UTI Bank Ltd.,, Ahmedabad v. The ACIT., Circle-8,, Ahmedabad

ITA 2571/AHD/2006 | misc
Pronouncement Date: 31-07-2012

Appeal Details

RSA Number 257120514 RSA 2006
Assessee PAN AAACU2414K
Bench Ahmedabad
Appeal Number ITA 2571/AHD/2006
Duration Of Justice 42 year(s) 6 month(s) 29 day(s)
Appellant UTI Bank Ltd.,, Ahmedabad
Respondent The ACIT., Circle-8,, Ahmedabad
Appeal Type Income Tax Appeal
Pronouncement Date 31-07-2012
Appeal Filed By Assessee
Assessment Year misc
Appeal Filed On 01-01-1970
Judgment Text
ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 1 IN THE INCOME TAX APPELLATE TRIBUNAL A B ENCH AHMEDABAD (BEFORE SHRI D. K. TYAGI JM & SHRI ANIL CHATURVEDI A.M.) I.T.A. NO. 25 71/AHD/2006. (ASSESSMENT YEAR: 2003-04) UTI BANK LIMITED TRISHUL OPP. SAMARTHAESHWAR MAHADEV NEAR LAW GARDEN ELLISBRIDGE AHMEDABAD-380 006. (APPELLANT) VS. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-8 KENDRIYA PRATYAKSHA BHAVAN NEAR PANJARA POLE AMBAWADI AHMEDABAD. (RESPONDENT) I.T.A. NO. 273 6/AHD/2006 (ASSESSMENT YEAR: 2003-04) ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-8 KENDRIYA PRATYAKSHA BHAVAN NEAR PANJARA POLE AMBAWADI AHMEDABAD . (APPELLANT) VS. UTI BANK LIMITED TRISHUL OPP. SAMARTHAESHWAR MAHADEV NEAR LAW GARDEN ELLISBRIDGE AHMEDABAD-380 006 (RESPONDENT) PAN: AAACU 2414K APPELLANT BY : SHRI ARVIND SONDE. RESPONDENT BY : SHRI KARTARSINGH CIT (D.R.) ( )/ ORDER DATE OF HEARING : 3-5-2012 DATE OF PRONOUNCEMENT : --7-2012 PER: SHRI ANIL CHATURVEDI ACCOUNTANT MEMBER. THESE ARE TWO CROSS APPEALS ONE FILED BY THE ASSES SEE AND THE OTHER FILED BY THE REVENUE AGAINST THE ORDER OF CIT (A)-X IV AHMEDABAD DATED 25-9-2006 FOR THE ASSESSMENT YEAR 2003-04. ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 2 2. THE ASSESSEE HAS RAISED IN ITS APPEAL AS MUCH AS SIX EFFECTIVE GROUNDS OF APPEAL. 3. THE FIRST GROUND RELATES TO DISALLOWANCE OF FRAU DS LOSS AMOUNTING TO RS.15.46 CR. 4. THE ASSESSEE IS A BANKING COMPANY GOVERNED BY TH E BANKING REGULATION ACT 1949. THE RETURN OF INCOME WAS FILE D ON 21-10-2003 DECLARING TOTAL INCOME OF RS.2 65 41 70 950/-.THE C ASE WAS TAKEN UP FOR SCRUTINY. CONSEQUENTLY THE ASSESSMENT WAS COMPLETED U/S 143(3) ON 30- 12-2005 AND THE TOTAL INCOME WAS DETERMINED AT RS.3 62 02 62 000/- AFTER MAKING VARIOUS DISALLOWANCES. 5. ON GOING THROUGH THE ACCOUNTS DURING THE COURSE OF ASSESSMENT PROCEEDINGS IT WAS NOTICED BY THE A.O. THAT OPERATI NG EXPENSES INCLUDED OTHER EXPENDITURE OF RS.56.76 CRORES COMPRISING OF VARIOUS SUB-HEADS INCLUDING AN AMOUNT OF RS.20 87 88 103/- WHICH WAS TERMED AS LOSS ON ACCOUNT OF FRAUDS. IT WAS SUBMITTED BY THE ASSESSE E THAT IT REPRESENTS THE PAYMENT MADE BY BANK AMOUNTING RS.15.56 CRORES TO V ARIOUS PARTIES ON ACCOUNT OF FAILURE BY HOME TRADE LTD. A BROKING CO MPANY ENGAGED IN BROKING DEALS SYNDICATED BY THE BANK TO MAKE DELIVE RY OF SECURITIES TO THE BUYING COUNTER PARTIES. BANK HAS BEEN PROVIDING ADV ISORY SERVICES TO VARIOUS PROVIDENT FUNDS AND CO-OPERATIVE BANKS AND GRAMIN BANKS IN PRIMARY MARKET ISSUES SINCE JANUARY 2001. THESE AD VISORY SERVICES WERE BEING PROVIDED TO MEET THE CLIENTS ONGOING REQUIRE MENTS FOR GOVERNMENT SECURITIES/PSU BONDS WHICH WERE AVAILABLE IN THE SE CONDARY MARKET. SINCE ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 3 THE BANK WAS NOT A REGISTERED BROKER WITH ANY STOCK EXCHANGE ITS SERVICES WERE RESTRICTED TO ADVISING/FACILITATING THE CLIENT S IN SOURCING THEIR REQUIREMENTS FROM BROKERS AT COMPETITIVE MARKET RAT ES. WHERE DEALS ARE FACILITATED BY ADVISORS THE INVESTORS MAKE PAYMENT DIRECTLY TO THE BROKERS AFTER RECEIVING THE CONFIRMATION OF THE TRACTION FR OM THE ADVISORS SINCE THE ADVISORS ROLE WAS RESTRICTED TO PROVIDING THE ADVIS ORY SERVICES ONLY AND NOT RECEIVING THE CONSIDERATION OF THE TRANSACTION. INI TIALLY TRANSACTIONS RELATING GOI/ PSU BONDS WERE ROUTED THROUGH THE BANK I.E. T HE PAYMENT WAS DIRECTLY RECEIVED BY THE BANK AND PASSED ON TO THE BROKERS SUBSEQUENTLY BY THE BANK WITHIN SPECIFIED DELIVERY TIME LIMIT OF 60 DAYS. AS MOST OF THE INVESTORS DID NOT MAINTAIN SGL OR CONSTITUENT SGL W ITH ANY SCHEDULED BANK THE MODE OF DELIVERY WAS IN PHYSICAL FORM ONL Y. FURTHER IN CERTAIN CASES SECURITIES HAD TO BE CONVERTED TO MARKETABLE LOTS BY WAY OF SPLITTING OR CONSOLIDATING OF THE SECURITIES HELD WITH THE BR OKER. THE AFORESAID PROCESS GENERALLY INVOLVED A TIME OF 1-2 MONTHS AND HENCE THE DELIVERY TIME OF 60 DAYS. THESE TRANSACTIONS WERE DONE WITH GILTEDGE MANAGEMENT SERVICES LTD. A GROUP COMPANY OF HOME TRADE LTD. O N REQUEST FROM INVESTORS THE BANK OBTAINED QUOTES FROM LOCAL BROKE RS. THE INVESTMENTS WERE APPROVED FOR BROKERS WITH LOWEST QUOTATIONS. A CCORDINGLY 27 DEALS WERE STRUCK BETWEEN THE BANKS CLIENTS AND GILTEDGE MANAGEMENT SERVICES LTD. /HOME TRADE LTD. ON THE BASIS OF BEST MARKET QUOTATIONS PROVIDED BY THEM. OUT OF THE 27 DEALS DELIVERIES WERE MADE BY T HEM IN 15 CASES. HOWEVER IN THE REMAINING 12 CASES SECURITIES WORTH RS.16.88 CRORES WERE NOT DELIVERED TO THE BUYING COUNTER PARTIES. THE DE TAILS OF THESE 12 CASES ARE AS UNDER:- ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 4 SR.NO. NAME OF THE PARTY. NATURE OF SECURITY AMOUNT (RS)(CRORES) 1. INDIAN IRON & STEEL CO. LTD 14.40% PSEB 0.80 2. INDIAN IRON & STEEL CO. LTD. 15.57% KBJNL 1.00 3. INDIAN IRON & STEEL CO. LTD. 15.50% SSNL 1.00 4. INDIAN IRON & STEEL CO. LTD. 12.59% GOI 04 1.00 5. STEEL AUTHORITY OF INDIA LTD 8.07% GOI-17 1.5 0 6. INDIAN IRON & STEEL CO. LTD. 143.35% MKVDC 2.00 7. INDIAN IRON & STEEL CO. LTD. 13.75% GOI-05 2.00 8. INDIAN IRON & STEEL CO. LTD. 13.65% GOI-07 1.00 9. INDIAN IRON & STEEL CO. LTD. 12.35% GOI-04 1.00 10. JUTE CORPORATION OF INDIA 12% IDBI-07 0.7 5 11. BHATPARA CO-OP. BANK 12.75% GOI-02 3.83 12. BAJAJ CAPITAL 12% IDBI-07 1.00 TOTAL 16.88 OUT OF THE AFORESAID AMOUNTS RS.15.56 CRORES WAS P AID BY THE BANK TO THE RESPECTIVE BUYING COUNTER PARTIES AND THIS WAS CLAI MED AS LOSS ON ACCOUNT OF FRAUD. 6. THE A.O. ALSO NOTICED THAT RESERVE BANK OF INDIA VIDE ITS ORDER DATED 24-1-2003 LEVIED A PENALTY OF RS.5 LAC ON THE ASSES SEE IN RESPECT OF THE ABOVE SYNDICATION. THE R.B.I. HELD THAT THE BANK HA D CONTRAVENED THE PROVISIONS OF SECTION 6(1) OF THE BANKING REGULATIO N ACT 1949 BY ACTING AS A BROKER FOR PURCHASE OR SALE OF GOVT. SECURITIES AND FOR SELLING THE SECURITIES WITHOUT TAKING THE DELIVERY OF THE SECUR ITIES THEREBY INDULGING IN SHORT SELLING WHICH IS PROHIBITED BY RBI GUIDELIN ES. AFTER CONSIDERING THE AFORESAID FACTS THE A.O. HELD THAT THE OUT OF THE FRAUD EXPENSES OF RS.20 87 88 103/- AN AMOUNT OF RS.15.56 CRORES WAS PAID TO VARIOUS PROVIDENT FUND ORGANIZATION CANNOT BE TERMED AS FRA UD EXPENSES INTERALIA FOR THE FOLLOWING REASONS. ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 5 (1) THE TRANSACTION ENTERED INTO BY THE ASSESSEE HA S BEEN HELD TO BE IN VIOLATION OF SECTION 6(1) OF THE BANKING REGULATION ACT 1949 BY THE BANK AND THEREBY A PENALTY OF RS.5 LACS WAS IMPOSED ON THE ASSESSEE AND THE SAME WAS PAID BY THE ASSESSEE. (2) THE A.O. WAS OF THE VIEW THAT THERE WAS NO FRAU D COMMITTED BY THE BANK AS THE TRANSACTIONS WERE BETWEEN HOME TRADE LT D (THE BROKER) AND THE P.F. ORGANIZATIONS. THE CLAIM OF THE ASSESS EE THAT THERE WAS VICARIOUS LIABILITY ON IT WAS NOT ACCEPTABLE TO THE AO. THE A.O. FURTHER HELD THAT THE CASE LAWS RELIED UPON BY THE ASSESSEE IN CASES OF SECTION 36(1) WERE IN RESPECT OF BUSINESS OTHER THA N BANKING. SINCE THE ASSESSEE IS NOT A PRIVATE INDIVIDUAL CARRYING O N MONEY LENDING BUSINESS CASE-LAWS CITED DOES NOT APPLY TO THE ASSE SSEE. THE A.O. THEREFORE HELD THAT THE COMPENSATORY PAYMENTS CLAIM ED AS FRAUD EXPENSES FOR THE DEFAULT COMMITTED BY THIRD PARTY I S NOT AN ALLOWABLE BUSINESS EXPENDITURE AS IT WAS NOT INCIDENTAL TO TH E BUSINESS OF BANKING INCLUDING MERCHANT BANKING. 7. AGGRIEVED BY THE ORDER OF THE A.O. ON THIS GROUN D THE ASSESSEE PREFERRED APPEAL BEFORE THE CIT (A). 