2013 (9) TMI 235 - AT - Income Tax

Tribunal Ruling: Exemption for Bank, Depreciation Rate Confirmed, Expenses Disallowance Reconsideration

ORIENTAL BANK OF COMMERCE Versus ASSTT COMMISSIONER OF INCOME TAX NEW DELHI

The Tribunal upheld the assessee's appeal, allowing the exemption claimed under Section 10(23G) for a public sector bank providing long-term finance to ... Claim of bad debts - Banking company - Restriction on Provision for bad debts - Rural branches versus non rural branches - Section u/s 36(i)(viia) – Held that:- Assessee has submitted working for claim u/s 36(i)(viia), to demonstrate that assessee had set off bad debts relating to non rural branches against the opening provision u/s 36(i)(viia). In the same statement, assessee had claimed bad debts relating to rural branches amounting to Rs. 10,38,51,000/-. Considering the entirety of facts, the claim of assessee needs to be examined afresh in the light of decision of Hon’ble Supreme Court in the case of Catholic Syrian Bank [2012 (2) TMI 262 - SUPREME COURT OF INDIA] - If on verification, the AO finds that no separate bad debts had been written off in respect of non rural branches, then the same is to be allowed after due verification – Decided in favor of Assessee. Exemption u/s 10(23G) - whether Banking company to be considered as Infrastructure capital funds/company - long term finance made available to infrastructure capital funds/company – Held that:- Assessee company had earned interest on long term loan given to Gujarat State Energy Generation Ltd. which is notified as engaged in the business of infrastructure development within the meaning of sec. 80(i)(a) sub-section (4) clause (iv) sub clause (a) of the Act vide CBDT’s notification dt. 29/06/2006 - Assessee had provided long term finance to an eligible undertaking – Reliance has been placed upon the judgment in the case of Jammu & Kashmir Bank [2008 (2) TMI 533 - ITAT AMRITSAR], wherein it has been held that assessee is a banking company. The essential feature of the business of a banking company is to mobilize resources from the public and lend it on interest to various sectors. The Revenue has not denied that assessee had indeed made investment in shares and providing long term finance to enterprises engaged in infrastructural facility. Therefore, all the conditions laid down for claiming exemption u/s 10(23G) are fulfilled by the assessee. It is not proper to take a narrow view of the issue when the assessee had in fact made investments in shares and financed the enterprises engaged in providing infrastructure facilities on long term basis. It is not necessary that the ‘infrastructure capital company’ should be formed solely for the purpose of mobilizing resources for financing infrastructure facilities. If it includes one of the objects of the banking business, the same should be sufficient to entitle the assessee to claim exemption of its income u/s 10(23G). The above view also finds support from the fact that subsequently this benefit of sec. 10(23G) has been extended to co-operative banks, though such banks have also not been set up for the purpose of mobilizing resources for financing the infrastructure facilities. Therefore, in the present case, the assessee falls in the category of ‘infrastructure capital company’ entitled to exemption u/s 10(23G). The view that banks are entitled to exemption of its income falling in the nature mentioned u/s 10(23G) is reinforced by the news item which appeared in The Economic Times dt. 19.01.2008 - Explanation 1A to sec. 10(23G) of the Act, defining infrastructure capital company does not exclude banking companies so long as banking company is a company and has made investment in providing long term finance to an enterprise wholly engaged in the infrastructure business and approved by the Central Government – Decided in favor of Assessee. Depreciation on Computers - LAN and WAN, a part of computer system in banks – Depreciation @ 60% or at normal rate of 20% only - Held that:- LAN and WAN, both formed integral part of computer system as computer could not be utilized without there devises for assessee’s business purposes and, therefore, assessee was entitled to depreciation @ 60% - Decided in favor of Assessee. Issues Involved:1. Disallowance of exemption claimed under Section 10(23G).2. Disallowance of expenses under Section 14A.3. Disallowance of excess depreciation claimed on LAN, WAN.4. Additional grounds raised by the assessee regarding bad debts under Section 36(1)(vii).Detailed Analysis:1. Disallowance of Exemption Claimed Under Section 10(23G):The assessee, a public sector bank, claimed an exemption of Rs. 5,69,65,390/- under Section 10(23G) for interest derived from long-term finance provided to infrastructure capital funds/company. The AO disallowed this claim, arguing that the exemption under Section 10(23G) is available only to infrastructure capital funds or companies established specifically for mobilizing resources for financing infrastructure facilities. The CIT(A) allowed the assessee's appeal, following the ITAT, Amritsar Bench's decision in Jammu & Kashmir Bank Ltd. vs. Asstt. CIT, which stated that banking companies providing long-term finance to infrastructure enterprises are entitled to this exemption. The Tribunal upheld the CIT(A)'s order, confirming that the assessee, being a banking company, qualifies as an infrastructure capital company under Section 10(23G) and is entitled to the exemption.2. Disallowance of Expenses Under Section 14A:The AO disallowed Rs. 4,81,18,439/- as expenses attributable to earning tax-free income under Section 14A. The CIT(A) confirmed this disallowance. The Tribunal restored the issue to the AO to re-examine it in light of the Delhi High Court's decision in Maxopp Investment Ltd. vs. CIT, which mandates that the AO must first be dissatisfied with the assessee's claim regarding the expenditure incurred in relation to tax-free income before determining the amount of such expenditure using a reasonable and acceptable method.3. Disallowance of Excess Depreciation Claimed on LAN, WAN:The assessee claimed 60% depreciation on LAN and WAN equipment, treating them as integral parts of computer software. The AO allowed only 20% depreciation, considering them as special-purpose business machines. The CIT(A) allowed the assessee's appeal, referencing decisions in CIT vs. BSES Rajdhani Powers Limited and DCIT vs. M/s Datacraft India Ltd., which held that computer accessories and peripherals form an integral part of the computer system. The Tribunal confirmed the CIT(A)'s order, agreeing that LAN and WAN are integral to the computer system and thus eligible for 60% depreciation.4. Additional Grounds Raised by the Assessee Regarding Bad Debts Under Section 36(1)(vii):The assessee raised additional grounds based on the Supreme Court's judgment in Catholic Syrian Bank Ltd. vs. CIT, which clarified that provisions of Section 36(1)(viia) apply only to rural advances, and Section 36(1)(vii) operates independently for non-rural advances. The assessee claimed a deduction of Rs. 191,17,16,392/- for bad debts related to non-rural branches. The Tribunal admitted this legal claim, noting that all necessary details were on record, and directed the AO to verify and allow the claim if no separate bad debts had been written off for non-rural branches.Conclusion:The Tribunal partly allowed the assessee's appeal for statistical purposes and dismissed the department's appeal. The key takeaways include the upholding of the exemption under Section 10(23G) for banking companies, the need for a re-examination of disallowance under Section 14A, confirmation of higher depreciation rates for LAN and WAN equipment, and the admission and direction for verification of additional grounds related to bad debts under Section 36(1)(vii).