ACIT, New Delhi V. M/s. Indiabulls Real Estate Ltd., New Delhi

ITA 6602/DEL/2016

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 2814 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 2 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-03-2020
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2012-2013
• Appeal Filed On: 26-12-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAJESH KUMAR KEDIA
• Keywords: Depreciation; Earning of tax free income; Capital expenditure; Rule 8D
• Section: 14A; 115JB; 37(1); 64; 73; 72; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH C, NEW DELHI BEFORE SH. AMIT SHUKLA, JUDICIAL MEMBER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER ITA NO. 6602/DEL/2016 : ASSTT. YEAR : 2012-13 ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE-12(1), NEW DELHI VS M/S INDIABULLS REAL ESTATE LTD., M-62 & 63, FIRST FLOOR, CONNAUGHT PLACE, NEW DELHI-110001 (APPELLANT) (RESPONDENT) PAN NO. AABCI5194F ITA NO. 6603/DEL/2016 : ASSTT. YEAR : 2012-13 ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE-12(1), NEW DELHI VS M/S INDIABULLS FINANCIAL SERVICES LTD., M-62 & 63, FIRST FLOOR, CONNAUGHT PLACE, NEW DELHI-110001 (APPELLANT) (RESPONDENT) PAN NO. AAACI8570Q ASSESSEE BY : SH. GAUTAM JAIN, ADV. & SH. LALIT MOHAN, CA REVENUE BY : SH. RAJESH KUMAR KEDIA, CIT DR DATE OF HEARING: 10.02.2020 DATE OF PRONOUNCEMENT: 11.03.2020 ORDER PER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER: THE PRESENT APPEALS HAVE BEEN FILED BY THE REVENUE AGAINST THE ORDERS OF THE LD. CIT(A)-4, NEW DELHI D ATED 18.10.2016 & 20.10.2016. 2. SINCE, THE ISSUES INVOLVED IN BOTH THE APPEALS A RE COMMON, THEY WERE HEARD TOGETHER AND ARE BEING DISPOSED OFF BY COMMON ORDER. ITA NOS. 6602 & 6603/DEL/2016 INDIABULLS REAL ESTATE LTD. & INDIABULLS FINANCIAL SERVICES LTD. 2 3. IN ITA NO. 6602/DEL/2016, FOLLOWING GROUNDS HAVE BEEN RAISED BY THE REVENUE: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT (A) HAS ERRED IN DELETING THE DISALLOWANCE U/S 14A R.W. RULE 8D OF THE ACT, AMOUNTING TO RS.16,37,03,673/-. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT (A) HAS ERRED IN DELETING THE DISALLOWANCE OF EXCESS DEPRECIATION, AMOUNTING TO RS.24,30,299/-. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT (A) HAS ERRED IN DELETING THE DISALLOWANCE OF ADDITIONAL CLAIM OF DEDUCTION ON ACCOUNT OF EMPLOYE E COMPENSATION EXPENSES, AMOUNTING TO RS.66.33 CRORES. ITA NO. 6602/DEL/2016 DISALLOWANCE U/S 14A: 4. THE RELEVANT FACTS REQUIRED FOR THE ADJUDICATION OF THIS ISSUE ARE: INVESTMENTS OF THE ASSESSEE: RS.656,58,000,000/- EXEMPT INCOME EARNED: RS.1,93,80,332/- DISALLOWANCE MADE BY THE ASSESSEE: RS.4,16,93 3/- DISALLOWANCE MADE BY THE REVENUE: RS.16,41,20,606/ - 5. THUS, PRIMA FACIE WE FIND THAT THE DISALLOWANCE MADE BY THE REVENUE IS MUCH MORE THAN THE EXEMPT INCOME EAR NED BY THE ASSESSEE. FROM THE ASSESSMENT ORDER, WE FIND TH AT THE ASSESSING OFFICER RESORTED TO RE-COMPUTATION OF THE DISALLOWANCE ON THE GROUNDS THAT NO RATIONALE WAS FURNISHED BY T HE ASSESSEE IN DECIDING THE AMOUNT DISALLOWED. FURTHER, NO SEPA RATE STAFF OR ITA NOS. 6602 & 6603/DEL/2016 INDIABULLS REAL ESTATE LTD. & INDIABULLS FINANCIAL SERVICES LTD. 3 WORK STATION HAS BEEN MAINTAINED BY THE ASSESSEE TO WARDS INVESTMENT ACTIVITIES. THE ASSESSING OFFICER FURTHE R HELD THAT THE EARNING OF INCOME IS NOT IN THE NATURE OF PASSI VE ACTIVITY BUT IN FACT, IT IS A WELL COORDINATED MANAGEMENT DECISI ON REGARDING THE DEPLOYMENT OF FUNDS. THE ASSESSING OFFICER RELI ED ON THE JUDGMENT OF THE ITAT SPECIAL BENCH NEW DELHI IN THE CASE OF CHEMINVEST LTD. IN ITA NO. 87/DEL/2008. 