TMI Blog2015 (11) TMI 1737X X X X Extracts X X X X X X X X Extracts X X X X ..... ture made under Rule 8D - Held that:- We direct the Assessing Officer to delete the disallowance on account of interest expenditure made under Rule 8D of the Income Tax and as regards the administration expenses, we direct the Assessing Officer to set off the suomotu disallowance made by the assessee on this account. Disallowance claimed in respect of provision towards long-term incentive plan holding the same to be an unascertained liability, observing that the liability has not been computed on a scientific basis - Held that:- The provision on account of incentive plan made by the assessee during the year is an ascertained liability. Further, we see that the Assessing Officer has nowhere objected to the method of quantifying the said provision by the assessee. The ground of appeal raised by the assessee is allowed. Credit of TDS - Held that:- Assessing Officer is directed to allow the credit of TDS amounting to ₹ 58,717/- while computing the income tax liability. Not allowing the relief claimed u/s 90 - Held that:- It is seen that relief of ₹ 2,69,492/- claimed under section 90 by the assessee in its return of income was allowed by the Assessing Officer in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... average expenditure of 1% of the three comparables, viz. Herman Milk Foods, Milk Specialties Ltd. and Mohan Dairies Ltd. In this way, in order passed under section 92CA(3) of the Act, the TPO proposed an adjustment of ₹ 1,26,87,00,171/-. 5. The said adjustment was also proposed by the Assessing Officer in its draft order and on objection raised by the assessee before the DRP, this adjustment was got confirmed. This way and addition of ₹ 1,26,87,00,171/- was made for adjustment on account of arms' length price of the AMP activities. 6. The learned counsel for the assessee brought to our notice the fact that on the similar issue of adjustment on account of AMP expenditure, Special Bench of the Tribunal was constituted in the case of L.G. Electronics India Pvt. Ltd., 140 ITD 41 (Del) (SB), where the assessee also intervened in its case for a preceding assessment year, i.e. assessment year 2007-08. Though the facts of the assessee, being an intervener, were not considered by the Special Bench, the Bench laid down certain criterion to compute the adjustment to be made, holding that the AMP expenditure may result in international transaction. The case of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g after the order of the Special Bench in the case of L.G. Electronics India (P.) Ltd. (supra), as stated by the counsels appearing before us, we are in agreement that since the order of the Hon'ble High Court in the case of Sony Ericsson Mobile Communications India (P.) Ltd. (supra) was not available at the time of the order for assessment years 2007-08 and 2008-09 in case of the assessee, the same cannot be followed as such. 9. Since the issue is now to be decided in the background of the decision of the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India (P.) Ltd. (supra), we have very carefully gone through the said judgment. We would like to quote certain observations made in the said judgment, which are vital to decide the present issue in question. 10. Firstly, at paras 133 and 134 of the said judgment, the Hon'ble High Court has quoted paras 6.36 to 6.38 of the OECD, Transfer Pricing Guidelines on the applicability of TP provisions for AMP activities to limited risk distributors and to full risk distributor : 133. Transfer Pricing Officers have referred to paragraphs 6.36 to 6.39. For the sake of completeness, we would qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on what an independent distributor would obtain in comparable circumstances. In some cases, a distributor may bear extraordinary marketing expenditures beyond what an independent distributor with similar rights might incur for the benefit of its own distribution activities. An independent distributor in such a case might obtain an additional return from the owner of the trademark, perhaps through a decrease in the purchase price of the product or a reduction in royalty rate. 6.39 The other question is how the return attributable to marketing activities can be identified. A marketing intangible may obtain value as a consequence of advertising and other promotional expenditures, which can be important to maintain the value of the trademark. However, it can be difficult to determine what these expenditures have contributed to the success of a product. For instance, it can be difficult to determine what advertising and marketing expenditures have contributed to the production or revenue, and to what degree. It is also possible that a new trademark or one newly introduced into a particular market may have no value or little value in that market and its value may change over the ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pra). 12. In para 124 of the order, the Hon'ble High Court distinguish between functional profile of a limited risk distributor, the finding reads as under : 124. There is a difference between a pure and a simple independent distributor and a distributor with marketing rights. An independent distributor with a full marketing right is a person or an entity legally independent of the manufacturer, who purchases goods from the manufacturer for re-sale on its own accounts. The transaction between the two is a straightforward sale in which the distributor takes all economic risk of product distribution and ultimately gains or makes loss depending upon market and other conditions. The manufacturer is not concerned. In case of a low or no risk distributor and he virtually acts as an agent for the loss and gain is that of the manufacturer. There is no economic risk on distribution of profits. He is, therefore, entitled to fixed remuneration for the self efforts, i.e., relating to the task or function of distribution. Similar will be the position of a low risk distributor with marketing functions, except that the said distributor should be compensated for the marketing, includin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. We have earlier used the term 'plain vanilla distributor'. When we use the words 'plain vanilla distributor' we do not mean plain vanilla situations, but value additions and each party making valuable unique contribution. From the perusal of above, it is quite evident that TNM method is not at all an appropriate method for computing ALP of AMP activities. 14. From the overall reading of the judgment, the proposition laid down by the Hon'ble Court can be summarized in simple terms to the effect that in case of a manufacturer, there are two activities, which are to be segregated, one is prime manufacturing activity and the other relating to AMP. Further, for a manufacturer, TNMM is not an appropriate method. Therefore, in the result, the ALP of the AMP activity has to be computed by using any other suitable method. However, it is to be taken care that if cost plus method is used, the selling expenses are to be excluded from the total AMP expense, which has been held by the Hon'ble High Court elsewhere in this order. This is also one of the observations of the Special Bench in the case of L.G. Electronics India (P.) Ltd. (supra) which has been affirm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the DRP in its order also confirmed the action of the Assessing Officer. 18. The learned counsel for the assessee before us explained that the deduction of closing balance of excise deposit amounting to ₹ 27,12,737/- being balance in PLA as on 31.3.2009 under section 43B of the Act was claimed by the assessee. Correspondingly, an amount of ₹ 32,62,786/- representing the opening balance of excise deposit lying in PLA, which was claimed as deduction in the return of income in the preceding assessment year 2008-09 was added back. The assessee in fact, has offered to tax an amount of ₹ 5,50,049/- as part of its taxable income being decremental difference between the Excise deposits with the Excise Department. Further it was submitted that the issue stands covered in favour of the assessee in its own case by the Special Bench of the Tribunal in assessment year 2001-2002, Dy CIT v. Glaxo Smithkline Consumer Healthcare Ltd. [2007] 107 ITD 343 (Chd.). It was also explained that similar issue has arisen in a number of years preceding the relevant assessment year, whereby the issue has been decided in favour of the assessee in all the years starting from 1998-99 to ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .3.2006. The said sum of ₹ 36,87,481/- represents the excess payment made to the excise authorities, which as per the assessee could be used to offset the payment of excise duty on the final products. The difference in the total balance of two accounts i.e. on 31.3.2007 and 31.3.2006 of ₹ 36,87,481/- was claimed by the assessee as a deduction under the provisions of section 43B of the Act. The present issue raised vide ground No.3 stands covered in favour of the assessee by the order of the Special Bench of the Chandigarh Tribunal in assessee's own case relating to assessment year 2001-02, reported in 107 ITR 343 (Chd)(SB) (supra). The said deduction had been consistently allowed in the case of the assessee i.e. in the preceding years 1998-99 to 2000-01 and thereafter in assessment years 2002-03 to 2006-07. The Tribunal in ITA No.1238/Chd/2010 relating to assessment year 2006-07 - order dated 25.1.2012 vide para 49 allowed the claim of the assessee in turn following the ratio laid down by the Hon'ble Punjab Haryana High Court in CIT v. Raj Sandeeps Ltd. (supra) observing as under: 49. The present issue is covered by the decision of Special Bench in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt and consequent allowance under section 43B of the Act and held as under: A plain reading of s. 43B clarifies that : (a) deduction claimed by the assessee must be otherwise allowable under the other provisions of the Act; (b) the deduction must relate to any sum payable by way of tax, duty, cess or fee; (c) the assessee must have incurred liability in respect of such tax, duty, etc. On fulfilling these conditions, the assessee's claim can be allowed in the year in which actual payment is made, notwithstanding the year in which liability is incurred. The term liability to pay such sum was incurred by the assessee together with the words a sum for which the assessee incurred liability in Expln. 2 underline that payment must relate to the incurred liability to be called 'any sum payable'. In the present case, the assessee had no option, but to keep the account, in respect of each excisable product (evident from the mandate in r. 173G that it shall keep an account-current ). The latter part of the main rule makes it clear beyond any doubt that the assessee has no choice in the obligation, and cannot remove the goods manufactured by it, unless sufficient amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er to allow the claim of expenditure of ₹ 36,87,481/- claimed under the provisions of section 43B of the Act. The ground No.3 raised by the assessee is thus allowed. 