2011 (2) TMI 1303 - AT - Income Tax

Tribunal Decides Tax Issues for Bank: Pension Deduction, Interest Disallowance, Bad Debts, & More

The Tribunal partly allowed both the assessee's and the Revenue's appeals in a case involving various tax issues faced by a bank. The disallowance of ... Disallowance – Whether, Disallowance of pension paid to its retired employees claimed u/s. 37(1) of Act by A.O. justified - AO's objection there-to was that the assessee had already established a pension fund for the purpose, and to which regular contributions were being claimed and allowed u/s. 36(1)(iv) of the Act. - Held that:- the aspect of the commercial expediency (on the parameters as settled by the apex court) has admittedly not been examined by the AO, and which is a perquisite for the allowance of a claim u/s. 37(1), and the onus to exhibit which is only on the assessee. - AO shall afford proper opportunity of hearing to assessee in matter. - matter remanded back. Lease equalization charges - Held that:- it is not qua depreciation charge, but only purports to allocate the lease rental between the capital recovery and the finance income. Noticing divergent views, it held in favour of the assessee. - following the decision in earlier case of the assessee [2009 (8) TMI 858 - ITAT COCHIN] decided in favor of assessee. Disallowance – interest attributable to the dividend income - Whether, Disallowance under section 14A could be invoked in absence of r. 8D r/w ss. 14A (2) and 14A(3) of Act - Held that:- Do not see as to how answer could be in negative. If that be so, no disallowance could be made u/s. 14A for assessment years 2002-03 and 2006-07. Section 14A is admittedly declarative of law as it always stood. Apex court in case of Rajasthan Warehousing Corporation vs. CIT [2000 (2) TMI 5 - SUPREME Court] stated that there is nothing to merit an allocation of expenditure qua taxable and tax-free incomes arising out of one, individual business, but that position can no longer be said to obtain in view of section 14A. Dividend Income - Whether in absence of prescribed, standard method, disallowance of dividend income u/s 14A could obtain – Held that:- assessee has earned dividend income, which does not form part of total income under Act - Assessee tried to justified its stand on basis that tax-free securities yield lower return, which would not be viable on basis of interest-bearing capital - Assessee has not furnished any material to justify investment in shares and units as self-financed - In absence of which consideration of same as being from common pool of funds available with assessee cannot be faulted - Disallowance, as effected, is, thus, justifiable – Decided partly in favour of assessee. Inclusion of the excess cash with the assessee-bank as on 31.3.2005 - Held that:- the bank has no record or clue as to from whom, or with respect to which transaction/s, the excess cash stands received by it. If the bank could identify the cash bundle/s bearing the excess Rs. note/s’ with a particular transaction/s, it would immediately notify the concerned depositor/payer or even credit his account. As such, it can be safely assumed that if no claim stands lodged qua cash found excess during the year up to its end or even up to the date of the close of the accounts for that year, none would. - Additions confirmed. - Decided against the assessee. Bad debts - claim u/s. 36(1)(vii) - Held that:- though the assessee may have written off debts as irrecoverable in its accounts for the year at Rs. 2962.88 lakhs, its claim u/s. 36(1)(vii) is only for Rs. 868.97 lakhs, so that the disallowance, if any, could not exceed the same - as there is considerable and unexplained variation between the provision account as drawn in the assessment order and that provided by the assessee pe its Rs. statement of facts’ before the first appellate authority, we only consider it fit to restore the matter back to the file of the AO, who shall also examine the satisfaction of the condition .of section 36(2)(v) - matter remanded back. - Decided in favor of revenue. Loss on amortisation of premium on purchase of Central Government securities - Held that:- the loss is in accordance with the RBI prudential norms and in pursuance to the regularly followed method of accounting is also not in dispute - claim allowed - Decided against the revenue. Additions on account of Unclaimed Deposits’ at 279 lakhs - assessee’ case is that there is no cessation of liability with time - Held that:- The matter has both factual and legal dimensions to it. In a given case, it could be that there are no claims, as say, whether an individual depositor dies with no known legal heirs. In such a case, subject to law of escheat, it could be said to represent the assesseebank’s money, assessable as income u/s. 28(i) or, say, where an incorporated entity becomes defunct, with the time limitation for its restoration having expired. However, even here, unless the bank can assume proprietary rights over the same, and for which the relevant provisions of the applicable laws may have to be examined, it cannot be said that it no longer represents a liability of the bank, which must, in order to be so, be satisfied on both factual and legal counts. - Decided against the revenue. Additions on account of surplus realised by the bank on the sale of gold ornaments pledged with it - Held that:- The doctrine of unjust enrichment, or the question of cessation of liability u/s. 41, would not arise