2016 (3) TMI 1176 - AT - Income Tax

Disallowance under section 14 A read with rule 8D - Held that - Respectfully following the order of the tribunal for the earlier years held that as assessee s claim of the expenditure on earning of exempt income is not remitted by the revenue. They applied the provisions of section 14 A read with rule 8D mechanically without regulating expressly the claim of Neil expenditure on the exempt income. AO needs to record his satisfAction on incorrectness of the assessee s claim in the return. Assessing officer has not recorded the same in this case. Therefore, considering the above as well as following the rule of consistency, we are of the opinion that this issue should also be remanded to the file of the assessing officer for fresh adjudication. Addition made on account of AIR information - Held that - Respectfully following the order of the tribunal for the earlier years the orders of the revenue on the issue of reconciliation of AIR data qua the books of accounts of the assessee stop refining his recorded by the assessing officer that no exhaustive exercise of reconsideration is undertaken by him before making the said addition. Assessee is certain. The consideration, if one more opportunity is granted considering the same, we read remand this ground to the file of the assessing officer for fresh adjudication of the issue after granting a reasonable opportunity of being heard to the assessee. Depreciation on uninterrupted power supply(UPS) - Held that - Tribunal had decided the issue in favour of the assessee, while adjudicating the appeals for the earlier years as following the principle of consistency, the depreciation at the rate of 80% should be allowed on UPS instead of 15% granted by the assessing officer. Accordingly ground raised by the revenue are dismissed. Marked to market losses (MTM) allowance - Held that - Identical issue had arisen in the earlier years and the tribunal had decided the issue in favour of the assessee held that the MTM loss is liable to be allowed. Disallowance made with regard to employee stock option scheme(ESOP) - Held that - Offer was made by the parent company to the employees of the assessee for ESOP and the assessee had made payment for the discount allowed by the parent company. As far as the assessee in the present case which is an affiliate of the foreign parent company is concerned, the shares were in fact acquired by the assessee from the parent company and there was an actual outflow of cash from the assessee to the foreign parent 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 not disputed at any stage by the revenue. In such circumstances, we do not see any basis on which it could be said that the expenditure in question was a capital expenditure of the foreign parent company. As far as the assessee is concerned, the difference between the fair market value of the shares of the parent company and the price at which those shares were issued to its employees in India was 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 expenditure wholly and exclusively incurred for the purpose of business of the assessee. - Decided against revenue

Issues Involved:
1. Disallowance of expenses under Section 14A.
2. Addition based on AIR information.
3. Depreciation on Uninterrupted Power Supply (UPS).
4. Marked to Market (MTM) losses.
5. Disallowance related to Employee Stock Option Scheme (ESOP).

Issue-wise Detailed Analysis:

1. Disallowance of Expenses under Section 14A:
The first ground of appeal concerns the disallowance of expenses amounting to Rs. 2.41 crores under Section 14A read with Rule 8D. The AO found that the assessee had earned dividend income but made no disallowance in the return of income. The AO disallowed Rs. 2.22 crores after considering a partial disallowance of Rs. 19.39 lakhs made by the assessee. The FAA upheld the AO's disallowance. However, the Tribunal noted that similar issues in earlier years had been remanded back to the AO for fresh adjudication. The Tribunal directed the AO to record satisfaction regarding the incorrectness of the assessee's claim and to consider all objections and written submissions. Thus, the Tribunal remanded this issue back to the AO for fresh adjudication, deciding the first ground of appeal in favor of the assessee, in part.

2. Addition Based on AIR Information:
The second ground of appeal deals with the addition made due to discrepancies in AIR information. The AO added the amount as the assessee failed to reconcile the differences. The FAA directed the AO to re-examine the AIR data and make necessary additions only if the assessee failed to reconcile the differences. The Tribunal, following earlier years' decisions, remanded this issue back to the AO for fresh adjudication, directing the AO to provide the assessee a reasonable opportunity to reconcile the differences. This ground was partly allowed in favor of the assessee.

3. Depreciation on Uninterrupted Power Supply (UPS):
The first ground of appeal raised by the AO concerns the depreciation rate on UPS. Both parties agreed that the Tribunal had previously decided this issue in favor of the assessee, allowing depreciation at 80% instead of 15%. The Tribunal, following the principle of consistency and previous decisions, decided this ground against the AO.

4. Marked to Market (MTM) Losses:
The next issue is about MTM losses. Both parties agreed that the Tribunal had previously decided this issue in favor of the assessee. The Tribunal noted that derivatives, considered as trading commodities, were treated on par with shares and stock options. The Tribunal upheld the FAA's order allowing the MTM losses, as the facts were identical to earlier years. Thus, this ground was decided against the AO.

5. Disallowance Related to Employee Stock Option Scheme (ESOP):
The last ground of appeal deals with the disallowance of expenses related to ESOP. The AO disallowed Rs. 519.19 lakhs, arguing that the ESOP discount was not a trading liability and was a capital expenditure. The FAA, however, allowed the deduction, following the Special Bench decision in the case of Biocon Ltd., which treated ESOP discounts as revenue expenditure. The Tribunal upheld the FAA's decision, noting that the ESOP expenses were incurred for retaining employees and were thus business expenditures. The Tribunal dismissed the AO's appeal on this ground, confirming the FAA's order.

Conclusion:
The appeal filed by the assessee was partly allowed, and the appeal of the AO was dismissed. The Tribunal remanded the issues of disallowance under Section 14A and AIR information back to the AO for fresh adjudication, upheld the depreciation rate on UPS and MTM losses in favor of the assessee, and confirmed the FAA's order allowing ESOP expenses as revenue expenditure.

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