2021 (2) TMI 954 - AT - Income Tax

Disallowance made u/s.14A of the Act r.w.Rule 8D(2) of the Rules both under normal provisions of the Act as well as in the computation of book profits u/s.115JB - HELD THAT - As far as the disallowance of indirect expenses under third limb of Rule 8D(2) of the Rules the only those investments which had actually yielded exempt income need to be considered for working out the disallowance thereon. This has been held by the Special Bench of Delhi Tribunal in the case of Vireet Investments 2017 (6) TMI 1124 - ITAT DELHI . However if adoption of such computation mechanism results in absurdity then the proportionate income theory is to be adopted for working out the disallowance as we hold that Rule 8D computation mechanism should be considered as the last resort and is not automatic in its application. In this regard the ld. AR placed reliance in the case of Future Retail Ltd. 2020 (11) TMI 64 - ITAT MUMBAI wherein under similar facts and circumstances where investments were made only within the group companies predominantly vis a vis incurring of expenses for the purpose of earning dividend income We direct the ld. AO to compute the disallowance in accordance with the ratio laid in para 12 of the aforesaid order u/s.14A of the Act for the purpose of computing income under normal provisions of the Act. The same figure shall be utilized for making disallowance under clause f of Explanation to section 115JB of the Act while computing the book profits as they are actual expenses incurred on proportionate basis for the purpose of earning exempt income. Accordingly the grounds raised by the assessee in cross objections and ground Nos.1-4 raised by the Revenue are disposed off in the aforesaid manner. Allowing ESOP discount as a deduction - as per AO the said expenditure is only incurred on a contingent basis and the same has not been incurred by the assessee and accordingly disallowed the same while completing the assessment - HELD THAT - We find that the ld. CIT(A) had placed reliance on the Special Bench of Bangalore Tribunal in the case of Biocon Ltd. 2013 (8) TMI 629 - ITAT BANGALORE M/S KOTAK MAHINDRA BANK LTD. 2018 (1) TMI 320 - ITAT MUMBAI AND M/S. PVP VENTURES LIMITED 2012 (7) TMI 696 - MADRAS HIGH COURT deleted the disallowance of ESOP expenses - e Special Bench of Bangalore Tribunal in the case of Biocon Ltd. has been subsequently approved by the Hon ble Karnataka High Court in the case of CIT vs. Biocon Ltd. 2020 (11) TMI 779 - KARNATAKA HIGH COURT wherein it was held that discount on issue of ESOP was allowable as deduction u/s.37(1) of the Act as primary object was not to vest capital but to earn profits by securing consistent services of employees. Respectfully following the said decision we hold no infirmity in the order of ld. CIT(A) granting relief to the assessee. Accordingly the ground raised by the Revenue are dismissed. Claiming deduction towards education cess and secondary higher education cess paid - HELD THAT - We find that this issue is covered in favour of the assessee in the case of Sesa Goa Ltd 2020 (3) TMI 347 - BOMBAY HIGH COURT held that education cess paid by the assessee is entitled for deduction. We find that the additional ground raised by the assessee goes to the root of the matter and does not involve any verification of facts and hence we are inclined to admit the same and allow the same by respectfully following the decision of the Hon ble Jurisdictional High Court referred to supra.

Summary

Issues involved:
1. Delay in filing cross objections by the assessee.
2. Disallowance made under section 14A of the Income Tax Act.
3. Disallowance of administrative expenses and expenses incurred for earning exempt income.
4. ESOP expenses claimed as deduction under section 37(1) of the Act.
5. Claiming deduction for education cess and secondary higher education cess paid.

Detailed Analysis:
1. The delay in filing cross objections by the assessee was due to the impact of the Covid-19 lockdown, which was considered reasonable by the Appellate Tribunal. The delay was condoned, and the cross objections were admitted for adjudication.

2. The disallowance under section 14A of the Act was contested by the assessee regarding expenses related to exempt income. The Tribunal directed the Assessing Officer (AO) to compute the disallowance based on actual income earned from investments yielding exempt income, following a specific ratio for the purpose of computing income under normal provisions and book profits.

3. The disallowance of administrative expenses and expenses incurred for earning exempt income was a contentious issue. The Tribunal held that the disallowance should be based on investments that had actually yielded exempt income, following a specific computation mechanism. The Tribunal directed the AO to calculate the disallowance accordingly.

4. The Appellate Tribunal addressed the issue of ESOP expenses claimed as a deduction under section 37(1) of the Act. The Tribunal relied on precedent cases and held that the ESOP expenses were allowable as a deduction, as the primary objective was to secure consistent services of employees to earn profits.

5. The claim for deduction of education cess and secondary higher education cess paid by the assessee was allowed by the Tribunal, citing a favorable decision of the Jurisdictional High Court. The additional ground raised by the assessee was admitted and allowed based on the court's decision.

In conclusion, the Appellate Tribunal partly allowed the appeal of the Revenue and the Cross Objections of the assessee, addressing various issues related to disallowances, deductions, and delays in filing objections. The Tribunal provided detailed analysis and directions for the computation of disallowances and deductions based on legal precedents and specific provisions of the Income Tax Act.