2017 (7) TMI 1289 - AT - Income Tax

Tribunal's Ruling on Assessee's Claims: Bad Debts Allowed, Lease Premium Disallowed, Foreign Income Excluded

Bank of India Versus Dy. Commissioner of Income Tax -2 (1) Mumbai And Vice-Versa.

The Tribunal allowed the assessee's claims for bad debts, payments to BCCI liquidators, and stamp duty, while disallowing the lease premium. It restricted ... Disallowance of bad debts written off - HELD THAT:- Tribunal in assessee’s own case for AY 2001-02 and facts being exactly identical, respectfully following the same, we allow the claim of the assessee. Further, this issue has also been decided in favour of assessee in case of Bank of Baroda in ITA [2014 (3) TMI 1144 - ITAT MUMBAI] for AY 2003-04 vide order dated 12-06-2013. Respectfully, following the Tribunal decision in assessee’s own case and consistently following the precedence, we allow the claim of the assessee. This issue of assessee’s appeal is allowed. Disallowance of payments made to liquidators of BCCI, interest and legal expenses - AO disallowed the payment made to liquidator’s Bank of Credit and Commerce International SA and Bank of Credit and Consumers International (overseas Ltd.) amounting to ₹ 364,64,32,957/- and also legal charges paid for defending suit filed by the liquidators of BCCI - HELD THAT:- On account of passage of time and the claim is in the nature of interest allowable u/s 28 of the Act in computing the total income. Further, the legal expenses incurred to defend the suit against the bank to avoid the full compensation should be allowed as deduction in computing the total income u/s 28 of the Act, since the same was incurred in the ordinary course of carrying on the banking business to contest a substantial original demand of USD 10 Billion against the assessee which was reduced substantially in the appeal.  We are of the view that  the compensation paid in term of judgment of Hon’ble High Court of Justice Chanclry Division, Companies Court, London is allowable deduction in view of the commercial expediency. Respectfully following Hon’ble Supreme Court, we allow the claim of assessee. This issue of assessee’s appeal is allowed.  Disallowance of lease premium paid in respect of its bank premises - HELD THAT:-  Assessee has made claim of ₹ 1,50,53,817/- on account of lease and premium of various lease of land by the Bank claiming that it is a proportionate of the total leased amount paid because the total lease and premium is spread over the life of lease and proportionately this amount is claimed in each year. AO treated the same as capital expenditure and CIT(A) also treated the same as capital expenditure and placing the reliance on the decision of ITAT, Mumbai special bench in the case of JCIT vs Mukund Ltd. [2007 (2) TMI 358 - ITAT MUMBAI] . We find that the Tribunal in ITA No.2781/Mum/201 for AY 2003-04 has already considered this issue against assessee and in favour of Revenue by following the special bench decision in the case Mukund Ltd. (Supra). Respectfully following the same, we confirm the addition and dismiss this issue of assessee’s appeal. Disallowance of stamp duty paid on leasehold property - HELD THAT:- Expenditure incurred by the assessee by way of stamp duty etc., in connection with lease agreement was covered by its own decision in the case of CIT vs. Cinceita (P.) Ltd. [1982 (2) TMI 58 - BOMBAY HIGH COURT] , respectfully, following the same we allow the appeal of the assessee on this issue.  Disallowance of expenditure relatable to exempt income under section 14A - HELD THAT:- , we direct the AO to restrict the disallowance on exempt income at 1% and this issue of assessee’s appeal is partly allowed. Deleting/ excluding the income of foreign branches - HELD THAT:- As decided in assessee’s own case for AY 2003-04 the right of the Indian Government to levy tax in respect of business profits of these types of Indian Enterprise as provided in opening paragraph of Article 7 is taken away because a permanent establishment is situated in Malaysia.” In the appellant’s case also in all the foreign countries the operation is carried out through its branches which is a permanent establishment situated outside India. Hence the income attributable to these branches cannot be taxed in India. - decided against revenue Issues Involved:1. Disallowance of bad debts written off.2. Disallowance of payments made to liquidators of BCCI, interest, and legal expenses.3. Disallowance of lease premium paid in respect of bank premises.4. Disallowance of stamp duty paid on leasehold property.5. Disallowance of expenditure relatable to exempt income under section 14A.6. Exclusion of income of foreign branches.Detailed Analysis:1. Disallowance of Bad Debts Written Off:The assessee claimed a deduction for bad debts amounting to Rs. 508,90,28,469/-, which was disallowed by the AO. The CIT(A) confirmed the disallowance based on the proviso to section 36(1)(vii) of the Income Tax Act, which restricts the allowance of bad debts to the excess over the provision for bad and doubtful debts. The Tribunal, however, allowed the claim of the assessee, following the Supreme Court's decision in Catholic Syrian Bank Ltd. v. CIT, which held that the deduction under section 36(1)(vii) cannot be negated by the limitations of section 36(1)(viia).2. Disallowance of Payments Made to Liquidators of BCCI, Interest, and Legal Expenses:The AO disallowed the compensation paid to the liquidators of BCCI amounting to Rs. 364,64,32,957/- and legal charges of Rs. 17,19,52,641/- on the grounds that the payments were related to fraudulent activities and not normal business expenses. The CIT(A) confirmed this disallowance. The Tribunal, however, allowed the claim, considering the payments as business losses deductible under ordinary commercial principles, referencing the Supreme Court's decision in DR. TA Quresi Vs CIT, which allowed business losses arising from confiscation of stock in trade.3. Disallowance of Lease Premium Paid in Respect of Bank Premises:The assessee claimed a deduction for amortized lease premium paid for bank premises amounting to Rs. 1,50,53,817/-. The AO and CIT(A) treated this as capital expenditure. The Tribunal upheld the disallowance, following its earlier decision in the assessee's own case for AY 2003-04 and the special bench decision in JCIT vs. Mukund Ltd.4. Disallowance of Stamp Duty Paid on Leasehold Property:The assessee claimed a deduction for stamp duty paid on leasehold land amounting to Rs. 1,15,20,980/-. The AO and CIT(A) treated this as capital expenditure. The Tribunal, however, allowed the claim, following the Bombay High Court's decision in Richardson Hindustan Ltd. vs CIT, which held that stamp duty paid in connection with lease agreements is deductible.5. Disallowance of Expenditure Relatable to Exempt Income Under Section 14A:The AO estimated an adhoc disallowance of Rs. 56,15,05,000/- towards expenses related to exempt income. The CIT(A) directed the AO to compute the disallowance at 0.5% of the average investment earning tax-free income. The Tribunal, referencing its decision in the assessee's own case for AY 2001-02, restricted the disallowance to 1% of the exempt income.6. Exclusion of Income of Foreign Branches:The CIT(A) directed the AO to exclude the income of foreign branches based on the Double Tax Avoidance Agreement (DTAA). The Tribunal upheld this decision, following the Supreme Court's ruling in CIT Vs PV.AL.Kulandagan Chettiar and its own earlier decisions in the assessee's case, confirming that income attributable to foreign branches with permanent establishments abroad cannot be taxed in India.Conclusion:The Tribunal's judgment addressed multiple issues, allowing the claims of the assessee concerning bad debts, payments to BCCI liquidators, and stamp duty, while disallowing the lease premium. It also provided relief by restricting the disallowance under section 14A and upheld the exclusion of foreign branch income based on DTAA provisions.