Section 14A Disallowance Restricted to 1% as Rule 8D

Section 14A Disallowance Restricted to 1% as Rule 8D Inapplicable and Interest Reversal Allowed Under RBI Norms

Issue

Whether Section 14A disallowance read with Rule 8D applies retrospectively for AYs 1997-98 and 1998-99, or if disallowance should be restricted to a reasonable estimate like 1% of exempt interest income.
Whether an assessee-bank can claim a tax adjustment/deduction in AY 1997-98 for interest on non-performing assets previously taxed in AY 1996-97 and subsequently reversed as per RBI prudential guidelines, even if Section 43D does not explicitly mention such a reversal mechanism.

Facts

Section 14A / Rule 8D Issue:
- For AYs 1997-98 and 1998-99, the assessee-bank claimed tax exemption under Section 10(15)(iv)(h) on interest income.
- The Assessing Officer (AO) allocated interest expenditure to the exempt income, restricting the exemption to a net/proportionate basis.
- Upon remand, the AO applied Section 14A read with Rule 8D to compute the disallowance, which was sustained by the CIT(A).
Section 43D Interest Reversal Issue:
- In AY 1996-97, the assessee-bank offered ₹35.03 crores of interest income on doubtful advances to tax pursuant to Section 43D and RBI prudential norms.
- In AY 1997-98, following RBI guidelines on non-performing assets (NPAs), the bank reversed the ₹35.03 crores by debiting its Profit and Loss Account and claimed a deduction in its tax computation.
- The AO disallowed the deduction, reasoning that Section 43D lacked an explicit statutory provision for reversing previously taxed unrealized interest.

Decision

Section 14A Disallowance: Partly in favour of Assessee. Rule 8D is not applicable retrospectively to AYs 1997-98 and 1998-99. Therefore, the disallowance under Section 14A is restricted to an ad hoc estimate of 1% of the exempt income. [Para 3]
Interest Reversal under Section 43D: In favour of Assessee. An assessee cannot be denied a tax adjustment for previously taxed unrealized interest that is subsequently reversed under mandatory RBI prudential norms simply because Section 43D does not explicitly articulate a reversal mechanism. The claim is allowable to the extent the interest was included in the taxable income of AY 1996-97, remained unrealized, and was actually reversed in the books during the relevant assessment year. [Para 5.7]

Key Takeaways

Prospective Operation of Rule 8D: Rule 8D cannot be applied to assessment years prior to its notification (AY 2008-09); disallowances for earlier years must be calculated on a reasonable basis (e.g., 1% of exempt income).
Alignment with RBI Prudential Norms: Income recognized and taxed in prior years under Section 43D that subsequently turns non-performing must be allowed as a tax adjustment upon book reversal per mandatory RBI guidelines to avoid double/unjust taxation.

IN THE ITAT MUMBAI BENCH ‘G’

DCIT

State Bank of India

Smt. Beena Pillai, Judicial Member
and Jagadish, Accountant Member

IT Appeal Nos. 2189, 2190, 2290 and 2291 (MUM) of 2019
[Assessment years 1997-98 and 1998-99]

SEPTEMBER 7, 2026

Kishor Dhule, CIT. DR for the Appellant. Ketan Ved, Adv. and Ninad Patade, AR for the Respondent.

ORDER

1. The above appeals are directed against separate orders of the learned CIT(A)-National Faceless Assessment Centre [in short “NFAC”], Delhi, tabulated hereinbelow. Since common issues are involved in all these appeals therefore, for the sake of convenience, these appeals are clubbed together for the purpose of hearing and adjudication.

ITA 2189/MUM/2019 ITA 2290/MUM/2019 (AY: 1997-98)	Ld. CIT(A)-5, MUMBAI vide order dated 28-Jan-2019.
ITA 2190/MUM/2019 ITA 2291/MUM/2019 (AY: 1998-99)	Ld. CIT(A)-5, MUMBAI vide order dated 28-Jan-2019.

We first take up the assessee’s appeal in ITA No.2290/Mum/2019 for A. Y. 1997-98.

2. Ground No. 1 is in respect of disallowance of exemption u/s 10(15)(iv)(h) of the Act on gross basis.

During the assessment proceedings, the then Ld.AO observed that the assessee claimed exemption u/s 10(15)(iv)(h) of the Act amounting to Rs.70.95 crores.

2.1. Before the Ld.AO, the assessee filed detailed explanation to establish that the interest expenditure incurred had no nexus with the exempt income earned by the assessee during the year under consideration. It was, submitted that no disallowance could be made either under Rule 8D(2)(ii) or u/s. 14A of the Act. The Ld.AO however attributed expenditure of Rs.25.43 crores towards earning such exempt income and, accordingly, restricted the exemption to Rs.45.51 crores on a proportionate basis.

2.2. Before the Ld.CIT(A), the assessee was required to furnish details to establish that borrowed funds had not been utilised for making investments yielding exempt income. The assessee expressed its inability to furnish the requisite details. In these circumstances, the Ld.CIT(A) upheld the action of the Ld.AO in allocating the expenditure on a proportionate basis.

2.3. Before this Tribunal, The Ld.AR submitted that, admittedly, the assessee was eligible to claim exemption in respect of the interest received u/s.10(15)(iv)(h) of the Act. During the original assessment proceeding, the only dispute raised by the Ld.AO was whether the same was to be claimed on a net or gross basis. The Ld.AR submitted that for assessment years 1996-97 and 1997-98, this Tribunal, in ITA Nos.1292/Mum/2001 and 1293/Mum/2001, vide order dated 06/06/2002, allowed the assessee’s claim of deduction on gross basis. It was submitted that the said order of the Tribunal attained finality as the Revenue did not prefer any appeal before the Hon’ble High Court against the view taken therein.

2.4. The Ld.AR submitted that this Tribunal while considering the appeal for the year under consideration in the first round of appeal in State Bank of India v. Addl. CIT [IT Appeal No. 3823 & 24 (Mum) of 2005, dated 29-4-2016], observed that the Ld.AO/FAA did not have the benefit of the cases dealing with the provisions of section 14A, while making the assessment/deciding the appeal. This Tribunal thus remanded the issue back to the Ld.AO for fresh adjudication.

The Ld.AR submitted that in the remand proceeding, the Ld.AO computed disallowance under section 14A r.w. Rule 8D which was subsequently restricted by the Ld.CIT(A) at 1% of the exempt income.

2.5. The Ld.AR further submitted Coordinate Bench of this Tribunal, in assessee’s own case for assessment years 2001-02 and 2002-03 in Addl. CIT v. State Bank of India [IT Appeal Nos.4408, 4409, 4655 & 4656 (Mum) of 2011, dated 12-7-2021], after considering various decisions of this Tribunal, came to the following conclusion:-

“19. Considered the rival submissions and perused the material on record. We notice that the provisions of rule 8D was introduced only from the assessment year 2008-09 and strictly the rules are not applicable in the current assessment year. However, following the findings of the Coordinate Bench decisions rendered in assessee’s own case which has directed the Assessing Officer to estimate the disallowance under section 14A of the Act at one percent of the exempt income. Keeping in view the consistency maintained by the Tribunal in assessee’s own case, we are also inclined to direct the Assessing Officer to estimate the expenditure under section 14A of the Act at the rate of one percent of the exempt income. We do not prefer to remit this issue to the Assessing Officer since the direction of the Co-ordinate Bench are very clear and it should be estimated at the rate of one percent of the exempt income. Thus, ground no.5, is allowed in terms indicated above.”

2.6. The Ld.AR submitted that the loans granted or investments made were out of own funds, being non-interest-bearing funds, and therefore, no disallowance attributable to interest expenditure could be made under Rule 8D(2)(ii). It was submitted that the assessee had sufficient own funds, which were more than the investments made during the year under consideration.

2.7. The Ld.DR, on the contrary, submitted that the impugned order passed by the Ld.CIT(A) has upheld the disallowance at 2% of the exempt income by applying the provisions of section 14A of the Act. It was submitted that the Ld.CIT(A) did not adjudicate the issue as to whether the exemption claimed u/s.10(15)(iv)(h) of the Act was allowable on gross or net basis. He thus placed reliance on the order passed by the Ld.CIT(A).

We have perused the submissions advanced by both sides in light of the record placed before us.

3. On perusal of the earlier order passed by this Tribunal, we note that the issue had been remanded to the Ld.AO for verification as to whether the provisions of section 14A of the Act were applicable to the exemption claimed by the assessee u/s. 10(15)(iv)(h) of the Act. We further note that the Ld. AO has not examined the aspect as to whether the deduction/exemption claimed u/s. 10(15)(iv)(h) is to be allowed on gross or net basis. The Ld. AO merely identified the interest expenditure and made a proportionate disallowance u/s. 14A of the Act. On perusal of the order passed by the Coordinate Bench of this Tribunal for A.Ys. 2001-02 and 2002-03 supra, we note that the controversy therein was confined to the quantum of disallowance to be made u/s. 14A of the Act. The Coordinate Bench, considering that Rule 8D of the Income-tax Rules, 1962 was not applicable to the years under consideration, restricted the disallowance to 1% of the exempt income. Admittedly, Rule 8D is also not applicable to the assessment year under consideration before us. Respectfully following the view taken by the Coordinate Bench for A.Ys. 2001-02 and 2002-03 supra, we direct the Ld. AO to restrict the disallowance u/s. 14A to 1% of the exempt income.

Accordingly, Ground No. 1 raised by the assessee stands partly allowed.

4. Ground No. 2 raised by the assessee is in respect of unearned interest on doubtful advances of Rs. 35,03,36,189/-.

The brief facts relating to this ground is that, during A.Y. 1996-97, the assessee accounted for interest income of Rs.35,03,36,189/-on doubtful advances in accordance with the prudential norms prescribed by the Reserve Bank of India. It is submitted that the said income was offered to tax in A.Y. 1996-97 having regard to the provisions of section 43D of the Act.

4.1. During the year under consideration, i.e., A.Y. 1997-98, the assessee reversed the aforesaid interest income of Rs.35,03,36,189/- by debiting the same to its Profit and Loss Account. According to the assessee, such reversal was made in conformity with paras 3.2.1 and 3.2.2 of the RBI Guidelines relating to income recognition in respect of non-performing assets, which require interest and similar income accrued in earlier periods to be reversed or provided for where the same remains unrealised and the corresponding advance has become a nonperforming asset. The assessee, therefore, claimed deduction of the aforesaid amount while computing its taxable income for the year under consideration.

The Ld.AO disallowed the deduction claimed by the assessee.

4.2. The Ld.CIT(A) after considering the submissions observed and held as under:-

“7.4 Decision-

7.4.1 I have considered the submissions of the appellant and have perused the materials available on records. The appellant has requested to allow the claim of unearned interest on doubtful advance at Rs. 35,03,36,189/-. The appellant’s main contention is that in the AY 199697, the said interest was booked as income as per RBI guidelines and in the year under consideration the same have been reversed by debiting the P& L account following RBI guidelines. The appellant has also contended that if the same is not allowed it would amount to double disallowance. The Hon’ble ITAT had also restored the matter to the Ld. AO to verify the claim of double disallowance. The contentions of the appellant have been considered carefully. The facts suggest that as per RBl guidelines in AY 1996-97, the appellant had recognized the same as income. However, in the present assessment year the same has been reversed by debiting P& L account again following RBI guidelines. The appellant has not specified the as to which RBI guideline mandated the Bank to reverse said interest income recognized in AY 1996-97 in subsequent assessment year. The RBl guidelines or prudential norms provides for income recognition from different activities of the Bank. In the original appellate proceedings, the Ld. CIT(A) has rightly held that the contention of the assessee was contrary to the provisions of the Act, that there was no provision in sec 43D for reversal of entries of interest credited or for claiming deduction in subsequent year, that it was entitled for any relief. If the income has already been recognized and in the event the same becomes non collectible, then under provisions of the Act, the same can only be claimed as bad debt, subject to conditions specified therein. It is not the case of the appellant that such income has become bad but it has reversed the same following RBl guidelines. Every assessment year is a distinct and different assessment unit and the total income of an assessee has to be determined for each assessment year, as per the provisions of the Act. The provisions of sec 36(1)(vi) and 36(1) (via) applies to appellant and the appellant has not made any claim therein in respect of such interest, which clearly suggests that the interest under consideration has not become bad or doubtful. In the facts and circumstances of the case, there is no question of double disallowance/taxation, as in AY 1996-97 the income was recognised as the same had accrued therein. Any default on collection of such interest income can be claimed as bad debt, subject to conditions specified therein and not otherwise. Hence, the disallowance of Rs. 35,03,36,189/-, being claim of unrealized interest on doubtful advances is CONFIRMED. Hence, the Ground No. 2 raised in appeal is DISMISSED.”

4.3. Before this Tribunal, the Ld.AR submitted that the sum of Rs.35,03,36,189/- already has been offered to tax on accrual basis in the immediately preceding A.Y. 1996-97 and tax had duly been paid thereon. During the year under consideration, i.e., A.Y. 1997-98, the said accrued interest was reversed in the books of account in compliance with the mandatory RBI Guidelines applicable to the assessee. It was submitted that if the reversal is not allowed as a deduction/reduction from the income of the year under consideration, the same amount would effectively suffer taxation twice, once when offered to tax on accrual basis in A.Y. 1996-97 and again by denial of the corresponding reversal in A.Y. 1997-98. According to the Ld. AR, the same income cannot be subjected to tax twice unless specifically authorised by the statute.

4.4. The Ld. AR further submitted that in terms of section 29 of the Act, profits and gains of business are required to be computed in accordance with ordinary commercial principles, subject to the specific provisions of the Act. The reversal of unrealised accrued interest, being a necessary business adjustment/incidental business loss arising in the course of carrying on the assessee’s business, was therefore allowable while computing the business income.

Alternatively, it was submitted that the amount was allowable as a deduction u/s. 37(1) of the Act, being a loss/expenditure incurred wholly and exclusively for the purposes of the assessee’s business.

4.5. It was further submitted that section 43D of the Act could not be invoked for denying the aforesaid claim. According to the Ld.AR, section 43D is a special provision governing the point of taxation of interest on bad or doubtful debts and does not prohibit reversal in a subsequent year of interest income which had already been recognised and offered to tax on accrual basis in an earlier year. Once the relevant advance was classified as a non-performing asset, the RBI Guidelines required reversal of the unrealised interest so that income was not overstated. Thus, section 43D could not operate so as to deny a legitimate business adjustment otherwise allowable under the Act.

4.6. In support of the aforesaid contention, the Ld. AR placed reliance on the decision of the Hon’ble Delhi High Court in CIT v. Industrial Finance Corporation of India Ltd. (Delhi), wherein, on similar facts, the assessee was held entitled to deduction in respect of income recognised in an earlier year and subsequently reversed when the same became irrecoverable. The Hon’ble High Court observed that where income earlier recognised was subsequently found to be unrecoverable, the assessee was entitled to write off/reverse such income in the relevant subsequent assessment year, having regard also to the principles laid down by the Hon’ble Supreme Court in Vijaya Bank v. CIT 323 ITR 166 (SC)andT.R.F. Ltd. v. CIT 323 ITR 397 (SC).

Accordingly, the Ld. AR submitted that the assessee was entitled to deduction of Rs. 35,03,36,189/- while computing its total income for the year under consideration.

4.7. On the contrary, the Ld.DR relied on the orders passed by the authorities below.

We have perused the submissions advanced by both sides in light of the record placed before us.

5. The short controversy before us is whether the assessee is entitled to claim deduction/reduction in respect of interest of Rs.35,03,36,189/-, which was recognised and offered to tax in the immediately preceding A.Y. 1996-97 and was subsequently reversed in the books of account during the year under consideration in accordance with the prudential norms applicable to the assessee.

5.1. At the outset, we find that the fundamental premise on which the assessee has advanced its claim is that the impugned amount of Rs.35,03,36,189/- had already been credited as income and had suffered taxation in A.Y. 1996-97. During the year under consideration, the very same amount was reversed in the books of account on the ground that the corresponding interest had remained unrealised and the concerned advances had been classified as non-performing/doubtful assets in accordance with the applicable RBI prudential norms. Thus, the claim made in the present year is not in respect of a fresh expenditure or a fresh loss unrelated to any income previously recognised; rather, it represents the accounting reversal of an amount which, according to the assessee, had already entered its taxable income in the preceding year.

5.2. In this context, we are unable to accept the approach of the Ld.CIT(A) that the provisions of section 43D, by themselves, operate as a bar against recognising the consequence of such subsequent reversal. Section 43D is essentially a special provision governing the point of chargeability of interest income in respect of bad or doubtful debts of specified entities having regard to the prescribed prudential norms. The provision does not, in our considered view, create a statutory prohibition against giving effect, in a subsequent assessment year, to the reversal of an amount which had already been recognised and subjected to tax in an earlier assessment year.

5.3. The fact that each assessment year is a separate unit of assessment cannot be disputed. However, the principle that assessment is year-wise does not mean that an amount which has already been brought to tax as income in an earlier year must necessarily continue to form part of the assessee’s taxable income even after the corresponding amount has ceased to represent realisable income and has been reversed in the subsequent year. The effect of the reversal has to be examined in accordance with the provisions governing computation of business income and the true nature of the transaction.

5.4. We also find merit in the submission of the Ld.AR that, where an amount has already been recognised as income and subjected to tax and the very same amount is subsequently found to be irrecoverable and is duly written off/reversed, the subsequent year cannot be considered in isolation so as to disregard the earlier taxation of the amount. The principle underlying the decisions of the Hon’ble Supreme Court in Vijaya Bank (supra) and T.R.F. Ltd. (supra) requires the claim to be examined having regard to the subsequent write-off and the statutory provisions governing such write-off.

The decision of the Hon’ble Delhi High Court in Industrial Finance Corporation of India Ltd. (supra), relied upon by the Ld.AR, is also relevant to the proposition that income earlier recognised, which is subsequently found to be irrecoverable and reversed/written off, cannot be considered without taking into account the subsequent event and the corresponding accounting treatment.

5.5. In the present case, the Ld.CIT(A) rejected the claim on the reasoning that the assessee had not established that section 43D itself permitted reversal of the interest and that, if the interest had become irrecoverable, the assessee ought to have claimed it as a bad debt under section 36(1)(vii)/36(1)(viia).

5.6. In our view, this approach does not fully address the precise issue arising before us. The question is not merely whether section 43D contains an express provision authorising a reversal entry. The relevant question is whether an amount which had already been recognised and subjected to tax as income in the preceding year can, upon its subsequent reversal in accordance with the applicable prudential norms, be completely ignored while computing the taxable income of the subsequent year, thereby leaving the assessee without any tax adjustment for the reversal of income which had already suffered tax.

5.7. We are of the considered view that the answer has to be in the negative, subject, however, to verification of the assessee’s foundational factual claim. If the impugned sum of Rs.35,03,36,189/- was in fact credited as income in the books and was actually included in the taxable income and subjected to tax in A.Y. 1996-97, and the very same amount has thereafter been reversed in A.Y. 1997-98 in accordance with the applicable RBI prudential norms, the assessee cannot be denied the corresponding tax adjustment merely on the ground that section 43D does not expressly provide for such reversal. Otherwise, the same income would effectively remain subjected to tax without corresponding recognition of its subsequent reversal.

5.8. The Ld.AO shall further verify, on an account-wise basis, whether the amount reversed during the year represented interest which had remained unrealized and whether any part of such interest had been received before or during the year under consideration. The claim shall be allowed only to the extent of the interest which was included in the taxable income of A.Y. 1996-97, remained unrealized and was actually reversed in the books during the year under consideration in accordance with the applicable RBI prudential norms. Any portion of the interest which had been realized shall not be allowed as deduction merely on the basis of the reversal entry. The Ld.AO shall also verify whether any subsequent recovery of the amount allowed as deduction has been offered to tax in the relevant year.

5.9. If the aforesaid facts are duly established, the assessee shall be entitled to the corresponding deduction/reduction of Rs.35,03,36,189/- in computing its taxable income for A.Y. 199798. The Ld.AO shall not deny the claim merely on the ground that section 43D does not contain an express provision permitting reversal of interest already taxed in an earlier year. Needless to say, the benefit shall not be granted if the assessee is unable to establish that the impugned amount had actually been subjected to tax in A.Y. 1996-97, or if the amount reversed in the year under consideration is found to be different from the amount so taxed earlier.

Accordingly, Ground No. 2 is allowed for statistical purposes.

6. Ground No. 3 raised by the assesse is in respect of bad debts written off in the earlier years amounting to Rs. 42,63,46,635/-.

6.1. At the outset, the Ld. AR submitted that the issue stands squarely covered by the decision of the Coordinate Bench of this Tribunal in assessee’s own case for A.Y. 2010-11 in DCIT v. D. Kumar Trading Co. (P.) Ltd. [IT Appeal Nos. 3680 & 3882 (Mum) of 2011, dated 21-4-2016]. It was submitted that the Coordinate Bench had restored the issue to the file of the Ld.AO for verification as to whether the recovery of the amount was in respect of a claim earlier written off against the provision created u/s. 36(1)(viia) of the Act.

6.2. The Ld.DR, on the other hand, relied on the order passed by authorities below.

We have perused the submissions advanced by both sides in light of the record placed before us.

7. The issue forming the basis of the addition made by the Ld.AO arise out of similar set of facts and circumstances as were involved in assessment year 2010-11. The arguments advanced by the Ld.DR in the year under consideration are substantially the same as those canvassed before this Tribunal for assessment year 201011.

7.1. We note that the assessee has been claiming deduction in respect of provision for bad and doubtful debts created u/s. 36(1)(viia) of the Act. Out of such provision, certain bad debts were subsequently written off in the books of account.

7.2. The bad debts so recovered assume the character of deemed income in the year of receipt and, accordingly, were held to be chargeable to tax. The Revenue thus denied the claim of deduction u/s.36(1)(vii) of the Act. During the assessment proceedings, the Ld.AO further noted that the assessee, during the financial year relevant to the assessment year under consideration, had recovered certain bad debts written off pertaining to the earlier A.Ys. 2005-06 and 2006-07.

7.3. The assessee submitted that deduction in respect of such bad debts had not been claimed u/s.36(1)(vii) of the Act and that it had instead been claiming deduction in respect of provision for bad and doubtful debts u/s. 36(1)(viia) of the Act.

We note that an identical issue came up for consideration before the Coordinate Bench of this Tribunal in assessee’s own case for A.Y. 2010-11, supra, wherein the Coordinate Bench observed as under:-

“18.4. Before this Tribunal, the Ld.AR submitted that the recovery pertains to advances written off in earlier years and such recovery cannot be brought to tax u/s 41(4) unless corresponding deduction was allowed in earlier years. It was submitted that assessee had not claimed a deduction u/s 36(1)(vii) in the earlier year and therefore is not hit by the provisions of Section 41(4) of the Act.

18.5. On the contrary, the Ld.DR submitted that the assessee has not placed any material on record to demonstrate that deduction was not allowed earlier and no verification has been carried out and therefore the claim should not be entertained.

We have perused the submission advanced by both sides in light of the records placed before us.

18.6. The issue for consideration is whether the recovery of bad debts written off in earlier years is liable to be taxed under section 41(4) of the Act. It is an undisputed legal position that the provisions of section 41(4) are attracted only where a deduction has been allowed in respect of bad debts under section 36(1)(vii) in an earlier year. The condition precedent for invoking section 41(4) is thus the prior allowance of deduction; in the absence of such allowance, the recovery cannot be brought to tax.

18.7. In the present case, the assessee offered to tax recovery of ?62.61 crores pertaining to loans written off up to 31.03.2004, in respect of which deduction was admittedly claimed and allowed. However, in respect of the balance recovery of \ 931.60 crores relating to write-offs made after 01.04.2004, the assessee contended that no deduction under section 36(1)(vii) was claimed in those years, and therefore, recovery thereafter does not fall within the ambit of section 41(4).

18.8. The Ld.DR objected to the claim on the ground that the assessee did not substantiate, with supporting material, that no deduction was allowed in earlier years and that no verification has been carried out at the assessment stage.

18.9. We find merit in the contention of the Ld.DR to the limited extent that the factual assertion of the assessee, namely, non-allowance of deduction in earlier years, requires verification from the assessment records. It is noted that on identical facts a similar disallowance was made in the hands of assessee for AY 2009-10. This Tribunal while considering this issue in ITA No. 3645 & 4564/Mum/2016 vide order dated 06/06/2023 observed and held as under:-

52. Having considered the submissions of both sides and perused the material available on record, we find that the Co-ordinate Bench of the Tribunal in assessee’s own case in State Bank of India (supra) for the assessment year 2008-09, vide order dated 03/02/2020, while deciding similar issue observed as under:-

“88. Brief facts are that during the year under consideration the assessee has recovered bad debts written off in earlier years, in respect of which no claim for deduction was made under section 36(1)(vii) of the Act in the past. The assessee raised an additional ground before the CIT(A) in this regard. But, the CIT(A) has dismissed the additional ground raised on the basis that a similar issue was decided against the assessee by the CIT(A) in assessment year 2007-08 and that the facts of this issue are not verified during the assessment proceedings and appellate proceedings.

89. The Revenue before the Tribunal has emphasized that the claim made for deduction under section 36(1)(viia) of the Act and also under section 36(1)(vii) of the Act, to the extent the write off exceeds the opening credit balance for the provision made for bad and doubtful debts and that even if the assessee has not claimed deduction under section 36(1)(vii) of the Act, but has claimed a deduction under section 36(1)(viia) of the Act, the same will be hit by the provisions of section 41(1) or 41(4) of the Act. In relation to the above, the assessee argued that the provisions of section 41(4) of the Act are applicable only when the recovery of bad debts are in relation to a debt for which a deduction under section 36(1)(vii) of the Act is allowed. The assessee has been allowed a deduction in relation to provision made for bad debts under section 36(1)(viia) of the Act in the earlier years. This provision, as if by a fiction deems something to be income, has to be strictly construed. Therefore, the provisions of section 41(4) of the Act, do not apply.

90. We noted from the above arguments of both the sides and case law cited by the parties, that the issue is squarely covered by a decision of the Bangalore Bench of the Tribunal in the case of State Bank of Mysore v. DCIT [2009] 33 SOT 7 (Bangalore), now merged with assessee. We noted that the Tribunal in the case of State Bank of Mysore (supra) narrated the facts and the facts in the present case are exactly the same as in the case of State Bank of Mysore. In the case of State Bank of Mysore (supra), the assessee had claimed deduction under section 36(1)(viia) of the Act and not under section 36(1)(vii) of the Act. Accordingly, the Bangalore Tribunal has held that section 41(4) of the Act cannot be invoked. Sections 41(1), 41(2), 41(3) and 41(4) of the Act operate in different spheres. Each of the sub-sections to section 41 of the Act deals with different and distinct circumstances. Each of the sub-sections deals with different and distinct topics and one cannot read recoupment under one sub-section into another. We have considered the decision relied on in this regard of Supreme Court in the case of Nectar Beverages (P.) Ltd. v. DCIT [2009] 314 ITR 314 (SC) wherein the Supreme Court has dealt with the specific section 41(2) of the Act for taxing balancing charge versus taxing the same under section 41(1) of the Act and has concluded that section 41(1) of the Act shall not be applicable.

91. As the aspects of bad and doubtful debts is dealt with specifically under section 41(4) of the Act, as laid down by the Supreme court in Nectar Beverages (supra), section 41(1) of the Act is not applicable in case of the assessee. Further, the primary condition to be satisfied for taxing an amount as deemed income under section 41(1) of the Act is that a deduction/allowance should have been claimed by the assessee in respect of a loss, expenditure or trading liability. A deduction under section 36(1)(viia) of the Act is not for a loss, expenditure or trading liability, but for a provision for bad and doubtful debts. We noted that the learned CIT Departmental Representative had raised a contention that the CIT(A) and AO have not perused the details and, hence, the matter may be restored back which was opposed. In relation to the above contention, without prejudice to the assessee’s objection, in the event the matter is proposed to be remanded back to the AO, a direction may be given to the AO to delete the addition, if the recovery of the amount is in respect of a write off claimed and allowed as a deduction under section 36(1)(viia) of the Act and not under section 36(1)(vii) of the Act in the earlier years.

92. In view of the above discussion, we are of the view that principally the assessee is entitled for claim of deduction under section 36(1)(viia) of the Act, which has rightly been claimed. The assessee has not made claim under section 36(1)(vii) of the Act in this regard. Hence, we allow the claim of assessee but the matter is restored back to the file of the AO for verification purposes. This issue of assessee’s appeal is allowed for statistical purposes.”

53. The learned DR could not show any reason to deviate from the aforesaid decision rendered in assessee’s own case and no change in facts and law was alleged in the relevant assessment year. Therefore, respectfully following the judicial precedent in assessee’s own case cited supra, we uphold the plea of the assessee that provisions of section 41(4) of the Act is applicable only when recovery of bad debts are in relation to debts for which a deduction under section 36(1)(vii) is allowed. However, this issue is restored to the file of the AO to verify if the recovery of the amount, in the present case, is in respect of a write-off of the claim allowed as a deduction under section 36(1)(viia) or under section 36(1)(vii) of the Act in earlier years. Accordingly, ground no.13, raised in assessee’s appeal is allowed for statistical purposes.

18.10. The applicability of section 41(4) hinges entirely on this factual aspect. Accordingly, while we accept the legal proposition advanced by the assessee that recovery of bad debts is taxable only where corresponding deduction has been allowed earlier, we deem it appropriate to restore this issue to the file of the Ld.AO for limited verification. The Ld.AO shall examine whether deduction under section 36(1)(vii) was in fact allowed in respect of the debts written off in the relevant earlier years. To the extent such deduction was allowed, the corresponding recovery shall be brought to tax under section 41(4); and to the extent no such deduction was allowed, the recovery shall not be taxed.

18.11. We find that the taxability of such recovery is contingent upon verification of whether deduction was allowed in earlier years. In absence of such verification, no conclusive finding can be recorded. The Ld.AO shall afford adequate opportunity of being heard to the assessee and decide the issue in accordance with law.

Accordingly, Ground No.13 raised by the assessee stands allowed for statistical purposes.”

7.4. It is noted that the Ld.CIT(A) has taken identical view as considered in A.Y. 2010-11. Respectfully following the view taken up for A.Y. 2010-11, we remit this issue back to the Ld.AO with similar direction as reproduced hereinabove.

Accordingly, Ground No.3 raised by assessee stands allowed for statistical purposes.

8. Ground No.4 raised by the assessee relates to the non-taxability of income earned by its foreign branches.

At the outset, the Ld. AR submitted that the issue stands squarely covered by the decision of the Coordinate Bench of this Tribunal in assessee’s own case for A.Y. 2010-11 in ITA Nos. 3680 & 3882/Mum/2011, vide order dated 21/04/2016.

8.1. The issue forming the basis of the addition made by the Ld.AO arise out of similar set of facts and circumstances as were involved in assessment year 2010-11. The arguments advanced by the Ld.DR in the year under consideration are substantially the same as those canvassed before this Tribunal for assessment year 201011.

8.2. It is further noted that the Tribunal, while deciding the issue, followed the view taken in assessee’s own case for A.Y. 2009-10, wherein a categorical finding was rendered regarding the applicability of CBDT Notification No. 91/2008 dated 28/08/2008, holding the same to be applicable prospectively from A.Y. 2009-10 onwards.

8.3. It is thus noted that, the decision rendered by the Coordinate Bench in assessee’s own case in ITA Nos. 3664 & 4563/Mum/2016, vide order dated 03/02/2020 for A.Y. 2008-09, would squarely applicable to the facts of the present case. For the sake of convenience, we reproduce the relevant observations of the Coordinate Bench, which read as under:-

“93. The next issue in this appeal of assessee is as regards to the order of CIT(A) confirming the action of AO in not allowing claim of the Bank in respect of non-taxability of income from foreign branches. For this assessee raised the following Ground No.12: –

“12. Non-taxability of income from foreign branches 12.1 The learned CIT(A) erred in not allowing the claim of the Bank in respect of non-taxability of income earned by its foreign branches.

12.2 The learned CIT(A) erred in not directing the Assessing Officer to not tax the income earned by the foreign branches of the appellant, based in countries with whom India has entered into a tax treaty.

12.3 The learned CIT(A) erred in not directing the Assessing Officer to verify and allow the claim of the appellant. 12.4. The learned CIT(A) erred in observing that no facts were on record, without appreciating that the claim of Double Taxation Relief was verified by the Assessing Officer and hence significant facts were available on record.”

94. Brief facts are that the income earned by the foreign branches of the assessee should not be liable to tax in India in terms of the relevant tax treaties in light of various judicial pronouncements. Assessee claimed before CIT(A) that necessary directions may be given to the AO to not tax income of foreign branches based in countries with which India has a tax treaty. The CIT(A) held as under:-

“23.2.4 I have considered the appellant’s submissions. Here the additional ground filed by the appellant is considered in view of decision of Mumbai High Court in the case of Pruthvi Brokers v. CIT 349 ITR 336. In the above case, it is clearly held that if the facts are verified by the AO, this legal claim may be considered in the appellant’s case. Regarding this issue the appellant had not submitted any facts and quantified the amount which falls under this category and what is the amount received by the appellant and this amount was neither verified by the AO during the assessment proceedings nor the facts are not placed before me, claim of the appellant cannot be allowed. Similar issue was decided against the Bank by the CIT(A) for AY 2007-08.”

95. Now before us assessee claimed that income earned by the branches of the assessee located outside India is not to be taxed in India in light of the tax treaties between India and the countries where the branches are located, as the income has been subject to tax in foreign countries. The details of the income earned by foreign branches were submitted to the AO vide Annexure 1 of letter dated 19.02.2010 and now enclosed in assessee paper book 1 at page 325. It was contended that the assessee raised an additional ground before the CIT(A) in this regard. However, the CIT(A) dismissed the additional ground raised by the assessee on the basis that a similar issue was decided against the assessee by the CIT(A) in assessment year 2007-08 and that the facts of this issue are not verified during the assessment proceedings and appellate proceedings.

96. The Revenue before the Tribunal emphasized that no details were filed before the AO in connection with income from foreign branches and that the Notification No.91/2008 dated 28 August 2008 issued under section 90(3) by the CBDT is Clarificatory in nature and applicable to the assessee for the year.

97. During the course of the hearing, it was pointed out that the details of income earned by foreign branches were submitted to the AO vide Annexure 1 of letter dated 19.02.2010. In fact, based on the said details, the AO has allowed relief for the tax credit in respect of taxes paid in the foreign branches as can be verified from the assessment order. The issue is decided in favour of the assessee by the decision of the Mumbai Tribunal in the case of Bank of India v. ACIT (Mumbai.Trib), wherein it has been held that income attributable to foreign branches being permanent establishments outside India cannot be taxed in India having regard to the mandate contained in Article 7(1) of the relevant double taxation avoidance agreements. The aforesaid decision has been affirmed by the Bombay High Court [2015] 64 (Bombay). When under the relevant tax treaty it is provided that tax ‘may be’ charged in a particular State in respect of the specified income, it is implied that tax will not be charged by the other State. Once an income is held to be taxable in a particular jurisdiction under a tax treaty, unless there is a specific mention that it can be taxed in the other jurisdiction, the other tax jurisdiction is denuded of its powers to tax the same. As regards the learned CIT DR’s reliance on the Notification No.91/2008 dated 28 August 2008 issued under section 90(3), it is submitted as under:

section 90(3) empowers the Central Government to define any term which is not defined in the Income-tax Act, 1961 or in the relevant tax treaty. The legal meaning of ‘term’ is any expression or phrase which has a fixed or known meaning in art, science, or profession. Accordingly, it is submitted that sale, transfer, gift, etc. could be regarded as terms; however ‘may be taxed’ cannot be regarded as a term. Hence, the said notification, is not applicable

The Notification does not define any ‘term’; it only gives a result / clarification.

Section 90(3) empowers the Central Government to define any term which is not inconsistent with the provisions of the Income-tax Act, 1961 or the tax treaty. As the Supreme Court has already interpreted the meaning of the phrase ‘may be taxed’ in the case of CIT v/s. PAVL Kulandagan Chettiar [267 ITR 654], the notification cannot give a meaning to ‘may be taxed’ which is inconsistent with the views of the Supreme Court.

The Notification cannot survive as it directly contradicts the judgment of the Supreme Court.

98. Without prejudice to the above argument made was that even if it held that the above notification is applicable, the same can be said to be applicable prospectively (i.e. from assessment 2009-10 onwards) and, hence, is not applicable for the year under consideration. Reliance in this regard, is placed on the decision of the Supreme Court in case CIT v. Vatika Township (P.) Ltd. [2014] 367 ITR 466 (SC), wherein it was held that one established rule for interpretation of legislation is that unless a contrary intention appears, a legislation is presumed not to be intended to have a retrospective operation. Similar view has been taken by the Madras High Court in V.R.S.M Firm [1994] 208 ITR 400 (Madras).

99. We noted from the above discussion that this issue is squarely covered by the decision of Bank of India (supra), wherein the coordinate Bench held that income attributable to foreign branches being permanent establishment outside India cannot be taxed in India, having regard to the mandate given in Article 7(1) of the DTAA. This view has been affirmed by Hon’ble Bombay High Court. Since, the issue is squarely covered by the decision of Hon’ble Bombay High Court in the case of Bank of India (supra), respectfully following the same, we allow this issue in favour of assessee.”

8.4. Respectfully following the aforesaid decision of the Coordinate Bench, we hold that that income attributable to foreign branches being permanent establishment outside India cannot be taxed in India, having regard to the mandate given in Article 7(1) of the DTAA.

Accordingly, Ground No. 4 raised by the assessee stands allowed.

9. Ground No. 5 raised by the assessee relates to short grant of interest u/s. 244A of the Act. The grievance of the assessee is that, while computing interest u/s. 244A, the refund granted earlier ought to have been first adjusted against the interest component and thereafter against the principal tax component.

9.1. The Ld.AR submitted that it is a settled proposition of law that where refund has already been granted by the Department, the same has to be first adjusted against the interest payable to the assessee and only thereafter against the principal amount of tax. In support, he placed reliance on the decision of the Hon’ble Delhi High Court in case of India Trade Promotion Organisation v. CIT 233/[2014] 361 ITR 646 (Delhi), wherein it is held that while computing interest u/s. 244A of the Act, the refund granted earlier should first be adjusted against the interest component and thereafter the balance, if any, against the principal component.

9.2. The Ld.AR further submitted that the issue stands covered in favour of the assessee by the decisions of the Coordinate Bench in assessee’s own case in ACIT v. State Bank of India [IT Appeal No. 5910 (Mum) of 2017, dated 16-9-2019], and ACIT v. State Bank of India [IT Appeal Nos. 1097 to 1102 (Mum) of 2023, dated 27-6-2023]. Reliance was also placed onPr. CIT v. Solan District Truck Operators Transport Co-op Society 428 ITR 33 (Himachal Pradesh),Union Bank of India v. Asstt. CIT [2017] 162 ITD 142 (Mumbai), DCIT v. State Bank of Saurashtra [IT Appeal No. 99 (Mum) of 2016, dated 27-10-2017, Dy. CIT v. Peerless General Finance & Investment Co. Ltd. (Kolkata – Trib.)andGrasim Industries Ltd. v. Dy. CIT 186 ITD 675 (Mumbai – Trib.).

9.3. The Ld.DR relied upon the orders of the authorities below. We have perused the submissions advanced by both sides in light of the record placed before us.

10. We note that the Hon’ble Delhi High Court in India Trade Promotion Organisation (supra) has held that, while computing interest u/s. 244A of the Act, the refund already granted is to be first adjusted against the interest component and thereafter the balance, if any, against the principal tax component. We further note that an identical issue has been decided in favour of the assessee by the Coordinate Benches in assessee’s own case, supra.

10.1. Respectfully following the aforesaid decisions, we direct the Ld. AO to recompute the interest allowable u/s. 244A of the Act by first adjusting the refund already granted against the interest component and thereafter adjusting the balance, if any, against the principal tax component.

Accordingly, Ground No. 5 raised by the assessee stands allowed.

In the result appeal filed by assessee in ITA No. 2290/Mum/2019 stands partly allowed.

11. ITA No. 2189/Mum/2019 – Revenue’s Appeal for A.Y. 1997-98

The solitary issue raised by the Revenue in the present appeal relates to the disallowance made u/s. 14A of the Act. We have already adjudicated the identical issue while deciding ground no. 1 raised by the assessee in ITA No. 2290/Mum/2019 for the same assessment year, wherein, following the decision of the Coordinate Bench in assessee’s own case for earlier years and considering that Rule 8D was not applicable to the year under consideration, we have directed the Ld. AO to restrict the disallowance u/s. 14A of the Act to 1% of the exempt income. Our findings rendered therein shall apply mutatis mutandis to the present appeal.

Accordingly, the ground raised by the Revenue stands dismissed.

In the result appeal filed by revenue in ITA No. 2189/Mum/2019 stands partly allowed.

12. ITA No. 2291/Mum/2019 – Assessee’s Appeal for A.Y. 1998-99

The grounds raised by the assessee in the present appeal are verbatim identical to the grounds adjudicated by us in ITA No. 2290/Mum/2019 for A.Y. 1997-98. Both sides fairly submitted that the facts and circumstances relating to the issues are identical. Accordingly, our findings rendered while adjudicating the corresponding grounds in ITA No. 2290/Mum/2019 shall apply mutatis mutandis to the present appeal. The respective grounds are disposed of accordingly.

13. ITA No. 2190/Mum/2019 – Revenue’s Appeal for A.Y. 1998-99

The solitary issue raised by the Revenue relates to disallowance u/s. 14A of the Act and is identical to the issue adjudicated by us in Revenue’s appeal in ITA No. 2189/Mum/2019 for A.Y. 1997-98. Following our findings rendered therein, which shall apply mutatis mutandis to the year under consideration, the ground raised by the Revenue stands dismissed.

In the result, the appeals filed by the assessee in ITA Nos. 2290 & 2291/Mum/2019 for A.Ys. 1997-98 and 1998-99 respectively stand partly allowed, whereas the appeals filed by the Revenue in ITA Nos. 2189 & 2190/Mum/2019 for the respective assessment years stand dismissed.