2014 (12) TMI 1236 - AT - Income Tax

Expenditure pertaining to employee stock purchase scheme disallowed - Held that - There is no dispute to the fact that the assessee in the impugned assessment year has issued 7590 equity shares to its employees at concessional price of R.100/- each under ESPS against the prevalent market price of 850/- per share. The difference amount of 53.92 lakhs has been debited by the assessee company as business expenditure. We find the Bangalore Special Bench of the Tribunal in the case of Biocon Ltd. (2013 (8) TMI 629 - ITAT BANGALORE) while deciding an identical issue has held that discount on issue of Employee Stock Option Plan (ESOP) is allowable as deduction in computing the income under the head profits and gains of business or profession . It is on account of an ascertained liability and it cannot be treated as a short capital receipt. While doing so the Special Bench of the Tribunal has also considered the decision of the Delhi Bench of the Tribunal in the case of Ranbaxy Laboratories Ltd. (2009 (7) TMI 1273 - ITAT DELHI) which has been relied on by the CIT(A) while rejecting the claim of the assessee.Respectfully following the decision of the Bangalore Special Bench of the Tribunal and in absence of any distinguishable features brought to our notice by the Ld. DR we set-aside the order of the CIT(A) on this issue and direct the AO to allow the claim of expenditure - Decided in favour of assessee Disallowance of Warranty Provision in normal tax computation - Held that - The Hon ble Supreme Court in the case of Rotork Controls Pvt. Ltd. (2009 (5) TMI 16 - SUPREME COURT OF INDIA ) has held that when large number of sophisticated goods are manufactured and sold with warranty and the past records show that defects existed in some of the items the provision made by the assessee for warranty claims on the basis of past experience is an allowable deduction u/s.37. The various decisions relied on by the Ld. Counsel for the assessee also support the case of the assessee. Since the assessee in subsequent years has incurred expenditure against such warranty provision therefore we do not find any justification in the order of the CIT(A) restricting the disallowance to 44, 94, 000/- which was the amount outstanding as on 31-03-2003, i.e. after a period of 12 months from the end of the accounting year. We accordingly set-aside the order of the CIT(A) on this issue and direct the Assessing Officer to delete the entire disallowance - Decided in favour of assessee Disallowance of Warranty Provision in computation of tax as per the provisions of section 115 JB - MAT - Held that - CIT(A) while deciding the appeal found that assessee has subsequently incurred an amount of 65, 84, 078/- towards stamp duty on adjudication of court order and another 4, 95, 610/- towards professional fees. Therefore he held that an amount of 70, 84, 078/- cannot be considered as unascertained contingent liability for which he allowed 1/5th of such expenditure as deduction u/s.35DD. The Ld. Departmental Representative could not controvert the above factual findings given by the Ld.CIT(A). Accordingly the order of the CIT(A) is upheld on this issue and the ground raised by the Revenue is dismissed. - Decided in favour of assessee Treatment to software expenditure - revenue or capital expenditure - Held that - The issue stands squarely decided in favour of the assessee by the decision of the Hon ble Bombay High Court in the case of CIT Vs. Lubrizol India Ltd.(2015 (8) TMI 134 - BOMBAY HIGH COURT) where it has been held that expenses incurred to obtain the application software which has to be upgraded from time to time due to change in technology has to be allowed as revenue expenditure. - Decided in favour of assessee Adhoc additions on account of car expenses communication expenses and workman 1.09 crores the assessee has made payment to the tune of 1.11 crores towards the provision for discount on sales therefore under the facts and circumstances of the case we find no infirmity in the order of the CIT(A) deleting the disallowance made by the AO. - Decided in favour of assessee Addition on account of loss in Foreign Exchange Rate Fluctuation - Held that - Hon ble Supreme Court in the case of CIT Vs. Woodward Governor India Pvt. Ltd. reported in 2009 (4) TMI 4 - SUPREME COURT has held that losses suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance sheet is an item of expenditure u/s.37(1) of the I.T.Act. Considering the fact that loss amounting to 72, 10, 000/- was incurred by the assessee on account of foreign exchange rate fluctuation in respect of import and export transactions made during the year we find no infirmity in the order of the CIT(A) allowing the claim of loss of 72, 10, 000/- on account of foreign exchange rate fluctuation as a revenue expenditure. - Decided in favour of assessee

Issues Involved:
1. Expenditure pertaining to Employee Stock Purchase Scheme (ESPS)
2. Disallowance of Warranty Provision in normal tax computation
3. Disallowance of Warranty Provision in computation of tax as per section 115JB
4. Amalgamation Expenses
5. Treatment of Software Expenditure
6. Adhoc Additions on Account of Car Expenses, Communication Expenses, and Workman & Staff Welfare Costs
7. Treatment of Unutilized CENVAT Credit
8. Provision for Discount on Sales
9. Loss in Foreign Exchange Rate Fluctuation

Detailed Analysis:

1. Expenditure pertaining to Employee Stock Purchase Scheme (ESPS):
The assessee claimed a deduction for the difference between the market price and the concessional price of shares issued to employees under ESPS. The AO disallowed this, considering it notional/contingent expenditure. The CIT(A) upheld this decision, relying on the Ranbaxy Laboratories Ltd. case. However, the ITAT allowed the deduction, following the Bangalore Special Bench decision in Biocon Ltd., which held that such discounts are business expenditures and not contingent liabilities.

2. Disallowance of Warranty Provision in normal tax computation:
The AO disallowed the warranty provision, considering it a contingent liability. The CIT(A) partially allowed the provision, restricting it to actual expenses. The ITAT, however, allowed the entire provision, citing consistent practice and the Supreme Court's decision in Rotork Controls India Pvt. Ltd., which allows provisions based on past experience.

3. Disallowance of Warranty Provision in computation of tax as per section 115JB:
This issue was deemed consequential to the normal tax computation of warranty provision. Since the ITAT allowed the warranty provision in normal computation, it also allowed the provision under section 115JB, making the grounds academic.

4. Amalgamation Expenses:
The AO disallowed estimated future expenses related to amalgamation, treating them as contingent liabilities. The CIT(A) reduced the disallowance, recognizing actual subsequent payments. The ITAT upheld the CIT(A)'s decision, noting that the expenses were incurred and justified.

5. Treatment of Software Expenditure:
The AO treated software expenses as capital expenditure, allowing only depreciation. The CIT(A) treated them as revenue expenditure, citing the need for regular upgrades and lack of enduring benefit. The ITAT upheld this, following the Bombay High Court's decision in Lubrizol India Ltd., which treats application software expenses as revenue in nature.

6. Adhoc Additions on Account of Car Expenses, Communication Expenses, and Workman & Staff Welfare Costs:
The AO made adhoc disallowances for these expenses, considering them personal. The CIT(A) deleted these additions, stating that personal expenses do not apply to companies and disallowances cannot be made without specific findings. The ITAT upheld the CIT(A)'s decision, referencing the Gujarat High Court's ruling in Sayaji Iron and Engineering Co.

7. Treatment of Unutilized CENVAT Credit:
The AO added unutilized CENVAT credit to the income, treating it as unaccounted. The CIT(A) deleted this addition, following the Chandigarh Special Bench's decision in Glaxo Smithkline Consumer Healthcare Ltd. and the Supreme Court's ruling in Indo Nippon Chemicals Co. Ltd., which considers CENVAT credit as advance excise duty payment. The ITAT upheld the CIT(A)'s decision.

8. Provision for Discount on Sales:
The AO disallowed the provision for sales discounts, considering it unaccrued. The CIT(A) allowed the provision, noting actual subsequent payments and referencing the Supreme Court's decisions in Bharat Earth Movers Ltd. and Rotork Controls India Pvt. Ltd. The ITAT upheld the CIT(A)'s decision, finding no infirmity.

9. Loss in Foreign Exchange Rate Fluctuation:
The AO disallowed foreign exchange loss, considering it not part of actual purchases/receipts. The CIT(A) allowed the loss, citing adherence to Accounting Standard-11 and relevant case laws. The ITAT upheld the CIT(A)'s decision, referencing the Bombay High Court's ruling in V.S. Dempo & Co. Pvt. Ltd. and the Supreme Court's decision in Woodward Governor India Pvt. Ltd., which treat such losses as trading losses.

Conclusion:
The ITAT allowed the appeals filed by the assessee and dismissed those filed by the Revenue, providing detailed justifications and referencing relevant case laws to support its decisions.

← Previous Next →