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.
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:
