2017 (10) TMI 1014 - AT - Income Tax

Assessee's Appeal Partially Allowed, Revenue's Appeal Dismissed

The Tribunal partly allowed the assessee's appeal by deleting the proportionate interest disallowance and speculative gains amortized as per RBI ... Addition u/s 14A r.w.r. 8D - Held that:- facts pertaining to the instant issue are identical as they were in preceding assessment year 2008-09 i.e. since application of Rule 8D of the Income Tax Rules. The assessee then takes us to paper book pages 77 to 98 containing a co-ordinate bench order dated 24.01.2017 for preceding assessment year deleting proportionate interest disallowance on the ground that assessee’s interest free funds exceed its tax free investments amounting to ₹ 651crores. It then confirms latter limb of administrative disallowance amounting to ₹ 63.84lacs. We take cue therefrom to notice that assessee’s tax free investments in the impugned assessment year read a figure of ₹ 684crores as against interest free funds in the nature of share capital and reserves amounting to ₹ 10,214crores. We therefore find no reason to concur with the above proportionate interest disallowance of ₹ 37,11,56,870/-. We now proceed to deal with administrative expenditure disallowance of ₹ 3,33,94,517/-. It is no more an issue that the above co-ordinate bench had upheld the same in preceding assessment year. We therefore adopt consistency to affirm this latter disallowance of administrative expenditure. This first substantive ground is taken as partly accepted. Adding speculative gains amortized as per RBI guidelines as well as in disallowing such related gain as taxed in preceding assessment years - Held that:- We draw support from above co-ordinate bench findings to delete addition of speculative gains of ₹ 2,64,27,796/- amortized as per RBI guidelines. The assessee at this stage submits that it no more wishes to press for its latter grievance qua addition of ₹ 3,21,05,491/- as an instance of double addition since assessed in earlier assessment years because of the fact that it has not been taxed till date. We appreciate this fair stand to confirm the above latter addition of ₹ 3.21crores. This second substantive ground is therefore partly accepted. Claiming employees’ stock option scheme “ESOP” as per SEBI guidelines, 1999 as revenue expenditure - Held that:- It is not in dispute that assessee’s relevant details pertaining to the impugned ESOP scheme already form part of the case records as indicated in preceding paragraph. It has further come on record that the whether or not such an ESOP expenditure is allowable u/s.37 of the Act or not was of course a debatable issue ultimately settled as per above special bench decision. We therefore find merit in assessee’s additional ground in principle. The same is therefore admitted. We accordingly direct the Assessing Officer to carry out necessary factual verification as per law after affording adequate opportunity of hearing to assessee. Prior period expenditure disallowance - Held that:- The Revenue fails to rebut the fact that the assessee has already succeeded on this prior period expenditure disallowance issue in preceding assessment years. We further find that hon’ble jurisdictional high court decision in PCIT vs. Adani Enterprises [2016 (7) TMI 1250 - GUJARAT HIGH COURT ] holds that such a disallowance is not to be invoked in case an assessee is assessed at the same rate in the two assessment years in question. We therefore affirm the CIT(A)’s findings under challenge. The Revenue’s sole substantive ground dismissed. Issues Involved:1. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules.2. Addition of speculative gains amortized as per RBI guidelines.3. Claim of employees' stock option scheme (ESOP) as revenue expenditure.4. Disallowance of prior period expenditure.Detailed Analysis:1. Disallowance under Section 14A read with Rule 8D:The assessee contested the disallowance of Rs. 39,45,30,140/- under Section 14A read with Rule 8D, relating to its exempt income of Rs. 15,48,10,925/-. The Assessing Officer (AO) had invoked proportionate interest and administrative disallowance under Rule 8D, which was upheld by the CIT(A) based on findings from the preceding assessment year 2008-09. The Tribunal observed that the assessee's interest-free funds exceeded its tax-free investments, leading to the deletion of the proportionate interest disallowance of Rs. 37,11,56,870/-. However, the administrative expenditure disallowance of Rs. 3,33,94,517/- was upheld in consistency with the preceding year's decision. Thus, the first substantive ground was partly accepted.2. Addition of Speculative Gains Amortized as per RBI Guidelines:The assessee challenged the addition of speculative gains of Rs. 2,64,27,796/- amortized as per RBI guidelines and the related gain of Rs. 3,21,04,491/- taxed in preceding assessment years. The Tribunal referred to a co-ordinate bench order from the preceding assessment year, which had accepted the assessee's arguments and deleted similar additions. Consequently, the addition of Rs. 2,64,27,796/- was deleted. The assessee did not press for the latter grievance of Rs. 3,21,05,491/- as it had not been taxed till date, leading to the confirmation of this addition. Thus, the second substantive ground was partly accepted.3. Claim of Employees' Stock Option Scheme (ESOP) as Revenue Expenditure:The assessee raised an additional ground claiming ESOP as revenue expenditure as per SEBI guidelines, 1999. The Tribunal noted that the assessee's significant accounting policies and relevant documents were already part of the case records. The Tribunal referred to the Special Bench decision in Biocon Ltd. vs. DCIT, which accepted the difference between the fair market value of shares on the ESOP grant date and the exercise date as business expenditure under Section 37(1). The Tribunal admitted the additional ground and directed the AO to carry out necessary factual verification as per law. Thus, the third substantive ground was accepted for statistical purposes.4. Disallowance of Prior Period Expenditure:The Revenue sought to revive the disallowance of prior period expenditure of Rs. 45,49,315/- related to annual technical fees paid to Infosys. The AO had disallowed the expenditure, stating it violated the matching concept and lacked evidence of crystallization in the relevant previous year. The CIT(A) had deleted the disallowance based on findings from the preceding assessment year. The Tribunal upheld the CIT(A)'s decision, noting that the assessee had succeeded on this issue in preceding years and referred to the jurisdictional High Court decision in PCIT vs. Adani Enterprises, which held that such disallowance is not to be invoked if the assessee is assessed at the same rate in both years. Thus, the Revenue's appeal was dismissed.Conclusion:The assessee's appeal was partly allowed, leading to the deletion of the proportionate interest disallowance and speculative gains amortized as per RBI guidelines while upholding the administrative expenditure disallowance and the addition of Rs. 3,21,05,491/-. The Revenue's appeal was dismissed, affirming the deletion of prior period expenditure disallowance.