ICICI BANK LIMITED ,MUMBAI vs. THE DY. COMMISSIONER OF INCOME TAX, 2(3)(1), MUMBAI

These cross appeals are directed against the order passed by Ld CIT(A), National Faceless Appeal Centre, New Delhi and they relate to the assessment year 2011-12.

ICICI Bank Limited 2

“6. Heard both the sides and perused the material on record. The assessee has recognized the amount of interest attributable on sticky advances as NPA for a period of 90 days or more as per the guidelines issued by the RBI in accordance with Sec. 43D of the Act. However, the A.O was of the view that as per Rule 6E, interest is not to be offered for taxation with respect to advances which become Non Performing Assets for a period of 180 days or more. With the assistance of ld. representative we have perused the decision of ITAT, Mumbai in the case of Union Bank of India VS. ACIT, 16 taxman.com 304 wherein on identical issue and similar facts held that bank had no option but follow the RBI guidelines to make a provision for unrealized interest on the NPA by debiting profit and loss account. In the case of DCIT Vs. Karur Vysya Bank & 2467 of ITAT Chennai dated 29.03.2017 held that it becomes necessary to read down such rules so that it is in consonance with the RBI regulation or prudential norms for recognizing income.

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In Royal Bank of Scotland Vs. DCIT vide ITAT Kolkata held as under:

"2.6 We have heard the rival submissions and perused the materials available on record including the detailed paper book filed by the assessee. The facts stated hereinabove remain undisputed and hence the same are not reiterated for the sake of brevity. It is not in dispute before the lower authorities that the loan accounts had become sticky and doubtful of recovery. The only contention of the revenue is that section 43D of the Act read with Rule 6BA of the Rules permits accounting of interest income on receipt basis only if the loan account had become overdue for more than six months, whereas in the instant case, it is more than three months but less than six months as on 31.3.2010. The loan account becoming overdue and becoming sticky was never disputed. The next issue is whether the prudential norms of RBI for income recognition would override the provisions of the IT Act. This issue has been addressed by the Hon'ble Supreme Court in the case of Southern Technologies Ltd supra in the context of allowability of deduction towards 'Provision for NPA. We find that the same decision clearly stated that the interest income on NPA accounts should not be recognized on accrual basis which is in line with RBI prudential norms for income recognition. This fine distinction has been duly considered in the decision of the Hon'ble Delhi High Court in the case of CIT vs Vasisth Chay Vyapar Ltd supra. When the account becoming NPA is not disputed by the revenue, the recognition of income is to be done only on receipt basis which is in consonance with the real income theory. In these circumstances and respectfully following the decisions of Hon'ble Delhi High Court in 330 ITR 440 and various other decisions refered to supra, we hold that the interest income on NPA accounts should not be assessed on mercantile basis and the same is to be taxed only on receipt basis. Accordingly, the grounds raised by the assessee are allowed."

We have also perused the provision of Sect. 43D of the Act which are reproduced as under:

"43D. Notwithstanding anything to the contrary contained in any other provision of this Act,-

(a) in the case of a public financial institution or a scheduled bank or "[a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank or] a State financial corporation or a State industrial investment corporation "[or a deposit taking non-banking financial company or a systemically important non-deposit taking non-banking financial company] the income by way of interest" in relation to such categories of bad or doubtful debts as may be prescribed" having regard to the guidelines issued by the Reserve Bank of India in relation to such debts,

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(b) in the case of a public company, the income by way of interest" in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the National Housing Bank in relation to such debts, shall be chargeable to tax in the previous year in which it is credited by the public financial institution or the scheduled bank or "[a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank or] the State financial corporation or the State industrial investment corporation or "[a deposit taking non-banking financial company or a systemically important non-deposit taking non-banking financial company or] the public company to its profit and loss account for that year or as the case may be, in which it is actually received by that institution or bank or corporation or company, whichever is earlier."

It is categorically provided in the provisions of section 43D that income by way of interest in relation to bad and doubtful debts to be prescribed in accordance with guidelines issued by the RBI. The section 43D was introduced by the Finance Act, 1991 as per the section the category of bad and doubtful debts to be prescribed in the Income Tax Rules having regard to the guidelines issued by the RBI in relation to such debts. In 1992 the Rules 6E was framed and as per RBI guidelines the norms for categorization of advances as NPA were those advances which remained over due for more than 6 months. The RBI has revised the guideline from time to time and made changes in the period of overdue of advances for categorization of NPA. During the year under consideration the RBI has reduced the period to 90 days for categorization of interest on sticky loan as NPA, however, similar changes was not made to Rule 6EA. After considering the provisions of Sec. 43D and judicial findings as supra we consider that norms for categorization of bad and doubtful debts had to be prescribed considering the guidelines issued by the RBI. Therefore, the ld. CIT(A) is not justified in substituting the limit for recognizing of interest on account of NPA to 180 days from 90 days in view of the clear provisions of Sec. 43D(a) that in the case of public financial institutions or schedule bank or a state financial corporation or a State Industrial Investment Corporation, the income by way of interest in relation to such categories of bad and doubtful debt as may be prescribed having regard to the guidelines issued by the RBI in relation to such debts. Therefore, both the ground of appeals of the assessee are allowed.”

Following the above said decision of the co-ordinate bench, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the addition of Rs.5.05 crores referred above.

ICICI Bank Limited 5 of its credit card business. The AO took the view that credit card is essentially a kind of “payment service” offered by the assessee and hence it would not fall under the definition of banking business. Hence the AO held that the assessee cannot claim the bad debts in respect of credit card business as it fails to comply with the conditions prescribed in sec. 36(2), viz., it is not taken into account while computing income of the assessee in any of the years and it also does not represent money lent in the ordinary course of business. The AO also noticed that the Ld PCIT has passed a revision order u/s 263 of the Act on the very same issue in AY 2013-14, wherein the Ld PCIT has expressed an identical view. Accordingly, the AO disallowed the claim of bad debts of Rs.47.63 crores in respect of credit card business.

6. The Ld CIT(A) noticed that an identical addition made in AY 2014-15 has been deleted by him with the following observations:- “25. Credit Card business is a legal business of appellant carried on with approval of RBI. It results in providing credit to customer. There would be bad debts arising out of the business. Credit cards are generally unsecured and on default, debt turns bad. The risk of providing credit is squarely on the lender, here the appellant bank, and if irrecoverable, is a bad debt. 26. The fact that credit card operation is carried through VISA/Master Card platform does not alter the case as it is merely a medium through which transaction is carried out. Once credit card is used, a debt accrues and it not squared off, it results in a business loss or bad debt. The loan arises as a result of use of the card by the customer. Credit card business involving providing credit and being one carried out with necessary RBI permission it was to be held as banking business. Income from credit card business like joining fee, renewal fee etc., as applicable, is duly disclosed as income and necessarily corresponding deduction as if credit card business is a banking business is to be granted.”

Following the above said decision, the Ld CIT(A) deleted the disallowance of bad debts relating to Credit Card business. The revenue is aggrieved.

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(b) Master Circular No.: BOD.No.FSD.BC.16/24.01011/2010-11 dated July 1, 2010 issued on credit card operations states as under with regard to charging of interest on outstanding credit card dues:-

“3. Interest rates and other charges:- Credit card dues are in the nature of non-priority sector personal loans and as such upto June 30, 2010, banks were free to determine the rate of interest on credit card dues …..

It can be noticed that the RBI itself states that the credit card dues are in the nature of unsecured loans or non-priority sector personal loans. When it is considered as a form of giving “loans”, it cannot be said that the credit card business does not form part of banking business. Hence it is a case of lending money in the ordinary course of business of money lending. Accordingly, it satisfies the condition prescribed u/s 36(2) of the Act and hence the same is allowable as deduction u/s 36(1)(vii) of the Act as “bad debts”, as it is written off in the books of account as bad. Accordingly, we do not find any infirmity in the decision taken by Ld CIT(A) on this issue.

ICICI Bank Limited 7 & 3215/Mum/2019 dated 22.08.2022), wherein this issue was decided in favour of the assessee holding as under:-

“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 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 Date of Principle amount Interest for the No. redemption period FY. 2009-10

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 ICICI Bank Limited 8 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.”

Since the decision rendered by Ld CIT(A) on this issue is in tune with the decision rendered by the co-ordinate bench, disallowing the above said order of the co-ordinate bench, we confirm the order passed by Ld CIT(A) on this issue.

Order pronounced in the open court on 14.12.2022.