Revenue appeals dismissed, assessee appeals partly allowed, ITAT directs AO to allow deductions

The appeals of the Revenue were dismissed, and the appeals filed by the assessee were partly allowed. The ITAT directed the Assessing Officer to allow various deductions and expenses claimed by the assessee, following precedents and judicial decisions.

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Issues Involved:
1. Provision for Standard Asset qua deduction under section 36(1)(viia)
2. Disallowance of Bad Debts Pertaining to Credit Cards
3. Interest on NPA under section 43D read with Rule 6EA
4. Invalid Re-assessment Proceedings
5. Disallowance of Administrative Expenses under section 14A read with Rule 8D(2)(iii)
6. Deletion of Disallowance under Rule 8D(2)(ii) of Interest Expenses
7. Allowing of Broken Period Interest
8. Allowing Expenditure Incurred on ESOP

Detailed Analysis:

1. Provision for Standard Asset qua deduction under section 36(1)(viia):
The assessee bank claimed deductions for provisions under section 36(1)(viia) of the Act for bad and doubtful debts, including standard assets. The Assessing Officer disallowed the provision for standard assets, stating it is not included in bad and doubtful debts. The ITAT referenced a previous decision in State Bank of India vs DCIT, which allowed such provisions, stating that provisions for standard assets are part of overall provisions for bad and doubtful debts. Therefore, the ITAT directed the Assessing Officer to allow the deduction under section 36(1)(viia) for standard assets.

2. Disallowance of Bad Debts Pertaining to Credit Cards:
The Assessing Officer disallowed the bad debt claimed for credit card business, arguing it is not part of banking or money lending business. The ITAT referenced a previous decision in ICICI Bank Ltd, which considered credit card dues as a form of unsecured loans within the scope of banking business. Consequently, the ITAT directed the Assessing Officer to allow the deduction under section 36(1)(vii) read with section 36(2) for bad debts on credit cards.

3. Interest on NPA under section 43D read with Rule 6EA:
The Assessing Officer added interest income from NPAs for the period of 91 to 180 days, arguing that Rule 6EA requires recognizing interest on NPAs overdue for 180 days or more. The ITAT referenced decisions in Union Bank of India and other cases, which held that banks must follow RBI guidelines, which prescribe a 90-day period. Therefore, the ITAT directed the Assessing Officer to allow the deduction under section 43D read with Rule 6EA for interest on NPAs.

4. Invalid Re-assessment Proceedings:
This legal ground was left open as the appeals were allowed on merit.

5. Disallowance of Administrative Expenses under section 14A read with Rule 8D(2)(iii):
The Assessing Officer disallowed administrative expenses related to exempt income, applying Rule 8D(2)(iii). The ITAT referenced its own decision in the assessee's case for previous years, directing the Assessing Officer to disallow 0.5% of the average value of investments, excluding strategic investments.

6. Deletion of Disallowance under Rule 8D(2)(ii) of Interest Expenses:
The Assessing Officer disallowed interest expenses under Rule 8D(2)(ii), arguing that the assessee did not prove investments were made from own funds. The ITAT referenced the jurisdictional High Court decisions in HDFC Bank Ltd and Reliance Utilities & Power Ltd, which presumed investments were made from own funds if reserves exceeded investments. Therefore, the ITAT upheld the CIT(A)'s decision to delete the disallowance.

7. Allowing of Broken Period Interest:
The Assessing Officer treated broken period interest on HTM securities as capital expenditure. The ITAT referenced its own decision in the assessee's case and other cases, which allowed such interest as revenue expenditure. Therefore, the ITAT upheld the CIT(A)'s decision to allow the broken period interest.

8. Allowing Expenditure Incurred on ESOP:
The Assessing Officer disallowed the ESOP expenditure, arguing it is not related to business profits. The ITAT referenced its own decision in the assessee's case and the Special Bench decision in Biocon Ltd, which allowed ESOP expenses as revenue expenditure. Therefore, the ITAT upheld the CIT(A)'s decision to allow the ESOP expenditure.

Conclusion:
The appeals of the Revenue were dismissed, and the appeals filed by the assessee were partly allowed. The ITAT directed the Assessing Officer to allow various deductions and expenses claimed by the assessee, following precedents and judicial decisions. The order was pronounced on 16/02/2023.

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