ICICI SECURITIES LTD,MUMBAI vs. DCIT RG 4(1), MUMBAI

ORDER

PER N.K. PRADHAN, AM

On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the action of the Deputy Commissioner of Income Tax, Range 4(1), Mumbai ("the AO") in disallowing the client assistance charges of Rs.7,13,24,846/- paid to ICICI Bank Ltd. on the alleged ground that these payments have not been laid out or expended wholly and exclusively for the purpose of business of the Appellant. 2.1 Briefly stated, the facts of the case are that the assessee had claimed client assistance charges of Rs.7,13,24,846/- as expenditure in the P&L account. This payment was made to ICICI Bank Ltd. The AO followed the assessment order of earlier years and disallowed the claim of Rs.7,13,24,846/- made by the assessee. 2.2 In appeal, the Ld. CIT(A) followed the order of his predecessor-in- office for AY 2007-08 and AY 2008-09 and confirmed the above disallowance made by the AO. 2.3 Before us, the Ld. counsel of the assessee submits that the issue has been decided in favour of the assessee by the order of the ITAT ‘I’ Bench in assessee’s own case for the AY 2004

05. (ITA No. 6529/Mum/2008), AY 2005 06. (ITA No. 7037/Mum/2008) and AY 2007 08. (ITA No. 2437/Mum/2011).

ICICI Securities 739/Mum/2016 2.4 On the other hand, the Ld. DR supports the order passed by the Ld. CIT(A). 2.5 We have heard the rival submissions and perused the relevant materials on record. We find that the above issue has been decided in favour of the assessee by the Co-ordinate Bench in assessee’s own case for AY 2004-05, AY 2005-06 and AY 2007-08. Facts being identical, we follow the above order of the Co-ordinate Bench and delete the disallowance of Rs.7,13,24,846/- made by the AO. Thus the 1st ground of appeal is allowed.

3. The 2nd ground of appeal On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the action of AO in disallowing expenditure in respect of amounts reimbursed to ISECPD on account of expenses incurred by ISECPD (other than rent, electricity and water charges) on behalf of the Appellant u/s 40a(ia) on the alleged ground that no Tax was Deducted at Source ("TDS") while making such payment. 3.1 The assessee had paid Rs.83,15,712/- to ICICI Securities Primary Dealership Ltd. and claimed the same as reimbursement of expenses for the use of facilities/amenities/utilities for the employees. On these payments, TDS was not made by the assessee. The AO followed the assessment order of the earlier years and held that the assessee was required to make TDS on payments to ICICI Securities Primary Dealership Ltd. Thus he disallowed a sum of Rs.83,15,712/-. 3.2 In appeal the Ld. CIT(A) followed the order of his predecessor-in- office for AY 2007-08 and AY 2008-09 and held that the provisions of ICICI Securities 739/Mum/2016 section 40(a)(ia) do not apply to reimbursement towards rent, water and electricity charges but will continue to apply to other expenses. He thus deleted the disallowance relating to reimbursement of rent, electricity and water charges and confirmed the balance disallowance on account of reimbursement of other expenses. 3.3 Before us, the Ld. counsel of the assessee submits that various expenses such as salary, staff welfare, canteen expenses, electricity, printing and stationary expenses, repairs, communication expenses etc. were recovered by ICICI Securities Primary Dealership Ltd. from the assessee by raising a debit note on a monthly basis. The forgoing expenses reimbursed to ICICI Securities Primary Dealership Ltd. were incurred wholly and exclusively for the purpose of assessee’s business. No tax is deductible on reimbursement of expenses since it did not have any income element in it. It is also stated by him that the above issue has been decided in favour of the assessee in its own case for the AY 2006-07 (ITA No. 1212/Mum/2010) and AY 2007-08 (ITA No. 2437/Mum/2011). 3.4 On the other hand, the Ld. DR supports the order passed by the Ld. CIT(A). 3.5 We have heard the rival submissions and perused the relevant materials on record. We find that similar issue arose before ITAT ‘I’ Bench, Mumbai in assessee’s own case for the AY 2006-07 and AY 2007- 08. The Tribunal has followed the decision in CIT v. OCB Engineers (214 taxman 121) (Bom.), M/s Stratcap Securities (I) Pvt. Ltd. v. ACIT (ITA No.

ICICI Securities 739/Mum/2016 7048/Mum/2008) (Mum), ITO v. Datamatics Software Pvt. Ltd. (ITA No. 5433/Mum/2010) (Mum), ACIT v. M/s J.B. BodaSurveyorsPvt. Ltd. (ITA No.4252/Mum/2009) (Mum), ASK Wealth Advisors (P.) Ltd. v. ACIT (51 taxmann.com 128) (Mum) and held that no tax is deductible at source if payments are made merely towards reimbursement of expenses incurred on assessee’s behalf by another entity. Facts being identical, we follow the above order of the Co-ordinate Bench and delete the disallowance of Rs.83,15,712/- made by the AO. Thus the 2nd ground of appeal is allowed.

4. The 3rd and 4th ground of appeal are discussed together as they address a common issue. The 3rd ground of appeal On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the action of AO of disallowing a sum of Rs.2,36,22,4737- u/s. 14Aof the Act read with rule 8D of Income Tax Rules, 1962 ("the Rules"). The 4th ground of appeal The Appellant also prays that the disallowance madeu/s 14A be added to the cost of the investments. 4.1 During the assessment proceedings, the AO noticed that the assessee had earned dividend income and claimed the same as exempt. However, it had not disallowed the proportionate expenses relating to such exempt income as per section 14A of the Act. The AO asked the assessee about the expenditure disallowable u/s 14A. In response to it, the assessee filed a reply dated 21.11.2011 before the AO. The AO was ICICI Securities 739/Mum/2016 not convinced with the said reply and following the judgment of the Hon’ble Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. v. DCIT (2010) 194 Taxman 203 (Bom),made a disallowance of Rs.1,98,22,473/- under Rule 8D(2)(ii) and Rs.38,00,000/- under Rule 8D(2)(iii) of the Rule. Thus the total disallowance made by him u/s 14A comes to Rs.2,36,22,473/-. 4.2 In appeal, the Ld. CIT(A) held that the assessee was not able to show any nexus between its own free funds and investment. He relied on the decision in Godrej & Boyce Mfg. Co. Ltd. (supra) and confirmed the disallowance of Rs.2,36,22,473/- made by the AO u/s 14A r.w. Rule 8D. 4.3 Before us, the Ld. counsel of the assessee submits that section 14A is not applicable to securities held as stock-in-trade. In this regard, reliance is placed by him on the decision in CCI v. JCIT(250 CTR 291) (Karn.), DCIT v. India Advantage Securities Ltd. (ITA No. 6711/Mum/2011) (Mum. Trib.) and affirmed by the Hon’ble Bombay High Court in the case of CIT v. India Advantage Securities Ltd. (ITA No. 1131 of 2013) and CIT v. Credit Suissee First Boston (ITA No. 2387 of 2013) (Bom.) Also it is submitted that if own funds are more than tax-free funds, then no disallowance u/s 14A r.w. Rule 8D(2)(ii) be made. He placed reliance on the decision in CIT v. Reliance Utilities & Power Ltd. (313 ITR 340) (Bom.), CIT v. HDFC Bank Ltd. (366 ITR 505) (Bom.) and HDFC Bank ltd. v. DCIT (67 taxmann.com 42)(Bom.).

ICICI Securities 739/Mum/2016 The Ld. counsel further submits that disallowance u/s 14A does not apply to growth funds. He relies on the decision in Aker Powergas (P.) Ltd. v. ACIT (70 taxmann.com 11) (Mum), Manugraph India Ltd. v.DCIT (ITA No. 4761/Mum/2013) (Mum), D.S. Purbhoodas& Co. v. ACIT (ITA No. 7631/Mum/2011) (Mum.) and DCIT v. M/s PNB Insurance Broking Pvt. Ltd. (ITA No. 2517/Mum/2013) (Mum). Also it is submitted that the disallowance u/s 14A be restricted to the dividend income earned. Reliance is placed on the decision in Joint Investment Pvt. Ltd. v. CIT (ITA No. 117/2015) (Del.) (AY 2009-10), Pr. CIT v. Empire package Pvt. Ltd. (ITA No. 415 of 2015) (P&H), M/s Daga Global Chemicals Ltd. v. ACIT (ITA 5592/Mum/2012) (ITAT) and Pinnacle BrocomPvt. Ltd. v. ACIT (ITA No. 6247/Mum/2012) (Mum) (ITAT). Finally it is stated that only investments which have earned income should be considered for the purpose of computing disallowance u/s 14A r.w. Rule 8D. Reliance is placed on the decision in ACIT v. Vireet Investments (P.) Ltd. (82 taxmann.com 415) (Del SB). Without prejudice to the above ground, the Ld. counsel submits that the disallowance u/s 14A be added to the cost of investments. 4.4 On the other hand, the Ld. DR relies on the decision in the case of Godrej & Boyce Mfg. Co. Ltd. (supra) and supports the order passed by the Ld. CIT(A). 4.5 We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below.

ICICI Securities 739/Mum/2016 We find that the AO had asked the assessee about the expenditure disallowable u/s 14A. In reply to it, the assessee filed its reply vide letter dated 21.11.2011. After examining the assessee’s reply, the AO made disallowance u/s 14A r.w. Rule 8D. We refer here to para 7.1 and 7.2 of the assessment order dated 31.12.2011 passed by the AO. A perusal of the balance sheet of the assessee as at March 31, 2009 indicates that the own fund was at Rs.1,734.84 million whereas the investments were Rs.2,136.85 million. Therefore, there is no merit in the contentions of the assessee that own fund was more than the investments. Accordingly, the case laws relied on by the Ld. counsel on this proposition are not applicable in the impugned assessment year. The rationale for enactment of section 14A was explained by the Hon’ble Bombay High Court in Godrej and Boyce Mfg. Co. Ltd (supra) as under: “Section 14A was enacted by the Parliament in order to overcome the judgments of the Supreme Court in the cases of CIT v. Indian Bank Ltd. AIR 1965 SC 1473, CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452 and Rajasthan State Warehousing Corpn. v. CIT [2000] 242 ITR 450/109 Taxman 145, in which it was held that in the case of a composite and indivisible business, which results in earning of taxable and non-taxable income, it is impermissible to apportion the expenditure between what was laid out for the earning of taxable income as opposed to non-taxable income. The effect of section 14A is to widen the theory of the apportionment of expenditure. Prior to the enactment of section 14A, where the business of an assessee was not a composite and indivisible business and the assessee earned both taxable and non-taxable income, the expenditure incurred on earning non-taxable income could not be allowed as a deduction as against the taxable income. As a result ICICI Securities 739/Mum/2016 of the enactment of section 14A, no expenditure can be allowed as a deduction in relation to income which does not form part of the total income under the Act. Hence, even in the case of a composite and indivisible business, which results in the earning of taxable and non-taxable income, it would be necessary to apportion the expenditure incurred by the assessee. Only that part of the expenditure, which is incurred in relation to income which forms part of the total income, can be allowed. The expenditure incurred in relation to income which does not form part of the total income has to be disallowed. From this, it would follow that section 14A has within it implicit notion of apportionment. The principle of apportionment which prior to the amendment of section 14A would not have applied to expenditure incurred in a composite and indivisible business which results in taxable and non- taxable income, must, after the enactment of the provisions, apply even to such a situation. The expression 'expenditure incurred' in section 14A refers to expenditure on rent, taxes, salaries, interest, etc., in respect of which allowances are provided for.” Also in the same judgment their Lordships explained Rule 8D as under: “In the affidavit-in-reply that had been filed on behalf of the revenue, an Explanation has been provided of the rationale underlying rule 8D. It had been stated with reference to rule 8D(2)(ii) that it would be difficult to allocate the actual quantum of borrowed funds that have been used for making tax-free investments. It is only the interest on borrowed funds that would be apportioned and the amount of expenditure by way of interest that will be taken excluding any expenditure by way of interest which is directly attributable to any particular income or receipt (for example - any aspect of the assessee's business such as plant/machinery, etc.). As regards rule 8D(2)(iii), it had been submitted that some mechanism or formula had to be adopted for attributing part of the administrative/managerial expenses to ICICI Securities 739/Mum/2016 tax-exempt investment income. The administrative expenses attributable to tax-free investment income have a fixed component and a variable component. A view was taken that the disallowance should also be linked to the value of the investment rather than the amount of exempt income. Under Portfolio Management Schemes (PMS), the fee charged ranges between 2 and 2.5 per cent of the portfolio value which would be inclusive of a profit element for the portfolio manager. While the fixed administrative expenses were excluded on the ground that in the case of a large corporate taxpayer they would be spread over a large number of voluminous activities, the variable expenses were computed at one-half per cent of the value of the investment. The justification that has been offered in support of the rationale for rule 8D cannot be regarded as being capricious, perverse or arbitrary.” 4.5.1 In Godrej & Boyce Manufacturing Company Ltd.(2017) 81 taxmann.com 111(SC), the Hon’ble Supreme Court has held that the literal meaning of Section 14A, far from giving rise to any absurdity, appears to be wholly consistent with the scheme of the Act and the object/purpose of levy of tax on income. 4.5.2 At this juncture, we refer to the recent decision dated 12.02.2018 in Maxopp Investment Ltd. v. CIT(2018) 91 taxmann.com 154(SC). The issues of ‘dominant purpose theory’ and ‘ what happens when the shares are held as stock-in-trade and not as investment, particularly by the banks’ etc. have been dealt by the Hon’ble Supreme Court. This recent judgement by the Hon’ble Supreme Court has immense relevance in the instant case. 4.5.3 In view of the above position of law, enunciated by the Hon’ble Bombay High Court and Hon’ble Supreme Court, we set aside the order of the Ld. CIT(A) and direct the AO to compute the disallowance u/s 14A ICICI Securities 739/Mum/2016 r.w. Rule 8D by examining the case laws cited by the Ld. counsel at para 4.3 in the light of the decisions mentioned at para 4.5, 4.5.1 & 4.5.2 hereinbefore after giving reasonable opportunity of being heard to the assessee. Thus the 3rdand 4thgrounds of appeal are allowed for statistical purposes.

5. The 5th ground of appeal On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the action of AO of adding the disallowance made u/s 14A to the book profits on the alleged ground that expenditure pertains to earning exempt income. The appellant prays that the addition of Rs.2,36,22,473/- made to the Book profit computed u/s 115JB be deleted. 5.1 In Vireet Investment (P.) Ltd. (supra), it has been held by the Special Bench of the Tribunal that computation of book profit in terms of clause (f) of Explanation 1 to section 115JB(2) is to be made without resorting to computation as contemplated u/s 14A r.w. Rule 8D. In the instant case, the AO has made a disallowance of Rs.2,36,22,473/- u/s 14A r.w. Rule 8D to the book profit u/s 115JB. We direct the AO to follow the above decision of the Special Bench. Thus the 5th ground of appeal is allowed for statistical purposes.

6. The 6th ground of appeal On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the action of the AO in disallowing loss on F&O marked to Market Margin amounting to Rs.4,98,862/- on the alleged ground that it is notional loss and it cannot be accrued unless the contracts are settled.

ICICI Securities 739/Mum/2016 Therefore, the Appellant prays that aforesaid claim of loss be allowed. 6.1 The AO observed that as per the accounting policy followed by the assessee in respect of derivative transaction, it was debiting the losses in respect of derivative open contract and ignoring the profit due to valuation of such contract on mark to market basis. The treatment given to losses as per accounting policy was not followed by the assessee in respect of gains. The entry in respect of gains were ignored to compute the income offering for taxation. Therefore, the AO disallowed the loss of Rs.4,98,862/- being mark to market in respect of open position of derivative contract. 6.2 In appeal, the Ld. CIT(A) followed the order of his predecessor-in- office for the AY 2008-09 and confirmed the disallowance of Rs.4,98,862/- made by the AO. 6.3 Before us, the Ld. counsel of the assessee submits that similar arose before the Tribunal in the AY 2007-08 and the issue was decided in favour of the assessee. On the other hand, the Ld. DR relies on the order passed by the Ld. CIT(A). 6.4 We have heard the rival submissions and perused the relevant materials on record. We find that the same issue arose before the ITAT ‘I’ Bench, Mumbai in assessee’s own case for the AY 2007-08 (ITA No. 2702/Mum/2011). The Tribunal following the decision in Edelweiss Capital Ltd. v. ITO (2010) 8 taxmann.com 157 (Mumbai) and Centrum Broking Ltd. v. ACIT (2015) 59 taxmann.com 451 (Mumbai), held that ICICI Securities 739/Mum/2016 ‘mark to market loss on derivatives could not be treated as contingent liability and hence, the same was to be allowed as deduction u/s 37(1)’. Facts being identical, we follow the above decision and delete the disallowance of Rs.4,98,862/- made by the AO. Thus the 6th ground of appeal is allowed.

7. The 7th ground of appeal On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the action of AO of disallowing the loss amounting to Rs.76,80,828/- arising out of sale of shares on the alleged ground that it is speculation loss in view of the Explanation to section 73 of the Act. 7.1 The assessee had booked loss of Rs.76,80,828/- on account of transactions relating to purchase and sale of shares. The assessee claimed it as business loss whereas the AO held it as speculation loss in view of Explanation to section 73 of the Act. 7.2 In appeal, the Ld. CIT(A) held that the assessee had merely claimed that it had no intention to resort to manipulative devices to distort income and the purchase and sale of shares were only incidental to its business activity. It was also claimed before him that the loss arose on account of revaluation of shares. However, the Ld. CIT(A) was not convinced with the above explanation of the assessee, as it was in the business of purchase and sale of shares along with other business and major source of income was business. Therefore, the Ld. CIT(A) held that conditions of Explanation to section 73 would apply to the case of the assessee and the income or loss on account of purchase and sale of shares were considered by him as speculation income/loss. Therefore, ICICI Securities 739/Mum/2016 the Ld. CIT(A) confirmed the above disallowance of Rs.76,80,828/- made by the AO. 7.3 Before us, the Ld. counsel of the assessee relies on the decision in Fiduciary Shares and Stock (P.) Ltd. v. ACIT 159 ITD 554 (Mum). It is submitted by him that the share trading activity of the assessee is incidental to its main business activity of stock-broking and carried out along with stock-broking activity. Common funds and managerial staff of the assessee carry out these activities. There is unity of control and management between the business of the assessee-company. It is stated that as evident from the business practice followed by the assessee, it has no intention to resort to manipulative devices to distort income and therefore, Explanation to section 73 cannot be invoked. 7.4 On the other hand, the Ld. DR submits that the assessee is in the business of purchase and sale of shares along with other business and major source of income is business, therefore, the conditions of Explanation to section 73 clearly apply to the case of the assessee and the Ld. CIT(A) rightly upheld the order of the AO treating the income or loss on account of purchase and sale of shares to be considered as speculation income/loss. 7.5 We have heard the rival submissions and perused the relevant materials on record. In Fiduciary Shares & Stock (P.) Ltd. (supra) it is held that a company whose principal business is trading of shares, loss incurred by said company in share trading will not be treated as speculation business loss but normal business loss and, hence, said loss can be adjusted against other business income or income from any other ICICI Securities 739/Mum/2016 sources of year under consideration. It held that the amendment inserted in Explanation the section 73 by Finance (No. 2) Act, 2014 w.e.f. 01.04.2015 is clarificatory in nature and would therefore, operate retrospectively from 01.04.1977 from which date the above Explanation was placed on the statute. However, we find that the ITAT ‘I’ Bench, Mumbai vide order dated 22.10.2014 in assessee’s own case for the AY 2004-05 (ITA No. 6304/Mum/2008), following the order of the Tribunal for AY 2003-04 (ITA No. 6560/Mum/2006) dated 20.08.2010 dismissed the claim of the assessee of share trading loss. Facts being identical, we follow the above order of the Co-ordinate Bench in assessee’s own case in earlier years and dismiss the 7th ground of appeal

8. We discuss below the 8th, 9th and 10th ground of appeal together as they address a common issue. The 8thground of appeal On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the action of the AO of adding the provision for bad and doubtful debts amounting to Rs.7,88,59,626/- to the Book Profit u/s 115JB of the Act. The 9th ground of appeal On the facts and in the circumstances of the case and in law, the Ld. CIT(A)erred in upholding the action of the AO in not allowing the Provision ICICI Securities 739/Mum/2016 for Bad and Doubtful Debts on the alleged ground that the claim has been made during the assessment proceedings without filing revised return. The appellant prays that the claim for the Provision for Bad and Doubtful Debt amounting to Rs.7,88,59,626/- made by the appellant in the course of the assessment as well as appellate proceedings accepted. The 10th ground of appeal On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the action the of the AO in disallowing the claim for Rs.7,88,59,626/- made u/s 36(1)(vii) read with section 36(2) on the alleged ground that it has not been actually written off as bad debts in its books of accounts. 8.1 In a nutshell, the facts are that the assessee had made provisions of doubtful debts of Rs.7,88,59,626/- and the same was debited to P&L account. While computing the book profit u/s 115JB, the same was not added to the profit. The AO further found that in the statement of income, the assessee has itself added the amount of provision for doubtful debts. In view of the above facts, the AO made a disallowance of Rs.7,88,59,626/- while computing book profit u/s 115JB. 8.2 In appeal, the Ld. CIT(A) held that the assessee had nowhere shown either before the AO or during the appellate proceedings that the bad debts had been written off whereas it was merely a provision as per the books of the accounts and the book profit was required to be increased by every kind of provisions as per section 115JB for computing the book profit. Thus the Ld. CIT(A) upheld the addition of Rs.7,88,59,626/- made by the AO to the book profit u/s 115JB of the Act.

ICICI Securities 739/Mum/2016 8.3 Before us, the Ld. counsel relies on the decision in Vijaya Bank v. CIT (2010) 190 Taxman 257 (SC), Tainwala Chemicals & Plastics India Ltd. (2013) 34 taxmann.com 159 (Bom), ACIT v. LML Ltd. (72 taxmann.com 207) (Mum.), Arrow Coated Products Ltd. v. ACIT (136 ITD 315) (Mum) and CIT v. Kirloskar Systems Ltd. (220 Taxman 1) (Kar.). 8.4 On the other hand, the Ld. DR relies on the order passed by the Ld. CIT(A). 8.5 We have heard the rival submissions and perused the relevant materials on record. In Vijaya Bank(supra), it is held in respect of section 36(1)(vii) that where assessee bank had written off impugned bad debt in its books by way of a debit to profit and loss account, simultaneously reducing corresponding amount from loans and advances to debtors depicted on assets side in balance sheet at close of year, assessee was entitled to deduction u/s 36(1)(vii) and for that purpose, it was not necessary for it to close individual account of each of its debtors in its books. We find that similar issue arose in Tainwala Chemicals & Plastics Ltd. (supra). The following questions of law were also before the Hon’ble High Court (c) Whether, on the facts and circumstances of the case, the Tribunal was justified in deleting the addition of Rs.1,90,51,000/- being provision for bad debts on account loan to its grounp concern, even though the debt did not qualify for deduction u/s 36(1)(vii) read with section 36(2) of the Act and the said debt has been depicted as a provision in the accounts of the assessee?

ICICI Securities 739/Mum/2016 (k) Whether, on the facts and circumstances of the case, the Tribunal was justified in upholding the decision of the CIT(A), in deleting the addition on account of provision for doubtful debts to the book profit u/s 115JB of the Act without appreciating that the disallowance/addition on account of diminution in the value of assets is mandatory in view of the Explanation (I) to section 115JB of the Act? On the above questions of law, the Hon’ble Bombay High Court held as under: “3. In so far as question (c) is concerned, the Tribunal by impugned order has followed the decision or the Apex Court in the matter of Vijaya Bank Ltd. v. CIT[2010] 323 ITR 166/190 Taxman 257, wherein it has been held that once the provision of doubtful debt has been debited to the profit and loss account and corresponding provision has been credited or reduced from the debtors account in the balance-sheet, then, this would amount to writing off. In the present case, the Tribunal recorded a finding of facts that the respondent-assessee has debited the provision of doubtful debt to the profit and loss account and correspondingly reduced the assets by reducing the amount of unsecured loans. On the aforesaid facts, the Tribunal held that this would amount to writing off of the debt. Thus, on examination of facts it concluded that the respondent-assessee has written off the loan and would be entitled to the claim of bad debts. The Tribunal by the impugned order also recorded a finding of fact that once the respondent-assessee has lent surplus money and offered the interest to tax as business income, then the activity of the respondent-assessee lending money is a business activity. Therefore, the debt qualifies for deduction u/s 36(1)(vii) read with section 36(2) of the Income Tax Act, 1961. In view of the finding of fact recorded by the Tribunal that the provision has been written off and reliance placed on the decision of the Apex Court in the matter of Vijaya Bank (supra), we see no reason to entertain question (c).

ICICI Securities 739/Mum/2016 8. In so far a as question (k) is concerned, the grievance of the Revenue is that for the purpose of computing profits u/s 115JB, the provision of doubtful debts has to be added. In view of our decision to question (c) above, issue of adding back the provisions for the purpose of computing book profits does not survive. This is particularly so in view of the fact that Tribunal has recorded a finding of fact that the provision has been written off. Accordingly, we see no reason to entertain question (k).” 8.5.1 Facts being identical, we follow the above decision in Vijaya Bank and Tainwala Chemicals & Plastics India Ltd. and delete the addition of Rs.7,88,59,626/- made by the AO while calculating the book profit u/s 115JB. Thus the 8th, 9th and 10th ground of appeal are allowed.

9. The 11th ground of appeal On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the action of the AO in disallowing the payment of Rs.25,38,66,133/- made to the employees of the Appellant in lieu of the ESOP on the alleged ground that the said payment was without any legal or commercial obligation on the Appellant. 9.1 The assessee had claimed expenses of Rs.25,38,66,133/- on account of payment made to employees under the Employee Stock Option Plan (ESOP) in the computation of total income. These expenses were not debited to the P&L account, but were directly reduced from the general reserve in the balance sheet. The AO came to finding that (i) there was no basis for the amount determined, (ii) the payment has been made without authority of the scheme, (iii) the amount was paid in lieu of the share not allotted and (iv) there was no legal or ICICI Securities 739/Mum/2016 commercial obligation. Therefore, the AO made a disallowance of the above sum of Rs.25,38,66,133/-. 9.2 In appeal, the Ld. CIT(A) held that there was no commercial or legal obligation on the part of the assessee for making such payment and the payment was made without any authority of the scheme. The payments were even made in lieu of the share not allotted and there was no legal or sound basis for the amount determined as payable for shares. Thus the Ld. CIT(A) upheld the above disallowance made by the AO. 9.3 Before us, the Ld. counsel of the assessee relies on the decision in CIT v. New Delhi Television Ltd. (ITA No. 366 & 367/2016) (Del.), Biocon Ltd. v. Dy. CIT [2013] 35 taxmann.com 335 (Bang-Trib.) (SB) and Aptech Ltd. v. DCIT (ITA No. 946 & others/Mum/2013) (Mum.Trib). 9.4 On the other hand, the Ld. DR supports the order passed by the Ld. CIT(A). 9.5 We have heard the rival submissions and perused the relevant materials on record. In Biocon Ltd. (supra), the assessee-company issued ESOP and claimed difference between market price and exercise option as deduction u/s 37(1), spread equally over vesting period of four years, on basis of SEBI guidelines and accounting principles. The AO disallowed the same, holding it as a contingent liability or a short receipt of share premium. The question of law before the Special Bench in the above case was the following:

ICICI Securities 739/Mum/2016 “Whether discount on issue of Employee Stock Options is allowable as deduction in computing the income under the head profits and gains of business?” The Special Bench of the Tribunal held (i) discount on premium under ESOP is simply a mode of compensating employees for their continued services to company and is a part of their remuneration, and cannot be described either as a short capital/share premium receipt or a capital expenditure, (ii) mere fact that quantification is not precisely possible at time of incurring liability would not make an ascertained liability a contingent, (iii) where liability in respect of ESOP is incurred at end of each year, which is quantified at end of vesting period when employees become entitled to exercise options, discount on ESOP is an ascertained liability and not a contingent liability, (iv) discount of ESOP being a general expense, is an allowable deduction u/s 37(1) during years of vesting on basis of percentage of vesting during such period, subject to upward or downward adjustment at time of exercise of option. 9.5.1 In New Delhi Television Ltd. (supra), it has been held that the expenses incurred by the company in relation to ESOP are allowable expenses. Also the Hon’ble Delhi High Court in CIT v. Lemon Tree Hotels vide order dated 18.08.2015 in affirmed the order of the ITAT deciding the issue in favour of the assessee in the said case where the addition made by the AO by way of disallowance of the expenses debited as cost of ESOP in P&L account was deleted by the ITAT.

ICICI Securities 739/Mum/2016 9.5.2 Facts being identical, we follow the above decisions and delete the disallowance of Rs.25,38,66,133/- made by the AO. Thus the 11th ground of appeal is allowed.

10. The 12th ground of appeal On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the action of the AO by not allowing the Provision for FBT on the alleged ground that the claim has been made during the assessment proceedings without filing revised return. Appellant prays that the claim for the Provision for FBT amounting to Rs.2,00,00,000/- made by the Appellant in the course of the Assessment as well as Appellate Proceedings be accepted. The 13th ground of appeal On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the action of the AO in disallowing the claim for Rs.2,00,00,000/- u/s 115JB of the Act. 10.1 The above grounds of appeal are discussed together as they address a common issue. The AO disallowed the claim of deduction of the provision for FBT without any discussion. The Ld. CIT(A) confirmed the order of the AO on the reason that the claim was not made in the return of income and the same was made during the assessment proceedings without filing revised return of income. 10.2 We have heard the rival submissions and perused the relevant materials on record. The issue here is whether the claim made by the assessee during the course of assessment proceedings be considered in a case where a revised return of income is not filed. In this regard, we ICICI Securities 739/Mum/2016 refer to the decision in Pruthvi Brokers & Shareholders (P.) Ltd. 349 ITR 336, wherein, the Hon’ble Bombay High Court, considering the decision in Goetze (India) Ltd. v. CIT (2006) 204 CTR (SC) 182 held that: “23. It is clear to us that the Supreme Court did not hold anything contrary to what was held in previous judgments to the effect that even if a claim is not made before the assessing officer, it can be made before the appellate authorities. The jurisdiction of the appellate authorities to entertain such a claim has not been negated by the Supreme Court in this judgment. In fact, the Supreme Court made it clear that the issue in the case was limited to the power of the assessing authority and that the judgment does not impinge on the power of the Tribunal u/s 254.

ICICI Securities 739/Mum/2016 11. In the result, the appeal is partly allowed. Assessment Year: 2010-11 12. The 1st ground of appeal

On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding the action of AO in disallowing the client assistance charges amounting to Rs.79,87,900/- paid to ICICI Bank Limited by merely following the order of his predecessor in Appellants own case for Assessment Years 2007-08, 2008-09 and 2009-10, 12.1 Facts being identical, our decision at para 2 hereinbefore for the AY 2009-10 applies mutatis mutandis to the above ground of appeal for the AY 2010-11. Thus the 1st ground of appeal is allowed.

13. The 2nd ground of appeal On the facts and circumstances of the case and in law, the Hon'ble CIT(A) erred in upholding the action of the AO in disallowing a sum of Rs.3,14,46,458/- under section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962.

13.1 During the course of assessment, the AO asked the assessee about expenditure disallowable u/s 14A. In reply to it, the assessee filed its reply vide letter dated 09.11.2012, 05.12.2012 and 28.02.2013. The AO was not convinced with the said reply of the assessee and made a disallowance of Rs.2,76,93,038/- under Rule 8D(2)(ii) and Rs.37,53,420/- under Rule 8D(2)(iii). The total disallowance made by the AO thus comes to Rs.3,14,46,458/-.

ICICI Securities 739/Mum/2016 13.2 In appeal, the Ld. CIT(A) confirmed the above disallowance made by the AO. 13.3 Before us, the Ld. counsel of the assessee reiterated the submission made by him for the AY 2009-10 narrated at para 4.3 hereinbefore. 13.4 On the other hand, the Ld. DR relies on the order passed by the Ld. CIT(A). 13.5 We have heard the rival submissions and perused the relevant materials on record. We find that in the impugned assessment year the own fund of the assessee-company was Rs.2,801,876,000/- whereas the investments were of Rs.738,959,000/-. In HDFC Bank Ltd. vs. DCIT [2016] 67 taxmann.com 42 (Bom), the Hon'ble Bombay High Court referring to the decision in CIT vs. HDFC Bank Ltd. [2014] 366 ITR 505 (Bom) and CIT v. Reliance Utilities & Power Ltd. [2009] 313 ITR 340 (Bom) held as under : “15. It is clear that for the first time in the case of HDFC Bank Ltd. (supra) that this Court took a view that the presumption which has been laid down in Reliance Utilities & Power Ltd. (supra) with regard to investment in tax free securities coming out of assessee's own funds in case the same are in excess of the investments made in the securities (notwithstanding the fact that the assessee concerned may also have taken some funds on interest) applies, when applying Section 14A of the Act. Thus, the decision of this Court in HDFC Bank Ltd. (supra) for the first time on 23rd July, 2014 has settled the issue by holding that the test of presumption as held by this Court in Reliance Utilities and Power Ltd. (supra) while considering Section 36(1)(iii) of the Act would apply while considering the application of Section 14A of the Act. The ICICI Securities 739/Mum/2016 aforesaid decision of this Court in HDFC Bank Ltd. (supra) on the above issue has also been accepted by the Revenue in as much as even though they have filed an appeal to the Supreme Court against that order on the other issue therein viz. broken period interest, no appeal has been preferred by the Revenue on the issue of invoking the principles laid down in Reliance Utilities & Power Ltd. (supra) in its application to Section 14A of the Act.” Facts being identical, we follow the above decision and delete the disallowance of Rs.2,76,93,038/- made by the AO under Rule 8D(2)(ii). 13.5.1 Now we come to the disallowance made by the AO of Rs.37,53,420/- under Rule 8D(2)(iii). Facts being identical, we direct the AO to follow our decision arrived at para 4.5.3 hereinabove and compute the disallowance under Rule 8D(2)(ii) after giving reasonable opportunity of being heard to the assessee. 13.6 Thus the 2nd ground of appeal is partly allowed.

14. The 3rd ground of appeal On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding the action of the AO of adding the disallowance made under section 14Ato the book profits by merely following the order of his predecessor in Appellants own case for AY 2009-10. The Appellant therefore prays that addition of Rs.3,14,46,458/- made to the book profits under section 115JB be deleted. 14.1 In the instant case, the AO has made a disallowance of Rs.3,14,46,458/- u/s 14A r.w Rule 8D to the book profit u/s 115JB. We direct the AO to follow the decision in Vireet Investments (P.) Ltd. (supra). Thus the 3rd ground of appeal is allowed for statistical purposes.

ICICI Securities 739/Mum/2016 15. We consider below the 4th and 5th ground of appeal together as they address a common issue. The 4th ground of appeal On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the action of the AO in disallowing the claim for bad debts written off amounting to Rs.12,18,53,156/- by purportedly relying on the orderpassed by his predecessor in the Appellant's own case for AY 2009-10. The Appellant, therefore prays that aforesaid disallowance of Rs.12,18,53,156/- on account of bad debts written off be deleted. The Appellant further prays that it be held that the reliance of the Ld. CIT(A) on his predecessor's order is misplaced since the Appellant did not claim any deduction on account of bad debts written off during AY 2009-10. The 5th ground of appeal On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding the action of the AO of not allowing the deduction of the provision for bad debts written back of Rs.8,34,29,528/- to the total income by purportedly relying on the order passed by his predecessor in the Appellant's own case for AY 2009-10. The Appellant therefore prays that the aforesaid addition of Rs.8,34,29,528/- on account of provision for bad debts written back be deleted. 15.1 During the course of assessment proceedings, the AO observed that the assessee had debited net amount of Rs.3,84,22,628/-( i.e. net of bad debts written off of Rs. 12,18,53,156/- and net reversal of provisions for doubtful debts of Rs. 8,34,29,528/-). The AO noted that the allowability of claim u/s 36(1)(vii) is governed by section 36(2). As ICICI Securities 739/Mum/2016 per section 36(2), unless such debt or part thereof has been included in the computation of income of the previous year or earlier previous years, it can notbe allowed as bad debts u/s 36(1)(vii). As the assessee failed to file the details, the AO made a disallowance of Rs.12,18,53,156/-. 15.2 In appeal, the Ld. CIT(A) followed the order his predecessor-in- office for the AY 2009-10 and dismissed the appeal filed by the assessee. 15.3 Before us, the Ld. counsel of the assessee submits that the appellant had written off bad debts of Rs.12,18,53,156/- to the P&L account due from various customers. The amounts written off as bad debts are in respect of the advisory services, brokerage/commission, issue management fees, private placement fees, sub-broker exchange fees, advances and rent deposits. These services provided to various clients which were disputed for various reasons and the same have not been recovered. Therefore, the assessee wrote off the said bad debts by debiting P&L account and claimed in the computation of income as bad debts. The said amount was offered to tax in earlier assessment years. It is stated by him that the assessee has satisfied of the conditions laid down in section 36(1)(vii) of the Act and has written off the aforesaid amount of Rs.12,18,53,156/- as they were considered as irrecoverable. Reliance is placed by him on the decision in DIT (International Taxation) v. Oman International Bank SAOG (313 ITR 128) (Bom.), CIT v. Chemicals(Bombay) (P) Ltd. (313 ITR 128) (Bom) and TRF Ltd. v. CIT (323 ITR 397) (SC) and CBDT Circular No. 12/2016 dated May 30, 2016.

ICICI Securities 739/Mum/2016 15.4 On the other hand, the Ld. DR relies on the order passed by the Ld. CIT(A). 15.5 We have heard the rival submissions and perused the relevant materials on record. We find that as per section 36(1)(vii), the amount of any debt or part thereof, which has been written off as irrecoverable in the accounts of the assessee for the previous year, shall be allowed as a deduction subject to the provisions of section 36(2) which are as under: (a) such debt or part thereof must have been taken into account in computing the income of the assessee of the previous year or of an earlier previous year, or (b) it represents money lent in the ordinary course of business of banking or money-lending which is carried on by the assessee. In TRF Ltd. (supra), the Hon’ble Supreme Court has held at para 4: “This position in is well-settled. After 01.04.1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off asirrecoverable in the accounts of the assessee. However, in the present case, the Assessing Officer has not examined whether the debt has, in fact, been written off in accounts of the assessee. When bad debt occurs, the bad debts account is debited and the customer’s account is credited, thus, closing the account of the customer. In the case of companies, the provision is deducted from sundry debtors. As stated above, the Assessing Officer has not examined whether, in fact, the bad debt or part thereof is written off in the accounts of the assessee. This exercise has not been undertaken by the Assessing Officer. Hence, the matter ICICI Securities 739/Mum/2016 remitted to the Assessing Officer for de novo consideration of the above- mentioned aspect only and that too only to the extent of the write off.” 15.5.1 In view of the factual scenario in the instant case, we set aside the order of the Ld. CIT(A) on the above issue and restore the matter to the file of the AO to examine whether such debt or part thereof has been taken into account in computing the income of the assessee of the previous year or of any earlier previous year for de novo consideration by following the decision in TRF Ltd. (supra), after giving reasonable opportunity of being heard to the assessee. We direct the assessee to file the relevant details before the AO. Thus the 4th and 5th ground of appeal s are allowed for statistical purposes.

16. The 6th ground of appeal On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding the action of the AO in disallowing procurement expenses of Rs.2,89,87,806/- paid to ICICI Bank Limited purportedly by relying on the order passed by his predecessor in the Appellants own case for AY 2008-09 and AY 2009-10. The Appellant prays that aforesaid disallowance of Rs.2,89,87,806/- under section 40(a)(ia) of the Act be deleted. The Appellant also prays that reliance of Ld. CIT(A) on predecessor's order is completely misplaced as there was no disallowance u/s 40(a)(ia) in respect of procurement expenses in AYs 2008-09 and 2009-10. 16.1 During the course of assessment proceedings, the AO found that the assessee had made payment of Rs.2,89,87,806/- on account of procurement expenses being brokerage paid to ICICI Bank Ltd. towards ICICI Securities 739/Mum/2016 the usage Bank’s agent network for marketing the various IPO’s. The assessee has not made TDS as applicable u/s 194H/194C on the payment. The assessee submitted before the AO that the payment of sub-brokerage is excluded from the definition of commission and brokerage u/s 194H and hence TDS was not made. The assessee further submitted before him that there is specific exclusion of services rendered in the course of buying and selling of securities, in terms of definition of commission and brokerage u/s 194H of the Act. However, the AO was not convinced with the above explanation of the assessee and held that in the case of the assessee i.e. ‘broker’ is paying commission/brokerage to a third party for services rendered by it/him to the assessee i.e. ‘broker’. Hence, it becomes one of the services wherein TDS is applicable as per the provisions of section 194H/194C of the Act. Therefore, the AO made a disallowance of Rs.2,89,87,806/-. 16.2 In appeal, the Ld. CIT(A) followed the order of his predecessor-in- office for the AY 2009-10 and confirmed the disallowance made by the AO. 16.3 Before us, the Ld. counsel of the assessee submits that provisions of section 194H/194J of the Act excludes commission or brokerage paid on securities. Reliance is placed by him on the decision in SHCIL Services Ltd. ACIT v. ACIT (224 taxman 159) (Bom.), CIT v. Tandon &Mahendra (363 ITR 454) (All.), Sundaram Asset Management Co. Ltd. v. DCIT (ITA No. 1774/Mds/2012) (Mad.) (ITAT), ITO v. Mittal Investment & Co. (147 ITD 624) (Del) (ITAT) and DCIT v. S.J. Investment Agencies (P.) Ltd. (21 ITR (T) 258) (Mum.) (ITAT).

ICICI Securities 739/Mum/2016 16.3.1 The Ld. counsel further submits that the provisions of section 194C excludes commission or brokerage paid on securities. Reliance is placed by him on the CBDT Circular No. 715 dated 08.08.1995 and the decision in S.R.F. Finance Ltd. v. CBDT (211 ITR 861) (Del) and Gujarat Federation of Tax Consultants v. CBDT (214 ITR 276) (Guj.). 16.4 On the other hand, the Ld. DR supports the order passed by the Ld. CIT(A). 16.5 We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. The primary facts on the above ground of appeal can be found out from the reply dated 11.02.2013 filed by the assessee before the AO which is produced below: During the financial year under consideration, we have paid Rs.28,987,806/- to ICICI Bank Ltd. towards brokerage expenses. The brokerage expenses are paid to ICICI Bank as per the service provider agreement dated July 30, 2007 (effective from April 1st, 2007). The copy of the said agreement is enclosed for your goodself’sreference. As per the agreement we have appointed ICICI Bank as agent for marketing of the Financial Products to its clients. During the current financial year, we have paid brokerage to ICICI Bank Ltd. towards usage of ICICI Bank’s Agents network for marketing for various IPO’s, and various financial products to its customers. The details of brokerage paid during the captioned financial year to ICICI Bank are given below: