TaxTMI 
TaxTMI 
TaxTMI 
2026 (4) TMI 260
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....nt year 2020-21 is considered as the lead case, and the decision rendered therein shall apply mutatis mutandis to the Revenue's appeals for the other years before us. ITA No.6723/Mum/2025 Revenue's Appeal - A.Y. 2020-21 3. In this appeal, the Revenue has raised the following grounds: - "1. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was correct in deleting the disallowance under section 14A read with Rule 8D of the Income-tax Rules, 1962, without appreciating that the assessee held investments capable of yielding exempt income and failed to discharge the onus that no expenditure was incurred, thereby disregarding the legislative intent and the prescribed statutory formula for computation? 2. Whether, on the facts and in the circumstances of the case and in law, the Ld. C(A) erred in holding that no disallowance under section 14A is warranted solely on the ground that no exempt income was earned during the year, ignoring the judicial position supporting the applicability of section 14A even when no exempt income is reported, and that the disallowance was computed as per Rule 8D? 3. Whether, on ....
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....hy the expenditure should not be attributed to earning exempt income in view of the provisions of section 14A read with Rule 8D of the Rules. In response, the assessee submitted that it has not incurred or paid any expenditure in relation to the investments made during the year. The assessee further submitted that during the year, it had made investments in various mutual fund schemes out of surplus funds of the previous/current year, after payment of taxes. The assessee further submitted that investments in mutual funds were made under the dividend option, while some other investments were made under the growth option. In respect of investments made in mutual funds under the dividend option, the assessee submitted that it has earned a dividend of Rs. 33,73,984/- during the year. In relation to the mutual funds under the growth option, the assessee submitted that it is not entitled to dividends on such schemes, and that the income will be by way of appreciation in the value of units, resulting in capital gains. The assessee further submitted that it suo motu made a disallowance of Rs. 7,58,921/- under section 14A read with Rule 8D of the Rules after taking into consideration the an....
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.... exempt income have been considered for computation of disallowance under section 14A read with Rule 8D of the Rules. In the present case, it is undisputed that no direct expenditure was incurred by the assessee in relation to income which does not form part of the total income. However, the AO disagreed with the submissions of the assessee regarding the suo motu calculation of disallowance under section 14A read with Rule 8D of the Rules and proceeded to compute the disallowance at Rs. 2,14,67,000/-. During the hearing, the learned Authorised Representative ("learned AR") reiterated the submissions of the assessee made before the lower authorities that for the computation of disallowance under section 14A read with Rule 8D of the Rules, only those investments which have yielded exempt income should be considered. 9. We find that this claim of the assessee is supported by the decision of the Special Bench of the Tribunal in ACIT v. Vireet Investment Pvt. Ltd., reported in (2017) 165 ITD 27 (Delhi - Tribunal), wherein it was held that only those investments are to be considered for computing the average value of investments which yielded exempt income during the year. Respectfull....
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....can be qualified as revenue in nature. Accordingly, the AO disallowed the ESOP expenditure amounting to Rs. 2 crore and added the same to the total income of the assessee. 13. The learned CIT(A), vide impugned order, following the decision of the Hon'ble Karnataka High Court in CIT v. Biocon Ltd., reported in (2020) 121 taxmann.com 351 (Kar.), allowed the ground raised by the assessee on this issue and deleted the disallowance of ESOP expenses under section 37 of the Act. Being aggrieved, the Revenue is in appeal before us. 14. We find that the Hon'ble Karnataka High Court, while deciding a similar issue in Biocon Ltd. (supra), observed as follows: - "6. We have considered the submissions made by learned counsel for the parties and have perused the record. The singular issue, which arises for consideration in this appeal is whether the tribunal is correct in holding that discount on the issue of ESOPs i.e., difference between the grant price and the market price on the shares as on the date of grant of options is allowable as a deduction under section 37 of the Act. Before proceeding further, it is apposite to take note of section 37(1) of the Act, which reads as und....
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....ly a quantification of liability, which takes place at a future date. The tribunal has therefore, rightly placed reliance on decisions of the Supreme Court in Bharat Movers supra and Rotork Controls India P. Ltd., supra and has recorded a finding that discount on issue of ESOPs is not a contingent liability but is an ascertained liability. 10. From perusal of section 37(1), which has been referred to supra, it is evident that an assessee is entitled to claim deduction under the aforesaid provision if the expenditure has been incurred. The expression 'expenditure' will also include a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which it is issued and the market value of the shares would also be expenditure incurred for the purposes of section 37(1) of the Act. The primary object of the aforesaid exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, the same cannot be construed as short receipt of capital. The tribunal therefore, in paragraphs 9.2.7 and 9.2.8 has rightly held that incurring of the expenditure by the assessee entitles h....
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....n the result, we do not find any merit in this appeal, the same fails and is hereby dismissed." 15. Therefore, in view of the aforesaid findings of the Hon'ble Karnataka High Court, we do not find any infirmity in the order passed by the learned CIT(A) in allowing the claim of deduction of ESOP expenses under section 37(1) of the Act. Accordingly, Ground No. 3 raised in the Revenue's appeal is dismissed. 16. Grounds Nos. 4 and 5, raised in Revenue's appeal, pertain to the deletion of the disallowance of sales incentive expenditure under Explanation 1 to section 37(1) of the Act. 17. We have considered the submissions of both sides and perused the material available on record. During the assessment proceedings, from the perusal of the profit and loss account of the assessee, it was observed that the assessee has claimed an expenditure of Rs. 17.49 crore as sales incentive. Accordingly, the assessee was asked to furnish the details of the parties to whom sales incentives were paid during the year, along with TDS deducted thereon. Further, the assessee was also asked to explain the nature of these payments. In response, the assessee submitted that it generated business leads ....
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....IT(A) on this issue are reproduced as follows: - "7. Appellant's submissions were carefully considered. Appellant submitted that major payments were made to its direct selling agents(DSA) and the rest were paid to smaller entities. Appellant submitted that TDS was also deducted against those payments. Appellant submitted copies of the agreements entered into some of its major direct selling agents(DSA). 8. From the above, it could be observed that appellant made payments to its direct selling agents. Appellant had also deducted TDS on the above payments. The AO, while disallowing 10% of the total sales incentives, had not brought in, any proof to show that the payments were made to medical practitioners. AO observed that it was not ethical in making payments towards sales incentives in the industry of medical aid, since it affects the poor patients. Without making any investigation to prove that the payments to the direct selling agents (DSA) by the appellant had in fact reached the medical practitioner indirectly, AO made an assumption that the payments to direct selling agents would have been in turn paid to the medical practitioner. For making any disallowa....
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.... diagnostic testing services. Accordingly, it is the plea of the assessee that no payment was made to medical practitioners, which is prohibited under the relevant MCI regulations. 23. We find that the Hon'ble Supreme Court in Apex Laboratories Pvt. Ltd. v. DCIT, reported in (2022) 442 ITR 1 (SC), held that gifting of freebies by pharmaceutical companies to medical practitioners is prohibited by law and, thus, the expenditure incurred in distribution of such freebies is not allowable as deduction in terms of Explanation 1 to section 37(1) of the Act. 24. From the perusal of the details of sales incentives paid by the assessee, forming part of the paper book from pages 97 to 179, we notice that the names of certain parties are prefixed by "Dr." During the hearing, the learned AR submitted that even though these parties are referred to as "Doctors", however, they are not medical practitioners and are pathological/collection centres to whom the assessee paid sales incentives to generate business leads for its diagnostic testing services. From the perusal of the aforesaid details, we find that the assessee has also provided the address and PAN details of these parties. However, n....
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....e Act, after rejecting the assessee's claim of no expenditure/quantum of expenditure, and consequently, the computation of disallowance as per the mandatory formula prescribed under Rule 8D was legally warranted and could not be deleted without pointing out any specific defect in the AO's satisfaction. 3. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the disallowance under Rule 8D, without considering the fact that the assessee failed to establish a one-to-one nexus between its own funds and the investments, and that in a scenario of 'hotchpotch' of mixed funds (borrowed and own), the presumption that interest-bearing funds were utilized for non-interest-bearing investments prevails, thereby justifying the disallowance of the interest component calculated under Rule 8D(2)(ii)." 4. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance under Rule 8D(2)(iii) (administrative expenses), without appreciating that the assessee held substantial investments which require general expenditure for their maintenance, management, a....