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TMI Blog2018 (10) TMI 1967X X X X Extracts X X X X X X X X Extracts X X X X ..... EY, JM AND SHRI MANOJ KUMAR AGGARWAL, AM For the Revenue : Pooja Swaroop, Ld. JCIT-DR For the Assessee : K. Shivram Aditya Ajgaonkar, Ld. AR s ORDER Per Manoj Kumar Aggarwal (Accountant Member) 1. These are cross appeals for Assessment Year [AY] 2012-13 which contest the order of the Ld. Commissioner of Income-Tax (Appeals)-9 [CIT(A)], Mumbai, Appeal No.CIT(A)-9/Cir.4/302/2015-16 dated 16/08/2016 on separate grounds of appeal. The assessee, vide application dated 19/07/2018, pleaded for admission of additional grounds of appeal. However, the same has not been urged during hearing before us and therefore, the same stand dismissed in limine. First we take up assessee s appeal ITA No.6891/Mum/2016, wherein the following grounds of appeal has been urged:- A. ADDITION BY WAY OF DISALLOWANCE OF EXPENDITURE INCURRED IN RESPECT OF THE EMPLOYEES STOCK OPTION SCHEME ( THE ESOP ) BY WAY OF THE PAYMENTS MADE TO THE HOLDING COMPANY RS.1,32,60,846/- 1. On the facts and I the circumstances of the case and in law, the Honourable Commissioner of Income Tax (Appeals)-9 [ the CIT(A) ] erred in confirming the action of the Deputy Commissioner of Income Tax- 4(3)(1) ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of issue price vs. market price of the said option shares to its holding company. The assessee vide letter dated 12/03/2015 defended the same by submitting that the ESOP scheme was in respect of participation by the employees of the assessee company in the scheme of the ultimate holding company M/s JM Financial Limited and the assessee paid the state amount to the holding company. However, the same could not convince Ld. AO for the following reasons:- a) ESOP discounts are incurred in relation to issue of shares to employees. They are not relatable to profits and gains arising or accruing from a business / trade. The Apex Court decision in the case of Punjab State Industrial Devl. Corp. Ltd. (1997) 225 ITR 792 (SC) and Brooke Bond India Ltd., (1997) 225 ITR 798 (SC) have held that expenditure resulting in increase in capital is not an allowable deduction even if such expenditure may incidentally held in business of the company. b) ESOP discount does not diminish trading/ business receipts of the issuing company. The company does not suffer any pecuniary detriment. To claim a charge against income, it should inflict a detriment to the financial position. ESOP is volun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... letter dated 30/03/2015 raised a new argument that the vesting period of Stock Options began from 21/04/2011 and the impugned amount of Rs.1.32 crores was the proportionate cost of 346 days for the period 21/04/2011 to 31/03/2012. However Ld. AO, upon perusal of assessee s communication before TDS Officer, noted that the vesting period was to start from FY 2012-13. Finally, not convinced and placing reliance on certain judicial pronouncements, Ld. AO disallowed the same. 3. The Ld. CIT(A) also rejected the claim of the assessee by observing as under:- 6.3 I have considered the stand of the AO and the submissions of the appellant. It is seen that the stock options were issued at an exercise price of Rs.1/- per stock as against the prevailing market price of Rs.31.50. On examination of notes to the financial statements, under note-32, it is found that the auditors have given a specific remark that the assessee had made payment of Rs.1,32,60,846/- to the ultimate holding company, JM Financial Ltd and claimed the same under the head, Employee Benefit Expenses vide note 22 of the P L Account. This ESOP scheme was formulated for grant of stock option and as corollary, the appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and therefore, the same cannot be allowed as decided by the Hon ble ITAT Mumbai in the case of Future Agrovet Ltd. Vs Addl. CIT Range-9(1) Mumbai (2015) 63 Taxmann.com 140, where it was decided as under: 7.We have heard the rival contentions and perused the record. We notice that both the tax authorities have placed reliance on the decision rendered in the case of Ranbaxy Laboratories Ltd. (supra). A perusal of the discussions made by Ld. CIT(A) about the facts prevailing in Ranbaxy Laboratories Ltd would show that the issue considered therein was different one, i.e., the assessee therein claimed the difference between the market value of shares and the issue price as expenditure. However, in the instant case, the assessee has issued shares at free of cost and hence the entire value of shares is treated as part of employee benefit and accordingly the value of sweat equity shares was claimed as deductions. 8.Before us, the Ld. AR mainly placed reliance on the provisions of Fringe benefit tax to contend that the assessee, having paid the fringe benefit tax, should be allowed to claim the value of sweat equity shares as deduction. The Ld. AR invited our attention to Circula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called. Thus, it is seen that the Sweat Equity Shares is issued for consideration Other than cash for providing know-how or for making available rights in the nature of intellectual property rights or value additions. Thus, the employees or directors should provide intangible assets of the nature specified in the above said definition to the company for obtaining the equity shares at a discount or for consideration other than cash . If shares are issued at free of cost without acquiring any intangible assets of the nature specified in the above said definition, in our view, the same would not fall in the category of Sweat Equity Shares. 10.The notes of accounts attached to the Balance sheet as at 31.3.2008, which is place at page 27 of the paper book, states about the issue of sweat equity shares, as under: - During the year the Company has issued equity shares of Rs.50,00,000/- each (5,00,000 equity shares of Rs.10/- each) to Mr. Narendra Baheti (Managing Director) and Mr. Rajendra Baheti (Zonal Hea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FPIL) as a wholly owned subsidiary of Pantaloon Retail (India) Ltd (PRIL) on 13.04.2005. The turnover target was fixed at Rs.50 crores for the first year of operations and the same was achieved. Hence both the persons cited above were allotted Sweat Equity Shares during the year under consideration. 12.The foregoing discussions would show that the Sweat Equity shares were issued to the above said two persons for Value Addition as given in the definition of the expression Sweat Equity Shares . As discussed earlier, the value addition was given by the above said persons to the assessee company in the form of their vast experience in new business concepts and professional experience. Under these set of facts, in our view, the Value addition would partake the character of an intangible asset in the hands of the assessee company. Since the Sweat Equity shares were issued for acquiring the Value addition, in our view, the tax authorities are justified in holding the same as Capital expenditure in the hands of the assessee company. Accordingly, we uphold the order of Ld. CIT(A) on this issue. 13.In the result, the appeal filed by the assessee is dismissed. Keeping in view th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Limited dealt with the issue of fees paid to Registrar of Companies for increase in Share Capital and hence not applicable. It is further submitted that the case of Future Agrovet Ltd. Vs. ACIT [155 ITD 786] dealt with the issue of Sweat Equity Shares which is not the case here. 4.3 Per Contra, Ld. Departmental Representative, Ms. Pooja Swaroop supported the stand of lower authorities by submitting that the impugned expenditure was related with increase in share capital and was in the nature of compensation of Share premium and therefore, capital in nature which could not be allowed to the assessee. 5.1 We have carefully heard the rival contentions and perused relevant material on record including judicial pronouncements as cited before us. Some undisputed facts that emerge out of the facts as narrated by us herein- above are that there is no increase in the Share Capital of the assessee rather the shares have been issued by its holding company to the assessee s employees and the assessee has funded the differential amount i.e. difference between issue price and the market price of the shares. The Ld. CIT(A), in our opinion, has clearly flawed in equating the same with Swea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at a discounted premium is to compensate them for the continuity of their services to the company. By no stretch of imagination, we can describe such discount as either a short capital receipt or a capital expenditure. It is nothing but the employees cost incurred by the company. The substance of this transaction is disbursing compensation to the employees for their services, for which the form of issuing shares at a discounted premium is adopted. 19. In the present case, there is no dispute that the liability has accrued to the assessee during the previous year. The only question to be decided is as to whether it is the expenditure of the assessee or that of the parent company. We are of the view that the observations of the CIT(A) in para 5.6 of his order that these expenses are the expenses of the foreign parent company is without any basis and lie in the realm of surmises. The foreign parent company has a policy of offering ESOP to its employees to attract the best talent as its work force. In pursuance of this policy of the foreign parent company, allowed its subsidiaries/affiliates across the world to issue its shares to the employees. As far as the assessee in the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the employees of the Assessee is the benefit which the employees get under the ESOP. The Assessee or its parent company can never influence the stock market prices on a particular date. There is no evidence or even a suggestion made by the CIT(A) in his order. There is no basis to apply the provisions of Sec.40A(2)(b) of the Act. 22. With regard to the decision of the ITAT in the case of Accenture Services (P.) Ltd. (supra), we find that the facts of the case of Accenture Services (P.) Ltd. (supra) are identical. In the case of Accenture Services (P.) Ltd. (supra), the facts were that the assessee company incurred certain expenses on account of payments made by it for the shares allotted to its employees in connection with the ESPP. The AO had disallowed Rs. 9,06,788/- incurred by the assessee on the ground that this expenditure is not the expenditure of assessee company but that expenditure is of parent company and the benefit of such expenditure accrues to the parent company and not assessee. The CIT(A) deleted the addition made by the AO. The CIT(A) found that the common shares of Accenture Ltd. the parent company, have been allotted to the employees of ASPL, the Indian affi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision in the case of Mysore Kirloskar Ltd. (supra) clearly support the plea of the assessee in this regard. 24. We are of the view that in the facts and circumstances of the present case, the expenditure in question was wholly and exclusively for the purpose of the business of the assessee and had to be allowed as deduction as a revenue expenditure. 25. For the reasons given above, we direct the expenditure be allowed as deduction. In view of the above stated position, the sole ground raised in assessee s appeal stand allowed. 5.4 So far as the quantification of the expenditure is concerned, the working of the same has been provided on Page number-54 of the paperbook. The Ld. AO is directed to verify the same and allow the claim of the assessee keeping in view the fact that the deduction would be available to the assessee only to the extent of shares which are ultimately allotted by the issuer to the assessee s employees and no deduction would be available against cancelled / un-allotted shares since the amount paid by assessee in respect of those shares would accrue to the assessee as refund from holding company. Revenue s Appeal, ITA No. 6479/Mum/2016 6. T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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