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2016 (1) TMI 803 - ITAT MUMBAI

2016 (1) TMI 803 - ITAT MUMBAI - TMI - Employees’ stock option scheme benefit taxability - AO observed that expenditure is directly related to the expansion of the capital base of the company and that therefore, the expenditure incurred on issuing shares to increase the capital by the company would not be allowable as revenue expenditure. - Held that:- The Special Bench in Biocon Limited [2013 (8) TMI 629 - ITAT BANGALORE] has held that the discount on premium under one of the modes, compensatin .....

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able in the hands of the assessee’s employees as perquisite under section 43(2) of the Act. The payment having been established as salary/employee cost, the same is revenue in nature. This expenditure claimed by the assessee is to be treated as a business expenditure of the assessee - Decided in favour of assessee

Set off of loss pertaining to certain STP units, against the taxable business income of the assessee disallowed - Held that:- In “Capgenimi India (P) Limited”, (2011 (5) TMI .....

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her case laws relied on by the assessee also hold that set off of loss of the eligible unit is allowable against the other taxable income.- Decided in favour of assessee - ITA No.6820/M/2010 - Dated:- 4-11-2015 - SH. A.D. JAIN, JUDICIAL MEMBER AND SH. RAJENDRA, ACCOUNTANT MEMBER For The Appellant : Sh. Dinesh Vyas, Sr. Advocate For The Respondent : Sh. N.K. Chand, CIT(DR) ORDER PER A.D. JAIN, JM This is assessee s appeal for the assessment year 2005-06 against the order dated 03.08.2010, passed .....

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t of ₹ 4,61,683/- paid for delay in payment of overseas tax u/s 40(a) of the Act. 3. The ld. CIT(A) erred in law and on facts in treating expenditure of ₹ 38,59,97,989/- incurred on purchase of application software products as capital expenditure. 4. (a) The ld. CIT(A) erred in law in confirming the addition made by ld. Addl. CIT (hereinafter referred to as the ld. ACIT} by invoking the provisions of Rule 8D read with section 14A of the Act, on the ground that rule 8D is retrospectiv .....

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d under its Employee Stock Purchase Scheme as Capital expenditure. 6. a) The ld. CIT(A) erred in law and on facts in not allowing the claim of set off of loss of ₹ 21,27,69,208/- pertaining to certain STP units against taxable business income of the appellant as required u/s 70 of the Act. b) Without prejudice to the above, the ld. CIT(A) erred in not directing the ld. ACIT to consider the revised loss after making adjustment on account of disallowance made in assessment order instead of t .....

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ng that the amended provisions of section 40(a)(ii) of the Act by way of insertion of Explanation-1 is clarificatory in nature and, thus, retrospective in effect. 4. Section 40(a)(ii) and Explanation-1 thereto reads as follows: 40. Notwithstanding anything contrary in section 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head Profits & gains of business or profession . In the case of any assessee- …………… ( .....

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come-tax payable under section 91. 5. As fairly contended on behalf of the assessee, the matter stands decided against the assessee by the Mumbai Bench of the Tribunal in assessee s own case, in ITA No.4776/M/2004. An appeal against the said Tribunal order stands admitted before the Hon ble High Court in the case of the assessee in ITA No.2024 of 2011, on the following substantial question of law: Whether on the facts and circumstances and in law, the Tribunal was right in holding that the State .....

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In so far as regards Ground No.2, as per the record, the assessee had paid ₹ 4,61,683/- as penal interest in USA towards late payment of tax. This was claimed as a deduction. The AO disallowed the claim, holding the provisions of section 40(a)(ii) of the Act to be applicable. It was observed that the late filing of return or late payment of advance tax or improper payment of advance tax is compensatory in nature and is a part and parcel of the tax covered u/s 40(a)(ii) of the Act. The ld. .....

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quired within India for facilitating its business operation. The AO disallowed the expenditure claimed and treated it as a capital expenditure. The ld. CIT(A) confirmed the disallowance, observing that since the software had been utilised for a period of more than one year, the expenditure could not be allowed in one year. The treatment of capitalizing the expenditure and allowing depreciation was confirmed. 11. The ld. counsel for the assessee has contended that since depreciation has been allo .....

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er appeal i.e., 2005-06. 14. As per Ground No.4(b), without prejudice, the ld. CIT(A) has erred in not considering the assessee s contention that interest expenditure of ₹ 10,38,82,525/- pertains to interest on pre-shipment loans and the same being for the purpose of assessee s business, it cannot be considered for allocation u/s 14A of the Act. 15. Apropos the main grievance of the assessee, disallowance of ₹ 32,24,49,976/- was made towards expenditure incurred to earn exempt income .....

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s should not be considered for disallowance u/s 14A of the Act r.w.s. 8D of the Rules. It has been contended that for the assessment years 2006-07 & 2007-08, this stand of the assessee has been accepted. 18. Here again, the ld. DR has placed strong reliance on the impugned order. 19. No decision contrary to Godrej & Boyce Manufacturing Co. Ltd. , (supra), has been placed before us. As per this decision, Rule 8D has no retrospective application. Therefore, it was not applicable to the yea .....

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sessee has been accepted by the department in the assessment years 2006-07 & 2007-08. 20. A perusal of the assessment order for AY 2006-07, a copy whereof has been placed on record, shows that the AO has followed/carried out the DRP s direction. Similar is the case for the A.Y. 2007-08. 21. For assessment year 2006-07, the amount of ₹ 16,73,399/-(employee and other cost of treasury group) and interest cost of ₹ 30,4000/- was taken to be direct and indirect expenses having proximi .....

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he AO shall verify and allow, on such verification, the sustained addition to the extent of ₹ 17,00,686/- only, as per the contention of the assessee, according to which, it is this amount which represents actual apportioned expenditure. 23. In view of the above, Ground No.4(b), which is the alternative ground to Ground no. 4(a), becomes infructuous and is rejected, as such. 24. Coming to Ground No.5, during the year the assessee company issued and allotted shares to its employees and dire .....

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share capital of the assessee; that as per the settled provisions of law, any expenditure in relation to increase in share capital of any assessee is capital expenditure. The AO placed reliance on Punjab State Industrial Corporation Ltd. vs. CIT , 225 ITR 792 (SC) and Brook Bond India Ltd. vs. CIT , 223 ITR 776 (SC), wherein, the Hon ble Supreme Court held that though increase in the capital results in expansion in the capital base of the company and incidently that would help in the business o .....

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he purpose of business, since the expenditure was definitely for the purpose of business; that the issue was as to whether the expenditure was capital expenditure or not; that the two Supreme Court decisions cited by the AO were directly in connection with the expenditure incurred to expand the capital base and the Hon ble Supreme Court had held that the expenditure was capital in nature and that the same principle was applicable to the assessee s case also. 26. The Ld. DR strongly relied on the .....

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. , 63 SOT 242 (ITAT Banglore) iii) SSI Ltd. , 85 TTJ 1049 (Chennai ITAT) iv) PVP Ventures Limited , ( 211 Taxman 554) (Mad) v) Spray Engineering, 53 SOT 70 (ITAT Chandigarh) vi) Dr. Reddy s Laboratories Limited , 30 ITR (T) 393 (ITAT Hyd) vii) Seassoon David , 118 ITR 261 (SC). 28. On the other hand, the ld. DR has placed strong reliance on the impugned order. 29. In this regard, the Special Bench of the Tribunal in Biocon Limited (supra), has held that in the Employees Stock Option Scheme, the .....

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ompany during the vesting period as given in the scheme. On the completion of the vesting period in the service of the company, such options vest with the employees. The options are then exercised by the employees by making application to the employer for the issue of shares against the options vested in them. The gap between the completion of the vesting period and the time for exercising the options is usually negligible. The company, on the exercise of option by the employees, allots shares t .....

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ing the vesting period and as a quid pro quo it undertakes to compensate the employees with a certain amount given in the shape of discounted premium on the issue of shares. 29.1. Share premium is a capital receipt and not chargeable to tax in the hands of company. If a company issues shares to the public or the existing shareholders at less than the otherwise prevailing premium due to market sentiment or otherwise, such short receipt of premium would be a case of a receipt of a lower amount on .....

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y, as nothing but a part of package of remuneration, a substitute to giving direct incentive in cash for availing of the services of the employees. There is no difference between the two situations: one, when the company issues shares to the public at market price and a part of the premium 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. It fo .....

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ict paying out of expenditure in cash alone. Sub-section (2) of section 43 defines paid to mean actually paid or incurred according to the method of accounting, upon the basis of which, the profits or gains are computed under the head profits and gains of business or profession . When the definition of the word paid u/s 43(2) is read in juxtaposition to section 37(1), not only paying of expenditure, but also incurring of expenditure qualifies for deduction u/s 37(1) subject to the fulfillment of .....

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vices is a part of their remuneration and as such, this discount cannot be held to be either a short capital receipt, or a capital expenditure. No decision to the contrary has been placed before us. Besides, the other decisions cited by the assessee are also on similar lines. Therefore, following Biocon Limited (supra) and the other case laws cited by the assessee, Ground No.5 is accepted and it is held that the employees stock option scheme benefit in question is taxable in the hands of the ass .....

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ertaining to certain STP units, against the taxable business income of the assessee, as per section 70 of the Act. 32. Ground No.6(b) states that without prejudice, the ld. CIT(A) erred in not directing the AO to consider the revised loss after making adjustment on account of disallowance made in the assessment order, instead of the loss of ₹ 21,27,69,208/-, as claimed by the assessee in the return of income. 33. As per the record, during the year under consideration, the following units o .....

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e AO disallowed the assessee s claim of loss of ₹ 21,27,69,208/- pertaining to certain STP units. The AO applied the provisions of section 14A of the Act. Further, the AO disallowed the above loss as claimed in the return of income, instead of the revised loss after making adjustment on account of disallowance made in the assessment order. The ld. CIT(A) upheld the AO s action, observing as follows: 8.17. I have considered the submission of the appellant but I am not inclined to accept it. .....

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the profit earned is to be treated as exempt, the loss incurred by the same unit cannot be permitted to be set off against the profit under the head Profits and Gains of Business or Profession . Various Courts have also held that profits include losses. As such this ground of the appellant is rejected and action of the AO is upheld. 35. Aggrieved, the contention of the assessee is that the provisions of section 10A of the Act, as amended by the Finance Act, 2000, are those of a deduction and the .....

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AT) vii) Mindtree Consulting Pvt. Ltd vs. ACIT , (102 TTJ 691) (Bang.ITAT) viii) A.V.Thomas Leather & Allied Products Ltd. , (ITA No.1021/Mad/2008) (Chennai ITAT). ix) Honeywell International India (P) Ltd. v. DCIT , (108 TTJ 924) (Delhi ITAT). x) Enercon Wind Farms (Krishna ) Ltd. , (21 SOT 29) (Mum. ITAT). xi) Ford Business Services Centre Pvt. Ltd. , (114 TTJ 881) (Chennai ITAT). 36. Apropos this Ground No.6, the ld. counsel for the assessee has contended that without prejudice, the revis .....

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2000, held, that the provisions, post amendment, are for deduction and that u/s 10B, loss in an eligible unit could be set off against the profits of business. The provisions of section 10A and those of section 10B are, mutatis mutandis, undisputedly pari-materia interse. Therefore, Hindustan Unilever Ltd. is squarely applicable to the facts of the present case also. No decision contrary to this jurisdictional High Court judgment has been placed before us. Further, in Galaxy Surfactants Ltd. (s .....

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(supra) has been referred to. It has been held that the principle in Hindustan Unilever Ltd. (supra), qua section 10B of the Act, equally applies to a case falling u/s 10A of the Act. 40. Since none of the above decisions, besides the other ones referred to by the assessee, has been countered by any decision in favour of the department, the grievance of the assessee is accepted. 41. The assessee has further contended that the term loss is different from the expenditure referred to section 14A of .....

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