TaxTMI 
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2025 (11) TMI 31
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....barring figurative variations and also the appeals were heard together, they are being taken up for adjudication vide this composite order for the sake of brevity. 2. The grounds of the appeals are as under: ITA No. 1555/MUM/2025 (AY 2019-2020) GROUND NO. 1: DISALLOWANCE UNDER SECTION 14A OF THE ACT 1. On the facts and in circumstances of the case and in law, the Ld. CIT(A), while partially deleting the disallowance u/s. 14A r.w.r. 8D of the Income-tax Rules, 1962 ("the Rules") made in the impugned assessment order, erred in not directing the Ld. AO to accept the scientifically derived suo-motu disallowance of Rs. 70,18,504/- offered by the Appellant for the purpose of disallowance under section 14A of the Act without any further disallowance. 2. The Ld. CTT(A) erred in directing the ld. AO to consider investments held as stock-in-trade also for the purposes of computing disallowance u/s. 14A r.w.r. 8D disregarding the appellate orders of Hon'ble Tribunal in Appellant's own case for earlier years. 3. The Ld. CIT(A) erred in not considering the basis of suo-motu disallowance offered by the Appellant during the course of Assessment proceedings. The....
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....red in earning exempt income. In the order in Maxopp Investment Ltd. (supra), the hon'ble Court held as in the case of State Bank of Patiala that when all the securities are held stock-in- trade, no disallowance u/s. 14A was required. Hence, in the assessee's case the securities held as stock-in-trade were not considered for the purpose of disallowance u/s. 14A r.w.r. 8D. 4.1 However, he observed that in the assessee's case, it had mixed portfolio for securities in terms of stock-in-trade as well as in investments. Hence, apportionment of expenses for interest as well as other expenses was required. The assessee also relied on the decision in its own case of Hon'ble Bombay High Court in CIT v. HDFC Bank Ltd. [366 ITR 505] and stated that no disallowance is warranted when interest free funds are in excess of investment in tax free securities. The AO however, made a detailed analysis of facts on record and legal position emerging from various High Court and Supreme Court decisions finally concluding that a plain reading of 14A rather makes it mandatory to identify such expenditure in relation to exempt income and disallow any expenditure in relation to exempt income as per Rule 8D....
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....isallowed and added to the total income of the assessee. The AO applied Rule 8D(2)(ii).In doing so, the AO aggregated the opening and closing balances of all the strategic investments (irrespective of whether any exempt income was earned thereon or not) and took 1% of such aggregate and computed the disallowance. The ld.CIT(A) gave partial relief by modifying the working of the AO and re- compute the disallowance u/s. 14A r.w.r. 8D(2)(ii) considering only the strategic investments which yielded exempt income and taking annual average of the monthly opening and closing balances of such investments. It is stated by the assessee that the Department has not raised any ground against such partial relief. 6. Before us, the ld.CIT-DR relied on the orders of lower authorities and claimed that the satisfactions of the AO was not mechanical but elaborate and well reasoned. The ld.AR inter alia pleaded that no objective satisfaction was recorded by the AO. He made a note of the 14A report, however, disregarded the computation of indirect expenses relatable to such tax-free investments identified on a scientific basis and made disallowance applying Rule 8D(2)(ii) at Rs. 79,43,93,186/-. The ....
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.... further submitted that the facts for AY 2020-21 are more or less similar and therefore, the submissions made for AY 2019-20 will apply mutatis mutandis to AY 2020-21. 7. We have carefully perused the records, considered rival submissions and also gone through the cited decisions and specifically decisions of the coordinate bench of ITAT Mumbai in its own case in appeals of AY 2016-17 to 2018-19 involving similar facts and circumstances in ITA No.1783/1784/1785/Mum/2023 dated 24.01.2024. In all these appeals, we find that the observations and findings of the AO were almost identical as also the facts of the case. We are of the considered view that in a case where the assessee has suo motu made disallowance, the AO can invoke the provisions of Rule 8D for the purposes of computation of such disallowance only when there is recording of an objective dis-satisfaction to such disallowance by him. It is noted that primary responsibility for making disallowance u/s. 14A is on the assessee while computing its total income and reporting the same in the return of income filed by it. In the present case, assessee has suo motu made disallowance, which is based on its audited financial state....
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....e suo moto disallowance of expenditure made towards earning exempt income by the respondent. This exercise not having been carried out by the Assessing Officer before applying Rule 8D of the Income Tax Rules, the disallowance of expenditure to earn exempt income cannot be sustained. 7.3 This issue is no longer res integra as the hon'ble Apex Court in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT, 394 ITR 449 decided the issue in favour of the respondent. In this case, the hon'ble Supreme Court has while considering the issue of disallowing of expenditure incurred to earn exempt income observed as under: "Whether such determination is to be made on application of the formula prescribed under rule 8D or in best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It only thereafter that the provisions of section 14A (2) and (3) read with rule 8D of the Rules or a best judgment determination, as earlier prevailing, would becom....
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....of State Bank of Patiala that when all the securities are held stock-in-trade, no disallowance u/s. 14A was required. Hence, in the assessee's case the securities held as stock-in-trade were not considered for the purpose of disallowance u/s. 14A r.w.r. 8D. However, the ld.CIT(A) held a contrary view of the matter and directed the AO accordingly. 8.2 We have heard the rival contentions and perused the material available on record. We find that as far as shares held as stock in trade by the assessee, which is duly reflected as such in its financial statements, the matter is no more res integra and the value of shares so held as stock-in-trade has to be excluded for the purposes of computation of disallowance u/s. 14A of the Act. In this regard, we can gainfully refer to the decision of the Hon'ble Supreme Court in the case of Maxopp Investment Ltd. vs. CIT (supra). The relevant findings read as under:- "36) There is yet another aspect which still needs to be looked into. What happens when the shares are held as stock-in-trade and not as investment, particularly, by the banks? On this specific aspect, CBDT has issued circular No. 18/2015 dated November 02, 2015. ....
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....ed as "income" under the head 'profits and gains from business and profession". What happens is that, in the process, when the shares are held as "stock-in-trade", certain dividend is also earned, though incidentally, which is also an income. However, by virtue of Section 10 (34) of the Act, this dividend income is not to be included in the total income and is exempt from tax. This triggers the applicability of Section 14A of the Act which is based on the theory of apportionment of expenditure between taxable and non-taxable income as held in Walfort Share and Stock Brokers P Ltd. case. Therefore, to that extent, depending upon the facts of each case, the expenditure incurred in acquiring those shares will have to be apportioned. 40) We note from the facts in the State Bank of Patiala cases that the AO, while passing the assessment order, had already restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 8D of the Rules and holding that section 14A of the Act would be applicable. In spite of this exercise of apportionment of expenditure carried out by the AO, CIT(A) disallowed the entire deduction of expenditu....
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....fits there from and therefore section 14A of the Act was not attracted and the expenditure could not be disallowed. The judgment of Maxopp Investment Ltd. (supra) has been duly noted by the Tribunal in its impugned order and in our opinion the Tribunal has correctly disallowed the disallowance under rule 8D(2)(iii) of the Rules. 20. In the present case as well, the Tribunal has considered that the Respondent was holding the shares as a stock-in-trade and has, therefore, disallowed the addition made by the JAO. Learned counsel for the Appellant has not disputed the fact that the shares are held as stock-in-trade by the Respondent. 21. In the aforesaid view of the matter, the questions of law proposed by the Appellant do not arise for consideration either in fact or in law in view of the judgments of the Supreme Court, which have conclusively decided the questions sought to be canvassed by the Appellant." 8.4 Also the Co-ordinate Bench in the case of Religare Securities Ltd. in ITA No. 7291/Del/2019; AY 2015-16 has followed the view taken by the hon'ble Supreme Court in the case of Maxopp Investment Ltd. (supra). 9. In light of the aforementioned decisions of ....
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....com 415] held that only those investments are to be considered for computing average value of investments which yielded exempt income during the year while computing the disallowance Rule 8D(2)(iii). Respectfully following the same, we do not find any infirmity in the action of the ld.CIT(A) in directing the AO to compute disallowance u/s. 14A r.w.r. 8D(2)(iii) in accordance with the ratio of law laid down by Special Bench-ITAT, Delhi in the case of Vireet Investment Private Limited (supra). This ground is therefore dismissed. 16. In the ground no.2, it is claimed by the Revenue the Ld. CIT(A) erred in restricting the disallowance u/s. 14A to the exempt income ignoring the provisions contained in the Act and the Rules? 17. In this regard, the ld.AR has contented that the above-mentioned ground raised by the Department is factually incorrect. The ld. CIT(A) has made disallowance u/s. 14A applying Rule 8D(2)(ii) and has not restricted the disallowance to the exempt income. The same can be evidenced from the tabulation provided hereunder: A.Y. Amount disallowed by CIT(A) (in Rs.) Amount of exempt income earned by the Assessee Bank (in Rs.) 2019- 20 28,45,08,751 ....
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....a 'donation' for the purpose of Section 80G of the Act. The CSR expenditure claimed as deduction u/s. 80G was against the intention of law maker. So when the assessee paid an amount to an eligible entity under Section 80G of the Act, such a payment was not made on a voluntary basis but it was a mandatory requirement of law to spend such an amount for activities benefitting the society. The assessee could also have made payment to an entity not covered by Section 80G or it could have directly incurred the expenditure for the specified purpose, however in any of these scenarios too the expenditure would not have been voluntary but mandatory to comply with the provisions of the law. Further, CSR expenditure, being an application of income, was not incurred wholly and exclusively for the purposes of carrying on business. As the application of income is not allowed as deduction for the purposes of computing taxable income of a company, amount spent on CSR could not be allowed as deduction for computing the taxable income of the company. Moreover, the objective of CSR is to share the burden of the Government in providing social services by companies having net worth/turnover/profit above....
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....(2024) 163 taxmann.com 536(Mum) considered the provisions of Companies Act and I.T. Act and held as follows: "11. We have heard the rival submissions and perused the materials available on record. The only morn question to be decided here is whether the expenditure towards CSR activities are an allowable deduction us 80G of the Act. The CSR expenses are governed by section 135 of the Companies Act, 2013, Schedule VII of the Act and Companies (CSR) Policy Rules, 2014 where companies having net worth of Rs 500 crores of more or turnover of Rs. 1000 crores or more or net profit of Rs 5 crores of more have to mandatorily comply with the CSR provisions specified u/s. 135(1) of the Companies Act, 2011. The above mentioned companies are liable to spend at least 25% of its average net profit for the immediately preceding three financial years on CSR activities. In the present case, the assessee has contributed Rs. 30 lacs to various educational and charitable trust for which the assessee has claimed 50% of the total donation paid as deduction u/s. 800 of the Act. Prior to the Finance (No.2) Act, 2014, the said expenditure was claimed as 'business expenditure' u/s. 37(1) of....
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....d u/s. 80G of the Act towards the CSR expenditure incurred by it. We, therefore, direct the ld. A.O, to allow the claim of the assessee subject to the condition that the assessee has satisfied the other requirements warranted u/s. 80G of the Act. Hence, ground no. 2 raised by the assessee is allowed." 23.1 The Delhi Tribunal in the case of Interglobe Technology Quotient (P.) Ltd. (2024) 163 Taxmann.com 542 (Del)held that mandatory nature of CSR expenditure does not justify disallowance of same u/s. 80G, if other conditions of section 80G are fulfilled by observing as follows: "7.3 As we take notice of the fact that Parliament legislated that CSR expenses would not be eligible for deduction as business expenditure under section 37 of the Act by inserting Explanation 2 to section 37(1) vide the Finance (No.2) Act, 2014 (applicable from the assessment year 2015-16), which provided that any expenditure incurred by an assessee on the activities relating to CSR referred to in section 135 of the CA 2011, shall not be deemed to be an expenditure incurred by an assessee for the purpose of business or profession and shall not be allowed as deduction under section 37(1) of the IT ....
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.... reciprocal commitment from beneficiary being philanthropic in nature. The Act permits deduction of donations as per Section 80G of the Act, even though, assessee is not gaining any benefit out of any reciprocity from donee. Similar is the case of CSR expenditure. Thus the reasoning of learned Tax Authority, the CSR expenditure is mandatory, does not justify disallowance of these expenditures u/s. 80G, if other conditions of section 80G are fulfilled. There is no allegation of Revenue that other conditions of Section 80G are not fulfilled. We, thus sustain the ground." 23.2 In a recent decision in the case of The Ruby Mills Limited, Mumbai vs PCIT on 27 June, 2025 in ITA No.3035/Mum/2025,the coordinate bench while dealing with similar issue held as under: "We find that co-ordinate bench of Mumbai Tribunal in DCIT Vs Gabriel India Ltd. (supra), Vistex Asia Pacific Private Limited (supra) and Axis Securities Limited (supra) consistently allowed deduction under section 80G @ 50% of CSR expenses. We, further, find that this combination in Dalal and Broacha Stock Broking Pvt. Ltd. in ITA No. No. 2718/Mum/2025 dated 19.06.2025 by considering other decision of Tribunal passed ....
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....t. Once the aforesaid condition is fulfilled, the donor is entitled to avail the deduction. This is also the view expressed by the Coordinate Bench in case of Honda Motorcycle and Scooter India Pvt. Ltd. (supra). The relevant observation are as under: "17. Apropos the issue of disallowance u/s. 80G of the Income-tax Act, 1961 (for short 'the Act') : The assessee made certain donation to approved institutions or funds and claimed 50% of the total donation made as deduction u/s. 80G. This amount also formed part of the CSR initiative of the assessee company which amounts to INR 22,81,29,964/-. It is observed that the assessee has duly disallowed CSR expenditure of INR 22,81,29,964/-debited to the statement of profit and loss under section 37 of the Act. DRP rejected the claim of the assessee by saying that the donation is pursuant to the CSR policy of the company and lacks the test of voluntariness as required under section 80G. The AO has disallowed the claim on the ground that anything donation over and above the CSR u/s. 80G will be only allowed as the CSR expense is not an allowable expense u/s. 37 of the Act. Ld. Counsel of the assessee placed reliance ....
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....of the case in hand show that the assessee has submitted the receipts of the donees evidencing the eligibility of deduction u/s. 80G of the Act. Therefore, respectfully following the decision of the Coordinate Bench, we do not find any reason to interfere with the findings of the ld. CIT(A). The decision relied upon by the ld. D/R is on different reasoning as the Co-ordinate Bench was of the opinion that CSR expenses cannot be allowed u/s. 37(1) of the Act, therefore, no deduction is allowed u/s. 80G, whereas in the case in hand, assessee has claimed deduction u/s. 80G and not u/s. 37(1) of the Act. Accordingly, ITA No. 1710/PUN/2023 is also dismissed." 24. In view of the facts of the case which are identical as in plethora of decisions of the coordinate benches of ITAT as outlined in the preceding paras, we do not find any infirmity in the appellate order which is accordingly upheld dismissing the instant ground of appeal of the Revenue. 25. In ground no.3, it is stated that the ld.CIT(A) was not right in holding that the discount on issue of ESOP is allowable deduction in computing the income under the head profits and gains of the business without appreciating the fact tha....
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.... on the cited decisions above. 27. Before us, the ld.CIT(DR) placed reliance on the assessment order while the ld. AR supported the appellate order claiming that the assessee Bank claimed deduction in respect of such ESOP expenses being the amount representing the difference between the grant price and the market price on the date of exercise (i.e. ESOP discount). Such claim has been disallowed by the AO but allowed by the CIT(A). The Department is in appeal on this ground. Under similar facts, the said issue is covered in assessee Bank's own case for A.Υ. 2016-17 to AY 2018-19 wherein the hon'ble Tribunal, following the decision of the Karnataka High Court in case of CIT Vs. Biocon Ltd. (2020) 430 IR 151 (Kar. HC), has held that ESOP expenses claimed by the Assessee Bank are allowable expenditure under section 37(1) of the Act. In view of the same, it is most humbly submitted that the claim of the Assessee Bank towards ESOP be allowed. 28. The facts for AY 2021-22 are similar and therefore, the submissions made for AY 2020-21 will apply mutatis mutandis to AY 2021-22. 29. We have carefully considered the relevant facts of the case and it is apparent that the issue....