2021 (8) TMI 1143 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - suo moto disallowance by assessee - mandation of recording satisfaction - whether AO has recorded any dissatisfaction as regards suo-moto disallowance made by the appellant ? - HELD THAT - Though it is incumbent upon the Ld. AO to record a satisfaction as to why the disallowance offered by the assessee was not sufficient which is sine qua non before proceeding to apply Rule 8D. Although there is no particular format or manner in which the satisfaction was to be recorded but the same should have been discernible from the order passed by the Ld. AO. We make it clear that no observation howsoever has been made as to the sufficiency or insufficiency of suo-moto disallowance offered by the assessee -no irregularities in the order passed by the Ld. CIT(A) in deleting such addition made by the Ld. AO in the absence of any dissatisfaction recorded by the Ld. AO as regards the amount of disallowance computed by the appellant under Section 14A without any ambiguity so as to warrant interference - Decided against revenue. Appellate authority had the power to admit the new ground - ESOP compensation expenses during assessment proceeding as the said claim was not made while filing of return of income by the assessee - HELD THAT - Since the appellate authority had the power to admit the new ground or a legal contention in view of the order passed by the Hon ble Jurisdictional High Court in the case of CIT vs. Mitesh Impex 2014 (4) TMI 484 - GUJARAT HIGH COURT the said claim has been admitted by the Ld. CIT(A). No explanation is forthcoming as to how without verifying the records as regards the actual expenses incurred by the appellant s claim has been allowed - As considered the order passed in the case of Biocon Ltd. 2013 (8) TMI 629 - ITAT BANGALORE where it has been held that ESOP compensation expenditure is not a notional expenditure but an allowable expenditure under Section 37(1) - object of issuing of shares at a lower issue price than the market price to the employees under ESOP must be taken into consideration and thereby it cannot be treated as short receipt of securities premium but a cost on account of compensation of employees - as principally the claim on account of deduction of ESOP compensation is allowable but in our considered opinion it would be in the fitness of things to remit the issue to the file of the Ld. AO to verify the actual expenses incurred by the appellant - Assessee s claim is allowed for statistical purposes.

Summary

Issues involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961 for A.Ys. 2012-13 and 2013-14.
2. Deductibility of ESOP compensation expenses under Section 37 of the Act.

Analysis:

Issue 1: Disallowance under Section 14A
The appeals filed by the Revenue challenged the orders passed by the Ld. CIT(A)-Gandhinagar, Ahmedabad regarding disallowance under Section 14A for A.Ys. 2012-13 and 2013-14. The appellant contended that all necessary expenses under Section 14A had been conservatively disallowed, but the Ld. AO applied Rule 8D and made further disallowances. The Ld. CIT(A) relied on previous decisions favoring the assessee, emphasizing that Rule 8D cannot be invoked without the Ld. AO recording dissatisfaction with the disallowance made by the appellant. The Tribunal upheld the CIT(A)'s decision, stating that the Ld. AO must record dissatisfaction before applying Rule 8D. The appeals by the Revenue were dismissed based on the precedent set by the Jurisdictional High Court.

Issue 2: Deductibility of ESOP compensation expenses
The appellant claimed ESOP compensation expenses under Section 37 of the Act, which was initially denied by the Ld. AO. The Ld. CIT(A) admitted the claim based on a High Court ruling allowing the admission of new grounds. The appellant's ESOP scheme was in compliance with SEBI guidelines, and the claim was supported by the Special Bench decision in Biocon Limited vs. DCIT. However, the Ld. DR requested verification of the expenses claimed. The Tribunal, after considering the Special Bench ruling, remitted the issue to the Ld. AO for verification of actual expenses incurred by the appellant. The claim was allowed for statistical purposes, emphasizing the need for verification before allowing the deduction.

In conclusion, both appeals filed by the Revenue were allowed for statistical purposes, maintaining the decisions on disallowance under Section 14A and ESOP compensation expenses.