M/s. Religare Securities Ltd., New Delhi V. ACIT, New Delhi

ITA 2282/DEL/2013

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 1419 (ITAT-DELHI)
• Duration Of Justice: 6 year(s) 7 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-12-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 06-06-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 18-04-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: PERTAINS TO ASSESSMENT YEAR; CHALLENGES PASSED
• Keywords: Capital asset; Business income; Depreciation; Transfer pricing; Business expenditure; Earning of tax free income; Retrospective amendment; Additional evidence; Question of law; Fair market value; Bad and doubtful debts; Revenue expenditure; Capital expenditure; Rule 8D; Set aside; Capital Gains
• Section: 14A; 37(1); 143(1); 192; 43; 48; 10(33); 10(33); 13; 28

Judgement Text

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH F: NEW DELHI BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA NO. 2282/DEL/2013 ASSTT. YEAR: 2008-09 O R D E R PER SUDHANSHU SRIVASTAVA, JM: THIS APPEAL BY THE ASSESSEE PERTAINS TO ASSESSMENT YEAR 2008-09 AND CHALLENGES THE ORDER PASSED BY THE LD. COMMISSIONER OF INCOME TAX (APPEALS) - XVIII, NEW D ELHI {CIT (A)} WHICH HAS BEEN PASSED VIDE ORDER DATED 28.2.20 13. ASSESSEE BY: SHR I ROHIT JAIN , ADVOCATE MS. TEJASVI JAIN, ADVOCATE MS. SOMYA JAIN, CA DEPARTMENT BY : SMT. SULEKHA VERMA, CIT(DR) DATE OF HEARING 18 /09 /201 9 DATE OF PRONOUNCEMENT 13 /12 /2019 M/S. RELIGARE SECURITIES LTD., D3, P3B, DISTRICT CENTRE, SAKET NEW DELHI. VS. ACIT CIRCLE-15(1), NEW DELHI. (APPELLANT) (RESPONDENT) ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 2 2.0 BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF BROKING IN SECURITIES, F INANCIAL ADVISORY SERVICES AND DEPOSITORY SERVICES. THE RETU RN OF INCOME WAS ORIGINALLY FILED DECLARING TOTAL INCOME OF RS. 1,22,23,68,020/- WHICH WAS SUBSEQUENTLY REVISED DECLARING TOTAL INCO ME OF RS. 1,21,16,08,860/-. RETURN OF INCOME WAS INITIALLY PR OCESSED U/S 143(1) OF THE INCOME TAX ACT, 1961 (HEREINAFTER CAL LED THE ACT) AND WAS LATER SELECTED FOR SCRUTINY UNDER CASS. THE ASSESSMENT WAS COMPLETED AT AN INCOME OF RS. 1,36,67,12,228/- AFTER, INTER ALIA, MAKING THE FOLLOWING ADDITIONS/DISALLOWANCES: I) DISALLOWANCE OF STOCK APPRECIATION RIGHTS RS. 2 ,04,87,736/- II) DISALLOWANCE OF BAD DEBTS WRITTEN OFF R S. 85,38,920/- III) DISALLOWANCE U/S 14A OF THE ACT RS. 1,19,79,827/- IV) MERCHANT BANKING LICENCE TRANSFERRED RS. 6,80,61,425/- V) DISALLOWANCE OF PROVISION FOR EXPENSES RS. 79,99,216/- VI) DISALLOWANCE OF DEPRECIATION ON UPS RS. 43,17,187/- VII) DISALLOWANCE OF DEPRECIATION ON OTHER ASSETS RS. 3, 47,98,353/- 2.1 AGGRIEVED, THE ASSESSEE CARRIED THE MATTER BEF ORE THE LD. FIRST APPELLATE AUTHORITY CHALLENGING THESE ADD ITIONS AND DISALLOWANCES. HOWEVER, THE APPEAL OF THE ASSESSEE WAS DISMISSED AND NOW THE ASSESSEE IS BEFORE THE TRIBUN AL ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 3 CHALLENGING THE ORDER OF THE LD. CIT (A) AND HAS RA ISED THE FOLLOWING GROUNDS OF APPEAL:- 1. THAT THE COMMISSIONER OF INCOME TAX (APPEALS) E RRED ON FACTS AND IN LAW IN SUSTAINING THE DISALLOWANCE OF RS.2,04,87,736 (AS AGAINST CORRECT AMOUNT OF RS.1,6 9,63,702) MADE BY THE ASSESSING OFFICER ON ACCOUNT OF THE DIF FERENCE BETWEEN PURCHASE PRICE OF STOCK APPRECIATION RIGHT ('SAR') AND THE SALE PRICE OF SUCH SAR AT THE TIME OF EXERC ISE BY THE EMPLOYEES, HOLDING THE SAME TO BE CAPITAL LOSS NOT ALLOWABLE BUSINESS DEDUCTION. 1.1 THAT THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE ABOVE DIFFE RENTIAL AMOUNT ACTUALLY REPRESENTS THE LOAN GRANTED BY THE APPELLANT TO RELIGARE ENTERPRISES LTD. EMPLOYEES SAR TRUST (' THE TRUST') FOR THE PURPOSE OF ADMINISTERING EMPLOYEE STOCK APP RECIATION RIGHT SCHEME (SAR SCHEME'), WHICH WAS NOT MEANT TO BE AND, IN FACT, NOT RECOVERED FROM THE LATTER IN ACCO RDANCE WITH THE SAR SCHEME. 1.2 THAT THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE ABOVE SAR S CHEME 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 RELI GARE ENTERPRISES LTD. ('REL') AND THE AFORESAID DIFFEREN TIAL AMOUNT WAS, THUS, IN THE NATURE OF EMPLOYEE BENEFIT ALLOWA BLE UNDER SECTION 37(1) OF THE INCOME TAX ACT, 1961 ('THE ACT '). 1.3 WITHOUT PREJUDICE, THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED ON FACTS AND IN LAW IN NOT ALLOWING DEDUCTION OF THE AFORESAID AMOUNT OF LOAN WRITTEN OFF AS LOSS INCIDE NTAL TO BUSINESS UNDER SECTION 28 OF THE ACT. 2. THAT THE COMMISSIONER OF INCOME TAX (APPEALS) E RRED ON FACTS AND IN LAW IN ENHANCING THE INCOME OF THE APPELLANT BY ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 4 DIRECTING FURTHER DISALLOWANCE OF RS.3,08,79,796 ON ACCOUNT OF DIFFERENCE BETWEEN THE SALE PRICE OF SAR AND THE EXERCISE PRICE OF SAR (PREFIXED AT RS. 140 PER SAR) PAID TO THE EMPLOYEES OF THE APPELLANT, HOLDING THE SAME TO BE CAPITAL EXPENDITURE INCURRED IN RELATION TO ISSUE OF SHARES TO EMPLOYEES. 2.1, THAT THE COMMISSIONER' OF INCOME TAX (APPEALS) ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE ABOVE DIFFERENTIAL AMOUNT OF RS.3,08,79,796 WAS IN THE NA TURE OF EMPLOYEE COMPENSATION ALLOWABLE AS DEDUCTION UNDER SECTION 37(1) OF THE ACT. 2.2 WITHOUT PREJUDICE, AND IN THE ALTERNATIVE, THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED ON FACTS AND IN LAW IN N OT ALLOWING DEDUCTION OF THE ABOVE DIFFERENTIAL AMOUNT OF RS.3, 08,79,796 UNDER SECTION 36(1)(II) OF THE ACT ALLEGING THAT TH E SAME WAS NOT IN ACCORDANCE WITH THE PROVISIONS OF THE PAYMEN T OF BONUS ACT, 1965. 3. THAT THE COMMISSIONER OF INCOME TAX (APPEALS) ER RED ON FACTS AND IN LAW IN UPHOLDING THE DISALLOWANCE OF RS. 85, 38,920 MADE BY THE ASSESSING OFFICER UNDER SECTION 36(L)(V II) OF THE ACT ON ACCOUNT OF BAD DEBTS WRITTEN OFF ON THE GROU ND THAT CORRESPONDING DEBT WAS NOT ACCOUNTED AS INCOME IN T HE BOOKS OF ACCOUNTS EARLIER. 3.1 THAT THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT NECESSARY CONDI TIONS STIPULATED UNDER SECTION 36(1)(VII) READ WITH SECTI ON 36(2) OF THE ACT STOOD SATISFIED INASMUCH AS PART OF THE ABO VE DEBTS WRITTEN OFF COMPRISED OF BROKERAGE INCOME AND INTER EST ON DELAYED PAYMENT WHICH WERE DULY ACCOUNTED AS INCOME BY THE APPELLANT EARLIER ILL THE BOOKS OF ACCOUNTS. 3.2 WITHOUT PREJUDICE, AND IN THE ALTERNATIVE, THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED ON FACTS AND IN LAW IN N OT ALLOWING ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 5 DEDUCTION OF THE ABOVE BAD DEBTS AS LOSS INCIDENTAL TO BUSINESS UNDER SECTION 28 OF THE ACT. 4. THAT THE COMMISSIONER OF INCOME TAX (APPEALS) E RRED ON FACTS AND IN LAW IN UPHOLDING DISALLOWANCE OF RS.1,19,79, 827 MADE BY THE ASSESSING OFFICER UNDER SECTION 14A OF THE ACT. 4.1 THAT THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED ON FACTS AND IN LAW IN IGNORING THE DISALLOWANCE SUO-MOTO OF FERED BY THE APPELLANT UNDER SECTION 14A OF THE ACT IN THE R EVISED COMPUTATION OF INCOME FILED DURING THE COURSE OF AS SESSMENT PROCEEDINGS ON THE GROUND THAT THE SAME WAS NOT SUB MITTED BY WAY OF REVISED-RETURN. 4.2 THAT THE COMMISSIONER OF INCOME TAX (APPEALS) E RRED ON FACTS IN UPHOLDING THE OBSERVATION OF THE ASSESSING OFFIC ER THAT THE LOAN GIVEN BY THE APPELLANT TO THE TRUST WOULD CONS TITUTE INVESTMENT FOR THE PURPOSES OF MAKING DISALLOWANCE UNDER SECTION 14A OF THE ACT. 4.3 THAT THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED ON FACTS AND IN LAW IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER IN PROPORTIONATELY DISALLOWING BANK GUARANTEE COMMISSI ON AND BANK CHARGES AS PART OF INTEREST EXPENDITURE WHILE APPLYING RULE 8D OF THE INCOME TAX RULES, 1961 WITHOUT APPRE CIATING THAT THERE WAS NO NEXUS BETWEEN THE INCURRENCE OF S AID EXPENDITURE AND THE INVESTMENTS MADE BY THE APPELLA NT. 5. THAT THE COMMISSIONER OF INCOME TAX (APPEALS) E RRED ON FACTS AND IN LAW IN SUSTAINING ADDITION OF RS. 6,80,61,42 5 MADE BY THE ASSESSING OFFICER ON ACCOUNT OF INCOME THAT OUG HT TO HAVE BEEN RECEIVED BY THE APPELLANT FROM THE TRANSFER OF MERCHANT BANKING BUSINESS LICENSE TO MIS. RELIGARE CAPITAL M ARKETS LTD ('RCML'). 5.1 THAT THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE ABOVE LICEN SE WAS TRANSFERRED BY THE APPELLANT TO RCML WITHOUT ANY CONSIDERATION AS PART OF RESTRUCTURING PROCESS. ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 6 6. THAT THE COMMISSIONER OF INCOME TAX (APPEALS) E RRED ON FACTS AND IN LAW IN UPHOLDING THE DISALLOWANCE OF RS. 79, 99,216 MADE BY THE ASSESSING OFFICER IN RESPECT OF YEAR EN D PROVISION MADE FOR FOLLOWING EXPENSES HOLDING THE SAME TO BE UNASCERTAINABLE LIABILITY ON THE GROUND THAT THE BI LLS FOR THE SAME WERE RECEIVED IN SUBSEQUENT YEAR: (I) LEGAL AND PROFESSIONAL - RS.67,33,154 (II) RECRUITMENT EXPENSES - RS. 11,24,551 (III) SOFTWARE LICENSE EXPENSES - RS. 1,41,511 6.1 THAT THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE ABOVE PROVI SIONS WERE ALLOWABLE DEDUCTION UNDER SECTION 37(1) OF THE ACT SINCE THE LIABILITY THEREAFTER STOOD CRYSTALLIZED, INASMUCH A S THE SERVICES WERE RECEIVED BY THE APPELLANT DURING THE YEAR UNDER CONSIDERATION. 6.2 WITHOUT PREJUDICE, AND IN ALTERNATIVE, THE COM MISSIONER OF INCOME TAX (APPEALS) ERRED ON FACTS AND IN LAW IN N OT DIRECTING THE ASSESSING OFFICER TO ALLOW DEDUCTION OF THE ABOVE SUM OFRS.79,99,216 IN THE SUBSEQUENT YEAR. 7. THAT THE COMMISSIONER OF INCOME TAX (APPEALS) E RRED ON FACTS AND IN LAW IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER IN ALLOWING DEPRECIATION ON UPS @ 15% AS AGAINST DEPRE CIATION @ 60% CLAIMED BY THE APPELLANT. 8. THAT THE COMMISSIONER OF INCOME TAX (APPEALS) E RRED ON FACTS AND IN UPHOLDING DISALLOWANCE OF DEPRECIATION TO TH E EXTENT OF RS. 3,47,15,985 HOLDING THAT THE APPELLANT FAILED T O PRODUCE NECESSARY DOCUMENTARY EVIDENCES IN SUPPORT OF ADDIT ION TO FIXED ASSETS WITHOUT APPRECIATING THAT THE APPELLAN T WAS NOT PROVIDED SUFFICIENT TIME TO FURNISH THE SAME. ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 7 3.0 THE LD. AUTHORISED REPRESENTATIVE (AR) SUBMITT ED THAT THE ISSUE OF STOCK APPRECIATION RIGHTS IS SQUARELY COVERED IN FAVOUR OF THE ASSESSSEE BY THE ORDER OF THE TRIBUNA L IN ASSESSEES OWN CASE AND IN THE CASE OF THE OTHER GROUP COMPANI ES. IT WAS SUBMITTED THAT THIS ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE BY THE ITAT DELHI BENCH IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR (AY) 2010-11 IN ITA NO. 4644/DEL/2015 VIDE ORD ER DATED 9.10.2017. IT WAS SUBMITTED THAT SUBSEQUENTLY THIS ORDER OF ITAT DELHI BENCH IN ASSESSEES OWN CASE WAS AFFIRMED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF PCIT VS. RELIGARE S ECURITIES LTD. IN ITA NO. 311/2018. THE LD. AR ALSO SUBMITTED THAT SIMILAR DECISIONS HAD BEEN RENDERED BY THE TRIBUNAL IN GROU P COMPANIES OF THE ASSESSEE VIZ: I) RELIGARE MACQUARIE WEALTH MANAGEMENT LIMITED VS. ACIT IN ITA NO. 2396/DEL/2013 FOR AY 2008-09 AND AFFIRMED BY THE HONBLE DELHI HIGH COURT IN PCIT VS . RELIGARE MACQUARIE WEALTH MANAGEMENT LIMITED IN ITA 438/2018. II) RELIGARE FINVEST LIMITED VS. ACIT IN ITA NO. 2284/DEL/2013 FOR AY 2008-09. ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 8 III) RELIGARE COMMODITIES LTD. VS. ACIT IN ITA NOS. 2283/DEL/2013 AND 3634/DEL/2014 FOR AYS 2008-09 AND 2009-10. IV) RELIGARE WEALTH MANAGEMENT LTD. VS. DCIT IN ITA NO. 1780/DEL/2016 FOR AY 2011-12. 3.1 A COPY OF THE ABOVE SAID ORDERS WERE ALSO PLAC ED ON RECORD. 3.2 WITH RESPECT TO DISALLOWANCE OF BAD DEBTS WRIT TEN OFF TO THE TUNE OF RS. 85,38,920/-, THE LD. AR SUBMITTED T HAT THE ASSESSEE IS A MEMBER OF NATIONAL STOCK EXCHANGE AND BOMBAY STOCK EXCHANGE AND IS ENGAGED IN THE BUSINESS OF BU YING AND SELLING SECURITIES ON BEHALF OF ITS CLIENTS ON THE STOCK EXCHANGE FOR WHICH BROKERAGE IS CHARGED FROM THE CLIENTS. IT WAS FURTHER SUBMITTED THAT ON PURCHASES OF SECURITIES, THE ASSE SSEE IS UNDER OBLIGATION TO PAY THE VALUE OF SECURITY SO TRANSACT ED TO THE STOCK EXCHANGE WITHIN THE PRESCRIBED TIME. IT WAS FURTHER SUBMITTED THAT THE TOTAL AMOUNT DUE FROM THE VARIOUS CLIENTS IS REFLECTED AS DEBTORS BALANCES IN THE BALANCE SHEET AND IT COMPRI SES OF AMOUNT RECOVERABLE TOWARDS THE PRINCIPAL VALUE OF SECURITI ES, BROKERAGE CHARGED FOR PURCHASE OR SALE OF SECURITIES AND INTE REST, IF ANY, FOR ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 9 DELAY IN MAKING THE PAYMENT FOR THE AMOUNT DUE. IT WAS SUBMITTED THAT IN CASES WHERE THE CLIENT IS UNABLE TO PAY THE AMOUNT DUE AND EFFORTS FOR RECOVERING SUCH AMOUNT F AIL, SUCH AMOUNTS ARE WRITTEN OFF BY THE ASSESSEE IN ITS BOOK S OF ACCOUNTS. THE LD. AR SUBMITTED THAT THESE AMOUNTS, WHICH WERE CALIMED AS BAD DEBTS, WERE ACTUALLY WRITTEN OFF AND THE WRITIN G OFF OF DEBT WAS NOT IN DISPUTE. IT WAS SUBMITTED THAT THE ASSES SING OFFICER (AO) HAD DISALLOWED THE BAD DEBTS ON THE GROUND THA T THESE DEBTS HAD NOT BEEN ROUTED THROUGH THE PROFIT AND LOSS ACC OUNT AND HAD NOT BEEN CONSIDERED AS INCOME AND FURTHER FOR THE R EASON THAT EXEMPTION FROM SHOWING THE DEBT AS INCOME IN CLAIMI NG DEDUCTION U/S 36(I)(VII) OF THE ACT IS AVAILABLE ON LY TO THE ASSESSEES ENGAGED IN MONEY LENDING OR BANKING BUSI NESSES AND CANNOT BE EXTENDED TO SHARE BROKERS. IT WAS FURTHER SUBMITTED THAT THE LD. CIT(A) HAD UPHELD THE ACTION OF THE A O BY HOLDING THAT NO EVIDENCES HAD BEEN PRODUCED TO DEMONSTRATE THAT THE ENTIRE DEBT, INCLUDING THE PRINCIPAL AMOUNT , HAD B EEN TAKEN IN TO CONSIDERATION BY THE ASSESSEE WHILE COMPUTING IT S INCOME IN THE RELEVANT OR EARLIER ASSESSMENT YEARS. THE LD. A R ARGUED THAT THE LD. CIT (A) AS WELL AS THE AO HAD ERRED IN MAKI NG DISALLOWANCE ON THIS ACCOUNT FOR THE SIMPLE REASON THAT POST ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 10 AMENDMENT TO SECTION 36(1)(VII) OF THE ACT W.E.F. 1 .4.1989, DEDUCTION FOR BAD DEBT HAS TO BE ALLOWED IN THE YEA R IN WHICH IT HAS BEEN WRITTEN OFF IN THE BOOKS OF ACCOUNTS AND, THUS, SINCE THE SAME HAS BEEN DONE, THE SAME COULD NOT BE DISALLOWE D. IT WAS FURTHER SUBMITTED THAT ANOTHER CONDITION ESSENTIAL FOR WRITING OFF OF BAD DEBT IS THAT THE DEBT OR PART THEREOF SHOULD HAVE BEEN TAKEN INTO ACCOUNT WHILE COMPUTING THE INCOME OF TH E ASSESSEE IN THE PREVIOUS YEAR OR EARLIER YEARS AND THIS TOO HAD BEEN DONE BECAUSE THE DEBT COMPRISES OF BROKERAGE INCOME AND INTEREST ON DELAYED PAYMENTS WHICH HAD, UNDISPUTEDLY, BEEN TAKE N INTO ACCOUNT WHILE COMPUTING THE INCOME OF THE ASSESSEE. IT WAS SUBMITTED THAT, THUS, THE CONDITION STIPULATED IN S ECTION 36(1)(VII) OF THE ACT IS THAT DEBT OR PART THEREOF SHOULD HAVE BEEN TAKEN INTO ACCOUNT FOR COMPUTING THE INCOME AND IT IS NOT ESSE NTIAL THAT THE ENTIRE DEBT SHOULD HAVE BEEN TAKEN AS INCOME. THE L D. AR PLACED RELIANCE OF NUMEROUS JUDGMENTS OF THE VARIOUS HONB LE HIGH COURTS AND THE CO-ORDINATE BENCHES OF THE TRIBUNAL TO SUPPORT THIS CONTENTION. IN THE ALTERNATIVE IT WAS SUBMITTE D THAT THE BAD DEBT IN QUESTION SHOULD BE ALLOWED AS AN ALLOWABLE BUSINESS LOSS IN TERMS OF SECTION 28 OF THE ACT. ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 11 3.3 COMING TO GROUND NOS. 4 TO 4.2 CHALLENGING THE DISALLOWANCE OF RS. 1,19,79,827/- MADE U/S 14A OF T HE ACT, THE LD. AR SUBMITTED THAT DURING THE RELEVANT ASSESSMEN T YEAR, THE ASSESSEE HAD EARNED DIVIDEND INCOME OF RS. 20,400/- FROM INVESTMENT IN SHARES OF RANBAXY LIMITED WHICH WAS C LAIMED AS EXEMPT U/S 10(34) OF THE ACT . IT WAS FURTHER SUBM ITTED THAT THIS DIVIDEND WAS RECEIVED FROM INVESTMENT OF RS. 29,46, 880/- IN SHARES OF RANBAXY LABORATORIES LTD. THE LD. AR ALSO SUBMITTED THAT IN SPITE OF RECEIVING DIVIDEND INCOME OF RS. 2 0,400/- ONLY, THE ASSESSEE HAD MADE A SUO MOTO DISALLOWANCE OF RS. 1,82,616/- U/S 14A OF THE ACT. BY CONSIDERING INTEREST EXPENDI TURE OF RS. 71,94,48,759/- BEING ATTRIBUTION IN THE RATIO OF AV ERAGE VALUE OF INVESTMENTS RESULTING IN EXEMPT INCOME TO THE AVERA GE VALUE OF ASSETS. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE HAD ALSO CONSIDERED AND MADE DISALLOWANCE @ HALF PERCENT OF AVERAGE VALUE OF INVESTMENT. THE LD. AR SUBMITTED THAT BOTH THE LOWER AUTHORITIES HAD ERRED IN APPLYING THE PROVISIONS OF RULE 8D WITHOUT ESTABLISHING ANY NEXUS BETWEEN THE EARNING OF EXEMPT INCOME AND EXPENDITURE. IT WAS SUBMITTED THAT ALTHO UGH NO EXPENDITURE WAS INCURRED IN RELATION TO EARNING OF EXEMPT INCOME, THE ASSESSEE HAD SUO MOT O MADE THE DISALLOWANCE BUT ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 12 THE SAME HAD BEEN DISCARDED BY THE AO WITHOUT RECOR DING ANY OBJECTIVE SATISFACTION. THE LD. AR ALSO SUBMITTED T HAT THE INTEREST EXPENDITURE INCURRED BY THE ASSESSEE RELATED ONLY T O THE BUSINESS OPERATIONS OF THE ASSESSEE IN AS MUCH AS THE BORROW ED FUNDS WERE UTILISED FOR BUSINESS OPERATIONS AND WERE NOT USED FOR MAKING ANY INVESTMENTS THEREBY ATTRACTING THE RIGOU RS OF SECTION 14A. THE LD. AR ALSO SUBMITTED THAT DURING THE YEAR UNDER CONSIDERATION, THE ONLY NEW INVESTMENT WAS OF RS. 2 5 CRORES IN RELIGARE AEGON ASSETS MANAGEMENT COMPANY (P) LTD. W HICH HAD BEEN MADE OUT OF ASSESSEES OWN FUNDS. REFERRING TO THE BALANCE SHEET AS ON 31.3.2008, THE LD. AR SUBMITTED THAT AS ON THAT DATE THE ASSESSEE HAD ITS OWN FUNDS AMOUNTING TO RS. 171 .77 CRORES WHICH INCLUDED SHARE CAPITAL OF RS. 28.19 CRORES AN D RESERVES AND SURPLUS OF 143.57 CRORES. THE LD. AR, REFERRING TO VARIOUS JUDICIAL PRECEDENTS, SUBMITTED THAT IT WAS SETTLED LAW THAT INTEREST EXPENDITURE CANNOT BE DISALLOWED U/S 14A W HERE THE ASSESSEE HAD SUFFICIENT SURPLUS FUNDS AND THERE WAS NO FINDING BY THE AO OF ANY DIRECT NEXUS OF BORROWED FUNDS WIT H THE INVESTMENTS. 3.4 IN THE ALTERNATE, IT WAS SUBMITTED THAT IT HAS ALSO BEEN CONSISTENTLY HELD BY THE VARIOUS HONBLE COURTS THA T FOR THE ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 13 PURPOSE OF COMPUTING INTEREST DISALLOWANCE, ONLY NE T INTEREST EXPENSES ARE TO BE CONSIDERED. IT WAS SUBMITTED THA T IN THE PRESENT CASE, THE ASSESSEE HAD INCURRED INTEREST E XPENDITURE AMOUNTING TO RS. 73,64,48,184/- WHEREAS THE INTERES T INCOME EARNED DURING THE YEAR AMOUNTING TO RS. 1,55,40,60, 732/- THEREBY EARNING NET POSITIVE INTEREST INCOME AND, T HUS, NO INTEREST EXPENDITURE COULD BE DISALLOWED U/S 14A OF THE ACT. THE LD. AR SUBMITTED THAT AS REGARDS THE DISALLOWANCE O N ACCOUNT OF ADMINISTRATIVE EXPENSES, NO PART OF EXPENDITURE DEB ITED TO PROFIT AND LOSS ACCOUNT WAS INCURRED IN RELATION TO EARNIN G OF EXEMPT INCOME AND, THEREFORE, THE SAME DID NOT WARRANT ANY DISALLOWANCE U/S 14A OF THE ACT. IT WAS ALSO SUBMIT TED THAT THE DISALLOWANCE U/S 14A HAS BEEN COMPUTED INCORRECTLY IN AS MUCH AS THE LOWER AUTHORITIES HAD ERRED IN TREATING THE LOAN GIVEN TO RELIGARE ENTERPRISES LTD. STOCK APPRECIATION RIGHTS TRUST AS INVESTMENT MADE BY THE ASSESSEE AND FURTHER THE LOW ER AUTHORITIES HAD ERRED IN DISALLOWING THE BANK GUARA NTEE COMMISSION AND BANK CHARGES AS PART OF INTEREST EXP ENDITURE WHILE APPLYING RULE 8D. IN VIEW OF THESE SUBMISSION S, THE LD. AR SUBMITTED THAT THE LOWER AUTHORITIES COULD NOT HAVE CONSIDERED THE INVESTMENTS NOT YIELDING EXEMPT INCOME WHILE CO MPUTING THE ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 14 DISALLOWANCE U/S 14A OF THE ACT. IT WAS SUBMITTED T HAT THE DISALLOWANCE, IF ANY, IS TO BE CONSIDERED ONLY WITH RESPECT TO THE INVESTMENT MADE IN THE SHARES OF RANBAXY LABORATORI ES LTD. FROM WHICH DIVIDEND INCOME AT RS. 20,400/- HAS BEEN RECE IVED. PLACING RELIANCE ON VARIOUS JUDICIAL PRECEDENTS, IT WAS SUBMITTED THAT NO DISALLOWANCE COULD BE MADE WHICH WOULD EXCE ED THE EXEMPT DIVIDEND INCOME OF RS. 20,400/-. 3.5 WITH RESPECT TO GROUND NOS. 5 AND 5.1 CHALLENG ING THE ADDITION OF RS. 6,80,61,425/- PERTAINING TO MERCHA NT BANKING LICENSE, THE LD. AR SUBMITTED THAT IN ORDER TO EXP AND THE SCOPE OF ITS BUSINESS, THE ASSESSEE HAD MADE AN APPLICATI ON TO THE SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI) FOR R EGISTRATION AS CATEGORY-I MERCHANT BANKER AND THAT ON FULFILMENT OF THE PRESCRIBED CONDITIONS THE ASSESSEE WAS GRANTED CERT IFICATE OF REGISTRATION BY SEBI FOR CARRYING ON MERCHANT BANKI NG ON 12.12.2006. IT WAS FURTHER SUBMITTED THAT DURING TH E YEAR UNDER CONSIDERATION, AS PART OF RESTRUCTURING OF THE OPER ATIONS IN THE RELIGARE GROUP, THE ASSESSEE TRANSFERRED ITS MERCHA NT BANKING REGISTRATION TO RELIGARE CAPITAL MARKETS LTD. WHICH IS ITS GROUP COMPANY. IT WAS SUBMITTED THAT THIS BUSINESS DECISI ON WAS TAKEN TO COMPLY WITH THE SEBI GUIDELINES WHICH PROVIDED T HAT THE ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 15 MERCHANT BANKING LICENSE CAN BE HELD BY ONLY ONE CO MPANY IN A GROUP OF COMPANIES. IT WAS SUBMITTED THAT IN ACCORD ANCE WITH THE RESTRUCTURING SCHEME, INSTEAD OF APPLYING FOR FRESH LICENCE TO CARRY ON THE MERCHANT BANKING BUSINESS, THE ASSESS EE SOUGHT TRANSFER OF THE MERCHANT BANKING REGISTRATION TO RE LIGARE CAPITAL MARKETS LIMITED VIDE APPLICATION DATED 22.5.2007, W HICH WAS SUBSEQUENTLY APPROVED BY THE SEBI VIDE APPROVAL DAT ED 21.1.2008. IT WAS SUBMITTED THAT, UNDISPUTEDLY, NO CONSIDERATION WAS RECEIVED OR ACCRUED AS A RESULT OF SUCH TRANSFE R OF REGISTRATION BY THE ASSESSEE BUT THE LOWER AUTHORIT IES MADE THE IMPUGNED ADDITION ON THE GROUND THAT SINCE THE LICE NCE WAS TRANSFERRED TO A SISTER CONCERN WITHOUT ANY CONSIDE RATION, THE SAME WAS NOT AT ARMS LENGTH PRICE. IT WAS SUBMITTE D THAT THE AO HAD COMPUTED THE MARKET VALUE OF THE REGISTRATION C ERTIFICATE ON THE BASIS OF THE INCOME EARNED BY THE ASSESSEE FROM MERCHANT BANKING BUSINESS DURING THE YEAR CONSIDERATION AND MULTIPLYING THE SAME BY 5. THE LD. AR SUBMITTED THAT THIS LICEN CE WAS A CAPITAL ASSET WHICH HAD BEEN TRANSFERRED PURSUANT T O AN APPLICATION MADE BY THE ASSESSEE TO SEBI AND NO CON SIDERATION WAS RECEIVED FOR THIS TRANSFER. IT WAS SUBMITTED TH AT SINCE IT WAS A CAPITAL ASSET, NO NOTIONAL INCOME COULD HAVE BEEN BROUGHT TO ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 16 TAX. IT WAS SUBMITTED THAT IN ABSENCE OF ANY CONSID ERATION HAVING BEEN RECEIVED BY THE ASSESSEE, THERE WAS NO TAXABLE INCOME IN THE HANDS OF THE ASSESSEE. IT WAS SUBMITTED THAT TH IS NOTIONAL AMOUNT HAD NEITHER BEEN EARNED NOR RECEIVED