KOTAK MAHINDRA BANK LIMITED,MUMBAI vs. DCIT-3(2)(2), ASSESSMENT UNIT, INCOME TAX DEPT, MUMBAI

आदेश / O R D E R PER BENCH :- The above captioned appeals arising from the appellate order dated 30.08.2023 are filed by the assessee and the Revenue respectively against A.Y. 2019-20 Kotak Mahindra Bank Limited the order passed by the Learned Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)”] pertaining to assessment order passed u/s. 143(3) of the Income-tax Act, 1961 [hereinafter referred to as “Act”] for the Assessment Year [A.Y.] 2019-20.Since both the appeals arise from the appellate order of even date and were also heard together, they are being adjudicated vide this composite order for the sake of brevity. We first take up the appeal of the assessee asunder:

6.1 In view of all the above aspects of the case, we are of the considered view that it would be in the fitness of things to set aside the matter to the ld.AO in the interest of principles of natural justice for de novo consideration of all relevant facts of the case, submissions claimed to have been made by the assessee in the matter. The assessee would submit relevant evidences/replies before the ld.AO who after due consideration of A.Y. 2019-20 Kotak Mahindra Bank Limited the same decide the issue as per the provisions of the Act in this regard. The ground is therefore, allowed for statistical purposes.

GROUND NO. 5

8.As per the order, the AO found that the sale consideration certain immovable properties reported in ITR was less that than the sale consideration as per Form 26 QB. There were 13 properties sold by the assessee bank for a total consideration of Rs. 18,76,31,500/-, out of which in one property situated in Kolkata the stamp duty valuation was shown at Rs.11,55,19,784/- against sale consideration of Rs.7,00,00,000/-, the difference beingRs.4,55,19,784/-. As per the assessment order, assessee had not furnished any explanation/ documentary evidences on this issue in any of its submissions. It did not provide the proof of the purchase consideration of sold out flat for a sale consideration ofRs.7cr as against stamp duty value. Accordingly, he considered Rs.11,55,19,784/- as Long Term Capital Gain and added to the total income of the assessee.

A.Y. 2019-20 Kotak Mahindra Bank Limited 9. The ld.CIT(A), observed that the assessee was unable to produce any evidence in support of utilisation of the alleged property for business purposes. Evidence in support of treating this property under Block of Assets from the year of merger and the amount of depreciation claimed by the assessee till the AYr.2019-20 couldn't be produced. The AO considered the entire sale consideration in respect of the alleged property of Rs.11,55,19,784/- as LTCG in absence of cost of acquisition of this property. However, AO allowed depreciation of Rs.70,00,000/- which was not claimed by the assessee in the return. It is stated that during the appellate proceedings, no new evidences were submitted by the assessee and also written submissions were not made .

10.1Without prejudice to the above, in any case, the difference between the stamp duty valuation and actual sale consideration Rs. 4,55,19,784/- needs to be reduced from WDV of block of assets.

13.We have carefully considered the above facts, rival submissions, contents of the orders of lower authorities and the provisions of law. It appears that the basic bone of contention is the applicability of the provisions of section 50C to the facts of the case as the impugned flats were found to have been sold at a lesser amount than the value adopted by the Stamp Value authorities. The ld.AO/CIT(A) have held that these provisions are applicable, more so in absence of relevant details from the assessee. It also failed to demonstrate that the assets sold were business assets or not. The user thereof could not be established. On the other hand, as per the Ld. Authorised Representative, the assets in question being part of block of asset on which depreciation was claimed did not attract the provisions of section 50C.Rather the sale proceed of Rs 7 cr. was reduced from the block of assets.Based on the cited decision in the case of Bhaidas Cursondas and A.Y. 2019-20 Kotak Mahindra Bank Limited co.(supra),it is claimed that in view of provisions of section 43(6)© of the Act, stamp duty value and agreement value difference could not be reduced from block of assets.

13.1We find that the entire issue has not been properly adjudicated either by the AO or the CIT(A). Neither the facts of the case nor the provisions of the Act have been appreciated in correct perspective by them. Even the assessee did not furnish relevant information, details and explanations before the authorities below. Moreover, the AO did not carry out any independent enquiry into the matter to find out the actual user of the said assets before applying the provisions of the Act. The relevant provisions of the Act relating to the issue in hand have not been properly analysed either. In so far as the contention of the assessee that the provisions of section 50C are not applicable to block of assets is concerned, it would be worthwhile to extract the relevant paras of decision given in the context of provisions of section 50 vis-a-vis section 50C of the Act in the case of Special Bench of the Tribunal in the case of ITO v. United Marine Academy [2011] 130 ITD 113 (Mum)as below:

“This Special Bench has been constituted by the Hon’ble President, Income-tax Appellate Tribunal to dispose of the appeal filed by the Revenue against the order of the learned Commissioner of Income-tax (Appeals)- XXII, Mumbai dated 20.11.2006 and to answer the following question, which is arising from the grounds raised therein : “On a proper interpretation of sections 48, 50 & 50C of the Income Tax Act, 1961, was the Assessing officer right in law in applying section 50C to capital assets covered by section 50 A.Y. 2019-20 Kotak Mahindra Bank Limited (depreciable assets) and in computing the capital gains on the sale of depreciable assets by adopting the Stamp Duty valuation?” PARA-11 We have considered the rival submissions and also perused the material on record. We have also gone through the various judicial pronouncements cited by the leaned representatives of both the sides in support of their contentions. First we shall take up the main issue which is raised for consideration and decision of this Special bench i.e. “whether in a case where capital gain arising from the transfer of depreciable asset is computed as per the special provisions contained in section 50, the provisions of section 50C can be applied so as to adopt the value assessed for the purpose of payment of stamp duty to be the full value of the consideration received or accruing as a result of such transfer?”. Para-13………………………….The Hon’ble Bombay High Court in the case of Bhatia Nagar Co-operative Society Ltd. (supra) had an occasion to consider the scope of section 50C and it was held by Their Lordships that section 50C is a measure provided to bridge the gap as it was found that the assessee’s were not correctly declaring the full value of consideration or in other words resorting to the practice of under valuation. As rightly contended by the learned Departmental Representative, if this is the legislative intention behind insertion of the provisions of section 50-C, it does not stand to any logic as to how the same should not be applied in the case of land and building where depreciation has been claimed by the assessee. Moreover, if there was any legislative intention to exclude the applicability of the provision of section 50C to the cases involving transfer of land and building being depreciable assets as covered by section 50, the same could have been provided for in the provisions of section 50C itself as the same was inserted in the statute on 01.04.2003 when the provisions of section 50 were already there in the statute. Para-16. In the case of CIT v. ACE Builders Pvt. Ltd. (supra), exemption available u/s.54E in respect of long term capital gains was denied to the assessee where capital gain was computed u/s.50 as short term capital gain on transfer of long capital asset which was deemed to be a short term capital asset being a depreciable asset. The Hon’ble Bombay High Court, however, allowed the exemption claimed by the assessee u/s.54E, inter alia, on the ground that section 54E does not make any distinction between depreciable asset and non- depreciable asset. A perusal of the provisions of section 50C, which has been reproduced hereinabove, also shows that there is no such distinction made between a depreciable asset and a non-depreciable asset and it, therefore, cannot be said that the said provision is not A.Y. 2019-20 Kotak Mahindra Bank Limited applicable in a case of transfer of depreciable asset which is covered by section 50. Para-20……………………………………………………..In our opinion, the Assessing Officer thus was right in applying the provision of section 50C to the transfer of depreciable capital assets covered by section 50 and in computing the capital gain arising from the said transfer by adopting the stamp duty valuation. We, therefore, answer the question referred to this special bench in the affirmative i.e. in favour of the Revenue and against the assesse.” 13.2We find that the hon’ble Special Bench while interpreting the sections 50 and 50C of the Act w.r.t. applicability in respect of depreciable assets,block of assets and non-depreciable assets has categorically held that the provisions of section 50C are equally applicable to asset forming a block of asset as well. This finding is contrary to the contentions of the assessee as stated above paras. This decision though given in the context of section 50 of the Act,has not been appreciated either the assessee or the Revenue in the impugned order.Moreover,in the relevant assessment year,the provisions of section 43CA had already been introduced which provide that for business assets provisions of section 43CA which are akin to section 50C would apply.The matter needed due examination vis-a-vis this provision also.

