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TMI Blog2021 (10) TMI 1010X X X X Extracts X X X X X X X X Extracts X X X X ..... u disallowance for earning the above exempted income - CIT(A) has deleted the disallowance mainly on the ground that investment from growth fund is taxable, and therefore, said investment should be excluded while working out the disallowance under Rule 8D(2)(iii) of the Rules. Also directed not to consider investment in subsidiary, which according to the Ld. CIT(A), was for controlling stake - HELD THAT:- As in view of the recent decision of the Hon ble Supreme Court in the case of Maxxop Investment Ltd [ 2018 (3) TMI 805 - SUPREME COURT] strategic investment for obtaining controlling stake has also been found liable for computing disallowance under Rule 8D(2)(iii) of the Rules and therefore to this extent, the order of the Ld. CIT(A) is set aside and matter restored back to the learned Assessing Office for re-computing the disallowance under Rule 8D(2)(iii) of the Rules. The Assessing Officer is also directed to verify whether income from growth funds has been included under taxable income and if so, then he shall exclude the said investment for computing disallowance in terms of Rule 8d(2)(iii) of Rules. The ground of the appeal of the Revenue is accordingly allowed partly for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the ground that expenditure was on account of issuance of share capital, which being in the nature of capital expenditure, was not allowed as business expenditure. The detailed finding of Learned Assessing Officer is reproduced as under: "i. The expenditure on ESOP compensation expenditure is not revenue expenditure as the same has been incurred towards the raising of share capital which is clearly capital in nature. The Various Hon'ble Courts has held in their decisions that the nature of expense should be taken in the broad way to which it is attributable. ii. The amount of expenditure claimed as Compensation towards Employees Stock Option Plan/Scheme is not an actual expenditure incurred by the company. It is just a notional loss. iii. SEBI guidelines are not a prerogative for determining allowability or otherwise of an item for income tax purpose. iv. The shares were the capital of the assessee company and any loss to the capital can be considered as capital loss and not revenue expenditure. Reliance is placed on decisions in the following cases; M/s VIP INDUSTRIES LTD Vs DCIT, & Ranbaxy Laboratories vs. Add.CIT 124 TTJ (Del) 771. v. Section 145 of the Income Tax, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g as under: "5.1 It is gathered from the appellant's submission at para 4 and 4.1 above that in AY 2011 - 12, the appellant granted ESOP to its employees under its Employee Stock Option Scheme, 2006 whose objective was - * Further the appellant's growth and development * Motivate employees towards the appellant's objectives * Maintain ability to attract and retain outstanding employees for positions of substantial responsibility The appellant recognized this 'employee' cost in its books of account as an expense in accordance with the extant SEBI Guidelines - mandatory for listed companies. Under the ESOP 2,72,500 shares were granted to its eligible employees in November 2010 vesting in the eligible employees over a period of 3 years - @ 40%, 30% and 30%. Accordingly, shares of face value of ₹ 10/- were issued at ₹ 330/- per share (IPO price) allotted to "ICRA Employees Welfare Trust" while the market price on the granting date was ₹ 1,423.85/- per share. The intrinsic value of shares of ₹ 1,093.85 i.e. difference between market price of ₹ 1,423.85 and the grant price of ₹ 330/-, was adopted for computing the ESOP expenses in accordance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the word "expenditure" has not been defined in the Act. They held that: the word "expenditure" is, therefore, required to be understood in the context in which it is used. Section 37 enjoins that any expenditure not being expenditure of the nature described in sections 30 to 36 laid out or expended wholly and exclusively for the purposes of the business should be allowed in computing the income chargeable under the head "profits and gains of business or profession" in sections 30 to 36 the expression "expenditure incurred", as well as allowance and depreciation, has also been used for example depreciation and allowances are dealt with in section 32, therefore, the parliament has used expression "any expenditure" in section 37 to cover both. Therefore, the expression "expenditure" as used in section 37 made in the circumstances of a particular case, covers an amount which is really a "loss" even though the said amount has not gone out from the pocket of the assessee. From the above enunciation of law by the Hon'ble Summit Court, there remains no doubt whatsoever that the term 'expenditure' in certain circumstances can also encompass 'loss' even though no amount is actually pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tood incurred at the end of each year on availing the services..." 5.1c Further, it is observed that the appellant's contention regarding deductibility of the compensation in ESOP supports itself on the fact that this loss is actually for the employees - providing a part of the wealth to the employees in order to motivate them to harness their potential in increasing the growth and thereby profits of the appellant. Hence, its contention that the loss can also be looked at as employees' welfare and thereby allowable under the Act u/s 37(1) appears plausible. Also plausible is the argument taken by the appellant's AR in submitting that there is no increase in the number of shares or in the paid up capital of the appellant in the present case but loss taken in its accounts - difference between the market price of the share and its issue price i.e. fixed by the appellant on the effective date of the ESOP scheme. It is observed that the appellant has relied on the Tribunal's decision in Biocon Ltd vs. Dy. CIT (LTU) [2013] 35 taxmann.com 335 (ITAT Bang)(SB). This decision has 'over ruled' that of ITAT (Del) in Ranbaxy Laboratories Ltd, vs. Addl. CIT (2010) (39 SOT 17). Also, both t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s computed disallowance of ₹ 85,43,800/- as under: S. No. Particulars Amount (i) Expenditure Directly relating to income which does not form part of total income NIL (ii) Expenditure incurred by way of Interest (A*B/C) A= Amount of Interest B= Average Value of Investments 1708760000 Investment as on 01-04-2010 1117949000 Investment as on 31 -03-2011 2299571000 C= Average of Total Assets Total Assets as on 01-04-2010 Total Assets as on 31-03-2011 A * B/C subject to Maximum of A (iii) One half % of Average value of Investment income from which does not form part of total Income. Average Value of Investments 1708760000 One half % of Average value of Investment. 8543800 TOTAL DISALLOWANCE AS PER RULE 8D 85,43,800 5.2 The Assessing Officer made net disallowance of ₹ 69,21,744/- after reducing the sum of ₹ 16,22,056, which was disallowed suo motu by the assessee. On further appeal, the Ld. CIT(A) deleted the disallowance observing as under: "5.2c It can therefore be safely inferred from the impugned order that the satisfaction of the AO for disallowance of expenses, in view of the presumed tax-exempt dividend income , u/s 14A of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. Also directed not to consider investment in subsidiary, which according to the Ld. CIT(A), was for controlling stake. We find that in view of the recent decision of the Hon'ble Supreme Court in the case of Maxxop Investment Ltd Vs. CIT, CIVIL APPEAL NOS. 104-109 OF 2015 & Ors. (Order dated 12th February, 2018) strategic investment for obtaining controlling stake has also been found liable for computing disallowance under Rule 8D(2)(iii) of the Rules and therefore to this extent, the order of the Ld. CIT(A) is set aside and matter restored back to the learned Assessing Office for re-computing the disallowance under Rule 8D(2)(iii) of the Rules. The Assessing Officer is also directed to verify whether income from growth funds has been included under taxable income and if so, then he shall exclude the said investment for computing disallowance in terms of Rule 8d(2)(iii) of Rules. The ground of the appeal of the Revenue is accordingly allowed partly for the statistical purposes. ITA No.5707/Del/2017 & C.O.No.8/Del/2018 for AY:2012-13 6. Now, we take up the appeal of Revenue for assessment year 2012-13 as well as the Cross Objection filed by the assessee. The grounds of the appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 03-2011 A * B/C subject to Maximum of A (iii) One half % of Average value of Investment income from which does not form part of total Income. Average Value of Investments 232,02,29,500 One half % of Average value of Investment. 1,16,01,148 TOTAL DISALLOWANCE AS PER RULE 8D 1,16,01,148 8.2 The finding of the Ld. CIT(A) on the issue in dispute is reproduced as under: "5.2b In the impugned order it is mentioned, inter alia, "….During the year under consideration, the assessee company has claimed exempted income of ₹ 2,10,87,429/-. The assessee has further disallowed a sum of ₹ 15,47,540/- being related to the earning of the exempted income. However, no working has been provided by the assessee to suggest as to how it has reached to such amount of disallowance u/s 14A. Further perusal of profit & loss account and balance sheet reveals that assessee company has made investment in shares/mutual funds at ₹ 2,29,95,71,000/- as on 31.03.2011 and ₹ 2,34,08,88,000/- as on 01.04.2012 for the purpose of earning dividend income, long term capital gains and interest income which has been claimed and will be claimed exempted and not chargeable to tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the value of investment, income from which does not or shall not form part of the total income..." From the audited accounts, this is discernible - income from growth funds is taxable and forms a part of the total income. Hence investment in such funds are to be excluded while working out the disallowance under Rule 8D(2)(iii). In fact, the AR's version of the facts is borne out from records. Accordingly, in view of the extant law on the subject, presently settled by judicial precedents from the courts including the jurisdictional High Court (Delhi HC) - • Maxopp Investment Ltd vs. CIT (A Y 2002-03) ITA no. 687/2009 (Del) • Cheminvest Ltd. vs. CIT (AY 2004-05) (2015) 61 taxmann.com 118 (Del) [the ITAT decision mentioned in the impugned order stands overruled by this decision] • CIT vs. Holcim India Pvt. Ltd. ITA No. 486/2014 and 299/2014 (Del) • CIT vs. Taikisha Engineering India Ltd (2014) ITA 115/2014 & 119/2014 (Del) • DCM Ltd. vs. DCITand Vice-Versa (2015) 9 TM11110 (ITAT Delhi) • Joint Investments Pvt. Ltd. vs. CIT 372ITR 694 (Del) • CIT vs. Hero Cycles Ltd.[2010] 189 taxmann 50 (P&H) • ACB India Ltd. vs. ACIT (201 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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