South Indian Bank Ltd. vs Commissioner of Income Tax

A.M. Shaffique, J.—The appeal is filed against the order passed by the income tax Appellate Tribunal, Cochin Bench, in I.T.A. No. 935/Coch/2008. The assessment year involved is 2005-06. The issue involved in the aforesaid assessment year is in respect of disallowance effected by the Assessing Officer u/s 14A of the income tax Act in respect of expenditure estimated to have been incurred by the assessee for earning interest on tax free bonds and dividends which are exempted u/s 10 of the Act. Further, the assessee has also raised an issue with reference to disallowance of leave encashment, disallowance of share issue expenses, addition on account of the excess cash found by the branches of the appellant and levy of interest u/s 234B of the income tax Act. The Commissioner of income tax (Appeals) also concurred with the view expressed by the Assessing Officer in the appeal filed by the assessee. Against the said order, the assessee preferred a further appeal before the Tribunal after considering the issues involved in the matter, found in favour of the Department.

The assessee has preferred this appeal raising the following questions of law:

A. Whether, on the facts and in the circumstances of the case, the authorities are correct in law and fact in making a disallowance u/s 14A of the Act?

B. Whether, on the facts and in the circumstances of the case, the authorities are correct in law and fact in not allowing the claim for leave encashment?

C. Whether, on the facts and in the circumstances of the case, the authorities are correct in law and fact in not allowing the share issue expenses as a deduction in computing the total income of the appellant?

D. Whether, on the facts and in the circumstances of the case, the authorities are correct in law and fact in adding the excess cash received by the branches of the appellant-bank to the total income?

E. Whether, on the facts and in the circumstances of the case, the authorities are correct in law and fact in levying interest u/s 234B of the Act in the appellant''s case?

Heard the learned counsel appearing for the appellant as well as the learned standing counsel for the Department.

These issues have been dealt with by the Tribunal elaborately. As far as the first question is concerned, this court had already held that section 14A has retrospective operation. This court followed the decision of the Special Bench of the Tribunal in (2009) 117 ITD 169 . In fact, the entire issue was considered by the Commissioner of income tax (Appeals). It is clear from section 14A that it has been introduced retrospective effect from April 1, 1962, by the Finance Act of 2001. The said provision enables the Assessing Officer to disallow the expenditure incurred by the assessee relating to income, which does not form part of the total income under the income tax Act. Sub-section (2) was introduced with effect from April 1, 2007, and it provides how the disallowance has to be worked out. This procedure has been prescribed under rule 8D of the income tax Rules as well, wherein sub-rules (2) and (3) are only of a clarificatory nature and do not amount to the charging provision. Therefore, we have no hesitation to hold that the Tribunal was justified in answering the aforesaid question in favour of the Department.

As far as the second question is concerned, it relates to disallowance of the claim for leave encashment. The assessee relied upon the judgment of the Calcutta High Court in Exide Industries Limited and Another Vs. Union of India (UOI) and Others, claiming that the said judgment applies in order to sustain the eligibility of the provision for leave encashment for deduction. It is also contended that the expenditure incurred on account of the leave encashment liability was inadvertently added back, which was pointed out during proceedings. However, it was claimed that the assessment u/s 143(3) is for ascertaining the correct taxable income. It does not prohibit allowing the justified claim of the assessee. The Assessing Officer held that the claim of the assessee cannot be accepted in view of the provisions of section 43B(f). A mere reading of section 43B(f) indicates that a deduction of any sum payable by the assessee as an employer in lieu of leave at the credit of its employee shall be allowed only in computing the income referred to in section 28 of the previous year for which such sum is actually paid. The authorities below have found that the claim with regard to section 43B(f) was enclosed along with the original as well as the revised return. Therefore, it was observed that there is no inadvertent mistake in not claiming it. It was found that when section 143(3) provides for assessment of correct taxable income and section 143(2) provides that the Assessing Officer himself considered the claim made by the taxpayer payable in accordance with the provisions of the Act for determining the correct taxable income u/s 143(3), the claim cannot be considered since the claim was not bona fide inadvertence as the original and the revised returns filed in accordance with the provisions of the Act were considered by the Assessing Officer u/s 143(3). Further, revised return was made after the due date as provided u/s 139(5). This being the concurrent finding of fact by the authorities below, we do not think that any change in view is possible as far as the above issue is concerned.

Next is with reference to the disallowance of the share issue expenses as a deduction in computing the total income of the assessee. It was contended by the assessee that the bank had increased its issue actually to the maintain capital adequacy ratio as prescribed by the Reserve Bank of India, failing which the bank cannot continue its business. Reference was made to the Reserve Bank of India guidelines dated July 19, 2004, which indicates that the banks are required to maintain a minimum capital adequacy ratio (CAR) at 9 per cent on an on-going basis. The Assessing Officer relied upon the judgment of the Supreme Court in Brooke Bond India Limited Vs. Commissioner of Income Tax, West Bengal-III, Calcutta, treating the claim as capital expenditure and, therefore, disallowed the claim. The appellate authority had considered this issue in Brook Bond''s case (supra) and had come to the conclusion that such expenditure still retain the character of capital expenditure. It is further found by the authorities that the minimum capital adequacy ratio of 9 per cent, as per the RBI guidelines had to be maintained. The rate of growth in assets may have been affected by the decline in the capital inadequacy ratio from 11.32 per cent to 9.89 per cent and, therefore, it cannot be said that the issue of capital is wholly and exclusively for the purpose of expansion of business. It was also found that there is no clear nexus between the expenditure and expansion. The bank was required to maintain the capital adequacy ratio statutorily at 9 per cent despite the fact that whether there is growth or not or whether there is profit or loss. The authorities relied on Brook Bond''s case (supra) and had come to the finding that the increase in capital results in expansion of capital base and may help in business as well by increasing the profit. Yet the expenditure incurred retain the character of a capital expenditure since it is directly related to the expansion of capital base. Having gone through the contentions raised on behalf of the appellant, as well as the standing counsel, since the issue involved had been considered by the authorities below on the basis of the judgment of the apex court, the question is answered against the assessee.

In regard to the next issue as to whether excess cash received by the branches of the appellant-bank had to be added to the total income, the contention urged is that as far as the said amount has not been transferred to the profit and loss account of the assessee, the same cannot be considered as an income. It is contended by the assessee that in the course of cash transaction at the branches, and also in the case of ATMs, excess amount has to be found due to operational deficiency. These are all to be repaid to the customers as and when claimed by them and it cannot be considered as the income of the bank. Apparently, when a contention has been raised that these amounts are only to be refunded at the time when there is demand, nevertheless the view expressed by the Tribunal in this regard has to be accepted and, therefore, this question is also answered against the assessee.

The last issue involved is regarding the charging of interest on Rs. 1,23,66,048. It was contended by the assessee that the charging interest u/s 234B is erroneous as the assessee cannot anticipate the conditions likely to be made by the Assessing Officer in regular assessment on a future date. Section 234B provides that short falls has to be taxed u/s 43(3). The matter is covered by the judgment of the Supreme Court in Commissioner of Income Tax, Mumbai Vs. Anjum M.H. Ghaswala and Others, and it was held that interest contemplated under sections 234A,234B and 234C is mandatory in nature. In view of the fact that the appellate authorities have considered the matter based on the judgment of the Supreme Court, this issue is also answered against the appellant. In the result, we do not find any merit in the arguments of the learned counsel for the appellant. Accordingly, the appeal is dismissed.