TMI Blog2017 (1) TMI 783X X X X Extracts X X X X X X X X Extracts X X X X ..... ee - ITA No. 2283/Del/2013, ITA No. 3634/Del/2014 - - - Dated:- 4-1-2017 - Ms Suchitra Kamble, Judicial Member And Shri Prashant Maharishi, Accountant Member Assessee by : Sh. Ajay Vohra, Sr. Adv Sh. Rohit Garg, Adv Ms. Tejasvi Jain, CA Revenue by: Sh. FR Meena, Sr. DR ORDER Per Prashant Maharishi, A. M. 1. These are the two appeals filed by the assessee against the order of the ld CIT (A)-XVIII, New Delhi dated 28.02.2013 and 03.03.2014 for the Assessment Year 2008-09 and 2009-10 where in the disallowance of stock appreciation rights made by the Ld AO was confirmed and further the disallowance was enhanced for AY 2008-09 holding some expenditure as capital expenditure with respect to Stock appreciation rights. As in both the appeal the issue involved is identical, therefore, these are disposed of by this common order stating the facts for the assessment year 2008 -2009 and then decision taken for that year shall be applied for appeal of AY 2009-10. 2. The assessee has raised the following grounds of appeal for the Assessment Year 2008-09:- 1. That the Commissioner of Income tax (Appeals) erred on facts and in law in sustaining the disallowance of & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1)(ii) of the Act alleging that the same was not in accordance with the provisions of the Payment of Bonus Act, 1965. 3. The assessee has raised the following grounds of appeal for the Assessment Year 2009-10:- 1. That the Commissioner of Income tax (Appeals) erred on facts and in law in sustaining the disallowance of ₹ 15,12,621 made by the assessing officer on account of the difference between purchase price of Stock Appreciation Right ('SAR') and the sale price of such SAR at the time of exercise by the employees, holding the same to be capital loss and not allowable business deduction. 1.1 That the Commissioner of Income tax (Appeals) erred on facts and in law in not appreciating that the above differential amount actually represents the loan granted by the appellant to Religare Enterprises Ltd. Employees SAR Trust ('the Trust') for the purpose of administering Employee Stock Appreciation Right Scheme ('SAR scheme'), which was not meant to be and, in fact, not recovered from the latter in accordance with the SAR scheme. 1.2 That the Commissioner of Income tax (Appeals) erred on facts and in law in not appreciating that the abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat was given by the assessee to the trust is ₹ 12182660/- being amount paid for 24220 stock appreciation rights at the rate of ₹ 503/- per right. For the purpose of exercising the right by the employee a sum of ₹ 2789501/- for 47993 units were paid to the employees as bonus and allowed by the AO as deduction. Consequently, the amount of ₹ 1147623/- was the outstanding amount which was written off during the year under consideration and claimed as deduction under section 37 of the income tax act in the computation of the total income by the assessee. The above sum was disallowed by the Ld. assessing officer considering it as a capital loss. Consequently, the total income of the assessee was assessed at ₹ 2,36,37,870/- against the returned income of ₹ 2,24,90,250/- vide order dated 29/12/2010. Assessee challenged the above addition to the total income before the Ld. first appellate authority. The Ld. first appellate authority confirmed the action of the Ld. assessing officer and further enhanced the total income of the assessee by ₹ 27,89,501/- further as distribution of bonus incentive paid to the employees holding it to be a capital expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gare securities Ltd and one employee was entitled to 500 stock appreciation Right was transferred to the appellant. Therefore, only 34780 stock appreciation rights were granted to 48 employees of the appellant. With respect to the deduction available under the income tax act for the above expenses that the appellant is entitled to deduction of the total cost that it incurred in relation to the stock appreciation rights scheme of 2007 which was for awarding and retaining employees and motivating them for better performance. Therefore, the above said cost represents the real tangible outflow of money and is beyond doubt revenue expenditure in nature. With respect to the enhancement is submitted that it is also related to the same scheme and therefore it is eligible for deduction as revenue expenditure only. He submitted that the difference between the stock appreciation Right value and the sale price is also allowable to the assessee as revenue expenditure and whereas the difference between the sale price and the purchase price is also allowable to the assessee as a revenue loss and according to him, both these claim are allowable. He further submitted that above issue is now squarel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stock exchange with respect to the stock appreciation Right exercised by the employees every year and the money was remitted to the respective companies. The companies on their part and in accordance with the scheme retained ₹ 140/- per share and paid the balance amount to the employees SAR compensation. The loan amount given to the trust by the company was adjusted towards the acquisition of shares to the extent of sale price and the balance amount was the loss incurred by the appellant, as it was not recoverable from the trust. For the appellant 34780 stock appreciation rights for granted to 52 employees for which the appellant has given a loan of ₹ 17522013/- for 434780 shares. The cost of the SAR was of ₹ 363.79, being ₹ 503.79 per share less ₹ 140/- and that crystallized at the beginning itself on purchase of the shares by the trust. This amount was amortized on estimated basis by the management over a period of 3 years, which was the vesting period over which this stock appreciation rights would be exercised by the employees equally each year. On analyzing the scheme of these stock appreciation rights. It was held by the Ld. first appellate autho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in that case has held that since the receipt of share premium is not taxable, any short receipt of such premium on issuing options to employees will be notional loss and not actual loss for which any liability is incurred. The learned Departmental Representative contended that the Mumbai bench of the Tribunal in the case of VIP Industries v. Dy. CIT [IT Appeal No.7242 (Mum.) of 2008 has also taken similar view vide its order dated 17.09.2010.] 9.2.2 Per contra, the learned AR submitted that it is not a case of any short receipt of share premium but that of compensation given to employees. He supported the admissibility of deduction of the amount of discount on the strength of the order passed by the Chennai bench of the tribunal in the case of S.S.I. Ltd. (supra) granting deduction of such discount by treating it as an employee cost. He submitted that the above view taken by the Chennai Bench has been approved by the Hon'ble Madras High Court in CIT v. PVP Ventures Ltd. [2012] 211 Taxman 554/23 taxmann.com 286. The learned AR argued that PVP Ventures Ltd. (supra) is a solitary judgment rendered by any High Court on the issue and hence the same needs to be followed in prefe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rectors, Officers or employees of a company, which gives such Directors, Officers or employees, the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a predetermined price . In an ESOP, the given company undertakes to issue shares to its employees at a future date at a price lower than the current market price. This is achieved by granting stock options to its employees at discount. The amount of discount represents the difference between market price of the shares at the time of the grant of option and the offer price. In order to be eligible for acquiring the shares under the ESOP, the concerned employees are obliged to render services to the company 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 vesting period and the time for exercising the options is usually negligible. The company, on the exercise of option by the employees, allots shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares can never be lost sight of. Having seen the rationale and modus operandi of the ESOP, it becomes out-and-out clear that when a company undertakes to issue shares to its employees at a discounted premium on a future date, the primary object of this exercise is not to raise share capital but to earn profit by securing the consistent and concentrated efforts of its dedicated employees during the vesting period. Such discount is construed, both by the employees and company, as nothing but a part of package of remuneration. In other words, such discounted premium on shares is a substitute to giving direct incentive in cash for availing the services of the employees. There is no difference in two situations viz., one, when the company issues shares to 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. 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 incent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y' and is something which has gone irretrievably. However, it is pertinent to note that this section does not restrict paying out of expenditure in cash alone. Section 43 contains the definition of certain terms relevant to income from profits of business or profession covering sections 28 to 41. Section 37 obviously falls under Chapter IV-D. 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 we read the definition of the word paid u/s 43(2) in juxtaposition to section 37(1), the position which emerges is that it is not only paying of expenditure but also incurring of the expenditure which entails deduction u/s 37(1) subject to the fulfilment of other conditions. At this juncture, it is imperative to note that the word 'expenditure' has not been defined in the Act. However, sec. 2(h) of the Expenditure Act, 1957 defines 'expenditure' as : 'Any sum of money or money's worth spent or disbursed or for the spending or disbursing of which a liability has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n certain circumstances can also encompass 'loss' even though no amount is actually paid out. Ex consequenti, the alternative argument of the ld. DR that discount on shares is 'loss' and hence can't be covered u/s 37(1), also does not hold water in the light of the above judgment. In view of the above discussion, we, with utmost respect, are unable to concur with the view taken in Ranbaxy Laboratories Ltd. (supra). B. Is discount a Contingent liability ? 