M/S. KOTAK MAHINDRA BANK LTD,MUMBAI vs. THE DCIT-3, MUMBAI

2005-06 31.10.2005 96,38,60,130/- 23.3.2007 99,10,60,035/- 18.3.2008 2006-07 29.11.2006 177,01,69,230/- 28.11.2007 192,12,96,090/- 18.3.2008 8523 /Mum/2011(A.Y.2003-04): 3.First Ground of Appeal deals with disallowance of bad debts.While completing the assessment u/s. 143(3) r.w.s.147/263 of the Act,the AO reduced the bad debts, amounting to Rs.2. 84 crores from the provision of bad debts of Rs.7.12 crores and accordingly allowed no bad debts.He held that bad debts were allowable to the extent they were in excess of provision for bad debts,that provisions had already been allowed,that the provisions of sec.36(ii), 36(1)(vii)(a) and 36(1)(viii) of the Act were clear in that regard. The assessee had claimed that it had no opening balance or provision for bad and doubtful debts, that the bad debts were to be reduced from opening balance of provisions of bad and doubtful debts, that it was entitled to make claim for full amount of bad debts,that the provisions for the bad debts existed on the last day of the year.However the AO considered the current year’s provision for bad and doubtful debts and made an addition of Rs.2.84 crores. 3.1.During the appellate proceedings,before the First Appellate Authority (FAA) the assessee made elaborate submissions and referred to Instruction No.17/2008 dt.26.11.2008. After considering the assessment order and the submission of the assessee ,the FAA held that there was no opening balance of provision for bad and doubtful debts as on 11.4.2003, that Instruction No.17/2008 provided that opening balance had to be considered for the purpose of allowing bad debts in excess of the provisions of allowing bad debts.He referred to the order of Tribunal delivered in the case Oman International and orders of his predecessors for the earlier years.Finally, he held that only opening balance as on 1.4.2002 was to be considered for allowing bad debts written off in excess of the provisions, that the opening balance on that date was nil, that the entire claim of the assessee under the head bad debts amounting to Rs.2, 84, 86,343/- was to be allowed. 3.2.Before us,the Departmental Representative(DR)supported the order of the AO.The Authorised Representative(AR) stated that the issue stands covered by the cases Oman International(2013-TII-11-HC-Mum-ITNL/Income Tax Appeal (Lod) No.1889 of 2012 dt.26. 2.2013),UTI Bank Ltd.(256CTR76);Abu Dhabi Commercial Bank(ITA/3462,3857,4022/ Mum/2010 dt.20.07.2012.He also referred to the Instruction No.17/2008,dated 26.11.2008, issued by the CBDT.The AR stated 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 :-

In the present case, however, the question of method of operation of proviso to section 36(1(vii) arises. Such proviso as noted, provides that in case of an assessee to which clause (viia) applies, the amount of deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause. The revenue's contention is that by virtue of such proviso, the claim of the assessee for deduction for debts written off, should be reduced by the closing balance of the assessee in his account for the provision of bad and doubtful debts. On the other hand, the assessee contends that such diminution should be limited to the opening balance of such account.

We notice that in this respect the provision is silent. We may therefore record that the interpretation adopted by the Tribunal in the impugned judgment would ordinarily give rise to a question of law particularly when it is pointed out that there is no previous decision of any High Court on the subject. However, the issue has been made sufficiently clear by the CBDT Circular No.17/2008 dated 26-11-2008. In the said circular, this very issue has been examined and clarified in the following manner:- "2. In a recent review of assessment of Banks carried out by C&AG, it has been observed that while computing the income of banks under the head 'Profit and Gains of Business & Profession', deductions of large amounts under different sections are being allowed by the Assessing Officers without proper verification, leading to substantial loss of revenue. It is, therefore, necessary that assessments in the cases of banks are completed with due care and after proper verification. In particular,deductions under the provisions referred to below should be allowed only after a thorough examination of the claim on facts and on law as per the provisions of the I.T. Act, 1961. (i) Under section 36(1)(vii) of the Act, deduction on account of bad debts which are written off as irrecoverable in the accounts of the assessee is admissible. However, this should be allowed only if the assessee had debited the amount of such debs to the provision for bad and doubtful debt account under section 36(1)(viia) of the Act, as required by section 36(2)(v) of the Act. (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."

As already noted, in absence of such clarification byCBDT, we would have been inclined to admit the appeals. However, when such circular issued under section 119(2) of the Act clarifies the position beyond any doubt, we have no reason to entertain the revenue's appeals. As already noted, the statutory provision is silent on the precise method of working out the deduction. It is by now well-settled that such circulars issued by the Board in exercise of its statutory powers under section 119(2) of the Act, may have the effect of relaxing the rigours of a statutory provision. In the case of Catholic Syrian Bank Ltd. (supra) itself, the Apex Court touched on the effect of the circular issued by the Board. It was observed as under:- "Now, we shall proceed to examine the effect of the circulars which are in force and are issued by the Central Board of Direct Taxes (for short, "the Board") in exercise of the power vested in it under section 119 of the Act. Circulars can be issued by the Board to explain or tone down the rigours of law and to ensure fair enforcement of its provisions. These circulars have the force of law and are binding on the income-tax authorities, though they cannot be enforced adversely against the assessee. Normally, these circulars cannot be ignored A circular may not override or detract from the provisions of the Act but it can seek to mitigate the rigour of a particular provision for the benefit of the assessee in certain specified circumstances. So long as the circular is in force, it aids the uniform and proper 3 8523/M/11 & Ors.--Kotak Mahindra(7)

In case of UCO Bank v/s. Commissioner ofIncome Tax reported in 237 ITR 889 the Supreme Court in connection with effect of circulars issued by the Board under section 119 of the Act observed: "Such instructions may be by way of relaxation of any of the provisions of the sections specified there or otherwise. The Board, thus, has powers, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circulars in exercise of its statutory powers under section 119 which are binding on the authorities in the administration of the Act. Under section 119(2)(a),however, the circulars as contemplated therein cannot be adverse to the assessee. Thus, the authority which wields the power for its own advantage under the Act is given the right to forgo the advantage when required to wield it in the manner it considers just by relaxing the rigour of the law or in other permissible manners as laid down in section 119. The power is given for the purpose of just, proper and efficient management of the work of assessment and in public interest. It is a beneficial power given to the Board for proper administration of fiscal law so that undue hardship may not be caused to the assessee and the fiscal laws may be correctly applied. Hard cases which can be properly categorised as belonging to a class, can thus be given the benefit of relaxation of law by issuing circulars binding on the taxing authorities."” Respectfully following the above judgment and the other judgments referred to by the AR,we hold that there is no legal or actual infirmity in the order of the FAA.Therefore, confirming his order,we decide Ground No.1 against the AO.As far as ,request made under Rule 27 is concerned ,we want to mention that we have already decided the issue in favour of the assessee therefore request made by it would not survive. ITA No.3114/M/2008(A.Y.04-05): 4.The first Ground of Appeal deals with disallowance of proportionate depreciation on premises given on rent/lease. During the course of hearing before us the AR did not press the ground.Hence, same stands dismissed as not pressed. 4.1.Next Ground of Appeal is about denial of set off of brought forward capital loss against short term capital gain u/s. 74 of the Act amounting to Rs.2.16 crores.During the assessment proceedings the AO found that the assessee had earned short term capital gain amount of Rs. 2,16,760,177/- and had offered it for tax ,that vide its note No.15 it had claimed a set off of long term capital loss, that in the note to the return of income the assessee had mentioned that it had a capital loss of Rs.8.11 crores brought forward from AY. 2003-04, that during the year there is short term capital gain of Rs.2.16 crores.Considering these facts,he held that the provisions of section 74 of the Act were prospective and could not change the character of past losses,that capital losses were brought forward from AY.2000-01,that the amended provisions of section 74 were not applicable to the brought forward capital losses,that amendment was applicable for the AY.2003-04,that FAA in one of the group cases had decided the issue against the assessee.Finally, he denied the assessee claim and taxed the disputed amount fully. 4.2.In the appellate proceedings,the FAA following the order of his predecesor for the AY. 03-04,held that claim of the assessee was not justifiable, that set off of brought forward losses could not be allowed against short term capital gains for the year under consideration. 4.4.During the course of hearing before us the AR contested that similar issue had arisen in the case of one of the group entities i.e. Kotak Mahindra Capital Co.Ltd.(ITANo. 521/ Mum/ 2007-AY 2003-04,dt.10.8.2012).We find that the Special Bench was constituted to decide the following question of law .

In the case of Govinddas & Ors. (supra), the HUF was a partner in the export firm and in the mining firm. During the course of assessment proceedings for the AY 1957-58, the claim was made on behalf of the members of the HUF that they had effected the partial partition of their immovable property on 15th November, 1955. This claim was accepted by the AO after due enquiry and finding was recorded by him in the order of assessment. Consequent to its partial partition, the HUF ceased to be a partner in the export firm and the mining firm and two Members of the HUF namely Gulabdas and his son Govinddas continued to be partners in these two firms in their individual capacity. The result was that from and after the assessment year 1957-58, no part of the income of the Export Firm or the Mining Firm was included in the assessment of the Hindu Undivided Family. The assessments of the Export Firm and the Mining Firm for assessment years 1950-51 to 1956-57 were reopened after the new Act came into force and reassessments were made enhancing the assessable income of the two firms in accordance with the procedure provided in the new Act. Consequent upon the reassessments, notices were issued to HUF for assessments of its income for assessment years 1950-51 to 1956-57 since it was a partner in these two firms during those years. The Income-tax Officer after following the requisite procedure passed an order of reassessment for each of the assessment years 1950-51 to 1956-57 enhancing the assessable income of the HUF. Consequent to the enhancement of assessable income of the HUF, the ITO determined the several liability of the members of the HUF u/s.171(7) of the New Act by apportioning the tax assessed on the HUF for assessment years 1950-51 to 1956-57. This lead to the filing of the petition by each of the Members of the HUF in the Bombay High Court. The Petitioner did not object to the recovery of tax liability of the HUF from out of the joint family property which had come to their hands on the partial partition. Their argument however was that they were not jointly or severally liable for the tax liability and the ITO was not entitled to proceed against them personally for recovery of any share of the tax liability as per the provisions and sub-sec.(6) and sub-sec.(7) of sec.171 of the New Act. The principle contention of the Petitioners was that the said provisions of the New Act had no application where the assessment of the HUF was made under the provisions of the Old Act of 1922 and at the time when tax was sought to be recovered, the family had already effected the partial partition. This contention was rejected by the Hon’ble Bombay High Court. The Hon’ble Supreme Court, however, accepted the claim of the assessee and held that the 5 8523/M/11 & Ors.--Kotak Mahindra(7)

At the time of hearing before us, the Ld. DR has contended that the decision of Hon’ble Supreme Court in the case of Govinddas (supra) was rendered on the interpretation of the provisions of sec.297(2)(d)(ii) of 1961 Act and relying on these specific provisions, the Hon’ble Supreme Court held that the right vested in the assessee as per 1922 Act had been saved. He has contended that in the situation as obtained in the case of Govind Das, the rights were accrued under 1922 Act and they were held to have been saved because of repeal of old Legislature keeping in view the specific provisions contained in sec.297(2)(d)(ii).

After having perused carefully the entire text of the judgment of the Hon’ble Supreme Court in the case of Govinddas & Ors. (supra), we are unable to agree with this contention of Ld. DR. It is observed that the entire discussion in the case of Govinddas & Ors. was made by the Hon’ble Supreme Court without referring to the provisions of sec.297(2)(d) and even the issue was decided in favour of the assessee without any reference to the said provision as is evident from page no.133 of the report. It was only after deciding the issue in favour of the assessee that their Lordships of Supreme Court proceeded to deal with and discuss the contention raised by the revenue relying on the provisions of sec.297(2)(d) of 1961 Act. The contention of the Ld. DR that the decision in the case of Govinddas & Ors. (supra) was decided by the Hon’ble Supreme Court on interpretation of provisions of sec.297(2)(d) of 1967 Act thus is devoid of any merit and the same cannot be accepted. As a matter of fact, the issue was decided by the Hon’ble Supreme Court on the basis of a well settled rule of interpretation hallowed by time and sanctified by judicial decisions that, unless the terms of a statute expressly so provide or necessarily require it, retrospective operation should not be given to a statute so as to take away or impair an existing right otherwise than as regards the matters of procedure. After referring this well settled rule on page no.132 of the report, the Hon’ble Supreme Court also made a reference to a general rule as stated by Halsbury in Vol. 36 of the Laws of England (3rd Ed.) and reiterated in several decisions of the Supreme Court as well as English Courts that "all statutes other than those which are merely declaratory or which relate only to the matters of procedure or of evidence are prima facie prospective" and retrospective operation should not be given to a statute so as to affect, alter or destroy an existing right or create a new liability or obligation unless that effect cannot be avoided without doing violence to the language of the enactment. If the enactment is expressed in language which is fairly capable of either interpretation, it ought to be construed as prospective only. Applying this principle of interpretation, Hon’ble Supreme Court held that it is clear that Subsection (6) of Section 171 applied only to a situation where the assessment of a Hindu undivided family is completed under Section 143 or Section 144 of the new Act and it could not have any application where the assessment of a HUF was completed under the corresponding provisions of the old Act. It was held that such a case would be governed by sec.25 of the old Act which did not impose any personal liability on the Members in case of partial partition and to construe sec.171(6) as applicable in such case with consequential effect of casting on the members personal liability which did not exist under sec.25A, would be to give retrospective operation to the said provision which is not warranted either by the express language of that provision or by necessary implication.

In the present case, the provisions of sec.74(1) as amended w.e.f. 1.4.2003 have been relied upon by the revenue authorities to disallow the assessee’s claim for set off of long-term capital loss relating to AY 2001-02 against short-term capital gain of the year under consideration and as already noted by us, the plain grammatical construction of the language of sec.74(1) as amended w.e.f. 1.4.2003 makes it clear that the same are applicable and deal with carry forward and set off of loss under the head “capital gain” incurred in AY 2003-04 and subsequent years. The right accrued to the assessee by virtue of sec.74(1) as it stood prior to 8523/M/11 & Ors.--Kotak Mahindra(7)

The golden rule of construction is that, in the absence of anything in the enactment to show that it is to have retrospective operation, it cannot be so construed as to have the effect of altering the law applicable to a claim in litigation at the time when the Act was passed. After referring to this golden rule in its judgment in the case of Maharaja Chintamani Saran Nath vs. State of Bihar & Ors. AIR 1999 SC 3609, the Hon’ble Supreme Court also referred to Francis Benion's Statutory Interpretation, 2nd Edn. wherein the learned author commented that the essential idea of a legal system is that current law should govern current activities. If we do something today, we feel that the law applying to it should be the law in force today, not tomorrow’s backward adjustment of it. Such is the nature of law and the true principle is that lex prospicit non respicit which means law looks forward and not back. As Willes, J. said, retrospective legislation is ‘contrary to the general principle that legislation by which the conduct of mankind is to be regulated ought, when introduced for the first time, to deal with future acts, and ought not to change the character of past transactions carried on upon the faith of the then existing law. 42 In the case of CIT vs. Shah Sadiq and Sons (supra), a similar issue again arose for the consideration of Hon’ble Supreme Court. In the said case, the assessee, a partnership firm, had claimed the set off of the speculation losses suffered in the assessment years 1960-61 and 1961- 62 against the speculation profit of the previous year 1962- 63 by virtue of sec.24(1) of the 1922 Act which gave a right to the assessee to carry forward the unabsorbed speculation losses to be set off against speculation profits of the future years. The claim of the assessee for such set off was disallowed by the ITO relying on the provisions of sec.75 of the 1961 Act which provided an entirely new scheme as follows; “sec.75 - losses of registered firms” (i) where the assessee is a registered firm, any loss which it cannot be set off against any other income of the firm shall be apportioned between the partners of the firm and the alone shall be entitled to have the amount of the loss set off and carry forward for set off u/s.70,71, 72,73, 74 & 74A. (ii) nothing contained in sub-section (1) of sec.72, sub-sec.(2) of sec.73, sub-sec.(1) of sec.74 and sub-sec.(3) of sec.74A shall entitled any assessee, being a registered firm, to have its loss carried forward and set off under the provisions of the aforesaid sections. The matter was carried by the assessee in an appeal before the Tribunal which held that the assessee was entitled to set off the speculation losses suffered in the assessment years 1960-61 and 1961-62 against the speculation profits of the previous year 1962-63. The Hon’ble Allahabad High Court upheld the decision of the Tribunal and while disposing off the appeal filed by the revenue against the order of the Hon’ble Allahabad High Court, the Hon’ble Supreme Court held that under the Income-tax Act, 1922, the assessee was entitled to carry forward the losses of the speculation business and set off such losses against the profit made from that business in future years. It was held that the fact that right created by operation of sec.24(2) was a vested right could not be disputed and such a right which had accrued and had become vested continued to be capable of being enforced notwithstanding the repeal of the statute under which that right accrued unless the repealing statute took away such right expressly. It is worthwhile to note here that in the case of Shah Sadiq and Sons (supra), reliance was placed on behalf of the revenue in support of its case on the decision of the Hon’ble Calcutta High Court in the case of Reliance Jute Mills Co. Ltd. vs. CIT 86 ITR 570 (which was affirmed by the Hon’ble Supreme Court in 120 ITR 921) and it was opined by the Hon’ble Supreme Court that the principles enunciated therein will have no application to the controversy involved in the case of Shah Sadiq and Sons (supra).

It is no doubt true that the decision in the case of Shah Sadiq and Sons (supra) was rendered by the Hon’ble Supreme court on the basis of section 6 of the General Clauses Act of 1897 as well as sec.297(2) of the Income-tax Act, 1961 as submitted by the Ld. DR. However, as already noted by us, the decision in the case of Govinddas and Others (supra) which is a decision of the Bench of three Judges of Hon’ble Supreme court was rendered on this issue on 7 8523/M/11 & Ors.--Kotak Mahindra(7)

It is observed that the decision of Hon’ble Madras High Court in the case of CIT vs. SSC Shoes Ltd. 259 ITR 674 cited by the Ld. Counsel for the assessee further clinches this issue. In that case, the assessee had claimed set off of depreciation carried forward from AY 1987-88 and 1988-89 in the assessment year 1989-90 by virtue of the provisions of sec.80VVA. The said provisions had imposed certain restrictions on the allowability of certain deductions specified in subsec.(2) and the deductions were restricted in the sense that the same were granted to the extent of 70% of the amount of profits as computed u/s.80VVA(2). Sub-sec.(4) of sec.80VVA provided that where the deduction was not granted in respect of any provision specified in sub- sec.(2) by virtue of the restrictions, the amount remaining unallowed shall be added to the amount to be allowed in the next financial year and shall be deemed to be a part of the deduction admissible to the assessee under the said provision for that year. Sec.80VV(a) further provided that the deduction not be allowed shall be added to the deduction for the succeeding assessment years. Sec.80VVA was deleted by the Finance Act, 1987 w.e.f. April 1, 1988 and as a result of the said deletion, the AO held that the assessee was not entitled to carry forward and set off the deduction u/s.80HHC relating to AY 1987-88 and 1988-89 in the assessment year 1989-90. The Ld. CIT (A) confirmed the view taken by the AO. The Tribunal however took a different view that a vested right had accrued to the assessee to carry forward and set off the unabsorbed deduction u/s.80HHC to which it was entitled to during the subsequent years. The Hon’ble Madras High Court upheld the decision of the Tribunal holding that a vested right u/s.80VVA(4) of the Act had accrued in favour of the assessee and that right was not taken away either expressly or by necessary implication by deletion of sec.80VVA of the Act. For this conclusion, the Hon’ble Madras High Court relied on the decision of Hon’ble Supreme Court in the case of CIT vs. Shah Sadiq and Sons (supra). It was noted by the Hon’ble Madras High Court that the decision in the case of Shah Sadiq and Sons (supra) was rendered by the Hon’ble Supreme Court with reference to sec.6 of General Clauses Act and it was held by Hon’ble Madras High Court that though the Supreme Court was dealing with a case of repeal of enactment, the principles laid down in the case of Shah Sadiq and Sons (supra) would apply to carry forward of deduction provided u/s.80VVA(4) of the Act. It was held that there was no necessity to consider the larger question that sec.6 of General Clauses Act does not apply to the omission of a provision and the omission of a provision is different from “repeal” as the assessee had acquired a right to carry forward the unabsorbed depreciation deeming the same as deduction of the next following assessment year when sec.80VVA was in existence and in full force, which was not taken away by omission of the provision from statute book.

In our opinion, the position in the present case is similar to the one involved in the case of S.S.C. Shoes Ltd. (supra) inasmuch as provisions of sec.74(1) as amended w.e.f. 1.4.2003, going by the language used therein, expressly provide for and deal with carry forward and set off of loss under the head “capital gains” for assessment year 2003-04 and subsequent years and the right accrued to the assessee by virtue of sec.74(1) as it stood prior to the amendment made w.e.f. 1.4.2003 to set off brought forward long-term capital loss relating to the period prior to AY 2003-04 against shortterm capital gain of subsequent year/s has not been taken away by the provisions of sec.74(1) substituted w.e.f. 1.4.2003.

In view of the above discussion, we are of the view that the provisions of sec.74 which deal with carry forward and set off of losses under the head “capital gains” as amended by Finance Act, 2002, will apply only to the unabsorbed capital loss for the assessment year 2003-04 and onwards and will not apply to the unabsorbed capital losses relating to the assessment years prior to the assessment year 2003-04. Accordingly, we answer the question referred to this Special Bench in favour of the assessee holding that the assessee is entitled to set off the long- term capital loss incurred in AY 2001-02 against the short-term capital gain made by it in AY 2003-04. Ground no.2 of the assessee’s appeal is accordingly allowed.” 8 8523/M/11 & Ors.--Kotak Mahindra(7)