2022 (12) TMI 1373 - AT - Income Tax

Tribunal rules in favor of assessee on interest income, bad debts & perpetual bonds

ICICI Bank Limited Versus DCIT-2 (3) (1) Mumbai (Vice-Versa)

The Tribunal allowed the assessee's appeal regarding the addition of interest income on NPAs, citing that RBI guidelines should prevail over Income Tax ... Income recognition - Addition of interest income on Non Performing Assets - As per AO provisions of sec. 43D r.w. Rule 6EA of I T Rules has prescribed a period of six months of irregularity for classifying loans as non-viable or sticky loan and period for determining an asset as NPA should be considered as 6 months or more and not 90 days - HELD THAT:- We notice that an identical issue has been adjudicated by the Tribunal in favour of the assessee in the assessee’s own case in AY 2010-11 [2022 (8) TMI 1346 - ITAT MUMBAI] bank had no option but follow the RBI guidelines to make a provision for unrealized interest on the NPA by debiting profit and loss account. In the case of DCIT Vs. Karur Vysya Bank [2017 (4) TMI 566 - ITAT CHENNAI] Chennai dated 29.03.2017 held that it becomes necessary to read down such rules so that it is in consonance with the RBI regulation or prudential norms for recognizing income - Also decided in ROYAL BANK OF SCOTLAND N.V. AND VICE-VERSA [2016 (11) TMI 665 - ITAT KOLKATA] CIT(A) is not justified in substituting the limit for recognizing of interest on account of NPA to 180 days from 90 days in view of the clear provisions of Sec. 43D(a) that in the case of public financial institutions or schedule bank or a state financial corporation or a State Industrial Investment Corporation, the income by way of interest in relation to such categories of bad and doubtful debt as may be prescribed having regard to the guidelines issued by the RBI in relation to such debts - we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the addition. Disallowance of claim of bad debts relating to Credit card business - As per AO credit card is essentially a kind of “payment service” offered by the assessee and hence it would not fall under the definition of banking business, thus cannot claim the bad debts in respect of credit card business as it fails to comply with the conditions prescribed in sec. 36(2) - CIT-A deleted addition - HELD THAT:- It can be noticed that the RBI itself states that the credit card dues are in the nature of unsecured loans or non-priority sector personal loans. When it is considered as a form of giving “loans”, it cannot be said that the credit card business does not form part of banking business. Hence it is a case of lending money in the ordinary course of business of money lending. Accordingly, it satisfies the condition prescribed u/s 36(2) of the Act and hence the same is allowable as deduction u/s 36(1)(vii) of the Act as “bad debts”, as it is written off in the books of account as bad. Accordingly, we do not find any infirmity in the decision taken by Ld CIT(A) on this issue. Disallowance of interest paid on perpetual bonds - AO held that the perpetual bonds issued by the assessee is in the nature of “equity capital” and accordingly held that the interest claimed thereon is not allowable as deduction u/s 36(1)(iii) - CIT-A deleted addition - HELD THAT:- As decided in own case [2022 (8) TMI 1346 - ITAT MUMBAI] merely that RBI recognizes to treat the said debt instruments as additional Tier/Capital would not change the nature of Innovative Perpetual Debt Instruments which were of the nature of long term borrowings and the interest paid was debited to the profit and loss account. These debt instruments were also redeemed on different dates as discussed supra in this order, therefore, we don't find any reason to interfere in the decision of ld. CIT(A), accordingly, this ground of appeal of the revenue is dismissed. Issues Involved:1. Addition of Rs.5.05 crores relating to interest income on Non-Performing Assets (NPA).2. Disallowance of claim of bad debts relating to Credit Card business.3. Disallowance of interest paid on perpetual bonds.Detailed Analysis:1. Addition of Rs.5.05 crores relating to interest income on Non-Performing Assets (NPA):The assessee, a banking company, contested the addition of Rs.5.05 crores related to interest income on NPAs. The assessee followed RBI guidelines, which prescribe a 90-day period for classifying a loan as an NPA, and thus did not recognize interest receivable on such assets. However, the Assessing Officer (AO) applied Section 43D read with Rule 6EA of the Income Tax Rules, which prescribes a six-month period for classifying loans as non-viable or sticky. Consequently, the AO added Rs.5.05 crores to the assessee's total income, a decision upheld by the Commissioner of Income Tax (Appeals) [CIT(A)].Upon reviewing the case, the Tribunal noted that a similar issue was adjudicated in favor of the assessee for the Assessment Year (AY) 2010-11. The Tribunal referenced multiple decisions, including those from the ITAT Mumbai and ITAT Chennai, which supported the view that RBI guidelines should be followed for recognizing interest on NPAs. The Tribunal concluded that the provisions of Section 43D, which consider RBI guidelines, override Rule 6EA. Therefore, the Tribunal directed the AO to delete the addition of Rs.5.05 crores, allowing the assessee's appeal on this issue.2. Disallowance of claim of bad debts relating to Credit Card business:The AO disallowed the assessee's claim of Rs.47.63 crores as bad debts related to its credit card business, arguing that credit card transactions do not fall under the definition of banking business and do not comply with Section 36(2) of the Income Tax Act. The AO's view was supported by a revision order under Section 263 for AY 2013-14.The CIT(A) observed that an identical addition was deleted for AY 2014-15, noting that credit card business is a legitimate banking activity approved by the RBI, involving unsecured credit to customers. The CIT(A) emphasized that bad debts arising from such business should be recognized as they are integral to banking operations.The Tribunal upheld the CIT(A)'s decision, referencing RBI circulars that classify credit card dues as unsecured loans or non-priority sector personal loans. The Tribunal affirmed that credit card business constitutes lending money in the ordinary course of banking, satisfying Section 36(2) conditions. Thus, the Tribunal found no infirmity in the CIT(A)'s decision to allow the deduction of bad debts related to the credit card business.3. Disallowance of interest paid on perpetual bonds:The AO disallowed interest on perpetual bonds, treating them as equity capital rather than debt, thus not deductible under Section 36(1)(iii). The CIT(A), however, allowed the claim, consistent with decisions from earlier years.The Tribunal reviewed the case and noted that in AY 2010-11, a similar issue was decided in favor of the assessee. The Tribunal highlighted that the perpetual bonds, classified as Innovative Perpetual Debt Instruments (IPDI), carry a fixed interest rate and are recognized as borrowings in the balance sheet. The Tribunal also noted that these instruments were redeemed, further supporting their classification as debt.The Tribunal referenced various judicial precedents distinguishing the nature of IPDIs from equity and confirmed that interest on these instruments is deductible. Consequently, the Tribunal upheld the CIT(A)'s decision, dismissing the revenue's appeal on this issue.Conclusion:The Tribunal allowed the assessee's appeal regarding the addition of interest income on NPAs and upheld the CIT(A)'s decisions on the disallowance of bad debts related to the credit card business and the interest paid on perpetual bonds, thereby dismissing the revenue's appeal. The order was pronounced in the open court on 14.12.2022.