JCIT(OSD) CIRCLE 2(3)(1), MUMBAI, MUMBAI vs. HDFC BANK LIMITED, MUMBAI

The grounds of the appeals are as under: GROUND NO. 1: DISALLOWANCE UNDER SECTION 14A OF THE ACT

ITA No. 1573/MUM/2025(AY 2020-21) GROUND NO. 1: DISALLOWANCE UNDER SECTION 14A OF THE ACT

We take up assessee's appeals in ITA No.1551 and 1573/Mum/2025 first which pertain to the disallowance of disallowance u/s 14A of the Act (AY 2019-20 and 2020-21).Both these appeals involve only question of disallowance u/s 14A of the Act. The only difference is in the figures. We consider the facts as stated in appeal for AY 2019-20 here and the decision rendered would apply mutatis mutandis to the appeal of AY 2020-21 also. Page 3 ITA No. 1555, 1573, 2258, 2259 & 2260 Mum 2025 Α.Υ. 2019-20, 2020-21, 2021-22 HDFC Bank Limited, Mumbai

The assessee claimed an exempt income of Rs.612,36,54,955/- while it had made disallowance under Section 14A of the Act as per its Accountant's report amounting to Rs.70,18,504/-. The assessee relied on the decision of Hon'ble Supreme Court in the case of Maxoрр Investment Ltd. v. CIT [Civil Appeal No. 104-109 of 2015] and contended that when the securities were held as stock-in-trade, no disallowance u/s 14A r.w.r. 8D is warranted.According to the AO, as per the provisions of section 14A r/w Rule 8D disallowance of expenditure in earning exempt income requires to be made if the AO is satisfied that such expenditure was incurred but not disallowed by the assessee. The disallowance is to be made even if the assessee contends that no expenditure has been incurred in earning exempt income. In the order in Maxopp Investment Ltd. (supra), the hon'ble Court held as in the case of State Bank of Patiala that when all the securities are held stock-in- trade, no disallowance u/s 14A was required. Hence, in the assessee's case the securities held as stock-in-trade were not considered for the purpose of disallowance u/s 14A r.w.r. 8D.

1 However, he observed that in the assessee's case, it had mixed portfolio for securities in terms of stock-in-trade as well as in investments. Hence, apportionment of expenses for interest as well as other expenses was required. The assessee also relied on the decision in its own case of Hon'ble Bombay High Court in CIT v. HDFC Bank Ltd. [366 ITR 505] and stated that no disallowance is warranted when interest free funds are in excess of investment in tax free securities. The AO however, made a detailed

Before us, the ld.CIT-DR relied on the orders of lower authorities and claimed that the satisfactions of the AO was not mechanical but elaborate and well reasoned. The ld.AR inter alia pleaded that no objective satisfaction was recorded by the AO. He made a note of the 14A report, however, disregarded the computation of indirect expenses relatable to such tax-free investments identified on a scientific basis and made disallowance applying Rule 8D(2)(ii) at Rs.79,43,93,186/-. The AO, while rejecting the suo- moto working failed to record satisfaction as to how the working was wrong but stated a generic reason as to why Rule 8D should be applied. The AO needs to record 'satisfaction "having regard to the accounts of the assessee' as to how he is not satisfied about 'correctness of the claim of assessee before applying Rule 8D.The AR argued that the findings of the AO in the assessment order for the year under consideration for invoking Rule 8D are verbatimthe same as his findings in AY 2016-17 to 2018-19.The hon'ble Tribunal in itsown case for these three years has held that the said findings of the AO cannot be considered as ‘satisfaction' for invoking Rule 8D and thereby restricted the disallowance u/s 14A to the suo-moto disallowance made pursuant to Accountant's report. He also relied on certain judicial precedents decided on the issue related to 'satisfaction',i.e. Maxopp Investment Ltd vs. CIT [2018] 402 ITR 640 (SC),PCIT vs.BSE Ltd. [2020] 113 taxmann.com 303 (Bombay HC),Trent Limited v. DCIT (ITA No. 4074/Mum/2024), Aditya Birla Tribunal), J.M. Financial Services Ltd. v. JCIT [54 ITR(T) 120] (Mum Tribunal),M/s Avinash Bhosale Infrastructure Pvt. Ltd. Vs DCIT 2(3) (ITA No. 1952/Mum/2020). In addition, reference was also made to the decision of honʼble Bombay High Court in the case of CIT v. Jubiliant Enterprises (P.) Ltd. (416 ITR 58) which would also be applicable in the case insofar as interest expenditure is concerned. Page 4 ITA No. 1555, 1573, 2258, 2259 & 2260 Mum 2025 Α.Υ. 2019-20, 2020-21, 2021-22 HDFC Bank Limited, Mumbai

In light of the aforementioned decisions of the hon'ble Supreme Court, High Courts and Co-ordinate bench, we do not find any merit in the appellate order directing the AO to include the shares held as stock-in-trade for the purpose of computation of disallowance u/s 14A of the Act and recompute the disallowance. The order is therefore, set aside and the AO is directed to delete the disallowance made as per the directions of the ld.CIT(A).The ground no.2 is therefore allowed.

In ground no.3 it is stated that the ld. CIT(A) erred in not considering the basis of suo-motu disallowance offered by the Appellant during the course of Assessment proceedings. The ld. CIT(A) erred in not declaring the assessment being completed by the AO as void-ab- initio.

1 No separate adjudication is needed in this regard as the issue has already been dealt with in ground no.1 above and the AO has been directed to accept suo motu disallowance and the balance to be deleted.

In the result,all the grounds of the assessee are allowed. Page 5 ITA No. 1555, 1573, 2258, 2259 & 2260 Mum 2025 Α.Υ. 2019-20, 2020-21, 2021-22 HDFC Bank Limited, Mumbai interest income of the assessee Bank is far greater than the interest expenditure incurred by it and consequently, no interest disallowance is called for having regard to the accounts of the assessee Bank. Indeed, this is an addition to the decision of the Bombay High Court in assessee's own case (366 ITR 505) wherein it has been held that where the aggregate of own funds and current account deposits is more than the investments in tax-free securities, no disallowance is called for. In the absence of recording objective satisfaction having regard to Bank's books of account and its various contentions/submissions/workings by the AO qua its claim in respect of adequacy of disallowance u/s.14A, it is submitted that the disallowance made by the AO deserves to be deleted.

1 It is further submitted that the facts for AY 2020-21 are more or less similar and therefore, the submissions made for AY 2019-20 will apply mutatis mutandis to AY 2020-21. 7. We have carefully perused the records, considered rival submissions and also gone through the cited decisions and specifically decisions of the coordinate bench of ITAT Mumbai in its own case in appeals of AY 2016-17 to 2018-19 involving similar facts and circumstances in ITA No.1783/1784/1785/Mum/2023 dated 24.01.2024. In all these appeals, we find that the observations and findings of the AO were almost identical as also the facts of the case. We are of the considered view that in a case where the assessee has suo motu made disallowance, the AO can invoke the provisions of Rule 8D for the purposes of computation of such disallowance only when there is recording of an objective dis-satisfaction to such disallowance by him. It is noted that primary responsibility for making disallowance u/s14A is on the assessee while computing its total income and reporting the same in the return of income filed by it. In the present case, assessee has suo motu made disallowance, which is based on its audited financial statements reported in annual report.Once this claim was made by the assessee, the onus was on the AO to satisfy himself about the correctness of this claim by verifying the factual data and then proceed to invoke Rule 8D(2) to resort to prescribed percentage for the purpose of making disallowance. In the order passed by the AO, there is no whisper as to the correctness or otherwise of the working made by the assessee. The AO has erred in invoking the provisions of Rule 8D for making disallowance of administrative expenses in absence of recording of objective satisfaction “having regard to the accounts of the assessee” and therefore, the disallowance u/s.14A is to be restricted to the amount of suo motu disallowance made by the assessee. Page 6 ITA No. 1555, 1573, 2258, 2259 & 2260 Mum 2025 Α.Υ. 2019-20, 2020-21, 2021-22 HDFC Bank Limited, Mumbai

1 The above finding arrived at by us is fortified by the decision of hon'ble Supreme Court in the case of Maxopp Investment Ltd. vs. CIT(A) [2018] 402 ITR 640 (SC) while emphasising the aspect of recording of satisfaction by the AO made observations as under:

Having regard to the language of section 14A(2) of the Act, read with rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the Assessing Officer needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the Assessing Officer was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, the nature of the loan taken by the assessee for purchasing the shares/ making the investment in shares is to be examined by the Assessing Officer.

2 In the case of CIT vs M/s Asian Paints Ltd., in ITA No. 1564 of 2016(Bom), while dismissing the appeal filed by Revenue hon'ble Bombay High Court held that in absence of recording of satisfaction in terms of section 14A(2) of the Act, invocation of Rule 8D is not permissible. Relevant findings of the hon'ble Court, are reproduced as under:- "

Regarding question no.(c) :- (c) On further appeal, the impugned order of the Tribunal while allowing the appeal held that before invoking the provisions of Rule 8D of the Income Tax Rules, the Assessing Officer has to record his non satisfaction with the suo moto disallowance of expenditure made towards earning exempt income by the respondent. This exercise not having been carried out by the Assessing Officer before applying Rule 8D of the Income Tax Rules, the disallowance of expenditure to earn exempt income cannot be sustained.

3 This issue is no longer res integra as the hon'ble Apex Court in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT, 394 ITR 449 decided Page 7 ITA No. 1555, 1573, 2258, 2259 & 2260 Mum 2025 Α.Υ. 2019-20, 2020-21, 2021-22 HDFC Bank Limited, Mumbai the issue in favour of the respondent. In this case, the hon'ble Supreme Court has while considering the issue of disallowing of expenditure incurred to earn exempt income observed as under: "Whether such determination is to be made on application of the formula prescribed under rule 8D or in best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It only thereafter that the provisions of section 144 (2) and (3) read with rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable."

4 We have carefully perused the assessment and appellate orders as also cited decisions(supra). From the plain reading of the assessment order, the satisfaction/dissatisfaction of the AO is not discernible at all. He has failed to point out any infirmity in the suo motu disallowance made by the assessee itself. It is noticed that the issue of recording of satisfaction is a recurrent one involving identical facts in various assessment years in the case of the assessee's own case and the ITAT has allowed its claim in appeals for AYs 2016-17/2017-18 and 2018-19. Therefore, in absence of any such satisfaction no disallowance under section 14A of the Act can be made. In the present case before us, AO has not taken into consideration the elaborate details and scientific basis adopted while arriving at the suo moto disallowance but has proceeded merely on his own presumptions to invoke section 14A r.w.r. 8D. Thus, Rule 8D cannot be invoked where the suo moto disallowance made by the assessee is not found to be satisfactory by the AO having regard to the accounts of the assessee. In the absence of recording the aforesaid fact of non- satisfaction in terms of section 14A(2) of the Act, invocation of Rule 8D is not permissible.Since, in the present case, no proper satisfaction has been recorded by the AO in terms of the provisions of section 14A(2) of the Act, having regard to the accounts of the assessee about the correctness of the claim of the assessee in respect of expenditure incurred in relation to exempt income, respectfully following the aforesaid decisions, we do not find any reason for upholding the disallowance made by the AO under section 14A read with Rule 8D of the Rules. Accordingly, the same is directed to be deleted. The ground of appeal is therefore allowed.

In ground no.2 it is stated that the ld. CIT(A) erred in directing the ld. AO to consider investments held as stock-in-trade also for the purposes of computing disallowance u/s.14A r.w.r. 8D disregarding the appellate orders of hon'ble Tribunal in assessee's own case for earlier years.

1 On perusal of the assessment order, we find that the AO did not take into consideration entire stock-in-trade for working out the disallowance u/s 14A of the Act following the order of hon'ble Supreme Court in Maxopp Investment Ltd. (supra), the hon'ble Court held as in the case of State Bank of Patiala that when all the securities are held stock-in-trade, no disallowance u/s 14A was required. Hence, in the assessee's case the securities held as stock-in-trade were not considered for the purpose of disallowance u/s 14A r.w.r. 8D.However,the ld.CIT(A) held a contrary view of the matter and directed the AO accordingly.

2 We have heard the rival contentions and perused the material available on record. We find that as far as shares held as stock in trade by the assessee, which is duly reflected as such in its financial statements, the matter is no more res integra and the value of shares so held as stock-in-trade has to be excluded for the purposes of computation of disallowance u/s.14A of the Act. In this regard, we can gainfully refer to the decision of the Hon'ble Supreme Court in the case read as under:- "36) There is yet another aspect which still needs to be looked into. What happens when the shares are held as stock-in-trade and not as investment, particularly, by the banks? On this specific aspect, CBDT has issued circular No. 18/2015 dated November 02, 2015. 37) This Circular has already been reproduced in Para 19 above. This Circular takes note of the judgment of this Court in Nawanshahar case wherein it is held that investments made by a banking concern are part of the business or banking. Therefore, the income arises from such investments is attributable to business of banking falling under the head ‘profits and gains of business and profession'. On that basis, the Circular contains the decision of the Board that no appeal would be filed on this ground by the officers of the Department and if the appeals are already filed, they should be withdrawn. A reading of this circular would make it clear that the issue was as to whether income by way of interest on securities shall be chargeable to income tax under the head income from other sources or it is to fall under the head profits and gains of business and profession. The Board, going by the decision of this Court in Nawanshahar case, clarified that it has to be treated as income falling under the head profits and gains of business and profession. The Board also went to the extent of saying that this would not be limited only to co-operative societies/Banks claiming deduction under Section 80P(2)(a)(i) of the Act but would also be applicable to all banks/commercial banks, to which Banking Regulation Act, 1949 applies. 38) From this, Punjab and Haryana High Court pointed out that this circular carves out a distinction between „stock-in-trade" and “investment" and provides that if the motive behind purchase and sale of shares is to earn profit, then the same would be treated as trading profit and if the object is to derive income by way of dividend then the profit would be said to have accrued from investment. To this extent, the High Court may be correct. At the same time, we do not agree with the test of dominant intention applied by the Punjab and Haryana High Court, which we have already discarded. In that event, the question is as to on what basis those cases are to be decided where the shares of other companies are purchased by the assessees as „stock-in-trade" and not as investment. We proceed to discuss this aspect hereinafter. 39) In those cases, where shares are held as stock-in-trade, the main purpose is to trade in those shares and earn profits therefrom. However, we are not concerned with those profits which would naturally be treated as „income" under the head 'profits and gains from business and profession". What happens is that, in the process, when the shares are held as „stock-in-trade", certain dividend is also earned, though incidentally, which is also an income. However, by virtue of Section 10 (34) of the Act, this dividend income is not to be included in the total income and is exempt from tax. This triggers the applicability of Section 144 of the Act which is based on the theory of apportionment of expenditure between taxable and non-taxable income as held in Walfort Share and Stock Brokers P Ltd. case. Therefore, to that extent, depending upon the facts of each case, the expenditure incurred in acquiring those shares will have to be apportioned. 40) We note from the facts in the State Bank of Patiala cases that the AO, while passing the assessment order, had already restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 8D of the Rules and holding that section 14A of the Act would be applicable. In spite of this exercise of apportionment of expenditure carried out by the AO, CIT(A) disallowed the entire deduction of expenditure. That view of the CIT(A) was clearly untenable and rightly set aside by the ITAT. Therefore, on facts, the Punjab and Haryana High Court has arrived at a correct conclusion by affirming the view of the ITAT, though we are not subscribing to the theory of dominant intention applied by the High Court. It is to be kept in mind that in those cases where shares are held as „stock-in-trade", it becomes a business activity of the assessee to deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is, therefore, different from the case like Maxopp Investment Ltd. where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well as and when such dividend income is held as stock-in-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes up in order to seek profit in the result. This has aptly filed by the Revenue challenging the treatment of the Punjab and Haryana High Court in State Bank of Patiala case also, though such claim has been clarified in HDFC Bank Limited, Mumbai.

3 The same view was followed by the hon'ble Supreme Court in the case of South Indian Bank Ltd. vs. CIT [2021] 438 ITR 1 (SC). The hon'ble High Court of Delhi in the case of PCIT vs. Punjab National Bank reported in [2022] 140 taxmann.com 131 (Delhi), had the occasion to consider a similar issue and it held as follows:- "

The Supreme Court in this judgment upheld the decision of the High Court of Punjab and Haryana arising under section 14A of the Act with respect to an assessee bank. It further held that when the shares were held as stock-in-trade and not as investment particularly by banks, the main purpose was to trade into those shares and earn profit therefrom and therefore, the judgment of Maxopp Investment Ltd. (supra) has been duly noted by the Tribunal in its impugned order and in our opinion the Tribunal has correctly disallowed the disallowance under rule 8D(2)(iii) of the Rules.

In the aforesaid view, the matter, the questions of law proposed by the Appellant do not arise for consideration either in fact or in law of the judgments of the Supreme Court which have conclusively decided the questions sought to be conveyed by the Appellant.

4 Also the Co-ordinate Bench in the case of Religare Securities Ltd. in ITA No. 7291/Del/2019; AY 2015-16 has followed the view taken by the hon'ble Supreme Court in the case of Maxopp Investment Ltd. (supra).

In light of the aforementioned decisions of the hon'ble Supreme Court, High Courts and Co-ordinate bench, we do not find any merit in the appellate order directing the AO to include the shares held as stock-in-trade for the purpose of computation of disallowance u/s 14A of the Act and recompute the disallowance. The order is therefore, set aside and the AO is directed to delete the disallowance made as per the directions of the ld.CIT(A).The ground no.2 is therefore allowed.

In ground no.3 it is stated that the ld. CIT(A) erred in not considering the basis of suo-motu disallowance offered by the Appellant during the course of Assessment proceedings. The ld. CIT(A) erred in not declaring the assessment being completed by the AO as void-ab- initio.

1 No separate adjudication is needed in this regard as the issue has already been dealt with in ground no.1 above and the AO has been directed to accept suo motu disallowance and the balance to be deleted.

In the result,all the grounds of the assessee are allowed. Page 8 ITA No. 1555, 1573, 2258, 2259 & 2260 Mum 2025 Α.Υ. 2019-20, 2020-21, 2021-22 HDFC Bank Limited, Mumbai

The decision above is applicable to the appeal for AY 2019-20 also mutatis mutandis as facts of the case and the issue involved are same.

In the result,both the appeals of the assessee in ITA No.1555/M/2025 and 1573/M/2025 are allowed.

ITA No. 2258/MUM/2025(AY2020-21)

In respect of ground no.1 above, we find that the Special Bench of the Delhi Tribunal in the case of ACIT v. Vireet Investments Private Limited [82 Taxman.com 415] held that only those investments are to be considered for computing average value of investments which yielded exempt income during the year while computing the disallowance Rule 8D(2)(iii). Respectfully following the same, we do not find any infirmity in the action of the ld.CIT(A) in directing the AO to compute disallowance u/s 14A r.w.r. 8D(2)(iii) in accordance with the ratio of law laid down by Special Bench-ITAT, Delhi in the case of Vireet Investment Private Limited (supra). This ground is therefore dismissed.

In the ground no.2, it is claimed by the Revenue the Ld. CIT(A) erred in restricting the disallowance u/s 14A to the exempt income ignoring the provisions contained in the Act and the Rules?

In this regard, the ld.AR has contented that the above-mentioned ground raised by the Department is factually incorrect. The ld. CIT(A) has made disallowance u/s 14A applying Rule 8D(2)(ii) and has not restricted the disallowance to the exempt income. The same can be evidenced from the tabulation provided hereunder: Page 9 ITA No. 1555, 1573, 2258, 2259 & 2260 Mum 2025 Α.Υ. 2019-20, 2020-21, 2021-22 HDFC Bank Limited, Mumbai A.Y. Amount disallowed by CIT(A) (in Rs.) Amount of exempt income earned by the Assessee Bank (in Rs.) 2019- 20 28,45,08,751 612,36,54,955 2020- 21 Directed the AO to compute 723,52,81,889 disallowance as per Rule 8D(2)(ii) Thus, it is clear from the above that the ground raised by the Department on the said issue is factually incorrect and ought to be dismissed as infructuous.

We find merits in the above submissions as no such directions appear to have been given to the AO to restrict the disallowance to exempt income.Accordingly,the ground being devoid of any merit is dismissed.

In ground no.2, it is stated that the Ld.CIT(A) erred in allowing the CSR donation, without appreciating the facts that the donation is "donation" refers to an amount paid voluntarily by a person?"

According to the assessment order,it was noticed that the assessee company had claimed deduction of donation under Section 80G of the Act of Rs 95,43,03,272/- (being 50% of 1,90,86,06,544/-) with respect to donation made to India Corporate Social Responsibility Foundation. He observed that section 80G(2) of the Act detailed various sums which are referred to in sub-section 100f section 80G of the Act. Section 80G(2) further reveals that any sum paid by the assessee in the previous year has to be in nature of 'donations' to various entities. So it is important to note that the ‘sums paid' needed to be donations for the purpose of being eligible for deductions under section 80G of the Act. The dictionary meaning of the word ‘donation 'is that it is a gift of charity, humanitarian aid, or to benefit a cause. Donations may take various forms, including money, alms, services or goods such as clothing, toys, food, or vehicles. The voluntary act on the part of donor is thus an essential element to treat the amount paid as a donation. In the case under consideration, the amount had not been paid by the assessee to the eligible entity specified in Section 80G of the Act on a voluntary basis. But the same had been paid by it as it was mandatorily required to spend such an amount for specified activities as per the provisions of Section 135 of the Companies Act, 2013. The expression "shall ensure” used in Section 135(5) of the Companies Act, 2013 clearly implies that there is a mandate to spend 2% of average net profits of the preceding three years on Corporate Social Responsibility(‘CSR') activity. The AO observed further that the sum paid by the assessee could not be considered as a 'donation' for the purpose of Section 80G of the Act. The CSR expenditure claimed as deduction u/s 80G was against the intention of law maker. So when the assessee paid an amount to an eligible entity under Section 80G of the Act, such a payment was not made on a voluntary basis but it was a mandatory requirement of law to spend such an amount for activities benefitting the society. The assessee could also have made payment to an entity not covered by Section 80G or it could have directly incurred the expenditure for the specified purpose, however in any of these scenarios too the expenditure would not have been voluntary but mandatory to comply with the provisions of the law. Further, CSR expenditure, being an application of income, was not incurred wholly and exclusively for the purposes of carrying on business. As the application of income is not allowed as deduction for the purposes of computing taxable income of a company, amount spent on CSR could not be allowed as deduction for computing the taxable income of the company. Moreover, the objective of CSR is to share the burden of the Government in providing social services by companies having net worth/turnover/profit above a threshold. If such expenses are allowed as tax deduction, this would result in subsidizing of around onethird of such expenses by the Government by way of tax expenditure Considering above, the amount claimed u/s 80G as deduction i.e. Rs. 95,43,03,272/- was disallowed and added back to the total income of the assessee. The ld.CIT(A) however, deleted the disallowance stating that section 80G deduction is not barred under the Act and only CSR expenses claimed as business expense is allowed. He also placed reliance on various decisions of coordinate benches of ITAT which has consistently allowed such claim u/s 80G of the Act.

Before us, the ld.CIT(DR) has placed reliance on the assessment order. Per contra the ld.AR has submitted that the assessee Bank incurred CSR expenditure on activities as per the provisions of section 135 of the Companies Act, 2013. The said amount was given as donation to certain institutions registered u/s 80G of the Income Tax Act. In the ROI, the aforesaid donation was disallowed u/s.37(1) of the Act and eligible amount was claimed u/s 80G of the Act. All the donation receipts in respect of the total claim made u/s 80G were produced before the lower authorities. Reliance is placed on various judicial precedents wherein it is held that CSR spend, even though made under a legal obligation under section 135 of Companies Act 2013, can be claimed as deduction under section 80G of the Act (except for Swachh Bharat Kosh and Clean Ganga Fund), subject to fulfillment of conditions prescribed for section 80G of the Act i.e Alubound Dacs India (P.) Ltd. v. DCIT (207 ITD 393) (Mumbai), ACG Pam Pharma Technologies (P.) Ltd. V. PCIT (176) taxmann.com 98) (Mumbai) etc. In view of the foregoing, the disallowance for the deduction towards donation u/s.80G of Act be deleted.

It is also stated that the facts for AY 2020-21 are more or less similar and therefore, the submissions made for AY 2019-20 will apply mutatis mutandis to AY 2020-21. 23. We have carefully considered all the relevant facts of the case, provisions in this regard and the cited decisions. We are of the considered opinion that whether the CSR expenditure is allowable u/s. 80G of the Act is no moreres integra by a catena of decisions by various Co-ordinate Benches of the Tribunal. The Mumbai Bench of the Tribunal in the case of Alubond Dacs India (P.) Ltd.in (2024) 163 taxmann.com 536(Mum) considered the provisions of Companies Act and I.T. Act and held as follows:- "

We have heard the rival submissions and perused the materials available on record. The only morn question to be decided here is whether the expenditure towards CSR activities are an allowable deduction us 80G of the Act. The CSR expenses are governed by section 135 of the Companies Act, 2013, Schedule VII of the Act and Companies (CSR) Policy Rules, 2014 where companies having net worth of Rs 500 crores of more or turnover of Rs.1000 crores or more or net profit of Rs 5 crores of more have to mandatorily comply with the CSR provisions specified us.135(1) of the Companies Act, 2011. The above mentioned companies are liable to spend atleast 25% of its average net profit for the immediately preceding three financial years on CSR activities. In the present case, the assessee has contributed Rs 30 lacs to various educational and charitable trust for which the assessee has claimed 50% of the total donation paid as deduction u/s.800 of the Act. Prior to the Finance (No.2) Act, 2014, the said expenditure was claimed as 'business expenditure' u/s.37(1) of the Act where after the insertion of Explanation 2 to section 37(1) of the Act, the CSR expenses referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purpose of business or profession. It is observed that the said expenses pertaining to CSR has been claimed as deduction u/s.80G of the Act which claim was perennially rejected by the Revenue for the reason that only donations which are voluntary in nature will come under the purview of section 80G of the Act and donation towards CSR was merely a statutory obligation on companies as per section 135 of the Companies Act, 2013. It is pertinent to point out that the intention of the legislature was clear when the same was clarified by the Finance (No.2) Act, 2014 that CSR expenses will not fall under the business expenditure and also there has been an express bar specified in sub clause (iiihk) and (iiihl) of section 80G(2)(a) of the Act that any sum paid by the assessee to Swatch Bharat Kosh and Clean Ganga Fund will not come under the purview of deduction u's 80G of the Act subject to certain conditions. This justifies the fact that the other donations specified us 80G of the Act would be entitled to deduction provided the conditions stipulated u/s.80G of the Act are satisfied. In the present case in hand, the contributions made by the assessee would not fall under the two exceptions specified above which clearly mandates that the assessee is entitled to claim deduction for the donations contributed during the year under consideration u/s 80G of the Act. The decision relied upon by the ld. A.O in the case of PVG Raju (supra) is distinguishable on the facts of the present case where there is no requirement of proving the voluntariness of the donation contributed by the assessee for claiming deduction u/s.80G of the Act. The amendment brought about by Finance Act, 2015 to section 80G of the Act which had inserted the sub clauses (iiihk) and (iiihl) to be the exception for qualifying a donation for claiming us.80G of the Act could also be an evidencing factor to substantiate that CSR expenditures which falls under the nature specified in section 30 to 36 of the Act are an allowable deduction u/s 80G of the Act.

On the above observation, we deem it fit to hold that the assessee is entitled to deduction claimed u/s.80G of the Act towards the CSR expenditure incurred by it. We, therefore, direct the ld. A.O, to allow the claim of the assessee subject to the condition that the assessee has satisfied the other requirements warranted u/s.80G of the Act. Hence, ground no. 2 raised by the assessee is allowed.

1 The Delhi Tribunal in the case of Interglobe Technology Quotient (P.) Ltd. (2024) 163 Taxmann.com 542 (Del)held that mandatory nature of CSR expenditure does not justify disallowance of same u/s.80G, if other conditions of section 80G are fulfilled by observing as follows:- "7.3 As we take notice of the fact that Parliament legislated that CSR expenses would not be eligible for deduction as business expenditure under section 37 of the Act by inserting Explanation 2 to section 37(1) vide the Finance (No.2) Act, 2014 (applicable from the assessment year 2015-16), which provided that any expenditure incurred by an assessee on the activities relating to CSR referred to in section 135 of the CA 2011, shall not be deemed to be an expenditure incurred by an assessee for the purpose of business or profession and shall not be allowed as deduction under section 37(1) of the IT Act. The intent of Parliament in bringing the aforesaid provision is given in the Explanatory Memorandum to the Finance (No.2) Bill, 2014 and is reproduced as under; "CSR expenditure, being an application of income, is not incurred wholly and exclusively for the purposes of carrying on business. As the application of income is not allowed as deduction for the purposes of computing taxable income of a company, amount spent on CSR cannot be allowed as deduction for computing the taxable income of the company. Moreover, the objective of CSR is to share burden of the Government in providing social services by companies having net worth/turnover/profit above a threshold. If such expenses are allowed as tax deduction, this would result in subsidizing of around one-third of such expenses by the Government by way of tax expenditure."

4 The aforesaid explanatory memorandum categorically expresses the legislative intent and the rationale of disallowance of CSR expenditure referred to in section 135 of the Companies Act, that such expenditure is application of income and not incurred for the purposes of business. We are of considered view that this in itself justifies the grant of deduction u/s 80G. As CSR expenditure is application of income of the assessee under the Income Tax Act, that means it continues to form part of the Total income of the assessee. Section 80G(1) of the Act provides that in computing the total income of an assessee, there shall be deducted, in accordance with the provisions of this section, such sum paid by the assessee in the previous year as a donation. Further, section 80G(2) lists down the suns on which deduction shall be allowed to the assessee. Section 80G falls in Chapter VIA, which comes into play only after the gross total income has been computed by applying the computation provisions under various heads of income, including the Explanation 2 to section 37(1) of the Act. Thus, there is no correlation between suo-moto disallowance of section 37(1) and claim of deduction under section 80G of the Act. The Mumbai Bench of the Tribunal in the case of Alubond Dacs India (P.) Ltd.in (2024) 163 taxmann.com 536(Mum) considered the provisions of Companies Act and I.T. Act and held as follows:- "

We have heard the rival submissions and perused the materials available on record. The only morn question to be decided here is whether the expenditure towards CSR activities are an allowable deduction us 80G of the Act. The CSR expenses are governed by section 135 of the Companies Act, 2013, Schedule VII of the Act and Companies (CSR) Policy Rules, 2014 where companies having net worth of Rs 500 crores of more or turnover of Rs.1000 crores or more or net profit of Rs 5 crores of more have to mandatorily comply with the CSR provisions specified us.135(1) of the Companies Act, 2011. The above mentioned companies are liable to spend atleast 25% of its average net profit for the immediately preceding three financial years on CSR activities. In the present case, the assessee has contributed Rs 30 lacs to various educational and charitable trust for which the assessee has claimed 50% of the total donation paid as deduction u/s.800 of the Act. Prior to the Finance (No.2) Act, 2014, the said expenditure was claimed as 'business expenditure' u/s.37(1) of the Act where after the insertion of Explanation 2 to section 37(1) of the Act, the CSR expenses referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purpose of business or profession. It is observed that the said expenses pertaining to CSR has been claimed as deduction u/s.80G of the Act which claim was perennially rejected by the Revenue for the reason that only donations which are voluntary in nature will come under the purview of section 80G of the Act and donation towards CSR was merely a statutory obligation on companies as per section 135 of the Companies Act, 2013. It is pertinent to point out that the intention of the legislature was clear when the same was clarified by the Finance (No.2) Act, 2014 that CSR expenses will not fall under the business expenditure and also there has been an express bar specified in sub clause (iiihk) and (iiihl) of section 80G(2)(a) of the Act that any sum paid by the assessee to Swatch Bharat Kosh and Clean Ganga Fund will not come under the purview of deduction u's 80G of the Act subject to certain conditions. This justifies the fact that the other donations specified us 80G of the Act would be entitled to deduction provided the conditions stipulated u/s.80G of the Act are satisfied. In the present case in hand, the contributions made by the assessee would not fall under the two exceptions specified above which clearly mandates that the assessee is entitled to claim deduction for the donations contributed during the year under consideration u/s 80G of the Act. The decision relied upon by the ld. A.O in the case of PVG Raju (supra) is distinguishable on the facts of the present case where there is no requirement of proving the voluntariness of the donation contributed by the assessee for claiming deduction u/s.80G of the Act. The amendment brought about by Finance Act, 2015 to section 80G of the Act which had inserted the sub clauses (iiihk) and (iiihl) to be the exception for qualifying a donation for claiming us.80G of the Act could also be an evidencing factor to substantiate that CSR expenditures which falls under the nature specified in section 30 to 36 of the Act are an allowable deduction u/s 80G of the Act.

On the above observation, we deem it fit to hold that the assessee is entitled to deduction claimed u/s.80G of the Act towards the CSR expenditure incurred by it. We, therefore, direct the ld. A.O, to allow the claim of the assessee subject to the condition that the assessee has satisfied the other requirements warranted u/s.80G of the Act. Hence, ground no. 2 raised by the assessee is allowed.

1 The Delhi Tribunal in the case of Interglobe Technology Quotient (P.) Ltd. (2024) 163 Taxmann.com 542 (Del)held that mandatory nature of CSR expenditure does not justify disallowance of same u/s.80G, if other conditions of section 80G are fulfilled by observing as follows:- "7.3 As we take notice of the fact that Parliament legislated that CSR expenses would not be eligible for deduction as business expenditure under section 37 of the Act by inserting Explanation 2 to section 37(1) vide the Finance (No.2) Act, 2014 (applicable from the assessment year 2015-16), which provided that any expenditure incurred by an assessee on the activities relating to CSR referred to in section 135 of the CA 2011, shall not be deemed to be an expenditure incurred by an assessee for the purpose of business or profession and shall not be allowed as deduction under section 37(1) of the IT Act. The intent of Parliament in bringing the aforesaid provision is given in the Explanatory Memorandum to the Finance (No.2) Bill, 2014 and is reproduced as under; "CSR expenditure, being an application of income, is not incurred wholly and exclusively for the purposes of carrying on business. As the application of income is not allowed as deduction for the purposes of computing taxable income of a company, amount spent on CSR cannot be allowed as deduction for computing the taxable income of the company. Moreover, the objective of CSR is to share burden of the Government in providing social services by companies having net worth/turnover/profit above a threshold. If such expenses are allowed as tax deduction, this would result in subsidizing of around one-third of such expenses by the Government by way of tax expenditure."

4 The aforesaid explanatory memorandum categorically expresses the legislative intent and the rationale of disallowance of CSR expenditure referred to in section 135 of the Companies Act, that such expenditure is application of income and not incurred for the purposes of business. We are of considered view that this in itself justifies the grant of deduction u/s 80G. As CSR expenditure is application of income of the assessee under the Income Tax Act, that means it continues to form part of the Total income of the assessee. Section 80G(1) of the Act provides that in computing the total income of an assessee, there shall be deducted, in accordance with the provisions of this section, such sum paid by the assessee in the previous year as a donation. Further, section 80G(2) lists down the suns on which deduction shall be allowed to the assessee. Section 80G falls in Chapter VIA, which comes into play only after the gross total income has been computed by applying the computation provisions under various heads of income, including the Explanation 2 to section 37(1) of the Act. Thus, there is no correlation between suo-moto disallowance of section 37(1) and claim of deduction under section 80G of the Act. The Mumbai Bench of the Tribunal in the case of Alubond Dacs India (P.) Ltd.in (2024) 163 taxmann.com 536(Mum) considered the provisions of Companies Act and I.T. Act and held as follows:- "

We have heard the rival submissions and perused the materials available on record. The only morn question to be decided here is whether the expenditure towards CSR activities are an allowable deduction us 80G of the Act. The CSR expenses are governed by section 135 of the Companies Act, 2013, Schedule VII of the Act and Companies (CSR) Policy Rules, 2014 where companies having net worth of Rs 500 crores of more or turnover of Rs.1000 crores or more or net profit of Rs 5 crores of more have to mandatorily comply with the CSR provisions specified us.135(1) of the Companies Act, 2011. The above mentioned companies are liable to spend atleast 25% of its average net profit for the immediately preceding three financial years on CSR activities. In the present case, the assessee has contributed Rs 30 lacs to various educational and charitable trust for which the assessee has claimed 50% of the total donation paid as deduction u/s.800 of the Act. Prior to the Finance (No.2) Act, 2014, the said expenditure was claimed as 'business expenditure' u/s.37(1) of the Act where after the insertion of Explanation 2 to section 37(1) of the Act, the CSR expenses referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purpose of business or profession. It is observed that the said expenses pertaining to CSR has been claimed as deduction u/s.80G of the Act which claim was perennially rejected by the Revenue for the reason that only donations which are voluntary in nature will come under the purview of section 80G of the Act and donation towards CSR was merely a statutory obligation on companies as per section 135 of the Companies Act, 2013. It is pertinent to point out that the intention of the legislature was clear when the same was clarified by the Finance (No.2) Act, 2014 that CSR expenses will not fall under the business expenditure and also there has been an express bar specified in sub clause (iiihk) and (iiihl) of section 80G(2)(a) of the Act that any sum paid by the assessee to Swatch Bharat Kosh and Clean Ganga Fund will not come under the purview of deduction u's 80G of the Act subject to certain conditions. This justifies the fact that the other donations specified us 80G of the Act would be entitled to deduction provided the conditions stipulated u/s.80G of the Act are satisfied. In the present case in hand, the contributions made by the assessee would not fall under the two exceptions specified above which clearly mandates that the assessee is entitled to claim deduction for the donations contributed during the year under consideration u/s 80G of the Act. The decision relied upon by the ld. A.O in the case of PVG Raju (supra) is distinguishable on the facts of the present case where there is no requirement of proving the voluntariness of the donation contributed by the assessee for claiming deduction u/s.80G of the Act. The amendment brought about by Finance Act, 2015 to section 80G of the Act which had inserted the sub clauses (iiihk) and (iiihl) to be the exception for qualifying a donation for claiming us.80G of the Act could also be an evidencing factor to substantiate that CSR expenditures which falls under the nature specified in section 30 to 36 of the Act are an allowable deduction u/s 80G of the Act.

On the above observation, we deem it fit to hold that the assessee is entitled to deduction claimed u/s.80G of the Act towards the CSR expenditure incurred by it. We, therefore, direct the ld. A.O, to allow the claim of the assessee subject to the condition that the assessee has satisfied the other requirements warranted u/s.80G of the Act. Hence, ground no. 2 raised by the assessee is allowed.

In view of the facts of the case which are identical as in plethora of decisions of the coordinate benches of ITAT as outlined in the preceding paras, we do not find any infirmity in the appellate order which is accordingly upheld dismissing the instant ground of appeal of the Revenue.

In ground no.3, it is stated that the ld.CIT(A) was not right in holding that the discount on issue of ESOP is allowable deductionin computing the income under the head profits and gains of the business without appreciating the fact that it is contingent and capital expenditure related to the issue of new share capital and hence not allowable.

According to the AO, the assessee in its return filed claimed a deduction of Rs.25,35,05,43,336/-as ESOP claim. The details of ESOP issued by the Bank, Options exercised during the year, Share capital money received, Share premium money received and Perquisite tax collected were provided in the Annual Report.The AO observed that ESOP discounts were incurred in relation to issue of shares to employees. They were not relatable to profits and gains arising or accruing from a business/trade. ESOP discount does not diminish trading/ business receipts of the issuing company. ESOP is a voluntary scheme launched by the employers to issue shares to employees. The intention is to only give a 'stake' to the employees in the organization. This discount is not incurred towards satisfaction of any trade liability as the employees have not given up anything to procure such ESOP. Share premiums obtained on issue of shares are items of capital receipt. When such premium is forgone, it cannot be claimed as an 'expenditure wholly and exclusively laid out or expended for the purposes of the trade'. There is not any specific provision for such deduction from sections 30 to 36 of the Act. So, the residuary section 37 only comes to play and the primary condition for allowance under this section is the existence of Revenue expenditure wholly and exclusively incurred for the purposes of the business. As elaborated in the above points, there is neither any real expenditure at the stage of grant or otherwise, nor the expenditure if at all any, can be qualified as Revenue in nature. The CBDT Circular No.9/2007 dated 20.12.2007 has already provided that where ESOPs are purchased by the Company, and then issued to the employees then the same is allowed else it is not an expenditure. It is however, admitted by the AO that the assessee has relied upon the ITAT, Bangalore Special Bench, decision in the case of Biocon Ltd. vs DCIT [ITA No. 368/369/370/371/1206/Bang/2010] and decision therein has not been accepted by the Revenue and appeal has been filed with Hon'ble Karnataka High Court. The High Court has admitted the question of law in the said case. Therefore, the ESOP expense of Rs.25,35,05,43,336/-was disallowed. The ld.CIT(A) deleted theaddition based on the cited decisions above.

Before us, the ld.CIT(DR) placed reliance on the assessment order while the ld. AR supported the appellate order claiming that the assessee Bank claimed deduction in respect of such ESOP expenses being the amount representing the difference between the grant price and the market price on the date of exercise (i.e. ESOP discount). Such claim has been disallowed by the AO but allowed by the CIT(A). The Department is in appeal on this ground. Under similar facts, the said issue is covered in assessee Bank's own case for A.Y. 2016-17 to AY 2018-19 wherein the hon'ble Tribunal, following the decision of the 28. The facts for AY 2021-22 are similar and therefore, the submissions made for AY 2020-21 will apply mutatis mutandis to AY 2021-22. 29. We have carefully considered therelevant facts of the case and (Hyderabad - Trib.) again decided this issue in favour of the assessee by holding that discount on issue of ESOPs i.e., difference between grant price and market price on shares as on date of grant of options was allowable deduction under Section 37(1) of the Act. In the case of Fortune Park Hotels Ltd. 159 taxmann.com 1217 (Delhi Trib.), the Delhi ITAT held that ESOP expenses are allowable as per ESOP scheme and further such expenses had been duly taxed in hands of employees as "perquisites" and included in Form-16 of employees and due TDS was deducted by assessee treating them as salary.

Therefore, we find that the law on the subject, therefore, is unanimous as various tribunals by following the decision of Biocon Ltd, Karnataka High Court have decided the issue in favour of the assessee. Secondly, we observe that the ESOP scheme under consideration was part of the Annual Report of the assessee and further the specific details of ESOP benefit granted to its employees had been duly disclosed to the AO during the course of assessment proceedings, being the difference between the market price of shares at the time of grant of option to these employees and the market price of such shares as on the date of exercise by employees of the assessee company. Therefore, even from this perspective, the expenses so claimed were not contingent in nature, since the assessee had claimed the ESOP expenses at the time of actual exercise of option by its employees, during the year under consideration. Accordingly, in view of the judicial precedents on the subject as on date, which have consistently taken the view that ESOP expenses are allowable in the hands of assessee under section 37 of the Act and looking into the facts of the assessee's case, we are of the considered view that ld. CIT(A) has not erred in facts and in law in deciding this issue in favour of the assessee. Accordingly, departmental appeal is dismissed.

ITA No. 2260/MUM/2025(AY 2021-22) 1. “Whether on the facts and circumstances of the case and in low, the Ld.CIT(A) erred in holding that ESOP discount is an allowable business expenses, ignoring the fact that the issuance of ESOP's creates a capital benefit for the employees and is not an expenditure laid out wholly and exclusively for business purposes under section 37(1) of the IT Act?”

The facts for the instant appeal are similar and therefore, our decisions in paras 30 above in ITA No.2259 for AY 2020-21 will also apply mutatis mutandis to AY 2021-22.Accordingly ground stands dismissed.

ITA No. 2259/MUM/2025(AY 2019-20) 1. “Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) erred in restricting the disallowance u/s.14A to the exempt income ignoring the provisions contained in the Act and Rules?” 2. “Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing the CSR donation, without appreciating the facts that the donation is donation refers to an amount paid voluntarily by a person?"

Both the above grounds have already been adjudicated in ITA No.2258/MUM/2025 (AY2020-21) (supra). Accordingly decision rendered therein dismissing the grounds will apply mutatis mutandis to the instant appeal also.Accordingly ground stands dismissed.

In the result, both the above stated appeals of the assessee in ITA No.1555 and 1573/Mum/2025 are allowed while Revenue's appeals in ITA No. 2258, 2259 and 2260/Mum/2025 are dismissed. Order pronounced in the open court on 06.10.2025. NARENDER KUMAR CHOUDHRY (न्यायिक सदस्य /JUDICIAL MEMBER) Place: मुंबई/Mumbai दिनांक / Date 06.10.2025 Lubhna Shaikh / Steno PRABHASH SHANKAR (लेखाकार सदस्य/ACCOUNTANT MEMBER) आदेश की प्रतिलिपि अग्रेषित/