9911796707
TMI Blog2020 (12) TMI 769X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) we do not find any infirmity in the order passed by the Ld.CIT(A). Thus, the grounds raised by the revenue are dismissed. Disallowance of interest u/s.36(1)(iii) - nexus between borrowed funds and capital work in progress - HELD THAT:- On a perusal of the order of the Tribunal for the A.Y.2014-15 we notice that the Tribunal upheld the order of the Ld.CIT(A) in deleting the disallowance made u/s. 36(1)(iii) of the Act as the assessee had sufficient own funds in the form of share capital and reserves. For A.Y. 2010-11 the Ld.CIT(A) deleted the disallowance for the reason that the assessee has share capital and reserves much more than the capital work-in-progress and it is the finding of the Ld.CIT(A) that no nexus between borrowed funds and capital work-in-progress has been established by the Assessing Officer and therefore Ld.CIT(A) held that no part of interest can be disallowed. He also placed reliance on the decision of the Hon'ble Bombay High Court in the case of CIT v. Reliance utilities Power Ltd., [ 2009 (1) TMI 4 - BOMBAY HIGH COURT ] and CIT v. HDFC Bank Ltd. [ 2014 (8) TMI 119 - BOMBAY HIGH COURT ] These findings of the Ld.CIT(A) could not be rebutted by the revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of Delhi Tribunal in the case of Ranbaxy Laboratories Ltd vs ACIT [124 TTJ 771 (2009) (Delhi Tribunal) where it has been held that the issue of shares at below market price does not result into incurring any expenditure; rather it results into short receipt of share premium which the assessee was otherwise entitled to and the receipt of share premium is not taxable and hence any short receipt of such premium will only be a notional loss and not actual loss for which no liability is incurred and such notional losses are not allowable under the provisions of the I.T.Act, 1961. 4. At the outset, Learned Counsel for the assessee submitted that this issue is covered by the decision of the Bangalore Special Bench in the case of M/s. Biocon Limited [115 TTJ 649] and the Ld.CIT(A) following the Special Bench decision deleted the disallowance made by the Assessing Officer towards ESOP expenses. 5. Ld. DR vehemently supported the orders of the Assessing Officer. 6. We have heard the rival submissions, perused the orders of the authorities below. The Assessing Officer while completing the assessment disallowed the expenses incurred by the assessee towards ESOP stating that these expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of incurring liability would not make an ascertained liability a contingent - Held, yes - Whether, where liability in respect of ESOP is incurred at end of each year, which is quantified at end of vesting period when employees become entitled to exercise options, discount on ESOP is an ascertained liability and not a contingent liability - Held, yes - Whether, discount on ESOP being a general expense, is an allowable deduction under section 37(1) during years of vesting on basis of percentage of vesting during such period, subject to upward or downward adjustment at time of exercise of option - Held, yes [Para 11.1.6] [In favour of assessee] FACTS 1. For the assessment year 2003-04, the assessee-company floated ESOP, under which it granted option of shares with face value of ₹ 10 at the same rate by claiming that the market price of such shares was ₹ 919, thereby claiming the total discount per option at ₹ 909. During the previous year, the assessee-company granted options to its employees. The difference between the alleged market price and the exercise price, at ₹ 909 per option was claimed as compensation to the employees to be spread over the vesting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effort. It follows that the discount on premium under ESOP is simply one of the modes of compensating the employees for their services and is a part of their remuneration. Thus, the contention of the revenue that by issuing shares to employees at a discounted premium, the company got a lower capital receipt, is bereft of any force. By no stretch of imagination, such discount can be described as either a short capital receipt or a capital expenditure. It is nothing but the employees cost incurred by the company. [9.2.6] The revenue also canvassed a view that an expenditure denotes paying out or away and unless the money goes out from the assessee, there can be no expenditure so as to qualify for deduction under section 37, Section 37(1) provides that an expenditure must be laid out or expended wholly and exclusively for the purpose of business so as to be eligible for deduction. There Is absolutely no doubt that section 37(1) talks of granting deduction for an 'expenditure'. However, it is pertinent to note that this section does not restrict paying out of expenditure in cash alone. When the definition of the word paid under section 43(2) is read in juxtaposition to section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of service by the employees. The factum of the employees becoming entitled to exercise options at the end of the vesting period and it is only then that the actual amount of discount would be determined, is akin to the quantification of the precise liability taking place at a future date, thereby not disturbing the otherwise liability which stood incurred at the end of each year on availing the services. It is, therefore, held that the discount in relation to options vesting during the year cannot be held as a contingent liability. [Paras 9.3.5 and 9.3.6] Whether deduction is allowable Also, it is discernible from the above provisions of Fringe Benefit tax that the legislature itself contemplates the discount on premium under ESOP as a benefit provided by the employer to its employees during the course of service. If the legislature considers such discounted premium to the employees as a fringe benefit or 'any consideration for employment', it is not open to argue contrary. Once it is held as a consideration for employment, the natural corollary which follows is that such discount i) is an expenditure; ii) such expenditure is on account of an ascertained (not contingent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, such discount needs to be reversed and taken as income. It is so because logically when the options have not eventually vested in the employees, to that extent, the company has incurred no employee cost. And if there is no cost to the company, the tentative amount of deduction earlier claimed on the basis of the market price at the time of grant of option ceases to be admissible and, hence, needs to be reversed. [Para 11.1.3] The second situation is when the options are exercised by the employees after putting in service during the vesting period. In such a scenario, the actual amount of remuneration to the employees would be only the amount of actual discounted premium at the time of exercise of option. The Supreme Court in the case of C/Tv. Infosys Technologies Ltd. [20081 297 ITR 167/116 Taxman 204 held that the allotment of shares to employees under ESOP, subject to a lock in period of five years and other conditions could not be treated as a perquisite as there was no benefit and the value of benefit, if any, was unascertainable at the time when options were exercised. [Para 11.1.4] From the provisions of section 17(2), two things surface. First, that the perquisite arise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee that, in the absence of any specific provision in the Act, the accounting principles should be followed for determining the total income of the assessee are not acceptable. What is true for accounting purpose need not necessarily be true for taxation. Taxation principles are enshrined in the legislature. Power to legislate lies with the Parliament. Accounting standards or Guidance Note or Guidelines etc., issued by any autonomous or even statutory bodies including the Institute of Chartered Accountants of India, or the SEBI are meant only to prescribe the way in which the transactions should be recorded in books or reflected in the annual accounts. These guidelines do not have the force of an Act of Parliament. Since the subject matter of tax on income falls in the Union List as per Part XI of the Indian Constitution, it is only the Parliament which can legislate on its scope. [Para 11.2.3] In view of the decision quoted above and the decisions of jurisdictional Tribunal in the case of DCIT vs. Kotak Mahindra Bank Ltd [2018] 89 taxmann.com 223 (Mumbai-trib), Accenture Services Private Ltd [2010 TIOL 409 ITAT Mumbai] and Hon ble Madras High Court in the case of CIT vs. PVP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal upheld the order of the Ld.CIT(A) in deleting the disallowance made u/s. 36(1)(iii) of the Act as the assessee had sufficient own funds in the form of share capital and reserves, observing as under: 4. In the appellate proceedings, ld.CIT(A) allowed this issue after taking into consideration of submissions and contentions as raised during the course of appellate proceedings by observing and holding as under:- 4.2 I have examined the submission made by the appellant and the reasons recorded by the AO. I am in agreement with the submission of the appellant that the AO should have examined the standalone accounts of the merged entities before drawing any adverse inference. If we examine the standalone accounts we find that capital work in progress of MCIE is ₹ 11,79,64,135 and own funds of this entity in form of share capital and reserve are ₹ 931,51,30,000. Similarly, capital work in progress of MCL is ₹ 91,95,418 and own funds of this entity in form of share capital and reserves are ₹ 15,42,05,700. Capital work in progress of MHIL is ₹ 1,20,36,692 and own funds of this entity in form of share capital and reserves are ₹ 154,20,10,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Sales Corporation Vs. Another (2008) 298 ITR 298(SC) and other various ITAT decisions. We find that the ld.CIT(A) has passed a speaking and reasonable order while relying on the various decisions as cited supra and accordingly, we are inclined to uphold the same by dismissing the grounds of the revenue relating to deletion of disallowance u/s.36(1)(iii) of the Act. 13. For A.Y. 2010-11 the Ld.CIT(A) deleted the disallowance for the reason that the assessee has share capital and reserves much more than the capital work-in-progress and it is the finding of the Ld.CIT(A) that no nexus between borrowed funds and capital work-in-progress has been established by the Assessing Officer and therefore Ld.CIT(A) held that no part of interest can be disallowed. He also placed reliance on the decision of the Hon'ble Bombay High Court in the case of CIT v. Reliance utilities Power Ltd., [313 ITR 340] and CIT v. HDFC Bank Ltd., (IT Appeal No. 330 of 2012). These findings of the Ld.CIT(A) could not be rebutted by the revenue with evidences. In the circumstances, we do not find any infirmity in the order passed by the Ld.CIT(A) for A.Y. 2010-11. 14. Facts being identical, for the A.Y. 2011-12 ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
