2015 (2) TMI 937 - AT - Income Tax

Amount received by discounting the maturity value of loan portfolio on assignment to commercial banks - treated as income during the year - Held that - Principles of bill discounting and accounting entries are similar to the portfolio sale/securitization of loan portfolios, being the method involved being same, we uphold the orders of AO and CIT(A) on the issue. In fact, both Assessing Officer and CIT(A) analyzed the accounting principles, agreements and came to conclusion that the amounts have accrued at the time of sale of portfolio. We affirm the same and hold that the amount of ₹ 13,09,44,315/- being the amount of discounted future interest received by assessee during the year is taxable in the year. Accordingly, we uphold the orders of Assessing Officer and reject the ground of assessee. - Decided in favour of revenue. Disallowance being value of Employees Stock Option granted and opted by the employees - whether it as not business expenditure but a notional capital expenditure - Held that - As decided in Biocon Ltd., Vs. DCIT 2013 (8) TMI 629 - ITAT BANGALORE the difference (discount) between the market price of the shares and their issue price is expenditure in the hands of the assessee because it is a substitute to giving direct incentive in cash for availing the services of the employees. There is no difference between a case where the company issues shares to the public at market price and pays a part of the premium to the employees for their services and another where the shares are directly issued to employees at a reduced rate. In both situations, the employees stand compensated for their effort. By undertaking to issue shares at a discount, the company does not pay anything to its employees but incurs the obligation of issuing shares at a discounted price at a future date. This is nothing but expenditure u/s 37(1). The obligation to issue shares at a discounted premium does not arise at the stage the options are granted. It arises at the stage that the options are vested in the employees. The amount deductible has to be determined based on the period and percentage of vesting under the ESOP scheme. On facts, the assessee's method of claiming a larger deduction in the first year defies logic. As the options vest equally over a period of four years, the deduction ought to be claimed in four equal installments on a straight line basis. AO directed to work out the deduction keeping in mind the principle laid down - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Confirmation of surplus on value realized from the discounting of the maturity value of the loan portfolio as income during the year.
2. Disallowance of the value of Employee Stock Options (ESOP) granted and opted by employees as a business expenditure.

Issue-Wise Detailed Analysis:

1. Confirmation of Surplus on Value Realized as Income During the Year:

The primary issue is whether the surplus of Rs. 13,09,44,315/- realized from discounting the maturity value of the loan portfolio should be recognized as income during the year. The assessee, a Micro Finance Institution, sells its loan portfolios to commercial banks to obtain capital refinancing funds. The assessee amortized the gain from the future receivable interest over multiple years, arguing that the amount had not accrued up to the end of the financial year. The Assessing Officer (AO) disagreed, stating that the transaction was a complete buyout of the loan portfolio and that the entire gain should be recognized as income during the year. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this view, emphasizing that the sale of the portfolio was unconditional and that the procedures and costs involved in servicing the portfolio were irrelevant for revenue recognition.

The Tribunal examined the agreements and accounting entries, noting that the assessee received the discounted amount as part of the sale consideration, which should be recognized as income at the time of sale. The Tribunal upheld the AO's and CIT(A)'s conclusions, referencing the Madras High Court's decision in TVS Finance and Services Ltd. v. JCIT, which held that the discount on bills should be recognized as income at the time of discounting. Consequently, the Tribunal affirmed that the amount of Rs. 13,09,44,315/- should be taxable in the year it was received.

2. Disallowance of ESOP as Business Expenditure:

The second issue concerns the disallowance of Rs. 3.22 Crores, being the value of Employee Stock Options (ESOP) granted and opted by employees, which was treated as notional capital expenditure rather than business expenditure. The Tribunal referred to the Special Bench decision in Biocon Ltd. v. DCIT, which held that the difference between the market price of shares and their issue price is "expenditure" under Section 37(1) of the Income Tax Act. This expenditure is incurred when the obligation to issue shares at a discounted price arises, which is at the stage of vesting of the options, not at the grant stage. The liability is not contingent as it becomes obligatory once the service is rendered for the vesting period. The deduction should be claimed based on the period and percentage of vesting under the ESOP scheme.

The Tribunal directed the AO to work out the deduction in line with the principles laid down by the Special Bench, allowing the ground for statistical purposes.

Conclusion:

The appeal was partly allowed, with the Tribunal upholding the recognition of the discounted future interest as income during the year and directing the AO to re-evaluate the ESOP-related deduction in accordance with the Special Bench's guidelines.