2019 (12) TMI 1457 - AT - Income Tax

Capital loss or allowable business deduction - difference between purchase price of Stock Appreciation Right ('SAR') and the sale price of such SAR at the time of exercise by the employees - HELD THAT - As decided in own case 2017 (10) TMI 1531 - ITAT DELHI above expenditure on account of employee stock option scheme is an ascertained liability for deduction and further also held that the expenses debited is cost of employee stock option plan in the profit and loss account is an allowable expenditure. The Ld. departmental representative also could not point out any other judicial precedent against the above judicial precedents cited by the Ld. authorized representative. - Decided in favour of assessee. Disallowance of bad debt written off - AO was of the opinion that since the debt has not been routed through the profit and loss account and had not been considered as income, as mandated u/s 36(1)(vii) of the Act, the same was not allowable - HELD THAT - Money receivable from a client by a share broker is to be treated as debt and even if a part of debt has been offered to income, the assessee will get the benefit of writing off of the entire amount of debt as is claimed as having becoming bad. Therefore, the only issue which needs to be looked into is as to whether a part of the debt written off was offered to income in this year or earlier years or not. Therefore, it will be in the fitness of things if this aspect is re-examined by the AO. Accordingly, we restore this issue to the file of the AO with a direction to verify and examine as to whether the assessee has offered to tax a part of the debt being claimed as bad and written off as income in earlier assessment years or in this year in form of brokerage or interest or not. If it has so been done, the AO shall allow the amount claimed as bad debt and written off as deduction. The assessee will be given due opportunity by the AO to present its case. Disallowance made u/s 14A - assessee made suo moto disallowance - HELD THAT - We agree with the proposition of the Ld. AR that disallowance u/s 14A cannot in any case exceed the exempt dividend income. We, therefore, set aside the issue and remit the issue back to the file of the AO to work out the disallowance by calculating the average investment under Rule 8D (2)(ii)/(iii) by taking those only investments which have actually yielded the divided income during the relevant year and if the same exceeds the dividend income then restrict the same to the extent of exempt income only. Here, since the assessee has suo moto disallowed an amount u/s 14A of the Act, the disallowance should not exceed this amount. AO shall give proper opportunity to the assessee before deciding the issue. Accordingly, ground allowed for statistical purposes. Accrual of income - Addition being notional addition made on account of transfer of merchant banking licence by the assessee to another of its group company - HELD THAT - Guided by the ratio laid down by BALBIR SINGH MAINI, CS ATWAL 2017 (10) TMI 323 - SUPREME COURT we are unable to agree with the contention of the Revenue that the impugned amount would be said to have accrued to the assessee company - As decided in ADITYA BIRLA TELECOM LIMITED 2016 (10) TMI 1326 - ITAT MUMBAI there can be no notional transaction with reference to fair market value in absence of any specific enabling provision in the Act and the full value of consideration has to be taken based on the price that has been contracted between the parties and further that there was no scope for imputing consideration on a notional basis. Therefore, it is our considered opinion that consideration cannot be imputed on a notional basis for the transfer of the merchant banking licence as the same has neither been received, realised and nor is capable of being received or realised. Accordingly, we set aside the order of the Ld. CIT (A) on the issue and direct the AO to delete the addition. Disallowance of provision made for expenses in respect of legal and professional charges, recruitment charges expenses and software license expenses - Lower authorities have disallowed these provisions on the ground that the liability for payment of expenses has not crystallised during the year - HELD THAT - 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 provision have been received and utilised during the year under consideration. If it is so found, then the AO shall allow the impugned provision as deduction in this year only. Disallowance of depreciation on UPS - Assessee had claimed depreciation on UPS @ 60% by treating the same as part of computer and peripherals whereas the AO restricted the depreciation to 15% by holding that UPS was plant and machinery and not a part of computer and peripherals - HELD THAT - This issue is no longer res judicata and there are a catena of judgments wherein it has been held that UPS is an essential part of computer system as a computer cannot function in isolation without the basic accessory. The leading case in this point is the judgment of the Hon ble Delhi High Court in the case of CIT vs. BSES Yamuna Power Ltd. 2010 (8) TMI 58 - DELHI HIGH COURT . Therefore, respectfully following the same we direct the AO to allow depreciation on UPS @ 60%. Disallowance of depreciation on fixed assets - disallowance has been made on the ground that the assessee could not submit complete bills for verification pertaining to purchase of fixed assets HELD THAT - AR has submitted as due to computer related issues and pressure of last dates, complete invoices could not be filed but now 77.45 % of the invoices/payments were verifiable. Therefore, it is our considered opinion that it will be in fitness of things if this issue is restored to the file of the AO to re-examine the assessee s claim and, thereafter, pass order in accordance with law after providing due opportunity to the assessee. It is so directed accordingly. Accordingly, ground stands allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance of Stock Appreciation Rights (SAR)
2. Disallowance of Bad Debts Written Off
3. Disallowance under Section 14A of the Income Tax Act
4. Addition on Account of Merchant Banking License Transfer
5. Disallowance of Provision for Expenses
6. Disallowance of Depreciation on UPS
7. Disallowance of Depreciation on Other Assets

Issue-wise Detailed Analysis:

1. Disallowance of Stock Appreciation Rights (SAR):
The assessee challenged the disallowance of ?2,04,87,736/- made by the AO on the difference between purchase and sale price of SAR, which was upheld by the CIT (A) as a capital loss not allowable as a business deduction. The Tribunal noted that this issue was previously decided in favor of the assessee by the ITAT Delhi Bench for AY 2010-11 and affirmed by the Hon'ble Delhi High Court in PCIT vs. Religare Securities Ltd. The Tribunal followed the earlier decision and allowed the grounds of appeal related to SAR disallowance.

2. Disallowance of Bad Debts Written Off:
The AO disallowed the bad debts of ?85,38,920/- on the grounds that these debts were not routed through the profit and loss account and not considered as income. The Tribunal noted that post-amendment to section 36(1)(vii) of the Act, deduction for bad debt is allowed in the year it is written off. The Tribunal referenced the Hon'ble Delhi High Court's judgment in CIT vs. Bonanza Portfolio Ltd., which held that if part of the debt has been considered as income, the condition laid down in section 36(2) is satisfied. The Tribunal remitted the issue back to the AO to verify if part of the debt was offered to tax in earlier years or this year.

3. Disallowance under Section 14A of the Income Tax Act:
The AO computed the disallowance under section 14A at ?1,21,62,443/- by applying Rule 8D, which was upheld by the CIT (A). The assessee argued that disallowance u/s 14A cannot exceed the exempt income. The Tribunal referenced the Hon'ble Delhi High Court's judgment in Pr. CIT vs. M/s. Caraf Builders & Constructions Pvt. Ltd., which held that disallowance u/s 14A cannot exceed the exempt income. The Tribunal remitted the issue back to the AO to compute the disallowance by considering only those investments which yielded exempt income during the relevant year and to restrict the disallowance to the extent of exempt income.

4. Addition on Account of Merchant Banking License Transfer:
The AO added ?6,80,61,425/- as notional income for the transfer of the merchant banking license without consideration. The Tribunal noted that the license is a capital asset and no consideration was received for its transfer. The Tribunal referenced the Hon'ble Apex Court's judgment in CIT vs. Balbir Singh Maini, which held that income tax cannot be levied on hypothetical income and that income accrues when there is a corresponding liability to pay. The Tribunal directed the AO to delete the addition as no notional gain can be imputed in the absence of any specific enabling provision in the Act.

5. Disallowance of Provision for Expenses:
The AO disallowed the provision for expenses amounting to ?79,99,216/- on the grounds that the liability had not crystallized during the year. The Tribunal noted that the assessee follows the mercantile system of accounting and the provision was made for services received during the year. The Tribunal remitted the issue back to the AO to verify if the services were received and utilized during the year under consideration and to allow the provision if it is so found.

6. Disallowance of Depreciation on UPS:
The AO restricted the depreciation on UPS to 15% by treating it as plant and machinery instead of 60% as claimed by the assessee. The Tribunal referenced the Hon'ble Delhi High Court's judgment in CIT vs. BSES Yamuna Power Ltd., which held that UPS is an essential part of a computer system and allowed depreciation at 60%. The Tribunal directed the AO to allow depreciation on UPS at 60%.

7. Disallowance of Depreciation on Other Assets:
The AO disallowed depreciation on fixed assets amounting to ?3,47,15,985/- due to incomplete submission of invoices. The Tribunal noted that the assessee had now produced 77.45% of the invoices and remitted the issue back to the AO to re-examine the claim and pass an order in accordance with the law after providing due opportunity to the assessee.

Conclusion:
The appeal of the assessee was allowed in terms of the directions contained in the preceding paragraphs.