Case Law Details

Case Name : Axis Bank Limited Vs DCIT (ITAT Ahmedabad)
Appeal Number : ITA No(s) 311/Ahd/2016
Date of Judgement/Order : 28/10/2021
Related Assessment Year : 2010-11

Axis Bank Limited Vs DCIT (ITAT Ahmedabad)

Facts- The assessee is a Scheduled Bank and is engaged in the business of banking. The assessee in the year under consideration has earned exempt income of Rs. 13,83,14,263/- by way of dividend. The assessee against such income has made the disallowance of Rs. 1,06,39,198/- under the computation of income under protest in pursuance to the provision of section 14A of the Act. However, the AO during the assessment proceedings found that there was no basis for making the disallowance of Rs. 1,06,39,198/- against the exempted income. As per the AO the disallowance needs to be made in terms of the provision of Rule 8D of Income Tax Rules r.w.s. 14A of the Act.

No interest expense disallowance when own fund exceeds capital work-in-progress

Addition on account of commission income-

The assessee till the immediate preceding assessment year was recognising the commission income generated on furnishing the bank guarantee on upfront basis. However, the assessee from the year under consideration has changed its policy of recognising the commission income qua to such bank guarantee by recognising the same on a pro rata basis.

Further, the assessee is also aggrieved by the addition of INR 136.52 Crores made by the AO on account of commission income from bank guarantee furnished to the customers.

Interest on capital work-in-progress-

During assessment proceeding AO made addition of INR 6748546 on account of interest expenses incurred in respect of capital work in progress.

Conclusion-

The onus lies upon the assessee to justify the expenses incurred in relation to exempt income. If the assessee failed to discharge the onus, the only option available to Revenue is to make the disallowance by resorting to the provisions of Rule 8D of Income Tax Rules. However, in the interest of justice, fair play, and keeping in view to the fact that assessee has made suo moto disallowance of Rs. 1,06,38,000, we are inclined to extend one more opportunity to the assessee to provide the basis of such disallowance by furnishing the necessary details. Accordingly, the issue with respect to administrative expenses is set aside to the file of AO for fresh adjudication as per the provision of law.

Addition on account of commission income-

The assessee is paying the taxes at the maximum marginal rate and there is no allegation by the Revenue that the income of the assessee by changing the accounting policy has not been offered to tax. In other word the income of 1 year has been postponed to the another year in the manner and for the reasons as discussed above. Hence, the ground of appeal of the assessee is allowed.

Interest on capital work-in-progress-

As own fund of the assessee exceeds the amount of capital work in progress. A presumption can be drawn that the own fund is utilized in such capital work in progress. Therefore there cannot be any disallowance on account of interest expenses.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

These nine appeals have been filed at the instance of the Assessee and Revenue against the appellate orders of the Learned Commissioner of Income-Tax (Appeals), Ahmedabad [“Ld. CIT(A)” in short] relevant to Assessment Years 2010-11, 2011-12, 2012-13 2013-14 and 2014-15. Out of nine appeals, five appeals are by the assessee and four appeal by the Revenue.

2. First we take up ITA No. 311/Ahd/2016 for AY 2010-11 for the purpose of adjudication. The assessee has raised the following grounds of appeal:

The appellant, being aggrieved by order dated 4-1-2016 passed by learned Commissioner of income Tax (Appeals] 10, Ahmedabad [hereinafter the learned CIT(A)], this appeal is filed on following grounds, which may be considered without prejudice to one another.

1.0 Disallowance u/s 14A r.w. Rule 8D Rs. 26,19,60,802 (Rs. 26.19 crores) plus suo moto disallowance of Rs. 106,38,000 (Rs. 1.06 croies)

1.1 In facts and circumstances of the case and in law, the learned CIT(A) erred in confirming disallowance out of interest expenses to the extent of Rs. 24.26 crores and oul of operating expenses to the extent of Rs. 3.00 crores, thus aggregate Rs. 27.26 crores (inclusive o f disallowance out of operating expenses of Rs. 1.06 crores volunteered u/s 14A by the Bank) i.e. confirming disallowance by upholding invocation of Rule 8D in relation to tax-free income of Rs. 13.83 crores. The disallowance is unlawful and, in any case, highly excessive and unrealistic in facts and law of the case.

1.2 In facts and circumstances of the case and in law, the learned CIT(A) erred in not appreciating that

(i) The Bank held (except shares in subsidiaries/JV companies) its entire investment portfolio of Rs. 55821 crores (including tax-free shares and securities of Rs. 683 crores) as current asset i.e. stock-in-trade: and provisions of section 14A are prima facie not applicable to the dealers in shares and securities.

(ii) The Bank held tax-free securities of Rs. 683 crores as against interest-free owned funds (paid-up share capital and free reserves) of Rs. 16044 crores [in addition to huge non-interest Peering current account deposits of Rs. 32167 crores of its constituents]; and post tax profit of Rs. 2514 crores earned during the previous year.

(iii) Dealings in shares and securities is one of the principal and core business of the Bank; the tax-free dividend income is incidental to the treasury operations.

(iv) There was no specific borrowing for making such tax-free shares and securities; nor it is so economically prudent (low ROR at 2,02%): There is no adverse evidence or scope even for primary presumption that interest-bearing funds have been utilized for making tax-free investment.

(v) The Bank earned shares and securities trading profits of Rs. 714.05 crores as Business profits which was much higher than the tax-free dividend income of Rs. 13.83 crores. Primary opject of the treasury operations is to reap trading profits and not to earn tax-free income.

(vi) The Bank has earned interest Income for in excess of interest expenses there against i.e. there is no net interest expenses and Rule 8D(2)(ii) cannot be invoked.

(vii) Rule 8D is not charging provision. Rule 8D is subordinate to charge provided in section I4A. Rule 8D w.e.f. A.Y. 2008-09 cannot supersede judicial authorities in the Bank’s own case for A.Y. 2002-03 to A.Y. 2005-06: nor can supersede real income theory. Rule 8D standalone cannot source charge in form of notional disallowance which is excessive and unrealistic.

(viii) Position of law upto A.Y. 2007-C different u/s 14A r.w.s. 4. and post A.Y. 2008-09 (Rule 8D) cannot be

1.3 The learned CIT(A) has erred in confirming that Rule 8D r.w.s. 14A are applicable to facts of the case: Rule 8D is mandatory or automatic with no scope for variation, effectively holding that Rule 8D, though subordinate or machinery provision, could go beyond the scope of charge provided in section 14A.

1.4 Having accepted that there was no Porrowing specific to any tax-free securities, no disallowance was warranted out of interest expenses having regard to adequate interest-free funds available in the form of paid-up share capital, reserves and interest-free current account balances of constituents, as held by the Hon. Gujarat HC for A.Y. 2002-03 to AY 2005-06 and upheld by the Hon. S.C. for A.Y. 2003-04 in the Bank’s own case and particularly without giving any cogent reasons how the said Hon. HC and Hon. SC orders u/s 14A though for pre-Rule 8D years are irrelevant in application of Rule 8D r.w.s. 14A during the previous year.

1.5 In facts and circumstances of the case and in law, the learned CIT (A] erred in not appreciating that administrative expenditure was incurred in the course of banking Pusiness and no port of such expenditure could have been disallowed u/s 14A as held by the Hon. Gujarat HC for A.Y. 2002-03 to 2005-06 rejecting the Revenue TA in the Bank’s own case, much less by sustaining harbour formula of Rule SD.

1.6 Without prejudice it is submitted that suo-moto disallowance out of operating expenses at Rs. 1.06 crores be cancelled or alternatively the said disallowance be restricted to 1% to 2% of tax-free income of Rs. 13.83 crores as held by Hon. Mumbai ITAT/Mumbai HC in the peer bank’s cases.

2.0 Securitisation gains of Rs. 3,85,08,433 (Rs. 3.85 crores) amortised as per RBI guidelines and non-allowance of such realised gains of Rs. 2,54,17,371 (Rs. 2.54 crores) disallowed and taxed during earlier years and now stand doubly taxed

2.1 In facts and circumstances of the case and in law, the learned CIT[A) erred in upholding addition of Rs. 3.85 crores under the caption ‘Securitisation gain deferred in books’ on securitization of loan assets which was accounted on deferred basis pursuant to mandate o f RBI guidelines governing the subject matter.

2.2 In facts and circumstances of the case and in law, the learned CIT(A) ought to have appreciated that

(i) The appellant being a banking company, RBI directives/guidelines are mandatorily applicable, particularly as no other expressed provisions to the contrary or otherwise exist in Income tax.

(ii) RBI is an apex regulatory and controlling body for the banks, RBI has sound and top class expertise to decide mode of this revenue recognition and its guidelines are in accordance with accepted and prudent accounting practises even at global level and accepted also by Statutory auditors, Audit committee, CEO/CFO etc. and even in RBI Inspection audit.

(iii) Securitised assets continue to be owned by the Bank and there is no direct sale or direct assignment of loan assets securitarised in favour of SPV. The Bank, under negotiated covenants, continues to service the loon assets, to provide credit enhancement in the form of cash collaterals (including subordination of cash flow through PTC) etc. to SPV.

[iv] The gains, as reported by applying mandatory RBI guidelines, is real commercial income of the previous year. Judicial authorities have given weightage to RBI directives/guidelines in deciding income tax issues where there are no specific provisions eitherway in income tax.

(v) Such charge of gain on securitization amortized is only timing difference based addition, tax-neutralized over the years [Nagri Mills 33 ITR 681 (Bom)] and also as per the ratio of Excel Industries 358 ITR 295 (SC] where the Hon. SC has directed the AO to take pragmatic view rather than pendatic view.

2.3 Without prejudice to above it is submitted that the AO be directed to allow reduction of Rs. 2.54 crores recognized as income during the previous year which was disallowed and taxed as accrual of income last year, resulting into double taxation of the same income without expressed authority of the Act and ought to be so reduced even on the principle of equity and justice.

3.0 Bank Guarantee (BG) commission income prorate relatable to unexpired period treated (w.e.f. A.Y. 2010-11) by the Bank as income received in advance but held taxable Rs. 136.52 crores

3.1 The learned CIT(A) erred both in law and on facts in upholding the addition of Rs. 136.52 crores in respect of BG commission income for unexpired period (beyond year end) as chargeable income of the previous year, but treated by the Bank as pre-received income.

3.2 It is submitted that there is nothing in section 145 to prohibit a change from one regular method of accounting to another regular method. The learned CIT(A) failed to appreciate that prudence and conservatism require not anticipating a receipt which had not become due at previous year end.

3.3 It is submitted that the changed pro-rate method is not devoid of logic, on the contrary is well-recognized, followed by peer banks, more rational and in accordance with globa l practises.

3.4 Para 4 of AS 1 notified u/s 145(2) permits an assessee to adopt accounting policies so as to represent a true and fair view of its state of affairs. Para 9 thereof permits a change in accounting policy if so required by the Statute; or if it is considered that the change would result in more appropriate preparation or presentation of the financial statements.

3.5 The adverse inference u/s 145 against the change is permissible only if accounting system adopted is contrary to prescribed AS u/s 145; or AS noitified by ICAI u/s 211 (3c) o f the Companies Act, 1956 or where true profits cannot be deduced.

3.6 The learned C1T(A) failed to appreciate that the customer has inherent legal right to receive refund for unexpired period in the event of BG being terminated before full period. It is submitted that even in absence of written covenant, a right always remains vested in the customer to get such refund, the Bank being a public institution and follows good and moral business practises.

3.7 Upfront collection of small commission is only mode of fee collection to cover severa l times more devolving risk which could extend beyond the previous year. BG is a continuing obligation, the liability generally extends beyond previous year end and monetary risk upon invocation of BG is disproportionately high than rate of BG commission earned.

3.8 The issue merely represents a timing difference, tax-neutral and there is no loss of revenue if considered over the years.

3.9 The learned C1T(A) erred in holding that BG get concluded or completed immediately upon the guarantee deed is signed and there is no reviewing powers to modify the term.

3.10 BG commission income is incidental income and not main revenue streams of the Bank. The learned CIT(A) erred in holding changed accounting method as unrealistic presentation which postpones real profits for a liability which is contingent and creafes a mis-match in revenue impact in hands of customer and in hands of the Bank. The learned CIT(A) also erred in holding that entire revision serves only one purpose i.e. deferment of tax for the Bank. The learned CIT(A) also erred in law that the Bank’s right to receive BG commission stands established since it is recognised as expense in hands of the customer.

It is, therefore, submitted that addition of Rs. 136.52 crores in respect of commission income relatable to period beyond previous year end be cancelled.

The appellant craves leave to add, to amend, alter, delete and/or modify the above grounds of appeal on or before the final date of hearing.

2.1 The assessee vide letter dated 27/11/2017 has filed additional grounds of appeal as detailed under:

Additional ground in the application dated 27-11-2017

1.1 The Appellant submits that Employees stock Options plan (ESOP) cost of Rs.250.63 crores, incurred by the Appellant on issue of new shares to the eligible employees ought to be allowed as deduction under section 37 of the Act and other applicable provisions of the Act.

1.2 The ESOP cost of Rs.250.63 crores represents the difference between the market price o f shares as on date of exercise and the exercise price (being market price of share as on date of grant option). The Appellant submits that it be granted deduction of the said ESOP cost of Rs.250.63 crores while computing its total income for the assessment year under consideration.

1.3 The appellant craves leave to add, amend, alter, substitute, delete and/or modify in any manner whatsoever this ground on or before the hearing of appeal.

2.2 The assessee vide letter dated 14-08-2020 has filed further additional grounds of appeal as detailed under:

Additional ground in the application dated 14-08-2020

1. DEDUCTION OF EDUCATION CESS AND SECONDARY AND HIGHER EDUCATION CESS

1.1 The appellant submits that education cess and secondary and higher education cess of INR 44,06,59,588 paid by the appellant should be allowed as deduction under section 37 of the Income-tax Act, 1961(‘the Act’)

1.2 The appellant had not claimed education cess and secondary and high secondary cess (collectively referred to as ‘Cess’) of INR 44,06,59,588 paid for FY 2009-10, in the return of income filed for AY 2010-11.

1.3 It is respectfully submitted that Cess is allowable as a deduction while computing taxable income. This is because it is different from and not forming part of income tax and hence does not fall under the purview of section 40(a)(ia) of the Act.

3. The first issue raised by the assessee is that the Ld. CIT(A) erred in confirming the order of the AO by sustaining the disallowance of Rs. 26,19,60,802/- under the provision of section 14 A r.w.Rule 8D of Income Tax Rules.

3.1 The facts in brief are that the assessee in the present case is a Schedule Bank and engaged in the business of banking. The assessee in the year under consideration has earned exempt income of Rs. 13,83,14,263/- by way of dividend. The assessee against such income has made the disallowance of Rs. 1,06,39,198/-under the computation of income under protest in pursuance to the provision of section 14A of the Act. However, the AO during the assessment proceedings found that there was no basis of making the disallowance of Rs. 1,06,39,198/- against the exempted income. As per the AO the disallowance needs to be made in terms of the provision of Rule 8D of Income Tax Rules r.w.s. 14A of the Act. Thus the AO worked out the amount of disallowance as detailed under:

Sr.No Particulars Amount
1. Direct Expenses Nil
2. Interest Expenses 24,25,90,327/-
3. Administrative Expenses 30,02,100/-
Total 27,26,11,827/-

3.2 The assessee already made disallowance u/s 14A of the Act for Rs. 1,06,39,198/- only. Accordingly, the AO made the disallowance of the balance amount of Rs. 26,19,72,629/- and added to the total income of the assessee.

4. The aggrieved assessee preferred an appeal to the Ld.CIT(A), who found that his predecessor in the own case of the assessee for the Assessment Year 2008­09 has also made the disallowance in the identical manner vide order dated 01/12/2011. Accordingly, the Ld.CIT(A) upheld the disallowance made by the AO under the provision of section 14A r.w. Rule 8D of Income Tax Rules.

5. Being aggrieved by the order of the Ld.CIT(A), the assessee is in appeal before us.

6. The Ld. AR before us filed a paper book running from pages 1 to 464 and contended that the Ld. CIT(A) has made the disallowance under the provisions of section 14A r.w.Rule 8D after making the reference to the order of his predecessor for the Assessment Year 2008-09 which has been reversed by order of the ITAT in ITA No. 251/AHD/2012 vide dated 24-01-2017.

6.1 The Ld. AR further contended that the order of the Tribunal for the AY 2008­09 bearing ITA No. 251/AHD/2012 was also upheld by the Hon’ble High Court of Gujarat in tax appeal No. 878 of 2001 vide order dated 12-12-2017.

6.2 It was also contended by the ld. AR that the impugned issue was also decided in favour of the assessee by the order of the ITAT in ITA No. 2196/Ahd/2014 for the Assessment Year 2009-10 vide order dated 13-10-2017.

6.3 In view of the above the Ld. AR for the assessee contended that there cannot be any disallowance under the provision of section 14A r.w.Rule 8D of Income Tax Rules.

7. On the other hand, the Ld. DR vehemently supported the order of the authorities below.

8. We have heard the rival contention of both the parties and perused the materials available on record. At the outset, we note that the disallowance has been made by the AO under the provisions of section 14A r.w.Rule 8D of Income Tax Rules for Rs. 26,19,72,629/- which was subsequently confirmed by the Ld. CIT(A) after making the reference to the order of his predecessor for the Assessment Year 2008-09 as discussed above.

8.1 The order of the Ld. CIT(A) for the Assessment Year 2008-09 has been reversed by the order of this ITAT in ITA No. 251/Ahd/2012 vide order dated 24/06/2017 by observing as under:

15. After giving a thoughtful consideration to the facts in issue, we find that from the balance sheet of the assessee for the year under consideration, the capital balance is at Rs. 360 crores and the free reserves are at Rs. 8411 crores totaling to Rs. 8051 crores. Against this, we find that the tax free investment at Rs. 651 crores. Thus, it can be safely concluded that the assessee was having sufficient own funds to make the tax free investment, jf the Hon’ble High Court of Bombay in the case of Reliance Utilities and wer Ltd. 313 ITR 340 has held that if there are mixed funds then the power presumption would be that the investments have been made out of interest free funds. This ratio of the Hon’ble High Court of Bombay was subsequently followed in the case of HDFC Ltd. 266 ITR 505. As mentioned elsewhere, the assessee was having sufficient own funds to meet out the tax free investment. Drawing support from the decision of the Hon’ble High Court of Bombay (supra), we do not find any merit in considering the interest expenses for the computation of disallowance u/s. 14A of the Act. To this extent, we set aside the findings of the Id. CIT(A) and direct the A.O. to delete the addition of Rs. 29,35,41,415/-.

16. However, in our considered opinion, administrative expenses need to be disallowed and since the assessee has made suo moto disallowance of Rs. 63,84,525/-, in our considered opinion, this should meet the ends of justice. We, accordingly, confirmed the suo moto disallowance of Rs. 63,84,525/-. Ground no. 2 Is accordingly dismissed and the additional ground raised by the assessee is also dismissed.

8.2 The fact of the case on hand seems identical to the fact of the case as discussed above in ITA No. 251/Ahd/2012 (Supra). However, before parting it is pertinent to note that the ITAT has not given any detailed findings based on reasons with respect to the administrative expenses disallowed under the provision of Rule 8D(2)(iii) of Income Tax Rules. The assessee has made suo moto disallowance of Rs. 1,06,38,000/- without any basis. Accordingly, a question was put up to the ld. AR for the assessee at the time of hearing to explain the basis of making the disallowance of Rs. 1,06,38,000/- but he failed to provide any information. Rather the Ld. AR requested to set aside the issue to the file of the AO to allow one more opportunity to the assessee to furnish the details concerning the basis adopted for disallowance of Rs. 1,06,38,000/- only under rule 8D(2)(iii) of Income Tax Rules.

9. The Ld. DR has not raised any objection if the matter is set aside to the file of the AO with respect to administrative expenses as per the provisions of law.

10. Indeed, the onus lies upon the assessee to justify the expenses incurred in relation to exempt income. If the assessee failed to discharge the onus, the only option available to Revenue is to make the disallowance by resorting the provisions of Rule 8D of Income Tax Rules. However, in the interest of justice, fair play and keeping in view to the fact that assessee has made suo moto disallowance of Rs. 1,06,38,000, we are inclined to extend one more opportunity to the assessee to provide the basis of such disallowance by furnishing the necessary details. Accordingly, the issue with respect to administrative expenses is set aside to the file of AO for fresh adjudication as per the provision of law. Hence, the ground of appeal of the assessee is partly allowed for statistical purposes.

11. The 2nd issue raised by the assessee is that the learned CIT (A) erred in confirming the addition made by the AO for Rs. 3,85,08,433.00 on account of sale of assets under securitization.

12. The assessee in the year under consideration has securitised its 7 loan accounts on the sale consideration of Rs. 2,173.10 crores. The book value of such loan which were securitised were of Rs. 2,153.80 crores. Thus the assessee as a result of securitisation of its loan assets has made a gain of Rs. 19.30 crores. Out of such gain a sum of Rs. 15.45 crores was recognised in the profit and loss account for the year under consideration. In other words the balance amount of Rs. 3.85 crores was deferred as other liabilities and provisions.

12.1 As per the assessee, the RBI by notification has directed to charge the income on the sale of loan assets under securitisation over a period of the life of special purpose vehicle (for short SPV) whereas any loss on account of the sale of assets under securitisation should be charged to the profit and loss account during the year in which the sale upon securitisation was effected.

12.2 The assessee further contended that it, in line of RBI notification, has offered a sum of Rs. 2.54 crores as income which was brought forward from the earlier year. Thus, the assessee effectively has offered the income on account of securitisation of loan assets for Rs. 17.99 crores ( 2.54 crores, the brought forward balance and 15.45 crores the income in the year under consideration).

12.3 The assessee also submitted that above system of recognising the income on the sale of loan assets under securitisation has been followed by it consistently in pursuance to the RBI guidelines dated 1st February 2006. The above system of accounting was also approved by the statutory auditors and the shareholders of the bank.

12.4 Admittedly, under securitisation the loan assets are transferred to the SPV but the bank (assessee) carry the responsibility for servicing the loan till it comes to the end. Furthermore, the bank remains liable to the investors to provide safeguard for the security, loan documents etc. Accordingly, the assessee contended that it is recognising the income by spreading the same over the residual term of the loan.

12.5 The assessee also contended that it is paying tax on the maximum marginal rate and without any tax holiday benefit. Thus, the amount of income recognized by the assessee over the residual period of the loan is nothing but represents the timing difference. Hence, it is a tax neutral exercise.

12.6 However, the AO being disagreed with the contention of the assessee and observed that on the sale of loan assets under securitisation, buyer i.e. SPV becomes the owner of the loan whereas the assessee has no connection with such loans. Accordingly there was no rational for spreading over the income over the tenure of the loan. Accordingly, the AO made the addition of Rs. 3.85 crores to the total income of the assessee.

13. Aggrieved assessee preferred an appeal before the ld. CIT-A who confirmed the order of the AO by placing the reliance on the order of his predecessor for the AY 2008-09 by observing as under:

5,2. Identical issue came up IP, appellant’s own case (or A.Y. 2008-09. Vide order dtd. 01-12-2011 in appeal no CIT(A)/Addl C1T./R-1/247/10-11. my predecessor held as under:

“5.3 I have considered the facts of the case; assessment order end appellant’s written submission Appellant deferred income earned on sale of secure/zed assets to the life o f ‘.hose assets It is not in dispute that sole of securitized assets was complete, it was in the nature of true sale as per R3i guidsiir.es and these assets have gone out of appellant’s balance sheet. It is also not in dispute that appellant had absolutely no liability whatsoever on these transactions afterwards. Since there was no liability of the appellant in future on account of securitization transactions, there is no reason for postponing the income in future years. As per accounting standard AS 9, income earned on sale of securitized assets is to be recognized in the same year and no! to be deferred in future years. However appellant relied upon RBI guidelines on securitization of assets and Para 20 of this guidelines says that premium arising on account of sale should be amortized over the life o/ the security issued or la be issued by SPV.

Appellant submitted (hoi P,BI guidelines ore binding on banks and in support of this, judicial decisions were relied upon. However the guideline 20.1 only relates to accounting in the books of originator, It nowhere deals with true sale transactions whets there is no liability of the bank after sale. Para 23.2 also mentions that guidance note issued by ICAI will apply to those aspects no: covered in the RB! Guidelines which means revenue recognition for true sole transaction need to be as per A S 9. Since there is no uncertainty to the income on these transactions, there is no question of postponing the income. In my view the appellant’s sell transactions as if the category of true sale to which AS 9 apples and as per that revenue need to be recognized in the year of sale.

Even otherwise, since appellant’s transactions were complete in this year with no uncertainty or liability in future, there is no question of postponing income Income has to be taxed on the basis of accrual and not on the basis of accounting entries. Accounting entries may be prescribed for the purpose of disclosure but that cannot decide the taxability of income Wherever there is any conflict between income tax act and accounting standards prescribed by any authority, income tax act will prevail. The chargeability of income := not based on accounting standard or accounting guidelines but it is based on real income earned. When there is no dispute or confusion about the quantum of income, income earned cannot be postponed to the future year. In view of this I agree with the assessing officer that deferment o/ income is not justified. Addition made by the AO is therefore confirmed.

Appellant’s claim of consequential relief on the basis of last year’s appeal aider cannot be granted at this stage since appellant has disputed the addition before ITAT and the issue is not final yet. Therefore ‘agree with the assessing officer that assessee will be free to claim deduction once the issue is finalized in assessment year 2007-08. “

Facts remaining the same in the year under consideration, following the above-mentioned order, impugned addition of profit on securitization of Rs 3,85,03,433/- is upheld This ground of appeal is dismissed.

14. Being aggrieved by the order of the ld. CIT-A, the assessee is in appeal before us.

15. The learned AR before us contended that the learned CIT (A) has confirmed the order of the AO by placing reliance on the order of his predecessor for the assessment year 2008-09 which was subsequently reversed/decided in favour of the assessee by the ITAT in ITA No. 251/AHD/2012 vide order dated 24-01-2017.

15.1 On the other hand, the ld. DR vehemently supported the order of the authorities below.

16. We have heard the rival contention of both the parties and perused the materials available on record. At the outset, we note that the disallowance made by the AO was subsequently confirmed by the Ld. CIT(A) after making the reference to the order of his predecessor for the Assessment Year 2008-09 which has been reversed by the order of this ITAT in ITA No. 251/Ahd/2012 vide order dated 24/06/2017. The relevant extract of the order is reproduced as under:

19. We find that in earlier assessment year, this dispute travelled up to the Tribunal and the Tribunal has considered the same in ITA Nos. 1015 & 1219/Ahd/2011 and 250/Ahd/2012. The relevant findings of the Coordinate Bench reads as under-

24. Ground 3 relates to the addition made towards Gain on securitlzatlon amortized as per KBI guidelines.

25. The A. 0 has considered this issue at para 7 on page 14 of his order wherein the Officer made the following observations;-

7.1 On perusal of the significant accounting policies to the financial statement, it is seen that the note on ‘securitization1 (Para 4,4) reads as under:

The bank enters Into purchase/ sale of corporate and retail loans through direct assignment/ special purpose vehicle (SPV). In most case, post securitization, the bonk continues to service the loans transferred to the assignee/ SPV. The bonk also provides credit enhancement in the form of, cash collaterals and/ or by subordination of cash flows to Senior Poss Through Certificate /PTC) holders. In respect of credit enhancements provided or recourse obligations (projected delinquencies, future servicing etc./ accepted by the Bank, appropriate provision/disclosure is mode at the_ time of sale in accordance with AS-29-provisions, contingent liabilities and contingent assets.

Gains on securitizatlon transaction is recognized over the period of the underlying securities issued by the SPV. Loss on securttizotion is immediately debited to Profit and Loss Account.

7.2.further, it is seen that ‘Notes to account'(Para 5.1. 15) reads as under:-

31.03.07 (RS in Cr.)
Number of loon accounts securitized 2.00
Book value of loan assets securitizsd 547.16
Sale consideration received for the securities assets 550.09
Net gain/ loss over net book value 2.93

7.3 The assesses was asked to explain where the above amount of Ks. 2.93 crores has been offered as Income in its annual accounts. In this regard, the assessee contended as under: GAIN ON SECURITIZA TION OF ASSET OF RS. 2.93 CRORES AS PER PARA 5.1,15 OF THE AUDITED ACCOUNTS

During the hearing held on 10.3.1.2009, you hove requested us to provide explanation that where the net gain of R$. 2.93 on securitization transactions, as per para 5.1.15 (Page No. 60 of the annual report), has been accounted in the Profit and Loss. In this regard we submit as follows:

For the year under consideration, the Bonk has recognized income of fts. 2,00,28,09? under the head Other Income, (Schedule 14, sub-clause, VII, miscellaneous income) and fis. 93,13,051 was shown under the head other liabilities and provisions /Schedule 5, sub clause vil, others including provisions). The method of accounting followed in this regard !s as per the RB1 guidelines.

In terms of the RBI Notification, a copy of which is enclosed for your reference, any loss arising on account of the sale pursuant to secvrittiation proposal should be accounted and charged to the Profit and Loss account for the year during which the sale upon secu/afiiation

Is effected and any profit/premium arising on account of such sale should be amortized over the life of the securities issued or to be issued by the SPV (specialpurpose vehicle). As per the RBI directives, (Please refer Significant Accounting Policies at Para 4.4 under the head ‘Securltisation’, on Page No. 51 of the annual report/, gain on securitizatlon is recogniied over the period of the underlying securities issued by the SPV and loss on securit/zoti’on fa deb/ted to Profit and Loss account,

26. The explanation of the assessee did not find favour with the A.O, who went on to make an addition of Rs. 93.13.051/: Assessee carried the matter before the Id. CIT’A) and reiterated what has been stated during the course of assessment proceedings. It was strongly contended that what Is relevant for Income Tax is real income. It was further brought to the notice of the First Appellate Authority that RBI guidelines ore expressly made mandatory for all banks. After considering the facts ond the submissions, the Id, CIT(A) was of the opinion since the assessee has sold these Impugned assets, therefore, the assessee has no liability whatsoever on these transactions afterwards. Since there is no uncertainty to the income on these transactions there Is no question of postponing the Income. The Id. CITfA) confirmed the addition made by the A.O. Before us, the counsel for the assessee once again stated that being a bank It has to monetarily follow the guidelines Issued by the RBI. It is the soy of the (d. counsel that It is not the cose of the revenue authorities that the assessee has not followed the guidelines of the RBI, Therefore, the action of the A.O and also of the la. ciTfA) ore against the facts of the case. Per CQntro, the Id. D.R. strong// relied upon the order of the revenue authorities.

27. Having heard the rival submissions, we hove carefully considered the orders of the authorities below. It Is a settled proposition of law that what is relevant far income Tax on the basis is the real income as held by the Hon’ble Supreme Court in the cose of’Godhra Electricity Ltd. 225 ITR 746. Various High Courts have given due recognition to RBI guidelines which determined the taxation of banks/NBFC. The Hon’ble Vttarunchat High Court in the case of Nainltal Bank Ltd, 309 ITR 335, Hon’ble Allahabad High Court In the case of Koihsh Auto Finance Ltd. 320 tTR 394 and also Hon’ble High Court of Delhi in the case of Elgi Finance Ltd. 293 ITR 357.

28. In our considered opinion, the amortization merely represents a timing difference and since the bank is consistently making profits and paying tax at the highest rate without claiming any tax holiday benefit, it can be safely concluded that the method followed Is revenue neutral. We draw support from the decision of the Hon’ble High Court of Bombay in the cose of Nagri Mills Co. Ltd. 33 ITR 681.

29. Considering the/acts in totality in the tight of the judicial decisions referred to heretnabove, we do not find any merit in the findings o/ the Id. QJ(f\}. We accordingly set aside the findings o/f the Id. CIT(A) ond direct the A.O to delete the addition of Rs. 93.13 lacs. Ground no. 3 accordingly allowed.

20. As no distinguishing decision has been brought to our notice, respectfully following the findings of the Co-ordinate Bench (supra), we direct the A.O to delete the impugned disallowance/ additions. So Ground no.3 is accordingly allowed.

16.1 Before us, no material has been placed on record by the Revenue to demonstrate that the decisions of Tribunal as discussed above has been set aside / stayed or overruled by the higher Judicial Authorities. Before us, Revenue has not placed any material on record to point out any distinguishing feature in the facts of the case for the year under consideration and that of earlier years nor has placed any contrary binding decision in its support. Hence the ground of appeal of the assessee is allowed.

17. The 3rd issue raised by the assessee in ground number 3 is that the learned CIT-A erred in confirming the order of the AO by sustaining the addition of Rs. 136.52 crore on account of commission income from the bank guarantee furnished to the customers.

18. The assessee being a banker was providing various kinds of bank guarantees to its customers. On providing the bank guarantees, the assessee used to charge commission up front from the customers which used to be offered to tax same year in which the bank guarantee was provided till the immediate preceding year. However, the assessee in the year under consideration has changed its policy for recognising the income by way of commission from the bank guarantees. Instead of charging the commission income in entirety in the year in which bank guarantee was furnished, it has spread the income over the guarantee period.

18.1 The change in the policy for recognising the income in the books of accounts was justified by the assessee on the reason that the bank guarantee is issued for certain period of time but the same can be rescind before the expiry of term on account of any reason. In that event the assessee has to refund the guarantee commission under the rules framed by the Foreign Exchange Dealers Association of India. Thus, the assessee changed its accounting policy to recognise the commission income qua the bank guarantee furnished which is accrued during the period of 12 months comprising in the financial year. There is no prohibition under the provisions of section 145 of the Act to change the policy to recognise the income if it is based on bona fides reasons.

18.2 However, the AO disregarded the contentions of the assessee by observing that there was no requirement for changing the accounting policy either under any statute or mandated by the ICAI. The assessee consistently has been following the system of recording the commission income on upfront basis. Similarly, the assessee has not given any justification that the change in the method of accounting will show the better presentation and preparation of the financial statements. As such the assessee has adopted unrealistic approach by postponing its real profit for a liability which is contingent in nature. Furthermore, the assessee will defer its income whereas its customers will recognise the expenses in the year in which the bank guarantee was furnished by the bank. Thus, there will be a mismatch between the income shown by the assessee viz a viz the expenses to be shown by the customers. The assessee by issuing a bank guarantee is not rendering services on constant/ year to year basis. As such, once the bank guarantee issued even for a longer period but the services are assumed to be rendered in one time.

18.3 The AO further observed that there was no clause appearing in the guarantee agreement making the assessee liable to repay the guarantee commission in the event it comes to an end before the tenure provided therein. Thus, there was no liability on the assessee to repay the amount of bank guarantee commission received by it.

18.4 Once the contract for the guarantee signed it means the services have been rendered by the assessee. As such the period of contractual terms becomes immaterial. Accordingly the amount of commission cannot be treated at par with the advances.

18.5 The deferment of tax liability on the commission income cannot invite the principles of matching concept. if it is accepted, then it would lead to distorted picture of the revenue in the hands of the assessee and the customer of the bank. In view of the above, the AO disregarded the contention of the assessee and made the disallowance of Rs. 136.52 crores which was added to the total income of the assessee.

19. Aggrieved assessee preferred an appeal to the learned CIT (A) who confirmed the order of the AO by observing as under:

7.3 I have considered the observations of ihe AO and the submissions made by the appellant. I find that the appellant had been following the accounting policy in respect of accounting its income of commission from providing bank guarantee on upfront basis ie as accrued in ine year of issuing bank guarantee While commission on deferred payment guarantee was being recognised in the books on pro rata basis over the tenure of such guarantee , the commission income on guarantee other than deferred payment guarantee was recognised as income in the year of issue of such bank guarantee. However, the appellant changed its policy to recognize the commission income on guarantees whereby all kinds of guarantees issued by the bank was recognized on pro-rala basis over the period of the guarantee The AO held that such a change in the mei’hod resulted in to lower income for the year under consideration and the chsnge was also not justified. He therefore added a sum of Rs 136.52 Crores as income considering the non acceptance of the changed method and as per note in the audited accounts It is necessary to understand the various types of bank guarantees so as to ascertain whether in respect of the guarantees issued by the appellant there is any service remaining to be provided as is the case of deferred payment guarantees

7.3 1 The various types of Bank Guarantees are generally issued as below.

i) Financial Guarantee: Here, the bank guarantees that the beneficiary wiil meet the financial obligation and in case he fails the bank as a guarantor is bound to pay.

ii) Performance Guarantee1 Here the guarantee issued is for honouring a task and completion of the same in the prescribed/agreed upon manner as stated in the guarantee document

iii) Advance Payment Guarantee This guarantee assures that the advance amount would be returned, in case the agreement for which the advance is given does not get fulfilled.

iv) Payment Guarantee/Loan Guarantee The guarantee is for assuring the payment/loan repayment In case, the party fails to do so, guarantor is bound to pay on behalf of the defaulting borrower

v) Bid Bond Guarantee: As a part of Ihe bidding process, this guarantee assures that the bidder would undertake the contract he has bid for. on the terms the bidding is done.

vi) Foreign Bank Guarantee. Wnen a guarantee is issued for a foreign beneficiary, it is called foreign BG

vii) Deferred Payment Guarantee- When the bank guarantees some deferred payment, the guarantee is termed as Deferred Payment Guarantee For example: A company purchases a machine on credit basis w.th terms of payment being 6 equal instalments In this case, since the payment is deferredto a later period, creditor seeks deferred payment guarantee for an assurance that the payment would reach him in the given time period.

viii) Shipping Guarantee: This guarantee protects the shipping company from all kinds o f loss, in case the customer does not pay. This document helps the customer to take possession “of goods

7.3.2 As seen above, it is only in respect of the deferred payment guarantee in which the appellant bank has to provide the service in respect of future period on deferred basis. However in respect of normal bank guarantees , the moment the guarantees are issued, the commission thereon is accrued and what is remaining is the liability of the bank if it may arise in future on account of invocation of the guarantee by the beneficiary. However, thai is a separate transaction and the expenditure or loss if any that may so arise due to invocation of the guarantee and the failure of the client to pay the same to the bank has nothing to do with the commission income that has already accrued at the time of issuing the financial guarantees. There remains nothing further in the matter of providing any service by the appellant hank once an irrevocable guarantee is issued. Hence the accaial of commission income in such a case cannol be postponed over the period of !he guarantee. No such claim of any loss is the issue before me nor il is the appellant’s case tha! any such commission has been refunded. If on happening o^ any such contingency in future during tenure of guarantee any such payment or refund is given, the same can be certainly claimed as expenditure in accordance with the provisions of law or as a loss incidental to the business in the year in which such even occurs but in such a case, (here is no effect as i’ar as ‘he commission income which has already accrued &( the time of issuing Ihe guarantee is concerned . By changing the method, ihe assessee cannot reverse the accrual of income. The basis of accounting the income and its chargeability is now specified in section 145 and the assessee can adopt either cash or mercantile method. Once the mercantile method is adopted for several years on ihe correct basis under which the commission income on normal type of financial guarantees is accounted for and taxed upfront. there is no justification to change the same in the year under consideration as that would disturb the very fundamenta l of accrual concept.

7.3.3 As far as the various case laws on which reliance is placed by the appellant it is to be stated that they are not relevant to ihe issues on hand. The decisions upholding spread over of income in later years are those in which there is some services to be provided in future and amount is received in advance but that is not the case as far as the question issuance of bank uuarantees is concerney, wnhen the commission is received and becomes the income of the appellant bank soon date when such guarantees are issued No further service are pending for being rendered as far as the client is concerned and what remains is only the likely obligation under such guarantee in case such contingency happens on invocation of such guarantees by the beneficiary However such obligation cannot be terms as “service ‘ provided by the sppellant but it is only part of its undertaking which it has undertaken to discharge which is a separate transaction on the side cf outgo ol the money

7.3.4 Regarding reliance placed by the appellant on the decisions in the case of Bank of Tokyo Ltd 71 Taxman 85 and on decision in the case of BNP Paribads Bank 150 TTJ 395 (Mum), it is to be noted thai in the case of Bank of Tokyo, the issue related to commission income on deferred payment guarantee and the facts were that under the terms of the guarantee, the amount of commission was refundable en cancellation of guarantees. The Hon ‘ble -High Court considered the relevant rules unoer which guarantees were issued which provided that in case the guarantee is redeemed or cancelled, the overcharged commission snail be refunded In the instant case of the appellant however, the issue is not about commission income on deferred payment guarantee (which is already accounted for as hitherto on pro rata basis and which is not disputed by AO) but the issue is regarding change in accounting the commission income on other guarantees which was accounted for as accrued when guarantees were issued where there is no such refund clause to return the commission income already accrued as noted by AO after verification of sample guarantee documents.

7.3.5 As regards ihe decision of the ITAT Mumbai in ihe case of BMP Paribas Bank 150 TTJ 395, the ITAT has followed the judgment of Calcutta High Court in the case of Bank of Tokyo Ltd which as seen above dealt with the issue of deferred payment guarantee. The said decision of ITAT also makes it clear that ihe appellant was following the method o f spread over such commission in earlier year (and it was not change made in the year which was under consideration). The Bombay High Court in 214 Taxman 548 affirmed the said decision because the facts found in that case were that the guarantee which has been issued for a certain period of time is cancelled by the client before the expiry of the tenure of ihe guarantee, resulting into the respcndent-assessee returning to its clients the part of the guarantee commission attributable to the unexpired period of the guarantee, hence the facts are clearly distinguishable from the facts of the appellant’s case in which the commission income on bonk guarantees was accounted for upfront in the pasi (excepi deferred payment guarantees) and the same was regularly followed and accepted in the past and there is no refund clause as noted above.

7.3 6 Regarding the contention that the guarantee transaction, does not get concluded or completed upon the signing of guarantee deed and it may be involving risk where the guarantee is invoked by the beneficiary, as already discussed above, there is no services to be rendered to the client from whom commission is received by the appellant and in ihe eveniuslity of invocation of guarantee , such payment by the appellant bank may be the expenditure of icss but that does not entitle the appellant to reduce the commission on the ground of likely hood of such contingency It is not the case of any product being sold with a warranty where in there may be scientific method of calculating risk based on past history and the provision thereof may be permit deduction when made baseo on such scientific analysis. In the case of aguarantee there may not be invocation foi several years or might be such invocation in any particular year which is quite contingent and such risk cannot be calculated as canbe done in case of a sale of manufactured product. Bank guarantee : s a service and not sale of product. Considering the facts and circumstances of the case, the judgments inthe case of Woodward Governor India P ld 312 ITR 254 and the case laws cited regarding real profits or commercial principles , permissible change in method are not applicable to the facts of the appellant’s case Any actual expenses or loss on account of payment while discharging obligation under the guarantee is always claimed and allowed to the appellant according lo ihe accepted accounting method in the past The judgment o f Gujarat High Court in the case of Echke Limited 310 ITR 4^ is also not relevant to the facts as it cannot be said that by net allowing the change in the accounting method in respect of accrued income, the assessee is paying tax on notional income. What is really accrued as income -s only being taxed by the AO as the guarantee commission has already accrued The decisions relied upon where the income is received in advance and services were to be rendered in future are also not applicable as there is no service to be rendered once the bank has accepted the obligation and any discharge of such obligation which may or may not arise has no impact as far as income side o! the-appellant is concerned. As far ss commission on bank guarantee is concerned . the same cannot be compared with receipt of interest orbil l discount where the borrower himself is using the fjnds of the bank for future period and hence the receipt is related Lo the period of such use , The judgment of Supreme court in the case of Madras Industrial Investment Corporation Lid 225 ITR 802 is alsonot relevant to the facts of the appellant’s case as in that case the assessee was making use of the funds for future period and hence the expense was spread over the period of use In the instant case, it is not the case of any such expenditure of which benefit is received (or future years but here the case is of receipt of income on accrual basis.

7.3.7 In my opinion, once guarantee is issued, the service to the client gets concluded unlike in the case of deferred payment guarantee where the provision of service is continued in respect of future payment. The contention of the appellant that a change in accounting policy is permissible, there is no dispute about such contention Also, the fact that in the year of change (here may be transitional impact is not the question relevant in the instant case. The moot question is that is there any justification which may permit the change in the accounting po;icy once the concept of accrual is considered and guarantee commission is held io have accrued when the guarantee is issued.

7.3.8 As regards the contenion that change in method is merely a timing difference and reliance on the decisions in the case of Nagri Mills Limited 33 ITR 681 and Excel Industries Limited relied upon by the appellant . the decision of the Nagri Mills was pertaining to deduction of bonus and year of allowability In the case of Excel Industries Limited again the Supreme Court was concerned wiih question of value of benefit in respect of benefit of duty on advance license pass book and :ssue was whether there can be brought to tax any hypothetical income which has not accrued ?

The Court on the contrary held that income “accrues’ when the same is due andvri to receive the same gets vested in the assessee. In ihe instant case, not only the to receives the bank guarantee commission is due and gets vested in the appellant but the same is also received when ;he guarantee is issued It is settled legal position that a decision in a case is always to be read with reference to the facts of that particular case, in the appellant’s case, once there is no refund clause of commission received on issuance of Pank guarantee . the income of commission gets accrued in the year in which the guarantee is issued

7.3.9 It is pertinent to state thai the Special Bench of ITAT in the case of Dy.CIT vs Bank of Baharain & Kuwait 132 TTJ 505 (Mum) (SB) has considered ihe identical issue and also judgment in the case of Bank of Tokyo and Madras Industrial Investment Corporation ltd relied upon tay ihe appellant and held that if the guarantee commission was refundable then it cannol be said that absolute right to the commission had accrued in favour of the assessee at the time of execution of contract for furnishing guarantee by it but if the guarantee commission was not depended upon the period of guarantee and. thus, had accrued m favour of the assessee on the date of execution of contract for furnishing guarantee then the same has to be taxed in ;he year in which the guarantee was furnished irrespective of the period to which guarantee remained alive because the guarantee commission cannot be apportioned with reference to the period over which the guarantee extended Similar view is taken by tV.umbai ITAT in the case of ,Dy CIT vs Cnohung Bank 126 ITD 448 after considering ihe judgments in the case of Bank of Tokyo and Madras Industrial Investment corporation and held as under:

Admittedly, the amount of commission is received when the bonk issues guarantee. Such guoram.se is lor n specific period, sometime; extending to years. The amount of full guarantee commission is received o; ths time of issuing guarantee iriespscuve of the period for \vhich the guarantee is given, ij the customer does not moke a default to the third party, theft ths au-arc-itss zxpiKi at the end of iha period and the security received from its customer, in the shape of FOfii. is returned There may be situation in wh:ch the client revokes the guarantee onor to the completion of the guarantee period 01 commits the default as o resu<t of wh.ch the bank hoi to appropriate the proceeds of the security to satisfy the third part’/ Whatever may be the case the bank incurs no persona! obligation cither at the time of issuing guarantee or thereafter, which may land it into situation o/ paying from its own pocket The bank’s duty is only to either return the security in the shape of FDfts tc its customer as such at ibe end of the guarantee period, if a!! goes well, or to appropriate the security in discharge of obligation of the customer to the third parly, in case of default Ordinarily the guarantee commission, once received, is not returnable even ij the customer revokes the guarantee prior to the prescribed period. In such a case, the income accrues at the time vjhen the guarantee is given irrespective of the duration o f ihe guarantee period. The right to receive the commission arises in favour oj the bank at the moment of giving guarantee. /Vot only the right to receive the income becomes absolute and gets vested into it at the time oj giving guarantee, the amount of commission is also received there and then, ft is beyond our comprehension os to how it can be linked with the period for which the guarantee runs. It is just like o doctor charging fee for giving prescription to a chronic patient for six months and the period of three months falling in this year and the remaining three months in the next year. Can it be said that the fee of the doctor, for giving the prescription, has not entirely accrued TO him at that time itself and ths income will accrue on month-to-month basis and as such half of the fee be not considered as income in the year one? In our considered opinion, the answer to this question has to be in negative and negative alone. In Ihe tike manner, when the bank gives guarantee for pence! emending inn closa of the year and (here is no obligation fo refund the amoun; in case such guarantee is revoked onor ro ‘he prescribed period, the entire commission accrues to it at tne lime of giving guarantee and no port of such commisvor, can be said to be deferred to next year.

17. However, if there is some clause in [he agreement between the bonk and the customer thai in cose the guarantee ;s revoked prior to the prescribed period, then the bank shall be liable to refund the pfoportiono:e commission for ;he unexpired period, then the situation will be different Ir, such a case, the right to income will accrue only proportionately for the period covered in (he vcar. It is tor the clenr season thoT even if the amount of commission is received :n advance- bin tne receipt cannot be said to have assumed the character o f income because the accrue! is dependent on the period for which the guarantee continue?. The accrual oJ the amount of commission relatabie 10 the period beyond the close of the year m such a situation will be solely dependent on the fact that whether the guarantee continues or not Thu\ m the contingency of the customer revoking the guarantee, Ihe amount earlier received will require refund Consequently, if there exists such a clause of refund of the commission in the agreement on the earlier revoking of the guarantee or there is some other material to show the understanding between the Dank and the customer to that extent, in that situation the accrual of entire income will not take place on furnishing guarantee, but it will be spread . over the period tc wh:ch the guarantee relates If, however, the amount of the guarantee commission is ‘Cceived at ,’; siretch and there is no contingency of paying it beck even in the eventuality of revoking the guarantee prior to the completion of the guarantee period, then the entire amount of guarantee commission will partake the character of income in the year of receipt itself. Coming back ro the facts of our case, we find that no material has been placed before us to demonstrate that there was any clause in the agreement or there wo.-, some other material obliging the bonk to refund the part of the guarantee comniission. in case it is eoetici revoked. “

7.3.10 In view of the above, the contentions of ‘he appellant cannot be accepted. The plea that a right always remain with customer ;o recall the payment for the debt of unexpired period and that it can be enforced by Ihe Ombudsman Office or regulatory authority is not supported by evidence on record and are merely empty arguments as no such eventuality has been brought on record to have happened in the year under consideration and even if it happens, the payment or expenditure ultimately borne bythe appellant can be claimed as the expenditure. However, this is not the issue for consideration in this appeal. On totality of facts and the legal position discussed above the ground raised by th appellant is rejected. The addition of Rs.136.42 Crores made by the AO is confirmed and appeal of the appellant on this ground is dismissed.

19.1 Being aggrieved by the order of the ld.CIT(A), the assessee is in appeal before us.

19.2 The ld.A.R before us submitted that commission income has been recognized in the books of accounts over the period of the guarantee furnished to the parties.

Furthermore, in the event of cancellation of the bank guarantee, the assessee was liable to refund the commission expenses. Thus, the assessee changed the policy for recognizing the commission expenses.

19.3 On the contrary, the learned DR vehemently supported the order of the authorities below.

20. We have heard the rival contentions of both the parties and perused the materials available on record. In the present case, the assessee till the immediate preceding assessment year was recognising the commission income generated on furnishing the bank guarantee on upfront basis. In other words whenever any bank guarantee is furnished by the bank, it has recognised the commission income qua such bank guarantee in the year in which it was furnished. However, the assessee from the year under consideration has changed its policy of recognising the commission income qua to such bank guarantee by recognising the same on a pro rata basis. For instance, if the assessee has issued bank guarantee for 2 years beginning from 1 April 2010 till 31 March 2012, then the assessee recognise the commission income in two financial years i.e. FY 2010-11 and 2011-12. The assessee for such change in the policy has justified by furnishing the note in the financial statements which is reproduced as under:

Change in recognition of bank Guarantee commission income

During the current financial year, the bank has changed its policy to recognize commission income on guarantees issue by it. Against the earlier practice of recognizing the commission incme on guarantees upfront when due (except in the case of deferred payment guarantees), the Bank now recognizes the income on a pro-rata basis over the period of the guarantee. As a result of the aforesaid change in policy, other income for the year is lowe by Rs.136.52 crores with a corresponding increase in other liabilities.

20.1 Now, first let us understand what does the accounting policy means. Accounting policies are the specific doctrines, conventions, rules and practices adopted by the assessee in the preparation and presentation of financial statements. These policies are used to deal specifically with complicated accounting practices such as depreciation methods, recognition of goodwill, preparation of research and development (R&D) costs, inventory valuation, and the consolidation of financial accounts. These policies may differ from company to company. It is the management of the company to choose specific accounting policies that are advantageous to the financial reporting of the company. Once a policy has been adopted by the company but on a later date the management decides to change the same then, the onus of justifying the change in accounting policy is on the assessee. In other words, the assessee has to justify the change in the accounting policy on the parameters that it is more logical and transpires sound commercial basis. Furthermore such change in the accounting policy should not defeat or postpone the charge on the income of the assessee which has been earned by it.

20.2 Now the question arises whether the commission income has accrued to the assessee on furnishing the bank guarantee to the parties. Admittedly, the assessee was charging commission immediately on furnishing the bank guarantee irrespective of the period to which the guarantee relates. For example, if the guarantees is issued for 2 years, the assessee shall charge the commission from the party for both the years upfront but the same shall be accounted as income in 2 different financial years to which it relates. Upon furnishing the bank guarantee, the assessee undertakes the risks for the period covered under the bank guarantee. If such risks spreads over more than one financial year, then the income should also correspond to such financial years. That is the requirement of the matching concept. Under matching concept the income is recognised to the period to which it relates. Thus, the mere receipt of commission does not mean that such amount represents the income of the assessee. It is for the reason that the assessee is exposed to the risk in different financial years, therefore in our considered view the same should relate to the periods where the assessee has undertaken the risk.

20.3 As per the accounting standard 9 issued by the ICAI, the fees earned by the bank on furnishing the bank guarantee which is carrying continuing obligations over the guarantee period should be recognised over the period of bank guarantee.

20.4 In the given facts, we find that the assessee has issued a refund to the Reliance Power Ltd on account of cancellation of bank guarantee furnished by it. The details of the same is placed on page 274 of the paper book. Likewise it is also seen that the assessee has issued a bank guarantee to a company known as Farsight securities Ltd dated 24 January 2011 for a period of 12 months. The period of 12 months is falling in two different financial years. Accordingly, the exposure of the assessee to the risk on such guarantee is relating to different financial years i.e. Financial Year 2011-12 and 2012-13. This fact can be verified from the details available on pages 275 to 277 of the paper book.

20.5 We also draw support and guidance from the judgment of Hon’ble Madras High Court in the case of CIT vs. Coral Electronic Pvt Ltd. reported 274 ITR 336, where it was held as under:

8. In the instant case the amount that was received was only as charges for the services to be rendered in future. The services may be rendered or may not be rendered depending upon withdrawal of the money as and when the customer required. So, it is highly uncertain as to whether it would at all remain as income of the assessee. Only when the service is done the assessee has a right over the amount that was deposited. Till then, he has no right over the same. It is in that sense till then, it cannot be considered as an income of the assessee and is not exigible to tax. Therefore, the issue is answered in favour of the assessee and against the revenue.

20.6 We further draw support and guidance from the judgment of Hon’ble Delhi High Court in case of CIT vs. Dinesh Kumar Goel reported in 331 ITR 10, where it was held as under:

In the instant case, it was apparent that at the time of admission, the students were required to deposit the whole fee of the entire course, but that would only remain a ‘deposit’ or ‘advance’ and it could not be said that said fee had become ‘due’at the time of deposit. Fee was charged in advance for the entire course, presumably because of the reason that there should not be any default in making the same by the students during the period of course. Interestingly, the Assessing Officer, in his assessment order, had himself stated that ‘students were required to deposit the fee for the whole module of course at the time o f registration itself’. The Assessing Officer had used the expression ‘deposit’. In the very next breadth, he drew the conclusion that it would mean that the fee had become ‘due’. Thus, the Assessing Officer knew the significance of the expression ‘deposit’ viz -a-viz ‘due’, though he committed the mistake in treating the said deposit as the fee due. On applying the principles of law laid down in E.D. Sassoon & Co. Ltd. (supra) and Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC), it would be apparent that the fee was not due at the time of the deposit. The services in respect of the financial year 1997-98, for which also the payment was taken in advance, were yet to be rendered. Therefore, applying the principle in the case of Calcutta Co. Ltd. (supra), it could only be treated as advance, otherwise it would lead to an anomalous situation, highly derogatory to the assessee, which is not intended by law, viz., even when for the very amount received, expenses were to be deducted to arrive at the net income and those expenses were yet to be incurred (which would be incurred in the next financial year), the entire receipts would be income which would be exigible to much higher tax. [Para 15]

20.7 It is also important to note that the assessee is paying the taxes at the maximum marginal rate and there is no allegation by the Revenue that the income of the assessee by changing the accounting policy has not been offered to tax. In other words the income of 1 year has been postponed to the another year in the manner and for the reasons as discussed above. In view of the above and after considering the facts in totatlity, we et aside the finding of the ld. CIT-A and directo the AO to delete the addition made by the AO. Hence, the ground of appeal of the assessee is allowed.

21. The assessee in the additional grounds of appeal has sought the deduction on account of education, secondary and higher education cess as well as employee stock option plan for Rs. 44,06,59,588.00 and 250.63 crores respectively.

22. The assessee has submitted two applications dated 27-11-2017 and 9-9-2020 for admitting the additional grounds of appeal which read as under:

Additional ground in the application dated 27-11-2017

1.4 The Appellant submits that Employees stock Options plan (ESOP) cost of Rs.250.63 crores, incurred by the Appellant on issue of new shares to the eligible employees ought to be allowed as deduction under section 37 of the Act and other applicable provisions of the Act.

1.5 The ESOP cost of Rs.250.63 crores represents the difference between the market price o f shares as on date of exercise and the exercise price (being market price of share as on date of grant option). The Appellant submits that it be granted deduction of the said ESOP cost of Rs.250.63 crores while computing its total income for the assessment year under consideration.

1.6 The appellant craves leave to add, amend, alter, substitute, delete and/or modify in any manner whatsoever this ground on or before the hearing of appeal.

Additional ground in the application dated 9-9-2020

2. DEDUCTION OF EDUCATION CESS AND SECONDARY AND HIGHER EDUCATION CESS

2.1 The appellant submits that education cess and secondary and higher education cess
of INR 44,06,59,588 paid by the appellant should be allowed as deduction under section 37 of the Income-tax Act, 1961(‘the Act’)

2.2 The appellant had not claimed education cess and secondary and high secondary cess (collectively referred to as ‘Cess’) of INR 44,06,59,588 paid for FY 2009-10, in the return of income filed for AY 2010-11.

2.3 It is respectfully submitted that Cess is allowable as a deduction while computing taxable income. This is because it is different from and not forming part of income tax and hence does not fall under the purview of section 40(a)(ia) of the Act.

23. It was pleaded by the assessee in the applications filed for the admission of the additional grounds of appeal that the issue raised in the additional grounds of appeal go to the root of the matter and the necessary facts are available on record. Accordingly, it was prayed by the learned AR for the assessee that the same should be admitted for adjudication.

24. On the other hand, the learned DR opposed to admit the additional ground of appeal on the reasoning that it was not raised before the authorities below.

25. We have heard both the parties and perused the materials available on record. The Hon’ble Supreme Court in the case of National Thermal Power Co. Limited vs. CIT, cited supra, has held as under :-

“ Under section 254 of the Income-tax Act, 1961, the Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit. The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction is denied, there is no reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of the item. There is no reason to restrict the power of the Tribunal under section 254 only to decide the grounds which arise from the order of the Commissioner of Income-tax (Appeals). Both the assessee as well as the Department have a right to file an appeal/cross-objections before the Tribunal. The Tribunal should not be prevented from considering questions of law arising in assessment proceedings, although not raised earlier.

25.1 The view that the Tribunal is confined only to issues arising out of the appeal before Commissioner (Appeals) is too narrow a view to describe the powers of the Tribunal. Undoubtedly, the Tribunal has the discretion to allow or not to allow a new ground to be raised. But where the Tribunal is only required to consider the question of law arising from facts which are on record in the assessment proceedings, there is no reason why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee.

25.2 Since the claim of the assessee is purely legal claim and entire facts are available on record. Thus it is not justified in not admitting the purely legal ground raised by the assessee for the first time. As the assessee has not claimed this expenditure before the lower authorities, they have not got opportunity to examine the same as per the provisions of Act, thus In the interest of justice, these grounds are restored back to the file of the Assessing Officer with a direction to examine assessee’s eligibility to claim of deduction of the items raised in the grounds of appeal de novo afresh after providing an opportunity of being heard to the assessee. Thus both the additional grounds of appeal raised by the assessee are allowed for statistical purposes.

25.3 In the result, the appeal filed by the assessee is partly allowed for statistical purposes.

Now coming to the ITA No. 2176/Ahd/2016, an appeal by the Assessee for A.Y. 2011-12

26. The assessee has raised the following grounds of appeal:

The appellant, being aggrieved by order dated 1-6-2016 passed by learned CIT (Appeals] 4, Ahmedabad [hereinafter the learned CIT(A)], this appeal is filed on following grounds, which may be considered without prejudice to one another.

1.0 Disallowance (further) /s 14A r.w. Rule 8D Rs. 36,65,00,000 (Rs. 36.65 crores) 1.1 In facts and circumstances of the case and in law, the learned CIT(A) erred in confirming disallowance out of interest expenses to the extent of Rs. 33-19 crores and out of operating expenses to the extent of Rs. 4.09 crores, thus aggregate Rs. 37.28 crores (inclusive o f disallowance out of operating expenses of Rs. 63.71 lacs volunteered thereunder by the Bank) i.e. confirming disallowance by upholding invocation of Rule 8D in relation to tax-free income of Rs. 16.25 crores.

1.2 In facts and circumstances of the case and in law, the learned CIT(A) erred in not appreciating that

(i) The Bank held (except shares in subsidiaries/JV companies) its entire investment portfolio of Rs. 71732 crores (including tax-free shares and securities) as current asset i.e. stock-in-trade; and provisions of section 14A are prima facie not applicable to the dealers in shares and securities.

(ii) The Bank held fax-free securities of Rs. 1571 crores as against interest-free owned funds (paid-up share capital and freejeserves) of Rs. 18998 crores [in addition to huge non-interest bearing current account deposits of Rs. 36917 crores]; and cash profit after tax of Rs. 2718 crores earned during the previous year.

(iii) Dealing in shares and securities is one of the principal and core business of the Bank.

(iv) There was no specific borrowing for making such tax-free shares and securities; there is no adverse evidence even for primary presumption that interest-bearing funds have been utilized for making tax-free investment.

(v) The Bank earned trading profits of Rs. 366 crores from shares and securities as business
profits which was much higher than the tax-free dividend income of Rs. 16.25 crores. The primary object of the treasury operations is to reap trading profits and not to earn tax-free income. Tax-free securities yielded meagre ROR of 1.03% p.a.

(vi) The Bank has earned interest income far in excess of interest expenses there against i.e. there is no net interest expenses and Rule 8D(2)(ii) cannot be invoked.

(vii) Rule 3D is not charging provision. Rule 8D is subordinate to charge provide section I4A. Rule 8D w.e.f. A.Y, 2008-09 cannot supersede judicial authorities in the Bank’s own case for A.Y. 2002-03 to A.Y. 2005-06 by Hon. Gujarat HC/Hon. SC. Rule 8D standalone cannot source charge in form of excessive and unrealistic disallowance.

(viii) Position of law upto A.Y. 2007-08 and post A.Y. 2008-09 (Rule 8D] cannot be different as to charge of tax u/s i4A r.w.s. 4.

1.3 The learned CIT(A) has erred in confirming that Rule 8D is mandatory or automatic with no scope for variation, holding that Rule 8D, though subordinate or machinery provision, could go beyond scope of charge provided in section 14A.

1.4 In facts and circumstances of the case and in law, the learned CIT (A) erred in not appreciating that administrative expenditures were incurred in the course of bonking business and no part of such expenditure could have been disallowed u/s 14A as held by Ihe Hon. Gujaiat HC for A.Y. 2002-03 to 2005-06 rejecting the Revenue TA in the Bank’s own case, much less by upholding harbour formula of Rule 8D.

1.5 Without prejudice it is submitted that suo-moto disallowance out of operating expenses at Rs. 0.67 lacs be cancelled or alternatively the said disallowance be restricted to 1% to 2% of tax-free income of Rs. 16.25 crores as held by Hon. Mumbai ITAT/Mumbai HC in the peer bank’s cases.

2.0 (a) Bank Guarantee (BG) commission income prorate relatable to unexpired period treated by the Bank as income received in advance but held taxable Rs. 139,49,90,036 (Rs. 139.49 crores)

(b) Alternative claim for reduction of BG commission income included in total income but already taxed during A.Y. 2010-11 Rs. 108.40 crores

2.1 The learned CIT(A) erred in upholding the addition of Rs. 139.49 crores in respect o f BG commission income for unexpired period (beyond the previous year end] as chargeable income of the previous year, but treated by the Bank as income received in advance.

2.2 It is submitted that there is nothing in section 145 to prohibit a change from one regular method of accounting to another reasoned and acceptable method. The learned CITfA] failed to appreciate that prudence and conservatism require not anticipating a receipt which had not become due at previous year end.

2.3 It is submitted that the changed pro-rate method is not devoid of logic, on the contrary is well-recognized, followed by peer banks, more rational and in accordance with globa l practises.

2.4 Para 4 of AS i notified u/s 145(2) permits an assessee to adopt accounting policies so as to represent a true and fair view. Para 9 of AS 1 notified u/s 145(2) permits a change in accounting policy if it is considered that the change would result in more appropriate preparation or presentation of the financial statements.

2.5 The adverse inference u/s 145 against the change is permissible only if accounting system adopted is contrary to prescribed AS u/s 145; or AS noitified by ICAI u/s 211 (3c) o f the Companies Act, ] 956 or where true profits cannot be deduced

2.6 The learned CIT(A) failed to appreciate that the customer has right to receive refund for unexpired period in the event of BG being terminated period-.

2.7 Upfront collection of small BG commission is only mode of fee collection to cover several time more devolving risk. BG is a continuing obligation, the liability generally extends beyond previous year end and monetary risk upon invocation of BG is disproportionately high than rate of BG commission earned.

2.8 The issue merely represents a timing difference, tax-neutral and there is no loss of revenue if considered over the years [Please see Excel Industries Limited 358 ITR 295 [SCJ]

2.9 BG commission income is incidental income and not main revenue streams of the Bank. The learned CITfA) erred in holding changed accounting method as unrealistic presentation which postpones real profits for a liability which is contingent and creates a mis-match in revenue impact in hands of customer and in hands of the Bank. The learned CIT(A) also erred in holding that entire revision serves only one purpose i.e. deferment of tax for the Bank. The learned CITfA) also erred in law that the Bank’s right to receive BG commission stands established since it is recognised as expense in hands of the customer.

2.10 It is, therefore, submitted that addition of Rs. 139.49 crores in respect of BG commission income reiatable to period beyond previous year end be cancelled; and such BG commission income of Rs. 108.40 crores, included in total income but already taxed during A.Y. 2010-11 but recognized and offered to tax as chargeable income during the previous year, be allowed as deduction.

3.0 Interest income on NPA held as deemed accrued as per RBI repealed Guidelines under Rule 6EAr.w.s. 43D Rs. 11,16,75,000 {Rs. 11.17 crores)

3.1 The CIT(A) erred in law and on facts in confirming addition of Rs. 11.16 crores as interest income on NPA deemed accrued under RBI 1991 outdated Guidelines u/s43Dr.w. Rule 6EA.

3.2 The method of accounting in respect of interest income recognition on NPA as per RBI binding directives is followed by the Bank since A.Y. 1995-96, accepted by the Department, there have been no change in underlying facts or law since A.Y. 1995-96 and addition needs to be cancelled standalone following the ratio of Radhasaomi Satsang 193 ITR 321 (SC).

3.3 if is submitted that section 43D charge have inbuilt mandatory check that the specified interest income in sticky/NPA loans could be charged to tax in the previous year in which such interest income is credited to P&L account or in which such interest income fon sticky loans) is received, whichever is earlier.

3.4 It is submitted that Rule 6EA is sub-ordinate provision and cannot go beyond charge provided in section 43D, It is further submitted that the AO is not justified making such huge addition on literal and clinical reading of Rule 6EA during A.Y. 2011-12 based on RBI outdated 20 years old assets classification etc. repealed Guidelines.

3.5 It is submitted that real income test does not authorize the AO to tax hypothetical interest income which is not real income earned by the assessee.

3.6 It is further submitted that alternatively the interest income deemed, by (he AO as accrued on 31-3-2011, becomes NPA interest on 30-6-2011 even as per 1991 RBI Guidelines 180 days overdue criteria (as against 90 days overdue criteria at present) under Rule 6EA.

3.7 Without prejudice it is submitted that interest income of Rs. 11.16 crores, deemed chargeable under Rule 6EA, should consequently be deemed bod debt write off as per present RBI binding directives and hence consequential allowable deduction u/s36fl)(vii).

3.8   Without prejudice and alternatively such interest income, deemed chargeable under Rule 6EA, becomes deemed provision for bad and doubtful debt u/s 36(I)fviia) and be allowed thereunder being within the ceiling limit of Rs. 546.07 crores allowable u/s 36(l)(viia).

3.9 It is further submitted that this addition is only timing difference based addition, tax-neutral over two years and hence ought to be cancelled in view of Hon. SC judgement in the case of Excel Industries Limited 358 ITR 295 (SC), since the Bank has already recognized and offered to tox/consider the same during A.Y. 2012-13.

4.0 Disallowance of additional expenditure on account of revision of lease operating expenses charged to revenue in accordance with ICAI AS 1? Rs. 93.04 crores.

4.1 The learned CIT(A) failed to appreciate that such lease arrangements are covered by mandatory AS 19, have been classified as operating lease thereunder, Expert Advisory Committee of ICAI by its opinion in February/March 2001 has reiterated and advised an enterprise to recognize operating lease rental expenses in P&L account on Straight Line Method (SLM) basis over the , lease tenure, since the lease property would be used throughout the lease term on a consistent basis irrespective of market rate variation of lease rental in the area and also since physical use of lease property during lease tenure is on consistent basis.

4.2 The CIT(A) failed to appreciate that ICAI is a recognized accounting Apex body vested with the authority to recommend AS for ultimate adoption by the Central Government in consultation with National Advisory Committee of Accounting Standards and further as per proviso to section 211 (3c) of the Companies Act, 1956, till such time the Central Government prescribes AS, the AS issued by ICAI in the meantime is deemed relevant AS and is binding to the assessee for preparation of financial statements.

4.3 It is further submitted that section 145(3] empowers the Department to reject the books only if the AO is not satisfied with correctness or completeness of the accounts; or accounting method is not in accordance with AS notified u/s 145(2); or unless true profits cannot be deduced. It is further submitted that AS 2 u/s 145(2) and AS 5 of ICAI permit change in accounting policy/method or accounting estimate thereof and has to be honoured, if so consistently followed by fhe assessee in subsequent years except in a case which falls u/s 145(3).

4.4 Section 143(2) for the purpose of section 30 defines (lease rent in this case) “paid” to mean actually paid or incurred according to the method of accounting followed.

4.5 It is, therefore, submitted that accounting estimate adopted by the Bank is commended by the highest accounting body in India, it reflects the best practices adopted by the accounting world over. The loss of revenue in the year of change is only a transitional one and over the years is tax-neutral.

4.6 The CIT(A) also failed to appreciate revised estimate adopted by the Bank, has foundational relevance to the nature of banking business carried on in the branches, offices, ATM, extension counters etc. which are housed in the premises acquired for long duration tenure upto 9 years period.

5.0 Deemed short term capital gains on transfer of depreciable residential flat Rs. 81,18,900 (Rs. 0.81 crores).

5.1 The CIT(A) erred to appreciate that residential flat was sold under Open Bid process, though registered agreement for sale was executed on 14-3-2011, only 10% of sale consideration was received upto 31-3-2011, possession of the flat was not given upto 31-3­2011, the Bank has exclusive right-to cancel the agreement for sale and reallocate the said flat to next successful bidder if balance sales consideration is not received within stipulated time.

5.2 The learned CITiAJ also failed to appreciate that balance 90% sales consideration was actually received during June/July, 2011, possession of the flat was actually given to the purchaser on 15-7-2011 and short term capital gain of Rs. 81.18 lacs has been offered and included in total income by the Bank during A.Y. 2012-13 [Please see Rajarani Devi Rarnana 201 ITR 1032 (Patna)].

5.3 It is further submitted that the addition is only timing difference based addition, is tax neutral, the Bank has already recognized and offered to tax the same capital gain and the AO has already taxed the same again as offered by the Bank during A.Y. 2012-13 [Please also see ratio of Excel Industries Limited 358 ITR 295 fSC)]

The appellant craves leave to add, to amend, alter, delete and/or modify the above grounds of appeal on or before the final date of hearing.

27. The first issue raised by the assessee is that the Ld.CIT(A) erred in confirming the order of the AO by sustaining the disallowance of Rs. 36,65,00,000/- under the provision of section 14A r.w.Rule 8D of Income Tax Rules.

28. At the outset we note that the issues raised by the assessee in its grounds of appeal for the AY 2011-12 are identical to the issues raised by the assessee in ITA No. 311/AHD/2016 for the assessment year 2010-11. Therefore, the findings given in ITA No. 311/AHD/2016 shall also be applicable for the year under consideration i.e. AY 2011-12. The appeal of the assessee for the assessment 2010­11 has been decided by us vide paragraph Nos. 8 to 10 of this order and partly allowed for statistical purposes. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2010-11 shall also be applied for the year under consideration i.e. AY 2011-12. Hence, the grounds of appeal filed by the assessee is partly allowed for statistical purposes.

29. The 2nd issue raised by the assessee is that the learned CIT-A erred in confirming the order of the AO by sustaining the addition of Rs. 139.49 crore on account of commission income from the bank guarantee furnished to the customers.

29.1 At the outset we note that the issues raised by the assessee in its grounds of appeal for the AY 2011-12 are identical to the issues raised by the assessee in ITA No. 311/AHD/2016 for the assessment year 2010-11. Therefore, the findings given in ITA No. 311/AHD/2016 shall also be applicable for the year under consideration i.e. AY 2011-12. The appeal of the assessee for the assessment 2010­11 has been decided by us vide paragraph No. 20 of this order in ITA No. 311/Ahd/2016. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2010-11 shall also be applied for the year under consideration i.e. AY 2011-12. Hence, the grounds of appeal filed by the assessee is allowed.

30. The next issue raised by the assessee in ground No. 3 is that the learned CIT (A) erred in confirming the addition of Rs. 11,16,75,000.00 being the amount of interest on the sticky advances under rule 6EA read with section 43D of the Act.

31. The assessee in the year under consideration has not recognised the interest as income on accrual basis with respect to the sticky advances i.e. the interest was due for 3 months. It was the contention of the assessee that as per the guidelines issued by the Reserve Bank of India, the advances/ loans in respect of which the interest was overdue for 3 months have to be categorised as non-performing assets. As per the assessee, the income on such overdue advances was to be recognised on realization/cash basis. The same method was also adopted by the assessee in the earlier years which was also accepted by the Revenue. The assessee also pointed out that the RBI guidelines are mandatory in nature.

31.1 However, the AO being dissatisfied with the contention of the assessee observed that the assessee is maintaining its books of accounts on accrual basis. Therefore, the income in respect of bad and doubtful debt is required to be taxed on accrual basis except for the exceptions provided under rule 6EA read with section 43D of the Act. As per rule 6EA, the interest on the sticky advances should not be recognised as income when overdue period is of 180 days or more. As per the AO, the amount of interest for Rs. 11.16 crores representing on the sticky advances where the overdue period was more than 3 months but less than 6 months ought to have been recognized as income under rule 6EA of Income Tax Rule. Thus the AO made the addition of Rs. 11.16 crores to the total income of the assessee.

32. Aggrieved assessee preferred an appeal to the learned CIT (A) who has also confirmed the order of the AO by observing as under:

8.3.2 On careful consideration of the contentions of the appellant, I find it difficult to accept the contention of the appellant. It is no doubt true that section 43D is a beneficial provision but the provision iS very clear when it states that “{a} in the case of a scheduled bank the income by way of interest in relation to such categories of bad and”dou”btful debts as may be prescribed having regard to the guidelines issued by the Reserve Bank of India in relation to such debts:…”. It is thus very clear that while giving regard to the RBI guidelines, the provision itself provides that the same shall be as per prescribed rule and rule 6EA is prescribed for that purpose, The authority of framing rule is therefore given by the law itself. It is not that the bad and doubtful debts, interest on which is required to be offered on receipt basis is to be considered in accordance with the RBI guidelines. Had that be the intention of the legislature, it would have provided so that the same shall be in accordance with RBI guidelines and not as prescribed by authority. There is no question of rule being not in accordance with provision of the law because the legislature has given authority in the relevant provision to frame such rules. RBI guidelines may be taken in to consideration while farming such rule but that does not mean that rule must conform totally with such guidelines.

8.3.3 This very issue is considered by Hon ‘ble Mumbai Tribunal in the following case GIG Housing Finance Ltd vs Addl CIT ITA No. 1874/Mum/ 2010, it has been held that

“In our view it cannot be said that the guidelines of trie NHB as and when they arc revised have to be treated by implication incorporated in Rule 6EB of the Rules. NHB is not the rule making authority for the purposes of Sec.43D of the Act. The discretion is left to the rule making authority to follow or not follow the guidelines of NHB as and when they are revised. The purpose of classification of debts as bad and doubtful by the NHB and the purpose of not recognising interest income for the purposes of the Act, are different. The considerations that weigh with the relevant authorities are also different. Therefore it cannot be said that the rule making authority under the Act has to automatically follow the guidelines of NHB as they exist from time to time. In that view of the matter, we cannot agree with the submission of the learned counsel for the Assessee, that the guidelines issued by the NHB, has to be read as part of Sec.43D of the Act. We cannot also agree that the expression “Having regard to” used in Sec.43D of the Act, means that the rule making authority .should amend the rules as and when the guidelines of NHB are revised or that we have to read the guidelines of NHB as part of Sec.43D of the Act.”

In view of above clear position and the same being directly on the issue in the present case whether Rule 6EA will prevail over RBI guidelines which is not the issue considered in the cases relied upon by appellant, I am inclined to agree with the decision of the AO that the difference in income of Rs. 11,16,75,000/- had to be considered as accrued interest income and liable to tax on the basis of mercantile method adopted. As regards the contention that since the income will be offered when realized and the judgment of Apex Court in the said case of Excel Industries Ltd 358 ITR 295,1 am of the opinion that the facts in the case before the Hon’ble Supreme Court in the case of Excel Industries were different as in the said case the Hon’ble Court was concerned with time of accrual of income from advance licenses and duty entitlement pass book which was being held in favour of assessee by ITAT for last several years against which did not prefer any further appeal and also, the Court held that there was no liability of payer to pay the income in the particular year and hence right to receive was absent in the relevant year. This is not the issue in instant case of the appellant as the income from interest has accrued but it is only in terms of rule 6EA prescribed under the provision of section 43D , that the same is treated as not accrued but taxed when received. Therefore the criteria of rule 6EA cannot be ignored, regarding Instruction No. 17/2008 of 26,11.2008, I have gone through the said instructions. The instructions nowhere states that rule SEA prescribed ts not to be followed. On the contrary, the circular in Para (xii) emphasizes the need for banks to follow mercantile method of accounting and not cash system as per RBI guidelines and Companies Act but does not state that while following mercantile method (for interest income) , the provisions of Income tax Act in accordance with section 43D read with rule 6EA is not to be followed.

Considering above factual position and the legal position directly dealt with after considering the various judgment and circulars relied upon by the appellant, the addition made by the AO is confirmed and this ground of the appellant is dismissed.

33 Being aggrieved by the order of the learned CIT (A) the assessee is in appeal before us.

34. The learned AR before us contended that the assessee is not liable to recognize the income on the NPA as per the RBI Provisions. The ld. AR in support of its contentions vehemently relied on various orders which are placed on record.

35. On the other hand the learned DR before us vehemently supported the order of the authorities below.

36. We have heard the rival contentions of both the parties and perused the materials available on record. The issue in the present case relates whether interest income with respect to the loans and advances which were overdue for more than 3 months but less than 6 months should be recognized as income. The AO was of the view that the interest on such categories of loans and advances has to be recognized as income as per rule 6EA of Income Tax Rule read with section 43D of the Act. The view taken by the AO was subsequently confirmed by the learned CIT(A).

36.1 However we find that the banks are governed by the rules/ regulations/ schemes of the Reserve Bank of India. As per the guidelines of Reserve Bank of India the interest cannot be recognized as income with respect to such loans and advances which were overdue for 3 months. The Kolkata tribunal in the identical facts and circumstances in the case of DCIT Vs. Royal Bank of Scotland reported in 76 taxmann.com 91 has held as under:

“2.6 We have heard the rival submissions and perused the materials available on record including the detailed paper book filed by the assessee. The facts stated hereinabove remain undisputed and hence the same are not reiterated for the sake of brevity. It is not in dispute before the lower authorities that the loan accounts had become sticky and doubtful o f recovery. The only contention of the revenue is that section 43D of the Act read with Rule 6EA of the Rules permits accounting of interest income on receipt basis only if the loan account had become overdue for more than six months, whereas in the instant case, it is more than three months but less than six months as on 31.3.2010. The loan account becoming overdue and becoming sticky was never disputed. The next issue is whether the prudential norms of RBI for income recognition would override the provisions of the IT Act. This issue has been addressed by the Hon’ble Supreme Court in the case of Southern Technologies Ltd supra in the context of allowability of deduction towards ‘Provision for NPA’. We find that the same decision clearly stated that the interest income on NPA accounts should not be recognized on accrual basis which is in line with RBI prudential norms for income recognition. This fine distinction has been duly considered in the decision of the Hon ‘ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd. (supra). When the account becoming NPA is not disputed by the revenue, the recognition of income is to be done only on receipt basis which is in consonance with the real income theory. In these circumstances and respectfully following the decisions of Hon’ble Delhi High Court in and various other decisions referred to supra, we hold that the interest income on NPA accounts should not be assessed on mercantile basis and the same is to be taxed only on receipt basis. Accordingly, the grounds raised by the assessee are allowed. ”

36.2 We also find that Hon’ble Jurisdiction High Court in case of Pr. CIT vs. Shri Mahila Sewa Sahakari Bank Ltd reported in [2016] 72 taxmann.com 117 (Gujarat) in similar facts held as under:

20. Section 45Q finds place in Chapter IIIB of the RBI Act. Thus, the provisions of Chapter IIIB of the RBI Act have an overriding effect qua other enactments to the extent the same are inconsistent with the provisions contained therein. In order to reflect a bank’s actual financial health in its balance sheet, the Reserve Bank has introduced prudential norms for income recognition, asset classification and provisioning for advances portfolio of the co­operative banks. The guidelines provided thereunder are mandatory and it is incumbent upon all co-operative banks to follow the same. Insofar as income recognition is concerned, clause 4.1.1 of the circular provides that the policy of income recognition has to be objective and based on the record of recovery. Income from non-performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received. Therefore, banks should not take to income account interest on non-performing assets on accrual basis. Thus, in view of the mandate of the RBI Guidelines the assessee cannot recognise income from non-performing assets on accrual basis but can book such income only when it is actually received. Thus, this is a case where at the threshold, the assessee, in view of the RBI Guidelines, cannot recognise income from NPA on accrual basis. This is, therefore, a case pertaining to recognition of income and not computation of the income o f the assessee.

21. The Supreme Court in Southern Technologies Ltd. (supra) has held that the 1998 Directions are only disclosure norms and have nothing to do with computation of total income under the IT Act or with the accounting treatment. The 1998 Directions only lay down the manner of presentation of NPA provision in the balance sheet of an NBFC. The court has referred to the deviations between the RBI Directions and the Companies Act as follows:

’42. Broadly, there are three deviations:

(i) in the matter of presentation of financial statements under Schedule VI to the Companies Act;

(ii) in not recognising the “income” under the mercantile system of accounting and its insistence to follow cash system with respect to assets classified as NPA as per its norms;

(iii) in creating a provision for all NPAs summarily as against creating a provision only when the debt is doubtful of recovery under the norms of the accounting standards issued by the Institute of Chartered Accountants of India.

These deviations prevail over certain provisions of the Companies Act, 1956 to protect the depositors in the context of income recognition and presentation of the assets and provisions created against them. Thus, the P&L account prepared by NBFC in terms of the RBI Directions, 1998 does not recognise “income from NPA” and, therefore, directs a provision to be made in that regard and hence an “add back”. It is important to note that “add back ” is there only in the case of provisions.” [Emphasis supplied]

22. Therefore, in terms of the above decision, where an assessee makes provision for NPA and seeks deduction of such amount under section 36(1)(vii) or section 37 of the Act, then in the computation of income, the RBI Guidelines would have no role to play, and hence, an add back. Insofar as income recognition is concerned, the Supreme Court has held thus: “Applicability of Section 145 At the outset, we may state that in essence the RBI Directions, 1998 are prudential/provisioning norms issued by RBI under Chapter III-B of the RBI Act, 1934. These norms deal essentially with income recognition. They force the NBFCs to disclose the amount of NPA in their financial accounts. They force the NBFCs to reflect “true and correct” profits. By virtue of Section 45-Q, an overriding effect is given to the RBI Directions, 1998 vis-à-vis “income recognition” principles in the Companies Act, 1956. These Directions constitute a code by itself. However, these RBI Directions, 1998 and the IT Act operate in different areas. These RBI Directions, 1998 have nothing to do with computation of taxable income. These Directions cannot overrule the “permissible deductions” or “their exclusion” under the IT Act. The inconsistency between these Directions and the Companies Act is only in the matter of income recognition and presentation of financial statements. The accounting policies adopted by an NBFC cannot determine the taxable income. It is well settled that the accounting policies followed by a company can be changed unless the AO comes to the conclusion that such change would result in understatement of profits. However, here is the case where the AO has to follow the RBI Directions, 1998 in view of Section 45-Q of the RBI Act. Hence, as far as income recognition is concerned, Section 145 of the IT Act has no role to play in the present dispute. “

Thus, insofar as income recognition is concerned, the court has held that even the Assessing Officer has to follow the RBI Directions, 1998 in view of section 45Q of the RBI Act and that as far as income recognition is concerned, section 145 of the Income-tax Act, has not role to play.

23. In the light of the above discussion what emerges is that while determining the tax liability of an assessee, two factors would come into play. Firstly, the recognition of income in terms of the recognised accounting principles and after such income is recognised, the computation thereof, in terms of the provisions of the Income-tax Act, 1961. Insofar as the computation of taxability is concerned, the same is solely governed by the provisions of the Income-tax Act and the accounting principles have no role to play. However, recognition of income stands on a different footing. Insofar as income recognition is concerned, it would be the RBI Directions which would prevail in view of the provisions of section 45Q of the RBI Act and section 145 would have no role to play. Hence, the Assessing Officer has to follow the RBI Directions.

24. The Delhi High Court in Vasisth Chay Vyapar Ltd., (supra), has in the context of a similar issue arising in the case of a non-banking financial company has held thus:

“17. In this scenario, we have to examine the strength in the submission of learned counsel for the Revenue that whether it can still be held that income in the form of interest though not received had still accrued to the assessee under the provisions of Income-tax Act and was, therefore, exigible to tax. Our answer is in the negative and we give the following reasons in support:-

(1) First of all we would discuss the matter in the light of the provisions of Income-tax Act and to examine as to whether in the given circumstances, interest income has accrued to the assessee. It is stated at the cost of repetition that admitted position is that the assessee had not received any interest on the said ICD placed with Shaw Wallace since the assessment year 1996-97 as it had become NPAs in accordance with the Prudential norms which was entered in the books of accounts as ITA 139/2008,ITA 466/2008, ITA 537/2008,ITA 408/2003 well. The assessee has further successfully demonstrated that even in the succeeding assessment years, no interest was received and the position remained the same until the assessment years 2006-07. Reason was adverse financial circumstances and the financia l crunch faced by Shaw Wallace. So much so, it was facing winding up petitions which were filed by many creditors. These circumstances, led to an uncertainty insofar as recovery of interest was concerned, as a result of the aforesaid precarious financial position of Shaw Wallace. What to talk of interest, even the principal amount itself had become doubtful to recover. In this scenario it was legitimate move to infer that interest income thereupon has not “accrued”. We are in agreement with the submission of Mr. Vohra on this count, supported by various decisions of different High Courts including this court which has already been referred to above.

(2) In the instant case, the assessee-company being NBFC is governed by the provisions of RBI Act.

In such a case, interest income cannot be said to have accrued to the assessee having regard to the provisions of section 45Q of the RBI and Prudential Norms issued by the RBI in exercise of its statutory powers. As per these norms, the ICD had become NPA and on such NPA where the interest was not received and possibility of recovery was almost nil, it could not be treated to have been accrued in favour of the assessee.

No doubt, in first blush, reading of the judgment gives an indication that the Court has held that RBI Act does not override the provisions of the Income-tax Act. However, when we examine the issue involved therein minutely and deeply in the context in which that had arisen and certain observations of the Apex Court contained in that very judgment, we find that the proposition advanced by Mr. Sabharwal may not be entirely correct. In the case before the Supreme Court, the assessee a NBFC debited Rs. 81,68,516 as provision against NPA in the profit and loss account, which was claimed as deduction in terms of section 36 (1) (vii) of the Act. The Assessing Officer did not allow the deduction claimed as aforesaid on the ground that the provision of NPA was not in the nature of expenditure or loss but more in the nature of a reserve, and thus not deductible under section 36(i) (vii) of the Act. The Assessing Officer, however, did not bring to tax Rs. 20,34,605 as income (being income accrued under the mercantile system of accounting). The dispute before the Apex court centered around deductibility of provision for NPA. After analyzing the provisions of the RBI Act, their Lordships of the Apex Court observed that insofar as the permissible deductions or exclusions under the Act are concerned, the same are admissible only if such deductions/exclusions satisfy the relevant conditions stipulated therefor under the Act. To that extent, it was observed that the Prudential Norms do not override the provisions of the Act. However, the Apex Court made a distinction with regard to “Income Recognition” and held that income had to be recognized in terms of the Prudential Norms, even though the same deviated from mercantile system of accounting and/or section 145 of the Income-tax Act. It can be said, therefore, that the Apex Court approved the ‘real income’ theory which is engrained in the Prudential Norms for recognition of revenue by NBFC. “

25. The distinction drawn by the Delhi High Court is that while the accounting policies o f adopted by the NBFC cannot determine the taxable income. However, insofar as income recognition is concerned, the Assessing Officer has to follow the RBI Directions, 1998 in view of section 45Q of the RBI Act. That insofar as income recognition is concerned, section 145 of the Income-tax Act, 1961 has not role to play.

36.3 In view of the above we hold that there cannot be any addition to the total income of the assessee by way of interest with respect to the loans and advances which were overdue for 3 months. Thus we set aside the finding of the learned CIT (A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.

37. The next issue raised by the assessee in ground No. 4 is that the learned CIT (A) erred in confirming the disallowance made by the AO for Rs. 93.04 crores on account of lease operating expenses.

38. The assessee being the bank takes various premises/properties on long-term lease basis. These lease are known as operating lease. Generally, in every lease agreement there is a clause for increase of the rent either on yearly or once in 3 years. Accordingly the assessee was claiming the rent expenses on accrual basis in each year. However, the bank found that the Accounting Standard 19 for Lease issued by the ICAI provides that if there is an escalation clause in the lease agreement in the amount of rent, then the average of total lease rent payable over the lease period should be charged in the profit and loss account. In other words, the rent payable for the entire lease period should be charged on straight line method in the profit and loss account. It was explained by the assessee that the lease property will be used throughout the lease period consistently despite the variation in the market rate, therefore the average amount of total rent payable over the lease period should be charged to the profit and loss account on the basis of straight-line method. Accordingly the assessee worked out the additional amount of lease rent and debited the same in the books of accounts.

38.1 As per the assessee, additional amount of lease rent is tax neutral. As such the assessee, will claim more deduction in the initial years of the lease agreement whereas the same deduction will be reduced in the later years. In effect, there will not be any impact on the taxable income of the assessee over the lease period.

38.2 However, the AO disagreed with the contention of the assessee by observing that the expenses to the assessee has to be allowed on accrual basis. But the assessee is claiming the amount of lease expenses which has not been due for payment in the year under consideration by reviewing its method of accounting as per AS 19 issued by the ICAI. Furthermore, the expenses which will be claimed by the assessee in the profit and loss account will not match with the corresponding income to be shown by the lesser/recipient in his books of accounts which will certainly distort the principle of income recognition under the Act. The assessee by claiming the lease expenses on straight-line method is charging notional expenses which are contingent in nature and depends upon the continuation of lease agreement. In the event the lease agreement is cancelled, the assessee would have already claimed those expenses which have not been incurred. Simultaneously, the income in the hands of the recipient will never be brought to tax.

38.3 The accounting standard 19 for leases issued by the ICAI has not been recognized by the Income Tax Department. Therefore the assessee cannot be allowed the deduction of the lease rent on straight-line method. Thus, the AO disallowed the sum of Rs. 93.04 crores and added to the total income of the assessee.

39. Aggrieved assessee preferred an appeal to the learned CIT (A) who confirmed the order of the AO by observing as under:

10.3 I have carefully considered the submissions of the appellant and the assessment order. This ground is relating to disallowance of additional expenditure on account of revision o f lease operating expenditure. The appellant included secondary lease period while claiming the liability of lease expenses. The AO has noted that the appellant reviewed the method o f accounting for the said purpose and that the claim made was contingent in nature. The AO has noted that in the circumstances of lease being cancelled, the expenditure allowed would be claimed as deduction and the would never be taxed in the hands of the recipient. The AO has noted that judgment of Delhi High Court in the case of Virtual Soft System Ltd 341 ITR 593 was on different issue and was not applicable;. The appellant has mainly relied on AS-19 and the case laws on Accounting Standards required to be followed.

10.3.1 Having carefully considered the observations of the AO and the submissions made, I find that issue pertains to claim of additional expenditure on account of revision of lease operating expenses. The appellant revised the estimate of lease term in case of assets taken on operating lease to include secondary period of lease. A primary lease is generally non-cancellable while a secondary lease is normally cancellable. Under the provisions of the Income tax Act, in case of mercantile method adopted, the liability which is ascertained is deductible though it may have to be discharged in future, However, any liability which is not presently ascertained but contingent is not deductible as expenses of the current year. The appellant tried to explain the situation with the help of the following table :-

(Amount in Rupees)

Year Annual rent liability as per agreement Annuairent payment Rent Expense as per SLM of AS- 19″ Additional cliarge/(reversal)
1 JOO 100 150 50
2 120 120 150 30
3 140 140 150 10
4 160 160 150 (10)
5 180 180 150 (30)
6 200 200 150 (50)
Total 900 900 900 0
Average rent for the lease tenure of 6 years considering the escalations as agreed in the lease agreement (Rs.900/6) 150

As seen from the above table, the illustration given by the appellant to explain the system adopted by the appellant from this year, in first three years, the appellant debits more lease rental expenditure than the actual expenditure incurred for the same. The AO has correctly stated that the appellant has debited notional expenditure, which has not been incurred by the appellant at all. Further, the recipient of such notional receipt will not show the said as income and it will not be and cannot be taxed in the hands of :he recipient. This shows that the accounting system adopted by the appellant from this year is not in accordance with any accounting procedures approved by the Department. If-the procedure adopted by the appellant is accepted, the books of accounts of the appellant will never show the true & correct profit / income. In first three years, the expenditure is debited more than the actual expenditure incurred and in next three years, the appellant will debit less expenditure than the actual expenditure incurred. In such situation, it is doubtful that the books of accounts of the appellant will show true & correct income / profit in any year. The appellant tried to explain the method with the help of the table mentioned above, but in the said table, the period of lease rent mentioned is static for six years, but the actual situation cannot remain same. Every year some new properties will be acquired on rent by the appellant and similarly few may be evacuated. This further shows that the method adopted by the appellant will create more confusion in maintaining the accounts of the appellant in next years. Moreover the appellant has not submitted any reason for change of method for accounting of this expenditure. The appellant was following the method for several years and change in the same in the year under consideration without any change of facts or circumstances is unwarranted. The appellant itself violated the principle of consistency without any reason.

Keeping in view the facts of the case, reasons given for making additions, appellant’s submission and the discussion above, it is found that the additions made by the AO are justified. Hence, these are confirmed. This ground of appeal is dismissed.

40. Being aggrieved by the order of the learned CIT (A) the assessee is in appeal before us.

40.1 The AR before us reiterated the submission made before the authorities below whereas on the other learned DR relied on the order of lower authorities.

41. We have heard the rival contentions of both the parties and carefully gone through the submissions of the assessee along with the documents furnished and the case law relied upon and perused the facts of the case including the finding of the learned CIT (A) and other documents brought on record. The expert advisory committee of ICAI has issued a clarification with respect to the treatment of accounting of operating lease rental expenses as provided under the Accounting Standard 19 issued by the ICAI. Pursuant to that clarification, the assessee was required to account the lease rent expenses on straight-line method. Under SLM Method the total lease rentals over the lease period will be divided by number of years and this will result the lease expense/income to be recognized in a particular year.

41.1 Under the Accounting Standard 19, the assessee is required to recognise the operating lease expenses on a straight-line method unless another systematic and rational basis is more presentable of the time pattern in which the benefit is derived from the lease property. The relevant extract of AS 9 reads as under:

“Lease payments under an operating lease should be recognized as an expense in the statement of profit and loss on a straight-line basis over the lease term, unless another systematic basis is more representative of the time pattern of the user’s benefit.”

41.2 In the light of the above discussion, we have to see whether the lease rent expenses claimed by the assessee on SLM basis is allowable deduction under the provisions of the Act. The provisions of section 145(3) of the Act mandates to maintain the books of accounts either on mercantile system of accounting or cash system of accounting. Undeniably, the assessee is following mercantile/accrual system of accounting. Under mercantile system of accounting, the following concepts needs to be consider:

(1) Under the mercantile system of accounting a liability has to be treated as accrued when it is due for payment though actual payment shall be in future.

(2) Just as the accrual system is concerned with accrued income, though not received, liability has also to be treated in the same manner.

(3) A condition subsequent has to be recognised. The fact that the liability may ultimately get reduced or even become extinct does not make it a contingent liability.

(4) A trader computing his taxable income is entitled to deduct payments actually made to his employees as well as the present value of any payments to be made in a subsequent year, if it can be satisfactorily estimated.

41.3 From the above, it is transpired that the liabilities which have accrued, the assessee can claim the deduction thereof. Admittedly, the deduction claimed by the assessee in the year under consideration considering the increament clause in the lease deed over the lease period has not been accrued to the assessee. As per the lease agreement, the liability arises to the assessee for its payment with respect to the increase rent in the later years. Thus in our considered view. Such amount cannot be treated as accrued liability.

41.4 We are also conscious to the fact that there will not be any impact on the Revenue if the assessee claims the deduction of the lease rental on straight-line method. It is for the reason that the assessee in the initial years will claim the deduction at the higher value but at the same time it will claim the deduction of the lease rent at the lesser value in the later years. Thus, the entire exercise over the lease period is tax neutral. In other words the liability for the tax under the Act of the initial periods shall be deferred to the later years. But in our considered view this will distort the pictures of the principles of income recognition under the income tax Act. The assessee in the initial year will claim higher amount of lease rent whereas the recipient will claim lesser amount of lease income. Likewise, the assessee will deduct the TDS on the higher amount which will not match with the income of the assessee recipient disclosed in the return of income.

41.5 Admittedly, the accounting standard issued by the ICAI are mandatory to be followed by the assessee under the Companies Act. But the question arises, such accounting standards should also be followed while working out the income under the provisions of the income tax Act. So far, the Income Tax Act has not notified the accounting standard 19 issued by the ICAI, though mandatory for the assessee to follow while preparing its books of accounts, but this is not the same under the Income Tax Act. Hence the ground of appeal of the assessee is dismissed.

42. The 5th issue raised by the assessee is that the learned CIT (A) erred in confirming the addition of Rs. 81.18 lakhs on the transfer of residential flat as short-term capital gain.

43. The assessee in the year under consideration has entered into the registered agreement for sale dated 14 March 2011 of a residential flat at Rs. 81.18 lakhs and received a sum of Rs. 8.11 lakhs being 10% of the total value of the consideration on the date of the agreement. The balance amount of Rs. 73.07 Lacs was received in the subsequent year in 2 instalments of Rs. 31.50 lakhs and Rs. 41.57 Lacs dated 1 June 2011 and 30 July 2011 respectively. Thereafter the possession was handed over to the buyer dated 15 July 2011 after receiving the full consideration. Thus the assessee contended that the transfer of the residential flat has not taken place in the year under consideration but it was effectively transferred within the meaning of the provisions of section 2(47) of the Act in the subsequent year. Furthermore, the income on the transfer of such property was offered to tax in the subsequent assessment year.

43.1 However, the AO disagreed with the contention of the assessee on the reasoning that the transfer of the residential flat has taken place in the year under consideration within the meaning provided under section 53A of Transfer of Property Act 1982. Thus the AO made the addition of Rs. 81.18 lakhs to the total income of the assessee.

43.2 Aggrieved assessee preferred an appeal to the learned CIT (A) who confirmed the order of the AO by observing as under:

9.3 I have carefully considered the submissions of the appellant and the1 assessment order. The AO made the additions of Rs.81,18,900/- stating that the appellant has not shown income on sale of property on 14-03-2011, which falls in the assessment year under consideration. The appellant contended that although the property was sold on 14-03-2011 is an open bid and 10% of the sale consideration was received but as 90% of the sale consideration was received in next financial year, the income has been shown in next assessment year. The contention of the appellant is not legally acceptable for the reason that as per definition of transfer given u/s.2(47) of the Act, transfer of the property took place on 14-03-2011, which falls in the assessment year under consideration. Therefore, the addition made by the AO are confirmed. This ground of appeal is dismissed.

44. Being aggrieved by the order of the learned CIT (A), the assessee is in appeal before us.

45. The learned AR before us while reiterating the submissions made before the authorties below also submitted that the assessee has already offered the income on the sale of property in the subsequent year. Therefore, no addition can be made in the year under consideration.

46. On the other hand the learned DR before us relied on the order of authorities below.

47. We have heard the rival contentions of both the parties and perused the materials available on record. The provisions of section 53A of TOPA were amended w.e.f. 24.09.2001 whereby the requirement of registration of agreement was made mandatory. While the provisions of s. 53A prior to the said amendment were applicable irrespective of whether the contract between the parties had been registered or not, the said relaxation in registration was done away with pursuant to the said amendment. This is evident from the amended s. 53A which is reproduced below:

“53 A. Part performance.- Where any person contracts to transfer for consideration any immoveable property by writing signed by him or on his behalf from which the terms necessary to constitute the transfer can be ascertained with reasonable certainty, and the transferee has, in part performance of the contract, taken possession of the property or any part thereof, or the transferee, being already in possession, continues in possession in part performance of the contract and has done some Act in furtherance of the contract, and the transferee has performed or is willing to perform his part of the contract, then, where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed therefore by the law for the time being in force, the transferor or any person claiming under him shall be debarred from enforcing against the transferee and persons claiming under him any right in respect of the property of which the transferee has taken or continued in possession, other than a right expressly provided by the terms of the contract.”

47.1 To attract the provisions of section 53A of the Act, it is necessary that the possession of the property should be handed over to the transferee. However, in the case on hand, the possession of the property has not been transferred. Accordingly, we are of the view that the transfer has not taken place within the meaning of the provisions of section 2(47) of the Act and consequently the provisions of capital gain cannot be attracted.

47.2 Besides the above, we also note that there is no loss to the Revenue in the given facts and circumstances for the reason that the assessee has already shown capital gain in the subsequent year. If, the addition sustained in the year under consideration then the same has to be deleted in the subsequent year. After considering the facts in totality as discussed above, we are not inclined to a the finding of the authorities below. Hence the ground of appeal of the assessee is allowed.

48. The assessee in the additional grounds of appeal has sought the deduction on account of education, secondary and higher education cess as well as employee stock option plan for Rs. 58.21 crores and Rs. 460.43 crores respectively.

49. At the outset we note that the issues raised by the assessee in its additional grounds of appeal for the AY 2011-12 are identical to the issues raised by the assessee in ITA No. 311/AHD/2016 for the assessment year 2010-11. Therefore, the findings given in ITA No. 311/AHD/2016 shall also be applicable for the year under consideration i.e. AY 2011-12. The appeal of the assessee for the assessment 2010-11 has been decided by us vide paragraph Nos. 25 of this order for the statistical purposes. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2010-11 shall also be applied for the year under consideration i.e. AY 2011-12. Hence, the grounds of appeal filed by the assessee is allowed for statistical purposes.

49.1 In the result, the appeal of the assessee is partly allowed for statistical purposes.

Coming to the ITA No. 2173/AHD/2016, an appeal by the revenue for the Assessment Year 2011-12.

50. The only issue raised by the revenue is that the learned CIT (A) erred in deleting the addition made by the AO for Rs. 2,72,21,975/- on account of prior period expenses.

51. The AO during the assessment proceedings found that the assessee has claimed certain expenses of Rs. 2,72,21,975.00 representing the annual payment to Infosys technologies Ltd for technical services fees which were pertaining to the earlier year. As per the AO, the assessee was not eligible for the deduction of such expenses for the reasons as discussed below:

I. The expenses claimed by the assessee do not match with the income of the current year.

II. There was no detail available suggesting that the expenses were crystallised in the year under consideration.

III. The assessee is maintaining mercantile system of accounting which requires to claim the expenses in the year in which such expenses were accrued.

In view of the above the AO disallowed the same and added to the total income of the assessee.

52. Aggrieved assessee preferred an appeal to the learned CIT (A) who deleted the addition made by the AO by observing as under:

6.3 I have carefully considered the submissions of the appellant and the assessment order. The identical issue was there in the appellant’s own case in AY 2010-11, which was decided by me as mentioned below :

“6.2. Identical issue came up in appellant’s own case for A.Y. 2008-09. Vide order dtd, 01-12-2011 in appeal no. CIT(A)/Addl.CIT./R-l/247/10-ll, my predecessor held as under: “6,3 Ihave considered the facts of the case; assessment order and appellant’s written submission. On the identical facts, this issue has been decided by me in appeal order fat- assessment year 2006-07 in the appellant’s own case. The relevant pan of the said order is quoted below-

“It is not in dispute that appellant received Bill from Infosys during the current year. The services rendered in earlier year were also included in the said Bill. Assessing officer allocated expense relating to earlier year and disallowed the same as prior p&riod expenses. However the expense was crystallised during the year since undispit/edly Bill was received during the current year and appellant could not have debited expense prior to this. Gujarat High Court in the case of Saurashtra cement and chemicals held that i f the expense is crystallised during the year, the same is allowable even if relating to earlier years. Since expense was crystallised during the year, respectfully following the decision ofjurisdictional High Court, the disallowance made by the assessing officer is deleted. “

Considering the above, disallowance made by the assessing officer on the identical facts is deleted. “

Facts remaining the same in the year under consideration, following the above-mentioned order, impugned disallowance of prior-period expenditure of Rs. 59J3,681/- is deleted. It is also seen that the CIT(A)’s decision on the issue in favour of the appellant in the A.Y. 2007-08 was accepted by the Revenue. This ground of appeal is allowed.

As the issue is identical to the issue involved in AY 2010-11 and as decided by me for that year, the addition of Rs.272.21 lakhs are deleted. This ground of appeal is allowed.

53. Being aggrieved by the order of the learned CIT (A), the Revenue is in appeal before us.

54. Both the learned DR and the AR before us vehemently supported the order of the authorities below as favourable to them.

55. We have heard the rival contentions of both the parties and perused the materials of the record. At the outset we note that the issue raised by the revenue has already been decided by this tribunal in the own case of the assessee in its favour for the assessment year 2009-10 in ITA No. 2196/AHD/2014 by observing as under:

10. We now advert to the Revenue’s appeal ITA No.2395/Ahd/2014 raising solitary substantive ground seeking to revive prior period expenditure disallowance of Rs.45,49,315/- made by the Assessing Officer qua annual technical fees paid to Infosys as deleted in lower appellate proceedings. There is no dispute that the issessee incurred the impugned expenditure in preceding assessment, year between July 2007 to March 2008. It however claimed that the above expenditure stood crystallized only in relevant previous year as it received corresponding bills in said period only. The Assessing Officer termed the same as violation of matching concept and lack of evidence indicating crystallization of impugned expenditure in relevant previous year lo invoke the disallowance in question. The C1T(A) in turn follows his findings in assessment year 2007-08 on identical issue in assessee’s favour.

11. We have given our thoughtful consideration to rival submissions. The Revenue fails to rebut the fact that the assessee has already succeeded on this prior period expenditure disallowance issue in preceding assessment years, We further find that hon’ble jurisdictional high court decision in Tax Appeal No. 566/2016 PCIT vs. Adani Enterprises holds that such a disallowance is not to be invoked in case an assessee is assessed at the same rate in the two assessment years in question. We therefore affirm the CIT(A)’s findings under challenge. The Revenu’s sole substantive ground as well as main appeal ITA No.2395/Ahs/2014 fai l

55.1 Before us, the learned AR has not brought out anything on record suggesting that the above finding in the own case of the assessee has either been stayed or overruled by a higher forum. Accordingly we are of the view, the principles laid down by the ITAT in the case of the assessee are squarely applicable in the given facts and circumstances. Hence the ground of appeal of the Revenue is dismissed.

55.2 In the result appeal of the Revenue is dismissed.

Coming to ITA No. 165/AHD/2017, an appeal by Assessee for the AY 2012-13

56. The assessee has raised the following grounds of appeal:

1.1 The CITfA) erred in confirming disallowance out of operating expenses of Rs. 7,37,03,738 under Rule 8d r.w.s. 14 A, though the Bank is o dealer of and holds all its shares and securities as ifs sfock-in-trade. The Bonk has earned treasury business profits (taxable] of Rs. 72.84 crores on dealings in shares and securities which is one of its main objects . The Bank is actively and extensively carrying out treasury operations in shares ond securities in order to contribute to its profits.

1.2 The CIT (A) erred in not appreciating that Rule 8D is neither charging provision; nor automatic and Rule 8D(2)(iii) w.e.f. A.}. 2008-09 cannot supersede Hon. ITA T/Gujarat HC favorable judgements upto A.}. 2007-08 in the Bank’s own case.

2.1 The CITfA) erred in upholding the addition of Borik Guaronteg_[6G) commission income of Rs. 170,91,09,524 relatable to unexpired period i.e. prorata income for1 The ” period beyond 1-4-2012 amortised by the Bank. This addition represents timing difference based addition which is tax-neutral and there is no loss of revenue.

2.2 The CIT[A] squarely erred in not admitting the Bank’s judicious claim for reduction of similar BG commission income of Rs. 134,09,00,000, included in total income, but held accrued/assessable and already taxed during A.Y. 2010-11 and A.Y. 2011-12.

3.1 The CIT (A) erred in law in confirming addition of notional interest income on NPA in accordance with RBI repealed guidelines of Rs. 30,40,62,000 under Rule 6EAj\w.s._4j: as interest income deemed to be accrued during previous year> though there has been no change in underlying facts or law since A.Y. 1995-96 and the same is accepted hitherto in income tax upto A.Y. 2010-11 [Radhasaomi Satsang 193 1TR 321 ISC)].

3.2 The CIT [A] failed to appreciate that Rule 6EA is subservient to Section 43D and hence it cannot extend the scope beyond the charge of income provided in section 43D.

3.3 It is submitted that such notional interest income, deemed as accrued, gets crystalised in any case by 30-6-2012 wherein period of 180 days is completed and hence it is a timing difference based addition and tax- neutral over two years.

4.1 The CIT (A) erred in confirming disallowance of additional expenditure of Rs. 20,00,72,692 on account of revision in treatment of lease operating expenses charged to revenue in accordance with ICAI AS 19.

4.2 The CIT(A) failed to appreciate that As issued by ICAI is binding u/s.211(3c) of the Companies Act, 1956. Hence it is imperative for the Bank to treat lease operating expenses in line with such accounting standard although it is tax neutral over the years.

The appellant craves, leave to add, to amend, alter delete and/or modify the above grounds of appeal on or before the final date of hearing.

57. The first issue raised by the assessee is that the Ld.CIT(A) erred in confirming the order of the AO by sustaining the disallowance of Rs. 7,37,03,738/- under the provision of section 14A r.w.Rule 8D of Income Tax Rules.

58. At the outset we note that the issues raised by the assessee in its grounds of appeal for the AY 2012-13 are identical to the issues raised by the assessee in ITA No. 311/AHD/2016 for the assessment year 2010-11. Therefore, the findings given in ITA No. 311/AHD/2016 shall also be applicable for the year under consideration i.e. AY 2012-13. The appeal of the assessee for the assessment 2010­11 has been decided by us vide paragraph Nos. 8 to 10 of this order in favoure the assessee for statistical purposes. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2010-11 shall also be applied for the year under consideration i.e. AY 2012-13. Hence, the grounds of appeal filed by the assessee is partly allowed for statistical purposes.

59. The 2nd issue raised by the assessee is that the learned CIT-A erred in confirming the order of the AO by sustaining the addition of Rs. 1,70,91,09,524/-crore on account of commission income from the bank guarantee furnished to the customers.

60. At the outset we note that the issues raised by the assessee in its grounds of appeal for the AY 2012-13 are identical to the issues raised by the assessee in ITA No. 311/AHD/2016 for the assessment year 2010-11. Therefore, the findings given in ITA No. 311/AHD/2016 shall also be applicable for the year under consideration i.e. AY 2012-13. The appeal of the assessee for the assessment 2010- 11 has been decided by us vide paragraph Nos. 20 to 20.8 of this order in ITA No.311/Ahd/2016. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2010-11 shall also be applied for the year under consideration i.e. AY 2012-13. Hence, the grounds of appeal filed by the assessee is allowed.

61. The next issue raised by the assessee in ground No. 3 is that the learned CIT (A) erred in confirming the addition of Rs. 30,40,62,200.00 being the amount of interest on the sticky advances under rule 6EA read with section 43D of the Act.

62. At the outset we note that the issues raised by the assessee in its grounds of appeal for the AY 2012-13 are identical to the issues raised by the assessee in ITA No. 2176/AHD/2016 for the assessment year 2011-12. Therefore, the findings given in ITA No. 2176/AHD/2016 shall also be applicable for the year under consideration i.e. AY 2012-13. The appeal of the assessee for the assessment 2011- 12 has been decided by us vide paragraph Nos. 36 to 36.3 of this order in favoure of the assessee. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2011-12 shall also be applied for the year under consideration i.e. AY 2012-13. Hence, the grounds of appeal filed by the assessee is allowed.

63. The next issue raised by the assessee in ground No. 4 is that the learned CIT (A) erred in confirming the disallowance made by the AO for Rs. 20,00,72,692/-crores on account of lease operating expenses.

64. At the outset we note that the issues raised by the assessee in its grounds of appeal for the AY 2012-13 are identical to the issues raised by the assessee in ITA No. 2176/AHD/2016 for the assessment year 2011-12. Therefore, the findings given in ITA No. 2176/AHD/2016 shall also be applicable for the year under consideration i.e. AY 2012-13. The appeal of the assessee for the assessment 2011­12 has been decided by us vide paragraph Nos 41 to 41.5 of this order in favoure of the Revenue. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2011-12 shall also be applied for the year under consideration i.e. AY 2012-13. Hence, the grounds of appeal filed by the assessee is dismissed.

65. The assessee in the additional grounds of appeal has sought the deduction on account of education, secondary and higher education cess as well as employee stock option plan for Rs. 66.10 crores and Rs. 185.51 crores respectively.

66. At the outset we note that the issues raised by the assessee in its additional grounds of appeal for the AY 2012-13 are identical to the issues raised by the assessee in ITA No. 311/AHD/2016 for the assessment year 2010-11. Therefore, the findings given in ITA No. 311/AHD/2016 shall also be applicable for the year under consideration i.e. AY 2012-13. The appeal of the assessee for the assessment 2010-11 has been decided by us vide paragraph Nos 25 to 25.2 of this order in favoure the assessee for statistical purposes. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2010-11 shall also be applied for the year under consideration i.e. AY 2012-123. Hence, the grounds of appeal filed by the assessee is allowed for statistical purposes.

66.1 In the result appeal of the assessee is partly allowed for statistical purposes

Coming to ITA No. 287/AHD/2017, an appeal by Revenue for the AY 2012-13

67. The Revenue has raised following grounds of appeal:

(1) That the ld.CIT(A) erred in law and on facts in deleting the addition of Rs.85,24,00,000/- made it/s 14A r.w.r 8D of the Act.

(2) That the ld.CIT(A) erred in law and on facts in deleting the addition of Rs.2,20,69,810/- made on account of disallowance of “Annual Technical Services Fees paid to Infosys Limited. “

(3) That the ld.CIT(A) erred in law and on facts in deleting the addition of Rs,67,48,546/- made u/s 36(l)(iii) of the l.T.Act. on account of capital work in progress.

On the fact and in the circumstances of the case and in law, the CIT(A) ought to have upheld the order of the Assessing Officer to the extent mentioned above since the assessee has failed to disclose his true income/book profit.

The appellant prays that the order of CIT(A) on the above grounds be set aside and that o f the Assessing Officer be restored to the above extent. The appellant craves, to leave, to amend or alter any ground or add a new ground which may be necessary.

68. The fisrt issue raised by the Revenue is that the leanred CIT (A) erred in deleting the addition of Rs. 85,24,00,000/- made under section 14A read with rule 8D of Income tax Rule.

69. At the outset we note that the issues raised by the Revenue in its grounds of appeal for the AY 2012-13 are identical to the issues raised by the assessee in ITA No. 311/AHD/2016 for the assessment year 2010-11. Therefore, the findings given in ITA No. 311/AHD/2016 shall also be applicable for the year under consideration i.e. AY 2012-13. The appeal of the assessee for the assessment 2010­11 has been decided by us vide paragraph Nos. 8 to 10 of this order in favoure the assessee for statistical purposes. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2010-11 shall also be applied for the year under consideration i.e. AY 2012-13. Hence, the grounds of appeal filed by the Revenue is partly allowed for statistical purposes.

70. The next issue raised by the revenue is that the learned CIT (A) erred in deleting the addition made by the AO for Rs. 2,20,69,810/- on account of prior period expenses.

71. At the outset we note that the issues raised by the Revenue in its grounds of appeal for the AY 2012-13 are identical to the issues raised by the Revenue in ITA No. 2173/AHD/2016 for the assessment year 2011-12. Therefore, the findings given in ITA No. 2173/AHD/2016 shall also be applicable for the year under consideration i.e. AY 2012-13. The appeal of the Revenue for the assessment 2010­11 has been decided by us vide paragraph Nos. 55 to 55.2 of this order in favoure the Revenue. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2011-12 shall also be applied for the year under consideration i.e. AY 2012-123. Hence, the grounds of appeal filed by the Revenue is allowed.

72. The issue raised by the revenue in ground No. 3 is that the learned CIT (A) erred in deleting the disallowance made by the AO for Rs. 67,48,546.00 on account of interest expenses incurred in respect of capital work in progress.

73. The AO during the assessment proceedings found that the assessee has shown capital work in progress of Rs. 70.63 crores. On question by the AO whether any interest-bearing fund has been utilised in such work in progress, the assessee has failed to make any satisfactory reply. Therefore, the AO concluded that the proportionate amount of interest on the fund deployed in such capital work-in-progress should be capitalised under the provisions of section 36 (1) (iii) of the Act. Accordingly, the AO worked out the proportionate amount of interst for Rs. 67,48,546.00 and added to the total income of the assessee.

74. Aggrieved assessee preferred an appeal to the learned CIT (A) who deleted the addition made by the AO by observing as under:

10.3 I have carefully considered the submissions of the appellant\ and the assessment order considering the ratio of Mumbai High Court in Reliance Utilities (supra) where similar issue has been decided in favour of the assessee. I am also of the opinion that where an assessee has interest-free funds far in excess of cost of capital advances towards purchase of fixed assets, in view of the judicial authorities brought out on the records, there is valid legal presumption that such investment in capital advances have been made out of interest free funds in absence o f any specific contrary evidence brought out by the AO. The addition of Rs. 67,48,546 made u/s.36(1)(iii) is cancelled for the reasons mentioned above. This ground of appeal is allowed.

75. Being aggrieved by the order of the learned CIT (A), the revenue is in appeal before us.

76. Both the learned DR and the AR before us vehemently supported the order of the authorities below as favourable to them.

77. We have heard the rival contentions of both the parties and perused the materials available on record. Admittedly the own fund of the assessee in the financial year 2011-12 stands at Rs. 22,808.00 crores whereas the capital work-in-progress stands at Rs. 70.76 crores. The own fund of the assessee exceeds the amount of capital work-in-progress. Therefore, a presumption can be drawn that the own fund of the assessee was utilised in such capital work in progress. Accordingly, there cannot be any disallowance on account of interest expenses. Hence the ground of appeal of the Revenue is dismissed.

77.1 In the result appeal of the Revenue is partly allowed for statistical purpuses

Coming to ITA No. 520/AHD/2018, an appeal by Assessee for the AY 2013-14

78. The Assessee has raised following grounds of appeal:

1. Disallowance u/s 14A r.w. Rule SD of the Income-tax Act, 1961

1.1 The learned CIT(A) erred in confirming disallowance out of operating expenses of Rs.9.58 crores under section 14A r.w. Rule 8D, despite the Bank being a dealer and holding all its shares and securities (except shares in subsidiaries/ JV companies) as its stock-in-trade. The learned CIT(A) has failed to appreciate that the Bank has earned treasury business profits (taxable) of Rs. 586.30 crores on dealings in shares and securities which is one of its main objects and the Bank is actively and extensively carrying out treasury operations .in shares and securities in order to contribute to its profits.

1.2 The learned CIT(A) erred in not appreciating that Rule 8D is neither charging provision nor automatic and Rule 8D(2)(iii) w.e.f. A.Y, 2008-09 cannot supersede favourable judgements of Hon. ITAT upfo AY 2009-10 and Gujarat HC upto A.Y. 2008-09 in the Bank’s own case.

2. Bank guarantee commission

2.1 The CIT (A) erred in upholding the addition of Bank Guarantee (BG) commission income of Rs. 152.32 crores being the sum relatable to unexpired period of the guarantee contract. This sum represents the pro-rata income for the period beyond 1-04-2013 which shall be amortised by the Bank over the balance tenure of the guarantee contract. This addition represents timing difference which shall be tax neutral and there shall not be loss of revenue to the department.

2.2 The learned CIT(A) failed to appreciate that the customer has inherent legal right to receive refund of proportionate amount of guarantee commission pertaining to the unexpired period of guarantee contract, in the event of bank guarantee being terminated before full period of the guarantee contract. Thus, the entire amount of commission received cannot be recognised as income in the year of receipt itself. Upfront collection of guarantee commission covers guarantee risk which extends over the tenure of the guarantee not being limited to the year in which such commission is received by the Bank.

3. Interest on NPA

3.1 The learned CIT (A) erred in law in confirming addition of notional interest income on NPA of Rs. 16.30 crores under Rule 6EA r.w.s. 43D of the Act as interest income is deemed to be accrued during previous year, though there has been no change in underlying facts or law since AY 1995-96 and the same is accepted hitherto in income tax assessment upto AY 2010-1 I.

3.2  The learned CITfA] failed to appreciate that recognition of interest income on NPA is in accordance with binding RBI guidelines and specific mandate of section 43D and that Rule 6EA is subservient to Section 43D and hence it cannot extend the scope beyond the charge of income provided in section 43D.

4. Lease operating expenditure

4.1. The learned CIT(A) erred in confirming disallowance of Rs. 17.86 crores by ignoring Ihe treatment of lease operating expenses followed by the Bank in accordance with AS-19 issued by ICAI to be mandatorily followed by the Bank as per section 133 of The Companies Act, 2013.

4.2. The learned CITfA) also failed to appreciate thai this addition represents timing difference which shall be tax neutral and there will not be any loss of revenue to the department.

5. Employee Stock Option cost

5.1 The learned CIT(A) erred in law by not allowing the ESOP cost of Rs. claimed as deduction u/s 37(1) of the Act. 177.34 crores

5.2 The learned CITfA) failed to appreciate that the market price as on date of exercise o f options being greater than the exercise price, there is actual discount offered to the employees.

5.3 The learned CITfA) also failed in correctly applying the ratio of the decision of Bangalore Special Bench of Hon’ble ITAT in case of Biocon Limited vs DCIT [2013] 144 ITD 21 (BangaloreJ(SB) which states that ESOP cost in hands of the company has to be equivalent to amount taxable as perquisite in the hands of employees. Relying on the decision of Hon’ble Special Bench, the difference between market price as on date of exercise of options and the exercise price (i.e. the market price on the grant date) is an allowable deduction for computing income under the head ‘profits and gains from business or profession’in the year of exercise of options by the employee (such amount being equal to the amount taxable as perquisite in hands of employee).

The appellant craves leave to add, fo amend, alter, delete and/or modify the above grounds of appeal on or before the final date of hearing.

79. The first issue raised by the assessee is that the Ld.CIT(A) erred in confirming the order of the AO by sustaining the disallowance of Rs. 9.58 crore under the provision of section 14A r.w.Rule 8D of Income Tax Rules.

80. At the outset we note that the issues raised by the assessee in its grounds of appeal for the AY 2013-14 are identical to the issues raised by the assessee in ITA No. 311/AHD/2016 for the assessment year 2010-11. Therefore, the findings given in ITA No. 311/AHD/2016 shall also be applicable for the year under consideration i.e. AY 2013-14. The appeal of the assessee for the assessment 2010­11 has been decided by us vide paragraph Nos. 8 to 10 of this order in favoure the assessee for statistical purposes. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2010-11 shall also be applied for the year under consideration i.e. AY 2013-14. Hence, the grounds of appeal filed by the assessee is allowed for statistical purposes.

81. The 2nd issue raised by the assessee is that the learned CIT-A erred in confirming the order of the AO by sustaining the addition of Rs. 152.32 crore on account of commission income from the bank guarantee furnished to the customers.

82. At the outset we note that the issues raised by the assessee in its grounds of appeal for the AY 2013-14 are identical to the issues raised by the assessee in ITA No. 311/AHD/2016 for the assessment year 2010-11. Therefore, the findings given in ITA No. 311/AHD/2016 shall also be applicable for the year under consideration i.e. AY 2013-14. The appeal of the assessee for the assessment 2010- 11 has been decided by us vide paragraph Nos. 20 to 20.8 of this order in ITA No.311/Ahd/2016. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2010-11 shall also be applied for the year under consideration i.e. AY 2013-14. Hence, the grounds of appeal filed by the assessee is allowed.

83. The next issue raised by the assessee in ground No. 3 is that the learned CIT (A) erred in confirming the addition of Rs. 16.30 crore being the amount of interest on the sticky advances under rule 6EA read with section 43D of the Act.

84. At the outset we note that the issues raised by the assessee in its grounds of appeal for the AY 2013-14 are identical to the issues raised by the assessee in ITA No. 2176/AHD/2016 for the assessment year 2011-12. Therefore, the findings given in ITA No. 2176/AHD/2016 shall also be applicable for the year under consideration i.e. AY 2013-14. The appeal of the assessee for the assessment 2011- 12 has been decided by us vide paragraph Nos 36 to 36.3 of this order in favoure of the assessee. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2011-12 shall also be applied for the year under consideration i.e. AY 2013-14. Hence, the grounds of appeal filed by the assessee is allowed.

85. The next issue raised by the assessee in ground No. 4 is that the learned CIT (A) erred in confirming the disallowance made by the AO for Rs. 17.86 crores on account of lease operating expenses.

86. At the outset we note that the issues raised by the assessee in its grounds of appeal for the AY 2013-14 are identical to the issues raised by the assessee in ITA No. 2176/AHD/2016 for the assessment year 2011-12. Therefore, the findings given in ITA No. 2176/AHD/2016 shall also be applicable for the year under consideration i.e. AY 2013-14. The appeal of the assessee for the assessment 2011­12 has been decided by us vide paragraph Nos 41 to 41.5 of this order in favoure of the Revenue. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2011-12 shall also be applied for the year under consideration i.e. AY 2013-14. Hence, the grounds of appeal filed by the assessee is dismissed.

87. The assessee in the gorund no 5 and additional grounds of appeal has sought the deduction on account of education, secondary and higher education cess as well as employee stock option plan for Rs. 177.34 crores and Rs. 80.35 crores respectively.

88. At the outset we note that the issues raised by the assessee in its additional grounds of appeal for the AY 2013-14 are identical to the issues raised by the assessee in ITA No. 311/AHD/2016 for the assessment year 2010-11. Therefore, the findings given in ITA No. 311/AHD/2016 shall also be applicable for the year under consideration i.e. AY 2013-14. The appeal of the assessee for the assessment 2010-11 has been decided by us vide paragraph Nos. 25 to 25.2 of this order in favoure the assessee for statistical purposes. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2010-11 shall also be applied for the year under consideration i.e. AY 2013-14. Hence, the grounds of appeal filed by the assessee is allowed for statistical purposes.

88.1 In the result appeal of the assessee is partly allowed for statistical purposes

Coming to ITA No. 604/AHD/2018, an appeal by Revenue for the AY 2013-14

89. The Revenue has raised following fgfrounds of appeal:

(1) That the ld.CIT(A) has erred in law and on facts in restricting the disallowance u/s.14A from Rs.1,31,27,60,212/- to Rs.9,58,07,301/-.

(2) That the ld.CIT(A) has erred in law and on facts in deleing the addition o f Rs. 1,82,63,504/- made on account of Annual Technical Fees.

(3) That the ld.CIT(A) has erred in law and on facts in deleting the disallowance o f Rs. 73,03,649/- made on account of interest in respect of capital work in progress.

(4) The appellant craves, to leave, to amend and/or to alter any ground or add a new ground which may be necessary.

90. The fisrt issue raised by the Revenue is that the leanred CIT (A) erred in deleting the addition of Rs. 1,29,54,449/- made under section 14A read with rule 8D of Income tax Rule.

91. At the outset we note that the issues raised by the Revenue in its grounds of appeal for the AY 2013-14 are identical to the issues raised by the assessee in ITA No. 311/AHD/2016 for the assessment year 2010-11. Therefore, the findings given in ITA No. 311/AHD/2016 shall also be applicable for the year under consideration i.e. AY 2013-14. The appeal of the assessee for the assessment 2010­11 has been decided by us vide paragraph Nos. 8 to 10 of this order partly allowed for statistical purposes. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2010-11 shall also be applied for the year under consideration i.e. AY 2013-14. Hence, the grounds of appeal filed by the Revenue is partly allowed for statistical purposes.

92. The next issue raised by the revenue is that the learned CIT (A) erred in deleting the addition made by the AO for Rs. 1,82,63,504/- on account of prior period expenses.

93. At the outset we note that the issues raised by the Revenue in its grounds of appeal for the AY 2013-14 are identical to the issues raised by the Revenue in ITA No. 2173/AHD/2016 for the assessment year 2011-12. Therefore, the findings given in ITA No. 2173/AHD/2016 shall also be applicable for the year under consideration i.e. AY 2013-14. The appeal of the Revenue for the assessment 2011- 12 has been decided by us vide paragraph Nos. 55 to 55.2 of this order against the Revenue. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2011-12 shall also be applied for the year under consideration i.e. AY 2013-14. Hence, the grounds of appeal filed by the Revenue is dismissed.

94. The issue raised by the revenue in ground No. 3 is that the learned CIT (A) erred in deleting the disallowance made by the AO for Rs. 73,03,649.00 on account of interest expenses incurred in respect of capital work in progress.

95. At the outset we note that the issues raised by the Revenue in its grounds of appeal for the AY 2013-14 are identical to the issues raised by the Revenue in ITA No. 287/AHD/2017 for the assessment year 2012-13. Therefore, the findings given in ITA No. 287/AHD/2017 shall also be applicable for the year under consideration i.e. AY 2013-14. The appeal of the Revenue for the assessment 2012- 13 has been decided by us vide paragraph Nos. 77 to.77.1 of this order against the Revenue. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2012-13 shall also be applied for the year under consideration i.e. AY 2013-14. Hence, the grounds of appeal filed by the Revenue is dismissed.

95.1 In the result appeal of the Revenue is partly allowed for statistical purposes

Coming to ITA No. 521/AHD/2018, an appeal by Assessee for the AY 2014-15

96. The Assessee has raised following grounds of appeal:

1. Disallowance u/s 14A r.w. Rule 8D of the Income-tax Act, 1961

1.1 The learned CIT(A) erred in confirming disallowance out of operating expenses of Rs. 15.59 crores under section I4A r.w. Rule 8D, despite the Bank being a dealer and holding all its shares and securities (except shares in subsidiaries/ JV companies) as its stock-in-trade. The learned CIT(A) has failed to appreciate that the Bank has earned treasury business profits (taxable] of Rs. 327.58 crores on dealings in shores and securities which is one of its main objects and the Bank is actively and extensively carrying out treasury operations in shares and securities in order to contribute to its profits.

1.2 The leorned C1T[A) erred in not appreciating that Rule 8D is neither charging provision nor automatic and Rule 8D(2)(iii) w.e.f. A.Y. 2008-09 cannot supersede favourable judgements of Hon. ITAT upto AY 2009-10 and Gujarat HC upto A.Y. 2008-09 in the Bank’s own case.

2. Bank guarantee commission

2.1 The CIT (A) erred in upholding the addition of Bank Guarantee (BG) commission income of Rs. 182.58 crores being the sum relatable to unexpired period of the guarantee contract. This sum represents the pro-rata income for the period beyond 1-04-2014 which shall be amortised by the Bank over the balance tenure of the guarantee contract. This addition represents timing difference which shall be tax neutral and there shall not be loss ot revenue to the department.

2.2 The learned CIT(A) failed to appreciate that the customer has inherent legal right to receive refund of proportionate amount of guarantee commission pertaining to the unexpired period of guarantee contract, in the event of bank guarantee being terminated before full period of the guarantee contract. Thus, the entire amount of commission received cannot be recognised as income in the year of receipt itself. Upfront collection of guarantee commission covers guarantee risk which extends over the tenure of the guarantee not being limited to the year in which such commission is received by the Bank.

3. Interest on NPA

3.1 The learned CIT (A) erred in law in confirming addition of notional interest income on NPA of Rs. 18.08 crores under Rule 6EA r.w.s. 43D of the Act as interest income deemed to be accrued during previous year, though there has been no change in underlying facts or low since AY 1995-96 and the same is accepted hitherto in income 1ax~ “\ assessment upto AY 2010-11. /

3.2 The leorned CIT(A) failed to appreciate that recognition of interest income on NPA is in accordance with binding RBI guidelines and specific mandate of section 43D and that Rule 6EA is subservient to Section 43D and hence it cannot extend the scope beyond the charge of income provided in section 43D.

4. Lease operating expenditure

4.1. The learned CIT(A) erred in confirming disallowance of Rs. 25.47 crores by ignoring the treatment of lease operating expenses followed by the Bank in accordance with AS-19 issued by ICAI to be mandatory followed by the Bank as per section 133 of The Companies Act, 2013.

4.2. The learned CIT(A) also failed to appreciate that this addition represents timing difference which shall be tax neutral and there will not be any loss of revenue to the department,

5. Employee Stock option cost

5.1 The learned CIT(A) erred in law by not allowing the ESOP cost of Rs. 104.56 crores claimed as deduction u/s 37(1) of the Act.

5.2 The .learned CIT(A) failed to appreciate that the market price as on date of exercise of options being greater than the exercise price, there is actual discount offered to the employees.

5.3 The learned CIT(A) also failed in correctly applying the ratio of the decision of Bangalore Special Bench of Hon’ble ITAT in case of Biocon Limited vs DCIT [2013] 144 ITD 21 (BangaloreJ(SB) which states that ESOP cost in hands of the company has to be equivalent to amount taxable as perquisite in the hands of employees. Relying on the decision of Hon’ble Special Bench, the difference between market price os on date of exercise of options and the exercise price (i.e. the market price on the grant date) is an allowable deduction for computing income under the head ‘profits and gains from business or profession’ in the year of exercise of options by the employee (such amount being equal to the amount taxable as perquisite in hands of employee),

The appellant craves leave to add, to amend, alter, delete and/or modify the above grounds of appeal’on or before the final date of hearing.

97. The first issue raised by the assessee is that the Ld.CIT(A) erred in confirming the order of the AO by sustaining the disallowance of Rs. 15.59 crore under the provision of section 14A r.w.Rule 8D of Income Tax Rules.

98. At the outset we note that the issues raised by the assessee in its grounds of appeal for the AY 2014-15 are identical to the issues raised by the assessee in ITA No. 311/AHD/2016 for the assessment year 2010-11. Therefore, the findings given in ITA No. 311/AHD/2016 shall also be applicable for the year under consideration i.e. AY 2014-15. The appeal of the assessee for the assessment 2010­11 vide paragraph Nos. 8 to 10 of this order has been partly allowed for statistical purposes. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2010-11 shall also be applied for the year under consideration i.e. AY 2014-15. Hence, the grounds of appeal filed by the assessee is partly allowed for statistical purposes.

99. The 2nd issue raised by the assessee is that the learned CIT-A erred in confirming the order of the AO by sustaining the addition of Rs. 182.58 crore on account of commission income from the bank guarantee furnished to the customers.

100. At the outset we note that the issues raised by the assessee in its grounds of appeal for the AY 2014-15 are identical to the issues raised by the assessee in ITA No. 311/AHD/2016 for the assessment year 2010-11. Therefore, the findings given in ITA No. 311/AHD/2016 shall also be applicable for the year under consideration i.e. AY 2014-15. The appeal of the assessee for the assessment 2010- 11 has been decided by us vide paragraph Nos 20 to 20.6 of this order in ITA No.311/Ahd/2016. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2010-11 shall also be applied for the year under consideration i.e. AY 2014-15. Hence, the grounds of appeal filed by the assessee is allowed.

101. The next issue raised by the assessee in ground No. 3 is that the learned CIT (A) erred in confirming the addition of Rs. 18.08 crore being the amount of interest on the sticky advances under rule 6EA read with section 43D of the Act.

102. At the outset we note that the issues raised by the assessee in its grounds of appeal for the AY 2014-15 are identical to the issues raised by the assessee in ITA No. 2176/AHD/2016 for the assessment year 2011-12. Therefore, the findings given in ITA No. 2176/AHD/2016 shall also be applicable for the year under consideration i.e. AY 2014-15. The appeal of the assessee for the assessment 2011- 12 has been decided by us vide paragraph Nos 36 to 36.3 of this order in favoure of the assessee. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2011-12 shall also be applied for the year under consideration i.e. AY 2014-15. Hence, the grounds of appeal filed by the assessee is allowed.

103. The next issue raised by the assessee in ground No. 4 is that the learned CIT (A) erred in confirming the disallowance made by the AO for Rs. 25.47 crores on account of lease operating expenses.

104. At the outset we note that the issues raised by the assessee in its grounds of appeal for the AY 2014-15 are identical to the issues raised by the assessee in ITA No. 2176/AHD/2016 for the assessment year 2011-12. Therefore, the findings given in ITA No. 2176/AHD/2016 shall also be applicable for the year under consideration i.e. AY 2014-15. The appeal of the assessee for the assessment 2011­12 has been decided by us vide paragraph Nos 41 to 41.5 of this order in favour of the Revenue. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2011-12 shall also be applied for the year under consideration i.e. AY 2014-15. Hence, the grounds of appeal filed by the assessee is dismissed.

105. The assessee in the gorund no 5 and additional grounds of appeal has sought the deduction on account of education, secondary and higher education cess as well as employee stock option plan for Rs. 104.56 crores and Rs. 102.19 crores respectively.

106. At the outset we note that the issues raised by the assessee in its additional grounds of appeal for the AY 2014-15 are identical to the issues raised by the assessee in ITA No. 311/AHD/2016 for the assessment year 2010-11. Therefore, the findings given in ITA No. 311/AHD/2016 shall also be applicable for the year under consideration i.e. AY 2014-15. The appeal of the assessee for the assessment 2010-11 has been decided by us vide paragraph Nos.25 to 25.2 of this order in favoure the assessee for statistical purposes. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2010-11 shall also be applied for the year under consideration i.e. AY 2014-15. Hence, the grounds of appeal filed by the assessee is allowed for statistical purposes.

106.1 In the result appeal of the assessee is partly allowed for statistical purposes

Coming to ITA No. 605/AHD/2018, an appeal by Revenue for the AY 2014-15

107. The Revenue has raised following grounds of appeal:

(1) That the ld.CIT(A) has erred in law and on facts in restricting the disallowance u/s.14A from Rs.1,98,34,99,488/- to Rs.15,59,59,936/-.

(2) That the ld.CIT(A) has erred in law and on facts in deleing the addition of Rs.3,08,31,629/- made on account of Annual Technical Fees.

(3) That the ld.CIT(A) has erred in law and on facts in deleting the disallowance of Rs.1,07,69,748/- made on account of interest in respect of capital work in progress.

(4) The appellant craves, to leave, to amend and/or to alter any ground or add a new ground which may be necessary.

108. The first issue raised by the Revenue is that the leanred CIT (A) erred in deleting the addition of Rs. 2,09,81,890/- made under section 14A read with rule 8D of Income tax Rule.

109. At the outset we note that the issues raised by the Revenue in its grounds of appeal for the AY 2014-15 are identical to the issues raised by the assessee in ITA No. 311/AHD/2016 for the assessment year 2010-11. Therefore, the findings given in ITA No. 311/AHD/2016 shall also be applicable for the year under consideration i.e. AY 2014-15. The appeal of the assessee for the assessment 2010­11 vide paragraph Nos. 8 to 10 of this order has been partly allowed for statistical purposes. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2010-11 shall also be applied for the year under consideration i.e. AY 2014-15. Hence, the grounds of appeal filed by the Revenue is partly allowed for statistical purposes.

110. The next issue raised by the revenue is that the learned CIT (A) erred in deleting the addition made by the AO for Rs. 3,08,31,629/- on account of prior period expenses.

111. At the outset we note that the issues raised by the Revenue in its grounds of appeal for the AY 2014-15 are identical to the issues raised by the Revenue in ITA No. 2173/AHD/2016 for the assessment year 2011-12. Therefore, the findings given in ITA No. 2173/AHD/2016 shall also be applicable for the year under consideration i.e. AY 2014-15. The appeal of the Revenue for the assessment 2011- 12 has been decided by us vide paragraph Nos.55 to 55.2 of this order in favour the Revenue. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2011-12 shall also be applied for the year under consideration i.e. AY 2014-15. Hence, the grounds of appeal filed by the Revenue is allowed.

112. The issue raised by the revenue in ground No. 3 is that the learned CIT (A) erred in deleting the disallowance made by the AO for Rs. 1,07,69,748/- on account of interest expenses incurred in respect of capital work in progress.

113. At the outset we note that the issues raised by the Revenue in its grounds of appeal for the AY 2014-15 are identical to the issues raised by the Revenue in ITA No. 287/AHD/2017 for the assessment year 2012-13. Therefore, the findings given in ITA No. 287/AHD/2017 shall also be applicable for the year under consideration i.e. AY 2014-15. The appeal of the Revenue for the assessment 2012- 13 has been decided by us vide paragraph No.71 of this order against the Revenue. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2012-13 shall also be applied for the year under consideration i.e. A.Y 2014-15. Hence, the grounds of appeal filed by the Revenue is allowed.

113.1 In the result appeal of the Revenue is partly allowed for statistical purposes

114. The combined results of the appeals are as follows:

Sr No ITA No A.Y Appeal by
1. 311/Ahd/2016 2010-11 Assessee
2. 2176/Ahd/2016 2011-12 Assesse
3. 2173/Ahd/2016 2011-12 Revenue
4. 165/Ahd/2017 2012-13 Assessee
5. 287/Ahd/2017 2012-13 Revenue
6-7 520 & 521/Ahd/2018 2013-14 & 2014-15 Assessee
8-9 604 & 605/Ahd/2018 2013-14 & 2014-15 Revenue

Order pronounced in the Court on  28/10/2021 at Ahmedabad.

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