2020 (12) TMI 769 - AT - Income Tax

Disallowance in respect of ESOP expenses - Whether permissible expense u/s 37(1) ? - as per AO addition made stating that these expenses are only notional expenses and have been incurred in relation to issue of shares to employees resulting in increase in capital and is not an allowable expense - HELD THAT - CIT(A) allowed claim of the assessee following the decision of the Bangalore Special Bench in the case of Biocon Limited 2013 (8) TMI 629 - ITAT BANGALORE and also the decision of the Mumbai benches in the case of DCIT v. Kotak Mahindra Bank Ltd 2018 (1) TMI 320 - ITAT MUMBAI , Accenture Services Pvt. Ltd., 2010 (3) TMI 1107 - ITAT MUMBAI and the decision of the Hon'ble Madras High Court in the case of CIT v PVP Ventures Limited 2012 (7) TMI 696 - MADRAS HIGH COURT and deleted the disallowance made by the Assessing Officer - On reading of the order of the Ld.CIT(A) we do not find any infirmity in the order passed by the Ld.CIT(A). Thus, the grounds raised by the revenue are dismissed. Disallowance of interest u/s.36(1)(iii) - nexus between borrowed funds and capital work in progress - HELD THAT - On a perusal of the order of the Tribunal for the A.Y.2014-15 we notice that the Tribunal upheld the order of the Ld.CIT(A) in deleting the disallowance made u/s. 36(1)(iii) of the Act as the assessee had sufficient own funds in the form of share capital and reserves. For A.Y. 2010-11 the Ld.CIT(A) deleted the disallowance for the reason that the assessee has share capital and reserves much more than the capital work-in-progress and it is the finding of the Ld.CIT(A) that no nexus between borrowed funds and capital work-in-progress has been established by the Assessing Officer and therefore Ld.CIT(A) held that no part of interest can be disallowed. He also placed reliance on the decision of the Hon'ble Bombay High Court in the case of CIT v. Reliance utilities Power Ltd., 2009 (1) TMI 4 - BOMBAY HIGH COURT and CIT v. HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT These findings of the Ld.CIT(A) could not be rebutted by the revenue with evidences. - Decided against revenue.

Summary

Issues Involved:
1. Deleting the disallowance of ESOP expenses for A.Y. 2008-09 and A.Y. 2009-10.
2. Disallowance of interest under section 36(1)(iii) of the Income Tax Act for A.Y. 2010-11 to A.Y. 2013-14.

Issue-Wise Detailed Analysis:

1. Deleting the Disallowance of ESOP Expenses for A.Y. 2008-09 and A.Y. 2009-10:
The Revenue contested the deletion of disallowance made by the Assessing Officer (AO) regarding ESOP expenses, arguing that these expenses were notional and related to the issuance of shares to employees, thus increasing capital and not qualifying as allowable deductions under section 37(1) of the Income Tax Act. The AO relied on the Supreme Court's decisions in Punjab State Industrial Development Corp. Ltd. and Brooke Bond India Ltd., which held that expenditure resulting in an increase in capital is not deductible. Additionally, the AO cited the Delhi Tribunal's decision in Ranbaxy Laboratories Ltd. v. ACIT, which stated that issuing shares below market price results in a notional loss, not an actual expenditure.

The Learned Commissioner of Income Tax (Appeals) [Ld.CIT(A)] deleted the disallowance, following the Bangalore Special Bench's decision in Biocon Limited, which treated ESOP discounts as a mode of compensating employees, thus qualifying as business expenditure under section 37(1). The ITAT upheld the Ld.CIT(A)'s decision, noting that the ESOP discount is considered part of employee remuneration and not a capital expenditure. The Tribunal emphasized that the liability for ESOP discounts is ascertained and incurred over the vesting period, making it deductible under section 37(1).

2. Disallowance of Interest under Section 36(1)(iii) of the Income Tax Act for A.Y. 2010-11 to A.Y. 2013-14:
The Revenue challenged the deletion of interest disallowance under section 36(1)(iii), arguing that there was a nexus between borrowed funds and capital work-in-progress (CWIP). The AO noted a negative balance in the assessee's bank account, suggesting that loan funds were used for CWIP, justifying the disallowance.

The Ld.CIT(A) deleted the disallowance, observing that the assessee had sufficient own funds in the form of share capital and reserves, which exceeded the CWIP. The Tribunal upheld this decision, referencing the assessee's own case for A.Y. 2014-15, where it was established that the assessee had ample own funds, and no disallowance was warranted. The Tribunal also referred to the Bombay High Court's decisions in CIT v. Reliance Utilities & Power Ltd. and CIT v. HDFC Bank Ltd., which support the principle that if the assessee has sufficient own funds, no interest disallowance should be made.

For A.Y. 2010-11 to A.Y. 2013-14, the Tribunal found that the Ld.CIT(A)'s findings were consistent and could not be rebutted by the Revenue with evidence. Consequently, the Tribunal upheld the Ld.CIT(A)'s orders, dismissing the Revenue's appeals for these assessment years.

Conclusion:
The ITAT Mumbai dismissed the Revenue's appeals, confirming that ESOP expenses are deductible under section 37(1) as employee compensation and that no interest disallowance under section 36(1)(iii) is warranted when the assessee has sufficient own funds.