Section 36(1)(vii) doesn’t require to establish that debts have become bad before writing off

DCIT Vs ICICI Bank Limited (ITAT Mumbai)

ITAT Mumbai held that post amendment to provisions of section 36(1)(vii) of the Income Tax Act as effective from 1^st April 1989, the Act does not require the assessee to establish that the debts have in fact become bad before writing off. Accordingly, addition with regard to disallowance of claim of write off of bad debts duly deleted by CIT(A).

Facts- The assessee has claimed bad debts written off to the tune of Rs.15,03,06,07,093/- u/s. 36(1)(vii) of Income Tax Act, 1961. During assessment proceedings the Assessing Officer disallowed assessee’s claim of write off of bad debts to the extent of Rs.769,75,10,766/-. CIT(A) deleted the said addition. Being aggrieved, revenue has preferred the appeal.

Conclusion- Under the old provisions of section 36(1)(vii) of the Act as were applicable prior to 1^st April, 1989, it was mandatory to establish before writing off that the debts have become bad. After amendment (effective from 1^st April, 1989) the requirement of section 36(1)(vii) as explained by Hon’ble Apex Court in the case of TRF Ltd.(supra) is, it is sufficient if the bad debt is written off as irrecoverable in accounts of the assessee. The Act does not require the assessee to establish that the debts have in fact become bad before writing off.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

These cross appeals by the Revenue and the assessee are directed against the order of Commissioner of Income Tax (Appeals)-7, Mumbai [ in short ‘the CIT(A)’] dated 29/09/2010, for the assessment year 2003-04.

2. The Revenue has assailed the order of CIT(A) by raising following grounds of appeal:

1. “On the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in allowing bad debts written off amounting Rs.769,75,10,766/-.”

2. “On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in allowing business/capital losses in respect of ICICI Information Technology Incubator Fund amounting to Rs.141,18,96,708/-“.

3. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the additions of non cash write back amounting to Rs.19,35,46,838/-“.

4. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition made by the AO relating to interest expenses directly attributable to earning the income u/s. 10(23G) of the I.T. Act”.

5. “On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in directing the AO to re-compute the exemption claimed on tax free interest u/s.10(15) of the I.T. Act”.

6. “On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in deleting the additions of depreciation on leased assets amounting to Rs.232,25,76,303/-

7. “On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in allowing the deduction u/s.80M of the I.T. Act amounting to Rs.156,34f12,743/-

8. “On the facts and in the circumstances of the case and in law, the “Ld. CIT(A) erred in deleting the notional interest taken for the purpose of determining the annual value u/s.23(l)(a) of the I.T. Act amounting to Rs.1,14,90,085/-“.

9. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowances of deduction u/s.36(l) (vii) of the IT. Act amounting to Rs.99,50,38,623/-“.

3. The appeal of Revenue is decided in seriatim of grounds raised.

Bad Debts Written Off:

4. Both sides made exhaustive submissions in respect of ground No.1 of appeal. The assessee has claimed bad debts written off to the tune of Rs.15,03,06,07,093/- u/s. 36(1)(vii) of Income Tax Act, 1961 [in short ‘the Act’]. During assessment proceedings the Assessing Officer disallowed assessee’s claim of write off of bad debts to the extent of Rs.769,75,10,766/-. During the period relevant to assessment year under appeal, the assessee purportedly has written off bad debts of nearly 9740 entities including companies, firms, individuals, etc. This includes bad debts of erstwhile Anagram Finance Ltd. (AFL), merged with the assessee. The assessee furnished the details of parties where bad debts written off were over Rs.1.00 crore. The Assessing Officer categorized the cases of bad debts written off. In the first category he selected the companies where the bad debts written off were substantial and after making detailed observations in each of the case, rejected assessee’s claim of bad debts written off. Thereafter, the Assessing Officer selected another bunch of parties, where the bad debts written off exceeded Rs.1.00 crore. The Assessing Officer after dealing with each of the companies, rejected assessee’s claim of bad debts written off aggregating to Rs.30,87,11,788/-. The Assessing Officer further bunched the entities into a category where the assessee had claimed bad debts written off but documents/evidences were allegedly not furnished to the satisfaction of Assessing Officer to come to a conclusion that debts had indeed become bad. Such number of cases include 18 entities and the aggregate of the bad debts written off in respect of such cases was Rs.46,89,50,366/-. The next bunch of bad debts written off was in respect to erstwhile AFL. The Assessing Officer rejected the assessee’s claim of bad debts written off in respect of debtors of AFL for the reason that the assessee failed to prove that the debts have become bad, no material or evidences were allegedly furnished to substantiate bad debts. According to the Assessing Officer debts could not be written off in accounts of the assessee as the claim is made after accounts of the assessee are audited and finalized. He further observed that the action of the assessee Bank appears to be an after thought exercise to reduce tax liability. Thus, the Assessing Officer disallowed assessee’s claim of bad debts written off of erstwhile AFL to the tune of Rs.49,62,08,864/-. The Assessing Officer has also disallowed assessee’s claim of write off of fees amounting to Rs.62,09,66,661/-. Thus, the Assessing Officer made addition made in respect of bad debts written off aggregating to Rs.769,57,10,766/-. Aggrieved by the addition made in assessment order dated 28/02/2006, the assessee carried the issue in appeal before CIT(A). The CIT(A) following the order of his predecessor in assessment years 2000-01, 2002-03 and 2004-05 deleted the addition, summarily.

