Issues: (i) Arm's-length mark-up for technical and information technology-enabled services supplied to associated enterprises; (ii) Deductibility of actuarially valued pension provision; (iii) Disallowance of expenditure relating to exempt income under section 14A and Rule 8D; (iv) Depreciation on leased assets; (v) Valuation of banking securities, including AFS, HFT and HTM securities, and amortisation of premium; (vi) Deduction for provision concerning standard assets under section 36(1)(viia); (vii) Taxability of interest on non-performing assets and non-performing investments; (viii) Deductibility of contribution to the retired employees medical benefit scheme; (ix) Taxability in India of foreign-branch income; (x) Taxability of recoveries from bad debts written off in earlier years; (xi) Deduction for windmill income under section 80-IA; (xii) Disallowance under section 40(a)(ia) for short deduction of tax at source; (xiii) Deduction under section 80LA; (xiv) Disallowance of interest expenditure and delayed-payment compensation; (xv) Additional deduction under section 36(1)(viii); (xvi) Quantification of deduction under section 36(1)(viia); (xvii) Deduction for bad debts relating to non-rural advances; (xviii) Deductibility of provisions for other employee benefits and privilege-leave encashment; (xix) Allowability of broken-period interest and staff-welfare expenditure; (xx) Taxability of interest on securities and deferred-payment guarantee commission; (xxi) Deductibility of other long-term employee-benefit liabilities.
Issue (i): Arm's-length mark-up for technical and information technology-enabled services supplied to associated enterprises.
Analysis: The Safe Harbour Rules prescribing a 20% mark-up were inapplicable to the relevant year and could not be mechanically adopted. Nevertheless, services rendered through deputed personnel involved value addition and required Arm's Length Price remuneration. In the absence of reliable contemporaneous comparables and owing to the elapsed period, a 10% mark-up on relevant costs was considered reasonable.
Conclusion: The transfer-pricing adjustment shall be recomputed by applying a 10% mark-up on relevant costs and granting credit for amounts already recovered. This issue is partly in favour of the assessee.
Issue (ii): Deductibility of actuarially valued pension provision.
Analysis: Pension obligations arose from employee services already rendered, while actuarial valuation only quantified their present value. The provision therefore represented an Accrued Liability rather than a contingent liability.
Conclusion: The actuarially valued pension provision is allowable as a deduction. This issue is in favour of the assessee.
Issue (iii): Disallowance of expenditure relating to exempt income under section 14A and Rule 8D.
Analysis: The interest component was not sustainable on the applicable facts. Recomputation must be confined to investments which actually yielded exempt income, with credit for the voluntary disallowance, and cannot exceed exempt income.
Conclusion: The disallowance is restored for limited recomputation on the stated basis. This issue is in favour of the assessee to that extent.
Issue (iv): Depreciation on leased assets.
Analysis: The leasing transactions were found to be financing arrangements in substance, with the lessees being the real owners and the assessee only a nominal owner.
Conclusion: Depreciation on the leased assets is not allowable. This issue is against the assessee.
Issue (v): Valuation of banking securities, including AFS, HFT and HTM securities, and amortisation of premium.
Analysis: Securities held in banking operations form part of circulating capital. Regulatory classification does not conclusively determine their tax character. A consistently followed recognised valuation method reflects Real Income and permits valuation at cost or market value, whichever is lower.
Conclusion: Depreciation, loss on valuation and amortisation claims relating to the securities are allowable. This issue is in favour of the assessee.
Issue (vi): Deduction for provision concerning standard assets under section 36(1)(viia).
Analysis: The expression concerning bad and doubtful debts is not confined to assets classified as non-performing under regulatory norms. Regulatory classifications cannot restrict the statutory deduction, though the provision created and statutory limits require verification.
Conclusion: Inclusion of standard assets does not by itself bar deduction; the issue is restored solely for quantification. This issue is in favour of the assessee on principle.
Issue (vii): Taxability of interest on non-performing assets and non-performing investments.
Analysis: Where recovery is uncertain and interest is not recognised under binding prudential norms, notional interest has not accrued in real terms. The Real Income principle applies notwithstanding the mercantile accounting method.
Conclusion: Interest on non-performing assets and non-performing investments cannot be taxed until realisation. This issue is in favour of the assessee.
Issue (viii): Deductibility of contribution to the retired employees medical benefit scheme.
Analysis: The actual contribution formed part of a structured employee-welfare scheme and had a direct nexus with workforce morale, industrial harmony and business operations. It was supported by Business Expediency and was not merely a prohibited fund contribution.
Conclusion: The contribution is allowable as business expenditure. This issue is in favour of the assessee.
Issue (ix): Taxability in India of foreign-branch income.
Analysis: Income which may be taxed in the other contracting jurisdiction remains includible in Indian total income under the statutory notification framework, with double-taxation relief available in accordance with the applicable treaty method.
Conclusion: Foreign-branch income is taxable in India. This issue is against the assessee.
Issue (x): Taxability of recoveries from bad debts written off in earlier years.
Analysis: Section 41(4) applies only where a corresponding deduction for the written-off debt had been allowed earlier. Whether such deduction was in fact allowed requires factual verification.
Conclusion: The issue is restored for verification; recoveries are taxable only to the extent of prior allowed deductions. This issue is in favour of the assessee on the governing principle.
Issue (xi): Deduction for windmill income under section 80-IA.
Analysis: Eligibility depends upon verification of the statutory conditions, including the nature of the undertaking, power generation and computation of eligible profits.
Conclusion: The claim is restored for verification and recomputation in accordance with law. No final entitlement is determined.
Issue (xii): Disallowance under section 40(a)(ia) for short deduction of tax at source.
Analysis: A claim raised through a note cannot be rejected solely on that basis before appellate authorities. The nature of payments, the extent of deduction and the applicability of the provision to short deduction require examination.
Conclusion: The issue is restored for factual and legal examination. No final entitlement is determined.
Issue (xiii): Deduction under section 80LA.
Analysis: The claim lacked material showing eligibility, the nature of qualifying income and computation of the deduction.
Conclusion: The deduction claim is not entertained. This issue is against the assessee.
Issue (xiv): Disallowance of interest expenditure and delayed-payment compensation.
Analysis: The allowability of the interest claim and the alleged compensatory character of delayed-payment compensation depend upon the relevant facts, supporting documentation and the statutory basis of the claim.
Conclusion: Both matters are restored for verification and fresh determination in accordance with law. No final entitlement is determined.
Issue (xv): Additional deduction under section 36(1)(viii).
Analysis: No complete and verifiable computation established attribution of non-interest income to the eligible long-term finance business or quantified the resulting additional deduction. The existence of a special reserve alone does not establish entitlement.
Conclusion: The additional deduction claim is disallowed. This issue is against the assessee.
Issue (xvi): Quantification of deduction under section 36(1)(viia).
Analysis: Quantification requires verification of the actual provision created, total income before the specified deductions, rural advances and the applicable statutory ceilings.
Conclusion: The issue is restored for recomputation of the allowable deduction. No final quantum is determined.
Issue (xvii): Deduction for bad debts relating to non-rural advances.
Analysis: Deductions under sections 36(1)(vii) and 36(1)(viia) operate in distinct fields, subject to conditions and prevention of Double Deduction. A deduction for actual write-off of non-rural advances is not automatically barred, but requires factual verification.
Conclusion: The claim is restored for verification and fresh adjudication. This issue is in favour of the assessee on the legal principle.
Issue (xviii): Deductibility of provisions for other employee benefits and privilege-leave encashment.
Analysis: Provisions for earned leave-related benefits, other than leave encashment, represented scientifically determined present obligations from past service and constituted Accrued Liability. Privilege-leave encashment is governed by the Actual Payment Basis mandated by section 43B(f).
Conclusion: Other employee-benefit provisions are allowable, while privilege-leave encashment is allowable only in the year of actual payment subject to statutory conditions. This issue is partly in favour of the assessee.
Issue (xix): Allowability of broken-period interest and staff-welfare expenditure.
Analysis: Broken-period interest paid on purchase of securities is Revenue Expenditure where corresponding receipt is taxed as business income; disallowance would violate the Real Income and Matching Principle. Staff-welfare expenditure having a direct business nexus is incurred wholly and exclusively for business purposes.
