ASSISTANT COMMISSIONER OF INCOME TAX 2(3)(1), MUMBAI vs. TATA CAPITAL LIMITED, MUMBAI

These cross appeals are filed by the assessee and revenue for the Assessment Years A.Y. 2012-13 and A.Y. 2013-14 against different orders of the Learned Commissioner of Income Tax (Appeals)-6, Mumbai [hereinafter in short “Ld.CIT(A)”] dated 05.10.2017.

Briefly stated the facts are that, the Assessing Officer completed the assessment u/s. 143(3) of the Act on 08.02.2016 and 11.03.2016 determining the income of ₹.60,89,72,020/- and ₹.55,08,34,480/- under normal provisions of the Act for assessment years 2012-13 and 2013-14 respectively. While computing the income the Assessing Officer made disallowance u/s. 14A r.w. Rule 8D at ₹.19,67,82,338/- and ₹.50,68,63,128/- respectively for the assessment years 2012-13 and 2013-14. On appeal Ld.CIT(A) deleted the interest disallowance made under Rule 8D(2)(ii) of I.T. Rules. In so far as the disallowance under Rule 8D(2)(iii) of I.T. Rules is concerned the Ld.CIT(A) held that for the purpose of computing the disallowance under Rule 8D investments which are capable of earning tax free income have to be considered irrespective of whether the dividend income has been earned or not.

Before us, the assessee has raised the following additional grounds in both these assessment years: - “1. Re: Disallowance under section 14A of the Income-tax Act, 1961 1.1 On the facts and the circumstances of the case and in law. the Commissioner of Income-tax (Appeals) - 6 (4CIT(A)') has erred in upholding the invocation of Rule 8D of the Income-tax Rules, 1962. 1.2 On the facts and the circumstances of the case and in law, the CIT(A) has erred in not upholding the voluntary disallowance of Rs.2,44,17,662 made by the appellant in its return of income. 2. Re: Deduction in respect of 'Education Cess on income- tax and 'secondary and higher education cess on income- tax” (collectively referred to as 'education cess on income- tax) payable for the year under consideration, while computing the total income of the Appellant: 2.1 The Assessing Officer has erred in not allowing a deduction for the 'education cess on income-tax' payable for the year under consideration. 2.2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject, 'education cess on income-tax' for the year under consideration, 4 & 7059/MUM/2017 ITA NOs. 59 & 60/MUM/2018 M/s. Tata Capital Limited ought to be allowed as a deduction while assessing its income for the year under consideration. 2.3 The Appellant submits that the Assessing Officer be directed to re-compute its total income and tax thereon after allowing deduction for 'education cess on income-tax'.

Re: Deduction in respect of expenditure incurred on Employee Stock Option Plan (ESOP) 3.1 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject, expenditure incurred by the Appellant on ESOP, being the perquisite value in the hands of its employees (i.e. difference between the market price of the shares on the date of exercise of option reduced by the exercise price), ought to be allowed as a deduction while assessing its income for the year under consideration.

Learned Counsel for the assessee submitted that additional grounds raised by the assessee are purely legal issues, the facts there off were already on record. Failure to raise these grounds originally was neither deliberate or contumacious. It is submitted that since these additional grounds were purely legal issues, placing reliance on the decision of the Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd v. CIT [229 ITR 383] the same may be admitted for adjudication.

On hearing both sides we are of the view that the issues are only legal issues and following the decision of the Hon'ble Supreme Court in

Coming to the additional Ground No.1 i.e., in respect of disallowance u/s. 14A of the Act, Learned Counsel for the assessee submitted that the Assessing Officer has not recorded any objective satisfaction in rejecting the assessee’s suomoto disallowance made u/s. 14A before invoking the provisions of rule 8D r.w.s. 14A of the Act by the Assessing Officer. Ld. Counsel for the assessee submits that the Assessing Officer did not specifically record that he has not satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to income which does not form part of total income. Ld. Counsel for the assessee submits that on a perusal of the Assessment Order it is evident that the Assessing Officer has recorded only general satisfaction and not objective satisfaction having regard to the Books of Accounts maintained by the assessee. Ld. Counsel for the assessee further submits that in the preceding assessment years 2010-11 and 2011-12 the Assessing Officer in the Assessment Orders had recorded similar general satisfaction while computing disallowance u/s. 14A r.w. Rule 8D of I.T. Rules. Learned Counsel for the assessee submitted that on these facts the Tribunal for 6 & 7059/MUM/2017 ITA NOs. 59 & 60/MUM/2018 M/s. Tata Capital Limited the assessment years 2010-11 and 2011-12 in ITA.No. 2223/Mum/2014 and 5615/Mum/2015 by order dated 30.01.2020 held that the Assessing Officer has recorded general satisfaction and he has failed to record any objective satisfaction as to how the suomoto disallowance made by the assessee is wrong. Ld. Counsel for the assessee further in support to his submissions also placed reliance on the following decisions: - i. Maxopp Investment Ltd. v. CIT [402 ITR 640 (SC)] ii. Godrej and Boyce Manufacturing company Ltd. v. DCIT [394 ITR 449 (SC)] iii. PCIT v. Reliance Capital Asset Management Ltd., [400 ITR 217 (Bom)] iv. H.T. Media Ltd., v. PCIT [399 ITR 576 (Del.)]

With regard to the additional ground No.2 of grounds of appeal i.e., in respect of deduction of education cess on income tax and secondary and higher education cess on Income-tax, Learned Counsel for the assessee placing reliance on the decision of the Hon'ble Jurisdictional High Court in the case of Sesa Goa Ltd., v. JCIT [423 ITR 426] submitted that the Hon'ble High Court held that Education Cess and Higher and Secondary Education Cess are eligible for deduction in computing income chargeable under the head “Profits and Gains of Business or Profession”.

Ld. Counsel for the assessee also placed reliance on the following decisions: -

Therefore, it is prayed that additional grounds may be admitted and the Assessing Officer be directed to allow deduction in respect of Education Cess on Income-tax and Secondary and Higher Education Cess on Income-tax following the decision of the Hon'ble Jurisdictional High Court in the case of Sesa Goa Ltd., v. JCIT (supra).

With regard to Additional Ground No.3 i.e., in respect of expenditure incurred on Employee Stock Option Plan (ESOP), Learned Counsel for the assessee placing reliance on the Special Bench of Bangalore in the case of Biocon Limited v. DCIT [144 ITD 21] submitted that, the Special Bench of Tribunal held that discount on ESOP is an allowable deduction u/s.37(1) of the Act. Ld. Counsel for the assessee further submits that the decision of the Special Bench of the Tribunal has subsequently been affirmed by the Hon'ble Karnataka High Court in the case of CIT v. Biocon Limited [430 ITR 151 (Kar)]. Ld. Counsel for the assessee also placed reliance on the decision of the Mumbai bench of the Tribunal in the case of Mahindra & Mahindra Ltd., v. DCIT in ITA.No. 1449/Mum/2016 and

Ld. DR vehemently supported the orders of the Assessing Officer. In so far as additional grounds are concerned the Ld. DR strongly opposed for admission and adjudication of the additional grounds.

We have heard the rival submissions, perused the orders of the authorities below and the case laws relied on. With respect to the disallowance u/s. 14A of the Act, on a perusal of the Assessment Order for both these assessment years we observed that the Assessing Officer has recorded only a general satisfaction with regard to the investments made by the assessee and the possible incurring of expenses for earning dividend income. The Assessing Officer having extracted in the Assessment Order the elaborate submissions made by the assessee including the allocation of expenses between the taxable income and tax free income did not record any objective satisfaction as to why the allocation of expenses made by the assessee is insufficient to meet the requirement of Rule 8D of the I.T. Rules r.w.s. u/s. 14A of the Act.

In the case of Godrej & Boyce Mfg., Co. Ltd., v. CIT (supra) the Hon'ble Bombay High Court held as under: - “……..What merits emphasis is that the jurisdiction of the Assessing Officer to determine the expenditure incurred in relation to such income which does not form part of the total income, in accordance with the prescribed method, arises if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of the expenditure which the assessee claims to have incurred in relation to income which does not part of the total income. Moreover, the satisfaction of the Assessing Officer has to be arrived at, having regard to the accounts of the assessee. Hence, Sub section (2) does not ipso facto enable the Assessing Officer to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income is correct. The Assessing Officer must, in the first instance, determine

Further, identical issue came up before Hon'ble Bombay High Court in the case of Pr.CIT v. Bombay Stock Exchange Ltd., (2020) 185 DTR 390 (Bom), and the Hon'ble Bombay High Court considering the decision of the Hon'ble Supreme Court in the case of Maxopp Investment Ltd., v. CIT [402 ITR 640] held as under: - “11. Non-satisfaction with the disallowance offered by the assessee has to be arrived at on the basis of the accounts submitted by the assessee. In this case, the Assessing Officer had not carried out the aforesaid exercise but rejected the disallowance claimed by the assessee only on the ground that it was not in accordance with Rule 8D of the Rules. The application of Rule 8D of the Rules would only arise once the Assessing Officer is not satisfied on an objective criteria in the context of its accounts, that suo motu disallowance claimed by the assessee is not proper. 12. In fact, the Supreme Court in the case of Maxopp Investment Ltd. v. Commissioner of Income Tax 2 while upholding the view of the Delhi High Court has held that the Assessing Officer needs to record his non-satisfaction having regard to the sou motu disallowances claimed by the assessee in the context of its accounts. It is only thereafter, the occasion to apply rule 8D of the Rules for apportionment of expenses can arise.

In the above view, the question as proposed does not give rise to any substantial question of law. Thus, not entertained. Accordingly, appeal is dismissed.” 15.

We further observe that in assessee’s own case the Coordinate Bench of the Tribunal for the Assessment Years 2010-11 and 2011-12 in ITA.Nos.2223/Mum/2014 and 5615/Mum/2015 by order dated 30.01.2020 held as under: - “8. After hearing both the parties and perusing the materials available on record, we observe that in this case undisputedly the AO has recorded general satisfaction as is apparent from the perusal of the assessment order particularly para 3.3 and thus AO has failed to record any objective satisfaction after having considered the books of accounts and also point out as to how the suo motto disallowance made by the assessee is wrong by referring to the books of accounts of the assessee. Therefore, in our opinion, the AO has failed to meet the conditions precedent for invocation of provisions u/s 14A r.w. Rule 8D. The case is squarely covered by the decision of Hon'ble Delhi High Court in the case of H.T. Media Ltd. (supra) wherein the relevant paragraphs are reproduced below: “30. Rule 8 D (1) states more or less what Section 14 A (2) of the Act states. It requires the AO to first examine the accounts of the Assessee and then record that he is not satisfied with (a) the correctness of the Assessee's claim of expenditure or (b) the claim made by the assessee that no expenditure has been incurred. Unless this stage is crossed i.e. the stage of the AO recording that he is not satisfied with the clam of the Assessee in the manner indicated i.e. after examining the Assessee's accounts, the question of applying the formula under Rule 8D (2) does not arise.

The Assessee had explained that Rs. 3 lakhs was being disallowed voluntarily as an "expenditure which could be attributable for earning the said income." The Assessee explained that the disallowance had been determined on the basis of cost of finance department in the ratio of exempt income to total turnover. On that basis the disallowance in AY 2005-06 was upheld by CIT (A) at Rs. 1 lakh. The disallowance for this AY was worked out as Rs. 1,42,404/- and since the Assessee had already made a disallowance of Rs. 3 Lacs, no further disallowance was called for.

In order to disallow this expense the AO had to first record, on examining the accounts, that he was not satisfied with the correctness of the Assessee's claim of Rs. 3 lakhs being the administrative expenses.

We observe that the facts for the assessment years under consideration i.e., assessment years 2012-13 and 2013-14 are identical to the facts for the assessment years 2010-11 and 2011-12 wherein similar and general satisfaction identically worded was recorded by the Assessing Officer and the Tribunal deleted the disallowance made u/s. 14A of the Act.

In the circumstances respectfully following the decision of the Hon'ble Supreme Court in the case of Maxopp Investment Ltd., v. CIT (supra) and the decisions of the Hon'ble Jurisdictional High Court referred to above , we direct the Assessing Officer to delete the disallowance made u/s. 14A r.w. Rule 8D of I.T.Rules for the assessment years 2012-13 and 2013-14 by accepting the suomoto disallowance of expenditure considered by the assessee for earning exempt income for the purpose of 14 & 7059/MUM/2017 ITA NOs. 59 & 60/MUM/2018 M/s. Tata Capital Limited computing the disallowance u/s. 14A r.w. Rule 8D of I.T.Rules. Additional ground No.1 filed by the assessee is allowed.

As we have allowed additional ground No.1 of the grounds of appeal of the assessee the regular grounds raised by the assessee for adjudication would become academic at this stage.

Respectfully following the said decision of the Hon'ble Jurisdictional High Court allowing the additional ground No.2 of grounds of appeal, we direct the Assessing Officer to compute the income of the assessee after allowing deduction in respect of Education Cess, Secondary and Higher Education Cess on Income-tax.

In the result, appeals of the assessee are partly allowed as indicated above and revenue’s appeals are dismissed.