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TMI Blog2025 (4) TMI 137X X X X Extracts X X X X X X X X Extracts X X X X ..... d in disallowing an amount of Rs. 1,58,74,888/ without appreciating the fact that ESOP expenses are not capital expenditure or a contingent liability but an ascertained revenue expenditure allowed under section 37(1) of the Act. 2.3 Further, the NFAC erred in not following the judicial discipline by disregarding the decision issued by the honorable High Court of Karnataka in the case of Biocon (Blacon Ltd.v. Dy. CIT [2013] 35 taxmann.com 335(Bang.) (SB), decision of honorable High Court of Delhi in the case of Lemon Tree Hotels (PCIT VS Lemon Tree Hotels Pvt Ltd (2019) 104 taxman.com 27(HC). Further, the fact that admission of SLP by Apex court cannot be a basis for the disallowance of the ESOP expenses under section 37(1) of the Act. Ground 3: Disallowance of Rs. 10,90,49,268 weighted deduction under section 35(2AB) of the Act 3.1 The learned AO and CIT(A) has erred in disallowing the weighted deduction under Section 35(2AB) of the Act without appreciating that Section 35(2AB)(1) of the Act prescribes the requirement of approval of the facility and not the expenditure. 3.2 The learned AO and CIT(A) ought to have appreciated the fact that the clinical trials conducted outsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were made under the normal tax regime to the MAT computation as well, without providing any reasons in the order for doing the same. 5.2 The learned AO and CIT(A) has erred in increasing the MAT income without giving any reasons in the show cause notice dated August 25, 2022. It is the Appellant's case that this is an inadvertent mistake which should be rectified. 5.3 The learned AD and CIT(A) grossly erred in disregarding the decision of Mumbai ITAT in the Appellants own case for the AY 2014-15 and other years wherein the AO was directed to delete the addition made to book profit computed under section 115JB of the Act on account of disallowance computed under section 14A of the Act. 5.4 The learned AO and CIT(A) has erred in disregarding the decision of Special Bench of the ITAT in the case of ACIT Vs. Vireet Investment Pvt. Ltd. [2017] ITA No. 502/ Del/2012 (Delhi Tribunal) and also ignoring the principles laid down by the Supreme Court in the case of Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273 (SC) and Malayala Manorama Vs CIT (5420-5423 of 2002). Ground 6: Disallowance of Rs. 1,36,18,930/- on account of business promotion expenditure under Section 37(1) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the genuine claim of the Appellant should be granted even in case of alleged procedural lapses. Ground 9: Claim of the Appellant of Rs. Rs. 2,23,73,789 representing 1/5th of the Write down of Inventory and Other Assets disallowed in AY 2018-19 9.1 The learned AO and CIT(A) has erred in not giving the claim of an amount of Rs. 2,23,73,789/-without appreciating the fact that the amount was disallowed in the assessment order for AY 2018-19 and was mentioned that 1/5th will be allowed in the 5 subsequent years beginning from AY 2018-19. Ground 10: Non grant of TDS credit 10.1 The learned AO and CIT(A) has erred in not granting the credit of INR 14,512 related to Strides Emerging Market Limited (PAN AARCS5667D), which was merged during the year. Ground 11: Initiation of penalty proceedings under Section 270A 11.1The learned AO and CIT(A) has erred in law and facts in initiating penalty proceedings under Section 270Aof the Act" 3. Brief facts of the case are that the assessee, a pharmaceutical company, filed its original return on 31.12.2020 at an income of Rs. 65,27,74,800/- and deemed income u/s 115JB of the Act of Rs. 129,55,76,399/-. Subsequently, the assessee filed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tration could be helpful, where suppose an assessee had issued Capital at fair rate and thereafter paid salary expenses out of the same, would the same be allowable or not? That is a question. As such both the authorities have erred in not granting the deduction. Further, the same ESOP expense has also been allowed in Earlier Years. Therefore, the same be allowed even on the principles of consistency and it prayed accordingly." 7.3 A chart of ESOP expenses incurred over the years has also been submitted by the Ld. AR to demonstrate that such expenditure has been allowed in several earlier years by the department as under: Assessment year Financial year Amount in INR Remarks AY 2011-12 FY 2010-11 - AY 2012-13 FY 2011-12 - AY 2013-14 FY 2012-13 26,21,996 AY 2014-15 FY 2013-14 1,01,51,371 AY 2015-16 FY 2014-15 89,57,972 AY 2016-17 FY 2015-16 4,48,25,018 AY 2017-18 FY 2016-17 5,47,10,012 AY 2018-19 FY 2017-18 2,45,21,147 Disallowed in assessment order of Rs. 2,45,20,000 AY 2019-20 FY 2018-19 89,72,990 AY 2020-21 FY 2019-20 1,58,74,888 Disallowed in assessment order 7.4 Ld. DR, on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he current market price. The employees are given stock options at discount and the same amount of discount represents the difference between market price of shares at the time of grant of option and the offer price. In order to be eligible for acquiring shares under the scheme, the employees are under an obligation to render their services to the company during the vesting period as provided in the scheme. On completion of the vesting period in the service of the company, the option vest with the employees. 9. In the instant case, the ESOPs vest in an employee over a period of four years i.e., at the rate of 25%, which means at the end of first year, the employee has a definite right to 25% of the shares and the assessee is bound to allow the vesting of 25% of the options. It is well settled in law that if a business liability has arisen in the accounting year, the same is permissible as deduction, even though, liability may have to quantify and discharged at a future date. On exercise of option by an employee, the actual amount of benefit has to be determined is only a quantification of liability, which takes place at a future date. The tribunal has therefore, rightly placed rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered in the case of Infosys Technologies is of no assistance to the revenue. The decisions relied upon by the revenue in Gajapathy Naidu, Morvi Industries and Keshav Mills Ltd. supra support the case of assessee as the 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 in the books of accounts. We are in respectful agreement with the view taken in PVP Ventures Ltd. And Lemon Tree Hotels Ltd. Supra." Moreover, the department has also allowed the deduction in several earlier years in similar facts and circumstances in assessee's own case. Also, Ld. AO while making the addition has duly noted the above decision as well as the decision of the Hon'ble Delhi Court in the case of Lemon Tree Hotel. However, he has stated in the assessment order that he is making the addition as the department's SLP on this issue has been admitted by the Hon'ble Apex Court in the case of Lemon Tree Hotel [PCIT v/s Lemon Tree Hotels Pvt. Ltd. (2019) 104 taxman.com 27 (SC)]. 7.6 In light of the facts of the case, judicial pronouncements discussed above as well as considering that the deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the DSIR, the same should be allowable as per the normal provisions of the Act u/s 35(1)(i) or 37 of the Act since admittedly the same are incurred for the purpose of business." 8.4 Ld. DR, on the other hand, argued that in view of the fact that expenditure of scientific research has to be quantified certified by the DSIR in Form 3CL, the assessee is entitled to claim expenditure only to that extent u/s 35(2AB) of the Act. In this regard, he pointed out the amendment made in Rule 6(7a) w.e.f. 01.o7.2016 after which the prescribed authority i.e. the Secretary, DSIR has to quantify the expenditure incurred on in-house R&D by the assessee which is eligible for weighted deduction u/s 35(2AB) of the Act. Accordingly, for AY 2020-21, the assessee is entitled to get the deduction in respect of the expenditure of scientific research only to the extent of the amount quantified in Form 3CL by the prescribed authority. 8.5 We have considered the rival submissions and perused the material placed before us. There are two aspects to the issue under consideration: i. Whether expenditure on clinical trials is eligible u/s 35(2AB). ii. Whether the amount eligible for deduction u/s 35(2A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in Rule 6(7a) w.e.f. AY 2017-18, the amount allowable for deduction u/s 35(2AB) has to be quantified by the prescribed authority viz. Secretary, DSIR. In this regard, if there is any variation in Form 3CL in amounts claimed by the assessee, it has the option of making reference to the prescribed authority as per the provisions of section 35(3). In case the assessee or the revenue wishes to seek any variation in the amount quantified by the prescribed authority in Form 3CL, a reference is required to be made to the prescribed authority in terms of section 35(3)(b) whose decision shall be final. Accordingly, we are of the view that the Ld. AO was justified in restricting the allowance of expenditure on in-house R&D to the amounts mentioned in Form 3CL. The assessee should have taken up the matter with the prescribed authority in case he did not accept the quantification given in the Form 3CL. Therefore, the decision of the Ld. AO in restricting the amount eligible for deduction u/s 35(2AB) to Rs. 3,76,93,000/- as against the claim of the assessee amounting to Rs. 44,91,93,361/- is correct as per the provisions of the section and is therefore upheld. However, the alternative claim o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ire exempt income earned by the assessee for the year under consideration. In other words, for other expenses a reasonable amount may be disallowed considering nature of investments and expenditure incurred for the year. 29. Having heard both the sides, and considered material on record, we are of the considered view that insofar as the first arguments of the assessee that the AO has not recorded satisfaction as required u/s 14A(2) of the Act, on perusal of assessment order we found that the AO on the basis of suo-moto disallowance of expenditure, has arrived at clear satisfaction having regard to nature of expenses and amount of exempt income and hence, we reject the +arguments of the Id. AR for the assessee. As regards interest disallowances under rule 8D(2)(ii), we find that the assessee has proved with evidence avallability of own funds which is in excess of investments which yield exempt Income. It is a settled position of law that if own funds, including borrowed fund is in excess of investments, then a general presumption is drawn that investments is out of own funds and consequently, no disallowance could be made towards interest expenses. This legal position is supported ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justice would be met if the disallowance is made after re-computing average value of investment by considering only those investments which yield exempt income. Hence, the matter is restored to the AO to re-work the disallowance in line of our discussions given hereinabove." 9.3 Respectfully following the decision of the co-ordinate bench, we remand back the issue to the Ld. AO to work out the disallowance afresh following the decisions in earlier years. 9.4 Related ground on this issue pertains to the addition of disallowance u/s 14A to the book profit u/s 115JB of the Act. This issue is also covered by the decision of the co-ordinate bench for AY 2014-15 wherein it has been held as under: "34. We have heard both the parties, perused materials available on record and gone through orders of the authorities below along with case laws cited by the Id. AR for the assessee. After considering the facts of the case and the various judgements cited supra, we are of the opinion that no addition to book profits u/s 115JB could be made on the basis of disallowance u/s 14A read with Rule 8D of the Income Tax Rules, 1962. This legal proposition is supported by the decision of Hon;ble Bomb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Raricap Chit pad, daily Call Planner, Labels, I Pledge Cards and Medical Tribune & Product concept & design expenses, Greeting Cards, Posters, Certificates and other printed Visual Aids, Posters, Cards, visiting Cards, envelop and Visual Aids, ID Cards, sample dispenser etc. 99,473 Total 1,35,72,956 He, therefore, argued that the majority of expenses are incurred towards business exhibitions, sponsorship and product advertisements which is entirely allowable u/s 37(1) of the Act. 10.3 Ld. DR, on the other hand, vehemently argued that the expenditure being in violation of the guidelines of the Indian Medical Council as well as the circular of the CBDT on the issue, is clearly disallowable. 10.4 We have heard the rival submission and perused the material placed before us. We deem it proper to remand back the matter to the Ld. AO for verification of these expenses. He is directed to give opportunity to furnish requisite details and supporting evidences and the expenses incurred for business promotion and not for providing gifts, freebies to the doctors etc. should be allowed after due verification. This ground is, therefore, allowed for statistical purposes in favour of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession. 11. This amendment will take effect from 1/04/2015 and will, accordingly, apply to assessment year 2015-16 and subsequent years. 12. Thus, CSR expenditure is to be disallowed by new Explanation 2 to section 37(1), while computing Income under the Head Income form Business and Profession'. Further, clarification regarding impact of Explanation 2 to section 37(1) of the Income Tax Act in Explanatory Memorandum to The Finance (No.2) Bill, 2014 is as under: "The existing provisions of section 37(1) of the Act provide that deduction for any expenditure, which is not mentioned specifically in section 30 to section 36 of the Act, shall be allowed it the same is incurred wholly and exclusively for the purposes of carrying on business or profession. As the CSR expenditure (being an application of income) is not incurred for the purposes of carrying on business, such expenditure cannot be allowed under the existing provisions of section 37 of the Income-tax Act. Therefore, in order to provide certainty on this issue, it is proposed to clare ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;s National Relief Fund, National Defence Fund, National Illness Assistance Fund etc., specified under section 80G(1) (i). b) Donations with 50% deduction are also available under Section 80G for all those sums that do not fall under section 80G(1)(i). Under Section 80G(2) (iiihk) and (iiihl) there are specific exclusion of certain payments, that are part of CSR responsibility, not eligible for deduction u/s80G. 14. In our view, expenditure incurred under section 30 to 36 are claimed while computing income under the head, 'Income form Business and Profession", where as monies spent under section 80G are claimed while computing "Total Taxable income" in the hands of assessee. The point of claim under these provisions are different. 15. Further, intention of legislature is very clear and unambiguous, since expenditure incurred under section 30 to 36 are excluded from Explanation 2 to section 37(1) of the Act, they are specifically excluded in clarification issued. There is no restriction on an expenditure being claimed under above sections to be exempt, as long as it satisfies necessary conditions under section 30 to 36 of the Act, for computing income under the head, "I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Ld. AR that this claim has been allowed by the Ld. AO from AY 2017-18 onwards and pursuant to the assessment order for 2017-18, this claim has been made for the first time before the Tribunal. He has, further, submitted that the same is admissible in view of the decision of the Hon'ble Apex Court in the case of Wipro Finance Ltd. v/s CIT (2022) 443 ITR 250 (SC). 12.2 Ld. DR, on the other hand, has argued that the issue does not arise out of assessment order, and therefore, Ld. CIT(A) has rightly dismissed the same at the time of deciding the first appeal. 12.3 We have considered the rival submissions. As this claim has been made for the first time before us on the basis of a similar allowance for AY 2017-18, we deem it appropriate to restore the issue back to the file of Ld. AO for considering the assessee's claim after verification of the same as per provisions of section 35DD. 12.4 This ground is, therefore, allowed for statistical purposes. 13. Ground No. 9: claim of 1/5th of write-down value of inventory and other Assets disallowed in AY 2018-19 - Rs. 2,23,73,789/-. 13.1 This deduction has also been claimed for the first time before us on the ground that in the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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