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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
1842, 3675 & 3674/Mum/2023 Indusind Bank Limited O R D E R Per Padmavathy S, AM: These appeals by the assessee and the revenue are against the separate orders of the Commissioner of Income Tax (Appeals)/ National Faceless Appeal Centre, (FNAC), Delhi, [In short 'CIT(A)'] passed under section 250 of the Income Tax Act, 1961 (the Act) dated 24.03.2023 for AY 2018-19 and dated 25.03.2023 for AY 2019-20. The issues contended by the assessee and the revenue for the AYs under consideration are tabulated below: Assessee's Appeal Issue AY 2018-19 AY 2019-20 Claim of Beneficial rate of DTAA on tax Ground No. 1 Ground No. 1 paid on Dividend Claim under section 36(1)(viia) for rural Ground No. 2 & 3 Ground No. 2 & 3 advances made by amalgamating company & percentage of deduction allowable Sale of immovable properties acquired Ground No. 4 Ground No. 4 through loan be treated as Business Income / loss Claim of standard assets under section Ground No. 5 Ground No. 5 36(1)(viia) Additional Ground of Appeal-
Ground No.
6. Ground No.
6. Allowability of additional ESOP costs Revenue's Appeal Issue AY 2018-19 AY 2019-20 Disallowance of ESOP Expenses Ground No.1 Ground No.1 Disallowances under section 14A Ground No.2 Ground No.2 r.w.8D(ii) Disallowance u/s.35D towards QIP Ground No.3 Ground No.3 subscription expenses Bad Debts pertaining to credit card Ground No.4 Ground No.4 business Allowability of interest on Perpetual Bond Ground No.5 &
6. Ground No.5 &
6. Amortization of premium on HTM Ground No.7 Ground No.7 securities Broken Period Interest Ground No. 8 &
9. Ground No. 8 & 9
2. The assessee was incorporated in 1994 under the Companies Act, 1956 and is licence by Reserve Bank of India to operate as the Commercial Bank under the Banking Regulations Act, 1949. The assessee is publicly held and provides a wide range of banking product and financial services to corporate and retail clients besides undertaking treasury operations. The assessee filed the return of income for AY 2018-19 declaring total income of Rs. 52,38,02,42,740/- on 30.11.2018. The assessee filed the revised return on 06.02.2020 declaring total income of Rs. 52,95,57,55,900/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. The Assessing Officer (AO) called on the assessee to furnish various details from time to time. The AO after perusing the details filed by the assessee made the following disallowance while completing the assessment under section 143(3) of the Act.
(i) Disallowance of ease of expenses Rs. 1,21,33,428/- (ii) Disallowance of interest under section 43B r.w.r 6EA Rs. 21,81,59,726/- (iii) Disallowance of interest accrued but not due Rs. 1,65,89,79,547/- (iv) Disallowance under section 14A r.w.r 8D Rs. 2,87,11,074/- (v) Disallowance under section 35D Rs. 10,21,58,858/- (vi) Disallowance of bad-debts pertaining to Credit Card Rs. 58,17,20,221/- (vii) Disallowance of interest on perpetual bonds Rs. 1,85,57,53,425/- (viii) Disallowance of amortization of premium on HTM Rs. 1,79,32,22,000/- Investments (ix) Disallowance of broken period interest Rs. 37,25,54,316/-
3. Aggrieved, the assessee filed further appeal before the CIT(A). Before the CIT(A) the assessee made a claim that for the purpose of allowing deduction under section 36(1)(via) the rural advances given by Bharat Financial Inclusion Ltd. (BFIL) an NBFC which got amalgamated with the assessee company from the appointed date 01.01.2018 should be included. The CIT(A) gave partial relief to the 1842, 3675 & 3674/Mum/2023 Indusind Bank Limited assessee with regard to the various disallowances made by the AO. With regard to fresh claim made towards deduction under section 36(1)(viia) the CIT(A) rejected the claim of the assessee. Both the assessee and the revenue are in appeal before the Tribunal against the order of the CIT(A).
Claim of beneficial rate of DTAA on tax paid on dividend – Ground No.1
4. The ld. AR during the course of hearing fairly conceded that the issue is covered against the assessee in terms of the decision of the Special Bench in the case of DCIT vs Total Oil India (P) Ltd ([2023] 149 taxmann.com 332 (Mumbai - Trib.) (SB)). Accordingly respectfully following the decision of the Special Bench, we dismiss the ground raised by the assessee in this regard.
Claim under section 36(1)(viia) for Rural Advances – Ground No. 2 & 3
BFIL was a listed micro finance NBFC whose primary lending was in rural area. BFIL amalgamated with the assessee from the appointed date 01.01.2018 vide the scheme of amalgamation as approved by NCLT vide order dated 10.06.2019 with effective date 04.07.2019. The assessee submitted before the CIT(A) that while claiming the deduction under section 36(1)(viia) the assessee missed to include the rural advances given by BFIL from the appointed date till effective date. The assessee further submitted that as per the scheme of amalgamation as approved by NCLT, BFIL was carrying on the business in the fiduciary capacity on behalf of the assessee during the above referred period. The assessee accordingly claimed that the assessee is entitled to include the rural advances given by BFIL during the above period for the purpose of claiming deduction under section 36(1)(viia). The CIT(A) did not allow the claim of the assessee for the reason that BFIL was operating as an NBFC during the interim period and therefore the rural advances given by NBFCs 1842, 3675 & 3674/Mum/2023 Indusind Bank Limited are not eligible for deduction under section 36(1)(viia). The CIT(A) further held that bank and NBFC are different and the provisions of section 36(1)(viia) are applicable only to Bank. Accordingly, the CIT(A) did not allow the claim of the assessee to include the rural advances given by BFIL for the purpose of section 36(1)(viia). The CIT(A) also reduced the percentage of deduction claimed under section36(1)(viia) stating that NBFCs are allowed deduction upto 5% of the total income and directed the AO accordingly to restrict the deduction claimed by the assessee.
6. The ld. AR submitted that BFIL was merged with the assessee w.e.f. the appointed date 01.01.2018. The ld. AR drew our attention to the relevant clauses of the scheme of amalgamation as approved by the NCLT to submit that BFIL was carrying on the business from the appointed date till the effective date in its fiduciary capacity on behalf of the assessee. The ld. AR further submitted that the lending activity from 01.01.2018 till 31.03.2018 was carried on by BFIL on behalf of the assessee and w.e.f. 01.01.2018 as per the order of the NCLT, BFIL would not be in existence. The ld. AR also submitted that the assessee while filing the revised return of income has included the income from the rural advances extended by BFIL on behalf of the assessee and the revenue accepted the income offered. The ld. AR drew our attention to the fact that the income of NBFC is taxed at 25% (plus surcharge and cess) whereas the assessee paid tax at 30% (plus surcharge and cess) on the income earned between the appointed date and the effective date for the reason that the income though arising out of BFIL are earned on behalf of the assessee. The ld. AR relied on the decision of Hon'ble Supreme Court in the case of Marshall Sons & Co. (India) Ltd. vs. ITO [1996] 233 ITR 809 (SC). The ld. AR on the issue of percentage of deduction submitted that the total income of the assessee including income of BFIL are arising in the hands of the assessee only since BFIL 1842, 3675 & 3674/Mum/2023 Indusind Bank Limited ceases to exist from the appointed date and therefore 8.5% of the total income should be considered while allowing the deduction under section 36(1)(viia). The ld. AR submitted the working of deduction claimed under section 36(1)(viia) as given below:
7. The ld. DR on the other hand vehemently argued that the provisions of section 36(1)(viia) are very clear that the deduction is allowable only to Banks and not to NBFCs. The ld. DR further argued that BFIL continued its business till the effective date as an NBFC and therefore the lending activity carried on by BFIL cannot be considered as that of the Bank. Accordingly, the ld. AR argued that the rural advances extended by BFIL is not eligible for deduction under section 36(1)(viia).
We heard the parties and perused the material on record. Under the provisions of section 36(1)(viia) deduction shall allowed at the minimum of 8.5% of the total income plus 10% of the rural advances as compared to the actual provisions made in the books of accounts. The claim of the assessee before the CIT(A) was that the 10% of rural advances should include the rural advances given by the BFIL from the appointed date to 31.03.2018. The revenue's contention is that BFIL is an NBFC and not a Bank and hence the advances extended by BFIL cannot be considered for the purpose of deduction under section 36(1)(viia). In this regard it is relevant to consider the facts pertaining to the issue and the relevant clauses of the scheme of arrangement as approved by NCLT (page 130 to 165 of paper book). The composite scheme of arrangement whereby BFIL got amalgamated with the assessee was approved by NCLT vide order dated 10.06.2019 (page 166 to 197 of paper book). From the perusal of the said composite scheme of arrangement we notice that from the appointed date i.e.01.01.2018 BFIL is carrying on the business on behalf of the assessee and the assets and liabilities have become that of the assessee. We further notice that the assessee once the scheme is approved, has filed the revised return of income including the income from BFIL and the statement of accounts are also revised accordingly. We also notice that from the appointed date, the existence of BFIL ceases and any liability towards the outstanding loans have to be born by the assessee. Considering these facts we see merit in the argument of the ld AR that the business carried on by BFIL from 01.01.2018 to 31.03.2018 was on behalf of the assessee which is a bank. It is also relevant to mention here that the revenue has not disputed the income offered by the assessee which includes the income of BFIL from the appointed date on which the assessee has paid taxed at the rate which is applicable to Banks. It is also relevant here to consider the following observations of 1842, 3675 & 3674/Mum/2023 Indusind Bank Limited the Hon'ble Supreme Court in the case of Marshall Sons & Co. (India) Ltd (supra) where it is held that – 12. Every scheme of amalgamation has to necessarily provide a date with effect from which the amalgamation/transfer shall take place. The scheme concerned herein does so provide, viz. 1-1-1982. It is true that while sanctioning the scheme, it is open to the Court to modify the said date and prescribe such date of amalgamation/transfer as it thinks appropriate in the facts and circumstances of the case. If the Court so specifies a date, there is little doubt that such date would be the date of amalgamation/date of transfer. But where the Court does not prescribe any specific date but merely sanctions the scheme presented to it as has happened in this case it should follow that the date of amalgamation/date of transfer is the date specified in the scheme as the transfer date. It cannot be otherwise, It must be remembered that before applying to the Court under section 391(1), a scheme has to be framed and such scheme has to contain a date of amalgamation/transfer. The proceedings before the Court may take some time, indeed, they are bound to take some time because several steps provided by sections 391 to 394A and the relevant Rules have to be followed and complied with. During the period, the proceedings are pending before the Court, both the amalgamating units, i.e. the transferor company and transferee company may carry on business, as has happened in this case but normally provision is made for this aspect also in the scheme of amalgamation. In the scheme before us, clause 6(6) does expressly provide that with effect from the transfer date, the transferor company (subsidiary company) shall be deemed to have carried on the business for and on behalf of the transferee company (holding company) with all attendant consequences. It is equally relevant to notice that the Courts have not only sanctioned the scheme in this case but have also not specified any other date as the date of transfer/amalgamation. In such a situation, it would not be reasonable to say that the scheme of amalgamation takes effect on and from the date of the order sanctioning the scheme. We are, therefore, of the opinion that the notices issued by the ITO (impugned in the writ petition) were not warranted in law. The business carried on by the transferor company (subsidiary company) should be deemed to have been carried on for and on behalf of the transferee company. This is the necessary and the logical consequence of the Court sanctioning the scheme of amalgamation as presented to it. The order of the Court sanctioning the scheme, the filing of the certified copies of the orders of the Court before the Registrar of Companies, the allotment of shares, etc., may have all taken place subsequent to the date of amalgamation/transfer, yet the date of amalgamation in the circumstances of this case would be 1-1-1982. This is also the ratio of the decision of the Privy Council in Raghubar Dayal v. Bank of Upper India Ltd. AIR 1919 PC 9.”
1842, 3675 & 3674/Mum/2023 Indusind Bank Limited 9. From the above observations of the Hon'ble Supreme Court it is clear that when the scheme is approved without any date being specified then the date as contained in the scheme would become the effective date of amalgamation. This fact is similar to the assessee's case and therefore the effective date of amalgamation in the present case is 01.01.2018 and from the said date the business carried on by BFIL would be that of the assessee. Therefore in our considered view, including the rural advances extended by BFIL should be included for the purpose of deduction under section 36(1)(viia) of the Act. Further the same logic would be applicable for the purpose computing the percentage of income and accordingly we hold that 8.5% would be the percentage applicable for the purpose of deduction under section 36(1)(viia) of the Act. The claim towards including the rural advances given by BFIL for deduction under section 36(1)(viia) is a fresh claim before the CIT(A) and the said claim needs factual examination to check the correctness of the quantum of the claim. Hence for the limited purpose of examining amount of claim made by the assessee we are remitting the issue back to the AO with a direction to verify and allow in accordance with the provisions of section 36(1)(viia) r.w.s. 36(2)(v).
Sale of Immovable Property acquired through loan to be treated as Business Income / Loss – Ground No.4 10. During the year under consideration the assessee had sold four immovable properties which were acquired on settlement of loan with the borrower. The assessee while filing the return of income has shown the loss from the sale of property under the head "Capital Gains". Before the CIT(A) the assessee made a claim that the loss arising from the sale of the immovable property are to be treated as Business Loss. The assessee in support of its claim submitted that the assets are acquired by the assessee against the settlement of outstanding loan by the borrowers in the normal course of business activity. The assessee further submitted that the 1842, 3675 & 3674/Mum/2023 Indusind Bank Limited properties so acquired are never utilized for the purpose of business and no depreciation was claimed. The assessee also submitted that these assets are not part of the fixed assets schedule and therefore the loss arising from the sale of these assets is to be treated as Business Loss. The CIT(A) did not allow the claim of the assessee stating that the assessee has acquired the assets in its own name and after lapse of considerable time period the assets were sold. The CIT(A) further held that in such circumstances the profit or loss arising out of such transactions cannot be treated as Business Income.
The ld. AR submitted that the assessee as part of its regular business activity lends money to borrower against assets mortgaged. The ld. AR further submitted that when the borrower fails to repaid the loan the assets are seized and subsequently sold. The ld. AR drew our attention to the financial statements (page 11 to 74 of PB) to submit that the immovable property sold are not part of the fixed assets schedule and no depreciation is claimed. Accordingly, the ld. AR submitted that the loss arising from the sale of these assets are incurred in the normal course of business and therefore to be allowed as business loss. The ld. AR in this regard placed reliance on the decision of the Hon'ble Bombay High Court in the case of L.M. Devere, Liquidator of Bank of Karal Limited vs. CIT [1998] 234 ITR 813 (Bom.).
The ld. DR on the other hand submitted that only when the assets are held as stock-in-trade, the loss or gain arising from the sale of such assets can be treated as Business Income. The ld. DR further submitted that the assessee has capitalized the assets as investments and mere fact that no depreciation is claimed cannot be the reason for holding that the assets are not part of fixed asset schedule to be taxed as Capital Gains.
We heard the parties and perused the material on record. The assessee is in business of banking and its part of its regular lending activity has extended loan to borrowers who mortgaged their property for the purpose of availing the loan. When the loans become unrecoverable the assessee ceases the property mortgaged and realizes the outstanding loan amount by selling the property. When the property is ceased / acquired by the assessee the ownership and title of the property is transferred in the name of the assessee and accounted as investments in books of account of the assessee. Though the properties are reflected as investments in the books of accounts, considering the nature of the transaction in our considered view, the properties are business assets. It is also relevant to note here that when the properties are sold, the consideration received is adjusted against the outstanding loan remaining unrecovered and the balance is accounted as loss. We also notice, from the perusal of the financial statement that the impugned assets are not part of the fixed assets schedule and hence no depreciation should have been claimed by the assessee on the said assets. Therefore, there is merit in the contention of the assessee that the properties acquired from the borrowers are not utilised for the purpose of business. We notice that the Hon'ble Bombay High Court in the case of L.M. Devere has considered a similar where it has been held that “6. On behalf of the revenue, it was submitted that the immovable properties were acquired in satisfaction of debt owed to the Bank. So it constituted stock-m-made of the money lending business carried on by the Bank. Any amount realised in excess of the amount due must be treated as income arising from the money lending business. The revenue submitted that these properties represent the converted form of stock-in- trade in the banking business of the assessee, viz, the money, therefore, profits made from the resale of these properties must be treated as the profits of the money lending business. The revenue further submitted that even though the amalgamation took place as per section 44A or the assessee was under compulsion to dispose of all the non- banking assets under section 9, income earned by the assessee must be treated as profits made from the resale of the stock-in-trade and most be treated as the profits of the money lending business. The revenue further submitted that due to the 1842, 3675 & 3674/Mum/2023 Indusind Bank Limited amalgamation character of the properties did not change, and it remained as that of stock-in-trade. Even though the assessee has paid the full market value of these immovable assets at the time of the amalgamation, these properties will continue to represent as the converted form of stock-in-trade of the assessee's banking business and the profits made from the sale of these properties will have to be treated as the profits of the money lending business. Both the learned counsel have relied upon various decisions in support of their respective submission.
The Andra Pradesh High Court in the case of Karumura Venkata Hamanadham v CIT [1964] 52 ITR 742 has held that if the assessee in money lending business acquires the immovable property in the satisfaction of the debt owed to it and on sale thereof the profit is derived, the said profs will have to be treated as business income and taxable under the Act, The Andhra Pradesh High Court held that the immovable property forms part of stock-in-trade of de business, the profit realised on sale of the immovable property will be business income and liable to be taxed. Similar View has been expressed by the same Court in the case of Pulavarthi Venkata Subba Rao v CTF [1967] 66 ITR 119. The Madras High Court in the case of M.R.RM SPL Subramanian Chettiar CIT[1968] 70 ITR 262 has held that if during the money lending business, the properties are acquired by the assessee in discharge of debt owed to it, on partition if these properties are allotted to one of the member of the family, the properties continue to represent the character of stock-in-trade and profits earned from the sale of these properties is the business income.” (emphasis supplied)
From the above it is clear that when a property which is acquired in satisfaction of the loan is subsequently sold the loss or gain should be treated as business loss/ gain. We unable to appreciate the contention of the ld DR that the above decision to be interpreted narrowly to the effect that it is applicable only when the assets acquired is kept as stock-in-trade. In our considered view, the ratio to be applied is that the assets are acquired in satisfaction of a debt which is same as in assessee's case and therefore the loss arising there from should be allowed as a business loss. However we notice that the facts pertaining to the acquisition of the property has not been factually examined by the lower authorities. Hence we are remitting this issue back to the AO for the limited purpose of examining the nature 1842, 3675 & 3674/Mum/2023 Indusind Bank Limited of acquisition i.e. it is in satisfaction of the debt and allow the claim of the assessee as business loss accordingly.
Claim of deduction under section 36(1)(viia) against the provision made on standard assets – Ground No.5 15. The assessee being a banking company is eligible for deduction under section 36(1)(viia) towards provision made for bad and doubtful debts. As per the provisions of the said section the deduction is computed as per the prescribed methodology and is compared with the provision made in the books of account and the lower of the amounts is allowed as deduction. While comparing the provision for bad and doubtful debts made in the books of account, the assessee submitted before the CIT(A) that the provision made for standard assets should also be considered. The CIT(A) dismissed the ground stating that the appellant has got relief on most of the issues and that the ground raised by the assessee is premature that cannot be adjudicated till the finality of the assessment order are achieved.
We heard the parties and perused the material on record. The ld. AR submitted that the impugned issue is covered by the decision of the Co-ordinate Bench in the case of Kotak Mahindra Bank vs. ACIT (ITA No. 3267/Mum/2019 dated 16.04.2023) where it has been held that “8. With the assistance of Ld. representatives, we have gone through the decision of ITAT, Mumbai Bench in the case of State Bank of India vs DCIT (supra). The relevant operating part of the decision is reproduced as under:- 71. We have noted the facts that the assessee has claimed that provision for standard assets should be taken into consideration for computing the deduction under section 36(1)(viia) of the Act. The assessee has also filed the details vide note 17 and Annexure 6 to the revised return of income on pages 8, 9 and 20 of Paper Book – 1 filed by assessee. As per the provisions of section 36(1)(viia) of the Act, a bank is eligible to avail deduction in respect of provision made for bad and doubtful debts, of an amount not exceeding 1842, 3675 & 3674/Mum/2023 Indusind Bank Limited 7.5% of total income and 10% of the aggregate average advances made by the rural branches of the bank. The provision is created by the assessee on the basis of RBI Guidelines. The assessee is required to create provision on non-performing assets on the basis of the classification of assets into the four prescribed categories i.e. loss assets, doubtful assets, substandard assets and standard assets [refer para 5.1.2 of the RBI Guidelines].
The Revenue before us emphasized that the provision for standard assets is not same as provision for bad and doubtful debts and the same is contingent in nature, since it is created only out of abundant caution. We noted from the provisions that the assessee is required to make a provision on all its debts ranging from 0.25% to 100% depending upon the categorization of the loan in terms of the guidelines issued by RBI. The provision on debts made by the assessee is in line with the RBI guidelines and section 36(1)(viia) of the Act does not have a requirement that the provision for debts should be in respect of specified debts only. Section 36(1)(viia) of the Act provides for a deduction to the bank in respect of ‘any provision made for bad and doubtful debts’ subject to certain ceiling. It does not specify the methodology for calculation of provision for bad and doubtful debts. The banks are required to make provision for bad and doubtful debts in accordance with the RBI guidelines. All the loan assets are initially classified as ‘Standard’. Later on depending upon the problems arising, if any, and symptoms of sickness shown including delays in the repayment of the principal and interest, deterioration of security, etc., they may be shifted to other categories. A provision made on any loan assets is a provision for ‘bad and doubtful debts’ irrespective of the category in which the loan falls. This is to provide for the inherent risk of loan losses which the bank may suffer in subsequent years.
We noted from the provision of Section 36(1)(viia) of the Act that the same allows a deduction to banks in respect of any provision made ‘for’ bad and doubtful debts. It does not restrict the allowance to provision made ‘on’ bad and doubtful debts. Even in respect of assets that are classified as standard assets, a part of the debts are doubtful of recovery. The fact that a provision is made for standard assets by itself indicates that a part of the standard assets are doubtful of recovery. Accordingly, the entire provision made by the assessee, including in respect of standard assets, is for bad and doubtful debts as envisaged by section 36(1)(viia) of the Act. Thus, in light of above, the assessee is eligible to claim deduction under section 36(1)(viia) of the Act even in respect of the provision made for standard assets. This issue was considered by the ITAT in assessment year 2006-07 in ITA 3145/Mum/2009 dated 6.09.2016, in an appeal against the revision order of the CIT passed under section 263 of the Act, wherein it is held as under:
“So, however, we may also clarify that we are in principle in agreement that a provision for bad and doubtful debts cannot include that against standard assets i.e. which the bank” (assessee) itself regards as good for receipt and, therefore with the decision by the tribunal in Bharat Overseas Bank Ltd. (supra) relied upon by the Revenue. A provision by definition a charge against profits, while that in respect of an asset, considered good, would be more in the nature of an appropriation of profit i.e. a reserve. This is precisely what the Tribunal in Bharat Overseas Bank Ltd. (supra) means when its states of the deduction being not in the nature of a standard allowance. No contrary judgement by the Tribunal or a higher court has even otherwise been brought to our notice. At the same time, the provision as per RBI guidelines – which are contended to have been followed / adopted, provide for the minimum provision, and the bank is free to make a higher provision, i.e., than that prescribed by the RBI norms. Provisioning, it may be noted, is a management function, made reflecting its risk assessment qua different assets. If therefore, the assesseebank is able to satisfy the assessing authority that the provision as made is justified with reference to the debts considered by it as bad and doubtful, we see no reason as to why the same cannot be allowed. The matter is accordingly restored back to the file of the A.O. for fresh determination by issuing definite findings of fact. Even as the primary onus would be on the assessee, the A.O. cannot substitute his own judgement with regard to the risk assessment qua a particular asset and, correspondingly, the provision in its respect. His purview would be to examine the reasonableness of the assessee’s claim in light of the facts and circumstances qua each asset/s in respect of which provision is made. In arriving at our decision, we have taken a holistic view of the matter, placing due emphasis on the words ‘provision’ preceding the words ‘for bad and doubtful debts’ as well as the words ‘not exceeding’ occurring in the section, and which stand highlighted for the purpose. We decide accordingly.”
In view of the above discussion, arguments of both the sides, we are of the view that the assessee is eligible for claim of deduction u/s 36(1)(viia) of the Act on standard assets and this issue is covered by Tribunal’s decision in assessee’s own case for AY 2006-07 in vide order dated 06.09.2016. Hence, we allow this issue of assessee’s appeal.” 9. In view of the decision of the co-ordinate bench as referred above, the issue in appeal in the case of the assessee is squarely covered by the said decision. Therefore, following the decision of the co-ordinate bench, we direct the Assessing Officer to allow the claim of deduction of the assessee under section 1842, 3675 & 3674/Mum/2023 Indusind Bank Limited 36(1)(viia) in respect of standard assets. This ground of appeal
of the assessee is allowed.”
17. Considering that the facts in assessee's case are identical, respectfully following the above decision of the Co-ordinate Bench, we direct the AO to examine the claim of the assets on merits ad allow deduction under section 36(1)(viia) including provision made towards standard assets. It is ordered accordingly.
Allowability of additional ESOP cost – Ground No.6
The assessee raised additional claim before us seeking deduction towards difference between market value on the date of exercise and market price at the grant of option to be allowed as a deduction. The assessee while filing the return of income has claimed deduction in relation to ESOP cost for the difference between the market price on the date of grant of option and the vesting price which is claimed over vesting period. Now the assessee is making addition claimed before us to allow deduction towards the market value on the date of exercise and the market price on the date of grant of option. The ld. AR in this regard placed reliance on the decision of the Special Bench of Bangalore Tribunal in the case of Biocon Ltd. vs. PCIT [2014] 144 ITD 21 (SB).
We heard the parties and perused the material on record. The claim now made by the assessee before us is an incremental claim towards the ESOP cost which was not claimed while filing the return of income. With regard to the claim of the assessee, we notice that the Special Bench in the Biocon Ltd. (supra) has considered a similar issue and held that “11.1.1 Having answered the first major issue in affirmative that the discount on options under ESOP is an ascertained liability and the second major issue that 1842, 3675 & 3674/Mum/2023 Indusind Bank Limited the discount is deductible over the vesting period on straight line basis unless the vesting is not uniform, then arises the present issue as to whether any subsequent adjustment is warranted at the time of exercise of options, to the deductions earlier allowed for the amount of discount. It is noticed that the assessment years 2003-04 to 2007-08 are under consideration and during these years ESOP 2000 has come to an end and the ESOP 2004 has started. Further, the extant issue is a vital part of the overall question of the deductibility or otherwise of the amount of discount under ESOP. 11.1.2 We have noticed above that the company incurs a definite liability during the vesting period, but its proper quantification is not possible at that stage as the actual amount of employees cost to the company, can ho finally determined at the time of the exercise of option or when the options remain unvested or lapse at the end of the exercise period. It is at this later stage that the provisional amount of discount on ESOP, initially quantified on the basis of market price at the tune of grant of options, needs to be suitably adjusted with the actual amount of discount. 11.1.3 As regards the adjustment of discount, when the options remain unvested or lapse at the end of the exercise period, it is but natural that there is no employee cost to that extent and hence there can be no deduction of discount qua such part of unvested or lapsing options. But, as the amount was claimed as deduction by the company during the period starting with the date of grant till the happening of this event, such discount needs to be reversed and taken as income. It is so because logically when the options have not eventually vested in the employees, to that extent, the company has incurred no employee cost. And if there is no cost to the company, the tentative amount of deduction earlier claimed on the basis of the market price at the time of grant of option ceases to be admissible and hence needs to be reversed. The Id. AR stated that the discount in respect of the unvested/lapsing options has been reversed on the happening of such events and the overall employee cost has been correspondingly reduced. We find that the SEBI Guidelines also provide that the discount written off in respect of unvested options and the options lapsing at the end of the exercise period shall be reversed at the appropriate time. As the accounting treatment directed through the Guidelines accords with the taxation principle of not allowing deduction for the amount of discount on unvested/lapsing options and further the assessee has admitted to have offered such amount as income in the relevant years, we stop here by holding that the amount of discount claimed as deduction earlier in respect of unvested/lapsing options, has to be taxed as income on the happening of such events. 11.1.4 Now we take up the second situation in which the options are exercised by the employees after putting in service during the vesting period. In such a 1842, 3675 & 3674/Mum/2023 Indusind Bank Limited scenario, the actual amount of remuneration to the employees would be only the amount of actual discounted premium at the time of exercise of option. The Hon'ble Supreme Court in the case of CIT v. Infosys Technologies Ltd. [2008] 297 ITR 167/166 Taxman 204 relevant to the assessment years 1997-98 to 1999- 2000 has held that the allotment of shares to employees under ESOP subject to a lock in period of five years and other conditions could not be treated as a perquisite as there was no benefit and the value of benefit, if any, was unascertainable at the time when options were exercised. The Finance Act, 1999 inserted section 17(2)(iiia) with effect from 1st April, 2000 providing that : "the value of my specified security allotted or transferred, directly or indirectly, by any person free concessional rate to an individual who is or has been in employment of that person" shall be treated as a perquisite. It further provides that in a case the allotment or transfer of specified securities is made in pursuance of an option exercised by an individual, the valve of the specified securities shall be taxable in the previous year in which such option is exercised by such individual. Such clause (iiia) subsequently deleted with effect from 1st April, 2001. After certain changes to the relevant provisions in this regard, the position which now stands is that the discount on ESOP' is taxable as perquisite u/s 17(2)(vi) for the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to these Clause (c) of Explanation to section 17(2)(vi) provides that the value of any specified security or sweat equity shares shall be the fair market value of the specified security or swear equity shares, as the case may be, on the date on which the option is exercised by the assessee as reduced by the amount actually paid by, or recovered from, the assessee in respect of such security of shares. Two things surface from the above provision. First, that the perquisite arises on the 'allotment' of shares and second, the value of such perquisite is to be computed by considering the fair market value of the shares on the date on which the option is exercised by the assessee as reduced by the amount actually paid. The position that such amount was of was not taxable during some of the years in the hands of the employees is not relevant in considering the occasion and the amount of benefit accruing to the employee under ESOP. Any exemption or the deductibility of an allowance or benefit to employee from taxation does not obliterate the benefit itself. It simply means that the benefit accrued to the assessee but the same did not attract tax. The position has now been clarified beyond doubt by the legislature that the ESOP discount, which is nothing but the reward for services, is a taxable perquisite to the employee at the time of exercise of option, and its valuation is to be done by considering the fair market value of the shares on the date on which the option is exercised. 11.1.5 The other side of the coin is the amount of remuneration to the employees in the hands of the company. We have noticed earlier that an expense becomes 1842, 3675 & 3674/Mum/2023 Indusind Bank Limited deductible on the incurring of liability under the mercantile system of accounting. Although the stage of taxability of perquisite in the hands of the employee may differ from the stage of the deductibility of expense in the hands of the company depending upon the method of account followed by the company, but the amount of such discount or employees remuneration can never be different. If the value of perquisite in the hands of the employee, whether or not taxable, is 'X', then its cost in the hands of the company has also to be. It can neither be 'x' nor's-1'. It is simple and plain that the amount of remuneration which percolates to the employees will always be equal to the amount flowing from the company and such remuneration to the employee in the present context is the amount which he actually becomes entitled to on the exercise of options. Thus, it is palpable that since the remuneration to the employees under the ESOP is the amount of discount w.r.t. the market price of shares at the time of exercise of option, the employees cost in the hands of the company should also be w.r.t the same base. 11.1.6 The amount of discount at the stage of granting of options w.r.t. the market price of shares at the time of grant of options is always a tentative employees cost because of the impossibility in correctly visualizing the likely market price of shares at the time of exercise of option by the employees, which, in turn, would reflect the correct employees cost. Since the definite liability is incurred during the vesting period, it has to be quantified on some logical basis. It is this market price at the time of the grant of options which is considered for working out the amount of discount during the vesting period. But, since actual amount of employees cost can be precisely determined only at the time of the exercise of option by the employees, the provisional amount of discount availed as deduction during the vesting period needs to be adjusted in the light of the actual discount on the basis of the market price of the shares at the time of exercise of options. It can be done by making suitable northwards or southwards adjustment at the time of exercise of option. This can be explained with the following example with the assumption of vesting period of four years and the benefit vesting at 25% each at the end of 1st to 4th years- At the time of At the time of granting option exercise of option Situation I Situation II Situation III Market Value per share 110 110 130 90 Option price 10 10 10 10 Employees Compensation or Discount 100, 100 120 80 11.1.7 From the above table it can be noticed that the market price of the shares at the time of grant of option was Rs. 110 against the option price of Rs. 10, which resulted in discount at Rs. 100 With the vesting period of four years with 1842, 3675 & 3674/Mum/2023 Indusind Bank Limited the equal vesting, the company can rightly claim deduction at the rate of Rs. 25 each at the end of first, second, third and fourth year of vesting. But this total deduction for discount of Rs. 100 over the vesting period needs to be adjusted at the time of exercise of option by the employee when the shares are issued, In Situation 1, the market price of shares at the time of exercise of option is at Rs. 110, which is similar to the market price at the time of grant of option As the total amount of discount of Rs. 100 over the vesting period is actually quantified at Rs. 100, no further adjustment to the discount is required at the time of exercise of option. In Situation II, the market price of the share at the tune of exercise of option has gone up to Rs.
