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2014 (11) TMI 772 - AT - Income TaxESOP expenses disallowed Held that - The CIT(A) rightly observed that the ESOP expenses represented the option discount, that is, the excess of the market price of the share on the date of grant of the option under ESOP 2006 over the exercise price of the option in assessee s own case for the earlier AY CIT(A) allowed the claim of assessee for ESOP expenses - the decision of the CIT(A) regarding allowing ESOP expenses claimed by the assessee is upheld Decided against revenue. Preponement of deferred sales tax loan chargeable u/s 41(1) or not capital receipt or not Held that - The AO noticed that the surplus representing remission of principal amount of sales tax loan was not offered for taxation and when queried assessee submitted that the sum of ₹ 34,79,580/- being remission of principal amount of loan is a capital receipt and is therefore not chargeable to tax under the Income-tax Act, 1961 - the company availed of the benefit offered SICOM scheme and decided to pay the discounted value of deferred liability which resulted in capital receipt - The AO held that the discounted surplus of sales tax loan represents sales tax subsidy and was taxable as revenue receipt chargeable to tax u/s 41(1) because assessee s liability to pay had been extinguished - CIT(A) rightly followed the order of the Tribunal and allowed the ground of assessee in regard to treating the deferred sales tax liability as capital receipt thus, the AO is directed to treat the deferred sales tax liability as capital receipt Decided against revenue.
Issues Involved:
1. Disallowance of ESOP expenses. 2. Classification of preponement of deferred sales tax loan as capital receipt or revenue receipt under Section 41(1) of the Income Tax Act. Issue-wise Detailed Analysis: 1. Disallowance of ESOP Expenses: The Revenue appealed against the CIT(A)'s decision to allow the disallowance of ESOP expenses amounting to Rs. 1,86,63,187/-. The CIT(A) had relied on the ITAT Mumbai bench's decision in the appellant's own case for A.Y. 2001-02, which allowed similar ESOP expenses. The CIT(A) noted that the ESOP expenses represented the option discount, which is the excess of the market price of the share on the date of grant over the exercise price. The CIT(A) observed that SEBI guidelines mandated the debiting of ESOP expenses to the P&L Account and considered the liability as ascertained and not contingent or capital in nature. The ESOPs were granted to motivate employees and were taxable in their hands, thus allowable as revenue deduction. The Revenue argued that the assessee did not consistently follow the "cost or market price, whichever is lower" method for stock valuation and that the ESOP expenses were notional, contingent, and capital in nature. The assessee countered that it followed SEBI guidelines and that the Tribunal had previously allowed similar claims. The ITAT upheld the CIT(A)'s decision, noting that the ESOP expenses were correctly allowed as revenue expenditure based on the Tribunal's earlier decision in the assessee's favor. 2. Classification of Preponement of Deferred Sales Tax Loan: The Revenue contested the CIT(A)'s ruling that the preponement of deferred sales tax loan amounting to Rs. 34,79,580/- was a capital receipt and not chargeable under Section 41(1) of the Income Tax Act. The AO had treated the surplus from the discounted value of the sales tax liability as a revenue receipt, arguing that the liability's extinguishment constituted a benefit chargeable under Section 41(1). The CIT(A) disagreed, noting that the remission of the principal amount of the sales tax loan was a capital receipt, as the transaction was essentially a loan repayment at a discounted value. The CIT(A) referenced the Tribunal's earlier decision in the assessee's favor for A.Y. 2001-02. The ITAT upheld the CIT(A)'s decision, confirming that the deferred sales tax liability should be treated as a capital receipt, following the Tribunal's consistent stance in the assessee's previous cases. Conclusion: The ITAT dismissed the Revenue's appeal, thereby upholding the CIT(A)'s decisions on both issues. The ESOP expenses were allowed as revenue expenditure, and the preponement of the deferred sales tax loan was classified as a capital receipt, not chargeable under Section 41(1) of the Income Tax Act. The judgment was pronounced on 14/11/2014.
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