BAJAJ ELECTRICALS LTD,MUMBAI vs. ADDL CIT 2(1), MUMBAI

Aggrieved the assessee filed further appeal before the CIT(A). The CIT(A) gave partial relief towards the disallowance made under section 14A r.w.r. 8D and confirmed the other additions/disallowances made by the AO. Aggrieved the assessee is in appeal before us contending the following issues:

The assessee vide letter dated 30.04.2015 has raised the following additional ground with regard to disallowance under section 14A.

The assessee vide letter dated 10-04-2017 & 04.12.2018 raised additional ground with regard to ESOP expenses – On the facts and circumstances of the case and in law, the appellant prays that deduction in respect of ESOP expenditure of Rs. 3,36,85,160/-ought to be allowed as a deduction while computing the business income which is computed as the difference between ESOP expenditure as per Fair Value method amounting to Rs.4,95,88,603 and the intrinsic value of Rs.1,59,03,443 debited in the books of account and already allowed to the appellant.

The assessee in the letter dated 04.12.2018 also raised additional ground deduction in respect of education cess. During the course of hearing, the ld. AR did not press for the admission of the said additional grounds. In support of the admission of these additional grounds, 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.

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

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:

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

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).

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.

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.

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.

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.”

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.

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:

On further appeal the CIT(A) confirmed the adhoc disallowance made by the AO stating that the assessee itself is offering the disallowance in the return of income and that it is not fair on the part of the assessee to submit voluminous data before the AO in the last minutes for verification.

The ld. AR submitted that despite furnishing of relevant details the AO without finding any adverse comments on the details furnished chose make adhoc disallowance. The ld. AR further submitted that the AO did not examine the details furnished which included the confirmations, PAN details, copies of income tax returns, etc. which fact has been admitted by the AO himself in the assessment order. The ld. AR also submitted that the claim of the AO that the details furnished

The ld DR on the other hand prayed that the issue may be remitted back to the AO for a denovo examination since the lower authorities have not considered the issue on merits.

We heard the parties and perused the material on record. From the perusal of the AO's findings as extracted in the earlier part of this order, the adhoc

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.

The ld. DR on the other hand submitted that the additional claims of expenditure towards ESOP expenditure made by the assessee before the Tribunal needs to be factually examined and accordingly prayed that the issue may be remitted back to the AO for fresh consideration.

We heard the parties and perused the material on record. We notice that the allowability of the ESOP expenditure at the time of exercise of options by the employees is settled by the decision of the Special Bench of Tribunal as confirmed by the Hon'ble Karnataka High Court in the case of Biocon Ltd (supra) where it has been held that – “11.1.4. Now we take up the second situation in which the options are exercised by the employees after putting in service during the vesting period. In such a scenario, the actual amount of remuneration to the employees would be only the amount of actual discounted premium at the time of exercise of option. The Hon'ble Supreme Court in the case of CIT vs. Infosys Technologies Ltd. (2008) 214 CTR (SC) 293: (2008) 1 DTR (SC) 330: (2008) 297 ITR 167 (SC) relevant to the asst. yrs. 1997-98 to 1999-2000 has held that the allotment of shares to employees under ESOP subject to a lock in period of five years and other conditions could not be treated as a perquisite as there was no benefit and the value of benefit, if any, was unascertainable at the time when options were exercised. The Finance Act, 1999 inserted s. 17(2)(iiia) w.e.f. 1st April, 2000 providing that "the value of any specified security allotted or transferred, directly or indirectly, by any person free of cost or at a concessional rate to an individual who is or has been in employment of that person" shall be treated as a perquisite. It further provides that in a case the allotment or transfer of specified securities is made in pursuance of an option exercised by an individual, the value of the specified securities shall be taxable in the previous year in which such option is exercised by such individual. Such cl. (iiia) was subsequently deleted w.e.f. 1st April, 2001. After certain changes to the relevant provisions in this regard, the position which now stands is that the discount on ESOP is taxable as perquisite under s. 17(2)(vi) for: 'the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the 20 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited assessee'. Clause (c) of Explanation to s. 17(2)(vi) provides that the value of any specified security or sweat equity shares shall be the fair market value of the specified security or sweat equity shares, as the case may be, on the date on which the option is exercised by the assessee as reduced by the amount actually paid by, or recovered from, the assessee in respect of such security or shares". Two things surface from the above provisions. First, that the perquisite arises on the 'allotment' of shares and second, the value of such perquisite is to be computed by considering the fair market value of the shares on 'the date on which the option is exercised' by the assessee as reduced by the amount actually paid. The position that such amount was or was not taxable during some of the years in the hands of the employees is not relevant in considering the occasion and the amount of benefit accruing to the employee under ESOP. Any exemption or the deductibility of an allowance or benefit to employee from taxation does not obliterate the benefit itself. It simply means that the benefit accrued to the assessee but the same did not attract tax. The position has now been clarified beyond doubt by the legislature that the ESOP discount, which is nothing but the reward for services, is a taxable perquisite to the employee at the time of exercise of option, and its valuation is to be done by considering the fair market value of the shares on the date on which the option is exercised.

1.5 The other side of the coin is the amount of remuneration to the employees in the hands of the company. We have noticed earlier that an expense becomes deductible on the incurring of liability under the mercantile system of accounting. Although the stage of taxability of perquisite in the hands of the employee may differ from the stage of the deductibility of expense in the hands of the company depending upon the method of account followed by the company, but the amount of such discount or employees remuneration can never be different. If the value of perquisite in the hands of the employee, whether or not taxable, is 'x', then its cost in the hands of the company has also to be 'x'. It can neither be 'x+1' nor 'x-1'. It is simple and plain that the amount of remuneration which percolates to the employees will always be equal to the amount flowing from the company and such remuneration to the employee in the present context is the amount which he actually becomes entitled to on the exercise of options. Thus, it is palpable that since the remuneration to the employees under the ESOP is the amount of discount w.r.t. the market price of shares at the time of exercise of option, the employees cost in the hands of the company should also be w.r.t. the same base.

1.6 The amount of discount at the stage of granting of options w.r.t. the market price of shares at the time of grant of options is always a tentative employees cost because of the impossibility in correctly visualizing the likely market price of shares at the time of exercise of option by the employees, which, in turn, would reflect the correct employees cost. Since the definite liability is 21 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited incurred during the vesting period, it has to be quantified on some logical basis. It is this market price at the time of the grant of options which is considered for working out the amount of discount during the vesting period. But, since actual amount of employees cost can be precisely determined only at the time of the exercise of option by the employees, the provisional amount of discount availed as deduction during the vesting period needs to be adjusted in the light of the actual discount on the basis of the market price of the shares at the time of exercise of options. It can be done by making suitable northwards or southwards adjustment at the time of exercise of option. This can be explained with the following example with the assumption of vesting period of four years and the benefit vesting at 25 per cent each at the end of 1st to 4th years:

1.7 From the above table it can be noticed that the market price of the shares at the time of grant of option was Rs. 110 against the option price of Rs. 10, which resulted in discount at Rs. 100. With the vesting period of four years with the equal vesting, the company can rightly claim deduction @ Rs. 25 each at the end of first, second, third and fourth year of vesting. But this total deduction for discount of Rs. 100 over the vesting period needs to be adjusted at the time of exercise of option by the employee when the shares are issued. In Situation I, the market price of shares at the time of exercise of option is at Rs. 110, which is similar to the market price at the time of grant of option. As the total amount of discount of Rs. 100 over the vesting period is actually quantified at Rs. 100, no further adjustment to the discount is required at the time of exercise of option. In Situation II, the market price of the share at the time of exercise of option has gone up to Rs. 130. The amount of real compensation to employee is Rs. 120 as against the tentative compensation of Rs. 100 per share which was accounted for and allowed as deduction during the vesting period. As the actual quantification of the compensation has turned out to be Rs. 120, the company is entitled to a further deduction of Rs. 20 at the time of exercise of option. In Situation III, the market price of the share at the time of exercise of option has come down to Rs. 90. The amount of real compensation to employees is Rs. 80 as against the tentative compensation of Rs. 100, which was allowed as deduction during the vesting period. As the actual quantification of the 22 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited compensation has turned out to be Rs. 80, the company is liable to reverse the deduction of Rs. 20 at the time of exercise of option.”

From the perusal of the above observations of Special Bench it is clear that at the time of exercise of options the expenditure towards ESOP needs to be adjusted for the market price of the shares at the time of exercise of option and the amount which is already allowed as a deduction during vesting period. It is also clear that the said adjustment can either be an upward adjustment by way of additional expenditure or a downward adjustment by way of a reversal. Therefore there is merit in the contention of the assessee that the ESOP deduction which is now claimed during the vesting period at Fair Value will automatically adjusted to the market value at the time of exercise of the options by the employees since the perquisite value in the hands of the employees would be calculated based on market value at the time of exercise of options. Now coming to the issue of additional claim of ESOP expenditure, we notice that a similar issue has been considered by the coordinate bench in assessee's own case for AY 2008-09 where it has been held that – 4. Proceeding further on the merit of the case, upon perusal of assessment order as well as appellate order, we concur with the submission of Ld. CIT-DR that the factual matrix with respect to issue of deduction of ESOP expenditure is not available on record and the same was not subject matter of assessment framed by Ld. AO for the year under consideration. Accordingly, while admitting this ground of appeal, we restore the same back to the file of Ld. AO to consider the factual matrix of the same and adjudicate the issue after providing due opportunity of hearing to the assessee. The assessee, in turn, is directed to substantiate his claim accordingly.

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.

The AO has disallowed a sum of Rs. 7,50,568/- claimed by the assessee in the revised return of income for the reason that the said expenditure pertain to earlier AY. The ld. AR in this regard submitted that the lower authorities have not questioned the genuineness of the expenditure and that the same is incurred for the purpose of business and that only reason for denial of deduction is that the expenditure pertains to prior period. The ld. AR therefore argued that it is only a time difference and that the assessee could not claim the expenditure in the respective years for the reasons beyond the control of the assessee. Accordingly, the ld. AR prayed that the expenditure be allowed as a deduction.

The ld. DR relied on the order of the lower authorities.

We heard the parties and perused the material on record. We notice that in the Annexure forming part of Form 3CD the following amounts have been reported as expenditure of prior period debited to the P&L A/c

For AY 2010-11 the assessee filed the return of income on 14.10.2010 declaring total income of Rs. 2,08,73,89,630/-. The Assessing Officer (AO) completed the assessment by making the following disallowances: (i) Disallowance under section 14A r.w.r. 8D

With regard to the appeal filed by the revenue the ld. AR submitted that the tax effect on the said appeal is below the monetary limit for revenue to file appeal before the Tribunal as per CBDT Circular No. 9/2024 dated 17.09.2024. The ld. AR in this regard presented the following table: Particular Amount – Rs. Ground on which department is on appeal for the relief allowed by the order of CIT(A - Disallowance under section 14A 39,58,065 - Disallowance of Prior Period Expenditure 54,83,149 Total Addition in dispute before the Tribunal 94,41,214 Tax on Income at normal rates 28,32,364 Add: Surcharge @10% 2,83,236

We heard the parties and perused the material on record. We notice that the CBDT vide Circular No. 9/2024 dated 17.09.2024 has set the monetary limit of tax effect in the appeals filed by the revenue before the Tribunal to be at Rs.60 lakhs. From the above table we notice that the tax effect of the relief given by the CIT(A) against which the revenue is in appeal before us is Rs. 32,09,069/-. Therefore, there is merit in the contention of the ld. AR that the appeal filed by the revenue is not sustainable. Accordingly, we dismiss the appeal of the revenue on the ground of monetary limit as per Circular No.9/2024. 26 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited ITA 110/Mum/2016 – Assessee's appeal

The assessee raised grounds pertaining to the following issues: (i) Disallowance under section 14A

The assessee vide letter dated 04.12.2018 raised the following additional grounds:

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 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.

During the year under consideration the assessee did not earn any exempt income. However the assessee while filing the return of income has made a suo- motu disallowance of Rs. 2,23,272/- being 50% of the annual salary paid to the employee whose is handling the investment activities. The AO during the course of assessment invoked the provisions of section 14A r.w.r 8D to make the disallowance of Rs. 1,05,10,437/- consisting of disallowance towards interest under Rule 8D(2)(ii) amounting to Rs. 90,39,789/- and under Rule 8D(2)(iii) amounting to Rs. 17,02,920/-. Before the CIT(A) the assessee submitted that since the assessee has not earned any exempt income no disallowance under section 14A is warranted. The assessee without prejudice submitted a revised working of disallowance under section 14A to the tune of Rs. 67,84,605/-. The CIT(A) did not accept the submission of the assessee that no disallowance can be made under section 14A for the reason that the investments made by the assessee are capable of generating exempt income and hence the expenditure has to be disallowed. The CIT(A) however gave partial relief by accepting the revised computation of disallowance submitted by the assessee and accordingly revised the disallowance to Rs. 67,84,065/-.

The ld. AR submitted that the assessee has not earned any exempt income and therefore the CIT(A) is not correct in upholding the disallowance partially on the 28 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited ground that the investments are capable of earning exempt income. In this regard the ld. AR placed reliance on the decision of the Hon'ble Madras High Court in the case of CIT vs. Chettinad Logistics (P.) Ltd [2017] 80 taxmann.com 221 (Mad). With regard to the contention of the ld. DR that the Circular of the Board 5/2014 dated 11.02.2014 is applicable in assessee's case, the ld. AR submitted that the Hon'ble Madras High Court in the above judgments has considered the said Circular and held that no disallowance is warranted when the assessee has not earned any exempt income.

We heard the parties and perused the material on record. It is an undisputed fact that during the year under consideration the assessee has not earned any exempt income. Though in the return of income the assessee has made a suo-motu disallowance of Rs. 2,23,272/- it is contended before us that no disallowance under section 14A r.w.r 8D can be made in the year since the assessee has not earned any exempt income. In this regard we notice that the Hon'ble Madras High Court has considered a similar issue where it has been held that “8. According to us, this exercise, in the given facts which emerge from the record, was clearly unnecessary, as the CIT(A) had returned the finding of fact that no dividend had been earned in the relevant assessment year, with which, we are concerned, in the present appeal.

In our opinion Section 14 A of the Act, can only be triggered, if, the Assessee seeks to square off expenditure against income which does not form part of the total income under the Act.

1 The legislature, in order to do away with the pernicious practice adopted by the Assessees', to claim expenditure, against income exempt from tax, introduced the said provision.

In the instant case, there is no dispute that no income i.e., dividend, which did not form part of total income of the Assessee was earned in the relevant assessment year.

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.

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.

4 Rule 8 D, in our view, cannot go beyond what is provided in Section 14 A of the Act.

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.

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.

3 Pertinently, the Division Bench in Redington (India) Ltd. (supra) case has repelled this precise argument.

The Division Bench, in our view, quiet correctly held that, the computation of total income, in terms of Section 5 of the Act, is made qua real income and not, vis-a-vis, notional income.

1 The Division Bench went on to hold that Section 4 of the Act brings to tax, that income, which is relatable to the assessment year in issue. The Division Bench, thus, held that where no exempt income is earned in the previous year, relevant to the assessment year in issue, provisions of Section 14 A of the Act, read with Rule 8 D could not be invoked.

3 The reasoning of the Division Bench is contained in the following part of the judgment:

Per contra, Sri. T. Ravikumar appearing on behalf of the revenue drew our attention to the marginal notes of s.14 A pointing out that the provision would apply not only where exempted income is included in the total income, but also where exempt income is 'includable' in total income.

He relied upon a Circular issued by the Central Board of Direct taxes in Circular No.5 of 2014 dated 11.2.2014 to the effect that s.14A was intended to cover even those situations whether there is a possibility of exempt income being earned in future. The Circular, at paragraph 4, states that it is not necessary for exempt income to have been included in the income of a particular year for the disallowance to be triggered. According to the Learned Standing Counsel, the provisions of s.14A are made applicable, in terms of sub section (1) thereof to income 'under the act and not 'of the year' and a disallowance under s.14A r.w.Rule 8D can thus be effected even in a situation where a tax payer has not earned any taxable income in a particular year.

We are unable to subscribe to the aforesaid view. The provisions of section 14A were inserted as a response to the judgments of the Supreme Court in Commissioner of Income Tax v. Maharashtra Sugar Mills Limited [1971] 82 ITR 452 and Rajasthan State Ware Housing Corporation v. Commissioner of Income-tax [2002] 242 ITR 450 in terms of which, expenditure incurred by an assessee carrying on a composite business giving rise to both taxable as well as non-taxable income, was allowable in entirety without apportionment. It was thus that s.14A was inserted providing that no deduction shall be allowable in respect of expenditure incurred in relation to the earning of income exempt from taxation. As observed by the Supreme Court in the judgment in the case of Commissioner of Income-tax v. Walfort Share and Stock Brokers (P) Ltd. [2010] 326 ITR 1

The provision this is clearly relatable to the earning of actual income and not notional or anticipated income. The submission of the Department to the effect that s.14A would be attracted even to exempt income includable' in total income would entail the assessment of notional income, assumed to be exempt in the future, in the present assessment year. The computation of total income in terms of s.5 of the Act is on real income and there is no sanction in law for the assessment of admittedly notional income, particularly in the context of effecting a disallowance in connection therewith.

The computation of disallowance in terms of Rule 8D is by way of a determination involving direct as well as indirect attribution. Thus, accepting the submission of the Revenue would result in the imposition of an artificial method of computation on notional and assumed income. We believe this would be carrying the artifice too far. (emphasis is ours)"

Mr.Senthil Kumar, seeks to distinguish the judgment in Redington (India) Ltd. case (supro) based on the fact that Rule 8D had not kicked-in by AY 2007- 08, which was the AY being considered in the said case.

According to us, this was not the argument, put forth, before the Division Bench. As a matter of fact, the Revenue relied heavily on Rule 8D.

1 Mr.Ravikumar, who appeared for the Revenue, in that matter and who is present in this Court, informs us that he had in fact argued that the Rule was clarifactory in nature and would apply retrospectively, and that, the Division Bench, therefore, discussed the impact of Rule 8D of the Rules.

However, it is, our view, as indicated above, independent of the reasoning given in Redington (India) Ltd. case (supra) that Rule 8D cannot be read in a manner, which takes it beyond the scope and content of the main provision, which is, Section 14 A of the Act.

The ratio as laid down by the Hon'ble High Court is that the disallowance under section 14A r.w.r 8D is not warranted in the year in which the assessee has not earned any exempt income. Accordingly we hold that the disallowance

During the year under consideration the assessee has debited commission expenditure of Rs. 17,61,11,105/-. The AO following the earlier year decision years made an adhoc disallowance of Rs. 3,60,61,410/- as per below working:

We heard the parties and perused the material on record. The ld. AR presented similar arguments with regard to the commission expenditure and prayed that the issue may be remitted back to the AO with a direction to disallow only the commission paid those vendors which the AO disallowed in the earlier years. The ld AR also submitted a table with the list of vendors and the commission paid as done in the AY 2009-10. We have while deciding the similar issue for AY 2009-10 has remitted the issue back to the AO with a direction to examine the details of the 33 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited vendors using the similar basis as applied for examining details of vendors in earlier years. Since the facts are being identical for the year under consideration also, we are remitting the impugned issue for the year under consideration also back to the AO with similar directions. It is ordered accordingly. The grounds raised by the assessee are allowed for statistical purposes.

The assessee through additional ground is making an additional claim towards ESOP Expenditure to the tune of Rs. 7,48,12,990/- based on the Fair Market Value. We have for AY 2009-10 while considering the similar issues have remitted it back to the AO with a direction to examine the claim of the assessee based on facts and allow the claim in accordance with law. We have further directed the AO to keep in mind the ratio laid down by the Special Bench in the case of Biocon Ltd. (supra) as confirmed by the Hon'ble Karnataka High Court while deciding the impugned 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.

The assessee for the AY 2011-12 filed the return of income on 30.09.2011 declaring a total income of Rs. 222,02,63,290/-. Subsequently the assessee filed the revised return on 28.03.2013 declaring a total income of Rs. 221,78,42,097/-. The AO complete the assessment by making the following disallowance: (i) Disallowance under section 14A r.w.r. 8D - Rs. 84,68,874/-

We heard the parties and perused the material on record. We notice that the CBDT vide Circular No. 9/2024 dated 17.09.2024 has set the monetary limit of tax effect in the appeals filed by the revenue before the Tribunal to be at Rs.60 lakhs. From the above table we notice that the tax effect of the relief given by the CIT(A) against which the revenue is in appeal before us is Rs. 19,23,546/-. Therefore, there is merit in the contention of the ld. AR that the appeal filed by the revenue is not 35 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited sustainable. Accordingly, we dismiss the appeal of the revenue on the ground of monetary limit as per Circular No.9/2024. 49. The assessee raised grounds pertaining to the following issues: (i) Disallowance under section 14A

The assessee vide letter dated 04.12.2018 raised the following additional grounds:

During the year under consideration the assessee has earned a dividend income of Rs. 9,23,680/- and the assessee has made a suo-motu disallowance of Rs. 2,12,188/-. The AO invoked the provisions of section 14A r.w.r 8D to make a disallowance of Rs. 86,81,062/-. On further appeal the CIT(A) restricted the disallowance to Rs. 32,82,975/-.

We heard the parties and perused the material on record. The ld. AR submitted that the facts pertaining to the impugned issue are identical to the facts in AY 2009-10. We have while deciding the issue in AY 2009-10 have held that no disallowance towards interest under Rule 8D(2)(ii) is warranted since own funds of the assessee are more than the investments earning exempt income. We further held that for the purpose of disallowance under Rule 8D(2)(iii) the investments which are earning exempt income only need to be considered by placing reliance on the 37 ITA 4172/M/13-5749-5750/M/15-110- 111/M/16 Bajaj Electricals Limited decision of the Special Bench in the case of Vireet Investments P. Ltd. (supra). On perusal of the facts pertaining to the year under consideration, we notice that the shareholders funds as of 31.03.2011 is at Rs. 61,111.01 lakhs (page 68 of PB) and the investments are less than the shareholders funds. Accordingly our decision regarding disallowance under Rule 8D(2)(ii) towards interest is mutatis mutandis applicable for the year under consideration also. Regarding the disallowance under Rule 8D(2)(iii) respectfully following the decision of Special Bench in the case of Vireet Investments P. Ltd. (supra) we direct the AO to consider only those investments which are earning exempt income to recomputed the disallowance. It is ordered accordingly. The grounds raised by the assessee in this regard are thus allowed.

Ground No. 16 to 18 and 19 to 22 - On perusal of facts pertaining to the disallowance made towards commission expenses and prior period expenditure, we notice that the facts are identical to AY 2009-10 and therefore in our considered view our decision on the impugned issues in AY 2009-10 is mutatis mutandis applicable to the year under consideration also. Accordingly we remit the impugned issue back to the AO with similar directions. The grounds raised by the assessee in this regard are allowed for statistical purposes.

The assessee through additional ground is making an additional claim towards ESOP Expenditure to the tune of Rs. 7,48,12,990/- based on the Fair Market Value (FMV) as on the date of exercising the options. We have for AY 2009-10 while considering the similar issue have remitted the issue back to the AO with a direction to examine the claim of the assessee based on facts and allow the claim in accordance with law. We have further directed the AO to keep in mind the ratio laid

In result the appeal of the assessee for AY 2009-10, 2010-11 & 2011-12 are partly allowed. The appeal of the revenue for AY 2010-11 & 2011-12 are dismissed.