M/s. DENA BANK, MUMBAI V. ADDL. CIT. - 2(3), MUMBAI

ITA 4790/MUM/2008

• Counselvise Citation: 479019914 RSA 2008
• Duration Of Justice: 2 year(s) 8 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-04-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 12-10-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 21-07-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR B SENTHIL KUMAR
• Keywords: Depreciation; Opportunity of being heard; Earning of tax free income; Bad and doubtful debts; Set aside
• Section: 191

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'D' BENCH, MUMBAI BEFORE SHRI R.S. PADVEKAR, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO. 4790/MUM/2008 (ASSESSMENT YEAR: 2004-05) M/S. DENA BANK ADDL. CIT, RANGE 2(3) DENA BANK BUILDING, 2ND FLOOR ROOM NO. 555, 5TH FLO OR 17-B, HORNIMAN CIRCLE, FORT VS. AAYAKAR BHAVAN, M.K. ROAD MUMBAI 400023 MUMBAI 400020 PAN - AAACD 4249 B APPELLANT RESPONDENT APPELLANT BY: SHRI S. ANANTHAN RESPONDENT BY: DR. B. SENTHIL KUMAR O R D E R PER B. RAMAKOTAIAH, A.M. THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER OF THE CIT(A)- XXX, MUMBAI DATED 29.04.200. ASSESSEE HAS RAISED 5 GROUN DS. 2. WE HAVE HEARD THE LEARNED COUNSEL AND THE LEARNED D .R. 2. THE FIRST ISSUE IN THIS APPEAL IS AGAINST ALLOWI NG THE DEDUCTION TOWARDS PROVISION FOR BAD DEBTS. BRIEFLY STATED FACTS OF TH E CASE ARE THAT THE ASSESSEE DEBITED A SUM OF ` 3,06,15,90,902/- TOWARDS SPECIFIC PROVISION ON ACCO UNT OF NON-PERFORMING ASSETS. THESE ASSETS INCLUDED SUB-ST ANDARD ASSETS, DOUBTFUL ASSETS AND LOSS ASSETS. ACCORDING TO THE AO, THE CL ASSIFICATION WAS DONE BY THE ASSESSEE AS PER THE GUIDELINES ISSUED BY THE RB I. THE AO NOTED, DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THAT A SUM OF 319.14 CORES REPRESENTED BAD DEBTS WRITTEN OFF DURING THE YEAR, WHICH WERE ADJUSTED AGAINST SIMILAR SPECIFIC PROVISION FOR AN EARLIER Y EAR. ACCORDING TO THE AO, THE ENTIRE PROVISION CREATED BY THE ASSESSEE WAS NO T DEDUCTIBLE. HE SPLIT THIS PROVISION INTO TWO PARTS, VIZ., PROVISION FOR RURAL DEBTS AMOUNTING TO ` 79,85,76,393/- AND THE REMAINING PROVISION TOWARDS NON-RURAL DEBTS. IN HIS OPINION, THE PROVISION FOR RURAL DEBS WAS ALLOW ABLE UNDER SECTION 36(1)(VIIA). AS REGARDS THE OTHER PROVISION, HE HEL D THAT ONLY THE ACTUAL AMOUNT OF BAD DEBTS WRITTEN OFF WAS DEDUCTIBLE UNDE R SECTION 36(1)(VII). THIS ITA NO. 4790/MUM/2008 M/S. DENA BANK 2 AMOUNT WAS DETERMINED AT ` 184.19 CRORES. THE EXCESS PROVISION OF 3.06,15,90,902/- WAS DISALLOWED. THE LD. CIT(A) CON FIRMED THE OBSERVATIONS SUBJECT TO VERIFICATION OF ACTUAL WRITE OFF. 3. AT THE OUTSET THE LEARNED COUNSEL SUBMITTED THAT TH E ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF ITAT IN I TA NO 237/MUM/02 FOR THE YEAR AY 1997-98 BY FOLLOWING THE DECISION OF THE HO N'BLE SUPREME COURT IN THE CASE OF VIJAY BANK. PARA 3 OF THE ORDER IS AS U NDER: - 3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. SEC. 36(1)(VII) GRANTS DEDUCTION FOR ANY AMOUNT OF BAD DEBT OR PART THEREOF WRITTEN OFF BY T HE ASSESSEE AS IRRECOVERABLE IN THE ACCOUNTS SUBJECT TO THE PROVIS IONS OF SEC. 36(2) OF THE ACT. SEC. 36(1)(VIIA) DEALS WITH THE GRANTING O F DEDUCTION IN RESPECT OF PROVISION FOR ANY BAD OR DOUBTFUL DEBTS MADE BY A SCHEDULED BANK, ETC. THE CASE OF THE AO IS THAT THE DEDUCTION ON ACCOUNT OF PROVISION FOR NON-RURAL DEBTS SHOULD BE ALLOWED ONL Y TO THE EXTENT OF THE AMOUNT OF DEBTS ACTUALLY WRITTEN OFF. ON THE O THER HAND, THE ASSESSEE IS CONTENDING THAT THE PROVISION MADE BY I T IN ACCORDANCE WITH THE RBI GUIDELINES SHOULD BE ALLOWED AS DEDUCT ION. HERE, IT IS IMPORTANT TO MENTION THAT THERE IS NO DISPUTE ON TH E CLAIM OF PROVISION FOR RURAL DEBTS WHICH HAS BEEN ALLOWED BY THE AO AT THE AMOUNT CLAIMED. THE HONBLE SUPREME COURT IN VIJAYA BANK V S. CIT (2010) 323 ITR 166 (SC) CONSIDERED A CASE IN WHICH THE ASS ESSEE CLAIMED DEDUCTION IN RESPECT OF PROVISION FOR BAD DEBTS U/S .36(1)(VII). THE AO HELD THAT IT WAS ONLY A PROVISION AND HENCE COULD N OT BE EQUATED WITH ACTUAL WRITE OFF OF BAD DEBTS AS PER THE REQUIREMEN TS OF SEC. 36(1)(VII). THE HONBLE SUPREME COURT, AFTER CONSIDERING THE IS SUE AT LENGTH, HELD THAT IF AN ASSESSEE DEBITS AN AMOUNT OF DOUBTF UL DEBTS TO THE P & L A/C. AND CREDITS THE ASSETS ACCOUNT LIKE SUNDRY DEBTORS ACCOUNT, THAT WOULD CONSTITUTE A WRITE OFF OF AN ACTUAL DEBT . IT WAS FURTHER HELD THAT IF AN ASSESSEE DEBITS PROVISION FOR DOUBTFUL D EBTS TO THE P & L A/C. AND MAKES A CORRESPONDING CREDIT TO THE TO TH E LIABILITIES AND PROVISIONS ON THE LIABILITIES SIDE OF THE BALANCE- SHEET, THEN IT WOULD CONSTITUTE A PROVISION FOR DOUBTFUL DEBTS AND IN SU CH A CASE THE ASSESSEE WOULD NOT BE ENTITLED TO DEDUCTION AFTER 1 -4-1989. THE YEAR UNDER CONSIDERATION IS ASSTT. YEAR 1996-97. AS PER THE JUDGMENT OF THE HONBLE APEX COURT IN VIJAYA BANK (SUPRA), DEDU CTION FOR BAD DEBTS IS ALLOWABLE PROVIDED IT IS FIRSTLY DEBITED T O THE P & L A/C. AND THEN IT IS REDUCED FROM THE FIGURE OF DEBTORS IN TH E BALANCE-SHEET. WE HAVE PERUSED THE ANNUAL REPORT OF THE ASSESSEE BANK FOR THE YEAR UNDER CONSIDERATION. IT IS NOTICED THAT THE ASSESSE E HAS REDUCED THE ULTIMATE AMOUNT OF PROVISION FOR BAD DEBTS FROM THE FIGURE OF DEBTORS IN THE BALANCE-SHEET AND IT IS ONLY AFTER REDUCING THE AMOUNT OF PROVISION FROM THE GROSS FIGURE OF DEBTORS THAT TH E NET FIGURE IS REFLECTED. SUCH A COMPUTATION CAN BE SEEN FROM PAGE S 24, 29 AND 47 OF THE PAPER BOOK. IN SO FAR AS THE FIGURE OF PROVI SION FOR NON- PERFORMING ASSETS AT THE YEAR ENDING IS CONCERNED, THE CALCULATION ITA NO. 4790/MUM/2008 M/S. DENA BANK 3 CAN BE SEEN AT PAGE 51 OF THE PAPER BOOK, FROM WHE RE IT IS DISCERNIBLE THAT THE AMOUNT OF PROVISION FOR NPA MA DE DURING THE YEAR IS ADDED TO THE AMOUNT OF OPENING BALANCE OF T HE PROVISION AND AFTER REDUCING THE AMOUNT OF BAD DEBTS WRITTEN OFF/ PROVISION WRITTEN BACK DURING THE YEAR, THE NET AMOUNT IS REFLECTED B Y WAY OF REDUCTION FROM THE AMOUNT OF DEBTORS IN THE BALANCE SHEET. I T IS, THEREFORE, VIVID THAT THE ASSESSEE HAS COMPLIED WITH THE REQUIREMENT S OF SEC. 36(1)(VIIA) AS INTERPRETED BY THE HONBLE SUPREME C OURT IN THE CASE OF VIJAYA BANK (SUPRA). THUS THE IMPUGNED ORDER ON THI S SCORE IS UPHELD AND GROUND NOS. 1 & 2 ARE NOT ALLOWED. FOLLOWING THE VIEW TAKEN ABOVE, THE AO IS DIRECTED TO ALLOW THE CLAIMS. GROUND IS ALLOWED. 4. GROUND NO. 2 PERTAINS TO THE DISALLOWANCE OF PROVIS ION FOR LOSS ON FORWARD EXCHANGE CONTRACT WHICH WERE UNMATURED ON T HE DATE OF BALANCE- SHEET OF AN AMOUNT OF ` 2,54,01,951/-. THE AO, WHILE NOT ALLOWING THIS AMOUNT, ALLOWED A SUM OF ` 12,55,15,000/- WHICH WAS DISALLOWED BY HIM IN A.Y. 2003-04. THE NET ALLOWANCE WAS RS. 10.01CRORES . THE CIT(A) UPHELD THE ASSESSMENT ORDER ON THIS ISSUE. ASSESSEE IS AGGRIEV ED. 5. SIMILAR ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE IN ASSESSEES OWN CASE IN ITA NO. 2637/MUM/2000 VIDE PARA 14, WHICH I S AS UNDER: - 14. HAVING HEARD BOTH THE SIDES AND PERUSED THE REL EVANT MATERIAL ON RECORD, WE FIND THAT THE SPECIAL BENCH OF TRIBUN AL IN DCIT VS. BANK OF BAHRAIN & KUWAIT (SUPRA) HAS DISPOSED OF TH IS ISSUE BY HOLDING THAT WHERE A FORWARD CONTRACT IS ENTERED IN TO BY THE ASSESSEE TO BUY OR SELL THE FOREIGN CURRENCY AT AN AGREED PRICE AT A FUTURE DATE FALLING BEYOND THE LAST DATE OF THE ACCOUNTING PERI OD, THE LOSS INCURRED BY THE ASSESSEE ON ACCOUNT OF EVALUATION OF THE CON TRACT ON THE LAST DATE OF THE RELEVANT ACCOUNTING PERIOD, I.E., BEFOR E THE DATE OF MATURITY OF THE FORWARD CONTRACT, IS ALLOWABLE AS DEDUCTION. A DETAILED DISCUSSION HAS BEEN MADE IN THE SAID ORDER. IN OUR CONSIDERED OPINION, IT WOULD BE JUST AND FAIR IF THE IMPUGNED ORDER ON THIS ISSUE IS SET ASIDE AND THE MATTER IS RESTORED TO THE FILE OF AO FOR DECIDING IT AFRESH ON THE TOUCHSTONE OF THE PRESCRIPTION GIVEN BY THE SPECIAL BENCH IN THE AFORENOTED ORDER. NEEDLESS TO SAY TH E ASSESSEE WOULD BE ALLOWED A REASONABLE OPPORTUNITY OF BEING HEARD. RESPECTFULLY FOLLOWING THE ABOVE, WE SET ASIDE THE ISSUE TO THE FILE OF THE A.O. IN THIS YEAR AS WELL, TO CONSIDER IT AFRESH AS ABOV E AND MAKE NECESSARY ADJUSTMENTS IF WARRANTED. 6. GROUND NO. 3 IS AGAINST CONFIRMATION OF DISALLOWAN CE UNDER SECTION 35D FOR THE EXPENSES ON PUBLIC ISSUE OF EQUITY SHAR ES. THE FACTS OF THIS ITA NO. 4790/MUM/2008 M/S. DENA BANK 4 GROUND ARE THAT IN AN EARLIER YEAR THE BANK ISSUED TO THE PUBLIC CERTAIN SHARES. TOTAL EXPENDITURE ON THIS PUBLIC ISSUE AMOU NTED TO ` 93,36,26,923/-. THE ASSESSEE CLAIMED DEDUCTION AT 1/10 TH OF THE ISSUE EXPENSES UNDER SECTION 35D AMOUNTING TO RS 93,74,000/-. THE AO, FO LLOWING THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF BROOKE BOND INDIA LTD. VS. CIT (1997) 225 ITR 798 AND ANOTHER JUDGMENT OF THE HON BLE SUPREME COURT IN PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION VS. CIT (1997) 225 ITR 792 (SC) HELD THAT SUCH EXPENSES CANNOT BE ALLOWED AS DEDUCTION U/S.35D. HE, THEREFORE, MADE DISALLOWANCE AS DONE IN THE PAS T. THE CIT(A), FOLLOWING THE VIEW TAKEN BY HIS PREDECESSORS IN EARLIER YEARS , UPHELD THE DISALLOWANCE. 7. THE LEARNED COUNSEL FOR THE ASSESSEE HAS RELIED ON THE JUDGMENT OF HONBLE RAJASTHAN HIGH COURT IN CIT. VS. NEHA PROTE INS LTD. (2008) 171 TAXMAN 455 (RAJ.) TO CONTEND THAT THE INTEREST ACCR UED ON SHARE APPLICATION MONEY LYING WITH THE BANK SHOULD BE ADJUSTED AGAINS T PUBLIC ISSUE EXPENSES SO AS REDUCE THE AMOUNT OF PUBLIC ISSUE EX PENSES FOR ENABLING THE ASSESSEE TO CLAIM AMORTIZATION UNDER AND IN ACCORDA NCE WITH THE PROVISIONS OF SEC. 35D. 8. WE HAVE OBSERVED FROM THE ASSESSMENT AS WELL AS THE IMPUGNED ORDER THAT THE ORIGINAL DEDUCTION WAS MADE IN AY 1997-98 AND THIS IS CONSEQUENTIAL CLAIM. THE ISSUE WAS BEING SET ASIDE TO THE AO FOR FRESH CONSIDERATION AND THE MATTER IS PENDING WITH THE AO IN EARLIER YEARS. UNDER SUCH CIRCUMSTANCES, WE ARE OF THE CONSIDERED OPINIO N THAT IT WOULD BE JUST AND FAIR IF THE IMPUGNED ORDER ON THIS ISSUE IS SET ASIDE AND THE MATTER IS RESTORED TO THE FILE OF AO. WE ORDER ACCORDINGLY AN D DIRECT HIM TO DECIDE THIS QUESTION AFRESH AS PER LAW AFTER ALLOWING A REASONA BLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 9. GROUND NO. 4 IS AGAINST DISALLOWANCE UNDER SECTION 14A. THE ASSESSEE CLAIMED INTEREST RECEIVED ON TAX FREE BONDS AMOUNTI NG TO 105.90 CRORES AS EXEMPT U/S.10(15)(IV)(A). RELYING ON THE JUDGMENT O F THE HONBLE SUPREME COURT IN THE CASE OF RAJASTHAN STATE WAREHOUSING CO RPORATION VS. CIT 209 ITR 271 AND CERTAIN OTHER JUDGMENTS, THE AO CAME TO HOLD THAT EXEMPTION WAS CLAIMED BY THE ASSESSEE FOR GROSS INTEREST RECE IVED WHICH WAS NOT CORRECT. HE REDUCED THE QUANTUM OF INTEREST INCOME BY PROPORTIONATELY ITA NO. 4790/MUM/2008 M/S. DENA BANK 5 REDUCING EXPENSES AT 36.93% OF SUCH INCOME. NO RELI EF WAS ALLOWED IN THE FIRST APPEAL. 10. SIMILAR ISSUE WAS CONSIDERED BY THE ITAT IN A.Y. 19 96-97 AND DECIDED AS UNDER: - 18. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PER USING THE RELEVANT MATERIAL ON RECORD, IT IS NOTICED THAT THE AO MADE DISALLOWANCE BY REDUCING PROPORTIONATE EXPENSES FRO M THE INTEREST RECEIPT BY DETERMINING THE CORRECT AMOUNT OF INCOME WHICH WAS EXEMPT U/S.10(15). IN OTHER WORDS, HE APPLIED THE PRESCRIPTION OF SEC. 14A. WE FIND THAT THIS ISSUE IS NO MORE RES INTEGRA IN VIEW OF THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT I N GODREJ & BOYCE MFG. LTD. VS. DCIT (2010) 328 ITR 81 (BOM) IN WHIC H IT HAS BEEN HELD THAT DISALLOWANCE IS CALLED FOR U/S.14A IN SUCH CIR CUMSTANCES. HOWEVER, THE MANNER OF COMPUTATION OF SUCH DISALLOW ANCE HAS BEEN RESTORED TO THE FILE OF AO FOR MAKING ON SOME REASO NABLE BASIS. IT HAS FURTHER BEEN HELD IN THIS CASE THE PROVISIONS OF RU LE 8D ARE NOT APPLICABLE AS THESE ARE PROSPECTIVE. RESPECTFULLY F OLLOWING THE PRECEDENT, WE SET ASIDE THE IMPUGNED ORDER AND DIRE CT THE AO TO COMPUTE DISALLOWANCE U/S.14A IN ACCORDANCE WITH THE RATIO LAID DOWN BY THE HONBLE JURISDICTIONAL HIGH COURT IN TH E AFORENOTED CASE OF GODREJ & BOYCE LTD. THE LD. A.R. HAS CONTENDED B EFORE US THAT IT WAS HAVING SUFFICIENT INTEREST-FREE FUNDS AT ITS DI SPOSAL WHICH WERE INVESTED IN SECURITIES EARNING EXEMPT INCOME AND HE NCE NO DISALLOWANCE OF INTEREST WAS CALLED FOR. THE AO, WH ILE COMPUTING DISALLOWANCE U/S.14A, WILL ALSO EXAMINE THIS CONT ENTION OF THE ASSESSEE AS PER LAW. RESPECTFULLY FOLLOWING THE ABOVE, THE ISSUE IN THIS YEAR IS ALSO RESTORED TO THE FILE OF THE A.O. FOR FRESH CONSIDERATION. 11. GROUND NO. 5 PERTAINS TO THE CLAIM OF PRIOR PERIOD EXPENDITURE MADE BY THE ASSESSEE. 12. IN THE BOOKS OF ACCOUNT ASSESSEE CLAIMED AN AMOUNT OF ` 42,49,741/- (NET) AS PRIOR PERIOD EXPENDITURE WHICH WAS STATED IN ANNEXURE V OF TAX AUDIT REPORT IN CLAUSE 22(B). THE A.O., WITHOUT ANY DISCUSSION DISALLOWED THE SAME STATING THAT THIS EXPENDITURE IS NOT RELAT ED TO THE CURRENT YEAR. BEFORE THE CIT(A) IT WAS SUBMITTED THAT THE AMOUNT HAS CRYSTALLISED DURING THE YEAR AND SEEMS TO HAVE FILED VARIOUS PAGES IN T HE PAPER BOOK FROM PAGES 119 TO 122. THE CIT(A) VIDE PARA 16 OF THE ORDER LI STS OUT THAT THE EXPENDITURE CLAIMED AS PRIOR PERIOD EXPENDITURE ARE ON ACCOUNT OF UNCLAIMED DEPRECIATION, INTEREST, RENT, REPAIRS AND MAINTENANCE, ELECTRIC EXPENSES, TELEPHONE EXPENSES, ETC. HE GIVES A CONCL USION THAT ADMITTEDLY ITA NO. 4790/MUM/2008 M/S. DENA BANK 6 THESE EXPENDITURES ARE NOT PERTAINING TO THE YEAR U NDER CONSIDERATION EVENTHOUGH THE ASSESSEE SUBMITTED THAT THESE EXPENS ES ARE CRYSTALLISED DURING THE YEAR. 13. SINCE BOTH THE A.O. AND CIT(A) HAVE NOT EXAMINED T HE CLAIM OF VARIOUS EXPENDITURES AND ONLY DISALLOWED THE NET AM OUNT WHILE ACCEPTING THE PRIOR PERIOD INCOME AS INCOME OF THIS YEAR, WE ARE OF THE OPINION THAT THE ISSUE SHOULD BE EXAMINED BY THE A.O. AFRESH. THE LE ARNED COUNSEL SUBMITTED THAT THE ITAT MUMBAI J BENCH IN THE CASE OF TOYO ENGINEERING INDIA LTD. VS. JCIT 5 SOT 616 HELD THAT THE PRIOR PERIOD EXPEN SES ARE TO BE ALLOWED IN THE YEAR OF CLAIM. HE ALSO RELIED ON THE DECISION O F HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. JAGATJIT INDUSTRIES LTD, 191 TAXMAN 54. SINCE THE ISSUE IS RESTORED TO THE A.O. FOR DETAILED EXAMINAT ION, THE ASSESSEE IS FREE TO MAKE FURTHER SUBMISSIONS BOTH ON FACTS AND ON LEGAL PRINCIPLES BEFORE THE A.O. WITH THIS DIRECTION THE ISSUE IN GROUND NO. 5 ALSO IS RESTORED TO THE FILE OF THE A.O. 14. IN THE RESULT, APPEAL IS ALLOWED FOR STATISTICAL PU RPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 13 TH APRIL 2011. SD/- SD/- (R.S. PADVEKAR) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 13 TH APRIL 2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) XXX, MUMBAI 4. THE CIT II, MUMBAI CITY 5. THE DR, D BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.