Loading judgment…
Facts
The Revenue filed an appeal against the CIT(A)'s order deleting additions made under Section 14A and allowing ESOP expenses. The Assessing Officer (AO) disallowed expenses under Section 14A and disallowed ESOP expenses as capital in nature. The CIT(A) deleted the disallowance under Section 14A, holding it should be restricted to exempt income and that the explanation added by the Finance Act 2022 was prospective. The CIT(A) also allowed ESOP expenses as revenue expenditure.
Held
The Tribunal held that disallowance under Section 14A is limited to the amount of exempt income earned and that the explanation inserted by the Finance Act 2022 is prospective. The Tribunal also held that ESOP expenses are allowable as revenue expenditure under Section 37(1) of the Act.
Key Issues
1. Whether disallowance under Section 14A is limited to exempt income earned and if the explanation to Section 14A is applicable retrospectively. 2. Whether ESOP expenses are revenue or capital expenditure.
Sections Cited
14A, 143(3), 37(1)
AI-generated summary — verify with the full judgment below
Detected automatically from the text. The count shows how many other judgments on BharatTax rely on the same authority.
Before: SHRI NARENDER KUMAR CHOUDHRY & SHRI PRABHASH SHANKAR
PER PRABHASH SHANKAR [A.M.] :- The present appeal arising from the appellate order dated 07.02.2024 is filed by the Revenue against the order passed by the Ld. Commissioner of Income-tax,(Central), CIT(A) 54,Mumbai [hereinafter referred to as “CIT(A)”] pertaining to assessment order passed u/s. 143(3) of the Income-tax Act, 1961 [hereinafter referred to as “Act”] dated 24.07.2021 for the Assessment Year [A.Y.] 2018-19. P a g e | 2 A.Y. 2018-19 Indiabulls Real Estate Limited
The grounds of appeal are as under:-
Whether on the facts and in the circumstances of the case and in law, the ld.CIT(A) has erred in deleting the addition u/s. 14A of the Act by ignoring that as per explanation inserted by Finance Act 2022, the provisions of section 14A shall apply and shall be deemed to have always applied in a case where the income, not forming the part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income?” 2. “Whether, on the facts and in the circumstances of the case and in law, the Ld CIT(A) has erred in allowing the claim of ESOP expenses without appreciating that by issuing shares at below the market price, the assessee company has not incurred any revenue expenditure, rather it resulted in short receipt of share premium which the assessee was otherwise entitled to, on capital account?” 3. “Whether, on the facts and in the circumstances of the case and in law the Ld. CIT(A) has erred in allowing the claim of ESOP expenses without appreciating that as the receipt of share premium is not taxable, any short receipt of such premium will only be a notional loss and not actual loss requiring any deduction, hence, incurring of such notional loss cannot be considered as expenditure within the meaning of section 37(1) of the become tax Act, 1961, as there was no “spending” or “paying out or away?”
The first issue relates to disallowance made under section 14A of the Act. During the assessment proceedings, the AO observed from the financial statement that the non-current investment in equity shares had been raised to Rs.5117,21,42,000/- as on 31.03.2018 from Rs.4533,38,64,000/- as on 31.03.2017 and as per the financial statements for the year the current investment in mutual funds had been raised to Rs.284,38,84,000/- as on 31.03.2018 from Rs.76,90,86,000/- as on 31.03.2017. The assessee had made a voluntary disallowance of only Rs.83,33,333/- u/s 14A of the Act which was rejected by him. Accordingly,he computed the disallowance u/s.14A r.w.r 8D at Rs.27,53,07,768/-.
P a g e | 3 A.Y. 2018-19 Indiabulls Real Estate Limited 4. Before the ld.CIT(A),the assessee pleaded that the investments that did not earn any exempt income during the year could not be included for computing average investment u/r 8D. The ld.CIT(A) observed that it is now settled that disallowance u/s 14A can be made only when the assessee has actually incurred an expenditure in relation to earning of exempt income. This is as per the ratio of the decisions laid out by the Hon’ble Courts in the cases of Maxopp Investment (15 Taxmann.com 390) (Delhi HC), Cheminvest Ltd (ITA No 749/2014) (Delhi HC) and Hero Cycles Ltd (323 ITR 518) (P & H HC). Once it is found that the assessee has incurred an expenditure in relation to earning of exempt income, the quantum of disallowance u/s 14A can be computed by the AO by applying rule 8D, if the AO is not satisfied with the correctness of the claim made by the assessee as regard the quantum of disallowance offered by it. He found no infirmity in the action of the AO in invoking the provisions of section 14A r.w.r 8D in the present case. However, he further observed that it is now also a settled legal position that disallowance u/s 14A is to be restricted to the exempt income earned during the year. The AO has mentioned that the exempt income earned during the year is only Rs. 5,06,52,261/-. It is further noted by him that when there is no exempt income or the exempt income is less than the disallowance calculated as per rule 8D,
P a g e | 4 A.Y. 2018-19 Indiabulls Real Estate Limited the various Judicial Authorities have held that disallowance u/s 14A cannot exceed the exempt income. It is now settled by the recent decision of the Hon’ble Supreme Court dated 02.07.2018 in the case of Chettinad Logistics P. Ltd. (95 taxmann.com 250) wherein the Revenue SLP against the decision of the Hon’ble Madras High Court (80 taxmann.com 221) has not been admitted. In this case, the Hon’ble Madras High Court held that Rule 8D cannot over-ride the provisions of sec. 14A. The Hon’ble Madras Court held that if provisions of section 14A itself are not applicable, then there is no question of invoking Rule 8D and computing the disallowance. It was held by the Hon’ble High Court that the provisions of sec. 14A cannot be invoked if no exempt income has been earned for the relevant year. The Hon’ble Bombay High Court in the case of M/s. Nirved Traders Pvt. Ltd. (ITA No. 149 of 2017) in their decision dated 23.04.2019 approved the claim that the disallowance under section 14A was to be restricted to the tax-exempt income earned during the year. Accordingly, the ld.CIT(A) held that the disallowance made by the AO u/s 14A has to in any case be restricted to the extent of the exempt income earned. He further held that the Explanation introduced in the section was not applicable during the year.He also directed the AO to follow the decision of the Special Bench of Hon’ble ITAT Delhi in the case of ACIT v.
P a g e | 5 A.Y. 2018-19 Indiabulls Real Estate Limited Vireet Investment (P.) Ltd. [2017] 82 taxmann.com 415 (Delhi - Trib.) (SB) as also the decision of the juri ictional Mumbai ITAT in the case Excel Industries Ltd. in ITA No. 5472/Mum/2017 (Order dated 09.01.2023), which lay down that investments that yielded exempt income during the year only have to be considered for computing average investment for the purpose of rule 8D. However, since the assessee had not given any bifurcation of investment that earned exempt income and that did not, the quantification of average investment that yielded exempt income was not possible. Accordingly, the assessee was directed to give bifurcation of investment that earned exempt income and that did not result into exempt income to the AO who was,in turn directed to compute disallowance u/s 14A taking average investment of those investments that have yielded the exempt income. The disallowance so calculated shall in any case not exceed the exempt income earned by the assessee.
We find that the ld.CIT(A) has dealt with the matter at length and has taken into consideration the legal position vis-a-vis the provisions of section 14A r.w. Rule 8D.Therefore,there is absolutely no infirmity in the order. We find that in the grounds of appeal, the Revenue has basically agitated the conclusion of the ld.CIT(A) that the Explanation inserted in the section w.e.f.01.04.2022 vide Finance Act
P a g e | 6 A.Y. 2018-19 Indiabulls Real Estate Limited 2022 was prospective and did not apply to the year under consideration. In 2022, the Parliament enacted a significant amendment to s.14A of the Act, incorporating a non-obstante clause and an explanatory provision to state that the section applies even if the exempt income is absent during the relevant year. This amendment became effective on 01.04.2022 and does not apply retrospectively. Regarding the applicability of explanation introduced in section 14A vide the Finance Act, 2022 w.e.f 01.04.2022, the Hon'ble Delhi High Court in the case of Era Infrastructure (India) Ltd. (2022) 141 taxman.com 289 (Delhi) held that explanation introduced in sec. 14A is prospective in nature, therefore, no disallowance could be made u/s 14A if there is no exempt income earned prior to assessment year 2022-23. The legislative intent behind insertion of the aforesaid Explanation to section 14A of the Act was to clarify that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such exempt income. The co- ordinate bench of ITAT Mumbai vide its order dated 29.06.2022 in the case of Bajaj Capital Ventures (P) Ltd. (2022) 141 taxmann.com
P a g e | 7 A.Y. 2018-19 Indiabulls Real Estate Limited 1 (Mumbai-Trib) has similarly held that the amendment by way of insertion of the aforesaid explanation was prospective in nature. The hon’ble High Court of Madhya Pradesh has also held the prospective applicability of the amendment to s.14A of the Act in the case of the Pr. CIT v. Keti Construction Ltd. 162 taxmann.com 278(2024).
In view of the above discussion, we hold that there is no merit in the ground of the Revenue which is therefore, dismissed.
Both the grounds no.3 and 4 pertain to the sole issue of claim of ESOP expenses u/s 37(1) of the Act. The brief facts of the case are that the assessee, in its return of income, had claimed ESOP expenses of Rs. 5,72,82,778/-. The Ld. AO held that this expenditure was not in the nature of revenue expenditure as the same had been incurred towards raising share capital and was, therefore, capital in nature. Accordingly, the entire claim was added to the total income of the assessee.
The Ld. CIT(A), following the orders of his predecessors as well as of the co-ordinate Mumbai ITAT bench in assessee’s own case, held the ESOP expenses to be allowable expenses u/s 37(1) of the Act and allowed the appeal of the assessee with the following observations:
P a g e | 8 A.Y. 2018-19 Indiabulls Real Estate Limited “5.5
Respectfully following the earlier orders of the CIT(A) and the Hon'ble Mumbai ITAT in the assessee's own case, the ESOP expenses are held to be allowable expenses u/s 37(1) of the Act. However, as also directed by the Hon'ble ITAT in AY 2012-13, the AO is directed to carry out the arithmetic calculation of apportioning the year wise discount over the period of vesting taking into consideration the options granted to the employees and determination of the perk value and allow the same as per the provisions of the Income Tax Act 1961. This ground of appeal is thus allowed for statistical purposes.”
We find that the issue is now well settled as the Special Bench of ITAT, Bangalore in the case of Biocon Ltd. has also decided the issue in favour of the assessee. There have been numerous other decisions including that of the Delhi High court in the case of Lemon Tree Hotels Ltd. as well as of various co-ordinate benches of the Tribunal across the country wherein this issue has been decided in favour of the assessee. The Ld. DR has placed reliance on the assessment order. Respectfully following the order of the co-ordinate bench in the assessee's own case for AY 2012-13, we hereby uphold the order of the Ld. CIT(A) and direct the AO to carry out the arithmetical calculation of apportioning the year wise discount over the period vesting, taking into consideration, the options granted the employees, determination of the perk value etc. and allow the same as per the provisions of the Act.
Accordingly, the Revenue’s appeal is dismissed.
Order pronounced in the open court on 10.03.2025. NARENDER KUMAR CHOUDHRY PRABHASH SHANKAR (न्याययक सदस्य /JUDICIAL MEMBER) (लेखाकार सदस्य/ACCOUNTANT MEMBER)
P a g e | 9 A.Y. 2018-19 Indiabulls Real Estate Limited Place: म ुंबई/Mumbai ददनाुंक /Date 10.03.2025 Lubhna Shaikh / Steno
आदेश की प्रयियलयि अग्रेयिि/Copy of the Order forwarded to : 1. अपीलार्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आयुक्त / CIT 4. विभागीय प्रविविवि, आयकर अपीलीय अविकरण DR, ITAT, Mumbai 5. गार्ड फाईल / Guard file.
सत्यावपि प्रवि //// आदेशानुसार/ BY ORDER,
उि/सहायक िंजीकार (Dy./Asstt.