2024 (7) TMI 1370 - AT - Income Tax

Assessee wins on Section 14A interest disallowance and ESOP expense deduction claims

Axis Bank Ltd. Versus Assistant Commissioner of Income Tax, Circle-1 (1) (1), Ahmedabad And (Vice-Versa)

Axis Bank Ltd. Versus Assistant Commissioner of Income Tax, Circle-1 (1) (1), Ahmedabad And (Vice-Versa) - TMI Issues Involved:1. Disallowance of administrative expenses under Section 14A read with Rule 8D.2. Disallowance of interest expenses under Section 14A read with Rule 8D.3. Disallowance of ESOP expenses.Issue-wise Detailed Analysis:1. Disallowance of Administrative Expenses under Section 14A read with Rule 8D:The assessee raised several grounds challenging the disallowance of administrative expenses under Section 14A read with Rule 8D(2)(iii). The primary contentions were that the suo-moto disallowance of administrative expenses was reasonable and that the majority of investments were in the nature of stock in trade, to which Section 14A should not apply. Additionally, the assessee argued that they had sufficient own funds to cover the investments yielding exempt income, and previous favorable judgments in their own case were not considered.However, during the hearing, the Counsel for the assessee stated that they would not press Ground No. 1 related to disallowance of administrative expenses. Consequently, this ground was dismissed as not pressed.2. Disallowance of Interest Expenses under Section 14A read with Rule 8D:The assessee contested the disallowance of interest expenses under Section 14A, arguing that the CIT(A) failed to appreciate that the AO did not follow the ITAT's decision regarding disallowance of interest expenses to the extent of Rs. 24.26 crores. The assessee highlighted that the ITAT had previously quashed similar disallowances in their own case for AY 2008-09 and AY 2010-11, and the CIT(A) erred by not following these precedents.The ITAT observed that the Tribunal had already provided relief to the assessee on this issue in their own case for AY 2010-11, noting that the assessee's own funds were far in excess of the investments made in funds yielding exempt income. Consequently, no disallowance was warranted under Section 14A for interest expenses. Accordingly, the ITAT allowed the assessee's appeal on this ground.3. Disallowance of ESOP Expenses:The Department's appeal focused on the disallowance of ESOP expenses, which the CIT(A) had allowed in favor of the assessee. The AO had rejected the assessee's claim for ESOP expenses of Rs. 250.63 crores, arguing that the discount should be calculated based on the market price on the date of grant of options, not the exercise date. The AO also contended that no actual expenditure was incurred, and any such expenditure would be capital in nature.The CIT(A) allowed the assessee's appeal, relying on the ITAT Special Bench decision in Biocon Ltd. v. DCIT, which held that the discount on ESOPs is in the nature of employee cost and deductible as a business expenditure under Section 37. The CIT(A) directed the AO to allow the deduction subject to verification of the discount figure.The Department argued that the assessee's case was not covered by the Biocon decision and that the assessee failed to submit the relevant ESOP scheme. However, the ITAT upheld the CIT(A)'s decision, noting that the ESOP scheme was part of the Annual Report and the specific details of ESOP benefits were disclosed. The ITAT observed that the law, as it stands, supports the allowability of ESOP expenses as a deduction under Section 37, following the Biocon decision and subsequent judicial precedents.Combined Result:The appeal of the assessee was partly allowed, specifically regarding the disallowance of interest expenses under Section 14A, while the appeal of the Department was dismissed concerning the disallowance of ESOP expenses. The ITAT's decision for both assessment years (2010-11 and 2011-12) followed the same rationale.Conclusion:The ITAT upheld the assessee's appeal on the disallowance of interest expenses under Section 14A and dismissed the Department's appeal on the disallowance of ESOP expenses, aligning with established judicial precedents and the specific facts of the case.