DBS BANK LTD (DBS BANK LTD., INDIA BRANCHES NOW CONVERTED INTO DBS BANK INDIA LTD),MUMBAI vs. DCIT (INT TXT)-2(1)(2), MUMBAI

Without prejudice to ground no. (5) above, the CIT(A) erred in upholding the action of AO in not allowing deduction for bad debts written off of Rs.3,28,68,000, under section 37(1) of the Act.

Without prejudice to ground nos. (5) and (6) above, the CIT(A) erred in not allowing deduction for Rs.3,28,68,000 under section 28 of the Act. 3 9. The CIT(A) erred in not deleting the disallowance under section 14A of the Act read with Rule 8D of the Income tax Rules, 1962, for the year under consideration. 10. The CIT(A) erred in upholding action of the AO in not including the amount taxed as income of the HO while working out adjusted total income for computing the deduction under section 36(1)(viia) and section 44C of the Act. 11. The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject, the impugned order dated 13 February 2018 passed u/s 143(3) r.w.s. 144C(3) of the Income-tax Act, 1961 is ab-initio void being barred by limitation and hence, ought to be struck down. The appellants crave leave to add, to amend, alter, vary, omit or substitute the aforesaid grounds of appeal or add a new ground or grounds of appeal at any time before or at the time of hearing of the appeal as they may be advised.”

Representatives of both the sides were heard at length. Case records carefully perused and the relevant documentary evidence brought on record duly considered in the light of Rule 18(6) of the ITAT Rules. 7. Briefly stated the facts of the case are that the assessee is a non- resident banking company operating in India as a branch of DBS Bank Ltd. Singapore. The assessee is engaged in banking activities permitted by the Reserve Bank of India (RBI), which includes corporate and institutional banking, retail banking, trade finance, transactional and treasury solutions. During the year under consideration, the assessee bank was operating from twelve branches in India. The bank was involved in wholesale lending (both loans and trade based) to its corporate customers. It also offered treasury solutions to its clients. The assessee was not involved in credit card services , auto loans, portfolio management and financial planning for clients. 4 7.1. While scrutinising the return of income, the AO noticed that the assessee has claimed a sum of Rs. 8,02,67,53,014/- as bad debt written off excess over opening provisions u/s 36(1)(viia) of the Act. The assessee was requested to explain and justify its claim for bad debts. The assessee furnished the following breakup of bad debts claimed in the computation of income:-

The point to be highlighted is that in case of banks, by way of incentive, a provision for bad and doubtful debt is given the benefit of deduction, however, subject to the ceiling prescribed as stated above. Lastly, the provision for NPA created by a scheduled bank is added back and only thereafter deduction is made permissible under section 36(1)(viia) as claimed.

A perusal of the above extracts from the judgment of the Hon’ble Supreme Court show that it was delivered totally on different facts and on a different context. Therefore, in our considered opinion, the same is not applicable to the facts of the case in hand. As mentioned elsewhere, the claim of the assessee as a bad debt is as per the provisions of the Act and also allowable as a business loss. Therefore, we do not find any merit in the impugned addition. The AO is directed to delete the addition of Rs.4,27,46,46,000/-. Ground Nos. 1 to 5, are accordingly allowed.

Before parting, the AO has also relied upon the decision of the Hon’ble Madras High Court in the case of Tower finance infrastructure Development Corporation Limited v. JCIT (supra). Again, this decision is on a different context in respect of the provision for bad and doubtful debts whereas the claim of the assessee is actually write off of bad debts and not provision and as mentioned elsewhere the provisions of bad and doubtful debts have been written back in the financial statement of the assessee. The relevant findings of the Hon’ble Madras High Court read as under:- “4. Even though the assessee has raised a ground to the effect that the debts have been incurred in the course of business and the purpose for which the finance was used by the other party is not relevant for allowing the deduction of debts written off and hence, section 36(1)(vii) would apply, learned counsel appearing for the assessee has fairly submitted that the assessee is not entitled to deduction, in view of the Explanation to section 36(1)(vii) which says that the provision for bad and doubtful debts made in the accounts of the assessee is not an allowable deduction.

Further, the Commissioner (Appeals), on the facts of the case, found that merely because the Reserve Bank of India has directed the assessee to provide for non- performing assets, that direction cannot override the mandatory provisions of the Income-tax Act contained in section 36(1)(viia) which stipulate for deduction not exceeding 5 per cent of the total income only in respect of the provision for bad and doubtful debts which are predominately revenue in nature or trade related and not for provision for non-performing assets which are of predominately capital nature, and held that the Assessing Officer was right in disallowing the provision of Rs. 30 lakhs debited in the profit and loss account of the assessee towards non-performing assets.

Ground Nos. 6 to 8 relates to the denial of deduction for bad debts written off Rs.3,28,68,000/- u/s 36(1)(vii) r.w.s. 36(2) of the Act and also u/s 37(1) of the Act. 15.1. The underlying facts in the issue show that the assessee had Rs. 162.75 Crores worth of loan outstanding from its customer PSL Limited which signed a Master Restructuring Agreement dated 19/11/2013 with the monitoring bank and various banks and financial institutions as CDR lenders. Pursuant to a scheme of Corporate Debt Restructuring (CDR), of the company, a part of loan amounting to Rs.7.83 Crores was converted into 30,15,380 equity shares of PSL Limited. These shares were allotted by the company on 30/12/2014 and were credited into the assessee’s D-Mat 11 account on 06/02/20215. These shares were issued to assessee on preferential basis @ Rs.26/- per share fully converting the loan of Rs.7.83 Crores into equity shares of Rs.10/- each. However, when the shares were credited into the D-Mat account, the market value was Rs.15.1/- per share, thereby giving a loss of Rs.3.29 Crores which was claimed as loss on account of bad debt. 15.2. Referring to the analysis given for the denial of bad debt write off of NPA of Rs.427.46 Crores considered vide Ground No. 1 to 5 above, the AO also denied the claim of this loss on conversion of debt. 15.3. When the matter was agitated before the ld. CIT(A), the assessee could not get any success.

Before us, the ld. Counsel for the assessee reiterated its claim of loss on conversion of debt to equity share u/s 36(1)(vii) of the Act and in alternative claimed it as a loss incurred in the ordinary course of business u/s 37(1) / u/s 28 of the Act. Per contra the ld. D/R strongly supported the findings of the ld. CIT(A) and read the operative part.

We have given a thoughtful consideration to the orders of the authorities below. The claim of loss can be understood from the following chart:-

The reasons for denial of the claim have been considered while deciding Ground Nos. 1 to 5 (supra) and for our detailed reasoning therein, this claim of loss is also allowed. Ground Nos. 6 to 8 are accordingly allowed.

Ground No. 9 relates to the disallowance u/s 14A r.w.r. 8D. 19.1. The underlying facts show that the assessee claimed exempt income of Rs. 3,25,11,604/- on which suo moto disallowance u/s 14 of the Act was computed at Rs.4,72,34,861/- by applying Rule 8D. The said disallowance was made out of abundant precaution, though, no disallowance was warranted as the shares held by the assessee were held as stock-in-trade. Since the disallowance was made by the assessee itself, the same was not disturbed by the ld. First Appellate Authority.

Before us, the ld. Counsel for the assessee drew our attention to the decision of the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. v. CIT (2018) 402 ITR 640 (SC) and pointed out that when the shares are held as stock-in-trade and not as investments, no disallowance is to be made u/s 14A r.w.r. 8D and further drew our attention to the decision of the Hon’ble Madras High Court in the case of Marg Ltd. Vs. CIT reported in 120 taxmann.com 84 (Madras) and pointed out that even if suo moto disallowance is made, the same has to be ignored. Per contra, the ld. D/R strongly supported the findings of the lower authorities.

We have given a thoughtful consideration to the orders of the authorities below. There is no dispute that shares were held as stock-in- trade. Whether disallowance u/s 14A of the Act can be made in the case of shares held as stock-in-trade was considered by the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. vs. CIT [2018] 402 ITR 640 (SC). The relevant findings read as under:- “36) There is yet another aspect which still needs to be looked into. What happens when the shares are held as ‘stock-in-trade’ and not as ‘investment’, particularly, by the banks? On this specific aspect, CBDT has issued circular No. 18/2015 dated November 02, 2015. 37) This Circular has already been reproduced in Para 19 above. This Circular takes note of the judgment of this Court in Nawanshahar case wherein it is held that investments made by a banking concern are part of the business or banking. Therefore, the income arises from such investments is attributable to business of banking falling under the head ‘profits and gains of business and profession’. On that basis, the Circular contains the decision of the Board that no appeal would be filed on this ground by the officers of the Department and if the appeals are already filed, they should be withdrawn. A reading of this circular would make it clear that the issue was as to whether income by way of interest on securities shall be chargeable to income tax under the head ‘income from other sources’ or it is to fall under the head ‘profits and gains of business and profession’. The Board, going by the decision of this Court in Nawanshahar case, clarified that it has to be treated as income falling under the head ‘profits and gains of business and profession’. The Board also went to the extent of saying that this would not be limited only to co-operative societies/Banks claiming deduction under Section 80P(2)(a)(i) of the Act but would also be applicable to all banks/commercial banks, to which Banking Regulation Act, 1949 applies.

Another important judgment dealing with Section 14A disallowance which merits consideration is Godrej and Boyce Manufacturing Company Ltd. V. DCIT11. Here the assessee had access to adequate interest free funds to make investments and the issue pertained to disallowance of expenditure incurred to earn dividend income, which was not forming part of total income of the Assessee. Justice Ranjan Gogoi writing the opinion on behalf of the Division Bench observed that for disallowance of expenditure incurred in earning an income, it is a condition precedent that such income should not be includible in total income of assessee. This Court accordingly concluded that for attracting provisions of Section 14A, the proof of fact regarding such expenditure being incurred for earning exempt income is necessary. The relevant portion of Justice Gogoi’s judgment reads as follow: “36. ……… what cannot be denied is that the requirement for attracting the provisions of Section 14-A (1) of the Act is proof of the fact that the expenditure sought to be disallowed/deducted had actually been incurred in earning the dividend income………….”

Proceeding now to another aspect, it is seen that the Central Board of Direct Taxes (CBDT) had issued the Circular no. 18 of 2015 dated 02.11.2015, which had analyzed and then explained that all shares and securities held by a bank which are not bought to maintain Statutory Liquidity Ratio (SLR) are its stock-in-trade and not investments and income arising out of those is attributable, to business of banking. This Circular came to be issued in the aftermath of CIT Vs. Nawanshahar Central Cooperative Bank Ltd.12 wherein this Court had held that investments made by a banking concern is part of their banking business. Hence the income earned through such investments would fall under the head Profits & Gains of business. The Punjab and Haryana High Court, in the case of Pr. CIT, vs. State Bank of Patiala13 while adverting to the CBDT Circular, concluded correctly that shares and securities held by a bank are stock in trade, and all income received on such shares and securities must be considered to be business income. That is why Section 14A would not be attracted to such income.”

The Hon’ble High Court of Delhi in the case of PCIT vs. Punjab National Bank reported in [2022] 140 taxmann.com 131 (Delhi), had the occasion to consider a similar grievance and held as follows:- “19. The Supreme Court in this judgment upheld the decision of the High Court of Punjab and Haryana arising under section 14A of the Act with respect to an assessee bank. It further held that when the shares were held as stock-in-trade and not as investment particularly by banks, the main purpose was to trade in those shares and earn profits there from and therefore section 14A of the Act was not attracted and the expenditure could not be disallowed. The judgment of Maxopp Investment Ltd. (supra) has been duly noted by the Tribunal in its impugned order and in our opinion the Tribunal has correctly disallowed the disallowance under rule 8D(2)(iii) of the Rules. 20. In the present case as well, the Tribunal has considered that the Respondent was holding the shares as a stock-in-trade and has, therefore, disallowed the addition made by the JAO. Learned counsel for the Appellant has not disputed the fact that the shares are held as stock-in-trade by the Respondent. 21. In the aforesaid view of the matter, the questions of law proposed by the Appellant do not arise for consideration either in fact or in law in view of the judgments of the Supreme Court, which have conclusively decided the questions sought to be canvassed by the Appellant.”

The above explanation of the assessee was dismissed by the AO who was of the firm belief that the expenditure was incurred for the purpose of expansion of the assessee’s business and was not for the day to day business of the assessee. The professional fees were paid for developing the plan to be used by the assessee in future and, therefore, the expenditure was resulting in enduring benefit to assessee. Accordingly, the expenditure was not revenue expenditure and the AO added back the same.

Aggrieved the assessee carried the matter before the ld. CIT(A) and strongly contended that the fees were paid for services connected with developing India 2.0 plan for the Bank with focus on key areas like Macro and Regulatory Context, Potential partnerships and inorganic play. It was explained that India 2.0 plan was about understanding the current thinking of the Bank and detailing plan across business mix distribution strategy, digital approach to inorganic and PSL + financial inclusion and economic model. It was strongly contended that the end objective of the plan was to have an overall business plan and a high level implementation roadmap. It was submitted that consultancy services used by the Bank in its business right away once services were rendered and such tangible or intangible capital asset but for conducting the business of banking better and more efficiently, not in future but in present. 34.1. Considering the facts and the submissions, the ld. CIT(A) was convinced that the said expenditure was of revenue in nature and allowed the same.

Before us, the ld. D/R strongly supported the findings of the AO and read the operative part. Per contra, the ld. Counsel for the assessee strongly supported the findings of the ld. CIT(A).

We have given a thoughtful consideration to the orders of the authorities below and after considering the business background of the assessee vis-à-vis the fees paid to McKinsey & Co. Inc., we are of the considered view that the expenditure was incurred primarily and essentially related to the operation and working of the business of the assessee. It was an expenditure which was not for acquiring any tangible or intangible asset but for conducting the business of banking better and more efficiently in the present. It would be pertinent to refer to the observations of the Hon’ble Supreme Court in the case of Empire Jute Co. Ltd vs Commissioner of Income reported in (124) ITR 1, which read as under:- “8. The decided cases have, from time to time, evolved various tests for distinguishing between capital and revenue expenditure but no test is paramount or conclusive. There is no all-embracing formula which can provide a ready solution to the problem; no touchstone has been devised. Every case has to be decided on its own facts keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. But a few tests formulated by the courts may be referred to as they might help to arrive at a correct decision of the controversy between the parties. One celebrated test is that laid down by Lord Cave, LC in British Insulated & Helsby Cables Ltd. v. Atherton 10 TC 155 where the learned Law Lord stated: "When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital." This test, as the parenthetical clause shows, must yield where there are special circumstances leading to a contrary conclusion and, as pointed out by Lord Radcliffe in CIT v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC), it would be misleading to suppose that, in all cases, securing a benefit for the business would be prima facie capital expenditure "so long as the benefit is not so transitory as to have no endurance at all". There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a, commercial sence and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. But even if this test were applied in the present case, it does not yield a conclusion in favour of the revenue. Here, by purchase of loom hours, no new asset has been created. There is no addition to or expansion of the profit-making apparatus of the assessee. The income earning machine remains what it was prior to the purchase of loom hours. The assessee is merely enabled to operate the profit-making structure for a longer number of hours. And this advantage is clearly not of an enduring nature. It is limited in its duration to six months and, moreover, the additional working hours per week transferred to the assessee have to be utilised during the week and cannot be carried forward to the next week. It is, therefore, not possible to say that any advantage of enduring benefit in the capital field was acquired by the assessee in purchasing loom hours and the test of enduring benefit cannot help the revenue.

Another test which is often applied is the one based on distinction between fixed and circulating capital. This test was applied by Lord Haldane in the leading case of John Smith & Son v. Moore 12 TC 266 where the learned Law Lord drew the distinction between fixed capital and circulating capital in words which have almost acquired the status of a definition. He said: "Fixed capital (is) what the owner turns to profit by keeping it in his own possession; circulating capital (is) what he makes profit of by parting with it and letting it change masters." Now so long as the expenditure in question can be clearly referred to the acquisition of an asset which falls within one or the other "of these two categories, such a test would be a critical one. But this test also sometimes breaks down because there are many forms of expenditure which do not fall easily within these two categories and not infrequently, as pointed out by Lord Radcliffe in CIT v. Nchanga Consolidated Copper Mines Ltd. (supra), the line of demarcation is difficult to draw and leads to subtle distinctions between profit that is made "out of" assets and profit that is made "upon" assets or "with" assets. Moreover, there may be cases where expenditure, though referable to or in connection with fixed capita], is nevertheless allowable as revenue expenditure. An illustrative example would be of expenditure incurred in preserving or maintaining capital assets. This test is, therefore, clearly not one of universal application. But, even if we were to apply this test, it would not be possible to characterise the amount paid for purchase of loom hours as capital expenditure, because acquisition of additional loom hours does not add at all to the fixed capital of the assessee. The permanent structure, of which the income is to be the produce or fruit, remains the same; it is not enlarged. We are not sure whether loom hours can be regarded as part of circulating capital like labour, raw material, power, etc., but it is clear beyond doubt that they are not part of fixed capital and hence even the application of this test does not compel the conclusion that the payment for purchase of loom hours was in the nature of capital expenditure.

The revenue, however, contended that by purchase of loom hours the assessee acquired a right to produce more than what it otherwise would have been entitled to do and this right to produce additional quantity of goods constituted addition to or augmentation of its profit-making structure. The assessee acquired the right to produce a larger quantity of goods and to earn more income and this, according to the revenue, amounted to acquisition of a source of profit or income which though intangible was, nevertheless, a source or "spinner" of income and the amount spent on purchase of this source of profit or income, therefore, represented expenditure of capital nature. Now, it is true that if disbursement is made for acquisition of a source of profit or income, it would ordinarily, in the absence of any other countervailing circumstances, be in the nature of capital expenditure. But we fail to see how it can at all be said, in the present case, that the assessee acquired a source of profit or income when it purchased loom hours. The source of profit or income was the profit- making apparatus and this remained untouched and unaltered. There was no enlargement of the permanent structure of which the income would be the produce or fruit. What the assessee acquired was merely an advantage in the nature of relaxation of restriction on working hours imposed by the working time agreement, so that the assessee could operate its profit-earning structure for a longer number of hours. Undoubtedly, the profit-earning structure of the assessee was enabled to produce more goods, but that was not because of any addition or augmentation in the profit-making structure, but because the profit-making structure could be operated for longer working hours. The expenditure incurred for this purpose was primarily and essentially related to the operation or working of the looms which constituted the profit earning apparatus of the assessee. It was an expenditure for operating or working the looms for longer working hours with a view to producing a larger quantity of goods and earning more income and was, therefore, in the nature of revenue expenditure. We are concious that in law, as in life, and particularly in the field of taxation law, analogies are apt to the deceptive and misleading, but in the present context, the analogy of quota right may not be inappropriate. Take a case, where acquisition of raw material is regulated by quota system and in order to obtain more raw material, the assessee purchases quota right of another. Now, it is obvious that by purchase of such quota right, the assessee would be able to acquire more raw material and that would increase the profitability of his profit-making apparatus, but the amount paid for purchase of such quota right would indubitably be revenue expenditure, since it is incurred for acquiring raw material and is part of the operating cost. Similarly, if payment has to be made for securing additional power every week, such payment would also be part of the cost of operating the profit- making structure and hence in the nature of revenue expenditure, even though the effect of acquiring additional power would be to augment the productivity of the 24 profit-making structure. On the same analogy, payment made for purchase of loom hours which would enable the assessee to operate the profit-making structure for a longer number of hours than those permitted under the working time agreement would also be part of the cost of performing the income-earning operations and hence revenue in character.

When dealing with cases of this kind where the question is whether expenditure incurred by an assessee is capital or revenue expenditure, it is necessary to bear in mind what Dixon, J., said in Hallstrom's Property Limited v. Federal Commissioner of Taxation 72 CLR 634: "What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process." The question must be viewed in the larger context of business necessity or expediency. If the outgoing expenditure is so related to the carrying on or the conduct of the business that may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure. See Bombay Steam Navigation Co. [1953] (P.) Ltd. v. CIT [1965] 56 ITR 52 (SC). The same test was formulated by Lord Clyde, in Robert Addie & Sons Collieries Ltd. v. Inland Revenue 8 TC 671, in these words: "Is it part of the company's working expenses, is it expenditure laid out as part of the process of profit earning? ; or, on the other hand, is it a capital outlay?, is it expenditure necessary for the acquisition of property or of rights of permanent character the possession of which is a condition of carrying on its trade at all ?" It is clear from the above discussion that the payment made by the assessee for purchase of loom hours was expenditure laid out as part of the process of profit earning. It was, to use Lord Soumner's words, "an outlay of a business in order to carry it on and to earn profit out of this expense as an expense of carrying of carrying it on". It was part of the cost of operating the profit-earning apparatus and was clearly in the nature of revenue expenditure.”

Respectfully following the decisions of the Hon’ble Supreme Court (supra), we do not find any reason to interfere with the findings of the ld. CIT(A). This Ground is accordingly dismissed.

Ground Nos. 2 & 3 read as under:- “2. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance of interest of Rs. 46,65,45,531/- paid to Head office without appreciating the fact that interest payable by the Indian Permanent establishment of the Foreign Bank to its HO and other overseas branches is not deductible expenses in computing the total income."