ICICI Bank Limited Vs ACIT (ITAT Mumbai)
ITAT Mumbai held that mere RBI recognition of debt instrument as additional tier/ capital doesn’t change the nature of perpetual debt instrument. Hence, interest expenses on perpetual bonds, allowable as deduction under Section 36(1)(iii) of the Income Tax Act, 1961
Facts-
During the course of assessment, the A.O also noticed that assessee has claimed interest expenditure u/s 36(1)(iii)of the Act in respect of perpetual bonds issued by the assessee bank. On query, the assessee explained that these bonds have been issued to various insurance companies, mutual fund provident fund and individuals. It is also explained that these bonds were in the nature of debentures and have superior claim over equity and cumulative preference shares of the bank.
The bank have fixed the interest rate and interest is paid out of distributable profits of previous years or current years. The bank has discretion to exercise the call option for the said bonds as per the applicable guidelines. It was also submitted that the bank has exercised the call option in October, 2016 in respect of the said bonds. The bank has paid interest to the bond holders after deducting the tax at source where applicable at the rate prescribed. The said interest paid on these bonds has been claimed as interest expenses u/s 36(1)(iii) of the Act.
The AO was of the view that perpetual bonds was equity and they have equity like features i.e (a) perpetual in nature; (b) high loss absorption capacity, Provision for write down of principal or conversion to equity on trigger; (c) Discretionary pay-out with existence of full coupon discretion and that where the lender does not have authority to claim refund of the amount given, the said amount cannot be held as borrowing and hence the interest on such bonds was not admissible as deduction u/s 36(1)(iii) of the Act. CIT(A) allowed the appeal.
Conclusion-
It is observed that assessee has issued innovative perpetual debt instruments (IPDI) which carry a fixed rate of interest. The holder of these instruments had no right in management of the assessee bank.
In the light of the facts and circumstances merely that RBI recognizes to treat the said debt instruments as additional Tier/Capital would not change the nature of Innovative Perpetual Debt Instruments which were of the nature of long term borrowings and the interest paid was debited to the profit and loss account. These debt instruments were also redeemed on different dates, therefore, this ground of appeal of the revenue is dismissed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The present appeals filed by the assessee and the revenue are directed against the order passed by the ld. CIT(A)-6 Mumbai, which in turn arises from the order passed by the A.O. u/s 143(3) r.w.s 147 of the Income Tax Act, 1961, for A.Y. 2010-11.
2. We shall first take ITA No. 3215/Mum/2019 appeal filed by the assessee. The assessee has raised the following grounds before us:
“1. Addition of Interest on Non performing assets (NPA) derecognized as per provisions of section 43D of the Act Rs.6,88,36,167 (Para 7, Pages 9 to 16 of the CIT(A) order)
1.1 On the facts and circumstances of the case and law, the CIT(A) erred in confirming the disallowance of interest on NPA amounting to Rs.6,88,36,167 derecognized by the Appellant in its books of accounts on the ground that the same is not in line with the provisions of section 43D of the Act read with Rule 6EA of the Income-tax Rules, 1962.
GENERAL
2. The Appellant craves leave and reserves its right to vary, amend, alter and/or add to the grounds of appeal and to produce such oral and documentary evidence and file such compilation of documents as may be necessary at the time of hearing of the appeal.”
3. The fact in brief is that return of income declaring total income of Rs. 46,71,80,98,310/-. The assessee revised its return of income on 31.03.2012 declaring total income of Rs.46,46,21,35,560/-. The assessment u/s 143(3) of the Act was finalized on 12.03.2014 determining the total income at Rs.87,24,41,88,318/-. Subsequently, the case was reopened u/s 147 of the Act and noticed u/s 148 was issued on 31.03.2017. During the course of reassessment the A.O noticed that as Section 43D r.w.Rule 6EA interest is not to be offered for taxation with respect to advances which have become non-performing assets for a period of 180 days or more, however, the assessee has recognized such interest on the non performing assets for a period of 90 days or more as per guidelines of RBI. On query the assessee explained that as per provision of Sec. 43D of the Act income by way of interest in relation to such categories of bad and doubtful debt as may be prescribed in the guidelines issued by RBI shall be chargeable to tax in the year in which it is credited by the public financial institution or schedule bank to its profit and loss account for the year or in the year in which it is actually received whichever is earlier. It is further stated that the bank on the guidelines laid down by the RBI regarding identification, classification and provisioning of non-performing assets derecognizes the interest if the accounts are over due for a period of more than 90 days. This method is consistently followed by the bank and is in line with provisions of Sec. 43D of the Act as this section also mentions the guidelines issued by RBI. The assessee has also submitted that the said accounting treatment has been accepted by the department in the preceding assessment years. However, the A.O has not agreed with the submission of the assessee and was of the view that the claim of interest made u/s 43D was excessive and required to be disallowed. The A.O observed that the provisions of Rule 6EA r.w.s 43D are very clear and the benefit of nonrecognition of interest in the NPA can be granted to the assessee as per the provision of Rule 6EA r.s.s 43D only when the irregularities exceeds for a period of 6 months or more. The A.O also observed that as per guidelines of RBI non-performing assets are recognized for a default of 3 months or more, however as per the IT rules, the period of 3 months has not been recognized anywhere. The A.O has not accepted the interest derecognized by the assessee therefore made addition of Rs.6,88,36,167/- to the total income of the assessee.
4. Aggrieved, the assessee filed the appeal before the ld. CIT(A). The CIT(A) has dismissed the appeal of the assessee. The relevant part of the decision of CIT(A) is reproduced as under:
“7.3 I have carefully considered the facts of the case, discussion of the AO in the assessment order, oral contentions and written submissions of the appellant and material available on record. It is the fact of the case that the appellant has not recognized the amount of interest attributable on sticky advances which remained NPA for a period of more than 90 days but less than 6 months as income for the period under consideration. The assessee in their reply had submitted before the AO that the interest on NPA which had not been offered to tax u/s 43D r.w.r.6EA is Rs.6,88,36,167/-. The AO, therefore added the amount of Rs.6,83,36,167/- being claim of interest on NPA made by the assessee. In this ground of appeal, what has been disputed by the assessee is that the guidelines of Reserve Bank of India prescribed recognition of the assets being NPA when the period of default is 90 days or more and that the provisions of section 430 of the Act which stipulates recognition of income by way of interest in relation to such categories of all bad or doubtful debts having regard to the guidelines issued by the RBI in relation to such debts The appellant mainly seeks to contend that what would prevail is RBI guidelines in relation to section 430 of the Act and not the Rule CEA of the Rules. In regard to such contention of the appellant, it is stated that the provisions of section 430 stipulates that “the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the Reserve Bank of India in relation to such debts.” Therefore, what can be seen from the provisions of section 43D of the Act is that the income by way of interest has to be considered “as may be prescribed” and such stipulation has been prescribed in Rule 6EA of I.T. Rules, 1962 for the said purposes. It is to be understood that the rule may be prescribed having regard to the guidelines issued by the Reserve Bank of India and such stipulation in section 43D only warrants the authorities to prescribe the rules in view and in reference to the guidelines issued by the Reserve Bank of India. It therefore has to be understood that while the guidelines issued by the Reserve Bank of India are essential point for recognition, having regard to them and keeping a reference of the same, the rules have to be prescribed, but it would be the rules which have to be followed. Even if for any reason, rules have been prescribed by the Government having regard to the guidelines of RBI which may subsequently have changed, then too, it has to be considered and taken that the rules which are in force are such which have been prescribed having regard to such guidelines and no change in the rules having regard to the guidelines of RBI have been considered necessary. The phrase as appearing in the provisions of section 43D as may be prescribed cannot be read in any other manner and certainly cannot be ignored. The contention of the appellant that the mention in section 430 of “having regard to the guidelines issued by the RBI would warrant necessarily to follow the guidelines, superseding the prescribed rules in IT Rules, 1962 is therefore, clearly flawed. The Hon’ble Delhi High Court in the case of CIT vs. Vashisth Chay Vyapar Ltd. 330 ITR 440 have clearly mentioned the observation of Hon’ble Apex Court that in so far as the permissible deductions or exclusions under the Acts are concerned, the same are admissible only if such deductions/exclusions satisfy the relevant conditions stipulated there for under the Act. Further, Hon’ble Supreme Court in the case of Southern Technologies Ltd. vs. JCIT (Civil Appeal No.1337/2003 dated 11.01.2010) have observed that the prudential norms of RBI do not override the provisions of the Act. Accordingly, “exclusion of recognizable income under the Act” cannot be allowed in the absence of any specific in this regard in the Act.
7.3.1 The appellant has further contended that the income recognition should have regard to the real income theory. In this regard, it is stated that any theory of this kind cannot apply which makes the implementation of a prescribed rule in I.T. Rules, 1962 as inapplicable or redundant. The appellant has further contended that Rule 6EA cannot expand the scope of section 43D. In this regard, it is stated that Rule GEA has been prescribed so as to apply the provision of section 43D correctly. Any askewed interpretation which leads to redundancy of any rule prescribed under the law, will lead to the conclusion that such interpretation is incorrect and flawed and not the concerned rule or provision of the Act. It is also noted that section 43D was introduced by Finance Act, 1991 with a view to improve the viability of the banks, public financial institutions, and as per that section the interest on sticky loans has to be charged only in the year in which interest is actually received or charged to profit and loss account, whichever is earlier. As per that section, the category of bad and doubtful debts [sticky loans] was to be prescribed in the IT Rules having regard to the guidelines issued by the RBI in relation to such debts. In 1992, the Rule 6EA was framed wherein the norms for six months was provided In that year as per the RBI guidelines, the norms for categorizing NPA were more than 6 months la 1991, the specified period was two years. In 1994, it was 1.5 years, from 1995 till 31.03.2004, it remained 6 months. Thus, it is very clear that the norms of 6 months provided in Rule 6EA was not equal to the period provided in RBI guidelines from when the rule was framed till 2004. The section 43D provided from the norms by framing the rules in view of the RBI guidelines but does not mean that the norms were to be adopted Admittedly, the norms as per RBI guidelines have been further reduced to ninety days. But the Rule 6EA still continues with the norms of 6 months. Thus, the benefit of section 430 would be available to the assessee bank only in those cases in which interest or principal remained unpaid for the period of 6 months or more. The appellant has also placed reliance on the decision of Hon’ble Tribunal In the case of DCП vs Royal Bank of Scotland (supra) and DCIT vs Karur Vyasa Bank (supra) In respect of such reliance placed, it is stated that in the said decisions, the Hon’ble ITAT have decided the issue in favour of the appellant but while deciding such issues, the historical background right from the year 1992 to 31 03.2004 as have been mentioned hereinabove, were not before the Hon’ble bench Therefore, it has not been considered that when the period given in the RBI guidelines were beyond 6 months given in Rule 6EA, then too whether there was any need to align the provisions of Rule 6EA to the guidelines issued by the RBI in this regard. The appellant has also contended that interest Income on the NPAs do not accrue u/s 5 of the Income-tax Act. They have also placed reliance on the decision of Hon’ble Supreme Court in the case of UCO Bank Ltd vs CIT (supra). In regard to such submission of the assessee, it is stated that the recognition of income in this case has to be deemed in view of the provisions of section 43D r.w Rule 6EA of the Rules and while doing so, the concept of real Income or the actual income or the accrual thereof u/s.5 of the Act shall not arise. It may be mentioned that it could be a case wherein even before the period of 90 days, the loan may have become bad, still the banking company have to recognize the accrual of interest on the same at least up till the period of 90 days even as per RBI guidelines. Therefore, the contention of the assessee in respect of accrual of income and thereby the real income theory would not be relevant in view of the extant provisions of section 430 r.w.r.6EA of the Rules. In respect of the decision of Hon’ble Apex Court in the case of UCO Bank Ltd. vs. CIT (supra), it is stated that the same is not in respect of Section 43D/Rule 6EA of Rules. The assessee has also contended and justified its stand based on clause (e) of Rule 6EA. In respect of the same, it is stated that on facts the irrecoverability of debt has not been proved. Neither the facts nor surrounding circumstances resulting into difficulties in enforcing and realizing of the securities have been proven on facts. If that would have been the situation, then such debts could not be included for the purposes of (a) to (d) and resultantly should have been taken to section 36(1)(vii)/(via) of the Act. In view of the facts and circumstances of the case and discussion hereinabove, the contentions and submissions of the assessee are not found to be acceptable and are therefore, rejected. Ground No.2 of the appeal is accordingly, dismissed.
5. During the course of appellate proceedings before us the ld. counsel vehemently contended that it is mandatory for the banks to follow the guidelines issued by the RBI and further submitted that assessee bank had not recognized the interest income in respect of advance which were overdue for more than 3 months in the profit and loss account in accordance with RBI guidelines applicable to the bank. The ld. Counsel has also submitted that assessee bank has to follow system of accounting and prepare account as mandated by RBI guidelines. She has also submitted that Rules 6EA was in conformity with the RBI guidelines at the time of introduction, however, subsequent amendment in Rule 6EA has not been carried out in accordance with the revised guidelines issued by the RBI from time to time. The ld. Counsel has placed reliance on the decision of ITAT Mumbai in the case of Union Bank of India Vs. ACIT 16 taxmann.com 304, and the ITAT Kolkata in the case of Royal Bank of Scotland Vs. DCIT(IT) 2(1), ITA No. 477/Kal/2015 dated 14.10.2016 and also placed reliance on decision of Chennai Tribunal in the case of DCIT Vs. Karur Vysya Bank (ITA 2433 & 2649/Mad/2016).
On the other hand the ld. D.R relied on the order of ld. CIT(A).
6. Heard both the sides and perused the material on record. The asesssee has recognized the amount of interest attributable on sticky advances as NPA for a period of 90 days or more as per the guidelines issued by the RBI in accordance with Sec. 43D of the Act. However, the A.O was of the view that as per Rule 6E, interest is not to be offered for taxation with respect to advances which become Non Performing Assets for a period of 180 days or more. With the assistance of ld. representative we have perused the decision of ITAT, Mumbai in the case of Union Bank of India VS. ACIT, 16 taxman.com 304 wherein on identical issue and similar facts held that bank had no option but follow the RBI guidelines to make a provision for unrealized interest on the NPA by debiting profit and loss account. In the case of DCIT Vs. Karur Vysya Bank ITA No. 2433 & 2467 of ITAT Chennai dated 29.03.2017 held that it becomes necessary to read down such rules so that it is in consonance with the RBI regulation or prudential norms for recognizing income.
