2021 (11) TMI 568 - AT - Income Tax

Tribunal dismisses Revenue's appeal, partly allows assessee's appeals. Upholds CIT(A)'s decisions on disallowances, deductions.

The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeals for statistical purposes. The Tribunal upheld the CIT(A)'s decisions ... Treatment of amounts in stale draft account as income - deductibility of ex-gratia payments under business expediency - deduction for debts written off under Section 36(1)(vii) - provision for bad and doubtful debts for rural branches under Section 36(1)(viia) - recognition and taxation of interest on non-performing assets - disallowance of expenditure attributable to exempt income under Section 14A read with Rule 8D - computation of deduction for eligible business under Section 36(1)(viii) - deductibility of Education Cess and Secondary & Higher Education Cess as business expense under Section 37(1) - scope of rectification under Section 154 - mistake apparent from recordTreatment of amounts in stale draft account as income - Amount standing in stale draft account is not assessable as the bank's income where the bank held the sums on behalf of payees and was obliged to remit unclaimed sums to the RBI Depositors Education & Awareness Fund after the statutory period. - HELD THAT: - The Tribunal accepted the factual and legal position that the bank received money when issuing demand drafts/pay orders and held it as liability until the drawee claimed it; the bank had no proprietary right over unclaimed drafts and was bound to remit unclaimed amounts to the Depositors Education & Awareness Fund after the statutory period. Consistent decisions in the assessee's own earlier years and a coordinate bench and the Madras High Court support that such stale draft balances recorded under 'outstanding liabilities' do not constitute the bank's income. The CIT(A)'s deletion of the addition was therefore upheld. [Paras 6]Deletion of addition made by AO towards stale draft account upheld; Revenue's ground rejected.Deductibility of ex-gratia payments under business expediency - Ex-gratia payments to staff (not covered by Bonus Act) were deductible as business expenditure under Section 37(1) where facts are similar to earlier favourable tribunal decisions. - HELD THAT: - The Tribunal followed its coordinate-bench precedents in the assessee's own case and found that ex-gratia payments were not an appropriation of profits but expenditures incurred wholly and exclusively for business, thus allowable under Section 37(1). The CIT(A)'s deletion of the disallowance made by AO was consistent with those precedents and therefore sustained. [Paras 7]Deletion of addition disallowing ex-gratia payments upheld; Revenue's ground rejected.Deduction for debts written off under Section 36(1)(vii) - Bad debts actually written off in the books are allowable under Section 36(1)(vii) notwithstanding differences vis-a -vis provision accounts, following Supreme Court and coordinate-bench authority. - HELD THAT: - The Tribunal relied on the Supreme Court's and earlier tribunal and High Court rulings to hold that, after statutory amendments, deduction under Section 36(1)(vii) is available where debts are written off in the books, and the proviso does not negate deduction for non-rural/urban advances merely because of provision account balances. The CIT(A)'s deletion of AO's disallowance was therefore correct. [Paras 8]Deletion of disallowance under Section 36(1)(vii) upheld; Revenue's ground rejected.Provision for bad and doubtful debts for rural branches under Section 36(1)(viia) - Whether certain branches qualify as 'rural branches' for Section 36(1)(viia) depends on which census figures were officially published and available as on the relevant previous year's first day; this factual question is not a mistake apparent on record and requires verification by AO. - HELD THAT: - The Tribunal noted that the assessee followed RBI classification based on 2001 census when provisions were created and produced RTI reply indicating village-level 2011 census data was published in the Gazette only on 30.04.2013 (after the relevant date). The Revenue relied on asserted earlier release of provisional 2011 data. Because the exact date when provisional/final 2011 village-level figures became officially available is material and disputed, the Tribunal held this to be a question requiring examination of extraneous records and factual verification. Therefore the matter was remitted to the AO to ascertain whether 2011 provisional data was officially published before the relevant date; if not, the assessee's 2001-based classification is to be accepted, otherwise 2011 figures apply. [Paras 14]Matter remitted to AO for determination of the date of official publication of 2011 village-level census