2024 (2) TMI 1590 - AT - Income Tax

Rule 8D upheld; partial s.14A disallowance sustained, multiple issues remitted for verification including s.36(1)(iii) deletion

CIT-2 (2) (2), Mumbai Versus M/s Yes Bank Ltd.

ITAT MUMBAI upheld the AO's invocation of rule 8D and sustained a disallowance under s.14A in part, but remitted multiple issues to the AO/CIT(A) for ... Disallowance u/s 14A - Assessee claimed by the assessee that all instruments like securities, bonds etc. have been held as stock-in-trade and income received from sale of those securities etc. has been offered to tax as business income except incidental exempted income - HELD THAT:-Disallowance u/s 14A of the Act towards earning of the exempted income. The contention of the assessee that Assessing Officer has invoked rule 8D of the rules without recording dissatisfaction to the accounts of the assessee, is not tenable and accordingly the contention of the assessee are rejected. The Hon'ble Delhi high Court in the case of India bulls Financial services Ltd. [2016 (11) TMI 1369 - DELHI HIGH COURT] in decision observed that the AO made elaborate analysis indicating three important steps and in such a case it can't be held that AO did not expressly recorded dissatisfaction or did not record cogent reasons for dissatisfaction. Accordingly, we don't find any infirmity in the finding of Ld CIT(A) on the issue in dispute and uphold the same. Disallowance under rule 8D(2)(ii) for directing the AO to verify the availability of interest-free funds with the assessee - We note that in identical circumstances the Tribunal in [2023 (6) TMI 1496 - ITAT MUMBAI] where the Ld. CIT(A) directed the AO for verification of the availability of the interest free funds, has set-aside the finding of CIT(A) and restored the matter back to the file of the Ld. CIT(A) for deciding afresh . Therefore, we feel it appropriate to restore this issue back to the file of the Ld. CIT(A) for verifying availability of the interest-free funds in the light of the decisions of Reliance Utilities and Power Ltd. [2009 (1) TMI 4 - BOMBAY HIGH COURT] and HDFC bank Ltd. [2014 (8) TMI 119 - BOMBAY HIGH COURT] and Maxopp investment Ltd. [2018 (3) TMI 805 - SUPREME COURT] and other decisions of the Hon'ble Supreme Court. Whether disallowance u/s 14A could be made in respect of the securities held as stock-in-trade? - As perused the relevant material on record. The Hon'ble Supreme Court in the case of Maxopp Investment Ltd. [2018 (3) TMI 805 - SUPREME COURT] has specifically decided the applicability of the provisions of section 14A in case of securities held as stock in trade. The Hon'ble Supreme Court rejected the dominant purpose theory and held that expenses incurred in relation to securities held in stock in trade, have to be apportioned in the ratio of the taxable and non-taxable income earned. Assessee has to provide details of taxable and non-taxable income earned from the securities held as stock-in-trade and thereafter apportion the expenses incurred in relation to such securities in the ratio of taxable and non-taxable income earned from those securities and thereafter to consider the proportion of the expenses related to non-taxable or exempted income for disallowance under section 14A of the Act. Therefore, we feel it appropriate to restore this issue back to the file of the AO for necessary verification and deciding afresh. Whether only securities yielding dividend income should be considered for computing disallowance under section 14A? - As undisputed that securities which are eligible for earning exempted income has only to be considered for the purpose of disallowance under section 14A of the Act. As in the case of ACB India Ltd. [2015 (4) TMI 224 - DELHI HIGH COURT] held that investment which do not give tax exempt income have to be excluded for computing the disallowance u/s 14A of the Act. Accordingly, we restore this issue also to the file of the Assessing Officer for deciding in accordance with law after verifying various securities appearing in the balance sheet of the assessee . Restricting the disallowance to the extent of suo-motu disallowance made by the assessee - We are of the opinion that with effect from assessment year 2008-09, once the Assessing Officer is dissatisfied with the computation of claim of disallowance of expenses in terms of section 14A of the Act, the Assessing Officer is required to invoke rule 8D of 'Rules'. Since in the case, Assessing Officer after recording dissatisfaction to the claim of the assessee, has invoked rule 8D of the 'Rules', therefore we do not find any infirmity in the same and the prayer of the assessee for restricting the disallowance to the extent of suo-motu disallowance is rejected. Income-tax has already been paid by the securitisation trust on the income from PTC, which has been distributed to the assessee as per the provisions of section 115TA of the