2024 (3) TMI 613 - AT - Income Tax

Disallowance of CSR expenses - allowable business expenditure or not? - AO disallowed CSR expenses on the ground that as per Explanation (2) to section 37 CSR expenses cannot be allowed as deduction to be an expenditure incurred by the assessee for the purpose of business or profession - HELD THAT - When an expenditure is incurred out of profit of an assessee it partakes the nature of appropriation of profit but not expenditure incurred wholly and exclusively for the purpose of business of the assessee. Further Explanation (2) to section 37 of the Act put a restriction on deductibility of expenditure of any kind referred to u/s. 135 of the Companies Act 2013 i.e. corporate social responsibilities expenses w.e.f. assessment year 2015-16. Although the assessee has relied upon the decision of Gujarat Narmada Valley Fertilizer and Chemicals Ltd 2019 (8) TMI 1288 - GUJARAT HIGH COURT but in our considered view said judgments were rendered before insertion of Explanation (2) to section 37 of the Act and thus the ratio laid down by the Karnataka High Court and also Hon ble Gujarat High Court is not applicable to the facts of the present case. Thus we are of the considered view that the assessee is not entitled for deduction towards CSR expenses and thus we are inclined to uphold the findings of the ld. CIT(A) and reject ground taken by the assessee. Disallowance of ESOS expenses and enhancement of disallowance of ESOS expenses - Addition on the ground that in case of ESOP the whole idea of treating differential value of shares as expenses is based on the misconception and thus the question of allowing deduction towards difference between market price and exercise price does not arise - HELD THAT - When there is no ambiguity in computation of expenditure deductible towards ESOS expenses and also said deduction has been computed in light of SEBI guidelines the Assessing Officer is erred in re-computing allowable expenses by adopting his own formula is incorrect. Since the appellant has deducted difference between market price and the price at which the option is exercised by the employees is deductible expenditure u/s. 37(1) of the Act in our considered view the AO is completely erred in re-computing the deduction without assigning proper reasons. Further this principle is supported by the decision of PVP Ventures Ltd 2012 (7) TMI 696 - MADRAS HIGH COURT where it has been clearly held that the difference between the market price and the price at which the option is exercised by the employees is to be debited to the profit and loss account as an expenditure. A similar view has been taken in the case of CIT vs M/s. ALSEC Technologies Ltd 2017 (12) TMI 1581 - MADRAS HIGH COURT where it has been held that difference between market price and the employees stock option plan is revenue expenditure and allowable u/s. 37(1) of the Act. Thus following the decision of M/s. ALSEC Technologies Ltd 2017 (12) TMI 1581 - MADRAS HIGH COURT we are of the considered view that ESOS expenses is allowable deduction u/s. 37(1) of the Act and thus we direct the Assessing Officer to delete additions made towards disallowance of expenses and also enhancement made by the ld. CIT(A). Depreciation on investments - AO disallowed excess depreciation claimed on certain investments on the ground that said depreciation is contrary to RBI guidelines and vide Circular no. 17/2008 dated 26th Nov 2008. assessee has classified all its securities as stock in trade for the purpose of Income Tax Act which provides a separate investment trading account and offers the net result of the trading account to tax - HELD THAT - This is a recurring issue and as per appellant s own case in CIT vs City Union Bank 2016 (12) TMI 1789 - ITAT CHENNAI has decided the issue in favour of the assessee. The Hon ble High Court after considering relevant facts and also by following the decision of South Indian Bank Ltd. 2002 (11) TMI 53 - KERALA HIGH COURT held that depreciation on investment as per market price as on the date of balance sheet is eligible for deduction. In the present case the assessee has followed different method of accounting for the purpose of Income tax Act and claimed that it has investments under one category and followed cost or market price whichever is lower which is different from valuation of securities for the purpose of books which is as per RBI guidelines. Thus AO is erred in making additions towards disallowance of depreciation on investments and thus we direct the Assessing Officer to delete additions made towards disallowance of depreciation on investments. Disallowance of interest u/s. 40(a)(ia) - non-deduction of tax at source u/s. 194A - appellant has failed to comply with provisions of section 197A(1A) 197A(1B) 197A(1C) - as claimed by the Ld. Counsel for the assessee interest payment to trust and institutions are exempt u/s. 11 12 then it is for the declarants to