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

PER SUDHANSHU SRIVASTAVA, JM:

This appeal by the assessee pertains to assessment year

2008-09 and challenges the order passed by the Ld.

Commissioner of Income Tax (Appeals) - XVIII, New Delhi {CIT

(A)} which has been passed vide order dated 28.2.2013.

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT 2.0 Brief facts of the case are that the assessee company is

engaged in the business of broking in securities, financial

advisory services and depository services. The return of income

was originally filed declaring total income of Rs. 1,22,23,68,020/-

which was subsequently revised declaring total income of Rs.

1,21,16,08,860/-. Return of income was initially processed u/s

143(1) of the Income Tax Act, 1961 (hereinafter called ‘the Act’)

and was later selected for scrutiny under CASS. The assessment

was completed at an income of Rs. 1,36,67,12,228/- after, inter

alia, making the following additions/disallowances:

i) Disallowance of stock appreciation rights Rs. 2,04,87,736/-

ii) Disallowance of bad debts written off Rs. 85,38,920/-

iii) Disallowance u/s 14A of the Act Rs. 1,19,79,827/-

iv) Merchant banking licence transferred Rs. 6,80,61,425/-

v) Disallowance of provision for expenses Rs. 79,99,216/-

vi) Disallowance of depreciation on UPS Rs. 43,17,187/-

vii) Disallowance of depreciation on other assets Rs. 3,47,98,353/-

2.1 Aggrieved, the assessee carried the matter before the

Ld. First appellate authority challenging these additions and

disallowances. However, the appeal of the assessee was

dismissed and now the assessee is before the Tribunal

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT challenging the order of the Ld. CIT (A) and has raised the

following grounds of appeal:-

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT directing further disallowance of Rs.3,08,79,796 on account of difference between the sale price of SAR 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 to employees. 2.1, That the Commissioner" of Income tax (Appeals) erred on facts and in law in not appreciating that the above differential amount of Rs.3,08,79,796 was in the nature of employee compensation allowable as deduction under section 37(1) of the Act. 2.2 Without prejudice, and in the alternative, the Commissioner of Income tax (Appeals) erred on facts and in law in not allowing deduction of the above differential amount of Rs.3,08,79,796 under section 36(1)(ii) of the Act alleging that the same was not in accordance with the provisions of the Payment of Bonus Act, 1965. 3. That the Commissioner of Income tax (Appeals) erred on facts and in law in upholding the disallowance of Rs. 85,38,920 made by the assessing officer under section 36(l)(vii) of the Act on account of bad debts written off on the ground that corresponding debt was not accounted as income in the books of accounts earlier. 3.1 That the Commissioner of Income tax (Appeals) erred on facts and in law in not appreciating that necessary conditions stipulated under section 36(1)(vii) read with section 36(2) of the Act stood satisfied inasmuch as part of the above debts written off comprised of brokerage income and interest on delayed payment which were duly accounted as income by the appellant earlier ill the books of accounts. 3.2 Without prejudice, and in the alternative, the Commissioner of Income tax (Appeals) erred on facts and in law in not allowing

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT deduction of the above bad debts as loss incidental to business under section 28 of the Act. 4. That the Commissioner of Income tax (Appeals) erred on facts and in law in upholding disallowance of Rs.1,19,79,827 made by the assessing officer under section 14A of the Act. 4.1 That the Commissioner of Income tax (Appeals) erred on facts and in law in ignoring the disallowance suo-moto offered by the appellant under section 14A of the Act in the revised computation of income filed during the course of assessment proceedings on the ground that the same was not submitted by way of revised-return. 4.2 That the Commissioner of Income tax (Appeals) erred on facts in upholding the observation of the assessing officer that the loan given by the appellant to the Trust would constitute investment for the purposes of making disallowance under section 14A of the Act. 4.3 That the Commissioner of Income tax (Appeals) erred on facts and in law in upholding the action of the assessing officer in proportionately disallowing bank guarantee commission and bank charges as part of interest expenditure while applying Rule 8D of the Income Tax Rules, 1961 without appreciating that there was no nexus between the incurrence of said expenditure and the investments made by the appellant. 5. That the Commissioner of Income tax (Appeals) erred on facts and in law in sustaining addition of Rs. 6,80,61,425 made by the assessing officer on account of income that ought to have been received by the appellant from the transfer of merchant banking business license to MIs. Religare Capital Markets Ltd ('RCML'). 5.1 That the Commissioner of Income tax (Appeals) erred on facts and in law in not appreciating that the above license was transferred by the appellant to RCML without any consideration as part of restructuring process. 5

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT 6. That the Commissioner of Income tax (Appeals) erred on facts and in law in upholding the disallowance of Rs. 79,99,216 made by the assessing officer in respect of year end provision made for following expenses holding the same to be unascertainable liability on the ground that the bills for the same were received in subsequent year: (i) Legal and Professional - Rs.67,33,154 (ii) Recruitment expenses - Rs. 11,24,551 (iii) Software license expenses - Rs. 1,41,511 6.1 That the Commissioner of Income tax (Appeals) erred on facts and in law in not appreciating that the above provisions were allowable deduction under section 37(1) of the Act since the liability thereafter stood crystallized, inasmuch as the services were received by the appellant during the year under consideration. 6.2 Without prejudice, and in alternative, the Commissioner of Income tax (Appeals) erred on facts and in law in not directing the assessing officer to allow deduction of the above sum ofRs.79,99,216 in the subsequent year. 7. That the Commissioner of Income tax (Appeals) erred on facts and in law in upholding the action of the assessing officer in allowing depreciation on UPS @ 15% as against depreciation @ 60% claimed by the appellant. 8. That the Commissioner of Income tax (Appeals) erred on facts and in upholding disallowance of depreciation to the extent of Rs. 3,47,15,985 holding that the appellant failed to produce necessary documentary evidences in support of addition to fixed assets without appreciating that the appellant was not provided sufficient time to furnish the same.”

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT 3.0 The Ld. Authorised Representative (AR) submitted that

the issue of stock appreciation rights is squarely covered in

favour of the assesssee by the order of the Tribunal in assessee’s

own case and in the case of the other group companies. It was

submitted that this issue was decided in favour of the assessee

by the ITAT Delhi Bench in assessee’s own case for Assessment

Year (AY) 2010-11 in ITA No. 4644/Del/2015 vide order dated

9.10.2017. It was submitted that subsequently this order of ITAT

Delhi Bench in assessee’s own case was affirmed by the Hon’ble

Delhi High Court in the case of PCIT vs. Religare Securities Ltd.

in ITA No. 311/2018. The Ld. AR also submitted that similar

decisions had been rendered by the Tribunal in group companies

of the assessee viz:

i) Religare Macquarie Wealth Management Limited vs.

ACIT in ITA No. 2396/Del/2013 for AY 2008-09 and

affirmed by the Hon’ble delhi High Court in PCIT vs.

Religare Macquarie Wealth Management Limited in ITA

438/2018.

ii) Religare Finvest Limited vs. ACIT in ITA No.

2284/Del/2013 for AY 2008-09.

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT iii) Religare Commodities Ltd. vs. ACIT in ITA Nos.

2283/Del/2013 and 3634/Del/2014 for AYs 2008-09

and 2009-10.

iv) Religare Wealth Management Ltd. vs. DCIT in ITA No.

1780/Del/2016 for AY 2011-12.

3.1 A copy of the above said orders were also placed on

record.

3.2 With respect to disallowance of bad debts written off to

the tune of Rs. 85,38,920/-, the Ld. AR submitted that the

assessee is a member of National Stock Exchange and Bombay

Stock Exchange and is engaged in the business of buying and

selling securities on behalf of its clients on the stock exchange for

which brokerage is charged from the clients. It was further

submitted that on purchases of securities, the assessee is under

obligation to pay the value of security so transacted to the stock

exchange within the prescribed time. It was further submitted

that the total amount due from the various clients is reflected as

debtors balances in the balance sheet and it comprises of amount

recoverable towards the principal value of securities, brokerage

charged for purchase or sale of securities and interest, if any, for

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT delay in making the payment for the amount due. It was

submitted that in cases where the client is unable to pay the

amount due and efforts for recovering such amount fail, such

amounts are written off by the assessee in its books of accounts.

The Ld. AR submitted that these amounts, which were calimed as

bad debts, were actually written off and the writing off of debt

was not in dispute. It was submitted that the Assessing Officer

(AO) had disallowed the bad debts on the ground that these debts

had not been routed through the profit and loss account and had

not been considered as income and further for the reason that

exemption from showing the debt as income in claiming

deduction u/s 36(i)(vii) of the Act is available only to the

assessees engaged in money lending or banking businesses and

cannot be extended to share brokers. It was further submitted

that the Ld. CIT(A) had upheld the action of the AO by holding

that no evidences had been produced to demonstrate that the

entire debt, including the principal amount , had been taken in

to consideration by the assessee while computing its income in

the relevant or earlier assessment years. The Ld. AR argued that

the Ld. CIT (A) as well as the AO had erred in making

disallowance on this account for the simple reason that post

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT amendment to section 36(1)(vii) of the Act w.e.f. 1.4.1989,

deduction for bad debt has to be allowed in the year in which it

has been written off in the books of accounts and, thus, since the

same has been done, the same could not be disallowed. It was

further submitted that another condition essential for writing off

of bad debt is that the debt or part thereof should have been

taken into account while computing the income of the assessee in

the previous year or earlier years and this too had been done

because the debt comprises of brokerage income and interest on

delayed payments which had, undisputedly, been taken into

account while computing the income of the assessee. It was

submitted that, thus, the condition stipulated in section 36(1)(vii)

of the Act is that debt or part thereof should have been taken into

account for computing the income and it is not essential that the

entire debt should have been taken as income. The Ld. AR placed

reliance of numerous judgments of the various Hon’ble High

Courts and the co-ordinate benches of the Tribunal to support

this contention. In the alternative it was submitted that the bad

debt in question should be allowed as an allowable business loss

in terms of section 28 of the Act.

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT 3.3 Coming to ground Nos. 4 to 4.2 challenging the

disallowance of Rs. 1,19,79,827/- made u/s 14A of the Act, the

Ld. AR submitted that during the relevant assessment year, the

assessee had earned dividend income of Rs. 20,400/- from

investment in shares of Ranbaxy Limited which was claimed as

exempt u/s 10(34) of the Act . It was further submitted that this

dividend was received from investment of Rs. 29,46,880/- in

shares of Ranbaxy Laboratories Ltd. The Ld. AR also submitted

that in spite of receiving dividend income of Rs. 20,400/- only,

the assessee had made a suo moto disallowance of Rs. 1,82,616/-

u/s 14A of the Act. by considering interest expenditure of Rs.

71,94,48,759/- being attribution in the ratio of average value of

investments resulting in exempt income to the average value of

assets. It was further submitted that the assessee had also

considered and made disallowance @ half percent of average

value of investment. The Ld. AR submitted that both the lower

authorities had erred in applying the provisions of rule 8D

without establishing any nexus between the earning of exempt

income and expenditure. It was submitted that although no

expenditure was incurred in relation to earning of exempt

income, the assessee had suo moto made the disallowance but

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT the same had been discarded by the AO without recording any

objective satisfaction. The Ld. AR also submitted that the interest

expenditure incurred by the assessee related only to the business

operations of the assessee in as much as the borrowed funds

were utilised for business operations and were not used for

making any investments thereby attracting the rigours of section

14A. The Ld. AR also submitted that during the year under

consideration, the only new investment was of Rs. 25 crores in

Religare Aegon Assets Management Company (P) Ltd. which had

been made out of assessee’s own funds. Referring to the balance

sheet as on 31.3.2008, the Ld. AR submitted that as on that date

the assessee had its own funds amounting to Rs. 171.77 crores

which included share capital of Rs. 28.19 crores and reserves

and surplus of 143.57 crores. The Ld. AR, referring to various

judicial precedents, submitted that it was settled law that

interest expenditure cannot be disallowed u/s 14A where the

assessee had sufficient surplus funds and there was no finding

by the AO of any direct nexus of borrowed funds with the

investments.

3.4 In the alternate, it was submitted that it has also been

consistently held by the various Hon’ble Courts that for the 12

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT purpose of computing interest disallowance, only net interest

expenses are to be considered. It was submitted that in the

present case, the assessee had incurred interest expenditure

amounting to Rs. 73,64,48,184/- whereas the interest income

earned during the year amounting to Rs. 1,55,40,60,732/-

thereby earning net positive interest income and, thus, no

interest expenditure could be disallowed u/s 14A of the Act. The

Ld. AR submitted that as regards the disallowance on account of

administrative expenses, no part of expenditure debited to profit

and loss account was incurred in relation to earning of exempt

income and, therefore, the same did not warrant any

disallowance u/s 14A of the Act. It was also submitted that the

disallowance u/s 14A has been computed incorrectly in as much

as the lower authorities had erred in treating the loan given to

Religare Enterprises Ltd. Stock Appreciation Rights Trust as

investment made by the assessee and further the lower

authorities had erred in disallowing the bank guarantee

commission and bank charges as part of interest expenditure

while applying Rule 8D. In view of these submissions, the Ld. AR

submitted that the lower authorities could not have considered

the investments not yielding exempt income while computing the

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT disallowance u/s 14A of the Act. It was submitted that the

disallowance, if any, is to be considered only with respect to the

investment made in the shares of Ranbaxy Laboratories Ltd. from

which dividend income at Rs. 20,400/- has been received.

Placing reliance on various judicial precedents, it was submitted

that no disallowance could be made which would exceed the

exempt dividend income of Rs. 20,400/-.

3.5 With respect to ground Nos. 5 and 5.1 challenging the

addition of Rs. 6,80,61,425/- pertaining to Merchant Banking

License, the Ld. AR submitted that in order to expand the scope

of its business, the assessee had made an application to the

Securities and Exchange Board of India (SEBI) for registration as

Category-I Merchant Banker and that on fulfilment of the

prescribed conditions the assessee was granted certificate of

registration by SEBI for carrying on Merchant banking on

12.12.2006. It was further submitted that during the year under

consideration, as part of restructuring of the operations in the

Religare group, the assessee transferred its merchant banking

registration to Religare Capital Markets Ltd. which is its group

company. It was submitted that this business decision was taken

to comply with the SEBI Guidelines which provided that the 14

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT merchant banking license can be held by only one company in a

group of companies. It was submitted that in accordance with the

restructuring scheme, instead of applying for fresh licence to

carry on the merchant banking business, the assessee sought

transfer of the merchant banking registration to Religare Capital

Markets Limited vide application dated 22.5.2007, which was

subsequently approved by the SEBI vide approval dated

21.1.2008. It was submitted that, undisputedly, no consideration

was received or accrued as a result of such transfer of

registration by the assessee but the lower authorities made the

impugned addition on the ground that since the licence was

transferred to a sister concern without any consideration, the

same was not at arm’s length price. It was submitted that the AO

had computed the market value of the registration certificate on

the basis of the income earned by the assessee from merchant

banking business during the year consideration and multiplying

the same by 5. The Ld. AR submitted that this licence was a

capital asset which had been transferred pursuant to an

application made by the assessee to SEBI and no consideration

was received for this transfer. It was submitted that since it was

a capital asset, no notional income could have been brought to

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT tax. It was submitted that in absence of any consideration having

been received by the assessee, there was no taxable income in

the hands of the assessee. It was submitted that this notional

amount had neither been earned nor received nor is receivable by

the assessee and capital gains, if at all, could be brought to tax

only on the basis of actual consideration. It was submitted that it

is only the real income to which the assessee is legally entitled to

receive can be brought to tax and any notional income which has

not duly been received / earned cannot be brought to tax.

3.6 Arguing for ground Nos. 6 to 6.2 pertaining to

disallowance of provision made for expenses amounting to Rs.

79,99,216/-, the Ld. AR submitted that the assessee had made

provision for legal and professional charges amounting to Rs.

67,33,154/-, recruitment expenses amounting to Rs. 11,24,551/-

and software license expenses amounting to Rs. 1,41,511/- for

which although the services had been received, the invoices were

received in the subsequent financial year. It was submitted that

these provisions were disallowed on the ground that the liability

for payment of these expenses had not crystallised during the

year. It was submitted that the assessee has been consistently

and regularly following the accrual system of accounting which 16

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT has always been accepted by the revenue and that in terms of the

accrual system it was incumbent on the assessee to provide for

expenses incurred during the year. It was submitted that under

the accrual/ mercantile system of accounting, expenses are

allowable as deduction if they are incurred/accrued irrespective

of the fact that the liability has to be discharged at a later date. It

was submitted that these provisions were not a contingent

liability as services have been rendered and the liability had

crystallised. The Ld. AR placed reliance on numerous judicial

precedents to buttress the argument that if the business liability

has definitely arisen in an accounting year, deduction for the

same should be allowed even if the liability is discharged in the

future. In the alternate, it was submitted that the assessee has

not claimed deduction of these impugned expenses in the

subsequent year on the receipt of invoices and, therefore, if the

disallowances made were to be upheld, appropriate direction may

be given for allowing the deduction of the aforesaid amount in the

subsequent year.

3.7 With respect to ground No. 7 regarding disallowance of

depreciation on UPS, it was submitted that the assessee has

claimed depreciation at @ 60% by treating the UPS as part of 17

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT computer and peripherals whereas the AO has part disallowed

the claim of depreciation by holding that UPS was not a part of

computer and peripherals but was plant and machinery eligible

for depreciation @ 15%. The Ld. AR submitted that it is settled

judicial precedent that UPS is an essential part of computer

system and computer cannot function in isolation without basic

computer accessories and peripherals like switches, routers,

cables, etc. which form an integral part of the computer system.

It was submitted that numerous courts have held that

depreciation should be allowed @ 60% on UPS. A list of such

cases was cited before us.

3.8 With respect to ground No. 8 pertaining to

disallowance of depreciation on fixed assets amounting to Rs.

3,47,15,985/- it was submitted that during the year under

consideration, the assessee had purchased fixed assets

amounting to Rs. 47,43,70,325/- which was duly recorded in the

audited financial statements and the tax audit report and during

the course of scrutiny proceedings the assessee had submitted

invoices pertaining to purchase of fixed assets amounting to Rs.

28,87,07,545/- before the AO for verification. It was submitted

that AO, however, had disallowed depreciation amounting to Rs. 18

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT 3,47,15,985/- on the ground that invoices amounting to Rs.

35,00,46,653/- were not produced for verification. The Ld. AR

submitted that the assessee had requested for some more time

for producing complete invoices but the AO had proceeded to

pass the assessment order disallowing the assessee’s claim of

depreciation. It was further submitted that the assessee had

sought to file additional evidences before the Ld. CIT (A) which

was rejected and the addition on this account was upheld. The

Ld. AR submitted that as on date, 77% of the invoices were

available and the same were open to verification. It was also

submitted that the financial statements of the assessee were duly

audited and the tax audit report also contained the complete list

of additions to the fixed assets made during the year and,

therefore, no disallowance should have been made in this regard.

4.0 The Ld. CIT (DR) argued at length responding to the

contentions of the Ld. AR on each of the grounds raised by the

assessee. The Ld. CIT (DR) vehemently argued for upholding the

order of the Ld. CIT (A) and contended that both the lower

authorities had returned concurrent findings on all the issues

which had been decided after giving due consideration to all the

aspects involved and, therefore, no interference was called for at 19

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT the second appellate stage. The Ld. CIT (DR) also filed written

submissions which were taken on record and are being

reproduced here in under for a ready reference:

“A. Ground no. 1.1, 1.2, 1.3, 2, 2.1 & 2.2 - The following decisions may kindly be considered in respect of these grounds: Hon'ble Delhi High Court of India in the case of Ranbaxy Laboratories Ltd. v. Addl. CIT 124 TTJ 771 has held as under: The assessee was to issue shares of face value of Rs. 10 by receiving a sum of Rs. 595 per share from its employees. Thus, the assessee was entitled to receive Rs. 585 towards premium on issue of shares. The market price at Rs. 738.95 per share would have resulted in realization of higher share premium. The assessee had not accounted for the difference between Rs. 738.95 and Rs. 10 as its income during the year. Thus, there was no loss of income held to be taxable. What was loss to the assessee was by way of short receipt of share premium account and not by way of any expenditure or incurring any liability for such an expenditure. By issuing shares at below market price, the same did not result into incurring any expenditure, rather it resulted into short receipt of share premium which the assessee was otherwise entitled to. Though the guidelines of the SEBI required the assessee to account for short receipt of share premium as employee's compensation expenses, for claiming such expenses as allowable, the assessee had to qualify that expenses were incurred and the same were wholly and exclusively for the purpose of business. By issuing shares at less than market price, the assessee could not be said to have incurred any expenditure, rather it amounted to short receipt of share

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT premium. The receipt of share premium was not taxable and, hence, any short receipt of such premium would only be a notional loss and not actual loss for which no liability was incurred. The SEBI guidelines are relevant for the purpose of accounting but are not conclusive for the purpose of allowing the same as an expenditure. In a case where the assessee contracts for sale of goods say at Rs. 100 per piece as against market price of Rs. 150 per piece, whether the loss of Rs. 50 can be said to be allowable where the assessee accounts for only Rs. 100 as sales and not at Rs. 150. In such a situation, the loss will be only a notional loss or the loss of possible benefit but not the loss or liability incurred so as to be held as allowable under the scheme of the Act. Similarly, in the instant case, what was loss to the assessee was short receipt of share premium and not incurring of any liability or loss in the course of carrying on the business. Therefore, such notional losses were not allowable under the Act. The assessee was not to defray or pay any liability under the claim. Therefore, such notional loss could not be held to be allowable under the scheme of the Act. As regards the claim of the assessee under section 37, since the assessee had not incurred any expenditure but had merely received lesser amount of share premium, the same did not amount to expenditure within the meaning of section 37. Therefore, the claim of the assessee was not allowable. Hon'ble Supreme Court of India in the case of Infosys Technologies Ltd. 297 ITR 167 has held as under: Question for consideration is whether 'perquisite' could be said to accrue at the time when warrants were granted or at the time when the option vested in the employee or at the time when the options stood exercised or at the time when lock-in

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT conditions were removed or at the time when the shares were to be sold in the share market. [Para 9] Warrant is a right without obligation to buy. Therefore, 'perquisite' could not be said to accrue at the time when warrants were granted in the instant case. Same would be the position when options vested in the employees after lapse of 12 months. It was important to note that in this case options were exercisable only after the cooling period of12 months. Further, it was open to the employees not to avail of the benefit of option. It was open to the employees to resign. There was no certainty that the option would be exercised. Further, the shares were not transferable for 5years (lock-in period). If an employee resigned during the lock-in period, the shares had to be re-transferred. During the lock-in period, the possession of the shares, which is an important ingredient of shares, remained with the trust. The Stock Exchange was duly notified about non-transferability of the shares during the lock-in period. The shares were stamped with the remark 'non- transferable' during the lock-in period. It was not open to the employees to hypothecate or pledge the said shares during the lock-in period. During the said period, the shares had no realisable value. Hence, there was no cash inflow to the employees on account of mere exercise of options. On the date when the options were exercised, it was not possible for the employees to foresee the future market value of the shares. Therefore, the benefit, if any, which arose on the date when the option stood exercised was only a notional benefit whose value was. unascertainable and, the department had erred in treating the amount being the difference in the market value of shares on the date of exercise of option and the total amount 'paid' by the employees consequent upon exercise of the said options as perquisite value. [Para I I]

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT B. Ground no. 4, 4.1, 4.2 & 4.3 -In relation to these grounds Revenue wants to rely on the following decisions may kindly be considered in respect of these grounds: Written Submission by Revenue with regard to Section 14A of I.T: Act with reference to the judgment of Hon'ble Supreme Court in the case of Maxopp Investment Ltd. Vs CIT. New Delhi [2018] 91 taxmann.com 154 (SC) order dated 12.02.2018- "Submission on Section 14AA. A. Section 14A of the Income-tax Act, 1961 (Act') was inserted into the Income Tax Act, 1961 vide Finance Act 2001, with retrospective application from 1.4.1962. It provides for disallowance of expenditure in relation to income not "includible" in total income. Over a period of time, there have been several cases decided on this issue by various High Courts. CBDT issued a Circular no. 5/2014 on 11th February 2014, clarifying, inter alia, as follows: "A controversy has arisen in certain cases as to whether disallowance can be made by invoking section 14A of the Act even in those cases where no income has been earned by an assessee which has been claimed as exempt during the financial-year. 3. It is pertinent to mention that section 14A of the Act was introduced by the Finance Act, 2001 with retrospective effect from 01.04.1962. The purpose for introduction of section 14A with retrospective effect since inception of the Act was clarified vide Circular No. 14 of 2001 as under: "Certain incomes are not includible while computing the total income, as these are exempt under various provisions of the Act. There have been cases where deductions have been

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure, is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income." Thus, legislative intent is to allow only that expenditure which is relatable to earning of income and it therefore follows that the expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective' of the fact whether any such income has been earned during the financial-year or not. 4. The above position is further clarified by the usage of term 'includible' in the Heading to section 14A of the Act and also the Heading to Rule 80 of I.T.Rules, 1962 which indicates that it is not necessary that exempt income should necessarily be included in a particular year's income, for disallowance to be triggered. Also, section 14A of the Act does not use the word "income of the year" but "income under the Act". This also indicates that for invoking disallowance under section 14A, it is not material that assessee should have earned such exempt income during the financial year under consideration. 5. The above position is further substantiated by the language used in Rule 8D(2(ii) & 8D(2)(iii) of I.T. Rules . 6. Thus, in light of above, Central Board of Direct Taxes, in exercise of its powers under section 119 of the Act hereby clarifies that Rule 8D read with section 14A of the Act provides

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income." B. The Hon'ble Supreme Court, in the judgment in the case of Maxopp Investment Ltd. reported in [2018] 91 taxmann.com 154 held vide order dated 12.02.2018 as follows: (i) Only that expenditure which is in relation to earning dividends can be disallowed under section 14A and rule 8D. (ii) The dominant purpose for which investment into shares is made by assessee may not be relevant as section 14A applies irrespective of whether shares are held to gain control or as stockin-trade. However, where shares are held as stock-in- trade, main purpose is to trade in those shares and earn profits therefrom and, in process, certain dividend is also earned which is tax exempt under section 10(34); expenditure attributable to exempt dividend income will have to be apportioned to be disallowed under section 14A. (iii) Rule 8D is prospective in nature and could not have been made applicable in respect of assessment years prior to 2007 when this rule was inserted. C. Definition of the issue- section 14A (1) says that no deduction shall be allowed in respect of expenditure incurred in relation to income which does not form part of total income. (i) The issue therefore, is if section 14A (1) would stand attracted even if such income, i.e.,income not includible in the total income, is not actually earned, subject to expenditure relatable to such income having been incurred. The CBOT Circular 5/2014, after explaining the rationale of the provision of section 14A (with reference to Circular 14 of 2001), i.e., to curb the practice of reducing the tax liability on taxable income (i.e., income forming part of the total income) by claiming

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT expenditure incurred in earning tax-exempt income against taxable income, goes on to state that the legislative intent is that the expenditure relatable to earning such income shall have to be considered for disallowance. In that event i.e., expenditure relating to earning tax-exempt income having been incurred, it would become irrelevant if the exempt income has actually materialized or not, so that the disallowance of the said expenditure u/s. 14A would follow. The same therefore is only a continuation of Circular 14 of 2001, taking the premise of section 14A to its logical conclusion. The purpose of these Circulars and the legislative intent is to apply the basic principle of taxation, i.e., that it is only the net income - taxable or non-taxable, i.e., net of all expenditure incurred for earning the same, that could be subject to tax or, as the case may be, exempt from tax. The latter Circular, which is in consonance with the Memorandum explaining the provisions of Finance Bill, 2001 (introducing section 14A) as well as the Notes to the Clauses presented along with the said Bill, has been noted with approval by the Hon'ble Supreme Court in CIT v. Walfort Share & Stock Brokers (P.) Ltd. [2010] 192 Taxman 211/326 ITR 1 (SC), holding as under: "The insertion of section 14A with retrospective effect is the serious attempt on the part of Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (see Circular No. 14 of 2001 dated November 22, 2001). In other words, section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT exempt income and partly to the taxable income. In the absence of section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. "The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of section 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act." (ii) The issue, thus, considered in perspective, is not if the income not forming the part of the total income (the tax-exempt income) is earned or not, but if expenditure relatable to such income has been incurred. If such expenditure stands incurred, section 14A(1) becomes applicable. (iii) The decision by the Apex Court in the case of CIT v. Walfort Share & Stock Brokers (P.) Ltd. (supra) stands followed in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2017] 81 taxmann.com 111 (SC) where the Hon'ble Supreme Court, while considering whether deduction of expenditure incurred in earning dividend income which is not includible in the total income of the Assessee by virtue of the provisions of Section 10(33) of the Income Tax Act, 1961 as in force during the Assessment Year i.e. 2002-2003, was admissible or otherwise, made the following observations: "32. A brief reference to the decision of this Court in Walfort Share and Stock Brokers (P.) Ltd. (supra) may now be made, if only, to make the discussion complete. In Walfort Share and Stock Brokers (P.) Ltd.(supra) the issue involved was: "whether

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT in a dividend stripping transaction the loss on sale of units could be considered as expenditure in relation to earning of dividend income exempt under Section 10(33), disallowable under Section 14A of the Act?" "33. While answering the said question this Court considered the object of insertion of Section 14A in the Income Tax Act by Finance Act, 2001, details of which have already been noticed. Noticing the objects and reasons behind introduction of Section 14A of the Act this Court held that: "Expenses allowed can only be in respect of earning of taxable income. " "In paragraph 17, this Court went on to observe that: "Therefore, one needs to read the words "expenditure incurred" in section 14A in the context of the scheme of the Act and, if so read, it is clear that it disallows certain expenditure incurred to earn exempt income from being deducted from other income which is includible in the "total income" for the purpose of chargeability to tax." 'The views expressed in Walfort Share and Stock Brokers (P.) Ltd. (supra), in our considered opinion, yet again militate against the plea urged on behalf of the Assessee." (iv) The expenditure is incurred to produce or generate or in anticipation of, income, whether taxable or non-taxable. In fact, the classification as to tax status (i.e., taxable or non- taxable) has nothing to do with the income generating process; an income being, as a matter of fiscal incentive, being granted tax exempt status under the Act, for the time being. The fact of having incurred expenditure for earning income - tax-exempt (or non-exempt), which is largely a question of fact, would thus remain, and not undergo any change, irrespective of whether

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT it has resulted in any income (whether tax-exempt or non- exempt). The principle is well-settled, representing a fundamental concept of taxation, i.e., the allowability (or otherwise) of an expenditure would not depend upon whether it has in fact resulted in an income, i.e., positive income, which is in any case a matter subsequent, and that the mere fact that expenditure stands incurred for the purpose is sufficient for its admissibility, as explained by the Apex Court in CfT v. Rajendra Prasad Moody [1978] 1151TR 519 (SC). The Apex Court was in that case examining the true interpretation of section 57(iii), which employed the words 'any expenditure (not being in the nature of capital expenditure) laid out or expended for the purpose of making or earning such income', the question of law raised before it reading as under: "Whether, on the facts and in the circumstances of the case, interest on money borrowed for investment in shares which had not yielded any dividend is admissible under s. 57(iii)?" The revenue's contention in the above case was that the making or earning of income was a sine qua non to the admissibility of the expenditure u/s. 57(iii). And, therefore, where no income resulted, no expenditure would be deductible. The Apex Court rejected the revenue's contention, and held that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure and therefore, the interest paid on money borrowed for investment in shares, which had not yielded any dividend, was admissible under section 57(iii). The ratio decidendi of the judgment of Hon'ble Supreme Court in CIT v. Rajendra Prasad Moody (supra) can be applied to say, by the same analogy, that the expenditure incurred to earn an exempt income is subject to its admissibility in

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT accordance with the provisions of the Income Tax Act, 1961 including those of section 14A irrespective of whether there is a receipt or income or not during the year under consideration. D. In the case of Maxopp Investment Ltd. reported in [2018] 91 taxmann.com 154 held vide order dated 12.02.2018 Hon'ble Supreme Court has observed in para 3 of its order, as follows: "3. Though, it is clear from the plain language of the aforesaid provision that no deduction is to be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act, the effect whereof is that if certain income is earned which is not to be included while computing total income, any expenditure incurred to earn that income is also not allowed as a deduction. It is well known that tax is leviable on the net income. Net income is arrived at after deducting the expenditure incurred in earning that income. Therefore, from the gross income, expenditure incurred to earn that income is allowed as a deduction and thereafter tax is levied on the net income. The purpose behind Section 14A of the Act, by not permitting deduction of the expenditure incurred in relation to income, which does not form part of total income, is to ensure that the assessee does not get double benefit. Once a particular income itself is not to be included in the total income and is exempted from tax, there is no reasonable basis for giving benefit of deduction of the expenditure incurred in earning such an income. For example, income in the form of dividend earned on shares held in a company is not taxable. If a person takes interest bearing loan from the Bank and invests that loan in shares/stocks, dividend earned therefrom is not taxable. Normally, interest paid on the loan would be expenditure incurred for earning dividend income. Such an interest would not be allowed as deduction as it is an

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT expenditure incurred in relation to dividend income which itself is spared from tax net. There is no quarrel upto this extent. " The Hon'ble Supreme Court, in the judgment in the case of Maxopp Investment Ltd. reported in [2018] 91 taxmann.com 154 (SC), has also affirmed the view that the dominant purpose for which investment into shares is made by assessee may not be relevant as section 14A applies irrespective of whether shares are held to gain control or as stock-in-trade. E. In sum, the principle that it is the net income, i.e., net of expenditure relatable thereto, which is subject to tax and, correspondingly, not liable to tax, i.e., where it does not form part of the total income, is well established. It follows, therefore, that once an income is liable (or not liable) to tax, all expenditure relatable thereto is to be reckoned, and it matters little that the said expenditure has indeed resulted in a positive income. This principle, i.e., to exclude all expenditure relatable to the earning of income not forming part of the total income, irrespective of its quantum, has also been noted with approval by the Hon'ble Apex Court in Maxopp Investment Ltd.'s case (supra), in para 32 of its order, as under: "32. In the first instance, it needs to be recognized that as per section 14A(1) of the Act, deduction of that expenditure is not to be allowed which has been incurred by the assessee "in relation to income which does not form part of the total income under this Act". Axiomatically, it is that expenditure alone which has been incurred in relation to the income which is (not) includible in total income that has to be disallowed. If an expenditure incurred has no causal connection with the exempted income, then such an expenditure would obviously be treated as not related to the income that is exempted from tax, and such expenditure would be allowed as business

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT expenditure. To put it differently, such expenditure would then be considered as incurred in respect of other income which is to be treated as part of the total income." F. The Hon'ble Supreme Court, in the case of Maxopp Investment Ltd. v. Commissioner of Income Tax, New Delhi [2018] 91 taxmann.com 154 (SC), while defining the scope of the term 'in relation to' as used in section 14A, further interpreted the dominant purpose test and upheld the theory of apportionment, in following words: "33. . The entire dispute is as to what interpretation is to be given to the words 'in relation to' in the given scenario, viz. where the dividend income on the shares is earned, though the dominant purpose for subscribing in those shares of the investee company was not to earn dividend. We have two scenarios in these sets of appeals. In one group of cases the main purpose for investing in shares was to gain control over the investee company. Other cases are those where the shares of investee company were held by the assessees as stock-in- trade (i.e. as a business activity) and not as investment to earn dividends. In this context, it is to be examined as to whether the expenditure was incurred, in respective scenarios, in relation to the dividend income or not. "34. Having clarified the aforesaid position, the first and foremost issue that falls for consideration is as to whether the dominant purpose test, which is pressed into service by the assessees would apply while interpreting Section 14A of the Act or we have to go by the theory of apportionment. We are of the opinion that the dominant purpose for which the investment into shares is made by an assessee may not be relevant. No doubt, the assessee like Maxopp Investment Limited may have made the investment in order to gain control of the investee company. However, that does not appear to be

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT a relevant factor in determining the issue at hand. Fact remains that such dividend income is non-taxable. In this scenario, if expenditure is incurred on earning the dividend income, that much of the expenditure which is attributable to the dividend income has to be disallowed and cannot be treated as business expenditure. Keeping this objective behind Section 14A of the Act in mind, the said provision has to be interpreted, particularly, the word 'in relation to the income' that does not form part of total income. Considered in this hue, the principle of apportionment of expenses comes into playas that is the principle which is engrained in Section 14A of the Act. This is so held in Walfort Share & Stock Brokers (P.) Ltd., relevant passage whereof is already reproduced above, for the sake of continuity of discussion, we would like to quote the following few lines therefrom. "The next phrase is, "in relation to income which does not form part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A.. .................................................................... The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14A." G. The Apex Court, in the above judgment, thus upheld the theory of apportionment, disregarding the theory of predominant object. The uncertainty of earning the dividend income, or of it being earned incidentally, was also noted by it. It was, therefore, immaterial if dividend income was actually earned or not. The relevant paras are as under:

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT "35. The Delhi High Court, therefore, correctly observed that prior to introduction of Section 14A of the Act, the law was that when an assessee had a composite and indivisible business which had elements of both taxable and non-taxable income, the entire expenditure in respect of said business was deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply. The principle of apportionment was made available only where the business was divisible. It is to find a cure to the aforesaid problem that the Legislature has not only inserted Section 14A by the Finance (Amendment) Act, 2001 but also made it retrospective, i.e., 1962 when the Income Tax Act itself came into force. The aforesaid intent was expressed loudly and clearly in the Memorandum explaining the provisions of the Finance Bill, 2001. We, thus, agree with the view taken by the Delhi High Court, and are not inclined to accept the opinion of Punjab & Haryana High Court which went by dominant purpose theory. The aforesaid reasoning would be applicable in cases where shares are held as investment in the investee company, may be for the purpose of having controlling interest therein. On that reasoning, appeals of Maxopp Investment Limited as well as similar cases where shares were purchased by the assessees to have controlling interest in the investee companies have to fail and are, therefore, dismissed. 36. There is yet another aspect which still needs to be looked into. What happens when the shares are held as 'stock-in- trade' and not as 'investment', particularly, by the banks? On this specific aspect, CBDT has issued circular No. 18/2015 dated November 02, 2015. 37. This Circular has already been reproduced in Para 19 above. This Circular takes note of the judgment of this Court in

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT Nawanshahar case wherein it is held that investments made by a banking concern are part of the business or banking. Therefore, the income arises from such investments is attributable to business of banking falling under the head 'profits and gains of business and profession'. On that basis, the Circular contains the decision of the Board that no appeal would be filed on this ground by the officers of the Department and if the appeals are already filed, they should be withdrawn. A reading of this circular would make it clear that the issue was as to whether income by way of interest on securities shall be chargeable to income tax under the head 'income from other sources' or it is to fall under the head 'profits and gains of business and profession'. The Board, going by the decision of this Court in Nawanshahar case, clarified that it has to be treated as income falling under the head 'profits and gains of business and profession'. The Board also went to the extent of saying that this would not be limited only to co-operative societies/Banks claiming deduction under Section 80P(2)(a)(i) of the Act but would also be applicable to all banks/commercial banks, to which Banking Regulation Act, 1949 applies. 38. From this, Punjab and Haryana High Court pointed out that this circular carves out a distinction between 'stock-in- trade' and 'investment' and provides that if the motive behind purchase and sale of shares is to earn profit, then the same would be treated as trading profit and if the object is to derive income by way of dividend then the profit would be said to have accrued from investment. To this extent, the High Court may be correct. At the same time, we do not agree with the test of dominant intention applied by the Punjab and Haryana High Court, which we have already discarded. In that event, the question is as to on what basis those cases are to be decided where the shares of other companies are purchased

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT by the assesses as 'stock-in-trade' and not as 'investment'. We proceed to discuss this aspect hereinafter. 39. In those cases, where shares are held as stock-in-trade, the main purpose is to trade in those shares and earn profits therefrom. However, we are not concerned with those profits which would naturally be treated as 'income' under the head 'profits and gains from business and profession'. What happens is that, in the process, when the shares are held as 'stock-in-trade', certain dividend is also earned, though incidentally, which is also an income. However, by virtue of Section 10 (34) of the Act, this dividend income is not to be included in the total income and is exempt from tax. This triggers the applicability of Section 14A of the Act which is based on the theory of apportionment of expenditure between taxable and non-taxable income as held in Walfort Share & Stock Brokers (P.) Ltd. case~ Therefore, to that extent, depending upon the facts of each case, the expenditure incurred in acquiring those shares will have to be apportioned." "40. We note from the facts in the State Bank of Patiala cases that the AO, while passing the assessment order, had already restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 80 of the Rules and holding that section 14A of the Act would be applicable. In spite of this exercise of apportionment of expenditure carried out by the AO, CIT(A) disallowed the entire deduction of expenditure. That view of the CIT(A) was clearly untenable and rightly set aside by the ITA T. Therefore, on facts, the Punjab and Haryana High Court has arrived at a correct conclusion by affirming the view of the ITA T, though we are not subscribing to the theory of dominant intention applied by the High Court. It is to be kept in mind that in those

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT cases where shares are held as 'stock-in-trade', it becomes a business activity of the assessee to deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is, therefore, different from the case like Maxopp Investment Ltd. where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stock-in-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes up in order to earn profits. In the result, the appeals filed by the Revenue challenging the judgment of the Punjab and Haryana High Court in State Bank of Patia/a also fail, though law in this respect has been clarified hereinabove." H. It is my humble submission therefore that the aforesaid judgments of Hon'ble Supreme Court constitute an authority in law on the issue whether an expenditure incurred in relation to a tax exempt income attracts disallowance u/s 14A( 1), irrespective of whether such tax-exempt income has been earned during the year or not or earned incidentally with business income and in the light of the decision of Hon'ble Supreme Court mentioned Supra the grounds of appeal raised by the appellant for the addition u/s 14A deserves to be

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT dismissed and the grounds of appeal raised by the Revenue deserves to be allowed." 5.0 We have heard the rival submissions and have also

perused the material on record. We now take up these grounds

one by one for adjudication.

5.1 Ground Nos. 1,1.1, 1.2, 2, 2.1, 2.2 challenge the action

of the Ld. CIT (A) in upholding the disallowance of Rs.

2,04,87,736/- made by the AO on account of the difference

between purchase price of stock appreciation rights and the sale

price of such right at the time of exercise by the employees by

holding to be the same a capital loss not allowable as business

deduction. We note that this issue was considered on an earlier

occasion by the ITAT Delhi Bench in assessee’s own case for

assessment year 2010-11 in ITA No. 4644/Del/2015 wherein,

vide order dated 9.1.2017, the assessee’s appeal was allowed on

identical facts. The relevant observations/findings of the Tribunal

in assessment year 2010-11 are contained in paragraph 10 of the

said order and the same is reproduced herein for a ready

reference.

“10. ... carefully considered the rival contention and also perused the order of the lower authorities. We have

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT also perused the scheme of stock appreciation Right of REL group companies in the identical circumstances. With respect to one of the group companies, Religare commodities Ltd. for assessment year 2008-09 identical issue arose before the coordinate bench, which decided this issue in ITA No. 2283/Del/2013 by order dated 4.1.2017 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 vs. 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. 20963780/- on account of the difference between the purchase price of stock appreciation right in the sale price of such stock 39

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT appreciation right on exercise by the employees of the appellant as these are revenue expenditure in nature. Therefore groundNo.1 & 2 of the appeal of the assesee is allowed.”

5.1 We also note that this order of the Tribunal was

affirmed by the Hon’ble Delhi High Court in the case of PCIT vs.

Religare Securities Ltd. in ITA No. 311/2018. Therefore, on

identical facts and respectfully following the order of the

coordinate bench, which has since been affirmed by the Hon’ble

Delhi High Court, we allow ground Nos. 1, 1.1, 1.2, 1.3, 2, 2.1

and 2.2 of the assessee’s appeal.

5.2 Ground Nos. 3, 3.1, 3.2 challenge the upholding the

disallowance of bad debt written off to the extent of Rs.

85,38,920/-. The AO, while making the disallowance, was of the

opinion that since the debt has not been routed through the

profit and loss account and had not been considered as income,

as mandated u/s 36(1)(vii) of the Act, the same was not

allowable. In this regard it is seen that section 36(1)(vii) read with

section 36 (2) of the Act post the amendment w.e.f. 1.4.1989

states that deduction for bad debt is to be allowed for the year in

which the same is written off in the books of accounts. In the

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT present case it is undisputed that the debt has been written off.

The objection of the AO and the Ld. CIT (A) is that the debt

should have been taken in computation of income in this year or

earlier assessment years but the same is not evidenced from

records. Section 36(1)(vii) read with section 36(2) also provides

that the debt or part thereof should be taken account while

computing the income of the assessee for the relevant previous

year or an earlier year if the writing off of a debt is to be treated

as a valid deduction. It has been submitted by the Ld. AR that

the debt consists of amount recoverable towards the principal

value of securities, brokerage charges for purchase or sale of

securities and interest, if any, for delay in making the payment

for the amount due. It is assessee’s contention that the part of

debt comprising of brokerage charges and interest on delayed

payments has already been taken into account while computing

the income of the assessee. Apparently, this fact has not been

examined by either of the lower authorities and they have

proceeded on a presumption that part of this debt has not been

taken into account for computing the income. It is settled law

that even if part of the debt has been considered as an income,

the condition laid down in section 36(2) of the Act would be said

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT to have been satisfied. We draw support from the judgment of the

Hon’ble Delhi High Court in the case of CIT vs. Bonanza Portfolio

Ltd. (2010) 320 ITR 178 (Delhi) wherein the Hon’ble Delhi High

Court was considering the question “whether in view of the

provisions of section 36(1)(vii), the total debit balance including the

consideration collectible by the assessee company for the

sale/purchase of shares can be claimed by the assessee as bad

debts when the assessee company had only credited brokerage in

the profit and loss account?” Adjudicating on this question, the

Hon’ble Delhi High Court held that the money receivable from the

client has to be treated as debt and since it had become bad it is

to be rightly considered as bad debt. The Hon’ble Delhi High

Court further went on to hold that since the brokerage payable

by the client is a part of the debt and that debt had been taken

into account in the computation of income, the condition

stipulated in section 36(2) read with section 36(1)(vii) stood

satisfied. The above judgment, thus, makes it amply clear that

money receivable from a client by a share broker is to be treated

as debt and even if a part of debt has been offered to income, the

assessee will get the benefit of writing off of the entire amount of

debt as is claimed as having becoming bad. Therefore, the only

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT issue which needs to be looked into is as to whether a part of the

debt written off was offered to income in this year or earlier years

or not. Therefore, it will be in the fitness of things if this aspect is

re-examined by the AO. Accordingly, we restore this issue to the

file of the AO with a direction to verify and examine as to whether

the assessee has offered to tax a part of the debt being claimed as

bad and written off as income in earlier assessment years or in

this year in form of brokerage or interest or not. If it has so been

done, the AO shall allow the amount claimed as bad debt and

written off as deduction. The assessee will be given due

opportunity by the AO to present its case. Accordingly, ground

Nos. 3, 3.1, 3.2 stand allowed for statistical purposes.

5.3 Ground Nos. 4, 4.1, 4.2 challenge the disallowance

made u/s 14A of the Act to the tune of Rs. 1,19,79,827/-. In the

present year, the assessee had admittedly earned dividend

income of Rs. 20,400/- from shares in Ranbaxy Laboratories Ltd.

which had been claimed as exempt u/s 10(34) of the Act.

However, the assessee had made a suo moto disallowance of Rs.

1,82,616/- u/s 14A of the Act but the AO, after applying the

provisions of Rule 8D of the Income Tax Rules, 1962, computed

the disallowance at Rs. 1,21,62,443/- by making disallowance on 43

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT account of interest expenditure as well as 0.5% of average value

of investments. The main thrust of the assessee’s arguments

before us is that the disallowance u/s 14A of the Act cannot

exceed the exempt income. The Hon’ble Delhi High Court had an

occasion to consider the applicability of section 14A in the case of

Pr. CIT vs. M/s. Caraf Builders & Constructions Pvt. Ltd. in ITA

No. 725 of 2018 (Del) and, vide judgment dated 13th November,

2018, after referring to numerous judgements of the Hon’ble

Delhi High Court as well as the Hon’ble Apex Court, the Hon’ble

Delhi High Court reiterated the view that the disallowance u/s

14A cannot exceed the exempt income. The observations of the

Hon’ble Delhi High Court are contained in Para 25 of the said

judgment and the same is reproduced here in under:

“25. Total exempt income earned by the respondent- assessee in this year was Rs.19 lakhs. In these circumstances, we are not required to consider the case of the Revenue that the disallowance should be enhanced from Rs. 75.89 crores to Rs.144.52 crores. Upper disallowance as held in Principal Commissioner of Income Tax vs. McDonalds India Pvt. Ltd., ITA 725/2018 decided on 22nd October, 2018 cannot exceed the exempt income of that year. This decision follows the ratio and judgment of the Supreme Court in the case of Maxopp Investments Ltd. vs. CIT (2018) 402 ITR 640

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT (SC) and the earlier judgments of the Delhi High Court in Cheminvest vs. CIT (2015) 378 ITR 33 and CIT vs. Holcim Pvt. Ltd. (2014) 272 CTR (Del.) 282. Relevant portion of the judgment in McDonalds India Pvt. Ltd.(supra) reads:-

"8. The decision in the case of Maxopp Investment Ltd. (Supra) is significant and does answer the question in issue. This decision does not support the Revenue as the Assessing Officer in the case of Maxopp Investment Ltd. (Supra) had himself restricted the disallowance to the extent of exempt income. After referring to Walford Share and Stock Brokers P. Ltd. (Supra) it was held-

"Axiomatically, it is that expenditure alone which has been incurred in relation to the income which is includable in total income that has to be disallowed. If an expenditure incurred has no causal connection with the exempted income, then such an expenditure would obviously be treated as not related to the income that is exempted from tax, and such expenditure would be allowed as business expenditure. To put it differently, such expenditure would then be considered as incurred in respect of other income which is to be treated as part of the total income."

xxx

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT disallowance of expenditure under Section 14A of the Act would be made even when no exempt income in the form of dividend was earned in the year, and it was observed:

"14. On the issue whether the respondent- assessee could have earned dividend income and even if no dividend income was earned, yet Section 14A can be invoked and disallowance of expenditure can be made, there are three decisions of the different High Courts directly on the issue and against the appellant-Revenue. No contrary decision of a High Court has been shown to us. The Punjab and Haryana High Court in Commissioner of Income Tax, Faridabad Vs. M/s. Lakhani Marketing Incl.,ITA No. 970/2008, decided on 02.04.2014, made reference to two earlier decisions of the same Court in CIT Vs. Hero Cycles Limited, [2010] 323 ITR 518 and CIT Vs. Winsome Textile Industries Limited, [2009] 319 ITR 204 to hold that Section 14A cannot be invoked when no exempt income was earned. The second decision is of the Gujarat High Court in Commissioner of Income Tax-I Vs. Corrtech Energy (P.) Ltd. [2014] 223 Taxmann 130 (Guj.). The third decision is of the Allahabad High Court in Income Tax Appeal No. 88 of 2014, Commissioner of Income Tax (Ii) Kanpur, Vs. M/s. Shivam Motors (P)

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT Ltd. decided on 05.05.2014. In the said decision it has been held:

"As regards the. second question, Section 14A of the Act provides that for the purposes of computing the total income under the Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Hence, what Section 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance. The view of the CIT(A), which has been affirmed by the Tribunal, hence does not give rise to any substantial question of law. Hence, the deletion of the disallowance of Rs.2,03,752/- made by the Assessing Officer was in order" .

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT upon the nature of transaction entered into in the subsequent assessment year. For example, long term capital gain on sale of shares is presently not taxable where security transaction tax has been paid, but a private sale of shares in an off market transaction attracts capital gains tax. It is an undisputed position that respondent assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private placement etc. cannot be ruled out and is not an improbability. Dividend mayor may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax.”

5.4 Therefore, we agree with the proposition of the Ld. AR

that disallowance u/s 14A cannot in any case exceed the exempt

dividend income. We, therefore, set aside the issue and remit the

issue back to the file of the AO to work out the disallowance by

calculating the average investment under Rule 8D (2)(ii)/(iii) by

taking those only investments which have actually yielded the

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT divided income during the relevant year and if the same exceeds

the dividend income then restrict the same to the extent of

exempt income only. Here, since the assessee has suo moto

disallowed an amount of Rs. 1,82,616/- u/s 14A of the Act, the

disallowance should not exceed this amount. AO shall give proper

opportunity to the assessee before deciding the issue.

Accordingly, ground No. 4, 4.1 and 4.2 stand allowed for

statistical purposes.

5.5 Ground Nos. 5 and 5.1 challenge the action of the AO

in making the addition of Rs. 6,80,61,425/- being notional

addition made on account of transfer of merchant banking

licence by the assessee to another of its group company Religare

Capital Markets Limited. This addition has been made since the

assessee had transferred the licence to its sister concern without

consideration and the notional value was arrived at by taking the

income earned by the assessee from Mercantile Banking business

during the year and multiplying it by five for five years. It is

assessee’s contention that the licence was a capital asset and no

income had been received by or accrued to the assessee on such

transfer and, therefore, there was no occasion to bring the

notional income to tax. Undisputedly, the assessee has not 49

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT received any consideration for the transfer of the licence and

what has been added at the hands of the assessee in this regard

is only a notional income. The lower authorities have noted that

since the licence transferred would be providing enduring benefit

to the transferee, addition was in order. The Merchant Banking

license entitles the holders to carry on the merchant banking

business and, thus, from that angle it can be considered as

capital asset. Section 48 of the Act provides the methodology of

calculation of gains relating to capital asset. Section 48 provides

that capital gains shall be computed by deducting from the full

value of consideration received or accruing as a result of transfer

of capital asset, the expenditure incurred wholly and exclusively

in connection with such transfer and the cost of acquisition of

the asset and the cost of any improvement thereto. Therefore, it

follows that in the case of transfer of capital asset and for

determining the gain or losses arising thereto, what is

fundamental is the full value of consideration received for

transfer of the capital asset. In the present case there is absence

of any such consideration and what has been added is only a

notional amount of consideration which has neither been earned

nor received and nor is receivable by the assessee. The Hon’ble

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT Apex Court in the case of CIT vs. Balbir Singh Maini reported in

398 ITR 531 (SC) examined the meaning of word ‘accrue’ in

relation to section 48 of the Act and held that the word ‘accrue’

would only refer to real income and no notional amount could be

brought to tax in the hands of the transfer u/s 45 read with

section 48 of the Act. The relevant observations of the Hon’ble

Apex Court are as under:

"14. First of all, it is now well settled that income tax cannot be levied on hypothetical income. In CIT v. Shoorji Vallabhdas and Co. [CIT v. Shoorji Vallabhdas and Co., (1962) 46 ITR 144 (SC)} it was held as follows: (ITR p. 148) " ... Income tax is a levy on income. No doubt, the Income Tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in bookkeeping, an entry is made about a 'hypothetical income', which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income 35 can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account. "

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT 15. The above passage was cited with approval in Morvi Industries Ltd. v. CIT [Morvi Industries Ltd. v. CIT, (1972) 4 SCC 451 : 1974 SCC (Tax) 140: (1971) 82 ITR 835) in which this Court also considered the dictionary meaning of the word "accrue" and held that income can be said to accrue when it becomes due. It was then observed that: (SCC p. 454, para 11) "11.... the date of payment ... does not affect the accrual of income. The moment the income accrues, the assessee gets vested with the right to claim that amount even though it may not be immediately. "

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT not materialise and its money value is, therefore, not the income of the assessee."

5.6 Guided by the ratio laid down by the Hon’ble Apex

Court, we are unable to agree with the contention of the Revenue

that the impugned amount would be said to have accrued to the

assessee company. Similarly, the Mumbai Bench of the ITAT in

the case of Aditya Birla Telecom Limited vs. DCIT in ITA

341/Mum/2014, vide order dated 19.10.2016, has reiterated this

proposition in context of transfer of capital assets and held that

what can be taxed in the hands of the transferor is real or actual

gain that accrues or arises from a transfer of an asset and in

absence of any sale consideration, no notional gain can be

imputed in the hands of the transferor. The Tribunal further held

that there can be no notional transaction with reference to fair

market value in absence of any specific enabling provision in the

Act and the full value of consideration has to be taken based on

the price that has been contracted between the parties and

further that there was no scope for imputing consideration on a

notional basis. Therefore, in view of the above mentioned judicial

precedents, it is our considered opinion that consideration

cannot be imputed on a notional basis for the transfer of the

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT merchant banking licence as the same has neither been received,

realised and nor is capable of being received or realised.

Accordingly, we set aside the order of the Ld. CIT (A) on the issue

and direct the AO to delete the addition. Thus ground Nos. 5, 5.1

stand allowed.

5.7 Ground Nos. 6, 6.1 and 6.2 challenge the upholding of

disallowance of provision made for expenses to the tune of Rs.

79,99,216/- in respect of legal and professional charges,

recruitment charges expenses and software license expenses. The

lower authorities have disallowed these provisions on the ground

that the liability for payment of expenses has not crystallised

during the year. It is the assessee’s contention that the assessee

had received services for which these invoices were raised in the

year under consideration and since it was only after the end of

the financial year that the invoices were received that provision

had to be made in the books of accounts. The Ld. AR has drawn

our attention to the copies of the various invoices in this regard

which are placed at paper book pages 524 to 540. Admittedly, the

assessee is following mercantile system of accounting in which

the income of expenditure has to be accounted for on accrual

basis. There is no dispute about the method of accounting being 54

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT followed. The only doubt, as been raised by the lower authorities,

is whether the liability for payment of these expenses had

crystallised during the year under consideration. A perusal of the

invoices filed by the assessee in this regard also does not throw

any light on the issue. To this extent, we are in agreement with

the lower authorities that the assessee should establish that the

services were rendered and utilised for the year under

consideration. Therefore, we deem it fit to restore this issue to the

file of the AO to verify as to whether the services for which these

invoices have been raised and for which the assessee had made

provision have been received and utilised during the year under

consideration. If it is so found, then the AO shall allow the

impugned provision as deduction in this year only. Thus, ground

Nos. 6, 6.1, 6.2 stand allowed for statistical purposes.

5.8 Ground No. 7 challenges the disallowance of

depreciation on UPS. The assesee had claimed depreciation on

UPS @ 60% by treating the same as part of computer and

peripherals whereas the AO restricted the depreciation to 15% by

holding that UPS was plant and machinery and not a part of

computer and peripherals. This issue is no longer res judicata

and there are a catena of judgments wherein it has been held 55

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT that UPS is an essential part of computer system as a computer

cannot function in isolation without the basic accessory. The

leading case in this point is the judgment of the Hon’ble Delhi

High Court in the case of CIT vs. BSES Yamuna Power Ltd. in ITA

1267/2010 and the SLP filed by the revenue against this

judgment of the Hon’ble Delhi High Court has also been

dismissed by the Hon’ble Apex Court in SLP (C) No. 20645/2012.

Therefore, respectfully following the same we direct the AO to

allow depreciation on UPS @ 60%.

5.9 Ground No. 8 challenges the action of the Ld. CIT (A)

in upholding the disallowance of depreciation on fixed assets to

the extent of Rs. 3,47,15,985/-. This disallowance has been made

on the ground that the assessee could not submit complete bills

for verification pertaining to purchase of fixed assets. In this

regard, the Ld. AR has submitted that due to computer related

issues and pressure of last dates, complete invoices could not be

filed but now 77.45 % of the invoices/payments were verifiable.

Therefore, it is our considered opinion that it will be in fitness of

things if this issue is restored to the file of the AO to re-examine

the assessee’s claim and, thereafter, pass order in accordance

with law after providing due opportunity to the assessee. It is so 56

ITA No. 2282/Del/2013 M/s. Religare Securities Ltd. vs ACIT directed accordingly. Accordingly, ground No. 8 stands allowed

for statistical purposes.

allowed in terms of our directions contained in the preceding

paragraphs.

Order pronounced in the open court on 13th December, 2019.

Sd/- Sd/-

(N.K. BILLAIYA) (SUDHANSHU SRIVASTAVA) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 13/12/2019 Veena Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi