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of <h1>Assessee wins appeals for 2010-11, 2011-12. Revenue partially successful.</h1> <h3>The Karur Vysya Bank Ltd. Versus The Joint Commissioner of Income Tax, Range – I, Tiruchirapalli And The Deputy Commissioner of Income Tax, Circle – 2 (1), Trichy Versus The Karur Vysya Bank Ltd.</h3> The Karur Vysya Bank Ltd. Versus The Joint Commissioner of Income Tax, Range – I, Tiruchirapalli And The Deputy Commissioner of Income Tax, Circle – 2 ... Issues Involved:1. Disallowance under Section 14A of the Income-tax Act, 1961.2. Calculation of Aggregate Average Rural Advances for Section 36(1)(viia).3. Claim under Section 36(1)(viii) of the Act.4. Addition for stale draft account.5. Disallowance of ex-gratia payments.6. Disallowance of entertainment expenses.7. Addition for interest accrued on NPAs.8. Deduction on account of wage settlement on actual payment basis.Detailed Analysis:1. Disallowance under Section 14A of the Income-tax Act, 1961:The assessee, a scheduled bank, contested the disallowance of Rs. 5,46,512 under Section 14A, which was enhanced to Rs. 51,85,950 by the CIT(A). The assessee argued that investments were part of its treasury operations and treated as stock-in-trade, thus disallowance under Section 14A was not applicable. The Tribunal referred to CBDT Circular No.18 and the judgment in Principal CIT v. State Bank of Patiala, holding that investments by a banking company are part of its business and income arising from such investments falls under 'Profits and Gains of Business.' Consequently, the disallowance under Section 14A was deleted, allowing the assessee's ground.2. Calculation of Aggregate Average Rural Advances for Section 36(1)(viia):The assessee claimed a deduction of Rs. 76,84,72,154 under Section 36(1)(viia) for bad and doubtful debts, which the AO restricted to Rs. 24,48,02,775 based on actual provisions made. The CIT(A) did not adjudicate on the method of calculation. The Tribunal remitted the issue back to the CIT(A) for adjudication on merits, noting that the CIT(A) should have provided a specific finding irrespective of the taxable income effect.3. Claim under Section 36(1)(viii) of the Act:The assessee initially claimed Rs. 9,17,03,880, later revised to Rs. 9,99,93,927, under Section 36(1)(viii). The AO did not accept the revised claim due to the absence of a revised return. The CIT(A) rejected the enhanced claim, stating it could not be allowed in appellate proceedings. The Tribunal, citing the National Thermal Power Company Ltd. case, held that the assessee could revise its claim and remitted the issue back to the AO for fresh consideration.4. Addition for stale draft account:The AO added Rs. 2,68,97,833 from stale draft accounts to the income, treating it as unclaimed money beyond the limitation period. The CIT(A) deleted the addition, noting that the assessee held the money in fiduciary capacity and referred to the RBI Notification mandating transfer of such amounts to the 'Depositor Education and Awareness Fund Scheme.' The Tribunal upheld the CIT(A)'s decision, confirming that the amount could not be construed as the assessee's income.5. Disallowance of ex-gratia payments:The AO disallowed Rs. 8,12,68,024 paid as ex-gratia to employees not covered under the Payment of Bonus Act, considering it an appropriation of profits. The CIT(A) allowed the claim, recognizing it as a business expenditure for maintaining good employee relations. The Tribunal upheld the CIT(A)'s decision, referencing the jurisdictional High Court's judgment in Kumaran Mills Ltd. v. CIT, which allowed ex-gratia payments on grounds of commercial expediency.6. Disallowance of entertainment expenses:The AO disallowed 5% of the Rs. 56,45,550 claimed as entertainment expenses, citing insufficient proof of business purpose. The CIT(A) deleted the disallowance, stating the expenses were purely for business purposes. The Tribunal upheld the CIT(A)'s decision, noting that the expenditure was related to customer entertainment and there was no evidence of personal benefit.7. Addition for interest accrued on NPAs:The AO added Rs. 74,60,000 as accrued interest on NPAs, adhering to a 180-day recognition period, contrary to the 90-day period mandated by RBI guidelines. The CIT(A) deleted the addition, aligning with RBI norms. The Tribunal upheld the CIT(A)'s decision, emphasizing the need to follow RBI guidelines for income recognition and referencing the Royal Bank of Scotland N.V. case.8. Deduction on account of wage settlement on actual payment basis:For assessment year 2011-12, the assessee claimed Rs. 17,66,43,818 as wage arrears disbursed during the year. The CIT(A) allowed the claim, but the Tribunal remitted the issue back to the AO to verify the actual disbursement, acknowledging the need for factual verification.Conclusion:The Tribunal allowed the assessee's appeals for assessment years 2010-11 and 2011-12 pro-tanto, dismissed the Revenue's appeal for assessment year 2010-11, and partly allowed the Revenue's appeal for assessment year 2011-12 for statistical purposes.
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