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TMI Blog2016 (1) TMI 803X X X X Extracts X X X X X X X X Extracts X X X X ..... having been established as salary/employee cost, the same is revenue in nature. This expenditure claimed by the assessee is to be treated as a business expenditure of the assessee - Decided in favour of assessee Set off of loss pertaining to certain STP units, against the taxable business income of the assessee disallowed - Held that:- In “Capgenimi India (P) Limited”, (2011 (5) TMI 509 - ITAT, MUMBAI), a co-ordinate Bench of this Tribunal, through one of us, i.e. the ld. AM, has held that in case of loss of units, eligible for deduction u/s 10A, section 10A is a deduction provision and not an exemption provision after its amendment with effect from the assessment year 2001-02 and that, therefore, the loss from the section 10A unit has to be adjusted against the taxable profits of other units after deduction u/s 10A has been allowed in respect of each eligible unit. The other case laws relied on by the assessee also hold that set off of loss of the eligible unit is allowable against the other taxable income.- Decided in favour of assessee - ITA No.6820/M/2010 - - - Dated:- 4-11-2015 - SH. A.D. JAIN, JUDICIAL MEMBER AND SH. RAJENDRA, ACCOUNTANT MEMBER For The Appellant : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16,27,28,117/- representing overseas tax paid, being Federal tax paid in USA, Canada and other overseas branches and State taxes in USA and Canada claimed as deduction in the return of income. The AO held that such taxes were covered by the provisions of section 40(a)(ii) of the Income-tax Act, 1961 (in short, the Act ). 3. The ld. CIT(A) upheld the disallowance, observing that the amended provisions of section 40(a)(ii) of the Act by way of insertion of Explanation-1 is clarificatory in nature and, thus, retrospective in effect. 4. Section 40(a)(ii) and Explanation-1 thereto reads as follows: 40. Notwithstanding anything contrary in section 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head Profits gains of business or profession . In the case of any assessee- (ii) any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains; Explanation-1- For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... since the software had been utilised for a period of more than one year, the expenditure could not be allowed in one year. The treatment of capitalizing the expenditure and allowing depreciation was confirmed. 11. The ld. counsel for the assessee has contended that since depreciation has been allowed with a view to avoid litigation requiring the interpretation of a large number of software purchase agreements, the assessee accepts the deduction of depreciation. 12. Accordingly, Ground No.3 is rejected, as infructuous. 13. Ground No. 4(a) states that the ld. CIT(A) has erred in confirming the addition made by the AO by invoking the provisions of Rule 8D of the Rules read with section 14A of the Act, on the ground that Rule 8D is retrospective in nature and hence applicable to the year under appeal i.e., 2005-06. 14. As per Ground No.4(b), without prejudice, the ld. CIT(A) has erred in not considering the assessee s contention that interest expenditure of ₹ 10,38,82,525/- pertains to interest on pre-shipment loans and the same being for the purpose of assessee s business, it cannot be considered for allocation u/s 14A of the Act. 15. Apropos the main grievance o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest cost of ₹ 70,792/- was taken to be direct and indirect expenditure having proximity of exempted income). Thus, a total of ₹ 29,876/- was disallowed. 22. Accordingly, for the year under consideration, the AO shall verify and allow, on such verification, the sustained addition to the extent of ₹ 17,00,686/- only, as per the contention of the assessee, according to which, it is this amount which represents actual apportioned expenditure. 23. In view of the above, Ground No.4(b), which is the alternative ground to Ground no. 4(a), becomes infructuous and is rejected, as such. 24. Coming to Ground No.5, during the year the assessee company issued and allotted shares to its employees and directors under the Employees Stock Purchase Scheme, or ESPS Scheme . The issue was made in accordance with the Employees Stock Option Plan or Scheme of the Central Government. An amount of ₹ 186.65 crores incurred by the assesseecompany under the ESPS was claimed as a deduction. The AO treated this expenditure as capital expenditure. It was observed that the Scheme had resulted in issuance of shares and the shares so issued and allocated under the Stock Option Sche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reliance on the impugned order. 29. In this regard, the Special Bench of the Tribunal in Biocon Limited (supra), has held that in the Employees Stock Option Scheme, the assessee 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 a discount. The amount of discount represents the difference between the 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 employees stock option scheme, 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 the 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 and they can free ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eduction u/s 37(1) of the Income-tax Act, 1961. However, this section does not restrict paying out of expenditure in cash alone. Sub-section (2) of section 43 defines paid to mean actually paid or incurred according to the method of accounting, upon the basis of which, the profits or gains are computed under the head profits and gains of business or profession . When the definition of the word paid u/s 43(2) is read in juxtaposition to section 37(1), not only paying of expenditure, but also incurring of expenditure qualifies for deduction u/s 37(1) subject to the fulfillment of other conditions. The meaning of the term expenditure is not only paying out , but also incurring . By undertaking to issue shares at a discount premium, the company does not pay anything to its employees, but incurs an obligation of issuing shares at a discounted price at a future date in lieu of their services, which is nothing but an expenditure u/s 37(1) of the Act. 30. Thus, the Special Bench has held that the discount on premium under one of the modes, compensating employees for their services is a part of their remuneration and as such, this discount cannot be held to be either a short ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The AO applied the provisions of section 14A of the Act. Further, the AO disallowed the above loss as claimed in the return of income, instead of the revised loss after making adjustment on account of disallowance made in the assessment order. The ld. CIT(A) upheld the AO s action, observing as follows: 8.17. I have considered the submission of the appellant but I am not inclined to accept it. Section 10A IS PART OF Chapter III of the Income-tax Act, which relates to exempt income. Profits earned by eligible unit from export of software is exempt from the tax and is not set off against loss under the head Profits and Gains of Business or Profession. The exemption provided by the statute should be interpreted in a manner to meet the intention of the legislatures. Profits and losses are two sides of the same coin. One cannot have the privilege of choosing only one side of the coin. If the profit earned is to be treated as exempt, the loss incurred by the same unit cannot be permitted to be set off against the profit under the head Profits and Gains of Business or Profession . Various Courts have also held that profits include losses. As such this ground of the appellant is r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eligible unit can be set off against the profits of business. Hindustan Unilever Ltd. was referred to. 39. Besides, Yokogawa India Ltd. (supra), according to the assessee, is the assessee s own case, the decision wherein has been rendered by the Hon ble Karnataka High Court. Therein, the scope of section 10A of the Act has been considered. Hindustan Unilever Ltd. (supra) has been referred to. It has been held that the principle in Hindustan Unilever Ltd. (supra), qua section 10B of the Act, equally applies to a case falling u/s 10A of the Act. 40. Since none of the above decisions, besides the other ones referred to by the assessee, has been countered by any decision in favour of the department, the grievance of the assessee is accepted. 41. The assessee has further contended that the term loss is different from the expenditure referred to section 14A of the Act and that, therefore, section 14A is not applicable to the present case. The following case laws have been relied on : i. Hindustan Unilever Ltd. , 325 ITR 102 (Bom. HC) ii. Galaxy Surfactants Ltd. , 343 ITR 108 (Bom. HC) iii. Assessee s Own case being Yokogawa India Ltd. and other connect ..... X X X X Extracts X X X X X X X X Extracts X X X X
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