6. BEFORE US, DURING THE ARGUMENTS, THE LD. DR RELI ED ON THE ASSESSMENT ORDER AND THE LD. AR SUPPORTED THE ORDER OF THE LD. CIT (A). 7. THE RELEVANT PORTION OF THE ASSESSING OFFICER IS AS UNDER: PARA 2: THE ASSESSEE COMPANY IS ENGAGED IN THE BUS INESS OF PROJECTS, ENGINEERING, INDUSTRIAL AND TECHNICAL CON SULTANCY, CONSTRUCTION AND DEVELOPMENT OF REAL ESTATE PROPERT IES AND OTHER RELATED AND ANCILLARY ACTIVITIES. THE BOOKS OF ACCO UNTS WERE PRODUCED WHICH HAVE BEEN EXAMINED ON TEXT CHECK BASIS. PARA 4.DURING THE ASSESSMENT PROCEEDINGS, THE A R OF THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY THE DISALLO WANCE U/S 14A SHOULD NOT BE MADE IN ACCORDANCE WITH RULE 8D. IN R ESPONSE, THE ASSESSEE FILED ITS REPLY VIDE LETTER DATED 15.01.20 15 WHEREIN IT STATED THAT 'THE ASSESSEE HAS ALREADY MADE DISALLOW ANCE U/S14A AMOUNTING TO RS.4,16,933/- BEING THE EXPENSES ATTRI BUTABLE TO EXEMPT INCOME'. HOWEVER, NOTHING HAS BEEN FURNISHED BY THE ASSESSEE IN THIS REGARD. HENCE, THE CLAIM OF THE AS SESSEE IN THIS REGARD IS NOT FOUND TO BE ACCEPTABLE AND THE ISSUE IS DECIDED ON THE BASIS OF INFORMATION AVAILABLE ON RECORD. THERE IS NO RATIONALE FURNISHED BY THE ASSESSEE IN DECIDING THE AMOUNT DISALLOWED AT RS.4,16,933/-. FURTHER, NO SEP ARATE STAFF OR ITA NOS. 6602 & 6603/DEL/2016 INDIABULLS REAL ESTATE LTD. & INDIABULLS FINANCIAL SERVICES LTD. 4 WORK STATION HAS BEEN DEPLOYED / MAINTAINED BY THE ASSESSEE TOWARDS THE INVESTMENT ACTIVITIES. FURTHER, THE EAR NING OF EXEMPT INCOME IS NOT THE NATURE OF PASSIVE ACTIVITY HAVING NO INPUT. IN FACT IN PRESENT SITUATION MAKING OF INVESTMENT, MAINTAIN ING OR CONTINUING OF INVESTMENT AND TIME TO EXIT FROM INVESTMENT ARE WELL INFORMED AND WELL COORDINATED MANAGEMENT DECISION INVOLVING NOT ONLY INPUTS FROM VARIOUS SOURCE BUT ALSO ACUMEN OF SENIOR MANAG EMENT FUNCTIONARIES. THEREFORE COST IS INBUILT INTO EVEN SO CALLED PASSIVE INVESTMENT. THERE ARE INCIDENTAL EXPENDITURES OF CO LLECTION, TELEPHONE, FOLLOW UP ETC. THEREFORE EXPENSES IN REL ATION TO EARNING OF INCOME ARE EMBEDDED IN INDIRECT EXPENSES. SECTION 14A OF THE I T ACT, 1961 REGULATES THE EXPE NDITURE WHICH WAS INCURRED IN RELATION TO EXEMPT INCOME. BY VIRTUE OF THIS SECTION NO DEDUCTION IS ALLOWABLE IN RESPECT OF EXPENDITURE IN CURRED BY THE ASSESSEE ON ACCOUNT OF INCOME WHICH DOES NOT FORM P ART OF THE TOTAL INCOME UNDER THE ACT. THE CBDT HAS NOTIFIED RULE 8D TO AVOID AD-HOC DISALLOWANCE TO IMPART VISIBILITY TO THE EXPENDITUR E INCURRED FOR EARNING EXEMPT INCOME. MOREOVER, PROCEDURE FOR COMP UTATION OF DISALLOWANCE HAS BEEN PROVIDED IN SUB-SECTIONS (2) AND (3) OF SECTION 14A OF THE I T ACT. THE HONBLE ITAT, SPECIAL BENCH , NEW DELHI IN THE CASE OF M/S CHEMINVEST LTD. ITA NO 87/DEL/2008 HAS ALSO HELD THAT THE DISALLOWANCE U/S 14A IS TO BE MADE