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Facts
The appeals concern the deduction of provisions for Non-Performing Assets (NPAs) claimed by a banking company under Section 36(1)(viia) and Section 36(1)(vii) of the Income Tax Act. The Assessing Officer (AO) disallowed the deductions, but the Commissioner of Income Tax (Appeals) [CIT(A)] allowed them, relying on judicial precedents. The revenue appealed against the CIT(A)'s order.
Held
The Tribunal held that provisions for NPAs made by banks are equivalent to provisions for bad and doubtful debts and are thus allowable deductions under Section 36(1)(viia). The Tribunal also confirmed that the CIT(A) correctly adjudicated the issue of bad debts under Section 36(1)(vii) and that penalties paid to the RBI for procedural violations are allowable as business expenditure under Section 37. The issue of disallowance under Section 14A was set aside and restored to the AO for fresh examination.
Key Issues
Whether provisions for NPAs are allowable as deductions for bad and doubtful debts; whether penalties paid to RBI are deductible business expenses; and whether Section 14A applies to investments made from own funds.
Sections Cited
36(1)(viia), 36(1)(vii), 14A, 36(1)(iii), 37, 115JB, 40(a)(ii)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, MUMBAI BENCH “F”, MUMBAI
Before: SHRI.B.R. BASKARAN & SHRI ANIKESH BANERJEE
These two appeals were filed by the revenue for the assessees, against the different orders of the National Faceless Appeal Centre, Delhi (NFAC) (for brevity, ‘Ld.CIT(A)’) passed under section 250 of the Income-tax Act, 1961 [for brevity, “Ld.CIT(A)”] for Assessment years 2020-21 date of order 23/02/2024 in the case of Union Bank of India(Andhra Bank) and dated 17/01/2024 in the case of Corporation Bank. Later both the Andhra Bank & Corporation Bank are merged with the assessee-bank. The impugned orders were emanated from the orders of the Learned DCIT /ACIT Circle 3(4), Mumbai (for brevity the “Ld. AO”) passed under section 143(3) of the Act, both dated 30/09/2022.
2. Since, the appeals carry identical facts and issues, for the sake of convenience, they were clubbed together, heard together and are being disposed of by this consolidated order.
is taken as lead case. The following are the grounds taken by the revenue: - (i) Whether on the facts and in the circumstances of the case the Ld. CIT(A) erred in allowing the deduction claimed u/s 36(1)(viia) of the Act amounting to Rs.1836,21,78,882/- without appreciating that this provision was made by the assessee for NPA as per RBI guidelines which cannot be equated with provision for bad and doubtful debts as required to be made as per the provisions of section 36(1)(viia)? (ii) Whether on the facts and in the circumstances of the case the Ld. CIT(A) ought to have appreciated that the disallowance of the above provision was made by the AO based on the specific findings that the provision for NPA made by the & 2149 /Mum/2024 Union Bank of India assessee include the NPA cases relating to corporates and those located in Metro, Urban and semi urban areas and therefore did not satisfy the working as per Rule 6ABA? (iii) Whether on the facts and in the circumstances of the case the Ld. CIT(A) ought to have appreciated that the AO made the disallowance of the above provision by highlighting the master circular of RBI that the 'provision for NPAs' made in the books are not eligible for tax deduction and tax benefits have to be claimed by evolving appropriate methodology for the same? (iv) Whether on the facts and in the circumstances of the case the Ld. CIT(A) erred directing the AO to restrict the disallowance to 2% of exempt income earned which is not in consonance with section 14A r.w. Rule 8D and CBDT's Circular No. 5/2014 dated 11.02.2014. (v) Whether the CIT(A) was right in directing the AO to delete the disallowance of bad debts amounting to Rs. 5712,89,34,620/- pertaining to non-Rural bad debts claimedu/s 36(1)(vii) of the Act ignoring the 1st proviso to section 36(1)(vii). (vi) Whether the CIT(A) was right in holding that the provisions of 36(1)(viia) of the Act do not apply to bad debts made by non rural branches particularly after insertion of explanation 2 after the renumbered explanation 1 to clause (vii) of subsection (1) of section 36 by the Finance Act 2013 with effect from 1 April 2014." vii) "Whether, on the facts and in the circumstances of the case and in law, the Ld.CIT(A) is justified in deleting the disallowance of payments of Rs. 25,00,000/- made on account of penalty imposed by RBI for not adhering guidelines of Banking Regulation Act.?" (viii) "Whether on the facts and in the circumstances of the case the Ld. CIT(A) erred in allowing the deduction claimed u/s 36(1)(iii) of the Act amounting to Rs.70,63,39,532/ without appreciating that the lender has no authority to claim refund of the amount and the assessee has the discretion to redeem the bond & 2149 /Mum/2024 Union Bank of India and the amounts claimed to have been repaid are based on the call option exercised by the assessee? (ix) Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A), was right in restoring the issue for examining it afresh, ignoring the facts section 251(1)(a) of the Act does not provide power to the Ld. CIT(A) for setting aside the matter? (x) Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A), was right in holding that the provisions of section 115JB of the I. T. Act are not applicable to the assessee, without appreciating the facts of the case?" (xi) "Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting a sum of Rs. 4,27,73,538/- towards disallowance u/s 14A in computing the book profit u/s 115 JB of the Act?" (xii) "Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing the claim of the Education Cess & Secondary & Higher Education Cess paid ignoring the fact that Explanation 3 to section 40(a)(ii) inserted by Finance Act, 2022 with effect from 1-4-2005 makes it clear that any surcharge or cess forms part of 'tax' and same cannot be allowed as deduction while computing profits and gains of business of assessee?
Brief facts of the case are that the assessee is a banking company. The original return of income was electronically filed on 12.02.2021 declaring total income as NIL under normal provisions after setting off losses of earlier years and Rs.136,23,32,185/- under Section 115JB provision. Subsequently, the case was selected for Scrutiny under CASS and notice u/s 143(2) of the Act was issued. The Ld. AO had passed the order u/s 143(3) of the Act, after making following additions: (i) Disallowance u/s 36(1)(viia) of the Act Rs. 2283,39,49,628/- (ii) Disallowance u/s.14A of the Act r.w.r. 8D Rs. 4,27,73,538/- & 2149 /Mum/2024 Union Bank of India (iii) Disallowance u/s 36(1)(vii) of the Act Rs. 5712,89,34,620/- (iv) Expenditure claimed for penalty levied by RBI Rs. 25,00,000/-. (v) Interest on IPDI Bonds Rs.70,63,39,532/-. 4.1 Aggrieved by that order of the Ld. AO, the appeal was assailed before the Ld. CIT(A). The Ld. CIT(A) partly allowed the appeal. Further aggrieved, the revenue had filed the appeal before us.
We have carefully heard the submissions of both parties and reviewed the documents on record. The issue raised in the grounds of appeal
pertains to the deduction claimed under Section 36(1)(viia) of the Act, amounting to Rs. 22,83,39,49,628.During the assessment proceedings, the Ld. AO observed that the bank had created a provision for Non-Performing Assets (NPAs) by debiting the Profit and Loss Account in its books of account and subsequently claimed a deduction under Section 36(1)(viia) of the act. The Ld. AO rejected the assessee's claim on the grounds that, as per Reserve Bank of India (RBI) norms, NPAs could not be considered part of "bad and doubtful debts." Consequently, the Ld. AO made additions and disallowed the claimed deductions. The matter was carried in appeal before the Ld. CIT(A). The Ld. CIT(A) ruled in favor of the assessee, relying on the judgment of the Hon’able Karnataka High Court in the case of ACIT vs Davangere District Central Co-operative Housing Society Ltd.430 ITR
29. (Kar.). The Ld. CIT(A) concluded that NPAs qualify as bad debts because such assets do not generate income, and their categorization as "provision for non-performing assets" is essentially equivalent to a provision for bad and doubtful debts. Accordingly, the addition made by the Ld. AO was deleted, and the deduction claimed by the assessee was allowed. A similar view & 2149 /Mum/2024 Union Bank of India was also taken by the Hon’able Karnataka High Court in the case of Shri Siddheshwari Co-operative Bank Ltd. vs JCIT, 388 ITR 588 (Kar). 5.1. The Ld. DR did not strongly oppose the submissions made by the Ld. AR.
In view of the judicial precedents, we concur with the findings of the Ld. CIT(A), who observed that the issue is directly covered by the decisions of the Hon’ble Karnataka High Court. The Act permits such deductions, considering that unrealized debts should be allowed based on the provision made in the books of account. The nomenclature of the provision, though referred to as NPAs, in essence and substance, constitutes a provision for bad and doubtful debts, as recognized by the Hon’ble Karnataka High Court. Accordingly, the revenue’s grounds of appeal
, Ground Nos. (i) to (iii) are dismissed.
7. Disallowance under section 14A 7.1 The Ld. AO made an addition of Rs. 4,27,73,538/- on the ground that the assessee had not allocated expenses related to the earning of exempt income as required under Section 14A of the Act read with Rule 8D of the Income Tax Rules 1962.The Ld. CIT(A) considered the submissions made by the assessee and found that the assessee had incurred efforts to earn the exempt income. Further, the Ld. CIT(A) noted that the shares in question were treated as stock-in-trade. The Ld. CIT(A) relied on the judgment of the Hon’able Supreme Court in South Indian Bank Ltd vs CIT, 438 ITR 1 (SC) and the decision of the ITAT Hyderabad in the case of Andhra Bank vs. DCIT [2015 (5) TMI 478].
Additionally, the Ld. CIT(A) observed that in the assessee’s own case for the A.Y. 2015–16, the issue was similarly decided in favor of the assessee. This decision & 2149 /Mum/2024 Union Bank of India was consistent with the ITAT Hyderabad Bench's ruling in 245, 246/Hyd/2014 dated 18/07/2014. For the current assessment year A.Y. 2020–21, the assessee had voluntarily disallowed an amount of Rs. 14,66,963/-, equivalent to 2% of the tax-free income generated investment amount toRs.7,32,98,136/-.
Following the principle of binding precedents and the rule of consistency, the Ld. CIT(A) decided the issue in favor of the assessee for the impugned assessment year. The Ld. DR has stated that the calculation made by assessee was improper and observation of the Ld. CIT(A) is not on factual position. He fully relied on the impugned assessment order. Consistent with this principle, the Ld. AR relied on the judgment of the Hon’able Delhi High Court in the case of Punjab National Bank, 449 ITR 468 (Del), held whether where shares were held by assessee-bank as stock-in-trade and not as investment, main purpose was to trade in those shares and earn profits there from and therefore section 14A of the Act was not attracted and expenditure could not be disallowed.
7.2. We have carefully considered the submissions of the rival parties. In the case of South Indian Bank Ltd. vs CIT (438 ITR 1, SC), the Hon’able Supreme Court held that if an assessee can demonstrate that investments yielding exempt income were made out of their own funds and not from borrowed funds, no disallowance under Section 14A of the Act is warranted.
Further, in the case of Punjab National Bank (449 ITR 468, Del), the Hon’ble Delhi High Court ruled that Section 14A cannot be invoked in the absence of exempt income earned during the relevant financial year. No disallowance can be made merely because investments capable of generating exempt income exist.
& 2149 /Mum/2024 Union Bank of India Finally, in the judgment of the Hon’able Supreme Court in Maxopp Investment Ltd. vs CIT, New Delhi (402 ITR 640, SC), it was held that where shares are held as stock-in-trade, the primary purpose is to trade in those shares and earn profits there from. However, if exempt dividend income under Section 10(34) of the Act is also earned in the process, the expenditure attributable to such exempt dividend income must be apportioned and disallowed under Section 14A of the Act.
Section 14A of the Act, read with Rule 8D of the Rules, is applicable where the assessee is unable to determine or allocate the correct expenses incurred to earn exempt income. In the present case, the Ld. CIT(A) relied solely on the judicial precedents and allowed the issue in favor of the assessee without duly considering the relevant facts.
As per the ratio laid down by above cited case laws, the disallowance u/s 14A is required to be made, when the assessee has earned any exempt income. In the instant case, it is submitted that the interest free funds available with the assessee is more than the value of investments. In that case, no disallowance out of interest expenses is called for. However, disallowance may be called for from out of administrative expenses in terms of sec.14A of the Act. For this purpose, we are of the view that the assessee may be provided with an opportunity to present the relevant facts before the AO. Accordingly, we set aside the order passed by Ld CIT(A) and restore this issue to his file for examining this issue afresh. After providing adequate opportunity of being heard to the assessee, the AO may take appropriate decision. We also direct the assessee to present its working of expenses, if any, relating to exempt income.
Deduction under section 36(1)(vii) of the Act 8.1 In the impugned assessment order, the Ld. AO disallowed an amount of Rs.5,712,89,34,620/- by relying on the judgment of the Hon’able Supreme Court in the case of Catholic Syrian Bank Ltd vs CIT, (2012) 343 ITR 270 (SC)]. The Hon’able Supreme Court held that a claim for bad debts under Section 36(1)(vii) should be limited to the extent of the claim for deduction under Section 36(1)(viia) of the Act, and the overall claim of the assessee is subject to the conditions outlined in Section 36(2)(v) of the Act. The Ld. CIT(A), in his findings, relied on the same judgment of the Hon’able Supreme Court in Catholic Syrian Bank Ltd. (supra) and decided in favor of the assessee. The Ld. CIT(A) held that the proviso to Section 36(1)(vii) pertains only to actual debts and, therefore, only actual (realized) debts need to be adjusted against the provisions of Section 36(1)(viia) of the Act.
We find that the Ld. CIT(A) has correctly examined and adjudicated the issue. The matter is squarely covered by the decision of the co-ordinate bench of the ITAT Bengaluru in the assessee’s own case, reported in (2022) 3 TMI 113 (ITAT Bangalore). We see no infirmity in the order passed by the Ld. CIT(A).
Further, the Ld. DR has not strongly opposed the submissions of the assessee and has failed to provide any contrary judgments to support the revenue’s case.
Accordingly, Grounds Nos. (v) and (vi) of the revenue’s appeal are dismissed.
The penalty paid to Reserve Bank of India (RBI) amount to Rs.25 lakhs was duly disallowed by the Ld.AO under section 37 of the Act.
In argument, the Ld.AR relied on the impugned appeal order. The relevant part of the said order is extracted as below: -
“6.2.1.1. This issue is settled in favour of the Appellant Bank by the following decisions:
S.No. Name of the Party Citation Annexure No. 1 CIT vs Stock & Bond Trading 2011 (10) TMI 172 – BOMBAY 13 Company HIGH COURT 2 IDBI Bank Ltd vs DCIT 2021 (2) RMI 608 ITAT 14 MUMBAI 3 DCIT vs Bapunagar Mahila Co-op 2015 (7) TMI 472 ITAT 15 Bank Ltd AHMEDBAD
6.2.2. Submission in detail:
6.2.2.1. We would like to submit that the penalty is not for infraction of any law. It is levied by Reserve Bank of India for non compliance with certain procedural guidelines of Reserve Bank of India. It can be seen from RBI Act that for these kinds of violations, only a penalty in the form of civil liability is prescribed and there is no criminal prosecution prescribed in respect of these violations. Under these circumstances, it is submitted that the penalty is not for infraction of any law and hence these are allowable deductions u/s 37. Therefore, the Appellant The Ld.CIT(A) considered the submission of the assessee and found that penalty is not sustainable as it is not against the infraction of law and same issue has already been taken care in the appeal order for A.Y. 2017-18 where the Ld.CIT(A) allowed the claim of the assessee. The Ld. CIT(A) followed the precedence in the earlier year and doctrine of consistency was followed. Further, the Ld.AR relied on the order in the case CIT vs M/s Stock & Bond Trading Co (2011) 10 TMI 172 (Bom) and the relevant of the said order is reproduced as below:–
“1 Two questions of law raised by the Revenue in this Appeal read thus:
A Whether on the facts and in the circumstances of the case and in law the Tribunal was justified in deleting the additions made by the Assessing Officer under section 40(a)(ia) of the Income Tax Act, 1961 claimed by the assessee firm being VSAT charges amounting to Rs.3,12,597/and NSE lease line charges amounting to Rs. 1,66,301/and Transaction charges of Rs.4,45,024/paid by the Assessee Firm to the National Stock Exchange, even though the Assessee had failed to deduct tax at source while making such payments as required under section 194.J of the Income Tax Act, 1961B Whether on the facts and in the circumstances of the case and in law the Tribunal was justified In deleting the additions made by the Assessing Officer under proviso to section 37(1) of the Income Tax Act, 1961 being penalty imposed by the National Stock Exchange on the Assessee.
As regards the first question is concerned, counsel for the Revenue states that the said question is answered against the Revenue in case of The Income Tax Commissioner Mumbai City 4 vs. Angel Capital & Debit Market Ltd. in Income Tax
As regards the second question is concerned, the finding of fact recorded by the CIT (A) and upheld by the ITAT is that the payments made by the Assessee to the Stock Exchange for violation of their regulation are not an account of an offence or which is prohibited by law. Hence, the invocation of explanation to section 37 of the Income Tax Act, 1961 is not justified in our opinion, in the facts and circumstances of the present case, no fault can be found with the decision of the ITAT. Accordingly, the second question cannot be entertained.
4 Appeal is accordingly disposed of with no order as to costs.”
We considered the order of the Hon’able Bombay High Court, and the higher judicial precedence should be followed. Further, the Ld. DR has not strongly opposed the submissions of the assessee and has failed to provide any contrary judgments to support the revenue’s case. We upheld the observation made by the Ld. CIT(A) in this issue.
Accordingly, the ground no (vii) of the revenue’s appeal is dismissed.
Interest on Perpetual Bond 11.1 The addition was made the interest of Innovative Perpetual Debt Instruments (IPDI) Bond amount to Rs.70,63,35,532/-. The Ld.AO held that the said interest is not admissible for deduction under section 36(1)(iii) for the reason that the bonds are (a) perpetual nature; (b) high loss absorption capacity – provision for write down of principal; or conversion of equity on tracker and (c) discretionary pay out with existence of full coupon discretion. The issue was brought before the Ld.CIT(A). The Ld.CIT(A) considering the judicial precedence & 2149 /Mum/2024 Union Bank of India and relied on the order of the coordinate bench of ITAT Mumbai in ICICI Bank Ltd vs DCIT,2022 (12)TMI 1373 ITAT Mumbai the issue was squarely covered. Further, the same issue was decided in assessee’s own case by the co-ordinate bench of ITAT, Mumbai Bench & 1818/Mum/2023, date of order 27/09/2024. Relevant paragraph is reproduced as below:- “Disallowance of interest paid on IPDI Bonds 7. The assessee has incurred interest expenditure of Rs. 100,89,00,000/- against issue of Innovative Perpetual Debt Instruments (IPDI) Bonds. The AO held that the said interest is not admissible as a deduction u/s 36(1)(iii) for the reason that the bonds are (a) Perpetual nature (b) High Loss Absorption Capacity – Provisions for write down of principal or conversion to equity on trigger (c) Discretionary pay out with existence of full coupon discretion. We heard the parties and perused the material on record. We notice that the Co-ordinate Bench in the case of DCIT Vs. State Bank of India (ITA Nos. 3033 & 2873/Mum/2019 dated 29.09.2022) has considered a similar issue where it has been held that “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 & 2149 /Mum/2024 Union Bank of India 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 & 2149 /Mum/2024 Union Bank of India 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 nonconvertible 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 this undisputed fact held that assessment order was erroneous so far it was prejudicial to the interest of Revenue. Therefore, we consider that the order
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.
The facts pertaining to the issue in assessee's case is identical to the above and therefore in our considered view the decision of the Co-ordinate Bench the above case is applicable to assessee Also. Accordingly, we hold that the interest claimed by the assessee is allowable as deduction u/s 36(1)(iii) and the AO is directed to delete the disallowance made in this regard.” 12. The issue pertains to the treatment of interest on Perpetual Bonds, specifically Innovative Perpetual Debt Instruments (IPDI), and whether such interest qualifies for deduction under Section 36(1)(iii) of the Act. In the present case, we have followed the order of the co-ordinate bench of the ITAT, Mumbai Bench, in the assessee’s own case (supra). The said decision relied on the earlier judgment of the co-ordinate bench of ITAT Mumbai in the case of DCIT vs. State Bank of India (ITA Nos. 3033 & 2873/Mum/2019, dated 29.09.2022). Innovative Perpetual Debt Instruments (IPDI) are hybrid instruments that exhibit characteristics of both debt and equity. These bonds are typically issued by banks to meet capital adequacy requirements under Basel norms. Although perpetual in nature and subordinated to other debt, the interest on IPDI is payable periodically unless deferred by the issuer under specific circumstances (e.g., insufficient profits).Section 36(1)(iii) of the Act allows for a deduction of interest on borrowings if such borrowings are utilized for business purposes. The interest & 2149 /Mum/2024 Union Bank of India paid on IPDI, despite the instrument's hybrid nature, has been held to be deductible as it represents a cost of funds incurred in the ordinary course of banking business. The ITAT Mumbai Bench, in the case of State Bank of India (supra), held that the interest on IPDI is an allowable deduction under Section 36(1)(iii), as the borrowings are directly linked to the business activities of the bank. In the present case, the Ld. CIT(A) upheld this view and rightly concluded that the addition of interest on IPDI under Section 36(1)(iii) is not warranted. Judicial discipline requires that decisions in similar cases, especially in the assessee’s own case in earlier assessment years, be consistently followed unless there is a significant change in law or facts. In this case, the Ld. CIT(A) and the ITAT Mumbai Bench have consistently upheld the deductibility of interest on IPDI in the assessee's earlier cases. There is no deviation in facts or legal principles in the current year, making the addition uncalled for. Considering the consistent judicial precedents and the principle of consistency, the addition of interest on IPDI under Section 36(1)(iii) of the Act is unwarranted. The view taken by the Ld. CIT(A) is upheld, as the interest expense on IPDI qualifies as a legitimate business expenditure. Accordingly, we dismiss the revenue’s grounds on this issue and uphold the order of the CIT(A). Accordingly, ground No. (viii) of the revenue is rejected.
The issues raised in Ground Nos. (ix), (x), (xi), and (xii), which pertain to the applicability of Section 115JB, the addition to book profits by invoking Section 14A of the Act, and the allowability of education cess, are consequential in nature. Therefore, these grounds do not require separate adjudication.
14. All the grounds in this appeal are covered by the decisions taken in the above appeal decided by us. Therefore, the decisions arrived at above shall apply mutatis mutandis to the grounds raised in this appeal also. As a result, the appeal of the revenue is partly allowed.