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TMI Blog2025 (2) TMI 530X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 - KARNATAKA HIGH COURT] Decided in favour of assessee. Disallowance u/s 14A - assessee had not allocated expenses related to the earning of exempt income as required under Section 14A r.w. Rule 8D - HELD THAT:- Section 14A of the Act, read with Rule 8D of the Rules, is applicable where the assessee is unable to determine or allocate the correct expenses incurred to earn exempt income. In the present case, CIT(A) relied solely on the judicial precedents and allowed the issue in favor of the assessee without duly considering the relevant facts. As per the ratio laid down in various case laws, the disallowance u/s 14A is required to be made, when the assessee has earned any exempt income. In the instant case, it is submitted that the interest free funds available with the assessee is more than the value of investments. In that case, no disallowance out of interest expenses is called for. However, disallowance may be called for from out of administrative expenses in terms of sec.14A - assessee may be provided with an opportunity to present the relevant facts before the AO. Accordingly, we set aside the order passed by Ld CIT(A) and restore this issue to his file for examining this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utilized for business purposes. The interest paid on IPDI, despite the instrument's hybrid nature, has been held to be deductible as it represents a cost of funds incurred in the ordinary course of banking business.
As in case of State Bank of India [2022 (9) TMI 1640 - ITAT MUMBAI] held that the interest on IPDI is an allowable deduction under Section 36(1)(iii), as the borrowings are directly linked to the business activities of the bank. In the present case, the Ld. CIT(A) upheld this view and rightly concluded that the addition of interest on IPDI under Section 36(1)(iii) is not warranted. Decided in favour of assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... s right in holding that the provisions of 36(1)(viia) of the Act do not apply to bad debts made by non rural branches particularly after insertion of explanation 2 after the renumbered explanation 1 to clause (vii) of subsection (1) of section 36 by the Finance Act 2013 with effect from 1 April 2014." vii) "Whether, on the facts and in the circumstances of the case and in law, the Ld.CIT(A) is justified in deleting the disallowance of payments of Rs. 25,00,000/- made on account of penalty imposed by RBI for not adhering guidelines of Banking Regulation Act.?" (viii) "Whether on the facts and in the circumstances of the case the Ld. CIT(A) erred in allowing the deduction claimed u/s 36(1)(iii) of the Act amounting to Rs. 70,63,39,532/ without appreciating that the lender has no authority to claim refund of the amount and the assessee has the discretion to redeem the bond and the amounts claimed to have been repaid are based on the call option exercised by the assessee? (ix) Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A), was right in restoring the issue for examining it afresh, ignoring the facts section 251(1)(a) of the Act does not provide p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in its books of account and subsequently claimed a deduction under Section 36(1)(viia) of the act. The Ld. AO rejected the assessee's claim on the grounds that, as per Reserve Bank of India (RBI) norms, NPAs could not be considered part of "bad and doubtful debts." Consequently, the Ld. AO made additions and disallowed the claimed deductions. The matter was carried in appeal before the Ld. CIT(A). The Ld. CIT(A) ruled in favor of the assessee, relying on the judgment of the Hon'ble Karnataka High Court in the case of ACIT vs Davangere District Central Co-operative Housing Society Ltd.430 ITR 29 (Kar.). The Ld. CIT(A) concluded that NPAs qualify as bad debts because such assets do not generate income, and their categorization as "provision for non-performing assets" is essentially equivalent to a provision for bad and doubtful debts. Accordingly, the addition made by the Ld. AO was deleted, and the deduction claimed by the assessee was allowed. A similar view was also taken by the Hon'ble Karnataka High Court in the case of Shri Siddheshwari Co-operative Bank Ltd. vs JCIT, 388 ITR 588 (Kar). 5.1. The Ld. DR did not strongly oppose the submissions made by the Ld. AR. 6. In v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urpose was to trade in those shares and earn profits there from and therefore section 14A of the Act was not attracted and expenditure could not be disallowed. 7.2. We have carefully considered the submissions of the rival parties. In the case of South Indian Bank Ltd. vs CIT (438 ITR 1, SC), the Hon'ble Supreme Court held that if an assessee can demonstrate that investments yielding exempt income were made out of their own funds and not from borrowed funds, no disallowance under Section 14A of the Act is warranted. Further, in the case of Punjab National Bank (449 ITR 468, Del), the Hon'ble Delhi High Court ruled that Section 14A cannot be invoked in the absence of exempt income earned during the relevant financial year. No disallowance can be made merely because investments capable of generating exempt income exist. Finally, in the judgment of the Hon'ble Supreme Court in Maxopp Investment Ltd. vs CIT, New Delhi (402 ITR 640, SC), it was held that where shares are held as stock-in-trade, the primary purpose is to trade in those shares and earn profits there from. However, if exempt dividend income under Section 10(34) of the Act is also earned in the process, the expenditure a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. We find that the Ld. CIT(A) has correctly examined and adjudicated the issue. The matter is squarely covered by the decision of the co-ordinate bench of the ITAT Bengaluru in the assessee's own case, reported in (2022) 3 TMI 113 (ITAT Bangalore). We see no infirmity in the order passed by the Ld. CIT(A). Further, the Ld. DR has not strongly opposed the submissions of the assessee and has failed to provide any contrary judgments to support the revenue's case. Accordingly, Grounds Nos. (v) and (vi) of the revenue's appeal are dismissed. 9. Penalty paid to RBI The penalty paid to Reserve Bank of India (RBI) amount to Rs. 25 lakhs was duly disallowed by the Ld.AO under section 37 of the Act. In argument, the Ld.AR relied on the impugned appeal order. The relevant part of the said order is extracted as below: - "6.2.1.1. This issue is settled in favour of the Appellant Bank by the following decisions: S.No. Name of the Party Citation Annexure No. 1 CIT vs Stock & Bond Trading Company 2011 (10) TMI 172 - BOMBAY HIGH COURT 13 2 IDBI Bank Ltd vs DCIT 2021 (2) RMI 608 ITAT MUMBAI 14 3 DCIT vs Bapunagar Mahila Co-op Bank Ltd 2015 (7) TMI 472 ITAT AHMEDB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Market Ltd. in Income Tax Appeal (L) No.475 of 2011 dated 28th July, 2011. Hence, the first question cannot be entertained. 3. As regards the second question is concerned, the finding of fact recorded by the CIT (A) and upheld by the ITAT is that the payments made by the Assessee to the Stock Exchange for violation of their regulation are not an account of an offence or which is prohibited by law. Hence, the invocation of explanation to section 37 of the Income Tax Act, 1961 is not justified in our opinion, in the facts and circumstances of the present case, no fault can be found with the decision of the ITAT. Accordingly, the second question cannot be entertained. 4 Appeal is accordingly disposed of with no order as to costs." 10. We considered the order of the Hon'ble Bombay High Court, and the higher judicial precedence should be followed. Further, the Ld. DR has not strongly opposed the submissions of the assessee and has failed to provide any contrary judgments to support the revenue's case. We upheld the observation made by the Ld. CIT(A) in this issue. Accordingly, the ground no (vii) of the revenue's appeal is dismissed. 11. Interest on Perpetual Bond 11.1 The addit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the liquidation of Pepsu Road transport Corporation after meeting the liabilities if any, the assets were to be divided among Central Government and the State Government and such other parties, if any as may have subscribed to the capital in proportion to the contribution made by each of them to the total capital. However in the instant case there was no statutory obligation on the investors to subscribe to IPDs and further the claim of the investor of the IPD bonds is superior to that of equity investor and subordinate to other creditors. Further, it was submitted that interest paid on IPD cannot be equated with the dividend as dividend is not mandatory to be paid each year and it has to be paid if there is profit during the any financial year and on approval of the proposal of the Board of Directors by the shareholders in the annual general meeting. Whereas in the case of the IPD, it is mandatory to pay interest irrespective of the availability of the profit and no approval of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also supplied to the Assessing Officer detailed offer document issued for unsecured perpetual debentures of Rs. 1500 crores during the course of assessment proceedings. In the offer document the terms and conditions of issuing perpetual debentures, basis of allotment, creation of debenture redemption reserves along with object of the issue were clearly mentioned. As per the copy of object of the issue placed at page 67 of the paper book, it is mentioned that utilization of funds to be raised through this private placement will be for general business purpose and at page no. 62 issue size was mentioned of 15000 debentures of face value of Rs. 10 lac each aggregating to Rs. 1500 crores. It is demonstrated from the detailed submission and copies of documents placed in the paper book that assessing officer has made detailed inquiry/verification during the course of assessment proceedings that assessee has borrowed funds for business use by issue of debentures. The borrowed fund were payable on 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 l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the assessee's own case (supra). The said decision relied on the earlier judgment of the co-ordinate bench of ITAT Mumbai in the case of DCIT vs. State Bank of India (ITA Nos. 3033 & 2873/Mum/2019, dated 29.09.2022). Innovative Perpetual Debt Instruments (IPDI) are hybrid instruments that exhibit characteristics of both debt and equity. These bonds are typically issued by banks to meet capital adequacy requirements under Basel norms. Although perpetual in nature and subordinated to other debt, the interest on IPDI is payable periodically unless deferred by the issuer under specific circumstances (e.g., insufficient profits).Section 36(1)(iii) of the Act allows for a deduction of interest on borrowings if such borrowings are utilized for business purposes. The interest paid on IPDI, despite the instrument's hybrid nature, has been held to be deductible as it represents a cost of funds incurred in the ordinary course of banking business. The ITAT Mumbai Bench, in the case of State Bank of India (supra), held that the interest on IPDI is an allowable deduction under Section 36(1)(iii), as the borrowings are directly linked to the business activities of the bank. In the presen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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