TaxTMI 
TaxTMI 
TaxTMI 
2015 (9) TMI 1303
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....on for the controversy, as gathered from the reading of the assessment and the appellate order, is the assessee's contention of its tax-free investments, i.e., investments yielding tax-free income, being funded by the assessee's own capital, so that no disallowance of interest, i.e., on a proportionate basis, would arise in terms of r. 8D(2)(ii). The Revenue's contention, on the other hand, is that the capital raised by the assessee was specifically meant to meet the capital adequacy norms and, therefore, could not be presumed or inferred as having been invested in shares, including preference shares and PSU bonds, so as to be excluded while reckoning the disallowance under rule 8D. 3. Before us, the assessee's contention was that it had sufficient balance in the current deposit account/s, on which no interest is suffered, and which can or must therefore be considered as applied toward tax-free investments, i.e., yielding or liable to yield income which does not form part of the total income and, thus, not taxable. Further, the said investments include securities which are eligible for being considered as stock-in-trade of the assessee's business, acquired in the regular course of....
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....n 31.3.2008, is to the same effect and purport, i.e., it has not incurred any expenditure on account of interest as it had sufficient interest free funds (capital) with it. As regards the second contention qua the securities representing trading assets, the same shall require being examined on merits only if the assessee had adduced any material to evidence its claim, accompanied by a petition for admission of additional evidence, which is absent. This is as the plea could be entertained only on the basis of a finding of the relevant investments as representing the assessee's stock-in-trade. We may nevertheless discuss both the issues arising on merits, as under: Financing Issue 4.2 The assessee has an income of Rs. 581.23 lacs by way of interest on tax-free bonds and dividend on shares and units of mutual funds (PB pg. 211). To attribute a particular liability or a class of liabilities, viz. current deposits, against a particular segment of assets, both accumulated over the years in the course of its business, would be incorrect, both on facts and in law. Funds from various sources are tapped from time to time as well as get generated through and in the course of its business,....
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....me. The said decision, among others, stands noted by the Hon'ble jurisdictional High Court in Godrej & Boyce (supra), on which it was otherwise binding (refer paras 17, 23, 41, 55 and 79 of the Reports), to hold that section 14A was enacted as it was impermissible to apportion expenditure between the taxable and non-taxable incomes, for which there is a clear mandate now (refer: CIT vs. Walfort Share and Stock Brokers P. Ltd. [2010] 326 ITR 1 (SC)). In our opinion, rather, the decision in the case of Godrej & Boyce (supra) covers the case at hand on all fours. Per the said decision, the Hon'ble jurisdictional High Court explains the genesis of section 14A, also expounding on its scope, clarifying that the basic principle of taxation is that it is only the net income, i.e., gross income less expenditure, which is taxable. The said principle, i.e., of only the net (and not gross) income (from any source or activity) as being liable to tax is axiomatic in tax jurisprudence and that, therefore, section 14A was curative and declaratory of the intent of the Parliament. That it represented the first serious attempt on its part to ensure that the tax incentive to certain incomes is....
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....he company was able to show that the investments with reference to which the disallowance u/s.36(1)(iii) was sought to be made by the Revenue were strategic investments in two companies of the same group, out of self generated funds. The utilization of borrowed capital of Rs. 43.62 crores, raised by way of issue of debentures, was shown as utilized toward capital expenditure and inter-corporate deposits, both yielding taxable income, so that no part of the interest bearing funds had gone in the investment of the said two companies (refer pg. 521, para 4 of the Reports). In fact, the hon'ble court in Godrej & Boyce (supra) goes to the extent of stating that the fact that the assessee has utilized its own funds in making the investments would not be dispositive of the question of whether the assessee has incurred the expenditure in relation to earning such (tax-free) income. Even if, therefore, it had utilized its own funds for making investment which had resulted in income not forming part of the total income under the Act, the expenditure which is incurred in earning the income would have to be disallowed (refer pg. 135, para 85 of the Reports). The matter stands duly discussed, re....
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....he tribunal in the case of D. H. Securities (P.) Ltd. (supra), a decision by its larger constitution. In our view, it was incumbent on the parties to have brought its' decision in the case of Godrej & Boyce (supra) to the notice of the Hon'ble Court in HDFC Bank Ltd. (supra). We are conscious that we are deciding an appeal in the case of the same assessee. So, however, we are deciding a purely legal issue, i.e., whether, in view of the statutory presumption cast by section 14A, a non obstante provision, a presumption on facts could obtain, or that the assessee shall have to establish the same with reference to its accounts, in terms of section 14A(2) r/w s. 14A(3), leading to a satisfaction or otherwise of the assessing authority, arrived at objectively, only to find the earlier decision in Godrej & Boyce (supra) as having addressed the said issue. Further, that the facts in Reliance Utilities and Power Ltd. (supra), which was even otherwise in respect of allowance of expenditure u/s.36(1)(iii) - a provision which does not mandate any apportionment per se, stood established, with in fact the said decision having been considered in Godrej & Boyce (supra). As such, there being no es....
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....s taxable, and the dividend income, which is not. Share trading or the banking activity can thus be said to have an inherent quality of producing both these incomes, a qualifying condition for apportionment of expenses, contemplated u/s.14A. How could, then, one may ask, interest expenditure in relation to such business, or in fact any expenditure of the said business, be said to be incurred either wholly and exclusively for either the regular share trading (banking) income or the dividend income? Dividend income, being tax-exempt, would thus warrant an apportionment of expenses. In fact, but for the provision of section 56(2)(i), dividend or tax-free interest income in such a case would stand classified as business income, even as it could yet be tax-exempt. The taxability or otherwise of a particular income is independent of its classification, which, rather, is required to be only for the income forming part of the total income, for the purpose of its computation under the Act (section 14). As such, being tax-exempt, expenses would require being apportioned in respect of such tax-exempt income/s. This is precisely the purport of the decision in Godrej & Boyce (supra), even as ex....
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....he mandate of law, i.e., section 14A(2) r/w s. 14(3) (refer para 70). It is only after an examination of the correctness of the assessee's claim, having regard to the accounts of the assessee, that a satisfaction (or otherwise), which is to be objectively arrived at on the basis of the accounts and after considering all the relevant facts and circumstances, is to be issued, and where not satisfied, rule 8D invoked. Reference for the same may be made to the discussion at paras 58 to 73 (pgs. 113-123) of the Reports - the constitutional validity of s. 14A as well as rule 8D being under challenge before the Hon'ble Court. Here it may be pertinent to state that prior to the enactment of rule 8D, the Hon'ble Courts had opined in favour of any reasonable method for allocation of expenditure attributable to tax exempt income/s. It is in this context, i.e., of a reasonable allocation, that the Hon'ble Court in India Advantage Securities Ltd. (supra) did not deem it appropriate to interfere with the disallowance u/s.14A worked at 10% of the dividend income earned, i.e., as confirmed by the tribunal. The Hon'ble Court did not answer any of the two questions referred to it, holding the same a....
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....onment of the expenses of the business would be required to be made in terms of sec. 14A r/w r. 8D, which rule is mandatory from the current year. Not so doing would be to defeat and, rather, contrary to the clear mandate of section 14A. On what basis, one may ask, could the expenses of the business be attributed only to one stream of income thereof? The issue of apportionment gets settled per Walfort Share and Stock Brokers P. Ltd. (supra), even as noted in Godrej & Boyce (supra) (refer pgs. 97 to 99 of the Reports), both binding precedents for us, and it is therefore immaterial whether the shares are held as investment or stock-in-trade, both being assets of a composite business giving rise to two sets of income. This also represents the view of the tribunal per its larger bench decision in Daga Capital Management Pvt. Ltd. (supra), which stands impliedly approved by the Hon'ble Court in Godrej & Boyce (supra), as well as the reading of the said decision per other decisions noted here-in-before. Unless, therefore, a decision by a larger Bench of the Hon'ble jurisdictional High Court, taking a different view, is brought to our notice, we are legally obliged to follow the same.....
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....g of fact qua the specific source/s of financing, even as the Hon'ble Court has in Godrej & Boyce (supra) clarified that even the fact that the assessee has utilized its own funds in making the investments would not be dispositive of the question as to whether the assessee has incurred expenditure in relation to earning of such income. Even if, therefore, as explained by it, the assessee had utilized its own funds for making investments which have resulted in income which does not form part of the total income under the Act, the expenditure which is incurred in the earning of that income would have to be disallowed, which is to be determined by the A.O. (para 85, pgs. 135-136 of the Reports). This is, it may be noted, in view of the rule of apportionment legislated by section 14A, enunciated by the Hon'ble Court, following the Apex Court in Walfort Share and Stock Brokers P. Ltd. (supra), also considered in Dhanuka and Sons (supra). In the facts of the present case, it is the admitted position that the investment in securities has been made out of common pool of funds (refer pgs. 7, 8 of the assessment order). Funds in the business, it may be appreciated, are always in a state of f....
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....d or over-ruled by the Apex Court or a larger bench decision of the Hon'ble jurisdictional High Court, continue to bind us. Further, the said decision stands, we may reiterate, discussed and explained at length by the tribunal in D. H. Securities (P) Ltd. (supra) - a larger bench decision, and Damani Estates & Finance (P.) Ltd. (supra), as well as by the hon'ble high court in Dhanuka & Sons (supra), all of which have precedent value, albeit varying, with our reading thereof being also in alignment therewith. Accordingly, we uphold the application of section 14A r/w rule 8D in the facts and circumstances of the case, dismissing the assessee's Gd. # I. 5. The assessee's second Ground relates to the disallowance of the amortized Employee Stock Options Plan (ESOP) expenses in the sum of Rs. 821.33 lacs. The same stands disallowed by the Revenue on the ground of it being a notional and, in any case, capital expenditure. The expenditure, as explained, represents the difference between the obtaining market price and the issue price of the shares offered as an option to the employees, to be acquired over the vesting period. For example, if 500 options, i.e., an option to acquire 500 shar....
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.... subsequent decision by the special bench of the Tribunal in the case of Biocon Ltd vs. Dy. CIT [2013] 25 ITR (Trib) 602 (Bang) (SB), warranted in view of the conflicting decisions in the matter by different benches of the Tribunal. Per the same, the tribunal, after considering the contrary decisions and examining the issues involved, held the discount on the issue of shares to employees under the ESOP as an expenditure deductible u/s.37(1) of the Act. 7. We have heard the parties, and perused the material on record. The decision by the Special Bench, rendered upon examining the issue in its various facets, is binding on us. No decision taking a contrary view by any higher appellate forum has been brought to our notice. The tribunal, per the same, explains that the discounted sum, i.e., which could be realized by the company on shares issued under ESOP, stands foregone by it only with a view to retain the employees, allowed by way of compensating them for their services. The extent of the amortized expense that could be allowed, i.e., with reference to time, stands also discussed by the tribunal per its said order, i.e., on a straight line basis over the vesting period, unless of....
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....ible in the computation of business income under the Act, should be taken at Rs. 60/- (80-20), i.e., with reference to their market price, or at Rs. 35/- (55-20), i.e., with reference to the issue price of the shares issued to and subscribed by the public. The excess of the market price over the issue price to the public (Rs.25/- in the example) is wholly notional. On what basis, one wonders, could the same be claimed to be the value foregone, when the shares are issued to the public at large at Rs. 55/-? This issue price is fixed by the issuer-company with reference to a host of factors, including the likely impact on the market value of the shares subsequent to the public issue (of shares). In fact, it is quite unlikely that the market value of the shares shall subsist at the same value, i.e., post the said issue, in-as-much as the company's earnings have henceforth to support or service a much larger number (base) of shares. Further, these considerations are common and constant across the two categories of share issues, i.e., issued to the public and to the employees, which rank pari passu, except, perhaps, for a stipulation with regard to their holding period - a different matt....
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.... and for which discount stands, in effect, allowed in the first place. It may be argued, as was indeed before us, as to what if there is no public issue? The question is misconceived. What, for instance, if the shares are not traded in the market, as where this is the first public offering by the company. The issue, it needs to be appreciated, is not whether the shares are or are not traded, but which 'difference' could be said to represent or be considered as a discount allowed by the company in the facts and circumstances of the case. We have in this regard clarified that it is the purpose for which the value, capital in nature, is foregone, which enables it to assume the character of a revenue expense, besides defining its business purpose, so as to be admissible u/s. 37(1) of the Act. In evidence of the value foregone, a public issue of shares at the relevant time, or even in proximity, provides an unimpeachable basis in the form of a comparable transaction, for determining the same, i.e., the value foregone or the discount allowed. Even accounting theory subscribes to booking only the discount qua the issue price. SEBI guidelines, prescribing a method in the matter, is largel....
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....t of premium amounting to Rs. 100 from issue of shares to public, gives Rs. 60 as incentive to its employees, such incentive of Rs. 60 would be remuneration to employees and hence deductible. In the same way, if the company, instead, issues shares to its employees at a premium of Rs. 40, the discounted premium of Rs. 60, being the difference between Rs. 100 and Rs. 40, is again nothing but a different mode of awarding remuneration to employees for their continued services. In both the cases, the object is to compensate employees to the tune of Rs. 60. It follows that the discount on premium under ESOP is simply one of the modes of compensating the employees for their services and is a part of their remuneration. Thus, the contention of the ld. DR that by issuing shares to employees at a discounted premium, the company got a lower capital receipt, is bereft of an force. The sole object of issuing shares to employees at a discounted premium is to compensate them for the continuity of their services to the company. By no stretch of imagination, we can describe such discount as either a short capital receipt or a capital expenditure. It is nothing but the employees cost incurred by the....