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2023 (1) TMI 1380 - AT - Income TaxNature of expenditure - Allowability of ESOP expenses - difference between the market value of shares as computed under the guidelines of SEBI and the value at which these shares were issued to the employees - AO disallowed the ESOP expenses on the ground that the same cannot be allowed u/s 37 (1) on the ground that these expenses are notional in nature and the same are required to be disallowed being capital in nature - HELD THAT - This issue has been discussed at length in the case of Biocon Ltd 2020 (11) TMI 779 - KARNATAKA HIGH COURT wherein the facts were that assessee floated Employees Stock Option Plans (ESOP) and provided shares to its employees at a discount discount. There was difference between grant price to employees and market price as on date of grant of ESOPs. The ESOPs were vested in employee over a period of four years. The deduction of discount on ESOP over vesting period was in accordance with accounting in books of account which had been prepared in accordance with SEBI Guidelines. The Karnataka High Court held that on exercise of option by an employee actual amount of benefit that had to be determined was only a quantification of liability which would take place at a future date. The Court further held that the discount on issue of ESOPs was not a contingent liability but was an ascertained liability. Accordingly issuance of shares at a discount would be an expenditure incurred for purposes of section 37(1) as primary object of aforesaid exercise was not to waste capital but to earn profits by securing consistent services of employees and therefore same could not be construed as short receipt of capital. Thus discount on issue of ESOP was allowable deduction under section 37(1) of the Act. The Delhi High Court in the case of PVR Ltd. 2022 (8) TMI 1234 - DELHI HIGH COURT has held that difference between price at which stock options were offered to employees of assessee-company under ESOP and ESPS and prevailing market price of stock on date of grant of such options was allowable as revenue expenditure. As the object of issuing such share at a lower price is nowhere directly connected with the earning of income but when the company undertakes to issue shares to its employees at a discounted premium at a future date the primary object of this exercise is not to raise the share capital but to earn profit by securing the consistent and concentrated efforts of dedicated employees during the vesting period such discount is construed both by the employees and the company as nothing but a part of package of remuneration a substitute for giving direct incentive in cash for availing of the services of the employees. Therefore it is not justified while upholding the disallowance of the assessee s claim. Decided in favour of assessee. Disallowance u/s 14A - AO observed that that the assessee did not disallow any direct or indirect expenses in relation to investments made by the company during the year under consideration but assessee has not earned any exempt income - HELD THAT - Admittedly during the year under consideration the assessee did not earn any exempt income. It is a well-settled law on the subject that no disallowance can be made under section 14A in case the assessee has not earned any exempt income. The Hon ble Supreme Court in the case of State Bank of Patiala 2018 (11) TMI 1565 - SC ORDER held that where High Court took a view that amount of disallowance under section 14A could be restricted to amount of exempt income only SLP filed against said order was to be dismissed. The Hon ble Supreme Court in the case of Chettinad Logistics (P.) Ltd 2018 (7) TMI 567 - SC ORDER dismissed SLP against High Court ruling that section 14A cannot be invoked where no exempt income was earned by assessee in relevant assessment year. Thus CIT(Appeals) has not erred in facts and in law in deleting the addition made un/s 14A - Decided in favour of assessee. Applicability of disallowance u/s 14A on the computation of liability u/s 115JB of the Act - HELD THAT - Since we have already held that in the instant set of facts no disallowance is called for under section 14A of the Act while adjudicating ground of appeal number 2 this ground of appeal number 3 becomes academic and the same is dismissed hereby. Allowability of education cess as an expense - whether education is allowable expense in the hands of the assessee while computing taxable income? - HELD THAT - Chambal Fertilisers Chemicals Ltd. 2022 (12) TMI 1098 - SC ORDER held that Education cess on rate or tax levied on PGPB is to be disallowed in view of retrospective amendment made by FA2022 to section 40(a)(ii) w.r.e.f. 1-4-2005. The ITAT Bangalore in the case of Cypress Semiconductor Technology India (P.) Ltd. 2022 (7) TMI 1518 - ITAT BANGALORE held that Education cess is not allowable as deduction under section 37(1) of the Act. Thus Payment of education cess including secondary and higher education cess is not allowable as deduction. Accordingly ground number 1 of the assessee s appeal is dismissed. Allowability of PF/ESI u/s 36(1)(va) of the Act - assessee had not deposited employees contributions towards PF and ESI within prescribed period in law - HELD THAT - The issue is squarely covered against the assessee by the order of Hon ble Supreme Court in the case of Harrisons Malayalam Ltd. 2023 (1) TMI 137 - SC ORDER wherein the Supreme Court dismissed the SLP against order of High Court that where assessee-company failed to pay employees contribution towards EPF and ESI within due date prescribed in respective Acts deduction under section 36(1)(va) was not allowable. Again in the case of Checkmate Services (P.) Ltd. 2022 (10) TMI 617 - SUPREME COURT the Supreme Court held that there is a marked difference between nature and character of assessee-employer s contribution and amounts retained by assessee from out of employee s income by way of deduction wherein one is liability to be paid by employer and second is deemed income as per section 2(24)(x) which is held in trust by assessee employer thus said marked difference was to be borne while interpreting obligation of assessee-employer under section 43B.Therefore the non obstante clause under section 43B could not apply in case of amounts which were held in trust as was case of employee s contribution which were deducted from their income and was not part assessee-employer s income thus said clause would not absolve assessee-employer from its liability to deposit employee s contribution on or before due date as a condition for deduction. Thus where assessee had not deposited employees contributions towards PF and ESI amounting Rs. 15.20 lakhs within prescribed period in law and AO by invoking provisions of section 36(1)(va) read with section 2(24)(x) made addition of aforesaid amount to income of assessee impugned addition made to income of assessee was justified - Decided against assessee.
Issues Involved:
1. ESOP disallowance 2. Disallowance u/s 14A of the Act 3. Applicability of disallowance u/s 14A on computation of liability u/s 115JB of the Act 4. Allowability of education cess 5. Allowability of PF/ESI u/s 36(1)(va) of the Act Summary: 1. ESOP Disallowance: The Department challenged the deletion of ESOP expenses of Rs. 22,65,000/- by CIT(A), arguing they were capital in nature and notional. The assessee argued these expenses were perquisites to employees, with TDS deducted, and relied on judicial precedents favoring ESOP expenses as allowable under section 37(1). The Tribunal upheld CIT(A)'s decision, referencing cases like Biocon Limited and Cera Sanitaryware Limited, which established ESOP expenses as a part of employee remuneration and not contingent liabilities. 2. Disallowance u/s 14A of the Act: The AO disallowed Rs. 2,84,52,088/- under section 14A, despite the assessee not earning exempt income during the year. The CIT(A) deleted this disallowance, citing previous decisions and the absence of exempt income. The Tribunal confirmed this, referencing multiple cases, including the Gujarat High Court's decision in Corrtech Energy Pvt. Ltd. and the Supreme Court's stance in Chettinad Logistics (P.) Ltd., which held that no disallowance under section 14A is permissible without exempt income. 3. Applicability of Disallowance u/s 14A on Computation of Liability u/s 115JB of the Act: The AO added the disallowed amount under section 14A to the computation of liability u/s 115JB. Since the Tribunal upheld that no disallowance was warranted under section 14A, this ground became academic and was dismissed. 4. Allowability of Education Cess: The assessee's claim for education cess as an allowable expense was rejected. The Tribunal cited the Supreme Court's decision in Chambal Fertilisers & Chemicals Ltd., which disallowed education cess as a deductible expense due to the retrospective amendment by FA2022 to section 40(a)(ii). 5. Allowability of PF/ESI u/s 36(1)(va) of the Act: The assessee's appeal against the disallowance of PF/ESI contributions was dismissed. The Tribunal referred to the Supreme Court's decisions in Harrisons Malayalam Ltd. and Checkmate Services (P.) Ltd., which held that employees' contributions not deposited within the due date prescribed in the respective Acts are not deductible under section 36(1)(va). Conclusion: The appeal of the Department was dismissed, and the Cross Objection of the assessee was also dismissed.
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