2022 (7) TMI 480 - AT - Income Tax

Disallowance u/s 14A - CIT-A deleted th addition - as argued disallowance u/s 14A has to be mandatorily calculated as per rule 8D of IT Rules and no discretion is available with the A.O for estimated disallowances - HELD THAT - AO has not given any finding about the voluntary disallowance offered by the assessee Hon'ble Supreme Court in case of Maxopp Investment Ltd. ( 2018 (3) TMI 805 - SUPREME COURT held that whether the assessee in his return has himself apportioned the disallowance under Section 14A of the Act, the learned Assessing Officer needs to record his satisfaction having record the accounts of the assessee and that why it is not correct. That means learned Assessing Officer has to give reasons with regard to the accounts of the assessee about incorrectness of the claim of the assessee. In the present case, we find that AO has failed to carry out the necessary exercise before applying the provisions of Rule 8D of the Rules. There is no reference to examination of accounts of the assessee. There is no finding that disallowance offered by assessee is inadequate as envisaged by the books of assessee - No hesitation in holding that the learned Assessing Officer has jumped the queue by invoking Rule 8D of the Rules without recording any satisfaction a holding that quantum of disallowance offered by assessee is inadequate. We reverse the orders of the learned CIT(A) on this ground and hold that in absence of any satisfaction of the learned Assessing Officer about correctness of the disallowance offered under Section 14A of the Act, no disallowance under Section 14A read with Rule 8D of the Rules can be made. Accordingly, we dismiss ground no. 1 of the appeal of the learned Assessing Officer and allow ground no. 1 and 2 of the appeal of the assessee. Disallowance of brokerage paid on acquisition of investments - Whether CIT Appeal was right in directing to delete the disallowances of brokerage paid on acquisition of investments without appreciating that such expenditure is in the nature of capital expenditure and forms a part of cost of asset? - HELD THAT - All necessary expenditure incurred by assessee for purchase of stock in trade, like, commission/ brokerage are revenue expenditure only. It is not the case of revenue that, despite these securities being stock in trade, it needs to value at cost or market value whichever is less at the end of the year, and commission or brokerage incurred on its acquisition should have formed part of cost of such securities, subject to available market rate. AO has held that commission or brokerage as far as it relates to unsold stock in trade is not allowable during the year of incurring such expenditure, but would be taken in to consideration when securities are sold. The Central Board of Direct Taxes has issued a circular no. 18 of 2015 provides that in view of the decision of Hon'ble Supreme Court in Nawanshahar cooperative bank Ltd ( 2005 (8) TMI 28 - SC ORDER wherein it has been held that the investment made by banking companies are part of the banking business which is chargeable to tax under the head profit and gains of business and profession and therefore, expenses relatable to investment cannot be disallowed under section 57(i) of the Act. The applicability of deduction of expenditure under section 28 is also to be treated on the same parameters. When it is not the claim of the ld AO that valuation of securities held as stock in trade at the end of the year is not valued higher to the extent of commission and brokerage incurred on these securities to determine at cost valuation , we do not find any reason to uphold disallowance made by the ld AO. In view of this, we do not find any infirmity in the order of the learned CIT (A) in deleting the above disallowance. - Decided against revenue. Disallowance u/s 35D - AO held that since the issue of shares to Qualified Institutional Buyers, does not tantamount to issue of shares to public and therefore, expenditure incurred is not covered under Section 35D - HELD THAT - As decided in own case 2020 (8) TMI 86 - ITAT MUMBAI so far the issue was whether QIB is Public or not . The co-ordinate Bench in that case considered whether the allottees Qualified Institutional Buyers is public or not. The coordinate Bench following the decision of ITAT in Deccan Chronicle Holdings Ltd. (supra) hold that QIB is Public so deduction under Section 35D of the Act is allowable. As we have already held that if the issue of shares is through public Subscription assessee is eligible for deduction u/s 35 D, conversely, if the issue of shares are not Public Subscription i.e. such as Private Placement etc, assessee is not eligible for deduction u/s 35 D of the Act . These facts are not on record whether shares issued to QIB are issued in Public Subscription or otherwise. Therefore, the matter needs to be set aside to the file of the ld AO for fresh examination, to show before him that the issue was a public subscription and not otherwise, onus lies on assessee. Ld AO may examine the same; if shares are issued in Public Subscription , deduction may be allowed. Non-admission of additional ground of appeal - allowance of deduction of discount on issue of shares under the Stock Option Plan - HELD THAT - As in claiming such expenditure, in the original return of income and now raising an additional ground cannot be said to be willful. Assessee is duty bound to file its return of income with proper due diligence, taking plausible stand about taxability of its income, Otherwise, there are severe consequences of penalties. After the assessee has same judicial precedents in its favour rendered by the courts and tribunals. Later on based on that any claim is made by raising additional ground of appeal, It cannot be said to be not a bona fide action of assessee. Assessee cannot be prevented to do so. No malafide can be attributed on part of the assessee in raising these additional grounds. Hence, according to us, it passes the test of section 250(5) of the Act. Therefore, we hold that raising the additional ground by the assessee is not willful and unreasonable failure. The ld CIT (A) ought to have admitted the same. Fresh claims can be raised before the learned CIT (A) or not? - We find assessee has disclosed the preliminary facts with respect to the employee s stock option scheme in its annual accounts. The details with respect to each of the scheme, options granted during the year, exercised during the year and options lapsed during the year along with the closing balance of each of the scheme are shown. It also shows how in the books of accounts the treatments of stock options granted are made. Various assumptions in arriving in the fair valuation of the options showing risk free interest rate, expected life, volatility and expected dividend are also disclosed. The details also show the market price of the shares of the company at the time of grant of options. Therefore, it cannot be said that the primary facts of deduction for ESOP is not available on record. No doubt, the final computation of allowable deduction is required to be produced and verified by the assessee. However, absence of such allowable deduction at the time of assessment stage cannot deprive the assessee in raising the additional claim Had such deduction already computed at the time of filing of the return of income or during the course of assessment proceedings, the occasion would not have arisen, for making this additional claim before the learned CIT A by raising an additional ground - CIT A is not correct in not admitting the additional ground raised by the assessee in respect of deduction of discount on issue of shares Under ESOP scheme. In the result ground, number 6 of the appeal of the assessee is allowed. Disallowance of QIP expenses by noting whether the expenditure are subject to deduction of tax at source or not? - HELD THAT - We find that in this year the expenditure has not been incurred by the assessee and therefore the question does not arise of disallowance u/s 40 (a)(ia) and (i) of the act. In the result ground, number 6 of the appeal is not required to be adjudicated. Revaluation of securities held as stock in trade - method of valuation followed by the assessee is to value investment at cost of market value in line with the guidelines issued by the reserve bank of India on valuation of investment - AO held that the guidelines issued by the reserve bank of India are not determinative to grant any deduction to the assessee Under the income tax act. Therefore, the entire depreciation provided in the books was disallowed - HELD THAT - This issue has been decided in favour of the assessee by the learned CIT A but has given a direction to the AO to verify the accounting entries and the method of valuation adopted by the assessee. This issue has also been considered by the coordinate benches in assessee s own case for assessment year 2006 07 and 2007 08 wherein loss in Revelation of securities classified as held for trading in available for sale is held to be a revenue expenditure and allowable as deduction. We do not find any reason to sustain the order of the learned CIT A for the purpose of verification to the file of the learned AO wherein identical deduction is allowed to the assessee in earlier years also. It would be a futile exercise. Ground allowed. Deduction claimed u/s 36 (1) (viia) - why the deduction is disallowed to the assessee is that assessee does not have any rural branches? - HELD THAT - As we find that deduction u/s 36 (1) (viia) of the act is not restricted to the banks only having the rural branches - As relying on ING VYSYA BANK LTD. 2014 (9) TMI 44 - ITAT BANGALORE lower authorities were not justified in denying deduction u/s 36 (1) (viia) of the act. Therefore, we set-aside the whole issue back to the file of the learned assessing officer to compute the deduction allowable to the assessee Under this Section and grant the same. In view of this ground of the appeal is allowed. Amortization of premium paid for acquisition of held to maturity securities - HELD THAT - We fully agree with the learned authorised representative that identical issue has been decided by the honourable Bombay High Court in favour of the assessee in CIT versus HDFC bank Ltd 2014 (7) TMI 997 - BOMBAY HIGH COURT

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance of deduction under Section 35D of the Income Tax Act.
3. Disallowance of brokerage paid on acquisition of investments.
4. Non-admission of additional ground of appeal regarding Employee Stock Option Plan (ESOP) deductions.
5. Deduction under Section 36(1)(viia) of the Income Tax Act.
6. Disallowance of broken period interest and amortization of premium on Held to Maturity (HTM) securities.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The assessee claimed exempt dividend income and disallowed a sum of ?9,27,255/- under Section 14A. The Assessing Officer (AO) computed disallowance as per Rule 8D, resulting in ?3,65,18,997/-. The CIT(A) deleted the disallowance, stating that AO did not record satisfaction as required under Section 14A(2). The Tribunal upheld this view, citing the Supreme Court's decision in Maxopp Investment Ltd. vs. CIT, which mandates AO to record satisfaction before invoking Rule 8D.

2. Disallowance of deduction under Section 35D of the Income Tax Act:
The assessee claimed ?2,82,80,291/- as a deduction under Section 35D for expenses incurred in connection with Qualified Institutional Placement (QIP). The AO disallowed this, stating QIP does not amount to public subscription. The CIT(A) confirmed the disallowance. The Tribunal, referencing the assessee's own case for AY 2010-11 and the decision in DCIT vs. Deccan Chronicle Holdings Ltd., held that QIPs qualify as public subscription. However, the matter was remanded to AO to verify if the shares were issued through public subscription.

3. Disallowance of brokerage paid on acquisition of investments:
The AO disallowed brokerage expenses related to unsold securities, treating them as capital expenditure. The CIT(A) allowed the deduction, stating that since the securities are stock-in-trade, all related expenses are revenue in nature. The Tribunal upheld this view, referencing the Supreme Court's decision in CIT vs. Nawan Shahar Co-operative Bank Ltd.

4. Non-admission of additional ground of appeal regarding ESOP deductions:
The assessee raised an additional ground for deduction of ?143,24,22,420/- under ESOP. The CIT(A) did not admit this, citing willful omission. The Tribunal disagreed, stating that judicial precedents available after the filing of the return provided a basis for the claim. The Tribunal directed the AO to examine and allow the claim as per law.

5. Deduction under Section 36(1)(viia) of the Income Tax Act:
The AO disallowed ?115,677,762/- claimed under Section 36(1)(viia), stating it applies only to rural branches. The CIT(A) directed AO to verify if the assessee had rural branches. The Tribunal held that the deduction is not restricted to banks with rural branches, referencing various judicial precedents. The matter was remanded to AO for verification and allowance of the claim.

6. Disallowance of broken period interest and amortization of premium on HTM securities:
The AO disallowed these expenses, treating HTM securities as capital assets. The CIT(A) allowed the deductions, following the Bombay High Court's decision in CIT vs. HDFC Bank Ltd. The Tribunal upheld this, stating that RBI guidelines mandate such deductions.

Conclusion:
The Tribunal provided detailed directions on each issue, emphasizing the need for AO to follow judicial precedents and statutory requirements. The appeals were disposed of with specific instructions for reassessment and verification where necessary.