."
22. In the present case, the assessee has created provisions for leave encashment of `27.68 crores. The learned AR has relied on the judgement of the Hon'ble Calcutta High Court in the case of Exide Industries Ltd. (supra) wherein the Hon'ble Court has struck down the provisions of sub-clause (f) of section 43B. The Hon'ble Supreme Court of India in the case of Bharat Earth Movers Ltd. Vs. CIT reported as 245 ITR 428 answering to the question : "whether, on the facts and in the circumstances of the 13 ITA Nos 1803 & 1815/Mds/2011 case, the provision for meeting the liability for encashment of earned leave by the employee is admissible deduction?"
held as under:-
"A few principles were laid down by this court, the relevant of which for our purpose are extracted and reproduced as under:
(i) For an assessee maintaining his accounts on the mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in the case of amounts actually expended or paid ;
(ii) Just as receipts, though not actual receipts but accrued due are brought in for income-tax assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business;
(iii) A condition subsequent, the fulfilment of which may result in the reduction or even extinction of the liability, would not have the effect of converting that liability into a contingent liability ;
(iv) A trader computing his taxable profits for a particular year may properly deduct not only the payments actually made to his employees but also the present value of any payments in respect of their services in that year to be made in a subsequent year if it can be satisfactorily estimated.
So is the view taken in Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC) wherein this court has held that the liability on the assessee having been imported, the liability would be an accrued liability and would not convert into a conditional one merely because the liability was to be dis- charged at a future date. There may be some difficulty in the estimation thereof but that would not convert the accrued liability into a conditional one ; it was always open to the tax authorities concerned to arrive at a proper estimate of the liability having regard to all the circumstances of the case.
Applying the above said settled principles to the facts of the case at hand we are satisfied that the provision made by the appellant-company for meeting the liability incurred by it under the leave encashment scheme proportionate with the entitlement earned by employees of the company, inclusive 14 ITA Nos 1803 & 1815/Mds/2011 of the officers and the staff, subject to the ceiling on accumulation as applicable on the relevant date, is entitled to deduction out of the gross receipts for the accounting year during which the provision is made for the liability. The liability is not a contingent liability. The High Court was not right in taking the view to the contrary. The appeal is allowed. The judgment under appeal is set aside. The question referred by the Tribunal to the High Court is answered in the affirmative, i.e., in favour of the assessee and against the Revenue."
The Hon'ble Madras High Court following the judgement of the Hon'ble Supreme Court of India, dismissed the appeal of the Revenue in the case of CIT Vs. Panasonic Home Appliances reported as 323 ITR 344 wherein similar question was involved. In view of the ratio laid down in the above judgements, this ground of appeal of the assessee is allowed."
In view of the aforesaid findings, we allow this ground of appeal of the assessee.
7. The last ground of appeal of the assessee relates to depreciation on UPS. The AR for the assessee submitted that UPS is a part of the computer and energy saving device and therefore, depreciation should be allowed @ 80%. On the other hand, the DR submitted that the UPS is neither power saving device nor part of a computer and the CIT(A) has rightly followed the decision of the Tribunal in the case of Nestle India Ltd. Vs. DCIT., reported as 111 TTJ 498.
15 ITA Nos 1803 & 1815/Mds/2011
8. We find that this issue has already been adjudicated by us in ITA No.818/Mds/2010 relevant to the assessment year 2007-08. The relevant extract of the order of the Tribunal in ITA No.818/Mds/2010 is reproduced herein below:- "The next ground of appeal relates to claim for depreciation on UPS at 80%. The AR submitted that the CIT(A) has failed to appreciate that UPS is an energy saving device, therefore, depreciation @ 80% should have been allowed. However, he also relied on the judgement of the Hon'ble Delhi High Court in the case of Orient Ceramics & Industries Ltd., reported as 56 DTR (Del) 397, wherein the Hon'ble High Court has allowed depreciation @ 60% on UPS treating it as part of computer hardware. On the other hand, learned DR relied on the order of the Delhi Bench of the Tribunal in the case of Nestle India Vs. DCIT., reported as 111 TTJ 498 wherein the Tribunal has held UPS at par with plant and machinery and rejected the contention of assessee to treat it as part of computer.
28. We do not agree with the submissions of the AR that the UPS is an energy saving device, therefore, depreciation @ 80% should be granted. However, we are in consonance with the decision of Hon'ble Delhi High Court in the case of Orient Ceramics & Industries Ltd. (supra), wherein the Hon'ble Court has granted depreciation @ 60% by treating UPS as part of computer hardware. Accordingly, we allow depreciation @ 60% on UPS and partly allow the ground of appeal of the assessee."
For the reasons recorded above, we hold that the assessee is entitled to claim depreciation @ 60% on the UPS.
16 ITA Nos 1803 & 1815/Mds/2011 Accordingly, this ground of appeal of the assessee is partly allowed.
9. In the result, the appeal of the assessee is partly allowed.
ITA No.1803/Mds/2011 (A.Y.2008-09):10. The appeal has been filed by the Revenue impugning the order of the Commissioner of Income Tax (Appeals) dated 30.08.2011 for the assessment year 2008-09. The Revenue has raised as many as 13 grounds in appeal.
Ground no.1 and 13 are general in nature, hence they are not taken up for adjudication.
11. Ground no.2 relates to deprecation on fixed assets taken over from Bank of Tamilnadu Ltd. The learned DR pointed out that the issue has already been adjudicated by the Tribunal in ITA No. 843/Mds/2008 for the assessment year 1996-97 decided on 2nd June, 2008. The Tribunal remitted the issue back to the Assessing Officer as provisions of section 2(1B) were not taken into consideration by Assessing Officer while deciding the issue. In the instant case also the Assessing Officer has failed to consider the 17 ITA Nos 1803 & 1815/Mds/2011 issue in the light of the provisions of section 2(1B). The learned AR agreed with the submissions of DR and further stated that the Tribunal in ITA No.1566/Mds/2008 for the assessment year 2004-05 decided on 5.3.2013 has also remitted the issue to Assessing Officer for same reasons. In view of the statements of learned DR and AR of the assessee, we remit the issue back to the Assessing Officer for deciding it afresh on the similar directions as given by the Tribunal vide order dated 2.6.2008. This ground of appeal of the Revenue is allowed for statistical purposes.
12. The third ground of the Revenue is with regard to computation of deduction under section 36(1)(viia). This issue has already been decided in the appeal of the assessee in para 4 hereinabove. For the detailed reasons recorded in para 4 above, we allow this ground of appeal of the Revenue.
13. The fourth ground of appeal relates to disallowance under section 14A in respect of investments on which tax free 18 ITA Nos 1803 & 1815/Mds/2011 income received. This issue has been adjudicated in the appeal of the assessee in para 5 hereinabove. For the reasons recorded in para 5 above, this ground of appeal of the Revenue is allowed.
14. The fifth ground of appeal of the Revenue relates to disallowance of contribution to staff welfare fund. This ground of appeal of the Revenue has already been adjudicated against the assessee in ITA No.1146/ Mds/2008 for the assessment year 2002-03. The relevant extract of the order of the Tribunal in the aforesaid appeal is reproduced herein below:-
"We have heard the submissions made by both the parties and have perused the orders of the authorities below. As per the contentions of the AR, the liability has arisen out of the agreement between the assessee bank and the employees of trade union and it is a contractual liability. As per the findings of the CIT(A) it is merely a provision and the liability has not been crystallized so far. As per the provisions of section 40A(7) deduction can be allowed in respect of any provision made by the assessee for payment of gratuity to its employees on retirement or termination from employment for any reason, provided the same has been contributed towards approved gratuity fund. Further sub-section (9) to Section 40A provides that no deduction shall be allowed in respect of any sum paid by the assessee as an employer except where such sum is so paid towards approved recognized fund in 19 ITA Nos 1803 & 1815/Mds/2011 accordance with the provisions of section 36(1)(v) . In the present case, the assessee has not been able to show that the liability has been crystallized or the contribution has been made towards approved fund as per the provisions of the Act.
The claim of the assessee based upon the provision of section 43B has no merit. Before the provisions of section 43B can be applicable, deduction must otherwise be allowable under the Act. In view of the above discussion, we are constrained to hold that the contribution towards staff welfare fund is not allowable expenditure. Therefore, this ground of appeal of the assessee is dismissed."
Accordingly, this ground of appeal of the Revenue is allowed.
15. The sixth ground of appeal of the Revenue relates to loss on revaluation of investments. We find that this issue has been decided in the appeal of the assessee in ITA No.694/Mds/2001 relevant to the assessment year 1996-97.
The relevant extract of the order of the Tribunal is reproduced herein below:-
"36. The A.R submitted that the issue was covered by the decision of the Hon'ble Madras High Court in the case of CIT vs Karur Vysya Bank Ltd in TCA No.2139 of 2008, order dated 13.7.2009. The DR also agreed with the same.
37. We find that the Hon'ble Madras High Court in the above quoted case has held as under:
"2. In so far as the first question of law raised by the revenue is "whether the Tribunal is right in holding that the diminution in the value of the securities held by the bank should be allowed as deduction disregarding the method prescribed in the Reserve Bank of India as per which 20 ITA Nos 1803 & 1815/Mds/2011 'permanent' investments had to be valued only at cost and only 'current 'investments were to be valued at market price at the close of the accounting year". The very same issue came up for consideration before this Court in the decision reported in 273 ITR 510 @ 571, which was rendered by relying upon the decision of the Supreme Court reported in 1999 240 ITR 355. In that case, the Hon'ble Supreme Court categorically formulated the principles as under:
1. That for valuing the closing stock, it is open to the assessee to value it at the cost or market value whichever is lower;
2. In the balance-sheet, if the securities and shares are valued at cost but from that no firm conclusion can be drawn. A taxpayer is free to employ for the purpose of his trade, his own method of keeping accounts, and for that purpose, to value stock-in-trade either at cost or market price.
3. A method of accounting adopted by the taxpayer consistently and regularly, cannot be discarded by the departmental authorities on the view that he should have adopted a different method of keeping accounts or of valuation.
4. The concept of real income is certainly applicable in judging whether there has been income or not, but, in every case, it must be applied with care and within their recognized limits.
5. Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation.
38. Following the principles laid down by the Hon'ble Supreme Court, this Court has clearly held that the assessee is entitled to change the method of valuation of Government securities to market value from cost and claim depreciation on the difference in the diminution value. The Tribunal also rightly pointed out the above ruling and held that the securities are trading assets of the bank and the loss arising on its sale is an allowable deduction. The loss on sale of securities is a revenue loss considering that the securities are trading assets and not 21 ITA Nos 1803 & 1815/Mds/2011 investments. Hence, this question of law is answered in favour of the assessee and against the revenue."
Respectfully following the above decision of the Hon'ble Madras High Court, we allow this ground of appeal of the assessee."
Respectfully following the aforesaid decision of the Tribunal, we dismiss this ground of appeal of the Revenue.
16. The seventh ground of appeal of the Revenue relates to disallowance of loss on revaluation of derivative contracts.
The DR submitted that the no settlement has actually taken place and the loss on market to market basis has resulted in reduction of profits, such notional loss is contingent in nature and cannot be allowed as deduction.
17. On the other hand, the AR submitted that the assessee deals in foreign exchange. Trading derivatives held by it constitutes its stock-in-trade which is to be valued at cost or market price whichever is lower. The loss arising on account of such trading derivatives are to be allowed as deduction in computing total income in accordance with the accepted method of valuation of stock-in-trade. The learned AR further submitted that the issue in hand is squarely covered by the order of Mumbai Bench of the Tribunal in the case of 22 ITA Nos 1803 & 1815/Mds/2011 Edelweiss Capital Ltd. Vs. ITO in ITA No.5324/Mum/2007 decided on 10th November, 2010 as well as the Special Bench decision of the Tribunal in the case of DCIT Vs. Bank of Bahrain & Kuwait reported as 5 ITR (Trib) 301 (Mum) (SB).
The Tribunal in the case of Edelweiss Capital Ltd. (supra) has held as under:-
"7. We have considered the facts and the rival contentions. In the Schedule annexed to and forming part of the Balance Sheet and Profit & Loss Account for the year under appeal (page 13 of the Paper Book), the assessee has made the following Note: -
"H. Equity Futures - Index I Stock
(a) "Initial Margin Equity Derivative Instruments", representing initial margin paid, and "Margin Deposits", representing additional margin over and above initial margin, for entering into contracts for Equity Index I Stock Futures, which are released on final settlement / squaring-up of underlying contracts, are disclosed under Loans and Advances.
(b) Equity Index / Stock Futures are
marked-to-market on a daily basis.
Debit or credit balance disclosed under
Loans and Advances or Current
Liabilities, respectively, in the "Mark-to-
Market Margin - Equity Index / Stock
Futures Account", represents the net
amount paid or received on the basis of
movement in the prices of Index / Stock
Futures till the Balance Sheet date.
Amount paid to brokers in addition to
Mark-to-Market Margins is disclosed as
"Margin Deposits" under Loans and
Advances.
(c) As on the Balance Sheet date, profit /
loss on open positions in Index / Stock
Futures are accounted for as follows:
23 ITA Nos 1803 & 1815/Mds/2011
• Credit balance in the "Mark-to-
Market Margin - Equity Index / Stock
Futures Account", being anticipated
profit, is ignored and no credit for the
same is taken in the Profit and Loss
Account.
• Debit balance in the "Mark-to-Market
Margin - Equity Index / Stock
Futures Account", being anticipated
loss, is adjusted in the Profit and
Loss Account.
(d)On final settlement or squaring-up of contracts for Equity Index / Stock Futures, the profit or loss is calculated as the difference between settlement / squaring-up price and contract price.
Accordingly, debit or credit balance
pertaining to the settled / squared-up
contract in "Mark-to-Market Margin -
Equity Index / Stock Futures Account" is
recognized in the Profit and Loss
Account."
The aforesaid Note gives a fair picture of the nature of the provision.
The provision in substance has been made to cover the anticipated loss in the derivates trading. There is no dispute that the assessee holds derivatives as its stock-in-trade and there is also no dispute that it follows the principle "cost or market price, whichever is lower" in valuing the derivatives. When the derivatives are held as stock-in-trade then whatever rules apply to the valuation of stock-in-trade will have to be necessarily apply to their valuation also. It is a well settled position in law that "while anticipated loss is taken into account in valuing the closing stock, anticipated profit in the shape of appreciated value of the closing stock is not brought into the account, as no prudent trader would care to show increased profit before its realization. This is the theory underlying the rule that the closing stock is to be valued at cost or market price whichever is the lower, and it is now generally accepted as an established rule of commercial practice and accountancy". This is what the Supreme Court held in the case of Chainrup Sampatram vs. Commissioner of Income Tax, West Bengal (1953) 24 ITR 481 (SC), speaking through Hon'ble Justice Patanjali Sastri, the then Chief Justice of India (page 485 - 486 of the Report). At page 486 the Supreme Court further observed that "loss due to a fall in price below cost is allowed even if such loss has not been actually realized". Quoting from the case of Whimster & Co. vs. Commissioners of Inland Revenue (1926) 12 Tax Cases 813, the Supreme Court observed that the profits that are chargeable to tax are those realized in the year and 24 ITA Nos 1803 & 1815/Mds/2011 that an exception is recognized where a trader purchased and still holds goods which are fallen in value in which case though no loss has been realized nor it has occurred, nevertheless at the close of the year he is permitted to treat these goods as of their market value. This decision of the Supreme Court governs the facts of the present case. It is to the assessee's strength that the Institute of Chartered Accountants of India in its guidelines have also approved of the rule of prudence which really means that while anticipated losses can be taken note of while valuing the closing stock, anticipated profits cannot be recognized. The anticipated loss, in the light of the judgment of the Supreme Court cited above, cannot be treated as a contingent liability.
8. The learned DR pointed out that the assessee has valued each scrip of the derivatives as at the end of the year. We do not see how this can make any difference to the legal principle. If the derivatives have been treated as stock-in-trade then there is nothing unusual in the assessee valuing each derivative by applying the rule cost or market whichever is lower.
9. We, therefore, direct the Assessing Officer to allow the provision as reflecting in substance the loss arising on account of valuation of the closing stock. The ground is allowed."
We find that the issue is covered against the Revenue by the aforementioned order of the Tribunal. The Commissioner of Income Tax (Appeals) has allowed this ground of appeal of the assessee by following the above stated order of the Tribunal. Respectfully following the aforesaid decision of the Tribunal, we dismiss this ground of appeal of the Revenue.
18. The eighth ground of appeal of the Revenue relates to recovery in respect of bad debts written off which has not been allowed as deduction in the earlier years. We do not find any infirmity in the order of the Commissioner of Income Tax 25 ITA Nos 1803 & 1815/Mds/2011 (Appeals) on this issue. The Commissioner of Income Tax (Appeals) has only remitted the issue back to Assessing Officer to verify whether the bad debts written off has earlier been allowed as deduction or not. If earlier, it has not been allowed as deduction at the time of write off, the same be allowed now. There is no error in the findings of Commissioner of Income Tax (Appeals). Therefore, this ground of appeal of the Revenue is dismissed.
19. The ninth ground raised by the Revenue relates to disallowance of provision towards leave travel allowance.
The assessee has created provision towards leave travel allowance and medical allowance to staff amounting to `48.00 crores. The Assessing Officer disallowed the same on the ground that these are prior period expenses and the provision is only a contingent liability. On appeal, the Commissioner of Income Tax (Appeals) has allowed this ground of appeal of the assessee on the ground that liability towards leave travel entitlement and medical benefits accrued during the year, as the revised Accounting Standard 15 became applicable in the current assessment year i.e. assessment year 2008-09. The 26 ITA Nos 1803 & 1815/Mds/2011 expenditure has been determined on actual valuation. The CIT(A) held that the provision made for leave travel concession and medical benefit to staff have to be allowed as a deduction as it is neither prior period expenses nor contingent liability. The learned DR submitted that the liability is not debited to profit and loss account nor it is quantified by actuarial valuation. These are prior period expenses. In order to support his contentions, the DR relied on the judgement of the Hon'ble Madras High Court in the case of CIT Vs. Southern Cable and Engineering works reported as 289 ITR 67 and in the case of Madras Fertilizers Ltd. Vs. CIT reported as 209 ITR 174(Mad).
On the other hand, the A.R. submitted that the amounts were provided in Accounting Standard-15 which came into force in the current assessment year. The said amounts were provided based on the contractual agreement with the employees which is a legal and statutory liability which has accrued during the relevant assessment year. By no stretch of imagination, it can be termed as prior period expenses . The AR strongly supported the order of the CIT(A) on the issue.
27 ITA Nos 1803 & 1815/Mds/2011 After hearing both the parties and perusing the order of the CIT(A), we are in concurrence with the findings of the CIT(A) that the expenditure on leave travel allowance to the staff is not prior period expenditure. The expenditure has been claimed on actual valuation. The DR has relied on the judgement of Southern Cables & Engg. Work (supra) and Madras Fertilizers Ltd. (supra). We find the facts in the present case are entirely different from the ratio laid down in the aforesaid cases. Therefore, the aforesaid judgements are not applicable in the facts of the present case. Therefore, this ground of appeal of the Revenue is dismissed.
20. The tenth ground of appeal of the Revenue relates to disallowance of the claim of debenture redemption reserve to the tune of ` 6.00 crores of Bharat Overseas Bank which has been subsequently taken over by the assessee during the assessment year 2007-08.
The DR submitted that the said reserve was not created by the assessee at the time of take over. The said reserve was part of aggregate liability of the amalgamated company 28 ITA Nos 1803 & 1815/Mds/2011 and hence the assessee cannot claim any deduction thereon.
Any liability take over with the assets of the amalgamated company and any subsequent reduction in such liability is the income of amalgamating company i.e. the assessee in the present case.
On the other hand, the A.R. submitted that the reserve was created out of profit already charged to tax and bringing the same to the tax net would result in double taxation of the same amount. The AR further submitted that the amount is not a liability it is only reversal of the reserve created earlier.
On appeal, the Commissioner of Income Tax (Appeals) allowed the appeal of the assessee on this issue with the finding that when an amount was credited to profit and loss account which had already been taxed in the earlier year, the same cannot be taxed again. The amount credited to profit and loss account during the relevant assessment year represents the amount withdrawn from debenture redemption reserve of earlier year of Bharat Overseas Bank Ltd. which has merged with the assessee. The reserve created is not to 29 ITA Nos 1803 & 1815/Mds/2011 be allowed as a deduction, therefore, withdrawals from such reserve cannot be taxed as it would amount to taxing the same income twice.
After hearing the representatives of both sides and perusing the orders of the authorities below, we find that the assessee has taken over assets and liabilities of the Bharat Overseas Bank Ltd. . In the process of amalgamation, all the reserves and provisions created by the erstwhile Bharat Overseas Bank Ltd. were also taken over by the assessee bank. As pointed out by the AR, the reserve has been created after preparation of profits already charged to tax. The assessee bank steps into the shoes of the amalgamating company. It shall be deemed that reserve has been created out of profits charged to tax, taxing the same amount would result in double taxation which would be unfair. We agree with the findings of the Commissioner of Income Tax (Appeals) on the issue and dismiss this ground of appeal of the Revenue.
21. The eleventh ground of appeal of the Revenue relates to grant of double taxation relief. This issue has been 30 ITA Nos 1803 & 1815/Mds/2011 adjudicated by the Tribunal in the appeal of the Revenue in ITA No.1566/Mds/2008 for the assessment year 2004-05. The relevant extract of the order of the Tribunal on the issue is reproduced herein below:-
14. The third ground of appeal of the Revenue is with respect to the direction given by CIT(A) to the Assessing Officer to allow the claim of double taxation relief in respect of foreign branches. The D.R. submitted that the issue is squarely covered in favour of the Revenue by the order of the Tribunal in ITA No.213/Mds/2010 passed in the case of DCIT Vs. Bharat Overseas Bank Ltd. dated 30.10.2012.
The DR placed on record a copy of the said order along with written submissions. We find that the issue decided by the Tribunal in Bharat Overseas Bank Ltd. (supra) is similar to the one in hand. The Tribunal in the case of Bharat Overseas Bank Ltd. has held as under:-
10. We have heard both the sides, perused the records and gone through the orders of the authorities below. In this case the assessee is a banking company and also having a branch office at Bangkok. The Assessing Officer in the original assessment order gave tax credit to the assessee on the tax paid at Bangkok at `1,08,25,780/-. According to the assessee he is entitled for the tax rate payable in India and claimed at `1,86,74,470/-. The matter went to the CIT(A). The learned CIT(Appeals) allowed the claim of the assessee. The Revenue carried the matter before the Tribunal.
The Tribunal vide order dated 30-11-2004 directed the Assessing Officer to enquire whether there is a DTAA between India and Bangkok. The Assessing Officer in accordance with the directions given by the ITAT enquired all the provisions of the DTAA between India and Thailand and as per Article 23(3) by following the tax credit method whatever tax was paid by the assessee in Thailand was given credit to the assessee. Aggrieved, the assessee carried the matter before the learned CIT(Appeals). The learned CIT(Appeals) hyper technically held that the only job of the Assessing Officer was to see whether there is a DTAA between 31 ITA Nos 1803 & 1815/Mds/2011 India and Thailand. We are unable to understand the above conclusion made by the learned CIT(Appeals) that the job of the Assessing Officer is just to see whether there is a DTAA between India and Thailand. If there is a DTAA, the Assessing Officer has to allow the relief claimed by the assessee. That being so, in our opinion, the Tribunal need not refer it to the Assessing Officer as well just to see and pass an order. The Tribunal clearly directed the Assessing Officer to enquire into the existence of a DTAA between India and Bangkok. "Enquiry" means to investigate and apply the same. In our opinion, the Assessing Officer has rightly investigated and applied the same and decided the issue. We therefore hold that the finding given by the learned CIT(Appeals) is not correct. Accordingly, we reverse the order passed by the learned CIT(Appeals) on this count and uphold the order of the Assessing Officer."
The learned AR of the bank fairly conceded that the issue has been decided against the bank. Respectfully following the decision of the Tribunal in the aforesaid case, we set aside the order of the CIT(A) on this issue and allow this ground of appeal of the Revenue.
In view of the above findings, we allow this ground of appeal of the Revenue.
22. The last ground of appeal of the Revenue relates to applicability of provisions of section 115JB. We find that this issue has also been adjudicated by the Tribunal in ITA No.2306/Mds/2008 in the appeal of the assessee for the assessment year 2005-06. The relevant extract of the findings of the Tribunal are reproduced herein below:-
32 ITA Nos 1803 & 1815/Mds/2011 "We have heard the submissions made by both the sides and have perused the orders of the authorities below. We have also examined the judgements/orders referred to by both the sides.
The DR has placed reliance on the judgements which are prior to nationalization of banks. After the enactment of the Banking Companies (Acquisition & Transfer of Undertakings) Act, 1970 the status of banks have changed and the said judgements have lost their relevance in the post nationalization scenario. The facts of the judgement of the Hon'ble Madras High Court in the case of S.P.Shanmugha Kesari (supra) are entirely different from the case in hand.
Therefore, the ratio of the said decision is also not applicable in the instant case. On the contrary, the order of the Hyderabad Bench of the Tribunal in the case of State Bank of Hyderabad (supra) deals with an identical issue. The Tribunal has held that provisions of section 115JB cannot be applied to the banking company. However, in view of amendment to the provisions of section 115JB by the Finance Act, 2012, the provisions of section 115JB are applicable to the banks as well from assessment year 2013-14. Respectfully following the decision of the Hyderabad Bench of the Tribunal, we set 33 ITA Nos 1803 & 1815/Mds/2011 aside the order of the CIT(A) on this issue and allow this ground of appeal of the assessee."
Accordingly, this ground of appeal of the Revenue is dismissed. To conclude, the appeal of the Revenue is partly allowed in the aforesaid terms.
Order pronounced in the open court on Tuesday, the 2nd day of April, 2013 at Chennai.
Sd/- Sd/-
( N.S. Saini ) (Vikas Awasthy)
Accountant Member Judicial Member
Dated the 2nd April, 2013.
Chennai
somu
Copy to: (1) Appellant (4) CIT(A)
(2) Respondent (5) D.R.
(3) CIT (6) G.F.