2017 (10) TMI 589 - AT - Income Tax

Disallowance of stock appreciation right - difference between the purchase price of stock appreciation right and the sale price of stock appreciation right at the time of the exercise by the employees holding the same to be capital loss and not allowable as business deduction - Held that - According to the particular scheme the grant price was paid by the Granti who is an employee eligible to participate under the scheme. According to that scheme the 10 employees of the assessee company opted for the scheme and all of them exercised their stock appreciation rights. According to that ₹ 2505946 was sale proceeds of the stocks of the company, resulting into the loss of ₹ 1599362 which was claimed by the assessee as an employee compensation. Further, the company has purchased the shares of Religare enterprise Ltd, through a trust under that particular scheme at an average price of ₹ 503/ per share whereas the grant price of shared to the employees was ₹ 140/ per share. Therefore, the difference between the sale price of the share and the purchase price of the share was claimed by the assessee as deduction as employee compensation. In the identical circumstances. With respect to one of the group companies, Religare commodities Ltd for assessment year 2008 09 identical issue arose before the coordinate bench 2017 (1) TMI 783 - ITAT DELHI claim of the assessee with respect to both the above items were allowed. The above expenditure on account of employee stock option scheme is an ascertained liability for deduction - the expenses debited is cost of employee stock option plan in the profit and loss account is an allowable expenditure. Deduction of expenditure incurred - Held that - In the present case the business of the assessee was set up by employment of the employees as well as by hiring the requisite infrastructure which happened in the month of April 2007. The courts have held that there is a clear distinction between a person commencing a business and a person setting up a business and for the purposes of the Indian Income-tax Act the setting up of the business and not the commencement of the business that is to be considered for cut off of deductibility of expenditure. It is only after the business is set up that the previous year of that business commences and any expense incurred prior to the setting up of a business would not be permissible deduction. When a business is established and is ready to commence business then it can be said of that business that it is set up; but before it is ready to commence business it is not set up. There may however be an interval between the setting up of the business and the commencement of the business and all expenses incurred during that interval would be permissible deductions. We also draw support from the decision of CIT versus Axis Equity private limited 2017 (2) TMI 340 - BOMBAY HIGH COURT wherein on identical facts, issue has been decided that the expenditure are allowable to the assessee after the businesses are set up. Therefore in view of this we are of the opinion that the assessee must be allowed the deduction of expenditure incurred w.e.f. 01/04/2007 when the employees were hired and the expenditure With respect to infrastructure was incurred by the assessee. In the result we reverse the finding of the lower authorities and direct the assessee officer to allow the expenditure of ₹ 9389552/ incurred by the assessee for the period from April 2007 to June 2007. Disallowance u/s 14A - Held that - As decided in Cheminvest Ltd versus CIT 2015 (9) TMI 238 - DELHI HIGH COURT , where the assessee has not earned any exempt income during the year there cannot be any disallowance under section 14 A of the income tax act. Undisputedly there is no exempt income during the year, earned by the assessee, therefore there cannot be any disallowance under section 14 A of the income tax act. Addition u/s 40(a)(ia) - Expenditure incurred towards reimbursement of expenses by the other group concern and it is sharing of cost of common services utilised by those companies - Held that - The Hon ble Delhi High Court in case of CIT versus Fortis healthcare Ltd 2009 (1) TMI 842 - HIGH COURT OF DELHI has held that no tax is required to be deducted on the reimbursement of the expenses. The revenue could not point out any fact that these expenses are not reimbursement of the expenses but for the purpose of rendering specific services to the assessee. Additions deleted. Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Disallowance of Stock Appreciation Rights (SAR) as capital loss.
2. Enhancement of income by disallowance related to SAR.
3. Disallowance of pre-commencement expenditure.
4. Disallowance under Section 14A of the Income Tax Act.
5. Disallowance under Section 40(a)(ia) for non-deduction of tax at source.

Issue-wise Detailed Analysis:

1. Disallowance of Stock Appreciation Rights (SAR) as Capital Loss:
The Commissioner of Income Tax (Appeals) [CIT(A)] sustained the disallowance of ?6,69,626 made by the Assessing Officer (AO) on account of the difference between the purchase price and the sale price of SAR, holding it to be a capital loss not allowable as a business deduction. The CIT(A) did not appreciate that the differential amount represented a loan granted by the appellant to the Religare Enterprises Ltd. Employees SAR Trust for administering the SAR scheme, which was not meant to be recovered. The CIT(A) also failed to recognize that the SAR scheme was implemented to motivate and retain key employees and should be allowable under Section 37(1) of the Income Tax Act, 1961.

2. Enhancement of Income by Disallowance Related to SAR:
The CIT(A) enhanced the income of the appellant by directing a further disallowance of ?15,99,306 on account of the difference between the sale price of SAR and the exercise price, holding it to be capital expenditure. The assessee argued that this differential amount was in the nature of employee compensation allowable under Section 37(1). Alternatively, it should be deductible under Section 36(1)(ii) of the Act, as it was not in accordance with the Payment of Bonus Act, 1965.

3. Disallowance of Pre-commencement Expenditure:
The CIT(A) confirmed the disallowance of ?93,89,552 made by the AO, considering it as pre-operative expenses since the business was set up only on 30.06.2007 when the first invoice was raised. The assessee contended that the business activities essential for carrying on the business had started earlier, and thus, the expenses incurred from April 2007 to June 2007 should be deductible.

4. Disallowance under Section 14A of the Income Tax Act:
The CIT(A) upheld the disallowance of ?1,96,524 under Section 14A by applying Rule 8D of the Income Tax Rules, 1962. The assessee argued that the loan given to the Trust did not constitute an investment for disallowance purposes under Section 14A, and Rule 8D should not apply as no investments appeared on the audited annual accounts.

5. Disallowance under Section 40(a)(ia) for Non-deduction of Tax at Source:
The CIT(A) upheld the disallowance of ?34,34,000 made by the AO under Section 40(a)(ia), alleging that tax was not deducted at source. The assessee argued that the amount represented reimbursements of actual expenditure to group companies, and thus, there was no requirement to deduct tax at source on such payments.

Decision and Reasons:

1. Disallowance of SAR as Capital Loss:
The Tribunal allowed the assessee's appeal, reversing the CIT(A)'s decision and directing the AO to allow the sum of ?6,69,626 as revenue expenditure. The Tribunal relied on the decision of the coordinate bench in Religare Commodities Ltd and the special bench decision in Biocon Ltd, which allowed similar claims.

2. Enhancement of Income by Disallowance Related to SAR:
The Tribunal reversed the CIT(A)'s enhancement, holding that the differential amount of ?15,99,306 was also revenue expenditure related to the SAR scheme. The Tribunal followed the decisions of the Madras High Court in the case of PVP Ventures Ltd and the Delhi High Court in CIT vs. Lemon Tree Hotels Ltd, which allowed such expenditures as revenue expenses.

3. Disallowance of Pre-commencement Expenditure:
The Tribunal allowed the assessee's claim, holding that the business was set up when the essential activities commenced, which was in April 2007. The Tribunal relied on the Bombay High Court's decision in Western India Vegetable Products Ltd, which distinguished between the setting up and commencement of business, allowing expenses incurred after the business was set up.

4. Disallowance under Section 14A:
The Tribunal directed the AO to delete the disallowance of ?1,96,524 under Section 14A, following the Delhi High Court's decision in Cheminvest Ltd vs. CIT, which held that no disallowance can be made when no exempt income is earned during the year.

5. Disallowance under Section 40(a)(ia) for Non-deduction of Tax at Source:
The Tribunal allowed the assessee's appeal, directing the AO to delete the disallowance of ?34,34,000. The Tribunal relied on the Delhi High Court's decision in CIT vs. Fortis Healthcare Ltd, which held that no tax is required to be deducted on reimbursement of expenses.

Conclusion:
The Tribunal allowed the assessee's appeal on all grounds, reversing the CIT(A)'s decisions and directing the AO to allow the claimed deductions. The order was pronounced in the open court on 09/10/2017.