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HDFC Bank Limited Versus Dy. CIT 2 (3) , Aaykar Bhavan, Mumbai

2015 (9) TMI 1303 - ITAT MUMBAI

Disallowance u/s.14A r/w rule 8D - Held that:- As regards the claim of adequacy of capital or interest-free funds (held in current deposit accounts), we have already clarified of there being no finding of fact qua the specific source/s of financing, even as the Hon’ble Court has in Godrej & Boyce (2010 (8) TMI 77 - BOMBAY HIGH COURT) clarified that even the fact that the assessee has utilized its own funds in making the investments would not be dispositive of the question as to whether the asses .....

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has been made out of common pool of funds. Funds in the business, it may be appreciated, are always in a state of flux, so that the proximate or the immediate source of funds may not and, in any case, not generally, reflect the real or the effective source. The same can be assessed on the basis of a fund flow statement (for the period) coupled with the legal obligations incident, if any. As an example, where a business assumes working capital advance from bank, maintaining net current assets at .....

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ssets being of the business, it is only the funds of the business as a whole, save dedicated funds, that can be said to finance its activities. Accordingly, we uphold the application of section 14A r/w rule 8D in the facts and circumstances of the case, dismissing the assessee’s Gd. # I. - Decided against assessee.

Disallowance of the amortized Employee Stock Options Plan (ESOP) expenses - Held that:- We direct the allowance of the discount on the shares issued to the employees, as he .....

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56.34 lac) other than ESOP shares (340.97 lac) have been issued during the year. As such, no disallowance of ESOP expenses, i.e., the expenditure under reference, is called for - Held that:- We are unable to understand the purport of the argument in-as-much as the ESOP expenses are only in relation to ESOP shares, i.e., shares issued to the employees under an optional scheme designed to benefit them. It is a share issue nevertheless, and the expenses thereon, share issue expenses all the same. T .....

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an expense and, in any case, as a revenue expenditure. The said Ground, which is in the nature of an alternate ground and/or argument, not pressed separately before us, stands, accordingly, dismissed as not pressed. - Decided against assessee. - I.T.A. No. 374/Mum/2012 - Dated:- 23-9-2015 - SHRI D. MANMOHAN, VP AND SHRI SANJAY ARORA, AM For The Appellant : Shri Yogesh Thar For The Respondent by : Shri S. D. Srivastava ORDER Per Sanjay Arora, A. M.: This is an Appeal by the Assessee directed agai .....

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ules, 1962 ( the Rules hereinafter). Section 14A of the Act being a non obstante provision, with rule 8D being mandatory, even as clarified by the Hon'ble jurisdictional High Court in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81 (Bom), the reason for the controversy, as gathered from the reading of the assessment and the appellate order, is the assessee s contention of its tax-free investments, i.e., investments yielding tax-free income, being funded by the assessee s own ca .....

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that it had sufficient balance in the current deposit account/s, on which no interest is suffered, and which can or must therefore be considered as applied toward tax-free investments, i.e., yielding or liable to yield income which does not form part of the total income and, thus, not taxable. Further, the said investments include securities which are eligible for being considered as stock-in-trade of the assessee s business, acquired in the regular course of its business, so that it would not .....

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argument as to the relevant securities representing the stock-in-trade of its business, stands advanced by the assessee before the Tribunal for the first time. The decision in the case of India Advantage Securities Ltd. (supra) upholds, in effect, the disallowance u/s.14A by estimating the same at 10% of the dividend income, i.e., as confirmed by the tribunal and, further, clarifies the issue raised before it as not raising any substantial question of law. The ld. Authorized Representative (AR) .....

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ecision in the case of D. H. Securities (P) Ltd. vs. DCIT [2014] 146 ITD 1 (Mum) (TM). 4. We have heard the parties, and perused the material on record. Preliminary 4.1 At the outset, we may clarify that the assessee s contention of the relevant securities as representing it s stock-in-trade, stands raised for the first time, i.e., before the tribunal. As regards the availability of adequate interest-free funds in the form of current deposit monies, does it mean that the assessee thereby conveni .....

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t interest free funds (capital) with it. As regards the second contention qua the securities representing trading assets, the same shall require being examined on merits only if the assessee had adduced any material to evidence its claim, accompanied by a petition for admission of additional evidence, which is absent. This is as the plea could be entertained only on the basis of a finding of the relevant investments as representing the assessee s stock-in-trade. We may nevertheless discuss both .....

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as well as get generated through and in the course of its business, and together go to form a common pool of funds, to be applied - on need basis, for the purpose of its business by the assessee-bank from time to time. To therefore appropriate a particular liability (or class of liabilities) toward a particular asset (or class of assets) would, therefore, be wholly incorrect, without factual basis and, rather, inconsistent with the manner in which the funds are normally accessed, generated and .....

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he capital (as Tier I capital) is required to be invested, to a particular extent, in specified securities. However, where the legal requirement is only toward maintaining liquid assets (say) at a prescribed percentage of the capital or liabilities, it would only imply that the funds of the business are invested in a composite manner. The specification with reference to capital (and/or liabilities) is only to work out the quantum of such investment. In fact, even in the former case, i.e., where .....

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re us, which, as it appears, is guided solely by the motive to avoid the incidence of section 14A. Continuing further, the decision in the case of Indian Bank Ltd. (supra) is prior to co-option of s. 14A on the statute, and would thus not apply. The apex court in that case held that it was impermissible under the scheme of the Act for the assessing authority to look behind the expenditure and to determine as to whether it had the quality of producing taxable income. The said decision, among othe .....

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(supra) covers the case at hand on all fours. Per the said decision, the Hon'ble jurisdictional High Court explains the genesis of section 14A, also expounding on its scope, clarifying that the basic principle of taxation is that it is only the net income, i.e., gross income less expenditure, which is taxable. The said principle, i.e., of only the net (and not gross) income (from any source or activity) as being liable to tax is axiomatic in tax jurisprudence and that, therefore, section 14A .....

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able and the tax-exempt income/s. Referring to Walfort Share and Stock Brokers P. Ltd. (supra), it was held that the theory of apportionment of expenditure between the taxable and non-taxable income has, in principle, been now widened under section 14A. Again, the apportionment of expenditure and, therefore, the expenditure that would be subject to disallowance, it stands explained, is not restricted to any particular expenditure, so that any expenditure falling u/ss.15 to 59, where incurred in .....

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sdictional High Court in Godrej & Boyce (supra), and for which reference may be made to pgs. 135 to 136 (paras 84-86) of the Reports. It was clarified by it that the said decision was rendered on a finding of fact by the tribunal that there were sufficient interest-free funds available (para 86). The decision in HDFC Bank Ltd. (supra) is again rendered on the basis of the facts of the case as being covered by the judgment in Reliance Utilities and Power Ltd. (supra) (refer pg. 522/para 5 of .....

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facts of that case, even as explained by its counsel in HDFC Bank Ltd. (supra), the company was able to show that the investments with reference to which the disallowance u/s.36(1)(iii) was sought to be made by the Revenue were strategic investments in two companies of the same group, out of self generated funds. The utilization of borrowed capital of ₹ 43.62 crores, raised by way of issue of debentures, was shown as utilized toward capital expenditure and inter-corporate deposits, both y .....

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ad utilized its own funds for making investment which had resulted in income not forming part of the total income under the Act, the expenditure which is incurred in earning the income would have to be disallowed (refer pg. 135, para 85 of the Reports). The matter stands duly discussed, reproducing the relevant part of the said decision, i.e., in Godrej & Boyce (supra), both in D. H. Securities (P) Ltd. (supra) (at pg. 7 of the Reports) and Damani Estates & Finance (P.) Ltd. (infra) (at .....

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ing Godrej & Boyce (supra), uphold the invocation of rule 8D. We may clarify that we are conscious that the decision by the Hon'ble jurisdictional High Court is binding on us, so that the issue before us reduces to ascertaining as to which of the two decisions by the Hon'ble jurisdictional High Court, i.e., in the case of Godrej & Boyce (supra) or HDFC Bank Ltd. (supra), is to be followed. We have already clarified that the decision in the latter case was based on the finding of .....

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same, rather, further endorses the said finding; the assessee-bank acquiring these assets, along with other assets and a range of liabilities, as a successor-in-business. Again, the said decision, unlike in the case of Godrej & Boyce (supra), does not dilate on the scope and parameters of section 14A, but considers the ratio arising out of the decision in the case of Reliance Utilities and Power Ltd. (supra), which is in the context of section 36(1)(iii) and, even more importantly, considere .....

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. We are conscious that we are deciding an appeal in the case of the same assessee. So, however, we are deciding a purely legal issue, i.e., whether, in view of the statutory presumption cast by section 14A, a non obstante provision, a presumption on facts could obtain, or that the assessee shall have to establish the same with reference to its accounts, in terms of section 14A(2) r/w s. 14A(3), leading to a satisfaction or otherwise of the assessing authority, arrived at objectively, only to fi .....

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llowing the said decision by the Hon'ble jurisdictional High Court, address as it does, in our opinion, the issue at hand, and is thus squarely applicable, even as found in Dhanuka & Sons (supra), D. H. Securities (P) Ltd. (supra); and Damani Estates & Finance (P.) Ltd. (supra). These also constitute the binding reasons for not following the decision by the tribunal in Dy. CIT (OSD) vs. Shri Durga Capital Ltd. (in ITA No. 7405/Mum/2011 dated 03.08.2015/copy on record), also relied up .....

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s bearing on the decision by the larger bench of the tribunal in Daga Capital Management Pvt. Ltd. (infra), in Shri Dura Capital Ltd. (supra). Tax free investments held as stock-in-trade of the business 4.3 In-as-much as dividend is earned on shares or units held as stock-in-trade, i.e., where so, it is a direct fall out of such holding, an incidence of business, which thus yields both taxable and non-taxable incomes. Rather, as apparent, it is only to mitigate and transcend issues relating to a .....

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come of a bank, as the assessee, i.e., business income, generally speaking. Now, the shares and securities giving rise to dividend income, even assuming to be held as stock-in-trade of the business, form an integral part thereof, which represents a source giving rise to both types of income, the share trading or the regular banking income, which is taxable, and the dividend income, which is not. Share trading or the banking activity can thus be said to have an inherent quality of producing both .....

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tax-free interest income in such a case would stand classified as business income, even as it could yet be tax-exempt. The taxability or otherwise of a particular income is independent of its classification, which, rather, is required to be only for the income forming part of the total income, for the purpose of its computation under the Act (section 14). As such, being tax-exempt, expenses would require being apportioned in respect of such tax-exempt income/s. This is precisely the purport of t .....

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es, or other assets for that matter, yielding or liable to yield tax-free income, form part of the assessee s stock-in-trade. After an exhaustive examination of the case law, it clarified that the decision by the Godrej & Boyce (supra) covers such a situation as well, so that the said decision in fact approves the decision by the Special Bench in ITO vs. Daga Capital Management Pvt. Ltd. [2009] 312 ITR (AT) 1 (Mum)(SB). Rather, as pointed out by the tribunal in Damani Estates & Finance ( .....

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member u/s.255(4) in D. H. Securities (P) Ltd. (supra) (Q. Nos. 4, 5), all of which stand answered approving/confirming the order by the Accountant Member, are directly on the point, i.e., if the decision by the Hon ble Court in Godrej & Boyce (supra) answers the situation where the tax-exempt income arises on an asset which represents the stock-in-trade of the business. Why, in-as-much as it forms part of the stock-in-trade of the business, it is clearly a case of a proximate cause, making .....

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w, i.e., section 14A(2) r/w s. 14(3) (refer para 70). It is only after an examination of the correctness of the assessee s claim, having regard to the accounts of the assessee, that a satisfaction (or otherwise), which is to be objectively arrived at on the basis of the accounts and after considering all the relevant facts and circumstances, is to be issued, and where not satisfied, rule 8D invoked. Reference for the same may be made to the discussion at paras 58 to 73 (pgs. 113-123) of the Repo .....

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ce u/s.14A worked at 10% of the dividend income earned, i.e., as confirmed by the tribunal. The Hon ble Court did not answer any of the two questions referred to it, holding the same as not raising any substantial question of law. We have already clarified that no case on facts has been made out by the assessee in the present case. In fact, there is even no claim, much less finding of the shares and securities under reference as representing stock-in-trade of the assessee s business. On the cont .....

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ective mechanism for apportionment of expenditure where a composite business or activity yields (or is capable of yielding, in-as-much as the actual earning/receipt of income, including its extent, is not guaranteed by incurring the expenditure) both taxable and non taxable incomes, i.e., between the two, an exercise impermissible prior to the enactment of section 14A by Finance Act, 2001 with retrospective effect from 01.04.1962. This is made abundantly clear by the Hon'ble jurisdictional H .....

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e of a dealer in shares, as afore-noted, is of the same species as the share trading income, arise as it does from the same principal activity of trading in shares, which yields two types of income, i.e., the profit on the purchase and sale of shares, and by way of dividend income on the shares held as stock-in-trade for the time being. Like-wise, for a bank (or any other assessee) who may deal in shares or other tax-free investments as a part of its regular business activity. The same composite .....

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s P. Ltd. (supra), even as noted in Godrej & Boyce (supra) (refer pgs. 97 to 99 of the Reports), both binding precedents for us, and it is therefore immaterial whether the shares are held as investment or stock-in-trade, both being assets of a composite business giving rise to two sets of income. This also represents the view of the tribunal per its larger bench decision in Daga Capital Management Pvt. Ltd. (supra), which stands impliedly approved by the Hon ble Court in Godrej & Boyce ( .....

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by the Hon ble Court, is when it states that one can at best disallow the expenses which are incurred for earning dividend income, at para 4 of its decision, clearly an unqualified observation. No doubt, it mentions of investments, but that by itself does not mean to the exclusion of others where the same also give rise to dividend income. In fact, the Hon ble Court approves the disallowance u/s.14A at 10% of the dividend income, i.e., a measure independent and, in any case, different from inve .....

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ordingly, the tribunal s decision in India Advantage Securities Ltd. (supra) must also be considered as having been rendered in the facts of the case and not as not laying down any proposition of law. In fact, the same also does not consider the decision by the Hon'ble jurisdictional High Court in Godrej & Boyce (supra), followed by us, for the reasons afore-stated, also explained by the tribunal per its other decisions, including by its larger constitution. The foregoing discussion is i .....

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tainable at the threshold. As regards the claim of adequacy of capital or interest-free funds (held in current deposit accounts), we have already clarified of there being no finding of fact qua the specific source/s of financing, even as the Hon ble Court has in Godrej & Boyce (supra) clarified that even the fact that the assessee has utilized its own funds in making the investments would not be dispositive of the question as to whether the assessee has incurred expenditure in relation to ea .....

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e Court, following the Apex Court in Walfort Share and Stock Brokers P. Ltd. (supra), also considered in Dhanuka and Sons (supra). In the facts of the present case, it is the admitted position that the investment in securities has been made out of common pool of funds (refer pgs. 7, 8 of the assessment order). Funds in the business, it may be appreciated, are always in a state of flux, so that the proximate or the immediate source of funds may not and, in any case, not generally, reflect the rea .....

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her income of the assessee. Similar would be a case of (say) a term loan for machinery, all of which fall in the category of dedicated funds. Can, excepting dedicated arrangements, a particular asset of the business be said to be financed in a particular manner? The assets being of the business, it is only the funds of the business as a whole, save dedicated funds, that can be said to finance its activities. This is precisely the import of what the Hon ble Court explains and emphasizes in Godrej .....

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he Hon ble High Court in Godrej & Boyce (supra), which also considers the decision in East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627 (SC), has settled this aspect of the matter as well, even clarifying with regard to the play provided in the form of the satisfaction of the A.O., per sub sections (2) and (3) of sec. 14A. The decision in Reliance Utilities and Power Ltd. (supra), in any case, stands distinguished by the Hon ble High Court in Godrej & Boyce (supra). The latt .....

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ined at length by the tribunal in D. H. Securities (P) Ltd. (supra) - a larger bench decision, and Damani Estates & Finance (P.) Ltd. (supra), as well as by the hon ble high court in Dhanuka & Sons (supra), all of which have precedent value, albeit varying, with our reading thereof being also in alignment therewith. Accordingly, we uphold the application of section 14A r/w rule 8D in the facts and circumstances of the case, dismissing the assessee s Gd. # I. 5. The assessee s second Grou .....

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quire 500 shares at ₹ 40 each (say) is given to an employee when the ruling market price thereof is at ₹ 160/-, the loss suffered by the company is ₹ 120 per share, leading to a total loss of ₹ 60,000/- (500 shares x ₹ 120). If the shares are to be acquired, in terms of the option scheme, by the employees over a period of 2 ½ years, i.e., the vesting period, the amortized expense would be at ₹ 24,000/- each for the first two years and at ₹ 12,000/ .....

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by the company by offering the shares at a discount, which is what an expenditure/loss essentially is, in-as-much as the shares are only rights therein issued by a company. The demand for shares would also depend on their issue price, while their market value itself represents the equilibrium of supply and demand forces there-for. The loss being reckoned with reference to the market price and not issue price, the loss to the extent of the difference between the two, is purely notional. Apart fr .....

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or otherwise fall u/ss.30 to 43D. Accordingly, applying the decision by the tribunal in Ranbaxy Ltd. vs. Addl. CIT [2010] 39 SOT 17 (URO), the ld. CIT(A) confirmed the impugned disallowance, distinguishing the decision by it in SSI Ltd. vs. Dy. CIT [2004] 85 TTJ 1049 (Chennai), in which, the issue, as explained by him, was different. 6. Before us, while the ld. DR would rely on the orders of the authorities below, the ld. AR would on the subsequent decision by the special bench of the Tribunal i .....

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endered upon examining the issue in its various facets, is binding on us. No decision taking a contrary view by any higher appellate forum has been brought to our notice. The tribunal, per the same, explains that the discounted sum, i.e., which could be realized by the company on shares issued under ESOP, stands foregone by it only with a view to retain the employees, allowed by way of compensating them for their services. The extent of the amortized expense that could be allowed, i.e., with ref .....

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), being a larger bench, is binding on us. We are even otherwise in total agreement therewith. However, we observe that though thereby the tribunal approves of deduction of the discount (on ESOP shares) in principle, it does not mandate the discount to be worked out in a particular manner, which, i.e., the quantum of the discount, and as would be apparent, is even otherwise a purely factual matter. True, the tribunal in that case has confirmed the working of the discount with reference to the ma .....

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he difference between the issue price of the shares to the two segments, i.e., to the public and its employees, which would mark or signify the extent of the value foregone or the discount allowed by the assessee on the latter issue. The ld. AR, on this being expressed by the Bench, would, while admitting that this aspect of the matter was not in controversy in Biocon Ltd. (supra), submit that the subscription price of the shares issued to the public is wholly irrelevant, for what has been foreg .....

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ed on the shares issued to the employees, deductible in the computation of business income under the Act, should be taken at ₹ 60/- (80-20), i.e., with reference to their market price, or at ₹ 35/- (55-20), i.e., with reference to the issue price of the shares issued to and subscribed by the public. The excess of the market price over the issue price to the public (Rs.25/- in the example) is wholly notional. On what basis, one wonders, could the same be claimed to be the value forego .....

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. Further, these considerations are common and constant across the two categories of share issues, i.e., issued to the public and to the employees, which rank pari passu, except, perhaps, for a stipulation with regard to their holding period - a different matter altogether. There is, or can be, no question of any discount or expenditure incurred by the assessee, much less for the purpose of its business thus; it thereby only deciding on the value at which it is to raise capital from the market, .....

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arket, at terms best suited to its interests and prospects, given the obtaining facts and circumstances. The question of the expenditure being incurred for business purpose thus just does not arise. The share issue to the employees under ESOP would therefore have to be considered as a segment of this issue, i.e., as a part/species of the public identified as its employees and, therefore, entitled to a discount on the regular price. Would, one may ask, the company issue shares to its employees at .....

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s service. That is, the reason for the difference or discount being considered as an expense per se, and of it being suffered for a business purpose, is one and the same, or in any case intrinsically linked, so that one would not survive without the other. It is thus only the second difference, i.e., the excess of the public issue price over the price charged to the employees that would qualify as a discount in-as-much as that is the value foregone by it with reference to an arm s length transac .....

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not whether the shares are or are not traded, but which difference could be said to represent or be considered as a discount allowed by the company in the facts and circumstances of the case. We have in this regard clarified that it is the purpose for which the value, capital in nature, is foregone, which enables it to assume the character of a revenue expense, besides defining its business purpose, so as to be admissible u/s. 37(1) of the Act. In evidence of the value foregone, a public issue .....

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ondly, the matter as to the quantum of discount, is purely factual, to be decided on the basis of evidence/s and material on record. The SEBI guidelines - which are essentially disclosure norms, aimed at protection of investor interest, are with reference to the shares issued under ESOP. Besides not operating to detract from the provisions of law, which would prevail, what is relevant and material for our purpose is not the ESOP scheme per se, but the deductibility of the discount allowed on the .....

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cally follow from it (refer: Goodyear India Ltd. vs. State of Haryana and Another [1991] 188 ITR 402 (SC); Blue Star Ltd. v. CIT (1996) 217 ITR 514 (Bom.)). The quantum of discount is even otherwise, as afore-stated, a purely factual matter, to be decided in the conspectus of the case. The assessee s argument alluding to the absence of a public issue in a particular case, in fact, endorses our view of the matter being a purely factual matter. We are, in fact, fully supported by the decision in B .....

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emium is given to the employees in lieu of their services and two, when the shares are directly issued to employees at a reduced rate. In both the situations, the employees stand compensated for their effort. If under the first situation, the company, say, on receipt of premium amounting to ₹ 100 from issue of shares to public, gives ₹ 60 as incentive to its employees, such incentive of ₹ 60 would be remuneration to employees and hence deductible. In the same way, if the compan .....

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their remuneration. Thus, the contention of the ld. DR that by issuing shares to employees at a discounted premium, the company got a lower capital receipt, is bereft of an force. The sole object of issuing shares to employees at a discounted premium is to compensate them for the continuity of their services to the company. By no stretch of imagination, we can describe such discount as either a short capital receipt or a capital expenditure. It is nothing but the employees cost incurred by the c .....

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