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TMI Blog2017 (4) TMI 1138X X X X Extracts X X X X X X X X Extracts X X X X ..... ue under dispute is squarely covered by the decision of the Hon’ble Jurisdictional High Court in the case of CIT vs PVP Ventures LTd [2012 (7) TMI 696 - MADRAS HIGH COURT ] wherein it had been held categorically held that ESOP expenditure is in the nature of staff welfare expenses and is squarely allowable as deduction in computing the taxable income of an assessee. Thus we hold that the compensation paid in the form of ESOP expenditure is an allowable deduction as an expenditure incurred wholly and exclusively for the purpose of business. - Decided in favour of assessee Adding back the provision for wealth tax while computing the book profits u/s 115JB - Held that:- We find that Explanation 2 to Section 115JB of the Act provides the amounts that would constitute income tax for the purpose of section 115JB of the Act, which contemplates dividend distribution tax, interest, surcharge, primary and secondary education cess. In fact this amendment was introduced in the statute vide Finance Act 2008 with retrospective effect from 1.4.2001. Hence it was never the intention of the legislature to include wealth tax within the ambit of income tax so as to fall within the mischief of Ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal to adjudicate the grounds on merits of the case. Respectfully following the directions of the Hon ble Madras High Court, we proceed to adjudicate the various issues raised in the grounds of appeal on merits of the case. 3. The first issue to be decided in this appeal is as to whether the ld CITA was justified in upholding the disallowance of compensation paid on account of Employee Stock Option Plan (ESOP) amounting to ₹ 7,41,51,630/- in the facts and circumstances of the case. 3.1. The brief facts of this issue is that the assessee is a company engaged in the business of providing marketing services to its group companies. The assessee is a 100% subsidiary of Caterpillar Inc., U.S.A. Caterpillar Inc., introduced the Caterpillar Inc, 1996 stock option and long term incentive plan which provided for grant of stock options, stock appreciation rights, restricted stock, restricted stock units and performance awards to certain officers, key employees and non-employee directors of Caterpillar group companies. The assessee being one of the Caterpillar group companies framed the Caterpillar Commercial 2006 stock option and long term incentive plan (hereinafter referre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee to evade tax as the scheme is not in accordance with the Central Government guidelines. (c) ESOP is, in a way extra remuneration paid to employees and hence can be brought under the head salaries. Hence, if the tax is not deducted at source in respect of such ESOP, the ESOP expenditure is not eligible to be deducted u/s 40(a)(ia) of the Act. 3.3. Aggrieved, the assessee is in appeal before us on the following grounds :- a) The Ld. Commissioner of Income Tax (Appeals) -IV [ the learned CIT(A) ] erred in confirming the action of Assessing Officer ( AO ) of disallowing the compensation paid on account of ESOP as notional loss. b) The Ld. CIT(A) erred in holding the ESOP will create an enduring benefit to the company and hence to be treated as capital expenditure c) The Ld. CIT(A) erred in treating the entire ESOP Scheme as a device created by the Appellant to evade tax. d) The Ld. CIT(A) erred in upholding the disallowance despite concluding that the ESOP expense is in the nature of salary expense. e) The Ld. CIT(A) erred in not placing reliance on judicial precedents in this regard. 3.4. The ld AR stated that the ESOP was granted to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary payments and consequential disallowance thereon was brought in the statute only at a later point of time and was not applicable for the year under appeal. Hence in any case, there cannot be any disallowance of ESOP expenditure as per the provisions of the Act. He argued that the CBDT had issued a Circular in the context of Fringe Benefit Tax vide Circular No. 9/2007 dated 20.12.2007, wherein, in response to Question No. 16 , they had specifically replied that ESOP expenditure is an allowable deduction in computing the taxable income of the employer company. He finally placed reliance on the decision of the Jurisdictional High Court in the case of CIT vs PVP Ventures Ltd in TC(A) No. 1023 of 2005 dated 19.6.2012 reported in 2012-TIOL-550-HC-MAD-IT wherein it had been categorically held that ESOP expenditure is in the nature of staff welfare expenses and is squarely allowable as deduction in computing the taxable income of an assessee. 3.5. In response to this, the ld DR argued that in the instant case , ESOP was given to employees who had come on deputation to assessee company and not to the employees of the company and hence it is given only to select employees as per the wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of section 40(a)(ia) of the Act as prevailing at the relevant point of time and as applicable to the year under appeal, that salary expenditure was not included in the list of items warranting disallowance. However the same was introduced in the statute at a much later point of time. Hence the argument of the revenue fails on that count. With regard to the version of the ld CITA that the ESOP scheme should be in accordance with the guidelines prescribed by the Central Government as mandated in section 17 of the Act , we agree with the ld AR that the same is to be applied only for the purpose of valuation of perquisites. We find that even the proviso to section 17(2)(iii) of the Act no where contemplated the eligibility of allowability of deduction of ESOP expenditure for an assessee. In any case, if the proviso is applied and perquisites valuation is made accordingly, then the same would have to be construed as salary to the employees which is an allowable deduction for the employer. If there is any violation thereon in the form of non deduction of tax at source, then the same would fasten some TDS liability on the employer u/s 201 and 201(1A) of the Act and that would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udgement is reproduced hereunder:- As far as the Employees Stock Option Plan is concerned, a rightly pointed out by the Tribunal, the assessee had to follow SEBI direction and by following such direction, the assessee claimed the ascertained amount as liability for deduction. We do not find that there exists any error to disturb the order of the Tribunal and in turn the Assessing Authority. In the circumstances, we agree with the submission of learned senior counsel appearing for the assessee in this regard by upholding the order of the Tribunal. We also find that the decision of Hon ble Madras High Court was subsequently followed by the Hon ble Delhi High Court in the case of CIT vs Lemon Tree Hotels Ltd in ITA No. 107/2015 dated 18.8.2015 reported in 2015-TIOL-2636-HC-DELIT. In view of our aforesaid findings in the facts and circumstances of the case, respectfully following the CBDT Circular and the judicial precedents relied upon hereinabove, we hold that the compensation paid in the form of ESOP expenditure is an allowable deduction as an expenditure incurred wholly and exclusively for the purpose of business. Hence we have no hesitation in directing the ld AO t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act starts with a non-obstante clause and overrides all other provisions of the Act. The only adjustments that may be made to the book profits of an assessee shall be the adjustments specified in Explanation 1 to Section 115JB of the Act. We find that Explanation 2 to Section 115JB of the Act provides the amounts that would constitute income tax for the purpose of section 115JB of the Act, which contemplates dividend distribution tax, interest, surcharge, primary and secondary education cess. In fact this amendment was introduced in the statute vide Finance Act 2008 with retrospective effect from 1.4.2001. Hence it was never the intention of the legislature to include wealth tax within the ambit of income tax so as to fall within the mischief of Explanation 1. We hold that the provision made towards wealth tax amounting to ₹ 66,600/- would be an ascertained liability. We also find that the issue under dispute is covered in favour of the assessee as rightly relied upon by the ld AR on the decision of the Hon ble Bombay High Court in the case of CIT vs Echjay Forgings (P) Ltd reported in (2001) 251 ITR 15 (Bom), wherein it was held that :- The net profit, as shown in the P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in confirming the action of the AO of not reducing the reversal of product support expenses from book profit b) The learned CIT(A) ought to have observed that provision for product support expenses was added back in computation of book profit for AY 2006-07 by the assessing officer vide assessment order dated 29 December 2009 and hence reversal of such provision in AY 2007-08 ought to be reduced from book profit. 6.2. The ld AR argued that since the provision for product support expenses was disallowed by the ld AO while computing book profits u/s 115JB of the Act for the Asst Year 2006-07 for ₹ 35,43,000/- , reversal of the part of the sum amounting to ₹ 34,80,251/- from the same during the Asst Year 2007-08 should be automatically reduced from the book profit as mandated in clause (i) of Explanation 1 defining book profit wherein it states that :- Explanation 1 For the purposes of this section, book profit means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2) , as increased by --------------------------------------------------------------- If any amount referre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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