ACIT, Trichy V. The Karur Vysya Bank Ltd., Karur

ITA 1711/CHNY/2014

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 7889 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 8 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-02-2016
• Appeal Filed By: Department
• Bench Allotted: B
• Next Hearing Date: 03-02-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 16-06-2014
• Court: TRIBUNAL
• Department Lawyers: R MOHAN
• Keywords: Reopening of assessment; Business income; Rectification of order; Earning of tax free income; Bad and doubtful debts; Revised return; Capital expenditure
• Section: 43B; 14A

Judgement Text

, , IN THE INCOME - TAX APPELLATE TRIBUNAL B BENCH, CHENNAI , . , BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER & SHRI DUVVURU RL REDDY , JUDICIAL MEMBER I.T.A.NO S . 1638, 1639 & 1640/MDS/2014 ASSESSMENT YEAR S :20 03 - 04, 2006 - 07 & 2009 - 10 THE KARUR VYSYA BANK LTD., ERODE ROAD, KARUR 639 001. [PAN: A AAC T3373J ] VS. THE ADDITIONAL COMMISSIONER OF INCOME TAX , RANGE I , TIRUCHIRAPALLI . ( / APPELLANT ) ( / RESPONDENT ) I.T.A.NO S . 1707, 1708, 1709, 1710, 1711, 1869 & 1734/MDS/2014 ASSESSMENT YEAR S : 1998 - 99, 02 - 03, 04 - 05, 06 - 07, 09 - 10, 91 - 92 & 01 - 02 THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE I( 1 ), TRICHY . VS. THE KARU R VYSYA BANK LTD., ERODE ROAD, KARUR 639 001. ( / APPELLANT ) ( / RESPONDENT ) ASSESSEE BY : SHRI QUADIR HOSEYN , ADVOCATE DEPARTMENT BY : SHRI R. MOHAN , CIT / DATE OF HEARING : 0 3 . 0 2 .201 6 / DATE OF P RONOUNCEMENT : 29 . 0 2 .201 6 / O R D E R PER DUVVURU RL REDDY , JUDICIAL MEMBER : THESE APPEALS BY THE ASSESSEE AND REVENUE ARE DIRECTED AGAINST THE DIFFERENT ORDER S OF THE COMMISSIONER OF INCOME TAX (APPEALS) I, COIMBATORE DATED 15.06.20 15 FOR THE ASSESSMENT YEAR S STATED ABOVE . I.T.A.NOS.1638, 1639 & 1640/MDS/2014 & I.T.A.NOS.1707 TO 1711, 1869 & 1734/MDS/2014 2 I.T.A.NOS.1638, 1639 & 1640/MDS/2014 [ASSESSEE S APPEALS] 2. THE ONLY GROUND RAISED IN THE APPEAL OF THE ASSESSEE IN I.T.A. NO. 1638/MDS/2014 FOR THE ASSESSMENT YEAR 2003 - 04 IS WITH REGARD TO CONFIRMATION OF ADD ITION MADE TOWARDS ENTERTAINMENT EXPENSES. THE ASSESSEE HAS CLAIMED DEDUCTION UNDER THE HEAD ENTERTAINMENT EXPENDITURE TO THE EXTENT OF .17,02,645/ - . THE ISSUE WAS WHETHER DEDUCTION UNDER THIS HEAD IS ALLOWABLE EXPENDITURE OR NOT AFTER DELETION OF SECTION 37(2) OF TH E ACT. IT WAS CLARIFIED BY THE BANK THAT THIS EXPENDITURE WAS INCURRED FOR SUPPLYING TEA, COFFEE, ETC. TO THE CUSTOMER AT TH E TIME OF CANVASSING BUSINESS. IT WAS ARGUED THAT EXPENDITURE HAS BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS AND THIS EXPENDITURE WAS NEITHER IN THE NATURE OF CAPITAL EXPENDITURE NOR IN THE NATURE OF PERSONAL EXPENDITURE. IT WAS ALSO ARGUED THAT EFFECT OF DELETION OF SECTION 37(2) WAS TO REMOVE THE RESTRICTION ON THE EXPENDITURE AND NOT DISALLOW EXPENDITURE INCURRED FOR PROMOTING BUSINESS WHICH MAY BE BOOKED UNDER THE HEAD ENTERTAINMENT EXPENDITURE. CONSIDERING THE TYPE OF VOUCHERS MA INTAINED AND NATURE OF EXPENDITURE, ON ESTIMATE BASIS, THE ASSESSING OFFICER HAS DISALLOWED 5% OF THE EXPENDITURE OF .17,02,645/ - , WHICH COMES TO .85,132/ - . 3. ON APPEAL, AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE LD. CIT(A) CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. 4. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. I.T.A.NOS.1638, 1639 & 1640/MDS/2014 & I.T.A.NOS.1707 TO 1711, 1869 & 1734/MDS/2014 3 5. WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIALS ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. WHILE REITERATING THE SUBMISSIONS AS MADE BEFORE THE AUTHORITIES BELOW, THE LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE EXPENDITURE OF .17,02,645/ - WAS INCURRED THROUGH ITS 238 BRANCHES, CENTRAL OFFICE AND DIVISION OFFICES FOR THE WHOLE YEAR AND REQUESTED TO DELETE THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE LD. CIT(A) HAS OBSERV ED THAT THE ASSESSING OFFICER HAS REASONABLY ESTIMATED THE EXPENDITURE TO THE TUNE OF 5% ONLY AS NOT UTILIZED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS AND CONFIRMED DISALLOWANCE OF .85,132/ - . UNDER THE ABOVE FACTS AND CIRCUMSTANCES, W E DO NOT S EE ANY INFIRMITY IN THE ORDER OF THE AUTHORITIES BELOW, WHICH CALLS FOR OUR INTERFERENCE. THUS, THE GROUND RAISED BY THE ASSESSEE IS DISMISSED. I.T.A. NO. 1639/MDS/2014 6. THE FIRST GROUND RAISED IN THE APPEAL OF THE ASSESSEE FOR THE ASSESSMENT YEAR 200 6 - 07 IS WITH REGARD TO REOPENING OF ASSESSMENT. AT THE TIME OF HEARING, THE LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE GROUND RAISED BY THE ASSESSEE ON REOPENING OF ASSESSMENT IS NOT PRESSED AND MADE ENDORSEMENT IN THE GROUNDS OF APPEAL. ACCORDINGL Y, THE GROUND RAISED BY THE ASSESSEE IS DISMISSED AS NOT PRESSED . I.T.A.NOS.1638, 1639 & 1640/MDS/2014 & I.T.A.NOS.1707 TO 1711, 1869 & 1734/MDS/2014 4 7. THE NEXT EFFECTIVE GROUND RAISED IN THE APPEAL OF THE ASSESSEE IS WITH REGARD TO CONFIRMATION OF ADDITION MADE TOWARDS FRINGE BENEFIT TAX CONTRIBUTION MADE TO SUPERANNUATION FUND OF .8.27 CRORES. THE ASSESSEE BANK FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2006 - 07 ON 29.11.2006 DECLARING FBT VALUE OF . 2,87,06,054/ - , AND THE SAME WAS PROCESSED UNDER SECTION 115 WE(1) DATED 20.09.2007. ANOTHER RECTIFICATION ORDER WAS PASSED ON 26 . 08 . 2008. THE ASSESSEE BANK'S CASE WAS REOPENED BY ISSUE OF NOTICE UNDER SECTION 115WH DATED 30 .03. 2011 AND SERVED ON THE ASSESSEE ON 04.04.2011. IN THE ORDER DATED 22 . 02 . 2012 UNDER SECTION 115 WG R.W.S 11 5 WE(3) OF THE ACT, THE ASSESSING OFFICER HAS MA DE AN ADDITION OF . 8,27,00,000 / - IN THE VALUE OF CONTRIBUTION MADE TO SUPERANNUATION FUND. 8. THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A). AFTER CONSIDERING ELABORATE SUBMISSIONS MADE BY THE AR OF THE ASSESSEE, THE LD. CIT(A) CONFI RMED THE ADDITION MADE BY THE ASSESSING OFFICER. 9. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 10. WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIALS ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. THE ASSESSING OFFICER HAS MADE AN ADDITION OF .8,27,00,000/ - IN THE VALUE OF CONTRIBUTION MADE TO SUPERANNUATION FUND. THE CASE OF THE ASSESSEE IS THAT A PROVISION WAS MADE IN THE BOOKS OF THE ASSESSEE AND THE ASSESSING OFFICER HAS ERRONEOUSLY TREATED AS ACTUAL PAYMENT TO SUPERANNUATION FUND. IT WAS SUBMITTED BEFORE I.T.A.NOS.1638, 1639 & 1640/MDS/2014 & I.T.A.NOS.1707 TO 1711, 1869 & 1734/MDS/2014 5 THE LD. CIT(A) THAT THE ACTUAL PAYMENT TO THE FUND WAS MADE ON 07.04.2006 AND THEREFORE, IT WAS PRAYED FOR DELETING THE ENTIRE AMOUNT OF CONTRIBUTION TO PENSION FUND FROM THE COMPUTATION OF FRINGE BENEFIT FOR THE ASSESSMENT YEAR 2006 - 07. H OWEVER, BY CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE LD. CIT(A) HAS OBSERVED THAT IF THE BANK WANTS TO ENJOY THE BENEFITS OF PROVISO TO SECTION 43B OF THE ACT FOR THE PURPOSE OF INCOME TAX AND BOOK THE EXPENDITURE MADE ON 07.04.2006 FOR THE ASSESSME NT YEAR 2006 - 07 ITSELF, IT SHOULD BE OFFERED FOR FRINGE BENEFITS ALSO AND NOT ACCEPTED THE CONTENTIONS OF THE ASSESSEE THAT THE EXPENDITURE ITEMS COVERED BY SECTION 43B OF THE ACT CANNOT BE TREATED ON DEEMED BASIS AND ACCORDINGLY CONFIRMED THE ADDITION MAD E BY THE ASSESSING OFFICER. 11. BEFORE US, IT WAS ARGUED THAT THE RESIDUARY PROVISIONS OF SECTION 115WL OF THE ACT CANNOT BE LINKED WITH THE PROVISIONS OF SECTIONS 115WB(1), 115WB(2), 115WC AND 115WB(2)(E) OF THE ACT, WHICH COVERS SPECIFIC ISSUES LIKE C ONTRIBUTION TO SUPERANNUATION FUND, ITS SCOPE, DEEMING PROVISION, VALUATION AND EXEMPTIONS RESPECTIVELY. BY FILING COPY OF THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF ACIT V. BHARAT OVERSEAS BANK LTD. IN I.T.A. NO. 1541/MDS/2010 FOR THE ASSESSMENT YEAR 2007 - 08 VIDE ORDER DATED 20.02.2013, I T WAS SUBMITTED THAT THE AMOUNT OF .8.27 CRORES IN QUESTION DO NOT COME WITHIN THE PURVIEW OF FBT SINCE SUCH A STATUTORY PAYMENT IS A COMMON EMPLOYEES WELFARE EXPENSE EXEMPT I.T.A.NOS.1638, 1639 & 1640/MDS/2014 & I.T.A.NOS.1707 TO 1711, 1869 & 1734/MDS/2014 6 UNDER SECTION 115WB(2)(E) OF THE ACT. WE HAVE GONE THROUGH THE ORDER OF THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF TTK HEALTH CARE LTD. V. DCIT IN I.T.A. NO. 1589/MDS/2014 FOR THE ASSESSMENT YEAR 2006 - 07 DATED 05.01.2016 , WHEREIN, BY FOLLOWING THE ORDER OF THE TRIBUNAL IN THE CASE OF ACIT V. BHARAT OVERSEAS BANK LTD.(SUPRA), THE TRIBUNAL HAS HELD AS UNDER: 7. WE HEARD THE RIVAL SUBMISSIONS OF BOTH THE PARTIES, PERUSED THE MATERIALS ON RECORD AND ORDERS OF THE LOWER AUTHORITIES AND JUDICIAL CITATION REFERRED BY THE LD. AUTHORISED REPRESENTATIVE. THE ASSESSEE COMPANY HAS MADE A PROVISION FOR CONTRIBUTION TO SUPE RANNUATION FUND AND THE SAME WAS PAID IN THE NEXT FINANCIAL YEAR. THERE IS NO DISPUTE ABOUT THE PROVISION AND THE PAYMENT AND THERE IS NO ESCAPEMENT OF VALUE AND SAME WAS SUBJECT TO FRINGE BENEFIT TAX. SIMILAR ISSUE WAS CONSIDERED BY THE CO - ORDINATE BENCH IN THE CASE OF M/S. BHARAT OVERSEAS BANK (SUPRA) WHEREIN HELD THAT PROVISION OF CONTRIBUTION TO THE APPROVED SUPERANNUATION FUND WAS NOT SUBJECT TO CHARGING OF FBT ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO DELETE THE ADDITION. 12. IN VIEW OF THE S PECIFIC FINDINGS IN THE CASE OF ACIT V. BHARAT OVERSEAS BANK LTD. (SUPRA) AS WELL AS IN THE CASE OF TTK HEALTH CARE LTD. V. DCIT (SUPRA), WE SET ASIDE THE ORDER OF THE LD. CIT(A) ON THIS ISSUE AND DELETE THE ADDITION MADE ON ACCOUNT OF SUPERANNUATION FUND. THUS, THE GROUND RAISED BY THE ASSESSEE IS ALLOWED. I.T.A. NO. 16 40 /MDS/2014 13. THE FIRST GROUND RAISED IN THE APPEAL OF THE ASSESSEE FOR THE ASSESSMENT YEAR 2009 - 10 IS WITH REGARD TO CONFIRMATION OF DISALLOWANCE UNDER SECTION 14 R.W.S. RULE 8D OF .3,42,654/ - . BEFORE THE ASSESSING OFFICER, THE ASSESSEE HAS CLAIMED THAT NO EXPENDITURE WAS INVOLVED EITHER IN TERMS OF INTEREST ON THE AMOUNT INVESTED ON SECURITIES OR MANPOWER AND I.T.A.NOS.1638, 1639 & 1640/MDS/2014 & I.T.A.NOS.1707 TO 1711, 1869 & 1734/MDS/2014 7 THEREFORE, NO DISALLOWANCE WAS REQUIRED TO BE MADE. IT WAS ALSO ARGUED TH AT SAME SET OF EMPLOYEES CARRIED OUT BANKING ACTIVITY AND INVESTMENT IN GOVERNMENT SECURITIES/TAX FREE SECURITIES, SHARE AND MUTUAL FUNDS FORMED PART OF INDIVISIBLE BUSINESS OF BANKING. HOWEVER, THE ASSESSING OFFICER HAS DISALLOWED AN AMOUNT OF .3,42,654/ - [BEING 2% OF .1,71,32,690/ - ] AS EXPENDITURE INCURRED ON EARNING TAX FREE DIVIDEND INCOME OF .1,71,32,690/ - . 14. ON APPEAL, THE LD. CIT(A) CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. 15. WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIALS ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE HAS STRONGLY CONTENDED THAT THE ASSESSEE BEING A BANK, THE SECURITIES HELD AS STOCK - IN - TRADE, SECTION 14A HAS NO APPLICATION TO SECURITIES/SHARES HELD A S STOCK - IN - TRADE AS PER THE DECISION OF THE HON BLE KARNATAKA HIGH COURT IN THE CASE OF CCI LTD. V. CIT 206 TAXMAN 563. THEREFORE, IT HAS TO BE DECIDED AS TO WHETHER SECTION 14 A IS APPLICABLE TO BANKING SECTOR WHERE, THE SECURITIES/ SHARES ARE HELD AS STOC K - IN - TRADE. WE ARE OF THE OPINION THAT THE PURPOSE FOR WHICH THE SHARES ARE PURCHASED AND HELD WOULD IN ANY MANNER IMPACT THE APPLICABILITY OF SECTION 14A, WHICH GETS ATTRACTED ON INCURRING THE EXPENDITURE IN RELATION TO A TAX FREE INCOME, AS DIVIDEND INCO ME. SIMILAR VIEW HAS BEEN TAKEN BY THE MUMBAI BENCHES OF THE TRIBUNAL IN THE CASE OF DCIT V. DAMANI ESTATES & FINANCE PVT. LTD. IN I.T.A.NOS.1638, 1639 & 1640/MDS/2014 & I.T.A.NOS.1707 TO 1711, 1869 & 1734/MDS/2014 8 I.T.A. NO. 3029/MUM/2012 (A.Y. 2008 - 09) ORDER DATED 17.07.2013 , WHEREIN THE TRIBUNAL HAS OBSERVED AS UNDER: 5.3 WE NEXT CON SIDER THE QUESTION OF THE APPLICABILITY OF SECTION 14A TO A CASE WHERE SHARES, ON WHICH DIVIDEND INCOME ARISES, ARE HELD AS STOCK - IN - TRADE. WE DO NOT THINK THAT THE PURPOSE FOR WHICH THE SHARES ARE PURCHASED AND HELD WOULD IN ANY MANNER IMPACT THE APPLICAB ILITY OF SECTION 14A, WHICH GETS ATTRACTED ON INCURRING THE EXPENDITURE IN RELATION TO A TAX - EXEMPT INCOME, AS DIVIDEND INCOME. IT MAY IMPACT THE HEAD OF THE INCOME UNDER WHICH THE INCOME ARISING THERE - FROM WOULD STAND TO BE ASSESSED, I.E., WERE IT TO BE T AXABLE, BUT NOTHING MORE. THE SAME IS IRRELEVANT AS SECTION 14A IS INDEPENDENT OF THE HEAD OF THE INCOME UNDER WHICH THE TAX EXEMPT INCOME WOULD BE OTHERWISE LIABLE TO TAX. IN FACT, DIVIDEND INCOME HAS BEEN SPECIFICALLY PROVIDED UNDER THE STATUTE FOR BEING ASSESSABLE U/S.56, SO THAT THE FACT THAT IT ARISES IN RESPECT OF SHARES HELD AS STOCK - IN - TRADE, I.E., AS A PART OF THE BUSINESS INCOME, AND AS SUCH THERE IS UNDER THE CIRCUMSTANCES NOT EVEN A CHANGE IN THE HEAD OF INCOME, AS WOULD GENERALLY BE THE CASE, W OULD BE OF NO CONSEQUENCE. SUCCINCTLY PUT, SECTION 14A WOULD COME INTO PLAY IRRESPECTIVE OF THE HEAD OF INCOME (ON ACCOUNT OF IT ARISING QUA A TRADING ASSET), UNDER WHICH THE INCOME NOT FORMING PART OF THE TOTAL INCOME WOULD BE OTHERWISE LIABLE TO BE ASSES SED. THE HON BLE COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. (SUPRA), EXAMINING THE GENESIS OF THE PROVISION OF SECTION 14A, CLARIFIED THAT THE BASIC PRINCIPLE OF TAXATION BEING THAT ONLY THE NET INCOME, I.E., GROSS INCOME MINUS EXPENDITURE, IS TAXAB LE, HOLDING SEC. 14A AS CURATIVE AND DECLARATORY OF THE INTENT OF THE PARLIAMENT. THE SAME WAS REQUIRED TO BE ENACTED TO OVERCOME THE INCIDENCE OF NON - DISALLOWANCE OF EXPENDITURE IN VIEW OF THE JUDICIAL PRECEDENTS BY THE APEX COURT WHERE THERE IS A ONE , INDIVISIBLE BUSINESS GIVING RISE TO TAXABLE AS WELL AS EXEMPT INCOMES. REFERENCE IN THIS CONTEXT MAY BE MADE TO THE SECTION OF THE DECISION UNDER THE HEADING ENACTMENT OF S.14A WITH THE HON BLE COURT PROCEEDING TO MEET THE VARIOUS ARGUMENTS ADVANCED, S UMMARIZING ITS FINDINGS UNDER THE HEADING A SUMMATION OF OUR CONCLUSIONS ON THE INTERPRETATION OF THE PROVISIONS . THIS POSITION STANDS INDEPENDENTLY OBSERVED BY THE HON BLE CALCUTTA HIGH COURT IN DHANUKA & SONS (SUPRA). THE FACTUAL SITUATION OBTAINING IN THE INSTANT CASE, WHERE THE SHARE TRADING BUSINESS YIELDS BOTH TAXABLE INCOME IN THE FORM OF SHARE TRADING PROFIT AND TAX - EXEMPT INCOME BY WAY OF DIVIDEND INCOME, IS THE SAME. THE SAID DECISIONS THUS SQUARELY COVER THE FACTS OF THE INSTANT CASE AS WELL. T HEREFORE, TO SAY THAT SECTION 14A WOULD NOT APPLY AS SHARES ARE HELD AS STOCK - IN - TRADE WOULD NOT HOLD. 16. IN VIEW OF THE ABOVE FINDINGS OF THE MUMBAI BENCHES OF THE TRIBUNAL, EVEN THOUGH THE ASSESSEE HAS HELD THE SECURITIES AS STOCK - IN - TRADE, SECTION 1 4A APPLIES. MOREOVER, THE H ON BLE MUMBAI HIGH C OURT IN THE CASE OF I.T.A.NOS.1638, 1639 & 1640/MDS/2014 & I.T.A.NOS.1707 TO 1711, 1869 & 1734/MDS/2014 9 GODREJ & BOYCE MFG. CO. LTD. 328 ITR 81 , AFTER EXAMINING THE GENESIS OF THE PROVISION OF SECTION 14A OF THE ACT , CLARIFIED THAT THE BASIC PRINCIPLE OF TAXATION BEING THAT ONLY THE NET INCOM E, I.E., GROSS INCOME MINUS EXPENDITURE IS TAXABLE, HOLDING SEC TION 14A AS CURATIVE AND DECLARATORY OF THE INTENT OF THE PARLIAMENT. INVESTMENT IN GOVERNMENT SECURITIES, ANY INVESTMENT IN TAX - FREE SECURITIES, SHARES, MUTUAL FUNDS WHICH FORM PART OF INDIVIS IBLE BUSINESS GIV ES RISE TO TAXABLE AS WELL AS EXEMPT INCOMES. 17. RULE 8D , NOTIFIED WITH EFFECT FROM 24.03.2008 AND APPLICABLE FROM THE ASSESSMENT YEAR 2008 - 09 ONWARDS, PRESCRIBES TO ARRIVE AT THE FIGURE OF EXPENDITURE ATTRIBUTABLE TO THE EXEMPT INCOME, IF THE ASSESSEE IS NOT MAINTAINING SEPARATE EXPENDITURE ACCOUNTS FOR EARNING EXEMPT INCOME. RULE 8D IS APPLICABLE FROM THE ASSESSMENT YEAR 2008 - 09 ONWARDS IN VIEW OF THE DECISION OF THE HON BLE MUMBAI HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. V. DCIT 328 ITR 81 , THE DISALLOWANCE SHOULD BE MADE BASED ON THE PRESCRIBED METHOD QUANTIFIED BY THE ACT. IN THE PRESENT CASE, THE ASSESSMENT YEAR UNDER CONSIDERATION IS 2009 - 10 AND THEREFORE, INSTEAD OF QUANTIFYING THE DISALLOWANCE UNDER SECTION 14A R.W. RULE 8D, THE ASSESSING OFFICER HAS MADE DISALLOWANCE TO THE TUNE OF 2% OF THE EXEMPTED INCOME UNDER SECTION 14A READ WITH RULE 8D IS FOUND TO BE INCORRECT SINCE THE LAW HAS PRESCRIBED A METHOD FOR QUANTIFYING THE DISALLOWANCE, THE SAME CANNOT BE OVERLOOKE D. I.T.A.NOS.1638, 1639 & 1640/MDS/2014 & I.T.A.NOS.1707 TO 1711, 1869 & 1734/MDS/2014 10 18. IN THE PRESENT CASE, THE ASSESSEE HAS NOT ADMITTED ANY EXPENDITURE TO EARN THE EXEMPT INCOME. FURTHER, IT WAS THE SUBMISSION OF THE ASSESSEE THAT THE ASSESSEE BANK HAS ENORMOUS OWN FUNDS AS WELL AS INTEREST FREE FUNDS FOR PURCHASING TAX EXEMPT SEC URITIES [SHARES AND MUTUAL FUNDS]. BE AS IT MAY, BUT SOME EXPENDITURE IN THE FORM OF TRAVEL, TELEPHONE, POSTAGE, STATIONERY AND MANPOWER MIGHT HAVE BEEN INVOLVED IN EARNING THE EXEMPT INCOME. MOREOVER, WE ARE OF THE OPINION THAT THE INVESTMENTS WOULD HAVE DEFINITELY INVOLVED CERTAIN ADMINISTRATIVE AND ESTABLISHMENT WORKS HAVE TO BE UNDERTAKEN WHICH ENTAILS DEFINITE COSTS. HENCE, THE CONTENTION OF THE ASSESSEE THAT NO EXPENSES HAVE BEEN INCURRED TO EARN THE EXEMPT INCOME IS NOT ACCEPTABLE. IN VIEW OF THE NOT IFICATION OF RULE 8D AND APPLICABLE FROM THE ASSESSMENT YEAR 2008 - 09, THE ASSESSING OFFICER SHOULD HAVE WORKED OUT THE EXPENSES UNDER RULE 8D(2)(III) INSTEAD OF DISALLOWING 2% OF EXEMPT INCOME. ACCORDINGLY, WE SET ASIDE THE ORDERS OF AUTHORITIES BELOW AND DIRECT THE ASSESSING OFFICER TO WORK OUT THE DISALLOWANCE UNDER SECTION 14A R.W. RULE 8D. THUS, THE GROUND RAISED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES . 19. THE NEXT ISSUE RAISED IN THE GROUNDS OF APPEAL OF THE ASSESSEE IS WITH REGA RD TO CONFIRMATION OF ADDITION ON ACCOUNT OF INTEREST ON NON - PERFORMING ASSETS. THE ASSESSING OFFICER HAS OBSERVED THAT IN VIEW OF THE RBI GUIDELINES, THE INTEREST NEED TO BE OFFERED FOR TAX ON ACCRUAL BASIS BY THE I.T.A.NOS.1638, 1639 & 1640/MDS/2014 & I.T.A.NOS.1707 TO 1711, 1869 & 1734/MDS/2014 11 BANKS IN RESPECT OF NON - PERFORMING ASSETS , WHICH ARE MORE THAN 90 DAYS OLD NPAS, BUT HAVE NOT BECOME STICKY ACCOUNT UNDER RULE 6EA R.W.S. 43D I.E. THESE ARE NOT BAD AND DOUBTFUL DEBTS UNDER THE RULE 6EA AS THESE NPAS BEING LESS THAN 180 DAYS OLD. SINCE SECTION 43D TAXES THE INTEREST INCOME WITH REGARD TO BAD AND DOUBTFUL DEBTS, ON RECEIPT BASIS, NO ADDITION IS CALLED FOR INTEREST ON NPAS WHICH ARE MORE THAN 180 DAYS OLD ON ACCRUAL BASIS, BUT INTEREST ON ACCRUAL BASIS HAVE TO BE OFFERED FOR TAX WITH REGARD TO NPAS (WHICH ARE OF THE CATEGORY OF ST ICKY ADVANCES) WHICH ARE MORE THAN 90 DAYS NPAS BUT ARE NOT BAD AND DOUBTFUL DEBTS BEING LESS THAN 180 DAYS OLD, UNDER RULE 6EA R.W.S. 43D OF THE ACT. 20. ON APPEAL, THE LD. CIT(A), AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, HAS OBSERVED AND HEL D AS UNDER: 11.2 THE AUTHORISED REPRESENTATIVE OF THE APPELLANT COULD NOT FURNISH ANY DETAILS OF TYPE OF NPAS WHICH ARE MORE THAN 90 DAYS OF OLD NPAS BUT ARE NOT BAD AND DOUBTFUL UNDER RULE 6EA R.W.S. 43D AS THE NPAS BEING LESS THAN 180 DAYS, THE ASSESSI NG OFFICER HAS ESTIMATED THE INCOME OF THE NPAS (WHICH ARE OF THE CATEGORY OF STICK ADVANCES) ON ACCRUAL BASIS (THE ASSESSING OFFICER HAS OBSERVED THAT NET INCREASE IN NPA TO THE EXTENT OF . 25.09 CRORE DURING THE YEAR SINCE THE ONLY LAST QUARTER NPA WOULD BE LESS THAN 6 MONTHS OLD, THE INTEREST ON ACCRUAL BASIS WOULD BE AROUND .41,81,667 ON THE AVERAGE NPA ADDITION FOR THE LAST QUARTER AT THE AVERAGE RATE OF 10% AS SHOWN IN THE ANNUAL RET URN. THUS THE ASSESSING OFFICER HAS MADE AN ADDITION U/S 43D AT .41,81,667. SINCE THE AUTHORISED REPRESENTATIVE OF THE APPELLANT HAS NEITHER FILED ANY DETAILS OF NPAS WHICH ARE MORE THAN 90 DAYS OLD WHICH ARE BAD AND DOUBTFUL DEBT AS STIPULATED UNDER RULE S 6EA R.W.S SEC. 43D BEFORE THE ASSESSING OFFICER NOR BEFORE THE UNDERSIGNED, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER NEED TO BE CONFIRMED AS NO DETAILS ARE AVAILABLE AS MENTIONED ABOVE. THE DISALLOWANCE MADE BY THE ASSESSING OFFICER ON ACCOUNT OF I NTEREST ON NPAS IS CONFIRMED. I.T.A.NOS.1638, 1639 & 1640/MDS/2014 & I.T.A.NOS.1707 TO 1711, 1869 & 1734/MDS/2014 12 2 1 . WE HAVE HEARD RIVAL CONTENTIONS AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. BASED ON THE DETAILS FURNISHED BY THE ASSESSEE, THE ASSESSING OFFICER WORKED OUT THE ACCRUED INTEREST AND MADE ADDITION UNDER SECTION 43D OF THE ACT TO THE TUNE OF .41,81,667/ - . THE LD. CIT(A) HAS OBSERVED THAT SINCE THE AR OF THE ASSESSEE COULD NOT FURNISH ANY DETAILS OF TYPE OF NPAS WHICH ARE MORE THAN 90 DAYS OF OLD NPAS BUT ARE NOT BAD AND DOUBTFUL DEBTS UNDER RULE 6EA R.W.S. 43D AS TH E NPAS BEING LESS THAN 180 DAYS , CONFIRMED THE DISALLOWANCE AS ESTIMATED BY THE ASSESSING OFFICER TO THE EXTENT OF .41,81,667/ - UNDER SECTION 43D OF THE ACT. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE , BY REFERRING TO PAGE NO. 138, RELIED ON THE DECISION IN THE CASE OF THE LAKSHMI VILAS BANK LTD. V. DCIT/ACIT IN I.T.A. NOS. 1401, 1402 &1403/MDS/2012 FOR THE A SSESSMENT Y EARS 2004 - 05, 2007 - 08 & 2008 - 09 VIDE ORDER DATED 22.03.2013, WHEREIN THE SIMILAR ISSUE WAS CONSIDERED AND THE TRIBUNAL REMITTED THE MATTER BACK TO THE ASSESSING OFFICER. ON SECOND ROUND OF LITIGATION, THE LD. CIT(A) VIDE HIS ORDER IN ITA NO. 284/11 - 12 & 193, 194, 195/13 - 14/CIT(A)/TRY DATED 25.10.2013 , BY FOLLOWING THE DECISION IN THE CASE OF UNITED COMMERCIAL BANK LTD. V. CIT 237 ITR 889 (SC ), WHEREIN, THE HON BLE SUPREME COURT HAS HELD THAT INTEREST TO A SUSPENSE ACCOUNT SHOULD NOT BE TAXED ON ACCRUAL BASIS , DELETED THE ADDITION IN RESPECT OF INTEREST ON NPAS. AGAINST THE ABOVE ORDER OF THE LD. CIT(A), THOUGH THE REVENUE HAS PREFERRED APP EALS FOR THE ASSESSMENT YEARS 2007 - 08 AND 2008 - 09, THE REVENUE, WHILE RAISING OTHER GROUNDS, HAS NOT I.T.A.NOS.1638, 1639 & 1640/MDS/2014 & I.T.A.NOS.1707 TO 1711, 1869 & 1734/MDS/2014 13 RAISED THE GROUND WITH REGARD TO THE DELETION OF ADDITION IN RESPECT OF INTEREST ON NPAS BY THE LD. CIT(A) . UNDER THE ABOVE FACTS AND CIRCUMSTANCES, WE DEL ETE THE ADDITION MADE ON ACCOUNT OF INTEREST ON NON - PERFORMING ASSETS. THUS, THE GROUND RAISED BY THE ASSESSEE IS ALLOWED. 22. THE NEXT ISSUE RAISED IN THE APPEAL OF THE ASSESSEE IS WITH REGARD TO DISALLOWANCE OF DEDUCTION UNDER SECTION 36(1)(VIII) OF T HE ACT. THE ASSESSEE BANK HAS ORIGINALLY CLAIMED A DEDUCTION OF .9,17,03,880/ - UNDER SECTION 36(1)(VIII) OF THE ACT AND VIDE THEIR LETTER DATED 19.12.2011 REVISING THE FIGURE TO .9.99,93,927/ - STATING THAT AN ITEM OF INTEREST RECEIVED UNDER INDUSTRIAL DEVELOPMENT LOAN WAS OMITTED TO BE CONSIDERED FOR THE PURPOSE. THE REVISED CLAIM OF THE ASSESSEE CAN BE CONSIDERED ONLY ON A REVISED RETURN, THE ASSESSING OFFICER HAS NOT ACCEPTED THE REVISED CLAIM IN VIEW OF THE RATIO LAID DOWN IN THE CASE OF GOETZE (INDIA) LTD. V. CIT 284 ITR 323. WITH REGARD TO THE ORIGINAL CLAIM OF D EDUCTION AT .9,17,03,880/ - , AFTER CONSIDERING DETAILS FURNISHED BY THE ASSESSEE AND AFTER VERIFYING THE ACCOUNTS, THE ASSESSING OFFICER DISALLOWED THE CLAIM OF DEDUCTION MADE UNDER SECTION 36(1)(VIII) OF THE ACT. 23. ON APPEAL, THE LD. CIT(A) CONFIRMED THE ORDER OF THE ASSESSING OFFICER. 24. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSED THE ORDERS OF AUTHORITIES BELOW. THE ASSESSEE HAS CLAIMED BENEFIT OF DEDUCTION UNDER SECTION 36(1)(VIII) OF THE ACT FOR THE FIRST TIME IN THE ASSESSMENT YEAR 2009 - I.T.A.NOS.1638, 1639 & 1640/MDS/2014 & I.T.A.NOS.1707 TO 1711, 1869 & 1734/MDS/2014 14 10. THIS RESERVE IS TO BE APPORTIONED FROM THE NET PROFIT ALONG WITH OTHER RESERVES AND IT IS A BELOW THE LINE OPERATION , I.E., AFTER ARRIVING NET PROFIT AND AT THE TIME OF APPORTIONING THE BALANCE OF PROFIT TO VARIOUS RESERVES. THE ASSESSING OFFICER HAS OBSERVED THAT THE ASSESSEE HAS NOT SEGREGATED THIS AMOUNT FROM THE GENERAL RESERVE IN 2009. THOUGH THE ASSESSEE HAS CLAIMED DEDUCTION, THE REQUIRED SPECIAL RESERVE WAS NOT CREATED AND FOUND IN THE BALANCE SHEET OF THE ASSESSEE AS ON 31.03.2009, BUT IN THE YEAR 201 0, IT HAD CREATED .10 CRORES RESERVE BY WITHDRAWING THE SAME FROM THE GENERAL RESERVE. SINCE THE ASSESSEE HAS NOT CREATED THE SPECIAL RESERVE IN THE FINANCIAL YEAR 2008 - 09 RELEVANT TO THE ASSESSMENT YEAR 2009 - 10, THE DEDUCTION CLAIMED BY THE ASSESSEE UNDE R SECTION 36(1)(V III) OF THE ACT WAS DISALLOWED AND THE LD. CIT(A) CONFIRMED THE DISALLOWANCE MADE ON THIS ACCOUNT. ADMITTEDLY, THOUGH THE ASSESSEE HAS FOR THE FIRST MADE A CLAIM FOR THE BENEFIT OF DEDUCTION UNDER SECTION 36(1)(VIII) OF THE ACT, IT IS A FA CT THAT THE ASSESSEE HAS NOT CREATED THE SPECIAL RESERVE IN THE FINANCIAL YEAR 2008 - 09 RELEVANT TO THE ASSESSMENT YEAR 2009 - 10. HOWEVER, THE ASSESSEE HAS CREATED THE AMOUNT OF .10 CRORES RESERVE BY WITHDRAWING THE SAME FROM THE GENERAL RESERVE IN THE YEAR 2010. 25. ON PERUSAL OF THE CALCULATION ADOPTED BY THE ASSESSEE BANK AS IN THE ORIGINAL CLAIM, THE OPERATING PROFIT WAS TOTAL INCOME MINUS TOTAL EXPENSES (EXCLUDING PROVISIONS & CONTINGENCIES). ACTUALLY, F OR THE PURPOSE OF ALLOWING I.T.A.NOS.1638, 1639 & 1640/MDS/2014 & I.T.A.NOS.1707 TO 1711, 1869 & 1734/MDS/2014 15 DEDUCTION UNDER TH IS SECTION, IT HAS TO BE CONSIDER ED WHETHER THE PROFITS DERIVED FROM BUSINESS OF PROVIDING LONG - TERM FINANCE COMPUTED UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION OR NOT . THE LONG - TERM FINANCE IS DEFINED UNDER CL AUSE (H) OF THE EXPLANATION TO SECTION 36(1)(VIII) AS PER WHICH, THE LONG - TERM FINANCE MEANS ANY LOAN OR ADVANCE WHERE THE TERMS UNDER WHICH MONEYS ARE LOANED OR ADVANCED PROVIDED FOR REPAYMENT ALONG WITH INTEREST THERE ON DURING THE PERIOD OF NOT LESS THAN FIVE YEARS. FROM THE ABOVE , IT IS CLEAR THAT PROFITS DERIVED FROM LONG - TERM FINANCE ONLY CAN BE CONSIDERED FOR THE PURPOSE OF ALLOWING DEDUCTION UNDER S ECTION 36(1)(VIII) OF THE ACT AND HENCE THESE RECEIPTS AS INTEREST ON DEPOSITS, LEASE RENTALS, CONSULTANCY AND OTHER PROFESSIONAL CHARGES, LEGAL FEES, GUARANTEE COMMISSION, APPRAISAL FEES, FINANCIAL CHANGES, INTEREST ON GUARANTEE COMMISSION AND MISCELLANEOUS INCOME, ETC., ARE NOT IN THE NATURE OF INCOME FROM LONG - TERM FINANCE AND HENCE THESE RECEIPTS CANNOT BE INCLUDED IN TOTAL INCOM E FOR THE PURPOSE OF COMPUTING DEDUCTION ALLOWABLE TO THE ASSESSEE UNDER S ECTION 36(1)(VIII) OF THE ACT. THESE RECEIPTS CAN BE ATTRIBUTED TO THE INCOME OF BUSINESS OF PROVIDING LONG - TERM FINANCE BUT IT CANNOT BE SAID THAT THESE ARE INCOME DERIVED FROM THE BUSINESS OF PROVIDING LONG - TERM FINANCE BECAUSE THE BUSINESS OF PROVIDING LONG - TERM FINANCES, CAN BE CARRIED OUT EVEN WITHOUT THESE ACTIVITIES SUCH AS CONSULTANCY , LEGAL SERVICE, APPRAISAL, ETC. , I N LEASING THERE IS NO FINANCE AND HENCE LEASE RENTAL IS NOT INCOME FROM PROVIDING LONG - TERM FINANCE. OTHER INTERESTS AND FINANCIAL CHARGES ARE NOT I.T.A.NOS.1638, 1639 & 1640/MDS/2014 & I.T.A.NOS.1707 TO 1711, 1869 & 1734/MDS/2014 16 SHOWN TO BE OUT OF PROVIDING LONG - TERM FINANCE AND HENCE NO T ELIGIBLE FOR DEDUCTION UNDER S ECTION 36(1)(VIII) OF THE ACT. 26. UNDER THE ABOVE FACTS AND CIRCUMSTANCES , WE SET ASIDE THE ORDER OF THE LD. CIT(A) ON THIS ISSUE AND DIRECT THE ASSESSING OFFICER TO DECIDE THE ISSUE AFRESH IN ACCORDANCE WITH LAW KEEPING IN VIEW OF THE RATIO LAID DOWN BY THE BANGALORE BENCHES OF THE TRIBUNAL IN THE CASE OF ACIT V. CORPORATION B ANK IN I.T.A. NO. 1264(BANG)2013 DATED 11.03.2015 AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESSEE. THUS, THE GROUND RAISED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. I.T.A.NOS.1707 TO 1711, 1869 & 1734/MDS/2014 [REVENUE S APPEALS] 27. IN ALL THE APPEALS FILED BY THE REVENUE FOR THE ASSESSMENT YEARS 1998 - 99,2002 - 03, 2004 - 05, 2006 - 07, 2009 - 10, 1991 - 92 AND 2001 - 02, WITH REGARD TO THE ISSUES REMITTED BACK TO THE FILE OF THE ASSESSING OFFICER AS ALLOWED FOR STATISTICAL PURPOSES BY THE LD. CIT (A), THE REVENUE HAS CHALLENGED THAT THE LD. CIT(A) CAN ONLY CONFIRM, REDUCE, ENHANCE OR ANNUL THE ASSESSMENT IN VIEW OF THE POWERS AS PER SECTION 252 OF THE ACT . BEFORE US, THE LD. DR HAS SUBMITTED THAT WITH EFFECT FROM 01.06.2001 VIDE FINANCE ACT, 2001, THE POWER OF LD. CIT(A) IN SETTING ASIDE THE ASSESSMENT AND REFER THE CASE BACK TO THE ASSESSING OFFICER FOR MAKING FRESH ASSESSMENT HAVE BEEN OMITTED AND THEREFORE, IT WAS PRAYED THAT ALL THE APPEALS MAY BE REMITTED BACK TO THE LD. CIT(A) TO DECIDE THE IS SUES AFRESH IN ACCORDANCE I.T.A.NOS.1638, 1639 & 1640/MDS/2014 & I.T.A.NOS.1707 TO 1711, 1869 & 1734/MDS/2014 17 WITH LAW. TO THE SUBMISSIONS OF THE LD. DR, THE LD. COUNSEL FOR THE ASSESSEE HAS FAIRLY CONCEDED THAT THE APPEALS MAY BE REMITTED BACK TO THE LD. CIT(A). 28. SINCE BOTH PARTIES HAVE AGREED THAT THE LD. CIT(A) HAS TO REDECIDE TH E ISSUES ALREADY REMITTED BACK TO THE FILE OF THE ASSESSING OFFICER FOR REDOING THE ASSESSMENT, WE SET ASIDE THE ORDER OF THE LD. CIT(A) ONLY TO THE EXTENT HE HAS REMITTED THE MATTER(S) BACK TO THE ASSESSING OFFICER TO DECIDE AFRESH, WE DIRECT THE LD. CIT( A) TO DECIDE THE ISSUES AFRESH IN ACCORDANCE WITH LAW AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESSEE FOR THE ASSESSMENT YEARS UNDER CONSIDERATION. THUS, ALL THE APPEALS FILED BY THE REVENUE ARE ALLOWED FOR STATISTICAL PURPOSES. 29. IN THE RESULT, THE APPEALS OF THE ASSESSEE IN I.T.A. NO. 1638/MDS/2014 IS DISMISSED, I.T.A. NO.1639/MDS/2014 IS PARTLY ALLOWED AND I.T.A. NO. 1640/MDS/2014 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES AND ALL THE APPEALS FILED BY THE REVENUE ARE ALLOWED FOR STATISTICAL PU RPOSES. ORDER PRONOUNCED ON THE 29 TH FEBRUARY , 201 6 AT CHENNAI. SD/ - SD/ - ( CHANDRA POOJARI ) ACCOUNTANT MEMBER ( DUVVURU RL REDDY ) JUDICIAL MEMBER CHENNAI, DATED, THE 29 . 0 2 .201 6 VM/ - I.T.A.NOS.1638, 1639 & 1640/MDS/2014 & I.T.A.NOS.1707 TO 1711, 1869 & 1734/MDS/2014 18 / COPY TO: 1. / APPELLANT , 2. / RESPONDENT , 3. ( ) / CIT(A) , 4. / CIT , 5. / DR & 6. / GF.