2019 (1) TMI 1401 - AT - Income Tax

Disallowance of Employee stock option scheme Compensation - allowable revenue expenditure - Held that - ESOP has been treated as Revenue expenditure. The Revenue did not bring any contrary decision against the Special Bench decision in case of Biocon Ltd. (2013 (8) TMI 629 - ITAT BANGALORE). It is not the case of Revenue that the decision of Special Bench of ITAT has been either set aside or reversed by Hon ble Karnataka High Court. Keeping all we find that the CIT(A) has rightly decided the issue in favour of the assessee with certain directions to the AO. - Decided against assessee. Addition u/s 14A - relevant factor in determining the deduction - dominant object for which the investment into the shares made - Held that - Hon ble Supreme Court in the case of Maxopp Investment Ltd. v. CIT (2018 (3) TMI 805 - SUPREME COURT OF INDIA) has categorically held that the dominant object for which the investment into the shares is made by the assessee may not be relevant. It is also held that the investment made in order to gain control of the investee company would not be relevant factor in determining the issue u/s. 14A. We, however, observe from the order of the Assessing Officer that the assessee in his computation of disallowance u/s. 14A filed before the AO has not even included such investments, from which he has earned the exempted income. The matter back to the file of the Assessing Officer to recomputed the disallowance u/s. 14A read with Rule 8D, after considering the decision of Hon ble Apex Court in the case of Maxopp Investment (supra). The assessee is also directed to furnish complete details of investments as required by the assessing officer for correct computation of disallowance u/s. 14A. Accordingly, this ground is allowed for statistical purposes.

Issues Involved:
1. Disallowance of Employee Stock Option Scheme (ESOP) Compensation.
2. Disallowance under Section 14A read with Rule 8D.

Issue-Wise Detailed Analysis:

1. Disallowance of Employee Stock Option Scheme (ESOP) Compensation:

The first issue involves the disallowance of ?1,76,67,000/- claimed as ESOP compensation by the assessee. The Assessing Officer (AO) treated the ESOP compensation as a capital expenditure rather than a revenue expenditure, arguing that no actual expenditure was incurred by the company. The AO relied on the decisions in the cases of M/s VIP Industries Ltd. vs. DCIT and Ranbaxy Laboratories vs. Addl. CIT, which held that ESOP expenses were in the nature of capital loss.

The CIT(A) reversed the AO's decision, relying on previous orders for the assessment years 2008-09 to 2010-11 and the decision of the Special Bench of the Bangalore ITAT in the case of Biocon Ltd., which treated ESOP expenses as revenue in nature. The CIT(A) noted that the primary objective of issuing shares to employees at a discounted price was to secure their dedicated efforts, making the discount a part of the remuneration package. The CIT(A) followed the principles laid down in the Biocon case, which stated that the liability towards discounted premium is incurred during the vesting period and should be treated as an allowable deduction under Section 37(1) of the Income Tax Act.

The Tribunal upheld the CIT(A)'s order, noting that the Revenue did not present any contrary decision against the Special Bench decision in the Biocon case. It was observed that the decision of the Special Bench had not been set aside or reversed by the Karnataka High Court. Consequently, the Tribunal found no infirmity in the CIT(A)'s order and dismissed the Revenue's ground on this issue.

2. Disallowance under Section 14A read with Rule 8D:

The second issue pertains to the disallowance of ?12,86,407/- under Section 14A read with Rule 8D. The AO noted that the assessee had made investments in shares/mutual funds and had suo moto disallowed ?68,11,786/- under Section 14A. However, the tax auditor computed the disallowance at ?93,70,518/-. The AO recomputed the disallowance as per Rule 8D, resulting in an additional disallowance of ?12,86,407/-.

The CIT(A) directed the AO to recompute the disallowance, considering the primary object of the investments made in subsidiary companies. The CIT(A) relied on the decisions of the Delhi High Court in CIT v. Oriental Structural Engineering Pvt. Ltd. and the Mumbai Tribunal in Garware Wall Ropes vs. ACIT.

The Tribunal, however, referred to the Supreme Court's decision in Maxopp Investment Ltd. v. CIT, which held that the dominant objective of making investments is not relevant for determining disallowance under Section 14A. The Tribunal observed that the assessee had not included all investments from which exempt income was earned in the computation of disallowance. Therefore, the Tribunal remanded the matter back to the AO to recompute the disallowance under Section 14A read with Rule 8D, considering the Supreme Court's decision in Maxopp Investment. The assessee was directed to furnish complete details of investments for correct computation.

Conclusion:

The Tribunal upheld the CIT(A)'s order on the ESOP compensation issue, treating it as revenue expenditure. On the disallowance under Section 14A, the Tribunal remanded the matter back to the AO for recomputation, considering the Supreme Court's decision in Maxopp Investment. The appeal of the Revenue was partly allowed for statistical purposes.

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