THOMAS COOK (INDIA) LTD,MUMBAI vs. DY CIT 1 (3)92), MUMBAI

PER OM PRAKASH KANT, AM

This appeal by the assessee is directed against final assessment order dated 30.10.2019 passed by the Dy. Commissioner of Income-tax Circle-1(3)(2), Mumbai [in short ‘the Ld. Assessing Officer’] for assessment year 2015-16 pursuant to the direction of the Ld. Dispute Resolution Panel (DRP) dated 28.09.2019, which was further rectified on 06.12.2019. The grounds raised by the assessee are reproduced as under:

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dealer,travel agent, tour agent, tour and operator and other associated services and operator and other associated services. For the year under or the year under consideration, the assessee filed return of assessee filed return of income on 30.11.2015 declaring total income at Rs.52,56,47,110/-. income on 30.11.2015 declaring total income at Rs.52,56,47,110/ income on 30.11.2015 declaring total income at Rs.52,56,47,110/ The case was selected for scrutiny and statutory notices under the The case was selected for scrutiny and statutory notices und The case was selected for scrutiny and statutory notices und Income-tax Act, 1961 (in short ‘the Act’) were issued and complied tax Act, 1961 (in short ‘the Act’) were issued and complied tax Act, 1961 (in short ‘the Act’) were issued and complied with. In view of the international transactions carried out by the with. In view of the international transactions carried out by the with. In view of the international transactions carried out by the assessee with its Associated ssociated Enterprises (AE) during the year under nterprises (AE) during the year under consideration, the determination of arm he determination of arm’s length price of those h price of those transactions was referred to the Ld. Transfer Pricing Officer (TPO). transactions was referred to the Ld. Transfer Pricing Officer (TPO). transactions was referred to the Ld. Transfer Pricing Officer (TPO). The Ld. TPO proposed The Ld. TPO proposed an adjustment of Rs.3,79,01,11,500/ adjustment of Rs.3,79,01,11,500/- on account of short recovery of share dividend distribution tax u/s account of short recovery of share dividend distribution account of short recovery of share dividend distribution 115A of the Act. The Ld. Assessing Officer i 115A of the Act. The Ld. Assessing Officer in the draft assessment n the draft assessment order proposed this transfer pricing adjustment for addition. The order proposed this transfer pricing adjustment for addition. The order proposed this transfer pricing adjustment for addition. The Ld. Assessing Officer also proposed additions on other issues, inter Ld. Assessing Officer also proposed additions on other issues, Ld. Assessing Officer also proposed additions on other issues, alia,disallowance u/s 14A of the Act, the disallowance of employee disallowance u/s 14A of the Act, the disallowance of employee disallowance u/s 14A of the Act, the disallowance of employee’s share option scheme expenses share option scheme expenses etc. The assessee preferred etc. The assessee preferred objections against the draft assessment order before the Ld. DRP. objections against the draft assessment order before the Ld. DRP. objections against the draft assessment order before the Ld. DRP. The Ld. DRP vide order dated 28.09.2019 r.w.s. the rectification The Ld. DRP vide order dated 28.09.2019 r.w.s. the rectification The Ld. DRP vide order dated 28.09.2019 r.w.s. the rectification order dated 06.12.2019 issued direction to the Ld. Assessing order dated 06.12.2019 issued direction to the Ld. Assessing order dated 06.12.2019 issued direction to the Ld. Assessing Officer. Pursuant to the direction o ursuant to the direction of the Ld. DRP, the Ld. Assessing he Ld. Assessing Officer passed the impugned final assessment order. In the said Officer passed the impugned final assessment order Officer passed the impugned final assessment order impugned final assessment order impugned final assessment order, the Ld. Assessing Officer deleted he Ld. Assessing Officer deleted the transfer pricing adjustment as per the direction of the Ld. DRP, the transfer pricing adjustment as per the direction of the Ld. DRP the transfer pricing adjustment as per the direction of the Ld. DRP however retained the di however retained the disallowance for employees share option sallowance for employees share option scheme expenses as well as disallowance u/s 14A r.s.r. 8D of the scheme expenses as well as disallowance u/s 14A r.s.r. 8D of the scheme expenses as well as disallowance u/s 14A r.s.r. 8D of the

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Income Tax Rules,1962. ,1962. The Ld. DRP also rejected the additional The Ld. DRP also rejected the additional ground of the assessee for claim of expenses in the nature of ground of the assessee for claim of expenses in the nature of ground of the assessee for claim of expenses in the nature of discount on employees stock discount on employees stock option plan (being it is between plan (being it is between market price at the time of exercise of the option and market price market price at the time of exercise of the option and market price market price at the time of exercise of the option and market price at the time of grant of option) amounting to Rs.100,136,178/- u/s at the time of grant of option) amounting to Rs.100,136,178/ at the time of grant of option) amounting to Rs.100,136,178/ 37(1) of the Act, which was not claimed at the time of filing of return which was not claimed at the time of filing of return which was not claimed at the time of filing of return of income.

2.1 Aggrieved with the final assessment order Aggrieved with the final assessment order, the assessee is the assessee is before the Tribunal by way of raising grounds as reproduced above. before the Tribunal by way of raising grounds as reproduced above. before the Tribunal by way of raising grounds as reproduced above.

“10.12 In view of the above direction of Hon’ble DRP-2, In view of the above direction of Hon’ble DRP Mumbai, the assessee vide its submission dated 18.10.2019, Mumbai, the assessee vide its submission dated 18.10.2019, Mumbai, the assessee vide its submission dated 18.10.2019, furnished the computation of disallowance to be made u/s furnished the computation of disallowance to be made u/s furnished the computation of disallowance to be made u/s 14A r.w.s. 8D of the Act as under: 14A r.w.s. 8D of the Act as under: S. No. Particulars Amount (Rs.) 1. Direct expenses attributable Direct expenses attributable -- Interest Expenses X Average Investment Interest Expenses X Average Investment Average of Total assets Average of Total assets 2 76,89,652/- 22,83,88,171/ 22,83,88,171/- X 62,53,18,827/- 18,55,07,05,474/ 18,55,07,05,474/- 3. 0.5% 0.5% 0.5% of of of Average Average Average Investments Investments Investments i.e. 31,26,594/- i.e. i.e. (Rs.62,53,18,827/ (Rs.62,53,18,827/-) Total Total 1,08,25,246/-

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4.1 The only dispute between the assessee and the Assessing The only dispute between the assessee and the Assessing The only dispute between the assessee and the Assessing Officer is in respect of proportionate Officer is in respect of proportionate disallowance under Rule disallowance under Rule 8D(2)(ii) of the Income 8D(2)(ii) of the Income-tax Rules, 1962 (in short ‘the Rules’). Before tax Rules, 1962 (in short ‘the Rules’). Before the Ld. DRP the assessee contended that the investment in the the Ld. DRP the assessee contended that the investment in the the Ld. DRP the assessee contended that the investment in the mutual funds aggregating to Rs.1,19,15,487/ mutual funds aggregating to Rs.1,19,15,487/- was made out of own was made out of own resources. The Ld. DRP after consi resources. The Ld. DRP after considering the submission of the dering the submission of the assessee rejected the contention of the availability of own funds assessee rejected the contention of the availability of own funds assessee rejected the contention of the availability of own funds mainly on the ground that the assessee failed to provide availability mainly on the ground that the assessee failed to provide availability mainly on the ground that the assessee failed to provide availability of the funds at the time of investment in mutual funds. The relevant of the funds at the time of investment in mutual funds. The relevant of the funds at the time of investment in mutual funds. The relevant finding of the Ld. DRP finding of the Ld. DRP is reproduced as under:

“6.3.6 We now advert to the disallowance of proportionate 6.3.6 We now advert to the disallowance of proportionate 6.3.6 We now advert to the disallowance of proportionate interest expenditure proposed by the Assessing Officer interest expenditure proposed by the Assessing Officer interest expenditure proposed by the Assessing Officer under rule 8D(i) of the Rules and examine the claim of the under rule 8D(i) of the Rules and examine the claim of the under rule 8D(i) of the Rules and examine the claim of the assessee with the aid of evidences adduced before us assessee with the aid of evidences adduced before us assessee with the aid of evidences adduced before us especially in view of the decisions of Hon'ble Jurisdictional ally in view of the decisions of Hon'ble Jurisdictional ally in view of the decisions of Hon'ble Jurisdictional High Court relevant for adjudication of the issue at hand. High Court relevant for adjudication of the issue at hand. High Court relevant for adjudication of the issue at hand. The assessee's prime argument is that rule 8D(2) (il) would The assessee's prime argument is that rule 8D(2) (il) would The assessee's prime argument is that rule 8D(2) (il) would not apply in case where investments have been made from not apply in case where investments have been made from not apply in case where investments have been made from interest-free funds avail free funds available and, such interest-free funds free funds were available with it. In this connection, the twin position were available with it. In this connection, the twin position were available with it. In this connection, the twin position taken vide letter dated 23.07.2019, is as under: taken vide letter dated 23.07.2019, is as under: (i) own funds exceeded the investments during the year as own funds exceeded the investments during the year as own funds exceeded the investments during the year as per particulars furnished for March 31, 2015 and tha per particulars furnished for March 31, 2015 and tha per particulars furnished for March 31, 2015 and that position of free funds in AY 2015 position of free funds in AY 2015-16 should be considered, 16 should be considered, and (ii) with respect to the position of interest with respect to the position of interest-free funds in the free funds in the vear of making the investments, the same was said to be vear of making the investments, the same was said to be vear of making the investments, the same was said to be 'dated' as they were acquired vide several restructuring 'dated' as they were acquired vide several restructuring 'dated' as they were acquired vide several restructuring and, hence, i and, hence, it was difficult to collate details of interest t was difficult to collate details of interest-free funds as on the date of investment. funds as on the date of investment. 6.3.7 The difficulty in accepting the contention of the 6.3.7 The difficulty in accepting the contention of the 6.3.7 The difficulty in accepting the contention of the assessee due is evident. The verification of the adequacy of assessee due is evident. The verification of the adequacy of assessee due is evident. The verification of the adequacy of

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self-generated funds for making investments is a tw generated funds for making investments is a tw generated funds for making investments is a two-fold one. Firstly, it has to be ascertained when the investments) one. Firstly, it has to be ascertained when the investments) one. Firstly, it has to be ascertained when the investments) in the tax-exempt income yielding investments/shares were exempt income yielding investments/shares were exempt income yielding investments/shares were actually made and, secondly, what was the position of actually made and, secondly, what was the position of actually made and, secondly, what was the position of funds at that point of time. The appellant has admittedly funds at that point of time. The appellant has admittedly funds at that point of time. The appellant has admittedly made investment in made investment in mutual funds, but is unable to provide mutual funds, but is unable to provide the any particulars whatsoever as to how the said the any particulars whatsoever as to how the said the any particulars whatsoever as to how the said investments could be said to be made out of own funds.In investments could be said to be made out of own funds.In investments could be said to be made out of own funds.In this backdrop, asserting that it was in possession of a this backdrop, asserting that it was in possession of a this backdrop, asserting that it was in possession of a greater amount of interest greater amount of interest-free funds is merely a fac free funds is merely a facile claim and nothing more. In our humble view, what is of claim and nothing more. In our humble view, what is of claim and nothing more. In our humble view, what is of paramount importance is the position of investible funds, paramount importance is the position of investible funds, paramount importance is the position of investible funds, own and/or borrowed at the time of making the own and/or borrowed at the time of making the own and/or borrowed at the time of making the investments and not at a time posterior to the event investments and not at a time posterior to the event investments and not at a time posterior to the event - which in this case, is the year for wh in this case, is the year for which scrutiny assessment was ich scrutiny assessment was made. In any case, the position of funds on the first/last made. In any case, the position of funds on the first/last made. In any case, the position of funds on the first/last day of the assessment year under consideration is not day of the assessment year under consideration is not day of the assessment year under consideration is not germane unless all the investments yielding exempt income germane unless all the investments yielding exempt income germane unless all the investments yielding exempt income were acquired in the very same assessment year were acquired in the very same assessment year were acquired in the very same assessment year - which is not the fact of this case. The assessee has also collaterally not the fact of this case. The assessee has also collaterally not the fact of this case. The assessee has also collaterally argued that if the Assessing Officer wants to make a argued that if the Assessing Officer wants to make a argued that if the Assessing Officer wants to make a disallowance under section 14A of the Act on account of disallowance under section 14A of the Act on account of disallowance under section 14A of the Act on account of interest, then he has to prove that there is nexus between interest, then he has to prove that there is nexus between interest, then he has to prove that there is nexus between the borrowed funds and th the borrowed funds and the investments made. This is not e investments made. This is not tenable. The basic details/documents as to when the tenable. The basic details/documents as to when the tenable. The basic details/documents as to when the relevant investments were made, has to be first made relevant investments were made, has to be first made relevant investments were made, has to be first made available by the assessee since these are in its exclusive available by the assessee since these are in its exclusive available by the assessee since these are in its exclusive knowledge alone. Moreover, there is the claim made by the knowledge alone. Moreover, there is the claim made by the knowledge alone. Moreover, there is the claim made by the assessee, which it has to support cogently, that no interest sessee, which it has to support cogently, that no interest- sessee, which it has to support cogently, that no interest bearing funds were used for this purpose. Hence, the initial bearing funds were used for this purpose. Hence, the initial bearing funds were used for this purpose. Hence, the initial onus lies on it to lead the primary details linking the onus lies on it to lead the primary details linking the onus lies on it to lead the primary details linking the investment with the nature of funds deployed, and only investment with the nature of funds deployed, and only investment with the nature of funds deployed, and only when the same is adequate when the same is adequately discharged, does it shift to ly discharged, does it shift to the Assessing Officer to make his inferences as warranted the Assessing Officer to make his inferences as warranted the Assessing Officer to make his inferences as warranted by law. In other words, there is no negative onus by law. In other words, there is no negative onus by law. In other words, there is no negative onus straightway straightway straightway on on on the the the Assessing Assessing Assessing Officer Officer Officer to to to lead lead lead the the the foundational facts. For this reason, the contention of the foundational facts. For this reason, the contention of the foundational facts. For this reason, the contention of the appellant that the Assessing Officer has not brought on t that the Assessing Officer has not brought on t that the Assessing Officer has not brought on record anything which proves that there was any record anything which proves that there was any record anything which proves that there was any expenditure incurred towards earning exempt income expenditure incurred towards earning exempt income expenditure incurred towards earning exempt income cannot be approved. At the risk of repetition, it has to be cannot be approved. At the risk of repetition, it has to be cannot be approved. At the risk of repetition, it has to be stated that the exercise of determining the sourc stated that the exercise of determining the sourc stated that the exercise of determining the source of investment in specific investments made in prior years investment in specific investments made in prior years investment in specific investments made in prior years

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cannot conceivably be done on the basis of fund cannot conceivably be done on the basis of fund cannot conceivably be done on the basis of fund-net investment position as at the Opening and the Balance investment position as at the Opening and the Balance investment position as at the Opening and the Balance Sheet date of the financial year under scrutiny. Sheet date of the financial year under scrutiny. 6.3.8 The appellant has relied on the dec 6.3.8 The appellant has relied on the decision of the Hon'ble ision of the Hon'ble Bombay High Court in Commissioner of Income Bombay High Court in Commissioner of Income Bombay High Court in Commissioner of Income-tax vs Reliance Utilities & Power Ltd. (2009] reported in 178 Reliance Utilities & Power Ltd. (2009] reported in 178 Reliance Utilities & Power Ltd. (2009] reported in 178 Taxman 135, where it has been held that if there be Taxman 135, where it has been held that if there be Taxman 135, where it has been held that if there be interest-free free free funds funds funds available available available sufficient sufficient sufficient to to to meet meet meet its its its investments and at the s investments and at the same time, the assessee had raised ame time, the assessee had raised a loan, it can be presumed that the investments were from a loan, it can be presumed that the investments were from a loan, it can be presumed that the investments were from the interest-free funds available. That is, if there are funds free funds available. That is, if there are funds free funds available. That is, if there are funds available both interest available both interest-free and overdraft and/or loans free and overdraft and/or loans taken, then a presumption would arise that in taken, then a presumption would arise that in taken, then a presumption would arise that investments would be out of the interest would be out of the interest-free fund generated or free fund generated or available, if the interest available, if the interest-free funds were sufficient to meet free funds were sufficient to meet the investments. The aforesaid principle laid down is the investments. The aforesaid principle laid down is the investments. The aforesaid principle laid down is unquestioningly binding. However, a vital fact unnoticed by unquestioningly binding. However, a vital fact unnoticed by unquestioningly binding. However, a vital fact unnoticed by the assessee is th the assessee is that in the Reliance Utilities & Power Lid. at in the Reliance Utilities & Power Lid. decision (supra), the Respondent had made investment in decision (supra), the Respondent had made investment in decision (supra), the Respondent had made investment in the sister concerns during January, 2000 to March, 2000. the sister concerns during January, 2000 to March, 2000. the sister concerns during January, 2000 to March, 2000. In In other other words, words, the the requisite requisite co-relation co relation between between investments made and the source of funds was in investments made and the source of funds was in investments made and the source of funds was in existence, stence, enabling, enabling, therefore, therefore, a a co-relation co relation between between investments and nature of funds. Thus, there could be no investments and nature of funds. Thus, there could be no investments and nature of funds. Thus, there could be no denying the fact that to apply the above principle laid down denying the fact that to apply the above principle laid down denying the fact that to apply the above principle laid down by the Hon'ble High Court, it is necessary to examine the by the Hon'ble High Court, it is necessary to examine the by the Hon'ble High Court, it is necessary to examine the sufficiency of material avail sufficiency of material available to raise the presumption in able to raise the presumption in the favour of the assessee as to availability of own fund at the favour of the assessee as to availability of own fund at the favour of the assessee as to availability of own fund at the relevant point of time. The Hon'ble Jurisdictional High the relevant point of time. The Hon'ble Jurisdictional High the relevant point of time. The Hon'ble Jurisdictional High Court, in para (5) of the order, recorded the facts of the said Court, in para (5) of the order, recorded the facts of the said Court, in para (5) of the order, recorded the facts of the said case as below (emphasis supplied): case as below (emphasis supplied): «5.From the order of the Assessing Officer the assessee in From the order of the Assessing Officer the assessee in From the order of the Assessing Officer the assessee in respect of disallowance of interest amounting to Rs. 4.40 respect of disallowance of interest amounting to Rs. 4.40 respect of disallowance of interest amounting to Rs. 4.40 crores preferred an appeal to the CIT (Appeals). It was the crores preferred an appeal to the CIT (Appeals). It was the crores preferred an appeal to the CIT (Appeals). It was the contention of the assessee that the assessee had invested contention of the assessee that the assessee had invested contention of the assessee that the assessee had invested Rs. 389.60 in Reliance G Rs. 389.60 in Reliance Gas Limited and Rs. 1.01 in as Limited and Rs. 1.01 in Reliance Strategic Investments Limited. The assessee Reliance Strategic Investments Limited. The assessee Reliance Strategic Investments Limited. The assessee themselves were in the business of generation of power. themselves were in the business of generation of power. themselves were in the business of generation of power. The companies in which the investments were made, were The companies in which the investments were made, were The companies in which the investments were made, were in the energy sector. Investments were made mainly during in the energy sector. Investments were made mainly during in the energy sector. Investments were made mainly during January, 2000 to March, 2000.It was the submission of the , 2000 to March, 2000.It was the submission of the , 2000 to March, 2000.It was the submission of the

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assessee that they had earned regular business income assessee that they had earned regular business income assessee that they had earned regular business income from distribution of power and investments made were in from distribution of power and investments made were in from distribution of power and investments made were in the companies in energy sector and were with a view to the companies in energy sector and were with a view to the companies in energy sector and were with a view to build long-term business prospects. Inve term business prospects. Investments were in the stments were in the regular course of business and accordingly no part of regular course of business and accordingly no part of regular course of business and accordingly no part of interest can be disallowed when the fund is utilized for the interest can be disallowed when the fund is utilized for the interest can be disallowed when the fund is utilized for the purpose of business. It was also pointed out that purpose of business. It was also pointed out that purpose of business. It was also pointed out that respondent had borrowed Rs. 43.62 crores by way of issue respondent had borrowed Rs. 43.62 crores by way of issue respondent had borrowed Rs. 43.62 crores by way of issue of Debentures of Debentures and the said amount was utilized as capital and the said amount was utilized as capital expenditure and inter expenditure and inter-corporate deposit. It was the corporate deposit. It was the submission that no part of the interest bearing fund have submission that no part of the interest bearing fund have submission that no part of the interest bearing fund have gone into investments in the two companies. Insofar as gone into investments in the two companies. Insofar as gone into investments in the two companies. Insofar as funds are concerned it was pointed out that inc funds are concerned it was pointed out that inc funds are concerned it was pointed out that income from operation of the company was Rs. 418.04 crores which was operation of the company was Rs. 418.04 crores which was operation of the company was Rs. 418.04 crores which was evenly distributed. evenly distributed. Considering this, till December, 1999 the appellant had Considering this, till December, 1999 the appellant had Considering this, till December, 1999 the appellant had earned Rs. 313.53 crores from its operation. It had raised earned Rs. 313.53 crores from its operation. It had raised earned Rs. 313.53 crores from its operation. It had raised capital of Rs. 7.90 crores and had also received intere capital of Rs. 7.90 crores and had also received intere capital of Rs. 7.90 crores and had also received interest-free deposit of Rs. 10.03 crores. Also it had recovered Rs. 39.04 deposit of Rs. 10.03 crores. Also it had recovered Rs. 39.04 deposit of Rs. 10.03 crores. Also it had recovered Rs. 39.04 from its debtors. from its debtors. 6.3.9 It was in this context, that the Hon'ble High Court 6.3.9 It was in this context, that the Hon'ble High Court 6.3.9 It was in this context, that the Hon'ble High Court observed that "Firstly, we are not concerned with the observed that "Firstly, we are not concerned with the observed that "Firstly, we are not concerned with the balance sheet as of 31 balance sheet as of 31-3-1999. What would be relevant 1999. What would be relevant would be balance sheet as on 31 ld be balance sheet as on 31-3-2000. Apart from that, 2000. Apart from that, the learned counsel has been unable to point out to us from the learned counsel has been unable to point out to us from the learned counsel has been unable to point out to us from the balance sheet that the balance sheet as on 31 the balance sheet that the balance sheet as on 31 the balance sheet that the balance sheet as on 31-3-1999 showed that the shareholders funds were utilized for the showed that the shareholders funds were utilized for the showed that the shareholders funds were utilized for the purpose of fixed assets. To purpose of fixed assets. To our mind the profit and loss our mind the profit and loss account and the balance sheet would not show whether account and the balance sheet would not show whether account and the balance sheet would not show whether shareholders funds have been utilised for investments. The shareholders funds have been utilised for investments. The shareholders funds have been utilised for investments. The argument has to be rejected on this count also. argument has to be rejected on this count also. 6.3.10 The Hon'ble High Court has further, noted in para (9) 6.3.10 The Hon'ble High Court has further, noted in para (9) 6.3.10 The Hon'ble High Court has further, noted in para (9) of the said order that "Apart from that we have noted earlier said order that "Apart from that we have noted earlier said order that "Apart from that we have noted earlier that both in the order of the CIT (Appeals) as also the that both in the order of the CIT (Appeals) as also the that both in the order of the CIT (Appeals) as also the Appellate Tribunal, a clear finding is recorded that the Appellate Tribunal, a clear finding is recorded that the Appellate Tribunal, a clear finding is recorded that the assessee had interest assessee had interest-free funds of its own which had been free funds of its own which had been generated in the course of t generated in the course of the year commencing from 1 he year commencing from 1-4- 1999. Apart from that in terms of the balance sheet there 1999. Apart from that in terms of the balance sheet there 1999. Apart from that in terms of the balance sheet there was a further availability of Rs. 398.19 crores including Rs. was a further availability of Rs. 398.19 crores including Rs. was a further availability of Rs. 398.19 crores including Rs. 180 crores of share capital. In this contexi, in our opinion, 180 crores of share capital. In this contexi, in our opinion, 180 crores of share capital. In this contexi, in our opinion,

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the finding of fact recorded by CIT (Appeals) the finding of fact recorded by CIT (Appeals) and ITAT as to and ITAT as to availability of interest availability of interest-free funds really cannot be faulted." free funds really cannot be faulted." 6.3.11 We may observe here that in respect of the 6.3.11 We may observe here that in respect of the 6.3.11 We may observe here that in respect of the investments made during the period of January to March investments made during the period of January to March investments made during the period of January to March 1999, there was a finding of fact by the AO that "till 1999, there was a finding of fact by the AO that "till 1999, there was a finding of fact by the AO that "till December, 1999 the December, 1999 the appellant had earned Rs. 313.53 appellant had earned Rs. 313.53 crores from its operation"', which provided a crucial crores from its operation"', which provided a crucial crores from its operation"', which provided a crucial evidential insight as to the presumption that there was evidential insight as to the presumption that there was evidential insight as to the presumption that there was sufficient material to conclude that the assessee had sufficient material to conclude that the assessee had sufficient material to conclude that the assessee had sufficient own funds to make the investment yielding tax sufficient own funds to make the investment yielding tax sufficient own funds to make the investment yielding tax- free income in the immediate coming months. As against ee income in the immediate coming months. As against ee income in the immediate coming months. As against this, in the case before us we have a mere financial year this, in the case before us we have a mere financial year this, in the case before us we have a mere financial year- wise details of the own fund and the investments made, wise details of the own fund and the investments made, wise details of the own fund and the investments made, which in our considered view is inadequate and lacks the which in our considered view is inadequate and lacks the which in our considered view is inadequate and lacks the sufficiency as material to raise sufficiency as material to raise the presumption that the the presumption that the assessee had sufficient own fund at the time of making the assessee had sufficient own fund at the time of making the assessee had sufficient own fund at the time of making the investments. Once the assessee is unsuccessful in this investments. Once the assessee is unsuccessful in this investments. Once the assessee is unsuccessful in this regard, the formula incorporated in rule 8D(i) of the Income regard, the formula incorporated in rule 8D(i) of the Income regard, the formula incorporated in rule 8D(i) of the Income- tax Rules. 1962 would inevitably come into play for maki tax Rules. 1962 would inevitably come into play for maki tax Rules. 1962 would inevitably come into play for making the estimate. the estimate. 6.3.12 Thus, it is not possible to ignore the exercise of 6.3.12 Thus, it is not possible to ignore the exercise of 6.3.12 Thus, it is not possible to ignore the exercise of determining without any haziness as to whether interest determining without any haziness as to whether interest determining without any haziness as to whether interest- bearing funds or interest bearing funds or interest-bearing funds were greater at the bearing funds were greater at the time when the underlying investments were made. The time when the underlying investments were made. The time when the underlying investments were made. The undeniable in undeniable inability of the assessee to furnish the ability of the assessee to furnish the particulars of when the tax particulars of when the tax-exempt investments were made exempt investments were made would lead precisely to the situation where the application would lead precisely to the situation where the application would lead precisely to the situation where the application of the formula engrafted in rule 8D(2)(il) would mandatorily of the formula engrafted in rule 8D(2)(il) would mandatorily of the formula engrafted in rule 8D(2)(il) would mandatorily comes comes comes into into into play play play for for for estimating estimating estimating the the the proportionate prop prop disallowance of interest expenditure. The estimation disallowance of interest expenditure. The estimation disallowance of interest expenditure. The estimation formula prescribed in the statute was inserted in formula prescribed in the statute was inserted in formula prescribed in the statute was inserted in contemplation of a situation similar to the one that is before contemplation of a situation similar to the one that is before contemplation of a situation similar to the one that is before us, where the assessee for whatever reasons, is unable to us, where the assessee for whatever reasons, is unable to us, where the assessee for whatever reasons, is unable to give the aforesaid det give the aforesaid details at the time of making the tax ails at the time of making the tax-free investments. Ex consequenti, the Assessing Officer is investments. Ex consequenti, the Assessing Officer is investments. Ex consequenti, the Assessing Officer is statutorily obliged to apply the provisions of section 14A(2) statutorily obliged to apply the provisions of section 14A(2) statutorily obliged to apply the provisions of section 14A(2) of the Act in such a situation and, therefore, bound to follow of the Act in such a situation and, therefore, bound to follow of the Act in such a situation and, therefore, bound to follow the prescribed method as per 8D(2)(il the prescribed method as per 8D(2)(il) of the Rules. Given ) of the Rules. Given the enunciation of law by the Hon'ble Bombay High Court, a the enunciation of law by the Hon'ble Bombay High Court, a the enunciation of law by the Hon'ble Bombay High Court, a discussion on other case laws relied upon the assessee discussion on other case laws relied upon the assessee discussion on other case laws relied upon the assessee becomes academic in nature. becomes academic in nature.

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6.3.13 On the other hand, in Bharath Beedi Works (P.) Lid 6.3.13 On the other hand, in Bharath Beedi Works (P.) Lid 6.3.13 On the other hand, in Bharath Beedi Works (P.) Lid vs Addl. CIT, Range vs Addl. CIT, Range-2, Mangalore[2016] reported in 74 016] reported in 74 taxmann.com 95, the Hon'ble Karnataka High Court noted taxmann.com 95, the Hon'ble Karnataka High Court noted taxmann.com 95, the Hon'ble Karnataka High Court noted the finding of the Appellate Commissioner which were as the finding of the Appellate Commissioner which were as the finding of the Appellate Commissioner which were as under (emphasis supplied): under (emphasis supplied): "I have considered the rival contentions carefully. I find that "I have considered the rival contentions carefully. I find that "I have considered the rival contentions carefully. I find that the argument of the appellant is v the argument of the appellant is vague in as much as when ague in as much as when the AO has asked to prove that the appellant has own the AO has asked to prove that the appellant has own the AO has asked to prove that the appellant has own funds to substantiate the investment as and when the funds to substantiate the investment as and when the funds to substantiate the investment as and when the investments are made the appellant is only trying to explain investments are made the appellant is only trying to explain investments are made the appellant is only trying to explain the opening and figures of the current year share capital the opening and figures of the current year share capital the opening and figures of the current year share capital and reserves and surplus. I find strength in the argument of erves and surplus. I find strength in the argument of erves and surplus. I find strength in the argument of the AO. Further, since the appellant could not explain the the AO. Further, since the appellant could not explain the the AO. Further, since the appellant could not explain the connected expenditure to the satisfaction of the A0 is clearly connected expenditure to the satisfaction of the A0 is clearly connected expenditure to the satisfaction of the A0 is clearly forthcoming in arriving at the estimation. Hence, I am forthcoming in arriving at the estimation. Hence, I am forthcoming in arriving at the estimation. Hence, I am inclined to confirm the a inclined to confirm the addition and the grounds are ddition and the grounds are dismissed." 6.3.14 Thereafter, in the aforesaid decision, the Hon'ble 6.3.14 Thereafter, in the aforesaid decision, the Hon'ble 6.3.14 Thereafter, in the aforesaid decision, the Hon'ble Kamataka High Court observed that the burden has not Kamataka High Court observed that the burden has not Kamataka High Court observed that the burden has not been discharged satisfactorily by the appellant and the been discharged satisfactorily by the appellant and the been discharged satisfactorily by the appellant and the Assessing Officer had correctly proceeded to appl Assessing Officer had correctly proceeded to appl Assessing Officer had correctly proceeded to apply the formula provided under rule 8D(2)/section 14A of the Act. formula provided under rule 8D(2)/section 14A of the Act. formula provided under rule 8D(2)/section 14A of the Act. 6.3.15 The assessee claimed that funds received from sale 6.3.15 The assessee claimed that funds received from sale 6.3.15 The assessee claimed that funds received from sale of short term investment were utilized for the purchase of of short term investment were utilized for the purchase of of short term investment were utilized for the purchase of short term investment in mutual funds. This is not borne out short term investment in mutual funds. This is not borne out short term investment in mutual funds. This is not borne out from any evide from any evidence, irrefutable or otherwise. There is no nce, irrefutable or otherwise. There is no calculation to show that all the interest expenditure calculation to show that all the interest expenditure calculation to show that all the interest expenditure incurred for the year pertains to working capital loans incurred for the year pertains to working capital loans incurred for the year pertains to working capital loans taken and it is not possible to do so in face of the fact that it taken and it is not possible to do so in face of the fact that it taken and it is not possible to do so in face of the fact that it is is is not not not known known known whether whether whether or or or not not not the the the income-yielding incom incom investments were sourced from borrowed funds or not. For investments were sourced from borrowed funds or not. For investments were sourced from borrowed funds or not. For this reason, the tentative claim of the assessee that interest this reason, the tentative claim of the assessee that interest this reason, the tentative claim of the assessee that interest expenditure of Rs. 22.83 crores "mainly comprises" of expenditure of Rs. 22.83 crores "mainly comprises" of expenditure of Rs. 22.83 crores "mainly comprises" of interest on Commercial Paper, NCD and Bank Overdraft is interest on Commercial Paper, NCD and Bank Overdraft is interest on Commercial Paper, NCD and Bank Overdraft is untenable. 6.3.16 The assessee has pressed one more indirect 16 The assessee has pressed one more indirect 16 The assessee has pressed one more indirect argument in its attempt to show that there is no nexus argument in its attempt to show that there is no nexus argument in its attempt to show that there is no nexus between between between interest interest interest expenditure expenditure expenditure and and and investment investment investment in in in subsidiaries. It claimed that the downstream investments subsidiaries. It claimed that the downstream investments subsidiaries. It claimed that the downstream investments by investing- -cum-operating entities are required to operating entities are required to be made

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by bringing requisite monies from abroad and domestic debt by bringing requisite monies from abroad and domestic debt by bringing requisite monies from abroad and domestic debt borrowings were not permitted as per the applicable Press borrowings were not permitted as per the applicable Press borrowings were not permitted as per the applicable Press Notes issued by the Ministry of Finance. We are unable to Notes issued by the Ministry of Finance. We are unable to Notes issued by the Ministry of Finance. We are unable to be persuaded by this as it is difficult to fathom a a reason be persuaded by this as it is difficult to fathom a a reason be persuaded by this as it is difficult to fathom a a reason for not submitting the details of investment in its position mitting the details of investment in its position mitting the details of investment in its position and instead relying on tangential, circumstantial and and instead relying on tangential, circumstantial and and instead relying on tangential, circumstantial and hypothetical explanations to get over this fundamental hypothetical explanations to get over this fundamental hypothetical explanations to get over this fundamental factual deficiency. No immunity under the Act can be factual deficiency. No immunity under the Act can be factual deficiency. No immunity under the Act can be granted for examining the facts merely becau granted for examining the facts merely because some other se some other law, rules or regulation prescribes something. Had this law, rules or regulation prescribes something. Had this law, rules or regulation prescribes something. Had this been so, then the Legislature would have provided for this been so, then the Legislature would have provided for this been so, then the Legislature would have provided for this exception in the rule itself. We are also unable to accept its exception in the rule itself. We are also unable to accept its exception in the rule itself. We are also unable to accept its sweeping, purely theoretical claim that no person would sweeping, purely theoretical claim that no person would sweeping, purely theoretical claim that no person would ever utilize borrowings for making investment in mutual lize borrowings for making investment in mutual lize borrowings for making investment in mutual funds (current investments) as the return on mutual funds funds (current investments) as the return on mutual funds funds (current investments) as the return on mutual funds is "generally lower" than the borrowing cost. There may be is "generally lower" than the borrowing cost. There may be is "generally lower" than the borrowing cost. There may be some obvious situations in which this assertion is untrue, some obvious situations in which this assertion is untrue, some obvious situations in which this assertion is untrue, such as parking of borrowed"idle such as parking of borrowed"idle" funds in short " funds in short-tenure investments till they are redeployed for the purpose they investments till they are redeployed for the purpose they investments till they are redeployed for the purpose they were borrowed or a general expectation of earning returns were borrowed or a general expectation of earning returns were borrowed or a general expectation of earning returns greater than the interest cost based on market reports or greater than the interest cost based on market reports or greater than the interest cost based on market reports or analysis. 6.3.17In the light of the discussion as 6.3.17In the light of the discussion as foregoing, we find foregoing, we find that the averments made to canvass the claim that it had that the averments made to canvass the claim that it had that the averments made to canvass the claim that it had adequate interest adequate interest-free, self-generated funds to make the generated funds to make the investments, are not firmly established and tangibly investments, are not firmly established and tangibly investments, are not firmly established and tangibly supported supported supported by by by credible credible credible documents, documents, documents, but but but based based based on on on presumptions and general presumptions and general surmises. This being the factual surmises. This being the factual position, we are of the considered view that the facts position, we are of the considered view that the facts position, we are of the considered view that the facts available before us could not be held as sufficient to raise available before us could not be held as sufficient to raise available before us could not be held as sufficient to raise the presumption and, hence, the application of rule 8D(2) (ii) the presumption and, hence, the application of rule 8D(2) (ii) the presumption and, hence, the application of rule 8D(2) (ii) of the Rules by the Assessing Officer in th of the Rules by the Assessing Officer in the case of the e case of the appellant cannot be rejected. We direct accordingly. appellant cannot be rejected. We direct accordingly. appellant cannot be rejected. We direct accordingly.” 5. Before us, the Ld. Counsel of the assessee reiterated Before us, the Ld. Counsel of the assessee reiterated Before us, the Ld. Counsel of the assessee reiterated that own funds being more than funds being more than investment, it is presumed that investment is presumed that investment has been made out of own funds has been made out of own funds. The Ld. Counsel provided he Ld. Counsel provided detail of own funds and investment as under: own funds and investment as under:

Particulars Particulars Amount (in Rs.)

Thomas Cook (India) Ltd. Thomas Cook (India) Ltd. 12 ITA No. No. 7807/M/2019

Equity 36,56,18,756 Reserves and Surplus Reserves and Surplus 1122,07,91,830 Total : 1158,64,10,586 Investment Investment 309,90,65,124 Earning Earning exempt exempt (125,06,37,654 + income 184,84,27,470) 5.1 The Ld. Counsel further relied on the decision of the Hon’ble The Ld. Counsel further relied on the decision of the Hon’ble The Ld. Counsel further relied on the decision of the Hon’ble Supreme Court of South India bank v. CIT reported in (2021) South India bank v. CIT reported in (2021) South India bank v. CIT reported in (2021) 140 taxmann.com 178 140 taxmann.com 178 wherein it is held that in cases where wherein it is held that in cases where interest free own funds interest free own funds exceed investment in tax free securities investment in tax free securities, then disallowance u/s 14A r.w.r. 8D(2)(ii) is not warranted. llowance u/s 14A r.w.r. 8D(2)(ii) is not warranted. llowance u/s 14A r.w.r. 8D(2)(ii) is not warranted.

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issue is restored back to the file of issue is restored back to the file of the Ld. Assessing Officer the Ld. Assessing Officer, the assessee will file details of file details of availability of funds at the time of availability of funds at the time of making investment in mutual funds from year to year. In view of making investment in mutual funds from year to year. In view of making investment in mutual funds from year to year. In view of undertaking by the Ld. Counsel of the assessee and interest of undertaking by the Ld. Counsel of the assessee and interest of undertaking by the Ld. Counsel of the assessee and interest of substantial justice, we justice, we set aside the finding of the DRP or finding of DRP or finding of the Assessing Officer the Assessing Officer in the final assessment order pursuant to the in the final assessment order pursuant to the Ld. DRP, and restore the matter back to the Ld. Assessing Officer and restore the matter back to the Ld. Assessing Officer and restore the matter back to the Ld. Assessing Officer for providing one more opportunity to the assessee for submitting for providing one more opportunity to the assessee for submitting for providing one more opportunity to the assessee for submitting the documentary evidence in support of availability of interest free mentary evidence in support of availability of interest free mentary evidence in support of availability of interest free funds at the time of making investment in assets eligible for yielding funds at the time of making investment in assets eligible funds at the time of making investment in assets eligible exempted income. The ground No. 1 of the appeal of the assessee is exempted income. The ground No. 1 of the appeal of the assessee is exempted income. The ground No. 1 of the appeal of the assessee is accordingly allowed for statistical purposes. accordingly allowed for statistical purposes.

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book profit u/s 115JB of the Act. On the contrary, the Ld. DR relied book profit u/s 115JB of the Act. On the contrary, the Ld. DR relied book profit u/s 115JB of the Act. On the contrary, the Ld. DR relied on the order of the lower authorities. on the order of the lower authorities.

“6.3.23We may observe here that the process before the DR 6.3.23We may observe here that the process before the DR 6.3.23We may observe here that the process before the DR is a continuation of assessment proceeding as it is only the is a continuation of assessment proceeding as it is only the is a continuation of assessment proceeding as it is only the draft assessment order which is being challenged before it. draft assessment order which is being challenged before it. draft assessment order which is being challenged before it. The final assessment orde The final assessment order is yet to be passed by the r is yet to be passed by the Assessing Officer. Hence, the DRP is not an appellate Assessing Officer. Hence, the DRP is not an appellate Assessing Officer. Hence, the DRP is not an appellate authority and the proceeding before the DR is continuation of authority and the proceeding before the DR is continuation of authority and the proceeding before the DR is continuation of assessment proceedings. This view is fortified by the assessment proceedings. This view is fortified by the assessment proceedings. This view is fortified by the decision of the division bench of the Hon'ble High Court decision of the division bench of the Hon'ble High Court decision of the division bench of the Hon'ble High Court of Bombay in the Writ Petition No. 1877 of 2013 in the case of Bombay in the Writ Petition No. 1877 of 2013 in the case of Bombay in the Writ Petition No. 1877 of 2013 in the case of Vodafone Vodafone Vodafone India India India Services Services Services Pvt. Pvt. Pvt. Ltd. Ltd. Ltd. vs. vs. vs. Additional Additional Additional Commissioner of Income Tax &Ors. (2014) reported in 264 Commissioner of Income Tax &Ors. (2014) reported in 264 Commissioner of Income Tax &Ors. (2014) reported in 264 CTR 0030. We find that the Assessing Officer has taken one CTR 0030. We find that the Assessing Officer has taken one CTR 0030. We find that the Assessing Officer has taken one of the possible views on this of the possible views on this aspect because Hon'ble Delhi aspect because Hon'ble Delhi High Court in the case of CIT vs Goetze (India) Ltd. (supra) High Court in the case of CIT vs Goetze (India) Ltd. (supra) High Court in the case of CIT vs Goetze (India) Ltd. (supra) held that computing the book profit under section 115 JB of held that computing the book profit under section 115 JB of held that computing the book profit under section 115 JB of the Act, the necessary disallowances under section 14A of the Act, the necessary disallowances under section 14A of the Act, the necessary disallowances under section 14A of the Act are required to be made. In the given f the Act are required to be made. In the given facts and the acts and the prevailing judicial cleavage on this contentious issue, prevailing judicial cleavage on this contentious issue, prevailing judicial cleavage on this contentious issue, circumstances of the case, we do not find any infirmity in the circumstances of the case, we do not find any infirmity in the circumstances of the case, we do not find any infirmity in the order of the Assessing Officer in keeping the matter alive. order of the Assessing Officer in keeping the matter alive. order of the Assessing Officer in keeping the matter alive. The objection of the assessee in this regard is accordingly The objection of the assessee in this regard is accordingly The objection of the assessee in this regard is accordingly rejected.”

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10.1 In our opinion, the issue in dispute is covered by the decision In our opinion, the issue in dispute is covered by the decision In our opinion, the issue in dispute is covered by the decision of the Special Bench of the Tribunal in the case of Vireet Investment of the Special Bench of the Tribunal in the case of Vireet Investment of the Special Bench of the Tribunal in the case of Vireet Investment Pvt. Ltd. (supra) and the Ld. DRP has retained the addition only on Pvt. Ltd. (supra) and the Ld. DRP has retained the addition only on Pvt. Ltd. (supra) and the Ld. DRP has retained the addition only on the ground that DRP is not for appellate p the ground that DRP is not for appellate proceedings and roceedings and continuation of the assessment proceedings. However, the issue in continuation of the assessment proceedings. However, the issue in continuation of the assessment proceedings. However, the issue in dispute being covered by the binding precedent in the case of Vireet dispute being covered by the binding precedent in the case of Vireet dispute being covered by the binding precedent in the case of Vireet Investment Pvt. Ltd. (supra). The addition made by the Assessing Investment Pvt. Ltd. (supra). The addition made by the Assessing Investment Pvt. Ltd. (supra). The addition made by the Assessing Officer is directed to be deleted the gro Officer is directed to be deleted the ground of appeal of the assessee und of appeal of the assessee is accordingly allowed. is accordingly allowed.

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instill a feeling of ownership in them instill a feeling of ownership in them. The ESOP scheme The ESOP scheme made during the year was uring the year was accounted by the difference between the accounted by the difference between the market price and the price at which the shares were offered to the market price and the price at which the shares were offered to the market price and the price at which the shares were offered to the employees as cost thereof on the date of grant of options. The employees as cost thereof on the date of grant of options. The employees as cost thereof on the date of grant of options. The discount on issue of shares was claimed over the vesting period. discount on issue of shares was claimed over the vesting period. discount on issue of shares was claimed over the vesting period. The detail of ESOP aggregating to Rs.8.70 crores reproduced e detail of ESOP aggregating to Rs.8.70 crores reproduced by Ld. e detail of ESOP aggregating to Rs.8.70 crores reproduced DRP in the impugned order in the impugned order, is extracted as under:

7.2.3 The The The assessee assessee assessee stated stated stated that that that the the the ESOP ESOP ESOP discount discount discount aggregating to Rs.8.70 crores has been claimed as under: aggregating to Rs.8.70 crores has been claimed as under: aggregating to Rs.8.70 crores has been claimed as under: Particulars Particulars Scheme 2013 Execom ESOP Date of Grant 05-Sep-13 05-Dec-13 05 Market Price 54.80 82.30 82.30 Exercise Price 49.32 1.00 1.00 Vesting Period (years) Vesting Period (years) 3.00 4.00 4.00 Charge to P&L per share Charge to P&L per share 5.48 81.30 81.30 Number of Options granted Number of Options granted 8,48,210 42,02,438 42,02,438 Total charge 0.47 crores 34.16 crores 34.16 crores Charge per year 0.15 crores 8.5 crores 8.5 crores Total charge for year 2014-15 Total charge for year 2014 8.70 crores 13. Before the ld DRP, the the ld DRP, the assessee relied on the decision of the relied on the decision of the Special Bench Bangalore Special Bench Bangalore Tribunal in the case of Biocon Ltd Tribunal in the case of Biocon Ltd (2013) 35taxmann.com 335 35taxmann.com 335, wherein it is held that amount of ESOP held that amount of ESOP compensation recognized in the book under the applicable compensation recognized in the book under the applicable compensation recognized in the book under the applicable accounting guidelines will be deduct accounting guidelines will be deductible u/s 37(1) of the Act. The u/s 37(1) of the Act. The Ld. DRP however noted that proceedings before it Ld. DRP however noted that proceedings before it are arein continuance of the assessment proceedings and the d of the assessment proceedings and the decision of the Special ecision of the Special Bench have been appealed by the Department before the Hon’ble Bench have been appealed by the Department before the Hon’ble Bench have been appealed by the Department before the Hon’ble Karnataka High Court Karnataka High Court and therefore, the addition proposed by the and therefore, the addition proposed by the Assessing Officer was directed to be retained in the final Assessing Officer was directed to be retained in the final Assessing Officer was directed to be retained in the final

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assessment order. The relevant finding of the L assessment order. The relevant finding of the Ld. DRP is reproduced d. DRP is reproduced as under:

“7.3.1 7.3.1 7.3.1 We We We have have have carefully carefully carefully considered considered considered the the the arguments arguments arguments advanced. The case of the assessee rests on the arguments advanced. The case of the assessee rests on the arguments advanced. The case of the assessee rests on the arguments that the same was considered in the decision of Id. that the same was considered in the decision of Id. that the same was considered in the decision of Id. Bangalore Tribunal in Biocon Ltd v DCIT (SB) (supra). It has Bangalore Tribunal in Biocon Ltd v DCIT (SB) (supra). It has Bangalore Tribunal in Biocon Ltd v DCIT (SB) (supra). It has also been argued that as the value of perquisite was taxable been argued that as the value of perquisite was taxable been argued that as the value of perquisite was taxable in the employee's hands, a disallowance in the hands of in the employee's hands, a disallowance in the hands of in the employee's hands, a disallowance in the hands of employer will mean double taxation. employer will mean double taxation. In this connection, we n this connection, we note that the said decision of the Id. Special Bench has been note that the said decision of the Id. Special Bench has been note that the said decision of the Id. Special Bench has been appealed against by th appealed against by the Department and is awaiting the e Department and is awaiting the decision of the Hon'ble Karnataka High Court which has decision of the Hon'ble Karnataka High Court which has decision of the Hon'ble Karnataka High Court which has admitted the Question of Law raised. We also note the admitted the Question of Law raised. We also note the admitted the Question of Law raised. We also note the number of judicial authorities that have been cited by the number of judicial authorities that have been cited by the number of judicial authorities that have been cited by the Assessing Officer and the assessee. Assessing Officer and the assessee.” 14. We have heard We have heard rival submission of the parties on the issue in rival submission of the parties on the issue in dispute and perused the relevant material on record. Before us, the dispute and perused the relevant material on record. Before us, the dispute and perused the relevant material on record. Before us, the Ld. Counsel of the assessee submitted that subsequent to the Ld. Counsel of the assessee submitted that subsequent to the Ld. Counsel of the assessee submitted that subsequent to the passing of the order of the Ld. DRP the Hon’ble Karnataka High passing of the order of the Ld. DRP the Hon’ble Karnataka High passing of the order of the Ld. DRP the Hon’ble Karnataka High Court in the case of CIT v. e of CIT v. Biocon Ltd -21 taxmann.com 351 has 21 taxmann.com 351 has upheld the finding of the Special Bench Tribunal in the case of CIT upheld the finding of the Special Bench Tribunal in the case of CIT upheld the finding of the Special Bench Tribunal in the case of CIT v. Biocon Ltd (supra) Biocon Ltd (supra). The relevant finding of the Hon’ble Karnataka . The relevant finding of the Hon’ble Karnataka High Court is reproduced as under: High Court is reproduced as under:

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Section 37(1) says that any expenditure (not being expenditure of says that any expenditure (not being expenditure of says that any expenditure (not being expenditure of the nature described in the nature described in sections 30 to 36 and not being in the and not being in the nature of capital expenditure or personal expenses of the assessee), nature of capital expenditure or personal expenses of the assessee), nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the laid out or expended wholly and exclusively for the purposes of the laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income r profession shall be allowed in computing the income r profession shall be allowed in computing the income chargeable under the head, "Profits and Gains of Business or under the head, "Profits and Gains of Business or under the head, "Profits and Gains of Business or Profession". 7. Thus, from perusal of 7. Thus, from perusal of Section 37 (1) of the Act, it is evident that (1) of the Act, it is evident that the aforesaid provision permits deduction for the expenditure laid oresaid provision permits deduction for the expenditure laid oresaid provision permits deduction for the expenditure laid out or expnded and does not contain a requirement that there has to out or expnded and does not contain a requirement that there has to out or expnded and does not contain a requirement that there has to be a pay out. If an expenditure has been incurred, provision be a pay out. If an expenditure has been incurred, provision be a pay out. If an expenditure has been incurred, provision of Section 37(1) of the Act would be attracted. It is also pertinent to of the Act would be attracted. It is also pertinent to of the Act would be attracted. It is also pertinent to note that Section 37 Section 37 does not envisage incurrence of expenditure in does not envisage incurrence of expenditure in cash. 8. Section 2(15A) of the Companies Act, 1956 defines 'employees he Companies Act, 1956 defines 'employees stock option' to mean option given to the whole time directors, stock option' to mean option given to the whole time directors, stock option' to mean option given to the whole time directors, officers or the employees of the company, which gives such officers or the employees of the company, which gives such officers or the employees of the company, which gives such directors, officers or employees, the benefit or right to purchase or directors, officers or employees, the benefit or right to purchase or directors, officers or employees, the benefit or right to purchase or subscribe at a future subscribe at a future rate the securities offered by a company at a rate the securities offered by a company at a free determined price. In an ESOP a company undertakes to issue free determined price. In an ESOP a company undertakes to issue free determined price. In an ESOP a company undertakes to issue shares to its employees at a future date at a price lower than the shares to its employees at a future date at a price lower than the shares to its employees at a future date at a price lower than the current market price. The current market price. The employees are given stock options at employees are given stock options at discount and the same amount of discount represents the difference e same amount of discount represents the difference e same amount of discount represents the difference between market price of shares at the time of grant of option and the between market price of shares at the time of grant of option and the between market price of shares at the time of grant of option and the offer price. In order to be eligible for acquiring shares under the offer price. In order to be eligible for acquiring shares under the offer price. In order to be eligible for acquiring shares under the scheme, the employees are under an obligation to render their scheme, the employees are under an obligation to render their scheme, the employees are under an obligation to render their services to the company during the vesting period as provided in the ices to the company during the vesting period as provided in the ices to the company during the vesting period as provided in the scheme. On completion of the vesting period in the service of the scheme. On completion of the vesting period in the service of the scheme. On completion of the vesting period in the service of the company, the option vest with the employees. company, the option vest with the employees. 9. In the instant case, the ESOPs vest in an employee over a period 9. In the instant case, the ESOPs vest in an employee over a period 9. In the instant case, the ESOPs vest in an employee over a period of four years i.e., at the rate of 25%, which means at the end of first s i.e., at the rate of 25%, which means at the end of first s i.e., at the rate of 25%, which means at the end of first year, the employee has a definite right to 25% of the shares and the year, the employee has a definite right to 25% of the shares and the year, the employee has a definite right to 25% of the shares and the assessee is bound to allow the vesting of 25% of the options. It is assessee is bound to allow the vesting of 25% of the options. It is assessee is bound to allow the vesting of 25% of the options. It is well settled in law that if a business liability has arisen in the well settled in law that if a business liability has arisen well settled in law that if a business liability has arisen accounting year, the same is permissible as deduction, even though, accounting year, the same is permissible as deduction, even though, accounting year, the same is permissible as deduction, even though, liability may have to quantify and discharged at a future date. liability may have to quantify and discharged at a future date. liability may have to quantify and discharged at a future date. On exercise of option by an employee, the actual amount of benefit exercise of option by an employee, the actual amount of benefit exercise of option by an employee, the actual amount of benefit has to be determined is only a quantification of has to be determined is only a quantification of liability, which takes liability, which takes place at a future date. The tribunal has therefore, rightly placed place at a future date. The tribunal has therefore, rightly placed place at a future date. The tribunal has therefore, rightly placed reliance on decisions of the Supreme Court in Bharat Movers supra reliance on decisions of the Supreme Court in Bharat Movers supra reliance on decisions of the Supreme Court in Bharat Movers supra

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and Rotork Controls India P. Ltd., supra and has recorded a finding and Rotork Controls India P. Ltd., supra and has recorded a finding and Rotork Controls India P. Ltd., supra and has recorded a finding that discount on issue of ESOPs that discount on issue of ESOPs is not a contingent liability but is an is not a contingent liability but is an ascertained liability. ascertained liability. 10. From perusal of 10. From perusal of Section 37(1), which has been referred to supra, , which has been referred to supra, it is evident that an assessee is entitled to claim deduction under the it is evident that an assessee is entitled to claim deduction under the it is evident that an assessee is entitled to claim deduction under the aforesaid provision if the expenditure has been incurred. The foresaid provision if the expenditure has been incurred. The foresaid provision if the expenditure has been incurred. The expression 'expenditure' will also include a loss and therefore, expression 'expenditure' will also include a loss and therefore, expression 'expenditure' will also include a loss and therefore, issuance of shares at a discount where the assessee absorbs the issuance of shares at a discount where the assessee absorbs the issuance of shares at a discount where the assessee absorbs the difference between the price at which it is issued and the market difference between the price at which it is issued and the market difference between the price at which it is issued and the market value of the shares would also be expenditure incurred for the value of the shares would also be expenditure incurred for the value of the shares would also be expenditure incurred for the purposes of Section 37(1) Section 37(1) of the Act. The primary object of the of the Act. The primary object of the aforesaid exercise is not to waste capital but to earn profits by aforesaid exercise is not to waste capital but to earn profits by aforesaid exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, the consistent services of the employees and therefore, the consistent services of the employees and therefore, the same cannot be construed as short receipt of capital. The tribunal same cannot be construed as short receipt of capital. The tribunal same cannot be construed as short receipt of capital. The tribunal therefore, in paragraph 9.2.7 and 9.2.8 has rightly held that therefore, in paragraph 9.2.7 and 9.2.8 has rightly held that therefore, in paragraph 9.2.7 and 9.2.8 has rightly held that incurring of the expenditure by the assessee entitles him for incurring of the expenditure by the assessee entitles him for incurring of the expenditure by the assessee entitles him for deduction under Section 37(1) Section 37(1) of the Act subject to fulfillment of the of the Act subject to fulfillment of the condition. 11. The deduction of discount on ESOP over the vesting period is in 11. The deduction of discount on ESOP over the vesting period is in 11. The deduction of discount on ESOP over the vesting period is in accordance with the accounting in the books of accounts, which has accordance with the accounting in the books of accounts accordance with the accounting in the books of accounts been prepared in accordance with Securities And Exchange Board of been prepared in accordance with Securities And Exchange Board of been prepared in accordance with Securities And Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase India (Employee Stock Option Scheme and Employee Stock Purchase India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. Scheme) Guidelines, 1999. 12. So far as reliance place by the revenue in the case of CIT VS. 12. So far as reliance place by the revenue in the case of CIT VS. 12. So far as reliance place by the revenue in the case of CIT VS. INFOSYS TECHNOLOGIES INFOSYS TECHNOLOGIES LTD. is concerned, it is noteworthy that in LTD. is concerned, it is noteworthy that in the aforesaid decision, the Supreme Court was dealing with a the aforesaid decision, the Supreme Court was dealing with a the aforesaid decision, the Supreme Court was dealing with a proceeding under Section 201 of the Act for non deduction of tax at of the Act for non deduction of tax at source and it was held that ther source and it was held that there was no cash inflow to the was no cash inflow to the employees. The aforesaid decision is of no assistance to decide the employees. The aforesaid decision is of no assistance to decide the employees. The aforesaid decision is of no assistance to decide the issue of allowability of expenses in the hands of the employer. It is issue of allowability of expenses in the hands of the employer. It is issue of allowability of expenses in the hands of the employer. It is also pertinent to mention here that in the decision rendered by the also pertinent to mention here that in the decision rendered by the also pertinent to mention here that in the decision rendered by the Supreme Court in the a Supreme Court in the aforesaid case, the Assessment Year in foresaid case, the Assessment Year in question was 1997 question was 1997-98 to 1999- 2000 and at that time, the Act did 2000 and at that time, the Act did not contain any specific provisions to tax the benefits on not contain any specific provisions to tax the benefits on not contain any specific provisions to tax the benefits on ESOPs. Section 17(2)(iiia) Section 17(2)(iiia) was inserted by Finance Act Finance Act, 1999 with effect from 01.04.2000. Therefore, it is evident that law recognizes a effect from 01.04.2000. Therefore, it is evident that law recognizes a effect from 01.04.2000. Therefore, it is evident that law recognizes a real benefit in the hands of the employees. For the aforementioned real benefit in the hands of the employees. For the aforementioned real benefit in the hands of the employees. For the aforementioned reasons, the decision rendered in the case o reasons, the decision rendered in the case of Infosys Technologies is f Infosys Technologies is of no assistance to the revenue. The decisions relied upon by the of no assistance to the revenue. The decisions relied upon by the of no assistance to the revenue. The decisions relied upon by the revenue in Gajapathy Naidu, Morvi Industries and Keshav Mills Ltd. revenue in Gajapathy Naidu, Morvi Industries and Keshav Mills Ltd. revenue in Gajapathy Naidu, Morvi Industries and Keshav Mills Ltd.

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supra support the case of assessee as the assessee has incurred a supra support the case of assessee as the assessee has incurred a supra support the case of assessee as the assessee has incurred a definite legal liability and on definite legal liability and on following the mercantile system of following the mercantile system of accounting, the discount on ESOPs has rightly been debited as accounting, the discount on ESOPs has rightly been debited as accounting, the discount on ESOPs has rightly been debited as expenditure in the books of expenditure in the books of accounts. We are in respectful accounts. We are in respectful agreement with the view taken in PVP Ventures Ltd. And Lemon agreement with the view taken in PVP Ventures Ltd. And Lemon agreement with the view taken in PVP Ventures Ltd. And Lemon Tree Hotels Ltd. Supra. Tree Hotels Ltd. Supra. 13. It is also pertinent to mention here that for Assessment Year pertinent to mention here that for Assessment Year pertinent to mention here that for Assessment Year 2009-10 onwards the Assessing Officer has permitted the deduction 10 onwards the Assessing Officer has permitted the deduction 10 onwards the Assessing Officer has permitted the deduction of ESOP expenses and in view of law laid down by Supreme Court of ESOP expenses and in view of law laid down by Supreme Court of ESOP expenses and in view of law laid down by Supreme Court in Radhasoami Satsang vs Radhasoami Satsang vs. CIT, (1992) 193 ITR 321 (SC), the , (1992) 193 ITR 321 (SC), the revenue cannot be permitted to take a different stand with regard to revenue cannot be permitted to take a different stand with regard to revenue cannot be permitted to take a different stand with regard to the Assessment Year in question. the Assessment Year in question. In view of preceding analysis, the substantial questions of law In view of preceding analysis, the substantial questions of law In view of preceding analysis, the substantial questions of law framed by a bench of this court are answered against the revenue framed by a bench of this court are answered against t framed by a bench of this court are answered against t and in favour of the assessee. In the result, we do not find any merit and in favour of the assessee. In the result, we do not find any merit and in favour of the assessee. In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed. in this appeal, the same fails and is hereby dismissed. 14.1 Respectfully following the finding of the Hon’ble Karnataka Respectfully following the finding of the Hon’ble Karnataka Respectfully following the finding of the Hon’ble Karnataka High Court(supra), the (supra), the Ld. Assessing Officer is directed to delete the ted to delete the addition. The ground of appeal of addition. The ground of appeal of the assessee is accordingly the assessee is accordingly allowed.

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be admitted otherwise then filing revised return of income. The be admitted otherwise then filing revised return of income. The be admitted otherwise then filing revised return of income. The relevant finding of the Ld. DRP is reproduced as under: relevant finding of the Ld. DRP is reproduced as under: relevant finding of the Ld. DRP is reproduced as under:

“8.3.7 The assessee relied on the decision 8.3.7 The assessee relied on the decision of the Hon'ble of the Hon'ble Bombay High court in the case of Pruthvi Brokers & Bombay High court in the case of Pruthvi Brokers & Bombay High court in the case of Pruthvi Brokers & Shareholders (ITA No 3098/2010), which relying on the Shareholders (ITA No 3098/2010), which relying on the Shareholders (ITA No 3098/2010), which relying on the decisions of the National Thermal Power Company Limited decisions of the National Thermal Power Company Limited decisions of the National Thermal Power Company Limited [1998] (229 IT 383), held that the Id. Tribunal had a [1998] (229 IT 383), held that the Id. Tribunal had a [1998] (229 IT 383), held that the Id. Tribunal had a jurisdiction to examine a jurisdiction to examine a question of law which arose from the question of law which arose from the facts as found by the lower authorities and had a bearing on facts as found by the lower authorities and had a bearing on facts as found by the lower authorities and had a bearing on the tax liability of the company. We have perused the said the tax liability of the company. We have perused the said the tax liability of the company. We have perused the said decision of the Hon'ble Bombay High Court and find that the decision of the Hon'ble Bombay High Court and find that the decision of the Hon'ble Bombay High Court and find that the same is not an authority for the propos same is not an authority for the proposition that an addition ition that an addition ground can be mechanically and automatically be accepted. ground can be mechanically and automatically be accepted. ground can be mechanically and automatically be accepted. The Hon'ble Bombay High Court observed that the appellate The Hon'ble Bombay High Court observed that the appellate The Hon'ble Bombay High Court observed that the appellate authorities have the discretion whether or not to permit such authorities have the discretion whether or not to permit such authorities have the discretion whether or not to permit such additional claims to be raised and that the exercise of additional claims to be raised and that the exercise of additional claims to be raised and that the exercise of discretion was entirely different from the existence of discretion was entirely different from the existence of discretion was entirely different from the existence of jurisdiction.” ” 16. We have heard rival submissions of the parties and perused We have heard rival submissions of the parties and perused We have heard rival submissions of the parties and perused the relevant material on record. We find that the Ld. DRP has the relevant material on record. We find that the Ld. DRP has the relevant material on record. We find that the Ld. DRP has rejected the additional claim mainly on the ground that pro additional claim mainly on the ground that pro additional claim mainly on the ground that proceedings before the Ld. DRP are in continuance of the assessment before the Ld. DRP are in continuance of the assessment before the Ld. DRP are in continuance of the assessment proceedings and not in the nature of appellate proceedings and proceedings and not in the nature of appellate proceedings and proceedings and not in the nature of appellate proceedings and therefore, the Ld. DRP was not authorized to admit such an therefore, the Ld. DRP was not authorized to admit such an therefore, the Ld. DRP was not authorized to admit such an additional claim otherwise then by revised return of income. additional claim otherwise then by revised return of income. additional claim otherwise then by revised return of income. However, the Tribunal being the Tribunal being appellate authority is entitled to admit is entitled to admit such a claim if same is purely being legal in the nature and no such a claim if same is purely being legal in the nature and no such a claim if same is purely being legal in the nature and no investigation of the fresh facts is required. Before us, the Ld. investigation of the fresh facts is required. Before us, the Ld. investigation of the fresh facts is required. Before us, the Ld. Counsel of the assessee has filed all details in respect of claim and Counsel of the assessee has filed all details in respect of claim Counsel of the assessee has filed all details in respect of claim submitted that all such details submitted that all such details were filed before the Ld. DRP and filed before the Ld. DRP and therefore, same are available on record. In view of the facts and therefore, same are available on record. In view of the facts and therefore, same are available on record. In view of the facts and

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circumstances, we admit this claim of the assessee relying on the circumstances, we admit this claim of the assessee relying on the circumstances, we admit this claim of the assessee relying on the decision of the Hon’ble Bombay High Court in the case of CIT v. decision of the Hon’ble Bombay High Court in the case decision of the Hon’ble Bombay High Court in the case Pruthvi Brokers & Shareholders (ITA No. 3098/2010 )and restore Pruthvi Brokers & Shareholders (ITA No. 3098/2010 ) Pruthvi Brokers & Shareholders (ITA No. 3098/2010 ) the matter back to the file of the Ld. Assessing Officer for examining the matter back to the file of the Ld. Assessing Officer for examining the matter back to the file of the Ld. Assessing Officer for examining the claim in accordance with law after verifying the documentary the claim in accordance with law after verifying the documentary the claim in accordance with law after verifying the documentary evidence submitted by the assessee. The ground No. 4 of the evidence submitted by the assessee. The ground evidence submitted by the assessee. The ground assessee is accordingly allowed for statistical purposes. assessee is accordingly allowed for statistical purposes. assessee is accordingly allowed for statistical purposes.

CONCLUSION: CONCLUSION: 83. For the reasons give above, we hold that where dividend 83. For the reasons give above, we hold that where dividend 83. For the reasons give above, we hold that where dividend is declared, distributed or paid by a domestic company to a is declared, distributed or paid by a domestic company to a is declared, distributed or paid by a domestic company to a non-resident shareholder(s), which attracts Additional Income resident shareholder(s), which attracts Additional Income resident shareholder(s), which attracts Additional Income Tax (Tax on Distributed Profits) refe Tax (Tax on Distributed Profits) referred to in Sec.115 rred to in Sec.115-O of the Act, such additional income tax payable by the domestic Act, such additional income tax payable by the domestic Act, such additional income tax payable by the domestic company shall be at the rate mentioned in Section 115 O of company shall be at the rate mentioned in Section 115 O of company shall be at the rate mentioned in Section 115 O of the Act and not at the rate of tax applicable to the non the Act and not at the rate of tax applicable to the non the Act and not at the rate of tax applicable to the non- resident shareholder(s) as specified in the relevant DTA resident shareholder(s) as specified in the relevant DTA resident shareholder(s) as specified in the relevant DTAA with reference to such dividend income. Nevertheless, we are reference to such dividend income. Nevertheless, we are reference to such dividend income. Nevertheless, we are conscious of the sovereign's prerogative to extend the treaty conscious of the sovereign's prerogative to extend the treaty conscious of the sovereign's prerogative to extend the treaty protection to domestic companies paying dividend distribution protection to domestic companies paying dividend distribution protection to domestic companies paying dividend distribution tax through the mechanism of tax through the mechanism of Special Bench - Total Oil India Total Oil India Pvt. Ltd.

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DTAAs. Thus, wherever the Contracting States to a tax treaty DTAAs. Thus, wherever the Contracting States to a tax treaty DTAAs. Thus, wherever the Contracting States to a tax treaty intend to extend the treaty protection to the domestic company intend to extend the treaty protection to the domestic company intend to extend the treaty protection to the domestic company paying dividend distribution tax, only then, the domestic paying dividend distribution tax, only then, the domestic paying dividend distribution tax, only then, the domestic company can claim benefit of the DTAA, if any. Thus, the company can claim benefit of the DTAA, if any. Thus, the company can claim benefit of the DTAA, if any. Thus, the question before question before the Special Bench is answered, accordingly. the Special Bench is answered, accordingly. 17.1 Respectfully following the finding of the Special Bench Respectfully following the finding of the Special Bench Respectfully following the finding of the Special Bench Tribunal (supra) ,the ground of appeal of the assessee is dismissed. the ground of appeal of the assessee is dismissed. the ground of appeal of the assessee is dismissed.

Order pronounced in the open Court on nounced in the open Court on 31/05/2023. /05/2023. Sd/ Sd/- Sd/ Sd/- (KAVITHA RAJAGOPAL KAVITHA RAJAGOPAL) (OM PRAKASH KANT OM PRAKASH KANT) JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER

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Mumbai; Dated: 31/05/2023 Rahul Sharma, Sr. P.S. Copy of the Order forwarded to Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. BY ORDER, BY ORDER, //True Copy// (Assistant Registrar) (Assistant Registrar) ITAT, Mumbai ITAT, Mumbai