TaxTMI 
TaxTMI 
2026 (9) TMI 226
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....sallowance made by the learned Assessing Officer of Rs. 1,00,00,000/- being the penalty paid to the Reserve Bank of India. 2.1. The learned CIT(A) failed to appreciate the fact that the amount paid to RBI is not towards violation of any legal provisions. 3. The learned CIT(A) erred in upholding the disallowance u/s. 14A of the I.T.Act r.w.Rule 8D, a sum of Rs. 15,21,175/- being expenditure incurred towards earning exempt income. 3.1. The Learned CIT(A) failed to appreciate the fact that the appellant did not incur any expenditure in relation to earning exempt income. 3.2. The Learned CIT(A) failed to appreciate the fact that no disallowance u/s 14A can be made based on the facts of the case. 3.3. The Learned CIT(A) failed to appreciate the fact that the investments are treated as stock in trade for the purpose of Income Tax and as such, no disallowance can be made u/s 14A. 3.4. The Learned CIT(A) erred in upholding the contention of the AO of disallowing the expense without recording the satisfaction as to how the disallowance made the appellant bank is not correct based on the books of accounts. 3.5. The Learned CIT(A)....
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.... 5.3. The learned CIT(A) failed to appreciate the fact that ESOP expenses are revenue expenditure and are allowable under Section 37 of the Income-tax Act, 1961. 5.4. The learned CIT(A) failed to appreciate the fact that the ESOP benefit is taxed in the hands of the employees as a perquisite. 3. The brief facts of the case emanating from the records are that the assessee is a Banking Company carrying on the business of banking in India. The assessee filed its return of income electronically on 26.10.2022 admitting a total income of Rs. 843,80,85,260/- computed under the regular provisions of the Act. As the assessee had opted for new regime of taxation u/s. 115BAA of the Act, no income was determined u/s. 115JB of the Act. The case was selected for scrutiny under CASS and accordingly the statutory notices were issued. In response to the notices, the assessee submitted certain details before the AO. The AO ignoring the submissions made by the assessee, passed an order u/s. 143(3) of the Act assessing the total Income of the assessee at Rs. 986,49,14,607/- under normal provisions after making the following additions and disallowance of claims made / deduction claimed: ....
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....(2) TMI 608 ITAT, Mumbai, ➢ DCIT vs Bapunagar Mahila Co-Op. Bank Ltd - 46 ITR (Trib) 458, ➢ City Union Bank Limited vs ACIT - 2026 (5) TMI 83 - ITAT Chennai. In view of the above arguments, the ld.AR prayed for deleting the disallowance of expenditure u/s. 37 of the Act. 9. Per contra, the ld.DR relied on the orders of the lower authorities and prayed for confirming the same and further stated that as per the penalty order of the RBI, which clearly states that non-following of guidelines is in violation of the Banking Regulation Act, 1949. The ld.DR further filed a written submission as detailed below: "The RBI penalty was imposed for the following statutory/regulatory contraventions: * under the Banking Regulation Act, 1949; * for non-compliance with RBI directions concerning lending to NBFCs and bank finance to NBFCs and statutory and other restrictions; and * for contravention of sections 19(2) and 20(1) of the Banking Regulation Act. A.3.2. The RBI's statutory penalty mechanism under section 47A is specifically directed at contraventions/defaults under the Banking Regulation Act. The relevant....
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....al finding that the payments made to the Stock Exchange for violation of its regulations were not on account of an offence prohibited by law. The present case stands on a materially different footing. The RBI Press Release itself records contravention of sections 19(2) and 20(1) of the Banking Regulation Act, 1949 and specifies the statutory provisions under which the penalty was imposed. A.3.8. The same distinction applies to IDBI Bank Ltd. v. ACIT, 2021 (2) TMI 608 (ITAT Mumbai) which is captured at pages 279-282 of the assessee's submission. The penalty considered therein related to RBI directions concerning customer service, exchange of coins and small denomination notes and mutilated notes, and the Tribunal proceeded on the factual finding that the relevant defaults were procedural in nature. The present case is materially different, as the RBI Press Release itself identifies the regulatory directions concerning lending to NBFCs and records the statutory basis on which the penalty was imposed. A.3.9. Likewise, Bapunagar Mahila Co-operative Bank Ltd.46 ITR (Trib.) 438, in page no.298 of the assessee's submissions involved a penalty of Rs.5 lakhs imposed for vi....
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.... decided on its own statutory and factual footing and not merely by reference to the nomenclature "RBI penalty". Thus, the assessee cannot seek to import the reasoning of earlier cases into the present assessment year without examining the statutory amendment. Once the payment is established to be a penalty imposed by the statutory banking regulator for regulatory non-compliance under a statute, the character of the payment cannot be altered merely by describing the underlying default as "procedural" or "administrative". A.3.11. The assessee's further contention that the penalty was incurred in the course of its banking business is therefore of no assistance. It is submitted that the business expediency cannot convert a penalty imposed for regulatory non-compliance into an allowable business expenditure. A banking company is permitted to carry on its business only within the regulatory framework prescribed by the Banking Regulation Act and the directions issued by the statutory regulator. Compliance with such statutory requirements is not an optional or incidental aspect of the business. A.3.12. In the present case, the RBI Press Release itself record....
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..... A decision laying down a proposition of law cannot be avoided merely by identifying peripheral factual differences which do not affect the ratio of the decision. 4. The Hon'ble Supreme Court in Rohan Vijay Nahar & Ors. v. State of Maharashtra & Ors., 2025 INSC 1296, has recently restated in emphatic terms the constitutional importance of judicial discipline. The Hon'ble Supreme Court observed that Article 141 makes the law declared by the Supreme Court binding on every Court in the country and that Article 144 obliges all civil and judicial authorities to act in aid of the Supreme Court. 5. The Hon'ble Supreme Court further observed that appellate jurisdiction exists to settle the law so that "like cases receive like outcomes", and that decisions of superior Courts have to be given full and faithful effect. 6. Of particular relevance to the present proceedings is the further declaration of the Hon'ble Supreme Court that it is impermissible to purportedly "distinguish in name while disregarding in substance" or to recast an issue so as to sidestep a rule which binds. The Court has reiterated the simple obligation of Courts to "apply prece....
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....CIT v. Excel Industries Ltd., (2013) 358 ITR 295 (SC). Therefore, where the same assessee follows the same methodology under the same statutory provisions and the issue has been adjudicated in earlier years, the Revenue is required to demonstrate a material change in facts or law before seeking a contrary result. Short Table of binding / direct precedents: Issue Principal Authority Status / relevance Judicial Decscipline Rohan Vijay Nahar v. State of Maharastra, 2025 INSC 1296 Supreme Court - binding precedent cannot be avoided through immaterial distinctions. Judicial Heirarchy Kamlakshi Finance Corp. Ltd., 1992 Supp (1) SCC 443 Supreme Court - appellate orders must be followed unless stayed. Coordinate Benches Paras Laminates(P.) Ltd., (1990)4 SCC 453; S.I. Rooplal, (2000) 1 SCC 644 Supreme Court - coordinate Bench to follow earlier decision or refer to larger Bench. Consistancy Radhasoami Satsang, 193 ITR 321 (SC); Excel Industries, 358 ITR 295 (SC) Same fundamental facts should not receive different treatment without material change. Section - 14A Banks South Indian Bank Ltd. v. CIT, 438 ITR 1 (SC) Direct Supreme Co....
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....er the particular RBI direction relates to NBFC lending, MSME lending or another regulated banking activity. Without prejudice to the above, it is submitted that the Legislative intent for inserting Explanation 1 has to be seen to decide which kind of penalty is disallowable by virtue of this Explanation. The relevant extract of the Board Circular no. 772 dated 23-12-1998 reads as follows: "This amendment will result in disallowance of the claims made by certain assessee's in respect of payments on account of protection money, extortion, hafta, bribes etc. as business expenditure." From the same, it can be seen that a penalty by a Regulator for violating certain regulatory guidelines are not intended to be covered by the Explanation 1. 20. The Revenue's proposed distinction is precisely the type of distinction cautioned against in Rohan Vijay Nahar. A binding or coordinate ratio cannot be avoided by relying upon a difference which does not affect the legal proposition decided. 21. The decision of the Hon'ble Bombay High Court in CIT v. Stock & Bond Trading Company further establishes that regulatory payments must be examined according to ....
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....erning sections 19(2) and 20(1) thereof. According to the Revenue, once the penalty is imposed by the statutory regulator in exercise of powers under the Banking Regulation Act, the payment necessarily assumes the character of a penalty for infraction of law and is therefore hit by Explanation 1 to section 37(1). 13. We are unable to accept the above proposition in such an absolute form. In our considered view, the mere fact that the authority to impose a monetary penalty can be traced to a statute cannot, by itself, be conclusive of the question whether the expenditure was incurred for a purpose which constitutes an "offence" or which is "prohibited by law" within the meaning of Explanation 1 to section 37(1). What is material is the true nature and character of the default, the purpose for which the payment was made and the statutory setting in which the levy came to be imposed. Explanation 1 to section 37(1) is intended to deny deduction in respect of expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law. Therefore, before applying the Explanation, it is necessary to ascertain whether the expenditure has the requisite nexus with....
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....lied upon DCIT v. Bapunagar Mahila Co-operative Bank Ltd., 46 ITR (Trib.) 438/458, wherein a monetary levy imposed in relation to violation of KYC norms was considered. The Revenue has sought to distinguish the said decision and has relied upon the subsequent decision of the Bangalore Bench in DCIT v. Canara Bank, ITA No.1102/Bang/2024, order dated 16.10.2024, wherein, on the evidentiary material available in that case, the assessee was held not to have demonstrated that the penalty was compensatory in nature. 18. We have considered the reliance placed by the Revenue on the decision in Canara Bank (supra). The said decision itself demonstrates that the question cannot be answered merely on the basis that the levy has been imposed by RBI. The statutory provision under which the levy is imposed, the nature of the contravention and the material establishing the character of the payment are relevant considerations. Thus, Canara Bank cannot, in our view, be read as laying down an absolute proposition that every monetary penalty imposed by RBI in exercise of powers under the Banking Regulation Act is necessarily expenditure incurred for an offence or an activity prohibited by law. ....
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....etary levy constitutes an offence or prohibited activity within the meaning of Explanation 1 to section 37(1) of the Act. The fact that one regulatory direction concerns MSME/education lending and another concerns NBFC lending cannot, without anything further, furnish a legally sustainable basis for applying a different principle u/s. 37(1) of the Act. For distinguishing a precedent, the factual distinction must have a material bearing upon the ratio laid down therein. A peripheral difference in the subject matter of the regulatory direction would not be sufficient if the character of the levy and the legal issue remain substantially the same. 21. The assessee has further referred to the decision of the Hon'ble Supreme Court in Rohan Vijay Nahar & Ors. v. State of Maharashtra & Ors., 2025 INSC 1296, emphasising that a binding precedent cannot be avoided by identifying distinctions which do not materially affect the ratio of the decision. 22. Applying the said principle, the Revenue has to demonstrate a material factual or statutory distinction before the ratio of the coordinate Bench decision on substantially the same legal issue can be departed from. We may also refer to the....
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....nion Bank Ltd. v. ACIT (supra), we are of the considered view that the impugned payment cannot be brought within the mischief of Explanation 1 to section 37(1) merely because RBI exercised its statutory powers under the Banking Regulation Act while imposing the monetary levy. In view of the foregoing discussion and respectfully following the judicial precedents we hold that the monetary penalty of Rs.1,00,00,000/- imposed by RBI, arising out of the regulatory non-compliance in question, cannot on the facts placed before us be regarded as expenditure incurred for any purpose which is an offence or which is prohibited by law so as to attract Explanation 1 to section 37(1) of the Act. Accordingly, the Ground No. 2 raised by the assessee is, accordingly, allowed. Ground No. 3 - Addition u/s 14A - Rs. 15,21,175/-: 26. The brief facts are that the assessee had earned dividend from tax free investments during the impugned assessment year amounting to Rs. 12,59,772/-and had made suo moto disallowance of Rs. 78,825/- by considering proportionate expenditure of Treasury & Investment Department, which handles the investment portfolio of the assessee. The AO invoked the provisions of Rul....
