TaxTMI 
TaxTMI 
TaxTMI 
2016 (4) TMI 1392
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....ring before us, the Authorised Representative(AR)fairly conceded that identical issue has been decided by the Tribunal against the assessee in the earlier years. We find that while deciding the appeal for the AY 1996-97 the Tribunal has held as under : "7. Ground No. 3 is regarding guest house expenses. We have heard the Ld. AR as well as Ld. DR and considered the relevant material on record. We find that an identical issue has been considered and decided by this Tribunal in assessee's own case for the assessment year 1991- 92 vide order dated 19. 5. 2008 in para 21 as under: "21. The next issue is regarding guest house expenses and depreciation thereon. At the time of hearing, the learned Authorised Representative of the assessee has submitted that the issue was decided against the assessee by the judgment of Hon'ble Supreme Court in the case of Britannia Industries Ltd. Vs CIT, reported in 278 ITR 546 (SC). Accordingly, we are not inclined to interfere with the findings of the CIT(A). The same is upheld." Following the earlier order of this Tribunal we decide this issue against the assessee and in favour of the revenue. Accordingly the order of CIT(A) qua this issue i....
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....ty(FAA). After considering the submission of the assessee and the assess ment order he held that his predecessor disallowed the claim made by the assessee while deciding the appeal for AY 1996-97. Following the order of his predecessor for the earlier year he upheld the order of the AO. 3.2. During the course of hearing before us, the AR agreed that assessee had not challenged the order for the year 1996-97 before the Tribunal. As the assessee had accepted the order of the FAA for the earlier year, we are of the opinion that there is no need to disturb the order of the CIT(A) for the current year as facts for both the years are identical- except that the amounts involved are different. Confirming the order of the FAA Ground No. 3 is decided against the assessee. 4. Fourth Ground deals with exemption u/s. 10(15)(iv)(h) of the Act. During the assessment proceedings the AO found that the assessee had claimed entire interest received on tax free securities amounting to Rs. 70. 95 crores, exempt u/s. 10(15)(iv)(h). He held that expression "income" meant "net income" i. e. receipt minus expenditure. He referred to Circular No. 780, dt. 4. 11. 1997 of the CBDT dealing with section 10(23....
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....O was justified in allowing exemption for interest income of Rs. 70. 95 crores on net basis. 4.2. During the course of hearing before us, the AR stated that while deciding the appeals for AY 1996-97 the Tribunal had held that gross amount of interest was exempt u/s. 10(15)(iv), that the Tribunal had while dealing with the deduction u/s. 80M, held that 1% of the dividend had to be treated as income for earning dividend income in the orders passed for the AY. s. 1982-83 and 1983-84, that the method of allocation of interest expenditure was illogical, that the provisions of section 14A were applicable only when expenditure was actually incurred, that the assessee would invest in tax free securities to comply SLR requirement laid down by the RBI, that the assessee had own funds of more than Rs. 30, 000 crores, that non-interest bearing funds far exceeded the investment. He relied upon the cases of American Express Bank Ltd. (55SOT136), Central Bank of India (264ITR522), Godrej Agrovt(ITA 1629/Mum/09), State Bank of Travancore (318 ITR(AT)-171);HDFC Bank (ITA /330of 2012 of Hon'ble Bombay HC), Tinbox Company(260ITR637) and UTI Bank Ltd. (32 taxmann. Com 370). He referred to Annexure to....
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....ompute the deduction u/s. 80M on the resultant net dividend income. As regards dividend earned on shares purchased on or after 1. 4. 96, he held that AO was justified in allocating proportionate expenses towards earning of dividend income. However, he stated that he was not in agreement with the method adopted by the AO for computing disallowance, that the interest and other expenses could not be estimated to be a percentage of dividend income, that the interest expense should be allocated on the basis of funds utilised for investment in shares. The FAA referred to the discussion held with regard to the expenditure incurred for earning tax free exempt income. He held that the assessee had not proved that borrowed funds were not used for the purpose of investment, that it would be reasonable to assume that the investment in shares had been made out of own funds as well as borrowed funds. Finally, he directed the AO to allocate interest expenditure towards investments in shares in ratio of own funds and borrowed funds as on 31. 3. 1997 and applied average rate of borrowings on that part of investment in shares in the year under consideration which was funded through borrowings. 5.1.....
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....ature of financial transaction, therefore, the claim of depreciation was disallowed. On appeal, the CIT(A) confirm the action of the AO and held that the so-called lease agreement is only a finance lease on which the depreciation can be allowed to a person who vests the dominion over the property/asset, who is entitled to use it in his own right and using the same for the purpose of his business or profession. The CIT(A) has observed that in the present case the lessee retained the asset in its own dominion at the exclusion of others including the assessee because the lessee has constructed the equipments and uses it as integral part of railway system. In order to get finance KRCL made an arrangement to issue a sale invoice but retained the asset for itself. However, the CIT(A) while confirming the disallowance of depreciation directed the AO to exclude the capital recovery component from the lease rentals assessed to tax. XXXXXXXXXXXXXX 20. We have considered the rival submissions as well as relevant material on record. The assessee has claimed that as per the lease agreement the assessee has entered into an operating lease of the asset in question. In order to determine the re....
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....hichever is lower. In case the Lessee proposes to avail MODVAT on the specified Excise Duty paid in terms of the Central Excise Rules, 1944, of which due intimation will be given by the Lessee to the Lessor, the acquisition cost will not include Excise duty payable on the equipment. 1.6 The Lessee hereby takes on lease the Equipment for the Fixed period from the Commencement Date as hereinafter referred to subject to the terms, conditions, covenants and stipulations contained herein and in the Schedules hereto. The Fixed period or the primary period of the Lease as defined in Part II of the First Schedule hereto is non-cancellable by the Lessee and/or the Lessor except as provided in Clause 13 hereof. The fixed period of the lease may be renewed for a further fixed term referred to as "the secondary period" at the option of the Lessee on the same terms and conditions as are contained in this agreement subject to payment by the Lessee of lease rentals in advance as stipulated in Part II of the First Schedule hereto. 5. Insurance It is agreed by and between the Parties hereto that the Lessee shall, for and on behalf of the lessor. 5. 1 Take out insurance on the Equipment ....
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.... otherwise deal with the Equipment or any interest therein nor create or allow to be created any lien on the Equipment whether for repairs or otherwise and in the event of any breach of this sub-clause by the Lessee, the Lessor shall be entitled to call upon the Lessee to have the lien or charge or other encumbrance lifted at its cost and in the event of the Lessee failing to do so within a reasonable time, the Lessor shall be entitled (but shall not be bound) to pay to any third party such sum as is necessary to procure the release of the Equipment from any lien charge or encumbrance and shall be entitled to recover from the Lessee forthwith all such expenses as might have been incurred for such release: 8. 6 not sell, mortgage, charge, demise, sub-let or otherwise dispose of any land or building on or in which the Equipment are kept or enter into any contract to do any of the aforesaid things without giving to the Lessor at least six weeks prior notice in writing and the Lessee shall in any event ensure that any such sale, mortgage, charge, demise, sub-lease, or other disposition as the case my be is made subject to the right of the Lessor to repossess the Equipment at any time....
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.... to increase the Lease rentals proportionate thereto and on such notification by the Lessor to the Lessee, the Lease Rentals shall correspondingly stand increased from the date specified by the Lessor in such notification. 12. Events of Default: An event of default shall occur hereunder, if the Lessee- 12. 4 without the Lessor's consent, sells, transfers, or attempts to sell or pledge, parts with possession or sub-lets or charges or encumbers or creates any lien on the Equipment or any item of the Equipment is endangered in the opinion of the Lessor or the interest of the Lessor is jeopardised: 13. Termination in the even of default: 13. 2 On the termination of this Agreement the Lessor shall without any notice be entitled to remove and repossess the Equipment and for that purpose by itself its servants or agents enter upon any land buildings or premises where the Equipment is situated or is reasonably believed by the Lessor to be situated for the time being and detach and dismantle the same and the Lessor shall not be responsible for any damage which may be caused by any such detachment or removal of the Equipment. 13. 3 Without prejudice to and in addition to the Less....
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.... action or inaction or with respect to any proceeds thereto and if such Equipment is sold the price obtained upon such sale shall not be questioned or challenged by the Lessee more shall the Lessee question or dispute the exercise or non-exercise by the Lessor of any one or more of the rights and remedies as set out in Clause 13 hereinabove. 16. Assignment: 16. 1 The Lessor may hypothecate the Equipment owned by it and leased out hereunder in favour of any bank, Financial Institution or any other Institution whatsoever as and by way of security for the financial assistance arranged therefore by the Lessor for the acquisition of such Equipment. The Lessor may assign to any person any of its rights under this Agreement and in particular may assign such rights by way of a charge and any person to whom such rights are assigned shall be entitled to the full benefit of all such rights of the lessor. 21. It is manifest from the terms and conditions of the lease agreement that the lease is for a fixed period of 84 months and as per clause 1. 6 it is non-concealable by the lessee and/or by the lessor except on the default on the part of the lessee. Even in case of default and conseque....
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....f the asset in question. The Special Bench of this Tribunal in case of IndusInd Bank Ltd. (supra) by following the decision of Hon'ble Supreme Court in case of Asea Brown Boveri Ltd. Vs Industrial Finance Corporation of India (IFCI) 154 Taxman 512 as well decision in case of Association of Lease and Financing Service Company Vs Union of India (supra) has enumerated various features which make distinction between operating lease and finance lease in para 5. 20 as under: "5. 20 In view of the fact that the Id. AR has lodged a strong claim to consider the present agreement as that of operating and not a finance lease, it is imperative to understand the distinction between the two as under :- a. In the case of an operating lease, the lessor provides the asset for use for a certain period of time to the lessee for rent. On the expiry of such lease period, the lessor has to inevitably repossess the asset. On the other hand, a case of finance lease is in essence an arrangement for borrowing. The role of lessor is limited to that of financier only. b. In operating lease, it is the lessor who bears the loss and obsolescence of the asset leased, whereas in &se of finance lease it....
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....rating lease and finance lease, the salient features of operating lease have become glaring. Now let us ascertain as to whether the above clauses, claimed by the id. AR as amply proving it to be a case of operating lease agreement, do in fact prove it so. IA an earlier para we have observed that this lease agreement fully satisfies all the characteristics of finance lease. The position which, therefore, emerges is that some clauses of the agreement tend to give impression of this being an operating lease whereas the others largely indicate it to be a finance lease. How to resolve the conflict? In order to decide as to whether the instant lease agreement be characterized as operating or finance lease, we need to take shelter of the doctrine of pith and substance. This rule stipulates that if there is some overlapping in the contents of the clauses of an agreement, then it becomes necessary to examine the pith and substance of the agreement. It can be done by seeing as to whether it predominantly satisfies the conditions of operating lease or finance lease. The crux is that we should find out the substance of the agreement. 5. 22 We have highlighted the broad features of operating ....
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....ssed in the foregoing paras the title over the asset as per the lease agreement is only for securing the financial interest of the assessee and not intended to really take the asset in its possession on the expiry of lease term or on the termination of the lease agreement. Therefore all the features and attributes of finance lease as discussed by the Special Bench in case of IndusInd Bank do exist in the case of the assessee. 24. Apart from the terms and conditions as stipulated in the lease agreement one more important aspect which is very relevant in deciding the issue is that as per the Banking Regulation Act, 1949, a Banking company is not permitted to engage in the activity of leasing of asset. Section 6 of the Banking Regulation Act specifies various business in which a banking company may engage as under: "6. Forms of business in which banking companies may engage. - (1) In addition to the business of banking, a banking company may engage in any one or more of the following forms of business, namely:- (a) the borrowing, raising, or taking up of money; the lending or advancing of money either upon or without security; the drawing, making, accepting, discounting, buying, s....
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....herwise; (j) establishing and supporting or aiding in the establishment and support of associations, institutions, funds, trusts and conveniences calculated to benefit employees or ex-employees of the company or the dependents or connections of such persons; granting pensions and allowances and making payments towards insurance; subscribing to or guaranteeing moneys for charitable or benevolent objects or for any exhibition or for any public, general or useful object; (k) the acquisition, construction, maintenance and alteration of any building or works necessary or convenient for the purposes of the company; (l) selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of or turning into account or otherwise dealing with all or any part of the property and rights of the company; (m) acquiring and undertaking the whole or an part of the business of any person or company, when such business is of a nature enumerated or described in this sub-section; (n) doing all such other things as are incidental or conducive to the promotion or advancement of the business of the company; (o) any other form of business which the Central Government may, by not....
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....iod of lease should not normally exceed five years. In exceptional cases, lease period not exceeding 7 years may be fixed in respect of lease transactions covering assets of Rs. 1 crore and above, as the recovery of cost may not be possible in a period of 5 years. " 5. 25 On perusal of the above paras of the above circular it becomes patent that the equipment leasing activity should be treated by banks "on par with loans and advances". The further contents of para 1 (ii) which provides that the guidelines on income recognition, asset classification and provisioning would also be applicable to them, make it clear that the activity of equipment leasing should be considered as an act of advancing loans and advances. It is so for the reason that the guidelines on income recognition and asset classification etc. as referred to herein, are applicable to loans and advances. Further para 1 (v) provides that the entire lease rental should not be taken to the bank's income account. Only the interest component being the finance charge should be taken to the income account and the second component being charge towards recovery of the cost representing the replacement cost of the asset ....
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....e agreement under consideration is that of finance lease and not operating lease. " 26. As it is clear from the circular that the banks undertaking equipment leasing departmentally should follow prudential accounting system and only the interest charge component should be recognised as income and the recovery of cost of asset should be carried to balance sheet on the form of provision of depreciation. Therefore under the circular the transaction of equipment lease is treated at par with the loan transaction and accordingly only the interest component of the receipt is recognised as income. Since it is not permitted to recognise the entire receipt being lease rentals as income the assessee has also recognised only interest component of the receipt of the lease rental as income in the profit and loss account and the balance which represents the capital component is taken to the balance sheet. Thus, in the books of account, the assessee has treated the transaction in question as finance lease and not as an operating lease because the banks are permitted only to carry out the transaction of finance lease of equipments. 27. It is pertinent to note that in case of ICDS Ltd. (supra) i....
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....of interest credited or for claiming deduction in subsequent years, that it was entitled for any relief. 7. 1. Before us, the AR stated that the amount in question had already been disallowed in the past, that there cannot be disallowance of the same amount in two years. He relied upon the case of American Express Bank Ltd. (55SOT136). The DR stated that section 43D was a charging section, that the order of the FAA was in accordance with the provisions of the Act. 7. 2. We have heard the rival submissions and perused the material before us. We find that the claim made by the assessee of double disallowance of the same amount has not been considered. Therefore, in the interest of justice we are reverting back the issue to the file of the AO to decide the issue afresh after affording reasonable opportunity of hearing to the aa. Gr. No. 7 stands partly allowed in favour of the assessee. 8. Next Ground is about not allowing deduction for provision for bad and doubtful debts at Rs. 706. 29 crores u/s. 36(1)(viia) as against Rs. 833. 30crores. 8. 1. In the appellate proceedings, before the FAA, the assessee argued that it had made provision for bad and doubtful debts on the basis of ....
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....lowance of contribution to SBI Retired Employees Medical Fund. During the year under consideration the assessee had contributed Rs. 20 crores towards the fund. The AO found that the assessee had in the return of income mentioned that it was a welfare measure and should be allowed as a deduction from the computation of total income even though the assessee itself had added back the sum to its income for the year under consideration. The AO did not allow the claim made by the assessee . 9. 1. Before the FAA, it was stated that the bank had been contribution every year certain amt out of its tax profits, towards contribution to SBI Employees medical Fund. The FAA held that as per the provisions of Section 40A(9) of the Act no deduction was allowable in respect of any sum paid by the assessee as an employer towards setting up or formation of or as contribution to any fund trust except where such sum was paid for the purposes and to the extent provide by sec. 36(1)(iv) and (v) and as required under any other law for the time being enforced, that the payment in question did not satisfy any of the requirements. The assessee was not entitled for deduction. 9. 2. Before us, the AR relied ....
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.... 41(4) and Income earned from foreign branches. During the course of hearing the AR relied upon the cases of Vijaya Bank(323ITR 166), State Bank of Mysore(33 SOT7)and Bank of India(ITA/2781/Mum/2011). He further stated that the Tribunal vide its Order 03. 01. 2014, in MA 371/M/14, in assessee's own case for 1996-97, had restored all the three issues back to the file of AO for fresh examination and adjudiucation. We find that the Tribunal has in its order dated 03. 01. 2014 (supra) has held as under :- "In additional Ground no. 1-3 are raised first time by the assessee and involves legal issue, therefore as prayer by the assessee the same are remitted to the record of the Assessing Officer for examination and adjudication as per law after giving a opportunity of hearing to the assessee". 5. It is apparent from the finding of the Tribunal in para 37 (Supra) that the decisions relied upon by the Ld. AR have escaped consideration, accordingly we are of the view that to that extent there is an apparent error in the impugn order of the Tribunal which requires to be rectified u/s 254(2) of the Income Tax Act. Since these issues were raised for the first time and remitted to the....
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.... had issued the relevant securities were not able to pay the amount due on redemption. The appellant treats these securities as nonperforming assets and a provision is made at a certain percentage for diminution in their value as in the case of other non-performing assets. There may be some delay on the part of the companies or the State Governments in paying the redemption amount. But, whenever the payment would be made it cannot be expected to be less than the face value. On the date of maturity, the whole of the amount of redemption money becomes due under the mercantile system of accounting followed by the appellant unless a portion of this amount is written off as bad debt. It is a real income and hence has to be taxed as such under the mercantile system followed by the appellant. Reliance in this regard is placed on State Bank of tate Bank of Travancore vs. CIT 158 ITR 102, 155 (SC) which was Travancore vs. CIT 158 ITR 102, 155 (SC) followed in Western India Oil Distributing Co. Ltd. Vs. CIT 206 ITR 359 (Bom). ITR 359 (Bom). It was held in this decision that the concept of real income should not be so read as to defeat the provisions of the Act. Extension of the concept of re....
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....concerned investment cannot be allowed while computing the income of the assessee from banking business. As held by the Hon'ble Kerala High Court in the case of Malabar Co-operative Central Bank Ltd. (supra), the banking institution as a part of business activity will have to have ready resources to meet its liability the extent of which could never be foreseen. It was held that even though the legislature has made it obligatory for the banking institutions to maintain certain percentage of its assets in the form of securities at any given day taking the interest of the public into consideration, this does not detract from the proposition that by so holding the securities, the bank is carrying on its business and securities so held are stock in trade. In the case of Bihar State Co-operative Bank Ltd. (supra), it was held by the Hon'ble Supreme Court that it is a normal mode of carrying on banking business to invest moneys in a manner that they are readily available. It was held that howsoever a security capital is employed, it is a part of normal course of business of a bank and the money which was not lend to the borrower but was invested in the form of deposits in another bank ca....