The Decision Of The Special Bench Of The Tribunal In Ito v. 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

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HON'BLE THE CHIEF JUSTICE DR. MANJULA CHELLUR & THE HONOURABLE MR.JUSTICE A.M.SHAFFIQUE WEDNESDAY, THE 22ND DAY OF JANUARY 2014/2ND MAGHA, 1935 ITA.No. 189 of 2011 -------------------- AGAINST THE ORDER IN ITA 935//COCH/2008 of I.T.A.TRIBUNAL,COCHINBENCH DATED 31-05-2011. APPELLANT(S): APPELLANT ------------------------ THE SOUTH INDIAN BANK LTD., TRICHUR BY ADV. SRI.P.BALAKRISHNAN (E) RESPONDENT(S):RESPONDENT -------------------------- THE COMMISSIONER OF INCOMETAX, TRICHUR BY ADV. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 22-01-2014, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: Manjula Chellur, C.J. & A.M. Shaffique, J.=-=-=-=-=-=-=-=--=-=-=-=-=-=-=-=-=-= I.T.A. No. 189 of 2011 =-=-=-=-=-=-=-=-=--=-=-=-=-=-=-=-=-=Dated this, the 22[nd]day of January, 2014. J U D G M E N T Shaffique, J. The appeal is filed against the order passed by theIncome-tax Appellate Tribunal, Cochin Bench in ITA No.935/Coch/2008. The assessment year involved is 2005-06. 2. The issue involved in the aforesaid assessment yearis in respect of disallowance effected by the the assessingofficer under Section 14A of the Income-tax Act in respectof expenditure estimated to have been incurred by theassessee for earning interest on tax free bonds anddividends which are exempted under Section 10 of the Act.Further, the assessee has also raised an issue withreference to disallowance of leave encashment,disallowance of share issue expenses, addition on account ofthe excess cash found by the branches of the appellant andlevy of interest under Section 234B of the I.T. Act. TheCommissioner of Income-tax (Appeals) also concurred withthe view expressed by the assessing officer in the appealfiled by assessee. Against the said order, the assesseepreferred a further appeal before the Tribunal afterconsidering the issues involved in the matter, found infavour of the Department. 3.The assessee has preferred this appeal raising the I.T.A. No. 189 of 2011 “A.Whether on the facts and in the circumstancesof the case authorities are correct in law andfact in making a disallowance under Section 14Aof the Act?of the case authorities are correct in law andfact in making a disallowance under Section 14Aof the Act? B. Whether on the facts and in the circumstancesof the case the authorities are correct in law andfact in not allowing the claim for leaveencashment?of the case the authorities are correct in law andfact in not allowing the claim for leaveencashment? C.Whether on the facts and in the circumstancesof the case the authorities are correct in law andfact in not allowing the share issue expenses as adeduction in computing the total income of theappellant?of the case the authorities are correct in law andfact in not allowing the share issue expenses as adeduction in computing the total income of theappellant? D.Whether on the facts and in the circumstancesof the case, the authorities are correct in lawand fact in adding the excess cash received bythe breaches of the appellant bank to the totalincome?of the case, the authorities are correct in lawand fact in adding the excess cash received bythe breaches of the appellant bank to the totalincome? E.Whether on the facts and in the circumstancesof the case, the authorities are correct in lawand fact in levying interest under Section 234Bof the Act in the appellant’s case?”of the case, the authorities are correct in lawand fact in levying interest under Section 234Bof the Act in the appellant’s case?” 4.Heard the learned counsel appearing for theappellant as well as the learned standing counsel forthe Department.the Department. D.Whether on the facts and in the circumstancesof the case, the authorities are correct in lawand fact in adding the excess cash received bythe breaches of the appellant bank to the totalincome?of the case, the authorities are correct in lawand fact in adding the excess cash received bythe breaches of the appellant bank to the totalincome? E.Whether on the facts and in the circumstancesof the case, the authorities are correct in lawand fact in levying interest under Section 234Bof the Act in the appellant’s case?”of the case, the authorities are correct in lawand fact in levying interest under Section 234Bof the Act in the appellant’s case?” 4.Heard the learned counsel appearing for theappellant as well as the learned standing counsel forthe Department.the Department. 5.These issues have been dealt with by theTribunal elaborately. As far as the first question isconcerned, this Court had already held that Section14A has retrospective operation. This Court followed I.T.A. No. 189 of 2011 the decision of the Special Bench of the Tribunal in ITOv. Daga Capital Management (P) Ltd., 312 ITR (AT)1 (Mum). In fact, the entire issue was considered bythe Commissioner of Income-tax (Appeal)s. It is clearfrom Section 14A that it has been introducedretrospective effect from 1.4.1962 by the Finance Act of2001. The said provision enables the assessing officerto disallow expenditure incurred by the assesseerelating to income, which does not form part of totalincome under the Income-tax Act. Sub-section (2) wasintroduced with effect from 1.4.2007 and it provideshow the disallowance has to be worked out. Thisprocedure has been prescribed under Rule 8B of theIncome-tax Rules as well, wherein sub-clauses (2) and(3) are only of a clarificatory nature and does notamount to the charging provision. Therefore, wehave no hesitation to hold that the Tribunal was justifiedin answering the aforesaid question in favour of theDepartment. 6.As far as the second question is concerned, itrelates to disallowance of the claim for leaveencashment. The assessee relied upon the judgment ofthe Calcutta High Court in Exide Industries Ltd. v.Union of India, 292 ITR 470 claiming that the said I.T.A. No. 189 of 2011 judgment applies in order to sustain the eligibility of theprovision for leave encashment for deduction. It isalso contended that the expenditure incurred onaccount of the leave encashment liability wasinadvertently added back, which was pointed outduring proceedings. However, it was claimed that theassessment under Section 143(3) is for ascertainingcorrect taxable income. It does not prohibit allowingjustified claim of the assessee. The assessing officerheld that the claim of the assesee cannot be accepted inview of the provisions of Section 43B(f). A merereading of Section 43B(f) indicates that a deduction ofany sum payable by the assessee as an employer in lieuof leave at the credit of its employee shall be allowedonly in computing the income referred to in Section 28of the previous year for which such sum is actuallypaid. The authorities below have found that the claimwith regard to Section 43B(f) was enclosed along withthe original as well as revised return. Therefore, itwas observed that there is no inadvertent mistake innot claiming it. It was found that when Section 143(3)provides for assessment of correct taxable income andSection 143(2) provides that the assessing officerhimself considered the claim made by the tax payerpayable in accordance with the provisions of the Act for I.T.A. No. 189 of 2011 I.T.A. No. 189 of 2011 determining correct taxable income under Section 143(3), the claim cannot be considered since the claim wasnot bona fide inadvertence as the original and revisedreturns filed in accordance with the provisions of theAct were considered by the assessing officer underSection 143(3). Further, revised return was madeafter the due date as provided under Section 139(5).This being the concurrent finding of fact by theauthorities below, we do not think that any change inview is possible as far as the above issue is concerned. 7.Next is with reference to the disallowance ofthe share issue expenses as a deduction in computingthe total income of the assessee. It was contended bythe assessee that the bank had increased its issueactually to maintain capital adequacy ratio asprescribed by the Reserve Bank of India, failing whichthe bank cannot continue its business. Reference wasmade to the Reserve Bank of India guidelines dated19.7.2004, which indicates that the banks are requiredto maintain a minimum capital adequacy ratio (CAR) at9% on an on-going basis. The assessing officer reliedupon the judgment of the Supreme Court in BrookBond India Ltd. v. Commissioner of Income-tax,225 ITR 798, treating the claim as capital expenditureand therefore disallowed the claim. The appellate I.T.A. No. 189 of 2011 -: 6 :- authority had considered this issue in Brook Bond’scase (supra) and had come to the conclusion that suchexpenditure still retain the character of capitalexpenditure. It is further found by the authorities thatthe minimum capital adequacy ratio of 9% as per RBIguidelines had to be maintained. The rate of growth inassets may have been affected by the decline in thecapital inadequacy ratio from 11.32% to 9.89% andtherefore it cannot be said that the issue of capital iswholly and exclusively for the purpose of expansion ofbusiness. It was also found that there is no clear nexusbetween the expenditure and expansion. The bank wasrequired to maintain capital adequacy ratio statutorilyat 9% despite the fact that whether there is growth ornot or whether there is profit or loss. The authoritiesrelied on Brook Bond’s case (supra) and had come tothe finding that the increase in capital results inexpansion of capital base and may help in business aswell by increasing the profit. Yet, the expenditureincurred retain the character of a capital expendituresince it is directly related to the expansion of capitalbase. Having gone through the contentions raised onbehalf of the appellant, as well as the standing counsel,since the issue involved had been considered by theauthorities below on the basis of the judgment of the I.T.A. No. 189 of 2011 -: 7 :- apex court, the question is answered against theassessee. 8.In regard to the next issue as to whetherexcess cash received by the branches of the appellantbank had to be added to the total income, thecontention urged is that as far as the said amount hasnot been transferred to the profit and loss account ofthe assessee, the same cannot be considered as anincome. It is contended by the assessee that in thecourse of cash transaction at the branches, and also inthe case of ATMs, excess amount has to be found dueto operational deficiency. These are all to be repaid tothe customers as and when claimed by them and itcannot be considered as the income of the bank.Apparently, when a contention has been raised thatthese amounts are only to be refunded at the time whenthere is demand, nevertheless the view expressed bythe Tribunal in this regard has to be accepted andtherefore this question is also answered against theassessee. 9.The last issue involved is regarding thecharging of interest on Rs. 1,23,66,048/-. It wascontended by the assessee that the charging underSection 234B is erroneous as the assessee cannotanticipate the conditions likely to be made by the 9.The last issue involved is regarding thecharging of interest on Rs. 1,23,66,048/-. It wascontended by the assessee that the charging underSection 234B is erroneous as the assessee cannotanticipate the conditions likely to be made by the I.T.A. No. 189 of 2011 -: 8 :- assessing officer in regular assessment on a futuredate. Section 234B provides that short falls has to betaxed under Section 43(3). The matter is covered bythe judgment of the Supreme Court in CIT v. AnnjuM.S., 2001 (2) 252 (1) ITR and it was held that interestcontemplated under Sections 234A, 234B and 234C ismandatory in nature. In view of the fact that theappellate authorities have considered the matter basedon the judgment of the Supreme Court, this issue is alsoanswered against the appellant. In the result, we do not find any merit in thearguments of the learned counsel for the appellant.Accordingly, the appeal is dismissed. Sd/- Manjula Chellur, Chief Justice. Sd/- A.M. Shaffique, Judge. Tds/ [True copy] P.S to Judge.