2026 (2) TMI 159 - AT - Income Tax

Disallowance under section 14A and taxation of foreign branches: rulings on deductibility, tax credit, and restorations

Disallowance of expenditure attributable to tax-exempt income was found unsustainable where shares are stockintrade, and the disallowance under the ... Disallowance of deduction made u/s 14A r/w Rule 8D - shares are held as stock-in-trade - HELD THAT:- As in the case of Maxopp Investment Ltd [2018 (3) TMI 805 - SUPREME COURT] deleting disallowance u/s. 14A where shares are held as stock-in-trade, we are of considered view that disallowance u/s. 14A of the Act is unsustainable in the instant case. Disallowance of the claim for amortisation of the lease premium paid in respect of various leasehold properties of the assessee -Amortization of lease premium paid in respect of various lease hold properties is in the nature of capital expenditure, then the learned ACIT be directed to allow depreciation u/s. 32 of the Act on the same and reduce the total income accordingly. Exclusion of income of foreign branches situated in countries with which India has entered into the Double Taxation Avoidance Agreement - AR fairly agreed that this issue has been decided against the assessee in its own case by the Coordinate Bench of the Tribunal in [2020 (12) TMI 862 - ITAT MUMBAI] notification deals with connotations of the expression 'may be taxed', appearing in the tax treaties entered into by India, and there is absolutely no basis whatsoever to support the proposition that the effect of the notification has to be restricted in its application to non-business income only. No such differentiation in treatment of business and non-business income is envisaged in the said notification, nor to do we see any justification for inferring the same. Learned counsel does not have any material whatsoever in support of the proposition canvassed by him, nor does this proposition make any sense on the first principles- inasmuch as once the notification is issued without any such specific restriction for application to business income, we cannot infer a restriction in its application. We, therefore, reject the plea of the assessee, and thus decline to interfere in the matter. We uphold the action of the Assessing Officer in including the profits of the assessee's overseas branches in its taxable income in India. Computation of income from foreign branches as per the provisions of the income tax laws of the respective countries and not the Income Tax computed as per the provisions of the Act - AR fairly agreed that the same has been decided against the assessee by the Coordinate Bench of the Tribunal in DCIT vs. Bank of Baroda [2019 (6) TMI 1209 - ITAT MUMBAI] held that income of the foreign branches of the assessee shall also be taxable in India, that is, it would be included in the return income filed by the assessee in India and whatever taxes have been paid by the branches in the other countries credit of such taxes shall be given. We find that the Tribunal as above has not held that it is only that income of the foreign branches which was taxed in that foreign country which is to be included in the return of income filed by the assessee. Hence, we are in agreement with the revenue plea that Ld. CIT-A has not properly followed the Tribunal decision as referred by him. A reading of the notification canvassed by the Ld. Counsel by the assessee also does not help the case of assessee. The notification also does not support the direction of Ld. CIT-A. The doctrine of stare decisis mandates that we follow the coordinate bench decision as above and hold that the income of the branches of assessee situated abroad shall also be taxable in India and whatever tax have been paid by the branches in the foreign country, credit of such taxed shall be given. Accordingly, we allow the ground raised by the revenue. Grant of credit towards foreign taxes - As decided in the assessee’s own case in the preceding year, this issue is restored to the file of the AO for de novo adjudication in compliance with the directions as rendered by the Tribunal in the preceding year as held in case the assessee furnishes the requisite details of the taxes paid abroad in respect of the profits of these branches, no tax credit has been claimed in respect of the same so far, and in case the claim so made is admissible in terms of the provisions of the related double taxation avoidance agreement, the Assessing Officer will allow the tax credit, to the extent admissible, for the taxes so paid abroad on incomes of the branches abroad earned in tax jurisdictions with which India has entered into double taxation avoidance agreement. While granting the tax credit, the Assessing Officer will examine the provisions of the respective tax treaty, and compute the admissible tax credit separately for each jurisdiction in accordance with the scheme of related treaty. Adding back the provision made towards country risk - During the hearing, the learned AR submitted that the exact working of the crystallised country risk during the year could not be furnished before the learned CIT (A). It was further submitted that, given another opportunity, the assessee can furnish the details, as the amount of country risk represents crystallised loss out of the amount provided as per the RBI guidelines. Accordingly, in the interest of justice, we deem it appropriate to restore this issue to the file of the AO for de novo adjudication. Disallowance of bad debts written off - AO held that as per the computation of the assessee, it was claiming double deduction of bad debt written off twice under section 36(1)(vii) as well as section 36(1)(viia) - HELD THAT:- Since the provision for bad and doubtful debt account maintained under section 36(1)(viia) of the Act does not have any credit balance as on 01/04/2015, we agree with the submissions of the assessee in claiming the deduction of the entire bad debt written off as an irrecoverable under section 36(1)(vii) of the Act. Accordingly, the impugned addition made by the AO on this issue is deleted. As a result, Ground raised in assessee’s appeal, is allowed. MAT Applicability of the provisions of section 115-JB of the Act to the assessee bank - We find that a similar issue came up for consideration before the Special Bench of the Tribunal in Union Bank of India [2024 (9) TMI 789 - ITAT MUMBAI] for the assessment year 2015-16, the Special Bench of the Tribunal deciding the issue in favour of the assessee banks, including the assessee in appeal before us, held that clause (b) to sub-section (2) of section 115JB of the Act inserted by Finance Act, 2012, w.e.f. 01/04/2013, i.e., from the assessment year 2013-14 onwards, are not applicable to the banks constituted as corresponding new banks in terms of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and therefore, provisions of section 115- JB of the Act cannot be applied and consequently, tax on book profit (MAT) are not applicable to such banks. Disallowance of broken period interest - revenue OR capital expenditure - HELD THAT:- We find that the Hon’ble Supreme Court in Bank of Rajasthan [2024 (10) TMI 875 - SUPREME COURT] held that where an assessee bank purchase government security and paid broken period interest since said securities was treated as stock-in-trade, the broken period interest could not be considered as capital asset and would have to be treated as revenue expenditure. Disallowance of the premium of HTM securities - CIT(A), vide impugned order, following the decision of the Tribunal rendered in assessee’s own case for the assessment year 2015-16 [2020 (12) TMI 862 - ITAT MUMBAI] correctly deleted the addition made by the AO on this issue and allowed the loss on account of amortisation of investment held in HTM category. Disallowance of losses written off - As we find that this issue is recurring in nature, and in preceding years, the learned CIT(A) directed the AO to carry out necessary verification, which directions were also issued in the year under consideration. Undisputedly, these findings in the preceding year were not challenged by the Revenue before the Tribunal. Disallowance of interest on perpetual bonds - We find that the Coordinate Bench of the Tribunal in State Bank of India (successor to State Bank of Bikaner and Jaipur) [2022 (9) TMI 1640 - ITAT MUMBAI] while allowing the interest paid on perpetual debt under section 36(1)(iii) held that perpetual bond are not in the nature of equity. Addition on account of the commission receipt on the deferred payment bank guarantee - We find that the Hon’ble Jurisdictional High Court in BNP Paribas SA [2013 (2) TMI 712 - BOMBAY HIGH COURT] held that guarantee which has been issued for a certain period of time are cancelled by the client before the expiry of the tenure of the guarantee, resulting into the respondent- assessee returning to its clients the part of the guarantee commission attributable to the unexpired period of the guarantee. This finding of fact was upheld by the Tribunal while following the decision of Bank of Tokyo Ltd. [1993 (5) TMI 172 - CALCUTTA HIGH COURT] wherein it has been held that the income earned from deferred guarantee commission did not accrue or arise to an assessee in the year in which the guarantee agreements were entered into but should be spread over the period of the guarantee proportionally. Addition of unrealised interest income on Non-Performing Assets (“NPA”) - assessee has not recognized an amount which was interest on sticky advances, which remained NPA for a period of more than 90 days but less than six months as its income for the year under consideration - HELD THAT:- We find that while deleting the similar interest pertaining to NPA, the Coordinate Bench of the Tribunal in State Bank of India [2020 (2) TMI 1350 - ITAT MUMBAI] as noted that this issue is squarely covered by the decision of American Express Bank Ltd [2015 (8) TMI 1584 - BOMBAY HIGH COURT] wherein it is held that there is no credit entry in the books of the account in respect of the interest on such NPAs, no addition can be made. As in the case of American Express Bank Ltd. [2012 (11) TMI 499 - ITAT MUMBAI] has considered this issue and held that where the AO has not contested that the policy adopted by the assessee is not in accordance with RBI guidelines, the incidence of taxation of interest on bad and doubtful debts will be either when the same is credited to the profit and loss account for the year or in the year in which it is actually received. Mere crediting of the interest to a reserve cannot be said to be an incidence by which the said interest could be charged to tax. Hence, we delete the addition of interest income. Disallowance being a loss on the sale of assets