Income Tax Appellate Tribunal - Bangalore
Karnataka Bank Ltd. vs Assistant Commissioner Of Income Tax on 24 July, 2002
Equivalent citations: (2003)78TTJ(BANG)996
ORDER
G.S. Pannu, A.M.
1. These are seven appeals in all, out of which, four are preferred by the assessee for the asst. yrs. 1990-91, 1991-92, 1992-93 and 1993-94 and three by the Revenue for the asst. yrs. 1990-91, 1991-92 and 1992-93 against the common order of the CIT(A), dt. 30th Nov., 1995. Since the assessee is common and certain common issues are involved in all these appeals, they are clubbed together and a consolidated order is being passed for the sake of convenience and brevity.
2. At the time of hearing Shri A. Raghavendra Rao, C.A., and Shri. P.O. Chadaga, Departmental Representative, appeared before us on behalf of the assessee and the Revenue, respectively. Their arguments were heard and have been taken into consideration while disposing the above seven appeals.
3 This is an appeal preferred by the assessee on various grounds, which we shall take up in seriatim. The first ground is in relation to the issue of bad debts written off. At the outset it was submitted by Shri A Raghavendra Rao, C.A. appearing before us at the time of hearing on behalf of the appellant-assessee, that the assessee does not intend to press this ground of appeal. The learned Departmental Representative had no objection to the prayer of the assessee. Hence, the aforesaid ground is dismissed as not pressed.
4. The second issue raised by the assessee is in relation to the disallowance under Section 37(2A) of the Act pertaining to entertainment expenditure. The AO made the disallowance in relation to reimbursement made towards the membership fees and payments to clubs. The first appellate authority allowed the claim of the assessee with respect to the expenditure incurred towards membership of the employees in the bankers' club and with respect to the balance, the addition was sustained. Presently the assessee is aggrieved by the order of the CIT(A) in restricting the allowable expenditure only to the extent of membership fees to the clubs paid while ignoring the balance of expenditure in toto. It is submitted by the learned counsel that the first appellate authority had merely relied upon the order of the CIT(A) in the earlier assessment year. The grievance of the assessee is that while following the earlier year's order, the learned CIT(A) has not allowed the 50 per cent of the balance alleged expenditure to be an allowable deduction as was held by the CIT(A) in his order dt. 22nd June, 1992, for the earlier year. It is submitted that the findings of the CIT(A) pertaining to the earlier assessment year of 1989-90 vide his order dt. 22nd June, 1992, pertaining to the aforesaid issue have been accepted by the Department insomuch as that the same has not been agitated before the Tribunal. On the same parity of reasoning, it was submitted that the claim of the assessee be similarly allowed to the extent as allowed in the immediately preceding assessment year.
5. The learned Departmental Representative Shri P.C. Ghadaga, appearing on behalf of the respondent Revenue did not controvert the aforesaid factual matrix as brought out by the counsel for the assessee.
6. We have heard the rival counsel and also perused the materials on record. We proceed to dispose of the issue in the following lines. We have perused the order of the CIT(A) in ITA 153/CIT(A)IV/1991-92, dt. 22nd June, 1992. We find that while the fees for membership in banker's club was allowed by the CIT(A), 50 per cent of the balance of the expenditure was directed by him to be taken as expenditure coming under the purview of Section 37(2A). The facts being similar to the earlier year and the Department not having contested the order of the CIT(A) in the earlier year, we deem it fit and proper that the assessee should be eligible to get similar benefit as in the earlier year with regard to the disallowance under Section 37(2A). The AO is directed to recompute the disallowance under Section 37(2A) in accordance with the principle followed in the earlier year.
7. The next ground is in relation to computation of income under Section 115J of the IT Act. The assessee is aggrieved by the action of the CIT(A) in confirming the order of the AO in which the income under Section 115J has been adopted without any discussion by merely following his order of intimation under Section 143(1)(a) of the Act.
8. At the time of hearing, the learned counsel also submitted arguments in relation to the merits of the computation of Section 115J made by the AO. It appears that the dispute in computing the book profit under Section 115J pertains to the adjustments in relation to the provision for bad and doubtful debts. The first appellate authority has dismissed the said ground on the plea that the computation under Section 115J has been adopted by the AO from that made in the intimation under Section 143(1)(a).
9. At the outset, we find that the computation of income under Section 115J as returned by the assessee has been tinkered with the Department initially while processing the return under Section 143(1)(a). Subsequently in the proceedings under Section 143(3), the same addition has been made. It is now well settled that the proceedings under Section 143(1)(a) and 143(3) are independent of each other. Presently, we are dealing with the appeal arising out of the order of assessment made by the AO under Section 143(3) of the Act. While it is true that the computation of income under Section 115J adopted by the AO in the impugned proceedings is akin to computation made under Section 143(1)(a) but the assessee has the right to agitate the same in the present proceedings. Therefore, the action of the CIT(A) in not going into the merits of the issue by simply foreclosing the matter by holding that the same is adopted from the order under Section 143(1)(a) is devoid of any legal support. Therefore, we deem it fit and proper to restore this issue back to the file of the CIT(A) who shall deal with the issue de novo with respect to the merits of the adjustments made by the AO to the returned computation under Section 115J made by the assessee.
10. The third ground taken by the assessee in this appeal is against the sustaining of levy of additional tax under Section 143(1A). The assessee is aggrieved by the continuation of the levy of additional tax in an order under Section 143(3) wherein the prima facie adjustments made in the intimation under Section 143(1)(a) did not subsist. The learned counsel submitted that the alleged prima facie adjustments made under Section 143(1)(a) and which was again considered in the order under Section 143(3) were agitated in appeal before the CIT(A). While the CIT(A) has opined in favour of the assessee with regard to the additions in respect of such adjustments, but has not given any direction to reduce or adjust the consequent additional tax under Section 143(1A).
11. After hearing the rival submissions on this point, we are of the view that Section 143(lA)(b) comes into operation in the present case. According to the aforesaid section, where as a result of an order under Sub-section (3) of this section or Section 154 or under any other section specified therein, the amounts on which the additional income-tax is payable under Section 143(1A) is reduced or increased, the consequent effect of the additional tax shall also be given effect to by the AO. In the instant case, the additional tax has been levied in relation to certain prima facie adjustments made under Section 143(1)(a). Subsequently, during the course of proceedings under Section 154 and the appeal thereafter, the additions with respect to the prima facie adjustments have been modified. Therefore, having regard to the explicit provisions of Section 143(1A)(b), the modifications to additional tax computed earlier have to be carried out. Hence, the said matter is restored to the file of the AO to pass appropriate orders as per law keeping in mind the aforesaid discussion.
12. The last ground taken by the assessee is in relation to the refusal of the AO to grant interest under Section 244A for the full period i.e., till the date of refund in respect of excess tax deducted at source. In this regard, the AO is directed to verify the claim of the assessee and compute the amount of interest payable to the assessee under Section 244A in accordance with law.
13. The appeal of the assessee is treated as partly allowed.
ITA 197/Bang/1997; Asst. yr. 1991-92
14. The first ground taken by the assessee in this appeal is against the action of the CIT(A) in not allowing the bad debts written off. Briefly the facts are that the assessee had claimed in its return of income deduction under Section 36(1)(vii) of Rs. 9,82,625 representing bad debts written off in its books of account. Simultaneously, the assessee had also claimed deduction of Rs. 1,15,47,946 under Section 36(1)(viia) representing provision for bad and doubtful debts. The AO noticed that the assessee had claimed the deduction under Section 36(1)(vii) without adjusting it against the provision made under Section 36(1)(viia). The AO by relying on the proviso to Section 36(1)(vii) held that it is to be adjusted against the provisions made under Section 36(1)(viia) and, therefore, disallowed the same. The claim of the assessee for deduction under Section 36(1)(viia) was also rejected by the AO on the plea that no details were available with respect to the advances, whether the same were from rural branches or not. With regard to the assessee's claim under Section 36(1)(viia), the CIT(A) has directed the AO to give opportunity to the assessee to provide specific details of the advances made by the rural branches and allow the deduction to the extent admissible as per the said section. With regard to the claim of the assessee for writing off of bad debts amounting to Rs. 9,82,615, the CIT(A), while following his order for the earlier assessment year, directed the AO to rework the claim. According to the first appellate authority, if the actual claim for bad debts written off was in excess of the provision for bad and doubtful rural debts as claimed by the assessee under Section 36(1)(viia), only such excess can be considered for deduction under Section 36(1)(vii). It is this finding of the CIT(A) that is presently being challenged by the assessee. According to the learned counsel for the assessee, the CIT(A) has failed to note that the provisions under Section 36(1)(viia) are in respect of rural debts whereas in Section 36(1)(vii), any irrecoverable bad debts actually written off can be claimed as deduction by the assessee specifically as provided for in the section. According to the learned counsel, the claim of the assessee under Section 36(1)(vii) is perfectly in order insomuch as that the quantum of provision for bad and doubtful debts allowable to the assessee under Section 36(1)(viia) does not limit its claim under Section 36(1)(vii).
15. The learned counsel placed reliance on the decision of the Tribunal in State Bank of Bikaner & Jaipur v. Dy. CIT (1999) 65 TTJ 480 (Jp) : (2000) 74 ITD 203 (Jp), Syndicate Bank v. Dy. CIT (2001) 72 TTJ (Bang) 744 : (2001) 78 1TD 103 (Bang) and United Bank of India v. Dy. CIT (1999) 68 ITD 332 (Cal) in support of his submissions. The learned counsel submitted that the assessee is qualified to get the deduction under Section 36(1)(viia) independent and irrespective of the deductions under Section 36(1)(vii) r/w Section 36(2).
16. On the other hand, the learned Departmental Representative, arguing for the Department, defended the orders of the first appellate authority and also brought to the notice of the Bench the decision of the Bangalore Bench of the Tribunal in ITA 1891/Bang/1991, dt. 22nd Dec., 1998, in the case of The Vysya Bank Ltd., which supported the stand of the Revenue. According to the learned Departmental Representative, the scheduled banks are allowed deduction from its total income in respect of such bad debts written off under Section 36(1)(vii) of such amounts as would exceed the 5 per cent provision for bad and doubtful debts made in pursuance to Section 36(1)(viia). According to the learned Departmental Representative, the former is under Section 36(1)(vii) and the latter is allowed under Section 36(1)(viia) of the IT Act.
17. We have heard the rival submissions, perused the materials on record and proceed to dispose of the issue in the following lines. As the dispute revolves around the provisions of Section 36(1)(vii) and 36(1)(viia), it would be appropriate and necessary to look into the provisions before we proceed to adjudicate on the matter. The relevant provisions read as under:
Sec. 36(1)(vii).--Subject to the provisions of Sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year:
Provided that in the case of a bank to which Clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause :
36(1)(viia).--in respect of any provision for bad and doubtful debts made by :
(a) a scheduled bank not being a bank approved by the Central Government for the purposes of Clause (viiia) or a bank incorporated by or under the laws of a country outside India or a non-scheduled bank, as amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) and an amount not exceeding two per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner :
18. Ostensibly, the view that has been canvassed by the Revenue is that the amount written off as irrecoverable by the assessee in the present case does not exceed the credit balance lying in the account of provisions for bad and doubtful debts, the said provisions having been made in pursuance to the provisions of Section 36(1)(viia) of the Act. The claim of the assessee admittedly represents bad debts other than those in the rural branches and it is contended by the assessee that the same is allowable. The stand of the Revenue is that only such debts which exceed the provision for bad and doubtful debts can be allowed. The Revenue also contends that it is not the aggregate amount of bad debts as a whole which is to be considered and that each debt has to be considered separately. The first appellate authority as also the learned Departmental Representative have relied upon the proviso to Section 36(1)(vii) in support of the stand that what is to be considered is the credit balance in the provision for bad and doubtful debts and see as to whether the amount of bad debts actually written of exceeds such credit balance, whereas the assessee has all along been contending that the deductions envisaged under Section 36(1)(vii) and 36(1)(viia) are distinct and independent of each other.
19. After hearing the rival counsel, we find that no part of the claim of bad debts actually written off has been the subject-matter of provision for bad and doubtful debts either in an earlier year or during the year under Section 36(1)(viia) of the IT Act. Therefore, on a prima facie basis, it appears that the provisions of Section 36(1)(vii) does not help the Revenue in disallowing the claim of the assessee. In our view, the said proviso applies to the cases of bad debts written off for which provision had also been made under Section 36(1)(viia) at any time before such write off. On the other hand, whatever is claimed by the assessee under Section 36(1)(vii) are merely the debts for which no provisions have been made and are actually written off as irrecoverable and are therefore, outside the purview of Section 36(1)(viia). The entire controversy revolves around the fact as to whether the provisions of Section 36(1)(vii) and 36(1)(viia) are overlapping or independent of each other. The rival counsel have relied upon apparently differing decisions of the Bangalore Benches of the Tribunal. However, before we go into that aspect, it shall be appropriate for us to deal with the scope and effect of the insertion of Section 36(1)(viia) by the legislature. Clause (viia) of Sub-section (1) of Section 36 was inserted by the Finance Act, 1979, with an objective to provide that a deduction shall be allowed in the cases of scheduled banks other than cooperative banks, in respect of provisions made by them for bad and doubtful debts in relation to the advances made by their rural branches. The deduction was, however, envisaged to be a specified percentage of the aggregate average advances made by the rural branches of the bank. In fact, the CBDT Circular No. 258, dt. 14th June, 1979, throws ample light on the objectives behind the introduction of the said section. We are extracting paras 13.1 and 13.3 of the said circular hereinbelow in order to appreciate the matter in proper perspective :
"13.1. Under Section 36(1)(vii) of the IT Act, a taxpayer carrying on business or profession is entitled to a deduction, in the computation of the taxable profits, of the amount of any debt which is established to have become bad during the previous year subject to certain conditions. However, a mere provision for bad and doubtful debts is not allowed as a deduction in the computation of the taxable profits.
13.3. It may be relevant to mention that the provisions of new Clause (viia) of Section 36(1) relating to the deduction on account of provisions for bad and doubtful debts is distinct and independent of the provisions of Section 36(1)(vii) relating to allowance of the bad debts. In other words, the scheduled commercial banks would continue to get the full benefit of the write off of the irrecoverable debts under Section 36(1)(vii) in addition to the benefit of the deduction of the provision for bad and doubtful debts under Section 36(1)(viia).
(Emphasis, italicised in print, supplied) A perusal of the aforesaid, gives ample proof of the intention of the legislature in inserting Section 36(1)(viia). Having regard to the contents of para 13.3 of the circular (supra), it is difficult to uphold the view that the said section was intended to limit or otherwise supersubscribe the deductions/benefit already available to the assessee under Section 36(1)(vii). Therefore, the circular aptly settles the controversy in the present appeal in favour of the assessee. The wordings of the circular (supra) underlined by us (italicised in print) leads to an irresistible conclusion that the deduction of bad debts actually written off under s. 36(1)(vii) is not subsumed in the deduction envisaged under Section 36(1)(viia).
20. In fact, the issue can also be looked into from a different angle. The deduction for the provision for bad and doubtful debts provided for under Section 36(1)(viia) is specific to the advances made by the rural branches of the assessee-banks, whereas there is no such restriction contained in Section 36(1)(vii). Clause (vii) of Sub-section (1) of Section 36 entitles the assessee for deduction for any debt which is established to have become bad and is actually written off in the books of account. In relation to assessees who are banks, it does not make any distinction between the bad debts pertaining to advances made by rural or non-rural branches.
21. Now, coming to the language of the proviso to Section 36(1)(vii) which is relied upon by the AO. The said proviso reads as under :
Provided that in the case of an assessee to which Clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part there of exceeds the credit balance in the provision for bad and doubtful debts account made under that clause.
The true import and meaning of the said proviso can be understood by way of an example. Instances can be visualised of a particular advance made by the rural branch of a bank, which have become bad and is claimed as deduction under Section 36(1)(vii), having been actually written off in the books of account. Now the said amount may also qualify for being comprised in the amount of provision made for bad and doubtful debts pertaining to rural branches, as it is specifically provided for in Section 36(1)(viia). Clearly it would be a case of allowing double deduction for the same amount. It is exactly such a situation which is sought to be prevented by the proviso to Section 36(1)(vii). That is the reason for wordings "Provided that in the case of an assessee to which Clause (viia) applied....." appearing in the proviso, which seeks to obviate situations of double benefits both under Section 36(1)(vii) and 36(1)(viia) for the same amount.
22. In fact, the insertion of Explanation to Clause (vii) of Sub-section (1) of Section 36 by the Finance Act, 2001, with retrospective effect settled all doubts. The said Explanation reads as under:
"Explanation : For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee."
Thus, the retrospective amendment to statute w.e.f. 1st April, 1989, has itself clarified that the deduction that is envisaged under Section 36(1)(vii) is independent and different from that allowable under Section 36(1)(viia), each being distinct. We are unable to agree to the proposition, that the amounts allowable as deduction under Section 36(1)(vii) are subsumed in the amount allowable as deduction under Section 36(1)(viia).
23. Having regard to the facts of the case and on an interpretation of the provisions of Section 36(1)(viia) and 36(1)(ii) of the Act, we are of the considered opinion that the claims made by the assessee on account of actual write off of the bad debts are allowable independent and irrespective of the provision for bad and doubtful debts created by it in relation to the advances of the rural branches, subject to the limitation that an amount should not be deducted twice under Section 36(1)(vii) and 36(1)(viia) simultaneously. In this view of the matter, on this ground the assessee has to succeed.
24. The second ground in this appeal is in relation to the disallowance under s; 37(2A) of the Act pertaining to entertainment expenditure. This issue has been dealt by us in detail in ITA No. 196/Bang/1996 in paras 4 to 7 (supra). The same finding on this ground holds good in this appeal as well.
25. The third ground pertains to tie disallowance of depreciation on flats for which the appellant had, paid full money and assumed possession and occupation of the same, but the title deeds were not registered. Briefly the facts are that the assessee had acquired immovable properties in the shape of flats for which it had paid full money and accordingly it was enjoying the possession and occupation over the flats in toto. However, till the end of the previous year relevant to the assessment year under appeal, the title of the aforesaid properties had not been registered. Therefore, the depreciation was denied to the assessee. The first appellate authority by following the decision of the Hon'ble High Court of Karnataka in CIT v. Bharat Gold Mines Ltd. (1991) 192 ITR 639 (Kar) upheld the contention of the AO. The rival counsel agreed at the time of hearing that the aforesaid issue has finally been settled by the decisions of the Hon'ble Supreme Court in the case of CTT v. Poddar Cements (P) Ltd. (1997) 226 TTR 625 (SC) and Mysore Minerals Ltd. v. CIT (1999) 239 ITR 775 (SC). Respectfully following the same, we allow this ground of appeal of the assessee.
26. The next ground preferred by the assessee is in relation to claim of interest under Section 244A of the IT Act, 1961. At the time of hearing, it was submitted by the learned counsel for the assessee that the AO has already granted this interest while passing the order under Section 154, dt. 3rd Sept., 1995. Hence, this ground of appeal is dismissed.
ITA 198/Bang/1996; Asst. yr. 1992-93
27. The first ground taken by the assessee in this appeal is against the action of the CIT(A) in not allowing the bad debts written off claimed by the assessee under Section 36(1)(viia) of the Act. This issue has been dealt by us in detail in ITA No. 197/Bang/1996 in paras 14 to 23 (supra). The same finding on this ground holds good in this appeal as well. We hold accordingly.
28. The second ground in this appeal is in relation to the disallowance of Rs. 1,03,431 under Section 37(2A) of the Act pertaining to entertainment expenditure. This issue has been dealt by us in detail in ITA No. 196/Bang/1996 in paras 4 to 7 (supra). The same finding on this ground holds good in this appeal as well. We hold accordingly.
29. The third ground in this appeal is in relation to disallowance of depreciation on flats for which the appellant had paid full money and assumed possession and occupation of the same, but the title deeds were not registered. This issue has been dealt by us at length in the assessee's appeal in ITA 197/Bang/1996 in para 24 (supra).
TTA 199/Bang/1996; Asst yr. 1993-94
30. The present appeal is preferred by the assessee arising out of the order of the AO under Section 154, dt. 31st March, 1995, arising out of the order of intimation under Section 143(1)(a) of the Act. Briefly the facts are that the assessee filed the return of income for the asst. yr. 1993-94 on 31st Dec., 1993, declaring loss of Rs. 2,27,23,505. The impugned return was processed under Section 143(1)(a) of the Act vide the order of the AO, dt. 23rd March, 1994. In the said intimation, -the AO carried out prima facie adjustments in relation to the claim of entertainment expenditure under Section 37(2A) and the returned loss was adjusted to Rs. 2,26,27,688. Subsequently, the AO passed an order under Section 154, dt. 31st March, 1995, rectifying the mistake apparent, in the original intimation under Section 143(1)(a), dt. 23rd March, 1994. It was noticed by the AO that while processing the return under Section 143(1)(a), a mistake had crept in the intimation order inasmuch as the claim of bad debts of Rs. 38,28,836 was omitted to be regulated as required in accordance with the proviso to Section 36(1)(vii). According to the AO, as the assessee had already claimed deduction in respect of provision for bad and doubtful debts to the tune of Rs. 1,10,94,360 under Section 36(1)(viia) and keeping in mind the proviso to Section 36(1)(vii) which clearly states that only such bad debts as are in excess of the above provision can be allowed as deduction under Section 36(1)(vii), he made adjustments to the extent of disallowing the bad debts of Rs. 38,28,836 as above. Aggrieved by the order of the AO, the matter was carried in appeal before the CIT(A). The CIT(A) upheld the prima facie adjustment made in pursuance to Section 143(1)(a) r/w Section 154(1)(b) of the Act. Hence, the appeal of the assessee before us.
31. The controversy in the present appeal revolves around as to whether the impugned adjustment as narrated above would have been made as a part of the prima facie adjustments as envisaged in accordance with the first proviso to Section 143(1)(a) of the Act. The adjustments permitted to be carried out in pursuance to the provisions of the first proviso to Section 143(1)(a) are now judicially well settled. The adjustments that are envisaged under the first proviso of Section 143(1)(a) are only that which go to correct the errors apparent on the face of the record alone and even this is permissible only on the basis of the information accompanying the return. It is held by the Madhya Pradesh High Court in the case of Kamal Textiles and Ors. v. ITO (1991) 189 ITR 339 (MP) that under the guise of carrying out the adjustments under Section 143(1)(a); the AO was precluded from adjudicating upon any debatable issue. The Hon'ble jurisdictional High Court in the case of God Granites v. Under Secretary, CBDT and Ors. (1996) 218 ITR 298 (Kar) has also reinforced the abovesaid view. According to the Hon'ble Court, unless the inadmissibility of a deduction was evidently obvious from the documents forming part of the return and its annexures, the AO who wanted to disallow such a deduction was precluded from doing the same and was bound to follow the procedure under Section 143(2) of the Act requiring giving of a notice to the assessee. It is further held by the Hon'ble jurisdictional High Court that no substantial adjustments which Inter alia require examination of evidence or a hearing were envisaged under Section 143(1)(a). We have no hesitation in concluding that the prima facie adjustment carried out in the impugned intimation is clearly outside the scope and ambit of Section 143(1)(a) and is, therefore, quashed. We hold accordingly.
32. In the result, the appeals of the assessee are accordingly disposed of. ITA No. 171/Bang/1996--Asst yr. 1990-91 Revenue's appeal:
33. The first issue taken by the Revenue relates to the addition of accrued interest income on securities. It is the plea of the Revenue that as the assessee is following the mercantile system of accounting, interest on securities is assessable on accrual basis. On the other hand, the learned counsel for the assessee, Shri A. Raghavendra Rao, C.A., vigorously supported the order of the CIT(A) by placing reliance on the decision of the Supreme Court in Vijaya Bank Ltd. v. CIT (1991) 187 ITR 541 (SC) as also the decision of the Hon'ble High Court of Karnataka in CIT v. Canara Bank (1992) 195 ITR 66 (Kar), which was also relied upon by the CIT(A). The assessee before us is a scheduled bank. Its interest income from Government securities is taxable. Up to the asst. yrs. 1988-89, the IT Act provided for taxability of income from securities as a separate head of income and the computation therein was governed by Sections 18 to 21 of the IT Act, 1961. However, w.e.f. 1st April, 1989, the aforesaid sections have been deleted, thereby making the income from interest on securities as taxable under the head 'Profits and gains from business' in the cases of such assessees as before us. With this background, a similar issue in the assessee's own case had come up for hearing before the Tribunal in earlier years. The Tribunal in its order dt. 11th Oct., 2000, in ITA Nos. 1698 & 1722/Bang/1992 and C0.29/Bang/1993, has decided the issue in favour of the assessee. The Tribunal had concluded the issue in the following manner:
It may be mentioned in this connection that even though the above cases decided by the Hon'ble High Courts were with respect to the chargeability of interest on securities under the erstwhile provisions of Section 18, the principle enunciated therein would still be applicable on the concept of accrual of income in the context of Section 145 to which reference has been made earlier. In fact, the decision of the ITAT, Jaipur Bench in the case of State Bank of Bikaner & Jaipur (supra) is directly on the issue relating to chargeability of accrued interest after the omission of Sections 18 to 21 w.e.f. 1st April, 1989. In this it has been pointed out that in spite of the omission of ss.18 to 21, the charging Section 4 relating to charge of income-tax and Section 5 relating to scope of total income have not undergone any change and, therefore, Section 145 which determines the mode of computing the taxable income does not affect the range of taxable income or the ambit of taxation.
Therefore, in view of the aforesaid and following the decision of the Tribunal in the assessee's own case for an earlier year, we uphold the decision of the CIT(A) in this regard and dismiss this ground of the Revenue.
34. The next issue relates to addition of Rs. 6,00,000 of alleged fictitious deposits and Rs. 1,45,070 representing interest thereon, made by the AO. The AO found that the assessee-bank could not identify the ownership of certain fixed assets and no evidence was produced to show that the deposits actually belonged to those in whose names they were entered in the records of the bank. Therefore, he invoked the provisions of Section 68 and added such amounts to the income of the assessee.
35. We find that the first appellate authority has held the issue in favour of the assessee by following his decision in the assessee's own case pertaining to the earlier asst. yr. 1989-90. The matter for the said earlier assessment year has already been adjudicated upon by the Tribunal in its order dt. 11th Oct., 2000 (supra), At para 10 of the order, the Tribunal has held as under:
"10. After carefully considering the evidence on record and the rival submissions, we are of the view that the decision of the CIT(A) does not call for any interference. The AO has made the addition under the provisions of Section 68 by alleging that the deposits are fictitious and, therefore, tantamount to cash credits which remained unexplained. However, we are concerned with a banking company which is accepting deposits from members of the public. The mere fact that some of the deposits appear to be not genuine, in the sense that the ostensible account holders are not the genuine account holders and that somebody else is behind the deposits does not lead to the conclusion that it is the unaccounted income of the assessee bank which is subject to the Banking Regulation Act and the norms and guidelines prescribed by the RBI. If the Department alleges that the ostensible account holders are fictitious persons, it is up to the Department to find out the real person behind the transaction and to tax the income in his hands, in case the source of the deposits remain unexplained. It is obvious that the entries in the books of account of the bank cannot be disbelieved to draw an adverse conclusion against the bank because sufficient evidence has not been brought on record to establish that these deposits represent the unaccounted income of the bank. For these reasons, and also for the detailed reasoning given by the CIT(A) in paras 6 and 7 of the impugned order, which we fully and strongly endorse, we uphold the order of the CIT(A) on this point in directing the AO to delete the addition."
Following the same, the facts of this issue being identical to those before the Tribunal in the earlier assessment year, this ground of the Revenue is dismissed.
36. The third issue in this appeal relates to the disallowance of Rs. 35,10,145 under Section 43B of the IT Act, pertaining to interest payable to IDBI. Briefly the facts are that the aforesaid outstanding amount of interest payable to IDBI pertained to the periods December, 1989, and January to March, 1990. As the dues were not paid before the close of the accounting year as also before the due date for filing of the return i.e., 31st Dec., 1990, the said amounts were, therefore, added back. According to the assessee's representative, the aforesaid interest is due to be paid to the IDBI only in the month of May, 1990. According to him, the dues pertaining to the period December, 1989, to March, 1990, would arise for payment only in the month of May, 1990, which falls after the close of the accounting year. According to the learned counsel, the first proviso to Section 43B provides a prerequisite for disallowance under this section to the effect that the liability to pay the impugned amounts must have arisen during the course of the previous year relevant to the particular assessment year. According to him, in the instant case as the due date for payment is May, 1990, which falls in the next previous year and which also falls outside the accounting year relevant for the year under appeal, the provisions of Section 43B can only be attracted in the subsequent assessment year. It was further argued by the learned counsel that although the said amount had accrued as on 31st March, 1990, but the same was not due and, therefore, Section 43B was not attracted.
37. On the other hand, the learned Departmental Representative, Dr. R.B. Krishna, argued that as on the year end, the impugned amount was merely a provision and could not be said to be an accrued liability for the year under consideration on the face of the fact that the same was not due to be paid within the said year as per the terms and conditions with the lender, i.e., the IDBI. Therefore, he defended the order of the AO in this regard.
38. We have heard the rival submissions, perused the materials on record and proceed to dispose of the issue in the following lines. The only point that arises before us is as to whether the Department is justified in disallowing a sum of Rs. 35,10,145 claimed by the assessee as accrued interest liability under the provisions of the Act. The allowability or otherwise of the impugned claim hinges, around the provisions of Section 43B of the Act. It would be appropriate to refer to the relevant provisions, which is reproduced hereunder, before we proceed to discuss further :
"Sec. 43B : Certain deductions to be only on actual payment.--Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of:
(a) to (c).......
(d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a state financial corporation or a state industrial investment corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing; or......
shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in Section 28 of that previous year in which such sum is actually paid by him :
Provided that nothing contained in this section shall apply in relation to any sum referred to in Clause (a) or Clause (c) or Clause (d) which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under Sub-section (1) of Section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return :
Explanation 2 : For the purposes of Clause (a), as in force at all material times, "any sum payable" means a sum for which the assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law."
A perusal of the aforesaid leads us to an irresistible conclusion that wherever allowance of the nature as contained in Section 43B above is claimed by the assessee, the same is allowable only if it is actually paid. The aforesaid proposition is abundantly clear by the first proviso to Section 43B of the Act, which is extracted above. In the instant case, it is an admitted fact that the interest amount in question, having regard to the terms and conditions of the agreement between the assessee and the lender financial institution, is payable in the succeeding assessment year and not in the assessment year in appeal i.e., 1990-91. It is a moot point as to whether when by the said agreement the assessee has not even incurred the liability in relation to the amounts of interest in question for the assessment year in appeal, can there be a basis for the assessee to claim that such amounts have indeed accrued during the previous year under consideration. The other factor is that by virtue of the first proviso to Section 43B, unless the amount claimed by the assessee as deductible is actually paid, the same shall suffer the disallowance as envisaged under Section 43B. In the light of the aforesaid, in our considered view, the claim of the assessee for the interest payment for the year under appeal is clearly inadmissible on the basis of the admitted facts. In other words, the assessee having not even incurred the liability in relation to the impugned amount of interest for the assessment year under appeal, the assessee cannot be justified in arguing that such interest amounts have accrued during the year under consideration. Having regard to the non obstante clause of Section 43B. the assessee cannot claim the benefit of deduction of the liability of the nature mentioned in Clause (d), in a year when such amount has not been paid. For invoking Section 43B under such circumstance, in our view, it is not further necessary for the Revenue to find out as to whether even though the liability has been claimed, if was payable in that year or not. Therefore, having regard to the aforesaid discussion, in our view, the first appellate authority has erred in holding that the provisions of Section 43B were indeed not attracted. On the other hand, we hold that the AO had rightly invoked the provisions of Section 43B and disallowed the amount. Our aforesaid view is also fortified by a recent decision of the Hon'ble High Court of Andhra Pradesh in Gopikrishna Granites India Ltd. v. Dy. CIT (2001) 251 ITR 337 (AP) as also the decision of the Hon'ble Kerala High Court in CIT v. Sitaram Textiles Ltd. (2000) 113 Taxman 241 (Ker).
39. In the end, we conclude by holding that the Revenue has to succeed on this ground.
40. The fourth ground in this appeal relates to the addition of Rs. 2,41,44,998, representing interest on sticky loans. The AO by following the decision of the Hon'ble Supreme Court in the case of State Bank of Travancore v. GIT (1986) 158 ITR 102 (SC) brought such interest to tax. The first appellate authority has deleted the said addition by following his own order for the earlier assessment years of 1985-86 and 1989-90 in the assessee's own case.
41. We find that similar issue has been adjudicated upon by the Tribunal in the case of the assessee in its order dt. 11th Oct., 2000 (supra), pertaining to the asst. yrs. 1985-86 and 1989-90. The Tribunal in the aforesaid order, set aside the issue for reconsideration by the AO. More specifically, the observations of the Tribunal in para 4 in ITA 1697/Bang/1992, dt. 11th Oct., 2000, throws light on the entire subject. Following the same, we hereby direct the AO to reconsider the entire issue by keeping in mind the directions and observations as contained in the order dt. 11th Oct., 2000 (supra).
ITA No. 172/Bang/1995; Asst. yr. 1991-92--Revenue's appeal42. In this appeal, the Revenue has taken as many as three grounds of appeal which we take up in seriatim. The first ground relates to the addition of Rs. 1,13,79,088 on account of interest accrued on securities. This ground is similar to the first issue in the appeal of the Revenue in ITA 171/Bang/96. Following our decision in para 33 (supra), this ground of the Revenue is dismissed.
43. The second ground in this appeal of the Revenue relates to addition of Rs.
5.5 lakhs and interest thereon on account of alleged fictitious deposits, made by the AO. A similar issue has been adjudicated upon by us in paras 30 and 31 (supra) in the Revenue's appeal for the asst. yr. 1990-91. Following the same, this ground of the Revenue is dismissed.
44. The third ground in this appeal by the Revenue relates to the disallowance of licence fee of Rs. 5 lakhs paid to the Securities and Exchange Board of India (SEBI). Briefly, the facts are that the assessee had incurred a sum of Rs. 5 lakhs as payment of authorisation fee to SEBI. The said amount was claimed as revenue expenditure and was found debited in the P&L a/c of the assessee. According to the AO, the said payment was made by the assessee to obtain sanction to act as a merchant banker and it was of non-recurring nature giving enduring benefit to the assessee, therefore, added back the same to the income of the assessee. The CIT(A) held that the impugned licence fee paid by the assessee only enabled the bank to continue its existing business and did not result in securing of any benefit of enduring nature and allowed the deduction of the said sum. Hence, the appeal of the Revenue before us.
45. At the time of hearing, Dr. R.B. Krishna, the learned Departmental Representative contended that the authorisation fee paid to SEBI was a capital expenditure since such payment enabled the assessee to enter into the merchant banking business which constituted a separate line of business. According to him, the incurring of such expenditure was a condition precedent to the continuance of assessee's business and in that light also it was to be understood as a capital expenditure. He placed reliance on the decisions of the Hon'ble Supreme Court in Punjab State Industrial Development Corporation Ltd. v. CIT (1997) 225 ITR 792 (SC) and Brooke Bond India Ltd. v. CIT (1997) 225 ITR 798 (SC) in support of his submissions.
46. On the other hand, Shri Raghavendra Rao, the learned counsel for the assessee, narrated the facts relating to the impugned expenditure in detail. According to him, the appellant was a bank which has been carrying out the banking activities since many decades. According to him, the Securities and Exchange Board of India (SEBI) was constituted by the Government of India in the year 1988. Thereafter the SEBI made it mandatory for all the then existing and prospective merchant bankers to register with SEBI in case they wished to carry on the business of merchant banking. This registration was required under the Rules and Regulations framed by SEBI before an entity could act as a merchant banker. The learned counsel submitted that the assessee bank has been in the business of merchant banking even before the relevant notification of the SEBI was made applicable. Therefore, according to him, the authorisation fee paid by the impugned bank in pursuance to the notification of SEBI was an expenditure purely in the nature of facilitating the carrying out of its earlier business continuously and that the registration with SEBI did not amount to the start of any new business of the bank. He also argued that under the facts and circumstances of the case, the authorisation fee paid by the assessee to register with SEBI was to be viewed as an expenditure incurred in carrying out its business and not for starting a new business venture. Therefore, he prayed that the claim of the assessee which has been rightly allowed by the AO in the original assessment proceedings by holding the impugned expenditure to be revenue in nature was in accordance with law.
47. We have heard the rival submissions and perused the material on record in relation to the said ground. The main issue for our consideration is as to whether the expenditure incurred by the assessee by way of authorisation fee to SEBI was to be taken as capital expenditure or revenue expenditure. The undisputed facts which have a bearing on the issue already form part of the discussion in above para and we do not repeat the same. Admittedly, the impugned fee has been paid to SEBI by the assessee to continue to carry on the business of merchant banking by it. It is an undisputed fact that even before the issuance of notification of SEBI requiring registration and payment of the authorisation fee, the bank was indeed carrying on various merchant banking activities. Therefore, it can be safely concluded that the business of merchant banking, for the continuation of which the impugned authorisation fee has been incurred was not a new line of business but was a continuing one. The assessee was merely required to pay the fee consequent to the operation of law by way of which the SEBI issued the required notification.
48. Having noticed the aforesaid facts, now we proceed to analyse the impugned expense. The words "capital expenditure" or "revenue expenditure" have not been defined in the IT Act. It is a well settled proposition of law that the expression capital expenditure has to be construed in a business sense while testing it with reference to the facts of each case, of course, having regard to the relevant rules of construction of statutes. There are a host of judicial pronouncements on the concept of capital expenditure. Generally speaking capital expenditure is accepted as akin to the concept of securing something, whether tangible or intangible, so that it could be of lasting or enduring benefit to the assessee. In contradistinction the revenue expenditure is akin to the concept of operational cost and is intended for the furtherance of the objects of the assessee's business.
49. If the purpose of the expenditure is the acquisition of an asset or a right which is of a permanent character, such an expenditure should rightly be held as a capital expenditure. But where the assessee has an existing right to carry on its business and in the course of carrying out of such business, it is later required under law to make an expenditure for continuing such business, it is to be understood as having been incurred on revenue account, provided of course, such expenditure does not result in the acquisition of a capital asset. The decision of the apex Court in Bikaner Gypsums Ltd v. CIT (1991) 187 ITR 39 (SC), throws light in this regard. The apex Court had opined that where an assessee carrying on an existing business makes certain payments for removal of restriction or obstruction or disability during the course of its business, although it may result in acquiring certain benefits to the business, but that by itself would not render it to be a capital expense Applying the same analogy to the facts of the present case, in our view, the bank which was carrying; out its merchant banking business hitherto, having been required by the subsequent operation of law to pay authorisation fee to SEBI, the expense has to be viewed only as having been incurred only to facilitate the carrying on of an existing business and has to be viewed as a revenue expenditure.
50. Hence, we conclude by holding that the first appellate authority has arrived at proper conclusions to the effect that the impugned authorisation fee was allowable as revenue expenditure in computing the taxable income of the assessee.
51. Before we part on this issue, we would like to deal with the ratio of decisions relied upon by Dr. R.B. Krishna, the learned Departmental Representative, namely, Punjab State Industrial Dev. Corpn. Ltd. (supra) and Brooke Bond India Ltd. (supra). The Hon'ble apex Court in Punjab State Industrial Dev. Corpn. Ltd. (supra) was dealing with expenditure on fees paid to Registrar of Companies for enhancement of authorised capital of the company. The argument to the effect that the resultant expanded capital of the company would also help in the process of profit-making. However, the said expense was held to be of the nature of capital expenditure. It was thus held : "We are of the opinion that the fee paid to the Registrar for expansion of the capital base of the company was directly related to the capital expenditure incurred by the company and although incidentally that would certainly help in the business of the company and may also help in profit-making, it still retains the character of a capital expenditure since the expenditure was directly related to the expansion of the capital base of the company." Therefore, it is clear that two reasons weighed in the mind of the Hon'ble apex Court. Firstly, that the impugned expenditure had a direct connection to the capital or fixed base of the assessee. Secondly, that the said expenditure was in furtherance of profit-making activity was only incidental or indirect and not direct.
52. Now coming to the instant case before us. Herein, the effect of the expense of SEBI fee is in fact directly on to the already existing business activity, while the benefit of enduring nature can only remotely be taken as purely incidental. Hence, in our considered view, the decision of the Hon'ble apex Court in Punjab State Industrial Dev. Corpn. Ltd. (supra) does not help the case of the Revenue. Similarly, the decision of the Hon'ble apex Court in Brooke Bond India Ltd. (supra) also does not come to the aid of the Revenue, as the reasoning which weighed with the Court was on similar lines as in Punjab State Industrial Dev. Corpn. Ltd. (supra), albeit the only difference being the nature of expense under consideration.
53. This appeal of the Revenue is accordingly disposed of.
ITA No. 173/Bang/1996; Asst yr. 1992-93--Revenue's appeal54. The only ground taken up by the Revenue in this appeal relates to addition of Rs. 55,000 on account of alleged fictitious deposits and interest thereon, made by the AO. A similar issue has been adjudicated upon by us in paras 30 and 31 (supra) in the Revenue's appeal for the asst. yr. 1990-91. Following the same, this ground of the Revenue is dismissed.
55. In the result, four appeals of the assessee and three appeals of the Revenue are accordingly disposed of.