EVEN IF NO E XEMPT INCOME HAS RESULTED OR EARNED BY THE ASSESSEE IN THE YEAR UNDER CONSIDERATION THEREFORE IN VIEW OF THE SPECIFIC PRO VISIONS FOR QUANTIFICATION OF DISALLOWANCE AS CONTAINED IN SUB- SECTIONS (2) AND (3) OF SECTION 14A, WHICH ARE PROCEDURAL, THE DISAL LOWANCE IS STRICTLY TO BE MADE IN TERMS OF THE SPECIFIC PROVISIONS OF R ULE 8D. ATTENTION IS ALSO INVITED TO THE LANGUAGE OF RULE 8 D(2)(II) WHEREIN IT HAS BEEN DEARLY MENTIONED THAT THE AVERAGE VALUE OF ASSETS SHALL BE COMPUTED IN RESPECT OF INVESTMENT, INCOME FROM WHIC H DOES NOT OR ITA NOS. 6602 & 6603/DEL/2016 INDIABULLS REAL ESTATE LTD. & INDIABULLS FINANCIAL SERVICES LTD. 5 SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARI NG IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAS T DAY OF THE PREVIOUS YEAR. RULE 8D(1) OF INCOME TAX RULES, 1962 PRESCRIBED THE APPLICABILITY OF THE PROCEDURE. IN CASE, THE ASSESSING OFFICER IS NO T SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE EXPENDITURE MADE BY THE ASSESSEE, THE PROCEDURAL PROVISIONS OF RULE 8D ARE VERY MUCH APPLICABLE TO COMPUTE THE EXPENDITURE WHICH ARE INCURRED IN RELAT ION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME . 8. THE LD. DR ARGUED RELYING ON THE FOLLOWING CASE JUDICIAL PRONOUNCEMENT AND SUBMITTED THE ARGUMENTS IN WRITIN G. 1. MAXOPP INVESTMENT LTD. VS CIT [2018] 91 TAXMANN. COM 154 (SIC)/[2018] 254 TAXMAN 325 (SC)/[2018] 402 ITR 640 (SC)/[2018] 301 CTR 489 (SC) WHERE HONBLE SUPREME COURT HELD THAT (1) WHEN THE SHARES ARE HELD BY THE ASSESSEE NOT TO EARN EXEMPT INCOME BUT TO RETAIN CONTROLLING STAKE IN TH E INVESTEE COMPANY, THE DOMINANT PURPOSE TEST CANNOT BE SAID T O BE RELEVANT FOR THE PURPOSE OF SEC 14A AND DISALLOWANC E U/S 14A CAN BE MADE. IT IS NOT THE DOMINANT PURPOSE TEST BU T THE PRINCIPLE OF APPORTIONMENT WHICH IS INGRAINED IN TH E PROVISIONS OF SECTION 14A. WHEN THE ASSESSEE ITSELF MAKES DISA LLOWANCE OF CERTAIN EXPENDITURE INCURRED TO EARN DIVIDEND INCOM E AND IF THE AO DOES NOT ACCEPT SUCH DISALLOWANCE, IT IS NECESSA RY FOR THE AO TO RECORD SATISFACTION BEFORE REJECTING THE SAME. (2) SECTION 14A WOULD BE APPLICABLE ONLY TO INCOME ARISING FROM THE INVESTMENT PORTFOLIO AND NOT FROM STOCK-IN-TRAD E. ITA NOS. 6602 & 6603/DEL/2016 INDIABULLS REAL ESTATE LTD. & INDIABULLS FINANCIAL SERVICES LTD. 6 2. INDIABULLS FINANCIAL SERVICES LTD. VS DCIT [2016 ] 76 TAXMANN.COM 268 (DELHI)/[2017] 395 ITR 242 (DELHI) WHERE HONBLE DELHI HIGH COURT HELD THAT WHERE ASSESSING OFFICER AFTER CARRYING OUT ELABORATE ANALYSIS AND FOLLOWING STEPS ENACTED IN STATUTE, HAD DETERMINED AMOUNT OF EXPENDITURE INCUR RED FOR EARNING TAX EXEMPT INCOME, MERELY BECAUSE HE DID NO T EXPRESSLY RECORD HIS DISSATISFACTION ABOUT ASSESSEE 'S CALCULATION, HIS CONCLUSION COULD NOT BE REJECTED. 3. JUBILANT SECURITIES PVT. LTD. VS DCIT T20181 90 TAXMANN.COM 126 (DELHI)/[2018] 253 TAXMAN 284 (DELHI)/[2018] 40 0 ITR 527 (DELHI), 2018-TIQL- 75-HC-DEL-IT WHERE HONBLE DELH I HIGH COURT HELD THAT WHEN THE CIT(A) REDUCED THE QUANTUM OF DISALLOWANCE MADE U/S 14A AND THE ASSESSEE DID NOT FILE APPEAL AGAINST THE SAME, RAKING UP THE SAME ISSUE AFTER FO UR YEARS WHEN THERE IS A FAVOURABLE JUDICIAL DECISION ON REC ORD, IS AKIN TO RAISING A DISPUTE AGAINST A STALE ISSUE. 4. LALLY MOTORS INDIA (P.) LTD. VS PCIT (T20181 93 TAXMANN.COM 39 (AMRITSAR - TRIB.)/[2018] 170 ITD 370 (AMRITSAR - TRIB.) WHERE HONBLE ITAT AMRITSAR HELD THAT SECTION 14A W OULD APPLY EVEN IF NO DIVIDEND WAS EARNED BY ASSESSEE FROM INV ESTMENTS IN SHARES. 5. GODREJ & BOYCE MANUFACTURING COMPANY LTD. VS DCI T [2017] 81 TAXMANN.COM 111 (SC)/[2017] 247TAXMAN361 (SC)/[2 017] 394 ITR 449 (SC)/[2017] 295 CTR 121 (SC) WHERE HON BLE SUPREME COURT HELD THAT WHERE ASSESSING OFFICER AFT ER CARRYING OUT ELABORATE ANALYSIS AND FOLLOWING STEPS ENACTED IN STATUTE, HAD DETERMINED AMOUNT OF EXPENDITURE INCURRED FOR E ARNING TAX ITA NOS. 6602 & 6603/DEL/2016 INDIABULLS REAL ESTATE LTD. & INDIABULLS FINANCIAL SERVICES LTD. 7 EXEMPT INCOME, MERELY BECAUSE HE DID NOT EXPRESSLY RECORD HIS DISSATISFACTION ABOUT ASSESSEE'S CALCULATION, HIS C ONCLUSION COULD NOT BE REJECTED. 6. PUNJAB TRACTORS LTD VS CIT [2017] 78 TAXMANN.COM 65 (PUNJAB & HARYANA)/[2017] 246 TAXMAN 31 (PUNJAB & HARYANA)/[2017] 393 ITR 223 (PUNJAB & HARVANA)/[201 7] 293 CTR 50 (PUNJAB & HARYANA), 2017-TIQL-353- HC-P&H-IT WHERE HONBLE PUNJAB & HARYANA HIGH COURT HELD THAT AO IS BOUND TO APPLY PROVISIONS OF RULE 8D WHERE HE IS NOT SATISFI ED WITH THE CORRECTNESS OF THE CLAIM OF ASSESSEE IN RESPECT OF EXPENDITURES INCURRED TO EARN EXEMPT INCOME. 7. AVON CYCLES LTD VS CIT [2015] 53 TAXMANN.COM 297 (PUNJAB & HARYANA)/[2015] 228 TAXMAN 368 (PUNJAB & HARYANA HMAG.) WHERE HONBLE PUNJAB & HARYANA HIGH COURT HELD THAT WHERE FUNDS UTILIZED BY ASSESSEE WAS MIXED FUNDS AND, HEN CE, INTEREST PAID ON BORROWED FUND WAS ALSO RELATABLE TO INTERES T ON INVESTMENT MADE IN TAX FREE FUNDS, INTEREST EXPENDI TURE RELATABLE TO INVESTMENT IN TAX FREE FUNDS WAS TO BE COMPUTED UNDER PROVISIONS OF RULE 8D(2)(II). 8. NAHAR SPINNING MILLS LTD. VS CIT [2017] 82 TAXMA NN.COM 154 (PUNJAB & HARYANA)/[2017] 395 ITR 12 (PUNJAB & HARY ANA) WHERE HONBLE PUNJAB & HARYANA HIGH COURT HELD THAT DISALLOWANCE OF PROPORTIONATE ADMINISTRATIVE EXPEND ITURE MADE FOR EARNING EXEMPTED DIVIDEND INCOME COMPUTED ON RE ASONABLE BASIS WOULD BE JUST (A.Y.2006-07). 9. DY. CIT V. VIRAJ PROFILES LTD. F20151 64 TAXMANN .COM 52 (MUMBAI - TRIB.)/[2016] 46 ITR(T) 626 (MUMBAI - TRI B.)/[2016] ITA NOS. 6602 & 6603/DEL/2016 INDIABULLS REAL ESTATE LTD. & INDIABULLS FINANCIAL SERVICES LTD. 8 156 ITD 72 (MUMBAI - TRIB.)/[2016] 177 TTJ 466 (MUM BAI - TRIB.) WHERE HONBLE ITAT MUMBAI HELD THAT DISALLOW ANCE OF EXPENDITURE - ADDITION ON ACCOUNT OF DISALLOWANCE U NDER S. 14A READ WITH RULE 8D BEING EXPENDITURE IN RELATION TO EARNING OF EXEMPT INCOME TO BOOK PROFIT UNDER S. 115JB JUSTIFI ED. [S.115JB] 10. VIPIN MALIK VS ACIT [2017] 88 TAXMANN.COM 415(D ELHI - TRIB) /[2016] 45 ITR(T) 589(DELHI- TRIB) WHERE HONBLE ITAT DELHI HELD THAT DISALLOWANCE OF EXPENDITURE -EVENT INCOME - NO DISALLOWANCE WAS MADE BY THE ASS ESSE- INVOKING THE PROVISION READ WITH RULE8D(2)(III) WAS HELD TO BE JUSTIFIED[R.8D] (AY 2009-10) 9. THE LD. AR RELIED ON THE ORDER OF THE LD. CIT (A ). 10. HAVING GONE THROUGH THE FACTS ON RECORD AND APP LICABILITY OF THE CASE LAWS QUOTED BY THE LD. DR TO THE CASE B EFORE US, WE FIND THAT THE CASES REFERRED ARE MOSTLY WHERE THE R EVENUE HAS GONE THROUGH THE BOOKS OF ACCOUNTS, NOT SATISFIED W ITH THE DISALLOWANCE MADE BY THE ASSESSING OFFICER AND THE REASONS OF SUCH NON-SATISFACTION HAS BEEN MENTIONED IN DETAIL IN THE ORDERS, WHEREAS IN THE INSTANT CASE, THE BOOKS OF A CCOUNT HAVE BEEN PRODUCED BEFORE THE ASSESSING OFFICER WHICH HA VE BEEN EXAMINED ON TEST CHECK BASIS. (REFER ASSESSING OFFI CER ABOVE) WHILE RE-COMPUTING THE DISALLOWANCE, THE ASSESSING OFFICER HAS NOT FOLLOWED THE PROVISIONS OF SECTION 14A(2) OF TH E INCOME TAX ACT, 1961 WHEREIN IT IS MANDATED THAT, IF THE ASSES SING OFFICER HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE IS NO T SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE I N RESPECT OF ITA NOS. 6602 & 6603/DEL/2016 INDIABULLS REAL ESTATE LTD. & INDIABULLS FINANCIAL SERVICES LTD. 9 SUCH EXPENDITURE IN RELATION TO WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, THEN THE ASSESSING OFFI CER SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN REL ATION TO SUCH INCOME. FURTHER, THE ACT ALSO MANDATES THAT SU CH RE- COMPUTATION ALSO APPLIES IN RELATION TO A CASE WHER E THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURR ED BY HIM IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. FROM THE READING OF THE JUDGMENT OF THE HON BLE APEX COURT IN THE CASE OF MAXOPP INVESTMENT LTD. VS CIT IN CA NOS. 104-109 OF 2015, WE FIND THAT HAVING REGARD TO THE LANGUAGE OF SECTION 14A(2) OF THE ACT, READ WITH RULE 8D OF THE RULES, IT CLEAR THAT BEFORE APPLYING THE THEORY OF APPORTIONM ENT, THE AO NEEDS TO RECORD SATISFACTION THAT HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE SUO MOTO DISALLOWANCE UNDER SECTION 14A WAS NOT CORRECT. IT WILL BE IN THOSE CASES WHERE THE AS SESSEE IN HIS RETURN HAS HIMSELF APPORTIONED BUT THE AO WAS NOT A CCEPTING THE SAID APPORTIONMENT, IN THAT EVENTUALITY, THE AS SESSING OFFICER WILL HAVE TO RECORD ITS SATISFACTION TO THI S EFFECT. 11. IN THE INSTANT CASE, WE FIND THAT NO SUCH SATIS FACTION HAS BEEN RECORDED BY THE A.O TO COME TO THE CONCLUSION TO INVOKE THE PROVISIONS OF SECTION 14A(2). HENCE, WE DECLINE TO INTERFERE WITH THE ORDER OF THE LD. CIT (A) AND THE DISALLOWA NCE IS DIRECTED TO BE DELETED. 12. THE SIMILAR RATIO APPLIES TO GROUND NO. 1 IN IT A NO. 6603/DEL/2016. DEPRECIATION: ITA NOS. 6602 & 6603/DEL/2016 INDIABULLS REAL ESTATE LTD. & INDIABULLS FINANCIAL SERVICES LTD. 10 13. THE ASSESSING OFFICER ALLOWED THE CLAIM OF DEPR ECIATION ON SOFTWARE @25% AGAINST THE 60% DEPRECIATION CLAIMED BY THE ASSESSEE. THE LD. CIT (A) DELETED THE ADDITION ON T HE GROUNDS THAT THE ASSESSING OFFICER HAS MISLEAD HIMSELF TREA TING THE SOFTWARE AS INTANGIBLE ASSET. 14. HAVING GONE THROUGH THE RECORD, WE FIND THAT TH E NATURE OF THE SOFTWARE ACQUIRED WERE LICENSES, WHICH DO NOT C ONFER ANY ENDURING RIGHT AND COULD BE USED FOR THE DURATION A S ACQUIRED FOR BY THE LICENSOR. THE TAXPAYERS OBJECTIVE WAS T O USE COMPUTER SOFTWARE TO MAXIMIZE ITS PERFORMANCE AND S TREAMLINE EFFICIENCY. THE HONBLE BOMBAY HIGH COURT IN THE C ASE OF M/S I- FLEX SOLUTIONS LTD. REPORTED IN 225 TAXMANN 37 HELD THAT THERE IS NO REASON TO DIFFERENTIATE THE COMPUTER AND THE SOFTWARE AS THE LATTER IS AN INTEGRAL PART OF THE