DCIT 2(1)(1), MUMBAI vs. BAJAJ ELECTRICALS LTD, MUMBAI

4 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited

(i) On the facts and in the circumstances of the case and in law the appellant prays that investments in shares of domestic companies, dividend from which is subject to tax under section 115-O ought to be excluded for the purpose of computing disallowance under section 14A of the Act. (ii) Without prejudice to ground no.1 the appellant prays that the strategic investments made in group companies made without the intention of earning exempt dividend income ought to be excluded while computing the disallowance under section 14A of the Act. (iii) Without prejudice to ground no.1 the appellant prays that investments capable of yielding taxable income ought to be excluded while computing the disallowance under section 14A of the Act. iv) Without prejudice to ground no.1 the appellant prays that amount of disallowance under section 14A of the Act ought to be restricted to the amount claimed as exempt.

5 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited Keeping into consideration the entire conspectus of the facts and circumstances of the case and the additional ground raised before us we are convinced that its adjudication does not require any fresh investigation of facts and involves only a question of law. Respectfully following the judgement of the Hon’ble Supreme Court in the case of National Thermal Power Company Ltd. Vs. CIT [(1998) 229 ITR 383 (SC)] we admit this additional ground for disposal on merits.

Disallowance under section 14A - Ground No. 1.1 to 1.4 and Additional Ground No.(i) to (iv) 7. During the year under consideration the assessee has earned income from free bonds to the tune of Rs. 86,851/- and claimed the same as exempt under section 10(15) of the Act. The assessee while filing the return of income has made a suo- motu disallowance of Rs.1,79,463/- being 50% of the salary paid to the employee who is managing the investments earning exempt income. The AO issued a show- cause notice to the assessee as to why disallowance under section 14A r.w.r. 8D cannot be applied in assessee's case. The relevant provisions of section 14A of the Act and Rule 8D of the Income Tax Rules read as under – 14A - Expenditure incurred in relation to income not includible in total income

(1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act

(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.

6 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.

Rule 8D - Method for determining amount of expenditure in relation to income not includible in total income. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with— (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2).

(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely :— (i) the amount of expenditure directly relating to income which does not form part of total income; (ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely :— B A × C amount of expenditure by way of interest other than the amount of Where A = interest included in clause (i) incurred during the previous year ; the average of value of investment, income from which does not or shall B = not form part of the total income, as appearing in the balance sheet of the 7 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited assessee, on the first day and the last day of the previous year ; the average of total assets as appearing in the balance sheet of the C = assessee, on the first day and the last day of the previous year; (iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year."

8. The assessee submitted that the expenses attributable to exempt income have already been disallowed by the assessee. Without prejudice the assessee submitted a computation of disallowance under section 14A to the tune of Rs 1,19,07,328/- as per below calculation:

9. Subsequently the assessee submitted a revised computation stating that the interest disallowance computed under Rule 8D(2)(ii) in the original submission includes certain interest expenditure which does not have any nexus to the exempt income and should be excluded. The assessee further submitted that the average

8 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited investments for the purpose of Rule 8D(2)(iii) should not include investments which are not earning exempt income. The AO however did not accept the revised computation of the assessee and proceeded to make a disallowance of Rs. 1,19,07,328/- as per the original computation submitted by the assessee. The CIT(A) gave partial relief to the assessee by directing the AO to consider the revised submission of the assessee with regard to exclusion of interest which are not relatable to the investment activity. The CIT(A) however did not accept the submission of the assessee that only those investments which are earning exempt income should be considered for the purpose of computing the disallowance under Rule 8D(2)(iii).

10. The ld. AR submitted that through additional ground, the assessee is praying for the reduction in suo-motu disallowance. The ld AR submitted that the only disallowance that needs to be made in assessee's case is under Rule 8D(2)(iii) and the interest disallowance under Rule 8D(2)(iii) is not warranted since the assessee is having sufficient own funds. In support of the contention that no disallowance is warranted under Rule 8D(2)(ii) towards interest, the ld AR submitted that the assessee is having sufficient own funds and drew our attention to the Financial Statements of the assessee in support of the said claim (page 25 & 30 of PB). The ld. AR further submitted that it is a settled position that when own funds are more than the investments earning exempt income, then no disallowance towards interest under Rule 8D(2)(ii) is required to be made. On the quantum of disallowance under Rule 8D(2)(iii) the ld AR submitted that 0.5% of the investments which are earning exempt income only should be considered and relied on the decision of Special Bench in the case of Vireet Investments P. Ltd. [2017] 82 taxmann.com 415 (Del. Trib. SB) in this regard. The ld AR during the course of hearing furnished a working whereby the amount to be disallowed under Rule 8D(2)(iii) is computed at 9 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited Rs.19,345. With regard to the prayer for reduction in suo-motu disallowance the ld. AR relied on the decision of the Co-ordinate Bench in the case of Sajjan India Ltd. vs. ACIT [2018] 89 taxmann.com 21 (Mum. Trib.). The ld. AR made a without prejudice plea that the disallowance under section 14A should be restricted to the exempt income earned by the assessee and in this regard placed reliance on the decision of the Hon'ble Bombay High Court in the case of Nirved Traders Pvt. Ltd. vs. DCIT (ITA No. 149 of 2017 dated 23.04.2019).

11. The ld. DR on the other hand vehemently argued that the assessee has initially submitted a working for disallowance under section 14A of the Act r.w.r.8D which the AO has considered for the purpose of making the disallowance. The ld. DR further argued that the assessee has repeatedly changed its stand towards the disallowance first by seeking exclusion of certain interest expenditure for the purpose of disallowance under Rule 8D(2)(ii) and now making a fresh claim before the Tribunal that no disallowance should be made under the said Rules. The ld. DR also argued that the various pleas of the assessee are not properly substantiated and therefore should not be entertained.

12. We heard the parities and perused the material on record. During the year under consideration the assessee has earned an exempt income of Rs. 86,851/- and against the said exempt income the assessee has made a suo-motu disallowance of Rs. 1,79,463/-. Before the AO the assessee submitted a without prejudice working of disallowance to the tune of Rs. 1,19,07,328/- which consists of a disallowance of Rs. 1,07,39,641/- under Rule 8D(2)(ii) towards interest and a sum of Rs. 13,47,150/- under Rule 8D(2)(iii) towards administrative expenses. The assessee subsequently revised the computation requesting the AO to exclude the following amount from 10 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited the disallowance made towards interest for the reason that the said interest expenditure has no nexus with earning exempt income.

Particulars Amount- Rs. Interest on buyers credit 5,83,658/- Bill discounting charges 16,68,02,011/- Interest on vehicle loan 5,15,527/- The assessee also submitted that for the purpose of computing the disallowance under Rule 8D(2)(iii) only those investment which are earning exempt income should be considered. Accordingly, the assessee submitted a revised working computing the disallowance at Rs. 1,03,529/- and prayed that the suo-motu disallowance may be restricted accordingly. The AO did not accept the submissions of the assessee and made the disallowance as per the original computation submitted by the assessee. The CIT(A) gave partial relief to the assessee by directing the AO to consider only the submission with regard to exclusion of certain interest expenditure as claimed by the assessee.

13. The fresh plea of the assessee before us is that there should not be any disallowance at all under Rule 8D(2)(ii) towards interest for the reason that own funds are more than the investments which are earning exempt income. In this regard we notice from the perusal of the financial statements for the year ending 31.03.2009 that the assessee has an investment in 6.75% tax free bonds of Unit Trust of India to the tune of Rs. 77,38,500/- and that the shareholder's fund is at Rs. 2,45,01,35,000/-. It is the settled position that when own funds are more than the investments which are earning exempt income then no disallowance under Rule 8D(2)(ii) towards interest is warranted. We further notice that the shareholders funds are much more as compared to even the entire investments of the assessee and 11 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited therefore we have no hesitation in holding that in assessee's case disallowance under Rule 8D(2)(ii) towards interest is not warranted.

14. The second contention of the assessee before us is with regard to the investments that need to be consider for the purpose disallowance under Rule 8D(2)(iii) towards indirect expenses. In this regard we notice that the Special Bench of the Tribunal in the case of Vireet Investments P. Ltd. (supra) has held that for the purpose of disallowance under Rule 8D(2)(iii) only those investments which are earning exempt income should only be considered. On perusal of the workings submitted by the assessee computing the disallowance under Rule 8D(2)(iii) applying the above said ratio the same works out to Rs. 19,345/- (refer para 4.7 of assessment order) and accordingly the disallowance under section 14A r.w.r.8D would be reduced to Rs.19,345/-. In that case it is necessary to examine whether the disallowance can be reduced below the suo-motu disallowance at the stage of appeal before the Tribunal. In this regard it is relevant to consider the following observations of the Co-ordinate Bench in the case of Sajjan India Ltd. (supra) where it is held that “5.***** The last grievance under these appeal is of the assessee as to whether the disallowance u/s 14A can fall below disallowance suo motu voluntarily made by the assessee in the return of income filed with the Revenue. The assessee has claimed that if his several contentions are favourably considered by tribunal keeping in view legal position, the disallowance u/s 14A can fall below the voluntary disallowance made by the assessee sun motu in return of income filed with the Revenue. The assessee has relied on decision of Hon'ble Gujarat High Court in the case of Pr. CIT v. UTI Bank Ltd. [2017] 398 ITR 514 and decision of ITAT, Mumbai in the case of Rupee Finance and Management (P.) Ltd. v. Dy. CIT [2017] 81 taxmann.com 249. We find merit in the contention of the assessee that once tribunal has adjudicated matter in assessee's favour then merely because disallowance was made in return of income voluntarily under a wrong belief, the assessee cannot resile from its position is not acceptable. The mandate of the 1961 Act is to tax real income and not an income which was never the income chargeable to tax in the hands of the assesseee but was declared under a 12 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited wrong belief or notion. The mandate of the 1961 Act is to tax real income and tax can only be levied under the authority of law. Thus, if after verifications and following the ratio of law decided by the tribunal in the instant case, if the disallowance falls below the disallowance u/s 14A offered by the assessee in return of income, be it may the Revenue cannot charge tax on income which never was the income of the assessee chargeable to tax within the mandate and provisions of the 1961 Act as the tax can only be levied by the authority of law. The Hon'ble Andhra Pradesh High Court in the case of CIT v. Bakelite Hylam Ltd. [1999] 107 Taxman 429/237 ITR 392 as well Hon;ble Gujarat High Court in the case of Gujarat Gas Co. Ltd. v. Jt. CIT [2000] 111 Taxman 144/245 ITR 84 has taken a similar view. Hon'ble Gujarat High Court in the case of Gujarat Gas Co. Ltd. (supro) has arrived at the said decision after considering CBDT circular No. 549 dated 31-10-1989 (1990) 182 ITR (st) 1 while arriving at the said decision that assessed income can fall below returned income in proceedings u/s 143(3) r.ws. 143(2). The Hon'ble Supreme Court decision in the case of CIT v. Sun Engg. Works (P.) Ltd. [1992] 64 Taxman 442/198 ITR 297 was in context of re-assessment proceedings initiated u/s 147 wherein Hon'ble Supreme Court held that reassessment proceedings initiated u/s 147 are for the benefit of revenue and not the assessee, wherein the mandate is to bring to tax income which has escaped assessment while presently we are concerned with proceedings initiated u/s 143(3) r.w.s. 143(2). We order accordingly.”

15. The ratio as laid down by the coordinate bench is that if by following judicial precedence, the disallowance under section 14A r.w.r.8D gets reduced below the suo-motu disallowance made by the assessee in the return of income, then the reduced disallowance only need to be considered for the reason that under the Act only the real income should be brought to tax. In assessee's case considering the various judicial precedence, we have already held that the correct disallowance under section 14A r.w.r.8D is Rs.19,345. Additionally when we apply the above ratio with regard to reduction in the suo-motu disallowance to assessee's case, we are of the view that there should not be any restriction in allowing the claim of the assessee that the disallowance under section 14A r.w.r.8D should be restricted to Rs.19,345. Accordingly, we direct the AO to re-compute disallowance under section 14A r.w.r 8D and thus the grounds raised by the assessee in this regard are allowed.

13 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited Disallowance of commission expenses – Ground No.2 16. The AO during the course of assessment noticed that the assessee has paid commission of Rs. 17,06,10,525/- and that the assessee has in the original return of income has made a disallowance of Rs. 50,00,000/- towards commission. The AO further notice that the assessee had revised its return of income on 08.02.2010 in which the disallowance towards commission was revised to Rs. 16,65,91,940/- claiming only the commission paid to M/s Bharat Petroleum Corporation Ltd. The assessee on 31.03.2011 filed a second revised return wherein the disallowance towards commission expenditure was reduced to Rs. 2,09,37,762/-. During the course of assessment, the assessee submitted that it has been able to obtain confirmation from most of the parties and accordingly the disallowance was reduced in the second revised return. The assessee also submitted the party-wise commission expenditure, confirmations, addresses and PAN and return of income of the parties before the AO. The AO held that the detail submitted by the assessee was voluminous and since the assessment was getting time barred the details could not examined in detail. The AO accordingly arrived at an adhoc disallowance of Rs. 2,39,87,983/- towards commission expenses. The relevant findings of the AO in this regard are extracted below:

“6.2 In the course of assessment proceedings the assessee vide its letters dated 15.09.2011 and 07.12.2011 made submissions on payment of commission and in the said letters, the assessee enclosed party-wise details of commission expenses along with addresses and PAN numbers. The assessee has furnished papers in support of the genuineness of the commission payments during the course of assessment proceedings viz sample copies of ledger, credit /debit notes of commission expenses, confirmation of accounts, Income Tax returns, proof of addresses etc. It produced some parties but the detailed examination of parties and documents / evidences could not be carried out because the compliance was attempted in December end. At the end of limited exercise of scrutiny of genuineness of commission the classification of commission claimed is presented in the following chart. It is seen that the alleged recipients of commissions are 14 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited spread all over the country. So it becomes even more difficult to carry out the verification. In respect of some of the parties which were produced complete set of papers like income-tax returns and bank statement copies, etc could not be produced. Results of enquiries in earlier years indicate that the commission cannot be claimed as genuine in all cases. As because of paucity of time examination of documents/evidences/parties could not be carried out logically, an adhoc disallowance is made in respect of the various types of commissions at rates indicated under against each group of commissions.

The sum of Rs 4,49.25,745/- appearing in the last column of the above table is not allowed as deduction as the said sum is treated as not genuine. The assessee in its revised return dated 31.03.2011 did not claim deduction of commission of Rs. 2,09,37,762/- and adjusting the said sum from total taken as disallowed results in addition of Rs 2,39,87,983/-to total income returned.”

15 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited could not be verified since they were submitted the last minutes is not correct and in any case the CIT(A) ought to have called for a remand report in this regard before confirming the disallowance. The ld. AR submitted that the similar issue arose in earlier year wherein the Co-ordinate Bench has remitted the issue back to the AO to decide the issue based on documentary evidences submitted by the assessee. The ld. AR drew our attention to the order giving effect passed by the AO for the earlier year after verifying the details submitted on a sample basis whereby the AO reduced the original disallowance of Rs. 8,26,90,631/- to Rs. 1,79,14,335/- based on test check conducted. The ld. AR presented a table as extracted below praying that for the year under consideration also for the purpose of disallowance of commission the same parties whose commission was disallowed by the AO in the earlier AY can be considered.

16 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited disallowance is made for the reason that complete verification of the details submitted by the assessee could not be carried out due to the volume of data and that from past experience the entire commission cannot be considered as genuine. It is relevant to mention here that the assessee itself has made suo-motu disallowance to the tune of Rs. 2,09,37,762/-. During the course of hearing the ld AR submitted that if the issue is remitted as in earlier years, considering the volume of data it may become challenging for both the assessee as well as the AO to examine the entire data. Therefore the ld AR is praying that the AO may be directed to disallow the commission paid to the same parties whose payments were disallowed in the earlier year (refer table above). However in our considered view, directing the AO to restrict the disallowance to the same set of vendors cannot be given without any basis since transactions pertaining to each AY are different. From the perusal of Order Giving Effect passed for AY 2007-08 we notice that the AO has reduced the disallowance by issuing notice under section 133(6) on sample basis amounting to circa 40% of the total expenditure claimed by the assessee and based on the response recomputed the disallowance towards commission paid to those parties. We further notice that for the rest of the parties considering the difficulty in examining the data, the AO has applied 10% as adhoc disallowance and for one party M/s.Talent Infoway Ltd., the AO has applied100% for disallowance. Considering these facts and challenges as admitted by the AO in verifying the complete data, we are remitting the issue of examining the commission expense back to the AO with specific directions. The AO is directed apply similar process for sample selection as has been applied in AY 2007-08 for verification of data pertaining to AY 2009-10 also. The AO is further directed to decide the issue in accordance with law after giving a reasonable opportunity of being heard. It is ordered accordingly. The grounds raised by the assessee are allowed statistical purposes.

17 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited Disallowance of Employee Stock Option Plan (ESOP) Expenditure – Ground No.3 and additional ground 21. The assessee has granted stock options to its employees under growth option as well as loyalty option. The said options granted under the loyalty plan vested in one year from the date of grant and those granted under the Growth Plan vested in four different tranches. The eligible employee could exercise the options within a period of three years from the date of vesting or such extended period as may be decided by the remuneration and compensation committee of the assessee. The said options would lapse if they were not exercised within the specified period of time. The assessee has accounted the cost of stock option granted to the employees using the intrinsic value method i.e. the difference between the market value of the share and the exercise price which the employee will have to pay for exercising the option. The assessee for AY 2009-10 has debited a sum of Rs. 1,59,03,443/- to the P&L A/c towards ESOP expenses. In the return of income the assessee has disallowed a sum of Rs. 1,51,67,582/- and the AO while completing the assessment disallowed the balance amount of Rs. 7,35,861/- stating that the assessee has short disallowed the ESOP expenditure. Before the CIT(A) the assessee submitted that the entire ESOP expenditure is an allowable claim and therefore should be allowed as a deduction. The CIT(A) did not accept the submissions of the assessee and confirmed the disallowance made by the AO. Before us the assessee raised original ground contending that the expenditure towards ESOP as disallowed by the AO should be allowed as a deduction. Through additional ground the assessee is making an additional claim of Rs. 3,36,85,160/- towards ESOP expenditure being the difference between the value of shares using Fair Value method of Rs.4,95,88,603 and the intrinsic value of Rs.1,59,03,443 debited in the books of account.

18 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited 22. At the outset the ld. AR in this regard drew our attention to the Notes to Accounts (page 49 & 50 of PB) where it is certified by the auditors that if the fair value of the options granted is to be applied the ESOP expenditure would be more to the extent of Rs. 3,36,85,160/-. The ld AR elaborated on the manner of taxation in the hands of the employees and the deduction towards ESOP expenditure in the hands of the assessee. The ld AR submitted that at the time of exercise of options ESOP gets taxed as perquisites in the hands of the employees under section 17(iv) for an amount being the difference between the market value on the date of exercise and the exercise price. The ld AR further submitted that in the hands of the employer i.e. the assessee, the deduction towards ESOP expenditure are accounted over the period from granting of ESOP till the vesting period and finally when the options are exercised by the employees. The ld AR also submitted that the ESOP expenditure during the vesting period is accounted at as a difference between the Fair Value and the value at which the shares are granted and at the time of exercise of option by the employees, the excess / shortfall of the amount already claimed as an expenditure as compared to the market value is accounted. The ld AR accordingly submitted that the assessee should be allowed the additional deduction of Rs. 3,36,85,160/- for the year under consideration as per fair value as certified by the auditors in the Notes to accounts. With regard to allowability of ESOP expenditure based on fair value at the time of granting of option, the ld. AR relied on the decision of the Co-ordinate Bench in assessee's own case (ITA No. 3789/Mum/2012 dated 03.03.2021). The ld. AR also placed reliance on the decision of the Delhi Bench of the Tribunal in the case of Jubilant Foodworks Ltd. (ITA No. 2886/Del/2024 dated 10.01.2025). With regard to the additional claim being the difference in the value of benefit assessed in the hands of the employees and the amount allowed as deduction earlier the ld. AR placed reliance on the decision of the Special Bench of the Tribunal in the case of Biocon Ltd. vs. DCIT [2013] 144

19 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited ITD 21 (Bang) (SB) as confirmed by the Hon'ble Karnataka High Court [2020] 121 taxmann.com 351 (Kar.)

26. For the year under consideration also in our considered view the impugned additional claim of the assessee needs factual verification. Accordingly respectfully following the above decision of the coordinate bench we remit the issue back to the AO examine the claim of the assessee and allow the same in accordance with law.

23 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited Needless to say that the assessee be given a reasonable opportunity of being heard. The grounds raised by the assessee are allowed for statistical purposes.

Disallowance of prior period expenditure – Ground No.4

24 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited 30. The contention of the assessee is that these expenses could not be claimed in the respective years and hence claimed as deduction in the year under consideration. The said claim of the assessee needs to examined factually to confirm that the assessee has not claimed the said expenditure in the year to which the expenditure belongs i.e. either by way of provision or by way of actual payment. It is also necessary to examine why the assessee could not claim the expenditure in the respective years also needs verification. Further it is relevant to note that the AO has not examined the claim of the assessee on merits and has simply made the disallowance based on the Tax Audit Report. It is also relevant to mention here that the CIT(A) while considering a similar issue in subsequent AY i.e. AY 2010-11 has allowed the prior period expenses after examining the merits of the claim. In view of the same we remit the impugned issue back to the AO to verify the claim of the assessee on merits and allow the claim in accordance with law. The assessee is directed to provide the necessary details as may be required by the AO in this regard and cooperate with the assessment proceedings. It is ordered accordingly. The grounds raised by the assessee are allowed for statistical purposes.

AY 2010-11

25 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited the disallowance made towards prior period expenditure. Both the assessee and the revenue are in appeal against the order of the CIT(A).

ITA 5749 Mum 2015 – Revenue's appeal

26 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited ITA 110/Mum/2016 – Assessee's appeal

“Additional Ground No. 1: Deduction of expenditure incurred in respect of Employee Stock Option Plan (ESOP): 1) On the facts and in the circumstances of the case and in law, the Appellant prays that deduction in respect of ESOP expenditure of Rs. 7,48,12,990 ought to be allowed as a deduction while computing the business income in respect of stock options exercised during the year under consideration, computed as the difference between the fair market value as on the date of exercising the options and the exercise price actually received from the employees, which has also been taxed as perquisite in the hands of the employees, and as reduced by the ESOP expenditure based on fair value method allowed to the appellant in respect of the said options in any of the earlier assessment years.

Additional Ground No. 2: Deduction in respect of Education Cess: 2) On the facts and circumstances of the case and in law, the Appellant prays that deduction in respect of education cess on income-tax paid during the year ought to be allowed as a deduction while computing the total income.”

before us we are 27. ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited convinced that its adjudication does not require any fresh investigation of facts and involves only a question of law. Respectfully following the judgement of the Hon’ble Supreme Court in the case of National Thermal Power Company Ltd. Vs. CIT [(1998) 229 ITR 383 (SC)] we admit this additional ground for disposal on merits.

Disallowance under section 14A - Ground No. 1 to 14

29 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited 10.1 Therefore, to our minds, the addition made by the Assessing Officer by relying upon Section 14 A of the Act, was completely contrary to the provisions of the said Section. 10.2 Mr.Senthil Kumar, who appears for the Revenue, submitted that the Revenue could disallow the expenditure even in such a circumstance by taking recourse to Rule 8D. 10.3 According to us, Rule BD, only provides for a method to determine the amount of expenditure incurred in relation to income, which does not form part of the total income of the Assessee. 10.4 Rule 8 D, in our view, cannot go beyond what is provided in Section 14 A of the Act.

11. Furthermore, we may note that a similar argument was sought to be advanced by the Revenue in the matter concerning, Redington (India) Ltd. v. Addl. CIT (2017) 77 taxmann.com 257 (Mad) which was, subject matter of T.C.A.No.520 of 2016. 11.1 A Co-ordinate Bench of this Court, vide judgment dated 23.12.2016, rejected the plea of the Revenue advanced in that behalf. 11.2 As a matter of fact, a perusal of the judgment would show that the Revenue had sought to argue the because exempt income could be earned in future years, therefore, recourse could be taken to the provisions of Section 14A of the Act, to disallow expenditure. In other words the stand taken by the Revenue was year expenditure under Section 14A could be disallowed against anticipated income. 11.3 Pertinently, the Division Bench in Redington (India) Ltd. (supra) case has repelled this precise argument.

30 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited 12.2 While coming to this conclusion, the Division Bench also took note of the aforementioned Circular, issued by the Board. 12.3 The reasoning of the Division Bench is contained in the following part of the judgment: "4. The admitted position is that no exempt income has been earned by the assessee in the financial year relevant to the assessment year in issue. The order of assessment records a finding of fact to that effect. The issue to be decided thus lies within the short compass of whether a disallowance in terms of s.14A of the Act read with Rule BD of the Rules can be contemplated even in a situation where no exempt income has admittedly been earned by the assessee in the relevant financial year.

32 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited confirmed by the CIT(A) to the tune of Rs. 67,84,065/- is liable to be deleted since the assessee did not earn any exempt income during the year under consideration. With regard to reducing the suo-motu disallowance made by the assessee in the return of income, our findings on the identical issue in AY 2009-10 is mutatis mutandis applicable for the year under consideration also. Accordingly the grounds raised by the assessee in this regard are allowed.

Disallowance towards commission expenditure - Ground No. 15 to 17

ESOP Expenditure – Additional Ground No.1

AY 2011-12

34 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited (ii) Disallowance of Prior period expenditure - Rs. 29,31,276/- (iii) Disallowance on account of commission payment - Rs. 1,07,54,506/- 46. On further appeal, the CIT(A) deleted the disallowance under section 14A to the tune of Rs. 53,98,087/- and partially allowed the prior period expenditure to the tune of Rs. 3,92,675/-. The CIT(A) confirmed the disallowance made by the AO towards commission expenses. Both the assessee and the revenue are in appeal against the order of the CIT(A).

“Additional Ground No. 1: Deduction of expenditure incurred in respect of Employee Stock Option Plan (ESOP):

1) On the facts and in the circumstances of the case and in law, the Appellant prays that deduction in respect of ESOP expenditure of Rs. 3,86,69,933, computed as per fair value method and as disclosed in the Directors' Report, ought to be allowed as a deduction while computing the business income.

2) On the facts and in the circumstances of the case and in law, the Appellant prays that deduction in respect of ESOP expenditure of Rs. 27,61,86,980 ought to be allowed as a deduction while computing the business income in respect of stock options exercised during the year under consideration, computed as the difference between the fair market value as on the date of exercising the options and the exercise price actually received from the employees, which has also been taxed as perquisite in the hands of the employees, and as reduced by the ESOP expenditure based on fair value method allowed to the appellant in respect of the said options in any of the earlier assessment years.

Additional Ground No. 2: Deduction in respect of Education Cess:

3) On the facts and circumstances of the case and in law, the Appellant prays that deduction in respect of education cess on income-tax paid during the year ought to be allowed as a deduction while computing the total income.”

36 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited 51. During the course of hearing, the ld. AR did not press for the admission of additional ground on deduction in respect of education cess. In support of the admission of the additional grounds on ESOP, the ld AR submitted that it involved only adjudication of question of law and no fresh facts were required to be examined. The ld DR did not raise any objection to the admission of additional ground. Keeping into consideration the entire conspectus of the facts and circumstances of the case and the additional ground raised before us we are convinced that its adjudication does not require any fresh investigation of facts and involves only a question of law. Respectfully following the judgement of the Hon’ble Supreme Court in the case of National Thermal Power Company Ltd. Vs. CIT [(1998) 229 ITR 383 (SC)] we admit this additional ground for disposal on merits.

Disallowance under section 14A - Ground No. 1 to 15

ESOP Expenditure – Additional Ground No.1

38 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited down by the Special Bench in the case of Biocon Ltd. (supra) as confirmed by the Hon'ble Karnataka High Court while deciding the issue. The facts for the year under consideration being identical we are of the considered view that the above decision is mutatis mutandis applicable for the year under consideration also. Accordingly, we remit the issue of allowing the claim of ESOP Expenditure back to the AO with similar directions. The additional grounds raised by the assessee in this regard are allowed for statistical purposes.