Act, therefore provisions of section 14A cannot apply to PTC - The PTCs are securities issued to investors against mortgaged backed loans of non-banking finance companies and banks. These loans are securitized and sold to an investment entity, such as a mutual fund etc, thereby transferring the future cash flows to the buyer of the security for a price. In the securitisation trust, the investors are making investment in the securitisation trust, and in turn they are receiving the returns in proportion to their investment and thus it is the investment of the investor which is earning them income. For avoiding the same income from taxing twice, the Hon'ble Parliament, has specifically treated the same income as exempted from tax in the hands of the investor under the provisions of section 10(35A) of the Act. The identical situation in case of partnership firms, where as the profit earned by the partnership firm is taxable, but the share of said profit is exempted in the hands of partner under the provisions of section 10(2A) of the Act. The learned counsel submits same income cannot be taxed twice. We may like to clear that for the purpose of disallowance u/s 14A of the Act, the expenses which are incurred by the assessee for earning such income are disallowed being the said income exempted in and of the assessee and said income is not taxed twice in the hands of the assessee. The expenses incurred towards receiving share of distribution from securitisation trust i.e. income from PTC are embedded in total expenses debited in profit and loss account of the assessee, which are therefore not eligible for deduction against the taxable income of the assessee, and therefore need to be excluded as per the formula provided under rule 8D of the rules. In view of the aforesaid discussion, we reject the contention of the assessee for not considering the investment in PTC for the purpose of disallowance under section 14A of the Act. The additional ground raised by the assessee is accordingly dismissed. Disallowance u/s 35D - As following the finding of the Tribunal for AY 2011-12 to 2013-14 [2022 (7) TMI 480 - ITAT MUMBAI],the issue in dispute of claim of 1/5th of the expense u/s 35D of the Act is restored to the file of the Assessing Officer to be decided in accordance with direction of the Tribunal in [2022 (7) TMI 480 - ITAT MUMBAI] for AYs 2011- 12 to 13-14 wherein held we do not find there is any finding in the order in the coordinate bench for earlier year whether it was an issue of public subscription or not. This is the basic requirement of that section. As no evidence was put forth, the issue was set aside for verification whether the expenses were in connection with the issue for ' Public Subscription' or not. The coordinate bench in earlier year allowed claim of the assessee holding that whether QIP is public or not. It did not decide whether it is a 'public subscription' or not. Disallowance u/s 35D those expenses in connection with QIP might not be allowable in view of section 40(a)(i)/(ia) - We find that the Assessing Officer made no disallowance of QIP expenses on account of non-deduction of tax at source and therefore there was no occasion for the Ld. CIT(A) to adjudicate on the issue. Accordingly, this ground of the appeal of the assessee being infructuous, it is dismissed. Disallowance of brokerage paid on acquisition of investment which remained unsold at the end of the year - If the securities have been treated by the assessee as stock-in-trade then the expenses incurred at the time of acquisition of such securities is allowable at the time of acquisition being revenue expenditure, but if the securities are held as investment and income from sale of those securities has been offered under the head capital gain, then brokerage for acquisition of those securities, would be allowable at the time of sale of those securities and not at the time of purchase of those securities. Thus, whether the HTM securities have been treated by the assessee as investment or stock-in-trade, is a subject matter of verification from the books of accounts and financial statements of the assessee, matter is restored back to the file of the Assessing Officer. Assessing interest income on HTM investment as income from other sources - CIT(A) has not upheld the finding of the Assessing Officer that interest income from HTM securities is assessable under the head income from other sources. However, for removing any doubt on the issue in dispute, we restore this matter back to the file of the Assessing Officer for verification, whether in the year under consideration the income from interest on HTM securities has treated under the head 'income from other sources' and if the answer is yes, then he may decide the issue in dispute, otherwise if the answer is no, then decision will be in favour of the assessee and no adjudication will be required on the issue in dispute. Addition of commission on bank Guarantee - assessee changed the method of recognizing 'guaranty commission' from 'anniversary date' to the 'specific period of guaranty' during the year under consideration and therefore part of the guaranty commission received was deferred for tax purposes. Issue need examination whether the assessee was required to render services in relation to guarantee only at the time of entering into guaranty agreement or it was required to render services over the period of the guaranty, therefore it needs to be seen whether the entire expenses in relation to income from guaranty commission have been claimed by the assessee in the year of entering into guaranty agreement or same have been spread over the period of the guaranty to the customers. We find that Ld. CIT(A) restored this issue in dispute back to the learner Assessing Officer for verification of the facts. Addition of interest on non-performing assets under section 43D read with Rule 6EA of Rules - We find that Tribunal in the case of the State Bank of India [2022 (9) TMI 1640 - ITAT MUMBAI] has relied on the decision of Housing and urban development Corporation Ltd. [2017 (7) TMI 144 - DELHI HIGH COURT] where specific issue of NHB guidelines vis-à-vis Rule 6EA read with section 43D of the Act was involved, which being a decision of higher appellate forum, therefore, keeping in view the judicial discipline, we are bound to follow the decision of the Tribunal in the case of State Bank of India [2022 (9) TMI 1640 - ITAT MUMBAI] We accordingly, uphold the finding of the Ld. CIT(A) on the issue in dispute. The ground of the assessee is accordingly dismissed. Disallowance of deduction claimed by the assessee u/s 36(1)(viia) in respect of provision of rural advances separately - Contentions of the appellant in this respect are devoid of merits and hence herewith rejected. The impugned disallowance being claim of deduction u/s 36(1)(viia) in respect of Rural Advances is confirmed. Disallowance of interest paid on Innovative Perpetual Debt Instruments(IPDI) u/s 36(1)(iii) - whether the IPDI bonds issued by the assessee are in the nature of equity capital or debt? - We set aside the finding of the Ld. CIT(A) and delete the disallowance of interest in respect of IPDI, which was made under section 36(1)(iii) of the Act. The ground of appeal of the assessee is accordingly allowed. Levy of interest under section 234A and 234D -Computation of the interest u/s 234A and 234D is a matter of verification from the record and in absence of details of computation, CIT(A) is justified in directing the Assessing Officer for verification in accordance with law. We therefore, feel it appropriate to direct the Assessing Officer that if he had not complied with the direction of the Ld. CIT(A) than he may verify the claim of the assessee in accordance with law and compute the interest accordingly. Disallowance of deduction for broken period interest in relation to HTM category of investment - whether the broken period interest in relation to HTM securities is allowable as business expenditure? - Since the issue whether the HTM securities in the case of the assessee are in the nature of the stock-in-trade or investment, has been raised in the appeal of the assessee in ground Nos. IX and X, which has been restored back to the file of the Ld. AO, we feel it appropriate to restore this issue also to the file of the Ld. AO for deciding afresh. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether disallowance under section 14A read with Rule 8D is properly invoked and computed by the Assessing Officer where the assessee made suo-motu disallowance and whether Rule 8D application requires a specific recorded satisfaction; scope of Rule 8D(2)(ii) (interest apportionment) and Rule 8D(2)(iii) (0.5% formula) in the facts. 2. Whether availability of own/interest-free funds must be tested as at the balance-sheet date or at the date(s) of investment for the purpose of limiting interest disallowance under section 14A r.w. Rule 8D(2)(ii). 3. Whether securities held as stock-in-trade (banking context) are excluded from section 14A disallowance or, post-Maxopp, require apportionment of expenses between taxable business income and exempt income (ratio vs. dominant purpose). 4. Whether only securities yielding dividend (or only those yielding exempt income) must be considered when computing section 14A disallowance; whether Pass-Through Certificates (PTCs) issued by securitisation trusts are to be treated as investments yielding exempt income for section 14A purposes. 5. Whether disallowance under section 14A should be restricted to the assessee's suo-motu disallowance or may be computed by AO as per Rule 8D. 6. Whether expenses incurred in connection with a Qualified Institutional Placement (QIP) qualify for deduction under section 35D (one-fifth write-off) or are capital in nature / hit by section 40(a)(i)/(ia). 7. Whether brokerage on acquisition of HTM securities and broken-period interest (BPI) on HTM securities are revenue deductible where the bank treats securities as stock-in-trade; whether interest on HTM investments is business income or income from other sources. 8. Whether change in accounting method for bank-guarantee commission (spreading over period vs. anniversary basis) is permissible and whether commission accrues in full at receipt or must be time-proportionately recognised. 9. Admissibility and allowability of ESOP discount deduction made during assessment proceedings. 10. Tax treatment of interest on Non-Performing Assets (NPAs): applicability of section 43D r.w. Rule 6EA vis-à-vis RBI prudential norms (90 days v. 180 days) and whether subordinate rules or prudential norms override statute. 11. Whether deduction under section 36(1)(viia) for rural advances can exceed book provision for bad and doubtful debts; interaction of statutory percentage limits and actual provisions booked. 12. Whether interest on Innovative Perpetual Debt Instruments (IPDIs) is deductible under section 36(1)(iii) (debt) or is capital/equity in character and non-deductible. 13. Whether interest under sections 234A and 234D was correctly levied; scope for appellate authority to direct verification of interest computations. 2. ISSUE-WISE DETAILED ANALYSIS A. Section 14A / Rule 8D - Invocation, scope and computation Legal framework: Section 14A disallows expenditure in relation to income not includible in total income; Rule 8D prescribes the method of computation (sub-rules 2(i), 2(ii), 2(iii)). Section 14A(2) permits AO to determine amount 'if not satisfied' with assessee's claim. Precedent treatment: The Tribunal and various High Courts have held that AO need not follow a rigid form of recording satisfaction; sufficient material and recording in assessment order is adequate (citing authorities summarized in the judgment). Maxopp (Supreme Court) rejected the dominant purpose test and endorsed apportionment principle. Post-Maxopp, Rule 8D remains the prescribed method. Interpretation and reasoning: The Tribunal agrees with authorities that AO's invocation of Rule 8D does not require a particular formula for recording dissatisfaction; detailed analysis in the assessment order suffices. Where AO is not satisfied with assessee's claim, invoking Rule 8D is proper. Rule 8D(2)(iii) (0.5% of average investment) can be applied; Rule 8D(2)(ii) requires analyzing availability of interest-free funds to exempt part of interest disallowance. Ratio vs. Obiter: Ratio - AO may apply Rule 8D upon recorded dissatisfaction of assessee's claim; Rule 8D remains mandatory mechanism for computation when invoked. Obiter - discussion of specific tribunal decisions cited and their interplay. Conclusions: Tribunal upheld that AO validly invoked Rule 8D; the 0.5% disallowance under Rule 8D(2)(iii) was sustained in the facts; the question on interest-free funds under Rule 8D(2)(ii) required further verification and was restored for reassessment of that factual issue. B. Timing for testing availability of interest-free/own funds (balance-sheet date v. investment date) Legal framework: Rule 8D(2)(ii) permits reduction of interest disallowance to extent investments were made from interest-free funds; Maxopp and subsequent authorities consider source of funds; earlier High Court/Tribunal decisions diverge on balance-sheet date v. investment date. Precedent treatment: Some High Court and Tribunal decisions treat balance-sheet date as appropriate (Reliance Utilities, HDFC Bank, South Indian Bank dicta); Maxopp and other Supreme Court dicta emphasize showing source at relevant point; conflicting coordinate bench decisions exist. Interpretation and reasoning: Tribunal found that law requires careful application of binding precedents and that the factual question of sufficiency of interest-free funds needed fresh verification in light of precedents; appellate authority cannot remit factual verification beyond its power under section 251, but Tribunal restored issue to CIT(A) for fresh decision consistent with higher court rulings. Ratio vs. Obiter: Ratio - availability of interest-free funds is a factual enquiry to be verified; where precedents favour balance-sheet approach, AO/CIT(A) should apply them; restoration for factual re-examination was appropriate. Obiter - commentary on conflicting authorities. Conclusions: The matter of whether own/interest-free funds cover investments must be factually examined (consistent with jurisdictional High Court/Supreme Court guidance); remitted for fresh verification rather than final determination by Tribunal. C. Securities held as stock-in-trade and section 14A applicability Legal framework: Section 14A disallows expenditure in relation to exempt income; when securities are stock-in-trade, income from sale is business