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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI [CAMP: MADURAI]
Before: SHRI N.R.S. GANESAN & SHRI ABRAHAM P. GEORGE
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER:
Appeals and cross-appeals of the assessee and Revenue for
assessment year 2010-11 are taken up first for disposal.
Assessee has taken four grounds of which, ground No.1 is general needs no specific adjudication.
Vide its ground No.2, grievance raised by the assessee is that disallowance of ` 5,46,512/- made under Section 14A of the Income-
tax Act, 1961 (in short 'the Act') by the Assessing Officer was enhanced by the Ld. CIT(Appeals) to `51,85,950/-.
Facts apropos are that the assessee, a scheduled bank, had
filed its return for impugned assessment year declaring income of `278,96,90,410/-. In the course of assessment proceedings, it was
noticed by the Assessing Officer that the assessee had claimed
dividend income as well as certain interest income as exempt from tax. Claim of the assessee was that no expenditure was incurred for the
amount invested in securities, shares and mutual funds which gave
rise to such income. The Assessing Officer held that this was not
3 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16 acceptable. He applied Section 14A of the Act read with Rule 8D of
Income-tax Rules, 1962. However, the disallowance was restricted to 2% of such income. Such disallowance came to `5,46,512/-.
Aggrieved, assessee moved in appeal before the CIT(Appeals).
Argument of the assessee was that investments made were a part of
its treasury operations. As per the assessee, the expenditure relating
to Treasury Department was a necessary corollary to the banking
operations. Claim of the assessee was that for the purpose of income-
tax, entire portfolio of investments, including the tax-free securities,
were treated as stock-in-trade. As per the assessee, since the
investments were part of stock-in-trade, disallowance under Section
14A of the Act could not be made. However, Ld. CIT(Appeals) was
not impressed by the above argument. According to him, assessee had received tax-free dividend of `1,66,21,733/- on shares worth
`82.72 Crores and dividend of `41,07,03,886/- on mutual funds units
of `573.44 Crores. As per Ld. CIT(Appeals), assessee itself had
admitted using its Treasury Department for investment related matters.
The Treasury Department, as per Ld. CIT(Appeals), incurred expenditure of `1,88,06,390/- during the relevant previous year. As
4 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16 per Ld. CIT(Appeals), proportion of investments in shares and mutual
funds came to 1.47% of total investments. Ld. CIT(Appeals) was of
the opinion that same percentage had to be applied on the expenditure
incurred in Treasury Department, for the purpose of calculating the
disallowance under Section 14A of the Act. As per Ld. CIT(Appeals),
the A.O. fell in error in working out the disallowance at 2% of exempt
income, when Rule 8D was applicable for impugned assessment year.
Ld. CIT(Appeals), therefore, chose to apply Rule 8D(2)(iii) and made
disallowance at half percent of average value of investment. He did
not accept the claim of the assessee that investments were held for
the purpose of stock-in-trade and therefore, disallowance under
Section 14A of the Act was not required. According to the Ld.
CIT(Appeals), Rule 8D did not make any differentiation between
shares/units held as stock-in-trade and investments. As per Ld.
CIT(Appeals), actual disallowance by applying Rule 8D(2)(iii) of Income-tax Rules, 1962 would come to `51,85,950/- and not
`5,46,512/- as worked by the Assessing Officer. He, therefore,
enhanced the disallowance to `51,85,950/-.
5 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16 6. Now before us, the Ld. A.R. for the assessee submitted that
investments held by a scheduled bank, whatever may be the caption
under which it was classified in the balance sheet, ought to be
considered only as stock-in-trade. Relying on circular No.18 dated
02.11.2015 of CBDT, Ld. AR submitted that investment made by
banking company was part of its business as banking and income
arising from such investment would fall only under the head “Profits
and Gains of Business”. Relying on the judgment of Hon'ble Punjab &
Haryana High Court in the case of Principal CIT v. State Bank of
Patiala [2017(2)TMI 125], Ld. A.R. submitted that investments done in
the course of a business of banking fell under stock-in-trade. Thus
according to Ld. A.R., there was no need for disallowance under
Section 14A of the Act.
Per contra, Ld. Departmental Representative submitted that
assessee was employing its Treasury Department for making
investments and for taking decisions with regard to investments, which
would yield in tax-free income. According to him, assessee had
classified the shares under the head ‘Investments’ and not stock-in-
trade in its balance sheet prepared in accordance with Banking
Regulation Act. As per Ld. D.R., assessee was claiming such
6 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16 investments to be a part of stock-in-trade for the purpose of income-
tax only. According to him, Section 14A of the Act clearly applied and
the Ld. CIT(Appeals) correctly applied Rule 8D(2)(iii).
We have heard the rival contentions and perused the orders.
Claim of the assessee is that shares/units held by it whether classified
as “investment” or “stock-in-trade” in balance sheet, that has to be
considered as stock-in-trade only for tax purpose, and Section 14A of
the Act had no application. Circular No.18 dated 02.11.2015 of CBDT
is reproduced hereunder:-
“Subject: Interest from non-SLR securities of Banks – Reg.
It has been brought to the notice of the Board that in the case of Banks, field officers are taking a view that, “expenses relatable to investment in non-SLR securities need to be disallowed u/s 57(i) of the Act as interest on non-SLR securities is income from other sources.”
Clause (id) of sub-section (1) of Section 56 of the Act provides that income by way of interest on securities shall be chargeable to income-tax under the head “Income from Other Sources”, if, the income is not chargeable to income-tax under the head “Profits and Gains of Business and Profession”.
The matter has been examined in the light of the judicial decisions on this issue. In the case of CIT v. Nawanshahar Central Cooperative Bank Ltd. [2007] 160 TAXMAN 48(SC), the Apex Court held that the investments
7 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16
made a banking concern are part of the business of banking. Therefore, the income arising from such investments is attributable to the business of banking falling under the head “Profits and Gains of Business and Profession”.
3.2 Even though the abovementioned decision was in the context of co-operative societies/Banks claiming deduction under section 80P(2)(a)(i) of the Act, the principle is equally applicable to all banks/commercial banks, to which Banking Regulation Act, 1949 applies.
In the light of the Supreme Court’s decision in the matter, the issue is well settled. Accordingly, the Board has decided that no appeals may henceforth be filed on this ground by the officers of the Department and appeals already filed, if any, on this ground before Courts/Tribunals may be withdrawn/not pressed upon. This may be brought to the notice of all concerned.” (emphasis supplied)”
CBDT itself has accepted the line of thinking that income from
investment made by a banking concern is part of its business of
banking to be considered under the head ‘Business and Profession’.
Direct result of this view is that such investments would be only a part
of stock-in-trade. In our opinion, how the assessee has treated the
shares and mutual funds in its balance sheet prepared under Banking
Regulation Act may not be relevant when the income therefrom is
treated as a part of business profit and not under the head of ‘Income
from other sources’. There is no case for the Revenue that assessee
was holding these investments solely for the purpose of earning
8 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16 dividend. At para 17 of its judgment in the case of State bank of
Patiala (supra), Hon'ble Punjab & Haryana High Court held as under:-
“17. Under section 14A, an expenditure can be disallowed only if it is incurred by the assessee in relation to income exempt from tax. The dividend or interest from the assessee’s stock-in-trade i.e. the securities was exempt from tax in view of sections 10(15)(iv)(h),(34) and (35). This was incidental to its business of banking. The business income on account of the assessee trading in the securities is assessable under the head “Profits and gains of business or profession”. The expenditure incurred in relation to stock-in-trade arising as a result of investment in shares and debentures is deductible under sections 28 to 37.”
Once holding of investment was considered incidental to the
business of banking to the assessee, in our opinion, Section 14A of
the Act could not have been applied. Para 26 of the very same
judgment is also relevant and it is reproduced hereunder:-
“26. What is of vital importance in the above judgment are the observations emphasized by us. Each of them expressly states that what is disallowed is expenditure incurred to “earn” exempt income. The words “in relation to” in section 14A must be construed accordingly. Thus, the words “in relation to” apply to earning exempt income. The importance of the observation is this.
We have held that the securities in question constituted the assessee’s stock-in-trade and the income that arises on account of the purchase and sale of the securities is its business income and is brought to tax as such. That income is not exempt from tax and, therefore,
9 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16
the expenditure incurred in relation thereto does not fall within the ambit of section 14A.
Now, the dividend and interest are income. The question then is whether the assessee can be said to have incurred any expenditure at all or any part of the said expenditure in respect of the exempt income viz. dividend and interest that arose out of the securities that constituted the assessee’s stock-in-trade. The answer must be in the negative. The purpose of the purchase of the said securities was not to earn income arising therefrom, namely, dividend and interest, but to earn profits from trading in i.e. purchasing and selling the same. It is axiomatic, therefore, that the entire expenditure including administrative costs was incurred for the purchase and sale of the stock-in- trade and, therefore, towards earning the business income from the trading activity of purchasing and selling the securities. Irrespective of whether the securities yielded any income arising therefrom, such as, dividend or interest, no expenditure was incurred in relation to the same.”
We are, therefore, of the opinion that disallowance under Section 14A
of the Act could not have been made in the assessee’s case for
investments which were considered as part of stock-in-trade for tax
purposes. Such disallowance therefore stands deleted.
Ground No.2 of the assessee stands allowed.
Vide its ground No.3, grievance of the assessee is that one of
its grounds regarding method of calculation of Aggregate Average
10 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16 Rural Advances for the purpose of application of Section 36(1)(viia)
was not adjudicated by the Ld. CIT(Appeals).
Assessee had made a provision of `76,84,72,154/- in its books
to the provision for bad and doubtful debts and claimed it as deduction
under Section 36(1)(viia) of the Act. This was arrived at by the
assessee as per following working:
7.5% of the Profits before allowing deduction ` 24,09,20,273 under chapter VI-A 10% of aggregate average advances made by ` 52,75,51,880 rural branches (as per Rule 6ABA) TOTAL ` 76,84,72,154
However, Assessing Officer restricted the claim to
`24,48,02,775/- being the actual provision made for bad and doubtful
debts in its Profit & Loss account. Work out given by the Assessing
Officer read as under:-
(a) Aggregate average rural advances during 18,45,11,366/- the year (b) Deduction allowable on aggregate rural 1,84,51,137/- advances [@ 10% of (b)] (c) 7.5% of Gross Total Income before 26,39,18,480/- deduction under chapter VIA (d) Total of (b) and (a) 28,23,69,617/- (e) Provision made for Bad and doubtful debts 24,48,02,775/- by the Bank
11 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16
(f) Least of (d) or (e) allowable as deduction 24,48,02,775/- u/s 36(1)(viia)
Aggrieved, the assessee moved in appeal before the
CIT(Appeals). Ld. CIT(Appeals) was of the opinion that the actual
amount of deduction computed by the assessee as well as the
Assessing Officer was very same. As per the Ld. CIT(Appeals), the
ground was purely academic, since, according to him, for the
impugned assessment year, the Assessing Officer though he followed
a different method of computation, it did not effect the taxable income
of the assessee.
Before us, Ld. A.R. for the assessee submitted that whether or
not taxable income of the assessee was disturbed, Ld. CIT(Appeals)
was obliged to give a specific finding on the ground raised by the
assessee. As per Ld. A.R., the issue was required to be remitted back
to the Ld. CIT(Appeals) to be adjudicated on merits.
Per contra, the Ld. Departmental Representative supported the
order of the CIT(Appeals).
12 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16 17. We have heard the rival contentions and perused the orders.
Assessee had raised ground No.10 before the Ld. CIT(Appeals) which
reads as under:-
“10. The learned Assessing Officer erred in calculating the average rural advances for the purpose of deduction u/s 36(1)(viia) of the Income-tax Act, 1961.
10.1. The learned Assessing Officer erred in considering the incremental advances for calculating the Aggregate Average Rural Advances as per the provisions of Rule 6ABA for the purpose of arriving at the deduction u/s 36(1)(viia).
10.2. The learned Assessing Officer failed to appreciate the fact that the Rule 6ABA does not prescribe only incremental advances are to be considered for arriving at the Aggregate Average Advances.”
In our opinion, irrespective of the fact whether computation
made by the Assessing Officer is having an effect on the taxable
income of the assessee, Ld. CIT(Appeals) ought to have decided the
ground raised by the assessee on merits. We are, therefore, of the
opinion that ground No.10 raised before the Ld. CIT(Appeals) needs to
be adjudicated by him. We, therefore, set aside the order of the
CIT(Appeals) and remit the issue back to the file of the Ld.
CIT(Appeals) for consideration in accordance with law. Ground No.3
is allowed for statistical purposes.
13 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16
Vide its ground No.4, grievance raised by the assessee is that claim of `20 Crores made by the assessee under Section 36(1)(viii) of
the Act was not allowed by the A.O.
Assessee had claimed a deduction of `9,17,03,880/- under 20.
Section 36(1)(viii) of the Act, which was later revised to `9,99,93,927/-.
The Assessing Officer did not accept the revised claim made through
letter dated 19.12.2011 since the assessee did not file a revised
return. Reliance was placed on the judgment of Hon'ble Apex Court in
Goetze (India) Ltd. v. CIT (284 ITR 323). As per the Ld. A.O., the
calculation adopted by the assessee in the original claim was for `16,25,20,366/- whereas only ` 13,22,62,398/- was allowable.
In its appeal before the CIT(Appeals), argument of the assessee was that it was eligible for a claim of `20,00,00,000/-.
Assessing Officer had reduced the claim by not accepting the
deduction of non-cash expenditure. As per the assessee, it had created a special reserve of `20 Crores and was eligible for deduction
of `20 Crores under Section 36(1)(viii) of the Act. Ld. CIT(Appeals)
was of the opinion that the enhanced claim could not be allowed in an
14 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16 appellate proceeding. As per Ld. CIT(Appeals), assessee had not
placed before the Assessing Officer the re-worked computation of
profits from eligible business. Relying on judgment of Apex Court in
the case of Jute Corporation of India v. CIT (1991) 187 ITR 688, Ld.
CIT(Appeals) held that only a bonafide ground, which could not be
raised earlier for good reasons, could be considered in an appellate
proceeding. Relying on the judgment of Apex Court in National
Thermal Power Company Ltd. v. CIT (229 ITR 383), Ld. CIT(Appeals)
rejected the claim for enhanced deduction under Section 36(1)(viii) of
the Act.
Now before us, the Ld. AR for the assessee submitted that
Hon'ble Apex Court’s judgment in National Thermal Power Company
Ltd. (supra) actually went in favour of assessee. According to him,
nothing stopped the appellate authorities from considering a fresh
ground raised by the assessee, if it was within the four corners of law.
Reliance was also placed on the decision of Bangalore Bench of the
Tribunal in the case of JCIT v. Vijaya Bank in I.T.A. No.578/Bang/2012
dated 27.02.2015.
Per contra, Ld. Departmental Representative submitted that
reason for revising the computation was never placed by the assessee
15 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16 before the lower authorities. Therefore, according to him,
CIT(Appeals) was justified in not considering the enhanced claim
under Section 36(1)(viii) of the Act.
