TMI Blog2015 (12) TMI 1666X X X X Extracts X X X X X X X X Extracts X X X X ..... s deduction being deferred employee compensation expense (ESOP) debited under the head employee cost as an allowable business expenditure under the head ‘profit and gains of business or profession’ incurred wholly and exclusively for the purposes of business of the assessee company. We further hold that the amount of discount claimed as deduction during the vesting period is required to be reversed in relation to the un-vesting/lapsing of options at the appropriate time. However, an adjustment to the income is called for at the time of exercise of option by the amount of difference in the amount of discount calculated with reference the market price at the time of grant of option and the market price at the time of exercise of option - Decided in favour of assessee Disallowance u/s 14A read with Rule 8D - Held that:- Since the relevant A.Y. is 2008-09, the Hon’ble Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. (2010 (8) TMI 77 - BOMBAY HIGH COURT) has already held that the Rule 8D is applicable for A.Y. 2008-09 and hence in our considered view, the investment of ₹ 4,61,37,00,000/- made by the assessee company in its subsidiary namely M/s India Infoline Investment Servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) on the grounds be set aside and that of the Assessing Officer be restored. 3. The assessee company is aggrieved by the disallowance of deferred compensation expenses of ₹ 5,99,74,467/- debited under the head employee cost, by the assessing officer (hereinafter called the AO ) which was confirmed by the CIT(A). 4. During the course of assessment proceedings u/s 143(3) read with Section 143(2) of the Act, the assessee company was asked by the AO that why the deferred employee compensation expenses of ₹ 5,99,74,467/- debited under the head employee cost was claimed as revenue expenditure by the assessee company as these expenses being related to issue of fresh equity shares (ESOP) by the assessee company and hence are capital in nature not allowable as revenue expenditure u/s 37(1) of the Act. The assessee company replied that the said expenses are on account of the difference between the fair market value of the shares and the issue price at which the shares are made available to the employees which is the income of the employee s being taxable perquisite in the hands of the employee s on which tax has been deducted at source by the assessee company. Employee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act, the assessee company carried the matter in appeal before the CIT(A) and reiterated its submissions as were submitted before the AO which are detailed in the preceding para s, which are not repeated for the sake of brevity. The assessee company further relied upon the decision of ACIT v. Spray Engineering Devices Ltd. ITAT- ITA No.701/Chd/2009 and CIT v. PVP Ventures Ltd. - Hon ble Chennai High Court and SSI Ltd. v. DCIT (2004) 85 TTJ 1049 (ITAT Chennai). The CIT(A) rejected the contentions of the assessee company and held that ESOP is not a business expenditure but it is merely receipt of lesser amount of share premium and hence the same is not allowable expenditure. The CIT(A) held that the decisions relied upon by the AO in the Ranbaxy Laboratories Ltd. v. ACIT 124 TTJ 771 (Delhi Tribunal) and M/s VIP Industries Ltd. TIOL 654, supports the finding of Assessing Officer that such ESOP is not allowable expenditure, hence the contentions of the assessee were rejected and the appeal of the assessee company was dismissed on this ground. 7. Aggrieved by the orders of the CIT(A), the assessee company is in appeal before the Tribunal. The assessee company submitted that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to whether the Discounted premium on ESOP also called as the Discount on issue of ESOP or the Employee stock option compensation expense or the Employees compensation expense or simply the Discount etc., is an allowable deduction in the computation the income under the head Profits and gains of business or profession ? This larger question can be answered in the following three steps, viz., I. Whether any deduction of such discount is allowable ? II. If yes, then when and how much? III. Subsequent adjustment to discount 8. We will take up these three steps one by one for consideration and decision. I. WHETHER ANY DEDUCTION OF SUCH DISCOUNT IS ALLOWABLE ? 9.1 The crux of the arguments put forth by the ld. AR is that discount under ESOP is nothing but employees cost incurred by the assessee for which deduction is warranted. On the other hand, the Revenue has set up a case that no deduction can be allowed as such discount is not only a short capital receipt but also a contingent liability. A. Is discount under ESOP a short capital receipt? 9.2.1 The ld. DR stated that the question of deduction u/s 37 can arise only if the assessee incurs any expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Chennai Bench has been approved by the Hon'ble Madras High Court in CIT v. PVP Ventures Ltd. [2012] 211 Taxman 554/23 taxmann.com 286. The learned AR argued that PVP Ventures Ltd. (supra) is a solitary judgment rendered by any High Court on the issue and hence the same needs to be followed in preference to any contrary Tribunal order. It was also pointed out that the Chennai bench's view has been subsequently followed by the Chandigarh Bench of the Tribunal in Asstt. CIT v. Spray Engineering Devices Ltd. [2012] 23 taxmann.com 267/53 SOT 70 (URO). 9.2.3 Let us examine the facts of the case of Ranbaxy Laboratories Ltd. (supra), which has been strongly relied by the learned Departmental Representative. It deals with a situation in which the assessee granted stock option to its employees. The shares were to be issued at ₹ 559 per share as against the face value of ₹ 10 and the market price on the date of grant at ₹ 738.95 per share. The assessee treated the difference between ₹ 738.95 and ₹ 595 as employees compensation in the books of account and charged the same to its Profit and loss account by spreading it over the vesting period. It wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ercised by the employees by making application to the employer for the issue of shares against the options vested in them. The gap between the completion of vesting period and the time for exercising the options is usually negligible. The company, on the exercise of option by the employees, allots shares to them who can then freely sell such shares in the open market subject to the terms of the ESOP. Thus it can be seen that it is during the vesting period that the options granted to the employees vest with them. This period commences with the grant of option and terminates when the options so granted vest in the employees after serving the company for the agreed period. By granting the options, the company gets a sort of assurance from its employee for rendering uninterrupted services during the vesting period and as a quid pro quo it undertakes to compensate the employees with a certain amount given in the shape of discounted premium on the issue of shares. 9.2.5 The core of the arguments of the ld. DR in this regard is twofold. First, that it is not an expenditure in itself and secondly, it is a short capital receipt or at the most a sort of capital expenditure. In our cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctly issued to employees at a reduced rate. In both the situations, the employees stand compensated for their effort. If under the first situation, the company, say, on receipt of premium amounting to ₹ 100 from issue of shares to public, gives ₹ 60 as incentive to its employees, such incentive of ₹ 60 would be remuneration to employees and hence deductible. In the same way, if the company, instead, issues shares to its employees at a premium of ₹ 40, the discounted premium of ₹ 60, being the difference between ₹ 100 and ₹ 40, is again nothing but a different mode of awarding remuneration to employees for their continued services. In both the cases, the object is to compensate employees to the tune of ₹ 60. It follows that the discount on premium under ESOP is simply one of the modes of compensating the employees for their services and is a part of their remuneration. Thus, the contention of the ld. DR that by issuing shares to employees at a discounted premium, the company got a lower capital receipt, is bereft of an force. The sole object of issuing shares to employees at a discounted premium is to compensate them for the continuity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it is imperative to note that the word 'expenditure' has not been defined in the Act. However, sec. 2(h) of the Expenditure Act, 1957 defines 'expenditure' as : 'Any sum of money or money's worth spent or disbursed or for the spending or disbursing of which a liability has been incurred by an assessee '. When section 43(2) of the Act is read in conjunction with section 37(1), the meaning of the term 'expenditure' turns out to be the same as is there in the aforequoted part of the definition under section 2(h) of the Expenditure Act, 1957, viz., not only 'paying out' but also 'incurring'. Coming back to our context, it is seen that by undertaking to issue shares at discounted premium, the company does not pay anything to its employees but incurs obligation of issuing shares at a discounted price on a future date in lieu of their services, which is nothing but an expenditure u/s 37(1) of the Act. 9.2.8 Though discount on premium is nothing but an expenditure u/s 37(1), it is worth noting that the Hon'ble Supreme Court in the case of CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254/179 Taxman 326 has gone to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, it is only a contingent liability and no deduction is admissible under the provisions of the Act for a contingent liability. The options so granted may lapse during the vesting period itself by reason of termination of employment or some of the employees may not choose to exercise the option even after rendering the services during the vesting period. It was, therefore, argued that the discount is nothing but a contingent liability during the vesting period not calling for any deduction. In the opposition, the learned AR submitted that the amount of discount claimed by the assessee as deduction is not a contingent liability but an ascertained liability. He stated that in the ESOP 2000, there is a vesting period of four years, which means that the options to the extent of 25% of the total grant would vest with the eligible employees at the end of first year after rendering unhindered service for one year and it would go on till the completion of four years. 