2015 (1) TMI 192 - AT - Income Tax

Appeals Dismissed, Precedents Upheld in Tax Disallowance Case. Surplus Jewelry Sales Taxable. Excess Cash Not Liability.

The Catholic Syrian Bank Ltd. Versus The Joint Commissioner of Income Tax

The Tribunal dismissed the appeals based on precedents set by previous High Court judgments, maintaining consistency in legal interpretation and ... Disallowance made u/s. 14A – Held that:- Following the decision in Catholic Syrian Bank Ltd. Versus Additional Commissioner of Income-tax [2013 (4) TMI 140 - Kerala High Court] - Section 14A of the Income Tax Act, 1961, was inserted by the Finance Act, 2001, with retrospective effect from April 1, 1962 - The object of section 14A is to ensure that so much of the expenditure incurred for earning income that does not constitute total income of the assessee, should not be allowed - By virtue of the subsequent legislation, now there is a precise formula for working out the disallowance to be made u/s 14A even if assessees do not have separate accounts showing the expenditure incurred on investments made for earning tax-free income - By subsequent amendment through sub-section (2) and by prescribing rule 8D therein specific guidelines are prescribed for disallowance in cases where separate accounts are not available on the expenditure incurred for earning tax free income. These are only clarificatory provisions and the main clause of section 14A applied for all periods after its introduction in the statute which authorizes the officer to make disallowance of the expenditure incurred for earning tax free income, irrespective of whether the assessee maintained separate accounts or not - the assessee-banks did not have separate accounts for the expenditure incurred towards interest paid on funds borrowed such as deposits utilized for investment in securities, bonds and shares which yielded tax free income - In the absence of separate accounts for investments which earned tax free income, the AO worked out a formula which was the average cost of deposit in the year under consideration and applying it he made proportionate disallowance of interest attributable to the funds invested to earn tax- free income - The disallowance on estimated basis had to be done as above until rule 8D was framed and thereafter it was for the AO to make disallowance by following sub-section (2) of section 14A and rule 8D of the Rules – Decided against assessee. Treatment of surplus realized on sale of pledged jewellery as income of the assessee – Held that:- Following the decision in Catholic Syrian Bank Ltd. Versus Additional Commissioner of Income-tax [2013 (4) TMI 140 - Kerala High Court] - amounts are kept in suspense account for several years and even the borrowers whose gold are sold, are not traceable – there was justification for the assessee to retain the amount perpetually in suspense account and to claim exemption - there is no claimant traceable for repayment of the amount and the assessee has not made any effort to trace the customer for repayment of the amount – Decided against assessee. Excess cash found by the assessee as income of the assessee – Held that:- Following the decision in Catholic Syrian Bank Ltd. Versus Additional Commissioner of Income-tax [2013 (4) TMI 140 - Kerala High Court] - when there was no possibility of any one claiming any amount against the surplus in the suspense account maintained by the assessee the as could not treat it as a liability or a provision for liability - the payment would be allowable as a deduction in the year in which the claim was made - the excess found during the previous year need not be treated as income and could be treated as surplus in the suspense account for three years to meet a liability in the event of any claim being made - The amount did not represent liability and was wrongly shown by the assessee as liability – Decided against assessee. Issues:1. Disallowance made u/s. 14A of the I.T. Act.2. Treatment of surplus realized on sale of pledged jewellery as income.3. Addition made on account of excess cash found by the assessee as income.Issue 1: Disallowance u/s. 14A of the I.T. ActThe appeals were filed against orders by the CIT(A)-V Kochi for the assessment years 2008-09 and 2009-10 regarding disallowance under sec. 14A of the I.T. Act. The Assessing officer disallowed expenditure incurred by the assessee in relation to income not forming part of total income. The CIT(A) confirmed this decision, citing a previous Tribunal ruling. The assessee argued that no disallowance was warranted as no expenditure was incurred to earn tax-free income. The Ld. AR referenced a Kerala High Court judgment but acknowledged the presence of rule 8D for the years under appeal. The Ld. AR further argued that the provisions of sec. 14A should not apply as all investments held were stock in trade. Additionally, the Ld. AR contended that even if rule 8D applied, no disallowance of interest expenditure was warranted due to excess interest-free funds. The Ld. DR argued that the issue was settled in a previous Tribunal order. The Tribunal found the issue identical to a previous High Court case and dismissed the appeal based on judicial consistency.Issue 2: Treatment of Surplus from Sale of Pledged JewelleryThe second ground concerned the treatment of surplus realized from the sale of pledged jewellery as income. The High Court had previously ruled that the surplus amount, kept in a suspense account for years without traceable borrowers, should be treated as income assessable to the assessee. The Tribunal, in line with the High Court's decision, rejected the appeal on this ground.Issue 3: Addition of Excess Cash as IncomeThe final ground involved the addition made on account of excess cash found by the assessee as income. The High Court had previously held that the excess cash, maintained in a suspense account without any claimants, could not be treated as a liability. The Tribunal, following the High Court's decision, dismissed the appeal on this ground as well.In conclusion, the Tribunal dismissed the appeals based on the precedents set by previous High Court judgments, maintaining consistency in legal interpretation and application across all issues raised by the assessee.