Following issues were decided on the Grounds of appeal made by Assessee and Assessing Officer challenging the orders of CIT(A) in their respective appeals. The issues are identical in one or more assessment year, hence decided on consolidation basis.
1. Taxability of interest accrued on securities but not due.
Investments are made in Govt. securities, debentures, bonds having fixed rate of return. Assessee is maintaining books of account on mercantile system i.e, on accrual basis. Whether Payment of Interest accrues on day to day basis?
Referring to the decision of tribunal, high-court and Supreme Court in various cases sighted, it was held that interest accrues only on specified coupon dates and not on day to day basis. Issue was decided in favor of the assessee.
2. Disallowance u/s 14A
Onus to establish that tax-free investment was made out of own funds and not from the borrowed funds, is on the assessee. Assessee contented that its own funds exceeded investment in tax free income securities. That the matter was remitted back to the AO for fresh consideration by the tribunal while deciding appeal in AY 2001-02 & 2004-05 on the same issue. Following the same, in the present case too, matter was restored back to the file of AO for fresh adjudication, giving a reasonable opportunity of being heard to the assessee.
3. Allowability of loss booked on unmatured foreign exchange contract.
It is settled principle that deduction is allowable under the Income-tax Act in respect of those liabilities which crystalises during the previous year. If an anticipated liability is coupled with present obligation and only quantification can vary depending upon the terms of contract, then a liability is said to have crystalised on the balance sheet date. Those anticipated liabilities are not allowable which are contingent in nature. If an event has already taken place, which, in the present case, is of entering into the contract and undertaking of obligation to meet the liability, and only consequential effect of the same is to be determined, then, it cannot be said that it is in the nature of contingent liability. It was further observed that when profits are being taxed by the department in respect of such unmatured forward foreign exchange contracts then there was no reason to disallow the loss as claimed by assessee in respect of same contracts on the same footing. Assessee’s appeal allowed.
4. Allowance of amortization of securities held as investment under HTM Category.
Assessee claimed depreciation on ‘Held to Maturity’ securities. CIT(A) held that the investment under the head HTM were long-term investment, that same would not marked to market, that diminution in value was not allowable as per provisions of s.37 of the Act. Assessee submitted that since its inception and upto F.Y. 1999-2000, it had all the investments as current investments and marked them to market as per RBI requirement. Later RBI in year 2000-01 issued fresh norms for classification and valuation of investments and due to the stipulation and rules framed by RBI it had classified its investment under this category. The same issue was decided in favour of the assessee in case of Bank of Rajasthan and in case of HDFC Bank Ltd. Following the same order, issue decided in favour of the assessee.
5. Software Expenditure whether capital or revenue?
Revenue submitted that software expenditure was capital expenditure hence could not be allowed as revenue expenditure. Assessee argued that software expenditure was basically license fees paid for use of software. Ownership of the software was with vendor and not with bank. Bank had only right to use the software. In support, decision of special Bench of Delhi Tribunal in case of Amway Enterprises (111 ITD 112) and Raychem RPG Ltd (346 ITR 138) was referred. Matter was remitted back to the file of the A.O. for fresh adjudication for deciding the issue after affording a reasonable opportunity of hearing to the assessee and after considering the two judgments.
6. Exemption u/s 10(38)
It was held that the assessee was showing the shares as investments and was not treating them as stock in trade. As per the settled law an assesee can have portfolios for the shares i.e. an assessee can be an investor and a businessman as far as holding of shares is concerned. The Hon’ble Bombay High Court has also reconginsed the said principle. Considering the peculiar circumstances if the assessee was treating shares of amalgamated company as investment then it cannot be held that same were part of its business assets. As the shares were sold after a stipulated period, the assessee was entitled to claim deduction u/s. 10(38) of the Act. Issue decided in favour of the assessee.
7. Allowability of Expense on ESOP
Revenue submitted that assessee has not incurred any expenditure for issuing ESOP. It was unascertainable item of expenditure as it depended upon the option to be exercised by the employees at a future date. Assessee contented that under ESOP shares were issued to employee at below market price to retain them in company. It was a form of compensation for service rendered and clearly revenue expenditure. It was an ascertained liability that was created during the year and ESOP benefits was taxed as perquisite in the hands of employees. It was held that in the interest of justice, issue needs further verification about the terms & conditions. Matter was restored back to the file of AO for fresh adjudication, who would afford a reasonable opportunity of hearing to the assessee. Decided in favour of the assessee, in part.
8. Deduction u/s 36(2) and Provision for Bad & Doubtful Debts u/s 36(1)(vii)
Assessee had claimed deduction u/s 36(2). AO held that bad debts to the extent of recoveries should not be allowed in view that the assessee was aware of such recoveries at the time of finalization of accounts and filing of returns. AR contended that bad debts were claimed as per the provision of s.36(1)(vii) r.w.s. 36(2) of the Act. That debts were written off in the account by crediting to the party’s account and debited in the P&L A/c. and all the conditions laid down u/s.36(1)(vii) were fulfilled. Also recoveries of the subsequent year were credited to P&L account and offered for taxation in assessment year, that AO could not go into recoverability of the debt, the assessee had not to prove what steps were taken by it to recover the amount. Decided in favour of the assessee and appeal of revenue dismissed.
Further It has claimed deduction of Rs.16.87 Crore u/s 36(1)(vii)(a) being 7.5% of business income before allowing the deduction. It further contented that A.O. has made prudential provision of Rs.1.1 Crore in the books and deduction restricted to the said amount. Aggrieved assessee filed appeal with CIT(A) which had directed the A.O. to allow deduction @7.5% of revised business income computed after making adjustment of addition/deduction in the income during the assessment.
Tribunal held that AO had given a relief of Rs.1.1 Crores, but it is not clear as to how he had arrived at the said figure. It is found that the AO had ignored the total provision for bad and doubtful debts and had considered only prudential provisions. We are of the opinion that the approach of the AO was against the mandate of the provisions of s.36(1)(vii)(a) of the Act. Here it is pertinent to note that the FAA had allowed the appeal of the assessee for the earlier year on the same issue and the AO had not agitated the matter before the Tribunal. Decided against the A.O.
9. Penalty u/s 271(1)(c) in case of debatable issue.
The issue whether depreciation is computable and allowable on leased assets was debatable and the Hon’ble Bombay High Court also admitted the substantial question of law. Further the assessee neither concealed its income nor furnished inaccurate particulars of income and the claim of depreciation is continuing one, penalty in these circumstances is not exigible. Penalty levied u/s 271(1)(c) deleted.