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TMI Blog2022 (9) TMI 1640X X X X Extracts X X X X X X X X Extracts X X X X ..... diting 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 - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MI 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. - Shri Om Prakash Kant (Account Member) And Ms. Kavitha Rajagopal (Judicial Member) For the Assessee : Shri Jeet Kamadar Ninad Patade. For the Department : Shri Kailash Kanojia. ORDER PER: OM PRAKASH KANT (AM) These cross appeals by the assessee and Revenue are directed against order dated 30/01/2018 passed by the Ld. CIT(Appeals)-5, Mumbai [in short the Ld. CIT(A)] for A.Y. 2015-16. 2. The grounds raised by the assessee in its appeal are reproduced as under: GROUNDS OF APPEAL Addition as per rule 6EA 1. The CIT (A) erred in confirming charging to tax unrealised interest of Rs. 3.86 crore in respect of borrower accounts classified as Non performing accounts under RBI directions even when collecting principal itself is uncertain and no inccine can be said to accrue therefrom. Recovery in respect of bad debts written off 2. The CIT (A) erred in confirming the taxing of recovery in respect of bad debts written off which was not allowed as deduction by erroneously relying on the decision of Karn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d facts of the case are that the assessee, M/s State Bank of Bikaner and Jaipur, now merged with the State Bank of India, is a public sector banking company, engaged in banking, treasury operations and other retail services. The assessee filed return of income for the year under consideration on 27/11/2015, declaring total income at Rs. 886,28,73,010/-. The return of income filed by the assessee was selected for scrutiny and statutory notices under the Income-Tax Act, 1961 (in short the Act) were issued and complied with. After considering the submission and verification of the details, the Ld. A.O. assessed total income at Rs. 3747,05,83,560/-. The details of addition/disallowances made by the Ld. A.O. are reproduced as under: Sr. No Particulars Rs. I. Business Income (as per ROI) 8,87,62,92,596 Add Interest accrued but not due 17,43,28,84,330 Broken period interest 9,33,17,00,000 Interest income from Nonperforming assets and non-performing investments 3,86,10,180 Recovery in written off accounts 92,38,01,731 Disallowance u/s 14A 41,75,73,740 Securities in HTM category 28,31,40,572 Interest on IPDI Bonds 18,00,00,000 Gross Total Income Less Deduction u/s chapter VI-A 1,34,19,587 T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to an account called Reserve for Doubtful Interest (RFDI) account. All subsequent interest accruals of such loans were credited to RFDI account and not to the profit and loss account. The assessee offered to tax the net amount credited to the RFDI account i.e. the interest accruals in the RFDI account net of recoveries. However, it was argued that such tax treatment leads to offering interest on nonaccrual loans to tax on accrual basis, even if the same is not credited to the profit and loss account. The Mumbai Tribunal 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. The aforesaid decision has been affirmed by the Bombay High Court in the case of DIT vs. American Express Bank Ltd [2015] 235 Taxman 85 (Bombay). In the present case the assessee argued that there is no credit entry in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the addition made by the Ld. A.O. 7. We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. Before us the Ld. Counsel of the assessee referred to the order of the Tribunal in the case of the state Bank of India for A.Y. 2008-09 in ITA No. 3644 and 4564/2016. The Tribunal in the said case 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. The relevant finding of the Tribunal (supra) is reproduced as under: We noted from the above arguments of both the sides and case law cited by the parties, that the issue is squarely covered by a decision of the Bangalore Bench of the Tribunal in the case of State Bank of Mysore Vs. DCIT [2009] 33 SOT 7 (Bangalore), now merged with assessee. We noted that the Tribunal in the case of State Bank of Mysore (supra) narrated the facts and the facts in the present case are exactly the same as in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee has not made claim under section 36(1)(vii) of the Act in this regard. Hence, we allow the claim of assessee but the matter is restored back to the file the AO for verification purposes. This issue of assessee's appeal is allowed for statistical purposes Respectfully following the finding of the Tribunal (supra) the issue in dispute in the year under consideration in the case of the assessee is also restored to the file of the Ld. A.O. for verification is directed by the Tribunal (supra). The ground No. 2 of the appeal of the assessee is accordingly allowed for statistical purposes. 7.1. The issue-in-dispute involved before us in above ground being identical to what has been adjudicated by the Tribunal (supra), respectfully following the same. The ground No. 2 of the appeal of the assessee is allowed and order Ld. CIT (A) is set aside on the issue-in-dispute. 8. The ground No. 3 of the appeal of the assessee relates to disallowance of Rs. 3,08,02,935/- u/s 14A of the Act read with Rule 8D(2)(iii) of Income-Tax rules, 1962 (insured the rules). The ground No. 3 of the appeal of Revenue also relates to disallowance of Rs. 38,67,70,805/- u/s 14A of the Act read with rule 8D( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investment, are contradictory to each other. The strategic investments are liable to disallowance as only benefit assessee derive is dividend income. (c) The disallowance u/s 14A needs to be made in respect of the investment of assessee in tax-free bonds in spite of the claim that interest income received from tax-free bond is incidental to the compliance of SLR norms of Reserve Bank of India and corresponding expenses are to be disallowed. 9.1 The Ld. A.O. recorded dissatisfaction on the correctness of the claim of the assessee invoking rule 8D of the rules and computed the disallowance in para 10.2(g) as under: Expenditure Disallowable U/s 14A relating to Rule 8D (ii) 38,67,70,805 Rule 8D (iii) 3,08,02,935 Total Disallowance u/s 14A rws Rule 8D 41.75,73,740 9.2 Thus the disallowance comprised of disallowance out of interest expenses in terms of rule 8D(2)(ii) at Rs. 8,67,70,805/- and under rule 8D(2)(iii) at Rs. 3,08,02,935/-, being 0.5% of average value of investment. 10 Before the Ld. CIT (A) the assessee mainly contended that (a) exemption u/s 10 is allowable on gross basis (b) the provision of section 14A applies only when expenditure is actually incurred(c) the disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D(2)(iii) of the rules of Rs. 3,08,02,935/- being 0.5% of the average value of the investment is concerned, it was confirmed following the third member bench ITAT Mumbai in the case of DH Securities Private Limited (supra). 11. Before us, regarding the disallowance of Rs. 38,67,70,805/- u/s 14A of the Act read with rule 8D(2)(ii), is concerned, the Ld. Departmental Representative submitted that assessee failed to correlate that investment in shares and securities which could yield exempted income were made out of the own/interest free funds and not out of the borrowed funds and therefore provisions of rule 8D(2)(ii) are squarely applicable in the case of the assessee. Whereas the Ld. Counsel of the assessee relied on the order of the Ld. CIT(A). 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) held as under: The Ld. 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 Ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 22 (supreme Court) and Tribunal third member bench decision in the case of S Vinod Kumar diamonds Robert Ltd versus DCIT reported in (2020) 118 taxmann.com 317 and Nimbus Communications Ltd versus ACIT reported in (2017) 85 taxmann.com 237. On the other hand, the Ld. DR submitted that in view of the amendment introduced by the Parliament in the Finance Act 2021 disallowance has to made as per rules even if same exceeds quantum of exempted income. 12. We have heard rival submission of the parties on the issue of disallowance of Rs. 3,08,02,935/- u/s 14A of the Act read with rule 8D(2)(iii) of rules. In view of the decision of the Hon ble Supreme Court in the case of Maxoop investment Ltd. (supra) the expenses incurred towards shares and securities held as stock in trade are also to be considered for disallowance u/s 14A of the Act real with rule 8D of rules, but those expenses has to be apportioned between the taxable income earned from sale or trading of those securities and non-taxable income earned by way of dividend. The relevant finding of the Hon ble Supreme Court is reproduced as under: 36) There is yet another aspect which still needs to be looked into. What happens when the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... main purpose is to trade in those shares and earn profits therefrom. However, we are not concerned with those profits which would naturally be treated as income under the head profits and gains from business and profession. What happens is that, in the process, when the shares are held as stock-in-trade, certain dividend is also earned, though incidentally, which is also an income. However, by virtue of Section 10 (34) of the Act, this dividend income not to be included in the total income and is exempt from tax. This triggers the applicability of Section 14A of the Act which is based on the theory of apportionment of expenditure between taxable and non-taxable income as held in Walfort Share and Stock Brokers P Ltd. case. Therefore, to that extent, depending upon the facts of each case, the expenditure incurred in acquiring those shares will have to be apportioned. 40) We note from the facts in the State Bank of Patiala cases that the AO, while passing the assessment order, had already restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 8D of the Rules and holding that section 14A of the Act would be applicable. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n ITA/204/2022 held that the amendment introduced to section by way finance Act, 2022 14A of the Act for disallowance even if the same exceeds exempted income, is prospective in nature and cannot be applied retrospectively. The relevant finding of the Hon ble Delhi High Court is reproduced as under: 8. Consequently, this Court is of the view that the amendment of Section 14A, which is for removal of doubts cannot be presumed to be retrospective even where such language is used, if it alters or changes the law as it earlier stood. 9. Though the judgment of this Court has been challenged and is pending adjudication before the Supreme Court, yet there is no stay of the said judgment till date. Consequently, in view of the judgments passed by the Supreme Court in Kunhayammed and Others vs. State of Kerala and Another, (2000) 6 SCC 359 and Shree Chamundi Mopeds Ltd. Vs. Church of South India Trust Association CSI Cinod Secretariat, Madras (1992) 3 SCC 1. the present appeal is dismissed being covered by the judgment passed by the learned predecessor Division Bench in PCIT vs. IL FS Energy Development Company Ltd (supra) and Cheminvest Limited vs. Commissioner of Income Tax-VI, (2015) 378 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Ld. A.O. relied on the decision of Hon ble Punjab and Haryana High Court in the case of Pepsu Road transport Corporation versus CIT reported in 130 ITR 18 (P H) wherein it is held that an element of refund or repayment is a must in case of concept of borrowing and if there is no obligation to refund the capital provided, the interest on such capital is not deductible u/s 36(1)(iii) of the Act. Accordingly, the Ld. A.O. held that in case of perpetual bonds, where the lender does not have authority to claim refund of the amount given, said amount cannot be held as borrowing and interest on such bonds was held disallowable u/s 36(1)(iii) of the Act. 14 On further appeal, the Ld. CIT (A) also upheld disallowance of the interest paid/payable in respect of perpetual bond holding them analogous to preference shares. The relevant finding of the Ld.CIT (A) is reproduced as under: I have considered the submissions made by the appellant and have perused the materials available on record. The appellant has requested to delete the impugned disallowance of Rs. 18,00,00,000/-, being the claim of interest paid on Innovative Perpetual Debt Instrument (IPDI). The appellant has made elaborate subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that there is no res judicata, as regards assessment orders, and assessments for one year may not bind the officer for the next year. This is consistent with the view of the Supreme Court that there is no such thing as res judicata in income-tax matters Raja Bahadur Visheshwara Singh v. CIT AIR 1961 SC 1062. Similarly, erroneous or mistaken views cannot fetter the authorities into repeating them, by application of a rule such as estoppel, for the reason that being an equitable principle, it has to yield to the mandate of law. A deeper reflection would show that blind adherence to the rule of consistency would lead to anomalous results, for the reason that it would engender the unequal application of laws, and direct the tax authorities to adopt varied interpretations, to suit individual assesses, subjective to their convenience, - a result at once debilitating and destructive of the rule of law. A previous Division Bench of this Court, in Rohitasava Chand v. CIT [2008] 306 ITR 242/ 171 Taxman 147 had held that the rule of consistency cannot be of inflexible application. 15 Before us, the Ld. Counsel of the assessee submitted that disallowance needs to be deleted on two grounds. Fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Board of Directors or shareholders was required. In view of the above discussion, we concur with the contention of the assessee that ratio in the case of Pepsu Road transport Corporation Ltd (supra) cannot be applied or the instant case. 16.2 However as far as finding of the Coordinate bench of Tribunal in the case of Tata Power Co Ltd (supra) is concerned, the Tribunal has in principle held that perpetual bond are not in the nature of equity and therefore quashed the revision proceedings passed by the Ld. PCIT, The relevant finding of the Tribunal (supra) is reproduced as under: Heard both the sides and perused the material on record. Assessment in the case of the assessee was completed by the Assessing Officer u/s 143(3) r.w.s 144C(13) of the I.T. Act, 1961 on 30.06.2017. The ld. Pr.CIT has held vide order u/s 263(3) of the Act, dated 28.03.2018 that assessment order passed u/s 143(3) r.w.s 144C(13) as erroneous insofar as it was prejudicial to the interest of revenue holding that the Assessing Officer was not correct in allowing the interest on perpetual debt instruments without examining and verifying the allowability of such expenditure. With the assistance of ld. represen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n call option exercising by company after the 10th year or any at the end of every year thereafter. It was also explained that the lenders were not entitled to share any surplus or bear any loss like shareholders. Debentures trustee were appointed to safeguard interest of the lenders. The assessee company had also stated on the basis of aforesaid discussion that it had borrowed fund for the purpose of its business and the interest on debenture was deductible in computing the income from profit and gains from business and profession. In the light of the above facts and after considering the detailed material furnished by the assessee during the course of assessment proceedings before the assessing officer we observe that the assessee has categorically explained to the assessing officer with relevant supporting material that it has issued unsecured perpetual non-convertible debentures and such lenders were not entitled to share any surplus or bear any loss like shareholders. These debentures were entitled for fixed interest @11.40% along with redemption after the 10th year. These facts and submissions were also brought to the notice of the ld. Pr.CIT during the course of proceedings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his predecessor in the A.Y. 2014-15 deleted the addition subject to verification of interest income offered on the due basis is brought to tax in the present assessment year. 17 Before us the Ld. DR relied on the order of the Ld. A.O. and submitted that interest income accrued as per section 5 of the Income-Tax Act, 1961 (in short the Act) has rightly been taxed by the Ld. A.O. in the year under consideration. 18. The Ld. Counsel of the assessee on the other hand submitted that issue in dispute has been consistently allowed in favour of the assessee by the Tribunal in the case of the State Bank of India for A.Y.2000-01; 2001-02; 2003-04; 2005-06 and 2008-09. He further submitted that Hon ble Jurisdictional Bombay High Court, on appeal filed by the Income-Tax Department against the decision of the Tribunal for A.Y.96-97, has also decided the issue in favour of the assessee by the order dated 01/08/2016. 19. We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. The relevant finding of the Tribunal on the issue in dispute for A.Y.2008-09 in ITA No. 3644 and 4563//2016 is reproduced under: We have heard rival contentions and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court was concerned with a case wherein the tax officer had taxed interest accrued but not due on securities held as on 31st March. The Bombay High Court held that right to receive the interest vested only on the due date mentioned in the securities and, hence, the same cannot be taxed since interest was not payable on the 31st March as per the terms of the said securities. The learned CIT DR referred to several decisions such as State Bank of Travancore Vs. CIT [1986] 158 ITR 102 (SC), U.P Chalchitra Nigam Ltd. Vs. CIT [2015] 370 ITR 379 (Allahabad) and Mahindra Telecommunication Investment P. Ltd Vs. ITO [2016] 69 taxmann.com 431 (Mumbai). He argued that the facts are not applicable to the present issue as in the said cases there was no dispute that as per the terms of contract between the parties, income had accrued but the dispute was with respect to its taxability based on the financial difficulty of the debtor parties. However, in the present case, the issue is with respect to whether the interest has become due and payable as per the terms of securities. The present is not a case wherein the right to receive the interest on securities exists and there is improbability of rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is entitled to interest from the last due date of interest to the date of the sale. The purchasing bank treats the broken period interest as expenditure and the selling bank treats the broken period interest received as income. During the year the assessee has claimed broken period interest expenditure of Rs. 933,17,00,000/- which has been disallowed by the Ld. A.O.. However, the Ld. CIT (A) has deleted the addition following the finding of his predecessor. 22. Before us, both the assessee and the Revenue agreed that issue in dispute is covered by the decision of the Tribunal in the case of the state Bank of India for earlier years. The relevant finding of the Tribunal (supra) in A.Y.2008-09 is reproduced as under: We noted that BPI refers to interest on Government and other approved securities relatable to the period from last due date (upto which interest was paid) till the date of purchase or sale. Thus, when the assessee purchases a security, it pays a price which is calculated having regard to two components, viz., the market price of security plus BPI to the seller. In this case, the assessee treats the BPI paid as expenditure. Similarly, when the assessee sells a security, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee was rejected by the Ld. A.O. holding that the RBI guidelines will not decide tax ability of the income. 25. The Ld. CIT(A), however following the finding of his predecessor, allowed the issue in dispute in favour of the assessee. The relevant finding of the Ld. CIT (A) is reproduced as under: I have considered the submissions of the appellant and perused the materials available on record. The appellant has requeste % to delete the impugned disallowance of Rs. 28,31,40,572/-, being loss on revaluation of investments/amortization of premium paid on securities in HTM categories. The appellant has made detailed submissions as above and the same have been considered carefully. From the records it is observed that similar issue had come up for consideration in the case of State Bank of India for AY 2014 15 and therein my Ld. Predecessor vide his above referred order dated 28.02.2018 has held as under. I have considered the appellant's submissions. This is a recurring issue and this issue was considered by CIT(A)in appellant's own case for A. Y. 2007-08 to 2011 12, by DRP in 2012-13 and by ITAT for A.Y. 1996-97 which are reproduced as under: After considering the rival su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r/o investments held in HTM category is an allowable deduction. This ground of appeal is therefore allowed The above decision of the CIT(A)/ITAT is considered. It is seen that the above facts are similar in this year also. Therefore, the above decision is followed and the claim of the appellant is allowed. This ground of appeal is allowed. Further, in the appellant's own case for AY 2014-15, my Ld. predecessor vide his above referred order dated 31.01.2018 has held as under. The facts if this year are similar to the facts of the preceding years. Following the above orders of the CIT (A) and the case laws discussed above, the Assessing Officer is directed to delete the addition made by him on account of disallowance of deduction on account of amortization of premium on purchase of securities under the 'Held To Maturity' category. Thus, ground of appeal no. 4 is allowed. 26. Before us, both the parties agreed that issue in dispute is covered in favour of the assessee by the order of the Tribunal in the earlier years including the order dated 22/03/2022 for A.Y.2005-06 in ITA No. 3685 and 4951/Mum/2013. The relevant part of the decision of the Tribunal (supra) is reproduce ..... X X X X Extracts X X X X X X X X Extracts X X X X
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