Appeal Details
Counselvise Citation
[2022] 105 COUNSELVISE.COM (IT) 5769 (ITAT-AHMEDABAD)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
2 year(s) 10 month(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
29-03-2022
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
A
Assessment Year
2015-2016
Appeal Filed On
29-05-2019
Judgement Text
आयकर अपीलीय अिधकरण, अहमदाबाद ᭠यायपीठ IN THE INCOME TAX APPELLATE TRIBUNAL, ‘’ A’’ BENCH, AHMEDABAD (CONDUCTED THROUGH VIRTUAL COURT AT AHMEDABAD) BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER And Ms. MADHUMITA ROY, JUDICIAL MEMBER आयकर अपील सं./ITA No. 852/AHD/2019 िनधाᭅरण वषᭅ/Asstt. Year: 2015-2016 Axis Bank Limited, “Trishul”, 3 rd Floor, Opp. Samtheshwar Mahadev, Near Law Garden, Ellisbridge, Ahmedabad-380006. PAN: AAACU2414K Vs. J.C.I.T., Circle-1(1)(1), Ahmedabad. And आयकर अपील सं./ITA No. 956/AHD/2019 िनधाᭅरण वषᭅ/Asstt. Year: 2015-2016 J.C.I.T.(OSD), Circle-1(1)(1), Ahmedabad. Vs. Axis Bank Limited, “Trishul”, 3 rd Floor, Opp. Samtheshwar Mahadev, Near Law Garden, Ellisbridge, Ahmedabad-380006. PAN: AAACU2414K (Applicant) (Respondent) Assessee by : Shri S.N. Soparkar Sr. Advocate with Shri Parin Shah, A.R Revenue by : Shri Vijaykumar Jaiswal, CIT.D.R ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 2 सुनवाई कᳱ तारीख/Date of Hearing : 03/03/2022 घोषणा कᳱ तारीख /Date of Pronouncement: 30/03/2022 आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: The captioned cross appeals have been filed at the instance of the Assessee and the Revenue against the order of the Learned Commissioner of Income Tax (Appeals)-6, Ahmedabad, dated 29/03/2019 arising in the matter of assessment order passed under s. 143(3) r.w.s. 263 of the Income Tax Act, 1961 (here-in-after referred to as "the Act") relevant to the Assessment Year 2015-2016. 2. First, we take up ITA No. 852/Ahd/2019 for AY 2015-16 for the purpose of adjudication. The assessee has raised the following grounds of appeal: 1. Disallowance u/s 14A read with Rule 8D of Ihe Income-tax Act, 1961 (Tax effect - Rs. 6,99,82,352) 1.1 The learned CIT(A) erred in confirming disallowance out of operating expenses of Rs.20.59 crores under section 14A read with Rule 8D. The learned CIT(A) has failed to appreciate that suo-moto disallowance made by the Bank under section 14A of the Act is made on a scientific basis by proportionately allocating operating expenses incurred towards earning tax-free income. Hence, there is no basis or reason for any further disallowance under Rule 8D of the Income-tax Rules. 1.2 The learned C1T(A) erred in not appreciating that Rule 8D is neither charging provision nor automatic and Rule 8D(2)(iii) cannot supersede favourable judgements of Hon. ITAT upto AY 2009-10 and Gujarat HC upto AY 2008-09 in the Bank's own case. 2. Bank guarantee commission {Tax effect- Rs. 61,67,61,673) 2.1 The CIT (A) erred in upholding the addition of Bank Guarantee commission income of Rs. 181.45 crores being the sum relatable to unexpired period of the guarantee contract. This sum represents the pro-rata income for the period beyond 1-4-2015 which shall be amortised by the Bank over the balance tenure of the guarantee contract. This addition represents timing difference which will be tax neutral and there will not be any 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 ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 3 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 NPAs (Tax effect - Rs. 13,78,93,023) 3.1 The learned CIT (A) erred in law in confirming addition of notional interest income on NPAs of Rs. 40.56 crores under Rule 6EA read with section 43D of the Act as interest income 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 has been accepted hitherto in income tax assessments upto AY 2010-1 1. 3.2 The learned CIT[A] failed to appreciate that recognition of interest income on NPAs 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. Operating expenditure on leases (Tax effect - Rs. 5,67,19,639) 4.1.The learned CIT(A) erred in confirming disallowance of Rs.16.68 crores by ignoring the treatment of lease rentals under operating expenses followed by the Bonk in accordance with AS-19 issued by 1C At to be mandatorily followed by the Bank as per section 133 of The Companies Act, 2013. 4.2. The learned C1T(A) also failed to appreciate that this addition represents timing difference which will be tax neutral and there will not be any loss of revenue to the department. 5. Employee Stock Option cost (Tax effect- Rs. 158,51,81,835) 5.1 The learned CIT(A) erred in law by not allowing the ESOP cost of Rs. 466.36 crores claimed os deduction u/s37fl) 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 incorrectly applying the observations of the decision of Bangalore special bench of Hon'ble ITAT in case of Biocon Limited vs DCIT [2013] 144 ITD 21 (Bangalore)(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 the date of exercise of options and exercise price (i.e market price on grant date] is an allowable deduction for computing income under the head 'profit and gains from business and 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. 3. The assessee vide letter dated 14/08/2020 has filed additional grounds of appeal as detailed under: ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 4 Additional ground in the application dated 14-08-2020 The Appellant has filed an appeal on 16 lh May, 2019. In regard to the captioned appeal, we request your Honour to kindly admit the following additional ground as taken hereunder. It is respectfully submitted that the additional ground can be raised for the first time before Tribunal relying on the decision of Supreme Court in the case of National Thermal Power Company Limited v. CIT (1998) 229 ITR 383 [SC] and Jute Corporation of India v, CIT( 1991) 187ITP688 [SC]. I. 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 1,14,92,44,906 paid by the appellant should be allowed as deduction under section 37 of the Income-tax Act, 1961 ('the Act 1 ). 1.2. The appellant had not claimed education cess and secondary and higher education cess (collectively referred to as 'Cess') of INR 1,14,92,44,906 paid for FY 2014-15, in the return of income filed for AY 2015-16. 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)(ii) of the Act. 1.4. CBDT vide Circular No. 91/58/66- ITJ(I9) doted 18-05-1967 has expressly clarified that the effect of the omission of the word 'cess' from Sec. 40(a) [ii) of the Act is that only taxes paid are to be disallowed in the assessment for the years 1962-63 onwards. 1.5. Further, the following decisions have held that education cess and secondary and higher education cess is an allowable expenditure under section 37(1) of the Act - a. Sesa Goa Limited vs. JCIT (2020) (Tax appeal No 17 and 18 of 2013, order dated 28- 02-2020) (Bombay High Court) b. Chambal Fertilisers and Chemicals Limited v. JCIT (ITA No. 52/2018, order dated 31.07.2018) (Rajasthan High Court] c. ITC Limited vs. ACIT (ITA No.685/Kol/2014 order dated 27-11-2018] d. The Peerless General Finance & Investment Co. Ltd. Vs. DCIT (ITA No. 937 & 938/Kol/2018 order dated 24-04-2019). e. DCIT vs. Bajaj Allianz General Insurance Company Ltd [ITANos.Hll & 1112/PUN/2017 order dated 25-07-2019) f. Atlas Copco (India) Limited vs. ACIT (ITA No.736 8. 732/PUN/2011 order dated 05- 08-2019] g. M/s Sicpa India Private Ltd. v. DCIT (ITA No. !586/Kol./20l6 order dated 3-01-2020) h. ACIT v. Persistent Systems Pvt. Ltd. [ITA No. 1232/PUN/2017 order dated 28-02- 2020) 1.6. Relying on CBDT circular and judicial precedents, it is submitted that Cess amounting to INR 1,14,92,44,906 is deductible expense under section 37 of the Act and hence the same be allowed as a deduction in computation at taxable income of the Bank for AY 2015-16. ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 5 2. 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. 4. 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. 20,58,91,006/- under the provision of section 14A r.w. Rule 8D of Income Tax Rules. 5. 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. 3,51,18,11,112/- by way of dividend. The assessee against such income has made the disallowance of Rs. 1,16,45,009/- 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. 1,16,45,009/- 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 218,8232,232/- 3. Administrative Expenses 21,75,36,015/- Total 240,57,68,248/- 5.1 The assessee already made disallowance u/s 14A of the Act for Rs. 1,16,45,009/- only. Accordingly, the AO made the disallowance of the balance amount of Rs. 239,41,23,239/- and added to the total income of the assessee. 6. 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 2014- 15 has deleted the disallowances of interest expenses whereas confirmed the ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 6 disallowances of administrative expenses. Accordingly, the Ld.CIT(A) upheld the disallowance of administrative expenses for Rs. 20,58,91,006/- after providing credit of suo moto disallowances of Rs. 1,16,45,009/- under the provision of section 14A r.w. Rule 8D of Income Tax Rules. 7. Being aggrieved by the order of the Ld. CIT(A), both the assessee and the revenue are in appeal before us. The assessee is in appeal against the confirmation of administrative expense of Rs. 20,58,91,006/- whereas the revenue is in appeal against the disallowances of interest expenses of Rs. 218,8232,232/-. The relevant ground of appeal of the Revenue reads as under: The ld.CIT(A) has erred in law and/or on facts in restricting the addition from Rs.2,39,41,23,239/- to Rs.20,58,91,006/- made on account of disallowance made u/s.14A r.w. Rule 8D(2)(ii) of the Act. 8. The Ld. AR before us filed a paper book running from pages 1 to 474 and contended that the identical issue was decided in the own case of the assessee for AY 2010-11 bearing ITA No. 311/Ahd/2016 for the statistical purposes. 9. On the other hand, the learned DR reiterated the findings of the AO and the ld. CIT-A. 10. Both the learned AR and DR vehemently supported the order of the Authorities below as favourable to them. 11. We have heard the rival contentions of both the parties and perused the material available on records. At the outset we note that the identical issue was before us in the own case of the assessee for AY 2010-11 bearing ITA No. 311/Ahd/2016 where it was observed as under: 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. ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 7 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, ^jfhe 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. ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 8 11.1 Respectfully following the above finding in own case of the assessee we hereby hold that there would be no disallowances of interest expenses under section 14A read with rule 8D of Income Tax Rule as the assessee was having sufficient interest free own fund of Rs. 1,00,785 crores against the investment of Rs. 3,704 crores. However with respect to disallowances of administrative expenses under rule 8D(2)(iii) of Income Tax Rules, we inclined to provide one more opportunity to the assessee for to demonstrate the basis of suo moto disallowance. Therefore, the issue to the extent of disallowances of administrative expenses is set aside to the file of the AO for fresh adjudication as per the provision of law. Thus the ground of Revenue’s appeal is hereby dismissed whereas ground of appeal of the assessee is allowed for statistical purposes. 12. The 2 nd issue raised by the assessee in ground number 2 is that the learned CIT-A erred in confirming the order of the AO by sustaining the addition of Rs. 181.45 crores on account of commission income from the bank guarantee furnished to the customers. 13. 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 in the same year in which the bank guarantee was provided till A.Y. 2009-10. However, the assessee from A.Y. 2010-11 has changed its policy for recognizing 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. 13.1 The change in the policy for recognizing 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 the 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 ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 9 India. Thus, the assessee changed its accounting policy to recognize the commission income qua the bank guarantee furnished which is accrued during the period of 12 months comprising in the financial year. It was also submitted by the assessee that there is no prohibition under the provisions of section 145 of the Act to change the policy to recognize the income if it is based on bona fides reasons. 13.2 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 recognize 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. 13.3 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. 13.4 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. ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 10 13.5 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. 181,45,38,609/- which was added to the total income of the assessee. 14. Aggrieved assessee preferred an appeal to the learned CIT (A) who by the order of his predecessor for the A.Y. 2013-14 allowed the part relief to the assessee by observing as under: 4.3. I have carefully considered the assessment order and the submission filed by the Appellant. The similar issue was raised in case of Appellant for AY 2013- 14 and 2014-15 wherein the undersigned has held as under- "7.3 I have considered the observations of the AO and the submissions made by the appellant. ! 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 i.e. as accrued in the 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 a!! kinds of guarantees issued by the bank was recognized on pro-rata basis over the period of the guarantee. The AO held that such a change in the method resulted in to lower income for the year under consideration and the change was also not justified He therefore added a sum of Rs, 136.52 Cmres 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 will meet the financial obligation and in case he fails, the bank as a guarantor is bound to pay. ii) Performance Guarantee. Here the guarantee issued is for honouring a particular 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. ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 11 v) Bid Bond Guarantee: As a part of the 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: When 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 with terms of payment being 6 equal instalments. In this case, since the payment is deferred to a /ater period, creditor seeks deferred payment guarantee for an assurance that the payment would reach him in thegiven time period. viii) Shipping Guarantee: This guarantee protects the shipping company from all kinds of 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, that 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 bank once an irrevocable guarantee is issued. Hence the accrual of commission income in such a case cannot be postponed over the period of the guarantee- No such claim of any loss is the issue before me nor it is the appellant's case that any such commission has been refunded. If on happening of 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, there is no effect as far as the commission income which has a/ready accrued at the time of issuing the guarantee is concerned. By changing the method, the assessee cannot reverse the accrual of income. The basis of accounting the income and its chargeability is now specified in section 145 and the assesses can adopt either cash or mercantile method. Once the mercantile method is adopted for several years on the 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 fundamental 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 the 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 thai is not the case as far as the question issuance of bank guarantees is concerned where the commission is received and becomes the income of the appellant bank soon on the 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 appellant but it is only part of its undertaking which it has undertaken to discharge which is a separate transaction on the side of outgo of the money. ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 12 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 Paribas Bank 150 TTJ 395 (Mum), it is to be noted that 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 on cancellation of guarantees. The Hon'ble High Court considered the relevant rules under which guarantees were issued which provided that in case the guarantee is redeemed or cancelled, the overcharged commission shall 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 the decision of the ITAT Mumbai in the case of BNP 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 the appellant was following the method of 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 the guarantee, resulting into the respondent- 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 bank guarantees was accounted for upfront in the past (except 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 the eventuality of invocation of guarantee , such payment by the appellant bank may be the expenditure of loss 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 permitted as deduction when made based on such scientific analysis. In the case of a bank guarantee there may not be invocation for several years or might be such invocation in any particular year which is quite contingent and such risk cannot be calculated as can be done in case of a sale of manufactured product. Bank guarantee is a service and not sale of product. Considering the facts and circumstances of the case, the judgments in the case of Woodward Governor India P Ltd 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 to the accepted accounting method in the past. The judgment of Gujarat High Court in the case of Echke Limited 31G ITR 44 is also not relevant to the facts as it cannot be said that by not 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 is 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 ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 13 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 of the appellant is concerned. As far as commission on bank guarantee is concerned, the same cannot be compared with receipt of interest or bill discount where the borrower himself is using the funds of the bank for future period and hence the receipt is related to the period of such use . The judgment of Supreme Court in the case of Madras Industrial Investment Corporation Ltd 225 ITR 802 is also not relevant to the facts of the appellant's case as in that case the assesses 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 for 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 there 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 policy once the concept of accrual is considered and guarantee commission is held to have accrued when the guarantee is issued. 7.3 8 As regards the contention 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 allowabi/ity. In the case of Excel Industries Limited again, the Supreme Court was concerned with question of value of benefit in respect of benefit of duty on advance license pass book and issue 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 and right to receive the same gets vested in the assessee. In the instant case, not only the right to receives the bank guarantee commission is due and gets vested in the appellant but the same is also received when the 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 bank guarantee , the income of commission gets accrued in the year in which the guarantee is issued. 7.3.9 it is pertinent to state that the Special Bench of ITA.T in the case of Dy.CITvs Bank of BaharainS, Kuwait 132 TTJ 505 (Mum) (SB) has considered the identical issue and also judgment in the case of Bank of Tokyo and Madras industrial Investment Corporation Ltd relied upon by the appellant and held that if the guarantee commission was refundable then it cannot be said that absolute right to the commission had accrued in favour of She assesses 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 in favour of the assesses on the date of execution of contract for furnishing guarantee then the same has to be taxed in the 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 Mumbai ITAT in the case of Dy CIT vs ChohungBank 126 ITD 448 after considering the judgments in the case of Bsnk of Tokyo and Madras Industrial Investment corporation and held as under: "Admittedly, the amount of commission is received when the bank issues guarantee. Such guarantee is for a specific penod, sometimes extending to years. The amount of full ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 14 guarantee commission is received a! the time of issuing guarantee irrespective of the period for which the guarantee is given. If the customer does not make 3 default to the third party, then the guarantee expires at the end of the period and the security received from its customer, in the shape of FDRs, is returned. There may be situation in which the client revokes the guarantee prior to the completion of the guarantee period or commits the default 9s a result of which the bank has to appropriate the proceeds of the security to satisfy the third party Whatever may be the case the bank incurs no personal obligation either at the time of issuing guarantee or thereafter, which may land it into situation of paying from its own pocket. The bank's duty is only to either return the security in the shape cf FDRs to its customer as such at the end of the guarantee period, if all goes well, or to appropriate the security in discharge of obligation of the customer to the third party, in case of default. Ordinarily the guarantee commission, once received, is not returnable even if the customer revokes the guarantee prior to the prescribed period. In such a case, the income accrues at the time when the guarantee is given irrespective of the duration of the guarantee period. The right to receive the commission arises in favour of the bank at the moment of giving guarantee. Not only the right to receive the income becomes absolute and gets vested into it at the time of giving guarantee, the amount of commission is also received there and then. It is beyond our comprehension as to how it can toe linked with the period for which the guarantee runs, it is just like a 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 the 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 the like manner, when the bank gives guarantee for period extending the close of the year and there is no obligation to refund the amount in case such guarantee is revoked prior to the prescribed period, the entire commission accrues to it at the time of giving guarantee and no part of such commission can be said to be deferred to next year. (i) However, if there is some clause in the agreement between the bank and the customer that in case the guarantee is revoked prior to the prescribed period, then the bank shall be liable to refund the proportionate commission for the unexpired period, then the situation will be different. In such a case, the right to income will accrue only proportionately for the period covered in the year. It is for the clear reason that even if the amount of commission is received in advance but the receipt cannot be said to have assumed the character of income because the accrual is dependent on tfie period for which the guarantee continues. The accrual of the amount of commission reiatable to the period beyond the dose of the year in such a situation will be solely dependent on the fact that whether the guarantee continues or not Thus, in the contingency of the customer revoking the guarantee, the 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 bank 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 to which the guarantee relates. If, however, the amount of the guarantee commission is received at a stretch and there is no contingency of paying it back 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 to 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 was some other material obliging the bank to refund the part of the guarantee commission in case it is earlier revoked." 7.3. Win view of the above, (he contentions of the appellant cannot be accepted. The plea that a right always remain with customer to recall the payment for the debt of unexpired period and that it can be enforced by the 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 by ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 15 the 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 the appellant is_reiected. The addition_of Rs. 136.42 Croresjrtade by the AO is confirmed and appeal of the appellant on this ground_ is dismissed. However, if the appellant has shown the part of such commission in the later year, the relief can be claimed by the appellant as per legal remedy available to it as the same income cannot be taxed twice once it is taxed on its accrual." As the issue and facts remains same this year identical to the issue involved in AY 2010- 11 & 2012-13 as decided by my predecessor for that year and following the above mentioned order, the additions of Rs. 170,91,00,000 made by the AO are confirmed for the reasons mentioned above. This ground of appeal is dismissed It is observed that facts of the year under consideration are similar to the facts of preceding assessment years wherein the undersigned has confirmed the addition made by AO and relying upon the finding referred, supra, addition made by AO for Rs.181,45,38,609/- is confirmed. The Appellant has raised an additional claim that part of such commission was already offered to tax in earlier assessment year hence income to that extent should be reduced. It is observed that Appellant has already preferred an appeal against assessment orders of earlier years and objected that income should not be taxed and matter is pending with Ahmedabad ITAT hence AO is directed to give appropriate effect of reducing income of current year if additions made in earlier years are sustained and it is proved by Appellant that income of current is already subjected to taxation in preceding assessment years. This ground of appeal is partly allowed. 15. Being aggrieved by the order of the ld. CIT-A, the assessee is in appeal before us. 16. The ld. AR 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. 17. On the contrary, the learned DR vehemently supported the order of the authorities below. 18. We have heard the rival contention of both the parties and perused the materials available on records. At the outset we note identical issue was before us ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 16 in the own case of the assessee for A.Y. 2010-11 bearing ITA No. 311/Ahd/2016 where it was observed as under: 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. ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 17 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 of 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 ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 18 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 totality, we set aside the finding of the ld. CIT-A and direct the AO to delete the addition made by the AO. Hence, the ground of appeal of the assessee is allowed. 18.1 At the time of hearing, the ld. DR has not brought anything contrary to the above finding of the ITAT in the own case of the assessee. Thus respectfully following the above finding in own case of the assessee, we hereby allow the grounds of appeal of the assessee. 19. The next issue raised by the assessee in ground No. 3 is that the learned CIT (A) erred in confirming the addition of Rs. 40,56,87,046 being the amount of interest on the sticky advances under rule 6EA read with section 43D of the Act. 20. The assessee in the year under consideration has not recognized 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 categorized as non-performing assets. As per the assessee, the income on such overdue advances was to be recognized 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 which are mandatory in nature. 20.1 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 recognized as income when overdue period is of 180 days or more. As per the AO, the amount of interest for Rs. 40,56,87,046/- representing the sticky advances where the overdue period was more than 3 months but less than 6 months ought ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 19 to have been recognized as income under rule 6EA of Income Tax Rule. Thus the AO made the addition of Rs. 40,56,87,046/- to the total income of the assessee. 21. Aggrieved assessee preferred an appeal to the learned CIT (A) who has also confirmed the order of the AO by observing as under: 5.3. / have carefully considered the submissions of the appellant and the assessment order. The identical issue came up for consideration in Appellant's own case for AY 2013-14 and AY 2014-15 wherein the undersigned has held as under:- "8.377)e AO has relied on rule 6EA which is prescribed in terms of provisions of section 43D of the income tax Act, 1981. The AO has held that there is difference between Rule 6EA prescribed under the authority of law and the Guidelines of the RBI. The RBI guidelines provides that if irregularities in the advances account is noticed for a period of three months then the interest income thereon need not be accounted for. However, the rule 6EA provides that in case of sticky advances, the period of such non recovery or irregularity shall be six months(180days). The AO observed that RBI guidelines may be binding as prudent norms of accounting but so far as the provisions of the Income tax Act are concerned, they must be preferred in preference to the accounting or prudency norms. 8.3.1 The appellant has reiterated the contentions raised during assessment proceedings It is also contended that section 43D is a beneficial provision and should be read so as to promote substantive provision of the Act. Arguments have been made regarding necessity of following RBI guidelines and AS-9. It is further contended that intention of section 43D is not to supersede expressly or impliedly applicability of RBI guidelines or mandatory AS-9. It is also contended that disconnect between Rule 6EA and present RBI guidelines should be resolved in favour of RBi guidelines .It is argued that Rule 6EA is not binding being in conflict with parent provision of section 43D. 8.3.2 I have considered the assessment order and submissions of the appellant. Identical issue was there in the appellant own case for A.Y. 2011-12 & 2012-13 . For that year my predecessor had decided the issue for A.Y. 2012-13 as mentioned below: 8.3,3 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 doubtful 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 8EA 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 debt, 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 been 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. 8.3-4 This very issue is considered by Hon'ble Mumbai Tribunal in the following case of QIC 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 the NHB as and when they are revised have to be treated by implication incorporated in Rule 6EB of the Rules. NHB is not the rule ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 20 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 views 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. Wo 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 ofSec.43D of the Act." In view of above clear position and (he 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 IJR 295, I 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 assesses by ITAT for last several years against which d/d 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 6EA prescribed is 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. 8.3.5 As the issue and facts remains same this year identical to the issue involved in AY 2010-11 & 2012-13 as decided by my predecessor for that year and following the above mentioned order, disallowance ofRs. 16,30,32,051/- made by the AO is confirmed. 8.3.6 Considering above factual position and the legal position directly dealt with after considering the various judgments and circulars relied upon by the appellant, the addition made by the AO is confirmed and this ground of the appellant is dismissed. 8.37 It has also been brought to my notice by the assessee that a sum of Rs. 30.41 crores be allowed as deduction for the current assessment year since the amount was already taxed in A. Y.2012-13 and if the deduction is not allowed, it would tantamount to double taxation, (Refer RP no. 52 of PBI). The AO's contention is that Bank has filed appeal against such disallowance and hence to protect revenue loss for possible double deduction, this claim can be considered only when the issue is settled in appeal. Tile AO is directed to examine the same issue and in case this is a case of income taxed twice, suitable relief to be given to assesses. Assessee will factor in the relief while claiming deduction on the issue when the same is decided." 5.4. Considering above factual position and the legal position directly dealt with after considering the various judgments and circulars relied upon by the appellant ad as the issue ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 21 and facts remains same this year identical to the issue involved in AY 2013-14 & 2014-15 as decided by my predecessor for that year and following the above mentioned order, disallowance of Rs. 40,56,87,0467- made by the AO is confirmed. 22. Being aggrieved by the order of the learned CIT (A) the assessee is in appeal before us. 23. The learned AR before us reiterated the submissions made before the authorities below. 24. On the other hand the learned DR before us vehemently supported the order of the authorities below. 25. We have heard the rival contention of both the parties and perused the material available on records. At the outset we note identical issue was before us in own case of the assessee for A.Y. 2011-12 bearing ITA No. 2176/Ahd/2016 where it was observed as under: 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 of 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 ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 22 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 co-operative 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 of 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 ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 23 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 57. 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 ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 24 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 financial 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 of 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 ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 25 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. 25.1 At the time of hearing, the ld. DR has not brought anything contrary to the above finding of the ITAT in the own case of the assessee. Thus respectfully following the above finding in own case of the assessee, we hereby allow the ground of appeal of the assessee. 26. 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. 16.68 crores on account of lease operating expenses. 27. 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. 27.1 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 ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 26 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. 27.2 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. 27.3 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. 16,68,71,547/- and added to the total income of the assessee. 28. Aggrieved assessee preferred an appeal to the learned CIT (A) who confirmed the order of the AO by observing as under: 6.3. 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 increase in lease operating expenditure. During the current year, the bank revised its estimate of lease term in case of assets taken on operating lease to include secondary period of lease involving further payment of lease rentals based on continuation of lease at the option of bank as against the primary lease period considered hitherto. As a result operating expenses for the year stands higher by Rs. 16.68 crores with consequent ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 27 reduction to PBT. The AO has noted that the appellant reviewed the method of 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 income 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. The appellant has submitted that Accounting Standard ('AS') -19 has mandated straight line basis (SLM) for accounting of lease expenses. The SLM mandated by AS-19 means that if the lease agreement provides for escalation clauses during the term of lease, the debit to P&L a/c in each year must represent average of the total lease rentals payable over the lease term. The actual rent payment may vary based on lease terms but expense needs to be booked in P&L a/c on SLM basis. It is further submitted that since the Bank is consistently making profits andpaying tax at the highest rate without claiming any tax holiday benefit, the method followed is revenue neutral. Reference is drawn to the following observations of jurisdictional Bombay HC (jurisdictional at the relevant time) in the case of CIT vs. Nagri Mills Co. Ltd (33 ITR 681) which has advocated a pragmatic approach in such matters. The appellant has also cited various decisions in support to his claim. 6.3.1 Having carefully considered the observations of the AO and the submissions made, identical issue was there in the appellant's own case for A.Y. 2013-14 & 2014-15. For that year the undersigned had decided the issue as mentioned hereunder- "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) /ear Annual rent liability as per agreement Annualrent payment Rent Expense as per SLM of AS-19 Additional charge/(reversal) 1 100 100 150 50 2 120 120 150 30 3 140 140 150 10 4 160 160 150 (10) 5 180 180 150 (30) ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 28 6 200 200 150 (50) To tal 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 the 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 year's. 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 are 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." 6.3.2 As the issue and facts remains same this year identical to the issue involved in AY 2013-14 & 2014-15 as decided by the undersigned for those years and following the above mentioned order, disallowance of Rs.16,68,71,547/- made by the AO is confirmed. This ground of appeal is dismissed. 29. Being aggrieved by the order of the learned CIT (A) the assessee is in appeal before us. 30. 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. ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 29 31. We have heard the rival contention of both the parties and perused the material available on records. At the outset we note identical issue was before us in own case of the assessee for A.Y. 2011-12 bearing ITA No. 2176/Ahd/2016 where it was observed as under: 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 ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 30 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. 31.1 At the time of hearing, the ld. DR has not brought anything contrary to the above finding of the ITAT in the own case of the assessee. Thus respectfully following the above finding in own case of the assessee, we hereby dismiss the grounds of appeal of the assessee. 32. The next issue raised by the assessee in ground no. 5 of its appeal is that the learned CIT (A) is erred in allowing the claim of deduction for Rs. 466.36 crores on account of ESOP. 33. At the outset we note that the learned AR for the assessee before us submitted that learned CIT(A) while confirming the disallowances followed the order of its predecessor for A.Y. 2014-15. The assessee against the order of the learned CIT(A) for the A.Y. 2014-15 was in appeal before this tribunal in ITA No. 521/Ahd/2018 where the issue was set aside to the file of the AO for fresh adjudication. Accordingly the learned AR for the assessee before us contended that the issue for the year under consideration should also be set aside to the file of the AO fresh adjudication as per law. The relevant observation of the bench reads as under: 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 ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 31 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. 34. The learned DR at the time hearing did not object on the plea of the learned AR for setting aside the issue to the file of the AO. Thus after hearing both the parties we hereby set aside the issue to the file of the AO for fresh adjudication as per the provision of the law. Hence the ground of the assessee is hereby allowed for statistical purposes. 35. The assessee in the additional grounds of appeal has sought the deduction on account of education, secondary and higher education cess for Rs. 1,14,92,44,906/-. 35.1 The assessee has submitted applications dated 14 th August 2020 for admitting the additional grounds of appeal. 35.2 It was pleaded by the assessee in the application 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. 36. 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. 37. 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 ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 32 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. 37.1 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. 37.2 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 deduction of education cess and secondary higher education cess 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 additional grounds of appeal de novo/ afresh after providing an opportunity of being heard to the assessee. Thus the additional grounds of appeal raised by the assessee are allowed for statistical purposes. 38. In the result, the appeal filed by the assessee is partly allowed for statistical purposes. Coming to ITA No. 956/Ahd/2019 and appeal by the Revenue ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 33 36. The Revenue has raised following grounds of appeal: The appellant has raised the following grounds of appeal:- (1) The ld.CIT(A) has erred in law and/or on facts in restricting the addition from Rs.2,39,41,23,239/- to Rs.20,58,91,006/- made on account of disallowance made u/s 14A r.w.Rule 8D(2)(ii) of the Act. (2) The Id. CIT(A) has erred in law and/or on facts in deleting the addition of Rs.1,47,53,606/- on account of disallowance of expenses incurred on account of Annual Technical Service Tees. (3) The ld.CIT(A) has erred in law and/or on facts in deleting the addition of Rs.1,16,47,871/- mode on account of disallowance of interest in respect of capital work in progress. (4) On the facts and circumstances of the case, the Id. CIT(A) ought to have upheld the order of the Assessing Officer. (5) It is therefore, prayed that the order of ld.CIT(A) may be set aside and that of the Assessing Officer be restored. 37. The first issue raised by the Revenue is that the learned CIT(A) erred in restricting the disallowances under section 14A r.w.r. 8D to the extent of Rs. 20,58,91,006/- out of total disallowances of Rs. 239,41,23,239/- 37.1 At the outset we note that the issue raised by the Revenue in its ground of appeal has been adjudicated along with ground no. 1 of the Assessee appeal in ITA No. 852/Ahd/2019. We have adjudicated the issue vide paragraphs number 9 of this order, where the issue was decided against the Revenue. For detail discussion please refer the aforementioned paragraphs of this order. Hence the ground of appeal of the Revenue is hereby dismissed. 38. The next issue raised by the Revenue is that the learned CIT (A) erred in deleting the addition made by the AO for Rs. 1,47,53,606/- on account of annual technical fee. 39. The AO during the assessment proceedings found that the assessee has claimed annual technical services fee of Rs. 15,74,69,788/- representing the annual ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 34 payment to Infosys Technologies Ltd out of which an amount of Rs. 1,47,53,606 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 crystallized 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. 39.1 In view of the above the AO disallowed the same and added to the total income of the assessee. 40. Aggrieved assessee preferred an appeal to the learned CIT (A) who deleted the addition made by the AO by observing as under: I have carefully considered the submissions of the appellant and (he assessment order. The identical issue was them in the appellant's own case in AY ','() 13-14 and A. Y. 2014-15, which was decided by the undersigned as under: - "6.2. Identical issue came up in appellant's own case for A.Y. 2008-09. Vide order did.01-12-2011 in appeal No.CIT(A)/AdiJI.CIT./R-1/247/10-11, my predecessor hold as under "6 3 I have considered the facts of She case; assessment order and appellant's written submission. On the identical facts, this issue i>as been decided by me in appeal order for assessment year 2006-07 in tlio appellant's own case. The relevant pail of the said oidet is quoted helow- "It is not in dispute that appellant received Bill from Infosys during tho current year. The services rendered in earlier year wero also included in the said Bill. Assessing officer allocated expense relating to earlier year and disallowed the same as prior period expenses. However the expense was crystallised during the year since undisputediy Bill was leceivod during the current year and appellant could not have debited expense ptior to this. Gujarat High Court in the case of Saurashtra cement and chemicals held that if the expense is crystallised during the year, the same is allowable even if relating to earlier year's. Since expense was crystallised dining the yeai, respectfully following the decision of jurisdictional High Cotnt, tho disallowance made by the assessing officer is deleted " Considering the above, disallowance made by Hie 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. ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 35 59,73.681/- 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 A.Y. 2013-14 and A.Y. 2014-15, unc! us decided by the undersigned for those years, the additions of Rs. 1,47,53,606/~ is deleted. This ground of appeal is allowed. 41. Being aggrieved by the order of the learned CIT (A), the Revenue is in appeal before us. 42. Both the learned DR and the AR before us vehemently supported the order of the authorities below as favourable to them. 43. We have heard the rival contention of both the parties and perused the material available on record. At the outset we note the Revenue has raised identical issue before us in own case of the assessee for A.Y. 2011-12 bearing ITA No. 2173/Ahd/2016, where it was observed as under: 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 PC1T 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 fail 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. ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 36 43.1 At the time of hearing, the ld. DR has not brought anything contrary to the above finding of the ITAT in the own case of the assessee. Thus respectfully following the above finding in own case of the assessee, we hereby dismiss the grounds of appeal of the Revenue. 44. The last 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. 1,16,47,871/- on account of interest expenses incurred in respect of capital work in progress. 45. The AO during the assessment proceedings found that the assessee has shown capital work in progress of Rs. 101,26,11,000/- only. On question by the AO whether any interest-bearing fund has been utilized in such work in progress, the assessee submitted that capital WIP consist of amount paid in advance for supply of furniture, ATM, computer peripheral, computer hardware, air conditioner for existing or new branches. These expenses are regular capital expenses incurred in course of business but does not amount to extension of existing business. Further there was no specific borrowed fund used in the acquisition of these assets. Therefore question of diversion of interest bearing fund does not arise. There was also sufficient interest free fund was available with it. 45.1 However the AO found that the majority of the amount incurred on account of installation of ATMs, Computers etc. in the new branches which represent extension of existing business. The assessee has not provided the detail of flow of fund for acquisition of assets despite being specific quarries raised. Thus in absence of documentary evidences, the assessee’s contention of assets acquired out own interest free fund is devoid of any merit. Therefore, the AO concluded that the proportionate amount of interest on the fund deployed in such capital work-in- progress should be capitalized under the provisions of section 36 (1) (iii) of the Act. Accordingly, the AO worked out the proportionate amount of interest for Rs. 1,16,47,871/- and added to the total income of the assessee. ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 37 46. Aggrieved assessee preferred an appeal to the learned CIT (A) who deleted the addition made by the AO by observing as under: 7.5. / have gone through the facts end the submission of the appellant carefully. The A.O. has observed that on verification of the details furnished by the assessee it is; found that the assessee company has It is seen that the assessee has shown capital work in progress (including capital advances) amounting to Rs.101.26 crores at Schedule-10 of Balance Sheet. The assessee has incurred gross interest expenses of Rs.21,254/- crores. The assessee had aggregate Capital WIP of Rs. 10126 crores against total assets size of Rs.4,61,932 crores. Inspite of allowing adequate time and opportunity; assessee had failed to submit material on record to prove that the funds utilized in respect of the capital work in progress were out of its own interest free funds and not from interest hearing funds. Accordingly, a sum of Rs. 1.16 crores is disallowed by the A.O. and added back to the total income of the assessee company. The AR has submitted that the Bank has not borrowed any fund for the purpose of making purchase of such fixed asset or for making advance payment along with purchase order for the fixed asset. The Bank hos huge interest-free funds by way of paid-up share capita! and reserves aggregating Rs. 44,6777- crores, apart from huge balances in current account:; of the customers (Rs. 56,108/- crores), which ore non-interest bearing. The Bank had cash on hand of Rs. 4,215 crores and bank balances with oilier banks in current accounts of Rs. 15,603.40 crores. The Bank has earned gross interest income of Rs. 35,479 crores and on the other hand has incurred gross interest expenses of Rs.21,254 crores. Thus, there is no net interest expense. The AR drew my attention and placed on record Bombay High Court judgment in Reliance Utilities 313 ITR 340 (Bombay) in respect of disallowance out of interest paid on borrowed capital u/s 36(1)(iii). it has been observed by the Hon'ble Court as under: "If there ho interest-free funds available to an assesses sufficient to meet its investments and at the same time the assesseo had raised a loan, it can he presumed that the investments were from the interest-free funds available." "The principle, therefore, would be that if there are funds available, both interest- free and overdraft and/or loans taken, then a presumption would also ilii.it investments would be out of the interest-free fund generated or available with the company, if the interest free funds were sufficient to meet the investments." "Held, dismissing the appeal, that if there were funds available both interest-free and overdraft and/or loans taken, then o presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption was established considering the finding of fact both by the Commissioner (Appeals) and the Tribunal. The interest was deductible". As per Ahmedabad ITA T in the case of Swagat Infrastructure Limited (2013) .17 tnxmanii.com 83 (Ahd - Till)), it has been held that where the assesses had sufficient interest-free funds, it would be presumed that advances were made out of the same and no disallowance can be made out of interest expenses for A. Y. 2009- ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 38 10. The Hon. ITA T also held that since at one hand, the Assessing Officer as well as Commissioner (Appeals) had given a finding that advances wore given out of interest bearing fund and at other hand it was observed that the assessee could not prove nexus between interest-free funds and advances, reasoning for disallowance was self-contradictory. Since the assessee had sufficient interest-free funds available for such advances, disallowance made was not justified. In case of the Bank, the learned AO held entire Capital WIP of Rs. 101.26 crores (including advance payment towards contracting purchase of fixed asset) as covered by proviso to section 36(1)(iii) of the Act holding that the onus is on the Bank to produce supporting evidence to prove that such Capital WIP were acquired out of its own funds and no amount of interest bearing funds have been utilized in respect of financing the Capital WIP. The AO has made this addition without pointing out any adverse proof or cogent circumstantial evidences to satisfy nexus lest. The AO made proportionate disallowance out of interest expenses at Rs.1.16 crores. It is observed that similar disallowance was made in case of appellant in A.Y. 2014- 15, wherein the issue was decided by the undersigned in favour of appellant and following relevant findings were given: "10.3 I have carefully considered the submissions of the appellant and the assessment ore/or considering the ratio o! Mumbai High Court in Reliance Utilities (supra) where similar issue has been decided in favour of the assesses. I am also of (lie opinion that where an assesses 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 of any specific contrary evidence brought out by the AO. The addition of Rs.73.03 lacs made u/s 36(1)(iii) is cancelled for the reasons mentioned above. This ground of appeal is allowed." Following the above findings and the fact that the appellant has sufficient interest froe funds to cover its cost of capital advances towards purchase of fixed assets , tho disallowance made by Assessing Officer for Rs. 1,16,47,871/- is deleted. The ground of appeal is allowed. 47. Being aggrieved by the order of the learned CIT (A), the Revenue is in appeal before us. 48. Both the learned DR and the AR before us vehemently supported the order of the authorities below as favourable to them. 49. We have heard the rival contentions of both the parties and perused the materials available on record. At the outset we note the Revenue has raised identical ITA nos.852 & 956/AHD/2019 Asstt. Year 2015-16 39 issue before us in own case of the assessee for A.Y. 2012-13 bearing ITA No. 287/Ahd/2017, where it was observed as under: 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. 49.1 At the time of hearing, the ld. DR has not brought anything contrary to the above finding of the ITAT in the own case of the assessee. Thus respectfully following the above finding in own case of the assessee, we hereby dismiss the grounds of appeal of the assessee. 50. In the result, the appeal of the Revenue is dismissed 51. In the combined result, the appeal filed by the assessee is partly allowed for statistical purpose whereas the appeal filed by the revenue is dismissed. Order pronounced in the Court on 30/03/2022 at Ahmedabad. Sd/- Sd/ (MADHUMITA ROY) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 30/03/2022 Manish
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