2025 (2) TMI 328 - AT - Income Tax

Quantum of deduction to be allowed u/s. 36(1)(viii) - HELD THAT - CIT(A) has noted that deduction u/s. 36(1)(viii) is permitted on infrastructure loan also and has allowed the claim. Also it is an admitted position that Revenue has not contested this allowance by ld. CIT(A). Accordingly we allow the claim of the assessee on this aspect for Assessment Year 2008-09 in order to rectify an inadvertent conclusion drawn of disallowing the claim though referring to the reasoning of the predecessor as the basis. Grant of deduction u/s. 36(1)(viii) in respect of interest arising from securitization of debt or such income earned - It is a fact on record that assessee is engaged in eligible business and its receivables are in respect of loans granted for housing purposes part of which has undergone securitisation arrangement. In this respect risk continues to remain with the assessee since in the event of default by the borrowers it is assessee who is responsible to make good the default to banks. Securitisation amount represents nothing but interest on housing loans which is discounted to the present net value. Hence this surplus of securitisation amount is the income of the assessee from long term housing loans disbursed by it for which it has received its discounted present value. Income earned by the assessee through PTC-B securitisation also represents loans originating from other housing finance companies who also have their underlying assets in the form of long-term housing finance. We allow the claim of deduction u/s. 36(1)(viii) on the aspect. Disallowance u/s. 14A r.w.r.8D - HELD THAT - In the given set of undisputed and verifiable facts whereby owned funds i.e. share capital and reserves and surplus available with the assessee far exceeded the amounts invested in securities yielding tax free income and in view of the decision of Co-ordinate Bench in assessee s own case for Assessment Year 1998-99 and 1999-2000 no interest cost needs to be disallowed against the exempt income. Disallowance of other expenses/administrative expenses - No suo moto disallowance is made by the assessee u/s. 14A while computing its total income and the period being dealt is prior to rule 8D brought on the statute. In absence of any prescribed methodology for computing the disallowance u/s. 14A the approach had been to resort to reasonableness of expenditure incurred for earning the exempt income. Such approach of reasonableness has been the bone of contention between the Revenue and the assessee for the purpose of disallowance u/s. 14A. We direct AO to allocate other expenses based on the stated ratio (directed to be re-computed) for all the years prior to introduction of Rule 8D i.e. Assessment Year 2002-03 to 2007-08. Accordingly grounds raised by both assessee and revenue are partly allowed. Period relating to post introduction of Rule 8D i.e. for Assessment Year 2008-09 to 2020-21 - suo moto disallowance computed by the assessee - allocation of interest which does not relate to any specific activity but is forming part of common borrowing needs for the purpose of disallowance u/s. 14A - it is evident that assessee had sufficient owned funds from which investments were made yielding tax-free income. By following consistency on this aspect of the issue we hold that no disallowance is warranted towards interest allocation which does not relate to any specific activity but forms part of common borrowing since assessee had sufficient owned funds. We also place our reliance on the decision of South Indian Bank 2021 (9) TMI 566 - SUPREME COURT Disallowance of administrative expenses - recording of satisfaction Mandation - We hold that ld. Assessing Officer has erred in invoking the provisions of Rule 8D for making disallowance of administrative expenses in absence of recording of objective satisfaction having regard to the accounts of the assessee and therefore the disallowance u/s. 14A is to be restricted to the amount of suo moto disallowance made by the assessee. It is important to note that the finding arrived here for these Assessment Years is not on the same footing of reasonableness applied in Assessment Years prior to introduction of Rule 8D but for non-recording of objective satisfaction having regard to the accounts of the assessee for rejecting the suo moto disallowance made by the assessee. AO is directed to take into account investments which have actually yielded exempt income during the year for the purpose of making disallowance u/s. 14A. For this purpose we draw our force from the decision of Vireet Investments Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI Increasing the book profits computed u/s. 115JB by the amount disallowed u/s. 14A - CIT(A) correctly held that amount disallowed u/s. 14A r.w.r. 8D cannot be added to the book profit computed u/s. 115JB. Facts relating to the issue under consideration are undisputed. We note that grounds raised by the Revenue are no longer res integra as held in plethora of decisions that disallowance made u/s. 14A r.w.r.8D under the normal provisions of the Act cannot be read into the provisions of Section 115JB for computing book profit since there is no express provision in clause (f) of Explanation 1 to Section 115JB to this effect. Discount on grant of stock options to employees - HELD THAT - The issue is covered by the order of Co-ordinate Bench of ITAT Mumbai in assessee s own case for Assessment Years 2000-01 and 2001-02 2024 (7) TMI 832 - ITAT MUMBAI wherein claim of the assessee has been allowed. Computation of amount eligible for deduction u/s. 80M - dividend income received from shares - HELD THAT - For an action of pro-rata allocation we refer to the provisions of Section 57(iii) and find that ld. Under the said section Assessing Officer has no power to bifurcate on pro-rata basis and deduct a part of it from the gross dividend income. There is no scope for any estimation of expenditure and hence no scope for allocation of notional expenditure. The deductions contemplated are the expenditure laid out or expended wholly and exclusively for the purpose of making or earning the said dividend income thereby referring to actual expenditure. Further from reading of section 80AB we note that it is not open for the Assessing Officer to deduct expenditure attributable to income under one head from the income under another head. Before us nothing has been brought on record by the Revenue to demonstrate identifiable expenditure actually incurred for the purpose of making or earning the said dividend income. Accordingly keeping the aforesaid provisions of the Act in juxtaposition authorities below are not justified in reducing the qualifying amount of income eligible u/s. 80M by making pro-rata allocation towards