2022 (12) TMI 1416 - AT - Income Tax

Tribunal limits disallowance, allows ESOP deduction, upholds interest income treatment

Bajaj Finance Limited. Versus DCIT, Circle-8, Pune. AND (Vice-Versa)

The Tribunal partly allowed the assessee's appeals, directing the AO to restrict the disallowance under Section 14A read with Rule 8D to Rs. 50,000/- for ... Disallowance u/s 14A r.w.r. 8D - suo motu disallowance made by assessee - HELD THAT:- As decided in Joint Investment [2015 (3) TMI 155 - DELHI HIGH COURT] that such a disallowance ought not to exceed the corresponding exempt income itself. The fact also remains that the assessee’s suo motu disallowance as already exceeds the sum which has nowhere been contested during the course of hearing. We, therefore, direct the AO to restrict the impugned section 14A r.w.r. 8D disallowance to a lump sum figure of Rs. 50,000/- each in both these assessment years Disallowance of “ESOP” (Employee Stock Options) deduction u/s.37 - HELD THAT:- This tribunal’s very recent order in assessee’s case itself [2022 (9) TMI 239 - ITAT PUNE] rejected the Revenue’s arguments discount on ESOP being a general expense, is an allowable deduction u/s 37(1) of the Act during the years of vesting on basis of percentage of vesting during such period subject to upward or downward adjustment at the time of exercise of option as following case of Biocon Ltd [2020 (11) TMI 779 - KARNATAKA HIGH COURT] - Decided in favour of assessee. Issues Involved:1. Disallowance under Section 14A read with Rule 8D.2. Disallowance of claim for deduction in respect of Employee Stock Options (ESOP) expenditure.3. Not allowing claim of deduction in respect of ESOP expenditure to the extent of perquisite value taxed in the hands of employees.4. Disallowance of interest income on Non-Performing Assets (NPAs) on accrual basis.Detailed Analysis:1. Disallowance under Section 14A read with Rule 8D:The primary issue was whether the disallowance under Section 14A of the Income Tax Act, 1961, read with Rule 8D of the Income Tax Rules, 1962, was justified. The CIT(A) upheld the AO's decision to disallow Rs. 2,51,101/- and Rs. 42,37,895/- for A.Y. 2012-13 and 2013-14, respectively, which the assessee contested. The Tribunal cited the case of Joint Investment Vs. ACIT (2015) 372 ITR 694 (Delhi), which ruled that such disallowance should not exceed the exempt income. Since the assessee had already disallowed Rs. 50,000/- suo motu, the Tribunal directed the AO to restrict the disallowance to Rs. 50,000/- for each assessment year.2. Disallowance of claim for deduction in respect of ESOP expenditure:The second issue involved the disallowance of ESOP expenditure claimed by the assessee under Section 37(1) of the Act. The Tribunal referred to its previous order dated 29-08-2022, which had allowed the deduction for ESOP expenditure based on the Special Bench decision in the case of Biocon Ltd. The Tribunal reiterated that the discount on ESOPs is an allowable deduction under Section 37(1) during the vesting period, subject to adjustments at the time of exercise of options. Consequently, the Tribunal allowed the assessee's claim for ESOP expenditure of Rs. 7,57,14,428/- and Rs. 12,85,12,529/- for the respective assessment years.3. Not allowing claim of deduction in respect of ESOP expenditure to the extent of perquisite value taxed in the hands of employees:The third issue was whether the ESOP expenditure equivalent to the perquisite value taxed in the hands of employees should be allowed as a deduction. The Tribunal referred to the Special Bench decision in Biocon Ltd., which held that the ESOP expenditure should be adjusted based on the market price at the time of exercise of options. The Tribunal allowed the assessee's claim for deduction of ESOP expenditure to the extent of the perquisite value taxed in the hands of employees.4. Disallowance of interest income on Non-Performing Assets (NPAs) on accrual basis:The final issue was the disallowance of interest income on NPAs on an accrual basis. The Tribunal noted that this issue had been settled by the jurisdictional High Court, which held that interest on NPAs should not be taxed on an accrual basis. The Tribunal followed the High Court's decision and affirmed the CIT(A)'s order, deleting the disallowance of interest income on NPAs for both assessment years.Conclusion:The assessee's appeals were partly allowed, with the Tribunal directing the AO to restrict the disallowance under Section 14A read with Rule 8D to Rs. 50,000/- for each assessment year. The Tribunal allowed the deduction for ESOP expenditure and the corresponding adjustment based on the perquisite value taxed in the hands of employees. The Tribunal also upheld the CIT(A)'s order regarding the non-taxation of interest income on NPAs on an accrual basis. The Revenue's cross appeals were dismissed.