2021 (12) TMI 538 - AT - Income Tax

Disallowance of ESOP expenses - AO disallowed the claim holding that it is a notional loss - HELD THAT -This issue is squarely covered in favour of the assessee by the decision of Biocon Ltd 2020 (11) TMI 779 - KARNATAKA HIGH COURT as held assessee has incurred a definite legal liability and on following the mercantile system of accounting, the discount on ESOPs has rightly been debited as expenditure in the books of account. Disallowance of interest on advance - interest free loan granted to a joint venture company - HELD THAT - As the assessee has huge non-interest-bearing funds available with it against the amount advanced interest free to a joint-venture company, the issue is squarely covered in favour of the assessee by the decision of the honourable Supreme Court in case of CIT versus Reliance Industries Ltd 2019 (1) TMI 757 - SUPREME COURT - thus we direct the learned assessing officer to delete the disallowance of interest expenditure. Addition being provision of the gratuity expenditure Provision for gratuity liability - Provision being created in compliance with revised Accounting Standard-15 issued by the Institute of Chartered Accountants of India (ICAI), relating to accounting of employee benefits - HELD THAT - The incremental provision on account of post-retirement gratuity to employees has been made in respect of liability in presenti, viz., entitlement earned by the employee while in service until the end of the relevant previous year, on the basis of actuarial valuation Since the aforesaid liability was quantified and recognized on a scientific and rational basis based on report of the actuarial valuer, the liability therefore crystallized and accrued in the relevant assessment year itself and was allowable deduction in that year. As relying on M/S HEWLETT PACKARD INDIA (P) LTD. 2008 (3) TMI 23 - HIGH COURT OF DELHI liability is considered as ascertained if the same is determined on actuarial valuation. The court held that the provision made for contingent liability was entitled to deduction if the provision was determined accurately and scientifically. In view of this we hold that provision of gratuity made in accordance with AS 15 and backed by actuarial valuation is an ascertained and current liability which cannot be added to the book profit while working MAT . Thus Ground is allowed.

Summary

Issues Involved:
1. Disallowance of ESOP expenses.
2. Disallowance of interest on funds advanced as interest-free loan.
3. Addition to book profits under Section 115JB for provision of gratuity.

Issue-wise Detailed Analysis:

1. Disallowance of ESOP Expenses:
The primary issue concerns the disallowance of ESOP expenses amounting to ?34.27 crores. The Commissioner of Income Tax (Appeals) disallowed the claim, citing it as a notional loss based on the decision in Ranbaxy Laboratories Ltd. vs. ACIT. However, the assessee argued that the ESOP expenses should be allowed as a revenue deduction, referencing the Special Bench decision in Biocon Limited vs. DCIT and the Karnataka High Court decision in CIT Vs. Biocon Ltd. The Tribunal noted that the Karnataka High Court held that the discount on ESOPs is an ascertained liability and deductible under section 37(1) of the Act, as it represents an expenditure incurred for securing consistent employee services. Consequently, the Tribunal allowed the ESOP expenses amounting to ?34,27,44,274.

2. Disallowance of Interest on Funds Advanced as Interest-Free Loan:
The second issue pertains to the disallowance of interest amounting to ?27.49 crores on the grounds that funds amounting to ?503 crores were advanced as an interest-free loan to a joint venture company. The assessee contended that it had sufficient interest-free funds (?14,246.38 crores) to cover the loan and that the advances were made for business purposes, citing the Supreme Court decisions in Munjal Sales Corporation and SA Builders. The Tribunal found that the assessee had substantial non-interest-bearing funds and that the issue was covered in favor of the assessee by the Supreme Court decision in CIT vs. Reliance Industries Ltd. Therefore, the Tribunal directed the deletion of the disallowance of interest expenditure amounting to ?27,49,85,908.

3. Addition to Book Profits under Section 115JB for Provision of Gratuity:
The third issue involves the addition of ?1,32,03,725 to the declared book profits under Section 115JB for the provision of gratuity, which the Commissioner deemed an unascertained liability. The assessee argued that the provision was made based on actuarial valuation and was an ascertained liability. The Tribunal referred to the Delhi High Court decision in CIT vs. Hewlett Packard India, which held that provisions for gratuity made on an actuarial basis are deductible when computing book profits under Section 115JB. The Tribunal concluded that the provision for gratuity was an ascertained liability and should not be added to the book profits, thus allowing the assessee's claim.

Conclusion:
The Tribunal allowed the appeal of the assessee on all grounds, directing the allowance of ESOP expenses, deletion of interest disallowance, and exclusion of the provision for gratuity from book profits. The judgment was pronounced on 15/11/2021.