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2022 (11) TMI 1050 - AT - Income TaxDisallowance with respect to expenditure on ESOP u/s 37 - outflow of money resulting in an expense - shares pertaining to Ultimate Holding Company are granted to eligible employees of HPISO under the above ESOP schemes - Applicability of section 195/192 - AR submitted differential price/full price of the shares granted under these schemes are considered as a part of 'perquisite' taxable in the hands of employees under section 17(2) - HELD THAT - As decided in NOVO NORDISK INDIA PVT LTD VERSUS DEPUTY COMMISSIONER OF INCOME TAX 2013 (11) TMI 218 - ITAT BANGALORE The law by now is well settled by the decision of the Special Bench of the ITAT Bangalore in the case of Biocon Ltd. in 2013 (8) TMI 629 - ITAT BANGALORE , wherein it was held that expenditure on account of ESOP is a revenue expenditure and had to be allowed as deduction while computing income - Expenditure in question is wholly and exclusively for the purpose of the business of the assessee and the fact that the parent company is also benefited by reason of a motivated work force would be no ground to deny the claim of the assessee for deduction, which otherwise satisfies all the conditions referred to in section 37(1) of the Act - Expenditure in question was wholly and exclusively for the purpose of the business of the assessee and had to be allowed as deduction as a revenue expenditure. No basis for the observation that the obligation to issue shares at a discounted price to the employees of the Assessee was that of the foreign parent company and not that of the Assessee. Admittedly, the shares were issued to employees of the Assessee and it is the Assessee who has to bear the difference in cost of the shares. The expenditure is necessary for the Assessee to retain a health work force. Business expediency required that the Assessee incur such costs. The parent company will be benefitted indirectly by such a motivated work force. With regard to the observations of the CIT(Appeals) that the ESOP actually benefits only the parent company, we are of the view that the expenditure in question is wholly and exclusively for the purpose of the business of the assessee and the fact that the parent company is also benefited by reason of a motivated work force would be no ground to deny the claim of the assessee for deduction, which otherwise satisfies all the conditions referred to in section 37(1) - disallowance of ESOP expenses has made under the provisions of section 37 of the I.T.Act (though there was some discussion in the draft assessment order with reference to disallowance u/s 40(a)(i) of the I.T.Act). - Decided in favor of Assessee. Payment of leave encashment - allowability of certain payments on actual basis u/s 43B - HELD THAT -This issue came up for consideration before this Tribunal in 2021 (8) TMI 1349 - ITAT BANGALORE in the case of M/s. Global e-Business Operations (P) Ltd. held in the light of the decision of the in the case of Exide Industries 2020 (4) TMI 792 - SUPREME COURT the assessee will not be entitled to claim deduction on leave encashment on the basis of the provision. Taking into consideration the circumstances under which the assessee did not claim a sum being leave encashment actually being paid during the previous year relevant to Assessment Year we are of the view that the assessee should be allowed leave encashment actually paid as per provisions of section 43B(f) - We remit the issue to the AO to verify the claim of the assessee and allow deduction to the assessee as per law after affording assessee opportunity of being heard. Not allowing the tax credits (TDS, Advance Tax Self-assessment tax) pertaining to erstwhile Aruba India (Merged Entity) - HELD THAT - The assessee is entitled for tax credit, which has been paid by Aruba India. Accordingly, the issue is remitted to AO to consider it afresh. Credit for TCS - non-following the direction of the Ld. DRP to grant consequent depreciation on software - HELD THAT - These issues remitted to the file of AO to grant appropriate depreciation as per the direction of Ld. DRP.
Issues Involved:
1. Erroneous disallowance of ESOP expenditure under section 37 of the Income Tax Act. 2. Non-applicability of section 195 of the Income Tax Act on ESOP expenditure. 3. Claim towards payment of leave encashment. 4. Other corporate tax-related grounds. 5. Penalty proceedings under section 270A of the Income Tax Act. Issue-Wise Detailed Analysis: 1. Erroneous Disallowance of ESOP Expenditure under Section 37 of the Income Tax Act: The assessee argued that the ESOP expenditure of INR 41,93,89,636 should be allowed under section 37 of the Act. The NFAC and DRP disallowed the expenditure, stating that there was no outflow of money. The assessee contended that the ESOP expenditure represents actual economic outflow and is taxed as a perquisite in the hands of employees. The Tribunal referred to previous judgments, including the Karnataka High Court decision in Biocon Limited and the Bangalore Tribunal's decision in Northern Operating Services Private Limited, which held that ESOP discounts are allowable business expenditures under section 37. The Tribunal concluded that the ESOP expenditure is a legitimate business expense incurred to retain and incentivize employees and should be allowed as a deduction. 2. Non-Applicability of Section 195 of the Income Tax Act on ESOP Expenditure: The assessee argued that the ESOP expenditure is subject to withholding tax under section 192 as a perquisite and not under section 195. The NFAC and DRP contended that section 195 applies to the remittance of reimbursement towards ESOP, resulting in disallowance under section 40(a)(i). The Tribunal noted that the ESOP cross-charges represent actual expenses incurred by the company and are not notional. Since the remittance does not contain any income element taxable in the hands of the Ultimate Holding Company, section 195 does not apply. The Tribunal relied on the Supreme Court's decision in GE India Technology Cen. (P.) Ltd., which clarified that TDS provisions apply only to sums chargeable to tax under the Act. Consequently, the Tribunal ruled that section 195 is not applicable to the ESOP cross-charges. 3. Claim Towards Payment of Leave Encashment: The assessee claimed a deduction for leave encashment of INR 4,39,31,243 under section 43B(f) of the Act. The NFAC and DRP denied the deduction, stating that the payment was not made during the relevant assessment years or before filing the return of income. The Tribunal referred to the Supreme Court's decision in Exide Industries, which upheld the constitutional validity of section 43B(f) and mandated that leave encashment claims be made on an actual payment basis. The Tribunal remitted the issue to the AO for verification of the actual payment and directed the AO to allow the deduction if the payment was made as per the provisions of section 43B(f). 4. Other Corporate Tax-Related Grounds: - Tax Credits (Ground No. 3.2): The NFAC erred in not allowing tax credits pertaining to the merged entity Aruba India amounting to INR 15,67,10,007. The Tribunal remitted the issue to the AO for fresh consideration. - Credit for TCS (Ground No. 3.3): The NFAC granted credit for TCS amounting to INR 75,520 instead of INR 1,03,250. The Tribunal remitted the issue to the AO for reconciliation and fresh consideration. - Depreciation on Software (Ground No. 3.4): The NFAC did not follow the DRP's direction to grant depreciation on software expenses. The Tribunal remitted the issue to the AO to grant appropriate depreciation as per the DRP's direction. - Interest under Sections 234B and 234C (Ground Nos. 3.5 & 3.6): The Tribunal noted that these grounds are consequential in nature and ordered accordingly. 5. Penalty Proceedings under Section 270A of the Income Tax Act: The NFAC initiated penalty proceedings under section 270A, which the assessee contested, arguing that a mere difference of opinion does not amount to under-reporting of income. The Tribunal did not explicitly address this issue in the judgment. Conclusion: The Tribunal allowed the appeal partly for statistical purposes, directing the AO to reconsider the ESOP expenditure under section 37, verify the payment of leave encashment under section 43B(f), and address other corporate tax-related issues as per the directions provided. The penalty proceedings under section 270A were not explicitly resolved in the judgment.
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