Disallowance u/s 14A to Cover Only Exempt Income Yielding Investments: ITAT Allows ₹2 Cr ESOP Deduction [Read Order]

The Income Tax AppellateTribunal (ITAT) Mumbai Bench, has ruled that disallowance under Section 14A together with Rule 8D can apply to those investments only which have generated income that is of exempt nature. The Tribunal also ruled that the claim of ₹2 crore as Employee Stock Ownership Plan (ESOP) expenditure as per Section 37(1) of the Income Tax Act is allowable.

The assessee Thyrocare Technologies Ltd company engaged in the business of diagnostic services has made large investments in the purchase of mutual fund units generating income from exempted sources.

Further, a Suo motu disallowance made by the assessee amounted to ₹7.58 lakh while the AO disallowed ₹2.14 crore on the ground that Rule 8D applies in the case. However, an additional disallowance of ₹2.07 crore was also done by the AO.

Additionally, AO has disallowed ₹2 crore on the claim of expenditure related to ESOPs on the ground that it was capital in nature or notional in nature. Part of sales incentive expenditure was also disallowed because it could be in contravention of Explanation 1 of Section 37(1).

The Tribunal accepted the assessee’s case under Section 14A and asked the AO to recalculate the disallowance based on investments which earned exempt income as per the decision in the Special Bench in ACIT v. Vireet Investment Pvt. Ltd.,

reported in (2017).

Regarding the issue of ESOP expenditure, the Tribunal confirmed the Commissioner of Income Tax [Appeal] ( CIT(A) ) order allowing the expenditure citing the decision of the Karnataka High Court in CIT v. Biocon Ltd (2020). wherein it was held that ESOP discount is an ascertainable expenditure allowable under Section 37(1).

In respect of the sales incentive, the Tribunal observed the absence of proper verification and remanded the matter back to the AO in light of the Supreme Court decision in Apex Laboratories Pvt. Ltd.

Accordingly, the appeals were partly allowed for statistical purposes reaffirming that disallowance provisions must be applied with precision and backed by proper factual verification.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates