ACIT, NEW DELHI vs. M/S RELIGARE SECURITIES LTD.,, NEW DELHI

ORDER PER R.K. PANDA, AM: These are cross appeals. The first one is filed by the assessee and the second one is filed by the Revenue and are directed against the order dated 11.11.2016 of the CIT(A)-7, New Delhi, for A.Y. 2011-12.

ITAs No.230 & 574/Del/2017

Grounds of appeal by the Assessee

ITAs No.230 & 574/Del/2017

2. That the CIT (A) erred on facts and in law in upholding the additional disallowance made by the assessing officer under section 14A of the Act to the tune of Rs. 24,00,638, which was over and above the suo-moto disallowance made by appellant of Rs. 2,75,99,362, without assigning any cogent reasons as to how the suo-moto disallowance made by appellant was incorrect. 2.1 That the CIT(A) erred on facts and in law in confirming the total disallowance i.e. sum total of suo-moto disallowance made by appellant and additional disallowance made by Assessing officer to the extent of dividend earned by appellant of Rs. 3,00,00,000 during the year under consideration, even after principally agreeing with all the contentions raised by the appellant and not restricting the total disallowance to suo-moto disallowance made by appellant.

3. That the CIT(A) erred on facts and in law in confirming the action of the assessing officer in not allowing the claim of the appellant for deduction of write back of SAR expenditure of Rs. 1,17,63,296/- being the amounts disallowed in earlier years treating it as a capital expenditure. 4. That the CIT(A) erred on facts and in law in sustaining the disallowance of Rs. 47,10,557 made by assessing officer holding the same to be as capital loss not allowable as business deduction. 4.1 That the CIT(A) erred on facts and in law in not appreciating that the aforesaid amount is a loan granted by the appellant to Religare Enterprise Ltd. Employee SAR Trust (“the Trust”) for the purpose of administering Employee Stock appreciation Right Scheme (“SAR scheme”) not recovered from the latter. 4.2 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 Enterprise Ltd. and the aforesaid amount was, thus in nature of employee related cost allowable under section 37(1) of the Act. 4.3 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. The appellant craves leave to add, alter, amend or vary the above grounds of appeal at or before the time of hearing.”

ITAs No.230 & 574/Del/2017 Grounds of appeal by the Revenue “1. That on facts and circumstances of the case and in law the Ld. CIT(A) erred in restricting the disallowance u/s 14A of the IT Act to the extent of exempt income of Rs. 3,00,00,000/- and giving relief of Rs. 2,80,61,219/- to the assessee in the light of CBDT Circular No. 5 of 2014 dated 11.02.2014 issuing a clarification that provision of 14A read with Rule 8D shall be applicable even in the cases where the assessee does not have any dividend income.

2. That on fact and circumstances of the case and in law the Ld. CIT(A) erred in allowing the depreciation @ 60% considering the UPS essentially part of computer system and giving relief of Rs. 19,16,829/- whereas the UPS is not an integral part of computer system and eligible depreciation on it is @ of 15%.

3. The appellant craves to leave, add, alter, modify and amend or any of the grounds before or at the time of hearing.” 6.1 The assessee has also raised the following additional grounds:- “5. That on the facts and circumstances of the case, disallowance under section 14A of the Income Tax Act, 1961 (“the Act”) should, in any case, be directed to be restricted to Rs.93,750, being ½% of average investment resulting in earning of dividend income.

6. That on the facts and circumstances of the case, no part of interest expenditure could be considered for the purpose of disallowance under section 14A of the Act, particularly considering that: (a) no part of interest on borrowed funds was incurred in relation to exempt income; and (b) interest income, in any case, far exceeded interest expenditure,

7. That on the facts and circumstances of the case, the lower authorities, in any case, erred in not considering only investments actually resulting in exempt income for the purpose of computing disallowance under section 14A of the Act”

7. Referring to the decision of the Hon’ble Supreme Court in the case of NTPC Ltd. vs. CIT, 229 ITR 383 and various other decisions, the ld. Counsel for the assessee submitted that the additional grounds being purely legal in nature and no ITAs No.230 & 574/Del/2017 fresh facts are required to be investigated, the same should be admitted for adjudication.

8. After hearing both the sides and considering that no new facts are required to be investigated and the additional grounds being legal in nature, therefore, following the decision of the Hon’ble Supreme Court in the case of NTPC Ltd. vs. CIT, reported in 229 ITR 383, the additional grounds are admitted for adjudication.

ITAs No.230 & 574/Del/2017 computed the disallowance u/s 14A r.w. Rule 8D at Rs.5,80,61,219/- and after deducting the suo motu disallowance made by the assessee, made disallowance of Rs.3,04,61,857/-. He submitted that the ld.CIT(A) restricted such disallowance to Rs.3 crore being the actual dividend income received during the year for which the Revenue is in appeal and for the addition sustained by the CIT(A), the assessee is in appeal before the Tribunal.

ITAs No.230 & 574/Del/2017

ITAs No.230 & 574/Del/2017 expenditure. He accordingly submitted that the disallowance made u/s 14A of the Act r.w. Rule 8D of the IT Rules cannot exceed in the worst scenario Rs.7,09,994/.

ITAs No.230 & 574/Del/2017 which has yielded dividend income is much less than the own capital and free reserves of the assessee company. It is also his submission that there is no estopple against law and it is always open to the assessee to resile from the decision taken under mis-conception of law. Accordingly, it is his submission that the assessee can suo motu raise grounds seeking correct computation u/s 14A of the Act. It is the submission of the ld. DR that once the assessee has suo motu made disallowance of Rs.2,75,99,362/-, the disallowance u/s 14A, under no circumstances can be less than the said amount. Otherwise, the final computation will be less than the returned income.

ITAs No.230 & 574/Del/2017 14A only qua investments which have yielded exempt income from the year under consideration. Under these circumstances, we deem it proper to restore the issue to the file of the AO with a direction to find out the investments which have yielded dividend income and to take into the same for considering the average value of investment. So far as the interest expenditure for the purpose of disallowance u/s 14A is concerned, we find merit in the argument of the ld. Counsel that bank guarantee commission, interest on TDS, interest on service tax, interest on professional tax, interest paid to clients on advance brokerage, interest on clients’ margins money, etc. cannot be considered for the purpose of disallowance u/s 14A r.w. Rule 8D. We, therefore, deem it proper to restore the issue to the file of the AO with a direction to recompute the disallowance u/s 14A r.w. Rule 8D after taking into account the investments that have yielded dividend income and recompute interest expenditure on investments as per fact and law. The AO, while doing so, shall keep in mind the total investment of the assessee, vis-à-vis the own funds and free reserves for making any disallowance out of any interest expenditure. He shall keep in mind the decision of the Hon’ble Supreme Court in the case of CIT vs. Reliance Industries Ltd. (supra) and the decision of the Hon’ble Delhi High Court in the case of HT Media (supra) and Taikisha Engineering India Ltd. (supra). Needless to say, the AO shall give due opportunity of being heard to the assessee and decide the issue as per fact and law. The grounds raised by the assessee including the additional grounds on this issue are accordingly allowed for statistical purposes. 12

ITAs No.230 & 574/Del/2017

“8.2. The AO disallowed the deduction claimed by the appellant in respect of Stock Appreciation Right (SAR) expenditure of Rs.1,17,63,296/- and Rs.47,10,557/- aggregating to Rs.1,64,73,853/- as not being eligible as an allowable expense u/s 37(1) of the Act. The AR has submitted that the said transaction pertained to write off of the loan given to the trust and was deductable as a business expenditure u/s 37(1) of the Act. It is noted that this issue was adjudicated in appeal for the A. Y. 2008-09 and the Ld. ClT(Appeals)-XVIII vide her order dated 28.02.2013 in A. No. 229/10-11 had held that the expenditure claimed was clearly a capital expense and hence not allowable. The finding of the Ld. CIT(Appeals)-XVIII is as under: "5.5 Why SAR discount is capital in nature (not allowable)? Claim of SAR discount as a deduction is to be examined under the head "Profits and gains of business or profession". This head of income is housed in sections 28 to 44DB. Under section 28(i) the profits and gains of any business or profession carried on by the assessee at any time during the previous; year is chargeable to tax. As per section 29, the income referred to in section 28 should be computed in accordance with the provisions contained in section 30 to 430. Section 36 to 36 confer specific deductions. Section 37 deals with expenditure which is general in nature and not covered within section 36 to 36. The remaining sections enlist various categories of nondeductible expenditure. Sections 30 to 36 dealing with specific deductions do not deals with ESOP discount. The allowability of SAR discount would have to be examined under section 37 - the residuary section. To examine eligibility of SAR discount u/s 37, the character of discount needs 13

ITAs No.230 & 574/Del/2017 to be examined. If the discount is regarded as capital in nature, section 37 would prohibit its deduction. Of it is expenditure on revenue account that qualifies for deduction. From an accounting perspective SAR discount may be revenue item but from an income-tax view point, whether such discount is capital or revenue in nature is the issue for consideration and of importance. In the absence of an express definition of capita! or revenue expenditure in the Act, one may have to rely on the various judicial precedents on this matter; the rationale adopted and the interpretation adjudged therein. In the treatise 'The Law and Practice of Income Tax' by Kanga and Palkiwala, (9th edition -page 225) the learned authors observe - "The problem of discriminating between capita/ receipts and income receipts, and between capital disbursements and income disbursements, has very frequently engaged the attention of the courts. In general, the distinction is well recognized and easily applied, but from time to time cases arise where the item lies on the border line and the task of assigning it to income or capita/ becomes much of refinement. As the Act does not define income except by way of adding artificial categories, it is to be decided cases that one must go in search of light." (Emphasis supplied) In the context of SAP discount, the Jurisdictional Tribunal - in the case of Ranbaxy Laboratories Limited (2009) 124 TTJ 771 (Del) held ESOP discount to be capital and not a allowable/ deductible business expenditure. The Delhi Tribunal placed it reliance on the decision of the House of Lords in the case of Lowry v Consolidated African Selection Trust Ltd. (1940) 8 ITR 88 (Supp) and held it to be capital. This decision was upheld by the Mumbai Tribunal. Thus the arguments, as fortified by the above decisions, wherein it has been held that SAR discount is NOT an allowable expenditure (largely for the reason that it is a capita/ expenditure), in favour of SAR discount being capital, are:- • SAR discount are incurred in relation to issue of shares to employees. They are not relatable to profits and gains arising or accruing from a business/trade. The Apex Court decision in the case of Punjab State Industrial Dev Corporation Ltd. (1997) 225 ITR 792 (SC) and Brooke Bond India Ltd. (1997) 225 ITR 798 (SC) have held that expenditure resulting in 'increase in capital' is not an allowable deduction even if such expenditure may incidentally help in business of the company.

ITAs No.230 & 574/Del/2017

• SAR discount does not diminish trading/ business receipts of the issuing company. The company does not suffer any pecuniary detriment. To claim a charge against income, it should inflict a detriment to the financial position. ESOP is a voluntary scheme launched by the employers to issue shares to employees. The intention is to only give a 'stake' to the employees in the organization. • This discount is not incurred towards satisfaction of any trade liability as the employees have not given up anything to procure such ESOP. • The discount was not a payment of sum contractually due to the employees and cannot be said to have been laid out for the purpose of business. • Share premiums obtained on issue of shares are items of capita/ receipt. When such premium is foregone, it cannot be claimed as an 'expenditure wholly and exclusively laid out or expended for the purposes of the trade'. Thus on the above basis the entire expense claimed by the appellant company i.e. the difference between the purchase price of SAR- Rs.503/ and SAR value i.e. Rs.140 is clearly a capital expense." 8.3. Since the facts in the present appeal are similar, following the order of the Ld. CIT(Appeals)-XVIII, the disallowance of Rs. 1,64,73,853/- made by the AO by holding the expenditure as capital in nature is confirmed. These grounds of appeal are ruled against the appellant.”

ITAs No.230 & 574/Del/2017 which decided this issue in by order dated 04/01/2017 wherein relying upon the decision of the special bench in 144 ITD 21 claim of the assessee with respect to the above disallowance were allowed vide para No. 7 of that order. The coordinate bench in para No. 8 also held that the issue is also squarely covered by the decision of the Hon‟ble Madras High Court in 211 Taxman 554 wherein it has been held that the above expenditure on account of employee stock option scheme is an ascertained liability for deduction and further the Hon‟ble Delhi High Court in CIT versus Lemon tree hotels Ltd in ITA No. 107/2015 has also held that the expenses debited is cost of employee stock option plan in the profit and loss account is an allowable expenditure. The Ld. departmental representative also could not point out any other judicial precedent against the above judicial precedents cited by the Ld. authorized representative. In view of this ground No. 1 and 2 of the appeal of the assessee is allowed reversing the decision of the Ld. CIT - A and directing the assessing officer to allow the sum of Rs. 2096 3780/- on account of the difference between the purchase price of stock appreciation right in the sale price of such stock appreciation right on exercise by the employees of the appellant as these are revenue expenditure in nature. Therefore ground no 1 & 2 of the appeal of the assessee is allowed.”

“ The Revenue’s appeal under Section 260A of the Income Tax Act alleges that the Income Tax Appellate Tribunal (1TAT) erred in allowing 22,09,63,780/- 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 IT AT 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-Ill, 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 16

ITAs No.230 & 574/Del/2017 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, 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 of66.82 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 ITAs No.230 & 574/Del/2017 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.”

ITAs No.230 & 574/Del/2017 in the order of the CIT(A) in directing the AO to allow depreciation @ 60% on UPS. Accordingly, the order of the CIT(A) is upheld and the ground raised by the Revenue is dismissed.