5. Shri P.C. Chhotaray representing the Department made exhaustive submissions assailing the findings of CIT(A) in respect of bad debts written off . The Ld. Departmental Representative submitted that the assessee has failed to substantiate that the bad debts written off had indeed become “Bad”. The ld. Departmental Representative in a manner similar to detailed discussion made by the Assessing Officer in the assessment order divided the parties into different categories in respect of which the assessee had written off bad debts. He pointed that claim of bad debts in respect of nine big companies aggregating to Rs.498.98 crores constitute approximately 65% of bad debts disallowed by the Assessing Officer. The nine parties in respect of which bad debts have been written off by the assessee and rejected by the Assessing Officer are:

6. The ld. Departmental Representative submitted that the CIT(A) while deleting the addition failed to consider the fact that Dabhol Power Corporation was under liquidation and the Hon’ble High Court had appointed Receiver to take possession of the properties of said company. The loan was secured by assets and guarantees. The assessee hastily wrote off Rs.220 crores without making efforts to recover the amount. The assessee did not wait for the final outcome of the decision of Hon’ble Bombay High Court as the matter was subjudice. The decision to write off of bad debts from the said company was taken in a biased manner with the sole motive of reducing tax liability.

7. The ld. Departmental Representative made detailed submissions in respect of other companies as well giving reasons as to how the decision of write off of bad debts by the assessee was not prudent and was taken in haste to suppress the taxable income. The various arguments raised by ld. Departmental Representative in respect of other companies is summed up as under:-

– The assets were expensive and valuable.

– Loan secured against assets and guarantees.

– Debts assigned to ARCIL.

– Debts written off casually and in an arbitrary manner without justification.

– No evidence to show that the debts had become bad.

8. In respect of bad debts written off of erstwhile AFL, the ld. Departmental Representative submitted that the assessee made claim of write off of bad debts to the tune of Rs.49.62 crores of erstwhile AFL in the revised return. The claim was made after the accounts of the Bank were audited u/s. 44AB of the Act. The Auditors had not made any observation that the amounts were written off in the accounts as irrecoverable. The details of expenses does not indicate that the bad debts written off have been debited to P&L Account. The Assessing Officer has categorically observed that there is nothing to show that such huge amount of debts involving such a large number of parties is a bad debt. The ld. Departmental Representative strongly supported the findings of Assessing Officer in rejecting assessee’s claim.

9. With regard to fee written off, the ld. Departmental Representative submitted that the claim was made in the revised return on the ground that it was inadvertently omitted to be claimed in the original return. The assessee had not furnished any details before the Assessing Officer to show that the fees was in fact irrecoverable and hence, the debit had become bad. As in the case of debtors of AFL the Auditors have not reported that any fee is to be written off as irrecoverable.

10. Likewise, in respect of bunch of debtors (comprising of twenty parties), where the bad debts written off exceeds Rs. 1.00 crore, the submissions of ld. Departmental Representative are summed up as under:

(i) The debits could not have been allowed in the impugned assessment year;

(ii) The action of the assessee in writing off was not bonafide and taken in haste;

(iii) The assessee did not allow recovery process to initiate;

(iv) Loans were fully secured; and

(v) Write off is premature.

11. The ld. Departmental Representative further pointed that there was another set of entities in respect of which the assessee has claimed bad debts written off where no explanation was furnished for treating the debts as bad.

12. Assailing the findings of CIT(A) submitted that CIT(A), he has summarily allowed the appeal of assessee stating it to be covered in favour of the assessee without examining the facts and dealing with each of the parties as was done by the Assessing Officer. He emphasized that there are series of decisions explaining and elaborating the meaning of word “Bad”. The CIT(A) has failed to examine assessee’s claim of bad debts written off. No exercise was carried out by CIT(A) to ascertain whether the debts had become really irrecoverable or there was any ray of hope to recover the debts that have been declared by the assessee as bad debts and has thereafter been written off.

13. Per contra, Aarti Visanji appearing on behalf of the assessee vehemently supported the order of CIT(A) in deleting the addition made by Assessing Officer in respect of writing off of bad debts. The ld. Counsel for the assessee submitted that during the course of assessment proceedings the criteria for written off of bad debts was explained to the Assessing Officer. The ld. Counsel for the assessee referred to letter dated 20/01/2006 at page 1 of the Paper Book. She pointed that debts were written off as bad debts due to continuous default in payment of dues by the borrowers for various reasons viz. project overruns, substantial cost escalations, pressure on liquidity leading to non-payment of wages or statutory dues, continued cash losses for more than one year, negative networth, unrealizable securities, stagnation in business, adverse market conditions, etc. She submits that before writing off the amounts as irrecoverable the assessee Bank makes an evaluation of individual borrower’s account. There is a bonafide assessment of each borrower. Wherever loans become bad, either suit is filed before the Debt Recovery Tribunal or winding up petitions are filed before Hon’ble Court. Where loans are advanced for larger projects, the assessee bank was part of the consortium of lenders, the loan is secured by the assets and in case of default or where the situation arises leading to sale of assets, the assessee gets is prorate share as part of consortium. She further submitted that even if the loans are secured in some cases it becomes difficult to liquidate assets of the borrower on account of lengthy procedures or obsolete deteriorated machinery. In case of consortium lending sometimes all constituents of the consortium does not concur to the sale of the asset. The ld. Counsel for the assessee pointed that in some of the cases assets of the defaulting companies were assigned to Asset Reconstruction Company India Limited (ARCIL). However, despite best efforts sometimes even ARCIL failed to sell the assets be it land or building. The ld. Counsel for the assessee submits that in so far as nine companies which have been specifically referred to by the Assessing Officer and the Ld. Departmental Representative is concerned, the assets of the defaulting companies were assigned to ARCIL. Whatever amounts have been recovered by ARCIL that has been offered to tax by the assessee in the year of receipt. The ld. Counsel for the assessee gave a specific example of Spice Petrochemical Ltd., wherein an amount of Rs.139.96 crores was outstanding. The assessee was part of consortium for advancing loans. The assessee has written off Rs.100.00 crores as the amount had become irrecoverable, loans advance were partly secured. The consortium assigned the assets of the company to ARCIL against security for Rs.101.00 crores. The security receipts were redeemable against recovery by ARCIL, if any. Till 31/03/2022 security deposit of Rs.100.4 crores was yet to be redeemed due to non-recovery by ARCIL. Similarly, in respect of other companies viz. Dabhol Power Company, Uniworth Ltd., Daewoo Motor India Limited, Sangli Industries Ltd., IFB Industries Ltd., DCM Hundai Ltd., Balaji Industrial Corporation, Akai Impex Limited, etc. irrecoverable amount was written off as bad debts. The ld. Counsel for the assessee furnished a chart giving the details of the steps taken by Bank to recover the amounts from the companies referred above and the reasons for write off of debts of the said companies.

14. The ld. Counsel for the assessee submits that after amendment to section 36(1)(vii) of the Act w.e.f. 01/04/1989, it is not obligatory on the part of assessee to prove that the debt has turned bad, if the debt is written off as irrecoverable in the books of account, the same is sufficient to claim it as bad. In support of this contention the ld. Counsel for the assessee placed reliance on the following decisions:

(i) TRF Ltd. vs. CIT , 230 CTR 14 (SC)

(ii) Vijaya Bank vs. CIT, 323 ITR 166 (SC)

She further referred to the order of Tribunal in assessee’s own case for the Assessment Year 2004-05 and 2005-06, wherein the Tribunal had restored the issue back to the file of Assessing Officer in light of decision in the case of Vijaya Bank (supra). In the order giving effect, the Assessing Officer fully allowed bad debt written off by the assessee. The ld. Counsel for the assessee further referred to CBDT Circular No.12/2016 dated 30/05/2016. She submitted that CBDT referred to the decision in the case of TRF(supra) and clarified that claim of any debt or part thereof in any previous year shall be admissible u/s. 36(1)(vii) of the Act, if it is written off as irrecoverable in the books of account of the assessee for that previous year and it fulfills the conditions stipulated in sub-section (2) of section 36 of the Act. She emphasized that CBDT Circular has clarified that no appeals are to be filed by the Department on this ground and appeals filed may be withdrawn/not pressed.

15. We have heard the submissions made by rival sides and have examined the orders of authorities below. We have also perused the decisions on which both sides have placed reliance in support of their respective arguments.

16. At the outset it is observed that the assessee has written off bad debts to the tune of Rs.1503,06,07,093/- u/s. 36(1)(vii) of the Act. The Assessing Officer while analyzing the debts written off by the assessee has rejected the claim of assessee to the extent of Rs.769,75,10,766/-. The remaining claim of the assessee has been accepted by the Assessing Officer. While examining the claim of bad debts written off, the Assessing Officer has segmented the debtors into large debtors, bad debt written off more than Rs.1.00 crore, bad debts in respect of which allegedly vague explanation has been offered by the assessee, bad debts in respect of erstwhile AFL and fees written off. It is an undisputed fact that the assessee has written off bad debts in the books of account. The provisions of section 36(1)(vii) were amended w.e.f. 1^st April 1989. The Hon’ble Apex Court in the case of TRF Ltd.(supra) after analyzing the provisions of section 36(1)(vii) of the Act prior to amendment and post amendment held that after 1^st April, 1989 it is not necessary for the assessee to establish that the debt in fact has become irrecoverable. It is enough if bad debts are written off as irrecoverable in accounts of the assessee. In line with the aforesaid decision CBDT issued Circular No. 12/2016 clarifying the legislative intent behind the amendment and the law settled by Hon’ble Apex Court in the case of TRF Ltd.(supra) with regard to admissibility of claim of deduction of bad debts u/s. 36(1)(vii) of the Act. For the sake of completeness the relevant extract of the said Circular is reproduced herein below:

“2. Direct Tax Laws (Amendment) Act, 1987 amended the provisions of sections 36(1)(vii) and 36(1)(vii) and 36(2) of the Income Tax Act 1961. (hereafter referred to as the Act) to rationalize the provisions regarding allowability of bad debt with effect from the I^st April, 1989.

3. The legislative intention behind the amendment was to eliminate litigation on the issue of the allowability of the bad debt by doing away with the requirement for the assessee to establish that the debt, has in fact, become irrecoverable. However, despite the amendment, disputes on the issue of allowability continue, mostly for the reason that the debt has not been established to be irrecoverable. The Hon’ble Supreme Court in the case of TRF Ltd. In CA Nos. 5292 to 5294 of 2003 vide judgment dated 9.2.2010, has stated that the position of law is well settled. “After 1.4.1989, for allowing deduction for the amount of any bad debt or part thereof under section 36(1)(vii) of the Act, it is not necessary for assessee to establish that the debt, in fact has become irrecoverable; it is enough if bad debt is written off as irrecoverable in the books of accounts of assessee”

4. In view of the above, claim for any debt or part thereof in any previous year, shall be admissible under section 36(l)(vii) of the Act. if it is written off as irrecoverable in the books of accounts of the assessee for that previous year and it fulfills the conditions stipulated in sub section (2) of sub-section 36(2) of the Act.

5. Accordingly, no appeals may henceforth be filed on this ground and appeals already filed, if any, on this issue before various Court/Tribunals may be withdrawn/not pressed upon.”

17. The main plank of arguments by the ld. Departmental Representative is that the assessee has failed to establish that debts that have been written off had in fact become bad. In support of this contention the ld. Departmental Representative has placed reliance on various case laws. The requirement to establish that the debts have become bad was done away vide amendment effective from 1^st April, 1989. Under the old provisions of section 36(1)(vii) of the Act as were applicable prior to 1^st April, 1989, it was mandatory to establish before writing off that the debts have become bad. After amendment (effective from 1^st April, 1989) the requirement of section 36(1)(vii) as explained by Hon’ble Apex Court in the case of TRF Ltd.(supra) is, it is sufficient if the bad debt is written off as irrecoverable in accounts of the assessee. The Act does not require the assessee to establish that the debts have in fact become bad before writing off. The CBDT vide Circular dated 30/05/2016 (supra) in an unambiguous manner explained the mandate of section and the law as explained by Hon’ble Apex Court in the case of TRF Ltd.(supra). Though the findings of CIT(A) in the impugned order on the issue are primarily based on the order of CIT(A) for assessment years 2001-02, 2002­03 and 2004-05 without any discussion, but we find no error in the conclusion in deleting the addition. Hence, ground No.1 raised in appeal by the Revenue is dismissed.

18. The ground No.2 of appeal by the Revenue is with respect to business/capital loss in respect of ICICI Information Technology Incubator Fund. The ld. Departmental Representative submits that during assessment proceedings the assessee failed to produce relevant documents in support of its claim. He referred to the findings of Assessing Officer in para 7.6 of the assessment order. He submitted that in the absence of supporting evidences the Assessing Officer was constrained to disallow claim of the assessee.

19. Per contra, the ld. Counsel for the assessee supporting the findings of CIT(A) prayed for dismissing ground raised by the Revenue. The ld. Counsel for the assessee submits that the erstwhile ICICI Ltd. had made investment in ICICI Information Technology Fund amounting to Rs.535.97 crores and in ICICI Technology Incubator Fund Rs.4.40 crores. Both the venture funds had made losses since assessment year 2000-01 and 2001-02, respectively. The total loss made by ICICI Technology Incubator Fund was to the tune of Rs.1.13 crores. Hence, on redemption of units the assessee was paid back lesser amount to the extent of losses. Hence, the assessee claimed the losses of Rs.141.18 crores as per the provisions of section 115U of the Act. The assessee had furnished details in the prescribed Form No.64 in respect of the gains and losses from the venture capital fund. The Assessing Officer selectively rejected assessee’s claim of losses from ICICI Information Technology Fund Rs.140.05 and ICICI Technology Incubator Fund Rs.1.13 crores. The CIT(A) after examining the details furnished by the assessee allowed the claim.

20. We have heard the submissions made by rival sides and have examined orders of authorities below. A perusal of documents on record reveals that the assessee had furnished audit report in Form No.64 before the Assessing Officer. The audit report in Form -64 for ICICI Information Technology Fund is at pages 48 to 56 of the paper book and audit report in Form-64 for ICICI Technology Incubator Fund is at page-57 to 63 of the paper book. The CIT(A) has given a categoric finding that the Assessing Officer has selectively considered Form -64 furnished by the assessee for respective funds. The Assessing Officer has ignored various losses under respective heads of income and has taken only short-term capital gain of Rs.32.00 lacs from ICICI Technology Incubator Fund. There is no justification for adopting such selective approach by the Assessing Officer. The CIT(A) after examining the documents on record allowed assessee’s claim on the basis of Form-64. We see no infirmity in findings of the CIT(A) on this issue. The ground No.2 raised by the Revenue is devoid of any merit, hence, dismissed.

21. In ground No.3 of appeal, the Revenue has assailed deleting of addition in respect of non-cash right back amounting to Rs.19.35 lacs. The ld. Counsel for the assessee submitted at the outset that this issue is recurring starting from assessment year 1987-88 in the case of erstwhile ICICI Ltd. Thereafter, in assessee’s own case for assessment year 2004-05 and 2005-06, the Tribunal has decided the issue in favour of assessee. The ld. Counsel for the assessee submits that the assessee has actually received the amounts, hence, the amounts are not taxable u/s. 41(4) of the Act.

22. The Ld. Departmental Representative vehemently defended the assessment order in respect of addition made u/s. 41(4) of the Act, however, he fairly admitted that this issue has been considered by the Tribunal in assessee’s own case in the subsequent Assessment Years i.e. 2004-05 and 2005-06 in appeal by the Department.

23. Both sides heard. We find that the issue relating to addition u/s. 41(4) of the Act in respect of write back is perennial. Even during the period of erstwhile identity ICICI Ltd., addition u/s. 41(4) of the Act was made by the Assessing Officer, the CIT(A) deleted the same. The Revenue carried the issue in appeal before the Tribunal. The Tribunal upheld the findings of CIT(A) in assessee’s own case for Assessment Year 2004-05 and 2005-06 in ITA NO.6137/Mum/2008 and 5276/Mum/2013, respectively. The Revenue challenged the deletion of addition of non-cash back u/s. 41(4) of the Act. The Co-ordinate Bench vide order dated 03/11/2017, common for the Assessment Year 2004-05 and 2005-06 placing reliance on the earlier orders of the Tribunal in the case of ICICI Ltd. restored the issue back to the file of Assessing Officer. For the sake of completeness the relevant extract of the said order by the Co-ordinate Bench in assessee’s own case is reproduced herein below”

“21. We have heard rival contentions and perused the material available on record. Learned Counsels appearing for both the parties have agreed before us that the issue is covered by the decision of the Tribunal in the preceding assessment years. Notably, in assessment year 2000–01, the Tribunal while deciding identical issue in ITA no.4657/Mum./2004 and ITA no.4826/Mum./2004, dated 31st January 2017, has restored the matter back to the file of the Assessing Officer for considering afresh. In fact, in assessment year 2002–03 also in assessee’s own case, the Tribunal while deciding identical issue in ITA no.836/Mum./2008 and ITA no.392/Mum./2008 dated 7th July 2017, has restored the issue to the Assessing Officer for considering afresh keeping in view the directions of the Tribunal in the preceding assessment year. Therefore, consistent with the view expressed by the Tribunal in the preceding assessment year as referred to above, we restore the issue to the file of the Assessing Officer for considering afresh with similar direction and only after reasonable opportunity of being heard to the assessee. Ground no.4, raised by the Revenue is allowed for statistical purposes.”

In light of above order of Tribunal, we restore this issue back to the file of Assessing Officer with similar directions. In the result, ground No.3 of appeal is allowed for statistical purposes.

24. The grounds No.4,5 & 7 of the appeal are inter connected, hence, taken up together for adjudication. The ld. Departmental Representative submitted that the issue in ground No.4, 5 and 7 of appeal relates to disallowance of expenditure u/s. 14A for earning income exempt from tax. The ld. Departmental Representative submitted that Hon’ble Apex Court in the case of Maxopp Investments Ltd. vs. CIT, 402 ITR 640, has held that doctrine of apportionment would apply in respect of interest expenditure. He submitted that the law laid down by Hon’ble Bombay High Court in the case CIT vs. Reliance Utilities & Power Ltd., 313 ITR 340(Bom) and CIT vs.HDFC Bank Ltd. 366 ITR 505 (Bom) is not a good law. He vehemently argued that the interest expenditure should be apportioned and disallowance should be made to the extent of apportionment of borrowed funds are utilized for earning exempt income. He further contended that for the purpose of ascertaining the fund position available for investment, the date of investment has to be assigned and not the date of balance sheet. In support of his submissions he placed reliance on the decision in the case of HDFC Bank Ltd. in MA No.18 to 20/Mum/2015 in ITA No.375/Mum/2012 decided on 31/03/2015. He submitted that the Assessing Officer has followed the theory of apportionment as approved by the Hon’ble Apex Court in the case of Maxopp Investment Ltd. vs. CIT(supra). He further submitted that when mixed funds are available apportionment should be the rule. To buttress his arguments he placed reliance on the decision of Avon Cycles (P) Ltd. vs. CIT, 53 taxmann.com 297 (P&H).

25. On the other hand, the ld. Counsel for the assessee emphatically supported the finds of CIT(A). She submitted that no interest expenses are to be apportioned as investments are made out of assessee’s own interest free funds. She pointed that as on 31/03/2003 the assessee’s own non-interest bearing funds to the tune of Rs.10972.76 crores were available, as against investment of Rs.152.20 crores. The ld.Counsel for the assessee referred to the financials of the assessee for the period relevant to Assessment Year 2003­04 at page F-4 and F-10 of the paper book. She further referred to the Tribunal order in assessee’s own case for Assessment Year 2004-05 and 2005­06, wherein disallowance made u/s. 14A was deleted.

26. We have heard submissions made by rival sides and have examined orders of authorities below. The assessee has earned income exempt from tax u/s. 10(23G) of the Act to the tune of Rs.520.11 crores. The breakup of exempt income is as under:

The Assessing Officer proportionately allocated the expenditure to the gross receipts in earning tax free income and made addition of Rs.70.90 crores. The Assessing Officer further made addition of Rs.9.95 crores in respect of income exempt from tax u/s. 10(15) of the Act. We find that similar issue had come up for consideration before the Co-ordinate Bench in assessee’s own case in appeal by the Revenue for Assessment Year 2004-05 in ITA No.6137/Mum/2008. The Tribunal decided the issue as under:

“7. We have further noted that the learned Commissioner (Appeals) while issuing fresh direction to the Assessing Officer regarding computation of net exempt income under section 10(23G) of the Act has followed his order in assessee’s own case for assessment year 2001–02. However, the Tribunal, while deciding the appeal of the Revenue in ITA no.393/ Mum./2008, dated 2nd March 2016, has restored the matter back to the file of the Assessing Officer for considering afresh. Therefore, consistent with the view taken by the Tribunal in preceding assessment year, we are inclined to restore the matter back to the file of the Assessing Officer for deciding afresh keeping in view the directions of the Tribunal reproduced herein above. At this stage, we must observe, though, the learned Departmental Representative had submitted before us that the issue relating to part disallowance of administrative expenditure was not considered earlier by the learned Commissioner (Appeals) and the Tribunal, however, we do not agree with the same. We have noted that in the preceding assessment year, the assessee itself has disallowed 1% out of the administrative expenditure while computing net exempt income under section 10(23G) of the Act. Accordingly, ground no.1 raised by the Revenue corresponding to ground no.2 raised by the assessee are allowed for statistical purposes.

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13. We have heard rival contentions and perused the material available on record. As far as disallowance of interest expenditure for computing net exempt income is concerned, we are of the view that if the investment made in exempt income yielding assets are made out of interest free funds available with the assessee, there cannot be any disallowance of interest expenditure. Therefore, what is required to be seen is whether sufficient interest free funds are available with the assessee to make investment in exempt income yielding assets. As per facts and material on record, surplus interest free funds available with the assessee far exceeds the investment made in tax free interest income yielding assets, therefore, no disallowance of interest expenditure can be made in view of the decision of the Hon’ble Jurisdictional High Court in CIT v/s Reliance Utilities and Power Ltd., [2009] 313 ITR 340 (Bom.) and CIT v/s HDFC Bank Ltd., [2014] 366 ITR 505 (Bom.). As far as disallowance of administrative expenses is concerned, it is the contention of the assessee that in the preceding assessment year, it has voluntarily disallowed 1% of the administrative expenditure attributable to earning of exempt income. However, we have noted, in assessment year 2001–02, the Tribunal while deciding the issue in Revenue’s appeal being ITA no.393/Mum./ 2008, dated 2nd March 2016, has restored the issue to the Assessing Officer for considering afresh. In view of the aforesaid, we are inclined to restore the issue to the file of the Assessing Officer for deciding afresh keeping in view the directions of the Tribunal in the preceding assessment year. Thus, ground no.2, raised by the Revenue corresponding to ground no.3, raised by the assessee are allowed for statistical purposes.”

The facts in the present appeal being similar to Assessment Year 2004-05, we see no reason to take a contrary view. The grounds No.4,5 & 7 are allowed for statistical purposes in similar terms.

27. In ground No.6 of appeal, the Revenue has assailed the findings of CIT(A) in deleting addition of depreciation on lease assets. The ld.Counsel for the assessee stated at the outset that this is a recurring issue, The Tribunal in assessee’s own case for Assessment Year 2004-05 and 2005-06 has allowed the claim of depreciation. The CIT(A) has allowed claim of assessee by following the order of Tribunal in earlier Assessment Years .

28. The Ld. Departmental Representative vehemently supporting the assessment order submitted that depreciation on leased assets was disallowed by the Assessing Officer following the earlier assessment /appellate orders for Assessment Year 1994-95 to 2002-03 treating lease transaction as finance transactions. However, he fairly submitted that the issue of depreciation on leased assets was considered by the Tribunal in assessee’s own case.

29. We have heard the submissions made by both sides. We find that the issue relating to allowability of claim of depreciation on leased assets was considered by the Tribunal in Revenue’s appeal for Assessment Year 2004-05 (supra). The Co-ordinate Bench decided this issue in favour of assessee as under:

“17. We have heard rival contentions and perused the material available on record. Learned Counsels appearing for both the parties have agreed before us that the issue is covered in favour of the assessee by the decision of the Tribunal in assessee’s own case for preceding assessment year as submitted in the paper book. As could be seen from the material on record, in the impugned assessment year, there is no new lease transaction. The assessee has claimed depreciation on its own fixed assets and depreciation claimed on leased assets were continuing from past lease transactions. Notably, in assessment year 1997–98, the Tribunal while deciding the issue in ITA no.5424/Mum./2001, dated 13th July 2016, had allowed assessee’s claim of depreciation. The same view was reiterated by the Tribunal while deciding the cross appeals for assessment year 2000–01 in ITA no.4657/Mum./2004 and ITA no.4826/Mum./2004 dated 31st January 2017. In view of the aforesaid, we uphold the order of the learned Commissioner (Appeals) on this issue. Ground no.3 is dismissed.”

We find that the facts in the impugned assessment year with regard to assessee’s claim of depreciation on leased assets is pari-materia to the facts in the appeal for Assessment Year 2004-05. Following the decision of Co­ordinate Bench ground No.6 of the appeal is dismissed being devoid of any merit.

30. In ground No.8 of appeal, the Revenue has assailed the findings of CIT(A) in deleting notional interest for the purpose of determining annual value u/s. 23(1)(a) of the Act. The ld. Departmental Representative submitted that the assessee has received deposit against let out property. The notional interest on account of deposit has been considered by the Assessing Officer for arriving at the annual value under section 23(1)(a) of the Act. The Assessing Officer has made the addition by following the order of Tribunal in the case of Tivoli Investment& Trading Co. Pvt. Ltd. vs. ACIT, 90 ITD 163 (Mum).

The ld. Counsel for the assessee supporting the order of CIT(A) stated that only the actual rent received or receivable has to be taken into consideration and not the notional value. The CIT(A) has deleted the addition by following earlier orders. The ld. Counsel for the assessee further placed reliance on the order of Tribunal in its own case for Assessment Year 2004-05 and the decision of Hon’ble Bombay High Court in the case of CIT vs. Tip Top Typography, 368 ITR 330 (Bom).

31. Both sides heard. We find that in assessee’s own case for Assessment Year 2004-05, the Assessing Officer had made addition on account of notional rent on deposit while determining annual value u/s. 23(1)(a) of the Act. The CIT(A) deleted the addition. The Revenue carried the issue in appeal before the Tribunal. The Co-ordinate Bench following its own order on identical issue in the case of ICICI Ltd for Assessment Year 2002-03in ITA No.836/Mum/2008 decided on 07/07/2017 upheld the findings of CIT(A) in deleting the addition. Facts being identical in the impugned assessment year, we see no reason to take a different view. Thus, ground No.8 of appeal by Revenue is dismissed.

32. The last effective ground raised in the appeal by the Revenue is with respect to disallowance of deduction u/s. 36(1)(viia) of the Act . The ld. Counsel for the assessee submitted that deduction is to be allowed as per proviso to sub-clause (a) @ 10% of net doubtful assets. She pointed that the CIT(A) has granted relief to the assessee by following the orders of earlier Assessment Years. The Tribunal in assessee’s own case for Assessment Year 2004-05 has decided this issue in favour of the assessee.

33. Per contra, Ld. Departmental Representative vehemently supported the assessment order. He submitted that the assessee has not produced any evidence in support of the deduction in respect of any provision made for any asset classified by RBI as doubtful or losses in accordance with guidelines issued by RBI.

34. We have made the submissions made by rival sides. We find that the CIT(A) has deleted the addition by following the order of CIT(A) in Assessment Year 2003-04 and 2004-05. Against the order of CIT(A) for Assessment Year 2004-05 the Revenue carried the issue in appeal before the Tribunal. The Co­ordinate Bench upheld the findings of CIT(A) by observing as under:

“ 60. We have heard rival contentions and perused the material available on record. A reading of section 36(1)(viia) of the Act would indicate that the assessee at its own option can be allowed deduction in respect of any provisions made by it for any assets classified by RBI as doubtful asset or loss assets in terms of the first proviso to section 36(1)(viia) of the Act. It is to be noted that the assessee is a Scheduled Bank and its accounts are maintained in conformity with the Generally Accepted Accounting Principle (GAAP) in India and the guidelines issued by the RBI from time to time. Further, it is evident from the annual report of the assessee that acquisition of assets including performing and non–performing asset are as per the prescribed guidelines of RBI. That being the case, there is no reason for the Assessing Officer to presume that the assessee is not qualified to exercise option under the first proviso. Further, as per the second proviso to section 36(1)(viia) of the Act for the assessment year commencing on/or after 1st April 2003 and ending before 1st April 2005, the deduction allowable in terms of proviso 1 to section 36(1)(viia) of the Act is 10% instead of 5%. In view of the above, we do not find any infirmity in the order of the learned Commissioner (Appeals) on this issued. Accordingly, we uphold the order of the learned Commissioner (Appeals) by dismissing ground no.10 raised by the Revenue.”

No contrary material has been placed before us to distinguish the order of Tribunal in assessee’s own case on this issue for Assessment Year 2004-05. In the absence of any contrary material we see no reason to take a different view. Thus, following the decision of Co-ordinate Bench in assessee’s own case, the ground No.9 of the present appeal is dismissed being devoid of any merit.

35. The ground No.10 & 11 of appeal are general in nature, hence, require no separate adjudication.

36. In the result, appeal by the Revenue is partly allowed for statistical purpose.

ITA NO.8420/Mum/2010-A.Y. 2003-04 : Assessee’s Appeal.

37. The assessee in appeal has raised six grounds. The ground No.1 and 6 are general in nature, hence, require no adjudication.

38. In ground No.2 of appeal, the assessee has assailed the findings of CIT(A) in restricting disallowance u/s. 10(23G) on the direct expenses i.e. Rs.41,23,15,359/-. The ld. Counsel for the assessee stated at Bar that the assessee Bank has accepted the findings of CIT(A) on this issue, hence, ground No.2 of appeal is not pressed. In view of the statement made by ld. Counsel for the assessee, ground No.2 of appeal is dismissed as not pressed.

39. In ground No.3 of appeal the assessee has assailed allocation of interest expenditure for earning Rs. 9,38,35,223/- and in ground No.4 of appeal assessee has prayed that provisions of section 115JB of the Act are not applicable to the assessee as the books of account are prepared as per the provisions of Banking Regulation Act r.w. provisions of 211(2) of the Companies Act, 1956. The ld. Counsel for the assessee submitted that assessee is exempt from preparing its accounts as per Part-II & Part III of Schedule -VI of the Companies Act. The ground No.3 & 4 of appeal are corresponding to the ground No.4 & 5, respectively in appeal by the Department. Since, we have dismissed corresponding grounds raised in appeal by Department, ground No.3 & 4 raised by the assessee in appeal are allowed.

40. In ground No.5 of appeal the assessee has assailed charging of interest u/s. 234B and 234D of the Act. Charging of interest under the respective sections is consequential and mandatory as per the provisions of the Act, hence, ground No.5 of appeal is dismissed.

41. In the result, appeal of the assessee is partly allowed.

42. To sum up, appeal by the Revenue is partly allowed for statistical purposes and appeal by the assessee is partly allowed.

Order pronounced in the open court on Friday the 21^st day of July, 2023.