IN INCOME TAX APPELLATE TRIBUNAL BENCH, MUMBAI BEFORE SRI MAHAVIR SINGH, JM AND SRI N. K. PRADHAN, AM ITA No.1163/Mum/2015 (A.Y:2011-12) Dy. Commissioner of Income Vs. M/s. Kotak Securities Ltd., Tax -4(3)(1), 6th Floor, Room 1 s t Floor, Bakhtawar, 229, No.649, Aayakar Bhavan, Nariman Point, Mumbai -21 Mumbai 400 021 PAN: AAACK 3436F Appellant .. Respondent ITA No.771/Mum/2015 (A.Y:2011-12) M/s. Kotak Securities Ltd., Vs. Dy. Commissioner of 1 s t Floor, Bakhtawar, 229, Income Tax -4(3)(1), 6th Floor, Nariman Point, Mumbai -21 Room No.649, Aayakar Bhavan, PAN: AAACK 3436F Mumbai 400 021 Appellant .. Respondent Revenue by .. Shri R. P. Meena, Sr. DR Assessee by .. Shri Madhur Agarwal, AR Date of hearing .. 13-10-2016 Date of pronouncement .. 13- 10- 2016 ORDER PER MAHAVIR SINGH, JM: These cross appeals i.e. ITA No.1163/Mum/2015 by Revenue and ITA No.771/Mum/2015 by assessee are arising out of order of CIT (A)-9, Mumbai in appeal No.CIT(A)-9/Cir.4/372/2013-14 dated 29-12-2014. Assessment was framed by ACIT, Circle-4(3), Mumbai for assessment year 2011-12 vide his order dated 14-02-2014 u/s 143(3) of Income Tax Act, 1961 (hereinafter Act ). 2. first issue assessee s appeal in ITA No.771/Mum/2015 is against order of CIT (A) confirming disallowance of expenses relatable to exempted income by invoking provisions of Section 14A of Act read with Rule 8D (2) (iii) of Income Tax Rules, 1963 (hereinafter Rules ) by disallowing administrative expenses of Rs.21,86,228/-. 2 ITA No.1163 & 771/Mum/2015 3. At outset, learned Counsel for assessee referred to Para 2.3 of CIT(A) s order and stated that CIT (A) noted that issue involved in present appeal is identical to one in assessment years 2009-10 and 2010- 11; hence, following predecessor s decision in assessee s own case, CIT (A) in this year also confirmed disallowance u/s 14A of Act read with Rule 8D (2) (iii) of Rules amounting to Rs.2,67,93,928/-. learned Counsel for assessee stated that Tribunal in assessment year 2010-11 in ITA No.1232/Mum/2014 has restricted disallowance and set aside matter back to file of AO as in earlier year vide Para 5 by observing as under:- 5. We have heard rival submissions and perused material before us we find that while deciding appeals for earlier years (ITA//// AY, dated) tribunal has observed as under: We have heard both parties on this issue and perused orders of revenue. Bharati of CIT (A) s order is relevant to issue and find that para 3.5 contains conclusion of CIT (A). It is clear from said paragraph that assessee s claim of expenditure on earning of exempt income is not remitted by revenue. They applied provisions of section 14 read with rule 8D mechanically without regulating expressly claim of Neil expenditure on exempt income. It is also noticed that CIT (A) has not attended assessees objections raised in round numbers 1 to 4 and eight sub grounds as well as written submissions before CIT (A). Assessing officer failed to record satisfaction on in corrections, if any, of assessee s claim in return and other objections raised in ground number four (A) to 4 (E) of appeal. On hearing both parties and on perusal of said order of tribunal in case of Nessus Walch Nagar industries Ltd (supra), we find wide para 10 tribunal dealt with similar issue and tribunal remanded issue to file of assessing officer for fresh adjudication. 7. Thus, it is requirement of law that assessing officer needs to record his satisfaction on incorrectness of assessee s claim in return. Assessing officer has not recorded same in this case. Therefore, considering above as well as following rule of consistency, we are of opinion that this issue should also be remanded to file of assessing officer for fresh adjudication. Assessing officer is directed to record his satisfaction in accordance with law. Further he is directed to attend to arguments relating to claim that impugned investments are for holding control and management of related companies. Assessing officer is also directed to attend to all written submissions of assessee made before CIT (A) to and considered relevant judgement before deciding issue. Assessing officer shall grant reasonable opportunity of being heard of assessee. Accordingly, ground number one is allowed for statistical purposes. Respectfully following above order of Tribunal for earlier year, first ground of appeal is decided in favour of assessee, in part. 3 ITA No.1163 & 771/Mum/2015 Respectfully following consistent view of Tribunal in assessee s own case in earlier years, we restore matter back to file of AO and hence, this issue is allowed for statistical purposes. 4. next issue in this appeal of assessee is as regards to order of CIT (A) directing AO for re-examining AIR Data relating to addition of Rs.2,35,097/-. learned Counsel for assessee stated that in assessee s own case in earlier years in ITA No.1232/Mum/2014 Tribunal has set aside this issue to file of AO to re-decide same by observing in Para 7 of Order as under:- 7. During course of hearing before us, AR stated that in earlier years matter was restored back to file of AO by tribunal. DR left issue to discretion of bench. We find that while deciding appeal for earlier years tribunal had dealt with issue as under: We have heard both parties and Paris orders of revenue on issue of reconciliation of AIR data qua books of accounts of assessee stop refining his recorded by assessing officer that no exhaustive exercise of reconsideration is undertaken by him before making said addition. Assessee is certain. consideration, if one more opportunity is granted considering same, we read remand this ground to file of assessing officer for fresh adjudication of issue after granting reasonable opportunity of being heard to assessee. Respectfully, following above order ground number 2, raised by assessee is restored back to file of AO for fresh adjudication. He is directed to afford reasonable opportunity of hearing to assessee. assessee would produce all necessary evidences and reconcile difference. In our opinion directions given by FW were quite reasonable. Therefore we don t see any infirmity in his order. Ground number two stands partly allowed in favour of assessee . Respectfully following order of Tribunal in assessee s own case and taking consistent view, we set aside issue to file of AO. AO is directed to follow directions given in earlier year. Resultantly, this issue of assessee s appeal stands allowed for statistical purposes. 5. first issue in Revenue s appeal in ITA No.1163/Mum/2015 is against order of CIT (A) directing AO grant 80% depreciation on UPS batteries instead of 15% allowed by AO. For this, Revenue has raised following ground No.1:- 4 ITA No.1163 & 771/Mum/2015 1. On facts and in circumstances of case and in law, Ld. CIT(A) erred in directing A O to grant 80% depreciation on UPS batteries Rs.59,63,111/- instead of 15% allowed by A O as batteries are used only when electric supply is cut off. 6. At outset, learned Counsel for assessee stated that this issue is covered in favour of assessee and against Revenue by Tribunal s decision in earlier year in ITA No.2096/Mum/2014 dated 11th March, 2016 wherein Tribunal has allowed claim of assessee by following earlier years decision vide Para 9 by observing as under:- 9. First ground of appeal, raised by AO, deals with depreciation on uninterrupted power supply (UPS).During course of hearing before us, representatives of both sides agreed that tribunal had decided issue in favour of assessee, while adjudicating appeals for earlier years. We would like to reproduce paragraphs 27-28 of order of tribunal dated (supra) and same reads as under: We have heard both parties and perused orders of revenue authorities as well as cited order of tribunal (supra) dated 21 five 2012 on perusal of said order of tribunal, we find similar issue was decided by tribunal in assessee s own case for a Y 2006 07 and para 13 is relevant. For sake of completeness of this order, said para 13 of tribunal s order dated 21.5.2012 is extracted as follows 13. We have heard both parties and perused records. We find that issue stands covered by coordinate bench of ITAT, Joe poor in case of surface finishing equipment (supra). We therefore, following decision of coordinate bench, direct assessing officer to allow depreciation at rate of 80% on UPS instead of 15%. Accordingly, ground number seven is allowed. 28. Considering above covered nature of issue as well as respectfully following decision of coordinate bench and also following principle of consistency, depreciation at rate of 80% should be allowed on UPS instead of 15% granted by assessing officer. Accordingly grounds raised by revenue are dismissed. Respectfully following order of bench for earlier years ground number one is decided against Assessing Officer . 7. Respectfully following order of Tribunal for earlier years in assessee s own case, we allow this issue in favour of assessee and against Revenue. 8. next issue in this appeal of Revenue is against order of CIT (A) in directing AO to delete disallowance of Mark to Market Loss as 5 ITA No.1163 & 771/Mum/2015 notional loss based on future contracts. For this, Revenue has raised following ground No.2:- 2. On facts and in circumstances of case and in law, Ld. CIT(A) erred in directing AO to delete disallowance of mark to market loss amounting to Rs.14,67,31,330/- when it is notional loss based on future contracts, provision made in Balance Sheet and profit or loss cannot accrue until and unless contracts are materialized and settled. 9. At outset, learned Counsel for assessee stated that this issue is also covered in favour of assessee and against Revenue by decision of this Tribunal in assessee s own case in ITA No.2096/Mum/2014 wherein vide Para 10 of Order dated 11-03-2016 deleted disallowance by observing as under:- 10. Next issue is about marked to market losses (MTM).The DR and AR, agreed that identical issue had arisen in earlier years and tribunal had decided issue in favour of assessee, that FAA had followed order of tribunal. We are reproducing order of tribunal and it reads as under:- We have heard both parties and perused orders of revenue authorities as well as cited decision of tribunal and relevant material placed before us. It is undisputed fact that derivative, which is subject matter of impugned MTM loss, is commodities of trading account. same are treated on exchange on par with shares and stock options and futures. losses are held allowable against profits of assessee while related profit on account of MTM are being ignored considering consistent method of accounting followed by assessee. same is in accordance with guidance note/and accounting standard issued by ICAI. It is claim of assessee that same consistently accepted by Department as well. We have also perused order of tribunal in case of Kotak Mahindra investment Ltd (supra), which was decided based on other decision of tribunal of Bombay benches we find para three of said order of tribunal in case of Kotak Mahindra investment Ltd (supra) is relevant and facts are comparable to instant case After reproducing order of Kotak Mahindra investment Ltd. Tribunal further held as under: facts pertaining to decision of Tribunal in above mentioned case include that derived case which is subject matter of impugned MTM losses was held as stock in trade in books of accounts in present case. profits were not accounted for in books. On these facts, tribunal held that MTM loss is liable to be allowed. On contrary, revenue has not brought any decision in their support. Therefore, we are of opinion that assessee s claim to mark two market loss of 6 ITA No.1163 & 771/Mum/2015 rupees to, 85, 10, 681/-is liable to be allowed. Therefore order of CIT (A) in this regard needs to be preserved accordingly ground number two raised by assessee is allowed. We find that facts of case for year under consideration are identical to facts for earlier years. Therefore, following order previous years, we uphold order of FAA. Ground number two is decided against AO. Respectfully following Tribunals above decision in assessee s own case in earlier years, we confirm order of CIT (A) deleting disallowance. This issue of Revenue s appeal is dismissed. 10. next issue in this appeal of Revenue is against order of CIT (A) directing A O to allow ESOP expenses. For this, Revenue has raised following ground No.3:- 3. On facts and in circumstances of case and in law, Ld. CIT (A) erred in directing A O to allow expenses Rs.4,95,45,000/- disallowed by O as it is not real expenditure qualified as revenue in nature. 11. At outset, learned Counsel for assessee argued that this issue is covered by Tribunal s decision in assessee s own case in immediately preceding year in ITA No.2096/Mum/2014 dated 11th March, 2016 vide Para 14, wherein Tribunal has observed as under:- 14. We have heard rival submissions and carriers matter before us. We find that parent company of assessee, KMBL, had offered ESOP to employees of assessee that assessee had made payment of Rs. 519.19 lakhs to parent company on account of discount for ESOP that AO had rejected claim made by assessee. We find that in case of Biocon Ltd. issue of allowability of expenditure with regard to ESOP has been deliberated upon at length. order of special bench is being followed by other benches. In our opinion facts of cases, relied upon by DR i.e. Vodafone and Consolidated African Selection Process Ltd.(supra)are not relevant for deciding issue before us. In case of Vodafone issue to be decided was issue of shares at premium by assessee to its non-resident holding company and applicability of provisions of chapter X of Act. In second case, company had issued shares to its employees at par value while shares to public were issued at premium. In case under consideration offer was made by parent company to employees of assessee for ESOP and assessee had made payment for discount allowed by parent company. We would like to refer to case of Nova Nordisk India Private Limited (supra), wherein identical issue has been dealt as under; 7 ITA No.1163 & 771/Mum/2015 18. We have considered rival submissions. It is clear from facts on record that there was accrual issue of shares of parent company by assessee to its employees difference between fair market value of share of parent company on date of issue of shares and price at which those shares were issued by assessee to its employees was reimbursed by assessee to its parent company. This sum so reimbursed was claimed as expenditure in profit and loss account of assessee as employee cost. law by now is well settled by decision of special bench of ITAT Bangalore in case of Biocon Ltd in ITA number 248/BANG/2010, AY. 2004-05 and other connected appeals by order dated 16. 07. 2013, wherein it was held that expenditure on account of ESOP is revenue expenditure and had to be allowed as deduction while computing income. special bench held that sole object of issuing shares to employees at discounted premium is to compensate them for continuity of their service to company. By no stretch of imagination, we can describe such discount is either short capital receipt or capital expenditure. It is nothing but employees costs incurred by company. substance of this transaction is disbursing compensation to employees for their services for which form of issuing shares at discounted premium is that the. 19. In present case, there is no dispute that liability has accrued to assessee during previous year. only question to be decided is as to whether it is expenditure of assessee or that of parent company. We are of view that observations of CIT(A) in para 5.6 of his order that these expenses are expenses of foreign parent company is without any basis and lie in realm of surmises. foreign parent company has policy of offering ESOP to its employees to attract best talent as its work force. In pursuance of this policy of foreign parent company, allowed its subsidiaries/affiliates across world to issue its shares to employees. As far as assessee in present case which is affiliate of foreign parent company is concerned, shares were in fact acquired by assessee from parent company and there was actual outflow of cash from assessee to foreign parent company. price at which shares were issued to employees was paid by employee to Assessee who in turn paid it to parent company. difference between fair market value of shares of price at which shares were issued to employees was met by Assessee. This factual position is not disputed at any stage by revenue. In such circumstances, we do not see any basis on which it could be said that expenditure in question was capital expenditure of foreign parent company. As far as assessee is concerned, difference between fair market value of shares of parent company and price at which those shares were issued to its employees in India was paid to employee and was employee cost which is revenue expenditure incurred for purpose of business of company and had to be allowed as deduction. There is no reason why this expenditure should not be considered as expenditure wholly and exclusively incurred for purpose of business of assessee. 8 ITA No.1163 & 771/Mum/2015 20. We fail to see any basis for observation of CIT(A) that obligation to issue shares at discounted price to employees of Assessee was that of foreign parent company and not that of Assessee. Admittedly, shares were issued to employees of Assessee and it is Assessee who has to bear difference in cost of shares. expenditure is necessary for Assessee to retain health work force. Business expediency required that Assessee incur such costs. parent company will be benefitted indirectly by such motivated work force. This will be no ground to deny deduction of legitimate business expenditure to Assessee as laid down by Hon ble Supreme Court in case of Sassoon J. David (supra). 21. reference by CIT(A) to provisions of Sec.40A(2)(b) of Act is again without any basis. price of shares of NNAS is arrived at by applying average market price for period 3rd October, - 17the October, 2005 in Copenhagen Stock Exchange. price so arrived at and price at which shares are issued to employees of Assessee is benefit which employees get under ESOP. Assessee or its parent company can never influence stock market prices on particular date. There is no evidence or even suggestion made by CIT(A) in his order. There is no basis to apply provisions of Sec.40A(2)(b) of Act. 22. With regard to decision of ITAT in case of Accenture (supra), we find that facts of case of Accenture (supra) are identical. In case of Accenture (supra), facts were that assessee company incurred certain expenses on account of payments made by it for shares allotted to its employees in connection with ESPP. AO had disallowed Rs. 9,06,788/- incurred by assessee on ground that this expenditure is not expenditure of assessee company but that expenditure is of parent company and benefit of such expenditure accrues to parent company and not assessee. CIT(A) deleted addition made by AO. CIT(A) found that common shares of Accenture Ltd. parent company, have been allotted to employees of ASPL, Indian affiliate/Assessee and not to employees of parent company. CIT(A) also found that though shares of parent company have been allotted, same have been given to employees of Assessee at behest of Assessee. CIT(A) thus held that it was expense incurred by assessee to retain, motive and award its employees for their hard work and is akin to salary costs of assessee. same was therefore business expenditure and should be allowable in computing taxable income of assessee. tribunal upheld view of CIT(A). It can be seen from decision in case of Accenture (supra) that shares of foreign company were allotted and given to employees of affiliate in India at behest of affiliate in India. CIT(Appeals), however, presumed that facts in instant case of assessee was that shares were allotted to employees of affiliate in India at behest of foreign company. This is not factual position in assessee s case, as assessee had on its own framed NNIPL ESOP Scheme, 2005, to benefit its employees. NNAS may have global policy of rewarding employees of affiliates with its shares 9 ITA No.1163 & 771/Mum/2015 being given at discount and that policy might be basis for Assessee to frame ESOP. That by itself will not mean that ESOP was at behest of parent company. In any event immediate beneficiary is Assessee though parent company may also be indirect beneficiary of motivated work force of subsidiary. We are of view that factual basis on which CIT(Appeals) distinguished decision of Mumbai Bench of ITAT in case of Accenture (supra) is erroneous. 23. With regard to observations of CIT(Appeals) that ESOP actually benefits only parent company, we are of view that expenditure in question is wholly and exclusively for purpose of business of assessee and fact that parent company is also benefited by reason of motivated work force would be no ground to deny claim of assessee for deduction, which otherwise satisfies all conditions referred to in section 37(1) of Act. decision of Hon ble Supreme Court in case of Sassoon J. David & Co. (P) Ltd. (supra) and Hon ble Karnataka High Court decision in case of Mysore Kirloskar Ltd. (supra) clearly support plea of assessee in this regard. 24.We are of view that in facts and circumstances of present case, expenditure in question was wholly and exclusively for purpose of business of assessee and had to be allowed as deduction as revenue expenditure. Respectfully, following above order, we hold that order of FAA does not suffer from any legal infirmity. So, confirming his order, we decide ground no.3 against AO. 12. As facts are exactly identical in this year also, we respectfully following same, confirm order of CIT (A) deleting disallowance. This issue of Revenue s appeal is dismissed. 13. In result, appeal of assessee is allowed for statistical purposes and Revenue s appeal is dismissed. Order pronounced in open court on 13-10-2016. Sd/- Sd/- (N. K. PRADHAN) (MAHAVIR SINGH) ACCONTANT MEMBER JUDICIAL MEMBER Mumbai, Dated: 13-10-2016 Lakshmikanta Deka/Sr.PS 10 ITA No.1163 & 771/Mum/2015 Copy of Order forwarded to: 1. Appellant 2. Respondent. 3. CIT (A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. //True Copy// BY ORDER, Assistant Registrar ITAT, MUMBAI Sr. Particulars Date Initials Member No. Concerned 1 Dictation given on 14/10/16 LK Deka JM 2 Draft placed before author 18/10/16/ 24/10/16 3 Draft proposed/placed before second Member 4 Draft discussed/approved by Second member 5 Approved Draft comes to Sr.PS 6 Kept for pronouncement on 7 File sent to Bench Clerk 8 Date on which file goes to Head Clerk 9 Date of dispatch of Order Dy. Commissioner of Income Tax -4(3)(1), Mumbai v. M/s. Kotak Securities Ltd