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Income Tax Appellate Tribunal, PUNE BENCH “B”, PUNE
Before: SHRI S.S. GODARA & DR. DIPAK P. RIPOTE
PER S.S. GODARA, JM :
These assessee’s and Revenue’s twin cross appeals each, arise against the CIT(A), Pune-6’s separate orders dated 31.01.2018 passed in case Nos. PN/CIT(A)-6/DCIT,Cir-8/3/2015-16 & PN /CIT(A)/DCIT,Cir-
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8/137/2016-17, for A.Yrs 2012-13 & 2013-14, respectively, involving
proceedings under 143(3) of the Income Tax Act, 1961 in short ‘the Act’.
Heard both the parties. Case files perused.
2.1 We note during the course of hearing the assessee’s twin appeals
ITA Nos.766 & 767/PUN/2018 raise the following common substantive
grounds :
“1. GROUND 1 - DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D 1.1 The CIT(A) erred in upholding the action of the Assessing Officer (‘AO’) in making disallowance under section 14A of the Income-tax Act, 1961 (‘Act’) by applying Rule 8D of the Income Tax Rules, 1962 (‘Rules’). 1.2 The CIT(A) have erred in not appreciating the fact that the disallowance under section 14A of the Act of Rs. 50,000 made by the Appellant in the Return of Income is reasonable. 1.3 The CIT(A) erred in observing that the Appellant claimed that it has not incurred any expenditure for earning exempt income, whereas, as evident from the facts of the case, the Appellant had itself disallowed an amount of Rs. 50,000 under section 14A of the Act. 1.4 The CIT(A) should have appreciated that the disallowance under section 14A read with Rule 8D cannot be invoked without recording objective satisfaction. 1.5 Without prejudice to the above, the CIT(A) erred in not restricting the disallowance under section 14A read with Rule 8D to Rs. 42,964, being the amount of exempt income earned by the Appellant during the subject year. 2. GROUND 2 - DISALLOWANCE OF CLAIM FOR DEDUCTION IN RESPECT OF EMPLOYEE STOCK OPTIONS (‘ESOP’) EXPENDITURE. 2.1 The CIT(A) erred in not allowing deduction in respect of ESOP expenditure of Rs.7,57,14,428 under section 37(1) of the Act. 3. GROUND 3 - NOT ALLOWING CLAIM OF DEDUCTION IN RESPECT OF ESOP EXPENDITURE TO THE EXTENT OF PERQUISITE VALUE TAXED IN THE HANDS OF EMPLOYEES 3.1 The CIT(A) erred in not allowing the ESOP expenditure equivalent to the entire perquisite value taxed in the hands of employees in the year of exercise under section 37 of the Act. 3.2 Alternatively, in case the claim in Ground 2 is found to be acceptable, the CIT(A) should have adjusted the claim of ESOP expenditure made in earlier years on accrual basis with the perquisite value taxed in the hands of the employees in respect of options exercised during the year under consideration.”
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We advert to the first and foremost substantive grievance raised at
the assessee’s behest that both the lower authorities have erred in law
and on facts in invoking section 14A read with Rule 8D disallowance(s)
of Rs.2,51,101/- and Rs.42,37,895/-, assessment year wise, in relation to
the corresponding exempt income(s) of Rs.42,964/- and Rs.42,911/-;
respectively. Suffice to say, the assessee had suo motu disallowed
Rs.50,000/- each in both the assessment years. Faced with this situation,
we quote Joint Investment Vs. ACIT (2015) 372 ITR 694 (Delhi) that
such a disallowance ought not to exceed the corresponding exempt
income itself. The fact also remains that the assessee’s suo motu
disallowance of Rs.50,000/- already exceeds the sum which has nowhere
been contested during the course of hearing. We, therefore, direct the
Assessing Officer to restrict the impugned section 14A read with rule 8D
disallowance to a lump sum figure of Rs.50,000/- each in both these
assessment years. Ordered accordingly. Necessary computation shall
follow as per law. The assessee’s identical first and foremost grounds in
both these appeals is partly accepted in very terms.
