2023 (2) TMI 1005 - AT - Income Tax

Provision for Standard Asset qua deduction u/s 36(1)(viia) - AO noted that assessee bank has claimed deduction for provisions under section 36(1)(viia) of the Act in respect of bad and doubtful debts though is available in respect of 7.5% of the total income and 10% of the rural branches - HELD THAT - As relying on STATE BANK OF INDIA case 2020 (2) TMI 1350 - ITAT MUMBAI the issue in appeal in the case of the assessee is squarely covered by the said decision. Therefore following the decision of the co-ordinate bench we direct the Assessing Officer to allow the claim of deduction of the assessee under section 36(1)(viia) in respect of standard assets. This ground of appeal of the assessee is allowed. Disallowance of bad debt from credit card business u/s 36(1)(vii) - HED THAT - As relying on ICICI Bank Ltd 2022 (12) TMI 1373 - ITAT MUMBAI case we direct the Assessing Officer to allow the claim of deduction under section 36(1)(vii) read with section 36(2) in respect of bad debts claimed on credit cards. Addition u/s 43D - interest in respect of NPAs on receipt basis - AO observed that as per guidelines of RBI non performing assets are recognized for a default of 3 months or more however as per the I.T. Rules the period of 3 months has not been recognized anywhere - HELD THAT - As relying on ICICI Bank Limits vs ACIT 2022 (8) TMI 1346 - ITAT MUMBAI we direct the Assessing Officer to allow the claim of deduction under under section 43D r.w.r. 6EA of I.T. Rules in respect of interest on NPAs. Disallowance of Administrative expenses u/s 14A r.w.r. 8D(2)(iii) - HELD THAT - We direct the Assessing Officer to disallow 0.5% of the average value of investment excluding strategic investments for the making of disallowance as directed in the decision of ITAT in assessee s own case 2019 (11) TMI 853 - ITAT MUMBAI for A.Y.2013-14 2014-15. This ground of the assessee is partly allowed. Disallowance under rule 8D(2)(ii) of Interest expenses - HELD THAT - Assessee had share capital and reserves which was far in excess of the investments made by the assessee in the instruments yielding exempt income. Therefore following the decision of HDFC Bank Ltd 2016 (3) TMI 755 - BOMBAY HIGH COURT and decision in the case of Reliance Utilities Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT a presumption would come into play that the investment in the instruments yielding exempt income has been made out of own funds. Therefore disallowance under rule 8D(2)(ii) cannot be made and on following the decision of the co-ordinate bench in assessee s own case. Therefore we do not find any infirmity in the decision of the Ld.CIT(A). Therefore this ground of appeal of the Revenue stands dismissed. Nature of expenditure - broken period interest on HTM (held to maturity) - revenue or capital expenditure -HELD THAT - As decided in 2019 (11) TMI 853 - ITAT MUMBAI the closing balance has been shown in the balance sheet. The interest income on Government securities and the profit / loss has been offered in the return of income for the current year. Similar treatment is consistently offered by the assessee in earlier years. The assessee also relied on the CBDT Circular No.18/2015 dated 02.11.2015. The Ld CIT(A) accepted the contention of the assessee granted relied to the assessee by relying on the CBDT circular and on the decision of Citi Bank NA 2008 (8) TMI 766 - SUPREME COURT and American Express International Banking Corporation 2002 (9) TMI 96 - BOMBAY HIGH COURT We have noted that this issue is also covered in favour of the assessee . Expenditure incurred on ESOP - AO noticed that assessee has claimed an amount on the ground that the liability on account of ESOP has been crystallized in the year when the ESOP have been exercised during the year under assessment - AO was of the view that it cannot be claimed as an expenditure wholly and exclusively laid out or expended for the purpose of trade - HELD THAT - As decided in assessee own case 2019 (11) TMI 853 - ITAT MUMBAI we dismiss the ground of the Revenue.

