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TMI Blog2016 (7) TMI 1710X X X X Extracts X X X X X X X X Extracts X X X X ..... ablished in the in the appellants case 1.2The Hon. Commissioner of Income Tax (Appeals) grossly erred in ignoring the fact that the Appellant incurred INR 50,000 in earning the exempt income and the Appellants have suo-moto made a disallowance of Rws.50,000/- in the computation of income submitted while filing their Return of Income. 1.3 The Hon. Commissioner of Income Tax (Appeals) grossly erred in ignoring the fact, without rendering any opinion on the correctness of Appellant's claim of not spending any amount for earning exempt income the learned Assessing Officer could not have made a disallowance by applying the provisions of section 14A r.w.r. 8D. 1.4 Hon. Commissioner of Income-tax (Appeals) grossly erred in overlooking the fact that the principle of apportionment embedded in section 14A had no application where no direct expenditure was incurred to earn exempt income and entire expenditure was incurred for business purposes only. 2 The Hon Commissioner of Income Tax (Appeals), grossly erred in confirming the disallowance of ESOP expenses, amounting to Rs 36,74,845/-, being the difference between the market price and allotment price of ESOP's granted by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brief facts in this regard are that during the year, the Assessee Company reimbursed Rs36,74,845/- to its ultimate holding company Korn Ferry International Inc ('KFII'), USA. Such reimbursement was made on account of the cost of restricted stock units (stocks) which have been allotted by KFII to the employees of the assessee on behalf of the Assessee Company under the Employees Stock Option Plan ('ESOP). The difference in the market price and the allotment price (i.e. Rs, 3,674,845) was reimbursed by the assessee to its ultimate holding company and same was charged to the P&L account and was claimed as a deduction in its tax return. The above payment is in the nature of compensation to the employees and the same was taxed in the hands of the employees as perquisite under relevant provisions of the Act and appropriate tax was deducted at the time of vesting of these stocks. During the course of assessment proceedings the AO followed his order of A.Y. 2010-11 and held that such expenditure was not allowable under the law on the following grounds: a. The shares were the capital of the Assessee Company and any loss to the capital can be considered as capital loss and not the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e scheme of the Act. In the Assessee Company's case the entry made in the books of accounts as per direction of SEBI cannot be held to be conclusive for the purpose of allowing expenditure under section 37 of the Act. f. The has relied on the decision in the case of New India Industries Ltd. vs ACIT 112 TTJ (Del) (SB) 917 and TVS Finance & Services Ltd. Vs. Joint CIT [23 DTR (Mad) 33] wherein it has been held that unless the provisions of section 37 of the Act are complied with, the deduction is not permissible. 8. Being aggrieved, assessee filed appeal before Ld. CIT(A) and made detailed submissions. Relevant part of the submissions made before Ld.CIT(A) are as follows: 5.4.1 At the outset, it is submitted that the understanding of the Ld. AO on this issue is completely erroneous. The Appellant has never issued any share to its employees under ESOP. This can be verified from the Schedule I to the audited financials which demonstrate the movement in the share capital of the Appellant. It is KFII (listed ultimate holding company) which has issued stocks to the employees of the Appellant at a price less than the market price. The differential between market price and vestin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s employees under the Employee Stock Option Plan (ESOP). Such shares were not allotted as per market price. The difference in the market price and allotment price i.e. Rs.52,08,592/- was debited by the assessee in its Profit & Loss Account. 6.2. Before me, the LAR vehemently argued that the previously mentioned difference of Rs.52,08,5921- in the market price and allotment price was in the nature of compensation to the employees and was taxed in the hands of the employees and that ESOP expenses have been claimed on the basis of SEBI guidelines. He also contended that SEBI Rules being statutory rules and since there was no specific provisions in the Act dealing with this issue, hence SEBI Rules should be applied and deduction in the difference in the market price and the allotment price should be allowed. He strongly contended that the said difference in the market price and the allotment price is deductible u/s 37(1) of the Act. He has relied on the following decision in support of the proposition that the difference in market price and the cost price of shares allotted to the employees of the assessee company under ESOP scheme is allowed deduction u/s.37(1) of the Act" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provisions of I.T. Act in the matter of allowing of expenditure under the provisions of I.T. Act. Strong reliance is placed on the following decisions: (i) New India Industries Ltd. Vs ACIT18 SOT 51 (SB) Delhi. (ii) TVS Finance and Services Ltd. Vs JCIT (2009) 23 CTR (MAD) 33. 6.5. Thirdly, it is well stated that the way in which entries are made by the appellant in its books of accounts is not determinative of the question that the appellant has earned any profit or suffered any loss. Therefore, it is necessary to consider the true nature of the transaction and whether it has actually resulted in profit or loss to the assessee. The reliance is placed on the following decisions: (i) Kedarnath Jute Mfg. Co. Ltd. Vs CIT (1971) 82 ITR 363 (SC) (ii) Chowringhee Sales Bureau Pvt. Ltd. Vs CIT (1973) 87 ITR 542 (SC) (iii) Satluj Cotton Mills vs CIT (1979) 116 ITR 01 (SC) In the present case, the appellant has not incurred any actual expenditure which accrued to it during F.Y.2009-10 relevant to A.Y.2010-11. The expenditure will be ascertained at the end of the expiry of ESOP scheme time period if the then surviving employees may actually exercise the right of bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, the AO found that the assessee had debited an amount of Rs.1.07 crores under the head cost of stock awarded to KF India Employees. Before the AO, the assessee stated that the expenditure was on account of ESOP. On perusal of the tax audit report, the AO found that the assessee had paid Fringe Benefit Tax(FBT)only on amount of Rs.50.65 lakhs. The AO directed the assessee to explain as to why FBT had not been paid to whole amount. The assessee vide its letter,dt.29.12.12,stated that the value of FBT taken for ESOP(Rs.50.65lakhs) as against cost of stock awarded to KF Employees(Rs.1.07crores),that the amount of Rs.50.65 represented the value of ESOP, that had been vested with the employees during FY 2007-08 and consequently considered for FBT, that the amount of Rs.1.07crores represented the amount charged by Korn Ferry International USA to Korn Ferry International Pvt. Ltd. India, towards stock awarded to the employees of the assessee . After considering the same the AO held that during the year under consideration only a part (Rs. 50. 65 lakhs)out of the total amount (Rs.1.07crores) was debited to P&L A/c. was vested in employees, that the balance amount would be vested in emp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee to its employees had to be regarded as expenditure incurred for business purposes allowable u/s. 37(1) of the Act. Respectfully following the above decision, we decide Ground No.2 in favour of the assessee ." Respectfully following the above order, we allow the appeal of the assessee with regard to second ground." 10. It may be thus noted from the above that once a stock option is granted to and exercised by the employee of the assessee, then liability in that option was ascertained and the cost is allowable in the year in which stock options were granted. It is further noted that all the contentions raised by the AO in the assessment order have duly considered by the Tribunal while deciding this issue. It is further noted that no distinction has been brought before us by Ld DR on facts or law. Thus, respectfully following the order of the Tribunal, we decide this issue in favour of the assessee and allow ESOP expenses amounting to Rs.36,74,845. This ground may be treated as allowed. 11. Now, we shall take up the revenue's appeal in ITA No.7139/Mum/2014. 12. The solitary issue raised by the revenue in its appeal is with regard to action of the Ld. CIT(A) in allowi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the four corners of law. The relevant portion of the submissions made by the assessee before Ld. CIT(A) are reproduced hereunder: "Buyback is a legitimate transaction and has been undertaken by the Appellant in accordance with the provisions of Companies Act, 1956 ('Companies Act') is submitted that buyback is a legally recognized transaction and that it was Undertaken in accordance with the provisions of the Companies Act. Section 77A of the Companies Act is the specific section which contains the basic framework for companies to buy back its own securities (provisions of section 77A of the Act are enclosed as 'Annexure 7'). Section 77A provides various guidelines which the company needs to fulfil for doing a buyback of shares. In the instant case, the Board of Directors of the company took such decision and complied with all such conditions for affecting the buy back. It is submitted that decision of buy back is the prerogative of the company and the tax authorities cannot challenge such decision. The Appellant has filed various documents with the ROC as required by the provisions of the Companies Act. Copy of such documents was duly filed with the Ld. AO to jus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by a shareholder or a holder of other specified securities from any company on purchase of its own shares or other specified securities shall be, subject to provisions contained in section 48, deemed to be the capital gains." In view of above, it can be concluded that the current law does not deem (or empower the assessing officer to deem) the buyback of shares as declaration of dividend by the company purchasing its own shares. The express provision of the Act (i.e. section 2(22)(e) read with section 46A of the Act) leaves no discretion to the assessing officer to choose between the taxability as capital gain or treating it as dividend. It is well settled that tax implications of a valid transaction need to be determined as per provisions applicable to the transaction and that the taxpayer is entitled to plan his affairs in a manner which mitigates or controls his tax liability. If buy back is effected in terms of provisions of the Companies Act, the specific tax provisions as contained in Section 46A read with Section 2(22) of the Act are clearly attracted and the same cannot be treated as a deemed dividend. The transaction of buyback is subjected to levy of capital ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ragraph No.7.1 to 7.18 of Order bearing No. CIT(A)-4/IT-68/DCIT.3(2)/2012-13 dated 06.08.2013. The relevant paragraphs may be extracted as under:- 77.1. I have carefully and dispassionately considered the facts and circumstances of the case. The LAO has charged dividend tax @ 15% and corollary surcharge on the buyback of shares as deemed dividend. However, he has not made any addition, whatsoever, in the computation of total income on this account. There is no separate addition on account of treatment of buyback of shares and appellant's profit/income has not been increased by any amount, whatsoever, on account of buyback of the shares of the appellant company. The briefly stated facts are that the appellant is a wholly owned subsidiary of Korn/Ferry Investment India Limited, Mauritius ("Korn Ferry Mauritius"). During the year under consideration, the Appellant bought back 155,000 shares from Korn Ferry Mauritius at the rate of Rs.627/- per share in accordance with the share buyback scheme offer dated March 2, 2010. This resulted in capital gains of Rs.617 per share in the hands of Korn Ferry Mauritius after reducing the cost of acquisition of Rs.10/- per share. The total am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. It was also submitted that as per the prevailing law (i.e. as applicable for AY) income on buyback of shares is taxed in the hands of as capital gains under Section 46A of the Act. Section 46A was introduced by Finance Act, 1999. In the course of debate, the Finance Minister made the following assurance to the House: "Very recently, the Companies Act, 1956 has been amended to permit transactions relating to buyback of shares. There is some ambiguity in the interpretation of the law as to whether such transactions would be treated as subject to dividend tax in addition to capital gains tax. In view of this, I propose to amend the law to put it beyond doubt that on buyback of shares, the shareholders will not be subject to dividend tax, and would only be liable to capital gains tax." 7.5. The relevant extracts from the Explanatory notes are as under: 'The Act, therefore, has amended clause (22) of section 2 of the income- tax Act by inserting a new clause to provide that dividend does not include any payment made by a company on purchase of its own shares in accordance with the provisions contained in section 77A of the Companies Act, 1956. It has also inserted a n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii. Banyan and Berry vs. Commissioner of Income-tax iii. Vodafone International vs. UOI (341 ITR 1) iv. Walfort Share & Stock Brokers Pvt. Ltd. (Supra) 7.9. The LAR vociferously contended that the consideration paid by the Appellant towards buyback of shares cannot be terms as dividend and accordingly cannot be taxed under section 115-O of the Act. 7.10. In this connection, it may be noted that the Finance Act 2013 has introduced Section 115AQA of the Act whereby tax of 20% is proposed to be levied on distributed income on buyback of shares by an unlisted domestic company. Consequently, such income shall be exempt in the hands of the shareholder by virtue of newly inserted Section 10(34) of the Act. 7.11. These provisions are applicable with effect from June 1, 2013. As a result, buyback which is completed prior to June 1, 2013 would be regulated by previous law and legal position. Therefore, it was strongly contended that the remittance of buyback should not be subjected to DDT in absence of express provisions for the same. 7.12. The LAR added that recently introduced GAAR provisions are proposed to be implemented from April, 2016. In absence of such provisions, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er transaction" is not very clear (and inclusion of all possible transactions does not correspond to the basic intent behind introduction of TP regulations), the phrase "any other transaction" should take colour from the preceding clauses viz, purchase, sale or lease tangible or intangible property, or provision of services, or lending or borrowing money. Therefore, 'any other transaction' must be a transaction in the nature of transfer of goods or provision of services or in nature of lending or borrowing, which would impact the reportable profits/income of the taxpayer. In view of the above discussion, it is humbly submitted that the transaction of buyback of shares by the Appellant cannot be covered under the residual clause. Thus, the transactions which are otherwise not taxable as income and which have no bearing on the income or loss of the Appellant were never meant to be covered within the purview of the TP provisions as indicated by the express provisions of section 92(1) of the Act. 7.18. Having carefully and dispassionately considered the facts and circumstances of the case and in view of the aforesaid discussion, it is held that the remittance made by the appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sachs (India) Securities Pvt. Ltd (ITA/3726/Mum/2015, AY 2011- 12, dtd.12. 02. 