the schools for the children of the officer who are frequently transferred, amounts to gratitude payment or perquisites, when it is paid as per the uniform policy of the bank. And the verdict goes against the Revenue.
Broken period interest
Facts of the case
The assessee, State Bank of India, a nationalized bank has raised the following grounds of appeal before the Tribunal against the order of the CIT(A).
The assessee has claimed the broken period interest on its securities which has been disallowed by the AO. Further, the AO has disallowed the bank loss on valuation of securities in respect of addition made to the closing stock of securities on account of the addition of broken period interest.
Deferred Payment Guarantee Commission
The bank had earned deferred guarantee commission which was added by the AO in the same AY on the ground that the income from guarantee commission becomes final and irrevocable as soon as guarantee is given and does not depend on the liability that may eventually arise under the guarantee contract.
Guest House Expenses
The assessee has incurred expenditure on repairs & maintenance, rates and taxes relating to the guest house and depreciation on the assets of the guest house, which were disallowed by the AO u/s 37(4) of the Act.
Entertainment expenses
The assessee has claimed the entertainment expenses as business expenditure, but the AO has allowed only 50% of it attributable to employees and disallowed the same.
Staff welfare expenses
The assessee has paid to various schools towards reservation of seats for the children of the officers of the Bank. It was submitted that such amounts paid towards reservation of seats for the children of the officers of the Bank is in the nature of staff welfare expenses to mitigate the hardship faced by the officers of the Bank for children's education during transfer/re-location. However, the AO disallowed the same and observed that the assessee has committed irregularity by not including those payments in the perquisite of the employees.
Claim of deduction towards interest
The AO denied the assessee claim of interest charged u/s 234B, 220(2) and 215 and also denied the alternative claim of set-off of the interest charged by the Department.
The CIT(A) erred in directing the AO to delete the double disallowance to the extent of Rs. 5,14,686 only as against the actual double disallowance of Rs. 1,40,78,488 in respect of profit tax of Frankfurt office.
Double disallowance of profit tax
The assessee has created a provision of profit tax for its Frankfurt office of Rs.1,45,93,174 out of which the assessee paid Rs.1,40,78,488. The balance of Rs.51,46,686 was offered by the assessee being addition u/s 43D. The AO disallow a sum of Rs.1,40,78,488 and accordingly the total disallowance on this account is Rs.1,45,93,174. The assessee submitted that because the provisions for foreign tax for all branches amounting to Rs.32,38,34,950 was also disallowed by the AO which includes the provision for profit tax at Frankfurt of Rs.1,45,93,174. Hence, there was a double disallowance to the extent of Rs.1,40,78,488.
Financial lease or operating lease
The assessee has entered into an agreement with Konkan Railway Corporation Ltd. for leasing transaction with respect to the asset of Rs.25,00,00,000. The assets have been categorised as plant and machinery in the shape of Railway Tracks comprising of rails, sleepers and associated fitting. The assessee claimed depreciation on these assets at the rate of 12.5% as used for less than 180 days. The assets in question were originally acquired by Konkan Railway Corporation Ltd. and thereafter to arrange the funds the same were sold to the assessee Bank and taken back on lease for a period of 84 months against the lease rental payable at monthly installment. The AO held that the transaction is in the nature of loan or financial assistance provided to the Konkan Railway Corporation Ltd. (KRCL) by the assessee Bank. The transaction has been given the shape of lease transaction only in order to enable the bank to claim depreciation and reduce its taxable income. Accordingly, the AO held that the sale and lease back transaction is in the nature of financial transaction, therefore, the claim of depreciation was disallowed. On appeal, the CIT(A) confirmed the action of the AO.
The counsel for the assessee submitted that the transaction has been approved by the Railway Board and the Government of India. Further, he referred to various clauses of the agreement and argued that the terms and conditions of the agreement clearly demonstrate the real attributes of the ownership of asset with the assessee. He also relied upon the decision of Supreme Court in case of M/s ICDS Vs CIT and submitted that the assessee is entitled for the depreciation on the lease asset as held by the Supreme Court.
On the other hand, the DR relied on the findings of the CIT(A) as well as AO and submitted that the issue is covered against the assessee by the decision of Special Bench of this Tribunal in case of IndusInd Bank Ltd. Vs ACIT.
In rebuttal the counsel for the assessee has submitted that the decision of Special Bench in case of IndusInd Bank is not applicable in the case of the assessee because of various reasons. The Counsel for the assessee has also submitted that as per the circular dated 19.2.1994 the RBI has permitted the bank the activity of equipment leasing and factoring service therefore the bank is empowered to do the business of leasing out of asset.
Provision for doubtful debts
The assessee has claimed deduction for provision for bad and doubtful debts u/s 36(1)(viia) of amount Rs 5,63,32,54,326 which was stated to have been made on the basis of RBI guidelines. The AO allowed Rs 5,36,21,32,507 u/s 36(1)(viia) of the Income Tax Act. On appeal, the CIT(A) has confirmed the action of the AO and held that the entire amount cannot be allowed as deduction merely on the basis of RBI guidelines.
Requirement of CoD
The assessee had raised several additional grounds which were objected by the DR on the ground that that the assessee has not obtained the approval of CoD for filing the appeal in respect of the additional ground. To counter this argument, the counsel of the assessee contended that in view of the decision of Supreme Court in case of Electronics Corporation of India Ltd. Vs Union of India, the direction for permission of CoD given in the earlier decisions has been recalled by the Supreme Court and consequently there is no requirement of obtaining permission of the CoD for filing appeal.
Having heard the parties, the Tribunal held that,
Broken Period Interest
++ at the outset we note that an identical issue has been consider and decided by this Tribunal in assessee's own case for the assessment year 1991-92 vide order dated 19.5.2008. Following the earlier order of this Tribunal we decide this issue in favour of the assessee and against the revenue;
Deferred Payment Guarantee Commission
++ We note that an identical issue has been decided by this Tribunal in assessee's own case for the assessment year 1984-85 vide order dated 22.8.2006;
++ as it is clear from the above order of the Tribunal for the assessment year 1984-85 that in the earlier years upto the assessment year 1983-84 this issue was decided by the Tribunal against the assessee. However, in view of the subsequent decisions of Calcutta High Court in case of Bank of Tokyo as well decision of Supreme Court in case of Madras Industrial Investment Corporation Ltd. , the Tribunal has set aside this issue to the record of the Assessing Officer for deciding the same afresh after taking into consideration, the decisions in case of Bank of Tokyo as well as in case of Madras Industrial Corporation. The AR of the assessee has pointed out that in the consequential order the Assessing Officer has allowed the claim of the assessee. We note that in the consequential order dated 19.12.2007. The AO has followed the decision of Calcutta High Court in case of Bank of Tokyo and decided the issue by accepting the claim of the assessee. Accordingly we decide this issue in favour of the assessee and against the revenue;
Guest House expenses
++ we find that an identical issue has been considered and decided by this Tribunal in assessee's own case for the assessment year 1991- 92 vide order dated 19.5.2008. Following the earlier order of this Tribunal we decide this issue against the assessee and in favour of the revenue. Accordingly the order of CIT(A) qua this issue is upheld;
Entertainment expenses
++ we note that an identical issue has been considered and decided by this Tribunal in assessee's own case for the assessment year 1984-85 vide order dated 22.8.2006. As it is evident from the above order that the Tribunal has held that 25% of such expenses attributable to employees are not in the nature of entertainment expenses and accordingly the AO was directed to recalculate the disallowances. Following the earlier order of this Tribunal we direct the AO to recalculate the disallowance in the terms of earlier order of this Tribunal;
Staff welfare expenses
++ as it is clear from the above order of the Tribunal that for the assessment year 1992-93 this issue was decided in favour of the assessee. The ground of disallowance for the year under consideration is treating the same as gratitudes payment. We note that as per the policy of the bank the arrangements are made for the reservation of seats in the schools for the children of the officer who are frequently transferred. Thus there is no discrimination in the policy as far as the officers subjected to transfer. A similar view has been taken by the Tribunal for the assessment year 1995-96 vide order dated 17.9.2009. Accordingly, following the order of this Tribunal for the assessment year 1992-93, we allow this claim of the assessee;
Deduction of interest payment
++ interest payment u/s 234B, 220(2) and 215 of the Income Tax Act is not an admissible claim u/s 36 or 37 of the Income Tax Act. The payment of interest due to delay in payment of tax does not relate to earning of business income. Therefore the same cannot be allowed as deduction. The decisions relied upon the by the Counsel for the assessee are not on the point of allowability of deduction being business expenditure but on a different point. The decision in case of Arter Anderson Company Vs ACIT is only on the point of reopening of assessment u/s 148 and not on the point whether the interest paid u/s 220 to be allowable deduction. Similarly, the decision in case of Manoj Kumar Bernival is on the point of definition of tax and whether interest would be part of tax for the purpose of section 249, therefore the said decisions are not relevant on the issue before us. As far as the alternative plea of the assessee is concerned, it is setter proposition is the interest receipt on refund of tax is assessable as income from other source whereas the interest paid u/s 234B, 220(2) and 115 is not an expenditure incurred for earning the interest on refund of tax. Even otherwise the interest on refund of tax is not an activity for earning the income and therefore no adjustment can be given against the interest receipt from the department. In view of the above discussion we do not find any merit in this ground of the assessee and the same is dismissed;
Double disallowance of profit tax
++ we are of the view that a proper verification is required regarding fact pointed out by the assessee that the provision for profit tax at Frankfurt branch was also part of the provision for foreign tax for all foreign branches of Rs.32,38,34,950/- and thus there is double disallowance of Rs.1,40,78,488/- being the profit tax paid by the assessee in respect of Frankfurt Branch. According the AO is directed to verify the point whether there is a double disallowance in this regard and decide the same as per law;
Financial lease or operating lease
++ in order to determine the real nature of transaction and arrangement between the parties, the substance of the document intention of the parties and surroundings circumstances under which the parties have entered into the transaction are material and relevant to be considered. Therefore, mere nomenclature words used in the agreement cannot be looked into in isolation of the substance of the document, the real intentions of the parties and the surroundings circumstances under which the transaction took place. Undisputedly in the case in hand the asset in question is the railway track which is already owned by the lessee Konkan Railway Corporation Ltd. (KRCL) but because of the requirement of funds the KRCL decided to raise the funds by making the arrangement of sale and lease back of the asset;
++ thus, the real object as far as KRCL is concerned for entering into the transaction of sale and lease back is to raise/arrange the funds. The two transaction of sale of the asset in question to the assessee bank and lease back cannot be separated as there was no choice with either of the party to restrict the transaction of sale alone independently because it was neither possible nor permissible to sell out the asset in question by the Konkan Railway Corporation being the integral part of their railway system which is the very basis of the existence of the KRCL. Thus, we have not doubt that the sale transaction in question is merely on paper and to facilitate the financial arrangement by the assessee to the KRCL without involving any real intention of transfer of the asset in question. Even otherwise the transfer of asset in question is impossible in the facts and circumstances of the case and therefore it was not the real intention of the parties even reflected from the lease agreement;
++ it is manifest from the terms and conditions of the lease agreement that the lease is for a fixed period of 84 months and as per clause 1.6 it is non-concealable by the lessee and/or by the lessor except on the default on the part of the lessee. Even in case of default and consequential termination of lease its is provided that the lessee shall pay the entire arrears of the lease as well the future instalment for the unexpired period of the lease term, therefore the lease agreement has been framed and constructed in such a way that the assessee recovers its entire cost along with the interest in equated monthly instalments. Even in the schedule to the lease agreement the period of 84 months is a fixed non-concealable period. The so-called restrictions on the sale, creating charge, lien by the lessee are necessary being a security against the funds provided by the assessee to the lessee;
++ therefore, the restrictions provided in the lease agreement are only to secure the interest of the bank till the recovery of the full amount along with the interest. Some of the terms of the agreement appear to be only for sake of the conditions as to protect to the interest of the bank but the same could not be given effect in practical. The Special Bench of this Tribunal in case of IndusInd Bank Ltd. by following the decision of Supreme Court in case of Asea Brown Boveri Ltd. Vs Industrial Finance Corporation of India (IFCI) as well decision in case of Association of Lease and Financing Service Company Vs Union of India has enumerated various features which make distinction between operating lease and finance lease;
++ thus the risk and reward of ownership of the asset vested with the lessee and therefore for all practical purposes the ownership of the asset was vested with the lessee and not with the assessee. The terms of the agreement are designed in a manner so that in any eventuality the assessee would recover the investment (cost of asset) with interest and not the asset in question. As discussed in the foregoing paras the title over the asset as per the lease agreement is only for securing the financial interest of the assessee and not intended to really take the asset in its possession on the expiry of lease term or on the termination of the lease agreement. Therefore all the features and attributes of finance lease as discussed by the Special Bench in case of IndusInd Bank do exist in the case of the assessee;
Mandate of the RBI Circular
++ as it is clear from the sub-section 2 that no banking company shall engaged in any form of business other than those referred in subsection 1 of section 6. However, as per circular dated 19.2.1994 the Reserve Bank of India has allowed the banking companies to undertake the activities of equipment leasing but the same should be treated on par with the loan and advances. Therefore, the activity of equipment leasing permitted by the RBI vide said circular is only in the nature of finance lease. The said circular has also been considered and discussed by the Special Bench;
++ as it is clear from the circular that the banks undertaking equipment leasing departmentally should follow prudential accounting system and only the interest charge component should be recognised as income and the recovery of cost of asset should be carried to balance sheet on the form of provision of depreciation. Therefore under the circular the transaction of equipment lease is treated at par with the loan transaction and accordingly only the interest component of the receipt is recognised as income. Since it is not permitted to recognise the entire receipt being lease rentals as income the assessee has also recognised only interest component of the receipt of the lease rental as income in the profit and loss account and the balance which represents the capital component is taken to the balance sheet. Thus, in the books of account, the assessee has treated the transaction in question as finance lease and not as an operating lease because the banks are permitted only to carry out the transaction of finance lease of equipments.
++ it is pertinent to note that in case of ICDS Ltd. it was not a lease by a bank but the assessee in the said case is a non-banking financial institution and one of the business of the assessee was leasing out the vehicles as the facts recorded by the Supreme Court in para 2 of the said decision. Therefore the Supreme Court has decided the issue in the case of non-banking financial company which is engage in the business of leasing whereas in the case of bank it is not permitted under the Banking Regulation Act to engage in the business of leasing of equipments. Following the decision of Special Bench of this Tribunal in case of IndusInd Bank Ltd., we hold that the transaction in question is finance lease and not operating lease. Accordingly, we uphold the orders of the authorities below qua this issue;
Provision for doubtful debts
++ there is no dispute regarding the claim allowed by the AO is proper as per the provisions of section 36(1)(viia). When the allowable claim has been accepted by the AO under the provision of section 36(1)(viia) then merely the provision made on the basis of RBI guidelines does not become allowable for deduction in contravention of the provision of section 36(1)(viia). It is pertinent to note that when the claim of deduction specifically provided u/s 36(1)(viia) then the same cannot be allowed by applying any other provision. Accordingly, we do not find any merit or substance in the claim of the assessee. Hence dismissed;
Requirement of CoD
++ we find that in view of the decision of Supreme Court in case of Electronics Corporation of India Ltd. Vs Union of India dated 17.2.2011, the requirement of permission of Committee on Disputes (CoD) has been recalled by the Supreme Court and accordingly there is no bar for filing an appeal by the Government Department or the public sector undertakings before this Tribunal. Since the additional ground No. 1-3 involved pure legal issue and additional ground No. 4-5 are not fresh ground but already raised before the CIT(A), therefore in the interest of justice we admit the additional grounds raised by the assessee for adjudication.
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