Astral Poly Technik Pvt. Ltd., Ahmedabad V. The DCIT, Circle-1(1)(1), Ahmedabad

CO 82/AHD/2020

AI Insights

The case involves an appeal by the Department against the order of the CIT(A) which had allowed the appeal of the assessee, M/s. Astral Polytechnik Ltd., regarding the disallowance of ESOP expenses and the deletion of additions made under Section 14A of the Income Tax Act. The Department contested these decisions, while the assessee also raised objections regarding the non-admission of an additional ground related to the disallowance of education cess and the disallowance of employees' contributions to PF and ESI. The tribunal examined the legal provisions, judicial precedents, and the facts of the case to arrive at its decision.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 131378 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 2 month(s) 2 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 24-01-2023
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 14-12-2022
• Assessment Year: 2016-2017
• Appeal Filed On: 22-11-2020
• Other Referred Cases: Biocon Limited, Cera Sanitaryware Limited, Ranbaxy Laboratories, Maxopp Investments Limited v/s CIT, Harrison Malayalam Ltd. v/s CIT, Checkmate Services (P.) Ltd. v/s CIT, Gujarat State Road Transportation Corporation v/s CIT, Suzlon Energy Ltd. v/s CIT, PVP Ventures Ltd. v/s CIT, Redington (India) Ltd. v/s CIT, Delhi International Airport (P.) Ltd. v/s CIT, People Strong HR Services (P.) Ltd. v/s CIT, Asian Granito India Ltd v/s CIT, Edelweiss Financial Advisors Ltd. v/s CIT, Dipesh Lalchand Shah v/s CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Business expenditure; Earning of tax free income; Period of limitation; Proportionate interest; Retrospective amendment; Capital receipt; Revenue expenditure; Capital expenditure; TDS; Rule 8D; Set aside
• Section: 37; 43B; 143(3); 14A; 115JB; 37(1); 250; 113; 72

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “B” BENCH Before: Ms. Annapurna Gupta, Accountant Member And Shri Siddhartha Nautiyal, Judicial Member Th e DCIT, Circle-1 (1 )(1), Ah medabad (Appellant) Vs M/s. Astral Polytechnik Ltd. , 207 /1 , Astral Ho use, B/h. Rajpath Club, Off. S. G. Highway , Ah med abad-3800 59 PAN: AABCA295 1N (Resp ondent) M/s. Astral Poly techn ik Ltd ., 207/1, Atral Ho use, B/h. Rajp ath Club, Off. S. G. Highway, Ah medabad -3 80059 PAN: AABC A2951N (Appellant) Vs The DCIT, Circle-1(1)(1 ), Ah med abad (Resp ondent) Asses see b y : Shri Biren Shah, A. R. Revenue by : Shri Rake sh J ha, Sr. D. R. Date of hearing : 15-12 -2 022 Date of pronouncement : 25-01 -2 023 ITA No. 287/Ahd/2020 Assessment Year 2016-17 Cross Objection No. 82/Ahd/2020 (In ITA No. 287/Ahd/2020) Assessment Year 2016-17 I.T.A No. 287 & CO 82/Ahd/2020 A.Y. 2016-17 Page No. DCIT vs. Astral Poly Technik Pvt. Ltd. & Astral Poly Technik Pvt. Ltd. vs. DCIT 2 आदेश/ORDER PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:- The appeal filed by the Department and the cross objection filed by the assessee are against the order of the ld. Commissioner of Income Tax (Appeals)-1, Ahmedabad in Appeal no. CIT(A)-1/ACIT Circle- 1(1)(1)/10261/18-19, in proceeding u/s. 143(3) vide order dated 05/02/2020 passed for the assessment year 2016-17. 2. The Department has taken the following grounds of appeal: “(1) The CIT(A) has erred in law and in facts in deleting the ESOP expenses of Rs.22,65,000/- which are on capital account and notional in nature. (2) The CIT(A) has erred in law and in facts in deleting the Section 14A disallowance of Rs.2,84,52,008/- under the general provisions. (3) The CIT(A) has erred in law and in facts in deleting the Section 1 15JB adjustment of Rs.2,84,52,008/-. (4) It is, therefore, prayed that the order of ld. CIT(A) may be set aside and that of the Assessing Officer be restored.” 3. The assessee has taken the following grounds of cross objection: “1. On the facts and in the circumstances of the Respondent's case, the Ld. CIT(A) erred in not admitting the additional ground which was raised during appellate proceedings in view of the decision of Rajasthan High Court in the case of Chambal Fertilisers and Chemicals wherein the it was held that cess is not disallowable u/s. 40(a)(ii). The Ld. CIT(A) thereby disallowing cess on income taxes paid and DDT paid u/s. 40(a)(ii). I.T.A No. 287 & CO 82/Ahd/2020 A.Y. 2016-17 Page No. DCIT vs. Astral Poly Technik Pvt. Ltd. & Astral Poly Technik Pvt. Ltd. vs. DCIT 3 2. On the facts .and in the circumstances of the Respondent's case, disallowance of employees contribution to PF and ESI u/s. 36(l)(va) r.w.s. 2(24)(x) of the Act for Rs. 57,850/- cannot be sustained on the ground that employees PF/ESI contribution is not covered by section 43B and is only allowable as a deduction u/s. 36(l)(va) if paid by the "due date" prescribed therein as held by Hon'ble Gujarat High court in the case of CIT vs. Gujarat State Road Transport Corporation. The Ld. CIT (A) erred in confirming the disallowance made by the Assessing Officer in this respect of Rs. 11,182/-. 3. The respondent craves leave to add, alter, amend and/or withdraw any ground or grounds of appeal either before or during the course of hearing of the appeal.” 4. We shall first take up the Departments grounds of appeal. 5. At the outset we note that the appeal is time-barred by 46 days. The Ld. DR submitted that delay is caused due to the fact that the appeal has been filed during the Covid pandemic period and accordingly, the delay was caused by circumstances beyond the control of the assessee. We note that the assessee company received the order of Ld. CIT(Appeals) on 17-02-2020. However, in view of the nation-wide lockdown from 24 th March 2020, the Apex Court in Cognizance for Extension of Limitation, In re[2021] 127 taxmann.com 72 (SC), took suo motu cognizance of the situation arising out of the challenge faced by the country on account of COVID-19 Virus and resultant difficulties that could be faced by the litigants across the country. Consequently, it was directed vide order dated 23-3-2020 that the period of limitation in filing petitions/applications/suits/appeals/all other proceedings, irrespective of the period of limitation prescribed under the general or special laws, shall stand extended with effect from 15-3-2020 till further orders. The suo motu proceedings were, disposed of issuing the directions as to in computing the period of limitation for any suit, appeal, I.T.A No. 287 & CO 82/Ahd/2020 A.Y. 2016-17 Page No. DCIT vs. Astral Poly Technik Pvt. Ltd. & Astral Poly Technik Pvt. Ltd. vs. DCIT 4 application or proceeding, the period from 15-3-2020 till 14-3-2021 shall stand excluded. Consequently, the balance period of limitation remaining as on 15-3-2020, if any, shall become available with effect from 15-3-2021. In view of the above, since the delay of 75 days in filing appeal is falling within the Covid pandemic period, the delay is hereby being condoned. Grounds of Appeal Number 1: ESOP disallowance 6. The brief facts in relation to this ground of appeal are that the assessee company had issued a scheme of ESOP for its employees after obtaining due approval of the shareholders on 21-10-2015. In the assessment order, the AO disallowed the ESOP expenses on the ground that the same cannot be allowed under section 37 (1) of the Act on the ground that these expenses are notional in nature and the same are required to be disallowed being capital in nature. According amount of 22, 65,000/- was added to the income of the assessee by disallowing ESOP expenses. In appeal, the assessee submitted that such expenses have been paid as perquisite to the employees and TDS has been deducted thereon at the time of payment. Further, the counsel for the assessee placed reliance on various judicial precedents which have held that ESOP expenses are not notional/contingent the nature and are an allowable expense under section 37 (1) of the Act. The Ld. CIT(Appeals) allowed the appeal of the assessee on this ground with the following observations: “5.3 Decision: I have carefully considered the assessment order and the submission filed by the appellant. The AO observed that appellant has claimed ESOP expenses of Rs. 22.60 lacs as revenue expenses. Such expenditure was I.T.A No. 287 & CO 82/Ahd/2020 A.Y. 2016-17 Page No. DCIT vs. Astral Poly Technik Pvt. Ltd. & Astral Poly Technik Pvt. Ltd. vs. DCIT 5 disallowed by AO on the ground that when ESOPs are issued, company chooses receive security premium of a lower amount or no security premium is charged in comparison of amount received in regular course of share issue. He observed that issue of shares is not crystallized till the date on which employee exercises the option hence expenditure debited during the vesting period remains contingent in nature and it is a capital expenditure. The AO relied upon decision of Hon'ble Delhi ITAT in the case of ACIT V/s Ranbaxy Laboratories (supra) and made disallowance under Section 37(1) of the Act. On the other hand appellant has relied upon various decision including decision of Hon'ble Bangalore Special Bench in the case of Biocon Limited and decision of Hon'ble Ahmedabad ITAT in the case of Sanityware Limited 68 taxmann.com 433 and contended that such expenditure cannot be disallowed. 5.4 On perusal of relevant facts on record, it is observed that AO has relied upon decision of Hon'ble Delhi ITAT in the case of Ranbaxy Laboratories wherein ESOP expenses are considered to be notional expenditure. However, entire issue is elaborately discussed by Hon'ble Bangalore Special Bench in the case of Biocon Limited 35 taxmann.com 335 and held as under: Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Discount on ESOP] - Assessment years 2003-04 to 2007- 08 - Assessee-company issued Employee's Stock Option Plan (ESOP) and claimed difference between market price and exercise price as deduction under section 37(1), spread equally over vesting period of four years, on basis of SEBI Guidelines and accounting principles - Assessing Officer disallowed same, holding it as a contingent liability or a short receipt of share premium - Whether, discount on premium under ESOP is simply a mode of compensating employees for their continued services to company and is a part of their remuneration, and cannot be described either as a short capital/share premium receipt or a capital expenditure - Held, yes - Whether, mere fact that quantification is not precisely possible at time of incurring liability would not make an ascertained liability a contingent - Held, yes - Whether, where liability in respect of ESOP is incurred at end of each year, which is quantified at end of vesting period when employees become entitled to exercfs. options, discount on ESOP is an ascertained liability and not a contingent liability - Held, yes -Whether, discount on ESOP being a general expense, is an allowable deduction under sectic- 37(1) during years of vesting on basis of percentage of vesting during such period, subject to upward or downward adjustment at lime of exercise of option - Held, yes [Para 11.1.6] [In favour ofassessee] The above issue is also decided by Hon'ble Ahmedabad ITAT in the case of Cera Sanitaryware Limited 68 taxmann.com 433 and held as under: I.T.A No. 287 & CO 82/Ahd/2020 A.Y. 2016-17 Page No. DCIT vs. Astral Poly Technik Pvt. Ltd. & Astral Poly Technik Pvt. Ltd. vs. DCIT 6 The assessee-company had implemented employees' stock option scheme. It had offered its shares to its employees at discount and resulting loss was claimed as deduction. The Assessing Officer disallowed said loss. Held that basically the Assessing Officer was of the view that it is a capital loss. It is not materialized in this year. It would happen only when option is exercised by the employees. All these aspects have been considered by the Special Bench of the Tribunal in Biocon Ltd, v. Dy. CIT [2013] 35 taxmann.com 335/120141 114 ITD 21 (Bang.) wherein it has been explained that share premium is a capital receipt and not chargeable to tax in the hands of the company. If a company issues shares to the public or to the existing shareholders at lesser than prevailing premium due to market sentiments or otherwise such share receipts of a premium would be a case of receipt of lower amount on capital amount. As the object of issuing such share at a lower price is nowhere directly connected with the earning of income but when the company undertakes to issue shares to its employees at a discounted premium at a future date the primary object of this exercise is not to raise the share capital but to earn profit by securing the consistent and concentrated efforts of dedicated employees during the vesting period, such discount is construed, both by the employees and the company, as nothing but a part of package of remuneration, a substitute for giving direct incentive in cash for availing of the services of the employees. Therefore, first appellate authority is not justified while upholding the disallowance of the assessee's claim." Further, Hon'ble Ahmedabad ITAT in the case of ACIT Vslnox leisure Limited in ITA No 3330/3362/Ahd/2015 vide order dated 05/01/2018 has held as under: "12. In ground No. 2, the Assessing Officer has raised the following grievance: - "2) On the facts and in the circumstances of the case and in law, the Ld. CIT (Appeals) erred in by holding Employee's stock option plan amounting to Rs.1621904/- as an allowable expenditure u/s.37(l) of the Income Tax Act, 1961 without appreciating the findings of Assessing Officer ". 13. Learned representatives fairly agree that this issue is also covered in favour of the assessee by Tribunal's decision in assessee's own case for the assessment year 2008-09 wherein the Tribunal has inter alia observed as follows :- "7. We have carefully considered the orders of the authorities below. We find force in the contention of the Id. counsel. The Co-ordinate Bench in I.T.A No. 287 & CO 82/Ahd/2020 A.Y. 2016-17 Page No. DCIT vs. Astral Poly Technik Pvt. Ltd. & Astral Poly Technik Pvt. Ltd. vs. DCIT 7 the case of the Cera Sanitaryware Ltd. (supra) has considered this issue at para 9 of its order and at para 10, the Tribunal considered the decision of the Special Bench in the case of Biocon Ltd. 25 ITR (Trib.) 602 and after considering the decision of the Special Bench directed the A. O to claim of deduction. 8. The Hon'ble High Court of Madras in the case of PVP Ventures Ltd. 25 Taxmann.com 286 has allowed such claim as business expenditure and the Hon'ble High Court of Delhi in the case of Lemon Tree Hotels Ltd. in ITA No. 107/2015 has followed the decision of the Hon'ble High Court of Madras held that cost of ESOP could be debited in Profit and Loss account of the assessee. Respectfully following the aforementioned decisions, we direct the A.O to allow the claim of deduction on account of remuneration to ESOP. Ground No. 1 is accordingly allowed." 14. We see no reasons to take any other view of the matter than the view so taken by the coordinate bench in assessee's own case for the assessment year 2008-09. Respectfully following the same, we uphold the relief granted by the learned CIT(A) and decline to interfere in the matter. Grievance of the Assessing Officer is accordingly rejected. 15. Ground No.2 is thus dismissed." As entire issue relating to ESOP expenses is decided in favour of Assessee by Hon'ble Ahmedabad ITAT, referred supra, and Hon'ble Special Bench in the case of Biocon Limited, disallowance of expenditure made by AO for Rs.22,65,000/- is not justified. On this ground disallowance made by AO is deleted. This ground of appeal is allowed. 6. The Second and Fourth Grounds of appeal relate to addition made by Assessing Officer for Rs. 2,84,52,088/- under Section 14A.” 7. Before us, the Department relied upon the order of the AO and argued that these expenses are at best notional/contingent in nature and hence are not allowable under section 37(1) of the Act. In response, the counsel for the assessee reiterated the submissions made before Ld. CIT(Appeals) to the effect that various judicial precedents on this issue in favour of the assessee and submitted that a special bench of the Tribunal in the case of SB Biocon was constituted which was subsequently approved by the Karnataka High I.T.A No. 287 & CO 82/Ahd/2020 A.Y. 2016-17 Page No. DCIT vs. Astral Poly Technik Pvt. Ltd. & Astral Poly Technik Pvt. Ltd. vs. DCIT 8 Court. The counsel for the assessee also placed reliance on the jurisdictional Ahmedabad ITAT decision the case of Cera Sanitary Ware Ltd. v. DCIT 68 taxmann.com 433 (Ahmedabad-Tribunal) which is held that ESOP expenses are allowable under section 37(1) of the Act. 8. We have heard the rival contentions and perused the material on record. The issue for consideration before us is that expenses of 22.65 lakhs were debited to the profit and loss account under the head ESOP expenses, being the difference between the market value of shares as computed under the guidelines of SEBI and the value at which these shares were issued to the employees. The contention of the Department is that no expenditure has been incurred by the company at the time of issuance of shares under the ESOP scheme and the expenditure has not crystallised till the date on which the employee exercises the option and hence any expenditure debited during the vesting period remains contingent in nature. The counsel for the assessee on the other hand contended that the liability had crystallised at the time of issuance of shares itself and only the quantification remained pending at the time of exercise of such option by the assessee. This issue has been discussed at length by the Karnataka High Court in the case of Biocon Ltd. [2020] 121 taxmann.com 351 (Karnataka), wherein the facts were that assessee floated Employees Stock Option Plans (ESOP) and provided shares to its employees at a discount discount. There was difference between grant price to employees and market price as on date of grant of ESOPs. The ESOPs were vested in employee over a period of four years. The deduction of discount on ESOP over vesting period was in accordance with accounting in books of account, which had I.T.A No. 287 & CO 82/Ahd/2020 A.Y. 2016-17 Page No. DCIT vs. Astral Poly Technik Pvt. Ltd. & Astral Poly Technik Pvt. Ltd. vs. DCIT 9 been prepared in accordance with SEBI Guidelines. The Karnataka High Court held that on exercise of option by an employee, actual amount of benefit that had to be determined was only a quantification of liability, which would take place at a future date. The Court further held that the discount on issue of ESOPs was not a contingent liability but was an ascertained liability. Accordingly, issuance of shares at a discount would be an expenditure incurred for purposes of section 37(1) as primary object of aforesaid exercise was not to waste capital but to earn profits by securing consistent services of employees and therefore, same could not be construed as short receipt of capital. Thus, discount on issue of ESOP was allowable deduction under section 37(1) of the Act. While deciding the issue, the High Court made the following observations: 9. In the instant case, the ESOPs vest in an employee over a period of four years i.e., at the rate of 25%, which means at the end of first year, the employee has a definite right to 25% of the shares and the assessee is bound to allow the vesting of 25% of the options. It is well settled in law that if a business liability has arisen in the accounting year, the same is permissible as deduction, even though, liability may have to quantify and discharged at a future date. On exercise of option by an employee, the actual amount of benefit has to be determined is only a quantification of liability, which takes place at a future date. The tribunal has therefore, rightly placed reliance on decisions of the Supreme Court in Bharat Movers supra and Rotork Controls India P. Ltd., supra and has recorded a finding that discount I.T.A No. 287 & CO 82/Ahd/2020 A.Y. 2016-17 Page No. DCIT vs. Astral Poly Technik Pvt. Ltd. & Astral Poly Technik Pvt. Ltd. vs. DCIT 10 on issue of ESOPs is not a contingent liability but is an ascertained liability. 10. From perusal of section 37(1), which has been referred to supra, it is evident that an assessee is entitled to claim deduction under the aforesaid provision if the expenditure has been incurred. The expression 'expenditure' will also include a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which it is issued and the market value of the shares would also be expenditure incurred for the purposes of section 37(1) of the Act. The primary object of the aforesaid exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, the same cannot be construed as short receipt of capital. The tribunal therefore, in paragraphs 9.2.7 and 9.2.8 has rightly held that incurring of the expenditure by the assessee entitles him for deduction under section 37(1) of the Act subject to fulfilment of the condition. 11. The deduction of discount on ESOP over the vesting period is in accordance with the accounting in the books of account, which has been prepared in accordance with Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. 8.1 The Delhi High Court in the case of PVR Ltd. [2022] 145 taxmann.com 331 (Delhi) has held that difference between price at which stock options were offered to employees of assessee-company under ESOP I.T.A No. 287 & CO 82/Ahd/2020 A.Y. 2016-17 Page No. DCIT vs. Astral Poly Technik Pvt. Ltd. & Astral Poly Technik Pvt. Ltd. vs. DCIT 11 and ESPS and prevailing market price of stock on date of grant of such options was allowable as revenue expenditure. 8.2 Again, the Delhi High Court in the case of New Delhi Television Ltd. [2018] 99 taxmann.com 401 (Delhi) has held that Expenditure arising on account of 'Employees' Stock Option Plan (ESOP) is an ascertained liability and hence allowable under section 37(1) of the Act. 8.3 The Madras High Court in the case of PVP Ventures Ltd [2012] 23 taxmann.com 286 (Mad.) held that where assessee allotted shares to its employees under Employees Staff Option Plan and Employee Staff Purchase Scheme Guidelines, 1999, difference between market value of shares and value at which shares were allotted was allowable as revenue expenditure. 8.4 The Delhi ITAT in the case of People Strong HR Services (P.) Ltd. [2022] 134 taxmann.com 351 (Delhi - Trib.) held that discount on shares allotted by assessee to its employee under ESOP Scheme is revenue expenditure allowable under section 37(1) of the Act. In this case, assessee had claimed deduction on account of amount incurred by it on stock option plan extended to its employees under section 37(1) of the Act. The Assessing Officer held that assessee had not paid notional discount on shares issued under ESOP Scheme and had no liability to make such payment and, accordingly, said sum could not be described as expenditure under section 37(1) of the Act. The ITAT held that that the High Court in CIT v. Lemon Tree Hotels Ltd. [IT Appeal No. 107 of 2015, dated 18-8-2015 held that employees' discount represents consideration for services rendered by I.T.A No. 287 & CO 82/Ahd/2020 A.Y. 2016-17 Page No. DCIT vs. Astral Poly Technik Pvt. Ltd. & Astral Poly Technik Pvt. Ltd. vs. DCIT 12 employees and, hence, it is a deductible business expenditure and it cannot be equated with share premium and it is to be intended towards profit by securing employees' consistent services. Therefore, thus, Commissioner (Appeals) was justified in deleting addition on account of disallowance of ESOP expenses by holding notional discount on shares issued under ESOP scheme as revenue expenditure allowable under section 37(1) of the Act. 8.5 In the case of Cera Sanitaryware Ltd[2016] 68 taxmann.com 433 (Ahmedabad - Trib.), the Ahmedabad ITAT held that Employees' stock option scheme expense is allowable as deduction u/s 37 of the Act. In this case, the assessee-company had implemented employees' stock option scheme. It had offered its shares to its employees at discount and resulting loss was claimed as deduction. The Assessing Officer disallowed said loss. The ITAT held that basically the Assessing Officer was of the view that it is a capital loss. It is not materialized in this year. It would happen only when option is exercised by the employees. All these aspects have been considered by the Special Bench of the Tribunal in Biocon Ltd. v. Dy. CIT [2013] 35 taxmann.com 335/[2014] 114 ITD 21 (Bang.) wherein it has been explained that share premium is a capital receipt and not chargeable to tax in the hands of the company. If a company issues shares to the public or to the existing shareholders at lesser than prevailing premium due to market sentiments or otherwise such share receipts of a premium would be a case of receipt of lower amount on capital amount. As the object of issuing such share at a lower price is nowhere directly connected with the earning of income but when the company undertakes to issue shares to its employees at a discounted premium at a future date the primary object of this exercise is not I.T.A No. 287 & CO 82/Ahd/2020 A.Y. 2016-17 Page No. DCIT vs. Astral Poly Technik Pvt. Ltd. & Astral Poly Technik Pvt. Ltd. vs. DCIT 13 to raise the share capital but to earn profit by securing the consistent and concentrated efforts of dedicated employees during the vesting period, such discount is construed, both by the employees and the company, as nothing but a part of package of remuneration, a substitute for giving direct incentive in cash for availing of the services of the employees. Therefore, first appellate authority is not justified while upholding the disallowance of the assessee's claim. 8.6 In our considered view, in the light of the facts of the instant case and the consistent position taken by the High Court and the Tribunals on this issue in favour of the assessee, the Ld. CIT(Appeals) has not erred in facts and in law in allowing the appeal of the assessee on this ground. 9. In the result, ground number 1 of appeal of the Department is hereby dismissed. Grounds of Appeal No. 2: disallowance under section 14A of the Act 10. The brief facts in relation to this ground of appeal are that during the year under consideration, the AO observed that that the assessee did not disallow any direct or indirect expenses in relation to investments made by the company during the year under consideration. However, admittedly, during the year under consideration the assessee did not earn any exempt income. During the course of assessment, the assessee submitted that investments made by the assessee in foreign subsidiaries cannot be subject matter of disallowance under section 14A for the reason that the income I.T.A No. 287 & CO 82/Ahd/2020 A.Y. 2016-17 Page No. DCIT vs. Astral Poly Technik Pvt. Ltd. & Astral Poly Technik Pvt. Ltd. vs. DCIT 14 generated from such subsidiary is taxable in India. Further, the assessee submitted that the assessee has substantial interest free funds at its disposal and accordingly no disallowance is called for under section 14A of the Act. The assessee further submitted that during the year under consideration, the assessee did not earn any exempt income but has received a loss from the partnership firm of 94,72,835/- (the same is evident from computation of income for the same has been added back to the total income). During the year under consideration, the assessee has withdrawn its investments in the partnership firm since it was not profitable venture. Thus, no disallowance can be made under section 14A of the Act when there is no exempt income. The assessee relied upon the decisions on this issue which have held that no disallowance can be made under section 14A of the Act in case the assessee has not earned in any exempt income. Regarding disallowance pertaining to administrative expenses, the assessee submitted that on perusal of profit and loss account, it is clearly evident that the administrative expenses incurred during the year was purely for the purpose of main business and not for earning any tax-free income, hence no disallowance of any administrative expenses should be made only on the presumption of increase thereof for the purpose of earning tax-free income. 10.1 In the assessment, the AO made disallowance under section 14A of the Act as per Rule 8D after excluding therefrom interest expenditure related to special purpose vehicle loans amounting to 4,18,94,506/- not related to investment having potential of earning tax-free income and investments in foreign subsidiaries. Accordingly, the AO added a sum of 2,84,52,088/- under section 14A of the Act to the total income of the assessee. I.T.A No. 287 & CO 82/Ahd/2020 A.Y. 2016-17 Page No. DCIT vs. Astral Poly Technik Pvt. Ltd. & Astral Poly Technik Pvt. Ltd. vs. DCIT 15 11. In appeal, Ld. CIT(Appeals) allowed the assessee’s appeal by holding that on identical facts, the Ld. CIT(Appeals) for the immediately previous assessment year i.e. AY 2015-16 had deleted such disallowance vide order dated 24 July 2018. Accordingly, following the same, Ld. CIT(Appeals) allowed the appeal of the assessee in the following observations: “6.3 Decision: I have carefully considered the Assessment Order and the submission made by the Appellant. The AO has made disallowance under Section 14A at Rs.2,84,52,058/- and identical disallowance was made in AY 2015-16 wherein my predecessor CIT (Appeals) on identical facts has deleted such disallowance vide order dated 24 th July, 2018 and held as under: "6.4. I have carefully considered the Assessment Order and submissions filed by the Appellant. The Assessing Officer has observed that Appellant Company has made investment of Rs. 10,66,95,000/- as on 31 s ' March, 2014 which increased to Rs.271,47,98,000/- as on 31 st March, 2015. The Appellant has not made any disallowance of any expenditure in terms of interest cost, administrative cost or any other expenses with regard to above investments. The Assessing Officer has observed that Assesses must have incurred administrative expenses such as documentation, salary to employees, administrative overheads like stationary, telephone, computer, office equipment, etc., and he relied upon Rule 8D and computed disallowance under Section 14A at Rs.2,15,04,044/-. On the other hand, Appellant has argued that as it has not earned any exempt income, disallowance under Section 14A read with Rule 8D cannot be made. The Appellant has also argued that it has sufficient own funds in form of share capital and reserves & surplus, which is in excess of investments made by it hence relying upon the various decisions of Hon'ble Gujarat High Court and SLP dismissed by Hon'ble Supreme Court in case of Sintex India Limited, the ARs of the Appellant contended that no proportionate interest disallowance is called for. The ARs of the Appellant have also contended that there was substantial increase in share capital, security premium and net profit for the year under consideration in comparison with increase in investments to justify its claim that no borrowed funds were used for the purpose of making investments. The Appellant has also argued that as majority investments are in subsidiary companies and partnership firms, no disallowance under Section 14A can be made. On careful consideration of entire facts, it is observed that Appellant has emphatically argued that major investments are made in subsidiary companies/partnership firm hence no disallowance under I.T.A No. 287 & CO 82/Ahd/2020 A.Y. 2016-17 Page No. DCIT vs. Astral Poly Technik Pvt. Ltd. & Astral Poly Technik Pvt. Ltd. vs. DCIT 16 Section 14A should be made. However, this argument of Appellant cannot be accepted in view of decision of Hon'ble Supreme Court in the case of Maxopp Investments Limited V/s CIT 91 taxmarmcoml54 wherein it is held that dominant purpose for which investment into shares is made by Assessee is not relevant for the applicability of Section 14A of the Act. It is observed that during the year under consideration, Appellant has not earned any exempt income from investments made by it and has incurred exempt loss from investment in partnership firm, which means that Appellant has not earned any exempt income during the year under consideration. This fact was also submitted before Assessing Officer at para 3.5 of written submission dated 9' 1 ' November, 2017 which is not disputed by Assessing Officer. On identical issue, the Hon'ble Gujarat High Court in the case of Corrtech Energy Pvt. Limited 45 taxman.com 116, on identical disallowance under Section 14A when no dividend income is earned by Assessee, the Court has held as under: "4. Counsel for the Revenue submitted that the Assessing Officer as well as CIT (Appeals) had applied formula of rule 8D of the Income Tax Rules, since this case arose after the assessment year 2009-2010. Since in the present case, we are concerned with the assessment year 2009-2010, such formula was correctly applied by the Revenue. We however, notice that sub-section(l) of section 14A provides that for the purpose of computing total income under chapter IV of the Act, no deduction shall be allowed in respect of expenditure incurred, by the assessee in relation to income which does not form part of the total income under the Act. In the present case, the tribunal has recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax. It was on this basis that the tribunal held that disallowance under section 14A of the Act could not be made. In the process tribunal relied on the decision of Division Bench of Punjab and Haryana High Court in case of CIT v Winsome Textile Industries Ltd. [2009] 319ITR 204in which also the Court had observed as under: "7. We do not find any merit in this submission. The judgement of this court in Abhishek Industries Ltd (2006) 286 ITR I was on the issue of allow ability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. The observations made therein have to be read in that context. In the present case, admittedly the assessee did not make any claim for exemption. In such a situation section 14A could have no application." I.T.A No. 287 & CO 82/Ahd/2020 A.Y. 2016-17 Page No. DCIT vs. Astral Poly Technik Pvt. Ltd. & Astral Poly Technik Pvt. Ltd. vs. DCIT 17 5. We do not find any question of law arising, Tax Appeal is therefore dismissed. " Further, Hon'ble Ahmedabad ITAT in case of Shah Alloys Ltd [2315/Afi(l/2010J, dated 27/03/2015 following the decision of Corrtech Energy Pvt. Ltd (referred supra), held as under: "The Authorized Representative of the assessee has relied on the decision of the Hon'ble Gujarat High Court in the case of CIT vs. Corrtech Energy (P) Ltd, reported in (2014) 272 CTR 262 (Guj.)(HC), wherein it has been held that where the assessee has not made any claim for exemption of any income from payment of tax, no disallowance could be made u/s 14A of the Act. The Departmental Representative has not disputed the submission of the assessee that during the assessment years under consideration the assessee has not claimed any income as exempt from tax in its Return of Income filed. Therefore, respectfully following the decision of Hon'ble Gujarat High Court in the case of Corrtech Energy (P) Ltd (supra), we delete the disallowance of expenditure made u/s 14A read with Rule 8D of Rs. 1,60,45,775/- in the Assessment Year 2007-08 and Rs. 2,04,30,869/- in the assessment year 2008-09. Thus this ground of appeal of assessee is allowed in both the years under appeal.” Further, Hon’ble Delhi High Court in case of Holisum India Pvt. ltd. (I.T. Act, 1961 No. 486/2014 and I.T. Act, 1961 NO. 299/2-4 Hon’ble Allahabad High Court in case of CIT V/s Shivam Motors Pvt. Limited in IT Appeal No. 88 of 2014, dated 5 lh May, 2014 on identical fact decided the issue in favour of Assesses. It is observed that no disallowance under Section 14A should be made if no exempt income is earned is also adjudicated in favour of Assessee by following Courts, who have also considered CBDT Circular No. 5 of 2014: (i) Decision of Hon'ble Delhi High Court in case of Principal Commissioner of Income-tax-04 v. IL & FS Energy Development Company Ltd, dated 16.08.2017 [84 taxmann.com 1861: "Section 14A_of the Income-tax Act, 1961, read with rule 8Dpf the Income-tax Rules, 1962 - Expenditure incurred in relation to income not includible in total income (CBDT Circular v. rule 8D) - Assessment year 2011-12 - Whether CBDT Circular No. 5/2014 dated 11-2-2014cannot override express provisions of section 14A, read with rule 8D - Held, yes - Whether where no exempt income was earned in relevant assessment year, merely because tax auditor had suggested in tax audit report that there ought to be such disallowance, it could not be a ground to make I.T.A No. 287 & CO 82/Ahd/2020 A.Y. 2016-17 Page No. DCIT vs. Astral Poly Technik Pvt. Ltd. & Astral Poly Technik Pvt. Ltd. vs. DCIT 18 disallowance in terms of section 14A, read with rule 8D - Held, yes [Para 23] [In favour of assessee] " (ii) Decision of High Court of Madras in case of Commissioner of Income- tax, Central J. Chennai v. Chettinad Logistics P.) Ltd I. T.C.A. NO. 24 OF 2017] dated MARCH 13.2017: "Section 14Aof the Income-tax Act, 1961, read with rule 8Dof the Income- tax Rules, 1962 - Expenditure incurred in relation to income not includible in total income (General principle) - Assessment year 2011-12 - Whether section 14A can only be triggered, if, assessee seeks to square off expenditure against income which does not form part of total income under Act; rule 8D only provides for a method to determine amount of expenditure incurred in relation to income, which does not form part of total income of assessee and it cannot go beyond what is provided in section 14A - Held yes - Whether where no exempt income i.e., dividend, was earned in relevant assessment year by assessee, section 14A could not be invoked - Held yes [Para 8] [Matterremanded] Circulars and Notifications: Circular No. 5. dated 11-2-2014" (iii) Decision of High Court of Madras in case of Redington (India) Ltd.v. Additional Commissioner of Income-fax. Co. Ranee-V. Chennai T.C.A. NO. 520 OF 20-16f dated DECEMBER 23. 2016: "Section 14A of the Income-tax Act, 1961, read with rule 8Dpf the Income- tax Rules, 1962 - Expenditure incurred in relation to income not includible in total income (Condition precedent) - Assessment year 2007-08 - Whether provision of section 14A is relatable to earning of actual income and not notional or anticipated income, hence, where there is no exempt income in a year, there cannot be a disallowance As facts of the year under consideration are similar with facts of earlier Assessment Year and Appellant has not earned any exempt income but incurred exempt loss, relying upon finding given by my predecessor CIT (Appeals) and various decisions of the Courts referred supra, disallowance under Section 14A made by AO for Rs.2,84,52,008/- is deleted. Similarly, no adjustment is required to be made while computing book profit under Section 115 JB of the Act. Both the grounds of appeal are allowed.” 12. The Department is in appeal before us against the order passed by Ld. CIT(Appeals) deleting the additions made under section 14A of the Act. The Department primarily relied on the observations made by the AO the I.T.A No. 287 & CO 82/Ahd/2020 A.Y. 2016-17 Page No. DCIT vs. Astral Poly Technik Pvt. Ltd. & Astral Poly Technik Pvt. Ltd. vs. DCIT 19 assessment order. In response, counsel for the assessee primarily relied upon the arguments made before Ld. CIT(Appeals) during the course of appellate proceedings. An issue for consideration which came before us during the course of arguments was that Ld. CIT(Appeals), while granting relief to the assessee has observed that the assessee has not earned any exempt income but has incurred exempt loss during the year under consideration. Seemingly, this observation made by Ld. CIT(Appeals) was not coming out from the facts of the case of the assessee. However, the assessee clarified that in the statement of income share of profit of AOP/BOI /URF Indo Green was shown at (-) 94,72,835/ -. The counsel for the assessee clarified that this share of loss from partnership firm amounting to (-) 94,72,835/- is reported in the “Information regarding Related Party Transactions” under item number 16 of the audited financial statements of the company (at page 41 of the paper book). Accordingly, Ld. CIT(Appeals) has not made any factual error in arriving at is finding at page 32 of the order where he observed that “the appellant had not earn any exempt income but incurred exempt loss”, during the year under consideration. Further, the Ld. Counsel for the assessee submitted that in the instant facts, even the AO admitted that during the year under consideration, the assessee did not earn any exempt income. The assessment order at paragraph 4.1, the AO has observed “during the year, the assessee has not erred any exempt income but also did not disallow any direct or indirect expenses related to investment”. Further, the Ld. Counsel for the assessee submitted before us (as well as before Ld. CIT(Appeals) that the incremental interest free funds available with the assessee during the year under consideration for 125.92 crores whereas I.T.A No. 287 & CO 82/Ahd/2020 A.Y. 2016-17 Page No. DCIT vs. Astral Poly Technik Pvt. Ltd. & Astral Poly Technik Pvt. Ltd. vs. DCIT 20 the incremental value of investments was 74.30 crores only. Accordingly, there is no basis for making disallowance under section 14A of the Act. 13. We have heard the rival contentions and perused the material on record. Admittedly, during the year under consideration, the assessee did not earn any exempt income. 13.1 It is a well-settled law on the subject that no disallowance can be made under section 14A in case the assessee has not earned any exempt income. The Hon'ble Supreme Court in the case of State Bank of Patiala [2018] 99 taxmann.com 286 (SC) held that where High Court took a view that amount of disallowance under section 14A could be restricted to amount of exempt income only, SLP filed against said order was to be dismissed. The Hon'ble Supreme Court in the case of Chettinad Logistics (P.) Ltd.[2018] 95 taxmann.com 250 (SC)dismissed SLP against High Court ruling that section 14A cannot be invoked where no exempt income was earned by assessee in relevant assessment year. The Gujarat High Court in the case of Dipesh Lalchand Shah [2022] 143 taxmann.com 419 (Gujarat) held that where in relevant assessment year, assessee-individual earned profits from partnership firm and made investments in shares of a company, since its income from partnership was negative and no exempt income was earned, in such case disallowance under section 14A could not be made. In the case of Corrtech Energy (P.) Ltd. [2014] 45 taxmann.com 116 (Gujarat), the Gujarat High Court held that where assessee did not make any claim for exemption of any income from payment of tax, disallowance under section 14A could not be made. The Delhi High Court in I.T.A No. 287 & CO 82/Ahd/2020 A.Y. 2016-17 Page No. DCIT vs. Astral Poly Technik Pvt. Ltd. & Astral Poly Technik Pvt. Ltd. vs. DCIT 21 the case of Delhi International Airport (P.) Ltd. [2022] 144 taxmann.com 80 (Delhi) held that section 14A would not be applicable if no exempt income was received or receivable during relevant previous year. The Delhi High Court in the case of Amadeus India (P.) Ltd.[2022] 145 taxmann.com 311 (Delhi), held that section 14A envisages that there should be an actual receipt of income which is not includible in total income; hence, section 14A will not apply where no exempt income is received or receivable during relevant previous year. The Ahmedabad ITAT in the case of Edelweiss Financial Advisors Ltd. [2021] 124 taxmann.com 361 (Ahmedabad - Trib.) held that disallowance of expenses under section 14A read with rule 8D could not exceed amount of exempted income. The Ahmedabad ITAT in the case of Addlife Investments (P.) Ltd.[2021] 124 taxmann.com 572 (Ahmedabad - Trib.) held that disallowances made under section 14A read with rule 8D could not exceed amount of exempt income earned by assessee during year. In the case of Asian Grantio India Ltd [2020] 113 taxmann.com 445 (Ahmedabad - Trib.), the Ahmedabad ITAT held that Disallowance of expenses under section 14A read with rule 8D of 1962 Rules cannot be made in absence of exempt income. 13.2 In view of the above decisions, and the facts of the assessee’s case, we are of the considered view that Ld. CIT(Appeals) has not erred in facts and in law in deleting the addition made under section 14A of the Act. 14. In the result, ground number 2 of the Department’s appeal is dismissed. I.T.A No. 287 & CO 82/Ahd/2020 A.Y. 2016-17 Page No. DCIT vs. Astral Poly Technik Pvt. Ltd. & Astral Poly Technik Pvt. Ltd. vs. DCIT 22 Grounds of Appeal No. 3: applicability of disallowance under section 14A of the Act on the computation of liability u/s 115JB of the Act 15. The brief facts in relation to this ground of appeal are that the AO while computing the liability under section 115JB of the Act added the sum of 2, 84,52,088/- disallowed under section 14A of the Act. 16. Since, we have already held that in the instant set of facts no disallowance is called for under section 14A of the Act while adjudicating ground of appeal number 2, this ground of appeal number 3 becomes academic and the same is dismissed hereby. 17. In the result, ground number 3 of the Department’s appeal is dismissed. Now we shall take up the assessee’s Grounds of Cross Objection Grounds of Appeal No. 1: allowability of education cess: 18. The issue for consideration in this ground of appeal of the assessee is whether education is allowable expense in the hands of the assessee while computing taxable income. 18.1 In our considered view, education cess paid by the assessee and income tax/ DDT is not an allowable expense and the issue has been affirmed in various decisions by various Courts and Tribunals. Recently, the I.T.A No. 287 & CO 82/Ahd/2020 A.Y. 2016-17 Page No. DCIT vs. Astral Poly Technik Pvt. Ltd. & Astral Poly Technik Pvt. Ltd. vs. DCIT 23 Hon'ble Supreme Court in the case of Chambal Fertilisers & Chemicals Ltd. [2022] 145 taxmann.com 420 (SC) held that Education cess on rate or tax levied on PGPB is to be disallowed in view of retrospective amendment made by FA2022 to section 40(a)(ii) w.r.e.f. 1-4-2005. The ITAT Bangalore in the case of Cypress Semiconductor Technology India (P.) Ltd. [2022] 142 taxmann.com 480 (Bangalore - Trib.) held that Education cess is not allowable as deduction under section 37(1) of the Act. The ITAT Bangalore in the case of Infinera India (P.) Ltd.[2022] 137 taxmann.com 197 (Bangalore - Trib.) held that payment of education cess including secondary and higher education cess is not allowable as deduction under section 37(1) of the Act. The Kolkata Bench of Tribunal in the case of Kanoria Chemicals & Industries Ltd. v. Addl. CIT [IT Appeal No. 2184 (Kol.) of 2018, dated 26-10-2021] has held that the education cess is an additional surcharge levied on income tax and hence it partakes the character of income tax. Accordingly, it held that the education cess is not allowable as deduction. Notably, the Supreme Court in the case of K. Srinivasan [1972] 83 ITR 346 (SC) have held that term ‘income-tax’ as employed in section 2 includes surcharge and additional surcharge whenever provided. While passing the judgment, the Hon'ble Supreme Court observed as below: The meaning of surcharge is to charge in addition or to subject to an additional or extra charge. If that meaning is applied to section 2 of the Finance Act, 1963, it would lead to the result that income-tax and super-tax were to be charged in four different way or at four different rates which may be described as : (i) the basic charge or rate (In Part I of the First Schedule); (ii) surcharge; (iii) special surcharge; and I.T.A No. 287 & CO 82/Ahd/2020 A.Y. 2016-17 Page No. DCIT vs. Astral Poly Technik Pvt. Ltd. & Astral Poly Technik Pvt. Ltd. vs. DCIT 24 (iv) additional surcharge calculated in the manner provided in the Schedule. Read in this way, the additional charges form a part of the income-tax and super-tax. According to the revenue, the word ‘surcharge’ has been used in Article 271 for the purpose of separating it from the basic charge of a tax or duty of the purposes of distributing the proceeds of the same between the Union and the States. The proceeds of the surcharge are exclusively assigned to the Union. Even in the finance Act itself it is expressly stated that the surcharge is meant for the purpose of the union. In the result, the view of the High Court could not be sustained. Thus, the words ‘income-tax’ in the Finance Act, 1964 in sub-section (2)(a) and sub-section (2)(b) of section 2 would include surcharge and additional surcharge. 18.2 In view of the above rulings, we are of the considered view that payment of education cess including secondary and higher education cess is not allowable as deduction. Accordingly, ground number 1 of the assessee’s appeal is dismissed. 19. In the result, ground number 1 of the assessee’s appeal is dismissed. Ground number 2: allowability of PF/ESI u/s 36(1)(va) of the Act I.T.A No. 287 & CO 82/Ahd/2020 A.Y. 2016-17 Page No. DCIT vs. Astral Poly Technik Pvt. Ltd. & Astral Poly Technik Pvt. Ltd. vs. DCIT 25 20. The assessee is in appeal before us against the disallowance of PF/ESI u/s 36(1)(va) of the Act as confirmed by Ld. CIT(Appeals). 20.1 In our view, the issue is squarely covered against the assessee by the order of Hon'ble Supreme Court in the case of Harrisons Malayalam Ltd. [2022] 145 taxmann.com 608 (SC), wherein the Supreme Court dismissed the SLP against order of High Court that where assessee-company failed to pay employees’ contribution towards EPF and ESI within due date prescribed in respective Acts, deduction under section 36(1)(va) was not allowable. Again in the case of Checkmate Services (P.) Ltd. [2022] 143 taxmann.com 178 (SC), the Supreme Court held that there is a marked difference between nature and character of assessee-employer's contribution and amounts retained by assessee from out of employee's income by way of deduction wherein one is liability to be paid by employer and second is deemed income as per section 2(24)(x) which is held in trust by assessee- employer, thus, said marked difference was to be borne while interpreting obligation of assessee-employer under section 43B.Therefore, the non obstante clause under section 43B could not apply in case of amounts which were held in trust as was case of employee's contribution which were deducted from their income and was not part assessee-employer's income, thus, said clause would not absolve assessee-employer from its liability to deposit employee's contribution on or before due date as a condition for deduction. Further, jurisdictional High Court decision in case of Gujarat State Road Transportation Corporation (2014) 41 taxman.com 100, wherein it was held that where assessee did not deposit employees' contribution to employees' account in relevant fund before due date I.T.A No. 287 & CO 82/Ahd/2020 A.Y. 2016-17 Page No. DCIT vs. Astral Poly Technik Pvt. Ltd. & Astral Poly Technik Pvt. Ltd. vs. DCIT 26 prescribed in Explanation to section 36(1)(va), no deduction would be admissible even though he deposits same before due date under section 43B of the Act. Again the Gujarat High Court in the case of Pr. CIT v. Suzlon Energy Ltd. [2020] 115 taxmann.com 340 (Gujarat) held that where assessee had not deposited employees' contributions towards PF and ESI amounting Rs. 15.20 lakhs within prescribed period in law and Assessing Officer by invoking provisions of section 36(1)(va) read with section 2(24)(x) made addition of aforesaid amount to income of assessee, impugned addition made to income of assessee was justified. Respectfully following the above decisions of Supreme Court and Jurisdictional High Gujarat High Court, we hold that there is no infirmity in the order passed by ld. CIT(A). We accordingly dismiss the appeal of the assessee. 20.2 In view of the above, ground number 2 of the assessee’s appeal is dismissed. 21. In the combined result, the appeal of the Department is dismissed and the Cross Objection of the assessee is also dismissed. Order pronounced in the open court on 25-01-2023 Sd/- Sd/- (ANNAPURNA GUPTA) (SIDDHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad : Dated 25/01/2023 I.T.A No. 287 & CO 82/Ahd/2020 A.Y. 2016-17 Page No. DCIT vs. Astral Poly Technik Pvt. Ltd. & Astral Poly Technik Pvt. Ltd. vs. DCIT 27 आदेश क त ल प अ े षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/ आदेश से, उप/सहायक पंजीकार आयकर अपील य अ धकरण, अहमदाबाद