KOTAK MAHINDRA BANK LTD,MUMBAI vs. ADDL CIT RG 3(2), MUMBAI

1929/M/12-Kotak Mahindra Bank Ltd. (+7Appls) that a request under Rule 27 of the ITAT Rules, 1963, Rules should be taken on record supporting the order of the FAA. 3.3.We find that in the case of UTI Bank Ltd.(supra),the Hon’ble Gujarat High Court has dealt the issue in light of the Instruction No.17/2008 dated 26.11.2008. We are reproducing the head notes of the said decision and the same reads as under :- “14. From the above statutory provisions, it can be seenthat in addition to the deduction available to an assessee under section 36(1)(vii) for bad debts, in case of special class of banks mentioned in clause (viia), deductions subject to fulfilment of certain conditions is available in respect of any provision for bad and doubtful debts. One of the restrictions is of limiting such deduction to a maximum of a specified percentage of total income of the assessee computed before making any deduction under this clause and not exceeding prescribed percentage of aggregate average advance made by the rural branches of such bank. From the decision of the Apex Court in the case of Catholic Syrian Bank Ltd. (supra), it can be gathered that under clause (vii) of sub-section (1) of section 36, deduction is made available in computation of taxable profits of all scheduled commercial banks in respect of provisions made by them for bad and doubtful debts relating to advances made by them in the rural branches. Such deduction is limited to a specified percentage of the aggregate average advances made by the rural branches. The Apex Court held that the deduction on the account of provision for bad and doubtful debts is distinct and independent of the provisions of section 36(1)(vii) relating to allowance of the bad debts. Contention of the Revenue that the Banks covered by clause (viia) were not entitled to deduction under section 36(1)(vii) was rejected. The Court held that proviso to section 36(1)(vii) would ensure that there would be no double benefit of deduction in such cases.

1929/M/12-Kotak Mahindra Bank Ltd. (+7Appls)

(ii) While considering the claim for bad debts u/s 36(1)(vii), the assessing officer should allow only such amount of bad debts written off as exceeds the credit balance available in the provision for bad & doubtful debt account created u/s 36(1)(viia) of the Act. The credit balance for this purpose will be the opening credit balance i.e., the balance brought forward as on 1st April of the relevant accounting year."

the cases of Premier Finance & Trading Co.Ltd.(ITA./1655/Mum/2013, AY. 2008-09 & others, dtd. 25.05.2016) and Aditya Birla Nuvo Ltd.(ITA/8427/8483/Mum/2010- dtd. 17. 09. 2014), referred to by the AR.We are reproducing the relevant portion of the order of the case of Premier Finance & Trading Co.Ltd.(supra) and that reads as under: 9.The effective ground of appeal

,raised by the assessee,is about disallowance made u/s.14A of the Act,amounting to Rs.2.21 crores under the head interest expenditure and Rs.12.15 lakhs out of the administrative and other expenses. XXXXX 12.We have heard the rival submissions and careers the material before us.We find that assessee was holding shares as stock in trade as well as investments, that it had earned dividend income for the shares held as stock in trade only, that assessee had not earned any dividend from the investments made for the year under appeal, that the investment was made in the shares of unquoted companies, that it had made strategic investment in group companies.A perusal of the balance sheet of the assessee revealed that the funds available to it was far more than the investment made during the year under consideration.The assessee had made investment of Rs. 48.43 crores,that the funds available to it in form of share capital, reserves & surplus,share application money and unsecured loans and others was Rs.1,14,44, 54,709/-.Therefore it has to be presumed that investments were made out of the own fund and not from the borrowed funds.We find that in the case of HDFC Bank Ltd.(67taxmann.com 42) the Hon’ble Bombay High Court has held that when there were sufficient own funds there was a presumption that investment in tax-free securities was made out of own funds. In the case of Pan India network infravest Pvt.Ltd.(ITA/3378/Mum/2013-AY.2009-10,dated11/05/016),we have held as under : “5.We have heard the rival submissions and perused the material before us.There is no doubt that the assessee had not earned exempt income during the year under consideration,so,in our considered opinion, no disallowance can be made u/s.14A of the Act.We find that in the case of M/s Gateway Distriparks Ltd.(supra),identical issue was adjudicated by us,as under: “3.The next ground pertains to deleting the disallowance made u/s 14A of the Act ignoring the ratio of the Tribunal in Cheminvest Ltd. (121 ITD 318)(Del.). The crux of argument on behalf of the assessee is that no income was earned by the assessee and merely hypothetical disallowance has been made. Reliance was placed 378 ITR

33. (Del.) order dated 02/09/2015. Considering the totality of facts and the arguments from both sides, we find that the Hon’ble Delhi High Court in the aforesaid order dated 02/09/2015 held that where no exempt income was earned by the assessee in the relevant assessment years and since the genuineness of expenditure is not in doubt, there is no question of disallowance u/s 14A of the Act. While coming to this conclusion, the Hon’ble High Court relied upon following decisions:- i. Cheminvest Ltd. v. CIT [2009] 317 ITR (AT)

86. (Delhi) [SB] (para 15) ii. CIT v. Chugandas and Co. [1964] 55. ITR 17. (SC) (para 14) iii. CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57. ITR 306 (SC) (para 14) iv. CIT v. Corrtech Energy (P.) Ltd. [2015] 372 ITR

97. (Guj) (para 15) v. CIT v.Holcim India (P.) Ltd.(I.T.A.No.486 of 2014 decided on 5- 9-2014) (para 15) vi. CIT v. Hero Cycles Ltd. [2010] 323 ITR 518 (P&H) (para 15) vii. CIT v. Lakhani Marketing Incl. [2015]

4. ITR-OL 246 (P&H) (para 15) viii. CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC) (para 10) ix.CIT v.Shivam Motors (P.) Ltd. (ITA No. 88 of 2014 decided on 5-5-2014) (para 15) x. IT v. Winsome Textile Industries Ltd. [2009] 319 ITR 204 (P&H) (para 15) , xi. Eicher Goodearth Ltd. vs. CIT [2015] 378 ITR

28. (Delhi) (para 14) 5

1929/M/12-Kotak Mahindra Bank Ltd. (+7Appls) xii. Harish Krishnakant Bhatt v. ITA [2005] 278 ITR (AT) 1 (Ahd) (para 10) " xiii. Maxopp Investment Ltd. v. CIT [2012] 347 ITR 272 (Delhi) (para 12) 3.1. In view of the factual matrix and following the aforesaid decision from Hon’ble Delhi High Court and in the absence of any contrary decision brought to our notice by either side, we find no infirmity in the conclusion of the Commissioner of Income Tax (Appeal) and affirmed the same, thus, this ground of the Revenue is also having no merit, consequently, dismissed.”” Respectfully,following the same we decide the effective ground of appeal against the AO.” In our opinion,in absence of any exempt income no disallowance could be made u/s.14A of the Act.Considering the facts-like availability of sufficient own funds, non-receipt of exempt income during the year, and strategic investment in the sister concerns-we hold that the FAA was not justified in upholding the disallowance. Reversing his order we decide effective ground of appeal in favour of the assessee.” Considering the above and respectfully following the judgment of HDFC Bank Ltd.(supra),we decide first ground in favour of the assessee,holding that the FAA was not justified in confirming the disallowance under the head interest expenditure. 5.Second ground of appeal deals with disallowance of interest of Rs. 1.59 crores u/s.14A r. w. r. 8D(2)(iii)of the Act.The AR argued that similar issue was dealt by the Tribunal in the case of Aditya Birla Nuvo Ltd. (supra) and had held that strategic investment should not be considered for making disallowance under rule 8D(2)(iii)of the Rules,that for the remaining amount disallowance could be made.The DR left the issue to the discretion of the Bench.We find that issue of strategic investment was dealt by the Tribunal in the case of Aditya Birla Nuvo Ltd. (supra)as under: “2.First ground of appeal is about addition of Rs. 85.47 Lakhs made u/s.14A of the Act towards indirect expenses incurred for earning exempt income.During the assessment proceedings, the AO found that assessee had received dividend income of Rs. 16,54,11,716/-, that out of the said amount Rs. 11.02 Crores pertained to the dividend received from mutual funds, that the balance amount of Rs. 5.51 Crores was received from shares from the total investment of Rs. 41.62 Crores which was group companies. Invoking the provisions of section 14A r.w. Rule 8D of the Income-tax Rules,1962 (Rules),the AO made a disallowance of Rs. 5.9386 Crores. 2.1.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA). After considering the submission of the assessee and the assessment order, FAA held that his predecessor,in the AY.s.2004-05 and 2005-06,had held that 0.5% of average investment only in non-strategic investment had to be disallowed.On the basis of that,he restricted the disallowance to Rs. 85.47 Lakhs and partly allowed the appeal filed by the assessee. 2.2.Before us, AR stated that similar issue had arisen in the earlier years and was decided in favour of the assessee,that the assessee itself had made a disallowance of Rs. 31.11 Lakhs u/s 14A of the Act.Departmental Representative (DR) argued that disallowance u/s 14A had to be made on the basis of facts of each year. 2.3.We have heard the rival submissions and perused the material before us. We find that the issue had arisen in the AY.s.2002-03 and 2005-06 also.Deciding the appeal for the AY 2005-06

1929/M/12-Kotak Mahindra Bank Ltd. (+7Appls)

(ITA No. 662/Mum/2009),the Tribunal at paragraph no.21 of the order (dt. 01.08.2014) has dealt the issue as under: “21.Ground no.3 is about disallowance u/s 14A of the Act,amounting to Rs. 1.69 lakhs. Before us,both the representatives admitted that Tribunal had dismissed the appeal filed by the AO on the identical issue,while deciding the appeal for the AY 2002-03. 21.1.We find that at page 19-20 of the order for the AY 2002-03 (supra) issue of disallowance u/s 14A was discussed as under: "32.Ground No. 2 relates to the restriction of the disallowance made u/s.14A of the Act. 32.1.During the course of the assessment proceedings, the AO noticed that the assessee has claimed the entire dividend income has been claimed as exempt. Invoking the provisions of Sec.14A, the AO asked the assessee to justify why the interest expenses incurred should not be apportioned towards earning of tax free income. It was explained that during the year, the assessee has received dividendof Rs. 5.04 crores out of 14.80 crores has been received from the group companies for which the assessee has not incurred any cost. It was further explained that the investments have been made out of internal accruals of the company. The statement of the assessee did not find favour from the AO who went on to compute the disallowance u/s.14A at Rs. 18,43,425/-. 32.2.It was explained before the Ld. CIT(A) that total amount of investment in group company is Rs.54.30 crores. It was further explained that in respect of investment in group companies,the assessee does not have to incur any expenditure at all.The Ld. CIT (A) was convinced with this explanation of the assessee. However, in respect of balance investment, the Ld. CIT(A) was of the opinion that disallowance u/s.. 14A need to be made. The Ld.CIT(A) computed such disallowance as ½% of the average investment and restrict the disallowance u/s.. 14A to Rs. 1,87,954/-. 32.3. Before us, the Ld. DR could not bring any distinguishing facts or decision in favour of the Revenue. The Ld. DR relied upon the findings of the AO. 32.4.The Ld. Sr. Counsel for the assessee fairly conceded to the findings of the Ld. CIT(A). 32.5.We have carefully perused the orders of the authorities below. We find that the major investment of the assessee is in its group companies. After considering this facts, the Ld. CIT(A) has restricted the disallowance to Rs. 1.87 lakhs. We do not find any reason to interfere with the findings of the Ld. CIT(A). Ground No. 2 is accordingly dismissed.” Respectfully, following the order for the year 2002-03,ground no.3 is decided against the AO.” Respectfully,following the order for the earlier years,ground no. 1 is decided in favour of the assessee.” Considering the above,we direct the AO to restrict the disallowance under rule 8D(2)(iii)of the Rules @ of 0.05% of the average investment.But,strategic investment should not be considered for computing the disallowance.Second ground is allowed in favour of the assessee,in part.

6.Disallowance of bad debts of Rs.45.74 crores is the subject matter of ground no.3.During the course of hearing the AR stated that the issue stands finally decided by the order of the Hon’ble Apex Court,delivered in the case of Catholic Syrian Bank Ltd.(343ITR270).He also referred to 1929/M/12-Kotak Mahindra Bank Ltd. (+7Appls) the matter of Karnataka Bank Ltd. (349 ITR705).The DR stated that matter could be decided on merits.We have heard the rival submissions .We find that the Hon’ble Supreme Court has dealt with the issue,in the case of Catholic Syrian Bank Ltd.(supra),as under: “The provisions of sections 36(1)(vii) and (viia) of the Income-tax Act, 1961,are distinct and independent items of deduction and operate in their respective fields. Bad debts written off, other than those for which provision is made under clause (viia) , will be covered under the main part of section 36(1)(vii) , while the proviso will operate in cases under clause (viia) to limit the deduction to the extent of difference between the debt or part thereof written off in the previous year and the credit balance in the provision for bad and doubtful debts account made under clause (viia) . Thus, the proviso would not permit the benefit of double deduction, operating with reference to rural loans while under section 36(1)(vii) . XXXXX The clear legislative intent of the provisions and unambiguous language of the circulars with reference to the amendments to section 36 of the Act is that the deduction on account of provisions for bad and doubtful debts under section 36(1)(viia) is distinct and independent of the provisions of section 36(1)(vii) relating to allowance of the bad debts. After introduction of section 36(1)(viia) by the Finance Act, 1979, with effect from April 1, 1980, Circular No. 258, dated June 14, 1979, was issued by the Central Board of Direct Taxes to clarify the application of the new provisions. The provisions were introduced in order to promote rural banking and assist scheduled commercial banks in making adequate provision from their current profits for risks in relation to their rural advances. The deductions were to be limited as specified in the section. The circular mentions 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 deduction of the bad debts. In other words, scheduled commercial banks would continue to get the benefit of the write-off of the irrecoverable debts under section 36(1)(vii) in addition to the benefit of deduction of the provision for bad and doubtful debts under section 36(1)(viia) . The legislative intent was to encourage rural advances and the making of provisions for bad debts in relation to such rural branches. The court would give an interpretation to these provisions which would serve the legislative object and intent, rather than to subvert them. The purpose of granting such deductions would stand frustrated if these deductions are implicitly neutralized against other independent deductions specifically provided under the provisions of the Act. The deductions permissible under section 36(1)(vii) should not be negated by reading into this provision, limitations of section 36(1)(viia) on the reasoning that it will form a check against double deduction. The language of section 36(1)(vii) of the Act is unambiguous and does not admit of two interpretations. It gives a benefit to all banks, commercial or rural, scheduled or unscheduled, to claim a deduction of any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year. This benefit is subject only to section 36(2) of the Act. The proviso to section 36(1)(vii) does not, in absolute terms, control the application of this provision as it comes into operation only when the case of the assessee is one which falls squarely under section 36(1)(viia) of the Act. The Explanation to section 36(1)(vii) , introduced by the Finance Act, 2001, specifically excluded any provision for bad and doubtful debts made in the account of the assessee from the ambit and scope of “any bad debt, or part thereof, written off as irrecoverable in the accounts of the assessee”. Thus, the concept of making a provision for bad and doubtful debts will fall outside the scope of section 36(1)(vii) simpliciter. Once the bad debt is actually written off as irrecoverable and the requirements of section 36(2) satisfied, then, it will not be permissible to deny such deduction on the apprehension of double deduction under the provisions of section 36(1)(viia) and the proviso to section 36(1)(vii) .”

1929/M/12-Kotak Mahindra Bank Ltd. (+7Appls)

Respectfully,following the above,we decide ground no.3 in favour of the assessee. 7.Next ground is about depreciation of premises given on lease.During the course of hearing before us,the AR did not press the said ground.Hence,same stands dismissed. 8.Last ground of appeal deals with depreciation on lease assets.Before us,the AR stated that it was consequential in nature, that it should be restored back to the file of the AO to follow the directions of the Tribunal given in the earlier years’orders. DR stated that matter could be decided on merits.After considering the rival submissions,we direct the AO to follow the directions of the Tribunal given while adjudicating the issue under consideration in the earlier years. ITA/3491/Mum/2013(AY.2009-10): 9.Solitary ground of appeal,raised by the AO,is about allowing bad debts of the assessee of Rs. 60.15 crores without appreciating the fact the bad debts written off during the year had to be computed not only with opening balance but also with the closing balance.

9.1.Representatives of both the sided agreed that the issue stands decided against the AO by the order of the Tribunal in the case of Oman International Bank SAOG(92ITD76).We are reproducing the relevant portion of the above order and it reads as under: “8.We now come to another plea strenuously argued by the learned Departmental Representative, and that is with regard to the proposition that in case the assessee';s plea is to be upheld, the assessee will get undue benefit in the first year of operations, because, on one hand, the assessee will be entitled to an ad hoc claim on the basis of taxable business income and, on the other hand, such an ad hoc claim will not be set off in deduction for actual bad debts. According to the learned Departmental Representative, this incongruity will end up in a situation that the assessee will get deduction for more than actual bad debts Something which is clearly contrary to the scheme of the Act and patently absurd.

1929/M/12-Kotak Mahindra Bank Ltd. (+7Appls)

ITA/3592/Mum/2013(AY.2009-10): 10.First ground of appeal,filed by the assessee,is about disallowance made u/s.14A r.w.r.8D (2) (ii)of the Rules. Following our order for the last AY.Ground no.1 is decided in favour of the assessee. 10.1.Second ground deals with disallowance made u/s.14A r.w.r.8D(2)(iii)of the Rules.The AO is directed to follow our instruction for the earlier AY.GOA -2 stands decided in favour of the assessee,in part. 11.Next two grounds pertains to non admission of additional claim regarding allowability of bad debts writing off relating to urban branches.Respectfully following the case of Catholic Syrian Bank Ltd.(supra),we decide third and fourth grounds in favour of the assessee. 12.Ground no.5 stands dismissed as not pressed. 13.Sixth ground is consequential in nature,as held in the earlier year,at paragraph no.8 of our order.We direct the AO to follow the directions of the Tribunal given while adjudicating the issue under consideration in the earlier years. ITA/3492/Mum/2013(AY.2010-11): 14.First two grounds of appeal are about allowing bad debt claim of Rs.106.28 crores u/s.36(1)(vi) r.w.s.36(1)(vii)of the Act. Following our order for the AY.2008-09,we decide both the grounds of appeal against the AO. 15.Third ground of appeal is identical to the effective ground of appeal,raised by the AO,for the AY.2009-10.Respectfully,following the order of the Tribunal in the case of Oman International Bank SAOG(supra),we decide last ground against the AO. ITA/3593/Mum/2013(AY.2010-11):

1929/M/12-Kotak Mahindra Bank Ltd. (+7Appls)

16.First two ground of appeal are about disallowance made by the AO u/s.14A r.w.r.8D(2)(ii) and(iii)of the Rules.Following our orders,for earlier year ground no.1 is allowed and ground no.2 is allowed,in part.AO would follow our directions with regard to GOA 2.

17.Third ground stands dismissed,as not pressed.

18.Last ground is consequential in nature. AO is directed to follow the directions of the Tribunal passed with regard to depreciation of various assets,while adjudicating the issue under considera -tion,for the earlier years.

ITA/6394/Mum/2013(AY.2011-12): 19.Both the grounds raised by the AO are identical to the ground raised by him in the earlier year i.e.bad debts.Following our order for the earlier AY.s. i.e. orders for the AY.s.2008-09 to 2010- 11,we decide both the grounds against the AO.

ITA/6217/Mum/2013(AY.2011-12): 20.First two grounds are about disallowances made u/s.14A r.w.r.8D(2)(ii)and 8D(2)(iii). The AO is directed to follow our orders for the earlier AY.s.First ground stands allowed whereas the second ground is allowed partly. 21.Ground no.4 is dismissed,as not pressed. 22.Grounds 5,6,7 and 10 deal with depreciation of various assets.We have held,in the earlier AY.s.,that these grounds are consequential in nature and the AO has to adopt the WDV of the assets of earlier years.AO will follow the same directions for this year also. 23.Ground no.3 pertains to deduction @7.5%,u/s.36(1)(vii)on the assessed Gross Total Income (GTI).During the appellate proceedings,the assessee took a ground,without prejudice and claimed that the AO had increased the GTI by making additions on account of disallowance u/s. 14A and bad debts.It further argued that deduction u/s.36(1)(viia)should be increased proportion -ately,that deduction was not re-worked correctly. 23.1.The FAA, after considering the submissions of the assessee directed the AO to dispose off the rectification application filed by the assessee in accordance with instruction number 03/2013, dated 05/07/2013 of the CBDT.

1929/M/12-Kotak Mahindra Bank Ltd. (+7Appls)

23.2.Before us, the AR stated that the assessee was entitled to deduction at the rate of 7.5% on the addition/disallowances made by the AO. The DR left the issue to the discretion of the bench. We find that the assessee had moved an application under section 154 of the Act, in that regard. On a query by the bench, it was stated that the AO had not passed the recognition order. The AO is directed to dispose off the application, filed by the assessee, as per the orders of the FAA within a period of one month from the date of receipt of our order. 24.Ground No.8 deals with addition on account of AIR. During the assessment proceedings, the AO held that the assessee was not able to reconcile difference of Rs. 1.40 lakhs on account of transactions listed in the AIR information. 24.1.Aggrieved by the order of the AO, the assessee preferred an appeal before the FAA. After considering the available material, he held the AO had disallowed on reconcile transaction worth Rs. 1.40 lakhs after giving sufficient time and opportunity to the assessee,that the assessee had requested for time to reconcile the difference, that part of the data in the AIR had been successfully reconcile by the assessee, that it was possible that the transactions were reported in earlier/subsequent assessment years, that it was also possible that transactions in question remain to be reported by the assessee in its books of accounts, that it had failed to reconcile the said discrepancy, that on reconcile transactions were required to be explained by the assessee mainly because the authenticity and the reliability and validity of the data had not been discredited by the assessee, that no material/evidence was filed before the AO or him to prove that the data. Finally,he directed the AO to re-examine the AIR data and decide the issue accordingly. 24.2.Before us,the AR stated that the amount in question was very meagre as computer the total turnover,that assessee had reconcile all the discrepancies except for Rs. 1.40 lakhs, that no addition should have been made on the basis of the AIR data. The DR contended that FAA had asked the AO to verify the claim of the assessee and to make addition only if the assessee was not able to reconcile the figure. We find that there was discrepancy in the figures appearing in the books of accounts of the assessee and the AIR data of the Department, that it reconcile all the the discrepancies except for a sum of Rs. 1.40 lakhs, that it had requested the AO to grant it sometime to reconcile the figure, that even before the FAA the assessee did not produce any reconciliation statement, that he directed the AO to re-examine the issue.. In our opinion the order of the FAA does not suffer 12

1929/M/12-Kotak Mahindra Bank Ltd. (+7Appls) from any legal infirmity.It was the duty of the assessee to reconcile the discrepancy. The FAA had not confirmed the order of the AO and had given one more chance to the assessee.. We are not inclined to interfere with the order of the FAA. We are aware that only on the basis of the AIR information no addition should be made. But the case under consideration is different. The assessee had reconcile major portion of the difference. The onus was on it to discredit the veracity of the remaining portion of the AIR information.The AO is directed to decide the issue within a period of one month after hearing the assessee.Eighth ground stands partly allowed. 25.Ground No. 9.is about non grant of TDS credit certificate.The AO is directed to verify the claim made by the assessee.If credit has not been given till date,he should pass the necessary order within a period of one month from the date of receipt of the our order.