STERLITE TECHNOLOGIES LTD,PUNE vs. ASST CIT LTU, MUMBAI

Learned Counsel submitted that the Assessing Officer has computed allowable amount of deduction u/s. 80IB to the tune of Rs. 21.97 crores andu/s. 80IC to the tune of Rs. 7.92 crores. However, the Assessing Officer has restricted the aggregate amount of deduction to the amount of business income included in the gross total income. By placing reliance on the decision rendered by Hon'ble Jurisdictional High Court in the case of V.M. Salgaocar & Brother Pvt. Ltd. (Tax appeal No. 25 of 2007 dated 4 Sterlite Technologies Limited 22.4.2015), learned counsel submitted that the maximum amount allowable u/s. 80IB & 80IC of the Act should be restricted to the amount of “gross total income” and not to the amount of “business income” included therein, as held by the tax authorities. He further submitted that identical view has been taken by the Hon’ble Bombay High Court in the cases of Tridoss Laboratories Ltd. (328 ITR 448), M/s. Eskay Knit (India) Ltd. (I.T. Appeal No. 184 of 2007 dated 25.3.2010) and also by other High Courts.

On the contrary, learned Departmental Representative placed reliance on the decision rendered by Hon'ble Supreme Court in the case of SYNCO industries Ltd. (supra) and submitted that the tax authorities were right in restricting the deduction to the amount of income from business included in the gross total income.

We heard the parties on this issue. We notice that the AO has placed reliance on the decision rendered by Hon’ble Supreme Court in the case of SYNCO Industries Ltd (supra) in order to restrict the amount of deduction to the amount of Business income included in the Gross total income. A careful perusal of the above said decision would show that the Hon’ble Supreme Court has only stated that the brought forward losses have to be set off as per law in order to arrive at the Gross Total Income. The contention of the assessee before Hon’ble Supreme Court was that the deduction u/s 80I of the Act should be allowed first and then only the Gross total income has to be computed and it was rejected by the Hon’ble Supreme Court.

The provisions of sec.80A(2) states that the aggregate amount of the deductions under Chapter VIA shall not, in any case, exceed the gross totalincome of the assessee. The expression “Gross Total income” has been defined in sec. 80B(5) of the Act to mean “the total income computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A of the Act”. The Hon’ble Supreme Court in the above cited case held that the losses suffered should be adjusted while working out gross total income and if the gross total income is NIL, then the assessee shall not be entitled to deduction under Chapter VI-A. We notice that the Hon’ble Supreme Court has not decided the issue as to whether the aggregate amount of deduction should be restricted to the amount of “Business income” or “Gross Total income”.

The Ld CIT(A) has taken support of the provisions of sec. 80AB to come to the conclusion that the income referred to in sec. 80IB and 80IC is the profits and gains of the undertakings included in the 5 Sterlite Technologies Limited Gross total income. Accordingly the Ld CIT(A) has held that the aggregate amount of deduction allowable u/s 80IB and 80IC cannot exceed the business income, since it is the amount of profits and gains included in the Gross total income. In our view, the Ld CIT(A) has misdirected himself in interpreting the provisions of sec.80AB of the Act. A study of history of provisions of sec. 80AB and its predecessor 80AA would show that the same is intended to refer to the “Net income”, i.e., (Gross income less expenses) included in the Gross total income. The intention of the parliament is that the deduction prescribed in Chapter VI-A should be allowed on the Net income included in the Gross Total income and not on the Gross income derived by the assessee.

The adjustment of brought forward losses for the purpose of arriving “Income from Business”, in our view, cannot be come in the category of determining the “Net income of the eligible undertaking” for the year under consideration, since the brought forward losses cannot be considered to be expenses incurred to earn the profits and gains of eligible undertakings. The adjustment of brought forward losses is the process prescribed by the statute to determine the “Gross total income”. Hence we are of the view that, for the purpose of determining the quantum of deduction, the Profits and gains ofeligible business of eligible undertaking should be considered before setting off of brought forward losses, but the deduction should restricted to the amount of “Gross Total income” as per the provisions of sec. 80A(2) of the Act. Our view is supported by the binding decisions rendered by Hon’ble Bombay High Court in the cases referred supra. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to restrict the aggregate amount of deduction u/s 80IB and 80IC of the Act to the aggregate amount or the Gross Total income, whichever is less.

The next issue contested by the assessee as well as the revenue relates to the disallowance made u/s 14A of the Act. The assessee received a dividend income of Rs.4,35,008/- and claimed the same as exempt. The assessee did not disallow any expenditure relatable to exempted income as per the provisions of sec.14A of the Act. The AO computed the disallowance as per Rule 8D of the I.T Rules and accordingly disallowed interest expenses to the tune of Rs.23,85,447/- and administrative expenses to the tune of Rs.3,08,000/-. The Ld CIT(A) deleted the disallowance of interest expenses by holding that no part of interest bearing funds have been used to make investments. He confirmed the disallowance of 6 Sterlite Technologies Limited administrative expenses. Both the parties are aggrieved by the decision of Ld CIT(A) on the issues decided against each of them.

We heard the parties on this issue. A perusal of Balance sheet as at 31.3.2008 would show that the interest free funds held by the assessee (Rs.539.51 crore) as on 31.3.2008 is in far excess of the amount of investments (Rs.6.01 crores). Similar is the position in the earlier year also. Hence, in view of the decision of Hon’ble Bombay High Court rendered in the case of HDFC Bank Ltd (366 ITR 505), there is no requirement to make interest disallowance under rule 8D(2)(ii) of the IT Rules. Accordingly we confirm the order passed by Ld CIT(A) on this issue.

With regard to the expenses, we notice that the assessee has made investment only in its subsidiary companies during the year under consideration. In the preceding year, it had also made investment in units of two mutual funds and they have been sold during the year under consideration. The Ld A.R submitted that there is no requirement to apply the provisions of rule 8D, when these specific details are available on record. He submitted that the assessee itself has worked out allocable expenses at Rs.1,65,000/- and accordingly prayed that the disallowance may be restricted to the above said amount. On a careful perusal of the submissions made by the assessee and the Ld D.R, we find merit in the submissions made by Ld A.R. We have noticed the nature of investments and the volume of transactions. Considering these factual details, we are of the view that the disallowance of Rs.1,65,000/- is reasonable. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to restrict the disallowance of administrative expenses u/s 14A to Rs.1,65,000/-.

The next ground urged by the assessee relates to the addition of amount disallowed u/s 14A to the book profit computed u/s 115JB of the Act. We direct the AO to add the amount disallowed u/s 14A of the Act under the normal provisions of the Act to book profit computed u/s 115JB of the Act.

We shall now take up the appeal filed by the revenue for AY 2008-09. The first relates to the relief granted by Ld CIT(A) in respect of addition made u/s 14A of the Act. We have already decided this issue by confirming the order passed by Ld CIT(A) in the preceding paragraphs.

The next issue urged by the revenue relates to the relief granted by Ld CIT(A) in respect of ESOP expenses. The assessee 7 Sterlite Technologies Limited claimed deduction of a sum of Rs.4.47 crores relating to the discount given on the stock option issued to employees. The AO noticed that identical issue was considered in the preceding years and the assessing officer had taken the view that the expenditure has not crystallized and accordingly disallowed the claim. Accordingly, by following the view taken in the earlier years, the AO disallowed the claim. The Ld CIT(A) noticed that the ITAT has decided identical issue in the assessee’s own case in AY 2002-03 (ITA No.3889/Mum/2006 dated 19- 01-2009 in assessee’s favour by following decision rendered in AY 2001-02 (ITA No.7136 & 7177/Mum/04 dated 08-01-2008). Accordingly he directed the AO to allow the claim relating to ESOP expenses.

Before us, the Ld D.R relied upon the assessment order, while the Ld A.R placed reliance on the decisions rendered by the Tribunal in the assessee’s own case.

We heard the parties on this issue. We notice that an identical issue was considered by the Special bench of Bangalore in the case of M/s Biocon Limited Vs. DCIT (ITA No.368/B/2010 dated 18-07- 2013)(25 ITR (Trib) 602) and the Special bench has held that the discount on ESOP is allowable as deduction. The Special bench has also prescribed the manner of computation of discount and the adjustments to be made in the succeeding years. There should not be any dispute that the decision rendered by the larger bench of Tribunal is required to be preferred over the division bench. Accordingly we are of the view that this issue requires fresh examination in accordance with the decision rendered by the Special bench in the case of Biocon Ltd (supra). Accordingly we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO with the direction to compute the deduction in accordance with the method prescribed by the Special bench in the decision referred supra. The assessee is directed to furnish the details that may be called for by the AO in this regard.

We shall now take up the appeal filed by the assessee for AY 2009-10. The first issue urged by the assessee relates to the claim for deduction u/s 80IC of the Act on the receipts from sale of scrap. This issue has been decided in favour of the assessee in the following cases:- (a) CIT Vs. Sadhu Forging Ltd (336 ITR 444)(Delhi) (b) CIT Vs. Harjivandas Juthabhai Zaveri (258 ITR 785)(Guj) Following the above said decision, we set aside the order passed by 8 Sterlite Technologies Limited Ld CIT(A) and direct the AO to allow deduction u/s 80IC of the Act on the receipts from sale of scrap.

The next issue urged by the assessee relates to the disallowance made u/s 14A of the Act. The revenue has also urged this issue in respect of relief granted by the Ld CIT(A). During the year under consideration, the assessee received dividend income of Rs.38,20,962/- and claimed the same as exempt. The AO computed the disallowance as per Rule 8D of the IT Rules and accordingly disallowed a sum of Rs.70,73,247/- towards interest expenses and Rs.9,00,500/- towards administrative expenses. The Ld CIT(A) deleted the disallowance of interest on noticing that the interest free funds available with the assessee is in far excess of the amount of investments. However, the Ld CIT(A) confirmed the disallowance made towards administrative expenses.

With regard to the disallowance made out of interest expenses, we notice that the interest free funds available with the assessee (Rs.620.94 crores) are in excess of the amount of investments (Rs.92.01 crores). Hence no disallowance is required to be made in view of the decision rendered by Hon’ble Bombay High Court in the case of HDFC Bank Ltd (supra). Accordingly we confirm the order passed by Ld CIT(A) on this issue. With regard to the disallowance made out of administrative expenses, we notice that the assessee has brought forward the amount of investment of Rs.6.01 crores made in the subsidiary company from the preceding year. During the year under consideration, the assessee has made fresh investment in the units of various mutual funds. Under these set of facts, as opined by us in the preceding AY, we are of the view that there is no requirement to apply the provisions of Rule 8D in view of the specific details available on record. The assessee has furnished a working as per which a sum of Rs.2.00 lakhs has been worked out as disallowance u/s 14A of the Act. A perusal of the same would show that the assessee has allocated a portion of salary expenses and administrative expenses. On the consideration of facts relating to this year, we are of the view that the disallowance of Rs.2.00 lakhs worked out by the assessee appears to be reasonable. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to restrict the disallowance u/s 14A of the Act to Rs.2.00 lakhs.

The AO is also directed to make addition of Rs.2.00 lakhs to the book profit under clause (c) of Explanation 1 to 115JB of the Act, as held by us in the preceding year while adjudicating identical issue.

We shall now take up the appeal filed by the revenue for AY 2009-10. The issues urged therein are identical to the one urged in AY 2008-09. However, the revenue has inadvertently mentioned the figures relating to assessment year 2008-09 in the grounds urged for AY 2009-10.

The first issue relates to the relief granted by Ld CIT(A) on the addition made u/s 14A of the Act. In the earlier paragraphs we have confirmed the order passed by Ld CIT(A) on this issue. Accordingly we reject this ground of the revenue. 25. The next issue urged by the revenue relates to the disallowance of ESOP expenses. The AO disallowed a sum of Rs.68,21,137/- during AY 2009-10. The Ld CIT(A) deleted the same by following the order passed by the Tribunal in the assessee’s own case for earlier years. We have considered an identical issue in AY 2008-09 in the preceding paragraphs and restored this matter to the file of the AO with the direction to decide this issue by following the decision rendered by the Special bench of Tribunal in the case of Biocon Limited (supra). Consistent with the view taken therein, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO with identical directions. 26. In the result, both the appeals of the assessee are allowed and both the appeals of the revenue are treated as partly allowed.” 2.2. In the light of the foregoing discussion and the material available on record, we find that an elaborate discussion has been made by the Tribunal in the aforesaid order dated 20/01/2017 for Assessment Year 2008-09 and 2009-10 (reproduced above), in the case of assessee itself, wherein, the disallowance of Rs.1,65,000/- was found to be reasonable. In the present appeal, since, there is increase in the volume of investment, therefore, on identical lines the disallowance is restricted to Rs.2,40,000/-, as agreed from both sides, therefore, this ground of the assessee is disposed of in terms indicated hereinabove.

So far as, ground no. 2 & 3 are concerned, these were argued to be consequential in nature. The ld. DR also consented that the these are consequential in nature. Considering the factual matrix, arguments from both sides, we held that both these grounds are consequential to ground no. 1, discussed hereinabove.

Ground no. 4 is with respect to interest u/s 234C of the Act. It was also argued to be consequential in nature. In the light of the foregoing discussion, this ground is held to be consequential in nature. Finally, the appeal of the assessee is partly allowed and disposed off in terms indicated hereinabove. This Order was pronounced in the open court in the presence of ld. representatives from both sides at the conclusion of the hearing on 13/02/2017.