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TMI Blog2024 (7) TMI 1370X X X X Extracts X X X X X X X X Extracts X X X X ..... in relation to administrative expenses under Section 14A read with Rule 8D of the Income-tax Act, 1961 (Tax effect- Rs. 65,88,045) 1.1 The learned AO and Hon'ble CIT(A) erred in disallowing the administrative expense under Section 14A r.w. Rule 8D(2)(iii) over and above the suo-moto disallowance of administrative expenses of Rs. 1.93 crores. 1.2 The learned AO and Hon'ble CIT(A) erred in not appreciating the fact that all the operating expense/ administrative expenses have been allocated to exempt income on a reasonable basis while computing suo-moto disallowance under Section 14A and accordingly, no further disallowance of administrative expenses is warranted. 1.3 The learned AO and Hon'ble CIT(A) erred in rejecting the suo-moto disallowance made by the Appellant without providing any cogent reasons for the same having regard to the accounts of the Appellant. 1.4 The learned AO and Hon'ble CIT(A) erred in not appreciating the fact that the majority of investments made by the Appellant are in the nature of stock in trade and accordingly, the provisions of Section 14A shall not be applicable to such investments in line with judicial precedents and not appreci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -13 to 2015-16, has deleted disallowance of interest expenses relying on the Hon'ble ITAT's order in appellant's own case for AY 2010-11. Further, while passing the order giving effect to ITAT order for AY 2012-13 to AY 2015-16, the learned AO had given the relief for 14A interest, however, the same was not allowed for AY 2010-11, even though the facts of AY 2010-11 are similar to AY 2012-13 to AY 2015-16. 2.6 Without prejudice to the above, even on merits, the learned AO and Hon'ble CIT(A) has erred in not appreciating that Appellant has sufficient own funds which are far more than the amount of investment in shares and securities which yield exempt income and thereby erred in holding that a portion of interest expense should be attributable to investments which fetch exempt income. 2.7 The learned AO and Hon'ble CIT(A) has erred in not appreciating that Appellant also has sufficient non-interest bearing current account balances/ sufficient net interest earned during the year, which are far more than the amount of investment in shares and securities which yield exempt income and thereby erred in holding that a portion of interest expenses should be attribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 ITR 340 has held that if there are mixed funds then the power presumption would be that the investments have been made out of interest free funds. This ratio of the Hon'ble High Court of Bombay was subsequently followed in the case of HDFC Ltd. 266 ITR 505. As mentioned elsewhere, the assessee was having sufficient own funds to meet out the tax free investment. Drawing support from the decision of the Hon'ble High Court of Bombay (supra), we do not find any merit in considering the interest expenses for the computation of disallowance u/s. 14A of the Act. To this extent, we set aside the findings of the Id. CIT(A) and direct the A.O. to delete the addition of Rs. 29,35,41,415/-. 16. However, in our considered opinion, administrative expenses need to be disallowed and since the assessee has made suo moto disallowance of Rs. 63,84,525/- in our considered opinion, this should meet the ends of justice. We, accordingly, confirmed the suo moto disallowance of Rs. 63,84,525/-. Ground no. 2 is accordingly dismissed and the additional ground raised by the assessee is a/so dismissed. 8.2 The fact of the case on hand seems identical to the fact of the case as discussed above in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he computation of the impugned disallowance. Per contra, the ld. D.R. strongly supported the findings of the A.O. and also objected to the additional ground raised by the assessee for the deletion of suo moto disallowance of Rs. 63,84,525/-. 15. After giving a thoughtful consideration to the facts in issue, we find that from the balance sheet of the assessee for the year under consideration, the capital balance is at Rs. 360 crores and the free reserves are at Rs. 8411 crores totaling to Rs. 8051 crores. Against this, we find that the tax free investment at Rs. 651 crores. Thus, it can be safely concluded that the assessee was having sufficient own funds to make the tax free investment. The Hon'ble High Court of Bombay in the case of Reliance Utilities and Power Ltd. 313 1TR 340 has held that if there are mixed funds then the presumption would be that the investments have been made out of interest free funds. This ratio of the Hon'ble High Court of Bombay was subsequently followed in the case of HDFC Ltd. 266 ITR 505. As mentioned elsewhere, the assessee was having sufficient own funds to meet out the tax free investment. Drawing support from the decision of the Hon'b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ITAT in assessee's own case for assessment year 2010-11. Accordingly, Ld. CIT(Appeals) erred in facts and in law in not allowing the appeal of the assessee on this issue. 11. In response, DR placed reliance on the observations made by the assessing officer and Ld. CIT(Appeals) in their respective orders. 12. We have heard the rival contentions and perused the material on record. In our considered view, on going through the contents of order passed by ITAT in the assessee's own case for assessment year 2010-11 (relevant extracts of the order have been reproduced in the preceding part of this order), we observe that the Tribunal has categorically given relief to the assessee on this issue on the ground that the assessee's own funds are far in excess of the investments made in funds yielding exempt income. Accordingly, the Tribunal in assessee's own case for assessment in 2010-11 (by following the decision of ITAT in assessee's own case for assessment year 2008-09) has held that so far as disallowance of interest under Section 14A of the Act is concerned, no disallowance is called for under Section 14A of the Act. 13. Accordingly, looking into the instant facts, we are hereby a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... option of shares with face value of Rs. 10 at the same rate by claiming that market value of such share on the date of grant of option was Rs. 919, thereby claiming the total discount per option at Rs. 909/-. The difference between market price and exercise price as on the date of grant of option was claimed as revenue expenditure to be spread over the vesting period. However, the treatment followed by the assessee was in line with provisions of Section 2(15A) of the Indian Companies Act, 1956 which defined ESOP to mean the option given to the whole-time Directors, Officers or employees of a company, which gives such Directors, officers or employees the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a predetermined price.' The AO was of the view that the crux of the above decision was that discount on issue of ESOP shall be allowed as revenue expenditure. Such discount represented difference between the market price of options and exercise price as on the date of grant of option. The AO has observed that in the present case, the assessee seeks to claim an expenditure of Rs. 250.63 crores which represents difference between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y was incurring or laying out. The issue of shares was also not crystallized till the date on which the employee exercised the option and hence any expenditure debited during the vesting period remained contingent in nature. The AO was of the view that the ESOP expense even if treated as expenditure was a capital expenditure since securities premium being a capital item. The AO has relied on the decision of the Delhi ITAT in the case of ACIT Vs Ranbaxy Laboratories ITA Nos. 2613 & 3871 in which it was held that the ESOP expense debited to P&L is notional in nature since the assessee has neither laid out or expended any amount while choosing to receive no/ lesser securities premium. The alternative argument that this ITAT has supported is since the receipt of securities premium is not chargeable to tax being a capital receipt any short collection of securities premium should also be considered as capital outlay and cannot be allowed as expenditure. The Delhi ITAT in the case of Ranbaxy (Supra) has relied on the various court rulings which have held that shares issued against assets/ Technical know-how contributed by shareholders cannot be claimed as revenue expenditure. The AO was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ited Vs. DCIT [ITA Nos. 7058 and 7059/Mum/2017, ITA Nos. 59 and 60/Mum/2018 3. JCIT v. RBL Bank Limited (ITA Nos.509 & 510/PUN/2023) 9.2.1 In nutshell, the submission of the appellant is that the Appellant has claimed deduction of ESOP cost of Rs. 250.63 crores, being the discount given to the employee considering the difference between market price as on date of exercise of options and the exercise price relying on the decision of Special Bench of Tribunal in case of Biocon (supra) which has been subsequently upheld by Karnataka High Court in CIT v. Biocon Ltd. [2020] 121 taxmann.com 351 (Karnataka)]. The Hon'ble Special Bench of the Tribunal in the case of Biocon Ltd (supra) while ruling in favour of the taxpayer observed as under: i) The discount under ESOP is in the nature of employees cost and is hence deductible as a business expenditure under Section 37 of the Act. ii) The amount of discount being the difference between the market price as on date of exercise and the exercise price is eligible as deduction. iii) The amount of deduction claimed by the company on ESOP should match with the quantum of perquisite in the hands of the employee. 1. No accounting pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Tribunal special bench in the case of Biocon supra, wherein, it has been pointed out that in the instant case, the discount claimed by the assessee was difference in market price of options and exercise price as on the date of grant of option, whereas in the case of Biocon supra, the ESOPs had been issued in terms of provisions of Section 2(15A) of the Indian Companies Act, 1956 which defines ESOP to mean the option given to employees which gives them right to purchase or subscribe to securities at a future date but at a predetermined price. Therefore, the AO was correct in taking the view, the option shall be granted at a predetermined price, so as to be eligible for deduction. Secondly, the Ld. DR submitted that during the entire course of assessment proceedings, the assessee has failed to submit the relevant ESOP scheme under which the aforesaid deduction was claimed as revenue expenditure. The Ld. DR pointed out that the assessee has launched multiple ESOP schemes over various years and there is no clarity whatsoever as to under with specific ESOP scheme the assessee has claimed the aforesaid deduction. The Ld. DR submitted that it was the duty of the assessee to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of Tribunal Special Bench in the case of Biocon supra and such decision has also been confirmed by the Karnataka High Court, in favour of the assessee. Further, the decision on which reliance was placed by the assessing officer while disallowing the claim of the assessee has been duly considered by the Special Bench Tribunal decision in the case of Biocon supra and relief was allowed to the assessee. The Counsel for the assessee submitted that ESOP scheme under which the benefits were provided to its employees was forming part of the Annual Report, for the year under consideration (reference page to 25 of paper book submitted before us), the calculation of ESOP cost along with details of option price, exercise price, grant date and exercise date was duly furnished before the assessing officer during the course of assessment proceedings (pages 316-611 of the paper book) and the ESOP expenses are allowable in view of various judicial precedents on the subject. 20. We have heard the rival contentions and perused the material on record. On going to the facts of the instant case, we observe that the law that stand as on date on the allowability of ESOP expenses has been decided in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of grant of option to these employees and the market price of such shares as on the date of exercise by employees of the assessee company. Therefore, even from this perspective, the expenses so claim were not contingent the nature, since the assessee had claimed the ESOP expenses at the time of actual exercise of option by its employees, during the year under consideration. It is also noteworthy that the assessee had reflected such ESOP expenses as "perquisites" in the hands of its employees and TDS at appropriate rate had also been deducted by the assessee company at the time of grant of ESOP benefits to its employees. Accordingly, in view of the judicial precedents on the subject as on date, which have consistently taken the view that ESOP expenses are allowable in the hands of assessees under Section 37 of the Act and looking into the facts of the assessee's case, as highlighted above, we are of the considered view that Ld. CIT(Appeals) has not erred in facts and in law in deciding this issue in favour of the assessee. 22. In the result, the appeal of the Department is dismissed. 23. Since the facts and issues for consideration, for both the assessment years before us are i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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