Bapunagar Mahila Co.Op.Bank Ltd.,, ... vs Department Of Income Tax

This Revenue's appeal and assessee's cross objection for A.Y.2007-08, arise from order of CIT(A)-XVI, Ahmedabad dated ITA No. 2423/ Ahd/2010 With C.O.269/Ahd/2010 Assessment Year 2007-08 2

28.5.2010, passed in case No.CIT(A)/XVI/DCIT.Cir.11/270/2009- 10, in proceedings u/s.143(3) of the Income Tax Act,1961 in short hereafter the Act.

2. The Revenue's appeal raises five substantive grounds challenging the CIT(A)'s order interalia deleting addition of Rs.45 lacs as unexplained cash deposits u/s. 68, section 40(a)(ia) disallowance of Rs.1,94,473/- + Rs.56,556/- regarding expenses on reimbursement of clearing housing charges paid to the Ahmedabad District Cooperative Bank Ltd. and service tax thereupon, restricting disallowance of alleged capital expenditure of Rs.5,30,000 + Rs.50,000/- totaling to Rs.5,80,000/- to Rs.4,15,000/-, deleting addition of Rs.90,000/- i.e. petrol allowance of Rs.24,000/-, telephone allowance of Rs.30,000/- and consulting charges of Rs.36,000/- and the last one being addition of Rs.5,03,380/- on account of interest accrued on NPA, as made by the Assessing Officer in a regular assessment framed on 29-12-2009.

The assessee's pleadings in its cross objection raise two substantive grounds assailing the lower appellate order confirming disallowance of RBI penalty for violation of KYC norms of Rs.5 lacs claimed as business expenditure and restricting the other one of the alleged capital expenditure of Rs.5,80,000/- to Rs.4,15,000/-.

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The latter ground is related to the Revenue's identical plea stated hereinabove.

3. Both parties reiterate their respective pleadings in the course of hearing. They also support the CIT (A)'s order to the extent it is in their favour.

We have heard both the sides and gone through the case file.

4. The Revenue's first ground seeks to restore unexplained cash deposits / credits addition of Rs.45 lacs u/s. 68 of the Act. The assessee had opened 250 FDR accounts of Rs.18,000/- each in F.Y. 2005-06 relevant to A.Y. 2006-07. The Reserve Bank of India imposed penalty of Rs.5 lacs on it alleging violation of KYC norms qua the same. The Assessing Officer accordingly observed that the said accounts had been opened without verifying business activities of the account holders their other requisite documents, names, addresses, PAN details etc. for necessary verification. The assessee submitted that its accounts did not relate to the impugned assessment year. The Assessing Officer in assessment order quoted the above stated reasons and treated the impugned FDRs of Rs.45 lacs as unexplained cash deposits u/s68 of the Act.

5. The CIT (A) has deleted the impugned addition as under:-

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5. Next ground is regarding addition of Rs. 45 lacs u/s. 68 of the I. T. Act. This issue has been discussed by the Assessing Officer at para 5 of the assessment order. The Assessing Officer observed that the appellant bank has opened the bank account of 250 parties without obtaining their proof of address, photo identity etc. In these 250 bank accounts total amount of Rs. 45 lacs was transferred. According to the Assessing Officer since the bank has not followed the necessary instructions of the RBI while opening these 250 bank accounts, the amount of Rs. 45 lacs deposited in these bank accounts is not properly explained because the identity and creditworthiness of such 250 depositors was not established. The Assessing Officer observed that in each of these accounts Rs. 18,0007- in the name of 250 different depositors were credited in the books of the appellant bank therefore the onus is on the bank to prove the identity and creditworthiness of the depositors. Since the bank has failed to discharge the onus cast u/s. 68 of the I T Act by giving name , address and PAN of .the depositors and also by producing them, the amount of Rs. 45 lacs deposited in their accounts was treated as cash credit u/s. 68 of the Act. The AR brought to my notice the copy of the resolution passed in the meeting of the Board of Directors held on 27-1-2006 which is placed at page No 28 of the Paper book. As per this resolution No.3 the Board of Directors offered their comments as under :-

" i) The cheque of Rs. 53.50 lacs dated 10-11-2005 was regarding refund of earnest money received from official liquidator Hon'ble High Court Gujarat in the name of M/s. Nilkanth Enterprise, Bileshwar Estate, Odhav Rd, Ahmedabad.

ii) The cheque of Nilkanth Enterprise has been transferred in the account of Radhe Finance in good faith, the other formalities were to be done as per verbal instructions of both the parties.

Our bank has practice to allow withdrawal against clearing only in respect of first class customers and even in such cases the extent of limits and the need thereof were subjected through scrutiny. In this case a cheque of an amount of Rs. 53.50 lacs issued by Hon'ble Gujarat High Court presented in HVC on 11- 11-2006, eventhough the amount was credited in .the beneficiary account after due realization. After clear proceeds of the cheque, ITA No. 2423/ Ahd/2010 With C.O.269/Ahd/2010 Assessment Year 2007-08 5

allowed transfer of this amount on the same day of credit into the account of M/s. Radhe Finance.

iii) On 6-11-2005 the amount has been transferred to 250 different members by making 250 FDRs from the account of Radhe Finance.

iv) The members were in need of money after depositing, • and therefore the money has been withdrawn on 19-11-2005.

v) The party is old and regular. Their operations and conduct of the account is satisfactory.

vi) The bank has acted in good faith.

The Board has viewed this matter very seriously and have instructed the staff to be more careful and to observe strictly all the norms and guidelines issued by Reserve Bank of India in all respect and ensure that there should not be any violation !n any banking operational area."

5.1 A copy of bank account of Radhe Finance with the appellant bank has been placed, at page No 49 to 56 of the paper book. As per which, in account No 1497 of Radhe Finance, a cheque of Rs. 53,50,0007-was credited on 11-11-2005 which was transferred from the account of Nilkanth Enterprises. On 15-11-2005 from this account of Radhe Finance 250 cheques of Rs. 18,000/- each were issued. Thus as on 16-11-2005, the balance in the account of Radhe Finance was only Rs. 2,80,949/-. It was reported by the AR that from these 250 bank accounts, cash was subsequently withdrawn within one to two week time of the deposit in these accounts. The case of the AO is that since the identity and creditworthiness of these 250 depositors has not been proved by the appellant bank, the credit of Rs. 18,0007- each in these 250 bank accounts amounting to Rs. 45 lacs represent unexplained credit in the hands of the appellant bank.

5.2 Whereas, the case of the AR is that no fresh fund has been deposited in the fixed deposit account holder. The entry in their account of Rs. 18,0007- each is made by way of transfer entry from the account of Radhe Finance, therefore the question of treating the ITA No. 2423/ Ahd/2010 With C.O.269/Ahd/2010 Assessment Year 2007-08 6

amount of Rs. 45 lacs u/s. 68 does not arise. Reliance was also placed on the decision of A P High Court at 246 ITR 283.

5.3 I have considered the submissions of the AR. On the perusal of the bank account No 1497 of Radhe Finance with the appellant bank, I have verified that the amount of Rs. 53,50,000 was transferred to the account of Radhe Finance from the account of Nilkanth Enterprise who received the refund of tender money from official liquidator. From this account of Radhe Finance, cheques of Rs. 18,000/- each were transferred to the accounts of 250 depositors (whose KYC Norms were not observed by the appellant bank and for which penalty of Rs. 5 lac was imposed by the R'BI on the appellant bank). In other words, the source of credit of Rs. 18,000/- each in the 250 accounts is explained out of the transfer entry from the account of Radhe Finance. Once the source of the deposit in the account of the 250 depositors is properly explained, there is no question of invoking the provisions of section 68 even though all the 250 parties may not be genuine. Because what is to be seen in this case is whether the amount credited in the account of such 250 depositors is. explained or not. There is no denial that the fund of Rs. 18,0007- each are transferred from the account "of Radhe Finance out of the fund of Rs. 53,50,000/- received from Nilkanth Enterprise. The proper course of action should have been to examine the nature of transaction in the hands of Nilkanth Enterprise and M/s. Radhe Finance and to see as to what treatment has been given by them in their books of accounts in respect of the amount transferred to such 250 depositors. In any case the amount of Rs. 45 lacs deposited in the accounts of 250 depositors is properly explained as transfer entry from the account of Radhe Finance. Therefore the addition made u/s. 68 in the hands of the appellant bank cannot be sustained. The AO is directed to delete the addition of Rs. 45 lacs.

6. Heard both sides. Records perused. It is evident that the assessee; a financial institution registered under the Gujarat Cooperative Societies Act has explained source of the impugned deposits of Rs.45 lacs. Rather source of the source as well. The Revenue reiterates the Assessing Officer's findings. It does not rebut the CIT (A)'s findings that the impugned deposits have come ITA No. 2423/ Ahd/2010 With C.O.269/Ahd/2010 Assessment Year 2007-08 7

from the official liquidator. The assessee supports the CIT (A)'s order. It also submits section 68 does not apply since the impugned transactions have not taken place in the relevant previous year. We are of the opinion that once the assessee has been able to prove the source of the source along with the fact that the depositors are its regular customers, it has satisfactorily explained identity along with necessary conditions of genuineness and creditworthiness thereof. We affirm the CIT (A)'s findings in these facts. The Revenue's first substantive ground fails.

7. The revenue's second substantive ground seeks to restore section 40(a)(ia) disallowance/addition ofRs.1,94,473/- on reimbursement of clearing house charges paid to the Ahmedabad Dist. Cooperative Bank and corresponding service tax of Rs.56,556/-. The assessee had included these sums under the head "other expenses". It had paid the same for its cheque process/MICR charges. The Assessing Officer invoked Sec. 40(a)(ia) disallowance for non deduction of TDS.

8. The CIT (A) has accepted the assessee's corresponding ground as under:-

6. Next ground is regarding disallowance of clearing house charges of Rs. 1,94,473 + service tax paid thereon Rs.

56,5227- on behalf of Ahmedabad District Co.Op. Bank (ADC Bank) u/s. 40(a)(ia) of the I T Act. This issue has been ITA No. 2423/ Ahd/2010 With C.O.269/Ahd/2010 Assessment Year 2007-08 8

discussed by the AO at para 6 of the asstt order. Briefly the facts are that the appellant bank is not a member of clearing house. The.cheques of the bank are cleared by the clearing house though Ahmedabad Dist Co Bank (ADC). The clearing house in Ahmedabad is managed by Bank of Baroda. For the services rendered by Bank of Baroda, the member banks are supposed to pay for services, to the Bank of Baroda. The payment is made by ADC Bank on behalf of the appellant bank (as the appellant is not member of clearing house) to the Bank of Baroda for clearing house expenses. On such payment, the ADC Bank has deducted tax at source and paid the balance amount to the. Bank of Baroda. Since the expenses incurred by the ADC Bank were on behalf of the appellant bank, the ADC Bank raised a bill on the appellant of the equivalent amount. The appellant bank has paid Rs. 1,94,4737-. towards the clearing house expenses and Rs. 56,5227- service tax thereon. According to the Assessing Officer the amount of Rs. 1,94,4737- & Rs. 56,5527- are liable for further TDS and since the appellant bank has not made any payment of TDS, he disallowed these two amounts of Rs.1,94,4737- and Rs. 56,5227- u/s. 40(a)(ia). On the other hand the case of the appellant is that the clearing house expenses has been incurred by ADC Bank on behalf of the appellant. While making payment to the Bank of Baroda (managing the clearing house in Ahmedabad) the ADC Bank deducts tax at source and pays the net amount to the Bank of Baroda. Since ADC Bank has already deducted TDS on the processing charges of the clearing house and the appellant bank is reimbursing the amount to the ADC Bank in respect of the expenses relating to appellant bank, there is no need of further deducting tax at source on the same amount. It was therefore requested that the Assessing Officer was not justified in disallowing the claim of R. 1,94,473/- Rs. 56,522/- u/s. 40(a)(ia) of the Act. .

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6.1. I have considered the submissions of the AR. The AR was asked to state as to whether ADC Bank is claiming the same amount which is paid by the ADC Bank to the Bank of Baroda for clearing house expenses or some additional amount is charged by the ADC Bank for the services rendered by them on behalf of the appellant bank. The appellant vide its letter dt 24-5-2010 filed a letter from ADC certifying that "We have reimbursed the MICR processing charges which have been rendered by MICR Processing Centre, Bank of Baroda, Ahmedabad. None of the other commission / service charges on account of processing of MICR cheques were recovered from the members of our bank by us." In other words, the expenses incurred by ADC Bank towards MICR Processing Centre were reimbursed by the appellant to the ADC Bank. Since ADC Bank has already deducted tax at source on such payment and the appellant has only reimbursed the expenses, such reimbursement is not further subject to TDS. The Assessing Officer was not therefore justified in disallowing the amount of Rs. 1.94,473/- + 56,222 u/s. 40(a)(ia) of the Act.".

9. We have heard rival contentions and gone through the relevant findings. It has come on record that the assessee has reimbursed the impugned expenses towards MICR processing centre and its recipient institution i.e. the Ahmedabad District Co-op. Bank has already deducted TDS thereupon. The Revenue does not dispute this factual position. We observe in these facts that the impugned disallowance amounts to double deduction of TDS as per a co- ordinate Bench decision reported as (2012) 14 ITR (Trib.)175 (Ahd) the Karnavati Coop. Bank Ltd. vs. DCIT. The Revenue does not highlight any distinction on facts or law therein. We affirm the CIT ITA No. 2423/ Ahd/2010 With C.O.269/Ahd/2010 Assessment Year 2007-08 10

(A)'s findings under challenge. The Revenue's second substantive ground is rejected.

10. The Revenue's third ground challenges the lower appellate order restricting disallowance of capital expenditure from Rs.5,80,000/- to Rs.4,15,000/-. The assessee's second substantive ground in its cross objection seeks to delete this remaining part of the disallowance as well. It had debited repair and renovation expenses amounting to Rs.5,30,000/- in the name of M/s. Saurashtra Construction Co. The Assessing Officer opined that the latter bill was nowhere submitted in the course of scrutiny. The former sum of Rs.5,30,000/- was described as Rs.30,000/- spent on labour for demolition of old building and debris removal, Rs.3,75,000/- on construction of RCC pillars, plaster, flooring, grill, door material of first floor at the site of old building, Rs.1,25,000/- relating to mason work, plaster, RCC beam column and ceiling labour of the old building. There is no dispute that the assessee is a tenant in the above stated building taken on rent. It submitted that the aforesaid expense was not to be set off against the other sums paid to the landlord. The rent agreement and other details were filed in support.

11. The case file reveals that all the above stated assertions could not impress upon the Assessing Officer. He observed that the impugned expenditure was meant for bringing into the existence assets of enduring nature which could not be treated as revenue expenditure. He held that the impugned charges were not for supply of material, but paid for a turnkey contract for execution of the job of construction of a new storey with labour and material. He concluded that there were certain factual inconsistencies as ITA No. 2423/ Ahd/2010 With C.O.269/Ahd/2010 Assessment Year 2007-08 11

well in the assessee's payments withdrawn. All this resulted in the impugned disallowance of Rs.5,80,000/-.

12. The assessee's corresponding ground stands partly accepted in the lower appellate proceedings as follows:-

7. Next ground is regarding disallowance of Rs.5,30,007-

incurred for the repairs of the office premises as capital expenditure and also Rs. 50,000/- for non availability of bill. This issue is discussed by the Assessing Officer in para 7 of the asstt. order. The bank is situated at the rented premises w.e.f. 1-1- 1999. During the year under consideration, the assessee bank incurred substantial expenditures towards the repairs and renovation total amounting to Rs. 5,30,000/- issued in the name of Saurashtra Construction Co and another Rs. 50,000/- withdrawn on 30-3-2007. According to the Assessing Officer, the copy of the bill in respect of Rs. 50,000/- was not submitted, therefore, the Assessing Officer disallowed the claim of this payment of Rs. 50,000/-. As regards the payment of Rs. 5,30,0007- to Saurashtra Const Co. the Assessing Officer observed that the expenditure incurred by the assessee bank is not towards routine maintenance but construction of new-floor on the existing building. According to the Assessing Officer the expenses are meant for bringing ' into existence of the assets of enduring nature and hence, he disallowed the same as not being revenue expenditure. On the other hand, the case of the appellant is that the premises are rented premises and the repairs undertaken by the appellant has not resulted into any benefit to the appellant because at the time of surrender of the premises to the landlord, no asset would remain with the appellant but would be handed over to the owner of the building. It was therefore argued that since no enduring benefit has accrued to the appellant, in view of the judgement of Hon'ble Guj High Court in the case of Mehta Transport Co. 160 ITR Page 35. The expenses of Rs. 5,30,0007- is allowable to the appellant. The head notes of the decision is as under :-

" Held, that the shop premises consisted only of ground floor admeasuring 450 sq yds and the assessee in order to provide adequate accommodation to its staff members numbering as many as 30, constructed a loft admeasuring about the 350 sq ft ITA No. 2423/ Ahd/2010 With C.O.269/Ahd/2010 Assessment Year 2007-08 12

inside the premises. The expenditure incurred for the construction of the loft was neither for extension nor for addition to the premises. The assessee was putting the available office / space to its optimum use for accommodating a large staff of 30 members which would result in greater efficiency by improvement of the working conditions. By constructing the loft, the assessee did not bring into existing an asset of a permanent nature because, on the surrender of the lease, the option of the lessor of the premises in which the improvements were made was either to pay compensations and take over the improvement or to permit the lessee to remove the improvement. Therefore, the expenditure incurred in constructing the loft in the rented premises was allowable as revenue expenditure."

7.1 In respect of the bill of Rs. 50,000/-, it was stated that the bill dated 25-2-2007 from Murlidhar Construction of Rs. 50,000/- for the repairs was enclosed in the paper book at page No71. In short the submission of the AR is that as per the rent agreement clause No 6, "there is a legal obligation to vacate the premises in the same condition when it was taken. Over and above, under any circumstances, if in. the said premises any colour or repairing or any correction, renovation as per the needs of the tenant is to be carried out by the tenant at his own cost. Thus as per this agreement, the repair expenses is required to be incurred by the tenant and therefore the expenditure is in the nature of revenue only."

7.2 I have considered the submissions of the appellant. The appellant also submitted a certificate in respect of the expenses incurred for the repairs of the business premises as under :-

CERTIFICATE

"CERTIFICATE TO WHOMSOEVER IT MAY CONCERN

This is to certify that Bank have carried out repairing work in rented premises during the F Y 2006-07 as under :-

i. Removal of old plasters of the walls in the whole occupied premises due to its very old age and cracked was evolved due to earthquake and replacing the same, approx. cost .... 5500 sq ft @ Rs. 20/- = 1.20 lacs.

ii. As the rented premises is very old in Age, flooring tiles were also cracked / broken hence such tiles were removed and fresh ITA No. 2423/ Ahd/2010 With C.O.269/Ahd/2010 Assessment Year 2007-08 13

tiles were fitted - approx cost .... 1900 sq ft @ Rs. 90/- = 1.71 lacs.

iii. Also load bearing beams were damaged due to its old age and earthquake, the same was get repaired by removing broken parts. Approx cost.... 1200 sq ft @ Rs.140/- = 1.68 lacs

iv. Colour works in the said premises - approx cost ... 5,500 sq ft @ Rs. JO/- = .55 lacs.

This also includes extension of safe deposit vault room due to shortage of vault room space by making bricks work and RCC work. Approx cost of 600 sq ft @ Rs. 120/- = 0.72 lacs."

From these details, I find that the expenses incurred at Sr No. I (Rs. 1.10 lacs) and IV (Rs. 0.55 lacs) i.e. on account of removal of plaster of the wall and colour works of the premises represent the revenue expenditure. By virtue of Expl. to section 30, capital expenditure incurred on repairs by a tenant would not be allowed u/s. 30(a)(i) of the I T act. For the sake of convenience section 30 is reproduced as under:-

" 30. In respect of rent, rates, taxes, repairs and insurance for premises used for the purpose of the business or profession, the following deductions shall be allowed -

(a) Where the premises are occupied by the assessee-

(i) As a tenant, the rent paid for such premises, and further if he has undertaken to bear the cost of repairs to the premises, the amount paid .on account of such repairs,

(ii) Otherwise than as a tenant, the amount paid by him on account of current repairs to the premises.

(b) Any sums paid on account of land revenue, local rates or municipal taxes,

(c) The amount of any premium paid in respect of insurance against risk of damage or destruction of the premises. (Explanation - For the removal of doubts, it is hereby declared that the amount paid on account of the cost of repairs referred to in sub clause(i) and the amount paid on account of current repairs referred to in sub clause (ii) of clause (a), shall not include any expenditure in the nature of capital expenditure."

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In other words, if a tenant incurs a capital expenditure in the repairs of business premises, then w.e.f. A Y 2004-05 onwards such repairs would not be .allowable expenditure in view of the introduction of Explanation to this section by Finance Act, 2003. The case laws cited by the appellant are relating to prior to A Y 2003-04. Such decisions include -

i] Madras Auto Services Ltd 233 ITR 460 (SC)

ii] Mehta Transport Co. 160 ITR 35 (Guj)

The ratio of these decisions cannot be applied in respect of A Y 2004-05 onwards in view of the Explanation to section

30. I, therefore, hold that out of total expenses of Rs. 5.80 lacs Rs. 1.10 lacs + 0.55 lacs = Rs. 1.65 lacs is revenue expenses and the balance expenses of Rs. 4.15 lacs is capital expenses. The Assessing Officer is directed to allow depreciation on the capital expenses of Rs. 4.15 lacs at the same rate which is applicable to an office premises"

13. We have heard both the parties and gone through the relevant findings. The former portion of the impugned disallowance involves a sum of Rs.5,30,000/- as restricted to Rs.3,65,000/-. The relevant facts and figures already stand narrated in the preceeding paragraph. The assessee is a tenant in a rented premises. It incurred the impugned expenditure on the above stated items. The lower authorities treat the same as capital expenditure by holding that the expenditure in question has brought new assets into existence. We find no increase in the relevant space area nor construction of a new structure forthcoming from the case file. The Revenue fails to prove that the assessee has demolished any existing structure altogether and erected a new one. The assessee appears to have got removed/ partly demolished the same and spent the impugned sums in carrying out necessary repair and maintenance by way of fixing new beams, re-plastering of ceiling etc. We hold in these circumstances that once no new structure has come up nor is there any increase in capacity of the already existing structure, the impugned claim is to be treated as revenue expenditure ITA No. 2423/ Ahd/2010 With C.O.269/Ahd/2010 Assessment Year 2007-08 15

only. We reject the Revenue's third ground and accept the assessee's corresponding plea in its cross objection. The balance amount is of Rs.50,000/-. Page No.102A contains its relevant bill on cement, flooring and a truck of sand. The Revenue's objection in assessment order (supra) stands rectified. The assessee's claim of Rs.5,80,000/- is allowed as revenue expenditure.

14. The Revenue's fourth ground assails correctness of the CIT(A)'s action in deleting disallowance of petrol allowance of Rs.30,000/-, telephone allowance of Rs.24,000/- and consultancy service charges of Rs.36,000/-; totaling to Rs.90,000/- paid to Shri Kanubhai B. Kothia husband of the assessee's chairperson Smt. Lilaben. The Assessing Officer involved section 40A (2) (b) and made the impugned disallowance.

15. The CIT (A) has reversed the Assessing Officer's action as given below:-

"8. Next ground is regarding disallowance of telephone and petrol expenses of Rs.54,000/- and consultancy expenses of Rs.36,000/- u/s. 40A(2)(b) of the Act. This issue is discussed by the Assessing Officer at para-8 of the assessment order. The Assessing |Officer held that Shri Kanubhai Kothia, husband of chairperson of the bank Mrs. Lilaben Kothia has been paid consultancy services of Rs.36,000/-, telephone allowance of Rs.24,000/- and petrol allowance of Rs.30,000/-.Shri Kanubhai in his return of income for A.Y. 2007-08 has not included petrol allowance of Rs.30,000/- are telephone allowance of Rs.24,000/- as his income. The Assessing Officer observed that Shri Kanubhai has educational qualification as B.Sc. He is associated with Co-op. Bank since last 25 years either as consultant or director of other co-operative bank. He has experience in managing loan disbursement and legal matters as well as routine banking operations. The above submission of the AR before the Assessing Officer did not find favour. Because as per Assessing Officer, the appellant bank has incurred expenditure of Rs.21,64,554/- on pay and allowances to its employees. Since A.Y. 2007-08 is the first assessment year where deduction u/s. 80P is not ITA No. 2423/ Ahd/2010 With C.O.269/Ahd/2010 Assessment Year 2007-08 16

allowable, the Assessing Officer held that the consultancy services of Rs.36,000/- along with petrol and telephone allowance is not justifiable expenditure. He accordingly made disallowance of Rs.54,000/- + Rs.36,000/- = 90,000/- u/s. 40A(2)(b) on the ground of telephone allowance, petrol and consultancy charges. The AR in his written submission submitted that the offering or not offering of any amount for tax is matter within the hands of the recipients and also it is beyond the ambit and control of the appellant bank. The nature of the expenditure of telephone and petrol allowance is reimbursement of expenses or services rendered by the appellant to the bank. Such allowance are consistently given to the relative and this allowance has been actually allowed to the bank in the past. The appellant also submitted that in past Shri Kanubhai has been reimbursed the amounts for telephone Rs.12,000/- and conveyance expenses Rs.1,12,000/- in F.Y. 2004-05. In F.Y. 2005-06 conveyance Rs.12,000/- telephone expenses Rs.12,000/-, in 2006-07 conveyance 30,000/- and telephone expenses 24,000/-. Copies of bills of BSNL were also enclosed. It was stated that such expenses are being allowed to the appellant from year to year. Since the expenses are in the form of reimbursement, the same were not shown as income by Shri Kanubhai Kothia. As regards the consultancy services it was stated that Shri Kanubhai has included the amount of Rs.36,000/- in his return of income for A.Y. 2007-08. The Assessing Officer has not doubted the nature of services. Nor his case is that such payments are excessive or unreasonable to bring the same under the purview of section 40A(2).

8.1. I have considered the submissions of the appellant. Looking into the fact that the appellant has paid salary to the tune of Rs.21,64,554/- and tat Shri Kanubhai has been reimbursed with the telephone allowance and petrol allowance since past years and he has been rendering consultancy services to the bank from the past many years and in fact, in the past such expenses have been allowed by the Assessing Officer, I do not find any infirmity in the claim of such expenses. Since the telephone and petrol allowances are reimbursement of expenses, they were not shown as income by Shri Kanubai. I therefore, direct the Assessing Officer to allow the expenses ofRs.90,000/- under the above mentioned three heads of consultancy charges, petrol and telephone allowances."

16. We have given our thoughtful consideration to rival contentions advanced by both the parties. The Revenue has not been able to controvert the CIT (A)'s crucial finding that the very expenditure is ITA No. 2423/ Ahd/2010 With C.O.269/Ahd/2010 Assessment Year 2007-08 17

being accepted in preceding assessment years as paid to the same recipient. Nor does it point out any exception in facts and circumstances involved there. We adopt consistency in these facts and uphold the CIT (A)'s action. The Revenue's corresponding ground is declined.

17. The Revenue's fifth and last ground seeks to restore addition Rs.5,03,380/- on account of interest accrued on NPA. It is to be seen that the CIT (A)'s findings elaborately discuss assessee's explanation and Assessing Officer's observations as under:-

9. Last ground is regarding addition of interest accrued on loans and advances not offered to tax. This issue is discussed by Assessing Officer at para 9 of the assessment order. The Assessing Officer observed that the interest income to the extent of Rs. 5,03,380/- has not been considered as income on the NPA account. He issued a show cause notice to the appellant in this regard. The assessee vide his letter dated 29-12-2009 submitted before the Assessing Officer as under :-

"With reference, to the information called by your honour vide letter No. DGIT. Cir-ll/143(3)/BMC/09-10 dt 24-12- 2009, received by our bank on 28-12-2009, your honour is requested - that the amount reflects at point No. 8 on balance side of the balance sheet under the head "Overdue Interest Reserve" is the amount of accrued interest on NPA account and the said accrued interest amount is accounted as income under the head " interest on advances" in P & L A/c....

The year-wise such amounts as under:-

F.Y. Amt of accrued interest as op 31st March 2004-05 8,88,300/-

2005-06 5,79,000/-

2006-07 5,03,380/- ITA No. 2423/ Ahd/2010 With C.O.269/Ahd/2010 Assessment Year 2007-08 18

There is practice of First Crediting Interest Income of amount recovered from NPA Account and any excess recovery than accrued interest being created as principal recovery. Therefore, there is no any amount of accrued interest not treated as income during all financial years."

9.1 The Assessing Officer was not satisfied with this reply of the assessee and made addition of Rs.5,03,380/- on the ground that the appellant has not furnished the copy of interest account showing booking of income of accrued interest on NPA accounts. The case of the AR is that the proforma for classification of assets and provision made against NPA Assets as on 31-3-2007 ( which is enclosed as page No 113 in the paper book), a copy of which is enclosed as Annexure-l to this order) was produced before the Assessing Officer during the assessment proceedings which clearly shows that out of the total loans and advances of Rs. 933.27 lacs, standard asset represent 857.61 lacs and the bifurcation of asset is given in this table. As per this, the principal amount of Rs. 76.62 lacs is shown on which interest capitalized is shown at Rs. 5.04 lacs. The Assessing Officer overlooked this classification and made wrong assumption that the interest income of Rs.5,03,380/- is not included from the NPA assets. It was therefore pleaded that the addition made by the Assessing Officer is without any basis.

9.2 I have considered the submissions. For the sake of convenience the proforma appearing at page No 113 of the paper book in respect of classification of asset and provision made against non performing asset as on 31-3-2007 is enclosed as Annexure-1 to this order. From this proforma I find that the interest income of Rs. 5.04 lacs has been included in the interest account. Therefore the assumption of the Assessing Officer that the interest income of Rs. 5.04 lac is not shown by the appellant is not correct-. In fact this amount is already shown by the appellant as income in the P & L A/c. The Assessing Officer is therefore directed to delete the addition of Rs.5,03,380/- on this account."

18. Heard both sides. Records perused. The CIT (A) has given a finding of fact that the assessee has already included the very interest income of Rs.5,04,000/- in its interest income and P & L account.

ITA No. 2423/ Ahd/2010 With C.O.269/Ahd/2010 Assessment Year 2007-08 19

Annexure "A" to this effect also forms part of the lower appellate order. The Revenue has not been able to dispute contents thereof. We affirm the CIT (A)'s findings in these circumstances and reject the Revenue's ground.

The Revenue's appeal ITA No.2423/Ahd/2010 is dismissed.

19. This leaves us with the assessee's cross objection raising two substantive grounds challenging the lower appellate order disallowing RBI penalty of Rs.5 lacs as expenditure and partly affirming the CIT(A)'s order holding expenditure on repair and maintenance of Rs.5.80 lacs to the tune of Rs.4.15 lacs (supra).

20. We come to the assessee's first substantive ground. The RBI imposed a penalty ofRs.5 lacs (supra) u/s. 47A (1)(b) of the Banking Regulation Act,1947 alleging violation of KYC norms. Both the authorities below hold that a penalty imposed does not give rise to any corresponding revenue expenditure being penal in nature.

21. It has come on record that this penalty arises from the assessee's action in opening 250 FDRs (supra) already dealt in Revenue's appeal. The question that arises for our consideration is as to whether the word 'penalty' results in a blanket disallowance or facts involved therein still need to be examined. The hon'ble Kerala high court (2004) 265 ITR 177 CIT v/s. Catholic Syrian Bank holds that an important test in such a case is as to whether the penalty for non compliance entails compensatory or penal consequences. And also that if any criminal liability or prosecution is provided, a levy is penal in nature. Section 46 r.w.s. 47A(1)(b) of the Banking Regulation law does not stipulate any such criminal liability. We follow the aforestated case law in these facts and direct the assessing authority to allow the assessee's claim of Rs.5 ITA No. 2423/ Ahd/2010 With C.O.269/Ahd/2010 Assessment Year 2007-08 20

lacs as revenue expenditure. The assessee's first substantive ground succeeds. Its second ground already stands accepted in the Revenue's appeal. The Revenue's appeal is dismissed. The assessee's cross objection is allowed.

Order pronounced in the Court on Friday, the 3rd 2015 at Ahmedabad.

Sd/- Sd/- (PRAMOD KUMAR) (S.S. GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER

Ahmedabad. Dated 3 /7 /2015

Patki

आदे श क त ल प अ े षत/Copy of the Order forwarded to : 1. अपीलाथ / The Appellant 2. यथ / The Respondent. 3. संबं धत आयकर आयु त / Concerned CIT

4. आयकर आयु त(अपील) / The CIT(A)XVI, Ahmedabad

5. वभागीय #त#न ध, आयकर अपील य अ धकरण, अहमदाबाद / DR, ITAT, Ahmedabad

6. गाड( फाईल / Guard file.

आदे शानस ु ार/ BY ORDER,

उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील!य अ"धकरण, अहमदाबाद / ITAT, Ahmedabad ITA No. 2423/ Ahd/2010 With C.O.269/Ahd/2010 Assessment Year 2007-08 21

1. Date of dictation- 30-6/1-7

2. Date on which the typed draft is placed before the Dictating Member :1-7-2015

3. Date on which the approved draft comes to the Sr.P.S./P.S. - 2-7-2015

4. Date on which the fair order is placed before the Dictating Member for Pronouncement 3-7-2015

5. Date on which the file goes to the Bench Clerk: 6-7-2015

6. Date on which the file goes to the Head Clerk..................................

7. The date on which the file goes to the Assistant Registrar for signature on the order..........................

8. Date of Despatch of the Order..................