TMI Blog2017 (5) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... he Ld. CIT-A, we feel it appropriate to restore the issue to the file of the Assessing Officer to verify the applicability of section 40A(2)(b) of the Act and decide the issue afresh in accordance with law. Not taking on record Memorandum of Understanding holding that the same being in the nature of additional evidence - Held that:- As we find that this Memorandum of Understanding goes to the root of the matter hence, the Assessing Officer is directed to also consider this Memorandum of Understanding while adjudicating the issue no. 3. This ground of appeal is allowed. Depreciation on UPS - @ 15% or 60% - Held that:- The Hon’ble High Court in the case of BSES Rajdhani Powers Ltd. (2010 (8) TMI 58 - DELHI HIGH COURT ) held that the computer accessories are peripherals such as, scanners and server etc. form an integral part of the computer system and the same cannot be used without the computer. Thus, they are entitled to depreciation at the higher rate of 60%. - ITA No. 2284/Del/2013 - - - Dated:- 28-4-2017 - SH. I.C. SUDHIR, JUDICIAL MEMBER AND SH. O.P. KANT, ACCOUNTANT MEMBER For The Appellant : Sh. Rohit Garg, Adv. and Ms. Tejasvi Jain, CA For The Respondent : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppreciating that the above differential amount of ₹ 29,19,920 was in the nature of employee compensation allowable as deduction under section 37(1) of the Act. 2.2 Without prejudice, and in the alternative, the Commissioner of Income tax (Appeals) erred on facts and in law in not allowing deduction of the above differential amount of ₹ 29,19,920 under section 36(1 )(ii) of the Act alleging that the same was not in accordance with the provisions of the Payment of Bonus Act, 1965. 3. That the Commissioner of Income tax (Appeals) erred on facts and in law in confirming the disallowance of ₹ 81,85,383 made under section 40A(2)(b) of the Act on account of rental payments made to Religare Securities Ltd.('RSL ) and Religare Realty Ltd ( RRL ). 3.1 That the Commissioner of Income tax (Appeals) erred on facts and in law in not appreciating that provisions of section 40A(2)(b) of the Act were not applicable in the above transaction inasmuch as : (a) RSL and RRL were not specified entities covered under that section; and (b) without prejudice, the payment of rent to RSL and RRL was neither excessive nor unreasonable having regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee filed an appeal before the learned CIT(A), who partly allowed the appeal of the assessee. Against the order of the learned CIT(A), assessee is in appeal before the Tribunal. 4. With regard to grounds no. 1 to 2.2, learned counsel for the assessee submitted that the issue involved in these grounds are covered in favour of the assessee in case of sister concerns i.e M/s Religare Commodities Ltd. by the order of ITAT dated 04.01.2017 passed in ITA No. 2283/Del/2013 and 3634/Del/2014 for assessment years 2008-09 and 2009-10 respectively, where in the same issue of stock Appreciation Right was involved. 4.2 On the other hand, learned Sr. DR relied on the order of the lower authorities. 4.3 We have heard the rival submissions and perused the relevant materials on record, especially the order of ITAT passed in the case of M/s Religare Commodities Ltd. in ITA Nos. 2283/Del/2013 and 3634/Del/2014 (supra) wherein we find that the issue in dispute has decided in favour of the assessee. The relevant portion of the decision is reproduced as under: 7. We have carefully considered the rival contentions and material placed before us. We have also perused the various j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r which deduction is warranted. On the other hand, the Revenue has set up a case that no deduction can be allowed as such discount is not only a short capital receipt but also a contingent liability. A. Is discount under ESOP a short capital receipt? 9.2.1 The ld. DR stated that the question of deduction u/s 37 can arise only if the assessee incurs any expenditure, which thereafter satisfies the requisite conditions of the sub-section (1). He submitted that the word expenditure has been described by the Hon'ble Supreme Court in the case of Indian Molasses Co. (P.) Ltd. v. CIT [1959] 37 ITR 66 as denoting spending or paying out, i.e. something going out of the coffers of the assessee. It was put forth that by issuing shares at discounted premium, nothing is paid out by the company. Once there is no paying out or away , the same cannot constitute an expenditure and resultantly section 37(1), which applies to only expenditure, cannot be activated. He further took pains in explaining that there is no revenue expenditure involved in the transaction of issuance of ESOP at discount. The so called 'discount' represents the difference between market price of the shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issued at ₹ 559 per share as against the face value of ₹ 10 and the market price on the date of grant at ₹ 738.95 per share. The assessee treated the difference between ₹ 738.95 and ₹ 595 as employees compensation in the books of account and charged the same to its Profit and loss account by spreading it over the vesting period. It was one of the years of the vesting period for which the assessee claimed deduction that came up for consideration before the Tribunal. It was held by the Tribunal that the market price of ₹ 738.55 per share would have resulted in realization of higher share premium. Since the assessee did not account for the difference between ₹ 738.55 and ₹ 10 as its income during the year, there was no loss of income. It was further noticed that by issuing shares at below the market price, there was no incurring of any expenditure. Rather it resulted into short receipt of share premium which the assessee was otherwise entitled to. As the receipt of share premium is not taxable, any short receipt of such premium will only be a notional loss and not actual loss requiring any deduction. The Tribunal further noticed that in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iod 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. 9.2.5 The core of the arguments of the ld. DR in this regard is twofold. First, that it is not an expenditure in itself and secondly, it is a short capital receipt or at the most a sort of capital expenditure. In our considered opinion both the legs of this contention are legally unsustainable. 9.2.6 There is no doubt that the amount of share premium is otherwise a capital receipt and hence not chargeable to tax in the hands of company. The Finance Act, 2012 has inserted clause (viib) of section 56(2) w.e.f. 1.4.2013 providing that: 'where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares', then such excess share premium shall be charged to tax under the head 'Income from other sources'. But for that, the amount of share premium ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m under ESOP is simply one of the modes of compensating the employees for their services and is a part of 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 company. The substance of this transaction is disbursing compensation to the employees for their services, for which the form of issuing shares at a discounted premium is adopted. 9.2.7 Now we espouse the second part of the submission of the ld. DR in this regard. He canvassed a view that an expenditure denotes paying out or away and unless the money goes out from the assessee, there can be no expenditure so as to qualify for deduction u/s 37. Sub-section (1) of the section provides that any expenditure (not being expenditure in the nature described in sections 30 to 36 and not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its employees but incurs obligation of issuing shares at a discounted price on a future date in lieu of their services, which is nothing but an expenditure u/s 37(1) of the Act. 9.2.8 Though discount on premium is nothing but an expenditure u/s 37(1), it is worth noting that the Hon'ble Supreme Court in the case of CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254/179 Taxman 326 has gone to the extent of covering loss in certain circumstances within the purview of expenditure as used in section in 37(1). In that case, the assessee incurred additional liability due to exchange rate fluctuation on a revenue account. The Assessing Officer did not allow deduction u/s 37. When the matter finally reached the Hon'ble Supreme Court, their Lordships noticed that the word expenditure has not been defined in the Act. They held that : the word expenditure is, therefore, required to be understood in the context in which it is used. Section 37 enjoins that any expenditure not being expenditure of the nature described in sections 30 to 36 laid out or expended wholly and exclusively for the purposes of the business should be allowed in computing the income chargea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the extent of 25% of the total grant would vest with the eligible employees at the end of first year after rendering unhindered service for one year and it would go on till the completion of four years. 9.3.2 It is a trite law and there can be no quarrel over the settled legal position that deduction is permissible in respect of an ascertained liability and not a contingent liability. Section 31 of the Indian Contract Act, 1872 defines contingent contract as a contract to do or not do something, if some event, collateral to such contract does not happen . We need to determine as to whether the liability arising on the assessee-company for issuing shares at a discounted premium can be characterized as a contingent liability in the light of the definition of contingent contract. From the stand point of the company, the options under ESOP 2000 vest with the employees at the rate of 25% only on putting in service for one year by the employees. Unless such service is rendered, the employees do not qualify for such options. In other words, rendering of service for one year is sine qua non for becoming eligible to avail the benefit under the scheme. Once the service is render ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee shall be allowed as deduction in computing the income of the previous year in which such sum is actually paid. With this legislative amendment, the application of the ratio decidendi in the case of Bharat Earth Movers (supra) to the provision for leave encashment has been nullified. However, the principle laid down in the said judgment is absolutely intact that a liability definitely incurred by an assessee is deductible notwithstanding the fact that its quantification may take place in a later year. The mere fact that the quantification is not precisely possible at the time of incurring the liability would not make an ascertained liability a contingent. 9.3.4 Almost to the similar effect, there is another judgment of the Hon'ble Supreme Court in the case of Rotork Controls India (P.) Ltd. v. CIT [2009] 314 ITR 62/180 Taxman 422. In that case, the assessee-company was engaged in selling certain products. At the time of sale, the company provided a standard warranty that in the event of certain part becoming defective within 12 months from the date of commissioning or 18 mon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if view it at macro level qua the group of employees as a whole, it loses the tag of 'contingent' because such lapsing options are up for grabs to the other eligible employees. In any case, if some of the options remain unvested or are not exercised, the discount hitherto claimed as deduction is required to be reversed and offered for taxation in such later year. We, therefore, hold that the discount in relation to options vesting during the year cannot be held as a contingent liability. C. Fringe benefit 9.4.1 There is another important dimension of this issue. Chapter XII-H of the Act consisting of sections 115W to 115WL with the caption : Income- Tax