2014 (9) TMI 939 - AT - Income Tax

Disallowance of claim for deduction of ₹ 1 crore relating to the value of sweat equity shares - Sweat equity shares issued to key persons - Fringe benefit tax paid on value of such shares - Held that - As submitted by the learned Departmental representative, the income from business has to be necessarily computed in terms of sections 28 to 43 of the Act. The computation of fringe benefit tax is a subsequent exercise. Accordingly, if any expenditure is disallowed while computing the business income, then the assessee may not be liable to pay the fringe benefit tax. This position has been made clear by the Central Board of Direct Taxes in the answer to Question No. 35 given in Circular No. 8 of 2005 dated August 29, 2005 wherein it is stated that the fringe benefit tax is payable only on the amount allowed under the provisions of the Income tax Act. Hence, in our view, the Assessing Officer was right in holding that the question of allowability of the impugned claim should be independently tested in terms of the provisions of section 37(1) of the Act.In any case, the methodologies prescribed in the provisions relating to the fringe benefit tax for payment/recovery of tax may not be relevant to determine about the deductibility of an expenditure under section 37(1) of the Act. In this case, it is clear that he sweat equity shares were issued to the above said two persons for value addition as given in the definition of the expression sweat equity shares . As discussed earlier, the value addition was given by the above said persons to the assessee- company in the form of their vast experience in new business concepts and professional experience. Under these set of facts, in our view, the value addition would partake the character of an intangible asset in the hands of the assessee-company. Since the sweat equity shares were issued for acquiring value addition, in our view, the tax authorities are justified in holding the same as capital expenditure in the hands of the assessee company. - Decided against the assessee.

Summary

Issues Involved:
1. Disallowance of claim for deduction of Rs. 1 crore relating to the value of sweat equity shares issued to key persons.
2. Applicability of fringe benefit tax provisions to sweat equity shares.
3. Classification of sweat equity shares as revenue or capital expenditure.

Issue-wise Detailed Analysis:

1. Disallowance of Claim for Deduction of Rs. 1 Crore:

The assessee-company, engaged in trading grocery, food grains, and provisions store items, issued sweat equity shares worth Rs. 1 crore to two key employees, claiming it as an expenditure. The Assessing Officer rejected this claim, stating that issuing shares at a lesser than market price does not constitute an expenditure but rather a short receipt of capital. The Assessing Officer cited the decision in *Ranbaxy Laboratories Ltd. v. Addl. CIT* [2009] 124 TTJ (Delhi) 771, affirming that such claims are not allowable under section 37 of the Act. The Commissioner of Income-tax (Appeals) upheld this disallowance, leading the assessee to appeal.

2. Applicability of Fringe Benefit Tax Provisions:

The assessee argued that since it paid fringe benefit tax on the value of sweat equity shares, these should be considered revenue expenditure. The learned authorised representative referenced several case laws to support this contention, including *CIT v. PVP Ventures Ltd.* (2013), *Biocon Ltd v. Deputy CIT* [2013], and others. However, the Departmental representative countered that these cases pertain to ESOP schemes, which differ from sweat equity schemes. The representative also highlighted that the approval from the Government of India for issuing shares was for "consideration other than cash" and dependent on performance achievements, making it non-monetary and conditional.

3. Classification of Sweat Equity Shares:

The Tribunal examined whether sweat equity shares should be treated as revenue or capital expenditure. The definition of "sweat equity shares" under section 115WB(1)(ii) was scrutinized, which specifies that these shares are issued for providing know-how, intellectual property rights, or value additions. The Tribunal noted that the shares were issued for "professional services," which the assessee considered as value addition. The valuation report indicated that the shares were issued based on the employees' contributions to business development and professional expertise.

The Tribunal concluded that the value addition from the employees constituted an intangible asset for the company. Since sweat equity shares were issued for acquiring this intangible asset, the expenditure was deemed capital in nature. Consequently, the tax authorities were justified in disallowing the deduction under section 37(1) of the Act.

Conclusion:

The Tribunal upheld the order of the Commissioner of Income-tax (Appeals), confirming the disallowance of the Rs. 1 crore deduction claimed by the assessee for issuing sweat equity shares. The appeal filed by the assessee was dismissed, and the order was pronounced in the open court on September 19, 2014.