2024 (8) TMI 1619 - AT - Income Tax

AO's suo-moto s.14A r.w. r.8D(2)(iii) invocation invalid; ESOP expenses and s.36, s.43D r.w.r.6EA deductions allowed

ITAT MUMBAI - AT held that the AO's suo-moto invocation of s.14A r.w. r.8D(2)(iii) without recording satisfaction was invalid and allowed the assessee's ... Disallowance u/s 14A r.w.r. 8D(2)(iii) - Mandation to record satisfaction - suo moto addition made by assessee rejected - HELD 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 [2018 (3) TMI 805 - SUPREME COURT] 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- decided in favour of assesse. Allowability of ESOP expenses decided in favour of assesse. Addition of interest income u/s 43D r.w.r. 6EA - HELD THAT:- As decided in own case after considering the provisions of Sec. 43D and judicial findings as supra we consider that norms for categorization of bad and doubtful debts had to be prescribed considering the guidelines issued by the RBI. Therefore, the ld. 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. Therefore, both the ground of appeals of the assessee is allowed. Disallowance of broken period interest - AO disallowed the same holding that the securities are held till the maturity which constitute the investment of the bank and cannot be considered as stock in trade - assessee contended that all the investments were made in accordance with RBI guidelines - HELD THAT:- Coordinate Bench in assessee’s own case held closing balance has been shown in the balance sheet. The interest income on Government securities and the profit / loss has been offered in the return of income for the current year. Similar treatment is consistently offered by the assessee in earlier years. The assessee also relied on the CBDT Circular No.18/2015 dated 02.11.2015. The Ld CIT(A) accepted the contention of the assessee granted relied to the assessee by relying on the CBDT circular and on the decision of Vs Citi Bank NA [2008 (8) TMI 766 - SUPREME COURT] and American Express International Banking Corporation [2002 (9) TMI 96 - BOMBAY HIGH COURT] We have noted that this issue is also covered in favour of the assessee. Claim of deduction of the assessee under section 36(1)(viia) in respect of standard assets allowed. Deduction u/s 36(1)(vii) read with section 36(2) in respect of bad debts claimed on credit cards allowed. Disallowance of interest u/s. 36(1)(ii) in respect of perpetual bond - HELD THAT:- This issue is recurring in nature and has been decided in favour of assessee as well as other banks also in ICICI BANK LIMITED [2022 (8) TMI 1346 - ITAT MUMBAI] in the case of ICICI vs. ACIT as held 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. Ground of appeal of the revenue is dismissed 1. ISSUES PRESENTED AND CONSIDERED 1. Whether reopening of assessment under sections 147/148 is valid where the Assessing Officer relied on provisions for standard assets and alleged non-disclosure - i.e., whether AO had 'reason to believe' or merely a change of opinion. 2. Whether provisions made for 'standard assets' under RBI norms qualify as 'provision for bad and doubtful debts' admissible as deduction under section 36(1)(viia). 3. Whether disallowance under section 14A read with Rule 8D (2)(ii)/(iii) was correctly invoked and quantified by AO - including (a) requirement of AO's recorded satisfaction before invoking Rule 8D, (b) whether own funds suffice to negate interest disallowance, and (c) whether disallowance should be restricted to assessee's suo moto computation. 4. Whether ESOP-related charges are allowable as business expenditure (revenue) or are capital/not allowable (section 37/other relevant provisions). 5. Whether interest on Non-Performing Assets (NPAs) and 'broken period interest' should be recognized/allowed under section 43D read with relevant Rules (Rule 6EA) and applicable RBI prudential norms. 6. Whether bad debts written off in respect of credit card business qualify as bad debts under section 36(1)(vii)/36(2) (i.e., represent money lent in ordinary course of banking or money-lending business). 7. Whether interest on perpetual bonds (Innovative Perpetual Debt Instruments) is allowable as revenue deduction under section 36(1)(iii) or should be treated as capital/part of Tier-I capital. 8. Whether withdrawal of interest previously offered under section 244A (i.e., tax effect of reversal) is deductible (to avoid double taxation). 