DCIT 9(2), MUMBAI V. INDIA INFOLINE LTD, MUMBAI

ITA 5612/MUM/2014

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 9543 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 3 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-12-2018
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: 2009-2010
• Appeal Filed On: 05-09-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ABI RAMA KARTIKEYAN
• Assessee Lawyers: ALI SAGAR RAMPURWALLA
• Keywords: Transfer pricing; Business expenditure; Earning of tax free income
• Section: 143(3); 142(1); 14A

Judgement Text

1 INDIA INFOLINE LTD IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH C, MUMBAI AND SHRI G MANJUNATHA (ACCOUNTANT MEMBER) AND BEFORE SHRI RAVISH SOOD (JUDICIAL MEMBER) ITA NO 5612/MUM/2014 (ASSESSMENT YEAR 2009-10) DCIT 9(2), MUMBAI VS M/S INDIA INFOLINE LTD (NOW K NOWN AS IIFL HOLDINGS LD) IIFL CENTRE, KAMALA CITY SENAPATI BAPAT MARG LOWER PAREL (W), MUMBAI-400 013 PAN : AABCI0745G APPELLANT RESPONDEDNT ITA NO 5182/MUM/2014 (ASSESSMENT YEAR 2009-10) M/S INDIA INFORLINE LTD NOW KNOWN AS IIFL HOLDINGS LD) IIFL CENTRE, KAMALA CITY SENAPATI BAPAT MARG LOWER PAREL (W), MUMBAI-400 013 PAN : AABCI0745G VS DCIT 9(2), MUMBAI APPELLANT RESPONDEDNT REVENUE BY SHRI ABI RAMA KARTIKEYAN ASSESSEE BY SHRI ALI SAGAR RAMPURWALLA DATE OF HEARING 11-10-2018 DATE OF PRONOUNCEMENT 19-12-2018 O R D E R PER G MANJUNATHA, AM : 2 INDIA INFOLINE LTD THIS APPEAL FILED BY THE REVENUE AS WELL AS BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDER OF THE LD.CIT(A)-20, MUMBAI DATED 13-06-2014 AND THEY PERTAIN TO ASSESSMENT YEAR 2009-10. SINCE FACTS AR E IDENTICAL AND ISSUES ARE COMMON, THESE APPEALS WERE HEARD TOGETHER AND ARE D ISPOSED OF BY THIS COMMON ORDER, FOR THE SAKE OF CONVENIENCE. 2. THE ASSESSEE, IN ITS APPEAL, HAS RAISED THE FOLL OWING GROUNDS OF APPEAL:- 1. THE LEARNED CIT (A) FAILED TO APPRECIATE THAT THE ASSESSEE HAS MINIMAL ACTIVITIES RELATING TO EXEMPT INCOME. 2. THE LEARNED CIT (A) FAILED TO APPRECIATE THAT THE ASSESSEE HAS MADE INVESTMENTS OUT OF OWN FUNDS AND NOT BORROWED FUNDS AND CONSEQUENTLY INTEREST EXPENDITURE SHOULD NOT BE DIS-ALLOWED. 3. THE LEARNED CIT (A) FAILED TO APPRECIATE T HAT THE MONIES BORROWED BY THE ASSESSEE ON WHICH INTEREST WAS PAID WAS LENT ON INTEREST BY THE ASSESSEE IN THE NORMAL COURSE OF BUSINESS AS AN NBFC. 4. THE LEARNED CIT (A) FAILED TO APPRECIATE T HAT THE SAID INVESTMENT WERE MADE OUT OF PROPRIETARY FUNDS AND NOT OUT OF BORROW ED FUNDS. 5. THE LEARNED CIT (A) FAILED TO APPRECIATE THAT THE ASSESSEE HAS MADE INVESTMENTS IN THE SUBSIDIARY COMPANIES TO RETAIN M ANAGEMENT CONTROL OF THE SAID SUBSIDIARIES AND NOT TO EARN INCOME. THE LEARN ED CIT (A) FAILED TO APPRECIATE THAT THE SAID INVESTMENT WERE MADE OUT O F PROPRIETARY FUNDS AND NOT OUT OF BORROWED FUNDS. 6. THE LEARNED CIT (A) FAILED TO APPRECIATE T HAT THE EXPENSES OF THE SUBSIDIARY COMPANIES ARE BEING BORNE BY THE SUBSIDI ARY COMPANIES THEMSELVES AND NO SUBSTANTIAL EXPENDITURE IS REQUIR ED TO BE INCURRED BY THE ASSESSEE FOR MAKING AND MAINTAINING THESE INVESTMEN TS. 7. THE LEARNED CIT (A) FAILED TO APPRECIATE T HAT THAT THE DIS-ALLOWANCE ON AD HOC BASIS OF 0.5 % OF AVERAGE INVESTMENTS IS UNC ALLED FOR AND UNREASONABLE. 8. THE LEARNED CIT (A) FAILED TO APPRECIATE T HAT THE ASSESSEE HAS INVESTED SHORT TERM SURPLUS FUNDS IN LIQUID SCHEMES OF MUTUAL FUNDS. SINCE THE INVESTMENTS IN MUTUAL FUNDS WERE MADE ON SHORT TERM BASIS IN LIQUID MUTUAL FUNDS, NO EXPENSE HAS BEEN INCURRED FOR MAKI NG SUCH INVESTMENTS. 9. THE LEARNED CIT (A) FAILED TO APPRECIATE T HAT DEFERRED COMPENSATION EXPENSES OF RS.6,51,31,1657- ON ACCOUNT OF ESOP WER E INCURRED IN THE NORMAL COURSE OF ACTIVITIES OF THE ASSESSEE AND ARE ALLOWABLE EXPENSES. 3 INDIA INFOLINE LTD 3. THE ASSESSEE ALSO FILED A PETITION FOR ADMISSION OF ADDITIONAL GROUND RAISING GROUND NO.5, VIDE ITS LETTER DATED 08-10-20 18. THE ADDITIONAL GROUND OF APPEAL TAKEN BY THE ASSESSEE READS AS FOLLOWS:- GROUND NO. 5 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN CONFIRMING THE PART D ISALLOWANCE U/S 14A R.W. RULE 8D MADE BY THE LEARNED ASSESSING OFFICER, WITHOUT EXCLUDING INVESTMENTS WHICH DID NOT YIELD EXEMPT INCOME DURING THE YEAR, WHILE COMPUTING AVERAGE INV ESTMENTS FOR THE PURPOSES OF WORKING OUT DISALLOWANCE U/S 14A R.W. RULE 8D. 4. THE REVENUE, IN ITS APPEAL HAS RAISED THE FOLLOW ING GROUND OF APPEAL:- 'WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW, LEARNED CIT(A) IS CORRECT IN EXCLUDING RS.461,37,00 ,0007- BEING INVESTMENT MADE BY THE ASSESSES IN THE SHARES OF IT S SUBSIDIARY M/S INDIA INFOLINE INVESTMENT SERVICES LTD. WHILE WORKING OUT THE AVERAGE VALUE OF INVESTMENT FOR THE PURPOSE OF COMPUTATION OF DISALL OWANCE U/S 14A R.W.R.SD?' 5. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E COMPANY IS ENGAGED IN THE BUSINESS OF FINANCIAL SERVICES, INTERNET AND IT SERVICES, FILED ITS RETURN OF INCOME FOR AY 2009-10 ON 29-09-2009 DECLARING TOTAL INCOME OF RS.141,01,05,910. THE CASE WAS SELECTED FOR SCRUTI NY AND NOTICES U/S 143(2) AND 142(1) OF THE ACT WERE ISSUED. IN RESPONSE TO NOTICES, THE AUTHORISED REPRESENTATIVE OF THE ASSESSEE APPEARED FROM TIME T O TIME AND FILED VARIOUS DETAILS, AS CALLED FOR. THE ASSESSMENT WAS COMPLET ED U/S 143(3) R.W.S. 144C(3) OF THE INCOME-TAX ACT, 1961 ON 30-03-2013 DETERMINI NG THE TOTAL INCOME AT RS.155,67,08,283 INTERALIA BY MAKING ADDITION TOWAR DS TRANSFER PRICING ADJUSTMENTS U/S 92CA(3) OF THE ACT FOR R.33,08,315, DISALLOWANCE OF EXPENSES 4 INDIA INFOLINE LTD INCURRED IN RELATION TO EXEMPT INCOME U/S 14A FOR R S.7,81,62,892 AND ADDITION TOWARDS ESOP ON ACCOUNT OF EMPLOYEE COST FOR RS.6,5 1,31,165. AGGRIEVED BY THE ASSESSMENT ORDER, ASSESSEE PREFERRED APPEAL BEF ORE THE CIT(A). 6. BEFORE THE CIT(A), THE ASSESSEE HAS CHALLENGED A DDITION MADE BY THE AO TOWARDS DISALLOWANCE OF EXPENSES INCURRED IN RELATI ON TO EXEMPT INCOME U/S 14A OF THE ACT. THE ASSESSEE ALSO CHALLENGED ADDIT ION MADE BY THE AO TOWARDS DEFERRED COMPENSATION EXPENSES ON ACCOUNT OF ESOP. THE ASSESSEE HAS FILED ELABORATE WRITTEN SUBMISSIONS ON THE ISSUE OF DISAL LOWANCE OF EXPENDITURE U/S 14A WHICH HAS BEEN REPRODUCED AT PARA 3.2 ON PAGES 4 TO 9 OF THE ORDER OF LD.CIT(A). THE SUM AND SUBSTANCE OF THE ARGUMENTS OF THE ASSESSEE BEFORE THE LD.CIT(A) ARE THAT IT HAD MINIMAL ACTIVITIES RELATI NG TO EXEMPT INCOME AND ITS INVESTMENTS MADE IN SHARES AND SECURITIES ARE OUT O F ITS OWN FUNDS AND NO EXPENSE HAS BEEN INCURRED FOR MAKING ANY INVESTMENT S. THE ASSESSEE FURTHER SUBMITTED THAT IT HAS MADE INVESTMENTS IN SUBSIDIAR Y COMPANIES IN ORDER TO HOLD CONTROL AND MANAGEMENT ON THE SAID COMPANIES, BUT NOT FOR EARNING ANY EXEMPT INCOME. THE ASSESSEE HAS NOT EARNED ANY DIV IDEND INCOME FROM INVESTMENT FROM SUBSIDIARY COMPANIES. THE ASSESSEE ALSO SUBMITTED THAT IT HAS FILED NECESSARY DETAILS BEFORE THE AO TO PROVE THAT IT HAS SUFFICIENT OWN FUNDS IN FORM OF SHARE CAPITAL AND RESERVES WHICH I S MORE THAN THE AMOUNT OF INVESTMENT IN SHARES AND SECURITIES, THEREFORE, THE QUESTION OF INTEREST 5 INDIA INFOLINE LTD DISALLOWANCE DOES NOT ARISE. AS REGARDS DISALLOWAN CE OF DEFERRED EMPLOYEE COMPENSATION EXPENSES IN RESPECT OF ESOP, THE ASSES SEE HAS FILED ELABORATE WRITTEN SUBMISSIONS, WHICH HAS BEEN REPRODUCED AT P ARA 4.2 ON PAGES 11 & 12 OF ORDER OF LD.CIT(A). 7. THE LD.CIT(A), AFTER CONSIDERING RELEVANT SUBMIS SIONS OF THE ASSESSEE HELD THAT THE ARGUMENTS OF THE ASSESSEE THAT IT DOE S NOT INCUR ANY EXPENDITURE IN RELATION TO EXEMPT INCOME IS DEVOID OF MERITS AS FROM THE DETAILS FURNISHED BY THE ASSESSEE, IT IS VERY CLEAR THAT THE ASSESSEE HAS INCURRED HUGE EXPENDITURE UNDER THE HEAD SALARIES & WAGES, ADMI NISTRATIVE EXPENSES AND INTEREST EXPENDITURE. THE LD.CIT(A) FURTHER OBSERV ED THAT INVESTMENT MADE BY THE ASSESSEE IN INDIA INFOLINE EQUITY TRUST IS NOT INVESTMENT IN A COMPANY BUT INVESTMENT IN UNITS OF A TRUST. THE INCOME FROM SA ID INVESTMENT IS TAXABLE IN NATURE AND NOT OF EXEMPT IN NATURE. THE LD.CIT(A) FURTHER OBSERVED THAT OUT OF TOTAL INVESTMENTS, A SUM OF RS.4,61,37,00,000 INVES TED IN INDIA INFOLINE SERVICES LTD IS OUT OF PROCEEDS OF SHARE ISSUE. TH EREFORE, THE SAID INVESTMENT CANNOT BE CONSIDERED FOR THE PURPOSE OF DISALLOWANC E OF INTEREST EXPENDITURE. WITH THESE OBSERVATIONS, HE RE-WORKED DISALLOWANCE CONTEMPLATED U/S 14A BY INVOKING RULE 8D AND DETERMINED TOTAL DISALLOWANCE OF RS.3,41,39,991. THE RELEVANT OBSERVATIONS OF THE LD.CIT(A) ARE EXTRACTE D BELOW:- 3.3 I HAVE CONSIDERED THE FINDING OF THE ASSESSING OFFICE R AND RIVAL SUBMISSION OF THE APPELLANT, CAREFULLY. 1 FIND THAT CONTENTION OF APPELLANT IS 6 INDIA INFOLINE LTD NOT FULLY TENABLE NOR IS DISALLOWANCE MADE BY ASSES SING OFFICER FULLY CORRECT. SO FAR AS APPLICABILITY OF RULE 8D WITH RE FERENCE TO SECTION 14A IS CONCERNED, SAME IS RIGHTLY APPLIED BUT AS REGARDS C ALCULATION OF AVERAGE OF TOTAL INVESTMENTS ASSETS OF RS 8,36.95.54,090/-. IT IS FOUND THAT WORKING OF THE ASSESSING OFFICER IS NOT CORRECT AND TO THAT EX TENT THE ARGUMENTS OF THE LD. A.R. IS FOUND CONVINCING ONE. IT IS ALSO RELEVA NT TO MENTION THAT OUT OF TOTAL INVESTMENT OF RS.8,69,31,23,758/- AS ON 31 MA RCH 2009 AS APPEARING IN SCHEDULE 'G INVESTMENT IN NON 1150 DIVIDEND FOR EIGN SUBSIDIARY IS OF RS.69,93,00,9837-. FURTHER INVESTMENT IN UNITS OF I NDIA INFOLINE PRIVATE EQUITY TRUST IS RS.10,02,00,000/-. SIMILARLY, AS ON 31 MARCH 2008, OUT OF TOTAL INVEST MENT OF RS.915,68,01,3787- AS APPEARING IN SCHEDULE 'G 1 , INVESTMENT IN NON 115O DIVIDEND FOREIGN SUBSIDIARY IS OF RS.21,15,15,9747- AND INVESTMENT I N UNITS OF INDIA INFOLINE PRIVATE EQUITY TRUST IS RS.10,02,00,0007-. FURTHER INVESTMENT IN SERIES A NCD ORDYN TECHNOLOGY PVT. LTD, SERIES B OCD ORDYN T ECHNOLOGY PVT LTD. IS OF RS.20,00,00,000/-. THE INVESTMENT MADE BY THE APPELLANT IN INDIA INFOL INE PRIVATE EQUITY TRUST IS NOT INVESTMENT IN A COMPANY BUT INVESTMENT IN UNITS OF A TRUST. THE INCOME FROM THE SAID INVESTMENT IN TAXABLE IN NATURE AND NOT OF EXEMPT NATURE LIKE DIVIDEND U/S 1150. SINCE INCOME FROM SUCH INVESTMEN T IS OF TAXABLE NATURE, SUCH INVESTMENT CANNOT BE CONSIDERED AS INVESTMENT YIELDING OR LIKELY TO YIELD EXEMPT INCOME FALLING WITHIN THE PURVIEW OF THE COM PUTATION METHODOLOGY OF RULE 8D. SIMILARLY, ON SUCH INVESTMENT IN DEBENTURES, THERE IS A INTEREST INCOME OFFERED DURING THE YEAR, .HENCE, IS NOT INVESTMENT RELATING TO EXEMPT INCOME. THE FURTHER ARGUMENT THAT THERE IS NO EXPENSES HAVI NG NEXUS WITH DIVIDEND INCOME OF RS.15,16,67,0397- IS NOT FOUND CORRECT BE CAUSE THERE IS EMPLOYEES COST OF RS.143,42,18,6017-, ADMINISTRATION AND OTHE R EXPENSES OF RS.95,46,76,174/-, INTEREST EXPENDITURE IS ALSO THE RE OF RS.7,84 R 56,609/-. THUS, IT IS WRONG TO CLAIM THAT THERE IS NO DIRECT OR IND IRECT EXPENDITURE RELATING TO EXEMPT INCOME. ON THE CONTRARY, THERE IS EXPENDITUR E DIRECTLY OR INDIRECTLY RELATED TO SUCH EXEMPT INCOME. HENCE, RULE 8D IS AP PLICABLE TO THE FACTS OF THE CASE. THEREFORE, IN THE BACKGROUND OF THE CASE, RULE 8D I S APPLICABLE. AFTER ANALYZING THE FULL FACTS AND PATTERN OF INVESTMENT, THE FOLLOWING CALCULATION IS FOUND TO BE AS PER RULE 8D. I INVESTMENT AS ON 1 APRIL 2008 9,156,801,378 LESS : INVESTMENT IN DEBENTURES AND UNITS OF TRUST YIELDING TAXABLE INCOME 300,200,000 LESS : INVESTMENT IN SHARES OF FOREIGN COMPANIES LIKELY TO YIELD TAXABLE DIVIDEND 211,515,974 LESS : INVESTMENT MADE IN INDI INFOLINE INVESTMENT SERVICES LIMITED ON 4 FEBRUARY 2008 OUT OF PROCEEDS OF SHARE ISSUE IN JANUARY 2008 4,613,700,000 (A) 7 INDIA INFOLINE LTD ELIGIBLE INVESTMENT AS ON 1 APRIL 2008 18,517,933,554 (B) INVESTMENT AS ON 31 MARCH 2009 8,693,123,758 LESS: INVESTMENT MADE IN INDIA INFOLINE SERVICES LIMITED ON 4 FEBRUARY 2008 OUT OF PROCEEDS OF SHARE ISSUE IN JANUARY 2008 4,613,700,000 LESS : INVESTMENT IN UNITS OF TRUST YIELDING TAXABLE INCOME 100,200,000 LESS : INVESTMENT IN SHARES OF FOREIGN COMPANIES LIKELY TO YIELD TAXABLE DIVIDEND 699,300,983 ELIGIBLE INVESTMENT AS ON 31 MARCH 2009 3,279,922,775 (C) TOTAL ASSETS AS ON 31 MARCH 2009 17,513,038,103 (D) AVERAGE INVESTMENT OUT OF BORROWED FUNDS FOR F.Y. 2008-09 3,655,654,090 (A+C)/2 = (E) AVERAGE TOTAL ASSETS FOR F.Y. 2008 - 2009 18,015,485,828 (B+D)/2= (F) INTEREST PAID DURING F.Y. 21008 - 2009 78,168,390 (G) DISALLOWANCE U/R8D(2)(II) 15,861,720 (G*E/F) II AVERAGE INVESTMENT OUT OF BORROWED FUNDS FOR F.Y. 2008-2009 3,655,654,090 (E) 0.5% OF AVERAGE INVESTMENT OUT OF BORROWED FUNDS FOR F.Y. 2008-2009 18,278,270 DISALLOWANCE U/R 8D(2)(III) 18,278,270 TOTAL DISALLOWANCE U/R 8D 34,139,991 (I+II) ACCORDINGLY, UNDER RULE 8D DISALLOWABLE EXPENDITURE COMES TO RS.3,41,39,991/. THUS, ASSESSING OFFICER IS HEREBY DIRECTED TO RESTRICT THE DISALLOWANCE TO THIS EXTENT AGAINST TOTAL DISALLOWA NCE OF RS.7,81,62,892/-. 8. INSOFAR AS ADDITION MADE TOWARDS DEFERRED EMPLOY EE COST RELATING TO ESOP, LD.CIT(A), BY FOLLOWING THE DECISION OF DELHI TRIBUNAL IN THE CASE OF RANBAXY LABORATORIES LTD VS ACIT 124 TTJ 771 (DEL) HELD THAT EMPLOYEE COST RELATING TO ESOP IS NOT AN ALLOWABLE EXPENDITURE. THE RELEVANT OBSERVATIONS OF THE LD.CIT(A) ARE EXTRACTED BELOW:- 8 INDIA INFOLINE LTD 4.9 I HAVE CONSIDERED THE FINDING OF THE ASSESSING OFFICER AND RIVAL SUBMISSION OF THE APPELLANT, CAREFULLY. ESOP IS NOT AT ALL BUSINESS EXPENDITURE. IT IS VERY OBVIOUS FACT THAT APPELLANT HAS NOT INCU RRED ANY EXPENDITURE BUT HAS MERELY RECEIVED LESSER AMOUNT OF SHARE PREMIUM. THE TWO DECISIONS OVER SUCH ISSUE REFERRED TO BY THE LD. ASSESSING OFFICER THAT IS THE CASE OF RANBAXY LABORATORIES LTD. VS. ACIT 124 TTJ 771 (DELHI TRIBU NAL) AND M/S. VIP INDUSTRIES LTD. TIOL 654, SUPPORT THE FINDING OF AS SESSING OFFICER THAT SUCH ESOP IS NOT AN ALLOWABLE EXPENDITURE. IN FACT ESOP GIVE EMPLOYEES THE RIGHT TO PURCHASE PERIOD. SUCH PURCHASE PRICE IS KNOWN AS STRIKE PRICE EMPLOYEES GET RIGHT TO APPLY FOR AND APPELLANT ISSUED SHARES OF THE COMPANY UNDER THE AUCTION GRANTED TO THEM. THE HON'BLE TRIBUNAL HAVE HELD THAT ISSUE OF SUCH SHARES AT BELOW MARKET PRICE DOES NOT RESULT INTO I NCURRING ANY EXPENDITURE RATHER IT RESULT INTO SHORT RECEIPT OF SHARE PREMIU M WHICH SUCH APPELLANTS ARE OTHERWISE ENTITLED TO. OBVIOUSLY, RECEIPT OF SHARE PREMIUM IS NOT TAXABLE HENCE ANY SHORT RECEIPT OF SUCH PREMIUM WILL NOT BE A NOT IONAL LOSS OR ACTUAL LOSS. THEREFORE, I FIND FORCE IN THE ARGUMENTS OF THE LD. ASSESSING OFFICER. SINCE THIS ISSUE IS COVERED BY THE DECISION OF HON'BLE JU RISDICTIONAL ITAT AND IS ALSO APPROVED BY THE HON'BLE BOMBAY HIGH COURT, THE FIND ING OF THE ASSESSING OFFICER IS SUSTAINED AND ALL THE ARGUMENTS ADVANCED BY THE LD. A.R. ARE DISAPPROVED AS THEY ARE NOT TENABLE. THUS, DISALLOW ANCE OF CLAIM OF EMPLOYEES COST RELATING TO ESOP OF RS.6,51,31,1657-IS SUSTAIN ED. 9. AGGRIEVED BY THE ORDER OF LD.CIT(A), THE REVENUE AS WELL AS THE ASSESSEE ARE IN APPEAL BEFORE US. 10. THE FIRST ISSUE THAT CAME UP FOR OUR CONSIDERAT ION FROM REVENUE AS WELL AS ASSESSEES APPEAL IS WITH REGARD TO COMPUTATION OF DISALLOWANCE CONTEMPLATED U/S 14A R.W.R. 8D(2) OF I.T. RULES, 19 62. THE FACTUAL MATRIX OF THE IMPUGNED DISPUTE ARE THAT DURING THE COURSE OF ASSE SSMENT PROCEEDINGS, THE AO NOTICED THAT THE ASSESSEE HAS EARNED DIVIDEND IN COME OF RS.15,16,67,039 AND CLAIMED EXEMPTION U/S 10(34) OF THE ACT. THE A O FURTHER OBSERVED THAT THE ASSESSEE HAS TOTAL INVESTMENT OF RS.799,38,22,7 75, BUT HAS NOT ATTRIBUTED ANY EXPENSES TO CARRY OUT ACTIVITIES OF MAKING EXEM PT INCOME BEARING 9 INDIA INFOLINE LTD INVESTMENTS, THEREFORE CALLED UPON THE ASSESSEE TO EXPLAIN AS TO WHY DISALLOWANCE OF EXPENSES SHALL NOT BE WORKED OUT AS PER RULE 8D OF I.T. RULES, 1962. IN RESPONSE, THE ASSESSEE, VIDE LETTER DATED 24-11-2012 SUBMITTED THAT IT HAS A MINIMAL ACTIVITIES IN RELATION TO EXEMPT I NCOME AND ALSO ITS INVESTMENTS ARE OUT OF ITS OWN FUNDS AND NO PART OF INTEREST BEARING FUNDS HAS BEEN USED. THEREFORE, INTEREST PAID ON LOANS CANNO T BE A SUBJECT MATTER OF DISALLOWANCE CONTEMPLATED U/S 14A OF THE I.T. ACT, 1961. THE ASSESSEE FURTHER SUBMITTED THAT IT HAS MADE VARIOUS INVESTMENTS IN T AX BEARING INVESTMENTS, THE INCOME FROM WHICH IS TAXABLE AND ALSO IT HAS INVEST MENTS IN FOREIGN SUBSIDIARY COMPANIES. THE ASSESSEE ALSO CLAIMED THAT IT HAS M ADE INVESTMENTS IN SUBSIDIARY COMPANIES FOR THE PURPOSE OF STRATEGIC I NVESTMENTS AND MANAGEMENT CONTROL AND SAID INVESTMENTS ARE MADE OU T OF ITS OWN FUNDS. THEREFORE, THESE INVESTMENTS NEED TO BE EXCLUDED FO R THE PURPOSE OF EVEN DISALLOWING EXPENSES SPECIFIED U/R8D(2)(III) OF I.T . RULES, 1962. THE AO REJECTED THE CONTENTIONS OF THE ASSESSEE AND HELD THAT THE A SSESSEE COMPANY CANNOT EARN INCOME FROM INVESTMENTS WITHOUT SYSTEMATIC MAN AGEMENT. THE INVESTMENT DECISIONS ARE VERY COMPLEX IN NATURE WHI CH REQUIRE SUBSTANTIAL MARKET RESEARCH AND DAY TODAY ANALYSIS OF THE MARKE T TREND AND THE DISCUSSIONS AT THE MOST APPROPRIATE TIME. THE ASSE SSEE IS HAVING HUGE INVESTMENTS IN VARIOUS SHARES AND SECURITIES AND AL SO EARNED SUBSTANTIAL 10 INDIA INFOLINE LTD AMOUNT OF DIVIDEND, THEREFORE, THE CONTENTION OF TH E ASSESSEE THAT IT HAS NOT INCURRED ANY EXPENDITURE IN RELATION TO EXEMPT INCO ME CANNOT BE ACCEPTED. THEREFORE, HE INVOKED THE PROVISIONS OF RULE 8D(2)( II) & 8D(2)(III) AND DETERMINED INTEREST DISALLOWANCE OF RS.3,63,15,122 AND EXPENSES OF RS.4,18,47,770. 11. THE LD.AR FOR THE ASSESSEE SUBMITTED THAT THE L D.CIT(A) ALTHOUGH ACCEPTED THE FACT THAT INVESTMENT MADE IN INDIA INF OLINE INVESTMENT SERVICES LTD IS OUT OF ITS OWN FUNDS, FAILED TO EXCLUDE OTHE R INVESTMENTS INCLUDING INVESTMENTS MADE OUT OF OWN FUNDS TO DETERMINE DISA LLOWANCE OF INTEREST EXPENDITURE ON WRONG PREMISES THAT THE ASSESSEE HAS USED INTEREST BEARING FUNDS FOR THE PURPOSE OF MAKING INVESTMENTS IN SHAR ES AND SECURITIES. THE LD.AR FURTHER SUBMITTED THT IT HAS FILED COMPLETE D ETAILS BEFORE THE AO IN ORDER TO PROVE THAT ITS INVESTMENTS ARE MOSTLY IN SUBSIDI ARY COMPANIES FOR THE PURPOSE OF STRATEGIC INVESTMENTS AND ALSO TO HOLD M ANAGEMENT CONTROL BUT NOT TO EARN ANY DIVIDEND INCOME. THE ASSESSEE ALSO FIL ED VARIOUS DETAILS TO PROVE THAT ITS INVESTMENTS ARE OUT OF ITS OWN FUNDS WHICH IS EVIDENT FROM THE FINANCIAL STATEMENTS FILED BEFORE THE AO AS PER WHICH, ITS OW N FUNDS IN THE FORM OF SHARE CAPITAL AND RESERVES ARE MORE THAN THE AMOUNT OF IN VESTMENTS MADE IN SHARES AND SECURITIES. THEREFORE, THE QUESTION OF DISALLO WANCE OF INTEREST EXPENDITURE DOES NOT ARISE. THE LD.AR FURTHER REFERRING TO THE ADDITIONAL GROUND OF APPEAL 11 INDIA INFOLINE LTD TAKEN, SUBMITTED THAT FOR THE PURPOSE OF DETERMININ G AVERAGE VALUE OF INVESTMENTS, THE AO NEEDS TO EXCLUDE INVESTMENTS WH ICH DID NOT YIELD EXEMPT INCOME DURING THE YEAR. THE ASSESSEE ALSO MADE A D ETAILED ARGUMENT ON THE ISSUE OF SATISFACTION TO ARGUE THAT THE AO HAS NOT ARRIVED AT A SATISFACTION AS REQUIRED U/S 14A(2) BEFORE INVOKING RULE 8D FOR DET ERMINATION OF DISALLOWANCE WHICH IS MANDATORY IN NATURE. IN ABSENCE OF ANY SA TISFACTION AS TO CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURR ED IN RELATION TO EXEMPT INCOME, THE AO CANNOT INVOKE RULE 8D(2). THE LD.AR ALSO TAKEN AN ALTERNATIVE ARGUMENT THAT WHEN OWN FUNDS ARE MORE THAN THE VALU E OF INVESTMENTS OR EVEN WHEN THERE IS A MIXED FUND INCLUDING BORROWED FUNDS, A GENERAL PRESUMPTION IS DRAWN THAT INVESTMENTS MADE IN SHARE S AND SECURITIES ARE OUT OF OWN FUNDS, IN THAT EVENTUALITY, INTEREST EXPENSE COULD NOT BE DISALLOWED U/R 8D(2) OF I.T. RULES, 1962. 12. THE ASSESSEE HAS RELIED UPON FOLLOWING JUDICIAL PRECEDENTS IN SUPPORT OF ITS ARGUMENTS:- 1. ACB INDIA LTD VS ACIT (2015) 62 TAXMANN.COM71 ( DEL.HC) 2. ACIT VS VIREET INVESTMENT (P) LTD 188 TTJ 1 (D EL.TRIB) 3. SAJJAN INDIA LTD VS ADDL. CIT 89 TAXMANN.COM 35 2 (MUM.TRIB) 4. PIRAMAL ENTEPRISE LTD VS ACIT (2018) 97 TAXMANN. COM 3521 (MUM.TRIB) 12 INDIA INFOLINE LTD 5. DCIT VS. EDELWEISS FINANCIAL SERVICES LTD ITA NO .2249/MUM/2017 6. DCIT VS BOMBAY OXYGEN CORPORATION LTD (23017) 86 TAXMANN.COM 88 (MUM.TRIB) 7. KALYANI BARTER PVT LTD VS ITO (2017) 79 TAXMANN. COM 457 (KOL.TRIB) 8. YASHODA HEALTH CARE SERVICES PVT LTD VS DCIT (20 17 88 TAXMAN.COM 916 (HYD.TRIB) 9. REI AGRO LTD VS DCIT (2013) 35 TAXMANN.COM 404 ( KOL.TRIB) 10. PCIT VS SINTEX INDUSTRIES LTD (2018) 255 TAXMAN 171 (SC) 11. CIT VS HDFC BANK LTD ITA NO.330 OF 2012 (BOM.HC ) 12. WADHWA RESIDENCY (P) LTD VS ACIT (2018) 95 TAXM ANN.COM 294 (MUM.TRIB) 13. STRIDES SHASUN LTD VS ACIT (2017) 88 TAXMANN.CO M 900 (MUM.TRIB) 13. THE LD.DR, ON THE OTHER HAND, SUBMITTED THAT TH E LD.CIT(A) WAS ERRED IN EXCLUDING RS.4,61,37,00,000 BEING INVESTMENT MADE B Y THE ASSESSEE IN THE SHARES OF ITS SUBSIDIARY, M/S INDIA INFOLINE INVEST MENT SERVICES LTD WHILE WORKING OUT THE AVERAGE VALUE OF INVESTMENTS FOR TH E PURPOSE OF COMPUTATION OF DISALLOWANCE U/S 14A R.W.R. 8D OF I.T. RULES, 19 62. THE LD.DR FURTHER SUBMITTED THAT A SIMILAR ISSUE HAS BEEN CONSIDERED BY ITAT FOR EARLIER ASSESSMENT YEAR IN ITA NO.2490/MUM/2013 FOR AY 2008 -09 WHEREIN AFTER 13 INDIA INFOLINE LTD CONSIDERING SIMILAR ARGUMENTS OF THE ASSESSEE ON SI MILAR INVESTMENT MADE IN M/S INDIA INFOLINE INVESTMENT SERVICES LTD HELD THA T FOR THE PURPOSE OF COMPUTATION OF DISALLOWANCE U/S 14A R.W.R. 8D(2)(II I) OF I.T. RULES, 1962, THE SAID INVESTMENT COULD NOT BE EXCLUDED AS THE EXPEND ITURE INCURRED IN RELATION TO EXEMPT INCOME HAS NO BEARING ON OWN FUNDS OR BOR ROWED FUNDS FOR INTEREST DISALLOWANCE. 14. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MAT ERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES B ELOW. IT IS AN ADMITTED FACT THAT THE ASSESSEE HAS EARNED DIVIDEND INCOME OF RS. 15,16,67,039 AND CLAIMED EXEMPTION U/S 10(34) OF THE ACT, BUT DID NOT ATTRIB UTE ANY EXPENDITURE INCLUDING INTEREST IN RELATION TO EARNING EXEMPT IN COME. THE ASSESSEE HAS TAKEN THREEFOLD ARGUMENTS TO CHALLENGE ADDITION MAD E BY THE AO. THE FIRST ARGUMENT TAKEN BY THE ASSESSEE IS WITH REGARD TO TH E SATISFACTION AS REQUIRED U/S 14A(2) OF I.T. RULES, 1962. THE LD.AR FOR THE ASSESSEE VEHEMENTLY ARGUED THE ISSUE IN THE LIGHT OF DECISION OF CO-ORDINATE B ENCH OF ITAT IN THE CASE OF WADHWA RESIDENCY PVT LTD VS ACIT (SUPRA) AND SUBMIT TED THAT THE AO SHALL RECORD A SATISFACTION HAVING REGARD TO THE ACCOUNT OF THE ASSESSEE THAT SUCH AND SUCH EXPENDITURE HAS BEEN INCURRED IN RELATION TO EXEMPT INCOME BEFORE INVOKING RULE 8D(2) OF I.T. RULES, 1962. WE HAVE C ONSIDERED THE CASE LAW RELIED UPON BY THE ASSESSEE IN THE LIGHT OF FACTS OF THE P RESENT CASE AND FIND THAT IN 14 INDIA INFOLINE LTD RESPECT OF SATISFACTION AS CONTEMPLATED U/S 14A(2), FACTS OF EACH CASE IS VERY MUCH RELEVANT. WHEN IT COMES TO THE ISSUE OF SATIS FACTION, THE FACTS OF OTHER CASE AND RATIO DECIDED IN THAT CASE CANNOT BE BLIND LY APPLIED TO THE FACTS OF ANOTHER CASE. IN THE CASE RELIED UPON BY THE ASSES SEE, NO DOUBT, THE TRIBUNAL HAS COME TO THE CONCLUSION THAT AO HAS TO ARRIVE AT A SATISFACTION HAVING REGARD TO THE BOOKS OF ACCOUNT AND FINDS THAT SUCH AND SUC H EXPENDITURE HAS BEEN INCURRED IN RELATION TO EXEMPT INCOME. IN THIS CAS E, ON PERUSAL OF FACTS AVAILABLE ON RECORD, WE FIND THAT THE AO HAS ARRIVE D AT A SATISFACTION HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE AND ALSO CON SIDERING THE MAGNITUDE OF EXPENDITURE INCURRED FOR SALARIES AND WAGES, ADMINI STRATIVE EXPENSES AND INTEREST EXPENSES TO COME TO THE CONCLUSION THAT TH ERE IS NO MERIT IN THE ARGUMENTS OF THE ASSESSEE THAT NO EXPENDITURE HAS B EEN INCURRED IN RELATION TO EXEMPT INCOME. WE FURTHER NOTICE THAT THE ISSUE OF SATISFACTION HAS BEEN FINALLY SETTLED BY THE HONBLE SUPREME COURT IN ITS LATEST JUDGEMENT IN CASE OF MAXOPP INVESTMENTS LTD VS CIT (2018) 408 ITR 640 (S C) WHERE IT WAS CATEGORICALLY HELD THAT HAVING REGARD TO THE LANGUA GE OF SECTION 14(3) OF THE ACT R.W.R.8D OF I.T. RULES, WE ALSO MAKE IT CLEAR THAT BEFORE APPLYING THE THEORY OF APPORTIONMENT, THE AO NEEDS TO RECORD SATISFACTION THAT HAVING REGARD TO THE ACCOUNT OF THE ASSESSEE, SUO MOTO DISALLOWANCE U/S 14A WAS NOT CORRECT. IT WILL BE IN THOSE CASES, WHERE THE ASSESSEE IN ITS R ETURN HAS HIMSELF 15 INDIA INFOLINE LTD APPORTIONED, BUT THE AO WAS NOT ACCEPTING THE SAID APPORTIONMENT, IN THAT EVENTUALITY HE WILL HAVE TO RECORD HIS SATISFACTION TO THIS EFFECT. IN THIS CASE, ON PERUSAL OF FACTS, WE FIND THAT THE ASSESSEE HAS NOT MADE ANY DISALLOWANCE IN RESPECT OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME, THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT THE ISSUE OF SATISFACTI ON AS CONTEMPLATED U/S 14A(2) DOES NOT ARISE. EVEN OTHERWISE, WE FIND THA T THE AO HAS ARRIVED AT A SATISFACTION HAVING REGARD TO THE QUANTUM OF EXPEND ITURE INCURRED BY THE ASSESSEE BEFORE APPLYING RULE 8D(2). THEREFORE, WE REJECT ARGUMENT TAKEN BY THE ASSESSEE. 15. COMING TO THE ISSUE RAISED BY THE ASSESSEE BY W AY OF ADDITIONAL GROUND OF APPEAL. THE ASSESSEE HAS TAKEN A GROUND THAT FO R THE PURPOSE OF COMPUTING AVERAGE INVESTMENTS TO DETERMINE DISALLOWANCE U/S 1 4A R.W.R.8D, ONLY THOSE INVESTMENTS WHICH EARNED EXEMPT INCOME FOR THE YEAR NEEDS TO BE CONSIDERED. THE ASSESSEE HAS RELIED UPON THE DECISION OF ITAT D ELHI SPECIAL BENCH IN THE CASE OF ACIT VS VIREET INVESTMENT PVT LTD (SUPRA) A ND IN THE CASE OF SAJJAN INDIA LTD VS ADDL. CIT (SUPRA). WE HAVE GONE THROUGH THE CASE LAWS RELIED UPON BY THE LD.AR FOR THE ASSESSEE, IN THE LIGHT OF FACTS O F THE ASSESSEES CASE. WE ALSO NOTED THAT THE COURTS HAVE TAKEN A CONSCIOUS DECISI ON TO HOLD THAT ONLY THOSE INVESTMENTS WHICH EARNED EXEMPT INCOME DURING THE Y EAR NEEDS TO BE CONSIDERED WHILE ARRIVING AT AVERAGE VALUE OF INVES TMENT FOR THE PURPOSE OF 16 INDIA INFOLINE LTD DETERMINATION OF DISALLOWANCE IN THE CONTEXT OF THE ARGUMENT OF THE ASSESSEE THAT VARIOUS INVESTMENT HAVE BEEN MADE IN SUBSIDIAR Y COMPANIES / ASSOCIATE COMPANIES FOR THE PURPOSE OF HOLDING STRATEGIC INVE STMENTS AND ALSO FOR MANAGEMENT CONTROL. IN THOSE CASES, THE MOTIVE OF INVESTMENT IS TO MAKE A STRATEGIC INVESTMENT AND ALSO TO HOLD MANAGEMENT CO NTROL BUT NOT TO EARN INCOME. IN THE ABOVE CONTEXT, IT HAS BEEN CONSCIOU SLY HELD THAT WHEN INVESTMENTS HAVE BEEN MADE FOR THE PURPOSE OF STRAT EGIC INVESTMENT AND ALSO TO HAVE A CONTROL OVER MANAGEMENT, THE QUESTION OF DISALLOWANCE OF INTEREST EXPENDITURE DOES NOT ARISE, THAT TOO, WHEN THE ASSE SSEE HAS PROVED AVAILABILITY OF OWN FUNDS. THIS ISSUE HAS BEEN FINALLY SETTLED BY THE HONBLE SUPREME COURT IN THE CASE OF MAXOPP INDIA LTD VS CIT(SUPRA), WHER E THE HONBLE COURT HAS CONSIDERED THE ARGUMENTS OF THE ASSESSEE IN THE CON TEXT OF STRATEGIC INVESTMENT AND HELD THAT EVEN IN CASE OF INVESTMENT S MADE IN SUBSIDIARY COMPANIES / ASSOCIATE COMPANIES FOR STRATEGIC PURPO SE AND ALSO TO HOLD MANAGEMENT CONTROL, THE PROVISIONS OF SECTION 14A W ILL HAVE TO APPLY FOR THE PURPOSE OF DETERMINING EXPENDITURE INCURRED IN RELA TION TO EXEMPT INCOME. IN THIS CASE, ON PERUSAL OF THE FACTS AVAILABLE ON REC ORD, THE ASSESSEE HAS MADE HUGE INVESTMENTS IN VARIOUS SHARES AND MUTUAL FUNDS INCLUDING INVESTMENTS IN SUBSIDIARIES. THEREFORE, WE ARE OF THE VIEW THAT T HE ASSESSEES ARGUMENT HOLDS GOOD TO THE EXTENT OF DISALLOWANCE OF INTEREST EXPE NDITURE AS CONTEMPLATED U/R 17 INDIA INFOLINE LTD 8D(2)(II), IF THE ASSESSEE PROVES THE AVAILABILITY OF OWN FUNDS. INSOFAR AS DISALLOWANCE OF EXPENDITURE AS SPECIFIED U/R 8D(2)( III), ASSESSEES ARGUMENT DOES NOT HOLD GOOD FOR THE REASON THAT EVEN FOR INV ESTMENTS IN SUBSIDIARY COMPANIES FOR STRATEGIC PURPOSE OR EVEN FOR OTHER P URPOSES, NEEDS TO BE MONITORED AND ASSESSEE NECESSARILY HAS TO INCUR EXP ENDITURE, THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT THERE IS NO MERIT I N THE ARGUMENT OF THE ASSESSEE FOR EXCLUSION OF INVESTMENT WHICH DID NOT EARN EXEMPT INCOME DURING THE YEAR WHILE ARRIVING AT AVERAGE VALUE OF INVESTM ENTS. 16. COMING TO THE OTHER ARGUMENT OF THE ASSESSEE IN THE LIGHT OF DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS HDF C BANK LTD IN ITA NO.330 OF 2012. THE ASSESSEE HAS TAKEN ONE MORE ARGUMENT IN THE LIGHT OF DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT AND SUBMITTED THAT WHEN OWN FUNDS IN THE FORM OF SHARE CAPITAL AND RESERVES ARE MORE THA N THE AMOUNT OF INVESTMENTS IN SHARES AND SECURITIES, A GENERAL PRE SUMPTION IS DRAWN THAT INVESTMENT IN SHARES AND SECURITIES ARE MADE OUT FR OM OWN FUNDS. CONSEQUENTLY, NO DISALLOWANCE COULD BE MADE IN RESP ECT OF INTEREST EXPENDITURE. WE FIND THAT THE HONBLE JURISDICTION AL HIGH COURT IN THE ABOVE CASE HAS GIVEN A FINDING TO THE EFFECT THAT WHEN MI XED FUNDS ARE AVAILABLE INCLUDING BORROWED FUNDS, IT IS GENERALLY PRESUMED THAT INVESTMENTS ARE MADE OUT OF OWN FUNDS AND CONSEQUENTLY, NO DISALLOWANCE COULD BE MADE TO 18 INDIA INFOLINE LTD INTEREST. WE ARE FULLY IN AGREEMENT WITH THE RATIO LAID DOWN BY THE HONBLE HIGH COURT. BUT, ON PERUSAL OF THE FACTS, WE FIND THAT WHEN THE AO HAS SPECIFICALLY ASKED THE ASSESSEE TO CO-RELATE ONE TO ONE INVESTMENT AND AVAILABILITY OF OWN FUNDS, THE ASSESSEE HAS FAILED TO FILE ANY DETAILS TO PROVE AVAILABILITY OF FUNDS. WE FURTHER NOTICE THAT DURI NG THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE ITSELF HAS FILED A SUBMIS SION, AS PER WHICH, IT HAS QUANTIFIED DISALLOWANCE U/S 14A R.W.R. 8D WHEREIN I T HAS ARRIVED AT AN AMOUNT OF RSW.5,59,40,009. ONCE, THE ASSESSEE HAS ACCEPTE D AND ALSO FILED A DETAILED WORKING DETERMINING THE AMOUNT OF DISALLOWANCE OF R S.5,59,40,009, THEN THE ASSESSEE CANNOT TAKE A PLEA THAT IT HAS OWN FUNDS A ND INTEREST EXPENSES COULD NOT BE DISALLOWED MERELY BY RELYING UPON SUBSEQUENT JUDGEMENTS OF THE COURTS/TRIBUNALS. WE FURTHER NOTICE THAT THE LD. C IT(A) WHILE DECIDING THE ISSUE HAS ALLOWED RELIEF WHEREVER, THE ASSESSEE HAS PROVED THE AVAILABILITY OF OWN FUNDS INCLUDING INVESTMENTS MADE IN INDIA INFOL INE INVESTMENTS SERVICES LTD AND ALSO INVESTMENT MADE IN MUTUAL FUNDS AND SH ARES OF FOREIGN COMPANIES WHERE THE DIVIDEND INCOME IS TAXABLE TO A RRIVE AT AVERAGE VALUE OF INVESTMENTS. THEREFORE, WE ARE OF THE CONSIDERED V IEW THAT THERE IS NO REASON TO INTERFERE WITH THE FINDINGS OF THE LD.CIT(A) AND CONSEQUENTLY REJECT THE ARGUMENTS OF THE ASSESSEE AND UPHOLD THE DISALLOWAN CE QUANTIFIED BY THE LD.CIT(A) U/R 8D(2)(II) OF I.T. RULES, 1962. 19 INDIA INFOLINE LTD 17. COMING TO THE DISALLOWANCE DETERMINED BY THE LD .CIT(A) U/R 8D(2)(III) OF I.T. RULES, 1962. THE LD.CIT(A) HAS ARRIVED AT AVE RAGE INVESTMENTS OUT OF BORROWED FUNDS OF RS.365,56,54,090 AND DETERMINED D ISALLOWANCE OF RS.1,82,78,270 BEING @0.5% OF AVERAGE INVESTMENTS. THE LD.CIT(A) WHILE ARRIVING AT THE AVERAGE INVESTMENTS, EXCLUDED INVES TMENT MADE IN INDIA INFOLINE INVESTMENTS SERVICES LTD ON THE GROUND THA T THE SAID INVESTMENT IS MADE OUT OF OWN FUNDS. THE LD.CIT(A) APPLIED THE S AME AMOUNT OF AVERAGE INVESTMENTS FOR THE PURPOSE OF QUANTIFICATION OF DI SALLOWANCE U/R 8D(2)(III). THE LD.DR, DURING THE COURSE OF HEARING, BROUGHT TO OUR NOTICE CO-ORDINATE BENCH DECISION IN ASSESSEES OWN CASE FOR AY 2008-0 9. WE FIND THAT THE CO- ORDINATE BENCH HAS EXAMINED THE INVESTMENT MADE IN INDIA INFOLINE INVESTMENTS SERVICES LTD OF RS.461,37,00,000 AND AF TER CONSIDERING RELEVANT FACTS HELD THAT FOR THE PURPOSE OF ARRIVING AT AVER AGE VALUE OF INVESTMENTS, THE AMOUNT OF INVESTMENTS MADE IN M/S INDIA INFOLINE IN VESTMENTS SERVICES LTD AMOUNTING TO RS. 461,37,00,000 WILL BE INCLUDED IN ORDER TO ARRIVE AT DISALLOWANCE U/S 14A R.W.R. 8D2)(III) OF THE I.T. R ULES, 1962. THE RELEVANT OBSERVATIONS OF THE TRIBUNAL ARE AS UNDER:- SINCE THE RELEVANT A.Y. IS 2008-09, THE HONBLE BOMBAY HIGH COURT IN GODREJ & BOYCE MFG. CO. LTD (SUPRA) HAS AL READY HELD THAT THE RULE 8D IS APPLICABLE FOR A.Y. 2008-09 AND HENC E IN OUR CONSIDERED VIEW, THE INVESTMENT OF RS.4,61,37,00,000/- MADE BY THE ASSESSEE COMPANY IN ITS SUBSIDIARY NAMELY M/S INDIA INFOLINE INVESTMENT SERVICES LTD. OF RS.4,61,37,00,000/- WIL L BE INCLUDED 20 INDIA INFOLINE LTD IN THE AVERAGE INVESTMENT FOR THE PURPOSE OF COMPUT ATION OF DISALLOWANCE U/S 14A R.W.R 8D(2)(III) OF THE INCOME TAX RULES, 1962 AND HENCE TO THAT EXTENT, THE CONTENTION OF TH E REVENUE IS ACCEPTED WHILE THE ASSESSEE COMPANY HAS DEMONSTRATE D THAT THE INVESTMENTS IN THE SHARE CAPITAL OF INDIA INFOLINE INVESTMENT SERVICES LIMITED ON 4TH FEBRUARY 2008 HAS BEEN MADE OUT OF PROCEEDS OF FRESH ISSUE OF SHARES OF THE ASSESSEE C OMPANY IN JANUARY 2008 , THUS NO DISALLOWANCE UNDER RULE 8D(2 )(II) OF INCOME TAX RULES, 1962 READ WITH SECTION 14A OF THE ACT IS JUSTIFIED. WE ORDER ACCORDINGLY. 18. IN THIS VIEW OF THE MATTER AND CONSISTENT WITH THE VIEW TAKEN BY THE CO- ORDINATE BENCH, WE ARE OF THE CONSIDERED VIEW THAT WHILE ARRIVING AT AVERAGE VALUE OF INVESTMENTS FOR THE PURPOSE OF DETERMINATI ON OF DISALLOWANCE CONTEMPLATED U/R 8D(2)(III), THE AMOUNT OF INVESTME NTS MADE IN M/S INDIA INFOLINE INVESTMENTS SERVICES LTD FOR RS.361`,37,00 ,000 SHALL BE INCLUDED. ACCORDINGLY, WE MODIFY THE ORDER OF THE LD.CIT(A) A ND DIRECT THE AO TO INCLUDE THE ABOVE AMOUNT WHILE DETERMINING THE AVERAGE INVE STMENTS FOR THE PURPOSE OF DISALLOWANCE CONTEMPLATED U/R 8D(2)(III) OF I.T. RULES, 1962. 19. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATI ON FROM ASSESSEES APPEAL IS DISALLOWANCE OF DEFERRED COMPENSATION EXP ENSES OF RS.6,51,31,165 ON ACCOUNT OF ESOP. THE LD.AR FOR THE ASSESSEE, AT THE TIME OF HEARING SUBMITTED THAT THIS ISSUE IS COVERED IN FAVOUR OF T HE ASSESSEE BY THE DECISION OF ITAT, MUMBAI BENCH I IN ASSESSEES OWN CASE FOR A Y 2008-09 IN ITA NO.2490/MUM/2013 WHEREIN AN IDENTICAL ISSUE HAS BEE N CONSIDERED BY THE CO- 21 INDIA INFOLINE LTD ORDINATE BENCH AND AFTER CONSIDERING RELEVANT FACTS HELD THAT DEFERRED EMPLOYEE COMPENSATION EXPENSES (ESOP) DEBITED UNDER THE HEAD EMPLOYEE COST IS AN ALLOWABLE BUSINESS EXPENDITURE WHOLLY A ND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. THE RELEVANT OBSERVATIONS OF THE TRIBUNAL ARE EXTRACTED BELOW:- THE HONTDLE SPECIAL BENCH OF TRIBUNAL IN THE CASE OF BIOCON LIMITED(SUPRA) HAS HELD THAT DISCOUNT UNDER ESOP IS IN THE NATURE OF EMPLOYEES COST AND IS HENCE DEDUCTIBLE DURING THE V ESTING PERIOD W.R.T. THE MARKET PRICE OF SHARE AT THE TIME OF GRA NT OF OPTIONS TO THE EMPLOYEES. THE HON'BLE SPECIAL BENCH HAS HELD THAT THE AMOUNT OF DISCOUNT CLAIMED AS DEDUCTION DURING THE VESTING PE RIOD IS REQUIRED TO BE REVERSED IN RELATION TO THE UN-VESTING/LAPSING O PTIONS AT THE APPROPRIATE TIME, HOWEVER, AN ADJUSTMENT TO THE INC OME IS FOR AT THE TIME OF EXERCISE OF OPTION BY THE AMOUNT OF DIFFERE NCE IN THE AMOUNT OF DISCOUNT CALCULATED WITH REFERENCE TO THE MARKET PRICE AT THE TIME OF GRANT OF OPTION AND THE MARKET PRICE AT THE TIME OF EXERCISE OF OPTION. NO CONTRARY DECISION IS BROUGHT TO OUR NOTICE BY TH E REVENUE TO CONTROVERT THE DECISION OF THE SPECIAL BENCH OF BAN GALORE ITAT WITH RESPECT TO THIS ISSUE. RESPECTFULLY FOLLOWING THE DECISION OF SPECIAL BENCH ITAT BANGALORE, WE HOLD THAT THE ASSESSEE COM PANY IS ENTITLED TO THE DEDUCTION OF RS.5,99,74,467/- BEING DEFERRED EMPLOYEE COMPENSATION EXPENSE (ESOP) DEBITED UNDER THE HEAD EMPLOYEE COST AS AN ALLOWABLE BUSINESS EXPENDITURE UNDER THE HEAD 'P ROFIT AND GAINS OF BUSINESS OR PROFESSION INCURRED WHOLLY AND EXCLUSIV ELY FOR THE PURPOSES OF BUSINESS OF THE ASSESSEE COMPANY. WE FURTHER HOL D THAT THE AMOUNT OF DISCOUNT CLAIMED AS DEDUCTION DURING THE VESTING PE RIOD IS REQUIRED TO BE REVERSED IN RELATION TO THE UN-VESTING/LAPSING OF O PTIONS AT THE APPROPRIATE TIME. HOWEVER, AN ADJUSTMENT TO THE IS CALLED FOR AT THE TIME OF EXERCISE OF OPTION BY THE OF DIFFERENCE IN THE A MOUNT OF DISCOUNT CALCULATED WITH REFERENCE THE MARKET PRICE AT THE T IME OF GRANT OF OPTION AND THE MARKET PRICE AT THE TIME OF EXERCISE OF OPTION .WE ORDER ACCORDINGLY AND HENCE THE APPEAL OF THE ASSESSEE CO MPANY IS ALLOWED. 22 INDIA INFOLINE LTD 20. IN THIS VIEW OF THE MATTER AND CONSISTENT WITH THE VIEW TAKEN BY THE CO- ORDINATE BENCH IN ASSESSEES OWN CASE, WE DIRECT TH E AO TO ALLOW DEFERRED EMPLOYEE COMPENSATION EXPENSES DEBITED UNDER THE HE AD EMPLOYEE COST WHILE COMPUTING INCOME UNDER THE HEAD INCOME FROM BUSINESS OR PROFESSION. 21. IN THE RESULT, THE APPEAL FILED BY THE REVENUE AND APPEAL FILED BY THE ASSESSEE ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 19 -12-2018 . SD/- SD/- (RAVISH SOOD) (G MANJUNATHA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DT : 19 TH DECEMBER, 2018 PK/- COPY TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR /TRUE COPY/ BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI