Case Law Details

Case Name : DCIT Vs. Bank of India (ITAT Mumbai)
Appeal Number : ITA No. 3082/Mum/2015
Date of Judgement/Order : 08/11/2017
Related Assessment Year : 2009-10
Courts : All ITAT (4430) ITAT Mumbai (1461)
DCIT Vs. Bank of India (ITAT Mumbai)

Loss on Sale of Assets to ARCIL is allowable irrespective of treatment in Books of Account

We find the assessee had sold NPA.s to ARCIL, that as per the RBI instructions it did not claim the loss in the profit and loss account, that the claim was made before the Department authorities that it had suffered a loss on sale of NPA.s, that the AO and the FAA held that the assessee had not suffered real loss i.e. it was notional loss only. There is no doubt about selling of assets to ARCIL, that ARRIL is not a fake or bogus entity, that the sale has not been doubted by the AO/ FAA,that the entry in the books of accounts have been made as per the instructions of the RBI. In our opinion, following of RBI instruction by a banking company cannot be basis for denying or allowing any claim. It is said that the entries in the books of accounts are not conclusive proof of taxability of any income. What has to be seen is the substance of the transaction. Considering the fact that the assessee had suffered loss while carrying out normal business activity i.e. selling its assets. Therefore,we hold that there was no justification for disallowing the loss suffered in the transaction. Reversing the order of the FAA, we decide Ground no. 8 in favour of the assessee.

Income from Kenyan house property cannot be taxed in India

Article 6 of the DTAA entered into by India and Kenya. The assessee had excluded the house property income from computation as it was covered by the Article 6. The AO and the FAA had treated the business income and house property income as one source of income for tax purposes. But, the DTAA contains two different Articles. Business income is governed by Article 7 and Article 6 deals with house property income. Secondly, any notification or circular cannot alter the nature of income that has been specifically included in DTAA.s. Even amendment in a section of the Act would not affect the provisions of tax treaties, unless same are not rectified by both the signatories of the treaty. So, we hold that house property income had to taxed as per Article 6 of the DTAA and as per that Article income from Kenyan house property could not be taxed in India.

Deduction of amount written off under Agricultural Debt Relief and Waiver Scheme (ADRWS)

During the assessment proceedings, the AO found that the assessee had claimed deduction of Rs. 9.45 crores under the head ADRWS, it was claimed that the Govt. of India had formulated the scheme in terms of which loan given to agriculturists were either waived or reimbursed by the Govt., that in accordance with the scheme the bank waived or partly waived the loans, that in some cases claims were rejected by Govt. of India, that in such cases bank was not in a position to recover the amount from the borrowers,that the assessee wrote off such amounts.

Government of India had formulated a scheme of waiver of loans, that the assessee’ s waived the loans of the farmers either partially or fully, that later on due to technical reasons government did not pay the waived amounts to the bank, that it wrote off the disputed amounts in its books of accounts. The departmental authorities have not doubted that the loan waiver was not a part of the business activity of the assessee. It is also a fact that the assessee had written of the disputed amounts in its P&L account. Even if the written off amount is not considered allowable as per the provisions of section 37, then same will have to be allowed u/s. 28 of the Act as Trading Loss.

Full Text of the ITAT Order is as follows:-

Order u/s. 254(1) of the Income- Tax Act, 1961 (Act)

Challenging the order, dated 05/02/2015, of the CIT(A)-4, Mumbai, the Assessing Officer (AO) and the Assessee have filed cross appeals for the year under consideration. Assessee, a public sector bank, engaged in the business of banking and other related financial activities, filed its return of income on 26/06/2009, declaring income of Rs. 2,920.52 crores. Later on,a revised return was filed on 24/03/2011 revising its income to Rs. 2,820.28 crores. The AO completed the assessment,u/s. 143(3)of the Act,on 30/03/20 11, determining its income at Rs. 4,857.07 crores.

2. During the course of hearing before us,the Authorized Representative (AR) stated that the assessee was not interested in perusing the 10th 11th, and 12th grounds of appeal. Therefore,we dismiss the same, as not pressed.

He fairly conceded that grounds of appeal No. 3 and 5 stand decided against the assessee. So, we dismiss both the grounds.

ITA/3082/Mum/2015:

3. First effective ground of appeal (ground 2), raised by the AO is about deleting the addition of provision for wage revision. During the assessment proceedings,the AO had claimed a sum of Rs. 186.85 crores, being the amount of wage arrears, arrived at based on the indicative increase in the ways payable by the bank. The AO disallowed the provision on the ground that it was only an estimated increase and no agreement for the increase was entered into by the assessee during the year.

3.1. Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA)and made elaborate submissions. It also relied upon certain case laws. Referring to the orders of the FAA.s for the earlier AY.s i.e. AY.s 2008-09 and 2004- 05, he decided the issue in favour of the assessee. He held that the provision was being made for the services rendered by the employees in the past,that the income on account of those services/ efforts of the employees had already been accounted for, that in view of the settlement with Indian bank Association and various unions the wages were to be paid, that the negotiations were not concluded,that the liability had crystallized in the year under consideration.

3.2. Before us,the Departmental Representative (DR)stated that matter could be decided on merits.The AR relied upon the case of Bank of Baroda (ITA/4619/Mum/2012, dated 4/11/ 2015;AY 2008-09).

We find that the assessee had made provisions for the services rendered by the employees. There is no doubt that the assessee had to make payment once the negotiations were over. Thus, it was not an unascertained liability. So, confirming the order of the FAA, we decide the issue in favour of the assessee/

4. Next effective ground of appeal (GOA-3 &4) deals with allowing depreciation on leased assets. Representatives of both the sides agreed that issue stands decided against the AO, by the order of the Tribunal for the AY. 2008-09 (ITA/341/Mumbai/2014,dated 13/07/ 2016). Accordingly, we dismiss ground number two.

5. Last ground of appeal pertains to income of foreign branches. It was brought to our notice that while deciding the appeals for the AY. 2004-05 (ITA/5977/Mum/2011 and 6016/Mum/ 2011, dated 26/7/2017) in assessee’s own case the Tribunal had dealt with the identical issue. We are reproducing the relevant portion of the order of the Tribunal and it reads as under:

5. The next issue in this appeal of Revenue in ITA No. 6016/Mum/2011 against the order of CIT(A) in deleting/excluding the income of foreign branches For this Revenue has raised following ground No. 1: –

“On the facts and in the circumstances of the case and in law the Ld.CIT(A) erred in directing the A.O. to exclude the income of foreign branches in violation to Central Government Notification No. S.O. 2123(E) date 28.8.2008 which clearly indicates its inclusion while arriving at the total income.”

2. At the outset it is noticed that this issue has already been deliberated by the Tribunal in assessee’s own case for AY 2003-04 in ITA No. 3534/Mum/2011 vide order dated 15-06-2012 and has allowed the claim of the assessee vide Para 34 and 35 as under: –

“34. The next two grounds are interlinked, wherein the assessee has sought relief of Rs. 90,63,29,812/- in respect of profit in foreign branches. The AR submitted that complete and comprehensive submissions made before the CIT(A), who after considering the submissions, allowed the assessee’ s appeal. The AR, thus pointed out the relevant portion of the written submissions also placed before us. “The respondent had excluded the income from foreign branches based on Double Tax Avoidance Agreement entered into between the Govt. of India and the Govt. of the respective countries. The AO had granted relief only in respect of branches at Singapore and Japan and in respect of the other branches denied the benefit to the appellant. The CIT (A) allowed the claim of the respondent based on the decision of Hon’ble ITAT in appellant’s own case. The respondent submits that this issue has been decided in favour of the assessee by Supreme Court of India in CIT Vs PV.AL.Kulandagan Chettiar, reported in 267 ITR 654 which upheld the decision of ITAT Chennai in the case of PV.AL.Kulandagan Chettiar Vs ITO (3 ITD 426). The ITAT had held that “So the argument that the agreement must be so interpreted as to retain the taxation powers with the Government of India in order to prevent fiscal evasion has only to be rejected. The agreement is mainly for avoidance of double taxation. That means the income shall not be taxed at the same time in both the countries in India and Malaysia. So, if we interpret the agreement to mean that the Indian Government and the Malaysian Government both still retain even after the execution of the agreement the power to tax at the same time the same income it will only frustrate the object with which the agreement is executed”. The ITAT had therefore concluded, “As regards business profits paragraph I of Article 7 provides that the profits of an enterprise of a contracting state shall be taxable only in that contracting state. We will take it that the assessee being a resident of India, the enterprise is an Indian enterprise. So the Profits are taxable in India. But this power of India to tax, as further provided in the Article, exists only when the enterprise does not carry on business in Malaysia through a permanent establishment situated in Malaysia. This is an undisputed fact. So the right of the Indian Government to levy tax in respect of business profits of these types of Indian Enterprise as provided in opening paragraph of Article 7 is taken away because a permanent establishment is situated in Malaysia.” In the appellant’s case also in all the foreign countries the operation is carried out through its branches which is a permanent establishment situated outside India. Hence the income attributable to these branches cannot be taxed in India. This issue has also been decided in favour of the appellant by ITAT in appellant’s own case in ITA No. 1679/Mum/2001 dated 27/03/2008 for the AY 1997-98, wherein the coordinate Bench has held, “. The Learned CIT(A) after examining articles 23, 24 and 25 of the different DTAAs found that the laws in force in either of the contracting states would govern the taxation of income in the respective contracting states, i.e. credit of tax paid in one state would be given in the other state. He also found that Article 7 stated that if enterprise of one State carries on business in another State through permanent establishment then the State where the business is carried out would levy tax on the profits attributable to the permanent establishment. On analysis of these provisions the learned CIT(A) found that Article 7 of the different DTAA.s are specific provision while Articles 23, 24 and 25 are general provisions. The coordinate Bench in the case of the assessee, in the earlier year’s case held, “As a result he also found that the issue already decided by the Tribunal in assessee’s own case for the earlier years have to be followed. We do not find any infirmity in the above finding of the CIT(A). Therefore consistent with the earlier finding of the Tribunal in assessee’ s own case for the earlier years case, we do not see any merit in the ground taken by the Revenue”. The AR submitted that in the instant case also, the view should be taken in the assessee’ s favour.”

Even Hon’ble Bombay High Court also confirmed the decision of Tribunal in Income Tax Appeal No. 1630/Mum/2012 vide order dated 07-01-2015, wherein Hon’ble High Court has dismissed the Revenues contention by observing in Para 4 as under: –

“4. With the assistance of Mr. Suresh Kumar and Sanjiv Shah, we have perused the memo of Appeal. The Assessing Officer was satisfied that the benefit of the Double Taxation Avoidance Agreement is admissible provided the proof is produced in relation to payment of taxes by the Assessee abroad. In other words, if the Assessee has permanent establishment abroad, then, the Assessee would have to produce evidence regarding payment of taxes pertaining to the income of these establishments abroad. On production of such evidence, the Assessee would be entitled to the benefit. That evidence was always available and as noted by the Commissioner of Income Tax (Appeals) and the Tribunal. In the circumstances, the authorities did nothing but follow their earlier orders based on identical facts and circumstances. The finding of fact, therefore, cannot be termed as perverse or vitiated by any error of law apparent on the face of the record.The Appeal does not raise any substantial question of law. It is devoid of merits and is, accordingly,dismissed. No costs.”

As the issue is squarely covered in favour of assessee in assessee ’s own case, respectfully following the Hon’ble Bombay High Court and co-ordinate Bench decision, we confirm the action of the CIT(A) and deleting the addition. This issue of Revenue’s appeal is dismissed.

Considering the above,we decide last ground of appeal against the AO.

ITA/2833/Mum/2015:

6. First ground of appeal,raised by the assessee is about deduction u/s. 36(1)(viii) of the Act. During the assessment proceedings,the AO found that the assessee had claimed deduction u/s. 36(1)(viii) in respect of the profits earned on eligible business, that for arriving at the profits it had allocated expenses relating to eligible business based on funds deployed, that while computing the funds deployed it had considered the amount of deposits, assets, borrowings and other liabilities. However,the AO was of the opinion that it should have considered only total of assets/ liabilities. Accordingly, he reallocated the expenses and restricted the deduction u/s. 36 (1) (viii) of the Act, to Rs. 133 crores as against Rs. 150 crores, claimed by assessee,for the year under appeal.

6.1. Aggrieved by the order of AO, the assessee preferred an appeal before the FAA and made elaborate submissions. After considering the available material, he held that benefit u/s. 36(1) (viii) applied only to Financial Corporations/ Public Sector Co. Banking Co. Co-operative Bank/ Housing Finance Co. etc., that the AO had adopted right method of allocation of expenses in arriving at the profits from eligible business. Finally, confirming order of AO, he dismissed the appeal of the assessee.

6.2. It was brought to our notice that identical issue was deliberated and decided upon by the Tribunal on 13/7/2016, while deciding the Appeals for AY.s 2007-08 and 2008-09 (ITA.s 2966/Mum/2014 and 3085/Mum/2014 and other two appeals). We would like to reproduce paragraph No. 14, of the said order of the Tribunal and it reads as under :-

“14. We shall now take up individual issue urged in the years under consideration. In AY 2007-08, the assessee is contesting the dis allowance of claim made u/s 36(1)(viii) of the Act. We notice that this issue has been decided in favour of the assessee by the co-ordinate bench of Tribunal in AY 2006-07. The tax authorities had rejected the claim by holding that the provisions of sec. 36(1)(viii) shall be applicable only to “financial Corporations”. The Tribunal has held that the banks will also be covered by the inclusive definition given for the expression “financial Corporations” in sec. 36(1)(viii) of the Act. Consistent with the view taken therein, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow the claim.

Respectfully following the above order of the Tribunal, we decide first Ground of appeal in favour of the assessee.

7. Next ground of appeal is with regard to dis allowance made u/s. 14 A of the Act. We find that the issue of 14A dis allowance was dealt by the Tribunal, while deciding the appeal for AY.s. 2007-08 and 2008-09 (supra). We are reproducing paragraphs no. 8-11 of the order of the Tribunal,dated 13/07/20 16 and same reads as under :-

“8. Now we shall take up the appeals filed by the assessee. The first common issue urged by the assessee in both the years relate to the dis allowance made u/s 14A of the Act. In both the years under consideration, the AO worked out the dis allowance u/s 14A of the Act in accordance with Rule 8D of the Act. The Ld CIT(A) took note of the binding decision rendered by Honorable Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd (328 ITR 81), wherein it was held that the provisions of Rule 8D shall apply from AY 2008-09 on wards and for M/s. Bank of India 4 earlier years, the dis allowance should be worked out on a reasonable basis. Accordingly he upheld the workings for AY 2008-09. However, for AY 2007-08, the Ld CIT(A) took the view that the dis allowance worked as per the provisions of Rule 8D would be reasonable dis allowance.

9. Before us the Ld A.R contended that the Tribunal has restricted the dis-allowance to 1% of the exempt income in AY 2006-07. He further submitted that (a) the interest free funds available with the assessee is in far excess of the investments. (HDFC Bank (284 CTR 409)(Bom)) (b) All investments are held as stock in trade and hence the provisions of sec. 14A should not be applied to it. (India Advantage Securities (ITA 1131 of 2013) The Ld A.R placed his reliance on various case laws.

10. In respect We heard Ld D.R and perused the record. We notice that the Tribunal has restricted the dis allowance to 1% of the exempt income in AY 2006-07 and earlier years. Consistent with the view taken therein we direct the AO to restrict the dis allowance to 1% of the exempt income in AY 2007-08, since the provisions of Rule 8D are not applicable to this year.

11. In respect of AY 2008-09, the assessee is raising new contentions before us, viz., the investments are held as stock in trade, interest free funds available with it are in far excess of the investments etc. The Ld D.R submitted that the claim of the assessee that it is holding all its investments as stock in trade is farfetched one, since the assessee is required to hold certain funds as pure investments. We notice that this aspect of the submissions require verification at the end of the AO. Accordingly, we set aside the orders passed by Ld CIT(A) on this issue and restore the same to the file of the AO with the direction to examine this issue afresh in the light of fresh explanations that may be furnished by the assessee by duly considering various case laws relied upon by the assessee.”

Considering the above, we remit the issue to the file of the AO. He is directed to follow the directions of the Tribunal for earlier years. Accordingly, second ground is partly allowed.

8. Restriction of deduction u/s.36(1)(viia)is the subject matter of third ground of appeal.The AR and DR agreed that the issue stands decided in favour of the assessee by the Tribunal.We are reproducing the relevant portion of the order (ITA.s/5977 & 6016/Mu m/ 2011, date 26-07-2017)and it reads as under:

2. Briefly stated facts are that the assessee claimed deduction of bad debts amounting to Rs. 508,90,28,469/- out of which the AO during the course of original assessment proceedings u/s 143(3) of the Act restricted the claim at Rs. 132,93,97,624/- and disallowed the balance bad debts of Rs. 375,96,30,845/-. The case was reopened u/s. 147 of the Act and claim for bad debts was disallowed further to the extent of Rs. 132,93,97,624/- and therefore, finally re-assessment framed u/s. 143(3)/147 of the Act dated 31-12-2007. The entire claim of bad debts of Rs. 508,90,28,469/- was disallowed. Aggrieved, assessee preferred the appeal before CIT(A), who considering the order which is already decided u/s. 147/143(3) of the Act dated 11-12-2011 confirmed the action of the AO vide Para 5 of his appellate order as under: –

XXXXX

3. At the outset, the learned Counsel for the assessee stated that exactly the identical issue has been allowed by Tribunal in assessee’s own case for the AY 2001-02 in ITA No. 1498/Mum/2011 vide order dated 09-04-2014. The Tribunal following the decision of Hon’ble Supreme Court in the case of Catholic Syrian Bank Ltd. v. CIT (2012) 343 ITR 270 (SC) allowed the claim of the assessee by observing in Para 2.5 to 2.7 as under: –

“2.5 Having considered the rival submissions and careful perusal of the record we find that on principle the CIT(A) has allowed the claim of the assessee in respect of bad debts written off, however, the quantum of the claim has been restricted in terms of the proviso to section 36( 1)(vii). It is to be noted that the proviso to section 36( 1)(vii) has been inserted to avoid the double claim in respect of the same amount and the amount of bad debts which exceeds the credit balance in the provisions for bad and doubtful debt account made under clause (viia) shall be allowable u/s 36(1)(vii). The Hon’ble Supreme Court in the case of Catholic Syrian Bank Ltd. v. CIT (supra) has held that the deduction u/s 36(1)(vii) cannot be negated by reading into the limitation of section 36(1)(viia) as it would frustrate the object of granting such deductions. An identical issue has been considered by the Hyderabad Benches of This Tribunal in the case of State Band of Hyderabad Vs. DCIT (Supra) in para 9 to 11 as under:-

“9. The Apex Court in the case of TRF Ltd. (supra) has held that any debt written off as irrecoverable should be allowed as deduction. In the case of Vijaya Bank Ltd. (supra), the Apex court has held that if the provision for bad debts debited to the P&L is netted against the current assets the provisions is an allowable deduction even if individual accounts of the debtors are not written off. In the case of Catholic Syrian bank Ltd. (supra), which was not available with the lower authorities at the time of deciding the issue, the Apex Court has held as under under:

(i) The clear legislative intent of s. 36(1)(vii) & 36(1)(viia) together with the circulars issued by the CBDT demonstrate that the deduction on account of provision for bad and doubtful debts u/s 36(1)(viia) is distinct and independent of s. 36(1)(vii) relating to allowance of bad debts. The legislative intent was to encourage rural advances and the making of provisions for bad debts in relation to such rural branches. The functioning of such banks is such that the rural branches were practically treated as a distinct business, though ultimately these advances would form part of the books of account of the head office. An interpretation which serves the legislative object and intent is to be preferred rather than one which subverts the same. The deduction u/s 36(1)(vii) cannot be negated by reading into it the limitations of s. 36(1)(viia) as it would frustrate the object of granting such deductions. The Revenue’s argument that this would lead to double deduction is not correct in view of the Proviso to s. 36(1)(vii) which provides that in respect of rural advances, the deduction on account of the actual write off of bad debts would be limited to excess of the amount written off over the amount of the provision which had already been allowed u/s 36(1) (viia) (Southern Technologies 320 ITR 577 (SC) & Vijaya Bank 323 ITR 166 (SC) referred).

10. In that case the Apex Court has held that the bank would be entitled to both the deductions, one under Clause (vii) on the basis of actual write off and another on the basis of clause (viia) in respect of mere provision. Further to prevent to double deduction, proviso to clause (vii) was inserted which says that in respect of bad debts arising out of rural advances the deduction on account of actual write off would be limited to the excess of the amount written off over the amount of the provision allowed under clause (viia). It follows that deduction u/s 36( 1)(viia) is to be allowed only on the amount of provision made for bad and doubtful debts subject to the maximum on the basis of rural advances/ income prescribed under that section. The allowance u/s 36( 1)(viia) cannot be in excess of provision for bad debts actually made in the accounts. 11. In view of the very clear principles laid down by the Apex Court in the above judgments, we deem it fit to set aside the issue to the file of the Assessing Officer to decide the issue in the light of the decisions of the Apex Court in the cases of (a) TRF Ltd. (supra) (b) Vijaya bank Ltd. (supra) and (c) Catholic Syrian BankLtd. (supra).

2.6 It is clear that the Hyderabad Benches in the case of State Bank of Hyderabad Vs. DCIT (supra) had decided this issue by following the decision of Hon’ble Supreme Court in the case of Catholic Syrian Bank Ltd. v. CIT (supra).

2.7 As regards the Introduction of Explanation 2 vide Finance Act 2013, it has been made clear in the Finance Act itself that the said Explanation will be effective w.e.f 01.04.2014 and, therefore, in our view the same is not applicable for the year under consideration. Following the decision of Hon’ble Supreme Court in the case of Catholic Syrian Bank Ltd. v. CIT as well as the decision of Hyderabad Benches of This Tribunal in the case of State Bank of Hyderabad Vs. DCIT (supra), we decide this issue in favour of the assessee and direct the AO to allow the claim in the light of the decision of Hon’ble Supreme Court.”

On the facts of the case, the learned DR has not contested the claim of the assessee that this issue is covered or not.”

4. We find that the issue has already been adjudicated by the Tribunal in assessee ’s own case for AY 2001-02 and facts being exactly identical, respectfully following the same, we allow the claim of the assessee. Further, this issue has also been decided in favour of assessee in case of Bank of Baroda in ITA No. 9195/Mum/2010 for AY 2003-04 vide order dated 12-06-2013. Respectfully, following the Tribunal decision in assessee ’s own case and consistently following the precedence, we allow the claim of the assessee. This issue of assessee ’s appeal is allowed.”

Considering the above,third ground appeal is allowed in favour of the assessee.

9. Ground of appeal No. 4 (GOA-4) pertains to deduction of amount written off under Agricultural Debt Relief and Waiver Scheme (ADRWS). During the assessment proceedings, the AO found that the assessee had claimed deduction of Rs. 9.45 crores under the head ADRWS, it was claimed that the Govt. of India had formulated the scheme in terms of which loan given to agriculturists were either waived or reimbursed by the Govt., that in accordance with the scheme the bank waived or partly waived the loans, that in some cases claims were rejected by Govt. of India, that in such cases bank was not in a position to recover the amount from the borrowers,that the assessee wrote off such amounts. However, the AO disallowed the claim made by the assessee on the ground that the amount,not paid by the Govt., had to be recovered by the assessee from the farmers. Accordingly, he made a dis allowance of Rs. 9,45,22,875/-.

9.1. Aggrieved by the order of the AO the assessee preferred an appeal before the FAA and made submissions. After considering the available material, he held that the Govt. of India had rejected the claim on account of various reasons,that the C&AG had reported several irregularities and illegalities in waiving/ writing off of the loans. Finally, he upheld the dis allowance of Rs. 9.45 crores.

9.2. Before us,the AR argued that there was considerable time lag between the making of claim by the assessee and rejection of claim by the Govt., that assessee could not trace any of the farmers, that before making a claim it was required to issue a certificate to a borrower to the effect that loan had been waived, that in the circumstances it could not recover the disputed amount that the loss suffered by assessee on account of rejection of loan by the Govt., was a normal business loss incurred by it in the course of carrying on the business. He referred to the scheme and notification No. 91 of 2008 in that regard. He also placed reliance on the judgment of Hon’ble Bombay High Court in the case of State Bank of India (Pg.s. 110- 115 of the LPB).

9.3. We find that Government of India had formulated a scheme of waiver of loans, that the assessee’ s waived the loans of the farmers either partially or fully, that later on due to technical reasons government did not pay the waived amounts to the bank, that it wrote off the disputed amounts in its books of accounts. The departmental authorities have not doubted that the loan waiver was not a part of the business activity of the assessee. It is also a fact that the assessee had written of the disputed amounts in its P&L account. Even if the written off amount is not considered allowable as per the provisions of section 37, then same will have to be allowed u/s. 28 of the Act as Trading Loss. Considering these facts and the case of State Bank of India (supra), we decide the third ground of appeal in favour of the assessee

10. Fifth ground is about dis allowance of lease premium.It is found that the Tribunal while deciding the appeals for the AY.s. 2007-08 & 2008-09, dated 13.7.2016 (supra) has dealt the issue as under:

“12. The next common issue urged by the assessee relates to the dis allowance of lease premium paid. The Ld A.R fairly admitted that this issue has been decided against the assessee by the Tribunal in AY 2006-07. We notice that the Tribunal has decided this issue against the assessee by following the decision rendered by Special Bench of Tribunal in the case of JCIT Vs. Mukund Ltd (106 ITD 231). Consistent with the view taken in the earlier years, we uphold the order passed by Ld CIT(A) on this issue.”

Following the orders for the earlier years,we allow ground no.5.

11. Next ground of appeal deals with exclusion of income of foreign branches.It was brought to our notice that,while deciding the appeal for AY. 2004-05, the Tribunal had decided the issue in favour of the assessee (supra). We have reproduced the relevant portion of the order while deciding the appeal filed by the AO at paragraph no. 5 our order. Respectfully following the same,we decide ground no. 6 in favour of the assessee.

12. Ground number seven is with regard to exclusion of income from house property at Kenya. During the assessment proceedings, the AO found that the assessee had credited and amount of Rs. 91.89 lakhs as rent received during the year under appeal. He considered the same for computing the income from house property in the original return, income at Rs. 61.64 lakhs however in the revised return declared a lower income of 9.09 lakhs from the house property. He directed the assessee to reconcile the differences and to justify the lower income offered in the revised return after considering the submission of the assessee, the AO held that the total rent received by it during the year included and amount of Rs. 75.06 lakhs received by its foreign branches, that the lower income offered in the revised return was going to the exclusion of the same from the Indian income u/s.90 of the Act.However,the AO held that the exclusion of income could not be allowed, that income of the assessee from house property had to be taxed at a figure shown in the original return. He held that income from house property located at Kenya could not be excluded.He referred to notification no. 91 of 2008 in that regard.

12.1. During the appellate proceedings,the FAA upheld the order of the AO, stating that notification did not allow exclusion of such income.

12.2. Before us,the AR referred to Article 6 of the India Kenya DTAA and stated that notification cannot override the provisions of tax treaty. The DR supported the order of the FAA.

12.3. We have perused Article 6 of the DTAA entered into by India and Kenya.The assessee had excluded the house property income from computation as it was covered by the Article 6. The AO and the FAA had treated the business income and house property income as one source of income for tax purposes. But, the DTAA contains two different Articles. Business income is governed by Article 7 and Article 6 deals with house property income. Secondly, any notification or circular cannot alter the nature of income that has been specifically included in DTAA.s. Even amendment in a section of the Act would not affect the provisions of tax treaties, unless same are not rectified by both the signatories of the treaty. So, we hold that house property income had to taxed as per Article 6 of the DTAA and as per that Article income from Kenyan house property could not be taxed in India. Reversing the order of the FAA, we allow Ground no. 7.

13. Dis allowance of loss of Rs. 49.35 crores,on sale of assets to Asset Reconstruction Company of India Ltd. (ARCIL),is the subject matter of ground number eight.During the assessment proceedings,the AO directed the assessee to file details on account of loss claimed.As per the AO,the assessee had only submitted that the deduction had been claimed on account of sale of NPAs to ARCIL, that it did not provide any other justification in support of the claim. He held that provisions of section 36(1)(viia)dealt with non-performing assets, that there was no justification for allowing the loss on sale of NPA.s when provision for the same had been allowed in the earlier years.He held that there was no actual loss arising on sale of assets to ARCIL. Finally, he disallowed the amount claimed by the assessee.

13.1. During the appellate proceedings, before the FAA, the assessee argued that loss had arisen on account of sale of advances to ARCIL enterprise less than the Book value, that same was not debited to P&L account as per the guidelines of the RBI, that the resultant loss had to be adjusted against the provisions held, that the loss had occurred in the course of carrying on banking business. After considering the available material,he held that the assessee had not debited the said claim of loss in its profit and loss account,that no material evidences were furnished to establish that the claim made by the assessee was genuine. Finally, upholding the order of the AO, he dismissed the ground, raised by the assessee.

13.2. Before us,the AR contended that the assessee had sold its assets,that it had incurred loss, that selling of assets was part of the normal business activity to ARCIL. The DR supported the order of the FAA and stated the claim was made in the computation of income, that it was not part of the profit and loss account.

13.3. We have heard the rival submissions and perused the material before us. We find the assessee had sold NPA.s to ARCIL, that as per the RBI instructions it did not claim the loss in the profit and loss account, that the claim was made before the Department authorities that it had suffered a loss on sale of NPA.s, that the AO and the FAA held that the assessee had not suffered real loss i.e. it was notional loss only. There is no doubt about selling of assets to ARCIL, that ARRIL is not a fake or bogus entity, that the sale has not been doubted by the AO/ FAA,that the entry in the books of accounts have been made as per the instructions of the RBI. In our opinion, following of RBI instruction by a banking company cannot be basis for denying or allowing any claim. It is said that the entries in the books of accounts are not conclusive proof of taxability of any income. What has to be seen is the substance of the transaction. Considering the fact that the assessee had suffered loss while carrying out normal business activity i.e. selling its assets. Therefore,we hold that there was no justification for disallowing the loss suffered in the transaction. Reversing the order of the FAA, we decide Ground no. 8 in favour of the assessee.

14. Last effective ground of appeal (GOA-9) is about applicability of provisions of section 115 JB of the Act. We find that identical issue was decided in favour of the assessee by the Tribunal, while deciding the appeal for the AY.s. 2007-08 and 2008-09 (supra) in following manner:

“13. The next common issue urged by the assessee relates to the applicability of provisions of sec. 115JB to it. This issue has been decided in favour of the assessee in AY 2006-07, wherein the Tribunal has followed the decision rendered in the assessee ’s own case in ITA No. 1498/Mum/2011 relating to AY 2001-02. Consistent with the view taken in AY 2006-07, we set aside the order passed by Ld CIT(A) on this issue and hold that the provisions of sec. 115JB shall not be applicable for both the years under consideration.”

Respectfully, following the above,we allow last effective ground of appeal in favour of the assessee.

As a result, appeal filed by the assessee is partly allowed and appeal of the AO stands dismissed.

Order pronounced in the open court on 08th November, 2017.

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Category : Income Tax (25503)
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Tags : ITAT Judgments (4610)

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