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TMI Blog2015 (7) TMI 174X X X X Extracts X X X X X X X X Extracts X X X X ..... the location attach moulding and casting at three places. Therefore, they are integral part of the machinery. We allow this ground of appeal and delete the disallowance. The ld. AO shall compute the depreciation admissible to the assessee @ 15% on these electrical fittings and fans. The moment they are treated as a part of plant the assessee will get additional depreciation also - Decided against revenue. Disallowance of Employee's Stock Option Scheme (ESOP) - Held that:- AO was of the view that it is a capital loss. It is not materialized in this year. It would happen only when option is exercised by the employees. All these aspects have been considered by the Special Bench of the Tribunal rendered in the case of Biocon Ltd. Vs. Dy.CIT reported at (2013 (8) TMI 629 - ITAT BANGALORE ) wherein it has been explained that share premium is a capital receipt and not chargeable to tax in the hands of the company. If a company issues shares to the public or to the existing shareholders at lesser than otherwise prevailing premium due to market sentiments or otherwise such share receipts of a premium would be a case of receipt of lower amount on capital amount. Because the object of iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total income at ₹ 4,99,85,297/-. The case of the assessee was selected for scrutiny assessment and a notice under section 143(2) of the I.T. Act, 1961 was issued and served upon the assessee. On scrutiny of the accounts it revealed to the AO that assessee had purchased a wind-mill for a consideration of ₹ 6,55,87,091/- during the year. It had claimed additional depreciation on wind-mill at ₹ 1,29,17,418/-. The AO had issued a questionnaire on 11/10/2010 under section 142(1) and asked the explanation of the assessee, as to why additional depreciation should not be disallowed because assessee has not been manufacturing any article or things out of the wind-mill. According to the AO the wind-mill essentially generate power but no manufacturing activity can be construed from the wind-mill and, therefore, additional depreciation is not admissible to the assessee. In response to the query of AO the assessee filed a written submission but the ld. AO was not convinced with the explanation of the assessee. According to the AO section 32(1)(iia) provides that if any new machinery or plant which has been acquired and installed after 31st March, 2005, by an assessee engaged i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll. 5. The ld. counsel for the assessee at the very outset submitted that the issue in dispute is squarely covered in favour of the assessee by the decision of Hon'ble Jurisdictional High Court rendered in the case of CIT vs. Diamines Chemicals Ltd. reported at (2014) 42 taxmann.com 193 (Gujarat). He placed on record a copy of the decision. We find that Hon'ble Gujarat High Court has considered the following question :- Whether on the facts and in the circumstances of the case and in law, the Tribunal was correct in law in deleting the addition of ₹ 1,17,98,030/- on account of disallowance of additional depreciation on wind electric generator without appreciating that the wind electric generator does not result into manufacture or production or article or thing, but it is used to generate electricity and that the basic criteria to get additional depreciation under clause (iia) of Section 32(1) of the Act is that the plant and machinery should be covered under clause (ii) of Section 32(1) of the Act, whereas wind electric generator is classified as per clause (i) of section 32(1) of the Act. After making a reference to the decisions of Hon'ble Madras ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the CIT(A) did not bring any relief to the assessee. 8. The ld. counsel for the assessee at the very outset submitted that the issue is covered in favour of the assessee by the decision of I.T.A.T. in the case of Madhu Industries Ltd. vs. Income-tax Officer, reported in 132 TTJ 233 (Ahd). He also relied upon the decisions of Hon'ble Gujarat High Court in the cases reported at 256 ITR 322 (Guj) and 151 ITR 75 (Guj). The question is, whether electrical fittings, fans in the case of assessee are integral part of plant or machinery or they are independent items. If they can function independently of plant and machinery then probably the AO would be right in restricting the claim of depreciation at 10%. The reason being the rates of depreciation are prescribed visualizing the wearing and tearing of the machinery in its user for the purpose of business. The ITAT in the case of Madhu Industries Ltd. (supra) has observed that as electrical items cannot function independently of plant and machinery, the same cannot be classified independently. They become part of plant and machinery and depreciation will be admissible at the same rate which is applicable in the case of plant and ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... predetermined price . In an ESOP, the given company undertakes to issue shares to its employees at a future date at a price lower than the current market price. This is achieved by granting stock options to its employees at discount. The amount of discount represents the difference between market price of the shares at the time of the grant of option and the offer price. In order to be eligible for acquiring the shares under the ESOP, the concerned employees are obliged to render services to the company during the vesting period as given in the scheme. On the completion of the vesting period in the service of the company, such options vest with the employees. The options are then exercised by the employees by making application to the employer for the issue of shares against the options vested in them. The gap between the completion of vesting period and the time for exercising the options is usually negligible. The company, on the exercise of option by the employees, allots shares to them who can then freely sell such shares in the open market subject to the terms of the ESOP. Thus it can be seen that it is during the vesting period that the options granted to the employees vest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um on a future date, the primary object of this exercise is not to raise share capital but to earn profit by securing the consistent and concentrated efforts of its dedicated employees during the vesting period. Such discount is construed, both by the employees and company, as nothing but a part of package of remuneration. In other words, such discounted premium on shares is a substitute to giving direct incentive in cash for availing the services of the employees. There is no difference in two situations viz., one, when the company issues shares to public at market price and a part of the premium is given to the employees in lieu of their services and two, when the shares are directly issued to employees at a reduced rate. In both the situations, the employees stand compensated for their effort. If under the first situation, the company, say, on receipt of premium amounting to ₹ 100 from issue of shares to public, gives ₹ 60 as incentive to its employees, such incentive of ₹ 60 would be remuneration to employees and hence deductible. In the same way, if the company, instead, issues shares to its employees at a premium of ₹ 40, the discounted premium of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the market value is ₹ 140.80. Thus there was a premium on each share of the assessee company at ₹ 135.80. The assessee has implemented the employees' stock option scheme of giving shares to the employees at a price fixed by the company, lesser than the average market value. It has offered the shares at ₹ 61/- per share (i.e. face value of ₹ 5/- and premium of ₹ 56/- per share). Thus the assessee has a loss of the difference in premium at ₹ 79.80 (Rs.135.80 - ₹ 56). This amount has been claimed as a revenue loss by the assessee. The AO has not independently made detailed discussion in the present year rather he relied upon the finding of his predecessor in AY 2007-08. He reproduced the finding of the AO recorded in AY 2007-08 on pages 4 to 8 of the assessment order. In AY 2007-08 assessee had claim of loss of ₹ 24,30,554/- which was amortized by the assessee. The loss relatable to this year has been computed by the assessee at ₹ 92,10,249/-. The reasonings given by the assessee in AY 2007-08 have been considered by the Special Bench of the Tribunal. The discussion made by the Tribunal in AY 2007-08 on this issue reads as und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , profit or income of the company is not at all affected. Therefore claiming any loss on account of giving option to employee to subscribe shares at lower value is without any basis and frivolous. 2-When shares are issued at premium, said premium is not offered as income for tax, therefore any reduction in shares premium cannot result in loss which can be claimed in P L account. 3-Disclosure norms for limited companies can be there as per Sebi or ICAI guidelines but the accounting will not make the claim as allowable expense or loss. For being an allowable expense or loss, the first condition is that expense cannot be capital in nature. Share premium or loss on premium is undoubtedly capital in nature and therefore clearly outside the purview of section 37 and 28 which deals with revenue expenses or losses. Therefore making such claim just on the basis of accounting entries for certain disclosure purposes and completely ignoring the provisions of IT act is nothing but furnishing inaccurate particulars of income. Considering the above and the discussion in assessment order, I find this claim frivolous, unsustainable and not as per the provisions of law. Accordingly the addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned that share premium is a capital receipt and not chargeable to tax in the hands of the company. If a company issues shares to the public or to the existing shareholders at lesser than otherwise prevailing premium due to market sentiments or otherwise such share receipts of a premium would be a case of receipt of lower amount on capital amount. Because the object of issuing such share at a lower price is nowhere directly connected with the earning of income but, when the company undertakes to issue shares to its employees at a discounted premium at a future date the primary object of this exercise is not to raise share capital but to earn profit by securing the consistent and concentrated efforts of dedicated employees during the vesting period, such discount is construed, both by the employees and the company, as nothing but a part of package of remuneration, a substitute to giving direct incentive in cash for availing the services of the employees. Therefore, in our opinion ld. first appellate authority is not justified while upholding the disallowance of the assessee's claim. Respectfully following the order of the co-ordinate Bench as well as that of the Special Bench we ..... X X X X Extracts X X X X X X X X Extracts X X X X
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