DCIT-2(3)(1), MUMBAI vs. INDUSIND BANK LTD., MUMBAI

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.

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.”

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.

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.

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:

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

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.

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.

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.

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.

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).

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)

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.

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)

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

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 –

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).

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).

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 -

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).

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

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.