2017 (9) TMI 1595 - AT - Income Tax

Nature of expenditure - whether the expenditure on ESOP is allowable or not? - Held that - This issue was decided in favour of assessee-company by the Special Bench of Bangalore Tribunal in the case of M/s. Biocon Ltd. 2013 (8) TMI 629 - ITAT BANGALORE as held that 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). - Decided in favour of assessee Disallowance of provision for standard and non-performing assets - Held that - The issue in the present ground of appeal is squarely covered by the Hon ble Apex Court in the case of Southern Technologies Ltd., Vs. JCIT 2010 (1) TMI 5 - SUPREME COURT OF INDIA wherein it was held that the provision on non-performing assets and debited to P&L A/c in terms of the guidelines of the RBI governing the income recognition cannot be allowed to be deductible expenditure either u/s. 36(1)(vii) or (viia) and it was further held that the guidelines of RBI does not override the provisions of Income Tax Act, 1961. Also the Hon ble Delhi High Court in the case of Housing & Urban Development Corporation Ltd. vs. Addl. CIT (2017 (7) TMI 144 - DELHI HIGH COURT) observed that based on guidelines issued by the Reserve Bank of India governing recognition of income, no deduction can be claimed. - Decided against assessee

Summary

Issues Involved:
1. Disallowance of Employee Stock Option Plan (ESOP) expenditure.
2. Disallowance of provision for standard and non-performing assets.
3. Levy of interest under Section 234-B of the Income Tax Act, 1961.

Detailed Analysis:

1. Disallowance of Employee Stock Option Plan (ESOP) Expenditure:

Facts:
The assessee company provided ESOPs to employees as an incentive, claiming the resultant loss as a revenue expenditure. The Assessing Officer (AO) disallowed this claim, categorizing it as capital expenditure.

Tribunal's Findings:
The Tribunal referred to the Special Bench decision in the case of M/s. Biocon Ltd., where it was held that the difference between the market price and issue price of shares under ESOPs is an "expenditure" under Section 37(1) of the Income Tax Act, 1961. The Tribunal noted that this expenditure is not contingent and should be recognized over the vesting period of the options. The Tribunal also acknowledged the divergence in judicial opinions but favored the Special Bench decision, citing the principle that the view favorable to the assessee should be adopted.

Conclusion:
The Tribunal allowed the deduction for ESOP expenditure, reversing the disallowance by the AO and CIT(A).

2. Disallowance of Provision for Standard and Non-Performing Assets:

Facts:
The assessee made a provision for standard and non-performing assets (NPAs) following RBI guidelines but did not add back the provision in the computation of income. The AO disallowed this provision, stating it was a contingent expenditure.

Tribunal's Findings:
The Tribunal relied on the Supreme Court's decision in Southern Technologies Ltd., which held that provisions for NPAs as per RBI guidelines are not deductible under Sections 36(1)(vii) or (viia) of the Income Tax Act. The Tribunal emphasized that RBI guidelines do not override the provisions of the Income Tax Act, and such provisions are notional expenses that do not qualify for deduction.

Conclusion:
The Tribunal upheld the disallowance of the provision for standard and non-performing assets, agreeing with the AO and CIT(A).

3. Levy of Interest under Section 234-B:

Facts:
The assessee denied liability for interest under Section 234-B of the Income Tax Act, 1961.

Tribunal's Findings:
The Tribunal did not provide a detailed analysis of this issue, as it was not specifically contested in the appeal.

Conclusion:
The Tribunal did not address this issue explicitly, implying no change to the AO's decision regarding the levy of interest under Section 234-B.

Final Judgment:
The appeal was partly allowed. The Tribunal allowed the deduction for ESOP expenditure but upheld the disallowance of the provision for standard and non-performing assets. The issue of interest under Section 234-B was not adjudicated.