In Royal Bank of Scotland Vs. DCIT vide ITA No. 477/Kal/2015 ITAT Kolkata 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 of recovery. The only contention of the revenue is that section 43D of the Act read with Rule 6BA 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 CIT vs 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 330 ITR 440 and various other decisions refered 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.”
We have also perused the provision of Sect. 43D of the Act which are reproduced as under:
“43D. Notwithstanding anything to the contrary contained in any other pro vision of this Act,-
(a) in the case of a public financial institution or a scheduled bank or “[a cooperative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank or] a State financial corporation or a State industrial investment corporation “[or a deposit taking non-banking financial company or a systemically important non-deposit taking non-banking financial company] the income by way of interest” in relation to such categories of bad or doubtful debts as may be prescribed” having regard to the guidelines issued by the Reserve Bank of India in relation to such debts,
(b) in the case of a public company, the income by way of interest” in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the National Housing Bank in relation to such debts,
shall be chargeable to tax in the previous year in which it is credited by the public financial institution or the scheduled bank or “[a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank or] the State financial corporation or the State industrial investment corporation or “[a deposit taking non-banking financial company or a systemically important non-deposit taking non-banking financial company or] the public company to its profit and loss account for that year or as the case may be, in which it is actually received by that institution or bank or corporation or company, whichever is earlier.”
It is categorically provided in the provisions of section 43D that income by way of interest in relation to bad and doubtful debts to be prescribed in accordance with guidelines issued by the RBI. The section 43D was introduced by the Finance Act, 1991 as per the section the category of bad and doubtful debts to be prescribed in the Income Tax Rules having regard to the guidelines issued by the RBI in relation to such debts. In 1992 the Rules 6E was framed and as per RBI guidelines the norms for categorization of advances as NPA were those advances which remained over due for more than 6 months. The RBI has revised the guideline from time to time and made changes in the period of overdue of advances for categorization of NPA. During the year under consideration the RBI has reduced the period to 90 days for categorization of interest on sticky loan as NPA, however, similar changes was not made to Rule 6EA. After considering the provisions of Sec. 43D and judicial findings as supra we consider that norms for categorization of bad and doubtful debts had to be prescribed considering the guidelines issued by the RBI. Therefore, the ld. CIT(A) is not justified in substituting the limit for recognizing of interest on account of NPA to 180 days from 90 days in view of the clear provisions of Sec. 43D(a) that in the case of public financial institutions or schedule bank or a state financial corporation or a State Industrial Investment Corporation, the income by way of interest in relation to such categories of bad and doubtful debt as may be prescribed having regard to the guidelines issued by the RBI in relation to such debts. Therefore, both the ground of appeals of the assessee are allowed.
ITA No. 3864/Mum/2019 (Revenue Appeal)
“1. Whether on the facts and the circumstances of the case and in laws, the Ld.CIT(A) was justified in directing the AO to dispose of the assessee’s rectification application filed u/s 154 on the issue of addition of Rs.4,42,424/- on the income of the merged entity not being reported by the assessee, as a rectifiable mistake when the assessee has categorically failed to substantiate the income being offered to tax?
2. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance of interest expenses u/s 36(1)(iii) claimed by the assessee in respect of perpetual bonds issued by it, without appreciating that the said bonds were issued to enhance the capital base of the company and considering the true nature of such instruments, and thereby corresponding interest expenditure incurred on them will not be a revenue expenditure?
3. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of interest expenses u/s 36(1)(iii) claimed by the assessee in respect of perpetual bonds issued by it, without appreciating that the RBI as the regulatory authority of banking classifies such bonds as Tier-1 capital on par with equity, free reserves, perpetual preference shares etc and thereby corresponding interest expenditure incurred on them will not be a revenue expenditure?
4. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance of interest expenses u/s 36(1)(iii) claimed by the assessee in respect of perpetual bonds issued by it without appreciating the fact that the issue of these Innovative Perpetual Debt Instruments (IPDI) do not qualify as ‘borrowing’ for the purposes of section 36(1)(iii) as the right to redeem these bonds does not lie with the lender at any given point of time?”
Ground No. 2 to 4:
7. During the course of assessment the A.O also noticed that assessee has claimed interest expenditure u/s 36(1)(iii)of the Act in respect of perpetual bonds issued by the assessee bank. The details of such Perpetual Debt Instruments (IPDI) are as under:
