M/s. STATE BANK OF INDIA, MUMBAI V. JT. CIT. SPL. Rg. - 27, MUMBAI

ITA 3823/MUM/2005

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 3702 (ITAT-MUMBAI)
• Duration Of Justice: 10 year(s) 11 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-04-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 20-01-2016
• Assessment Year: 1997-1998
• Appeal Filed On: 19-05-2005
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RAJESHWAR YADAV
• Keywords: Depreciation; Earning of tax free income; Cost of acquisition; Bad and doubtful debts
• Section: 80HHC; 14A; 10

Judgement Text

3823-24/M/05-SBI 1 , INCOME-TAX APPELLATE TRIBUNAL -ABENCH MUMBAI , BEFORE S/SH.RAJENDRA,ACCOUNTANT MEMBER AND AMIT SHUKLA,JUDICIAL MEMBER ./ I.T.A. NO.3823-24/MUM/2005 / AY.S.1997-98, 1998-99 STATE BANK OF INDIA ACCOUNTS & COMPLIANCE DEPTT. CORPORATE CENTRE,MADAM CAMA ROAD MUMBAI-400 021. PAN:AAACS 8577 K VS. ADDL. CIT- RANGE-2(2) MUMBAI. ( /APPELLANT ) ( / RESPONDENT ) REVENUE BY: SHRI RAJESHWAR YADAV A SSESSEE BY: SHRI GIRISH DAVE / DATE OF HEARING :02.03.2016 / DATE OF PRONOUNCEMENT: 29.04.2016 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER BENCH: CHALLENGING THE ORDERS DATED 24.3.2005 AND 28.3.200 5 THE ASSSESSEE HAS FILED THE APPEALS FOR ABOVE MENTIONED TWO AY.S RAISING VARIOUS GROUNDS OF APPEAL. IT HAS ALSO FILED ADDITIONAL GROUNDS OF APPEAL FOR THE AY 1997-98.ASSESSEE,A PUB LIC SECTOR BANK IS ENGAGED IN THE BUSINESS OF BANKING.THE DETAILS OF FILING OF RETURN S, RETURNED INCOME ETC., FOR BOTH THE YEARS CAN BE SUMMARISED AS UNDER : A.Y. ROI FILED ON RETURNED INCOME(RS.) ASSESSMENT DT. ASSESSED INCOME(RS.) DT. OF ORDERS OF CIT(A) 1997-98 28.11.1997 2086,56,04,580/- 27.03.2000 2433 ,18,77,427/- 24.3.2005 1998-99 30.11.1998 2816,41,01,920/- 14.02.2001 35 58,87,03,620/- 28.3.2005 3823/MUM/05(97-98): 2. FIRST GROUND OF APPEAL IS ABOUT GUEST HOUSE EXPENSE S, AMOUNTING TO RS.1.19 CRORES.DURING THE COURSE OF HEARING BEFORE US,THE AUTHORISED REPR ESENTATIVE(AR)FAIRLY CONCEDED THAT IDENTICAL ISSUE HAS BEEN DECIDED BY THE TRIBUNAL AG AINST THE ASSESSEE IN THE EARLIER YEARS.WE FIND THAT WHILE DECIDING THE APPEAL FOR THE AY 1996 -97 THE TRIBUNAL HAS HELD AS UNDER : 7. GROUND NO. 3 IS REGARDING GUEST HOUSE EXPENSES . WE HAVE HEARD THE LD. AR AS WELL AS LD. DR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. WE FIND THAT AN IDENTICAL ISSUE HAS BEEN CONSIDERED AND DECIDED BY THIS TRIBUNAL IN ASSESSEE S OWN CASE FOR THE ASSESSMENT YEAR 1991- 92 VIDE ORDER DATED 19.5.2008 IN PARA 21 AS UNDER: 21. THE NEXT ISSUE IS REGARDING GUEST HOUSE EXPENS ES AND DEPRECIATION THEREON. AT THE TIME OF HEARING, THE LEARNED AUTHORISED REPRESENTATIVE O F THE ASSESSEE HAS SUBMITTED THAT THE ISSUE WAS DECIDED AGAINST THE ASSESSEE BY THE JUDGM ENT OF HONBLE SUPREME COURT IN THE 3823-24/M/05-SBI 2 CASE OF BRITANNIA INDUSTRIES LTD. VS CIT, REPORTED IN 278 ITR 546 (SC). ACCORDINGLY, WE ARE NOT INCLINED TO INTERFERE WITH THE FINDINGS OF THE CIT(A). THE SAME IS UPHELD. FOLLOWING THE EARLIER ORDER OF THIS TRIBUNAL WE DEC IDE THIS ISSUE AGAINST THE ASSESSEE AND IN FAVOUR OF THE REVENUE. ACCORDINGLY THE ORDER OF CIT (A) QUA THIS ISSUE IS UPHELD. RESPECTFULLY,FOLLOWING THE ABOVE,GROUND NO.1 IS DEC IDED AGAINST THE ASSESSEE . 2. NEXT GROUND IS ABOUT INTEREST CREDITED TO INTEREST SUSPENSE ACCOUNT TAXED IN EARLIER YEARS. DURING THE COURSE OF HEARING BEFORE US, REPRESENTAT IVES OF BOTH THE SIDES CONCEDED THAT ISSUE STANDS DECIDED IN FAVOUR OF THE ASSESSEE SUBJECT TO VERIFICATION BY THE AO WITH RESPECT TO THE EARLIER YEARS. 19. AT THE TIME OF HEARING BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE ADDITION MADE BY THE A.O. ON ACCOUNT OF INTERES T CREDITED TO INTEREST SUSPENSE ACCOUNT IN EARLIER YEARS AMOUNTING TO RS.54,50,93,051/- HAS A LREADY BEEN DELETED BY THE TRIBUNAL BY ALLOWING THE APPEALS OF THE ASSESSEE ON THIS ISSUE. HE HAS CONTENDED THAT THIS MATTER THUS HAD BECOME VIRTUALLY INFRUCTUOS AND THE ASSESSEE IS NOT INTERESTED IN PRESSING THE SAME.HE HAS CONTENDED THAT THIS CONCESSION, HOWEVER, IS SUBJECT TO THE RIDER THAT IF THE ORDER OF THE TRIBUNAL FOR EARLIER YEARS ALLOWING THE DEDUCTION IS REVERSE D BY THE HON'BLE HIGH COURT, THE ASSESSEE SHALL BE AT LIBERTY TO REVERT HIS CLAIM. THIS GROUN D OF THE ASSESSEES APPEAL IS ACCORDINGLY DISMISSED AS NOT PRESSED AFTER TAKING NOTE THE SUBM ISSIONS MADE BY THE LEARNED COUNSEL FOR THE ASSESSEE. 20. AS REGARDS GROUND NO.10 CHALLENGING THE ACTION OF THE LD. COMMISSIONER OF INCOME TAX(APPEALS) IN SETTING ASIDE THE ISSUE REGARDING D EDUCTION FOR PROVISION ON ACCOUNT OF BAD AND DOUBTFUL DEBTS, THE LEARNED COUNSEL FOR THE ASSESSE E HAS SUBMITTED THAT THE COD HAS NOT GIVEN ITS APPROVAL FOR PURSUING THIS GROUND. ACCORDINGLY, THIS GROUND IS DISMISSED FOR WANT OF COD APPROVAL. FOLLOWING THE ABOVE,WE DIRECT THE AO TO CARRYOUT VE RIFICATION AND ALLOW THE CLAIM IF FOUND CORRECT.GROUND NO.2 IS ALLOWED IN FAVOUR OF THE ASS ESSEE,IN PART. 3. THIRD GROUND IS ABOUT DISALLOWANCE OF RS.26,44,876/ - IN RESPECT OF PAYMENT FOR SCIENTIFIC RESEARCH.DURING THE ASSESSMENT PROCEEDINGS,THE AO F OUND THAT PAYMENT OF RS.26,44,876/- HAD BEEN MADE OUT OF A FUND ESTABLISHED BY THE ASSE SSEE FOR SCIENTIFIC RESEARCH ASSISTANCE, THAT THE FUND WAS SET UP OUT OF SURPLUS FUND IN EARLIER YEARS, THAT THE PAYMENT WAS NOT OUT OF THE INCOME OF THE YEAR UNDER CONSIDERATION.FOLLOWING TH E EARLIER YEARS ORDER THE AO DISALLOWED THE CLAIM. 3823-24/M/05-SBI 3 3.1. AGGRIEVED BY THE ORDER OF THE AO THE ASSESSEE PREFE RRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY(FAA).AFTER CONSIDERING THE SUBM ISSION OF THE ASSESSEE AND THE ASSESS - MENT ORDER HE HELD THAT HIS PREDECESSOR DISALLOWED THE CLAIM MADE BY THE ASSESSEE WHILE DECIDING THE APPEAL FOR AY 1996-97. FOLLOWING THE O RDER OF HIS PREDECESSOR FOR THE EARLIER YEAR HE UPHELD THE ORDER OF THE AO. 3.2. DURING THE COURSE OF HEARING BEFORE US,THE AR AGREE D THAT ASSESSEE HAD NOT CHALLENGED THE ORDER FOR THE YEAR 1996-97 BEFORE THE TRIBUNAL. AS THE ASSESSEE HAD ACCEPTED THE ORDER OF THE FAA FOR THE EARLIER YEAR, WE ARE OF THE OPINION THA T THERE IS NO NEED TO DISTURB THE ORDER OF THE CIT(A) FOR THE CURRENT YEAR AS FACTS FOR BOTH THE YEARS ARE IDENTICAL- EXCEPT THAT THE AMOUNTS INVOLVED ARE DIFFERENT.CONFIRMING THE ORDER OF THE FAA GROUND NO.3 IS DECIDED AGAINST THE ASSESSEE. 4. FOURTH GROUND DEALS WITH EXEMPTION U/S. 10(15)(IV)( H) OF THE ACT.DURING THE ASSESSMENT PROCEEDINGS THE AO FOUND THAT THE ASSESSEE HAD CLAI MED ENTIRE INTEREST RECEIVED ON TAX FREE SECURITIES AMOUNTING TO RS.70.95 CRORES, EXEMPT U/S . 10(15)(IV)(H).HE HELD THAT EXPRESSION INCOME MEANT NET INCOME I.E. RECEIPT MINUS EXPE NDITURE.HE REFERRED TO CIRCULAR NO.780,DT.4.11.1997 OF THE CBDT DEALING WITH SECTIO N 10(23)(G) OF THE ACT AND OBSERVED THAT THE WORD INTEREST MENTIONED IN SECTION 10(15) WAS USED BECAUSE IT TALKED ABOUT AMOUNT PAYABLE BY THE PAYER IN WHOSE HANDS IT WAS AN EXPEN DITURE, THAT IF THE ASSESSEE WAS ALLOWED AN EXEMPTION WITH REGARD TO GROSS INTEREST RECEIVED BY IT, IT WOULD AMOUNT TO ALLOWING EXPENDITURE TWICE.HE DISALLOWED THE EXPENDITURE OF RS.45.51 CRORES. 4.1. AGGRIEVED BY THE ORDER OF THE AO THE ASSESSEE PREF ERRED AN APPEAL BEFORE THE FAA AND MADE ELABORATE SUBMISSIONS RELYING UPON VARIOUS CAS E LAWS.AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE AND THE ASSESSMENT ORDER THE FAA REFERRED TO THE PROVISIONS OF SECTION 14A OF THE ACT AND HELD THAT THE ASSESSEE BORROWED FUND S BY PAYING INTEREST AND GAVE ADVANCES AND INVESTED FUNDS FOR EARNING INTEREST/DIVIDENDS BY CLAIMING GROSS RECEIPTS EXEMPT FROM TAX AND CLAIMING THE ENTIRE COST OF BORROWING FROM BUSI NESS INCOME IT WAS CLAIMING DOUBLE DEDUCTION, THAT THE EXPENSES INCURRED FOR EARNING T HE TAX FREE INCOME WHICH HAD BEEN CLAIMED AGAINST TAXABLE INCOME SHOULD BE EXCLUDED FROM THE COMPUTATION OF TAXABLE INCOME, THAT IT WOULD BE ALLOCATED AGAINST TAX FREE INCOME, THAT WO ULD RESULT IN DEDUCTION OF CLAIM U/S. 10 OF THE ACT,THAT THE ASSESSEE HAD EARNED INTEREST OF RS .7.85 CRORES THAT WAS NOT ADDED IN TOTAL INCOME AS PER PROVISIONS OF SECTION 10(15) OF THE A CT, THAT ANY EXPENDITURE INCURRED IN RELATION TO THE SAID INCOME COULD NOT BE ALLOWED AS DEDUCTION.THE FAA HAD DIRECTED THE ASSESSEE TO PROVE THAT BORROWED FUNDS WERE NOT USED FOR MAKING INVESTMENT YIELDING TAX FREE 3823-24/M/05-SBI 4 INCOME.HOWEVER, VIDE ORDER SHEET ENTRY DT.21.3.2004 THE ASSESSEE STATED THAT IT DID NOT MAINTAIN SEPARATE ACCOUNTS FOR TAX FREE AND TAXABLE INCOME AND THAT IT WAS NOT POSSIBLE TO CORRELATE THE INVESTMENT WITH THE OWN FUNDS.THE FAA AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE HELD THAT ONUS WAS ON THE ASSESSEE TO SHO W THAT THE BORROWED FUNDS HAD NOT BEEN UTILISED OR THAT EXPENSES HAD NOT BEEN INCURRED IN RELATION TO EXEMPT INCOME, THAT THE ACCOUNTS OF THE BUSINESS WERE MAINTAINED BY IT, IT WAS THE D UTY OF THE ASSESSEE TO PROVIDE NECESSARY DETAILS,THAT IT WOULD BE REASONABLE TO ASSUME THAT INVESTMENT IN TAX FREE SECURITIES/BONDS ETC. HAD BEEN MADE OUT OF ASSESSEE S OWN FUNDS AS WELL AS FROM BORROWED FUNDS, THAT THE METHOD ADOPTED BY THE AO TO WORK OUT THE ALLOCABLE EXPEND ITURE WAS QUITE REASONABLE.FINALLY, HE HELD THAT THE AO WAS JUSTIFIED IN ALLOWING EXEMPTIO N FOR INTEREST INCOME OF RS.70.95 CRORES ON NET BASIS. 4.2. DURING THE COURSE OF HEARING BEFORE US, THE AR STAT ED THAT WHILE DECIDING THE APPEALS FOR AY 1996-97 THE TRIBUNAL HAD HELD THAT GROSS AMOUNT OF INTEREST WAS EXEMPT U/S. 10(15)(IV), THAT THE TRIBUNAL HAD WHILE DEALING WITH THE DEDUCT ION U/S. 80M, HELD THAT 1% OF THE DIVIDEND HAD TO BE TREATED AS INCOME FOR EARNING DIVIDEND IN COME IN THE ORDERS PASSED FOR THE AY.S.1982-83 AND 1983-84, THAT THE METHOD OF ALLOCA TION OF INTEREST EXPENDITURE WAS ILLOGICAL, THAT THE PROVISIONS OF SECTION 14A WERE APPLICABLE ONLY WHEN EXPENDITURE WAS ACTUALLY INCURRED, THAT THE ASSESSEE WOULD INVEST I N TAX FREE SECURITIES TO COMPLY SLR REQUIREMENT LAID DOWN BY THE RBI, THAT THE ASSESSEE HAD OWN FUNDS OF MORE THAN RS.30,000 CRORES, THAT NON-INTEREST BEARING FUNDS FAR EXCEEDE D THE INVESTMENT.HE RELIED UPON THE CASES OF AMERICAN EXPRESS BANK LTD.(55SOT136),CENTRAL BAN K OF INDIA (264ITR522), GODREJ AGROVT(ITA 1629/MUM/09),STATE BANK OF TRAVANCORE (3 18 ITR(AT)-171);HDFC BANK (ITA /330OF 2012 OF HONBLE BOMBAY HC),TINBOX COMPANY(26 0ITR637) AND UTI BANK LTD. (32 TAXMANN. COM 370).HE REFERRED TO ANNEXURE TO THE RE TURN OF INCOME AND THE SUBMISSIONS MADE BEFORE THE AO AND THE FAA.THE DR SUPPORTED THE ORDER OF THE FAA. 4.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE AO HAD ALLOWED EXPENDITURE TO THE EXTENT OF RS.25.4 3 CRORES AND HAD DISALLOWED EXPENDITURE OF RS.45.51CRORES ON PROPORTIONATE BASIS, THAT THE FAA DIRECTED THE ASSESSEE TO FURNISH DETAILS TO PROVE THAT BORROWED FUNDS WERE NOT USED FOR MAKING INVESTMENT YIELDING EXEMPT INCOME, THAT THE ASSESSEE HAD ADMITTED THAT IT WAS NOT POSSIBLE TO CO-RELATE THE INVESTMENT WITH OWN FUNDS, THE ASSESSEE HAD CLAIMED THAT ITS O WN FUNDS INCLUDING RESERVES AND SURPLUSES WERE ABOUT RS.30,000 CRORES FOR THE YEAR UNDER CONS IDERATION. THE AO HAD APPLIED THE PROVISIONS OF SECTION 14A OF THE ACT.IN OUR OPINION LAW RELATING TO ALLOWING EXPENDITURE WITH REGARD TO EXEMPT INCOME HAS EVOLVED SINCE THE APPEA L WAS DECIDED BY THE FAA FOR THE YEAR 3823-24/M/05-SBI 5 UNDER CONSIDERATION. THE AO/FAA DID NOT HAVE THE BE NEFIT OF THE CASES DEALING WITH THE PROVISIONS OF SECTION 14A, WHILE MAKING THE ASSESSM ENT /DECIDING THE APPEAL.WE ARE OF THE OPINION, THAT MATTER NEEDS FURTHER VERIFICATION/INV ESTIGATION. THEREFORE, IN THE INTEREST OF JUSTICE WE ARE RESTORING BACK THE ISSUE THE FILE OF THE AO FOR FRESH ADJUDICATION.HE IS DIRECTED TO AFFORD REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE .GROUND NO.4 IS DECIDED IN FAVOUR OF THE ASSESSEE IN PART. 5. GROUND NO.5 IS ABOUT REDUCTION U/S.80M OF THE ACT. DEALING WITH THE CLAIM MADE BY THE ASSESSEE U/S.80M OF THE ACT,THE AO ALLOWED A SUM OF RS.14.04 CRORES,AS AGAINST RS.39.16 CRORES.THE ASSESSEE HAD CLAIMED DEDUCTION OF RS. 3 9,16,45,149 @ 60% OF THE GROSS DIVIDEND (RS.65.27 CRORES).THE ASSESSEE PREFERRED AN APPEAL BEFORE THE FAA AND STATED THAT THE TRIBUNAL HAD,WHILE DECIDING THE APPEAL FOR THE AY.S 1982-83 AND 1983-84 HELD THAT 1% OF THE DIVIDEND SHALL BE TREATED AS EXPENDITURE INCURRED F OR EARNING DIVIDEND INCOME.AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE AND THE ASSTESSMENT ORDER THE FAA HELD THAT THE TRIBUNAL HAD IN THE EARLIER YEARS HELD THAT ONLY ON E PERCENT OF DIVIDEND INCOME SHOULD BE TREATED AS EXPENDITURE INCURRED FOR EARNING DIVIDEN D INCOME.FOLLOWING THE ORDER OF THE TRIBUNAL,HE HELD THAT IN RESPECT OF DIVIDEND ON SHA RES, PURCHASED PRIOR TO 31.3.96 THE AO SHOULD ALLOCATE ONLY 1% OF DIVIDEND INCOME AS EXPEN DITURE AND COMPUTE THE DEDUCTION U/S. 80M ON THE RESULTANT NET DIVIDEND INCOME.AS REGARDS DIVIDEND EARNED ON SHARES PURCHASED ON OR AFTER 1.4.96,HE HELD THAT AO WAS JUSTIFIED IN AL LOCATING PROPORTIONATE EXPENSES TOWARDS EARNING OF DIVIDEND INCOME.HOWEVER, HE STATED THAT HE WAS NOT IN AGREEMENT WITH THE METHOD ADOPTED BY THE AO FOR COMPUTING DISALLOWANCE, THAT THE INTEREST AND OTHER EXPENSES COULD NOT BE ESTIMATED TO BE A PERCENTAGE OF DIVIDEND INCOME, THAT THE INTEREST EXPENSE SHOULD BE ALLOCATED ON THE BASIS OF FUNDS UTILISED FOR INVEST MENT IN SHARES.THE FAA REFERRED TO THE DISCUSSION HELD WITH REGARD TO THE EXPENDITURE INCU RRED FOR EARNING TAX FREE EXEMPT INCOME.HE HELD THAT THE ASSESSEE HAD NOT PROVED TH AT BORROWED FUNDS WERE NOT USED FOR THE PURPOSE OF INVESTMENT, THAT IT WOULD BE REASONABLE TO ASSUME THAT THE INVESTMENT IN SHARES HAD BEEN MADE OUT OF OWN FUNDS AS WELL AS BORROWED FUNDS.FINALLY, HE DIRECTED THE AO TO ALLOCATE INTEREST EXPENDITURE TOWARDS INVESTMENTS I N SHARES IN RATIO OF OWN FUNDS AND BORROWED FUNDS AS ON 31.3.1997 AND APPLIED AVERAGE RATE OF BORROWINGS ON THAT PART OF INVESTMENT IN SHARES IN THE YEAR UNDER CONSIDERATIO N WHICH WAS FUNDED THROUGH BORROWINGS. 5.1. BEFORE US, THE AR STATED THAT ARGUMENTS ADVANCED FO R GR.NO.4 WERE APPLICABLE TO THIS GROUND ALSO,THAT DEDUCTION HAD TO BE ALLOWED ON GRO SS.HE RELIED UPON THE CASE OF MODERN TERRY TOWELS LTD. (357ITR750).THE DR SUPPORTED THE ORDER OF THE FAA. 3823-24/M/05-SBI 6 WE FIND THAT THE ISSUE STANDS DECIDED IN FAVOUR OF THE ASSESSEE BY THE ABOVE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT WHICH READS AS UNDER: THE PROVISIONS OF SECTION 80HHC OF THE INCOME-TAX A CT, 1961, ARE ENTIRELY DIFFERENT FROM THOSE OF SECTIONS 80M AND 80AA.THERE IS NO BAS IS FOR IMPORTING THE PROVISIONS OF SECTION 80HHC FOR INTERPRETING SECTION 80M.THAT WOULD NOT LEAD TO A SATISFACTORY COMPUTATION OF THE NET DIVIDEND UNDER SECTION 80M. THE TRIBUNAL WAS JUSTIFIED IN LAW IN ALLOWING SPECIAL DEDUCTION UNDER SECTION 80M IN RESPECT OF GROSS DIVIDEND WITHOUT DEDUCTING ESTIMATED EXPENSES THEREFROM. 6. NEXT GROUND OF APPEAL IS ABOUT DISALLOWANCE OF DEPR ECIATION OF RS.61.75 CRORES ON LEASED ASSETS.DURING THE COURSE OF HEARING BEFORE US,THE A R FAIRLY CONCEDED THAT IDENTICAL ISSUE HAS BEEN DECIDED AGAINST THE ASSESSEE BY THE TRIBUNAL. WHILE ADJUDICATING APPEAL FOR AY.1996-97 DT.26.7.13 IN ITA NO.5470/MUM/2002 THE TRIBUNAL HE LD AS UNDER : 15.GROUND NO. 8 IS REGARDING DEPRECIATION ON LEASE ASSETS GIVEN TO KONKAN RAILWAY CORPORATION LTD. THE ASSESSEE HAS ENTERED INTO AN AGREEMENT DATED 30 .3.1996 WITH KONKAN RAILWAY CORPORATION LTD. FOR LEASING TRANSACTION WITH RESPECT TO THE ASSET O F RS. 25,00,00,000/-. THE ASSETS HAVE BEEN CATEGORISED AS PLANT AND MACHINERY IN THE SHAPE OF RAILWAY TRACKS COMPRISING OF RAILS, SLEEPERS AND ASSOCIATED FITTING. THE ASSESSEE CLAIMED DEPRECIATI ON ON THESE ASSETS AT THE RATE OF 12.5% AS USED FOR LESS THAN 180 DAYS. THE ASSETS IN QUESTION WERE ORI GINALLY ACQUIRED BY KONKAN RAILWAY CORPORATION LTD. AND THEREAFTER TO ARRANGE THE FUNDS THE SAME W ERE SOLD TO THE ASSESSEE BANK AND TAKEN BACK ON LEASE FOR A PERIOD OF 84 MONTHS AGAINST THE LEASE R ENTAL PAYABLE AT MONTHLY INSTALMENT. THE ASSESSING OFFICER HELD THAT THE TRANSACTION IS IN THE NATURE OF LOAN OR FINANCIAL ASSISTANCE PROVIDED TO THE KONKAN RAILWAY CORPORATION LTD. (KRCL) BY THE ASSES SEE BANK. THE TRANSACTION HAS BEEN GIVEN THE SHAPE OF LEASE TRANSACTION ONLY IN ORDER TO ENABLE THE BANK TO CLAIM DEPRECIATION AND REDUCE ITS TAXABLE INCOME. ACCORDINGLY, THE AO HELD THAT THE S ALE AND LEASE BACK TRANSACTION IS IN THE NATURE OF FINANCIAL TRANSACTION, THEREFORE, THE CLAIM OF DEPR ECIATION WAS DISALLOWED. ON APPEAL, THE CIT(A) CONFIRM THE ACTION OF THE AO AND HELD THAT THE SO-C ALLED LEASE AGREEMENT IS ONLY A FINANCE LEASE ON WHICH THE DEPRECIATION CAN BE ALLOWED TO A PERSON W HO VESTS THE DOMINION OVER THE PROPERTY/ASSET, WHO IS ENTITLED TO USE IT IN HIS OWN RIGHT AND USIN G THE SAME FOR THE PURPOSE OF HIS BUSINESS OR PROFESSION. THE CIT(A) HAS OBSERVED THAT IN THE PRE SENT CASE THE LESSEE RETAINED THE ASSET IN ITS OWN DOMINION AT THE EXCLUSION OF OTHERS INCLUDING THE A SSESSEE BECAUSE THE LESSEE HAS CONSTRUCTED THE EQUIPMENTS AND USES IT AS INTEGRAL PART OF RAILWAY SYSTEM. IN ORDER TO GET FINANCE KRCL MADE AN ARRANGEMENT TO ISSUE A SALE INVOICE BUT RETAINED TH E ASSET FOR ITSELF. HOWEVER, THE CIT(A) WHILE CONFIRMING THE DISALLOWANCE OF DEPRECIATION DIRECTE D THE AO TO EXCLUDE THE CAPITAL RECOVERY COMPONENT FROM THE LEASE RENTALS ASSESSED TO TAX. 3823-24/M/05-SBI 7 XXXXXXXXXXXXXX 20. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WEL L AS RELEVANT MATERIAL ON RECORD. THE ASSESSEE HAS CLAIMED THAT AS PER THE LEASE AGREEMENT THE ASS ESSEE HAS ENTERED INTO AN OPERATING LEASE OF THE ASSET IN QUESTION. IN ORDER TO DETERMINE THE REAL N ATURE OF TRANSACTION AND ARRANGEMENT BETWEEN THE PARTIES, THE SUBSTANCE OF THE DOCUMENT INTENTION OF THE PARTIES AND SURROUNDINGS CIRCUMSTANCES UNDER WHICH THE PARTIES HAVE ENTERED INTO THE TRANSACTION ARE MATERIAL AND RELEVANT TO BE CONSIDERED. THEREFORE, MERE NOMENCLATURE WORDS USED IN THE AGRE EMENT CANNOT BE LOOKED INTO IN ISOLATION OF THE SUBSTANCE OF THE DOCUMENT, THE REAL INTENTIONS OF T HE PARTIES AND THE SURROUNDINGS CIRCUMSTANCES UNDER WHICH THE TRANSACTION TOOK PLACE. UNDISPUTEDL Y IN THE CASE IN HAND THE ASSET IN QUESTION IS THE RAILWAY TRACK WHICH IS ALREADY OWNED BY THE LESSEE KONKAN RAILWAY CORPORATION LTD. (KRCL) BUT BECAUSE OF THE REQUIREMENT OF FUNDS THE KRCL DECIDE D TO RAISE THE FUNDS BY MAKING THE ARRANGEMENT OF SALE AND LEASE BACK OF THE ASSET. THUS, THE REAL OBJECT AS FAR AS KRCL IS CONCERNED FOR ENTERING IN TO THE TRANSACTION OF SALE AND LEASE BACK IS TO RAISE/ ARRANGE THE FUNDS. THE TWO TRANSACTION OF SALE OF T HE ASSET IN QUESTION TO THE ASSESSEE BANK AND LEASE BA CK CANNOT BE SEPARATED AS THERE WAS NO CHOICE WITH EITHER OF THE PARTY TO RESTRICT THE TRANSACTION OF SALE ALONE INDEPENDENTLY BECAUSE IT WAS NEITHER POSSIBLE NOR PERMISSIBLE TO SELL OUT THE ASSET IN Q UESTION BY THE KONKAN RAILWAY CORPORATION BEING THE INTEGRAL PART OF THEIR RAILWAY SYSTEM WHICH IS THE VERY BASIS OF THE EXISTENCE OF THE KRCL. THUS, WE HAVE NOT DOUBT THAT THE SALE TRANSACTION IN QUESTIO N IS MERELY ON PAPER AND TO FACILITATE THE FINANCIA L ARRANGEMENT BY THE ASSESSEE TO THE KRCL WITHOUT INV OLVING ANY REAL INTENTION OF TRANSFER OF THE ASSET IN QUESTION. EVEN OTHERWISE THE TRANSFER OF ASSET I N QUESTION IS IMPOSSIBLE IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND THEREFORE IT WAS NOT THE REAL INTENTION OF THE PARTIES EVEN REFLECTED FR OM THE LEASE AGREEMENT. SOME OF THE RELEVANT CLAUSES O F THE AGREEMENT ARE AS UNDER: 1.5 THE ACQUISITION COST OF THE EQUIPMENT SHALL B E THE INVOICE VALUE OF THE EQUIPMENT INCLUSIVE OF LEVIES ON IMPORTANT OF T HE EQUIPMENT, CUSTOMS DUTY, CENTRAL EXCISE DUTY, SALES TAX, ADDITIONAL TA X, SURCHARGE ON SALES TAX, INTEREST TAX, WHERE APPLICABLE, TURNOVER TAX, WHERE PAYABLE AND ALL OTHER COSTS AND EXPENSES, AS THE CASE MAY BE SUCH A S FREIGHT, OCTROI, ENTRY TAX, ERECTION AND INSTALLATION \CHARGES, COMMISSION ING CHARGES, TESTING CHARGES PAID OR PAYABLE IN RESPECT OF THE EQUIPMENT OR VALUE ASSESSED BY THE VALUERS AS PER CLAUSE 2.2. BELOW WHICHEVER IS L OWER. IN CASE THE LESSEE PROPOSES TO AVAIL MODVAT ON THE SPECIFIED EXCISE DU TY PAID IN TERMS OF THE CENTRAL EXCISE RULES, 1944, OF WHICH DUE INTIMA TION WILL BE GIVEN BY THE LESSEE TO THE LESSOR, THE ACQUISITION COST WILL NOT INCLUDE EXCISE DUTY PAYABLE ON THE EQUIPMENT. 1.6 THE LESSEE HEREBY TAKES ON LEASE THE EQUIPMENT FOR THE FIXED PERIOD FROM THE COMMENCEMENT DATE AS HEREINAFTER REFERRED TO SUBJECT TO THE TERMS, CONDITIONS, COVENANTS AND STIPULATIONS CONTAINED HE REIN AND IN THE SCHEDULES 3823-24/M/05-SBI 8 HERETO. THE FIXED PERIOD OR THE PRIMARY PERIOD OF T HE LEASE AS DEFINED IN PART II OF THE FIRST SCHEDULE HERETO IS NON-CANCELL ABLE BY THE LESSEE AND/OR THE LESSOR EXCEPT AS PROVIDED IN CLAUSE 13 HEREOF. THE FIXED PERIOD OF THE LEASE MAY BE RENEWED FOR A FURTHER FIXED TERM REFER RED TO AS THE SECONDARY PERIOD AT THE OPTION OF THE LESSEE ON THE SAME TER MS AND CONDITIONS AS ARE CONTAINED IN THIS AGREEMENT SUBJECT TO PAYMENT BY T HE LESSEE OF LEASE RENTALS IN ADVANCE AS STIPULATED IN PART II OF THE FIRST SCHEDULE HERETO. 5. INSURANCE IT IS AGREED BY AND BETWEEN THE PARTIE S HERETO THAT THE LESSEE SHALL, FOR AND ON BEHALF OF THE LESSOR. 5.1 TAKE OUT INSURANCE ON THE EQUIPMENT AGAINST LOS S IN TRANSIT, ERECTION AND INSTALLATION RISKS, MARITIME RISKS, WHERE NECESSARY PRIOR TO THE DESPATCH OF THE EQUIPMENT, OR ALTERNATIVELY TO ENSURE THAT THE INSURANCE ON THE EQUIPMENT IN RESPECT OF THE SAID RISKS IS EFFECTED BY THE MANUFACTURER/SUPPLIER BEFORE DELIVERY OF THE EQUIPM ENT. 5.2 IMMEDIATELY AFTER THE DELIVERY OF THE EQUIPMENT , INSURE THE EQUIPMENT AND KEEP THE SAME INSURED THROUGHOUT THE TERM OF TH IS AGREEMENT AGAINST LOSS OR DAMAGE BY ACCIDENT, LIGHTING, FIRE, FLOOD, STORM, EARTHQUAKE, TEMPEST, FALLING AIRCRAFT, MALICIOUS DAMAGE, RIOT, STRIKE, C IVIL COMMOTION, EXPLOSION, IMPLOSION AND WHERE NECESSARY AGAINST THIRD PARTY C LAIMS IN RESPECT OF EQUIPMENT USED IN HAZARDOUS INDUSTRIES AND THOSE RE QUIRING ENVIRONMENTAL PROTECTION AS ALSO FOR OTHER RISKS USUALLY COVERED BY INSURANCE IN THE TYPE OF BUSINESS FOR WHICH THE EQUIPMENT IS FOR THE TIME BE ING USED TO THE SATISFACTION OF THE LESSOR UPTO THE FULL REPLACEMEN T VALUE THEREOF UNDER A COMPREHENSIVE POLICY OF INSURANCE, IN THE JOINT NAM ES OF THE LESSOR AND THE LESSEE WITH AN ENDORSEMENT SHOWING THE LESSOR AS TH E OWNER AND LOSS PAYEE. 8. LESSORS INTEREST AND TITLE: THE LESSEE AGREES AND UNDERTAKES THAT IT WILL- 8.1 ENSURE THAT IN SO FAR AS THE EQUIPMENT IS INSTA LLED IN OR AFFIXED TO ANY LAND OR BUILDING, SUCH EQUIPMENT SHALL BE CAPABLE O F BEING REMOVED WITHOUT MATERIAL INJURY TO THE SAID LAND OR BUILDING AND TH AT ALL SUCH STEPS SHALL BE TAKEN AS ARE NECESSARY TO PREVENT TITLE TO THE EQUI PMENT FROM PASSION TO THE OWNER/LESSOR/OCCUPIER OF THE SAID LAND OR BUILDING: 8.2 KEEP THE EQUIPMENT AT ALL TIMES IN THE POSSESS ION AND CONTROL OF THE LESSEE AT THE LESSEES FACTORY OR PREMISES AS INDIC ATED IN THE PROPOSAL AND AT THE ADDRESS AS SPECIFIED IN PART II OF THE FIRST SCHEDULE HERETO AND NOT 3823-24/M/05-SBI 9 REMOVE THE SAME FROM THE PLACE SO SPECIFIED WHERE I T IS INSTALLED WITHOUT THE CONSENT IN WRITING OF THE LESSOR: 8.3 NOTIFY THE LESSOR OF ANY CHANGE IN THE LESSEE S ADDRESS AND UPON REQUEST BY THE LESSOR PROMPTLY INFORM THE LESSOR OF THE WHEREABOUTS OF THE EQUIPMENT: 8.4 NOT DO OR OMIT TO DO ANY ACT WHICH MAY RESULT I N SEIZURE AND/OR CONFISCATION OF THE EQUIPMENT BY THE CENTRAL OR STA TE GOVERNMENT OR LOCAL AUTHORITY OR ANY PUBLIC OFFICER OR AUTHORITY UNDER ANY LAW FOR THE TIME BEING IN FORCE: 8.5 NOT SELL, ASSIGN, SUB-LET, PLEDGE, MORTGAGE, CH ARGE, ENCUMBER, OR PART WITH POSSESSION OF OR OTHERWISE DEAL WITH THE EQUIP MENT OR ANY INTEREST THEREIN NOR CREATE OR ALLOW TO BE CREATED ANY LIEN ON THE EQUIPMENT WHETHER FOR REPAIRS OR OTHERWISE AND IN THE EVENT OF ANY BR EACH OF THIS SUB-CLAUSE BY THE LESSEE, THE LESSOR SHALL BE ENTITLED TO CALL UP ON THE LESSEE TO HAVE THE LIEN OR CHARGE OR OTHER ENCUMBRANCE LIFTED AT ITS C OST AND IN THE EVENT OF THE LESSEE FAILING TO DO SO WITHIN A REASONABLE TIME, T HE LESSOR SHALL BE ENTITLED (BUT SHALL NOT BE BOUND) TO PAY TO ANY THIRD PARTY SUCH SUM AS IS NECESSARY TO PROCURE THE RELEASE OF THE EQUIPMENT FROM ANY LIEN CHARGE OR ENCUMBRANCE AND SHALL BE ENTITLED TO RECOVER FROM THE LESSEE FO RTHWITH ALL SUCH EXPENSES AS MIGHT HAVE BEEN INCURRED FOR SUCH RELEASE: 8.6 NOT SELL, MORTGAGE, CHARGE, DEMISE, SUB-LET OR OTHERWISE DISPOSE OF ANY LAND OR BUILDING ON OR IN WHICH THE EQUIPMENT ARE K EPT OR ENTER INTO ANY CONTRACT TO DO ANY OF THE AFORESAID THINGS WITHOUT GIVING TO THE LESSOR AT LEAST SIX WEEKS PRIOR NOTICE IN WRITING AND THE LES SEE SHALL IN ANY EVENT ENSURE THAT ANY SUCH SALE, MORTGAGE, CHARGE, DEMISE , SUB-LEASE, OR OTHER DISPOSITION AS THE CASE MY BE IS MADE SUBJECT TO TH E RIGHT OF THE LESSOR TO REPOSSESS THE EQUIPMENT AT ANY TIME(WHETHER OR NOT THE SAME OR ANY PART THEREOF SHALL HAVE BECOME AFFIXED TO THE SAID LAND OR BUILDING) AND FOR THAT PURPOSE TO ENTER UPON SUCH LAND OR BUILDING AND SEV ER ANY EQUIPMENT AFFIXED THERETO: 8.7 PUNCTUALLY PAY ALL REGISTRATION CHARGES, LICENC E FEES, RENT, RATES, TAXES INCLUDING IN PARTICULAR SALES TAX AND OTHER OUTGOIN GS PAYABLE IN RESPECT OF THE EQUIPMENT UNDER THIS AGREEMENT OR FOR STORAGE, INSTALLATION, OR USE THEREOF, OR IN RESPECT OF ANY PREMISES IN WHICH THE EQUIPMENT FORM TIME TO TIME MAY BE PLACED OR KEPT AND PRODUCE TO THE LESSO R, ON DEMAND, THE LATEST RECEIPTS FOR ALL SUCH PAYMENTS AND IN THE EVENT OF THE LESSEE MAKING DEFAULT 3823-24/M/05-SBI 10 UNDER THIS SUB-CLAUSE THE LESSOR SHALL BE AT LIBERT Y TO MAKE ALL OR ANY OF SUCH PAYMENTS AND TO RECOVER THE AMOUNT THEREOF FRO M THE LESSEE FORTHWITH. 8.8 NOT CLAIM ANY RELIEF BY WAY OF ANY DEDUCTION, A LLOWANCE OR GRANT AVAILABLE TO THE LESSOR AS THE OWNER OF THE EQUIPME NT, UNDER THE INCOME TAX ACT, 1961 OR UNDER ANY OTHER STATUTE, RULE, REGULAT ION OR GUIDELINE ISSUED OR THAT MAY BE ISSUED BY THE GOVERNMENT OF INDIA OR AN Y STATUTORY AUTHORITY AND NOT DO OR OMIT TO DO OR BE DONE ANY ACT, DEED O R THING WHEREBY THE LESSOR IS DEPRIVED, WHETHER WHOLLY OR PARTLY OF SUC H RELIEF BY WAY OF DEDUCTION, ALLOWANCE OR GRANT. THE LESSEE SHALL AT THE END OF EACH FINANCIAL YEAR OF THE LESSOR PROVIDE TO THE LESSOR SUCH INFOR MATION AS IT MAY REQUIRE TO CLAIM RELIEF BY WAY OF ANY DEDUCTION ALLOWANCE O R GRANT AS THE OWNER OF THE EQUIPMENT UNDER THE INCOME TAX ACT, 1961 AND TH E LESSEE UNDERTAKES TO COMPLY WITH AND OBSERVE AT ALL TIMES ALL THE TERMS AND CONDITIONS TO BE COMPLIED WITH OR OBSERVED IN RESPECT OF THE USE AND OPERATION OF THE EQUIPMENT SO AS TO ENTITLE THE LESSOR TO OBTAIN SUC H RELIEF. 8.9 THE LESSEE IRREVOCABLY AGREES THAT IF DUE TO I NCREMENTAL TAXES WHETHER ON ACCOUNT OF THE IMPACT OF THE SALES TAX LEGISLATI ON IN THE VARIOUS STATES AS APPLICABLE OR ON ACCOUNT OF CUSTOMS DUTY OR EXCISE DUTIES OR ANY OTHER RELATED AND CONSEQUENTIAL TAXES OR CHARGES LEVIED O R LEVIABLE ON THIS TRANSACTION NOW OR HEREAFTER AS ALSO DUE TO ANY INC REASE IN THE PURCHASE PRICE OF THE EQUIPMENT COVERED BY THIS AGREEMENT ON ACCOUNT OF PURCHASE TAX AND/OR ANY OTHER TAX OR IMPOSITION OR DUE TO TA X ON THE RIGHT TO USE GOODS AS MAY BE APPLICABLE TO THE EQUIPMENT THE ACQUISITI ON COST OF THE EQUIPMENT STANDS INCREASED, THEN THE LESSOR RESERVE S THE RIGHT TO INCREASE THE LEASE RENTALS PROPORTIONATE THERETO AND ON SUCH NOTIFICATION BY THE LESSOR TO THE LESSEE, THE LEASE RENTALS SHALL CORRE SPONDINGLY STAND INCREASED FROM THE DATE SPECIFIED BY THE LESSOR IN SUCH NOTIFICATION. 12. EVENTS OF DEFAULT: AN EVENT OF DEFAULT SHALL OCCUR HEREUNDER, IF THE L ESSEE- 12.4 WITHOUT THE LESSORS CONSENT, SELLS, TRANSFERS , OR ATTEMPTS TO SELL OR PLEDGE, PARTS WITH POSSESSION OR SUB-LETS OR CHARGE S OR ENCUMBERS OR CREATES ANY LIEN ON THE EQUIPMENT OR ANY ITEM OF THE EQUIPM ENT IS ENDANGERED IN THE OPINION OF THE LESSOR OR THE INTEREST OF THE LESSOR IS JEOPARDISED: 13. TERMINATION IN THE EVEN OF DEFAULT: 13.2 ON THE TERMINATION OF THIS AGREEMENT THE LESSO R SHALL WITHOUT ANY NOTICE BE ENTITLED TO REMOVE AND REPOSSESS THE EQUI PMENT AND FOR THAT PURPOSE BY ITSELF ITS SERVANTS OR AGENTS ENTER UPON ANY LAND BUILDINGS OR 3823-24/M/05-SBI 11 PREMISES WHERE THE EQUIPMENT IS SITUATED OR IS REAS ONABLY BELIEVED BY THE LESSOR TO BE SITUATED FOR THE TIME BEING AND DETACH AND DISMANTLE THE SAME AND THE LESSOR SHALL NOT BE RESPONSIBLE FOR ANY DAM AGE WHICH MAY BE CAUSED BY ANY SUCH DETACHMENT OR REMOVAL OF THE EQUIPMENT. 13.3 WITHOUT PREJUDICE TO AND IN ADDITION TO THE LE SSORS RIGHTS PROVIDED IN CLAUSE 13.2 HEREINABOVE THE LESSOR SHALL ALSO BE EN TITLED TO RECOVER FROM THE LESSEE AND THE LESSEE SHALL BE BOUND TO PAY TO THE LESSOR THE FOLLOWING AMOUNTS VIZ: 13.3.1 THE ENTIRE AMOUNT OF THE LEASE RENTALS FOR T HE FIXED PERIOD OF THE LEASE COMPUTED IN THE MANNER SET OUT IN PART II OF THE FIRST SCHEDULE HERETO ON THE FOOTING AND AS IF THE AGREEMENT HAD NOT BEEN TERMINATED TO THE END AND INTENT THAT THE LESSEE SHALL PAY TO THE LESSOR NOT ONLY ARREARS OF INSTALMENTS OF LEASE RENTALS UPTO THE DATE OF TERMI NATION OF THIS AGREEMENT BUT ALSO SUCH FURTHER INSTALMENTS FOR THE THEN UNEX PIRED RESIDUE OF THE TERM WHICH THE LESSEE WOULD HAVE BEEN BOUND TO PAY TO TH E LESSOR HAD THIS AGREEMENT CONTINUED. 14. REDELIVERY/REPOSSESSION OF EQUIPMENT: 14.1 UPON THE EXPIRATION OF THIS AGREEMENT IF THE L ESSEE DOES NOT PROPOSE TO RENEW THE LEASE FOR FURTHER FIXED PERIOD OR SECONDA RY PERIOD THE LESSEE SHALL IF REQUIRED BY THE LESSOR DELIVER THE EQUIPMENT TO THE LESSOR AT THE ADDRESS OF THE LESSOR STATED IN THIS AGREEMENT OR AT SUCH O THER ADDRESSES AS THE LESSOR MAY SPECIFY OR IF NOT SO REQUIRED SHALL HOLD THE EQUIPMENT IN TRUST FOR THE LESSOR SO AS TO MAKE IT AVAILABLE TO THE LE SSOR FOR COLLECTION BY ITSELF OR BY ITS EMPLOYEES OR AGENTS; THE LESSOR OR ITS EM PLOYEES OR AGENTS SHALL BE ENTITLED TO RETAKE POSSESSION OF THE EQUIPMENT AND MAY FOR THAT PURPOSE ENTER UPON ANY LAND OR BUILDING LESSOR OR ITS EMPLO YEES OR AGENTS TO BE SITUATED AND IF THE EQUIPMENT OR ANY PART THEREOF I S AFFIXED TO SUCH LAND OR BUILDINGS, THE LESSOR OR ITS EMPLOYEES OR AGENTS SH ALL BE ENTITLED TO SERVER THE SAME THEREFROM AND TO REMOVE THE EQUIPMENT OR P ART THEREOF SO SEVERED AND THE LESSEE HEREBY AGREES THAT IT SHALL NOT HOLD THE LESSOR FOR ANY DAMAGE DONE RESPONSIBLE FOR AND TO MAKE GOOD AT ITS EXPENS E ALL DAMAGE CAUSED TO THE LAND OR BUILDINGS BY SUCH REMOVAL. 15. SALE OF EQUIPMENT ON TERMINATION OF THE AGREEME NT: UPON THE TERMINATION OF THIS AGREEMENT UNLESS THE L ESSEE HAS ELECTED TO RENEW THE LEASE FOR A FURTHER FIXED PERIOD OR SECON DARY PERIOD THE LESSOR SHALL AS THE ABSOLUTE OWNER OF THE EQUIPMENT BE AT LIBERTY TO SELL ANY OR ALL 3823-24/M/05-SBI 12 OF THE EQUIPMENT AT A PUBLIC OR PRIVATE SALE OR OTH ERWISE DISPOSE OF, HOLD, USE, OPERATES, LEASE TO OTHERS OR KEEP IDLE SUCH EQ UIPMENT, ALL FREE AND CLEAR OF ANY RIGHTS OF THE LESSEE AND WITHOUT ANY DUTY TO ACCOUNT TO THE LESSEE FOR SUCH ACTION OR INACTION OR WITH RESPECT TO ANY PROC EEDS THERETO AND IF SUCH EQUIPMENT IS SOLD THE PRICE OBTAINED UPON SUCH SALE SHALL NOT BE QUESTIONED OR CHALLENGED BY THE LESSEE MORE SHALL THE LESSEE Q UESTION OR DISPUTE THE EXERCISE OR NON-EXERCISE BY THE LESSOR OF ANY ONE O R MORE OF THE RIGHTS AND REMEDIES AS SET OUT IN CLAUSE 13 HEREINABOVE. 16. ASSIGNMENT: 16.1 THE LESSOR MAY HYPOTHECATE THE EQUIPMENT OWNED BY IT AND LEASED OUT HEREUNDER IN FAVOUR OF ANY BANK, FINANCIAL INSTITUT ION OR ANY OTHER INSTITUTION WHATSOEVER AS AND BY WAY OF SECURITY FO R THE FINANCIAL ASSISTANCE ARRANGED THEREFORE BY THE LESSOR FOR THE ACQUISITIO N OF SUCH EQUIPMENT. THE LESSOR MAY ASSIGN TO ANY PERSON ANY OF ITS RIGHTS U NDER THIS AGREEMENT AND IN PARTICULAR MAY ASSIGN SUCH RIGHTS BY WAY OF A CH ARGE AND ANY PERSON TO WHOM SUCH RIGHTS ARE ASSIGNED SHALL BE ENTITLED TO THE FULL BENEFIT OF ALL SUCH RIGHTS OF THE LESSOR. 21. IT IS MANIFEST FROM THE TERMS AND CONDITIONS OF THE LEASE AGREEMENT THAT THE LEASE IS FOR A FIXED PERIOD OF 84 MONTHS AND AS PER CLAUSE 1.6 IT IS NON -CONCEALABLE BY THE LESSEE AND/OR BY THE LESSOR EXCEPT ON THE DEFAULT ON THE PART OF THE LESSEE. EV EN IN CASE OF DEFAULT AND CONSEQUENTIAL TERMINATION OF LEASE ITS IS PROVIDED THAT THE LESSEE SHALL PAY THE ENTIRE ARREARS OF THE LEASE AS WELL THE FUTURE INSTALMENT FOR THE UNEXPIRED PERIOD OF THE LEASE TE RM, THEREFORE THE LEASE AGREEMENT HAS BEEN FRAMED AND CONSTRUCTED IN SUCH A WAY THAT THE ASSESSEE REC OVERS ITS ENTIRE COST ALONG WITH THE INTEREST IN EQUATED MONTHLY INSTALMENTS. EVEN IN THE SCHEDULE T O THE LEASE AGREEMENT THE PERIOD OF 84 MONTHS IS A FIXED NON-CONCEALABLE PERIOD. AS PER CLAUSE 5 OF TH E AGREEMENT THE LESSEE IS REQUIRED TO TAKE OUT THE INSURANCE ON THE ASSET IN QUESTION AND ALSO BEAR AL L THE DAMAGES, LOSS AND RISK ATTACHED TO THE LEASED ASSET, THEREFORE, IT IS AGREEMENT BETWEEN THE PARTI ES THAT ALL THE RISK AND REWARD ATTACH TO THE LEASE ASSET SHALL BE BORN AND ENJOYED BY THE LESSEE. THE SO-CALLED RESTRICTIONS ON THE SALE, CREATING CHARGE , LIEN BY THE LESSEE ARE NECESSARY BEING A SECURITY A GAINST THE FUNDS PROVIDED BY THE ASSESSEE TO THE LESSEE. EVEN OTHERWISE IN CASE OF SIMPLE FINANCE, T HE ASSET WHICH IS BEING FINANCED IS ALWAYS KEPT AS A SECURITY/MORTGAGE WITH THE BANK TO PROTECT THE INTE REST OF THE BANK TILL THE REPAYMENT OF THE FINANCE. THEREFORE, THE RESTRICTIONS PROVIDED IN THE LEASE A GREEMENT ARE ONLY TO SECURE THE INTEREST OF THE BAN K TILL THE RECOVERY OF THE FULL AMOUNT ALONG WITH THE INTEREST. SOME OF THE TERMS OF THE AGREEMENT APPEA R TO BE ONLY FOR SAKE OF THE CONDITIONS AS TO PROTECT TO THE INTEREST OF THE BANK BUT THE SAME COULD NOT BE GIVEN EFFECT IN PRACTICAL. FOR INSTANCE, IN CASE OF DEFAULT IF THE ASSESSEE TERMINATES THE LEASE AGREEMENT IN QUESTION THEN IT IS NOT POSSIBLE FOR T HE ASSESSEE EITHER TO TAKE THE POSSESSION OF THE AS SET 3823-24/M/05-SBI 13 IN QUESTION BECAUSE OF THE NATURE OF ASSET WHICH CO ULD NOT BE SEPARATED FROM THE RAILWAY NETWORK OR REMOVE THE ASSET FROM THE PLACE OF ITS EXISTENCE BE ING PART OF THE RAILWAY NETWORK. FURTHER APART FROM THE LESSEE THE ASSET CANNOT BE TRANSFERRED OR ASSIG NED TO ANYBODY ELSE AS IT IS NOT POSSIBLE TO USE ON LY A PARTICULAR STRETCH OF RAILWAY TRACK WITHOUT CONNE CTING OR BEING A PART OF THE ENTIRE NETWORK. THUS, THE TERMS AND CONDITIONS AS HEAVILY RELIED UPON LD. AR WOULD NOT HELP THE CASE OF THE ASSESSEE TO ESTABLISH THAT THE ASSET IN QUESTION COULD ACTUALLY BE TAKEN IN POSSESSION BY THE ASSESSEE. THEREFORE, THE ASSESSEE CANNOT EXERCISE THE REAL AND ACTUAL OW NERSHIP OVER THE ASSET KEEPING IN VIEW THE FACTS AND CIRCUMSTANCES AND NATURE OF THE ASSET IN QUESTI ON. THE SPECIAL BENCH OF THIS TRIBUNAL IN CASE OF INDUSIND BANK LTD. (SUPRA) BY FOLLOWING THE DECISIO N OF HONBLE SUPREME COURT IN CASE OF ASEA BROWN BOVERI LTD. VS INDUSTRIAL FINANCE CORPORATION OF INDIA (IFCI) 154 TAXMAN 512 AS WELL DECISION IN CASE OF ASSOCIATION OF LEASE AND FINANC ING SERVICE COMPANY VS UNION OF INDIA (SUPRA) HAS ENUMERATED VARIOUS FEATURES WHICH MAKE DISTINCT ION BETWEEN OPERATING LEASE AND FINANCE LEASE IN PARA 5.20 AS UNDER: 5.20 IN VIEW OF THE FACT THAT THE ID. AR HAS LODG ED A STRONG CLAIM TO CONSIDER THE PRESENT AGREEMENT AS THAT OF OPERATING AND NOT A FINANCE LEASE, IT IS IMPERATIVE TO UNDERSTAND THE DISTINCTION BETW EEN THE TWO AS UNDER :- A. IN THE CASE OF AN OPERATING LEASE, THE LESSOR P ROVIDES THE ASSET FOR USE FOR A CERTAIN PERIOD OF TIME TO THE LESSEE FOR RENT. ON THE EXPIRY OF SUCH LEASE PERIOD, THE LESSOR HAS TO INEVITABLY REPOSSESS THE ASSET. ON THE OTHER HAND, A CASE OF FINANCE LEASE IS IN ESSENCE AN ARRANGEMENT FOR BORROWING. THE ROLE OF LESSOR IS LIMITED TO THAT OF FINANCIER ONLY. B. IN OPERATING LEASE, IT IS THE LESSOR WHO BEARS THE LOSS AND OBSOLESCENCE OF THE ASSET LEASED, WHEREAS IN &SE OF FINANCE LEASE I T IS THE LESSEE WHO ALWAYS BEARS SUCH LOSS. C. IN THE CASE OF AN OPERATING LEASE, THE LESSOR R EMAINS THE OWNER OF THE ASSET THROUGHOUT THE LEASE PERIOD AND THEREAFTER AL SO, WHEREAS IN A FINANCE LEASE IT IS THE LESSEE WHO BECOMES THE REAL OWNER. THE LESSORS TITLE OVER THE ASSET IS ONLY SYMBOLIC TO SERVE AS SECURITY FOR THE RENTALS, WHICH ARE NOTHING BUT THE RETURN OF HIS INVESTMENT WITH INTEREST. D. OPERATING LEASE IS CANCELLABLE, WHEREAS TINANCE LEASE IS ALWAYS NON- CANCELLABLE. IN A CASE OF FINANCE LEASE, THE LESSOR IS INTERESTED IN LEASE RENTALS AND NOT THE ASSET. E. IN THE CASE OF AN OPERATING LEASE, SUBSTANTIAL RISKS AND REWARDS OF OWNERSHIP OF THE ASSET REMAIN WITH THE LESSOR, WHER EAS IN THE CASE OF FINANCE LEASE THESE AB INITIO VEST WITH THE LESSEE. F. IN THE CASE OF AN OPERATING LEASE, THE FIXATION OF LEASE RENTAL BEAR NO SYMMETRY WITH THE ECONOMIC LIFE OF THE ASSET AND TH E POSSIBILITY OF THE ASSET 3823-24/M/05-SBI 14 REVERTING BACK TO THE LESSOR CAN NEVER BE RULED OUT . HOWEVER IN THE CASE OF A FINANCE LEASE, THE LEASE PERIOD IS ORDINARILY EQUAL TO THE ECONOMIC LIFE OF THE ASSET AND LEASE RENTALS ARE FIXED IN SUCH A WAY SO AS TO RECOVER THE INVESTMENT WITH INTEREST DURING THE LEASE PEIOD ITS ELF. THE POSSIBILITY OF THE ASSET REVERTING BACK TO THE LESSOR IS NEVER THERE. G. IN THE CASE OF AN OPERATING LEASE, THE ASSET IS ORDINARILY COMMON USE UTILITY WHEREAS IN CASE OF FINANCE LEASE THE ASSET IS NORMALLY SELECTED BY THE LESSEE HIMSELF SO AS TO SUIT HIS PARTICULAR REQUIRE MENTS H. NORMALLY AN OPERATING LEASE IS NON PAYOUT WHERE AS A FINANCE LEASE IS FULL PAYOUT. FULL PAYOUT LEASE MEANS THAT THE LESSOR REC OVERS THE FULL VALUE OF THE LEASED ASSET PLUS THE FINANCE COST OVER THE PERIOD OF FIRST LEASE. FULL PAYOUT LEASE IS PECULIAR TO FINANCE LEASE. ON THE OTHER HA ND, A NON PAYOUT LEASE IS ONE WHERE THE LESSOR IS NOT INTERESTED IN RECOVERIN G HIS PRINCIPAL INVESTMENT PLUS INTEREST FROM ONE LESSEE ONLY BECAUSE HE MAY L EASE OUT THE SAME ASSET OVER AND OVER AGAIN. THOUGH NO SINGLE LEASE RECOVER S THE PRINCIPAL AMOUNT PLUS INTEREST COMPONENT OF THE LESSOR BUT ALL THE L EASES TAKEN TOGETHER MAKE IT A FULL PAYOUT. THAT IS WHY THE NON PAYOUT LEASE IS PECULIAR TO OPERATING LEASE. 22. THE SPECIAL BENCH THEN ANALYSED THE VARIOUS FA CTORS OF DISTINCTION BETWEEN OPERATING LEASE AND FINANCE LEASE IN PARA 5.21-5.23 AS UNDER: 5.21 FROM THE ABOVE POINTS OF DISTINCTION BETWEEN OPERATING LEASE AND FINANCE LEASE, THE SALIENT FEATURES OF OPERATING LE ASE HAVE BECOME GLARING. NOW LET US ASCERTAIN AS TO WHETHER THE ABOVE CLAUSE S, CLAIMED BY THE ID. AR AS AMPLY PROVING IT TO BE A CASE OF OPERATING LEASE AGREEMENT, DO IN FACT PROVE IT SO. IA AN EARLIER PARA WE HAVE OBSERVED TH AT THIS LEASE AGREEMENT FULLY SATISFIES ALL THE CHARACTERISTICS OF FINANCE LEASE. THE POSITION WHICH, THEREFORE, EMERGES IS THAT SOME CLAUSES OF THE AGRE EMENT TEND TO GIVE IMPRESSION OF THIS BEING AN OPERATING LEASE WHEREAS THE OTHERS LARGELY INDICATE IT TO BE A FINANCE LEASE. HOW TO RESOLVE T HE CONFLICT? IN ORDER TO DECIDE AS TO WHETHER THE INSTANT LEASE AGREEMENT BE CHARACTERIZED AS OPERATING OR FINANCE LEASE, WE NEED TO TAKE SHELTER OF THE DOCTRINE OF PITH AND SUBSTANCE. THIS RULE STIPULATES THAT IF THERE I S SOME OVERLAPPING IN THE CONTENTS OF THE CLAUSES OF AN AGREEMENT, THEN IT BE COMES NECESSARY TO EXAMINE THE PITH AND SUBSTANCE OF THE AGREEMENT. IT CAN BE DONE BY SEEING AS TO WHETHER IT PREDOMINANTLY SATISFIES THE CONDITION S OF OPERATING LEASE OR FINANCE LEASE. THE CRUX IS THAT WE SHOULD FIND OUT THE SUBSTANCE OF THE AGREEMENT. 3823-24/M/05-SBI 15 5.22 WE HAVE HIGHLIGHTED THE BROAD FEATURES OF OPER ATING LEASE SUCH AS, THE LEASE IS CANCELLABLE; THE LESSOR PROVIDES SERVICES, MAINTENANCE AND INSURANCE; TOTAL OF ALL THE LEASE PAYMENTS BY THE L ESSEE DOES NOT PROVIDE FOR THE RECOVERY OF THE INVESTMENT WITH INTEREST. FURTH ER THE OPERATING LEASE GENERALLY COVERS THE ASSET WHICH CAN BE NEEDED BY D IFFERENT USERS SO THAT THE LESSOR MAY MAKE AVAILABLE TO ONE LESSEE AFTER ANOTH ER. 5.23 NOW LET US TRY TO FIND OUT THE SUBSTANCE OF T HE EXTANT LEASE AGREEMENT AS TO WHETHER IT PREDOMINANTLY SATISFIES THE CONDIT IONS OF AN OPERATING LEASE. ON READING THE LEASE AGREEMENT AS A WHOLE, WE FIND THAT EXCEPT FOR NAMING THE LESSOR AS OWNER AT SOME PLACES IN THE AGREEMENT AND INSERTING CERTAIN COSMETIC CLAUSES TO GIVE THE COLOUR OF OPERATING LE ASE, THERE IS NOTHING IN SUBSTANCE WHICH SATISFIES THE INHERENT REQUISITES O F OPERATING LEASE. IT CAN BE OBSERVED THAT THE LEASE IS NOT CANCELLABLE PRIOR TO THE EXPIRY PERIOD OF SEVEN YEARS. THE COST OF REPAIRS AND INSURANCE IS TO BE B ORNE BY THE LESSEE. SUM TOTAL OF THE LEASE RENTALS BY THE LESSEE RECOUPS TH E AMOUNT INVESTED BY THE LESSOR PLUS INTEREST. THERE IS A CLAUSE THAT AFTER THE EXPIRY OF SEVEN YEARS PERIOD, THE BOILER WILL BE SOLD TO THE LESSEE AT PR EDETERMINED VALUE. IT IS THE LESSEE WHO HAS TO BEAR THE LOSS DUE TO OBSOLESCENCE . ALL THE RISKS AND REWARDS VEST WITH THE LESSEE. WHEN WE CONSIDER THE CUMULATIVE EFFECT OF ALL THE FACTORS FOR AND AGAINST THE OPERATING LEASE, IT CAN BE EASILY FOUND OUT THAT IF ONE HAS TO CHOOSE BETWEEN THE FINANCE LEASE AND OPERATING LEASE, THERE CAN BE NO DIFFICULTY IN REACHING THE IRRESISTIBLE CONCL USION THAT IT IS A CASE OF FINANCE LEASE AGREEMENT. IN PITH AND SUBSTANCE THIS AGREEMENT IS NOTHING BUT A FINANCE LEASE. 23. IN THE CASE IN HAND THE LEASE IS FOR FIX PERIOD OF 84 MONTHS DURING WHICH THE ASSESSEE WOULD RECOVER THE FULL VALUE OF LEASE ASSET WITH FINANCE COST BEING INTEREST AS AGREED BETWEEN THE PARTIES. ALL THE COSTS REGARDING LOSS AND OBSOLENCES, REPAIRS, M AINTENANCE, INSURANCE ETC. ARE TO BE BORN BY THE LESSEE. THUS THE RISK AND REWARD OF OWNERSHIP OF TH E ASSET VESTED WITH THE LESSEE AND THEREFORE FOR AL L PRACTICAL PURPOSES THE OWNERSHIP OF THE ASSET WAS V ESTED WITH THE LESSEE AND NOT WITH THE ASSESSEE. THE TERMS OF THE AGREEMENT ARE DESIGNED IN A MANNER SO THAT IN ANY EVENTUALITY THE ASSESSEE WOULD RECOVER THE INVESTMENT (COST OF ASSET) WITH INTERES T AND NOT THE ASSET IN QUESTION. AS DISCUSSED IN TH E FOREGOING PARAS THE TITLE OVER THE ASSET AS PER THE LEASE AGREEMENT IS ONLY FOR SECURING THE FINANCIAL INTEREST OF THE ASSESSEE AND NOT INTENDED TO REALLY TAKE THE ASSET IN ITS POSSESSION ON THE EXPIRY OF LEASE TERM OR ON THE TERMINATION OF THE LEASE AGREEMENT. THEREFORE ALL THE FEATURES AND ATTRIBUTES OF FINANC E LEASE AS DISCUSSED BY THE SPECIAL BENCH IN CASE OF INDUSIND BANK DO EXIST IN THE CASE OF THE ASSESSEE. 24. APART FROM THE TERMS AND CONDITIONS AS STIPULA TED IN THE LEASE AGREEMENT ONE MORE IMPORTANT ASPECT WHICH IS VERY RELEVANT IN DECIDING THE ISSUE IS THAT AS PER THE BANKING REGULATION ACT, 1949, A 3823-24/M/05-SBI 16 BANKING COMPANY IS NOT PERMITTED TO ENGAGE IN THE A CTIVITY OF LEASING OF ASSET. SECTION 6 OF THE BANKING REGULATION ACT SPECIFIES VARIOUS BUSINESS I N WHICH A BANKING COMPANY MAY ENGAGE AS UNDER: 6. FORMS OF BUSINESS IN WHICH BANKING COMPANIES M AY ENGAGE. (1) IN ADDITION TO THE BUSINESS OF BANKING, A BANKING COMPANY MAY ENGAGE IN ANY ONE OR MORE OF THE FOLLOWING FORMS OF BUSINESS, NAMELY: (A) THE BORROWING, RAISING, OR TAKING UP OF MONEY; THE LENDING OR ADVANCING OF MONEY EITHER UPON OR WITHOUT SECURITY; THE DRAWI NG, MAKING, ACCEPTING, DISCOUNTING, BUYING, SELLING, COLLECTING AND DEALIN G IN BILLS OF EXCHANGE, HOONDEES, PROMISSORY NOTES, COUPONS, DRAFTS, BILLS OF LADING, RAILWAY RECEIPTS, WARRANTS, DEBENTURES, CERTIFICATES, SCRIP S AND OTHER INSTRUMENTS, AND SECURITIES WHETHER TRANSFERABLE OR NEGOTIABLE OR NO T; THE GRANTING AND ISSUING OF LETTERS OF CREDIT, TRAVELLERS CHEQUES AND CIRCU LAR NOTES; THE BUYING, SELLING AND DEALING IN BULLION AND SPECIE; THE BUYI NG AND SELLING OF FOREIGN EXCHANGE INCLUDING FOREIGN BANK NOTES; THE ACQUIRIN G, HOLDING, ISSUING ON COMMISSION, UNDERWRITING AND DEALING IN STOCK, FUND S, SHARES, DEBENTURES, DEBENTURE STOCK, BONDS, OBLIGATIONS, SECURITIES AND INVESTMENTS OF ALL KINDS; THE PURCHASING AND SELLING OF BONDS, SCRIPS OR OTHE R FORMS OF SECURITIES ON BEHALF OF CONSTITUENTS OR OTHERS, THE NEGOTIATING O F LOANS AND ADVANCES; THE RECEIVING OF ALL KINDS OF BONDS, SCRIPS OR VALUABLE S ON DEPOSIT OR FOR SAFE CUSTODY OR OTHERWISE; THE PROVIDING OF SAFE DEPOSIT VAULTS; THE COLLECTING AND TRANSMITTING OF MONEY AND SECURITIES; (B) ACTING AS AGENTS FOR ANY GOVERNMENT OR LOCAL AU THORITY OR ANY OTHER PERSON OR PERSONS; THE CARRYING ON OF AGENCY BUSINE SS OF ANY DESCRIPTION INCLUDING THE CLEARING AND FORWARDING OF GOODS, GIV ING OF RECEIPTS AND DISCHARGES AND OTHERWISE ACTING AS AN ATTORNEY ON B EHALF OF CUSTOMERS, BUT EXCLUDING THE BUSINESS OF A 1[MANAGING AGENT OR SEC RETARY AND TREASURER] OF A COMPANY; (C) CONTRACTING FOR PUBLIC AND PRIVATE LOANS AND NE GOTIATING AND ISSUING THE SAME; (D) THE EFFECTING, INSURING, GUARANTEEING, UNDERWRI TING, PARTICIPATING IN MANAGING AND CARRYING OUT OF ANY ISSUE, PUBLIC OR P RIVATE, OF STATE, MUNICIPAL OR OTHER LOANS OR OF SHARES, STOCK, DEBEN TURES, OR DEBENTURE STOCK OF ANY COMPANY, CORPORATION OR ASSOCIATION AND THE LENDING OF MONEY FOR THE PURPOSE OF ANY SUCH ISSUE; (E) CARRYING ON AND TRANSACTING EVERY KIND OF GUARA NTEE AND INDEMNITY BUSINESS; 3823-24/M/05-SBI 17 (F) MANAGING, SELLING AND REALISING ANY PROPERTY WH ICH MAY COME INTO THE POSSESSION OF THE COMPANY IN SATISFACTION OR PART S ATISFACTION OF ANY OF ITS CLAIMS; (G) ACQUIRING AND HOLDING AND GENERALLY DEALING WI TH ANY PROPERTY OR ANY RIGHT, TITLE OR INTEREST IN ANY SUCH PROPERTY WHICH MAY FORM THE SECURITY OR PART OF THE SECURITY FOR ANY LOANS OR ADVANCES OR W HICH MAY BE CONNECTED WITH ANY SUCH SECURITY; (H) UNDERTAKING AND EXECUTING TRUSTS; (I) UNDERTAKING THE ADMINISTRATION OF ESTATES AS EX ECUTOR, TRUSTEE OR OTHERWISE; (J) ESTABLISHING AND SUPPORTING OR AIDING IN THE ES TABLISHMENT AND SUPPORT OF ASSOCIATIONS, INSTITUTIONS, FUNDS, TRUSTS AND CONVE NIENCES CALCULATED TO BENEFIT EMPLOYEES OR EX-EMPLOYEES OF THE COMPANY OR THE DEPENDENTS OR CONNECTIONS OF SUCH PERSONS; GRANTING PENSIONS AND ALLOWANCES AND MAKING PAYMENTS TOWARDS INSURANCE; SUBSCRIBING TO OR GUARA NTEEING MONEYS FOR CHARITABLE OR BENEVOLENT OBJECTS OR FOR ANY EXHIBIT ION OR FOR ANY PUBLIC, GENERAL OR USEFUL OBJECT; (K) THE ACQUISITION, CONSTRUCTION, MAINTENANCE AND ALTERATION OF ANY BUILDING OR WORKS NECESSARY OR CONVENIENT FOR THE PURPOSES O F THE COMPANY; (L) SELLING, IMPROVING, MANAGING, DEVELOPING, EXCHA NGING, LEASING, MORTGAGING, DISPOSING OF OR TURNING INTO ACCOUNT OR OTHERWISE DEALING WITH ALL OR ANY PART OF THE PROPERTY AND RIGHTS OF THE C OMPANY; (M) ACQUIRING AND UNDERTAKING THE WHOLE OR AN PART OF THE BUSINESS OF ANY PERSON OR COMPANY, WHEN SUCH BUSINESS IS OF A NATUR E ENUMERATED OR DESCRIBED IN THIS SUB-SECTION; (N) DOING ALL SUCH OTHER THINGS AS ARE INCIDENTAL O R CONDUCIVE TO THE PROMOTION OR ADVANCEMENT OF THE BUSINESS OF THE COM PANY; (O) ANY OTHER FORM OF BUSINESS WHICH THE CENTRAL GO VERNMENT MAY, BY NOTIFICATION IN THE OFFICIAL GAZETTE, SPECIFY AS A FORM OF BUSINESS IN WHICH IT IS LAWFUL FOR A BANKING COMPANY TO ENGAGE. (2) NO BANKING COMPANY SHALL ENGAGE IN ANY FORM OF BUSINESS OTHER THAN THOSE REFERRED TO IN SUB-SECTION (1). 25. AS IT IS CLEAR FROM THE SUB-SECTION 2 THAT NO B ANKING COMPANY SHALL ENGAGED IN ANY FORM OF BUSINESS OTHER THAN THOSE REFERRED IN SUBSECTION 1 OF SECTION 6. HOWEVER, AS PER CIRCULAR DATED 19.2.1994 THE RESERVE BANK OF INDIA HAS ALLOWED THE BANKING COMPANIES TO UNDERTAKE THE ACTIVITIES OF EQUIPMENT LEASING BUT THE SAME SHOULD BE TREATED ON PAR WITH THE LOAN AND ADVANCES. THEREFORE, THE ACTIVITY OF EQUIPMENT LEASING PERMITTED BY THE RBI VIDE SAID CIRCULAR IS ONLY IN THE NATURE OF FINANCE 3823-24/M/05-SBI 18 LEASE. THE SAID CIRCULAR HAS ALSO BEEN CONSIDERED A ND DISCUSSED BY THE SPECIAL BENCH IN PARA 5.24- 5.27 AS UNDER: 5.24 OUR VIEW IS FORTIFIED BY THE RBI CIRCULAR NO. FSCBC 18/24- 01-001/93-94 DATED 14.02.1994 WHICH INTER ALIA DEALS WITH EQUIPMENT LE ASING. IT IS NEEDLESS TO SAY THAT THIS CIRCULAR IS BINDING ON THE ASSESSEE BANK. PARA 1(I) OF IT PROVIDES THAT THE ACTIVITIES LIKE EQUIPMENT LEASING, HIRE PURCHASE AND FACTORING SERV ICES SHOULD BE UNDERTAKEN ONLY BY CERTAIN SELECTED BRANCHES OF THE BANK. PARA 1 (II) WHICH IS RELEVANT FOR OUR PURPOSE READS AS UNDER: (II) THESE ACTIVITIES SHOULD BE TREATED ON PAR WI TH LOANS AND ADVANCES AND SHOULD ACCORDINGLY BE GIVEN RISK WEIGHT OF 100 PER CENT FO R CALCULATION OF CAPITAL TO RISK ASSET RATIO. FURTHER, THE EXTANT GUIDELINES ON INCOME RECOGNITIO N, ASSET CLASSIFICATION, ASSET CLASSIFICATION AND PROVISIONING WOULD ALSO BE APPLICABLE TO THEM. PARAS 1(V) AND (VI) WHICH ARE ALSO RELEVANT READ A S UNDER:- (V) BANKS UNDERTAKING EQUIPMENT LEASING DEPARTMEN TALLY SHOULD FOLLOW PRUDENTIAL ACCOUNTING STANDARDS. THE ENTIRE LEASE RENTAL SHOUL D NOT BE TAKEN TO THE BANKS INCOME ACCOUNT. IT WOULD BE RECOGNIZED THAT LEASE RENTALS COMPRISE TWO ELEMENTS A FINANCE CHARGE (I.E. INTEREST CHARGE) AND A CHARGE TOWARDS RECOVERY OF T HE COST OF THE ASSET. THE INTEREST COMPONENT ALONE SHOULD BE TAKEN TO THE INCOME ACCOU NT. THE COMPONENT REPRESENTING THE REPLACEMENT COST OF THE ASSET SHOULD BE CARRIED TO THE BALANCE SHEET IN THE FORM OF A PROVISION FOR DEPRECIATION. (VI) AS A PRUDENT MEASURE, FULL DEPRECIATION SHOUL D BE PROVIDED FOR DURING THE PRIMARY LEASE PERIOD OF THE ASSET. THE PERIOD OF LEASE SHOULD NOT NORMALLY EXCEED FIVE YEARS. IN EXCEPTIONAL CASES, LEASE PERIOD NOT EXCEEDING 7 YEARS MAY BE FI XED IN RESPECT OF LEASE TRANSACTIONS COVERING ASSETS OF RS. 1 CRORE AND ABOVE, AS THE RE COVERY OF COST MAY NOT BE POSSIBLE IN A PERIOD OF 5 YEARS. 5.25 ON PERUSAL OF THE ABOVE PARAS OF THE ABOVE CI RCULAR IT BECOMES PATENT THAT THE EQUIPMENT LEASING ACTIVITY SHOULD BE TREAT ED BY BANKS ON PAR WITH LOANS AND ADVANCES. THE FURTHER CONTENTS OF PARA 1 (II) WHICH PROVIDES THAT THE GUIDELINES ON INCOME RECOGNITION, ASSET CLASSIF ICATION AND PROVISIONING WOULD ALSO BE APPLICABLE TO THEM, MAKE IT CLEAR THA T THE ACTIVITY OF EQUIPMENT LEASING SHOULD BE CONSIDERED AS AN ACT OF ADVANCING LOANS AND ADVANCES. IT IS SO FOR THE REASON THAT THE GUIDELIN ES ON INCOME RECOGNITION AND ASSET CLASSIFICATION ETC. AS REFERRED TO HEREIN , ARE APPLICABLE TO LOANS AND ADVANCES. FURTHER PARA 1 (V) PROVIDES THAT THE ENTI RE LEASE RENTAL SHOULD NOT BE TAKEN TO THE BANKS INCOME ACCOUNT. ONLY THE INT EREST COMPONENT BEING THE FINANCE CHARGE SHOULD BE TAKEN TO THE INCOME AC COUNT AND THE SECOND COMPONENT BEING CHARGE TOWARDS RECOVERY OF THE COST REPRESENTING THE REPLACEMENT COST OF THE ASSET SHOULD BE CARRIED TO THE BALANCE SHEET IN THE 3823-24/M/05-SBI 19 FORM OF A PROVISION FOR DEPRECIATION. PARA 1 (VI) S TATES THAT AS A PRUDENT MEASURE FULL DEPRECIATION SHOULD BE PROVIDED FOR DU RING THE PRELIMINARY LEASE PERIOD OF THE ASSET. IT IS .IMPERMISSIBLE TO READ PARA 1 (VI) OF THE CIRCULAR IN ISOLATION TO SUPPORT THE CONTENTION THA T THE RBI PERMITS CLAIMING DEPRECIATION ON THE LEASED ASSETS. IT IS IN FACT NO T SO BECAUSE THE CIRCULAR AS A WHOLE TREATS THE ACTIVITY OF EQUIPMENT LEASING AS THAT OF LOANS AND ADVANCES AND THE REFERENCE TO FULL DEPRECIATION IN PARA 1 (VI) SHOULD BE READ IN JUXTAPOSITION TO PARA 1(V) WHICH TALKS OF THE SE COND COMPONENT OF THE LEASE RENTAL BEING THE REPLACEMENT COST OF THE ASSE T. WHEN WE READ THIS CIRCULAR IN ENTIRETY, THERE REMAINS NO DOUBT THAT T HE ACTIVITY OF EQUIPMENT LEASING HAS TO BE CONSIDERED BY A BANK ON PAR WITH THE LOANS AND ADVANCES. 5.26 IN VIEW OF THE ABOVE CIRCULAR WE DO NOT FIND A NY SCOPE FOR ARGUMENT THAT THE INSTANT LEASE AGREEMENT BE TREATED AS THAT OF OPERATING LEASE. SINCE THE LOANS AND ADVANCES ENCOMPASS FINANCE LEASE, NAT URALLY SUCH TYPE OF EQUIPMENT LEASING CANNOT BE GIVEN ANY NAME OTHER TH AN THE FINANCE LEASE. HERE IT IS RELEVANT TO NOTE THAT THE ASSESSEE CLAIM ED DEPRECIATION ON LEASED ASSET AND ALSO SHOWED FULL AMOUNT OF LEASE RENTAL A S INCOME IN CONTRAVENTION OF PARA 1(V) OF THE AFORE NOTED RBI ITA NO. 5470/M/ 2002 STATE BANK OF INDIA . 36 CIRCULAR. WHEN THE ASSESSING OFFICER CON CLUDED THAT THE INSTANT LEASE CANNOT BE CHARACTERIZED AS FINANCE LEASE, THE ASSESSEE REQUESTED THE A.O. THAT IN CASE THE DEPRECIATION ON THE LEASED AS SET TO ASSESSEE IS NOT TO BE GRANTED BY TREATING IT AS A LOAN TRANSACTION, THEN THE CAPITAL RECOVERY EMBEDDED IN THE LEASE RENTAL SHOULD NOT BE CHARGED TO TAX. THIS ISSUE HAS BEEN DISCUSSED IN PARA 2.30 OF THE ASSESSMENT ORDER . ACCEDING TO THE ASSESSEES REQUEST, THE ASSESSING OFFICER EXCLUDED THE PORTION OF CAPITAL RECOVERIES FROM THE RENTAL INCOME. THUS IT CAN BE O BSERVED THAT THE ACTION OF THE A.O. IS FULLY IN CONSONANCE WITH THE RBI CIRCUL AR WHICH STATES THAT IN CASE OF EQUIPMENT LEASING THE ENTIRE LEASE RENTAL S HOULD NOT BE TREATED AS BANKS INCOME BUT ONLY THAT COMPONENT OF SUCH LEASE RENTAL WHICH REPRESENTS FINANCE CHARGES I.E. INTEREST SHOULD BE RECOGNIZED AS INCOME ALONE. 5.27 WE, THEREFORE, APPROVE THE VIEW TAKEN BY THE A UTHORITIES BELOW IN COMING TO THE CONCLUSION THAT THE LEASE AGREEMENT U NDER CONSIDERATION IS THAT OF FINANCE LEASE AND NOT OPERATING LEASE. 26. AS IT IS CLEAR FROM THE CIRCULAR THAT THE BANKS UNDERTAKING EQUIPMENT LEASING DEPARTMENTALLY SHOULD FOLLOW PRUDENTIAL ACCOUNTING SYSTEM AND ONLY THE INTEREST CHARGE COMPONENT SHOULD BE RECOGNISED AS INCOME AND THE RECOVERY OF COST OF AS SET SHOULD BE CARRIED TO BALANCE SHEET ON THE FORM OF PROVISION OF DEPRECIATION. THEREFORE UNDER THE C IRCULAR THE TRANSACTION OF EQUIPMENT LEASE IS 3823-24/M/05-SBI 20 TREATED AT PAR WITH THE LOAN TRANSACTION AND ACCORD INGLY ONLY THE INTEREST COMPONENT OF THE RECEIPT IS RECOGNISED AS INCOME. SINCE IT IS NOT PERMITTED TO RECOGNISE THE ENTIRE RECEIPT BEING LEASE RENTALS AS INCOME THE ASSESSEE HAS ALSO RECOGNISED ONLY INTERE ST COMPONENT OF THE RECEIPT OF THE LEASE RENTAL AS INCOME IN THE PROFIT AND LOSS ACCOUNT AND THE BALAN CE WHICH REPRESENTS THE CAPITAL COMPONENT IS TAKEN TO THE BALANCE SHEET. THUS, IN THE BOOKS OF ACCOUNT , THE ASSESSEE HAS TREATED THE TRANSACTION IN QUESTION AS FINANCE LEASE AND NOT AS AN OPERATING L EASE BECAUSE THE BANKS ARE PERMITTED ONLY TO CARRY OUT THE TRANSACTION OF FINANCE LEASE OF EQUIPMENTS. 27. IT IS PERTINENT TO NOTE THAT IN CASE OF ICDS L TD. (SUPRA) IT WAS NOT A LEASE BY A BANK BUT THE ASSESSEE IN THE SAID CASE IS A NON-BANKING FINANCIA L INSTITUTION AND ONE OF THE BUSINESS OF THE ASSESS EE WAS LEASING OUT THE VEHICLES AS THE FACTS RECORDED BY THE HONBLE SUPREME COURT IN PARA 2 OF THE SAID DECISION AS UNDER: 2. THE ASSESSEE IS A PUBLIC LIMITED COMPANY, CLASS IFIED BY THE RESERVE BANK OF INDIA (RBI) AS A NON-BANKING FINANCE COMPANY. IT IS ENGAGED IN THE BUSINESS OF HIRE PURCHASE, LEASING AND REAL ESTATE ETC. THE VEHICLES, ON WHICH DEPRECIATION WAS CLAIMED, ARE STATED TO HAVE BEEN P URCHASED BY THE ASSESSEE AGAINST DIRECT PAYMENT TO THE MANUFACTURERS. THE AS SESSEE, AS A PART OF ITS BUSINESS, LEASED OUT THESE VEHICLES TO ITS CUSTOMER S AND THEREAFTER, HAD NO PHYSICAL AFFILIATION WITH THE VEHICLES. IN FACT, LE SSEES WERE REGISTERED AS THE OWNERS OF THE VEHICLES, IN THE CERTIFICATE OF REGIS TRATION ISSUED UNDER THE MOTOR VEHICLES ACT, 1988 (HEREINAFTER REFERRED TO A S THE MV ACT). 28. THEREFORE THE HONBLE SUPREME COURT HAS DECIDED THE ISSUE IN THE CASE OF NON-BANKING FINANCIAL COMPANY WHICH IS ENGAGE IN THE BUSINESS OF LEASING WHEREAS IN THE CASE OF BANK IT IS NOT PERMITTED UNDER THE BANKING REGULATION ACT TO ENGAGE IN THE B USINESS OF LEASING OF EQUIPMENTS. FOLLOWING THE DECISION OF SPECIAL BENCH OF THIS TRIBUNAL IN CASE OF INDUSIND BANK LTD., WE HOLD THAT THE TRANSACTION IN QUESTION IS FINANCE LEASE AND NOT OPERATING LEAS E. ACCORDINGLY, WE UPHOLD THE ORDERS OF THE AUTHORITIES BELOW QUA THIS ISSUE. RESPECTFULLY,FOLLOWING THE ABOVE ORDER OF THE TRIBU NAL GROUND NO.6 IS DECIDED AGAINST THE ASSESSEE. 7. GROUND NO.7 DEALS WITH UN-EARNED INTEREST ON DOUBTF UL ADVANCES AS PER SEC.43D OF THE ACT. DURING THE ASSESSMENT PROCEEDINGS THE AO DID NOT AL LOW DEDUCTION OF RS.35.03 CRORES U/S. 43 OF THE ACT.BEFORE THE FAA THE ASSESSEE CONTENDED THAT IT HAD INFORMED THE AO THAT THE UN- REASLISED INTEREST ON NON-PERFORMING ASSET WAS NOT TAXABLE AS PER THE SEC.43D OF THE ACT, THAT AND AS PER THE RBI GUIDELINES UNREALIZED INTEREST O F EARLIER YEARS RELATING TO NPAS COULD NOT BE CONSIDERED AS INCOME, THAT IT HAD DEBITED P&L AC COUNT WITH RS.35,03,36,189/- BEING THE UNREALIZED INTEREST OF THE EARLIER YEARS OF NPAS.AF TER CONSIDERING THE SUBMISSION OF THE 3823-24/M/05-SBI 21 ASSESSEE THE FAA HELD THAT THE CONTENTION OF THE AS SESSEE WAS CONTRARY TO THE PROVISIONS OF THE ACT,THAT THERE WAS NO PROVISION IN SEC.43D FOR REVERSAL OF ENTRIES OF INTEREST CREDITED OR FOR CLAIMING DEDUCTION IN SUBSEQUENT YEARS, THAT IT WAS ENTITLED FOR ANY RELIEF. 7.1. BEFORE US, THE AR STATED THAT THE AMOUNT IN QUESTIO N HAD ALREADY BEEN DISALLOWED IN THE PAST, THAT THERE CANNOT BE DISALLOWANCE OF THE SAME AMOUNT IN TWO YEARS. HE RELIED UPON THE CASE OF AMERICAN EXPRESS BANK LTD.(55SOT136).THE DR STATED THAT SECTION 43D WAS A CHARGING SECTION,THAT THE ORDER OF THE FAA WAS IN A CCORDANCE WITH THE PROVISIONS OF THE ACT. 7.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE CLAIM MADE BY THE ASSESSEE OF DOUBLE DISALLOWANCE OF THE SAME AMOUNT HAS NOT BEEN CONSIDERED.THEREFORE, IN THE INTEREST OF JUSTICE WE ARE REVERTING BACK THE ISSUE TO THE FILE OF THE AO TO DECIDE THE ISSUE AFRESH AFTER AFFORDING R EASONABLE OPPORTUNITY OF HEARING TO THE AA.GR.NO.7 STANDS PARTLY ALLOWED IN FAVOUR OF THE A SSESSEE. 8. NEXT GROUND IS ABOUT NOT ALLOWING DEDUCTION FOR PRO VISION FOR BAD AND DOUBTFUL DEBTS AT RS.706.29 CRORES U/S. 36(1)(VIIA) AS AGAINST RS.833 .30CRORES. 8.1. IN THE APPELLATE PROCEEDINGS,BEFORE THE FAA,THE ASS ESSEE ARGUED THAT IT HAD MADE PROVISION FOR BAD AND DOUBTFUL DEBTS ON THE BASIS O F RBI GUIDELINES,THAT THE ENTIRE AMT OF PROVISION HAD TO BE ALLOWED AS A DEDUCTION.THE FAA AFTER CONSIDERING THE ASSESSMENT ORDER AND THE ASSESSEES ORDER HELD THAT SECTION 36(1)(VI IA) PRESCRIBED UPPER LIMIT FOR DEDUCTION IN RESPECT OF PROVISION FOR BAD AND DOUBTFUL DEBTS, TH AT THE ASSESSEE COULD NOT ALLOW DEDUCTION FOR ANY AMT EXCEEDING THE LIMIT EVEN IF THE PROVISI ON HAD BEEN CREATED AS PER THE DIRECTIONS OF THE RBI.DURING THE COURSE OF HEARING BEFORE US, REP RESENTATIVES OF BOTH THE SIDED AGREED THAT ISSUE STAND DECIDED AGAINST THE ASSESSEE BY THE TRI BUNAL ORDER DT.26.7.2013 (SUPRA).WE FIND THAT THE TRIBUNAL HAD DECIDED THE ISSUE AS UNDER . 32. GROUND NO. 11 IS REGARDING PROVISION FOR DOUBT FUL DEBTS. THE ASSESSEE HAS CLAIMED DEDUCTION FOR PROVISION FOR BAD AND DOUBTFUL DEBTS U/S 36(1)(VIIA ) AMOUNTING TO ` 5,63,32,54,326/-. THE SAID PROVISI ON WAS STATED TO BE MADE ON THE BASIS OF RBI GUIDELINE S. THE AO ALLOWED A SUM OF ` 5,36,21,32,507/- U/S 36(1)(VIIA) OF THE INCOME TAX ACT. ON APPEAL, THE C IT(A) HAS CONFIRMED THE ACTION OF THE AO AND HELD THAT THE ENTIRE AMOUNT CANNOT BE ALLOWED AS DEDUCTI ON MERELY ON THE BASIS OF RBI GUIDELINES. BEFORE US THE LD. AR OF THE ASSESSEE HAS RELIED UPON THE DECI SION OF CHENNAI BENCH OF THIS TRIBUNAL IN CASE OF OVERSEAS SANMAR FINANCIAL LTD. VS JCIT 86 ITD 602. ON THE OTHER HAND, THE LD. DR HAS RELIED UPON THE ORDER OF THE AUTHORITIES BELOW AND SUBMITTED THAT T HE PROVISIONS OF STATUTE WILL PREVAIL OVER THE RBI GUIDELINES FOR THE PURPOSE OF DEDUCTION U/S 36(1)(V IIA). 33. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WE LL AS RELEVANT MATERIAL ON RECORD. THERE IS NO DISP UTE REGARDING THE CLAIM ALLOWED BY THE AO IS PROPER AS PER THE PROVISIONS OF SECTION 36(1)(VIIA). WHEN THE 3823-24/M/05-SBI 22 ALLOWABLE CLAIM HAS BEEN ACCEPTED BY THE AO UNDER T HE PROVISION OF SECTION 36(1)(VIIA) THEN MERELY THE PROVISION MADE ON THE BASIS OF RBI GUIDELINES DOES NOT BECOME ALLOWABLE FOR DEDUCTION IN CONTRAVENTIO N OF THE PROVISION OF SECTION 36(1)(VIIA). IT IS PERT INENT TO NOTE THAT WHEN THE CLAIM OF DEDUCTION SPEC IFICALLY PROVIDED U/S 36(1)(VIIA) THEN THE SAME CANNOT BE AL LOWED BY APPLYING ANY OTHER PROVISION. ACCORDINGLY, WE DO NOT FIND ANY MERIT OR SUBSTANCE IN THE CLAIM OF THE ASSESSEE. HENCE DISMISSED. RESPECTFULLY FOLLOWING THE ABOVE ORDER OF THE TRIBU NAL,WE DECIDE GROUND NO.8 AGAINST THE ASSESSEE . 9. LAST GROUND DEALS WITH DISALLOWANCE OF CONTRIBUTION TO SBI RETIRED EMPLOYEES MEDICAL FUND.DURING THE YEAR UNDER CONSIDERATION THE ASSESS EE HAD CONTRIBUTED RS.20 CRORES TOWARDS THE FUND.THE AO FOUND THAT THE ASSESSEE HAD IN THE RETURN OF INCOME MENTIONED THAT IT WAS A WELFARE MEASURE AND SHOULD BE ALLOWED AS A DEDUCTIO N FROM THE COMPUTATION OF TOTAL INCOME EVEN THOUGH THE ASSESSEE ITSELF HAD ADDED BACK THE SUM TO ITS INCOME FOR THE YEAR UNDER CONSIDERATION. THE AO DID NOT ALLOW THE CLAIM MADE BY THE ASSESSEE . 9.1. BEFORE THE FAA, IT WAS STATED THAT THE BANK HAD BEE N CONTRIBUTION EVERY YEAR CERTAIN AMT OUT OF ITS TAX PROFITS,TOWARDS CONTRIBUTION TO SBI EMPLOYEES MEDICAL FUND.THE FAA HELD THAT AS PER THE PROVISIONS OF SECTION 40A(9) OF THE ACT NO DEDUCTION WAS ALLOWABLE IN RESPECT OF ANY SUM PAID BY THE ASSESSEE AS AN EMPLOYER TOWARD S SETTING UP OR FORMATION OF OR AS CONTRIBUTION TO ANY FUND TRUST EXCEPT WHERE SUCH SU M WAS PAID FOR THE PURPOSES AND TO THE EXTENT PROVIDE BY SEC.36(1)(IV) AND (V) AND AS REQU IRED UNDER ANY OTHER LAW FOR THE TIME BEING ENFORCED, THAT THE PAYMENT IN QUESTION DID NOT SATI SFY ANY OF THE REQUIREMENTS.THE ASSESSEE WAS NOT ENTITLED FOR DEDUCTION. 9.2. BEFORE US,THE AR RELIED UPON THE CASE OF STATE BANK OF TRAVANCORE (306ITR-AT128) AND STATED THAT IT WAS A WELFARE MEASURE.THE DR SUPPORT ED THE ORDER OF THE FAA. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS BEFORE US, WE FIND THAT IN THE CASE OF STATE BANK OF TRAVANCORE(SUPRA),THE AO HAD DISALLOWED THE CLAIM OF THE BANK IN RESPECT OF THE CONTRIBUTION TO MEDICAL BENEFIT SCHE ME, AMOUNTING TO RS.50.00 LAKHS.THE AO WAS OF THE OPINION THAT THE PROVISION OF SECTION 40 A(9) OF THE ACT WERE APPLICABLE AND THE ASSESSEE WAS NOT ENTITLED TO CLAIM THE EXPENDITURE AS AN ALLOWABLE ITEM.MATTER TRAVELLED UPTO THE TRIBUNAL AND IT DELIBERATED UPON THE PROVISIONS OF SECTION 40A(9)OF THE ACT AT LENGTH. THE TRIBUNAL HELD THAT THE BASIC INTENTION OF THE LEGIS LATURE FOR INSERTION OF SUB SECTION 9 OF SECTION 40A WAS TO DISCOURAGE THE PRACTICE OF CREATION OF C AMOUFLAGE TRUST FUNDS, OSTENSIBLY FOR THE WELFARE OF THE EMPLOYEES AND TRANSFERRING HUGE FUND S TO SUCH TRUSTS BY WAY OF CONTRIBUTION, THAT IN THOSE CASES THE INVESTMENT OF THE TRUST COR PUS WAS ALSO LEFT TO THE COMPLETE DISCRETION 3823-24/M/05-SBI 23 OF THETRUSTEES,THAT TO AVOID HARDSHIP IN THE CASE W HERE TRUST/FUNDS HAD BEEN SET UP WHOLLY AND EXCLUSIVELY FOR THE WELFARE OF THE EMPLOYEES PR IOR TO 1.4.1984 SUB SECTION (10) WAS ALSO INSERTED TO SECTION 40A.THE TRIBUNAL WAS OF THE OPI NION THAT PROVISIONS OF SECTION 40A(9) SHOULD NOT MAKE ANY HARM TO THE EXPENDITURE INCURRE D BONAFIDE, THAT THE CONTRIBUTION BY THE ASSESSEE BANK WAS NOT DISPUTED BY THE AO, STATING T HAT THE SAME WAS NOT BONAFIDE, THAT THE FUNDS WERE NOT CONTROLLED BY THE ASSESSEE BANKS, TH AT THE BONAFIDE CONTRIBUTION MADE BY THE ASSESSEE AS AN EMPLOYER WAS NOT HIT BY SECTION 9 OF SECTION 40A OF THE ACT.IN THE CASE UNDER CONSIDERATION,THERE IS NO DOUBT ABOUT GENUINENESS O F PAYMENT NOR IT IS THE CASE OF THE AO OR FAA THAT TRUST WAS NOT BONAFIDE OR THE EXPENDITURE WAS NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE EMPLOYEES.CONSIDERING THESE FACTS OF THE CA SE AND FOLLOWING THE JUDGMENT OF STATE BANK OF TRAVANCORE (SUPRA),GROUND NO.9 IS DECIDED I N FAVOUR OF THE ASSESSEE. 10. THE ASSESSEE HAD ALSO RAISED ADDITIONAL GROUNDS FOR THE YEAR UNDER CONSIDERATION. CONSIDERING THE FACT THAT THEY WERE PURELY OF LEGAL NATURE,SAME WERE ADMITTED.NOW,WE WOULD LIKE TO DEAL WITH THEM.FIRST THREE ADDITIONAL GROUN DS DEAL WITH WRITE OFF BAD DEBTS U/S. 36 (1) (III),RECOVERY OF BAD DEBTS WRITTEN OFF U/S.41(4) A ND INCOME EARNED FROM FOREIGN BRANCHES. DURING THE COURSE OF HEARING THE AR RELIED UPON THE CASES OF VIJAYA BANK(323ITR 166),STATE BANK OF MYSORE(33 SOT7)AND BANK OF INDIA(ITA/2781/MUM/2011).HE FURTHER STATED THAT THE TRIBUNAL VIDE ITS ORDER 03.01.2014, IN MA 371/M /14,IN ASSESSEES OWN CASE FOR 1996-97, HAD RESTORED ALL THE THREE ISSUES BACK TO THE FILE OF AO FOR FRESH EXAMINATION AND ADJUDIUCATION. WE FIND THAT THE TRIBUNAL HAS IN ITS ORDER DATED 03 .01.2014 (SUPRA) HAS HELD AS UNDER :- IN ADDITIONAL GROUND NO. 1-3 ARE RAISED FIRST TIME BY THE ASSESSEE AND INVOLVES LEGAL ISSUE, THEREFORE AS PRAYER BY THE ASSESSEE THE SAME ARE RE MITTED TO THE RECORD OF THE ASSESSING OFFICER FOR EXAMINATION AND ADJUDICATION AS PER LAW AFTER GIVING A OPPORTUNITY OF HEARING TO THE ASSESSEE. 5. IT IS APPARENT FROM THE FINDING OF THE TRIBUNAL IN PARA 37 (SUPRA) THAT THE DECISIONS RELIED UPON BY THE LD. AR HAVE ESCAPED CONSIDERATION, ACCO RDINGLY WE ARE OF THE VIEW THAT TO THAT EXTENT THERE IS AN APPARENT ERROR IN THE IMPUGN ORD ER OF THE TRIBUNAL WHICH REQUIRES TO BE RECTIFIED U/S 254(2) OF THE INCOME TAX ACT. SINCE T HESE ISSUES WERE RAISED FOR THE FIRST TIME AND REMITTED TO THE RECORD OF THE AO FOR EXAMINATION AN D ADJUDICATION, THEREFORE, WE MODIFY OUR FINDING ON THE ADDITIONAL GROUNDS NO. 1-3 IN PARA 3 7 WHICH READS AS UNDER:- 37. ADDITIONAL GROUND NO. 1-3 ARE RAISED FIRST T IME BY THE ASSESSEE AND INVOLVES LEGAL ISSUE. THOUGH THE ASSESSEE HAS RELIED UPON THE FOLLOWING D ECISION IN SUPPORT OF ITS CLAIM ;- 3823-24/M/05-SBI 24 1. COVERED BY THE DECISION OF THE SUPREME COURT IN THE CASE OF VIJAYA BANK VS. CIT (2010) 323 ITR 166 2. COVERED BY THE DECISION OF THE BANGALORE TRIBUNA L IN THE CASE OF STATE BANK OF INDIA MYSORE VS. DCIT (2009) 33 SOT 7 (BANG.) 3. COVERED IN FAVOUR OF THE APPELLANT BY THE DECISI ON OF THE MUMBAI BENCH OF TRIBUNAL IN THE CASE OF BANK OF INDIA VS. DCIT (ITA NO. 2781/MUM/20 11) HOWEVER SINCE THE ISSUE HAS NOT BEEN EXAMINED BY TH E AO, THEREFORE, IN THE INTEREST OF JUSTICE WE REMIT THESE GROUNDS TO THE RECORD OF THE ASSESSI NG OFFICER FOR FRESH EXAMINATION AND ADJUDICATION AFTER CONSIDERING THE DECISIONS RELIED UPON BY THE ASSESSEE AS WELL AS AFTER GIVING OPPORTUNITY OF HEARING TO THE ASSESSEE. RESPECTFULLY FOLLOWING THE ABOVE WE ARE REMITTING B ACK ALL THE THREE ISSUE TO THE FILE OF THE AO FOR FRESH ADJUDICATION.AO MAY AFFORD A REASONABL E OPPORTUNITY OF HEARING TO THE ASSESSEE. ADDITIONAL GROUNDS NO.1 TO 3 ARE DECIDE IN FAVOUR O F THE ASSESSEE, IN PART. 11. NEXT ADDITIONAL GROUND PERTAINS TO DISALLOWANCE OF DEPRECIATION ON MATURED INVESTMENTS RS.18,35,53,508/- . THE AR FAIRLY CONCEEDED THAT THE ISSUE IS COVERED A GAINST THE ASSESSEE BY THE DECISION OF THE TRIBUNAL IN ITS OWN CASE FOR AS SESSMENT YEAR 1996-97 (PARA 38 & 39) IN ITA NO.5470/M/2002 WHICH READS AS UNDER :- 38. ADDITIONAL GROUND NO. 4 IS REGARDING DEPRECIAT ION ON MATURED SECURITIES. THE ASSESSEE HAS CLAIMED A SUM OF RS. 2,23,86,418/- TOWARDS DEPR ECIATION OF INVESTMENTS. THE AO DISALLOWED THE CLAIM OF THE ASSESSEE AND THE CIT(A) HAS CONFIRMED THE ACTION OF THE AO. WE HAVE HEARD THE LD. AR AS WELL AS LD. DR AND CONSIDE RED THE RELEVANT MATERIAL ON RECORD. THE CIT(A) HAS DECIDED THE ISSUE IN PARA 9 AS UNDER: 9.THE NINTH EFFECTIVE GROUND OF APPEAL IS AGAINST THE DISALLOWANCE OF RS.2,23,86,418/- BEING THE PROVISION FOR DIMINUTION IN THE VALUE OF SECURI TIES WHICH HAD MATURED AND BECOME DUE FOR REDEMPTION DURING THE YEAR BUT WERE NOT REDEEMED. I T WAS CONTENDED BEFORE THE A.O. THAT IN SOME CASES, THE COMPANIES OR THE STATE GOVERNMENTS WHO HAD ISSUED THE RELEVANT SECURITIES WERE NOT ABLE TO PAY THE AMOUNT DUE ON REDEMPTION. THE APPELLANT TREATS THESE SECURITIES AS NONPERFORMING ASSETS AND A PROVISION IS MADE AT A C ERTAIN PERCENTAGE FOR DIMINUTION IN THEIR VALUE AS IN THE CASE OF OTHER NON-PERFORMING ASSETS . THERE MAY BE SOME DELAY ON THE PART OF THE COMPANIES OR THE STATE GOVERNMENTS IN PAYING TH E REDEMPTION AMOUNT. BUT, WHENEVER THE PAYMENT WOULD BE MADE IT CANNOT BE EXPECTED TO BE L ESS THAN THE FACE VALUE. ON THE DATE OF MATURITY, THE WHOLE OF THE AMOUNT OF REDEMPTION MON EY BECOMES DUE UNDER THE MERCANTILE SYSTEM OF ACCOUNTING FOLLOWED BY THE APPELLANT UNLE SS A PORTION OF THIS AMOUNT IS WRITTEN OFF AS BAD DEBT. IT IS A REAL INCOME AND HENCE HAS TO B E TAXED AS SUCH UNDER THE MERCANTILE SYSTEM FOLLOWED BY THE APPELLANT. RELIANCE IN THIS REGARD IS PLACED ON STATE BANK OF TATE BANK OF 3823-24/M/05-SBI 25 TRAVANCORE VS. CIT 158 ITR 102, 155 (SC) WHICH WAS TRAVANCORE VS. CIT 158 ITR 102, 155 (SC) FOLLOWED IN WESTERN INDIA OIL DISTRIBUTING CO. LTD. VS. CIT 206 ITR 359 (BOM). ITR 359 (BOM). IT WAS HELD IN THIS DECISION THAT THE CO NCEPT OF REAL INCOME SHOULD NOT BE SO READ AS TO DEFEAT THE PROVISIONS OF THE ACT. EXTENSION O F THE CONCEPT OF REAL INCOME TO A FIELD SO AS TO NEGATE ACCRUAL AFTER THE AMOUNT HAD BECOME RECEI VABLE IS CONTRARY TO THE POSTULATES OF THE ACT, THE SUPREME COURT HELD (P. 146 OF 158 ITR). MO REOVER, AS HELD IN THE CASE OF NAVIN R. AVIN R. KARNANI VS. CIT 185 ITR 408 (BOM) KARNANI V S. CIT 185 ITR 408 (BOM) ANI VS. CIT 185 ITR 408 (BOM), IT WAS NOT POSSIBLE TO WAIVE ANY AMOUNT OF INCOME WHICH HAD ACCRUED UNDER THE MERCANTILE SYSTEM OF ACCOUNTING ON THE GR OUND OF DIMINISHED HOPE OF RECOVERY. FURTHERMORE, ANY LIABILITY DE FUTURO IS NOT AN ASCE RTAINED LIABILITY IN PRAESENTI AND CANNOT BE ALLOWED AS DEDUCTION UNDER THE INCOME-TAX ACT AS HE LD IN THE CASE OF INDIAN MOLASSES CO. PVT. MOLASSES CO. PVT.LTD. VS. CIT 37 ITR 66 (SC) L TD. VS. CIT 37 ITR 66 (SC) AND STANDARD MILLS LTD. VS. CIT 37 ITR 66 (SC) STANDARD MILLS CO . LTD. VS.CIT 229 ITR 366(BOM CO. LTD. VS.CIT 229 ITR 366(BOM) CIT 229 ITR 366(BOM). HENCE, NO SUCH AD HOC DEDUCTION COULD BE ALLOWED AGAINST THE AMOUNT RECEIVABLE ON R EDEMPTION OF SECURITIES WHICH HAD MATURED AND BECOME DUE FOR PAYMENT BEFORE THE CLOSE OF THE ACCOUNTING YEAR. THIS GROUND THEREFORE FAILS. 39.THE FINDINGS OF THE CIT(A) IS BASED THE ON THE V ARIOUS DECISIONS OF THE HONBLE SUPREME COURT AS WELL JURISDICTION HIGH COURT. NO CONTRARY DECISIONS HAS BEEN BROUGHT BEFORE US ACCORDINGLY WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE IMPUGNED ORDER OF CIT(A) QUA THIS ISSUE. THE SAME IS UPHELD. RESPECTFULLY FOLLOWING THE ABOVE ADDITIONAL GROUND NO.4 IS DECIDED AGAINST THE ASSESSEE. 12. FIFTH ADDITIONAL GROUND IS REGARDING LOSS ON REVALU ATION OF PERMANENT CATEGORY INVEST - MENTS.THE AR AND THE DR AGREED THAT THE ISSUE IS DE CIDED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE TRIBUNAL IN ITS OWN CASE FOR THE AS SESSMENT YEAR 1995-96 (PARAS NO.6 TO 10) OR IN ASSESSMENT YEAR 1996-97 (PARA NO.40): 40.ADDITIONAL GROUND NO. 5 IS REGARDING LOSS OF RE VALUATION OF PERMANENT CATEGORY INVESTMENT. WE HAVE HEARD THE LD. AR AS WELL AS LD. DR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET WE NOTE THAT AN IDENTICAL ISSUE HAS BEEN CONSIDERED AND DECIDED BY THIS TRIBUNAL IS ASSESSEES OWN CASE FOR THE ASSESS MENT YEAR 1995-96 IN PARA 10 AS UNDER: 10. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PE RUSING THE RELEVANT RECORDS, WE FIND IT DIFFICULT TO AGREE WITH THE STAND OF THE REVENUE AU THORITIES THAT THE LOSS CLAIMED BY THE ASSESSEE ON REVALUATION OF THE CONCERNED INVESTMENT CANNOT BE ALLOWED WHILE COMPUTING THE INCOME OF THE ASSESSEE FROM BANKING BUSINESS. AS HE LD BY THE HONBLE KERALA HIGH COURT IN THE CASE OF MALABAR CO-OPERATIVE CENTRAL BANK LTD. (SUPRA), THE BANKING INSTITUTION AS A PART 3823-24/M/05-SBI 26 OF BUSINESS ACTIVITY WILL HAVE TO HAVE READY RESOUR CES TO MEET ITS LIABILITY THE EXTENT OF WHICH COULD NEVER BE FORESEEN. IT WAS HELD THAT EVEN THOU GH THE LEGISLATURE HAS MADE IT OBLIGATORY FOR THE BANKING INSTITUTIONS TO MAINTAIN CERTAIN PE RCENTAGE OF ITS ASSETS IN THE FORM OF SECURITIES AT ANY GIVEN DAY TAKING THE INTEREST OF THE PUBLIC INTO CONSIDERATION, THIS DOES NOT DETRACT FROM THE PROPOSITION THAT BY SO HOLDING THE SECURITIES, THE BANK IS CARRYING ON ITS BUSINESS AND SECURITIES SO HELD ARE STOCK IN TRADE. IN THE CASE OF BIHAR STATE CO-OPERATIVE BANK LTD. (SUPRA), IT WAS HELD BY THE HONBLE SUPREME CO URT THAT IT IS A NORMAL MODE OF CARRYING ON BANKING BUSINESS TO INVEST MONEYS IN A MANNER TH AT THEY ARE READILY AVAILABLE. IT WAS HELD THAT HOWSOEVER A SECURITY CAPITAL IS EMPLOYED, IT I S A PART OF NORMAL COURSE OF BUSINESS OF A BANK AND THE MONEY WHICH WAS NOT LEND TO THE BORROW ER BUT WAS INVESTED IN THE FORM OF DEPOSITS IN ANOTHER BANK CANNOT BE SAID TO HAVE BEC OME CEASED TO BE PART OF STOCK IN TRADE OF BANK. KEEPING IN VIEW THE RATIO OF THESE JUDICIAL P RONOUNCEMENTS, WE HOLD THAT THE INVESTMENT IN QUESTION VERY MUCH REPRESENTED STOCK IN TRADE OF THE BAKING BUSINESS OF THE ASSESSEE AND THE LOSS ON THE REVALUATION THEREOF IS ALLOWABLE AS DEDUCTION. ACCORDINGLY, THE IMPUGNED ORDER OF THE LD. CIT(A) ON THIS ISSUE IS SET ASIDE AND TH E A.O. IS DIRECTED TO ALLOW THE DEDUCTION CLAIMED BY THE ASSESSEE ON ACCOUNT OF LOSS ON REVAL UATION OF INVESTMENT. GROUND NO. 3 OF ASSESSEES APPEAL IS ACCORDINGLY ALLOWED. FOLLOWING THE EARLIER ORDER OF THIS TRIBUNAL, WE DE CIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE AGAINST THE REVENUE. CONSIDERING THE ABOVE,LAST ADDITIONAL GROUND IS DEC IDED IN FAVOUR OF THE ASSESSEE. ITA/3824/MUM/05-AY.1998-99: 13. GROUND NO.1 DEALS WITH INTEREST CREDITED TO INTERES T SUSPENSE ACCOUNT. WE HAVE DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE WHILE ADJUDICAT ING THE APPEAL FOR THE EARLIER AY. GROUND NO.1 IS ALLOWED. 14 .NEXT GROUND IS ABOUT DISALLOWANCE OF RS.27.52 LAKH S IN RESPECT OF PAYMENT FOR SCIENTIFIC RESEARCH.FOLLOWING OUR ORDER FOR THE EARLIER AY.(PA RA NO.3-3.2)GROUND NO.2 IS DECIDED AGAINST THE ASSESSEE. 15 .GROUND NO.3 DEALS WITH INTEREST CLAIMED EXEMPT UND ER VARIOUS SUB-SECTIONS OF SECTION 10 OF THE ACT.WHILE DECIDING THE APPEAL FOR AY.1997-98 ,WE HAVE RESTORED BACK THE ISSUE TO THE FILE OF THE AO. FOLLOWING THE SAME MATTER IS REMITT ED BACK TO THE FILE OF THE AO.GROUND NO. 3 IS DECIDED IN FAVOUR OF THE ASSESSEE,IN PART. 3823-24/M/05-SBI 27 16. GROUND OF APPEAL NO.4 PERTAINS TO EXEMPTION U/S.10( 33) OF THE ACT.THE ISSUE WAS SENT BACK TO THE AO,BY US,FOR FRESH ADJUDICATION, IN THE APPEAL FOR THE EARLIER AY.CONSIDERING THE FACT,THAT EXCEPT FOR THE AMOUNT INVOLVED,THERE IS N O DIFFERENCE IN THE FACTS,WE ARE SENDING BACK THE ISSUE TO THE FILE OF THE AO FOR DECIDING T HE SAME AFRESH.GROUND 4 IS PARTLY ALLOWED IN FAVOUR OF THE ASSESSEE. 17. NEXT GROUND IS ABOUT DISALLOWANCE OF RS.93.75 CRORE S UNDER THE HEAD DEPRECIATION ON LEASED ASSETS.WE FIND THAT WE HAD DECIDED THE ISSUE AGAINST THE ASSESSEE, WHILE DECIDING THE APPEAL FOR THE LAST AY. ACCORDINGLY GROUND NO.5 STA NDS DECIDED AGAINST THE ASSESSEE. 18. GROUND NO.6 DEALS WITH DISALLOWANCE OF CONTRIBUTION TOWARDS SBI RETIRED EMPLOYEES MEDICAL BENEFIT FUND.FOLLOWING OUR ORDER FOR LAST Y EAR GROUND NO.6 STANDS ALLOWED. 19. SEVENTH GROUND OF APPEAL IS ABOUT PROVISION FOR BAD AND DOUBTFUL DEBTS AMOUNTING TO RS.13,02,24,75,974/-.WE HAD DECIDED THE ISSUE AGAIN ST THE ASSESSE,WHILE DECIDING THE APPEAL FOR AY 1997-98, FOLLOWING THE SAME SEVENTH GROUND O F APPEAL STANDS DISMISSED. 20. LAST GROUND OF APPEAL PERTAINS TO DISALLOWANCE OF P ROVISION IN RESPECT OF FOREIGN OFFICES. BEFORE US,THE AR REFERRED TO NOTE NO.19, OF THE RET URN OF INCOME AND THE LETTER SUBMITTED ON 5.9.2000 ALONG WITH THE ANNEXURES WHICH FORM PART O F THE PAPER BOOK.WE ARE OF THE OPINION THAT THE ISSUE NEEDS FURTHER VERIFICATION.THEREFORE ,MATTER IS RESTORED BACK TO THE FILE OF THE AO FOR FRESH ADJUDICATION,WHO WOULD DECIDE THE CASE AF TER HEARING THE ASSESSEE.GROUND NO.8 STANDS DECIDED IN FAVOUR OF THE ASSESSEE,IN PART. 21. THE ASSESSEE HAS RAISED ADDITIONAL GROUNDS FOR THIS YEAR ALSO.FIRST THREE ADDITIONAL GROUNDS ARE IDENTICAL TO THE ADDITIONAL GROUNDS OF THE EARL IER YEAR-THE ONLY DIFFERENCE IS THE AMOUNTS INVOLVED.FOLLOWING OUT ORDER FOR THE LAST AY.WE ARE RESTORING BACK THE ISSUES TO THE FILE OF THE AO FOR FRESH ADJUDICATION. HE IS DIRECTED TO AFFORD A REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. ADDITIONAL GROUND NO.1-3 ARE DECIDED IN F AVOUR OF THE ASSESSEE, IN PART. 22. ADDITIONAL GROUND NO.4 IS ABOUT DISALLOWANCE OF RS.12,15,90,793/- TOWARDS DEPRECIATION ON MATURED SECURITIES.IDENTICAL GROUND RAISED BY TH E ASSESSEE HAS BEEN DECIDED AGAINST IT BY 3823-24/M/05-SBI 28 US, WHILE ADJUDICATING THE APPEAL FOR THE EARLIER A Y. FOLLOWING THE SAME ADDITIONAL GROUND NO.4 IS DECIDED AGAINST THE ASSESSEE. AS A RESULT,APPEALS FILED BY THE ASSESSEE FOR BOTH THE AY.S.STAND PARTLY ALLOWED. . ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH APRIL, 2016. 29 ,2016 SD/- SD/- ( / AMIT SHUKLA ) ( / RAJENDRA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI, DATE:29 .04.2016 . . . .. . JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR D BENCH, ITAT, MUMBAI / , A , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.