UTI Bank Ltd.,(Now known as Axis Bank Ltd), Ahmedabad V. The Dy.CIT.,Circle-8, Ahmedabad

ITA 4387/AHD/2007

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 67579 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 year(s) 8 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-08-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 10-07-2013
• Assessment Year: 2003-2004
• Appeal Filed On: 11-12-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ARVIND SONDE
• Keywords: Business income; Depreciation; Earning of tax free income; Question of law; Bad and doubtful debts; Difference of opinion; Tax effect
• Section: 143(3); 133A; 14A; 32; 147; 27; 148; 6

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, AH MEDABAD (BEFORE SHRI G.C.GUPTA VICE PRESIDENT & SHRI ANIL C HATURVEDI, A.M.) ITA NO.152/AHD/2006, 815/AHD/2007 & 4387/AHD/2007 (ASSESSMENT YEAR: 2002-2003, 2001-02 & 2003,04 UTI BANK LTD.,TRISHUL BLDG. OPP: SAMARTHESHWAR MAHADEV TEMPLE NR. LAW GARDEN ELLISBRIDGE, AHMEDABAD (APPELLANT) VS. ACIT, CIR.8 AHMEDABAD (RESPONDENT) ITA NO.233/AHD/2006 AND 237/AHD/2008 (ASSTT.YEAR : 2002-2003 AND 2003-2004) ACIT, CIR.8 AHMEDABAD (APPELLANT) VS. UTI BANK LTD.,TRISHUL BLDG. OPP: SAMARTHESHWAR MAHADEV TEMPLE NR. LAW GARDEN ELLISBRIDGE, AHMEDABAD. (RESPONDENT) PAN: AACU2414K APPELLANT BY : SHRI SUBHASH BAINS, CIT-DR RESPONDENT BY : SHRI ARVIND SONDE ( )/ ORDER DATE OF HEARING : 10 TH JULY, 2013 DATE OF PRONOUNCEMENT : 30 -08-2013 ITA NOS. 152 & 233/AHD/2006, 815 & 4387/AHD/ 2007 ITA NO. 237/AHD/2008 A.Y. 2001-02 TO 2003-04 2 PER SHRI ANIL CHATURVEDI,A.M. THESE ARE 5 APPEALS OUT OF WHICH THREE APPEALS ARE FILED BY ASSESSEE NAMELY ITA NO. 815/AHD/2007 (FOR A.Y. 2001,02), ITA NO. 152/AHD/20 06 (FOR A.Y. 2002,03) & ITA NO. 4387/AHD/2007 (FOR A.Y. 2003-04) AGAINST THE ORDER OF CIT(A) DATED 10.01.2003, 18.11.2005 AND 5.10.2007 RESPECTIVELY. THE TWO APPE AL OF REVENUE NAMELY ITA NO. 233/AHD/2006 (FOR A.Y. 2002-03) & ITA NO. 237/AHD/2 008 (FOR A.Y. 2003-04) ARE AGAINST THE ORDER CIT(A) DATED 18.11.2005 & 5.10.20 07 RESPECTIVELY. WE FIRST TAKE UP ASSESSEES APPEAL (IN ITA NO. 152/AHD/2006 FOR AY 2002-03) 2. THE FACTS AS CULLED OUT FROM THE ORDER OF LOWER AUTHORITIES ARE AS UNDER: 3. ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF BANKING. IT FILED ITS RETURN OF INCOME FOR A.Y. 2002-03 DECLARING INCOME OF RS. 208 ,83,29,510/-. ON 28.02.2003, IT REVISED THE RETURN OF INCOME BY DECLARING TOTAL INC OME OF RS. 208,95,81,108/-. THE CASE WAS SELECTED FOR SCRUTINY AND THEREAFTER THE ASSESS MENT WAS FRAMED U/S 143(3) VIDE ORDER DATED 30.03.2005 AND THE TOTAL INCOME WAS DET ERMINED AT RS. 363,22,37,200/-. AGGRIEVED BY THE ORDER OF ASSESSING OFFICER (AO), A SSESSEE CARRIED THE MATTER BEFORE CIT(A). CIT(A) VIDE ORDER DATED 18.11.2005 GRANTED PARTIAL RELIEF TO THE ASSESSEE. AGGRIEVED BY THE AFORESAID ORDER OF CIT(A) BOTH THE ASSESSEE AS WELL AS REVENUE ARE IN APPEAL BEFORE US. 4. GROUND NO. 1 IS GENERAL IN NATURE AND THEREFORE NOT ADJUDICATED AND DISMISSED. 5. GROUND NO. 2 AND SUB GROUNDS ARE WITH RESPECT TO THE CLAIM OF BAD DEBTS. 6. DURING THE COURSE OF ASSESSMENT PROCEEDING S, AO NOTICED THAT ASSESSEE HAS CLAIMED DEDUCTION UNDER SECTION 36(1)(VII) AT RS. 1 31,55,63,089/- AND DEDUCTION UNDER SECTION 36(1)(VIIA)(A) AT RS. 8,24,00,000/-. THE CO MPUTATION OF DEDUCTION OF THE AFORESAID DEDUCTION BY THE ASSESSEE WAS AS UNDER: ITA NOS. 152 & 233/AHD/2006, 815 & 4387/AHD/ 2007 ITA NO. 237/AHD/2008 A.Y. 2001-02 TO 2003-04 3 (A) DEDUCTION U/S 36(1)(VII) GROSS BAD DEBTS WRITTEN OFF DURING THE PREVIOUS YE AR RS. 138.29 CRORES. LESS: OP.BAL.IN PROVISION FOR BAD AND DOUBTFUL DEB TS U/S. 36(1)(VIIA)(A) AS ON 01.04.2001 RS. 6.69 CRORES CLAIM U/S 36(1)(VII) RS. 131,59,63,089/- (B) DEDUCTION U/S 36(1)(VIIA)(A) DEDUCTION U/S. 36(1)(VIIA)(A) @ 5% ON THE TOTAL VA LUE OF NPA WORTH RS. 16473.42 LACS RS. 8,24,00,000/- 7. THE ASSESSEE WAS ASKED TO GIVE THE DETAILS OF DE DUCTION CLAIMED. THE ASSESSEE INTERALIA EXPLAINED THE MANNER OF WRITING OF THE BAD DEBTS AND THE PROVISIONING ON THE SAME AND SUBMITTED THAT THE PRO VISIONING HAS BEEN MADE IN TERMS OF THE GUIDELINES OF RESERVE BANK OF INDIA . THE TOTAL PROVISION MADE BY THE ASSESSEE FOR STANDARD, DOUBTFUL, LOSS AND SU B-STANDARD ASSET AS PER RBI GUIDELINE WORKED OUT AS UNDER: RS 1 CREDIT BALANCE OF PROVISION FOR NPAS/DOUBTFUL DEB TS 59,03,00,000 2 PROVISION FOR LOSS ASSETS (A) FULL WRITE OFF 40,54,77,000 (B) PARTIAL WRITE OFF 38,96,93,000 TOTAL PROVISIONS MADE ON DOUBTFUL AND LOSS ASSETS 138,54,70,000 8. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE W ORKING MADE BY THE ASSESSEE FOR WORKING OUT DEDUCTION UNDER SECTION 36(1)(VII) WAS INCORRECT. ACCORDING TO AO THE ASSESSEE IS TO BE ALLOWED DEDUCTION U/S 36(1)(VII) OF THE BAD DEBTS WRITTEN OFF IN THE BOOKS OF ACCOUNTS. HOWEVER, IN CASES WHERE SUB CLAU SE (VIIA) OF SUB SECTION 36(1) IS APPLICABLE, THE DEDUCTION IS TO BE RESTRICTED AS PE R PROVISO TO S. 36(1)(VII). THE AO WAS OF THE VIEW THAT FOR COMPUTING THE FIGURE OF RS 59. 03 CRORES, ASSESSEE HAS REDUCED THE OPENING BALANCE OF RS. 44.40 CRORE WHICH WAS INCORR ECT. HE WAS OF THE VIEW THAT THE PROVISIONS HELD ON 31.01.2001 AS DETERMINED BY THE A.O. DURING THE ASSESSMENT OF A.Y. 2001-02 OF RS. 12.70 CRORES SHOULD HAVE BEEN CONSID ERED AS THE OPENING BALANCE. HE ITA NOS. 152 & 233/AHD/2006, 815 & 4387/AHD/ 2007 ITA NO. 237/AHD/2008 A.Y. 2001-02 TO 2003-04 4 ACCORDINGLY WORKED OUT THE CREDIT BALANCE OF PROVIS ION FOR DOUBTFUL DEBTS AT RS 90,72,93,000. HE THEREAFTER WORKED OUT THE DEDUCTIO N ALLOWABLE U/S 36(1)(VII) AS UNDER: RS ASSESSEES CLAIM OF DEDUCTION U/S 36(1)(VII) 131,5 9,63,080 CORRECTLY ALLOWABLE AS PER AO 38,92,07,000 DISALLOWANCE 92,67,56,089 9. ACCORDINGLY, AO WORKED OUT THE EXCESS DEDUCTION U/S 36(1)(VII) AT RS 92,67,56,089/-. AGGRIEVED BY THE ORDER OF AO, ASSESSEE CARRIED THE MATTER BEFORE CIT(A). CIT(A) UPHELD THE ORDER OF AO BY HOLDING AS UNDER: 4.3 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE AND THE SUBMISSIONS AS ADVANCED BY THE APPELLANT ALONGWITH VARIOUS JUDICIAL DECISIONS. THE LEGAL POSITION EMERGES ON THE BASIS OF VARIOUS CASE LAWS CITED ABOVE IS AS FOLLOW S:- A) AS PER THE DECISION OF KERALA HIGH COURT IN THE CASE OF SOUTH INDIAN BANK, 262 ITR 579 THE SCOPE OF THE PROVISO TO CL. (VII) OF S. 36(1) HAS TO BE ASCERTAINED FROM CUMULATIVE READING OF PROVISIONS OF CLS. (VII), (VI IA) OF S.36(1) AND CL.(V) OF S.36(2) OF THE ACT. IT WOULD APPEAR TO US THAT THE OBJECT OF INTR ODUCING THE PROVISO WAS TO AVOID A DOUBLE BENEFIT TO THE SCHEDULED BANK. THE LEGISLATURE, IT APPEARS, THOUGHT THAT SUCH DOUB LE BENEFITS IN RESPECT OF RURAL ADVANCES SHOULD NO BE ALLOWED AND, THEREFORE, THEY HAVE INSE RTED A PROVISO TO I. (VII) AND SIMULTANEOUSLY INSERTED CL. (V) OF S. 36(2). IT IS ONLY FOR THE SAID PURPOSE, THE PROVISO AND CL. (V) WERE INTRODUCED SIMULTANEOUSLY BY THE AMEND MENT ACT, 1985, W.E.F. 1ST APRIL, 1985. ACCORDING TO US, THE SCOPE OF THE PROVISO TO CL. (VII) OF S. 36(1) OF THE ACT IS ONLY TO DENY THE DEDUCTION TO THE EXTENT OF BAD DEBT WRITTE N OFF IN THE BOOKS WITH RESPECT TO WHICH PROVISION MADE UNDER C. (VIIA) OF THE ACT. TO MAKE IT CLEAR, IF THE BAD DEBT WRITTEN OFF RELATES TO DEBTS OTHER THAN FOR WHICH THE PROVISION IS MADE UNDER CL. (VIIA), SUCH DEBTS WILL FALL SQUARELY UNDER THE MAIN PART OF CL. (VII) WHIC H IS ENTITLED TO DEDUCTION AND IN RESPECT OF THAT PART OF THE DEBT WITH REFERENCE TO WHICH A PRO VISION IS MADE UNDER C1. (VIIA), THE PROVISO WILL OPERATE TO LIMIT THE DEDUCTION TO THE EXTENT OF THE DIFFERENCE BETWEEN THAT PART OF DEBT WRITTEN OFF IN THE. PREVIOUS YEAR AND THE C REDIT BALANCE IN THE PROVISION FOR BAD AND DOUBTFUL DEBTS ACCOUNT MADE UNDER CL. (VIIA). THIS DECISION IS ACTUALLY IN FAVOUR OF THE DEPTI., WHICH SAYS THAT ALTHOUGH DEDUCTION U/S. 36(1)(VII) AND 36(1)(VIIA) ARE TWO SEPARATE DEDUCTI ONS ALLOWABLE, BUT AS PER PROVISO TO CL 36(L)VII), PROVISIONS MADE UNDER CL. (VIIA) OF SEC. 36(1) SHOULD BE REDUCED FROM THE DEDUCTION ALLOWABLE U/S. 36(1)(VII). B) AS PER THE DECISION IN THE CASE OF D.C.I.T. V. C ATHOLIC SYRIAN BANK, LTD., 88 ITD 185 (COCHIN), THE INTENTION BEHIND THE RELEVANT PRO VISIONS IN THE CASE OF BANKS, IS LIKE THIS. NORMALLY A DEDUCTION FOR BAD DEBTS CAN B E ALLOWED ONLY IF THE DEBT IS WRITTEN OFF IN THE BOOKS AS DEBT. NO DEDUCTION 'IS TO BE ALLOWED IN RESPECT OF A MERE PROVISION FOR BAD AND DOUBTFUL DEBTS. BUT IN THE CA SE OF RURAL ADVANCES, A DEDUCTION WOULD BE ALLOWED EVEN IN RESPECT OF A MER E PROVISION WITHOUT INSISTING ON AN ACTUAL WRITE-OFF. THIS, HOWEVER, MAY RESULT I N DOUBLE ALLOWANCE IN THE SENSE ITA NOS. 152 & 233/AHD/2006, 815 & 4387/AHD/ 2007 ITA NO. 237/AHD/2008 A.Y. 2001-02 TO 2003-04 5 IN RESPECT OF THE SAME RURAL ADVANCE THE BANK MAY G ET AN ALLOWANCE OF THE PROVISION ON THE BASIS OF CL (VIIA) AND ALSO ON THE BASIS OF THE ACTUAL WRITE-OFF UNDER CL. (VII). THIS SITUATION IS TAKEN CARE OF BY THE P ROVISION TO CL (VII) WHICH LIMITS THE ALLOWANCE ON THE BASIS OF HE ACTUAL WRITE OFF TO TH E EXCESS, IF ANY OF THE WRITE-OFF OVER THE AMOUNT STANDING TO THE CREDIT OF THE PROVI SION ACCOUNT CREATED UNDER CL. (VIIA)'. ...............I.............. ............................... THIS MAY LEAD, AS NOTED EARLIER TO THE RESULT THAT IN RESPECT OF THE SAME ADVANCE THE ASSESSEE MAY GET A DOUBLE DEDUCTION, ONE ON THE BASIS OF THE WRITE OFF AND AGAIN ON THE BASIS OF THE PROVISION. IT WAS TO PREV ENT THIS THAT THE PROVISO TO CLAUSE (VII) WAS INSERTED WHICH SAYS THAT IN RESPECT OF TH E BAD DEBT ARISING OUT OF RURAL ADVANCES THE DEDUCTION ON ACCOUNT OF THE ACTUAL WRI TE-OFF WOULD BE LIMITED TO THE EXCESS AMOUNT WRITTEN OFF OVER THE AMOUNT OF THE PR OVISION WHICH HAS ALREADY BEEN ALLOWED UNDER CL.