9.3.1 The learned Departmental Representative supported the impugned order by contending that the entitlement to ESOP depends upon the fulfilment of several conditions laid down under the scheme. It is only when all such conditions are fulfilled and the employees render services during the vesting period that the question of any ascertained liability can arise. He submitted that during the entire vesting period, it is only a contingent liability and no deduction is admissible under the provisions of the Act for a contingent liability. The options so granted may lapse during the vesting period itself by reason of termination of employment or some of the employees may not choose to exercise the option ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company floated beneficial scheme for its employees for encashment of leave. The earned leave could be accumulated up to certain days. The assessee created provision of ₹ 62.25 lakh for encashment of accrued leave and claimed deduction for the same. The Assessing Officer held it to be a contingent liability and hence not a permissible deduction. When the matter finally came up before the Hon'ble Supreme Court, it was held that the provision for meeting the liability for encashment of earned leave by the employee was an admissible deduction. In holding so, the Hon'ble Apex Court observed that : the law is settled : if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the futur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation : and (c) a reliable estimate can be made of the amount of the obligation . Resultantly, the provision was held to be deductible. 9.3.5 When we consider the facts of the present case in the backdrop of the ratio laid down by the Hon'ble Supreme Court in Bharat Earth Movers (supra) and Rotork Controls India (P.) Ltd. (supra), it becomes vivid that the mandate of these cases is applicable with full force to the deductibility of the discount on incurring of liability on the rendition of service by the employees. The factum of the employees becoming entitled to exercise options at the end of the vesting period and it is only then that the actual amount of discount would be determined, is akin to the quantification of the precise liability taking place at a future date, thereby not disturbing the otherwise liability which stood incurred at the end of the each year on availing the services. 9.3.6 As regards the contention of the ld. DR about the contingent liability arising on account of the options lapsing during the vesting period or the employees not choo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken as fringe benefit. Explanation to this clause clarifies that for the purposes of this clause,- (i) specified security means the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and, where employees' stock option has been granted under any plan or scheme thereof, includes the securities offered under such plan or scheme. Thus it is discernible from the above provisions of the Act that the legislature itself contemplates the discount on premium under ESOP as a benefit provided by the employer to its employees during the course of service. If the legislature considers such discounted premium to the employees as a fringe benefit or 'any consideration for employment', it is not open to argue contrary. Once it is held as a consideration for employment, the natural corollary which follows is that such discount (i) is an expenditure; (ii) such expenditure is on account of an ascertained (not contingent) liability ; and (iii) it cannot be treated as a short capital receipt. In view of the foregoing discussion, we are of the considered opinion that discount on shares under the ESOP is an allowable deduction. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discounted premium. The vesting period may vary from a case to case. If the vesting period is, say, four years with equal vesting at the end of each year, then it is at the end of the vesting period or during the exercise period, which in turn immediately succeeds the vesting period, that the employee becomes entitled to exercise 100 options or qualify for receipt of 100 shares at discount. Though the shares are allotted at the end of the vesting period, but it is during such vesting period that the entitlement is earned. It means that 25 options vest with the employee at the end of each year on his rendering service for the respective year. If during the interregnum, he leaves the service, say after one year, he will still remain entitled to exercise option for 25 shares at the discounted premium at the time of exercise of option. In that case, the benefit which would have accrued to him at the end of the second, third and fourth years would stand forfeited. Thus it becomes abundantly clear that an employee becomes entitled to the shares at a discounted premium over the vesting period depending upon the length of service provided by him to the company. In all such schemes, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e employees compensation liability which it incurred over the vesting period by obtaining their services. From the above it is apparent that the company incurs liability to issue shares at the discounted premium only during the vesting period. The liability is neither incurred at the stage of the grant of options nor when such options are exercised. 10.6 Let us consider the facts of the case of S.S.I. Ltd. (supra), which has been strongly relied by the ld. AR in support of his claim for deduction of discount during the years of vesting of options. In that case the vesting period was three years and the assessment order was passed u/s 143(3), inter alia, allowing deduction of ₹ 66.82 lakh under the head Staff welfare expenses on account of amortization of discounted value of option over a period of three years. The CIT revised such order by directing the A.O. to disallow ESOP expenditure of ₹ 66.82 lakh. When the matter came up before the Tribunal, it was held that the expenditure in that behalf was an ascertained liability and not contingent upon happening of certain events. It was further noticed that the assessee claimed deduction of such discount on ESOP by fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... line basis unless the vesting is not uniform, then arises the present issue as to whether any subsequent adjustment is warranted at the time of exercise of options, to the deductions earlier allowed for the amount of discount. It is noticed that the assessment years 2003-2004 to 2007-2008 are under consideration and during these years ESOP 2000 has come to an end and the ESOP 2004 has started. Further, the extant issue is a vital part of the overall question of the deductibility or otherwise of the amount of discount under ESOP. 11.1.2 We have noticed above that the company incurs a definite liability during the vesting period, but its proper quantification is not possible at that stage as the actual amount of employees cost to the company, can be finally determined at the time of the exercise of option or when the options remain unvested or lapse at the end of the exercise period. It is at this later stage that the provisional amount of discount on ESOP, initially quantified on the basis of market price at the time of grant of options, needs to be suitably adjusted with the actual amount of discount. 11.1.3 As regards the adjustment of discount when the options remain un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 999 inserted section 17(2)(iiia) with effect from 1st April, 2000 providing that : the value of any specified security allotted or transferred, directly or indirectly, by any person free of cost or at a concessional rate to an individual who is or has been in employment of that person shall be treated as a perquisite. It further provides that in a case the allotment or transfer of specified securities is made in pursuance of an option exercised by an individual, the value of the specified securities shall be taxable in the previous year in which such option is exercised by such individual. Such clause (iiia) was subsequently deleted with effect from 1st April, 2001. After certain changes to the relevant provisions in this regard, the position which now stands is that the discount on ESOP is taxable as perquisite u/s 17(2)(vi) for : 'the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assessee'. Clause (c) of Explanation to section 17(2)(vi) provides that : 'the value of any specified security or sweat equity shares shall be the fair ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titled to on the exercise of options. Thus, it is palpable that since the remuneration to the employees under the ESOP is the amount of discount w.r.t. the market price of shares at the time of exercise of option, the employees cost in the hands of the company should also be w.r.t. the same base. 11.1.6 The amount of discount at the stage of granting of options w.r.t. the market price of shares at the time of grant of options is always a tentative employees cost because of the impossibility in correctly visualizing the likely market price of shares at the time of exercise of option by the employees, which, in turn, would reflect the correct employees cost. Since the definite liability is incurred during the vesting period, it has to be quantified on some logical basis. It is this market price at the time of the grant of options which is considered for working out the amount of discount during the vesting period. But, since actual amount of employees cost can be precisely determined only at the time of the exercise of option by the employees, the provisional amount of discount availed as deduction during the vesting period needs to be adjusted in the light of the actual discoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ensation has turned out to be ₹ 120, the company is entitled to a further deduction of ₹ 20 at the time of exercise of option. In Situation III, the market price of the share at the time of exercise of option has come down to ₹ 90. The amount of real compensation to employees is ₹ 80 as against the tentative compensation of ₹ 100, which was allowed as deduction during the vesting period. As the actual quantification of the compensation has turned out to be ₹ 80, the company is liable to reverse the deduction of ₹ 20 at the time of exercise of option. Taxation vis- -vis Accountancy principles 11.2.1 It has been noticed that broadly there are three stages having effect on the total income of the company in the life cycle of ESOP, viz., (i) during the vesting period, (ii) at the time of unvesting/lapse of options and (iii) finally at the time of exercise of options. It has been argued that the assessee company claimed deduction for the amount of discount during the vesting period on the basis of the market price of shares at the time of grant of options and also reversed the proportionate discount on unvesting/lapsing of options at the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of any specific provision in the Act, the accounting principles should be followed for determining the total income of the assessee. What is true for accounting purpose need not necessarily be true for taxation. Taxation principles are enshrined in the legislature. Power to legislate lies with the Parliament. Accounting standards or Guidance Note or Guidelines etc., by whatever name called, issued by any autonomous or even statutory bodies including the Institute of Chartered Accountants of India, or for that matter, the SEBI are meant only to prescribe the way in which the transactions should be recorded in books or reflected in the annual accounts. These guidelines do not have the force of an Act of Parliament. Since the subject matter of tax on income falls in the Union List as per Part XI of the Indian Constitution, it is only the Parliament which can legislate on its scope. 11.2.4 Be that as it may, there is no weight in the contention of the ld. AR that there is no specific provision in the Act on the ESOP discount. It is axiomatic that the taxation rules are always embodied in the relevant Act, either in a specific or a general manner. These can be specific by making ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtainment of profit made by a company or value of the assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override section 56 or any other provision of the Act. As was pointed out by Lord Russell in the case of B.S. C. Footwear Ltd. v. Ridguary (Inspector of Taxes [1970] 77 ITR 857 (CA), the income- tax law does not march step by step in the footprints of the accountancy profession.' 11.2.6 The same view has been adopted by the Hon'ble Supreme Court in Godhra Electricity Co. Ltd. (supra), by holding that : 'Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a hypothetical income, which does not materialise.' 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. AR to bolster his submission for assigning the status of binding force to the SEBI Guidelines is the order in the case of S.S.I. Ltd. (supra) which came to be affirmed by the Hon'ble Madras High Court in PVP Ventures Ltd. (supra). We have noticed above that the said case dealt a situation falling within one of the three years of the vesting period, in which it was held that one third of the total amount of discount computed on the basis of the market price of the shares at the time of grant of option, is deductible. It is evident from the SEBI Guidelines that these deal with the deductibility of discount in the hands of company during the years of vesting period. These Guidelines are silent on the position emanating from variation in the market price of the shares at the time of exercise of option by the employees vis- -vis the market price at the time of grant of option. In other words, the SEBI Guidelines prescribe accounting treatment only in respect of the period of vesting of the options and the situation arising out of unvested options or vested options lapsing. The very reference by the Chennai Bench of the Tribunal in SSI Limited (supra) to the SEBI Guidelines is i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'Profits and gains of business or profession'. 8. Hon ble Madras High Court has also an occasion to consider the allowability of the ESOP expenditure in 211 taxman 554 wherein Hon ble high court has held that the claim of the ESOP is an ascertained liability for deduction on is allowable. Similarly Hon ble Delhi High Court in case of CIT versus Lemon tree hotels Ltd in ITA No. 107/2015 has held that the expenses debited as cost of employee stock option plan in the profit and loss account is allowable. In view of the above judicial precedents of special bench of tribunal and decision of the Hon ble Delhi and Madras High Courts, we respectfully hold that stock Appreciation right expenses claimed by the appellant, amounting to ₹ 393714/ is not in a capital expenses, but revenue expenditure and ascertained liability therefore it is allowable expenses. In the result the disallowance made by the Ld. and assessing officer of ₹ 1147623/ and enhancement made to that taxable income of the appellant by Ld. 1st appellate authority of ₹ 2789501/ is held to be erroneous and therefore set aside. In the result the appeal of the assessee for AY 2008-09 is allowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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