Canara Bank V. The Assistant Commissioner of Income Tax, Circle-11(2) and The Commissioner of Income-tax, Central Circle and The Deputy Commissioner of Income-Tax, Circle \\u2013 11 (2)

ITA/1397/2006

AI Insights

The case involves multiple income tax appeals filed by Canara Bank against the orders of the Income Tax Appellate Tribunal (ITAT) concerning the assessment years 1998-99, 2000-01, and 2001-02. The primary issue was the deduction claimed by Canara Bank for the expenditure incurred in purchasing CANSTAR units, which were part of a mutual fund scheme that failed to meet its promised returns. The Bank argued that the purchase was a commercial expediency to maintain public goodwill and mitigate hardship to the investors, while the ITAT and the Assessing Officer viewed it as a capital investment, not allowing the claimed deductions. The High Court, after examining the nature of the transactions and the intent behind them, sided with the Bank, recognizing the expenditure as a business loss or expenditure under Section 37(1) of the Income Tax Act.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 794240 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 12-11-2013
• Assessment Year: misc
• Other Referred Cases: MAHARASHTRA APEX CORPORATION LIMITED vs. CIT, CIT vs. Malayalam Plantations Ltd., Sassoon J. David & Co.P.Ltd. vs. CIT, Bombay, CIT vs. Chandulal Keshavlal & Co., CIT, U.P., Lucknow vs. The Nainital Bank Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: HIGH COURT
• Department Lawyers: E R INDRAKUMAR; K V ARAVIND
• Assessee Lawyers: G SARANGAN
• Keywords: Business expenditure; Commercial expediency; Exempt income; Goodwill; Income tax appeal; Mutual Fund; CANSTAR
• Section: 143(3); 14A; 37(1); 10(33); 10(33); 28(i); 36(1)(viia); 10(23G); 260-A; 10(15)(h)

Judgement Text

" - 1 - IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 12TH DAY OF NOVEMBER 2013 PRESENT THE HON’BLE MR.JUSTICE N.KUMAR AND THE HON’BLE MRS.JUSTICE RATHNAKALA INCOME TAX APPEAL NO.1397 OF 2006 c/w INCOME TAX APPEAL NO.1416 OF 2006 INCOME TAX APPEAL NO.723 OF 2007 INCOME TAX APPEAL NO.834 OF 2007 IN I.T.A. NO.1397/2006 BETWEEN: M/s. Canara Bank BSCA Section Head Office No.112, J C Road Bangalore – 560 002. represented by its General Manager Sri. T R Ekanathan aged about 58 years Son of Sri. T R Rajagopal ..APPELLANT (By Sri G. Sarangan Sr. Counsel for Sri S. Parthasarathi, Adv.) AND: The Assistant commissioner of Income Tax, Circle-11(2) C R Buildings Queens Road Bangalore – 560 001. .. RESPONDENT (By Sri E.R. Indrakumar Sr. Counsel for Sri. E.I. Sanmathi, Adv.) - 2 - IN I.T.A. NO.1416 of 2006 BETWEEN: M/s. Canara Bank Head Office No.112, J C Road Bangalore – 560 002. represented by its General Manager Sri. T R Ekanathan aged about 58 years Son of Sri. T R RajagopaL ..APPELLANT (By Sri G. Sarangan Sr. Counsel for Sri S. Parthasarathi, Adv.) AND: The Assistant Commissioner of Income Tax, Range 11 (2) BANGALORE .. RESPONDENT (By Sri E.R. Indrakumar Sr. Counsel for Sri. E.I. Sanmathi,Adv.) IN I.T.A. NO.723 of 2007 BETWEEN: M/s. Canara Bank BSCA Section Head Office No.112, J C Road Bangalore – 560 002. ..APPELLANT (By Sri G. Sarangan Sr. Counsel for Sri K.S. Ramabhadran, Adv.) AND: Assistant Commissioner of Income Tax Circle 11 (2) BANGALORE .. RESPONDENT (By Sri K.V. Aravind, Adv.) - 3 - IN I.T.A. NO.834 of 2007 BETWEEN: 1. The Commissioner of Income-tax, Central Circle, C.R Building, Queens Road, Bangalore 2. The Deputy Commissioner of Income-Tax Circle – 11 (2) Bangalore .. APPELLANTS (By Sri K.V. Aravind, Adv.) AND: M/s. Canara Bank, 12, J.C. Road, Bangalore .. RESPONDENT (By Sri G. Sarangan Sr. Counsel for Sri K.S. Ramabhadran, Adv.) I.T.A.No.1397 is filed under Section 260-A of I.T. Act, 1961 arising out of Order dated 09-06-2006 passed in ITA No.58/Bang/2004, for the Assessment Year 2000-01, praying that this Hon'ble Court may be pleased to: i. formulate the substantial questions of law stated therein, ii. allow the appeal and set aside the order passed by the ITAT, Bangalore Bench, bearing ITA No.58/Bang/2004& dated 09-06-2006, interest of justice and equity. I.T.A. No.1416/2006 is filed under Section 260-A of I.T. Act, 1961 arising out of Order dated 08-06-2006 passed in I.T.A. No.694/Bang/2003, for the Assessment Year 1998- 99, praying that this Hon'ble Court may be pleased to: - 4 - iii. formulate the substantial questions of law stated therein, iv. allow the appeal and set aside the order passed by the ITAT in ITA No.694/Bang/2003 dated 08-06-2006, in the interest of justice and equity. I.T.A.No.723/2007 is filed under Section 260-A of I.T.Act, 1961 arising out of Order dated 31-05-2007 passed in ITA No.3759/Bang/2004, for the Assessment year 2001- 2002, praying that this Hon'ble Court may be pleased to: i. formulate the substantial questions of law stated therein, ii. allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.3759/Bang/2004 dated 31- 05-2007 relating to assessment year 2001-2002, in the interest of justice and equity. I.T.A.No.834/2007 is filed under Section 260-A of the Income Tax Act, 1961 arising out of Order dated 17-4-2007 passed in M.P. No. 23/Bang/2007, praying that this Hon'ble Court may be pleased to: i. formulate the substantial questions of law stated therein ii. allow the appeal and set aside the order passed by the Income Tax Appellate Tribunal, Bangalore in M.P. No.23/Bang/2007 (In ITA No. 94/Bang/2005 dt.17-4- 2007) confirming the order of the Appellate Commissioner and Deputy commissioner of Income Tax, Circle 11(2), Bangalore. These Appeals coming on for final hearing this day, KUMAR J., delivered the following: - 5 - J U D G M E N T All these four appeals are taken up for consideration together as common question of law is involved. 2. The assessee – Canara Bank is a Nationalized Bank carrying on banking business. It filed its return of income for the assessment year 2000-01 on 29.11.2000 declaring total income of Rs.143,56,29,680/- and claiming refund of Rs.44,34,04,764/-. The return was processed on 26.11.2001 and refund of Rs.51,46,79,254/- [including 244A interest], was issued. Thereafter, the case was selected for scrutiny under section 143[3] of the Income Tax Act, 1961 [for short hereinafter referred to as ‘the Act’]. Notices were issued under sections 143[2] and 143[1] on 26.11.2001 which was received by the assessee on the same day. The assessee had claimed disallowance under section 14A of the Act in a sum of Rs.16,50,00,000/-. The assessee had claimed the following income as exempt under section 10 of the Act. - 6 - [a] Dividends u/s. 10[33] Rs. 52,00,27,446/- [b] Interest on tax free bonds u/s. 10[15][h] of the Act Rs.156,66,73,929/- [c] Interest on long term finance to infrastructure companies u/s. 10[23G] Rs. 95,82,88,460/- TOTAL Rs.304,49,89,835/- 3. The assessee contended that “since they have not incurred any expenditure for earning aforesaid income, the question of expenditure relating to these income being added back to the taxable income would not arise”. 4. The assessing authority did not accept the said contention of the assessee and disallowed Rs.16.5 crores. On calculation, the assessing authority came to the conclusion that 5.4% of the total exempted income is the expenditure incurred for earning the said income. 5. The assessee preferred an appeal before the Commissioner of Income Tax [Appeals] – I, Bangalore. The Commissioner of Income Tax [Appeals] restricted the disallowance under section 14A of the Act to 2% of - 7 - the gross receipts on account of dividends and interest which are exempt following earlier order of his own in the assessee’s case for the assessment year 1998-99. The said order was challenged before the Tribunal. The Tribunal confirmed the said order, in view of the fact that for the earlier assessment years in the case of the assessee itself, and the Tribunal also has taken the same view for the assessment year 1998-99. It is against the said order, ITA No.1397/2006 is preferred. The same question is involved in ITA No.1416/2006 relating to the assessment year 1998-99. 6. The assessee in the return of income in Part-V, captioned ‘Income claimed exempt’ stated “Please refer Statement of Total Income & Notes forming part of Computation of Total Income.” The explanation as were submitted by the assessee before the Assessing Officer on 3.9.2003 was as under: “(9) Canstar The Canstar units purchased during the year ended 31.3.1998 by the bank constitute our current investments. Like any other - 8 - Investments we had claimed depreciation of `232.42 crore on these units in our Income Tax return for the above year. As the Government had permitted us to write off the depreciation on these units out of the Capital contribution of `600 crore made by it, we had submitted our claim in the return of Income without reckoning for arriving at taxable Income. For the Assessment Year 2001-02, as the entire CANSTAR units have been redeemed, there has been loss of `95.21 crore for which we have submitted our claim as business loss under Part V in the Return of Income and not reckoned for Computation of Income. It may be submitted that our claim for deduction is fully allowable either under section 37(1) or under 28(i) of the Act. Under Section 37(1) of the Act, an assessee is entitled to deduct any expenditure laid out or expended wholly and exclusively for the purposes of the business. Considering the scope of the expression ‘for the purposes of the business or profession’, in its decision in the case of CIT v. Malayalam Plantations Ltd., 53 ITR 140 the Supreme Court has observed that it may take into account not only the day to day running of a business also the rationalization of its - 9 - administration and modernization of its machinery, it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title: it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for carrying on of a business: it may comprehend many other acts incidental to the carrying on of a business. The limitation is that the purpose should be for the purpose of the business, that is to say, the expenditure incurred should be for the carrying of the business and the assessee should incur it in his capacity as a person carrying on the business. It is submitted that the deduction claimed which was the amount expended by the appellant to preserve the goodwill of its customers being an intangible asset of its business is a legitimate deduction allowable under section 37(1) of the Act. This deduction is also allowable since it was incurred from the point of view of commercial expediency to facilitate carrying on of its business. It is also submitted that the deduction claimed is also allowable under section 28(i) as a loss incidental to the appellant’s business. It - 10 - has been explained above as to how the loss was incurred by the appellant in the course of carrying on its business. In this regard, the appellant relies on the decision of the Supreme Court in the case of Amalgamations Pvt. Ltd., V. CIT, 226 ITR 188. In that case, the Supreme Court has held that a loss incurred by the holding company in guaranteeing loans to a subsidiary company is an allowable deduction in the computation of the total income of the holding company. Thus it is submitted that the deduction of Rs.95.21 Crores claimed by us is allowable as a business expenditure under section 37[1] or as a loss incidental to the appellant’s business which is allowable under section 28[i] of the Act. On the other hand, if depreciation claimed by us was not allowed by the department in the earlier years, the loss on redemption of Rs.473.07 crore being the difference between the purchase price and the redemption value has to be allowed as capital loss treating the Canstar units as permanent investments of the bank as contested by the department.” - 11 - 7. In the appeal before the Commissioner of Income Tax, in support of their claim, the assessee in the note appended to the return of income for the assessment year 2001-02, in support of the claim for deduction, has stated as under: “During the financial year 1997-98, the bank had purchased CANSTAR units of CANSTAR scheme of Canbank Mutual fund from unit holders at Rs.23/- the assured purchase price as the Mutual Fund was unable to fulfill its commitment. As a commercial expediency the bank has purchased these units from the unit holders in order to gain the goodwill and confidence of the public. As at 31.3.1998 due to valuation of these units it resulted in depreciation amounting to Rs.2,32,42,42,100/- . As the depreciation is on account of valuation of the investments of the bank like other investments, we were eligible for deduction of the same from our taxable income. However, the Assessing Officer had not allowed our claim of depreciation on the contention that the units were purchased by the Bank only as an investment and the same cannot be treated as Stock in Trade. Against the Orders of the - 12 - Assessing Officer, we went on appeal before the Commissioner which is pending. During the current year, the entire Canstar units have been redeemed by the Canbank Mutual Fund at NAV. As a result, we incurred a loss of Rs.95,21,84,983/- which has been claimed under Part V of the Return. Though the above loss has not been reckoned for computation of taxable income, the above claim has been submitted for favourable consideration” 8. In fact, the Assessing Authority did not consider the said claim at all and he also did not allow the expenditure. Therefore, the assessee preferred an appeal challenging the disallowance of the expenditure before the Commissioner of Income Tax (Appeals), Bangalore. The Appellate Authority following the judgment rendered by it in assessee’s case for the assessment year 1998-99, confirmed the order of assessment. The reasons given in the appellate order for 1998-99 are as under: “2.9.8. The above have been carefully considered. In my view the appellant is not - 13 - entitled for deduction towards diminution in the value of units for the following reasons. a) As per clause 20 of the trust deed, the appellant as principal trustee was not liable to purchase Canstar units as a rescue measure b) In the offer letter itself issued by the appellant reproduced above, it was not legally liable to Canstar unit holders and it was only a gesture of goodwill to purchase the units @ Rs.23/- per unit though it had fallen to about Rs.10. c) In the letter dated 2-6-1999 reproduced above, the RBI has directed the appellant to treat the shortfall as contingent liability in its published account. d) The AO is correct in observing that the investment in Canstar units was permanent investment in as no such diminution in the value has been claimed in earlier assessment years even though the units were purchased/invested in earlier assessment year as per details in para 2.9.6 above. So far this additional reason also it s proved that the intention of the appellant was not to invest in the units as stock-in-trade but as a permanent investment apart from other reasons discussed in the assessment order that the units were never sold or traded in etc., e) The appellant has failed to file details of scheme if any worked out by Canbank Investment Management Services Ltd., in the preceding year as - 14 - directed by RBI and as to why similar scheme was not evolved in the present year. So an adverse inference is called for against the appellant. In view of the above the AO’s action in not allowing the diminution in the value of Canstar units as deduction is upheld and no interference is called for.” 9. Therefore, for the assessment year 2001-02, the assessee’s claim for deduction of Rs.95.22 crores claimed as loss was rejected. Aggrieved by the said order, the assessee preferred an appeal before the Tribunal. The Tribunal by detailed order held that the Canbank Mutual Fund being a separate entity, the loss suffered on redemption or for protecting Canbank Mutual Fund cannot be said to be incurred while running the banking business and therefore, is not allowable. Further, it also held that the loss of Rs.499.05 crores + 95.22 crores is not suffered in the year. Since the element of Rs.23/- included Rs.10/- face value also, which is initial deposit made by the unit holders, it is necessary to set off the capital amount and it is only the element of Rs.13/- that requires to be considered. The element of Rs.13/- is not the interest - 15 - payable for the assessment year in entirety. It is payable on completion of six years, meaning that, interest of Rs.13/- is accumulated over a period of six years, but not at one stroke and it got added from one year to the other years. Roughly speaking, 1/6th of Rs.13/- could be stated to be the loss suffered in the year on the principle as stated with regard to reserve created for redemption of debentures. Under no circumstances, the capital of Rs.10/- which was received earlier, can be said to be a loss in the hands of the assessee. This is on the basis that Canbank Mutual Fund is part of it. The claim of the assessee could at best be considered only to the element of interest, that too, 1/6th only and not beyond and therefore, it declined to entertain the appeal and accordingly, the appeal was dismissed, affirming the orders passed by the Assessing Authority. Aggrieved by the said order, the present appeals are filed. 10. The substantial questions of law that arise for our consideration in these appeals are: - 16 - (1) ‘Whether the Tribunal was justified in upholding the estimation of expenditure at 2% on the gross dividends to arrive at net dividends for granting exemption u/s.10[33] of the Act in the light of the ratio laid down by this court in the case of ‘MAHARASHTRA APEX CORPORATION LIMITED vs. CIT’ reported in 286 ITR 585 [KAR]. (2) Whether the appellant – Bank was not entitled to the deduction on account of depreciation on the units of CANSTAR purchased by the appellant as business expenditure or in the alternative as business loss? (3) Whether the loss incurred on the purchase of unit of CANSTAR was on commercial expediency and thus was liable to be allowed under Section 37(1) of the Act? Yet another substantial question of law that arises for consideration in I.T.A. No.1397/2006 is as under: (4) Whether the Tribunal was right in restricting the allowance under Section 36(1)(viia) of the Act to the extent of the provision made by the appellant when the Section provides for the allowance not - 17 - exceeding 5% of the total income and not exceeding 10% of the rural advances made by the Bank?” Substantial Question of Law No.1 11. This court, in Maharashtra Apex Corporation Limited case [supra] held, when no expenditure is incurred by an assessee in earning the dividend income, no notional expenditure could be deducted from the said income. Though benefit u/s. 80M is granted on the net income, when no expenditure is incurred in earning the dividend income, the gross income would become the net income. Thus, there is no scope for any estimation being made or any amount being deducted as notional expenditure. 12. In the instant case, facts set out above demonstrates the income is derived by the dividends u/s. 10[33] of the Act and interest on tax free bonds u/s. 10[15][h] of the Act and interest on long term finance to infrastructure companies u/s. 10[23G] of the Act. In other words, the persons with whom the - 18 - amounts are invested by the assessee are crediting the aforesaid amount to the assessee’s account by way of a bank transfer. Therefore, no human agency is involved in collecting these dividends and interest for which the assessee has to incur any expenditure. This is the consequence of computerization, online transaction through NEFT[National Electronic Fund Transfer], RTGS [Real Time Gross Settlement] and also DEMAT Accounts. The assessing authority should take note of these developments in deciding whether any expenditure is incurred in earning the said income. The discussion by the assessing authority clearly demonstrates these aspects has not been taken note of and the notional expenditure is calculated pre modernization. Therefore, in the light of the aforesaid Judgment, when the assessee has not incurred any expenditure for realizing this income, the question of holding that 2% of the gross total income is an expenditure and that has to be added back to the income is unsustainable in law. Accordingly, the - 19 - substantial question of law is answered in favour of the assessee and against the revenue. Substantial question of Law No.2 and 3 13. Sri. Sarangan, learned Senior Counsel appearing for the assessee contended that the material on record discloses that though Canbank Mutual Fund is a distinct legal entity from Canara Bank, the Canbank Mutual Fund is a creation of the assessee. In order to carry on mutual fund business, they created a Trust. The assessee is a Trustee of the said Trust. Of course, there are other Trustees also. Though there is no financial dealing between these two entities, when the mutual fund business suffered loss and the amounts promised to the public were not returned, there was a hue and cry. The unit holders approached the Central Government, the Reserve Bank of India and Securities & Exchange Board of India (‘SEBI’ for short). Then a meeting was convened, though all of them accepted the legal position, they impressed upon the assessee to discharge those obligations in order to - 20 - protect its goodwill and image in the public, as the gullible public invested money in mutual fund believing it to be an arm of the assessee, otherwise it is possible that actions have to be taken against the assessee under various provisions of law. That apart, the public confidence in the institution would be lost. After weighing the options, as the commercial expediency and in order to preserve the goodwill of the assessee, they purchased the units at Rs.23/- and thus, they incurred loss to the extent of Rs.499.05 crores, as at the end of the period during which this CANSTAR scheme was in force. Therefore, from 1998-99 onwards every year, they have claimed depreciation on the ground of diminution in value of the asset. That has not been allowed. In the alternative, they have claimed the loss incurred on the purchase of units as an expenditure, which is liable to be allowed under Section 37(1) of the Act. However, the authorities have looked at the entire matter in a very narrow compass and have not kept the settled law on the point and in fact, the Tribunal has gone in a tangent and has denied the relief to the - 21 - assessee. Therefore, he submitted that these orders require to be set aside. 14. Per contra, learned Counsel appearing for the Revenue contended that, as the assessee and Canbank Mutual Fund are distinct legal entities, there was no obligation cast upon the assessee to go to the rescue of the mutual fund. It is not done in the course of the business and therefore, they are not entitled to any benefit either as depreciation or as loss or as an expenditure. Even otherwise, he submits that the units were purchased at Rs.23/- per unit, out of which, Rs.13/- was the interest payable, even if they pay the said interest and therefore, are entitled to the benefit of disallowance as an expenditure, they cannot claim the said benefit for the entire Rs.23/- as either Rs.10/- continued or they could claim the same from the Mutual Fund. It is in this context, the authorities have clearly held that the said loss is not per year, but it is roughly for about 6 years and therefore, the assessee would be entitled to the benefit of 1/6th of Rs.13/- and nothing - 22 - more and therefore, he submits that no case for interference is made out. 15. We have gone through the entire material on record. We find from the assessment orders that the Assessing Authority has not referred to the claim at all, but he has disallowed the same. In appeal, an additional ground was urged. The assessee has claimed the benefit in one breath as depreciation on the basis of diminution of value of the asset, in another breath, the assessee is claiming the benefit as a loss incurred in the business and in another breath, the claim is on the basis of expenditure incurred in carrying on the capital expenditure laid out or expended wholly and exclusively for the purposes of the business and a commercial expediency. That probably may have led the authorities to reject the claim. In fact, the Tribunal proceeds on the assumption that the units are in the nature of debenture and entire loss to debenture is discussed. 16. It is in this background, it is necessary to find out what exactly is the nature of the transaction, what - 23 - is the benefit that the assessee is claiming and what does law say on this aspect. 17. The assessee is a nationalized Bank. It carries on the business of Banking. The Reserve Bank of India and Government of India, Ministry of Finance, New Delhi (Central Government) considered the issue of setting up of mutual funds. On 18th November 1988, a notification under Section 10(23D) of the Act was issued, setting up CANBANK Mutual Fund by Canara Bank. The assessee set up a Trust to carry on the said mutual fund business. The principal Trust Deed dated 31.1.1990 was drawn up. The assessee as ‘Settlor’ set up the Mutual Fund as a Trust and acted itself as a Principal Trustee. The assessee contributed a sum of Rs.1,00,000/- as initial contribution to the Mutual Fund. The day-to-day administration of the mutual fund was entrusted to an Asset Management Company by name CANBANK Investment Management Services Limited. This Management Company was also approved by SEBI under the SEBI (Mutual Funds) Regulations, 1996. The CANBANK Mutual Fund was to run several - 24 - schemes, one of which was the CANSTAR Scheme. The Scheme is defined as a ‘redeemable non-debt security’ with face value of Rs.10/- for the amount so paid, the investors will get one unit of CANSTAR. CANSTAR scheme was floated by the Mutual Fund on 16.8.1990. The termination date for the scheme was specified as 10 years. The assessee did not contribute to the scheme at the initial stage. In other words, no investment was made by the Bank in the scheme initially. Money so raised by the mutual fund was invested in securities, shares and other fiscal instruments. On the date of maturity, the maturity value of CANSTAR Unit was to be paid to the investors. The scheme also provided for a declaration of an annual income distribution of not less than 12.5% in a year. The said return was not payable but was to be ploughed back on investments. This high fixed assured return for the investment was the specialty of the scheme. Substantial sums had been collected even from institutional investors. One such institutional investor was Oil and Natural Gas Commission (ONGC) which had purchased 5.4 crore - 25 - units of the face value of Rs.54 crores. The Scheme over the years could not generate an income which would yield 12.5% annually. Operations were poor for number of reasons beyond the control of Mutual Fund. Each of the schemes floated by the Mutual Fund including CANSTAR units was self-contained and in water tight compartments. Thus, no consolidated fund was being operated for all the schemes. Diversion of funds thus from one scheme to another was not possible to be made. The bad investment in a particular Scheme could not be made good by other schemes. All the schemes were giving very poor yields including CANSTAR scheme. The result was the Mutual Fund could not bring resources to redeem the units by making the payments as promised. The investors wanted to withdraw but the Mutual Fund was unable to purchase back the units. Investors including ONGC made complaints to various authorities. The Reserve Bank of India, Central Government and SEBI intervened in the matter. They impressed upon the assessee that the name “CANSTAR” having been associated with the - 26 - Bank in the minds of the public, the silence on the part of the assessee would not be in the interest of the Bank. In these circumstances, the Board of Directors of the Bank held a meting on 8.9.1997 and decided to purchase CANSTAR units at Rs.23/- per unit to mitigate the hardship to the investors, as a gesture of goodwill and by way of one time offer. Then they made a public announcement as under: “OFFER FOR PURCHASE: CANSTAR UNITS The Board of Trustees of Canbank Mutual Fund have suspended the repurchase facilities of Canstar with effect from 18th September 1996 in view of the fact that NAV of Canstar is far below the specified rate of repurchase. Consequently, Canstar holders are put to certain hardships. With a view to mitigate their hardship, Canara bank, though not legally liable to the Canstar unit holders, as a gesture of goodwill and by way of one time offer, proposes to purchase Canstar units (both “CG Canstar” and “80L Canstar”) at a price of Rs.23/- per Canstar. The unit holders who are desirous of availing this facility may surrender their units to any - 27 - branch of Canara Bank or R&T Agents by Registered Post on or before 11.10.1997 by depositing the units along with transfer deed and the letter of acceptance, duly filled in. The offer letter and letter of acceptance is being separately mailed to the investors. This offer is open only till 11.10.1997. The unit holders may approach the same branch of Canara Bank where they had deposited their units, for collecting the proceeds of their units on or after 10.11.1997. In case the unit holders do not receive the offer letter and copy of letter of acceptance, which is separately mailed by the bank, within three weeks from the date of this publication, they may contact the nearest branch of Canara Bank for a copy of the said letter for the purpose of sale of their Canstar units”. 18. The said decision was taken in pursuance to the pressures brought in by the Finance Ministry, Reserve Bank of India, SEBI and the imminent threat of SEBI to debar Canara Bank from dealing in Capital Market forced the bank to take a decision to bail out CANSTAR scheme. The controversy was affecting the - 28 - name and reputation of the Bank and consequently threatening to erode the goodwill of the customers which it had earned over the years. Such erosion of goodwill would have affected the business. Thus, from the point of view of commercial expediency the bank decided to repurchase the units at the applicable committed price of Rs.23/- per unit despite NAV being Rs.10/- only. The Department including the Tribunal has treated the transaction of re-purchase of CANSTAR units as capital investment. The scheme had run nearly 5-6 years when the bank stepped into bail out the scheme. The scheme was to run for the balance period of 4 years. That being so, it cannot be treated as capital investments much less permanent investment. The said investment was in the nature of current investment. For the assessment year 1998-99, Rs.232.42 crores was claimed as depreciation. For subsequent years also, additional depreciation was claimed. For assessment year 2001-02, the entire CANSTAR units were redeemed. A loss of Rs.95.22 crores was incurred. After taking note of depreciation / appreciation for the - 29 - earlier years, the said amount was claimed as business loss in the year 2001-02. Therefore, the said sum was claimed as business expenditure or as loss incidental to the business of the bank. In the alternative, they have also made a claim to treat the loss on redemption of Rs.499.05 crores being the difference between the purchase price and redemption value of Rs.10/-, which has to be allowed as loss arising out of the redemption of CANSTAR units. 19. It is in this background, we have to decide whether the assessee is entitled to exemption from payment of tax either on the ground of depreciation for diminution in value of capital asset or as a loss – expenditure incurred. Section 37 of the Act reads as under: “37. Any expenditure not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be - 30 - allowed in computing the income chargeable under the head “Profits and gains of business or profession”. 20. In this context, it is necessary to note the judgment of the Apex Court interpreting Section 37 of the Act. The Apex Court in the case of Commissioner of Income-Tax, Kerala –vs- Malayalam Plantations Limited reported in 1964 ITR Vol.53 page 140 has explained the meaning of the expression “for the purpose of the business” as under: “The aforesaid discussion leads to the following result: The expression \"for the purpose of the business\" is wider in scope than the expression \"for the purpose of earning profits\". Its range is wide: it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measure for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile titles; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to - 31 - commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. 21. The Apex Court in the case of Sassoon J. David & Co.P.Ltd. –vs- Commissioner of Income-Tax, Bombay reported in ITR 1979 Vol.118 page 261, at page 275 has held as under: “. . . . the expression “wholly and exclusively” used in s.10(2)(xv) of the Act does not mean “necessarily”. Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. It is relevant to refer at this stage to the legislative history of s.37 of the I.T. Act, 1961, which corresponds to s.10(2)(xv) of the Act. An attempt was made in the I.T. Bill of 1961 to lay down the “necessity” of the expenditure as a condition for claiming deduction under s.37. Section 37(1) in the Bill read “any expenditure….. laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed….”. The introduction of the word - 32 - “necessarily” in the above section resulted in public protest. Consequently, when s.37 was finally enacted into law, the word “necessarily” came to dropped.” 22. The Apex Court in the case of Commissioner of Income-Tax –vs- Chandulal Keshavlal & Co. reported in (1960) 38 ITR page 601 (SC) at page 610 has observed as under: “Another fact that emerges from these cases is that if the expense is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business then the expense is not deductible. Another test is whether the transaction is properly entered into as a part of the assessee’s legitimate commercial undertaking in order to facilitate the carrying on of its business; and it is immaterial that a third party also benefits thereby. But in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of trade or business of the assessee.” - 33 - 23. The Apex Court in the case of The Commissioner of Income Tax, U.P., Lucknow –vs- The Nainital Bank Ltd. reported in AIR 1967 SC 453 at para-7 has held as under: “We hold accordingly that the settlements with the constituents and the consequent posting of entries in the books of account cannot be regarded as forbearance to enforce the claim of the Bank to recover the loans advance. The settlement consisted of two constituent elements – praying by the Bank of the value of the jewellery pledged with it against receipt from the constituent the amount which was recoverable by the Bank. The first element of the transaction would appropriately be deemed expenditure and such expenditure having been laid out for protecting and furthering the business of the Bank was properly admissible under S. 10 (2) (xv) of the Income tax Act, 1922.” 24. In the light of the aforesaid statutory provisions and the judgments of the Apex Court, it is clear that, - 34 - “Any expenditure not being in the nature of capital expenditure, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory; in that event, he pays the amount on behalf of another and for a purpose unconnected with the business. Expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under s.10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the - 35 - way of an expenditure being allowed by way of deduction under s.10(2)(xv) of the Act if it satisfies otherwise the tests laid down by law. In deciding whether a payment of maney is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading If the payment of expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may inure to the benefit of a third party”. The only limitation is found in Explanation, which was inserted by Finance (No.2) Act, 1998, No.2, w.e.f. 1.4.1962 i.e., any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. Therefore, the word “for the purpose of business” takes in its sweep, the expenditure incurred for the preservation of the business and for the protection of its assets including the name and any - 36 - other acts incidental thereto and necessary to carry on a business. If somebody other than the assessee is also benefited by that expenditure, that should not come in the way of an expenditure being allowed by way of deduction under Section 37 of the Act, if it satisfies otherwise the tests laid down by law. If the expense is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business, then the expense is not deductible. In other words, the intention behind the said transaction has to be looked into. If it is for avoiding payment of tax under the Act, such a scheme is put forth, then the assessee would not be entitled to any benefit under Section 37 of the Act. If the said expenditure is incurred for preserving the goodwill of the business and to avoid any legal proceedings, which may ruin the said business, then it is a case for allowing of expenditure under Section 37 of the Act. In particular, when a Bank is carrying on banking business and advances, loans and the security, the - 37 - credit of a banking business is very sensitive, it rests upon the confidence, which the Management has to maintain. The Management is often to make compensation and thereby preserve the goodwill of the business and its relation with the clients. By taking a very legalistic approach, if the interest of the Bank were to suffer and ruin the business, then damage is irreparable. In those circumstances, the assessee were to incur expenditure in the interest of maintaining the confidence of the public, the fair name which it has acquired, to protect its goodwill, any expenditure incurred for the said purpose is an expenditure, which is wholly and exclusively incurred for the purpose of the business and the expenditure was laid out for no other purpose and the assessee is entitled to the benefit of Section 37 of the Act. It is well settled that in every case, it is a question of fact whether the expenditure were expended wholly and exclusively for the purpose of trade or business of the assessee and therefore, keeping in mind the aforesaid principles, the same has to be applied to the facts of the particular case and then we - 38 - are to come to the conclusion whether the assessee is entitled to the benefit or not. 25. In the instant case, the undisputed facts are: The assessee is a nationalized Bank. It has acquired goodwill and name in the financial sector. It is to give effect to the Government policy, they set up a mutual fund as a Trust and acted as a principal Trustee. The mutual fund also bears the name CANBANK Mutual Fund Trust. The Management of the said Trust was entrusted to CANBANK Investment Management Services Limited. Therefore, the trade name finds a place even in that Company. The Scheme, which they formulated, was given the name CANSTAR. Again the name of the assessee is predominantly mentioned in the scheme also. The assessee except contributing a sum of Rs.1,00,000/- at the stage of formation of the Trust, did not contribute any further amount. In other words, there is no financial implication on the part of the assessee in the mutual fund business. Both are distinct legal entities. One is a Corporation and another is a Trust. After formation of - 39 - the said Trust, an advertisement was issued calling upon the public to invest their money in mutual fund. It is because of the name and its association with Canara Bank, public liberally subscribed to the said mutual fund scheme. As aforesaid, CANSTAR scheme was floated by the mutual fund on 16.8.1990. The term of the scheme was 10 years. The unit cost was Rs.10/-. They promised a return of not less than 12.5% in a year. The scheme did not do well as expected. When the public wanted their money back, they were unable to repay the amount subscribed with interest @ 12.5%. One of the subscriber was ONGC, which invested Rs.54 crores. When the moneys were not repaid in terms of the promise made, the public and public institutions, which had invested money, approached the Central Government, SEBI, RBI and other authorities and brought pressure on the mutual fund as well as the assessee for payment of the amounts, which are legally due to them. It is true that in law none of the public, who had subscribed to these units, could have legally enforced their rights against the assessee. But if the - 40 - amounts had not been paid, it would have created a hue and cry, which would have tarnished the image of Canara Bank. People would have lost confidence in the said Bank. A common man could not appreciate these legal aspects. They honestly believed that the mutual fund is a part of a business activity of the assessee. It is in this background, it is necessary to notice what the assessee said in the public announcement, which is published in the Press. They categorically stated that “the Board of Trustees of CANBANK Mutual Fund have suspended the repurchase facilities of Canstar with effect from 18th September 1996 in view of the fact that NAV of Canstar is far below the specified rate of repurchase. Consequently, Canstar holders are put to certain hardships. With a view to mitigate their hardship, Canara Bank, though not legally liable to the Canstar unit holders, as a gesture of goodwill and by way of one time offer, proposed to purchase Canstar units at a price of Rs.23/- per Canstar”. Therefore, the intention is clear that the assessee knew in law they are not liable to pay these unit holders but to mitigate the - 41 - hardship of these investors, as a gesture of goodwill and in reality to preserve the goodwill of the assessee, they came forward to purchase these units at the agreed price of Rs.23/- though the face value and NAV on the date of purchase was only Rs.10/-. The expenditure incurred by the assessee for the purchase of these units was not prohibited by law or it is an offence under any law. Similarly, it was not purchased for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business. On the contrary, as the assessee is in the business of banking, having branches all over country and continues to carry on the business of banking, in order to preserve their fair name in the society, they came forward to purchase the shares with the sole object of mitigating the hardship caused to the public investors in their mutual fund company. The object was not to evade payment of tax nor was there any other oblique motive behind this purchase. They had to protect the Goodwill in the name “CAN Bank” - 42 - Therefore, in the facts of the case, it is obvious that the aforesaid expenditure was incurred wholly and exclusively for the purpose of the business thereby to maintain the fair name and goodwill, which they have acquired over the years. Therefore, the finding of the authorities that the assessee was not liable to purchase CANSTAR units in terms of Clause 20 of the Trust Deed as a rescue measure, is without any substance. It is a voluntary act under compelling circumstances thereby they have not contravened any clause in the Trust Deed. A mere fact that in the public notice, the assessee mentioned that though they were not legally liable to CANSTAR unit holders, it was only a gesture of goodwill, they decided to purchase the units at Rs.23/- per unit, though it had fallen to Rs.10/- would indicate the fairness of the assessee and their bonafides. Therefore, the said honest statement cannot be held against the assessee. Merely because RBI has directed the assessee to treat the shortfall as contingent liability in its public amount, would not in any way render the claim of the assessee to claim it as an expenditure, without - 43 - substance. As is clear from the material on record, the duration of this Canstar unit was only 10 years. By the time they purchased the units, nearly six years had lapsed. In view of these undisputed facts, the authority proceeded on the basis that the amount spent is in the nature of permanent investment. Similarly, the authorities found fault with the assessee for not placing before them the scheme which they have worked out with the CANBANK Investment Management Services Limited and therefore, they proceeded to draw an adverse inference. All these grounds on which the claim of the assessee has been rejected are incorrect, that would not constitute sufficient grounds for disallowing the legitimate claim of the assessee. 26. In para-23 of the judgment of the Tribunal, the value of the purchases, sales and loss are extracted, which reads as under: “23. The claim of the assessee before the authorities and before us was in view of the all round pressure from public, unit holders and the Government as well, the assessee was compelled to redeem the various units at Rs.23 and it was based on this feature that the - 44 - assessee suffered the loss of just under Rs.500 crores and this was claimed as such. In the earlier paragraphs while narrating the facts of the case as was submitted by the assessee, even before the CIT(A), the claim of the assessee is in fact alternative to its claim of depreciation with regard to the said units. The assessee had shown the units to the extent of its investment as purchases and had claimed depreciation in some years, shown sales of certain units and shown appreciation in certain years. It is when the depreciation claim is not allowed, then the claim of the assessee to the extent of Rs.499.05 crores is as under: “If depreciation claim is not allowed (Rs.in crores) Asst. Year Particulars Amount 1998-99 Purchases 972.12 1999-00 Purchases 20.96 2000-01 Purchases 5.63 2001-02 Purchases 0.45 Total 999.16 Less: 1998-99 Sales 0.18 1999-00 Sales 0.88 2000-01 Sales 0.00 2001-02 Sales 499.05 Total 500.11 Loss 499.05 27. In view of what is stated above, it would be appropriate to look at all transactions in a comprehensive manner. The whole object of purchasing - 45 - the units is to gain public confidence and to mitigate the hardship that is caused to the public. In the process, the assessee has invested Rs.999.16 crores for purchase of units and only Rs.500.11 crores was realized on its redemption after maturity, thus, incurring a loss of Rs.499.05 crores. It is in the nature of an expenditure and assessee is entitled to the benefit of Section 37(1) of the Act. Therefore, we are of the view that the claim of the assessee for depreciation on the basis of diminution of value of the capital asset or even loss sustained in the business would not be appropriate and the assessee would be entitled to the claim as expenditure incurred in the business because the entire amount was invested as commercial expediency with the intention of preserving their goodwill in the business. 28. In that view of the matter, the proper course would be to set aside the findings of the authorities on this aspect and remit the matter back to the Assessing Authority to grant the exemption treating it as a business loss under Section 37(1) of the Act and redo the calculations for the relevant four assessment years. - 46 - 29. In that view of the matter, the first substantial question of law is answered in favour of the assessee and against the Revenue. The third substantial question of law is answered in favour of the assessee and against the Revenue. Substantial Question of Law No.4 30. Insofar as the substantial question of law arisen for consideration in I.T.A.No.1397/2006 is concerned, learned Counsel for the appellant – assessee fairly conceded that the said issue has been correctly held by the Tribunal and therefore, the said substantial question of law is held against the assessee and in favour of the Revenue. 31. Accordingly, I.T.A.No.1397/2006, 1416/2006 and 723/2007 are partly allowed. In view of the judgment in the aforesaid appeals, the impugned order in I.T.A.No.834/2007 is hereby set aside. The orders of the authorities on the aforesaid question are also set aside and the matter is remanded back to the Assessing - 47 - Authority to redo the whole thing in the light of the above said observations. Parties to bear their own costs. Sd/- JUDGE Sd/- JUDGE KNM/- "