2019 (2) TMI 1713 - AT - Income Tax

Disallowance @ 0.5% of the average investments u/s 14A read with rule 8D2(iii) towards administrative and other expenses - HELD THAT - The co-ordinate bench of the Tribunal in assessee s own case 2017 (11) TMI 1854 - ITAT MUMBAI decide the issue in favour of the assessee by holding that no disallowance under section 14A is called for. The AO is directed accordingly. Thus the assessee s appeal is allowed and ground no.1 of the revenue appeal is dismissed. Disallowance of amortization of Employee Stock Plan (ESOP) expenses - Addition made by the AO without appreciating the fact that it is a capital expenditure incurred for the purpose of business being employee compensation cost - HELD THAT - We are of the opinion that the issue needs further verification about the terms and conditions of ESOP issue by the assessee .Therefore, in the interest of justice the matter is restored back to the file of AO for fresh adjudication, who would afford a reasonable opportunity of hearing to the assessee Disallowance on account of broken period interest which was treated as capital expenditure by the AO - HELD THAT - CIT(A) allowed the issue in favour of the assessee by following the order of his predecessor in assessee s own case for A.Y. 2007-08, 2008-09 2009-10 by following the decision of the Hon ble Supreme Court in the case of CIT vs. Citi Bank 2008 (8) TMI 766 - SUPREME COURT Fresh issue admitted before the appellate authority - New claim of deduction under section 35D can be admitted first time which was not raised before the AO at all - HELD THAT - After perusing the appellate order, we find that the appellate authority has passed the order after following the decisions of the Hon ble Bombay High Court in the case of CIT vs. Pruthvi Brokers and Shareholders Pvt. Ltd. 2012 (7) TMI 158 - BOMBAY HIGH COURT and Grasim Industries Ltd. 2016 (2) TMI 1124 - BOMBAY HIGH COURT wherein the decisions of the Hon ble Supreme Court in the case of Goetz India Ltd. 2006 (3) TMI 75 - SUPREME COURT has been considered and it was held that the fresh issue can be admitted before the appellate authority. We, therefore, do not find any infirmity in the order of the Ld. CIT(A) and accordingly the same is upheld.

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Amortization of Employee Stock Plan (ESOP) expenses.
3. Disallowance of broken period interest.
4. Admission of new claim for deduction under Section 35D.

Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
The assessee, a banking company, challenged the disallowance of ?18,50,000/- made by the Assessing Officer (AO) under Section 14A read with Rule 8D(2)(iii) for administrative and other expenses related to earning exempt income. The AO initially disallowed ?2,21,10,000/- under Section 14A, which included ?2,02,60,000/- under Rule 8D(2)(ii) and ?18,50,000/- under Rule 8D(2)(iii). The CIT(A) deleted the disallowance under Rule 8D(2)(ii) but upheld the disallowance under Rule 8D(2)(iii). The Tribunal found that the issue had already been decided in favor of the assessee in its own case for earlier assessment years, following the ruling of the Punjab & Haryana High Court in PCIT vs. State Bank of Patiala and the CBDT Circular No. 18/2015. It was held that investments made by banking concerns are part of the business activity of banking, and thus, no disallowance under Section 14A is warranted. Consequently, the Tribunal directed the AO to delete the disallowance, allowing the assessee’s appeal and dismissing the Revenue’s appeal on this ground.

2. Amortization of Employee Stock Plan (ESOP) expenses:
The Revenue challenged the deletion of disallowance of ?6,45,53,097/- related to ESOP expenses, which the AO had treated as capital expenditure. The CIT(A) allowed the deduction, following the ITAT’s direction in the assessee's own case for A.Y. 2009-10, where ESOP expenses were accepted as allowable expenses. The Tribunal upheld the CIT(A)’s decision, noting that the issue had been consistently decided in favor of the assessee in previous years. Thus, the Revenue’s appeal on this issue was dismissed.

3. Disallowance of broken period interest:
The Revenue contested the deletion of disallowance of ?2,81,01,155/- and ?10,40,07,375/- on account of broken period interest, which the AO had treated as capital expenditure. The CIT(A) allowed the deduction, following the decision of the Hon’ble Bombay High Court in the case of HDFC Bank and the Hon’ble Supreme Court in CIT vs. Citi Bank NA. The Tribunal upheld the CIT(A)’s decision, confirming that the issue was covered in favor of the assessee by precedent. Therefore, the Revenue’s appeal on this ground was dismissed.

4. Admission of new claim for deduction under Section 35D:
The Revenue challenged the CIT(A)’s decision to admit a new claim for deduction under Section 35D for preliminary expenses incurred in connection with the issue of shares under qualified institutional placement (QIP). The CIT(A) admitted the claim, following the Hon’ble Bombay High Court’s rulings in CIT vs. Pruthvi Brokers and Shareholders Pvt. Ltd. and Grasim Industries Ltd., which held that appellate authorities have the power to entertain legal issues raised for the first time. The Tribunal upheld the CIT(A)’s decision, noting that the appellate authority had correctly followed judicial precedents. Consequently, the Revenue’s appeal on this issue was dismissed.

Conclusion:
The Tribunal allowed both appeals of the assessee and dismissed both appeals of the Revenue, upholding the CIT(A)’s decisions on all contested issues. The order was pronounced in the open court on 28.02.2019.

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