ESOP Expenditure Allowed as Revenue Expenditure; Section 14A Disallowance Cannot Exceed Exempt Income;

DCIT Vs Dhani Services Ltd. (ITAT Mumbai)

Introduction: In a significant decision, the Income Tax Appellate Tribunal (ITAT) Mumbai addressed two key issues in the case of DCIT vs. Dhani Services Ltd. The first issue pertained to disallowances made under Section 14A of the Income Tax Act, while the second issue focused on the disallowance of Employee Stock Ownership Plan (ESOP) expenditure claimed by the assessee. This article provides an in-depth analysis of the ITAT’s ruling, which upheld the deletion of these disallowances.

Detailed Analysis:

1. Disallowance Under Section 14A: The primary issue in this case was the disallowance made under Section 14A of the Income Tax Act. The assessee had earned exempt dividend income of Rs. 18,20,000 but had voluntarily disallowed a mere Rs. 100 under Section 14A of the Act in line with Rule 8D of the Income Tax Rules. However, the Assessing Officer computed the disallowance based on Rule 8D, resulting in a disallowance of Rs. 7,34,68,829—significantly exceeding the exempt income. The learned Commissioner of Income Tax (Appeals) (CIT(A)) provided clear directions on this matter:

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