2016), that the Tribunal had decided the issue in favour of the assessee. We find that the Tribunal had deliberated upon the issue and had decided as under: "The assessee is a wholly owned subsidiary of Goldman Sachs (Mauritius) LLC(GS-M). It was set up to undertake merchant banking and security business in India. Registered under the STPI scheme, it had set up a 100% export oriented unit in Bangalore to serve as a global support centre for the Goldman Sachs Group entities. On 24.11.2010, the assessee had remitted an amount Rs.1,88,99,97,781/- to GS-M under a buyback of shares scheme, whereby 4,03,93,199/- equity shares having face value of Rs.10 each were bought back from GS-M by the assessee @Rs.46.79/-per share. Taking into account the face value of Rs.10 per share, the AO in his order, passed u/s.201(1) and 201(1A) r.w.s. 195 of the Act, on 27.01.2014 held that the excess payment of Rs.36.79/-per equity share for 4,03,93,199 shares bought back amounting to Rs.1,48,60, 65,791/-was nothing but its distribution of its accumulated profits to its ultimate beneficiary and the only shareholder i.e.GS-M, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement or compulsion as a justification for the non-grant of dividend in the regular course, inspite of the continuous accumulation of profits in its books, that the AO had specifically required the assessee to explain the commercial reason, if any, for the non issue of dividend although the profits were being accumulated year after year, that it chose to remain silent on this show cause notice issued by the AO, that by permitting the profits to accumulate in its books it had avoided the payment of DDT that would have been payable if such accumulated profits had been distributed to its share-holders, that a portion of such accumulated profit was finally passed on to the sole shareholder on 24.11.2010 by way of payment on account of buy back of shares, that it had claimed the exemption available u/s.2(22)(iv) of the Act that excluded any payment made by a company on the purchase of its own shares from a shareholder in accordance with the provisions of section 77-A of the Companies Act,1956.The FAA further observed that the definition of dividend given in section 10(22) of the Act was an inclusive definition that sought to extend the scope of amounts chargeable to tax as deemed divide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee showed that its share-capital actually got reduced and was so reflected in the books after the buy-back of the shares, that buy-back of shares was one of the ways of capital reduction, that reliance by the AO on the provisions of section 2(22)(d) of the Act dealing with capital reduction, as including a transaction of buy-back of shares was justified, that the provisions of section 10(34) would apply only if DDT had been paid u/s.115-0 of the Act, that no DDT was paid by the assessee, that the recipient would not be entitled to any exemption u/s. 10(34) of the Act, that the receipt in its hands would be chargeable to income tax, that the treatment by the AO of the assessee as an A-I-D and the raising of demand u/s.201(1) and 201(1A) r.w.s. 195 of the Act was justified. Finally, he decided the issue against the assessee. 4.Before us, the Authorised Representative(AR)argued that the assessee had bought back the shares as per the resolution passed in the general meeting in the Board of Directors on 4.11.2010 (Pg 14 of PB), that the offer for buy back opened on 5.11.2010 and closed on 20.11.2010, that the shareholder tendered the shares on 23/.11.2010, that after t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tained in this clause shall apply in any case where-(A) the buy-back is or less than ten per cent of the total paid-up equity capital and free reserves of the company; and (B) such buy-back has been authorised by the board by means of a resolution passed at its meeting: Provided further that no offer of buy-back shall be made within a period of three hundred and sixty-five days reckoned from the date of the preceding offer of buy-back, if any. Explanation - For the purposes of this clause, the expression "offer of buy-back" means the offer of such buyback made in pursuance of the resolution of the board referred to in the first proviso ; (c) the buy-back is of less than twenty-five per cent of the total paid-up capital and free reserves of the company : Provided that the buy-back of equity shares in any financial year shall not exceed twenty-five per cent of its total paidup equity capital in that financial year ; (d) the ratio of the debt owed by the company is not more than twice the capital and its free reserves after such buyback : Provided that the Central Government may prescribe a higher ratio of the debt than that specified under this clause for a class or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esaid decision of this Court the objection of the Petitioner with regard to the locus of the Regional Director is untenable and deserves to be rejected. 6. The Petitioner has submitted that it is open to the Petitioner to follow either the procedure under section 77A/section 68 or the procedure under section 391 read with Sections 100 to 104 to effectuate the buyback of shares and there is no compulsion for the Petitioner to follow only the procedure prescribed by Section 77 A/Section 68. In any event, under Section 77 /Section 68 a company can buyback only 25% of the total paid up capital and free reserves of the company whereas under the Scheme the company proposes buyback of 30% of its paid up capital and free reserves, which is not possible under Section 77 /Section 68. Consequently the only manner in which the company can buy back the said shares is by following the procedure under Section 391 read with Sections 100 - 104 of the 1956 Act. In support of its contentions the Petitioner has relied upon the decision of the Division Bench of this Court in the case of SEBI V/s. Sterilite Industries (India) Limited. 7. The Division Bench of this Court in the case of Sterilite In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ell settled that the exclusion of the jurisdiction of the court should not readily be inferred, such exclusion should be explicitly or clearly implied. There is nothing in the language of section 77 that gives rise to such an inference. We are, therefore, inclined to hold that section 77 A is merely an enabling provision and the courts powers under sections 100 to 104 and section 391 are not in any way affected. The conditions provided in section 77A are applicable only to buy-back of shares under section 77A. The conditions applicable to sections 100 to 104 and section 391 cannot be imported into or made applicable to a buy-back under section 77A. Similarly the conditions for a buy-back under section 77A cannot be applied to a scheme under sections 100 to 104 and section 391. The two operate in independent fields". 4.However,it is necessary to note that the above was the position in law under the1956 Act in view of the language of the provisions of Section 391 and Section 77 A of that Act. In the 2013 Act Sub-section 10 of Section 230 provides as follows:- "10. No compromise or arrangement in respect of any buyback of securities under this section shall be sanctioned b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied securities" shall have the meaning assigned to it in Explanation to section 77A of the Companies Act, 1956 (1 of 1956)." The reasonable conclusions that can be drawn from the scrutiny of the above sections are that buy back of shares and reduction of share-capital are different concepts, that buyback of shares of a corporate entity cannot to be characterised as deemed dividend, that profit arising out of the buyback schemes had to taxed under the head capital gains. Here, it would be useful to take notice of the Speech of the Finance Minister while introducing the amendment to the Act with regard to the buyback of shares. Relevant part of the speech of the FM reads as follow: "95.Very recently, the Companies Act, 1956 has been amended to permit transactions relating to buy-back of shares. There is some ambiguity in the interpretation of the law as to whether such transactions would be treated as subject to dividend tax in addition to capital gains. In view of this, I propose to amend the law to put it beyond doubt that on buy-back of shares, the shareholders will not be subject to dividend tax, and would only be liable to capital gains tax." Central Board of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... There is no ambiguity about the provisions that would govern the buyback of shares. Section 2(22)(d)(iv) r.w.s.46A of the Act would be applicable to the buyback scheme. Accordingly, the transaction cannot be treated as deemed dividend. 5.2. Now, we would deal with the issue of treating the assessee as A-I-D for not deducting tax at source. Once it has been decided that the profit arising out of buyback would be taxed as capital gains the next step is to determine as to whether the capital gains are taxable in the hands of parent company of the assessee in light the Indo-Mauritius Tax Treaty. Article 13 of the said DTAA provides that capital gains would not be taxable in the hands of GS-M. If the assessee was not liable to deduct taxes as per the provisions of section 195 of the Act, it cannot be held A-I-D. For invoking the provisions of section 201 of the Act, non deduction of taxes at source is a pre-condition. We also find force in the alternate argument raised by the assessee. Even if the payment to GSM is considered as dividend u/s 2(22)(d) of the Act, then the taxes on the same have to be charged by way of DDT as per section 115-O of the Act. As per section 10(34) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the aforesaid circular of the RBI. The Regional Director has not disputed the fair market value of the shares so determined. In these circumstances it is clear that the buyback of shares under the Scheme is in accordance with the RBI Guidelines and that being so, there is no question of there being any draining away of foreign exchange. 8. In view of the above and particularly the fact that in law, the Petitioner is entitled to buy back its own shares by means of a scheme under Section 391 read with sections 100-104 of the 1956 Act, the scheme cannot be said to be a colorable device to evade income tax. It is a legally permissible procedure which the Petitioner is entitled to follow to buy back its shares." Following the above order, we hold that transaction in question would not fall under the category of colourable device. If an assessee enters into a deal which does not violate any provision of the Act of applicable to a particular AY, the deal cannot be termed a colourable device, if it result in non-payment or lesser payment of taxes in that year. The whole exercise should not lead to tax evasion. Non-payment of taxes by an assessee in given circumstances could be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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