AI Drafter 
TaxTMI 
TaxTMI 
2024 (11) TMI 1158
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....ee has raised the following grounds of appeal:- "1. The Commissioner of Income-tax (Appeals) - 56, Mumbai [herein after referred to as the "CIT(A)"] erred in upholding the action of the Assessing officer ("AO") in not allowing the deduction for bad debts written off of Rs. 427,46,46,000 net of sale consideration of the non-performing asset (NPA), under section 36(i)(vii) of the Income tax Act, 1961 ("the Act"). The Appellants submit that the bad debts written off of Rs. 427,46,46,000 ought to be allowed as deduction under section 36(1)(vii) of the Act read with section 36(2) of the Act. 2. The CIT(A) erred in applying the decision of the Supreme Court in the case of Southern Technologies (2010) 187 Taxman 346 (SC) without appreciating that the decision is not applicable to the facts of the case. 3. The CIT(A) erred in not following the binding decision of the Mumbai Tribunal in the case of Bank of India (ITA No. 2833/Mum/2015) dated 08 November 2017 4. Without prejudice to ground nos. (1) to (3) above, the CIT(A) erred in upholding the action of the AO in not allowing deduction of Rs. 427,46,46,000 under section 37(1) of the Act. ....
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....pany operating in India as a branch of DBS Bank Ltd. Singapore. The assessee is engaged in banking activities permitted by the Reserve Bank of India (RBI), which includes corporate and institutional banking, retail banking, trade finance, transactional and treasury solutions. During the year under consideration, the assessee bank was operating from twelve branches in India. The bank was involved in wholesale lending (both loans and trade based) to its corporate customers. It also offered treasury solutions to its clients. The assessee was not involved in credit card services, auto loans, portfolio management and financial planning for clients. 7.1. While scrutinising the return of income, the AO noticed that the assessee has claimed a sum of Rs. 8,02,67,53,014/- as bad debt written off excess over opening provisions u/s 36(1)(viia) of the Act. The assessee was requested to explain and justify its claim for bad debts. The assessee furnished the following breakup of bad debts claimed in the computation of income:- Sl No. Particulars Amount in INR 000 1 Write Off of Bad Debts 43,66,698 2 Loss on Sale of NPA 42,74,646 3 Loss on conversion of Debt ....
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.... in the case of Tower finance infrastructure Development Corporation Limited v. JCIT 280 ITR 491 (Mad), the AO was of the opinion that the RBI guidelines cannot override the statutory provisions of Income-tax. Further heavily relying upon the decision of the Hon'ble Supreme Court in the case of Southern Technologies Limited vs. JCIT 320 ITR 577 (SC), the AO came to the conclusion that the claim of the assessee for bad debt on account of loss on sale of NPA are not bad debt written off as irrecoverable in the accounts and not allowable u/s 36(1)(vii) of the Act. 8. The assessee carried the matter before the ld. CIT(A) but without any success. 9. Before us, the ld. Counsel for the assessee reiterated the claim of write off as bad debt. It is the say of the ld. Counsel for the assessee that both the lower authorities have grossly erred in placing heavy reliance on the decision of the Hon'ble Supreme Court in the case of Southern Technologies Limited (supra), which is totally on different context and, therefore, not applicable on the facts of the case in hand. Per contra, the ld. D/R strongly supported the findings of the ld. CIT(A). 10. We have given a thoughtful considera....
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.... was calculated as per Para 8 of the Prudential Norms, 1998. Accordingly, the P & L Account was debited and corresponding amount was shown in the Balance Sheet. The Department sought to add back Rs. 81,68,516 to the taxable income on the ground that the provision for bad and doubtful debt was not allowable under section 36(1)(vii) of the Income-tax Act. The appellant claimed that the "Provision for NPA", however, represented "loss" in the value of assets and was, therefore, allowable under section 37(1) of the Income-tax Act. This claim of the appellant was dismissed on the ground that the provisions of section 36(1)(vii) of the Income-tax Act could not be by-passed. ******************************************************************************** 25. Prior to 1-4-1989, the law, as it then stood, took the view that even in cases in which the assessee(s) makes only a provision in its accounts for bad debts and interest thereon and even though the amount is not actually written off by debiting the P&L Account of the assessee and crediting the amount to the account of the debtor, assessee was still entitled to deduction under section 36(1)(vii). See CIT v. Jw....
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....t I of Schedule VI to the Companies Act, 1956 an amount could be first included in the list of sundry debtors/loans and then deducted from the list as "provision for doubtful debts". However, these are matters of Presentation of Provisions for doubtful debts even under the Companies Act and have nothing to do with taxability under the Income-tax Act. One more aspect needs to be mentioned. Section 36(1)(vii) is subject to sub-section (2) of section 36. The condition incorporated in section 36 of the Income-tax Act, which was not there in section 10(2)(xi) of the 1922 Act, is that the amount of debt should have been taken into account in computing the income of the assessee in the previous year. Under the Income-tax Act, the emphasis is not on the assessee being the creditor but taking into account of the debt in computing the business income. [See section 36(2)]. In CIT v. T. Veerabhadra Rao, K. Koteswara Rao & Co. [1985] 155 ITR 152 at 157 (SC), it was found that the debt was taken into account in the income of the assessee for the assessment year 1963-64 when the interest accruing thereon was taxed in the hands of the assessee. The said interest was taxed as income as it represent....
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....we do not find any merit in the impugned addition. The AO is directed to delete the addition of Rs. 4,27,46,46,000/-. Ground Nos. 1 to 5, are accordingly allowed. 14. Before parting, the AO has also relied upon the decision of the Hon'ble Madras High Court in the case of Tower finance infrastructure Development Corporation Limited v. JCIT (supra). Again, this decision is on a different context in respect of the provision for bad and doubtful debts whereas the claim of the assessee is actually write off of bad debts and not provision and as mentioned elsewhere the provisions of bad and doubtful debts have been written back in the financial statement of the assessee. The relevant findings of the Hon'ble Madras High Court read as under:- "4. Even though the assessee has raised a ground to the effect that the debts have been incurred in the course of business and the purpose for which the finance was used by the other party is not relevant for allowing the deduction of debts written off and hence, section 36(1)(vii) would apply, learned counsel appearing for the assessee has fairly submitted that the assessee is not entitled to deduction, in view of the Explanation to secti....
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.... which was claimed as loss on account of bad debt. 15.2. Referring to the analysis given for the denial of bad debt write off of NPA of Rs. 427.46 Crores considered vide Ground No. 1 to 5 above, the AO also denied the claim of this loss on conversion of debt. 15.3. When the matter was agitated before the ld. CIT(A), the assessee could not get any success. 16. Before us, the ld. Counsel for the assessee reiterated its claim of loss on conversion of debt to equity share u/s 36(1)(vii) of the Act and in alternative claimed it as a loss incurred in the ordinary course of business u/s 37(1) / u/s 28 of the Act. Per contra the ld. D/R strongly supported the findings of the ld. CIT(A) and read the operative part. 17. We have given a thoughtful consideration to the orders of the authorities below. The claim of loss can be understood from the following chart:- A Loan Outstanding 7.84 B No. of Shares issued on 30 December 2014 30,15,380 C Value of Shares at the Preferential issue Price @ INR 26 each 7.84 D Date of Receipt of Shares by Bank in Demat Account 06th Feb, 2015 E Closing Price of Shares on 06th f....
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....vant findings read as under:- "36) There is yet another aspect which still needs to be looked into. What happens when the shares are held as 'stock-in-trade' and not as 'investment', particularly, by the banks? On this specific aspect, CBDT has issued circular No. 18/2015 dated November 02, 2015. 37) This Circular has already been reproduced in Para 19 above. This Circular takes note of the judgment of this Court in Nawanshahar case wherein it is held that investments made by a banking concern are part of the business or banking. Therefore, the income arises from such investments is attributable to business of banking falling under the head 'profits and gains of business and profession'. On that basis, the Circular contains the decision of the Board that no appeal would be filed on this ground by the officers of the Department and if the appeals are already filed, they should be withdrawn. A reading of this circular would make it clear that the issue was as to whether income by way of interest on securities shall be chargeable to income tax under the head 'income from other sources' or it is to fall under the head 'profits and gains of business and profession'. Th....
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....tricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 8D of the Rules and holding that section 14A of the Act would be applicable. In spite of this exercise of apportionment of expenditure carried out by the AO, CIT(A) disallowed the entire deduction of expenditure. That view of the CIT(A) was clearly untenable and rightly set aside by the ITAT. Therefore, on facts, the Punjab and Haryana High Court has arrived at a correct conclusion by affirming the view of the ITAT, though we are not subscribing to the theory of dominant intention applied by the High Court. It is to be kept in mind that in those cases where shares are held as 'stock-in-trade', it becomes a business activity of the assessee to deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is, therefore, different from the case like Maxopp Investment Ltd. where the assessee would cont....
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....re would obviously be treated as not related to the income that is exempted from tax, and such expenditure would be allowed as business expenditure. To put it differently, such 10 (2018) 15 SCC 523 expenditure would then be considered as incurred in respect of other income which is to be treated as part of the total income." Adverting to the law as it stood earlier, this Court rejected the theory of dominant purpose suggested by the Punjab & Haryana High Court and accepted the principle of apportionment of expenditure only when the business was divisible, as was propounded by the Delhi High Court. Finally adjudicating the issue of expenditure on shares held as stock-in-trade, the following key observations were made by Justice Sikri: "50. It is to be kept in mind that in those cases where shares are held as "stock-in-trade", it becomes a business activity of the assessee to deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares b....
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....s judgment reads as follow: "36. ......... what cannot be denied is that the requirement for attracting the provisions of Section 14-A (1) of the Act is proof of the fact that the expenditure sought to be disallowed/deducted had actually been incurred in earning the dividend income............." 25. Proceeding now to another aspect, it is seen that the Central Board of Direct Taxes (CBDT) had issued the Circular no. 18 of 2015 dated 02.11.2015, which had analyzed and then explained that all shares and securities held by a bank which are not bought to maintain Statutory Liquidity Ratio (SLR) are its stock-in-trade and not investments and income arising out of those is attributable, to business of banking. This Circular came to be issued in the aftermath of CIT Vs. Nawanshahar Central Cooperative Bank Ltd.12 wherein this Court had held that investments made by a banking concern is part of their banking business. Hence the income earned through such investments would fall under the head Profits & Gains of business. The Punjab and Haryana High Court, in the case of Pr. CIT, vs. State Bank of Patiala13 while adverting to the CBDT Circular, concluded correctly that shar....
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....pra) has settled the dispute, the assessee was not required to disallow any expenditure for earning the exempt income as mentioned elsewhere. Therefore, the AO is directed to delete the suo moto disallowance. Ground No. 9 is accordingly allowed. 25. Ground No. 10 relates to the non-inclusion of the amount taxed as income of the head-office while working out adjusted total income for computing the deduction u/s 36(1)(viia) of the Act. 26. The underlying facts show that the AO has computed the adjusted total income without considering income of the head-office while working of deductions u/s 36(1)(viia) and Section 44C of the Act. 27. When this issue was brought to the notice of the ld. CIT(A), the ld. CIT(A) following the decision given in AY 2013-14 and earlier AYs, denied the claim. 28. After giving a thoughtful consideration to the orders of the authorities below, we are of the considered view that this issue needs a fresh look qua the decision taken in AY 2013-14 by the appellate authorities. Therefore, this issue is restored to the file of the AO and the AO is directed to decide it afresh after considering the facts of AY 2013-14. 29. Ground No. 10 is allowed for....
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....f expenditure, on the other hand, is operational in perspective, is solely intended for the furtherance of the enterprise. Therefore, not all one-time payments are capital in nature. As long as, such payments are for furtherance of an enterprise and do not bring into existence any tangible or intangible property, they would retain the character of revenue expense. 33. The above explanation of the assessee was dismissed by the AO who was of the firm belief that the expenditure was incurred for the purpose of expansion of the assessee's business and was not for the day to day business of the assessee. The professional fees were paid for developing the plan to be used by the assessee in future and, therefore, the expenditure was resulting in enduring benefit to assessee. Accordingly, the expenditure was not revenue expenditure and the AO added back the same. 34. Aggrieved the assessee carried the matter before the ld. CIT(A) and strongly contended that the fees were paid for services connected with developing India 2.0 plan for the Bank with focus on key areas like Macro and Regulatory Context, Potential partnerships and inorganic play. It was explained that India 2.0 plan was a....
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....the learned Law Lord stated: "When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital." This test, as the parenthetical clause shows, must yield where there are special circumstances leading to a contrary conclusion and, as pointed out by Lord Radcliffe in CIT v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC), it would be misleading to suppose that, in all cases, securing a benefit for the business would be prima facie capital expenditure "so long as the benefit is not so transitory as to have no endurance at all". There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to conside....
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.... these two categories, such a test would be a critical one. But this test also sometimes breaks down because there are many forms of expenditure which do not fall easily within these two categories and not infrequently, as pointed out by Lord Radcliffe in CIT v. Nchanga Consolidated Copper Mines Ltd. (supra), the line of demarcation is difficult to draw and leads to subtle distinctions between profit that is made "out of" assets and profit that is made "upon" assets or "with" assets. Moreover, there may be cases where expenditure, though referable to or in connection with fixed capita], is nevertheless allowable as revenue expenditure. An illustrative example would be of expenditure incurred in preserving or maintaining capital assets. This test is, therefore, clearly not one of universal application. But, even if we were to apply this test, it would not be possible to characterise the amount paid for purchase of loom hours as capital expenditure, because acquisition of additional loom hours does not add at all to the fixed capital of the assessee. The permanent structure, of which the income is to be the produce or fruit, remains the same; it is not enlarged. We are not sure wheth....
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....ger quantity of goods and earning more income and was, therefore, in the nature of revenue expenditure. We are concious that in law, as in life, and particularly in the field of taxation law, analogies are apt to the deceptive and misleading, but in the present context, the analogy of quota right may not be inappropriate. Take a case, where acquisition of raw material is regulated by quota system and in order to obtain more raw material, the assessee purchases quota right of another. Now, it is obvious that by purchase of such quota right, the assessee would be able to acquire more raw material and that would increase the profitability of his profit-making apparatus, but the amount paid for purchase of such quota right would indubitably be revenue expenditure, since it is incurred for acquiring raw material and is part of the operating cost. Similarly, if payment has to be made for securing additional power every week, such payment would also be part of the cost of operating the profitmaking structure and hence in the nature of revenue expenditure, even though the effect of acquiring additional power would be to augment the productivity of the profit-making structure. On the same a....
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.... 37. Respectfully following the decisions of the Hon'ble Supreme Court (supra), we do not find any reason to interfere with the findings of the ld. CIT(A). This Ground is accordingly dismissed. 38. Ground Nos. 2 & 3 read as under:- "2. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance of interest of Rs. 46,65,45,531/- paid to Head office without appreciating the fact that interest payable by the Indian Permanent establishment of the Foreign Bank to its HO and other overseas branches is not deductible expenses in computing the total income." 3. "Whether on the facts and circumstances of the case and in law the Ld. CIT(A) has erred in deciding the issue of interest paid to HO by the Indian PE based on decision of Special Bench of ITAT Mumbai in Sumitomo Mitsui Banking Corp Vs DDIT(IT)(2012) without appreciating the fact that the relevant order was based on Article 7(2) and 7(3) along with Protocol 8 of the Indian Japan DTAA while no such provision as to Protocol 8 is present in India Singapore DTAA." 39. The assessed computation of income in the assessment order is as under:- Particu....