We have heard the rival contentions and perused the orders. It may be true that the assessee had made a claim of `20 Crores under
Section 36(1)(viii) of the Act for the first time before the Ld.
CIT(Appeals). Assessee had specifically stated that it had created a
special reserve which made it eligible for such claim. Assessee had
for staking such claim adopted a method of computation which was
different from the one which it had adopted in its original return of
income. We are of the opinion that assessee cannot be stopped from
making an enhanced claim of deduction. It is not a case where the
assessee had not made any claim under Section 36(1)(viii) of the Act
in its original return. In other words, it is not a fresh claim altogether. It
had only revised its claim based on fresh method of computation which
was not earlier adopted by it. In our opinion, the lower authorities
ought have verified whether the method of computation adopted by the
assessee for the enhanced claim was acceptable under law. We are
of the opinion that by virtue of judgment of Hon'ble Apex Court in the
case of National Thermal Power Corporation Ltd. (supra), assessee
16 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16 could make such a claim before Ld. CIT(Appeals). Considering the
facts of the case we are, therefore, of the opinion that the matter
requires a fresh consideration by the A.O. We set aside the orders of
the lower authorities and remit the issue regarding deduction under
Section 36(1)(viii) of the Act back to the file of the A.O. for
consideration afresh in accordance with law.
Ground No.4 of the assessee stands allowed for statistical
purposes.
Now, we take up the cross-appeal of the Revenue.
Revenue has raised 15 grounds. Ground No.1 and 15 are
general needing no adjudication.
Vide its grounds numbered 2 to 5, grievance raised by the
Revenue is on an addition made by the Assessing Officer for stale
draft account which was deleted by the Ld. CIT(Appeals).
Facts apropos are that balance sheet of the assessee for relevant previous year disclosed outstanding liability of `8,82,15,584/-
towards stale draft account. The above sum represented unclaimed
money on demand drafts, which were issued more than three years
17 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16 earlier. As per the A.O., legally, such money which remained
unclaimed for more than three years could no more be claimed by the
creditor, since limitation period kicked in. He treated the sum as income of the assessee, but, restricted that addition to `2,68,97,833/-
being the accretion relatable to the relevant previous year. Reliance
was placed on the judgment of Hon'ble Apex Court in the case of CIT
v. T.V. Sundaram Iyengar & Sons (222 ITR 344).
Challenging the above, assessee moved in appeal before the
CIT(Appeals). As per the assessee, consideration for issuing bank
demand draft, etc. were recovered by the assessee from various
persons. According to it, there was no time limit for claiming the
money by the persons who had paid for these instruments, if it was not
encashed by the beneficiary. As per the assessee, when they were
not claimed by the beneficiary in whose favour the instruments were
issued, it would be transferred to stale draft account. If the
beneficiaries came even after three years, encashment was allowed
after revalidation. Contention of the assessee was that it was holding
it as only as a trustee and could never treat it as its own money. Ld.
CIT(Appeals) was appreciative of this contention. According to him,
the facts in the case of T.V. Sundaram Iyengar & Sons (supra) relied
18 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16 on by the Ld. Assessing Officer did not fit with that of the assessee.
As per the Ld. CIT(Appeals), the drafts remaining unclaimed did not
mean that there was cessation of liability on the assessee. Ld.
CIT(Appeals) accepted the contention of the assessee that it was
holding the stale drafts as a trustee in fiduciary capacity on behalf of
drawee of the instrument. Reliance was also placed on Notification
dated 24.05.2014 from Reserve Bank of India whereby stale demand
drafts which remained unclaimed for ten years or more had to be
credited by banks to a scheme account called “The Depositor
Education and Awareness Fund Scheme, 2014”. As per the Ld.
CIT(Appeals), the stale draft amounts had to be transferred to the
Fund and therefore, this would never be income of the assessee. He
deleted the addition.
Now before us, Ld. D.R. strongly assailing the order of the
CIT(Appeals), submitted that the stale draft became property of the
assessee once three years period for making a claim was over.
According to him, Assessing Officer was justified in treating such
accounts as income of the assessee.
Per contra, the Ld. AR relied on the order of the CIT(Appeals).
19 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16 33. We have heard rival contentions and perused the orders. Just
because a draft remained unclaimed by the beneficiaries, in our
opinion, would not entitle the assessee to claim it as its money or
property. Assessee was always obliged to pay the amount either to
the beneficiary or the original drawer. Assessee held the money only
as a trustee in fiduciary capacity. Once the money is held as trustee,
the question of limitation will not arise at all. In any case, RBI itself has
issued a Notification on 24.05.2014 mandating the banks to transfer
such unclaimed amounts to “Depositor Education and Awareness
Fund Scheme”. In our opinion, in such circumstances, Ld.
CIT(Appeals) was justified in taking the view that the amount cannot
be construed as income of the assessee. We do not find any reason
to interfere in the order of the CIT(Appeals).
Ground Nos. 2 to 5 of the Revenue stand dismissed.
Vide its ground Nos.6 to 10, grievance raised by the Revenue is
that the CIT(Appeals) deleted the disallowance for ex-gratia payment
made by the assessee.
