2022 (9) TMI 1640 - AT - Income Tax

Addition in respect of unrealized interest on borrower accounts classified as non-performing accounts under RBI directions - AO rejected the claim of the assessee that exceptions should be provided as per RBI guidelines and accordingly he added the amount being the interest on NPA/NPI not recognized by the assessee as income in view of RBI guidelines ignoring the provision of section 43D read with rule 6 EA of rules - HELD THAT - We find that identical issue has been adjudicated by the Tribunal in the case of the assessee for A.Y. 2008-09 2020 (2) TMI 1350 - ITAT MUMBAI held that where the AO has not contested that the policy adopted by the assessee is not in accordance with RBI guidelines, the incidence of taxation of interest on bad and doubtful debts will be either when the same is credited to the profit and loss account for the year or in the year in which it is actually received. Mere crediting of the interest to a reserve cannot be said to be an incidence by which the said interest could be charged to tax. Hence, we delete the addition of interest income and allow this issue of assessee's appeal. Addition in respect of recovery of bad debts written off in earlier years - assessee claimed that amount was not claimed as deduction u/s 36(1)(vii) of the Act and therefore the subsequent recovery is not taxable u/s 41(1) - HELD THAT - As decided in case of the state Bank of India for A.Y. 2008-09 2020 (2) TMI 1350 - ITAT MUMBAI has in principle accepted the contention of the assessee that if no claim has been made for bad debt written off u/s 36(1)(vii) of the Act in respect of the amount in dispute, then no addition could have been made u/s 41(1) of the Act, however matter has been restored to the file of the Ld. A.O. for verification of the claim of the assessee. Disallowance u/s 14A r.w.r. 8D(2)(iii) - A.O. noted that assessee in the revised return of income filed has suo moto made disallowance of 0.5% of average investment generating exempt income and thus assessee itself has accepted the provisions of section 14A of the Act read with rule 8D of the rules - HELD THAT - We find that Ld. CIT (A) after considering the submission of the assessee and decision of the Hon ble Bombay High Court in the case of HDFC Ltd (supra) 2016 (3) TMI 755 - BOMBAY HIGH COURT held that AO has not brought anything on record to prove that interest bearing funds have been utilized for making investments. As discussed above, the Hon'ble Bombay High Court in the case of HDFC Bank Ltd has held that once the issue is settled by it in the case of HDFC Bank Ltd, there is now no need for the assessee to establish with evidence that amounts which have been invested in the tax free securities have come out of interest free funds available with it. This is because once the assessee is possessed of interest free funds sufficient to make the investment in tax free securities; it is presumed that it has been paid for out of the interest free funds. Disallowance u/s 14A read with rule 8D(2)(iii) of the rules , is restored to the file of the Ld. A.O. for fresh computation in view of the finding in the case of Maxopp investment Ltd. 2018 (3) TMI 805 - SUPREME COURT and decision of Era Infrastructure P. (Ltd.) 2022 (7) TMI 1093 - DELHI HIGH COURT The ground No. 3 of the appeal of the assessee is accordingly allowed for statistical purposes. Disallowance for interest paid on Innovative Perpetual Debt Instruments (IPDI Bonds) - We set aside the finding of the Ld. CIT (A) on the issue in dispute and direct the Ld. A.O. to delete the disallowance of interest which was made u/s 36(1)(iii). Disallowance of interest on securities (difference between accrual and due method) - HELD THAT - The relevant finding of the Tribunal on the issue in dispute for A.Y.2008-09 2020 (2) TMI 1350 - ITAT MUMBAI this ground of appeal is covered in favour of the assessee vide the aforementioned orders of the Tribunal and Bombay High Court. The right to receive interest on securities arises on due date only, which falls after the accounting year and, accordingly, it cannot be taxed in the accounting year itself. Hence, we decide this issue in favour of assessee and accordingly, this ground of Revenue's appeal is dismissed. Addition of broken period Interest expenses to be deleted. Addition for the loss on revaluation of investment/provision for amortization of premium paid on securities held HTM category - HELD THAT - As decided in A.Y.2005-06 2022 (3) TMI 1187 - ITAT MUMBAI we find no scope to interfere into the findings returned by the Ld. CIT (A) by holding the securities as stock in trade and loss on revaluation as revenue expenditure.

Summary

Issues Involved:

1. Taxation of unrealized interest on non-performing assets (NPAs).
2. Taxability of recovery of bad debts not claimed as a deduction.
3. Disallowance under Section 14A of the Income Tax Act.
4. Disallowance of interest paid on Innovative Perpetual Debt Instruments (IPDI) bonds.
5. Taxation of interest income on securities on accrual vs. due basis.
6. Treatment of broken period interest as revenue or capital.
7. Amortization of premium on securities held under the "Held to Maturity" (HTM) category.

Detailed Analysis:

1. Taxation of Unrealized Interest on NPAs:
- The Tribunal addressed the issue of taxing unrealized interest on NPAs, where the assessee argued that such interest should not be taxed until actually received, following RBI guidelines. The Tribunal referenced past decisions, notably the case of American Express Bank Ltd., where it was held that interest on NPAs should not be taxed until credited to the profit and loss account or received. The Tribunal followed this precedent and directed the deletion of the addition related to unrealized interest on NPAs.

2. Taxability of Recovery of Bad Debts:
- The issue was whether the recovery of bad debts, which were not claimed as a deduction under Section 36(1)(vii), should be taxed under Section 41(1). The Tribunal referenced prior decisions, including the case of State Bank of Mysore, which held that if no deduction was claimed, Section 41(1) could not be invoked. The Tribunal remanded the issue back to the Assessing Officer (A.O.) for verification, allowing the appeal for statistical purposes.

3. Disallowance under Section 14A:
- The Tribunal dealt with the disallowance under Section 14A concerning investments yielding exempt income. The Tribunal upheld the CIT(A)'s decision to delete disallowance under Rule 8D(2)(ii) due to sufficient interest-free funds, following the Bombay High Court's decision in HDFC Bank Ltd. However, for Rule 8D(2)(iii), the Tribunal remanded the issue back to the A.O. for apportionment of expenses between taxable and non-taxable income, following the Supreme Court's decision in Maxopp Investment Ltd.

4. Disallowance of Interest on IPDI Bonds:
- The Tribunal examined whether interest on IPDI bonds, considered quasi-equity, should be disallowed. It referenced a decision in Tata Power Co. Ltd., which held that perpetual bonds are not equity and allowed the deduction of interest. Following this precedent, the Tribunal directed the deletion of the disallowance of interest on IPDI bonds.

5. Taxation of Interest on Securities:
- The Tribunal addressed the issue of taxing interest on securities on an accrual vs. due basis. It followed past decisions and the Bombay High Court's ruling that interest should be taxed on a due basis, not merely accrued. The Tribunal upheld the CIT(A)'s decision to delete the addition of interest income on an accrual basis.

6. Treatment of Broken Period Interest:
- The Tribunal considered whether broken period interest should be treated as revenue or capital. It followed previous Tribunal decisions and the Bombay High Court's ruling, which treated broken period interest as revenue expenditure. The Tribunal upheld the CIT(A)'s decision to delete the addition related to broken period interest.

7. Amortization of Premium on HTM Securities:
- The Tribunal examined the amortization of premium on HTM securities, which the assessee claimed as allowable under RBI guidelines. The Tribunal referenced past decisions, including those upheld by the Bombay High Court, which treated such amortization as allowable expenditure. The Tribunal upheld the CIT(A)'s decision to allow the amortization of premium on HTM securities.

Conclusion:
The Tribunal allowed the appeal of the assessee partly for statistical purposes and dismissed the appeal of the Revenue, following established precedents and judicial interpretations in similar cases.