Case Law Details
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:
-
- Only investments that have generated exempt income should be considered when calculating the average value of investments.
- The disallowance should not exceed the amount of exempt income.
2. The First Proposition: In regard to the first proposition, the CIT(A) referred to the decision of the Special Bench of ITAT Delhi in the case of ACIT vs. Vireet Investments Pvt. Ltd. (2017). This ruling emphasized that only investments generating exempt income should be taken into account when calculating the average value of investments for Rule 8D.
3. The Second Proposition: The second proposition was based on the judgment of the Bombay High Court in the case of M/s. Nirved Traders Pvt. Ltd. (ITA No. 149 of 2017). This decision clarified that the disallowance under Section 14A should not exceed the amount of exempt income.
4. Disallowance of ESOP Expenditure: The second issue concerned the disallowance of ESOP expenditure claimed by the assessee. The company had claimed ESOP expenditure of Rs. 22.03 crores. However, the Assessing Officer contended that ESOP expenditure was capital in nature as it was related to raising share capital and was essentially notional, not representing actual expenses. The CIT(A), however, took into consideration the decision of the Special Bench in the case of Biocon Ltd. (2013), which had ruled that ESOP expenditure is a revenue expenditure. Moreover, the CIT(A) pointed out that similar disallowances of ESOP expenditure in previous assessment years (2012-13, 2013-14, and 2017-18) had been deleted.
Conclusion: The ITAT Mumbai’s decision in the case of DCIT vs. Dhani Services Ltd. is significant as it provides a clear perspective on two contentious tax issues. In the case of disallowances under Section 14A, the ITAT upheld the CIT(A)’s decision, which was consistent with the Special Bench’s ruling in the case of Vireet Investments Pvt. Ltd. This decision emphasizes that the disallowance under Section 14A should not exceed the exempt income.
Regarding the disallowance of ESOP expenditure, the ITAT’s decision aligned with the Special Bench’s judgment in the case of Biocon Ltd., which recognized ESOP expenditure as a revenue expenditure. Additionally, the decision was in line with the CIT(A)’s previous rulings in the same regard for the assessment years 2012-13 and 2017-18. The consistent application of tax principles ensures a fair and uniform approach for both taxpayers and tax authorities.
In conclusion, the ITAT’s verdict in this case offers clarity on crucial tax matters and underscores the significance of adhering to legal precedents. The decisions contribute to a just and consistent approach in tax disallowances, benefiting all stakeholders involved.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The Revenue has filed this appeal challenging the order dated 02.02.2023 passed by the learned Commissioner of Income Tax (Appeals)- 54, Mumbai (in short ‘ld. CIT(A)’) and it relates to Asst. Year 20 18-19. The grounds raised by the Revenue relate to the following two issues :-
a) Disallowance made under Section 14A of the Income Tax Act, 1961 (in short ‘the Act’); and,
b) Disallowance of ESOP expenditure claimed by the assessee.
3. The first issue relates to disallowance made under Section 14A of the Act. The assessee had earned exempt dividend income of Rs. 18,20,000/-. However, the assessee disallowed a sum of Rs. 100/- only under Section 14A of the Act read with Rule 8D of the Income Tax Rules. The Assessing Officer, however, computed the disallowance as per Rule 8D at Rs.7,34,68,829/- and accordingly disallowed the balance amount of Rs.7,34,68,729/-. The ld. CIT(A) gave the following directions on this issue:-
i) for computing average value of investments, only those investments that have yielded exempt income have to be considered; and,
ii) disallowance cannot exceed the amount of exempt income.
The Revenue is aggrieved.
4. With regard to the first proposition, we notice that the ld. CIT(A) relied upon the decision of the Special Bench of ITAT Delhi in the case of ACIT vs Vi reet Investments Pvt. Ltd., (2017) 82 taxmann.com 415. With regard to the second proposition, the ld. CIT(A) followed the decision rendered by the Hon’ble Bombay High Court in the case of M/s. Nirved Traders Pvt. Ltd. (ITA No. 149 of 2017).
5. We heard the parties on this issue and perused the record. We noticed that the ld. CIT(A) has followed the decision rendered by the Special Bench in the case of Vireet Investments Pvt. Ltd. (supra) to hold that only those investments which have yielded exempt income should be considered for computing the average value of investments for the purpose of Rule 8D. Further, the ld. CIT(A) has followed the binding decision rendered by the Jurisdictional Bombay High Court in the case of M/s. Nirved Traders Pvt. Ltd. (supra), wherein it was held that the disallowance cannot exceed the exempt income. Since the ld. CIT(A) has followed the decision rendered by the Special Bench of ITAT and the Jurisdictional High Court in adjudicating this issue, we do not find any reason to interfere with the decision so rendered by the ld. CIT(A) on this issue.
6. The next issue relates to disallowance of ESOP expenditure claimed by the assessee. The assessee-company has claimed ESOP expenditure of Rs.22.03 crores. While computing the total income, the Assessing Officer took the view that the ESOP expenditure is not Revenue expenditure as it has been incurred towards raising of Share Capital and hence it is clearly Capital in nature. Further, he took the view that the ESOP expenditure is not an actual expenditure incurred by the company and it is notional in nature. The ld. CIT(A), however, noticed that ESOP expenditure has been held to be Revenue in nature by the Special Bench of Tribunal in the case of Biocon Ltd. (2013) 35 taxmann.com 335. The ld. CIT(A) further observed that an identical disallowance of ESOP expenditure made in Asst. Years 2012-13, 2013-14 and 2017-18 has been deleted by the ld. CIT(A). Accordingly, following the decision rendered in the earlier years, the ld. CIT(A) deleted the disallowance.
7. We heard the parties on this issue and perused the record. The view taken by the Assessing Officer in order to disallow the ESOP expenditure is contrary to the view expressed by the Special Bench in the case of Biocon Ltd. (supra), wherein it has been held that ESOP expenditure is allowable as Revenue expenditure. We also noticed that the decision rendered by the ld. CIT(A) in Asst. Year 20 12-13 in deleting the disallowance of ESOP expenditure has since been upheld by the Tribunal in ITA No. 1418/Mum/2022 vide order dated 16.02.2023. The learned AR brought to our notice that the ld. CIT(A) had granted identical relief in Asst. Year 2017- 18 and the Revenue did not challenge the said decision before the Tribunal.
8. Thus, we noticed that the disallowance of ESOP expenditure has been deleted by the ld. CIT(A)/ITAT in the earlier years in the hands of the assessee. Accordingly, following the above said decision, we uphold the order passed by the ld. CIT(A) on this issue.
9. In the result, appeal filed by the Revenue is dismissed.
Pronounced in the open court on 11/10/2023.