Summary

Issues Involved:
1. Provision for Standard Asset qua deduction under section 36(1)(viia)
2. Disallowance of Bad Debts Pertaining to Credit Cards
3. Interest on NPA under section 43D read with Rule 6EA
4. Invalid Re-assessment Proceedings
5. Disallowance of Administrative Expenses under section 14A read with Rule 8D(2)(iii)
6. Deletion of Disallowance under Rule 8D(2)(ii) of Interest Expenses
7. Allowing of Broken Period Interest
8. Allowing Expenditure Incurred on ESOP

Detailed Analysis:

1. Provision for Standard Asset qua deduction under section 36(1)(viia):
The assessee bank claimed deductions for provisions under section 36(1)(viia) of the Act for bad and doubtful debts, including standard assets. The Assessing Officer disallowed the provision for standard assets, stating it is not included in bad and doubtful debts. The ITAT referenced a previous decision in State Bank of India vs DCIT, which allowed such provisions, stating that provisions for standard assets are part of overall provisions for bad and doubtful debts. Therefore, the ITAT directed the Assessing Officer to allow the deduction under section 36(1)(viia) for standard assets.

2. Disallowance of Bad Debts Pertaining to Credit Cards:
The Assessing Officer disallowed the bad debt claimed for credit card business, arguing it is not part of banking or money lending business. The ITAT referenced a previous decision in ICICI Bank Ltd, which considered credit card dues as a form of unsecured loans within the scope of banking business. Consequently, the ITAT directed the Assessing Officer to allow the deduction under section 36(1)(vii) read with section 36(2) for bad debts on credit cards.

3. Interest on NPA under section 43D read with Rule 6EA:
The Assessing Officer added interest income from NPAs for the period of 91 to 180 days, arguing that Rule 6EA requires recognizing interest on NPAs overdue for 180 days or more. The ITAT referenced decisions in Union Bank of India and other cases, which held that banks must follow RBI guidelines, which prescribe a 90-day period. Therefore, the ITAT directed the Assessing Officer to allow the deduction under section 43D read with Rule 6EA for interest on NPAs.

4. Invalid Re-assessment Proceedings:
This legal ground was left open as the appeals were allowed on merit.

5. Disallowance of Administrative Expenses under section 14A read with Rule 8D(2)(iii):
The Assessing Officer disallowed administrative expenses related to exempt income, applying Rule 8D(2)(iii). The ITAT referenced its own decision in the assessee's case for previous years, directing the Assessing Officer to disallow 0.5% of the average value of investments, excluding strategic investments.

6. Deletion of Disallowance under Rule 8D(2)(ii) of Interest Expenses:
The Assessing Officer disallowed interest expenses under Rule 8D(2)(ii), arguing that the assessee did not prove investments were made from own funds. The ITAT referenced the jurisdictional High Court decisions in HDFC Bank Ltd and Reliance Utilities & Power Ltd, which presumed investments were made from own funds if reserves exceeded investments. Therefore, the ITAT upheld the CIT(A)'s decision to delete the disallowance.

7. Allowing of Broken Period Interest:
The Assessing Officer treated broken period interest on HTM securities as capital expenditure. The ITAT referenced its own decision in the assessee's case and other cases, which allowed such interest as revenue expenditure. Therefore, the ITAT upheld the CIT(A)'s decision to allow the broken period interest.

8. Allowing Expenditure Incurred on ESOP:
The Assessing Officer disallowed the ESOP expenditure, arguing it is not related to business profits. The ITAT referenced its own decision in the assessee's case and the Special Bench decision in Biocon Ltd, which allowed ESOP expenses as revenue expenditure. Therefore, the ITAT upheld the CIT(A)'s decision to allow the ESOP expenditure.

Conclusion:
The appeals of the Revenue were dismissed, and the appeals filed by the assessee were partly allowed. The ITAT directed the Assessing Officer to allow various deductions and expenses claimed by the assessee, following precedents and judicial decisions. The order was pronounced on 16/02/2023.