2014 (10) TMI 175 - AT - Income Tax

Claim of depreciation u/s 32 - Depreciation on the Mumbai Premises purchased, possessed and owned by the company, was put to use during the year Whether the assessee would be entitled for the depreciation as claimed despite the undisputed fact that the assessee had only purchased the building during the year under consideration and carried out certain furnishing work for the purpose of establishing the Bath Studio - Held that - The assessee had purchased the premises on 05/03/2007 and for the purpose of Bath Studio the furnishing and other work were carried out from March-07 to 31st May-2007 as decided in CIT vs. India Tea and Timber Trading Co. 1996 (6) TMI 83 - GAUHATI High Court - the word used for business purpose should have a wider import including active as well as passive usage of the asset. Also in Commissioner Of Income-Tax, Gujarat Versus Suhrid Geigy Limited 1981 (4) TMI 79 - GUJARAT High Court it has been held that depreciation was claimed by the assessee with effect from the date on which trail production was commenced - there was a time lag between the date when the trial production commenced and the date when the actual production commenced - the date on which the trial production commenced was irrelevant for the purposes of claiming depreciation and that it cannot be said that the company had set up its business at the point of time when the trial production had commenced - the company had not commenced its business from the standpoint of the right to claim depreciation for the user of a building or machine in the business of the assessee-company - although the assessee had purchased the building for business purpose and furnishing of the same was being carried out for actual use - the arguments of the assessee cannot be accepted Decided against assessee. Deduction on amortization of ESOP Scheme - Deduction allowable u/s 28 r.w. section 37 or not Held that - The assessee has claimed business expenditure on ESPO following the decision in Biocon Ltd. Vs. Dy.CIT 2013 (8) TMI 629 - ITAT BANGALORE - the assessee-company was a closely held company in the previous year and as such there was no question of listing of its shares and having some market price at the time of grant of options - Ordinarily, the amount of discount on premium which is written off over the vesting period represents the market price of the shares listed on the stock exchange on the date of grant of option as reduced by the price at which option is given to the employees - since there was no availability of any market price of such shares on the date of grant of option as the company came to be listed on a stock exchange in a subsequent year Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of depreciation on Mumbai Premises.
2. Deduction for Employee Stock Option Scheme (ESOP) expenses.
3. Interest charged under Sections 234B and 234C.
4. Initiation of penalty proceedings under Section 271(1)(c).

Detailed Analysis:

1. Disallowance of Depreciation on Mumbai Premises
The appellant challenged the disallowance of Rs. 7,80,826/- claimed as depreciation under Section 32 of the Income Tax Act, 1961. The primary contention was whether the Mumbai Premises were "put to use" for business purposes during the assessment year 2007-08. The Assessee argued that the premises were ready for business use when purchased on 05/03/2007, and the furnishing work for establishing the "Bath Studio" commenced in March 2007. However, the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that the premises were not ready for business use until 31st May 2007, thus disallowing the depreciation claim.

The Tribunal referred to various case laws, including CIT vs. India Tea & Timber Trading Co. and CIT vs. Suhrid Geigy Ltd., to interpret the term "used" for business purposes. The Tribunal concluded that mere preparation for use does not qualify as actual use and upheld the disallowance, citing the binding precedent of the Hon'ble Gujarat High Court in the case of CIT vs. Suhrid Geigy Ltd.

2. Deduction for Employee Stock Option Scheme (ESOP) Expenses
The appellant claimed a deduction of Rs. 24,30,554/- for ESOP expenses under Sections 28 and 37 of the Act. The CIT(A) disallowed this claim, stating that no actual expenditure was incurred by the Assessee, and the difference between the market price and the ESOP offer price was not a revenue loss but a capital nature transaction.

The Tribunal, however, referred to the Special Bench decision in the case of Biocon Ltd. vs. Dy.CIT, which allowed such deductions as business expenditure. The Tribunal found that the ESOP expenses were indeed allowable and reversed the disallowance made by the lower authorities.

3. Interest Charged under Sections 234B and 234C
The appellant contested the interest charged under Section 234B amounting to Rs. 11,43,780/- and Section 234C amounting to Rs. 5,25,159/-. The Tribunal noted that these issues were consequential in nature and did not require independent adjudication.

4. Initiation of Penalty Proceedings under Section 271(1)(c)
The appellant also challenged the initiation of penalty proceedings under Section 271(1)(c). The Tribunal deemed this issue as premature and thus did not provide an independent adjudication.

Conclusion:
The Tribunal partially allowed the appeal by:
- Upholding the disallowance of depreciation on the Mumbai Premises.
- Allowing the deduction for ESOP expenses.
- Treating the interest charges under Sections 234B and 234C as consequential.
- Considering the initiation of penalty proceedings under Section 271(1)(c) as premature.