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DCIT-3 (2) , Mumbai Versus Kotak Mahindra Asset Management Co. Ltd. and Vica-Versaa

2016 (5) TMI 536 - ITAT MUMBAI

Disallowance of Employees Stock Option Plan (ESOP) expenses - Held that:- The shares were allotted to the employees and the expenses were incurred by the assessee to motivate the employees, therefore, the expenses were incurred for business purposes - Decided in favour of assessee

Disallowance u/s 14A - Held that:- It is true that Assessing Officer has made adhoc disallowance which is not justified. It is necessary to evolve a system or basis for making disallowance u/s 14A. We upheld .....

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ioner of Income Tax (Appeal) . However, by taking a lenient view, the disallowance of ₹ 2,50,887/- is reduced to ₹ 2 lakh, thus, this ground of the assessee is partly allowed.

Difference between service tax payable and the service tax paid - disallowance u/s 43B - Held that:- We find that section 43(2) define certain terms relevant to income from profit & gains of business or profession and sub-section (2) speaks about the word “paid” which means actually paid or incurred .....

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t of Bombay in Lloyds Steels India Ltd. vs UOI [2001 (2) TMI 150 - HIGH COURT OF JUDICATURE AT BOMBAY ] holding that utilizing CENVAT credit to pay duty on clearance of final product is as good as making payment by debiting current account. Considering these decisions, the ld. Assessing Officer is directed to examine the factual matrix and decide in the light of the aforesaid decisions. This ground of the assessee is disposed off in terms indicated hereinabove. - ITA NO.940/Mum/2010, ITA NO.1653 .....

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0 & ITA No.1653/Mum/2008). 2. During hearing of these appeals, at the outset, Shri F.V. Irani, ld. counsel for the assessee contended that in ITA No.940/Mum/2010, the tax effect is ₹ 8,01,542/- and in ITA No.1653/Mum/2003, the total tax effect is ₹ 7,45,794/-, therefore, both these appeals are not maintainable being below prescribed monetary limit for filing the appeal before this Tribunal. The ld. DR, Shri Arvind Kumar, did not controvert the factual matrix. 2.1. We have conside .....

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was advised/directed by the Board not to file appeal in the cases where the tax effect does not exceed the following monetary limit.:- Sl. No. Appeals in Income -tax matters Monetary Limit (in Rs.) 1. Before ITAT 10,00,000/- 2. U/s 260 A before Hon ble High Court 20,00,000/- 3. Before Hon ble Supreme Court 25,00,000/- As per the aforesaid instruction/revised monetary limit, the Department is not to file appeal before the Tribunal, wherein, the tax effect is less than ₹ 10,00,000/-, conseq .....

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essee did not press this ground to which the ld. DR also has no objection, therefore, this ground of the assessee is dismissed as not pressed. 4. The next ground pertains to addition of ₹ 5,12,333/- being the disallowance of Employees Stock Option Plan (ESOP) expenses. The crux of argument on behalf of the assessee is that the impugned issue is covered by the decision of the Tribunal in the case of DCIT vs Accenture Services Pvt. Ltd. (2010) TIOL 409-ITAT-Mumbai, for which our attention wa .....

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company. 18. The assessee company incurred certain expenses on account of payments made by it for the shares allotted to its employees in connection with the ESPP. The AO had disallowed ₹ 9,06,788/- incurred by the assessee on the ground that this expenditure is not the expenditure of assessee company but that expenditure is of parent company and the benefit of such expenditure accrues to the parent company and not assessee. The disallowance made by the AO has been deleted by the CIT(A) by .....

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mployees for their hard work and is akin to the salary costs of the appellant. As has been pointed out by the appellant, this is a common practice to retain and motivate hardworking employees which is being followed by all major companies such as Infosys. Further, the amount that has been claimed by the appellant is the difference in the market price of the shares of Accenture Ltd and the exercise price of such shares by the employees of AIPL and not the entire share price of the shares allotted .....

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the above, I am of the opinion that such expenses qualify as business expenses of the appellant and the appellant should accordingly be given a deduction on this account. Accordingly I hereby delete the addition made by the AO on ground No. 9. 19. We have heard the learned representatives of the parties and perused the record. The CIT(A) has given a categorical finding after examining the relevant material and submission of the assessee that shares were allotted to its employees and not to the e .....

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t we confirm the order of CIT(A) on this issue. 4.2. Our view further find support from the decision in Novo Nordisk India Pvt. Ltd. vs DCIT (ITA No.1275/Bang/2011) order dated 30/09/2013. We are reproducing hereunder the relevant portion from the aforesaid order for analysis and ready reference:- This appeal by the assessee is against the order dated 03.10.2011 of the CIT(Appeals)-III, Bangalore relating to assessment year 2006-07. 2. In this appeal, the only grievance of the assessee is agains .....

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nce of expenditure incurred on providing shares under the ESOP. The facts necessary for adjudication of the aforesaid ground are as follows. 4. The assessee (NNIPL) is a wholly owned subsidiary of Novo Nordisk A/S, Denmark ( NNAS ) and is a private limited company incorporated under the Companies Act, 1956, having its registered office in Bangalore. It is primarily engaged in the marketing and distribution of healthcare products, specifically diabetes care products such as insulin formulations/o .....

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change. By a Board resolution dated 10.8.2005, the Board of Directors of NNAS resolved that the employees of foreign affiliates of NNAS would also be entitled to opt to purchase shares of NNAS under the Plan. A copy of the international information memorandum for purchase of employees shares in NNAS as given by NNAS is at page 32 to 37 of the Assessee s paper book. The employees of the Assessee who have opted for acquiring shares of NNAS under ESOP have to give their option to purchase on or bef .....

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the affiliates The total benefit for the employees will - if permitted by local rules - be recharged from Novo Nordisk A/S to the relevant affiliates using the average market price for the period 3rd October, - 17the October, 2005. The recharge will be made in local (convertible) currencies before the 15th of December, 2005. The recharge is necessary in most countries to obtain a local deduction for tax purposes. In some countries it might be necessary to get an approval from the Central Bank, t .....

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come on November 29, 2006, reporting an income of ₹ 58,399,200. During the FY 2005-06, eligible employees of assessee (NNIPL) were given the option of purchasing shares of its parent company NNAS under the NNAS Global Share Programme, 2005 ( the Plan ). In this regard, 231 employees of the company had applied for purchase of 12,931 shares at the price of DKK 150 per share. Further, as per the Plan, the difference between the purchase price of the shares and the average market price of the .....

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KK 2,112,796 (Rs 15,191,003) was recognised as employee cost, and claimed as a deductible expenditure in computing the taxable income of NNIPL for the AY 2006-07. 7. The assessee submitted before the AO that the aforesaid expenditure was revenue expenditure wholly and exclusively laid out or expended for the purpose of business or profession of the assessee and should be allowed as deduction u/s. 37(1) of the Act. The assessee also pointed out that under the guidelines prescribed by SEBI (Employ .....

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the assessee towards such expenses and that the expenditure was not of notional cost. The assessee relied on the decision of the Chennai Bench of the Tribunal in the case of SSI Ltd. v. DCIT, 85 TTJ 1049 (Chn), wherein it was held that the discount on ESOP i.e., the difference between the market value of the shares and the price at which the shares have been given to the employees has to be allowed as an expenditure. The assessee also brought to the notice of the AO, CBDT Circular No.9 of 2007 .....

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which under clause (4) there was a lock-in period provided during which the shares cannot be sold or transferred by the employee. The lock-in period was three years. The AO was of the view that because of the lock-in period, it was a capital expenditure. The second reason given by the AO for not accepting the claim of the assessee for deduction of the aforesaid expenditure was that the expenditure resulted in capital building of the parent company and therefore there was no expenditure incurred .....

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hed the decision relied on by the assessee in the case of SSI Ltd. (supra) by observing that SSI was a listed company in Indian Stock Exchange and therefore as per SEBI Guidelines, the expenses were debited to the P&L account. Further, the AO observed that the employees were free to transfer their shares whenever they liked without any lock-in period. The AO thus distinguished the decision relied upon by the assessee. The AO accordingly disallowed the claim of the assessee for deduction on a .....

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e issue: a) The ESOP is issued by the foreign parent of the appellant out of its own share-holding b) The appellant is only a conduit for the issue of the ESOPs by the parent with regard to the paperwork, collection of options, providing data for eligibility etc. No direct liability in the form of shareholding obligation in costs accrues to the appellant in the scheme. c) It is the foreign parent which has imposed the liability for recharge of the discounted portion of the ESOP upon the appellan .....

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(no new shares are floated for the ESOP), and in the fitness of normal accounting principles, it should bear the liability for the discount instead of passing on this liability to the appellant by a purely administrative, internal arrangement. The parent company perhaps would not be entitled to deduction of such discount as it would fall clearly in the realm of capital expenditure since its own share capital base is involved. b) The arrangement between the Assessee and NNAS was a clevermechanis .....

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ecause a legitimate liability of the parent company would not be expenditure laid out wholly and exclusively for the purposes of the business of the Assessee. d) Even if for argument s sake the expenditure is considered as a business expenditure, it is clearly a related-party transaction which is liable to be hit by the provisions of Sec 40A(2)(b) since there is no justifiable reason why this payment should have to be absorbed by the appellant in India when the largesse and shares involved are t .....

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nt and its foreign Parent (NNAS) claim to have offered the ESOPs to encourage stock ownership among the appellant s employees and to motivate and encourage them in their performance. b) NNAS, the foreign parent company, issued the ESOP voluntarily at a discounted value without however shouldering the liability for the same, via the mechanism of a recharge of the discount obtained from the appellant. c) The appellant has absorbed a liability not arising out of its own regular business, but only t .....

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will be made in local (convertible) currencies before the 15th of December 2005. The recharge is necessary in most countries to obtain a local deduction for tax purposes. (emphasis is mine). 5.5. From the above it can be seen that the ESOP arrangement was meant to achieve several objectives simultaneously. Not only were the employees to be motivated and encouraged, the foreign parent company NNAS was simultaneously covering the losses arising from its largesse by a mechanism of a recharge from t .....

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a staff welfare measure. However, it is the intention behind the arrangement, and the consequential mechanism adopted to work that intention, that weakens the appellant s case drastically. The parent company at Denmark has handed over a benefit out of its own stock holding (no new shares are floated for the ESOP), and in the fitness of normal accounting principles, it should bear the liability for the discount instead of passing on this liability to the appellant by a purely administrative, int .....

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this liability to the appellant is very clear from that document to be to facilitate the tax deduction claim of the affiliate. In this view, what is actually happening is that the capital expense of the parent company at Denmark is being cloaked in the garb of the revenue expense claim of the affiliate in India. In these circumstances, the point to be considered is whether such a reimbursement made to the parent qualifies to be taken as business expenditure at all for the purpose of Sec 37(1) o .....

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expenditure, even so it is clearly a related-party transaction which is liable to be hit by the provisions of Sec 40A(2)(b) since there is no justifiable reason why this payment should have to be absorbed by the appellant in India when the largesse and shares involved are those of its parent company at Denmark. This parent company is itself a separate taxable entity and could have set off these expenses against its share premium or other relevant capital account, as per normal accounting princi .....

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IT(A) to be allotted to the employees of the affiliate by the parent company at the behest of the affiliate. So in a way, the liability has been invited by the affiliate onto itself. There is no such initiative from the present appellant which is recorded in the Memorandum of Purchase, rather it only mentions that the Board of Directors of the parent company took this decision to allot ESOPs of B shares out of its own stock holding. Hence, the basic anomaly of the appellant s intention in donnin .....

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e assessee has preferred the present appeal before the Tribunal. We have heard the submissions of the ld. counsel for the assessee and the ld. DR. 13. The ld. counsel for the assessee brought to our notice that the facts of the assessee s case were identical to the facts as it prevailed in the case of DCIT v. Accenture Services Pvt. Ltd. ,ITA 4540/Mum/2008 for the A.Y. 2002-03, order dated 23.3.2010. In the aforesaid case, the Tribunal considered an identical ESOP whereby the Indian company issu .....

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ase of the assessee, there is nothing to show that the assessee took initiative to reward its employees with an ESOP rather it was the foreign parent company who took the initiative to issue shares to employees of its affiliates in India. It was pointed out that this observation of the CIT(A) is factually incorrect, because in the case of Accenture (supra), the shares were issued at the behest of the Indian company and not at the instance of the foreign parent company, as has been wrongly unders .....

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Apex Court took the view that if the assessee incurred any expenditure in the course of its business, even voluntarily and even without necessity, but if it is incurred for promoting the business and to earn profit, deduction u/s. 37(1) of the Act has to be allowed. The Hon ble Court further held that the fact that somebody other than the assessee is also benefited by the expenditure, should not come in the way of expenditure being allowed as deduction. 15. Our attention was also drawn to the de .....

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o.323 dated 11.10.2011, which was a notification issued in exercise of powers conferred u/s. 17(2) of the Act. The Central Government in the aforesaid Notification has specified the guidelines which need to be followed when shares are allotted under an ESOP scheme. In clause (6) of the aforesaid guidelines, the Central Govt. has laid down that where shares of a parent company are issued under an ESOP, the company issuing ESOP has to give the required particulars to the Chief Commissioner of Inco .....

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ent company under an ESOP and paid the difference between the issue price and the fair market value of the shares as reimbursement to the parent company was a mechanism to pass on the liability to the Indian company only to enable the Indian company to avail of the tax deduction under the Act. It was his submission that no such inference whatsoever had been drawn by the CCIT, pursuant to the assessee filing the required details of ESOP. With regard to the observations of the CIT(Appeals) that ca .....

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18. We have considered the rival submissions. It is clear from the facts on record that there was an actual issue of shares of the parent company by the assessee to its employees. The difference, between the fair market value of the shares of the parent company on the date of issue of shares and the price at which those shares were issued by the assessee to its employees, was reimbursed by the assessee to its parent company. This sum so reimbursed was claimed as expenditure in the profit & .....

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is to compensate them for the continuity of their services to the company. By no stretch of imagination, we can describe such discount as either a short capital receipt or a capital expenditure. It is nothing but the employees cost incurred by the company. The substance of this transaction is disbursing compensation to the employees for their services, for which the form of issuing shares at a discounted premium is adopted. 19. In the present case, there is no dispute that the liability has accr .....

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f this policy of the foreign parent company, allowed its subsidiaries/affiliates across the world to issue its shares to the employees. As far as the assessee in the present case which is an affiliate of the foreign parent company is concerned, the shares were in fact acquired by the assessee from the parent company and there was an actual outflow of cash from the assessee to the foreign parent company. The price at which shares were issued to the employees was paid by the employee to the Assess .....

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of the shares of the parent company and the price at which those shares were issued to its employees in India was paid to the employee and was an employee cost which is a revenue expenditure incurred for the purpose of the business of the company and had to be allowed as deduction. There is no reason why this expenditure should not be considered as expenditure wholly and exclusively incurred for the purpose of business of the assessee. 20. We fail to see any basis for the observation of the CIT( .....

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ch a motivated work force. This will be no ground to deny the deduction of a legitimate business expenditure to the Assessee as laid down by the Hon ble Supreme Court in the case of Sassoon J.David (supra). 21. The reference by the CIT(A) to the provisions of Sec.40A(2)(b) of the Act is again without any basis. The price of the shares of NNAS is arrived at by applying the average market price for the period 3rd October, - 17the October, 2005 in the Copenhagen Stock Exchange. The price so arrived .....

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nture (supra) are identical. In the case of Accenture (supra), the facts were that the assessee company incurred certain expenses on account of payments made by it for the shares allotted to its employees in connection with the ESPP. The AO had disallowed ₹ 9,06,788/- incurred by the assessee on the ground that this expenditure is not the expenditure of assessee company but that expenditure is of parent company and the benefit of such expenditure accrues to the parent company and not asses .....

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o retain, motive and award its employees for their hard work and is akin to the salary costs of the assessee. The same was therefore business expenditure and should be allowable in computing the taxable income of the assessee. The tribunal upheld the view of the CIT(A). It can be seen from the decision in the case of Accenture (supra) that the shares of the foreign company were allotted and given to the employees of affiliate in India at the behest of the affiliate in India. The CIT(Appeals), ho .....

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e ESOP. That by itself will not mean that the ESOP was at the behest of the parent company. In any event the immediate beneficiary is the Assessee though the parent company may also be indirect beneficiary of a motivated work force of a subsidiary. We are of the view that the factual basis on which the CIT(Appeals) distinguished the decision of the Mumbai Bench of ITAT in the case of Accenture (supra) is erroneous. 23. With regard to the observations of the CIT(Appeals) that the ESOP actually be .....

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ra) and the Hon ble Karnataka High Court decision in the case of Mysore Kirloskar Ltd. (supra) clearly support the plea of the assessee in this regard. 24. We are of the view that in the facts and circumstances of the present case, the expenditure in question was wholly and exclusively for the purpose of the business of the assessee and had to be allowed as deduction as a revenue expenditure. 25. For the reasons given above, we direct the expenditure be allowed as deduction. 26. In view of the d .....

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ince, the shares were allotted to the employees and the expenses were incurred by the assessee to motivate the employees, therefore, the expenses were incurred for business purposes. It is noted that the Bangalore Bench of the Tribunal in the aforesaid order dated 30/09/2013 has duly considered the scheme, decision of the Mumbai Bench in DCIT vs Accenture Services Pvt. Ltd. (supra) another decision in SSI Ltd. vs DCIT (85 TTJ 1049 (Chennai), CBDT Circular No.9 of 2007 dated 20/12/2007, Sassoon J .....

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expenditure was indeed incurred for earning exempt dividend income. It was explained that the assessee has not incurred any expenditure, which was attributable to earning free dividend income, thus, there is no question of making adhoc disallowance. The ld. counsel place reliance upon following decisions:- i. Tata Consulting and Engineers Ltd. (ITA No.265/Mum/2011 and 2460/Mum/2012), ii. DCIT vs HDFC Bank Ltd. (ITA No.4529/Mum/2005, 3650 & 3651/Mum/2006 and 4039/Mum/2007) iii. Godrej Agrove .....

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a) to section 80HHC to make the disallowance by holding that the manpower and administrative machinery was used by the assessee to earn tax free income and accordingly, made disallowance. On appeal, before the Commissioner of Income Tax (Appeal) (as is evident from para 15 of the impugned order), it was claimed that no direct expenses were attributed to earn exempt income. Reliance was also placed upon the Delhi Bench Tribunal decision in Motor and General Finance Ltd. (90 ITD 449) and Maruti Ud .....

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expenses. We find that in the case of Tata Consulting Engineers Ltd., the expenses were disallowed to 1%, whereas, in Godrez Agrovet Ltd.(ITA No.1629/Mum/2009, ITA No.1613/Mum/2011 and 4897/Mum/2012), the disallowance was made to 2%. Considering the material available on record, we upheld the disallowance to 1.5% of the exempt income, thus, the Assessing Officer is directed accordingly. 6. Now, we shall take up ITA No.861/Mum/2010 for A.Y. 2005-06, wherein, first ground raised by the assessee p .....

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of the Act. It was contended that it may be substantially reduced. The ld. DR, defended the addition. 7.1. We have considered the rival submissions and perused the material available on record. Considering the material available on record, factual matrix, submission of the assessee, the observation made in the assessment order/impugned order, argument of ld. DR, we find that no evidence was produced by the assessee at any stage, therefore, mere claim is not enough. In principle, we affirm the st .....

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of the Act. The crux of argument on behalf of the assessee is that the difference of ₹ 42,49,947/- represent service tax CENVAT credit availed and utilized by the assessee for payment of service tax liability. It was contended that no service tax is unpaid. The ld. counsel place reliance upon the decision in ACIT vs Kaiser Industries Ltd. (ITA No.555/Del/2010), Lloyds Steel Industries Ltd. vs UOI (2005) 183 ELT 351 (Bom.) and CIT vs Noble and Hewitt (I) Pvt. Ltd. (2007) TIOL 570-Del-IT. On .....

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education cess tax amounting to ₹ 3,23,30,578/- against the total payable amount of ₹ 3,65,80,525/-, accordingly, he brought to tax the difference of ₹ 42,49,947/- u/s 43B of the Act. On appeal, before the Commissioner of Income Tax (Appeal), the assessee took the plea that the differential amount of ₹ 42,49,957/- is a deemed payment under the service tax credit rules 2002. This explanation of the assessee could not find favour with the Commissioner of Income Tax (Appeal .....

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h means actually paid or incurred according to method of accounting. Whereas, section 43B starts with non-obstante clause and permits the deduction of any sum payable by way of tax, duty, cess or fee, by whatever name called, in the year in which the sum is actually paid. Therefore, it can be said that adjustment, if any made, is as good as duty paid and it amounts to actual payment. If the payment has been made/adjusted before due date of filing of return u/s 139(1) of the Act. Identical ratio .....

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disallowance of ₹ 5,96,963/- u/s 14A of the Act. Considering the totality of facts and the establish norm that investment in mutual funds requires a good experience, professional skill and the administrative expenses involved, therefore, the disallowance is restricted to 1.5% of the exempt income. Thus, the ld. Assessing Officer is directed accordingly. 10. The last ground raised in this appeal pertains to disallowance of ₹ 3,85,141/-, on account of entertainment expenses. The crux .....

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