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TMI Blog2015 (12) TMI 1666X X X X Extracts X X X X X X X X Extracts X X X X ..... ssue price of the shares offered to employees under the stock option scheme was held to be allowable expenditure under similar circumstances." The revenue has raised the following grounds of appeal in the memo of appeal filed by the Revenue, the appeal being ITA No. 2490/Mum/2013:- "1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in excluding Rs. 4,61,37,00,000/- being investment made by the assessee in the shares of its subsidiary M/s India Infoline Investment Services Limited while working out the average value of investment for the purpose of computation of disallowance u/s 14A r.w.r. 8D. 2. The appellant prays that the order of the CIT(A) on the grounds be set aside and that of the Assessing Officer be restored." 3. The assessee company is aggrieved by the disallowance of deferred compensation expenses of Rs. 5,99,74,467/- debited under the head employee cost, by the assessing officer (hereinafter called "the AO") which was confirmed by the CIT(A). 4. During the course of assessment proceedings u/s 143(3) read with Section 143(2) of the Act, the assessee company was asked by the AO that why the deferred employee compensation ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort receipt of share premium which the assessee company was otherwise entitled to. The receipt of share premium is not taxable and hence any short receipt of such share premium will be a notional loss and not actual loss for which no liability is incurred and such notional losses are not allowable under the provisions of the Income Tax Act, 1961. Similarly, the AO held that no expenditure has been incurred by the assessee company and the benefit or income foregone cannot be considered as business expenditure. In view of the above, the expenditure of Rs. 5,99,74,467/- on ESOP was disallowed by the AO. 6. Aggrieved by the assessment order of the AO passed u/s 143(3) of the Act, the assessee company carried the matter in appeal before the CIT(A) and reiterated its submissions as were submitted before the AO which are detailed in the preceding para's, which are not repeated for the sake of brevity. The assessee company further relied upon the decision of ACIT v. Spray Engineering Devices Ltd. ITAT- ITA No.701/Chd/2009 and CIT v. PVP Ventures Ltd. - Hon'ble Chennai High Court and SSI Ltd. v. DCIT (2004) 85 TTJ 1049 (ITAT Chennai). The CIT(A) rejected the contentions of the assessee com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Hon'ble Special BenchBangalore Tribunal reported in (2013) 35 taxmann.com 335(SB) Biocon Limited v. DCIT(LTU) in favour of the assessee company whereby the Hon'ble Special Bench has held as under : "7. We have heard Shri H. Padam Chand Khincha for the appellantassessee; Shri Rohit Jain for the Intervener, M/s. Bharti Airtel; Shri Sachin Kumar B.P. for the Intervener, M/s. Advinus Therapeatics Limited; and Shri K.R. Pradeep for the Intervener, M/s. NDTV Media Limited, (all the four counsel are hereinafter collectively referred to as 'the ld. AR'). We have also heard Shri S.K. Ambastha, the ld. CIT representing the Revenue. The moot question is as to whether the Discounted premium on ESOP also called as the Discount on issue of ESOP or the Employee stock option compensation expense or the Employees compensation expense or simply the Discount etc., is an allowable deduction in the computation the income under the head "Profits and gains of business or profession"? This larger question can be answered in the following three steps, viz., I. Whether any deduction of such discount is allowable ? II. If yes, then when and how much? III. Subsequent adjustment to discount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... presentative contended that the Mumbai bench of the Tribunal in the case of VIP Industries v. Dy. CIT [IT Appeal No.7242 (Mum.) of 2008 has also taken similar view vide its order dated 17.09.2010.] 9.2.2 Per contra, the learned AR submitted that it is not a case of any short receipt of share premium but that of compensation given to employees. He supported the admissibility of deduction of the amount of discount on the strength of the order passed by the Chennai bench of the tribunal in the case of S.S.I. Ltd. (supra) granting deduction of such discount by treating it as an employee cost. He submitted that the above view taken by the Chennai Bench has been approved by the Hon'ble Madras High Court in CIT v. PVP Ventures Ltd. [2012] 211 Taxman 554/23 taxmann.com 286. The learned AR argued that PVP Ventures Ltd. (supra) is a solitary judgment rendered by any High Court on the issue and hence the same needs to be followed in preference to any contrary Tribunal order. It was also pointed out that the Chennai bench's view has been subsequently followed by the Chandigarh Bench of the Tribunal in Asstt. CIT v. Spray Engineering Devices Ltd. [2012] 23 taxmann.com 267/53 SOT 70 (U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ployees