income but incidental exempt receipts (dividend/interest) may arise. Precedent treatment: Maxopp (Supreme Court) rejected dominant purpose test and held apportionment applies where securities are stock-in-trade - expenses must be apportioned between taxable and non-taxable income. Earlier decisions (State Bank of Patiala line) had applied a different test but were superseded to extent inconsistent with Maxopp. CBDT Circular 18/2015 and subsequent tribunal decisions discussed. Interpretation and reasoning: Tribunal follows Maxopp - even where securities are stock-in-trade (banking), section 14A is triggered to the extent exempt income arises; expenses must be apportioned between taxable business income and exempt income and disallowance confined to proportion attributable to exempt income. Coordinate bench decisions inconsistent with Supreme Court ratio are treated as per-incuriam. Ratio vs. Obiter: Ratio - post-Maxopp, holdings in stock-in-trade do not automatically exclude section 14A; apportionment principle governs. Obiter - references to other benches' divergent rulings are noted but not followed. Conclusions: Tribunal directed AO to verify taxable v. non-taxable income components from stock-in-trade securities and apportion expenses accordingly; issue remitted for factual determination. D. Scope of securities to be considered and treatment of PTCs Legal framework: Section 14A applies to expenditures in relation to income not includible in total income. For PTCs, historically trust paid tax under section 115TA and recipients were exempt under section 10(35A) for the relevant period. Precedent treatment: Legislative change (w.e.f. 01.06.2016) moved tax incidence to investors by section 115TCA; prior to that, section 115TA taxed trusts and section 10(35A) exempted distributed income in recipient hands. Interpretation and reasoning: Tribunal rejected assessee's argument that PTC income cannot be treated as exempt for section 14A because the trust paid tax-reasoning that for purposes of section 14A the income received by investor was exempt in the assessee's hands (section 10(35A) applied then) and thus expenditures attributable to that exempt receipt fall within section 14A. The fact a trust paid tax under 115TA did not negate that the recipient's received income was exempt and hence relevant for section 14A apportionment. Ratio vs. Obiter: Ratio - PTC receipts (exempt in assessee's hands under 10(35A) during the year) are to be considered in computing section 14A disallowance; additional ground dismissed. Obiter - discussion of trustee v. company distinctions. Conclusions: Investments in PTCs were includible for section 14A computation in the year under consideration. E. QIP expenses and section 35D / section 40(a) Legal framework: Section 35D permits spread (one-fifth) of expenses connected with public subscription of shares; question whether QIP to QIBs amounts to 'public subscription' and whether such expenses are capital or revenue. Precedent treatment: Tribunal decisions (Deccan Chronicle and coordinate bench rulings) have held QIB allotments can constitute public subscription when tested against listing rules, SEBI/Listing Agreement and SCRR definitions; earlier Tribunal orders in assessee's own earlier years allowed section 35D treatment subject to verification. Interpretation and reasoning: Tribunal followed prior coordinate bench guidance and restored the issue to AO for verification whether the QIP constituted public subscription and whether expenses were in connection with such issue; section 40(a) point was left infructuous where no TDS non-compliance occurred. Ratio vs. Obiter: Ratio - factual verification on nature of QIP (public subscription vs private placement) governs allowability under section 35D; restoration to AO directed. Obiter - extensive citations to previous Tribunal findings. Conclusions: Issue remitted for fact finding; deduction under section 35D not finally disallowed at Tribunal stage but requires AO verification per directions. F. Brokerage on HTM acquisitions, broken period interest (BPI) and head of income Legal framework: Revenue recognition, classification of securities (AFS/HFT/HTM) per RBI and accounting practice; taxability of interest and timing of brokerage/BPI depend on whether securities are stock-in-trade or investments. Precedent treatment: Supreme Court and tribunal decisions (Nawanshahar, HDFC Bank etc.) indicate investments by banks can be business assets; broken-period interest and acquisition brokerage treated as revenue where securities are stock-in-trade. Interpretation and reasoning: Tribunal noted factual dispute whether HTM securities were treated as stock-in-trade in the assessee's books; where they are stock-in-trade, brokerage and BPI are revenue deductible; remitted to AO for verification of accounting classification and consequent tax treatment. As to head of income, if HTM interest is treated as business income in accounts, AO should follow that; otherwise AO to adjudicate. Ratio vs. Obiter: Ratio - tax consequence depends on factual classification; restoration for factual verification. Obiter - reliance on prior year decisions in assessee's own case. Conclusions: Matters relating to brokerage, BPI and head of interest income restored to AO for factual verification and fresh decision. G. Bank-guarantee commission accounting method change Legal framework: Mercantile accounting recognises income when accrued; taxability follows accrual unless statute requires otherwise. Interpretation and reasoning: Tribunal accepted that commission related to multi-year guarantees may be taxed on time-proportionate basis but found CIT(A) exceeded authority in remitting without final decision; remitted matter back to CIT(A) to decide afresh after verification whether the change in accounting method was justified and whether corresponding expenses were similarly allocated. Conclusions: Directed fresh adjudication by CIT(A); no final disallowance upheld by Tribunal. H. ESOP discount claims Legal framework: Deduction for employee-share discount may be allowable subject to evidence and timing of claim. Interpretation and reasoning: Tribunal admitted the additional ground (legal nature) and restored the claim to AO/CIT(A) for verification of quantum and entitlement, following earlier tribunal directions in related years. Conclusions: Claim admitted; remitted for factual adjudication. I. NPAs - section 43D and Rule 6EA v. RBI prudential norms Legal framework: Section 43D and Rule 6EA prescribe recognition of interest on NPAs for tax purposes; RBI prudential norms set accounting/ prudential classification (90 days). Statutory rulemaking and judicial interpretation determine applicability. Precedent treatment: Tribunal followed earlier tribunal/DRP decisions holding Rule 6EA (six months/180 days) to be operative and not overridden automatically by RBI changing to 90 days; higher court precedents upheld primacy of statute/rules. Interpretation and reasoning: Tribunal upheld AO's addition where interest was not recognized per rule period; observed that RBI guidelines do not override statutory rule and that Rule 6EA/section 43D timings govern tax recognition. Coordinate jurisprudence exists but Tribunal followed binding precedents. Conclusions: Addition for interest on NPAs under section 43D r.w. Rule 6EA affirmed. J. Section 36(1)(viia) rural advances provision Legal framework: Deduction under section 36(1)(viia) is available only in respect of provisions made for bad and doubtful debts and is limited by statutory percentage caps. Precedent treatment: Punjab & Haryana High Court (State Bank of Patiala) and tribunal decisions hold deduction cannot exceed provision actually debited in books for that year. Interpretation and reasoning: Tribunal followed those precedents and CIT(A) reasoning: claim for separate rural advances deduction beyond book provision is not permissible; making of a provision in books is a precondition to avail statutory deduction upto prescribed percentages. Conclusions: Disallowance confirmed; deduction cannot exceed provision actually made in books. K. Innovative Perpetual Debt Instruments (IPDIs) Legal framework: Distinction between debt and equity for deduction under section 36(1)(iii) depends on substance (redemption obligation, perpetual nature, investor rights); RBI treats IPDIs as Additional Tier I capital. Precedent treatment: Coordinate bench decisions (Tata Power, etc.) have treated certain perpetual instruments as debt/borrowings allowing interest deduction where substance shows borrowing; other authorities treated them as quasi-equity and disallowed interest. Interpretation and reasoning: Tribunal followed a recent coordinate bench decision that, on the facts, IPDIs were debt-like (unsecured perpetual debentures with fixed interest, lenders not sharing losses) and that earlier revenue practice did not bind AO; set aside CIT(A) disallowance and directed deletion of disallowance of interest. Ratio vs. Obiter: Ratio - in the facts, IPDIs were debt for tax purposes and interest deductible; Obiter - discussion of differences with cases treating perpetual instruments as equity. Conclusions: Disallowance of interest on IPDIs deleted in the facts; interest treated as deductible. L. Interest under sections 234A and 234D Legal framework: Sections 234A/234D interest computations depend on returns, refunds and timing; appellate authorities can direct verification where computation details are absent. Interpretation and reasoning: Tribunal found CIT(A)'s direction to AO to verify computations justified given lack of detail in assessment record; directed AO to verify and compute interest if not already properly done. Conclusions: Matters remitted for verification; no final order on interest levy at Tribunal level.