Facts apropos are that assessee had made ex-gratia payment of `8,12,68,024/- to its employees who were not covered under
20 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16 Payment of Bonus Act, 1965. Ld. A.O. held that it was nothing but
appropriation of profits by senior employees who had income in excess of `10,000/- per month. As per Ld. A.O., there was no co-
relation between the ex-gratia payment and the quality of work of
these employees. Though assessee, claimed such payments to have
been made for business expediency and to ensure smooth working
and better relationship with its employees, this was not accepted by
the Ld. A.O. According to him, such ex-gratia payment was not
allowable either under Section 36(1)(ii) or under Section 36(1)(v) of the
Act.
Aggrieved, assessee moved in appeal before the CIT(Appeals).
Argument of the assessee was that the payment of ex-gratia to
employees who were not eligible for bonus under Payment of Bonus
Act was in recognition of their contribution and also as incentive to
motivate them for better performance. As per the assessee, there was
a clear methodology through which the ex-gratia payment was
calculated. Assessee relied on an internal circular dated 28.05.2009
numbered as 217/2009-INF issued by its Human Resource
Department, in support. Ld. CIT(Appeals) was appreciative of above
contention. According to him, Section 36(1)(ii) of the Act was not
21 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16 applicable to ex-gratia payment since ex-gratia payment was neither
bonus nor commission. Further according to Ld. CIT(Appeals), the
payment made could not be considered as appropriation of profits
since none of these employees, were shareholders of the assessee.
According to Ld. CIT(Appeals), the ex-gratia payment was decided by
the assessee in consultation with Employees’ Union and Officers’
Association and by virtue of judgment of Hon'ble jurisdictional High
Court in the case of Kumaran Mills Ltd. v. CIT (2000) 241 ITR 564,
these payments could be allowed on the ground of commercial
expediency under Section 37 of the Act. He allowed the plea.
Now before us, Ld. D.R. strongly assailing the order of Ld.
CIT(Appeals), submitted that the ex-gratia payment was not based on
any performance appraisal of the employees and it was a purely
gratuitous payment. Therefore, according to him, it could not be
considered as an expenditure for business expediency.
Per contra, Ld. A.R. supported the order of the CIT(Appeals).
We have heard rival contentions and perused the orders. It is
not disputed that ex-gratia payment was made by the assessee to the
employees who were not covered under Payment of Bonus Act for
22 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16 payment of bonus. It is also not disputed by the Revenue that such
payment was made after consultation with Unions representing the
employees and officers of the assessee. Whether such ex-gratia
payments are required or not was a business decision. In our opinion,
the Assessing Officer could not have put himself in the shoes of the
businessman and decide whether employees concerned were eligible
for such ex-gratia payment. When part of employees alone were
eligible for bonus under Payment of Bonus Act, the assessee, in our
opinion, was justified in taking a business decision as to how to treat
those employees who were not covered by such enactment.
Assessee cannot be faulted for making such payment so as to ensure
smooth and better relationship with its employees. In any case, we
find Hon'ble jurisdictional High Court in the case of Kumaran Mills Ltd.
(supra) had held that ex-gratia payments could not be disallowed if it
was found to be commercial expedient. Therefore, in our opinion, Ld.
CIT(Appeals) was justified in disallowing this issue.
Ground Nos. 6 to 10 are dismissed.
23 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16 42. Vide its ground No.11, Revenue is aggrieved on disallowance
of entertainment expenses made by the Assessing Officer being
deleted by the Ld. CIT(Appeals).
Assessee had claimed a deduction of `56,45,550/- as 43.
entertainment expenditure. It was clarified by the assessee that the
amount has been spent in supplying of tea, coffee, etc. to the
customers. Contention was that it was incurred wholly and exclusively
for the purpose of its business. As per the assessee, though Section
37(2) was removed from the Act, it did not mean that expenditure
incurred for promoting business was required to be disallowed.
However, Assessing Officer was of the opinion that the claim though
allowable, the type of vouchers maintained by the assessee and the
nature of expenditure did not demonstrate how it was wholly and
exclusively for the purpose of business. He made a disallowance of
5%.
Aggrieved, the assessee moved before the CIT(Appeals). The
CIT(Appeals) was of the opinion that the disallowance was not
warranted since the expenditure incurred by the assessee was purely
24 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16 for business purpose and was not of personal or capital nature. He,
therefore, deleted the addition.
Now before us, Ld. D.R. strongly assailing the order of the
CIT(Appeals), submitted that 5% alone was disallowed since assessee
could not prove the business purpose for incurring such expenditure.
Per contra, Ld. A.R. submitted that the whole of the ledger
which gave break-up of expenditure and nature of expenditure was
placed before the lower authorities. According to him, there was no
reason for making an ad-hoc disallowance of 5%.
We have heard rival contentions and perused the orders. It is
not disputed that the claim of entertainment expenditure was in relation
to customers of the assessee-bank. There is no ground for the
Revenue that entertainment expenditure was incurred by the
employees of the assessee for their own benefit. In the nature of
business of the assessee, we cannot say that the entertainment
expenditure claimed by the assessee was not required to be incurred.
In any case, there is no reason why an ad-hoc disallowance of 5% was
made. If the Assessing Officer was of the opinion that any expenditure
was not vouched, he could have made disallowance for such
25 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16 expenditure. In our opinion, the CIT(Appeals) was justified in deleting
5% disallowance made by the Assessing Officer. We do not find any
reason to interfere in the order of the CIT(Appeals).
Ground No.11 stands dismissed.
Vide its ground Nos.12 to 14, grievance raised by the Revenue
is that addition made for interest accrued on NPAs was deleted by the
Ld. CIT(Appeals).
Facts apropos are that assessee was mandated by RBI
guidelines to maintain their books on accrual basis. As per A.O., Rule
6EA, which was framed in accordance with Section 43D of the Act,
prescribed the categories of bad and doubtful debts in relation to which
and the extent to which interest had to be recognized. According to
him, if no interest was being paid by a borrower for six months, then
such sticky accounts had to be treated as bad and doubtful debts or in
other words, Non-Performing Asset. Ld. A.O. noted that RBI had
lowered the limit for recognizing an account as NPA from 180 days to
90 days. However, as per the Ld. A.O., there was no such change
either in Section 43D or Rule 6EA. As per the A.O., interest was
required to be offered for taxation on accrual basis on all NPAs which
26 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16 were more than 90 days old but were less than 180 days old as well.
Ld. A.O. demarcated the additions to the list of NPAs made in the last
quarter of relevant previous year since these fell under the category of
accounts which were more than 90 days old but less than 180 days. He computed an accrued interest of ` 74,60,000/- on such accounts
having balance of `59.68 Crores, applying average interest rate of
10% per annum. An addition of `74,60,000/- was made.
In its appeal before the CIT(Appeals), argument of the
assessee was that there were various types of categories mentioned
in Rule 6EA, which were to be treated as bad and doubtful debts for
the purpose of Section 43D of the Act. As per the assessee, if an
account falls under any one of the clauses (a) to (e) of Rule 6EA, then
it had to be treated as bad and doubtful one. Further, as per the
assessee, in respect of sub clauses (b) to (e), and certain items falling
in clause (a) there were no limit of 180 days. If an advance was
recalled, then it immediately became bad and doubtful irrespective of
period. In other words, as per the assessee, wherever there was a
threat of recovery or the accounts became irregular, the same became
bad and doubtful debts. Assessee also submitted that on classification
27 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16 of accounts as NPA, the amounts due were recalled within 10 days by
issuing notice to the defaulting borrowers. Relying on clause (b) of
Rule 6EA, the assessee submitted before the Ld. CIT(Appeals) that
loans which were recalled had to be classified as doubtful debts.
Thus, as per the assessee, the differentiation made by the Assessing
Officer between the accounts which were more than 90 days in default
but less than 180 days was not warranted. Another argument of the
assessee was that Rule 6EA though it was introduced in the statute
book with effect from 01.04.1992, was never revised though Reserve
Bank of India was periodically issuing guidelines changing the criteria
for categorizing bad and doubtful debts.
Ld. CIT(Appeals), after going through the submissions of the
assessee, was of the opinion that RBI had reduced time frame for
recognizing loans/advances as NPAs where interest remained unpaid,
from 180 days to 90 days. Such a revision, as per Ld. CIT(Appeals),
was effected on 01.04.2004. But similar change was not made to Rule
6EA. As per Ld. CIT(Appeals), Rule 6EA ought have been amended
pursuant to revision made by RBI but was not done. This according to
him, went against the mandate of Section 43D of the Act. He,
28 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16 therefore, held that addition of `74,60,000/- was not warranted and it
was deleted.
Now before us, the Ld. Departmental Representative strongly
assailing the order of the CIT(Appeals), submitted that RBI guidelines
could not be given preference over the provisions of the Act and
Income-tax Rules. According to him, clause (a) of Rule 6EA mandated
time period of six months, for classifying a loan account as sticky
advance. According to him, the CIT(Appeals) was not justified in
substituting the period of six months with 90 days. The addition, as
per the Ld. D.R., was correctly worked by the A.O.
Per contra, the Ld. AR strongly supporting the order of the
CIT(Appeals), submitted that this issue had come up before Kolkata
Bench of this Tribunal in the case of DCIT v. The Royal Bank of
Scotland N.V. 2016(11) TMI 665 and it was held that interest on loans
should not automatically be recognized on accrual basis and this had
to be in line with RBI prudential norms for income recognition.
Reliance was also placed on the judgment of Delhi High Court in the
case of CIT v. Vasisth Chay Vyapar Ltd. (2011) 330 ITR 440.
29 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16 55. We have heard rival contentions and perused the orders. A.O.
had refused to consider accounts on which principal and interest were
outstanding for a period of more than 90 days but less than 180 days,
as sticky. According to him, interest on such advances had to be
considered on the basis of accrual. Reliance was placed on Section
43D of the Act. Section 43D clause (a) and (b) are reproduced
hereunder:-
SPECIAL PROVISION IN CASE OF INCOME OF PUBLIC FINANCIAL INSTITUTIONS, PUBLIC COMPANIES, ETC. 43D. Notwithstanding anything to the contrary contained in any other provision of this Act,-- (a) in the case of a public financial institution or a scheduled bank or a State financial corporation or a State industrial investment corporation, the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the Reserve Bank of India in relation to such debts ; (b) in the case of a public company, the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the National Housing Bank in relation to such debts, shall be chargeable to tax in the previous year in which it is credited by the public financial institution or the scheduled bank or the State financial corporation or the State industrial investment corporation or the public company to its profit and loss account for that year or, as the case may be, in which it is actually received by that institution or bank or corporation or company, whichever is earlier.
30 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16
A reading of clauses clearly indicates that categories of bad and
doubtful debts had to be prescribed considering the guidelines issued
by Reserve Bank of India. In respect of interest relatable to various
categories prescribed by RBI, assessee can opt for booking interest
income on receipt basis instead of booking it on accrual basis. The
only question that remains is whether Rule 6EA which gave categories
of bad and doubtful debts disabled an assessee from claiming the
benefit of RBI guidelines with regard to recognition of income. Rule
6EA(a)(i) is reproduced hereunder:-
SPECIAL PROVISION REGARDING INTEREST ON BAD AND DOUBTFUL DEBTS OF FINANCIAL INSTITUTIONS, BANKS, ETC. 6EA. The provisions of section 43D shall apply in the case of every public financial institution, scheduled bank, State Financial Corporation and State Industrial Investment Corporation where its income by way of interest pertains to the following categories of bad and doubtful debts, namely:-- (a) (i) Non-viable or sticky advances (i.e., where irregularities of the nature specified in sub-clause (ii) are noticed in the accounts of the borrowers for a period of six months and more and there are no minimum prospects of regularisation of accounts, or where the accounts or information in relation to such accounts reflect usual signs of sickness, such as,-- 1. apparent stagnation in the business as a result of the slow or negligible turnover;
31 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16
frequent requests for over-drawing or issue of cheques without ensuring availability of funds in the account; 3. bills purchased or discounted remain overdue for 3 months and more or the recovery of such bills from the borrower poses difficulties; 4. in the case of term loans, instalments which are overdue for 6 months or more; 5. unexplained delays by the borrower in submission of quarterly or half-yearly operating statements or stock statements or balance-sheets and other information required by the bank; 6. slow movement or stagnation of stocks observed during inspections; 7. low or negligible level of activity observed during inspections or suspension or closure of the business; 8. persistent delay in compliance with vital requirements like execution of documents, producing additional security when required or non-compliance with such requirements; 9. diversion of funds to sister units or acquiring capital assets not relevant to the business or large personal withdrawals by the borrowers; 10. intentional non-adherence to project schedules leading to substantial cost escalations and requirement of additional term finance; 11. the pressure on the liquidity leading to non-payment of wages to workers or statutory dues or rents of office and factory premises; 12. the current liabilities exceeding current assets; 13. any grave irregularities observed by the auditors of the borrowers which remain to be rectified;
32 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16
basic weakness revealed by the financial statements of the unit, for example, continued cash loss beyond one year.
A careful reading of above rule would show that only for non-viable or
sticky advances having irregularities falling within sub-clause (ii) alone
the six months limitation apply. However, where accounts or
information of accounts show usual signs of sickness, this condition
regarding six months may not be applicable. In any case, once the
rule does not follow the guidelines issued by RBI, in our opinion, it
becomes necessary to read down such rule so that it is in consonance
with the RBI regulations or prudential norms for recognizing income.
We also find that Kolkata Bench of this Tribunal in the case of Royal
Bank of Scotland N.V. (supra) at para 2.6 of its order, had held as
under:-
“2.6. We have heard the rival contentions and perused the materials available on record including the detailed paper book filed by the assessee. The facts stated hereinabove remain undisputed and hence the same are not reiterated for the sake of brevity. It is not in dispute before the lower authorities that the loan accounts had become sticky and doubtful of recovery. The only contention of the revenue is that section 43D of the Act read with Rule 6EA of the Rules permits accounting of interest income on receipt basis only if the loan account had become overdue for more than six months, whereas in the instant case, it is more than three months but less than six months as on 31.3.2010. The loan account becoming overdue and becoming sticky was never disputed.
33 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16
The next issue is whether the prudential norms of RBI for income recognition would override the provisions of the I.T. Act. This issue has been addressed by the Hon'ble Supreme Court in the case of Southern Technologies Ltd. supra in the context of allowability of deduction towards ‘Provision for NPA'. We find that the same decision clearly stated that the interest income on NPA accounts should not be recognized on accrual basis which is in line with RBI prudential norms for income recognition. This fine distinction has been duly considered in the decision of the Hon'ble’ Delhi High Court in the case of CIT v. Vasisth Chay Vyapar Ltd. supra. When the account becoming NPA is not disputed by the revenue, the recognition of income is to be done only on receipt basis which is in consonance with the real income theory. In these circumstances respectfully following the decisions of Hon'ble Delhi High Court in 330 ITR 440 and various other decisions referred to supra, we hold that the interest income on NPA accounts should not be assessed on mercantile basis and the same is to be taxed only on receipt basis. Accordingly, the grounds raised by the assessee are allowed.”
Therefore, in our opinion, CIT(Appeals) was justified in deleting
the addition made on interest on NPAs. We do not find any reason to
interfere with the order of the CIT(Appeals).
Ground Nos.12 to 14 of the Revenue stands dismissed.
Now, we take up the appeals of the assessee and Revenue for
assessment year 2011-12.
34 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16 59. Ground No.2 taken by the assessee for this assessment year is
similar to the ground raised by it in its appeal for assessment year
2010-11.
We have already held in I.T.A. No.2325/Mds/2016, at paras 8 &
9 above, that disallowance under Section 14A of the Act was not
warranted in assessment year 2010-11. The factual situation being
the same, we delete the disallowance made under Section 14A of the
Act for the impugned assessment year also.
Ground No.2 is allowed.
Grounds Nos.3 and 4 of the assessee are similar to the
grounds 3 & 4 raised by the assessee for assessment year 2010-11.
Accordingly for the same reasons mentioned at para 17 & 18 above,
we remit the issue raised by the assessee in its ground number 3,
back to the Ld. CIT(Appeals) for consideration afresh in accordance
with law. For reasons mentioned at para 24 above, we remit the issue
raised by the assessee in its ground number 4 back to the file of the
Ld. A.O. for consideration afresh in accordance with law.
35 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16 63. Coming to the appeal of the Revenue, grounds raised by the
Revenue are similar to those raised by it in its appeal for assessment
year 2010-11 except for ground No.15. Grounds 2 to 5 are on stale
drafts, grounds 6 to 10 on ex-gratia payments, ground 11 on
entertainment expenses and grounds 12 to 14 on interest on NPA.
Based on our findings for assessment year 2010-11, given at paras
33, 40, 47 and 56, these grounds are dismissed. This leaves us with
the grievance raised by the Revenue in its ground No.15. Revenue is
aggrieved that the CIT(Appeals) allowed deduction on account of
wage settlement on actual payment basis without ascertaining the
factum of payment.
Assessee had made a claim of `18,00,00,000/- as provision
towards wage arrears in its return for assessment year 2010-11. The
said claim was disallowed in that year holding that it was only a
contingent liability. This disallowance was upheld by the CIT(A) in
assessee’s appeal for assessment year 2010-11. The CIT(Appeals),
while upholding this disallowance had relied on a Bipartite Settlement
entered into by the assessee with Indian Banks Association and
Workmens’ Association on 27.04.2010 which fell in previous year
ended 31.07.2011 relevant to assessment year 2011-12.
36 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16
The assessee had during the course of appellate proceedings for the impugned assessment year staked a claim for `17,66,43,818/-
being the wage settlement amount disbursed to its employees. As per the assessee, it had disbursed the said sum of `17,66,43,818/- during
the relevant previous year, on dates falling between 22.05.2010 and
18.03.2011. The Ld. CIT(Appeals) was of the opinion that the assessee having disbursed `17,66,43,818/-, the claim was allowable.
Now before us, the Ld. Departmental Representative submitted
that the CIT(Appeals) had believed the claim of the assessee
regarding actual disbursement of wage arrears without giving any
opportunity to the Assessing Officer to verify the facts.
Per contra, the Ld. AR strongly supported the order of the
CIT(Appeals).
We have heard the rival contentions and perused the orders.
The CIT(Appeals) had allowed the claim of disbursement of `17,66,43,818/- on actual payment basis. The provision made by the
assessee for such wage arrears in earlier year was disallowed.
Against such disallowance, assessee has taken no grounds before this
37 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16 Tribunal in its appeal for assessment year 2010-11. Accordingly, the claim of the assessee that it had to be allowed on actual payment basis was, in our opinion, rightly allowed by the CIT(Appeals). However, whether the assessee had actually disbursed `17,66,43,818/- requires to be verified by the A.O. For this limited
purpose, the matter is remitted back to the file of the Assessing Officer.
Ground No.15 of the Revenue is allowed for statistical purposes.
To sum up, appeals of the assessee for assessment years 2010-11 and 2011-12 are allowed pro-tanto. Appeal of the Revenue for assessment year 2010-11 is dismissed and whereas that for 2011- 12 is partly allowed for statistical purposes.
Order pronounced on 29th March, 2017 at Chennai.
sd/- sd/- (अ�ाहम पी.जॉज�) (एन.आर.एस. गणेशन) (N.R.S. Ganesan) (Abraham P. George) �या�यक सद�य/Judicial Member लेखा सद�य/Accountant Member
चे�नई/Chennai, �दनांक/Dated, the 29th March, 2017. Kri.
38 I.T.A. Nos.2325 & 2326/Mds/16 I.T.A. Nos.2433 & 2649/Mds/16
आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. �नधा�रती /Assessee 2. Assessing Officer 3. आयकर आयु�त (अपील)/CIT(A)-1, Tiruchirapalli 4. Principal CIT-1, Trichy 5. �वभागीय ��त�न�ध/DR 6. गाड� फाईल/GF.