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Facts
The appeals involved cross-appeals by the assessee and revenue concerning assessment years 2020-21 and 2021-22. Key issues included the addition on account of extinguishment of liability under Section 41, disallowance of administrative expenses under Section 14A, and issues related to ESOP expenditure, NPA interest, and broken period interest on securities.
Held
The Tribunal remitted the issue of extinguishment of liability to the AO for verification. The disallowance of administrative expenses under Section 14A was deleted. The issues related to ESOP expenditure, NPA interest, and broken period interest were decided in favor of the assessee, following earlier decisions. The deduction for QIP expenses was directed to be examined afresh by the AO.
Key Issues
Whether the addition on account of extinguishment of liability is sustainable, whether administrative expenses are disallowable under Section 14A, and the allowability of deductions for ESOP expenditure, NPA interest, and broken period interest on securities.
Sections Cited
41, 14A, 8D(2), 37(1), 43D, 234A, 35D
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Before: SHRI SAKTIJIT DEY & SHRI NARENDRA KUMAR BILLAIYA
स िवाई की िारीख / Date of Hearing 05.06.2025 घोर्णा की िारीख/Date of Pronouncement 11.06.2025 आदेश / O R D E R PER NARENDRA KUMAR BILLAIYA [A.M.]: - & 5075/Mum/2024 are cross appeals by the assessee and the revenue preferred against the order dated 29.07.2024 by NFAC, Delhi [hereinafter referred to as “CIT(A)”] pertaining to Assessment Year [AY] 2020-21. & 5110/Mum/2024 are cross appeals by the assessee and the revenue preferred against the order dated 29.07.2024 by the CIT(A) pertaining to AY 2021-22.
Since common grievance is involved in the captioned appeals, they were heard together and are disposed of by this common order for the sake of convenience and brevity.
Representatives of both the sides were heard at length, the case records carefully perused, and the relevant documentary evidences brought on record duly considered in the light of Rule 18(6) of ITAT Rules, 1963.
(assessee’s appeal for AY 2020-21) 4. The first grievance of the assessee relates to the addition on account of extinguishment of liability u/s 41, amounting to Rs. 30,31,324/-.
P a g e | 3 , 4950, 5075 & 5110/Mum/2024 A.Y. 2020-21 & 2021-22 Kotak Mahindra Bank Ltd. 4.1 During the course of the scrutiny assessment proceedings, from the insight portal, the AO found that 7 assessees have written off amounts as debts written off. The AO was of the opinion that the amounts were required to be added u/s 41 of the Act. The details of the 7 parties are as under:
Sr. No. Name PAN Amount (in Rs.) 1. Alpha Digital Home AAMFA4243M 9,515 2. Bilkish Associates Pvt. Ltd. AACCB8625M 5,87,401 3. Legal Options AADFL3012C 7,86,800 4. Litmus World Marketing AACCL9236A 6,72,600 Technologies Pvt. Ltd. 5 Manav Motors AAIFM6527E 9,55,061 6. Nikhil Comforts AAAFN0812H 7,83,282 7. P. Manickam & Co. AAAFP0680R 10,615 Total 38,05,274 Taking a leaf out of the write-offs done by the aforementioned parties, the AO made the addition of Rs. 30,31,324/- u/s 41 of the Act as extinguishment of liability. The action of the AO was confirmed by the CIT(A). 4.2 It would be pertinent to understand the transaction. The assessee has availed services from the aforementioned parties. The transactions can be understood by an example. The assessee availed services from X. X raised a bill of Rs. 1,00,000/-, and the bank approved the bill of Rs. 70,000/-. Accordingly, the bank charged its profit and loss (P&L) account by Rs. 70,000/-. Now, the case of the revenue is that X has written off the debt. It is not coming from the assessment records whether X has written off Rs. 1,00,000/- or Rs. 70,000/-.
P a g e | 4 , 4950, 5075 & 5110/Mum/2024 A.Y. 2020-21 & 2021-22 Kotak Mahindra Bank Ltd. Since the assessee has charged its expenditure by Rs. 70,000/-, there is no question of any cessation of liability u/s 41 of the Act. 4.3 The assessee has furnished a complete detail of invoices, which have been charged by it in its P&L account, but the AO has proceeded on the footing that the other parties have written off the debts. 4.4 In our considered opinion, the facts need to be verified in their true perspective. Therefore, we remit this issue to the files of the AO. The assessee is directed to furnish the details of the amount charged by it in its P&L account for the services availed by it from the impugned parties, and the AO is directed to verify whether the impugned parties have written off debts of the amount charged by the assessee in its books or written off debts of the amount of invoices issued by them. If it is found that the assessee has only charged an amount lesser than the invoice value, then to that extent, there is no question of any cessation of liability u/s 41 of the Act. The AO shall decide the issue afresh after verifying the aforementioned facts and after affording a reasonable and adequate opportunity of being heard to the assessee. Ground No. 1 is allowed for statistical purposes.
Ground No. 2 relates to the disallowance of administrative expenses of Rs. 33,17,45,092/- u/s 14A r.w. rule 8D(2) of the Act.
P a g e | 5 , 4950, 5075 & 5110/Mum/2024 A.Y. 2020-21 & 2021-22 Kotak Mahindra Bank Ltd. 5.1 The main contention of the assessee is that the AO has not recorded any satisfaction before invoking the provisions of section 14A r.w. rule 8D. 5.2 Briefly stated, the facts of the case are that during the course of the assessment proceedings, the AO noticed that the assessee has claimed income of Rs. 67,95,18,669/- as tax-free income. The AO issued a show cause notice to the assessee, asking it to show cause why provisions of section 14A r.w. rule 8D should not be applied. In its reply, the assessee explained that it has suo motu disallowed Rs. 2.94 cr., and further stated that in case Rule 8D(2) is invoked, then only those investments which have yielded dividends should be considered for arriving at administrative expenses for the purpose of disallowance u/s 14A of the Act. 5.3 The contention of the assessee was dismissed by the AO, who proceeded by justifying the applicability of section 14A, stating that the assessee definitely would have spent substantial sums to manage these investments, and the same are also claimed as expenses in the routine course of business as the assessee has not maintained any separate books to maintain such expenses. Thereafter, the AO went on to discuss the jurisprudence of section 14A r.w. rule 8D. 5.4 We have given a thoughtful consideration to the observations made by the AO in the assessment order. We find that though the AO has discussed the jurisprudence of section 14A r.w. rule 8D at length, but nowhere he has recorded
P a g e | 6 4950, 5075 & 5110/Mum/2024 A.Y. 2020-21 & 2021-22 Kotak Mahindra Bank Ltd. any satisfaction nor any dissatisfaction in so far as the suo moto disallowance of Rs. 2.94 cr. is concerned. In our understanding of the law, the AO has to record his satisfaction or dissatisfaction with the character of the claim of the assessee in respect of such expenditure in relation to income, which does not form part of the total income under the Act, having regard to the accounts of the assessee. We find that the AO has made only general remarks without pointing out any specific item of expenditure nor he has said anything about the suo moto disallowance of Rs. 2.94 cr. 5.5 Considering the underlying facts in the issue, we do not find any merit in the impugned addition made u/s 14A r.w. rule 8D and the same is directed to be deleted. Ground No. 2 is allowed.
In the result, the appeal of the assessee is allowed in part for statistical purposes.
(revenue’s appeal for AY 2020-21) 7. The first grievance of the revenue is in respect of ESOP expenditure, which was allowed as deduction in computing the income by the CIT(A). 7.1 This issue was considered by the coordinate bench in and 4103//Mum/2023 for AY 2019-20. The relevant findings of the coordinate bench read as under:
P a g e | 7 4950, 5075 & 5110/Mum/2024 A.Y. 2020-21 & 2021-22 Kotak Mahindra Bank Ltd. “25. It may be stated here that similar issue has come for adjudication in assessment and subsequent appeals in the case of assessee itself. Moreover, following the decision of Special Bench of Bangalore Tribunal in case of Biocon Ltd (ITA No. 368 to 371 &1206/Bang/2010), the respondent has claimed the deduction based on the principle laid down therein and the ld.CIT(A) has followed this decision. On the other hand, the ld.AO has stated that the Department has not accepted the decision of Special Bench in Biocon and appeal has been filed with Hon'ble Karnataka High Court which has been subsequently decided in favour of the assessee and claim of the Assessee made in accordance with the principles laid down in Biocon (supra) is not accepted.
It is further claimed that case of the assessee is identical to the case of Biocon, It is submitted before us that based on favourable decision in Respondent's own case by CIT(A) for AY 2013-14, 2014-15 & 2015-16 and the Hon'ble ITAT Mumbai in dated 16-02-2023 and & 782/M/2018 dated 27.08.2019, the disallowance was deleted by CIT(A). Besides, the same is allowed in favour in respondent's own case by ITAT Mumbai in ITA No. 4056 & others/Mum/2023,ITA No. 3267 to 3269/Mum/2019,ITANo. 781/782/mum/2018, ITA No. 2817/Mum/2016 and 168 ITD 529(Mum).
Rewarding employees through share-based benefit schemes has been an effective tool for the companies to not just recognise their contribution to the company but also retain them by imbibing a sense of belonging and ownership. One such scheme, popular among the companies for almost last two decades, has been to grant of Employee Stock Option Plans ("ESOPs"). In simple terms, an ESOP is an option and not an obligation, provided by a company to its employees, to purchase its shares at a future date at a pre-determined price, which is ordinarily less than the market price, on satisfaction of certain prescribed conditions. Recently, the Karnataka High Court affirmed the ruling of the special bench of the Bangalore Income Tax Appellate Tribunal in the caseof Biocon Ltd., wherein it was held that discount on issuance of ESOPS is an allowable business expenditure under Section 37(1) of the Act, 1961 for the employer.Commissioner of Income Tax v. Biocon Ltd., of 2013 (Karnataka HC); (2013) 35 taxmann.com 335 (Bangalore - ITAT) (SB). 27.1 In view of the foregoing, considering the fact that issue in hand is identical and recurring in nature and is also being consistently decided in favour of the assessee, respectfully following the decisions referred above, the disallowance made is accordingly deleted.” Respectfully following the findings of the coordinate bench (supra), we 7.2 decline to interfere with the findings of the CIT(A). Ground No. 1 is dismissed.
P a g e | 8 4950, 5075 & 5110/Mum/2024 A.Y. 2020-21 & 2021-22 Kotak Mahindra Bank Ltd. 8. Ground No. 2 relates to the disallowance u/s 14A. In appeal of the assessee in (supra), we have deleted the entire disallowance made u/s 14A of the Act vide ground No. 2 of that appeal. For a detailed discussion therein, this ground becomes infructuous.
The third grievance of the revenue relates to the deletion of the addition in respect of NPA. 9.1 An identical issue was considered by the coordinate bench in for AY 2019-20. The relevant findings read as under: “29. The assessee has pleaded that having regard to RBI Guidelines which are binding upon it, has treated accounts which are delinquent for more than 90 days as NPAs and has accordingly not offered interest thereon, relying upon the provisions of Section 43D of the Act. The AO, however, has adopted the criterion of 180 days mentioning Rule 6EA, to regard the accounts as delinquent and has taxed the interest for the differential period of 90 days (180 days as per the AO minus 90 days- as per the RBI Guidelines as discussed by him on page 41/ 2nd last para of the order. 29.1 It is further stated that the ld.CIT(A) has followed decision of ITAT Mumbai in ICICI V ACIT (ITA No. 3215/M/19) dated 22.08.2022 and allowed the claim of the Assessee. Therefore, relying upon favourable decision of ITAT Mumbai in Respondent's own case in ITA No. 4056 & others/2023 vide order dated 08.08.2024 and ITA No. 3267 to 3260/M/2019 vide order dated 16.02.2023 and in the case of ICICI Bank (ITA No. 3215/Mum/2019), the interest on NPA shall be taxed based on RBI Guidelines as mentioned under section 43D of the Act. Reliance is placed on the decision of hon'ble Supreme Court in the case of CIT vs Vasistht Chay Vyapar Ltd 410 ITR 244 which confirmed the findings of hon'ble Delhi High Court in this case that since as per prudential norms issued by RBI, ICD had become NPA on which no interest was received and possibility of recovery was almost nil, it could not be treated to have accrued to the assessee.
In view of the foregoing, considering the fact that issue in hand is recurring in nature and is being consistently decided in favour of the assessee, respectfully following the decision referred above, the disallowance made is accordingly deleted.” 9.2 Respectfully following the findings of the coordinate bench, ground No. 3 is dismissed.
P a g e | 9 4950, 5075 & 5110/Mum/2024 A.Y. 2020-21 & 2021-22 Kotak Mahindra Bank Ltd.
Ground No. 4 relates to the allowance of interest in relation to the broken period of securities held to maturity as revenue expenditure. 10.1 An identical issue was considered by the coordinate bench in for AY 2019-20. The relevant findings read as under: “32. Relying upon decision of CIT(A) for AY 2013-14, AY 2014-15 & AY 2015-16, in assessee's own case, it is contented by the Id.AR that the issue has been allowed in favour of the assessee by the ld.CIT(A). Before us, it is submitted relying upon favourable decisions of ITAT Mumbai in Respondent's own case in ITA No. 4056 & others/M/2023 vide order dated 08.08.2024, ITA No. 3267 to 3269/M/2019 vide order dated 16-02-2023 and ITA No. 781 &782/M/2018vide order dated 27-08-2019 that once the investments in Govt. Securities are stock-in- trade, the broken period interest paid on purchase of such securities are on revenue account and the same be allowed as deduction. Morover, as per recent decision of Hon'ble Supreme Court in the case of Bank of Rajasthan v CIT in CA No. 3291-3294 of 2009-dated 16.10.2024, Broken Period Interest is allowed as deduction to Banks as all the securities including HTM securities are held by bank as stock in trade. It is further submitted that hon'ble Supreme Court has dismissed the SLP filed by the Department in the case of ICICI Bank Ltd SLP Diary no. 19414/2018 dated 19.10.2019 on a reference as to whether broken period interest on HTM Securities should be disallowed as revenue expenditure and should be capitalized to the cost of the securities.
We have carefully considered all the relevant facts of the case and the legal position emerging from various judicial decisions relating to the issue in hand.In a recent judgment of Bank of Rajasthan Ltd. v. Commissioner of Income Tax, 2024 SCC OnLine SC 2877, dated October 16, 2024, the Hon'ble Supreme Court of India has allowed banks to claim tax deductions for broken period interest on Held to Maturity (HTM) government securities, provided they are classified as stock-in-trade. The decision clarifies the tax treatment for banks regarding interest paid for the period between the last coupon date and the date of purchase of securities, resolving a long- standing issue between banks and tax authorities.The appellant, Bank of Rajasthan, was engaged in purchasing and selling government securities, particularly those held to meet statutory liquidity ratio (SLR) obligations under the Banking Regulation Act, 1949. The dispute arose over whether broken period interest, i.e., the interest accrued between the last coupon date and the date of purchase of government securities, could be deducted as a business expense when computing taxable income. The Commissioner of Income Tax disallowed the deduction for broken period interest, relying on the Supreme Court's ruling in Vijaya Bank Ltd. v. Additional Commissioner of Income Tax, Bangalore, 1991 Supp (2) SCC 147, dated September
P a g e | 10 4950, 5075 & 5110/Mum/2024 A.Y. 2020-21 & 2021-22 Kotak Mahindra Bank Ltd. 19, 1990, where broken period interest was classified as capital expenditure and hence not deductible as a business expense. 33.1 In view of the foregoing, considering the fact that issue here is identical, recurring in nature and is being consistently decided in favour of the assessee, respectfully following the decision referred above, the disallowance made is accordingly deleted.” 10.2 Respectfully following the findings of the coordinate bench, ground No. 4 is also dismissed.
In the result, the appeal of the revenue is dismissed.
(assessee’s appeal for AY 2021-22) 12. The first grievance of the assessee relates to the non-grant of the deduction of amortisation u/s 35D on expenses incurred in connection with the Qualified Institutional Placement (QIP) – Rs. 9,25,58,697/- 12.1 Briefly stated, the facts of the case are that during the year under consideration, the assessee has made QIP issue, where it had raised Rs. 7442.0 cr., in which it placed its share capital with qualified institutional buyers. In connection with the issue of shares to QIP, the assessee incurred expenses of Rs. 46.28 cr. on account of payments to lead managers of the issue and payments to legal consultants and auditors for the finalisation of the placement document for the purpose of QIP. The assessee claimed 1/5th of the expenses incurred in connection with the issue for public subscription of shares in or debentures of the company u/s 35D of the Act. However, the claim of deduction
P a g e | 11 , 4950, 5075 & 5110/Mum/2024 A.Y. 2020-21 & 2021-22 Kotak Mahindra Bank Ltd. was made during the assessment proceedings, but the AO did not entertain the claim of deduction, stating that the same should have been claimed by way of a revised return of income. The action of the AO was confirmed by the CIT(A). 12.2 After carefully perusing the order of authorities below, we are of the considered view that the AO should examine the claim of deduction afresh after affording a reasonable and adequate opportunity of being heard to the assessee. The assessee is directed to furnish complete details for its claim of deduction u/s 35D of the Act, and the AO is directed to examine the same and decide the issue as per the relevant provisions of the law. Ground No. 1 is allowed for statistical purposes.
Ground No. 2 relates to the levy of interest u/s 234A of the Act. Before us, the counsel fairly stated that while giving appeal effect to the order of CIT(A), the AO has not charged any interest u/s 234A of the Act. On such a concession, ground No. 2 becomes infructuous.
In the result, the appeal of the assessee is allowed in part for statistical purposes.
(revenue’s appeal for AY 2021-22) 15. The first grievance of the revenue relates to the issue of ESOP. An identical issue has been decided by us in (supra). For our detailed discussion therein, this ground is dismissed.
P a g e | 12 4950, 5075 & 5110/Mum/2024 A.Y. 2020-21 & 2021-22 Kotak Mahindra Bank Ltd. 16. Ground No. 2 relates deletion of the addition on interest in respect of NPA. The same issue has been decided by us in (supra) vide ground No. 3 of that appeal. For our detailed discussion therein, this ground is dismissed.
The third grievance relates to the deletion of interest in relation to the broken period of securities held to maturity as revenue expenditure. A similar issue has been decided by us in (surpa) vide ground No. 4 of that appeal. For detailed discussion therein, this ground is also dismissed.