ADDL CIT 2(1), MUMBAI V. BANK OF BARODA, MUMBAI

ITA 6018/MUM/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 79425 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 10 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-07-2014
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: L
• Next Hearing Date: 16-07-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 29-08-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Business income; General deduction; Business expenditure; Residential status; Double taxation relief; Rule of consistency; Earning of tax free income; Bad and doubtful debts; Provision of bad debts
• Section: 143(3); 37(1); 90

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL L BENCH, MUMBAI . . , , , BEFORE SHRI R.C. SHARMA , ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEM BER . / ITA NO. 2927 / MUM./ 2011 ( / ASSESSMENT YEAR : 20 05 06 ) BANK OF BARODA CORPORATE TAX PLANNING BARODA CORPORATE CENTRE C 26, G BLOCK, BANDRA KURLA COMPLEX BANDRA (E), MUMBAI 400 051 .. / APPELLANT V/ S ASSTT. COMMISSIONER OF INCOME TAX RANGE 2(1), AAYAKAR BHAVAN 101, M.K. ROAD, MUMBAI 400 020 .... / RESPONDENT . / PERMANENT ACCOUNT NUMBER AAACB1534F . / ITA NO. 3667 / MUM./ 2011 ( / ASSESSMENT YEAR : 20 05 06 ) DY. COMMISSIONER OF INCOME TAX RANGE 2(1), AAYAKAR BHAVAN 101, M.K. ROAD, MUMBAI 400 020 .. / APPELLANT V/S BANK OF BARODA BARODA CORPORATE CENTRE C 26, G BLOCK, BANDRA KURLA COMPLEX BANDRA (E), MUMBAI 400 051 .... / RESPONDENT . / PERMANENT ACCOUNT NUMBER AAACB1534F BANK OF BARODA 2 . / ITA NO. 2928 / MUM./ 2011 ( / ASSESSMENT YEAR : 20 0 6 07 ) BANK OF BARODA BARODA CORPORATE CENTRE C 26, G B LOCK, BANDRA KURLA COMPLEX BANDRA (E), MUMBAI 400 051 .. / APPELLANT V/S ASSTT. COMMISSIONER OF INCOME TAX RANGE 2(1), AAYAKAR BHAVAN 101, M.K. ROAD, MUMBAI 400 020 .... / RESPONDENT . / PERMANENT ACCOUNT NUMBER AAACB1534F . / ITA NO. 5735 / MUM./ 2011 ( / ASSESSMENT YEAR : 20 07 08 ) BANK OF BARODA BARODA CORPORATE CENTRE C 26, G BLOCK, BANDRA KURLA COMPLEX BANDRA (E), MUMBAI 400 051 .. / APPE LLANT V/S ASSTT. COMMISSIONER OF INCOME TAX RANGE 2(1), AAYAKAR BHAVAN 101, M.K. ROAD, MUMBAI 400 020 .... / RESPONDENT . / PERMANENT ACCOUNT NUMBER AAACB1534F . / ITA NO. 6018 / MUM./ 201 1 ( / ASSESSMENT YEAR : 20 07 08 ) DY. COMMISSIONER OF INCOME TAX RANGE 2(1), AAYAKAR BHAVAN 101, M.K. ROAD, MUMBAI 400 020 .. / APPELLANT V/S BANK OF BARODA BARODA CORPORATE CENTRE C 26, G BLOCK, BANDRA KURLA COMPLEX BANDRA (E), MUMBAI 400 051 .... / RESPONDENT . / PERMANENT ACCOUNT NUMBER AAACB1534F / ASSESSEE BY : MR. C. NARESH / REVENUE BY : MR . AJAY KUMAR SRIVASTAVA BANK OF BARODA 3 / DATE OF HEARING 1 6 .0 7 .2014 / DATE OF ORDER 25/07/2014 / ORDER / PER BENCH THE CROSS APPEALS FOR THE ASSESSMENT YEAR 2005 06, ARE DIRECTED AGAINST THE IMPUGNED ORDER DATED 11 TH FEBRUARY 2011, APPEA L PREFERRED BY THE ASSESSEE FOR THE ASSESSMENT YEAR 2006 07, IS DIRECTED AGAINST THE IMPUGNED ORDER DATED 18 TH FEBRUARY 2011, AND THE CROSS APPEALS FOR THE ASSESSMENT YEAR 2007 08, ARE DIRECTED AGAINST THE IMPUGNED ORDER DATED 15 TH JUNE 2011, WHICH ARE PAS SED BY THE LEARNED COMMISSIONER (APPEALS) IV, MUMBAI, FOR THE QUANTUM OF ASSESSMENT PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (FOR SHORT 'THE ACT' ). 2 . SINCE ALL THE ABOVE APPEALS PERTAIN TO THE SAME ASSESSEE INVOLVING COMMON ISSUES ARISING OUT OF IDENTICAL SET OF FACTS AND CIRCUMSTANCES, THEREFORE, AS A MATTER OF CONVENIENCE, THESE APPEALS WERE HEARD TOGETHER AND ARE BEING DISPOSED OFF BY WAY OF THIS CONSOLIDATED ORDER. 3 . THE IDENTICAL ISSUES RAISED IN ALL THE APPEALS OF THE ASSESSEE ARE AS UND ER: I ) DISALLOWANCE UNDER SECTION 14A; BANK OF BARODA 4 II ) DISALLOWANCE OF BAD DEBT WRITTEN OFF IN RELATION TO NON RURAL BRANCHES; III ) EXCLUSION OF INCOME EARNED BY THE FOREIGN BRANCHES IN THE RETURN OF INCOME FILED IN INDIA ON THE GROUND THAT ONCE THE BRANCHES ARE TAXABLE IN TH E FOREIGN COUNTRY I.E., SOURCE COUNTRY, THEREFORE, THE SAME CANNOT BE TAXED IN INDIA; AND IV ) DISALLOWANCE OF STAFF WELFARE EXPENSES WHICH ARE ARISING OUT OF REVENUES APPEAL FOR THE ASSESSMENT YEAR 2005 06. I ) DISALLOWANCE UNDER SECTION 14 : IN THE ASSESSMEN T YEAR 2005 06, THE ASSESSEE IN ITS APPEAL BEING ITA NO.2927/MUM./2011, HAS CHALLENGED THE DISALLOWANCE OF ` 238.53 CRORES UNDER SECTION 14A, AS AGAINST THE EXEMPT INCOME OF ` 182.33 CRORES. 4 . THE ASSESSING OFFICER, IN THE ASSESSMENT YEAR 2005 06, NOTED THA T THE ASSESSEE HAS EARNED FOLLOWING EXEMPT INCOME: I) INTEREST U/S 10(15)(IV)(C&D) ` 27,41,00,000 II) INTEREST ON TAX FREE BONDS ` 41,07,18,916 III) INTEREST ON ADVANCES U /S 10(23G) ` 90,83,23,000 IV) DIVIDEND FROM COMPANIES ` 23,01,86,554 ` 182,33 ,28,470 A GAINST SUCH INCOME, THE ASSESSEE HAS ESTIMATED THE EXPENDITURE FOR THE PURPOSE OF DISALLOWANCE AT ` 15,63,982. THE ASSESSING OFFICER BANK OF BARODA 5 FURTHER NOTED THAT THE ENTIRE CAPITAL INCLUDING THE CAPITAL RESERVE, SURPLUS AND BORROWED CAPITAL, HAS BEEN KEPT BY THE ASSESSEE IN THE COMMON POOL. WHENEVER A PARTICULAR INVESTMENT IS MADE, THE SAME HAS BEEN MADE OUT OF COMMON POOL AND IT IS NOT POSSIBLE TO IDENTIFY WHICH INGREDIENTS OF THE CAPITAL ARE INVESTED IN PARTICULAR INSTRUMENT. ACCORDINGLY, HE WORKED OUT T HE DISALLOWANCE AT ` 2,38,53,21,733, AS PER THE WORKING GIVEN IN PAGE 5 TO 7 OF THE ASSESSMENT ORDER. 