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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
Before: SHRI AMARJIT SINGHSHRI SANDEEP SINGH KARHAIL
The present cross-appeal has been filed by the assessee and the Revenue challenging the impugned order dated 08.02.2019 passed u/s 250 of the Income-tax Act, 1961 (“the Act”) by the Ld. Commissioner of Income- Tax – 4, Mumbai [“Ld. CIT(A)”] for the assessment year 2016-17.
The brief facts of the case are that the assessee is a public sector bank engaged in the business of banking and other related financial activities. For the year under consideration, the assessee filed its return of income on 28.11.2016, declaring a total income of Rs.2214,42,70,940/-. The assessee filed the revised return of income on 07.03.2018 declaring a total income of Rs.95,30,18,240/-. The return of income filed by the assessee was selected for scrutiny and after considering the details/submissions filed by the assessee, the Assessing Officer (“AO”) vide order dated 27.03.2018 passed u/s 143(3) of the Act assessed the total income of the assessee at Rs.6266,18,55,642/- under the normal provisions of the Act and computed the book profit of the assessee at Rs.7479,30,27,395/- u/s 115JB of the Act. The Ld. CIT(A), vide impugned order dated granted partial relief to the assessee. Being aggrieved, the assessee and the Revenue are in appeal before us.
Assessee’s Appeal – A.Y.2016-17 3. In this appeal, the assessee has raised the following grounds: - “1. The Ld. CIT(A) failed to note that since appellant was holding all securities as stock in trade the expenditure incurred was only for buying and selling the securities and not for earning tax free income and that in the absence of any expenditure incurred in relation to earning tax free income no disallowance u/s 14A is warranted. 1.1 The CIT(A) ought to have followed the decision of hon'ble Supreme Court in the case of State Bank of Patiala (402 ITR 640) and allowed the claim of appellant that no disallowance is warranted u/s 14A.
1.2 Without prejudice to above, as appellant does not hold any investments but only stock in trade, the disallowance under Rule 8D can only be nil since the disallowance is to be computed based on average value of investments, the income from which shall not or does not form part of total income. 1.3 Without prejudice to above, since the interest free funds available with appellant far exceeds the securities on which tax free income was earned no disallowance under Rule 8D (ii) is warranted.
2. The CIT (A) ought to have allowed the appellants claim in respect of exclusion of income of foreign branches situated in countries where there is a Double tax Avoidance Agreement based on Article 7 of the respective agreements which provides that the business profits is to be taxed in the respective countries. The CIT (A) failed to note that notification 91 of 2008 relied upon by Hon'ble ITAT does not apply to business profits but only to other sources of income.
The CIT(A) failed to appreciate that in accounts where there was uncertainty of recovery of amounts, the interest not recognized as income cannot be taxed. The CIT(A) erred in relying on rule 6EA without appreciating that the chargeability to tax will arise only when there is certainty of recovery.
4. The CIT(A) erred in holding that the provisions of section 115JB are applicable to appellant relying on Explanation 3 without appreciating that the said Explanation will apply only to those entities established under Companies Act and will not apply to appellant which is established under Banking (Companies Transfer Of Undertakings) Act, 1970 as held by Hon'ble ITAT Kolkata in the case of UCO 5. The CIT(A), having held that the provisions of section 115JB are applicable should not have held that the additions made to book profits are academic and should have decided on various additions made in computing book profit which were agitated in appeal.”
4. The issue arising in ground no. 1 raised in assessee’s appeal pertains to disallowance u/s 14A of the Act.
The brief facts of the case pertaining to this issue, as emanating from the record, are: During the year under consideration, the assessee claimed an exemption of Rs.60,20,63,604/- in its return of income. Further, the assessee incurred an amount of Rs.31321.42 crores and interest on borrowed funds. Since the investment yielding the exempt income was quite sizable, and it was unreasonable to assume that the assessee could not have invested any part of the borrowed capital in tax-free investments, during the assessment proceedings, the assessee was asked to explain why the provisions of section 14A r.w.r. 8D of the Income-tax Rules, 1962 (“the Rules”) be not applied in its case. In response, the assessee submitted that it holds all its securities as stock in trade, and the tax-free bonds and dividends have been received from such securities which are held as stock in trade. It was further submitted that the assessee has not retained any of the above securities with the intention of earning tax-free income and, therefore, the income earned was only incidental to the sale of such securities. Thus, the assessee submitted that disallowing proportionate expenditure by invoking provisions of section 14A of the Act is not warranted in its case. Without prejudice to the above contentions, the assessee submitted that if at all any disallowance is to be made as per section 14A of the Act, the same cannot exceed the proportionate expenses incurred by the treasury branch since the entire investment from which the tax-free income is earned is held by said branch, which amounts to Rs.61,60,129/-. The AO, vide assessment order passed u/s 143(3) of the Act, disagreed that the submissions of the assessee and computed disallowance of Rs.9,49,68,870/- u/s 14A r.w.r. 8D of the Rules.
The Ld. CIT(A), vide impugned order, directed the AO to recompute the disallowance made u/s 14A r.w.r. 8D of the Rules after considering the decisions of the Hon’ble Supreme Court in Maxopp Investment Ltd. v.
Commissioner of Income Tax, [(2018) 91 taxmann.com 154 (SC). Being aggrieved, the assessee is in appeal before us.
Having considered the submissions of both sides and perused the material available on record, we find that a similar issue came up for consideration before the Co-ordinate Bench of the Tribunal in the assessee’s own case in ACIT v. Bank of Baroda, in and 3412/Mum/2023, for the assessment years 2010-11 and 2013-14. While dismissing the Revenue’s appeal vide order dated 10.07.2024, the Co-ordinate Bench deleted the disallowance made u/s 14A r.w.r. 8D of the Rules, by observing as follows: -
“3. In the appeal before the ld. CIT(A), the ld. CIT(A) has allowed the appeal of the assessee after following the decision of Mumbai ITAT in the case of the assessee itself vide for assessment year 2009 dated 08.03.2021. The relevant extract of the decision of CIT(A) is produced as under: “5. I have considered the findings of the AO, submissions of the appellant and the facts of the case as placed before me. It is pertinent to note that the honourable Mumbai ITAT in the appellants own case vide for AY 2009-10 dated 08/03/2021 had dismissed the grounds of Revenue on the same ground. The operative part of the order is reproduced as under: “2. The ground No 1 raised by the Revenue is challenging the action of the Id. CIT(A) in deleting the Interest disallowance made u/s 144 of the Act row. Rule 8D(2)(d) of the Rules on the ground that the assessee bank is having sufficient interest free funds to make investments. 3 We have heard rival submissions and perused the materials available on record. We find that assessee had earned exempt income of Rs.58,43,00,883 by way of interest on tax free bands, dividends on shares and interest which is exempt u/s 10(15)(iv)(c) & (f) of the Act. The assessée also holds certain securities as stock in trade. The assessee pleaded that its own funds available by way of share capital was Rs.365.52 Crores, reserves and surplus of Rs.12514.19 Crores and demand deposits of Rs.14451.22 Crores on which no interest was paid The assessee pleaded that these interest free funds were sufficient enough to explain the investments made by the assessee which had yielded exempt income. Accordingly, the assessée placed reliance on the decisions of the Hon'ble Jurisdictional High Court in the case of HDFC Bank Limited 366 1TR 505 and 383 ITR 629 to drive home the point that interest free funds available with the assessee were sufficient enough to cover the investments that had yielded exempt income.
3.1. We find that the Id. AO disregarded the aforesaid contentions of the assessee and proceeded to disallow Rs.85,90,80,262/- u/s 144A of the Act row Rule 8D(2) of the Rules. We find that assessee had voluntarily disallowed the sum of Rs.7,94,39,436/ under Rule 8D(2) (ii) of the Rules considering the investments which had yielded exempt income. We find that the Id CIT(A) on appreciating the fact that assessee has flooded with sufficient own and interest free funds in its kitty which would sufficiently explain the investments made by it which had actually yielded exempt income and hence, it could be safely inferred that no borrowed funds could have been utilised for the same. Accordingly, by placing reliance on the decision of Jurisdictional High Court in assessee's own case and various Tribunal decisions of Hon'ble Jurisdictional High Court which has been followed by the Id. CIT(A) while granting relief to the assessee, we find no infirmity in the said order of the Id. CIT(A). Accordingly, the ground No. 1 raised by the Revenue is dismissed.
4. The ground No.2 raised by the Revenue is challenging the action of the id CIT(A) wherein he had directed the Id. AO to exclude the investments that were held as 'stock in trade' while computing disallowance u/s 14A of the Act r.w Rule 8D(2) of the Rules We find that the Id. CIT(A) had directed the id AO to ignore the investment in shares and securities that were held as 'stock in trade' for the purpose of computing disallowance u/s 14A of the Act r w Rule 8D(2) of the Rules, by placing reliance on the decision of this Tribunal in case of DCIT vs. India Advantage Securities Ltd., in dated 14/09/2012, the decision of Hon'ble Kerala High Court in the case of CIT vs. Smt. Leena Ramachandran reported in 339 1TR 296 and also on the decision of the Hon'ble Jurisdictional High Court in the case of CIT vs India Advantage Securities Ltd, in of 2013 dated 17/03/2015 We find that this issue was the subject matter of adjudication by this Tribunal in the case of Central Bank of India vs. DCIT in ITA No.3739/Mum/2018 & 3763/Mum/2018 for AY 2012-13 dated 29/01/2020, which is authored by the undersigned, wherein it was held that the Hon'ble Apex Court in the case of Maxopp Investment Ltd., reported in 402 ITR 640 had categorically upheld the findings recorded by the Hon'ble Punjab and Haryana High Court in the case of State Bank of Patiala reported in 78 Taxmann.com 3 (P & H) with regard to non-applicability of provisions of Section 14A of the Act in respect of investments held as stock in trade in respect of banks. It was also held by this Tribunal that the Hon'ble Punjab and Haryana High Court in above mentioned case had further placed reliance on the CBDT Circular No 18/2015 dated 02/11/2015. Hence, by respectfully following the said decision, we hold that there was absolutely no error in the action of the Id. CIT(A) in holding that provisions of Section 14A of the Act could not be made applicable in respect of investments in shares held as stock in trade in the case of assessee bank Accordingly, the ground No.2 raised by the Revenue is dismissed. At this juncture, I could not resist from observing that the judgment delivered by the Tribunal was very much binding on the Assessing Officer. The Assessing Officer was bound to follow the judgments in its true letter and spirit. It was necessary for the judicial unity and discipline that all the authorities below the Tribunal must accept as binding the judgment of the Tribunal. The Assessing Officer being inferior officer vis-a-vis the Tribunal, was bound by the judgment of the Tribunal and the Assessing Officer should not have tried to distinguish the same 14A issue on untenable grounds. The observation of the AO in the assessment order at para 3 4 that the submissions of the assessee have been considered but not found tenable because of the facts already discussed in the original assessment order indicates that the AO has approached the issue in a already pre-determined mind set and not willing to follow the jurisdictional ITAT direction. In this behalf, it will not be out of place to mention that in the hierarchical system of Courts which exists in our country. It is necessary for each lower tier' including the High Court, to accept loyally the decisions of the higher tiers. 'It is inevitable in hierarchical system of Courts that there are decisions of the supreme Appellate Tribunals which do not attract the unanimous approval of all members of the judiciary. But the judicial system only works if someone is allowed to have the last word, and that last word once spoken is loyally accepted The better wisdom of the Court below must yield to the higher wisdom of the Court above as held by the Supreme Court in the matter of CCE v. Dunlop India Ltd AIR 1985 SC 330.
17. In the aforesaid backdrop, for the reasons stated hereinabove, and humbly following the jurisdictional ITAT decision in the appellants own case, the disallowance u/s 14A in the impugned "giving effect order of the Assessing Officer dated 30.12 2019 is not held as not tenable and hence the appellants ground is hereby allowed.”
Heard both the sides and perused the material on record. We find that issue raised before the Tribunal in this year are similar to preceding year and it would not be appropriate for us to deviate from the view taken in earlier years without pointing out any material change in the fact and circumstances in the subsequent years. Therefore, there is nothing before us on hand to differ from the issue raised in the case cited supra as elaborated in the finding of ld. CIT(A) so as to take a different view on this issue. Therefore, since the issue on hand being squarely covered from the following principal of consistency we find merit in the submission of the assessee and allow the ground of appeal of the assessee.”
The Ld. Departmental Representative (“Ld. DR”) could not show any reason to deviate from the aforesaid decision rendered in assessee’s own case and no change in facts and law was alleged in the relevant assessment year. Therefore, respectfully following the judicial precedent in assessee’s own case (cited supra), we uphold the plea of the assessee and the addition made by the AO u/s 14A r.w.r. 8D of the Rules is hereby deleted. Thus, ground no. 1, raised in assessee’s appeal is allowed.
The issue arising in ground No. 2, raised in assessee’s appeal, pertains to the exclusion of income of foreign branches situated in countries with whom India has entered into the Double Taxation Avoidance Agreement.
The brief facts of the case pertaining to this issue, as emanating from the record, are: During the year under consideration, the assessee has excluded the income from the branches located in Fiji, Seychelles, Nassau (OBU), Hongkong, Bahrain, Thailand, Australia, Mumbai (OBU), Mauritius, U.A.E, Oman, Belgium, South Africa, U.K., U.S.A., Mauritius, (OBU), China, Singapore (OBU), and Malaysia on the basis of Double Taxation Avoidance Agreement entered into by India with these countries. Vide assessment order passed u/s 143(3) of the Act, the AO by referring to the provisions of section 90(3) of the Act and notification dated 28.08.2008 issued by the Central Government held that the claim of the assessee to exclude the business profit/income of foreign/overseas branches from its total income for the purpose of the Act, is not allowable and accordingly, the same was added to its total income.
11. The Ld. CIT(A), vide impugned order, following the decision of the Co- ordinate Bench in assessee’s own case dismissed the ground raised by the assessee and upheld the addition made by the AO. Being aggrieved, the assessee is in appeal before us.
12. During the year, the Ld. Authorized Representative (“Ld. AR”) fairly agreed that this issue has been decided against the assessee in its own case by the Co-ordinate Bench of the Tribunal in preceding years. We find that the Co-ordinate Bench of the Tribunal in assessee’s own case in M/s Bank of Baroda v. DCIT, in & 1121/Mum/2018, vide order dated 22.05.2019 for the assessment years 2014-15 and 2015-16, following the decision rendered in preceding years upheld the addition made on the similar issue, by observing as follows: - “10. Another common issue raised in assessee's appeals is that learned CIT(A) ought to have allowed assessee's claim in respect of exclusion of income of foreign branches situated in countries where there is double tax avoidance agreement based on Article 7 of the respective agreements which provides that business profits is to be taxed in respective countries. It has further been submitted that learned CIT(A) failed to note that Notification No. 91 of 2008 relied upon by ITAT does not apply to business profit but only to other sources of income.
On this issue learned Counsel of the assessee fairly conceded that the issue has been decided against the assessee by the ITAT in assessee's own case for A.Y. 2011-12 in vide para 19 of the said order.
Accordingly following the precedent as above, we uphold the order of learned CIT(A) on this issue.”
Thus, respectfully following the decision of the Co-ordinate Bench of the Tribunal rendered in assessee’s own case (cited supra), the addition made on account of income earned by the foreign branches is upheld. Thus, the ground no.2 raised in assessee’s appeal is dismissed.
The issue arising ground No. 3, raised in assessee’s appeal, pertains to taxation of unrealized income from non-performing assets (“NPA”).
The brief facts of the case pertaining to this issue, as emanating from the record, are: During the assessment proceedings, it was observed that the assessee has not provided interest earned on NPA when the amount of interest is due for 90 days as per the RBI guidelines. The AO, vide assessment order passed u/s 143(3) of the Act, noted that Rule 6EA of the Rules provides for six months time for doubtful debts whose income will be taxed on a receipt basis. Thus, it was concluded that the time limit for bad and doubtful debts for interest to be taxed on a receipt basis if six months have elapsed or overdrawn for more than six months. Since the assessee has not provided interest on sticky loans of Rs.255.37 crores, accordingly, the said amount was added to the total income of the assessee.
16. The Ld. CIT(A), vide impugned order, dismissed the ground raised by the assessee on this issue and held that for the purpose of application of the provisions of section 43D of the Act, the time limit as provided in Rule 6EA, of the Rules should be applicable instead of the RBI guidelines. Being aggrieved, the assessee is in appeal before us.
We have considered the submissions of both sides and perused the material available on record. The issue which arises for our consideration is whether for the purpose of recognition of income as per section 43D of the Act, the time limit as prescribed in Rule 6EA of the Rules shall be applicable or the time as prescribed under the RBI guidelines in relation to bad and doubtful debts shall govern the determination of the interest income under the aforesaid section. We find that a similar issue came up for consideration before the Co-ordinate Bench of the Tribunal in ICICI Bank Ltd. v. ACIT, in for the assessment year 2010-11. Vide order dated 22.08.2022, the Co-ordinate Bench of the Tribunal while deciding the issue in favour of the taxpayer held that the norms for categorization of bad and doubtful debts had to be prescribed considering the RBI guidelines. The relevant findings of the Co-ordinate Bench, in the aforesaid decision, are reproduced as follows: -
“6. Heard both the sides and perused the material on record. The asesssee 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 id. 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. 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 us 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 pro vision of this Act,- (a) in the case of a public financial institution or a scheduled bank or "[a cooperative 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 "jor 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, (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 "la 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 Id. 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.”
We find that similar findings were rendered by the Co-ordinate Bench in State Bank of India v. DCIT, in vide its order dated 06.06.2023, for the assessment year 2009-10.
Since the issue under consideration before us has already been adjudicated by the Co-ordinate Bench of the Tribunal in aforesaid decisions, thus respectfully following the same we uphold the plea of the assessee that the income u/s 43D of the Act in respect of NPA is to be computed as per the RBI guidelines. As a result, ground no.3 raised in assessee’s appeal is allowed.
20. The issue arising in ground No. 4 raising assessee’s appeal pertains to applicability for the provisions of section 115JB of the Act to the assessee bank.
During the hearing, the Ld. Representatives appearing for the parties fairly agreed that this issue has recently been decided in favour of the assessee by the Special Bench of the Tribunal. We find that a similar issue came up for consideration before the Special Bench of the Tribunal in Union Bank of India v. DCIT, in for the assessment year 2015-16. Vide its order dated 06.09.2024, the Special Bench of the Tribunal deciding the issue in favour of the assessee banks, including the assessee in appeal before us, held that clause (b) to sub-section (2) of section 115JB of the Act inserted by Finance Act, 2012, w.e.f. 01.04.2013, i.e., from the assessment year 2013-14 onwards, are not applicable to the banks constituted as corresponding new banks in terms of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and therefore, provisions of section 115JB of the Act cannot be applied and consequently, tax on book profit (MAT) are not applicable to such banks. Therefore, respectfully following the decision of the Special Bench of the Tribunal (cited supra), ground no.4 raised in assessee’s appeal is allowed.
In view of our finding rendered in respect of ground no.4, the issue arising in ground no.5 raised in assessee’s appeal, is rendered infructuous and therefore, is left open.
Vide application dated 25.11.2020, the assessee sought admission of the following additional grounds of appeal: - “1. Deduction in respect of Education Cess and Higher and Secondary Education Cess: The amount of Education Cess and higher and secondary education cess not being in the nature of tax is not covered by the provisions of section 40(a)(ii) and accordingly ought to be allowed as deduction in computing income from business or profession as held by Hon'ble Jurisdictional Bombay High Court in case of Sesa Goa Ltd (423 ITR 426) and other decisions.
2. Taxability of Income of foreign branches Without prejudice to the contention that income of foreign branches is to be excluded in computing total income as per Section 90 of Income-tax Act, even if the income is to be taxed it will only be the income computed in accordance with Income-tax laws of respective countries and not foreign income computed as per provisions of Indian Income-tax Act.”
Since the issues raised by way of additional grounds are legal issues, which can be decided on the basis of material available on record, therefore, the same are admitted in view of the ratio laid down by the Hon’ble Supreme Court in NTPC v. CIT, (1998) 229 ITR 383 (SC).
25. The additional ground no.1 raised by the assessee, pertaining to the deduction of education cess and higher and secondary education cess was not pressed, during the hearing. Therefore, the same is dismissed as not pressed.
26. The issue arising in additional ground no.2 raised in assessee’s appeal, pertains to the exclusion of income of foreign branches.
During the hearing, the Ld. AR fairly agreed that this issue has been decided against the assessee by the Co-ordinate Bench of the Tribunal in assessee’s own case for the assessment years 2014-15 and 2015-16. We find that while deciding the similar issue in assessee’s own case in DCIT v. M/s Bank of Baroda, in & 1222/Mum/2018, the Co-ordinate Bench of the Tribunal vide its order dated 22.05.2019, following the decision rendered in preceding years, observed as follows: -
“18. Another common issue raised relates to foreign income to be taxed in India. 19. On this issue learned Counsel of the assessee fairly conceded that this issue has been decided against the assessee by the ITAT in assessee's own case for A.Y. 2011-12 in vide para 3 to 5 of the said order.
Upon careful consideration we find that ITAT in assessee's own case has decided the issue in favour of the Revenue as under :- 4. We have considered the submission of ld. representative of the parties and perused the order of authorities below. The Assessing Officer while relying upon the Notification No. S 2123(e) dated 28.08.2008 treated the income of foreign branches as taxable in India. The ld. CIT(A) on the basis of decision of Tribunal in assessee's own case for Assessment Year 2005-06 to 2007-08 in 2928, 5735/Mum/2011 dated 25.07.2014 held that as per the Notification, the income which is to be included in the total income is such income of foreign branch that was taxed in the foreign country, the relief of tax will be allowed based on the taxed paid in the foreign country and thereby granted part relief to the assessee. We have noted that similar ground of appal was raised by Revenue in appeal for A.Y. 2009-10 and the co- ordinate bench of the Tribunal in ITA No. 2480/Mum/2015 dated 17.02.2017 passed the following order: 24. We have carefully considered the submission and perused the record we find that the ITAT in the aforesaid decision has duly considered the said notification referred by the Ld. Counsel of the assessee. We may carefully refer to the contents of the said notification as under; "In exercise of the powers conferred by sub-section (3) of section 90 of the Income-Tax Act, 1961 (43 of 1961), the Central Government hereby notifies that where an agreement entered into by the Central Government with the Government of any country outside India for granting relief to tax, or as the case may be, avoidance of double taxation, provides that any income of a resident of India "may be taxed" in the other country, such income shall be included in his total income chargeable to tax in India in accordance with the provisions of the Income-Tax Act, 1961 (43 of 1961), and relief shall be granted in accordance with the method for elimination or avoidance of double taxation provided in such agreement."
We find that after taking into account the aforesaid notification the Tribunal in the aforesaid order has concluded as under. "In view of the aforesaid findings/conclusion, we hold that the income of the branches of the assessee shall also taxable in India i.e., it would be included in the return of income filed by the assessee in India and whatever taxed have been paid by the Branches in the other contracting States i.e., the source country, credit of such taxes shall be given."
A reading of the above makes it clear the Tribunal had held that the income of the foreign branches of the assessee shall also be taxable in India, that is, it would be included in the return income filed by the assessee in India and whatever taxes have been paid by the branches in the other countries credit of such taxes shall be given. We find that the Tribunal as above has not held that it is only that income of the foreign branches which was taxed in that foreign country which is to be included in the return of income filed by the assessee. Hence, we are in agreement with the revenue plea that Ld. CIT-A has not properly followed the Tribunal decision as referred by him. A reading of the notification canvassed by the Ld. Counsel by the assessee also does not help the case of assessee. The notification also does not support the direction of Ld. CIT-A. The doctrine of stare decisis mandates that we follow the coordinate bench decision as above and hold that the income of the branches of assessee situated abroad shall also be taxable in India and whatever tax have been paid by the branches in the foreign country, credit of such taxed shall be given. Accordingly, we allow the ground raised
by the revenue.
5. Considering the decision of co-ordinate bench in assessee's own case, the ground of appeal raised by Revenue is allowed mutatis mutandis as per order dated 17.02.2017 for A.Y. 2009-10. In the result, Ground No.2 of appeal of the Revenue is allowed. Since the notification issued by the Government does not differentiate between dividend income and business income, we are unable to agree with the interpretation given by Ld A.R on the notification issued by the Government. Accordingly, we set aside the order of learned CIT(A).”
28. Thus, respectfully following the aforesaid decision rendered in assessee’s own case, additional ground no.2, raised by the assessee, is dismissed.
In the result, the appeal by the assessee is partly allowed.
Revenue’s Appeal – A.Y. 2016-17 30. In this appeal, the Revenue has raised the following grounds: - “
1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in relying on the ratio of the Apex Court in the case of American Express International banking Corporation Vs CIF reported in 258 ITR 601 (Bom) and Citi Bank (Civil appeal No. 1549 of 2006) where the income from securities were treated as business income which was not the same in the present case? 2. "On the facts & circumstances of the case and in law, the Ld. CIT(A) is correct deleting the addition on account of interest accrued but not due to the assessee following the decision of Hon'ble Bombay High Court in the case of Credit Suisse First Boston (Cyprus) Ltd.(351 ITR 323) without appreciating the Assessing Officer's contention that deducting interest accrued but not due would tantamount to cash basis of accounting which is not permitted as per the provisions of section 145 of the IT Act, 1961. 3. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in upholding that the Perpetual Bonds cannot be compared to the equity/ share capital of the banks without considering as per settled legal position in 130 ITR
18. ( P & H) of Hon'ble Punjab & Haryana High Court in the case of Pepsu Road Transport Corp vs CIT that an element of refund or repayment is a must in the concept of borrowing."
31. The issue arising in ground no.1, raised in Revenue’s appeal, pertains to the disallowance of the broken period of interest.
32. The brief facts of the case pertaining to this issue, as emanating from the record, are: During the year under consideration, the assessee paid Rs.1639.76 crores as broken period interest on the purchase of securities, and treated the same as revenue expenditure. During the assessment proceedings, the assessee was asked to furnish an explanation why the broken period interest should be allowed as revenue expenditure. In response, the assessee submitted that its client treats its investment in Government securities, shares and debentures as stock in trade, and therefore, the broken period interest on the purchase and sales of securities is an item of revenue expenditure. Apart from placing reliance upon the decisions of various Hon’ble High Courts, in support of aforesaid submissions, the assessee also placed reliance upon the decisions of the Co- ordinate Bench in its own case for the earlier years. The AO, vide assessment order passed u/s 143(3) of the Act, disagreed with the submissions of the assessee and held that the broken period interest paid by the assessee is nothing but part of the price paid for the securities for acquiring the securities and therefore, whatever may be the reason that prompted the assessee to purchase the securities, the price paid for them is in the nature of capital outlay only. Accordingly, the AO held that the broken period interest claimed by the assessee is part of the cost price of the securities acquired by it, and therefore, the deduction of Rs.1639.76 crores claimed by the assessee was disallowed.
The Ld. CIT(A), vide impugned order, inter alia, following the decision of the Co-ordinate Bench of the Tribunal in assessee’s own case allowed the ground raised by the assessee on this issue and held that the broken period interest paid by the assessee is revenue expenditure. Being aggrieved the Revenue is in appeal before us.
Having considered the submissions of both sides and perused the material available on record, we find that while deciding a similar issue in favour of the assessee the Co-ordinate Bench of the Tribunal in assessee’s own case for the assessment years 2014-15 and 2015-16, cited supra, observed as follows: - “13. One common issue raised relates to broken period interest.
14. On this issue consequent upon Assessing Officer's disallowance, learned CIT(A) has decided the issue in favour of the assessee by referring to earlier years appellate order in assessee's own case where Hon'ble Supreme Court decision in the case of Citibank and Hon'ble Bombay High Court decision in the case of American Express were followed.
15. Now Revenue is in appeal before us.
We have heard both the counsel and perused the records. We find that identical issue has been decided in favour of the assessee by Hon'ble Supreme Court in the case of Citibank (Civil Appeal No. 1549 of 2006) and Hon'ble Bombay High Court in the case of HDFC Bank Ltd. (366 ITR 505) following these decisions ITAT in assessee's own case for A.Y. 2011-12 (in allowed the claim of the assessee and dismissed the Departmental appeal vide para 6 to 8 of the said order.
17. Accordingly, respectfully following the precedent as above, we uphold the order of learned CIT(A) and dismiss the ground raised by the Revenue."
We further find that recently the Hon’ble Supreme Court in Bank of Rajasthan Ltd. v. CIT, (2024) 469 ITR 280 (SC) held that where assessee bank purchased Government securities and paid broken period of interest, since said securities were treated as stock in trade, the broken period interest could not be considered as capital expenditure and would have to be treated as revenue expenditure.
Therefore, in view of the aforesaid findings and respectfully following the decision of the Hon’ble Supreme Court, we do not find any infirmity in the findings of the Ld. CIT(A) on this issue and the same are upheld. As a result, ground no.1 raised in Revenue’s appeal is dismissed.
The issue arising ground no.2, raised in Revenue’s appeal, pertains to the deletion of addition on account of interest accrued but not due.
The brief facts of the case pertaining to this issue, as emanating from the record, are: During the year under consideration, the assessee claimed a deduction of Rs.2182,83,81,297/- being interest accrued but not due on investments. In its revised return of income, the assessee deducted this amount from its total income stating that the interest accrued but not due should be taxed on a cash basis. The AO, vide assessment order passed u/s 143(3) of the Act, disagreed with the contention of the assessee and held that the method of accounting followed by the assessee is mercantile and any income accrued on 31st March of the year has to be offered for tax. The AO further held that the assessee cannot follow a hybrid system i.e. certain income on a cash basis and certain income earned on accrued basis. It was further held that since the assessee has been regularly following the mercantile system of accounting, the right to receive the interest is taxable on an accrual basis as per provisions of section 145 of the Act. Accordingly, the amount of Rs.2182,82,20,297/- claimed as a deduction by the assessee was added to its total income.
The Ld. CIT(A), vide impugned order, following the decision of the Hon’ble Jurisdictional High Court in DIT v. M/s. Credit Suisse First Boston (Cyprus) Ltd., 351 ITR 323, allowed the ground raised by the assessee and deleted the addition made by the AO on account of interest accrued but not due. Being aggrieved, the Revenue is in appeal before us.
Having considered the submission of both sides and perused the material available on record, we find that a similar issue also came up for consideration before the Hon’ble Jurisdictional High Court in CIT v. State Bank of India in of 2014. Following the earlier decision in M/s. Credit Suisse First Boston (Cyprus) Ltd. (supra), the Hon’ble Jurisdictional High Court vide its order dated 01.08.2016 decided a similar issue in favour of the taxpayer. Therefore, since the Ld. CT(A) has followed the decision of the Hon’ble Jurisdictional High Court while deciding the issue under consideration before us in favour of the assessee, we find no infirmity in the impugned order on this issue. Accordingly, the same is upheld. As a result, ground no.2 raised in Revenue’s appeal is dismissed.
The issue arising in ground no. 3, raised in Revenue’s appeal, pertains to the deletion of disallowance on account of interest on perpetual bonds.
The brief facts of the case pertaining to this issue, as emanating from the record are: During the assessment proceedings, the assessee was asked to show cause why the perpetual bonds should not be treated as equity in nature and consequently, the interest paid on such bonds should be allowed u/s 36(1)(iii) of the Act. In response, the assessee submitted that it has issued perpetual debt over the years and the outstanding balance of the perpetual debt as on 31.03.2016 is at Rs.2911 crores. The assessee further submitted that these instruments are classified as borrowing in assessee’s balance sheet and the interest paid on the same is provided in the books as interest expenses. The assessee further submitted that the above accounting treatment is in accordance with RBI guidelines and Accounting Standard-16 issued by the ICAI on Borrowed Cost. Therefore, it was submitted that the interest on perpetual bonds is an allowable expenditure. The AO, vide assessment order passed u/s 143(3) of the Act, disagreed with the submissions of the assessee and held that perpetual bonds are quasi- equity and they have the following equity-like features: - (i) perpetual in nature (ii) High loss absorption capacity. Provisions for write-down of principal or conversion to equity on trigger (iii) Discretionary pay-out with the existence of full coupon discretion.
Further, the AO followed the decision of the Hon’ble Punjab & Haryana High Court in Pepsu Road Transport Corporation v. CIT, 130 ITR 18 (P&H), and held that in case of perpetual bonds, where the lender does not have authority to claim a 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. Accordingly, the amount of Rs.245 crores was disallowed and added to the total income of the assessee.
The Ld. CIT(A), vide impugned order, allowed the ground raised by the assessee on this issue, by observing as follows: - “13.3 During the course of appellate proceedings, a written submission was filed which finds place in Para 5 of this order. The appellant has submitted that Ld. A.O was not correct in giving the observation that the amount was not reflected as borrowings in its books of accounts. According to the Appellant, the same was shown as borrowing in Schedule IV of the Annual Report. In support of its claim, a copy of the Annual Report was filed by the Appellant during the course of Appellate proceedings. The Appellant further clarified that the interest paid on such bonds was debited to P & L A/c under the head "Interest Expenditure" . It was further clarified that A.O was not correct in stating that the lender had no authority to claim the refunds. According to the Appellant, these bonds were listed in Stock Exchange and the lender had choice to exit at any point of time by selling them through Stock market. The Appellant emphasized that in case of share capital, the assessee company had an option to declare or not to declare dividends depending upon the financial requirement of the company, whereas, a fixed interest liability has to be paid by the Appellant on such bonds annually without any failure. The Appellant further contended that on share capital, dividend is paid out of the reserves which is purely discretionary whether to pay dividend in a particular year or not. On the other hand, according to the Appellant, on these bonds fixed interest has to be paid whether there is any profit or not. It was also argued that on share capital capital, dividend is paid out of reserve and surplus which is exempted from tax for the recipient, because tax has been already paid by the company on such reserves and surplus, whereas interest on such bonds is taxable in the hands of the recipient. 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, hence appeal of the assessee on this ground is, allowed.” Being aggrieved the Revenue is in appeal before us.
Having considered the submission of both sides and perused the material available on record, we find that a similar issue came up for consideration before the Co-ordinate Bench of the Tribunal in the case of State Bank of India v. DCIT, in for the assessment year 2015-16. While deciding this issue in favour of the taxpayer, vide its order dated 29.09.2022, the Co-ordinate Bench of the Tribunal, after considering the decision of the Hon’ble Punjab & Haryana High Court in the case of Pepsu Road Transport Corporation (supra), observed as follows: -
“16 We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. As far as argument of rule of consistency is concerned, the Ld. CIT(A) has rejected the contention of the assessee following the decision of the Hon'ble Delhi High Court in the case of Krishak Bharati cooperative Ltd (supra). The said finding being based on the precedent, we concur with the finding of the Ld. CIT(A). 16.1 The assessee has distinguished the decision of Hon'ble Punjab Haryana High Court in the case of Pepsu Road transport Corporation (supra) on the ground that in said case capital was provided by the Union of India under a statutory obligation which had no provision of repayment. Further in the event of the liquidation of Pepsu Road transport Corporation after meeting the liabilities if any, the assets were to be divided among Central Government and the State Government and such other parties, if any as may have subscribed to the capital in proportion to the contribution made by each of them to the total capital. However in the instant case there was no statutory obligation on the investors to subscribe to IPDs and further the claim of the investor of the IPD bonds is superior to that of equity investor and subordinate to other creditors. Further, it was submitted that interest paid on IPD cannot be equated with the dividend as dividend is not mandatory to be paid each year and it has to be paid if there is profit during the any financial year and on approval of the proposal of the Board of Directors by the shareholders in the annual general meeting. Whereas in the case of the IPD, it is mandatory to pay interest irrespective of the availability of the profit and no approval of the Board of Directors or shareholders was required. In view of the above discussion, we concur with the contention of the assessee that ratio in the case of Pepsu Road transport Corporation Ltd (supra) cannot be applied or the instant case. 16.2 However as far as finding of the Coordinate bench of Tribunal in the case of Tata Power Co Ltd (supra) is concerned, the Tribunal has in principle held that perpetual bond are not in the nature of equity and therefore quashed the revision proceedings passed by the Ld. PCIT, The relevant finding of the Tribunal (supra) is reproduced as under: Heard both the sides and perused the material on record. Assessment in the case of the assessee was completed by the Assessing Officer u/s 143(3) r.w.s 144C(13) of the I.T. Act, 1961 on 30.06.2017. The ld. Pr.CIT has held vide order u/s 263(3) of the Act, dated 28.03.2018 that assessment order passed u/s 143(3) r.w.s 144C(13) as erroneous insofar as it was prejudicial to the interest of revenue holding that the Assessing Officer was not correct in allowing the interest on perpetual debt instruments without examining and verifying the allowability of such expenditure. With the assistance of ld. representatives we have gone through the copies of documents and detailed submission made before the A.O during the course of assessment proceedings as per page no. 1 to 160 of the paper book filed by the assessee. It is noticed that assessing officer has specifically asked the assessee vide notice dated 24.11.2016 to provide the detail of income tax reversal on distribution of unsecured perpetual securities. In this regard assessee has given detailed submission vide letter dated 16.12.2016 stating that it has issued 11.4% unsecured perpetual securities (bonds) for the purpose of business use. Interest of such securities is payable @ 11.40% per annum. The assessee has also specifically explained in line with accounting standard, the aforesaid interest is charged to reserve and surplus. The gross amount of interest of aforesaid securities was of Rs.142.03 crores for F.Y. 2010-11. But the same was charged to Rs.113.61 crores after netting off taxes [142.03 28.42]. The amount of tax impact of Rs.28.42 crores has been charged to reserve and surplus during the year. Thereafter again on 23.12.2016 the assessee has explained to the assessing officer that during the year the company has incurred Rs. 18.63 crores on issue of 10.75% debenture of Rs. 1500 crores. This amount being expenditure of capital nature has not been claimed by the assessee in its return of income. The assessee has also supplied to the Assessing Officer detailed offer document issued for unsecured perpetual debentures of Rs. 1500 crores during the course of assessment proceedings. In the offer document the terms and conditions of issuing perpetual debentures, basis of allotment, creation of debenture redemption reserves along with object of the issue were clearly mentioned. As per the copy of object of the issue placed at page 67 of the paper book, it is mentioned that utilization of funds to be raised through this private placement will be for general business purpose and at page no. 62 issue size was mentioned of 15000 debentures of face value of Rs. 10 lac each aggregating to Rs.1500 crores. It is demonstrated from the detailed submission and copies of documents placed in the paper book that assessing officer has made detailed inquiry/verification during the course of assessment proceedings that assessee has borrowed funds for business use by issue of debentures. The borrowed fund were payable on call option exercising by company after the 10th year or any at the end of every year thereafter. It was also explained that the lenders were not entitled to share any surplus or bear any loss like shareholders. Debentures trustee were appointed to safeguard interest of the lenders. The assessee company had also stated on the basis of aforesaid discussion that it had borrowed fund for the purpose of its business and the interest on debenture was deductible in computing the income from profit and gains from business and profession. In the light of the above facts and after considering the detailed material furnished by the assessee during the course of assessment proceedings before the assessing officer we observe that the assessee has categorically explained to the assessing officer with relevant supporting material that it has issued unsecured perpetual non-convertible debentures and such lenders were not entitled to share any surplus or bear any loss like shareholders. These debentures were entitled for fixed interest @11.40% along with redemption after the 10th year. These facts and submissions were also brought to the notice of the ld. Pr.CIT during the course of proceedings u/s 263 of the Act, however, the ld. Pr.CIT without controverting these undisputed fact held that assessment order was erroneous so far it was prejudicial to the interest of Revenue. Therefore, we consider that the order passed by the ld. Pr.CIT u/s 263 is unjustified and we quash the same. Therefore, we allow the ground of appeal of the assessee. 16.3 Respectfully, following the finding of the Tribunal (supra), we set aside the finding of the Ld. CIT(A) on the issue in dispute and direct the Ld. A.O. to delete the disallowance of interest amounting to Rs. 18,00,00,000/-, which was made u/s 36(1)(iii) of the Act. The ground No. 4 of the appeal of the assessee is accordingly allowed.”
We further find that in ACIT v. ICICI Bank Ltd., in for the assessment year 2010-11, vide order dated 22.08.2022, the Co-ordinate Bench of the Tribunal decided a similar issue in favour of the taxpayer, by observing as follows: -
“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 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 34,00,00,000 1,16,68,81,013 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.”
During the hearing, the Ld. AR submitted that all the perpetual bonds were redeemed and furnished the following details: -
Thus, respectfully following the decisions of the Co-ordinate Bench (cited supra), we find no infirmity in the findings of the Ld. CIT(A) in allowing the interest on perpetual bonds and, therefore, the same is upheld. As a result, ground no.3 raised in Revenue’s appeal is dismissed.
In the result, the appeal by the Revenue is dismissed.
To sum up, the appeal by the assessee is partly allowed, while the appeal by the Revenue is dismissed. Order pronounced in the open Court on 06/02/2025.