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TMI Blog2022 (10) TMI 826X X X X Extracts X X X X X X X X Extracts X X X X ..... hereon and consequentially there cannot be any disallowance u/s 40(a)(ia) of the Act. Accordingly, the Ground No. II raised by the assessee is allowed. The Ground No. I raised by the assessee is only supporting the Ground No. II for furnishing of additional evidences, the adjudication of which becomes academic in nature. Hence Ground No. I is also allowed. Disallowance of compensation cost of ESOP on account of Employee Stock Option Scheme (ESOP) - HELD THAT:- As decided in M/S. BIOCON LIMITED [ 2013 (8) TMI 629 - ITAT BANGALORE] discount under ESOP is in the nature of employees cost and is hence deductible during the vesting period w.r.t. the market price of shares at the time of grant of options to the employees. The amount of discount claimed as deduction during the vesting period is required to be reversed in relation to the unvesting/lapsing options at the appropriate time. However, an adjustment to the income is called for at the time of exercise of option by the amount of difference in the amount of discount calculated with reference the market price at the time of grant of option and the market price at the time of exercise of option. No accounting principle can be de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the same circle where the assessee is operating its telecom services. If it is found that there is no double deduction claimed by the assessee, the assessee would be eligible for deduction as revenue expenditure u/s.37(1) of the Act which would be in tune with the decisions rendered by the Hon ble Jurisdictional High Court in assessee s own case for A.Yrs. 2003-04, 2006-07 and 2007-08 referred to supra. With these observations, the ground raised by the assessee is allowed for statistical purposes. Disallowance on proportionate deduction u/s.35DD in respect of legal fees incurred on amalgamation - HELD THAT:- This claim is only remaining 1/5th of the total legal fees claimed by the assessee which was incurred in A.Y.2004-05 being the first year. The present assessment year i.e. A.Y.2008-09 would be the 5th year of claim and accordingly, we direct the ld. AO to grant deduction of the remaining 1/5th portion being the legal fees incurred on merger expenses u/s.35DD of the Act in tune with orders passed for the earlier years. Accordingly, the ground No.VIII raised by the assessee is allowed. Disallowance of compensation cost of ESOP while computing book profit u/s.115JB of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Tribunal order for A.Yrs.2006-07 and 2007-08 dated 27/05/2018 wherein the club expenses was allowed as Revenue expenditure had attained finality. Hence, the ground No.3 raised by the Revenue has no legs to stand and hence, dismissed. Claim of the assessee to allow further expenditure being the expenditure made by the assessee during the course of assessment proceedings and not in the return of income - HELD THAT:- As there is nothing wrong apparently in the claim made by the assessee with regard to liability of expenses and its business nexus thereon. As stated earlier, there is absolutely no grievance that could be present in the instant case for the Revenue as the ld. CIT(A) had only directed the ld.AO to examine the allowability of the expenses based on extensive verification with supporting documents. However, it is a fact that none of the ld. AO had not given any factual finding with regard to the allowability of these additional claim of expenses. This aspect requires factual verification by the ld. AO and hence we deem it fit and appropriate to remand this issue to the file of ld. AO for denovo adjudication in accordance with law. Accordingly, the ground No.4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the distributors. The assessee furnished a copy of agreement entered into with the distributors and filed a detailed reply before the ld. AO. It was submitted by the assessee that it appoints distributors who purchase prepaid Starter Packs and recharge vouchers in bulk and then sell them to sub-dealers or retailers. It was submitted that there is a principal to principal relationship between the assessee company and the distributors and the prepaid Starter Packs and Recharge Vouchers are given to them at a discounted price. It was submitted that the assessee company receives the sale proceeds from the distributors in advance and thereafter, deliver the products to the distributors irrespective of whether they inturn are sold or unsold by the distributors. The distributors are free to sell the prepaid cards / recharge vouchers to any retailers who shall be appointed by them on their own account (i.e. the distributors) and no control is being exercised by the assessee company thereon, at any price which the distributor decides subject to maximum retail price (MRP). The assessee company does not have any risk of any bad debts as payment is received by it in advance from the dist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .e.CIT vs. Idea Cellular Ltd., reported in 325 ITR 148 wherein the issue was decided in favour of the Revenue. Accordingly, the ld. AO concluded that the discount given to the dealers / distributors is in the nature of commission on which tax is deductible u/s 194H of the Act which has not been done by the assessee and consequently the same would be liable for disallowance u/s.40(a)(ia) of the Act. For the purpose of arriving at the disallowance figure, the ld. AO vide order sheet noting dated 16/12/2010 asked the assessee to submit details of discount debited during the year. The assessee during the course of hearing on 24/12/2010 submitted that a sum of Rs.162 Crores represent discount for the half year. Accordingly, the ld. AO extrapolated the same for the remaining half year and arrived at the total discount figure for the whole year at Rs.320 Crores and disallowed the same u/s.40(a)(ia) of the Act. However, this has been subsequently reduced to Rs.262.82 Crores (Rs.320 Rs.57.18 Crores) by the ld. AO vide order u/s.154 of the Act dated 16/09/2015 by considering the actual figures. This action of the ld. AO was upheld by the ld. CIT(A). 2.4. We find that assessee in the cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase. In this regard, we find that the ld. AR rightly placed reliance on the decision of Hon ble Karnataka High Court in the case of Bharti Airtel Ltd vs DCIT reported in 372 ITR 33 (Kar) wherein it was held as under:- 62. In the appeals before us, the assessees sell prepaid cards/vouchers to the distributors. At the time of the assessee selling these pre-paid cards for a consideration to the distributor, the distributor does not earn any income. In fact, rather than earning income, distributors incur expenditure for the purchase of prepaid cards. Only after the resale of those prepaid cards, distributors would derive income. At the time of the assessee selling these pre-paid cards, he is not in possession of any income belonging to the distributor. Therefore, the question of any income accruing or arising to the distributor at the point of time of sale of prepaid card by the assessee to the distributor does not arise. The condition precedent for attracting Section 194H of the Act is that there should be an income payable by the assessee to the distributor. In other words the income accrued or belonging to the distributor should be in the hands of the assessees. Then out of that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k time upto MRP). Assuming the MRP of the sim cards and recharge vouchers is Rs.100/-, the assessee sells the same to its distributors at a discounted price of Rs.70/-. Later the distributor in turn sells the same product to retailers at Rs.90/- and thereafter, the retailer sells the same product to the ultimate customer / user at Rs.100/-. In this case, the distributors margin would be Rs.20/- (i.e. Rs.90-Rs.70) and retailers margin would be Rs.10 (Rs.100-Rs.90). From the above example, it could be seen that there are different amounts of margins earned by the distributor and retailer at every point in time. As stated supra, the margins arise to the distributor or the retailer only when the product is ultimately sold by them to the respective parties, i.e. the distributor earns the margin when he sells the sim cards to the retailers and retailer earns margin when he sells to the ultimate customer / user. In this scenario, how the assessee could be expected to determine the margins that could be derived by the distributor or the retailer and deduct tax at source. Admittedly, the agreement is entered by the assessee only with the distributors. It is very likely that the distributor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es [In favour of assessee] 2.6.1. Similarly in yet another decision of Hon ble Jurisdictional High Court in the case of CIT vs Qatar Airways reported in 332 ITR 253 (Bom), the same decision was rendered. The facts of that case and decision rendered thereon are reproduced herein for the sake of convenience :- 1. The question of law as raised in this appeal is as under: Whether on the facts and in the circumstances of the case and in law, the difference in amount between commercial price and published price is special commission in the nature of commission or brokerage within the meaning of Explanation (i) to section 194H of the Income-tax Act 1961 ? 2. It is not in dispute that the airlines have a discretion to reduce the published price to their tickets. In the present case, the airlines had an agreement with their agents to sell their tickets at a minimum fixed commercial price which was lower than the published price but was of a variable nature and could be increased by the agent, at his discretion, to the extent up to the published price. It is not in dispute that under rules of IATA, the commission payable to the agent was 9 per cent. of the published pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. With regard to yet another argument advanced by the ld. DR before us that the assessee had changed its method of accounting during the middle of the year i.e.upto October 2007, the assessee had recorded sale of prepaid sim cards and recharge vouchers to distributors at Rs.100/- in its income side and had debited discount of Rs.30/- in the expenditure side of the profit and loss account. However, after October 2007, the assessee had recorded the sales at discounted price to distributors at Rs.70/- as income in the profit and loss account. Though the net effect of both these accounting methods would result in the same profit ultimately, it does present a picture that would enable the Revenue to expect assessee to deduct tax at source on the discount portion of Rs.30/- deducted in the profit and loss account. In this regard, it is well settled proposition that entries in the books of accounts are not determinative and conclusive for the purpose of determining the tax liability of a person. Reliance in this regard is placed on the following celebrated decisions of Hon ble Supreme Court:- a) Kedarnath Jute Manufacturing Co. Ltd vs CIT reported in 82 ITR 363 (SC) b) Tuticori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer who shall have the right to appoint the sole arbitrator; that all financial penalties could be levied only by the assessee company and not by distributors for any non-compliance or violation of the terms of the agreement; that the distributor had agreed to indemnify, defend and hold the assessee company and its Directors and office bearers, employees, their legal heirs etc., harmless against any liabilities for any claims whatsoever and demands arising out of the conduct of the distributors business or breach or violation by it of any of its terms of this agreement, so on and so forth. Accordingly, the ld. DR from the aforesaid clauses of the distributors agreement concluded that the relationship between the assessee is only that of Principal to Agent and not Principal to Principal. Further, with regard to various case laws relied upon by the ld. AR at the time of hearing on certain Tribunal decisions and Hon ble High Court decisions, the ld. DR defended the same by stating that in all those cases there was an established fact of principal to principal relationship between those assessees and distributors, whereas in the instant case the relationship between assessee and dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . This does not tantamount to fixation of pricing of the product by the assessee or exercising control over the distributors on pricing. Hence, the arguments advanced by the ld. DR in this regard are hereby rejected. Ultimately, the assessee by selling the prepaid sim cards gives the content of talk time of Rs.100/-( as per our example stated supra). No customer will pay the MRP i.e. Rs.100/- and get the reduced talk time. We find that as per Clause 4 of the Distribution Agreement which clearly specifies the RELATIONSHIP between assessee and the distributor to be at Principal to Principal. With regard to yet another argument advanced by the ld. DR that revenue is recognised by the assessee only when talk time is activated by the end user i.e the customer, which goes to prove that the ownership remained with the assessee and all the distributors and retailers are only acting as agents of the assessee to enable them to sell the sim cards ultimately to the customer. In this regard, we find that assessee in its Accounting Policies vide Point No. 9 had stated that revenue is recognised as and when the talk time gets activated. When the retailer sells the sim card to the customer, the cu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he income of these middlemen would be the difference in the sale price and the MRP, which they have to share as per the agreement between them. The said income accrues to them only when they sell this right to service and not when they purchase this right to service. The assessee is not concerned with quantum and time of accrual of income to the distributors by reselling the prepaid cards to the sub-distributors/retailers. As at the time of sale of prepaid card by the assessee to the distributor, income has not accrued or arisen to the distributor, there is no primary liability to tax on the Distributor. In the absence of primary liability on the distributor at such point of time, there is no liability on the assessee to deduct tax at source. The difference between the sale price to retailer and the price which the distributor pays to the assessee is his income from business. It cannot be categorized as commission. The sale is subject to conditions, and stipulations. This by itself does not show and establish principal and agent relationship. 2.8.2. We find that in the case before the Co-ordinate Bench of Pune Tribunal in the case of Idea Cellular Limited vs DCIT (TDS) in ITA N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x Appellate Tribunal erred in setting aside the case to the Assessing Officer ? 5. The Tribunal noted the observations of the Assessing Officer that the discount allowed to the distributors by the Respondent - assessee company is on account of principal to principal relationship and not that of principal to agent. The Tribunal followed the decision of the Karnataka High Court in the case of Bharati Airtel Ltd. vs. DCIT [372 ITR 33] and held that the sale of SIM cards/recharge coupons at discounted rate to the distributors was not commission and therefore not liable to deduct the TDS under Section 194H . The Tribunal noted that there was no decision of this Court on this issue on that date. 6. Learned counsel for the parties have tendered the copy of the order passed in Income Tax Appeal No. 702 of 2017 subsequently in the case of Pr. Commissioner of Income Tax-8 vs. M/s. Reliance Communications Infrastructure Ltd., where same issue arose for the consideration of this Court. The Division Bench of this Court while holding against the Appellant - Revenue observed thus :- 3. Having heard the learned Counsel for the parties and having perused the documents on re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further find that the Hon ble Rajasthan High Court in the case of Hindustan Coca Cola Beverages (P) Ltd vs CIT III Jaipur reported in 402 ITR 539 (Raj) which had rendered a comprehensive judgement on the impugned issue together with various other assesses including Idea Cellular Ltd (assessee herein). The relevant Income Tax Appeal Nos. 168/2015 , 169/2015 . 170/2015 and 171/2015 which were admitted by the Hon ble Rajasthan High Court on 18/10/2016 relates to assessee herein for Rajasthan Circle in respect of the identical issue. The question no.1 raised before the Hon ble Rajasthan High Court is as under:- 1. Whether in the facts and circumstances of the case, the Tribunal was justified in holding that whether the assessee is liable to deduct TDS u/s. 194-H of IT Act, as the relation between assessee and distributor is that of Principal to Agent? 2.8.4.1. We find that the Hon ble Rajasthan High Court after considering the plethora of judgements on the impugned issue of various High Courts (which includes the three High Court decisions of Kerala, Delhi and Calcutta relied upon by the ld. DR before us herein) had rendered its decision as under:- Idea Cellular 58. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the department -- -- 8. 1/2014 In favour of assessee and against the department In favour of assessee and against the department In favour of assessee and against the department In favour of assessee and against the department In favour of assessee and against the department 9. 2/2014 In favour of assessee and against the department In favour of assessee and against the department In favour of assessee and against the department In favour of assessee and against the department In favour of assessee and against the department 10. 3/2014 In favour of assessee and against the department In favour of assessee and against the department In favour of assessee and against the department In favour of assessee and against the department In f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -- -- -- 20. 171/2015 Against the department and In favour of assessee Against the department and In favour of assessee -- -- -- 21. 195/2015 Against the department and In favour of assessee Against the department and In favour of assessee -- -- -- 22. 08/2016 Against the department and In favour of assessee Against the department and In favour of assessee -- -- - 23. 45/2016 Against the department and In favour of assessee Against the department and In favour of assessee -- -- -- 24. 48/2016 Against the department and In favour of assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... department and In favour of assessee Against the department and In favour of assessee Against the department and In favour of assessee Against the department and In favour of assessee Against the department and In favour of assessee 33. 103/2016 Against the department and In favour of assessee Against the department and In favour of assessee Against the department and In favour of assessee Against the department and In favour of assessee Against the department and In favour of assessee 34. 104/2016 Against the department and In favour of assessee Against the department and In favour of assessee Against the department and In favour of assessee Against the department and In favour of assessee Against the department and In favour of assessee 35. 105/2016 Against the department and In favour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nst the department and In favour of assessee - -- 44. 217/2016 Against the department and In favour of assessee Against the department and In favour of assessee Against the department and In favour of assessee Against the department and In favour of assessee Against the department and In favour of assessee 61. In view of the above discussion, all the appeals of assessees are allowed and those of Department are dismissed. (BOLD PORTION PERTAINS TO ASSESSEE IN THE AFORESAID JUDGEMENT OF HON BLE RAJASTHAN HIGH COURT) 2.8.5. We further find that the Hon ble Rajasthan High Court in the case of CIT (TDS) Jaipur vs Idea Cellular Ltd in Income Tax Appeal No. 90/2018 dated 12/04/2018 had taken an identical view on the identical set of facts. Further we find that the Hon ble Jurisdictional High Court in the case of CIT(TDS) Pune vs Vodafone Cellular Ltd (assessee s own case) in Income Tax Appeal Nos. 1152 , 1274, 1995, of 2017 Income Tax Appeal Nos. 571, 1266 of 2018 dated 27/01/2020 had also taken an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see and distributor is only that of Principal to Principal. Hence this finding cannot be disturbed by this tribunal by respectfully following the judicial hierarchy. Infact no contrary materials on facts were even brought on record by the revenue before us to disturb the findings of Hon ble High Courts. Hence we have no hesitation in holding that the relationship between assessee and distributor is only that of Principal to Principal and not that of Principal to Agent and accordingly there is no obligation for the assessee to deduct tax at source in terms of section 194H of the Act. 2.8.8. In view of the aforesaid observations and findings given thereon, we do not deem it fit to adjudicate other arguments advanced by the ld. AR on the applicability of second proviso to section 40(a)(ia) read with section 201 of the Act, as it would become academic in nature. This aspect of the issue is left open. 2.9. In view of the aforesaid observations and respectfully following the various judicial precedents relied upon hereinabove, we hold that the sale of prepaid sim cards / recharge vouchers by the assessee to distributors cannot be treated as commission / discount to attract the prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not ascertained. With these observations, the ld. AO disallowed the provision made on account of ESOP in the sum of Rs.3,75,90,000/- in the assessment. 3.1. The ld. CIT(A) observed that assessee has not explained or commented on reversal of the value of entries due to retirement, death, VRS, quitting etc., of eligible employees on 31/12/2008, 31/12/2009, 31/12/2010 and 31/12/2011. The ld. CIT(A) further observed that if eligible employees did not exercise their options, then the ESOP should go back to the assessee. The ld. CIT(A) by placing reliance on the decision of the Delhi Tribunal in the case of Ranbaxy Laboratories Ltd., reported in 124 TTJ 771 upheld the action of the ld. AO by stating that the provisions made for ESOP expenditure is notional and contingent in nature. 3.2. Further, the ld. CIT(A) in para 5.7.4 had also observed that since the shares were the capital of the assessee company and any loss on account of capital should be considered as capital loss and not the Revenue expenditure. Accordingly, he observed that the loss suffered by the assessee as a result of allotment of shares to its employees under ESOP scheme below market price was on capital account a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Complete disclosure with regard to manner in which the ESOP cost has been arrived at by the assessee is duly disclosed both in the financial statements, notes on accounts and in the Directors Report of the assessee company for the year ended 31/03/2008. 3.7. Yet another grievance addressed by the lower authorities and by the ld. DR is that the Fringe benefit tax (FBT) is not paid by the assessee company on the amortisation cost of ESOP. In this regard, we find that the assessee had specifically mentioned in its tax audit report that the said amortisation cost has not been considered for calculation of FBT as FBT would be payable only at the time when stock options are exercised by the employees. This note has been conveniently ignored by the lower authorities. Moreover, whether the particular expenditure has suffered fringe benefit taxed or not is of no relevance for the purpose of allowability of expenditure while computing the total income of the assessee. What is relevant to be seen is that whether the said expenditure is incurred wholly and exclusively for the purpose of business of the assessee. In our considered opinion, the compensation cost of ESOP has been incurred b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons are granted. Since the amount over and above the face value of the shares, being the share premium, is itself a capital receipt, any under-recovery of such share premium on account of obligation to issue shares to employees in future at a lower premium, would be a case of short capital receipt. If at all it is to be viewed in terms of expenditure, then, at best, it would be in the nature of a capital expenditure. He supported his view by relying on the order passed by the Delhi Bench of the Tribunal in Ranbaxy Laboratories Ltd. v. Addl. CIT [2010] 39 SOT 17 (URO). It was stated that the Tribunal in that case has held that since the receipt of share premium is not taxable, any short receipt of such premium on issuing options to employees will be notional loss and not actual loss for which any liability is incurred. The learned Departmental Representative contended that the Mumbai bench of the Tribunal in the case of VIP Industries v. Dy. CIT [IT Appeal No.7242 (Mum.) of 2008 has also taken similar view vide its order dated 17.09.2010.] 9.2.2 Per contra, the learned AR submitted that it is not a case of any short receipt of share premium but that of compensation given to em ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 37(1) as there was no spending or paying out or away . The contention of the assessee that SEBI Guidelines recommend claim for deduction of discount over the vesting period, did not find favour with the Tribunal on the ground that the SEBI Guidelines were not relevant in determining the total income chargeable to tax. 9.2.4 In order to appreciate the rival submissions, it is of the utmost importance to understand the concept of ESOP. Section 2(15A) of the Indian Companies Act, 1956 defines employee stock option to mean 'the option given to the whole-time Directors, Officers or employees of a company, which gives such Directors, Officers or employees, the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a 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 sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he existing shareholders at less than the otherwise prevailing premium due to market sentiment or otherwise, such short receipt of premium would be a case of a receipt of a lower amount on capital account. It is so because the object of issuing such shares at a lower price is nowhere directly connected with the earning of income. It is in such like situation that the contention of the learned Departmental Representative would properly fit in, thereby debarring the company from claiming any deduction towards discounted premium. It is quite basic that the object of issuing shares can never be lost sight of. Having seen the rationale and modus operandi of the ESOP, it becomes out-and-out clear that when a company undertakes to issue shares to its employees at a discounted premium 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 incenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession . To put it differently, an expenditure must be laid out or expended wholly and exclusively for the purpose of business so as to be eligible for deduction u/s 37(1). There is absolutely no doubt that section 37(1) talks of granting deduction for an 'expenditure', and the Hon'ble Supreme Court in Indian Molasses Co. (P.) Ltd. (supra) has described 'expenditure' to mean what is 'paid out or away' and is something which has gone irretrievably. However, it is pertinent to note that this section does not restrict paying out of expenditure in cash alone. Section 43 contains the definition of certain terms relevant to income from profits of business or profession covering sections 28 to 41. Section 37 obviously falls under Chapter IV-D. 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 we read the definition of the word paid u/s 43(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o been used. For example depreciation and allowances are dealt with in section 32, therefore, the parliament has used expression any expenditure in section 37 to cover both. Therefore, the expression expenditure as used in section 37 made in the circumstances of a particular case, covers an amount which is really a loss even though the said amount has not gone out from the pocket of the assessee'. From the above enunciation of law by the Hon'ble Summit Court, there remains no doubt whatsoever that the term 'expenditure' in certain circumstances can also encompass 'loss' even though no amount is actually paid out. Ex consequenti, the alternative argument of the ld. DR that discount on shares is 'loss' and hence can't be covered u/s 37(1), also does not hold water in the light of the above judgment. In view of the above discussion, we, with utmost respect, are unable to concur with the view taken in Ranbaxy Laboratories Ltd. (supra). B. Is discount a Contingent liability ? 9.3.1 The learned Departmental Representative supported the impugned order by contending that the entitlement to ESOP depends upon the fulfilment of several con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company incurs liability of fulfilling its promise of allowing proportionate discount, which liability would be actually discharged at the end of the fourth year when the options are exercised by the employees. Now the question arises as to whether the liability at the end of each year can be construed as a contingent one? 9.3.3 The Hon'ble Supreme Court in Bharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61 dealt with the deductibility or otherwise of provision for liability towards encashment of earned leave. In that case, the company floated beneficial scheme for its employees for encashment of leave. The earned leave could be accumulated up to certain days. The assessee created provision of Rs. 62.25 lakh for encashment of accrued leave and claimed deduction for the same. The Assessing Officer held it to be a contingent liability and hence not a permissible deduction. When the matter finally came up before the Hon'ble Supreme Court, it was held that the provision for meeting the liability for encashment of earned leave by the employee was an admissible deduction. In holding so, the Hon'ble Apex Court observed that : the law is settled : if a business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nty clause. The assessee made a provision for warranty at Rs. 5.18 lakh towards the warranty claim likely to arise on the sales effected by the assessee. The Assessing Officer disallowed the same on the ground that the liability was merely a contingent liability and hence not allowable as deduction u/s 37 of the Act. When the matter finally came up before the Hon'ble Supreme court, it entitled the assessee to deduction on the accrual concept by holding that a provision is recognized when : (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation : and (c) a reliable estimate can be made of the amount of the obligation . Resultantly, the provision was held to be deductible. 9.3.5 When we consider the facts of the present case in the backdrop of the ratio laid down by the Hon'ble Supreme Court in Bharat Earth Movers (supra) and Rotork Controls India (P.) Ltd. (supra), it becomes vivid that the mandate of these cases is applicable with full force to the deductibility of the discount on incurring of liability on the rendition of service by the employees. The factum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the previous year . . Section 115WB gives meaning to the expression 'Fringe Benefits'. Sub-section (1) provides that for the purposes of this Chapter, 'fringe benefits' means any consideration for employment as provided under clauses (a) to (d). Clause (d), which is relevant for our purpose, states that : 'any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer free of cost or at concessional rate to his employees (including former employee or employees)' shall be taken as fringe benefit. Explanation to this clause clarifies that for the purposes of this clause,- (i) specified security means the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and, where employees' stock option has been granted under any plan or scheme thereof, includes the securities offered under such plan or scheme. Thus it is discernible from the above provisions of the Act 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as in the first case, there cannot be any question of allowing deduction, in the second case, deduction has to be allowed for a sum determined on some rational basis representing the amount of liability incurred. 10.3 We have earlier underlined the concepts of grant of options, vesting of options and exercise of options. The period from grant of option to the vesting of option is the 'vesting period'. It is during such period that an employee is supposed to render service to the company so as to earn an entitlement to the shares at a discounted premium. The vesting period may vary from a case to case. If the vesting period is, say, four years with equal vesting at the end of each year, then it is at the end of the vesting period or during the exercise period, which in turn immediately succeeds the vesting period, that the employee becomes entitled to exercise 100 options or qualify for receipt of 100 shares at discount. Though the shares are allotted at the end of the vesting period, but it is during such vesting period that the entitlement is earned. It means that 25 options vest with the employee at the end of each year on his rendering service for the respective ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ranting options does not cast any liability on the company. On the other end is the date of exercising the options. Though the employees become entitled to exercise the option at such stage but the fact is that it is simply a result of vesting of options with them over the vesting period on the rendition of services to the company. In other words, it is a stage of realization of income earned during the vesting period. In the same manner, though the company becomes liable to issue shares at the time of the exercise of option, but it is in lieu of the employees compensation liability which it incurred over the vesting period by obtaining their services. From the above it is apparent that the company incurs liability to issue shares at the discounted premium only during the vesting period. The liability is neither incurred at the stage of the grant of options nor when such options are exercised. 10.6 Let us consider the facts of the case of S.S.I. Ltd. (supra), which has been strongly relied by the ld. AR in support of his claim for deduction of discount during the years of vesting of options. In that case the vesting period was three years and the assessment order was passed u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch period. We, therefore, agree with the conclusion drawn by the tribunal in S.S.I. Ltd.'s case (supra) allowing deduction of the discounted premium during the years of vesting on a straight line basis, which coincides with our above reasoning. III. SUBSEQUENT ADJUSTMENT TO DISCOUNT 11.1.1 Having answered the first major issue in affirmative that the discount on options under ESOP is an ascertained liability and the second major issue that the discount is deductible over the vesting period on straight line basis unless the vesting is not uniform, then arises the present issue as to whether any subsequent adjustment is warranted at the time of exercise of options, to the deductions earlier allowed for the amount of discount. It is noticed that the assessment years 2003-2004 to 2007-2008 are under consideration and during these years ESOP 2000 has come to an end and the ESOP 2004 has started. Further, the extant issue is a vital part of the overall question of the deductibility or otherwise of the amount of discount under ESOP. 11.1.2 We have noticed above that the company incurs a definite liability during the vesting period, but its proper quantification is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actual discounted premium at the time of exercise of option. The Hon'ble Supreme Court in the case of CIT v. Infosys Technologies Ltd. [2008] 297 ITR 167/166 Taxman 204 relevant to the assessment years 1997-98 to 1999-2000 has 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. The Finance Act, 1999 inserted section 17(2)(iiia) with effect from 1st April, 2000 providing that : the value of any specified security allotted or transferred, directly or indirectly, by any person free of cost or at a concessional rate to an individual who is or has been in employment of that person shall be treated as a perquisite. It further provides that in a case the allotment or transfer of specified securities is made in pursuance of an option exercised by an individual, the value of the specified securities shall be taxable in the previous year in which such option is exercised by such individual. Such clause (iiia) was subsequently deleted with effect from 1st April, 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iscount or employees remuneration can never be different. If the value of perquisite in the hands of the employee, whether or not taxable, is 'x', then its cost in the hands of the company has also to be 'x'. It can neither be 'x+1' nor 'x-1'. It is simple and plain that the amount of remuneration which percolates to the employees will always be equal to the amount flowing from the company and such remuneration to the employee in the present context is the amount which he actually becomes entitled to on the exercise of options. Thus, it is palpable that since the remuneration to the employees under the ESOP is the amount of discount w.r.t. the market price of shares at the time of exercise of option, the employees cost in the hands of the company should also be w.r.t. the same base. 11.1.6 The amount of discount at the stage of granting of options w.r.t. the market price of shares at the time of grant of options is always a tentative employees cost because of the impossibility in correctly visualizing the likely market price of shares at the time of exercise of option by the employees, which, in turn, would reflect the correct employees cost. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment to the discount is required at the time of exercise of option. In Situation II, the market price of the share at the time of exercise of option has gone up to Rs. 130. The amount of real compensation to employee is Rs. 120 as against the tentative compensation of Rs. 100 per share which was accounted for and allowed as deduction during the vesting period. As the actual quantification of the compensation has turned out to be Rs. 120, the company is entitled to a further deduction of Rs. 20 at the time of exercise of option. In Situation III, the market price of the share at the time of exercise of option has come down to Rs. 90. The amount of real compensation to employees is Rs. 80 as against the tentative compensation of Rs. 100, which was allowed as deduction during the vesting period. As the actual quantification of the compensation has turned out to be Rs. 80, the company is liable to reverse the deduction of Rs. 20 at the time of exercise of option. Taxation vis- -vis Accountancy principles 11.2.1 It has been noticed that broadly there are three stages having effect on the total income of the company in the life cycle of ESOP, viz., (i) during the vesting period, ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s cannot mandate the deductibility or otherwise of an amount under the provisions of the Act. He relied on the judgments of the Hon'ble Supreme Court in Tuticorin Alkali Chemicals Fertilizers Ltd. (supra) and Godhra Electricity Co. Ltd. (supra) in support of this proposition. 11.2.3 We are not persuaded by the submissions put forth by the ld. AR 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. 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., by whatever name called, issued by any autonomous or even statutory bodies including the Institute of Chartered Accountants of India, or for that matter, 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 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), the Hon'ble Supreme Court has laid down in so many words that the taxing principles cannot walk on the footsteps of the accounting principles. At this juncture, it would be useful to have a glimpse at the following observations of the Hon'ble Supreme Court in the afore noted case: 'It is true that this court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override section 56 or any other provision of the Act. As was pointed out by Lord Russell in the case of B.S. C. Footwear Ltd. v. Ridguary (Inspector of Taxes [1970] 77 ITR 857 (CA), the income-tax law does not march step by step in the footprints of the accountancy profession.' 11.2.6 The same view has been adopted by the Hon'ble Supreme Court in Godhra Electricity Co. Ltd. (supra), by holding that : 'Income-tax is a levy on income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not in any way departing from legal principles because of any opinion expressed by the Institute of Chartered Accountants. From the above observations there is not even an iota of doubt in our minds that there can be no question of following the accounting principle or Guidance notes etc. in the matter of determination of total income. 11.2.9 The trump card of the ld. AR to bolster his submission for assigning the status of binding force to the SEBI Guidelines is the order in the case of S.S.I. Ltd. (supra) which came to be affirmed by the Hon'ble Madras High Court in PVP Ventures Ltd. (supra). We have noticed above that the said case dealt a situation falling within one of the three years of the vesting period, in which it was held that one third of the total amount of discount computed on the basis of the market price of the shares at the time of grant of option, is deductible. It is evident from the SEBI Guidelines that these deal with the deductibility of discount in the hands of company during the years of vesting period. These Guidelines are silent on the position emanating from variation in the market price of the shares at the time of exercise of option by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime of grant of option and the market price at the time of exercise of option. No accounting principle can be determinative in the matter of computation of total income under the Act. The question before the special bench is thus answered in affirmative by holding that discount on issue of Employee Stock Options is allowable as deduction in computing the income under the head 'Profits and gains of business or profession'. 3.9. We further find that the aforesaid decision on Special Bench of Bangalore Tribunal has been approved by the Hon ble Karnataka High Court in the case of CIT vs. Biocon Ltd., reported 430 ITR 151 / 121 taxmann.com 351. The relevant operative portion of the judgement of the Hon ble Karnataka High Court are reproduced hereunder:- 10. From perusal of section 37(1), which has been referred to supra, it is evident that an assessee is entitled to claim deduction under the aforesaid provision if the expenditure has been incurred. The expression 'expenditure' will also include a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which it is issued and the market value of the share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s foreign exchange gains (net) on loans and creditors in foreign currency (not covered by forward contract) related to acquisition of capital assets. 4.2. From the above note, the ld. AO concluded that assessee had not reduced the foreign exchange gain of Rs.51,96,46,461/- by adjusting the same with the cost of assets and had claimed excess depreciation in the return so as to reduce the taxable profits. 4.3. Before the ld. CIT(A), the assessee sought to produce a certificate dated 10/04/2013 which is enclosed in page 513 of the paper book filed before us, wherein the tax auditor had duly clarified that a sum of Rs.51,96,46,461/- had been actually reduced from the cost of fixed assets, being the foreign exchange gain on loans taken in foreign currency utilised for acquisition of fixed assets in accordance with Section 43A of the Income Tax Act. The ld. CIT(A) ignores this certificate without even mentioning the fact of filing of the said certificate and upheld the action of the ld. AO. 4.4. Before us, the ld. DR vehemently argued that the tax audit certificate dated 10/04/2013 is purely an afterthought and was given after five years from the time of filing the return. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 022 in support of his contentions. But we find that the Co-ordinate Bench of this Tribunal in a very elaborate order rendered in the case of K. Raheja Corporate Services Pvt. Ltd., in ITA Nos. 2521-2527/Mum/2021 for A.Yrs.2012-13 to 2017-18 respectively dated 17/06/2022 had elaborately considered the meaning of expression for the removal of doubts incorporated in the explanation in the amendment brought in Section 14A of the Act by Finance Act 2022 and had held that the said amendment need to be construed only prospectively. It is also pertinent to note that the said decision of Mumbai Tribunal relied upon supra has considered various Hon ble Supreme Court decisions and had arrived at the conclusion in favour of the assessee. In any case, we further find that recent decision of the Hon ble Delhi High Court in the case of PCIT vs. M/s. Era Infrastructure (India) Ltd., in ITA No.204 of 2022 dated 20/07/2022 had categorically held that the amendment bought in Finance Act 2022 is prospective in operation. For the sake of convenience, the relevant order is hereby reproduced:- Present Income-tax Appeal has been filed challenging the Order passed by the Income-tax Appellate Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lates that the amendment made to section 14A will take effect from 1st April, 2022 and will apply in relation to the assessment year 2022-23 and subsequent assessment years. The relevant extract of Clauses 4, 5, 6 7 of the Memorandum of Finance Bill, 2022 are reproduced hereinbelow: 4. In order to make the intention of the legislation clear and to make it free from any misinterpretation, it is proposed to insert an Explanation to section 14A of the Act to clarify that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such exempt income. 5. This amendment will take effect from 1st April, 2022. 6. It is also proposed to amend sub-section (1) of the said section, so as to include a non-obstante clause in respect of other provisions of the Income-tax Act and provide that no deduction shall be allowed in relation to exempt income, notwithstanding anyth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the substituted Explanation would read: Explanation.-For the removal of doubts, it is hereby declared that the income of the nature referred to in this clause payable for- (a) service rendered in India; and (b) the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract of employment, shall be regarded as income earned in India. The Finance Act, 1999 which followed the Bill incorporated the substituted Explanation to Section 9(1)(ii) without any change. 13. The Explanation as introduced in 1983 was construed by the Kerala High Court in CIT v. S.R. Patton [(1992) 193 ITR 49 (Ker.)] while following the Gujarat High Court's decision in S.G. Pgnatale [(1980) 124 ITR 391 (Guj.)] to hold that the Explanation was not declaratory but widened the scope of Section 9(1)(ii). It was further held that even if it were assumed to be clarificatory or that it removed whatever ambiguity there was in Section 9(1)(ii) of the Act, it did not operate in respect of periods which were prior to 1-4-1979. It was held that since the Explanation came into force from 1-4-1979, it could not be relied on f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P., (1981) 2 SCC 585, 598 : AIR 1981 SC 1274, 1282 para 24]. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force [See Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24 (para 44); Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC 352, 354; CIT v. Podar Cement (P.) Ltd., (1997) 5 SCC 482, 506]. But if it changes the law it is not presumed to be retrospective, irrespective of the fact that the phrases used are it is declared or for the removal of doubts .' (emphasis supplied) 7. The aforesaid proposition of law has been reiterated by the Supreme Court in M.M. Aqua Technologies Ltd. v. CIT [2021] 129 taxmann.com 145/282 Taxman 281/436 ITR 582. The relevant portion of the said judgment is reproduced hereinbelow:- 22. Second, a retrospective provision in a tax act which is for the removal of doubts cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood. This was stated in Sedco Forex International Drill Inc. v. CIT, (2005) 12 SCC 717 as follows : 17. As was affirmed by this Court in Goslino Mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Supreme Court in Kunhayammed v. State of Kerala [2000] 113 Taxman 470/245 ITR 360 and Shree Chamundi Mopeds Ltd. v. Church of South India Trust Association [1992] 3 SCC 1, the present appeal is dismissed being covered by the judgment passed by the learned predecessor Division Bench in IL FS Energy Development Co. Ltd. (supra) and Cheminvest Ltd. v. CIT [2015] 61 taxmann.com 118/234 Taxman 761/378 ITR 33 (Delhi). 10. Accordingly, the appeal and application are dismissed. However, it is clarified that the order passed in the present appeal shall abide by the final decision of the Supreme Court in the SLP filed in the case of IL FS Energy Development Co. Ltd. (supra). 5.3. Respectfully following the same, we direct the ld. AO to delete the disallowance made u/s.14A of the Act. Accordingly, the ground No.V raised by the assessee is allowed. 6. The ground No.VI raised by the assessee is challenging the disallowance of Revenue sharing license fees amounting to Rs.415,08,45,362/-. 6.1. We have heard rival submissions and perused the materials available on record. The ld. AO observed that assessee had debited license fee amounting to Rs.4150.84 million in its profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 11/04/2016 was decided in favour of the assessee by the Hon ble High Court by allowing it as Revenue expenditure u/s.37(1) of the Act. 6.4. With regard to allegation levelled by the ld. DR that assessee had made double deduction, the ld. AR duly clarified that assessee had claimed this deduction on hybrid model, because for one circle which was taken over by the assessee from another company, that company was claiming deduction on amortisation basis u/s.35ABB of the Act. This was continued by the assessee even after takeover of the said company in respect of that one circle alone. In respect of other circles operated by the assessee, the assessee had been consistently claiming deduction as revenue expenditure u/s.37(1) of the Act. Accordingly, he submitted that there is absolutely no double deduction claimed by the assessee at all. This fact was submitted before the ld. CIT(A) by the assessee but no finding has been given by the ld. CIT(A) in this regard. Hence, in the interest of justice and fair play, we remand this issue to the file of the ld. AO for limited purpose on verification of the fact as to whether the assessee has claimed double deduction in respect of this exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the disallowance u/s.14A of the Act while computing book profits u/s.115JB of the Act. 10.1. We have heard rival submissions and perused the materials available on record. We have already held vide ground No.V above that no disallowance u/s.14A of the Act could be made in the instant case as there was no exempt income claimed by the assessee. The said decision would hold good for this ground also as admittedly Clause f of Explanation 1 to Section 115JB(2) of the Act would come into operation only if there is exempt income credited in the profit and loss account. Accordingly, the ground No.X raised by the assessee is allowed. 11. The ground No.XI raised by the assessee is general in nature and does not require any specific adjudication. Let us take up the Revenue appeal in ITA No.2273/Mum/2014 for A.Y.2008-09. 12. The ground No.1 raised by the Revenue is common with ground No.VI raised by the assessee. The decision rendered hereinabove for ground No.VI of assessee s appeal would hold good for ground No.1 of the Revenue appeal. Hence, the ground No.1 raised by the Revenue is dismissed. 13. The ground No.2 raised by the Revenue is challenging the deletion of dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e other two advances are given to assessee own group companies which are engaged in the same business. In any case, he submitted that this issue has been decided in favour of the assessee by the Tribunal for A.Y.2007-08 in ITA Nos. 4445 and 4418/Mum/2013 for A.Y.2006-07 dated 27/05/2016 wherein this interest disallowance was deleted by the Tribunal. It is also pertinent to note that this Tribunal order has been upheld by the Hon ble Jurisdictional High Court in PCIT vs. Idea Cellular Ltd., in ITA No.741/Mum/2017 dated 13/01/2020 for A.Y.2007-08 and in Income Tax Appeal No.417 of 2017 dated 22/04/2019 for A.Y.2006-07. In view of the same, the ground No.2 raised by the Revenue has no legs to stand and hence, dismissed. 14. The ground No.3 raised by the Revenue is challenging the deletion of disallowance on account of club entrance fees amounting to Rs.37,79,021/-. 14.1. We have heard rival submissions and perused the materials available on record. We find that assessee had debited expenses on account of club entrance fees paid to various clubs amounting to Rs.37.79,021/- and claimed the same as revenue expenditure u/s.37(1) of the Act. The ld. AO disallowed the same on the grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the AO since the time of revising the ROI under section 139(5) of the Act had expired. 15.3. The assessee had submitted the details of expenses incurred by making payment to IBM vide letter dated 02/12/2010 to the ld.AO. The assessee had also filed the copy of the agreement entered with IBM vide letter dated 22/12/2010 to the AO. Further, the assessee made detailed submissions on the admissibility of expenditure vide letter dated 23/12/2010 to the ld. AO during the assessment proceedings. 15.4. The AO disallowed the foregoing expenditure on the alleged ground that the claim cannot be admitted during the assessment proceedings following the decision of Goetze (India) Ltd. Vs. CIT (284 ITR 323) (SC). The ld. CIT(A) directed ld. AO to consider the claim of the assessee and allow the same on proper verification of relevant vouchers, invoices, genuineness of services, payment and in accordance with the provisions of section 37 of the Act. 15.5. As it could be seen from the above that out of total payment of Rs.207,10,72,067/- paid by the assessee pursuant to an agreement entered into with IBM, the ld. AO had already allowed a sum of Rs.192,60,80,504/-. One of the main griev ..... X X X X Extracts X X X X X X X X Extracts X X X X
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