DCIT 3(2), MUMBAI V. KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD, MUMBAI

ITA 940/MUM/2010

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 4165 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 2 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-04-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 14-04-2015
• Assessment Year: 2003-2004
• Appeal Filed On: 05-02-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: F V IRANI
• Keywords: Business expenditure; Earning of tax free income; Retrospective amendment; Wholly owned subsidiary; Fair market value; Tax effect; Revenue expenditure; Capital expenditure
• Section: 43B; 80HHC; 14A; 37(1)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES A, MUMBAI , , , BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER AND SHRI RAJENDRA, ACCOUNTANT MEMBER ITA NO.940/MUM /2010 ASSESSMENT YEAR-2003-04 DCIT - 3(2), ROOM NO.608, 6 TH FLOOR, AAYAKAR BHAVAN, M.K.ROAD, MUMBAI-400020 / VS. KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 5A, 5 TH FLOOR, BAKHTAWAR, 229, NARIMAN POINT, MUMBAI-400021 PAN NO. AAACK5576C ( / REVENUE) ( / ASSESSEE) ITA NO.1653/MUM /2008 ASSESSMENT YEAR-2004-05 DCIT - 3(2), ROOM NO.608, 6 TH FLOOR, AAYAKAR BHAVAN, M.K.ROAD, MUMBAI-400020 / VS. KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 5A, 5 TH FLOOR, BAKHTAWAR, 229, NARIMAN POINT, MUMBAI-400021 PAN NO.AAACK5576C ( / REVENUE) ( / ASSESSEE) ITA NOS.940/MUM/2010, 1653/MUM/2008, 1416/MUM/2008, 861 & 862/MUM/2010 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 2 ITA NO.1416/MUM /2008 ASSESSMENT YEAR-2004-05 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 5A, 5 TH FLOOR, BAKHTAWAR, 229, NARIMAN POINT, MUMBAI-400021 / VS. DCIT - 3(2), ROOM NO.608, 6 TH FLOOR, AAYAKAR BHAVAN, M.K.ROAD, MUMBAI-400020 PAN NO.AAACK5576C ( / ASSESSEE) ( / REVENUE) ITA NOS.861 & 862/MUM /2010 ASSESSMENT YEAR-2005-06 & 2006-07 KOTAK MAHINDRA ASS ET MANAGEMENT CO. LTD. 36-38A, NARIMAN BHAVAN, 227, NARIMAN POINT, MUMBAI-400021 / VS. DCIT - 3(2), ROOM NO.608, 6 TH FLOOR, AAYAKAR BHAVAN, M.K.ROAD, MUMBAI-400020 PAN NO.AAACK5576C ( / ASSESSEE) ( / REVENUE) / REVENUE BY SHRI ARVIND KUMAR -DR / ASSESSEE BY SHRI F.V. IRANI / DATE OF HEARING : 06/04/2016 / DATE OF ORDER: 07/04/2016 ITA NOS.940/MUM/2010, 1653/MUM/2008, 1416/MUM/2008, 861 & 862/MUM/2010 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 3 / O R D E R PER JOGINDER SINGH (JUDICIAL MEMBER) THIS BUNCH OF FIVE APPEALS IS BY THE REVENUE AS WEL L AS BY THE ASSESSEE, CHALLENGING THE IMPUGNED RESPEC TIVE ORDERS OF THE LD. FIRST APPELLATE AUTHORITY, MUMBAI . FIRST, WE SHALL TAKE UP APPEAL OF THE REVENUE (ITA NO.940/MUM/2010 & ITA NO.1653/MUM/2008). 2. DURING HEARING OF THESE APPEALS, AT THE OUTSET, SHRI F.V. IRANI, LD. COUNSEL FOR THE ASSESSEE CONTE NDED THAT IN ITA NO.940/MUM/2010, THE TAX EFFECT IS RS.8,01,5 42/- AND IN ITA NO.1653/MUM/2003, THE TOTAL TAX EFFECT I S RS.7,45,794/-, THEREFORE, BOTH THESE APPEALS ARE NO T MAINTAINABLE BEING BELOW PRESCRIBED MONETARY LIMIT FOR FILING THE APPEAL BEFORE THIS TRIBUNAL. THE LD. DR, SHRI ARVIND KUMAR, DID NOT CONTROVERT THE FACTUAL MATRIX . 2.1. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD . IN VIEW OF THE ABOVE, IT IS NOTED THAT THE TAX EFFECT IN THE PRESE NT APPEALS IS BELOW PRESCRIBED LIMIT OF RS.10 LAKH FOR FILING THE APPEAL BEFORE THE TRIBUNAL. 2.2. IN VIEW OF THE FACT, THAT THE TAX EFFECT IN THE PRESENT APPEAL IS BELOW PRESCRIBED MONETARY LIMIT, AS CONTAINED IN CBDT INSTRUCTION NO.21 OF 2015, DATED ITA NOS.940/MUM/2010, 1653/MUM/2008, 1416/MUM/2008, 861 & 862/MUM/2010 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 4 10/12/2015 (F NO.279/MISC./142/2007-IT(PT), APPLICA BLE WITH RETROSPECTIVE EFFECT, WHEREIN, THE DEPARTMENT WAS ADVISED/DIRECTED BY THE BOARD NOT TO FILE APPEAL I N THE CASES WHERE THE TAX EFFECT DOES NOT EXCEED THE FOLL OWING MONETARY LIMIT.:- SL. NO. APPEALS IN INCOME TAX MATTERS MONETARY LIMIT (IN RS.) 1. BEFORE ITAT 10,00,000/ - 2. U/S 260 A BEFORE HONBLE HIGH COURT 20,00,000/ - 3. BEFORE HONBLE SUPREME COURT 25,00,000/ - AS PER THE AFORESAID INSTRUCTION/REVISED MONETARY LIMIT, THE DEPARTMENT IS NOT TO FILE APPEAL BEFORE THE TRIBUNAL, WHEREIN, THE TAX EFFECT IS LESS THAN RS.10,00,000/-, CONSEQUENTLY, THE APPEALS OF THE RE VENUE ARE NOT MAINTAINABLE, THEREFORE, THE APPEALS OF TH E REVENUE ARE DISMISSED AS NOT MAINTAINABLE. FINALLY, THE APPEALS OF THE REVENUE ARE DISMISSED A S NOT MAINTAINABLE. 3. NOW, WE SHALL TAKE UP APPEAL OF THE ASSESSEE FO R A.Y. 2004-05 (ITA NO.1416/MUM/2008), WHEREIN, FIRST GROUND RAISED BY THE ASSESSEE PERTAINS TO INTEREST INCOME FROM DEBENTURES/REC BONDS, WHICH WAS TREATED AS INC OME FROM OTHER SOURCES AMOUNTING TO RS.1,14,03,249/-. T HE LD. COUNSEL FOR THE ASSESSEE DID NOT PRESS THIS GROUND TO WHICH ITA NOS.940/MUM/2010, 1653/MUM/2008, 1416/MUM/2008, 861 & 862/MUM/2010 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 5 THE LD. DR ALSO HAS NO OBJECTION, THEREFORE, THIS G ROUND OF THE ASSESSEE IS DISMISSED AS NOT PRESSED. 4. THE NEXT GROUND PERTAINS TO ADDITION OF RS.5,12,333/- BEING THE DISALLOWANCE OF EMPLOYEES S TOCK OPTION PLAN (ESOP) EXPENSES. THE CRUX OF ARGUMENT O N BEHALF OF THE ASSESSEE IS THAT THE IMPUGNED ISSUE I S COVERED BY THE DECISION OF THE TRIBUNAL IN THE CASE OF DCIT VS ACCENTURE SERVICES PVT. LTD. (2010) TIOL 409-ITAT-M UMBAI, FOR WHICH OUR ATTENTION WAS INVITED TO PAGE 12 (PAR A-19 OF THE PAPER BOOK). THIS FACTUAL MATRIX WAS NOT CONTRO VERTED BY THE LD. DR. 4.1. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IN VIEW O F THE ABOVE, WE ARE REPRODUCING HEREUNDER THE RELEVANT PO RTION FROM THE AFORESAID ORDER DATED 23/03/2010 FOR READY REFERENCE AND ANALYSIS:- 17. GROUND NO. 5 IS AGAINST THE DELETION OF DISALLO WANCE OF EXPENSES ON EMPLOYEES STOCK PURCHASE PLAN AS THE EXPENSES INC URRED FOR THE BENEFIT OF PARENT COMPANY. 18. THE ASSESSEE COMPANY INCURRED CERTAIN EXPENSES ON ACCOUNT OF PAYMENTS MADE BY IT FOR THE SHARES ALLOTTED TO ITS E MPLOYEES IN CONNECTION WITH THE ESPP. THE AO HAD DISALLOWED RS. 9,06,788/- INCURRED BY THE ASSESSEE ON THE GROUND THAT THIS EXPEN DITURE IS NOT THE EXPENDITURE OF ASSESSEE COMPANY BUT THAT EXPENDI TURE IS OF ITA NOS.940/MUM/2010, 1653/MUM/2008, 1416/MUM/2008, 861 & 862/MUM/2010 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 6 PARENT COMPANY AND THE BENEFIT OF SUCH EXPENDITURE AC CRUES TO THE PARENT COMPANY AND NOT ASSESSEE. THE DISALLOWANCE MA DE BY THE AO HAS BEEN DELETED BY THE CIT(A) BY OBSERVING AS UNDER: - I HAVE GONE THROUGH THE SUBMISSIONS OF THE APPELLAN T AND PERUSED THE MATERIAL ON RECORD AND NOTED THAT THE COMMON SHARES OF ACCENTURE LTD. THE PARENT COMPANY, HAVE BEEN ALLOTTED TO THE EMPLOYEES OF ASPL AND NOT TO THE EMPLOYEES OF THE P ARENT COMPANY. THOUGH THE SHARES OF THE PARENT COMPANY HAVE BEEN AL LOTTED, THE SAME HAVE BEEN GIVEN TO THE EMPLOYEES OF THE APPELL ANT AT THE BEHEST OF THE APPELLANT. IT IS AN EXPENSE INCURRED BY THE APPELLANT TO RETAIN, MOTIVE AND AWARD ITS EMPLOYEES FOR THEIR HARD WO RK AND IS AKIN TO THE SALARY COSTS OF THE APPELLANT. AS HAS BE EN POINTED OUT BY THE APPELLANT, THIS IS A COMMON PRACTICE TO RETAIN AN D MOTIVATE HARD- WORKING EMPLOYEES WHICH IS BEING FOLLOWED BY ALL MAJ OR COMPANIES SUCH AS INFOSYS. FURTHER, THE AMOUNT THAT HAS BEEN C LAIMED BY THE APPELLANT IS THE DIFFERENCE IN THE MARKET PRICE OF THE SHARES OF ACCENTURE LTD AND THE EXERCISE PRICE OF SUCH SHARES BY THE EMPLOYEES OF AIPL AND NOT THE ENTIRE SHARE PRICE OF THE SHARES AL LOTTED. FURTHER, SUCH SHARES HAVE NOT BEEN ISSUED OUT OF THE SHARE CAP ITAL OF THE APPELLANT AND HENCE CANNOT BE SAID TO BE A CAPITAL EXPENDITURE. I HAVE ANALYSED THE DECISION OF SSI LTD. RELIED ON BY THE A PPELLANT AND AM OF THE VIEW THAT THE SAME IS APPLICABLE TO THE APPELLA NTS CASE. AS ARGUED BY THE APPELLANT, SUCH EXPENSE IS A QUALIFIED BUSINESS EXPENDITURE AND SHOULD BE ALLOWABLE IN COMPUTING THE TAXABLE INCOME OF THE APPELLANT. THIS ASPECT HAS BEEN UPHEL D IN VARIOUS JUDICIAL PRECEDENTS. ITA NOS.940/MUM/2010, 1653/MUM/2008, 1416/MUM/2008, 861 & 862/MUM/2010 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 7 BASED ON THE ABOVE, I AM OF THE OPINION THAT SUCH E XPENSES QUALIFY AS BUSINESS EXPENSES OF THE APPELLANT AND THE APPELLAN T SHOULD ACCORDINGLY BE GIVEN A DEDUCTION ON THIS ACCOUNT. AC CORDINGLY I HEREBY DELETE THE ADDITION MADE BY THE AO ON GROUND NO. 9. 19. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF THE PA RTIES AND PERUSED THE RECORD. THE CIT(A) HAS GIVEN A CATEGORICAL FINDING AFTER EXAMINING THE RELEVANT MATERIAL AND SUBMISSION OF THE ASSESSEE THAT SHARES WERE ALLOTTED TO ITS EMPLOYEES AND NOT TO THE EMPLOYEES OF THE PARENT COMPANY. THE EXPENSES INCURRED BY THE ASSESSEE TO MOTIVATE AND AWARD ITS EMPLOYEES FOR THEIR HARD WORK, WHICH AMOUN TS SALARY COST OF THE ASSESSEE COMPANY. THE EXPENDITURE INCURRED BY THE ASSESSEE FOR THE PURPOSE OF BUSINESS ON EMPLOYEES IS ALLOWABLE EXPENSES. THE CIT(A) HAS EXAMINED THE ENTIRE SCHEME AND FOUND THAT SUCH EXPENSES ARE BUSINESS EXPENSES AND SHOULD BE AL LOWABLE AS DEDUCTION. SINCE THERE IS NO CONTRARY MATERIAL TO THE FINDINGS OF THE CIT(A), IN THE LIGHT OF THAT WE CONFIRM THE ORDER OF CIT(A) ON THIS ISSUE. 4.2. OUR VIEW FURTHER FIND SUPPORT FROM THE DECISI ON IN NOVO NORDISK INDIA PVT. LTD. VS DCIT (ITA NO.1275/BANG/2011) ORDER DATED 30/09/2013. WE ARE REPRODUCING HEREUNDER THE RELEVANT PORTION FROM THE AFORESAID ORDER FOR ANALYSIS AND READY REFERENCE:- THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER DAT ED 03.10.2011 OF THE CIT(APPEALS)-III, BANGALORE RELATING TO ASSESS MENT YEAR 2006-07. ITA NOS.940/MUM/2010, 1653/MUM/2008, 1416/MUM/2008, 861 & 862/MUM/2010 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 8 2. IN THIS APPEAL, THE ONLY GRIEVANCE OF THE ASSESSE E IS AGAINST THE ACTION OF THE REVENUE AUTHORITIES IN DISALLOWING THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF SUM OF RS.1,51,91,003 AS E XPENDITURE INCURRED IN PROVIDING SHARES OF NOVO NORDISK A/S DENMA RK UNDER THE NOVO NORDISK INDIA PRIVATE LIMITED EMPLOYEE STOCK PURCHASE SCHEME, 2005. (HEREINAFTER REFERRED TO AS ESOP). THE F URTHER GRIEVANCE OF THE ASSESSEE IS WITH REGARD TO CHARGING OF INTEREST U/S. 234D OF THE ACT. 3. WE SHALL FIRST TAKE UP THE GRIEVANCE OF THE ASSESS EE WITH REGARD TO THE DISALLOWANCE OF EXPENDITURE INCURRED ON PROVIDIN G SHARES UNDER THE ESOP. THE FACTS NECESSARY FOR ADJUDICATION O F THE AFORESAID GROUND ARE AS FOLLOWS. 4. THE ASSESSEE (NNIPL) IS A WHOLLY OWNED SUBSIDIARY OF NOVO NORDISK A/S, DENMARK (NNAS) AND IS A PRIVATE LIMITED COMPANY INCORPORATED UNDER THE COMPANIES ACT, 1956, HAVING IT S REGISTERED OFFICE IN BANGALORE. IT IS PRIMARILY ENGAGED IN THE MA RKETING AND DISTRIBUTION OF HEALTHCARE PRODUCTS, SPECIFICALLY DIAB ETES CARE PRODUCTS SUCH AS INSULIN FORMULATIONS/OTHER INSULIN PRO DUCTS. IN CARRYING ON ITS BUSINESS ACTIVITIES IN INDIA, THE ASS ESSEE SOURCES THE PRODUCTS FROM INDIAN COMPANIES/NNAS AND MARKETS/ DISTRI BUTES SUCH PRODUCTS IN INDIA THROUGH WHOLESALE DISTRIBUTOR(S ). 5. NNAS THE PARENT COMPANY OF THE ASSESSEE HAS A SCH EME CALLED NNAS GLOBAL SHARE PROGRAMME, 2005 (THE PLAN). AS PER THE PLAN THE EMPLOYEES OF NNAS WERE ENTITLED TO PURCHASE SHARES OF NNAS AT A PRICE LESS THAN THE MARKET PRICE. THE SHARES OF NN AS ARE LISTED ON THE COPENHAGEN STOCK EXCHANGE. BY A BOARD RESOLUTI ON DATED 10.8.2005, THE BOARD OF DIRECTORS OF NNAS RESOLVED THAT THE EMPLOYEES OF FOREIGN AFFILIATES OF NNAS WOULD ALSO B E ENTITLED TO OPT TO PURCHASE SHARES OF NNAS UNDER THE PLAN. A COP Y OF THE INTERNATIONAL INFORMATION MEMORANDUM FOR PURCHASE OF EMP LOYEES SHARES IN NNAS AS GIVEN BY NNAS IS AT PAGE 32 TO 37 OF THE ASSESSEES PAPER BOOK. THE EMPLOYEES OF THE ASSESSEE WHO HAVE ITA NOS.940/MUM/2010, 1653/MUM/2008, 1416/MUM/2008, 861 & 862/MUM/2010 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 9 OPTED FOR ACQUIRING SHARES OF NNAS UNDER ESOP HAVE TO G IVE THEIR OPTION TO PURCHASE ON OR BEFORE 31.10.3005 AND PAY THE MONEY PAYABLE FOR ACQUIRING THE SHARES TO THE ASSESSEE. THE ASSESSEE WILL DEPOSIT THE PURCHASE PRICE SO COLLECTED FROM ITS EMPLO YEES AND MAKE A LUMP SUM PAYMENT TO NNAS ON BEHALF OF THE EM PLOYEES. NNAS WILL ALLOT SHARES DURING JANUARY-FEBRUARY, 2006. T HE EMPLOYEES WILL NOT BE ENTITLED TO SELL THE SHARES SO ALLOTTED TILL THE END OF 2008. THE MEMORANDUM FURTHER SETS OUT THE TAX A ND ACCOUNTING TREATMENT IN THE AFFILIATES AND IT READS T HUS: TAX AND ACCOUNTING TREATMENT IN THE AFFILIATES THE TOTAL BENEFIT FOR THE EMPLOYEES WILL IF PERMIT TED BY LOCAL RULES BE RECHARGED FROM NOVO NORDISK A/S TO THE RELEVANT AFF ILIATES USING THE AVERAGE MARKET PRICE FOR THE PERIOD 3RD OCTOBE R, - 17THE OCTOBER, 2005. THE RECHARGE WILL BE MADE IN LOCAL (CO NVERTIBLE) CURRENCIES BEFORE THE 15TH OF DECEMBER, 2005. THE RECHA RGE IS NECESSARY IN MOST COUNTRIES TO OBTAIN A LOCAL DEDUCTI ON FOR TAX PURPOSES. IN SOME COUNTRIES IT MIGHT BE NECESSARY TO GET AN APP ROVAL FROM THE CENTRAL BANK, TO BE ABLE TO PAY THE RECHARGE. IN OTHER COUNTRIES IT IS IMPOSSIBLE, DUE TO LEGAL RESTRICTIONS, TO ACCEP T A RECHARGE. 6. THE ASSESSEE FRAMED NOVO NORDISK INDIA PRIVATE LIMI TED EMPLOYEE STOCK PURCHASE SCHEME, 2005. (HEREINAFTER REF ERRED TO AS ESOP) WHEREBY IT OFFERED SHARES OF MNAS TO ITS EMP LOYEES SUBJECT TO CERTAIN TERMS AND CONDITIONS SET OUT IN T HE SCHEME. A COPY OF THE ESOP IS AT PAGE-28 TO 31 OF THE ASSESSE ES PAPER BOOK. FOR THE ASSESSMENT YEAR 2006-07, THE ASSESSEE FILED I TS RETURN OF INCOME ON NOVEMBER 29, 2006, REPORTING AN INCOME OF RS 58,399,200. DURING THE FY 2005-06, ELIGIBLE EMPLOYEE S OF ASSESSEE (NNIPL) WERE GIVEN THE OPTION OF PURCHASING SHARES OF ITS PARENT COMPANY NNAS UNDER THE NNAS GLOBAL SHARE PROGRAMME, 200 5 (THE PLAN). IN THIS REGARD, 231 EMPLOYEES OF THE C OMPANY HAD ITA NOS.940/MUM/2010, 1653/MUM/2008, 1416/MUM/2008, 861 & 862/MUM/2010 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 10 APPLIED FOR PURCHASE OF 12,931 SHARES AT THE PRICE OF D KK 150 PER SHARE. FURTHER, AS PER THE PLAN, THE DIFFERENCE BETWEEN THE PURCHASE PRICE OF THE SHARES AND THE AVERAGE MARKET PRICE OF THE SHARES DURING THE PURCHASE OFFER PERIOD (I.E., DKK 313. 39) AMOUNTING TO DKK 163.39 PER SHARE WAS RECHARGED BY NNAS TO NNIPL. THE PLAN WAS CONCEPTUALISED WITH A VIEW TO E NCOURAGING STOCK OWNERSHIP AMONG NNIPLS EMPLOYEES, TO MOTIVATE AND ENCOURAGE EMPLOYEES TO RENDER SERVICES WHICH WOULD CONT RIBUTE TO THE CONTINUED GROWTH AND SUCCESS OF THE COMPANY. ACC ORDINGLY, SINCE NNIPL HAS ACTUALLY INCURRED THE EXPENSES DURING THE SUBJECT FINANCIAL YEAR, THE ENTIRE AMOUNT OF ESOP RECHARGE COS T AMOUNTING TO DKK 2,112,796 (RS 15,191,003) WAS RECOGNISED AS E MPLOYEE COST, AND CLAIMED AS A DEDUCTIBLE EXPENDITURE IN COM PUTING THE TAXABLE INCOME OF NNIPL FOR THE AY 2006-07. 7. THE ASSESSEE SUBMITTED BEFORE THE AO THAT THE AFO RESAID EXPENDITURE WAS REVENUE EXPENDITURE WHOLLY AND EXCLUSI VELY LAID OUT OR EXPENDED FOR THE PURPOSE OF BUSINESS OR PROFESSI ON OF THE ASSESSEE AND SHOULD BE ALLOWED AS DEDUCTION U/S. 37 (1) OF THE ACT. THE ASSESSEE ALSO POINTED OUT THAT UNDER THE GUIDELI NES PRESCRIBED BY SEBI (EMPLOYEES STOCK OPTION SCHEME OR EMPLOYEE STOCK PURCHASE SCHEME) GUIDELINES, 1999, EXPENDITURE ON STO CK OPTION HAS TO BE TREATED AS A FORM OF EMPLOYEE COMPENSATION INCURRED BY THE COMPANY. THE ASSESSEE POINTED OUT THAT IT HAD P AID NNAS THE DIFFERENCE BETWEEN THE PRICE PAID BY THE EMPLOYEES FO R ACQUIRING THE SHARES OF NNAS AND THE AVERAGE MARKET PRICE OF THE SHARES DURING THE PURCHASE OFFER PERIOD AND THUS THE ASSESSEE HAD ACTUALLY INCURRED THE EXPENDITURE AND THERE HAS BEEN AN ACTUAL CASH OUTFLOW FROM THE ASSESSEE TOWARDS SUCH EXPENSES AND THAT THE EXPENDITURE WAS NOT OF NOTIONAL COST. THE ASSESS EE RELIED ON THE DECISION OF THE CHENNAI BENCH OF THE TRIBUNAL IN THE CASE OF SSI LTD. V. DCIT, 85 TTJ 1049 (CHN), WHEREIN IT WAS HELD THAT THE DISCOUNT ON ESOP I.E., THE DIFFERENCE BETWEEN THE MA RKET VALUE OF THE SHARES AND THE PRICE AT WHICH THE SHARES HAVE BEE N GIVEN TO THE ITA NOS.940/MUM/2010, 1653/MUM/2008, 1416/MUM/2008, 861 & 862/MUM/2010 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 11 EMPLOYEES HAS TO BE ALLOWED AS AN EXPENDITURE. THE A SSESSEE ALSO BROUGHT TO THE NOTICE OF THE AO, CBDT CIRCULAR NO.9 OF 2007 DATED 20.12.07 WHICH WAS ISSUED IN RELATION TO FRINGE BENEF IT TAX IN WHICH IN ANSWER TO QUESTION NO.16, THE BOARD HAS CLARIFIED THAT THE DIFFERENCE BETWEEN THE MARKET PRICE AND EXERCISE PRICE A RISING ON ACCOUNT OF SHARES ALLOTTED OR TRANSFERRED UNDER ESOP IS A LLOWABLE AS DEDUCTION IN CALCULATING THE TAXABLE INCOME OF T HE EMPLOYER. 8. THE AO, HOWEVER, DID NOT AGREE WITH THE SUBMISSIO NS MADE ON BEHALF OF THE ASSESSEE. IN THIS REGARD, THE AO CONSID ERED NNIPL EMPLOYEE STOCK PURCHASE SCHEME, 2005 IN WHICH UNDER C LAUSE (4) THERE WAS A LOCK-IN PERIOD PROVIDED DURING WHICH THE SH ARES CANNOT BE SOLD OR TRANSFERRED BY THE EMPLOYEE. THE LOCK-IN PERI OD WAS THREE YEARS. THE AO WAS OF THE VIEW THAT BECAUSE OF T HE LOCK-IN PERIOD, IT WAS A CAPITAL EXPENDITURE. THE SECOND REASO N GIVEN BY THE AO FOR NOT ACCEPTING THE CLAIM OF THE ASSESSEE F OR DEDUCTION OF THE AFORESAID EXPENDITURE WAS THAT THE EXPENDITURE RESU LTED IN CAPITAL BUILDING OF THE PARENT COMPANY AND THEREFORE T HERE WAS NO EXPENDITURE INCURRED BY THE ASSESSEE IN THE REGULAR COURS E OF ITS BUSINESS. ON THE RELIANCE PLACED BY THE ASSESSEE ON CBDT CIRCULAR NO.9 OF 2007, THE AO HELD THAT FBT WAS ONLY TAXED F ROM THE A.Y. 2007-08 AND THEREFORE THE CIRCULAR REFERRED TO BY THE ASSE SSEE WOULD BE IRRELEVANT FOR THE A.Y. 2006-07. THE AO ALSO OBSERVED THAT THE SHARES OF NNAS WERE LISTED IN COPENHAGEN STO CK EXCHANGE, DENMARK AND NOT IN ANY INDIAN STOCK EXCHAN GE AND THEREFORE SEBI GUIDELINES WERE NOT APPLICABLE TO THE T RANSACTIONS. THE AO DISTINGUISHED THE DECISION RELIED ON BY THE A SSESSEE IN THE CASE OF SSI LTD. (SUPRA) BY OBSERVING THAT SSI WAS A LISTED COMPANY IN INDIAN STOCK EXCHANGE AND THEREFORE AS PER SEBI GUI DELINES, THE EXPENSES WERE DEBITED TO THE P&L ACCOUNT. FURTHER, TH E AO OBSERVED THAT THE EMPLOYEES WERE FREE TO TRANSFER THEIR S HARES WHENEVER THEY LIKED WITHOUT ANY LOCK-IN PERIOD. THE A O THUS DISTINGUISHED THE DECISION RELIED UPON BY THE ASSESS EE. THE AO ITA NOS.940/MUM/2010, 1653/MUM/2008, 1416/MUM/2008, 861 & 862/MUM/2010 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 12 ACCORDINGLY DISALLOWED THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF ESOP EXPENSES. 9. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PREFE RRED AN APPEAL BEFORE THE CIT(APPEALS). THE CIT(A) AGREED WI TH THE SUBMISSIONS OF THE ASSESSEE THAT THE EXPENDITURE IN QUESTION WAS NOT A CAPITAL EXPENDITURE. THE CIT(A) ALSO HELD THAT LIABILITY WAS NOT CONTINGENT OR UNASCERTAINED. HE NOTICED THE FOLLOWING FACTS AS IT TRANSPIRED FROM THE RECORDS:- 5.2 FROM AN EXAMINATION OF THE FACTS OF THE CASE, I FIND THAT THE FOLLOWING FACTS ARE RELEVANT T A PROPER APPRAISAL OF TH E ISSUE: A) THE ESOP IS ISSUED BY THE FOREIGN PARENT OF THE AP PELLANT OUT OF ITS OWN SHARE-HOLDING B) THE APPELLANT IS ONLY A CONDUIT FOR THE ISSUE OF THE ESOPS BY THE PARENT WITH REGARD TO THE PAPERWORK, COLLECTION OF OPTIO NS, PROVIDING DATA FOR ELIGIBILITY ETC. NO DIRECT LIABILIT Y IN THE FORM OF SHAREHOLDING OBLIGATION IN COSTS ACCRUES TO THE APPEL LANT IN THE SCHEME. C) IT IS THE FOREIGN PARENT WHICH HAS IMPOSED THE LIA BILITY FOR RECHARGE OF THE DISCOUNTED PORTION OF THE ESOP UPON THE APPELLANT D) THE DISCOUNTED AMOUNT IS AN EXPENDITURE NOT TO M EET ANY OUTSIDE LIABILITY BUT ONLY A REIMBURSEMENT TO THE P ARENT COMPANY FOR THE AMOUNT OF SHORTFALL IN THE LATTERS BOOKS ON THE DISCOUNTED ISSUE OF ESOPS. 10. THE CIT(A) THEREAFTER FORMULATED A QUESTION AS TO WHETHER THE CLAIM OF THE ASSESSEE FOR DEDUCTION HAS TO BE CONSID ERED AS ALLOWABLE U/S. 37(1) OF THE ACT. THE CIT(A)S REASON S MAY BE SUMMED UP THUS: ITA NOS.940/MUM/2010, 1653/MUM/2008, 1416/MUM/2008, 861 & 862/MUM/2010 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 13 A) THE PARENT COMPANY AT DENMARK HAS HANDED OVER A BEN EFIT OUT OF ITS OWN STOCK HOLDING (NO NEW SHARES ARE FLOATED F OR THE ESOP), AND IN THE FITNESS OF NORMAL ACCOUNTING PRINCIPLES, I T SHOULD BEAR THE LIABILITY FOR THE DISCOUNT INSTEAD OF PASSING ON THIS LIABILITY TO THE APPELLANT BY A PURELY ADMINISTRATIVE, INTERNAL ARRAN GEMENT. THE PARENT COMPANY PERHAPS WOULD NOT BE ENTITLED TO D EDUCTION OF SUCH DISCOUNT AS IT WOULD FALL CLEARLY IN THE REALM O F CAPITAL EXPENDITURE SINCE ITS OWN SHARE CAPITAL BASE IS INVOL VED. B) THE ARRANGEMENT BETWEEN THE ASSESSEE AND NNAS WAS A CLEVERMECHANISM TO PASS ON THE LIABILITY OF NNAS TO THE AFFILIATE IN INDIA (THE ASSESSEE) WHO WOULD MAKE THE TAX DEDUCTI ON CLAIM AS AN EMPLOYEE EXPENSE. THE INTENTION FOR ROUTING THIS LIA BILITY TO THE ASSESSEE IS TO FACILITATE THE TAX DEDUCTION CLAIM O F THE AFFILIATE. A CAPITAL EXPENDITURE OF THE PARENT COMPANY AT DENMARK I S BEING CLOAKED IN THE GARB OF THE REVENUE EXPENSE CLAIM OF T HE AFFILIATE IN INDIA. C) THERE WAS NO BUSINESS EXPEDIENCY FOR THE ASSESSEE TO HAVE PAID THE DIFFERENCE IN PRICE OF THE SHARES BECAUSE A LEGITI MATE LIABILITY OF THE PARENT COMPANY WOULD NOT BE EXPENDITURE LAID OU T WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OF THE ASSESSEE. D) EVEN IF FOR ARGUMENTS SAKE THE EXPENDITURE IS CONS IDERED AS A BUSINESS EXPENDITURE, IT IS CLEARLY A RELATED-PARTY TRAN SACTION WHICH IS LIABLE TO BE HIT BY THE PROVISIONS OF SEC 40A(2)( B) SINCE THERE IS NO JUSTIFIABLE REASON WHY THIS PAYMENT SHOULD HAVE TO B E ABSORBED BY THE APPELLANT IN INDIA WHEN THE LARGESSE AND SHARES I NVOLVED ARE THOSE OF ITS PARENT COMPANY AT DENMARK. E) SEBI GUIDELINES ARE NOT APPLICABLE BECAUSE THE SH ARES WERE NOT ISSUED UNDER ANY ESOP RECOGNIZED BY SEBI. 11. FOR THE SAKE OF READY REFERENCE THE OBSERVATIONS OF THE CIT(A) ARE ALSO REPRODUCED: ITA NOS.940/MUM/2010, 1653/MUM/2008, 1416/MUM/2008, 861 & 862/MUM/2010 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 14 5.4. THUS, THE BASIC ISSUE THAT IS TO BE CONSIDERE D IN THIS APPEAL IS WITH REGARD TO THE BUSINESS EXPEDIENCY OF THE EXPENDI TURE, IE. ITS ALLOWABILITY U/S 37(1) OF THE ACT. ON THIS COUNT, I FIND THAT THE FOLLOWING ARE THE RELEVANT FACTS OF THE MATTER: A) THE APPELLANT AND ITS FOREIGN PARENT (NNAS) CLAIM TO HAVE OFFERED THE ESOPS TO ENCOURAGE STOCK OWNERSHIP AMONG T HE APPELLANTS EMPLOYEES AND TO MOTIVATE AND ENCOURAGE THEM IN THEIR PERFORMANCE. B) NNAS, THE FOREIGN PARENT COMPANY, ISSUED THE ESOP VOLUNTARILY AT A DISCOUNTED VALUE WITHOUT HOWEVER SHOULDERING THE LIABILITY FOR THE SAME, VIA THE MECHANISM OF A RECHARGE OF THE DI SCOUNT OBTAINED FROM THE APPELLANT. C) THE APPELLANT HAS ABSORBED A LIABILITY NOT ARISING OUT OF ITS OWN REGULAR BUSINESS, BUT ONLY TO REIMBURSE ITS PARENT COMPA NY IN DENMARK FOR THE DISCOUNT WHICH THE LATTER HAS OFFERED O N ITS OWN VOLITION. D) IN THE INTERNATIONAL MEMORANDUM REFERRED TO ABOVE F ROM THE PARENT COMPANY, IT IS STATED UNDER THE HEADING TAX A ND ACCOUNTING TREATMENT IN THE AFFILIATES AS FOLLOWS: THE TOTAL BENEFIT FOR THE EMPLOYEES WILL - IF PERMIT TED BY LOCAL RULES - BE RECHARGED FROM NOVO NORDISK A/S TO THE RELEVANT AFF ILIATES USING THE AVERAGE MARKET PRICE FOR THE PERIOD 3 OCTOBER 17 OCTOBER 2005. THE RECHARGE WILL BE MADE IN LOCAL (CONV ERTIBLE) CURRENCIES BEFORE THE 15TH OF DECEMBER 2005. THE RECHARGE IS NECESSARY IN MOST COUNTRIES TO OBTAIN A LOCAL DEDUCTI ON FOR TAX PURPOSES. (EMPHASIS IS MINE). 5.5. FROM THE ABOVE IT CAN BE SEEN THAT THE ESOP ARRAN GEMENT WAS MEANT TO ACHIEVE SEVERAL OBJECTIVES SIMULTANEOUSLY. NOT ONLY WERE THE EMPLOYEES TO BE MOTIVATED AND ENCOURAGED, THE FO REIGN PARENT COMPANY NNAS WAS SIMULTANEOUSLY COVERING THE LOSSES ARISING ITA NOS.940/MUM/2010, 1653/MUM/2008, 1416/MUM/2008, 861 & 862/MUM/2010 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 15 FROM ITS LARGESSE BY A MECHANISM OF A RECHARGE FROM TH E APPELLANT. AT THE SAME TIME, THIS WAS DONE WITH THE EXPRESS INTENTION OF USING THE RECHARGE AS A MEANS TO OBTAI N TAX DEDUCTION FOR THE APPELLANT IN ITS OWN COUNTRY OF LOC ATION. 5.6. THERE COULD BE PROPPED AN ARGUMENT THAT THE ESOPS ARE ACTUALLY IN THE FORM OF AN ENHANCED EMPLOYEE COMPENS ATION AND WELFARE PLAN AND ARE INCURRED TO HELP THE APPELLANT C ARRY ON HIS BUSINESS. TO THIS EXTENT, THE EXPENSES INCURRED BY T HE APPELLANT COULD QUALIFY AS EXTENDED EXPENSES ON PAYROLL OR EMPL OYEE COSTS OR AS A STAFF WELFARE MEASURE. HOWEVER, IT IS THE INTENT ION BEHIND THE ARRANGEMENT, AND THE CONSEQUENTIAL MECHANISM ADOPTED TO WORK THAT INTENTION, THAT WEAKENS THE APPELLANTS CASE D RASTICALLY. THE PARENT COMPANY AT DENMARK HAS HANDED OVER A BENEFIT OU T OF ITS OWN STOCK HOLDING (NO NEW SHARES ARE FLOATED FOR THE E SOP), AND IN THE FITNESS OF NORMAL ACCOUNTING PRINCIPLES, IT SHOU LD BEAR THE LIABILITY FOR THE DISCOUNT INSTEAD OF PASSING ON THI S LIABILITY TO THE APPELLANT BY A PURELY ADMINISTRATIVE, INTERNAL ARRANGEME NT. HOWEVER, THE PARENT COMPANY PERHAPS WOULD NOT BE ENTI TLED TO DEDUCTION OF SUCH DISCOUNT AS IT WOULD FALL CLEARLY IN THE REALM OF CAPITAL EXPENDITURE SINCE ITS OWN SHARE CAPITAL BASE IS INVOLVED. THIS BEING THE CASE, I AM CONSTRAINED TO VIEW THIS A RRANGEMENT AS A CLEVER-MECHANISM TO PASS ON THE LIABILITY TO THE AF FILIATE IN INDIA (THE APPELLANT) WHO WOULD MAKE THE TAX DEDUCTION CL AIM AS AN EMPLOYEE EXPENSE. THE INTERNATIONAL MEMORANDUM REVEALS AS MUCH. THE INTENTION FOR ROUTING THIS LIABILITY TO TH E APPELLANT IS VERY CLEAR FROM THAT DOCUMENT TO BE TO FACILITATE THE TAX DEDUCTION CLAIM OF THE AFFILIATE. IN THIS VIEW, WHAT IS ACTUA LLY HAPPENING IS THAT THE CAPITAL EXPENSE OF THE PARENT COMPANY AT DE NMARK IS BEING CLOAKED IN THE GARB OF THE REVENUE EXPENSE CLAI M OF THE AFFILIATE IN INDIA. IN THESE CIRCUMSTANCES, THE POIN T TO BE CONSIDERED IS WHETHER SUCH A REIMBURSEMENT MADE TO THE PARENT Q UALIFIES TO BE TAKEN AS BUSINESS EXPENDITURE AT ALL FOR THE PUR POSE OF SEC 37(1) OF THE ACT. IN TERMS OF BUSINESS EXPEDIENCY, I AM NOT ITA NOS.940/MUM/2010, 1653/MUM/2008, 1416/MUM/2008, 861 & 862/MUM/2010 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 16 CONVINCED THAT CUSHIONING A LEGITIMATE LIABILITY OF THE PARENT COMPANY (A LIABILITY WHICH IT HAS VOLUNTARILY RAISED) DUE TO EITHER TAX CLAIM CONSIDERATIONS AS STATED, OR POSSIBLY TO TH E DICTATES OF THE PARENT (OR DUE TO BOTH FACTORS) - QUALIFIES THE CLAIM OF THE APPELLANT AS EXPENDITURE LAID OUT WHOLLY AND EXCLUSIVELY FO R THE PURPOSES OF THE BUSINESS. MOREOVER, I FIND THAT EVEN IF FOR ARGUME NTS SAKE ALONE, THE SAME IS CONSIDERED AS A BUSINESS EXPENDIT URE, EVEN SO IT IS CLEARLY A RELATED-PARTY TRANSACTION WHICH IS LIABLE TO BE HIT BY THE PROVISIONS OF SEC 40A(2)(B) SINCE THERE IS NO JUSTIFI ABLE REASON WHY THIS PAYMENT SHOULD HAVE TO BE ABSORBED BY THE APPEL LANT IN INDIA WHEN THE LARGESSE AND SHARES INVOLVED ARE THOSE OF ITS PARENT COMPANY AT DENMARK. THIS PARENT COMPANY IS ITSELF A S EPARATE TAXABLE ENTITY AND COULD HAVE SET OFF THESE EXPENSE S AGAINST ITS SHARE PREMIUM OR OTHER RELEVANT CAPITAL ACCOUNT, AS PER N ORMAL ACCOUNTING PRINCIPLES. IN THIS CONNECTION, THE RELIAN CE ON SEBI GUIDELINES BY THE APPELLANT AT PARA 2.2 OF HIS SUBMI SSION DATED 22.11.2010 IS COMPLETELY MISPLACED SINCE THE INDIAN COMPANY HAD NOT ISSUED SHARES UNDER THE CONCERNED ESOP AT ALL. 5.7. WITH REGARD TO THE CASE-LAWS CITED BY THE APPELL ANT, I FIND THAT IN THE ACCENTURE CASE BEFORE 1TAT MUMBAI [ITA NO. 454 0/M/08], THERE ARE MATERIAL DIFFERENCES IN THE FACTS OF THAT CAS E AND THE ONE BEFORE US. IN THE ACCENTURE CASE, THE SHARES WERE CLEARL Y STATED BY THE CIT(A) TO BE ALLOTTED TO THE EMPLOYEES OF THE A FFILIATE BY THE PARENT COMPANY AT THE BEHEST OF THE AFFILIATE. SO IN A WAY, THE LIABILITY HAS BEEN INVITED BY THE AFFILIATE ONTO IT SELF. THERE IS NO SUCH INITIATIVE FROM THE PRESENT APPELLANT WHICH IS RECORDED IN THE MEMORANDUM OF PURCHASE, RATHER IT ONLY MENTIONS THAT TH E BOARD OF DIRECTORS OF THE PARENT COMPANY TOOK THIS DECISION TO ALLOT ESOPS OF B SHARES OUT OF ITS OWN STOCK HOLDING. HENCE, T HE BASIC ANOMALY OF THE APPELLANTS INTENTION IN DONNING THIS LIABIL ITY WHICH BELONGS TO ITS PARENT PREVAILS. HOWEVER, THIS ISSUE IS IN ANY CASE DISTINCT IN THE APPELLANTS CIRCUMSTANCES SINCE WHATEVER BE THE A DMINISTRATIVE ARRANGEMENT, THE EXPENDITURE IS NOT JUSTIFIABLE AS IT DOES NOT ITA NOS.940/MUM/2010, 1653/MUM/2008, 1416/MUM/2008, 861 & 862/MUM/2010 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 17 PERTAIN TO THE APPELLANT AND ANY PERCEIVED BENEFITS A RE ALSO NOT LIMITED TO IT ALONE, BUT ARE EXTENDABLE TO THE ENTIRE GROUP HEADED BY THE PARENT COMPANY AT DENMARK, OF WHICH THE APPELL ANT IS ONLY A CONTRIBUTING PART. 12. AGGRIEVED BY THE ORDER OF THE CIT(APPEALS), THE AS SESSEE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. WE HAVE HEARD THE SUBMISSIONS OF THE LD. COUNSEL FOR THE ASSESSEE AND THE LD. DR. 13. THE LD. COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NO TICE THAT THE FACTS OF THE ASSESSEES CASE WERE IDENTICAL TO THE F ACTS AS IT PREVAILED IN THE CASE OF DCIT V. ACCENTURE SERVICES PV T. LTD. ,ITA 4540/MUM/2008 FOR THE A.Y. 2002-03, ORDER DATED 23.3.2 010. IN THE AFORESAID CASE, THE TRIBUNAL CONSIDERED AN IDENTIC AL ESOP WHEREBY THE INDIAN COMPANY ISSUED SHARES OF ITS FOREIG N PARENT COMPANY AND CLAIMED THE DIFFERENCE OF THE ISSUE PRICE AND THE FAIR MARKET VALUE AS AN ESOP COST. THE TRIBUNAL UPHELD THE CLAIM OF THE ASSESSEE. THE LD. COUNSEL FURTHER BROUGHT TO OUR NOTICE THAT THE CIT(APPEALS) IN PARA 5.7 OF HIS ORDER AFTER MAKING A REF ERENCE TO THE DECISION OF THE TRIBUNAL IN THE CASE OF ACCENTURE (SUPRA), HELD THAT IN THAT CASE, THE SHARES IN THAT CASE WERE ISSUE D TO THE EMPLOYEES AT THE BEHEST OF THE INDIAN AFFILIATE, WH EREAS IN THE INSTANT CASE OF THE ASSESSEE, THERE IS NOTHING TO SH OW THAT THE ASSESSEE TOOK INITIATIVE TO REWARD ITS EMPLOYEES WITH AN ESOP RATHER IT WAS THE FOREIGN PARENT COMPANY WHO TOOK THE I NITIATIVE TO ISSUE SHARES TO EMPLOYEES OF ITS AFFILIATES IN INDIA . IT WAS POINTED OUT THAT THIS OBSERVATION OF THE CIT(A) IS FACTUALLY INCORRECT, BECAUSE IN THE CASE OF ACCENTURE (SUPRA), THE SHARES W ERE ISSUED AT THE BEHEST OF THE INDIAN COMPANY AND NOT AT THE INS TANCE OF THE FOREIGN PARENT COMPANY, AS HAS BEEN WRONGLY UNDERSTOOD BY THE CIT(A) IN PARA 5.7 OF HIS ORDER. 14. IT WAS FURTHER SUBMITTED THAT THE OBSERVATIONS OF THE CIT(A) THAT BY ISSUE OF ESOP, THE FOREIGN PARENT COMPANY AT DENMARK WAS BENEFITED WILL BE NO GROUND TO DISALLOW A LEGITIMATE BUSINESS ITA NOS.940/MUM/2010, 1653/MUM/2008, 1416/MUM/2008, 861 & 862/MUM/2010 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 18 EXPENDITURE OF THE ASSESSEE WHICH WAS EMPLOYEE COST OF THE ASSESSEE. THE LD. COUNSEL FOR THE ASSESSEE DREW OUR AT TENTION TO THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF SASSOON J. DAVID & CO. (P) LTD. V. CIT, 118 ITR 261 (SC), WHERE IN THE HONBLE APEX COURT TOOK THE VIEW THAT IF THE ASSESSEE INCURRED ANY EXPENDITURE IN THE COURSE OF ITS BUSINESS, EVEN VOLUN TARILY AND EVEN WITHOUT NECESSITY, BUT IF IT IS INCURRED FOR PROMOTING THE BUSINESS AND TO EARN PROFIT, DEDUCTION U/S. 37(1) OF THE ACT H AS TO BE ALLOWED. THE HONBLE COURT FURTHER HELD THAT THE FACT THAT SOMEBODY OTHER THAN THE ASSESSEE IS ALSO BENEFITED B Y THE EXPENDITURE, SHOULD NOT COME IN THE WAY OF EXPENDITU RE BEING ALLOWED AS DEDUCTION. 15. OUR ATTENTION WAS ALSO DRAWN TO THE DECISION OF T HE HONBLE KARNATAKA HIGH COURT IN THE CASE OF MYSORE KIRLOSKAR LTD ., 166 ITR 836 (KAR), WHEREIN FOLLOWING THE HONBLE SUPREME COU RT DECISION IN THE CASE OF SASSOON J. DAVID & CO. (P) LTD. (SUPRA), THE HONBLE KARNATAKA HIGH COURT HELD THAT THE FACT THAT SOMEBODY OTHER THAN THE ASSESSEE IS ALSO BENEFITED BY THE EXPENDITURE SH OULD NOT COME IN THE WAY OF AN EXPENDITURE BEING ALLOWED AS DEDUCT ION U/S. 37(1) OF THE ACT. 16. OUR ATTENTION WAS ALSO DRAWN TO THE DIRECT TAX NOT IFICATION NO.323 DATED 11.10.2011, WHICH WAS A NOTIFICATION I SSUED IN EXERCISE OF POWERS CONFERRED U/S. 17(2) OF THE ACT. THE CENTRAL GOVERNMENT IN THE AFORESAID NOTIFICATION HAS SPECIFIE D THE GUIDELINES WHICH NEED TO BE FOLLOWED WHEN SHARES ARE ALLOTTED UNDER AN ESOP SCHEME. IN CLAUSE (6) OF THE AFORESAID GUIDELINES, THE CENTRAL GOVT. HAS LAID DOWN THAT WHERE SHARES OF A PARENT COMPANY ARE ISSUED UNDER AN ESOP, THE COMPANY ISSUING ESOP HAS TO GIVE THE REQUIRED PARTICULARS TO THE CHIEF COMMISSIO NER OF INCOME-TAX (CCIT) WITH AN ENGLISH TRANSLATION OF T HE PLAN OR SCHEME, IF THE SAME IS IN A LANGUAGE OTHER THAN ENGL ISH. IT WAS POINTED OUT THAT THE ASSESSEE HAD DULY COMPLIED WIT H THE AFORESAID GUIDELINES AND FILED THE ESOP SCHEME WITH THE CCIT AS EARLY AS ITA NOS.940/MUM/2010, 1653/MUM/2008, 1416/MUM/2008, 861 & 862/MUM/2010 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 19 05.12.2005. THE LD. COUNSEL DREW OUR ATTENTION TO TH E OBSERVATIONS OF THE CIT(APPEALS) IN PARA 5.6 OF HIS ORDER, WHEREBY THE CIT(A) HAS OBSERVED THAT THE ARRANGEMENT BY WHICH THE ASSESSEE IS SUED THE SHARES AT A DISCOUNT TO ITS EMPLOYEES OF THE PARENT C OMPANY UNDER AN ESOP AND PAID THE DIFFERENCE BETWEEN THE ISSUE PRI CE AND THE FAIR MARKET VALUE OF THE SHARES AS REIMBURSEMENT TO THE PARENT COMPANY WAS A MECHANISM TO PASS ON THE LIABILITY TO THE INDIAN COMPANY ONLY TO ENABLE THE INDIAN COMPANY TO AVAIL OF THE TAX DEDUCTION UNDER THE ACT. IT WAS HIS SUBMISSION THAT NO SUCH INFERENCE WHATSOEVER HAD BEEN DRAWN BY THE CCIT, PURSUA NT TO THE ASSESSEE FILING THE REQUIRED DETAILS OF ESOP. WITH REG ARD TO THE OBSERVATIONS OF THE CIT(APPEALS) THAT CAPITAL EXPEND ITURE OF THE PARENT COMPANY WAS BEING CLOAKED IN THE GARB OF REVENU E EXPENDITURE OF THE AFFILIATE IN INDIA, IT WAS POINTE D OUT THAT THERE WAS AN ACTUAL CASH OUTFLOW FROM THE ASSESSEE TO THE PARENT COMPANY AND THAT THERE WAS NO ARRANGEMENT TO PASS ON T HE CAPITAL EXPENSES OF THE PARENT COMPANY AS REVENUE EXP ENSES OF THE AFFILIATE IN INDIA. THE OBSERVATIONS OF THE CIT(A) I N THIS REGARD ARE BASED ON SURMISES AND SUSPICION. 17. THE LD. DR RELIED UPON THE ORDERS OF THE REVENUE AU THORITIES. 18. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IT IS CLEAR FROM THE FACTS ON RECORD THAT THERE WAS AN ACTUAL ISSUE OF SHARE S OF THE PARENT COMPANY BY THE ASSESSEE TO ITS EMPLOYEES. THE DIFFERENCE, BETWEEN THE FAIR MARKET VALUE OF THE SHARES OF THE PARE NT COMPANY ON THE DATE OF ISSUE OF SHARES AND THE PRICE AT WHICH THOSE SHARES WERE ISSUED BY THE ASSESSEE TO ITS EMPLOYEES, WAS REI MBURSED BY THE ASSESSEE TO ITS PARENT COMPANY. THIS SUM SO REIM BURSED WAS CLAIMED AS EXPENDITURE IN THE PROFIT & LOSS ACCOUNT O F THE ASSESSEE AS AN EMPLOYEE COST. THE LAW BY NOW IS WELL SETTLED BY THE DECISION OF THE SPECIAL BENCH OF THE ITAT BANGALORE IN THE CA SE OF BIOCON LTD. IN ITA NO.248/BANG/2010, A.Y. 2004-05 AND OTHE R CONNECTED APPEALS, BY ORDER DATED 16.07.2013, WHEREIN IT WAS HEL D THAT EXPENDITURE ON ACCOUNT OF ESOP IS A REVENUE EXPENDITU RE AND HAD ITA NOS.940/MUM/2010, 1653/MUM/2008, 1416/MUM/2008, 861 & 862/MUM/2010 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 20 TO BE ALLOWED AS DEDUCTION WHILE COMPUTING INCOME. THE SPECIAL BENCH HELD THAT THE SOLE OBJECT OF ISSUING SHARES T O EMPLOYEES AT A DISCOUNTED PREMIUM IS TO COMPENSATE THEM FOR THE CONT INUITY OF THEIR SERVICES TO THE COMPANY. BY NO STRETCH OF IMAGIN ATION, WE CAN DESCRIBE SUCH DISCOUNT AS EITHER A SHORT CAPITAL RECEI PT OR A CAPITAL EXPENDITURE. IT IS NOTHING BUT THE EMPLOYEES COST IN CURRED BY THE COMPANY. THE SUBSTANCE OF THIS TRANSACTION IS DISBURS ING COMPENSATION TO THE EMPLOYEES FOR THEIR SERVICES, FOR WHICH THE FORM OF ISSUING SHARES AT A DISCOUNTED PREMIUM IS ADOP TED. 19. IN THE PRESENT CASE, THERE IS NO DISPUTE THAT THE LIABILITY HAS ACCRUED TO THE ASSESSEE DURING THE PREVIOUS YEAR. THE O NLY QUESTION TO BE DECIDED IS AS TO WHETHER IT IS THE EXPENDITURE OF THE ASSESSEE OR THAT OF THE PARENT COMPANY. WE ARE OF THE VIEW THAT THE OBSERVATIONS OF THE CIT(A) IN PARA 5.6 OF HIS ORDER THA T THESE EXPENSES ARE THE EXPENSES OF THE FOREIGN PARENT COMPAN Y IS WITHOUT ANY BASIS AND LIE IN THE REALM OF SURMISES. T HE FOREIGN PARENT COMPANY HAS A POLICY OF OFFERING ESOP TO ITS E MPLOYEES TO ATTRACT THE BEST TALENT AS ITS WORK FORCE. IN PURSUANCE OF THIS POLICY OF THE FOREIGN PARENT COMPANY, ALLOWED ITS SUBSIDIARIE S/AFFILIATES ACROSS THE WORLD TO ISSUE ITS SHARES TO THE EMPLOYEES. AS FAR AS THE ASSESSEE IN THE PRESENT CASE WHICH IS AN AFFILIATE O F THE FOREIGN PARENT COMPANY IS CONCERNED, THE SHARES WERE IN FACT A CQUIRED BY THE ASSESSEE FROM THE PARENT COMPANY AND THERE WAS AN ACTUAL OUTFLOW OF CASH FROM THE ASSESSEE TO THE FOREIGN PAR ENT COMPANY. THE PRICE AT WHICH SHARES WERE ISSUED TO THE EMPLOYEES WAS PAID BY THE EMPLOYEE TO THE ASSESSEE WHO IN TURN PAID IT TO THE PARENT COMPANY. THE DIFFERENCE BETWEEN THE FAIR MARKET VALUE OF THE SHARES OF THE PRICE AT WHICH SHARES WERE ISSUED TO THE EMPLOYEES WAS MET BY THE ASSESSEE. THIS FACTUAL POSITION IS N OT DISPUTED AT ANY STAGE BY THE REVENUE. IN SUCH CIRCUMSTANCES, WE D O NOT SEE ANY BASIS ON WHICH IT COULD BE SAID THAT THE EXPENDITURE IN QUESTION WAS A CAPITAL EXPENDITURE OF THE FOREIGN PARENT COMPANY. A S FAR AS THE ASSESSEE IS CONCERNED, THE DIFFERENCE BETWEEN THE FAI R MARKET ITA NOS.940/MUM/2010, 1653/MUM/2008, 1416/MUM/2008, 861 & 862/MUM/2010 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 21 VALUE OF THE SHARES OF THE PARENT COMPANY AND THE PRIC E AT WHICH THOSE SHARES WERE ISSUED TO ITS EMPLOYEES IN INDIA WA S PAID TO THE EMPLOYEE AND WAS AN EMPLOYEE COST WHICH IS A REVENUE EXPENDITURE INCURRED FOR THE PURPOSE OF THE BUSINESS OF THE COMPANY AND HAD TO BE ALLOWED AS DEDUCTION. THERE IS NO REASON WHY THIS EXPENDITURE SHOULD NOT BE CONSIDERED AS EXPE NDITURE WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF BUS INESS OF THE ASSESSEE. 20. WE FAIL TO SEE ANY BASIS FOR THE OBSERVATION OF T HE CIT(A) THAT THE OBLIGATION TO ISSUE SHARES AT A DISCOUNTED PRICE TO THE EMPLOYEES OF THE ASSESSEE WAS THAT OF THE FOREIGN PA RENT COMPANY AND NOT THAT OF THE ASSESSEE. ADMITTEDLY, THE SHARES WERE ISSUED TO EMPLOYEES OF THE ASSESSEE AND IT IS THE ASSESSEE WH O HAS TO BEAR THE DIFFERENCE IN COST OF THE SHARES. THE EXPENDITURE IS NECESSARY FOR THE ASSESSEE TO RETAIN A HEALTH WORK FORCE. BUSINES S EXPEDIENCY REQUIRED THAT THE ASSESSEE INCUR SUCH COSTS. THE PARENT COMPANY WILL BE BENEFITTED INDIRECTLY BY SUCH A MOTIVATED WO RK FORCE. THIS WILL BE NO GROUND TO DENY THE DEDUCTION OF A LEGITIM ATE BUSINESS EXPENDITURE TO THE ASSESSEE AS LAID DOWN BY THE HON BLE SUPREME COURT IN THE CASE OF SASSOON J.DAVID (SUPRA). 21. THE REFERENCE BY THE CIT(A) TO THE PROVISIONS OF S EC.40A(2)(B) OF THE ACT IS AGAIN WITHOUT ANY BASIS. THE PRICE OF THE SHARES OF NNAS IS ARRIVED AT BY APPLYING THE AVERAGE MARKET PRICE FOR T HE PERIOD 3RD OCTOBER, - 17THE OCTOBER, 2005 IN THE COPENHAGEN STOCK EXCHANGE. THE PRICE SO ARRIVED AT AND THE PRICE AT WHIC H SHARES ARE ISSUED TO THE EMPLOYEES OF THE ASSESSEE IS THE BENE FIT WHICH THE EMPLOYEES GET UNDER THE ESOP. THE ASSESSEE OR ITS PARE NT COMPANY CAN NEVER INFLUENCE THE STOCK MARKET PRICES ON A PARTIC ULAR DATE. THERE IS NO EVIDENCE OR EVEN A SUGGESTION MADE BY THE CIT(A) IN HIS ORDER. THERE IS NO BASIS TO APPLY THE PROVISIONS OF SEC .40A(2)(B) OF THE ACT. ITA NOS.940/MUM/2010, 1653/MUM/2008, 1416/MUM/2008, 861 & 862/MUM/2010 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 22 22. WITH REGARD TO THE DECISION OF THE ITAT IN THE C ASE OF ACCENTURE (SUPRA), WE FIND THAT THE FACTS OF THE CASE OF ACCENTURE (SUPRA) ARE IDENTICAL. IN THE CASE OF ACCENTURE (SUPRA) , THE FACTS WERE THAT THE ASSESSEE COMPANY INCURRED CERTAIN EXPENSE S ON ACCOUNT OF PAYMENTS MADE BY IT FOR THE SHARES ALLOTTE D TO ITS EMPLOYEES IN CONNECTION WITH THE ESPP. THE AO HAD D ISALLOWED RS. 9,06,788/- INCURRED BY THE ASSESSEE ON THE GROUND THAT THIS EXPENDITURE IS NOT THE EXPENDITURE OF ASSESSEE COMPAN Y BUT THAT EXPENDITURE IS OF PARENT COMPANY AND THE BENEFIT OF S UCH EXPENDITURE ACCRUES TO THE PARENT COMPANY AND NOT ASSE SSEE. THE CIT(A) DELETED THE ADDITION MADE BY THE AO. THE CIT (A) FOUND THAT THE COMMON SHARES OF ACCENTURE LTD. THE PARENT COMPANY , HAVE BEEN ALLOTTED TO THE EMPLOYEES OF ASPL, THE INDIAN AFFILIATE/ASSESSEE AND NOT TO THE EMPLOYEES OF THE PARENT COMPANY. THE CIT(A) ALSO FOUND THAT THOUGH THE SHARE S OF THE PARENT COMPANY HAVE BEEN ALLOTTED, THE SAME HAVE BEE N GIVEN TO THE EMPLOYEES OF THE ASSESSEE AT THE BEHEST OF THE ASSESSEE. THE CIT(A) THUS HELD THAT IT WAS AN EXPENSE INCURRED BY T HE ASSESSEE TO RETAIN, MOTIVE AND AWARD ITS EMPLOYEES FOR THEIR HARD WO RK AND IS AKIN TO THE SALARY COSTS OF THE ASSESSEE. THE SAME W AS THEREFORE BUSINESS EXPENDITURE AND SHOULD BE ALLOWABLE IN COMP UTING THE TAXABLE INCOME OF THE ASSESSEE. THE TRIBUNAL UPHELD THE VIEW OF THE CIT(A). IT CAN BE SEEN FROM THE DECISION IN THE CASE OF ACCENTURE (SUPRA) THAT THE SHARES OF THE FOREIGN COMPANY WERE ALL OTTED AND GIVEN TO THE EMPLOYEES OF AFFILIATE IN INDIA AT THE BEHEST OF THE AFFILIATE IN INDIA. THE CIT(APPEALS), HOWEVER, PRESU MED THAT THE FACTS IN THE INSTANT CASE OF THE ASSESSEE WAS THAT THE SHARES WERE ALLOTTED TO THE EMPLOYEES OF THE AFFILIATE IN INDIA AT THE BEHEST OF THE FOREIGN COMPANY. THIS IS NOT THE FACTUAL POSITIO N IN THE ASSESSEES CASE, AS THE ASSESSEE HAD ON ITS OWN FRAM ED THE NNIPL ESOP SCHEME, 2005, TO BENEFIT ITS EMPLOYEES. NNAS M AY HAVE A GLOBAL POLICY OF REWARDING EMPLOYEES OF AFFILIATES WI TH ITS SHARES BEING GIVEN AT A DISCOUNT AND THAT POLICY MIGHT BE THE BASIS FOR THE ASSESSEE TO FRAME ESOP. THAT BY ITSELF WILL NOT MEAN THAT THE ESOP ITA NOS.940/MUM/2010, 1653/MUM/2008, 1416/MUM/2008, 861 & 862/MUM/2010 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 23 WAS AT THE BEHEST OF THE PARENT COMPANY. IN ANY EVEN T THE IMMEDIATE BENEFICIARY IS THE ASSESSEE THOUGH THE PARE NT COMPANY MAY ALSO BE INDIRECT BENEFICIARY OF A MOTIVATED WORK F ORCE OF A SUBSIDIARY. WE ARE OF THE VIEW THAT THE FACTUAL BASIS ON WHICH THE CIT(APPEALS) DISTINGUISHED THE DECISION OF THE MUMB AI BENCH OF ITAT IN THE CASE OF ACCENTURE (SUPRA) IS ERRONEOUS. 23. WITH REGARD TO THE OBSERVATIONS OF THE CIT(APPEALS ) THAT THE ESOP ACTUALLY BENEFITS ONLY THE PARENT COMPANY, WE A RE OF THE VIEW THAT THE EXPENDITURE IN QUESTION IS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE AND THE FACT THAT THE PARENT COMPANY IS ALSO BENEFITED BY REASON OF A MOTIV ATED WORK FORCE WOULD BE NO GROUND TO DENY THE CLAIM OF THE ASS ESSEE FOR DEDUCTION, WHICH OTHERWISE SATISFIES ALL THE CONDITI ONS REFERRED TO IN SECTION 37(1) OF THE ACT. THE DECISION OF THE HO NBLE SUPREME COURT IN THE CASE OF SASSOON J. DAVID & CO. (P) LTD. (SUPRA) AND THE HONBLE KARNATAKA HIGH COURT DECISION IN THE CASE OF MYSORE KIRLOSKAR LTD. (SUPRA) CLEARLY SUPPORT THE PLEA OF THE A SSESSEE IN THIS REGARD. 24. WE ARE OF THE VIEW THAT IN THE FACTS AND CIRCUMST ANCES OF THE PRESENT CASE, THE EXPENDITURE IN QUESTION WAS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OF THE A SSESSEE AND HAD TO BE ALLOWED AS DEDUCTION AS A REVENUE EXPENDITURE. 25. FOR THE REASONS GIVEN ABOVE, WE DIRECT THE EXPENDI TURE BE ALLOWED AS DEDUCTION. 26. IN VIEW OF THE DECISION ON MERITS, THE GROUND RELA TING TO CHARGING OF INTEREST U/S. 234D OF THE ACT IS ONLY ACA DEMIC. 27. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED. IN THE PRESENT APPEAL ALSO, THE LD. COUNSEL FOR THE ASSESSEE CLAIMED THAT THE FACTS ARE IDENTICAL, WHIC H WERE ITA NOS.940/MUM/2010, 1653/MUM/2008, 1416/MUM/2008, 861 & 862/MUM/2010 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 24 NOT CONTROVERTED BY THE LD. DR. THUS, CONSIDERING THE FACTS AND THE AFOREMENTIONED DECISION OF THE TRIBUNAL AND ALSO IN THE ABSENCE OF ANY CONTRARY FACTS BROUGHT TO OUR KN OWLEDGE BY EITHER SIDE AND MORE SPECIFICALLY THE REVENUE, S INCE, THE SHARES WERE ALLOTTED TO THE EMPLOYEES AND THE EXPEN SES WERE INCURRED BY THE ASSESSEE TO MOTIVATE THE EMPLO YEES, THEREFORE, THE EXPENSES WERE INCURRED FOR BUSINESS PURPOSES. IT IS NOTED THAT THE BANGALORE BENCH OF T HE TRIBUNAL IN THE AFORESAID ORDER DATED 30/09/2013 HA S DULY CONSIDERED THE SCHEME, DECISION OF THE MUMBAI BENCH IN DCIT VS ACCENTURE SERVICES PVT. LTD. (SUPRA) ANOTHE R DECISION IN SSI LTD. VS DCIT (85 TTJ 1049 (CHENNAI) , CBDT CIRCULAR NO.9 OF 2007 DATED 20/12/2007, SASSOON J. DAVID & CO. PVT. LTD. VS CIT (118 ITR 261)(SC), MYSORE KI RLOSKAR LTD. 166 ITR 836(KARNAT.), BICON LTD. (ITA NO.248/BANG/2010) ORDER DATED 16/07/2013. IN THE PRESENT APPEAL ALSO, THE ASSESSEE HAS DULY SATISFIE D THE CONDITIONS REQUIRED U/S 37 OF THE ACT, THEREFORE, T HIS GROUND THE ASSESSEE IS ALLOWED. 5. THE NEXT GROUND PERTAINS TO DISALLOWANCE OF RS.4,46,900/- MADE U/S 14A OF THE ACT, BY CONTENDIN G THAT THERE WAS NO BASIS FOR MAKING THE ADHOC DISALLOWANC E WITHOUT ESTABLISHING THAT SUCH EXPENDITURE WAS INDE ED INCURRED FOR EARNING EXEMPT DIVIDEND INCOME. IT WAS EXPLAINED THAT THE ASSESSEE HAS NOT INCURRED ANY ITA NOS.940/MUM/2010, 1653/MUM/2008, 1416/MUM/2008, 861 & 862/MUM/2010 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 25 EXPENDITURE, WHICH WAS ATTRIBUTABLE TO EARNING FREE DIVIDEND INCOME, THUS, THERE IS NO QUESTION OF MAKI NG ADHOC DISALLOWANCE. THE LD. COUNSEL PLACE RELIANCE UPON FOLLOWING DECISIONS:- I. TATA CONSULTING AND ENGINEERS LTD. (ITA NO.265/MUM/2011 AND 2460/MUM/2012), II. DCIT VS HDFC BANK LTD. (ITA NO.4529/MUM/2005, 3650 & 3651/MUM/2006 AND 4039/MUM/2007) III. GODREJ AGROVET LTD. (ITA NO.1629/MUM/2009), WHICH WAS APPROVED IN 934/2011 BY HONBLE HIGH COURT. 5.1. ON THE OTHER HAND, THE LD. DR, THOUGH DEFENDE D THE ADDITION BUT DID NOT CONTROVERT THE ASSERTION O F THE LD. COUNSEL FOR THE ASSESSEE. 5.2. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE LD. A SSESSING OFFICER DISALLOWED 10% OF THE TAX FREE INCOME AS IN CURRED FOR EARNING EXEMPT INCOME BY PLACING RELIANCE UPON CBDT CIRCULAR NO.621 DATED 19/12/1991 AND EXPLANATION (B AA) TO SECTION 80HHC TO MAKE THE DISALLOWANCE BY HOLDIN G THAT THE MANPOWER AND ADMINISTRATIVE MACHINERY WAS USED BY THE ASSESSEE TO EARN TAX FREE INCOME AND ACCORDINGL Y, MADE DISALLOWANCE. ON APPEAL, BEFORE THE COMMISSIONER O F INCOME TAX (APPEAL) (AS IS EVIDENT FROM PARA 15 OF THE ITA NOS.940/MUM/2010, 1653/MUM/2008, 1416/MUM/2008, 861 & 862/MUM/2010 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 26 IMPUGNED ORDER), IT WAS CLAIMED THAT NO DIRECT EXPE NSES WERE ATTRIBUTED TO EARN EXEMPT INCOME. RELIANCE WAS ALSO PLACED UPON THE DELHI BENCH TRIBUNAL DECISION IN MO TOR AND GENERAL FINANCE LTD. (90 ITD 449) AND MARUTI UD YOG LTD. 92 ITD 11 AND ALSO THE MUMBAI BENCH OF THE TRI BUNAL IN GHERZI EASTERN LTD. 6562/94. WE FIND THAT IN PA RA 16 OF THE IMPUGNED ORDER, THERE IS OBSERVATION BY THE COMMISSIONER OF INCOME TAX (APPEAL) THAT IT IS TR UE THAT ASSESSING OFFICER HAS MADE ADHOC DISALLOWANCE WHICH IS NOT JUSTIFIED. IT IS NECESSARY TO EVOLVE A SYSTEM OR BASIS FOR MAKING DISALLOWANCE U/S 14A. THE COMMISSIONER OF INCOME TAX (APPEAL) ADOPTED 1.92%, WHICH IS TO BE APPLIED TO ADMINISTRATIVE EXPENSES. WE FIND THAT IN THE CASE OF TATA CONSULTING ENGINEERS LTD., THE EXPENSES WER E DISALLOWED TO 1%, WHEREAS, IN GODREZ AGROVET LTD.(I TA NO.1629/MUM/2009, ITA NO.1613/MUM/2011 AND 4897/MUM/2012), THE DISALLOWANCE WAS MADE TO 2%. CONSIDERING THE MATERIAL AVAILABLE ON RECORD, WE UP HELD THE DISALLOWANCE TO 1.5% OF THE EXEMPT INCOME, THUS, TH E ASSESSING OFFICER IS DIRECTED ACCORDINGLY. 6. NOW, WE SHALL TAKE UP ITA NO.861/MUM/2010 FOR A.Y. 2005-06, WHEREIN, FIRST GROUND RAISED BY T HE ASSESSEE PERTAINS TO INTEREST INCOME FROM REC BONDS , WHICH WAS TREATED AS INCOME FROM OTHER SOURCES. THI S ITA NOS.940/MUM/2010, 1653/MUM/2008, 1416/MUM/2008, 861 & 862/MUM/2010 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 27 GROUND WAS NOT PRESSED BY THE LD. COUNSEL FOR THE A SSESSEE, THEREFORE, DISMISSED AS NOT PRESSED. 7. THE NEXT GROUND RAISED BY THE ASSESSEE PERTAINS TO DISALLOWANCE OF RS.2,50,887/- ON ACCOUNT OF ENTERTAINMENT EXPENSES. THE CRUX OF ARGUMENT ON BEH ALF OF THE ASSESSEE IS THAT THE EXPENDITURE WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS THERE FORE, IS AN ALLOWABLE DEDUCTION U/S 37 OF THE ACT. IT WAS CO NTENDED THAT IT MAY BE SUBSTANTIALLY REDUCED. THE LD. DR, D EFENDED THE ADDITION. 7.1. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. CONSIDERI NG THE MATERIAL AVAILABLE ON RECORD, FACTUAL MATRIX, SUBMI SSION OF THE ASSESSEE, THE OBSERVATION MADE IN THE ASSESSMEN T ORDER/IMPUGNED ORDER, ARGUMENT OF LD. DR, WE FIND T HAT NO EVIDENCE WAS PRODUCED BY THE ASSESSEE AT ANY STAGE, THEREFORE, MERE CLAIM IS NOT ENOUGH. IN PRINCIPLE, WE AFFIRM THE STAND OF THE COMMISSIONER OF INCOME TAX (APPEAL ) . HOWEVER, BY TAKING A LENIENT VIEW, THE DISALLOWANCE OF RS. 2,50,887/- IS REDUCED TO RS.2 LAKH, THUS, THIS GROU ND OF THE ASSESSEE IS PARTLY ALLOWED. 8. NOW, WE SHALL TAKE APPEAL IN ITA NO.862/MUM/2010, WHEREIN, THE FIRST GROUND PERTAINS TO ADDITION OF RS.42,49,947/-, BEING THE DIFFERENCE BE TWEEN ITA NOS.940/MUM/2010, 1653/MUM/2008, 1416/MUM/2008, 861 & 862/MUM/2010 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 28 SERVICE TAX PAYABLE AT RS.3,65,80,525/- AND THE SER VICE TAX PAID AT RS.3,23,30,578/- ON THE GROUND THAT IT IS DISALLOWABLE U/S 43B OF THE ACT. THE CRUX OF ARGUME NT ON BEHALF OF THE ASSESSEE IS THAT THE DIFFERENCE OF RS.42,49,947/- REPRESENT SERVICE TAX CENVAT CREDIT AVAILED AND UTILIZED BY THE ASSESSEE FOR PAYMENT OF SERVICE TAX LIABILITY. IT WAS CONTENDED THAT NO SERVICE TAX IS UNPAID. THE LD. COUNSEL PLACE RELIANCE UPON THE DECISION IN ACI T VS KAISER INDUSTRIES LTD. (ITA NO.555/DEL/2010), LLOYD S STEEL INDUSTRIES LTD. VS UOI (2005) 183 ELT 351 (BOM.) AN D CIT VS NOBLE AND HEWITT (I) PVT. LTD. (2007) TIOL 570-D EL-IT. ON THE OTHER HAND, THE LD. DR, DEFENDED THE ADDITION A ND PLACE RELIANCE UPON THE DECISION OF THE COMMISSIONER OF I NCOME TAX (APPEAL). 8.1. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE FACTS , IN BRIEF, ARE THAT THE ASSESSEE, BEFORE THE ASSESSING OFFICER , FILED SUMMARY OF PAYMENTS OF SERVICE TAX AND EDUCATION TA X FROM APRIL 2005 TO MARCH 2006 IN ITS SERVICE TAX RETURN. THE LD. ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS AC TUALLY PAID SERVICE TAX AND EDUCATION CESS TAX AMOUNTING T O RS.3,23,30,578/- AGAINST THE TOTAL PAYABLE AMOUNT O F RS.3,65,80,525/-, ACCORDINGLY, HE BROUGHT TO TAX TH E DIFFERENCE OF RS.42,49,947/- U/S 43B OF THE ACT. ON APPEAL, BEFORE THE COMMISSIONER OF INCOME TAX (APPE AL), ITA NOS.940/MUM/2010, 1653/MUM/2008, 1416/MUM/2008, 861 & 862/MUM/2010 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 29 THE ASSESSEE TOOK THE PLEA THAT THE DIFFERENTIAL AM OUNT OF RS.42,49,957/- IS A DEEMED PAYMENT UNDER THE SERVIC E TAX CREDIT RULES 2002. THIS EXPLANATION OF THE ASSESSEE COULD NOT FIND FAVOUR WITH THE COMMISSIONER OF INCOME TAX (APPEAL) AS HE OBSERVED THAT THE ASSESSEE HAS WRONG LY INTERPRETED CENVAT CREDIT SCHEME AND THE CLAIMED DEDUCTION CANNOT BE ALLOWED FOR THE DEEMED PAYMENT U/S 43B OF THE ACT, WHEN ACTUAL PAYMENT HAS NOT BEEN MA DE BY THE ASSESSEE. THE ASSESSEE IS IN APPEAL BEFORE THIS TRIBUNAL. THE ASSESSEE HAS RELIED UPON CERTAIN CASE LAWS FOR ITS CLAIM. WE FIND THAT SECTION 43(2) DEFINE CERTAIN TE RMS RELEVANT TO INCOME FROM PROFIT & GAINS OF BUSINESS OR PROFESSION AND SUB-SECTION (2) SPEAKS ABOUT THE WOR D PAID WHICH MEANS ACTUALLY PAID OR INCURRED ACCORD ING TO METHOD OF ACCOUNTING. WHEREAS, SECTION 43B STARTS WITH NON-OBSTANTE CLAUSE AND PERMITS THE DEDUCTION OF AN Y SUM PAYABLE BY WAY OF TAX, DUTY, CESS OR FEE, BY WHATEV ER NAME CALLED, IN THE YEAR IN WHICH THE SUM IS ACTUALLY PA ID. THEREFORE, IT CAN BE SAID THAT ADJUSTMENT, IF ANY M ADE, IS AS GOOD AS DUTY PAID AND IT AMOUNTS TO ACTUAL PAYMENT. IF THE PAYMENT HAS BEEN MADE/ADJUSTED BEFORE DUE DATE OF F ILING OF RETURN U/S 139(1) OF THE ACT. IDENTICAL RATIO WA S LAID DOWN BY HONBLE HIGH COURT OF BOMBAY IN LLOYDS STEE LS INDIA LTD. VS UOI 2005 (183) ELT 351 BOMBAY, HOLDIN G THAT UTILIZING CENVAT CREDIT TO PAY DUTY ON CLEARANCE OF FINAL ITA NOS.940/MUM/2010, 1653/MUM/2008, 1416/MUM/2008, 861 & 862/MUM/2010 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 30 PRODUCT IS AS GOOD AS MAKING PAYMENT BY DEBITING CU RRENT ACCOUNT. CONSIDERING THESE DECISIONS, THE LD. ASSES SING OFFICER IS DIRECTED TO EXAMINE THE FACTUAL MATRIX A ND DECIDE IN THE LIGHT OF THE AFORESAID DECISIONS. THIS GROU ND OF THE ASSESSEE IS DISPOSED OFF IN TERMS INDICATED HEREINA BOVE. 9. THE NEXT GROUND PERTAINS TO DISALLOWANCE OF RS.5,96,963/- U/S 14A OF THE ACT. CONSIDERING THE T OTALITY OF FACTS AND THE ESTABLISH NORM THAT INVESTMENT IN MUTUAL FUNDS REQUIRES A GOOD EXPERIENCE, PROFESSIONAL SKIL L AND THE ADMINISTRATIVE EXPENSES INVOLVED, THEREFORE, THE DISALLOWANCE IS RESTRICTED TO 1.5% OF THE EXEMPT IN COME. THUS, THE LD. ASSESSING OFFICER IS DIRECTED ACCORDI NGLY. 10. THE LAST GROUND RAISED IN THIS APPEAL PERTAINS TO DISALLOWANCE OF RS.3,85,141/-, ON ACCOUNT OF ENTERT AINMENT EXPENSES. THE CRUX OF ARGUMENT IS THAT THE LD. FIRS T APPELLATE AUTHORITY IS NOT JUSTIFIED IN DISALLOWING A SUM OF RS.3,85,141/-, BEING 20% OF THE ENTERTAINMENT EXPEN SES OF RS.19,25,703/- ON THE GROUND THAT NO SUPPORTING EVI DENCE WAS PRODUCED BY THE ASSESSEE TO ESTABLISH THAT THE EXPENDITURE WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. IT WAS CONTENDED THAT THE EXPE NSES WERE GENUINELY INCURRED FOR BUSINESS PURPOSES. ALTERNATIVELY, IT WAS CONTENDED THAT IT MAY BE REDU CED. ON THE OTHER HAND, THE LD. DR CONTENDED THAT FIRSTLY E VIDENCE ITA NOS.940/MUM/2010, 1653/MUM/2008, 1416/MUM/2008, 861 & 862/MUM/2010 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 31 WAS NOT PRODUCED BY THE ASSESSEE FOR ITS CLAIM AND SECONDLY GENUINENESS OF THE EXPENDITURE WAS NEVER P ROVED. 10.1. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE FACTS , IN BRIEF, ARE THAT THE ASSESSEE DEBITED AN AMOUNT OF RS.19,25 ,703/- TOWARDS ENTERTAINMENT EXPENSES IN ITS PROFIT & LOSS ACCOUNT. THE CLAIM OF THE ASSESSEE WAS THAT EXPENS ES WERE INCURRED ON HOTEL BILLS FOR THE ENTERTAINMENT OF CU STOMERS. BEFORE THE LD. ASSESSING OFFICER, NO DOCUMENTARY EV IDENCE WAS FURNISHED BY THE ASSESSEE, THUS, THE EXPLANATIO N OFFERED BY THE ASSESSEE WAS NOT FOUND JUSTIFIED. CO NSIDERING THE TOTALITY OF FATS, HE MADE DISALLOWANCE OF 20% O F THE CLAIMED EXPENDITURE, BEING PERSONAL IN NATURE, AND ADDED BACK TO THE INCOME OF THE ASSESSEE. 10.2. ON APPEAL, BEFORE THE COMMISSIONER OF INCOME TAX (APPEAL), THE STAND OF THE ASSESSING OFFICER WA S AFFIRMED. WE FIND THAT RIGHT FROM ASSESSMENT STAGE AND TILL THE STAGE OF THE TRIBUNAL EXCEPT CLAIMING THAT THE EXPENSES WERE INCURRED FOR BUSINESS PURPOSES, NO EVIDENCE WA S FURNISHED BY THE ASSESSEE, THUS, WE FIND NO MERIT I N THE CLAIM OF THE ASSESSEE AND IN PRINCIPLE SUSTAIN THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEAL). HOWEVER, TAKING A LENIENT VIEW, THE AMOUNT OF RS.3,85,141/- IS REDU CED TO RS.3 LAKHS, THUS, THIS GROUND IS PARTLY ALLOWED. ITA NOS.940/MUM/2010, 1653/MUM/2008, 1416/MUM/2008, 861 & 862/MUM/2010 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 32 FINALLY, THE APPEALS IN I. ITA NO. 940/MUM/2010 & ITA NO.1653/MUM/2008 ARE DISMISSED AS NOT MAINTAINABLE, BEING, BELOW PRESCRIBED MONETARY LIMIT. II. ITA NO.1416/MUM/2008 (A.Y. 2004-05) IS PARTLY ALLOWED. III. ITA NO.861/MUM/2010 AND ITA NO.862/MUM/2010 ARE ALSO PARTLY ALLOWED. THIS ORDER WAS PRONOUNCED IN THE OPEN IN THE PRESENCE OF LD. REPRESENTATIVES FROM BOTH SIDES AT THE CONCLUSION OF THE HEARING ON 06/04/2016. SD/- SD/- (RAJENDRA) (JOGINDER SINGH) '# / ACCOUNTANT MEMBER $# / JUDICIAL MEMBER MUMBAI; # DATED : 07/04/2016 F{X~{T? P.S/. . . %$&'()(*& / COPY OF THE ORDER FORWARDED TO : 1. %& '( / THE APPELLANT (RESPECTIVE ASSESSEE) 2. )*'( / THE RESPONDENT. 3. + + , ( %& ) / THE CIT, MUMBAI. 4. + + , / CIT(A)- , MUMBAI, 5. /01 )2 , + %& %23 , / DR, ITAT, MUMBAI ITA NOS.940/MUM/2010, 1653/MUM/2008, 1416/MUM/2008, 861 & 862/MUM/2010 KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. 33 6. 14 5 / GUARD FILE. / BY ORDER, */& ) //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI