ASSISTANT COMMISSIONER OF INCOME TAX-15(3)(1), MUMBAI, MUMBAI vs. M/S THYROCARE TECHNOLOGIES LIMITED, MUMBAI

Grounds No. 1 and 2, raised in Revenue’s appeal, pertain to the deletion of the disallowance made under section 14A read with Rule 8D of the Income Tax Rules, 1962 (“the Rules”).

We have considered the submissions of both sides and perused the material available on record. The brief facts of the case are that the assessee is engaged in the business of providing diagnostic services. For the year under consideration, the assessee filed its return of income on 03.12.2020, declaring a total income of Rs. 165,37,56,420/-. The return filed by the assessee was selected for scrutiny, and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, upon perusal of the computation of income, it was observed that the assessee has shown an amount of Rs. 1,946.74 million as non-current investments, Rs. 200 million as equity accounted investments, and Rs. 69.03 crore as current investments as on 31.03.2020. It was further observed that the assessee has shown expenditure of Rs. 7,58,921/- incurred for earning the dividend income claimed as exempt. Accordingly, the assessee was asked to furnish the details of the same and to explain why 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 ITAs No.6715, 6721, 6723, 7292 & 7293/Mum/2025 4 (A.Ys. 2018-19, 2020-21, 2021-22, 2022-23 & 2023-24 ) 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 annual average of the monthly averages of the value of investment in mutual funds.

The Assessing Officer (“AO”), vide order dated 27.09.2022 passed under section 143(3) read with section 144B of the Act, disagreed with the submissions of the assessee and held that making of investments, maintaining or continuing investments, and timing of exit from investments are well informed and coordinated management decisions involving inputs from various sources as well as the acumen of senior managerial functionaries. Thus, it was held that the cost is inbuilt into even so called “passive” investments. Accordingly, the AO computed the disallowance at Rs. 2,14,67,000/- as against the disallowance of Rs. 7,58,921/- made by the assessee under section 14A read with Rule 8D of the Rules. After taking into consideration the suo motu disallowance already made by the assessee, the ITAs No.6715, 6721, 6723, 7292 & 7293/Mum/2025 5 (A.Ys. 2018-19, 2020-21, 2021-22, 2022-23 & 2023-24 )

The learned CIT(A), vide impugned order, allowed the ground raised by the assessee on this issue and deleted the addition made by the AO under section 14A read with Rule 8D of the Rules. The learned CIT(A) held that the provisions of section 14A can only be applied in cases where the assessee has earned any exempt income during the year. It was further held that since the assessee has not earned any exempt income from the investments, the provisions of section 14A will not be attracted. Being aggrieved, the Revenue is in appeal before us.

Having considered the submissions of both sides and perused the material available on record, we find that during the year under consideration, the assessee received a dividend of Rs. 33,73,984/- from investments made in mutual funds, which was claimed as exempt under section 10 of the Act. While computing the total income, the assessee made a disallowance of Rs. 7,58,921/- under section 14A in respect of expenditure incurred in relation to income which does not form part of the total income. In this regard, during the hearing, our attention was drawn to page no. 79 of the paper book, which comprises the computation of disallowance made by the assessee under section 14A after taking into consideration the monthly average of the investments. As per the assessee, only those investments which have yielded 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

We have considered the submissions of both sides and perused the material available on record. During the assessment proceedings, upon perusal of the profit and loss account, it was observed that the assessee has claimed ESOP expenses of Rs. 2 crore. Accordingly, the assessee was asked to provide an explanation regarding the allowability of such expenses. In response, the assessee submitted that ESOP is granted for attracting, maintaining, retaining and rewarding employees within the company, and the same cannot be regarded as capital expenditure merely because shares have been allotted to employees. In support of its submission, the assessee placed reliance upon the decision of the Special Bench of the Tribunal in the case of Biocon Ltd. v. DCIT, reported in (2013) 144 ITD 21 (Bangalore - Tribunal) (SB).

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 under: Section 37(1) says that any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head, "Profits and Gains of Business or Profession". 7. Thus, from perusal of section 37(1) of the Act, it is evident that the aforesaid provision permits deduction for the expenditure laid out or expended and does not contain a requirement that there has to 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 note that section 37 does not envisage incurrence of expenditure in cash. 8. Section 2(15A) of the Companies Act, 1956 defines 'employees stock option' to mean option given to the whole time directors, officers or the employees of the company, which gives such directors, officers or employees, the benefit or right to purchase or subscribe at a future rate the securities offered by a ITAs No.6715, 6721, 6723, 7292 & 7293/Mum/2025 9 (A.Ys. 2018-19, 2020-21, 2021-22, 2022-23 & 2023-24 ) company at a 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 current market price. The employees are given stock options at discount and the same amount of discount represents the difference 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 scheme, the employees are under an obligation to render their services to the company during the vesting period as provided in the scheme. On completion of the vesting period in the service of the company, the option vest with the employees.

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 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 well settled in law that if a business liability has arisen in the accounting year, the same is permissible as deduction, even though, liability may have to quantify and discharged at a future date. On exercise of option by an employee, the actual amount of benefit has to be determined is only 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.

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 him for deduction under section 37(1) of the Act subject to fulfilment of the condition.

So far as reliance place by the revenue in the case of Infosys Technologies Ltd.(supra) is concerned, it is noteworthy that in the aforesaid decision, the Supreme Court was dealing with a proceeding under section 201 of the Act for non-deduction of tax at source and it was held that there was no cash inflow to 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 also pertinent to mention here that in the decision rendered by the Supreme Court in the aforesaid case, the Assessment Years in question was 1997-98 to 1999-2000 and at that time, the Act did not contain any specific provisions to tax the benefits on ESOPs. Section 17(2)(iiia) was inserted by Finance Act, 1999 with effect from 1-4-2000. Therefore, it is evident that law recognizes a real benefit

It is also pertinent to mention here that for Assessment Year 2009-10 onwards the Assessing Officer has permitted the deduction of ESOP expenses and in view of law laid down by Supreme Court in Radhasoami Satsang v. CIT, [1992] 60 Taxman 248/193 ITR 321, the revenue cannot be permitted to take a different stand with regard to the Assessment Year in question. In view of preceding analysis, the substantial questions of law framed by a bench of this court are answered against the revenue 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.”

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.

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.

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

The AO, vide order passed under section 143(3) read with section 144B of the Act, disagreed with the submissions of the assessee and held that prima facie certain medical practitioners were provided monetary benefits in the garb of commission payments to promote the assessee’s client services. Thus, the AO held that in the letter and spirit, the same constitutes professional misconduct on the part of medical practitioners. On the basis that the assessee failed to clearly demonstrate that such payments do not fall within the ambit of “unlawful”, the AO made an addition of 10% of Rs. 17.49 crore under the provisions of Explanation 1 to section 37(1) of the Act.

The learned CIT(A), vide the impugned order, allowed the ground raised

During the hearing, the learned AR reiterated the submissions made by the assessee before the lower authorities and submitted that the sales incentives were paid by the assessee to third-party service providers, aggregators, and online platforms in relation to its diagnostic testing services. The learned AR submitted that a certain percentage of the revenue generated from leads provided by the abovementioned concerns was paid by the assessee as commission, and the same is accounted as sales incentives in the books of account. In this regard, the learned AR made a specific reference to pages 97–179 of the paper book comprising the details of sales incentives paid to various service providers.

On the other hand, the learned DR submitted that some of the parties to whom sales incentives were paid during the year are medical practitioners and, on a sample basis, made a reference to Serial Nos. 17, 31, 36, 37, etc., of the details forming part of the paper book from pages 97–179.

Having considered the submissions of both sides and perused the material available on record, it is evident that the sales incentives paid by the assessee to various parties was treated as being in contravention of law by the AO and, accordingly, 10% of such sales incentives paid by the assessee was disallowed under Explanation 1 to section 37(1) of the Act. As per the ITAs No.6715, 6721, 6723, 7292 & 7293/Mum/2025 14 (A.Ys. 2018-19, 2020-21, 2021-22, 2022-23 & 2023-24 ) assessee, these sales incentives were paid to generate business leads for its 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.

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.

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, neither the AO nor the learned CIT(A) has gone into the details of the activities conducted by these parties on behalf of the assessee. There is no dispute amongst the parties regarding the law settled by the Hon’ble Supreme Court in Apex Laboratories Pvt. Ltd. (supra). Therefore, in the light of the facts and circumstances of the present case, we deem it appropriate to restore this issue to the file of the jurisdictional AO for de novo adjudication after examination qua each and every party to whom

In the result, the appeal by the Revenue for the assessment year 2020– 21 is partly allowed for statistical purposes.

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)."

The solitary grievance of the Revenue, in the present appeal, pertains to the deletion of the disallowance made under section 14A, read with Rule 8D of the Rules.

We have considered the submissions of both sides and perused the material available on record. During the assessment year 2018–19, the assessee received a dividend of Rs. 3,63,44,833/- from investments made in mutual funds, which was claimed as exempt under section 10(34) of the Act. While computing its total income, the assessee made a suo motu disallowance of Rs. 81,64,334/- under section 14A of the Act in respect of expenditure incurred in relation to income which does not form part of the total income. In this regard, during the hearing, our attention was drawn to page 81 of the paper book, which comprises the computation of disallowance made by the assessee under section 14A of the Act after taking into consideration the monthly average of the investments which resulted in exempt income. As per

We find that while considering a similar issue in Revenue’s appeal for the assessment year 2020–21, we direct the AO to consider only those investments for the purpose of computation of disallowance under Rule 8D of the Rules which have yielded exempt income during the year, following the decision of the Special Bench of the Tribunal in Vireet Investment Pvt. Ltd. (supra). Accordingly, we are of the considered view that our findings/conclusions as rendered in the Revenue’s appeal for the assessment year 2020–21 shall apply mutatis mutandis to the present case. With similar directions, the impugned order on this issue is set aside, and the grounds raised by the Revenue are allowed for statistical purposes.

In the result, the appeal by the Revenue for the assessment year 2018– 19 is allowed for statistical purposes.

In its appeals for the assessment years 2021–22, 2022-23 and 2023– 24, the solitary issue raised by the Revenue pertains to the deletion of the disallowance of sales incentive expenditure under Explanation 1 to section 37(1) of the Act.

During the hearing, the learned representatives for both parties fairly agreed that the factual matrix resulting in this issue is similar to the assessment year 2020–21. Accordingly, we are of the considered view that our findings/conclusions as rendered in Revenue’s appeal for the assessment year 2020–21 shall apply mutatis mutandis to these appeals. Accordingly, with similar directions, the grounds raised by the Revenue in its appeals for the assessment years 2021–22, 2022–23 and 2023–24 are allowed for statistical purposes.

In the result, the appeals by the Revenue for the assessment years 2021–22, 2022–23 and 2023–24 are allowed for statistical purposes.

To sum up, the appeal by the Revenue for the assessment year 2020– 21 is partly allowed for statistical purposes, while its appeals for the assessment years 2018–19, 2021–22, 2022–23 and 2023–24 are allowed for statistical purposes. Order pronounced in the open Court on 30/03/2026