KOTAK MAHINDRA BANK LTD,MUMBAI vs. DCIT CIR 2(3)(2), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, MUMBAI

BEFORE SHRI SHAMIM YAHYA, AM AND SHRI PAWAN SINGH, JM I.T.A. No.681/Mum/2016 (Assessment Year: 2009-10)

Kotak Mahindra Bank Limited Dy. CIT, Circle 2(3)2, 27, BKC, C-27, G Block, Aayakar Bhavan, Bandra Kurla Complex, Bandra (E), Vs. Mumbai-400 020 Mumbai-400 051

PAN/GIR No. AAACK 4409 J (Appellant) : (Respondent)

: Shri F. V. Irani Appellant by : Shri Sanjay Singh Respondent by

Date of Hearing : 28.06.2018 Date of Pronouncement : 14.09.2018

O R D E R Per Shamim Yahya, A. M.: This appeal by the assessee is directed against the order of the Commissioner of

Income Tax (Appeals) (‘ld.CIT(A)’ for short) dated 12.11.2015 and pertains to the

assessment year (‘A.Y.’ for short) 2009-10.

GROUND NO.I - Invalid Re-assessment Proceedings 1. The Commissioner of Income tax (Appeals)-6, Mumbai ("the CIT(A)"), erred in upheld the reassessment proceedings u/s 147 of the Income tax Act, 1961 ("the Act") initiated by the Assessing Officer. 2. He failed to appreciate and ought to have held that: a. The reasons mentioned in the reopening notice were merely a change of opinion and the facts and details were already submitted along with return of income and during the course of regular assessment proceedings.

2 ITA No. 681/Mum/2016 Kotak Mahindra Bank Limited b. The AO has reopened the assessment merely after having a "re-look" at the Notes to the Balance sheet & P & L A/c and Notes to Return of Income filed by the assessee during the assessment proceedings, no fresh material was available with the AO while reopening the assessment; c. The regular assessment was completed on 23.03.2011, wherein all the information was available with the AO who passed the order after going through all the details and satisfying himself fully. 7 d. In order to reopen an assessment, the AO should have fresh and new material to form his belief whereas in the Appellant's case there was no fresh material on record and assessment cannot be re-opened except on fresh material / evidence. e. There was no failure on the part of the appellant in disclosure of material of facts, as has been envisaged in first proviso to section 147. f. Entire reopening was based on audit query and without independent application of mind by AO. 3. Your Appellant prays that the entire reassessment proceedings are bad in law and requires to be quashed. GROUND NO. II - Disallowance of Deduction of Rs.9,55,02.691 u/s. 1. The CIT(A) erred in confirming disallowance of deduction of Rs.9,55,02,691 u/s. 36(l)(vii) being 20% of profits from providing long term finance for construction / purchase of houses residential purposes on the ground that Appellant has not created Special Reserve for the same during the Assessment Year 2009-10. 2. The CIT(A) failed to appreciate and ought to have held that: a. Nowhere in section 36(l)(viii) it has been provided that the asssesee should create a special reserve in the year in which profit is earned. b. Creation of special reserve was a mere book entry and there is no impact on the net profit carried forward for appropriation c. The Appellant has substantially complied with the procedural requirement of creating reserve by book entry in subsequent AY 2010-11 and the amount so transferred have been maintained thereafter, d. Requirement to transfer to a special reserve is only an act of making an accounting entry which has been duly complied with in the subsequent year. e. Creation of Special Reserve in subsequent year will not change financial position or profit & loss of the appellant as the appellant had sufficient profits in the year ended 31.3.2009 and 31.3.2010 to create the Special Reserve. f. Creation of Special Reserve in immediately succeeding year, being procedural in nature, should not deprive the assessee of the benefit u/s 36(l)(viii) which is the beneficial provision. 3. The Appellant prays that the AO be directed to grant deduction of Rs.9,55,02,691 u/s36(l)(viii).

GROUND NO.III - ESOP Disallowance of Rs.23,36,86,000/-

3 ITA No. 681/Mum/2016 Kotak Mahindra Bank Limited 1. The CIT(A) erred in disallowing Rs.23,36,86,000 on account of Employee Stock Option Plan (ESOP) discount as charged to P&L account as per SEBI Guidelines. 2. He failed to appreciate and ought to have held that: a. ESOP expenses of Rs. 23,36,86,000 /- represented the option discount, that is, the excess of the market price of the share on the date of grant of the option over the exercise price of the option. b. Issue of shares at discount is an alternative form of employee reward & hence cannot be considered as transaction on capital account. c. The liability was not a contingent or notional liability but an ascertained liability and it was also not a capital expenditure d. ESOPs were granted to the employees of the company as per the scheme for motivating them to work for the company for a certain number of years. e. Under section 115WB(d) of the Act, stock options allotted to the employees at discounted price are considered as Fringe Benefits in the hands of employee and liable to Fringe Benefit Tax , the natural corollary which follows is that such discount is employee cost in the hands of employer fully deductible. f. The ESOP discount was accounted as per the SEBI guidelines (SEBI) which has made it mandatory to reflect such costs and charge the same to the Profit & Loss Account and hence it should be allowed as business expenditure u/s 37(1). g. SEBI Guidelines require a company to account for ESOP discount with reference to the market value of shares as on the date of grant of options and not on upon vesting of options.

Apropos ground no.1 – Validity of reopening:

filed the return of income for A.Y. 2009-10 on 29.09.2009 declaring total income of

Rs.533,53,40,480/-. Thereafter, the assessee revised return on 29.09.2010 and 18.02.2011

declaring total income of Rs.502,03,08,180/-. The return was processed u/s.143(1).

Subsequently, the case was selected for scrutiny and notices u/s.143(2) and 142(1) were

issued and served on the assessee. After hearing the assessee, order u/s.143(3) was passed

on 23.03.2011 determining the total income at Rs.5,75,09,99,270/-. Subsequently, the

case was re-opened u/s. 147 on the grounds that the assessee had created the special

reserve u/s.36(1 )(viii) amounting to Rs.9,55,02,691/- in the subsequent financial year

4 ITA No. 681/Mum/2016 Kotak Mahindra Bank Limited 2009-10 but the claim was made in the financial year 2008-09 relevant to assessment year

2009-10. The other reason was claim of deduction u/s.36(1)(viia) @ 7.5% before

allowing bad debts written off. The third reason was claim of expenditure on ESOPs to

employees amounting to Rs.23,36,86,000/-. Accordingly, notice u/s 148 was issued by

the Assessing Officer (‘A.O.’ for short) and was duly served on the assessee.

Subsequently, notices u/s.143(2) and 142(1) were issued. The assessee objected to the re-

opening on the ground that no new and fresh material was available to the A.O.. Full and

complete details of creation of special reserve u/s.36(1)(viii) disclosed by way of "Notes

to the revised return of income" was filed before the A.O. for A.Y.2009-10. As regard

claim for expenditure on ESOPs to employees amounting to Rs.23,36,86,000, complete

details of expenditure were available before the Assessing Officer in the form of Notes to

the audited accounts appended to the return of income filed by the assessee. The

Assessing Officer did not agree with the contention of the assessee and completed the

assessment u/s. 143(3) r.w.s. 147 of the Income Tax Act, 1961 (‘the Act' for short) after

disallowing deduction of Rs.9,55,02,691/- claimed u/s 36(1)(viii) and disallowing

expenditure on ESOP of Rs.23,36,86,000/-. The Assessing Officer also charged interest

of Rs.1,22,31,633/- u/s.234D of the Act.

reopening which reads as under:

"In this case assessment for AY 2009-10 was completed after scrutiny assessing taxable income at Rs.575,09 crores. 2. On perusal of the records, it is seen that the assessee has derived the profit from long term finance for construction and purchase of residential houses and has

5 ITA No. 681/Mum/2016 Kotak Mahindra Bank Limited claimed deduction u/s, 36(1 )(viii) of Rs.9,55,02,691. On verification, it is found out that the assessee has created a special reserve in F.Y.2Q09-1Q relevant to A.Y.2Q1Q-11, instead off. Y.2008-09 relevant to AY 2009-10. 3. It is further seen that deduction u/s.36(1)(viia) @ 7.5% has been allowed before allowing claim of bad debts which has resulted in short levy of tax of Rs. 79,82,943, 4. The assessee has also allotted shares to employees under the ESOP scheme, out of its share capital and therefore, the expenditure is not allowable in view of Board's Circular No.9/2007 dated 20.12.2007. The omission resulted in underassessment of income by Rs.23,36,86,000. 5. In view of the above, I have reason to believe that the income chargeable to tax has escaped assessment in the hands of the assessee for AY. 2009-10 within the meaning of section 147 of the IT Act."

issue. He also noted that reassessment notice was issued within four year. He referred to

Explanation 1 to section 147 and referred to the decision of Hon’ble Delhi High Court in

the case of Honda Siel Power Products Ltd. vs. Deputy Commissioner of Income-

tax [2012] 340 ITR 53 (Del). Referring to the above decision, the ld. CIT(A) upheld the

validity of reopening by concluding as under:

The Hon'ble High court decided the issue in favour of revenue though the re- assessment was done after four year. It held that whether or not there was a failure or omission to disclose truly and fully is essentially a question of fact. It referred to the Explanation 1 of section 147 which stipulates that mere production of books of account or other evidence is not sufficient. Merely because material lies embedded in material or evidence, which the Assessing Officer could have uncovered but did not uncover, is not a good ground to strike down a notice for re- assessment. The SLP filed against the above decision has been dismissed by the Hon'ble Supreme Court and therefore the issue has attended finality. There is no reason why the ratio of the above decision shall not be applicable to the facts of the instant appeal. I do not agree with the contention of the Ld. AR that disclosure in the form of Notes to the return of income or Notes to the financial accounts amount to full and true disclosures of material facts. There was no specific enquiry by the A.O. during the course of assessment proceedings in respect of non-creation of special reserve and allowability of ESOP expenditure. In view of the above, in the present case, the decisions cited by the Ld, AR are clearly distinguishable on facts. Considering the facts that the assessee failed to make full and true

6 ITA No. 681/Mum/2016 Kotak Mahindra Bank Limited disclosures as envisaged by Explanation 1 to section 147, the action of the A.O. in re-opening the assessment is upheld. This ground is, accordingly, dismissed.

assessee Shri F. V. Irani submitted that the assessment in this case was completed on

23.03.2011. Subsequently, the notice for reopening was issued on 13.03.2014 for the

reasons mentioned as above. He submitted that all the materials referred for reopening

were already there before the A.O. when the assessment was completed earlier u/s.

143(3) of the Act. He submitted that no fresh material has come in the possession of the

A.O. to warrant reopening. In this connection, he placed reliance upon the following case

laws:

notes, the matter was duly disclosed. The ld. Counsel of the assessee Shri F. V. Irani

further submitted that the second reason for reopening has become infructuous as the

A.O. has allowed the same in the giving effect order.

submitted that there is no proper disclosure by the assessee. He claimed that the so called

7 ITA No. 681/Mum/2016 Kotak Mahindra Bank Limited disclosure is in note to computation of income. He submitted that this issue is not subject

to any discussion by the A.O. Hence, no opinion was expressed. He further referred to

several case laws in support of his proposition.

Apropos ground no.2 – Deduction u/s. 36(1)(viii) of the Act:

deduction to the extent of 20 per cent of the eligible profit is allowed only when assessee

creates special reserve for the same during the assessment year. In this case, the assessee

earned profit from the long-term finance from eligible business but has not created the

special reserve for A.Y.2009-10 as required u/s.36(1)(viii) of the Act for business. He has

created the special reserve in the next F.Y.2009-10, which is relevant to A.Y,2010-11.

According to the A.O., since the assessee had not created special reserve as required

u/s.36(1)(viii), it did not qualify for deduction 36(1)(viii) and therefore, he rejected the

claim of the assessee and added the amount of Rs.9,55,02,691/- the total income.

He referred to the provision of section 36(1)(viii). He observed that there is no dispute

that the assessee is a special entity and it has carried out eligible business as per

explanation below the said section. However, he noted that in the present case the

assessee has neither created nor maintained the special reserve during the previous year

relevant to the subject assessment year. That it has created the special reserve in the

subsequent financial year. He found that there is no such exception provided in the Act.

He distinguished the decision in the case of CIT vs. Punjab State Industrial Development

8 ITA No. 681/Mum/2016 Kotak Mahindra Bank Limited Corporation [2010] 323 ITR 425 (P & H) referred by the assessee and the Circular No.

45 dated 02.09.2017. He found that the case was distinguishable as in the present case,

the assessee has not made any reserve. Accordingly, he concluded that since the special

reserve was created in the subsequent year, the same cannot be considered for allowing

deduction u/s. 36(1)(viii) for the current year.

assessee has stated that this issue is covered in favour of the assessee by a catena of

decision from the ITAT as under:

Court in the case of Punjab State Industrial Development Corporation (supra).\

authorities below.

afore said tribunal decision. We may gainfully refer to the decision of the ITAT, Mumbai

Bench in the case of State Bank of India (supra). This issue was elaborately dealt with

and the issue was decided in favour of the assessee. The same reads as under:

9 ITA No. 681/Mum/2016 Kotak Mahindra Bank Limited 3. In the above ground the assessee has challenged the action of the Ld.CIT(Appeals) in upholding disallowance of deduction claimed by the assessee u/s 36(1)(viii) of the Income Tax Act, 1961 (in short 'the Act') amounting to Rs.120 crores. The assessee bank had claimed deduction of Rs.120 crores on account of a special reserve created for the impugned assessment year, under the provisions of section 36(1)(viii) of the Act. The same was denied by the Assessing Officer since he found that the special reserve was not created before finalization of the books of the assessee for the impugned year. The Assessing Officer found that the assessee had created the special reserve only in financial year 2012-13 relevant to assessment year 2013-14. He, therefore, held that the assessee was not entitled to claim deduction u/s 36(1)(viii) of the Act. 4. The Ld.CIT(Appeals) upheld the disallowance, holding that the assessee was duty bound to create and maintain the special reserve out of the profits of the eligible business during the relevant financial year itself and having not done so he held that the Assessing Officer had rightly denied the said claim of the assessee. The Ld.CIT(Appeals) distinguished all the case laws relied upon by the assessee in support of its contention that it was not imperative to create reserve for the impugned year itself before claiming the said deduction. 5. During the course of hearing before us, the Ld. counsel for assessee pointed out that identical issue had been dealt with by the Delhi Bench of the I.T.A.T. in the case of Power Finance Corporation Limited Vs. JCIT (2008) 16 DTR 519(Del) which was followed by the Mumbai Bench of the I.T.A.T. in the case of Bank of Baroda Vs. Addl.CIT in ITA No.4619/M/2012 dated 4.11.2015. Copies of the order were placed before us. The Ld. counsel for assessee pointed out therefrom that it was held by the Tribunal in the said cases that the reserve created in subsequent years, however, before finalization of grant of deduction is required to be considered while allowing the assessee's claim of deduction made u/s 36(1)(viii) of the Act 6. The Ld. DR, on the other hand, relied upon the order of the Ld.CIT(Appeals) and pointed out therefrom that the Ld.CIT(Appeals) had distinguished the aforesaid case law relied upon by the assessee before it by pointing out that the said decision pertained to assessment year prior to assessment year 1998-99 and further that as per the amended provisions the pre-condition for claiming deduction u/s 36(1)(viii) is the creation and maintenance of the reserve, which the assessee had failed to do in the present case. The Ld. DR further drew our attention to the case laws relied upon by the Ld.CIT(Appeals) while upholding the order of the Assessing Officer in support of its finding that the creation of reserve is a pre-condition for claiming deduction u/s 36(1)(viii) of the Act as under: 1) CIT Vs. Tamil Nadu Industrial Investment Corporation Ltd., 240 ITR 573 (Mad) 2) Kerala Financial Corporation Vs. CIT 129 Taxmann 365(Ker)

10 ITA No. 681/Mum/2016 Kotak Mahindra Bank Limited 7. We have heard the contentions of both the parties. We have also gone through the orders of the authorities below and case laws cited before us and also the documents which were brought to our notice during the course of hearing. 8. The issue before us pertains to allowance of deduction on account of creation of a special reserve as per the provisions of section 36(1)(viii) of the Act which though not created in the books of account in the relevant previous year and created later in the A.Y. 2013-14, but before the assessment for the impugned year was completed. 9. We find merit in the contention of the Ld. counsel for assessee that the issue is squarely covered by the decision of the Coordinate Benches in the case of Power Finance Corporation Limited (supra) and Bank of Baroda (supra). On perusing the order of the Delhi Bench of the I.T.A.T. in the case of Power Finance Corporation Limited (supra) we find that the issue before it was identical to the impugned case whether the creation of special reserve at the time of finalization of accounts is imperative for the purpose of claiming deduction on account of the same as per the provision of section 36(1)(viii) of the Act. As per the facts of the said case the assessee had created special reserve of Rs.76.72 crores during the year under consideration but had claimed deduction 36(1)(viii) of the Act on account of higher amount of Rs.130.47 crores on the basis that the reserve of the balance amount of Rs.53.27 crores had been created in the succeeding year. The tax authorities restricted the claim to the extent of reserve created during the year only denying the balance for the reason that the same was not created by the assessee in the books of account for the impugned year but was created in the subsequent year. The I.T.A.T. held that as per the plain reading of section 36(1)(viii) no time limit is indicated for the creation of special reserve for claiming deduction u/s 36(1)(viii) of the Act. The I.T.A.T. held that, therefore, there was no force in the contention of the Revenue that section does not permit deduction in cases where the reserve is created in subsequent years. The I.T.A.T. held that the words used in section "before making any deduction under this clause carried to such reserve account" meant that the creation of the reserve should be considered at the time of considering the claim of deduction made by the assessee and not before making any deduction. The I.T.A.T. drew support for its findings from the decision of he Delhi High Court in the case of CIT Vs. Orient Express Co. Pvt. Ltd. Vs. IAC (1985) 14 ITD 506 (Delhi), the decision of the Special Bench of the ITAT Chandigarh Bench in the case of M/s Punjab State Industrial Corporation Ltd. Vs. DCIT, 102 ITD 1 (Chd)(SB) and the decision of the Hon'ble Apex Court in the case of Karimjee Pvt. Ltd vs DCIT (2005) 193 CTR (SC) 55. The I.T.A.T., therefore, held that the assessee is entitled to deduction u/s 36(1)(viii) of the Act though the reserve is created in the subsequent year provided the same is created before the claim of the assessee is considered and also provided that the same is made out of the profits for the concerned year and not out of the profits of the subsequent year. The relevant findings of the I.T.A.T. in this regard at paras 20 to 25 are as under:

11 ITA No. 681/Mum/2016 Kotak Mahindra Bank Limited " 20. A plain reading of s. 36(1)(viii) does not indicate any time-limit for creation of special reserve for claiming deduction under s. 36(1)(viii) of the Act, hence, the contention of learned Departmental Representative for the Revenue that this provision does not permit the deduction in case the special reserve is created in subsequent year, has no force as it does not find support from the plain language of s. 36(1)(viii) of the Act. Perhaps, the words "......... (before making any deduction under this clause) carried to such reserve account" prompt such inference by the learned Departmental Representative for the Revenue but to our mind answer to such inference drawn by the learned Departmental Representative for the Revenue is that before making any deduction does not mean before making any claim but means at the time of considering such deduction claimed by the assessee. 21. Hon'ble jurisdictional High Court of Delhi while interpreting similar wordings in the context of s. 32A of the Act in the case of CIT vs. Orient Express Co. (P) Ltd. (supra) while dealing with creation of reserve required under s. 32A of the Act at p. 896 held that section prescribes no point of time by which the reserve should be created and in this regard accepted that a reserve created after the closure of the accounts of the year qualifies by observing as under : "The second question which is raised only in ITC Nos. 44 and 45 of 1986 is whether the assessee is disentitled to the investment allowance scheme because no requisite reserve has been created by the assessee company before the close of books of the relevant previous year. On this, the finding is that the requisite 'reserve' has been created by holding a second annual general meeting of the members of the company and that the accounts had been duly amended so as to provide for the reserve before the assessment was completed. In view of the fact that the section prescribes no point of time by which the reserve should be created and in view of the various decisions also referred to by the Tribunal, we think, no question of law arises in regard to this aspect. We, therefore, decline to refer this question." The observation made by the Hon'ble Delhi High Court in this regard is thus clearly applicable to the instant case under consideration also. 22. We further find that the Special Bench of Tribunal (Chandigarh) in the case of Punjab State Industrial Development Corporation Ltd. (supra) also clearly held that in case of claim under s. 36(1)(viii) of the Act further reserve could be created after closure of the account and AO should offer an opportunity to the assessee to do the same for claiming the deduction under s. 36(1)(viii) of the Act. 23. Similar view as taken by the apex Court in the case of Karimjee (P) Ltd. (supra) wherein while dealing with deduction under s. 80HHC of the Act, their Lordships observed that creation of reserve after closure of the accounts was construed as complying with the requirement of granting deduction under s. 80HHC of the Act and in this case the timing of creation of reserve was while the matter was being dealt with by the apex Court.

12 ITA No. 681/Mum/2016 Kotak Mahindra Bank Limited 24. Respectfully following the case law (supra) as discussed hereinabove, we hold that a reserve created in subsequent years, however, before finalization of grant of deduction, is required to be considered while allowing assessee's claim of deduction made under s. 36(1)(viii) of the Act. 25. We further observe that for and from asst. yr. 1996-97, a financial corporation engaged in providing long-term finance for development of infrastructure facility in India has also become eligible assessee and for computing deduction under s. 36(1)(viii) of the Act in the hands of all eligible assessees, only the income derived from the business of providing long- term finance specified in s. 36(1)(viii) of the Act has to be taken into account and an amount not exceeding 40 per cent of the profits from such business is to be carried to such reserve account. This makes out a condition that the amount so transferred to such reserve account should be from such eligible business of providing long-term financing. In view thereof, we hold that the increase in reserve created on 31st March, 1998 i.e., in subsequent year/years is allowable subject to the same being from the profits of eligible business of the assessee of the asst. yr. 1997-98 and not of asst. yr. 1998-99." 10. The aforesaid decision of the Delhi Bench of the I.T.A.T. was followed by the Mumbai Bench of the I.T.A.T. in the case of Bank of Baroda (supra) wherein the issue was identical, the assessee having claimed deduction u/s 36(1)(viii) of the Act, though the special reserve for the purpose of the said claim had not been made during the impugned year but had been made in the subsequent year. 11. It is clear therefore that for claiming deduction u/s 36(1)(viii) of the Act on account of creation of special reserve, what is essential is that the same should be created out of the profits of the year only though not necessarily in the books for the impugned year and that the same can be created in the books of the subsequent year also. What is essential is the creation out of the profits of the impugned year, the point of time of creation being before the consideration of the claim of deduction and not before claiming the deduction as such. 12. Applying the aforesaid provision to the facts of the present case we find that the claim of the assessee amounts to Rs.120 crores for deduction u/s 36(1)(viii) of the Act. The said reserve had been created in financial year 2012-13,i.e before the completion of the assessment for the impugned year vide order passed u/s 143(3) dt.31- 03-2014 was . As per the audited annual report of the assessee of the said year placed before us, it is seen from the Profit & Loss Account for the year ending 31.3.2013, that an amount of Rs.120 crores was transferred from the general reserve out of the profit for the financial year 2010-11 relating to assessment year 2011-12, which is the impugned assessment year, for creating the special reserve u/s 36(1)(viii) of the Act for the assessment year 2011-12. Thus the assessee has duly demonstrated the creation of reserve out of the profits for the impugned assessment year only and also it is not denied that the same had been created before the finalization of the assessment for the impugned assessment year, meaning thereby while considering the claim of the assessee for deduction

13 ITA No. 681/Mum/2016 Kotak Mahindra Bank Limited u/s 36(1)(viii) of the Act. In view of the above, since the assessee has fulfilled the requirement of section 36(1)(viii) of the Act as interpreted by two decisions of the Tribunal as cited above, we hold that the assessee is entitled to deduction u/s 36(1)(viii) of the Act to the extent of reserve created amounting to Rs.120 crores. 13. The reliance placed by the Ld. DR on the decision of the Hon'ble Madras High Court in the case of Tamil Nadu Industrial Investment Corporation Ltd. (supra), we find is of no help to the Revenue. In fact, we find that the ratio laid down in the said decision helps the assessee since the Hon'ble High Court held that for the purpose of claiming deduction u/s 36(1)(viii) of the Act, the creation of reserve out of the profits of the impugned year was imperative. In the case before the Hon'ble High Court the assessee had created reserve out of profits of earlier years which the Hon'ble High Court held would not entitle the assessee to claim deduction u/s 36(1)(viii) of, since the essential condition for claiming the said deduction was creation of reserve out of the profits of the impugned year itself. Since the same has been demonstrated in the present case, the decision of the Hon'ble Madras High Court in the case of Tamil Nadu Industrial Investment Corporation Ltd. (supra), in fact, we find helps the assessee's case. As for the decision relied upon by the assessee of the Hon'ble Kerala High Court in the case of Kerala Financial Corporation (supra), we fail to understand how the said decision is of any assistance to the Revenue since no decision was rendered by the Hon'ble High Court vis-à-vis the issue of point of time of creation of reserve and the only issue before it was whether after creation of reserve, writing off bad debts from the same would tantamount to not "maintaining" the reserve which was required u/s 36(1)(viii) of the Act. The decision of the Hon'ble Kerala High Court is, therefore, clearly distinguishable and we hold, therefore, does not apply to the facts and circumstances of the present case at all. As for the contention of the Ld. DR that the case laws relied upon by the assessee are for the period prior to assessment year 1998-99 and as per amended provisions of section 36(1)(viii) thereafter, the creation of reserve is essential pre-requisite, we find is mis-placed. The creation of reserve was always a condition both in pre-amended and post-amended section. What was added only to the words of the section after the amendment carried out in 1998 was the words "maintained". Therefore, even the decision rendered prior to the amendment brought about to section in 1998, applies to the issue at hand since the amendment had no impact on the condition of creation of reserve. 14. In view of the above, we hold that the assessee is entitled to claim deduction on account of creation of special reserve of Rs.120 crores u/s 36(1)(viii) of the Act since the said reserve has been created out of the profits of the impugned year before the claim was considered for the purpose of deduction. The ground of appeal No.1 raised by the assessee, therefore, stands allowed.

case. It was expounded in the said case that for claiming the deduction u/s. 36(1)(viii) of

14 ITA No. 681/Mum/2016 Kotak Mahindra Bank Limited the Act on account of creation of special reserve what is essential is that the same should

be created out of profits of the impugned year only though not necessarily in the books

for the impugned year and the same can be created in the books of the subsequent year.

That what is essential is the profit of the impugned year, the point of time of creation

being before the consideration of the claim of the deduction and not before claiming the

deduction as such. In the preset case before us, it is not disputed that the assessee has

sufficient profit for the concerned assessment year for creation of the reserve. The only

adverse inference has been taken that the reserve was created in the subsequent year.

Accordingly, on the touch stone of the above said tribunal decision, the assessee is

eligible for deduction u/s. 36(1)(viii) of the Act. It is not the case of the Revenue that the

above said decision of the tribunal have been reversed by the Hon'ble jurisdictional High

Court. Hence, respectfully following the precedent as above, we hold that the assessee is

eligible for deduction u/s. 36(1)(viii) of the act.

Apropos ground no. 3 – Disallowance of ESOP expenses:

assessee was allowed a claim of Rs,23,36,86.000/- being expenditure on ESOP. The AO

observed that the assessee bank had formulated ESOP for the eligible employees of the

bank and the compensation cost pertaining to share based payment of Rs.23.37 crore was

debited to profit and loss account. During the re-assessment proceedings, relying on the

decision of the Special Bench of the Bangalore Tribunal in the case of Biocon Ltd. (ITA

No.368 to 371 & 1206/Ban/2010), the assessee contended that the expenditure on ESOP

15 ITA No. 681/Mum/2016 Kotak Mahindra Bank Limited should be allowed to the assessee. The A.O. did not agree with the contention of the

assessee on the ground that ESOP discounts are incurred in relation to issue of shares to

employees and they are not relatable to profits and gains arising or accruing from a

business/trade. ESOP discount does not diminish trading/business receipts of the issuing

company. The discount is not incurred towards satisfaction of any trade liability, as the

employees have not given up anything to procure such ESOP Share premiums obtained

on issue of shares are items of capital receipt. According to the AO in this case section 37

comes into play and the primary condition for allowance under this section is the

existence of revenue expenditure wholly and exclusively incurred for the purposes of the

business. Moreover, the department did not accept the decision in the case of Biocon Ltd.

(supra) and appeal has been filed with Hon'ble Karnataka High Court. The AO, therefore,

disallowed a sum of Rs.23,36,86,000/- debited to the books of account.

reliance upon the decision of the ITAT Special Bench decision in the case of Biocon Ltd.

(supra). The ld. CIT(A) held as under:

9.2 I have carefully considered the facts of the case and submission of the appellant. I have also gone through the decisions relied on by the Ld. AR. The issue under dispute is whether the appellant is entitled to a deduction in respect of ESOP granted to its employees and if yes, what is the quantum of the deduction. The issue is squarely covered by the decision of the Hon'ble ITAT Bangalore (Special Bench) in the case of Biocon (supra) where it is held that deduction on account ESOP is allowed in the year of vesting of shares, since the discount is nothing but a remuneration package to the employees and it is one of the modes of compensating the employee. The AO has not disputed the working of Rs.13,84,17,686/- which is in accordance with the principle laid down by the Bangalore Special Bench decision in Biocon (supra).

16 ITA No. 681/Mum/2016 Kotak Mahindra Bank Limited 9.3 Further, the Hon'ble jurisdictional Mumbai ITAT in the case of Mahindra & Mahindra Ltd. (supra) has also followed the principle laid down by the Special Bench decision in Biocon (supra). Considering the above decisions on the subject matter, the AO is directed to grant deduction of Rs.13,84,17,686/-, being expenditure incurred on ESOP, in accordance with the principle laid down by the Hon'bie Special Bench in the case of Biocon (supra) in lieu of Rs 23,36,86,000/- claimed by the assesses. Accordingly, this ground is partly allowed.

assessee submitted that the same matter has already been dealt with by the Tribunal in

department’s appeal for the same year in assessee’s case and the issue has been decided

in favour of the assessee. Hence, he submitted that this issue is now covered in favour of

the assessee.

submissions that the Revenue’s appeal for the same year in the case of the assessee in

ITA No.698/Mum/2016 vide order dated 20.12.2017 has been disposed off by the

Tribunal. This issue has been decided in favour of the assessee by the Tribunal. Hence,

this issue stands covered in favour of the assessee. The Tribunal has held as under:

17 ITA No. 681/Mum/2016 Kotak Mahindra Bank Limited High Court of Karnataka. We find that it is not the case of the department that either the order of the „Special Bench‟ of the Tribunal in the case of Biocon Ltd. (supra) had been set aside or the operation of the same had been stayed by the Hon‟ble High Court. We are unable to comprehend that as to how the A.O despite conceding that the claim of the assessee as regards allowability of the discount of ESOP‟s was in accordance with the principle laid down by the „Special Bench‟ of the Tribunal in the case of Biocon Ltd. (supra), could still decline to adjudicate the issue under consideration in terms with the order of the „Special Bench‟. We are seriously taken aback by the aforesaid observations of the A.O, and are of a strong conviction that as on the date on which the assessment was framed, the order of the „Special Bench‟ of the Tribunal did hold the ground, therefore, he remained under a statutory obligation to have passed his order in conformity with the view taken by the „Special Bench‟, which we find had also been followed by the jurisdictional Tribunal, viz. ITAT, Mumbai in the case of Mahindra and Mahindra Ltd. Vs. Addl. CIT, Range-2(2) [40 taxmann.com 522 (Mum)]. We are afraid that the conduct of the A.O in declining to follow the order of the „Special Bench‟ of the Tribunal in the case of Biocon Ltd. (supra), which as observed by us had neither been set aside or stayed by the Hon‟ble High Court has to be deprecated. We find that the Ld. CIT(A) duly appreciating the serious infirmity in the order of the A.O, therein going by the principle of judicial discipline had set aside the order of the A.O by observing that the issue under consideration was covered by the order of the „Special Bench‟ of the Tribunal in the case of Biocon Ltd. (supra). We find that the department had assailed the order of the CIT(A) before us for the reason that the latter had erred in directing the A.O to follow the order of the „Special Bench‟ of the Tribunal in the case of Biocon Ltd. (supra). We would not hesitate to observe that it is absolutely beyond our comprehension that as to how the department could be aggrieved with the order of the Ld. CIT(A) who had set aside the observations of the A.O which were palpably found to be in serious contradiction of the order of the „Special Bench‟ of the Tribunal in the case of Biocon Ltd. (supra). We may herein clarify that neither anything has been placed on record nor averred before us which could persuade us to conclude that the order of the „Special Bench‟ of the Tribunal in the case of Biocon Ltd. (supra) had either been stayed or set aside by the Hon‟ble High Court of Karnataka, or a view taken by the „Special Bench‟ no more holds the ground on account of a contrary view taken by any other High Court. We thus in the backdrop of our aforesaid observations are unable to persuade ourselves to accept the ground of appeal raised by the revenue before us, therefore, finding no infirmity in the well reasoned order of the CIT(A), uphold the same.

following the Special Bench decision in the case of Biocon Ltd. (supra) and that was the

18 ITA No. 681/Mum/2016 Kotak Mahindra Bank Limited case of the assessee before the A.O. Since the issue on merit is already adjudicated to the

satisfaction of the assessee, the adjudication on the issue of reopening is only of academic

interest, hence, we are not engaging into the same.

(Pawan Singh) (Shamim Yahya) Judicial Member Accountant Member Mumbai; Dated :14.09.2018 Roshani, Sr. PS

Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(A) 4. CIT - concerned 5. DR, ITAT, Mumbai 6. Guard File BY ORDER,

(Dy./Asstt. Registrar) ITAT, Mumbai