5 . BEFORE THE LEARNED COMMISSIONER (APPEALS), THE ASSESSEE BANK SUBMITTED THAT IT HAD INTEREST FREE FUNDS OF ` 15,607 CRORES AND HENCE, INTEREST SHOULD NOT BE DISALLOWED FOR EARNING THE TAX FREE INCOME , AS THESE FUNDS WERE FOR MORE EXCESS THAN THE INVESTMENTS MADE . RELIANCE WAS ALSO PLACED ON THE EARLIER DECISION S OF THE LEARNED COMMISSIONER (APPEALS) IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 1998 99 AN D 1999 2000. IT WAS FURTHER SUBMITTED THAT THE ASSESSEES INVESTMENT IN SECURITIES AND BONDS AND LOANS AND ADVANCES WERE IN THE ORDINARY COURSE OF BUSINESS AND, THEREFORE, NO PART OF THE INTEREST SHOULD BE DISALLOW ED UNDER SECTION 14A. HOWEVER, THE LEARNED COMMISSIONER (APPEALS) HELD THAT THOUGH RULE 8D IS NOT APPLICABLE IN VIEW OF THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN GODREJ & BOYCE MFG. CO. LTD. V/S DCIT, (2010), 328 ITR 081 (BOM.), HOWEVER, THE DISALLOWANCE WHICH HAS BEEN MADE BY THE A SSESSING OFFICER IS QUITE REASONABLE AND, ACCORDINGLY, HE CONFIRMED THE SAID DISALLOWANCE. BANK OF BARODA 6 6 . BEFORE US, THE LEARNED COUNSEL SUBMITTED THAT INSOFAR AS THE DISALLOWANCE OF INTEREST IS CONCERNED, THE SAME SHOULD NOT BE MADE AS THE ASSESSEE HAS SURPLUS FUNDS WH ICH FACT HAS NOT BEEN DISPUTED EITHER BY THE ASSESSING OFFICER OR BY THE LEARNED COMMISSIONER (APPEALS). HE ALSO POINTED OUT THAT IN THE ASSESSEES OWN APPEAL FOR THE ASSESSMENT YEAR S 2003 04 AND 2004 05, THIS MATTER HAS BEEN RESTORED BACK TO THE FILE OF T HE ASSESSING OFFICER FOR FRESH ADJUDICATION. IN ANY CASE, PRIOR TO ASSESSMENT YEAR 2008 09, RULE 8D IS NOT APPLICABLE AND SOME REASONABLE BASIS HAS TO BE ADOPTED LOOKING TO THE ACCOUNTS OF THE ASSESSEE AND DISALLOWANCE OFFERED BY THE ASSESSEE HAS NOT BEEN DISPUTED, THEREFORE, NO FURTHER DISALLOWANCE SHOULD BE MADE. 7 . THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, STRONGLY RELIED UPON THE ORDER OF THE LEARNED COMMISSIONER (APPEALS) AND SUBMITTED THAT IN ANY CASE, THIS MATTER HAS BEEN SET ASIDE BY THE TRIBUNAL BACK TO THE FILE OF THE ASSESSING OFFICER IN THE EARLIER YEARS, THEREFORE, ON THE SAME LINE, THE SAME SHOULD BE SET ASIDE TO THE ASSESSING OFFICER FOR FRESH ADJUDICATION. 8 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL PLACED ON RECORDS. WE FIND THAT SIMILAR ISSUE HAD COME UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2003 04 AND 2004 05, WHEREIN THE TRIBUNAL HAS SET BANK OF BARODA 7 ASIDE THE ISSUE OF DISALLOWANCE UNDER SECTION 14A, BACK TO THE FILE OF T HE ASSESSING OFFICER AFTER OBSERVING AND HOLDING AS UNDER: 2.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. WE FIND THAT INITIALLY ASSESSEE ITSELF HAD CALCULATED ESTIMATED EXPENSES FOR EARNING EXEMPTED INCOME AT 22.4% AMOUNTIN G TO ` 205.77 CRORES. LATER ON ASSESSEE OFFERED ONLY A SUM OF ` 69.73 LAKHS TOWARDS EARNING OF EXEMPTED INCOME THAT WORKS OUT TO 0.3389%. THUS, THERE IS A DRASTIC CHANGE IN THE DISALLOWANCE CALCULATED BY THE ASSESSEE BANK UNDER THE HEAD DISALLOWANCE MADE F OR EARNING EXEMPT INCOME. WE FURTHER FIND THAT VITAL FACTORS LIKE AVAILABILITY OF SHARE CAPITAL / RESERVE & PROFITS, HOLDING OF SECURITIES AS STOCK IN TRADE OR INVESTMENT, TO DECIDE THE ISSUE OF PROPORTIONATE DISALLOWANCE HAVE NOT BEEN CONSIDERED BY THE AO / FAA. IN OUR OPINION, IN THE INTEREST OF JUSTICE MATTER HAS TO BE RESTORED BACK TO THE FILE OF THE A.O. FOR FRESH ADJUDICATION. A.O. IS DIRECTED TO AFFORD REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. APPEAL FILED BY THE ASSESSEE STAND PARTIALLY ALLO WED. IN THIS YEAR ALSO, CONSISTENT WITH THE VIEW TAKEN BY THE TRIBUNAL IN ASSESSEES OWN CASE, WE SET ASIDE THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR FRESH ADJUDICATION BUT WITHOUT APPLYING RULE 8D. THE ASSESSING OFFICER MAY, AFTER EXAMINING TH E ACCOUNTS , WILL WORK OUT SOME REASONABLE BASIS FOR THE PURPOSE OF DISALLOWANCE , IF AT ALL REQUIRED. ACCORDINGLY, GROUND NO.1, IS TREATED AS ALLOWED FOR STATISTICAL PURPOSE. 9 . SIMILAR ISSUE OF DISALLOWANCE UNDER SECTION 14A, HAS BEEN MADE IN ASSESSEES APPE AL FOR THE ASSESSMENT YEAR 2006 07 AND 2007 08. SINCE THE FACTS ARE IDENTICAL, THEREFORE, IN THIS YEAR ALSO, THIS GROUND IS RESTORED BACK TO THE FILE OF THE ASSESSING OFFICER IN VIEW OF THE ABOVE BANK OF BARODA 8 FINDINGS. THUS, THE GROUND S TAKEN IN THESE YEARS ARE ALSO AL LOWED FOR STATISTICAL PURPOSES. II ) DISALLOWANCE OF BAD DEBT WRITTEN OFF IN RELATION TO NON RURAL BRANCHES : THE SECOND ISSUE RELATES TO DISALLOWANCE OF BAD DEBT WRITTEN OFF IN RESPECT OF NON RURAL BRANCHES. THIS ISSUE HAS BEEN RAISED IN GROUND NO.2, FOR TH E ASSESSMENT YEAR 2005 06, 2006 07 AND 2007 089 BY THE ASSESSEE. 10 . SINCE THE FACTS ARE IDENTICAL IN ALL THE YEARS, THEREFORE, FOR THE SAKE OF READY REFERENCE, THE FACTS RELATING TO ASSESSMENT YEAR 2005 06, ARE BEING DISCUSSED HEREUNDER: 11 . THE ASSESSING OFFI CER NOTED THAT THE ASSESSEE HAS CLAIMED BAD DEBT OF ` 4,77,49,69,612, UNDER SECTION 36(1)(VII). THE SAID CLAIM COMPRISES OF ` 71,35,13,000, AS BAD DEBT AND ` 4,05,14,56,612, AS AMOUNT WRITTEN OFF AS BAD DEBT AS GENERAL PROVISIONS OF BAD DEBT. 12 . THE ASSESSIN G OFFICER DISALLOWED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT THE ASSESSEE HAS NOT FULFILLED THE CONDITIONS LAID DOWN IN SECTION 36(1)(VII), 36(1)(VIIA) AND 36(2)(V). ACCORDING TO HIM, THE ASSESSEE IS ELIGIBLE TO CLAIM BAD DEBT ONLY IF THE BANK HAS CRE ATED PROVISIONS OF BAD DEBT AND ONLY THE EXCESS AMOUNT , WHICH IS MORE THAN BANK OF BARODA 9 THE PROVISIONS FOR BAD AND DOUBTFUL DEBT AS STIPULATED IN SECTION 36(2)(V), CAN BE CLAIMED AND ALSO THE PROVISION FOR BAD AND DOUBTFUL DEBT UNDER SECTION 36(1)(VIIA), WHICH IS LIMIT ED TO 7.5% OF THE TOTAL INCOME BEFORE MAKING ANY DEDUCTION UNDER CHAPTER VIA. W HEREAS THE ASSESSEE HAS ADDED BACK THE TOTAL BAD DEBT WHICH INCLUDED PRUDENTIAL WRITTEN OFF, ACTUAL RIGHT OF F PARTIAL RIGHT OFF AND PROVISIONS FOR BAD AND DOUBTFUL DEBT. HE HELD THAT T HIS CANNOT BE DONE UNDER THE PROVISIONS OF THE ACT AND, THEREFORE, BAD DEBTS WRITTEN OFF ARE MORE THAN THE PROVISIONS CLAIMED. ACCORDINGLY, HE ALLOWED THE DEDUCTION OF ` 106 , 60 , 38 , 651 UNDER SECTION 36(1)(VII) AND DISALLOWED A SUM OF ` 3,70,89,30,961 . THE RELEVANT OBSERVATIONS OF THE ASSESSING OFFICER ARE AS UNDER: 5.7 THE ASSESSEE HAS ADDED BACK TOTAL BAD DEBTS WRITTEN OFF, PRUDENTIAL WRITTEN OFF, ACTUAL WRITE OFF, PARTIAL WRITE OFF AND PROVISION FOR BAD AND DOUBTFUL DEBTS. THE ASSESSEE HAS CLAIM ED ACTUAL BAD DEBTS WRITTEN OFF AT ` 71,35,13,000 UNDER SECTION 36(1)(VII) AS WELL AS ` 406,14,56,612 UNDER SECTION 36(1)(VII) TOWARDS NON RURAL DEBTS WRITE OFF. THE LEGISLATURE HAS QUALIFIED SECTION 36(1)(VII) SUBJECT TO THE PROVISIONS OF SUB SECTION 2 OF SECTION 36. SINCE BAD DEBTS WRITTEN OFF IS MORE THAN THE PROVISION CLAIMED UNDER SECTION 36(1)(VIIA) ONLY THE EXCESS CLAIM IS ALLOWED UNDER SECTION 36(1)(VII) I.E., ` 106,60,38,651 ( ` 71,35,13,000 + ` 406,14,56,612) ` 370,89,30,961). THE CLAIM OF BAD DE BTS PROVISION UNDER SECTION 36(1)(VIIA) IS ALLOWED AS DEDUCTION. TOTAL DEDUCTION ALLOWED THEREFORE IS ` 106,60,38,651 UNDER SECTION 36(1)(VII) AS BAD DEBTS WRITE OFF AND ` 4,72,52,24,565 UNDER SECTION 36(1)(VIIA) AS BAD DEBTS PROVISION AND DISALLOWANCE IS ` 370,89,30,961. THE SIMILAR DISALLOWANCES HAVE BEEN MADE IN THE EARLIER ASSESSMENT YEARS ALSO. THE FACTS OF THE CASE AND ASSESSEES REPLY ARE ALSO SAME. BANK OF BARODA 10 13 . BEFORE THE LEARNED COMMISSIONER (APPEALS), THE ASSESSEE BANK SUBMITTED THAT IT HAS WRITTEN OFF THE N ON RURAL DEBTS OF ` 71,35,13,000, IN THE PROFIT & LOSS ACCOUNT. IT HAS ALSO WRITTEN OFF ` 4,06,14,56,612, OUT OF PROVISIONS FOR BAD DEBT WHICH HAS BEEN DISALLOWED IN THE PAST. THE ASSESSEE PLACED RELIA NCE ON THE FOLLOWING DECISIONS TO JUSTIFY ITS CLAIM FOR BAD DEBT. I ) SOUTH INDIAN BANK V/S CIT, 262 ITR 579 (KAR.); II ) DCIT V/S CATHOLIC SYRIAN BANK LTD., 267 ITR 52, ITAT COCHIN SPECIAL BENCH; III ) STATE BANK OF BIKANER & JAIPUR V/S DCIT, [2001[ 74 ITD 203 (JAIPUR BENCH); IV ) BANK OF BARODA V/S JCIT, ITAT B BENCH, MUM BAI, FOR A.Y. 1996 97, 1997 98 AND 2000 01; V ) TRF LTD. V/S CIT, 323 ITR 397 (SC) AND VIJAYA BANK V/S CIT (SC) 323 ITR 167. IT WAS FURTHER SUBMITTED THAT IN THE EARLIER YEARS, THE LEARNED COMMISSIONER (APPEALS), IN THE ASSESSMENT YEAR 1996 97, 2001 02 AND 2002 03, HAS DECIDED THIS ISSUE IN FAVOUR OF THE ASSESSEE AND ALSO THE TRIBUNAL HAS ALSO DECIDED IN FAVOUR IN THE ASSESSMENT YEAR 1997 98 AND 2000 01. 14 . THE LEARNED COMMISSIONER (APPEALS) NOTED THAT THE PROVISIONS FOR BAD AND DOUBTFUL DEBT WAS ` 428,67,46, 464, WHEREAS, T HE ASSESSEE CLAIMED FOR BAD DEBT AT ` 477,49,69,612 AND, THEREFORE, ONLY THE SUM BANK OF BARODA 11 OF ` 48,82,23,148, HAS TO BE ALLOWED AS BAD DEBT OUT OF THE TOTAL CLAIM. SINCE THE ASSESSING OFFICER HAS ALL O WED MORE BAD DEBT AT ` 106.60 CRORES, THEREFORE, NO TICE OF ENHANCEMENT UNDER SECTION 251(2) WAS GIVEN TO THE ASSESSEE . IN RESPONSE, THE ASSESSEE SUBMITTED THAT NO ENHANCEMENT IS REQUIRED AS BOTH THE DEDUCTIONS , NAMELY , DEDUCTION OF BAD DEBT UNDER SECTION 36(1)(VII) AND DEDUCTION OF PROVISION OF 36(1)(VIIA) ARE REQUIRED TO BE ALLOWED SEPARATELY. IN SUPPORT OF ITS CONTENTION, FOLLOWING CASE LAWS WERE RELIED UPON: I ) KARNATAKA HIGH COURT IN THE CASE OF DCIT & ANR. V/S KARNATAKA BANK LTD., [2008] 218 CTR (KAR.) 273, DECIDED THAT BAD DEBTS WRITTEN OFF U/ S36(1)(V II) IS ALLOWABLE INDEPENDENTLY AND IRRESPECTIVE OF PROVISION FOR BAD AND DOUBTFUL DEBTS CREATED BY ASSESSEE IN RELATION TO THE ADVANCES OF THE RURAL BRANCHES SUBJECT TO THE LIMITATION NTHAT AN AMOUNT SHOULD NOT BE DEDUCTED TWICE U/S 36(1)(VII) AND 36(1)(VI IA) SIMULTANEOUSLY. II ) SIMILARLY MADRAS HIGH COURT IN CASE OF CIT V/S CITY UNION BANK LTD., [2007] 213 CTR (MAD.) 113, ALSO DECIDED THAT BAD DEBTS IN RELATION TO NON RURAL BRANCHES OF THE ASSESSEE BANK IS ALLOWABLE WITHOUT FIRST SETTING OFF AGAINST THE PROVI SION ALREADY ALLOWED UNDER SECTION 36(1)(VIIA) WHEN NO DISTINCTION BETWEEN ADVANCES RELATING TO NON RURAL AND RURAL HAS BEEN MADE IN SECTION 36(1)(VII); III ) KERALA HIGH COURT IN CASE OF SOUTH INDIAN BANK LTD. V/S CIT, [2003) 262 ITR 579 ALSO DECIDED WHAT WAS DECIDED IN KARNATAKA BANK AND CITY UNION BANKS CASE. IV ) ITAT IN APPELLANTS OWN CASE FOR A.Y. 1997 98 AND 2000 01 ALSO DECIDED THAT PROVISIONS OF SECTION 36(1)(VII) AND 36(10)(VIIA) ARE EXCLUSIVELY AND BANK IS ENTITLED TO CLAIM NON RURAL WRITE OFF OF BAD DE BTS WITHOUT REFERRING TO SECTION 36(1)(VIIA) PROVISION FOR BAD DEBTS. BANK OF BARODA 12 15 . THE LEARNED COMMISSIONER (APPEALS) REJECTED THE ASSESSEES ARGUMENT AND HELD THAT THE DECISION RELIED UPON BY THE ASSESSEE ARE DISTINGUISHABLE ON FACTS AND THE ASSESSEE WOULD NOT BE ENT ITLED FOR DOUBLE DEDUCTION IN RESPECT OF THE SAME DEBT. HE ALSO REFERRED TO THE CBDT INSTRUCTION NO.17 DATED 26 TH NOVEMBER 2008 , THAT ONLY THE EXCESS OF BAD DEBTS WHICH IS OVER AND ABOVE THE PROVISIONS FOR BAD AND DOUBTFUL DEBT IS REQUIRED TO BE ALLOWED. A CCORDINGLY, HE REJECTED THE CLAIM OF BAD DEBT OF ` 48,82,23,148 AND, THEREFORE, HE ENHANCED THE DISALLOWANCE BY ` 57,78,15,503. 16 . BEFORE US, THE LEARNED COUNSEL SUBMITTED THAT THIS ISSUE IS NOW SQUARELY COVERED BY THE DECISION OF THE HON'BLE SUPREME COURT I N CATHOLIC SYRIAN BANK LTD. V/S CIT, [2012] 343 ITR 270 (SC) . FURTHER, T HIS DECISION OF THE HON'BLE SUPREME COURT HAS BEEN FOLLOWED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2003 04 AND 2004 05, VIDE ORDER DATED 12 TH JUNE 2013, IN ITA NO.9243/MUM./2010. 17 . THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, STRONGLY RELIED UPON THE ORDER OF THE LEARNED COMMISSIONER (APPEALS). 18 . WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE IMPUGNED ORDER PASSED BY THE LEARNED COMMISSIONER (APPEA LS). THE LEARNED COMMISSIONER (APPEALS) HAS CONFIRMED THE DISALLOWANCE OR RATHER ENHANCED THE DISALLOWANCE MAINLY ON THE GROUND THAT TWO DEDUCTIONS BANK OF BARODA 13 UNDER DIFFERENT PROVISIONS I.E., UNDER SECTION 36(1)(VII) AND 36(1)(VIIA), CANNOT BE ALLOWED SIMULTANEOUSLY AS IT WILL AMOUNT TO DOUBLE DEDUCTION IN RESPECT OF THE SAME DEBT. THIS PR ECISE ISSUE HAS BEEN SETTLED BY THE HON'BLE SUPREME COURT IN CATHOLIC SYRIAN BANK LTD. (SUPRA), WHEREIN THE HON'BLE SUPREME COURT HELD THAT THE DEDUCTION UNDER SECTION 36(1)(VII) AND 36(1)(VIIA) ARE SEPARATE ITEMS AND ARE INDEPENDENT PROVISIONS THEY HAVE TO BE ALLOWED SEPARATELY . RELEVANT OBSERVATIONS OF THEIR LORDSHIPS, ARE AS UNDER: 16. SECS. 36(1)(VII) AND 36(1)(VIIA) PROVIDE FOR SUCH DEDUCTIONS, WHICH ARE TO BE PERMITTED, IN AC CORDANCE WITH THE LANGUAGE OF THESE PROVISIONS. A BARE READING OF THESE PROVISIONS SHOW THAT SS. 36(1)(VII) AND 36(1)(VIIA) ARE SEPARATE ITEMS OF DEDUCTION. THESE ARE INDEPENDENT PROVISIONS AND, THEREFORE, CANNOT BE INTERMINGLED OR READ INTO EACH OTHER. IT IS A SETTLED CANON OF INTERPRETATION OF FISCAL STATUTES THAT THEY NEED TO BE CONSTRUED STRICTLY AND ON THEIR PLAIN READING. 17. THE PROVISIONS OF S. 36(1)(VII) WOULD COME INTO PLAY IN THE GRANT OF DEDUCTIONS, SUBJECT TO THE LIMITATION CONTAINED IN S. 36 (2) OF THE ACT. ANY BAD DEBT OR PART THEREOF, WHICH IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE FOR THE PREVIOUS YEAR IS THE DEDUCTION WHICH THE ASSESSEE WOULD BE ENTITLED TO GET, PROVIDED HE SATISFIES THE REQUIREMENTS OF S. 36(2) OF TH E ACT. ALLOWING OF DEDUCTION OF BAD DEBTS IS CONTROLLED BY THE PROVISIONS OF S. 36(2). THE ARGUMENT ADVANCED ON BEHALF OF THE REVENUE IS THAT IT WOULD AMOUNT TO ALLOWING A DOUBLE DEDUCTION IF THE PROVISIONS OF SS. 36(1)(VII) AND 36(1)(VIIA) ARE PERMITTED T O OPERATE INDEPENDENTLY. THERE IS NO DOUBT THAT A STATUTE IS NORMALLY NOT CONSTRUED TO PROVIDE FOR A DOUBLE BENEFIT UNLESS IT IS SPECIFICALLY SO STIPULATED OR IS CLEAR FROM THE SCHEME OF THE ACT. AS FAR AS THE QUESTION OF DOUBLE BENEFIT IS CONCERNED, THE L EGISLATURE IN ITS WISDOM INTRODUCED S. 36(2)(V) BY THE FINANCE ACT, 1985 W.E.F. 1ST APRIL, 1985. SEC. 36(2)(V) CONCERNS ITSELF AS A CHECK FOR CLAIM OF ANY DOUBLE DEDUCTION AND HAS TO BE READ IN CONJUNCTION WITH S. 36(1)(VIIA) OF THE ACT. IT REQUIRES THE AS SESSEE TO DEBIT THE AMOUNT OF SUCH DEBT OR PART THEREOF IN THE PREVIOUS YEAR TO THE PROVISION MADE FOR THAT PURPOSE. BANK OF BARODA 14 24. CLEAR LEGISLATIVE INTENT OF THE RELEVANT PROVISIONS AND UNAMBIGUOUS LANGUAGE OF THE CIRCULARS WITH REFERENCE TO THE AMENDMENTS TO S. 36 OF THE ACT DEMONSTRATE THAT THE DEDUCTION ON ACCOUNT OF PROVISIONS FOR BAD AND DOUBTFUL DEBTS UNDER S. 36(1)(VIIA) IS DISTINCT AND INDEPENDENT OF THE PROVISIONS OF S. 36(1)(VII) RELATING TO ALLOWANCE OF THE BAD DEBTS. THE LEGISLATIVE INTENT WAS TO ENCOU RAGE RURAL ADVANCES AND THE MAKING OF PROVISIONS FOR BAD DEBTS IN RELATION TO SUCH RURAL BRANCHES. ANOTHER MATERIAL ASPECT OF THE FUNCTIONING OF SUCH BANKS IS THAT THEIR RURAL BRANCHES WERE PRACTICALLY TREATED AS A DISTINCT BUSINESS, THOUGH ULTIMATELY THES E ADVANCES WOULD FORM PART OF THE BOOKS OF ACCOUNTS OF THE PRINCIPAL OR HEAD OFFICE BRANCH. THUS, THIS COURT WOULD BE MORE INCLINED TO GIVE AN INTERPRETATION TO THESE PROVISIONS WHICH WOULD SERVE THE LEGISLATIVE OBJECT AND INTENT, RATHER THAN TO SUBVERT TH E SAME. THE CIRCULARS IN QUESTION SHOW A TREND OF ENCOURAGING RURAL BUSINESS AND FOR PROVIDING GREATER DEDUCTIONS. THE PURPOSE OF GRANTING SUCH DEDUCTIONS WOULD STAND FRUSTRATED IF THESE DEDUCTIONS ARE IMPLICITLY NEUTRALIZED AGAINST OTHER INDEPENDENT DEDUC TIONS SPECIFICALLY PROVIDED UNDER THE PROVISIONS OF THE ACT. TO PUT IT SIMPLY, THE DEDUCTIONS PERMISSIBLE UNDER S. 36(1)(VII) SHOULD NOT BE NEGATED BY READING INTO THIS PROVISION, LIMITATIONS OF S. 36(1)(VIIA) ON THE REASONING THAT IT WILL FORM A CHECK AGA INST DOUBLE DEDUCTION. TO OUR MIND, SUCH APPROACH WOULD BE ERRONEOUS AND NOT APPLICABLE ON THE FACTS OF THE CASE IN HAND. 25. THE LANGUAGE OF S. 36(1)(VII) OF THE ACT IS UNAMBIGUOUS AND DOES NOT ADMIT OF TWO INTERPRETATIONS. IT APPLIES TO ALL BANKS, COMME RCIAL OR RURAL, SCHEDULED OR UNSCHEDULED. IT GIVES A BENEFIT TO THE ASSESSEE TO CLAIM A DEDUCTION ON ANY BAD DEBT OR PART THEREOF, WHICH IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE FOR THE PREVIOUS YEAR. THIS BENEFIT IS SUBJECT ONLY TO S. 36(2) OF THE ACT. IT IS OBLIGATORY UPON THE ASSESSEE TO PROVE TO THE AO THAT THE CASE SATISFIES THE INGREDIENTS OF S. 36(1)(VII) ON THE ONE HAND AND THAT IT SATISFIES THE REQUIREMENTS STATED IN S. 36(2) OF THE ACT ON THE OTHER. THE PROVISO TO S. 36(1)(V II) DOES NOT, IN ABSOLUTE TERMS, CONTROL THE APPLICATION OF THIS PROVISION AS IT COMES INTO OPERATION ONLY WHEN THE CASE OF THE ASSESSEE IS ONE WHICH FALLS SQUARELY UNDER S. 36(1)(VIIA) OF THE ACT. WE MAY ALSO NOTICE THAT THE EXPLANATION TO S. 36(1)(VII), INTRODUCED BY THE FINANCE ACT, 2001, HAS TO BE EXAMINED IN CONJUNCTION WITH THE PRINCIPAL SECTION. THE EXPLANATION SPECIFICALLY EXCLUDED ANY PROVISION FOR BAD AND DOUBTFUL DEBTS MADE IN THE ACCOUNT OF THE ASSESSEE FROM THE AMBIT AND SCOPE OF 'ANY BAD DEBT, OR PART THEREOF, WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE'. THUS, THE CONCEPT OF MAKING A PROVISION FOR BAD AND DOUBTFUL DEBTS WILL FALL OUTSIDE THE SCOPE OF S. 36(1) (VII) SIMPLICITER. THE PROVISO, AS ALREADY NOTICED, WILL HAVE TO BE READ BANK OF BARODA 15 WITH THE PROVISIONS OF S. 36(1)(VIIA) OF THE ACT. ONCE THE BAD DEBT IS ACTUALLY WRITTEN OFF AS IRRECOVERABLE AND THE REQUIREMENTS OF S. 36(2) SATISFIED, THEN, IT WILL NOT BE PERMISSIBLE TO DENY SUCH DEDUCTION ON THE APPREHENSION OF DOUBLE DEDUCTION UN DER THE PROVISIONS OF S. 36(1)(VIIA) AND PROVISO TO S. 36(1) (VII). THIS DOES NOT APPEAR TO BE THE INTENTION OF THE FRAMERS OF LAW. THE SCHEDULED AND NON - SCHEDULED COMMERCIAL BANKS WOULD CONTINUE TO GET THE FULL BENEFIT OF WRITE OFF OF THE IRRECOVERABLE DE BTS UNDER S. 36(1)(VII) IN ADDITION TO THE BENEFIT OF DEDUCTION OF BAD AND DOUBTFUL DEBTS UNDER S. 36(1)(VIIA). MERE PROVISION FOR BAD AND DOUBTFUL DEBTS MAY NOT BE ALLOWABLE, BUT IN THE CASE OF A RURAL ADVANCE, THE SAME, IN TERMS OF S. 36(1)(VIIA)(A), MAY BE ALLOWABLE WITHOUT INSISTING ON AN ACTUAL WRITE OFF. 30. THE SCOPE OF THE PROVISO TO CL. (VII) OF S. 36(1) HAS TO BE ASCERTAINED FROM A CUMULATIVE READING OF THE PROVISIONS OF CLS. (VII), (VIIA) OF S. 36(1) AND CL. (V) OF S. 36(2) AND ONLY SHOWS THAT A DOUBLE BENEFIT IN RESPECT OF THE SAME DEBT IS NOT GIVEN TO A SCHEDULED BANK. A SCHEDULED BANK MAY HAVE BOTH URBAN AND RURAL BRANCHES. IT MAY GIVE ADVANCES FROM BOTH BRANCHES WITH SEPARATE PROVISION ACCOUNTS FOR EACH. 31. IT WAS NEITHER IN DISPUTE EARLI ER, NOR DISPUTED BEFORE US, THAT THE ASSESSEE BANK IS MAINTAINING TWO SEPARATE ACCOUNTS, ONE BEING A PROVISION FOR BAD AND DOUBTFUL DEBTS OTHER THAN PROVISIONS FOR BAD DEBTS IN RURAL BRANCHES AND ANOTHER PROVISION ACCOUNT FOR BAD DEBTS IN RURAL BRANCHES FO R WHICH SEPARATE ACCOUNTS ARE MAINTAINED. THIS FACT IS EVINCED BY THE ENTRIES IN THE P&L A/C, BALANCE SHEET AND BREAK UP DETAILS. WE NEED NOT DELIBERATE THIS ASPECT WITH REFERENCE TO RECORDS AT ANY GREATER LENGTH AS THIS IS NOT A MATTER IN ISSUE BEFORE US. IT WAS CONTENDED ON BEHALF OF THE REVENUE THAT THE REVENUE IS ONLY CONCERNED WITH THE ASSESSEE AS A SINGLE UNIT AND NOT WITH HOW MANY SEPARATE ACCOUNTS ARE BEING MAINTAINED BY THE ASSESSEE AND UNDER WHAT ITEMS. THE DEPARTMENT, THEREFORE, WOULD ASSESS AN A SSESSEE WITH REFERENCE TO A SINGLE ACCOUNT MAINTAINED IN THE HEAD OFFICE OF THE CONCERNED BANK. THIS, ACCORDING TO THE LEARNED COUNSEL APPEARING FOR THE DEPARTMENT, WOULD FURTHER SUBSTANTIATE THE ARGUMENT OF THE DEPARTMENT THAT THE INTERPRETATION GIVEN BY THE FULL BENCH OF THE HIGH COURT IS THE CORRECT INTERPRETATION OF S. 36 (1)(VII). THIS ARGUMENT HAS TO BE REJECTED, BEING WITHOUT MERIT. 36. MERELY BECAUSE THE DEPARTMENT HAS SOME APPREHENSION OF THE POSSIBILITY OF DOUBLE BENEFIT TO THE ASSESSEE, THIS WO ULD NOT BY ITSELF BE A SUFFICIENT GROUND FOR ACCEPTING ITS INTERPRETATION. FURTHERMORE, THE PROVISIONS OF A SECTION HAVE TO BE INTERPRETED ON THEIR PLAIN LANGUAGE AND COULD NOT BE INTERPRETED ON THE BASIS BANK OF BARODA 16 OF APPREHENSION OF THE DEPARTMENT. THIS COURT, IN T HE CASE OF VIJAYA BANK VS. CIT & ANR. (2010) 231 CTR (SC) 209 : (2010) 37 DTR (SC) 401 : (2010) 5 SCC 416, HELD THAT UNDER THE ACCOUNTING PRACTICE, THE ACCOUNTS OF THE RURAL BRANCHES HAVE TO TALLY WITH THE ACCOUNTS OF THE HEAD OFFICE. IF THE REPAID AMOUNT IN SUBSEQUENT YEARS IS NOT CREDITED TO THE P&L A/C OF THE HEAD OFFICE, WHICH IS WHAT ULTIMATELY MATTERS, THEN THERE WOULD BE A MISMATCH BETWEEN THE RURAL BRANCH ACCOUNTS AND THE HEAD OFFICE ACCOUNTS. THEREFORE, IN ORDER TO PREVENT SUCH MISMATCH AND TO BE I N CONFORMITY WITH THE ACCOUNTING PRACTICE, THE BANKS SHOULD MAINTAIN SEPARATE ACCOUNTS. OF COURSE, ALL ACCOUNTS WOULD ULTIMATELY GET MERGED INTO THE ACCOUNT OF THE HEAD OFFICE, WHICH WILL ULTIMATELY REFLECT ONE ACCOUNT (BALANCE SHEET), THOUGH CONTAINING DI FFERENT ITEMS. 40. IT IS USEFUL TO NOTICE THAT IN THE PROVISO TO S. 36(1)(VII), THE EXPLANATION TO THAT SECTION, SS. 36(1)(VIIA) AND 36(2)(V), THE WORDS USED ARE 'PROVISION FOR BAD AND DOUBTFUL DEBTS' WHILE IN THE MAIN PART OF S. 36(1)(VII), THE LEGISLAT URE HAS INTENTIONALLY NOT USED SUCH LANGUAGE. THE PROVISO TO S. 36(1)(VII) AND SS. 36(1)(VIIA) AND 36(2)(V) HAVE TO BE READ AND CONSTRUED TOGETHER. THEY FORM A COMPLETE SCHEME FOR DEDUCTIONS AND PRESCRIBE THE EXTENT TO WHICH SUCH DEDUCTIONS ARE AVAILABLE T O A SCHEDULED BANK IN RELATION TO RURAL LOANS ETC., WHEREAS S. 36(1)(VII) DEALS WITH GENERAL DEDUCTIONS AVAILABLE TO A BANK AND EVEN NON - BANKING BUSINESSES UPON THEIR SHOWING THAT AN ACCOUNT HAD BECOME BAD AND WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS O F THE ASSESSEE FOR THE PREVIOUS YEAR, SATISFYING THE REQUIREMENTS CONTEMPLATED IN THAT BEHALF UNDER S. 36(2). THE PROVISIONS OF S. 36(1)(VII) OPERATE IN THEIR OWN FIELD AND ARE NOT RESTRICTED BY THE LIMITATIONS OF S. 36(1)(VIIA) OF THE ACT. IN ADDITION TO THE REASONS AFORESTATED, WE ALSO APPROVE THE VIEW TAKEN BY THE SPECIAL BENCH OF TRIBUNAL AND THE DIVISION BENCH OF THE KERALA HIGH COURT IN THE CASE OF SOUTH INDIAN BANK (SUPRA). 41. TO CONCLUDE, WE HOLD THAT THE PROVISIONS OF SS. 36(1)(VII) AND 36(1)(VII A) OF THE ACT ARE DISTINCT AND INDEPENDENT ITEMS OF DEDUCTION AND OPERATE IN THEIR RESPECTIVE FIELDS. THE BAD DEBTS WRITTEN OFF IN DEBTS, OTHER THAN THOSE FOR WHICH THE PROVISION IS MADE UNDER CL. (VIIA), WILL BE COVERED UNDER THE MAIN PART OF S. 36(1)(VII ), WHILE THE PROVISO WILL OPERATE IN CASES UNDER CL. (VIIA) TO LIMIT DEDUCTION TO THE EXTENT OF DIFFERENCE BETWEEN THE DEBT OR PART THEREOF WRITTEN OFF IN THE PREVIOUS YEAR AND CREDIT BALANCE IN THE PROVISION FOR BAD AND DOUBTFUL DEBTS ACCOUNT MADE UNDER C L. (VIIA). THE PROVISO TO S. 36(1)(VII) WILL RELATE TO CASES COVERED UNDER S. 36(1) (VIIA) AND HAS TO BE READ WITH S. 36(2)(V) OF THE ACT. THUS, THE PROVISO WOULD NOT PERMIT BENEFIT OF DOUBLE DEDUCTION, OPERATING WITH REFERENCE TO RURAL LOANS WHILE UNDER S . 36(1)(VII), THE ASSESSEE WOULD BE ENTITLED TO GENERAL DEDUCTION BANK OF BARODA 17 UPON AN ACCOUNT HAVING BECOME BAD DEBT AND BEING WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE FOR THE PREVIOUS YEAR. THIS, OBVIOUSLY, WOULD BE SUBJECT TO SATISFACTION OF THE REQUIREMENTS CONTEMPLATED UNDER S. 36(2). 19 . THE AFORESAID PRINCIPLES OF THE HON'BLE SUPREME COURT HAS ALSO BEEN FOLLOWED BY THE TRIBUNAL IN ASSESSEES OWN CASE, AS CITED SUPRA, THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE HON'BLE SUPREME COURT, W E HOLD THAT THE ASSESSEES CLAIM FOR BAD DEBT IS TO BE ALLOWED IN TERMS OF OBSERVATIONS MADE BY THE HON'BLE SUPREME COURT HEREIN ABOVE, SUBJECT TO SATISFACTION OF REQUIREMENTS CONTEMPLATED U/S 36(2). WE, THEREFORE, DIRECT THE ASSESSING OFFICER TO SEE THE R EQUIREMENTS OF SECTION 36(2) AND ALLOW ASSESSEES CLAIM OF BAD DEBTS ACCORDINGLY. 20 . THIS GROUND IS COMMON IN THE ASSESSMENT YEAR 2006 07 AND 2007 08, WHICH ARE BASED ON IDENTICAL FACTS AND, THEREFORE, THE AFORESAID FINDINGS WILL APPLY MUTATIS MUTANDIS IN TH ESE YEARS ALSO . ACCORDINGLY, GROUND NO.2, RAISED BY THE ASSESSEE IN THE ASSESSMENT YEAR 2006 07 AND 2007 08 IS ALLOWED IN TERMS INDICATED ABOVE. III ) EXCLUSION OF INCOME EARNED BY THE FOREIGN BRANCHES : THE ASSESSEES CONTENTION IN GROUND NO.3, IN THE ASSESSM ENT YEAR 2005 06 AND 2006 07 IS THAT THE FOREIGN BRANCHES OF THE ASSESSEES BANK, ARE SUBJECT TO TAX IN THE SOURCE COUNTRY I.E., IN FOREIGN COUNTRY , THEREFORE, THEIR INCOME CANNOT BE INCLUDED IN THE RETURN OF INCOME FILED IN INDIA . THAT IS, THE R ESIDENT ST ATE DOES NOT HAVE RIGHT TO TAX THE BANK OF BARODA 18 SAME INCOME. THE RELEVANT GROUND RAISED BY THE ASSESSEE IN THE ASSESSMENT YEAR 2005 06, READS AS UNDER: 3. THE A.O. EARED IN NOT EXCLUDING THE INCOME OF FOREIGN BRANCHES AMOUNTING TO ` 186.84 CRORES BASED ON THE PROVIS IONS OF SECTION 90 R/W DOUBLE TAX AVOIDANCE AGREEMENTS ENTERED INTO BETWEEN GOVERNMENT OF INDIA AND GOVERNMENTS OF THE RESPECTIVE COUNTRIES. THE A.O. OUGHT TO HAVE NOTED THAT AS HELD BY THE SUPREME COURT IN THE CASE OF CIT V/S PVAL KULANDAGAN CHETTIAR (267 ITR 654) AND OTHER DECISIONS THE INCOME OF FOREIGN BRANCH IS NOT SUBJECT TO TAX IN INDIA AND THEREFORE SHOULD HAVE BEEN EXCLUDED IN COMPUTING TOTAL INCOME . 21 . FIRST OF ALL, THIS ISSUE IN THE ASSESSMENT YEAR 2005 06, HAS NEITHER BEEN RAISED BEFORE THE ASSE SSING OFFICER NOR BEFORE THE LEARNED COMMISSIONER (APPEALS). THIS CLAIM HAS BEEN MADE FOR THE FIRST TIME BEFORE THE TRIBUNAL AND THAT TO BE WITHOUT FILING ANY PETITION FOR ADMISSION OF ADDITIONAL GROUND AS REQUIRED UNDER RULE 11 OF THE ITAT RULE, 1963. TH E ASSESSEE IN ITS RETURN OF INCOME HAS INCLUDED THE PROFITS / INCOME OF THE FOREIGN BRANCHES IN THE RETURN OF INCOME FILED IN INDIA. THE CLAIM FOR EXCLUSION OF SUCH INCOME HA S NEITHER BE E N MADE BEFORE THE ASSESSING OFFICER NOR BEFORE THE LEARNED COMMISSION ER (APPEALS). BEFORE US ALSO , THE ASSESSEE HAS NEITHER FILED ANY APPLICATION FOR ADMISSION OF THE ADDITIONAL GROUND NOR HAS SOUGHT ANY LEAVE FOR ADMITTING THIS GROUND AS REQUIRED UNDER RULE 11 OF THE ITAT RULES, 1963. THOUGH, SUCH A GROUND MAY BE TERMED AS LEGAL GROUND , BANK OF BARODA 19 HOWEVER, ADJUDICATION IS ALWAYS REQUIRE D ON THE FACTS AND MATERIAL PLACED ON RECORD. IN ASSESSMENT YEAR 2006 07, THIS GROUND WAS THOUGH RAISED BEFORE THE LEARNED COMMISSIONER (APPEALS), HOWEVER, THE SAME HAS NOT BEEN ADJUDICATED UPON BY THE LEARNED COMMISSIONER (APPEALS). HOWEVER, I N THE ASSESSMENT YEAR 2007 08, THIS CLAIM WAS MADE BEFORE THE LEARNED COMMISSIONER (APPEALS) BY WAY OF ADDITIONAL GROUND , WHEREIN THE LEARNED COMMISSIONER (APPEALS) HAS ADMITTED THIS GROUND AND DECIDED THIS ISS UE IN FAVOUR OF THE ASSESSEE O N WHICH THE DEPARTMENT HAS FILED AN APPEAL FOR THE ASSESSMENT YEAR 2007 08 . SINCE THIS ISSUE IS COMMON IN ALL THE THREE YEARS WHICH IS ARISING OUT OF SIMILAR SET OF FACTS AND IN ANY CASE WE HAVE TO DECIDE THIS ISSUE IN DEPARTM ENTS APPEAL FOR THE ASSESSMENT YEAR 2007 08 , THEREFORE, WE ARE PROCEEDING TO ADJUDICATE THIS ISSUE. 22 . THE LEARNED COUNSEL BEFORE US SUBMITTED THAT THE ASSESSEE HAS CERTAIN BRANCHES LOCATED IN THE FOREIGN COUNTRIES AND THESE BRANCHES ARE TAX RESIDENT OF THO SE COUNTRIES AS PER DTAA. ACCORDINGLY, THE ASSESSEE HAS CLAIMED THAT INCOME TAX PAID / PAYABLE ON THE INCOME OF SUCH BRANCHES IN THE RESPECTIVE COUNTRIES SHOULD BE EXCLUDED FROM THE RETURN OF INCOME FILED IN INDIA. THIS CLAIM WAS MADE IN VIEW OF THE ARTICL E 7 OF THE RESPECTIVE DTAAS , WHEREIN THE INCOME FROM SUCH FOREIGN BRANCHES IS NOT TAXABLE AGAIN ALONG WITH THE INCOME OF THE ASSESSEE IN INDIA. THE ASSESSING OFFICER HAS ALLOWED THE CREDIT / RELIEF BANK OF BARODA 20 FOR THE TAXES PAID ABROAD OUT OF THE TAXES PAYABLE IN INDI A FROM THE TAX PAYABLE ON THE INCOME OF THE ASSESSEE IN INDIA. THE ASSESSING OFFICER FURTHER NOTED THAT AS PER SECTION 90(3), CENTRAL GOVERNMENT HAS NOTIFIED THAT FOR GRANTING RELIEF OF TAX ANY INCOME OF A RESIDENT OF INDIA THE PHRASE MAY BE TAXED IN OTHE R COUNTRY HAS TO BE INTERPRETED AS TAXABLE IN INDIA ALSO , AS THE INCOME OF THE P.E. IS TO BE INCLUDED IN THE TOTAL INCOME CHARGEABLE TO TAX IN INDIA SUBJECT TO RELIEF IN ACCORDANCE WITH THE DTAA. WHEREAS, THE ASSESSEES SUBMISSION BEFORE THE LEARNED COMMI SSIONER (APPEALS) WAS THAT THE INCOME OF THE BRANCHES IS TAXABLE ONLY IN THOSE COUNTRIES AND SUCH AN INCOME HAS TO BE EXCLUDED FROM THE INCOME FILED IN INDIA I.E., IT IS NOT TAXABLE IN INDIA. RELIANCE HAS BEEN PLACED ON THE DECISION OF THE HON'BLE SUPREME COURT IN P . V . A . L . KULANDAGAN CHETTIAR (SUPRA) . 23 . THE LEARNED COMMISSIONER (APPEALS) AGREED WITH THE CONTENTION OF THE ASSESSEE AND DIRECTED THE ASSESSING OFFICER TO ALLOW EXCLUSION OF THE INCOME OF FOREIGN BRANCH WITH WHOM THE INDIA HAS DTAA IN THE YEAR 20 07 08 . HOWEVER, IN THE ASSESSMENT YEAR 2005 06 AND 2006 07, THERE IS NO SUCH FINDING AS STATED ABOVE IN THE FOREGOING PARAGRAPHS . 24 . THE LEARNED COUNSEL SUBMITTED THAT UNDER ARTICLE 7, BUSINESS INCOME IS TO BE COMPUTED , WHICH ENVISAGES THAT THE PROFIT OF TH E ENTERPRISE SITUATED IN THE OTHER CONTRACTING STATE I.E., THE SOURCE BANK OF BARODA 21 COUNTRY , THEN IT IS TO BE TAXED THERE, WHATEVER IS ATTRIBUTABLE DIRECTLY OR INDIRECTLY TO THAT P.E. WHICH IS SITUATED IN THE S OURC E STATE. THIS MEANS THAT ONCE THE TAX HAS BEEN PAID IN T HE OTHER CONTRACTING STATE, THEN THE SAME CANNOT BE TAXED IN THE RESIDENT STATE. THE NOTIFICATION DATED 29 TH AUGUST 2008, AS ISSUED BY THE GOVERNMENT OF INDIA, WILL NOT APPLY IN CASE OF BUSINESS PROFIT OF THE P.E. HE SUBMITTED THAT THE DECISION OF THE HON' BLE SUPREME COURT P . V . A . L . KULANDAGAN CHETTIAR (SUPRA) SQUARELY COVERS THE CASE WHEREIN THE HON'BLE SUPREME COURT HELD THAT ONCE THE TAX HAS BEEN PAID / PAYABLE IN THE COUNTRY OF SOURCE, THEN THE SAME IS PRECLUDED FROM TAXING IN INDIA. THOUGH THIS CASE PER TAIN TO CAPITAL GAIN, HOWEVER, THE SAME PRINCIPLE WILL ALSO APPLY HERE BECAUSE IN THE ARTICLE DEALING WITH THE CAPITAL GAIN, THE PHRASE USED IS MAY BE TAXED . HE FURTHER SUBMITTED THAT THE DECISION OF THE TRIBUNAL, MUMBAI BENCH, IN BANK OF INDIA V/S DCIT, ITA NO.2781 AND 3534/MUM./2011, HAS DECIDED THIS ISSUE IN FAVOUR OF THE ASSESSEE FOLLOWING THE AFORESAID SUPREME COURT JUDGMENT. 25 . THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, SUBMITTED THAT THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF THE TRIBUNAL IN ESSAR OIL LTD. V/S ACIT, ITA NO.2428/MUM./2007, ETC., ORDER DATED 28 TH AUGUST 2013 , WHEREIN THE TRIBUNAL HAS NOT ONLY TAKEN INTO CONSIDERATION THE DECISION OF THE HON'BLE SUPREME COURT IN P.V.A.L. KULANDAGAN CHETTIAR (SUPRA) BUT ALSO VARIOU S OTHER DECISIONS BANK OF BARODA 22 OF SUPREME COURT AND HIGH COURTS, INCLUDING THE AMENDMENT BROUGHT IN THE STATUTE IN SUB SECTION (3) OF SECTION 90 W.E.F. ASSESSMENT YEAR 2004 05 AND ALSO THE NOTIFICATION. THUS, THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE DEPARTMENT T HAT INCOME OF THE BRANCHES / P.E. SHALL BE INCLUDED IN THE TOTAL INCOME OF THE ASSESSEE BUT CREDIT OF TAX PAID IN SOURCE COUNTRY WOULD BE ALLOWED HERE IN THE RESIDENT STATE . THE TRIBUNAL HAS ALSO ANALYSED IN DETAIL THE PHRASE MAY BE TAXED TO COME TO THE CONCLUSION THAT IT DOES NOT PRECLUDE THE R ESIDENT STATE TO TAX THE RESIDENT ASSESSEE ON THE INCOME WHICH HAS BEEN EARNED BY THE P.E. IN THE SOURCE COUNTRY WHICH ARE LIABLE FOR TAX IN SUCH COUNTRY. 26 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE DECIS IONS RELIED UPON BY BOTH THE PARTIES. THE ISSUE OF INTERPRETATION OF PHRASE MAY BE TAXED IN OTHER CONTRACTING STATES , AS USED IN DIFFERENT ARTICLES INCLUDING ARTICLE 7 IN THE DTAA HAS BEEN DISCUSSED IN DETAIL BY THE TRIBUNAL IN ESSAR OIL LTD. (SUPRA) AFT ER TAKING INTO CONSIDERATION VARIOUS DECISIONS OF THE HIGH COURT, SUPREME COURT, AFFECT OF AMENDMENT IN SECTION 90(3) AND NOTIFICATION DATED 28 TH AUGUST 2008, ISSUED BY THE CENTRAL GOVERNMENT . THE CONCLUSION ARRIVED BY THE TRIBUNAL AFTER DISCUSSING VARIOUS ASPECTS ARE AS UNDER: I) THE RATIO OF ALL THE JUDGMENTS RENDERED BY THE HON'BLE HIGH C OURTS, AS DISCUSSED HEREIN ABOVE AND CONFIRMED BY THE HON'BLE SUPREME COURT SPECIFICALLY IN THE CASE OF TURQUOISE INVESTMENT, ON THE INTERPRETATION OF THE EXPRESSION 'MAY BE TAXED', THAT ONCE THE TAX IS PAYABLE OR BANK OF BARODA 23 PAID IN THE COUNTRY OF SOURCE, THEN COUNTRY OF RESIDENCE IS DENIED OF THE RIGHT TO LEVY TAX ON SUCH INCOME OR THE SAID INCOME CANNOT BE INCLUDED IN RETURN OF INCOME FILED IN INDIA, WOULD NO LONGER APPLY AFTE R THE INSERTION OF PROVISION OF SUB - SECTION (3) OF SECTION 90 W.E.F. 1ST APRIL, 2004, I.E. ASSESSMENT YEAR 2004 - 05. THE SAID PROVISION AS CONFERRED UPON THE CENTRAL GOVERNMENT A POWER TO ISSUE NOTIFICATION, ASSIGNING MEANING TO THE TERMS USED IN THE DTAA, WHICH HAS NEITHER BEEN DEFINED UNDER THE ACT NOR IN THE AGREEMENT PROVIDED THAT SUCH A MEANING SHOULD NOT BE INCONSISTENT WITH THE PROVISIONS OF THE ACT OR AGREEMENT. IN PURSUANCE OF SUCH A STATUTORY EMPOWERMENT, CENTRAL GOVT. HAS ISSUED A NOTIFICATION ON 28TH AUGUST, 2008, CLEARLY SPECIFYING THAT WHERE THE DTAA ENTERED INTO BY THE CENTRAL GOVT. WITH THE GOVT. OF ANY OTHER COUNTRY PROVIDES THAT ANY INCOME OF A RESIDENT OF INDIA 'MAY BE TAXED' IN THE OTHER COUNTRY, SUCH INCOME SHALL BE INCLUDED IN HIS TOTA L INCOME CHARGEABLE TO TAX IN INDIA IN ACCORDANCE WITH THE PROVISIONS OF THE INCOME TAX ACT, 1961 AND RELIEF SHALL BE GRANTED IN ACCORDANCE WITH THE METHOD FOR ELIMINATION OR AVOIDANCE OF DOUBLE TAXATION PROVIDED IN SUCH AGREEMENT. THIS MEANING ASSIGNED TO THE TERM 'MAY BE TAXED' HAS CHANGED ITS COMPLEXION; II) THE NOTIFICATION DATED 28TH AUGUST 2008, REFLECTS A PARTICULAR INTENT AND OBJECTIVE OF THE GOVERNMENT OF INDIA, AS UNDERSTOOD DURING THE COURSE OF NEGOTIATIONS LEADING TO FORMALIZATION OF TREATY. TH EREFORE, SUCH A NOTIFICATION HAS TO BE RECKONED AS CLARIFICATORY IN NATURE AND HENCE INTERPRET TATION GIVEN BY GOVT. OF INDIA THROUGH THIS N OTIFICATION WILL BE EFFECTIVE FROM 1ST APRIL 2004, I.E., FROM THE DATE WHEN PROVISION OF SECTION 90(3) WAS BROUGHT I N THE STATUTE, GIVING A LEGAL FRAME WORK FOR CLARIFYING THE INTENT OF ONE OF THE NEGOTIATING PARTIES; III) THE PHRASE 'MAY BE TAXED' IS NOT APPEARING IN THE STATUTE, BUT IT IS APPEARING IN THE AGREEMENT AND THEREFORE, THE INTERPRETATION AS UNDERSTOOD AND INTENDED BY THE NEGOTIATING PARTIES SHOULD BE ADOPTED. HERE ONE OF THE PARTIES I.E., GOVERNMENT OF INDIA HAS CLEARLY SPECIFIED THE INTENT AND THE OBJECT OF THIS PHRASE. IF PHRASE IS USED IN A STATUTE, THEN 'ANY INTERPRETATION GIVEN BY THE HIGH COURT OR THE SUPREME COURT IS BINDING ON ALL THE SUBORDINATE COURTS AND HAS TO BE RECKONED AS LAW OF THE LAND. HOWEVER, THE MEANING ASSIGNED BY GOVERNMENT OF INDIA FOR A PHRASE OR TERM USED IN THE AGREEMENT THROUGH NOTIFICATION WILL PREVAIL AT LEAST FROM THE ASSESS MENT YEAR 2004 - 05. BECAUSE, WHILE INTERPRETING THE TREATY, THE INTENTION OF THE PARTIES TO THE AGREEMENT HAS TO BE BANK OF BARODA 24 GIVEN PRIMACY AND HAS TO BE UNDERSTOOD IN THAT MANNER ONLY. THEREFORE, THE NOTIFICATION IS NOT CONTRARY TO THE PROVISIONS OF THE ACT. CONSEQU ENTLY, THE EARLIER JUDGMENTS RENDERED IN ASSESSEE'S CASE PRIOR TO ASSESSMENT YEAR 2004 - 05, WILL NOT HAVE BINDING PRECEDENCE IN THIS YEAR OR SUBSEQUENT YEAR; ._ 27 . IN VIEW OF THE AFORESAID FINDINGS / CONCLUSION, WE HOLD THAT THE INCOME OF THE BRANCHES OF THE ASSESSEE SHALL ALSO TAXABLE IN INDIA I.E., IT WOULD BE INCLUDED IN THE RETURN OF INCOME FILED BY THE ASSESSEE IN INDIA AND WHATEVER TAXES HAVE BEEN PAID BY THE BRANCHES IN THE OTHER CONTRACTING STATES I.E., THE SOURCE COUNTRY , CREDIT OF SUCH TAXES SHAL L BE GIVEN. ACCORDINGLY, THE GROUND NO.3, AS RAISED BY THE ASSESSEE IN THE ASSESSMENT YEAR 2005 06 AND 2006 07, IS TREATED AS DISMISSED, WHEREAS, GROUND NO.1, AS RAISED BY THE DEPARTMENT IN ITA NO.6018/MUM./2011, FOR THE ASSESSMENT YEAR 2007 08, IS TREATED AS ALLOWED. WE NOW TAKE UP REVENUES APPEAL IN ITA NO.3667/MUM./2011, FOR THE ASSESSMENT YEAR 2005 06, VIDE WHICH, FOLLOWING GROUNDS HAVE BEEN RAISED: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT(A) ERRED IN DELETING T HE ADDITION OF ` 14,78,23,918 FROM STAFF WELFARE EXPENSES CLAIMED, IGNORING THE FACT THAT THESE EXPENSES ARE NOT INCURRED WHOLLY AND EXCLUSIVELY FOR BUSINESS. BANK OF BARODA 25 28 . THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS INCURRED FOLLOWING EXPENSES ON ACCOUNT OF STA FF WELFARE EXPENSES AMOUNTING TO ` 14,78,23,918, ON THE FOLLOWING HEADS: (I) SCHOLARSHIPS (VII) REIMBURSEMENT OF EDUCATIONAL EXPENSES (II) PHYSICALLY HANDICAPPED (VIII) LOSS OF PAY LEAVE (III) DEATH IN HARNESS (IX) HOLIDAY HOMES (IV) ABHINANDAN YOJNA (X) EMERGENCY AID (V) AID FOR ARTIFICIAL LIMBS/HEARING AID (XI) CANTEEN FACILITY (VI) INCENTIVE FOR SMALL FAMILY NORMS (XII) HEALTH CHECK UP 29 . THE ASSESSING OFFICER DISALLOWED THE CLAIM ON THE GROUND THAT THE ASSESSEE IS NOT ENGAGED IN THESE ACTIVITIES AND IT IS NOT BOUND TO INCUR THESE EXPENSES. HE ALSO HELD THAT SIMILAR VIEW WAS TAKEN BY THE DEPARTMENT IN THE EARLIER YEAR ALSO. 30 . BEFORE THE LEARNED COMMISSIONER (APPEALS), IT WAS SUBMITTED THAT THESE EXPENSES ARE INCURRED OUT OF CURRENT ACCOUNT MAINTAINE D WITH THE ASSESSEE AND EVERY YEAR SOME AMOUNT TO STAFF WELFARE CURRENT ACCOUNT IS OFFERED FOR TAX BY ADDING UP TO THE COMPUTATION OF INCOME AND ONLY THE ACTUAL EXPENSES INCURRED TOWARDS STAFF WELFARE EVERY YEAR IS CLAIMED. IN THE EARLIER YEARS, THE SIMILA R EXPENDITURE HAVE BEEN DELETED BY THE LEARNED COMMISSIONER (APPEALS). THE LEARNED COMMISSIONER (APPEALS) HELD THAT THIS ISSUE STANDS COVERED BY THE BANK OF BARODA 26 DECISION OF THE LEARNED COMMISSIONER (APPEALS) IN THE EARLIER YEARS WHEREIN IT HAS BEEN HELD THAT IT IS A B USINESS EXPENDITURE ALLOWABLE UNDER SECTION 37(1). 31 . AFTER HEARING BOTH THE PARTIES, WE FIND THAT THE ASSESSEE HAS CLAIMED ACTUAL EXPENDITURE INCURRED ON STAFF WELFARE TO MAINTAIN CORDIAL RELATIONSHIP. THESE EXPENSES CANNOT BE SAID TO BE OF PERSONAL IN NATU RE AND CONSISTENTLY IT HAS BEEN ALLOWED BY THE APPELLATE AUTHORITIES. THUS, FOLLOWING THE RULE OF CONSISTENCY AND ALSO THE F A CT THAT THESE EXPENSES ARE INCURRED IN THE NORMAL COURSE OF BUSINESS TO MAINTAIN HEALTHY RELATIONSHIP WITH THE EMPLOYEES, THE SAME IS TO BE TREATED AS ALLOWABLE BUSINESS EXPENDITURE UNDER SECTION 37(1) . THUS, THIS GROUND, AS RAISED BY THE DEPARTMENT, STANDS DISMISSED. 32 . 33. IN THE RESULT, REVENUES APPEAL IS DISMISSED. WE NOW TAKE UP REVENUES APPEAL IN ITA NO.6018/MUM./2011, FOR THE ASSESSMENT YEAR 2007 08, VIDE WHICH, FOLLOWING GROUND HAS BEEN RAISED: ON THE FACTS AND IN T HE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT(A) ERRED IN DIRECTING THE ASSESSING OFFICER TO EXCLUDE INCOME OF FOREIGN BRANCHES IN VIOLATION OF CENTRAL GOVERNMENT NOTIFICATION NO.S.O. 2123(E) DATED 28 TH AUGUST 2008, WHICH CLEARLY INDICATES ITS IN CLUSION WHILE ARRIVING AT THE TOTAL INCOME. BANK OF BARODA 27 33 . THE AFORESAID GROUND HAS ALREADY BEEN DECIDED IN THE FORGOING PARAGRAPH AND, THEREFORE, IN VIEW OF THE FINDINGS GIVEN THEREIN, THE GROUND RAISED BY THE REVENUE IS TREATED AS ALLOWED. 34 . 34. IN THE RESULT, REVENUES APPEAL IS DISMISSED. 35 . , . 2927/MUM./ 2011, 2928/MUM./2011 5735/MUM./2011, . 3667/MUM./2011 . 6018/MUM./ 2011 , 35. IN THE RESULT, ASSESSEES APPEAL IN ITA NO.2927/MUM./2011, ITA NO.2928/MUM./2011 AND ITA NO.5735/MUM./2011, ARE TREATED AS PARTLY ALLOWE D FOR STATISTICAL PURPOSES. REVENUES APPEAL IN ITA NO. 3667/MUM./2011 , IS DISMISSED WHEREAS, REVENUES APPEAL IN ITA NO. 6018/MUM./2011, IS ALLOWED . 25 TH JULY 2014 ORDER PRONOUNCED IN THE OPEN COURT O N 25 TH JULY 2014 SD/ - . . R.C. SHARMA ACCOUNTANT MEMBER SD/ - AMIT SHUKLA JUDICIAL MEMBER MUMBAI, DATED : 25 TH JULY 2014 BANK OF BARODA 28 / COPY OF THE ORDER FORWARDED TO : ( 1 ) / THE ASSESSEE ; ( 2 ) / THE REVENUE; ( 3 ) ( ) / THE CIT(A ) ; ( 4 ) / THE CIT, MUMBAI CITY CONCERNED ; ( 5 ) , , / THE DR, ITAT, MUMBAI ; ( 6 ) / GUARD FILE . / TRUE COPY / BY ORDER . / PRADEEP J. CHOWDHURY / SR. PRIVATE SECRETARY / / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI