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TMI Blog2014 (11) TMI 729X X X X Extracts X X X X X X X X Extracts X X X X ..... ich was on account of interest income arising during the year. The copy of computation of income for the relevant AY is enclosed as Annexure 1. The said return was selected for scrutiny assessment. The AO has passed an order u/s 143(3) of the Act dt. 22.12.2011 received by the assessee on 23.12.2011. As per the assessment order, the AO has assessed the total income of the assessee at Rs. 7,691,633 as under: Particulars Amount Rs Amount Rs. Net Profit as per P&L a/c 397,868 Add: Loss on sale of investments for separate consideration 20,492,300 Less: Dividend income exempt u/s 10(35) 397,654 Income under business and profession 20,492,514 Short term capital loss (-) 12,800,881 Net income 7,691,633 2. Our submissions: Ground of appeal no.3: That on facts and circumstances of the case and in law, the AO failed to appreciate that under the Stock Appreciation Right Scheme (SAR scheme) the assessee was not envisaged to make any profit/losses in respect of the purchase and sale of shares, pursuant to exercise of SAR by the employees of the companies which had implemented the SAR scheme and, therefore, no income/loss on account of such transactions could be assessed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are Securities Ltd. Rs. 218,072,986 Religare Enterprises Ltd Rs.5,163,070 Religare Finvest Ltd. Rs.27,688,609 Total: Rs. 268,446,678 On vesting and exercise of the SAR by the Accounting of the transactions in the books of Trust Since, the assessee was to administer the scheme, for which it was required to purchase the shares of REL, it was necessary that adequate amounts were advanced by the respective companies to the assessee enable such-purchase. Further, it was obligatory on the part of the assessee to repay / refund the money advanced by the companies to it pursuant to sale of REL shares on exercise of SARs by the employees of the respective companies. Thus, for the assessee it was a liability to be repaid to the companies. Therefore, the advance received by the assessee from the respective companies which had implemented the Scheme, for the purchase of shares of REL from the stock exchange for the administration of the SAR Scheme, was a loan / advance repayable to these 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under:- "5.7 Why SAR discount is capital in nature (not allowable)? Claim of SAR discount as a deduction is to be examined under the head "Profits and gains of business or profession". This head of income is housed in sections 28 to 44 DB. Under section 28(i) the profits and gains of any business or profession carried on by the assessee at any time during the previous year is chargeable to tax. As per section 29, the income referred to in section 28 should be computed in accordance with the provisions contained in sections 30 to 43D. Sections 30 to 36 confer specific deductions. Section 37 deals with expenditure which is general in nature and not covered 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 ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company. The company does not suffer any pecuniary detriment. To claim a charge against income, it should inflict a detriment to the financial position. ESOP is a voluntary scheme launched by the employers to issue shares to employees. The intention is to only give a 'stake' to the employees in the organization. This discount is not incurred towards satisfaction of any trade liability as the employees have not given up anything to procure such ESOP. The discount was not a payment of sum contractually due to the employees and cannot be said to have been laid out for the purpose of business. Share premiums obtained on issue of shares 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 H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppreciation Right Scheme (SAR scheme) the appellant was not envisaged to make any profit/loss on purchase and sale of equity shares of REL. 2. That on the facts and circumstances of the case and in law, the AO erred in adding the above loss on sale of investment to be returned income of the appellant thereby resulting in double addition inasmuch as such loss was suo moto added back by the appellant in the computation of income. Without prejudice: 2. That on facts and circumstances of the case and in law, the CIT(A) erred in erroneously adjudicating grounds of appeal nos. 4 to 7 raised by the appellant 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces the arguments of the assessee, which are contrary to the financial statements, should not be accepted. He relied on the order of the Ld.CIT(A). 5. Shri Ajay Vohra, the Ld.Counsel for the assessee in reply submitted that the entries in the books of accounts do not determine the taxability or otherwise of a transaction. 6. On a careful consideration of the facts and circumstances of the case, on perusal of orders of lower authorities, material on record and case laws cited, we hold as follows. 7. In the audited financial statements the Trustees of the assessee have recognised 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 div ..... X X X X Extracts X X X X X X X X Extracts X X X X
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