TaxTMI 
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2024 (7) TMI 704
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....owance of ESOP of expenses Ground No.2 Ground No.2 - Revenue's Appeal Issue AY 2016-17 AY 2017-18 AY 2018-19 Disallowance under section 14A - Amendment brought in by Finance Act 2022 is retrospective Ground No.1 Ground No.1 Ground No.1 Disallowance of broken period interest on securities Ground No.2 Ground No.2 Ground No.2 Disallowance of bad-debts on Credit Card Ground No.3 Ground No.3 Ground No.3 Disallowance towards provision for debit and credit reward points Ground No.4 Ground No.4 Ground No.4 Disallowance of revised claim for deduction under section 36(1)(viia) Ground No.5 Ground No.5 Disallowance of ESOP of expenses Ground No.5 2. We will first consider the assessee's appeal for adjudication. ITA No. 1783/Mum/2023 - AY 2016-17 Disallowance under section 14A - Ground No.1 2. During the year under consideration, the assessee had earned exempt income to the tune of Rs. 480,76,49,494/-. The Assessing Officer (AO) called on the assessee as to why disallowance should not be made under section 14A r.w.r 8D. The assessee vide letter dated 28.12.2018 offered a disallowance under section 14A to the tune of Rs. 20,18,079/....
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....2)(ii). With regard to disallowance under section 14A r.w.r. 8D(2)(ii) the assessee submitted that, assessee's own funds are sufficient and therefore, no is warranted. With regard to disallowance made by the AO under Rule 8D(2)(ii), the CIT(A) has given a detailed finding and gave relief to the assessee stating that when the assessee is having sufficient own funds no disallowance shall be warranted . With regard to 8D(2)(iii) the CIT(A) by relying on assessee's own case in ITA No. 374/Mum/2012 for AY 2008-09 held that for the purpose of disallowance under Rule 8D(2)(iii) the disallowance should be restricted to only those investments yielding exempt income. Against the decision of the CIT(A), the assessee is before the Tribunal contending that the plea of the assessee before the CIT(A) was to restrict the disallowance to the suo-moto disallowance offered by the assessee and the said relief has not been considered by the CIT(A). 4. The ld. AR with regard to the plea that disallowance should be restricted to the suo-moto disallowance, submitted that the assessee has investments which are in the nature of stock in trade and also are strategic investments made in subsidiaries.....
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....d to non-executive directors, salary cost of the executive directors and other employees (deputed on the Board of the subsidiary companies of the HDFCBL) pertaining to the date of the Board meeting, secretarial cost for conducting the Board meeting, rental charges in case where meeting is conducted outside the HDFCBL's owned premises, travel cost of all the directors which has been incurred for the purpose of this Board meeting and other expenses which are incurred for the purpose of the Board meeting. Step 3: The total cost of conducting the Board meeting has been identified for every meeting which the Bank has conducted. After identifying the total cost, the Bank counts the total agenda discussed in the Board meeting. The total agenda pertaining to the subsidiary companies is also identified. The ratio of the agenda pertaining to the subsidiary companies in proportion to the total agendas is applied to the total cost incurred for the particular Board meeting. This amount is attributed as disallowance for the purpose of section 14A of the Act. For instance, if the total cost incurred for conducting the Board meeting is Rs. 10 lakhs and out of the total 20 agendas in the Bo....
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....tted that the AO while arriving at the disallowance did not record any findings as to why the suo-moto disallowance calculated by the assessee is not correct thereby failed to record any satisfaction. The ld. AR in this regard relied on the decision of the Co-ordinate Bench in the case of Aditya Birla Finance Ltd. Vs. ACIT (83 taxmann.com 85) where the Tribunal has accepted similar accountant report and held that the disallowance should be restricted to the suo-moto disallowance. The relevant findings of the co-ordinate bench are as extracted below: "3.28 In the light of the foregoing discussion, we find that neither the Ld. Assessing Officer nor the Ld. Commissioner of Income Tax (Appeal) pointed out any defect in the accounts of the assessee, therefore, the ratio laid down in the case of Britania Industries Ltd. v. Dy CIT [IT Appeal No.390 (Kol.) of 2013, dated 2-3- 2016], Rapiakos Brett & Co. Ltd. v. Addl. CIT(A) [IT Appeal No. 7490 (Mum.) of 2013, dated 10-11-2016] supports the case of the assessee. The ratio laid down in Fedex Finance (P) Ltd. v. Dy. CIT [IT Appeal Nos. 1067 & 1073 (Mum.) of 2013] and White Water Mass Media v. ACIT [IT Appeal No. 2963(Mum.) of 2013] supports....
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....s followed a scientific method as explained in the Accountant's report which is extracted in the earlier part of this order for arriving at the disallowance under section 14A. From the perusal of the financial statements, it is also noticed there no movement in the investment made in the subsidiaries and therefore, there is merit in the contention of the ld. AR that only the cost pertaining to the Board meeting where strategic decisions are taken with regard to investments in subsidiaries and the proportionate costs of those employees in the company who involving the decisions have been considered for the purpose of disallowance under section 14A and that the said method is appropriate. 9. On the contention that the AO has not recorded any satisfaction, it is relevant to take note of the following observations of the AO before he proceeded to compute the disallowance under section 14A. "3.3 Excluding stock-in-trade from the total investment, the strategic investment for the assessee as on 31.03 2015 was Rs. 2853,16,62,252/- and as on 31.03.2016 was Rs. 2853,56,41,425/ Hence, the average value of investment is Rs. 2853,36,51,839/- These investments cannot be managed without i....
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.... a finding that the AO needs to record satisfaction that having regard to the kind of the assessee suo-moto disallowance under section 14A is not correct. In view of these discussions and considering the judicial pronouncements, we are of the view that the AO is not correct in invoking the provisions of section 14A without recording any satisfaction as to why the suo-moto disallowance computed by the assessee is not correct. Accordingly, we delete the disallowance made by the AO and direct the AO to restrict the disallowance to the suo-moto disallowance made by the assessee. It is ordered accordingly. Disallowance of ESOP expenses - Ground No.2 11. The ld. AR in this regard submitted that the assessee for the first time made the claim before the CIT(A) with regard to the ESOP Expense. The CIT(A) did not allow the claim of assessee following the decision of the Supreme Court in the case of Goetz (India) Ltd. vs. CIT (2006) 284 ITR 323 (SC). The CIT(A) also did not accept the submission of the assessee that the issue is covered by the decision of the Hon'ble Karnataka High Court in the case of CIT Vs. Biocon Ltd. (2020) 430 IR 151 (Kar. HC) 12. Before us, the ld. AR submitted....
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....llowed the department's appeal. In the Supreme Court, the assessee relied upon the judgment in National Thermal Power Co. Ltd. (supra) contending that it was open to the assessee to raise the points of law even before the Tribunal. The Supreme Court held:- "4. The decision in question is that the power of the Tribunal under section 254 of the Income- tax Act, 1961, is to entertain for the first time a point of law provided the fact on the basis of which the issue of law can be raised before the Tribunal. The decision does not in any way relate to the power of the Assessing Officer to entertain a claim for deduction otherwise than by filing a revised return. In the circumstances of the case, we dismiss the civil appeal. However, we make it clear that the issue in this case is limited to the power of the assessing authority and does not impinge on the power of the income-tax Appellate Tribunal under section 254 of the Income-tax Act, 1961. There shall be no order as to costs." [Emphasis supplied) 23. It is clear to us that the Supreme Court did not hold anything contrary to what was held in the previous judgments to the effect that even if a claim is not made before the ass....
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....ability of expenses in the hands of the employer. It is also pertinent to mention here that in the decision rendered by the Supreme Court in the aforesaid case, the Assessment Years in question was 1997-98 to 1999-2000 and at that time, the Act did not contain any specific provisions to tax the benefits on ESOPs. Section 17(2)(iiia) was inserted by Finance Act, 1999 with effect from 1-4-2000. Therefore, it is evident that law recognizes a real benefit in the hands of the employees. For the aforementioned reasons, the decision rendered in the case of Infosys Technologies is of no assistance to the revenue. The decisions relied upon by the revenue in A. Gajapathy Naidu, Morvi Industries Ltd. and Keshav Mills Ltd.(supra) support the case of assessee as the assessee has incurred a definite legal liability and on following the mercantile system of accounting, the discount on ESOPs has rightly been debited as expenditure in the books of account. We are in respectful agreement with the view taken in PVP Ventures Ltd. And Lemon Tree Hotels Ltd/ case (supra)." 16. Respectfully following the above judicial precedence, we hold that the ESOP expenses claimed by the assessee an allowable expe....
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..... MST.Katiji & Ors., (167 ITR 471) (SC) we condone the delay of 120 days in filing the appeal and admit the appeal for adjudication. ITA.No.3375/Mum/2023 Disallowance under section 14A - Ground No.1 22. The contention of the Revenue is that the CIT(A) erred in not appreciating that the amendment brought in by Finance Act 2022 to section 14A whereby it has been clarified that the provisions of section 14A can be invoked when the assessee has investments which have the potentional of yielding exempt income and the amount of exempt income earned is not relevant in this context. The ld. DR in this regard submitted that the Explanation inserted by the Finance Act, 2022 is clarificatory in nature and therefore, should be applied retrospectively. The ld. DR further submitted that the Guwahati bench of the Tribunal in the case of ACIT vs Williomson Financial Services Ltd ((2022) 140 Taxmann.com 164 (Guwahati - Trib)) while considering the similar issue has correctly interpreted the word used in the Explanation namely "the provisions of this section shall apply and shall be deemed to have always applied" which would mean that the provisions are clarificatory in nature and is inserted onl....
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....come, notwithstanding anything to the contrary contained in this Act. 7. This amendment will take effect from 1st April, 2022 and will accordingly apply in relation to the assessment year 2022-23 and subsequent assessment years." (emphasis supplied) 6. Furthermore, the Supreme Court in Sedco Forex International Drill. Inc. v. CIT [2005] 149 Taxman 352/279 ITR 310 has held that a retrospective provision in a tax act which is "for the removal of doubts cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood. The relevant extract of the said judgment is reproduced here-in-below. '9. The High Court did not refer to the 1999 Explanation in upholding the inclusion of salary for the field break periods in the assessable income of the employees of the appellant. However, the respondents have urged the point before us. 10. In our view the 1999 Explanation could not apply to assessment years for the simple reason that it had not come into effect then. Prior to introducing the 1999 Explanation, the decision in CIT v. S.G. Pgnatale [(1980) 124 (TR 391 (Guj.)] was followed in 1989 by a Division Bench of the Gauhat....
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....ny purpose for an anterior period. 14. In the appeal preferred from the decision by the Revenue before this Court, the Revenue did not question this reading of the Explanation by the Kerala High Court, but restricted itself to a question of fact viz. whether the Tribunal had correctly found that the salary of the assessee was paid by a foreign company. This Court dismissed the appeal holding that it was a question of fact. (CIT v. SR Patton [(1998) 8 SCC 608].) 15. Given this legislative history of Section 9(1)(ii), we can only assume that it was deliberately introduced with effect from 1-4-2000 and therefore intended to apply prospectively [See CIT v. Patel Bros. & Co. Ltd., (1995) 4 SCC 485, 494 (para 18): (1995) 215 ITR 165]. It was also understood as such by CBDT which issued Circular No. 779 dated 14-9-1999 containing Explanatory Notes on the provisions of the Finance Act, 1999 insofar as it related to direct taxes. It said in paras 5.2 and 5.3. "5.2 The Act has expanded the existing Explanation which states that salary paid for services rendered in India shall be regarded as income earned in India, so as to specifically provide that any salary payable for the rest pe....
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....ple of the tax law is that the law to be applied is that which is in force in the relevant assessment year unless otherwise provided expressly or by necessary implication. (See also Reliance Jute and Industries Ltd. v. CIT [(1980) 1 SCC 1391) An Explanation to a statutory provision may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section [See Sonia Bhatia v. State of UP., (1981) 2 SCC 585]. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force [See Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24; Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC 352; CTT v. Podar Cement (P.) Ltd., (1997) 5 SCC 482). But if it changes the law it is not presumed to be retrospective, irrespective of the fact that the phrases used are "it is declared" or "for the removal of doubts", 18. There was and is no ambiguity in the main provision of section 9(1)(ii). It includes salaries in the total income of an assessee if the assessee has earned it in India. The word "earned" had been judicially defined in SG. Pgnatale ((198....
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....he Tribunal that in all the aforementioned decisions it was held that the broken period interest paid by the assessee was allowable as a deduction while computing its total income. Observing, that the issue was covered in the assessee's own case by various decisions of the Tribunal and that of the Hon'ble jurisdictional High Court, the order of the CIT(A) vacating the disallowance of broken period interest was upheld by the Tribunal. For the sake clarity the relevant observations of the Tribunal are culled out as under: "7. The only issue to be decided is deletion of disallowance by the Id. CIT(A) in respect of broken period interest in the sum of Rs. 1947,35,93,107/-. 7.1. We have heard nval submissions and perused the materials available on record. We find that assessee has debited an amount of Rs. 1947,35,93,107/- in the profit and loss account as broken period interest. The assessee submitted that this broken period interest paid is nothing but part of the price paid for the securities at the time of its acquisition. The Id. AO observed that the said purchase price is in the nature of capital outlay and hence, the same cannot be allowed as deduction while computin....