Conclusion: Broken-period interest and staff-welfare expenditure are allowable. This issue is in favour of the assessee.
Issue (xx): Taxability of interest on securities and deferred-payment guarantee commission.
Analysis: Interest on securities was accepted on due basis because of binding earlier determinations and Judicial Discipline, notwithstanding the accrual-based accounting treatment. Guarantee commission received upon issue of a non-refundable deferred guarantee accrues at that time and cannot be spread over the guarantee period.
Conclusion: Interest on securities remains taxable on due basis, whereas deferred-payment guarantee commission is taxable in the year of receipt. The former is in favour of the assessee and the latter is against the assessee.
Issue (xxi): Deductibility of other long-term employee-benefit liabilities.
Analysis: Allowability of bonus and other employee liabilities depends upon actual payment by the statutory due date; leave encashment additionally requires compliance with the specific actual-payment requirement. Verification is necessary.
Conclusion: The issue is restored for limited verification under the Actual Payment Basis. No final entitlement is determined.
Final Conclusion: The assessment is to be recomputed by giving effect to the allowed claims and the limited verification directions, while the disallowed claims remain governed by the findings recorded above.
TP Adjustment - Arm's length pricing of intra-group technical and information technology services - Actuarially valued employee-benefit liabilities - Disallowance of expenditure relating to exempt income - Depreciation on leased assets - Valuation of banking securities - Deduction for provision for bad and doubtful debts of scheduled banks - Real-income taxation of interest on non-performing assets and investments - Employee welfare contribution for retired employees - Taxability in India of foreign branch income - Taxability of recovery of bad debts - Deduction for windmill undertakings - Disallowance for short deduction of tax at source - Deduction claim unsupported by material - Allowability of interest expenditure - Allowability of delayed-payment compensation - Deduction for special reserve attributable to long-term finance business - Broken-period interest on purchase of securities - Staff welfare expenditure - Provision for employee benefits - Bad-debt deduction for non-rural advances - Privilege-leave encashment liability - Accrual of interest on securities - Deferred-payment guarantee commission Arm's length pricing of intra-group technical and information technology services - Safe Harbour margin - Arm's length consideration for technical services rendered through deputed personnel and information technology services rendered to associated enterprises - HELD THAT: - The Safe Harbour margin could not be mechanically applied for the relevant year, as the regime was not applicable. However, the absence of Safe Harbour Rules did not establish that the recoveries were at arm's length, since the services involved value addition. In view of the elapsed time and absence of reliable contemporaneous comparables, a reasonable mark-up on cost was considered appropriate on the peculiar facts. [Paras 2] The arm's length price shall be determined by applying a 10% mark-up on the relevant costs, after giving credit for the amounts recovered. Actuarially valued pension liability - Allowability of actuarially valued provision for pension - HELD THAT: - Following the earlier order in the assessee's own case [2026 (7) TMI 192 - ITAT MUMBAI] and in the absence of any change in facts or law, the actuarially quantified employee-benefit obligation was treated as an accrued and ascertained liability rather than a contingent liability. [Paras 3] The pension provision was allowed. Disallowance of expenditure relating to exempt income u/s 14A - Investments yielding exempt income - Recomputation of disallowance relating to exempt income - HELD THAT: - The issue was restored consistently with the earlier order for a limited exercise of excluding the interest component, considering only investments that actually yielded exempt income, and allowing credit for the assessee's voluntary disallowance. The aggregate disallowance cannot exceed the exempt income. [Paras 4] The matter was remanded for limited recomputation in accordance with these directions. Depreciation on leased assets - Depreciation claimed on assets stated to have been leased by the assessee. - HELD THAT: - The Tribunal followed the consistent view in the assessee's own case [2026 (7) TMI 192 - ITAT MUMBAI] A.Y. 2011-12 that the assessee was only a nominal owner and the lessees were the actual owners; the arrangement was treated as financing in the guise of leasing. No change in facts or law was shown. [Paras 5] The depreciation claim was disallowed. Valuation of banking securities - Depreciation on held-to-maturity securities - Recognition of depreciation and appreciation on Available for Sale and Held for Trading securities, and allowability of loss on revaluation and premium amortisation on Held to Maturity securities. - HELD THAT: - Following the earlier orders, the consistently followed valuation method of a banking company was accepted. Regulatory classification of securities does not conclusively determine their tax character, and securities held as part of banking operations may be valued under a recognised method reflecting real income. [Paras 6, 26] The assessee's claim concerning Available for Sale and Held for Trading securities was allowed, and the Revenue's challenge to relief concerning Held to Maturity securities was dismissed. Deduction for provision for bad and doubtful debts of scheduled banks - Provision for standard assets - Eligibility of provision relating to standard assets for deduction available to scheduled banks for bad and doubtful debts - HELD THAT: - The statutory deduction is not confined to assets classified as non-performing under prudential norms. Regulatory asset classification cannot restrict the wider statutory expression, though the permissible deduction remains subject to the provision created and statutory ceilings. [Paras 7] The principle of allowability was decided in favour of the assessee, with remand confined to quantification. Real-income taxation of interest on non-performing assets and investments - Taxability of interest on non-performing advances and non-performing investments which was not recognised under binding prudential norms - HELD THAT: - Following the earlier order [2026 (7) TMI 192 - ITAT MUMBAI] 2011-12, interest whose recovery was uncertain and which was not recognised in accordance with prudential norms could not be taxed as notional accrual. The regulatory norms were relevant to ascertain whether income had accrued in real terms. [Paras 8] The additions on account of such interest were deleted. Employee welfare contribution for retired employees - Allowability of contribution to the retired employees medical-benefit scheme - HELD THAT: - The contribution formed part of a structured employee-welfare scheme and had a nexus with business objectives, including employee confidence, industrial harmony and efficient functioning. It was a bona fide business expenditure and could not be denied merely because it also covered retired employees. [Paras 9] The contribution was allowed as a business deduction. Taxability in India of foreign branch income - Double-taxation avoidance agreement relief - Taxability in India of income derived by foreign branches - HELD THAT: - Following the earlier order, income which may be taxed in the other country under an applicable agreement remained includible in total income in India, with relief to be granted by the prescribed method for elimination or avoidance of double taxation. [Paras 10] The claim that foreign branch income was not taxable in India was rejected. Taxability of recovery of bad debts - Taxability of amounts recovered against debts written off in earlier years - HELD THAT: - Recovery is taxable only to the extent corresponding deduction for the bad debts had been allowed in an earlier year. As that factual condition required verification, no conclusive determination could be made without examining the earlier allowance. [Paras 11] The matter was remanded to verify prior allowance of the corresponding bad-debt deduction and tax only recoveries satisfying that condition. Deduction for windmill undertakings - Deduction claimed in respect of income from windmills - HELD THAT: - Eligibility depends upon verification of the nature of the undertaking, generation of power and computation of eligible profits under the statutory conditions. [Paras 12] The claim was remanded for verification and computation in accordance with law. Disallowance for short deduction of tax at source - Applicability of disallowance for payments on which tax was short-deducted rather than not deducted - HELD THAT: - The claim could not be rejected merely because it was raised through a note to the revised computation. The nature of payments and extent of tax deduction required verification, including examination of the legal contention that short deduction does not attract the disallowance. [Paras 13] The issue was remanded for examination in accordance with law. Deduction claim unsupported by material - Deduction claim made through a note without particulars of eligibility, qualifying income or computation - HELD THAT: - The claim could not be adjudicated in the absence of supporting material establishing eligibility, the nature of qualifying income and the computation of the deduction. [Paras 14] The deduction claim was not entertained. Allowability of interest expenditure - Disallowance for non-compliance with tax deduction requirements - Allowability of interest expenditure claimed through a note to the return and applicability of disallowance for non-compliance with tax deduction requirements - HELD THAT: - The nature of the expenditure, its claimed business nexus and the applicability of the disallowance provision had not been examined factually. [Paras 15] The matter was remanded for factual verification and a reasoned decision. Allowability of delayed-payment compensation - Withdrawal of voluntary disallowance and deduction of payment described as delayed-payment compensation - HELD THAT: - A voluntary disallowance does not preclude examination of its sustainability in law. The nature, purpose and circumstances of the payment required factual verification before its deductibility could be determined. [Paras 16] The matter was remanded to determine whether the voluntary disallowance could be withdrawn and the payment allowed as a deduction. Deduction for special reserve attributable to long-term finance business - Additional deduction claimed for non-interest income alleged to be attributable to the business of providing long-term finance - HELD THAT: - The assessee did not provide a complete and verifiable computation identifying eligible business income, the non-interest income attributable to that business, or the basis of the additional deduction. Creation of a special reserve did not by itself establish the allowable deduction. [Paras 17] The additional deduction claim was rejected; the consequential recomputation claim also failed. Deduction for provision for bad and doubtful debts of scheduled banks - Quantification of statutory deduction - Computation of the deduction for provision for bad and doubtful debts claimed by a scheduled bank - HELD THAT: - The deduction required verification of the provision actually created, total income before the specified deductions, aggregate average advances of eligible rural branches and applicable statutory limits. The required reconciliation had not been examined. [Paras 18] The matter was remanded for verification and recomputation of the allowable deduction. Broken-period interest on purchase of securities - Allowability of broken-period interest paid on purchase of securities - HELD THAT: - Broken-period interest paid relates to the period before acquisition and is revenue expenditure. Where corresponding broken-period interest received is assessed as business income, disallowance of the payment would result in taxation of notional income; the classification of the securities was not decisive for this purpose. [Paras 24] The allowance of broken-period interest was upheld and the Revenue's challenge was dismissed. Staff welfare expenditure - Allowability of expenditure incurred for staff welfare, including a payment connected with reservation of school seats - HELD THAT: - The expenditure was intrinsically connected with employee welfare and banking operations and had a direct business nexus. In the absence of changed facts or law, the consistent earlier view allowing the expenditure was followed. [Paras 25] The allowance of staff-welfare expenditure was upheld. Provision for employee benefits - Allowability of provision for leave travel, home travel, sick leave and casual leave benefits - HELD THAT: - Liability arising from services already rendered by employees is not contingent merely because the outflow may arise when leave is availed. Actuarially determined employee-benefit obligations representing present obligations from past service are ascertained liabilities; non-encashable leave benefits are not governed as leave encashment. [Paras 28] The provision for other employee benefits was allowed. Bad-debt deduction for non-rural advances - Deduction for debts written off in respect of non-rural advances - HELD THAT: - A legitimate claim raised through a note may be entertained at the appellate stage. The deduction for actual write-off of non-rural advances operates in a field distinct from the statutory provision deduction, subject to statutory conditions and avoidance of double deduction; factual verification and quantification remained necessary. [Paras 29] The matter was remanded for verification and fresh adjudication. Privilege-leave encashment liability - Actual-payment condition - Deduction of provision for privilege-leave encashment - HELD THAT: - Deduction for privilege-leave encashment is allowable only on actual payment, subject to the statutory condition governing payment by the return-filing due date. [Paras 30] The Assessing Officer was directed to allow the deduction in the year of actual payment in accordance with law. Accrual of interest on securities - Judicial discipline - Taxability of interest on securities on accrual basis as against due basis - HELD THAT: - Although the earlier reasoning noted that recognition in the books on accrual basis ordinarily supported taxation on accrual, the identical issue had consistently been decided for the assessee. Judicial discipline required adherence to the binding earlier position. [Paras 31] The Revenue's challenge was dismissed. Deferred-payment guarantee commission - Timing of taxability of commission received on issuing deferred-payment guarantees - HELD THAT: - Where guarantee commission is received when the guarantee is issued and is not refundable, it accrues at that time and cannot be spread over the period for which the guarantee subsists. [Paras 33] The commission was held taxable in the year of receipt and the Revenue's appeal was allowed on this issue. Actual-payment condition for employee-related liabilities - Allowability of bonus, leave encashment and other long-term employee-benefit liabilities - HELD THAT: - Allowability turned on verification of whether payments other than leave encashment were made by the return-filing due date and whether leave encashment satisfied the separate actual-payment requirement. [Paras 35] The matter was remanded for limited verification and allowance in accordance with law. Final Conclusion: The assessee's appeals were partly allowed and the Revenue's appeal for the earlier assessment year was dismissed, while its appeal for the later assessment year was partly allowed. Several claims were allowed or rejected on the merits, and the remaining matters were remanded only for the specified verification or computation.
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