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TMI Blog2023 (5) TMI 1354X X X X Extracts X X X X X X X X Extracts X X X X ..... is accordingly allowed for statistical purposes. Disallowance u/s 14A r.w.r. 8D while computing book profit u/s 115JB - HELD THAT:- The issue in dispute is covered by the decision of the Special Bench of the Tribunal in the case of Vireet Investment Pvt. Ltd. [ 2017 (6) TMI 1124 - ITAT DELHI] and the Ld. DRP has retained the addition only on the ground that DRP is not for appellate proceedings and continuation of the assessment proceedings. However, the issue in dispute being covered by the binding precedent in the case of Vireet Investment Pvt. Ltd. (supra). The addition made by the Assessing Officer is directed to be deleted the ground of appeal of the assessee is accordingly allowed. Nature of expenses - Disallowance of expenses on employee stock option - According to the Assessing Officer these expenses were in the nature of capital expenditure and being contingent in nature, samewere not allowable in the year under consideration - HELD THAT:- As decided by HC Biocon Ltd [ 2020 (11) TMI 779 - KARNATAKA HIGH COURT] assessee has incurred a definite legal liability and on following the mercantile system of accounting, the discount on ESOPs has rightly been debited as expenditure i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... solution Panel erred in The Id. A0 erred in disallowing Rs. 76,98,652/- under section 14A read with Rule 8D of the Income tax Rules, 1962 under section 115JB of the Act without appreciating that Section 14A the Act cannot be extended and read into section 115]B which is a complete code in Itself; 3. The Assessing Officer / DRP erred in making disallowing Rs.8,70,45,135/- pertaining to discount on Employee Stock Option Plan (being the difference of market price at the time of grant of option and exercise price) claimed over the vesting period under section 37(1) of the Act; 4. The Assessing Officer / DRP erred in not allowing additional claim of discount on Employee Stock Option Plan (being difference between market price at the time of, exercise of options and market price at the time of grant of options), of Rs.10,01,36,178/- claimed under section 37(1) of the Act. The Assessing officer / DR erred in holding that additional claim of deduction, not made in the return of income, cannot be directly made before the Assessing officer / DRP. 5. The learned A has erred in not granting the refund of excess Dividend DistributionTax (DDT) of Rs. 83,50,980/-; 6. The Id. Assessing Officer / D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .1 Aggrieved with the final assessment order, the assessee is before the Tribunal by way of raising grounds as reproduced above. 3. Before us, the assessee has filed a Paper Book containing pages 1 to 150. 4. The ground No. 1 of the appeal of the assessee relates to disallowance u/s 14A of the Act in the final assessment order. The Assessing Officer made disallowance u/s 14A r.w.r. 8D as under: 10.12 In view of the above direction of Hon ble DRP-2, Mumbai, the assessee vide its submission dated 18.10.2019, furnished the computation of disallowance to be made u/s 14A r.w.s. 8D of the Act as under: S. No. Particulars Amount (Rs.) 1. Direct expenses attributable -- 2 Interest Expenses X Average Investment 76,89,652/- Average of Total assets 22,83,88,171/- X 62,53,18,827/- 18,55,07,05,474/- 3. 0.5% of Average Investments (Rs.62,53,18,827/-) i.e. 31,26,594/- Total 1,08,25,246/- 4.1 The only dispute between the assessee and the Assessing Officer is in respect of proportionate disallowance under Rule 8D(2)(ii) of the Income-tax Rules, 1962 (in short the Rules ). Before the Ld. DRP the assessee contended that the investment in the mutual funds aggregating to Rs.1,19,15,487/- was made out o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase, the position of funds on the first/last day of the assessment year under consideration is not germane unless all the investments yielding exempt income were acquired in the very same assessment year - which is not the fact of this case. The assessee has also collaterally argued that if the Assessing Officer wants to make a disallowance under section 14A of the Act on account of interest, then he has to prove that there is nexus between the borrowed funds and the investments made. This is not tenable. The basic details/documents as to when the relevant investments were made, has to be first made available by the assessee since these are in its exclusive knowledge alone. Moreover, there is the claim made by the assessee, which it has to support cogently, that no interestbearing funds were used for this purpose. Hence, the initial onus lies on it to lead the primary details linking the investment with the nature of funds deployed, and only when the same is adequately discharged, does it shift to the Assessing Officer to make his inferences as warranted by law. In other words, there is no negative onus straightway on the Assessing Officer to lead the foundational facts. For this r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments Limited. The assessee themselves were in the business of generation of power. The companies in which the investments were made, were in the energy sector. Investments were made mainly during January, 2000 to March, 2000.It was the submission of the assessee that they had earned regular business income from distribution of power and investments made were in the companies in energy sector and were with a view to build long-term business prospects. Investments were in the regular course of business and accordingly no part of interest can be disallowed when the fund is utilized for the purpose of business. It was also pointed out that respondent had borrowed Rs. 43.62 crores by way of issue of Debentures and the said amount was utilized as capital expenditure and inter-corporate deposit. It was the submission that no part of the interest bearing fund have gone into investments in the two companies. Insofar as funds are concerned it was pointed out that income from operation of the company was Rs. 418.04 crores which was evenly distributed. Considering this, till December, 1999 the appellant had earned Rs. 313.53 crores from its operation. It had raised capital of Rs. 7.90 crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exercise of determining without any haziness as to whether interest bearing funds or interest-bearing funds were greater at the time when the underlying investments were made. The undeniable inability of the assessee to furnish the particulars of when the tax-exempt investments were made would lead precisely to the situation where the application of the formula engrafted in rule 8D(2)(il) would mandatorily comes into play for estimating the proportionate disallowance of interest expenditure. The estimation formula prescribed in the statute was inserted in contemplation of a situation similar to the one that is before us, where the assessee for whatever reasons, is unable to give the aforesaid details at the time of making the tax-free investments. Ex consequenti, the Assessing Officer is statutorily obliged to apply the provisions of section 14A(2) of the Act in such a situation and, therefore, bound to follow the prescribed method as per 8D(2)(il) of the Rules. Given the enunciation of law by the Hon'ble Bombay High Court, a discussion on other case laws relied upon the assessee becomes academic in nature. 6.3.13 On the other hand, in Bharath Beedi Works (P.) Lid vs Addl. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on tangential, circumstantial and hypothetical explanations to get over this fundamental factual deficiency. No immunity under the Act can be granted for examining the facts merely because some other law, rules or regulation prescribes something. Had this been so, then the Legislature would have provided for this exception in the rule itself. We are also unable to accept its sweeping, purely theoretical claim that no person would ever utilize borrowings for making investment in mutual funds (current investments) as the return on mutual funds is generally lower than the borrowing cost. There may be some obvious situations in which this assertion is untrue, such as parking of borrowed idle funds in short-tenure investments till they are redeployed for the purpose they were borrowed or a general expectation of earning returns greater than the interest cost based on market reports or analysis. 6.3.17In the light of the discussion as foregoing, we find that the averments made to canvass the claim that it had adequate interest-free, self-generated funds to make the investments, are not firmly established and tangibly supported by credible documents, but based on presumptions and general ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... restore the matter back to the Ld. Assessing Officer for providing one more opportunity to the assessee for submitting the documentary evidence in support of availability of interest free funds at the time of making investment in assets eligible for yielding exempted income. The ground No. 1 of the appeal of the assessee is accordingly allowed for statistical purposes. 8. The ground No. 2 of the appeal relates to disallowance u/s 14A r.w.r. 8D while computing book profit u/s 115JB of the Income-tax Act, 1961. 9. We find that on this issue the grievance of the assessee is that the Assessing Officer wrongly added the disallowance of Rs.2,08,08,691/- made u/s 14A to the book profit computed made u/s 115JB of the Act. Before us, the Ld. Counsel of the assessee submitted that no addition could be made in view of the decision of the Special Bench in the case of ACIT v. Vireet Investment Pvt. Ltd. in (17) 58 ITR 313, Delhi Tribunal Special Bench, wherein it is held that disallowance u/s 14A cannot be added while computing book profit u/s 115JB of the Act. On the contrary, the Ld. DR relied on the order of the lower authorities. 10. We have heard rival submission of the parties on the iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f employee stock option plan (being difference between exercise price and at the time of grant of addition amended of Rs.8,70,45,135/-. 12. Briefly stated facts qua the issue in dispute are that the assessee claimed employee stock option claim expenses of Rs.8,70,45,135/- in the profit and loss account. According to the Assessing Officer these expenses were in the nature of capital expenditure and being contingent in nature, samewere not allowable in the year under consideration. The assessee on the other hand contended that discount of expenses amounting to Rs.8,70,45,135/- was claimed as revenue expense. The ESOP scheme was introduced with an objective to attract and retain its human talent by motivating the employees to contribute to the business activities and to inculcate a sense of belongingness and instill a feeling of ownership in them. The ESOP scheme made during the year was accounted by the difference between the market price and the price at which the shares were offered to the employees as cost thereof on the date of grant of options. The discount on issue of shares was claimed over the vesting period. The detail of ESOP aggregating to Rs.8.70 crores reproduced by Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court is reproduced as under: 6. We have considered the submissions made by learned counsel for the parties and have perused the record. The singular issue, which arises for consideration in this appeal is whether the tribunal is correct in holding that discount on the issue of ESOPs i.e., difference between the grant price and the market price on the shares as on the date of grant of options is allowable as a deduction under Section 37 of the Act. Before proceeding further, it is apposite to take note of Section 37(1) of the Act, which reads as under: Section 37(1) says that any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head, Profits and Gains of Business or Profession . 7. Thus, from perusal of Section 37 (1) of the Act, it is evident that the aforesaid provision permits deduction for the expenditure laid out or expnded and does not contain a requirement that there has to be a pay out. If an expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the difference between the price at which it is issued and the market value of the shares would also be expenditure incurred for the purposes of Section 37(1) of the Act. The primary object of the aforesaid exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, the same cannot be construed as short receipt of capital. The tribunal therefore, in paragraph 9.2.7 and 9.2.8 has rightly held that incurring of the expenditure by the assessee entitles him for deduction under Section 37(1) of the Act subject to fulfillment of the condition. 11. The deduction of discount on ESOP over the vesting period is in accordance with the accounting in the books of accounts, which has been prepared in accordance with Securities And Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. 12. So far as reliance place by the revenue in the case of CIT VS. INFOSYS TECHNOLOGIES LTD. is concerned, it is noteworthy that in the aforesaid decision, the Supreme Court was dealing with a proceeding under Section 201 of the Act for non deduction of tax at source and it was held that there was no cash ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edings and not in the nature of the appellate proceedings and therefore, claim cannot be admitted otherwise then filing revised return of income. The relevant finding of the Ld. DRP is reproduced as under: 8.3.7 The assessee relied on the decision of the Hon'ble Bombay High court in the case of Pruthvi Brokers Shareholders (ITA No 3098/2010), which relying on the decisions of the National Thermal Power Company Limited [1998] (229 IT 383), held that the Id. Tribunal had a jurisdiction to examine a question of law which arose from the facts as found by the lower authorities and had a bearing on the tax liability of the company. We have perused the said decision of the Hon'ble Bombay High Court and find that the same is not an authority for the proposition that an addition ground can be mechanically and automatically be accepted. The Hon'ble Bombay High Court observed that the appellate authorities have the discretion whether or not to permit such additional claims to be raised and that the exercise of discretion was entirely different from the existence of jurisdiction. 16. We have heard rival submissions of the parties and perused the relevant material on record. We find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erever the Contracting States to a tax treaty intend to extend the treaty protection to the domestic company paying dividend distribution tax, only then, the domestic company can claim benefit of the DTAA, if any. Thus, the question before the Special Bench is answered, accordingly. 17.1 Respectfully following the finding of the Special Bench Tribunal (supra) ,the ground of appeal of the assessee is dismissed. 18. The ground No. 6 relates to initiation of penalty u/s 271(1)(c) of the Act which being premature at this stage, the ground is dismissed as infructuous. The ground No. 7 relates to levy of interest u/s 234B and 234C of the Act. As far as interest u/s 234B is concerned same is consequential and therefore, grounds realted to the same is dismissed as infructuous. As far as levy of interest u/s 234C is concerned, which is a matter of verification by the Assessing Officer. We accordingly direct the Assessing Officer to verify the levy of interest u/s 234C of the Act in accordance with law after providing adequate opportunity of being heard to the assessee. The ground No. 7 of the appeal is accordingly partly allowed for statistical purposes. 19. In the result, the appeal filed ..... 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