Religare Securities Ltd. Vs DCIT (ITAT Delhi)
The issue under consideration is whether the UPS is considered as essentially part of computer system and depreciation at rate of 60% charged on it?
In present case, the assessee claimed depreciation on UPS @ 60% treating the same to be part of computer and peripherals. But the AO held that UPS is not a part of computer and peripherals and it is eligible for depreciation @ 15% being plant & machinery. Tthe ld. CIT(A) allowed depreciation @ 60%.Hence revenue filed the appeal against this order of the CIT(A).
ITAT states that, the Hon’ble Delhi High Court in the case of CIT BSES Yamuna Powers Ltd. vide ITA No.1267/2010 and in the case of BSES Rajdhani Powers Ltd. vide ITA No.1266/2010 has held that UPS is an essential part of computer system and is eligible for depreciation @ 60%. The various other decisions relied on by the ld. Counsel in the paper book also supports its case that UPS is eligible for higher rate of depreciation. In view of the above, ITAT do not find any infirmity in the order of the CIT(A) in directing the AO to allow depreciation @ 60% on UPS. Accordingly, the order of the CIT(A) is upheld and the appeal raised by the Revenue is dismissed.
FULL TEXT OF THE ITAT JUDGEMENT
These are cross appeals. The first one is filed by the assessee and the second one is filed by the Revenue and are directed against the order dated 11.11.2016 of the CIT(A)-7, New Delhi, for A.Y. 2011-12.
2. Facts of the case, in brief, are that the assessee company is member of the Bombay stock exchange and National Stock Exchange and is engaged in providing broking and depository services to retail clients. It filed its return of income on 27.09.2011 declaring taxable income of Rs.37,87,10,248/-. The AO, during the course of assessment proceedings, noted that the assessee has declared dividend income of Rs.3 crores which has been claimed as exempt. He noted that the assessee company has offered disallowance u/s 14A of Rs.2,75,99,362/- in the revised return of income. From the various details furnished by the assessee, the AO noted that the assessee company has invested in equity preference shares as well as in trading, investments and mutual funds. The income from trading, investments and mutual funds has been offered as business income and taxed under the head ‘PGBP.’ Therefore, the same has not been considered for the purpose of calculation of disallowance u/s 14A. He noted that the total investments as on 31.03.2011 related to the exempt income is Rs.211,05,88,093/- out of which the assessee company claimed Rs.72 crore (Rs.12 crore invested on December, 1, 2008, Rs.25 Cr. Invested in December, 24, 2008 and Rs.35 crore invested on July 13, 2009) were met out of own funds.
3. However, the AO rejected the submissions made by the assessee justifying the suo motu disallowance made u/s 14A of 2,75,99,362/-. Applying the provisions of section 14A r.w. Rule 8D, the AO computed such disallowance at Rs.5,80,61,219/-. After giving credit of Rs.2,75,99,362/- offered by the assessee as suo motu disallowance, the AO made an addition of Rs.3,04,61,857/- to the total income of the assessee.
4. Similarly, the AO allowed depreciation @ 15% as against 60% claimed by the assessee on UPS. The AO also disallowed the deduction on account of SAR expenses of 1,64,73,853/- as not an allowable expenses u/s 37(1) of the Act. There is also another addition of Rs.81,66,260/- made by the AO being disallowance of reversal of earlier year expenses not claimed in the revised return of income for which the assessee is not in appeal before us. Therefore, we are not concerned with the same. The AO determined the total income at Rs.39,37,05,670.
5. In appeal, the ld.CIT(A) restricted the disallowance u/s 14A of the Act to the extent of exempt income of Rs.3 crore. Similarly, he also directed the AO to allow depreciation @ 60% by considering the UPS as an essential part of computer system. He, however, sustained the other additions made by the AO.
6. Aggrieved with such order of the CIT(A), the assessee as well as the Revenue are in appeal before us by raising the following grounds:-
Grounds of appeal by the Assessee
“1. That the Commissioner of Income Tax (Appeals) (“CIT(A)”) erred on facts and in law in confirming the disallowances to the extent of Rs. 1,88,74,491 made by the assessing officer (“the AO”) viz. (a) additional disallowance under section 14A of the Income Tax Act, 1961, (“the Act) of Rs. 24,00,638 (b) disallowance of SAR expenditure of Rs. 1,64,73,853.
2. That the CIT (A) erred on facts and in law in upholding the additional disallowance made by the assessing officer under section 14A of the Act to the tune of Rs. 24,00,638, which was over and above the suo-moto disallowance made by appellant of Rs. 2,75,99,362, without assigning any cogent reasons as to how the suo-moto disallowance made by appellant was incorrect.
2.1 That the CIT(A) erred on facts and in law in confirming the total disallowance i.e. sum total of suo-moto disallowance made by appellant and additional disallowance made by Assessing officer to the extent of dividend earned by appellant of Rs. 3,00,00,000 during the year under consideration, even after principally agreeing with all the contentions raised by the appellant and not restricting the total disallowance to suo-moto disallowance made by appellant.
3. That the CIT(A) erred on facts and in law in confirming the action of the assessing officer in not allowing the claim of the appellant for deduction of write back of SAR expenditure of Rs. 1,17,63,296/- being the amounts disallowed in earlier years treating it as a capital expenditure.
4. That the CIT(A) erred on facts and in law in sustaining the disallowance of Rs. 47,10,557 made by assessing officer holding the same to be as capital loss not allowable as business deduction.
4.1 That the CIT(A) erred on facts and in law in not appreciating that the aforesaid amount is a loan granted by the appellant to Religare Enterprise Ltd. Employee SAR Trust (“the Trust”) for the purpose of administering Employee Stock appreciation Right Scheme (“SAR scheme”) not recovered from the latter.
4.2 That the CIT(A) erred on facts and in law in not appreciating that the above SAR scheme was implemented to motivate, reward and retain key employees whereby each SAR granted to the employees of the appellant stood equivalent to one share of Religare Enterprise Ltd. and the aforesaid amount was, thus in nature of employee related cost allowable under section 37(1) of the Act.
4.3 Without Prejudice, the CIT(A) erred on facts and in law in not allowing deduction of the aforesaid amount of loan written off as loss incidental to business under section 28 of the Act.
The appellant craves leave to add, alter, amend or vary the above grounds of appeal at or before the time of hearing.”
Grounds of appeal by the Revenue
“1. That on facts and circumstances of the case and in law the Ld. CIT(A) erred in restricting the disallowance u/s 14A of the IT Act to the extent of exempt income of Rs. 3,00,00,000/- and giving relief of Rs. 2,80,61,219/- to the assessee in the light of CBDT Circular No. 5 of 2014 dated 11.02.2014 issuing a clarification that provision of 14A read with Rule 8D shall be applicable even in the cases where the assessee does not have any dividend income.
2. That on fact and circumstances of the case and in law the Ld. CIT(A) erred in allowing the depreciation @ 60% considering the UPS essentially part of computer system and giving relief of 19,16,829/- whereas the UPS is not an integral part of computer system and eligible depreciation on it is @ of 15%.
3. The appellant craves to leave, add, alter, modify and amend or any of the grounds before or at the time of ”
6.1 The assessee has also raised the following additional grounds:-
“5. That on the facts and circumstances of the case, disallowance under section 14A of the Income Tax Act, 1961 (“the Act”) should, in any case, be directed to be restricted to Rs.93,750, being ½% of average investment resulting in earning of dividend income.
6. That on the facts and circumstances of the case, no part of interest expenditure could be considered for the purpose of disallowance under section 14A of the Act, particularly considering that: (a) no part of interest on borrowed funds was incurred in relation to exempt income; and (b) interest income, in any case, far exceeded interest expenditure,
7. That on the facts and circumstances of the case, the lower authorities, in any case, erred in not considering only investments actually resulting in exempt income for the purpose of computing disallowance under section 14A of the Act”
7. Referring to the decision of the Hon’ble Supreme Court in the case of NTPC vs. CIT, 229 ITR 383 and various other decisions, the ld. Counsel for the assessee submitted that the additional grounds being purely legal in nature and no fresh facts are required to be investigated, the same should be admitted for adjudication.
8. After hearing both the sides and considering that no new facts are required to be investigated and the additional grounds being legal in nature, therefore, following the decision of the Hon’ble Supreme Court in the case of NTPC Ltd. vs. CIT, reported in 229 ITR 383, the additional grounds are admitted for adjudication.
9. Grounds of appeal No.1 and 1(a) by the Revenue and grounds No.2 and 2.1 by the assesseee relate to the part relief granted by the CIT(A) out of the disallowance made by the AO u/s 14A r.w. Rule D of 3,04,61,857/-.
10. The ld. Counsel for the assessee submitted that the assessee during the impugned assessment year has earned dividend income of Rs.3 crores from investment in shares of Religare Commodities Ltd., which was claimed as exempt. The assessee, in the revised return of income on the basis of erroneous understanding of the provisions has suo motu disallowed Rs. 2,75,99,362/- by considering interest u/s 2,41,81,922/- and ½ of average value of investment at Rs.34,80,440/- both totaling to Rs.275,99,362/-. He submitted that while erroneously computing the disallowance, the assesseee has even considered investments not yielding dividend income during the year while computing disallowance in terms of Rule 8D(2)(ii)(iii) of the IT Act which has been highlighted in the additional ground of appeal. He submitted that the AO computed the disallowance u/s 14A r.w. Rule 8D at Rs.5,80,61,219/- and after deducting the suo motu disallowance made by the assessee, made disallowance of Rs.3,04,61,857/-. He submitted that the ld.CIT(A) restricted such disallowance to Rs.3 crore being the actual dividend income received during the year for which the Revenue is in appeal and for the addition sustained by the CIT(A), the assessee is in appeal before the Tribunal.
11. The Counsel for the assessee submitted that the assessee has earned dividend income of Rs.3 crore from investment in shares of Religare Commodities Ltd., wherein investment made was only of Rs.3,75,00,000/- out of the total closing investment of Rs.2,11,05,88,093/- as on 31.03.2011. Referring to various decisions, he submitted that although the assessee has suo mou calculated higher disallowance u/s 14A of the Act r.w. Rule 8D in terms of income, the said position was taken under misconception in law. Referring to the following decisions, he submitted that there is no estopple against the law and it was always open to the assessee to resile from the decision taken under misconception of law:-
i) NTPC vs. CIT, 229, ITR 383 (SC);
ii) CIT vs. Bharat General Reinsurance Ltd., 81 ITR 303 (Del);
iii) SAIL DSP VR Employees Association 1998 V. UOI, 262 ITR 638 (Cal);
iv) Sheo Nath Prasad Sharma vs. CIT, 66 ITR 647 (All); and
v) Indo Java & Co. vs. ITO, 30 ITD 161 (Del, SB).
12. He accordingly, submitted that the assessee can notwithstanding suo motu disallowance at a higher amount, raise ground seeking correct computation of disallowance u/s 14A of the Act. Referring to the decision of the Hon’ble Delhi High Court in the case of ACB India Ltd., 374 ITR 108, he submitted that the Hon’ble High Court in the said decision has held that only such investments which yielded exempt dividend income during the year are required to be considered for the purpose of disallowance. Referring to the decision of the coordinate Bench of the Tribunal in the case of Religare Enterprises Ltd. vs. DCIT, ITA No.1549/Del/2014 for A.Y. 2009-10 and various other decisions including the decision of the Special Bench of the Tribunal in the case of ACIT vs. Vireet Investments Pvt. , 165 ITD 27, he submitted that only investments that have yielded dividend income are to be considered for the purpose of computing average investments and for computing disallowance u/s 14A of the Act. He submitted that the Tribunal in assessee’s own case for A.Y. 2008-09 has directed the AO to compute disallowance u/s 14A only qua investments which have yielded exempt income in the year under consideration.
13. The ld. Counsel for the assessee, in his next plank of argument, submitted that there is no warrant to consider interest expenditure for the purpose of disallowance u/s 14A since the assessee had net interest income and there was no interest expenditure. Referring to various decisions, he submitted that for the purpose of computing disallowance u/s rule 8D, only net interest expenses has to be considered. He submitted that in the instant case, the assessee had incurred interest expenditure of Rs.73,57,40,035 whereas the interest income is Rs.182,27,00,961/-. Therefore, the interest income earned by the assessee far exceeded the interest expenditure and, therefore, no interest expenditure can be considered for disallowance under Rule 8D(2)(ii).
14. Without prejudice to the above, he submitted that the AO/CIT(A) has incorrectly included interest on bank overdraft, inter-corporate loan, commercial paper, client margin, interest on TDS, interest on service tax, interest on professional tax, interest paid to clients on advance brokerage received and bank guarantee commission, etc. which is not in accordance with the law. He, however, submitted that the investment of Rs.3,75,00,000/- inshares of RCL which yielded commercial income can only be considered for disallowance u/s 14A of the He submitted that the above investment of Rs.3,75,00,000/- far exceeds shareholders funds of Rs.433 crores as on 31.03.2011 and Rs.425 crores as on 31.03.2010. Referring to various decisions including the decision of the Hon’ble Supreme Court in the case of CIT vs. Reliance Industries Ltd., 410 ITR 466 and the decision of the Hon’ble Delhi High Curt in the case of HT Media vs. PCIT, 399 ITR 576 and CIT vs. Taikisha Engineering India Ltd., 370 ITR 338, he submitted that since own funds with the assessee far exceeds the investments which yielded dividend income there is no warrant to make any disallowance out of any interest expenditure. He accordingly submitted that the disallowance made u/s 14A of the Act r.w. Rule 8D of the IT Rules cannot exceed in the worst scenario Rs.7,09,994/.
15. The ld. DR, on the other hand, submitted that the decision of the Hon’ble Supreme Court in the case of Maxopp Investments Ltd., was not available at the time of deciding the issue by the CIT(A). In any case, he submitted that, the action of the AO is fully justified under the facts and circumstances of the case. He accordingly submitted that the order of the AO be upheld.
16. We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the We have also considered the various decisions cited before us. We find, the AO, in the instant case, made disallowance of Rs.3,04,61,857/- u/s 14A r.w. Rule 8D, after deducting the amount of Rs.2,75,99,362/- suo motu disallowed by the assessee. We find, the ld.CIT(A) restricted the disallowance u/s 14A r.w. Rule 8D to Rs.3 crores being the actual dividend received by the assessee. It is the submission of the ld. Counsel that due to erroneous understanding of the provisions of section 14A the assessee had computed such suo motu disallowance at Rs.2,75,99,362/-. However, in view of the various decisions, only the investments which yielded dividend income should be considered for computation of the average investment. It is also his submission that no interest expenditure has been incurred by the assessee in the instant case since the interest expenditure is much less than the interest income. It is also his submission that the total investments which has yielded dividend income is much less than the own capital and free reserves of the assessee company. It is also his submission that there is no estopple against law and it is always open to the assessee to resile from the decision taken under mis-conception of law. Accordingly, it is his submission that the assessee can suo motu raise grounds seeking correct computation u/s 14A of the Act. It is the submission of the ld. DR that once the assessee has suo motu made disallowance of Rs.2,75,99,362/-, the disallowance u/s 14A, under no circumstances can be less than the said amount. Otherwise, the final computation will be less than the returned income.
17. The Hon’ble Supreme Court in the case of Maxopp Investments Ltd. vs. CIT, 402 ITR 640, has held that the disallowance u/s 14A cannot exceed the actual exempt income received. Therefore, the ground raised by the Revenue on this issue has to be dismissed. Accordingly, the ground by the Revenue on this issue is dismissed.
18. So far as the grounds raised by the assessee including the additional grounds are concerned, the Hon’ble High Court in the case of ACB India Ltd. vs. ACIT, 374 ITR 108 has held that for the purpose of computing disallowance u/s 14A of the Act instead of taking into account total investment, only such investments which yielded exempt dividend income during the year are required to be considered for the purpose of disallowance. Further, the Tribunal in assessee’s own case for Y. 2008-09 has directed the AO to compute the disallowance u/s 14A only qua investments which have yielded exempt income from the year under consideration. Under these circumstances, we deem it proper to restore the issue to the file of the AO with a direction to find out the investments which have yielded dividend income and to take into the same for considering the average value of investment. So far as the interest expenditure for the purpose of disallowance u/s 14A is concerned, we find merit in the argument of the ld. Counsel that bank guarantee commission, interest on TDS, interest on service tax, interest on professional tax, interest paid to clients on advance brokerage, interest on clients’ margins money, etc. cannot be considered for the purpose of disallowance u/s 14A r.w. Rule 8D. We, therefore, deem it proper to restore the issue to the file of the AO with a direction to recompute the disallowance u/s 14A r.w. Rule 8D after taking into account the investments that have yielded dividend income and recompute interest expenditure on investments as per fact and law. The AO, while doing so, shall keep in mind the total investment of the assessee, vis-à-vis the own funds and free reserves for making any disallowance out of any interest expenditure. He shall keep in mind the decision of the Hon’ble Supreme Court in the case of CIT vs. Reliance Industries Ltd. (supra) and the decision of the Hon’ble Delhi High Court in the case of HT Media (supra) and Taikisha Engineering India Ltd. (supra). Needless to say, the AO shall give due opportunity of being heard to the assessee and decide the issue as per fact and law. The grounds raised by the assessee including the additional grounds on this issue are accordingly allowed for statistical purposes.
19. Ground No.3 to 3 of the assessee’s appeal relates to the order of the CIT(A) in sustaining the disallowance of Rs.47,10,557/- out of the disallowance on account of SAR expenses written off.
20. After hearing both the sides, we find, the AO made disallowance of 1,64,73,853/- on account of SAR expenses written off and advance of sale of shares written off. We find, the ld. CIT(A) sustained the disallowance by observing as under:-
“8.2. The AO disallowed the deduction claimed by the appellant in respect of Stock Appreciation Right (SAR) expenditure of Rs.1,17,63,296/- and Rs.47,10,557/- aggregating to Rs.1,64,73,853/- as not being eligible as an allowable expense u/s 37(1) of the Act. The AR has submitted that the said transaction pertained to write off of the loan given to the trust and was deductable as a business expenditure u/s 37(1) of the Act. It is noted that this issue was adjudicated in appeal for the A. Y. 2008-09 and the Ld. ClT(Appeals)-XVIII vide her order dated 28.02.2013 in A. No. 229/10-11 had held that the expenditure claimed was clearly a capital expense and hence not allowable. The finding of the Ld. CIT(Appeals)-XVIII is as under:
“5.5 Why SAR discount is capital in nature (not allowable)?
Claim of SAR discount as a deduction is to be examined under the head “Profits and gains of business or profession”. This head of income is housed in sections 28 to 44DB. Under section 28(i) the profits and gains of any business or profession carried on by the assessee at any time during the previous; year is chargeable to tax. As per section 29, the income referred to in section 28 should be computed in accordance with the provisions contained in section 30 to 430. Section 36 to 36 confer specific deductions. Section 37 deals with expenditure which is general in nature and not covered within section 36 to 36. The remaining sections enlist various categories of nondeductible expenditure.
Sections 30 to 36 dealing with specific deductions do not deals with ESOP discount. The allowability of SAR discount would have to be examined under section 37 – the residuary section. To examine eligibility of SAR discount u/s 37, the character of discount needs to be examined. If the discount is regarded as capital in nature, section 37 would prohibit its deduction. Of it is expenditure on revenue account that qualifies for deduction. From an accounting perspective SAR discount may be revenue item but from an income-tax view point, whether such discount is capital or revenue in nature is the issue for consideration and of importance.
In the absence of an express definition of capita! or revenue expenditure in the Act, one may have to rely on the various judicial precedents on this matter; the rationale adopted and the interpretation adjudged therein.
In the treatise ‘The Law and Practice of Income Tax’ by Kanga and Palkiwala, (9th edition -page 225) the learned authors observe –
“The problem of discriminating between capita/ receipts and income receipts, and between capital disbursements and income disbursements, has very frequently engaged the attention of the courts. In general, the distinction is well recognized and easily applied, but from time to time cases arise where the item lies on the border line and the task of assigning it to income or capita/ becomes much of refinement. As the Act does not define income except by way of adding artificial categories, it is to be decided cases that one must go in search of light.” (Emphasis supplied)
In the context of SAP discount, the Jurisdictional Tribunal – in the case of Ranbaxy Laboratories Limited (2009) 124 TTJ 771 (Del) held ESOP discount to be capital and not a allowable/ deductible business expenditure. The Delhi Tribunal placed it reliance on the decision of the House of Lords in the case of Lowry v Consolidated African Selection Trust Ltd. (1940) 8 ITR 88 (Supp) and held it to be capital. This decision was upheld by the Mumbai Tribunal.
Thus the arguments, as fortified by the above decisions, wherein it has been held that SAR discount is NOT an allowable expenditure (largely for the reason that it is a capita/ expenditure), in favour of SAR discount being capital, are:-
