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2022 (10) TMI 826 - AT - Income TaxTDS u/s 194H - disallowance of discount given to prepaid distributors u/s.40(a)(ia) - HELD THAT - We have no hesitation in holding that the relationship between assessee and distributor is only that of Principal to Principal and not that of Principal to Agent and accordingly there is no obligation for the assessee to deduct tax at source in terms of section 194H of the Act. We do not deem it fit to adjudicate other arguments advanced by the ld. AR on the applicability of second proviso to section 40(a)(ia) read with section 201 of the Act, as it would become academic in nature. This aspect of the issue is left open. In view of the aforesaid observations and respectfully following the various judicial precedents relied upon hereinabove, we hold that the sale of prepaid sim cards / recharge vouchers by the assessee to distributors cannot be treated as commission / discount to attract the provisions of section 194H and hence there cannot be any obligation on the part of the assessee to deduct tax at source thereon and consequentially there cannot be any disallowance u/s 40(a)(ia) of the Act. Accordingly, the Ground No. II raised by the assessee is allowed. The Ground No. I raised by the assessee is only supporting the Ground No. II for furnishing of additional evidences, the adjudication of which becomes academic in nature. Hence Ground No. I is also allowed. Disallowance of compensation cost of ESOP on account of Employee Stock Option Scheme (ESOP) - HELD THAT - As decided in M/S. BIOCON LIMITED 2013 (8) TMI 629 - ITAT BANGALORE discount under ESOP is in the nature of employees cost and is hence deductible during the vesting period w.r.t. the market price of shares at the time of grant of options to the employees. The amount of discount claimed as deduction during the vesting period is required to be reversed in relation to the unvesting/lapsing options at the appropriate time. However, an adjustment to the income is called for at the time of exercise of option by the amount of difference in the amount of discount calculated with reference the market price at the time of grant of option and the market price at the time of exercise of option. No accounting principle can be determinative in the matter of computation of total income under the Act. The question before the special bench is thus answered in affirmative by holding that discount on issue of Employee Stock Options is allowable as deduction in computing the income under the head 'Profits and gains of business or profession - Also confirmed by HC M/S. BIOCON LTD. 2020 (11) TMI 779 - KARNATAKA HIGH COURT Decided in favour of assessee. Addition made on account of foreign exchange gain - cost of assets was not reduced with the aforesaid gain and thereby assessee had claimed excess depreciation - AO observed that in the computation of income, the assessee has reduced on account of gain of foreign exchange fluctuation relating to fixed assets - HELD THAT - Primafacie on reading note No.3(a) to the income tax depreciation schedule enclosed we find that Rs.519.65 million representing foreign exchange gain relatable to acquisition of fixed assets seem to have been adjusted with the cost of fixed assets as per Section 43A of the Act. However, in order to avoid doubts, we deem it fit and appropriate to remand this issue to the file of the ld. AO for the limited purpose of verification of the fact as to whether this foreign exchange gain of Rs.519.65 million had been reduced from the cost of fixed assets or not. If it is found to be reduced, then the addition made by the ld. AO need to be deleted. With these directions, the ground No.IV is allowed for statistical purposes. Disallowance made u/s.14A - sufficiency of own funds - HELD THAT - As in the absence of any exempt income there cannot be any disallowance u/s.14A of the Act. We direct the ld. AO to delete the disallowance made u/s.14A of the Act. Accordingly, the ground raised by the assessee is allowed. Disallowance of Revenue sharing license fees - HELD THAT - We find that this is a recurring issue in the case of the assessee - The very same issue in the case of the assessee for A.Y.2003-04 in Income Tax Appeal 2016 (4) TMI 1410 - BOMBAY HIGH COURT was decided in favour of the assessee by the Hon ble High Court by allowing it as Revenue expenditure u/s.37(1) of the Act. As in the interest of justice and fair play, we remand this issue to the file of the ld. AO for limited purpose on verification of the fact as to whether the assessee has claimed double deduction in respect of this expenditure for the same circle where the assessee is operating its telecom services. If it is found that there is no double deduction claimed by the assessee, the assessee would be eligible for deduction as revenue expenditure u/s.37(1) of the Act which would be in tune with the decisions rendered by the Hon ble Jurisdictional High Court in assessee s own case for A.Yrs. 2003-04, 2006-07 and 2007-08 referred to supra. With these observations, the ground raised by the assessee is allowed for statistical purposes. Disallowance on proportionate deduction u/s.35DD in respect of legal fees incurred on amalgamation - HELD THAT - This claim is only remaining 1/5th of the total legal fees claimed by the assessee which was incurred in A.Y.2004-05 being the first year. The present assessment year i.e. A.Y.2008-09 would be the 5th year of claim and accordingly, we direct the ld. AO to grant deduction of the remaining 1/5th portion being the legal fees incurred on merger expenses u/s.35DD of the Act in tune with orders passed for the earlier years. Accordingly, the ground No.VIII raised by the assessee is allowed. Disallowance of compensation cost of ESOP while computing book profit u/s.115JB of the Act - HELD THAT - The compensation cost of ESOP would be allowable as revenue expenditure for the assessee company on merits. Hence, the said expenditure is not be eligible to be added back for computing the book profit u/s.115JB of the Act, as we have already held that the said expenditure is not contingent or notional in nature. Accordingly, the ground IX raised by the assessee is allowed. Disallowance u/s.14A of the Act while computing book profits u/s.115JB - HELD THAT - As already held no disallowance u/s.14A of the Act could be made in the instant case as there was no exempt income claimed by the assessee. The said decision would hold good for this ground also as admittedly Clause f of Explanation 1 to Section 115JB(2) of the Act would come into operation only if there is exempt income credited in the profit and loss account. Accordingly, the ground No.X raised by the assessee is allowed. Disallowance of interest paid on borrowed funds in respect of interest free loans / advances to subsidiary company - HELD THAT - ABTL was having telecom circle license in Bihar and Jharkhand. They were also engaged in telecommunication business. Assessee is also engaged in telecommunication business. Hence, commercial expediency is proved beyond doubt. The other two advances are given to assessee own group companies which are engaged in the same business. In any case, decided in favour of the assessee by the Tribunal for A.Y.2007-08 2016 (5) TMI 1592 - ITAT MUMBAI wherein this interest disallowance was deleted by the Tribunal - Decided against revenue. Disallowance on account of club entrance fees - HELD THAT - We find that these amounts were paid for membership of various clubs in order to enable the Senior Executives to socialise and develop contacts with various persons for promoting the assessee s business. The membership of any club, in our considered opinion, does not bring in any enduring benefit to the club member. We find that this Tribunal for A.Yrs. 2006-07 and 2007-08 2016 (5) TMI 1592 - ITAT MUMBAI in assessee s own case had deleted the disallowance. It is also pertinent to note that the Revenue though challenged the Tribunal order passed for A.Y.2006-07 and 2007-08 before the Hon ble Jurisdictional High Court, chose not to raise any question of law with regard to this issue of disallowance of club expenses. This goes to prove that the Tribunal order for A.Yrs.2006-07 and 2007-08 dated 27/05/2018 wherein the club expenses was allowed as Revenue expenditure had attained finality. Hence, the ground No.3 raised by the Revenue has no legs to stand and hence, dismissed. Claim of the assessee to allow further expenditure being the expenditure made by the assessee during the course of assessment proceedings and not in the return of income - HELD THAT - As there is nothing wrong apparently in the claim made by the assessee with regard to liability of expenses and its business nexus thereon. As stated earlier, there is absolutely no grievance that could be present in the instant case for the Revenue as the ld. CIT(A) had only directed the ld.AO to examine the allowability of the expenses based on extensive verification with supporting documents. However, it is a fact that none of the ld. AO had not given any factual finding with regard to the allowability of these additional claim of expenses. This aspect requires factual verification by the ld. AO and hence we deem it fit and appropriate to remand this issue to the file of ld. AO for denovo adjudication in accordance with law. Accordingly, the ground No.4 raised by the Revenue is allowed for statistical purposes.
Issues Involved:
1. Disallowance of discount given to prepaid distributors under Section 40(a)(ia) for non-deduction of tax at source under Section 194H. 2. Disallowance of compensation cost of Employee Stock Option Scheme (ESOP). 3. Addition of foreign exchange gain to the total income. 4. Disallowance under Section 14A. 5. Disallowance of revenue sharing license fees. 6. Disallowance of club entrance fees. 7. Disallowance of interest on borrowed funds for interest-free loans/advances to subsidiaries. 8. Proportionate deduction under Section 35DD for legal fees on amalgamation. 9. Disallowance of ESOP cost while computing book profit under Section 115JB. 10. Disallowance under Section 14A while computing book profit under Section 115JB. 11. Additional expenditure claimed during assessment proceedings. Detailed Analysis: 1. Disallowance of Discount Given to Prepaid Distributors: The assessee challenged the disallowance of Rs. 320,00,00,000/- given to prepaid distributors under Section 40(a)(ia) for non-deduction of tax at source under Section 194H. The assessee argued that the relationship with distributors was on a principal-to-principal basis, and thus, the discount should not be subjected to TDS. The Tribunal found that the distributor's income was not ascertainable at the time of the transaction, and thus, no TDS obligation arose. The Tribunal relied on the Karnataka High Court's decision in Bharti Airtel Ltd., which held that the relationship was principal-to-principal, and no TDS was required. The Tribunal concluded that the discount given to prepaid distributors was not commission and hence, not liable for TDS under Section 194H. The disallowance was deleted. 2. Disallowance of Compensation Cost of ESOP: The assessee challenged the disallowance of Rs. 3,75,90,000/- on account of ESOP. The Tribunal noted that the ESOP cost was amortized based on SEBI guidelines and was a legitimate business expenditure. The Tribunal relied on the Special Bench decision in Biocon Ltd., which was upheld by the Karnataka High Court, stating that ESOP costs are allowable as revenue expenditure. The disallowance was deleted. 3. Addition of Foreign Exchange Gain: The assessee contested the addition of Rs. 51,96,46,461/- on account of foreign exchange gain related to fixed assets. The Tribunal remanded the issue to the AO for verification of whether the foreign exchange gain was adjusted in the cost of fixed assets as per Section 43A. If adjusted, the addition should be deleted. 4. Disallowance under Section 14A: The assessee argued that no exempt income was earned during the year, and thus, no disallowance under Section 14A should be made. The Tribunal agreed, citing the Delhi High Court's decision in Era Infrastructure (India) Ltd., which held that the amendment to Section 14A by Finance Act 2022 is prospective and not applicable retrospectively. The disallowance was deleted. 5. Disallowance of Revenue Sharing License Fees: The assessee challenged the disallowance of Rs. 415,08,45,362/- for revenue sharing license fees. The Tribunal noted that the issue was consistently decided in favor of the assessee in earlier years and upheld by the High Court. The Tribunal remanded the issue to the AO for verification of whether any double deduction was claimed. If no double deduction, the expenditure should be allowed as revenue expenditure. 6. Disallowance of Club Entrance Fees: The assessee contested the disallowance of Rs. 37,79,021/- for club entrance fees. The Tribunal noted that the expenses were for business promotion and socializing by senior executives and had been allowed in earlier years. The disallowance was deleted. 7. Disallowance of Interest on Borrowed Funds: The assessee challenged the disallowance of Rs. 1,82,34,720/- for interest on borrowed funds given as interest-free loans to subsidiaries. The Tribunal noted that the issue was decided in favor of the assessee in earlier years and upheld by the High Court. The disallowance was deleted. 8. Proportionate Deduction under Section 35DD: The assessee claimed a deduction of Rs. 5,87,487/- for legal fees on amalgamation. The Tribunal directed the AO to allow the deduction as per the provisions of Section 35DD. 9. Disallowance of ESOP Cost while Computing Book Profit under Section 115JB: The assessee challenged the addition of ESOP cost while computing book profit. The Tribunal, having allowed the ESOP cost as revenue expenditure, directed that it should not be added back for computing book profit under Section 115JB. 10. Disallowance under Section 14A while Computing Book Profit under Section 115JB: The assessee argued that no exempt income was earned, and thus, no disallowance under Section 14A should be made while computing book profit. The Tribunal agreed and deleted the disallowance. 11. Additional Expenditure Claimed during Assessment Proceedings: The assessee claimed additional expenditure of Rs. 14,49,91,563/- during assessment proceedings. The Tribunal remanded the issue to the AO for verification of the claim and directed to allow the deduction if found genuine. Conclusion: The Tribunal allowed the appeals of the assessee and the revenue partly for statistical purposes, directing the AO to verify certain claims and allow deductions as per the law.
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