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....s on credit cards - Ground No.3 29. During the year under consideration, the AO noticed that the assessee has claimed Rs. 375,10,36,088/- as write off of bad debts towards credit card. The AO did not allow the claim of the assessee for the reason that the credit card bad debts were never taken into account for computing the income of the assessee and that the same does not represent the money lent in the ordinary course of business of banking. The relevant observation of the AO is extracted below: "(i) It is observed that as per provisions of Section 36(1)(vii), the assessee is allowed deduction of any amount of bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee. However, the aforesaid provisions are subject to the provisions of section 36(2), which provide that deduction cannot be claimed for bad debt unless such debt has been taken into account in computing the income in the previous year or in an earlier previous years or it represents money lent in the ordinary course of the business of banking or money lending. (ii) The banking services are defined and controlled by the provisions of section 5(b) and section 6 of the Banking R....
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....the assessee is a banking service which is part of the lending activity . The CIT(A) placed reliance on the decision of the Delhi High Court in the case of JDS Apparels Pvt. Ltd. 370 ITR 454 (Del. HC) and the decision of the Jurisdictional Bombay High court in the case of PCIT Vs. Hotel Leela Ventures Ltd. (ITA No. 847 & 954 of 2016 dated 18.12.2018). 31. The ld. DR relied on the order of the AO to submit that the credit card written off as bad debts cannot be allowed as deduction under section 36(1)(vii) for the reason that the assessee accounts for income from credit card only to the extent of commission and not the entire amount paid towards credit cards. Further, the ld. DR submitted that the AO has given a clear finding with regard to the credit card business being not part of the regular banking business and therefore, the amount cannot be allowed as a deduction as bad-debts. 32. The ld. AR on the other hand submitted that the assessee has to settle to the Merchants for the purchases made by the credit card holder and therefore, the amount which is irrecoverable from the customers should be allowed as incurred in the normal course of business of the assessee. The ld. AR als....
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....uld certainly be entitled for deduction u/s.36(i)(vii) of the Act. It need not be routed through provision for bad and doubtful debts account. Moreover, we find that RBI has issued a master circular dated 01/07/2013 which provides for credit card / debit card and rupee denominated co-branded prepaid card portions of the banks. The said circular clearly establishes the fact that credit card business is part and parcel of banking business. This fact that was placed on record by the assessee before the lower authorities had been ignored by them. Further as part of the banking license granted by the RBI, the assessee is entitled to carry on the banking business either departmentally or through a company set up for this purpose. We find that credit card could be issued by the assessee bank only to its customers. Hence, the observation made by the ld. PCIT in the case of ICICI Bank for the A.Y.2013-14 that a person need not be a customer of the bank to obtain credit card is fundamentally incorrect. Credit card business according to the RBI master circular is a permissible banking business activity provided under Banking Regulation Act and hence, it could be safely construed that credit c....
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....y and is not a real expenditure incurred by the assessee. Therefore, the AO held the provision to be an ascertained liability. The AO based on the perusal of annual reports for the subsequent financial year was of the view that the assessee is utilizing only Rs. 65-70 crores out of the provision made and accordingly disallowed a sum of Rs. 106.29 crores. 37. The CIT(A) deleted the disallowance stating that the assessee has followed a scientific basis for arriving at the provision and therefore, the same is not a contingent liability. Further, the CIT(A) considered the opinion of the expert advisory committee of the Institute of Chartered Accounts of India wherein that accounting treatment of reward points given to credit card holder has been provided. The CIT(A) also held that the job of the actuary who computes the amount of provision to be made, is highly specialized job and therefore, the provision made for reward points on credit and debit cards deserves to be allowed. 38. The ld. DR in this regard submitted that the AO has analyzed the data pertaining to actual utilization of the provision made as reported in the notes to accounts of subsequent years and has disallowed the a....
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....im as an unascertained expenditure in view of the fact that the appellant is recognizing redemption of the FCC point only when gift vouchers or points are actually redeemed by a customer. The Assessing Officer has been Led to this view by the Auditor's Notes to Financial Statement reproduced by him in the assessment order. As against this, the main plank of appellant's defence is that the claim is being made in sync with the concept of matching revenue and costs and that in terms of the judicial decisions relied upon the claim is allowable. Weighing these two basic positions, I find that the issue begs the following questions:- i) Whether or not the claim of the reward point is a cost attached to corresponding revenue? ii) Whether or not the ascertainment of the claim is substantially accurate based on the consistent trend of redemption of rewards points ? iii) Whether or not excess/shortage is accounted for after verification? 3.3.1 The answer to these questions lead me to agree with the appellant that the claim is allowable. To this end, in answer to the first question, I find that the FCC points claim have their genesis in the sales made and accordingly, when....
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....tion. In this decision, in the context of allowability of provision for warranty on account of warranty claims likely to arise on the sales, the Hon'ble Supreme Court has held that if historical trend indicates that in past, large number of sophisticated goods were being manufactured and the defects existed in some of the items manufactured and sold, then provision made for warranty in respect of army of such sophisticated goods would be entitled to deduction from the gross receipts u/s.37(1), provided the data is systematically maintained by the assessee. In this decision, the Hon'ble Supreme Court has further held that a provision is recognized when : (a) an enterprise has a present obligation as a result of past event, (b) it is probable that an outflow of resources will be required to settle the obligation and (c) a reliable estimate can be made of the amount of the amount of the obligation. The FCC points claimed by the appellant passes these tests laid down by the Hon'ble Supreme Court. To this end, it may be noted that the claim here is attached to an obligation of redemption and carries on the liability of an outflow of resources when the points are redeemed. Fu....
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....aft. That is also based on the minimum cost. In our view, these provisions are based on the experience of the airline and the actual miles accumulated by the passengers. If one were to go through the entire scheme it cannot be said that provision made by the assessee is in respect of a contingent liability. The principle laid down by the Hon'ble Supreme Court in the case of Bharat Earth Movers (supra), equally applies to the scheme in question and the claim of the assessee has been properly appreciated by the CIT(A) and his order is confirmed." I now come to the third question. In this respect, I find that the accounting method followed by the appellant duly redresses the fallout of any excess/shortage as the appellant accounts for the excess/ shortage after verification of redemption for each customer. I further find that the revenue on account of sale is also accounted gross. These are safeguards against the possibility of double deduction of expenses. 3.3.2 In line with the foregoing, I find that in view of the concept of matching revenue and costs, the scientific and reasonable basis of the quantification of the FCC claim, the judicial decisions discussed above and ad....
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....of revised claim for deduction under section 36(1)(viia) - Ground No.5 42. The assessee vide letter dated 24.12.2018 stated that at the time of filing the return of income the census data was not fully available and since the data is now available the deduction with respect to Rural Branches have been revised on the basis of such data. The assessee revised the claim under section 36(1)(viia) r.w.r. 6ABA from Rs. 245,25,02,963/- to Rs. 358,31,63,918/-. The AO did not allow the revised claim by the assessee stating that the revised claim during assessment proceedings cannot be allowed without filing the revised return of income relying on the decision of the Hon'ble Supreme Court in the case of Goetz India Ltd. (supra). The CIT(A) allowed the revised claim of the assessee for the reason that the assessee has not made a new claim but has asked for re-computation of the deduction claimed which is based on re-classification of the existing branches into Rural and Urban branches which was not available at the time of filing the return of income. The relevant observation of the CIT(A) is extracted below: "9.4.1 It is seen that during the assessment proceedings, the assessee has re....
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...., the disallowance cannot be denied on the ground that the additional claim is not made by filing the revised return of income. In assessee's case it is an admitted position that the assessee has not made a fresh claim under section 36(1)(viia) but has only re-computed the amount of claim based on the fresh data made available with respect to the classification of branches into Rural and Urban. Therefore, we are inclined to agree with the decision of the CIT(A) and accordingly, direct the AO to verify the revised claim and allow the same in accordance with law. It is ordered accordingly. This ground of the revenue is dismissed. ITA No. 3374/Mum/2023 46. The issues contended by the Revenue for AY 2017-18 through various grounds is tabulated in the earlier part of this order from which it is clear that ground no. 1 to 5 pertaining to various disallowances as allowed by the CIT(A) are identical to AY 2016-17. Therefore, our decision with regard to these issues as adjudicated in AY 2016-17 is mutatis mutandis applicable to AY 2017-18 also. Accordingly, we dismiss ground no.1 to 5raised by the Revenue. ITA No. 3371/Mum/2023- Revenue's Appeal 47. The issues contended by the....