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Facts
This judgment addresses cross-appeals for AY 2019-20. In its appeal, the assessee challenged additions under Section 41(1) for remission of trade liability and Long Term Capital Gains under Section 50C/43CA on the sale of depreciable property, as well as a disallowance under Section 14A for expenses related to exempt income. The Revenue, in its appeal, contested the CIT(A)'s deletion of disallowances concerning Section 14A administrative expenses, ESOP expenses, interest income on NPAs under Section 43D, broken period interest, and provision for standard assets under Section 36(1)(viia).
Held
The Tribunal remanded the issues concerning Section 41(1) and Section 50C/43CA in the assessee's appeal back to the AO for de novo consideration due to incomplete adjudication and lack of sufficient evidence, allowing these grounds for statistical purposes. However, the assessee's additional ground regarding Section 14A disallowance was dismissed, as the AO's analysis was found to be elaborate. For all grounds in the Revenue's appeal, the Tribunal found no infirmity in the CIT(A)'s decisions, upholding them and thereby dismissing the Revenue's appeal.
Key Issues
1. Applicability of Section 41(1) for remission of trade liability without proving prior claim of expenditure. 2. Application of Section 50C/43CA for computing capital gains on the sale of depreciable immovable property part of a block of assets. 3. Requirement for the Assessing Officer to record satisfaction before making disallowances under Section 14A. 4. Deductibility of Employee Stock Option Plan (ESOP) expenses. 5. Taxability of interest income on Non-Performing Assets (NPAs) for banks under Section 43D. 6. Deductibility of broken period interest paid by banks on government securities. 7. Deductibility of provision for standard assets as bad and doubtful debts under Section 36(1)(viia).
Sections Cited
143(3), 144B, 41(1), 133(6), 131, 50C, 43CA, 50, 48, 43(6), 14A, 37(1), 43D, 36(1)(viia)
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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
P a g e | 2 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:
/MUM/2023 GROUND NOs.1,2 and 3 2.In all these grounds, the assessee has claimed that the order was not passed as per procedures laid down in section 144B of the Act. It is also claimed that no personal hearing was allowed by the ld.CIT(A) despite request. Thus, the proceedings are bad in law. It is further stated that the adjustment made by CPC was wrongly upheld by the ld.CIT(A).However, in the course of hearing before this Bench, the Ld. Authorised Representative of the assessee vide written communication dated 26/11/2024 did not press these grounds. Therefore, they are considered as being withdrawn and dismissed accordingly. GROUND NO. 4
In various related grounds, it is claimed that the CIT(A) confirmed the addition made by the AO in invoking provisions of section P a g e | 3 A.Y. 2019-20 Kotak Mahindra Bank Limited 41(1) of the Act and thereby making addition of Rs.33,00,549/- treating it as extinguishment of liabilities u/s. 41(1) without establishing that any such loss/ expenditure/trading liability had been claimed and allowed in the earlier years. He further erred in not granting an opportunity to cross examine the parties who have written off bad debts resulting in gross violation of principal of natural justice.
As per discussion on pages 18 and 19 of the assessment order, the AO on the basis of Insight portal information noticed that the assessee wrote off amounts to seven debtors but no such income was offered u/s 41(1) of the Act on account of remission of trade liability. It is stated by him in the order that no explanation in this regard was given during assessment proceedings, consequently leading to addition of Rs 33,00,549/-, being the aggregate amount to the income. Before the ld.CIT(A),it was claimed by the assessee that the opportunity to examine the said persons was not given. Further, it mentioned that net amount was paid to the vendors and the vendors had debited the bad debts which were neither paid or debited by the appellant. The ld.CIT(A) observed that the appellant had availed services from the said parties but full payments as per the claim made by them parties had not been made by it and the amount payable to them were reduced after negotiation. In his view, the provisions of section 41(1) would be attracted
P a g e | 4 A.Y. 2019-20 Kotak Mahindra Bank Limited since the bill amounts raised by the concerned vendors had been reduced by the appellant and only net amount was paid against the gross bills raised by these parties. It is observed by him that though the assessee has claimed that they had not claimed any expenditure related them, it had neither produced the relevant material/information/ledger accounts before the AO or before this office to justify its claim but has admitted to have paid net bill amounts to the said vendors. Therefore, the addition made by the AO was confirmed and the ground raised by the appellant was dismissed.
Before us, it is pleaded that explanation was given vide letter dated 17.09.2022.It is further stated that the alleged amount was never claimed as expenditure/deduction/loss or trading liability by the assessee. Therefore, it could not be added as income u/s 41(1) of the Act.The assessee has drawn attention to page-116to 119of its paper book -1 which is a detailed reply submitted before the ld.CIT(A) in which it is inter alia claimed that the assessee only debited the net amount to these seven vendors and to the profit and loss account.Thus, there was no question of applicability of section 41(1) of the Act as no expenditure/loss was claimed by it. Besides, the AO did not issue any notice to them u/s 133(6) and obtain ledger account of the assessee even after request made to him. No cross-examination was also allowed. The assessee submitted confirmations
P a g e | 5 A.Y. 2019-20 Kotak Mahindra Bank Limited from two parties CSV Techno and Nikhil Comforts in support of the claim the assessee paid only the net amount and bad debt was neither debited or paid in financials of the assessee. It never claimed any bad debt amount written off.
On careful consideration of above facts by us, it appears that the addition was made by the ld.AO due to non availability/production of any reply/evidences by the assessee in support of its contentions. Moreover,it is observed submissions made to CIT(A)do not appear to be complete for properly evaluation by him. The AO also did not make any independent enquiry in the matter with the respective parties as well by invoking provisions of section 131 or 133(6) of the Act. The assessee has also contended that no cross-examination of the parties was allowed before taking adverse view of the matter.
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 P a g e | 6 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
Addition on account of Long Term Capital Gains ofRs.11,55,19,784/- on Sale of depreciable immovable property and invocation of provisions of Sec.50C on sale of depreciable immovable property are being agitated in the ground.
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.
P a g e | 7 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 .
Before us, in the written submission made, the ld.AR pleaded that the CIT(A) erred in confirming the addition without giving any cogent reason and was also not correct in concluding that the Appellant had not submitted any written submission with supporting documents. He Further erred in confirming the action of AO in applying section 50C/43CA to capital assets covered by section 50 (depreciable assets) and in computing the capital gains on the sale of depreciable assets by adopting the Stamp Duty valuation. He further erred in alleging that the Appellant has not established that properties have been considered under Block of Assets and P a g e | 8 A.Y. 2019-20 Kotak Mahindra Bank Limited that it is also not clear whether the above said block is in existence or not which is factually incorrect since the appellant clearly demonstrated that the said properties were part of Block of Assets.He wrongly invoked section 50C without making reference to valuation officer despite being request made by Appellant u/s. 50C(2)(a) since the value assessed by the stamp valuation authorities exceeded the fair market value of the property as shown in the approved valuer's report.He did not appreciate that Section 50C does not apply to sale of assets forming part of Block of Assets. Provisions of section 50 as well a section 50C are mutually disjoint provisions and are special provisions for specific purposes and the provisions of section 50C are not overriding in nature over provisions of section 50 which are meant for the purposes of taxing the capital gains out of transfer of depreciable assets forming part of block of assets.Provisions of section 50C are not applicable to present case since in the Appellant’s case, immovable properties constituting block of asset were sold but the block continues to exist.It is submitted that the addition of LTCG on Sale of depreciable immovable properties be deleted and only actual sale consideration of Rs. 7 cr. to be reduced from WDV of block of assets.
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.
It is argued that the ld.CIT(A) erred in confirming the application of section 50C/43CA to capital assets covered by section 50 (depreciable assets) and in computing the capital gains on the sale of depreciable assets by adopting the Stamp Duty valuation.He further erred in stating that the appellant has not made any written submission but submitted some photos and document without appreciating the fact that the Appellant vide its letter dt. 9th August 2023 made detailed written factual and legal submission along with all supporting including photographs and documents.He further erred in ignoring detailed written factual and legal submission, along with all supporting including photographs and documents, made by the Appellant.
Both ground no.5 and 6 are inter-related pertaining to sale of an immovable assets and are being adjudicated taken together. It appears that the addition made has also been made/upheld by the authorities below on account of lack of necessary reply on part of the assessee before them. The AO in paras 3.3.1.1 onwards on pages 7 and 8 of the order has specifically narrated the relevant points relating to the matter which needed due explanation from the assessee which were evidently not furnished before
P a g e | 10 A.Y. 2019-20 Kotak Mahindra Bank Limited him and more particularly the reasons for treating alleged residential flats as depreciable assets in the books of account. The assessee, on the other hand, has drawn attention to pages 124 to 136 of paper book-1 whereby detailed submission dated 1.9.2022 was claimed to have been made explaining all relevant aspects of the case.It was submitted that the sold out property was a dilapidated house property at Kolkata was valued Rs 11,55,19,784/- by stamp value authorities.The valuation report clearly showed that the property was old since it was purchased in 1996 and heavy repairs were needed.The assessee proposed to make a distress sale at lesser value of Rs 7 cr. to one Deepak Builder P.Ltd.The property consisted of 32 flats. Copy of reply dated 9.8.2023 to the ld.CIT(A) is also part of paper book pages 137 to 147 enclosing copies of sale agreements of flats alongwith their photos showing poor conditions thereof. It was submitted that the flats were earlier held by ING Vysya Bank which was merged with the assessee on 01.04.2015 mainly for the purposes of providing residential accommodation to the employees of the ING.It was further claimed that since the flats were used for residential purposes and subsequently for keeping bank records, they could not be treated as capital assets for the purposes of LTCG. Also the provisions of section 43C(6)(c) apply where the capital assets enters a block of asset as in case of the assessee. Thus, as per the section what is required to be reduced is money
P a g e | 11 A.Y. 2019-20 Kotak Mahindra Bank Limited payable in respect of asset sold, discarded, demolished and destroyed.There is no provisions in section 43(6) to state that if value as perstamp duty is higher than the agreement value that the value a per stamp duty act should be deemed to be full value of consideration. Reliance in this regard is also placed on Mumbai ITAT decision in the case of Bhaidas Cursondas and co.(2015) 59 Taxmann.cm 373 wherein the tribunal decided that the difference in the stamp valuation and agreement value cannot be reduced from the 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 P a g e | 12 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
P a g e | 13 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 P a g e | 14 ITA No. 3754/Mum/2023& 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 P a g e | 15 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
P a g e | 16 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
P a g e | 17 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
P a g e | 18 A.Y. 2019-20 Kotak Mahindra Bank Limited of the Rules or a best judgment determination, as earlier prevailing, would become applicable.
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 P a g e | 19 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.
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.
P a g e | 20 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.
In view of above discussion and the legal position emerging from the cited decisions (supra), we do not find any infirmity in the assessment order in this regard. Accordingly, the additional ground of the assessee is dismissed. 20.In result, the appeal of the assessee is partly allowed.
P a g e | 21 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
It is pleaded by the ld.AR. that the assessee has made all investments, which yield tax-free income out of its capital and reserves i.e. owned funds. No administrative expenditure can be attributed towards making such investments or earning dividend income therefrom.Without prejudice, appellant has already suo motto disallowed in the computation an amount of Rs.2.37 crore being administrative expenses of Investment / Treasury Division attributable to investments yielding exempt income. Disallowance to be restricted to Rs.2.37 cr. being suo motto disallowance made on the basis of administrative expenses of Investment / Treasury Division attributable to investments yielding exempt income. This view is also established in Bank's own case in &
P a g e | 22 A.Y. 2019-20 Kotak Mahindra Bank Limited others (ITAT, Mumbai) dated 08.08.2024 and HDFC Bank Ltd v DCIT ITA No.1783/M/2023.Without prejudice to the above contention, the disallowance should be restricted as per 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. Such claim is allowed in the Respondent's own case by ITAT, Mumbai vide order in to 3269/M/2019 dated 16-02-2023.
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 &
P a g e | 23 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.
It is further claimed that case of the assessee is identical to the case of Biocon,It is submitted before us that based on favourable decision in Respondent's own case by CIT(A) for AY 2013-14, 2014-15 & 2015-16 and the Hon'ble ITAT Mumbai in dated 16-02- 2023 and & 782/M/2018 dated 27.08.2019, the disallowance was deleted by CIT(A).Besides, the same is allowed in favour in respondent's own case by ITAT Mumbai in ITA No. 4056 & others/Mum/2023,ITA No. 3267 to 3269/Mum/2019,ΙΤΑΝο. 781/782/mum/2018,ITA No. 2817/Mum/2016 and 168 ITD 529(Mum).
Rewarding employees through share-based benefit schemes has been an effective tool for the companies to not just recognise their contribution to the company but also retain them by imbibing a sense of belonging and ownership. One such scheme, popular among the P a g e | 24 A.Y. 2019-20 Kotak Mahindra Bank Limited companies for almost last two decades, has been to grant of Employee Stock Option Plans (“ESOPs”). In simple terms, an ESOP is an option and not an obligation, provided by a company to its employees, to purchase its shares at a future date at a pre-determined price, which is ordinarily less than the market price, on satisfaction of certain prescribed conditions. Recently, the Karnataka High Court affirmed the ruling of the special bench of the Bangalore Income Tax Appellate Tribunal in the caseof Biocon Ltd.,wherein it was held that discount on issuance of ESOPs is an allowable business expenditure under Section 37(1) of the Act, 1961 for the employer.Commissioner of Income Tax v. Biocon Ltd., of 2013 (Karnataka HC); (2013) 35 taxmann.com 335 (Bangalore – ITAT) (SB).
27.1 In view of the foregoing, considering the fact that issue in hand is identical and recurring in nature and is also being consistently decided in favour of the assessee, respectfully following the decisions referred above, the disallowance made is accordingly deleted.
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.”
P a g e | 25 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 P a g e | 26 ITA No. 3754/Mum/2023& 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.
In view of the foregoing, considering the fact that issue in hand is recurring in nature and is being consistently decided in favour of the assessee, respectfully following the decision referred above, the disallowance made is accordingly deleted.
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 P a g e | 27 ITA No. 3754/Mum/2023& 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.
We have carefully considered all the relevant facts of the case and the legal position emerging from various judicial decisions relating to the issue in hand.In a recent judgment of Bank of Rajasthan Ltd. v. Commissioner of Income Tax, 2024 SCC OnLine SC 2877, dated October 16, 2024, the Hon’ble Supreme Court of India has allowed banks to claim tax deductions for broken period interest on Held to Maturity (HTM) government securities, provided they are classified as stock-in-trade. The decision clarifies the tax treatment for banks regarding interest paid for the period between the last coupon date and the date of purchase of securities, resolving a long-standing issue between banks and tax authorities.The appellant, Bank of Rajasthan, was engaged in purchasing and selling government securities, particularly those held to P a g e | 28 A.Y. 2019-20 Kotak Mahindra Bank Limited meet statutory liquidity ratio (SLR) obligations under the Banking Regulation Act, 1949. The dispute arose over whether broken period interest, i.e., the interest accrued between the last coupon date and the date of purchase of government securities, could be deducted as a business expense when computing taxable income. The Commissioner of Income Tax disallowed the deduction for broken period interest, relying on the Supreme Court’s ruling in Vijaya Bank Ltd. v. Additional Commissioner of Income Tax, Bangalore, 1991 Supp (2) SCC 147, dated September 19, 1990, where broken period interest was classified as capital expenditure and hence not deductible as a business expense.
33.1 In view of the foregoing, considering the fact that issue here is identical, recurring in nature and is being consistently decided in favour of the assessee, respectfully following the decision referred above, the disallowance made is accordingly deleted.
GROUND No. 5 & 6 - Provision for Standard Asset as provision for “Bad & Doubtful Debt u/s 36(1)(viia)”
“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.
P a g e | 29 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,
P a g e | 30 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).
Before us, it is contended that even in respect of assets that are classified as standard assets, a part of the debts are, recognised by the RBI itself, as doubtful of recovery. The fact that a provision is required to be made by the RBI even in respect of standard assets by itself indicates that a part of the standard assets are doubtful of recovery. It is also submitted that such claim is allowed in the assessee's own case by ITAT, Mumbai vide order in & others/M/2023 dated 08.08.2024 and to 3269/M/2019 dated 16-02-2023, relying upon decision in the case of SBI v DCIT vide ITA No. 3644/M/2016 dated 03-02-2020.
In view of the foregoing, considering the fact that issue being identical and recurring in nature and being consistently decided in favour of the assessee vide several decisions of the co-ordinate benches of ITAT,Mumbai(supra),respectfully following the decision referred above,the disallowance made is accordingly deleted.
Order pronounced in the open court on 07/01/2025.