ACIT, CIRCLE- 21(1), NEW DELHI vs. RELIGARE FINVEST LTD., NEW DELHI

PER O.P. KANT, A.M.:

These cross appeals by the assessee and the Revenue are directed against two separate orders dated 22/01/2018 and 30/08/2016 passed by the learned CIT(Appeals) for assessment year 2007-08 and 2009-10 respectively. All the appeals being connected to one assessee, same have been heard together and disposed off by way of this consolidated order for convenience. 2. First, we take up the appeal of the assessee and the Revenue for assessment year 2007-08.The grounds raised by the assessee in ITA No. 1947/del/2018 are reproduced as under:

3 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016

appellant Rs.2,424,142) under section 14A of the Income Tax Act, 1961 (“ the Act” )

1.1 That the CIT(A) has erred on facts and in law in mechanically restricting the disallowance under section 14A of the Act to the exempt dividend income, without appreciating fulfillment of condition for applying provisions of the said section as contained in sub-section (2) of that section, viz., the requirement of the assessing officer not being satisfied with the correctness of claim of expenditure.

1.2 That the CIT(A) has erred on facts and in law in computing disallowance under section 14A of the Act without appreciating that the Appellant has already made a disallowance of all the expenses debited to the profit and loss account aggregating to Rs.685,436,878 less expenses suo-motu disallowed in the computation under various sections aggregating to Rs.12,970,624, proportionate to the exempt dividend income of Rs.3,509,948.

1.3 That the CIT(A) has erred on facts and in law in not appreciating that Rule 8D of the Income Tax rules, 1962 (“the Rules”) is not applicable for the subject AY for disallowance under Section 14A of the Income Tax Act, 1961 (“the Act”).

2.1 The grounds raised by the Revenue in ITA No. 2364/Del/2018 are reproduced as under:

4 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016 3. Briefly stated facts of the case at that the assessee, a Nonbanking Financial Company (NBFC), was engaged in providing different kind of services including granting of loans, providing corporate advisory services, distribution of mutual funds etc. For the year under consideration, the assessee filed return of income on 30/10/2007 declaring income of ₹ 28,33,97,440/-. The return filed by the assessee was selected for scrutiny assessment and notice under section 143(2) of the Income Tax act, 1961 (in short ‘the Act’) was issued and complied with. The scrutiny assessment under section 143(3) of the Act was completed on 31/12/2009 after making certain addition/disallowances to the returned income. Aggrieved, the assessee filed appeal before the Ld. CIT(A), who partly allowed the appeal of the assessee. Aggrieved with the finding of the Ld. CIT(A), both the assessee and the Revenue are in appeal before the Tribunal raising the grounds as reproduced above. 3.1 All the grounds raised by the assessee are in relation to sustaining disallowance of ₹ 10,85,806/- under section 14A of the Act. The ground No. 1 of the appeal of the Revenue is in relation to deleting the part disallowance (of ₹ 1,80,83,891/-) under section 14A of the Act. 3.2 Brief facts qua the issue in dispute are that the assessee reported dividend income of ₹ 35,09,948/-as exempted under section 10(34) of the Act and made sumo disallowance of ₹ 24,24,142/-against the said exempt income. The assessee allocated expenses towards exempted dividend income in the ratio of dividend receipt to total receipts during the year under consideration, as under:

5 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016

Disallowance under = (Dividend receipt/total receipts)X section 14A of the Act allowable expenses for the year = (3509948/973248925)/672173271 = 2424142

3.3 The Assessing Officer did not accept the above working of the disallowance by the assessee due to two reasons. Firstly, the interest cost has not been taken into consideration while allocating the expenses towards exempted income. Secondly, the funds generating tax-free income are at a time much more as compared to other assets and thus expenses towards tax-free income computed on the basis of the receipt is not giving correct allocation. The Assessing Officer observed that 72.5% of the funds of the assessee are interest-bearing and cost of those funds of ₹ 50,59,10,687/-was debited in the books of accounts. He further observed the application of the funds towards investment from the cash flow statement. He noticed that the assessee has shown purchase of investment of ₹ 1599,47,66,321/- , sale of investment of Rs.1560,35,65,787/- and cash out used in the investment activity at the end of the year was of Rs.3,58,84,442/. In view of the observation, the Assessing Officer concluded that assessee has heavily used funds for investment activity but the interest cost was not attributed toward earning exempt income in proportion of the funds utilized for investment. The Assessing Officer recorded his dissatisfaction on the disallowance worked out by the assessee and invoking section 14A of the Act with rule 8D of the Income-tax Rules, 1962 (In short the ‘Rules’) computed disallowance of Rs.1,80,83,891 as under:

6 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016

3.4 The assessee contested before the Ld. CIT(A) that total borrowing of the assessee is Rs, 450 crores, whereas the money lent is more than ₹ 561 crores and thus assessee has used his own funds for granting loan and the finding of the Assessing Officer of utilizing borrowed funds for investment was totally incorrect. The assessee submitted that 100% borrowed funds have been utilized for the purpose of the business. The Ld. CIT(A) however restricted the disallowance under section 14A to the extent of exempted income of ₹ 35,09,948/-. As the assessee made sumo disallowance of ₹ 24,24,142/-, he sustained the balance amount of ₹ 10,85,806/-out of the disallowance made by the Assessing Officer.

7 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016 3.5 Before us, the learned Counsel of the assessee filed a paper- book containing pages 1 to 293 and made various argument in support of the grounds raised. 3.6 Firstly, the learned Counsel submitted that the suo-motu disallowance of ₹ 24,24,142/-was made in scientific manner and the Assessing Officer has rejected the contention of the assessee based on wrong assumption of the facts and without recording proper dissatisfaction to the claim of the assessee. 3.7 Secondly, he referred to page 19 of the paper-book, which is balance-sheet of the assessee company as on 31/03/2007 and submitted that under the head investment opening amount as on 31/03/2006 was nil and closing amount is ₹ 35,35,35,421/-. He referred to page 24 of the Paper-book, which is detail of the investments and submitted that during the year the assessee has made investment in 22,60,000 shares of ‘ Karnataka Bank Ltd’ at value of Rs. 35,35,35,421/-. The LearnedCounsel referred to report of the Accountant obtained in relation to expenses incurred for earning exempt income, a copy of which is available on page 75 to 92 the Paper-book. He referred to page 85 of the Paper-book regarding explanation of the investment in equity shares of Karnataka bank Ltd. According to him, the investment in shares of the Karnataka bank Ltd was made out of the share application money of ₹ 125 crores and profit accrued during the year under consideration upto the date of the investment on pro rata basis, which works out to ₹ 22.09 crores. The Counsel referred to page 101 of the Paper-book, which is acopy of the bank statement of the assessee , to show that immediate source of investment in the shares of the Karnataka bank Ltd was out of the share

8 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016 application money received. He further submitted that no dividend income was earned from the shares of the Karnataka Bank Ltd. and no expenses have been incurred for making this investment. Thus, even after invoking the rule 8D of the ‘Rules’ , the disallowance under section 14A of the Act would be nil. 3.8 Thirdly, submitted that there is net interest income and thus no interest expenditure is required to be allocated towards the investment in assets yielding exempt income. Further, he referred to page 111 to 115 of the paper-book, which contain details of capital gain of ₹ 1,21,48,156/- earned on trading of mutual funds, on which assessee has paid taxes and thus no interest expenditure corresponding to the investment in mutual fund should be disallowed. He submitted that all the investments in mutual funds were made in accordance with the guidelines of the Reserve Bank of India for the purpose of the business of the assessee, and thus disallowance for the interest expenditure should be made towards exempted income. 3.9 We have heard rival submission of the parties on the issue in dispute. The Hon’ble Bombay High Court in its decision dated 12/-8/2010 in the case of Godrej Boyce and Manufacturing Co Ltd Vs DCIT , Mumbai and Anr. (2010) 328 ITR 8 (Bom) held the Rule 8D of the ‘Rules’ to be prospective from assessment year 2008-09. Further, Hon’ble Supreme Court recently in Civil Appeal No. 2165 of 2012 in the case of CIT-5, Mumbai Vs M/s Essar Teleholding Ltd approved the decision of the Hon’ble Bombay High court in the case of Godrej Boyce and Manufacturing Co .Ltd observing as under: ,

9 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016

“48. Applying the principles of statutory interpretation for interpreting retrospectivity of a fiscal statute and looking into the nature and purpose of subsection (2) and sub- section (3) of Section 14A as well as purpose and intent of Rule 8D coupled with the explanatory notes in the Finance Bill, 2006 and the departmental understanding as reflected by Circular dated 28.12.2006, we are of the considered opinion that Rule 8D was intended to operate prospectively. 49. It is relevant to note that impugned judgment in this appeal relies on earlier judgment of Bombay High Court in Godrej and Boyce Manufacturing Company Limited versus Deputy Commissioner of Income Tax, Mumbai and Another, (2017) 7 SCC 421, where the Division Bench of the Bombay High court after elaborately considering the principles to determine the prospectivity or retrospectivity of the amendment has concluded that Rule 8D is prospective in nature. Against the aforesaid judgment of the Bombay High court dated 12.08.2010 an appeal was filed in this court which has been decided by vide its judgment reported in Godrej and Boyce Manufacturing Company Limited Vs. Deputy Commissioner of Income Tax, Mumbai & Anr. (2017) 7 SCC 421. This Court, while deciding the above appeal repelled the challenge raised by the assessee regarding vires of Section 14A. In para 36 of the judgment, this Court noticed that with regard to retrospectivity of provisions Revenue had filed appeal, hence the said question was not gone into the aforesaid appeal. In the above case, this Court specifically left the question of retrospectivity to be decided in other appeals filed by the Revenue. We thus have proceeded to decide the question of retrospectivity of Rule 8D in these appeals. 50. In view of our opinion as expressed above, dismissal of the appeal by the Bombay High Court is fully sustainable. As held above, the Rule 8D is prospective in operation and could not have been applied to any assessment year prior to Assessment Year 200809.

3.9.1 The Hon’ble Supreme Court in the case of Maxopp Investment Ltd. Vs CIT reported in 402 ITR 640 has affirmed the view held in the case of Essar Teleholdings Ltd. (supra) as under:

10 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016

“ 43. Few appeals are filed by the Revenue against the assessees which pertained to the period prior to the introduction of Rule 8D of the Rules. Here, the case is decided in favour of the assessees also on the ground that Rule 8D of the Rules is prospective in nature and could not have been made applicable in respect of the Assessment Years prior to 2007 when this Rule was inserted. This view has already been upheld by this Court in Civil Appeal No. 2165 of 2012 (Commissioner of Income Tax, Mumbai v. M/s. Essar Teleholdings Ltd. through its Manager), pronounced on January 31, 2018, that the said Rule is prospective in nature. On this ground alone, these appeals of the Revenue fail as it is not necessary to go into the other issues.”

3.9.2 In view of the above decision on the operation of the Rule 8D of the ‘Rules’, the action of the Assessing Officer of invoking Rule 8D of Income-tax Rules in the year under consideration (i.e. assessment year 2007-08), is not justified. 3.10. In the case, while disallowing suo-moto expenses towards earning exempted income , the assessee has not taken interest expenditure towards allocation for earning exempt dividend income on the ground that investment was made out of own funds rather than borrowed funds. This claim of the assessee as far as investment in shares of ‘Karnataka Bank Ltd’ (KBL) of Rs. 35.35 crores, is concerned is found to be acceptable from the explanation given in the report of the chartered accountant available on page 85-86 of the Paper-book. The relevant part of the said report is reproduced as under:

“7.2 In the FY 2006-07, RFL has invested in Equity Shres of KBL amounting Rs.35.35 crores. The said investments were made on several dates during the said financial year.

11 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016

Analysis

In the assessment proceedings, the Company has stated that the said investment was made out of own funds. On a close scrutiny of the books of account, we find that: a. The company had received Share Application Money amounting to Rs.125 crores during the period December 12, 2006 to December 21, 2006. b. The investment in the KBL shares amounting to Rs.35.35 crores has been made during the period December 27, 2006 to January 5, 2007/ c. The profits before depreciation and taxes of RFL for the year ended March 31, 2007 amounted to Rs.29.46 crores. If it is presumed that the profits accrue evenly throughout the year, then the profits accruing upto the date of investment in KBL shares on a pro-rata basis, would amount to Rs.22.09 crores (Approximately) d. Here, the aggregate of Share Application Moneys and the profits accruing during the year upto the dates of investments in KBL shares are far in excess of the investment in KBL shares.

Having regard to the above facts and the legal principles discussed in paras 6.3 to 6.7 above, it can be safely inferred that the investment in KBL shares is indeed out of own funds.

As a cross-check we have also reviewed the yearly funds flow statement extracted from the audited financials of FY 2006-07. The said yearly funds flow statement, showing the incremental funds position for FY 2006-07. The said yearly funds flow statement, showing the incremental funds position for FY 2006-07 is annexed and marked as Annexure 3. The Summary of the incremental yearly funds position is as under: (Rs. In Crores) Particulars FY 2006-07 Shareholder’s Funds A 112.82 Loan Funds B 86.23 Deferred tax Liability (Net) C 0.22 Total D=A+B+C 199.27

Fixed Assets E 1.67 Investments Tax Free Investments F 35.35 Others G NIL Net Current Assets: H 162.25 Total I=E+F+G+H 199.27

As would be observed from the above, the year in which investment in Equity Shares of KBL has been made, the incremental borrowings (Rs.86.23 crores) for that year were much lesser then the net increase in the Fixed Assets and Net Current Assets (Rs.163.92 Crores = Rs.1.67 Crores + Rs.162.25 Crores). Thus, based on the judicial principles

12 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016 discussed in Para 6 above, it can be said that the borrowings have been fully utilized for the business purposes and not for the purpose of making investments. Therefore, it can be safely inferred that the question of allocating interest u/s 14A of the Act towards investments in the shares of KBL does not arise. In fact, the internal accrual during the said year is much higher than the amount of investments made in KBL.”

3.11 The source of the investment in shares of KBL is out of share application money is also evident from the copy of the bank statement available on page 101 of the Paper-book. 3.12. But, we find that the assessee has also made investment in mutual funds. According to the detail of investment available on schedule to the balance sheet on page 24 and 25 of the paper- book, we find that during the year assessee traded in mutual funds worth ₹ 1545.84 crores. The assessee has not explained source of investment in those mutual funds. In view of the decision of the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. reported in 402 ITR 640(SC) the expenditure on assets which may yield exempt income as well as taxable income, need to be apportioned towards both the exempted and non- exempted income. Thus, the certain interest expenditure towards investment in mutual fund clearly needs to be disallowed, which the assessee has not considered in its suo-motu disallowance. No such breakup of proportionate expenses towards exempted and non-exempted income from investment in mutual funds has been provided either lower authorities or before us. In absence of any such working provided by the assessee, it is not possible for us to quantify the proportionate disallowance out of the interest expenditure incurred for investment in Mutual funds.

13 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016 3.13 We find that Hon’ble Delhi High Court in the case of Joint Investment Company Private Limited Vs. CIT: 372 ITR 694 (Del.) has restricted the disallowance under section 14A to the extent of the exempted income. Following the finding of the Hon’ble Delhi High Court in the case of Joint Stock Investment Ltd. (supra), The Ld CIT(A) has restricted the disallowance u/s 14A of the Act in the case of the assessee to the extent of excepted income. In the facts and circumstances of the case, we do not find any error in the order of the Ld. CIT(A) on the issue in dispute in following a binding precedent of the jurisdictional High Court. and accordingly, we uphold the same. The grounds of the appeal of the assessee as well as ground No. 1 of the Revenue are accordingly dismissed. 4. The ground No.2, of the appeal of the Revenue relates to deemed dividend income of ₹ 10,94,00,000/-, which has been deleted by the Ld. CIT(A). 4.1 The facts qua the issue in dispute are that the assessee has taken a loan of ₹ 10,94,00,000/- from M/s. Religare Securities Ltd. (RSL), which is subsidiary of M/s Religare enterprises Ltd (REL). The REL holds 2,71,42,200 shares in RSL out of total shares of 27142800. The assessee RFL is also subsidiary of REL and 8,74,94,400 shares of the assessee out of total shares of 87500000, are held by REL. The Assessing Officer held that money lending is not the business of the RSL, and therefore the loan received by the assessee from RSL, ( a subsidiary of REL having share holding more than 90%) falls under the definition of the deemed dividend in terms of section 2(22)(e ) of the Act. The Ld. CIT(A) deleted the addition.

14 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016 4.2 We have heard rival submission of the parties on the issue in dispute and perused the relevant metal on record. The Ld. CIT(A) has deleted the addition observing as under:

“13.3 I have examined the facts at hand. I have studies the appellant’s submissions. It has been established that the appellant is not a share holder in M/s. Religare Securities Ltd., from whom it had obtained a loan. In this connection, I place reliance upon order of Hon’ble Delhi High Court in the case of CIT Vs. Ankitech (P) Ltd., 340 ITR 14 Delhi (paras 33 and 34 of this order, related specifically to this proposition). This order of Hon’ble Delhi High Court has been approved by the Hon’ble Supreme Court vide order dated 05.10.2017. Thus, as the appellant is not a share holder of M/s. Religare Securities Ltd., provisions of section 2(22)(e) are not applicable. Accordingly, grounds 8 and 9 are adjudicate in favour of the appellant.”

4.3 It is undisputed that assessee is not a shareholder in RSL from which it has obtained a loan. The addition of deemed dividend can be made only in the hand of the shareholders and not otherwise. Thus, we do not find any infirmity in the finding of the Ld. CIT(A), where he has followed binding precedent of the Hon’ble Jurisdictional High Court. Accordingly, the finding of the Learned CIT(A) on the issue in dispute is upheld. The ground of the appeal of the Revenue is accordingly dismissed. 5. The ground No.3 of the appeal of the Revenue which is general in nature, we are not required to adjudicate upon and accordingly dismissed. 6. Now, we take up the cross appeals of the assessee and the Revenue for assessment year 2009-10.The grounds raised by the assessee in ITA No. 6474/Del./2016 are reproduced as under:

15 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016

purchase price of stock Appreciation Right (‘SAR’ ) and the sale price of such SAR at the time of exercise by the employees, holding the same to be capital loss not allowable as business deduction. 1.1 That the CIT(A) erred on facts and in law in not appreciating that the above differential amount actually represents the loan granted by the appellant to Religare Enterprises Ltd. Employees SAR Trust (‘the Trust’ ) for the purpose of administering Employee Stock Appreciation Right Scheme (‘SAR Scheme’), which was not meant to be and, in fact, not recovered from the later in accordance with the SAR scheme. 1.2 That the CIT(A) erred on facts and in law in not appreciating that the above SAR scheme was implemented to motivate, reward and retain key employees whereby each SAR granted to the employees of the appellant stood equivalent to one share of Religare Enterprises Ltd. (‘REL’) and the aforesaid differential amount was, thus, in the nature of employee benefit allowable under section 37(1) of the Income Tax Act, 1961 (‘the Act’). 1.3 Without prejudice, the CIT(A) erred on facts and in law in not allowing deduction of the aforesaid amount of loan written off as loss incidental to business under section 28 of the Act. 2. That the CIT(A) erred on facts and in law in upholding the disallowance of Rs.18,60,898 on account of difference between the sale price of AR and the exercise price of SAR (prefixed at Rs.140 per SAR) paid to the employees of the appellant, holding the same to be capital expenditure incurred in relation to issue of shares of employees. 2.1 That the CIT(A) erred on facts and in law in not appreciating that the above differential amount of Rs.18,60,898/- was in the nature of employee compensation allowable as deduction under Section 37(1) of the Act.

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8.1 We have heard submission of the parties on the admission of the additional ground. We find that the additional grounds raised by the assessee being legal in nature and not requiring investigation of the fresh facts, following the settled legal position in view of the decision of the Hon’ble Supreme Court in the case

17 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016 of NTPC Ltd versus CIT (supra), we admit the additional ground raised by the assessee. 8.2 The brief facts of the case are that the assessee filed return ₹ of income on 29/09/2009 declaring total income of 71,34,32,349/-. The assessment under section 143(3) of the Act was completed after making certain additions/disallowances to the returned income. 8.3 On further appeal, the Ld. CIT(A) allowed the appeal partly. Aggrieved, both the assessee and the Revenue are in appeal before the Tribunal raising the grounds along with additional grounds reproduced as above. 9. The ground No.1 to 2.1 of the appeal of the assessee relate to disallowance of expenses on ‘Stock Appreciation Right (SAR)’ written off. 9.1 Brief facts qua the issue in dispute are that Religare enterprises Ltd (REL), the holding company of the assessee, launched a stock appreciation right scheme with effect from 01/04/2007 for employees retention purpose. The grant price of SAR was nil tough each SAR was equivalent to one share of REL , having value of Rs. 140/- . Vesting of SAR was spread over a period of three years with 1/3rs of the SARs vesting in an employee every year. On exercise date the employees made an application to his employer company for payment of SAR compensation against vested SAR. The scheme was administered through a SAR trust. The trust purchased shares of the REL from the stock exchange at an average price of ₹ 503 per share. The financing (funding) of said purchase by the trust was made by way of loan, which was initially given by the REL, but

18 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016 later on the respective companies paid to REL. On exercise of the SAR by an employee, the trust sold the corresponding No. of shares on the stock exchange and amount realized was paid to the respective company as a settlement of the loan. The company paid to the employee amount which was a difference between the sale price of the shares and SAR value of ₹ 140 multiplied by the No. of SAR exercised by the employee after deducting taxes source. In relation to the SAR , the assessee debited two type of expenses. Firstly, the benefit which was granted to the employees during the year on sale of shares( difference between sale price of the share and base price of Rs. 140/-) and secondly, the loan written off which was issued to the SAR trust for purchase of respective shares vested in the employees. The claim of the assessee is that both these expenses are allowable under section 37 of the Act as incurred wholly and exclusively for the purpose of the business. 9.2 The Assessing Officer made a addition of ₹78,18,311/-under the head “ SAR expenses treated as loss” observing as under:

“I have considered the submission of the assessee in this regard. SARs, or stock appreciation rights, are contractual rights that entitle one to receive the appreciation from a corresponding number of company shares after the grant date. Instead of exercising a stock option, one exercises the SAR and, depending on the plan’s design and practices, receive in either cash or stock the “spread” between the exercise price and the fair market value on the date of exercise. For stock plan participants, all the other rules and financial-planning considerations are similar to those of stock options. In the instant case the total number of SAR that were vested and exercised is 10614 and booked a loss of Rs.50,29,087/-. The assessee has shown an amountof Rs.18,60,898/- as SAR compensation paid and an amount of Rs.20,00,369/- as Advance written off. It is this amount of Rs.50,29,087/- which the assessee has claimed as a deduction in the computation of income treating it as a loss incidental to the business. It is a case where the assessee has

19 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016 invested a particular amount under the SAR through a trust. This is also a case where unrecoverable advance has been treated as a business loss. In fact it is a capital loss as capital loss is commonly understood to be the difference between the purchase price of an asset and the price that the investor ultimately sells that same asset. In instance when the sale price is less than the purchase price, the investor realizes a negative return in investment. In this case, the assessee has held the amount as investment. Thus, going by the presentation of the accounts and the balance sheet given by the assessee itself the shares in question were held by assessee not as stock-in-trade, but as an investment and consequently, the loss incurred in respect thereof would be a capital loss and not a business or trading loss. In this view of the matter, the various decisions relied upon by the assessee are not applicable to the facts of the case as they are distinguishable on facts. I, therefore, disallow the claim of the assessee in this regard amounting to Rs.50,29,087/- under the head “SAR expenses treated as Loss”. Further, assessee has claim3ed provision for inatvice SARs Rs.8,32,207/- which is disallowed. Also the assessee has submitted unreconciled balance Rs.19,57,017/- and the same has been claimed under SAR. This unreconciled amount is also added back to the total income of the assessee. Penalty proceeding u/s 271(1)(c) are initiated separately for furnishing inaccurate particulars of income and thereby concealing income.”

9.3 On further appeal, the Ld. CIT(A) adjudicated the issue following finding of his predecessor in earlier years. 9.4 Before us, the learned Counsel of the assessee submitted that issue in dispute has been decided in favour in the case of the assessee as well as in the case of associated cases by the Tribunal. He submitted that Hon’ble Delhi High Court upheld the finding of the Tribunal in the case of the assessee as well as in the case of ‘Religare securities Ltd.’ Thus issue in dispute being covered in favour of the assessee, should be decided in favour of the assessee. 9.5 The learned DR, on the other, and relied on the order of the lower authorities.

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9.6 We have heard the rival submission and perused the relevant material on record. We find that the Ld. CIT(A) has adjudicated the issue in dispute observing as under:

“Therefore, considering the identical facts and circumstances of the present case with those of A.Y. 2011-12 and 2008-09, I am inclined to follow the judicial consistency and treat the claim of deduction made on account of SAR expenses of Rs.50,29,087/- being capital in nature. During the appellant proceedings, Ld. AR has referred that addition of Rs.78,18,311/- has been restricted to Rs.50,29,087/- only by the AO by passing rectification order u/s. 154 of the Act dated 06.11.2015. a copy of which has been furnished while submissions dated 23.11.2015. Hence, above grounds of appeal are allowed. The remaining addition of Rs.27,89,224/- has been treated as withdrawn considering the following submissions made by the Ld. AR: “While passing the assessment order the AO has disallowed a sum of Rs.78,18,311 being the SAR expenses claimed as a deduction by the Appellant. Vide order dated November 6, 2016 passed under Section 154 of the Act the AO has rectified the said disallowance by restricting it to Rs.50,29,087. The copy of the rectification order has been filed with your office vide our letter dated November 23, 2015 and letter dated June 17, 2016. Therefore, the ground of appeal no. 6 has been withdrawn by the appellant.”

9.7 We have perused the addition made by the Assessing Officer. The Assessing Officer in para 3 of the assessment order has mentioned that the total number of SAR that were vested and exercised was 10614 and booked loss of Rs. 50,29,087/-. According to the Assessing officer this amount included amount of Rs. 18,60,898 as SAR compensation paid to employees and Rs.20,00,369/- as advance written off. The Assessing Officer disallowed this deduction of Rs. 50,29,087/-. Further, he made disallowance for provision for inactive SARs of Rs. 8,32,207/- and unreconciled balance of Rs. 19,57,017/-. In this manner, the AO made total disallowance of Rs. 78,18,311/-. The assessee challenged this addition before the Ld. CIT(A). However, on further rectification application of the assessee, the ld. AO deleted

21 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016

the addition of Rs. 8,32,207/- and Rs. 19,57,017/-. The Ld CIT(A) mentioned the fact of rectification by the AO and sustained the balance amount of addition of Rs. 50,29,087/- in view of the decision of learned CIT(A) in AY 2011-12 and 2008-09. 9.8 Before us, the learned counsel of the assessee has submitted that the issue-in-dispute is covered in favour of the assessee by following a judicial decision of the Tribunal in the case of Religare Finvest Limited Vs. ACIT, ITA No. 2284/Del./2013 for AY 2008-09 (Del.-Trib.) and Hon’ble Delhi High Court in the case of Principal Commissioner of Income Tax vs. M/s. Religare Securities Ltd., ITA No. 311/2018, order dated 19.03.2018. The relevant finding of the Tribunal in the case of M/s. Religare Finvest Limited (supra) is reproduced as under: “4.3 We have heard the rival submissions and perused the relevant materials on record, especially the order of ITAT passed in the case of M/s Religare Commodities Ltd. in ITA Nos. 2283/Del/2013 and 3634/Del/2014 (supra) wherein we find that the issue in dispute has decided in favour of the assessee. The relevant portion of the decision is reproduced as under:

“7. We have carefully ……………………………................................ 8. Hon’ble Madras High Court has also an occasion to consider the allowability of the ESOP expenditure in 211 taxman 554 wherein Hon’ble high court has held that the claim of the ESOP is an ascertained liability for deduction on is allowable. Similarly Hon’ble Delhi High Court in case of CIT versus Lemon tree Page 25 of 25 hotels Ltd in ITA No. 107/2015 has held that the expenses debited as cost of employee stock option plan in the profit and loss account is allowable. In view of the above judicial precedents of special bench of tribunal and decision of the Hon’ble Delhi and Madras High Courts, we respectfully hold that stock Appreciation right expenses claimed by the appellant, amounting to Rs. 393714/– is not in a capital expenses, but revenue expenditure and ascertained liability therefore it is allowable expenses. In the result the disallowance made by the Ld. and assessing officer of Rs. 1147623/– and enhancement made to that taxable income of the appellant by Ld. 1 st appellate authority of Rs. 2789501/– is held to

22 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016

be erroneous and therefore set aside. In the result the appeal of the assessee for AY 2008-09 is allowed.”

4.4 Thus, respectfully following the above findings in the above order, grounds no. 1 to 2.2 of the appeal are allowed.”

9.9 Further, the Hon’ble Delhi High Court in the case of Religare Securities Limited (supra) has held as under: “The Revenue’s appeal under Section 260A of the Income Tax Act alleges that the Income Tax Appellate Tribunal (ITAT) erred in allowing T2,09,63,780/- as a capital expense. That amount was the quantum of discount given in respect of the SAR (Stock Appreciation Rights) - similar to Employee Stock Option (ESO) offered by the employer to the work force. The ITAT followed its previous decision and also cited a judgment of this Court in Commissioner of Income Tax vs. Lemon Tree Hotels Ltd, (ITA 107/2015 decided on 18.08.2015). The ITAT also relied upon the judgment of Madras High Court in Commissioner of Income Tax-III, Chennai vs. PVP Ventures Ltd., TC(A) 1023 of 2005.

In PVP Ventures Ltd. (supra), Madras High Court discussed the relevant issues in the following manner :

“7. On the issue of Staff Welfare expenditure, the Commissioner pointed out that the assessee had debited a sum of Rs. 66.82 lakhs under the head of Staff Welfare expenditure. The said sum was incurred by the assessee in respect of Employees Staff Option Plan and Employees Staff Purchase Scheme Guidelines. As per SEBI guidelines, the difference between the market value of the shares and the value at which the shares were allotted to the employee is allowable as an expenditure. The Commissioner of Income Tax revised this claim accepted by the Officer and held that the accounting treatment prescribed by SEBI, nowhere suggests that it was a revenue expenditure to be debited to the Profit and Loss Account as it was only a notional and contingent expenditure. In the circumstances, the Commissioner of Income Tax held that the shares allotted under Employees Staff Option Plan and Employee Staff Purchase Scheme Guidelines, 1999, having not stated anything about the manner of treatment to this expenditure, the difference in the value at which the shares were allotted and the market value of the shares did not warrant any allowance as expenditure. Ultimately, the Commissioner of Income Tax passed an order directing the Assessing Officer to revise the assessment. Thus, holding that the revision proceedings were validly initiated,

23 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016

the income received on account of exchange fluctuation was held as a revenue receipt and be taxed as such and the Staff Welfare expenditure was to be disallowed. xxx xxx xxx 11. As regards the second issue which is now canvassed before this Court viz., on the issue of expenditure of 66.82 lakhs towards the issue of shares to the Employees Stock Option is concerned, the Tribunal pointed out that the shares were issued to the employees only for the interest of the business of the assessee to induce employees to work in the best interest of the assessee. The allotment of shares was done by the assessee in strict compliance of SEBI regulations, which mandate that the difference between the market prices and the price at which the option is exercised by the employees is to be debited to the Profit and Loss Account as an expenditure. The Tribunal pointed out that what had been adopted was not notional or contingent as had been submitted by the Revenue. Pointing out to the Employees Stock Option Plan, the Tribunal in its order stated that it was a benefit conferred on the employee. So far as the company is concerned, once the option was given and exercised by the employee, the liability in this behalf got ascertained. This was recognised by SEBI and the entire Employees Stock Option Plan was governed by guidelines issued by SEBI. On the facts thus found, the Tribunal held that it was not a case of contingent liability depending on the various factors on which the assessee had no control. The expenditure in this behalf was an ascertained liability, thus the expenditure incurred being on lines of the SEBI guidelines, there could be no interference in the relief granted by the Assessing Authority for the expenditure arising on account of Employees Stock Option Plan. This expenditure incurred as per SEBI guidelines and granted by the Officer could not be considered as erroneous one calling for exercise of jurisdiction under Section 263 of the Act. ”

In view of the above reasoning, the Court is of the opinion that there is no infirmity with the approach or order of the Tribunal. No question of law arises. The appeal is consequently dismissed.”

9.10 In view of the above decisions, the issue-in-dispute of SAR expenses as revenue in nature is covered in favour of the assessee. Respectfully following the above decisions, we set aside the order of the learned CIT(A) and delete the addition of

24 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016 Rs.50,29,087/- on the issue. The grounds no. 1 to 2.1 of the appeal are accordingly allowed. 10. The additional ground nos. 3 to 3.3 of the assessee and ground No.2 of the appeal of the Revenue are related to disallowance under section 14A of the Act. 10.1 The facts in brief qua the issue in dispute are that during the year under consideration, the assessee earned dividend income aggregating to ₹ 2,77,17,070/-, which was claimed as exempt under section 10(34)/10(35) of the Act as under: (i) Rs.1,54,00,000/- on equity shares in M/s Karnataka bank Ltd (KBL) held as investment and (ii) Rs.1,23,17,070/- from various mutual funds.

10.2 The assessee suo-motu made disallowance of ₹49,25,241/- under section 14A of the Act read with rule 8D of Income-tax Rules, 1962 ( in short ‘the Rules’) as under:

Investment Details As at March 31, As at March 31, 2009 2008 Amount (Rs.) Amount (Rs.) Karnatka Bank Limited 215,716,571 215,716,571 Hindalco Industries Limited 503,500,000 - Vistaar Media Fund 140,000,000 - Religare Art Fund 22,500,000 22,500,000 Birla Cash Plus - 850,163,307 Total 881,761,571 1,088,379,879 Average value of investments 985,070,725 0.5% of average value of investments 4,925,241

10.3 The Assessing Officer however computed the disallowance of ₹ 11,95,19,889/-in terms of section 14A of the Act read with Rule 8D of the ‘Rules’ as under:

25 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016

Particulars 31.03.2009 31.03.2008 A.1 Investment in shares and 881,716,571 2,088,379,878.00 mutual fund (shown as investment)

A. Total Investment 881,716,571 2,088,379,878 B. Average Investment 1,485,048,224.50

C. Total Assets 21,780,570,613 21,210,852,105.00

D. Average Assets 21,495,711,359.00

E. Indirect Interest Costs 1,622,542,721.00

1) Direct Costs Attributable - 2) Indirect Cost of Interest (Total- 112,094,647.47 Considered above) 3) Other Expenses (.5% of 7,425,241.12 Average Investment)

TOTAL DISALLOWANCE U/S 119,519,888.60 14A

10.4 Before the Ld. CIT(A), the assessee filed a revised computation for disallowance of ₹ 2,77,57,100/-under section 14A of the Act read with rule 8D as under:

Particulars Amount(Rs.) i) Amount of expenditure directly relating to 578,392 income which does not form part of income ii) Interest cost not directly attributable to 22,253,467 any income or receipt iii) 0.5% of the average value of investments, 4,925,241 income from which does not or shall not form part of the total income (detailed in the table given above) Total 27,757,100

26 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016

10.5 The assessee provided detailed explanation as why the disallowance of interest cost not directly attributable to any income of the receipt in terms of rule 8D(2)(ii) should work out to ₹ 2,22,53,467/-, which the Ld. CIT(A) has reproduced in the impugned order on pages 31 as under: “6. The appellant vide its submission dated 05.08.2016 under point no. 4 has clarified the foregoing facts related to the dividend earned on the mutual fund units and has also given the basis of calculation of the aforesaid amount of disallowance of Rs.2,22,53,467/- under section 14A of the Act read with Rule 8D(2)(ii) of the Income Tax Rules. The Appellant has submitted as follows: • It has invested Rs.850,000,000 on March 30, 2008 in Birla Cash Plus which has been redeemed by it on April 2, 2008. As the said investment has been funded from borrowings made by it during assessment year 2008-09 at an average interest rate of 12.43%, It has attributed direct interest costs of Rs.578,392 under Rule 8D(2)(i) to the said investment held by it for the period April 1-2, 2008. Copy of the disallowance computed by the Appellant under Section 14A for AY 2008-09 detailing the calculation of the average rate of interest of borrowing for the period March 30,2008 to April 2, 2008 at 12.43% as furnished before the AO duly accepted by him vide order dated December 29, 2010 is enclosed as Annexture(s) • With regard to the dividend earned on other mutual fund units which bought and liquidated in December 2008, the interest cost attributable to such dividend income will be Rs.22,253,467/-. Considering that the average rate of borrowing for the quarter ended December 2008 was 15.04%. Copy of the scrip wise details of mutual funds units purchased and redeemed by the Appellant dividend earned thereon and corresponding interest cost attributed by the Appellant @ 15.04% to the value of such units over the period of holding is enclosed as Annextures 15 to the submission dated October 25, 2013.”

10.6 The assessee also pointed out before the Ld. CIT(A) as why the computation of disallowance of ₹ 11,95,19,889/- by the Assessing Officer is not correct due to incorrect average value of the investment taken by him.

27 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016 10.7 The assessee submitted that in view of the decision of the Hon’ble Delhi High Court in the case of Joint Investment Private Limited versus Commissioner of Income-tax (2015) 59 taxmann.com 295 (Delhi), the disallowance under section 14A of the Act cannot exceed the exempt income declared by the assessee. 10.8 In view of the submissions, the Ld. CIT(A) following the decision of Hon’ble Delhi High Court in the case of joint investment private limited (supra), restricted the disallowance to the amount of the exempted income of ₹ 2,77,17,070/-. 10.9 The Department is in appeal to the extent of the relief allowed by the Ld. CIT(A) and the assessee has raised additional ground of appeal filed separate application challenging the action of the learned CIT(A) in restricting the disallowance under section 14A of the Act to the extent of the dividend income received and action of the Learned Assessing Officer in mechanically applying rule 8D of the rules. 10.10 Before us, the Learned Counsel of the assessee has filed a paper book containing pages 1 to 610. The Ld. Counsel submitted that the Assessing Officer erred in mechanically applying rule 8D without establishing any Nexus between the earning of the income and expenditure incurred (beyond suo-motu disallowance made by the assessee) is beyond the jurisdiction. In support of the contention the learned Counsel relied on the various decisions including the decision of the Hon’ble Supreme Court in the case of Godrej & Boyce manufacturing company limited Vs DCIT 394 ITR 449(SC).

28 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016 10.11 The Ld. Counsel further submitted that no expenditure incurred in relation to earning of the exempt dividend income though the assessee made suo-motu disallowance of ₹49,25,241/-under section 14A of the Act, which was computed at the rate of 0.5% of the average investment. The learned Counsel further submitted that the assessee sought report of the Chartered Accountant firm to independently analyse the entire facts in relation to disallowance under section 14A of the Act read with rule 8D of the ‘Rules’, a copy of which was made available on page 423-451 of the paper-book. The said report concluded that no part of the interest expenditure was required to be disallowed under section 14A of the Act. 10.12 The learned Counsel further submitted that the Assessing Officer has not recorded any dissatisfaction to the claim of the assessee. He submitted that Assessing Officer has wrongly alleged that the assessee had not attributed any administrative expenses towards earning of the exempt income, without appreciating that the assessee suo-motu attributed and disallowed 0.5% of the average investment for earning the exempt income in the return of income. The learned Counsel submitted that the Assessing Officer has erred in mechanically applying rule 8D of the Rules, and on this ground alone the addition made by the Assessing Officer and partly confirmed by the Learned CIT(A) should be deleted 10.13 Without prejudice to the above arguments, the learned Counsel further submitted that the computation under Rule 8D of the ‘Rules’ by the Assessing Officer is erroneous due to attributing interest expenditure towards assets yielding exempt

29 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016 income. According to him the assessee has made investment out of own funds and no borrowed funds have been utilized because the RBI circular prohibited utilization of the borrowed funds for investment in shares/securities. He also submitted that investment in shares of Karnataka bank Ltd in assessment year 2007-08 was made out of own funds. The learned Counsel also submitted that no dividend was received from the investment in shares of Hindalco Industries Ltd. in assessment year 2009-10 amounting to ₹ 51 35 crores and therefore said investment is not relevant for the purpose of the disallowance under section 14A of the Act. The learned Counsel submitted that investment in units of Vistaar Media Fund (VMF) of ₹ 14 crore made during the year under consideration was not out of the borrowed funds and it was out of the cash profit earned by the assessee during the year under consideration. The learned Counsel summarised that the assessee has made investment from its own interest-free funds and not out of borrowed funds. Accordingly, the learned Counsel submitted that where the assessee had sufficient surplus fund and there was no finding by the Assessing Officer of any direct Nexus of the borrowed funds for the investment, no disallowance should be made. 10.14 Alternatively, the learned Counsel also submitted that in view of the decision of Hon’ble Gujarat High Court in the case of PCIT Vs Nirmla Credit and capital (P) Ltd 300 CTR 286, submitted that for the purpose of computing disallowance under section 14A of the Act, only net interest expenditure should be reconsidered.

30 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016 10.15 On the contrary, the learned DR relied on the order of the Learned Assessing Officer and submitted that disallowance made by him should be sustained. 10.16 We have heard rival submission of the parties on the issue in dispute and perused the relevant metal on record. We find that in the instant case before the Learned CIT(A), the assessee itself has filed a revised computation of disallowance under section 14A of the Act read with rule 8D of the Rules, wherein the assessee computed disallowance of ₹ 2,77,57,100/-. The assessee justified disallowance by way of submitting detailed explanations, which the Ld. CIT(A) has reproduced in the impugned order. Further the assessee itself sought to follow the decision of the Hon’ble Delhi High Court in the case of Joint investment private limited (supra). In view of these arguments of the Authorised Representative of the assessee before the learned CIT(A), he restricted the disallowance following the decision of the Hon’ble Delhi High Court in the case of Joint Investment Private Limited (supra) to the amount of the exempt income of ₹ 2,77,17,070/-. The relevant part of the impugned order of the learned CIT(A) is reproduced as under:

“4.6 I have carefully considered the written submissions of the Ld. AR and Assessment order passed by the AO, which reveals that AO has made the disallowance under Section 14A r.w.r. 8D of the IT Rules taking the figures of average investment (Rs.1,485,048,224.50/-), average assets (Rs.21,495,711,359/-) and indirect interest cost (Rs.1,622,542,721/-). On the basis of above figures, total disallowance under section 14A was computed at Rs.119,519,888/- and after giving benefit of suo-motu disallowance made by the appellant of Rs.49,25,241/-, resultant disallowance was made to the extent of Rs.11,45,94,648/-. 4.6.1 From the assessment order passed, it is gathered that addition u/s 14A was based since no separate bank accounts were found to be maintained by the appellant in respect of

31 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016

investments and other activities, in other words, common funds were found to be used by the appellant for both the above activities. Further, it was held by the AO that while computed the disallowance, appellant did not consider administrative expenses which were also attributable to earn the exempt dividend income. 4.6.2 During the appellate proceedings, detailed submission have been made by the Ld. AR wherein it has been explained that AO has erred in ignoring the fact that investment held by the appellant in Karnatka Bank Ltd., Hindalco Industries Ltd. and VISTAAR Media fund were funded through its own funds. Further, it has been contended that AO has also erred in including the investment held by the appellant in Lotus India Liquid Fund India from which is chargeable to tax. In this connection, Ld. AR placed reliance on the appellate order passed by Ld. CIT(A)-XVIII, New Delhi in appeal No. 203/10-11 dated 28.02.2013, the relevant portion of which is reproduced below: “…6.1 I have carefully considered the assessment order and the submissions filed by the appellant. The facts of the case as per assessment order are that the AO made a disallowance u/s 14A r.w.r 8D by computing the disallowance at half per cent of the average investment held by the assessee during the year. The assessee has claimed during appellate proceedings that while computing the disallowance, the AO has included the average investments for purpose of computation of disallowance u/s 14A, the investments made in growth funds, income from which is taxable and has been offered to tax. The appellant has made a special reference to its investments in Lotus India Mutual Fund. The Assessing Officer is directed to recomputed disallowance u/s 14A r.w.r. 8D after reducing investment in any fund, the income from which has been included by the appellant in its taxable income and has been offered to tax. This ground of appeal is disposed of accordingly…….” 4.6.3 Apart from the above, Ld. AR has placed reliance on the jurisdictional High Court’s order in the case of Joint Investments Pvt. Ltd. Vs. Commissioner of Income Tax, Dt. 25 February, 2015, the basis on which it has been claimed that disallowance u/s. 14A cannot exceed to the exempt income, which in the instant case is Rs.2,77,17,070/-“

10.17 Ld. CIT(A) finally sustained the disallowance of ₹2,77,17,070 holding as under : “4.6.5 From the above, it is clearly established that the Hon’ble Delhi High Court in the case of Joint Investment Pvt. Ltd. Vs. CIT, vide its order

32 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016 dated 25.02.2015, has held that disallowance u/s 14A cannot exceed the amount of exempt income. It is evident from the above judicial pronouncements that the rationale behind these judgments are that, the amount of disallowance should not exceed the exempt income. 4.6.6 Therefore, keeping in view the ration of above pronouncements, it is held that disallowance u/s 14A read with Rule 8D can be invoked only in respect of exempt income and disallowance under this section cannot exceed the exempt income. Since appellant has received dividend income of Rs.2,77,17,070/- only, the disallowance under Section 14A is restricted to this amount only as against the disallowance of Rs.11,45,94,648/- computed by the AO. Hence, appellant gets relief of Rs.8,68,77,578/-.”

10.18 Before the Ld AO, the assessee made disallowance according to its own method of disallowance , which was not accepted by the Ld AO and invoked the Rule 8D of the Rules. In our opinion, when he rejected the disallowance computed by the assessee, that in itself is dissatisfaction with the claim of the assessee of disallowance. It is not necessary that such dissatisfaction has to be recorded in explicit words, when the it is evident from the implied action of the Assessing Officer. Accordingly, we dismiss the plea of the assessee that dissatisfaction was not recorded by the Assessing Officer while invoking the Rule 8D of Rules. 10.19 Further, In view of the admission by the assessee itself of the disallowance in terms of section 14A of the Act read with rule 8D of Rules and thereafter request for restricting the disallowance following the decision of the Hon’ble Jurisdictional High Court in the case of Joint Investment Private Limited (supra), we do not find any justification in challenging the issue again before the Tribunal, disputing its own factual submissions made before the Ld. CIT(A). The assessee has admitted before the Ld CIT(A) the fact of investment in Birla Cash Plus on March 30,

33 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016 2008 of Rs. 85,00,00,000/- out of funds borrowed at the interest rate of 12.43% and admitted disallowance of direct interest cost of Rs.5,78,392/-. The assessee has also admitted before the Ld CIT(A) the fact of investment in Mutual Funds out of borrowed funds and computed disallowance of Rs. 2,22,53,467/- towards indirect interest expenditure. In view of these factual admissions, the Ld. CIT(A) decided the issue partly in favor of the assessee. Now the assessee cannot be allowed to dispute those factual submission and litigate the issues again, once its factual submissions have been relied upon by the first appellate authority and issue decided in its favour. Accordingly, we reject the grounds raised by the assessee challenging the disallowance sustained by the Ld. CIT(A). As far as grounds of Revenue is concerned, in our opinion, the action of the Ld. CIT(A) in following the decision of the jurisdictional High Court is in accordance with law and we do not find any error in the same. Accordingly, we also reject the grounds raised by the Revenue challenging the disallowance under section 14A of the Act deleted by Ld CIT(A). Thus, both, the grounds raised by the assessee as well as the Revenue are dismissed. 11. The ground No.1 of the appeal of the Revenue and additional ground No.4 of the appeal of the assessee are related to disallowance on account of provision for expenses. 11.1 Brief facts qua the issue in dispute are that the assessee for the year ended 31/03/2009 created provision for expenses aggregating to Rs.1,63,83,690/-. The Assessing Officer disallowed the said provision on the ground that same are not allowable. The Assessing Officer while rectification order dated 06/11/2015

34 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016

deleted the disallowance made on account of provision for bonus thus reducing the disallowance to Rs.1,12,82,534/-. On further appeal, the Ld. CIT(A) restricted the disallowance to Rs.27,90,535/-observing that deduction is allowable to the extent provision have been settled/payments have been made against the said provisions subsequently. 11.2 Before us, the learned Counsel of the assessee submitted that the Assessing Officer in disallowing the said provision and partly sustained by the Ld. CIT(A) was bad in law and liable to be deleted the learned Counsel submitted the detail of the provisions and payment/written back in subsequent years as under:

S.No. Particulars Amount Paid in AY Reversed in Remarks (in Rs.) 2010-11 AY 2010-11 1. Bonus 51,01,156 51,01,156 Deleted by AO vide rectification order dated 06.11.2015 2. Stock 51,22,651 This issues is Appreciation considered twice by Right (“SAR”) the assessing officer expenses Moreover, issue of allowability of SAR is covered in favour of the assessee- company [refer Ground Nos. 1 to 2.1 supra] 3. Leave Travel 45,48,172 24,24,401 21,55,463 Rs.24,24,401 paid Allowance in AY 2010-11. Employees wise payment details placed at Pages 266- 273 of PB-Vol I Excess provision of Rs.21,55,463 has been reversed in subsequent assessment year. 4. Full and final 9,83,218 8,32,877 1,50,341 Employee wise settlement details of payment of payable to medical employees reimbursement serving their amounting to notice period as Rs.8,32,877 made in on March 31, AY 2010-11 was 2009 furnished vide letter

35 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016

dated 9.10.2013. Excess provision of Rs.1,50,341 has been reversed in subsequent assessment year. 5. Other 6,28,493 1,43,762 4,84,731 Employee wise allowances detail of payment payable to made in AY 2010-11 employees is placed at Page 326 of PN-Vol I Excess provision of Rs.4,84,731 has been reversed in subsequent assessment years. Total 1,63,83,690

11.3 The learned Counsel further submitted that provisions aggregating to Rs. 1.63 Crores were created by the assessee for various personnel cost payable by it to its employees in relation to services rendered by them during the relevant assessment year 2009-10. According to the learned Counsel the aforesaid provision created by the assessee was for the amount payable by it to its employees under different salary heads and legally due to the employees in accordance with the terms of employment. 11.4 He further submitted that aforesaid provisions have been paid in assessment year 2010-11 and excess provisions have been reversed as stipulated above. He submitted that the assessee has consistently and regularly been following accrual system of accounting for the purpose of the keeping books of accounts, which has always been accepted by the Revenue. 11.5 The learned Counsel further submitted that under the Mercantile system of accounting, the expenses are allowable in the year in which the same are incurred and liability thereof accrues, notwithstanding that the liability has to be discharged at later date. According to the learned Counsel, an accrued

36 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016 expenditure shall be allowable deduction if the liability thereof can be reasonably estimated and difficulty in exact estimation of the liability does not categorize the same as contingent liability. 11.6 The learned Counsel submitted that above provisions are not a future or a contingent liability. The liability towards personnel expenses incurred as well as services rendered by the employees and therefore, it is a liability in presenting and definitely in the accounting year. 11.7 The learned Counsel in support of the contention relied on the decision of the Hon’ble Supreme Court in the case of Bharat Earth movers Vs CIT 245 ITR 428. 11.8 The Counsel alternatively submitted that if the disallowance made by the Assessing Officer is upheld, the Assessing Officer may be directed for allowing the amount in the subsequent year. Without prejudice, the assessee submitted that as far as amount of reversal of provision is concerned, the assessee has already offered for tax a sum of Rs.27,90,535/-in subsequent assessment year and thus disallowance of the same by the Assessing Officer and sustained by the Ld. CIT(A) has resulted in a double disallowance. 11.9 On the contrary, the Learned DR relied on the order of the Assessing Officer and submitted that the provisions for expenses were purely under estimate basis without ascertaining the exact liability, which is clear from the fact that in subsequent assessment years, the assessee has reversed most part of the provisions. According to him the assessee cannot be allowed to shift the tax liability which was to be paid in the year under consideration, to the subsequent assessment years.

37 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016 11.10 We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. The provision in respect of the bonus of Rs.51,01,156/-has already been deleted by the Assessing Officer while rectification dated 06/11/2015, which is not in dispute before us. The second provisions of stock appreciation right (SAR) for which separate addition of Rs.51,22,651/- was also made by the Assessing Officer. The addition has been deleted in view of the issue covered in the favour of the assessee by the decision of the Coordinate bench of the Tribunal in and the Hon’ble High Court. Therefore, in our opinion making further addition on the ground of unascertained liability is not justified. Accordingly, we direct to delete the addition made for provision of Rs.51,22 651/- for Stock Appreciation Right (SAR). The next provision made was of Rs. 45,48,172/-for leave travel allowance. It is claimed by the assessee that out of the provision, and amount of Rs. 24,24,401/- has been paid in assessment year 2010-11 and remaining amount of Rs. 21,55,463/- has been reversed in subsequent year. For the payment of Rs. 24,24,401/- the assessee has provided employee -wise details, which is available on page 266-273 of the paper-book. The assessee has not provided any justification as how the estimate of Rs.45,48,172/- was made for leave travel allowance of the employees, whereas actually amount paid to the employees was only of the Rs. 24,24,401/-. In view of the facts, we agree with the finding of the Ld. CIT(A) in disallowing the excess provision made by the assessee. Similarly, we agree with the finding of the Ld. CIT(A) in respect of the provision for medical reimbursement and other allowances. The alternative request of

38 ITA No.1947/Del./2018 ; 2364/Del.2018; 6474/Del./2016 &5872/Del./2016 the assesseeto delete the addition of Rs.27,90,535/- on the ground that the assessee has offered the same for tax in subsequent assessment year, is also rejected because the issue in dispute is to be decided in accordance with law and not according to the choice of the assessee when he offer for tax. However, the assessee is at liberty to make request for rectification in the subsequent assessment year in accordance with law. The ground No. 1 of the appeal of the Revenue is accordingly dismissed and the additional ground No.4 of the appeal of the assessee is also dismissed. 12. In the result, for assessment year 2007-08 the appeal of the assessee as well as Revenue are dismissed. For assessment year 2009-10, the appeal of the assessee is allowed partly, whereas the appeal of Revenue is dismissed. Order pronounced in the open court on 24th August, 2020.

Sd/- Sd/- (KULDIP SINGH) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 24th August,2020. RK/-(D.T.D.S) Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi