BANK OF INDIA,MUMBAI vs. ASST CIT 2(1), MUMBAI

The assessee is a public sector Bank and is engaged in the banking activities.

We shall take up the appeals filed by the revenue. The first common issue urged in both the appeals relates to the deduction allowed in respect of bad debts written off. The AO restricted the deduction in excess of the amount available in “Provision for bad and doubtful Debts Account” created u/s 36(1)(viia) of the Act. The Ld CIT(A), however, directed the AO to apply the principles laid down by Hon’ble Supreme Court in the case of Catholic Syrian Bank Ltd (343 ITR 270).

At the time of hearing, both the parties agreed that this issue is covered by the decision rendered by co-ordinate benches of Tribunal in the assessee’s own case in & 3437/Mum/2013 relating to AY 2006-07. A perusal of the order passed by the co-ordinate bench of Tribunal shows that the Tribunal has followed the decision rendered by another co-ordinate bench in assessee’s own case relating to AY 2001-02 passed in ITA No.1498/Mum/2011 dated 09-04- 2014 and ITA No.3534/Mum/2011 dated 15-06-2012.

In the co-ordinate bench has followed the decision rendered by Hyderabad bench of Tribunal in the case of State Bank of Hyderabad (ITA No.578 and 579/Hyd/2010 dated 07-09-2012) and held that the Explanation 2 to sec. 36(1)(vii) introduced by Finance Act 2013 shall be applicable from 1.4.2014, i.e., AY 2014-15. In the case of Catholic Syrian Bank (supra), the Hon’ble Supreme Court had held that the restriction provided in the proviso to sec. 36(1)(vii) shall apply only to the provision created for rural advances. Accordingly, the Tribunal has restored this matter to the file of the AO with the direction to allow the claim in the light of decision rendered by Hon’ble Supreme Court. Consistent with the view taken in the assessee’s own

The next common issue urged in both the appeals relates to disallowance of diminution in value of investments. In the earlier years, the Tribunal had allowed this claim by following the decision rendered by Hon’ble Bombay High Court in the case of CIT Vs. Bank of Baroda (262 ITR 334). We notice that the Ld CIT(A) has followed the above said binding decision of Hon’ble jurisdictional High Court as well as the orders passed by the ITAT. Hence we do not find any infirmity in the order passed by him on this issue.

The next issue relates to the disallowance of depreciation claimed on leased assets. We notice that the identical disallowance made by the AO in AY 2002-03 and 2003-04 was deleted by Ld CIT(A) and the same was accepted by the revenue by not filing appeal before ITAT. Recognizing this factual position, the co-ordinate bench has deleted the disallowance of depreciation made in AY 2006-07, in the order referred supra passed for AY 2006-07. Since there is no change in facts, consistent with the view taken by the co-ordinate bench in AY 2006-07, we uphold the order passed by Ld CIT(A) on this issue.

Now we shall take up the appeals filed by the assessee. The first common issue urged by the assessee in both the years relate to the disallowance made u/s 14A of the Act. In both the years under consideration, the AO worked out the disallowance u/s 14A of the Act in accordance with Rule 8D of the Act. The Ld CIT(A) took note of the binding decision rendered by Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd (328 ITR 81), wherein it was held that the provisions of Rule 8D shall apply from AY 2008-09 onwards and for 4 M/s. Bank of India earlier years, the disallowance should be worked out on a reasonable basis. Accordingly he upheld the workings for AY 2008-09. However, for AY 2007-08, the Ld CIT(A) took the view that the disallowance worked as per the provisions of Rule 8D would be reasonable disallowance.

Before us the Ld A.R contended that the Tribunal has restricted the disallowance to 1% of the exempt income in AY 2006-07. He further submitted that (a) the interest free funds available with the assessee is in far excess of the investments. (HDFC Bank (284 CTR 409)(Bom))

We heard Ld D.R and perused the record. We notice that the Tribunal has restricted the disallowance to 1% of the exempt income in AY 2006-07 and earlier years. Consistent with the view taken therein we direct the AO to restrict the disallowance to 1% of the exempt income in AY 2007-08, since the provisions of Rule 8D are not applicable to this year.

In respect of AY 2008-09, the assessee is raising new contentions before us, viz., the investments are held as stock in trade, interest free funds available with it are in far excess of the investments etc. The Ld D.R submitted that the claim of the assessee that it is holding all its investments as stock in trade is farfetched one, since the assessee is required to hold certain funds as pure investments. We notice that this aspect of the submissions require verification at the end of the AO. Accordingly, we set aside the orders passed by Ld CIT(A) on this issue and restore the same to the file of the AO with the direction to 5 M/s. Bank of India examine this issue afresh in the light of fresh explanations that may be furnished by the assessee by duly considering various case laws relied upon by the assessee.

The next common issue urged by the assessee relates to the disallowance of lease premium paid. The Ld A.R fairly admitted that this issue has been decided against the assessee by the Tribunal in AY 2006-07. We notice that the Tribunal has decided this issue against the assessee by following the decision rendered by Special Bench of Tribunal in the case of JCIT Vs. Mukund Ltd (106 ITD 231). Consistent with the view taken in the earlier years, we uphold the order passed by Ld CIT(A) on this issue.

The next common issue urged by the assessee relates to the applicability of provisions of sec. 115JB to it. This issue has been decided in favour of the assessee in AY 2006-07, wherein the Tribunal has followed the decision rendered in the assessee’s own case in relating to AY 2001-02. Consistent with the view taken in AY 2006-07, we set aside the order passed by Ld CIT(A) on this issue and hold that the provisions of sec. 115JB shall not be applicable for both the years under consideration.

We shall now take up individual issue urged in the years under consideration. In AY 2007-08, the assessee is contesting the disallowance of claim made u/s 36(1)(viii) of the Act. We notice that this issue has been decided in favour of the assessee by the co-ordinate bench of Tribunal in AY 2006-07. The tax authorities had rejected the claim by holding that the provisions of sec. 36(1)(viii) shall be applicable only to “financial Corporations”. The Tribunal has held that the banks will also be covered by the inclusive definition given for the expression “financial Corporations” in sec. 36(1)(viii) of the Act. Consistent with 6 M/s. Bank of India the view taken therein, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow the claim.

In AY 2008-09, the assessee is contesting the disallowance of expenditure relating to issue of capital. During the relevant year, the paid share capital of the assessee has been increased from Rs.488 crores to Rs.525 crores by issuing new shares. The AO ascertained that the assessee has incurred a sum of Rs.8,25,57,501/- towards increasing the share capital by way of fee for merchant bankers, legal fees, Stamp Duty, Registration charges etc. The AO took the view that this expenditure cannot be allowed under sec. 32 to 37 of the Act and further they are not in the nature of revenue expenditure. He also took the view that this expenditure cannot be amortised. Accordingly the AO disallowed the above said expenditure. The Learned.CIT(A) confirmed the disallowance by holding that the expenditure incurred for expansion of capital base is Capital Expenditure. In this regard, the Ld CIT(A) took support of the decision rendered by Hon’ble Supreme Court in the following cases:- (a) Brooke Bond India Ltd Vs. CIT (1997)(225 ITR 798) (b) Punjab State Indl. Corporation Ltd Vs. CIT (225 ITR 792) (c) CIT Vs. Kodak India Ltd (2002)(253 ITR 445)

The Ld A.R submitted that the assessee was constrained to increase the share capital by issuing shares in order to meet Capital adequacy Norms fixed by Reserve Bank of India. He submitted that the assessee could not have continued to carry on the business unless it fulfilled the norms of RBI. He submitted that issue of share capital was on account of satisfying a legal and statutory requirement and hence the same cannot be treated as Capital Expenditure. In support of these contentions, the Ld A.R placed reliance on the decisions rendered by Hon’ble jurisdictional Bombay High Court in the case of Glaxo Pharmaceuticals Ltd (181 ITR 59). The Ld A.R further submitted that the funds received from share capital issued by the assessee shall be used for 7 M/s. Bank of India working capital purposes only, since the money is ‘stock in trade’ for the assessee. He submitted that Hon’ble Supreme Court has decided, in the case of Brooke Bond India Ltd (supra), the issue relating to expenses incurred on capital raised to meet capital expenditure requirements. With regard to the contention of the assessee that capital was raised to meet working capital needs, the Hon’ble Supreme Court refrained from considering the said fact, since the same was not available on record. He submitted that the observations made by Hon’ble Supreme Court indicate that the expenditure incurred for raising capital for working capital purposes should be allowed as revenue expenditure.

On the contrary, the Ld D.R submitted that the assessee has issued fresh capital and hence the expenses incurred on expansion of capital base is capital expenditure, as held by Hon’ble Supreme Court in the case of Brooke Bond India Ltd (supra). He submitted that the user of funds so raised shall not be taken as determinative factor for deciding the nature of expenditure.

We have heard rival contentions on this issue and perused the record. We notice that the facts prevailing in the case of Glaxo Laboratories (India) Ltd (supra) are different, i.e., in the case before Hon’ble Bombay High Court, the assessee was not in requirement of any funds, since it had a cash balance of Rs.50.00 lakhs and borrowing capacity of Rs.10 crores. The assessee was compelled to raise additional capital, since the Government of India put a condition for diluting its share holding in order to give its approval for continuation of a technical collaboration arrangement with its parent company. In these set of facts, the Hon’ble Bombay High Court held that the expenditure incurred on raising the capital is revenue in nature. However, in the instant case, the assessee has been carrying on the business for the past several years. The Reserve Bank of India, the apex body which monitors the functioning of banks, had prescribed certain norms that should be complied by the banks. In 8 M/s. Bank of India the course of compliance of those norms, the assessee has raised capital by issuing shares. It was not the case of the assessee that it was not in need of funds. It was also possible to reach the required Capital adequacy ratio by generating profit also. In any case, the above said decision was rendered by Hon’ble Bombay High Court prior to the decision of Hon’ble Supreme Court rendered in the case of Brooke Bond India Ltd (supra).

In the case of Brooke Bond India Ltd (supra), the following question was placed before Hon’ble Supreme Court for its decision:- "Whether on the facts and in the circumstances of the case, the Tribunal was right in sustaining the disallowance of Rs. 13,99,305/- being expenses incurred in connection with the issue of fresh lot of shares in 1967?"

In the result, both the appeals filed by the revenue are dismissed and both the appeals of the assessee are partly allowed.