9. Whether alleged delayed payment of employees' contributions to Provident Fund / Labour Welfare Fund attracts disallowance under section 36(1)(va) or is allowable under section 43B (timing rules) / sections 2(24)(x) etc. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of reopening under sections 147/148 Legal framework: Section 147/148 permit reopening where AO has reason to believe income has escaped assessment; if notice beyond four years, proviso requires failure to make true & full disclosure. Reopening must rest on reasons recorded; change of opinion is impermissible. Precedent Treatment: Coordinate authorities and High Court decisions (as discussed) hold that reopening cannot be mere change of opinion, AO must have tangible new material or independent application of mind; AO cannot improve reasons after notice. Interpretation and reasoning: The Tribunal examined reasons recorded by AO (provision on standard assets claimed as deduction) versus material already on record (notes to accounts, submissions in assessment). CIT(A) and Tribunal found no new material was gathered and AO had earlier accepted/considered same material in original assessment - thus reopening amounted to change of opinion. Reliance on earlier coordinate decisions that require AO's independent reasoned satisfaction was endorsed. Distinguishing relied authorities that predate or differ on material facts was undertaken. Ratio vs. Obiter: Ratio - reopening invalid where reasons show mere change of opinion and no fresh tangible material; reasons must be read as recorded and cannot be supplemented. Obiter - discussion of particular earlier authorities distinguished. Conclusions: Reopening quashed for lack of jurisdiction; reassessment invalid. All consequential grounds rendered infructuous. Issue 2 - Deductibility of provisions for standard assets under section 36(1)(viia) Legal framework: Section 36(1)(viia) permits deduction to banks for 'any provision made for bad and doubtful debts' subject to ceilings; provisioning methods follow RBI prudential classification (standard, substandard, doubtful, loss). Precedent Treatment: Tribunal/coordinate benches have held that section 36(1)(viia) contemplates provisions 'for' bad and doubtful debts and does not restrict allowance to provisions made only 'on' assets already classified as bad/doubtful; RBI-mandated provisioning for standard assets may be part of overall provisioning and allowed. Interpretation and reasoning: Tribunal reasoned that (a) banks must provision across categories per RBI norms; (b) 'for bad and doubtful debts' contemplates anticipated defaults, not only presently bad debts; (c) provisions on standard assets reflect prudential anticipation of future defaults and are in substance similar to bad/doubtful provisions; (d) therefore such provision falls within section 36(1)(viia) subject to statutory ceilings. Ratio vs. Obiter: Ratio - provisions for standard assets made in compliance with RBI norms qualify as 'provision for bad and doubtful debts' under section 36(1)(viia) and are deductible (subject to limits). Obiter - comments distinguishing contrary older decisions. Conclusions: Deduction in respect of provisions for standard assets allowed; AO directed to permit claimed amounts within statutory ceilings. Issue 3 - Disallowance under section 14A read with Rule 8D (2)(ii)/(iii) Legal framework: Section 14A disallows expenditure incurred in relation to exempt income (notably exempt dividends); Rule 8D prescribes formulae (including 1% of average investments and apportionment methods) to compute notional disallowance. Pre-requisite: AO must be satisfied that suo moto disallowance is incorrect before invoking Rule 8D. Precedent Treatment: Coordinate benches and higher decisions require AO to record satisfaction (per Maxopp) before substituting assessee's computation; where own funds far exceed investments yielding exempt income, interest disallowance may not be warranted; disallowance under Rule 8D(2)(iii) should be limited to investments yielding exempt income and, in certain fact patterns, restricted to assessee's suo moto figure if AO fails to show why that computation is incorrect. Interpretation and reasoning: Tribunal applied precedent: (a) where assessee's own funds are more than investments capable of yielding exempt income, no interest disallowance under 8D(2)(ii); (b) AO's mechanical invocation without recording reasons/satisfaction as to incorrectness of taxpayer's suo moto apportionment is impermissible; (c) Rule 8D(2)(iii) disallowance should focus on investments that actually yielded exempt income and can be limited to assessee's suo-moto calculation where AO fails to point to defects. Ratio vs. Obiter: Ratio - AO must record satisfaction and demonstrate why assessee's computation is wrong before invoking Rule 8D; interest disallowance unnecessary where own funds cover investments; Rule 8D(2)(iii) disallowance limited to investments yielding exempt income and may be capped at assessee's suo-moto figure if AO fails to justify larger figure. Obiter - detailed allocation methodologies referenced. Conclusions: Disallowances under s.14A/Rule 8D (2)(ii)/(iii) set aside/restricted as per reasoning; AO directed to restrict to suo-moto or to investments yielding exempt income where applicable. Issue 4 - Allowability of ESOP expenses Legal framework: Deduction under section 37 requires expenditure 'wholly & exclusively' for business; question whether ESOP discount constitutes expenditure or capital/benefit foregone (notional). Precedent Treatment: Special Bench and coordinate decisions accepted in favour of allowing ESOP-related expenses where treated as business expenditure (Biocon special bench and subsequent Tribunal orders); contrary decisions treating it as capital/notional loss were considered and distinguished. Interpretation and reasoning: Tribunal relied on earlier favorable bench decisions and found ESOP costs allowable where (i) expense relates to employee remuneration/business operations, (ii) consistent treatment and factual matrix (including purchase/issue mechanics) support revenue characterization, and (iii) authorities on capital vs revenue were distinguishable on facts. Ratio vs. Obiter: Ratio - ESOP expenses in the facts of these assessments are allowable as revenue expenditure. Obiter - discussion of alternative precedents. Conclusions: ESOP disallowances deleted; claimed ESOP expenditure allowed. Issue 5 - Interest on NPAs and broken period interest under section 43D / Rule 6EA Legal framework: Section 43D links tax recognition of interest to RBI/NHB prudential guidelines for banks/financial institutions; Rule 6EA historically referenced 180-day NPA threshold but RBI revised norm to 90 days - interplay requires reading Section 43D with RBI norms. Precedent Treatment: Coordinate decisions held RBI prudential norms must be given effect for recognition; Rule 6EA should be read in light of Section 43D and RBI guidelines reducing NPA threshold; broken period interest on securities held to maturity has been allowed as revenue (subject to matching principles and rulings). Interpretation and reasoning: Tribunal followed coordinate precedents: (a) where RBI norms prescribe 90 days for NPA recognition, section 43D requires regard to RBI guidelines and interest derecognition aligns therewith; (b) Rule 6EA cannot override express statutory direction to have regard to RBI guidelines; (c) broken period interest in the facts was revenue in nature and allowable under matching principles and relevant case law. Ratio vs. Obiter: Ratio - interest on NPAs and broken period interest allowed in conformity with RBI guidelines and section 43D; Rule 6EA read harmoniously. Obiter - nuances on matching principles. Conclusions: Additions for overdue interest and broken period interest disallowed; interest recognition allowed on RBI-consistent treatment. Issue 6 - Bad debts on credit card business Legal framework: Section 36(1)(vii) allows deduction for bad debts; section 36(2) limits allowance to debts representing money lent in ordinary course of banking or money-lending business. Precedent Treatment: Coordinate Tribunal held credit card dues are unsecured lines of credit/loans (per RBI circulars) and thus part of lending activity; consequent bad debts are allowable if written off in books and satisfy section 36(2) conditions. Interpretation and reasoning: Tribunal relied on RBI circulars classifying credit card dues as unsecured personal loans and found such transactions constitute lending in ordinary course of banking; hence write-offs in credit card business qualify as bad debts allowable under section 36(1)(vii) read with section 36(2). Ratio vs. Obiter: Ratio - credit card bad debts allowed as deductions where they represent money lent in ordinary course of banking. Obiter - policy comments on payment services vs lending distinguished by RBI characterization. Conclusions: Disallowances of credit card bad debts deleted; deduction allowed. Issue 7 - Interest on perpetual bonds (IPDI) under section 36(1)(iii) Legal framework: Section 36(1)(iii) permits deduction of interest on borrowed capital if revenue in nature; characterization depends on instrument's substance (debt/borrowing vs. quasi-equity/Tier-I). Precedent Treatment: Coordinate benches found where perpetual instruments carried fixed interest, were shown as borrowings, interest paid and TDS deducted, and instruments were redeemed as per records, they constituted long-term borrowings and interest was deductible. Interpretation and reasoning: Tribunal examined instrument terms, treatment in accounts (classified as borrowings), interest payments (tax deducted), and actual redemption events; concluded substance was borrowing and interest was revenue expenditure deductible under section 36(1)(iii). RBI classification as Tier-I does not automatically change tax character absent other indicia. Ratio vs. Obiter: Ratio - interest on such perpetual instruments held to be deductible where substantive features show debt (fixed interest, payment, redemption) and lender has no management rights; RBI regulatory characterization alone not decisive. Obiter - observations on distinguishable fact patterns where instruments truly equity-like. Conclusions: Disallowance of interest on perpetual bonds deleted; interest allowed as revenue deduction. Issue 8 - Deduction for withdrawal of interest earlier offered under section 244A Legal framework: Tax consequences of withdrawal of amounts previously offered in an earlier year may require adjustment to avoid double taxation; correct year to allow deduction is the year of withdrawal, subject to facts and taxability in earlier year. Interpretation and reasoning: Tribunal accepted submission that the interest in question had been offered in an earlier year and later withdrawn by Revenue; non-allowance of deduction would cause double taxation. Direction issued to allow deduction/adjustment in relevant year. Ratio vs. Obiter: Ratio - withdrawal of amounts earlier taxed should be allowed as deduction/adjustment in year of withdrawal to prevent double taxation where facts show prior offer. Obiter - procedural aspects. Conclusions: Direction to allow deduction of withdrawn interest corresponding to earlier offer. Issue 9 - Delayed payment of employee PF / LWF contributions and section 36(1)(va) / section 43B Legal framework: Section 43B prescribes allowable deduction only on actual payment by due dates; Finance Act amendments (from specified AY) affect timing; section 2(24)(x) treats some employer-deducted but unremitted amounts as income where received by employer. Interpretation and reasoning: Tribunal accepted that employer deposited employees' contributions before due date of filing return and amendments (Finance Act, 2021) apply from specified AY; further, where employee has not linked Aadhaar to UAN, employer has merely deducted but not received contribution - thus not income under section 2(24)(x). Consequently deduction allowable under section 43B / 36(1)(va) as applicable, and additions outside scope of intimation/assessment processing were infirm. Ratio vs. Obiter: Ratio - payments of employees' contributions made before filing of return (within statutory timelines) are allowable under section 43B and corresponding provisions; where amount not received by employer (deducted but not remitted due to UAN/Aadhaar issues), it is not income under section 2(24)(x). Obiter - procedural limits on revisiting 143(1) intimation adjustments. Conclusions: Additions/disallowances for PF/LWF timing deleted; deductions directed to be allowed per statutory timing. OVERALL CONCLUSION The Tribunal dismissed Revenue appeals and allowed the assessee appeals/Cross-objections on the core issues above: reopening under sections 147/148 invalid where no fresh material; provisions for standard assets deductible under section 36(1)(viia) in banks when in accordance with RBI norms; section 14A/Rule 8D disallowances curtailed where AO failed to record satisfaction or where own funds covered investments; ESOP, NPAs/broken period interest, credit-card bad debts and interest on perpetual bonds allowed in the facts; adjustments for withdrawn interest and timing under section 43B upheld. Precedent authorities were applied, followed or distinguished as set out above.