The amount of real compensation to employee is Rs. 120 as against the tentative compensation of Rs. 100 per share which was accounted for and allowed as deduction during the vesting period. As the actual quantification of the compensation has turned out to be Rs. 120, the company is entitled to a further deduction of Rs. 20 at the time of exercise of option. In Situation III, the market price of the share at the time of exercise of option has come down to Rs.
The amount of real compensation to employees is Rs. 80 as against the tentative compensation of Rs. 100, which was allowed as deduction during the vesting period. As the actual quantification of the compensation has turned out to be Rs. 80, the company is liable to reverse the deduction of Rs. 20 at the time of exercise of option. Taxation vis-a-vis Accountancy principles 11.2.1 it has been noticed that broadly there are three stages having effect on the total income of the company in the life cycle of ESOP. viz., (i) during the vesting period, (1) at the time of unvesting/lapse of options and (ii) finally at the time of exercise of options. It has been argued that the assessee company claimed deduction for the amount of discount during the vesting period on the basis of the market price of shares at the time of grant of options and also reversed the proportionate discount on unvesting/lapsing of options at the appropriate time on the bass of the SEBI Guidelines. If this contention is correct, it would mean that the first two stages have been rightly given effect to. But the appellant assessee does not appear to have made any downward adjustment to the amount of discount at the time of exercise of option by the employees with the difference in the market price of the shares at the time of grant of option and price at the time of exercise of option. The argument seems to be that the SEBI Guidelines do not provide for such downward adjustment. It has been argued by the Ld AR that where the provisions of the Act specifically provide for treatment of a particular source of income in a particular manner, then the germane provision should be followed. II. however, there is no specific provision dealing with an issue in the Act, then the accounting he relied on the judged by the case of Challapalli Sugars Ltd. (supra) wherein the Hon’ble Supreme Court has held that the interest payable on capital borrowed by the assessee for purchase of plant and 1842, 3675 & 3674/Mum/2023 Indusind Bank Limited machinery before the commencement of business should be capitalized on the basis of accepted accountancy rule. Similarly in the case of UP State Industrial Development Corpn. (supra), the Hon'ble Apex Court held in the case of an underwriter that it would be right to consider the net investment, that is the purchase price less the underwriting commission received by the underwriter as investment as against treating the gross amount by taking into consideration the principles of commercial accounting. He stated that since there is no specific provision in the Act providing for the treatment of discount on ESOP in the computation of total income, the accounting principles formulated by way of the SEBI Guidelines are required to be followed. 11.2.2 In the oppugnation, the Learned Departmental Representative submitted that the SEBI Guidelines cannot mandate the deductibility or otherwise of an amount under the provisions of the Act. He relied on the judgments of the Hon'ble Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) and Godhra Electricity Co. Lad Supra) in support of this proposition. 11.2.3 We are not persuaded by the submissions put forth by the Id. AR that, in the absence of any specific provision in the Act, the accounting principles should be followed for determining the total income of the assessee. What is true for accounting purpose need not necessarily be true for taxation. Taxation principles are enshrined in the legislature. Power to legislate lies with the Parliament. Accounting standards or Guidance Note or Guideline free by whatever name called, issued by any autonomous or even statutory bodies including the Institute of Chartered Accountants of India, or for that matter, the SEBI are meant only to prescribe the way in which the transactions should be recorded in books or reflected in the annual accounts. These guidelines do not have the force of an Act of Parliament. Since the subject matter if tax on income falls in the Union List as per Part XI of the Indian Constitution, it is only the Parliament which can legislate on its scope. 11.2.4 Be that at it may, there is no weight in the contention of the Id. AR that there is no specific provision in the Act on the ESOP discount. It is axiomatic that the taxation rules are always embodied in the relevant Act, either in a specific or a general manner. These can be specific by making a clear cut provision in respect of deductibility of a particular item of expense or taxation of a particular item of Income. General provisions are those which set out the overall principles to govern the deductibility or taxability of unspecified items. For example, the definition of 'income' u's 2(24) has been given by the Act in an inclusive manner. There have been enshrined clauses (1) to (xvi) dealing with the items specifically listed. However, the provision has been couched in such a way so as to include general items of receipts having character of income, even though not specifically mentioned Similar is the position regarding deductions.
1842, 3675 & 3674/Mum/2023 Indusind Bank Limited Under the head Profits and gains of business or profession', there are sections granting deductions in respect of specific expenses or allowances. Similarly, there is section 37(1), which grants deduction for expenses not specifically set out in other sections, if the conditions stipulated in the section, are fulfilled. All other items of expenses, which fulfil the requisite conditions, gain deductibility under section 37(1). To put it in simple words, this section is a specific provision for granting deduction in respect of the unspecified or the general categories of expenses Discount on ESOP is a general expense and hence covered by the specific provision of section 37. The contention of the Id. AR that there is no provision in the Act dealing with the deductibility of ESOP discount, is therefore, devoid of any merit. This concludes the question of granting of deduction of discount during the vesting period. 11.2.5 The SEBI Guidelines have been taken shelter of to contend that there is no requirement for the adjustment of discount at the time of exercise of options. Primarily, we are unable to trace the proposition anywhere from the Act that the accounting principles are also determinative of the tax liability. The jurisprudence is rather the other way around. In Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra). The Hon'ble Supreme Court has laid down in so many words that the taxing principles cannot walk on the footsteps of the accounting principles. At this juncture, it would be useful to have a glimpse at the following observations of the Hon'ble Supreme Court in the afore noted case: 'It is true that this court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice canned override section 56 or any other provision of the Act. As was pointed out by Lord Russell in the case of RS C. Footwear Lid v Ridguary (Inspector of Taxes [1970] 77 ITR 857 (CA), the income-tax law does not march step by step in the footprints of the accountancy profession.’ 11.2.6 The same view has been adopted by the Hon'ble Supreme Court in Godlira Electricity Co. Lid (supra), by holding that: "Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt, but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a hypothetical income, which does not materialise 11.2.7 It follows that accounting principles have absolutely no role to play in the matter of determination of total income under the Act. If an accounting principle 1842, 3675 & 3674/Mum/2023 Indusind Bank Limited is referred to by the higher judiciary, then there is an underlying presumption that such accounting principle is in conformity with and not in conflict with the taxation principle The essence of the manor is that taxation principles are to be followed. If an accounting principle is in conformity with the mandate of taxing principle and reference is made to such accounting principle while deciding the issue, it does not meant that the accounting principle has been followed. It simply means that the taxation principle has been followed and the accounting principle, which is in line with such taxation principle, has been simply taken note of. If however, an accounting principle runs counter to the taxation principle, then there is no prize for guessing that it is only the taxation principle which shall prevail. 11.2.8 The plea now raised before us by the id. AR, relying on the case of Challapalli Sugars Ltd. (supra), was also taken up before the Hon'ble Supreme Court in the case of Tuticorin Alkalis Chemicals & Fertilizers Ltd (supra). Dealing with the same, the Hon'ble Supreme Court held that "The question in Challapalli Sugars Ltd.'s case (supra) was about computation of depreciation and development mhate under the Indian Income-tax Act, 1922. In order to calculate depreciation and development rebate it was necessary to find out "the actual cost of the plant and machinery purchased by the company. This court held that "cost" is a word of wider connotation than "price". There was a difference between the price of a machinery and its cost. This court thereafter pointed out that the expression "actual cost" had not been defined in the Act. It was, therefore, necessary to find out the commercial sense of the phrase The judgment in Challapalli Sugar Lad's case (supro), goes to show that the court was not in any way departing from legal principles because of any opinion expressed by the Institute of Chartered Accountants." From the above observations there is not even an iota of doubt in our minds that there can be no question of following the accounting principle or Guidance notes etc. in the matter of determination of total income. 11.2.9 The trump card of the Id. AR to bolster his submission for assigning the status of binding force to the SEBI Guidelines is the order in the case of $51 Ltd. (supra) which came to be affirmed by the Hon'ble Madras High Court in PVP Ventures Ltd. (supra). We have noticed above that the said case dealt a situation falling within one of the three years of the vesting period, in which it was held that one third of the total amount of discount computed on the basis of the market price of the shares at the time of grant of option, is deductible. It is evident from the SEBI Guidelines that these deal with the deductibility of discount in the hands of company during the years of vesting period. These Guidelines are silent on the position emanating from variation in the market price of the shares at the time of exercise of option by the employees vis-à-vis the market price at the time of grant of option. In other words, the SEBI Guidelines prescribe accounting treatment 1842, 3675 & 3674/Mum/2023 Indusind Bank Limited only in respect of the period of vesting of the options and the situation arising out of unvested options or vested options lapsing. The very reference by the Chennai Bench of the Tribunal in SSI Limited (supra) to the SEBI Guidelines is indicative of the fact that it dealt with a year during which the options were vesting with the employees and the company claimed discount during the vesting period. The Hon'ble Madras High Court in the case of PVP Ventures Ltd. (supra) has upheld the view taken by the Chennai Bench in the case of SSI Lad (supra). The granting of the binding force to the SEBI Guidelines by the Hon'ble Madras High Court should be viewed in the context of the issue before it, which was about the deductibility of discount during one of the vesting years. In the earlier part of this order, we have held that the deductibility of discount during the vesting period, as prescribed under the SEBI Guidelines, matches with the treatment under the mercantile system of accounting. To that extent, we also hold that the SEBI guidelines are applicable in the matter of deduction of discount. Neither there was any issue before the Hon'ble Madras High Court nor it dealt with a situation in which the market price of the shares at the time of exercise of option is more or less than the market price at the time of grant of option. It is a situation which has also not been dealt with by the Guidelines Accordingly, the afore noted taxation principle of granting deduction for the additional discount and reversing deduction for the short amount of discount at the time of exercise of option, needs to be scrupulously followed. 11.3 We, therefore, sum up the position that the discount under ESOP is in the nature of employees cost and is hence deductible during the vesting period w.r.t the market price of shares at the time of grant of options to the employees. The amount of discount claimed as deduction during the vesting period is required to be reversed in relation to the unvesting/lapsing options at the appropriate time. However, an adjustment to the income is called for at the time of exercise of option by the amount of difference in the amount of discount calculated with reference the market price at the time of grant of option and the market price at the time of exercise of option. No accounting principle can be determinative in the matter of computation of total income under the Act. The question before the special bench is thus answered in affirmative by holding that discount on issue of Employee Stock Options is allowable as deduction in computing the income under the head Profits and gains of business or profession.”
Considering the binding precedents of the decision of the Special Bench, we are remitting the impugned issue to the AO for verification of the additional claim now made by the assessee and allow the same in accordance with law keeping in 1842, 3675 & 3674/Mum/2023 Indusind Bank Limited mind the decision of the Special Bench. Needless to say that the assessee be given a reasonable opportunity of being heard. It is ordered accordingly.
AY 2018-19- Revenue's Appeal Disallowance of ESOP Expenses – Ground No.1 21. During the year under consideration, the assessee has claimed a sum of Rs. 1,21,33,428/- as deduction towards ESOP Expenditure. The AO disallowed the said amount stating that the expenditure is not incurred wholly and exclusively for the purpose of business and the capital in nature. The CIT(A) deleted the disallowance by placing reliance on the decision of the Co-ordinate Bench in assessee's own case for AY 2014-15 and AY 2015-16 (ITA No. 2725 and 2726/Mum/2019 dated 26.10.2022).
We heard the parties and perused the material on record. We notice that the identical issue has been considered by the Co-ordinate Bench in assessee's own case (supra) where it has been held that “12. After hearing both the parties and perusing the material on record, we find that in this case the issue has been decided by the ITAT co-ordinate bench in favour of the assessee which has been followed by the Ld. CIT(A) while allowing the relief to the assessee in the current year. The operative part of Ld. CIT(A)’s order is reproduced as below: “7.4.3 I have considered the above submissions of the appellant as well as the facts of the case. The Hon'ble Mumbai Tribunal in the appellant's own case for A.Y.2009- 10 had held as under: "9. Disallowance of expenditure on ESOP is the subject matter of Ground No.4 for the year under appeal. During the assessment proceedings the AO held that the assesses had not incurred the expenditure for issuing ESOPs, that it was an unascertainable item of expenditure, that it depended upon the option to be exercised by the employees at a future date. In the appellate proceedings the FAA upheld the order of the AO.
1842, 3675 & 3674/Mum/2023 Indusind Bank Limited 9.1 Before us, the AR argued that share under ESOP were issued to the employee at below market price to retain them in co., that it was a form of compensation for services rendered, that SEBI had directed the listed companies to account for the compensation cost as expenditure, that ESOP amortization cost was charged to the P&LA/c. under the matching cost and revenue principles as well as fundamental accounting concept of prudence, that both the above concepts were followed as per mandatory Accounting Standard-:,that there was no benefit of enduring nature, that it was clearly a revenue expenditure being employee compensation cost, that it was an ascertained liability that was created during the year and quantified during the date of grant, that in the hands of employees ESOP benefits was taxed as perquisite. DR supported the order of FAA. 9.2 We have heard the rival submissions. We are of the opinion that the issue needs further verification about the terms and conditions of ESOP issue by the assessee .Therefore, in the interest of justice the matter is restored back to the file of AO for fresh adjudication, who would afford a reasonable opportunity of hearing to the assessee, Gr.No.4 is decided in favour of the assesses, in part." The facts of this ground are same decided by the coordinate bench in assessee’s own case supra, We, therefore, do find any infirmity in the order of the ld CIT(A) on this issue and the ground no. 2 of the revenue appeal is dismissed.”
Considering that the facts being identical respectfully following the above decisions we see no reason to interfere with the order of the CIT(A) in allowing the claim of the assessee.
Disallowance under section 14A r.w.r. 8D – Ground No.2
The assessee during the year under consideration has made a suo-motu disallowance of Rs. 43,20,000/- towards exempt income earned. The AO invoked Rule 8D(2)(iii) to make an additional disallowance of Rs. 2,87,11,074/-. The CIT(A) deleted the disallowance by placing reliance on the decision of the Co- ordinate Bench in assessee's own case for AY 2011-12 and 2012-13 (ITA No.3875 and 3876/Mum/2017 dated 28.02.2019).
1842, 3675 & 3674/Mum/2023 Indusind Bank Limited 25. We heard the parties and perused the material on record. The contention of the ld. AR before us is that the investments earning exempt income are held as stock-in-trade by the assessee and therefore no disallowance is warranted under section 14A. We notice that the Co-ordinate Bench in assessee's own case for AY 2014-15 and 2015-16 (supra) has considered a similar issue where it has been held that “4.1. We have heard the rival submissions and perused the materials available on record. We find that the assessee earned exempt income by way of dividend of Rs 9.34 crores and did not disallow any expenditure u/s 14A of the Act as expenses incurred for the purpose of earning such exempt income. The ld. AO applied the computation mechanism provided in Rule 8D(2) of the Income Tax Rules and worked out the disallowance u/s 14A of the Act as under:- Under Rule 8D(2)(ii) - Rs 9.63 crores Under Rule 8D(2)(iii) - Rs 0.72 crores ----------------------- Rs 10.35 crores 4.2. The ld. CIT(A) by placing reliance on the order passed by his predecessor for the A.Y. 2013-14 dated 06/11/2017 and by placing reliance on the decision of Hon‟ble Jurisdictional High Court in the case of HDFC Bank Ltd reported in 366 ITR 505 (Bom) and Reliance Utilities & Power Ltd reported in 313 ITR 340 (Bom) deleted the disallowance of interest made under Rule 8D(2)(ii) of the Rules. The ld. CIT(A) however upheld the disallowance made under Rule 8D(2)(iii) of the Rules. With regard to yet another submission made by the assessee that the disallowance u/s 14A of the Act per se could not be made in the instant case as the investments were admittedly held as stock in trade, the ld. CIT(A) by placing reliance on the decision of Hon‟ble Supreme Court in the case of Maxopp Investments reported in 402 ITR 640(SC) decided the same against the assessee. 4.3. We find that the Hon‟ble Supreme Court in the case of Maxopp Investments reported in 402 ITR 640(SC) had categorically held that normally investments held as stock in trade would also be liable for disallowance u/s 14A of the Act. However, with respect to investments held as stock in trade by the banks, the same decision held by placing reliance on the CBDT Circular No. 18/2015 dated 02/11/2015 had held as under:-
1842, 3675 & 3674/Mum/2023 Indusind Bank Limited “19. In its analysis, the High Court accepted the contention of the counsel for the assessee that the assessee is engaged in the purchase and sale of shares as a trader with the object of earning profit and not with a view to earn interest or dividend. The assessee does not have an investment portfolio. The securities constitute the assessee's stock-in-trade. The Department, in fact, rightly accepted, as a matter of fact, that the dividend and interest earned was from the securities that constituted the assessee's stock-in-trade. The same is, in any event, established. The assessee carried on the business of sale and purchase of securities. It was supported by Circular No.18, dated November 02, 2015, issued by the CBDT, which reads as under:— 'Subject: Interest from Non-SLR securities of Banks – Reg. It has been brought to the notice of the Board that in the case of Banks, field officers are taking a view that, "expenses relatable to investment in non-SLR securities need to be disallowed u/s 57(i) of the Act as interest on non-SLR securities is income from other sources."
Clause (id) of sub-section (1) of Section 56 of the Act provides that income by way of interest on securities shall be chargeable to income-tax under the head "Income from Other Sources", if, the income is not chargeable to income-tax under the head "Profits and Gains of Business and Profession".
The matter has been examined in light of the judicial decisions on this issue. In the case of CIT Vs Nawanshahar Central Cooperative Bank Ltd. [2007] 160 TAXMAN 48(SC), the Apex Court held that the investments made by a banking concern are part of the business of banking. Therefore, the income arising from such investments is attributable to the business of banking falling under the head "Profits and Gains of Business and Profession". 3.2 Even though the abovementioned decision was in the context of cooperative societies/Banks claiming deduction under section 80P(2)(a)(i) of the Act, the principle is equally applicable to all banks/commercial banks, to which Banking Regulation Act, 1949 applies.
In the light of the Supreme Court's decision in the matter, the issue is well settled. Accordingly, the Board has decided that no appeals may henceforth be filed on this ground by the officers of the Department and appeals already filed, if any, on this ground before Courts/Tribunals may be withdrawn/not pressed upon. This may be brought to the notice of all concerned.' (emphasis supplied)
1842, 3675 & 3674/Mum/2023 Indusind Bank Limited 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.
This Circular has already been reproduced in Para 19 above. This Circular takes note of the judgment of this Court in Nawanshankar 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 Nawanshankar 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. 4.4. Respectfully following the aforesaid decision, we hold that the ld. CIT(A) grossly erred in misinterpreting the said decision of Hon‟ble Supreme Court. Accordingly, we direct the ld. AO to completely delete the disallowance made u/s 14A of the Act in respect of both second and third limbs of Rule 8D(2) of the Rules. Accordingly, the Ground No. 3 raised by the revenue is dismissed.”
1842, 3675 & 3674/Mum/2023 Indusind Bank Limited 26. Respectfully following the above decision of the Co-ordinate Bench we see no infirmity in the order of the CIT(A).
Disallowance of expenses claimed under section 35D – Ground No. 3
During the year under consideration the assessee has incurred expenses to the tune of Rs. 51,07,94,290/- on issuance of equity shares through Qualified Institutional Placement (QIP). The assessee claimed 1/5th of the said amount i.e. Rs. 10,21,58,858/- during the year under consideration under section 35D(2)(c)(iv) which allow amortization of preliminary expenses incurred in connection with the issue for "Public Subscription" of shares. The AO disallowed the said claim on the ground that QIP is not a public subscription and therefore the expenses fall outside the scope of section 35D(2)(c)(iv). The CIT(A) deleted the disallowance made by the AO by placing reliance on the decision of the Co-ordinate Bench in assessee's own case on an identical issue for AY 2011-12 and 2012-13. The revenue is in appeal before the Tribunal against the order of the CIT(A).
The ld. DR submitted that the deduction under section 35D(2)(c)(iv) allows amortization of certain preliminary expenses including those incurred in connection with the issue for public subscription of shares towards underwriting commission, brokerage and charges for drafting, typing, printing, advertising of the prospectus. The ld. DR further submitted that the essential precondition for allowability of deduction is that the expenditure must have been incurred in connection with the issue of shares or debentures "Public Subscription". The ld. DR drew our attention to the definitions of public offer and private placement under the Companies Act and the definition of public issue under the SEBI Regulations (ICDR), 2018. The ld. DR submitted that the definition under SEBI Regulations makes it clear that QIP constitutes private placement exclusively to Qualified Institutional Buyers (QIB)
1842, 3675 & 3674/Mum/2023 Indusind Bank Limited and unlike public issue a QIP does not involve offering securities to the public at large through a prospectus. Therefore, the ld. DR argued that the expenses incurred towards QIP cannot be regarded as expenses towards public subscription to be eligible for deduction under section 35D(2)(c)(iv). The ld. DR placed reliance on the decision of the Co-ordinate Bench in the case of Yes Bank Ltd. vs. DCIT (ITA No. 3047/Mum/2019 dated 05.02.2024) where the issue has been set-aside to the AO to examine whether QIP is a public subscription or not. The ld. DR argued that QIB do not assume the character of public as any aspiring investor or prospective subscriber of general public would be opted out to subscribe to any issue of shares which are ipso facto restricted to a selected class of investors limited to the QIBs. The ld. DR further argued that the assessee's internal classification of the class of investor where QIP are classified under public subscription do not ascertain or give a general nature to such investors. The ld. DR further argued that the decision of the Co-ordinate Bench in assessee's own case in earlier years cannot be directly applied for the year under consideration since the facts and the issue decided in those AYs are distinguishable.
The ld. AR submitted that the term 'Public' is defined in Rule 2(d) of the Securities Contract (Regulation) Rules, 1957 (SCRR) which specifically includes QIB and the same interpretation should be applied while construing the expression "Public Subscription" under section 35D(2)(c)(iv). The ld. AR further submitted that the assessee being a listed company is require to make a disclosure of its surrounding pattern and as per Regulation 31 of SEBI Regulations there are only three categories of shareholders i.e. promoter/promoter group, public and non- promoter/non-public and that as per the said Regulations QIB are classified under category public. The ld. AR placed reliance on the decision of the Hyderabad 1842, 3675 & 3674/Mum/2023 Indusind Bank Limited Bench of the Tribunal in the case of DCIT vs. Deccan Chronicle Holdings Ltd. [2015] 60 taxmann.com 240 (Hyd. Trib.) where it has been held that
6. With respect to ground No. 4 for the assessment year 2008-09, we find that the Assessing Officer has not disallowed for the assessment years 2006-07 and 2007- 08. However, the Assessing Officer has disallowed the expenditure on the issue of qualified institutional buyers for the assessment year 2008-09 which has been allowed by the Commissioner of Income-tax (Appeals) holding as under : "5. I have gone through the factual and legal contentions of the appellant in support of its argument that the deduction was claimed under section 35D read with section 37 i.e., both under sections 35D and 37. I agree with the argument of the appellant that the language used in section 35D is so plain and unambiguous that the only condition laid down in that section is that the issue should be offered for public subscription and the mode of placement is immaterial. Thus, the only issue for consideration is whether QIB can be called 'public' or not. After a careful and comprehensive consideration of the relevant provisions of the Company Law, Securities Contract (Regulation) Rules, SEBI Guidelines/Instructions, I am of the considered opinion that QIBs constitute 'public' and accordingly, the subscription made by the amount to public subscription. In this view of the matter and also considering the facts with regard to the utility of funds raised through QIB issue, I hold that the issue expenditure, to the extent attributable to the funds utilised for extension of the appellant's undertakings, is eligible for deduction under section 35D. So far as the remaining funds, utilised for modernisation and working capital requirements of the appellant's business are concerned, I have considered both factual and legal submissions of the applicant, in support of its contention that the expenditure was in the nature of revenue expenditure since the primary object and intent of raising these funds was to meet the operational requirements, in order to run the business more efficiently and profitably. The hon'ble High Court of Delhi, after analysing plethora of case law on this subject, had laid down certain broad guidelines, in the case of CIT v. J.K. Synthetics Ltd. [2009] 309 ITR 371 (Delhi), to decide whether a particular expenditure is capital or revenue in nature. Tested against these broad legal principles, I am of the opinion that there is considerable force in the arguments of the appellant-company that the expenditure claimed by it clearly falls in the revenue field. These guidelines were impliedly approved by the hon'ble Supreme Court, in view of the fact that the special leave petition filed against this decision was dismissed. There is also merit in the argument of the appellant-company that the facts of its case are distinguishable from those in the case of Brooke Bond, for the detailed reasons submitted by it, and therefore its claim cannot be denied by relying on that decision. It was further 1842, 3675 & 3674/Mum/2023 Indusind Bank Limited claimed that though the entire expenditure was allowable in one year under section 37, the same was treated as deferred revenue expenditure and claimed over five years, starting from the assessment year 2007-08. The concept of deferred revenue expenditure is now legally recognised by various judicial authorities and in fact, this was upheld even in the case of the appellant by my predecessor, while deciding the appeal for assessment year 2006-07. In view of the above facts, I hold that the expenditure of Rs. 2,07,00,112 claimed for assessment year 2008-09 is allowable under sections 35D and 37. As the claim of this expenditure under section 35D read with section 37 is in order, the disallowance on this account is deleted."
We find that during the year 2007-08, the company incurred debenture expenses of Rs. 2.07 crores and QIB issue expenditure of Rs. 8.28 crores, both totalling to Rs. 10.35 crores. The expenditure referred to above of Rs. 10.35 crores was adjusted against the share premium account as per the provision of the Companies Act. However, the expenditure being deferred revenue expenditure falls within the ambit of section 35D read with section 37 of the Income-tax Act which is eligible to be charted to profit and loss account. Accordingly as per the provisions of section 35D of the Income-tax Act, one-fifth of the QIB issue expenditure i.e., Rs. 207 lakhs was written off. Qualified Institutional Buyers (QIBs) are a class of investors as a part of the large investor community and the companies sought for QIB issues because the funds can be raised within a short span. This is an extremely important investment for larger investors and since the buyers are only a class of investors, the issue of shares to QIB have been considered as public issue. The expenses in connection with public issue of shares or debentures of the company are allowable. Reliance is placed on CIT v. Shree Synthetics Ltd. [1986] 162 ITR 819 (MP). Hence on the merits of the issue, the QIB expenditure can be treated as revenue expenditure and eligible for deduction under section 35D of the Income-tax Act is confirmed. Hence on merits of the issue as well as the fact that the same issue has been allowed in the earlier years and the Department cannot came upon in appeals in the subsequent years would be the reason to dismiss the Departmental appeal. We confirm the order of the Commissioner of Income-tax (Appeals) with respect to qualified institutional buyers expenses and dismiss the Departmental appeal on this issue. In the result, the Departmental appeal for the assessment years 2007-08 and 2008-09 are dismissed.
The ld. AR accordingly submitted that the contention of the revenue that in the above decision there is no finding with regard to QIB being public is factually incorrect. The ld. AR argued that QIBs are part of the investing public and shares issued through QIP are listed and traded on public exchanges. Accordingly, the ld. 1842, 3675 & 3674/Mum/2023 Indusind Bank Limited AR argued that the contention of the revenue that expenses towards QIP are not eligible for deduction under section 35D(2)(c)(iv) is not tenable.
We heard the parties and perused the material on record. The assessee during the year under consideration has claimed 1/5th of expenses incurred towards issue of shares to QIP. The contention of the revenue is that QIPs do not fall within the purview of public subscription and the expenses incurred towards public subscription only are eligible for deduction under section 35D(2)(c)(iv). From the perusal of the order of the Co-ordinate Bench as relied on by the CIT(A), we notice that the Co-ordinate Bench has dismissed the ground of the revenue by placing reliance on the decision in the case of the Deccan Chronicle Holding Ltd. (supra). We further notice that the coordinate bench in the case of Yes Bank Ltd. vs DCIT ([2020] 117 taxmann.com 974 (Mumbai – Trib) has considered a similar issue where it has been held that –
We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. The appellant is a banking company. It filed its revised return of income for the AY 2010-11 on March 30, 2012 declaring total income at Rs. 7,90,10,18,157/-. As mentioned earlier, the question involved in this appeal is whether QIB can be regarded as "public" and whether the offer made to them can be regarded as "offer made to public" for the purpose of section 35D of the Act. In Deccan Chronicle Holdings Ltd. (supra), the Tribunal has held as under : ******* 6.1 A perusal of the above order of the Tribunal clearly indicates that the present issue is directly covered in favour of the appellant. 6.2 Further, we find that the appellant being a listed company is bound by "Listing Agreement", which provides for the disclosure requirements for the 1842, 3675 & 3674/Mum/2023 Indusind Bank Limited share holding pattern of a listed company. As can be seen there from, there are only two categories of shareholders- "promoter/promoter group" and "public". For the definition of these terms in clause 35, reference is made to clause 40A of the Listing Agreement. As can be seen therefrom, Mutual Funds/Financial Institutions which are QIBs are classified under "public shareholding". The terms are defined in clause 40A of the SEBI Listing Agreement. Further, the listing agreement takes us to Securities Contracts (Regulation) Rules, 1957 (in short "SCRR"). Also Rule 19(2)(b) and Rule 19A of the SCRR provide that companies are required to maintain minimum public shareholding of 25% in case of first time listing and in case of continuous listing agreement respectively. In this context, we may refer to section 2(d) of SCRR defining the term "public". It (public) is defined to mean any person other than the promoter, promoter group, subsidiaries and associates of the company. Thus any person other than these four qualify to be considered as public. As can be seen from the list of QIBs to whom shares are issued, the shares are not issued to any of the aforesaid category. Thus QIBs, not being promoters, promoter group, subsidiaries and associates of the company would qualify as "public". As specified in clause 40A(ii) of the listing agreement, public shareholding can be increased by any of the modes specified therein to comply with Rule 19(2) and 19A of SCRR. One such note is the issue of IIP in accordance with Chapter VIIIA of the SEBI-ICDR. Chapter VIIIA has been included to provide for fresh issue of shares to comply with minimum shareholding requirement in Rule 19(2) and 19A of SCRR. Reg. 91B defines IPP as a further public offer made only to QIBs. These regulations provide that when a company has a public shareholding lower than the requirements specified, then the company may issue IPP to QIBs and raise the public shareholding to the required levels. It thus implies that QIBs form part of public. Further, even Reg. 82 which gives conditions for QIP, provides that the same must be in compliance with the requirements of public shareholding. That "a section of public qualifies as public" has been clarified in Nitta Gelatine India Ltd. (supra) and Andhra Chamber of Commerce (supra).
7. Facts being identical, we follow the order of the Tribunal in the case of Deccan Chronicle Holdings Ltd. (supra) and in view of the discussion hereinabove at para 6.2 , hold that the appellant is eligible for deduction u/s 35D of the Act. Thus we set aside the order of the Ld. CIT(A) and allow the 1st , 2nd and 3rd ground filed by the assessee.
1842, 3675 & 3674/Mum/2023 Indusind Bank Limited 32. The ratio laid down by the coordinate bench in the above case is that QIBs are to be treated a public and hence any expenditure incurred towards issue of shares under QIP would qualify for deduction under section 35D. Therefore respectfully following the above judicial precedence and the decision of the coordinate bench in assessee's own case we hold that there is no infirmity in the findings of the Tribunal.
Disallowance of Bad-debts pertaining to credit card expenses – Ground No.4
The AO during the course of assessment disallowed the bad debts claimed as deduction pertaining to credit card business. The CIT(A) allowed the claim by placing reliance on the decision of the Co-ordinate Bench in assessee's own case for AY 2015 and2015-16 (supra).
We heard the parties and perused the material on record. We notice that the Co-ordinate Bench has considered an identical issue for AY 2014-15 in assessee's own case where it has been held that “17.1. We have heard rival submissions and perused the materials available on record. It is not in dispute that assessee bank had engaged its own credit card business by issuing credit cards to its customers and the customers had used the said card while making purchases and had defaulted in the payments to the bank by not paying the dues on the due date. Since this loss was incurred by the assessee bank in the ordinary course of its business, the same was claimed as a regular business loss by the assessee bank. But the ld. AO observed that assessee bank is licensed to carryout business of banking only and that credit card business is not banking business. The ld. AO also placed reliance on the observations of the ld. Pr. Commissioner of Income Tax in case of ICICI Bank for the A.Y.2013-14 wherein it was decided that bad debts would not be allowed to that assessee since the same arose from the credit card business of ICICI Bank. 17.2. The ld. CIT(A) confirmed the disallowance on the ground that bad debts claimed by the assessee is not routed through or debited to the provisions for bad and doubtful debts account. Instead the said bad debts has been directly claimed 1842, 3675 & 3674/Mum/2023 Indusind Bank Limited u/s.36(1)(vii) of the Act. Accordingly, he confirmed the disallowance of bad debts claimed by the assessee. 17.3. We find that assessee had been deriving huge income of Rs.152.32 crores from its total credit card business of Rs.2030 Crores. Out of the said business, Rs.8.34 Crores had turned bad which assessee had claimed as bad debts u/s.36(1)(vii) of the Act. It is not in dispute that assessee had indeed offered income from credit card business as income under the head „profits and gains of business or profession‟ and which has been taxed as such by the ld. AO. Hence, the income derived from credit card business has been accepted as business income by the ld. AO. The satisfaction of requirement of offering of income in terms of Section 36(2) of the Act has been done by the assessee in the instant case. Hence, if any of the debts in respect of income already offered to tax by the assessee bank had become bad, and the same is written off as bad debt by the assessee in its books of accounts, the assessee would certainly be entitled for deduction u/s.36(i)(vii) of the Act. It need not be routed through provision for bad and doubtful debts account. Moreover, we find that RBI has issued a master circular dated 01/07/2013 which provides for credit card / debit card and rupee denominated co-branded prepaid card portions of the banks. The said circular clearly establishes the fact that credit card business is part and parcel of banking business. This fact that was placed on record by the assessee before the lower authorities had been ignored by them. Further as part of the banking license granted by the RBI, the assessee is entitled to carry on the banking business either departmentally or through a company set up for this purpose. We find that credit card could be issued by the assessee bank only to its customers. Hence, the observation made by the ld. PCIT in the case of ICICI Bank for the A.Y.2013-14 that a person need not be a customer of the bank to obtain credit card is fundamentally incorrect. Credit card business according to the RBI master circular is a permissible banking business activity provided under Banking Regulation Act and hence, it could be safely construed that credit card business is part and parcel of the banking business carried on by the assessee bank. We find that VISA and Master Card only act as service provider. The monies are lent by the assessee bank. The entire risk of bad debts thereon is borne by the assessee bank and not the service providers. 17.4. We hold that the claim of bad debts to be routed through provision for bad and doubtful debts account would be relevant if the provision is created u/s.36(1)(viia) of the Act. The assessee duly drew our attention from the computation of income that total amount of bad debts of Rs.179,25,17,964/- is reduced by the amount of brought forward provision for bad and doubtful debts claimed u/s.36(1)(viia) of the Act in the preceding previous year of Rs.159,78,14,026/- and only the balance amount of Rs.19,47,03,938/- was claimed as deduction as bad debts u/s.36(1)(vii) of the Act. In this regard, we 1842, 3675 & 3674/Mum/2023 Indusind Bank Limited have verified the computation of income annexed in page 38 & 39 of the paper book. We have also gone through the workings for bad debts written off enclosed in page 43 of the paper book. Hence, it is observed that the bad debts arising from credit card business is part and parcel of total bad debts reflected by the assessee. Hence, we have no hesitation to hold that bad debts arising from credit card business would be part and parcel of loss arising in the course of banking business and hence liable as deduction u/s.36(1)(vii) of the Act. Accordingly, the ground No.4 raised by the assessee is allowed.”
The facts for the year under consideration being identical, we see no reason to interfere with the decision of the CIT(A).
Allowability of interest on perpetual bonds – Ground No.5 & 6
The assessee has raised an amount of Rs. 1000 crores through Innovative Perpetual Debt Instruments (IPDI). The assessee claimed the interest paid on these bonds under section 36(1)(iii). The AO did not allow the claim of the assessee for the reason that IPDR is an instrument without a maturity date and therefore are quasi equity in nature. Accordingly, the AO held that the interest on IPDI cannot be allowed as a deduction under section 36(1)(iii) which allows deduction in respect of capital "borrowed". The CIT(A) deleted the disallowance by placing reliance on the decision of the Co-ordinate Bench in the case of ACIT vs. ICICI Bank Ltd. (ITA No. 3864/Mum/2019 dated 22.08.2022).
37. We heard the parties and perused the material on record. We notice that the Co-ordinate Bench in the case of ICICI Bank Ltd. has considered the issue of allowability of interest on IPDI under section 36(1)(iii) and held that:
7. During the course of assessment the A.O also noticed that assessee has claimed interest expenditure u/s 36(1)(iii) of the Act in respect of perpetual bonds issued by the assessee bank. The details of such Perpetual Debt Instruments (IPDI) are as under:
On query the assessee explained that these bonds have been issued to various insurance companies, mutual fund provident fund and individuals. It is also explained that these bonds were in the nature of debentures and have superior claim over equity and cumulative preference shares of the bank. They have fixed the interest rate and interest is paid out of distributable profits of previous years or current years. The bank has discretion to exercise the call option for the said bonds as per the applicable guidelines. It is also submitted that the bank has exercised the call option in October, 2016 in respect of the said bonds. The bank has paid interest to the bond holders after deducting the tax at source where applicable at the rate prescribed. The said interest paid on these bonds has been claimed as interest expenses u/s 36(1)(iii) of the Act. Further, since interest paid to the bond holders unlike dividend income is not exempt as per the provision of the Act and the bondholders would have accordingly offered the same to income in their respective returns, disallowance of the said interest would result in double taxation of same income. The A.O was of the view that perpetual bonds was equity and they have equity like features i.e (a) perpetual in nature; (b) high loss absorption capacity, Provision for write down of principal or conversion to equity on trigger; (c) Discretionary pay-out with existence of full coupon discretion. The A.O was of the view that in case of perpetual bonds, where the lender does not have authority to claim refund of the amount given, the said amount cannot be held as borrowing and hence the interest on such bonds was not admissible as deduction u/s 36(1)(iii) of the Act. The A.O also placed reliance on the order u/s 263 passed by the Pr. CIT, Mumbai in the assessee’s own case for A.Y. 2013-14. Therefore, the A.O disallowed the amount of Rs.2,47,65,011/- holding that the same was not qualified for deduction u/s 36(1)(iii) of the Act.
8. Aggrieved, the assessee filed the appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assessee. The relevant part of the decision is reproduced as under:
“9.3 I have carefully considered the facts of the case, discussion of the AO in the assessment order, oral contentions and written submission of the appellant and material 1842, 3675 & 3674/Mum/2023 Indusind Bank Limited available on record According to the AO, the assessee bank had issued Innovative Perpetual Bonds Debt Instrument (IPDI) which qualified as Tier I capital of the bank. The AO had further mentioned that the assessee had claimed deduction on account of interest paid on such bonds for an amount of Rs 2,47,65,45.011/- u/s 36(1)(m) of the Act. Before The AO, the bank has claimed that it has discretion to exercise the call option for such bonds as per applicable guidelines. The Appellant also claimed that the interest paid to the bond holders unlike dividend income was not exempt as per provision of the Act and the bondholders accordingly had offered the interest receipts as their income. The Appellant claimed that as per RBI Guidelines, the Perpetual Bond were treated as Tier I capital subject to certain conditions The investors do not get the right to redeem the bonds at any given point of time Only the issuing company can buy back the bonds from the investors Therefore, even if subsequently borrower buys back these bonds, it will not alter the nature and character of these bonds because it is the borrower and not the lender who has every right in such bonds to redeem it Further, in the appellant's case, monies borrowed by issuance of IPDIs have been disclosed in Schedule 4 of the balance sheet as "Borrowings" and the interest paid on the said bonds is debited to the Profit and Loss Account of the year by the appellant. The IPDI holders/lenders are not entitled to participate in the management of the affairs of the appellant and neither are they entitled to the share in the profits of the appellant, but are entitled to interest only upon the appellant making sufficient profits from its business activities. Though the interest payments are made out of distributable profits, they are payable prior to such distribution and are only computed by reference to the apparent net profits. The eligibility to claim the interest payments by the IPDI holder is at a stage prior to determination of profits and not at a later stage. Further, merely because interest is payable by the appellant only when there are sufficient profits, the payment of interest does not partake the character of payment out of profits, so as to be disallowed in determining taxable profits of the appellant. Not every payment that is quantified based on profits or becomes payable upon earning of profits becomes payment out of profits Furthermore, a payment, the making of which is conditional on profits being earned can very well be expenditure incurred for the purposes of earning profits. Also, the appellant has paid interest to the IPDI holders after deducting tax at source where applicable at the rates prescribed. Since the interest paid to the IPDI holders unlike dividend income is not exempt as per provisions of the Act and the IPDI holders would have accordingly offered the same to income in their respective returns, disallowance of the said interest would result in double taxation of the same income.
9.3.1 In this case, the appellant is a banking company and there is no dispute to the fact that the monies borrowed through IPDI by the appellant have been used for the purposes of business of the appellant. Even if it is considered that the money so borrowed actually formed the assets of the appellant in the shape of IPDI, still there cannot be any dispute that such IPDIs have been put to use for its business purposes 1842, 3675 & 3674/Mum/2023 Indusind Bank Limited and therefore the interest paid on such IPDIs would even be allowable as per the proviso to section 36(1)(ii) of the Act.
9.3.2 The appellant has also distinguished the decision of Punjab and Haryana High Court in Pepsu Road Transport Corporation (supra) relied upon by the Pr. CIT in his order under section 263 of the Act. In that case, the capital of the Petitioner Corporation was provided by the Union of India and the Punjab Government as per provisions of section 23 of the Road Transport Corporation Act, 1950 The Petitioner had paid interest on the capital, provided by the Government. On the question of whether the interest paid by the Petitioner can be regarded as deductible under section 36(1)(ii) of the IT Act, on facts, the High Court held that (a) the capital was not borrowed by the Petitioner, but was only provided by the Government, (b) there was no obligation on the Petitioner to repay the capital provided by the Government as per provisions of the Road Transport Corporation Act, 1950, and (c) hence, the interest paid on the capital, though termed as interest, would not be allowable as deduction under section 36(1)(ii) of the IT Act. The facts of aforesaid case are distinguishable as the assessee has borrowed money and it cannot be treated as provided by lenders. Further even though the terms of the IPDIs are perpetual in nature, as per the terms of the issue, all IPDIs are redeemed either at the first available opportunity or within a short while thereafter. This is mainly because if the Appellant fails to redeem the IPDIs at regular intervals, the subsequent issues of IPDIs would not be subscribed by the investors. Thus, in actual practice, the IPDIs are not perpetual as the intent is always to repay the sums borrowed. It is also the case that if the deduction of interest under section 36(1)(ii) of the Act is not allowable on the ground that the IPDI cannot constitute 'capital borrowed for the purposes of the Act, and consequentially, the interest expenditure looses its character of being an expenditure covered by section 36(1)(i), the expenditure continues to be a revenue expenditure incurred for the purpose of the business of the Appellant and hence would be allowable under section 37(1) of the Act. In view of these facts, it is clear that liability of bank in respect to Perpetual Bonds is totally different from capital of the bank, therefore, the Perpetual Bonds cannot be compared to the equity / share capital of the banks. Therefore, the interest expenses incurred in respect of such bonds are found to be allowable u/s 36(1)(iii)/37(1) of the Act. Ground No. 4 of the appeal is accordingly, allowed.”
During the course of appellate proceedings before us the ld. D.R. submitted that perpetual bond issued by the assessee was of the kind of equity share rather than debt and the interest paid on such bonds cannot be charged to the profit and loss account. The ld. D.R has referred the observations of the A.O mentioned at para 7.3 of the assessment order stating that the investors do not get the right to redeem the bond at any given point of time and only the issuing company buy back bonds from the investors and the said amount cannot be allowed as deduction as interest u/s 36(1)(iii) of the Act. The ld. D.R referred the decision 1842, 3675 & 3674/Mum/2023 Indusind Bank Limited of Punjab & Haryana High Court in the case of Pepsu Road Transport Corporation Vs. CIT, Patiala –I, ld. D.R has also referred Bank of India Vs. ACIT, ITA 1767/2048 of 2019 122 taxman.com 247.
On the other hand the ld. Counsel has supported the order of the ld. CIT(A). The ld. CIT(A) has also furnished copy of RBI letter dated 30.03.2010, wherein Innovative Perpetual Debt Instrument (IPDI) was classified under the head borrowings. The ld. Counsel has also referred page no. 1 of the paper book pertaining to schedule 4 of the balance sheet of the assessee bank wherein assessee has shown innovative perpetual debt instrument under the head borrowings. The ld. Counsel has also referred page no. 91 of the case law paper book wherein copy of the order of Hon’ble Punjab & Haryana High Court in the case of Pepsu Road Transport Corporation referred by the ld. D.R. in his argument was placed. By referring this case the ld. Counsel contended that fact of the case of the assessee are distinguishable from the facts of the case of Pepsu Road Transport Corporation. She stated that in the case of Pepsu Road Transport Corporation, it was the statutory requirement that the corporation shall pay interest on the capital borrowed from the central & state Government at such rates as may be fixed by the Government. In that case the capital of the corporation was to be provided by the Central & State Government whereas in the case of the assessee there was no such statutory requirement and assessee has issued debt instruments without any compulsory requirement of contribution. The ld. Counsel has also referred decision of ITAT, Cochin in the case of Kerala Road Transport Corporation Vs. ITO 34 TTJ 101.
10. Heard both the sides and perused the material on record. The A.O has disallowed the claim of interest made u/s 36(1)(iii) by treating the perpetual bond as equity in nature. In support of his finding the A.O has placed reliance on the observation of the Pr. CIT made in the order u/s 263 in the case of the assessee for A.Y. 2013-14. These observations are as under:
(i) Perpetual bond with no maturity date; (ii) right to redeem that assessee not with the Investors; (iii) showing in the balance sheet as debt or borrowings.
However, it is observed that A.O has failed to controvert the undisputed fact that assessee has issued innovative perpetual debt instruments (IPDI) which carry a fixed rate of interest. The holder of these instruments had no right in management of the assessee bank. The assessee had paid interest to the bond holder after deducting tax at source. We have also perused the schedule 4 of the balance sheet placed in the paper book wherein at serial no. (vi) Innovative Perpetual Debt Instruments was placed under the head borrowings. The interest payment on these debt instruments was paid before computing profit of the assessee 1842, 3675 & 3674/Mum/2023 Indusind Bank Limited bank. We have also perused the detail of the redemption of perpetual debt instrument made by the assessee placed in the paper book reproduced as under:
Sr. Series Allotment Date of Principle amount Interest for the No. date redemption period FY. 2009-10 1 DAG06RRB 09.08.2006 09.08.2016 Rs.233,00,00,000 23,53,30,000 2 DSP06RRB 13.09.2006 13.09.2016 RS.550,00,00,000 54,89,00,000 3 DJA07RB1 15.01.2007 30.04.2017 Rs.18,00,00,000 1,79,63,998 4 DJA08RB1 10.01.2008 30.04.2018 Rs.500,00,00,000 50,75,00,000 5 BHSTN7.25% 24.06.2006 31.10.2016 USD 1,16,68,81,013 34,00,00,000 2,47,65,45,011
It is further noticed that the assessee had demonstrated from the submission that these debt instruments were also redeemed. We also find that facts of the case of Pepsu Road Transport Corporation Vs. CIT 130 ITR 18 (P & H) relied upon by the ld. D.R. are distinguishable from the case of the assessee. In that case the capital was not borrowed but the same was provided by the Government as per the provisions of the Road Transport Corporation Act, 1950 whereas in the case of the assessee bank it had borrowed the money from the lenders. Similarly the fact of the case of Bank of India Vs. ACIT vide 122 taxman.com 247 (Mum ITAT) are also distinguishable from the case of the assessee. In that case the revenue had not discussed about the terms on which perpetual bond were issued. Therefore, the issue was remained back to the ld. CIT(A) for fresh adjudication. We have also perused the decision of Kerala Road Transport Corporation Vs. ITO 34 TTJ 101 Cochin, ITAT, wherein held that payment of interest was not made to the corporation but it was the payment made to the third parties. In the light of the above facts and circumstances merely that RBI recognizes to treat the said debt instruments as additional Tier/Capital would not change the nature of Innovative Perpetual Debt Instruments which were of the nature of long term borrowings and the interest paid was debited to the profit and loss account. These debt instruments were also redeemed on different dates as discussed supra in this order, therefore, we don’t find any reason to interfere in the decision of ld. CIT(A), accordingly, this ground of appeal of the revenue is dismissed.”
The facts in assessee's case being identical respectfully following the above decision of the Co-ordinate Bench we see no reason to interfere with the decision of the CIT(A).
The assessee during the year under consideration has amortized the premium on HTM Investments to the tune of Rs. 179,32,22,000/- and claimed the same as a deduction in P&L A/c. The AO denied the claim stating that there is no provision under the Act to claim such expenditure and that for AY 2015-16 and 2016-17 the same has been disallowed. The CIT(A) allowed the claim of the assessee by placing reliance on the decision of the Co-ordinate Bench in assessee's own case for AY 2002-03 to AY 2009-10 (ITA No. 2839/Mum/2008 dated 17.06.2015).
We heard the parties and perused the material on record. We notice that the Co-ordinate Bench in assessee's own case (supra) where it has been held that -
“6.Next common Ground(Ground-4 for AY.05-06,Ground-3 for AY.08-09 and Ground-1 for AY. 02-03)is about disallowance of amortisation of investments classified under held to maturity (HTM) category. The AO, while completing the assessment proceedings, for the AY.2005-06 found that the assessee had claimed depreciation on HTM securities of Rs.15.67 cr. He directed it to explain as to why the provision should not be disallowed. Vide its letter dated10.12.2007 the assessee submitted that since its inception and upto FY 1999-2000 it had held all its investments as current investments and marked them to market as per the erstwhile requirements of the RBI, that in the year 2000-01 the RBI issued guidelines giving fresh norms for classification and valuation of investments, that as per the new guidelines the investments were to be held in 3 categories i.e. HTM, AFS and HFT, that due to stipulation and rules framed by the RBI, it had classified its investment interest to various categories. The AO after considering the reply of the assessee held that HTM were long-term investments that they were not in the nature of stock intrade, that any diminution thereof was in the nature of provision, that the claim of the assessee was not acceptable. Accordingly, the amortisation of HTM investment, amounting to Rs.15,67, 83,664/-,was disallowed and added back to the income of the assessee. 6.1 In the appellate proceedings the FAA held that the investment under the head HTM were long-term investment, that same would not marked to market, that diminution in value was not allowable as per provisions of s.37 of the Act. 6.2 Before us,the AR and DR agreed that the issue now stands settled by the decision of the Tribunal delivered in the case of Bank of Rajasthan(2011-TIOL-35-ITAT,Mum).A reference was made to the CBDT Instruction No.17 dated 26/11/2008. It was also 1842, 3675 & 3674/Mum/2023 Indusind Bank Limited agreed that the FAA had followed the decision of the Tribunal, while deciding the appeal for assessment year 2008-09 and the AO had agitated the issue before the Tribunal. 6.3 We have heard the rival submissions and perused the material before us. We find that in the case of Bank of Rajasthan (supra), the issue has been decided in favour of the assessee. While adjudicating the appeal for the AY.2008-09 the FAA had followed that order and allowed the appeal filed by the assessee. It is also found that similar issue had arisen in the case of HDFC Bank Ltd. (ITA/6939/Mum/201)and the Tribunal had decided the issue in favour of the assessee. Following the orders of the Bank of Rajasthan and HDFC Bank(supra)Ground-4 for AY.05-06,Ground-3 for AY.08-09 and Ground-1 for AY. 02-03 are decided in favour of the assessee.”
Respectfully following the above decision of the Co-ordinate Bench, we hold that there is no infirmity in the decision of the CIT(A) in allowing the claim of the assessee towards amortization of premium on Securities Held to Maturity (HTM).
Disallowance of Broken Period Interest – Ground No.8 & 9
The assessee has debited an amount of Rs. 37,25,54,316/- in the P&L A/c as broken period interest. The AO held that the broken period interest paid by the assessee is nothing but part of the price paid for the securities towards acquiring and therefore of capital in nature. Accordingly, the AO disallowed the expenditure claimed by the assessee. The CIT(A) deleted the disallowance by placing reliance on the assessee's own case for AY 2014-15 and 2015-16 (ITA No. 2725 & 2726/Mum/2019 dated 26.10.2022).
We heard the parties and perused the material on record. We notice that the Hon'ble Jurisdictional High Court in assessee's own case in of 2017 dated 22.04.2019 has considered the following question of law and held that " Whether on facts and in circumstances of the case and in law the Tribunal was correct in holding that broken period interest is allowable as a deduction insptie of the Hon'ble 1842, 3675 & 3674/Mum/2023 Indusind Bank Limited Supreme Court decision in the case of CIT vs. Vijya Bank (187 ITR 541) and the Rajasthan High Court decision in the case of Bank of Rajasthan (316 ITR 391)? 4. It appears that the assessee had purchased securities on which certain interest was paid. The Revenue argued that the entire cost of security would include such interest component and the same would, therefore, be in the nature of capital expenditure. The assessee, however, argued that there was separate interest component payment of which was an allowable deduction. The Tribunal having accepted the assessee's contention, the Revenue is in the appeal before us. This issue is no longer res integra. The Division Bench of this Court in case of CIT Vs. HDFC Bank Ltd had ruled in favour of the assessee. We are informed that the appeal against such judgment of the High Court was also dismissed by the Supreme Court. In the result, the Income Tax Appeal is dismissed."
Respectfully following the above decision of the Hon'ble High Court, we dismiss the ground raised
by the revenue in this regard. AY 2019
20. /Mum/2023 - Assessee's appeal and ITA No.3774 /Mum/2023 – Revenue's appeal
The grounds raised by the assessee and the revenue for AY 2019-20 are tabulated in the earlier part of this order from which it is clear that the grounds are identical to the grounds in AY 2018-19. Accordingly our decisions with regard to the grounds in AY 2018-19 are mutatis mutandis applicable to AY 2019-20 also.
In result the appeals of the assessee for AY 2018-19 and AY 2019-20 are partly allowed. The appeals of the revenue for AY 2018-19 and AY 2019-20 are dismissed.