13.3 In view ofthe discussion made above para,we are of the considered view that it would be in the fitness of things to set aside the matter to the AO for de novo consideration of all the relevant aspects of the case including the provisions of law in this regard and in the interest of A.Y. 2019-20 Kotak Mahindra Bank Limited principles of natural justice. The assessee would submit relevant evidences before the ld.AO who after due consideration of the same decide the issue as per the provisions of section 43CA r.w.s. 50C of the Act. The grounds 5 and 6 are therefore, allowed for statistical purposes.

Additional ground dated 24.06.2024 14. During hearing of the case, a request was made by the assessee for admission of Additional ground of appeal with regard to section 14A by claiming that the AO has not recorded satisfaction with respect of correctness of claim of expenditure while making disallowance u/s 14A.Since it is a purely legal ground requiring no investigation of facts, it may be admitted. We agree that the additional ground is legal in nature and intrinsically linked to the issue of disallowance u/s 14A of the Act, the same is admitted for adjudication. 14.1 In various interrelated grounds, it is contented that NFAC erred in not adjudicating all the grounds relating to disallowance under section 14A of the Act, 1961 read with Rule 8D(2)(ii) of the Rulesand summarily partly allowed this ground by directing the Assessing Officer to restrict the 14A disallowance based on the investments yielding exempt income only. He erred in by invoking provisions of Rule 8D without appreciating that conditions precedent for applying provisions of the said Rule as contained in sub-sections (2) and (3) of section 14A were not satisfied in as much as that the AO has not recorded any objective satisfaction that the claim made by the Appellant in respect of the expenditure incurred in relation to income which does not form part of the total income is incorrect.

15. We have carefully perused the assessment records, provisions of law and judicial decisions in this regard. The sub-section (2) and (3) to Section 14A, which empower the AO to compute disallowance as per the provisions A.Y. 2019-20 Kotak Mahindra Bank Limited of Rule 8D of the Income-tax Rules, 1962 with effect from Assessment Year 2008-09, provide that the disallowance under Rule 8D can be computed, only if the AO, having regard to the accounts of the assessee, is not satisfied with the claim of the assessee regarding the expenditure claimed to have been incurred/ not incurred in relation to the exempt income. As per the provisions of sub-section (1) of Section 14A of the Act, the AO is empowered to not allow the assessee any deduction with regard to any such expenditure which has been incurred by the assessee in relation to income which does not form part of its total income, i.e. the income which is exempt. The provision of sub-section (2), which was inserted by the Finance Act, 2006 with effect from 01 April, 2007 further provides that if the AO is not satisfied with the correctness of claim of assessee in respect of expenditure in relation to exempt income, the AO is to determine the amount of such expenditure incurred in accordance with the method as prescribed. Rule 8D provides for a mechanism of computing the expenditure to be disallowed by the AO under Section 14A. Subsection (3) of Section 14A further states that the provisions of sub-section (2) are also applicable in a situation where the assessee claims that no expenditure has been incurred in relation to earning of exempt income. This means that even after the introduction of the computation mechanism provided for in Rule 8D from AY 2008-09 and onwards, it is only if the AO, having regard A.Y. 2019-20 Kotak Mahindra Bank Limited to the accounts of the assessee, reaches to a finding/ satisfaction that the claim of assessee regarding expenditure incurred in relation to exempt income is incorrect, that he can compute the disallowance under Section 14A as per the provisions of Rule 8D. 15.1 It may be stated here that the Hon’ble Supreme Court of India in the case Godrej & Boyce Manufacturing Co. Ltd. vs. Deputy Commissioner of Income-Tax And Another reported in 394 ITR 449after analyzing the current provisions of Section 14A and the earlier prevailing provisions of this section held that sub-sections (2) and (3) of Section 14A read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act, in a situation where the AO is not satisfied with the claim of assessee. The Court is of the view that whether the determination of disallowance is to be made on application of formula prescribed under Rule 8D or in the best judgment of the AO, what the law postulates is the requirement of a satisfaction of the AO that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. The Court concluded that it is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D A.Y. 2019-20 Kotak Mahindra Bank Limited of the Rules or a best judgment determination, as earlier prevailing, would become applicable.

16. In this background, it is however, pertinent to note that the Act merely provides for the AO to record his satisfaction regarding the claim of assessee in relation to expenditure incurred to earn income which does not form part of total income, and does not specify any particular manner in which such satisfaction ought to be recorded by an AO. In this context, it is important to refer to the judgment of Hon’ble High Court of Gujarat in the case of Devarsons Industries (P) Ltd vs ACIT (OSD), (2017) 84 taxmann.com 244(Gujrat)wherein it has been held that where the Ld. Assessing Officer gave detailed reasons for making disallowance under Section 14A in respect of exempt dividend income and long-term capital gain earned by assessee discarding assessee’s theory that to earn the income assessee incurred no expenditure whatsoever, mere fact that AO did not arrive at the satisfaction in a particular manner while making the disallowance under Section 14A, would not per se destroy the mandate of Section 14A.Also hon’ble Delhi High Court of Delhi in the case of India Bulls Financial Services Ltd vs DCIT, (2016) 76 Taxmann.com 268 (Delhi)on scrutinizing the provisions of Section 14A, has reached to a conclusion that where the AO has carried out an elaborate analysis and has thereafter followed the steps enacted in the statute in determining the A.Y. 2019-20 Kotak Mahindra Bank Limited amount of expenditure incurred for earning tax exempt income, the fact that he did not record his dissatisfaction about assessee’s calculation of disallowance, could not be a ground for rejection of the stand taken by the AO.

17. In the present case, perusal of the assessment order reveals that the ld.AO has dealt with the issue starting in paras 3.3.10 onwards on page 59 to page-80 of the assessment order. A detailed show cause notice dated 14.09.2022 was issued as discussed in paras 2.3.2.1 and 2.3.2.2 pages 59 and 60 of the order wherein on the basis of analysis of amended provisions of Rule 8D(ii) he observed that the case laws submitted by the assessee were not applicable in post amended section and Rule. It is further stated that no reply was submitted by the assessee to this SCN. Moreover in sub-paras i) on page 77 to xiii) on page-80,he has elaborately dealt with the submissions of the assessee. From these facts, it is apparent that the issue has been considered in detail before making the disallowance. There is due application of mind even before making the disallowance by issuing SCN, though, there is no categorical satisfaction discernible. He has reached to a conclusion on an elaborate analysis and thereafter followed the steps enacted in the statute in determining the amount of expenditure incurred for earning tax exempt income.

A.Y. 2019-20 Kotak Mahindra Bank Limited 18. The above judgments of High Courts in the case of Devarsons (supra) and Indiabulls (supra) though held that recording of satisfaction of the AO regarding the claim of assessee after considering the accounts of the assessee is necessary, there is neither any specific or particular manner in which such satisfaction should be recorded nor any specific or particular manner in which the dissatisfaction of AO with claim of assessee prescribed under the scheme of the Act shall be set out. All that is required under the Act is the recording of satisfaction by the AO before proceeding with making any disallowance under Section 14A, which may be based upon the understanding and analysis of the tax law by the AO, considering the accounts of the assessee. These decisions mentioned hereinabove do shift the onus on the AO, however, these judgments do not carve out any specific manner in which the onus has to be dispensed off with by the AO.

(Departmental appeal) 21. GROUND No. 1- Disallowance U/s. 14A- Administrative Expenses A.Y. 2019-20 Kotak Mahindra Bank Limited 1. Whether on the facts and the circumstances,the Ld CIT(A) was justified in holding that disallowance u/s 14A is to be restricted to the exempt income whereas Finance Act 2022 ,explanation to section 14A has been inserted which provides for applicability of the section even in absence of exempt income,being clarificatory in nature being retrospective effect. 21.1It is stated that the AO mechanically applied Rule 8D(2)(ii) without recording any satisfaction for rejecting the suo-motto disallowance made by assessee in return of income.The ld.CIT(A) accepted the alternative plea of assessee and directed the AO to compute the disallowance based on decision of Special Bench in case of Vireet Investments Pvt. Ltd. 165 ITD 27 (Delhi-Trib.). i.e. disallowance to be made considering only those investments which yield exempt income during the year

23.On due consideration of all the relevant facts of the case, the rival contentions and the position of law as also the order of co-ordinate benches, high courts etc. we do not find any reason for interference in the matter as there is no infirmity in the order passed by the ld. CIT(A) which is accordingly, upheld and ground of the Revenue is dismissed.

24.GROUND No. 2 - ESOP expenses “On the facts and the circumstances of the case,whether ld.CIT(A) erred in directing the AO to allow expenditure under ESOP after verification in accordance with the principles laid down by Special Bench in Biocon Ltd without appreciating that the same is not ascertained liability and contingent in nature, quantum cannot be worked out precisely and is capital in nature and hence not allowable.” It may be stated here that similar issue has come for 25. adjudication in assessment and subsequent appeals in the case of assessee itself. Moreover, following the decision of Special Bench of Bangalore Tribunal in case of Biocon Ltd (ITA No. 368 to 371 & A.Y. 2019-20 Kotak Mahindra Bank Limited 1206/Bang/2010), the respondent has claimed the deduction based on the principle laid down therein and the ld.CIT(A) has followed this decision.On the other hand,the ld.AO has stated that the Department has not accepted the decision of Special Bench in Biocon and appeal has been filed with Hon'ble Karnataka High Court which has been subsequently decided in favour of the assessee and claim of the Assessee made in accordance with the principles laid down in Biocon (supra) is not accepted.

27.1 In view of the foregoing, considering the fact that issue in hand is identical and recurring in nature and is also being consistently decided in favour of the assessee, respectfully following the decisions referred above, the disallowance made is accordingly deleted.

28.GROUND No. 3 - Addition of Interest Income under section 43D R.W.R. 6EA “Whether on the facts and the circumstance ,the ld,CIT(A) erred in deleting the addition of Rs 29.68 cr being overdue interest when in fact as per the provisions of Rule 6EA the interest was not overdue and RBI guidelines are independent from the provisions of the Act.”

A.Y. 2019-20 Kotak Mahindra Bank Limited The assessee has pleaded that having regard to RBI Guidelines 29. which are binding upon it, has treated accounts which are delinquent for more than 90 days as NPAs and has accordingly not offered interest thereon, relying upon the provisions of Section 43D of the Act. The AO, however, has adopted the criterion of 180 days mentioning Rule 6EA, to regard the accounts as delinquent and has taxed the interest for the differential period of 90 days (180 days as per the AO minus 90 days- as per the RBI Guidelines as discussed by him on page 41/ 2nd last para of the order.

29.1 It is further stated that the ld.CIT(A)has followed decision of ITAT Mumbai in ICICI v ACIT (ІТА No. 3215/M/19) dated 22.08.2022 and allowed the claim of the Assessee. Therefore, relying upon favourable decision of ITAT Mumbai in Respondent's own case in & others/2023 vide order dated 08.08.2024 and to 3260/M/2019 vide order dated 16.02.2023 and in the case of ICICI Bank (ITA No. 3215/Mum/2019), the interest on NPA shall be taxed based on RBI Guidelines as mentioned under section 43D of the Act. Reliance is placed on the decision of hon’ble Supreme Court in the case of CIT vs Vasistht Chay Vyapar Ltd 410 ITR 244 which confirmed the findings of hon’ble Delhi High Court in this case that since as per prudential norms issued by RBI,ICD had become NPA on A.Y. 2019-20 Kotak Mahindra Bank Limited which no interest was received and possibility of recovery was almost nil, it could not be treated to have accrued to the assessee.

31.GROUND No. 4- Disallowance of Broken Period Interest “On the facts and the circumstances of the case, the ld.CIT(A)erred in holding that Broken period interest is allowable on matching principles without realising that the same has not been incurred for realising the interest on securities as enunciated by the Apex Court in Vijaya Bank Ltd(57Taxman 152(SC).”

Relying upon decision of CIT(A) for AY 2013-14, AY 32. 2014-15 & AY 2015-16, in assessee’s own case, it is contented by the ld.AR that the issue has been allowed in favour of the assessee by the ld.CIT(A).Before us, it is submitted relying upon favourable decisions of ITAT Mumbai in Respondent's own case in & others/M/2023 vide order dated 08.08.2024, to 3269/M/2019 vide order dated 16-02-2023 and ITA No. 781 &782/M/2018vide order dated 27-08-2019 that once the investments in Govt. Securities are stock-in- trade, the broken period interest paid on purchase of such securities are on revenue account and the same be A.Y. 2019-20 Kotak Mahindra Bank Limited allowed as deduction. Morover, as per recent decision of Hon'ble Supreme Court in the case of Bank of Rajasthan v CIT in CA No. 3291-3294 of 2009- dated 16.10.2024, Broken Period Interest is allowed as deduction to Banks as all the securities including HTM securities are held by bank as stock in trade. It is further submitted that hon’ble Supreme Court has dismissed the SLP filed by the Department in the case of ICICI Bank Ltd SLP © Diary no. 19414/2018 dated 19.10.2019 on a reference as to whether broken period interest on HTM Securities should be disallowed as revenue expenditure and should be capitalized to the cost of the securities.

33.1 In view of the foregoing, considering the fact that issue here is identical, recurring in nature and is being consistently decided in favour of the assessee, respectfully following the decision referred above, the disallowance made is accordingly deleted.

“5. Whether on the facts and the circumstances, the ld. CIT(A) was correct in allowing deduction u/s 36(1)(vii) of the Act when in fact the assessee is claiming deduction u/s 36(1)(viia)) and the first proviso to section 36(1)(vii0 restricts the deduction to the same.

ITA No. 4103/Mum/2023 A.Y. 2019-20 Kotak Mahindra Bank Limited 6. Whether on the facts and the circumstances of the case and law, the ld.CIT(A0 was correct in allowing provisions on standard assets of Rs 41.36 cr. When in fact standard assets are neither bad or doubtful as required by section 36(1)(viia) of the Act.’ 35. As per the ld.Counsel, the assessee makes a provision for bad and doubtful debts as per directions of RBI. The RBI categorises loans into various categories based on their performance. One such category is “Standard Asset”. Even with regard to assets classified as standard asset, the RBI in para 5.5 of the Master Circular dated 1-7-2015, has prescribed that the provision should be made therefore, at different percentages ranging from 0.25% to 1%.The Assessee in accordance with above RBI directions has made the provisions in respect of its standard assets and, as such provisions represents a provision for bad and doubtful debt, has taken the same into account for the purpose of section 36(1)(viia).The AO held that the deduction under section 36(1)(viia) is allowed in respect of, “any provisions for bad and doubtful debts” and accordingly, provision on standard assets do not form part of the same.The appellant has also relied in decisions in its own case where co-ordinate benches of ITAT, Mumbai is allowing its claim consistently in past. It has also relied on the case of State Bank of India where ITAT,Mumbai in and Model Co-operative Bank vs. DCIT, Mumbai allowed similar claims. The ld.CIT(A) held that based on ITAT, A.Y. 2019-20 Kotak Mahindra Bank Limited Mumbai decision in assessee’s own case in to 3269/M/2019 vide order dated 16.02.2023, the provision for standard assets is considered as provision for bad and doubtful debts eligible for deduction under section 36(1)(viia).

Order pronounced in the open court on 07/01/2025.