obtain necessary certificates u/s. 197 of the Act from the Assessing Officer and produce before the appellant s bank for compliance - HELD THAT - Since income of trust and associations is exempt u/s. 11 12 of the Act unless otherwise said exemption was either withdrawn or not granted by the authorities in our considered view this aspect needs to be verified by the Assessing Officer in light of averments made by the Ld. Counsel for the assessee and also necessary evidences that may be placed before the Assessing Officer to prove its claim. Similarly in respect of remaining interest disallowance of Rs. 3, 72, 35, 522/- it is the claim of the appellant s bank that in most of the cases the deductees have already filed return of income and paid income tax on interest payment made by the bank. This fact also needs to be verified by the Assessing Officer with necessary evidences that may be filed by the appellant. Therefore we are of the considered view that this issue needs to go back to the file of the Assessing Officer for further verification and thus we set aside the order of the ld. CIT(A) on this issue and restore the issue back to the file of the Assessing Officer with a direction to reexamine the claim of the assessee. Disallowance of QIP expenses - AO disallowed 1/5th of the share issue expenses under QIP mode on the ground that QIP expenses is not eligible for deduction u/s. 35D of the Act as no extension of existing business is undertaken - HED THAT - t no evidences has been placed before us to prove that the assessee has spent the amount for extension of its existing business by setting up new branches and ATMs etc. Further this issue has been covered by the decision of IDBI Bank Ltd 2020 (1) TMI 213 - ITAT MUMBAI where a similar view has been expressed by the Tribunal. Therefore we are of the considered view that the matter needs to go back to the file of the Assessing Officer to verify the claim of the assessee in light of amount spent towards extension of existing business like setting up new branches ATMs etc. Deduction u/s. 36(1)(vii) and 36(1)(viia) - provision for bad debts and bad debts actually written off in the books of accounts of the assessee - HELD THAT - In this view of the matter and by respectfully following the decision of Karnataka Bank vs DCIT 2022 (5) TMI 1537 - ITAT BENGALURU as further strengthened by the decision of Oriental Bank of Commerce 2023 (10) TMI 1244 - DELHI HIGH COURT we are of the considered view that the bad debts written off relating to non-rural advances is not required to be adjusted against provision for bad and doubtful debts allowed u/s. 36(1)(viia) of the Act and thus we direct the Assessing Officer to re-compute deduction in respect of write off of non - rural debts without any adjustment to credit balance in the provision for bad and doubtful debts account in respect of rural advance. Additions u/s. 36(1)(vii) r.w.s. 36(2)(v) - We have dealt with the issue of deduction towards provision for bad and doubtful debts u/s. 36(1)(viia) of the Act and deduction for write off of actual bad debt u/s. 36(1)(vii) of the Act in previous paragraph and held that while allowing deduction for actual write off of non-rural debts same need not be adjusted against credit balance in provision for bad and doubtful debts account. Therefore we direct the Assessing Officer to verify the facts with regard to amount claimed by the assessee and in case the AO found that what was claimed as deduction is pertains to write off of non-rural debts then the same should be allowed as deduction without adjusting against credit balance in provision for bad and doubtful debts account created u/s. 36(1)(viia) of the Act. Deduction u/s. 36(1)(vii) of the Act towards write off of non-rural debts - This ground also pertains to deduction towards actual write off of non-rural debts as claimed by the assessee. If the claim of the assessee is correct then the same needs to be considered for the purpose of deduction u/s. 36(1)(vii) of the Act without any adjustment to credit balance in provision for bad and doubtful debts account created u/s. 36(1)(viia) of the Act in respect of rural debts. But facts are not clear. There is no details with us with regard to actual write off of bad debts to ascertain whether it is for rural debt or non-rural debt. Therefore we are of the considered view that this issue needs to go back to the file of the Assessing Officer for fresh verification. Addition of Deduction @20% in respect of income earned from providing long term finance to eligible business u/s. 36(1)(viii) - AO recomputed deduction of eligible profit u/s. 36(1)(viii) of the Act on the ground that as per provisions of section 36(1)(viii) of the Act prescribed method has been provided for computing deduction for eligible profit and as per said section an amount not exceeding 20% of profit derived from eligible business computed under the head profit and gains of business or profession (before making any deduction under this clause) carried to such reserve account - HELD THAT - n the present case the facts are not clear whether the interest earned from eligible business and corresponding expenditure incurred for said business is separately available with the assessee or not. Further the assessee has computed profit and apportioned various expenses into three businesses and this method followed by the assessee has been disapproved by us. If the assessee is able to furnish necessary details with regard to interest income earned from eligible business and corresponding total expenditure incurred for the activity then there is no problem for computing eligible profit. In case the assessee does not have any details then the method followed by the Assessing Officer should be accepted. Since facts are not clear we are of the considered view that this issue needs to go back to the file of the Assessing Officer for fresh consideration. Deduction claimed u/s. 36(1)(viia) - assessee bank had made a provision for bad and doubtful debts u/s. 36(1)(viia) of the Act and while computing the deduction has considered total aggregate average advance made by rural branches in terms of Rule 6ABA of I.T. Rules 1962 - HELD THAT - We are of the considered view that the Assessing Officer is erred in computing deduction u/s. 36(1)(viia) of the Act by considering only incremental advances made by rural branches of appellant bank as against the aggregate average advances made by rural branches of appellant bank as outstanding at the end of the financial year and thus we direct the Assessing Officer to consider aggregate average advances outstanding at the end of the relevant financial year for the purpose of computing deduction u/s. 36(1)(viia) of the Act. Further to compute correct amount of deduction the matter has been set aside to the file of the Assessing Officer with a direction to reconsider the issue in light of our discussions given herein above and also the details that may be filed by the assessee. Addition u/s. 14A r.w.r. 8D - contention of the appellant that the appellant had not incurred any expenditure to earn exempt income - HELD THAT - No reason was assigned by the AO for rejecting the explanation of the assessee. In the circumstances ratio of the decision of Hon ble Supreme Court in the case of Maxopp Investment Ltd. 2018 (3) TMI 805 - SUPREME COURT is squarely applicable. We direct the Assessing Officer to delete the addition made u/s. 14A of the Act. Additions made towards Excess cash Stale drafts and Branch suspense account - HELD THAT - We find that this issue is squarely covered in favour of the assessee by the decision of Hon ble High Court of Madras in appellant s own case reported in 2020 (3) TMI 475 - MADRAS HIGH COURT wherein by following the decision of Raddi Sahakara Bank Niyamitha 2017 (2) TMI 734 - KARNATAKA HIGH COURT held that Excess cash Stale drafts and Branch suspense account cannot be treated as income of the assessee because as per RBI guidelines/notifications said amount should be transferred to Depositors Education and Awareness Fund. We are inclined to uphold the findings of the ld. CIT(A) and reject ground taken by the revenue. Depreciation @ 60% on ATMs - HELD THAT - The issue of depreciation @60% on ATMs is no longer res-integra. The coordinate bench of ITAT in appellant s own case for assessment year 2012-13 2013-14 2019 (9) TMI 1225 - ITAT CHENNAI has considered an identical issue and after considering relevant facts held that ATMs are akin to computer and computer software and are eligible for higher depreciation @ 60% but not depreciation @ 15% as applicable to plant and machinery and as claimed by the Assessing Officer. The ld. CIT(A) deleted additions made by the Assessing Officer towards excess depreciation by following the decision of Hon ble Supreme Court in the case of CIT vs State Bank of Patiala 2016 (4) TMI 1430 - SC ORDER has dismissed SLP filed by the revenue against the decision of Hon ble Punjab and Haryana High Court. Therefore no error in the reasons given by the ld. CIT(A) to delete additions made towards excess depreciation claimed on ATMs - reject ground taken by the revenue. Additions made towards interest on non-performing assets - AO has made additions towards interest accrued but not due of NPA on the ground that NPA should be classified as per Rule 6EA of I.T. Rules 1962 which says account can be treated as non-performing asset only if the interest is overdue for more than 6 months - HELD THAT - As decided in in the case of Karur Vysya Bank 2021 (11) TMI 568 - ITAT CHEENAI wherein after referring to the decision of Vasisth Chay Vyapar Ltd 2018 (3) TMI 56 - SUPREME COURT interest income cannot be said to have been accrued to the assessee on the non performing assets accounts. Accordingly we direct the Assessing Officer to delete the addition made on interest on non performing assets accounts.

Summary

Issues Involved:

1. Disallowance of CSR expenses.
2. Disallowance of ESOS expenses.
3. Depreciation on investments.
4. Disallowance of interest u/s. 40(a)(ia) for non-deduction of TDS.
5. Disallowance of QIP expenses.
6. Deduction u/s. 36(1)(vii) and 36(1)(viia) for bad debts and provisions.
7. Deduction u/s. 36(1)(viii) for eligible profit.
8. Disallowance of education cess and secondary and higher education cess.
9. Disallowance of expenses relatable to exempt income u/s. 14A.
10. Addition of excess cash, stale drafts, and branch suspense account.
11. Depreciation on ATMs.
12. Addition towards interest on NPA.
13. Deduction u/s. 36(1)(viia) for provision for bad and doubtful debts.

Summary:

1. Disallowance of CSR Expenses:
The Tribunal upheld the disallowance of CSR expenses, stating that CSR expenditure mandated by Section 135 of the Companies Act, 2013, is not deductible as per Explanation 2 to Section 37 of the Income Tax Act.

2. Disallowance of ESOS Expenses:
The Tribunal allowed the deduction of ESOS expenses, following the decision of the Hon'ble Madras High Court in the case of ALSEC Technologies Ltd, and directed the Assessing Officer to delete the disallowance and the enhancement made by the CIT(A).

3. Depreciation on Investments:
The Tribunal directed the deletion of disallowance of depreciation on investments, following the decision of the Hon'ble High Court of Madras in the appellant's own case, which allowed depreciation on investments as per market price as on the date of the balance sheet.

4. Disallowance of Interest u/s. 40(a)(ia):
The Tribunal set aside the issue to the file of the Assessing Officer for further verification, directing to reexamine the claim of the assessee in light of the evidences that may be placed before the Assessing Officer.

5. Disallowance of QIP Expenses:
The Tribunal directed the Assessing Officer to verify the claim of the assessee regarding the utilization of QIP proceeds for the extension of existing business and allow the deduction if the claim is substantiated.

6. Deduction u/s. 36(1)(vii) and 36(1)(viia) for Bad Debts and Provisions:
The Tribunal held that the bad debts written off relating to non-rural advances should not be adjusted against the provision for bad and doubtful debts allowed u/s. 36(1)(viia) for rural advances. The issue was set aside to the Assessing Officer for verification.

7. Deduction u/s. 36(1)(viii) for Eligible Profit:
The Tribunal set aside the issue to the file of the Assessing Officer to reconsider the computation of eligible profit for deduction u/s. 36(1)(viii), directing to follow the correct principles for computation.

8. Disallowance of Education Cess and Secondary and Higher Education Cess:
The assessee did not press this ground, and thus, it was dismissed as not pressed.

9. Disallowance of Expenses Relatable to Exempt Income u/s. 14A:
The Tribunal upheld the deletion of additions made u/s. 14A, following the decision of the coordinate bench of ITAT, Chennai, in the appellant's own case for earlier assessment years.

10. Addition of Excess Cash, Stale Drafts, and Branch Suspense Account:
The Tribunal upheld the deletion of additions made towards excess cash, stale drafts, and branch suspense account, following the decision of the Hon'ble High Court of Madras in the appellant's own case.

11. Depreciation on ATMs:
The Tribunal upheld the deletion of disallowance of excess depreciation on ATMs, following the decision of the Hon'ble Supreme Court in the case of CIT vs State Bank of Patiala.

12. Addition Towards Interest on NPA:
The Tribunal upheld the deletion of additions made towards interest on NPA, following the decision of the coordinate bench of ITAT, Chennai, in the appellant's own case for earlier years.

13. Deduction u/s. 36(1)(viia) for Provision for Bad and Doubtful Debts:
The Tribunal directed the Assessing Officer to consider aggregate average advances outstanding at the end of the relevant financial year for the purpose of computing deduction u/s. 36(1)(viia), following the decision of the Hon'ble High Court of Madras in the appellant's own case.