at a future date at a price lower than the current market price. This is achieved by granting stock options to its employees at discount. The amount of discount represents the difference between market price of the shares at the time of the grant of option and the offer price. In order to be eligible for acquiring the shares under the ESOP, the concerned employees are obliged to render services to the company during the vesting period as given in the scheme. On the completion of the vesting period in the service of the company, such options vest with the employees. The options are then exercised by the employees by making application to the employer for the issue of shares against the options vested in them. The gap between the completion of vesting period and the time for exercising the options is usually negligible. The company, on the exercise of option by the employees, allots shares to them who can then freely sell such shares in the open market subject to the terms of the ESOP. Thus it can be seen that it is during the vesting period that the options granted to the employees vest with them. This period commences with the grant of option and terminates when the options ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earn profit by securing the consistent and concentrated efforts of its dedicated employees during the vesting period. Such discount is construed, both by the employees and company, as nothing but a part of package of remuneration. In other words, such discounted premium on shares is a substitute to giving direct incentive in cash for availing the services of the employees. There is no difference in two situations viz., one, when the company issues shares to public at market price and a part of the premium is given to the employees in lieu of their services and two, when the shares are directly issued to employees at a reduced rate. In both the situations, the employees stand compensated for their effort. If under the first situation, the company, say, on receipt of premium amounting to Rs. 100 from issue of shares to public, gives Rs. 60 as incentive to its employees, such incentive of Rs. 60 would be remuneration to employees and hence deductible. In the same way, if the company, instead, issues shares to its employees at a premium of Rs. 40, the discounted premium of Rs. 60, being the difference between Rs. 100 and Rs. 40, is again nothing but a different mode of awarding remune ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chapter IV-D. Sub-section (2) of section 43 defines "paid" to mean: "actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head 'profits and gains of business or profession'." When we read the definition of the word "paid" u/s 43(2) in juxtaposition to section 37(1), the position which emerges is that it is not only paying of expenditure but also incurring of the expenditure which entails deduction u/s 37(1) subject to the fulfilment of other conditions. At this juncture, it is imperative to note that the word 'expenditure' has not been defined in the Act. However, sec. 2(h) of the Expenditure Act, 1957 defines 'expenditure' as : 'Any sum of money or money's worth spent or disbursed or for the spending or disbursing of which a liability has been incurred by an assessee......'. When section 43(2) of the Act is read in conjunction with section 37(1), the meaning of the term 'expenditure' turns out to be the same as is there in the aforequoted part of the definition under section 2(h) of the Expenditure Act, 1957, viz., not only 'paying out' but also ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , we, with utmost respect, are unable to concur with the view taken in Ranbaxy Laboratories Ltd.(supra). B. Is discount a Contingent liability ? 9.3.1 The learned Departmental Representative supported the impugned order by contending that the entitlement to ESOP depends upon the fulfilment of several conditions laid down under the scheme. It is only when all such conditions are fulfilled and the employees render services during the vesting period that the question of any ascertained liability can arise. He submitted that during the entire vesting period, it is only a contingent liability and no deduction is admissible under the provisions of the Act for a contingent liability. The options so granted may lapse during the vesting period itself by reason of termination of employment or some of the employees may not choose to exercise the option even after rendering the services during the vesting period. It was, therefore, argued that the discount is nothing but a contingent liability during the vesting period not calling for any deduction. In the opposition, the learned AR submitted that the amount of discount claimed by the assessee as deduction is not a contingent liability but a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . When the matter finally came up before the Hon'ble Supreme Court, it was held that the provision for meeting the liability for encashment of earned leave by the employee was an admissible deduction. In holding so, the Hon'ble Apex Court observed that : "the law is settled : if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain." From the above enunciation of law by the Hon'ble Supreme Court, it is manifest that a definite business liability arising in an accounting year qualifies for deduction even though the liability may have to be quantified and discharged at a future date. We consider it our e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Supreme Court in Bharat Earth Movers (supra) and Rotork Controls India (P.) Ltd. (supra), it becomes vivid that the mandate of these cases is applicable with full force to the deductibility of the discount on incurring of liability on the rendition of service by the employees. The factum of the employees becoming entitled to exercise options at the end of the vesting period and it is only then that the actual amount of discount would be determined, is akin to the quantification of the precise liability taking place at a future date, thereby not disturbing the otherwise liability which stood incurred at the end of the each year on availing the services. 9.3.6 As regards the contention of the ld. DR about the contingent liability arising on account of the options lapsing during the vesting period or the employees not choosing to exercise the option, we find that normally it is provided in the schemes of ESOP that the vested options that lapse due to non-exercise and/or unvested options that get cancelled due to resignation of the employees or otherwise, would be available for grant at a future date or would be available for being re-granted at a future date. If we consider it at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities offered under such plan or scheme. Thus it is discernible from the above provisions of the Act that the legislature itself contemplates the discount on premium under ESOP as a benefit provided by the employer to its employees during the course of service. If the legislature considers such discounted premium to the employees as a fringe benefit or 'any consideration for employment', it is not open to argue contrary. Once it is held as a consideration for employment, the natural corollary which follows is that such discount (i) is an expenditure; (ii) such expenditure is on account of an ascertained (not contingent) liability; and (iii) it cannot be treated as a short capital receipt. In view of the foregoing discussion, we are of the considered opinion that discount on shares under the ESOP is an allowable deduction. II. IF YES, THEN WHEN AND HOW MUCH? 10.1 Having seen that the discount under ESOP is a deductible expenditure u/s 37(1), the next question is that 'when' and for 'how much' amount should the deduction be granted ? 10.2 The assessee is a limited company and hence it is obliged to maintain its accounts on mercantile basis. Under such sy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 100 shares at discount. Though the shares are allotted at the end of the vesting period, but it is during such vesting period that the entitlement is earned. It means that 25 options vest with the employee at the end of each year on his rendering service for the respective year. If during the interregnum, he leaves the service, say after one year, he will still remain entitled to exercise option for 25 shares at the discounted premium at the time of exercise of option. In that case, the benefit which would have accrued to him at the end of the second, third and fourth years would stand forfeited. Thus it becomes abundantly clear that an employee becomes entitled to the shares at a discounted premium over the vesting period depending upon the length of service provided by him to the company. In all such schemes, it is at the end of the vesting period that option is exercisable albeit the proportionate right to option is acquired by rendering service at the end of each year. 10.4 Similar is the position from the stand point of the company. An obligation falls upon the company to allot shares at the time of exercise of option depending upon the length of service rendered by the empl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e facts of the case of S.S.I. Ltd. (supra), which has been strongly relied by the ld. AR in support of his claim for deduction of discount during the years of vesting of options. In that case the vesting period was three years and the assessment order was passed u/s 143(3), inter alia, allowing deduction of Rs. 66.82 lakh under the head "Staff welfare expenses" on account of amortization of discounted value of option over a period of three years. The CIT revised such order by directing the A.O. to disallow ESOP expenditure of Rs. 66.82 lakh. When the matter came up before the Tribunal, it was held that the expenditure in that behalf was an ascertained liability and not contingent upon happening of certain events. It was further noticed that the assessee claimed deduction of such discount on ESOP by following the SEBI Guidelines. As the expenditure itself was an ascertained liability, the Tribunal held that the same to be deductible. 10.7 Before proceeding further it would be befitting to take stock of the nutshell of the SEBI Guidelines in this regard. These Guidelines provide for granting of deduction on account of discount on issue of options during the vesting period. It has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vital part of the overall question of the deductibility or otherwise of the amount of discount under ESOP. 11.1.2 We have noticed above that the company incurs a definite liability during the vesting period, but its proper quantification is not possible at that stage as the actual amount of employees cost to the company, can be finally determined at the time of the exercise of option or when the options remain unvested or lapse at the end of the exercise period. It is at this later stage that the provisional amount of discount on ESOP, initially quantified on the basis of market price at the time of grant of options, needs to be suitably adjusted with the actual amount of discount. 11.1.3 As regards the adjustment of discount when the options remain unvested or lapse at the end of the exercise period, it is but natural that there is no employee cost to that extent and hence there can be no deduction of discount qua such part of unvested or lapsing options. But, as the amount was claimed as deduction by the company during the period starting with the date of grant till the happening of this event, such discount needs to be reversed and taken as income. It is so because logically ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion exercised by an individual, the value of the specified securities shall be taxable in the previous year in which such option is exercised by such individual. Such clause (iiia) was subsequently deleted with effect from 1st April, 2001. After certain changes to the relevant provisions in this regard, the position which now stands is that the discount on ESOP is taxable as perquisite u/s 17(2)(vi) for : 'the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assessee'. Clause (c) of Explanation to section 17(2)(vi) provides that : 'the value of any specified security or sweat equity shares shall be the fair market value of the specified security or sweat equity shares, as the case may be, on the date on which the option is exercised by the assessee as reduced by the amount actually paid by, or recovered from, the assessee in respect of such security or shares'. Two things surface from the above provisions. First, that the perquisite arises on the 'allotment' of shares and second, the value of such perquisite is to be compute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a tentative employees cost because of the impossibility in correctly visualizing the likely market price of shares at the time of exercise of option by the employees, which, in turn, would reflect the correct employees cost. Since the definite liability is incurred during the vesting period, it has to be quantified on some logical basis. It is this market price at the time of the grant of options which is considered for working out the amount of discount during the vesting period. But, since actual amount of employees cost can be precisely determined only at the time of the exercise of option by the employees, the provisional amount of discount availed as deduction during the vesting period needs to be adjusted in the light of the actual discount on the basis of the market price of the shares at the time of exercise of options. It can be done by making suitable northwards or southwards adjustment at the time of exercise of option. This can be explained with the following example with the assumption of vesting period of four years and the benefit vesting at 25% each at the end of 1st to 4th years:- At the time of granting option At the time of exercise of option ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company claimed deduction for the amount of discount during the vesting period on the basis of the market price of shares at the time of grant of options and also reversed the proportionate discount on unvesting/lapsing of options at the appropriate time on the basis of the SEBI Guidelines. If this contention is correct, it would mean that the first two stages have been rightly given effect to. But the appellant assessee does not appear to have made any downward adjustment to the amount of discount at the time of exercise of option by the employees with the difference in the market price of the shares at the time of grant of option and price at the time of exercise of option. The argument seems to be that the SEBI Guidelines do not provide for such downward adjustment. It has been argued by the ld. AR that where the provisions of the Act specifically provide for treatment of a particular source of income in a particular manner, then the germane provision should be followed. If, however, there is no specific provision dealing with an issue in the Act, then the accounting principles should be adhered to while determining the total income of the assessee. In this regard, he relied on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. AR that there is no specific provision in the Act on the ESOP discount. It is axiomatic that the taxation rules are always embodied in the relevant Act, either in a specific or a general manner. These can be specific by making a clear cut provision in respect of deductibility of a particular item of expense or taxation of a particular item of income. General provisions are those which set out the overall principles to govern the deductibility or taxability of unspecified items. For example, the definition of 'income' u/s 2(24) has been given by the Act in an inclusive manner. There have been enshrined clauses (i) to (xvi) dealing with the items specifically listed. However, the provision has been couched in such a way so as to include general items of receipts having character of income, even though not specifically mentioned. Similar is the position regarding deductions. Under the head 'Profits and gains of business or profession', there are sections granting deductions in respect of specific expenses or allowances. Similarly, there is section 37(1), which grants deduction for expenses not specifically set out in other sections, if the conditions stipulated in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a hypothetical income, which does not materialise.' 11.2.7 It follows that accounting principles have absolutely no role to play in the matter of determination of total income under the Act. If an accounting principle is referred to by the higher judiciary, then there is an underlying presumption that such accounting principle is in conformity with and not in conflict with the taxation principle. The essence of the matter is that taxation principles are to be followed. If an accounting principle is in conformity with the mandate of taxing principle and reference is made to such accounting principle while deciding the issue, it does not mean that the accounting principle has been followed. It simply means that the taxation principle has been followed and the accounting principle, which is in line with such taxation principle, has been simply taken note of. If however, an accounting principle runs counter to the taxation principle, then there is no prize for guessing that it is only the taxation principle which shall pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the period of vesting of the options and the situation arising out of unvested options or vested options lapsing. The very reference by the Chennai Bench of the Tribunal in SSI Limited (supra) to the SEBI Guidelines is indicative of the fact that it dealt with a year during which the options were vesting with the employees and the company claimed discount during the vesting period. The Hon'ble Madras High Court in the case of PVP Ventures Ltd. (supra) has upheld the view taken by the Chennai Bench in the case of S.S.I. Ltd. (supra). The granting of the binding force to the SEBI Guidelines by the Hon'ble Madras High Court should be viewed in the context of the issue before it, which was about the deductibility of discount during one of the vesting years. In the earlier part of this order, we have held that the deductibility of discount during the vesting period, as prescribed under the SEBI Guidelines, matches with the treatment under the mercantile system of accounting. To that extent, we also hold that the SEBI guidelines are applicable in the matter of deduction of discount. Neither there was any issue before the Hon'ble Madras High Court nor it dealt with a situat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction. a. The assessee-company was a closely held company in the previous year relevant to the assessment year 2003-2004 and as such there was no question of the listing of its shares and having some market price at the time of grant of options. Ordinarily, the amount of discount on premium which is written off over the vesting period represents the market price of the shares listed on the stock exchange on the date of grant of option as reduced by the price at which option is given to the employees. However, presently there is no availability of any market price of such shares on the date of grant of option as the company came to be listed on a stock exchange in a subsequent year. On a pointed query, the ld. AR furnished the details of such claim by showing that it granted 71,510 options with discount of Rs. 909 per option making total discount at Rs. 6.50 crore. He stated that the face value of shares is at Rs. 10 against which the deduction for discounted premium over the vesting period has been claimed at Rs. 909, meaning thereby that the market price of the share on the date of grant of option was taken at Rs. 919. No material worth the name has been placed on record to in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndicate the date of grant of options in respect of which deduction has been claimed in the instant year. Two letters granting options to Shri Murali Krishnan K.N. and Neville Bain have been randomly filed which are dated 2nd April, 2002. If the options are granted on 2nd April, 2002, then 25% of the total option shall vest in the employees at the end of the first year from this date, which date would be 1st April, 2003. As such, the amount would become deductible in the previous year relevant to assessment year 2004-2005 and not 2003-2004. The ld. AR contended that though these letters are dated 2nd April, 2002, but in fact the options were granted on 1st April, 2002. The correct date of grant and vesting needs to be verified at the AO's end. d. The ld. AR has stated that the amount of discount claimed as deduction in the earlier years in respect of unvesting/lapsing options has been reversed at the relevant time. There is no finding either in the assessment or the impugned order in this regard. This fact should also be verified by the AO to ensure that the overall expenditure booked by the company is restricted only to the extent of the exercised options." The Hon'ble Speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as reflected under the Balance Sheet. The AO noted that the assessee company had not attributed any expenses which have been incurred to carry out the activity of making exempt income bearing investment, whereas, it is accepted fact as per the AO for carrying out any such activity, some kind of expenditure are necessarily to be incurred . 10.1. The assessee company submitted before the AO that the assesee company has not incurred any expenses for earning such exempt income in the form of dividend income. The assessee company has made investment in short term surplus funds in liquid schemes of mutual funds out of own funds and no borrowed funds have been used to make investments. Similarly, assessee company has made investment in subsidiary companies to retain management control of the said subsidiaries not to earn income and the investment have been made out of own funds and no borrowed funds have been used. The AO rejected the contentions of the assessee company and held that the assessee company cannot earn any income from investments without systematic management. The investment decisions are very complex in nature which requires substantial market research and day to day analy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earing in Schedule 'G' investment in non 115O dividend foreign subsidiary is of Rs. 21,15,15,974/- and further investment in Series A NCD Ordyn Technology Private Limited, Series B OCD Ordyn Technology Private Limited and Equity Fund Trust is of Rs. 30,02,00,000/- on such investment there is a interest income offered during the year, hence, is not investment relating to exempt income. The CIT(A) also held that there is investment in subsidiaries of Rs. 755,92,38,775/- on which no dividend has been received. With this background the CIT(A) held that Rule 8D is squarely applicable and restricted the addition based upon the following chart and hence the disallowance was restricted to Rs. 39,427,835/-. I. Investment as on 1 April 2007 1,714,503,772 Less: Investment in Debentures, etc yielding taxable income 200,000,000 Less: Investment in shares of Foreign Companies likely to yield taxable dividend 11,755,102 Eligible Investment as on 1 April 2007 1,502,748,670(A) Total Assets as on 1 April 2007 6,662,626,622(B) Investment as on 31 March 2008 9,156,801,378 Less: Investment made in India Infoline Investment services 4,613,700,000 Limited on 4 February 2008 out of proceeds o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used the material available on record. We have observed that the assessee company has made investment in the subsidiary company namely M/s India Infoline Investment Services Ltd. of Rs. 4,61,37,00,000/- on 4th February, 2008 out of proceeds of fresh shares issued by the assessee company in January 2008 which is duly reflected from the orders of the authorities below and it is stated by the Ld. Counsel of the assessee company before us that no borrowed funds whatsoever has been utilized by the assessee company for the purpose of making the investment in the said subsidiary company namely M/s India Infoline Investment Services Ltd. amounting to Rs. 4,61,37,00,000/-. In fact it is stated before us that the entire own funds are utilized by the assessee company for making this investment in subsidiary company namely M/s India Infoline Investment Services Ltd. of Rs. 4,61,37,00,000/-. We are of the considered opinion that the CIT(A) has rightly excluded the said investment of Rs. 4,61,37,00,000/- for the purposes of disallowance under Rule 8D (2)(ii) of the Income Tax Rules, 1962 r.w.s. 14A of the Act. Coming to the submission of the assessee company that these are strategic investments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the following decisions : i). The observation made by Hon'ble Supreme Court in the case of CIT v. Walfort Share & Stock Brokers Pvt. Ltd. (2010) 326 ITR 1(SC) defining the scope of Section 14A of the Act incorporated retrospectively w.e.f. 1st April 1962. The relevant observations are reproduced as under: "The insertion of section 14A with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (see Circular No. 14 of 2001 dated 22-11-2001). In other words, section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4A. Reading section 14 in juxtaposition with sections 15 to 59, it is clear that the words "expenditure incurred" in section 14A refers to expenditure on rent, taxes, salaries, interest, etc. in respect of which allowances are provided for (see sections 30 to 37). ii) The Hon'ble Bombay High Court in the judgment in Godrej and Boyce Manufacturing Company Limited v. DCIT (2010)328 ITR 0081 on applicability of Section 14A of the Act read with Rule 8D of Income Tax Rules, 1962 has laid down the legal propositions and detailed summation on the subject with the factual background that Godrej and Boyce Manufacturing Company Limited, the assessee invested in share capital of group company promoted by it namely Godrej Soaps Limited several years back and received dividend from the said investee company during the assessment year. The relevant extracts are as under: "B. Facts 7. The assessee filed its return of income for the assessment year 2002-03 on 29-10-2002, declaring a loss of Rs. 45.90 crores. The assessee had claimed a dividend of Rs. 34.34 crores as exempt from the total taxable income under section 10(33). During the course of scrutiny proceedings, the assessee was called upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal income by virtue of the provisions of section 10(33). Income from mutual funds stands on the same basis; (iii) The provisions of sub-sections (2) and (3) of section 14A of the Income Tax Act 1961, are constitutionally valid; (iv) The provisions of rule 8D of the Income-tax Rules as inserted by the Income-tax (Fifth Amendment) Rules, 2008, are not ultra vires the provisions of section 14A, more particularly sub-section (2) and do not offend article 14 of the Constitution; (v) The provisions of rule 8D of the Income-tax Rules which have been notified with effect from 24-3-2008, shall apply with effect from the assessment year 2008-09; (vi) Even prior to the assessment year 2008-09, when rule 8D was not applicable, the assessing officer has to enforce the provisions of sub-section (1) of section 14A. For that purpose, the assessing officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The assessing officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gement is involved and therefore proportionate management expenses are required to be deducted while computing the exempt income from dividend. In Harish Krishnakant Bhatt v. Income Tax Officer (2004) 91 ITD 311 (Ahd.), the Ahmedabad Bench of this Tribunal has held that, the dividend income being exempt under section 10(33), the interest on capital borrowed for acquisition of relevant shares yielding such dividend cannot be allowed deduction by operation of section 14A. In Dy. CIT v. SG Investments &Industries Ltd. (2004) 89 ITD 44 (Cal.), the Calcutta Bench of this Tribunal has laid down two propositions: one, in view of section 14A inserted in the Income Tax Act with retrospective effect from 1-4-1962, pro rata expenses on account of interest relatable to investment in shares for earning exempt income from dividend are to be disallowed against taxable income and only the net dividend income is to be allowed exemption after deducting the expenses; and two, the expression "expenditure incurred by the assessee in relation to income which does not form part of the total income" in section 14A has to be given a wider meaning and would include both direct and indirect relationship betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the decision oi Hon'ble Supreme Court in the case of Distributors (Baroda) (P) Ltd. v. Union of India (1985) 47 CTR (SC) 349: (1985) 155 ITR 120 (SC), reversed the decision of the Hon'ble Bombay High Court in CIT v. United General Trust (P) Ltd. (supra), wherein the question was as under: "Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in applying the decision of the Bombay High Court in the case of CIT v. New Great Insurance Co. Ltd. (1973) 90 ITR 348 (Bom) to the assessment year in question without considering the effect of the amendment operative from Ist April, 1968, and in thus holding that the assessee would be entitled to the deduction under section 80M on the gross dividend before deduction of the proportionate management expenses ?" Thus, when the decision of the Hon'ble Bombay High Court has been reversed, the proportionate management expenses are required to be deducted while computing the dividend income. In the decision of the Hon'ble Calcutta High Court, relied upon by the learned counsel for the assessee, Mr. Dastur, in the case of CIT v. United Collieries Ltd. (supra), it has been held that if the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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