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2016 (1) TMI 641 - AT - Income TaxDisallowance of ESOP expenses - Held that - Perused orders of lower authorities and the decisions relied on. L & T Ltd. which is a group concern of the assessee wherein held that absence of a written contract by itself might not be fatal to the claim of an expenditure especially when such expenditure is based on an understanding between a holding company and a subsidiary company, but nevertheless it is the duty of the assessee to show that what has been reimbursed as amortised ESOP cost by its holding company were actually charged by such holding company in its P & L account as expenditure and the reimbursements made by the assessee were shown as a part of its income. Assessee has to demonstrate that the services received by it from such employees were commensurate with the payment. We are therefore of the opinion that the claim of the assessee requires a fresh look by the AO. We therefore set aside the orders of the lower authorities on this issue and remit it back to the AO for fresh consideration. Assessee will be free to produce fresh evidence to justify the incurrence of such expenditure and also show that the expenditure was not claimed twice i.e. both by the assessee as well as by its holding company. Disallowance of portion of salary paid to deputed employees - assessee explained that cost of all the employees which were deputed to serve the assessee were either booked under 8036 or under Voith and that debit notes raised by the assessee combined the expenses towards employees having either of the two codes- Held that - We find considerable force in the submissions of the assessee. In fact the Commissioner of Income Tax (Appeals) initially agreed to the extent where the payments made to the deputed employees where the cost centre is shown as voith is to be allowed. The question now is whether cost centre voith and 8036 are one and the same or not. For this limited purpose of examining as to whether voith and 8036 are one and the same we remit this issue to the file of the Assessing Officer to find out whether these two cost centres are one and the same and if they are one and the same no disallowance towards reimbursement by the company to the parent company on account of deputed employees shall be made. The Assessing Officer may call for details and decide the issue accordingly after providing adequate opportunity of being heard to the assessee. Disallowance u/s sec 14A - Held that - As held by the Hon ble Supreme Court in the case of M/s. Walfort Share & Stock Brokers P.Ltd. (2010 (7) TMI 15 - SUPREME COURT ) for attracting section 14A there should be a proximate cause for disallowance with relation to its tax exempt income. The Punjab & Haryana High Court in the case of Hero Cycles Ltd. (2009 (11) TMI 33 - PUNJAB AND HARYANA HIGH COURT ) held that disallowance under section 14A requires finding of incurring of expenditure where it is found that for earning exempted income no expenditure has been incurred disallowance under section 14A cannot be made. The Delhi High Court in the case of Maxopp Investment Ltd. (2011 (11) TMI 267 - Delhi High Court ) held that while rejecting the claim of the assessee with regard to no expenditure was incurred in relation to exempt income the Assessing Officer should indicate cogent reasons for the same. The satisfaction of the Assessing Officer should be arrived on an objective basis. It is only when the Assessing Officer is not satisfied with the claim of the assessee he can invoke the provisions of section 14A of the Act. In this case the Assessing Officer has mechanically applied the provisions of section 14A read with Rule 8D without recording any satisfaction which is not permissible in view of the above decisions. Respectfully following the decisions cited above we direct the Assessing Officer to delete the addition made under section 14A of the Act. - Decided in favour of assessee.
Issues Involved:
1. Disallowance of ESOP charges. 2. Disallowance of portion of salary paid to deputed employees. 3. Application of Rule 8D for computing disallowance under section 14A. Issue-wise Detailed Analysis: 1. Disallowance of ESOP Charges: The first issue addressed by the Tribunal was whether the Commissioner of Income Tax (Appeals) erred in confirming the disallowance of ESOP charges amounting to Rs. 35,28,333/-. The assessee argued that these ESOP expenses reimbursed to L&T Ltd. for deputed employees were incurred for business purposes and should be allowable under section 37(1) of the Act. The Assessing Officer had disallowed the amount on the grounds that the shares were issued by L&T Ltd., not the assessee, and considered it a notional expenditure. The Commissioner of Income Tax (Appeals) upheld this disallowance. The Tribunal referred to a similar case involving L&T Valdel Engineering P. Ltd., where the Bangalore Bench had remitted the issue back to the Assessing Officer for fresh consideration. Following this precedent, the Tribunal directed the Assessing Officer to reconsider the issue afresh, taking into account the observations made in the L&T Valdel Engineering P. Ltd. case and providing the assessee with adequate opportunity to be heard. 2. Disallowance of Portion of Salary Paid to Deputed Employees: The second issue was the disallowance of Rs. 1,10,31,518/-, part of the salary paid to the parent company for deputed employees. The Assessing Officer had disallowed this amount, claiming it was inflated through invoices. The Commissioner of Income Tax (Appeals) allowed the expenditure only for invoices mentioning the cost center "Voith Paper Technology" and not "8036". The assessee contended that both cost centers represented deputation costs, supported by a letter from L&T. The Tribunal found merit in the assessee's argument and remitted the issue back to the Assessing Officer to verify whether "Voith" and "8036" were indeed the same cost center. If they were, the disallowance should not be made. The Assessing Officer was directed to call for details and decide the issue accordingly after providing the assessee with an adequate opportunity to be heard. 3. Application of Rule 8D for Computing Disallowance under Section 14A: The third issue involved the disallowance of Rs. 5,71,602/- under section 14A read with Rule 8D, related to the earning of exempt income (dividends). The Assessing Officer had applied Rule 8D mechanically without recording any satisfaction regarding the correctness of the assessee's claim that no expenses were incurred for earning the exempt income. The Tribunal noted that for attracting section 14A, there must be a proximate cause for disallowance related to tax-exempt income, as held by the Supreme Court in CIT Vs. Walfort Share & Stock Brokers P. Ltd. Additionally, the Tribunal cited decisions from the Punjab & Haryana High Court and Delhi High Court, emphasizing that disallowance under section 14A requires a finding of incurred expenditure and that the Assessing Officer must provide cogent reasons for rejecting the assessee's claim. Since the Assessing Officer failed to record any satisfaction or provide reasons, the Tribunal directed the deletion of the addition made under section 14A. Conclusion: The Tribunal partly allowed the appeal for statistical purposes, directing the Assessing Officer to reconsider the ESOP charges and salary disallowance issues afresh and to delete the disallowance made under section 14A due to the lack of recorded satisfaction. The decision ensures that the assessee is given a fair opportunity to present their case and that disallowances are made based on proper verification and reasoning.
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