2020 (8) TMI 48 - AT - Income Tax

Disallowance u/s 14A r.w. Rule 8D - suo motu disallowance by the assessee - HELD THAT - We deem it proper to restore the issue to the file of the AO with a direction to find out the investments which have yielded dividend income and to take into the same for considering the average value of investment. So far as the interest expenditure for the purpose of disallowance u/s 14A we find merit in the argument of the ld. Counsel that bank guarantee commission, interest on TDS, interest on service tax, interest on professional tax, interest paid to clients on advance brokerage, interest on clients margins money, etc. cannot be considered for the purpose of disallowance u/s 14A r.w. Rule 8D. We, therefore, deem it proper to restore the issue to the file of the AO with a direction to recompute the disallowance u/s 14A r.w. Rule 8D after taking into account the investments that have yielded dividend income and recompute interest expenditure on investments as per fact and law. AO, while doing so, shall keep in mind the total investment of the assessee, vis- -vis the own funds and free reserves for making any disallowance out of any interest expenditure. He shall keep in mind the decision in the case of CIT vs. Reliance Industries Ltd. 2019 (1) TMI 757 - SUPREME COURT and in the case of HT Media 2017 (8) TMI 962 - DELHI HIGH COURT and Taikisha Engineering India Ltd. 2014 (12) TMI 482 - DELHI HIGH COURT . - Decided in favour of assessee for statistical purposes. Disallowance on account of SAR expenses written off and advance of sale of shares written off - HELD THAT - As decided in M/S. RELIGARE SECURITIES LTD. 2018 (3) TMI 1529 - DELHI HIGH COURT assessee had to follow SEBI direction and by following such direction, the assessee claimed the ascertained amount as liability for deduction - the expenditure on issue of shares under the Employees Stock Option could be allowed as staff welfare expenditure - Decided in favour of assessee. Higher depreciation on UPS - assessee claimed depreciation on UPS @ 60% treating the same to be part of computer and peripherals - HELD THAT - As in the case of BSES YAMUNA POWERS LLD. / BSES RAJDHANI POWERS LTD. 2010 (8) TMI 58 - DELHI HIGH COURT has held that UPS is an essential part of computer system and is eligible for depreciation @ 60% - no infirmity in the order of the CIT(A) in directing the AO to allow depreciation @ 60% on UPS. Accordingly, the order of the CIT(A) is upheld and the ground raised by the Revenue is dismissed.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Depreciation rate on UPS.
3. Deduction of SAR (Stock Appreciation Rights) expenditure.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The assessee declared a dividend income of ?3 crore, claiming it as exempt. The AO disallowed ?5,80,61,219/- under Section 14A read with Rule 8D, after considering the suo motu disallowance of ?2,75,99,362/- made by the assessee. The CIT(A) restricted the disallowance to the extent of the exempt income of ?3 crore. The Tribunal noted that the assessee had miscalculated the disallowance under a misconception of law by including investments not yielding dividend income. Citing the Delhi High Court's decision in ACB India Ltd., the Tribunal held that only investments yielding exempt income should be considered. The Tribunal restored the issue to the AO to recompute disallowance, considering only investments yielding dividend income and excluding certain interest expenditures like bank guarantee commission, interest on TDS, etc. The Tribunal also emphasized considering the assessee’s own funds and free reserves vis-à-vis investments. The Tribunal dismissed the Revenue's appeal on this issue, following the Supreme Court's ruling in Maxopp Investments Ltd. that disallowance under Section 14A cannot exceed the actual exempt income received.

2. Depreciation Rate on UPS:
The assessee claimed depreciation on UPS at 60%, treating it as part of the computer system. The AO allowed depreciation at 15%, treating UPS as plant and machinery. The CIT(A) allowed the higher rate of depreciation at 60%, which the Tribunal upheld. The Tribunal referred to the Delhi High Court's decisions in CIT vs. BSES Yamuna Powers Ltd. and CIT vs. BSES Rajdhani Powers Ltd., which held that UPS is an essential part of the computer system and eligible for 60% depreciation. Consequently, the Tribunal found no infirmity in the CIT(A)'s order and dismissed the Revenue's appeal on this issue.

3. Deduction of SAR (Stock Appreciation Rights) Expenditure:
The AO disallowed ?1,64,73,853/- on account of SAR expenses, treating it as capital expenditure. The CIT(A) sustained this disallowance. However, the Tribunal referred to its earlier decision in the assessee's own case for the previous assessment year, where it allowed the claim of the assessee, treating SAR expenses as revenue expenditure. The Tribunal noted that the Hon’ble Delhi High Court in CIT vs. Lemon Tree Hotels Ltd. and the Madras High Court in PVP Ventures Ltd. had upheld that SAR expenses are ascertained liabilities and deductible as revenue expenditure. Following these precedents, the Tribunal set aside the CIT(A)'s order and directed the AO to delete the addition, allowing the assessee's appeal on this issue.

Conclusion:
The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal for statistical purposes, directing the AO to recompute the disallowance under Section 14A and to delete the addition related to SAR expenses. The Tribunal upheld the CIT(A)'s decision to allow higher depreciation on UPS at 60%.