figures and consequent classification of the specified branches for Section 36(1)(viia) purposes.Recognition and taxation of interest on non-performing assets - Interest accrued on NPAs is not to be taxed on accrual when classified as NPA in terms of judicial precedents; deletion of AO's addition was appropriate. - HELD THAT: - The Tribunal applied its prior decision in the assessee's own case and relied on the Supreme Court's authority that interest income cannot be said to have accrued to the assessee-bank on NPA accounts for taxation on accrual basis. The CIT(A)'s deletion of the addition made by the AO under the assessment was therefore upheld. [Paras 10]Deletion of addition for interest on NPAs upheld; Revenue's ground rejected.Disallowance of expenditure attributable to exempt income under Section 14A read with Rule 8D - Section 14A and Rule 8D do not apply to shares and securities held by a bank as stock-in-trade; consequently disallowance under Section 14A/read with Rule 8D is not permissible for the bank. - HELD THAT: - The Tribunal followed its coordinate-bench precedent in the assessee's own case and the Supreme Court's decision in South Indian Bank Ltd. which held that for banking companies shares and securities are stock-in-trade and income therefrom is business income; Section 14A therefore is not attracted. On that basis the CIT(A)'s reduction/disallowance was set aside and the AO directed to delete the disallowance under Section 14A/read with Rule 8D. [Paras 12]Addition under Section 14A/read with Rule 8D deleted; AO directed to give effect.Computation of deduction for eligible business under Section 36(1)(viii) - Methodology for computing deduction under Section 36(1)(viii) requires reconsideration by the AO in light of earlier Tribunal directions; issue remitted for fresh consideration. - HELD THAT: - While eligibility for deduction under Section 36(1)(viii) was not disputed, the CIT(A) substituted his method for the assessee's computation. The Tribunal observed that similar computation issues for earlier assessment years were remitted to the AO and, having noted that the AO in subsequent proceedings had accepted the assessee's methodology for other years, directed that the AO reconsider computation for the impugned year following the Tribunal's earlier directions. The matter was therefore set aside to the AO for compliance with earlier Tribunal guidance. [Paras 15]Issue remitted to AO to recompute deduction under Section 36(1)(viii) in accordance with Tribunal's earlier directions.Deductibility of Education Cess and Secondary & Higher Education Cess as business expense under Section 37(1) - Education Cess and Secondary & Higher Education Cess are deductible as business expenditure under Section 37(1) in principle, but factual claim was not before the AO and the matter is to be remitted to AO for fresh consideration. - HELD THAT: - The Tribunal admitted the additional ground as a pure question of law and, relying on a recent High Court decision (Bombay High Court in Sesa Goa Ltd.), held that such cesses are allowable under Section 37(1). However, since the facts and materials in support of the claim were not placed before the AO at assessment, the Tribunal remitted the issue to the AO to consider the claim in accordance with law and the cited precedent. [Paras 16, 17]Additional ground admitted; issue remitted to AO to decide deductibility of cesses in accordance with law and relevant precedents.Scope of rectification under Section 154 - mistake apparent from record - Application of Section 154 is confined to glaring mistakes apparent from record; classification of branches using 2001 or 2011 census is a debatable question requiring extraneous inquiry and therefore not rectifiable under Section 154. - HELD THAT: - The Tribunal reiterated that Section 154 permits correction of mistakes that are obvious and do not require further investigation or extraneous evidence. The question whether 2011 provisional/final village-level census figures were officially available before the relevant date is disputed and entails examination of external documents; hence it is not a mistake apparent from record. Applying these principles and precedent, the Tribunal set aside the CIT(A)'s rectification order under Section 154 and allowed the assessee's appeal on this point. [Paras 19]Order passed under Section 154 by CIT(A) set aside; assessee's appeal allowed on rectification point.Final Conclusion: For Assessment Year 2013-14, the Tribunal dismissed the Revenue's appeal and upheld the CIT(A)'s deletions on stale drafts, ex-gratia payments, bad-debt write-offs under Section 36(1)(vii) and interest on NPAs; it deleted the Section 14A/Rule 8D disallowance for the bank; it remitted specific factual issues (qualification of certain branches as 'rural' under Section 36(1)(viia), computation under Section 36(1)(viii), and the claim for Education Cess/SHE Cess) to the AO for verification/decision in accordance with law; and it set aside the CIT(A)'s rectification under Section 154 as impermissible. Appeals accordingly disposed as reflected above. Issues Involved:1. Deletion of disallowance of Stale Draft Account.2. Disallowance of ex-gratia payment.3. Deletion of disallowance of bad debts u/s 36(1)(vii).4. Disallowance of provision for bad and doubtful debts u/s 36(1)(viia).5. Deletion of disallowance of interest accrued on NPAs.6. Disallowance of expenditure relatable to exempt income u/s 14A.7. Deduction claimed u/s 36(1)(viii).8. Deductibility of Education Cess and Secondary & Higher Education Cess.9. Legality of rectification order passed u/s 154.Detailed Analysis:1. Deletion of Disallowance of Stale Draft Account:The Tribunal upheld the CIT(A)'s decision to delete the addition made by the AO towards the stale draft account. The Tribunal noted that the amount in the stale draft account is not the income of the assessee as it is held on behalf of the drawee until claimed. The Tribunal relied on its previous decision and the Hon'ble High Court of Madras in the case of City Union Bank Ltd., which held that such amounts cannot be treated as income of the assessee.2. Disallowance of Ex-gratia Payment:The Tribunal upheld the CIT(A)'s decision to delete the disallowance of ex-gratia payment made to staff. It was noted that the issue was covered in favor of the assessee by the Tribunal's previous decision and that ex-gratia payments are deductible under Section 37(1) of the Act.3. Deletion of Disallowance of Bad Debts u/s 36(1)(vii):The Tribunal upheld the CIT(A)'s decision to delete the disallowance of bad debts claimed under Section 36(1)(vii). The Tribunal referred to its previous decision and the Supreme Court's ruling in the case of Catholic Syrian Bank Ltd., which held that the assessee is entitled to deduction under Section 36(1)(vii) irrespective of the difference between the credit balance in the provision account and the bad debts written off.4. Disallowance of Provision for Bad and Doubtful Debts u/s 36(1)(viia):The Tribunal noted that the issue became infructuous due to the order passed u/s 154. The Tribunal directed the AO to examine the correct facts regarding the publication date of the 2011 census data to determine the classification of branches as rural or urban for the purpose of Section 36(1)(viia).5. Deletion of Disallowance of Interest Accrued on NPAs:The Tribunal upheld the CIT(A)'s decision to delete the disallowance of interest accrued on NPAs. The Tribunal referred to its previous decision and the Supreme Court's ruling in the case of Vasisth Chary Vyapar Ltd., which held that interest income on NPAs does not accrue to the assessee.6. Disallowance of Expenditure Relatable to Exempt Income u/s 14A:The Tribunal directed the AO to delete the disallowance made under Section 14A read with Rule 8D, noting that the issue was covered in favor of the assessee by the Tribunal's previous decision and the Supreme Court's ruling in the case of South Indian Bank Ltd., which held that Section 14A does not apply to banking companies.7. Deduction Claimed u/s 36(1)(viii):The Tribunal set aside the issue to the AO to reconsider the deduction claimed under Section 36(1)(viii) in accordance with the Tribunal's directions for earlier years. The Tribunal noted that the AO had already accepted the computation methodology adopted by the assessee for previous years.8. Deductibility of Education Cess and Secondary & Higher Education Cess:The Tribunal admitted the additional ground raised by the assessee and directed the AO to reconsider the issue in light of the Bombay High Court's decision in the case of Sesa Goa Ltd., which held that Education Cess and Secondary & Higher Education Cess are deductible under Section 37(1).9. Legality of Rectification Order Passed u/s 154:The Tribunal set aside the rectification order passed by the CIT(A) under Section 154, noting that the issue of applying census data of 2001 or 2011 is highly debatable and cannot be considered a glaring mistake apparent from the record. The Tribunal referred to the Supreme Court's decision in the case of T.S. Balaram vs. Volkart Brothers, which held that rectification under Section 154 can only be made for glaring mistakes apparent from the record.Conclusion:The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeals for statistical purposes. The Tribunal directed the AO to reconsider certain issues in light of the Tribunal's and higher courts' rulings. The Tribunal upheld the CIT(A)'s decisions on various disallowances and deductions, providing detailed reasons and referring to relevant case laws.