2020 (5) TMI 597 - AT - Income Tax

Disallowance u/ s 14A r. w. Rule 8D - need for recording satisfaction - HELD THAT - From the reading of the judgment of the Hon ble Apex Court in the case of Maxopp Investment Ltd. Vs CIT 2018 (3) TMI 805 - SUPREME COURT we find that having regard to the language of Section 14 A(2 ) of the Act, read with Rule 8D of the Rules, it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the accounts of the assessee suo moto disallowance under Section 14 A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment, in that eventuality, the Assessing Officer will have to record its satisfaction to this effect. In the instant case, we find that no such satisfaction has been recorded by the A. O to come to the conclusion to invoke the provisions of Section 14 A(2). Hence, we decline to interfere with the order of the ld. CIT (A) and the disallowance is directed to be deleted. Disallowance of excess depreciation - depreciation on software @25% against the 60 % depreciation claimed by the assessee - CIT (A) deleted the addition on the grounds that the AO has mislead himself treating the software as intangible asset - HELD THAT - We find that the nature of the software acquired were licenses, which do not confer any enduring right and could be used for the duration as acquired for by the licensor. The taxpayer s objective was to use computer software to maximize its performance and streamline efficiency. The Hon ble Bombay High Court in the case of M/ s I- Flex Solutions Ltd. 2014 (3) TMI 1162 - BOMBAY HIGH COURT held that there is no reason to differentiate the computer and the software as the latter is an integral part of the former. The software cannot be seen in isolation delinked from the computers.The issue of depreciation @60% on the software is now a settled issue beyond any perplexity Disallowance of additional claim of deduction on account of Employee Compensation Expenses - HELD THAT - From the details filed in the case Indiabulls Real Estate Ltd., we find that two schemes have been issued by the assessee namely, IBREL ESOP 2006 and IBREL ESOP 2007. The spread of ESOP 2006 was from FY 2006-07 to 2013-14 whereas ESOP 2008 spread from FY 2008-09 to FY 2009-10 . The assessee has also given the details of date of vesting, number of shares granted, number of shares vested, perk value, taxed in the hands of employees, period of vesting. The perk value of the share ranged from ₹ 635/- to ₹ 134 /- and ₹ 101 /-. The perk value of the share on the date of vesting i. e. 01.11 .2011 was ₹ 6158/-. The discount given in the ESOP 2008 scheme was ₹ 110 .50. Further, no material was placed as to what was the value of the shares as per the market at different years of vesting While laying down the principle that the discount offered on the shares under the ESOP of scheme is allowable deduction u/s 37 (1) of the Act, we hereby remand the matter to the file of the AO for the limited purpose of arithmetic calculation of apportioning the year wise discount over the period of vesting taking into consideration, the options granted to the employees, determination of the perk value, FBT levied and allow the same as per the provisions of the Income Tax Act, 1961. - Revenue appeal dismissed.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Disallowance of excess depreciation on software.
3. Disallowance of additional claim of deduction on account of Employee Compensation Expenses (ESOP expenses).

Detailed Analysis:

Disallowance under Section 14A read with Rule 8D:
The revenue challenged the deletion of disallowance amounting to ?16,37,03,673/- under Section 14A read with Rule 8D. The Assessing Officer (AO) had recomputed the disallowance, arguing that the assessee did not provide a rationale for the disallowed amount and did not maintain separate staff or workstations for investment activities. The AO relied on the ITAT Special Bench New Delhi's judgment in Cheminvest Ltd. However, the CIT(A) deleted the disallowance, noting that the AO did not record satisfaction regarding the correctness of the assessee's claim as mandated by Section 14A(2). The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO must record dissatisfaction with the assessee's disallowance before invoking Rule 8D, as clarified by the Supreme Court in Maxopp Investment Ltd. v. CIT. Consequently, the Tribunal directed the deletion of the disallowance.

Disallowance of Excess Depreciation on Software:
The AO allowed depreciation on software at 25%, contrary to the 60% claimed by the assessee, treating the software as an intangible asset. The CIT(A) deleted the addition, clarifying that the software licenses did not confer enduring rights and were integral to computer systems. The Tribunal supported this view, citing the Bombay High Court's decision in I-Flex Solutions Ltd., which treated software as part of the computer system, warranting a 60% depreciation rate. The Tribunal also referenced similar ITAT decisions in Make My Trip (India) Pvt. Ltd. and Globe Capital Market Ltd., affirming that the issue of 60% depreciation on software is settled law. Thus, the Tribunal upheld the CIT(A)'s order.

Disallowance of Additional Claim of Deduction on Account of Employee Compensation Expenses (ESOP expenses):
The assessee claimed ?66.33 crores as ESOP expenses, relying on the ITAT Special Bench's decision in Biocon Ltd., which was approved by the Delhi High Court in Lemon Tree Hotels Limited. The CIT(A) allowed the claim, treating ESOP expenses as deductible under Section 37(1). The Tribunal examined the principles laid out by the Special Bench, which considered ESOP discounts as employee costs deductible over the vesting period. The Tribunal remanded the matter to the AO for arithmetic calculation of the year-wise discount over the vesting period, considering the options granted, perk value, and FBT levied. The Tribunal directed the AO to allow the deduction as per the Income Tax Act provisions.

Conclusion:
The Tribunal dismissed the revenue's appeals, upholding the CIT(A)'s decisions on all issues. The Tribunal emphasized the need for the AO to record dissatisfaction before invoking Rule 8D for disallowance under Section 14A, affirmed the 60% depreciation rate for software, and remanded the ESOP expenses issue for recalculation based on established principles. The judgments in ITA No. 6602/Del/2016 were applied mutatis mutandis to ITA No. 6603/Del/2016.