2015 (9) TMI 1303 - AT - Income Tax

Disallowance u/s.14A r/w rule 8D - Held that - As regards the claim of adequacy of capital or interest-free funds (held in current deposit accounts), we have already clarified of there being no finding of fact qua the specific source/s of financing, even as the Hon ble Court has in Godrej & Boyce (2010 (8) TMI 77 - BOMBAY HIGH COURT) clarified that even the fact that the assessee has utilized its own funds in making the investments would not be dispositive of the question as to whether the assessee has incurred expenditure in relation to earning of such income. Even if, therefore, as explained by it, the assessee had utilized its own funds for making investments which have resulted in income which does not form part of the total income under the Act, the expenditure which is incurred in the earning of that income would have to be disallowed, which is to be determined by the A.O. In the facts of the present case, it is the admitted position that the investment in securities has been made out of common pool of funds. Funds in the business, it may be appreciated, are always in a state of flux, so that the proximate or the immediate source of funds may not and, in any case, not generally, reflect the real or the effective source. The same can be assessed on the basis of a fund flow statement (for the period) coupled with the legal obligations incident, if any. As an example, where a business assumes working capital advance from bank, maintaining net current assets at the prescribed level, it could safely be assumed that the borrowed funds have financed its current assets to that extent, precluding an apportionment of the expenditure by way of bank interest - a direct expenditure, against any other income of the assessee. Similar would be a case of (say) a term loan for machinery, all of which fall in the category of dedicated funds. Can, excepting dedicated arrangements, a particular asset of the business be said to be financed in a particular manner? The assets being of the business, it is only the funds of the business as a whole, save dedicated funds, that can be said to finance its activities. Accordingly, we uphold the application of section 14A r/w rule 8D in the facts and circumstances of the case, dismissing the assessee s Gd. # I. - Decided against assessee. Disallowance of the amortized Employee Stock Options Plan (ESOP) expenses - Held that - We direct the allowance of the discount on the shares issued to the employees, as held by the larger bench of the tribunal in Biocon Ltd. (2013 (8) TMI 629 - ITAT BANGALORE), subject to the same being reckoned with reference to issue price of the shares issued to the public during the relevant year. All other parameters, including the adjustment to the discount, shall be in terms of the said order, having regard to the terms and conditions of the assessee s employee issue. - Decided partly against assessee. Disallowance of ESOP expenses - as claimed equity shares (3056.34 lac) other than ESOP shares (340.97 lac) have been issued during the year. As such, no disallowance of ESOP expenses, i.e., the expenditure under reference, is called for - Held that - We are unable to understand the purport of the argument in-as-much as the ESOP expenses are only in relation to ESOP shares, i.e., shares issued to the employees under an optional scheme designed to benefit them. It is a share issue nevertheless, and the expenses thereon, share issue expenses all the same. They thus bear the same character. In fact, we have already answered Gd. II by stating, as indeed informed the decision by the larger bench, that no doubt the expenditure inures in the form of a shortfall in the capital raised, the purpose in foregoing the same is to allow an incentive to its employees, i.e., a business purpose, so that the capital to that extent stands deployed thus, and further clarified that it is only the stated business purpose which qualifies the same to be considered as an expense and, in any case, as a revenue expenditure. The said Ground, which is in the nature of an alternate ground and/or argument, not pressed separately before us, stands, accordingly, dismissed as not pressed. - Decided against assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules, 1962.
2. Disallowance of amortized Employee Stock Options Plan (ESOP) expenses.
3. Alternate claim regarding ESOP expenses in relation to equity shares issued.

Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules, 1962:

The primary issue revolves around the disallowance of Rs. 366 lacs under Section 14A read with Rule 8D. The assessee contends that its tax-free investments were funded by its own capital, thus no proportionate disallowance of interest should arise. The Revenue argues that the capital was raised to meet capital adequacy norms and could not be presumed to have been invested in tax-free income-yielding securities.

The Tribunal observed that the assessee's argument regarding the availability of interest-free funds in current deposit accounts was essentially the same as its earlier stance on the sufficiency of its own capital. The Tribunal noted that funds from various sources form a common pool, which is applied for business purposes. The Tribunal referenced the decision in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT, which clarified that Section 14A was enacted to ensure that tax incentives for certain incomes are not used to reduce tax on taxable income by debiting related expenditures against taxable income.

The Tribunal concluded that the decision in Godrej & Boyce covers the case at hand, emphasizing that the apportionment of expenditure is not restricted to direct expenditure only. The Tribunal upheld the application of Section 14A read with Rule 8D, dismissing the assessee's ground.

2. Disallowance of Amortized Employee Stock Options Plan (ESOP) Expenses:

The second issue pertains to the disallowance of Rs. 821.33 lacs related to ESOP expenses. The Revenue disallowed the expense, considering it notional and capital in nature. The Tribunal referenced the Special Bench decision in Biocon Ltd. vs. Dy. CIT, which held that the discount on the issue of shares to employees under ESOP is deductible under Section 37(1) of the Act.

The Tribunal agreed with the Special Bench's reasoning that the discount represents compensation to employees for their services, thus qualifying as a business expense. However, the Tribunal noted that the quantum of the discount should be determined with reference to the issue price of shares issued to the public during the relevant year, rather than the market price.

The Tribunal directed the allowance of the discount on ESOP shares, subject to it being reckoned with reference to the public issue price, and partly allowed the assessee's ground.

3. Alternate Claim Regarding ESOP Expenses in Relation to Equity Shares Issued:

The third ground was an alternate claim that no disallowance of ESOP expenses should be made due to the issuance of equity shares other than ESOP shares. The Tribunal found this argument unconvincing, stating that ESOP expenses relate specifically to shares issued under the ESOP scheme. The Tribunal dismissed this ground as not pressed.

Conclusion:

The Tribunal upheld the disallowance under Section 14A read with Rule 8D, partially allowed the deduction of ESOP expenses with a directive to calculate the discount with reference to the public issue price, and dismissed the alternate claim regarding ESOP expenses. The assessee's appeal was partly allowed.