2025 (8) TMI 1085 - AT - Income Tax

Appellate panel directs fresh adjudication on tax additions, extinguishment of liabilities, s.50C/s.43CA, s.14A, s.43D, s.36(1)(viia)

Kotak Mahindra Bank Limited Versus Assessment Unit, Income Tax Department, DCIT-3 (2) (2), Maharashtra And DCIT-Circle 2 (3) (1), Maharashtra Versus Kotak Mahindra Bank Limited

ITAT, Mumbai set aside multiple contested additions to the ld.AO for de novo consideration in the interest of natural justice, directing fresh ... Applicability of section 41(1) - addition treating it as extinguishment of liabilities - HELD THAT:- Addition was made by the ld.AO due to non availability/production of any reply/evidences by the assessee in support of its contentions. Moreover, it is observed submissions made to CIT(A)do not appear to be complete for properly evaluation by him. AO also did not make any independent enquiry in the matter with the respective parties as well by invoking provisions of section 131 or 133(6) - The assessee has also contended that no cross-examination of the parties was allowed before taking adverse view of the matter. We are of the considered view that it would be in the fitness of things to set aside the matter to the ld.AO in the interest of principles of natural justice for de novo consideration of all relevant facts of the case, submissions claimed to have been made by the assessee in the matter. The assessee would submit relevant evidences/replies before the ld.AO who after due consideration of the same decide the issue as per the provisions of the Act in this regard. Long Term Capital Gains on Sale of depreciable immovable property and invocation of provisions of Sec.50C on sale of depreciable immovable property are being agitated in the ground - HELD THAT:- We find that the entire issue has not been properly adjudicated either by the AO or the CIT(A). Neither the facts of the case nor the provisions of the Act have been appreciated in correct perspective by them. Even the assessee did not furnish relevant information, details and explanations before the authorities below. Moreover, the AO did not carry out any independent enquiry into the matter to find out the actual user of the said assets before applying the provisions of the Act. The relevant provisions of the Act relating to the issue in hand have not been properly analysed either. In so far as the contention of the assessee that the provisions of section 50C are not applicable to block of assets is concerned, it would be worthwhile to extract the relevant paras of decision given in the context of provisions of section 50 vis-a-vis section 50C of the Act in the case of United Marine Academy [2011 (4) TMI 15 - ITAT MUMBAI] while interpreting the sections 50 and 50C of the Act w.r.t. applicability in respect of depreciable assets, block of assets and non-depreciable assets has categorically held that the provisions of section 50C are equally applicable to asset forming a block of asset as well. This finding is contrary to the contentions of the assessee as stated above paras. This decision though given in the context of section 50 of the Act, has not been appreciated either the assessee or the Revenue in the impugned order. Moreover, in the relevant assessment year, the provisions of section 43CA had already been introduced which provide that for business assets provisions of section 43CA which are akin to section 50C would apply. The matter needed due examination vis-a-vis this provision also. We are of the considered view that it would be in the fitness of things to set aside the matter to the AO for de novo consideration of all the relevant aspects of the case including the provisions of law in this regard and in the interest of principles of natural justice. The assessee would submit relevant evidences before the ld.AO who after due consideration of the same decide the issue as per the provisions of section 43CA r.w.s. 50C of the Act. The grounds 5 and 6 are therefore, allowed for statistical purposes. Addition u/s 14A - Recording of satisfaction - HELD THAT:- High Courts in the case of Devarsons [2017 (8) TMI 37 - GUJARAT HIGH COURT] and Indiabulls [2016 (11) TMI 1369 - DELHI HIGH COURT] though held that recording of satisfaction of the AO regarding the claim of assessee after considering the accounts of the assessee is necessary, there is neither any specific or particular manner in which such satisfaction should be recorded nor any specific or particular manner in which the dissatisfaction of AO with claim of assessee prescribed under the scheme of the Act shall be set out. All that is required under the Act is the recording of satisfaction by the AO before proceeding with making any disallowance under Section 14A, which may be based upon the understanding and analysis of the tax law by the AO, considering the accounts of the assessee. These decisions mentioned hereinabove do shift the onus on the AO, however, these judgments do not carve out any specific manner in which the onus has to be dispensed off with by the AO. Allowance of expenditure under ESOP - HELD THAT:- ESOP is an option and not an obligation, provided by a company to its employees, to purchase its shares at a future date at a pre-determined price, which is ordinarily less than the market price, on satisfaction of certain prescribed conditions. Recently, the Karnataka High Court affirmed the ruling of the special bench of Biocon Ltd. [2013 (8) TMI 629 - ITAT BANGALORE] wherein it was held that discount on issuance of ESOPs is an allowable business expenditure u/s 37(1) of the Act, 1961 for the employer. Considering the fact that issue in hand is identical and recurring in nature and is also being consistently decided in favour of the assessee, respectfully following the decisions referred above, the disallowance made is accordingly deleted. Addition of Interest Income u/s 43D R.W.R. 6EA - HELD THAT:- As relying upon favourable decision of ITAT Mumbai in Respondent's own case [2024 (8) TMI 1619 - ITAT MUMBAI] and [2023 (2) TMI 1005 - ITAT MUMBAI] and in the case of ICICI Bank [2022 (8) TMI 1346 - ITAT MUMBAI] the interest on NPA shall be taxed based on RBI Guidelines as mentioned under section 43D of the Act. Reliance is placed on the decision of Vasistht Chay Vyapar Ltd [2018 (3) TMI 56 - SUPREME COURT] which confirmed the findings of hon’ble Delhi High Court in this case that since as per prudential norms issued by RBI, ICD had become NPA on which no interest was received and possibility of recovery was almost nil, it could not be treated to have accrued to the assessee. Disallowance of Broken Period Interest - HELD THAT:- In a recent judgment of Bank of Rajasthan Ltd. [2024 (10) TMI 875 - SUPREME COURT] has allowed banks to claim tax deductions for broken period interest on Held to Maturity (HTM) government securities, provided they are classified as stock-in-trade. The decision clarifies the tax treatment for banks regarding interest paid for the period between the last coupon date and the date of purchase of securities, resolving a long-standing issue between banks and tax authorities. Provision for Standard Asset as provision for “Bad & Doubtful Debt u/s 36(1)(viia) - HELD THAT:- The fact that a provision is required to be made by the RBI even in respect of standard assets by itself indicates that a part of the standard assets are doubtful of recovery. It is also submitted that such claim is allowed in the assessee's own case by ITAT, Mumbai vide order in [2024 (8) TMI 1619 - ITAT MUMBAI] and [2023 (2) TMI 1005 - ITAT MUMBAI], relying upon decision in the case of SBI v DCIT vide ITA No. 3644/M/2016 dated 03-02-2020. 1. ISSUES PRESENTED and CONSIDERED Whether the assessment order was passed in accordance with the procedures prescribed under section 144B of the Income-tax Act, 1961, and whether denial of personal hearing violated principles of natural justice. Whether addition under section 41(1) for extinguishment of liabilities is justified without proof of prior allowance of such liabilities as expenditure or trading liability. Whether long-term capital gains (LTCG) on sale of depreciable immovable property are correctly computed by applying provisions of section 50C and/or section 43CA, particularly when the asset forms part of a block of assets. Whether provisions of section 50C apply to depreciable assets forming part of block of assets, and the interplay between sections 50, 50C, and 43CA in such context. Whether disallowance under section 14A read with Rule 8D of the Income-tax Rules, 1962 was validly made, particularly regarding the requirement of recording satisfaction by the Assessing Officer (AO) before applying Rule 8D. Whether disallowance of administrative expenses under section 14A should be restricted to investments yielding exempt income, considering recent amendments and judicial precedents. Whether Employee Stock Option Plan (ESOP) expenses are allowable as business expenditure under section 37(1) of the Act. Whether interest income on Non-Performing Assets (NPA) should be taxed considering RBI guidelines and provisions of section 43D read with Rule 6EA. Whether broken period interest paid on government securities held as stock-in-trade is allowable as revenue expenditure. Whether provisions made for standard assets qualify as deductible provisions for bad and doubtful debts under section 36(1)(viia) of the Act. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Compliance with Procedure under Section 144B and Natural Justice - The assessee challenged the assessment order on grounds of non-compliance with section 144B procedures and denial of personal hearing before the CIT(A). - During hearing, the assessee withdrew these grounds and they were dismissed accordingly. Conclusion: Grounds relating to procedural non-compliance and denial of hearing were withdrawn and dismissed. Issue 2: Addition under Section 41(1) for Extinguishment of Liabilities - The AO made addition of Rs. 33,00,549/- under section 41(1) treating write-off of certain debts as extinguishment of liabilities, on basis of information from the Insight portal. - The AO noted no income was offered under section 41(1) for remission of trade liability and no explanation was furnished by the assessee during assessment. - CIT(A) upheld the addition, observing that the assessee availed services but paid only net amounts after negotiation, effectively reducing liabilities; no ledger or documentary evidence was produced to support the claim that bad debts were neither paid nor debited. - Before the Tribunal, the assessee submitted that the amount was never claimed as expenditure or loss and provided confirmations from two parties supporting payment of net amounts only; also contended no cross-examination of parties was allowed and AO did not issue notices under section 133(6) to verify accounts. - The Tribunal noted that the addition arose due to absence of evidence before AO and incomplete submissions before CIT(A). AO did not conduct independent inquiry under sections 131 or 133(6). No opportunity for cross-examination was granted, violating principles of natural justice. - The matter was set aside to AO for de novo consideration with directions to allow the assessee to submit relevant evidence and for AO to decide after due inquiry. Conclusion: Addition under section 41(1) set aside for fresh adjudication in light of evidence and principles of natural justice. Issue 3 & 4: Long-Term Capital Gains on Sale of Depreciable Immovable Property and Applicability of Sections 50, 50C, and 43CA - The AO observed discrepancy between sale consideration declared in ITR and that as per Form 26QB and stamp duty valuation for 13 properties; particularly, one property had stamp duty value of Rs. 11,55,19,784/- against declared sale consideration of Rs. 7 crore. - AO treated entire stamp duty value as sale consideration for LTCG computation and added excess amount as income; depreciation was allowed on a portion of the value. - CIT(A) confirmed addition, noting failure of assessee to produce evidence regarding use of property for business or inclusion in block of assets, and absence of written submissions during appellate proceedings. - The assessee contended before the Tribunal that the property formed part of block of assets inherited from merger, used for residential accommodation and record storage, and depreciation was claimed accordingly; section 50C does not apply to depreciable assets forming part of block of assets; provisions of sections 50 and 50C are mutually exclusive; and that the AO erred in not referring valuation to valuation officer under section 50C(2)(a). - The assessee relied on detailed submissions with photographs and documents evidencing poor condition of flats and distress sale at lower price. - The Tribunal noted that neither AO nor CIT(A) properly adjudicated the issue; AO did not conduct independent inquiry regarding asset use; assessee failed to furnish complete details; and relevant provisions of law were not properly analyzed. - The Tribunal referred to Special Bench decision interpreting sections 50 and 50C, holding that section 50C applies to depreciable assets forming part of block of assets; legislative intent supports applicability of section 50C even to depreciable assets; and that section 43CA provisions for business assets also need consideration. - The Tribunal set aside the matter for fresh adjudication by AO, directing consideration of all relevant facts, including submissions and evidences, and application of sections 43CA read with 50C. Conclusion: Addition on LTCG and applicability of sections 50C/43CA set aside for de novo consideration with directions to AO to examine facts and law comprehensively. Issue 5: Disallowance under Section 14A and Requirement of AO's Satisfaction - The assessee raised additional ground challenging disallowance under section 14A read with Rule 8D, contending that AO did not record satisfaction regarding correctness of claim before applying Rule 8D. - The Tribunal reviewed statutory provisions: subsection (2) and (3) of section 14A empower AO to compute disallowance under Rule 8D only if AO is not satisfied with assessee's claim regarding expenditure related to exempt income. - Supreme Court precedent clarified that recording of AO's satisfaction is a precondition before applying Rule 8D formula. - Tribunal noted that the Act does not prescribe specific manner of recording satisfaction; judicial precedents held that detailed reasons and analysis suffice to meet requirement. - Assessment order showed detailed show cause notice and analysis by AO; although no categorical satisfaction recorded, AO applied mind and followed statutory steps. Conclusion: No infirmity found in disallowance under section 14A; additional ground dismissed. Issue 6: Disallowance of Administrative Expenses under Section 14A - Revenue challenged CIT(A)'s restriction of disallowance under section 14A to investments yielding exempt income only, citing Finance Act 2022 amendment and explanation to section 14A. - CIT(A) had accepted assessee's alternative plea based on Special Bench decision that disallowance should be restricted to investments yielding exempt income. - The Tribunal upheld CIT(A)'s order, relying on consistent judicial precedents and coordinate bench decisions supporting this approach. Conclusion: Disallowance under section 14A restricted to exempt income-yielding investments upheld; Revenue's appeal dismissed. Issue 7: Allowability of ESOP Expenses - The issue concerned whether ESOP expenses are allowable business expenditure under section 37(1). - CIT(A) allowed the claim following Special Bench decision in Biocon Ltd., which held that discount on ESOP issuance is allowable expenditure. - AO disputed, noting contingent nature and capital character of ESOP expenses; department filed appeal which was decided in favour of assessee by Karnataka High Court. - Tribunal noted consistent favorable decisions in assessee's own cases and other coordinate benches. Conclusion: ESOP expenses allowed as business expenditure; disallowance deleted. Issue 8: Taxation of Interest Income on NPAs under Section 43D read with Rule 6EA - AO taxed interest income on NPAs beyond 180 days as per Rule 6EA, whereas assessee followed RBI guidelines treating 90 days delinquency as NPA and not recognizing interest income beyond that. - CIT(A) deleted addition relying on ITAT Mumbai decisions and Supreme Court precedent confirming that interest on NPAs not accrued if recovery is doubtful. Conclusion: Interest income on NPAs to be taxed as per RBI guidelines and section 43D; addition deleted. Issue 9: Allowability of Broken Period Interest - AO disallowed broken period interest on government securities, contending it was not incurred for earning interest income on securities. - CIT(A) allowed deduction following favorable decisions in assessee's own cases and recent Supreme Court ruling in Bank of Rajasthan Ltd. v. CIT, which allowed deduction of broken period interest on HTM securities held as stock-in-trade. Conclusion: Broken period interest allowed as revenue expenditure; disallowance deleted. Issue 10: Deductibility of Provisions for Standard Assets under Section 36(1)(viia) - AO disallowed provisions made for standard assets, contending they are not bad or doubtful debts as required under section 36(1)(viia). - Assessee contended that RBI requires provisioning even for standard assets due to inherent doubtful recovery; relied on consistent ITAT Mumbai decisions allowing such provisions. - CIT(A) allowed deduction following coordinate bench decisions. Conclusion: Provisions for standard assets held deductible under section 36(1)(viia); disallowance deleted.