DCIT (LTU)1, MUMBAI vs. STERLITE TECHNOLOGIES LTD,

आदेश / O R D E R

Per Sandeep Gosain, Judicial Member:

1. The Ld. CIT(A) erred in deleting the disallowance of ESOP expenses of Rs.2,02,00,935/- without appreciating the facts of the case."

2. The Ld. CIT(A) erred in directing the AO to delete the disallowance u/s 14A of the I.T. Act at Rs. 79,73,747/- without appreciating the fact that the AO has rightly computed the disallowance as per provisions of section 14A read with Rule 8D of the IT Act relying on submissions of assessee. 3. The Ld. CIT(A) erred in directing the delete the disallowance of Rs. 16,72,260/- u/s 14A r.w. Rule 8D in computation of book profit u/s 115JB. 4. The appellant prays that the order of the id. CIT(A) on the above ground be set aside and that of the Assessing Officer restored. 5. The Appellant craves leave to amend or alter any ground or add a new ground which may be necessary.

by the revenue relates to challenging the order of CIT(A) in deleting the disallowance of ESOP M/s Sterlite Technologies Ltd expenses of Rs.2,02,00,935/- without appreciating the facts of the case.

4. We have heard the counsels for both the parties and we have also perused the material placed on record as well as the orders passed by revenue authorities. Before we decide the merits of the case, it is necessary to evaluate the orders passed by Ld. CIT(A). The Ld. CIT(A) has dealt with the above grounds raised by the revenue in para no. 6(6.3 to 6.4) of its order. The operative portion of the order of Ld. CIT(A) is contained in para no. 6.3 to 6.4 of its order and the same is reproduced below:-

6.3 I have considered the facts and circumstances of the case, assessment order and submission of the appellant. It is noticed that the issue of disallowance of ESOP was contested in appeal by the appellant for AY 201011 also vide Ground No.2.1 of appeal No.CIT(A) LTU/ACIT (LTU)/66/12-13 dtd. 18.03.2014. My learned predecessor has decided the issue in the following manner - "I have considered the facts of the case and the submissions made by the assessee. Crux of assessee's submission is that (1) SEDI guidelines mandate that M/s Sterlite Technologies Ltd the ESOP expenses should be debited to the P&L Account, (2) the liability was not a contingent or notional liability but an ascertained liability and it was also not a capital expenditure, (3) ESOP were granted to the employees of the company as per the scheme for motivating them to work for the company for a certain number of years and since these were taxable in the hands of the employees, the expenditure was allowable as revenue deduction. In this connection, assessee has relied on ITAT's decision in its own case for AY 2001- 02 and 200203 and plethora of other indirect judgments. Assessing Officer disallowed assessee's claim for deduction of ESOP expenses of Rs. 72,94,2351- on the ground that the ESOP expenses were notional and contingent in nature and capital in nature. It is seen from the submissions, the Hon'ble ITAT, Mumbai in assessee's own case decided the issue in its favour. Respectfully following the decision of Hon'b!e ITAT the ESOP expenses claimed has to be allowed. Thus, these grounds of appeal are allowed. 6.4 It is obvious that the disallowance made by the AO on this issue is same and similar which has been decided in appeal in earlier years as described above. In view of same and similar facts and circumstances of the case on this issue, I find no reason to deviate from the order of my predecessor and respectfully following M/s Sterlite Technologies Ltd the order of the Hon’ble ITAT, the Ground no. 2 of appeal is allowed.

After having gone through the facts of the present case as well as considering the orders passed by the revenue authorities and submissions made by both the parties, we find that Ld. CIT(A) while dealing with this ground had relied upon the orders passed in earlier years i.e. 2010-11 by Ld. CIT(A) as well as Hon’ble ITAT in assessee’s own case. In this respect, our attention was also drawn to the order of Hon’ble ITAT bearing dated 26.10.16. Hence, considering the above facts, we are of the considered view that the findings recorded by Ld. CIT(A) are well reasoned and based upon the factual as well as legal proposition and therefore needs no interference. No new facts or contrary judgments have been brought on record before us in order to controvert or rebut the findings so recorded by Ld CIT (A). The Ld. CIT(A) has rightly allowed this ground after appreciating and relying upon the orders of Hon’ble ITAT in assessee’s own case in AY 2010-11 wherein the factual position was also similar. Therefore, there are no reasons for us M/s Sterlite Technologies Ltd to interfere into or deviate from the findings recorded by the Ld. CIT (A). Hence, we are of the considered view that the findings so recorded by the Ld. CIT (A) are judicious and are well reasoned. Resultantly, this ground raised by the revenue stands dismissed.

Ground No. 2 & 3. 5. Since both the grounds raised by the revenue are inter connected and inter related, therefore we thought it fit to dispose of the same through this common order.

6. We have heard the counsels for both the parties and we have also perused the material placed on record as well as the orders passed by revenue authorities. Before we decide the merits of the case, it is necessary to evaluate the orders passed by Ld. CIT(A). The Ld. CIT(A) has dealt with the above grounds raised by the revenue in para no. 7(7.1 to 7.10) to 10 of its order. The operative portion of the order of Ld. CIT(A) is contained in para no. 7.7 to 7.10 and 8 to 10 of its order and the same is reproduced below:-

M/s Sterlite Technologies Ltd 7.7 It is noticed that before invoking Sec. 14A r.w. Rule 8D, the AO has not recorded his dis-satisfaction or/and has not established the nexus between the expenditure incurred by the appellant and exempt income so as to fulfill the requirement of invoking Sec.14A r.w. Rule 8D particularly when an amount of Rs.2,75,000/- suo- moto is worked out by the appellant and disallowed for this purpose. The submission of the appellant also revealed that the 'investments were made out of internal accruals/tax paid reserves of the appellant (i.e.non interest bearing source of funds) and a cash flow statement in this regard was filed before the learned AO during the course of scrutiny proceedings enclosed at page 100 of the paper book" and that "except for the investments stated above, the appellant had not invested any sum in tax free source during AY 2011-12'. The disallowance offered by the appellant in its revised Return is considering the impact of sa lary cost and remote administrative expenses. The appellant has relied upon the decisions of the higher judicial Authorities recorded in its submissions, particularly in Pukhraj Chunilal Bafana Vs. DCIT (ITA.7231/Mum/2012) dtd. 13.06.2014 for AY 2009-10 and Godrej & Boyce Vs. DCIT (Born) endorsing the legal position that before invoking section 14A, the AO has to record dissatisfaction with the disallowance or no disallowance made by the assessee in relation to M/s Sterlite Technologies Ltd exempt income. The appellant as noted above, made a disallowance for remote administrative expenses, has placed on record the necessary facts and figures showing that its own surplus/reserve has been utilized in the investments generating exempt income and AO has not questioned the same. 7.8 It was also placed before the AO that there were no expenses directly attributable to exempt income and from the submissions and facts & figures furnished during the appellate proceedings also, it is revealed that the investments are made out of non interest bearing funds to the extent of reserve and surplus at Rs.934.53 Crores for AY 2011-12 and Rs.813.91 Crores for AY 2010-11. At the same time, it is also submitted and revealed from the accounts that the total unsecured loans of Rs.619.77 Crores is claimed to be utilized in the fixed assets and current assets of the business aggregating to Rs.612.84 Crores. In this context, the recent decision in the case of CIT Vs. HDFC Bank Ltd. (Tax Appeal No.330 of 2012) (Born) is relevant where it is held that - "In principle, if there are funds available, both interest-free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company if the interest-free funds were sufficient to meet the investment. On facts, the assessee's own funds M/s Sterlite Technologies Ltd and other non-interest bearing funds were more than the investment in the tax free securities. Consequently, the !TAT rightly held that there was no basis for deeming that the assessee had used borrowed funds for Investment in tax free securities. (Reliance Utilities and Power Ltd 313 ITR 340 (Born), East India Pharmaceutical Works 224 ITR 627 (SC) & Woolcombers 134 ITR 219 (Cal) followed)." 7.9 The appellant has also referred and relied upon the appellant's decision in its own case for AY 2007-08, 08-09 & 09-10. The copy of the appellate order for AY 2009-10 dated 2.12.2013 is filed wherein Ground No.7 and 8, the issue of disallowance u/s 14A of the I.T. Act, read with Rule 8D have been considered and the Ground has been partly ,allowed in favour of the appellant subject to verification of the investments made during the year Rs.2 Crores, in excess of reserve amount. The relevant part of the decision in appellate proceedings is reproduced herewith for the sake of convenience — "Therefore, the Assessing Officer is directed to examine this issue, and the assesee is advised tq furnish the details to substantiate its claim of nexus between the funds invested in the income exempt assets are form the surplus (reserves) funds available with the assessee. If the assesee proves this nexus, the disallowance under clause (ii) of sub Rule (2) of Rule M/s Sterlite Technologies Ltd 8D is not warranted. Subject to this verification this ground of appeal is allowed. However, the disallowance made under clause (iii) under the head administrative expenses is considered to be applicable to the facts of the case of the assesee as the assessee must have incurred the administrative expense for earning exempt income." 7.10 From the records and final accounts also submitted during the appellate proceedings, it is seen that the surplus and reserves during the year exceeds the investments and at the same time, the borrowed funds at Rs.619.77 Crores are claimed to be utilized in business investments aggregating to Rs.1612.84 Crores. Thus, prima facie as per the legal propositions, there is no instance of borrowed funds being utilized for earning exempt income as also per decision in the case of HDFC Bank (supra). The Ground of appeal for disallowance u/s 14A r.w. Rule 8D has been allowed in the appellate order for AY 2009-10, subject to verification of excess investments as compared to reserves, which is not the case in current year, and the disallowance of administrative expenditure has been upheld resulting •'n Ground of appeal being partly allowed in that year. Therefore, under the facts and circumstances of the case, I find that the disallowance made by the AO is not justified and the necessary condition for M/s Sterlite Technologies Ltd applicability of section 14A r.w. Rule 8D are not present, the disallowance for remote administrative expenses for the exempt income made by the appellant is in order and does not call for any interference. Therefore, the disallowance of Rs.16,72,260/- contested in Gaad No.3 of appeal is deleted. Accordingly, Ground No.3 & 4 of appeal is allowed for the reasons as above.

8. Ground No.1 of appeal is relating to and consequential of disallowances in Ground No.2 and 3 of appeal discussed above. The appellant has submitted further that "the aforesaid Ground is generic and applicable all additions/disallowance". Therefore, being so, same is in consequential itself and dismissed.

is not sustainable. Accordingly, Ground No.5 of appeal is dismissed.

10. In the result, the appeal is partly allowed.

M/s Sterlite Technologies Ltd After having gone through the facts of the present case as well as considering orders passed by revenue authorities and submissions made by both the parties, we find that Ld. CIT(A) while dealing with this ground has relied upon orders passed in earlier years i.e. AY 2007-08, 2008-09 and 2009-10 in assessee’s own case. The Ld. CIT(A) recorded its observation form the records and final accounts that the surplus and reserves during the year exceeds the investments and at the same time, the borrowed funds at Rs. 619.77 crores are claimed to be utilized in business investments aggregating to Rs. 1612.84 crores. Ld. CIT(A) thus reached to the conclusion that there is no instance of borrowed funds being utilized for earning exempt income, therefore while relying upon the judgment in the case of HDFC Bank(supra). Hence, considering the above facts, we are of the considered view that the findings recorded by Ld. CIT(A) are well reasoned and based upon the factual as well as legal proposition and therefore needs no interference. No new facts or contrary judgments have been brought on record before us in order to controvert or rebut the findings so recorded by Ld CIT (A). The Ld. CIT(A) has rightly allowed this M/s Sterlite Technologies Ltd ground after appreciating and relying upon the orders in assessee’s own case wherein the factual position was also similar. Therefore, there are no reasons for us to interfere into or deviate from the findings recorded by the Ld. CIT (A). Hence, we are of the considered view that the findings so recorded by the Ld. CIT (A) are judicious and are well reasoned. Resultantly, these ground raised by the revenue stands dismissed. Ground No. 4 & 5

7. These ground raised by the revenue are general in nature, thus requires no specific adjudication.

8. In the net result, the appeal filed by the revenue stands dismissed. Order pronounced in the open court on 22th Sept., 2017 Sd/- Sd/- (Shamim Yahya) (Sandeep Gosain) लेखासदस्य / Accountant Member न्याययकसदस्य / Judicial Member मुंबई Mumbai;यदनांकDated : 22.09.2017 Sr.PS. Dhananjay आदेशकीप्रनिनिनिअग्रेनर्ि/Copy of the Order forwarded to : 1. अपीलाथी/ The Appellant 2. प्रत्यथी/ The Respondent 3. आयकरआयुक्त(अपील) / The CIT(A) आयकरआयुक्त/ CIT- concerned 4. 5. यवभागीयप्रयतयनयध, आयकरअपीलीयअयधकरण, मुंबई/ DR, ITAT, M/s Sterlite Technologies Ltd Mumbai 6. गार्डफाईल / Guard File आदेशधिुसधर/ BY ORDER,