2012 (5) TMI 728 - AT - Income Tax

Tribunal reopens interest disallowance issue for banking company, excludes Section 115JA application

The Tribunal restored the issue of disallowance of interest and other operating expenses to the CIT(A) for fresh adjudication. It held that Section 115JA ... Disallowance of interest and other operating expenses treating that the expenses were incurred for earning income exempt u/s. 10 - Held that:- We are of the opinion that matter should be restored to the file of the CIT(A) for adjudicating the issue of disallowance afresh. Assessee is directed to furnish the details like availability of interest free funds, reserves, self generated fund etc., during the hearing proceedings to be held by the CIT(A). Applicability/non-applicability of Section 115JA - Held that:- MAT cannot be applied to electricity companies for mutually similar reason we uphold the plea of the assessee. We decided the issue in favour of the assessee. As we have held that provisions of Sec. 115JA are not applicable in the case under consideration. Issues Involved:1. Disallowance of interest and other operating expenses under Section 14A of the Income Tax Act.2. Disallowance of provision for non-performing assets under Section 115JA(2).3. Addition of exempt income while computing Book profit under Section 115JA.4. Applicability of Section 115JA to a banking company.Issue-wise Detailed Analysis:1. Disallowance of Interest and Other Operating Expenses:The first ground of appeal concerns the disallowance of interest and other operating expenses amounting to Rs. 18,09,53,825, which were treated as incurred for earning income exempt under Sections 10(15) and 10(33) of the Income Tax Act. The Assessing Officer (AO) noted that the assessee claimed deductions on gross income, which was erroneous as deductions should be on net income after accounting for expenses attributable to earning the exempt income. The AO applied Section 14A, allocating 2% of total operating expenses towards earning tax-free income, resulting in a disallowance of Rs. 18,09,53,825. The CIT(A) upheld this decision, noting that no expenditure was claimed as attributable to earning the exempt income, and the assessee failed to provide evidence to substantiate its claims. The Tribunal, after considering submissions from both parties, decided to restore the matter to the CIT(A) for fresh adjudication, directing the assessee to furnish relevant details during the proceedings.2. Disallowance of Provision for Non-Performing Assets:The second ground of appeal pertains to the disallowance of Rs. 5,88,30,184, being the provision for non-performing assets while computing income under Minimum Alternative Tax (MAT). The CIT(A) upheld the AO's action, invoking clause (c) of Explanation to Section 115JA(2). However, the Tribunal noted that the basic question of the applicability of Section 115JA should be decided first before addressing this disallowance.3. Addition of Exempt Income While Computing Book Profit:The third ground of appeal involves the addition of the entire amount of exempt income of Rs. 14,85,56,081 as expenses attributable to earning tax-free income while computing book profit under Section 115JA. The CIT(A) upheld the AO's decision, but the Tribunal emphasized that the applicability of Section 115JA needs to be resolved first.4. Applicability of Section 115JA to a Banking Company:The additional grounds of appeal challenge the applicability of Section 115JA to the appellant, a banking company. The appellant argued that Section 115JA applies only to companies preparing accounts as per Schedule VI of the Companies Act, whereas banking companies prepare accounts as per the Banking Regulation Act. The Tribunal agreed with the appellant, referencing the case of Krung Thai Bank PCL and the purpose behind Section 115JA, which targets 'zero tax companies.' The Tribunal concluded that Section 115JA does not apply to banking companies governed by special provisions of other Acts. Consequently, the Tribunal held that Section 115JA is not applicable to the appellant, rendering grounds 2 and 3 academic.Conclusion:The Tribunal restored the issue of disallowance of interest and other operating expenses to the CIT(A) for fresh adjudication. It also held that Section 115JA does not apply to the appellant, a banking company, thereby resolving the issues related to the provision for non-performing assets and the addition of exempt income while computing book profit. The appeal was partly allowed.