NOR IS RECEIVABLE BY THE ASSESSEE AND CAPITAL GAINS, IF AT ALL, COULD BE BROUGHT TO TAX ONLY ON THE BASIS OF ACTUAL CONSIDERATION. IT WAS S UBMITTED THAT IT IS ONLY THE REAL INCOME TO WHICH THE ASSESSEE IS LE GALLY ENTITLED TO RECEIVE CAN BE BROUGHT TO TAX AND ANY NOTIONAL INCO ME WHICH HAS NOT DULY BEEN RECEIVED / EARNED CANNOT BE BROUGHT T O TAX. 3.6 ARGUING FOR GROUND NOS. 6 TO 6.2 PERTAINING TO DISALLOWANCE OF PROVISION MADE FOR EXPENSES AMOUNTI NG TO RS. 79,99,216/-, THE LD. AR SUBMITTED THAT THE ASSESSEE HAD MADE PROVISION FOR LEGAL AND PROFESSIONAL CHARGES AMOUNT ING TO RS. 67,33,154/-, RECRUITMENT EXPENSES AMOUNTING TO RS. 11,24,551/- AND SOFTWARE LICENSE EXPENSES AMOUNTING TO RS. 1,41 ,511/- FOR WHICH ALTHOUGH THE SERVICES HAD BEEN RECEIVED, THE INVOICES WERE RECEIVED IN THE SUBSEQUENT FINANCIAL YEAR. IT WAS S UBMITTED THAT THESE PROVISIONS WERE DISALLOWED ON THE GROUND THAT THE LIABILITY FOR PAYMENT OF THESE EXPENSES HAD NOT CRYSTALLISED DURING THE YEAR. IT WAS SUBMITTED THAT THE ASSESSEE HAS BEEN C ONSISTENTLY AND REGULARLY FOLLOWING THE ACCRUAL SYSTEM OF ACCOU NTING WHICH ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 17 HAS ALWAYS BEEN ACCEPTED BY THE REVENUE AND THAT IN TERMS OF THE ACCRUAL SYSTEM IT WAS INCUMBENT ON THE ASSESSEE TO PROVIDE FOR EXPENSES INCURRED DURING THE YEAR. IT WAS SUBMITTED THAT UNDER THE ACCRUAL/ MERCANTILE SYSTEM OF ACCOUNTING, EXPEN SES ARE ALLOWABLE AS DEDUCTION IF THEY ARE INCURRED/ACCRUED IRRESPECTIVE OF THE FACT THAT THE LIABILITY HAS TO BE DISCHARGED AT A LATER DATE. IT WAS SUBMITTED THAT THESE PROVISIONS WERE NOT A CONT INGENT LIABILITY AS SERVICES HAVE BEEN RENDERED AND THE LI ABILITY HAD CRYSTALLISED. THE LD. AR PLACED RELIANCE ON NUMEROU S JUDICIAL PRECEDENTS TO BUTTRESS THE ARGUMENT THAT IF THE BUS INESS LIABILITY HAS DEFINITELY ARISEN IN AN ACCOUNTING YEAR, DEDUCT ION FOR THE SAME SHOULD BE ALLOWED EVEN IF THE LIABILITY IS DIS CHARGED IN THE FUTURE. IN THE ALTERNATE, IT WAS SUBMITTED THAT THE ASSESSEE HAS NOT CLAIMED DEDUCTION OF THESE IMPUGNED EXPENSES IN THE SUBSEQUENT YEAR ON THE RECEIPT OF INVOICES AND, THE REFORE, IF THE DISALLOWANCES MADE WERE TO BE UPHELD, APPROPRIATE D IRECTION MAY BE GIVEN FOR ALLOWING THE DEDUCTION OF THE AFORESAI D AMOUNT IN THE SUBSEQUENT YEAR. 3.7 WITH RESPECT TO GROUND NO. 7 REGARDING DISALLO WANCE OF DEPRECIATION ON UPS, IT WAS SUBMITTED THAT THE ASSE SSEE HAS CLAIMED DEPRECIATION AT @ 60% BY TREATING THE UPS A S PART OF ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 18 COMPUTER AND PERIPHERALS WHEREAS THE AO HAS PART DI SALLOWED THE CLAIM OF DEPRECIATION BY HOLDING THAT UPS WAS N OT A PART OF COMPUTER AND PERIPHERALS BUT WAS PLANT AND MACHINER Y ELIGIBLE FOR DEPRECIATION @ 15%. THE LD. AR SUBMITTED THAT I T IS SETTLED JUDICIAL PRECEDENT THAT UPS IS AN ESSENTIAL PART OF COMPUTER SYSTEM AND COMPUTER CANNOT FUNCTION IN ISOLATION WI THOUT BASIC COMPUTER ACCESSORIES AND PERIPHERALS LIKE SWITCHES, ROUTERS, CABLES, ETC. WHICH FORM AN INTEGRAL PART OF THE COM PUTER SYSTEM. IT WAS SUBMITTED THAT NUMEROUS COURTS HAVE HELD THA T DEPRECIATION SHOULD BE ALLOWED @ 60% ON UPS. A LIST OF SUCH CASES WAS CITED BEFORE US. 3.8 WITH RESPECT TO GROUND NO. 8 PERTAINING TO DISALLOWANCE OF DEPRECIATION ON FIXED ASSETS AMOUNT ING TO RS. 3,47,15,985/- IT WAS SUBMITTED THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD PURCHASED FIXED ASS ETS AMOUNTING TO RS. 47,43,70,325/- WHICH WAS DULY RECO RDED IN THE AUDITED FINANCIAL STATEMENTS AND THE TAX AUDIT REP ORT AND DURING THE COURSE OF SCRUTINY PROCEEDINGS THE ASSESSEE HAD SUBMITTED INVOICES PERTAINING TO PURCHASE OF FIXED ASSETS AMO UNTING TO RS. 28,87,07,545/- BEFORE THE AO FOR VERIFICATION. IT W AS SUBMITTED THAT AO, HOWEVER, HAD DISALLOWED DEPRECIATION AMOUN TING TO RS. ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 19 3,47,15,985/- ON THE GROUND THAT INVOICES AMOUNTING TO RS. 35,00,46,653/- WERE NOT PRODUCED FOR VERIFICATION. THE LD. AR SUBMITTED THAT THE ASSESSEE HAD REQUESTED FOR SOME MORE TIME FOR PRODUCING COMPLETE INVOICES BUT THE AO HAD PROC EEDED TO PASS THE ASSESSMENT ORDER DISALLOWING THE ASSESSEE S CLAIM OF DEPRECIATION. IT WAS FURTHER SUBMITTED THAT THE ASS ESSEE HAD SOUGHT TO FILE ADDITIONAL EVIDENCES BEFORE THE LD. CIT (A) WHICH WAS REJECTED AND THE ADDITION ON THIS ACCOUNT WAS U PHELD. THE LD. AR SUBMITTED THAT AS ON DATE, 77% OF THE INVOIC ES WERE AVAILABLE AND THE SAME WERE OPEN TO VERIFICATION. IT WAS ALSO SUBMITTED THAT THE FINANCIAL STATEMENTS OF THE ASSE SSEE WERE DULY AUDITED AND THE TAX AUDIT REPORT ALSO CONTAINED THE COMPLETE LIST OF ADDITIONS TO THE FIXED ASSETS MADE DURING THE YE AR AND, THEREFORE, NO DISALLOWANCE SHOULD HAVE BEEN MADE IN THIS REGARD. 4.0 THE LD. CIT (DR) ARGUED AT LENGTH RESPONDING T O THE CONTENTIONS OF THE LD. AR ON EACH OF THE GROUNDS RA ISED BY THE ASSESSEE. THE LD. CIT (DR) VEHEMENTLY ARGUED FOR UP HOLDING THE ORDER OF THE LD. CIT (A) AND CONTENDED THAT BOTH TH E LOWER AUTHORITIES HAD RETURNED CONCURRENT FINDINGS ON ALL THE ISSUES WHICH HAD BEEN DECIDED AFTER GIVING DUE CONSIDERATI ON TO ALL THE ASPECTS INVOLVED AND, THEREFORE, NO INTERFERENCE WA S CALLED FOR AT ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 20 THE SECOND APPELLATE STAGE. THE LD. CIT (DR) ALSO F ILED WRITTEN SUBMISSIONS WHICH WERE TAKEN ON RECORD AND ARE BEIN G REPRODUCED HERE IN UNDER FOR A READY REFERENCE: A. GROUND NO. 1.1, 1.2, 1.3, 2, 2.1 & 2.2 - THE FO LLOWING DECISIONS MAY KINDLY BE CONSIDERED IN RESPECT OF TH ESE GROUNDS: HON'BLE DELHI HIGH COURT OF INDIA IN THE CASE OF RA NBAXY LABORATORIES LTD. V. ADDL. CIT 124 TTJ 771 HAS HELD AS UNDER: THE ASSESSEE WAS TO ISSUE SHARES OF FACE VALUE OF R S. 10 BY RECEIVING A SUM OF RS. 595 PER SHARE FROM ITS EMPLO YEES. THUS, THE ASSESSEE WAS ENTITLED TO RECEIVE RS. 585 TOWARDS PREMIUM ON ISSUE OF SHARES. THE MARKET PRICE AT RS. 738.95 PER SHARE WOULD HAVE RESULTED IN REALIZATION OF HIG HER SHARE PREMIUM. THE ASSESSEE HAD NOT ACCOUNTED FOR THE DIF FERENCE BETWEEN RS. 738.95 AND RS. 10 AS ITS INCOME DURING THE YEAR. THUS, THERE WAS NO LOSS OF INCOME HELD TO BE TAXABL E. WHAT WAS LOSS TO THE ASSESSEE WAS BY WAY OF SHORT RECEIP T OF SHARE PREMIUM ACCOUNT AND NOT BY WAY OF ANY EXPENDITURE O R INCURRING ANY LIABILITY FOR SUCH AN EXPENDITURE. BY ISSUING SHARES AT BELOW MARKET PRICE, THE SAME DID NOT RESU LT INTO INCURRING ANY EXPENDITURE, RATHER IT RESULTED INTO SHORT RECEIPT OF SHARE PREMIUM WHICH THE ASSESSEE WAS OTHERWISE E NTITLED TO. THOUGH THE GUIDELINES OF THE SEBI REQUIRED THE ASSESSEE TO ACCOUNT FOR SHORT RECEIPT OF SHARE PREMIUM AS EMPLO YEE'S COMPENSATION EXPENSES, FOR CLAIMING SUCH EXPENSES A S ALLOWABLE, THE ASSESSEE HAD TO QUALIFY THAT EXPENSE S WERE INCURRED AND THE SAME WERE WHOLLY AND EXCLUSIVELY F OR THE PURPOSE OF BUSINESS. BY ISSUING SHARES AT LESS THAN MARKET PRICE, THE ASSESSEE COULD NOT BE SAID TO HAVE INCUR RED ANY EXPENDITURE, RATHER IT AMOUNTED TO SHORT RECEIPT OF SHARE ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 21 PREMIUM. THE RECEIPT OF SHARE PREMIUM WAS NOT TAXAB LE AND, HENCE, ANY SHORT RECEIPT OF SUCH PREMIUM WOULD ONLY BE A NOTIONAL LOSS AND NOT ACTUAL LOSS FOR WHICH NO LIAB ILITY WAS INCURRED. THE SEBI GUIDELINES ARE RELEVANT FOR THE PURPOSE OF ACCOUNTING BUT ARE NOT CONCLUSIVE FOR THE PURPOSE O F ALLOWING THE SAME AS AN EXPENDITURE. IN A CASE WHERE THE ASS ESSEE CONTRACTS FOR SALE OF GOODS SAY AT RS. 100 PER PIEC E AS AGAINST MARKET PRICE OF RS. 150 PER PIECE, WHETHER THE LOSS OF RS. 50 CAN BE SAID TO BE ALLOWABLE WHERE THE ASSESSEE ACCO UNTS FOR ONLY RS. 100 AS SALES AND NOT AT RS. 150. IN SUCH A SITUATION, THE LOSS WILL BE ONLY A NOTIONAL LOSS OR THE LOSS O F POSSIBLE BENEFIT BUT NOT THE LOSS OR LIABILITY INCURRED SO A S TO BE HELD AS ALLOWABLE UNDER THE SCHEME OF THE ACT. SIMILARLY, I N THE INSTANT CASE, WHAT WAS LOSS TO THE ASSESSEE WAS SHORT RECEI PT OF SHARE PREMIUM AND NOT INCURRING OF ANY LIABILITY OR LOSS IN THE COURSE OF CARRYING ON THE BUSINESS. THEREFORE, SUCH NOTIONAL LOSSES WERE NOT ALLOWABLE UNDER THE ACT. THE ASSESS EE WAS NOT TO DEFRAY OR PAY ANY LIABILITY UNDER THE CLAIM. THEREFORE, SUCH NOTIONAL LOSS COULD NOT BE HELD TO BE ALLOWABLE UNDER THE SCHEME OF THE ACT. AS REGARDS THE CLAIM OF THE ASSESSEE UNDER SECTION 37, SINCE THE ASSESSEE HAD NOT INCURRED ANY EXPENDITURE BUT H AD MERELY RECEIVED LESSER AMOUNT OF SHARE PREMIUM, THE SAME DID NOT AMOUNT TO EXPENDITURE WITHIN THE MEANING OF SECTION 37. THEREFORE, THE CLAIM OF THE ASSESSEE WAS NOT AL LOWABLE. HON'BLE SUPREME COURT OF INDIA IN THE CASE OF INFOS YS TECHNOLOGIES LTD. 297 ITR 167 HAS HELD AS UNDER: QUESTION FOR CONSIDERATION IS WHETHER 'PERQUISITE' COULD BE SAID TO ACCRUE AT THE TIME WHEN WARRANTS WERE GRANTED OR AT THE TIME WHEN THE OPTION VESTED IN THE EMPLOYEE OR AT T HE TIME WHEN THE OPTIONS STOOD EXERCISED OR AT THE TIME WHE N LOCK-IN ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 22 CONDITIONS WERE REMOVED OR AT THE TIME WHEN THE SHA RES WERE TO BE SOLD IN THE SHARE MARKET. [PARA 9] WARRANT IS A RIGHT WITHOUT OBLIGATION TO BUY. THERE FORE, 'PERQUISITE' COULD NOT BE SAID TO ACCRUE AT THE TIM E WHEN WARRANTS WERE GRANTED IN THE INSTANT CASE. SAME WOU LD BE THE POSITION WHEN OPTIONS VESTED IN THE EMPLOYEES AFTER LAPSE OF 12 MONTHS. IT WAS IMPORTANT TO NOTE THAT IN THIS CA SE OPTIONS WERE EXERCISABLE ONLY AFTER THE COOLING PERIOD OF12 MONTHS. FURTHER, IT WAS OPEN TO THE EMPLOYEES NOT TO AVAIL OF THE BENEFIT OF OPTION. IT WAS OPEN TO THE EMPLOYEES TO RESIGN. THERE WAS NO CERTAINTY THAT THE OPTION WOULD BE EXERCISED . FURTHER, THE SHARES WERE NOT TRANSFERABLE FOR 5YEARS (LOCK-I N PERIOD). IF AN EMPLOYEE RESIGNED DURING THE LOCK-IN PERIOD, THE SHARES HAD TO BE RE-TRANSFERRED. DURING THE LOCK-IN PERIOD , THE POSSESSION OF THE SHARES, WHICH IS AN IMPORTANT ING REDIENT OF SHARES, REMAINED WITH THE TRUST. THE STOCK EXCHANGE WAS DULY NOTIFIED ABOUT NON-TRANSFERABILITY OF THE SHAR ES DURING THE LOCK-IN PERIOD. THE SHARES WERE STAMPED WITH THE RE MARK 'NON- TRANSFERABLE' DURING THE LOCK-IN PERIOD. IT WAS NOT OPEN TO THE EMPLOYEES TO HYPOTHECATE OR PLEDGE THE SAID SHARES DURING THE LOCK-IN PERIOD. DURING THE SAID PERIOD, THE SHARES HAD NO REALISABLE VALUE. HENCE, THERE WAS NO CASH INFLOW T O THE EMPLOYEES ON ACCOUNT OF MERE EXERCISE OF OPTIONS. O N THE DATE WHEN THE OPTIONS WERE EXERCISED, IT WAS NOT POSSIBL E FOR THE EMPLOYEES TO FORESEE THE FUTURE MARKET VALUE OF THE SHARES. THEREFORE, THE BENEFIT, IF ANY, WHICH AROSE ON THE DATE WHEN THE OPTION STOOD EXERCISED WAS ONLY A NOTIONAL BENE FIT WHOSE VALUE WAS. UNASCERTAINABLE AND, THE DEPARTMENT HAD ERRED IN TREATING THE AMOUNT BEING THE DIFFERENCE IN THE MAR KET VALUE OF SHARES ON THE DATE OF EXERCISE OF OPTION AND THE TO TAL AMOUNT 'PAID' BY THE EMPLOYEES CONSEQUENT UPON EXERCISE OF THE SAID OPTIONS AS PERQUISITE VALUE. [PARA I I] ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 23 B. GROUND NO. 4, 4.1, 4.2 & 4.3 -IN RELATION TO THE SE GROUNDS REVENUE WANTS TO RELY ON THE FOLLOWING DECISIONS MA Y KINDLY BE CONSIDERED IN RESPECT OF THESE GROUNDS: WRITTEN SUBMISSION BY REVENUE WITH REGARD TO SECTIO N 14A OF I.T: ACT WITH REFERENCE TO THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF MAXOPP INVESTMENT LTD. VS CIT. NEW DELHI [2018] 91 TAXMANN.COM 154 (SC) ORDER DATED 12.02.20 18- 'SUBMISSION ON SECTION 14AA. A. SECTION 14A OF THE INCOME-TAX ACT, 1961 (ACT') W AS INSERTED INTO THE INCOME TAX ACT, 1961 VIDE FINANCE ACT 2001 , WITH RETROSPECTIVE APPLICATION FROM 1.4.1962. IT PROVIDE S FOR DISALLOWANCE OF EXPENDITURE IN RELATION TO INCOME N OT 'INCLUDIBLE' IN TOTAL INCOME. OVER A PERIOD OF TIME , THERE HAVE BEEN SEVERAL CASES DECIDED ON THIS ISSUE BY VARIOUS HIGH COURTS. CBDT ISSUED A CIRCULAR NO. 5/2014 ON 11TH FEBRUARY 2014, CLARIFYING, INTER ALIA, AS FOLLOWS: 'A CONTROVERSY HAS ARISEN IN CERTAIN CASES AS TO WH ETHER DISALLOWANCE CAN BE MADE BY INVOKING SECTION 14A OF THE ACT EVEN IN THOSE CASES WHERE NO INCOME HAS BEEN EARNED BY AN ASSESSEE WHICH HAS BEEN CLAIMED AS EXEMPT DURING TH E FINANCIAL-YEAR. 3. IT IS PERTINENT TO MENTION THAT SECTION 14A OF T HE ACT WAS INTRODUCED BY THE FINANCE ACT, 2001 WITH RETROSPECT IVE EFFECT FROM 01.04.1962. THE PURPOSE FOR INTRODUCTION OF SE CTION 14A WITH RETROSPECTIVE EFFECT SINCE INCEPTION OF THE AC T WAS CLARIFIED VIDE CIRCULAR NO. 14 OF 2001 AS UNDER: 'CERTAIN INCOMES ARE NOT INCLUDIBLE WHILE COMPUTING THE TOTAL INCOME, AS THESE ARE EXEMPT UNDER VARIOUS PROVISION S OF THE ACT. THERE HAVE BEEN CASES WHERE DEDUCTIONS HAVE BE EN ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 24 CLAIMED IN RESPECT OF SUCH EXEMPT INCOME. THIS IN E FFECT MEANS THAT THE TAX INCENTIVE GIVEN BY WAY OF EXEMPTIONS T O CERTAIN CATEGORIES OF INCOME IS BEING USED TO REDUCE ALSO T HE TAX PAYABLE ON THE NON-EXEMPT INCOME BY DEBITING THE EX PENSES INCURRED TO EARN THE EXEMPT INCOME AGAINST TAXABLE INCOME. THIS IS AGAINST THE BASIC PRINCIPLES OF TAXATION WH EREBY ONLY THE NET INCOME, I.E., GROSS INCOME MINUS THE EXPEND ITURE, IS TAXED. ON THE SAME ANALOGY, THE EXEMPTION IS ALSO I N RESPECT OF THE NET INCOME. EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO THE EARNING OF TAX ABLE INCOME.' THUS, LEGISLATIVE INTENT IS TO ALLOW ONLY THAT EXPE NDITURE WHICH IS RELATABLE TO EARNING OF INCOME AND IT THEREFORE FOLLOWS THAT THE EXPENSES WHICH ARE RELATABLE TO EARNING OF EXEM PT INCOME HAVE TO BE CONSIDERED FOR DISALLOWANCE, IRRESPECTIV E' OF THE FACT WHETHER ANY SUCH INCOME HAS BEEN EARNED DURING THE FINANCIAL-YEAR OR NOT. 4. THE ABOVE POSITION IS FURTHER CLARIFIED BY THE U SAGE OF TERM 'INCLUDIBLE' IN THE HEADING TO SECTION 14A OF THE A CT AND ALSO THE HEADING TO RULE 80 OF I.T.RULES, 1962 WHICH IND ICATES THAT IT IS NOT NECESSARY THAT EXEMPT INCOME SHOULD NECES SARILY BE INCLUDED IN A PARTICULAR YEAR'S INCOME, FOR DISALLO WANCE TO BE TRIGGERED. ALSO, SECTION 14A OF THE ACT DOES NOT US E THE WORD 'INCOME OF THE YEAR' BUT 'INCOME UNDER THE ACT'. TH IS ALSO INDICATES THAT FOR INVOKING DISALLOWANCE UNDER SECT ION 14A, IT IS NOT MATERIAL THAT ASSESSEE SHOULD HAVE EARNED SU CH EXEMPT INCOME DURING THE FINANCIAL YEAR UNDER CONSIDERATIO N. 5. THE ABOVE POSITION IS FURTHER SUBSTANTIATED BY T HE LANGUAGE USED IN RULE 8D(2(II) & 8D(2)(III) OF I.T. RULES . 6. THUS, IN LIGHT OF ABOVE, CENTRAL BOARD OF DIRECT TAXES, IN EXERCISE OF ITS POWERS UNDER SECTION 119 OF THE ACT HEREBY CLARIFIES THAT RULE 8D READ WITH SECTION 14A OF THE ACT PROVIDES ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 25 FOR DISALLOWANCE OF THE EXPENDITURE EVEN WHERE TAXP AYER IN A PARTICULAR YEAR HAS NOT EARNED ANY EXEMPT INCOME.' B. THE HON'BLE SUPREME COURT, IN THE JUDGMENT IN TH E CASE OF MAXOPP INVESTMENT LTD. REPORTED IN [2018] 91 TAXMAN N.COM 154 HELD VIDE ORDER DATED 12.02.2018 AS FOLLOWS: (I) ONLY THAT EXPENDITURE WHICH IS IN RELATION TO E ARNING DIVIDENDS CAN BE DISALLOWED UNDER SECTION 14A AND R ULE 8D. (II) THE DOMINANT PURPOSE FOR WHICH INVESTMENT INTO SHARES IS MADE BY ASSESSEE MAY NOT BE RELEVANT AS SECTION 14A APPLIES IRRESPECTIVE OF WHETHER SHARES ARE HELD TO GAIN CON TROL OR AS STOCKIN-TRADE. HOWEVER, WHERE SHARES ARE HELD AS ST OCK-IN- TRADE, MAIN PURPOSE IS TO TRADE IN THOSE SHARES AND EARN PROFITS THEREFROM AND, IN PROCESS, CERTAIN DIVIDEND IS ALSO EARNED WHICH IS TAX EXEMPT UNDER SECTION 10(34); EX PENDITURE ATTRIBUTABLE TO EXEMPT DIVIDEND INCOME WILL HAVE TO BE APPORTIONED TO BE DISALLOWED UNDER SECTION 14A. (III) RULE 8D IS PROSPECTIVE IN NATURE AND COULD NO T HAVE BEEN MADE APPLICABLE IN RESPECT OF ASSESSMENT YEARS PRIO R TO 2007 WHEN THIS RULE WAS INSERTED. C. DEFINITION OF THE ISSUE- SECTION 14A (1) SAYS TH AT NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITUR E INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T OTAL INCOME. (I) THE ISSUE THEREFORE, IS IF SECTION 14A (1) WOUL D STAND ATTRACTED EVEN IF SUCH INCOME, I.E.,INCOME NOT INCL UDIBLE IN THE TOTAL INCOME, IS NOT ACTUALLY EARNED, SUBJECT TO EX PENDITURE RELATABLE TO SUCH INCOME HAVING BEEN INCURRED. THE CBOT CIRCULAR 5/2014, AFTER EXPLAINING THE RATIONALE OF THE PROVISION OF SECTION 14A (WITH REFERENCE TO CIRCULAR 14 OF 20 01), I.E., TO CURB THE PRACTICE OF REDUCING THE TAX LIABILITY ON TAXABLE INCOME (I.E., INCOME FORMING PART OF THE TOTAL INCOME) BY CLAIMING ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 26 EXPENDITURE INCURRED IN EARNING TAX-EXEMPT INCOME A GAINST TAXABLE INCOME, GOES ON TO STATE THAT THE LEGISLATI VE INTENT IS THAT THE EXPENDITURE RELATABLE TO EARNING SUCH INCOME SH ALL HAVE TO BE CONSIDERED FOR DISALLOWANCE. IN THAT EVENT I.E., EXPENDITURE RELATING TO EARNING TAX-EXEMPT INCOME HAVING BEEN I NCURRED, IT WOULD BECOME IRRELEVANT IF THE EXEMPT INCOME HAS AC TUALLY MATERIALIZED OR NOT, SO THAT THE DISALLOWANCE OF TH E SAID EXPENDITURE U/S. 14A WOULD FOLLOW. THE SAME THEREFO RE IS ONLY A CONTINUATION OF CIRCULAR 14 OF 2001, TAKING THE P REMISE OF SECTION 14A TO ITS LOGICAL CONCLUSION. THE PURPOSE OF THESE CIRCULARS AND THE LEGISLATIVE INTENT IS TO APPLY TH E BASIC PRINCIPLE OF TAXATION, I.E., THAT IT IS ONLY THE NE T INCOME - TAXABLE OR NON-TAXABLE, I.E., NET OF ALL EXPENDITURE INCURR ED FOR EARNING THE SAME, THAT COULD BE SUBJECT TO TAX OR, AS THE C ASE MAY BE, EXEMPT FROM TAX. THE LATTER CIRCULAR, WHICH IS IN C ONSONANCE WITH THE MEMORANDUM EXPLAINING THE PROVISIONS OF FI NANCE BILL, 2001 (INTRODUCING SECTION 14A) AS WELL AS THE NOTES TO THE CLAUSES PRESENTED ALONG WITH THE SAID BILL, HAS BEE N NOTED WITH APPROVAL BY THE HON'BLE SUPREME COURT IN CIT V . WALFORT SHARE & STOCK BROKERS (P.) LTD. [2010] 192 TAXMAN 2 11/326 ITR 1 (SC), HOLDING AS UNDER: 'THE INSERTION OF SECTION 14A WITH RETROSPECTIVE EF FECT IS THE SERIOUS ATTEMPT ON THE PART OF PARLIAMENT NOT TO AL LOW DEDUCTION IN RESPECT OF ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT AGAINST THE TAXABLE INCO ME (SEE CIRCULAR NO. 14 OF 2001 DATED NOVEMBER 22, 2001). I N OTHER WORDS, SECTION 14A CLARIFIES THAT EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO TH E EARNING OF TAXABLE INCOME. IN MANY CASES THE NATURE OF EXPENSE S INCURRED BY THE ASSESSEE MAY BE RELATABLE PARTLY TO THE ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 27 EXEMPT INCOME AND PARTLY TO THE TAXABLE INCOME. IN THE ABSENCE OF SECTION 14A, THE EXPENDITURE INCURRED IN RESPECT OF EXEMPT INCOME WAS BEING CLAIMED AGAINST TAXABLE INC OME. 'THE MANDATE OF SECTION 14A IS CLEAR. IT DESIRES TO CURB THE PRACTICE TO CLAIM DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME AGAINST TAXABLE INCOME AND AT THE SAM E TIME AVAIL OF THE TAX INCENTIVE BY WAY OF EXEMPTION OF E XEMPT INCOME WITHOUT MAKING ANY APPORTIONMENT OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME. THE BASIC RE ASON FOR INSERTION OF SECTION 14A IS THAT CERTAIN INCOMES AR E NOT INCLUDIBLE WHILE COMPUTING TOTAL INCOME AS THESE AR E EXEMPT UNDER CERTAIN PROVISIONS OF THE ACT.' (II) THE ISSUE, THUS, CONSIDERED IN PERSPECTIVE, IS NOT IF THE INCOME NOT FORMING THE PART OF THE TOTAL INCOME (TH E TAX-EXEMPT INCOME) IS EARNED OR NOT, BUT IF EXPENDITURE RELATA BLE TO SUCH INCOME HAS BEEN INCURRED. IF SUCH EXPENDITURE STAND S INCURRED, SECTION 14A(1) BECOMES APPLICABLE. (III) THE DECISION BY THE APEX COURT IN THE CASE OF CIT V. WALFORT SHARE & STOCK BROKERS (P.) LTD. (SUPRA) STA NDS FOLLOWED IN GODREJ & BOYCE MFG. CO. LTD. V. DY. CIT [2017] 81 TAXMANN.COM 111 (SC) WHERE THE HON'BLE SUPREME COUR T, WHILE CONSIDERING WHETHER DEDUCTION OF EXPENDITURE INCURRED IN EARNING DIVIDEND INCOME WHICH IS NOT INCLUDIBLE IN THE TOTAL INCOME OF THE ASSESSEE BY VIRTUE OF THE PROVISIONS OF SECTION 10(33) OF THE INCOME TAX ACT, 1961 AS IN FORCE DURI NG THE ASSESSMENT YEAR I.E. 2002-2003, WAS ADMISSIBLE OR OTHERWISE, MADE THE FOLLOWING OBSERVATIONS: '32. A BRIEF REFERENCE TO THE DECISION OF THIS COUR T IN WALFORT SHARE AND STOCK BROKERS (P.) LTD. (SUPRA) MAY NOW B E MADE, IF ONLY, TO MAKE THE DISCUSSION COMPLETE. IN WALFORT S HARE AND STOCK BROKERS (P.) LTD.(SUPRA) THE ISSUE INVOLVED W AS: 'WHETHER ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 28 IN A DIVIDEND STRIPPING TRANSACTION THE LOSS ON SAL E OF UNITS COULD BE CONSIDERED AS EXPENDITURE IN RELATION TO E ARNING OF DIVIDEND INCOME EXEMPT UNDER SECTION 10(33), DISALL OWABLE UNDER SECTION 14A OF THE ACT?' '33. WHILE ANSWERING THE SAID QUESTION THIS COURT C ONSIDERED THE OBJECT OF INSERTION OF SECTION 14A IN THE INCOM E TAX ACT BY FINANCE ACT, 2001, DETAILS OF WHICH HAVE ALREADY BE EN NOTICED. NOTICING THE OBJECTS AND REASONS BEHIND IN TRODUCTION OF SECTION 14A OF THE ACT THIS COURT HELD THAT: 'EXPENSES ALLOWED CAN ONLY BE IN RESPECT OF EARNING OF TAXABLE INCOME. ' 'IN PARAGRAPH 17, THIS COURT WENT ON TO OBSERVE THA T: 'THEREFORE, ONE NEEDS TO READ THE WORDS 'EXPENDITUR E INCURRED' IN SECTION 14A IN THE CONTEXT OF THE SCHE ME OF THE ACT AND, IF SO READ, IT IS CLEAR THAT IT DISALLOWS CERT AIN EXPENDITURE INCURRED TO EARN EXEMPT INCOME FROM BEING DEDUCTED FROM OTHER INCOME WHICH IS INCLUDIBLE IN THE 'TOTAL INCO ME' FOR THE PURPOSE OF CHARGEABILITY TO TAX.' 'THE VIEWS EXPRESSED IN WALFORT SHARE AND STOCK BRO KERS (P.) LTD. (SUPRA), IN OUR CONSIDERED OPINION, YET AGAIN MILITATE AGAINST THE PLEA URGED ON BEHALF OF THE ASSESSEE.' (IV) THE EXPENDITURE IS INCURRED TO PRODUCE OR GENE RATE OR IN ANTICIPATION OF, INCOME, WHETHER TAXABLE OR NON-TAX ABLE. IN FACT, THE CLASSIFICATION AS TO TAX STATUS (I.E., TA XABLE OR NON- TAXABLE) HAS NOTHING TO DO WITH THE INCOME GENERATI NG PROCESS; AN INCOME BEING, AS A MATTER OF FISCAL INCENTIVE, B EING GRANTED TAX EXEMPT STATUS UNDER THE ACT, FOR THE TIME BEING . THE FACT OF HAVING INCURRED EXPENDITURE FOR EARNING INCOME - TA X-EXEMPT (OR NON-EXEMPT), WHICH IS LARGELY A QUESTION OF FAC T, WOULD THUS REMAIN, AND NOT UNDERGO ANY CHANGE, IRRESPECTIVE OF WHETHER ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 29 IT HAS RESULTED IN ANY INCOME (WHETHER TAX-EXEMPT O R NON- EXEMPT). THE PRINCIPLE IS WELL-SETTLED, REPRESENTIN G A FUNDAMENTAL CONCEPT OF TAXATION, I.E., THE ALLOWABI LITY (OR OTHERWISE) OF AN EXPENDITURE WOULD NOT DEPEND UPON WHETHER IT HAS IN FACT RESULTED IN AN INCOME, I.E., POSITIV E INCOME, WHICH IS IN ANY CASE A MATTER SUBSEQUENT, AND THAT THE ME RE FACT THAT EXPENDITURE STANDS INCURRED FOR THE PURPOSE IS SUFFICIENT FOR ITS ADMISSIBILITY, AS EXPLAINED BY THE APEX COU RT IN CFT V. RAJENDRA PRASAD MOODY [1978] 1151TR 519 (SC). THE APEX COURT WAS IN THAT CASE EXAMINING THE TRUE INTERPRETATION OF SECTION 57(III), WHICH EMPLOYED T HE WORDS 'ANY EXPENDITURE (NOT BEING IN THE NATURE OF CAPITAL EXP ENDITURE) LAID OUT OR EXPENDED FOR THE PURPOSE OF MAKING OR E ARNING SUCH INCOME', THE QUESTION OF LAW RAISED BEFORE IT READING AS UNDER: 'WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, INTEREST ON MONEY BORROWED FOR INVESTMENT IN SHARES WHICH HAD NOT YIELDED ANY DIVIDEND IS ADMISSIBLE UNDER S. 57(III)?' THE REVENUE'S CONTENTION IN THE ABOVE CASE WAS THAT THE MAKING OR EARNING OF INCOME WAS A SINE QUA NON TO T HE ADMISSIBILITY OF THE EXPENDITURE U/S. 57(III). AND, THEREFORE, WHERE NO INCOME RESULTED, NO EXPENDITURE WOULD BE DEDUCTIBLE. THE APEX COURT REJECTED THE REVENUE'S C ONTENTION, AND HELD THAT TO BRING A CASE WITHIN THE SECTION, I T IS NOT NECESSARY THAT ANY INCOME SHOULD IN FACT HAVE BEEN EARNED AS A RESULT OF THE EXPENDITURE AND THEREFORE, THE INTE REST PAID ON MONEY BORROWED FOR INVESTMENT IN SHARES, WHICH HAD NOT YIELDED ANY DIVIDEND, WAS ADMISSIBLE UNDER SECTION 57(III). THE RATIO DECIDENDI OF THE JUDGMENT OF HON'BLE SUPR EME COURT IN CIT V. RAJENDRA PRASAD MOODY (SUPRA) CAN BE APPL IED TO SAY, BY THE SAME ANALOGY, THAT THE EXPENDITURE INCU RRED TO EARN AN EXEMPT INCOME IS SUBJECT TO ITS ADMISSIBILI TY IN ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 30 ACCORDANCE WITH THE PROVISIONS OF THE INCOME TAX AC T, 1961 INCLUDING THOSE OF SECTION 14A IRRESPECTIVE OF WHET HER THERE IS A RECEIPT OR INCOME OR NOT DURING THE YEAR UNDER CO NSIDERATION. D. IN THE CASE OF MAXOPP INVESTMENT LTD. REPORTED I N [2018] 91 TAXMANN.COM 154 HELD VIDE ORDER DATED 12.02.2018 HO N'BLE SUPREME COURT HAS OBSERVED IN PARA 3 OF ITS ORDER, AS FOLLOWS: '3. THOUGH, IT IS CLEAR FROM THE PLAIN LANGUAGE OF THE AFORESAID PROVISION THAT NO DEDUCTION IS TO BE ALLOWED IN RES PECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, THE EFFECT WHEREOF IS THAT IF CERTAIN INCOME IS EARNED WHICH IS NOT TO BE INCLUDED WHILE COMPUTING TOTAL INCOME, ANY EX PENDITURE INCURRED TO EARN THAT INCOME IS ALSO NOT ALLOWED AS A DEDUCTION. IT IS WELL KNOWN THAT TAX IS LEVIABLE ON THE NET INCOME. NET INCOME IS ARRIVED AT AFTER DEDUCTING TH E EXPENDITURE INCURRED IN EARNING THAT INCOME. THEREF ORE, FROM THE GROSS INCOME, EXPENDITURE INCURRED TO EARN THAT INCOME IS ALLOWED AS A DEDUCTION AND THEREAFTER TAX IS LEVIED ON THE NET INCOME. THE PURPOSE BEHIND SECTION 14A OF THE ACT, BY NOT PERMITTING DEDUCTION OF THE EXPENDITURE INCURRED IN RELATION TO INCOME, WHICH DOES NOT FORM PART OF TOTAL INCOME, I S TO ENSURE THAT THE ASSESSEE DOES NOT GET DOUBLE BENEFIT. ONCE A PARTICULAR INCOME ITSELF IS NOT TO BE INCLUDED IN T HE TOTAL INCOME AND IS EXEMPTED FROM TAX, THERE IS NO REASONABLE BA SIS FOR GIVING BENEFIT OF DEDUCTION OF THE EXPENDITURE INCU RRED IN EARNING SUCH AN INCOME. FOR EXAMPLE, INCOME IN THE FORM OF DIVIDEND EARNED ON SHARES HELD IN A COMPANY IS NOT TAXABLE. IF A PERSON TAKES INTEREST BEARING LOAN FROM THE BANK AND INVESTS THAT LOAN IN SHARES/STOCKS, DIVIDEND EARNED THEREFROM IS NOT TAXABLE. NORMALLY, INTEREST PAID ON THE LOAN WOULD BE EXPENDITURE INCURRED FOR EARNING DIVIDEND INCOME. S UCH AN INTEREST WOULD NOT BE ALLOWED AS DEDUCTION AS IT IS AN ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 31 EXPENDITURE INCURRED IN RELATION TO DIVIDEND INCOME WHICH ITSELF IS SPARED FROM TAX NET. THERE IS NO QUARREL UPTO THIS EXTENT. ' THE HON'BLE SUPREME COURT, IN THE JUDGMENT IN THE C ASE OF MAXOPP INVESTMENT LTD. REPORTED IN [2018] 91 TAXMAN N.COM 154 (SC), HAS ALSO AFFIRMED THE VIEW THAT THE DOMIN ANT PURPOSE FOR WHICH INVESTMENT INTO SHARES IS MADE BY ASSESSEE MAY NOT BE RELEVANT AS SECTION 14A APPLIES IRRESPEC TIVE OF WHETHER SHARES ARE HELD TO GAIN CONTROL OR AS STOCK -IN-TRADE. E. IN SUM, THE PRINCIPLE THAT IT IS THE NET INCOME, I.E., NET OF EXPENDITURE RELATABLE THERETO, WHICH IS SUBJECT TO TAX AND, CORRESPONDINGLY, NOT LIABLE TO TAX, I.E., WHERE IT DOES NOT FORM PART OF THE TOTAL INCOME, IS WELL ESTABLISHED. IT F OLLOWS, THEREFORE, THAT ONCE AN INCOME IS LIABLE (OR NOT LI ABLE) TO TAX, ALL EXPENDITURE RELATABLE THERETO IS TO BE RECKONED, AN D IT MATTERS LITTLE THAT THE SAID EXPENDITURE HAS INDEED RESULTE D IN A POSITIVE INCOME. THIS PRINCIPLE, I.E., TO EXCLUDE A LL EXPENDITURE RELATABLE TO THE EARNING OF INCOME NOT FORMING PART OF THE TOTAL INCOME, IRRESPECTIVE OF ITS QUANTUM, HAS ALSO BEEN NOTED WITH APPROVAL BY THE HON'BLE APEX COURT IN MAXOPP INVEST MENT LTD.'S CASE (SUPRA), IN PARA 32 OF ITS ORDER, AS UN DER: '32. IN THE FIRST INSTANCE, IT NEEDS TO BE RECOGNIZ ED THAT AS PER SECTION 14A(1) OF THE ACT, DEDUCTION OF THAT EXPEND ITURE IS NOT TO BE ALLOWED WHICH HAS BEEN INCURRED BY THE ASSESS EE 'IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT'. AXIOMATICALLY, IT IS THAT EXPENDIT URE ALONE WHICH HAS BEEN INCURRED IN RELATION TO THE INCOME W HICH IS (NOT) INCLUDIBLE IN TOTAL INCOME THAT HAS TO BE DIS ALLOWED. IF AN EXPENDITURE INCURRED HAS NO CAUSAL CONNECTION WITH THE EXEMPTED INCOME, THEN SUCH AN EXPENDITURE WOULD OBV IOUSLY BE TREATED AS NOT RELATED TO THE INCOME THAT IS EXE MPTED FROM TAX, AND SUCH EXPENDITURE WOULD BE ALLOWED AS BUSIN ESS ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 32 EXPENDITURE. TO PUT IT DIFFERENTLY, SUCH EXPENDITUR E WOULD THEN BE CONSIDERED AS INCURRED IN RESPECT OF OTHER INCOM E WHICH IS TO BE TREATED AS PART OF THE TOTAL INCOME.' F. THE HON'BLE SUPREME COURT, IN THE CASE OF MAXOPP INVESTMENT LTD. V. COMMISSIONER OF INCOME TAX, NEW DELHI [2018] 91 TAXMANN.COM 154 (SC), WHILE DEFINING THE SCOPE OF THE TERM 'IN RELATION TO' AS USED IN SECTION 14A, F URTHER INTERPRETED THE DOMINANT PURPOSE TEST AND UPHELD TH E THEORY OF APPORTIONMENT, IN FOLLOWING WORDS: '33. . THE ENTIRE DISPUTE IS AS TO WHAT INTERPRETAT ION IS TO BE GIVEN TO THE WORDS 'IN RELATION TO' IN THE GIVEN SC ENARIO, VIZ. WHERE THE DIVIDEND INCOME ON THE SHARES IS EARNED, THOUGH THE DOMINANT PURPOSE FOR SUBSCRIBING IN THOSE SHARE S OF THE INVESTEE COMPANY WAS NOT TO EARN DIVIDEND. WE HAVE TWO SCENARIOS IN THESE SETS OF APPEALS. IN ONE GROUP OF CASES THE MAIN PURPOSE FOR INVESTING IN SHARES WAS TO GAIN CO NTROL OVER THE INVESTEE COMPANY. OTHER CASES ARE THOSE WHERE T HE SHARES OF INVESTEE COMPANY WERE HELD BY THE ASSESSEES AS S TOCK-IN- TRADE (I.E. AS A BUSINESS ACTIVITY) AND NOT AS INVE STMENT TO EARN DIVIDENDS. IN THIS CONTEXT, IT IS TO BE EXAMIN ED AS TO WHETHER THE EXPENDITURE WAS INCURRED, IN RESPECTIVE SCENARIOS, IN RELATION TO THE DIVIDEND INCOME OR NOT. '34. HAVING CLARIFIED THE AFORESAID POSITION, THE F IRST AND FOREMOST ISSUE THAT FALLS FOR CONSIDERATION IS AS T O WHETHER THE DOMINANT PURPOSE TEST, WHICH IS PRESSED INTO SERVIC E BY THE ASSESSEES WOULD APPLY WHILE INTERPRETING SECTION 14 A OF THE ACT OR WE HAVE TO GO BY THE THEORY OF APPORTIONMENT . WE ARE OF THE OPINION THAT THE DOMINANT PURPOSE FOR WHICH THE INVESTMENT INTO SHARES IS MADE BY AN ASSESSEE MAY N OT BE RELEVANT. NO DOUBT, THE ASSESSEE LIKE MAXOPP INVEST MENT LIMITED MAY HAVE MADE THE INVESTMENT IN ORDER TO GA IN CONTROL OF THE INVESTEE COMPANY. HOWEVER, THAT DOES NOT APP EAR TO BE ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 33 A RELEVANT FACTOR IN DETERMINING THE ISSUE AT HAND. FACT REMAINS THAT SUCH DIVIDEND INCOME IS NON-TAXABLE. I N THIS SCENARIO, IF EXPENDITURE IS INCURRED ON EARNING THE DIVIDEND INCOME, THAT MUCH OF THE EXPENDITURE WHICH IS ATTRI BUTABLE TO THE DIVIDEND INCOME HAS TO BE DISALLOWED AND CANNOT BE TREATED AS BUSINESS EXPENDITURE. KEEPING THIS OBJEC TIVE BEHIND SECTION 14A OF THE ACT IN MIND, THE SAID PROVISION HAS TO BE INTERPRETED, PARTICULARLY, THE WORD 'IN RELATION TO THE INCOME' THAT DOES NOT FORM PART OF TOTAL INCOME. CONSIDERED IN THIS HUE, THE PRINCIPLE OF APPORTIONMENT OF EXPENSES COMES IN TO PLAYAS THAT IS THE PRINCIPLE WHICH IS ENGRAINED IN SECTION 14A OF THE ACT. THIS IS SO HELD IN WALFORT SHARE & STOCK BROKE RS (P.) LTD., RELEVANT PASSAGE WHEREOF IS ALREADY REPRODUCED ABOV E, FOR THE SAKE OF CONTINUITY OF DISCUSSION, WE WOULD LIKE TO QUOTE THE FOLLOWING FEW LINES THEREFROM. 'THE NEXT PHRASE IS, 'IN RELATION TO INCOME WHICH D OES NOT FORM PART OF TOTAL INCOME UNDER THE ACT'. IT MEANS THAT IF AN INCOME DOES NOT FORM PART OF TO TAL INCOME, THEN THE RELATED EXPENDITURE IS OUTSIDE THE AMBIT O F THE APPLICABILITY OF SECTION 14A.. ................................................... ................. THE THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON-TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDER SECTION 14A.' G. THE APEX COURT, IN THE ABOVE JUDGMENT, THUS UPHE LD THE THEORY OF APPORTIONMENT, DISREGARDING THE THEORY OF PREDOMINANT OBJECT. THE UNCERTAINTY OF EARNING THE DIVIDEND INCOME, OR OF IT BEING EARNED INCIDENTALLY, WAS ALS O NOTED BY IT. IT WAS, THEREFORE, IMMATERIAL IF DIVIDEND INCOME WA S ACTUALLY EARNED OR NOT. THE RELEVANT PARAS ARE AS UNDER: ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 34 '35. THE DELHI HIGH COURT, THEREFORE, CORRECTLY OBS ERVED THAT PRIOR TO INTRODUCTION OF SECTION 14A OF THE ACT, TH E LAW WAS THAT WHEN AN ASSESSEE HAD A COMPOSITE AND INDIVISIB LE BUSINESS WHICH HAD ELEMENTS OF BOTH TAXABLE AND NON -TAXABLE INCOME, THE ENTIRE EXPENDITURE IN RESPECT OF SAID B USINESS WAS DEDUCTIBLE AND, IN SUCH A CASE, THE PRINCIPLE OF AP PORTIONMENT OF THE EXPENDITURE RELATING TO THE NON-TAXABLE INCO ME DID NOT APPLY. THE PRINCIPLE OF APPORTIONMENT WAS MADE AVAI LABLE ONLY WHERE THE BUSINESS WAS DIVISIBLE. IT IS TO FIN D A CURE TO THE AFORESAID PROBLEM THAT THE LEGISLATURE HAS NOT ONLY INSERTED SECTION 14A BY THE FINANCE (AMENDMENT) ACT , 2001 BUT ALSO MADE IT RETROSPECTIVE, I.E., 1962 WHEN THE INCOME TAX ACT ITSELF CAME INTO FORCE. THE AFORESAID INTENT WA S EXPRESSED LOUDLY AND CLEARLY IN THE MEMORANDUM EXPLAINING THE PROVISIONS OF THE FINANCE BILL, 2001. WE, THUS, AGR EE WITH THE VIEW TAKEN BY THE DELHI HIGH COURT, AND ARE NOT INC LINED TO ACCEPT THE OPINION OF PUNJAB & HARYANA HIGH COURT W HICH WENT BY DOMINANT PURPOSE THEORY. THE AFORESAID REAS ONING WOULD BE APPLICABLE IN CASES WHERE SHARES ARE HELD AS INVESTMENT IN THE INVESTEE COMPANY, MAY BE FOR THE PURPOSE OF HAVING CONTROLLING INTEREST THEREIN. ON THAT REASON ING, APPEALS OF MAXOPP INVESTMENT LIMITED AS WELL AS SIMILAR CAS ES WHERE SHARES WERE PURCHASED BY THE ASSESSEES TO HAVE CONT ROLLING INTEREST IN THE INVESTEE COMPANIES HAVE TO FAIL AND ARE, THEREFORE, DISMISSED. 36. THERE IS YET ANOTHER ASPECT WHICH STILL NEEDS T O BE LOOKED INTO. WHAT HAPPENS WHEN THE SHARES ARE HELD AS 'STO CK-IN- TRADE' AND NOT AS 'INVESTMENT', PARTICULARLY, BY TH E BANKS? ON THIS SPECIFIC ASPECT, CBDT HAS ISSUED CIRCULAR NO. 18/2015 DATED NOVEMBER 02, 2015. 37. THIS CIRCULAR HAS ALREADY BEEN REPRODUCED IN PA RA 19 ABOVE. THIS CIRCULAR TAKES NOTE OF THE JUDGMENT OF THIS COURT IN ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 35 NAWANSHAHAR CASE WHEREIN IT IS HELD THAT INVESTMENT S MADE BY A BANKING CONCERN ARE PART OF THE BUSINESS OR BA NKING. THEREFORE, THE INCOME ARISES FROM SUCH INVESTMENTS IS ATTRIBUTABLE TO BUSINESS OF BANKING FALLING UNDER T HE HEAD 'PROFITS AND GAINS OF BUSINESS AND PROFESSION'. ON THAT BASIS, THE CIRCULAR CONTAINS THE DECISION OF THE BOARD THA T NO APPEAL WOULD BE FILED ON THIS GROUND BY THE OFFICERS OF TH E DEPARTMENT AND IF THE APPEALS ARE ALREADY FILED, THEY SHOULD B E WITHDRAWN. A READING OF THIS CIRCULAR WOULD MAKE IT CLEAR THAT THE ISSUE WAS AS TO WHETHER INCOME BY WAY OF INTERE ST ON SECURITIES SHALL BE CHARGEABLE TO INCOME TAX UNDER THE HEAD 'INCOME FROM OTHER SOURCES' OR IT IS TO FALL UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS AND PROFESSION'. THE BOARD, GOING BY THE DECISION OF THIS COURT IN NAWANSHAHAR CASE, CLARIFIED THAT IT HAS TO BE TREATED AS INCOME FALLI NG UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS AND PROFESSION' . THE BOARD ALSO WENT TO THE EXTENT OF SAYING THAT THIS WOULD N OT BE LIMITED ONLY TO CO-OPERATIVE SOCIETIES/BANKS CLAIMING DEDUC TION UNDER SECTION 80P(2)(A)(I) OF THE ACT BUT WOULD ALSO BE A PPLICABLE TO ALL BANKS/COMMERCIAL BANKS, TO WHICH BANKING REGULA TION ACT, 1949 APPLIES. 38. FROM THIS, PUNJAB AND HARYANA HIGH COURT POINTE D OUT THAT THIS CIRCULAR CARVES OUT A DISTINCTION BETWEEN 'STOCK-IN- TRADE' AND 'INVESTMENT' AND PROVIDES THAT IF THE MO TIVE BEHIND PURCHASE AND SALE OF SHARES IS TO EARN PROFIT, THEN THE SAME WOULD BE TREATED AS TRADING PROFIT AND IF THE OBJEC T IS TO DERIVE INCOME BY WAY OF DIVIDEND THEN THE PROFIT WOULD BE SAID TO HAVE ACCRUED FROM INVESTMENT. TO THIS EXTENT, THE H IGH COURT MAY BE CORRECT. AT THE SAME TIME, WE DO NOT AGREE W ITH THE TEST OF DOMINANT INTENTION APPLIED BY THE PUNJAB AN D HARYANA HIGH COURT, WHICH WE HAVE ALREADY DISCARDED. IN THA T EVENT, THE QUESTION IS AS TO ON WHAT BASIS THOSE CASES ARE TO BE DECIDED WHERE THE SHARES OF OTHER COMPANIES ARE PUR CHASED ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 36 BY THE ASSESSES AS 'STOCK-IN-TRADE' AND NOT AS 'INV ESTMENT'. WE PROCEED TO DISCUSS THIS ASPECT HEREINAFTER. 39. IN THOSE CASES, WHERE SHARES ARE HELD AS STOCK- IN-TRADE, THE MAIN PURPOSE IS TO TRADE IN THOSE SHARES AND EA RN PROFITS THEREFROM. HOWEVER, WE ARE NOT CONCERNED WITH THOSE PROFITS WHICH WOULD NATURALLY BE TREATED AS 'INCOME' UNDER THE HEAD 'PROFITS AND GAINS FROM BUSINESS AND PROFESSION'. W HAT HAPPENS IS THAT, IN THE PROCESS, WHEN THE SHARES AR E HELD AS 'STOCK-IN-TRADE', CERTAIN DIVIDEND IS ALSO EARNED, THOUGH INCIDENTALLY, WHICH IS ALSO AN INCOME. HOWEVER, BY VIRTUE OF SECTION 10 (34) OF THE ACT, THIS DIVIDEND INCOME IS NOT TO BE INCLUDED IN THE TOTAL INCOME AND IS EXEMPT FROM TAX . THIS TRIGGERS THE APPLICABILITY OF SECTION 14A OF THE AC T WHICH IS BASED ON THE THEORY OF APPORTIONMENT OF EXPENDITUR E BETWEEN TAXABLE AND NON-TAXABLE INCOME AS HELD IN WALFORT S HARE & STOCK BROKERS (P.) LTD. CASE~ THEREFORE, TO THAT EX TENT, DEPENDING UPON THE FACTS OF EACH CASE, THE EXPENDIT URE INCURRED IN ACQUIRING THOSE SHARES WILL HAVE TO BE APPORTIONED.' '40. WE NOTE FROM THE FACTS IN THE STATE BANK OF PA TIALA CASES THAT THE AO, WHILE PASSING THE ASSESSMENT ORDER, HA D ALREADY RESTRICTED THE DISALLOWANCE TO THE AMOUNT WHICH WAS CLAIMED AS EXEMPT INCOME BY APPLYING THE FORMULA CONTAINED IN RULE 80 OF THE RULES AND HOLDING THAT SECTION 14A OF THE ACT WOULD BE APPLICABLE. IN SPITE OF THIS EXERCISE OF APPORTI ONMENT OF EXPENDITURE CARRIED OUT BY THE AO, CIT(A) DISALLOWE D THE ENTIRE DEDUCTION OF EXPENDITURE. THAT VIEW OF THE CIT(A) W AS CLEARLY UNTENABLE AND RIGHTLY SET ASIDE BY THE ITA T. THERE FORE, ON FACTS, THE PUNJAB AND HARYANA HIGH COURT HAS ARRIVE D AT A CORRECT CONCLUSION BY AFFIRMING THE VIEW OF THE ITA T, THOUGH WE ARE NOT SUBSCRIBING TO THE THEORY OF DOMINANT IN TENTION APPLIED BY THE HIGH COURT. IT IS TO BE KEPT IN MIND THAT IN THOSE ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 37 CASES WHERE SHARES ARE HELD AS 'STOCK-IN-TRADE', IT BECOMES A BUSINESS ACTIVITY OF THE ASSESSEE TO DEAL IN THOSE SHARES AS A BUSINESS PROPOSITION. WHETHER DIVIDEND IS EARNED OR NOT BECOMES IMMATERIAL. IN FACT, IT WOULD BE A QUIRK OF FATE THAT WHEN THE INVESTEE COMPANY DECLARED DIVIDEND, THOSE SHARES ARE HELD BY THE ASSESSEE, THOUGH THE ASSESSEE HAS T O ULTIMATELY TRADE THOSE SHARES BY SELLING THEM TO EA RN PROFITS. THE SITUATION HERE IS, THEREFORE, DIFFERENT FROM TH E CASE LIKE MAXOPP INVESTMENT LTD. WHERE THE ASSESSEE WOULD CON TINUE TO HOLD THOSE SHARES AS IT WANTS TO RETAIN CONTROL OVE R THE INVESTEE COMPANY. IN THAT CASE, WHENEVER DIVIDEND I S DECLARED BY THE INVESTEE COMPANY THAT WOULD NECESSA RILY BE EARNED BY THE ASSESSEE AND THE ASSESSEE ALONE. THER EFORE, EVEN AT THE TIME OF INVESTING INTO THOSE SHARES, TH E ASSESSEE KNOWS THAT IT MAY GENERATE DIVIDEND INCOME AS WELL AND AS AND WHEN SUCH DIVIDEND INCOME IS GENERATED THAT WOU LD BE EARNED BY THE ASSESSEE. IN CONTRAST, WHERE THE SHAR ES ARE HELD AS STOCK-IN-TRADE, THIS MAY NOT BE NECESSARILY A SITUATION. THE MAIN PURPOSE IS TO LIQUIDATE THOSE SHARES WHENE VER THE SHARE PRICE GOES UP IN ORDER TO EARN PROFITS. IN TH E RESULT, THE APPEALS FILED BY THE REVENUE CHALLENGING THE JUDGME NT OF THE PUNJAB AND HARYANA HIGH COURT IN STATE BANK OF PATI A/A ALSO FAIL, THOUGH LAW IN THIS RESPECT HAS BEEN CLARIFIED HEREINABOVE.' H. IT IS MY HUMBLE SUBMISSION THEREFORE THAT THE AF ORESAID JUDGMENTS OF HON'BLE SUPREME COURT CONSTITUTE AN AU THORITY IN LAW ON THE ISSUE WHETHER AN EXPENDITURE INCURRED IN RELATION TO A TAX EXEMPT INCOME ATTRACTS DISALLOWANCE U/S 14 A( 1), IRRESPECTIVE OF WHETHER SUCH TAX-EXEMPT INCOME HAS BEEN EARNED DURING THE YEAR OR NOT OR EARNED INCIDENTALL Y WITH BUSINESS INCOME AND IN THE LIGHT OF THE DECISION OF HON'BLE SUPREME COURT MENTIONED SUPRA THE GROUNDS OF APPEAL RAISED BY THE APPELLANT FOR THE ADDITION U/S 14A DESERVES TO BE ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 38 DISMISSED AND THE GROUNDS OF APPEAL RAISED BY THE R EVENUE DESERVES TO BE ALLOWED.' 5.0 WE HAVE HEARD THE RIVAL SUBMISSIONS AND HAVE ALSO PERUSED THE MATERIAL ON RECORD. WE NOW TAKE UP THES E GROUNDS ONE BY ONE FOR ADJUDICATION. 5.1 GROUND NOS. 1,1.1, 1.2, 2, 2.1, 2.2 CHALLENGE THE ACTION OF THE LD. CIT (A) IN UPHOLDING THE DISALLOWANCE OF RS. 2,04,87,736/- MADE BY THE AO ON ACCOUNT OF THE DIFF ERENCE BETWEEN PURCHASE PRICE OF STOCK APPRECIATION RIGHTS AND THE SALE PRICE OF SUCH RIGHT AT THE TIME OF EXERCISE BY THE EMPLOYEES BY HOLDING TO BE THE SAME A CAPITAL LOSS NOT ALLOWABLE AS BUSINESS DEDUCTION. WE NOTE THAT THIS ISSUE WAS CONSIDERED O N AN EARLIER OCCASION BY THE ITAT DELHI BENCH IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2010-11 IN ITA NO. 4644/DEL/2015 WH EREIN, VIDE ORDER DATED 9.1.2017, THE ASSESSEES APPEAL WA S ALLOWED ON IDENTICAL FACTS. THE RELEVANT OBSERVATIONS/FINDINGS OF THE TRIBUNAL IN ASSESSMENT YEAR 2010-11 ARE CONTAINED IN PARAGRA PH 10 OF THE SAID ORDER AND THE SAME IS REPRODUCED HEREIN FOR A READY REFERENCE. 10. ... CAREFULLY CONSIDERED THE RIVAL CONTENTION AND ALSO PERUSED THE ORDER OF THE LOWER AUTHORITIES. WE HAVE ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 39 ALSO PERUSED THE SCHEME OF STOCK APPRECIATION RIGHT OF REL GROUP COMPANIES IN THE IDENTICAL CIRCUMSTANCES. WITH RESPECT TO ONE OF THE GROUP COMPANIES, RELIGAR E COMMODITIES LTD. FOR ASSESSMENT YEAR 2008-09 IDENTI CAL ISSUE AROSE BEFORE THE COORDINATE BENCH, WHICH DECI DED THIS ISSUE IN ITA NO. 2283/DEL/2013 BY ORDER DATED 4.1.2017 WHEREIN RELYING UPON THE DECISION OF THE SPECIAL BENCH IN 144 ITD 21 CLAIM OF THE ASSESSEE W ITH RESPECT TO THE ABOVE DISALLOWANCE WERE ALLOWED VIDE PARA NO. 7 OF THAT ORDER. THE COORDINATE BENCH IN P ARA NO. 8 ALSO HELD THAT THE ISSUE IS ALSO SQUARELY COV ERED BY THE DECISION OF THE HONBLE MADRAS HIGH COURT IN 211 TAXMAN 554 WHEREIN IT HAS BEEN HELD THAT THE ABOVE EXPENDITURE ON ACCOUNT OF EMPLOYEE STOCK OPTION SCH EME IS AN ASCERTAINED LIABILITY FOR DEDUCTION AND FURTH ER THE HONBLE DELHI HIGH COURT IN CIT VS. LEMON TREE HOTE LS LTD. IN ITA NO. 107/2015 HAS ALSO HELD THAT THE EXPENSES DEBITED IS COST OF EMPLOYEE STOCK OPTION P LAN IN THE PROFIT AND LOSS ACCOUNT IS AN ALLOWABLE EXPENDITURE. THE LD. DEPARTMENTAL REPRESENTATIVE AL SO COULD NOT POINT OUT ANY OTHER JUDICIAL PRECEDENT AG AINST THE ABOVE JUDICIAL PRECEDENTS CITED BY THE LD. AUTHORIZED REPRESENTATIVE. IN VIEW OF THIS GROUND N O. 1 AND 2 OF THE APPEAL OF THE ASSESSEE IS ALLOWED REVE RSING THE DECISION OF THE LD CIT-A AND DIRECTING THE ASSE SSING OFFICER TO ALLOW THE SUM OF RS. 20963780/- ON ACCOU NT OF THE DIFFERENCE BETWEEN THE PURCHASE PRICE OF STOCK APPRECIATION RIGHT IN THE SALE PRICE OF SUCH STOCK ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 40 APPRECIATION RIGHT ON EXERCISE BY THE EMPLOYEES OF THE APPELLANT AS THESE ARE REVENUE EXPENDITURE IN NATUR E. THEREFORE GROUNDNO.1 & 2 OF THE APPEAL OF THE ASSES EE IS ALLOWED. 5.1 WE ALSO NOTE THAT THIS ORDER OF THE TRIBUNAL W AS AFFIRMED BY THE HONBLE DELHI HIGH COURT IN THE CAS E OF PCIT VS. RELIGARE SECURITIES LTD. IN ITA NO. 311/2018. THERE FORE, ON IDENTICAL FACTS AND RESPECTFULLY FOLLOWING THE ORDE R OF THE COORDINATE BENCH, WHICH HAS SINCE BEEN AFFIRMED BY THE HONBLE DELHI HIGH COURT, WE ALLOW GROUND NOS. 1, 1.1, 1.2, 1.3, 2, 2.1 AND 2.2 OF THE ASSESSEES APPEAL. 5.2 GROUND NOS. 3, 3.1, 3.2 CHALLENGE THE UPHOLDIN G THE DISALLOWANCE OF BAD DEBT WRITTEN OFF TO THE EXTENT OF RS. 85,38,920/-. THE AO, WHILE MAKING THE DISALLOWANCE, WAS OF THE OPINION THAT SINCE THE DEBT HAS NOT BEEN ROUTED THR OUGH THE PROFIT AND LOSS ACCOUNT AND HAD NOT BEEN CONSIDERED AS INCOME, AS MANDATED U/S 36(1)(VII) OF THE ACT, THE SAME WAS NOT ALLOWABLE. IN THIS REGARD IT IS SEEN THAT SECTION 3 6(1)(VII) READ WITH SECTION 36 (2) OF THE ACT POST THE AMENDMENT W.E.F. 1.4.1989 STATES THAT DEDUCTION FOR BAD DEBT IS TO BE ALLOWE D FOR THE YEAR IN WHICH THE SAME IS WRITTEN OFF IN THE BOOKS OF ACCOU NTS. IN THE ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 41 PRESENT CASE IT IS UNDISPUTED THAT THE DEBT HAS BEE N WRITTEN OFF. THE OBJECTION OF THE AO AND THE LD. CIT (A) IS THAT THE DEBT SHOULD HAVE BEEN TAKEN IN COMPUTATION OF INCOME IN THIS YEAR OR EARLIER ASSESSMENT YEARS BUT THE SAME IS NOT EVIDEN CED FROM RECORDS. SECTION 36(1)(VII) READ WITH SECTION 36(2) ALSO PROVIDES THAT THE DEBT OR PART THEREOF SHOULD BE TAKEN ACCOU NT WHILE COMPUTING THE INCOME OF THE ASSESSEE FOR THE RELEVA NT PREVIOUS YEAR OR AN EARLIER YEAR IF THE WRITING OFF OF A DEB T IS TO BE TREATED AS A VALID DEDUCTION. IT HAS BEEN SUBMITTED BY THE LD. AR THAT THE DEBT CONSISTS OF AMOUNT RECOVERABLE TOWARDS THE PRINCIPAL VALUE OF SECURITIES, BROKERAGE CHARGES FOR PURCHASE OR SALE OF SECURITIES AND INTEREST, IF ANY, FOR DELAY IN MAKIN G THE PAYMENT FOR THE AMOUNT DUE. IT IS ASSESSEES CONTENTION THA T THE PART OF DEBT COMPRISING OF BROKERAGE CHARGES AND INTEREST O N DELAYED PAYMENTS HAS ALREADY BEEN TAKEN INTO ACCOUNT WHILE COMPUTING THE INCOME OF THE ASSESSEE. APPARENTLY, THIS FACT H AS NOT BEEN EXAMINED BY EITHER OF THE LOWER AUTHORITIES AND THE Y HAVE PROCEEDED ON A PRESUMPTION THAT PART OF THIS DEBT H AS NOT BEEN TAKEN INTO ACCOUNT FOR COMPUTING THE INCOME. IT IS SETTLED LAW THAT EVEN IF PART OF THE DEBT HAS BEEN CONSIDERED A S AN INCOME, THE CONDITION LAID DOWN IN SECTION 36(2) OF THE ACT WOULD BE SAID ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 42 TO HAVE BEEN SATISFIED. WE DRAW SUPPORT FROM THE JU DGMENT OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. BON ANZA PORTFOLIO LTD. (2010) 320 ITR 178 (DELHI) WHEREIN THE HONBLE DELHI HIGH COURT WAS CONSIDERING THE QUESTION WHETHER IN VIEW OF THE PROVISIONS OF SECTION 36(1)(VII), THE TOTAL DEBIT B ALANCE INCLUDING THE CONSIDERATION COLLECTIBLE BY THE ASSESSEE COMPANY F OR THE SALE/PURCHASE OF SHARES CAN BE CLAIMED BY THE ASSES SEE AS BAD DEBTS WHEN THE ASSESSEE COMPANY HAD ONLY CREDITED B ROKERAGE IN THE PROFIT AND LOSS ACCOUNT? ADJUDICATING ON THIS QUESTION, THE HONBLE DELHI HIGH COURT HELD THAT THE MONEY RECEIV ABLE FROM THE CLIENT HAS TO BE TREATED AS DEBT AND SINCE IT HAD B ECOME BAD IT IS TO BE RIGHTLY CONSIDERED AS BAD DEBT. THE HONBLE D ELHI HIGH COURT FURTHER WENT ON TO HOLD THAT SINCE THE BROKER AGE PAYABLE BY THE CLIENT IS A PART OF THE DEBT AND THAT DEBT H AD BEEN TAKEN INTO ACCOUNT IN THE COMPUTATION OF INCOME, THE COND ITION STIPULATED IN SECTION 36(2) READ WITH SECTION 36(1) (VII) STOOD SATISFIED. THE ABOVE JUDGMENT, THUS, MAKES IT AMPLY CLEAR THAT MONEY RECEIVABLE FROM A CLIENT BY A SHARE BROKER IS TO BE TREATED AS DEBT AND EVEN IF A PART OF DEBT HAS BEEN OFFERED TO INCOME, THE ASSESSEE WILL GET THE BENEFIT OF WRITING OFF OF THE ENTIRE AMOUNT OF DEBT AS IS CLAIMED AS HAVING BECOMING BAD. THEREFOR E, THE ONLY ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 43 ISSUE WHICH NEEDS TO BE LOOKED INTO IS AS TO WHETHE R A PART OF THE DEBT WRITTEN OFF WAS OFFERED TO INCOME IN THIS YEAR OR EARLIER YEARS OR NOT. THEREFORE, IT WILL BE IN THE FITNESS OF THI NGS IF THIS ASPECT IS RE-EXAMINED BY THE AO. ACCORDINGLY, WE RESTORE THIS ISSUE TO THE FILE OF THE AO WITH A DIRECTION TO VERIFY AND EXAMI NE AS TO WHETHER THE ASSESSEE HAS OFFERED TO TAX A PART OF THE DEBT BEING CLAIMED AS BAD AND WRITTEN OFF AS INCOME IN EARLIER ASSESSMENT YEARS OR IN THIS YEAR IN FORM OF BROKERAGE OR INTEREST OR NOT. IF IT HAS SO BEEN DONE, THE AO SHALL ALLOW THE AMOUNT CLAIMED AS BAD DEBT AND WRITTEN OFF AS DEDUCTION. THE ASSESSEE WILL BE GIVE N DUE OPPORTUNITY BY THE AO TO PRESENT ITS CASE. ACCORDIN GLY, GROUND NOS. 3, 3.1, 3.2 STAND ALLOWED FOR STATISTICAL PURP OSES. 5.3 GROUND NOS. 4, 4.1, 4.2 CHALLENGE THE DISALLO WANCE MADE U/S 14A OF THE ACT TO THE TUNE OF RS. 1,19,79, 827/-. IN THE PRESENT YEAR, THE ASSESSEE HAD ADMITTEDLY EARNED DI VIDEND INCOME OF RS. 20,400/- FROM SHARES IN RANBAXY LABOR ATORIES LTD. WHICH HAD BEEN CLAIMED AS EXEMPT U/S 10(34) OF THE ACT. HOWEVER, THE ASSESSEE HAD MADE A SUO MOTO DISALLOWANCE OF RS. 1,82,616/- U/S 14A OF THE ACT BUT THE AO, AFTER APP LYING THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULES, 1962 , COMPUTED THE DISALLOWANCE AT RS. 1,21,62,443/- BY MAKING DIS ALLOWANCE ON ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 44 ACCOUNT OF INTEREST EXPENDITURE AS WELL AS 0.5% OF AVERAGE VALUE OF INVESTMENTS. THE MAIN THRUST OF THE ASSESSEES A RGUMENTS BEFORE US IS THAT THE DISALLOWANCE U/S 14A OF THE A CT CANNOT EXCEED THE EXEMPT INCOME. THE HONBLE DELHI HIGH CO URT HAD AN OCCASION TO CONSIDER THE APPLICABILITY OF SECTION 1 4A IN THE CASE OF PR. CIT VS. M/S. CARAF BUILDERS & CONSTRUCTIONS PVT . LTD. IN ITA NO. 725 OF 2018 (DEL) AND, VIDE JUDGMENT DATED 13 TH NOVEMBER, 2018, AFTER REFERRING TO NUMEROUS JUDGEMENTS OF THE HONBLE DELHI HIGH COURT AS WELL AS THE HONBLE APEX COURT, THE HONBLE DELHI HIGH COURT REITERATED THE VIEW THAT THE DISAL LOWANCE U/S 14A CANNOT EXCEED THE EXEMPT INCOME. THE OBSERVATIO NS OF THE HONBLE DELHI HIGH COURT ARE CONTAINED IN PARA 25 O F THE SAID JUDGMENT AND THE SAME IS REPRODUCED HERE IN UNDER: 25. TOTAL EXEMPT INCOME EARNED BY THE RESPONDENT- ASSESSEE IN THIS YEAR WAS RS.19 LAKHS. IN THESE CIRCUMSTANCES, WE ARE NOT REQUIRED TO CONSIDER THE CASE OF THE REVENUE THAT THE DISALLOWANCE SHOULD BE ENHANCED FR OM RS. 75.89 CRORES TO RS.144.52 CRORES. UPPER DISALLOWANC E AS HELD IN PRINCIPAL COMMISSIONER OF INCOME TAX VS. MCDONAL DS INDIA PVT. LTD., ITA 725/2018 DECIDED ON 22 ND OCTOBER, 2018 CANNOT EXCEED THE EXEMPT INCOME OF THAT YEAR. THIS DECISION FOLLOWS THE RATIO AND JUDGMENT OF THE SUPREME COURT IN THE CASE OF MAXOPP INVESTMENTS LTD. VS. CIT (2018) 402 ITR 640 ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 45 (SC) AND THE EARLIER JUDGMENTS OF THE DELHI HIGH CO URT IN CHEMINVEST VS. CIT (2015) 378 ITR 33 AND CIT VS. HO LCIM PVT. LTD. (2014) 272 CTR (DEL.) 282. RELEVANT PORTION OF THE JUDGMENT IN MCDONALDS INDIA PVT. LTD.(SUPRA) READS: - '8. THE DECISION IN THE CASE OF MAXOPP INVESTMENT L TD. (SUPRA) IS SIGNIFICANT AND DOES ANSWER THE QUESTION IN ISSUE. THIS DECISION DOES NOT SUPPORT THE REVENUE A S THE ASSESSING OFFICER IN THE CASE OF MAXOPP INVESTM ENT LTD. (SUPRA) HAD HIMSELF RESTRICTED THE DISALLOWANC E TO THE EXTENT OF EXEMPT INCOME. AFTER REFERRING TO WAL FORD SHARE AND STOCK BROKERS P. LTD. (SUPRA) IT WAS HELD - 'AXIOMATICALLY, IT IS THAT EXPENDITURE ALONE WHICH HAS BEEN INCURRED IN RELATION TO THE INCOME WHICH IS INCLUDABLE IN TOTAL INCOME THAT HAS TO BE DISALLOWED. IF AN EXPENDITURE INCURRED HAS NO CAUSAL CONNECTION WITH THE EXEMPTED INCOME, THEN SUCH AN EXPENDITURE WOULD OBVIOUSLY BE TREATED AS NOT RELATED TO THE INCOME THAT IS EXEMPTED FROM TAX, AND SUCH EXPENDITURE WOULD BE ALLOWED AS BUSINESS EXPENDITURE. TO PUT IT DIFFERENTLY, SUCH EXPENDITURE WOULD THEN BE CONSIDERED AS INCURRED IN RESPECT OF OTHER INCOME WHICH IS TO BE TREATED A S PART OF THE TOTAL INCOME.' XXX 10. THE DECISION OF THE DELHI HIGH COURT IN HOLCIM INDIA PVT. LTD (SUPRA) HAD REFERRED TO THE ISSUE WHETHER ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 46 DISALLOWANCE OF EXPENDITURE UNDER SECTION 14A OF TH E ACT WOULD BE MADE EVEN WHEN NO EXEMPT INCOME IN THE FORM OF DIVIDEND WAS EARNED IN THE YEAR, AND IT WAS OBSERVED: '14. ON THE ISSUE WHETHER THE RESPONDENT- ASSESSEE COULD HAVE EARNED DIVIDEND INCOME AND EVEN IF NO DIVIDEND INCOME WAS EARNED, YET SECTION 14A CAN BE INVOKED AND DISALLOWANCE OF EXPENDITURE CAN BE MADE, THERE ARE THREE DECISIONS OF THE DIFFERENT HIGH COURTS DIRECTLY ON THE ISSUE AND AGAINST THE APPELLANT-REVENUE. NO CONTRARY DECISION OF A HIGH COURT HAS BEEN SHOWN TO US. THE PUNJAB AND HARYANA HIGH COURT IN COMMISSIONER OF INCOME TAX, FARIDABAD VS. M/S. LAKHANI MARKETING INCL.,ITA NO. 970/2008, DECIDED ON 02.04.2014, MADE REFERENCE TO TWO EARLIER DECISIONS OF THE SAME COURT IN CIT VS. HERO CYCLES LIMITED, [2010] 323 ITR 518 AND CIT VS. WINSOME TEXTILE INDUSTRIES LIMITED, [2009] 319 ITR 204 TO HOLD THAT SECTION 14A CANNOT BE INVOKED WHEN NO EXEMPT INCOME WAS EARNED. THE SECOND DECISION IS OF THE GUJARAT HIGH COURT IN COMMISSIONER OF INCOME TAX-I VS. CORRTECH ENERGY (P.) LTD. [2014] 223 TAXMANN 130 (GUJ.). THE THIRD DECISION IS OF THE ALLAHABAD HIGH COURT IN INCOME TAX APPEAL NO. 88 OF 2014, COMMISSIONER OF INCOME TAX (II) KANPUR, VS. M/S. SHIVAM MOTORS (P) ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 47 LTD. DECIDED ON 05.05.2014. IN THE SAID DECISION IT HAS BEEN HELD: 'AS REGARDS THE. SECOND QUESTION, SECTION 14A OF THE ACT PROVIDES THAT FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THE CHAPTER, 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. HENCE, WHAT SECTION 14A PROVIDES IS THAT IF THERE I S ANY INCOME WHICH DOES NOT FORM PART OF THE INCOME UNDER THE ACT, THE EXPENDITURE WHICH IS INCURRED FOR EARNING THE INCOME IS NOT AN ALLOWABLE DEDUCTION. FOR THE YEAR IN QUESTION, THE FINDING OF FACT IS THAT THE ASSESSEE HAD NOT EARNED ANY TAX FREE INCOME. HENCE, IN THE ABSENCE OF ANY TAX FREE INCOME, THE CORRESPONDING EXPENDITURE COULD NOT BE WORKED OUT FOR DISALLOWANCE. THE VIEW OF THE CIT(A), WHICH HAS BEEN AFFIRMED BY THE TRIBUNAL, HENCE DOES NOT GIVE RISE TO ANY SUBSTANTIAL QUESTION OF LAW. HENCE, THE DELETION OF THE DISALLOWANCE OF RS.2,03,752/- MADE BY THE ASSESSING OFFICER WAS IN ORDER' . 15. INCOME EXEMPT UNDER SECTION 10 IN A PARTICULAR ASSESSMENT YEAR, MAY NOT HAVE BEEN EXEMPT EARLIER AND CAN BECOME TAXABLE IN FUTURE YEARS. FURTHER, WHETHER INCOME EARNED IN A SUBSEQUENT YEAR WOULD OR WOULD NOT BE TAXABLE, MAY DEPEND ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 48 UPON THE NATURE OF TRANSACTION ENTERED INTO IN THE SUBSEQUENT ASSESSMENT YEAR. FOR EXAMPLE, LONG TERM CAPITAL GAIN ON SALE OF SHARES IS PRESENTLY NO T TAXABLE WHERE SECURITY TRANSACTION TAX HAS BEEN PAID, BUT A PRIVATE SALE OF SHARES IN AN OFF MARKET TRANSACTION ATTRACTS CAPITAL GAINS TAX. IT IS AN UNDISPUTED POSITION THAT RESPONDENT ASSESSEE IS AN INVESTMENT COMPANY AND HAD INVESTED BY PURCHASING A SUBSTANTIAL NUMBER OF SHARES AND THEREBY SECURING RIGHT TO MANAGEMENT. POSSIBILITY OF SALE OF SHARES BY PRIVATE PLACEMENT ETC. CANNOT BE RULED OUT AND IS NOT AN IMPROBABILITY. DIVIDEND MAYOR MAY NOT BE DECLARED. DIVIDEND IS DECLARED BY THE COMPANY AND STRICTLY IN LEGAL SENSE, A SHAREHOLDER HAS NO CONTROL AND CANNOT INSIST ON PAYMENT OF DIVIDEND. WHEN DECLARED, IT IS SUBJECTED TO DIVIDEND DISTRIBUTION TAX. 11. DECISION IN HOLCIM INDIA PVT. LTD. (SUPRA) WAS FOLLOWED AND ELABORATED IN CHEMINVEST LTD. (SUPRA). 5.4 THEREFORE, WE AGREE WITH THE PROPOSITION OF TH E LD. AR THAT DISALLOWANCE U/S 14A CANNOT IN ANY CASE EXCEED THE EXEMPT DIVIDEND INCOME. WE, THEREFORE, SET ASIDE THE ISSUE AND REMIT THE ISSUE BACK TO THE FILE OF THE AO TO WORK OUT THE DI SALLOWANCE BY CALCULATING THE AVERAGE INVESTMENT UNDER RULE 8D (2 )(II)/(III) BY TAKING THOSE ONLY INVESTMENTS WHICH HAVE ACTUALLY Y IELDED THE ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 49 DIVIDED INCOME DURING THE RELEVANT YEAR AND IF THE SAME EXCEEDS THE DIVIDEND INCOME THEN RESTRICT THE SAME TO THE E XTENT OF EXEMPT INCOME ONLY. HERE, SINCE THE ASSESSEE HAS SUO MOTO DISALLOWED AN AMOUNT OF RS. 1,82,616/- U/S 14A OF T HE ACT, THE DISALLOWANCE SHOULD NOT EXCEED THIS AMOUNT. AO SHAL L GIVE PROPER OPPORTUNITY TO THE ASSESSEE BEFORE DECIDING THE ISS UE. ACCORDINGLY, GROUND NO. 4, 4.1 AND 4.2 STAND ALLOWE D FOR STATISTICAL PURPOSES. 5.5 GROUND NOS. 5 AND 5.1 CHALLENGE THE ACTION OF THE AO IN MAKING THE ADDITION OF RS. 6,80,61,425/- BEING N OTIONAL ADDITION MADE ON ACCOUNT OF TRANSFER OF MERCHANT BA NKING LICENCE BY THE ASSESSEE TO ANOTHER OF ITS GROUP COM PANY RELIGARE CAPITAL MARKETS LIMITED. THIS ADDITION HAS BEEN MAD E SINCE THE ASSESSEE HAD TRANSFERRED THE LICENCE TO ITS SISTER CONCERN WITHOUT CONSIDERATION AND THE NOTIONAL VALUE WAS ARRIVED AT BY TAKING THE INCOME EARNED BY THE ASSESSEE FROM MERCANTILE BANKI NG BUSINESS DURING THE YEAR AND MULTIPLYING IT BY FIVE FOR FIVE YEARS. IT IS ASSESSEES CONTENTION THAT THE LICENCE WAS A CAPITA L ASSET AND NO INCOME HAD BEEN RECEIVED BY OR ACCRUED TO THE ASSES SEE ON SUCH TRANSFER AND, THEREFORE, THERE WAS NO OCCASION TO B RING THE NOTIONAL INCOME TO TAX. UNDISPUTEDLY, THE ASSESSEE HAS NOT ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 50 RECEIVED ANY CONSIDERATION FOR THE TRANSFER OF THE LICENCE AND WHAT HAS BEEN ADDED AT THE HANDS OF THE ASSESSEE IN THIS REGARD IS ONLY A NOTIONAL INCOME. THE LOWER AUTHORITIES HA VE NOTED THAT SINCE THE LICENCE TRANSFERRED WOULD BE PROVIDING EN DURING BENEFIT TO THE TRANSFEREE, ADDITION WAS IN ORDER. THE MERCH ANT BANKING LICENSE ENTITLES THE HOLDERS TO CARRY ON THE MERCHA NT BANKING BUSINESS AND, THUS, FROM THAT ANGLE IT CAN BE CONSI DERED AS CAPITAL ASSET. SECTION 48 OF THE ACT PROVIDES THE M ETHODOLOGY OF CALCULATION OF GAINS RELATING TO CAPITAL ASSET. SEC TION 48 PROVIDES THAT CAPITAL GAINS SHALL BE COMPUTED BY DEDUCTING F ROM THE FULL VALUE OF CONSIDERATION RECEIVED OR ACCRUING AS A RE SULT OF TRANSFER OF CAPITAL ASSET, THE EXPENDITURE INCURRED WHOLLY A ND EXCLUSIVELY IN CONNECTION WITH SUCH TRANSFER AND THE COST OF AC QUISITION OF THE ASSET AND THE COST OF ANY IMPROVEMENT THERETO . THEREFORE, IT FOLLOWS THAT IN THE CASE OF TRANSFER OF CAPITAL ASS ET AND FOR DETERMINING THE GAIN OR LOSSES ARISING THERETO, WHA T IS FUNDAMENTAL IS THE FULL VALUE OF CONSIDERATION RECE IVED FOR TRANSFER OF THE CAPITAL ASSET. IN THE PRESENT CASE THERE IS ABSENCE OF ANY SUCH CONSIDERATION AND WHAT HAS BEEN ADDED I S ONLY A NOTIONAL AMOUNT OF CONSIDERATION WHICH HAS NEITHER BEEN EARNED NOR RECEIVED AND NOR IS RECEIVABLE BY THE ASSESSEE. THE HONBLE ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 51 APEX COURT IN THE CASE OF CIT VS. BALBIR SINGH MAIN I REPORTED IN 398 ITR 531 (SC) EXAMINED THE MEANING OF WORD ACCR UE IN RELATION TO SECTION 48 OF THE ACT AND HELD THAT THE WORD ACCRUE WOULD ONLY REFER TO REAL INCOME AND NO NOTIONAL AMO UNT COULD BE BROUGHT TO TAX IN THE HANDS OF THE TRANSFER U/S 45 READ WITH SECTION 48 OF THE ACT. THE RELEVANT OBSERVATIONS OF THE HONBLE APEX COURT ARE AS UNDER: '14. FIRST OF ALL, IT IS NOW WELL SETTLED THAT INCO ME TAX CANNOT BE LEVIED ON HYPOTHETICAL INCOME. IN CIT V. SHOORJI VALLABHDAS AND CO. [CIT V. SHOORJI VALLABHDAS AND CO., (1962) 46 ITR 144 (SC)} IT WAS HELD AS FOLLOWS: (ITR P. 148) ' .. . INCOME TAX IS A LEVY ON INCOME. NO DOUBT, THE INCOME TAX ACT T AKES INTO ACCOUNT TWO POINTS OF TIME AT WHICH THE LIABILITY T O TAX IS ATTRACTED, VIZ., THE ACCRUAL OF THE INCOME OR ITS R ECEIPT; BUT THE SUBSTANCE OF THE MATTER IS THE INCOME. IF INCOME DO ES NOT RESULT AT ALL, THERE CANNOT BE A TAX, EVEN THOUGH I N BOOKKEEPING, AN ENTRY IS MADE ABOUT A 'HYPOTHETICAL INCOME', WHICH DOES NOT MATERIALISE. WHERE INCOME HAS, IN FA CT, BEEN RECEIVED AND IS SUBSEQUENTLY GIVEN UP IN SUCH CIRCU MSTANCES THAT IT REMAINS THE INCOME OF THE RECIPIENT, EVEN T HOUGH GIVEN UP, THE TAX MAY BE PAYABLE. WHERE, HOWEVER, THE INC OME 35 CAN BE SAID NOT TO HAVE RESULTED AT ALL, THERE IS O BVIOUSLY NEITHER ACCRUAL NOR RECEIPT OF INCOME, EVEN THOUGH AN ENTRY TO THAT EFFECT MIGHT, IN CERTAIN CIRCUMSTANCES, HAVE B EEN MADE IN THE BOOKS OF ACCOUNT. ' ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 52 15. THE ABOVE PASSAGE WAS CITED WITH APPROVAL IN MO RVI INDUSTRIES LTD. V. CIT [MORVI INDUSTRIES LTD. V. CI T, (1972) 4 SCC 451 : 1974 SCC (TAX) 140: (1971) 82 ITR 835) IN WHICH THIS COURT ALSO CONSIDERED THE DICTIONARY MEANING O F THE WORD 'ACCRUE' AND HELD THAT INCOME CAN BE SAID TO ACCRUE WHEN IT BECOMES DUE. IT WAS THEN OBSERVED THAT: (SCC P. 454 , PARA 11) '11.... THE DATE OF PAYMENT ... DOES NOT AFFECT THE ACCRUAL OF INCOME. THE MOMENT THE INCOME ACCRUES, THE ASSES SEE GETS VESTED WITH THE RIGHT TO CLAIM THAT AMOUNT EVEN THO UGH IT MAY NOT BE IMMEDIATELY. ' 16. THIS COURT FURTHER HELD, AND IN OUR OPINION MOR E IMPORTANTLY, THAT INCOME ACCRUES WHEN THERE 'ARISES A CORRESPONDING LIABILITY OF THE OTHER PARTY FROM WHO M THE INCOME BECOMES DUE TO PAY THAT AMOUNT'. 17. IT FOLLOWS FROM THESE DECISIONS THAT INCOME ACC RUES WHEN IT BECOMES DUE BUT IT MUST ALSO BE ACCOMPANIED BY A CORRESPONDING LIABILITY OF THE OTHER PARTY TO PAY T HE AMOUNT. ONLY THEN CAN IT BE SAID THAT FOR THE PURPOSES OF T AXABILITY THAT THE INCOME IS NOT HYPOTHETICAL AND IT HAS REAL LY ACCRUED TO THE ASSESSEE. 18. INSOFAR AS THE PRESENT CASE IS CONCERNED, EVEN IF IT IS ASSUMED THAT THE ASSESSEE WAS ENTITLE D TO THE BENEFITS UNDER THE ADVANCE LICENCES AS WELL AS UNDE R THE DUTY ENTITLEMENT PASSBOOK, THERE WAS NO CORRESPONDI NG LIABILITY ON THE CUSTOMS AUTHORITIES TO PASS ON THE BENEFIT OF DUTY-FREE IMPORTS TO THE ASSESSEE UNTIL THE GOODS A RE ACTUALLY IMPORTED AND MADE AVAILABLE FOR CLEARANCE. THE BENE FITS REPRESENT, AT BEST, A HYPOTHETICAL INCOME WHICH MAY OR MAY ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 53 NOT MATERIALISE AND ITS MONEY VALUE IS, THEREFORE, NOT THE INCOME OF THE ASSESSEE.' 5.6 GUIDED BY THE RATIO LAID DOWN BY THE HONBLE A PEX COURT, WE ARE UNABLE TO AGREE WITH THE CONTENTION O F THE REVENUE THAT THE IMPUGNED AMOUNT WOULD BE SAID TO HAVE ACCR UED TO THE ASSESSEE COMPANY. SIMILARLY, THE MUMBAI BENCH OF TH E ITAT IN THE CASE OF ADITYA BIRLA TELECOM LIMITED VS. DCIT I N ITA 341/MUM/2014, VIDE ORDER DATED 19.10.2016, HAS REIT ERATED THIS PROPOSITION IN CONTEXT OF TRANSFER OF CAPITAL ASSET S AND HELD THAT WHAT CAN BE TAXED IN THE HANDS OF THE TRANSFEROR IS REAL OR ACTUAL GAIN THAT ACCRUES OR ARISES FROM A TRANSFER OF AN A SSET AND IN ABSENCE OF ANY SALE CONSIDERATION, NO NOTIONAL GAIN CAN BE IMPUTED IN THE HANDS OF THE TRANSFEROR. THE TRIBUNA L FURTHER HELD THAT THERE CAN BE NO NOTIONAL TRANSACTION WITH REFE RENCE TO FAIR MARKET VALUE IN ABSENCE OF ANY SPECIFIC ENABLING PR OVISION IN THE ACT AND THE FULL VALUE OF CONSIDERATION HAS TO BE T AKEN BASED ON THE PRICE THAT HAS BEEN CONTRACTED BETWEEN THE PART IES AND FURTHER THAT THERE WAS NO SCOPE FOR IMPUTING CONSID ERATION ON A NOTIONAL BASIS. THEREFORE, IN VIEW OF THE ABOVE MEN TIONED JUDICIAL PRECEDENTS, IT IS OUR CONSIDERED OPINION THAT CONSI DERATION CANNOT BE IMPUTED ON A NOTIONAL BASIS FOR THE TRANS FER OF THE ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 54 MERCHANT BANKING LICENCE AS THE SAME HAS NEITHER BE EN RECEIVED, REALISED AND NOR IS CAPABLE OF BEING RECEIVED OR RE ALISED. ACCORDINGLY, WE SET ASIDE THE ORDER OF THE LD. CIT (A) ON THE ISSUE AND DIRECT THE AO TO DELETE THE ADDITION. THUS GROU ND NOS. 5, 5.1 STAND ALLOWED. 5.7 GROUND NOS. 6, 6.1 AND 6.2 CHALLENGE THE UPHOL DING OF DISALLOWANCE OF PROVISION MADE FOR EXPENSES TO THE TUNE OF RS. 79,99,216/- IN RESPECT OF LEGAL AND PROFESSIONAL CH ARGES, RECRUITMENT CHARGES EXPENSES AND SOFTWARE LICENSE E XPENSES. THE LOWER AUTHORITIES HAVE DISALLOWED THESE PROVISIONS ON THE GROUND THAT THE LIABILITY FOR PAYMENT OF EXPENSES HAS NOT CRYSTALLISED DURING THE YEAR. IT IS THE ASSESSEES CONTENTION TH AT THE ASSESSEE HAD RECEIVED SERVICES FOR WHICH THESE INVOICES WERE RAISED IN THE YEAR UNDER CONSIDERATION AND SINCE IT WAS ONLY AFTE R THE END OF THE FINANCIAL YEAR THAT THE INVOICES WERE RECEIVED THAT PROVISION HAD TO BE MADE IN THE BOOKS OF ACCOUNTS. THE LD. AR HAS DRAWN OUR ATTENTION TO THE COPIES OF THE VARIOUS INVOICES IN THIS REGARD WHICH ARE PLACED AT PAPER BOOK PAGES 524 TO 540. AD MITTEDLY, THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTI NG IN WHICH THE INCOME OF EXPENDITURE HAS TO BE ACCOUNTED FOR O N ACCRUAL BASIS. THERE IS NO DISPUTE ABOUT THE METHOD OF ACCO UNTING BEING ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 55 FOLLOWED. THE ONLY DOUBT, AS BEEN RAISED BY THE LOW ER AUTHORITIES, IS WHETHER THE LIABILITY FOR PAYMENT OF THESE EXPEN SES HAD CRYSTALLISED DURING THE YEAR UNDER CONSIDERATION. A PERUSAL OF THE INVOICES FILED BY THE ASSESSEE IN THIS REGARD ALSO DOES NOT THROW ANY LIGHT ON THE ISSUE. TO THIS EXTENT, WE ARE IN A GREEMENT WITH THE LOWER AUTHORITIES THAT THE ASSESSEE SHOULD ESTA BLISH THAT THE SERVICES WERE RENDERED AND UTILISED FOR THE YEAR UN DER CONSIDERATION. THEREFORE, WE DEEM IT FIT TO RESTORE THIS ISSUE TO THE FILE OF THE AO TO VERIFY AS TO WHETHER THE SERVICES FOR WHICH THESE INVOICES HAVE BEEN RAISED AND FOR WHICH THE ASSESSE E HAD MADE PROVISION HAVE BEEN RECEIVED AND UTILISED DURING TH E YEAR UNDER CONSIDERATION. IF IT IS SO FOUND, THEN THE AO SHALL ALLOW THE IMPUGNED PROVISION AS DEDUCTION IN THIS YEAR ONLY. THUS, GROUND NOS. 6, 6.1, 6.2 STAND ALLOWED FOR STATISTICAL PURP OSES. 5.8 GROUND NO. 7 CHALLENGES THE DISALLOWANCE OF DEPRECIATION ON UPS. THE ASSESEE HAD CLAIMED DEPREC IATION ON UPS @ 60% BY TREATING THE SAME AS PART OF COMPUTER AND PERIPHERALS WHEREAS THE AO RESTRICTED THE DEPRECIAT ION TO 15% BY HOLDING THAT UPS WAS PLANT AND MACHINERY AND NOT A PART OF COMPUTER AND PERIPHERALS. THIS ISSUE IS NO LONGER RES JUDICATA AND THERE ARE A CATENA OF JUDGMENTS WHEREIN IT HAS BEEN HELD ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 56 THAT UPS IS AN ESSENTIAL PART OF COMPUTER SYSTEM AS A COMPUTER CANNOT FUNCTION IN ISOLATION WITHOUT THE BASIC ACCE SSORY. THE LEADING CASE IN THIS POINT IS THE JUDGMENT OF THE H ONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. BSES YAMUNA POWER LTD. IN ITA 1267/2010 AND THE SLP FILED BY THE REVENUE AGAINST THIS JUDGMENT OF THE HONBLE DELHI HIGH COURT HAS ALSO B EEN DISMISSED BY THE HONBLE APEX COURT IN SLP (C) NO. 20645/2012. THEREFORE, RESPECTFULLY FOLLOWING THE SAME WE DIREC T THE AO TO ALLOW DEPRECIATION ON UPS @ 60%. 5.9 GROUND NO. 8 CHALLENGES THE ACTION OF THE LD. CIT (A) IN UPHOLDING THE DISALLOWANCE OF DEPRECIATION ON FI XED ASSETS TO THE EXTENT OF RS. 3,47,15,985/-. THIS DISALLOWANCE HAS BEEN MADE ON THE GROUND THAT THE ASSESSEE COULD NOT SUBMIT CO MPLETE BILLS FOR VERIFICATION PERTAINING TO PURCHASE OF FIXED AS SETS. IN THIS REGARD, THE LD. AR HAS SUBMITTED THAT DUE TO COMPUT ER RELATED ISSUES AND PRESSURE OF LAST DATES, COMPLETE INVOICE S COULD NOT BE FILED BUT NOW 77.45 % OF THE INVOICES/PAYMENTS WERE VERIFIABLE. THEREFORE, IT IS OUR CONSIDERED OPINION THAT IT WIL L BE IN FITNESS OF THINGS IF THIS ISSUE IS RESTORED TO THE FILE OF THE AO TO RE-EXAMINE THE ASSESSEES CLAIM AND, THEREAFTER, PASS ORDER IN ACCORDANCE WITH LAW AFTER PROVIDING DUE OPPORTUNITY TO THE ASS ESSEE. IT IS SO ITA NO. 2282/DEL/2013 M/S. RELIGARE SECURITIES LTD. VS ACIT 57 DIRECTED ACCORDINGLY. ACCORDINGLY, GROUND NO. 8 STA NDS ALLOWED FOR STATISTICAL PURPOSES. 6. IN THE FINAL RESULT, THE APPEAL OF THE ASSESSEE STANDS ALLOWED IN TERMS OF OUR DIRECTIONS CONTAINED IN THE PRECEDING PARAGRAPHS. ORDER PRONOUNCED IN THE OPEN COURT ON 13 TH DECEMBER, 2019. SD/- SD/- (N.K. BILLAIYA) (SUDHANSH U SRIVASTAVA) ACCOUNTANT MEMBER JUDICIAL MEMB ER DATED: 13/12/2019 VEENA COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI