Income Tax Appellate Tribunal - Mumbai
Asst Cit 2(1), Mumbai vs Bank Of India, Mumbai on 26 July, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL " B" BENCH, MUMBAI
BEFORE SRI MAHAVIR SINGH, JM AND SRI RAJESH KUMAR, AM
ITA No.5977/Mum/2011
(A.Y:2004-05)
Bank of India Dy. Commissioner of
8 t h Floor, Star House, Income Tax -2(1)
Taxation Department, BKC, Vs. Aayakar Bhavan,
Bandra (E), Mumbai-400 051 Mumbai-400 002
P AN No. AAACB0472C
Appellant .. Respondent
ITA No.6016/Mum/2011
(A.Y:2004-05)
Dy. Commissioner of Income Bank of India
Tax -2(1) 8 t h Floor, Star House,
Aayakar Bhavan, Taxation Department, BKC,
Vs.
Mumbai-400 002 Bandra (E),
Mumbai-400 051
P AN No. AAACB0472C
Appellant .. Respondent
Assessee by .. Shri C Naresh, AR
Revenue by .. Shri Purushottam Kumar, DR
Date of hearing .. 02-06-2017
Date of pronouncement .. 26-07-2017
ORDER
PER MAHAVIR SINGH, JM:
These cross appeals are arising out of the order of CIT(A)-4, Mumbai, in appeal No. CIT(A)-4/IT-123/DCIT.2(1)/2009-10 dated 01-06- 2011. The assessment was framed by DCIT Circle-2(1), Mumbai for the A.Y. 2004-05 vide order dated 30-12-2005 under section 143(3) of the Income Tax Act, 1961 (hereinafter 'the Act').
2. The first issue in this appeal of assessee is against the order of CIT(A) in confirming the disallowance of bad debts written off amounting to Rs. 550,03,05,865/-. For this assessee has raised following grounds: -
"1.1 The Commissioner of Income Tax (Appeals) [CIT (A)] erred in confirming disallowance of bad ITA No . 59 7 7 & 6 01 6/ Mum/ 2 01 1 Ban k of Ind i a A Y: 04 - 05 debts written off amounting to Rs.550,03,05,865/- contrary to law and facts and circumstances of the case.
1.1 The Commissioner of Income Tax (Appeals) [CIT (A)] erred in confirming disallowance of bad debts written off amounting to Rs.550,03,05,865/- contrary to law and facts and circumstances of the case.
1.2. The CIT (A) erred in arriving at the balance in the provision for bad and doubtful account referred to in sec 36(1)(viia) by artificially pegging the credit balance in the provision account by the amount allowed u/s 36(1)(viia) in the previous and the current assessment year which is unreasonable and uncalled for.
1.3. The CIT(A) ought not to have ignored the account for provision for bad and doubtful accounts as maintained by the appellant having made entries for debits and 'C credits of actual amount of provision allowed and bad debt written off as required under the provisions of the Act and hence the same cannot be rejected.
1.4. The CIT(A) ought to have appreciated that since there was only a debit balance in the provision for bad and doubtful debts account referred to in 36(1)(viia) as per the details already furnished the entire bad debts written off ought to have been allowed as deduction without any restriction whatsoever."
3. Briefly stated facts are that the assessee claimed deduction of bad debts amounting to Rs. 508,90,28,469/- out of which the AO during the course of original assessment proceedings u/s 143(3) of the Act Page 2 of 32 ITA No . 59 7 7 & 6 01 6/ Mum/ 2 01 1 Ban k of Ind i a A Y: 04 - 05 restricted the claim at Rs. 132,93,97,624/- and disallowed the balance bad debts of Rs. 375,96,30,845/-. The case was reopened under section 147 of the Act and claim for bad debts was disallowed further to the extent of Rs. 132,93,97,624/- and therefore, finally re-assessment framed under section 143(3)/147 of the Act dated 31-12-2007. The entire claim of bad debts of Rs. 508,90,28,469/- was disallowed. Aggrieved, assessee preferred the appeal before CIT(A), who considering the order which is already decided under section 147/143(3) of the Act dated 11-12-2011 confirmed the action of the AO vide Para 5 of his appellate order as under: -
"5. I have considered the facts of the case and submissions of the assessee. The issue has already been decided by my predecessor against the appeal for order u./s. 147/143(3) vide order dated 11/2/2011 and relevant portion of his decision is as follows:
"1 have carefully considered the submissions of the A.R. and the facts of the case. The A.
0. has pointed out that there was sufficient balance in the provision for bad and doubtful debts. As per proviso to section 36(1)(vii) only the excess amount over and above the pro vision for bad and doubtful debts is required to be allowed as bad debts in respect of banks. Hence, the AO is justified in disallowing the claim of bad debts on the round that the appellant was having sufficient balance in the doubtful debt provision account The A.R. has not contradicted this finding of the A.O. that there was sufficient provision for bad and doubtful debts with evidence but simply argued that the A.0. should have checked year-wise balance in Page 3 of 32 ITA No . 59 7 7 & 6 01 6/ Mum/ 2 01 1 Ban k of Ind i a A Y: 04 - 05 the provision A/c. and the bad debts allowed As per Instruction No. 17 of 2008 the A. 0. should allow the bad debts over and above the opening balance of provision for bad and doubtful debts as double claim is not intended by the Legislature. In this year there was more provision in the provision for bad debt in fact there was provision for bad and doubtful debt of Rs. 348, 79,62,0551- for A. 1'. 2003-04 and for A. Y. 2004-05 the provision was R5.375,96,30,8451% As a matter of fact no bad debt was allowed in AY: 2003-04. Hence, the same is available for adjusting the claim of bad debt of It. 132,93,97,624/- in this year. Since the claim of bad debt is less than the provision, the A.0. has rightly disallowed the claim of the appellant. The disallowance is confirmed and appeal on this round is dismissed Following the decision of my predecessor the ground of appeal is dismissed."
Aggrieved, now assessee is in second appeal before Tribunal.
4. At the outset, the learned Counsel for the assessee stated that exactly the identical issue has been allowed by Tribunal in assessee's own case for the AY 2001-02 in ITA No. 1498/Mum/2011 vide order dated 09-04-2014. The Tribunal following the decision of Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. v. CIT (2012) 343 ITR 270 (SC) allowed the claim of the assessee by observing in Para 2.5 to 2.7 as under: -
"2.5 Having considered the rival submissions and careful perusal of the record we find that on principle the CIT(A) has allowed the claim of the assessee in Page 4 of 32 ITA No . 59 7 7 & 6 01 6/ Mum/ 2 01 1 Ban k of Ind i a A Y: 04 - 05 respect of bad debts written off, however, the quantum of the claim has been restricted in terms of the proviso to section 36(1)(vii). It is to be noted that the proviso to section 36(1)(vii) has been inserted to avoid the double claim in respect of the same amount and the amount of bad debts which exceeds the credit balance in the provisions for bad and doubtful debt account made under clause (viia) shall be allowable u/s 36(1)(vii). The Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. v. CIT (supra) has held that the deduction u/s 36(1)(vii) cannot be negated by reading into the limitation of section 36(1)(viia) as it would frustrate the object of granting such deductions. An identical issue has been considered by the Hyderabad Benches of This Tribunal in the case of State Band of Hyderabad Vs. DCIT (Supra) in para 9 to 11 as under:-
"9. The Apex Court in the case of TRF Ltd. (supra) has held that any debt written off as irrecoverable should be allowed as deduction. In the case of Vijaya Bank Ltd. (supra), the Apex court has held that if the provision for bad debts debited to the P&L is netted against the current assets the provisions is an allowable deduction even if individual accounts of the debtors are not wtitten off. In the case of Catholic Syrian bank Ltd. (supra), which was not available with the lower authorities at the time of deciding the issue, the Apex Court has held as under under:
(i) The clear legislative intent of s.
36(1)(vii) & 36(1)(viia) together with the circulars issued by the CBDT Page 5 of 32 ITA No . 59 7 7 & 6 01 6/ Mum/ 2 01 1 Ban k of Ind i a A Y: 04 - 05 demonstrate that the deduction on account of provision for bad and doubtful debts u/s 36(1)(viia) is distinct and independent of s. 36(1)(vii) relating to allowance of bad debts. The legislative intent was to encourage rural advances and the making of provisions for bad debts in relation to such rural branches. The functioning of such banks is such that the rural branches were practically treated as a distinct business, though ultimately these advances would form part of the books of account of the head office.
An interpretation which serves the legislative object and intent is to be preferred rather than one which subverts the same. The deduction u/s 36(1)(vii) cannot be negated by reading into it the limitations of s.
36(1)(viia) as it would frustrate the object of granting such deductions.
The Revenue's argument that this would lead to double deduction is not correct in view of the Proviso to s.
36(1)(vii) which provides that in respect of rural advances, the deduction on account of the actual write off of bad debts would be limited to excess of the amount written off over the amount of the provision which had already been allowed u/s 36(1) (viia) (Southern Technologies 320 ITR 577 (SC) & Vijaya Bank 323 ITR 166 (SC) referred).
Page 6 of 32ITA No . 59 7 7 & 6 01 6/ Mum/ 2 01 1 Ban k of Ind i a A Y: 04 - 05
10. In that case the Apex Court has held that the bank would be entitled to both the deductions, one under Clause (vii) on the basis of actual write off and another on the basis of clause (viia) in respect of mere provision. Further to prevent to double deduction, proviso to clause (vii) was inserted which says that in respect of bad debts 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). It follows that deduction u/s 36(1)(viia) is to be allowed only on the amount of provision made for bad and doubtful debts subject to the maximum on the basis of rural advances/ income prescribed under that section. The allowance u/s 36(1)(viia) cannot be in excess of provision for bad debts actually made in the accounts. 11. In view of the very clear principles laid down by the Apex Court in the above judgments, we deem it fit to set aside the issue to the file of the Assessing Officer to decide the issue in the light of the decisions of the Apex Court in the cases of (a) TRF Ltd. (supra) (b) Vijaya bank Ltd. (supra) and (c) Catholic Syrian BankLtd. (supra).
2.6 It is clear that the Hyderabad Benches in the case of State Bank of Hyderabad Vs. DCIT (supra) had decided this issue by following the decision of Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. v. CIT (supra).
2.7 As regards the Introduction of Explanation 2 vide Finance Act 2013, it has been made clear in the Finance Act itself that the said Explanation will be effective w.e.f 01.04.2014 and, therefore, in our view the same is not applicable for the year under Page 7 of 32 ITA No . 59 7 7 & 6 01 6/ Mum/ 2 01 1 Ban k of Ind i a A Y: 04 - 05 consideration. Following the decision of Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. v. CIT as well as the decision of Hyderabad Benches of This Tribunal in the case of State Bank of Hyderabad Vs. DCIT (supra), we decide this issue in favour of the assessee and direct the AO to allow the claim in the light of the decision of Hon'ble Supreme Court."
On the facts of the case, the learned DR has not contested the claim of the assessee that this issue is covered or not.
5. We find that the issue has already been adjudicated by the Tribunal in assessee's own case for AY 2001-02 and facts being exactly identical, respectfully following the same, we allow the claim of the assessee. Further, this issue has also been decided in favour of assessee in case of Bank of Baroda in ITA No. 9195/Mum/2010 for AY 2003-04 vide order dated 12-06-2013. Respectfully, following the Tribunal decision in assessee's own case and consistently following the precedence, we allow the claim of the assessee. This issue of assessee's appeal is allowed.
6. The next issue in this appeal of assessee is against the order of CIT(A) confirming the disallowance of payments made to liquidators of BCCI, interest and legal expenses. For this assessee has raised following grounds: -
"2.1 The CIT (A) erred in confirming the disallowance of compensation of Rs.364,64,32,957/- paid to the liquidators of BCCI as per the orders of courts in UK contrary to law and facts and circumstances of the case.
2.1 The CIT (A) erred in confirming the disallowance of compensation of Rs.364,64,32,957/- paid to the liquidators of BCCI as per the orders of Page 8 of 32 ITA No . 59 7 7 & 6 01 6/ Mum/ 2 01 1 Ban k of Ind i a A Y: 04 - 05 courts in UK contrary to law and facts and circumstances of the case.
2.2 The CIT(A) failed to note that the compensation was required to be paid in deference to a court order and as a matter of business expediency since non-payment would prejudice continuation of banking business in U.K. and therefore is allowable in full. Reliance is placed on the decision of Apex Court in CIT V Udaypur Distillery Co. Ltd. 314 ITR 181.
2.3 The CIT (A) ought not to concluded that the appellant hank was a party to the fraud committed by BCCJ against its creditors and hence the payment of compensation did not arise in the course of carrying on its banking business over-looking the fact that the order of court is in connection with a civil proceeding against the appellant and the payment was only a compensation as by the court order itself.
2.4 Without prejudice to the above, the CIT(A) ought to have allowed in any case the interest paid amounting to Rs.173.65 lacs and legal charges amounting to Rs. 17.19 Lacs being / expenses incurred for delayed payment of compensation and for defending the suit filed against the appellant."
7. Briefly stated facts are that the AO disallowed the payment made to liquidator's Bank of Credit and Commerce International SA and Bank of Credit and Consumers International (overseas Ltd.) amounting to Rs. 364,64,32,957/- and also legal charges paid for defending suit filed by the liquidators of BCCI amounting to Rs. 17,19,52,641/-. The assessee made certain advances at its London and Cayman Island Branch to certain customers of BCCI and subsequently, BCCI went into liquidation in 1991 Page 9 of 32 ITA No . 59 7 7 & 6 01 6/ Mum/ 2 01 1 Ban k of Ind i a A Y: 04 - 05 and these advances were made on the guarantee of BCCI as claimed by the assessee. The liquidators claimed compensation from certain banks including the assessee bank holding that BCCI was involved in a fraud and the other banks including assessee's bank connived with BCCI in this fraudulent agenda for the reason that the assessee bank made these advances to certain customers identified by BCCI, which has resulted in a false hope about BCCI and its financial position and results. Aggrieved, assessee preferred the appeal before CIT(A), who confirmed the action of the AO vide para 15 to 18 as under: -
"15. From the above mentioned judgment it is clear that the practice of giving such loan has been held as highly artificial and BOl knowingly participated in the carrying on of the business of the BCCI SA and BCCI Overseas with intent to defraud the creditors of those companies or for the fraudulent purpose. Therefore, it is clear that assessee made loan to the customers of BCCI knowingly for conniving with a fraud to be committed by BCCI and, therefore, on liquidation of BCCI any damages which have been claimed from the assessee are for the reasons that the assessee was a part of the fraud committed by the BCCI and the compensation was not for the normal business of the assessee. Though the assessee has claimed that it was during the course of normal business but the court has held that such a claim was artificial. In any case the loss is not because of the business activity because as submitted by the assessee entire loan amount had been recovered and assessee also earned certain net interest on such loans. But the compensation had to be paid because of the fraud committed by BCCI and because the assessee was a party who connived with the BCCI in the fraud. Therefore, the A.O. has rightly disallowed the claim of the Page 10 of 32 ITA No . 59 7 7 & 6 01 6/ Mum/ 2 01 1 Ban k of Ind i a A Y: 04 - 05 assessee holding it as expenditure incurred on account of fraud not relating to the normal business of the assessee. The claim of the assessee relating to the interest on the compensation and litigation expenses regarding the said claim are also not allowable for the same reasons because they are also related to the fraudulent activity and compensation for that.
16. The A.O. has also disallowed the claim of the assessee on the basis that expenditure does not pertain to the year under consideration, which has also been disputed by the assessee. But once it has been held that it is relating to a fraud, the relevant year will not make any difference. But in any case if at any sage it is found as allowable business expenditure then it can be considered under the year under consideration in view of the decision of Saurashtra Cement and Chemical Industries Ltd. vs. CIT 213 ITR 523 (Gui) and Toyo Engg. India Ltd. vs. JCIT 100 TTJ 373, ITAT, Mumbai, both the judgments are relied upon by the assessee. To this limited extent the ground of appeal of the assessee is treated as allowed for statistical purposes.
17. Another ground on which disallowance has been made is that it relates to a foreign branch, the income of which is not includable in the income of the assessee in view of section 90 and the DTAA. Whereas the assessee has claimed that the more beneficial provisions between DTAA and I.T. Act will apply to the assessee. The ground is academic only because the claim has already been rejected as relating to a fraud but in any case treatment of loss of a foreign branch has to be given as per section Page 11 of 32 ITA No . 59 7 7 & 6 01 6/ Mum/ 2 01 1 Ban k of Ind i a A Y: 04 - 05 90 read with DTAA and notification No.91/2008 dated 28/812008.
18. The assessee has made an alternative claim vide Ground No. 3(c) that in case the claim for loss on account of payment to BCCI is not allowable then it will result in having net profit in London branch which assessee has claimed to be excludable from the income of the assessee assessable in India. In such a situation if assessee has paid taxes abroad in London then the-relief is allowed as per section
90. In this regard a separate decision has been given against Gr6und No. 11 where the income of foreign branches where DTAA is applicable and assessee is having a permanent establishment, the assessee is allowed in terms of section 90 and notification No.91/2008 dated 28/8/2008. Accordingly, the A.O. is directed against Ground No 3(c) also to follow the decision against Ground No. 11(a) for allowing relief to the assessee against the income taxed in London/Britain. In the result the ground of appeal is treated as partly allowed.
Aggrieved, now assessee is in second appeal before us.
7. We have heard the rival contentions and gone through the facts and circumstances of the case. Before us, the learned Counsel for the assessee argued that the disallowance of payments made to liquidators of Bank of Credit and Commerce International SA and Bank of Credit and Commerce International (Overseas) Ltd - Rs. 364,64,82,9571- and law charges paid by the assessee for defending the suit filed by the liquidators of BCCI-Rs. 17,19, 52,641/- are legitimate business expenses. He explained that the AO had disallowed the above loss on the ground that the loss pertained to London branch and any loss of London branch cannot be allowed as deduction since the assessee had claimed the income from foreign branches as "exclusion" from total income and Page 12 of 32 ITA No . 59 7 7 & 6 01 6/ Mum/ 2 01 1 Ban k of Ind i a A Y: 04 - 05 therefore the loss sustained by a foreign branch cannot be allowed as deduction. He argued that as per the provisions of section 90(2) of the Act, the provisions of the Indian Income Tax Act shall apply to the extent they are more beneficial to the assessee and in respect of London branch where there was a loss, the income should be taxed in accordance with the normal provisions of the Act. Hence the above loss should be reduced in computing the total income. He further explained that the AO disallowed the above sum on the ground that it does not relate to the current assessment year since the transactions took place during financial years 1981 to 1986. He submitted that the liability to pay has crystallized arose and became payable only in the current year based on the orders of High Court of Justice, Chancery Division, Companies Court, UK dated 19/03/2004 and 26/03/2004 and therefore cannot be disallowed for the current assessment year. He placed reliance on the decisions in support of its contention of Hon'ble Gujarat High Court in the case of Saurashtra Cement and Chemical Industries Ltd Vs CIT 213 ITR 177 523 (Guj) and ITAT Mumbai Tribunal in the case of Toyo Engineering India Limited Vs JCIT 100 TTJ 373 (ITAT Mum).
8. He further argued that another reason given by the AO for disallowance of the above amount is that it is expenses incurred for fraud and not a normal business expenses. He explained that assessee is engaged in the business of the banking and as per the Banking Regulation Act, one of the main objects of a banking company is to accept deposits from various depositors and lend money to various borrowers. He cited Section 6(1)('a) of Banking Regulation Act, which states as under:
"A Banking Company may engage in one or more of the following business namely :-
The borrowing, raising or taking up of money, the lending or advancing of money either upon or without security."Page 13 of 32
ITA No . 59 7 7 & 6 01 6/ Mum/ 2 01 1 Ban k of Ind i a A Y: 04 - 05 In respect to this he argued that in pursuance of the above objects the assessee in the ordinary course of carrying on its main business accepted deposits from Bank of Credit and Commerce International SA BCCI and advanced loans to various borrowers as introduced by BCCI in its London Branch. Further the repayments of the loans introduced by BCCI were also guarantee by BCCI. In the banking business, both acceptance of deposits and lending require proper introduction from the persons acceptable to the bank in order to ensure that the deposits and advances represent genuine business transactions. This is insisted by the various regulators in respective countries to ensure that the banks engage in genuine business transactions and dealings and to prevent fraudulent or bogus transactions. The London branch of the assessee has duly followed the above guidelines and the transactions were entered into with BCCI for a very long time much before the transactions under present appeal which took place from 1981 to 1986. The deposits of BCCI accepted by London Branch were duly repaid by the assessee on the due dates and the loans granted to parties introduced were also recovered in full by the London Branch. In view of these facts mentioned above, he stated that it is clear beyond doubt that assessee had carried on its normal banking business permitted by section 6(1)(a) of Banking Regulation Act and the said transactions have not resulted in any loss or damage. However out of the above transactions, one of the parties to whose transactions viz. BCCI have acted in a manner which resulted in the liquidation proceedings and its ultimate winding up. The assessee had absolutely no control or supervision of the management whatsoever on the transactions entered into by BCCI, which is a separate and distinct and legal entity from the assessee. Hence the said BCCI was ultimately held liable for payment of certain sums, consequent on which the assessee was also required to pay compensation. Further even under normal proceedings of law present in India, the banks incur huge losses in respect of loans and advances granted by them in normal course of banking due to fraudulent practices followed by the borrowers, and not utilizing loans for the purpose for which it was sanctioned, large scale Page 14 of 32 ITA No . 59 7 7 & 6 01 6/ Mum/ 2 01 1 Ban k of Ind i a A Y: 04 - 05 diversion of bank loans for personnel use, not having sufficient stock or other securities and utilizing the bank funds for speculative purposes, as a result of which the banks are unable to realize their dues in full. In such circumstances the banks usually write off such debts either as bad debts or trading loss and no questions are raised about the misuse of the banks funds by the borrowers and the losses are allowed in full even though the borrowers had cheated or defrauded the banks in such cases resulting in criminal proceedings against the borrowers.
9. On the other hand before us, the learned Sr. DR argued that on the issue of fraudulent transactions Hon'ble High Court justice Chancellery Division the Commence Court London has recorded this fact that how BCCI and these parties collided and the relevant portion of the judgments reads as under:-
'"This application is concerned with six transactions involving the Bank of India (BOI and BCCI which took place between 1981 and 1986. In each of five successive years, BCCI approached BOI and requested them to enter into an arrangement under which BCCI would deposit monies with BOI for a fixed term, usually of three months. With the assistance of the finance provided by these deposits BOl would then grant to a company nominated by BCCI a loan for the same period. No formal lien was ranted in favour of BOI over the deposits, hut BCCI provided a guarantee for the repayment of the principal of the loan and accrued interest. No payments of interest were made on either side during the currency of the deposits and the loans. These arrangements came to be referred to in BOI's internal documentation as BCCI's usual deal They were said by those dealing with these matters at the London branch of BOI at the time to be motivated solely by a desire on the part of BCCI to improve what was described as its earnings to advances ratio by recording in its accounts a decrease in the amounts outstanding on loan to borrowers Page 15 of 32 ITA No . 59 7 7 & 6 01 6/ Mum/ 2 01 1 Ban k of Ind i a A Y: 04 - 05 and thereby producing a corresponding increase in the amount of interest received relative to the sums lent as at the year end. This practice was on any view highly artificial and was referred to by BOl, both in contemporaneous documents and during the course of the oral evidence, as a form of window dressing by BCCI. It was for this reasons that in each of the five years in question the arrangements were timed to coincide with BCCI'S year end and the preparation of its balance-sheet and accounts. In 1984 (the fourth transaction) there was also a similar transaction which coincided with the period in late September when BCCI'S auditors were carrying out their circularization procedures.
The liquidators of Bank of Credit and Commerce International SA (BCCI SA") and Bank of Credit and Commerce International (Overseas) Limited ("BCCI Overseas'2, who are the applicants in these proceedings, allege two things. The first is that each of the transactions was entered into by BCCI SA and BCCI Overseas to assist them and their holding company, BCCI Holdings (Luxembourg) SA ("BCCI Holdings"), to maintain the concealment of serious had debts and losses incurred by the group on a number of customer accounts and as a result of metal trading carried out for their own account There is no dispute about this. The conduct of BCCI (by which I refer to the group as a whole) was undoubtedly fraudulent and this is now common ground between the parties to this application. The second allegation is that BOI, by entering into these six transactions under review, knowingly participated in the carrying on of the business of BCCI SA and BCCI Overseas with intent to defraud the creditors of those companies or for a fraudulent purpose. If this allegation (which is denied) is made out, then I have jurisdiction u/s. 213 of the Insolvency Act 1986 to order Page 16 of 32 ITA No . 59 7 7 & 6 01 6/ Mum/ 2 01 1 Ban k of Ind i a A Y: 04 - 05 BOI to pay compensation to the liquidators for the losses to creditors which have been sustained."
10. We have gone through the argument of both the sides and noted that the transactions of the London Branch of the assessee were perfectly legal and no losses were incurred on such transactions. However the assessee was called upon to pay compensation to the liquidators of BCCI for the losses sustained by creditors and bank in respect of the transactions of BCCI for which the assessee was not a party at all. However as the compensation regarding contribution to liquidator under UIC insolvency Act was made to fulfil its statutory liability consequent on the decision of judicial authorities, the said compensation takes the character of the normal business expenditure which is allowable in full both under section 28 of Act. We find from the case law relied by assessee of Hon'ble Supreme Court in the case of DR. TA Quresi Vs CIT 287 ITR 547 SC held that the explanation to Section 37 has really nothing to do with the present case, as it is not a case of business expenditure but of business loss. Business losses are allowable on ordinary commercial principles in computing profit and once it is established that the items seized, whether contraband, formed part of the stock in trade, it follows that the seizure and confiscation of such stock in trade is to be allowed as business loss. Hon'ble Supreme Court held as under: -
"No doubt, it was initially contented by the assessee before the Income Tax authorities that the apparatus for manufacturing heroin from opium did not belong to the assessee but belonged to one V. T. Madan. However, the Assessing Officer did not agree with this contention and the Tribunal in its earlier order dated 31.3.1993 has recorded a finding (in paragraph 7 of its order) that the assessee was involved in the manufacture and selling of heroin for material gain. Thus, it has been held by the Income Tax authorities that the appellant was engaged in Page 17 of 32 ITA No . 59 7 7 & 6 01 6/ Mum/ 2 01 1 Ban k of Ind i a A Y: 04 - 05 manufacture of heroin and selling it for material gain.
No doubt, the assessee had contended that he was only earning income from his medical profession and was not doing any illegal activity of manufacturing and selling of heroin. However, the finding of fact of the Tribunal in its order dated 31.3.1993 is that the assessee was engaged in manufacture and selling of heroin. Thus the Income Tax authorities themselves have recorded a finding that the assessee was engaged in manufacture and selling of heroin. No doubt the order of the Tribunal dated 31.3.1993 was subsequently recalled by the Tribunal, but since with ultimate order dated 14.10.1998 the Tribunal has held that the heroin seized was the assessee's stock in trade it is implicit that the Tribunal reiterated to view that the assessee was doing the business of manufacture and sale of heroin.
Once the Income Tax authorities records such a finding of fact, it follows that any loss from such a business is a business loss.
The facts of this case are squarely covered by the decision of this Court in CIT vs. Piara Singh AIR 1980 SC 1271 which was a case of an assessee carrying on smuggling activity and this Court held that the loss arising out of confiscation of currency notes must be allowed as a business loss.
In the order of the Tribunal dated 14.10.1998 there is a finding of fact in paragraph 8 to the effect that the heroin forms part of the stock in trade of the assessee. In view of this finding, the Tribunal allowed the assessee's claim of deducting the loss Page 18 of 32 ITA No . 59 7 7 & 6 01 6/ Mum/ 2 01 1 Ban k of Ind i a A Y: 04 - 05 of 5 kg. of heroin whose value was assessed by the Tribunal at Rs. 2 lacs as a business loss.
We fully agree with the view taken by the Tribunal.
The High Court, however, in paragraph 10 of its judgment observed:
"The assessee in this case was engaged in profession of doctor. He had nothing to do with the contraband article Heroin for carrying on his profession. It is an admitted fact that possession of Heroin is an offence under NDPS Act. In this view, the rigour of explanation to Section 37 was fully satisfied and hence the question claiming any deduction for the value of seized article did not arise nor was an assessee entitled to claim any such deduction who was bound in indulging in such heinous and illegal business unconnected with his pious professional activity. Indeed, it was disgrace for a doctor community where one doctor was found indulging in doing such kind of activities against the humanity".
In our opinion, the High Court has adopted an emotional and moral approach rather than a legal approach. We fully agree with the High Court that the assessee was committing a highly immoral act in illegally manufacturing and selling heroin. However, cases are to be decided by Court on legal principles and not on one's own moral views. Law is different from morality, as the positivist jurists Bentham and Austin pointed out.
As already observed above, the facts of the case are squarely covered by the decision of this Court in CIT vs. Piara Singh (supra).
Page 19 of 32ITA No . 59 7 7 & 6 01 6/ Mum/ 2 01 1 Ban k of Ind i a A Y: 04 - 05 The explanation to Section 37 has really nothing to do with the present case as it is not a case of a business expenditure, but of business loss. Business losses are allowable on ordinary commercial principles in computing profits. Once it is found that the heroin seized formed part of the stock in trade of the assessee, it follows that the seizure and confiscation of such stock in trade has to be allowed as a business loss. Loss of stock in trade has to be considered as a trading loss vide Commissioner of Income- Tax vs. S.N.A.S.A. Annamalai Chettiar AIR 1973 SC 1032."
11. Alternative submissions were also made by Ld Counsel for the assessee that Without prejudice to the above contention, at least the following amounts should be allowed in full:-
a) Interest paid Rs. 173,65,21,485/- b) Legal Charges in defending the suit Rs. 17,19,52,641/-
The above sums were incurred based on the order of court on the amount of compensation payable against which the assessee had denied its liability in the legal proceeding before the High Court and Supreme Court, on account of passage of time and the claim is in the nature of interest allowable u/s 28 of the Act in computing the total income. Further, the legal expenses incurred to defend the suit against the bank to avoid the full compensation should be allowed as deduction in computing the total income u/s 28 of the Act, since the same was incurred in the ordinary course of carrying on the banking business to contest a substantial original demand of USD 10 Billion against the assessee which was reduced substantially in the appeal.
12. In view of the above facts of the case, we are of the view that the compensation paid in term of judgment of Hon'ble High Court of Justice Chanclry Division, Companies Court, London is allowable deduction in Page 20 of 32 ITA No . 59 7 7 & 6 01 6/ Mum/ 2 01 1 Ban k of Ind i a A Y: 04 - 05 view of the commercial expediency. Respectfully following Hon'ble Supreme Court, we allow the claim of assessee. This issue of assessee's appeal is allowed.
13. The next issue in this appeal of assessee is against the order of CIT(A) in confirming the disallowance of lease premium paid in respect of its bank premises amounting to Rs. 1,50,53,817/-. For this assessee has raised following grounds: -
"3.1 The CIT (A) erred in disallowing as capital expenditure the amortized lease premium paid in respect of its bank premises amounting to Rs. 1,50,53,817/-
3.2 The CIT(A) ought to have appreciated that the said sum being annual amortization of premium paid on leasehold properties for which the appellant had paid the entire premium of Rs. 124,43,05,430/- in a prior year. Since the appellant was not allowed deduction inspect of the initial sum the CIT(A) ought to have allowed at least the proportionate amount of Rs. 1,50,53,817/- claimed by the appellant. Reliance is placed on the decision of Apex Court in Madras Industrial Investment Corpn. Ltd - vs- CIT 225 ITR 802 (SC)."
14. At the outset, the learned Counsel for the assessee stated that this issue is covered against the assessee and in favour of Revenue in assessee's own case for AY 2003-04 in ITA No. 2781/Mum/2011 order dated 15-06-2012.
15. After hearing both the sides and going through the facts of the case, we find that the assessee has made claim of Rs.1,50,53,817/- on account of lease and premium of various lease of land by the Bank claiming that it is a proportionate of the total leased amount paid because the total lease and premium is spread over the life of lease and Page 21 of 32 ITA No . 59 7 7 & 6 01 6/ Mum/ 2 01 1 Ban k of Ind i a A Y: 04 - 05 proportionately this amount is claimed in each year. The AO treated the same as capital expenditure and CIT(A) also treated the same as capital expenditure and placing the reliance on the decision of ITAT, Mumbai special bench in the case of JCIT vs Mukund Ltd. 106 ITD 231 (Mum- SB). We find that the Tribunal in ITA No.2781/Mum/201 for AY 2003-04 has already considered this issue against assessee and in favour of Revenue by following the special bench decision in the case Mukund Ltd. (Supra). Respectfully following the same, we confirm the addition and dismiss this issue of assessee's appeal.
16. The next issue in this appeal of assessee is against the order of CIT(A) in confirming the disallowance of stamp duty paid on leasehold property. For this assessee has raised following ground No. 4: -
"4. The CIT (A) erred in disallowing as capital expenditure, the stamp duty of Rs.1,15,20,980/- paid on lease hold land. The CIT (A) ought not to have distinguished the decisions of Richardson Hindusthan Ltd (169 ITR 516) and Gopal Associates (326 ITR 413 MP) which are applicable to the appellant's case."
17. Briefly stated facts are that the assessee paid stamp duty of Rs.1,15,20,980/- on leasehold land and claim the same as deduction for the reason that the stamp duty paid in relation to acquisition of lease or land for a long period. The details of lease period were not furnished before the AO and hence the AO disallowed the same as capital expenditure. Aggrieved, assessee preferred the appeal before CIT(A), who also confirmed the action of the vide Para 35 of his appellate order as under: -
"35. I have considered the facts of the case an submissions of the assessee. The AO has treated the lease premium paid by the assessee as capital expenditure and decision relating to that of the A.O. Page 22 of 32 ITA No . 59 7 7 & 6 01 6/ Mum/ 2 01 1 Ban k of Ind i a A Y: 04 - 05 has been confirmed by me in earlier ground and similarly confirmed by my predecessor in the appeal for AY. 03-04 and, therefore, the lease premium has been held as capital expenditure and therefore acquisition of capital asset. Accordingly, stamp duty paid is part of the acquisition of land on lease which has been held as capital expenditure. Therefore, the expenses on stamp-duty are also held as capital expenditure. The assessee has relied on the decision of Hon'ble Bombay High Court in the case of Richardson Hindustan Ltd (supra) but in that case the Hon'ble High Court has held the lease as business and revenue expenditure. Similarly, in the case of Gopal Associates (supra) the lease was taken for a period of 7 years only and, therefore, that is not a comparable case with the facts of the case of assessee where the lease is taken for a much larger period and on which building has been constructed for residential purposes. Therefore, the cases relied by the assessee are distinguishable on facts. Hence, the claim of the assessee is rejected."
Aggrieved, now assessee is in second appeal before Tribunal.
18. We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the assessee has paid the stamp duty for registering the document in connection with the purchase of leasehold lands for residential purposes at Bandra Kurla Complex. It was claimed that this expenditure has been incurred in respect of leasehold property and it does not amount to acquisition of any asset and therefore, the claim cannot be claimed as capital in nature. The learned Counsel for the assessee relied on the decision of Hon'ble Bombay High Court in its support on the case law of Richardson Hindustan Ltd. vs CIT (1987)169 ITR 516 (Bom) and Hon'ble HP High Court in the case of CIT Vs. Gopal Associates (2010) 326 ITR 413 (HP). Hon'ble Bombay High Page 23 of 32 ITA No . 59 7 7 & 6 01 6/ Mum/ 2 01 1 Ban k of Ind i a A Y: 04 - 05 court in the case of Richardson Hindustan Ltd. (Supra) has held as under: -
"6. The expenditure of Rs. 10,453 incurred by the assessee by way of stamp, etc., in executing lease deed dated 3-4-1967 is covered by this Court's decision in Cinceita (P. ) Ltd.'s case (supra). The payment of Rs. 8,396 to the estate agents Ravee A. Sood is in terms of the lease agreement entered into between the assessee and the lessor. Clause 4(vii) of the agreement reads as under :
"The lessees shall during their occupation of the demised premises pay to Ravee A. Sood, estate agents, monthly a sum of Rs. 691.60 (calculated at 8 per cent on the monthly rent hereby reserved) by way of commission on or before the tenth of each succeeding English calendar month. Provided that the lessee shall not be liable to pay the said commission for the period during which the rent shall remain completely suspended under sub- clause (ii) hereof and in case rent is proportionately reduced under the said sub clause the lessees shall be liable to pay the said commission only on such reduced rent."
It is evident that so far as the assessee is concerned, it has taken the premises on lease. In terms of lease deed it is required to pay certain amount per month as rent to the lessor and certain other amount as commission to the estate agent during the period of lease for use of the premises. In the circumstances, we find force in Shri Dastur's submission that though described as commission the exact nature of payment is more like rent. Assuming that the payment is in the nature of Page 24 of 32 ITA No . 59 7 7 & 6 01 6/ Mum/ 2 01 1 Ban k of Ind i a A Y: 04 - 05 commission or brokerage even then it would have to be allowed as deduction as held by this Court in the decisions relied on by Shri Dastur."
19. In view of the above, decision of Hon'ble Bombay High Court wherein it is held that expenditure incurred by the assessee by way of stamp duty etc., in connection with lease agreement was covered by its own decision in the case of CIT vs. Cinceita (P.) Ltd. (1982) 137 ITR 652 (Bom), respectfully, following the same we allow the appeal of the assessee on this issue.
20. The next issue in this appeal of assessee is against the order of CIT(A) in confirming the disallowance of expenditure relatable to exempt income under section 14A of the Act. For this assessee has raised following ground No. 5.1 to 5.3: -
5.1 The CIT (A) erred in confirming the disallowance u/s 14A on an estimated basis at 0.5% of average investments yielding tax free income without appreciating the fact that the appellant had not incurred any expenditure to earn the said income.
5.2 The CIT (A) ought to have noted no disallowance on estimated basis could be done under section 14A .Reliance is placed on the decision of Hon'ble ITAT Delhi in the case of Minda Investments Ltd Vs DOT (ITA 4046/Del/2009).
5.3 Without prejudice to the above, the CIT(A) ought to have followed in any case the decision of Jurisdictional ITAT Mumbai in the case of Godrej Agrovat Ltd Vs ACIT (2010-TIOL-616-ITAT-Mum) wherein it had been held that the disallowance will be 2% of exempt income and not more than that."Page 25 of 32
ITA No . 59 7 7 & 6 01 6/ Mum/ 2 01 1 Ban k of Ind i a A Y: 04 - 05
21. Briefly stated facts are that the assessee has following exempt income, which reads as under: -
Details Rs.
Interest on infrastructure lending 38,73,05.351/-
under section 10(23G)
Dividend from domestic companies 28,79,69,464/-
exempt under section 10(33)
Tax free bonds exempt under section 10,21,09,724/-
10(33)
77,73,84,539/-
The AO estimated adhoc amount of expense towards this exempt income at Rs. 56,15,05,000/-.
22. At the outset, the learned Counsel for the assessee stated that exactly identical issue in AY 2001-02 was decided partly in favour of assessee in ITA No. 1498/Mum/2011 order dated 09-04-2014 wherein, disallowed was restricted at 1% of the exempt income. The learned Counsel for the assessee also drew our attention to Para 4.4. and 4.5 of the Tribunal's order in assessee's own case which reads as under: -
"4.4 Having considered the rival submissions as well as relevant material on record. We note that the CIT(A) has accepted the fact that the assessee has purchased the securities in question by using its own fund and, therefore, there is no interest expenditure in respect of these securities. However for disallowance of administrative expenses u/s 14A, CIT(A) has directed the AO to compute the disallowance at .5% of the average investment earning tax free income. It is pertinent to note that .5% of the average investment is clearly given under Rule 8D which is not applicable for the year under consideration. Further the securities are maintained by the assessee as stock in trade and the income arising from the sale and purchase of securities is taxable as business income of the assessee, therefore, the expenditure if any incurred on account Page 26 of 32 ITA No . 59 7 7 & 6 01 6/ Mum/ 2 01 1 Ban k of Ind i a A Y: 04 - 05 of administrative expenses for maintaining these securities the whole of the said expenditure cannot be attributed to the dividend income when the income arising from the sale and purchase of the securities is taxable. Accordingly only a reasonable estimate has to be made for disallowance of expenditure u/s 14A in respect of earning of dividend income and tax free interest. The Coordinate Bench of this Tribunal in the case of DCIT Vs. HDFC Bank Ltd. (supra) in para 7.1 and 7.2 has considered an identical issue as under:-
7.1 In the case in hand, the CIT(A) considered the facts and pointed out that the assessee is maintaining the treasury department which looks after the day to day investment portfolio of the bank including tax free investments. Having regard to the said factual proposition, the administrative expenses relatable to the income not forming part of the total income can be attributable to the expenditure of special treasury department maintained by the assessee; but it seems the assessee has not filed the exact detail of the operating expenses and therefore, no option was left but to estimate the disallowance. 7.2 Even otherwise, the overall administration of the bank looks after all the department including the treasury department; therefore, in the absence of the exact expenditure incurred in relation to the activity relating to tax free investment and earning the income not forming part of the total income, in our considered opinion, the CIT(A) is justified in restricting the said disallowance to 1%. Accordingly, we do not Page 27 of 32 ITA No . 59 7 7 & 6 01 6/ Mum/ 2 01 1 Ban k of Ind i a A Y: 04 - 05 find any reason to interfere with the order of the ld CIT(A) on this issue of disallowance of administrative expenditure u/s 14A.
Accordingly, the ground raised by the revenue as well as the assessee in the respective appeal and cross objection are liable to be dismissed.
4.5 Accordingly, we are of the considered view that 1% of the exempt income will be a reasonable disallowance on account of administrative expenses u/s 14A."
23. In view of the above the learned Counsel for the assessee requested for restricting the disallowance at 1% of the exempted income. The learned DR has not objected to the same.
24. After hearing both the sides and going through the facts of the case, we direct the AO to restrict the disallowance on exempt income at 1% and this issue of assessee's appeal is partly allowed.
25. The next issue in this appeal of Revenue in ITA No. 6016/Mum/2011 against the order of CIT(A) in deleting/ excluding the income of foreign branches. For this Revenue has raised following ground No. 1: -
"On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in directing the A.O. to exclude the income of foreign branches in violation to Central Government Notification No. S.O. 2123(E) dt. 28.8.2008 which clearly indicates its inclusion while arriving at the total income."
26. At the outset it is noticed that this issue has already been deliberated by the Tribunal in assessee's own case for AY 2003-04 in ITA No. 3534/Mum/2011 vide order dated 15-06-2012 and has allowed the claim of the assessee vide Para 34 and 35 as under: -
Page 28 of 32ITA No . 59 7 7 & 6 01 6/ Mum/ 2 01 1 Ban k of Ind i a A Y: 04 - 05 "34. The next two grounds are interlinked, wherein the assessee has sought relief of Rs. 90,63,29,812/-
in respect of profit in foreign branches. The AR submitted that complete and comprehensive submissions made before the CIT(A), who after considering the submissions, allowed the assessee's appeal. The AR, thus pointed out the relevant portion of the written submissions also placed before us. "The respondent had excluded the income from foreign branches based on Double Tax Avoidance Agreement entered into between the Govt. of India and the Govt. of the respective countries. The AO had granted relief only in respect of branches at Singapore and Japan and in respect of the other branches denied the benefit to the appellant. The CIT (A) allowed the claim of the respondent based on the decision of Hon'ble ITAT in appellant's own case. The respondent submits that this issue has been decided in favour of the assessee by Supreme Court of India in CIT Vs PV.AL.Kulandagan Chettiar, reported in 267 ITR 654 which upheld the decision of ITAT Chennai in the case of PV.AL.Kulandagan Chettiar Vs ITO (3 ITD 426). The ITAT had held that "So the argument that the agreement must be so interpreted as to retain the taxation powers with the Government of India in order to prevent fiscal evasion has only to be rejected. The agreement is mainly for avoidance of double taxation. That means the income shall not be taxed at the same time in both the countries in India and Malaysia. So, if we interpret the agreement to mean that the Indian Government and the Malaysian Government both still retain even after the execution of the agreement the power to tax at the same time the same income it will only Page 29 of 32 ITA No . 59 7 7 & 6 01 6/ Mum/ 2 01 1 Ban k of Ind i a A Y: 04 - 05 frustrate the object with which the agreement is executed". The ITAT had therefore concluded, "As regards business profits paragraph I of Article 7 provides that the profits of an enterprise of a contracting state shall be taxable only in that contracting state. We will take it that the assessee being a resident of India, the enterprise is an Indian enterprise. So the Profits are taxable in India. But this power of India to tax, as further provided in the Article, exists only when the enterprise does not carry on business in Malaysia through a permanent establishment situated in Malaysia. This is an undisputed fact. So the right of the Indian Government to levy tax in respect of business profits of these types of Indian Enterprise as provided in opening paragraph of Article 7 is taken away because a permanent establishment is situated in Malaysia." In the appellant's case also in all the foreign countries the operation is carried out through its branches which is a permanent establishment situated outside India. Hence the income attributable to these branches cannot be taxed in India. This issue has also been decided in favour of the appellant by ITAT in appellant's own case in ITA No. 1679/Mum/2001 dated 27/03/2008 for the AY 1997-98, wherein the coordinate Bench has held, ".The Learned CIT(A) after examining articles 23, 24 and 25 of the different DTAAs found that the laws in force in either of the contracting states would govern the taxation of income in the respective contracting states, i.e. credit of tax paid in one state would be given in the other state. He also found that Article 7 stated that if enterprise of one State carries on business in another State through permanent establishment then the State where the business is Page 30 of 32 ITA No . 59 7 7 & 6 01 6/ Mum/ 2 01 1 Ban k of Ind i a A Y: 04 - 05 carried out would levy tax on the profits attributable to the permanent establishment. On analysis of these provisions the learned CIT(A) found that Article 7 of the different DTAAs are specific provision while Articles 23, 24 and 25 are general provisions. The coordinate Bench in the case of the assessee, in the earlier year's case held, "As a result he also found that the issue already decided by the Tribunal in assessee's own case for the earlier years have to be followed. We do not find any infirmity in the above finding of the CIT(A). Therefore consistent with the earlier finding of the Tribunal in assessee's own case for the earlier years case, we do not see any merit in the ground taken by the Revenue". The AR submitted that in the instant case also, the view should be taken in the assessee's favour."
Even Hon'ble Bombay High Court also confirmed the decision of Tribunal in Income Tax Appeal No. 1630/Mum/2012 vide order dated 07-01-2015, wherein Hon'ble High Court has dismissed the Revenues contention by observing in Para 4 as under: -
"4. With the assistance of Mr. Suresh Kumar and Sanjiv Shah, we have perused the memo of Appeal. The Assessing Officer was satisfied that the benefit of the Double Taxation Avoidance Agreement is admissible provided the proof is produced in relation to payment of taxes by the Assessee abroad. In other words, if the Assessee has permanent establishment abroad, then, the Assessee would have to produce evidence regarding payment of taxes pertaining to the income of these establishments abroad. On production of such evidence, the Assessee would be entitled to the benefit. That evidence was always available and as Page 31 of 32 ITA No . 59 7 7 & 6 01 6/ Mum/ 2 01 1 Ban k of Ind i a A Y: 04 - 05 noted by the Commissioner of Income Tax (Appeals) and the Tribunal. In the circumstances, the authorities did nothing but follow their earlier orders based on identical facts and circumstances. The finding of fact, therefore, cannot be termed as perverse or vitiated by any error of law apparent on the face of the record. The Appeal does not raise any substantial question of law. It is devoid of merits and is, accordingly, dismissed. No costs."
27. As the issue is squarely covered in favour of assessee in assessee's own case, respectfully following the Hon'ble Bombay High Court and co-ordinate Bench decision, we confirm the action of the CIT(A) and deleing the addition. This issue of Revenue's appeal is dismissed.
28. In the result, the appeal of Revenue is dismissed and the appeal of assessee is partly allowed.
Order pronounced in the open court on 26-07-2017.
Sd/- Sd/-
(RAJESH KUMAR) (MAHAVIR SINGH)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Dated: 26-07-2017
Sudip Sarkar /Sr.PS
Copy of the Order forwarded to:
1. The Appellant
2. The Respondent.
3. The CIT (A), Mumbai.
4. CIT
5. DR, ITAT, Mumbai
6. Guard file. //True Copy//
BY ORDER,
Assistant Registrar
ITAT, MUMBAI
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