2021 (4) TMI 911 - AT - Income Tax

Disallowance of Employee Stock Expenditure (ESOP) - AO noticed from the computation for the AY under consideration that the assessee had added back an amount as ESOP Expenditure disallowed to the extent of options not exercised during the year - CIT(A) after considering the submissions of the assessee and following the decision of ITAT, Hyderabad in assessee s own case 2017 (9) TMI 1595 - ITAT HYDERABAD deleted the disallowance - HELD THAT - We are of the view that the decision of the CIT(A) is in consonance with the decision of ITAT, therefore, we do not find any infirmity in the order of the CIT(A) and upholding the same, we dismiss the ground No. 2 raised by the revenue on this issue. Disallowance made u/s 43B towards gratuity provision - AO noticed from the audit report that an amount was claimed as provision for gratuity which remained unpaid as on the date of filing of return and the same was not disallowed in the computation of income - HELD THAT - As gone through the orders of revenue authorities. In the case of CIT Vs Commonwealth Trust (P) Ltd. 2004 (4) TMI 51 - KERALA HIGH COURT , on which reliance placed by the assessee, the Hon'ble High Court of Kerala held that provision towards an approved gratuity fund is allowable u/ s 40A(7)(b) as deduction and is not hit by section 43B of the Act. The Hon'ble High Court of Kerala in the case of Chacko las Spinning and Weaving Mills Ltd Vs CIT 1989 (3) TMI 124 - KERALA HIGH COURT held that provision made for contribution to approved gratuity fund shall be allowed as deduction u/s 40A(7)(b) of the Act and it is not necessary that there should be a payment by the assessee of for contribution towards an approved gratuity fund existing on the day when the provision is made or during the period for which the provision is made. Therefore, we see no reason to interfere with the order of CIT(A) in allowing the ground of assessee and upholding the same, we dismiss ground No. 3 raised by the revenue. Deduction on the basis of section 43B for provision made for an approved gratuity fund as deductible u/s 40A(7) - HELD THAT - As sufficient internal accruals to fund the advance trust as well as considering the AO s observations in assessee s own case for AY 2008-09 following the Tribunal decision in AYs 2009-10 and 2010-11 that the loan to trust was made out of internal accruals and not from the borrowed funds, the CIT(A) allowed the ground of the assessee. DR could not bring any contrary decision against the decision of the Tribunal for AYs 2009-10 and 2010-11. Therefore, upholding the decision of the CIT(A), we dismiss the ground raised by the revenue on this issue.

Summary

Issues:
1. Disallowance of Employee Stock Expenditure (ESOP)
2. Disallowance u/s 43B towards Gratuity provision
3. Disallowance of interest expenditure

Analysis:

Issue 1: Disallowance of Employee Stock Expenditure (ESOP)
The Revenue appealed against the CIT(A)'s decision to delete the disallowance of ESOP expenditure of ?26,59,559. The AO disallowed this amount as the company did not add back the entire provision of ?9,69,25,414. The company argued that the loss from ESOP is a revenue expenditure. The CIT(A) deleted the disallowance based on the ITAT's decision in the assessee's own case for AY 2011-12. The ITAT upheld the CIT(A)'s decision, citing it was in line with the ITAT's decision. The Revenue's appeal on this issue was dismissed.

Issue 2: Disallowance u/s 43B towards Gratuity provision
The AO disallowed ?1,28,79,193 provision for gratuity under section 43B as it remained unpaid by the due date. The CIT(A) allowed this ground, referencing judicial decisions supporting the deduction of provisions for approved gratuity funds under section 40A(7)(b). The ITAT upheld the CIT(A)'s decision, citing relevant case law and dismissing the Revenue's appeal on this issue. A similar ground for AY 2014-15 was also allowed by the ITAT.

Issue 3: Disallowance of interest expenditure
The AO disallowed ?48,75,175 interest expenditure on a loan to an employees' trust as the source of funds was not proven to be interest-free. The CIT(A) allowed the ground based on the company's submission of sufficient internal accruals to fund the trust. The ITAT upheld the CIT(A)'s decision, considering the absence of contrary decisions and previous Tribunal rulings in favor of the company. The Revenue's appeal on this issue was dismissed.

In conclusion, the ITAT dismissed the Revenue's appeal in ITA No. 252/Hyd/2018 and allowed the assessee's appeal in ITA No. 907/Hyd/2019. The judgments were pronounced on 20th April 2021.