administrative expenditure. Thus grounds taken by the Revenue are dismissed and those by the assessee are allowed. Deduction of income by the amount credited to lease equalization account - HELD THAT - In the year under appeal before us i.e. Assessment Year 2003-04 ld. CIT(A) has relied upon the first 2002-03 Year 2002-03 but denied the claim of assessee of reducing the taxable income by the amount credited to lease equalisation account. Considering the facts as stated above for the purpose of consistency we find it appropriate to remand this issue back to the file of ld. Assessing Officer for reconsideration as directed by ld. CIT(A). Assessment of amount withdrawn from reserve created u/s. 36(1)(viii) - HELD THAT - From the audited financial statements of the assessee as extracted above it is an admitted fact that assessee has bifurcated the creation of special reserve required u/s. 36(1)(viii) owing to the amendment brought in the said section along with corresponding amendment u/s. 41(1A) which are effective from AY 1998-99. Assessee had explained this aspect before the ld. AO by clarifying that special reserve had been created over the years out of the profits and Special Reserve No. I Account relates to amount which had been transferred up to financial year 1997-98. Thus it is not as though assessee has surreptitiously transferred any amount nor it is a case of Revenue that transfer of such fund from the special reserve was in any manner contrary to any law. No infirmity in the conclusion drawn by the ld. CIT(A) granting relief to the assessee. Disallowance of entrance fees and subscription paid to clubs -Assessee has claimed deduction u/s. 37(1) towards club entrance fees and subscription to enable the benefit of such facility to its employees - HELD THAT - We note that though entrance fee is a one-time payment regular payment of annual subscription is an essential condition for continuance of such club membership. Thus unless such annual subscription is paid there is no enduring benefit to the assessee. Accordingly it cannot be treated as capital expenditure. Decision of Otis Elevators 1991 (4) TMI 53 - BOMBAY HIGH COURT was considered and followed in the case of CIT v. Groz Beckert Asia Ltd. 2013 (2) TMI 375 - PUNJAB HARYANA HIGH COURT wherein it allowed the deduction of expenditure by holding it as not capital in nature. Claim made by the assessee is thus allowed. Exemption u/s 54EC in respect of capital gains arising on depreciable assets - HELD THAT - Assessee is entitled to exemption u/s. 54E in respect of capital gains arising on transfer of a capital asset on which depreciation has been allowed. It may be noted that deduction u/s. 54E is pari-materia to the one u/s. 54EC both requiring the assessee to make investment in specified asset/certain bonds within a period of six months after the date of transfer of the asset on which capital gain arises. In the present case it is a claim made by assessee u/s. 54EC and thus the aforesaid decision of V.S. Dempo Company Ltd. 2016 (10) TMI 62 - SUPREME COURT covers the case of the assessee in its favour. Respectfully following the same ground raised by the Revenue is dismissed. Disallowance of FCCB issue expenses - HELD THAT - Time of issue of the security i.e. FCCB was in the nature of a bond and not an equity share. Accordingly expenditure incurred should be allowed as revenue expenditure on the basis of factual position existing at the time of issue of the impugned security. Reliance was placed on decision of Reliance Natural Resource Ltd. 2019 (8) TMI 1615 - BOMBAY HIGH COURT wherein it was held that expense for issuing FCCB is an expense for raising loan hence revenue expenditure. Set-off of short-term capital loss - HELD THAT - We are of the view that assessee has the choice about setting off of short-term capital loss from one set of transaction against any other short-term capital gain irrespective of higher benefit accruing to the assessee on account of chargeability at a lower rate of tax. Accordingly we uphold the stance of the assessee that short-term capital loss is to be set off against the short-term capital gains which was chargeable to tax at 33.66%. Ground taken by the assessee is allowed and the one by Revenue is dismissed. Income from India Value Fund - According to AO assessee has not discharged its onus of explaining the said difference which according to him was on account of cost incurred by the fund in relation to such income and the relevant investments in respect of which assessee had not passed entries in the books of account - HELD THAT - According to the assessee the difference is on account of cost incurred by India Value Fund for which assessee had not passed certain entries in its books of account. Assessee has reported the income as certified by India Value Fund in terms of Form 64 which is not in dispute. However for the difference assessee has expressed its inability to explain the same owing to passage of time. In the given set of facts and circumstances what the assessee has returned is the correct amount of income as communicated by India Value Fund and nothing contrary has been placed on record to dis-prove the same except for the entry in the books of account. Income really accruing or arising to or received by the assessee as contained in section 115U(1) as long-term capital gain duly substantiated by communication received from India Value Fund as prescribed in Form 64.Thus we delete the addition. Addition on account of receipts as per the ITS details not found recorded in the books of account of assessee - HELD THAT - We note that assessee had discharged its onus by reconciling substantial amount of ITS/AIR data with its books of account. No addition can be made solely on the basis of ITS/AIR information more particularly when assessee denies receipt of such income and for which the onus lies on the AO to prove that assessee in fact received such income. Accordingly we hold that addition made by AO on the basis of ITS/AIR information is not sustainable. The same is deleted. Ground taken by the assessee is allowed. Capital gains in respect of sale of property - HELD THAT - We note that in the third proviso to Section 50C comparison has to be made between the value adopted or assessed by the stamp valuation authority and 110% of the consideration received or accruing as per sub-section (2) of the said section. However once the matter is referred to ld. DVO and valuation is arrived at the value as determined by the ld. DVO would be relevant for the purposes of the said section. Accordingly consideration as received by assessee falls within the range as permitted by the third proviso to section 50C. Consideration of Rs. 47, 14, 67, 550/- as received by it is deemed to be the full value