2022 (2) TMI 29 - AT - Income Tax

Disallowance of expenditure u/s 14A read with rule 8D - proportionate disallowance of interest - common pool of funds - Availability of interest free fund - disallowance of interest expenditure made under rule 8D(2)(ii) and administrative expenditure under rule 8D(2)(iii) - HELD THAT - As in South Indian Bank 2021 (9) TMI 566 - SUPREME COURT while approving the theory of presumption that in case of common pool of funds, it will be presumed that interest free funds have been utilized for making the investments, the Hon ble Court went a step further and opined that in respect of payments made out of mixed funds, it is the assessee, who has the right of appropriation and also the right to assert from which part of the funds a particular investment is made and it may not be permissible for the revenue to make an estimation of a proportionate figure. While doing so, the Hon ble Supreme Court has approved the view expressed by the Hon ble Jurisdictional High Court in case of HDFC Bank Ltd vs DCIT 2014 (8) TMI 119 - BOMBAY HIGH COURT Thus, the law declared by the Hon ble Supreme Court, as aforesaid, being the law of the land as per Article 141 of the Constitution of India, would be binding on all subordinate courts / tribunals / authorities, etc. Therefore, if we apply the ratio laid down by the Hon ble Supreme Court to the facts of the present case, it can be seen that though the assessee has common pool of funds; however, interest free fund available with the assessee is far in excess of the investments made. Therefore, the presumption that investments have been made out of interest free funds would automatically get triggered. Availability of interest free fund has to be seen with reference to date of investment and not the balance-sheet date. In this regard, we must observe, if the contention of the learned counsel for the revenue is accepted, applying the theory of presumption of surplus fund being used for the purpose of investments would not at all arise. If availability of interest free fund as on the date of investment is to be seen, then a direct nexus is established between the fund available and the investment made. The applicability of presumption would only arise in a case where the assessee has sufficient interest free funds available with it, being part of a common pool of funds, which is more than the investments made. Therefore, the position of interest free funds available with the assessee has to be seen as on the date of balance-sheet. Acceptance of revenue s contention that availability of interest free funds has to be seen as on the date of investment, in our view, would lead to absurdity. This is so, because, on each date of investment a balance-sheet has to be drawn up which is neither possible nor practicable. Therefore, the fund position of the assessee has to be seen as on the date of balance-sheet which is drawn up at the end of the financial year. This view of ours gets further strengthened by the decision of CIT vs Reliance Utilities and Power Ltd 2009 (1) TMI 4 - BOMBAY HIGH COURT wherein, the Hon ble High Court has observed that availability of interest free fund has to be seen as on the date of balance-sheet. Thus, if we apply the ratio laid down in the decisions discussed herein before to the facts of the present case, the inescapable conclusion would be, as per the balance-sheet the assessee had sufficient interest free fund available with it to take care of the investment. That being the factual position, presumption would be, the investments have been made out of the interest free funds available with the assessee. Hence, no disallowance under rule 8D(2)(ii) can be made. Having found that the assessee had sufficient interest free funds available to take care of the investment made, we hold that no disallowance of interest expenditure under rule 8D(2)(ii) can be made. Accordingly, we delete the disallowance made under rule 8D(2)(ii). Disallowance under rule 8D(2)(iii) - In view of the ratio laid down by the Special Bench of this Tribunal in case of ACIT vs Vireet Investments Pvt Ltd 2017 (6) TMI 1124 - ITAT DELHI we accept the aforesaid contention. Accordingly, we direct the assessing officer to compute disallowance under rule 8D(2)(iii) considering only those investments which have yielded exempt income during the year. We are of the view that the issue whether the investments held by the assessee are in the nature of stock in trade or investment has become academic in the facts of the present case, since, we have deleted the disallowance made under rule 8D(2)(ii) and has directed the assessing officer to compute the disallowance under rule 8D(2)(iii) by considering only those investments which yielded exempt income during the year. Suffice to say, as per the ratio laid down by the Hon ble Supreme Court in case of Maxopp Investment Ltd 2018 (3) TMI 805 - SUPREME COURT and South Indian Bank Ltd vs CIT (supra), the non SLR investments have to be treated as stock in trade. Hence, provisions of section 14A would not apply. Disallowance of expenses incurred towards employee stock option plan (ESOP) - HELD THAT - We are of the view that assessee s claim of deduction of ESOP expenses by way of amortization over the period of grant has to be allowed keeping in view the decision of the ITAT, Special Bench in case of Biocon Ltd vs DCIT 2013 (8) TMI 629 - ITAT BANGALORE wherein, it has been held that ESOP expenses are allowable as revenue expenditure under section 37(1) of the Act, we direct the assessing officer to allow assessee s claim of deduction. Also see NEW DELHI TELEVISION LTD. 2017 (2) TMI 1399 - DELHI HIGH COURT - This ground is allowed.

Summary

Issues Involved:
1. Disallowance of expenditure under section 14A of the Income Tax Act, 1961 read with rule 8D of the I.T. Rules, 1962.
2. Disallowance of expenses incurred under the Employee Stock Option Plan (ESOP).

Detailed Analysis:

Issue 1: Disallowance of Expenditure under Section 14A read with Rule 8D

Background:
The assessee, HDFC Bank Limited, filed its return of income declaring total income for the assessment year 2008-09. During the assessment proceedings, the assessing officer observed that the assessee had earned exempt income and called upon the assessee to furnish details of interest and other expenses incurred for earning the exempt income as per rule 8D. The assessee contended that the investments generating tax-free income were made from its own funds and internal cash accruals, and thus, no disallowance under section 14A should be made.

Tribunal’s Observations:
1. Interest Expenditure under Rule 8D(2)(ii):
- The assessee argued that it had sufficient interest-free funds available, which were more than the investments made. The Tribunal referred to the balance sheet which showed that the interest-free funds available were significantly higher than the investments.
- The Tribunal relied on the jurisdictional High Court's decision in CIT vs HDFC Bank Ltd and the Supreme Court’s decision in South Indian Bank Ltd vs CIT, which upheld the presumption that if interest-free funds are sufficient to cover the investments, it should be presumed that investments were made out of interest-free funds.
- The Tribunal concluded that no disallowance of interest expenditure under rule 8D(2)(ii) could be made since the assessee had sufficient interest-free funds.

2. Administrative Expenditure under Rule 8D(2)(iii):
- The Tribunal accepted the assessee's contention that disallowance should be computed only with reference to the investments yielding exempt income during the year, as per the Special Bench decision in ACIT vs Vireet Investments Pvt Ltd.

Conclusion:
The Tribunal deleted the disallowance of interest expenditure under rule 8D(2)(ii) and directed the assessing officer to compute the disallowance under rule 8D(2)(iii) considering only those investments which yielded exempt income during the year.

Issue 2: Disallowance of Expenses Incurred under ESOP

Background:
The assessing officer disallowed the ESOP expenses claimed by the assessee on the ground that ESOP results in the issuance of shares, thereby increasing the capital base of the company, and hence, it should be treated as capital expenditure. The Commissioner (Appeals) upheld this disallowance.

Tribunal’s Observations:
1. ESOP Expenses as Revenue Expenditure:
- The assessee contended that the ESOP expenses were amortized over the period of the grant and should be allowed as revenue expenditure.
- The Tribunal referred to the Special Bench decision in Biocon Ltd vs DCIT and the Delhi High Court’s decision in PCIT vs New Delhi Television Ltd, which held that ESOP expenses are allowable as revenue expenditure under section 37(1) of the Act.

Conclusion:
The Tribunal directed the assessing officer to allow the assessee's claim of deduction for ESOP expenses.

Final Judgment:
The appeal was partly allowed. The Tribunal deleted the disallowance of interest expenditure under rule 8D(2)(ii) and directed the assessing officer to recompute the disallowance under rule 8D(2)(iii) based on investments yielding exempt income. Additionally, the Tribunal allowed the deduction of ESOP expenses as revenue expenditure.