8. BEFORE THE CIT (A) ASSESSEE REITERATED THE SUBM ISSIONS MADE BEFORE THE A.O. AND IT WAS FURTHER SUBMITTED BEFORE CIT (A ) THAT THERE WERE 27 SYNDICATION DEALS STRUCK BETWEEN THE INVESTORS AND HOME TRADE LTD. ABOUT 15 DEALS WERE SUCCESSFULLY COMPLETED AND 12 DEALS C OULD NOT BE COMPLETED AND REMAINED OUTSTANDING. THESE TRANSACTIONS WHERE EITHER HOME TRADE LTD. OR ITS ASSOCIATE CONCERNS WERE THE COUNTER PAR TIES. THE SAID PARTIES FAILED TO DELIVER SECURITIES AFTER TAKING FUNDS FRO M INVESTORS. THE GRIEVANCES ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 6 OF THE INVESTORS WERE PERSISTING FOR LONG TIME AND THE INVESTORS WERE DEMANDING FOR REFUND OF THE AMOUNTS. IT WAS ALSO SU BMITTED THAT THE BANK WAS ADVISED THAT THE BANK INCURRED NO LIABILITY TO THE INVESTORS BUT HOWEVER CONSIDERING THE VARIOUS FACTORS THE BANKS MANAGEMEN T DECIDED TO MAKE SUITABLE COMPENSATION IN APPROPRIATE CASES. THE BUS INESS CONSIDERATION AND THE FACTORS WHICH INFLUENCED THE BANK TO PAY TH E COMPENSATION INTERALIA WERE AS UNDER:- (A) THE INVESTORS WERE PROVIDENT FUNDS HAVING MULTI TUDES OF EMPLOYEES AS THEIR MEMBERS. THERE WOULD HAVE BEEN AN EXTREMEL Y ADVERSE PUBLICITY OF MOUTH AGAINST THE BANK IF THE BANK HAD TAKEN A STRICT STAND. ON THE CONTRARY THE BANK WOULD BE TURNING TH E EMPLOYEES AS THEIR AMBASSADORS OF GOODWILL IF THE BANK RESCUED F ROM THE STALEMATE. (B) THERE WOULD HAVE BEEN ADVERSE NEWSPAPER PUBLICI TY AND SUSPECTED POLITICAL INVOLVEMENT HAD THE MOVEMENT OF EMPLOYEES GAINED MOMENTUM AND THIS WOULD HAVE RUINED THE REPUTATION OF THE BANK. (C ) THE BANK WAS HOLDING LARGE DEPOSITS FROM PSUS AND PROVIDENT FUNDS. THERE WERE MANY EMPLOYEES WHO WERE CONSTITUENTS OF THE BANK. THE BANK WOULD HAVE LOST THE CONFIDENCE OF THESE CONSTI TUENTS BY TAKING A STRICT VIEW WHILE IRONICALLY THE BANK COULD CONSO LIDATE ITS POSITION AND REPUTATION AS A RESULT OF THE PAYMENT. (D) HAVING REGARD TO THE QUANTUM OF FUNDS INVOLVED LEGAL PROCEEDINGS OF ALL FORMS AGAINST THE BANK WITH A VIEW TO SEEKING REFUND OF THE FUNDS WAS A VERY STRONG POSSIBILITY; THIS COULD HAVE DRAG GED THE BANK INTO ENORMOUS LITIGATION. (E) THE BANK REALIZED WHILE THE BANK AS ALSO THE IN VESTORS WERE INNOCENT AND WERE THE VICTIMS OF THE FRAUD AS BETWEEN TWO I NNOCENT PERSONS THE LOSS MAY BE SUFFERED BY A PERSON WHO HAS BEEN P RIVY TO MAKING OFFER TO ANOTHER INNOCENT PERSON. ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 7 9. THE ASSESSEES SUBMISSION THAT THE COMPENSATION WAS AN ITEM OF LOSS ON ACCOUNT OF FRAUD ARISING DUE TO 3 RD PARTY FRAUD HAS BEEN PAID BY THE ASSESSEE IN THE BUSINESS INTEREST ON A VOLUNTARY BA SIS. THE ASSESSEE HAS ALSO NOT SUFFERED ANYTHING IN RELATION TO THE SHORT SALE TRANSACTION NOTED ADVERSELY BY THE RBI. THE LEVY OF PENALTY BY RBI WA S FOR PROCEDURAL LAPSES. SEBI THE APPROPRIATE AUTHORITY IN-CHARGE OF MERCHA NT BANKING ACTIVITIES HAS ALSO NOT FOUND ANYTHING WRONG WITH THE ASSESSEE . THE ASSESSEE ALSO RELIED ON THE FOLLOWING DECISIONS:- (1) CIT VS. NAINITAL BANK LTD. 62 ITR 638 (SC) (2) CIT VS. GEORGEPOLOUS 146 ITR 380 (MAD.) (3) EVEREADY INDUSTRIES INDIA LTD. VS. DCIT 78 ITD 175 (CAL.) (4) BADRIDAS DAGA VS. CIT 34 ITR 10 (SC) (5) ANNAMALAI TIMBER TRUST LTD VS. CIT 47 ITR 814 (KER) 11. CIT (A) DID NOT AGREE WITH THE CONTENTIONS OF T HE ASSESSEE. HE UPHELD THE DECISION OF THE AO BY HOLDING AS UNDER:- 3.4. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE AND THE SUBMISSIONS AS ADVANCED BY THE APPELLANT ALONG WITH VARIOUS CASE LAWS RELIED UPON. HOWEVER I DO NOT AGREE WITH THE APPELLANTS VIEW FOR THE FOLLOWING REASONS:- 3.4(I) IT IS A FACT THAT THE ASSESSEE WAS ONLY MANDATED BY THE SEBI AS WELL AS RBI TO BE ADVISED IN THE MATTER OF PURCHASE AND SALE OF SHARES. THE BANK CANNOT ACT AS A BROKER. THIS IS VERY EVIDENT FROM THE PENALTY ORDER OF RBI. FURTHER AS PER THE AGREE MENT ON 20-1-2002 MADE BETWEEN THE APPELLANT AND THE HOME TRADE LTD. FOR AVAILING OF THE INTERNET PAYMENT GATEWAY COVENANTS TO THE PROVI SIONS NO.3 SAYS THAT THE SECURITIES TRADER SHALL CARRY OUT ALL VER IFICATIONS FOR THE CUSTOMER AS MAY BE REQUIRED ON AN INDEPENDENT BASIS AND UTI BANK ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 8 SHALL NOT BE A PARTY TO THE AGREEMENT BETWEEN THE C USTOMERS AND THE SECURITIES TRADER AND THE CUSTOMERS. THESE CLAUSES CLEARLY SHOW THAT HOME TRADE LTD. WAS RESPONSIBLE FOR DELIVERY OF TH E SECURITIES AND THE TRANSACTIONS WERE BETWEEN THE SAID COMPANY AND THE PROVIDENT FUND ORGANIZATION. IN THE CIRCUMSTANCES THE CLAIM OF THE APPELLANT THAT THERE WAS VICARIOUS LIABILITY ON THE APPELLANT IS NOT FOUND ACCEPTABLE. 3.4.(II) THE IISCO (INDIAN IRON & STEEL CO. LTD.) WROTE A LETTER TO THE UTI BANK DATED 23-9-2002 AND ALLEGED THAT THEY ISSUED CHEQUE WITH DRAWEES NAME AS UTI BANK LTD. BUT THE BANK PE OPLE ADDED THE ACCOUNT DETAILS OF HOME TRADE LTD. AND MADE THEM C OUNTER PARTY. IISCO FILED COMPLAINT WITH POLICE AND COURT AUTHORI TIES BUT LATER ON WITHDRAWN THE COMPLAINT AND SUBMITTED PRAYER WITH C HIEF METROPOLITAN MAGISTRATE KOLKATTA AFTER RECEIVING THE PAYMENT F ROM UTI BANK FOR REFUND OF P.F. AMOUNT. THUS THESE FACTS SHOW THAT THE APPELLANT MADE PAYMENT TO IISCO AUTHORITIES NOT FOR ANY CONTR ACTUAL OBLIGATION AND NOT FOR BUSINESS NEEDS BUT TO END THE ALLEGATI ONS THAT THEY WERE INDULGED IN UNCALLED FOR ACTIVITIES. 3.4.(III) THE TRANSACTION ENTERED INTO BY THE ASSE SSEE HAS BEEN HELD AS VIOLATIVE OF SEC.6(1) OF THE BANKING REGULA TION ACT 1949 BY THE RBI AND AS A PUNITIVE MEASURE A PENALTY OF RS.5 LACS WAS IMPOSED ON IT AND THE SAME HAS BEEN PAID BY IT. THE CHAIRMAN AND MD AGREED UNEQUIVOCALLY DURING THE HEARING BY THE R BI THAT THE TYPE OF TRANSACTION DONE BY THE ASSESSEE IS NEITHER PERM ISSIBLE UNDER THE BANKING REGULATION ACT 1949 NOR UNDER THE SEBI ACT . 3.4.(IV) IN VIEW OF THE ABOVE INDICTMENT BY THE RB I THE TRANSACTION IN QUESTION WAS NOT INCIDENTAL TO ITS B USINESS OF BANKING. THE QUESTION OF ALLOWANCE OF SUCH EXPENDITURE U/S. 37(1) IS THEREFORE UNTENABLE. 3.4.(V) THE APPELLANT SHOWED THIS EXPENDITURE RELAT ED TO FRAUD EXPENSES UNDER MISCELLANEOUS EXPENSES AND ALSO PENA LTY LEVIED BY THE RBI WAS ALSO CLAIMED UNDER MISCELLANEOUS EXPENS ES. THESE PAYMENTS WERE IN VIOLATION OF THE BANKING REGULATIO NS ACT. THE HON. SUPREME COURT IN THE CASE OF MADDI VENKATARAMANAN & CO. (P) LTD. VS. CIT (1998) 229 ITR 534 (SC) HELD THAT ONE CAN C ARRY ON HIS TRADE ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 9 WITHOUT VIOLATING THE LAW AND AFTER THE INTRODUCTIO N OF EXPLANATION IN SEC. 37 SUCH EXPENDITURE IS CLEARLY DISALLOWABLE. I N THE PRESENT CASE THE TRANSACTIONS ENTERED INTO BY THE APPELLANT WERE FOUND TO BE VIOLATIVE OF SEC. 6(1) OF THE BANKING REGULATION AC T 1949 AND THE APPELLANT HAS BEEN PENALIZED FOR THE VIOLATION. THE ALLEGED FRAUD PAYMENT MADE BY THE APPELLANT IS EMANATING FROM THE ABOVE TRANSACTION. THE DECISION OF HON. SUPREME COURT IS SQUARELY APPLICABLE TO THE FACTS OF THE PRESENT CASE. THE CO MPENSATORY PAYMENT CLAIMED AS FRAUD EXPENSES FOR THE DEFAULT C OMMITTED BY THE THIRD PARTY IS NOT AN ALLOWABLE EXPENDITURE AS IT IS NOT INCIDENTAL TO THE BUSINESS OF BANKING INCLUDING THE MERCHANT BANKING. 3.4 (VI) THE LOSS INCURRED FOR MAKING THESE PAYMENT S IS NOT IN THE COURSE OF ITS NORMAL BUSINESS. THEREFORE THE APPEL LANTS SUBMISSION THAT IT WAS MADE IN THE NORMAL COURSE OF BUSINESS A CTIVITIES IS NOT ACCEPTABLE. 3.4.(VII) FURTHER THE SUBMISSION OF THE APPELLANT THAT THE PAYMENTS WERE MADE TO COMPENSATE INNOCENT INVESTORS OF IISCO PROVIDENT FUND IS BUSINESS EXPENSES AND ALLOWABLE IS ALSO NOT ACCEPTABLE. IT MAY BE TREATED AS APPLICATION OF INC OME/APPLICATION OF PROFIT BUT CANNOT BE TREATED AS EXPENDITURE FOR EA RNING TAXABLE PROFIT. 3.5. THE CASE LAWS RELIED ON BY THE APPELLANT ARE NOT APPLICABLE AS THE FACTS IN THOSE CASES ARE DIFFEREN T THAN THE FACTS OF THE PRESENT CASE. IN THE CASE OF CIT VS. NAINITAL B ANK LTD. 62 ITR 638 (SC) THE ISSUE WAS THAT THE ASSESSEE BANK LOST CURRENCY NOTES AND JEWELLERY PLEDGED WITH IT BY ITS CONSTITUENTS W HICH WERE STOLEN BY DACOITS. HERE THE FACTS WERE ENTIRELY DIFFERENT. I N THE CASE OF CIT VS. GEORGEPOLOUS 146 ITR 380 (MAD.) THE MATTER WAS TH AT THE ASSESSEE FIRM WAS NOT UNDER AN OBLIGATION EITHER UNDER THE TERMS OF THE AGREEMENT OR UNDER ANY PROVISIONS OF LAW OR OF CUST OM TO MEET THE CLAIM FOR THE PAYMENT UNDER OBLIGATION ENTERED BY T HE PREVIOUS OWNER WHICH HAS BEEN TAKEN SUCCESSION BY THE CONCE RNED ASSESSEE AND THE COURT HELD THAT PAYMENT WAS NECESSARY TO MA INTAIN THE REPUTATION AND OBLIGATION. HERE THERE IS NO SUCH O BLIGATION ALREADY AGREED UPON BY THE ASSESSEE OR BY ITS PREDECESSORS. IN THE CASE OF EVEREADY INDUSTRIES INDIA LTD. V. DCIT 78 ITD 175 (CAL.) THE COURT HELD THAT IF THERE IS ANY LOSS OR MISHANDLING OF LA PSE OR ERROR OF THE ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 10 EMPLOYEE AND THERE IS NEGLIGENCE ON THE PART OF THE EMPLOYEE THE LOSS MAY BE ALLOWABLE. HERE IT IS NOT THE CASE. IT IS NOT THE CASE THAT LOSSES WERE INCURRED FOR ANY FAULT OF ANY PARTICULA R EMPLOYEE. IN THE CASE OF BADRIDAS DAGA V. CIT 34 ITR 10(SC) IT WAS HELD THAT THE LOSS INCURRED ON ACCOUNT OF EMBEZZLEMENT/MISAPPROPRIATIO N OF FUNDS BY THE AGENT IS ALLOWABLE HERE IT IS NOT THE CASE OF EMBEZZLEMENT BY ANY PARTICULAR EMPLOYEE. HENCE THESE CASE LAWS ARE NOT APPLICABLE. IN THE CASE OF ANNAMALAI TIMBER TRUST LTD. VS. CIT 47 ITR 814 (KER.) IT WAS HELD THAT FOR ANY NEGLIGENCE OF THE ASSESSEES SERV ANTS WHILE ACTING ON THE COURSE OF THEIR EMPLOYMENT IS ALSO INCIDENTA L TO SUCH BUSINESS THE LIABILITY OF THE ASSESSEE TO PAY DAMAGES FOR SU CH NEGLIGENCE IS ALSO INCIDENTAL TO THE BUSINESS AND LOSS RESULTING FROM PAYMENT OF SUCH DAMAGES IS ALLOWABLE. IT IS NOT THE CASE IN TH E PRESENT CASE. THEREFORE IN MY VIEW THE A.O. WAS JUSTIFIED IN DI SALLOWING THE PAYMENT MADE FOR RS.15.56 CRORES AND ALSO JUSTIFIED IN DISALLOWING THE PENALTY OF RS.5 LACS LEVIED BY THE RBI. HENCE G ROUND NO.2 AND 3 BOTH ARE REJECTED. 13. AGGRIEVED BY THE DECISION OF CIT (A) THE ASSES SEE IS NOW IN APPEAL BEFORE US. 14 BEFORE US THE LD. A.R. SUBMITTED THAT THE BANK IS REGISTERED WITH THE SECURITIES & EXCHANGE BOARD OF INDIA (SEBI) AS A CA TEGORY I MERCHANT BANKER AND CARRIES ON MERCHANT BANKING ACTIVITIES W ITHIN THE AMBIT OF THE SEBI REGULATIONS AND THE BANKING REGULATIONS ACT. D URING THE YEAR 2002 THE BANK HAD SYNDICATED/FACILITATED CERTAIN SECURIT Y DEALS MAINLY WITH CERTAIN PSU PROVIDENT FUND TRUSTS THROUGH HOME TRAD E LIMITED AND ITS HOLDING COMPANY GILTEDGE MANAGEMENT SERVICES LIMIT ED AS THE SELLER COUNTER PARTIES. IN THE DEALS THAT WERE STRUCK THE BANK HAD ACTED ONLY AS A SYNDICATOR BY BRINGING THE COUNTER PARTIES TOGETHER . THE CONTRACT NOTES WERE ISSUED BY THE BROKER WHICH WAS ALSO THE COUNTE R-PARTY AND THE ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 11 PAYMENTS WERE RECEIVED BY HIM DIRECTLY. IN NONE OF THE CASES THE BANK HAD ISSUED ANY CONTRACT NOTE. 15. IN THE MIDDLE OF THE YEAR 2002 THE ASSE SSEE BECAME AWARE OF THE FACT THAT THE TWO BROKING FIRMS NAMELY HOME TRADE L IMITED AND GILTEDGE MANAGEMENT SERVICES LTD WHO WERE THE COUNTER PARTI ES FOR THE DEALS SYNDICATED BY THE ASSESSEE HAD DEFAULTED AND FAILE D TO MAKE THE DELIVERY OF THE SECURITIES TO THE RESPECTIVE INVESTING PARTI ES I.E. BUYING COUNTER PARTIES. THE HOME TRADE GROUPS WERE CHARGED BY THE MEDIA AS FRAUD COMPANIES AND ALSO IMMEDIATELY WERE PUT UNDER INVES TIGATIONS BY THE STATUTORY AUTHORITIES. 16. IN THE TRANSACTIONS UNDER CONSIDERATION THE CHEQUES WERE ISSUED BY THE PROVIDENT FUND TRUSTS IN THE NAME OF THE UT I BANK LIMITED ACCOUNT NO ____ WHICH INDICATED THAT THE ASSESSEE WAS NOT THE COUNTER PARTY. HOWEVER THE CONTENTION OF THE INVESTING PARTIES WAS THAT THEY WERE UNDER BONAFIDE BELIEF THAT THE BANK IS COUNTER PARTY. THE INVESTING PARTIES WERE CONTENDING THAT THEY WERE NOT AWARE OF THE SELLING COUNTER PARTIES. THE INVESTING PARTIES HAD FILED COMPLAINTS AGAINST THE ASSESSEE BANK AND ALLEGED THAT IT HAD INVESTED THE MONEY WITH THE ASS ESSEE AND THAT THEY DID NOT HAVE ANY PRIVITY OF CONTRACT WITH HOME TRADE LI MITED. THE LD. A.R. SUBMITTED THAT THOUGH THE BANK WAS NOT INVOLVED IN THE FRAUD PERPETUATED BY HOME TRADE LIMITED BUT BEING ONE OF THE PARTIES TO THE SECURITIES TRANSACTIONS IT WOULD HAVE PROVED HIGHLY DETRIMENT AL TO AND SEVERELY IMPACTED THE BANKS REPUTATION AND ITS BRAND IMAGE. THE ASSESSEE WAS ALSO OF THE VIEW THAT THE CLIMATE OF ADVERSE PUBLIC ITY WAS BEING SOUGHT TO BE CREATED BY THE PROVIDENT FUND AND THE UNIT OF EMPLO YEES CONCERNED AGAINST ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 12 THE ASSESSEE LEADING TO A NEGATIVE PERCEPTION IN T HE MINDS OF THE PEOPLE INCLUDING THE CUSTOMERS THAT THE ASSESSEE WAS ALSO A PARTY TO THE SCAM. THIS ACCORDING TO THE ASSESSEE WOULD HAVE PROVED DE TRIMENTAL TO THE REPUTATION AND ADVERSELY AFFECTED THE BANKS ACTIVIT Y TO PROVE ITS BUSINESS BESIDES IMPAIRING ITS CAPABILITY TO GENERATE BUSINE SS FROM PUBLIC SECTOR UNITS AND FROM CENTRAL AND STATE GOVERNMENTS. IT CO ULD HAVE ADVERSELY AFFECTED THE BANKS ABILITY TO GROW ITS BUSINESS IN THE EASTERN REGION WHERE HOME TRADE LIMITED AND ITS ASSOCIATES HAD DEFRAUDED INVESTORS. THE ASSESSEE CONSIDERING THE OVERALL SITUATION INCLUDIN G ITS BUSINESS INTEREST ITS BRAND IMAGE AND GOODWILL FELT THAT UNDER THE CIRCUM STANCES IT HAS A FIDUCIARY ACCOUNTABILITY AND RESPONSIBILITY. THUS I N ORDER TO AVOID PROTRACTED LITIGATION AND OUT OF COMMERCIAL EXPEDIENCY THE AS SESSEE DECIDED TO HAVE A SETTLEMENT WITH SOME OF THE INVESTING BODIES PART ICULARLY BECAUSE THE PSU EMPLOYEES INTEREST WAS INVOLVED IN THOSE TRANSA CTIONS SUBJECT TO THE CONDITION THAT THE AMOUNT WOULD BE REFUNDED TO THE ASSESSEE IF ANY AMOUNT IS RECOVERED FROM HOME TRADE LTD OR THEIR CUSTODIAN S. THE ASSESSEE ALSO FILED A CASE AGAINST GILTEDGE MANAGEMENT SERVICES L TD FOR RECOVERY OF THE AMOUNTS PAID TO THE INVESTING PARTIES. THE STAFF AC COUNTABILITY IN THE MATTER WAS ALSO FIXED AND THE CONCERNED MANAGER WAS DISMIS SED FROM SERVICES OF THE ASSESSEE. THE ASSESSEE ALSO PLACED ON RECORD AT PAGE 52 OF THE PAPER BOOK THE LETTER DATED 13-8-2002 OF INDIAN IRON & ST EEL CO. LTD. TO SEBI AT PAGE 69 OF THE PAPER BOOK WAS THE COPY OF THE COMPL AINT MADE BY CHAIRMAN HINDUSTAN STEEL LTD. TO SEBI. THE LD. A. R. PLACED AT PAGES 25- 34 OF THE PAPER BOOK THE COPIES OF THE NEWSPAPER CL IPPINGS WHERE THE NEWS OF THE SCAM WAS REPORTED. IT WAS THUS ARGUED ON BEH ALF OF THE ASSESSEE THAT THOUGH THERE WAS NO LIABILITY ON THE ASSESSEE THE ASSESSEE PAID THE AMOUNT OUT OF COMMERCIAL EXPEDIENCY. THE LD. A.R. F URTHER STATED THAT BY ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 13 MAKING THE PAYMENT THE ASSESSEE HAS BEEN IN A POSI TION TO RETAIN THE CUSTOMERS AND THE BUSINESS HAS IMPROVED. AS FAR THE ALLOWABILITY OF PENALTY OF RS.5 LACS IS CONCERNED THE LD. A.R. VEHEMENTLY A RGUED THAT THE SAME BEING FOR THE PURPOSE OF BUSINESS AND INCURRED DURI NG THE COURSE OF BUSINESS IT SHOULD BE ALLOWED AS DEDUCTION. 17. IN ITS SUPPORT THE LD. A.R. RELIED ON THE FOLL OWING DECISIONS:- (1) CIT VS GEORGEPOLOUS (1984) 146 ITR 380 (MAD.) (2) EVERREADY IND.INDIA LTD VS DCIT (2001) 78 ITD 175 (CAL) (3) ANAMALAI TIMBER TRUST LTD. VS CIT (1963) 47 I TR 874 (KOL.) 18. FOR THE PROPOSITION THAT THE PAYMENT MADE PURSU ANT TO COMMERCIAL EXPEDIENCY IS AN ALLOWABLE EXPENDITURE THE LD. A.R . RELIED ON THE FOLLOWING DECISIONS:- CIT VS CHANDULAL KESHAVLAL & CO (1960) 38 ITR 601 ( SC) SASSOON J.DAVID & CO. P.LTD VS CIT (1979) 118 ITR 2 61(SC) J.R.PATEL & SONS LTD VS CIT (1968) 69 ITR 782 (GUJ) 19. THE LD. D.R. ON THE OTHER HAND CONTENDED THAT T HE A.O. HAS RIGHTLY DISALLOWED THE AFORESAID PAYMENTS AS IT WAS NOT A L IABILITY OF THE ASSESSEE. THE LD. D.R. POINTED OUT THAT THE ASSESSEE WAS ONLY MANDATED BY SEBI AND RESERVE BANK OF INDIA TO GIVE ADVICE IN THE MAT TER OF PURCHASE AND SALE OF THE SHARES. THE ASSESSEE CANNOT ACT AS BROK ER. HE ALSO POINTED OUT TO THE AGREEMENT ENTERED ON 20-1-2002 BETWEEN THE A SSESSEE AND THE HOME TRADE LTD. WHICH IS REPRODUCED ON PAGE 21 OF THE ASSESSMENT ORDER. THE CLAUSES OF THE AGREEMENT REVEAL THAT HOM E TRADE LIMITED WAS RESPONSIBLE FOR THE DELIVERY OF THE SECURITIES AND THE TRANSACTIONS WERE ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 14 BETWEEN THE HOME TRADE LIMITED AND PROVIDENT FUND O RGANIZATION. THE LD. D.R. SUBMITTED THAT THE ASSESSEE MADE THE PAYMENT T O PF ORGANISATIONS OF THE PSUS SUBJECT TO THE CONDITION THAT THEY WILL BE RETURNING THE AMOUNT AS AND WHEN THE PAYMENT WAS RECEIVED FROM THE DEFAULTI NG COMPANIES. IN FACT THERE WAS NO FRAUD COMMITTED ON THE BANK AS THE TRA NSACTIONS WERE BETWEEN THE BROKER AND THE PF ORGANIZATION. CBI HAS CHARGE SHEETED THE EMPLOYEE OF THE ASSESSEE ONLY IN THE CASE OF JUTE C ORPORATION OF INDIA WHEREIN THE AMOUNT INVOLVED WAS ONLY RS 75 LACS. TH E FINAL ORDER OF THE CRIMINAL COURT HAS NOT BEEN PRONOUNCED HOLDING AS T O WHO ARE FOUND GUILTY IN FRAUD. THE ASSESSEE HAS NOT MADE ANY DISCLOSURE ABOUT THE SAME IN THE ANNUAL ACCOUNTS OR IN THE STATEMENT OF TOTAL INCOME AND THERE WAS NO OBSERVATION TO THIS EFFECT BY THE AUDITORS IN THEIR REPORT. IN THESE CIRCUMSTANCES THE CLAIM OF THE ASSESSEE THAT THERE WAS VICARIOUS LIABILITY ON THE ASSESSEE IS NOT ACCEPTABLE. IT WAS POINTED O UT BY THE D.R. THAT THE ASSESSEES STAND BEFORE THE RBI WAS THAT IT HAD NEV ER ENTERED INTO SHORT SELLING OR BROKERING AND THE MISTAKE HAD HAPPENED D UE TO IGNORANCE AND THAT THERE WAS NO MONETARY LOSS SUFFERED OUT OF THE ABOVE TRANSACTION. THIS STATEMENT WHICH WAS MADE BEFORE THE RBI IS OPPOSITE TO THAT MADE DURING THE COURSE OF ASSESSMENT PROCEEDINGS TO CLAIM THE L OSS. THUS THE COMPENSATORY PAYMENTS CLAIMED AS FRAUD EXPENSES FOR THE DEFAULT COMMITTED BY 3 RD PARTY IS NOT ALLOWABLE BUSINESS EXPENDITURE AS IT IS NOT INCIDENTAL TO THE BUSINESS OF BANKING INCLUDING MER CHANT BANKING. THE LD. D.R. ALSO RELIED ON THE DECISION OF SUPREME COURT I N THE CASE OF MADDI VANKATANRAMAN & CO. (P) LTD. VS CIT (1998) 229 ITR 534 (SC). 20. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. THE FACTUAL MATRIX IS AS UNDER:- ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 15 DURING THE YEAR THE ASSESSEE HAD SYNDICATED CERTAIN SECURITY DEALS FOR VARIOUS ORGANISATIONS THROUGH HOME TRADE LIMITE D AND ITS HOLDING COMPANY. AS PER THE CONTRACT BETWEEN THE INVESTORS AND THE BROKER THE BROKER WAS REQUIRED TO DELIVER THE SECURITIES TO TH E INVESTORS CONTRACTED FOR. DURING THE YEAR 27 SYNDICATION DEALS WERE STRUCK BE TWEEN THE INVESTORS AND HOME TRADE LIMITED. OUT OF THE 27 DEALS 15 DEA LS WERE SUCCESSFULLY COMPLETED AND 12 DEALS COULD NOT BE COMPLETED AND R EMAINED OUTSTANDING. IN ALL THESE CASES THE CONTRACT NOTES WERE ISSUED T O THE INVESTORS BY THE BROKER. THE ASSESSEE HAD ONLY ACTED AS A FACILITATO R BETWEEN THE INVESTOR AND THE BROKER. IN ALL THESE CASES THE BROKING FIRM FAILED TO DELIVER SECURITIES AFTER TAKING FUNDS FROM THE INVESTORS. WHEN THE INV ESTORS DID NOT GET THE SECURITIES CONTRACTED FOR THEY PRESSURIZED THE ASS ESSEE TO MAKE GOOD THE LOSSES AS THEIR CONTENTION WAS THAT THEY WERE UNDER BONAFIDE BELIEF THAT BANK IS COUNTER PARTY. THE INVESTORS HAD FILED COMP LAINTS AGAINST THE ASSESSEE AND ALLEGED THAT IT HAD INVESTED THE MONEY WITH THE ASSESSEE AND THEY DID NOT HAVE ANY PRIVITY OF CONTRACT WITH HOME TRADE LIMITED. HOME TRADE GROUP WAS CHARGED BY THE MEDIA AS FRAUD COMPANIES AND WAS IMMEDIATELY PUT UNDER INVESTIGATIONS BY THE STATUTO RY AUTHORITIES. THE NEWS OF THE SCAM PERPETUATED BY HOME TRADE GROUP WAS VER Y WIDELY PUBLICIZED BY VARIOUS NEWPAPERS AND MEDIA THROUGHOUT THE COUNT RY. THE ASSESSEE WAS ADVISED THAT IT INCURRED NO LIABILITY TO THE IN VESTORS AS IT WAS ONLY A FACILITATOR. HOWEVER THE ASSESSEE DECIDED TO PAY CO MPENSATION FOR THE REASON THAT THE INVESTORS WERE PROVIDENT FUNDS HAVI NG LARGE NUMBER OF EMPLOYEES AS THEIR MEMBERS. HAD THE BANK TAKEN A VE RY RIGID STAND AND REFUSED THE COMPENSATION TO THE FUNDS THE ASSESSEE WAS OF THE VIEW THAT IT WOULD HAVE GIVEN EXTREMELY ADVERSE PUBLICITY AGAINS T THE ASSESSEE BY THE MEDIA AND IT POLITICAL INVOLVEMENT WHICH WOULD HAVE RUINED THE REPUTATION OF ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 16 THE BANK. THE ASSESSEE WAS ALSO HOLDING LARGE DEPOS ITS FROM PSUS AND PROVIDENT FUNDS. THE EMPLOYEES OF THE PSUS WERE THE CUSTOMERS OF THE ASSESSEE. THE ASSESSEE WAS OF THE VIEW THAT NONPAYM ENT WOULD HAVE RESULTED INTO THE ASSESSEE BEING DRAWN INTO LONG DR AWN LITIGATION. IN VIEW OF ALL THESE FACTORS THE ASSESSEE DECIDED COMPENSATE THE INVESTORS BY MAKING PAYMENT OF RS 15.56 CRORE AND THIS PAYMENT W AS CLAIMED AS LOSS DUE TO FRAUD. THE AFORESAID FACTS ARE UNDISPUTED FA CTS AND HAVE NOT BEEN CONTROVERTED BY THE REVENUE. THE ONLY DISPUTE IS WH ETHER THE AMOUNT OF COMPENSATION OF RS 15.56 CRORE PAID IS AN ALLOWABLE EXPENDITURE OR NOT. IN THE CASE OF CIT VS. GEORGEPOLOUS (1984) 146 ITR 380 (MAD.) THE HONBLE MADRAS HIGH COURT HAS HELD THAT U/S 37 THER E IS NO REQUIREMENT THAT AN ITEM OF EXPENDITURE OR OUTGOING MUST BE INC URRED OR LAID OUT WITH A VIEW TO EARN THE PROFITS NOR IS THERE ANY REQUIREME NT THAT THE EXPENDITURE MUST BE INCURRED IN ORDER TO MEET AN OBLIGATION ARI SING EITHER OUT OF A COMMERCIAL CONTRACT OR OUT OF ANY PROVISION OF LAW OR CUSTOM. ALL THAT THE SECTION REQUIRES IS THAT THE EXPENDITURE MUST BE IN CURRED OR LAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE ASSESSEES BUSINESS. IN THE CASE OF ANNAMALAI TIMBER CO. VS. DCIT (1963 ) 47 ITR 814 (KER) THE ISSUE WAS THAT THE ASSESSEE WAS IN THE BU SINESS OF TIMBER. IT HAD HIRED ELEPHANTS FOR CARRYING LOGS. DUE TO THE NEGLI GENCE OF THE MAHOUT ENGAGED FOR CONTROLLING THE ELEPHANTS INJURIES SUF FERED BY THE ELEPHANT. ASSESSEE PAID DAMAGES TO THE OWNER OF THE ELEPHANT. THE HBLE HIGH COURT HELD THAT THE COMPENSATION THAT THE ASSESSEE HAD TO PAY AROSE FROM THE CARRYING ON OF ITS BUSINESS AND IS INCIDENTAL T HERETO THOUGH THE LIABILITY OF THE ASSESSEE IN RESPECT OF DAMAGES PAID BY IT ST EMMED FROM THE ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 17 NEGLIGENCE OF ITS SERVANTS. THE HIGH COURT HELD THA T IT MADE NO DIFFERENCE THAT BY SUCH NEGLIGENCE A BREACH OF CONTRACT HAD RE SULTED. CONSIDERING THE NATURE OF BUSINESS THE RISK OF NEGLIGENCE WHICH WA S ATTRIBUTED TO THE ASSESSEES SERVANTS WHILE ACTING IN THE COURSE OF T HEIR EMPLOYMENT WAS CLEARLY INCIDENTAL TO SUCH BUSINESS. IT THUS FOLLOW ED THAT THE CONSEQUENTIAL LIABILITY TO PAY DAMAGES FOR SUCH NEGLIGENCE WAS AL SO INCIDENTAL TO THE BUSINESS AND HENCE ALLOWABLE. IN THE CASE OF CIT VS CHANDULAL KESHAVLAL & CO (19 60) 38 ITR 601 (SC) THE HONBLE APEX COURT HELD THAT IN DECIDING W HETHER THE PAYMENT OF MONEY IS A DEDUCTIBLE EXPENDITURE ONE HAS TO TAKE I NTO CONSIDERATION QUESTION OF COMMERCIAL EXPEDIENCY AND THE PRINCIPLE S OF ORDINARY COMMERCIAL TRADING. IF THE PAYMENT OR EXPENDITURE I S INCURRED FOR THE PURPOSE OF TRADE OF THE ASSESSEE IT DOES NOT MATTER THAT THE PAYMENT MADE INURE TO THE BENEFIT OF A THIRD PARTY. IN THE CASE OF SASOON J. DAVID & CO. PVT. LTD. (1 979) 118 ITR 261 (SC). THE HONBLE APEX COURT HELD THAT THE EXPRESSI ON WHOLLY AND EXCLUSIVELY DOES NOT MEAN NECESSARILY. ORDINARIL Y IT IS FOR THE ASSESSEE TO DECIDE WHETHER ANY EXPENDITURE SHOULD BE INCURRED I N THE COURSE OF ITS BUSINESS. SUCH EXPENDITURE MAY BE INCURRED VOLUNTAR ILY WITHOUT ANY NECESSITY AND IF IT IS INCURRED FOR PROMOTING THE B USINESS AND TO EARN PROFITS THE ASSESSEE CAN CLAIM DEDUCTION EVEN THOUGH THERE WAS NO COMPELLING NECESSITY TO INCUR SUCH EXPENDITURE. THE FACT THAT SOMEBODY OTHER THAN THE ASSESSEE IS ALSO BENEFITED BY THE EXPENDITURE SHOUL D NOT COME IN THE WAY OF AN EXPENDITURE BEING ALLOWED BY WAY OF DEDUCTION IF IT SATISFIES OTHERWISE THE TESTS LAID DOWN BY LAW. ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 18 IN THE CASE OF J.R. PATEL & SONS (P) LTD V/S. CIT - (1968) 69 ITR 782 (GUJ.) THE HONBLE GUJARAT HIGH COURT HAS HELD THAT WHAT HAS TO BE CONSIDERED WHILE APPLYING THE TEST OF COMMERCIAL EX PEDIENCY IS WHETHER PARTICULAR EXPENDITURE CAN BE JUSTIFIED NOT BECAUSE OF ANY OBLIGATION UNDER WHICH THE ASSESSEE PAID THE SAME BUT EVEN ON THE GR OUND OF AMOUNT BEING EXPENDED VOLUNTARILY IN THE CASE OF ANY APPLICATION UNDER WHICH THE ASSESSEE-COMPANY PAID THE SAME BUT EVEN ON THE GROU ND OF THE AMOUNT BEING EXPENDED VOLUNTARILY BY THE ASSESSEE-COMPANY. IF THE ASSESSEE DERIVES ANY INDIRECT BENEFIT ALSO THEN THE AMOUNT PAID IS TO BE CONSIDERED TO HAVE EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PUR POSE OF BUSINESS AND THEREFORE ALLOWABLE. IN THE CASE OF MADDI VANKATARAMAN & CO. (P) LT D. VS CIT (1998) 229 ITR 534 (SC) THE FACTS OF THE CASE IS THAT THE ASS ESSEE WAS ENGAGED IN THE TOBACCO BUSINESS. THE ASSESSEE HAD INDULGED IN TRANSACTIONS IN VIOLATION OF THE PROVISIONS OF FERA. THE ASSESSEES PLEA WAS THAT IF IT HAD NOT ENTERED INTO SUCH TRANSACTION IT WOULD HAVE IN CURRED A LOSS. IN THOSE FACTS THE HBLE APEX COURT HELD THAT SPUR OF LOSS C ANNOT BE A JUSTIFICATION FOR CONTRAVENTION OF LAW. IF THE ASSESSEE CONTRAVENES T HE PROVISIONS OF FERA TO CUT DOWN ITS LOSSES OR TO MAKE LARGER PROFITS WH ILE CARRYING ON THE BUSINESS IT WAS ONLY TO BE EXPECTED THAT PROCEEDIN GS WILL BE TAKEN AGAINST THE ASSESSEE FOR VIOLATION OF THE ACT. THE EXPENDIT URE INCURRED FOR EVADING THE PROVISIONS OF THE ACT AND ALSO THE PENALTY LEVI ED FOR SUCH EVASION CANNOT BE ALLOWED AS DEDUCTION. ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 19 IN THE CASE BEFORE US THE FACT IS THAT THE ASSE SSEE IS IN THE BUSINESS OF MERCHANT BANKING ACTIVITIES AND THE EXP ENDITURE HAS BEEN INCURRED DURING THE COURSE OF BUSINESS. IT IS ALSO A FACT THAT THE ASSESSEE WAS NOT LEGALLY LIABLE TO MAKE THE PAYMENT AND COMP ENSATE THE INVESTORS BUT THE ASSESSEE HAD COMPENSATED THE INVE STORS. IN THESE CIRCUMSTANCES IT CANNOT BE SAID THAT THE EXPENDITUR E IS NOT RELATING TO THE ASSESSEES BUSINESS ONLY FOR THE REASON THAT IT WAS LEGALLY NOT LIABLE TO PAY. THUS IT CAN BE CONSIDERED TO HAVE BEEN MADE AS A MATTER OF BUSINESS EXPEDIENCY. THE PAYMENT WAS MADE BY THE AS SESSEE TO KEEP UP THE REPUTATION OF THE ASSESSEE BANK TO AVOID LO NG PROTRACTED LITIGATION TO CONTINUE THE BUSINESS RELATIONSHIP W ITH THE PSUS AND THEIR EMPLOYEES TO INCREASE THE BUSINESS IN THE LONG RUN PROMOTING ITS BUSINESS AND IN THE INTEREST OF BUSINESS THE COMPEN SATION PAYMENTS WERE MADE. IN VIEW OF THESE FACTS AND APPLYING THE RATIO OF VARIOUS DECISIONS CITED HEREINABOVE IT CAN BE SAID THAT THE AMOUNT OF COMPENSATION OF RS 15.62 CRORES IS AN EXPENDITURE H AS BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ASSESSEE S BUSINESS. AS FAR AS THE PAYMENT OF PENALTY OF RS 5 LACS PURSUANT TO THE ORDER OF RBI IS CONCERNED RELYING ON THE DECISION OF APEX COURT IN THE MADDI VANKATARAMAN (SUPRA) AND IN VIEW OF THE FACT THAT T HE PENALTY WAS LEVIED FOR VIOLATION OF BANKING REGULATION ACT THE SAME C ANNOT BE ALLOWED AS DEDUCTION. THUS THIS GROUND OF THE ASSESSEE IS PART LY ALLOWED. 21. GROUND NO.3 RELATES TO DEDUCTION IN RESPECT OF PROFESSIONAL FEES PAID TO FINANCIAL SOFTWARE AND SYSTEM PVT. LTD.(FSSPL) RS.34.35 LACS AND TO NCR CORPORATION RS. 25.84 LACS ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 20 ON PERUSING THE DETAILS OF EXPENSES THE AO OBSERVED THAT THE ASSESSEE HAS INCURRED RS 34 35 500 FOR IMPLEMENTATION OF VIS A MODULE AND FM SUPPORT TO BASE 24 SWITCHES. (LISTED AT SR. NO 19 A ND 20 ON PAGE 29 OF THE ASSESSMENT ORDER). THE AO WAS OF THE VIEW THAT IT H AS BEEN INCURRED FOR IT RELATED EXPENSES AND ARE ONLY SUPPLEMENTAL TO THE E XISTING PROGRAMS AND THE PAYMENTS ARE DEFERMENT AND HAS TO BE TREATED AS CAPITAL EXPENDITURE. HE ACCORDINGLY DISALLOWED THE EXPENSES AS REVENUE E XPENSES BUT ALLOWED DEPRECIATION AT THE APPLICABLE RATES. 22. THE AO ALSO OBSERVED THAT ASSESSEE HAD PAID RS 25 84 000 TO NCR CORPORATION LTD BEING PAYMENT MADE FOR UPGRADATION OF ATMS. THE ASSESSEE SUBMITTED THAT IT REPRESENTED THE COST OF CHANGE IN THE SOFTWARE LOADED ON THE ATMS SO THAT ATMS CAN ACCEPT VISA CAR DS AND CUSTOMERS OF OTHER BANKS CAN START USING THE BANKS ATMS. THE AO CONSIDERED IT TO BE CAPITAL EXPENDITURE AS ADDITION TO THE EXISTING ATM S AND GRANTED DEPRECIATION ON THE SAME. 23. ON BOTH THE ABOVE ADDITIONS THE ASSESSEE CARRIE D THE MATTER BEFORE CIT (A). CIT (A). CIT(A) VIDE PARA 4.3 ON PAGE 18 O F HIS ORDER HELD THAT THE EXPENDITURE INCURRED RESULTED INTO MODIFICATION OF EXISTING SYSTEM AND SUPPLEMENTING OF ADDITIONAL FEATURES AND ACCORDINGL Y HELD IT TO BE OF CAPITAL EXPENDITURE AND THUS UPHELD THE ORDER OF AO. AGGRIE VED BY THE ORDER OF CIT(A) THE ASSESSEE IS NOW IN APPEAL BEFORE US. 24. BEFORE US THE LD. A. R. POINTED OUT TO THE FAC T THAT THE AO HIMSELF VIDE PARA 7.3 AND 7.5 STATED THAT THE ASSESSEE BE G RANTED DEPRECIATION OF THE AFORESAID EXPENDITURE BUT NO DEPRECIATION HAS B EEN GRANTED WHILE ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 21 COMPUTING THE TOTAL INCOME. HE ACCORDINGLY URGED TH AT THE AO BE DIRECTED TO GRANT DEPRECIATION. THE LD. D.R. DID NOT SERIOUS LY OBJECT IT. 25. WE HAVE HEARD THE RIVAL CONTENTIONS PERUSED TH E MATERIAL ON RECORD. WE OBSERVE THAT VIDE PARA NO 7.3 AND 7.5 OF THE ASS ESSMENT ORDER HAS STATED THAT THE ASSESSEE IS ALLOWED DEPRECIATION AT THE APPLICABLE RATES DEPENDING UPON THE DATE PUT TO USE. IN VIEW OF THES E FACTS WE DIRECT THE AO TO VERIFY THE RECORDS AND GRANT DEPRECIATION ON THE ADDITIONS MADE IF NOT ALREADY ALLOWED. IN THE RESULT THIS GROUND OF THE A SSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. GROUND NO.4 RELATED TO DISALLOWANCE U/S. 14A OF RS .12.76 CRORES. 26. THE FACTS ARE THAT A.O. OBSERVED THAT THE ASSE SSEE HAS CLAIMED EXEMPTION IN RESPECT OF INTEREST INCOME EARNED ON T AX FREE TAX BONDS AND DEBENTURE AMOUNTING TO RS. 17 45 12 563/-. THE ASSE SSEE HAD SUO MOTO DISALLOWED RS.5 53 00 000/- BEING THE ELEMENT OF IN TEREST ON THE INVESTMENT IN TAX FREE BONDS AND DEBENTURE. THE CALCULATION OF DISALLOWANCE AND THE SUBMISSIONS MADE BY THE ASSESSEE WAS NOT ACCEPTABLE TO THE AO. THE AO WAS OF THE VIEW THAT BORROWED FUNDS HAVE BEEN USED FOR THE PURPOSE OF MAKING INVESTMENTS ON WHICH THE ASSESSEE HAD EARNED TAX FREE INCOME. ACCORDING TO THE AO THE TOTAL INTEREST PAID ON BORR OWED FUNDS AND WHICH WERE UTILIZED FOR MAKING INVESTMENTS WAS TO THE EXT ENT OF RS 25.53 CRORES. APART FROM THE DISALLOWANCE OF INTEREST THE AO EST IMATED RS 7.23 CRORE BEING OTHER EXPENDITURE ATTRIBUTED TO TAX FREE INCO ME. THE AO THUS ESTIMATED AGGREGATE SUM OF RS 32.76 CRORE U/S14A. S INCE THE ASSESSEE HAD SUO MOTO DISALLOWED RS 5.53 CRORES THE AO DISA LLOWED THE DIFFERENTIAL ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 22 AMOUNT OF RS 27.23 CRORES U/S 14A. AGGRIEVED BY THE ORDER OF AO THE ASSESSEE CARRIED THE MATTER BEFORE CIT (A). 27. BEFORE CIT (A) IT WAS SUBMITTED THAT THE ASSESS EE WAS HAVING OWN INTEREST FREE FUNDS AND HENCE NO DISALLOWANCE IS CA LLED FOR IN RESPECT OF INTEREST EXPENSES ATTRIBUTABLE TO THE TAX FREE BOND S. THERE IS ALSO NO CASE FOR DISALLOWANCE OF ADMINISTRATIVE EXPENSES AS NO SUCH EXPENSES WERE INCURRED. 28. CIT (A) HELD THAT ON SIMILAR ISSUE IN AY 2002-0 3 AFTER DISCUSSING THE FACTS THE CASE THE ISSUE WAS DECIDED VIDE ORDER DAT ED 18.11.2005 AS UNDER: THE ACTION OF THE A.O. IS NOT CORRECT AS REGARDS D ISALLOWING INTEREST EXPENSES AMOUNT AFTER ALLOCATING IT TO THE INVESTME NTS FOR EXEMPTED INCOME. THE APPELLANT HAS FILED THE DETAILS BEFORE THE A.O. ADMITTING THAT ONLY PART OF THE INTEREST BEARING FUNDS IS USE D FOR INVESTING IN THE INVESTMENTS GIVING TAX EXEMPTED INCOME. THE INTERES T COST IS CALCULATED AT RS.6.23 CR. WHICH IS OFFERED FOR TAXA TION. HENCE THE A.O. IS NOT JUSTIFIED IN FURTHER ALLOCATING THE INTEREST EXPENDITURE FOR THIS PURPOSE DISREGARDING THE FACT THAT THE APPELLANT HA S SURPLUS FUNDS. HOWEVER AS REGARDS THE OTHER OPERATING EXPENSES AR E CONCERNED THE APPELLANT HAS NOT FILED ANY DETAILS AS TO HOW M UCH EXPENDITURE IS TO BE APPORTIONED FOR EARNING THE EXEMPTED INCOME. THE TOTAL OPERATING EXPENSES ARE RS.205.47 CR. AND THE EXEMPT INCOME CLAIMED BY THE APPELLANT IS RS.39.65 CR. WHEREAS TH E TOTAL INCOME EARNED BY THE APPELLANT IS RS.1595.40 CR. HENCE THE EXEMPTED INCOME IS 2.485% OF THE TOTAL INCOME. THEREFORE BY ALLOCATING THE OPERATING EXPENSES OF RS.205.47 CR. IN THIS RATIO THE EXPENSE ALLOCABLE TO THE EXEMPT INCOME COMES TO RS.5.11 CR. (205.47 X 2.485%) THEREFORE THIS EXPENDITURE HAS TO BE DISAL LOWED OUT OF THE TOTAL EXPENDITURE FOR EARNING THE EXEMPT INCOME UND ER THE PROVISIONS OF SEC. 14A. THIS VIEW IS SUPPORTED BY THE DECISION OF ITAT CHENNAI BENCH IN THE CASE OF SOUTHERN PETRO CHEMICALS V. DC IT 93 TTJ 161. AS PER THIS DECISION THE INVESTMENT DECISIONS ARE VERY STRATEGIC ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 23 DECISIONS IN WHICH TOP MANAGEMENT IS INVOLVED AND THEREFORE PROPORTIONATE MANAGEMENT EXPENSES ARE REQUIRED TO B E DEDUCTED WHILE COMPUTING THE EXEMPT INCOME. ON SIMILAR LOGIC THE OTHER OPERATING EXPENSES ARE ALSO TO BE DEDUCTED. THE APP ELLANT HAS ALREADY DISALLOWED RS.6.23 CR. OUT OF INTEREST EXPE NDITURE. THE DISALLOWANCE OUT OF OPERATIVE EXPENSES COMES TO RS. 5.11 CR. WHICH IS JUSTIFIED. HENCE THE DISALLOWANCE IS CONFIRMED TO THE EXTENT OF RS.5.11 CR. AND THE BALANCE AMOUNT OF RS.25.34 IS D ELETED. 29. CIT(A) THUS BY FOLLOWING THE ORDER FOR A.Y. 200 2-03 AND THE REASONING GIVEN THEREIN HELD THAT INTEREST EXPENSES DISALLOW ABLE WAS JUSTIFIED TO THE EXTENT OF RS.5.53 CR. CALCULATED BY THE APPELLANT I TSELF. CIT(A) FURTHER HELD THAT THE OBSERVATION OF THE AO THAT WHILE WORKING O UT THE INTEREST FREE FUNDS IN AY 2002-03 THE REQUIREMENT OF SLR AMOUNTING TO RS 2784 CRORE WAS NOT CONSIDERED THROUGH OVERSIGHT WAS INCORRECT IN V IEW OF THE FACT THAT ALTHOUGH THE ASSESSEE HAS TO MAINTAIN THE SLR BUT I T IS HIS OPTION TO MAINTAIN THE SLR AMOUNT EITHER FROM HIS OWN FUNDS O R FROM BORROWED FUNDS. HENCE IT CANNOT BE SAID THAT ALL THE INTERES T FREE FUNDS AND RESERVE WERE BLOCKED IN MAINTAINING OF SLR AND ONLY INTERES T BEARING FUNDS WERE INVESTED IN TAX FREE BONDS. THIS FACT CANNOT MAKE T HE FACTS OF THE CASE DIFFERENT FROM THE FACTS OF THE ASSESSMENT ORDER FO R AY 2002-03. HENCE THERE WAS NO REASON TO DEVIATE FROM THE DECISION GI VEN IN THE APPELLATE ORDER FOR AY 2002-03. CIT(A) HOWEVER UPHELD THE AC TION OF THE AO IN DISALLOWING EXPENDITURE OUT OF ADMINISTRATIVE EXPEN DITURE OF RS.7.23 CR. HE THUS CONFIRMED THE DISALLOWANCE TO THE EXTENT OF RS .7.23 CRORE ONLY. 30. AGGRIEVED BY THE ACTION OF THE CIT (A) IN PAR TLY CONFIRMING THE ACTION OF AO THE ASSESSEE IS IN APPEAL. REVENUE IS ALSO I N APPEAL FOR THE REASON THAT THE CIT RESTRICTED THE DISALLOWANCE TO RS 7.23 CRORE. ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 24 31. BEFORE US THE LD. A.R. SUBMITTED THAT THE ASSE SSEE HAD SOU MOTO DISALLOWED RS 5.53 CRORE U/S 14A IN RESPECT OF INTE REST EXPENDITURE. THE QUANTUM OF EXEMPT INCOME FOR THE YEAR IS RS 17.45 C RORES WHEREAS THE AO HAS WORKED OUT THE DISALLOWANCE U/S 14A OF RS 32.76 CRORE WHICH IS FAR MORE THAN THE AMOUNT OF EXEMPT INCOME. THE ASSESSEE HAD EARNED CASH PROFITS OF RS 599 CRORES DURING THE ASSESSMENT YEAR IN QUESTION. THE OWN FUNDS AS ON 31 ST MARCH 2003 WAS RS 919 CRORES COMPRISING OF SHARE C APITAL OF RS 230 CRORE AND RESERVES OF RS 689 CRORES. THE LD. A.R. PLACED ON RECORD THE COPIES OF THE AUDITED BALANCE SHEETS IN SUPPORT OF ITS CONTENTIONS THAT IT HAD SUFFICIENT INTEREST FREE FU NDS AND THEREFORE NO INTEREST BEARING FUNDS WERE UTILIZED FOR MAKING THE INVESTMENTS. THE LD. A.R. ALSO FURNISHED A CHART SHOWING THE POSITION OF INTEREST FREE FUNDS VIS A VIS TAX FREE INVESTMENTS AS ON THE BALANCE SHEET DA TES RIGHT FROM 31 ST MARCH 1995 TO 31 ST MARCH 2003. FROM THE CHART IT WAS POINTED OUT THAT AS ON 31 ST MARCH 2003 THE INTEREST FREE FUNDS IN THE FORM OF CAPITAL RESERVES AND INTEREST FREE DEMAND DEPOSITS WAS TO THE EXTENT OF RS 3404 CRORE AS AGAINST THE TAX FREE INVESTMENTS OF RS 589 CRORES. THUS THE INTEREST FREE FUNDS WERE FAR IN EXCESS OF THE INVESTMENTS. IT WAS SUBMITTED THAT THE AO HAD WORKED OUT THE DISALLOWANCE PRIMARILY ON THE PR ESUMPTION THAT INTEREST BEARING FUNDS HAVE BEEN UTILIZED FOR MAKING THE TAX FREE INVESTMENTS WITHOUT ANY COGENT EVIDENCE. IT WAS SUBMITTED THAT SINCE THE ASSESSEE HAS ALREADY SUO MOTO DISALLOWED RS 5.53 CRORES WHICH I S ALREADY EXCESSIVE THE DISALLOWANCE BE RESTRICTED TO IT AND NO FURTHER DISALLOWANCE BE MADE. THE LD. A.R. FURTHER RELIED ON THE DECISION OF BOMB AY HIGH COURT IN THE CASE OF CIT VS RELIANCE UTILITIES & POWER LTD (2009 ) 313 ITR 340 FOR THE PROPOSITION THAT IF THERE ARE INTEREST FREE FUNDS A VAILABLE TO AN ASSESSEE ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 25 SUFFICIENT TO MEET ITS INVESTMENTS AND AT THE SAME TIME THE ASSESSEE HAS RAISED A LOAN IT CAN BE PRESUMED THAT THE INVESTMEN TS WERE FROM INTEREST FREE FUNDS AVAILABLE. AS FAR AS DISALLOWANCE WITH R ESPECT TO OTHER ADMINISTRATIVE EXPENSES IS CONCERNED THE LD.A.R. S UBMITTED THAT THE ASSESSEE HAS NOT INCURRED ANY SUCH EXPENSES AND THE REFORE NO DISALLOWANCE IS CALLED FOR. THE DISALLOWANCE HAS BE EN MADE ONLY ON THE BASIS OF PRESUMPTION BY THE AO WITHOUT GIVING ANY F INDING ON THIS ASPECT. THE LD.A.R. ALSO RELIED ON THE DECISION OF CIT VS H ERO CYCLES LTD (2010) 323 ITR 518 (P&H). 32. THE LEARNED D.R. ON THE OTHER HAND RELIED ON TH E ORDER OF THE AO. 33. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. THE UNDISPUTED FACTS ARE THAT DURING THE YE AR THE ASSESSEE HAS EARNED INTEREST OF RS 17.45 CRORE ON TAX FREE BOND AND DEBENTURES AS AGAINST WHICH THE ASSESSEE HAD SUO MOTO DISALLOWED RS 5.53 CRORE BEING THE INTEREST EXPENSES U/S 14A AS AGAINST WHICH THE AO HAS WORKED OUT THE DISALLOWANCE OF RS 32.76 CRORE. AFTER GIVING THE CR EDIT OF DISALLOWANCE OF RS 5.53 CRORE MADE BY THE ASSESSEE THE AO DISALLOWED RS 27.23 CRORE U/S 14A. AS ON 31 ST MARCH 2003 THE INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE WAS TO THE TUNE OF RS 3404 CRORE (COMPRISI NG OF SHARE CAPITAL OF RS 230 CRORE RESERVES OF RS 689 CRORES AND INTERES T FREE DEMAND DEPOSITS OF RS 2485 CRORES) AS AGAINST WHICH THE TA X FREE INVESTMENTS WERE TO THE TUNE OF RS 589 CRORE. THUS THE INTEREST FREE FUNDS WERE FAR IN EXCESS OF THE INVESTMENTS. CIT (A) HAS GIVEN A FINDING THA T THE FACTS IN AY 2003-04 ARE IDENTICAL TO THE FACTS OF THE CASE IN AY 2002-0 3 AND ACCORDINGLY HE HAS FOLLOWED THE DECISION OF CIT (A) FOR AY 2002-03. TH ESE FACTS HAVE NOT BEEN ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 26 CONTROVERTED BY THE LD. D.R. NOR HAVE THEY BROUGHT ON RECORD ANY FACTS TO THE CONTRARY. HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS RELIANCE UTILITIES & POWER LTD (SUPRA) HAS HELD THAT IF THER E ARE INTEREST FREE FUNDS AVAILABLE TO AN ASSESSEE SUFFICIENT TO MEET ITS INV ESTMENTS AND AT THE SAME TIME THE ASSESSEE HAS RAISED A LOAN IT CAN BE PRESU MED THAT THE INVESTMENTS WERE FROM INTEREST FREE FUNDS AVAILABLE . IN THE PRESENT CASE SINCE THE ASSESSEE HAS SUO MOTO DISALLOWED RS 5.53 CRORE U/S 14A RESPECTFULLY FOLLOWING THE DECISION OF BOMBAY HIGH COURT WE ARE OF THE VIEW THAT IN THE FACTS OF THE PRESENT CASE NO FURT HER DISALLOWANCE OVER AND ABOVE THAN WHAT HAS BEEN DISALLOWED BY THE ASSESSEE IS CALLED FOR. AS FAR AS DISALLOWANCE OF OTHER ADMINISTRATIVE EXPENSES IS CONCERNED THE UNDISPUTED FACT IS THAT THE DISALLOWANCE HAS BEEN M ADE BY THE AO WITHOUT GIVING A FINDING AS TO HOW MUCH ADMINISTRATIVE EXPE NDITURE HAS BEEN INCURRED TO EARN THE EXEMPT INCOME. IN THE CASE OF HERO CYCLES (SUPRA) THE HONBLE HIGH COURT HAS HELD THAT THE CONTENTION OF THE REVENUE THAT DIRECTLY OR INDIRECTLY SOME EXPENDITURE IS ALWAYS I NCURRED WHICH MUST BE DISALLOWED U/S 14A CANNOT BE ACCEPTED. DISALLOWANCE U/S 14A REQUIRES FINDING OF INCURRING OF EXPENDITURE. IN THE PRESEN T CASE THE AO HAS PRESUMED THAT THE ASSESSEE MIGHT HAVE INCURRED EXPE NDITURE TO EARN THE EXEMPT INCOME. HE HAS NOT GIVEN ANY FINDING OF INCU RRING OF EXPENDITURE. IN VIEW OF THESE FACTS AND RESPECTFULLY FOLLOWING THE DECISION OF HIGH COURT WE ARE OF THE VIEW THAT NO DISALLOWANCE OF ADMINISTRAT IVE EXPENSES CAN BE MADE. WE ACCORDINGLY DIRECT FOR THE DELETION OF THE ADDITION MADE BY THE AO AND ALLOW THIS GROUND OF THE ASSESSEE. GROUND NO.5 RELATES TO DEDUCTION U/S. 36(1)(VII). ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 27 34. THE ASSESSEE IS REQUIRED TO MAKE PROVISION FOR LOSS ASSETS DOUBTFUL ASSETS AND STANDARD ASSETS AS PER THE RBI PRUDENTIA L GUIDELINES SUCH PROVISION IS CHARGED TO PROFIT AND LOSS ACCOUNT AS PER THE RBI DIRECTIVES BUT THIS PROVISION AS PER RBI GUIDELINES IS NOT CLAIMED IN INCOME TAX. IN INCOME TAX THE ASSESSEE CLAIMS DEDUCTION IN RESPECT OF BA D DEBTS ACTUALLY WRITTEN OFF IN THE BOOKS U/S 36(1)(VII) AND FURTHER THE ASS ESSEE CLAIMS DEDUCTION WITHIN THE PRESCRIBED LIMIT TOWARDS PROVISION MADE FOR BAD AND DOUBTFUL DEBTS U/S 36(I)(VIIA). THE CUMULATIVE PROVISION FOR DOUBTFUL ASSETS AND LOSS ASSETS AS PER THE RBI GUIDELINES WAS RS 96.70 CRORE S AS ON 31 ST MARCH 2002 AND THE PROVISION REQUIRED FOR LOSS AND DOUBTF UL ASSETS SO CLASSIFIED AS PER THE RBI GUIDELINES AS ON 31 ST MARCH WAS AT RS 66.92 CRORES. THE BANK HAD TO WRITE BACK EXCESS PROVISION FOR DOUBTFU L ASSETS AND LOSS ASSETS AS PER THE GUIDELINES AT RS 29.77 CRORES WHICH WAS CREDITED AS INCOME TO ITS PROFIT AND LOSS ACCOUNT. AS THIS EXCESS PROVISI ON WAS WRITTEN BACK WAS BEING DISALLOWED BY THE ASSESSEE ITSELF AND OFFERED TO TAX DURING THE EARLIER YEARS THE BANK HAD REDUCED THIS EXCESS PROVISION O F RS 29.77 CRORE FROM TOTAL INCOME DURING THE PREVIOUS YEAR. THE AO FOLLO WING THE ORDER OF PREDECESSOR FOR AY 2001-02 MADE DISALLOWANCE OF RS 60.04 CRORE. THE ASSESSEE CARRIED THE MATTER BEFORE CIT (A). CIT(A) FOLLOWING HIS OWN DECISION FOR AY 2002-03 HELD THAT THE ALLOWABLE DED UCTION U/S 36(1)(VII) AT RS 103.54 CRORE INSTEAD OF RS 110.14 CRORE AS CLAIM ED BY THE ASSESSEE AND ACCORDINGLY CONFIRMED THE DISALLOWED OF RS 6.60 CRORE. 35. AGGRIEVED BY THE ORDER OF CIT (A) BOTH THE AS SESSEE AND THE REVENUE ARE IN APPEAL BEFORE US. ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 28 36. AT THE OUTSET THE LD. A.R. SUBMITTED THAT THE I SSUE IS COVERED IN FAVOUR OF THE ASSESSEE IN VIEW OF THE DECISION OF T HE HONBLE ITAT VIDE ORDER DATED 5.12.2008 IN ITA NO 81/AHD/2005 AND ITA NO. 3665/AHD/2004 & 3665 ORDER DATED 7.11.2008 IN ITA NO 1394 & 1894 /AHD/2003 FOR AY 1998-99 AND ORDER DATED 23.1.2009 IN ITA NOS. 4151 & 4400/A/2003 2001- 02. HE PLACED THE SAME ON RECORD AT PAGE NOS 346 TO 368 OF THE PAPER BOOK. THE LD A.R. ALSO PLACED ON RECORD AT PAGE 377 OF THE PAPER BOOK THE COPY OF INSTRUCTION NO 17/2008 DATED 26 TH NOV. 2008 ISSUED BY CBDT WHEREIN INTERALIA IT HAS BEEN STATED THAT THAT WHIL E WORKING OUT THE DEDUCTION U/S 36(1)(VII) THE OPENING CREDIT BALANC E I.E BALANCE BROUGHT FORWARD AS ON 1 ST APRIL OF THE RELEVANT ACCOUNTING PERIOD NEEDS TO B E REDUCED. 37. THE LD. D.R. DID NOT SERIOUSLY OBJECT TO IT. 38. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT THE IDENTICAL ISSUE WAS DECIDE D BY THE CO-ORDINATE BENCH IN ITA NO 81/AHD/2005 AND ITA NO 3665/AHD/200 4 FOR AY 2001-02 BY HOLDING AS UNDER: 5. AT THE TIME OF HEARING BOTH THE PARTIES SUBMI TTED THAT IDENTICAL ISSUE HAS BEEN CONSIDERED IN THE ASSESSEES OWN CAS E IN THE ASSESSMENT YEAR 1998-99 IN WHICH A VIEW HAS BEEN TA KEN THAT THE AMOUNT OF DEDUCTION CLAIMED BY THE ASSESSEE U/S 36( 1)(VIIA) OF THE ACT IN RESPECT OF BAD DEBTS WRITTEN OFF WAS NOT REQ UIRED TO BE REDUCED BY THE OPENING BALANCE IN THE PROVISION OF BAD DEBT ACCOUNT. SINCE THE ISSUE HAS ALREADY BEEN CONSIDERED AND DECIDED B Y THIS TRIBUNAL IN THE ASSESSEES OWN CASE IN THE ASSESSMENT YEAR 1998 -99 IT IS CONSIDERED APPROPRIATE TO DIRECT THE ASSESSING OFFI CER TO EXAMINE THE ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 29 MATTER AND ALLOW THE CLAIM IN ACCORDANCE WITH THE A FORESAID ORDER OF THE TRIBUNAL 39. SINCE THE ISSUE IN THE PRESENT APPEAL IS IDENTI CAL TO THAT OF AY 2001- 02 WE TAKE A SIMILAR VIEW AND ACCORDINGLY DIRECT T HE AO TO EXAMINE THE MATTER AND ALLOW THE CLAIM IN ACCORDANCE WITH THE O RDER OF THE TRIBUNAL AND THE INSTRUCTION NO 17/2008 DATED 26 TH NOV 2008 ISSUED BY CBDT. IN THE RESULT THE APPEAL IS ALLOWED FOR STATISTICAL PURPOS ES. 40. THE LAST ISSUE IS WITH RESPECT TO INTEREST U/S 234B. SINCE THIS ISSUE IS CONSEQUENTIAL IN NATURE IS NOT ADJUDICATED. APPEAL NO 2736 (OF REVENUE) 1 ST GROUND IS WITH RESPECT TO DISALLOWANCE U/S 14A 41. FOR THE REASONS STATED WHILE ADJUDICATING THE G ROUND NO.4 OF THE ASSESSEES APPEAL WE DISMISS THIS GROUND OF THE RE VENUE. 2 ND GROUND IS WITH RESPECT TO DEDUCTION U/S 36(1)(VIIA ) 42. FOR THE REASONS STATED WHILE ADJUDICATING THE G ROUND NO 5 OF THE ASSESSEES APPEAL WE DISMISS THIS GROUND OF THE RE VENUE. 3 RD GROUND IS WITH RESPECT TO THE COMPENSATION OF RS 6 LACS PAID FOR NON- OCCUPATION OF THE PREMISES . ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 30 43. THE ASSESSEE FOR OPENING ITS BRANCH AT TRICHY CONSIDERED TAKING ON LEASE A PREMISE WHICH WAS BEING CONSTRUCTED BY MR. AND MRS. K.A.S. RAMADOSS. AFTER NEGOTIATIONS THE PROPOSAL OF MR. RA MADOSS WAS ACCEPTED AND IT WAS ACCORDINGLY CONVEYED TO THE OWNER VIDE L ETTER DATED 15.9.2001. THE LANDLORD (MR. RAMADOSS) STARTED THE CONSTRUCTIO N OF THE PROPERTY AS PER THE REQUIREMENTS OF THE ASSESSEE. BEFORE COMPLE TION OF CONSTRUCTION OF THE PROPERTY THE ASSESSEE LEARNT THAT AN OVERBRIDG E WAS PROPOSED TO BE CONSTRUCTED OVER THE PROPERTY WHICH COULD HAVE CAUS ED HINDERANCE AND COULD HAVE BEEN IMPEDIMENT TO ITS BUSINESS PROSPECT S. ACCORDINGLY IT WITHDREW THE OFFER MADE TO THE LANDLORD FOR TAKING HIS PREMISES ON LEASE. SINCE THE LANDLORD HAD ALREADY INCURRED SIGNIFICANT EXPENDITURE ON THE PROPERTY IN THE EXPECTATION OF RENTAL INCOME FROM T HE ASSESSEE THE LANDLORD CONTESTED SUCH WITHDRAWAL. THE ASSESSEE AFTER TAKIN G INTO ACCOUNT ALL THE FACTS CHOSE TO SETTLE THE DISPUTE WITH THE LANDLORD BY PAYING HIM A COMPENSATION OF RS 6 LACS. THE LANDLORD AGREED WITH THE OFFER AND CONSENTED TO WITHDREW ALL HIS CLAIMS AGAINST THE AS SESSEE. 44. THE AO DISALLOWED THE COMPENSATION OF RS 6 LACS FOR THE REASON THAT THE ASSESSEE HAD NOT OCCUPIED THE PROPERTY AND THER E WAS NO FORMAL LEASE AGREEMENT SIGNED WITH THE LANDLORD THE CONSENT LET TER WAS SIGNED BY MR. RAMADOSS ONLY WHILE THE PROPERTY IS IN THE NAME OF MR AND MRS RAMADOSS THE LANDLORD DID NOT HAVE ANY ACTIONABLE CLAIM OVER THE ASSESSEE AND THE COMPENSATION OF RS 6 LAC WAS UNREASONABLE SINCE THE RE WAS NO EVIDENCE OF LANDLORD HAVING INCURRED ANY COST FOR MODIFICATI ON OF THE PROPERTY AS PER THE ASSESSEES REQUIREMENT. AGGRIEVED BY THE ORDER OF THE AO THE ASSESSEE PREFERRED APPEAL BEFORE CIT (A). BEFORE CI T (A) THE ASSESSEE MADE VARIOUS SUBMISSIONS. THE LD. A. R. ALSO RELIED ON VARIOUS DECISIONS ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 31 IN ITS SUPPORT. CIT (A) AGREED WITH THE CONTENTIONS OF THE ASSESSEE AND DELETED THE ADDITION MADE BY THE AO. AGGRIEVED BY T HE ACTION OF THE CIT(A) THE REVENUE IS IN APPEAL BEFORE US. 45 BEFORE US THE LD. D.R. RELIED ON THE ORDER OF T HE AO AND SUBMITTED THAT THE EXPENSES IS NOT FOR THE PURPOSE OF BUSINES S. THE LD. D.R. THEREFORE URGED THAT THE ACTION OF THE AO BE UPHELD. 46. ON THE OTHER HAND THE LD. A.R. PLACED ON RECORD AT PAGE 195 TO 204 OF THE PAPER BOOK VARIOUS CORRESPONDENCE EXCHANGED BETWEEN THE ASSESSEE AND THE LANDLORD. HE POINTED OUT TO THE LE TTER AT PAGE 200 WHERE THE LANDLORD INTERALIA STATED THAT A WIDE PUBLICITY HAD ALREADY BEEN MADE IN THE CITY ABOUT THE BRANCH OF THE ASSESSEE BEING EST ABLISHED IN HIS PROPERTY. WITH THE CANCELLATION OF THE AGREEMENT THERE IS LI KELIHOOD OF LOSS OF REPUTATION AND FALL IN MARKET VALUE OF THE PROPERTY BESIDES MONETARY LOSS OF MORE THAN 25 TO 30 LACS. BASED ON THE NEGOTIATION T HE LANDLORD AGREED FOR A COMPENSATION OF RS 6 LACS IN FULL AND FINAL SETTLEM ENT OF ALL ITS CLAIM. THE COPY OF THE LETTER WAS PLACED AT PAGE 203 AND 204 O F THE PAPER BOOK. 47. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. THE FACTUAL MATRIX OF THE CASE IS THAT THE ASSESSEE HAD CONTRACTED WITH LANDLORD TO TAKE A PREMISE ON LEASE FOR OPENIN G ITS BRANCH THOUGH NO FORMAL AGREEMENT WITH THE LANDLORD WAS ENTERED INTO . BASED ON THE UNDERSTANDING THE LANDLORD HAD STARTED THE CONSTRU CTION OF THE PREMISES AS PER THE REQUIREMENT OF THE ASSESSEE. BEFORE THE CON STRUCTION WAS COMPLETED THE ASSESSEE CAME TO KNOW OF THE PROPOSED CONSTRUCTION OF OVERBRIDGE OVER THE SAID PROPERTY. THE ASSESSEE WAS OF THE VIEW THAT THE ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 32 OVERBRIDGE WILL CAUSE HINDRANCE TO CONDUCT THE BUSI NESS AND SERVICES. ACCORDINGLY IT DECIDED TO TERMINATE THE UNDERSTANDI NG WITH THE LANDLORD. BASED ON THE NEGOTIATION AND UNDERSTANDING THE ASS ESSEE AGREED TO COMPENSATE THE LANDLORD FOR THE WORK DONE IT BY PAY ING THE COMPENSATION AND THE LANDLORD AGREED TO WITHDRAW ALL THE CLAIMS AGAINST THE ASSESSEE. ACCORDINGLY THE ASSESSEE COMPENSATED THE LANDLORD B Y MAKING A PAYMENT OF RS 6 LACS IN FULL AND FINAL SETTLEMENT OF ALL IT S CLAIMS. THE AFORESAID FACTS ARE NOT DISPUTED BY THE REVENUE. FROM THE FACTS IT IS CLEAR THAT THE TRANSACTION IN RESPECT OF WHICH THE COMPENSATION WA S PAID AROSE DURING THE COURSE OF BUSINESS AND WAS FOR THE PURPOSE OF BUSIN ESS. THE EXPENSE HAS BEEN INCURRED BY THE ASSESSEE TO PROTECT ITS INTERE ST AND IN LIEU OF THE CLAIMS THAT COULD HAVE BEEN RAISED BY THE LANDLORD. THE INCURRING OF EXPENDITURE HAS NOT BEEN DOUBTED BY THE REVENUE. TH E APEX COURT IN THE CASE OF J.K.WOLLEN VS CIT (1969) 72 ITR 612 (SC) HA S HELD THAT IN APPLYING THE TEST OF COMMERCIAL EXPEDIENCY FOR DETERMINING W HETHER AN EXPENDITURE WAS WHOLLY AND EXCLUSIVELY LAID OUT FOR THE PURPOSE OF THE BUSINESS REASONABLENESS OF THE EXPENDITURE HAS TO BE ADJUDGE D FROM THE POINT OF VIEW OF THE BUSINESSMAN AND NOT OF THE IT DEPARTMEN T. IN VIEW OF THE AFORESAID FACTS AND RESPECTFULLY FOLLOWING THE APEX COURT WE ARE OF THE VIEW THAT THE DISALLOWANCE MADE BY THE AO WAS RIGHTLY DE LETED BY CIT(A) AND IT DOES NOT CALL FOR ANY INTERFERENCE. IN THE RESULT THIS GROUND OF THE REVENUE IS REJECTED. 48. THE NEXT GROUND IS WITH RESPECT TO THE FEES O F RS 26.25 LACS PAID TO KPMG AND TRAVELLING EXPENSES OF RS 5.58 LACS. ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 33 49. THE AO OBSERVED THAT ASSESSEE HAS MADE PAYMEN T OF RS 26.25 LACS TO KPMG. THE ASSESSEE EXPLAINED THAT THE EXPEN SE WAS INCURRED FOR EXPLORING THE POSSIBILITY OF BRANCH ABROAD. SIMILAR LY THE ASSESSEE HAD SPENT RS 5.58 LAC ON THE TRAVELLING EXPENSES INCLUDING TR AVELLING EXPENSES AND ALLOWANCE OF THE CHAIRMAN OF THE ASSESSEE BANK TO V ISIT USA AND UK FOR EXPLORING BUSINESS OPPORTUNITY IN OVERSEAS MARKET. THE AO WAS OF THE VIEW THAT SINCE THE ASSESSEE IS GOVERNED BY BANKING REGU LATION ACT 1949 PRIOR PERMISSION OF RBI WAS NECESSARY FOR OPENING ANY FOR EIGN BRANCH AND INCURRING EXPENDITURE. SINCE IN THE CASE OF ASSESSE E AS IT DID NOT HAVE OPERATIONS IN FOREIGN COUNTRY AND NO LICENCE WAS GR ANTED BY RBI TO OPEN ANY BRANCH ABROAD THE EXPENDITURE WAS NOT ALLOWABL E. HE ACCORDINGLY DISALLOWED IT. THE ASSESSEE CARRIED THE MATTER BEFO RE CIT (A). BEFORE CIT (A) IT WAS SUBMITTED BY THE ASSESSEE THAT NO PERMIS SION WAS REQUIRED FROM RBI FOR INCURRING THE EXPENDITURE. IT WAS FURTHER S UBMITTED THAT BASED ON THE SUGGESTIONS MADE BY KPMG THE ASSESSEE STARTED NRI SERVICE HUB IN INDIA TO SERVE AS A SINGLE POINT OF CONTACT FOR NRIS FOR THEIR BANKING NEEDS IN INDIA. THE LD. A. R. ALSO RELIED ON VARIOUS DECISIO NS IN ITS SUPPORT. CIT (A) AFTER CONSIDERING THE FACTS AND THE CASE LAW CITED BY ASSESSEE DELETED THE ADDITION MADE BY THE AO AND ALLOWED THE APPEAL OF T HE ASSESSEE. BEING AGGRIEVED BY THE DECISION OF CIT (A) THE REVENUE I S NOW IN APPEAL BEFORE US. 50. BEFORE US THE LD. D.R. RELIED ON THE ORDER OF AO AND ON THE OTHER HAND THE LD. A.R. REITERATED THE SUBMISSIONS MADE B EFORE CIT(A) AND ALSO RELIED ON THE ORDER OF CIT(A). HE ALSO PLACED ON RE CORD ON PAGE NOS 205 TO 229 OF THE PAPER BOOK THE LETTER OF KPMG COPIES OF INVOICES AND OTHER DOCUMENTS IN RELATION TO THE EXPENDITURE. IT WAS FU RTHER SUBMITTED BY THE LD. ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 34 A.R. THAT THE EXPENDITURE DOES NOT HAVE ANY NEXUS W ITH OVERSEAS BRANCH NO PERMISSION FROM RBI IS REQUIRED FOR INCURRING AN Y EXPENDITURE. THE PAYMENT TO KPMG WAS FOR PROFESSIONAL FEES FOR THE A DVICE RENDERED BY THEM. AT THE TIME OF MAKING PAYMENT THE ASSESSEE HA D ALSO DEDUCTED TDS U/S 194J. 51. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL ON RECORD THE FACTUAL MATRIX OF THE EXPENSE INCURRED B Y THE ASSESSEE WAS DISALLOWED BY THE AO FOR THE REASON THAT NO PRIOR P ERMISSION WAS RECEIVED FROM RBI BEFORE INCURRING SUCH EXPENSES. AFTER CONS IDERING THE SUBMISSIONS AND CASE LAWS RELIED BY THE ASSESSEE CI T (A) HAS GIVEN A FINDING THAT THE EXPENSES ARE OF REVENUE NATURE AND WERE INCURRED FOR THE EXPANSION OF EXISTING BUSINESS AND ACCORDINGLY DELE TED THE ADDITION MADE BY THE AO. BEFORE US THE REVENUE HAS NOT CONTROVER TED THE FINDINGS OF CIT(A) NOR HAS BROUGHT ON RECORD ANY MATERIAL TO TH E CONTRARY. IN VIEW OF THESE FACTS WE ARE OF THE VIEW THAT NO INTEREFEREN CE IS CALLED FOR TO THE ORDER OF CIT(A). WE ACCORDINGLY DISMISS THE GROUND OF THE REVENUE. 52. THE NEXT GROUND IS WITH RESPECT TO PAYMENT OF SERVICE CHARGES OF RS 25.84 LAC AND COMPUTER CABLING EXPENSES OF RS 1.50 LACS. 53. THE AO OBSERVED THAT THE ASSESSEE HAS PAID RS 2 5.84 LACS TO NCR CORPORATION INDIA LTD BEING PAYMENT FOR UPGRADATION OF ATMS FOR VISA IMPLEMENTATION. THE ASSESSEE SUBMITTED THAT THE EXP ENSE REPRESENTED THE COST OF CHANGE IN SOFTWARE LOADED ON THE ATMS SO TH AT THE ATMS CAN ACCEPT VISA CARDS AND CUSTOMERS OF OTHER BANKS CAN ALSO USE THE BANKS ATMS. IT WAS FURTHER SUBMITTED THAT THE MODIFICATIO N DOES NOT ENHANCE THE ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 35 PRODUCTIVITY OF THE ATM AND THE PAYMENT DOES NOT CO NSTITUTE PAYMENT FOR CAPITAL EXPENDITURE. THE AO WAS OF THE VIEW THAT EN ABLING THE EXISTING ATMS TO ACCEPT THE VISA CARDS AND USE OF ATMS BY TH E CUSTOMERS OF OTHER BANKS WAS AN ADDITIONAL FACILITY GENERATED. ACCORDI NGLY HE REJECTED THE SUBMISSIONS OF THE ASSESSEE AND ADDED RS 25.84 LACS TO THE INCOME OF THE ASSESSEE. 54. ASSESSEE HAD PAID RS 1 52 893/- TO NILME ELECT RIC FOR TELEPHONE CABLE EXPENSES. THE ASSESSEE SUBMITTED THAT THE EXP ENSE WAS MADE FOR REPLACEMENT OF COMPUTER NETWORK AND TELEPHONE WIRES ON SHIFTING OF SOME OF THE BANKS DEPARTMENTS TO THE NEW LEASED PREMISES . THE AO HELD THE SAME TO BE OF CAPITAL IN NATURE AND DISALLOWED IT B UT GRANTED DEPRECIATION ON IT. 55. ASSESSEE CARRIED THE MATTER BEFORE CIT (A). CIT (A) HELD THE EXPENSES OF RS 25.84 LACS TO BE OF CAPITAL NATURE B UT HOWEVER ALLOWED DEPRECIATION ON IT AND ACCORDINGLY UPHELD THE ORDER OF THE AO. WITH RESPECT TO THE DISALLOWANCE OF RS 1.52 LACS CIT (A) DELETE D THE ADDITION FOR THE REASON THAT THE AMOUNT WAS SPENT ON SHIFTING THE TE LEPHONE FROM ONE LEASED PREMISES TO THE OTHER AND THEREFORE NO NEW A DVANTAGE HAS BEEN OBTAINED BY THE ASSESSEE AND THE LEASE IS LIABLE TO TERMINATION IN THE EVENT OF DEFAULT BY THE ASSESSEE. 56. AGGRIEVED BY THE ACTION OF THE CIT (A) THE R EVENUE IS IN APPEAL BEFORE US. BEFORE US THE LD. D.R. RELIED ON THE ORD ER OF THE AO AND THE LD. A.R. RELIED ON THE ORDER OF THE CIT(A). ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 36 57. WE HAVE HEARD THE RIVAL SUBMISSION AND PERUSE D THE MATERIAL ON RECORD. CIT(A) HAS GIVEN A FINDING THAT THE EXPENSE S ON SHIFTING OF TELEPHONE LINE FROM ONE LEASED PREMISE TO ANOTHER D OES NOT RESULT INTO ANY NEW ADVANTAGE TO THE ASSESSEE AND THE LEASE IS LIAB LE TO TERMINATION IN CASE OF DEFAULT OF ASSESSEE. WE FIND NO REASON TO I NTEREFERE IN THE ORDER OF CIT(A) AND THUS WE UPHOLD HIS ORDER. IN THE RESULT THE GROUND OF THE REVENUE IS DISMISSED. 58. THE NEXT GROUND IS WITH RESPECT TO CONSIDERIN G RS 4.07 CRORES PAID AS PROFESSIONAL SERVICES AS REVENUE EXPENDITURE. 59. AO HAD DISALLOWED FOLLOWING PAYMENTS AGGREGAT ING TO RS 4.07 CRORES (LIST AT PARA 4.2 ON PAGE 14 OF CIT(A) ORDER) 60. THE PAYMENT OF RS 137.30 LACS TO INFOSYS WAS D ISALLOWED FOR THE REASON THAT THE INVOICES RAISED BY INFOSYS INCLUDE CENTRAL SALES TAX. WITH REGARD TO PAYMENT TO OTHER PARTIES THE AO DISALLOW ED IT FOR THE REASON THAT IT WAS FOR THE PURCHASE OF APPLICATION SOFTWARE. HE ACCORDINGLY HELD IT TO BE OF CAPITAL NATURE. THE ASSESSEE CARRIED THE MATTER BEFORE CIT (A). BEFORE CIT (A) IT WAS SUBMITTED THAT THE PAYMENTS ARE IN T HE NATURE OF ANNUAL SUBSCRIPTION SERVICE CHARGES AND FOR EXPENSES SIMI LAR TO AMC CHARGES. BASED ON THE SUBMISSIONS MADE BY THE ASSESSEE AND A FTER ANALYZING THE VOUCHERS OF THE EXPENSES CAME TO THE CONCLUSION TH AT THE ALL THE EXPENSES EXCEPT OF RS 34.35 LACS PAID TO FSSPL ARE IN THE NA TURE OF REVENUE EXPENDITURE. HE ACCORDINGLY HELD THAT OUT OF RS 4.0 7 CRORE ONLY PAYMENT OF RS 34.35 LACS IS OF CAPITAL NATURE AND THEREFORE DI RECTED THE DELETION OF REST ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 37 OF THE DISALLOWANCE. AGGRIEVED WITH THE ORDER OF CI T(A) THE REVENUE IS NOW IN APPEAL BEFORE US. 61. BEFORE US THE LD. A.R. RELIED ON THE ORDER OF AO. ON THE OTHER HAND THE LD. A.R. SUBMITTED THAT THE EXPENSES ARE IN THE NATURE OF ANNUAL MAINTENANCE CHARGES ANNUAL SUBSCRIPTION SERVICE C HARGES. ACCORDINGLY ALL THE EXPENSES ARE OF REVENUE NATURE. IN VIEW OF THES E FACTS THE CIT(A) WAS RIGHT IN DELETING THE ADDITIONS MADE. 62. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSE D THE MATERIAL ON RECORD. CIT (A) IN HIS ORDER AFTER EXAMINATION OF T HE DETAILS AND MATERIAL HAS GIVEN A FINDING THAT THE EXPENSES ARE OF REVENUE IN NATURE. REVENUE HAS NEITHER BEEN IN A POSITION TO CONTROVERT THE FINDIN GS OF CIT (A) NOR HAS BROUGHT ANY MATERIAL TO THE CONTRARY. IN VIEW OF TH ESE FACTS WE ARE OF THE VIEW THAT NO INTERFERENCE IS CALLED FOR IN THE ORDE R OF CIT (A). WE ACCORDINGLY DISMISS THE GROUND OF THE REVENUE. 63. IN THE RESULT THE APPEAL OF THE REVENUE IS DI SMISSED. 64. IN THE RESULT APPEAL OF THE ASSESSEE IS PART LY ALLOWED AND THE APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 31 - 7 - 2012. SD/- SD/- (D.K. TYAGI) (ANIL CHATURVEDI) JUDICIAL MEMBER ACC OUNTANT MEMBER ITA NO.2571 & 2736AHD/2006 A.SSESSMENT YEAR 2003-04. 38 AHMEDABAD. S.A.PATKI. COPY OF THE ORDER FORWARDED TO: - 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (APPEALS)-XIV AHMEDABAD. 4. THE CIT CONCERNED. 5. THE DR. ITAT AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT AHMEDABAD. 1.DATE OF DICTATION 8 - 5 -2012 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING 31 / 5 / 2012/16-7-12 MEMBER.OTHER MEMBER. 3.DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S 20 - 7 -2012. 4.DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT 31 - 7 -2012 5.DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR .P.S./P.S 31 - 7 -2012 6.DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 3 1 - 7 -2012. 7.DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8.THE DATE ON WHICH THE FILE GOES TO THE ASSTT. REG ISTRAR FOR SIGNATURE ON THE ORDER 9.DATE OF DESPATCH OF THE ORDER..