in the facts of the case, and reference thereto is wholly unwarranted. Where is the question of an Rs. unjust’ enrichment, one may ask, when there are no claimants. Had there been so, they would have prevented the sale of gold or, in any case, lodged a claim for the balance surplus. - The decisions by the apex court in the case of Sinclair Murray & Co. (P.) Ltd. v. CIT [1974 (11) TMI 3 - SUPREME Court] and Chowringhee Sales Bureau (P.) Ltd. v. CIT [1972 (10) TMI 4 - SUPREME Court] may be referred to in this regard, wherein the hon’ble court, while holding the amount collected (though held in a separate account) as the assessee’s trade receipt, clarified that it would nonetheless qualify for deduction for the year of payment, even though the assessee followed the mercantile method of accounting. - Decided in favor of revenue. Issues Involved:1. Disallowance of pension paid to retired employees.2. Disallowance of lease equalization charges.3. Disallowance of interest attributable to dividend income under Section 14A.4. Inclusion of excess cash as income.5. Deletion of disallowance of bad debts written off under Section 36(1)(vii).6. Allowance of loss on amortization of premium on purchase of Central Government securities.7. Taxability of unclaimed deposits.8. Taxability of surplus realized on the sale of gold ornaments pledged with the bank.Issue-wise Detailed Analysis:1. Disallowance of Pension Paid to Retired Employees:The assessee, a bank, claimed a disallowance of Rs. 310 lakhs paid as pension to retired employees under Section 37(1) of the Income Tax Act. The Assessing Officer (AO) objected, stating that the pension fund already established under Section 36(1)(iv) had sufficient funds. The Tribunal had previously remitted a similar issue back to the AO to determine the commercial expediency of the direct pension payment. The Tribunal observed that the legal issues raised by the AO no longer held, and the assessee was eligible for the deduction in principle. However, the commercial expediency needed examination, and the matter was restored to the AO for further review.2. Disallowance of Lease Equalization Charges:The assessee followed the accounting method recommended by the Institute of Chartered Accountants of India for lease financing, charging Rs. 2858/- as lease equalization charges. The Revenue disallowed this, arguing it pertained to depreciation on leased assets. The Tribunal, relying on its previous decisions, held in favor of the assessee, stating the charges were not for depreciation but for allocating lease rental between capital recovery and finance income.3. Disallowance of Interest Attributable to Dividend Income under Section 14A:The AO disallowed interest attributable to tax-free dividend income proportionately, as the assessee had a common pool of interest-bearing and interest-free funds. The CIT(A) upheld this, referencing the Special Bench decision in ITO vs. Daga Capital Management Pvt. Ltd. The Tribunal noted that Rule 8D, introduced later, could not apply retrospectively. The Tribunal found the AO's disallowance justifiable, as the assessee did not provide sufficient details to support its claim that tax-free investments were self-financed.4. Inclusion of Excess Cash as Income:The AO included Rs. 952434/- as income, applying the doctrine of unjust enrichment. The CIT(A) upheld this, stating the bank had no claimants for the excess cash. The Tribunal agreed in principle but limited the taxable amount to Rs. 94,404/-, representing the excess cash arising during the current year.5. Deletion of Disallowance of Bad Debts Written Off under Section 36(1)(vii):The AO disallowed the assessee's claim for bad debts written off, arguing the provision for bad debts under Section 36(1)(viia) covered the amount. The CIT(A) allowed the claim based on jurisdictional high court decisions. The Tribunal noted that the high court decision had been overruled and restored the matter to the AO to re-examine the claim, considering the Full Bench decision in South Indian Bank Ltd.6. Allowance of Loss on Amortization of Premium on Purchase of Central Government Securities:The AO disallowed the amortization of premium on government securities, treating it as a capital loss. The CIT(A) allowed the claim, following the Tribunal's decision in the assessee's earlier case. The Tribunal upheld this, noting the amortization was in line with RBI guidelines and the regularly followed accounting method.7. Taxability of Unclaimed Deposits:The AO taxed unclaimed deposits of Rs. 279 lakhs, applying the principles from CIT vs. T.V. Sunderam Iyengar & Sons Pvt. Ltd. The CIT(A) found these deposits continued to be liabilities under the Banking Regulation Act and not taxable as income. The Tribunal agreed, noting the deposits remained liabilities under regulatory mechanisms and had not been written back as income.8. Taxability of Surplus Realized on the Sale of Gold Ornaments Pledged with the Bank:The AO treated the surplus from auctioned gold as income. The CIT(A) disagreed, stating the surplus was a liability to the borrowers. The Tribunal found the surplus had acquired the character of a trade receipt due to the lapse of time and absence of claimants. The Tribunal held the surplus as taxable income, subject to provisions for any future claims.Conclusion:Both the assessee's and the Revenue's appeals were partly allowed and partly allowed for statistical purposes, with several matters remitted back to the AO for re-examination.