Next comes the assessee’s identical second substantive grievance
that both the lower authorities have erred in law and on facts in
disallowing its “ESOP” (Employee Stock Options) deduction claim(s) of
Rs.7,57,14,428/- and Rs.12,85,12,529/-, assessment year wise;
respectively as not an allowable revenue expenditure u/s.37 of the Act.
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We have given our thoughtful consideration to vehement rival
contentions against and in support of the impugned disallowance. It
emerges during the course of hearing that this tribunal’s very recent
order dated 29-08-2022 in assessee’s case itself in ITA
No.1393/PUN/2018 involving the preceding twin assessment years
2010-11 and 2011-12, has already rejected the Revenue’s arguments as
follows :
“3. We would first adjudicate appeal in ITA No. 1392/PUN/2018 for A.Y. 2010-11. The only ground is with regard to not allowing deduction by the ld. CIT(A) in respect of Employee Stock Options (ESOP) expenditure of Rs. 1,33,64,340/- u/s 37 sub-clause (1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”. The ld. Sr. Counsel for the assessee submitted that in the first round of litigation the Pune Tribunal in assessee’s own case in ITA No. 579/PUN/2014 for A.Y. 2010-11, order dated 11-04-2016 had remanded this issue back to the file of the A.O to consider the claim of the assessee in the light of decision of Special Bench Bangalore Tribunal in the case of Biocon Ltd., in (2013) 35 taxmann.com 335 (Bangalore – Trib) (SB). The relevant paragraphs of Tribunal’s order are extracted as follows: “32. The assessee raised additional ground as ground no. 4 on account of claim of deduction in respect of Employee Stock Options (ESOP) expenditure of `1,33,64,340/-. The ld. AR submitted that the assessee is a listed company and issued stock options with a ceiling of 5% of the issued equity capital of the company to its employees pursuant to Employee Stock Option Scheme 2009. The said scheme was formulated in accordance with the SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) guidelines, 1999. The assessee as a matter of abundant caution did not claim deduction of ESOP expenditure of `1,33,64,340/- in its return of income for assessment year 2010-11 in view of conflicting decisions of various Benches of the Tribunal on the issue. Now, in the light of Bangalore Special Bench decision in the case of Biocon Limited Vs. DCIT reported as 25 ITR (Trib.) 602 the additional ground of appeal is raised before Tribunal for claiming ESOP expenditure as a tax deductible expense. 33. On the other hand ld. DR submitted that the assessee raised this issue first time before the Tribunal. The ld. DR submitted that the expenditure was never claimed by the assessee. Therefore, the same is not allowable. 34. Both sides heard. It is an admitted fact that the assessee has claimed ESOP expenditure for the first time before the Tribunal. The Hon'ble Supreme Court of India in the case of Goetze (India) Ltd. Vs. CIT has held that the powers of the Appellate Tribunal are not impinged to accept the claim of assessee which has not been made before the Assessing Officer. We deem it appropriate to remit this issue back to the file of Assessing Officer to consider the claim of the assessee in the light of decision of Special Bench of the Bangalore Tribunal in the case of Biocon Limited
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(supra). The assessee shall file fresh computation of income before the Assessing Officer. The Assessing Officer shall consider the same and decide the claim of assessee in accordance with law. Accordingly, this ground of appeal of the assessee is allowed for the statistical purpose.”
Therefore, as per the remand proceedings and judicial discipline, the A.O should have only restricted himself in following the direction of the Tribunal in deciding the issue only on the basis of Special Bench decision in the case of Biocon Ltd (supra). However, we find that the A.O while adjudicating on this issue in his order from para 5 onwards has in effect tried to distinguish the Special Bench decision in the case of Biocon Ltd (supra) and has also referred to Delhi ITAT decision in the case of ACIT Vs. Ranbaxy Laboratories in ITA 2613 and 3871/Del/. The A.O has also commented that there is no jurisdictional High Court decision that has been placed before him. Thereafter, at para 7.3 in his order, he opines that ESOP claim of the assessee is not as per the guidelines issued by the Special Bench decision in the case of Biocon Ltd (supra) on which the assessee has placed reliance. According to the A.O the assessee has not clarified on this issue. In view of the discussion, the claim of deduction of ESOP expenditure amounting to Rs. 1,33,64,340/- was disallowed by the A.O. We find that in the order of the Tribunal (supra) it has been clearly mentioned that the A.O has to adjudicate the issue in the light of the Special Bench decision Bangalore whereas the A.O has gone beyond and has tried to distinguish the judgment itself along with other cases which is not in accordance with the judicial decorum. We find that the Hon‟ble Calcutta High court in the case of Surrendra Overseas Ltd. Vs. CIT in Income-tax Reference No. 406 of 1975 - (1979) - 120 ITR 872 (Cal) wherein the facts were that the assessee preferred appeals before the Appellate Assistant Commissioner (hereinafter referred to as “the AAC” for short) against the additions made on account of hundi loans. The AAC remanded the matter for fresh consideration. While acting under AAC‟s directions the A.O withdrew development rebate allowed in respect of two ships on the ground that the assessee had sold those ships within a period of eight years from the date of acquisition. The Tribunal held that the ITO was justified in considering admissibility of rebate while acting under AAC‟s direction. Now, before the High Court a question was when specific direction has been given to the ITO by AAC to re-examine the question of genuineness of hundi loans only in such circumstances the ITO had no jurisdiction to consider the admissibility or otherwise of development rebate and it was held by the Hon‟ble High Court that the only issue which the ITO could have examined was as per what the AAC has directed him to look into and nothing further. Reverting to the facts of the present case taking guidance from the aforesaid decision, the A.O should have decided the issue taking the guidance from the Special Bench decision (supra) as has been directed by the Tribunal in the first round of litigation. Now, we find that the Special Bench Bangalore in the case of Biocon Ltd (supra) on the issue have held the discount on ESOP being a general expense, is an allowable deduction u/s 37(1) of the Act during the years of vesting on basis of percentage of vesting during such period subject to upward or downward adjustment at the time of exercise of option. When this issue was decided in favour of the assessee, the department took up this matter before the Hon‟ble Karnataka High Court in the case of CIT LTU vs. Biocon Ltd ((2020) in ITA No. 653 of 2013 - 121 taxman.com 351 (Karnataka). The Hon‟ble Karnataka High court analysed the facts involving the issue and the background of the case as follows: “2. Facts leading to filing of this appeal briefly stated are that the assessee is a company engaged in the business of manufacture of Enzymes and Pharmaceuticals Ingredients. The assessee filed its return of income for the Assessment Year 2004-05 on 31.10.2004 declaring total income of Rs.50,65,18,080/-. The case was selected for scrutiny by the Assessing Officer.
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The Assessing Officer by an order dated 29.12.2006 inter alia held that assessee has floated a scheme viz., Employees Stock Option Plans (ESOP) and under the scheme had constituted the Trust. The shares of the company were transferred to the trust at the face value and the employees of the assessee were allowed to exercise the option to buy the shares within the time prescribed under the scheme subject to terms and conditions mentioned therein. The assessee claimed the difference of market price and allotment price as a discount and claimed the same as an expenditure under Section 37 of the Act. The Assessing Officer rejected the claim on the ground that the assessee has not incurred any expenditure and the expenditure is contingent in nature and therefore, the assessee is not entitled to claim the difference between the market price and the allotment price as an expenditure under Section 37 of the Act. The assessee thereupon filed an appeal before the Commissioner of Income Tax (Appeals) who by an order dated 13.11.2009 dismissed the appeal preferred by the assessee.
The assessee thereupon filed an appeal before the Income Tax Appellate Tribunal (hereinafter referred to as 'the tribunal' for short). The division bench of the tribunal made a reference to the special bench. The special bench referred the question 'whether discount on the issue of employees for options is allowable as deduction in computing the income under the head 'profits and gains' of business'?. The Special bench of the tribunal by an order dated 16.07.2013 while answering the reference inter alia held different amount of between the market value and the face value at which shares are allotted are part of remuneration, which are paid to the employees in order to compensate them for the continuity of their services to the company and therefore, the same is allowable as an expenditure under Section 37 of the Act. It was further held that the expenditure is not contingent in nature. The appeal preferred by the assessee was directed to be placed before the division bench for decision in the light of findings recorded by the special bench. In the aforesaid factual background, the revenue has filed this appeal.” Thereafter, the Hon‟ble High court has held as follows: 5.
We have considered the submissions made by learned counsel for the parties and have perused the record. The singular issue, which arises for consideration in this appeal is whether the tribunal is correct in holding that discount on the issue of ESOPs i.e., difference between the grant price and the market price on the shares as on the date of grant of options is allowable as a deduction under Section 37 of the Act. Before proceeding further, it is apposite to take note of Section 37(1) of the Act, which reads as under:
Section 37(1) says that any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head, "Profits and Gains of Business or Profession".
Thus, from perusal of Section 37 (1) of the Act, it is evident that the aforesaid provision permits deduction for the expenditure laid out or expended and does not contain a requirement that there has to be a pay-out. If an expenditure has been incurred, provision of Section 37(1) of the Act would be attracted. It is also pertinent to note that Section 37 does not envisage incurrence of expenditure in cash.
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Section 2(15A) of the Companies Act, 1956 defines 'employees stock option' to mean option given to the whole time directors, officers or the employees of the company, which gives such directors, officers or employees, the benefit or right to purchase or subscribe at a future rate the securities offered by a company at a free determined price. In an ESOP a company undertakes to issue shares to its employees at a future date at a price lower than the current market price. The employees are given stock options at discount and the same amount of discount represents the difference between market price of shares at the time of grant of option and the offer price. In order to be eligible for acquiring shares under the scheme, the employees are under an obligation to render their services to the company during the vesting period as provided in the scheme. On completion of the vesting period in the service of the company, the option vest with the employees.
In the instant case, the ESOPs vest in an employee over a period of four years i.e., at the rate of 25%, which means at the end of first year, the employee has a definite right to 25% of the shares and the assessee is bound to allow the vesting of 25% of the options. It is well settled in law that if a business liability has arisen in the accounting year, the same is permissible as deduction, even though, liability may have to quantify and discharged at a future date. On exercise of option by an employee, the actual amount of benefit has to be determined is only a quantification of liability, which takes place at a future date. The tribunal has therefore, rightly placed reliance on decisions of the Supreme Court in Bharat Movers supra and Rotork Controls India P. Ltd., supra and has recorded a finding that discount on issue of ESOPs is not a contingent liability but is an ascertained liability.
From perusal of Section 37(1), which has been referred to supra, it is evident that an assessee is entitled to claim deduction under the aforesaid provision if the expenditure has been incurred. The expression 'expenditure' will also include a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which it is issued and the market value of the shares would also be expenditure incurred for the purposes of Section 37(1) of the Act. The primary object of the aforesaid exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, the same cannot be construed as short receipt of capital. The tribunal therefore, in paragraph 9.2.7 and 9.2.8 has rightly held that incurring of the expenditure by the assessee entitles him for deduction under Section 37(1) of the Act subject to fulfilment of the condition.
The deduction of discount on ESOP over the vesting period is in accordance with the accounting in the books of accounts, which has been prepared in accordance with Securities And Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999.
So far as reliance place by the revenue in the case of CIT VS. INFOSYS TECHNOLOGIES LTD. is concerned, it is noteworthy that in the aforesaid decision, the Supreme Court was dealing with a proceeding under Section 201 of the Act for non-deduction of tax at source and it was held that there was no cash inflow to the employees. The aforesaid decision is of no assistance to decide the issue of allowability of expenses in the hands of the employer. It is also pertinent to mention here that in the decision rendered by the Supreme Court in the aforesaid case, the Assessment Year in question was 1997-98 to 1999- 2000 and at that time, the Act did not contain any specific provisions to tax the benefits on ESOPs. Section 17(2)(iiia) was inserted by Finance Act, 1999 with effect from 01.04.2000. Therefore, it is evident that law recognizes a real benefit in the
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hands of the employees. For the aforementioned reasons, the decision rendered in the case of Infosys Technologies is of no assistance to the revenue. The decisions relied upon by the revenue in Gajapathy Naidu, Morvi Industries and Keshav Mills Ltd. supra support the case of assessee as the assessee has incurred a definite legal liability and on following the mercantile system of accounting, the discount on ESOPs has rightly been debited as expenditure in the books of accounts. We are in respectful agreement with the view taken in PVP Ventures Ltd. And Lemon Tree Hotels Ltd. Supra. 13. It is also pertinent to mention here that for Assessment Year 2009-10 onwards the Assessing Officer has permitted the deduction of ESOP expenses and in view of law laid down by Supreme Court in Radhasoami Satsang vs. CIT, (1992) 193 ITR 321 (SC), the revenue cannot be permitted to take a different stand with regard to the Assessment Year in question. In view of preceding analysis, the substantial questions of law framed by a bench of this court are answered against the revenue and in favour of the assessee. In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed.”
We find that Ranbaxy Laboratories‟ judgment which has been referred to 6. by the department was also considered in the aforesaid judicial pronouncement. The decision of the Special Bench Bangalore has been upheld by the Hon‟ble Karnataka High court (supra) and it has been categorically held that the expenditure on ESOP entitles the assessee for deduction u/s 37(1) of the Act. Respectfully following the aforesaid judicial pronouncement we allow the ground of appeal of the assessee. In the result, the appeal of the assessee in ITA 1392/PUN/2018 for A.Y. 2010-11 is allowed. 7. Both the parties, at the time of hearing, submitted that this issue also finds place in ITA No. 1393/PUN/2018. Under similar facts and circumstances therefore, having heard the parties, our decision on this issue in ITA No.1392/PUN/2018 for A.Y. 2010-11 except for the amounts involved shall apply mutatis mutandis also for ITA No. 1393.PUN/2018 for A.Y. 2011-12. Accordingly, the ground No. 1.1 of assessee‟s appeal is allowed. 8. The ld. Sr. Counsel further submitted that if Ground No. 1.1 is allowed, then ground No. 1.3 would become infructuous. Since we have decided the said ground No. 1.1 in favour of the assessee, therefore, taking the submissions of the ld. Sr. counsel ground No. 1.3 is dismissed as infructuous. 9. Ground No. 1.2 reads as follows: “2. the CIT(A) has further erred in not allowing deduction for ESOP expenditure on the basis of the perquisite value taxed in the hands of employees in respect of options exercised by them during the year, to the extent such expenditure is not allowed on accrual basis in earlier years.” 10. This issue has also been dealt with by the Special Bench decision in the case of Biocon Ltd (supra). The Tribunal held as follows: “11.1.5. The other side of the coin is the amount of remuneration to the employees in the hands of the company. We have noticed earlier that an expense becomes deductible on the incurring of liability under the mercantile system of accounting. Although the stage of taxability of
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perquisite in the hands of the employee may differ from the stage of the deductibility of expense in the hands of the company depending upon the method of account followed by the company, but the amount of such discount or employees remuneration can never be different. If the value of perquisite in the hands of the employee, whether or not taxable, is `x', then its cost in the hands of the company has also to be `x'. It can neither be `x+1' nor `x-1'. It is simple and plain that the amount of remuneration which percolates to the employees will always be equal to the amount flowing from the company and such remuneration to the employee in the present context is the amount which he actually becomes entitled to on the exercise of options. Thus, it is palpable that since the remuneration to M/s.Biocon Limited the employees under the ESOP is the amount of discount w.r.t. the market price of shares at the time of exercise of option, the employees cost in the hands of the company should also be w.r.t. the same base.
11.1.6. The amount of discount at the stage of granting of options w.r.t. the market price of shares at the time of grant of options is always a tentative employees cost because of the impossibility in correctly visualizing the likely market price of shares at the time of exercise of option by the employees, which, in turn, would reflect the correct employees cost. Since the definite liability is incurred during the vesting period, it has to be quantified on some logical basis. It is this market price at the time of the grant of options which is considered for working out the amount of discount during the vesting period. But, since actual amount of employees cost can be precisely determined only at the time of the exercise of option by the employees, the provisional amount of discount availed as deduction during the vesting period needs to be adjusted in the light of the actual discount on the basis of the market price of the shares at the time of exercise of options. It can be done by making suitable northwards or southwards adjustment at the time of exercise of option. This can be explained with the following example with the assumption of vesting period of four years and the benefit vesting at 25% each at the end of 1st to 4th years:
At the time of At the time of exercise of option granting option 1 Situation I Situation II Situation III 1 Market value per 110 110 130 90 . share 1 Option price 10 10 10 10 . Employees 100 100 120 80 7 compensation or . discount From the above table it can be noticed that the market price of the shares at the time of grant of option was Rs. 110 against the option price of `10, which resulted in discount at `100. With the vesting period of four years with the equal vesting, the company can rightly claim deduction at the rate of Rs. 25 each at the end of first, second, third and fourth year of vesting. But this total deduction for discount of Rs. 100 over the vesting period needs to be adjusted at the time of exercise of option by the employee when the shares are issued. In Situation I, the market price of shares at the time of exercise of option is at Rs. 110, which is similar to the market price at the time of grant of option. As the total amount of discount of Rs. 100 over the vesting period is actually quantified at Rs. 100, no further adjustment to the discount is required at the time of exercise of option. In Situation II, the market price of the share at the time of exercise of option has gone up to Rs.
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The amount of real compensation to employee is Rs. 120 as against the tentative compensation of Rs. 100 per share which was accounted for and allowed as deduction during the vesting period. As the actual quantification of the compensation has turned out to be Rs. 120, the company is entitled to a further deduction of Rs. 20 at the time of exercise of option. In Situation III, the market price of the share at the time of exercise of option has come down to Rs. 90. The amount of real compensation to employees is Rs. 80 as against the tentative compensation of `100, which was allowed as deduction during the vesting period. As the actual quantification of the compensation has turned out to be Rs. 80, the company is liable to reverse the deduction of Rs. 20 at the time of exercise of option. 11. Having heard the parties, this ground is allowed as per the aforesaid terms of decision of the Special Bench.”
We do not see any distinction on facts and law pinpointing at the
Revenue’s behest during the course of hearing. We thus adopt the
foregoing total discussion mutatis mutandis and accept the assessee’s
corresponding substantive ground Nos. 2 to 3.2 in both these appeals.
Ordered accordingly.
Learned counsel does not press for the assessee’s third substantive
ground raising the issue of Education Cess(s) as an allowable business
expenditure deduction. Rejected accordingly.
These assessee’s twin appeals ITA Nos. 766 & 767/PUN/2018 are partly
allowed in foregoing terms.
This leaves us with the Revenue’s as many cross appeals –ITA
Nos.818 and 819/PUN/2018 raising the identical sole substantive
grievance of disallowance of interest income on Non Performing Assets
(NPAs) on accrual basis involving Rs.11,53,98,886/- and Rs.81,44,877/-
case wise; respectively. It emerges during the course of hearing that the
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same is also no more res integra in light of hon’ble jurisdictional high
court’s recent common order involving assessment years 2009-10 to
2011-12 in assessee’s case(s) itself dated 02-04-2019 declining the
Revenue’s Income Tax Appeal Nos.237 and 485/2017 as follows :
“2. The appeal is filed by the Revenue to challenge the judgment of the Income Tax Appellate Tribunal ("the Tribunal" for short) raising following questions for our consideration:-
"(i) Whether on the facts and circumstances of the case and in law, the Tribunal was correct in disregarding the judgment of the Hon'ble Supreme Court given in the case of Southern Technologies Ltd Vs. JCIT 320 ITR 577 (SC) which says that provisions of RBI Act cannot override the provision of Section 145 of the Income Tax Act, 1961, since both the Acts operate in different fields and therefore, assessee cannot recognize interest income on NPA and yet not offer it in Profit and Loss account?
(ii) Whether on the facts and in the circumstances of the case and in law, the Tribunal was correct in deleting the disallowance of Rs.71,13,261/- made by AO u/s. 14A r/w Rule 8D after treating the disallowance of Rs. 57,600/- offered by assessee as insufficient on the ground that the AO has not recorded the error in the offer of the assessee before invoking Rule 8D, without any such explicit requirement of law?" 3. Question No. (i) arose in following background:-
3.1 Respondent assessee is a Non Banking Finance Company ("NBFC" for short). Respondent filed return of income for the assessment year 2009-10 in which the assessee had claimed deduction of interest on advances which had become non performing assets ("NPA" for short). The Assessing Officer disallowed the claim relying on such disallowance for the earlier assessment years which were on the ground that the assessee which was following the mercantile system of banking had to pay tax on interest on accrual basis.
3.2 The issue eventually reached the Tribunal. The Tribunal, by the impugned judgment, allowed the assessee's claim, upon which, the Revenue has filed this appeal. 4. Learned counsel for the Revenue submitted that the assessee had to offer the interest income to tax on accrual basis. The special provision for taxing interest income on NPAs on the basis of receipt has been made under Section 43D of the Income Tax Act, 1961 ("the Act" for short) which does not apply to NBFC. By necessary implication, therefore, the legislature desired that such benefit would be restricted only to such of the entities as are referred to in Section 43D of the Act.
On the other hand, learned counsel for the assessee brought to our notice several judgments of the different High Courts holding that on the principle of real income theory, interest on NPAs cannot be charged on accrual basis.
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Gujarat High Court in case of Principal CIT Vs. Mahila Sewa Sahakari Bank Ltd1 had held that in case of a co-operative bank, the interest on NPAs would not be chargeable to tax on mere accrual. The Court referred to and relied upon the decision of the Supreme Court in the case of Southern Technologies Ltd Vs. Joint CIT. We may note that the decision concerns the assessment year 2010-11 when a co-operative bank was not included under Section 43D of the Act which was inserted by Finance Act, 2017 w.e.f 1.4.2018.
In case of CIT Vs. Deogiri Nagari Sahakari Bank Ltd & Ors.3, this Court had expressed a similar view. We may further clarify that in the said case, the Court was concerned with a similar claim raised by the co-operative bank and the Court did record that the assessee was a co-operative bank and not NBFC. However, this distinction may not have much significance now in view of the fact that this Court in case of CIT Vs. M/s. KEC Holdings Ltd (Income Tax Appeal No. 221 of 2012 decided on 11.6.2014) held and observed as under:-
"8. The assessee had credited only an amount of Rs.38,57,933/- as interest on loans. The Assessing Officer was of the view that the interest accrued on the entire loans should have been shown as income. The details as to how the interest income on accrual basis should have been disclosed are, therefore, referred to by the Tribunal. The Tribunal held that the said income was not realized. It held that the assessee follows the mercantile system of accounting. The Tribunal held that the loan advanced by the assessee which was in NBFC had become non-performing asset. That is how following judgments rendered by the Hon'ble Supreme Court and the Delhi High Court, the Tribunal has eventually held that once there is no dispute that the interest considered as accrued was a non-performing asset as per Reserve Bank of India guidelines, then, the income from this interest did not accrue to the assessee. It is in such circumstances, that this income in question was not and cannot be assessed on accrual basis.
We do not find that the Tribunal has either misdirected itself in law or its order can be termed as perverse warranting interference in our appellate jurisdiction. We find that the view taken by the Tribunal accords with the Reserve Bank of India guidelines and which are not in any way in conflict with the Income Tax Act, 1961, the Hon'ble Supreme Court has held in the case of UCO Bank that the interest income would have been brought to the Profit and Loss Account provided it was actually realized, that in case of Nationalized Bank it treated something which is doubtful, and therefore, kept it in a suspense account, was held to be a permissible exercise. In respect of the loans which are advanced, recovery of some of them if considered doubtful, then, even the interest on the loans advanced may not be realized. That is how the amount is not brought to the profit and loss account because they are not likely to be realized by the bank or a NBFC as well. It is permissible therefore to disclose or to show them as income in assessment year in which either the interest amount or part of it is recovered. The Tribunal in this case, namely, of the assessee before us, has precisely followed this course. We do not find that the course permitted and upheld by the Tribunal is in any way in conflict with any legal provisions or the settled principles. Rather as held by us, it is in accordance with the same. Once the view taken by the Tribunal was possible and in the given facts and circumstances the income has not been realized by the assessee, the addition was rightly deleted. We, therefore, do not find that the appeal raises any substantial question of law. It is accordingly dismissed. No costs."
13 ITA Nos.766 & 767/PUN/2018 and ITA Nos.818 & 819/PUN/2018 Bajaj Finance Limited
Delhi High Court in case of CIT Vs. Vasisth Chay Vyapar Ltd held that interest on NPAs cannot be taxed on accrual basis. It was noted that NBFC would be governed by the directions issued by the Reserve Bank of India and RBI directives provided that under certain circumstances, a loan or advance would be treated as NPA. The Court on the real income theory held that such interest would not be taxable. We notice that the decision of the Delhi High Court in case of Vasisth Chay Vyapar Ltd (supra) was carried in the appeal by the Revenue before the Supreme Court. The Supreme Court in the judgment reported in [2018] 253 Taxman 401 (SC) approved the decision of the High Court and dismissed the appeal. Under these circumstances, this question is not entertained.” 9. Learned departmental representative could hardly pinpoint any
distinction on facts or law, as the case may be, in both these assessment
years. Faced with this situation, we adopt judicial consistency to affirm
the CIT(A)’s detailed discussion relating to the impugned sole
disallowance of accrued interest income on NPAs. Ordered accordingly.
These Revenue’s cross appeals ITA Nos.818 & 819/PUN/2018 fail
therefore.
To sum up, the assessee’s twin appeals ITA Nos.766 &
767/PUN/2018 are partly allowed and Revenue’s cross appeals ITA
Nos.818 & 819/PUN/2018 are dismissed in above terms. A copy of this
order be placed in the respective case files.
Order pronounced in the Open Court on 09th December, 2022.
Sd/- Sd/- (DIPAK P RIPOTE) (S.S. GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER
पुणे Pune; �दनांक Dated : 09th December, 2022 Satish
14 ITA Nos.766 & 767/PUN/2018 and ITA Nos.818 & 819/PUN/2018 Bajaj Finance Limited
आदेश क� ��त�ल�प अ�े�षत/Copy of the Order is forwarded to: 1. अपीलाथ� / The Appellant; 2. ��यथ� / The Respondent; 3. The concerned CIT(A); 4. The CIT concerned िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे “B” / 5. DR ‘B’, ITAT, Pune गाड� फाईल / Guard file 6. आदेशानुसार/ BY ORDER,
// True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune
Date 1. Draft dictated on 29-11-2022 Sr.PS 2. Draft placed before author 02-12-2022 Sr.PS 3. Draft proposed & placed before JM the second member 4. Draft discussed/approved by JM Second Member. 5. Approved Draft comes to the Sr.PS Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order.