(VIIA). AS PER THIS JUDGMENT, THE ACTUAL HAD DEBT WRITTEN O FF WOULD BE LIMITED TO THE EXCESS AMOUNT OF WRITE OFF OVER THE AMOUNT STANDING TO THE CREDIT OF THE PROVISION ACCOUNT CREATED UNDER CL. (VIIA) TO SEC. 36(1) ALLOWED UNDE R CL.(VIIA) TO SECTION 36(1). THUS, IT IS CLEAR FROM THE DECISION OF COCHIN ITAT SPECIAL BENC H THAT IT IS THE PROVISION MADE AND ALLOWED U/S SEC 36 (1) (VIIA) WHICH HAS TO BE CONSI DERED FOR RESTRICTING THE DEDUCTION U/S 36 (1) (VII). THE AO. HAS UNDERSTOOD IT AND INSTEAD OF RESTRICTING THE DISALLOWANCE OF BAD DEBT U/S 36 (1) (VII) BY THIS PROVISIONS MADE AND A LLOWED U/S 36 (I) (VIIA) AMOUNTING TO RS. 8.24 CR. HE HAS RESTRICTED IT AND DISALLOWED BY AN AMOUNT OF RS. 59.03 CR.PLUS 31.603 CR. THIS IS NOT CORRECT AND CANNOT BE UPHELD . 4.4 THUS, IT IS CLEAR THAT THE PROVISION MADE AND A LLOWED U/S. 36(1)(VIIA) IS ALTHOUGH INDEPENDENT ALLOWANCE, IT WILL RESTRICT THE DISALLO WANCE U/S. 36(1)(VII) BY APPLICATION OF PROVISO TO SEC. 36(1)(VII), WHICH RESTRICTS TO THE CREDIT BALANCE OF THE PROVISION MADE AND ALLOWED IN ASSESSMENT FOR DOUBTFUL DEBTS U/S. 36(1) (VIIA). NOW, THE ONLY DISPUTE REMAINS IS THAT OF RESTRICTIN G THE DISALLOWANCE U/S. 36(L)(VII) BY APPLYING THE PROVISO TO THIS SEC., WHETHER IT SHOUL D BE RESTRICTED BY THE OPENING BALANCE OF THE PROVISIONS FOR BAD AND DOUBTFUL DEBTS U/S. 36(1 )(VIIA) OR BY THE CLOSING BALANCE OF PROVISION FOR BAD AND DOUBTFUL DEBTS U/S. 36(1)(VII A) OF THE I.T. ACT. THE APPELLANT HAS SUBMITTED THAT IT SHOULD BE THE OPENING BALANCE ON THE LINE OF DECISION IN THE CASE OF OMAN INTERNATIONAL BANK SAOG, SUPRA. HOWEVER, THE CASE IS NOT APPLICABLE TO THE APPELLAN TS CASE. AS PER THIS DECISION, THE FINDINGS OF THE ITAT ARE AS UNDER: SEC. 36(1)(VII) OF IT ACT, 1961 - BAD DEBTS- A.Y. 1 993-94- WHETHER DEDUCTION U/S. 36(1)(VII). SO FAR AS FOREIG N BANK IS CONCERNED, SUPPLEMENTAL IN NATURE AND IS ADMISSIBLE TO EXTENT PROVISION FOR BAD AND DOUBTFUL DEBTS ALLOWED U/S. 36(1)(VIIA)(B) FALLS SHORT OF AC TUAL BAD DEBTS WRITTEN OFF AS IRRECOVERABLE - HELD, YES -WHETHER SINCE DEDUCTION U/S. 36(1)(VIIA)(B) IS IN NATURE OF A 'TAXABLE BUSINESS INCOME BASED DEDUCTION, IT C AN ONLY BE QUANTIFIED AFTER COMPUTING TAXABLE BUSINESS INCOME OF AN ASSESSE, T HOUGH BEFORE MAKING ANY DEDUCTION. UNDER SEC. 36(1)(VIIA)(B) ITSELF - HELD, YES -WHETHER, THEREFORE, AT STAGE OF COMPUTING ADMISSIBLE DEDUCTION U/S. 36(1)(VII), ADMISSIBLE DEDUCTION U/S. 36(L)(VIIA)(B) CANNOT BE WORKED OUT AND IN THAT VIE W OF MATTER, ADMISSIBLE PROVISION ITA NOS. 152 & 233/AHD/2006, 815 & 4387/AHD/ 2007 ITA NO. 237/AHD/2008 A.Y. 2001-02 TO 2003-04 6 UNDER SEC. 36(1)(VIIA)(B) FOR CURRENT PREVIOUS YEAR CANNOT BE TAKEN INTO ACCOUNT FOR PURPOSE OF COMPUTING DEDUCTION UNDER SEE. 36(1)(VII ) - HELD, YES. HON. ITAT, MUMBAI BENCH HAS HELD THAT DEDUCTION U/S . 36(I)(VII)(B) IS IN THE NATURE OF TAXABLE BUSINESS INCOME BASED DEDUCTION, IT CAN ONL Y BE QUANTIFIED AFTER COMPUTING TAXABLE BUSINESS INCOME OF AN ASSESSEE, HENCE, ADMI SSIBLE PROVISION U/S. 36(L)(VII)(B) FOR CURRENT PREVIOUS YEAR CANNOT BE TAKEN INTO ACCOUNT FOR THE PURPOSES OF COMPUTING DEDUCTION U/S. 36(L)(VII) AND THEREFORE, ONLY THE O PENING BALANCE OF THE PROVISIONS FOR DOUBTFUL DEBTS SHOULD BE TAKEN INTO CONSIDERATION. HOWEVER, FACTS OF THE PRESENT CASE IS DIFFERENT. HAD THE APPELLANT CLAIMED DEDUCTION U/S. 36(1)(VII)(A) THE RELIANCE MAY BE RELEVANT, BUT HERE THE APPELLANT CLAIMED DEDUCTION U/S. 36(L)(VIIA)(A) PROVISO, WHICH SAYS FOR DEDUCTION @ 5% OF THE LOSS AND DOUBTFUL ASSETS AS PER RBI GUIDELINES AS ON 31ST MARCH, 2000. THIS DEDUCTION IS NOT IN THE NATURE OF TAXABLE BUSINESS INCOME BASED DEDUCTION AND HENCE THE CONCLUSION THAT FOR COMPUTI NG DEDUCTION U/S. 36(1)(VII), THE CLOSING BALANCE OF PROVISION U/S. 36(1)(VII)(A) FOR CURRENT PREVIOUS YEAR CANNOT BE TAKEN INTO ACCOUNT FOR THE PURPOSE OF COMPUTING THE DEDUC TION U/S. 36(L)(VII) IS NOT CORRECT. . AS THIS DEDUCTION U/S. 36(1)(VII)(A) PROVISO IS BASED ON LOSS AND DOUBTFUL ASSETS AS AT THE CLOSE OF PREVIOUS YEAR, THE CLOSING BALANCE OF PROV ISION 36(1)(VII) A) FOR CURRENT PREVIOUS YEAR HAS TO BE TAKEN INTO ACCOUNT FOR APPLYING THE PROVISO TO SECTION 36(1)(VIII). THIS IS THE ONLY POSSIBLE VIEW OF SECTION 36(1)(VII) PROVIS O, WHERE DEDUCTION U/S.36(1)(VIIA) PROVISO IS CLAIMED AND THE DECISION OF HON. BOMBAY ITAT IN THE CASE OF OMAN INTERNATIONAL BANK IS NOT APPLICABLE IN APPELLANTS CASE. THEREFORE, IN MY VIEW, THE CORRECT DEDUCTION ALLOWA BLE TO THE APPELLANT IS AS UNDER: DEDUCTION ALLOWABLE U/S.36(1)(VII): GROSS BAD DEBT ACTUALLY WRITTEN OFF DURING PREVIOUS YEAR : RS.138.29 CR. LESS: CLOSING BALANCE IN THE PROVISION FOR BAD & DOUBTFUL DEBTS U/S.36(1)(VIIA) AS ON 31.3.02. : RS. 8.24 CR. BALANCE ALLOWABLE : RS.130.05 CR. HENCE, THE ALLOWABLE DEDUCTION U/S.36(12)(VII) IS RS.130.05 CR. AS AGAINST THE CLAIM MADE BY THE APPELLANT RS.131.59 CR. THEREFORE, THE DISALLOWANC E COMES TO RS.1.54 CR. WHICH IS CONFIRMED AND THE BALANCE AMOUNT IS DELETED. 10. AGGRIEVED BY THE ORDER OF CIT(A), THE ASSESSEE IS NOW IN APPEAL BEFORE US. 11. BEFORE US, AT THE OUTSET, THE LEARNED A.R. SUBM ITTED THAT THE ISSUE IN THE PRESENT GROUND IS IDENTICAL TO THAT OF THE FACTS OF THE CAS E IN EARLIER YEARS. HE FURTHER SUBMITTED THAT IN EARLIER YEARS THE HONOURABLE AHMEDABAD BENC H HAS DECIDED THE ISSUE FOR AY 2003-04 IN ITS FAVOUR. HE PLACED ON RECORD THE COPY OF THE AFORESAID DECISION. HE FURTHER SUBMITTED THAT HBLE GUJARAT HIGH COURT IN ASSESSEE S OWN CASE FOR A.Y. 1998-99, +- 2000-01 AND 2001-02 IN 1077 TO 1080/AHD/2010 (FOR AY 1998-99, 2000-01 & 20 01-02) ITA NOS. 152 & 233/AHD/2006, 815 & 4387/AHD/ 2007 ITA NO. 237/AHD/2008 A.Y. 2001-02 TO 2003-04 7 HAS ALSO DECIDED THE ISSUE IN FAVOUR OF ASSESSEE. HE PLACED ON RECORD AT PAGE 28 TO 40 THE COPY OF AFORESAID ORDER OF HBLE GUJARAT HIGH C OURT. HE POINTED TO THE RELEVANT FINDING OF HON. GUJ. H.C. ON PAGE 33 TO 40 TO P.B. HE THUS SUBMITTED THAT SINCE THE FACTS IN THE YEAR UNDER APPEAL ARE IDENTICAL TO EARLIER Y EARS, THE ISSUE BE DECIDED IN ITS FAVOUR FOLLOWING THE DECISION OF HIGH COURT AND TRIBUNAL. 12. THE LEARNED D.R. ON THE OTHER HAND RELIED ON TH E ORDER OF A.O. AND CIT(A). 13. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT THE REVENUE IN TAX APPEAL NO. 1077 TO 1080/AHD/2010 (FOR AY 1998-99, 2000- 01 & 2001-02) HAD PREFERRED APPEAL BEFORE HIGH COURT AGAINST THE ORDER OF TRIBUNAL AND THE QUESTION RAISED BEFORE HON. GUJARAT HIGH COURT READS AS UNDER: WHETHER THE APPELLATE TRIBUNAL IS RIGHT IN LAW AND ON FACTS IN HOLDING THAT FOR THE PURPOSE OF SECTION 36(1)(VII) ONLY THE CLOSING CREDIT BALANCE IN THE PREVIOUS ACCOUNT OF THE EARLIER YEARS IS TO BE CONSIDERED. DESPITE THE PROVISION OF SECTION 36(1)(VII) OF THE ACT? THE HON. GUJ. H. C. HELD AS UNDER:- 15. IN THE PRESENT CASE, HOWEVER, THE QUESTION OF M ETHOD OF OPERATION OF PROVISO TO SECTION 36(L) (VII) ARISES. SUCH PROVISO AS NOTED, PROVIDES THAT IN CASE OF AN ASSESSEE TO WHICH CLAUSE (VIIA) APPLIES, THE AMOUNT OF DEDUCTION RELATING TO ANY SUCH DEBT OR PART THEREOF SHALL BE LIMITED TO THE AMOUNT BY WHICH SUCH DEBT OR PART TH EREOF EXCEEDS THE CREDIT BALANCE IN THE PROVISION FOR ACCOUNT MADE UNDER THAT CLAUSE. THE R EVENUES CONTENTION IS THAT BY VIRTUE OF SUCH PROVISO, THE CLAIM OF THE ASSESSEE FOR DEDUCTI ON FOR DEBTS WRITE OFF, SHOULD BE REDUCED BY THE CLOSING BALANCE OF THE ASSESSEE IN HIS ACCO UNT FOR THE PROVISION OF BAD AND DOUBTFUL DEBTS. ON THE OTHER HAND, THE ASSESSEE CONTENTS TH AT SUCH DIMINUTION BE LIMITED TO THE OPENING BALANCE OF SUCH ACCOUNT. 16.WE NOTICE THAT IN THIS RESPECT THE PROVISION IS SILENT. WE MAY THEREFORE RECORD THAT THE INTERPRETATION ADOPTED BY THE TRIBUNAL IN THE IMPUG NED JUDGMENT WOULD ORDINARILY GIVE RISE TO A QUESTION OF LAW PARTICULARLY WHEN IT IS POINTED OUT THAT THERE IS NO PREVIOUS DECISION OF ANY HIGH COURT ON THE SUBJECT. HOWEVER, THE ISSUE HAS B EEN MADE SUFFICIENTLY CLEAR BY THE CBDT CIRCULAR NO.17/2008 DATED 26-11-2008. IN THE SAID C IRCULAR, THIS VERY ISSUE HAS BEEN EXAMINED AND CLARIFIED IN THE FOLLOWING MANNER:- 2. IN A RECENT REVIEW OF ASSESSMENT OF BANKS CA RRIED OUT BY C&AG, IT HAS BEEN OBSERVED THAT WHILE COMPUTING THE INCOME OF BANKS UNDER THE HEAD 'PROFIT AND GAINS OF BUSINESS & PROFESSION 1 , DEDUCTIONS OF LARGE AMOUNTS UNDER DIFFERENT SECTI ONS ARE BEING ALLOWED BY THE ASSESSING OFFICERS WITHOUT PROPER VERIFICATION, LEA DING TO SUBSTANTIAL LOSS OF REVENUE. IT IS, THEREFORE, NECESSARY THAT ASSESSMENTS IN THE CASES OF BANKS ARE COMPLETED WITH DUE CARE AND AFTER PROPER VERIFICATION. IN PARTICULAR, DEDUC TIONS UNDER THE PROVISIONS REFERRED TO BELOW ITA NOS. 152 & 233/AHD/2006, 815 & 4387/AHD/ 2007 ITA NO. 237/AHD/2008 A.Y. 2001-02 TO 2003-04 8 SHOULD BE ALLOWED ONLY AFTER A THOROUGH EXAMINATION OF THE CLAIM ON FACTS AND ON LAW AS PER THE PROVISIONS OF THE I.T, ACT, 1961. (I) UNDER SECTION 36(L)(VII) OF THE ACT, DEDUCTION ON A CCOUNT OF BAD DEBTS WHICH ARE WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE IS ADMISSIBLE. HOWEVER, THIS SHOULD BE ALLOWED ONLY IF THE ASSESSEE HAD DEB ITED THE AMOUNT OF SUCH ||IBS TO THE PROVISION FOR BAD AND DOUBTFUL DEBT ACCOUNT UND ER SECTION 36F3||LFL|A) OF THEACT, AS REQUIRED BY SECTION 36(2) (V) OF THE AC T. (II) WHILE CONSIDERING THE CLAIM FOR BAD DEBTS U/S 36(1) (VII), THE ASSESSING OFFICVER SHOULD ALLOW ONLY SUCH AMOUNT OF BAD DEBTS WRITTEN OFF AS EXCEEDS THE CREDIT BALANCE AVAILABLE IN THE PROVISION FOR BAD AND DOUB TFUL DEBT ACCOUNT CREATED U/S 36(1) (VIIA) OF THE ACT. THE CREDIT BALANCE FOR TH IS PURPOSE WILL BE THE OPENING CREDIT BALANCE I.E., THE BALANCE BROUGHT FORWARD AS ON 1 ST APRIL OF THE RELEVANT ACCOUNTING YEAR. 17. AS ALREADY NOTED, IN ABSENCE OF SUCH CLARIFICATIO N BY CBDT, WE WOULD HAVE BEEN INCLINED TO ADMIT THE APPEALS. HOWEVER, WHEN SUCH CIRCULAR I SSUED UNDER SECTION 119(2) OF THE ACT CLARIFIES-THE POSITION BEYOND ANY DOUBT, WE HAVE NO REASON TO ENTERTAIN THE REVENUE'S APPEALS. AS ALREADY NOTED, THE STATUTORY PROVISION IS SILENT ON THE PRECISE METHOD OF WORKING OUT THE DEDUCTION. IT IS BY NOW WELL-SETTLED THAT S UCH CIRCULARS ISSUED BY THE BOARD IN EXERCISE OF ITS STATUTORY POWERS UNDER SECTION 119(2) OF THE ACT, MAY HAVE THE EFFECT OF RELAXING THE RIGOURS OF A STATUTORY PROVISION. IN THE CASE OF CA THOLIC SYRIAN BANK LTD. (SUPRA) ITSELF, THE APEX COURT TOUCHED ON THE EFFECT OF THE CIRCULAR IS SUED BY THE BOARD. IT WAS OBSERVED AS UNDER:- 'NOW, WE SHALL PROCEED TO EXAMINE THE EFFECT OF THE CIRCULARS WHICH ARE IN FORCE AND ARE ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES (FOR SH ORT, 'THE BOARD') IN EXERCISE THE POWER VESTED N IT UNDER SECTION 119 OF THE ACT. CIRCULARS CAN BE ISSUED BY THE BOARD TO EXPLAIN OR TONE DOWN THE RIGOURS OF LAW AND TO ENSURE FAIR ENFORCEMENT OF ITS PROVISIONS. THESE CIRCULARS HAVE THE FORCE OF LAW AND ARE BINDING ON THE INCOME-TAX AUTHORITIES, THOUGH THEY CANNOT BE ENFORCED ADVERSELY AGAINST THE ASSESSEE. NORMALLY, THESE CIRCULARS CANNOT BE IGNORED A CIRCULAR MAY NOT OVERRIDE OR DETRACT FROM THE PROVISIONS OF THE ACT BUT IT CAN SEEK TO MITIGATE THE RIGOUR OF A PARTICULAR PROVISI ON FOR THE BENEFIT OF THE ASSESSEE IN CERTAIN SPECIFIED CIRCUMSTANCES. SO LONG AS THE CIR CULAR IS IN FORCE, IT AIDS THE UNIFORM AND PROPER ADMINISTRATION AND APPLICATION OF THE PROVIS IONS OF THE ACT. (REFER TO UCO BANK V. CIT(1999) 4 SCC 599). 18. IN CASE OF UCO BANK VS. COMMISSIONER OF INCOME TAX REPORTED IN 237 ITR 889 THE SUPREME COURT IN CONNECTION WITH EFFECT OF CIRCULARS ISSUED BY THE BOARD UNDER SECTION 119 OF THE ACT OBSERVED: SUCH INSTRUCTIONS MAY BE BY WAY OF RELAXATION OF ANY OF THE PROVISIONS OF THE SECTIONS SPECIFIED THERE OR OTHERWISE. THE BOARD, THUS, HAS POWERS INTER ALIA, TO TONE DOWN THE RIGOUR OF THE LAW AND ENSURE A FAIR ENFORCEMENT OF ITS PROVISIONS, BY ISSUING CIRCULARS IN EXERCISE OF ITS STATUTORY POWERS UNDER SECTION 119 WHICH ARE BINDING ON THE AUTHORITIES IN THE ADMINISTRATION OF THE ACT. UNDER SECTION 119(2) (A), HOWEVER, THE CIRCULARS AS CONTEMPLATED THEREIN CANNOT BE ADVERSE TO THE ASSES SEE. THUS, THE AUTHORITY WHICH WIELDS THE POWER FOR ITS OWN ADVANTAGE UNDER THE AC T IS GIVEN THE RIGHT TO FORGO THE ADVANTAGE WHEN REQUIRED TO WIELD IT IN THE MANNER I T CONSIDERS JUST BY RELAXING THE RIGOUR OF THE LAW OR IN OTHER PERMISSIBLE MANNERS AS LAID DOWN IN SECTION 119. THE POWER IS GIVEN FOR THE PURPOSE OF JUST, PROPER AND EFFICIENT MANAGEMENT OF THE WORK OF ASSESSMENT AND IN PUBLIC INTEREST. IT IS A BENEFICIAL POWER GI VEN TO THE BOARD FOR PROPER ADMINISTRATION OF FISCAL LAW SO THAT UNDUE HARDSHIP MAY NOT BE CAU SED TO THE ASSESSEE AND THE FISCAL LAWS MAY BE CORRECTLY APPLIED. HARD CASES WHICH CAN BE PROPERLY CATEGORISED AS BELONGING TO A CLASS, CAN THUS BE GIVEN THE BENEFIT OF RELAXATION OF LAW BY ISSUING CIRCULARS BINDING THE TAXING AUTHORITIES.' ITA NOS. 152 & 233/AHD/2006, 815 & 4387/AHD/ 2007 ITA NO. 237/AHD/2008 A.Y. 2001-02 TO 2003-04 9 19. IN THE RESULT, BEARING IN MIND THE CIRCULAR ISSUED BY CBDT DATED 26.11.2008 NO FURTHER CONTROVERSY SHOULD ARISE. IN THE RESULT, THE TAX APPEALS ARE DISMISSED. 1. 14. BEFORE US, THE LD.D.R. COULD NOT CONTROVERT THE SUBMISSIONS MADE BY THE LD.A.R. NOR COULD BRING ANY MATERIAL ON RECORD TO DEMONSTRA TE THAT THE DECISION OF HIGH COURT HAS BEEN OVERTURNED BY SUPERIOR COURT. FURTHER, SIN CE THE FACTS THE YEAR UNDER APPEAL ARE IDENTICAL TO THAT OF EARLIER YEARS, WE RESPECTF ULLY, FOLLOWING THE DECISION OF HON. GUJARAT HIGH COURT, IN ASSESSEES OWN CASE ALLOW TH IS GROUND IN FAVOUR OF ASSESSEE AND THUS THIS GROUND OF ASSESSEE IS ALLOWED. GROUND NO. 3.1 TO 3.7 ARE WITH RESPECT TO DISALLOWA NCE U/S 14A. 15. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, AO NOTICED THAT ASSESSEE HAD SUBMITTED THAT IT HAD INVESTMENTS TO THE TUNE OF RS . 413.60 CRORE ON WHICH THE ASSESSEE HAS EARNED TAX FREE INCOME. AO ALSO N OTICED THAT ASSESSEE HAS CLAIMED EXEMPTION OF RS. 39.65 CRORE ON ACCOUNT OF INTEREST ON TAX FREE BONDS AND DEBENTURES AND DIVIDEND INCOME AND HAD FU RTHER CALCULATED EXPENSES DISALLOWABLE U/S 14A AT RS. 6.32 CRORE. TH E ASSESSEE WAS ASKED TO JUSTIFY ITS CLAIM AND ALLOCATE TAX FREE INCOME T O TAX FREE INVESTMENT. ASSESSEE INTERALIA SUBMITTED THAT THE INVESTMENTS W ERE TOTALLY FUNDED OUT OF INTEREST FREE FUNDS WHICH WERE AVAILABLE WITH IT IN THE FORM OF CAPITAL, RESERVES AND SURPLUS, BALANCE IN CURRENT ACCOUNT DE POSITS ETC. ON THE BASIS OF ITS COMPUTATION, THE ASSESSEE HAD SHOWN INCREMEN TAL POSITION OF TAX FREE INVESTMENT OF RS. 13 CRORE FOR THE YEAR UNDER APPEA L. ON THE AFORESAID INVESTMENT IT HAD COMPUTED THE TOTAL INTEREST COST OF RS. 6.23 CRORE WHICH WAS ADDED BACK TO COMPUTATION INCOME. THE SUBMISSI ON MADE BY THE ASSESSEE WERE NOT FOUND ACCEPTABLE TO THE AO FOR TH E REASON THAT THE ASSESSEE HAD NOT CONFIRMED THE DATE OF PURCHASE OF INVESTMENTS AND THEREFORE HE WAS OF THE VIEW THAT THE ASSESSEE CANN OT CLAIM THAT THE ITA NOS. 152 & 233/AHD/2006, 815 & 4387/AHD/ 2007 ITA NO. 237/AHD/2008 A.Y. 2001-02 TO 2003-04 10 INVESTMENTS WERE HELD BY IT PERMANENTLY FOR 8 LONG YEARS. HE ALSO NOTED THAT ASSESSEE HAD OPENING BALANCE OF TAX FREE INVESTMENT OF RS. 401 CRORE, HAD ENTERED INTO PURCHASE AND SALE OF INVESTMENT WORTH HUNDREDS OF CRORES IN THE TAX FREE INVESTMENT, THE TOTAL TRANSACTIONS IN SHAR ES AND BONDS AND DEBENTURES INCLUDING TAXABLE AND TAX FREE INSTRUMEN TS WAS TO THE TUNE OF RS. 6,818 CRORE HE ACCORDINGLY CONCLUDED THAT THE ASSES SEE WAS TRADING HEAVILY IN TAX FREE INSTRUMENTS. HE FURTHER NOTICED THAT A SSESSEE HAS CONSIDERED ONLY THE INTEREST COST OF FUNDS FOR THE PURPOSE OF DISAL LOWANCE. HE WAS OF THE VIEW THAT SINCE THE BANK WAS CARRYING ON DIFFERENT ACTIV ITIES WHICH EARNED TAXABLE AS WELL AS TAX FREE INCOME THE BUSINESS OF THE ASSE SSEE CANNOT BE TERMED AS INDIVISIBLE BUSINESS AND THEREFORE ALLOCATION OF EX PENSES IN PROPORTION BASIS NEEDS TO BE DONE TAKING INTO ACCOUNT THE TOTAL FUND S, INTEREST BEARING AND NON INTEREST BEARING FUNDS WITH THE ASSESSEE. HE THEREAFTER WORKED OUT DISALLOWANCE U/ S 14A AS UNDER: TOTAL TAX-FREE INVESTMENTS AT 31/3/2002 (RS. 414 CR ORES + 14.92 CRORES) RS. 428.92 CRORES PROPORTION OF TOTAL FUNDS TO INTEREST BEARING FUNDS 91% PROPORTION OF INTEREST BEARING FUNDS USED FOR TAX F REE INVESTMENT (91% OF RS. 428.92 CRORES) RS. 390.32 CRORES EXPENSES ALLOCATED TO SUCH AMOUNT OF RS. 390.32 CRO RES @ 9.4 % ON THE BASIS OF AVERAGE COST OF BORROWAL = 9.4% OF RS. 390.32 CR. RS. 36.68 CRORES TOTAL EXPENSES INCURRED FOR EARNING TAX-FREE INCOME IS DETERMINED AT RS. 36.68 CRORES DISALLOWANCES U/S 14A RS. 36.68 CRORES ALREADY DISALLOWED BY ASSESSEE RS. 6.23 CRORES BALANCE DISALLOWABLE RS. 30.45 CRORES 16. THE DISALLOWANCE WORKED OUT BY THE AO WAS RS. 3 6.68 CRORE BUT SINCE THE ASSESSEE HAD ALREADY SUO MOTU DISALLOWED RS. 6.23 C RORE, HE MADE DISALLOWANCE OF BALANCE AMOUNT OF RS. 30.45 CRORE. AGGRIEVED BY TH E ORDER OF AO, ASSESSEE CARRIED THE MATTER BEFORE CIT(A). CIT(A) AFTER CONSIDERING THE SUBMISSIONS MADE BY THE ASSESSEE GRANTED PARTIAL RELIEF TO THE ASSESSEE BY HOLDING AS UNDER: ITA NOS. 152 & 233/AHD/2006, 815 & 4387/AHD/ 2007 ITA NO. 237/AHD/2008 A.Y. 2001-02 TO 2003-04 11 6. 3 AFTER CONSIDERING THE SUBMISSIONS OF THE APPELLANT AND THE CASE LAWS RELIED UPON, I AM OF THE OPINION THAT THE ACTION OF THE A.O. IS NOT C ORRECT AS REGARDS DISALLOWING INTEREST EXPENSES AMOUNT AFTER ALLOCATING IT TO THE INVESTME NTS FOR EXEMPTED INCOME. THE APPELLANT HAS FILED THE DETAILS BEFORE THE A.O. ADMITTING THA T ONLY PART OF THE INTEREST BEARING FUNDS IS USED FOR INVESTING IN THE INVESTMENTS GIVING TAX EX EMPTED INCOME. THE INTEREST COST IS CALCULATED AT RS. 6.23 CR. WHICH IS OFFERED FOR TAX ATION. HENCE, THE A.O. IS NOT JUSTIFIED IN FURTHER ALLOCATING THE INTEREST EXPENDITURE FOR THI S PURPOSE DISREGARDING THE FACT THAT THE APPELLANT HAS SURPLUS FUNDS. HOWEVER AS REGARDS THE OTHER OPERATING EXPENSES ARE CONCERNED, THE APPELLANT HAS NOT FILED ANY DETAILS AS TO HOW MUCH EXPENDITURE IS TO BE APPORTIONED FOR EARNING THE EXEMPTED INCOME. THE TOTAL OPERATING EXPENSES ARE RS. 205 .47 CR. AND THE EXEMPT INCOME CLAIMED BY THE APPELLANT IS RS. 39.65 CR. WHEREAS THE TOTAL INCOME EARNED BY THE APPELLANT IS RS. 1595.40 CR. H ENCE THE EXEMPTED INCOME IS 2.485% OF THE TOTAL INCOME. THEREFORE, BY ALLOCATING THE OPE RATING EXPENSES OF RS. 205.47 CR. IN THIS RATIO, THE EXPENSE ALLOCABLE TO THE EXEMPT INCOME C OMES TO RS. 5.11 CR. (205.47 X 2.485%) THEREFORE, THIS EXPENDITURE HAS TO BE DISALLOWED OUT OF THE TOTAL E XPENDITURE FOR EARNING THE EXEMPT INCOME UNDER THE PROVISIONS OF SEC. 14A. THI S VIEW IS SUPPORTED BY THE DECISION OF ITAT CHENNAI BENCH IN THE CASE OF SOUTHERN PETRO CH EMICALS INDUSTRIES V. DCIT, 93 TTJ 161. AS PT THIS DECISION, THE INVESTMENT DECISIONS ARE VERY STRATEGIC DECISIONS IN WHICH TOP MANAGEMENT IS INVOLVED AND, THEREFORE, PROPORTIONAT E MANAGEMENT EXPENSES ARE REQUIRED TO BE DEDUCTED WHILE COMPUTING THE EXEMPTED INCOME. ON SIMILAR LOGIC, THE OTHER OPERATING EXPENSES ARE ALSO TO BE DEDUCTED. THE APPELLANT HAS ALREADY DISALLOWED RS. 6.23 CR. OUT OF INTEREST EXPENDITURE. THE DISALLOWANCE OUT OF OPERA TING EXPENSES COMES TO RS. 5.11 CR. WHICH IS JUSTIFIED. HENCE, THE DISALLOWANCE IS CONF IRMED TO THE EXTENT OF RS. 5.11 CR. AND THE BALANCE AMOUNT OF RS. 25.34 CR. IS DELETED. 17. AGGRIEVED BY THE ORDER OF CIT(A), THE ASSESSEE AND REVENUE, BOTH ARE IN APPEAL BEFORE US. 18. BEFORE US, THE LEARNED A.R. PLACED AT PAGE 61 O F THE PAPER BOOK THE CHART SHOWING OPENING POSITION OF INTEREST FREE FUNDS VIS -A-VIS TAX FREE INVESTMENT FOR VARIOUS YEARS STARTING FROM 31 ST MARCH, 1995 TO 31 ST MARCH, 2003. FROM THE AFORESAID CHART, HE POINTED THAT THE INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE IN THE FORM OF CAPITAL, RESERVES AND INTER EST FREE DEMAND DEPOSITS AGGREGATED TO RS. 1766 CRORE AS AGAINST WHICH THE T AX FREE INVESTMENT AT THE END OF THE YEAR WAS RS. 414 CRORE. HE THUS SUBMIT TED THAT THE INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE WERE FAR IN EXCES S OVER THE TAX FREE INVESTMENT AND IN PERCENTAGE TERMS, THE INTEREST FR EE DEPOSITS IN RELATION TO TAX FREE FUNDS WORKED OUT TO 327%. HE FURTHER SUBM ITTED THAT IN VIEW OF THE FACT THAT INTEREST FREE FUNDS WAS FAR IN EXCESS OF TAX FREE INVESTMENTS, NO DISALLOWANCE U/S 14A WAS CALLED FOR. HE FURTHER SU BMITTED THAT THE DISALLOWANCE MADE SUO MOTU BY THE ASSESSEE OF RS. 6 .23 CRORE SHOULD ALSO ITA NOS. 152 & 233/AHD/2006, 815 & 4387/AHD/ 2007 ITA NO. 237/AHD/2008 A.Y. 2001-02 TO 2003-04 12 BE REVERSED FOR THE REASON THAT ON IDENTICAL FACTS IN THE CASE OF ASSESSEE, THE HON. TRIBUNAL HAD DELETED THE ADDITION MADE U/S 14A AND WHICH WAS ALSO UPHELD BY HON. GUJARAT HIGH COURT IN TAX APPEAL NO. 118/AHD/2013. HE PLACED ON RECORD AT PAGE 335 TO 372 THE ORDER OF TR IBUNAL FOR A.Y. 2003-04 AND AT PAGE 373 TO 378 THE ORDER OF GUJARAT HIGH CO URT. THE LEARNED A.R. FURTHER SUBMITTED THAT SINCE NO AMOUNT OF DISALLOWA NCE U/S 14A CAN BE MADE IN THE CASE OF THE ASSESSEE AND THEREFORE URGED TO DELETE THE ENTIRE DISALLOWANCE U/S 14A. HE FURTHER SUBMITTED THAT THE DELETION OF ENTIRE DISALLOWANCE U/S 14A CAN BE RAISED BY THE ASSESSEE FOR THE FIRST TIME BEFORE TRIBUNAL AND FOR WHICH HE PLACED RELIANCE ON THE DE CISIONS IN THE CASE OF NATIONAL THERMAL POWER COMPANY LIMITED VS. CIT 1998 229 383 ITR (SC), JUTE CORPORATION OF INDIA VS. CIT (1991) 187 ITR 68 8 (SC). HE ALSO PLACED RELIANCE ON THE DECISION IN THE CASE OF ASIT KUMAR GHOSH VS. CIT (1953) 24 ITR 576 FOR THE PROPOSITION THAT ESTOPPEL IS ONLY A RULE OF EVIDENCE AND NOT A CAUSE OF ACTION. IN ANY EVENT ESTOPPEL IS NOT A BA SIS OF LIABILITY TO ASSESSMENT UNDER THE INCOME TAX ACT AND THEREFORE THE ASSESSME NT OF A PERSON FOR AN AMOUNT OF INCOME TO WHICH HE IS A STRANGER CANNOT B E BASED ON THE GROUND THAT HE HIMSELF WANTED TO BE ASSESSED ON IT. THE L EARNED D.R. ON THE OTHER HAND POINTED TO THE RELEVANT PARAGRAPHS OF THE ORDE R OF AO AND RELIED ON THE ORDER OF AO AND FURTHER SUBMITTED THAT THE AO HAS R IGHTLY MADE THE DISALLOWANCE U/S 14A AND THUS SUPPORTED HIS ORDER. 19. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IT IS AN UNDISPUTED FACT THAT THE ASSESSEE HAS EARNED RS. 39.65 CRORE ON ACCOUNT OF INTEREST ON TAX FREE BONDS, DEBENTURES AND DIVID END INCOME WHICH HAS BEEN CLAIMED AS EXEMPT. IT IS ALSO A FACT THAT THE ASSESSEE WHILE COMPUTING THE TOTAL INCOME HAS SUO MOTU DISALLOWED RS. 6.32 C RORE U/S 14A. AO WORKED OUT THE DISALLOWANCE UNDER SECTION 14A AT RS. 36.68 CRORE AND AFTER SETTING OFF DISALLOWANCE MADE BY THE ASSESSEE, HE DISALLOWE D RS. 30.45 CRORE. WE FIND THAT BEFORE AO, ASSESSEE HAS NOT RAISED THE CO NTENTION ABOUT NO DISALLOWANCE U/S 14A AND THEREFORE THE AO HAD PROCE EDED AHEAD ON THE ITA NOS. 152 & 233/AHD/2006, 815 & 4387/AHD/ 2007 ITA NO. 237/AHD/2008 A.Y. 2001-02 TO 2003-04 13 BASIS OF SUO MOTO DISALLOWANCE MADE BY THE ASSESSEE . CIT(A) HAD DELETED THE ADDITION TO THE EXTENT OF RS. 25.35 CRORE. WE F URTHER FIND THAT ON IDENTICAL FACTS FOR A.Y. 2003-04, (ITA NO 2571/AHD/2006), TH E CO-ORDINATE BENCH OF TRIBUNAL HAD RESTRICTED THE DISALLOWANCE TO THAT MA DE BY THE ASSESSEE BY HOLDING AS UNDER: 33 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. THE UNDISPUTED FACTS ARE THAT DURING THE YEAR THE ASSES SEE HAS EARNED INTEREST OF RS 17.45 CRORE ON TAX FREE BOND AND DEBENTURES AS AGAINST WHICH TH E ASSESSEE HAD SUO MOTO DISALLOWED RS 5.53 CRORE BEING THE INTEREST EXPENSES U/S 14A AS A GAINST WHICH THE AO HAS WORKED OUT THE DISALLOWANCE OF RS 32.76 CRORE. AFTER GIVING THE CR EDIT OF DISALLOWANCE OF RS 5.53 CRORE MADE BY THE ASSESSEE, THE AO DISALLOWED RS 27.23 CRORE U /S 14A. AS ON 31 ST MARCH 2003, THE INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE WAS TO THE TUNE OF RS 3404 CRORE (COMPRISING OF SHARE CAPITAL OF RS 230 CRORE, RESERVES OF RS 68 9 CRORES AND INTEREST FREE DEMAND DEPOSITS OF RS 2485 CRORES) AS AGAINST WHICH THE TA X FREE INVESTMENTS WERE TO THE TUNE OF RS 589 CRORE. THUS THE INTEREST FREE FUNDS WERE FAR IN EXCESS OF THE INVESTMENTS. CIT (A) HAS GIVEN A FINDING THAT THE FACTS IN AY 2003-04 ARE ID ENTICAL TO THE FACTS OF THE CASE IN AY 2002- 03 AND ACCORDINGLY HE HAS FOLLOWED THE DECISION OF CIT (A) FOR AY 2002-03. THESE FACTS HAVE NOT BEEN CONTROVERTED BY THE LD. D.R. NOR HAVE THEY BROUGHT ON RECORD ANY FACTS TO THE CONTRARY. HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS RELIANCE UTILITIES & POWER LTD (SUPRA) HAS HELD THAT IF THERE ARE INTEREST FREE FU NDS AVAILABLE TO AN ASSESSEE SUFFICIENT TO MEET ITS INVESTMENTS AND AT THE SAME TIME THE ASSES SEE HAS RAISED A LOAN IT CAN BE PRESUMED THAT THE INVESTMENTS WERE FROM INTEREST FR EE FUNDS AVAILABLE. IN THE PRESENT CASE, SINCE THE ASSESSEE HAS SUO MOTO DISALLOWED RS 5.53 CRORE U/S 14A, RESPECTFULLY FOLLOWING THE DECISION OF BOMBAY HIGH COURT, WE ARE OF THE VIEW T HAT IN THE FACTS OF THE PRESENT CASE, NO FURTHER DISALLOWANCE OVER AND ABOVE THAN WHAT HAS B EEN DISALLOWED BY THE ASSESSEE IS CALLED FOR. AS FAR AS DISALLOWANCE OF OTHER ADMINIS TRATIVE EXPENSES IS CONCERNED, THE UNDISPUTED FACT IS THAT THE DISALLOWANCE HAS BEEN M ADE BY THE AO WITHOUT GIVING A FINDING AS TO HOW MUCH ADMINISTRATIVE EXPENDITURE HAS BEEN INC URRED TO EARN THE EXEMPT INCOME. IN THE CASE OF HERO CYCLES (SUPRA) THE HON'BLE HIGH COURT HAS HELD THAT THE CONTENTION OF THE REVENUE THAT DIRECTLY OR INDIRECTLY SOME EXPENDITUR E IS ALWAYS INCURRED WHICH MUST BE DISALLOWED U/S 14A CANNOT BE ACCEPTED. DISALLOWANCE U/S 14A REQUIRES FINDING OF INCURRING OF EXPENDITURE. IN THE PRESENT CASE, THE AO HAS PRESUM ED THAT THE ASSESSEE MIGHT HAVE INCURRED EXPENDITURE TO EARN THE EXEMPT INCOME. HE HAS NOT GIVEN ANY FINDING OF INCURRING OF EXPENDITURE. IN VIEW OF THESE FACTS AND RESPECTFULL Y FOLLOWING THE DECISION OF HIGH COURT, WE ARE OF THE VIEW THAT NO DISALLOWANCE OF ADMINISTRAT IVE EXPENSES CAN BE MADE. WE ACCORDINGLY DIRECT FOR THE DELETION OF THE ADDITION MADE BY THE AO AND ALLOW THIS GROUND OF THE ASSESSEE. 20. BEFORE US, THE LEARNED A.R. HAS RAISED A NEW AR GUMENT WHEREIN IT WAS SUBMITTED THAT EVEN THE SUO MOTU DISALLOWANCE MADE BY THE ASSESSEE WHILE COMPUTING THE INCOME SHOULD BE DELETED AND FOR WHIC H HE PLACED RELIANCE THE DECISION OF HON. CALCUTTA HIGH COURT AND THE DECISI ON OF SUPREME COURT. WE FIND THAT THIS GROUND WAS NOT TAKEN BY THE ASSESSEE BEFORE A.O. AND CIT(A). AO HAD PROCEEDED ON THE BASIS OF THE SUO-MOTO DISAL LOWANCE MADE BY THE ASSESSEE. THUS THE AO OR CIT(A) DID NOT HAD ANY OPP ORTUNITY TO EXAMINE THE ITA NOS. 152 & 233/AHD/2006, 815 & 4387/AHD/ 2007 ITA NO. 237/AHD/2008 A.Y. 2001-02 TO 2003-04 14 AFORESAID CONTENTION AND THEREFORE THERE IS NO FIND ING ON IT EITHER BY THE A.O. AND CIT(A). IN VIEW OF THESE FACTS, WE ARE OF THE VIEW THAT THE MATTER WITH RESPECT TO NIL DISALLOWANCE UNDER 14A BE REMITTED B ACK TO THE FILE OF AO FOR EXAMINING IT AFRESH. THUS THE MATTER IS REMITTED T O THE FILE OF AO AND HE IS DIRECTED TO ADMIT THE ISSUE AND DECIDE THE ISSUE AF RESH ON MERITS. AS PER LAW AFTER CONSIDERING THE SUBMISSIONS MADE BY THE ASSES SEE AND AFTER GIVING A REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. ASSESSEE IS ALSO DIRECTED AND FURNISH PROMPTLY THE DETAILS CALLED FOR BY THE AO TO DECIDE THE ISSUE. THUS THIS GROUND OF THE ASSESSEE IS ALLOWED FOR STA TISTICAL PURPOSES. GROUND NO 4 AND ITS SUB GROUNDS ARE WRT TO DEPRECIA TION ON WINDMILLS. 21 DURING THE COURSE OF ASSESSMENT PROCEEDINGS, AO NOTICED THAT ASSESSEE HAVE ENTERED INTO TRIPARTITE OPERATING LEASE AGREEMENT W ITH BRAKES INDIA LTD. AND WESCARE INDIA LIMITED. AS PER THE AFORESAID LEASE AGREEMENT , HE OBSERVED THAT 45 WIND ENERGY GENERATORS WERE LEASED OUT TO BRAKES INDIA LIMITED AND THE PAYMENT FOR THE ASSET BY THE ASSESSEE WAS MADE IN THE CAPACITY OF THE FINANC IER AND NOT AS A REAL OWNER. HE FURTHER NOTICED THAT WESCARE INDIA LIMITED WAS REQU IRED TO SUFFER THE LOSS ARISING OUT OF THE PURCHASE OF ASSETS AND ALL THE RISKS ATTACHED F OR THE PURCHASE OF ASSETS WAS ON ACCOUNT OF WESCARE INDIA LTD. THE AO THUS CONCLUDE D THAT THE ASSESSEE DID NOT ASSUME ANY RISK OF OWNERSHIP AND THE REAL INTENTION BEHIND THE LEASE AGREEMENT WAS TO HOLD THE ASSETS DURING THE PERIOD OF LEASE FOR THE PURPOSE OF SECURITY FOR THE LOANS ADVANCED. HE FURTHER NOTICED THAT THE ASSESSEE WAS NOT CONCERNED WITH THE OPERATIONS OF THE EQUIPMENTS OR LOSS OR DAMAGE TO IT. HE THUS CONCLUDED THAT THE TRANSACTION WAS NOT A GENUINE OPERATING LEASE AGREEMENT BUT WAS THE CASE OF FINANCE/HIRE AGREEMENT. HE THEREAFTER RELYING ON ACCOUNTING STANDARD 19, IS SUED BY THE INSTITUTE BY CHARTERED ACCOUNTANT OF INDIA ON THE LEASE TRANSACTIONS, WAS OF THE VIEW THAT UNDER THE FINANCE LEASE, THE ASSETS SHOULD BE TAKEN TO THE BALANCE SH EET OF THE LESSEE AND NOT THE LESSOR AND THE DEPRECIATION SHOULD BE CLAIMED AND ALLOWED IN THE HANDS OF THE LESSEE ONLY AND NOT IN THE HANDS OF THE LESSOR. HE ACCORDINGLY DIS ALLOWED THE CLAIM OF DEPRECIATION ON THE LEASED ASSETS AND MADE AN ADDITION OF RS. 22,50 ,00,000/-. ITA NOS. 152 & 233/AHD/2006, 815 & 4387/AHD/ 2007 ITA NO. 237/AHD/2008 A.Y. 2001-02 TO 2003-04 15 22. AGGRIEVED BY THE ORDER OF AO, ASSESSEE CARRIE D THE MATTER BEFORE CIT(A). CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE U PHELD THE ORDER OF ASSESSING OFFICER BY HOLDING AS UNDER: 7.3 AFTER CAREFUL CONSIDERATION OF THE FACTS OF THE CAS E AND THE SUBMISSIONS AS ADVANCED BY THE APPELLANT ALONG WITH THE JUDICIAL DECISIONS AS RELIED UPON, I AM NOT INCLINED TO AGREE WITH THE CONTENTIONS RAISED BY THE APPELLANT FOR REASONS GIVEN BELOW: - I) IF THE A.O. HAS NOT GIVEN PROPER OPPORTUNITY AND NO T CONFRONTED ALL THE PAPERS USED AGAINST THE APPELLANT, THE OPPORTUNITY HAS TO BE GIVEN AND CAN BE GIVEN AT THE APPELLATE STAGE. ACCORDINGLY THE A.O. WAS ASKED TO GIVE THE COPIES O F VARIOUS PAPERS WHICH WERE REFERRED TO IN THE ASST. ORDER, BUT WHICH WERE NOT CONFRONTED WITH THE APPELLANT. THE A.O HAS GIVEN COPIES OF THE SAID MATERIALS AND COPIES OF STATEMENTS RECO RDED VIDE HIS LETTER DT: 26-9-05. THE APPELLANT'S SUBMISSION THEREON WERE FILED DURING TH E APPELLATE PROCEEDINGS AND THE SAME HAVE BEEN CONSIDERED IN THE APPELLATE PROCEEDINGS H ENCE, THE APPELLANT HAS BEEN GIVEN PROPER OPPORTUNITIES. II) THE APPELLANT HAS CONTENDED THAT THE STATEMENT RECO RDED U/S. 133A OF THE ACT HAS NO EVIDENTIARY VALUE. ALTHOUGH THE STATEMENT RECORDED U/S. 133A HAS NO EVIDENCIARY VALUE, AS MUCH AS STATEMENT RECORDED U/S. 132(4) OF THE I.T A CT, YET THE STATEMENT RECORDED U/S. 133A PROVIDES INFORMATION AND EVIDENCE TO BRING OUT THE TRUTH AND THE SAME HAS TO BE CONSIDERED IN FINDING OUT THE FACT AND TRUTH. III) THE A.O. HAS PASSED THE ORDER ON THE BASIS OF FACTS GATHERED AND AFTER APPRECIATING THE FACTS AND EVIDENCE COLLECTED. THE OBJECTIONS AND SU BMISSIONS MADE BY THE APPELLANT ARE DULY CONSIDERED BY HIM. THE OTHER SUBMISSIONS GIVEN DURI NG THE APPELLATE PROCEEDINGS HAVE FURTHER BEEN CONSIDERED IN APPELLATE PROCEEDINGS. IV) FROM THE CONTENTS OF THE TRIPARTITE AGREEMENT D ATED 22.09.2000, THE STATEMENT OF SHRI V.R. RAGHUNATHAN AND PAPERS FOUND IN SURVEY WHICH ARE DI SCUSSED IN DETAIL BY THE ASSESSING OFFICER IN THE ASST. ORDER AND IN BRIEF REPRODUCED IN PARA 7.1 ABOVE, IT IS EVIDENT THAT ACTUALLY M/S. WESCARE INDIA LTD. (WIL) APPROACHED UTI BANK F OR FINANCING THEIR BUSINESS IN WHICH TAX SAVING BENEFIT WAS TO BE PASSED ON TO UTI BANK. THE REAFTER, THE TRIPARTITE AGREEMENT WAS SIGNED. THE TRIPARTITE LEASE AGREEMENT SUGGESTS THA T THE PAYMENT FOR ASSETS HAS BEEN MADE BY UTI BANK IN THE CAPACITY OF FINANCIER AND NOT RE AL OWNER. THE LESSEE AND WIL IS REQUIRED TO SUFFER THE LOSSES ARISING OUT OF PURCHASE OF ASS ETS AND THEY ARE ONLY AMENABLE TO ALL RISKS ATTACHED TO PURCHASE OF ASSETS. V) THE APPELLANT IS ENGAGED IN BANKING BUSINESS UNDER THE BANKING REGULATIONS ACT. THE APPELLANT CANNOT ENGAGED IN GENERATION OF ELECTRICI TY, AS IT IS NOT PERMISSIBLE UNDER THE BANKING REGULATIONS ACT. HENCE, THE APPELLANT WAS N OT PERMITTED TO PURCHASE WINDMILL FOR GENERATION OF POWER IN THE NORMAL COURSE OF BUSINES S IN THE FIRST INSTANT. VI) FURTHER, THE UTI WAS NOT CONCERNED WITH THE OPERATI ONAL ASPECT OF EQUIPMENT OR LOSS OR DAMAGES TO THE EQUIPMENT. HERE ONLY WIL HAS TAKEN A LL RESPONSIBILITIES FOR THAT. EVEN THE LAND DID NOT BELONG TO THE UTI BANK LTD, BUT BELONG TO WIL. VII) THE CONTENTION OF ASSESSEE THAT IN CASE OF WIND MIL LS STOP OPERATION DUE TO AGITATION OR DUE TO CHANGE IN THE WIND VELOCITY RESULTING IN SHO RT GENERATION OF POWER THE REVENUE WOULD BE DRASTICALLY AND CRITICALLY AFFECTED IS CONTRARY TO THE EVIDENCE. WIL HAS AGREED TO PAY FOR THE SHORTAGE VIDE CLAUSE 6A(I) PROVISO. NON RECEIPT OF DEPOSIT FROM WIL AND NON ACTION FOR THE LAPSE IS A SERIOUS BREACH OF THE AGREEMENT ITSELF. THE ASSESSEE HAS NOT FOLLOWED THE AGREEMENT IN ITS TRUE MEANING AS THE ASSESSEE HAS NOT TAKEN ANY ACTION FOR NON-OBSERVANCE OF VARIOUS COND ITIONS IN THE AGREEMENT. INSTEAD OF TAKING ACTION FOR THE DEFAULT IN DEPOSIT BY WIL AS A VIOLATION OF THE AGREEMENT, THE ASSESSEE IS TURNING THE SAME AS A SHIELD 'THAT DEPOSIT IS NOT RECEIVED'. ITA NOS. 152 & 233/AHD/2006, 815 & 4387/AHD/ 2007 ITA NO. 237/AHD/2008 A.Y. 2001-02 TO 2003-04 16 THE OWING OF THE WEG WITHOUT THE REQUISITE LAND WIT H ABUNDANT VELOCITY OF AND IS SCRAP VALUE. THIS MAY BE THE REASON FOR THE ALLEGED LESSEE BIL B ELONGING TO TVS GROUP DID NOT GO FOR THE PURCHASE OF THE WIND MILLS. ON THE CONTRARY BY JOIN ING IN THE AGREEMENT WITHOUT ANY INVESTMENT AND/OR RESPONSIBILITY BIL IS GETTING THE POWER AT 60 PS. LESS PER UNIT. VIII) THE DECISION IN THE CASE OF PRAKASH IND. LTD. IS NOT RELEVANT FOR DECIDING THE ISSUE WHETHER THE ASSESSEE IS ENTITLED TO DEPRECIATION OR NOT IN THAT CASE THE QUESTIONS INVOLVED WAS OF OWNERSHIP BETWEEN THE COMPANY AND BANK. IN T HE SAID LEASE AGREEMENT THERE WAS A STIPULATION THAT AFTER THE EXPIRY OF THE LEASE PERI OD THE MACHINERY WAS TO BE RETURNED TO THE BANK. THE DISPUTE WAS NOT UNDER THE INCOME TAX ACT AND THEREFORE NOT APPLICABLE. THE DECISION OF THE ITAT IN THE CASE OF BIRLA CHEMICALS AND TRADERS (P) LTD. IS ALSO NOT RELEVANT FOR THE ISSUE AT HAND. THEREFORE, IN VIEW OF THE DISCUSSIONS MADE ABOVE AN D THE FINDING BROUGHT OUT ON RECORD BY THE A.O. AND DISCUSSED IN DETAILS IN THE ASST. ORDE R, WHICH ARE PRODUCED ABOVE IN EARLIER PARAS, IT IS EVIDENT THAT THIS WAS NOT A LEASE TRAN SACTION, BUT ONLY FINANCE TRANSACTION. HENCE, THE DEPRECIATION IS NOT ALLOWABLE. AS PER THE DECISION OF HON. SUPREME COURT IN THE CA SE OF MCDOWELL & CO. VS. CIT., 154 ITR 148, TO ASCERTAIN THE REAL NATURE OF TRANSACTION, T HE VIEL HAS TO BE LIFTED. AS PER THE DECISION OF HON. KARNATAKA HIGH COURT IN THE CASE OF AVASARALA AUTOMATION LTD. VS. JCIT 266 ITR 178, IT HAS BEEN HELD THAT WHILE IT IS PERMISSIBLE FOR AN A SSESSEE TO HAVE THE TAX PLANNING, IT IS NOT PERMISSIBLE TO PREPARE DOCUMENTS AND TO GIVE THE CO LOUR OF REAL TRANSACTIONS ON THE BASIS OF SAID DOCUMENTS, WHICH WOULD ENABLE THE ASSESSEE TO EVADE THE PAYMENT OF TAX. WHEN AN ASSESSEE MAKES A CLAIM OF DEPRECIATION ON THE GROUN D ALLOWED BY LAW, IT WOULD ALWAYS BE OPEN TO THE AO TO PIERCE THE VEIL OF TRANSACTIONS P UT FORWARD AND FIND OUT AS WHETHER THE TRANSACTION PUT FORWARD FOR THE PURPOSE OF CLAIMING DEPRECIATION IS GENUINE TRANSACTION OR ONLY A MAKE BELIEVE, ONE INTENDED TO AVOID PAYMENT OF TA X. THEREFORE, IT IS HELD THAT THE ASSESSING OFFICER. W AS JUSTIFIED IN DISALLOWING THE DEPRECIATION AND THE ACTION OF THE ASSESSING OFFICER IS HEREBY C ONFIRMED. 23. AGGRIEVED BY THE ORDER OF CIT(A), THE ASSE SSEE IS NOW APPEAL BEFORE US. 24. BEFORE US, THE LEARNED A.R. AT THE OUTSET SUBMI TTED THAT THE ISSUE OF DEPRECIATION ON LEASED ASSETS HAS NOW BEEN SETTLED AND DECIDED B Y HON. SUPREME COURT IN THE CASE OF ICDS LTD VS. CIT & ANR (2013) 350 ITR 527 (SC). HE ALSO SUBMITTED THE FOLLOWING THE AFORESAID DECISION OF HON. APEX COURT, THE MUMB AI TRIBUNAL ON IDENTICAL FACTS IN THE CASE OF DEVELOPMENT CREDIT BANK LTD. VS. DCIT ITA N O. 300/AHD/2001 AND 4892/AHD/2003 HAS DECIDED THE ISSUE IN ASSESSEES F AVOUR. HE PLACED ON RECORD THE COPY OF THE AFORESAID DECISIONS AT PAGE 379 TO 461. THE LEARNED A.R. FURTHER SUBMITTED THAT THE ASSESSEE HAD ENTERED INTO LEASE TRANSACTIO N IN THE NORMAL COURSE OF BUSINESS AS THE SAME WAS PERMISSIBLE BY THE BANKING REGULATI ON ACT. HE FURTHER SUBMITTED THAT THE LEASE INCOME EARNED BY THE ASSESSEE IS ALSO DIS CLOSED IN ITS PROFIT AND LOSS ACCOUNT. HE POINTED OUT TO SCHEDULE 14 OF OTHER I NCOME FORMING PART OF PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 ST MARCH, 2002, PLACED AT PAGE 326 OF THE PAPER BOOK. HE ALSO PLACED ON RECORD THE COMPARISON OR L EASE TRANSACTIONS ENTERED BY THE ITA NOS. 152 & 233/AHD/2006, 815 & 4387/AHD/ 2007 ITA NO. 237/AHD/2008 A.Y. 2001-02 TO 2003-04 17 ASSESSEE WITH FEATURES OF OWNERSHIP AS PER THE TEST LAID DOWN BY THE SUPREME COURT IN THE CASE OF ICDS LTD. (SUPRA). HE THUS URGED THAT T HE ADDITION MADE BE THE AO BE DELETED. 25. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IT IS AN UNDISPUTED FACT THAT THE INCOME FROM LEASE HAS BEEN CONSIDERED BY ASSESSEE AS INCOME IT IS AN UNDISPUTED FACT THAT THE AO HAS CON SIDERED THE LEASE ENTERED BY THE ASSESSEE TO BE A FINANCE LEASE TO ARRIVE AT THE CON CLUSION THAT THE ASSESSEE IS NOT ENTITLED TO DEPRECIATION. WE FIND THAT THE ISSUE OF DEPRECIATION ON LEASED ASSETS HAS BEEN DECIDED BY HONOURABLE APEX COURT IN THE CASE O F ICDS LTD (SUPRA). ONE OF THE QUESTION BEFORE THE HON. SUPREME COURT WAS WHETHER THE ASSESSEE IS ENTITLED TO DEPRECIATION VEHICLES FINANCE BY IT WHICH IS NEITHE R OWNED NOR USED BY THE ASSESSEE BY VIRTUE OF THE BUSINESS THE HON. SUPREME COURT HELD AS UNDER: THE PROVISION ON DEPRECIATION IN THE INCOME-TAX AC T, 1961, READS THAT THE ASSET MUST BE 'OWNED, WHOLLY OR PARTLY, BY THE ASSESSEE AND USED FOR THE PURPOSES OF THE BUSINESS'. THEREFORE, IT IMPOSES A TWIN REQUIREMENT OF 'OWNERSHIP' AND 'U SAGE FOR BUSINESS' FOR A SUCCESSFUL CLAIM UNDER SECTION 32 OF THE ACT. THE SECTION REQUIRES THAT THE ASSESSEE MUST USE THE ASSET FOR THE 'PURPOSE, OF BUSINESS'. IT DOES NOT MANDATE USAGE OF THE ASSET BY THE ASSESSEE ITSE LF. AS LONG AS THE ASSET IS UTILIZED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE, THE REQUIREMEN T OF SECTION 32 WILL STAND SATISFIED, NOTWITHSTANDING NON-USAGE OF THE ASSET ITSELF BY TH E ASSESSEE. THE DEFINITIONS OF 'OWNERSHIP' ESSENTIALLY MAKE OWN ERSHIP A FUNCTION OF LEGAL RIGHT OR TITLE AGAINST THE REST OF THE WORLD. HOWEVER, IT IS 'NOMEN GENERA -LISSIMUM', AND ITS MEANING IS TO BE GATHERED FROM THE CONNECTION IN WHICH IT IS USED, AND FROM T HE SUBJECT-MATTER TO WHICH IT IS APPLIED. AS LONG AS THE ASSESSEE HAS A RIGHT TO RETAIN THE LEGAL TIT LE AGAINST THE REST OF THE WORLD, IT WOULD BE THE OWNER OF THE ASSET IN THE EYES OF LAW. HELD, AFFIRMING THE DECISION OF THE TRIBUNAL, (I) T HAT THE ASSESSEE WAS A LEASING COMPANY WHICH LEASED OUT THE TRUCKS THAT IT PURCHASED. THEREFORE, ON A COMBINED READING OF SECTION 2(13) AND (24) OF THE ACT THE INCOME DERIVED FROM LEASING OF THE TRUCKS WOULD BE BUSINESS INCOME, OR INCOME DERIVED IN THE COURSE OF BUSINESS, AND HAD B EEN SO ASSESSED. HENCE, IT FULFILLED THE REQUIREMENT OF SECTION 32 OF THE ACT, THAT THE ASSE T MUST BE USED IN THE COURSE OF BUSINESS. THE ASSESSEE DID USE THE VEHICLES IN THE COURSE OF ITS LEASING BUSINESS. THE FACT THAT THE TRUCKS THEMSELVES WERE NOT USED BY THE ASSESSEE WAS IRRELE VANT FOR [HE PURPOSE OF THE SECTION. 26. THE CASE OF DEVELOPMENT CREDIT BANK LTD. THE IS SUE BEFORE MUMBAI TRIBUNAL WAS WITH RESPECT TO DEPRECIATION ON ASSETS GIVEN ON LEASE. THE CO-ORDINATE BENCH OF TRIBUNAL DECIDED THE ISSUE IN FAVOUR OF ASSESSEE BY HOLDING AS UNDER: 28 WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AND W E ARE OF THE VIEW THAT CROSS APPEALS ON THE ISSUE O F ALLOWANCE OF DEPRECIATION IN THE CURRENT YEAR HAVE TO BE DECIDED SIMULTANEOUSLY. IN SO FAR AS DISALLOW ANCE OF DEPRECIATION ON THE ASSETS INVOLVED IN SLB TRANSACT IONS, THE ISSUE STANDS SETTLED IN FAVOUR OF THE ASS ESSEE. FROM THE SYNOPSIS FILED BY THE AR, IT IS SEEN THAT THE A SSESSEE PROVIDED THE AO WITH ALL THE INFORMATION AS WAS ASKED FOR, I.E. LEASE AGREEMENTS, COPIES OF BILLS FOR PUR CHASE OF ASSETS, INSPECTION REPORTS, COPIES OF INSU RANCE COVER ITA NOS. 152 & 233/AHD/2006, 815 & 4387/AHD/ 2007 ITA NO. 237/AHD/2008 A.Y. 2001-02 TO 2003-04 18 ETC., WHICH, IN OUR CONSIDERED OPINION, WAS IDENTIC AL CIRCUMSTANCE, WHICH WAS BEFORE THE HON'BLE DELHI HIGH COURT IN THE CASE OF COSMO FILMS (SUPRA), I.E. SLB TRANSACTIONS, REVENUE AUTHORITIES APPLYING MCDOWELL 'S CASE AND ARGUING THAT IT IS A DEVISE FOR LOWERING THE TAX EFFECT AND RELYING ON THE BOARD'S CIRCULAR (SUP RA), AND MORE IMPORTANTLY, THAT, THAT CASE ALSO PERTAINED TO ASSE SSMENT YEAR 1996-97. THE HON'BLE DELHI COURT TOOK T HE VIEW THAT SLB TRANSACTIONS ARE GENUINE AND CANNOT BE CON SIDERED TO BE SHAM. 29. ON APPRECIATION OF THE RECORDS, AS PRODUCED BEFORE US, THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF COSMO FILMS LTD. ISUPRA) HAS ARGUMENTS OF T HE ASSESSEE ON THE IMPUGNED ISSUE, THEREBY, IMPLIED LY, REVERSED THE RATIO IN THE DECISIONS OF MIDEAST (SUP RA) AND INDUSLND (SUPRA). WE FIND THAT TESTS LAID D OWN IN MIDEAST CASE WAS PRIMARILY TO ASCERTAIN THE GENUINE NESS OF THE TRANSACTION ENTERED BY THE ASSESSEE WIT H ITS LESSEE, WHICH WAS DONE BY THE CIT(A) IN EACH CASE. 31. IN ANY CASE, THE ISSUE OF SLB TRANSACTION AND IN P ARTICULAR THE ISSUE OF OWNERSHIP OF ASSET, ALSO HAS BEEN LAID TO REST BY THE HON'BLE APEX COURT IN THE CASE OF ICDS LTD. VS CIT, IN CA NO. 3286 TO 3290 OF 2008 , WHEREIN THE QUESTION THAT WAS SOUGHT TO BE ANSWERED WAS WHETHER THE APPELLANT (ASSESSEE) IS THE OWNER OF THE VEHICLES WHICH ARE LEASED OUT BY IT TO ITS CUSTOMER S. THE HON. SUPREME COURT OF INDIA, CONCLUDED, EX TRACTED FROM PARA 28, FROM A PERUSAL OF THE LEASE AGREEMEN T AND OTHER RELATED FACTORS, AS DISCUSSED ABOVE, WE ARE SATISFIED OF THE ASSESSEES OWNERSHIP OF THE TRUCKS IN QUESTION (PARA28, PAGE28). 32. COMING TO THE ISSUE OF FINANCE LEASE, WHEREIN THE CIT(A) SUSTAINED THE DISALLOWANCE BECAUSE THE USAGE OF THE EQUIPMENT LEASE OUT COULD NOT BE SUBST ANTIATED. ON GOING THROUGH THE DECISION OF THE JURISDICTIONAL HIGH COURT OF BOMBAY, WE FIND THAT THE ISSUE NOW IS AT REST, IN SO FAR AS THE LESSOR I S CONCERNED, BECAUSE, WHILE DEALING THE CASE OF THE L ESSOR, I.E. THE ASSESSEE IN THE INSTANT CASE, THE ASSET HAS LEFT ITS CORRIDORS FOR BEING UTILIZED, AN D IN RETURN, RENT HAD BEEN RECEIVED BY THE ASSESSEE . THE HON. BOMBAY HIGH COURT IN THE CASE OF KOTAK SEC URITIES LTD. HAS HELD THAT WHAT IS TO BE SEEN IS THAT THE ASSET HAS BEEN GIVEN ON LEASE AND THE LEAS E RENT HAS BEEN RECEIVED, GIVEN IN THAT CASE, SO FAR AS LESSOR IS CONCERNED, THE ASSET HAS BEEN USED . 34. AFTER HAVING EXAMINED ALL THE TRANSACTIONS WHI CH HAVE BEEN IMPUGNED BEFORE US, WE ARE OF THE OPINION THAT THE ASSESSEE IS ENTITLED TO THE CLAIM OF DEPRECIATION UNDER ALL THE THREE CIRCUMSTANCES, I.E. SALE LEASE BACK, GENUINENESS OF TRANSACTION AND ASS ET HAVING BEING PUT TO USE. WE, THEREFORE, ALLOW GROUND NO. 1 THE ASSESSEES APPEAL AND DISMISS BOTH THE GROUNDS OF THE DEPARTMENTS APPEAL. 27. IN VIEW OF THE AFORESAID FACTS, WE ARE OF THE VIEW THAT IN VIEW OF THE DECISION OF HBLE APEX COURT IN THE CASE OF ICDS (SUPRA) AND TH E DECISION OF MUMBAI TRIBUNAL IN THE CASE OF DEVELOPMENT CREDIT BANK LTD, ASSESSEE I S ELIGIBLE FOR DEPRECIATION AND WE THUS DELETE THE ADDITION MADE BY THE ASSESSING OFFI CER. THUS THIS GROUND OF THE ASSESSEE IS ALLOWED. NOW WE TAKE UP REVENUES APPEAL IN ITA NO. 233/A/20 06 THE GROUNDS READS AS UNDER: 1. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE OF RS. 92.68 CRORES MADE UNDER THE PROVISO TO SECTION 36(1 )(VII) OF THE ACT, BEING THE CREDIT BALANCE AS PER THE ACCOUNTS MAINTAINED BY THE ASSES SEE. 2 THE LD. CIT(A) HAS ERRED IN LAW ON FACTS IN NOT APPRECIATING THE FACT THAT THERE WAS NO DOUBLE DISALLOWANCE OF THE PROVISION AS CONTENDED B Y THE ASSESSEE FOR THE PURPOSE OF WRITE OFF MADE BECAUSE ALL THE PROVISIONS ARE DISAL LOWABLE UNDER THE ACT AND WHAT HAS ITA NOS. 152 & 233/AHD/2006, 815 & 4387/AHD/ 2007 ITA NO. 237/AHD/2008 A.Y. 2001-02 TO 2003-04 19 BEEN DISALLOWED WAS THE CREDIT BALANCE AS PER THE R ESERVE FOR BAD DOUBTFUL DEBTS ACCOUNTS. 3.THE LD. CIT(A) HAS ERRED IN LAW ON FACTS IN DELET ING THE DISALLOWANCE OF RS. 8.64 CRORES MADE IN RESPECT OF INVESTMENT WRITTEN OFF ON THE GR OUND THAT THE BUSINESS OF THE ASSESSEE IS INDIVISIBLE AND PURCHASE OF DEBENTURE IS ONE OF THE MODES OF ADVANCEMENT OF MONEY. 4.THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN R ESTRICTING THE DISALLOWANCE U/S. 14A AT RS. 5.11 CRORES AS AGAINST THE DISALLOWANCE OF RS. 30.45 CRORES MADE BY THE ASSESSING OFFICER. 5.THE LD. CIT(A) HAVING CONSIDERED THE ARGUMENTS OF THE ASSESSEE AGAINST GROUND (1) ABOVE THAT THE INVESTMENT IN DEBENTURE OF THE COMPA NIES IS ALSO ONE OF THE MODES OF FINANCING OUGHT TO HAVE HELD THAT THE ASSESSEE WAS NOT ENTITLED FOR ANY EXEMPTION U/S. 10 (33) OF THE IT ACT. 28. BEFORE US, BOTH THE PARTIES SUBMITTED THAT GROU ND NO 1 & 2 ARE CONNECTED WITH GROUND NO 2 OF ASSESSEES APPEAL IN ITA NO. 152/A/2 006AND THE SUBMISSIONS MADE BY THEM WHILE ARGUING THE GROUND IN ASSESSEES APPEAL ARE EQUALLY APPLICABLE TO THE PRESENT GROUNDS. 29. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. SINCE GROUND NO. 1 AND 2 OF THE PRESENT REVENUES APPEAL ARE CONNECTED WITH GROUND NO. 2.1 AND 2.3 OF ASSESSEES APPEAL IN ITA NO. 152/AHD/200 6 AND SINCE GROUND NO 2 OF ASSESSEES APPEAL IN ITA NO 152/AHD/2006 HEREINABO VE HAS BEEN HAS BEEN DISCUSSED AND DECIDED IN FAVOUR OF ASSESSEE, WE THEREFORE FOR SIMILAR REASONS DISMISS THESE GROUNDS OF THE REVENUE. GROUND NO. 3 IS WITH RESPECT TO DISALLOWANCE OF RS. 8.6 CRORE WRITE OFF IN RESPECT OF INVESTMENT. 30. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, AO NOTICED THAT INVESTMENTS WORTH RS. 8.64 CRORES HAVE BEEN WRITTEN OFF AND HAS BEEN CLAIMED AS BAD DEBTS WRITTEN OFF. ON PERUSING THE SUBMISSIONS MADE BY THE ASSESS EE, AO NOTICED THAT ASSESSEE IN ADDITION TO SANCTIONING LOAN HAD ALSO INVESTED IN N ON CONVERTIBLE DEBENTURES OF THE COMPANY. ON ACCOUNT OF THE FAILURE OF THE BORROWER TO REPAY THE LOAN, THE LOAN HAD TURNED BAD AND ACCORDINGLY, THE ASSESSEE HAD WRITTE N OFF THE LOANS ALONG WITH THE INVESTMENT. AO WAS OF THE VIEW THAT THE ALLOWABILI TY OF WRITING OFF OF DEBTS UNDER SECTION ITA NOS. 152 & 233/AHD/2006, 815 & 4387/AHD/ 2007 ITA NO. 237/AHD/2008 A.Y. 2001-02 TO 2003-04 20 36(1)(VII) CANNOT BE EQUATED WITH WRITING OFF OF IN VESTMENTS AND THEREFORE THE INVESTMENTS CANNOT BE WRITTEN OFF AS BAD DEBTS. HE WAS FURTHER OF THE VIEW THAT PROFIT OR LOSS FROM INVESTMENT HAVE TO BE COMPUTED AS PROVIDE D UNDER SECTIONS 45 TO 55 OF THE ACT FOR THE COMPUTATION OF INCOME OR LOSS. FOR COMP UTATION OF INCOME OR LOSS THERE HAS TO BE TRANSFER UNDER SECTION 2 (47) WHICH HAD NOT O CCURRED IN THE PRESENT CASE AND THEREFORE THE SAME CANNOT BE ALLOWED U/S 36. AO WAS THEREFORE OF THE VIEW THAT THE INSTRUMENT WHICH THE ASSESSEE HAD INVESTED WERE IN THE NATURE OF INVESTMENT AND NOT A LOAN FOR THE PURPOSE OF DEDUCTION AS BAD DEBTS U/S 36(1)(VII). HE ACCORDINGLY CONSIDERED THE AMOUNT WRITTEN OFF OF RS 8.64 CRORE AS CAPITAL LOSS AND DISALLOWED THE CLAIM OF THE ASSESSEE. AGGRIEVED BY THE ORDER OF A O, ASSESSEE CARRIED THE MATTER BEFORE CIT(A). CIT(A) AFTER CONSIDERING THE SUBMIS SIONS OF THE ASSESSEE DELETED THE ADDITION BY HOLDING AS UNDER: 5. 3 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE A ND THE SUBMISSIONS AS ADVANCED BY THE APPELLANT ALONG WITH THE CASE LAWS RELIED UPON. I AM INCLINED TO AGREE WITH THE APPELLANTS VIEWS. NON-CONVERTIBLE DEBENTURES ARE IN THE TYPE O F ADVANCING FUNDS TO VARIOUS COMPANIES AND THE INCOME WHICH IS TAKEN AS INTEREST AND ASSES SABLE AS BUSINESS INCOME. FOR THE BANKS, GIVING OF LOANS IS PART OF ITS BUSINESS AND ANY BAD DEBT ARISING THEREIN IS COVERED U/S 36(L)(VII) AS BAD DEBT, WHETHER IT IS LOAN OR NON-C ONVERTIBLE DEBENTURES. AS PER THE DECISION OF SUPREME COURT IN THE CASE OF KEDARNATH JUTE MFG. CO . LTD., MERE DESCRIPTION BOOK DOES NOT DECIDE THE NATURE OF TRANSACTION, BUT IT SHOULD BE INDEPENDENTLY DECIDED, RELYING ON THE BOARD'S CIRCULAR AND VARIOUS CASE LAWS CITED BY APP ELLANT, IT IS HELD THAT THE LOSS ARISING ON WRITING OFF THIS IS PART OF BAD DEBT AND IS ALLOWAB LE. HENCE, THIS GROUND OF THE APPELLANT IS DECIDED IN FAVOUR OF THE APPELLANT. 31. AGGRIEVED BY THE ORDER OF CIT(A) THE REVENUE IS NOW IN APPEAL BEFORE US. 32. BEFORE US, THE LEARNED D.R. RELIED ON THE ORDER OF ASSESSING OFFICER. ON THE OTHER HAND THE LEARNED A.R. SUBMITTED THAT GIVING O F LOANS WAS A PART OF BUSINESS AND THE DEPLOYMENT OF FUNDS IN DEBENTURES CONSTITUTES O NE OF THE MODES OF ADVANCING LOANS IN THE ORDINARY COURSE OF BUSINESS AND THE INVESTME NTS IN DEBENTURES WAS AS PER THE PROVISIONS OF SECTION 6 OF BANKING REGULATION ACT, 1949. THE LEARNED A.R. FURTHER SUBMITTED THAT THE INCOME FROM DEBENTURES HAS BEEN OFFERED FOR TAX AND IS TREATED AS BUSINESS INCOME. HE THUS SUPPORTED THE ORDER OF CI T(A). ITA NOS. 152 & 233/AHD/2006, 815 & 4387/AHD/ 2007 ITA NO. 237/AHD/2008 A.Y. 2001-02 TO 2003-04 21 33. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. CIT(A) WHILE DELETING THE ADDITION HAS NOTED THAT GIVING O F LOANS WHETHER IN THE FORM OF LOAN OR NON CONVERTIBLE DEBENTURES IS THE PART OF THE BUSIN ESS AND RELYING ON THE DECISION OF SUPREME COURT IN THE CASE OF KEDARNATH JUTE MANUFAC TURING COMPANY LIMITED VS. CIT 82 ITR 363 HELD IT TO BE COVERED UNDER SECTION 36(1 )(VII). HE ALSO RELIED ON THE BOARD CIRCULAR. BEFORE US, THE REVENUE COULD NOT CONTROVE RT THE FINDINGS OF CIT(A) BY BRINGING ANY CONTRARY MATERIAL ON RECORD. IN VIEW OF THE AFO RESAID FACTS WE FIND NO INFIRMITY IN THE ORDER OF CIT(A) AND THUS THIS GROUND OF THE REVENUE IS DISMISSED. GROUND NO. 4 TO 6 ARE IN RELATION TO DISALLOWANCE U NDER 14A. 34. BEFORE US, BOTH THE PARTIES SUBMITTED THAT GROU ND NO 4 TO 6 ARE CONNECTED WITH GROUND NO 3 OF ASSESSEES APPEAL IN ITA NO. 152/AHD /2006AND THE SUBMISSIONS MADE BY THEM WHILE ARGUING THE GROUND IN ASSESSEES APPE AL ARE EQUALLY APPLICABLE TO THE PRESENT GROUNDS AND HAVE NO NEW SUBMISSIONS TO MAKE . 35. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. SINCE GROUND NO. 4 TO 6 OF THE PRESENT REVENUES APPEAL A RE CONNECTED WITH GROUND NO. 3 OF ASSESSEES APPEAL IN ITA NO. 152/AHD/2006 AND GROUN D NO 3 OF ASSESSEES APPEAL IN ITA NO 152/AHD/2006 HEREINABOVE HAS BEEN HAS BEEN DISCUSSED AND ALLOWED FOR STATISTICAL PURPOSES, THE PRESENT GROUND OF REVENUE IS ALSO REMITTED TO THE FILE OF AO TO DECIDE IT AFRESH. THUS THIS GROUND OF REVENUE IS AL LOWED FOR STATISTICAL PURPOSES. 36. IN THE RESULT THE APPEAL OF THE REVENUE IS PART LY ALLOWED FOR STATISTICAL PURPOSE. ITA NO. 815/AHD/2007 (AY 2001-02) ( ASSESSEES AP PEAL) ITA NOS. 152 & 233/AHD/2006, 815 & 4387/AHD/ 2007 ITA NO. 237/AHD/2008 A.Y. 2001-02 TO 2003-04 22 37. IN THIS CASE THE ORIGINAL ASSESSMENT FOR A.Y. 2 001-02 WAS COMPLETED U/S 143(3) VIDE ORDER DATED 30.03.2004 AND THE TOTAL INCOME WA S DETERMINED AT RS. 60,05,29,930/- THE ASSESSMENT WAS THEREAFTER REOPENED U/S 147 BY I SSUE OF NOTICE U/S 148 DATED 24.08.2005 AND THEREAFTER THE ASSESSMENT WAS FRAMED UNDER SECTION 143(3) READ WITH SECTION 147 OF THE ACT VIDE ORDER DATED 26.07.2006 AND THE TOTAL REVISED TOTAL INCOME WAS DETERMINED AT RS. 82,76,29,930/-. AGGRIEVED BY THE ORDER OF CIT(A), THE ASSESSEE IS NOW IN APPEAL BEFORE US. 38. BEFORE US, AT THE OUTSET, THE LEARNED A.R. SUBM ITTED THAT ONLY MATERIAL GROUND IN THE PRESENT APPEAL IS GROUND 1.2 WITH RESPECT TO DI SALLOWANCE OF DEPRECIATION OF RS. 22.95 CRORE ON WIND GENERATION MACHINES. HE FURTHER SUBMITTED THAT FACTS OF THE PRESENT CASE ARE IDENTICAL TO THAT ITA NO. 152/AHD/ 2006 FOR A.Y. 2002-03 EXCEPT FROM THE AMOUNT. HE THUS SUBMITTED THAT SUBMISSIONS MADE BY HIM WHILE ARGUING THE APPEAL IN ITA NO. 152/AHD/2006 ARE EQUALLY APPLICABLE TO T HE PRESENT CASE AND HAVE NO NEW SUBMISSIONS TO MAKE. THE LEARNED D.R. ON THE OTHER HAND RELIED ON THE ORDER OF ASSESSING OFFICER AND CIT(A). 39. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE DISPUTE IN THE PRESENT CASE IS WITH RESPECT TO THE DEPRECIATION ON WIND ENERGY GENERATORS LEASED TO BRAKES INDIA LTD. ON IDENTICAL FACTS, FOR AY 2002-03, THE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE. WE THEREFOR E, FOR SIMILAR REASONS STATED HEREIN WHILE DECIDING THE APPEAL IN ITA NO 152/AHD/2006 FO R AY 2002-03, DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE. THUS THIS GROUND OF THE ASS ESSEE IS ALSO ALLOWED. THE OTHER GROUNDS WERE NOT SERIOUSLY PRESSED AND THEREFORE NO T ADJUDICATED. 40. IN THE RESULT THIS APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ITA NO: 4387/AHD/2007 (ASSESSEES APPEAL) AND ITA N O 237/AHD/2008 (REVENUES APPEAL) FOR AY 2003-04 ITA NOS. 152 & 233/AHD/2006, 815 & 4387/AHD/ 2007 ITA NO. 237/AHD/2008 A.Y. 2001-02 TO 2003-04 23 41. THESE TWO APPEALS, ONE BY THE ASSESSEE AND THE OTHER BY THE REVENUE, ARISE OUT OF THE ORDER OF CIT(A) DATED 5.10.2007 WHEREIN THE DISPUTE IS WITH RESPECT TO PENALTY U/S 271(1)(C). 42. THIS APPEAL OF ASSESSEE IS AGAINST THE ORDER OF AO DATED 5.10.2007 FOR AY 2003- 04 WHEREBY PENALTY WAS LEVIED U/S 271(1)(C) AT 300% (RS 17,21,81,835/-) BY AO. ASSESSEE IS AGGRIEVED BY THE LEVY OF PENALTY WHEREA S REVENUE IS AGGRIEVED BY THE ORDER OF CIT(A) DATED 25.1.2007 WHEREBY HE REDUCED THE PENALTY AT 100% (RS. 5,73,93,945). SINCE THE ISSUE IS COMMON, BOTH THE A PPEALS ARE CONSIDERED TOGETHER FOR DISPOSAL FOR THE SAKE OF CONVENIENCE. 43. IN THIS APPEAL, ASSESSEE HAS RAISED VARIOUS GRO UNDS BUT THEY ALL RELATE TO LEVY OF PENALTY UNDER SECTION 271(1)(C) AMOUNTING TO RS. 17 ,21,81,835/-. 44. THE FACTS AS CULLED OUT ARE AS UNDER: 45. WHILE PASSING THE ORDER UNDER SECTION 143(3) FO R A.Y. 2003-04,AO APART FROM OTHER DISALLOWANCES, HAD MADE DISALLOWANCE ON ACCOU NT OF FRAUD EXPENSES (RS 15,56,74,000/-) AND PENALTY EXPENSES (RS 5,00,000/- ). THE AFORESAID 2 DISALLOWANCES WAS ALSO SUSTAINED BY CIT(A). ON THESE 2 DISALLOWAN CE, AO NOTED THAT IN THE AUDITED ACCOUNTS AS WELL AS IN THE RETURN OF INCOME, THE FA CTS REGARDING THE TRUE NATURE OF THE FRAUD EXPENSES AND THE PAYMENT OF PENALTY WAS NOT D ULY DISCLOSED BY THE ASSESSEE. HE ALSO NOTED THAT THE FACT WAS NOT DISCLOSED EVEN IN THE TAX AUDIT REPORT U/S 44AB IN FORM 3CD THOUGH THE ASSESSEE WAS STATUTORILY REQUIRED TO DISCLOSE THE SAME. HE THUS CONCLUDED THAT ASSESSEE HAD CAMOUFLAGED THE EXPENSE S UNDER THE HEAD MISCELLANEOUS EXPENSES WHICH ESCAPED THE SCRUTINY OF THE STATUTORY AUDITORS AND THEREFORE WAS SATISFIED THAT ASSESSEE HAS WITHIN TH E MEANING OF S. 271(1)(C) READ WITH EXPLANATIONS HAS KNOWINGLY COMMITTED THE DEFAULT OF FURNISHING INACCURATE PARTICULARS OF INCOME AND THEREFORE LEVIED PENALTY @300% OF THE TA X SOUGHT TO BE EVADED (RS 17,21,81,835/-). ITA NOS. 152 & 233/AHD/2006, 815 & 4387/AHD/ 2007 ITA NO. 237/AHD/2008 A.Y. 2001-02 TO 2003-04 24 46. AGGRIEVED BY THE ORDER OF AO, ASSESSEE CARRIED THE MATTER BEFORE CIT(A). CIT(A) GRANTED PARTIAL RELIEF BY REDUCING THE PENALTY FROM 300% TO 100%. ASSESSEE IS AGGRIEVED BY THE ORDER OF CIT(A) BECAUSE HE HAS RET AINED THE PENALTY AND ON THE OTHER HAND THE REVENUE IS AGGRIEVED BY THE ACTION OF CIT( A) IN REDUCING PENALTY FROM 300% TO 100%. 47. BEFORE US THE LEARNED A.R. SUBMITTED THAT THE A SSESSEE HAS DISCLOSED AND MADE KNOWN TO THE AO ALL THE PARTICULARS AND FACTS MATER IAL TO COMPUTATION OF ITS INCOME ACCURATELY. THE IMPUGNED AMOUNT REPRESENTED LOSS IN CURRED IN THE NORMAL COURSE OF BUSINESS. HE FURTHER SUBMITTED THAT EACH OF THE CLA IMS MADE IN THE RETURN WAS BONAFIDE AND BASED ON HONEST UNDERSTANDING OF LAW OR JUDICIA L PRECEDENTS AS ALSO WAS MADE UNDER THE GUIDANCE OF PROFESSIONAL. HE FURTHER SUBM ITTED THAT THE IMPUGNED DISALLOWANCE INVOLVED A LEGAL PROPOSITION ON UNDERS TANDING OR INTERPRETATION WHEREOF TWO VIEWS WERE POSSIBLE. HE FURTHER SUBMITTED THAT PENALTY PROCEEDINGS ARE MATERIALLY DIFFERENT FROM THE ASSESSMENT PROCEEDINGS AND THAT MERE ASSESSMENT OF AN ITEM AS INCOME DOES NOT PER SE JUSTIFY CONCLUSION OF CONCEA LMENT AND OR FURNISHING OF INACCURATE PARTICULARS. HE FURTHER SUBMITTED THAT T HE DISALLOWANCE INVOLVED A LEGAL PROPOSITION ON UNDERSTANDING OR INTERPRETATIONS WHE RE TWO VIEWS WERE POSSIBLE. HE FURTHER SUBMITTED THAT THE ASSESSEE HAD DISCLOSED A ND MADE ALL PARTICULARS AND FACTS MATERIAL TO THE COMPUTATION OF ITS INCOME ACCURATEL Y THE CLAIM MADE IN THE RETURN WAS BONAFIDE AND BASED ON HONEST AND BONAFIDE UNDERSTAN DING OF LAW AND JUDICIAL PRECEDENT. THE LEARNED A.R. FURTHER SUBMITTED THAT THE ASSESSEE HAS DISCHARGED ITS BURDEN OF SATISFACTORILY EXPLANATION OF ITS CLAIM. HE FURTHER SUBMITTED THAT NO PENALTY WAS LEVIABLE AS THE ASSESSEE WAS NEITHER GUILTY OF CONTUMACIOUS CONDUCT NOR ANY ELEMENT OF MENS REA WAS PRESENT. HE FURTHER SUBMIT TED THAT MERE DIFFERENCE OF OPINION AS PRIMARILY LAW BASED DEBATABLE COMPLEX QUESTION O F INTERPRETATION CANNOT BE A GROUND FOR SUSTAINING PENALTY. HE FURTHER RELIED ON THE D ECISION OF THE APEX COURT IN THE CASE OF RELIANCE PETROPRODUCTS (2010) 322 ITR 158 (SC). HE THUS URGED THAT THE PENALTY LEVIED BE DELETED. THE LEARNED D.R. ON THE OTHER HAND RELI ED ON THE ORDER OF ASSESSING OFFICER. ITA NOS. 152 & 233/AHD/2006, 815 & 4387/AHD/ 2007 ITA NO. 237/AHD/2008 A.Y. 2001-02 TO 2003-04 25 48. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT IN THE PRESENT CASE ADDITION MADE ON ACCO UNT OF DISALLOWANCE OF EXPENSES (FRAUD EXPENSES AND PENALTY EXPENSES) THE EXPENSES MADE BY THE AO WAS SUSTAINED BY CIT(A). ON THE AFORESAID EXPENSES PENALTY U/S 27 1(1)(C) HAS BEEN LEVIED BY AO. 49. THE PENALTY UNDER S. 271(1)(C) OF THE ACT IS LE VIABLE IF THE AO IS SATISFIED IN THE COURSE OF ANY PROCEEDINGS UNDER THE ACT THAT ANY PE RSON HAS CONCEALED THE PARTICULARS OF HIS INCOME OR FURNISHED INACCURATE PARTICULARS O F SUCH INCOME. IT IS WELL SETTLED THAT ASSESSMENT PROCEEDINGS AND PENALTY PROCEEDINGS ARE SEPARATE AND DISTINCT AND THE FINDING IN THE ASSESSMENT PROCEEDINGS CANNOT BE REG ARDED AS CONCLUSIVE FOR THE PURPOSES OF THE PENALTY PROCEEDINGS. 50. THE NECESSARY INGREDIENTS FOR ATTRACTING EXPLN. 1 TO S. 271(1)(C) ARE THAT : (I) THE PERSON FAILS TO OFFER THE EXPLANATION, OR (II) HE O FFERS THE EXPLANATION WHICH IS FOUND BY THE AO OR THE CIT(A) OR THE CIT TO BE FALSE, OR (II I) THE PERSON OFFERS EXPLANATION WHICH HE IS NOT ABLE TO SUBSTANTIATE AND FAILS TO PROVE T HAT SUCH EXPLANATION IS BONAFIDE AND THAT ALL THE FACTS RELATING TO THE SAME HAVE BEEN D ISCLOSED BY HIM. IF THE CASE OF ANY ASSESSEE FALLS IN ANY OF THESE THREE CATEGORIES, TH EN ACCORDING TO THE DEEMING PROVISION PROVIDED IN EXPLN. 1 TO S. 271(1)(C) THE AMOUNT ADD ED OR DISALLOWED IN COMPUTING THE TOTAL INCOME SHALL BE CONSIDERED AS THE INCOME IN R ESPECT OF WHICH PARTICULARS HAVE BEEN CONCEALED, FOR THE PURPOSES OF CL. (C) OF S. 2 71(1), AND THE PENALTY FOLLOWS. ON THE OTHER HAND, IF THE ASSESSEE IS ABLE TO OFFER AN EXP LANATION, WHICH IS NOT FOUND BY THE AUTHORITIES TO BE FALSE, AND ASSESSEE HAS BEEN ABLE TO PROVE THAT SUCH EXPLANATION IS BONA FIDE AND THAT ALL THE FACTS RELATING TO THE SA ME HAVE BEEN DISCLOSED BY HIM, THEN IN THAT CASE PENALTY SHALL NOT BE IMPOSED. 51. IN THE PRESENT CASE THE ASSESSEE HAD DISCLOSED ALL THE MATERIAL FACTS BEFORE THE AO AND CIT(A). WHEN THE ASSESSEE HAS MADE A PARTICU LAR CLAIM IN THE RETURN OF INCOME AND HAS ALSO FURNISHED ALL THE MATERIAL FACTS RELEV ANT THERETO, THE DISALLOWANCE OF SUCH CLAIM CANNOT AUTOMATICALLY LEAD TO THE CONCLUSION T HAT THERE WAS CONCEALMENT OF PARTICULARS OF HIS INCOME BY THE ASSESSEE OR FURNIS HING INACCURATE PARTICULARS THEREOF. THIS IS A CASE OF BONA FIDE DIFFERENCE OF OPINION R EGARDING THE ALLOWABILITY OF A CLAIM OF ITA NOS. 152 & 233/AHD/2006, 815 & 4387/AHD/ 2007 ITA NO. 237/AHD/2008 A.Y. 2001-02 TO 2003-04 26 DEDUCTION BETWEEN THE ASSESSEE AND DEPT. WHAT IS TO BE SEEN IS WHETHER THE SAID CLAIM MADE BY THE ASSESSEE WAS BONA FIDE AND WHETHER ALL THE MATERIAL FACTS RELEVANT THERETO HAVE BEEN FURNISHED AND ONCE IT IS SO ESTABLISHED, THE ASSESSEE CANNOT BE HELD LIABLE FOR CONCEALMENT PENALTY UNDER S. 271(1) (C) OF THE ACT. IN THE PRESENT CASE ALL THE NECESSARY FACTS WERE FURNISHED BY ASSESSEE. IN THE CASE OF CIT VS. RELIANCE PETROPRODUCTS (SUPRA) THE HON. APEX COURT HAS HELD THAT THERE MAKING A CLAIM WHICH IS NOT SUSTAINABLE IN LAW BY ITSELF WILL NOT AMOUNT TO FURNISHING INACCURATE PARTICULARS REGARDING THE INCOME OF ASSESSEE. IN VIEW OF THE TO TALITY OF FACTS WE ARE OF THE VIEW THAT THE ADDITION DOES NOT CALL FOR LEVY OF PENALTY UNDE R S. 271(1)(C). WE THUS CANCEL THE PENALTY LEVIED BY THE AO. THEREFORE, THIS GROUND OF ASSESSEE IS ALLOWED AND THE GROUND OF REVENUE IS DISMISSED. 52. IN THE RESULT, THE ASSESSEES APPEAL IN ITA NO . 152/AHD/2006 IS PARTLY ALLOWED, THE REVENUES APPEAL IN ITA NO. 233/AHD/2006 IS PAR TLY ALLOWED FOR STATISTICAL PURPOSES, ASSESSEES APPEAL IN ITA NO. 815/AHD/2007 IS PARTLY ALLOWED, ASSESSEES APPEAL IN ITA NO. 4387/AHD/2007 IS ALLOWED AND THE REVENUES APPEAL IN ITA NO. 237/AHD/2008 IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 30 - 08 - 2013. SD/- SD/- (G.C.GUPTA) (ANIL CHATURVEDI) VICE PRESIDENT ACCOUNTANT MEMBER AHMEDABAD. TRUE COPY RAJESH COPY OF THE ORDER FORWARDED TO: - 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (APPEALS) 4. THE CIT CONCERNED. 5. THE DR., ITAT, AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT,AHMEDABAD