TMI Blog2009 (6) TMI 126X X X X Extracts X X X X X X X X Extracts X X X X ..... such preliminary expenses under the provision of s. 35D. This ground of the assessee is dismissed. Deduction u/s 37 - shares granted under Employees Stock Option Scheme (ESOP) - shares at below market price - assessee treated the difference between as employees compensation in the books of accounts and charged the same to the P L a/c - charge to P L a/c, deferred over the vesting period which is 5yrs - Pro rata amount of such amount was charged as deferred employees compensation, and claimed as expenses - AO held that the claim is made only on the basis of SEBI guidelines but the deduction is not permissible under the IT Act unless a liability has either been paid or arisen during the year. Therefore, the claim is not allowable as such - CIT(A) held that the liability will be a certain liability only when the employees exercise their option by making payment of the offer price and get their share. He accordingly directed the AO to allow deduction in the year in which the option is exercised and allow deduction accordingly. HELD THAT:- Here we find that by issuing shares at lesser than market price, the assessee cannot be said to have incurred any expenditure rather it amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of the lease transaction as finance transaction was upheld by the ITAT in the case of CRL in AY 1996-97. CIT(A) has deleted that protective addition. HELD THAT:- This issue is covered in favour of assessee by the order of the Tribunal for AY 1997-98 in case of Jt. CIT vs. Ranbaxy Laboratories Ltd.[ 2008 (3) TMI 694 - ITAT DELHI] held that AO was not justified in making addition on protective basis as has been done by him. On the other hand, the approach of CIT(A) is fully justified that only interest component of the lease rental can be brought to tax and not the portion of the principal amount. only present year are similar except difference in figure. Hence, issues are similar except difference in figure. we decline to interfere in the order of CIT(A) on this ground and this ground of Revenue is dismissed Deduction u/s. 37 r/w ss. 28 and 29 - Quantified and Crystallized demand - show cause that why overcharged price in respect of drug known as Pantojosign Injection should not be recovered - submitted reply denying its liability for payment of such amount - demand against assessee was raised payable along with interest @ 15 per cent - AO disallowed the claim of as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and by directing the AO to allow the same only in the year in which the shares are allotted to employees upon exercise of the option." Grounds of appeal in ITA No. 2613/Del/2004: "On the facts and in the circumstances of the case, the learned CIT(A) has erred in: (1) Deleting the addition of Rs. 33,00,782 in respect of lease rental on lease transaction with Rajasthan State Electricity Board. (2) Deleting the disallowance of Rs. 4,94,69,267 made by the AO under s. 43B(b) on account of provision for pension. (3) Directing the AO to in elude duty drawback of Rs. 16,915 in the profit for working out deduction under s. 80-IB. (4) Directing to verify the details of shares allotted during the year under ESOP scheme and allow deduction accordingly with reference to deduction of Rs. 30,89,839 on account of deferred employee compensation. (5, 6 and 7) directing to exclude excise duty of Rs. 7,65,47,346, taxes recovered of Rs. 2,84,19,115, discount on sale of Rs. 2,21,09,218, commission on sale of Rs. 22,02,51,315 and miscellaneous income of Rs. 1,56,89,670 from the total turnover while working out deduction under s. 80HHC. (8) deleting the addition of Rs. 20 lacs on accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... motorcars and other assets provided in accordance with the companies employment policy to the R D employees. (9) Directing that while computing book profit under s. 115JB, the book profit should be reduced by the amount of profit eligible for deduction under s. 80HHC and 80HHC should be computed by excluding the miscellaneous income, excise duty and other taxes etc. from the total turnover. (10) Directing to allow deduction of Rs. 2,59,76,070 on account of demand raised by National Pharmaceutical Pricing Authority (NPPA)." 