Interest on Delayed TDS Payment not allowable as Business Expenditure

RBL Bank Limited Vs DCIT (ITAT Pune)

Introduction: The Income Tax Appellate Tribunal (ITAT) in Pune recently made a pivotal decision in the case of RBL Bank Ltd Vs DCIT, specifically regarding the treatment of interest paid on delayed payment of Tax Deducted at Source (TDS) under Section 201(1A) of the Income Tax Act, allowability of penalty imposed by the Reserve Bank of India (RBI), Employee Stock Option Plan (ESOP) and Broken Period Interest.

Interest on Delayed TDS Payment not allowable as Business Expenditure

In this case, the issue revolves around the treatment of interest paid on delayed Tax Deducted at Source (TDS) as a business expenditure. The Income Tax department disallowed the deduction claimed by the assessee for interest paid on delayed TDS and added it to the total income of the assessee.

Here’s a breakdown of the key points:

1. The Assessing Officer (AO) disallowed the deduction of interest paid for delayed TDS and added it to the assessee’s total income. The AO argued that the assessee was aware that such expenditure is not allowable as a deduction, as the assessee had initially disallowed it in the original return of income but later claimed it as a business expenditure in the revised return of income.
2. The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the AO’s order, denying the deduction.
3. The CIT(A) relied on a decision of the Madras High Court in the case of Chennai Properties & Investment Ltd. (1999) 239 ITR 435 (Mad.). The High Court held that interest paid under Section 201(1A) of the Income Tax Act by the assessee does not qualify as a business expenditure and cannot be considered as compensatory payment.
4. The assessee did not dispute the applicability of the High Court’s decision.

Based on the above considerations, the tax authorities and the CIT(A) concluded that the interest paid on delayed TDS to the Central Government account is not eligible for allowance as a business expenditure. Therefore, the deduction claimed by the assessee was denied.

In summary, the tax authorities and the CIT(A) held that interest on delayed TDS is not treated as a business expenditure and cannot be claimed as a deduction. The decision was based on both the provisions of the Income Tax Act and the precedent set by the Madras High Court. As a result, the appeal challenging this treatment was dismissed.

Penalty Imposed by RBI

Assessee challenged the addition of Rs. 1,00,00,000 made by the Assessing Officer (AO) on account of a penalty imposed by the Reserve Bank of India (RBI). The penalty was levied on the assessee for non-adherence to certain directives issued by the RBI.

Here are the key points regarding this issue:

1. The assessee claimed a deduction of Rs. 1,00,00,000 paid as a penalty to the RBI for not complying with certain directives issued by the RBI.
2. The AO disallowed the claim, stating that there is no provision in the Income Tax Act that allows the deduction of payments made as fines or penalties as business expenditure.
3. The assessee explained that the penalty payment was nominal and did not result in criminal prosecution. It was imposed for non-adherence to RBI directives related to the operation of banks.
4. The AO added the penalty amount to the total income of the assessee by disallowing the claim.
5. The Commissioner of Income Tax (Appeals) [CIT(A)] discussed the issue in detail but remanded it to the AO to consider and allow the penal interest if the payment related to the first default. If not, the CIT(A) suggested denying the claim.
6. The Tax Board noted that the CIT(A) had no jurisdiction to remand the issue to the AO. According to the provisions of section 251 of the Income Tax Act, the CIT(A) should either confirm, reduce, enhance, or annul the assessment but is not empowered to remand the matter to the AO.
7. As there was no finding by the CIT(A), the Tax Board deemed it appropriate to remand the issue back to the CIT(A) for fresh adjudication in accordance with the requirements of section 251 of the Act.

In summary, the issue related to the deduction of the penalty imposed by the RBI was remanded by the CIT(A) to the AO, which was found to be beyond the CIT(A)’s jurisdiction. Therefore, the Tax Board allowed the assessee’s appeal on this ground for statistical purposes and instructed the CIT(A) to adjudicate the matter in accordance with the law.

Allowance of ESOP as Business Expenditure

Revenue challenged two grounds (Ground Nos. A and B) raised by the assessee regarding the deductibility of Employee Stock Option Plan (ESOP) expenses under section 37(1) of the Income Tax Act.

Here are the key points regarding this issue:

1. The assessee, a bank, issued equity shares to its employees under an ESOP scheme at a discount totaling Rs. 147,63,91,803.
2. The assessee claimed the discount as a business expenditure, specifically as employee stock option compensation expenses, which it believed to be allowable under section 37(1) of the Income Tax Act.
3. The Assessing Officer (AO) questioned the sufficiency of documentary evidence provided by the assessee to support the claim as a business expenditure. The AO also noted that disallowances had been made on similar issues in previous years, which were pending before the Bombay High Court.
4. The AO denied the deduction for the discount on equity shares under the ESOP scheme and added it to the total income of the assessee.
5. The assessee presented its case before the Commissioner of Income Tax (Appeals) [CIT(A)], citing the order of the Special Bench of the Bangalore Income Tax Appellate Tribunal (ITAT) in the case of Biocon Ltd. and the decision of the Madras High Court in the case of SSI Capital Ltd. vs. DCIT.
6. The CIT(A) considered various decisions, including those mentioned above, and concluded that the ESOP expenses were an allowable deduction in computing income under the head “profits and gains of business and profession.”
7. The Revenue did not provide any contradictory evidence or arguments against the findings of the CIT(A).
8. The Tax Board found no issues with the order of the CIT(A) and upheld it as justified.

In summary, the Revenue challenged the deductibility of ESOP expenses under section 37(1) of the Income Tax Act. The CIT(A) ruled in favor of the assessee, and the Tax Board found no issues with the CIT(A)’s decision, dismissing the Revenue’s grounds of appeal (Ground Nos. A and B).

Broken period interest is an allowable business expenditure

Revenue raised two grounds (Ground Nos. C and D) challenging the decision of the Commissioner of Income Tax (Appeals) [CIT(A)] regarding the treatment of broken period interest paid on Held to Maturity (HTM) securities as an allowable deduction.

Here are the key points regarding this issue:

1. The Assessing Officer (AO) discussed the issue of broken period interest in the assessment order and considered it as non-allowable expenditure. The AO specifically mentioned that the interest between the time of actual disbursal of the first installment of the loan and the commencement of Equated Monthly Installments (EMIs) is considered broken period interest and not eligible for deduction.
2. The AO disallowed an amount of Rs. 7,54,88,125 on account of broken period interest levied by the assessee and added it to the total income of the assessee.
3. The CIT(A) disagreed with the AO’s position and allowed the broken period interest as a deductible business expenditure. The CIT(A) relied on a decision of the Income Tax Appellate Tribunal (ITAT) Pune Bench in the case of Prathamik Shikshan Sahara Bank Ltd. (ITA No. 491/PUN/2015) to support this conclusion.
4. The CIT(A) also mentioned that the Pune ITAT Benches had relied on judgments of the Bombay High Court in the cases of HDFC Bank Ltd. and American Express International Banking Corporation to reach its decision.
5. The Revenue challenged the CIT(A)’s decision by raising Ground Nos. C and D in the appeal.
6. The Assessing Officer had argued that the broken period interest should not be allowed as an expenditure, but the CIT(A) supported the claim of the assessee based on the Pune ITAT decision and the judgments of the Bombay High Court.
7. After careful consideration of the case and the relevant judgments, the Tax Board found no issues with the CIT(A)’s order, dismissing Ground Nos. C and D raised by the Revenue.

In summary, the Revenue challenged the treatment of broken period interest paid on HTM securities as a deductible business expenditure. The CIT(A) allowed the deduction based on the Pune ITAT decision and the Bombay High Court judgments. The Tax Board upheld the CIT(A)’s decision and dismissed the Revenue’s grounds of appeal (Ground Nos. C and D).

Conclusion: The ITAT Pune’s decision in the RBL Bank Ltd Vs DCIT case is a comprehensive one covering key issues regarding the non-allowability of interest on delayed TDS payments, the treatment of RBI imposed penalties, and other financial compliance matters. Tax professionals and financial experts should be cognizant of these developments to ensure that they are in line with the latest jurisprudence.

The ruling makes it clear that interest on delayed TDS payment cannot be claimed as a business expenditure. Further, it underlines the importance of abiding by statutory provisions to avoid penalties and disallowances.

FULL TEXT OF THE ORDER OF ITAT PUNE

These three appeals by the assessee and Revenue against the common order dated 02-03-2023 passed by the National Faceless Appeal Centre (“NFAC”), Delhi for assessment years 2017-18 and 2018-19.

2. Since, the issues raised in these three appeals are similar basing on the same identical facts, we proceed to hear these three appeals together and to pass a consolidated order for the sake of convenience.

3. First, we shall take up appeal of the assessee in ITA No. 499/PUN/2013 for A.Y. 2017-18.

4. Ground No. 1 raised by the assessee challenging the action of CIT(A) in confirming the order of AO in levying interest for delayed payment of TDS to Central Government account in the facts and circumstances of the case.

5. We note that the said issue was discussed by the AO in para No. 11 of the assessment order dated 31-12-2019 passed u/s. 143(3) of the Act. On perusal of the same, it is observed that the assessee treated interest paid for delayed payment of TDS as business expenditure and claimed deduction thereon. According to the AO, the assessee is well aware that the said expenditure is not allowable as deduction and referred to disallowance made by the assessee on its own in the original return of income and claimed the same as business expenditure in the revised return of income. By holding so, the AO disallowed an amount of Rs.24,18,553/- by denying assessee’s claim, added to the total income of the assessee. The CIT(A) confirmed the order of AO in denying the claim of assessee as deduction. We note that the CIT(A) in order to come to such conclusion placed reliance on the decision of Hon’ble High Court of Madras in the case of Chennai Properties & Investment Ltd. reported in (1999) 239 ITR 435 (Mad.) which held the interest paid u/s. 201(1A) of the Act by the assessee does not assume the character of business expenditure and also cannot be regarded as compensatory payment. The ld. AR did not dispute the same. Therefore, we hold the interest paid on delayed payment of TDS to Central Government account is not eligible for allowance as business expenditure, consequently, the deduction claimed by the assessee is liable to be denied. Thus, we find no infirmity in the order of CIT(A) in holding the same. Thus, the order of CIT(A) is justified and ground No. 1 raised by the assessee is dismissed.

6. Ground No. 2 raised by the assessee challenging the action of CIT(A) in confirming the order of AO in making addition of Rs.1,00,00,000/- on account of penalty imposed by the RBI in the facts and circumstances of the case.

7. We note that the assessee claimed Rs.1,00,00,000/- paid on account of penalty levied by the RBI for non adherence to certain directives issued by the RBI. According to the AO, no provision in the statue allows the claim of payment as fine/penalty as business expenditure. The assessee explained the said payment on account of penalty is a nominal payment but does not lead to criminal prosecution as it was imposed on account of non adherence of certain directives in relation to operation of banks. The AO disallowed the above said amount and added to the total income of the assessee by denying the claim of assessee as business expenditure. The CIT(A) discussed the issue in detail regarding the allowability of penalty paid to RBI, but however, remanded the issue to the file of AO to consider and allow the penal interest if the payment relates to first default, if not but deny the claim vide para 20 of the impugned order. We note that the CIT(A) has no jurisdiction to remand the issue to the file of AO as provided under the provisions of section 251 of the Act. We note that it is settled principle that the CIT(A) has to dispose off an appeal against the order of assessment either he may confirm, reduce, enhance or annul the assessment, but however, no jurisdiction is conferred by the statute in remanding the issue to the file of AO. As there was no finding by the CIT(A), in our opinion, the issue requires adjudication by the CIT(A) and pass an order, in accordance with law. Therefore, we deem it proper to remand the issue to the file of CIT(A) for its fresh adjudication for deciding the issue, in accordance with requirement as provided under the provisions of section 251 of the Act. Thus, ground No. 2 raised by the assessee is allowed for statistical purpose.

8. In the result, the appeal of assessee is partly allowed for statistical purpose.

Now, we shall take the appeal of Revenue in ITA No. 509/PUN/2023 for A.Y. 2017-18.

9. Ground Nos. A and B raised by the Revenue challenging the action of CIT(A) in holding the Employees Stock Expenses (ESOP) is an allowable expense u/s. 37(1) of the Act.

10. We note that the AO discussed the issue in para No. 7 of the assessment order dated 31-12-2019. We note that the assessee bank issued equity shares to its employees under ESOP Scheme at discount amounting to Rs.147,63,91,803/-. The assessee explained the said discount as business expenditure. The assessee claimed the said discount is nothing but employee stock option compensation expenses allowable u/s. 37(1) of the Act. According to the AO, no sufficient documentary evidences furnished by the assessee in support of the claim as business expenditure. Further, he observed the disallowances were made on the same issue in earlier years and attained no finality as were pending before the Hon’ble High Court of Bombay. By following the assessment order of earlier years he denied the deduction in respect of discount on equity shares under ESOP and added the same to the total income of the assessee vide para Nos. 7 to 7.8 of the assessment order. The assessee placed reliance on the order of Special Bench of Bangalore, ITAT in the case of Biocon Ltd. and the decision of Hon’ble High Court of Madras in the case of SSI Capital Ltd. Vs. DCIT reported in 85 TTJ 104 before the CIT(A). The CIT(A) considering the said decisions and also many other decisions which are reproduced in para Nos. 11 and 12 of the impugned order, held the issue of employees stock option is an allowable deduction in computing the income under the head profits and gains of business and profession. The ld. DR did not bring on record any contrary to the finding of the CIT(A) in placing reliance on the order of Special Bench of Bangalore, ITAT in the case of Biocon Ltd. and the decision of Hon’ble High Court of Madras in the case of SSI Capital Ltd. (supra). Therefore, we find no infirmity in the order of CIT(A) and it is justified. Thus, ground Nos. A and B raised by the Revenue are dismissed.

11. Ground Nos. C and D raised by the Revenue challenging the action of CIT(A) in holding the broken period interest paid on Held to Maturity (HTM) as an allowable deduction in the facts and circumstances of the case.

12. We note that the AO discussed the issue in para No. 8 of the assessment order. On perusal of the same, the AO opined that the interest levied between the time gap of actual disbursal of the first installment of the loan and the time of the commencement of EMIs is broken period interest, is not allowable as expenditure. The AO disallowed an amount of Rs.7,54,88,125/- on account of broken period interest levied by the assessee and added the same to the total income of the assessee. The CIT(A) by placing reliance in the case of Prathamik Shikshan Sahara Bank Ltd. in ITA No. 491/PUN/2015 of ITAT Pune Benches held that the assessee is entitled to claim same as business expenditure. We note that on perusal of the impugned order that Pune ITAT Benches in order to come to such conclusion in the case of Prathamik Shikshan Sahara Bank Ltd. (supra) placed reliance in the case of HDFC Bank Ltd. reported in 366 ITR 505 (Bom.) and American Express International Banking Corporation reported in 258 ITR 601 (Bom.). The ld. AR placed the decision of Hon’ble High Court of Bombay in the case of HDFC Bank Ltd. and American Express International Banking Corporation (supra) at pages 52 to 71 of the paper book and careful consideration of the same, we find no infirmity in the order of CIT(A) in following the order of Pune Benches of ITAT in the case of Prathamik Shikshan Sahara Bank Ltd. (supra) in holding the assessee is entitled to claim broken period interest as deduction. Thus, ground Nos. C and D raised by the Revenue are dismissed.

13. In the result, the appeal of Revenue is dismissed.

ITA No. 510/PUN/2023, A.Y. 2018-19

14. We find that the issues raised in the appeal and the facts in ITA No. 510/PUN/2023 are identical to ITA No. 509/PUN/2023 except the variance in amount. Since, the facts in ITA No. 510/PUN/2023 are similar to ITA No. 509/PUN/2023, the findings given by us while deciding the appeal of Revenue in ITA No. 509/PUN/2023 would mutatis mutandis apply to ITA No. 510/PUN/2023, as well. Accordingly, the appeal of Revenue is dismissed.

15. To sum up, the appeal of assessee is partly allowed for statistical purpose and both the appeals by the Revenue are dismissed.

Order pronounced in the open court on 03^rd August, 2023.