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TMI Blog2019 (12) TMI 1457X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,228/- after, inter alia, making the following additions/disallowances: i) Disallowance of stock appreciation rights Rs. 2,04,87,736/- ii) Disallowance of bad debts written off Rs. 85,38,920/- iii) Disallowance u/s 14A of the Act Rs. 1,19,79,827/- iv) Merchant banking licence transferred Rs. 6,80,61,425/- v) Disallowance of provision for expenses Rs. 79,99,216/- vi) Disallowance of depreciation on UPS Rs. 43,17,187/- vii) Disallowance of depreciation on other assets Rs. 3,47,98,353/- 2.1 Aggrieved, the assessee carried the matter before the Ld. First appellate authority challenging these additions and disallowances. However, the appeal of the assessee was dismissed and now the assessee is before the Tribunal challenging the order of the Ld. CIT (A) and has raised the following grounds of appeal:- 1. "That the Commissioner of Income tax (Appeals) erred on facts and in law in sustaining the disallowance of Rs. 2,04,87,736 (as against correct amount of Rs. 1,69,63,702) made by the assessing officer on account of the difference between purchase price of Stock Appreciation Right ('SAR') and the sale price of such SAR at the time of exercise by the employ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 36(l)(vii) of the Act on account of bad debts written off on the ground that corresponding debt was not accounted as income in the books of accounts earlier. 3.1 That the Commissioner of Income tax (Appeals) erred on facts and in law in not appreciating that necessary conditions stipulated under section 36(1)(vii) read with section 36(2) of the Act stood satisfied inasmuch as part of the above debts written off comprised of brokerage income and interest on delayed payment which were duly accounted as income by the appellant earlier ill the books of accounts. 3.2 Without prejudice, and in the alternative, the Commissioner of Income tax (Appeals) erred on facts and in law in not allowing deduction of the above bad debts as loss incidental to business under section 28 of the Act. 4. That the Commissioner of Income tax (Appeals) erred on facts and in law in upholding disallowance of Rs. 1,19,79,827 made by the assessing officer under section 14A of the Act. 4.1 That the Commissioner of Income tax (Appeals) erred on facts and in law in ignoring the disallowance suo-moto offered by the appellant under section 14A of the Act in the revised computation of income f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar. 7. That the Commissioner of Income tax (Appeals) erred on facts and in law in upholding the action of the assessing officer in allowing depreciation on UPS @ 15% as against depreciation @ 60% claimed by the appellant. 8. That the Commissioner of Income tax (Appeals) erred on facts and in upholding disallowance of depreciation to the extent of Rs. 3,47,15,985 holding that the appellant failed to produce necessary documentary evidences in support of addition to fixed assets without appreciating that the appellant was not provided sufficient time to furnish the same." 3.0 The Ld. Authorised Representative (AR) submitted that the issue of stock appreciation rights is squarely covered in favour of the assesssee by the order of the Tribunal in assessee's own case and in the case of the other group companies. It was submitted that this issue was decided in favour of the assessee by the ITAT Delhi Bench in assessee's own case for Assessment Year (AY) 2010-11 in ITA No. 4644/Del/2015 vide order dated 9.10.2017. It was submitted that subsequently this order of ITAT Delhi Bench in assessee's own case was affirmed by the Hon'ble Delhi High Court in the case of PCIT vs. Religare Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further submitted that the Ld. CIT(A) had upheld the action of the AO by holding that no evidences had been produced to demonstrate that the entire debt, including the principal amount , had been taken in to consideration by the assessee while computing its income in the relevant or earlier assessment years. The Ld. AR argued that the Ld. CIT (A) as well as the AO had erred in making disallowance on this account for the simple reason that post amendment to section 36(1)(vii) of the Act w.e.f. 1.4.1989, deduction for bad debt has to be allowed in the year in which it has been written off in the books of accounts and, thus, since the same has been done, the same could not be disallowed. It was further submitted that another condition essential for writing off of bad debt is that the debt or part thereof should have been taken into account while computing the income of the assessee in the previous year or earlier years and this too had been done because the debt comprises of brokerage income and interest on delayed payments which had, undisputedly, been taken into account while computing the income of the assessee. It was submitted that, thus, the condition stipulated in section 36(1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heet as on 31.3.2008, the Ld. AR submitted that as on that date the assessee had its own funds amounting to Rs. 171.77 crores which included share capital of Rs. 28.19 crores and reserves and surplus of 143.57 crores. The Ld. AR, referring to various judicial precedents, submitted that it was settled law that interest expenditure cannot be disallowed u/s 14A where the assessee had sufficient surplus funds and there was no finding by the AO of any direct nexus of borrowed funds with the investments. 3.4 In the alternate, it was submitted that it has also been consistently held by the various Hon'ble Courts that for the purpose of computing interest disallowance, only net interest expenses are to be considered. It was submitted that in the present case, the assessee had incurred interest expenditure amounting to Rs. 73,64,48,184/- whereas the interest income earned during the year amounting to Rs. 1,55,40,60,732/- thereby earning net positive interest income and, thus, no interest expenditure could be disallowed u/s 14A of the Act. The Ld. AR submitted that as regards the disallowance on account of administrative expenses, no part of expenditure debited to profit and loss account wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... approval dated 21.1.2008. It was submitted that, undisputedly, no consideration was received or accrued as a result of such transfer of registration by the assessee but the lower authorities made the impugned addition on the ground that since the licence was transferred to a sister concern without any consideration, the same was not at arm's length price. It was submitted that the AO had computed the market value of the registration certificate on the basis of the income earned by the assessee from merchant banking business during the year consideration and multiplying the same by 5. The Ld. AR submitted that this licence was a capital asset which had been transferred pursuant to an application made by the assessee to SEBI and no consideration was received for this transfer. It was submitted that since it was a capital asset, no notional income could have been brought to tax. It was submitted that in absence of any consideration having been received by the assessee, there was no taxable income in the hands of the assessee. It was submitted that this notional amount had neither been earned nor received nor is receivable by the assessee and capital gains, if at all, could be brought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not a part of computer and peripherals but was plant and machinery eligible for depreciation @ 15%. The Ld. AR submitted that it is settled judicial precedent that UPS is an essential part of computer system and computer cannot function in isolation without basic computer accessories and peripherals like switches, routers, cables, etc. which form an integral part of the computer system. It was submitted that numerous courts have held that depreciation should be allowed @ 60% on UPS. A list of such cases was cited before us. 3.8 With respect to ground No. 8 pertaining to disallowance of depreciation on fixed assets amounting to Rs. 3,47,15,985/- it was submitted that during the year under consideration, the assessee had purchased fixed assets amounting to Rs. 47,43,70,325/- which was duly recorded in the audited financial statements and the tax audit report and during the course of scrutiny proceedings the assessee had submitted invoices pertaining to purchase of fixed assets amounting to Rs. 28,87,07,545/- before the AO for verification. It was submitted that AO, however, had disallowed depreciation amounting to Rs. 3,47,15,985/- on the ground that invoices amounting to Rs. 35 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rather it resulted into short receipt of share premium which the assessee was otherwise entitled to. Though the guidelines of the SEBI required the assessee to account for short receipt of share premium as employee's compensation expenses, for claiming such expenses as allowable, the assessee had to qualify that expenses were incurred and the same were wholly and exclusively for the purpose of business. By issuing shares at less than market price, the assessee could not be said to have incurred any expenditure, rather it amounted to short receipt of share premium. The receipt of share premium was not taxable and, hence, any short receipt of such premium would only be a notional loss and not actual loss for which no liability was incurred. The SEBI guidelines are relevant for the purpose of accounting but are not conclusive for the purpose of allowing the same as an expenditure. In a case where the assessee contracts for sale of goods say at Rs. 100 per piece as against market price of Rs. 150 per piece, whether the loss of Rs. 50 can be said to be allowable where the assessee accounts for only Rs. 100 as sales and not at Rs. 150. In such a situation, the loss will be only a not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the said shares during the lock-in period. During the said period, the shares had no realisable value. Hence, there was no cash inflow to the employees on account of mere exercise of options. On the date when the options were exercised, it was not possible for the employees to foresee the future market value of the shares. Therefore, the benefit, if any, which arose on the date when the option stood exercised was only a notional benefit whose value was. unascertainable and, the department had erred in treating the amount being the difference in the market value of shares on the date of exercise of option and the total amount 'paid' by the employees consequent upon exercise of the said options as perquisite value. [Para I I] B. Ground no. 4, 4.1, 4.2 & 4.3 -In relation to these grounds Revenue wants to rely on the following decisions may kindly be considered in respect of these grounds: Written Submission by Revenue with regard to Section 14A of I.T: Act with reference to the judgment of Hon'ble Supreme Court in the case of Maxopp Investment Ltd. Vs CIT. New Delhi [2018] 91 taxmann.com 154 (SC) order dated 12.02.2018- "Submission on Section 14AA. A. Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar year's income, for disallowance to be triggered. Also, section 14A of the Act does not use the word "income of the year" but "income under the Act". This also indicates that for invoking disallowance under section 14A, it is not material that assessee should have earned such exempt income during the financial year under consideration. 5. The above position is further substantiated by the language used in Rule 8D(2(ii) & 8D(2)(iii) of I.T. Rules . 6. Thus, in light of above, Central Board of Direct Taxes, in exercise of its powers under section 119 of the Act hereby clarifies that Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income." B. The Hon'ble Supreme Court, in the judgment in the case of Maxopp Investment Ltd. reported in [2018] 91 taxmann.com 154 held vide order dated 12.02.2018 as follows: (i) Only that expenditure which is in relation to earning dividends can be disallowed under section 14A and rule 8D. (ii) The dominant purpose for which investment into shares is made by assessee may not be relevant as section 14A applies irrespective of whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort Share & Stock Brokers (P.) Ltd. [2010] 192 Taxman 211/326 ITR 1 (SC), holding as under: "The insertion of section 14A with retrospective effect is the serious attempt on the part of Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (see Circular No. 14 of 2001 dated November 22, 2001). In other words, section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. "The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the plea urged on behalf of the Assessee." (iv) The expenditure is incurred to produce or generate or in anticipation of, income, whether taxable or non-taxable. In fact, the classification as to tax status (i.e., taxable or nontaxable) has nothing to do with the income generating process; an income being, as a matter of fiscal incentive, being granted tax exempt status under the Act, for the time being. The fact of having incurred expenditure for earning income - tax-exempt (or non-exempt), which is largely a question of fact, would thus remain, and not undergo any change, irrespective of whether it has resulted in any income (whether tax-exempt or nonexempt). The principle is well-settled, representing a fundamental concept of taxation, i.e., the allowability (or otherwise) of an expenditure would not depend upon whether it has in fact resulted in an income, i.e., positive income, which is in any case a matter subsequent, and that the mere fact that expenditure stands incurred for the purpose is sufficient for its admissibility, as explained by the Apex Court in CfT v. Rajendra Prasad Moody [1978] 1151TR 519 (SC). The Apex Court was in that case examining the true interpret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Section 14A of the Act, by not permitting deduction of the expenditure incurred in relation to income, which does not form part of total income, is to ensure that the assessee does not get double benefit. Once a particular income itself is not to be included in the total income and is exempted from tax, there is no reasonable basis for giving benefit of deduction of the expenditure incurred in earning such an income. For example, income in the form of dividend earned on shares held in a company is not taxable. If a person takes interest bearing loan from the Bank and invests that loan in shares/stocks, dividend earned therefrom is not taxable. Normally, interest paid on the loan would be expenditure incurred for earning dividend income. Such an interest would not be allowed as deduction as it is an expenditure incurred in relation to dividend income which itself is spared from tax net. There is no quarrel upto this extent. " The Hon'ble Supreme Court, in the judgment in the case of Maxopp Investment Ltd. reported in [2018] 91 taxmann.com 154 (SC), has also affirmed the view that the dominant purpose for which investment into shares is made by assessee may not be relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases the main purpose for investing in shares was to gain control over the investee company. Other cases are those where the shares of investee company were held by the assessees as stock-intrade (i.e. as a business activity) and not as investment to earn dividends. In this context, it is to be examined as to whether the expenditure was incurred, in respective scenarios, in relation to the dividend income or not. "34. Having clarified the aforesaid position, the first and foremost issue that falls for consideration is as to whether the dominant purpose test, which is pressed into service by the assessees would apply while interpreting Section 14A of the Act or we have to go by the theory of apportionment. We are of the opinion that the dominant purpose for which the investment into shares is made by an assessee may not be relevant. No doubt, the assessee like Maxopp Investment Limited may have made the investment in order to gain control of the investee company. However, that does not appear to be a relevant factor in determining the issue at hand. Fact remains that such dividend income is non-taxable. In this scenario, if expenditure is incurred on earning the dividend income, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill, 2001. We, thus, agree with the view taken by the Delhi High Court, and are not inclined to accept the opinion of Punjab & Haryana High Court which went by dominant purpose theory. The aforesaid reasoning would be applicable in cases where shares are held as investment in the investee company, may be for the purpose of having controlling interest therein. On that reasoning, appeals of Maxopp Investment Limited as well as similar cases where shares were purchased by the assessees to have controlling interest in the investee companies have to fail and are, therefore, dismissed. 36. There is yet another aspect which still needs to be looked into. What happens when the shares are held as 'stock-intrade' and not as 'investment', particularly, by the banks? On this specific aspect, CBDT has issued circular No. 18/2015 dated November 02, 2015. 37. This Circular has already been reproduced in Para 19 above. This Circular takes note of the judgment of this Court in Nawanshahar case wherein it is held that investments made by a banking concern are part of the business or banking. Therefore, the income arises from such investments is attributable to business of banki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However, by virtue of Section 10 (34) of the Act, this dividend income is not to be included in the total income and is exempt from tax. This triggers the applicability of Section 14A of the Act which is based on the theory of apportionment of expenditure between taxable and non-taxable income as held in Walfort Share & Stock Brokers (P.) Ltd. case~ Therefore, to that extent, depending upon the facts of each case, the expenditure incurred in acquiring those shares will have to be apportioned." "40. We note from the facts in the State Bank of Patiala cases that the AO, while passing the assessment order, had already restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 80 of the Rules and holding that section 14A of the Act would be applicable. In spite of this exercise of apportionment of expenditure carried out by the AO, CIT(A) disallowed the entire deduction of expenditure. That view of the CIT(A) was clearly untenable and rightly set aside by the ITA T. Therefore, on facts, the Punjab and Haryana High Court has arrived at a correct conclusion by affirming the view of the ITA T, though we are not subscribing to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O on account of the difference between purchase price of stock appreciation rights and the sale price of such right at the time of exercise by the employees by holding to be the same a capital loss not allowable as business deduction. We note that this issue was considered on an earlier occasion by the ITAT Delhi Bench in assessee's own case for assessment year 2010-11 in ITA No. 4644/Del/2015 wherein, vide order dated 9.1.2017, the assessee's appeal was allowed on identical facts. The relevant observations/findings of the Tribunal in assessment year 2010-11 are contained in paragraph 10 of the said order and the same is reproduced herein for a ready reference. "10. ... carefully considered the rival contention and also perused the order of the lower authorities. We have also perused the scheme of stock appreciation Right of REL group companies in the identical circumstances. With respect to one of the group companies, Religare commodities Ltd. for assessment year 2008-09 identical issue arose before the coordinate bench, which decided this issue in ITA No. 2283/Del/2013 by order dated 4.1.2017 wherein relying upon the decision of the special bench in 144 ITD 21 claim of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he debt should have been taken in computation of income in this year or earlier assessment years but the same is not evidenced from records. Section 36(1)(vii) read with section 36(2) also provides that the debt or part thereof should be taken account while computing the income of the assessee for the relevant previous year or an earlier year if the writing off of a debt is to be treated as a valid deduction. It has been submitted by the Ld. AR that the debt consists of amount recoverable towards the principal value of securities, brokerage charges for purchase or sale of securities and interest, if any, for delay in making the payment for the amount due. It is assessee's contention that the part of debt comprising of brokerage charges and interest on delayed payments has already been taken into account while computing the income of the assessee. Apparently, this fact has not been examined by either of the lower authorities and they have proceeded on a presumption that part of this debt has not been taken into account for computing the income. It is settled law that even if part of the debt has been considered as an income, the condition laid down in section 36(2) of the Act would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xempt u/s 10(34) of the Act. However, the assessee had made a suo moto disallowance of Rs. 1,82,616/- u/s 14A of the Act but the AO, after applying the provisions of Rule 8D of the Income Tax Rules, 1962, computed the disallowance at Rs. 1,21,62,443/- by making disallowance on account of interest expenditure as well as 0.5% of average value of investments. The main thrust of the assessee's arguments before us is that the disallowance u/s 14A of the Act cannot exceed the exempt income. The Hon'ble Delhi High Court had an occasion to consider the applicability of section 14A in the case of Pr. CIT vs. M/s. Caraf Builders & Constructions Pvt. Ltd. in ITA No. 725 of 2018 (Del) and, vide judgment dated 13th November, 2018, after referring to numerous judgements of the Hon'ble Delhi High Court as well as the Hon'ble Apex Court, the Hon'ble Delhi High Court reiterated the view that the disallowance u/s 14A cannot exceed the exempt income. The observations of the Hon'ble Delhi High Court are contained in Para 25 of the said judgment and the same is reproduced here in under: "25. Total exempt income earned by the respondent assessee in this year was Rs. 19 lakhs. In these circumstances, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Incl.,ITA No. 970/2008, decided on 02.04.2014, made reference to two earlier decisions of the same Court in CIT Vs. Hero Cycles Limited, [2010] 323 ITR 518 and CIT Vs. Winsome Textile Industries Limited, [2009] 319 ITR 204 to hold that Section 14A cannot be invoked when no exempt income was earned. The second decision is of the Gujarat High Court in Commissioner of Income Tax-I Vs. Corrtech Energy (P.) Ltd. [2014] 223 Taxmann 130 (Guj.). The third decision is of the Allahabad High Court in Income Tax Appeal No. 88 of 2014, Commissioner of Income Tax (Ii) Kanpur, Vs. M/s. Shivam Motors (P) Ltd. decided on 05.05.2014. In the said decision it has been held: "As regards the. second question, Section 14A of the Act provides that for the purposes of computing the total income under the Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Hence, what Section 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purposes. 5.5 Ground Nos. 5 and 5.1 challenge the action of the AO in making the addition of Rs. 6,80,61,425/- being notional addition made on account of transfer of merchant banking licence by the assessee to another of its group company Religare Capital Markets Limited. This addition has been made since the assessee had transferred the licence to its sister concern without consideration and the notional value was arrived at by taking the income earned by the assessee from Mercantile Banking business during the year and multiplying it by five for five years. It is assessee's contention that the licence was a capital asset and no income had been received by or accrued to the assessee on such transfer and, therefore, there was no occasion to bring the notional income to tax. Undisputedly, the assessee has not received any consideration for the transfer of the licence and what has been added at the hands of the assessee in this regard is only a notional income. The lower authorities have noted that since the licence transferred would be providing enduring benefit to the transferee, addition was in order. The Merchant Banking license entitles the holders to carry on the merchant bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade in the books of account. " 15. The above passage was cited with approval in Morvi Industries Ltd. v. CIT [Morvi Industries Ltd. v. CIT, (1972) 4 SCC 451 : 1974 SCC (Tax) 140: (1971) 82 ITR 835) in which this Court also considered the dictionary meaning of the word "accrue" and held that income can be said to accrue when it becomes due. It was then observed that: (SCC p. 454, para 11) "11.... the date of payment ... does not affect the accrual of income. The moment the income accrues, the assessee gets vested with the right to claim that amount even though it may not be immediately. " 16. This Court further held, and in our opinion more importantly, that income accrues when there "arises a corresponding liability of the other party from whom the income becomes due to pay that amount". 17. It follows from these decisions that income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount. Only then can it be said that for the purposes of taxability that the income is not hypothetical and it has really accrued to the assessee. 18. Insofar as the present case is concerned, even if it is assumed that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch these invoices were raised in the year under consideration and since it was only after the end of the financial year that the invoices were received that provision had to be made in the books of accounts. The Ld. AR has drawn our attention to the copies of the various invoices in this regard which are placed at paper book pages 524 to 540. Admittedly, the assessee is following mercantile system of accounting in which the income of expenditure has to be accounted for on accrual basis. There is no dispute about the method of accounting being followed. The only doubt, as been raised by the lower authorities, is whether the liability for payment of these expenses had crystallised during the year under consideration. A perusal of the invoices filed by the assessee in this regard also does not throw any light on the issue. To this extent, we are in agreement with the lower authorities that the assessee should establish that the services were rendered and utilised for the year under consideration. Therefore, we deem it fit to restore this issue to the file of the AO to verify as to whether the services for which these invoices have been raised and for which the assessee had made provis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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