of consideration. Long term capital gain computed by the assessee as tabulated above is thus accepted and ground raised by the assessee on this issue is allowed. Additional claim of the Assessee with regard to inadvertent suo moto disallowance made during the course of the assessment proceedings - HELD THAT - Dispute is only in respect of allowability of the claim made by assessee when made before the Assessing Officer without filing the revised return. We are in agreement with the view arrived at by ld. CIT(A) since Hon ble Supreme Court in the case of Goetze India Ltd. 2006 (3) TMI 75 - SUPREME COURT has stated that nothing impinges on the power of the appellate authorities to entertain such a claim of the assessee . Accordingly ground raised by the Revenue is dismissed. Refund of excess dividend distribution tax - HELD THAT - We refer to the provisions of section 115-O(1A) which provides that the amount referred to in sub-section (1) shall be reduced by amount of dividend received by the domestic company during the year if such dividend is received from its subsidiary and the subsidiary has paid the applicable DDT. Receipt of dividend from the subsidiaries is not in dispute as to fulfilment of conditions prescribed u/s. 115-O(1A). Drawing force from the decision of Torrent India Pvt. Ltd. 2013 (2) TMI 149 - GUJARAT HIGH COURT we do not find any infirmity in the findings arrived at by ld. CIT(A) of directing AO to grant refund of the excess DDT paid by the assessee. Accordingly ground raised the Revenue is dismissed. Transfer pricing adjustment in respect of specified domestic transactions covered by section 40A(2)(b) - HELD THAT - We note that there is no dispute in respect of impugned transactions falling within the definition of SDT under clause (i) of section 92BA prior to its omission. Since the said provision has been omitted by the Finance Act 2017 it has to be treated as if it never existed on the statute. This position stands accepted in the case of Texport Overseas Pvt. Ltd. 2019 (12) TMI 1312 - KARNATAKA HIGH COURT . Accordingly grounds taken by the Revenue are dismissed. Disallowance of year-end provisions - HELD THAT - As correctly helf by CIT(A) none of the provisions made represents ad-hoc provisions or are in respect of any unascertained liability. According to him assessee is regularly following the practice of year end provision for various expenses which is reversed on 1st April of next year and that expenses are considered on the basis of actual payment in the subsequent year placing reliance on HDFC Sales Pvt. Ltd. 2020 (9) TMI 868 - ITAT MUMBAI Increasing the book profits computed u/s. 115JB by the amount disallowed as year-end provisions - CIT(A) had allowed the claim of the assessee by holding that these are ascertained liabilities which are paid on actual basis in subsequent year and therefore no addition is warranted while computing book profit u/s. 115JB - HELD THAT - In the present case provision for expenses made by the assessee at the year-end are on a reasonable estimate basis having regard to past trends for which consistent accounting practice has been adopted by way of creating a provision at the year end and reversing the same on the first day of the next financial year so as to reflect true and fair state of affairs since assessee follows mercantile system of accounting. Such a practice has been followed by the assessee year on year basis in terms of generally accepted accounting practices. This issue has already been dealt with above whereby provision for expenses has been allowed negating the stance taken by ld. Assessing Officer of treating it as contingent liability. No infirmity in the findings arrived at by ld. CIT(A). Deduction in respect of expenditure incurred on Employee Stock Option Scheme ( ESOS ) - HELD THAT - This issue is no longer res integra as has been dealt by Co-ordinate Bench in the case of HDFC Bank Ltd. 2015 (9) TMI 1303 - ITAT MUMBAI with similar view taken in the case of Biocon Ltd. 2013 (8) TMI 629 - ITAT BANGALORE the same having been approved in CIT vs. Biocon Ltd. 2020 (11) TMI 779 - KARNATAKA HIGH COURT Thus on the claim of expenditure towards ESOS expenditure assessee gets a relief in its appeal against the original assessment made u/s. 143(3) by way of additional ground and at the same time its claim made in the assessment pursuant to giving effect to the appellate order is rejected while allowing the appeal of the Revenue. For other years as tabulated above grounds raised by the Revenue are dismissed and those by assessee are allowed. AO disputed the claim of bad debts written off u/s 36(1)(vii) for Assessment Year 2018-19 on the basis that no ledger accounts of the concerned parties have been placed on record which otherwise could have been examined for ascertaining the genuineness of the claim - HELD THAT - CIT(A) correctly after going through the provisions of the Act relating to this issue and documents provided by the assessee in respect of sample parties since volume being large with 624 parties/individuals having bad loans directed the ld. Assessing Officer to verify the claim and allow bad debts written off to the extent same could be linked to the provisions created up to 31.03.2016. For assessee failing to do so in enabling the said examination ld. Assessing Officer was further directed to adjust the bad debts written off against section 36(1)(viia)(d) account. While giving the said direction ld. CIT(A) arrived at a view that bad debts written off during Assessment Year 2018-19 should be allowed if the same is out of provisions created upto 31.03.2016 as well as if the same was never claimed as a deduction. In absence of fulfilment of this requirements bad debts written off should be adjusted against credit balance in the account relating to section 36(1)(viia)(d) and claim of bad debt should be allowed when the bad debts exceed the credit balance in the account created in respect of deduction u/s. 36(1)(viia)(d). Penalty imposed u/s. 271(1)(c) on disallowance on deduction u/s. 36(1)(viii) - HELD THAT - In the given set of facts and elaborate discussions already made in respect of deduction made u/s. 36(1)(viii) whereby certain components relating to the said deduction have been allowed and certain others disallowed respectfully following the decision of Reliance Petroproducts (P) Ltd. 2010 (3) TMI 80 - SUPREME COURT penalty imposed by ld. Assessing Officer u/s. 271(1)(c) on account of furnishing inaccurate particulars of income is deleted. Grounds raised by the assessee are thus allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The Tribunal considered multiple issues across 42 appeals filed by both the assessee and the revenue, which were consolidated for adjudication. The core issues include:

• Quantum of deduction under section 36(1)(viii) of the Income-tax Act, 1961.
• Disallowance under section 14A of the Act.
• Increasing book profits computed under section 115JB by the amount disallowed under section 14A.
• Discount on stock options (ESOP/ESOS) to employees.
• Computation of deduction under section 80M.
• Deduction of income credited to lease equalisation account.
• Assessment of amount withdrawn from reserve created under section 36(1)(viii).
• Disallowance of club entrance fees and subscriptions.
• Exemption under section 54EC for capital gains on depreciable assets.
• Disallowance of FCCB issue expenses.
• Set-off of short-term capital loss.
• Income from India Value Fund.
• Addition based on ITS details not recorded in books.
• Capital gains from property sale.
• Additional claims regarding inadvertent disallowances.
• Refund of excess dividend distribution tax (DDT).
• Transfer pricing adjustments on specified domestic transactions.
• Disallowance of year-end provisions.
• Increasing book profits by disallowed year-end provisions.
• Deduction for ESOS expenditures.
• Deduction of provision for bad and doubtful debts under section 36(1)(viia).
• Deduction of bad debts under section 36(1)(vii).
• Addition of interest on income-tax refund.
• Dropping penalty proceedings under section 270A.
• Penalty under section 271(1)(c) on disallowance under section 36(1)(viii).

ISSUE-WISE DETAILED ANALYSIS

I. Quantum of deduction under section 36(1)(viii)

The Tribunal addressed the eligibility of various income streams for deduction under section 36(1)(viii), including profits from housing loans for less than five years, non-residential loans, and temporary fund deployment. The Tribunal followed precedents set in earlier years, allowing deductions for housing loans of less than five years and temporary fund deployment but disallowing for non-residential loans. The allocation of expenses related to eligible and non-eligible income was also discussed, with directions for proper allocation based on final determined ratios.

II. Disallowance under section 14A

The Tribunal dealt with disallowance under section 14A both pre and post Rule 8D introduction. For pre-Rule 8D years, it was held that no interest disallowance was warranted due to sufficient owned funds. For post-Rule 8D years, the Tribunal emphasized the need for the Assessing Officer to record dissatisfaction objectively before invoking Rule 8D. It was held that administrative expenses disallowance should be restricted to the suo moto disallowance made by the assessee due to lack of recorded dissatisfaction by the Assessing Officer.

III. Increasing book profits under section 115JB

The Tribunal dismissed the Revenue's appeal to add disallowed section 14A amounts to book profits under section 115JB, following judicial precedents that disallowance under section 14A does not affect book profit computation under section 115JB.

IV. Discount on stock options (ESOP/ESOS)

The Tribunal allowed the assessee's claim for deduction of ESOS expenses, following precedents that such expenses are part of employee compensation costs and thus allowable under section 37(1).

V. Computation of deduction under section 80M

The Tribunal held that no interest expenditure should be allocated to dividend income for deduction under section 80M, as investments were made from owned funds. It also rejected pro-rata allocation of administrative expenses, emphasizing actual expenditure incurred for earning dividend income.

VI. Deduction of income credited to lease equalisation account

The Tribunal remanded the issue back to the Assessing Officer for reconsideration, following the approach taken in the previous year.

VII. Assessment of amount withdrawn from reserve under section 36(1)(viii)

The Tribunal upheld the CIT(A)'s decision that withdrawals from reserves created before the amendment to section 36(1)(viii) should not be taxed, following judicial precedents.

VIII. Disallowance of club entrance fees and subscriptions

The Tribunal upheld the CIT(A)'s decision allowing such expenses as business expenses, following judicial precedents that such expenses are not capital in nature.

IX. Exemption under section 54EC for capital gains on depreciable assets

The Tribunal upheld the CIT(A)'s decision allowing exemption under section 54EC, following judicial precedents that deem capital gains under section 50 do not change the nature of the asset.

X. Disallowance of FCCB issue expenses

The Tribunal allowed the assessee's claim for deduction of FCCB issue expenses as revenue expenditure, following judicial precedents that such expenses are for raising loans.

XI. Set-off of short-term capital loss

The Tribunal allowed the assessee's preference for setting off short-term capital loss against non-STT paid gains, emphasizing the assessee's entitlement under section 70(2).

XII. Income from India Value Fund

The Tribunal deleted the addition made by the Assessing Officer, holding that the income reported in Form 64 by the venture capital fund should be accepted.

XIII. Addition based on ITS details not recorded in books

The Tribunal deleted the addition made solely on ITS/AIR information, emphasizing that the onus is on the Assessing Officer to prove the receipt of income by the assessee.

XIV. Capital gains from property sale

The Tribunal accepted the assessee's computation of capital gains, holding that the consideration received falls within the permissible range under the third proviso to section 50C.

XV. Additional claims regarding inadvertent disallowances

The Tribunal upheld the CIT(A)'s decision allowing the assessee's claim made during assessment proceedings, following the Supreme Court's decision in Goetze India Ltd.

XVI. Refund of excess dividend distribution tax (DDT)

The Tribunal upheld the CIT(A)'s decision directing the refund of excess DDT paid, following judicial precedents and emphasizing the substantive law over technicalities.

XVII. Transfer pricing adjustments on specified domestic transactions

The Tribunal upheld the CIT(A)'s decision deleting the transfer pricing adjustments, following judicial precedents that the omission of the relevant clause means it never existed.

XVIII. Disallowance of year-end provisions

The Tribunal upheld the CIT(A)'s decision allowing year-end provisions, following judicial precedents that such provisions are not contingent liabilities.

XIX. Increasing book profits by disallowed year-end provisions

The Tribunal upheld the CIT(A)'s decision not to add disallowed year-end provisions to book profits under section 115JB, emphasizing that only contingent liabilities can be added.

XX. Deduction for ESOS expenditures

The Tribunal allowed the assessee's claim for ESOS expenditures, following judicial precedents that such expenses are allowable under section 37(1).

XXI. Deduction of provision for bad and doubtful debts under section 36(1)(viia)

The Tribunal upheld the CIT(A)'s decision allowing the deduction, emphasizing the assessee's eligibility under the amended provisions and the NHB's prudential norms.

XXII. Deduction of bad debts under section 36(1)(vii)

The Tribunal upheld the CIT(A)'s direction for verification by the Assessing Officer, emphasizing the distinct and independent nature of deductions under sections 36(1)(vii) and 36(1)(viia).

XXIII. Addition of interest on income-tax refund

The Tribunal dismissed the assessee's grounds as infructuous, noting that rectification orders had already addressed the issue.

XXIV. Dropping penalty proceedings under section 270A

The Tribunal dismissed the Revenue's grounds as premature and consequential to the quantum appeal.

XXV. Penalty under section 271(1)(c) on disallowance under section 36(1)(viii)

The Tribunal deleted the penalty imposed, following the Supreme Court's decision in Reliance Petroproducts, emphasizing that mere disallowance does not amount to furnishing inaccurate particulars.

SIGNIFICANT HOLDINGS

The Tribunal's significant holdings include:

• Reaffirmation of the principle that disallowance under section 14A does not affect book profit computation under section 115JB.
• Allowance of ESOS expenditures as deductible business expenses.
• Recognition of the retrospective nature of the third proviso to section 50C, allowing the assessee's computation of capital gains.
• Emphasis on the substantive law over technicalities in the context of excess DDT refund.
• Clarification that the omission of a statutory provision means it never existed, affecting transfer pricing adjustments.
• Reiteration that mere disallowance does not justify penalty under section 271(1)(c).