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2014 (4) TMI 109 - AT - Income TaxDisallowance of interest - interest expenditure claimed u/s. 37(1) Interest free loan given to Murugappa Employees Foundation - borrowings have been made by the assessee for advancing the amount to the Trust formed by the assessee for acquiring shares of the group companies to be allotted under ESOP Scheme - Held that - The benefits accruing to employees by allotment of shares under the scheme is in the form of perquisite. The difference between the market value at which the shares are acquired by the Trust and the value at which the employees were allotted shares is assessable as perquisite in the hands of the employees. CIT(A) has rightly pointed out that, when company provides benefit or amenity to its employees through intermediary institution, it is not necessary to that such intermediary institute should operate solely for the similar company - What is important is that value of benefit has been conferred to employees irrespective of manner in which or through whom they obtain the benefit as long as source of benefit is employer of benefit get taxed in hands of employees - CIT(Appeals) remitted file back to Assessing Officer with direction to proportionately disallow expenditure if shares have been allotted to employees of other group companies - However, disallowance so made shall be allowed in hands of respective group companies - Do not find any infirmity in impugned order of CIT(Appeals) - Findings of CIT(Appeals) confirmed - Decided against Revenue.
Issues:
Disallowance of interest expenditure under Section 37(1) of the Income Tax Act, 1961 for loan given to Trust without charging interest. Analysis: The appeal was filed by the Revenue against the order of the Commissioner of Income Tax(Appeals)-V, Chennai regarding the disallowance of interest expenditure claimed by the assessee under Section 37(1) of the Act for a loan given to a Trust without charging interest. The Assessing Officer disallowed the interest amount claimed by the assessee as expenditure, leading to an appeal before the CIT(Appeals). The CIT(Appeals) held that expenditure incurred by the company in providing benefits taxable as perquisites to employees is allowable. Citing a judgment, the CIT(Appeals) stated that expenditure on Employee Stock Option Plan (ESOP) is allowable under Section 37(1) of the Act. The CIT(Appeals) directed the Assessing Officer to verify and allow the claim if it relates only to the ESOP scheme of the employees. The Revenue, aggrieved by this decision, appealed before the Tribunal. The Revenue argued that interest paid by the assessee on borrowed funds was rightly disallowed as the assessee lent interest-bearing funds to the Trust without charging interest. On the other hand, the assessee contended that the borrowed funds were used for ESOP scheme purposes, making the interest expenditure allowable. The Tribunal considered the arguments and reviewed the orders and judgments cited. The Tribunal noted that the borrowings were used by the assessee to advance funds to the Trust for acquiring shares under the ESOP scheme. The Tribunal observed that the Trust was not exclusively handling shares of the assessee-company but also of group companies. However, it acknowledged that the Trust was formed by the assessee to provide management services and hold shares, and the benefits to employees through the ESOP scheme were considered perquisites. The Tribunal agreed with the CIT(Appeals) that the value of benefits conferred to employees, regardless of the intermediary institution, should be taxed in the hands of employees. The Tribunal upheld the CIT(Appeals) decision to proportionately disallow expenditure if shares were allotted to employees of other group companies, with such disallowance allowed in the hands of respective companies. In conclusion, the Tribunal confirmed the findings of the CIT(Appeals) and dismissed the Revenue's appeal as lacking merit.
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