FORMER. THE S OFTWARE CANNOT BE SEEN IN ISOLATION DELINKED FROM THE COMPUTERS. S IMILAR VIEW HAS BEEN TAKEN BY THE CO-ORDINATE BENCH OF ITAT IN THE CASE OF MAKE MY TRIP (INDIA) PVT. LTD. VS DCIT IN ITA NO. 6055/DEL/2010 AND GLOBE CAPITAL MARKET LTD. VS CIT IN ITA NO. 2926/DEL/2012. THE ISSUE OF DEPRECIATION @60% ON TH E SOFTWARE IS NOW A SETTLED ISSUE BEYOND ANY PERPLEXI TY. HENCE, WE DECLINE TO INTERFERE WITH THE ORDER OF THE LD. C IT (A). EMPLOYEE COMPENSATION EXPENSES: 15. FOR THE GROUND RELATING TO CLAIM IN RESPECT OF EMPLOYEE STOCK OPTION SCHEME COMPENSATION (ESOP EXPENSES) OF RS.66.33 CRORES, THE ASSESSEE RELIED ON THE DECISIO N OF THE SPECIAL BENCH OF ITAT (BANGALORE), IN THE CASE OF M /S BIOCON LTD. ARGUES THAT IN THAT ORDER, A COMPREHENSIVE OVE R-VIEW OF ITA NOS. 6602 & 6603/DEL/2016 INDIABULLS REAL ESTATE LTD. & INDIABULLS FINANCIAL SERVICES LTD. 11 THE LEGAL POSITION REGARDING ALLOWABILITY OF ESOP E XPENSES HAS BEEN MADE BY THE ITAT IN THE LIGHT OF APPLICABLE AC COUNTING AND TAXATION PRINCIPLES. THE DECISION HAS SINCE BEEN AP PROVED BY THE HON'BLE JURISDICTIONAL HIGH COURT OF DELHI IN THE C ASE OF M/S LEMON TREE HOTELS LIMITED. HENCE, IT WAS REITERATED THAT THE CLAIM OF ESOP EXPENSES IS AN ALLOWABLE EXPENDITURE U/S 37(1) OF THE ACT. 16. THE LD. DR ARGUED THAT ESOP EXPENDITURE CLAIMED BY THE ASSESSEE IS NOT ALLOWABLE IN THIS YEAR BY GOING THR OUGH THE DETAILS FURNISHED BY THE ASSESSEE IN THE PAPER BOOK . 17. HEARD THE ARGUMENTS OF BOTH THE PARTIES AND PER USED THE MATERIAL AVAILABLE ON RECORD. 18. THE SPECIAL BENCH OF ITAT EXAMINED THE FOLLOWIN G ISSUES: *WHETHER ANY DEDUCTION OF DISCOUNT GIVEN ON SHARES IS ALLOWABLE? *IF YES WHEN AND HOW MUCH? *SUBSEQUENT ADJUSTMENT TO DISCOUNT? 19. THE TRIBUNAL EXAMINED THE ISSUE FROM THE PERSPE CTIVE OF CAPITAL EXPENDITURE AS LAID DOWN BY THE DELHI BENCH IN THE CASE OF RANBAXY LABORATORIES LTD. VS ADDL. CIT 39 SOT 17 . IT WAS HELD IN VIP INDUSTRIES VS DCIT IN ITA NO. 7242/MUM/ 2008 THAT THE SHORT RECEIPT OF PREMIUM ON RECEIVING OPTION TO THE EMPLOYEE WILL BE NOTIONAL LOSS BUT NOT ACTUAL LOSS FOR WHICH ANY LIABILITY HAS INCURRED. THE CHENNAI BENCH OF THE TR IBUNAL IN SSI LTD. VS DCIT 85 TTJ 1049 WHEREIN GRANTING OF DEDUCT ION OF THE DISCOUNT ON SHARES WAS TREATED AS EMPLOYEE COST. TH E ORDER HAS ITA NOS. 6602 & 6603/DEL/2016 INDIABULLS REAL ESTATE LTD. & INDIABULLS FINANCIAL SERVICES LTD. 12 BEEN RELIED UPON BY THE ORDER OF THE HONBLE HIGH C OURT OF MADRAS IN THE CASE OF CIT VS PVP VENTURES LTD. 211 TAXMANN 554. 20. IT WAS HELD THE AMOUNT OF DISCOUNT REPRESENTS T HE DIFFERENCE BETWEEN MARKET PRICE OF THE SHARES AT TH E TIME OF THE GRANT OF OPTION AND THE OFFER PRICE. IN ORDER TO BE ELIGIBLE FOR ACQUIRING THE SHARES UNDER THE ESOP, THE CONCERNED EMPLOYEES ARE OBLIGED TO RENDER SERVICES TO THE COMPANY DURIN G THE VESTING PERIOD AS GIVEN IN THE SCHEME. 21. THE SPECIAL BENCH HELD THAT THE DISCOUNTED PREM IUM ON SHARES IS A SUBSTITUTE TO GIVING DIRECT INCENTIVE I N CASH FOR AVAILING THE SERVICES OF THE EMPLOYEES. THERE IS NO DIFFERENCE IN THE SITUATIONS, (A) WHEN THE COMPANIES ISSUES SHARES TO PUBLIC AT M ARKET PRICE AND A PART OF PREMIUM IS GIVEN TO THE EMPLOYEES IN LIEU OF THEIR SERVICES, (B) WHEN THE SHARES ARE DIRECTLY ISSUED TO EMPLOYEE S AT A REDUCED RATE. 22. IN BOTH THE SITUATIONS, THE EMPLOYEES STAND COM PENSATED FOR THEIR EFFORTS. ESOP IS ONE SUCH MODE OF COMPENS ATING THE EMPLOYEES FOR THEIR SERVICES. SINCE, IT IS AN EXPEN DITURE FOR THE COMPANY, THE SAME NEEDS TO BE ALLOWED U/S 37(1) OF THE ACT. 23. AS TO WHEN AND HOW MUCH DEDUCTION IS TO BE CLAI MED, THE SPECIAL BENCH OBSERVED THAT THE PERIOD FROM GRANT O F OPTION TO THE VESTING OF OPTION IS THE VESTING PERIOD AND IT IS DURING SUCH PERIOD THAT AN EMPLOYEE IS SUPPOSED TO RENDER THE S ERVICE TO THE COMPANY SO AS TO EARN AND ENTITLEMENT TO THE SH ARES AT A ITA NOS. 6602 & 6603/DEL/2016 INDIABULLS REAL ESTATE LTD. & INDIABULLS FINANCIAL SERVICES LTD. 13 DISCOUNTED PRICE. IF THE VESTING PERIOD IS, SAY, FO UR YEARS WITH EQUAL VESTING AT THE END OF EACH YEAR, THEN IT IS A T THE END OF THE VESTING PERIOD OR DURING THE EXERCISE PERIOD, W HICH IN TURN IMMEDIATELY SUCCEEDS THE VESTING PERIOD, THAT THE E MPLOYEE BECOMES ENTITLED TO EXERCISE 100 OPTIONS OR QUALIFY FOR RECEIPT OF 100 SHARES AT DISCOUNT. THOUGH THE SHARES ARE AL LOTTED AT THE END OF THE VESTING PERIOD, BUT IT IS DURING SUCH VE STING PERIOD THAT THE ENTITLEMENT IS EARNED. IT MEANS THAT 25 O PTIONS VEST WITH THE EMPLOYEE AT THE END OF EACH YEAR ON HIS RE NDERING SERVICE FOR THE RESPECTIVE YEAR. IF DURING THE INTE RREGNUM, HE LEAVES THE SERVICE, SAY AFTER ONE YEAR, HE WILL STI LL REMAIN ENTITLED TO EXERCISE OPTION FOR 25 SHARES AT THE DI SCOUNTED PREMIUM AT THE TIME OF EXERCISE OF OPTION. IN THAT CASE, THE BENEFIT WHICH WOULD HAVE ACCRUED TO HIM AT THE END OF THE SECOND, THIRD AND FOURTH YEARS WOULD STAND FORFEITE D. THUS, IT BECOMES ABUNDANTLY CLEAR THAT AN EMPLOYEE BECOMES E NTITLED TO THE SHARES AT A DISCOUNTED PREMIUM OVER THE VESTING PERIOD DEPENDING UPON THE LENGTH OF SERVICE PROVIDED BY HI M TO THE COMPANY. IN ALL SUCH SCHEMES, IT IS AT THE END OF T HE VESTING PERIOD THAT OPTION IS EXERCISABLE ALBEIT THE PROPOR TIONATE RIGHT TO OPTION IS ACQUIRED BY RENDERING SERVICE AT THE E ND OF EACH YEAR. 24. THE CONTRA SITUATION TO THE COMPANY IS SUCH THA T THE OBLIGATION FALLS ON THE COMPANY TO ALLOT SHARES AT THE TIME OF EXERCISE OF THE OPTION DEPENDING UPON THE LENGTH OF THE SERVICE RENDERED BY THE EMPLOYEE DURING THE VESTING PERIOD. THE SPECIAL BENCH HELD THAT SUCH DISCOUNT IS DEDUCTIBLE OVER THE VESTING PERIOD ON STRAIGHT LINE BASIS. ITA NOS. 6602 & 6603/DEL/2016 INDIABULLS REAL ESTATE LTD. & INDIABULLS FINANCIAL SERVICES LTD. 14 25. TO SUM UP, IT WAS HELD THAT THE DISCOUNT UNDER ESOP IS IN THE NATURE OF EMPLOYEE COST AND HENCE DEDUCTIBLE DURING THE VESTING PERIOD. 26. FROM THE DETAILS FILED IN THE CASE INDIABULLS R EAL ESTATE LTD., WE FIND THAT TWO SCHEMES HAVE BEEN ISSUED BY THE ASSESSEE NAMELY, IBREL ESOP 2006 AND IBREL ESOP 200 7. THE SPREAD OF ESOP 2006 WAS FROM FY 2006-07 TO 2013-14 WHEREAS ESOP 2008 SPREAD FROM FY 2008-09 TO FY 2009-10. THE ASSESSEE HAS ALSO GIVEN THE DETAILS OF DATE OF VEST ING, NUMBER OF SHARES GRANTED, NUMBER OF SHARES VESTED, PERK VA LUE, TAXED IN THE HANDS OF EMPLOYEES, PERIOD OF VESTING. THE P ERK VALUE OF THE SHARE RANGED FROM RS.635/- TO RS.134/- AND RS.1 01/-. THE PERK VALUE OF THE SHARE ON THE DATE OF VESTING I.E. 01.11.2011 WAS RS.6158/-. THE DISCOUNT GIVEN IN THE ESOP 2008 SCHEME WAS RS.110.50. FURTHER, NO MATERIAL WAS PLACED AS T O WHAT WAS THE VALUE OF THE SHARES AS PER THE MARKET AT DIFFER ENT YEARS OF VESTING (PAGE 143 TO 154 PB). THE DETAILS IN THE CA SE OF INDIABULLS REAL ESTATE LTD. ARE AS PER THE TABLE BE LOW: SCHEME NAME ESOP EXP (FY 06-07) ESOP EXP (FY 07-08) ESOP EXP (FY 08-09) ESOP EXP (FY 09-10) ESOP EXP (FY 10-11) ESOP EXP (FY 11-12) ESOP EXP (FY 12-13) ESOP EXP (FY 13-4) IBREL-ESOP- 2006 246,370,340 354,992,832 41,052,997 12,051,561 3,051,602 210,003 96,248 33,613 IBREL- ESOP-2008 929,482 4,740,358 TOTAL 246,370,340 354,992,832 41,982,479 16,791,920 3,051,602 210,003 96,248 33,613 CUMULATIVE ESOP COST 246,370,340 601,363,172 643,345,652 660,137,571 663,189,1 73 663,399,1 76 663,495 ,423 663,529 ,036 DEDUCTION ALLOWED NIL NIL NIL NIL NIL NIL NIL NIL 27. THE DETAILS IN THE CASE OF INDIABULLS FINANCIAL SERVICES LTD. ARE AS UNDER: ITA NOS. 6602 & 6603/DEL/2016 INDIABULLS REAL ESTATE LTD. & INDIABULLS FINANCIAL SERVICES LTD. 15 28. HENCE, WHILE LAYING DOWN THE PRINCIPLE THAT THE DISCOUNT OFFERED ON THE SHARES UNDER THE ESOP OF SCHEME IS A LLOWABLE DEDUCTION U/S 37(1) OF THE ACT, WE HEREBY REMAND TH E MATTER TO THE FILE OF THE AO FOR THE LIMITED PURPOSE OF ARITH METIC CALCULATION OF APPORTIONING THE YEAR WISE DISCOUNT OVER THE PERIOD OF VESTING TAKING INTO CONSIDERATION, THE OP TIONS GRANTED TO THE EMPLOYEES, DETERMINATION OF THE PERK VALUE, FBT LEVIED AND ALLOW THE SAME AS PER THE PROVISIONS OF THE INC OME TAX ACT, 1961. 29. THE RATIO ON THE ISSUES IN ITA NO. 6602/DEL/201 6 WOULD BE APPLICABLE MUTATIS MUTANDIS TO THE SIMILAR ISSUES IN ITA NO. 6603/DEL/2016. SCHEME NAME ESOP EXP (FY 06-07 ESOP EXP (FY 07-08) ESOP EXP (FY 08-09) ESOP EXP (FY 09-10) ESOP EXP (FY 10-11) ESOP EXP (FY 11-12) ESOP EXP (FY 12-13) ESOP EXP (FY 13-14) IBFSL-ICSL-ESOP-2006 3,48,85,665 2,24,47,263 1,21,14,310 85,79,747 59,82,085 34,64,530 18,89,433 IBFSL-ICSL-ESOP-II-2006 24,78,799 36,87,969 30,94,563 20,30,218 14,77,803 10,59,274 7,54,296 3,07,713 ESOP-2008 2,93,81,331 8,24,45,171 5,00,.08,02 6 3,65,99,755 2,46,69,301 94,81,686 ESOP-2008-REGRANT-125-90 2,36,164 8,65,288 5,32,190 3,04 ,022 41,485 ESOP-2008-REGRANT-158-50 11,07,336 14,32,554 11,34,952 9,90,919 ESOP-2008-REGRANT-153-65 5,03,308 22,55,792 16,24,534 2,68,255 IBPSL-ICSL-ESOP-2006- REGRANT 54,30,664 81,28,900 71,25,968 63,38,096 44,33,448 IBFSL-ICSL-ESOP-II-2006- REGRANT 28,57,241 42,99,699 38,05,747 34,05,190 23,74,034 TOTAL 24,78,799 3,85,73,635 5,49,23,158 10,51,13,769 7,49,70,109 5,87,93,364 4,16,95,519 1,97,86,972 CUMULATIVE ESOP COST 4,10,52,433 9,S9,75,591 20,10,89,360 27,60,59,46 9 33,48,52,83 3 37,65,48,352 39,63,35,325 ACTUAL ESOP COST, ALLOWED NIL NIL NIL NIL NIL-CLAIM MADE NIL NIL 39,63,35,325 ITA NOS. 6602 & 6603/DEL/2016 INDIABULLS REAL ESTATE LTD. & INDIABULLS FINANCIAL SERVICES LTD. 16 30. IN THE RESULT, BOTH THE APPEALS OF THE REVENUE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 11/03/2020. SD/- SD/- (AMIT SHUKLA) (DR. B. R. R. KUMAR) JUDICIAL MEMBER ACCOUNT ANT MEMBER DATED: 11/03/2020 *SUBODH* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR