2018 (4) TMI 430 - AT - Income Tax

Disallowance of interest under section 14A of the Act read with Rule 8D(2)(ii) in respect of interest - Held that - The assessee has availability of sufficient own funds which was claimed by assessee before AO as well as before CIT(A). The company has own funds of ₹ 7945.94 crores as on 31-03-2012 as per financial accounts and out of which company has made temporary investments in mutual funds and earned dividend income. The assessee has made investment of ₹ 342.54 crores as on 31-03-2012 in subsidiaries and associate companies as on 31-03- 2012. We are of the view that subject to limited purpose of verification of facts whether the assessee s investments in instruments giving interest free income is in commensurate with that the interest free funds available, the AO will not make any disallowance qua that. Secondly, the AO will not include the strategic investments while computing these disallowances. The AO will accordingly compute the disallowance if any. Accordingly, this issue of Revenue s appeal is dismissed and that of the assessee is allowed subject to verification as suggested by us. Disallowance of bad debts under section 36(1)(viia) - Held that - Hon ble Supreme Court in the case of Catholic Syrian Bank Ltd. v. CIT (2012 (2) TMI 262 - SUPREME COURT OF INDIA) wherein it is held that the assessee is entitled for deduction under section 36(1)(vii) read with section 36(2)(v) of the Act and also this deduction is independent of provisions made in section 36(1)(viia) of the Act. Accordingly, we are of the view that the CIT(A) has rightly allowed the claim of the assessee and we confirm the same. This issue of Revenue s appeal is also dismissed. Expenditure incurred by the assessee on Employees State Option Plan (ESOP) is to be allowed. See Biocon Ltd. Vs. DCIT 2013 (8) TMI 629 - ITAT BANGALORE

Summary

Issues Involved:
1. Condonation of Delay in Filing Cross Objection
2. Computation of Disallowance under Section 14A of the Income Tax Act
3. Disallowance of Bad Debts under Section 36(1)(viia) of the Income Tax Act
4. Disallowance of Expenditure on Employee Stock Option Plan (ESOP)

Issue-wise Detailed Analysis:

1. Condonation of Delay in Filing Cross Objection:
The assessee filed a cross objection delayed by 64 days, seeking condonation of delay. The delay occurred because the issue of disallowance of interest under section 14A read with Rule 8D(2)(ii) was not adjudicated by the CIT(A). This fact came to light during a conference with counsel, who advised filing a cross objection based on jurisdictional High Court decisions. The Tribunal, after hearing both sides, found the delay inadvertent and under bona fide belief, thus condoned the delay and admitted the cross objection.

2. Computation of Disallowance under Section 14A of the Income Tax Act:
The Revenue and assessee disputed the computation of disallowance under section 14A read with Rule 8D(2). The AO disallowed interest expenses, asserting investments were made from borrowed funds. The CIT(A) partially allowed the assessee's appeal, excluding strategic investments from the disallowance computation. The Tribunal noted the assessee had sufficient own funds and strategic investments were to meet regulatory requirements. Following precedents, the Tribunal held that no disallowance under Rule 8D(2)(ii) should be made for investments from own funds or strategic investments. The AO was directed to verify and recompute disallowance accordingly.

3. Disallowance of Bad Debts under Section 36(1)(viia) of the Income Tax Act:
The AO disallowed the assessee’s claim of bad debts, arguing it exceeded the provision under section 36(1)(viia). The CIT(A) allowed the claim, referencing earlier years' orders and judicial precedents, asserting the claim under section 36(1)(vii) is independent of section 36(1)(viia). The Tribunal upheld the CIT(A)’s decision, citing the Supreme Court's judgment in Catholic Syrian Bank Ltd., which clarified that deductions under sections 36(1)(vii) and 36(1)(viia) are distinct and independent.

4. Disallowance of Expenditure on Employee Stock Option Plan (ESOP):
The AO disallowed ESOP expenditure, despite the assessee’s reliance on the Special Bench decision in Biocon Ltd. The CIT(A) allowed the claim, following the Special Bench’s principles. The Tribunal affirmed the CIT(A)’s order, emphasizing that the AO must follow the Special Bench decision unless overturned or stayed by a higher court. The Tribunal found the AO’s refusal to follow the precedent unjustified and upheld the allowance of ESOP expenditure.

Conclusion:
The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross objection, directing the AO to recompute disallowances considering the availability of own funds and excluding strategic investments. The Tribunal also upheld the CIT(A)’s decisions on bad debts and ESOP expenditure, aligning with established judicial precedents.