TMI Blog2014 (11) TMI 729X X X X Extracts X X X X X X X X Extracts X X X X ..... hands of the Holding Company or any of the Subsidiary Companies, on the ground that they are the real owners, then the dividend income has to be taken in their account - This needs verification. Be it as it may, when the loan taken by the assessee is written off, the same cannot be treated as income of the assessee u/s 41(1) as the loan was taken on capital account – in Logitronics Pvt. Ltd. vs. CIT [2011 (2) TMI 12 - DELHI HIGH COURT] has laid down the principle that if a loan was taken for acquiring a capital asset, waiver thereof would not amount to any income exigible to tax - the liabilities written off cannot be brought to tax - The assessee is not claiming any deduction on the loss on sale of investments - The issue now boils down to dividend income and bank interest - As the facts are not clear, the issue of taxability of dividend and interest should be set aside to the file of the AO for fresh adjudication after verification – Decided in favour of assessee. - ITA No. 6595 /Del/2013, ITA No. 4856/Del/2014 - - - Dated:- 20-11-2014 - Shri H. S. Sidhu, JM And Shri J. Sudhakar Reddy, A.M.,JJ. For the Appellant : Shri Ajay Vohra, Sr.Adv. along with Shri Rohit Garg, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .1. Facts of the case: The assessee came into existence ;vide execution of Trust Deed dt. 16.11.2007 (copy of Trust Deed is enclosed as Annexure 2), whereby the objective of constituting the former was administration of the SAR scheme for the exclusive benefit of the employees of the companies implementing such scheme. The SAR scheme, in a nutshell, is mentioned hereunder Religare Enterprises Ltd. (REL) the holding company of the Religare group of companies, introduced the Religare Employee Stock Appreciation Right Scheme 2007 ( the Scheme ) to motivate, reward and retain its key employees and employees of the subsidiaries of REL. A copy of the scheme is attached as A-3. For the relevant AY the scheme was implemented by following companies of Religare group namely Religare Enterprises Ltd. Religare Macquarie Wealth Management Ltd. Religare Commodities Ltd. Religare Finvest Ltd. Religare Securities Ltd. The salient features of the scheme are summarised below. a. The purpose of the scheme was to reward and retain employees, to attract best talent and to provide motivation for best performance of the employees. b. Under the scheme each specified employe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies accordingly, the same has been shown as current liability in the books of Trust. Similarly the shares of REL purchased by the assessee from the loan so received were shown in the accounts of the assessee as an investment. Pursuant to the implementation of the Scheme, the employees of the companies that implemented the SAR Scheme exercised 171,122 SAR(s) during the subject A Y. The assessee sold the equal number of shares of REL on the stock exchanges and realized ₹ 65,740,677. In accordance' wittI the Trust Deed, the assessee repaid the said amount to the respective companies end to that extent the loan received from such companies and to that extent the loan received from such companies was adjusted. Since the total amount of loan received by the assessee from the respective companies in jrelation to 171,122 equity shares of REL was ₹ 86,209,552 and the sale proceeds on sale of 1,71,122 REL shares was ₹ 65,717,391, the assessee has written back the unadjusted balance amount of loan i.e. ₹ 20,492,161. Loans received for above shares Rs.86,209,552 Less: Sale proceeds of shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed within sections 30 to 36. The remaining sections enlist various categories of nondeductible expenditure. Sections 30 to 36 dealing with specific deductions do not deal with ESOP discount. The allowability of SAR discount would have to be examined under section 37 - the residuary section. To examine eligibility of SAR discount u/s. 37, the character of discount needs to be examined. If the discount is regarded as capital in nature, section 37 would prohibit its deduction. It is expenditure on revenue account that qualifies for deduction. From an accounting perspective SAR discount may be a revenue item but from an income-tax view point, whether such discount is capital or revenue in nature is the issue for consideration and of importance. In the absence of an express definition of capital or revenue expenditure in the Act, one may have to rely on the various judicial precedents on this matter; the rationale adopted and the interpretation adjudged therein. In the treatise The Law and Practice of Income Tax' by Kanga and Palkiwala, (9th edition - page 225) the learned authors observe - The problem of discriminating between capital receipts and income receipts, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es are items of capital receipt. When such premium is forgone, it cannot be claimed as an 'expenditure wholly and exclusively laid out or expended for the purposes of the trade'. 5.2 In the above mentioned judgement, my Ld. predecessor has relied on the judgement in the case of Ranbaxy Laboratories Ltd. 124 TT J 771 (Del), wherein Hon'ble Income Tax Appellate Tribunal Delhi has held that ESOP. discount is capital and it is not allowable/deductible business expenditure. As the issue is directly covered by the decision of Hon'ble Delhi High Court and Hon'ble Delhi Tribunal as mentioned above and I am in full agreement with my Ld. predecessor in this regard. As scheme remains the same and various other elements of the scheme are also same and it belongs to the same group. After putting my reliance on the judgement of Hon'ble Delhi Income Tax Appellate Tribunal in the case of Ranbaxy Laboratories Ltd. 124 TT J 771 (Del), grounds of appeal Nos. 1 to 4 deserves to be dismissed. 2.4. Aggrieved the assessee is before us on the following grounds. Grounds of appeal for AY 2009-10:- 1. That the CIT(A) erred on facts and in law in confirming the action of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant without prejudice by following his order passed in the appellant s own case for the AY 2009-10, wherein reliance was placed on order passed by his predecessor in case of one of the group companies, without appreciating that the issue involved in that case was allowability of the difference between purchase price of SAR and the sale price of such SAR at the time of exercise by the employee benefit expense u/s 37(1) of the Act. 3. That the CIT(A) erred on facts and in law in not appreciating that loan written back by the appellant to the credit of profit and loss account amounting to ₹ 16,689,459 was accepted by the AO as being in the nature of capital receipt and no addition in respect thereof was made in the assessment order. The appellant craves leave to add, alter, amend or vary the above grounds of appeal at or before the time of hearing. 3. Mr.Ajay Vohra, the Ld.Counsel for the assessee submits that the assessee is a pass through entity (hereinafter referred to as PTE) and has neither income nor loss and has been formed for the specific purpose by REL for implementation of SAR scheme for the benefit of the employees of the respective companies who were the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed liabilities written back, dividend and bank interest as income. Loss on sale of investments was claimed as expenditure. No doubt entries in the books of accounts do not determine the taxability or otherwise of a transaction, but at the same time the entries give a good indication as to the understanding of the management of the nature of the transactions. 7.1. The assessee claims that it is a pass through entity. This means that the parent company, has taken into account the income, expenditure and losses of the assessee Trust while computing its income. The assessee for the AY 2009-10 has disclosed dividend income of ₹ 397,654/- as well as interest income of ₹ 253/-. If the arguments of the assessee has to be accepted, then it has to be seen as to in which entitity s hands this income has been offered to tax. From the facts on record this is not clear. If the loss on sale of investments has been booked in the hands of the Holding Company or any of the Subsidiary Companies, on the ground that they are the real owners, then the dividend income has to be taken in their account. This needs verification. 7.2. Be it as it may, when the loan taken by the assessee is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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