2017 (10) TMI 1531 - AT - Income Tax

Capital loss OR allowable business deduction - difference between purchase price of Stock Appreciation Right ( SAR‟) and the sale price of such SAR at the time of exercise by the employees - Whether above differential amount was in the nature of employee compensation allowable as deduction under section 37(1) ? - HELD THAT - With respect to one of the group companies, Religare commodities Ltd. 2017 (1) TMI 783 - ITAT DELHI identical issue arose before the coordinate bench, which decided this issue held that the issue is also squarely covered by the decision of the Hon‟ble Madras High Court 2012 (7) TMI 696 - MADRAS HIGH COURT wherein it has been held that the above expenditure on account of employee stock option scheme is an ascertained liability for deduction and further also held that the expenses debited is cost of employee stock option plan in the profit and loss account is an allowable expenditure. The Ld. departmental representative also could not point out any other judicial precedent against the above judicial precedents cited by the Ld. authorized representative. - Decided in favour of assessee.

Summary

Issues:
- Disallowance of difference between purchase price and sale price of Stock Appreciation Right (SAR)
- Disallowance of difference between sale price and exercise price of SAR as capital expenditure
- Allowability of deduction for the amount of loan written off as loss incidental to business under section 28 of the Act

Analysis:
1. Disallowance of SAR Difference: The assessee appealed against the disallowance of ?2,09,63,780 by the assessing officer as capital loss, not allowable as a business deduction. The assessee argued that the differential amount represented a loan granted to the Trust for administering the SAR scheme, which was not recovered in accordance with the scheme. Additionally, the SAR scheme aimed to motivate, reward, and retain key employees, making the differential amount an employee benefit under section 37(1) of the Income Tax Act, 1961. The tribunal allowed the appeal, stating that the differential amount was a revenue expenditure and directed the assessing officer to allow the deduction.

2. Enhancement of Income: The Commissioner of Income tax (Appeals) enhanced the income by directing further disallowance on the difference between the sale price and exercise price of SAR, considering it as capital expenditure related to issuing shares to employees. The assessee contended that this differential amount was employee compensation deductible under section 37(1) of the Act. The tribunal found in favor of the assessee, citing precedents where similar expenses were allowed as deductions, emphasizing that the expenditure was revenue in nature. The tribunal reversed the decision of the CIT (A) and directed the assessing officer to allow the deduction of the differential amount.

3. Loan Written Off Deduction: The assessee also argued for the deduction of the loan written off as a loss incidental to business under section 28 of the Act. However, this issue was not explicitly addressed in the detailed analysis provided in the judgment.

In conclusion, the tribunal allowed the appeal filed by the assessee, overturning the decisions of the lower authorities and directing the assessing officer to allow the deductions claimed by the assessee related to SAR expenses. The tribunal emphasized the revenue nature of the expenses and relied on judicial precedents supporting the allowability of such deductions.