Income Tax Appellate Tribunal - Ahmedabad
Uti Bank Ltd.,, Ahmedabad vs Assessee on 3 May, 2012
1 ITA No.2571 & 2736Ahd/2006
A.ssessment Year 2003-04.
IN THE INCOME TAX APPELLATE TRIBUNAL " A "BENCH, AHMEDABAD
(BEFORE SHRI D. K. TYAGI JM & SHRI ANIL CHATURVEDI A.M.)
I.T.A. No. 2571/AHD/2006.
(Assessment Year: 2003-04)
UTI Bank Limited, Vs. Assistant Commissioner of
"Trishul" Income Tax,Circle-8,
Opp. Samarthaeshwar Mahadev, Kendriya Pratyaksha Bhavan,
Near Law Garden, Near Panjara Pole,
Ellisbridge, Ahmedabad-380 006. Ambawadi, Ahmedabad.
(Appellant) (Respondent)
I.T.A. No. 2736/AHD/2006
(Assessment Year: 2003-04)
Assistant Commissioner of Vs. UTI Bank Limited,
Income Tax,Circle-8, "Trishul"
Kendriya Pratyaksha Bhavan, Opp. Samarthaeshwar Mahadev,
Near Panjara Pole, Near Law Garden,
Ambawadi, Ahmedabad. Ellisbridge, Ahmedabad-380 006
(Appellant) (Respondent)
PAN: AAACU 2414K
Appellant by : Shri Arvind Sonde.
Respondent by : Shri Kartarsingh, CIT (D.R.)
आदे श)/ORDER
(आदे Date of hearing : 3-5-2012 Date of Pronouncement : --7-2012 PER: SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER.
These are two cross appeals one filed by the assessee and the other filed by the Revenue against the order of CIT (A)-XIV, Ahmedabad dated 25-9-2006 for the assessment year 2003-04.
2 ITA No.2571 & 2736Ahd/2006A.ssessment Year 2003-04.
2. The assessee has raised in its appeal as much as six effective grounds of appeal.
3. The first ground relates to disallowance of frauds loss amounting to Rs.15.46 cr.
4. The assessee is a Banking company governed by the Banking Regulation Act, 1949. The return of income was filed on 21-10-2003 declaring total income of Rs.2,65,41,70,950/-.The case was taken up for scrutiny. Consequently the assessment was completed u/s 143(3) on 30- 12-2005 and the total income was determined at Rs.3,62,02,62,000/- after making various disallowances.
5. On going through the accounts during the course of assessment proceedings it was noticed by the A.O. that operating expenses included other expenditure of Rs.56.76 crores comprising of various sub-heads including an amount of Rs.20,87,88,103/- which was termed as "loss on account of frauds." It was submitted by the assessee that it represents the payment made by bank amounting Rs.15.56 crores to various parties on account of failure by Home Trade Ltd., a broking company engaged in broking deals syndicated by the Bank to make delivery of securities to the buying counter parties. Bank has been providing advisory services to various Provident funds and Co-operative Banks and Gramin Banks in primary market issues since January, 2001. These advisory services were being provided to meet the clients' ongoing requirements for Government Securities/PSU Bonds which were available in the secondary market. Since 3 ITA No.2571 & 2736Ahd/2006 A.ssessment Year 2003-04.
the bank was not a registered broker with any stock exchange, its services were restricted to advising/facilitating the clients in sourcing their requirements from brokers at competitive market rates. Where deals are facilitated by advisors, the investors make payment directly to the brokers after receiving the confirmation of the traction from the advisors since the advisors role was restricted to providing the advisory services only and not receiving the consideration of the transaction. Initially, transactions relating GOI/ PSU Bonds were routed through the Bank, i.e. the payment was directly received by the Bank and passed on to the brokers subsequently by the bank within specified delivery time limit of 60 days. As most of the investors did not maintain SGL or constituent SGL with any scheduled bank, the mode of delivery was in physical form only. Further in certain cases, securities had to be converted to marketable lots by way of splitting or consolidating of the securities held with the broker. The aforesaid process generally involved a time of 1-2 months and hence the delivery time of 60 days. These transactions were done with Giltedge Management Services Ltd., a group company of Home Trade Ltd. On request from investors the bank obtained quotes from local brokers. The investments were approved for brokers with lowest quotations. Accordingly 27 deals were struck between the banks clients and Giltedge Management Services Ltd.,/Home Trade Ltd., on the basis of best market quotations provided by them. Out of the 27 deals deliveries were made by them in 15 cases. However, in the remaining 12 cases securities worth Rs.16.88 crores were not delivered to the buying counter parties. The details of these 12 cases are as under:-
4 ITA No.2571 & 2736Ahd/2006A.ssessment Year 2003-04.
Sr.No. Name of the party. Nature of security Amount (Rs)(crores)
1. Indian Iron & Steel Co. Ltd 14.40% PSEB 0.80
2. Indian Iron & Steel Co. Ltd. 15.57% KBJNL 1.00
3. Indian Iron & Steel Co. Ltd. 15.50% SSNL 1.00
4. Indian Iron & Steel Co. Ltd. 12.59% GOI 04 1.00
5. Steel Authority of India Ltd 8.07% GOI-17 1.50
6. Indian Iron & Steel Co. Ltd. 143.35% MKVDC 2.00
7. Indian Iron & Steel Co. Ltd. 13.75% GOI-05 2.00
8. Indian Iron & Steel Co. Ltd. 13.65% GOI-07 1.00
9. Indian Iron & Steel Co. Ltd. 12.35% GOI-04 1.00
10. Jute Corporation of India 12% IDBI-07 0.75
11. Bhatpara Co-op. Bank 12.75% GOI-02 3.83
12. Bajaj Capital 12% IDBI-07 1.00 TOTAL 16.88 Out of the aforesaid amounts, Rs.15.56 crores was paid by the bank to the respective buying counter parties and this was claimed as loss on account of fraud.
6. The A.O. also noticed that Reserve Bank of India vide its order dated 24-1-2003 levied a penalty of Rs.5 lac on the assessee in respect of the above syndication. The R.B.I. held that the Bank had contravened the provisions of section 6(1) of the Banking Regulation Act, 1949 by acting as a "broker" for purchase or sale of Govt. Securities and for selling the securities without taking the delivery of the securities thereby indulging in "short selling" which is prohibited by RBI guidelines. After considering the aforesaid facts, the A.O. held that the out of the fraud expenses of Rs.20,87,88,103/- an amount of Rs.15.56 crores was paid to various Provident Fund organization cannot be termed as fraud expenses interalia for the following reasons.
5 ITA No.2571 & 2736Ahd/2006A.ssessment Year 2003-04.
(1) The transaction entered into by the assessee has been held to be in violation of section 6(1) of the Banking Regulation Act, 1949 by the Bank and thereby a penalty of Rs.5 lacs was imposed on the assessee and the same was paid by the assessee.
(2) The A.O. was of the view that there was no fraud committed by the Bank as the transactions were between Home trade Ltd (the broker) and the P.F. organizations. The claim of the assessee that there was vicarious liability on it was not acceptable to the AO. The A.O. further held that the case laws relied upon by the assessee in cases of section 36(1) were in respect of business other than banking. Since the assessee is not a private individual carrying on money lending business case-laws cited does not apply to the assessee. The A.O. therefore held that the compensatory payments claimed as fraud expenses for the default committed by third party is not an allowable business expenditure as it was not incidental to the business of banking including merchant banking.
7. Aggrieved by the order of the A.O. on this ground, the assessee preferred appeal before the CIT (A).
8. Before the CIT (A), assessee reiterated the submissions made before the A.O. and it was further submitted before CIT (A) that there were 27 syndication deals struck between the investors and Home Trade Ltd., about 15 deals were successfully completed and 12 deals could not be completed and remained outstanding. These transactions where either Home Trade Ltd. or its associate concerns were the counter parties. The said parties failed to deliver securities after taking funds from investors. The grievances 6 ITA No.2571 & 2736Ahd/2006 A.ssessment Year 2003-04.
of the investors were persisting for long time and the investors were demanding for refund of the amounts. It was also submitted that the bank was advised that the bank incurred no liability to the investors but however, considering the various factors the Banks management decided to make suitable compensation in appropriate cases. The business consideration and the factors which influenced the bank to pay the compensation interalia were as under:-
(a) The investors were provident funds having multitudes of employees as their members. There would have been an extremely adverse publicity of mouth against the bank if the bank had taken a strict stand. On the contrary the bank would be turning the employees as their ambassadors of goodwill if the bank rescued from the stalemate.
(b) There would have been adverse newspaper publicity and suspected political involvement had the movement of employees gained momentum and this would have ruined the reputation of the bank.
(c ) The bank was holding large deposits from PSUs and provident funds.
There were many employees who were constituents of the bank. The bank would have lost the confidence of these constituents by taking a strict view while, ironically, the bank could consolidate its position and reputation as a result of the payment.
(d) Having regard to the quantum of funds involved, legal proceedings of all forms against the bank, with a view to seeking refund of the funds, was a very strong possibility; this could have dragged the bank into enormous litigation.
(e) The bank realized while the bank as also the investors were innocent and were the victims of the fraud, as between two innocent persons, the loss may be suffered by a person who has been privy to making offer to another innocent person.
7 ITA No.2571 & 2736Ahd/2006A.ssessment Year 2003-04.
9. The assessee's submission that the compensation was an item of loss on account of fraud arising due to 3rd party fraud has been paid by the assessee in the business interest on a voluntary basis. The assessee has also not suffered anything in relation to the short sale transaction noted adversely by the RBI. The levy of penalty by RBI was for procedural lapses. SEBI, the appropriate authority in-charge of merchant banking activities, has also not found anything wrong with the assessee. The assessee also relied on the following decisions:-
(1) CIT vs. Nainital Bank Ltd., 62 ITR 638 (SC) (2) CIT vs. Georgepolous 146 ITR 380 (Mad.) (3) Eveready Industries India Ltd. vs. DCIT 78 ITD 175 (Cal.) (4) Badridas Daga vs. CIT 34 ITR 10 (SC) (5) Annamalai Timber Trust Ltd vs. CIT 47 ITR 814 (Ker)
11. CIT (A) did not agree with the contentions of the assessee. He upheld the decision of the AO by holding as under:-
"3.4. I have carefully considered the facts of the case and the submissions as advanced by the appellant along with various case laws relied upon. However, I do not agree with the appellant's view for the following reasons:-
3.4(i) It is a fact that the assessee was only mandated by the SEBI as well as RBI to be advised in the matter of purchase and sale of shares. The bank cannot act as a broker. This is very evident from the penalty order of RBI. Further, as per the agreement on 20-1-2002 made between the appellant and the Home Trade Ltd., for availing of the internet payment gateway covenants to the provisions No.3 says that "the securities trader shall carry out all verifications for the customer as may be required on an independent basis and UTI Bank 8 ITA No.2571 & 2736Ahd/2006 A.ssessment Year 2003-04.
shall not be a party to the agreement between the customers and the securities trader and the customers." These clauses clearly show that Home Trade Ltd., was responsible for delivery of the securities and the transactions were between the said company and the Provident Fund Organization. In the circumstances, the claim of the appellant that there was vicarious liability on the appellant is not found acceptable.
3.4.(ii) The IISCO (Indian Iron & Steel Co. Ltd.) wrote a letter to the UTI Bank dated 23-9-2002 and alleged that they issued cheque with drawees name as UTI Bank Ltd., but the bank people added the account details of Home Trade Ltd., and made them counter party. IISCO filed complaint with police and court authorities, but later on withdrawn the complaint and submitted prayer with Chief Metropolitan Magistrate, Kolkatta, after receiving the payment from UTI Bank for refund of P.F. amount. Thus, these facts show that the appellant made payment to IISCO authorities not for any contractual obligation and not for business needs, but to end the allegations that they were indulged in uncalled for activities.
3.4.(iii) The transaction entered into by the assessee has been held as violative of sec.6(1) of the Banking Regulation Act, 1949 by the RBI and as a punitive measure a penalty of Rs.5 lacs was imposed on it and the same has been paid by it. The Chairman and MD agreed unequivocally during the hearing by the RBI that the type of transaction done by the assessee is neither permissible under the Banking Regulation Act, 1949 nor under the SEBI Act.
3.4.(iv) In view of the above indictment by the RBI, the transaction in question was not incidental to its business of banking. The question of allowance of such expenditure u/s. 37(1) is, therefore, untenable.
3.4.(v) The appellant showed this expenditure related to fraud expenses under miscellaneous expenses and also penalty levied by the RBI was also claimed under miscellaneous expenses. These payments were in violation of the banking regulations Act. The Hon. Supreme Court in the case of Maddi Venkataramanan & Co. (P) Ltd. vs. CIT (1998) 229 ITR 534 (SC) held that one can carry on his trade 9 ITA No.2571 & 2736Ahd/2006 A.ssessment Year 2003-04.
without violating the law and after the introduction of Explanation in Sec. 37 such expenditure is clearly disallowable. In the present case, the transactions entered into by the appellant were found to be violative of Sec. 6(1) of the Banking Regulation Act, 1949 and the appellant has been penalized for the violation. The alleged fraud payment made by the appellant is emanating from the above transaction. The decision of Hon. Supreme Court is squarely applicable to the facts of the present case. The compensatory payment claimed as fraud expenses for the default committed by the third party is not an allowable expenditure, as it is not incidental to the business of banking including the merchant banking.
3.4 (vi) The loss incurred for making these payments is not in the course of its normal business. Therefore, the appellant's submission that it was made in the normal course of business activities is not acceptable.
3.4.(vii) Further, the submission of the appellant that, the payments were made to compensate innocent investors of IISCO Provident Fund is business expenses and allowable, is also not acceptable. It may be treated as application of income/application of profit, but cannot be treated as expenditure for earning taxable profit.
3.5. The case laws relied on by the appellant are not applicable as the facts in those cases are different than the facts of the present case. In the case of CIT vs. Nainital Bank Ltd., 62 ITR 638 (SC), the issue was that the assessee Bank lost currency notes and jewellery pledged with it by its constituents which were stolen by dacoits. Here, the facts were entirely different. In the case of CIT vs. Georgepolous, 146 ITR 380 (Mad.), the matter was that the assessee firm was not under an obligation, either under the terms of the agreement or under any provisions of law or of custom, to meet the claim for the payment under obligation entered by the previous owner, which has been taken succession by the concerned assessee and the Court held that payment was necessary to maintain the reputation and obligation. Here, there is no such obligation already agreed upon by the assessee or by its predecessors. In the case of Eveready Industries India Ltd. v. DCIT, 78 ITD 175 (Cal.), the Court held that if there is any loss or mishandling of lapse or error of the 10 ITA No.2571 & 2736Ahd/2006 A.ssessment Year 2003-04.
employee and there is negligence on the part of the employee, the loss may be allowable. Here it is not the case. It is not the case that losses were incurred for any fault of any particular employee. In the case of Badridas Daga v. CIT 34 ITR 10(SC), it was held that the loss incurred on account of embezzlement/misappropriation of funds by the agent is allowable, here it is not the case of embezzlement by any particular employee. Hence these case laws are not applicable. In the case of Annamalai Timber Trust Ltd. vs. CIT 47 ITR 814 (Ker.), it was held that for any negligence of the assessee's servants while acting on the course of their employment is also incidental to such business, the liability of the assessee to pay damages for such negligence is also incidental to the business, and loss resulting from payment of such damages is allowable. It is not the case in the present case. Therefore, in my view, the A.O. was justified in disallowing the payment made for Rs.15.56 crores and also justified in disallowing the penalty of Rs.5 lacs levied by the RBI. Hence ground No.2 and 3 both are rejected."
13. Aggrieved by the decision of CIT (A), the assessee is now in appeal before us.
14 Before us, the Ld. A.R. submitted that the Bank is registered with the Securities & Exchange Board of India (SEBI) as a Category I Merchant Banker and carries on merchant banking activities within the ambit of the SEBI Regulations and the Banking Regulations Act. During the year 2002, the bank had syndicated/facilitated certain security deals mainly with certain PSU Provident Fund trusts through Home Trade limited and its holding company, Giltedge Management Services Limited as the seller counter parties. In the deals that were struck, the Bank had acted only as a syndicator by bringing the counter parties together. The contract notes were issued by the broker which was also the counter-party and the 11 ITA No.2571 & 2736Ahd/2006 A.ssessment Year 2003-04.
payments were received by him directly. In none of the cases the bank had issued any contract note.
15. In the middle of the year 2002, the assessee became aware of the fact that the two broking firms namely Home Trade Limited and Giltedge Management Services Ltd, who were the counter parties for the deals syndicated by the assessee, had defaulted and failed to make the delivery of the securities to the respective investing parties i.e. buying counter parties. The Home trade groups were charged by the media as fraud companies and also immediately were put under investigations by the statutory authorities.
16. In the transactions under consideration the cheques were issued by the Provident Fund trusts in the name of "The UTI Bank Limited Account No ____ which indicated that the Assessee was not the counter party. However the contention of the investing parties was that they were under bonafide belief that the bank is counter party. The investing parties were contending that they were not aware of the selling counter parties. The investing parties had filed complaints against the assessee bank and alleged that it had invested the money with the assessee and that they did not have any privity of contract with Home Trade Limited. The Ld. A.R. submitted that though the bank was not involved in the fraud perpetuated by Home Trade Limited, but being one of the parties to the securities transactions, it would have proved highly detrimental to and severely impacted the bank's reputation and its brand image. The assessee was also of the view that the climate of adverse publicity was being sought to be created by the Provident fund and the unit of employees concerned against 12 ITA No.2571 & 2736Ahd/2006 A.ssessment Year 2003-04.
the assessee, leading to a negative perception in the minds of the people including the customers that the assessee was also a party to the scam. This according to the assessee would have proved detrimental to the reputation and adversely affected the Banks activity to prove its business besides impairing its capability to generate business from Public Sector units and from Central and state Governments. It could have adversely affected the bank's ability to grow its business in the eastern region where Home trade limited and its associates had defrauded investors. The assessee considering the overall situation including its business interest, its brand image and goodwill felt that under the circumstances, it has a fiduciary accountability and responsibility. Thus in order to avoid protracted litigation and out of commercial expediency, the assessee decided to have a settlement with some of the investing bodies particularly because the PSU employees interest was involved in those transactions subject to the condition that the amount would be refunded to the assessee if any amount is recovered from Home Trade Ltd or their custodians. The assessee also filed a case against Giltedge Management Services Ltd for recovery of the amounts paid to the investing parties. The staff accountability in the matter was also fixed and the concerned manager was dismissed from services of the assessee. The assessee also placed on record at page 52 of the paper book the letter dated 13-8-2002 of Indian Iron & Steel Co. Ltd., to SEBI, at page 69 of the paper book was the copy of the complaint made by Chairman, Hindustan Steel Ltd., to SEBI. The Ld. A.R. placed at pages 25- 34 of the paper book the copies of the newspaper clippings where the news of the scam was reported. It was thus argued on behalf of the assessee that though there was no liability on the assessee, the assessee paid the amount out of commercial expediency. The Ld. A.R. further stated that by 13 ITA No.2571 & 2736Ahd/2006 A.ssessment Year 2003-04.
making the payment, the assessee has been in a position to retain the customers and the business has improved. As far the allowability of penalty of Rs.5 lacs is concerned the Ld. A.R. vehemently argued that the same being for the purpose of business and incurred during the course of business, it should be allowed as deduction.
17. In its support, the Ld. A.R. relied on the following decisions:-
(1) CIT Vs Georgepolous (1984) 146 ITR 380 (Mad.) (2) Everready Ind.India Ltd Vs DCIT (2001) 78 ITD 175 (Cal) (3) Anamalai Timber Trust Ltd. Vs CIT (1963) 47 ITR 874 (Kol.)
18. For the proposition that the payment made pursuant to commercial expediency is an allowable expenditure, the Ld. A.R. relied on the following decisions:-
CIT Vs Chandulal Keshavlal & Co (1960) 38 ITR 601 (SC) Sassoon J.David & Co. P.Ltd Vs CIT (1979) 118 ITR 261(SC) J.R.Patel & Sons Ltd vs CIT (1968) 69 ITR 782 (Guj)
19. The Ld. D.R. on the other hand contended that the A.O. has rightly disallowed the aforesaid payments as it was not a liability of the assessee. The Ld. D.R. pointed out that the assessee was only mandated by SEBI and Reserve Bank of India to give advice in the matter of purchase and sale of the shares. The assessee cannot act as broker. He also pointed out to the agreement entered on 20-1-2002 between the assessee and the Home Trade Ltd., which is reproduced on page 21 of the assessment order. The clauses of the agreement reveal that Home Trade Limited was responsible for the delivery of the securities and the transactions were 14 ITA No.2571 & 2736Ahd/2006 A.ssessment Year 2003-04.
between the Home trade Limited and Provident Fund Organization. The Ld. D.R. submitted that the assessee made the payment to PF organisations of the PSUs subject to the condition that they will be returning the amount as and when the payment was received from the defaulting companies. In fact there was no fraud committed on the bank as the transactions were between the broker and the PF organization. CBI has charge sheeted the employee of the assessee only in the case of Jute Corporation of India wherein the amount involved was only Rs 75 lacs. The final order of the criminal court has not been pronounced holding as to who are found guilty in fraud. The assessee has not made any disclosure about the same in the annual accounts or in the statement of total income and there was no observation to this effect by the Auditors in their report. In these circumstances, the claim of the assessee that there was vicarious liability on the assessee is not acceptable. It was pointed out by the D.R. that the assessee's stand before the RBI was that it had never entered into short selling or brokering and the mistake had happened due to ignorance and that there was no monetary loss suffered out of the above transaction. This statement which was made before the RBI is opposite to that made during the course of assessment proceedings to claim the loss. Thus the compensatory payments claimed as fraud expenses for the default committed by 3rd party is not allowable business expenditure as it is not incidental to the business of banking including merchant banking. The Ld. D.R. also relied on the decision of Supreme Court in the case of Maddi Vankatanraman & Co. (P) Ltd. vs CIT (1998) 229 ITR 534 (SC).
20. We have heard the rival contentions and perused the material on record. The factual matrix is as under:-
15 ITA No.2571 & 2736Ahd/2006A.ssessment Year 2003-04.
During the year the assessee had syndicated certain security deals for various organisations through Home trade Limited and its holding company. As per the contract between the investors and the broker, the broker was required to deliver the securities to the investors contracted for. During the year 27 syndication deals were struck between the investors and Home trade Limited. Out of the 27 deals, 15 deals were successfully completed and 12 deals could not be completed and remained outstanding. In all these cases the contract notes were issued to the investors by the broker. The assessee had only acted as a facilitator between the investor and the broker. In all these cases the broking firm failed to deliver securities after taking funds from the investors. When the investors did not get the securities contracted for, they pressurized the assessee to make good the losses as their contention was that they were under bonafide belief that bank is counter party. The investors had filed complaints against the assessee and alleged that it had invested the money with the assessee and they did not have any privity of contract with Home trade Limited. Home trade group was charged by the media as fraud companies and was immediately put under investigations by the statutory authorities. The news of the scam perpetuated by Home Trade group was very widely publicized by various newpapers and media throughout the country. The assessee was advised that it incurred no liability to the investors as it was only a facilitator. However the assessee decided to pay compensation for the reason that the investors were provident funds having large number of employees as their members. Had the bank taken a very rigid stand and refused the compensation to the funds, the assessee was of the view that it would have given extremely adverse publicity against the assessee by the media and it political involvement which would have ruined the reputation of 16 ITA No.2571 & 2736Ahd/2006 A.ssessment Year 2003-04.
the bank. The assessee was also holding large deposits from PSUs and provident funds. The employees of the PSUs were the customers of the assessee. The assessee was of the view that nonpayment would have resulted into the assessee being drawn into long drawn litigation. In view of all these factors, the Assessee decided compensate the investors by making payment of Rs 15.56 crore and this payment was claimed as loss due to fraud. The aforesaid facts are undisputed facts and have not been controverted by the Revenue. The only dispute is whether the amount of compensation of Rs 15.56 crore paid is an allowable expenditure or not.
In the case of CIT vs. Georgepolous (1984) 146 ITR 380, (Mad.) the Hon'ble Madras High Court has held that U/s 37 there is no requirement that an item of expenditure or outgoing must be incurred or laid out with a view to earn the profits nor is there any requirement that the expenditure must be incurred in order to meet an obligation arising either out of a commercial contract or out of any provision of law or custom. All that the section requires is that the expenditure must be incurred or laid out wholly and exclusively for the purposes of the assessee's business.
In the case of Annamalai Timber Co. vs. DCIT (1963) 47 ITR 814 (Ker) the issue was that the assessee was in the business of timber. It had hired elephants for carrying logs. Due to the negligence of the mahout engaged for controlling the elephants, injuries suffered by the elephant.
Assessee paid damages to the owner of the elephant. The H'ble High Court held that the compensation that the assessee had to pay arose from the carrying on of its business and is incidental thereto though the liability of the assessee in respect of damages paid by it stemmed from the 17 ITA No.2571 & 2736Ahd/2006 A.ssessment Year 2003-04.
negligence of its servants. The High court held that it made no difference that by such negligence a breach of contract had resulted. Considering the nature of business, the risk of negligence which was attributed to the assessee's servants while acting in the course of their employment was clearly incidental to such business. It thus followed that the consequential liability to pay damages for such negligence was also incidental to the business and hence allowable.
In the case of CIT Vs Chandulal Keshavlal & Co (1960) 38 ITR 601 (SC) the Hon'ble Apex Court held that in deciding whether the payment of money is a deductible expenditure one has to take into consideration question of commercial expediency and the principles of ordinary commercial trading. If the payment or expenditure is incurred for the purpose of trade of the assessee it does not matter that the payment made inure to the benefit of a third party.
In the case of Sasoon J. David & Co. Pvt. Ltd., (1979) 118 ITR 261 (SC). The Hon'ble Apex Court held that the expression "wholly and exclusively" does not mean "necessarily". Ordinarily it is for the assessee to decide whether any expenditure should be incurred in the course of its business. Such expenditure may be incurred voluntarily without any necessity and if it is incurred for promoting the business and to earn profits the assessee can claim deduction even though there was no compelling necessity to incur such expenditure. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction if it satisfies otherwise the tests laid down by law.
18 ITA No.2571 & 2736Ahd/2006A.ssessment Year 2003-04.
In the case of J.R. Patel & Sons (P) Ltd v/s. CIT - (1968) 69 ITR 782 (Guj.) the Hon'ble Gujarat High Court has held that what has to be considered while applying the test of commercial expediency is whether particular expenditure can be justified not because of any obligation under which the assessee paid the same but even on the ground of amount being expended voluntarily in the case of any application under which the assessee-company paid the same but even on the ground of the amount being expended voluntarily by the assessee-company. If the assessee derives any indirect benefit also, then the amount paid is to be considered to have expended wholly and exclusively for the purpose of business and therefore allowable.
In the case of Maddi Vankataraman & Co. (P) Ltd. vs CIT (1998) 229 ITR 534 (SC), the facts of the case is that the assessee was engaged in the tobacco business. The assessee had indulged in transactions in violation of the provisions of FERA. The assessee's plea was that if it had not entered into such transaction, it would have incurred a loss. In those facts the H'ble Apex court held that spur of loss cannot be a justification for contravention of law. If the assessee contravenes the provisions of FERA to cut down its losses or to make larger profits while carrying on the business, it was only to be expected that proceedings will be taken against the assessee for violation of the Act. The expenditure incurred for evading the provisions of the Act and also the penalty levied for such evasion cannot be allowed as deduction.
19 ITA No.2571 & 2736Ahd/2006A.ssessment Year 2003-04.
In the case before us, the fact is that the assessee is in the business of Merchant banking activities and the expenditure has been incurred during the course of business. It is also a fact that the assessee was not legally liable to make the payment and compensate the investors but the assessee had compensated the investors. In these circumstances it cannot be said that the expenditure is not relating to the assessee's business only for the reason that it was legally not liable to pay. Thus it can be considered to have been made as a matter of business expediency. The payment was made by the assessee to keep up the reputation of the assessee bank, to avoid long protracted litigation, to continue the business relationship with the PSUs and their employees, to increase the business in the long run, promoting its business and in the interest of business the compensation payments were made. In view of these facts and applying the ratio of various decisions cited hereinabove it can be said that the amount of compensation of Rs 15.62 crores is an expenditure has been incurred wholly and exclusively for the purpose of assessee's business. As far as the payment of penalty of Rs 5 lacs pursuant to the order of RBI is concerned, relying on the decision of Apex Court in the Maddi Vankataraman (supra) and in view of the fact that the penalty was levied for violation of Banking Regulation Act, the same cannot be allowed as deduction. Thus this ground of the assessee is partly allowed.
21. Ground No.3 relates to deduction in respect of professional fees paid to Financial Software and System Pvt. Ltd.(FSSPL) -Rs.34.35 lacs and to NCR Corporation Rs. 25.84 lacs 20 ITA No.2571 & 2736Ahd/2006 A.ssessment Year 2003-04.
On perusing the details of expenses the AO observed that the assessee has incurred Rs 34,35,500 for implementation of Visa Module and FM support to base 24 switches. (listed at Sr. No 19 and 20 on page 29 of the Assessment order). The Ao was of the view that it has been incurred for IT related expenses and are only supplemental to the existing programs and the payments are deferment and has to be treated as capital expenditure. He accordingly disallowed the expenses as Revenue expenses but allowed depreciation at the applicable rates.
22. The AO also observed that assessee had paid Rs 25,84,000 to NCR Corporation Ltd being payment made for upgradation of ATMs. The assessee submitted that it represented the cost of change in the software loaded on the ATMs so that ATMs can accept Visa cards and customers of other banks can start using the bank's ATMs. The AO considered it to be capital expenditure as addition to the existing ATMs and granted depreciation on the same.
23. On both the above additions the assessee carried the matter before CIT (A). CIT (A). CIT(A) vide para 4.3 on page 18 of his order held that the expenditure incurred resulted into modification of existing system and supplementing of additional features and accordingly held it to be of capital expenditure and thus upheld the order of AO. Aggrieved by the order of CIT(A) the assessee is now in appeal before us.
24. Before us, the Ld. A. R. pointed out to the fact that the AO himself vide para 7.3 and 7.5 stated that the assessee be granted depreciation of the aforesaid expenditure but no depreciation has been granted while 21 ITA No.2571 & 2736Ahd/2006 A.ssessment Year 2003-04.
computing the total income. He accordingly urged that the AO be directed to grant depreciation. The Ld. D.R. did not seriously object it.
25. We have heard the rival contentions, perused the material on record. We observe that vide para no 7.3 and 7.5 of the Assessment order has stated that the assessee is allowed depreciation at the applicable rates depending upon the date put to use. In view of these facts we direct the AO to verify the records and grant depreciation on the additions made, if not already allowed. In the result this ground of the assessee is allowed for statistical purposes.
Ground No.4 related to disallowance u/s. 14A of Rs.12.76 crores.
26. The facts are that A.O. observed that the assessee has claimed exemption in respect of interest income earned on tax free tax bonds and debenture amounting to Rs. 17,45,12,563/-. The assessee had suo moto disallowed Rs.5,53,00,000/- being the element of interest on the investment in tax free bonds and debenture. The calculation of disallowance and the submissions made by the assessee was not acceptable to the AO. The AO was of the view that borrowed funds have been used for the purpose of making investments on which the assessee had earned tax free income. According to the AO the total interest paid on borrowed funds and which were utilized for making investments was to the extent of Rs 25.53 crores. Apart from the disallowance of interest, the AO estimated Rs 7.23 crore being other expenditure attributed to tax free income. The AO thus estimated aggregate sum of Rs 32.76 crore u/s14A. Since the assessee had suo moto disallowed Rs 5.53 crores, the AO disallowed the differential 22 ITA No.2571 & 2736Ahd/2006 A.ssessment Year 2003-04.
amount of Rs 27.23 crores u/s 14A. Aggrieved by the order of AO, the Assessee carried the matter before CIT (A).
27. Before CIT (A) it was submitted that the assessee was having own interest free funds and hence no disallowance is called for in respect of interest expenses attributable to the tax free bonds. There is also no case for disallowance of administrative expenses, as no such expenses were incurred.
28. CIT (A) held that on similar issue in AY 2002-03, after discussing the facts the case the issue was decided vide order dated 18.11.2005 as under:
"The action of the A.O. is not correct as regards disallowing interest expenses amount after allocating it to the investments for exempted income. The appellant has filed the details before the A.O. admitting that only part of the interest bearing funds is used for investing in the investments giving tax exempted income. The interest cost is calculated at Rs.6.23 cr. which is offered for taxation. Hence, the A.O. is not justified in further allocating the interest expenditure for this purpose disregarding the fact that the appellant has surplus funds. However, as regards the other operating expenses are concerned, the appellant has not filed any details as to how much expenditure is to be apportioned for earning the exempted income. The total operating expenses are Rs.205.47 cr. and the exempt income claimed by the appellant is Rs.39.65 cr. whereas the total income earned by the appellant is Rs.1595.40 cr. Hence the exempted income is 2.485% of the total income. Therefore, by allocating the operating expenses of Rs.205.47 cr. in this ratio, the expense allocable to the exempt income comes to Rs.5.11 cr. (205.47 x 2.485%) Therefore, this expenditure has to be disallowed out of the total expenditure for earning the exempt income under the provisions of Sec. 14A. This view is supported by the decision of ITAT Chennai Bench in the case of Southern Petro Chemicals v. DCIT, 93 TTJ 161. As per this decision, the investment decisions are very strategic 23 ITA No.2571 & 2736Ahd/2006 A.ssessment Year 2003-04.
decisions in which top management is involved and, therefore, proportionate management expenses are required to be deducted while computing the exempt income. On similar logic, the other operating expenses are also to be deducted. The appellant has already disallowed Rs.6.23 cr. out of interest expenditure. The disallowance out of operative expenses comes to Rs.5.11 cr. which is justified. Hence, the disallowance is confirmed to the extent of Rs.5.11 cr. and the balance amount of Rs.25.34 is deleted."
29. CIT(A) thus by following the order for A.Y. 2002-03 and the reasoning given therein, held that interest expenses disallowable was justified to the extent of Rs.5.53 Cr. calculated by the appellant itself. CIT(A) further held that the observation of the AO that while working out the interest free funds, in AY 2002-03, the requirement of SLR amounting to Rs 2784 crore was not considered through oversight was incorrect in view of the fact that although the assessee has to maintain the SLR but it is his option to maintain the SLR amount either from his own funds or from borrowed funds. Hence it cannot be said that all the interest free funds and reserve were blocked in maintaining of SLR and only interest bearing funds were invested in tax free bonds. This fact cannot make the facts of the case different from the facts of the assessment order for AY 2002-03. Hence there was no reason to deviate from the decision given in the appellate order for AY 2002-03. CIT(A) however upheld, the action of the AO in disallowing expenditure out of administrative expenditure of Rs.7.23 Cr. He thus confirmed the disallowance to the extent of Rs.7.23 crore only.
30. Aggrieved by the action of the CIT (A) in partly confirming the action of AO, the assessee is in appeal. Revenue is also in appeal for the reason that the CIT restricted the disallowance to Rs 7.23 crore.
24 ITA No.2571 & 2736Ahd/2006A.ssessment Year 2003-04.
31. Before us, the Ld. A.R. submitted that the assessee had sou moto disallowed Rs 5.53 crore u/s 14A in respect of interest expenditure. The quantum of exempt income for the year is Rs 17.45 crores whereas the AO has worked out the disallowance u/s 14A of Rs 32.76 crore which is far more than the amount of exempt income. The Assessee had earned cash profits of Rs 599 crores during the assessment year in question. The own funds as on 31st march 2003 was Rs 919 crores comprising of share capital of Rs 230 crore and Reserves of Rs 689 crores. The Ld. A.R. placed on record the copies of the audited balance sheets in support of its contentions that it had sufficient interest free funds and therefore no interest bearing funds were utilized for making the investments. The Ld. A.R. also furnished a chart showing the position of interest free funds vis a vis tax free investments as on the balance sheet dates right from 31st march 1995 to 31st March 2003. From the chart it was pointed out that as on 31st March 2003, the interest free funds in the form of capital, reserves and interest free demand deposits was to the extent of Rs 3404 crore as against the tax free investments of Rs 589 crores. Thus the interest free funds were far in excess of the investments. It was submitted that the AO had worked out the disallowance primarily on the presumption that interest bearing funds have been utilized for making the tax free investments without any cogent evidence. It was submitted that since the assessee has already suo moto disallowed Rs 5.53 crores, which is already excessive, the disallowance be restricted to it and no further disallowance be made. The Ld. A.R. further relied on the decision of Bombay High Court in the case of CIT Vs Reliance Utilities & Power Ltd (2009) 313 ITR 340 for the proposition that if there are interest free funds available to an assessee 25 ITA No.2571 & 2736Ahd/2006 A.ssessment Year 2003-04.
sufficient to meet its investments and at the same time the assessee has raised a loan it can be presumed that the investments were from interest free funds available. As far as disallowance with respect to other administrative expenses is concerned, the Ld.A.R. submitted that the assessee has not incurred any such expenses and therefore no disallowance is called for. The disallowance has been made only on the basis of presumption by the AO without giving any finding on this aspect. The Ld.A.R. also relied on the decision of CIT Vs Hero Cycles Ltd (2010) 323 ITR 518 (P&H).
32. The learned D.R. on the other hand relied on the order of the AO.
33. We have heard the rival contentions and perused the material on record. The undisputed facts are that during the year the assessee has earned interest of Rs 17.45 crore on tax free bond and debentures as against which the assessee had suo moto disallowed Rs 5.53 crore being the interest expenses u/s 14A as against which the AO has worked out the disallowance of Rs 32.76 crore. After giving the credit of disallowance of Rs 5.53 crore made by the Assessee, the AO disallowed Rs 27.23 crore u/s 14A. As on 31st March 2003, the interest free funds available with the assessee was to the tune of Rs 3404 crore (comprising of share capital of Rs 230 crore, Reserves of Rs 689 crores and interest free demand deposits of Rs 2485 crores) as against which the tax free investments were to the tune of Rs 589 crore. Thus the interest free funds were far in excess of the investments. CIT (A) has given a finding that the facts in AY 2003-04 are identical to the facts of the case in AY 2002-03 and accordingly he has followed the decision of CIT (A) for AY 2002-03. These facts have not been 26 ITA No.2571 & 2736Ahd/2006 A.ssessment Year 2003-04.
controverted by the Ld. D.R. nor have they brought on record any facts to the contrary. Hon'ble Bombay High Court in the case of CIT Vs Reliance Utilities & Power Ltd (supra) has held that if there are interest free funds available to an assessee sufficient to meet its investments and at the same time the assessee has raised a loan it can be presumed that the investments were from interest free funds available. In the present case, since the assessee has suo moto disallowed Rs 5.53 crore u/s 14A, respectfully following the decision of Bombay High Court, we are of the view that in the facts of the present case, no further disallowance over and above than what has been disallowed by the Assessee is called for. As far as disallowance of other administrative expenses is concerned, the undisputed fact is that the disallowance has been made by the AO without giving a finding as to how much administrative expenditure has been incurred to earn the exempt income. In the case of Hero Cycles (supra) the Hon'ble High Court has held that the contention of the Revenue that directly or indirectly some expenditure is always incurred which must be disallowed u/s 14A cannot be accepted. Disallowance u/s 14A requires finding of incurring of expenditure. In the present case, the AO has presumed that the assessee might have incurred expenditure to earn the exempt income. He has not given any finding of incurring of expenditure. In view of these facts and respectfully following the decision of High Court, we are of the view that no disallowance of administrative expenses can be made. We accordingly direct for the deletion of the addition made by the AO and allow this ground of the assessee.
Ground No.5 relates to deduction u/s. 36(1)(vii).
27 ITA No.2571 & 2736Ahd/2006A.ssessment Year 2003-04.
34. The Assessee is required to make provision for loss assets, doubtful assets and standard assets as per the RBI prudential guidelines, such provision is charged to Profit and loss account as per the RBI directives but this provision as per RBI guidelines is not claimed in Income tax. In income tax, the assessee claims deduction in respect of bad debts actually written off in the books u/s 36(1)(vii) and further the assessee claims deduction within the prescribed limit towards provision made for bad and doubtful debts u/s 36(i)(viia). The cumulative provision for doubtful assets and loss assets as per the RBI guidelines was Rs 96.70 crores as on 31st March 2002 and the provision required for loss and doubtful assets so classified as per the RBI guidelines as on 31st March was at Rs 66.92 crores. The bank had to write back excess provision for doubtful assets and loss assets as per the guidelines at Rs 29.77 crores which was credited as income to its Profit and loss account. As this excess provision was written back was being disallowed by the assessee itself and offered to tax during the earlier years, the bank had reduced this excess provision of Rs 29.77 crore from total income during the previous year. The AO following the order of predecessor for AY 2001-02 made disallowance of Rs 60.04 crore. The assessee carried the matter before CIT (A). CIT(A) following his own decision for AY 2002-03 held that the allowable deduction u/s 36(1)(vii) at Rs 103.54 crore instead of Rs 110.14 crore as claimed by the assessee and accordingly confirmed the disallowed of Rs 6.60 crore.
35. Aggrieved by the order of CIT (A), both the Assessee and the Revenue are in appeal before us.
28 ITA No.2571 & 2736Ahd/2006A.ssessment Year 2003-04.
36. At the outset the Ld. A.R. submitted that the issue is covered in favour of the assessee in view of the decision of the Hon'ble ITAT vide order dated 5.12.2008 in ITA No 81/Ahd/2005 and ITA No. 3665/Ahd/2004 & 3665, order dated 7.11.2008 in ITA No 1394 & 1894/Ahd/2003 for AY 1998-99 and order dated 23.1.2009 in ITA Nos. 4151 & 4400/A/2003 2001-
02. He placed the same on record at page nos 346 to 368 of the paper Book. The Ld A.R. also placed on record at page 377 of the paper book the copy of instruction No 17/2008 dated 26th Nov. 2008 issued by CBDT wherein interalia it has been stated that that while working out the deduction u/s 36(1)(vii), the opening credit balance i.e balance brought forward as on 1st April of the relevant accounting period needs to be reduced.
37. The Ld. D.R. did not seriously object to it.
38. We have heard the rival submissions and perused the material on record. We find that the identical issue was decided by the co-ordinate Bench in ITA No 81/Ahd/2005 and ITA No 3665/Ahd/2004 for AY 2001-02 by holding as under:
"5. ... At the time of hearing both the parties submitted that identical issue has been considered in the assessee's own case in the assessment year 1998-99 in which a view has been taken that the amount of deduction claimed by the assessee u/s 36(1)(viia) of the Act in respect of bad debts written off was not required to be reduced by the opening balance in the provision of bad debt account. Since the issue has already been considered and decided by this tribunal in the assessee's own case in the assessment year 1998-99 it is considered appropriate to direct the Assessing officer to examine the 29 ITA No.2571 & 2736Ahd/2006 A.ssessment Year 2003-04.
matter and allow the claim in accordance with the aforesaid order of the tribunal"
39. Since the issue in the present appeal is identical to that of AY 2001- 02, we take a similar view and accordingly direct the AO to examine the matter and allow the claim in accordance with the order of the tribunal and the instruction no 17/2008 dated 26th Nov 2008 issued by CBDT. In the result the appeal is allowed for statistical purposes.
40. The last issue is with respect to interest u/s 234B. Since this issue is consequential in nature, is not adjudicated.
APPEAL NO 2736 (OF REVENUE) 1st ground is with respect to disallowance u/s 14A
41. For the reasons stated while adjudicating the ground No.4 of the Assessee's appeal, we dismiss this ground of the Revenue.
2nd ground is with respect to deduction u/s 36(1)(viia)
42. For the reasons stated while adjudicating the ground No 5 of the Assessee's appeal, we dismiss this ground of the Revenue.
3rd ground is with respect to the compensation of Rs 6 lacs paid for non- occupation of the premises.
30 ITA No.2571 & 2736Ahd/2006A.ssessment Year 2003-04.
43. The assessee for opening its branch at Trichy considered taking on lease a premise which was being constructed by Mr. and Mrs. K.A.S. Ramadoss. After negotiations the proposal of Mr. Ramadoss was accepted and it was accordingly conveyed to the owner vide letter dated 15.9.2001. The landlord (Mr. Ramadoss) started the construction of the property as per the requirements of the assessee. Before completion of construction of the property, the assessee learnt that an overbridge was proposed to be constructed over the property which could have caused hinderance and could have been impediment to its business prospects. Accordingly, it withdrew the offer made to the landlord for taking his premises on lease. Since the landlord had already incurred significant expenditure on the property in the expectation of rental income from the assessee, the landlord contested such withdrawal. The assessee after taking into account all the facts chose to settle the dispute with the landlord by paying him a compensation of Rs 6 lacs. The landlord agreed with the offer and consented to withdrew all his claims against the assessee.
44. The AO disallowed the compensation of Rs 6 lacs for the reason that the assessee had not occupied the property and there was no formal lease agreement signed with the landlord, the consent letter was signed by Mr. Ramadoss only while the property is in the name of Mr and Mrs Ramadoss, the landlord did not have any actionable claim over the assessee and the compensation of Rs 6 lac was unreasonable since there was no evidence of landlord having incurred any cost for modification of the property as per the assessee's requirement. Aggrieved by the order of the AO, the assessee preferred appeal before CIT (A). Before CIT (A), the assessee made various submissions. The Ld. A. R. also relied on various decisions 31 ITA No.2571 & 2736Ahd/2006 A.ssessment Year 2003-04.
in its support. CIT (A) agreed with the contentions of the assessee and deleted the addition made by the AO. Aggrieved by the action of the CIT(A), the Revenue is in appeal before us.
45 Before us, the Ld. D.R. relied on the order of the AO and submitted that the expenses is not for the purpose of business. The Ld. D.R. therefore urged that the action of the AO be upheld.
46. On the other hand the Ld. A.R. placed on record at page 195 to 204 of the paper book various correspondence exchanged between the assessee and the landlord. He pointed out to the letter at page 200 where the landlord interalia stated that a wide publicity had already been made in the city about the branch of the assessee being established in his property. With the cancellation of the agreement, there is likelihood of loss of reputation and fall in market value of the property besides monetary loss of more than 25 to 30 lacs. Based on the negotiation the landlord agreed for a compensation of Rs 6 lacs in full and final settlement of all its claim. The copy of the letter was placed at page 203 and 204 of the paper book.
47. We have heard the rival contentions and perused the material on record. The factual matrix of the case is that the assessee had contracted with landlord to take a premise on lease for opening its branch though no formal agreement with the landlord was entered into. Based on the understanding, the landlord had started the construction of the premises as per the requirement of the assessee. Before the construction was completed the assessee came to know of the proposed construction of overbridge over the said property. The assessee was of the view that the 32 ITA No.2571 & 2736Ahd/2006 A.ssessment Year 2003-04.
overbridge will cause hindrance to conduct the business and services. Accordingly it decided to terminate the understanding with the landlord. Based on the negotiation and understanding, the assessee agreed to compensate the landlord for the work done it by paying the compensation and the landlord agreed to withdraw all the claims against the assessee. Accordingly the assessee compensated the landlord by making a payment of Rs 6 lacs in full and final settlement of all its claims. The aforesaid facts are not disputed by the Revenue. From the facts it is clear that the transaction in respect of which the compensation was paid arose during the course of business and was for the purpose of business. The expense has been incurred by the assessee to protect its interest and in lieu of the claims that could have been raised by the landlord. The incurring of expenditure has not been doubted by the Revenue. The Apex Court in the case of J.K.Wollen Vs CIT (1969) 72 ITR 612 (SC) has held that in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the IT Department. In view of the aforesaid facts and respectfully following the Apex Court we are of the view that the disallowance made by the Ao was rightly deleted by CIT(A) and it does not call for any interference. In the result, this ground of the Revenue is rejected.
48. The next ground is with respect to the fees of Rs 26.25 lacs paid to KPMG and travelling expenses of Rs 5.58 lacs.
33 ITA No.2571 & 2736Ahd/2006A.ssessment Year 2003-04.
49. The AO observed that assessee has made payment of Rs 26.25 lacs to KPMG. The Assessee explained that the expense was incurred for exploring the possibility of branch abroad. Similarly the assessee had spent Rs 5.58 lac on the travelling expenses including travelling expenses and allowance of the Chairman of the assessee bank to visit USA and UK for exploring business opportunity in overseas market. The AO was of the view that since the assessee is governed by Banking Regulation Act, 1949, prior permission of RBI was necessary for opening any foreign branch and incurring expenditure. Since in the case of assessee as it did not have operations in foreign country and no licence was granted by RBI to open any branch abroad, the expenditure was not allowable. He accordingly disallowed it. The Assessee carried the matter before CIT (A). Before CIT (A) it was submitted by the assessee that no permission was required from RBI for incurring the expenditure. It was further submitted that based on the suggestions made by KPMG, the assessee started NRI service hub in India to serve as a single point of contact for NRIs for their banking needs in India. The Ld. A. R. also relied on various decisions in its support. CIT (A) after considering the facts and the case law cited by assessee, deleted the addition made by the AO and allowed the appeal of the assessee. Being aggrieved by the decision of CIT (A), the Revenue is now in appeal before us.
50. Before us, the Ld. D.R. relied on the order of AO and on the other hand the Ld. A.R. reiterated the submissions made before CIT(A) and also relied on the order of CIT(A). He also placed on record on page nos 205 to 229 of the paper book the letter of KPMG, copies of invoices and other documents in relation to the expenditure. It was further submitted by the Ld. 34 ITA No.2571 & 2736Ahd/2006 A.ssessment Year 2003-04.
A.R. that the expenditure does not have any nexus with overseas branch, no permission from RBI is required for incurring any expenditure. The payment to KPMG was for professional fees for the advice rendered by them. At the time of making payment the Assessee had also deducted TDS u/s 194J.
51. We have heard the rival submissions and perused the material on record the factual matrix of the expense incurred by the assessee was disallowed by the AO for the reason that no prior permission was received from RBI before incurring such expenses. After considering the submissions and case laws relied by the assessee CIT (A) has given a finding that the expenses are of revenue nature and were incurred for the expansion of existing business and accordingly deleted the addition made by the AO. Before us, the Revenue has not controverted the findings of CIT(A) nor has brought on record any material to the contrary. In view of these facts, we are of the view that no intereference is called for to the order of CIT(A). We accordingly dismiss the ground of the Revenue.
52. The next ground is with respect to payment of service charges of Rs 25.84 lac and computer cabling expenses of Rs 1.50 lacs.
53. The AO observed that the assessee has paid Rs 25.84 lacs to NCR Corporation India Ltd being payment for upgradation of ATMs for visa implementation. The Assessee submitted that the expense represented the cost of change in software loaded on the ATMs so that the ATMs can accept Visa cards and customers of other banks can also use the bank's ATMs. It was further submitted that the modification does not enhance the 35 ITA No.2571 & 2736Ahd/2006 A.ssessment Year 2003-04.
productivity of the ATM and the payment does not constitute payment for capital expenditure. The AO was of the view that enabling the existing ATMs to accept the visa cards and use of ATMs by the customers of other banks was an additional facility generated. Accordingly he rejected the submissions of the assessee and added Rs 25.84 lacs to the income of the assessee.
54. Assessee had paid Rs 1,52,893/- to Nilme electric for telephone cable expenses. The assessee submitted that the expense was made for replacement of computer network and telephone wires on shifting of some of the banks departments to the new leased premises. The Ao held the same to be of capital in nature and disallowed it but granted depreciation on it.
55. Assessee carried the matter before CIT (A). CIT (A) held the expenses of Rs 25.84 lacs to be of capital nature but however allowed depreciation on it and accordingly upheld the order of the AO. With respect to the disallowance of Rs 1.52 lacs, CIT (A) deleted the addition for the reason that the amount was spent on shifting the telephone from one leased premises to the other and therefore no new advantage has been obtained by the assessee and the lease is liable to termination in the event of default by the assessee.
56. Aggrieved by the action of the CIT (A), the Revenue is in appeal before us. Before us the Ld. D.R. relied on the order of the AO and the Ld. A.R. relied on the order of the CIT(A).
36 ITA No.2571 & 2736Ahd/2006A.ssessment Year 2003-04.
57. We have heard the rival submission and perused the material on record. CIT(A) has given a finding that the expenses on shifting of telephone line from one leased premise to another does not result into any new advantage to the assessee and the lease is liable to termination in case of default of assessee. We find no reason to interefere in the order of CIT(A) and thus we uphold his order. In the result the ground of the Revenue is dismissed.
58. The next ground is with respect to considering Rs 4.07 crores paid as professional services as revenue expenditure.
59. AO had disallowed following payments aggregating to rs 4.07 crores (list at para 4.2 on page 14 of CIT(A) order)
60. The payment of Rs 137.30 lacs to Infosys was disallowed for the reason that the invoices raised by Infosys include Central sales tax. With regard to payment to other parties, the AO disallowed it for the reason that it was for the purchase of application software. He accordingly held it to be of capital nature. The assessee carried the matter before CIT (A). Before CIT (A) it was submitted that the payments are in the nature of annual subscription, service charges and for expenses similar to AMC charges. Based on the submissions made by the assessee and after analyzing the vouchers of the expenses, came to the conclusion that the all the expenses except of Rs 34.35 lacs paid to FSSPL are in the nature of revenue expenditure. He accordingly held that out of Rs 4.07 crore, only payment of Rs 34.35 lacs is of capital nature and therefore directed the deletion of rest 37 ITA No.2571 & 2736Ahd/2006 A.ssessment Year 2003-04.
of the disallowance. Aggrieved with the order of CIT(A), the Revenue is now in appeal before us.
61. Before us, the Ld. A.R. relied on the order of AO. On the other hand, the Ld. A.R. submitted that the expenses are in the nature of annual maintenance charges, Annual subscription, service charges. Accordingly all the expenses are of revenue nature. In view of these facts the CIT(A) was right in deleting the additions made.
62. We have heard the rival contentions and perused the material on record. CIT (A) in his order after examination of the details and material has given a finding that the expenses are of revenue in nature. Revenue has neither been in a position to controvert the findings of CIT (A) nor has brought any material to the contrary. In view of these facts, we are of the view that no interference is called for in the order of CIT (A). We accordingly dismiss the ground of the Revenue.
63. In the result the appeal of the Revenue is dismissed.
64. In the result, appeal of the assessee is partly allowed and the appeal of the Revenue is dismissed.
Order pronounced in Open Court on 31 - 7 - 2012.
Sd/- Sd/-
(D.K. TYAGI) (ANIL CHATURVEDI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
38 ITA No.2571 & 2736Ahd/2006
A.ssessment Year 2003-04.
Ahmedabad.
S.A.Patki.
Copy of the Order forwarded to:-
1. The Appellant.
2. The Respondent.
3. The CIT (Appeals)-XIV, Ahmedabad.
4. The CIT concerned.
5. The DR., ITAT, Ahmedabad.
6. Guard File.
By ORDER
Deputy/Asstt.Registrar
ITAT,Ahmedabad.
1.Date of dictation 8 - 5 -2012
2.Date on which the typed draft is placed before the Dictating 31 / 5 / 2012/16-7-12 Member................Other Member................
3.Date on which the approved draft comes to the Sr.P.S./P.S 20 - 7 -2012.
4.Date on which the fair order is placed before the Dictating Member for pronouncement 31 - 7 -2012
5.Date on which the fair order comes back to the Sr.P.S./P.S 31 - 7 -2012
6.Date on which the file goes to the Bench Clerk 31 - 7 -2012.
7.Date on which the file goes to the Head Clerk.............
8.The date on which the file goes to the Asstt. Registrar for signature on the order........................
9.Date of Despatch of the Order.................