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....ble Chennai Tribunal has repeatedly applied the law concerning banking investments and section 14A in the Appellant's own case. 27. Therefore, the learned CIT-DR's contention that since exempt income has admittedly been earned, Rule 8D must necessarily be invoked overlooks both the binding Supreme Court judgment and the earlier orders in the Appellant's own case. 28. The Appellant treats the securities as stock-in-trade for income-tax purposes. The Appellant had also, without prejudice, suo motu disallowed Rs. 78,825 after considering proportionate expenditure of the Treasury Department. 29. Even where an assessee has made a suo motu disallowance, section 14A(2) requires the Assessing Officer to examine the accounts and record dissatisfaction regarding the correctness of the assessee's claim before invoking the prescribed method. 30. In the present case, the assessment computation simply applies the Rule 8D percentage to the investment, computes Rs. 16,00,000, reduces the suo motu disallowance of Rs. 78,825 and makes a further addition of Rs. 15,21,175. 31. Merely stating that the expenditure identified by the Appellant w....
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....he authorities below. Admittedly, the issue is covered in favour of the assessee by the decision of ITAT in assessee's own case for assessment year 2012- 13, where under identical set of facts, the Tribunal by following certain judicial precedents including the decision of Hon'ble Punjab & Haryana High Court in the case of Pr.CIT vs. State Bank of Patiala, [2017] (2) TMI 125, held that no disallowance u/s. 14A is permissible in terms of Rule 8D, where the assessee is engaged in banking business. A similar view is taken by the Hon'ble Supreme Court in the case of South Indian Bank Ltd vs. CIT in Civil Appeal No. 9606 of 2011, and held that shares and securities held by a bank are stock-in-trade and income received on such shares and securities must be considered to be business income. That is why, Section 14A of the Act would not be attracted to such income. 12.4 In this view of matter and consistent with view taken by the Co-ordinate Bench and also by respectfully following the decision of Hon'ble Supreme Court in the case of South Indian Bank Ltd., vs. CIT, supra, we direct the AO to delete addition made towards disallowance u/s. 14A r.w.rule 8D of the IT Rules, 1962." ....
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.... that the Hon'ble ITAT may kindly decide the issue on merits. 35. Further the ld.AR also filed a rejoinder to the written submissions made by the ld.DR as detailed below: IV. DEPRECIATION ON INVESTMENTS - Rs. 1,01,24,85,173 36. This issue is particularly governed by the rule of consistency and coordinate precedent because the very same methodology has been adjudicated by this Hon'ble Tribunal in the Appellant's own case under the ICDS regime. 37. ICDS-VIII Part B specifically applies to securities held by scheduled banks. The standard provides that such securities shall be classified, recognised and measured in accordance with the extant RBI guidelines, and only a deduction in excess of such guidelines is excluded. 38. The Appellant's claim is thus not founded merely upon an accounting practice or upon RBI guidelines operating independently of the Income-tax Act. The RBI valuation framework has itself been incorporated into the statutory income-computation standard applicable to scheduled banks. 39. The issue was considered by the Chennai Tribunal in the Appellant's own case for AY 2017-18, being the period after ICDS-....
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....9;s working satisfies precisely this requirement. 51. Accordingly, both on the basis of the direct decisions in the Appellant's own case and on the basis of the actual computation for the year, the disallowance is unsustainable. 36. We have heard the rival arguments perused the materials on record and gone through the orders of the authorities along with the judicial precedents relied on. We note that the assessee has followed the provisions of ICDS and claimed net depreciation as per RBI guidelines. We noticed that the co-ordinate bench of the Tribunal in the identical set of facts in assessee's own case in ITA Nos.1502 & 1889/Chny/2025 (supra) has decided the issue in favour of the assessee by following its own decision in ITA No.620/Chny/2020 (supra) by holding as follows: "13.4 We have heard the rival arguments and perused the materials on record. We note that the Ld.CIT(A) has clearly recorded a finding that Assessee has followed the provisions of ICDS and claimed only the net depreciation as per RBI guidelines. The Revenue could not controvert this factual finding. We notice that the co-ordinate Bench of the Tribunal in the assessee's own case in ITA ....
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....he ld.CIT(A) has erred in confirming the disallowance of depreciation on investments and hence we set aside the order of the ld.CIT(A) and direct the AO to allow the depreciation as claimed by the assessee by allowing the corresponding ground raised by the assessee. Ground No.5 - Disallowance of Expenditure relating to ESOP - Rs. 48,84,112/- 38. The brief facts of the case are that the assessee had granted Employee Stock Option (ESOP) to the eligible employees and accordingly the difference between the 'market value' and the 'exercise price' was debited to P&L a/c. as ESOP expenses and was claimed as an allowable expenditure. The AO disallowed the same by holding it as a capital expenditure by relying on the decision of the Hon'ble Supreme Court. On appeal preferred by the assessee before the First appellate authority, the ld.CIT(A) upheld the same. 39. Aggrieved by the decision of the ld.CIT(A), the assessee is in appeal before us. The ld.AR submitted that ESOP expenditure is a revenue expenditure and the same is allowable expenditure. In support of their arguments, they submitted that the issue is squarely covered by the jurisdictional Hon'ble Madras High Court and the d....
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....ntivise and retain employees and is allowable as revenue expenditure. 67. This decision assumes particular significance because the Revenue in the present case relies upon Punjab State Industrial Development Corporation Ltd. and Brooke Bond India Ltd. to contend that the expenditure relates to capital augmentation. 68. The jurisdictional High Court has already dealt with the distinction between expenses incurred for raising share capital and ESOP compensation granted to employees. Therefore, the Revenue cannot invite this Hon'ble Tribunal to once again treat ESOP expenditure as though it were merely share-issue expenditure. 69. The matter is also supported by the earlier jurisdictional High Court decisions in PVP Ventures Ltd. and Allsec Technologies Ltd., and by the Karnataka High Court decision in Biocon Ltd.. 70. The Appellant's earlier written submissions specifically relied upon the above line of authority. 71. The distinction between expenditure incurred for raising capital and expenditure incurred as employee compensation is fundamental. An ESOP discount is granted to employees because of and in consideration of their serv....
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....law No.2 - ESOP:- 8.6. Admittedly, the ESOP scheme is a voluntary scheme launched by the employer to issue shares to their employees, with an intent to give a stake to the employees in the organisation as incentives for performing better. Such an expenditure is incurred to facilitate and promote the business and there is no enduring benefit or advantage or creation of asset to the company, rather it is to earn more revenue and the expenses incurred for such purpose is nothing but revenue expenditure. It isa general principle that any expenditure incurred for the purpose of business is a deductible expenditure and the amount spent by an assessee for labour / employees' welfare, would be deductible as revenue expenditure. In Dalmia Jain & Co. Ltd v. CIT [81 ITR 754], the Hon'ble supreme court held that "expenditure incurred for maintenance of business is revenue in nature". 8.7. According to the assessee's, the ESOP benefit is taxable in the hands of employees as 'perquisite' under section 17(2) of the Act and it was brought within the purview of Fringe Benefit Tax, which is an employee related expenditure. It is further pointed out by the assessee's that si....
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....ted was not notional or contingent as had been submitted by the Revenue. Pointing out to the Employees Stock Option Plan, the Tribunal in its order stated that it was a benefit conferred on the employee. So far as the company is concerned, once the option was given and exercised by the employee, the liability in this behalf got ascertained. This was recognised by SEBI and the entire Employees Stock Option Plan was governed by guidelines issued by SEBI. On the facts thus found, the Tribunal held that it was not a case of contingent liability depending on the various factors on which the assessee had no control. The expenditure in this behalf was an ascertained liability, thus the expenditure incurred being on lines of the SEBI guidelines, there could be no interference in the relief granted by the Assessing Authority for the expenditure arising on account of Employees Stock Option Plan. This expenditure incurred as per SEBI guidelines and granted by the Officer could not be considered as erroneous one calling for exercise of jurisdiction undersection 263 of the Act." 8.9. It is also to be noted at this juncture that as against the aforesaid decision of this Court, SLP(C) No....