2020 (5) TMI 84 - AT - Income Tax

Disallowance u/s 14A - HELD THAT - From the reading of the judgment of the Hon ble Apex Court in the case of Maxopp Investment Ltd. Vs CIT 2018 (3) TMI 805 - SUPREME COURT we find that having regard to the language of Section 14A(2) of the Act read with Rule 8D of the Rules it clear that before applying the theory of apportionment the AO needs to record satisfaction that having regard to the accounts of the assessee suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment in that eventuality the Assessing Officer will have to record its satisfaction to this effect. In the instant case we find that no such satisfaction has been recorded by the A.O to come to the conclusion to invoke the provisions of Section 14A(2). Hence we decline to interfere with the order of the ld. CIT (A) and the disallowance is directed to be deleted. Claim of depreciation on software - @25% OR 60% depreciation claimed by the assessee - CIT (A) deleted the addition on the grounds that the AO has mislead himself treating the software as intangible asset - HELD THAT - we find that the nature of the software acquired were licenses which do not confer any enduring right and could be used for the duration as acquired for by the licensor. The taxpayer s objective was to use computer software to maximize its performance and streamline efficiency. The Hon ble Bombay High Court in the case of M/s IFlex Solutions Ltd. . 2014 (3) TMI 1162 - BOMBAY HIGH COURT held that there is no reason to differentiate the computer and the software as the latter is an integral part of the former. The software cannot be seen in isolation delinked from the computers. The issue of depreciation @60% on the software is now a settled issue beyond any perplexity. Employee Compensation Expenses - allowable expenditure u/s 37(1) - HELD THAT - Discount offered on the shares under the ESOP of scheme is allowable deduction u/s 37(1) of the Act we hereby remand the matter to the file of the AO for the limited purpose of arithmetic calculation of apportioning the year wise discount over the period of vesting taking into consideration the options granted to the employees determination of the perk value FBT levied and allow the same as per the provisions of the Income Tax Act 1961.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Disallowance of excess depreciation.
3. Disallowance of additional claim of deduction on account of Employee Compensation Expenses.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:

The revenue challenged the deletion of disallowance under Section 14A amounting to ?16,37,03,673/-. The Assessing Officer (AO) had recomputed the disallowance on the grounds that the assessee did not furnish a rationale for the amount disallowed and did not maintain separate staff or workstations for investment activities. The AO relied on the ITAT Special Bench judgment in the case of Cheminvest Ltd. The AO did not follow the provisions of Section 14A(2) which mandates recording satisfaction regarding the correctness of the assessee's claim. The Tribunal found that the AO did not record such satisfaction and thus upheld the CIT(A)'s order deleting the disallowance.

2. Disallowance of Excess Depreciation:

The AO allowed depreciation on software at 25% instead of 60% claimed by the assessee, treating the software as an intangible asset. The CIT(A) deleted this addition, stating that the software licenses do not confer any enduring right and are integral to computers. The Tribunal agreed, referencing the Bombay High Court decision in the case of M/s IFlex Solutions Ltd. and ITAT decisions in Make My Trip (India) Pvt. Ltd. and Globe Capital Market Ltd., confirming the depreciation rate of 60% for software.

3. Disallowance of Additional Claim of Deduction on Account of Employee Compensation Expenses:

The assessee claimed ESOP expenses of ?66.33 crores, relying on the ITAT Special Bench decision in M/s Biocon Ltd., which was approved by the Delhi High Court in M/s Lemon Tree Hotels Limited. The Special Bench had held that ESOP expenses are allowable under Section 37(1) as they represent employee compensation. The Tribunal remanded the matter to the AO for arithmetic calculation of apportioning the year-wise discount over the vesting period, considering options granted, perk value, and FBT levied, and to allow the same as per the Income Tax Act provisions.

Conclusion:

The Tribunal dismissed the revenue's appeals, upholding the CIT(A)'s orders on all issues. The Tribunal emphasized the need for the AO to follow statutory provisions and record satisfaction when disallowing expenses under Section 14A. It also confirmed the higher depreciation rate for software and the allowability of ESOP expenses as employee compensation.