DCIT 2(3)(1), MUMBAI vs. HDFC BANK LIMITED , MUMBAI

We will first consider the assessee's appeal for adjudication. – AY 2016-17 Disallowance under section 14A – Ground No.1

2. During the year under consideration, the assessee had earned exempt income to the tune of Rs. 480,76,49,494/-. The Assessing Officer (AO) called on the assessee as to why disallowance should not be made under section 14A r.w.r 8D. The assessee vide letter dated 28.12.2018 offered a disallowance under section 14A to the tune of Rs. 20,18,079/- based on the Accountant's report. The assessee also relied on the decision of the Hon'ble Supreme Court in the case of Maxopp Investments Ltd. Vs. CIT (2018) [91 taxmann.com 154 (SC) ] and submitted that the securities which are held as stock in trade by the assessee should not be considered for disallowance under section 14A r.w.r.8D. The AO accepted the said contention of the assessee that the disallowance under section 14A cannot be 4 to 1785 & 3371, 3374 & 3375/Mum/2023 HDFC Bank Ltd. applied on securities held as stock in trade. However, with regard to strategic investments made by the assessee in its subsidiaries, the AO invoked the provisions of section 14A r.w.r. 8D. The AO made disallowance under section 14A r.w.r. 8D(2)(ii) and also 8D(2)(iii) as per the below table:

Description Amount as per Addition Rule 8D(2) (i) the amount of expenditure directly Nil Nil relating Nil to income which does not form part of total income; (ii) (ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely:- B A x C Where A amount of expenditure by way of = interest other than the amount of interest included in clause (i) incurred during the previous year: B the average of value of investment, = income from which does not or shall not form part of the total income, as appearing in the balance 3451,64,41,000 sheet of the assessee, on the first day and the last day of the previous year; C the average of total assets as = appearing in the balance sheet of the assessee, on the first day and the last day of the previous year;

15,15,95,974

2853,36,51,839 649674,31,91,000 (iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of 14,26,68,259 14,26,68,259 the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year Total Disallowance under Section 29,42,64,233 14A

“6.4. Part D: Disallowance of administrative/ managerial expenses in respect of strategic investments The Hon'ble Supreme Court in the case of Maxopp Investment Ltd (supra) in the context of recording of satisfaction has held that having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was Attribution of Top Managerial Expenses

Step 1: The detailed workings are attached as Annexure 5 to this report. In these workings, we have identified from the recorded minutes of the Board meeting of the HDFCBL's agendas pertaining to subsidiary companies. These agendas include adoption of the accounts, evaluation of the progress of the subsidiary companies, additional infusion of capital, if any for the year under consideration and several other items. Step 2: Thereafter, we proceed to identify the total cost incurred in the Board meeting. The total cost includes sitting fees paid to non-executive directors, salary cost of the executive directors and other employees (deputed on the Board of the subsidiary companies of the HDFCBL) pertaining to the date of the Board meeting, secretarial cost for conducting the Board meeting, rental charges in case where meeting is conducted outside the HDFCBL's owned premises, travel cost of all the directors which has been incurred for the purpose of this Board meeting and other expenses which are incurred for the purpose of the Board meeting.

Step 3: The total cost of conducting the Board meeting has been identified for every meeting which the Bank has conducted. After identifying the total cost, the Bank counts the total agenda discussed in the Board meeting. The total agenda pertaining to the subsidiary companies is also identified. The ratio of the agenda pertaining to the subsidiary companies in proportion to the total agendas is applied to the total cost incurred for the particular Board meeting. This amount is attributed as disallowance for the purpose of section 14A of the Act.

For instance, if the total cost incurred for conducting the Board meeting is Rs. 10 lakhs and out of the total 20 agendas in the Board meeting, 5 agendas pertains to subsidiary associate and joint venture companies, 1/4th i.e. (5/20) cost of the Board meeting viz., Rs. 2.5 lakhs would be attributed as amount to be disallowed under section 14A of the Act.

Employees engaged on Board of Subsidiary Companies HDFC Bank has identified that they have the following employees which are on the Board of the subsidiary companies: Sr.No. Name of the employee Subsidiary Company Designation (director) 1 Mr. Abhay Aima HDFC Securities Ltd Non-Executive

8 to 1785 & 3371, 3374 & 3375/Mum/2023 HDFC Bank Ltd. 2 Mr. Dhiraj Relli HDFC Securities Ltd Non-Executive 3 Mr. Aseem Dhuru HDFC Securities Ltd Non-Executive 4 Mr. Kaizad Bhaarucha HDB Financial Non-Executive Services Ltd 5 Mr. Anil Jaggia HDB Financial Non-Executive Services Ltd 6 Mr. Jimmy Tata International Asset Non-Executive Reconstruction Co Ltd 7 ADFC Pvt. Ltd. Non-Executive

The aforesaid employees are on the payrolls of HDFCBL as group head of one department of the other or they hold position as key managerial personnel (KMPs). These employees/ KMPs also attend the Board meeting of HDFCBL.

The total salary [cost-to-company (CTC)] is identified. These employees are paid salaries even on the days when they have attended the Board meeting of the subsidiary companies.

Therefore, the cost of such days has been identified by dividing the total CTC with 365 days i.e. the entire year. Such per day cost of all the employees has been attributed for the purpose of disallowance u/s. 14A of the Act.

Further, these employees have also attended the Board meeting of HDFCBL. The cost per day for attending the Board meeting is identified and the same is thereafter allocated in the ratio of agenda pertaining to the subsidiary companies and the total agenda.”

5. The ld. AR also took the Bench through the actual calculation workings which are done as per the process stated above. To summarise that the assessee has used a scientific method in order to arrive at the suo-moto disallowance, the ld. AR submitted that the lower authorities have completely ignored the suo-moto disallowance working done by the assessee and has proceeded to arrive at the disallowance under section 14A r.w.r. 8D(2)(iii). The ld. AR also raised a legal

9 to 1785 & 3371, 3374 & 3375/Mum/2023 HDFC Bank Ltd. contention that the AO while invoking the provisions of section 14A r.w.r. 8D(2)(iii) did not record any satisfaction. The ld. AR further submitted that the AO while arriving at the disallowance did not record any findings as to why the suo- moto disallowance calculated by the assessee is not correct thereby failed to record any satisfaction. The ld. AR in this regard relied on the decision of the Co-ordinate Bench in the case of Aditya Birla Finance Ltd. Vs. ACIT (83 taxmann.com 85) where the Tribunal has accepted similar accountant report and held that the disallowance should be restricted to the suo-moto disallowance. The relevant findings of the co-ordinate bench are as extracted below:

3.28 In the light of the foregoing discussion, we find that neither the Ld. Assessing Officer nor the Ld. Commissioner of Income Tax (Appeal) pointed out any defect in the accounts of the assessee, therefore, the ratio laid down in the case of Britania Industries Ltd. v. Dy CIT [IT Appeal No.390 (Kol.) of 2013, dated 2-3- 2016], Rapiakos Brett & Co. Ltd. v. Addl. CIT(A) [IT Appeal No. 7490 (Mum.) of 2013, dated 10-11-2016] supports the case of the assessee. The ratio laid down in Fedex Finance (P) Ltd. v. Dy. CIT [IT Appeal Nos. 1067 & 1073 (Mum.) of 2013] and White Water Mass Media v. ACIT [IT Appeal No. 2963(Mum.) of 2013] supports the case of the assessee. It is also noted that during assessment proceedings, the report of the accountant, specifying the basis for calculating the amount disallowable u/s 14A of the Act was submitted by the assessee and the Ld. Assessing Officer without rejecting the report mechanically applied Rule-D and computed the amount of disallowance, which cannot be said to be justified. At best, the disallowance may be restricted as suo-moto made by the assessee. Thus, no further disallowance was required to be made.

6. Therefore, the ld. AR submitted that on this count also the disallowance made by the AO as confirmed by the CIT(A) without recording satisfaction is bad in law.

7. We have heard the parties and perused the material on record. During the course of assessment, the AO made disallowance under section 14A by applying Rule 8D(2)(ii) and 8D(2)(iii). The CIT(A) gave relief to the assessee to the extent

10 to 1785 & 3371, 3374 & 3375/Mum/2023 HDFC Bank Ltd. of disallowance made under section 8D(2)(ii) accepting the contention of the assessee that the own funds are employed for making strategic investment in subsidiaries and therefore, no disallowance was warranted towards interest expenses. With regard to disallowance under Rule 8D(2)(iii) though the assessee has raised the contention before the CIT(A) that the disallowance, if any should be restricted the suo-moto disallowance made by the assessee before the AO, it is noticed that the CIT(A) has relied on the order of the Co-ordinate Bench in assessee's own case for AY 2008-09 to hold that no disallowance under Rule 8D(2)(ii) is warranted and also that for the purpose of Rule 8D(2)(iii) only those investments yielding exempt income should be considered for the purpose of disallowance. The CIT(A) had not given any finding with regard to the plea of the assessee that the disallowance should be restricted to the suo-moto disallowance made by the assessee. The contention of the assessee in this regard is two fold. One the suo-moto disallowance has been arrived at on the basis of a scientific method wherein all the relevant costs incurred towards strategic investments in subsidiaries have been considered and proportionate disallowance is arrived at. The alternate contention of the assessee is that the AO failed to record satisfaction before invoking the provisions of section 14A.

“3.3 Excluding stock-in-trade from the total investment, the strategic investment for the assessee as on 31.03 2015 was Rs. 2853,16,62,252/- and as on 31.03.2016 was Rs. 2853,56,41,425/ Hence, the average value of investment is Rs. 2853,36,51,839/- These investments cannot be managed without inherent expenses since no investments can be made without market analysis and expertise The assessee could not have got the market expertise and the necessary staff for free and has to necessarily incur expenditure. It is not possible without sufficient expertise as to selection of securities and timely swaps. With increase in technicalities involved in market operations the assessee is bound to have expert advice and necessary staff to act in a time bound manner for proper investments. The assessee would be in receipt of various daily reports, fortnightly reports and monthly reports at regular intervals so that the assessee can take informed decisions regarding deployment / redemption of their investments in various schemes. These inputs have costs in terms of substantial time as well as cost on account of conveyance, traveling, telephone / mobile bills, stationery etc. It is difficult to ascertain such cost in quantitative terms. However the cost on approximate basis has to be considered for the purpose of disallowance. Hence I am satisfied that the disallowance under Section 14A as per Rule BD has to be made.”

10. From the above observations of the AO, it is clear that thought the AO is stating that the assessee would have incurred many indirect expenses towards investments in subsidiaries he has not mentioned anything adverse with regard to the way in which the assessee has computed the suo-moto disallowance. Considering the fact that the investments made are in subsidiaries companies and that there is no movements in the investments during the year under consideration. We do not see merit in the findings given by the AO that the assessee should have incurred indirect expenses such as market report, telephone stationary, etc. for the 12 to 1785 & 3371, 3374 & 3375/Mum/2023 HDFC Bank Ltd. purpose of investments. We are also of the view that the observations of the AO as extracted above cannot be considered to be recording of satisfaction, since the AO has not stated anything as to why the calculation of suo-moto disallowance is not acceptable by the AO and why he is not satisfied about the correctness of the said calculation. Therefore, there is merit in the alternate contention of the assessee that the AO has invoked section 14A without recording satisfaction and therefore, bad in law. The Hon'ble Supreme Court in the case of Maxopp Investments (supra) while considering the similar issue and have given a finding that the AO needs to record satisfaction that having regard to the kind of the assessee suo-moto disallowance under section 14A is not correct. In view of these discussions and considering the judicial pronouncements, we are of the view that the AO is not correct in invoking the provisions of section 14A without recording any satisfaction as to why the suo-moto disallowance computed by the assessee is not correct. Accordingly, we delete the disallowance made by the AO and direct the AO to restrict the disallowance to the suo-moto disallowance made by the assessee. It is ordered accordingly.

Disallowance of ESOP expenses – Ground No.2

11. The ld. AR in this regard submitted that the assessee for the first time made the claim before the CIT(A) with regard to the ESOP Expense. The CIT(A) did not allow the claim of assessee following the decision of the Supreme Court in the case of Goetz (India) Ltd. vs. CIT (2006) 284 ITR 323 (SC). The CIT(A) also did not accept the submission of the assessee that the issue is covered by the decision of the Hon'ble Karnataka High Court in the case of CIT Vs. Biocon Ltd. (2020) 430 IR 151 (Kar. HC)

13 to 1785 & 3371, 3374 & 3375/Mum/2023 HDFC Bank Ltd.

12. Before us, the ld. AR submitted that the additional claim based on facts existing on record should have been admitted and adjudicated by the Appellate Authority and in this regard placed reliance on the decision of the Jurisdictional High Court in the case of Pruthvi Brokers and Shareholders Pvt. Ltd. (2012) 349 ITR 336 (Bom.). On merits, the ld. AR submitted that the issue is squarely covered by the decision of the Karnataka High Court in the case of Biocon Ltd. (supra) which has been followed by the Co-ordinate Bench in assessee's own case for AY 2008-09 (ITA No. 374/Mum/2012).

13. The ld. DR submitted that the assessee has made a fresh claim before the CIT(A) for the first time and therefore, the decision of the Hon'ble Supreme Court in the case of Goetz (India) Ltd. (supra) has been correctly applied by the CIT(A). Further, the ld. DR submitted that the Departmental is in appeal before the Supreme Court against the decision of the Karnataka High Court in the case of Biocon (supra) and therefore, the issue of allowability of ESOP expenses has not reached finality. Therefore, the ld. AR prayed that the claim of the assessee shall not be entertained.

15. Considering the ratio laid down by the Jurisdictional High Court in the above case, we hold that the CIT(A) is not correcting in not admitting the claim of the assessee with regard to ESOP expenses. On merits we notice that a similar issue is considered by the Hon'ble Karnataka High Court in the case of Biocon Ltd. (supra) where it is held that “10. 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 15 to 1785 & 3371, 3374 & 3375/Mum/2023 HDFC Bank Ltd. 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 paragraphs 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 fulfillment of the condition.

11. The deduction of discount on ESOP over the vesting period is in accordance with the accounting in the books of account, which has been prepared in accordance with Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. 12 So far as reliance place by the revenue in the case of Infosys Technologies Ltd.(supra) 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 Years 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 1-4-2000. Therefore, it is evident that law recognizes a real benefit in the 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 A. Gajapathy Naidu, Morvi Industries Ltd. 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 account. We are in respectful agreement with the view taken in PVP Ventures Ltd. And Lemon Tree Hotels Ltd/ case (supra).”

16. Respectfully following the above judicial precedence, we hold that the ESOP expenses claimed by the assessee an allowable expenditure under section 37(1) of the Act. Accordingly, we direct the AO to allow the claim of the assessee. This ground of the assessee is allowed.

ITA No. 1785/Mum/2023- AY 2018-19

Revenue's Appeal Condonation of delay

19. There is a delay of 120 days in filing all the appeals by the Revenue. The ld. DR in this regard filed a letter requesting for condonation of delay stating that the concerned AO was not in good health and therefore, could not carry out his duty fully which resulted in the delay in filing the appeal. The ld. DR accordingly prayed that there is reasonable cause for the delay which needs to be condoned.

ITA.No.3375/Mum/2023 Disallowance under section 14A – Ground No.1

14. In the appeal preferred from the decision by the Revenue before this Court, the Revenue did not question this reading of the Explanation by the Kerala High Court, but restricted itself to a question of fact viz. whether the Tribunal had correctly found that the salary of the assessee was paid by a foreign company. This Court dismissed the appeal holding that it was a question of fact. (CIT v. SR Patton [(1998) 8 SCC 608].)

23 to 1785 & 3371, 3374 & 3375/Mum/2023 HDFC Bank Ltd. where such language is used, if it alters or changes the law as it earlier stood.” 25. Therefore, respectfully following the decision of the Hon'ble Court, we are of the considered view that the Explanation inserted by Finance Act, 2022 to section 14A is prospective in nature. Accordingly, ground raised by the Revenue is rejected.

Disallowance of Broken period interest on securities – Ground No.2

24 to 1785 & 3371, 3374 & 3375/Mum/2023 HDFC Bank Ltd. “7. The only issue to be decided is deletion of disallowance by the Id. CIT(A) in respect of broken period interest in the sum of Rs. 1947,35,93,107/-. 7.1. We have heard nval submissions and perused the materials available on record. We find that assessee has debited an amount of Rs. 1947,35,93,107/- in the profit and loss account as broken period interest. The assessee submitted that this broken period interest paid is nothing but part of the price paid for the securities at the time of its acquisition. The Id. AO observed that the said purchase price is in the nature of capital outlay and hence, the same cannot be allowed as deduction while computing business income of the assessee. The Id. AO observed that similar disallowance was made in assessee's own case for the AY.2009- 10 and the revenue appeal was pending before this Tribunal at the time of completion of the assessment proceedings. Hence, in order to keep the issue alive, disallowance was made by the Id. AO. We find that the Id. CIT(A) had deleted this addition by following the decision of the Hon'ble Jurisdictional High Court in assessee's own case and the decision of this Tribunal in assessee's own case for A.Y 2008-09 and 2009-10 and 2010- 11 in ITA Nos, 375, 722, 3465, 4367/Mum/2012 and ITA No. 1795/Mum/2010 dated 12/11/2014. In all these decisions, it was held that the broken period interest paid by the assessee is allowable as deduction while computing total income of the assessee. Since, this issue is already covered in assessee's own case by various decisions of this Tribunal and Hon'ble Jurisdictional High Court, which has been rightly followed by the Id. CIT(A), we do not find any infirmity in the order of the Id. CIT(A). Accordingly, the grounds raised by the revenue are dismissed.

8. In the result, appeal of the revenue is dismissed." As the facts and the issue involved in the present appeal remains the same as were there before the Tribunal in the assessee's own case for the immediately preceding year ie A.Y. 2011-12 in ITA No. 6187/Mum/2016, as well as in the preceding years, therefore, we respectfully follow the same. We, thus, finding no infirmity in the view taken by the CIT(A) who had rightly vacated the disallowance of the broken period interest on HTM securities of Rs. 165,60,89,890/-, uphold the same. The Ground of appeal No. 5 raised by the revenue is dismissed.”

27. The ld. DR fairly conceded that the issues covered by the above mentioned decision of the Jurisdictional High Court.

Disallowance of bad debts on credit cards – Ground No.3

“(i) It is observed that as per provisions of Section 36(1)(vii), the assessee is allowed deduction of any amount of bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee. However, the aforesaid provisions are subject to the provisions of section 36(2), which provide that deduction cannot be claimed for bad debt unless such debt has been taken into account in computing the income in the previous year or in an earlier previous years or it represents money lent in the ordinary course of the business of banking or money lending. (ii) The banking services are defined and controlled by the provisions of section 5(b) and section 6 of the Banking Regulation Act, 1949 and are essentially services arising from acceptance of deposits of money from the public. Credit card services can be carried on by any person including non- banking financial institutions. One need not be a customer of a bank to avail and use a credit card. Thus, the credit card services are not part of the business of banking.

26 to 1785 & 3371, 3374 & 3375/Mum/2023 HDFC Bank Ltd. (iii) The activity of offering of credit cards in India is not the business of money lending. The activity is mainly carried out through the provisions of the services provided by two American Companies i.e. Visa card and Master card. These two American companies have signed agreements with shops, establishments, enterprises that they would accept payments by cards on purchase of goods and services made by the customers. The banks have also been taken help from Visa and Master cards by paying fees and on the strength of their agreements with these two American companies banks have issued cards to various customers. The customers or the card holders holding the cards of the banks issued in association with Visa and Master card can make purchases without carrying any money. After the transaction of purchase and services is made the data gets electronically transferred to the computer base of Visa or master card and after the settlement the amounts are intimated to the banks by the card operators. The bank then raises the bills on their customers and gives them a grace period. If the customers make payments within the grace period no interest is charged by the banks. The bank also gives an option to the cardholders to pay by EMI with interest and service charges. From the above description, it is clear that the banks by issuing credit card does not carry out the business of money lending, but acts only as service provider or as agent of the card issuer companies such as Visa or master card. Therefore, the bad debts incurred with regard to issuance and services of credit cards are neither related to banking business or business of money lending. (iv) Hence, the deduction claimed u/s 36(1)(vii) regarding bad debt on credit cards is not allowed and Rs. 375,10,36,088/- is added back to the total income of the assessee. Penalty proceedings u/s 271(1)(c) of the Act are initiated for furnishing inaccurate particulars of income."

27 to 1785 & 3371, 3374 & 3375/Mum/2023 HDFC Bank Ltd.

28 to 1785 & 3371, 3374 & 3375/Mum/2023 HDFC Bank Ltd. considering the applicability of deduction of tax at source under section 194H on the credit card charges has held that the amount of fees retained by the Bank is a fee charged by them for having rendered the banking services and cannot be treated as commission or brokerage. We also noticed that the Co-ordinate Bench in the case of Indusind Bank (supra) has considered as similar issue and held that “17.3. We find that assessee had been deriving huge income of Rs.152.32 crores from its total credit card business of Rs.2030 Crores. Out of the said business, Rs.8.34 Crores had turned bad which assessee had claimed as bad debts u/s.36(1)(vii) of the Act. It is not in dispute that assessee had indeed offered income from credit card business as income under the head „profits and gains of business or profession‟ and which has been taxed as such by the ld. AO. Hence, the income derived from credit card business has been accepted as business income by the ld. AO. The satisfaction of requirement of offering of income in terms of Section 36(2) of the Act has been done by the assessee in the instant case. Hence, if any of the debts in respect of income already offered to tax by the assessee bank had become bad, and the same is written off as bad debt by the assessee in its books of accounts, the assessee would certainly be entitled for deduction u/s.36(i)(vii) of the Act. It need not be routed through provision for bad and doubtful debts account. Moreover, we find that RBI has issued a master circular dated 01/07/2013 which provides for credit card / debit card and rupee denominated co-branded prepaid card portions of the banks. The said circular clearly establishes the fact that credit card business is part and parcel of banking business. This fact that was placed on record by the assessee before the lower authorities had been ignored by them. Further as part of the banking license granted by the RBI, the assessee is entitled to carry on the banking business either departmentally or through a company set up for this purpose. We find that credit card could be issued by the assessee bank only to its customers. Hence, the observation made by the ld. PCIT in the case of ICICI Bank for the A.Y.2013-14 that a person need not be a customer of the bank to obtain credit card is fundamentally incorrect. Credit card business according to the RBI master circular is a permissible banking business activity provided under Banking Regulation Act and hence, it could be safely construed that credit card business is part and parcel of the banking business carried on by the assessee bank. We find that VISA and Master Card only act as service provider. The monies are lent by the assessee bank. The entire risk of bad debts thereon is borne by the assessee bank and not the service providers.

29 to 1785 & 3371, 3374 & 3375/Mum/2023 HDFC Bank Ltd. 17.4. We hold that the claim of bad debts to be routed through provision for bad and doubtful debts account would be relevant if the provision is created u/s.36(1)(viia) of the Act. The assessee duly drew our attention from the computation of income that total amount of bad debts of Rs.179,25,17,964/- is reduced by the amount of brought forward provision for bad and doubtful debts claimed u/s.36(1)(viia) of the Act in the preceding previous year of Rs.159,78,14,026/- and only the balance amount of Rs.19,47,03,938/- was claimed as deduction as bad debts u/s.36(1)(vii) of the Act. In this regard, we have verified the computation of income annexed in page 38 & 39 of the paper book. We have also gone through the workings for bad debts written off enclosed in page 43 of the paper book. Hence, it is observed that the bad debts arising from credit card business is part and parcel of total bad debts reflected by the assessee. Hence, we have no hesitation to hold that bad debts arising from credit card business would be part and parcel of loss arising in the course of banking business and hence liable as deduction u/s.36(1)(vii) of the Act. Accordingly, the ground No.4 raised by the assessee is allowed.”

Disallowance towards provision for debit and credit card reward points – Ground No.4

30 to 1785 & 3371, 3374 & 3375/Mum/2023 HDFC Bank Ltd. was of the view that the assessee is utilizing only Rs. 65-70 crores out of the provision made and accordingly disallowed a sum of Rs. 106.29 crores.

31 to 1785 & 3371, 3374 & 3375/Mum/2023 HDFC Bank Ltd. relied on the decision of the Co-ordinate Bench in the case of ACIT Vs. Shoppers Stop Ltd. (ITA No. 1835/Mum/2010 dated 25.01.2012.

32 to 1785 & 3371, 3374 & 3375/Mum/2023 HDFC Bank Ltd. Weighing these two basic positions, I find that the issue begs the following questions:- i) Whether or not the claim of the reward point is a cost attached to corresponding revenue? ii) Whether or not the ascertainment of the claim is substantially accurate based on the consistent trend of redemption of rewards points ? iii) Whether or not excess/shortage is accounted for after verification?

3.3.1 The answer to these questions lead me to agree with the appellant that the claim is allowable. To this end, in answer to the first question, I find that the FCC points claim have their genesis in the sales made and accordingly, when they are earned, incurred to earn the corresponding revenue. As I find, when a sale is made under the scheme, simultaneously and since the appellant has to bear the cost of the redemption, the points assume the character of cost in relation to the redemption entitled sale. The appellant's claim is thus, in full agreement with the concept of matching revenue and costs. In this respect, I find the appellant's reliance on the decision of the Hon'ble Supreme Court in the case Calcutta Co. Ltd. Vs. CIT (WB) 37 ITR 1 as apt and appropriate. In the case Calcutta Co. Ltd. Vs. CIT, the Hon'ble Supreme Court has, in the context of a future discharge of liability in connection with development of plots,! held that the liability on the assessee having been imported, the Liability would be an accrued liability and would not convert into a conditional one merely because the liability was to be discharged at a future date. This view has been echoed by the Hon'ble Supreme Court again in their decision in the case Bharat Earth Movers Vs. CIT. Once the concept of matching revenue and costs is found established, the next natural question would be to see the quality and accuracy of the quantification of the cost to see whether on not the FCC points debited are based on scientific calculation and research. This brings us to the second question. In this respect, I find that the appellant recognizes the liability to the extent of 50% of the points on a conservative basis clued into its past experience suggesting that 50% of the reward points granted were redeemed by the customers. Further, I also note that since the value of reward points also includes gross profit margin for the purpose of quantification of liability, the appellant- reduces the estimated gross profit margin of 30%. I find this process of quantification scientific as it is based on past trends and further, I also find it reasonable since the final liability debited also takes into account the trend of redemption and the gross profit margins. In this view of the matter, the ascertainment of the FCC points is found to be based on sound

33 to 1785 & 3371, 3374 & 3375/Mum/2023 HDFC Bank Ltd. and reasonable quantification. This being so, the claim cannot be disallowed on the ground that it is an unascertained expenditure. In this respect, the decision 9f1 the Hon'ble Supreme Court in the case Rotork Controls India (P) Ltd. Vs. CIT bears special mention. In this decision, in the context of allowability of provision for warranty on account of warranty claims likely to arise on the sales, the Hon'ble Supreme Court has held that if historical trend indicates that in past, large number of sophisticated goods were being manufactured and the defects existed in some of the items manufactured and sold, then provision made for warranty in respect of army of such sophisticated goods would be entitled to deduction from the gross receipts u/s.37(1), provided the data is systematically maintained by the assessee. In this decision, the Hon'ble Supreme Court has further held that a provision is recognized when : (a) an enterprise has a present obligation as a result of past event, (b) it is probable that an outflow of resources will be required to settle the obligation and (c) a reliable estimate can be made of the amount of the amount of the obligation. The FCC points claimed by the appellant passes these tests laid down by the Hon'ble Supreme Court. To this end, it may be noted that the claim here is attached to an obligation of redemption and carries on the liability of an outflow of resources when the points are redeemed. Further, as may be noted, the appellant quantifies the FCC liability at 50% of the actual reward points based on its past experience that a minimum 50% gross points granted were redeemed by the customers. Further, this is again reduced by gross profit margin of 30%. The appellant also maintains proper accounting entry in the FCC points redemption account and also runs a software on the redemption process. Premised on this, find that the tests of historical basis and systematic entry of data as laid down by the Supreme Court are fulfilled by the appellant's method of quantification and accounting of the FCC points. In this respect, I also note that the appellant's reliance on the decision of the Hon'ble ITAT, Mumbai Bench in the case ACIT. Circle 5(1), Mumbai and M/s. Jet Airways India P. Ltd. in TA No.3691/M/02 as very apt and appropriate. In this decision, vide its order dated 30.05.2006 while allowing the airline's claim on its scheme called "frequent flyer programme", a claim very similar to the FCC reward points in the appellant's case, the Hon'ble ITAT has held as under:-

"In our view, the claim of the assessee has been properly allowed by the CIT(A). The assessee has a scheme known as "frequent flyer programme", Whereby the passengers who frequently use the services of the assessee's airline are permitted to accumulate certain number of miles o their credit........ Any redemption of the accumulated mileage in the subsequent years is debited to the provision account. To track the miles earned by each

34 to 1785 & 3371, 3374 & 3375/Mum/2023 HDFC Bank Ltd. member, a member is required to mention his "JP Membership Number at the time of making booking or at the time of checking in for a flight based on this information available in the system, the miles are then updated-in each members account. The total number of miles earned is ascertained in the above manner and a provision for the cost of tickets to be issued in future for the unutilized redeemable miles is made in the books of accounts as a liability. Such liability is claimed as revenue expenditure. In our view, the claim of the assessee is based on the liability it has undertaken under the frequent flyer programme. It is not the case of the revenue that the liability provided by he assessee is not in accordance with the scheme operated by the assessee. The liability provided is in respect of variable cost of flying the aircraft. That is also based on the minimum cost. In our view, these provisions are based on the experience of the airline and the actual miles accumulated by the passengers. If one were to go through the entire scheme it cannot be said that provision made by the assessee is in respect of a contingent liability. The principle laid down by the Hon'ble Supreme Court in the case of Bharat Earth Movers (supra), equally applies to the scheme in question and the claim of the assessee has been properly appreciated by the CIT(A) and his order is confirmed."

I now come to the third question. In this respect, I find that the accounting method followed by the appellant duly redresses the fallout of any excess/shortage as the appellant accounts for the excess/ shortage after verification of redemption for each customer. I further find that the revenue on account of sale is also accounted gross. These are safeguards against the possibility of double deduction of expenses.

3.3.2 In line with the foregoing, I find that in view of the concept of matching revenue and costs, the scientific and reasonable basis of the quantification of the FCC claim, the judicial decisions discussed above and adequate safeguards against the possibility of double deduction, the appellant's claim is allowable. Accordingly, the disallowance is deleted and the ground of appeal is allowed."

“11. We fully agree with the aforesaid findings of the Commissioner (Appeals). The facts, issues and the findings are brought out nicely by the Commissioner (Appeals). As and when the customer of the assessee makes a particular purchase, the customer is given a monetary right, in the form of rebate in the cost of goods that he may purchase at a future date. Thus, as and when a right is given, the assessee incurs a liability which it has claimed as marketing expenditures. The assessee, based a historical data, in 35 to 1785 & 3371, 3374 & 3375/Mum/2023 HDFC Bank Ltd. a scientific manner, has estimated that only 50% of the reward points given are likely to be encashed by the customers. Out of this, 50% gross profit margin is reduced and the balance is only claimed as expenditure. On a direction from the Bench, the assessee has also filed data from the assessment year 2005-06 to the assessment year 2010-11, which shows that the points lapsed was shown as income. The assessee has also proved that this is a consistent accounting policy being followed year after year. On this factual matrix, we uphold the findings of the Commissioner (Appeals). Consequently, the ground raised by the Revenue is dismissed. As we have upheld the order passed by the Commissioner (Appeals), we do not adjudicate the issue of re-opening raised under Rule-27, as it would be an academic exercise.

12. In the result, Revenue’s appeal is dismissed.”

41. Considering the fact that in the expert advisory committee of the ICAI, it is stated that the liability towards reward points on credit and debit cards should not be limited to the points expected to be redeemed in a particular period such as next year and that the actuarial report based on which the provision is made takes into consideration all the relevant factors with regard to the reward points, in our considered view there is merit in the claim of the assessee that the provision made towards reward points on credit and debit cards should be allowed as a deduction. Accordingly, we hold that there is no infirmity in the decision of the CIT(A) in allowing the claim of the assessee with regard to the provision for reward points on credit and debit cards. This ground of the Revenue is dismissed.

Disallowance of revised claim for deduction under section 36(1)(viia) – Ground No.5

36 to 1785 & 3371, 3374 & 3375/Mum/2023 HDFC Bank Ltd. 6ABA from Rs. 245,25,02,963/- to Rs. 358,31,63,918/-. The AO did not allow the revised claim by the assessee stating that the revised claim during assessment proceedings cannot be allowed without filing the revised return of income relying on the decision of the Hon'ble Supreme Court in the case of Goetz India Ltd. (supra). The CIT(A) allowed the revised claim of the assessee for the reason that the assessee has not made a new claim but has asked for re-computation of the deduction claimed which is based on re-classification of the existing branches into Rural and Urban branches which was not available at the time of filing the return of income. The relevant observation of the CIT(A) is extracted below:

“9.4.1 It is seen that during the assessment proceedings, the assessee has revised the claim of deduction u/s 36(1)(viia) r.w. Rule 6ABA which the Ld. AO rejected following the decision of Hon'ble Supreme Court in the case of Goetze (India) vs. CIT (284 ITR 323) SC. In support of the grounds of appeal against such rejection the assessee appellant has uploaded submission containing several judgements of the High Courts including the jurisdictional High Court which have been respectfully considered. It is seen that the assessee has not made a new claim but has asked for re-computation of the deduction claimed which is based on re-classification of the existing branches into rural and/or urban branches because of non-availability of the exact data at the time of filing the ITR but was made available later on by the respective authority in the web-site. 9.4.2 As per submission, the assessee has relied upon the decision/judgement given in the case of Chicago Pneumatic India Ltd vs. DCIT (15 SOT 252) (Mum), decision of the Hon'ble Gujarat High Court in case of Choksi Metal Refinery vs. CIT (107 ITR 63), decision of the Hon'ble Delhi HC in the case of CIT v. Natraj Stationery Products (P) Ltd. (2009) 312 ITR 22, decision of the Hon'ble Jurisdictional Bombay High Court in Pruthvi Brokers & Shareholders Pvt. Ltd (2012) 349 ITR 0336 (BOM) and decision of the Hon'ble Gujarat High Court in the case of Arvind Mills Ltd. [TS592-HC- 2012(GUJ)] which cover the factual findings. Thus, respectfully following the judgements of the jurisdictional High Court and other High Court(s), Ground No. VI and its supportive grounds taken by the appellant are allowed.”

37 to 1785 & 3371, 3374 & 3375/Mum/2023 HDFC Bank Ltd. 43. The ld. DR submitted that the reason given by the assessee for revising the deduction claimed under section 36(1)(viia) before the AO is not bonafide and that the assessee should have made the claim by filing the revised return of income. Accordingly, the ld. DR supported the order of the AO.

ITA No. 3371/Mum/2023- Revenue's Appeal

39 to 1785 & 3371, 3374 & 3375/Mum/2023 HDFC Bank Ltd. 49. In the result, the assessee's appeal for AY 2016-17 to AY 2018-19 is allowed and the Revenue's appeal for AY 2016-17 to 2018-19 is dismissed.

Order pronounced in the open court on 24-01-2024.