43. Following the abovesaid parity of reasoning we direct the Assessing Officer to allow expenditure of ₹ 32,62,786/-. Further the second plea of the assessee in respect of the addition of ₹ 1,70,88,165/- is not warranted. However, the Assessing Officer shall verify the claim of the assessee in this regard and after affording reasonable opportunity of hearing shall work out the consequential effect. The ground No.4 raised by the assessee is allowed and ground No.4.1 is allowed for statistical purposes.' 21. Since no distinguishing facts were brought to our notice during the course of hearing, respectfully following the order of the Coordinate Bench of the Tribunal, we also send back the issue to the file of the Assessing Officer to decide it as per the direction of the I.T.A.T. in earlier year. 22. The ground No.4 raised by the assessee reads as under : 4. That the Assessing Officer erred on facts and in law in disallowing market research expenses of ₹ 10,14,36,000/- under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 i.e. the preceding year, we find the issue has been discussed as under : 31. We find that similar issue arose before the Tribunal in assessment year 2007-08 and the Tribunal vide paras 26 to 29 observed as under: 26. The next set of grounds of appeal are ground Nos.2.14 to 2.16 wherein the assessee has raised the issue that the expenditure relating to market research service charges paid to selling agents and discount on sales are to be excluded from the alleged AMP expenditure as being not relatable to advertisement and marketing expenditure. The claim of the learned A.R. for the assessee is that the said issue is also covered by the decision of Special Bench of the Tribunal (majority view) in M/s L.G. Electronics India (P) Ltd. v. ACIT (supra) vide paras 18.5 and 18.6 of the decision. The relevant paras are as under: 18.5 We do not find any force in the contention of the learned DR made in this regard. The logic in the exercise of finding out the AMP expenses towards creation of marketing intangibles for the foreign AE starts with the expenses which are otherwise in the nature of advertisement, marketing and promotion. If an expenditure itself is not in the natur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 86 29. We find that the Special Bench of the Tribunal (majority view) in M/s L.G. Electronics India (P) Ltd. v. ACIT (supra) held that the expenses in connection with the sales do not lead to brand promotion and thus cannot be brought within the ambit of advertisement, marketing and promotion expenses for determining the cost/value of the international transaction. In view thereof, we direct the Assessing Officer to exclude the expenses incurred by the assessee in connection with the sales totalling ₹ 5500.86 lakh as the same do not fall within the ambit of AMP expenses and hence not to be considered for computing the cost/value of international transaction. The assessee vide ground No.4 had raised the issue against disallowance of consumer market research expenses of ₹ 567.49 lakh. In view of our decision in allowing the claim of the assessee being relatable to sales promotion expenses, this ground of appeal is thus allowed. The ground Nos.2.14 to 2.16 and ground No.4 are thus allowed. 32. The issue before us is identical to the issue arising before the Tribunal in earlier year and following the same parity of reasoning we direct the Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benefits to employees has resulted in double deduction to employees and that the provision has been made by debiting the general reserves. 30. Briefly, the facts of the case are that in the Profit Loss Account the assessee has claimed expenditure of ₹ 5.97 crore on account of medical reimbursement liability for ex-employees. The assessee filed detailed reply together with the actuarial valuation certificate on the basis of which the liability was shown in the Profit Loss Account. The Assessing Officer was of the view that reading of this valuation certificate reveals that the purpose of this valuation is to make incremental provisions in the books of account as required under AS-15 on an ongoing basis. He was of the view that the actuary has calculated/estimated liability of the company towards post-retirement medical assistance to the retired employees over a period of time to comply with the revised AS-15. This provision has been made by debiting the general reserves of company from the point of view of transparent accounting practices for the benefit of the shareholders of the company and its other stakeholders. As per the Assessing Officer, this liability is tot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits/assistance to its employees post-retirement, the assessee was contributing towards the insurance policy taken for the said purpose. The assessee prior to the year under consideration had claimed and was allowed deduction in respect of the premium paid for keeping afloat the medical insurance policy taken for the benefit of employees from year to year. Such medi-claim insurance policies were taken by the assessee in order to provide medical assistance post-retirement to the employees. However, during the year under consideration the Institute of Chartered Accountants revised the Accounting Standard-15 which is reproduced at pages 29 to 31 of the assessment order under which the Institute issued revised accounting standard for accounting the employees' medical benefit post-retirement. As per the assessee, the ICAI made the said Accounting Standard to be followed compulsorily w.e.f. 1.4.2006 i.e. assessment year 2007-08 i.e. the year under appeal. The gist of the revised Accounting Standard-15 is reproduced at pages 29 to 31 of the assessment order. However, the copy of the Accounting Standard-15 is enclosed at pages 836 to 902 of the Paper Book. The objective of the revised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the method of working actuarial benefits is to be laid down under Accounting Standard-15. Further in respect of termination benefits, as per clause 133 it is provided that the termination benefits are to be treated separately from other employee benefits as the event which gave rise to the obligation is the termination rather than employee service. Under clause 134 it is laid down that an enterprise should recognize termination benefits as a liability and an expense when, and only when: (a) The enterprise has a present obligation as a result of a past event; (b) It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) A reliable estimate can be made of the amount of the obligation. 55. Clause 137 of Revised AS-15 provides that termination benefits are recognized as an expenses immediately. Under clause 138 it is provided that where an enterprise recognizes termination benefits, the enterprise may also have to account for a curtailment of retirement benefits or other employee benefits. 56. The assessee admittedly followed the revised Accounting Standard-15. In view thereof the assessee obtaine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ingly made a provision of ₹ 1636.20 lakh on account of employees benefits which included the provisions for post-retirement medical benefits to employees at ₹ 11.09 crore. The abovesaid amount was booked as an expenditure for computation of income in compliance to the mandatory revised Accounting Standard-15. The claim of the assessee in respect of the abovesaid expenditure was as under: (a) The said deduction has been claimed for the first time during the relevant assessment year, in view of compliance of mandatory revised Accounting Standard-15. (b) Since the provision was made by the assessee on the basis of actuarial valuation in respect of an accrued liability for the entitlement earned by the employees while in service, the same was clearly allowable as deduction. (c) Under the mercantile system of accounting, deduction of expenditure is allowable in the year in which liability is quantified and accrued, notwithstanding that the same has to be discharged at a later date. (d) Further, the aforesaid liability incurred towards medical benefits was only an incremental liability after considering/reducing the amount of medical insurance premium paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liability of leave encashment scheme is to be allowed as deduction, observing as under: The law is settled : if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable 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. In Metal Box Company of India Ltd. v. Their Workmen (1969) 73 ITR 53 (SC), the appellant-company estimated its liability under two gratuity schemes framed by the company and the amount of liability was deducted from the gross receipts in the profit and loss account. The company had worked out on an actuarial valuation its estimated liability and made provision for such liability not all at once but spread over a number of years. The practi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion made by the appellant-company for meeting the liability incurred by it under the leave encashment scheme proportionate with the entitlement earned by employees of the company, inclusive of the officers and the staff, subject to the ceiling on accumulation as applicable on the relevant date, is entitled to deduction out of the gross receipts for the accounting year during which the provision is made for the liability. The liability is not a contingent liability. The High Court was not right in taking the view to the contrary. The appeal is allowed. The judgment under appeal is set aside. The question referred by the Tribunal to the High Court is answered in the affirmative, i.e., in favour of the assessee and against the Revenue. 61. In the facts of the present case before us the assessee had recognized and accounted for the post-retirement benefit due to its employees, in terms of the scheme of employment and also in terms of the revised/change in Accounting Standard-15 issued by ICAI which was to be followed during the year, is an allowable deduction in the hands of the assessee. The said claim being based on the valuation of the actuary is both scientific and o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be possible, however, liability cannot be said to be a contingent one. Since the provision has been made on scientific basis and the assessee is following mercantile system of accounting, therefore, in our considered view, the CIT (A) was justified in deleting the addition while deciding ITA No.149/Del/2012. A liability which has already accrued though discharged on a future date would be entitled for deduction. While working out the profit gain of the business the accrued receipts are brought to the tax, similarly, accrued liabilities due would also be entitled for deduction while working out the profit and gain of the business of the year. Computation of taxable profit for a particular year can be worked out only by deducting the actual payments made to the employees and present value of any payment in respect of the services in that particular year to be made in subsequent year. In view of this, we find the order of CIT (A) in ITA No.149/Del/2012 in order. We set aside the order of CIT (A) in ITA No.4921/Del/2010. For doing so, we also get support from the following decisions of Supreme Court and Hon'ble Delhi High Court. The 5.1 Supreme Court in the case of Metal Box Comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the employees of the company, inclusive of the officers and the staff, subject to the ceiling on accumulation as applicable on the relevant date, was entitled to deduction out of the gross receipts for the accounting year during which the provision is made for the liability. The liability is not a contingent liability. Hon'ble Delhi High Court in the case of CIT vs. Insilco Limited - 197 Taxman 55 has held as under :- Similarly it was held by the Hon'ble Delhi High Court in the case of CIT v. Insilco Ltd. that where the provisions were estimated on the basis of actuarial calculations, the deduction claimed by the assessee has to be allowed. The relevant extracts of the decision is reproduced below for ready reference:- 6. In the case of Shree Sajjan Mills Ltd. (supra), the Supreme Court was examining the provision-made by the assessee towards gratuity under the Income-tax Act, 1961. The Supreme Court, after noticing the judgment in Metal Box Company (supra), crystallized its analysis at page 599 and made the following observations:- It would thus be apparent from the analysis aforesaid that the position till the provisions of section 40A(7) were inserted in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant previous year on account of royalty, holding the same to be capital in nature. 37. Briefly, the facts of the case are that the assessee had paid royalty of ₹ 6167.79 lakh to M/s Glaxo Smithkline Asia Pvt. Ltd. for use of trademark 'Horlicks'. The assessee is paying every year royalty @ 5% of the net sales of the products bearing the trademark 'Horlicks' and claiming it as revenue expenditure. On a query raised by the Assessing Officer, the assessee submitted that it has been paying royalty in terms of an agreement with M/s Glaxo Smithkline Asia Pvt. Ltd. dated 7.2.1997, which has always been admitted in all the earlier assessment years treating it as revenue in nature. However, in assessment year 2008-09, the Assessing Officer disallowed the said expenses holding the same to be capital in nature simply on the ground that similar issue has been raised by the Revenue in the case of Swaraj Engines Ltd.309 ITR 443 (SC), wherein the matter has been remitted back to the Punjab Haryana High Court. Upon filing of objection before the DRP in assessment year 2008-09, the DRP had directed the Assessing Officer to redetermine the issue of allowability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee on account of payment of royalty to the GSKAP. Admittedly the assessee was paying the said royalty from year to year as per the terms of agreement dated 7.2.1997. As per the terms of the said agreement the payment was made for the licence/rights to use trademark provided by GSKAP. The copy of the agreement is placed at pages 1 to 17 of the Paper Book and as per clause-12 it is provided as under: 12. In consideration of the right to use the Trademarks granted herein, SBCH shall pay to SB Asia a royalty of upto five (5) per cent of the Net Sales Value of the Contract Products sold under the Trademarks. Net Sales Value for the purpose of this Clause shall mean sales net of returns/allowances and net of excise duty. 54. The issue arising in the present appeal is whether such royalty paid by the assessee is in the nature of capital or revenue expenditure. The Assessing Officer and DRP had considered the allowability of the expenditure in view of the judgment of the Supreme Court in the case of Swaraj Engines Ltd. (supra) wherein the issue was the applicability of section 35AB of the Act in the context of royalty paid as percentage of the net sale price being revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction, the TPO has accepted the arms' length price of the transaction for the year under consideration. Accordingly, we direct the Assessing Officer to allow the claim of royalty paid at ₹ 5556.64 lakh. The ground Nos.6 and 6.1 raised by the assessee are thus allowed.' 42. Since no distinguishing features were brought to our notice, respectfully following the order of the Coordinate Bench of the Tribunal, the claim of the assessee is allowed. The ground of appeal No.6 raised by the assessee is decided in its favour. 43. The ground of appeal NO.7 raised by the assessee reads as under : 7. That the Assessing Officer erred on facts and in law in disallowing interest of ₹ 2,03,16,000 as capital expenditure in terms of proviso to section 36(l)(iii) of the Act alleging the same to have been incurred for investment made in capital work in progress ('CWIP'). 7.1 That the Assessing Officer erred on facts and in law in proceeding on a factually incorrect premise that the appellant had borrowed funds and in holding/observing that the appellant failed to furnish complete details in respect of loan funds. 7.2 Without prejudice, that the Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al assets and thus, no disallowance under section 36(1)(iii) of the Act can be made. Rejecting the submissions of the assessee and making his own calculation, the Assessing Officer proposed to capitalize an amount of ₹ 203.16 lakh. 45. Before the DRP, detailed submissions were made by the assessee. However, rejecting the same and relying on the order of the DRP for assessment year 2008-09, the objection raised by the assessee was rejected by the DRP. In this way, an addition of ₹ 203.16 lakh was made by the Assessing Officer. 46. Before us, the learned counsel for the assessee reiterated the submissions made before the Assessing Officer as well as the DRP. The submissions were basically twofold, firstly, it was submitted that the assessee is a debt free company having no borrowings at all. Therefore, no disallowance on account of interest can be made. Secondly, it was submitted that all the heads of interest expenditure on account of which the said addition has been computed pertain to the regular business of the assessee and has been made on account of business expediency only. Therefore, no such disallowance can be made. 47. Further, it was submitted that sim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1389 crore, net of excise duty. Further the assessee had deposits with bank at ₹ 5750.00 lakh as against ₹ 1650.00 lakh along with reserves and surplus at ₹ 66248.2 lakh. The assessee had shown income of interest earned by it during the year at ₹ 608.44 lakh. The perusal of the interest expenditure incurred by the assessee reflects that the major portion as on interest on deposits from dealers/wholesalers at ₹ 290.06 lakh, which is being paid by the assessee due to the business compulsion. No fresh deposit has been received during the year. Further interest was paid to the bank on cheque discounting at ₹ 83.71 lakh and such interest cannot be said to have been incurred on such borrowed funds which in turn could be presumed to have been parked as investment in CWIP. The balance interest is paid to other at ₹ 3.35 lakh. In the totality of the abovesaid facts and in view of the assessee having earned interest income of ₹ 608.44 lakh as against the interest expenditure of ₹ 474.70 lakh and in the absence of any borrowings made by the assessee for running the business, we find no merit in the disallowance made by the Assessing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 6.38 lakh against the huge income of ₹ 1265.21 lakh. Therefore, not satisfying with the correctness of the expenses so claimed by the assessee, the Assessing Officer invoking the provisions of section 14A of the Act made the disallowance computed under Rule 8D of the Income Tax Rules. In this way, a disallowance of ₹ 162.30 lakh was proposed. 53. Before the DRP, detailed submissions were made by the assessee. However, rejecting all the submissions made by the assessee, the DRP found no fault in the action of the Assessing Officer. Therefore, the Assessing Officer made a disallowance of ₹ 162.30 lakh. 54. The learned counsel for the assessee submitted before us that the assessee had suo motu disallowed expenses of ₹ 6,38,304/- computed on the basis of salary and overheads of certain employees involved in investment activity, administration and other expenses to be attributed to earning of exempt income. The details of suo motu disallowance were also placed in the Paper Book. The submissions were made before us to the effect that Rule 8D of the Income Tax Rules cannot be applied mechanically. Further, it was reiterated that the assessee is a debt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d out all the disallowance in a scientific manner by making disallowance out of salaries and other heads involved in the investment activity and also out of administration and other expenses. The second aspect of the issue was that no borrowed funds were available with the assessee-company. There was no merit in the disallowance under Rule 8D(ii) of Income Tax Rules on account of such interest expenditure. In view of our decision in the paras hereinabove in relation to the disallowance of interest under proviso to section 36(1)(iii) of the Act, we hold that no disallowance of interest expenditure being relatable to the investment in such funds on which the assessee had earned tax free income, is merited. Accordingly, we direct the Assessing Officer to delete the disallowance computed under Rule 8D(ii) of Income Tax Rules. The second aspect of the issue is disallowance under Rule 8D(iii) of Income Tax Rules on account of administrative expenses. Admittedly, the assessee is not maintaining separate accounts in respect of its investment activity and in view thereof the provisions of Rule 8D of Income Tax Rules are squarely applicable and disallowance is to be computed in accordance wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the date of grant of the option provided the employee is in continuous employment till such date. The payment is made to the employee which is equivalent to market price of the shares on the date of exercise of the option. In this background, the assessee had made a provision of ₹ 158.96 lakh for proportionate liability of the relevant year in respect of the amount payable to the employees relatable to services rendered by the employees until the end of the relevant year. The said amount represents the value of options granted during the current year as well as the differential amount on revaluing the options granted in earlier years by applying the share value as well as the exchange rate as at the end of the year. It was submitted that under the mercantile system of accounting deduction of expenditure is allowable in the year in which liability is quantified and accrued notwithstanding that the same has to be discharged at a later date. Since the liability is in respect of subsisting liability of incentive payable to employees in relation to services rendered until the end of the relevant year, which got accrued during such year, the same is allowable as business deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t or ceased to be eligible for the benefit. The provisions reversed during the year are accordingly credited to the Profit Loss Account and duly offered to tax. The computation part was explained with the help of a chart filed. In view of the same, it was submitted that the provision of incentive payable to employees is in respect of services rendered by employees until the end of the relevant year and the same accrued or crystallized into a liability during the relevant year on grant of the option to the employee. Therefore, it is necessary to the assessee to make provision of such accrued or crystallized liability under the mercantile system of accounting mandatorily to be followed. Reliance was heavily placed on the order of the Special Bench of the Tribunal in the case of Biocon Limited Vs. DCIT, 155 TTJ 649 (SB), copy of which was placed before the Bench, wherein it has been held that the said discount was an ascertained liability since the employer incurs obligation to compensate the employee over the vesting period notwithstanding the fact that the exact amount of discount is quantified only at the time of exercising the options. Further, it has been held in the same order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the liability which is ascertained during the year is an allowable expenditure, while contingent liability is not. It is also a settled law that an unascertained liability has to be allowed even if the same is quantified on a future date. The incentive plan so formulated by the assessee is a very common form of scheme formed by many of the companies popularly known as 'ESOP' scheme. The terms and conditions of the investment plan of the assessee are same as in any general scheme of ESOP. The question of liability of this type of provision came before the Bangalore Bench of the Tribunal in the case of Biocon Ltd. (supra). The basic question in that case also was whether the provision made for ESOP during the year is an ascertained liability under section 37(1) of the Act. The Special Bench dealing with the issue held that the discount in relation to options lapsing during the year cannot be held as contingent liability and such expenditure is on account of an ascertained liability in following terms : As regards the contention of the revenue about the contingent liability arising on account of the options lapsing during the vesting period or the employees not choos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on facts and in law in not allowing credit of TDS amounting to ₹ 58,817 while finally computing the income tax liability although the same was allowed as per the assessment order. 62. The Assessing Officer is directed to allow the credit of TDS amounting to ₹ 58,717/- while computing the income tax liability. 63. The ground No.11 raised by the assessee reads as under : 11. That the Assessing Officer erred on facts and in law in not allowing the relief of ₹ 2,69,492 claimed under section 90 of the Act in the return of income although the same was allowed as per the draft order passed under section 143(3)/144C of the Act. 64. It is seen that relief of ₹ 2,69,492/- claimed under section 90 of the Act by the assessee in its return of income was allowed by the Assessing Officer in the draft assessment order passed under section 143(3)/144 of the Act. However, while making the final computation, the said relief was not allowed. We hereby direct the Assessing Officer to grant the said relief to the assessee. 65. The ground No.12 is consequential in nature, hence needs not adjudication. 66. The appeal of the assessee in ITA No.290/Chd/2014 is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer erred on facts and in law in making disallowance of ₹ 2,10,00,000/-, claimed in respect of liability for post-retirement medical benefits to the employees, holding the same to be an unascertained liability. 5.1 That the Assessing Officer erred on facts and in law in observing that the provision has been made by debiting the general reserves, without appreciating that the said provision was made by debiting the profit and loss account. 75. It is relevant to observe here that the issue in this ground is similar to the issue in ground No.5 raised by the assessee in ITA No.290/Chd/2014 and the findings given in ITA No.290/Chd/2014 shall apply to this case also with equal force. 76. The ground of appeal No.6 raised by the assessee reads as under : 6. That the Assessing Officer erred on facts and in law in disallowing expenditure aggregating to ₹ 73.31,80,000. incurred by the appellant during the relevant previous year on account of royalty, holding the same to be capital in nature. 77. The issue in this ground is similar to the issue in ground No.6 raised by the assessee in ITA No.290/Chd/2014 and the findings given in ITA No.290/Ch ..... X X X X Extracts X X X X X X X X Extracts X X X X
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