2023 (12) TMI 541 - AT - Income Tax

Disallowance u/s 14A - suo-moto addition made by assessee - CIT(A) upheld the contention of assessee that disallowance under Rule 8D(2)(iii) of the Rules should be made only on investment which yielded exempt income by referring to case law of Vireet Investment (P) Ltd 2017 (6) TMI 1124 - ITAT DELHI and further directed AO to re-compute the disallowance u/s 14A of the Act by taking the average investment of those investment that have yielded the exempt income - HELD THAT - We agree with the action of Ld. CIT(A), firstly because he has followed the ratio laid in Vireet Investment (supra) wherein it was held that for computing the average investment for the purpose of Rule 8D(2)(iii) of the Rules, the investment that yielded exempt income during the year only have to be considered and not the investment which did not yield any exempt income. And for such a preposition, we also rely on the decisions of ACB India Ltd. 2015 (4) TMI 224 - DELHI HIGH COURT and we find nothing wrong in the direction given by the Ld. CIT(A) and therefore, reiterate the direction of Ld. CIT(A) to assessee to submit before AO the value of investment which yielded exempt income and then the AO to compute disallowance u/s 14A of the Act taking average investment of those investment that have yielded the exempt income. And if the assessee is able to demonstrate that suo-motto disallowance made by assessee is in consonance with the aforesaid discussion, then no more disallowance is warranted. With the aforesaid observation, AO is directed to re-compute disallowance in accordance to law. For completeness, we do not find any merit in the contention of Ld. DR that in the light of amendment/explanation inserted by Finance Act, 2022, the disallowance made by AO is justified. We find that this issue is also no longer res-integra. The explanation inserted by Finance Act, 2022 w.e.f. 01.04.2022 is applicable from AY. 2022-23 onwards as held by Hon ble Delhi High Court in Era Infra Structure (India) Ltd. 2022 (7) TMI 1093 - DELHI HIGH COURT Therefore, this contention of Ld. DR is also rejected. Nature of expenses - ESOP expenses - Revenue or capital expenditure - as decided by CIT(A) ESOP is allowable deduction u/s 37(1) - HELD THAT - We note that Ld. CIT(A) has allowed the ESOP expenses by relying on the decision of his predecessor in assessee s own case as well as the decision of Tribunal dated 31.10.2022 in assessee s own case for AY. 2013-14 2022 (11) TMI 1164 - ITAT MUMBAI In such a scenario, we will be able to interfere only if the revenue is able to show that there is change in facts or law which warrant interference. Since revenue could not point out any change in facts or law vis- -vis the decision of ours in assessee s own case for earlier years, we have no other alternative but to uphold the impugned action of Ld. CIT(A). Revenue appeal dismissed.

Summary

Issues Involved:
1. Deletion of addition made under Section 14A.
2. Deletion of ESOP expenses.

Summary:

Issue 1: Deletion of addition made under Section 14A

The revenue challenged the order of CIT(A) which deleted the addition made under Section 14A by the AO. The AO had observed that the assessee company claimed exempt income and made a suo-moto disallowance under Section 14A. The AO, however, computed a higher disallowance under Rule 8D, considering all investments capable of generating exempt income, which led to an additional disallowance.

The CIT(A) allowed the appeal of the assessee, directing the AO to compute the disallowance only on investments that yielded exempt income, referencing the Special Bench decision in ACIT v. Vireet Investment (P.) Ltd. and other relevant case laws. The CIT(A) instructed the assessee to provide a bifurcation of investments that earned exempt income for accurate computation.

The Tribunal upheld CIT(A)'s decision, agreeing that only investments yielding exempt income should be considered for disallowance under Rule 8D, and rejected the revenue's contention regarding the applicability of the Finance Act, 2022 amendment, stating it is prospective from AY 2022-23 onwards.

Issue 2: Deletion of ESOP expenses

The revenue also contested the deletion of ESOP expenses by CIT(A). The AO had disallowed the ESOP expenses, considering them capital in nature. The CIT(A) deleted the addition, citing earlier decisions in the assessee's favor, including Tribunal's decision for AY 2013-14, which allowed ESOP expenses as revenue expenses under Section 37(1).

The Tribunal affirmed CIT(A)'s decision, noting that the revenue failed to demonstrate any change in facts or law from previous years' decisions, thus upholding the deletion of ESOP expenses.

Conclusion:

The appeal by the revenue was dismissed, with the Tribunal upholding the CIT(A)'s decisions on both issues. The Tribunal reiterated that disallowance under Section 14A should only consider investments yielding exempt income and confirmed the ESOP expenses as revenue expenses based on consistent past rulings.