Income Tax Appellate Tribunal - Chandigarh
The State Bank Of Patiala, Patiala vs Assessee on 28 March, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
DIVISION BENCH, CHANDIGARH
BEFORE SHRI H.L.KARWA, VICE PRESIDENT
AND MS. RANO JAIN, ACCOUNTANT MEMBER
ITA No.215/Chd/2015
(Assessment Year : 2008-09)
The State Bank of Patiala, Vs. The A.C.I.T.,
H.O. The Mall, Patiala. Circle Patiala.
PAN: AACCS0143D
And
ITA No.362/Chd/2015
(Assessment Year : 2008-09)
The A.C.I.T., Vs. The State Bank of Patiala,
Circle Patiala. H.O. The Mall, Patiala.
PAN: AACCS0143D
ITA No.216/Chd/2015
(Assessment Year : 2009-10)
The State Bank of Patiala, Vs. The A.C.I.T.,
H.O. The Mall, Patiala. Circle Patiala.
PAN: AACCS0143D
And
ITA No.363/Chd/2015
(Assessment Year : 2009-10)
The A.C.I.T., Vs. The State Bank of Patiala,
Circle Patiala. H.O. The Mall, Patiala.
PAN: AACCS0143D
ITA No.447/Chd/2014
(Assessment Year : 2009-10)
The State Bank of Patiala, Vs. The C.I.T.,
Head Office The Mall, Patiala. Patiala.
PAN: AACCS0143D
(Appellant) (Respondent)
2
Assessee by : Shri C. Naresh
Department by : Shri Sushil Kumar, DR
Date of hearing : 04.02.2016
Date of Pronouncement : 28.03.2016
O R D E R
PER RANO JAIN, A.M. :
The above mentioned cross appeals filed by the assessee and the Revenue are directed against the separate orders of learned Commissioner of Income Tax (Appeals), Patiala all dated 6.1.2015 for assessment years 2008-09 and 2009-10 and the appeal of the assessee in ITA No.447/Chd/2014 is directed against the order of learned Commissioner of Income Tax, Patiala dated 18.3.2014 for assessment year 2009-10, passed under section 263 of the Income Tax Act, 1961 (in short 'the Act').
2. We will first take up the cross appeals in ITA Nos.215/Chd/2015 & ITA No.362/Chd/2015 and ITA Nos.216/Chd/2015 & ITA No.363/Chd/2015.
ITA No.215/Chd/2015 : (Assessee's Appeal):
3. Ground No. 1 raised by the assessee in its appeal reads as under.
"1.1 The Ld CIT(A) erred in confirming the disallowance made by the AO u/s 14A for Rs.12.20 crore and enhancing the same to 3 Rs.40.72 crore contrary to the provisions of the Act and facts and circumstances of the case.
1.2 The Ld CIT(A) ought to have appreciated that for the appellant bank, investments constituted stock for the purpose determination of Total Income, and hence the vires of section 14A does not contemplate any disallowance consequent to income arising from stock in trade, taxable or exempt and therefore no disallowance can be made u/s 14A.
1.3 Without prejudice to the above, even if any disallowance under rule 8D r.w.s 14A was warranted, since the formula prescribed in the said rule does not take into account value of stock in trade, no disallowance can be arrived at even by applying said formula.
4. The facts of the case are that the assessee had shown certain exempt income in the return of income on account of dividend and interest. The assessing officer invoking the provisions of section 14 A, making computation under rule 8D of the Income Tax Rules make disallowance. The assessing officer computed the disallowance under rule 8D to Rs. 40.72 Crores, however since the total exempt income claim by the assessee was Rs. 12.20 crores, Therefore he restricted the disallowance to Rs. 12, 19, 78, 015/.
5. Before the CIT (Appeals), the assessee raised many contentions. Firstly, it was stated that no disallowance under section 14A of the Act is called for in view of the earlier order of the Hon'ble ITAT. Secondly, it was stated that at most the disallowance can be made to the extent of Rs.17.56 lakhs only, which is the expenses of the funds Department, which is dealing with assets yielding tax-free income, which has 4 already been accounted for by the bank while computing the taxable income. Thirdly, it was stated that expenditure incurred for a earning exempted income is only incidental to the main business of the assessee bank of dealing in shares, securities, bonds etc. and expenditure would have remained the same even if no dividend or interest income had earned by the assessee bank from shares etc. Lastly, it was submitted that no expenditure on account of interest can be considered for disallowance in view of the fact that the assessee bank has owned funds amounting to Rs.2708.63 which are much more than the investment.
6. The CIT (Appeals) sent the matter back to the Assessing Officer for remand proceedings. In the remand proceedings apart from the earlier submissions the assessee made vehement arguments with regard to the fact that assessee bank is trading in shares and bonds etc. and as such the shares and bonds are held as stock in trade of the assessee. Therefore it was contended that there is no expenditure incurred for earning exempted dividend income or interest income as the expenditure has been incurred for business purposes only. It was explained to the Assessing Officer that investment in shares and bonds is not made under any obligation under the Banking Regulation Act, 1949 as compared to SLR Securities, which are maintained under section 24 of the said Act. The bank is dealing in shares and bonds as a trader which is permitted under section 6 of the Banking Regulation Act, 1949. Reliance was placed on the 5 judgement of the Karnataka High Court in the case of CCI Ltd. versus JCIT 250 CTR 291 (Kar), CIT Vs. Leena Ramachandran, 399 ITR 296 (Ker) and MSA Securities Private Limited, ITA No. 1523/MAD/2012, (Chennai tribunal). A number of judgements of various High Courts as well as various benches of the tribunal were filed by the assessee relating to various arguments taken by it in the remand proceedings. The assessing officer rejected all the pleas of the assessee, relying on certain other decisions in favour of the Revenue.
7. After considering all the material on record the CIT (Appeals) held that since the fact in the relevant assessment year has gone a profound change and a particular method has been prescribed for computation of disallowance under section 14A of the Act, the order of the earlier years are not applicable in the present year. The method of disallowance has to be as per rule 8D. Further he held that the provisions of section 14A of the Act are mandatory in nature and explicitly states that expenditure incurred in relation to exempt income is to be disallowed. Relying on the order of the Madras High Court in the case of Beach Mineral Company Private Ltd versus Department of income tax, ITA No. 263/MADD/2012 dated 2.05.2013, the CIT (Appeals) enhanced the disallowance made by the Assessing Officer to Rs.40.72 crores after giving a notice of enhancement under section 251 of the Income Tax Act to the assessee.
8. Aggrieved by this, the assessee has come in appeal before us. The Ld. counsel of the assessee while arguing 6 before us vehemently argued that since all the securities of the assessee, from which the tax-free income has been earned constitute its stock in trade, therefore, the earning of income therefrom is only incidental to which the provisions of section 14A cannot be applied. Reliance was placed on the judgement of High Court in the case of CCI Ltd(Supra), CIT vs. India Advantage Securities Ltd, ITA No. 6711/Mum/2011 as affirmed by the Bombay High Court in ITA No. 1131 of 2013 dated 17/03/2015. This issue was also held in favour of the assessee by Hon'ble ITAT Chennai in the case of Indian Overseas Bank for assessment year 2000 910 in ITA No. 1949/MDS/2012 dated 18/06/2014. To explain, it was also submitted that even if it is held that rule 8D is applicable, the disallowance will only be Nil, as the disallowance under sub clause (ii) and (iii)is based on average investments the income from which does not or shall not form part of total income. Since all the securities are held by the bank as stock in trade only and this has also been accepted by the Assessing Officer, and not as investments held, there cannot be any disallowance made as per the said sub clause also. Reliance was placed on the decision of Bombay High Court in the case of India Advantage Securities (supra) and ITAT Kolkata bench in the case of DCIT versus Gulshan investment company limited, ITA No. 666/K OL/2012 dated 11/03/2013.
9. Alternatively, it was argued that since the interest free funds available with the assessee as share capital, reserves and surplus, current-account balances on which the 7 bank does not pay any interest are far more than the investments in assets earning tax-free income, no disallowance under section 14A of the Act with respect to interest can be made. Reliance was placed on the judgement of CIT versus Reliance Utility and Power 313 ITR 340. Reliance was also placed on the judgement of the jurisdictional High Court in the case of Lakhani marketing, ITA No. 970 of 2008. Without prejudice it was also submitted that the Hon'ble ITAT in assessee's own case for all the earlier years had held that the expenses that can be disallowed is only 2.5% of the tax-free income and accordingly submitted that at best only this amount can disallowed.
10. Ld. DR relied on the order of the CIT (Appeals) and vehemently argued against the stance taken by the assessee to the effect that since the securities are being held as stock in trade, no addition under section 14A of the Act can be made. Reliance was placed on the judgement of Mumbai bench of the tribunal in the case of the Damani Estates and Finance Private Limited, ITA No. 3029/MU/2012 and that of another judgement of the Mumbai ITAT in the case of American Express Bank Ltd, ITA No.5904/MUM/2000. It was argued that the judgement in the case of the Damani Estate(supra) has considered all the judgements cited by the counsel of the assessee including that of the High Court in the case of CCI Ltd(supra), therefore the said order of the Mumbai bench should be followed.
8
11. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available on record. We are in total agreement with the argument of the learned D.R. that the computational provisions as provided under rule 8D are applicable in the relevant assessment year as the year is 2008-09. We are also not in agreement with the argument of the counsel of the assessee to the effect that since in the earlier years only 2.5% of the tax free income was held to be disallowed under section 14A of the Act by the ITAT, it should be followed in this year also. Since the year under consideration is assessment year 2008-09, in which year the provisions of Rule 8D are applicable in full. However we find ourselves in agreement with the argument of the counsel that the bank is holding securities as stock in trade, therefore earning of income therefrom is only incidental to its business, the provisions of section 14A cannot be applied. In the case of State Bank of Hyderabad versus DCIT, ITA No. 450/Hyd/2015, dated 14th of August 2015 it has been held very categorically that since earning of exempt income is incidental to assessee's business and securities are held in the nature of stock in trade, holding of such incomes ancillary and incidental to assessee's business, income from such shares and securities cannot be treated as investment so as to attract provisions of section 14A of the Act. 9
12. We have also perused the circular issued by the CBDT No. 18/2015 dated 02/11/2015, whereby in some other context it has been stated that income arising from investments of a banking concern is attributable to the business of banking falling under the head profits and gains of business and profession. The content of this circular were shown to us to emphasise the fact that the shares and stocks held by the bank are its stock in trade and not investments.
13. In another order of the ITAT Ahemedabad bench in the case of Anjali Exim private limited versus ACI T, I TA No. 2386/AHD/11 dated 29.0.2014 it has been held as under:
"+ + the issue is covered by a coordinate bench decision in the case of DCIT Vs Gulshan Investment Co Ltd [(2013) - 2013-TIQL- 206-ITAT-KOL inasmuch as even if the provisions of Section 14A are to be held applicable in this case-as was held therein, computation provisions under rule 8D2 (ii) and (iii) will fail because the dividend yielding shares are held as stock in trade and not as investments, and the disallowance under rule 8D(2)(i) will be confined to only direct expenses for earning the tax exempt income. Having noted that there are admittedly no direction expenses incurred in earning the dividends which could qualify for being covered by rule 8D2(i), we delete the impugned disallowance of Rs 42,97,650;"
14. Apart from these judgements the Ld. counsel of the assessee filed before us a number of other orders of various benches of the tribunals whereby it has been held that where the securities etc. have been held as stock in trade the income in the form of dividend earned from the securities provisions 10 of section 14A cannot be applied. However we see that there is only one judgement of the High Court that is of Karnataka High Court in the case of CCI Ltd (supra). In the case of American Express bank (supra) and Damani Estates finance private limited, we agree that the said issue has been decided against the assessee. However in view of the clear finding given by the Karnataka High Court in the case of CCI Ltd we found ourselves bound by the said judgement and hold that since the assessee bank is holding the securities as its stock in trade the disallowance under section 14A cannot be made. Karnataka High Court has been held in the last paragraph as under:
"But in this case, wh e n the assessee has not
retained shares wi t h the intention of earning
dividend income and the dividend i n c o me is
i n c i d e n t a l t o t h e b u s i n e s s o f s a l e o f s h a r e s , wh i c h remained unsold by the assessee, it cannot be said that the expenditure incurred in acquiring the shares has to be apportioned to the extent of dividend i n c o me and that should be d i s a l l o we d from deductions. In that v ie w of the matter, the approach of the authorities is not in conf ormity wi t h the statutory provisions contained under the Act. Theref ore, the impugned orders are not sustainable and require to be set aside."
15. As regards the argument that the judgement of the Karnataka High Court relates to the assessment year 2007 -08 which is earlier to the coming of rule 8D under Statute, we observe that rule 8D is a computational provision provided to calculate the disallowance to be made under section 14A. We 11 are inclined only to borrow the proposition laid down by the High Court that since the dividend income or any other exempt income earned by the assessee which is incidental to its business of sale of shares etc the same cannot be exigible to disallowance under section 14A. Further we also observe that a very apt interpretation of the said proposition has been given by the Ahemedabad bench of the tribunal in the case of Anjali Exim private limited (Supra), which we have already referred herein above. In this order it has been very categorically analysed that if the shares are held that as stock in trade and not as investment then even the disallowance under section under rule 8D will be Nil as rule 8D (2)(i) will be confined to only direct expenses for earning the tax exempt income. In the present case also since there are no direct expenses incurred in earning the dividend the disallowance will come to nil.
16. In view of the above, ground raised by the assessee is allowed.
17. Ground No. 2 of the assessee's appeal to read as under.
2. The CIT (A) erred in confirming the addition made by the AO in respect of bad debts recovered amounting to Rs.94.60 crore ignoring the fact that when bad debts were written off in any of the precious years, no claim of deduction was made or allowed u/s 36(1)(vii).
18. The facts of the case are that, as per the Assessing Officer, the assessee reduced an amount of Rs.94,60,13,100- 12 from income on account of debts which were recovered during the year under consideration on the plea that the income of bad debts have never been claimed or allowed as deduction in year in which it was written off and hence not covered under the provisions of section 41 of the Act. The Assessing Officer contended that the debts which are recovered during the year are revenue in nature and also the similar addition was confirmed in earlier year by the CIT (Appeals).
19. Before the CIT (Appeals), the assessee submitted that no deduction of bad debts recovered was claimed in any earlier year and that similar addition was deleted in the assessment year 2001-02. After considering the submission of the assessee the CIT (Appeals) held that since in exactly the similar circumstances in the assessment year 2007-08, the CIT (Appeals) had held that the amount of debts recovered during the year are liable to be taxed and the ITAT has also dismissed the ground of appeal for assessment year 2007-08 in its order dated 16.05.2012, the CIT (Appeals) dismissed the ground of the assessee.
20. Aggrieved by this, the assessee has come in appeal before us. The Ld. counsel of the assessee submitted that since the bad debts written off were not claimed as deduction, the recovery of such bad debts written off earlier could not be brought to tax as per the provisions of section 41 of the Act. Further our attention was invited to the order of the Hon'ble ITAT in assessee's case in the earlier year and it was 13 submitted that the ITAT confirmed the disallowance in the earlier year for the reason that the assessee was not able to produce the details before the authorities and also on account of the fact that the tax auditor in his report had clearly stated that the said amount is taxable. Whereas in the present Assessment Year the assessee had furnished full details of the claim and it is evident from these statements that no claim in any earlier year in respect of bad debts written off has been made. A detail of recovery in respect of recovery of accounts starting from the financial year 2001-02 to financial year 2009-10 were also filed before us.
21. Ld. DR relied on the order of the lower authorities and submitted that the CIT (Appeals) has rightly confirmed the disallowance.
22. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available on record. From the perusal of the order of the ITAT in assessee's own case for the assessment year 2007-08, we see that the said issue has been decided by the ITAT at page 5 para 7 to 8, as under.
"7. In Ground No.2, the appellant contended that learned Commissioner of Income Tax (Appeals) has erred in holding that bad debts recovered during the year which were neither claimed nor allowed as a deduction u/s 36(1)(vii) were liable to tax thereby sustaining the addition of Rs.55,24,00,000/-.
8. In the course of present appellate proceedings before us, both ld.'AR' and ld.'DR' stated that the issue is squarely covered against the assessee, in assessee's own case, by the Tribunal's order. The 14 detail of such bad debts has been provided in the Paper Book, from page 105 to 184. A perusal of the issues and facts, involved in the present case and the adjudication made by the Tribunal in assessee's own case, it reveals that the same are similar in nature. Therefore, respectfully following the decision of the Tribunal in assessee's own case, this ground of appeal of the assessee is found to be covered against the assessee. The relevant part of the findings of the Tribunal is reproduced hereunder :
"19. We have heard the rival contentions. The assessee during the year had recovered bad debts totaling Rs. 4.52 Cr. In the original return of income, the same was included as income by the assessee. However, the assessee filed Revised Return of Income and vide Note No.3 it was claimed as under :
"Bad debts written off earlier year and recovered during the year amounting Rs.4,52,49,329/- though credited to profit and loss account have been reduced from income as debts have been neither claimed nor allowed as deduction in the year of writing off and hence are nor covered by provision of Section 41(1) of the Act."
20. The return of income was revised to the extent of bad debts recovered totaling Rs.4.52 Cr. The copy of revised computation of income is placed at pages 5 to 5 of PB-1. During the course of assessment proceedings, the explanation of the assessee was as under :
"The assessee bank during the year under consideration recovered bad debts amounting to Rs.4,52,49,330/- written off earlier. The amount was included in the income in the Profit & Loss Account but while preparing the return, the amount of bad debts recovered during the year has been reduced from the taxable income. The assessee has been claiming deduction u/s 36(1)(viia). As per proviso to Section 36(1)(vii) the bad debts in the case of the assessee 15 where provisions of Section 36(1)(viia) are applicable are only allowable to the extent the bad debts exceed the provision u/s 36(1)(viia), in view of the proviso to Section 36(1)(vii), the bank has neither claimed nor was allowed any deduction for bad debts written off u/s 36(1)(vii). The provisions of Section 41(4) are only applicable in the case of bad debts recovered which have been allowed as deduction u/s 36(1)(vii) in the past. As the debts recovered during the year were neither claimed nor allowed as a deduction u/s 36(1)(vii), the provisions of Section 41(4) are not applicable and, as such, bad debts recovered during the year have been reduced from the income and the facts has been fully disclosed in the shape of a note attached with the return."
21. The Assessing Officer noticed from the report of the Auditor in Form No. 3CD at Sr.No. (18), there is mention that the amount recovered on account of advance written off at Rs.4.52 Cr was credited to Profit & Loss Account meaning thereby that the same are covered u/s 41(1) of the Act though the case of assessee is that these are not covered u/s 41(4) of the Act. The issue arising in the present case is in connection with the bad debts recovered. The A.O. requisitioned the assessee to file details of bad debts written off year wise and recovered during the year. The assessee has failed to furnish any information in this regard either before A.O. or CIT(A). No details have been filed by the learned AR for the assessee before us, despite a specific query raised in this regard. The learned AR has placed reliance on the ratio laid down by the Bangalore Bench of Tribunal in State Bank of Mysore Vs DCIT (2009) 33 SOT 7 (Bang) without bringing on record the factual aspects on record. In the absence of the same and in view of the report of Auditor and the assessee not discharging its onus, we are in conformity with order of CIT(Appeals) and A.O. that bad debts recovered during the year are to be included as income 16 in the hands of the assessee in view of the provisions of Section 41(4) of the Act."
22. The Assessing Officer during the assessment proceedings carried out pursuant to notice issued u/s 148 of the Act relating to assessment year 2002-03, in respect of claim of bad debts recovered not being chargeable to tax, had issued letter dated 23.10.2008 u/s 133(6) of the Act to the auditor G.S.Goel & Co. and in response it was replied as under:-
"We are in receipt of your above referred letter on 29.10.2008 and have noted its contents. In response to the same we wish to submit the following reply.
The amount of Rs. 2,93,24,755.99 recovered against bad debts written-off and allowed as expenditure in earlier years u/s 36(1)(vii) of the Act is chargeable to Income Tax U/s 41(4) of the Income Tax Act, 1961.................
In our Tax Audit report, in reply to Point No.20 regarding amount chargeable to tax u/s 41, we have mentioned that 8 amount recovered in respect of advances written off is Rs. 2,93,24,755.99 and is chargeable to tax /s 41 of the Income Tax Act, 1961. However, the same has been credited by the bank to its profit and loss account. In our opinion this amount is chargeable to tax u/s 41 of the Income Tax Act, 1961.
23. In the totality of the above said facts and circumstances, upholding the order of CIT(Appeals), we dismiss the Ground No.5 raised by the assessee." 8(i) Thus, this ground of appeal of the assessee is dismissed.
23. There is no denying the fact that the ITAT had dismissed the ground raised by the assessee on the basis of 17 two facts, firstly, it was stated that there is a mention in the tax audit report that the amounts recovered on account of advances were credited to profit and loss account though the same are not covered under section 41 of the Act. Further the other reason was that the assessee could not file the detail of these recovered amounts before any of the lower authorities. However in the present case we see that the Assessing Officer while making the disallowance has stated what has been stated in the audit report which is at page 5 of the Assessing Officer's order which reads as under:
"1. The Auditors in Para 20 of Tax Audit Report have stated as under:-
The Bank is eligible for deduction of provision for Bad & doubtful debts u/s 36(1)(viia) of the Income Tax Act, however the actual bad debts written off are not claimed as expense while arriving at the assessable income and are met from the "Provisions for Bad & Doubtful debts u/s 36(1)(viia) outstanding in the books of accounts. As the bad debts written off have not been claimed as expense while arriving at the assessable income, therefore, the Bad Debts recovered amounting to Rs.94,60,13,107/- credited to charges account A/c Misc. are not considered as income u/s 41(1) of the I.T.Act.
2. A certificate from the Management of bank certifying that bad debts recovered during the year have not been claimed nor allowed as a deduction u/s 36(1)(vii)of the Act is also attached with the return at page 474. In view of the facts stated above, the amount of Rs.94,60,13,107/-on account of bad debts recovered during the year is not chargeable to tax."
24. Further, there is no denying the fact that the details of these amounts recovered were filed before the lower authorities. A copy of the same has also been filed before us. 18 The assessee being a bank is eligible for deduction under section 36(1)(vii) of the Act. Further, the provisions of section 41(4) are also applicable on such debts that are recovered during the year which have been reduced from the income in any of the earlier years. In view of all these, we are inclined to send this issue back to the file of the Assessing Officer to verify with the details filed by the assessee whether any claim of any such nature, which reduces the income of the assessee with regard to these recoveries, if made in any of the earlier years the disallowance has to be sustained however in case no such benefit has been taken by the assessee out of these amounts recoverable in any of the earlier years the disallowance should be deleted. This ground of the assessee is allowed for statistical purposes.
25. Ground No. 3 of the assessee's appeal reads as under:
3. The (A) erred in confirming the estimated disallowance of Rs.8.03 lacs made by1 the AO as prior period expenses even when the appellant had not claimed any expenses relating to prior years in the computation of income.
26. Briefly, the facts of the case are that there were certain prior period expenses, in which regard the Assessing Officer noticed that a note was given in the tax audit report of the assessee which reads as under:
"Prior period expenses or incomes are not ascertained and disclosed separately in the P & L account. As the books of the bank are closed on 31st March and provisions of expenses made on 19 estimated basis through adjusting account, the amount paid later on, is based on amount of actual bills received/settlement or on crystallization of liability. Similarly, the incomes booked are based on actual crystallization and therefore keeping in view the volume and operation of the bank there are no material amount of expenditure/income related to prior period."
27. Argument of the bank that the expenses were allowable in the year in which they were booked, was accepted by the I.T.A.T. in the assessment year 2002-03, however to verify the claim of the assessee the issue was restored to the file of the Assessing Officer. Following the same, the Assessing Officer disallowed an amount of Rs.76,00,000/-, being 1/3rd of the total 2,30,00,000/-.
28. Before the CIT (Appeals), the submissions were reiterated. The issue was sent back to the file of the Assessing Officer on remand and after considering the remand report and other material the CIT (Appeals) held that the Assessing Officer had not identified any particular instance of prior period expenses even during the remand proceedings. The Assessing Officer has only restricted prior period expenses to stationery and miscellaneous expenses in the earlier year. In this way the CIT (Appeals) too restricted the disallowance to Rs.8, 03, 000/-
29. Aggrieved by this, the assessee has come up in appeal before us. Before us the Ld. counsel of the assessee submitted that the lower authorities were not correct in estimating the disallowance. It was submitted that even 20 though every previous year cuts off on 31st March of every year, the actual carrying on of business which is a life process, cannot be cut off as exactly, specially in an organization like that of a bank where activities are carried out through various branches spread across the country. Therefore such expenses cannot be treated as disallowed as prior period expenses. Reliance was placed on the judgement of Bombay ITAT in the case of Polio Engineering India Ltd. Vs. JCIT 100 TTJ 373.
30. Ld. DR relied on the order of the lower authorities.
31. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available on record. From the perusal of the order of the ITAT in assessee's own case for assessment year 2007-08 in ITA No. 456/CHD/2011 dated 16.5.2012, we see that the issue has been decided at paragraph 9,10 and 11 of the order which read as under:
9. In Ground No.3, the assessee contended Commissioner of Income Tax Appeals) has erred in sustaining the addition of Rs.42,00,000/- being 1/5t h of the estimated prior period expenses of Rs. 2,10,00,000/- ignoring totally the directions and order of the Hon'ble Income Tax Appellate Tribunal in the case of the appellant in previous years.
10. This issue is covered in ITA No. 451 to 455/Chd/2011 A.Y. 1996-97, 1998-99,1999-2000, 2001-02 & 2002-03 in assessee's own case dated 25.01.2012, as stated by ld. 'AR' and ld. 'DR'.
11. The relevant part of the order of the Hon'ble Tribunal is reproduced hereunder :21
"3. In the course of present appellate proceedings, ld. 'AR' contended that the AO has not complied with the directions of the Tribunal, as contained in para 11 of the order dated 19.06.2008 in ITA No. 785/Chd/1999 and others, for the assessment year 1996-97, in assessee's own case. He narrated the issue in question, in the appeal, as pertaining to prior period expenses. He, further, stated that since the inception of the Bank, it has been consistently following the hybrid method of accounting and items in issue regarding payment of stationery bills, misc. bills, no-departure has been made in the method of accounting followed by the assessee. Ld. 'DR' on the other hand, contended that the assessee has failed to produce requisite evidence in respect of such expenses to enable the ITO to take proper and appropriate view in the matter. He referred to page 7 of the assessment order dated 30.11.2009 for the assessment year 1996-97, passed u/s 143(3) read with Section 254 of the Act, whereby the AO has categorically mentioned "However, the assessee failed to produce any proof in respect of stationery expenses and misc. expenses etc. as to on what basis, they were booked for, in the year under consideration, though they were purchased in earlier years." The AO, further, mentioned "On perusal of the audit report of the Tax Auditors furnished by the assessee with the return of income, it is clear that the assessee was required to provide details to the auditor in respect of prior period expenses/income debited to Profit & Loss Account but the assessee has failed to do so stating the reasons depicted in the audit report against column 9(b) as also in the reply filed during the course of assessment proceedings as stated supra." Accordingly, the ld. 'AR' was of the opinion that it is the failure of the assessee which led to frame present assessment. Both ld. 'AR' and ld. 'DR' were of the opinion that for the proper and judicious disposal of the issue in question, in these appeals, the case(s) may be restored to the file of the AO.22
4. We have carefully perused the rival submissions,facts of the case and the relevant material on record. The grievance of the assessee is non-compliance with the directions given by the ITAT, in the above referred decision. The relevant para of the ITAT order while restoring the appeal to the AO is as under :
"11. We have given our careful consideration to the rival contentions. In our considered view, the system of accounting adopted by the assessee regarding certain expenses booked on the basis of receipt of bills, has been followed by the assessee right from the inception. There is no change in the system of accounting. In our considered view, no disallowance could be made merely because the bills received in the year under appeal related to the period preceding to the year under appeal in the light of system of accounting regularly followed by the assessee. Certain expenditure such as telephone expenses electricity etc. is being booked by the assessee on the basis of receipt of actual bills. Such method has been followed in the past and was being accepted by the department. The CIT(A) has not disposed of this issue on any basis. He has adopted the arbitrary procedure of allowing 50% and sustaining disallowance of remaining 50%. The deduction on account of expenses is either allowable to the assessee on the basis of the method of accounting regularly adopted or it is not so allowable. We do not find any justification for allowing deduction at 50% and disallowing the remaining 50%. Since the assessee has been following a regular system of accounting and there is no change in respect of booking of the expenditure, the disallowance made by the AO in our view, is not justified in principle. However, the AO is entitled to verify the claim of the assessee and demanding details of such expenses.23
We restore the issue to the file of the AO for fresh decision in accordance with law after giving reasonable opportunity of heard to the assessee."
5. A reference to the observations recorded by the AO at page 7 of the impugned assessment order is pertinent and relevant. Such observations of the AO clearly indicate that the assessee had not cooperated with the AO in the mater of furnishing the required details for proper appreciation and adjudication of the issue of prior period expenses. Needless to say that the claim has been made by the assessee and hence, it is incumbent upon the assessee to adduce necessary evidence in respect of such claim, failing which it is not possible for the AO to draw inference, as intended by the assessee. Therefore, we are of the considered opinion that the issue may be restored to the file of the AO for the purpose of proper and judicious disposal of the issue of prior period expenses afresh, in accordance with relevant provisions of the Act. The assessee is directed to render necessary cooperation in the matter of filing evidences and any other detail, as required by the AO for the purpose of framing assessment. The AO is also directed to comply with the necessary directions contained in the decision of the ITAT in assessee's own case, reproduced above, and provide proper and reasonable opportunity to the assessee.
6. In the result, appeal of the assessee in ITA No.451/Chd/2011 is allowed for statistical purposes only." 11(i) In view of the above discussions, the issue is restored to the file of the AO, as indicated above."
32. As it has been held in earlier year by the I.T.A.T. that looking into the regular system of accounting being followed by the assessee, an expenditure either has to be allowed or not to be allowed. In the present year also, both the Assessing Officer as well as the CIT (Appeals) has 24 indulged in estimating the disallowance. Nowhere any of these authorities have been able to pinpoint which expenses are prior period in nature. A disallowance has not to be made just for the sake of making disallowance. We do not appreciate the way the issue has been handled by he lower authorities. The assessee has provided all details which were asked for by them. The order and dictate of I.T.A.T. were before them. Even then they did not bother to analyze the details filed by the assessee. In the earlier year, in the proceedings set aside by the I.T.A.T., the Assessing Officer restricted the disallowance only to stationery and miscellaneous expenses. This year also, same has been done on an estimated basis. This is not the right approach. Looking into the fact that the only dispute remaining is with regard to stationery and miscellaneous expenses, we are inclined to delete the disallowance made by the Assessing Officer and confirmed by the CIT (Appeals) in this regard. This ground of appeal raised by assessee is allowed.
33. Ground No. 4 raised by the assessee reads as under:
"4. The CIT(A) erred in confirming the addition of Rs. 5.19 lacs as income chargeable to tax being the increase in the credit balance outstanding in blocked accounts of customers (under NOSTRO balances) notwithstanding the fact that the said amount has not been written back in the profit and loss account as any remission of liability by the appellant bank.."
34. Briefly, the facts are that the assessee had shown certain unclaimed balances in NOSTRO account amounting 25 to Rs.15, 19, 250/-. On the basis of guidelines issued by the RBI, the Assessing Officer has held that these unclaimed deposits are liable to be added as income of the assessee.
35. Before the CIT (Appeals), the submissions made before the Assessing Officer were reiterated. The CIT (Appeals) held that the issue is covered by the decision of the CIT (Appeals) in assessee's own case for the Assessment Year 2007-08 which was upheld by the ITAT in its order dated 16.05.2012. Based on this the CIT (Appeals) confirmed the disallowance.
36. Aggrieved by this, the assessee has come in appeal before us. Ld. counsel of the assessee submitted before us that the assessee had amounts outstanding in unclaimed balances in an NOSTRO blocked accounts which were reflected as liability of the bank. The same was taken by the Assessing Officer on the ground that they were unclaimed deposits and hence income of the bank. This was confirmed by the CIT (Appeals) on the ground that the disallowance made was confirmed by the Hon'ble ITAT in the earlier years. It was submitted that the amount of unclaimed balances were never treated by the appellant as its income and continue to be shown as a liability. The bank is liable to pay the customers the amounts due to them as and when the claims are made by them. Further our attention was invited to a circular titled "Depositors Education and Welfare Fund" whereby as per the directions of the RBI these amounts are to be transferred to the government of India. Therefore it was submitted that the 26 balance outstanding as on 31.0.2008 was fully transferred to the said fund and there is no balance outstanding as on date in respect of the said amount. In view of this it was submitted that since the notification came from government to transfer the unclaimed account after the order of the ITAT in earlier year, the facts become distinguishable. Therefore the addition made by the Assessing Officer may be deleted.
37. The Ld. DR relied on the order of the authorities below.
38. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available on record. The undisputed facts of the case are that there are certain unclaimed balances lying in the account of the assessee on account of NOSTRO Blocked accounts. This is also undisputed that the same nature of amount was taxed as income in the earlier year by the Assessing Officer which got confirmed till the level of ITAT. However we are in agreement with the argument of the assessee that there is a circular of the RBI No.RBI/2013-14/527, DBOD No. DEAF Cell.BC.101/30.01.002/2013-14, dated 21.3.2014, whereby these kind of unclaimed balances are to be transferred to a government account under the 'Depositors Education and Awareness Fund'. This circular was not available to the I.T.A.T. while adjudicating the similar issue in assessment year 2007-08. In view of the same we are very clear that since no balance outstanding as on date is there in assessee's account in respect of the said amount, the said amount cannot be considered as 'income' in nature. No addition on this account can be made. In view of this we direct the Assessing Officer to delete the addition made by him. The ground of assessee is allowed.
27
39. The appeal of the assessee is partly allowed. ITA No.362/Chd/2015 : (Revenue's Appeal):
40. Ground Nos.1 and 2 raised by the Department relate to prior period expenses and read as under :
"1. In the facts and circumstances of the case, Ld. CIT(A) has erred in restricting the addition of Rs.76,00,000/- to Rs.8,03,000/-made on account of prior period expenses.
2. In the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in restricting the addition on account of prior period expenses without appreciating that the AO had sought to verify the expenditure claimed on the basis of actual bills received/settlement or on crystallization of liability, in light of the comments of the tax auditors, but the assessee did not produce any voucher."
41. Since while adjudicating the ground No.3 raised by the assessee in ITA No.215/Chd/2015, we have allowed the appeal of the assessee. By following the same reasoning, the ground of appeal raised by the Revenue is dismissed.
42. The ground Nos.3 and 4 raised by the Department relate to inter-branch and inter-bank entries and read as under :
"3. In the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in deleting the addition of Rs.8,91,00,0007- made on account of un reconciled inter-branch and inter-bank entries.28
4. In the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in deleting the addition on account of un-reconciled inter-branch and inter-bank entries by relying on the certificate from the assessee that there were no entries which were hit by the provision of section 22 of the Limitation Act, without allowing the AO opportunity to examine this contention of the assessee.
43. Briefly, the facts are that there were large number of unreconciled entries between the different branches of the bank and in inter-bank reconciliation account. Before the Assessing Officer, it was submitted that no addition on this account is called for as issue has been finally resolved in favour of the assessee as the Committee on Dispute has not given permission to the Department to pursue appeal before the I.T.A.T. Otherwise also, a certificate from the management to the effect that there are no entries hit by limitation per Article 22 of Schedule of Limitation Act was filed.
44. Before the CIT (Appeals), same submissions were reiterated. After considering which the CIT (Appeals) allowed the appeal of the assessee.
45. Aggrieved, the Department has come in appeal before us. The learned D.R. relied on the order of the Assessing Officer, while the learned counsel for the assessee relied on the order of the CIT (Appeals).
29
46. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available on record. On perusal of the order of the CIT (Appeals), we see that he has adjudicated the issue as follows :
"8.3 I have considered the submission. The issue is covered by decision rendered in earlier year and in the assessment year 2007-08, the Ld. CIT(A) in his order dated 28.02.2010 has held that the addition made for un-reconciled entries which are not hit by article 22 of limitation act are to be allowed after proper verification. The Hon'ble ITAT, thereafter, in its order dated 16.05.2012 referred to its earlier decision in ITA no. 785/CHANDI/99 for A.Y. 1996-97 & others. The relevant part of the decision is reproduced as under:-
"It is observed from the order of the CIT(A) that the issue has been restored to the file of the A.O. as per para 10.2 of the order of the CIT(A). The same is reproduced hereunder:- "I have carefully considered the rival submission and the facts of the case. During the course of the assessment proceedings, the A.O. had asked the appellant to explain these entries. The appellant filed a reply wherein they gave the figure of the un-reconciled entries dated 31.03.1995 as on 31.12.1997 and on the basis of this statement the A.O. worked out the addition of Rs.1512.75 lacs. It is thus obvious that the entries which remained reconciled on 31.03.1995 remained 'so' even on 31.12.1997. It is, thus obvious that some of the entries may have remained un-reconciled for a much longer period. Under the limitation acts a creditor can enforce liability only upto three years and, thereafter, the right to enforce the liability cases. The A.O. is directed to reexamine this issue and restrict the disallowance to those entries only which have remained outstanding for a period of more than 30 three years on 31.03.1995. The matter to this limited extent is restored to the file of the A.O."
The Hon'ble ITAT thereafter restored the matter to the Assessing Officer to be decided on same lines.
Thus it is seen that Hb' ITAT has directed to consider only the entries which have remained outstanding for a period of more than three years. The appellant during the course of assessment proceeding has submitted the certificate from the Management that no entries are hit by the limitation Act. The A.O has not cited a single instance where the entry is hit by the limitation Act and the addition is merely made to keep the issue alive. Therefore, following the order of Hon'ble ITAT in the previous year, the addition made by the A.O. is deleted as the facts are exactly same."
47. On perusal of the same, we do not find any infirmity in the same, as the I.T.A.T. in earlier year has directed the Assessing Officer to take the entries outstanding for more than three years. In the relevant year, there is no entry outstanding for more than three years. This fact has not been controverted by any of the lower authorities. Even the learned D.R. before us could not conrovert the same. In view of the above, we confirm the order of the learned CIT (Appeals). The ground of appeal raised by the Department is dismissed.
48. Ground Nos.5 to 7 relate to disallowance of depreciation on ATM, which read as under :
"5. In the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.3,71,00,000/- made on account of disallowance of excess depreciation on ATMs.31
6. In the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in allowing depreciation in respect of ATMs at the rate allowable for computers without appreciating the decision in the case of the Hon'ble Karnataka High Court decision in Diebold Systems Pvt. Ltd. Vs. Commissioner of Commercial Taxes reported as 144 STC 59 Kar., in which it has been held that ATMs cannot be treated as computers after detailed examination of the nature of ATMs.
7. In the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in allowing depreciation on ATMs at the rate applicable to computers without appreciating that if it is held that anything connected to computers in input or output is held to be a computer for the purpose of rate of depreciation then many equipment like mobile phones, robots, computer controlled machinery etc. which connected to computers or have embedded computers would also qualify for depreciation at the rate applicable to computers."
49. The facts are that the assessee claimed 60% depreciation on ATM, claiming the same to be computer, while the Assessing Officer allowed depreciation @ 15% holding the same to be plant & machinery.
50. The CIT (Appeals) after considering the various case laws relied on by the assessee, deleted the disallowance.
51. The learned D.R. relied on the order of the Assessing Officer, while the learned counsel for the assessee again seek support of the various judgments, which were relied on before the CIT (Appeals).
32
52. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available on record. The CIT (Appeals) has allowed the claim of assessee at para 9.1 of his order, which reads as under :
"9.1 I have considered the submission made. As noted above the appellant has relied on the plethora of judgments in his favour. The latest decision pertains to Hon'ble Bombay High Court wherein it is held that ATM is a computer and entitled to depreciation @ 60% for the purpose of income tax proceedings. There is no order of the Jurisdictional High Court cited by either the appellant or the Assessing Officer. It is an established law that when two views are possible then the view favourable to the assessee has to be taken namely in CIT vs. Polar Cement Put. Ltd. 226 ITR 625(SC). In this case, most of the latest judgments are in favour of the assessee including the order of Hon'ble Bombay High Court. The issue in the case of Diebold System Pvt. Ltd. pertains to commercial taxes and not Income Tax. Therefore, looking into entirety of facts of the case and respectfully following the decision of Hon'ble Bombay High Court I am of the opinion that ATM has to be treated as a computer and is entitled to depreciation @ 60%. In the result, this ground of appeal is allowed."
53. On perusal of the above, we do not find any infirmity in the same as there are a number of judgments of various High Courts where the ATM is held to be computer and depreciation is allowed @ 60%. The grounds raised by the Department are dismissed.
54. The appeal of the Revenue is dismissed.
33ITA No.216/Chd/2015:(Assessee's Appeal) :
55. Ground No.1.1 to 1.3 raised by the assessee read as under :
"1.1 The Ld CIT(A) erred in confirming the disallowance made by the AO u/s 14A as per rule 8D of Rs.2.23 crore.
1.2 The Ld CIT(A) ought to have appreciated that for the appellant bank, investments constituted stock for the purpose determination of Total Income, and hence the vires of section 14A does not contemplate any disallowance consequent to income arising from stock in trade, taxable or exempt and therefore no disallowance can be made u/s 14A.
1.3 Without prejudice to the above, even if any disallowance under rule 8D r.w.s 14A was warranted, since the formula prescribed in the said rule does not take into account value of stock in trade, no disallowance can be arrived at even by applying said formula.
56. The issues in these grounds are similar to the issues in ground No.1.1 to 1.3 raised by the assessee in ITA No.215/Chd/2015 and the findings given in ITA No.215/Chd/2015 shall apply to this case mutatis mutandis. The ground of appeal raised by the assessee is allowed.
57. Ground No.2 raised by the assessee reads as under :
2. The CIT (A) erred in confirming the addition made by the AO in respect of bad debts recovered amounting to Rs.94.60 crore ignoring the fact that when bad debts were written off in any of the precious years, no claim of deduction was made or allowed u/s 36(1)(vii).34
58. It is relevant to observe here that this issue is similar to the issue in ground No.2 raised by the assessee in ITA No.215/Chd/2015 and the findings given in ITA No.215/Chd/2015 shall apply to this case also with equal force. The ground raised by the assessee is allowed for statistical purposes.
59. Ground No.3 raised by the assessee is as under :
"3. The CIT (A) erred in not allowing deduction on account of reduction in blocked accounts (under NOSTRO balances) being he reduction in the credit balance outstanding in blocked accounts of customers (under NOSTRO balances) notwithstanding the fact that the increase in the said amounts in all the earlier years have been taxed by the department."
60. This ground is a fall-out of ground No.3 raised in ITA No.215/Chd/2015. It was contended by the learned counsel for the assessee that consistent with the stand of the Department that increase in the unclaimed balance in NOSTRO account will be taxes, since there is a reduction in such unclaimed balances during the year, the same should have been allowed.
61. Since we have deleted the addition made by the Assessing Officer on account of unclaimed balance in NOSTRO account, while adjudicating the issue in ITA No.215/Chd/2015, the issue in the present case, becomes infructuous.
62. The appeal of the assessee is partly allowed. 35 ITA No.363/Chd/2015:(Revenue's Appeal) :
63. Ground Nos. 1 to 3 raised by the Revenue read as under :
"1. In the facts and circumstances of the case, Ld. CIT(A) has erred in deleting the addition of Rs.86,66,667/- made on account of prior period expenses.
2. In the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in deleting the addition on account of prior period expenses without appreciating that the AO had sought to verify the expenditure claimed on the basis of actual bills received/settlement or on crystallization of liability, in light of the comments of the tax auditors and also the quantification done by the Auditor, but the assessee did not produce all the vouchers.
3. In the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition on account of prior period expenses solely on the ground that these were lesser than the prior period income without appreciating that taxability of income and allowance of expenditure are to be considered separately as per relevant provisions of the Act and there is no automatic set-off of one against the other, and that the AO was justified in taxing income offered for tax under the head 'Prior Period Income while disallowing deduction in respect of prior period expenditure."
64. The issues in these grounds are similar to the issues in ground No.1 and 2 raised by the Revenue in ITA No.362/Chd/2015 and the findings given in ITA No.362/Chd/2015 shall apply to this case mutatis mutandis. The grounds raised by the Revenue are dismissed.
65. Ground No.4 and 5 raised by the Revenue read as 36 under :
"4. In the facts and circumstances of the case and in law, the Ld. CIT(A)has erred in deleting the addition of Rs.8,94,00,000/- made on account of unreconciled inter- branch and inter-bank entries.
5. In the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition on account of un- reconciled inter-branch and inter-bank entries by relying on the certificate from the assessee that there wee no entries which were hit by the provision of section 22 of the Limitation Act. without allowing the AO opportunity to examine this contention of the assessee."
66. It is relevant to observe here that the issues in these grounds are similar to the issues in ground Nos.3 and 4 raised by the Revenue in ITA No.362/Chd/2015 and the findings given in ITA No.362/Chd/2015 shall apply to this case also with equal force. The grounds raised by Department are dismissed.
67. Ground Nos.6, 7 and 8 raised by the Revenue read as under :
"6. In the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.3.,00,43,543/- made on account of disallowance of excess depreciation on ATMs.
7. In the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in allowing depreciation in respect of ATMs at the rate allowable for computers without appreciating the decision in the case of the Hon'ble Karnataka High Court decision in Diebold Systems Pvt. Ltd. Vs. Commissioner of Commercial Taxes reported as 144 STC 59 Kar., in which it has been held that ATMs 37 cannot be treated as computers after detailed examination of the nature of ATMs.
8. In the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in allowing depreciation on ATMs at the rate applicable to computers without appreciating that if it is held that anything connected to computers in input or output is held to be a computer for the purpose of rate of depreciation then many equipment like mobile phones, robots, computer controlled machinery etc. which are connected to computers or have embedded computers would also qualify for depreciation at the rate applicable to computers."
68. It is relevant to observe here that the issues in these grounds are similar to the issues in ground Nos.5 to 6 raised by the Revenue in ITA No.362/Chd/2015 and the findings given in ITA No.362/Chd/2015 shall apply to this case also with equal force. The grounds raised by Department are dismissed.
69. Ground No. 9 and 10 are general in nature and, hence need no adjudication.
ITA No.447/Chd/2014:(assessee's Appeal) :
70. On perusal of the order of the Commissioner of Income Tax, we observe that the Commissioner of Income Tax has invoked his revisionery powers under section 263 of the Act, only on the issue of disallowance under section 14A of the Act for assessment year 2009-10 holding the order of the Assessing Officer to be erroneous and prejudicial to the interest of the Revenue.
71. Since while deciding assessee's appeal for the same 38 year, in ITA No.216/Chd/2015, we have deleted the addition made by the Assessing Officer under section 14A of the Act, the action of the CIT (Appeals) under section 263 of the Act is also quashed, being on the same issue.
72. The appeal of the assessee is allowed.
73. In the result:
i) The appeal of the assessee in ITA
No.215/Chd/2015 is partly allowed.
ii) The appeal of the Revenue in ITA
No.362/Chd/2015 is dismissed.
iii) The appeal of the assessee in ITA
No.216/Chd/2016 is partly allowed.
iv) The appeal of the Revenue in ITA
No.363/Chd/2015 is dismissed.
v) The appeal of the assessee in ITA
No.447/Chd/2014 is allowed.
Order pronounced in the open court on this 28th
day of March, 2016.
Sd/- Sd/-
(H.L.KARWA) (RANO JAIN)
VICE PRESIDENT ACCOUNTANT MEMBER
Dated : 28 t h March, 2016
*Rati*
Copy to: The Appellant/The Respondent/The CIT(A)/The CIT/The DR.
Assistant Registrar, ITAT, Chandigarh 39