to the Asset Reconstruction Company (“ARC”) - We find that while deciding a similar issue in favour of the assessee, the Coordinate Bench of the Tribunal in assessee’s own case in Bank of India [2017 (11) TMI 1812 - ITAT MUMBAI] following of RBI instruction by a banking company cannot be basis for denying or allowing any claim. It is said that the entries in the books of accounts are not conclusive proof of taxability of any income. What has to be seen is the substance of the transaction. Considering the fact that the assessee had suffered loss while carrying out normal business activity i.e. selling its assets. Therefore, we hold that there was no justification for disallowing the loss suffered in the transaction. Grant of credit of taxes paid by foreign branches in countries or territories with whom India does not have any agreement under section 90 - We restore this issue to the file of the AO for de novo adjudication with a direction to grant the credit of tax as per the provisions of section 91 of the Act after necessary verification of the relevant facts as per law. With the above, Ground raised in assessee’s appeal, is allowed for statistical purposes. Disallowance of the penalty paid by the assessee for non-compliance with norms/regulations - Nature of non-compliance for which the penalty was levied in the said decision is nowhere similar to the nature of non-compliance for which the penalty is levied on the assessee’s Singapore Branch, i.e. for violation of rules/regulations on Prevention of Money Laundering and Countering the Financing of Terrorism. Therefore, the reliance placed on the decision of the Coordinate Bench in IDBI Bank Ltd [2021 (6) TMI 661 - ITAT MUMBAI] by the learned CIT(A) is completely misplaced. Accordingly, penalty of Rs. 21.64 crore levied on the assessee’s Singapore Branch falls within the ambit of provisions of Explanation-1 to section 37(1) of the Act and, therefore, cannot be allowed as deduction to the assessee while computing its income chargeable under the head “profits and gains of business or profession” and, therefore, the same is sustained. Accordingly, Ground No.6, raised in Revenue’s Appeal, is partly allowed. Issues: (i) Whether disallowance under section 14A read with Rule 8D is sustainable where exempt income arose from securities held as stock-in-trade; (ii) Whether amortisation of lease premium for leasehold properties is allowable as revenue expenditure or otherwise; (iii) Whether profits of foreign branches are to be excluded under section 90/91 or included in Indian taxable income; (iv) Whether addition on account of provision for country risk can be sustained or requires fresh adjudication; (v) Whether bad debts written off are allowable under section 36(1)(vii) having regard to section 36(1)(viia) and related accounting; (vi) Whether provisions of section 115JB (MAT) apply to the bank; (vii) Whether tax credit for taxes paid/withheld abroad under sections 90/91 is allowable and on what basis; (viii) Whether broken period interest on government/HTM securities is revenue expenditure; (ix) Whether amortisation/premium on HTM securities is deductible; (x) Whether interest on perpetual bonds is deductible as borrowing cost; (xi) Whether deferred guarantee commission accrues in full on receipt or must be spread; (xii) Whether unrealised interest on NPAs and loss on sale to ARC are taxable or allowable; (xiii) Whether penalties levied for regulatory breaches are deductible under section 37.Issue (i): Applicability of section 14A read with Rule 8D to exempt income earned from securities held as stock-in-trade.Analysis: The Tribunal considered Supreme Court and coordinate-bench precedents (including Maxopp and subsequent decisions) holding that where securities are held as stock-in-trade by a bank, exempt income (dividend/interest) arising therefrom is incidental business income and section 14A/Rule 8D disallowance is not sustainable; the Tribunal also followed its own coordinate-bench decision in the assessee's earlier years.Conclusion: Disallowance under section 14A read with Rule 8D deleted; conclusion in favour of the assessee.Issue (ii): Allowability of amortisation of lease premium as revenue expenditure (or depreciation).Analysis: The Tribunal followed coordinate-bench precedent adverse to the assessee and noted absence of change in facts or law; the assessee did not press the issue against binding coordinate-bench decisions.Conclusion: Amortisation claim disallowed; conclusion against the assessee.Issue (iii): Exclusion of foreign branch profits under section 90/91 and method of computing such income.Analysis: The Tribunal followed earlier coordinate-bench decisions and Notification No.2123(e) (28.08.2008) interpreting treaty relief/notification; on facts the coordinate-bench approach of including foreign branch profits in Indian return and allowing credit where admissible was applied.Conclusion: Addition of foreign branch profits upheld (conclusion against the assessee); related alternative pleas on computation dismissed.Issue (iv): Addition concerning reversal/claim of provision for country risk.Analysis: Records did not show requisite working; the assessee undertook to produce computations and the Tribunal considered it appropriate to remit for factual verification by the Assessing Officer.Conclusion: Issue restored to the file of the AO for de novo adjudication (remitted) - outcome in favour of procedural fresh adjudication for the assessee (allowed for statistical purposes).Issue (v): Claim of bad debts written off under section 36(1)(vii) vis-à-vis provisions under section 36(1)(viia) and proviso; correctness of the assessee's PBDD account methodology.Analysis: The Tribunal examined statutory text of section 36(1)(vii), 36(1)(viia), section 36(2)(v) and CBDT Instruction No.17/2008, and considered accounting and opening credit-balance facts; where PBDD account had no opening credit balance as on 01/04/2015 the proviso did not limit deduction.Conclusion: Impugned addition deleted and bad-debt claim allowed; conclusion in favour of the assessee.Issue (vi): Applicability of section 115JB (MAT) to the bank.Analysis: The Tribunal followed a Special Bench decision holding clause (b) to sub-section (2) of section 115JB (Finance Act, 2012 amendment) not applicable to banks constituted as corresponding new banks under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970; no change in material facts.Conclusion: Section 115JB not applicable to the assessee bank for the years in question; conclusion in favour of the assessee.Issue (vii): Grant of tax credit for taxes paid/withheld abroad under sections 90/91.Analysis: Where details and jurisdiction-specific verification are required, the Tribunal followed earlier coordinate-bench directions: admissible credit to be examined and computed by AO in accordance with respective treaties and statutory provisions; certain claims restored for de novo adjudication.Conclusion: Claims restored to AO for verification and computation; outcome: remitted/allowed for statistical purposes.Issue (viii): Treatment of broken period interest as revenue expenditure.Analysis: The Tribunal followed coordinate-bench precedent and recent Supreme Court authority holding that where securities are stock-in-trade, broken period interest is revenue in nature.Conclusion: Broken period interest held to be revenue expenditure; conclusion in favour of the assessee.Issue (ix): Deductibility of amortisation/premium on HTM securities.Analysis: Applying coordinate-bench precedent in the assessee's own case and considering RBI guidance and revenue practice, the Tribunal upheld the CIT(A)'s deletion of the disallowance and allowed the amortisation in the facts of the case.Conclusion: Disallowance deleted; conclusion in favour of the assessee.Issue (x): Deductibility of interest on perpetual bonds as borrowing cost under section 36(1)(iii).Analysis: The Tribunal followed coordinate-bench authorities distinguishing perpetual bonds from equity on the facts (features, tradability, contractual interest payment) and applied those precedents to allow interest as deductible.Conclusion: Interest on perpetual bonds allowed as deduction; conclusion in favour of the assessee.Issue (xi): Taxability of deferred guarantee commission (accrual v. spread over guarantee period).Analysis: The Tribunal followed jurisdictional High Court precedent (BNP Paribas) and factual findings that commissions are contingent/refundable for unexpired period and have been consistently accounted for by the assessee.Conclusion: Addition deleted; conclusion in favour of the assessee.Issue (xii): Addition of unrealised interest on NPAs and loss on sale to ARC.Analysis: The Tribunal followed coordinate-bench and High Court precedents holding that interest on NPAs not credited to P&L (or recognised per RBI policy) need not be taxed on accrual; loss on sale to ARC accepted as real business loss on facts.Conclusion: Additions deleted; conclusions in favour of the assessee.Issue (xiii): Deductibility of penalties levied by regulatory authorities (compensatory v. penal).Analysis: The Tribunal examined the nature and grounds of imposition; it held most penalties (domestic and small foreign regulatory penalties) to be compensatory and deductible but sustained a large penalty levied by MAS (Singapore) for breaches of AML/CFT rules as falling within Explanation 1 to section 37 (prohibited offence) and therefore non-deductible.Conclusion: Mixed result - majority of penalties allowed (in favour of the assessee) but the MAS penalty sustained (in favour of the Revenue) to that extent.Final Conclusion: The Tribunal partly allowed the assessee's appeals and dismissed or partly allowed the Revenue's appeals by applying coordinate-bench and higher-court precedents: key tax-contention in favour of the assessee (deletion of section 14A/Rule 8D disallowance, allowance of bad debts where PBDD had no opening credit balance, broken period interest, HTM amortisation, interest on perpetual bonds, deferred guarantee commission, loss on sale to ARC), certain issues remitted to the Assessing Officer for factual/verificatory adjudication (tax credit claims, country-risk reversal), and limited relief to the Revenue only on the regulatory penalty imposed by MAS that was held penal.Ratio Decidendi: Where exempt income arises from securities held as stock-in-trade by a bank, section 14A/Rule 8D disallowance does not apply; statutory and accounting provisions governing PBDD and provisos to section 36(1)(vii) control allowability of bad-debt deductions; treaty-notification and coordinate-bench precedent govern inclusion/exclusion and tax-credit treatment of foreign branch income, subject to jurisdiction-specific verification.