ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1(1)(1), AHMEDABAD, AHMEDABAD vs. ARVIND LIMITED, AHMEDABAD

4. Aggrieved by the order of the ld. CIT(A), the assessee and Revenue, both are in appeal before the Tribunal. The Revenue is in appeal against the relief allowed by the ld. CIT(A) while the assessee is in appeal against the addition sustained by the CIT(A). – Assessee’s appeal 5. The grounds raised

in this appeal are as follows:-

1. In law and in the facts and circumstances of the appellant's case, the Ld. CIT(A) has grossly erred in ordering that the disallowance of 14A r.w.r. 8D of the Act should be restricted considering investments, which have yielded exempt income during the year under consideration instead of deleting the entire disallowance made by the Assessing Officer as appellant has already made disallowance u/s 14A of the Act while filling Return of Income. & 466/Ahd/2024 Assessee : Arvind Limited Asst. Year : 2018-19 - 3–

2. In law and in the facts and circumstances of the appellant's case, the Ld. CIT(A) has grossly erred in upholding upward adjustment of Rs.23,51,235/- being interest on loan given to AEs when interest charged by Appellant is at arms' length price as elaborately explained in written submission. 2.1 In law and in the facts and circumstances of the appellant's case, the Ld. CIT(A) has grossly erred in not following decision of Hon'ble Ahmedabad ITAT in Appellant's own case for AY 2008-09 in dated 26-05-2023 wherein interest rate of foreign loan considering LIBOR plus 2.5% is considered as reasonable rate for the purpose of determining ALP and interest charged by Appellant in year under consideration is within such parameters. 2.2 In law and in the facts and circumstances of the appellant's case, the Ld. CIT(A) has grossly erred in holding that while applying filter to the loan connected data base, there was no requirement for applying one more filter "primary purpose" meaning thereby comparable interest rate on loan given to AE for specific purpose such as acquisition, takeover or dividend recapitalization should be excluded and only general corporate loan should be considered. 2.3 In law and in the facts and circumstances of the appellant's case, the Ld. CIT(A) has erred in upholding TPO's working for computing ALP of interest charged on AE by considering forex risk 100 point BPS. Ld CIT(A) ought to have appreciated that comparable loan instances obtained from global data base which includes loan obtained in specific region/country by domestic companies, the spread rate already has considered impact of forex risk and other relevant risks.

3. In law and in the facts and circumstances of the appellant's case, the Ld. CIT(A) has erred in upholding upward adjustment of Rs.30,008/-relating to share application money and subsequently shares were allotted. Ld. CIT(A) ought to have appreciated that share application is not loan transaction but it is in nature of quasi capital under TP regulation for which no further adjustment is required. 4. In law and in the facts and circumstances of the appellant's case, the Ld. CIT(A) ought to have deleted entire disallowance of deduction claimed u/s. 35(2AB) of the Act amounting to Rs. 58,36,15,599/- as same was already approved by DSIR in Form 3CL before the date of passing of assessment order instead of directing Assessing Officer to pass rectification order pursuant to rectification application filed by Appellant on similar ground. 5. In law and in the fact and circumstances of the case, the Ld. CIT(A) has erred in rejecting additional claim made during the course of assessment ITA No. 349 & 466/Ahd/2024 Assessee : Arvind Limited Asst. Year : 2018-19 - 4– proceedings/appellate proceedings even though all the facts relating to such claim was on record of Assessing Officer and claim so made is within four corners of the law. The Ld. CIT(A) ought to have appreciated that assessee is liable for taxation on correct taxable income. 5.1 In law and in the fact and circumstances of the case, the Ld. CIT(A) ought to have appreciated that when the assessee is entitled to any lawful claim, denial of the same on account of technicalities would result into levying and collecting more tax than sanctioned by law, which is violative of Article 265 of Constitution of India.

6. In law and in the facts and circumstances of the appellant's case, the Ld. CIT(A) has grossly erred in not allowing additional claim for deduction on account of ESOP amounting to Rs. 1,77,40,250/- when such claim left out to be made in original/revised return of income due to arithmetical error and entire working of ESOP is supported by judicial pronouncements referred in Appellant's submission and relied upon by ld. CIT(A) while deleting disallowance of ESOP expenses claimed in the return of income.

7. In law and in the facts and circumstances of the appellant's case, the Ld. CIT(A) has grossly erred in not allowing additional claim resulting into reduction of long term capital gain by Rs.21,62,670/-. The Id. CIT(A) ought to have appreciated that there was arithmetical error while computing income from long term capital gain in return of income which was demonstrated in written submission filed before Assessing Officer as well as CIT(A).

8. In law and in the facts and circumstances of the appellant's case, the Ld. CIT(A) has grossly erred in not allowing additional claim in respect of reduction of notional interest income of Rs. 37,76,627/- credited to the appellant’s Profit and Loss Account, when the said amount, not being real income, is not chargeable to tax.”

2. Whether the CIT(A) has justified in law and on facts in allowing the deduction of ESOP of Rs. 71,39,194/-claimed by the assessee in the P&L account, merely only on the basis of the SEBI Guidelines when the deduction is not permissible under the income-tax Act unless a liability has either been paid or arisen during the year?"

Ground No. 1 – Disallowance u/s 14A r.w.r 8D

On appeal before the Ld.CIT(A), the Ld. CIT(A) directed the Assessing Officer to verify the records and recompute the disallowance u/s 14A r.w.r. 8D, considering only such investments, which have yielded exempt income during the year under consideration.

7.1 Before us, the Ld. AR submitted that as per the directions of the Ld. CIT(A) the Assessing Officer, in order giving effect to the CIT(A) order, deleted the disallowance of Rs.6,37,67,430/- and confirmed Rs.23,77,260/- and with respect to this, the Ld. AR contended that the investments were not made for the purpose of earning exempt income and those investments were made as part of expansion & 466/Ahd/2024 Assessee : Arvind Limited Asst. Year : 2018-19 - 6– of assessee’s own business. The Ld AR submitted that the exempt income is ancillary to the main objective of the investments made in the group/subsidiary companies. With regards to the disallowance of expenditure, the assessee company submits that since all investments are long-term strategic investments in group/subsidiary' companies and joint ventures, these investments do not require constant monitoring and therefore, no major efforts are required for the same. Ld. AR also submitted that no specific attempt was required for earning dividend income, accordingly, no part of the administrative expenses was attributable to exempt income. Thus, the entire administrative and other expenditure are incurred for the purpose of business only and not for the purpose of making investments resulting into tax free income.

The Ld. AR argued that the assessee has identified the expenditure incurred for the investment activities yielding tax free income and accordingly, the assessee has disallowed Rs. 41,48,310/- while filing the return of income as per the working already provided. The Ld. AR submitted that the said expenses are separately identified in respect of persons engaged in work relating to investments and resources utilized for such activities. It was argued that all the actual expenses relating the investment activities yielding exempt income has already been disallowed while computing the total income of the appellant company. The Ld. AR submitted that Rs. 41,48,310/- has rightly been disallowed u/s 14A while computing the business income and that no other expenditure has been incurred during the year under consideration which is attributable to earning of exempt income.

7.2 The Ld. DR, on the other hand, supported the order of the Assessing Officer. Ld.DR argued that the assesses has earned exempt income u/s. 10 of the Act to the extent of Rs. 5,17,61,551 /- and the source of investment for earning income was out of borrowed funds, as the balance-sheet of the assessee prima-facie reflects that equity and share capital of the company has already utilized to meet the & 466/Ahd/2024 Assessee : Arvind Limited Asst. Year : 2018-19 - 7– requirements to the extent of fixed assets i.e. property and plant and machinery. Therefore, it is clear that the investments in shares have been made out of interest-bearing funds and thus there is direct nexus between the exempt income and expenditure incurred. The Ld. DR relied on the judgment of the Hon’ble High Court of Allahabad in the case of CIT Vs. Subrata Roy (219 Taxman 0133) wherein it was held that interest on borrowed funds cannot be allowed on investment which are note exclusively and wholly for the purposes of business, having no chance to receive any pecuniary benefits and are colorable devises for tax evasion. The Ld. DR argued that the assessee has made investments in unlisted equities, preference shares, other investments etc. out of interest-bearing funds as the equity and share capital of the assessee only suffice the investment in fixed assets i.e., property and plant and machinery, hence the provisions of Sec. 14A read with rule 8D are squarely applicable in the case of assessee company and the disallowance u/s.14A read with rule 8D towards expenditure made by the assessee is not sufficient to cover the investment to raise exempt income.

7.3 Having heard the rival contentions and perused the material available on record, we find that the investments have been made in the (group) companies to the tune of Rs.883 Crores. The assessee had share capital of Rs.258 Crores and Reserves & Surplus of Rs.2899 Crores, totaling to Rs. 3158 Crores of own resources/funds. The assessee has earned passive income earned out of the investments in (Group) various companies.

7.4 Since the assessee had enough own resources in the form of share capital, reserves and surplus to the tune of Rs.3158 crores and investments were only to the tune of Rs.883 crores, it is by now judicially established to presume that own funds have been utilized for the dividend yielding investments. Hence, no disallowance on account of interest is required to be made. The assessee had not made any continuous efforts to earn the dividend and also worked out the power, & 466/Ahd/2024 Assessee : Arvind Limited Asst. Year : 2018-19 - 8– salary, printing & stationary, legal and secretarial expenses which are exclusively utilized for earning of exempt income.

Hence, we hold that disallowance of Rs.41.48 lakhs would suffice the expenses incurred in earning the exempt income of Rs.5.17 crores. The decision of the Assessing Officer to determine total disallowance of Rs. 7.02 crore for earning exempt income of Rs.5.17 crores cannot be supported.

In the result, the appeal of the assessee on this ground is allowed.

Ground No. 2 & 3 – Upward adjustments

8.2 The Ld. DR, on the other hand, supported the order of the authorities below.

ITA No. 349 & 466/Ahd/2024 Assessee : Arvind Limited Asst. Year : 2018-19 - 10– 8.3 We have heard the rival contentions and perused the material available on record. We find that the Tribunal has considered LIBOR + 2.5% as appropriate for AY 2008-09 in in assessee’s own case, hence keeping in view the interest charged by the assessee, we hold that no further adjustment is required on this issue.

The appeal of the assessee on these grounds are allowed.

Ground No. 4 - Deduction u/s 35(2AB)

Ground No. 5 – Additional claim made by the assessee Ground No. 6 – Deduction on account of ESOP – Rs. 4,90,35,650/- Assessee’s appeal & Ground No.1 – Deduction of ESOP – Rs.3,12,95,400/-, Ground No.2 - Deduction of ESOP of Rs. 71,39,194/- Revenue’s Appeal

10.1 The Ld. CIT(A) held that ESOP benefits are taxable as perquisite and form part of employee's salary income. The employer is required to withhold tax at source in respect of such perquisite. The perquisite value is computed as the difference between the FMV of the share on the date of exercise and the exercise price. According to provisions of section 17(2) of the Act, said item is taxable in & 466/Ahd/2024 Assessee : Arvind Limited Asst. Year : 2018-19 - 11– the hands of employees as Perquisite. The Ld. CIT(A) reversed the order of the Assessing Officer holding that if the appellant company is not allowed the deduction of expenditure i.e. “perquisite value” on which the employee has already paid the taxes, it would result into double taxation, which is completely against the principles of natural justice.

10.2 Aggrieved, the Revenue is in appeal before us against the deletion of Rs. 3,12,95,400/-. The assessee is in appeal arguing that the expenditure incurred was not Rs. 3,12,95,400/-, but in reality, the amount was Rs. 4,90,35,650/- and prayed that the entire expenditure incurred in ESOPs be allowed.

10.3 It was argued that, during the assessment proceedings, the assessee presented an additional claim for certain deductions and benefits, which was based on facts and evidence already present in the Assessing Officer's records. The Assessing Officer did not allow such claim relying on the judgment of the Hon’ble Apex Court in the case of Goetze (India) Ltd. vs CIT, 284 ITR 323. The same reads as under:-

“2. The question raised in this appeal relates to whether the appellant assessee could make a claim for deduction other than by filing a revised return. The assessment year in question was 1995-96. The return was filed on 30-11-1995, by the appellant for the assessment year in question. On 12- 1-1998, the appellant sought to claim a deduction by way of a letter before the assessing officer. The deduction was disallowed by the assessing officer on the ground that there was no provision under the Income Tax Act to make amendment in the return of income by modifying an application at the assessment stage without revising the return.

3. This appellant's appeal before the Commissioner (Appeals) was allowed. However, the order of the further appeal of the department before the Income Tax Appellate Tribunal was allowed. The appellant has approached this court and has submitted that the Tribunal was wrong in upholding the assessing officer's order. He has relied upon the decision of this court in National Thermal Power Company Ltd. v. CIT (1998) 229 ITR 383, to contend that it was open to the assessee to raise the points of law even before the Appellate Tribunal. & 466/Ahd/2024 Assessee : Arvind Limited Asst. Year : 2018-19 - 12–

10.4 When the assessee reiterated such claim during the appellate proceedings, the CIT (A) rejected it relying on the same judgement.

10.5 Before us, the Ld. AR argued that the principle of assessing the correct taxable income should take precedence over procedural technicalities. It was argued that the denial of valid substantial claim will result in incorrect assessment of the taxable income.

10.6 Heard both the parties and the material available on record.

The admissibility of a claim which is not made by filing of revised return before assessing officer/appellate authority, have always been a contentious issue. There are various judicial pronouncements that support the contention that an additional claim not claimed in the return of income can be raised before the appellate authorities, even if it has not been raised before the Assessing Officer. The normal procedure envisages that an assessee is required to file his return of income, u/s. 139(1), before the due date specified. In case the assessee discovers any omission or any wrong statement in such return of income, they can file a revised return before the expiry of one year from the end of the relevant assessment year, or before the completion of assessment, whichever is earlier, in accordance with the provisions of section 139(5). Infrequently, the assessee discovers a mistake or omission in the return of income after the expiry of the & 466/Ahd/2024 Assessee : Arvind Limited Asst. Year : 2018-19 - 13– time prescribed for revision of his return of income u/s. 139(5). The issue arises whether in such cases the assessee can make a claim for a deduction, before the Assessing Officer or before the appellate authorities, which has not been claimed in the return of income, when he is not in a position to revise his return of income. The Revenue is always of the view that any claim can be made only through a revised return of income filed in time. Relying on the decision of the Supreme Court in the case of Goetze (India) Ltd vs. CIT 284 ITR 323, the department always argues that no such claim can be made outside the revised return of income. We find that Hon’ble Bombay High Court, in the case of Pruthvi Brokers & Shareholders Pvt. Ltd. (349 ITR 336), held that even if a claim was not made before the assessing officer, it could be made before the appellate authorities. It has been held that the assessee was entitled to raise not merely additional legal submissions before the appellate authorities, but was also entitled to raise additional claims before them. It was held that the appellate authorities had the discretion whether or not to permit such additional claims to be raised, but it could not be said that the Tribunal had no jurisdiction to consider the same as clearly enunciated by the Hon’ble Apex Court in the judgment of Goetze (India) Ltd. (supra). We also find that Chennai bench of the Tribunal in the case of Chiranjeevi Wind Energy Ltd. vs. ACIT 29 ITR (Trib) 534 vide order dated 21.10.2013 rejected the claim made for the first time before the Tribunal. We also find that the Hon’ble Supreme Court in the case of Jute Corpn. of India Ltd. vs. (CIT 187 ITR 688), it is clear that an assessee is entitled to raise not merely additional legal submissions before the appellate authorities, but is also entitled to raise additional claims before them. The appellate authorities have the discretion whether or not to permit such additional claims to be raised. They have the jurisdiction to entertain the new claim.

CBDT, Circular stating that: “Officers of the Department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the Officers should take the & 466/Ahd/2024 Assessee : Arvind Limited Asst. Year : 2018-19 - 14– initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the department for it would inspire confidence in him that he may be sure of getting a square deal from the department. Although, therefore, the responsibility for claiming refunds and reliefs rests with assessee on whom it is imposed by law, officers should — (a) Draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other;(b) Freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs.” still holds the water.

10.7 Similarly, in CIT vs. Jai Parabolic Springs Ltd. (306 ITR 42), the Delhi High Court held that the tribunal had power to allow deduction for expenditure to assessee to which it was otherwise entitled to even though no claim was made by the assessee in the return of income. In this case, the decision of Supreme Court in Goetze (India) Ltd. was considered. The Cochin tribunal in the case of Thomas Kurian 303 ITR (AT) 110 (Coch), held that even the CIT(A) had the power to entertain a claim not made in the return of income. In Lupin Agrochemicals Ltd. (Mum), the case of Goetze (I) Ltd. was considered and it was held that said decision did not prevent an assessee to make legal claim in assessment proceedings and that such claim could be made even in appellant proceedings. Hence, keeping in view the claim of the assessee is being considered on merits of the case.

10.8 The assessee, while filing the return of income, has claimed the deduction of Rs. 3,12,95,400/- for Employee Stock Option Plans (ESOPs) granted to employees, instead of the actual eligible amount of Rs. 4,90,35,650/-. It was stated that upon realizing the error, the assessee requested the Assessing Officer to allow the additional deduction of Rs. 1,77,40,250/-. However, the Assessing Officer refused to grant the adjustment and the Ld. CIT(A), on appeal, dismissed the ground raised by the assessee on this aspect. & 466/Ahd/2024 Assessee : Arvind Limited Asst. Year : 2018-19 - 15– 10.9 Before us, the Ld. AR submitted that there was an inadvertent error in claiming a deduction of Rs. 3,12,95,400/- for ESOPs granted to employees, instead of the correct amount of Rs. 4,90,35,650/-. The working on the basis of which the said expenditure was claimed, as submitted by the assessee, is reproduced as under: Particulars Aamir Aamir Aamir Susheel Susheel Total Akhtar Akhtar Akhtar Kaul Kaul Date of 01-Nov-17 02-Nov-17 13-Apr-17 26-Sep-17 30-Mar

17. Exercise FMV of 402.70 405.83 393.48 368.00 392.88 shares Option 200.45 200.45 200.45 200.45 200.45 Price Perquisite 202.25 205.38 193.03 167.55 192.43 Tax on 71.87 72.98 68.59 59.54 8.38 Perquisite Options 14000 36000 50000 50000 108000 258000 exercised Total 28,31,500 73,93,500 96,51,250 83,77,500 2,07,81,900 4,90,35,650 Perquisite Amount Total TDS 10,06,174 26,27,280 34,29,572 29,76,945 73,84,848 collected 10.10 The Ld. AR submitted that when the assessee has claimed insufficient deductions, thereby resulting in higher tax payments, the Assessing Officer is obligated to notify the assessee and adjust the tax liability accordingly. The Ld. AR submitted that, the assessee in this case had inadvertently claimed Rs. 1,77,40,250/- less in ESOP deductions and, upon recognizing error, the assessee requested the Assessing Officer to adjust the deduction to reflect the correct expenditure incurred; however, the request of the assessee was denied by the Revenue Authorities.

10.11 The Ld. DR, on the other hand, supported the order of the authorities below.

10.12 We have heard the rival contentions and perused the material available on record. We find that there was no error in the above computation. The assessee & 466/Ahd/2024 Assessee : Arvind Limited Asst. Year : 2018-19 - 16– is eligible to claim deduction of Rs.4,90,35,650/- instead of Rs.3,12,95,400/-. The computation is not in dispute even by the Revenue, but denied just because it was not claimed in the return. With regard to the merits of allowability on expenditure on ESOPs, we are guided by the judgment of Hon’ble Delhi High Court in the case of CIT vs. Lemon Tree Hotels Ltd, wherein it was held as under:-

The question sought to be projected by the Revenue is whether the ITAT erred in deleting the addition of Rs. 1,28,19,169/- made by the Assessing Officer (‘AO’) by way of disallowance of the expenses debited as cost of Employees Stock Option (‘ESOP’) in profit and loss account? The Court has been shown a copy of the decision dated 19th June 2012 passed by the Division Bench of Madras High Court in CIT-III Chennai v. PVP Ventures Ltd. (TC(A) No. 1023 of 2005) where a similar question was answered in favour of the Assessee by holding that the cost of ESOP could be debited to the profit and loss account of the Assessee. This Court has also in its decision dated 4th August 2015 in of 2002 (CIT v. Oswal Agro Mills Ltd.) held that the expenditure incurred in connection with issue of debentures or obtaining loan should be considered as revenue expenditure. In the circumstances, the impugned order of the ITAT answering the question in favour of the Assessee is affirmed.

Further reliance is being place on the judgements in the case of :-

• CIT(A) Vs. M/s. Biocon Ltd, of 2013 • DCIT Vs. M/s. Astral Polytechnik Ltd, ITA No. 287/Ahd/2020 10.13 Keeping in view the above proposition laid down, the claim of the assessee which was correct is now being allowed. The appeal of the assessee on these grounds are allowed, whereas the appeal of the Revenue on these grounds are dismissed.

Ground No. 7 – Additional Claim resulting in LTCG – Rs.21,62,670/-

11.1 The Ld. AR argued that the assessee mistakenly reported a gain of Rs. 38,81,310/- instead of the actual gain of Rs. 17,18,640/- from the sale of shares in Amol Decalite Ltd. The issue is akin to the issue dealt with at Ground No. 6 above. Keeping in view the above proposition laid down, the claim of the assessee which was correct is now being allowed. Since the computation is not being examined by the Tribunal, after laying down the proposition, the matter is remitted to the Assessing Officer for the limited purpose of re-computation of the capital gains.

The appeal of the assessee on this ground is allowed for statistical purposes.

Ground No. 8 – Notional interest

12.2 Before us, the Ld. AR submitted that an inadvertent error occurred in the calculation of total income chargeable to tax by failing to exclude notional interest income and the assessee had inadvertently failed to reduce the notional interest income of Rs. 37,76,627/-, however, upon realizing this mistake, when the assessee requested the Assessing Officer to exclude this notional income from the total income, the request of the assessee was denied by both the Assessing Officer and the CIT(A). The Ld. AR, therefore, urges before the Tribunal to allow the reduction of the notional interest income being charged to tax.

12.3 The Ld. DR, on the other hand, supported the order of the authorities below.

12.4 We have heard the rival contentions and perused the material available on record. We find that the assessee has been harping upon an inadvertent error occurred in the calculation of total income chargeable to tax by failing to exclude notional interest income and the assessee had inadvertently failed to reduce the notional interest income of Rs. 37,76,627/-, however, upon realizing this mistake, the assessee requested the Assessing Officer to exclude this notional income from the total income. This needs a detailed examination of the accounts of the assessee as to how the same has been reflected in the P & L, its subsequent impact on the balance-sheet and on the determination of the total taxable income. Hence, accepting the argument of the Ld. DR, the matter is being restored to the Assessing & 466/Ahd/2024 Assessee : Arvind Limited Asst. Year : 2018-19 - 19– Officer for examination as to how the error has crept in and its impact on the determination of the total income.

The appeal of the assessee on this ground is allowed for statistical purposes.