9.3.2 It is a trite law and there can be no quarrel over the settled legal position that deduction is permissible in respect of an ascertained liability and not a contingent liability. Section 31 of the Indian Contract Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain. From the above enunciation of law by the Hon'ble Supreme Court, it is manifest that a definite business liability arising in an accounting year qualifies for deduction even though the liability may have to be quantified and discharged at a future date. We consider it our earnest duty to mention that the legislature has inserted clause (f) to section 43B by providing that any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee shall be allowed as deduction in computing the income of the previous year in which such sum is actually paid. With this legislative amendment, the application of the ratio decidendi in the case of Bharat Earth Movers (supra) to the provision for leave encashment has been nullified. However, the principle laid down in the said judgment is absolute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereby not disturbing the otherwise liability which stood incurred at the end of the each year on availing the services. 9.3.6 As regards the contention of the ld. DR about the contingent liability arising on account of the options lapsing during the vesting period or the employees not choosing to exercise the option, we find that normally it is provided in the schemes of ESOP that the vested options that lapse due to non-exercise and/or unvested options that get cancelled due to resignation of the employees or otherwise, would be available for grant at a future date or would be available for being re-granted at a future date. If we consider it at micro level qua each individual employee, it may sound contingent, but if view it at macro level qua the group of employees as a whole, it loses the tag of 'contingent' because such lapsing options are up for grabs to the other eligible employees. In any case, if some of the options remain unvested or are not exercised, the discount hitherto claimed as deduction is required to be reversed and offered for taxation in such later year. We, therefore, hold that the discount in relation to options vesting during the year cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is an expenditure; (ii) such expenditure is on account of an ascertained (not contingent) liability; and (iii) it cannot be treated as a short capital receipt. In view of the foregoing discussion, we are of the considered opinion that discount on shares under the ESOP is an allowable deduction. II. IF YES, THEN WHEN AND HOW MUCH? 10.1 Having seen that the discount under ESOP is a deductible expenditure u/s 37(1), the next question is that 'when' and for 'how much' amount should the deduction be granted ? 10.2 The assessee is a limited company and hence it is obliged to maintain its accounts on mercantile basis. Under such system of accounting, an item of income becomes taxable when a right to receive it is finally acquired notwithstanding the fact that when such income is actually received. Even if such income is actually received in a later year, its taxability would not be evaded for the year in which right to receive was finally acquired. In the same manner, an expense becomes deductible when liability to pay arises irrespective of its actual discharge. The incurring of liability and the resultant deduction cannot be marred by mere reason of some ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the end of the second, third and fourth years would stand forfeited. Thus it becomes abundantly clear that an employee becomes entitled to the shares at a discounted premium over the vesting period depending upon the length of service provided by him to the company. In all such schemes, it is at the end of the vesting period that option is exercisable albeit the proportionate right to option is acquired by rendering service at the end of each year. 10.4 Similar is the position from the stand point of the company. An obligation falls upon the company to allot shares at the time of exercise of option depending upon the length of service rendered by the employee during the vesting period. The incurring of liability towards the discounted premium, being compensation to employee, is directly linked with the span of service put in by the employee. In the above illustration, when 25 out of 100 shares vest in the employee after rendering one year's service, the company also incurs equal obligation at the end of the first year for which it becomes entitled to rightfully claim deduction u/s 37(1) of the Act. Similarly at the end of the second year of service by the employees, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure of ₹ 66.82 lakh. When the matter came up before the Tribunal, it was held that the expenditure in that behalf was an ascertained liability and not contingent upon happening of certain events. It was further noticed that the assessee claimed deduction of such discount on ESOP by following the SEBI Guidelines. As the expenditure itself was an ascertained liability, the Tribunal held that the same to be deductible. 10.7 Before proceeding further it would be befitting to take stock of the nutshell of the SEBI Guidelines in this regard. These Guidelines provide for granting of deduction on account of discount on issue of options during the vesting period. It has been so explained with the help of an example in Schedule I to the Guidelines. For the sake of simplicity, we are taking an instance under which an option of share with face value of ₹ 10 is given under ESOP to employees at the option price of ₹ 10 as against the market price of such shares at ₹ 110 on that date. Further suppose that the vesting period is four years with equal vesting @ 25% at the end of each year. Total discount comes to ₹ 100 (Rs. 110 - ₹ 10). These Guidelines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s at this later stage that the provisional amount of discount on ESOP, initially quantified on the basis of market price at the time of grant of options, needs to be suitably adjusted with the actual amount of discount. 11.1.3 As regards the adjustment of discount when the options remain unvested or lapse at the end of the exercise period, it is but natural that there is no employee cost to that extent and hence there can be no deduction of discount qua such part of unvested or lapsing options. But, as the amount was claimed as deduction by the company during the period starting with the date of grant till the happening of this event, such discount needs to be reversed and taken as income. It is so because logically when the options have not eventually vested in the employees, to that extent, the company has incurred no employee cost. And if there is no cost to the company, the tentative amount of deduction earlier claimed on the basis of the market price at the time of grant of option ceases to be admissible and hence needs to be reversed. The ld. AR stated that the discount in respect of the unvested/lapsing options has been reversed on the happening of such events and the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assessee'. Clause (c) of Explanation to section 17(2)(vi) provides that : 'the value of any specified security or sweat equity shares shall be the fair market value of the specified security or sweat equity shares, as the case may be, on the date on which the option is exercised by the assessee as reduced by the amount actually paid by, or recovered from, the assessee in respect of such security or shares'. Two things surface from the above provisions. First, that the perquisite arises on the 'allotment' of shares and second, the value of such perquisite is to be computed by considering the fair market value of the shares on 'the date on which the option is exercised' by the assessee as reduced by the amount actually paid. The position that such amount was or was not taxable during some of the years in the hands of the employees is not relevant in considering the occasion and the amount of benefit accruing to the employee under ESOP. Any exemption or the deductibility of an allowance or benefit to employee from taxation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the vesting period. But, since actual amount of employees cost can be precisely determined only at the time of the exercise of option by the employees, the provisional amount of discount availed as deduction during the vesting period needs to be adjusted in the light of the actual discount on the basis of the market price of the shares at the time of exercise of options. It can be done by making suitable northwards or southwards adjustment at the time of exercise of option. This can be explained with the following example with the assumption of vesting period of four years and the benefit vesting at 25% each at the end of 1st to 4th years:- At the time of granting option At the time of exercise of option Situation I Situation II Situation III Market value per share 110 110 130 90 Option price 10 10 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. It has been argued that the assessee company claimed deduction for the amount of discount during the vesting period on the basis of the market price of shares at the time of grant of options and also reversed the proportionate discount on unvesting/lapsing of options at the appropriate time on the basis of the SEBI Guidelines. If this contention is correct, it would mean that the first two stages have been rightly given effect to. But the appellant assessee does not appear to have made any downward adjustment to the amount of discount at the time of exercise of option by the employees with the difference in the market price of the shares at the time of grant of option and price at the time of exercise of option. The argument seems to be that the SEBI Guidelines do not provide for such downward adjustment. It has been argued by the ld. AR that where the provisions of the Act specifically provide for treatment of a particular source of income in a particular manner, then the germane provision should be followed. If, however, there is no specific provision dealing with an issue in the Act, then the accounting principles should be adhered to while determining the total income of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may, there is no weight in the contention of the ld. AR that there is no specific provision in the Act on the ESOP discount. It is axiomatic that the taxation rules are always embodied in the relevant Act, either in a specific or a general manner. These can be specific by making a clear cut provision in respect of deductibility of a particular item of expense or taxation of a particular item of income. General provisions are those which set out the overall principles to govern the deductibility or taxability of unspecified items. For example, the definition of 'income' u/s 2(24) has been given by the Act in an inclusive manner. There have been enshrined clauses (i) to (xvi) dealing with the items specifically listed. However, the provision has been couched in such a way so as to include general items of receipts having character of income, even though not specifically mentioned. Similar is the position regarding deductions. Under the head 'Profits and gains of business or profession', there are sections granting deductions in respect of specific expenses or allowances. Similarly, there is section 37(1), which grants deduction for expenses not specifically set out in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a hypothetical income, which does not materialise.' 11.2.7 It follows that accounting principles have absolutely no role to play in the matter of determination of total income under the Act. If an accounting principle is referred to by the higher judiciary, then there is an underlying presumption that such accounting principle is in conformity with and not in conflict with the taxation principle. The essence of the matter is that taxation principles are to be followed. If an accounting principle is in conformity with the mandate of taxing principle and reference is made to such accounting principle while deciding the issue, it does not mean that the accounting principle has been followed. It simply means that the taxation principle has been followed and the accounting principle, which is in line with such taxation principle, has been simply taken note of. If however, an accounting principle runs counter to the taxation principle, then there is no prize for guess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prescribe accounting treatment only in respect of the period of vesting of the options and the situation arising out of unvested options or vested options lapsing. The very reference by the Chennai Bench of the Tribunal in SSI Limited (supra) to the SEBI Guidelines is indicative of the fact that it dealt with a year during which the options were vesting with the employees and the company claimed discount during the vesting period. The Hon'ble Madras High Court in the case of PVP Ventures Ltd. (supra) has upheld the view taken by the Chennai Bench in the case of S.S.I. Ltd. (supra). The granting of the binding force to the SEBI Guidelines by the Hon'ble Madras High Court should be viewed in the context of the issue before it, which was about the deductibility of discount during one of the vesting years. In the earlier part of this order, we have held that the deductibility of discount during the vesting period, as prescribed under the SEBI Guidelines, matches with the treatment under the mercantile system of accounting. To that extent, we also hold that the SEBI guidelines are applicable in the matter of deduction of discount. Neither there was any issue before the Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into these aspects in quantifying the amount of eligible deduction. a. The assessee-company was a closely held company in the previous year relevant to the assessment year 2003-2004 and as such there was no question of the listing of its shares and having some market price at the time of grant of options. Ordinarily, the amount of discount on premium which is written off over the vesting period represents the market price of the shares listed on the stock exchange on the date of grant of option as reduced by the price at which option is given to the employees. However, presently there is no availability of any market price of such shares on the date of grant of option as the company came to be listed on a stock exchange in a subsequent year. On a pointed query, the ld. AR furnished the details of such claim by showing that it granted 71,510 options with discount of ₹ 909 per option making total discount at ₹ 6.50 crore. He stated that the face value of shares is at ₹ 10 against which the deduction for discounted premium over the vesting period has been claimed at ₹ 909, meaning thereby that the market price of the share on the date of grant of option w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % deduction would be available on the completion of one year from the date of grant of option. The assessee was required to indicate the date of grant of options in respect of which deduction has been claimed in the instant year. Two letters granting options to Shri Murali Krishnan K.N. and Neville Bain have been randomly filed which are dated 2nd April, 2002. If the options are granted on 2nd April, 2002, then 25% of the total option shall vest in the employees at the end of the first year from this date, which date would be 1st April, 2003. As such, the amount would become deductible in the previous year relevant to assessment year 2004-2005 and not 2003-2004. The ld. AR contended that though these letters are dated 2nd April, 2002, but in fact the options were granted on 1st April, 2002. The correct date of grant and vesting needs to be verified at the AO's end. d. The ld. AR has stated that the amount of discount claimed as deduction in the earlier years in respect of unvesting/lapsing options has been reversed at the relevant time. There is no finding either in the assessment or the impugned order in this regard. This fact should also be verified by the AO to ensure t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edings, the AO noted that the assessee company has received dividend income of ₹ 4,78,44,562/- and total investment of ₹ 9,15,68,01,378/- was reflected under the Balance Sheet. The AO noted that the assessee company had not attributed any expenses which have been incurred to carry out the activity of making exempt income bearing investment, whereas, it is accepted fact as per the AO for carrying out any such activity, some kind of expenditure are necessarily to be incurred . 10.1. The assessee company submitted before the AO that the assesee company has not incurred any expenses for earning such exempt income in the form of dividend income. The assessee company has made investment in short term surplus funds in liquid schemes of mutual funds out of own funds and no borrowed funds have been used to make investments. Similarly, assessee company has made investment in subsidiary companies to retain management control of the said subsidiaries not to earn income and the investment have been made out of own funds and no borrowed funds have been used. The AO rejected the contentions of the assessee company and held that the assessee company cannot earn any income from inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indirect expenditure has been incurred in relation to the exempt income. The CIT(A) while restricting the disallowance held that out of the total investments of ₹ 915,68,01,378/- as appearing in Schedule G investment in non 115O dividend foreign subsidiary is of ₹ 21,15,15,974/- and further investment in Series A NCD Ordyn Technology Private Limited, Series B OCD Ordyn Technology Private Limited and Equity Fund Trust is of ₹ 30,02,00,000/- on such investment there is a interest income offered during the year, hence, is not investment relating to exempt income. The CIT(A) also held that there is investment in subsidiaries of ₹ 755,92,38,775/- on which no dividend has been received. With this background the CIT(A) held that Rule 8D is squarely applicable and restricted the addition based upon the following chart and hence the disallowance was restricted to ₹ 39,427,835/-. I. Investment as on 1 April 2007 1,714,503,772 Less: Investment in Debentures, etc yielding taxable income 200,000,000 Less: Investment in shares of Foreign Companies likely to yield taxabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 4,61,37,00,000/- have been made in the subsidiary company M/s India Infoline Investment Services Ltd. as strategic investment in February 2008 out of the proceeds of fresh shares issued by the assessee company in January 2008 which is also reflected in the CIT(A) orders and no borrowed funds whatsoever had been utilized for the purpose of investment. The assessee company submitted that the company has made fresh issue of shares in January 2008 and the proceeds thereof were utilized for making investment in the subsidiary company M/s India Infoline Investment Services Ltd.and hence no interest expenses whatsoever has been incurred for making this investment of ₹ 4,61,37,00,000/- in M/s India Infoline Investment Services Ltd. and hence the CIT(A) has rightly excluded the said investment for the computation of average investment. 13. We have considered the rival submissions and perused the material available on record. We have observed that the assessee company has made investment in the subsidiary company namely M/s India Infoline Investment Services Ltd. of ₹ 4,61,37,00,000/- on 4th February, 2008 out of proceeds of fresh shares issued by the assessee company in Ja ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... research, day-today analysis of market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time. They require huge investment in shares and consequential blocking of funds. It is well-known that capital has cost and that element of cost is represented by interest. Besides, investment decisions are generally taken in the meetings of the Board of Directors/Shareholders for which administrative and management expenses are incurred and in some businesses regulatory approvals are required before setting up the same. There will be regular monitoring of these investments which also may require participation in the meetings of committees, Board of Director and Shareholder meetings. There will definitely be an expenditure incurred towards administrative and management cost etc. towards planning, executing and maintaining these investments. Our view is fortified by the following decisions : i). The observation made by Hon ble Supreme Court in the case of CIT v. Walfort Share Stock Brokers Pvt. Ltd. (2010) 326 ITR 1(SC) defining the scope of Section 14A of the Act incorporated retrospectively w.e.f. 1st April 1962. The relevant observati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. Sections 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. Sections 15 to 59 quantify the total income chargeable to tax. The permissible deductions enumerated in sections 15 to 59 are now to be allowed only with reference to income which is brought under one of the above heads and is chargeable to tax. If an income like dividend income is not a part of the total income, the expenditure/deduction though of the nature specified in sections 15 to 59 but related to the income not forming part of total income could not be allowed against other income includible in the total income for the purpose of chargeability to tax. The theory of apportionment of expenditures between taxable and non-taxable has, in principle, been now widened under section 14A. Reading section 14 in juxtaposition with sections 15 to 59, it is clear that the words expenditure incurred in section 14A refers to expenditure on rent, taxes, salaries, interest, etc. in respect of which allowances are provided for (see sections 30 to 37). ii) The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dividend income and income from mutual funds falling within the ambit of section 10(33) of the Income Tax Act, 1961, as was applicable for the assessment year 2002-03 is not includible in computing the total income of the assessee. Consequently, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to such income which does not form part of the total income under the Act, by virtue of the provisions of section 14A(1); (ii) The payment by a domestic company under section 115O(1) of additional income-tax on profits declared, distributed or paid is a charge on a component of the profits of the company. The company is chargeable to tax on its profits as a distinct taxable entity and it pays tax in discharge of its own liability and not on behalf of or as an agent for its shareholders. In the hands of the shareholder as the recipient of dividend, income by way of dividend does not form part of the total income by virtue of the provisions of section 10(33). Income from mutual funds stands on the same basis; (iii) The provisions of sub-sections (2) and (3) of section 14A of the Income Tax Act 1961, are constitutionally valid; ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y require substantial market research, day-to-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time. They require huge investment in shares and consequential blocking of funds. It is well known that capital has cost and that element of cost is represented by interest. Besides, investment decisions are generally taken in the meetings of the Board of Directors for which administrative expenses are incurred. It is therefore not correct to say that dividend income can be earned by incurring no or nominal expenditure. This aspect of the matter has also received careful attention of Chennai Bench of this Tribunal in Southern Petro Chemical Industries v. Dy. CIT (2005) 3 SOT 157 (Chennai-Trib). After comprehensive consideration of all the relevant aspects of the case including the provisions of law, the Chennai Bench has held that investment decisions are very strategic decisions in which top management is involved and therefore proportionate management expenses are required to be deducted while computing the exempt income from dividend. In Harish Krishnakant Bhatt v. Income Tax Officer (2004) 91 ITD 311 (Ahd.), t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made during the course of the carrying on of business and as is evident from the records, substantial investments had been made by the assessee in earlier years, and during the current year as well the assessee made an investment of ₹ 19 crores. Whether to invest or not to invest and whether to retain the investments or to liquidate the same are very strategic decisions which the management is called upon to take. These are mind-boggling decisions and top management is involved in taking these decisions. This decision making process is very complicated and requires very careful analysis. Moreover, the assessee has to keep track of various dividend incomes declared by the investee companies and also to keep track of the dividend income having been regularly received by the assessee. This activity itself calls for considerable management attention and cannot be left to a junior clerk. The Hon'ble Supreme Court in the case of United General Trust Ltd. (supra), applying the decision oi Hon'ble Supreme Court in the case of Distributors (Baroda) (P) Ltd. v. Union of India (1985) 47 CTR (SC) 349: (1985) 155 ITR 120 (SC), reversed the decision of the Hon'ble Bombay High C ..... X X X X Extracts X X X X X X X X Extracts X X X X
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