TMI Blog2020 (9) TMI 141X X X X Extracts X X X X X X X X Extracts X X X X ..... e us. In absence of any such working provided by the assessee, it is not possible for us to quantify the proportionate disallowance out of the interest expenditure incurred for investment in Mutual funds. Hon ble Delhi High Court in the case of Joint Investment Company Private Limited [ 2015 (3) TMI 155 - DELHI HIGH COURT] has restricted the disallowance under section 14A to the extent of the exempted income. Following the finding above CIT(A) has restricted the disallowance u/s 14A of the Act in the case of the assessee to the extent of excepted income. Deemed dividend u/s 2(22)(e) - CIT- A deleted the addition - HELD THAT:- It is undisputed that assessee is not a shareholder in RSL from which it has obtained a loan. The addition of deemed dividend can be made only in the hand of the shareholders and not otherwise. Thus, we do not find any infirmity in the finding of the Ld. CIT(A), where he has followed binding precedent of ANKITECH PVT LTD. OTHERS [ 2011 (5) TMI 325 - DELHI HIGH COURT] . Accordingly, the finding of the Learned CIT(A) on the issue in dispute is upheld. The ground of the appeal of the Revenue is accordingly dismissed. Disallowance of expenses on St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew of the facts, we agree with the finding of the Ld. CIT(A) in disallowing the excess provision made by the assessee. Similarly, we agree with the finding of the Ld. CIT(A) in respect of the provision for medical reimbursement and other allowances. The alternative request of the assessee to delete the addition on the ground that the assessee has offered the same for tax in subsequent assessment year, is also rejected because the issue in dispute is to be decided in accordance with law and not according to the choice of the assessee when he offer for tax. However, the assessee is at liberty to make request for rectification in the subsequent assessment year in accordance with law. The ground No. 1 of the appeal of the Revenue is accordingly dismissed and the additional ground No.4 of the appeal of the assessee is also dismissed. - ITA No.1947/Del./2018 And ITA No.2364/Del./2018 And ITA No.6474/Del./2016 And ITA No.5872/Del./2016 - - - Dated:- 24-8-2020 - Shri O.P. Kant, Accountant Member And Shri Kuldip Singh, Judicial Member For the Assessee : Shri Rohit Jain, Adv., Ms. Somya Jain, CA For the Department : Shri Satish Kr. Gupta, Sr. DR ORDER PER O.P. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts and under circumstances of the case, Ld. CIT(A) has erred in law and facts in deleting the addition of ₹ 10,94,00,000/- on account of deemed dividend ignoring that the assessee company M/s. Religare Securities Ltd. are both the subsidiary of M/s. Religare Enterprises Ltd. and the loan amount of ₹ 10,94,00,000/- received by the assessee company from M/s. Religare Securities Ltd. is to be considered as deemed dividend on substantive basis. 3. The appellant craves to be allowed to add and alter any fresh grounds of appeal and/or delete or amend any of the ground(s) of appeal. 3. Briefly stated facts of the case at that the assessee, a Nonbanking Financial Company (NBFC), was engaged in providing different kind of services including granting of loans, providing corporate advisory services, distribution of mutual funds etc. For the year under consideration, the assessee filed return of income on 30/10/2007 declaring income of ₹ 28,33,97,440/-. The return filed by the assessee was selected for scrutiny assessment and notice under section 143(2) of the Income Tax act, 1961 (in short the Act ) was issued and complied with. The scrutiny assessment under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bservation, the Assessing Officer concluded that assessee has heavily used funds for investment activity but the interest cost was not attributed toward earning exempt income in proportion of the funds utilized for investment. The Assessing Officer recorded his dissatisfaction on the disallowance worked out by the assessee and invoking section 14A of the Act with rule 8D of the Income-tax Rules, 1962 (In short the Rules ) computed disallowance of ₹ 1,80,83,891 as under: 3.4 The assessee contested before the Ld. CIT(A) that total borrowing of the assessee is Rs, 450 crores, whereas the money lent is more than ₹ 561 crores and thus assessee has used his own funds for granting loan and the finding of the Assessing Officer of utilizing borrowed funds for investment was totally incorrect. The assessee submitted that 100% borrowed funds have been utilized for the purpose of the business. The Ld. CIT(A) however restricted the disallowance under section 14A to the extent of exempted income of ₹ 35,09,948/-. As the assessee made sumo disallowance of ₹ 24,24,142/-, he sustained the balance amount of ₹ 10,85,806/-out of the disallowance made by the Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l funds, on which assessee has paid taxes and thus no interest expenditure corresponding to the investment in mutual fund should be disallowed. He submitted that all the investments in mutual funds were made in accordance with the guidelines of the Reserve Bank of India for the purpose of the business of the assessee, and thus disallowance for the interest expenditure should be made towards exempted income. 3.9 We have heard rival submission of the parties on the issue in dispute. The Hon ble Bombay High Court in its decision dated 12/-8/2010 in the case of Godrej Boyce and Manufacturing Co Ltd Vs DCIT , Mumbai and Anr. (2010) 328 ITR 8 (Bom) held the Rule 8D of the Rules to be prospective from assessment year 2008-09. Further, Hon ble Supreme Court recently in Civil Appeal No. 2165 of 2012 in the case of CIT-5, Mumbai Vs M/s Essar Teleholding Ltd approved the decision of the Hon ble Bombay High court in the case of Godrej Boyce and Manufacturing Co .Ltd observing as under: , 48. Applying the principles of statutory interpretation for interpreting retrospectivity of a fiscal statute and looking into the nature and purpose of subsection (2) and subsection (3) of Section 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew has already been upheld by this Court in Civil Appeal No. 2165 of 2012 ( Commissioner of Income Tax, Mumbai v. M/s. Essar Teleholdings Ltd. through its Manager ), pronounced on January 31, 2018, that the said Rule is prospective in nature. On this ground alone, these appeals of the Revenue fail as it is not necessary to go into the other issues. 3.9.2 In view of the above decision on the operation of the Rule 8D of the Rules , the action of the Assessing Officer of invoking Rule 8D of Income-tax Rules in the year under consideration (i.e. assessment year 2007-08), is not justified. 3.10. In the case, while disallowing suo-moto expenses towards earning exempted income , the assessee has not taken interest expenditure towards allocation for earning exempt dividend income on the ground that investment was made out of own funds rather than borrowed funds. This claim of the assessee as far as investment in shares of Karnataka Bank Ltd (KBL) of ₹ 35.35 crores, is concerned is found to be acceptable from the explanation given in the report of the chartered accountant available on page 85-86 of the Paper-book. The relevant part of the said report is reproduced as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Investments Tax Free Investments F 35.35 Others G NIL Net Current Assets: H 162.25 Total I=E+F+G+H 199.27 As would be observed from the above, the year in which investment in Equity Shares of KBL has been made, the incremental borrowings (₹ 86.23 crores) for that year were much lesser then the net increase in the Fixed Assets and Net Current Assets (₹ 163.92 Crores = ₹ 1.67 Crores + ₹ 162.25 Crores). Thus, based on the judicial principles discussed in Para 6 above, it can be said that the borrowings have been fully utilized for the business purposes and not for the purpose of making investments. Therefore, it can be safely inferred that the question of allocating interest u/s 14A of the Act towards investments in the shares of KBL does not arise. In fact, the internal accrual during the said year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n dispute are that the assessee has taken a loan of ₹ 10,94,00,000/- from M/s. Religare Securities Ltd. (RSL), which is subsidiary of M/s Religare enterprises Ltd (REL). The REL holds 2,71,42,200 shares in RSL out of total shares of 27142800. The assessee RFL is also subsidiary of REL and 8,74,94,400 shares of the assessee out of total shares of 87500000, are held by REL. The Assessing Officer held that money lending is not the business of the RSL, and therefore the loan received by the assessee from RSL, ( a subsidiary of REL having share holding more than 90%) falls under the definition of the deemed dividend in terms of section 2(22)(e ) of the Act. The Ld. CIT(A) deleted the addition. 4.2 We have heard rival submission of the parties on the issue in dispute and perused the relevant metal on record. The Ld. CIT(A) has deleted the addition observing as under: 13.3 I have examined the facts at hand. I have studies the appellant s submissions. It has been established that the appellant is not a share holder in M/s. Religare Securities Ltd., from whom it had obtained a loan. In this connection, I place reliance upon order of Hon ble Delhi High Court in the case of CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tial amount was, thus, in the nature of employee benefit allowable under section 37(1) of the Income Tax Act, 1961 ( the Act ). 1.3 Without prejudice, the CIT(A) erred on facts and in law in not allowing deduction of the aforesaid amount of loan written off as loss incidental to business under section 28 of the Act. 2. That the CIT(A) erred on facts and in law in upholding the disallowance of ₹ 18,60,898 on account of difference between the sale price of AR and the exercise price of SAR (prefixed at ₹ 140 per SAR) paid to the employees of the appellant, holding the same to be capital expenditure incurred in relation to issue of shares of employees. 2.1 That the CIT(A) erred on facts and in law in not appreciating that the above differential amount of ₹ 18,60,898/- was in the nature of employee compensation allowable as deduction under Section 37(1) of the Act. 7. The grounds raised by the Revenue in ITA No. 5872/del/2016 are reproduced as under: 1. That on facts and circumstances of the case, the Ld. CIT(A) has erred in restricting the addition/disallowance of ₹ 1,12,82,534/- to ₹ 27,90,535/- as the Income Tax Act does not allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10-11, thus, resulting in double taxation of the said amount. 8.1 We have heard submission of the parties on the admission of the additional ground. We find that the additional grounds raised by the assessee being legal in nature and not requiring investigation of the fresh facts, following the settled legal position in view of the decision of the Hon ble Supreme Court in the case of NTPC Ltd versus CIT (supra), we admit the additional ground raised by the assessee. 8.2 The brief facts of the case are that the assessee filed return of income on 29/09/2009 declaring total income of ₹ 71,34,32,349/-. The assessment under section 143(3) of the Act was completed after making certain additions/disallowances to the returned income. 8.3 On further appeal, the Ld. CIT(A) allowed the appeal partly. Aggrieved, both the assessee and the Revenue are in appeal before the Tribunal raising the grounds along with additional grounds reproduced as above. 9. The ground No.1 to 2.1 of the appeal of the assessee relate to disallowance of expenses on Stock Appreciation Right (SAR) written off. 9.1 Brief facts qua the issue in dispute are that Religare enterprises Ltd (REL), th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all the other rules and financial-planning considerations are similar to those of stock options. In the instant case the total number of SAR that were vested and exercised is 10614 and booked a loss of ₹ 50,29,087/-. The assessee has shown an amountof ₹ 18,60,898/- as SAR compensation paid and an amount of ₹ 20,00,369/- as Advance written off. It is this amount of ₹ 50,29,087/- which the assessee has claimed as a deduction in the computation of income treating it as a loss incidental to the business. It is a case where the assessee has invested a particular amount under the SAR through a trust. This is also a case where unrecoverable advance has been treated as a business loss. In fact it is a capital loss as capital loss is commonly understood to be the difference between the purchase price of an asset and the price that the investor ultimately sells that same asset. In instance when the sale price is less than the purchase price, the investor realizes a negative return in investment. In this case, the assessee has held the amount as investment. Thus, going by the presentation of the accounts and the balance sheet given by the assessee itself the shares in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. The remaining addition of ₹ 27,89,224/- has been treated as withdrawn considering the following submissions made by the Ld. AR: While passing the assessment order the AO has disallowed a sum of ₹ 78,18,311 being the SAR expenses claimed as a deduction by the Appellant. Vide order dated November 6, 2016 passed under Section 154 of the Act the AO has rectified the said disallowance by restricting it to ₹ 50,29,087. The copy of the rectification order has been filed with your office vide our letter dated November 23, 2015 and letter dated June 17, 2016. Therefore, the ground of appeal no. 6 has been withdrawn by the appellant. 9.7 We have perused the addition made by the Assessing Officer. The Assessing Officer in para 3 of the assessment order has mentioned that the total number of SAR that were vested and exercised was 10614 and booked loss of ₹ 50,29,087/-. According to the Assessing officer this amount included amount of ₹ 18,60,898 as SAR compensation paid to employees and ₹ 20,00,369/- as advance written off. The Assessing Officer disallowed this deduction of ₹ 50,29,087/-. Further, he made disallowance for provision for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the disallowance made by the Ld. and assessing officer of ₹ 1147623/ and enhancement made to that taxable income of the appellant by Ld. 1 st appellate authority of ₹ 2789501/ is held to be erroneous and therefore set aside. In the result the appeal of the assessee for AY 2008-09 is allowed. 4.4 Thus, respectfully following the above findings in the above order, grounds no. 1 to 2.2 of the appeal are allowed. 9.9 Further, the Hon ble Delhi High Court in the case of Religare Securities Limited (supra) has held as under: The Revenue s appeal under Section 260A of the Income Tax Act alleges that the Income Tax Appellate Tribunal (ITAT) erred in allowing T2,09,63,780/- as a capital expense. That amount was the quantum of discount given in respect of the SAR (Stock Appreciation Rights) - similar to Employee Stock Option (ESO) offered by the employer to the work force. The ITAT followed its previous decision and also cited a judgment of this Court in Commissioner of Income Tax vs. Lemon Tree Hotels Ltd, (ITA 107/2015 decided on 18.08.2015). The ITAT also relied upon the judgment of Madras High Court in Commissioner of Income Tax-III, Chennai vs. PVP Ventures ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notional or contingent as had been submitted by the Revenue. Pointing out to the Employees Stock Option Plan, the Tribunal in its order stated that it was a benefit conferred on the employee. So far as the company is concerned, once the option was given and exercised by the employee, the liability in this behalf got ascertained. This was recognised by SEBI and the entire Employees Stock Option Plan was governed by guidelines issued by SEBI. On the facts thus found, the Tribunal held that it was not a case of contingent liability depending on the various factors on which the assessee had no control. The expenditure in this behalf was an ascertained liability, thus the expenditure incurred being on lines of the SEBI guidelines, there could be no interference in the relief granted by the Assessing Authority for the expenditure arising on account of Employees Stock Option Plan. This expenditure incurred as per SEBI guidelines and granted by the Officer could not be considered as erroneous one calling for exercise of jurisdiction under Section 263 of the Act. In view of the above reasoning, the Court is of the opinion that there is no infirmity with the approach or order of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Particulars 31.03.2009 31.03.2008 A.1 Investment in shares and mutual fund (shown as investment) 881,716,571 2,088,379,878.00 A. Total Investment 881,716,571 2,088,379,878 B. Average Investment 1,485,048,224.50 C. Total Assets 21,780,570,613 21,210,852,105.00 D. Average Assets 21,495,711,359.00 E. Indirect Interest Costs 1,622,542,721.00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 12.43%, It has attributed direct interest costs of ₹ 578,392 under Rule 8D(2)(i) to the said investment held by it for the period April 1-2, 2008. Copy of the disallowance computed by the Appellant under Section 14A for AY 2008-09 detailing the calculation of the average rate of interest of borrowing for the period March 30,2008 to April 2, 2008 at 12.43% as furnished before the AO duly accepted by him vide order dated December 29, 2010 is enclosed as Annexture(s) With regard to the dividend earned on other mutual fund units which bought and liquidated in December 2008, the interest cost attributable to such dividend income will be ₹ 22,253,467/-. Considering that the average rate of borrowing for the quarter ended December 2008 was 15.04%. Copy of the scrip wise details of mutual funds units purchased and redeemed by the Appellant dividend earned thereon and corresponding interest cost attributed by the Appellant @ 15.04% to the value of such units over the period of holding is enclosed as Annextures 15 to the submission dated October 25, 2013. 10.6 The assessee also pointed out before the Ld. CIT(A) as why the computation of disallowance of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. 10.12 The learned Counsel further submitted that the Assessing Officer has not recorded any dissatisfaction to the claim of the assessee. He submitted that Assessing Officer has wrongly alleged that the assessee had not attributed any administrative expenses towards earning of the exempt income, without appreciating that the assessee suo-motu attributed and disallowed 0.5% of the average investment for earning the exempt income in the return of income. The learned Counsel submitted that the Assessing Officer has erred in mechanically applying rule 8D of the Rules, and on this ground alone the addition made by the Assessing Officer and partly confirmed by the Learned CIT(A) should be deleted 10.13 Without prejudice to the above arguments, the learned Counsel further submitted that the computation under Rule 8D of the Rules by the Assessing Officer is erroneous due to attributing interest expenditure towards assets yielding exempt income. According to him the assessee has made investment out of own funds and no borrowed funds have been utilized because the RBI circular prohibited utilization of the borrowed funds for investment in shares/securities. He also submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oint Investment Private Limited (supra) to the amount of the exempt income of ₹ 2,77,17,070/-. The relevant part of the impugned order of the learned CIT(A) is reproduced as under: 4.6 I have carefully considered the written submissions of the Ld. AR and Assessment order passed by the AO, which reveals that AO has made the disallowance under Section 14A r.w.r. 8D of the IT Rules taking the figures of average investment (₹ 1,485,048,224.50/-), average assets (₹ 21,495,711,359/-) and indirect interest cost (₹ 1,622,542,721/-). On the basis of above figures, total disallowance under section 14A was computed at ₹ 119,519,888/- and after giving benefit of suo-motu disallowance made by the appellant of ₹ 49,25,241/-, resultant disallowance was made to the extent of ₹ 11,45,94,648/-. 4.6.1 From the assessment order passed, it is gathered that addition u/s 14A was based since no separate bank accounts were found to be maintained by the appellant in respect of investments and other activities, in other words, common funds were found to be used by the appellant for both the above activities. Further, it was held by the AO that while compute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15, has held that disallowance u/s 14A cannot exceed the amount of exempt income. It is evident from the above judicial pronouncements that the rationale behind these judgments are that, the amount of disallowance should not exceed the exempt income. 4.6.6 Therefore, keeping in view the ration of above pronouncements, it is held that disallowance u/s 14A read with Rule 8D can be invoked only in respect of exempt income and disallowance under this section cannot exceed the exempt income. Since appellant has received dividend income of ₹ 2,77,17,070/- only, the disallowance under Section 14A is restricted to this amount only as against the disallowance of ₹ 11,45,94,648/- computed by the AO. Hence, appellant gets relief of ₹ 8,68,77,578/-. 10.18 Before the Ld AO, the assessee made disallowance according to its own method of disallowance , which was not accepted by the Ld AO and invoked the Rule 8D of the Rules. In our opinion, when he rejected the disallowance computed by the assessee, that in itself is dissatisfaction with the claim of the assessee of disallowance. It is not necessary that such dissatisfaction has to be recorded in explicit words, when th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer disallowed the said provision on the ground that same are not allowable. The Assessing Officer while rectification order dated 06/11/2015 deleted the disallowance made on account of provision for bonus thus reducing the disallowance to ₹ 1,12,82,534/-. On further appeal, the Ld. CIT(A) restricted the disallowance to ₹ 27,90,535/-observing that deduction is allowable to the extent provision have been settled/payments have been made against the said provisions subsequently. 11.2 Before us, the learned Counsel of the assessee submitted that the Assessing Officer in disallowing the said provision and partly sustained by the Ld. CIT(A) was bad in law and liable to be deleted the learned Counsel submitted the detail of the provisions and payment/written back in subsequent years as under: S.No. Particulars Amount (in Rs.) Paid in AY 2010-11 Reversed in AY 2010-11 Remarks 1. Bonus 51,01,156 51,01,156 Deleted by AO vide rectification order dated 06.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly and regularly been following accrual system of accounting for the purpose of the keeping books of accounts, which has always been accepted by the Revenue. 11.5 The learned Counsel further submitted that under the Mercantile system of accounting, the expenses are allowable in the year in which the same are incurred and liability thereof accrues, notwithstanding that the liability has to be discharged at later date. According to the learned Counsel, an accrued expenditure shall be allowable deduction if the liability thereof can be reasonably estimated and difficulty in exact estimation of the liability does not categorize the same as contingent liability. 11.6 The learned Counsel submitted that above provisions are not a future or a contingent liability. The liability towards personnel expenses incurred as well as services rendered by the employees and therefore, it is a liability in presenting and definitely in the accounting year. 11.7 The learned Counsel in support of the contention relied on the decision of the Hon ble Supreme Court in the case of Bharat Earth movers Vs CIT 245 ITR 428. 11.8 The Counsel alternatively submitted that if the disallowance made by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tually amount paid to the employees was only of the ₹ 24,24,401/-. In view of the facts, we agree with the finding of the Ld. CIT(A) in disallowing the excess provision made by the assessee. Similarly, we agree with the finding of the Ld. CIT(A) in respect of the provision for medical reimbursement and other allowances. The alternative request of the assesseeto delete the addition of ₹ 27,90,535/- on the ground that the assessee has offered the same for tax in subsequent assessment year, is also rejected because the issue in dispute is to be decided in accordance with law and not according to the choice of the assessee when he offer for tax. However, the assessee is at liberty to make request for rectification in the subsequent assessment year in accordance with law. The ground No. 1 of the appeal of the Revenue is accordingly dismissed and the additional ground No.4 of the appeal of the assessee is also dismissed. 12. In the result, for assessment year 2007-08 the appeal of the assessee as well as Revenue are dismissed. For assessment year 2009-10, the appeal of the assessee is allowed partly, whereas the appeal of Revenue is dismissed. Order pronounced in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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