2. These appeals were argued on the basis of charts submitted by learned Authorised Representative with respect to all the appeals. Many of the issues are common and covered by the earlier orders of the Tribunal. In this manner this appeal was heard and appeals are decided as under. ITA No. 1855/Del/2004: 3. Ground No. 1: There is no discussion regarding this ground in the assessment order. Learned CIT(A) has discussed this issue in para 11 of the impugned order. The claim of assessee is regarding fee paid to RoC of Rs. 24,30,000 for increasing the authorized share capital under s. 35D of the IT Act, 1961 (Act). It was submitted by the assessee befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound No. 4 in appeal by the Revenue are against disallowance of deduction on account of shares of the company granted under Employees Stock Option Scheme (ESOP). During the year the assessee granted stock option of 3,32,250 shares to its employees. The shares were to be issued at Rs. 595 per share as against face value of Rs. 10 per share. The relevant market price on the date of grant was Rs. 738.95 per share. The assessee treated the difference between Rs. 738.95 and Rs. 595 as employees compensation in the books of accounts and charged the same to the P L a/c. The charge to P L a/c was deferred over the vesting period which is 5 years. Thus pro rata amount of such amount was charged as deferred employees compensation, and claimed as expenses. Before the AO it was contended that the shares are issued under ESOP scheme in accordance with SEBI guidelines. As per guidelines issued by SEBI the amount of option premium has to be treated as employees compensation in the books and to be charged to P L a/c over the vesting period. The assessee submitted ESOP scheme. It was contended that any amenity, benefit or perquisite allowed to an employee is taxable as perquisite under s. 17(2) i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compensation can be estimated with reasonable certainty, following the mercantile system of accounting as regularly followed by the assessee, a liability towards the said compensation has definitely arisen during the year and is allowable deduction as has been similarly held in the following cases: (i) Calcutta Co. Ltd. vs. CIT (1959) 37 ITR 1 (SC); (ii) Metal Box Company of India Ltd. vs. Their Workmen; and (iii) Bharat Earth Movers vs. CIT. - The CIT(A) appears to have been influenced by the fact that the employee may not at a subsequent date, exercise the option and hence came to the conclusion that liability would crystallize as and when options are exercised by the employees at a future date. The CIT(A), however, failed to appreciate that the crystallization of liability has to be seen from the point of view of the company. The fact that at a subsequent date the employees may not exercise their option would only have the effect of remission/cessation of the liability at a future date. The CIT(A), therefore, erred in holding that the liability would crystallize as and when options are exercised by the employees. - It may be appreciated that similar situation arises i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he employees are not considered as their income. Hence in view of the fact that merely stock options were granted and the loss if any, is towards lesser realization of share premium, the assessee has not incurred any expenditure and hence no part thereof is allowable. 7.3 We have considered relevant facts, arguments advanced and the case laws cited. The undisputed fact remains that the assessee granted stock option to its employees for 3,32,250 shares on 3rd Dec., 2001 at Rs. 595 per share. The prevailing market price on that date was Rs. 738.95 per share. As per ESOP scheme of the company, shares at 20 per cent per annum of the total option granted to the vest on the expiry of one year from the date of grant of option. In other words, after completion of one year from the date of grant of option, an employee would be entitled to exercise the option for allotment of shares at 20 per cent per annum by making an application in writing and tendering the offer price in cash. However, during the year the assessee has merely granted option but the same were not exercised by making payment thereof. 7.4 The assessee was to issue shares of face value of Rs. 10 by receiving a sum of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is made under s. 37 of the Act. What is allowable under s. 37 is any expenditure not being expenditure of the nature described in ss. 30 to 36 and not being in the nature of capital expenditure or personal expenditure of the assessee. Such expenditure should be wholly and exclusively for the purpose of business. Thus, the prerequisite is that the assessee should have incurred an expenditure. The word "expenditure" is not defined under the Act. Hon'ble Supreme Court in the case of Indian Molasses Co. Ltd. vs. CIT (1959) 37 ITR 66 (SC) held that expenditure is equal to 'expense' and 'expense' is money laid out by calculation and intention though in many uses of the word this element may not be present. as when one speaks of a joke at another's expense. But the idea of 'spending' in the sense of 'paying out or away' money is the primary meaning which is relevant. 'Expenditure' is thus, what is 'paid out or away' and is something which has gone irretrievably. 7.6 Once again Hon'ble Supreme Court in the case of CIT vs. Nainital Bank Ltd. (1966) 62 ITR 638 (SC) held that in its 'normal meaning, the expression 'expenditure' denotes 'spending' or 'paying out or away', i.e., something tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not expenditure, proceeds on the view that the decision in Usher's Wiltshire Brewery Ltd. vs. Bruce 6 Tax Cases 399 which was a special case, cannot be regarded as laying down any broad rule of general application. The second ground of the decision, viz., that the issue of shares by a company is not a trading transaction at all, distinguishes this case from Usher where the acquisition and letting of licensed premises was in the ordinary course of trade. 7.9 Applying the aforesaid decisions of Hon'ble Supreme Court as also the House of Lords in the case of Lowry (Inspector of Taxes) vs. Consolidated African Selection Trust Ltd., since the assessee had not incurred any expenditure but has merely received lesser amount of share premium, the same does not amount to expenditure within the meaning of s. 37 of the Act. Therefore, the claim of assessee is not allowable. 7.10 The claim of the assessee is based on the entry made in the books of account which in term is made on the recommendation of the SEBI. It is by now settled law that entry or absence thereof in books of account is not conclusive either for treating the amount as income or allowability or otherwise of the expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircumstances, the Hon'ble Supreme Court held that amount to be expended could be debited in accounts maintained in mercantile system of accounting before it was actually disbursed. Since the liability accrued and was estimated with reasonable certainty, discharging the same at future date is allowable. 7.12 In the case of Metal Box Company of India Ltd. vs. Their Workmen the company was considering the liability incurred towards payment of gratuity for purpose of computing profit under Payment of Bonus Act. Though such gratuity liabilities were payable at a future date but since the liabilities were pertaining to the year and to be discharged at a future date, were held to be reducing the profit for purpose of computing surplus under the Payment of Bonus Act. 7.13 In the case of Bharat Earth Movers vs. CIT, the Hon'ble Supreme Court applying the decision in the case of Calcutta Co. Ltd. and Metal Box Company of India Ltd. held that amount set apart to meet liability on account of leave encashment of employees is not a contingent liability but an accrued liability though such liability is to be discharged at a future date. 7.14 However, in all the three above referred Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equity shares in the new company, the amount attributable to technical know-how was not revenue expenditure under s. 37 of the Act. However, it was treated to be of capital nature. It is clearly borne out from the various orders that the assessee was a new company. That being the position, the Tribunal was not justified in holding that the expenditure in question was revenue in character." 7.16 The decision of Tribunal, Chennai in the case of S.S.I. Ltd. relied upon by the learned counsel for the assessee is also distinguishable on facts. In the said case the assessee claimed similar expenditure which was allowed by the AO. The learned CIT in his revision jurisdiction under s. 263 held such expenditure as notional and contingent in nature. The Tribunal held that in view of SEBI guidelines which the assessee was required to follow, such expenditure are in the nature of ascertained liability and not contingent liability upon happening of certain events. Hence, it was held that the order was not erroneous so as to be validly revised under s. 263 of the Act. However, the Tribunal in the said case has not answered the issue whether the loss is notional in nature or not. The Tribunal h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal in assessee's own case and, therefore, the learned CIT(A) has rightly decided this issue. 10. On the other hand, learned Departmental Representative relied on the order of AO. 11. We have carefully considered the rival submissions in the light of material placed before us. The facts and circumstances of the case as it found for asst. yr. 1997-98 and present year are similar except difference in figure. For the sake of clarity relevant portion of the order of Tribunal vide which this issue was first decided i.e., for asst. yr. 1997-98 vide aforementioned order dt. 31st March, 2008 is reproduced hereunder: "13. Ground No.5 : This ground is as under: 'On the facts and in the circumstances of the case, the learned CIT(A) has erred: in directing to exclude the amount of Rs. 61,95,562 from the income of the assessee on account of amount received towards principal from RSEB.' 13.1 During the financial year relevant to asst. yr. 1996-97 the erstwhile M/s Crosslands Research Laboratories Ltd. (since merged into assessee) leased plant and machinery amounting to Rs. 15.5 crores to Rajasthan State Electricity Board, Jaipur (RSEB) on which lease rent of Rs. 80,25,600 was received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brought to tax and not the portion of the principal amount. Accordingly, we uphold the order of the learned CIT(A) on the issue in question and reject ground No. 5 taken by the Revenue." 12. In this view of the situation, respectfully following the aforementioned order, we decline to interfere in the order of CIT(A) on this ground and this ground of Revenue is dismissed. Ground No. : 13. A new pension scheme was introduced by the assessee w.e.f. 1st Nov., 1997. According to the said scheme pension was payable to managerial employees who were to retire/resign after completing 10/20 years of service respectively so as to bring the total pension payable to 2.25 per cent of basic salary for every complete year of service. The assessee estimated liability towards that pension fund for the year under consideration at Rs. 4,94,69,267 which was claimed as deductible expenses. The AO though accepted that the above liability was computed on actuarial basis but held that absence of contribution of pension amount to any pension trust, the expenditure was not allowable deduction in the light of provisions of s. 43B(b) of the Act and thus, disallowance was made. The CIT(A) has allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interfere in the findings of learned CIT(A) on this issue and this ground of Revenue is dismissed. Ground No. 3: 18. While computing eligible profit for the purpose of deduction under s. 80-IB in respect of eligible units, the AO reduced a sum of Rs. 16,915 received by the assessee as duty drawback. The said adjustment has been deleted by CIT(A). It is the case of assessee that such order of CIT(A) is in accordance with the decision of Hon'ble Delhi High Court in the case of CIT vs. Eltek SGS (P) Lid. (2008) 215 CTR (Del) 279 : (2008) 3 DTR (Del) 241 : (2008) 300 ITR 6 (Del) and also by the aforementioned decision of Tribunal dt. 31st Dec., 2008 for asst. yr. 1999-2000 and also by the decision of Hon'ble Delhi High Court in assessee's own case for asst. yrs. 1996-97 and 1997-98. Copy of Hon'ble High Court order is placed at pp. 286 and 287 of the paper book which is dt. 11th Dec., 2008 in IT Appeal No. 682 of 2007, wherein their Lordships have decided the issue in favour of assessee following their decision in the case of CIT vs. Dharam Pal Prem Chand Ltd. in IT Appeal No. 1441 of 2006 decided on 27th Nov., 2008 [reported at (2009) 221 CTR (Del) 133 : (2008) 16 DTR (Del) 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 (SC) and also CIT vs. Catapharma (India) (P) Ltd. (2007) 211 CTR (SC) 83 : (2007) 292 ITR 641 (SC). Further reliance was also placed on the decision of the Tribunal in assessee's own case for asst. yr. 1996-97. The learned Departmental Representative was also heard in the matter and we have gone through the records. In our view the numerator and the denominator or a formula must be alike. When the above receipts are not included in the denominator, the same can be included in the numerator. In the light of the decisions of the Hon'ble Supreme Court, cited above, which are on these lines, the order of the CIT(A) is upheld." 27. In view of above position respectfully following the aforementioned order of the Tribunal in assessee's own case, we decline to interfere and these grounds of Revenue are dismissed. Ground No. 8: 28. During the year under consideration, the assessee contributed a sum of Rs. 20 lacs to Ranbaxy Community Health Care Society, on which deduction @ 50 per cent of contribution was claimed under s. 80G of the Act. However, in note No. 4, 100 per cent deduction was claimed as revenue expenditure as according to assessee this deduction was allowable eithe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , convene, conduct, hold and participate in conferences, seminars, workshops and exhibitions, etc. On going through the material placed in the paper book and on examining various activities carried out by the society and the foundation, it is found that these activities are closely linked with the business activities of the assessee company. It appears that the assessee company is the main source behind these two institutions, which have been created for promotion of its own business and for the larger objective to promote research work and for updating the knowledge in the field of medical science. The assessee company, therefore, is directly concerned with the activities of these two organizations, although the organizations have a separate entity of their own. It is true that these organizations have been exempted under s. 11 or under s. 80G but the fact remains that the assessee company is incurring heavy expenditure in maintaining these institutions for its own business purposes and is being directly benefited by their activities. The provisions made by the assessee company cannot be said merely for carrying out philanthropic objects, rather the contributions are directly aime ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pulsion on the assessee to make contribution but still the contribution was made in pursuance of a scheme which was evolved by the Rice Millers' Association in consultation with the District Collector and therefore the deduction was allowable under s. 37(1) of the Act. The Tribunal also held that such contribution could not be held to be opposed to public policy. The Department filed reference application under s. 256. The Hon'ble High Court answered the questions referred in favour of the assessee. The Hon'ble High Court, however, disallowed deduction by coming to the conclusion that the payment of this amount was opposed to public policy. The Hon'ble Supreme Court, after making reference to various decisions, allowed the claim of the assessee by observing as under: 'From the aforesaid discussion it follows that any contribution made by an assessee to a public welfare fund which is directly connected or related with the carrying on of the assessee's business or which results in benefit to the assessee's business has to be regarded as an allowable deduction under s. 37(1) of the Act. Such a donation, whether voluntary or at the instance of the authorities concerned, when made to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aesenti, as opposed to a contingent liability of the future. (iii) That the reasons given by the Tribunal for rejecting the claim of the assessee were not sound. Moreover, since the Tribunal had not recorded a finding as to whether the donation made by the assessee to the trust could be considered as 'expenditure', the matter had to be remanded to the Tribunal for decision afresh in the light of the observations contained in the judgment.' 6.12 In the case of Mahindra Mahindra Ltd. vs. CIT (2003) 182 CTR (Bom) 34 : (2003) 261 ITR 501 (Bom), the Hon'ble Bombay High Court allowed deduction of expenditure incurred by the assessee in making initial contribution to the approved superannuation fund to an educational society, which was running a school for children of employees, as business expenditure under s. 37. It was held that the amount should be allowed as business expenditure because it was incurred predominantly for staff welfare. 6.13 The decision in the case of Mahindra Mahindra Ltd. was further followed by the Hon'ble Bombay High Court in the case of CIT vs. Mahindra Mahindra Ltd. (2006) 200 CTR (Bom) 28 : (2006) 284 ITR 679 (Bom). 6.14 In the case of CIT vs. Che ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utually exclusive. Thus, there are overlapping areas between the donations given by the assessee and the business expenditure incurred by the assessee. In other words, there can be certain amounts, though in the nature of donations, and nonetheless, these amounts may be deductible under s. 37(1) as well. Therefore, merely because the expenditure in question was in the nature of donation, or, as per the words of the CIT(A), 'prompted by altruistic motives', it did not cease to be an expenditure deductible under s. 37(1). In the case of Mysore Kirloskar Ltd., the High Court had observed that even if the contribution by the assessee is in the form of donations, but if it could be termed as expenditure of the category falling in s. 37(1), then the right of the assessee to claim the whole of it as a deduction under s. 37(1) cannot be declined. What is material in this context is whether the expenditure in question was necessitated by business considerations or not. Once it is found that the expenditure was dictated by commercial expediencies, the deduction under s. 37(1) cannot be declined.In the instant case, the expenditure on 20-point programme was incurred in view of specific direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital expenditure on assets provided to the employees working at such approved R D facilities aggregating to Rs. 1,32,64,258 were considered for 100 per cent deduction under s. 35(2)(ia). In note No. 10 filed along with return weighted deduction @ 150 per cent was claimed thereby additional 50 per cent was claimed which was disallowed by the AO and allowed by CIT(A). Department is aggrieved, hence in appeal. 34. Learned Departmental Representative relied on the order of AO. 35. On the other hand, it was submitted by learned Authorised Representative that this issue is covered in favour of assessee by the aforementioned decision of Tribunal dt. 31st Dec., 2008 for asst. yr. 1999-2000, the copy of which is placed at pp. 267 to 285 of the paper book and this issue is discussed in paras 9 and 12. Thus, it was pleaded that order of CIT(A) should be upheld. 36. We have carefully considered the rival submissions. We found that this issue is covered by aforementioned decision of Tribunal for asst. yr. 1999-2000 in assessee's own case. The relevant portion of order is reproduced below: "The next dispute in assessee's appeal for asst. yr. 1999-2900 relates to the claim of weighted d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he contention of learned Authorised Representative that in this ground Revenue has merely challenged that the directions of learned CIT(A) to recompute deduction allowable under s. 80HHC of the Act in view of relief allowed in earlier grounds and thus, it was pointed out that this ground of appeal is merely consequential to the decision in other grounds. 38. We find that the amount of deduction allowable under s. 80HHC disallowed was an issue in computation of income under the regular provision of the Act. The learned CIT(A) has considered the effect of various adjustments made by the AO in computing deduction under s. 80HHC of the Act. Therefore, even for the purpose of computing book profit deduction allowable under s. 80HHC to be reduced from book profit was also required to be reworked. Hence the direction of the learned CIT(A) does not call for any interference. 38.1 In the result, the appeal for the assessee for asst. yr. 2002-03 is dismissed and that of the Revenue is partly allowed. ITA No. 3387/Del/2004: 39. Ground No. 1: It is similar to ground no. 1 of assessee's appeal in ITA No. 1855/Del/2004. The said ground of assessee has been dismissed. Accordingly this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. 3rd June, 2002 denying its liability for payment of such amount, copy of which is placed at pp. 216 to 218 of the paper book. However, vide letter dt. 13th Feb., 2003, demand against assessee was raised for a sum of Rs. 2,59,76,070 which was payable along with interest @ 15 per cent under s. 7A Essential Commodities Act, 1955 latest by 28th Feb., 2003. The assessee filed a writ petition to Hon'ble High Court and Vide order dt. 28th Feb., 2003, the assessee was required to deposit a sum of Rs. 1 crore within a week from the date of the order and balance demand was stayed, copy of said order is placed at pp. 220 to 221 of the paper book. Accordingly, a payment of Rs. 1 crore was made vide City Bank cheque, a copy of which is placed at p. 222 of the paper book. The assessee claimed the said amount of Rs. 2,59,76,070 on account of demand raised by NPPA. The claim of assessee has been disallowed by the AO as per para 5.8. The AO observed that the said claim of the assessee could not be allowed for the reason that assessee company has not accepted the said demand as a liability as appeal has been filed before Hon'ble Delhi High Court. Thus, according to AO assessee could not establish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - CIT vs. Ganga Glass Works (P) Ltd. (2005) 276 ITR 394 (All); - CIT vs. Appollo Textiles Agency (2005) 142 Taxman 396 (All). 51. We have carefully considered the rival submissions in the light of material placed before us. It is not disputed that demand was raised against the assessee by NPPA. The said demand was also enforced but assessee approached Hon'ble High Court and part payment was also made during the year to fulfill the directions of Hon'ble High Court. Thus, the demand had not only arisen during the year but it was a quantified and crystallized demand enforceable in law. Thus, it was a statutory liability which was to be paid by the assessee within the stipulated time saved if otherwise directed by higher Court. Disputing the payment of liability by way of an appeal does not make disentitle the assessee to claim that demand as an expenditure as what is sought by the assessee who is disputing the liability is a relief from higher Court. Suppose if higher Court gives some relief to the assessee and deduction is already granted to the assessee in a particular year, s. 41(1) is there to take care of the relief got by the assessee by way of an appellate order. Thus, th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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