TaxTMI 
TaxTMI 
2012 (9) TMI 697
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....llowances. 5. On going through the accounts during the course of assessment proceedings it was noticed by the A.O. that operating expenses included other expenditure of Rs. 56.76 crores comprising of various sub-heads including an amount of Rs. 20,87,88,103/- which was termed as "loss on account of frauds." It was submitted by the assessee that it represents the payment made by bank amounting Rs. 15.56 crores to various parties on account of failure by Home Trade Ltd., a broking company engaged in broking deals syndicated by the Bank to make delivery of securities to the buying counter parties. Bank has been providing advisory services to various Provident funds and Co-operative Banks and Gramin Banks in primary market issues since January, 2001. These advisory services were being provided to meet the clients' ongoing requirements for Government Securities/PSU Bonds which were available in the secondary market. Since the bank was not a registered broker with any stock exchange, its services were restricted to advising/facilitating the clients in sourcing their requirements from brokers at competitive market rates. Where deals are facilitated by advisors, the investors make payme....
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....ank to the respective buying counter parties and this was claimed as loss on account of fraud. 6. The A.O. also noticed that Reserve Bank of India vide its order dated 24-1-2003 levied a penalty of Rs. 5 lac on the assessee in respect of the above syndication. The R.B.I. held that the Bank had contravened the provisions of section 6(1) of the Banking Regulation Act, 1949 by acting as a "broker" for purchase or sale of Govt. Securities and for selling the securities without taking the delivery of the securities thereby indulging in "short selling" which is prohibited by RBI guidelines. After considering the aforesaid facts, the A.O. held that the out of the fraud expenses of Rs. 20,87,88,103/- an amount of Rs. 15.56 crores was paid to various Provident Fund organization cannot be termed as fraud expenses interalia for the following reasons. (1) The transaction entered into by the assessee has been held to be in violation of section 6(1) of the Banking Regulation Act, 1949 by the Bank and thereby a penalty of Rs. 5 lacs was imposed on the assessee and the same was paid by the assessee. (2) The A.O. was of the view that there was no fraud committed by the Bank as ....
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....re were many employees who were constituents of the bank. The bank would have lost the confidence of these constituents by taking a strict view while, ironically, the bank could consolidate its position and reputation as a result of the payment. (d) Having regard to the quantum of funds involved, legal proceedings of all forms against the bank, with a view to seeking refund of the funds, was a very strong possibility; this could have dragged the bank into enormous litigation. (e) The bank realized while the bank as also the investors were innocent and were the victims of the fraud, as between two innocent persons, the loss may be suffered by a person who has been privy to making offer to another innocent person. 9. The assessee's submission that the compensation was an item of loss on account of fraud arising due to 3rd party fraud has been paid by the assessee in the business interest on a voluntary basis. The assessee has also not suffered anything in relation to the short sale transaction noted adversely by the RBI. The levy of penalty by RBI was for procedural lapses. SEBI, the appropriate authority in-charge of merchant banking activities, has also not fou....
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....d in uncalled for activities. 3.4.(iii) The transaction entered into by the assessee has been held as violative of sec.6(1) of the Banking Regulation Act, 1949 by the RBI and as a punitive measure a penalty of Rs. 5 lacs was imposed on it and the same has been paid by it. The Chairman and MD agreed unequivocally during the hearing by the RBI that the type of transaction done by the assessee is neither permissible under the Banking Regulation Act, 1949 nor under the SEBI Act. 3.4.(iv) In view of the above indictment by the RBI, the transaction in question was not incidental to its business of banking. The question of allowance of such expenditure u/s. 37(1) is, therefore, untenable. 3.4.(v) The appellant showed this expenditure related to fraud expenses under miscellaneous expenses and also penalty levied by the RBI was also claimed under miscellaneous expenses. These payments were in violation of the banking regulations Act. The Hon. Supreme Court in the case of Maddi Venkataramanan & Co. (P) Ltd. vs. CIT (1998) 229 ITR 534 (SC) held that one can carry on his trade without violating the law and after the introduction of Explanation in Sec. 37 such expendi....
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....losses were incurred for any fault of any particular employee. In the case of Badridas Daga v. CIT 34 ITR 10(SC), it was held that the loss incurred on account of embezzlement/misappropriation of funds by the agent is allowable, here it is not the case of embezzlement by any particular employee. Hence these case laws are not applicable. In the case of Annamalai Timber Trust Ltd. vs. CIT 47 ITR 814 (Ker.), it was held that for any negligence of the assessee's servants while acting on the course of their employment is also incidental to such business, the liability of the assessee to pay damages for such negligence is also incidental to the business, and loss resulting from payment of such damages is allowable. It is not the case in the present case. Therefore, in my view, the A.O. was justified in disallowing the payment made for Rs. 15.56 crores and also justified in disallowing the penalty of Rs. 5 lacs levied by the RBI. Hence ground No.2 and 3 both are rejected." 13. Aggrieved by the decision of CIT (A), the assessee is now in appeal before us. 14 Before us, the Ld. A.R. submitted that the Bank is registered with the Securities & Exchange Board of India (SEBI) as ....
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.... assessee was also a party to the scam. This according to the assessee would have proved detrimental to the reputation and adversely affected the Banks activity to prove its business besides impairing its capability to generate business from Public Sector units and from Central and state Governments. It could have adversely affected the bank's ability to grow its business in the eastern region where Home trade limited and its associates had defrauded investors. The assessee considering the overall situation including its business interest, its brand image and goodwill felt that under the circumstances, it has a fiduciary accountability and responsibility. Thus in order to avoid protracted litigation and out of commercial expediency, the assessee decided to have a settlement with some of the investing bodies particularly because the PSU employees interest was involved in those transactions subject to the condition that the amount would be refunded to the assessee if any amount is recovered from Home Trade Ltd or their custodians. The assessee also filed a case against Giltedge Management Services Ltd for recovery of the amounts paid to the investing parties. The staff accountabil....
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....organisations of the PSUs subject to the condition that they will be returning the amount as and when the payment was received from the defaulting companies. In fact there was no fraud committed on the bank as the transactions were between the broker and the PF organization. CBI has charge sheeted the employee of the assessee only in the case of Jute Corporation of India wherein the amount involved was only Rs. 75 lacs. The final order of the criminal court has not been pronounced holding as to who are found guilty in fraud. The assessee has not made any disclosure about the same in the annual accounts or in the statement of total income and there was no observation to this effect by the Auditors in their report. In these circumstances, the claim of the assessee that there was vicarious liability on the assessee is not acceptable. It was pointed out by the D.R. that the assessee's stand before the RBI was that it had never entered into short selling or brokering and the mistake had happened due to ignorance and that there was no monetary loss suffered out of the above transaction. This statement which was made before the RBI is opposite to that made during the course of assessment ....
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....al involvement which would have ruined the reputation of the bank. The assessee was also holding large deposits from PSUs and provident funds. The employees of the PSUs were the customers of the assessee. The assessee was of the view that nonpayment would have resulted into the assessee being drawn into long drawn litigation. In view of all these factors, the Assessee decided compensate the investors by making payment of Rs. 15.56 crore and this payment was claimed as loss due to fraud. The aforesaid facts are undisputed facts and have not been controverted by the Revenue. The only dispute is whether the amount of compensation of Rs. 15.56 crore paid is an allowable expenditure or not. In the case of CIT vs. Georgepolous (1984) 146 ITR 380, (Mad.) the Hon'ble Madras High Court has held that U/s 37 there is no requirement that an item of expenditure or outgoing must be incurred or laid out with a view to earn the profits nor is there any requirement that the expenditure must be incurred in order to meet an obligation arising either out of a commercial contract or out of any provision of law or custom. All that the section requires is that the expenditure must be incurred or laid out....
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.... (Guj.) the Hon'ble Gujarat High Court has held that what has to be considered while applying the test of commercial expediency is whether particular expenditure can be justified not because of any obligation under which the assessee paid the same but even on the ground of amount being expended voluntarily in the case of any application under which the assessee-company paid the same but even on the ground of the amount being expended voluntarily by the assessee-company. If the assessee derives any indirect benefit also, then the amount paid is to be considered to have expended wholly and exclusively for the purpose of business and therefore allowable. In the case of Maddi Vankataraman & Co. (P) Ltd. vs CIT (1998) 229 ITR 534 (SC), the facts of the case is that the assessee was engaged in the tobacco business. The assessee had indulged in transactions in violation of the provisions of FERA. The assessee's plea was that if it had not entered into such transaction, it would have incurred a loss. In those facts the H'ble Apex court held that spur of loss cannot be a justification for contravention of law. If the assessee contravenes the provisions of FERA to cut down its losses or t....
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....ital expenditure. He accordingly disallowed the expenses as Revenue expenses but allowed depreciation at the applicable rates. 22. The AO also observed that assessee had paid Rs. 25,84,000 to NCR Corporation Ltd being payment made for upgradation of ATMs. The assessee submitted that it represented the cost of change in the software loaded on the ATMs so that ATMs can accept Visa cards and customers of other banks can start using the bank's ATMs. The AO considered it to be capital expenditure as addition to the existing ATMs and granted depreciation on the same. 23. On both the above additions the assessee carried the matter before CIT (A). CIT (A). CIT(A) vide para 4.3 on page 18 of his order held that the expenditure incurred resulted into modification of existing system and supplementing of additional features and accordingly held it to be of capital expenditure and thus upheld the order of AO. Aggrieved by the order of CIT(A) the assessee is now in appeal before us. 24. Before us, the Ld. A. R. pointed out to the fact that the AO himself vide para 7.3 and 7.5 stated that the assessee be granted depreciation of the aforesaid expenditure but no depreciation has been gr....
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....mpted income. The appellant has filed the details before the A.O. admitting that only part of the interest bearing funds is used for investing in the investments giving tax exempted income. The interest cost is calculated at Rs. 6.23 cr. which is offered for taxation. Hence, the A.O. is not justified in further allocating the interest expenditure for this purpose disregarding the fact that the appellant has surplus funds. However, as regards the other operating expenses are concerned, the appellant has not filed any details as to how much expenditure is to be apportioned for earning the exempted income. The total operating expenses are Rs. 205.47 cr. and the exempt income claimed by the appellant is Rs. 39.65 cr. whereas the total income earned by the appellant is Rs. 1595.40 cr. Hence the exempted income is 2.485% of the total income. Therefore, by allocating the operating expenses of Rs. 205.47 cr. in this ratio, the expense allocable to the exempt income comes to Rs. 5.11 cr. (205.47 x 2.485%) Therefore, this expenditure has to be disallowed out of the total expenditure for earning the exempt income under the provisions of Sec. 14A. This view is supported by the decision of ITAT....
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....ash profits of Rs. 599 crores during the assessment year in question. The own funds as on 31st march 2003 was Rs. 919 crores comprising of share capital of Rs. 230 crore and Reserves of Rs. 689 crores. The Ld. A.R. placed on record the copies of the audited balance sheets in support of its contentions that it had sufficient interest free funds and therefore no interest bearing funds were utilized for making the investments. The Ld. A.R. also furnished a chart showing the position of interest free funds vis a vis tax free investments as on the balance sheet dates right from 31st march 1995 to 31st March 2003. From the chart it was pointed out that as on 31st March 2003, the interest free funds in the form of capital, reserves and interest free demand deposits was to the extent of Rs. 3404 crore as against the tax free investments of Rs. 589 crores. Thus the interest free funds were far in excess of the investments. It was submitted that the AO had worked out the disallowance primarily on the presumption that interest bearing funds have been utilized for making the tax free investments without any cogent evidence. It was submitted that since the assessee has already suo moto disallow....
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....e time the assessee has raised a loan it can be presumed that the investments were from interest free funds available. In the present case, since the assessee has suo moto disallowed Rs. 5.53 crore u/s 14A, respectfully following the decision of Bombay High Court, we are of the view that in the facts of the present case, no further disallowance over and above than what has been disallowed by the Assessee is called for. As far as disallowance of other administrative expenses is concerned, the undisputed fact is that the disallowance has been made by the AO without giving a finding as to how much administrative expenditure has been incurred to earn the exempt income. In the case of Hero Cycles (supra) the Hon'ble High Court has held that the contention of the Revenue that directly or indirectly some expenditure is always incurred which must be disallowed u/s 14A cannot be accepted. Disallowance u/s 14A requires finding of incurring of expenditure. In the present case, the AO has presumed that the assessee might have incurred expenditure to earn the exempt income. He has not given any finding of incurring of expenditure. In view of these facts and respectfully following the decision o....
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....Ld A.R. also placed on record at page 377 of the paper book the copy of instruction No 17/2008 dated 26th Nov. 2008 issued by CBDT wherein interalia it has been stated that that while working out the deduction u/s 36(1)(vii), the opening credit balance i.e balance brought forward as on 1st April of the relevant accounting period needs to be reduced. 37. The Ld. D.R. did not seriously object to it. 38. We have heard the rival submissions and perused the material on record. We find that the identical issue was decided by the co-ordinate Bench in ITA No 81/Ahd/2005 and ITA No 3665/Ahd/2004 for AY 2001-02 by holding as under: "5. ... At the time of hearing both the parties submitted that identical issue has been considered in the assessee's own case in the assessment year 1998-99 in which a view has been taken that the amount of deduction claimed by the assessee u/s 36(1)(viia) of the Act in respect of bad debts written off was not required to be reduced by the opening balance in the provision of bad debt account. Since the issue has already been considered and decided by this tribunal in the assessee's own case in the assessment year 1998-99 it is considered appropriate....
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....reement signed with the landlord, the consent letter was signed by Mr. Ramadoss only while the property is in the name of Mr and Mrs Ramadoss, the landlord did not have any actionable claim over the assessee and the compensation of Rs. 6 lac was unreasonable since there was no evidence of landlord having incurred any cost for modification of the property as per the assessee's requirement. Aggrieved by the order of the AO, the assessee preferred appeal before CIT (A). Before CIT (A), the assessee made various submissions. The Ld. A. R. also relied on various decisions in its support. CIT (A) agreed with the contentions of the assessee and deleted the addition made by the AO. Aggrieved by the action of the CIT(A), the Revenue is in appeal before us. 45 Before us, the Ld. D.R. relied on the order of the AO and submitted that the expenses is not for the purpose of business. The Ld. D.R. therefore urged that the action of the AO be upheld. 46. On the other hand the Ld. A.R. placed on record at page 195 to 204 of the paper book various correspondence exchanged between the assessee and the landlord. He pointed out to the letter at page 200 where the landlord interalia stated that a ....
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....e Apex Court we are of the view that the disallowance made by the Ao was rightly deleted by CIT(A) and it does not call for any interference. In the result, this ground of the Revenue is rejected. 48. The next ground is with respect to the fees of Rs. 26.25 lacs paid to KPMG and travelling expenses of Rs. 5.58 lacs. 49. The AO observed that assessee has made payment of Rs. 26.25 lacs to KPMG. The Assessee explained that the expense was incurred for exploring the possibility of branch abroad. Similarly the assessee had spent Rs. 5.58 lac on the travelling expenses including travelling expenses and allowance of the Chairman of the assessee bank to visit USA and UK for exploring business opportunity in overseas market. The AO was of the view that since the assessee is governed by Banking Regulation Act, 1949, prior permission of RBI was necessary for opening any foreign branch and incurring expenditure. Since in the case of assessee as it did not have operations in foreign country and no licence was granted by RBI to open any branch abroad, the expenditure was not allowable. He accordingly disallowed it. The Assessee carried the matter before CIT (A). Before CIT (A) it was submi....
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....e loaded on the ATMs so that the ATMs can accept Visa cards and customers of other banks can also use the bank's ATMs. It was further submitted that the modification does not enhance the productivity of the ATM and the payment does not constitute payment for capital expenditure. The AO was of the view that enabling the existing ATMs to accept the visa cards and use of ATMs by the customers of other banks was an additional facility generated. Accordingly he rejected the submissions of the assessee and added Rs. 25.84 lacs to the income of the assessee. 54. Assessee had paid Rs. 1,52,893/- to Nilme electric for telephone cable expenses. The assessee submitted that the expense was made for replacement of computer network and telephone wires on shifting of some of the banks departments to the new leased premises. The Ao held the same to be of capital in nature and disallowed it but granted depreciation on it. 55. Assessee carried the matter before CIT (A). CIT (A) held the expenses of Rs. 25.84 lacs to be of capital nature but however allowed depreciation on it and accordingly upheld the order of the AO. With respect to the disallowance of Rs. 1.52 lacs, CIT (A) deleted the addit....