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Income Tax Appellate Tribunal, MUMBAI BENCH “L”, MUMBAI
Before: SHRI D. KARUNAKARA RAO & SHRI SANJAY GARG
Per Sanjay Garg, Judicial Member:
The above titled cross appeals one by the assessee and the other by the Revenue have been preferred against the order dated 11.05.2012 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2008-09. For sake of convenience, the facts have been taken from assessee’s appeal i.e. ITA No.4619/M/2012.
The assessee has taken the following grounds of appeal:
“1.1 The Ld.CIT (A) erred on facts in confirming the disallowance of deduction u/s 36(1)(viii) of the Income Tax Act on the ground that no special reserve had been created whereas on facts the requisite reserve had been created and hence no disallowance is warranted. The Ld CIT(A) ought to have noted that from the audited and approved accounts for the y.e 31/03/2008, amounts transferred to Revenue and other reserves from the profits for the relevant year amounted to Rs 651,05 Cr and the same was maintained thereafter without being withdrawn and hence the compliance of condition mentioned in sec 36(1)(viii) has been fulfilled. The Ld CIT(A) failed to appreciate that the requirement to transfer to a special reserve is only an act of making an accounting entry which has been duly complied with and further the amount so transferred have been maintained thereafter and merely because the reserve was not christen as special reserve deduction otherwise allowable ought not to have been disallowed. 2.1 Without prejudice to above, the Ld CIT(A) failed to appreciate that in the financial year 2008-09 following the current financial year 2007-08 the appellant had as a matter of abundant caution transferred a sum of Rs 200 Crores from profits to reserve to be maintained as a special reserve and hence based on the decision of ITAT Delhi in the case of Power Finance Corporation Ltd (2008-TIOL-475-ITAT-DEL) the claim of the appellant should have been allowed. 3.1 The Ld CIT(A) erred in confirming the disallowance of provision towards liability arising on account of revision payable to employees. The Ld CIT(A) failed to appreciate that provision had been made based on a reasonable estimate of the imminent liability consequent on the bipartite settlement talks that were being held between the Indian Bank's Association (IBA) and various Employee Unions. 3.2 The Ld CIT(A) failed to appreciate that once liability for an expenditure which is contractual in nature is foisted on appellant the same is allowable as deduction though the same could be quantified based on reasonable estimate only. Reliance is placed on the decision of ITAT in Neyveli Lignite Corporation v ACIT 93 TTJ 685 (Chen) 4.1 The Ld CIT (A) erred in confirming the disallowance u/s 14A computed as per Rule 8D at Rs.65.37 crore on a tax free income of Rs. 60.81 crore over looking fact that the appellant had himself quantified the disallowance at Rs.6.05 crore being 0.5% of average investments earning tax free income. The CIT (A) having agreed with the claim of the appellant that its interest free funds far exceed the amount of investments in assets earning tax free income ought to have followed the ratio laid down by Jurisdictional High Court in the case of Reliance Utilities and Power Ltd 313 ITR 340 and held that no disallowance of interest as contemplated in Rule 8D was warranted.
5. The Ld CIT (A) erred in confirming the taxability of Management fee and Dividend from foreign subsidiaries at 30% instead of 10% as provided for in the Double Tax Avoidance agreements. The CIT (A) had considered the provisions of section 91 which will apply only when there is no DTAA and where there is a DTAA, the rates prescribed in DTAA should have been the basis.”
Ground Nos.1 & 2: 3. The issue raised vide ground Nos.1 & 2 is relating to the confirmation of disallowance of deduction in section 36(1)(viii) of the Income Tax Act. The assessee during the year claimed deduction under section 36(1)(viii) of the Act at Rs.161,55,76,163/- in relation to profit derived from eligible business and income computed under the head ‘Profit and gains of business or profession’, to the extent, 20% of such profit against a reserve created in this respect. The Assessing Officer (hereinafter referred to as the AO), however, rejected the claim of the assessee holding that the assessee had not created the special reserve for this purpose during the year. The assessee had only transferred the amount towards the general reserve. Aggrieved by the order of the AO, the assessee preferred appeal before the Ld. CIT(A).
After considering the submissions of the assessee, the Ld. CIT(A) observed that there was no dispute regarding the eligibility of the assessee to claim deduction under section 36(1)(viii) of the Act. The assessee had claimed that it had transferred Rs.651.05 crores to revenue and other reserves during the Financial Year 2007-08 relevant to A.Y. 2008-09 i.e. the year under consideration and claimed that the transfer of profit to such general reserves fulfill the condition of transfer to special reserve as per the provisions of section 36(1)(viii) of the Act. It was also claimed that in the subsequent period i.e. on 31.03.09, the assessee had transferred more than the required amount i.e. Rs.200 crores to the special reserve created as per the requirement of section 36(1)(viii) of the Act. The Ld. CIT(A), however, observed that as per the relevant provisions, the assessee was required to transfer the 20% of the profit in the special reserve during the year itself. However, the assessee had transferred the required amount in the general reserve. Subsequent transfer of any fund amount to special reserve during the subsequent year would not entitle the assessee to claim deduction during the year under consideration. He, therefore, rejected the claim of the assessee and upheld the disallowance made by the AO.
Before us, the Ld. A.R. of the assessee, at the outset, has invited our attention to the decision of the co-ordinate Delhi Bench of the Tribunal in the case of “M/s. Power Finance Corporation Ltd. vs. JCIT” dated 31.07.2008, wherein the Tribunal on the identical issue while analyzing the provisions of section 36(1)(viii) has held that a reserve created in subsequent years, however, before finalization of grant of deduction is required to be considered while allowing assessee’s claim of deduction made under section 36(1)(viii) of the Act. The Tribunal, while holding so, observed that the inference from the words “Before making any deduction under this clause carried to such reserve account” can be drawn that the requirement of special reserve is to be complied with at the time of considering the claim of deduction and it does not mean that the amount should be transferred to the special reserve before making any claim of deduction. The Tribunal further in para 26 of the order has observed in the said case that although the reserve created in the year ended on 31.03.98 was of Rs.53.74 crores for the year ended on 31.03.97 but the profit remaining in general reserve in F.Y. 1996-97 was only Rs.5327.54 lakhs. It was also pointed out that as per the details of reserve as on 31.03.98 Rs.5300 lakhs was transferred out from general reserve to special reserve created under section 36(1)(viii) of the Act and the Tribunal in these fact and circumstances held that to the extent of Rs.53 crores, the special reserve created during F.Y. 1997-98 was out of the remaining profit of F.Y. 1996-97 and hence to this extent the reserve created in F.Y. 1997-98 should be considered for allowing the deduction under section 36(1)(viii) of the Act. The proposition of law laid down by the Tribunal in this respect is that the amount of the previous year which was transferred to the special reserve out of the general reserve created during the subsequent year should be considered for deduction under section 36(1)(viii) of the Act. Admittedly, in the case in hand, the assessee has transferred the amount of Rs.200 crores in the special reserve created during the subsequent year, out of the general reserve created during the year under consideration, whereas the claim of deduction has been made in respect of the amount of Rs.161 crores only. The issue under consideration is thus squarely covered by the decision of the co-ordinate Delhi bench of the Tribunal (supra). We, therefore, direct the AO to allow the claim for the deduction to the assessee in the light of the decision of the co-ordinate bench of the Delhi Tribunal in the case of “M/s. Power Finance Corporation Ltd. vs. JCIT” (supra).
Ground Nos.3.1 & 3.2 6. Ground Nos.3.1 & 3.2 relate to the disallowance of provision towards liability arising on account of wage revision payable to employees. According to the assessee the provision made for excess payment of wages payable to the employees was towards the ascertained liability. It was submitted that after every five years, charges are revised as per the policy and agreement reached with the unions. Therefore, the wage revision for the year under consideration was must and certain. However, the negotiation was going on with the union and the agreement was signed with the union on 27.04.10 only. The Ld. CIT(A), however, rejected the claim on the ground that it was a contingent liability. He held that no agreement was signed by the assessee during the year under consideration, hence the assessee was not entitled to create provision for the wage revision. Being aggrieved, the assessee has come in appeal before us.
The Ld. A.R. of the assessee, at the outset, has submitted that the issue is squarely covered by the decision of the co-ordinate bench of the Tribunal in the case of “Tata Communications Ltd. vs. DCIT” & 3438/M/2003 vide order dated 05.12.12 wherein the Tribunal has taken a view that in case of salary/wage revision, what is important is not the date of signing the agreement nor the date of approval granted by the DRE, what is important is the effective date of commencement. The Tribunal, while relying upon the decision of the Hon’ble Supreme Court in the case of “Bharat Earth vs. CIT” 245 ITR 428, held that in such a case the incurring of liability was certain and the same could also be estimated with reasonable certainty, although, the actual quantification may not be possible. In the case in hand also as per the agreement and the policy, the wage revision was certain and it could have been reasonably estimated also. Hence, the provision made by the assessee towards wage revision was allowable. Respectfully following the decision of the co- ordinate bench of the Tribunal in the case of “Tata Communications Ltd.” (supra), this issue is accordingly decided in favour of the assessee and the AO is directed to allow the claim of the provision on account of wage revision.
Ground No.4 8. Ground No.4 is relating to the disallowance under section 14A. The lower authorities have computed the disallowance under section 14A as per the provisions of rule 8D of the Income Tax Rules.
The Ld. A.R. of the assessee, before us, has submitted that the AO has straightway applied rule 8D without considering the computation working/working given by the assessee. He has further relied upon the decision of the Hon’ble Bombay High Court in the case of “CIT vs. Reliance Utilities and Power Ltd.” (2009) 313 ITR 340 (Bom) to stress that if the own funds of the assessee are available, then the presumption will be that the assessee had used the own funds for making the investment and no interest disallowance is required to be made in relation to the investments made by the assessee out of his own funds. In relation to the disallowance of administrative expenses under rule 8D(2)(iii), the Ld. A.R. has submitted that the AO had included the investments which were taken as stock in trade in the accounts while computing the disallowance under rule 8D(2)(iii) of the Act. He had relied upon the decision of the Hon’ble Bombay High Court in the case of “CIT vs. India Advantage Securities Ltd.” in of 2013 vide order dated 17.03.2015 wherein the Hon’ble Bombay High Court has upheld the finding of the Tribunal holding that while making the disallowance under rule 8D, the shares held as stock in trade should not be considered, only the shares taken as investment in the account be considered for computation of disallowance of expenditure under rule 8D. The Ld. A.R. has submitted that the dividend earned in respect of shares held in stock in trade is incidental to the business of the assessee and the investment in the shares held as stock in trade was not made for earning of exempt income.
We have considered the rival submissions. It may be observed that in the case of ‘Godrej & Boyce Manufacturing Co. Ltd.’ 328 ITR 81, the Hon'ble Bombay High Court has held that Rule 8D r.w.s. 14A(2) is not arbitrary or unreasonable and also not retrospective and applies from A.Y. 2008-09. It has been further held that under section 14A of the Income Tax Act, resort can be made to Rule 8D of the Income Tax Rules for determining the amount of expenditure in relation to exempt income, if, the AO is not satisfied with the correctness of the claim made by the assessee in respect of such expenditure. The satisfaction of the Assessing Officer has to be arrived at, having regard to the accounts of the assessee. Sub section (2) does not ipso facto enable the Assessing Officer to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect such expenditure is correct. The satisfaction of the Assessing Officer must be arrived at on an objective basis. In a situation where the accounts of the assessee furnish an objective basis for the Assessing Officer to arrive at a satisfaction in regard to the correctness of the claim of the assessee, there would be no warrant for taking recourse to the method prescribed by the rules. An objective satisfaction contemplates a notice to the assessee, an opportunity to the assessee to place on record all the relevant facts including his accounts and recording of reasons by the Assessing Officer in the event that he comes to the conclusion that he is not satisfied with the claim of the assessee.
However, a perusal of the assessment order reveals that the AO has not followed the guidelines of objective satisfaction as laid down by the Hon’ble Bombay high Court in the case of Godrej & Boyce (supra) while making the disallowance . He without recording any reasoning for his dissatisfaction with regard to the working/claim of the assessee, straightway applied Rule 8D against the mandate of the provisions of section 14A of the Income Tax Act. The ld. CIT(A) also ignored the mandate of the provisions of section 14 A, while confirming the disallowance.
Further, we find that the Hon’ble Bombay High Court in the case of “CIT vs. Reliance Utilities and Power Ltd.” (2009) 313 ITR 340 (Bom) has held has held that if there are funds available, both interest free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest free fund generated or available with the company, if the interest free funds were sufficient to meet the investment. Similar view has been taken in the case of “CIT vs. HDFC Bank Ltd.” in of 2012 decided on 23rd July 2014 by the Hon’ble Bombay High Court.
Further, we find that this Tribunal in the case of “DCIT vs. India Advantage Securities Ltd.” in vide order dated 14.09.2012 while relying upon the decision of the Hon’ble Kerala High Court in the case of “CIT vs. Smt. Leena Ramachandran (339 ITR 296) and further on the decision of the Hon’ble High Court of Karnataka in the case of “CCL Ltd. vs. JCIT” 250 CTR 291 has held that disallowance under section 14A in relation to dividend received from trading shares cannot be made. The said finding of the Tribunal has been upheld by the Hon’ble Jurisdictional Bombay High Court in the case of “CIT vs. India Advantage Securities Ltd.” in ITA No.1131 of 2013 vide order dated 17.03.2015 (supra). The said decision holds binding precedent upon this Tribunal. In view of our above discussion of the matter, we direct the AO to decide this issue afresh in the light of the our observations made above and taking into consideration the judicial pronouncements in the case of “Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT” (supra), “CIT vs. Reliance Utilities and Power Ltd.” (supra), “CIT vs. HDFC Bank Ltd.”(supra) and in the case of “India Advantage Securities Ltd.” (supra). Needless to say, the AO will give proper opportunity to the assessee to present its case and furnish working/computation etc. and then to decide the case in accordance with law.
The Ld. A.R. of the assessee has not advanced any argument in relation to ground No.5 of the appeal and the said ground is accordingly dismissed.
Now coming to the appeal of the department i.e. ITA No.4873/M/2012 14. The sole issue raised by the Revenue through its grounds of appeal is relating to inclusion of income of foreign branches into the total income of the assessee. The contention of the assessee bank has been that the foreign branches of the assessee are subject to tax in the source country i.e. foreign country, therefore, their income cannot be included in the return of income filed in India. The Ld. A.R. of the assessee has been fair enough to admit that this issue is squarely covered against the assessee in the own case of the assessee for A.Y. 2005-06 in ITA No.3367/M/2011 dated 25.07.2014. The Tribunal in the said decision, following another decision of the Tribunal in the case of “Essar Oil Ltd.” 175 TTJ 785 has held that the income of the branches of the assessee is also taxable in India and the same would be includable in the return of income. However, the assessee will be entitled to credit of such taxes which have been paid by the branches in other contracting states. Since the issue is squarely covered by the decision of the co-ordinate bench of the Tribunal in the own case of the assessee, hence, respectfully following the same, the appeal of the Revenue is treated as allowed in the same lines.
In view of our findings given above, the appeal of the assessee is treated as partly allowed for statistical purposes whereas the appeal of the Revenue is treated as allowed in terms indicated above.
Order pronounced in the open court on 04.11.2015.