on Fringe Benefits has been inserted by the Finance Act, 2005 w.e.f. 1.4.2006. Memorandum explaining the provisions of the Finance Bill, 2005 highlights the details of the Fringe Benefits Tax. It provides that : 'Fringe benefits as outlined in section 115WB, mean any privilege, service, facility or amenity directly or indirectly provided by an employer to his employees (including former employees) by reason of their employment.' Charging section 115WA of this Chapter provides that : In addition to the income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e when a right to receive it is finally acquired notwithstanding the fact that when such income is actually received. Even if such income is actually received in a later year, its taxability would not be evaded for the year in which right to receive was finally acquired. In the same manner, an expense becomes deductible when liability to pay arises irrespective of its actual discharge. The incurring of liability and the resultant deduction cannot be marred by mere reason of some difficulty in proper quantification of such liability at that stage. The very point of incurring the liability enables the assessee to claim deduction under mercantile system of accounting. We have noticed the mandate of the Hon'ble Supreme Court in Bharat Earth Movers (supra) that if a business liability has definitely arisen in an accounting year, then the deduction should be allowed in that year itself notwithstanding the fact that such liability is incapable of proper quantification at that stage and is dischargeable at a future date. It follows that the deduction for an expense is allowable on incurring of liability and the same cannot be disturbed simply because of some difficulty in the proper qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The incurring of liability towards the discounted premium, being compensation to employee, is directly linked with the span of service put in by the employee. In the above illustration, when 25 out of 100 shares vest in the employee after rendering one year's service, the company also incurs equal obligation at the end of the first year for which it becomes entitled to rightfully claim deduction u/s 37(1) of the Act. Similarly at the end of the second year of service by the employees, the company can claim deduction for discounted premium in respect of further 25 shares so on and so forth till fourth year when the last tranche of discounted premium in respect of 25 shares becomes available for deduction. It, therefore, transpires that a company under the mercantile system can lawfully claim deduction for total discounted premium representing the employees cost over the vesting period at the rate at which there is vesting of options in the employees. 10.5 From the above discussion it is lucid that at the event of granting options, the company does not incur any obligation to issue the shares at discounted premium. Mere granting of option does neither entitle the employee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been so explained with the help of an example in Schedule I to the Guidelines. For the sake of simplicity, we are taking an instance under which an option of share with face value of ₹ 10 is given under ESOP to employees at the option price of ₹ 10 as against the market price of such shares at ₹ 110 on that date. Further suppose that the vesting period is four years with equal vesting @ 25% at the end of each year. Total discount comes to ₹ 100 (Rs. 110 - ₹ 10). These Guidelines provide for claiming deduction in the accounts for a total discount of ₹ 100 divided over the vesting period of four years on straight line basis at the rate of ₹ 25 each. The case of S.S.I. Ltd. (supra) deals with a controversy relating to one of the vesting years. The tribunal entitled the assessee to proportionate deduction. Thus it is evident that the view taken by the tribunal in that case not only matches with the SEBI Guidelines but also the 'accrual concept' in the mercantile system of accounting, thereby allowing deduction at the stage of incurring of liability. 10.8 Reverting to the questions of 'when' and 'how much' of ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be reversed and taken as income. It is so because logically when the options have not eventually vested in the employees, to that extent, the company has incurred no employee cost. And if there is no cost to the company, the tentative amount of deduction earlier claimed on the basis of the market price at the time of grant of option ceases to be admissible and hence needs to be reversed. The ld. AR stated that the discount in respect of the unvested/lapsing options has been reversed on the happening of such events and the overall employee cost has been correspondingly reduced. We find that the SEBI Guidelines also provide that the discount written off in respect of unvested options and the options lapsing at the end of the exercise period shall be reversed at the appropriate time. As the accounting treatment directed through the Guidelines accords with the taxation principle of not allowing deduction for the amount of discount on unvested/lapsing options and further the assessee has admitted to have offered such amount as income in the relevant years, we stop here by holding that the amount of discount claimed as deduction earlier in respect of unvested/lapsing options, has to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment' of shares and second, the value of such perquisite is to be computed by considering the fair market value of the shares on 'the date on which the option is exercised' by the assessee as reduced by the amount actually paid. The position that such amount was or was not taxable during some of the years in the hands of the employees is not relevant in considering the occasion and the amount of benefit accruing to the employee under ESOP. Any exemption or the deductibility of an allowance or benefit to employee from taxation does not obliterate the benefit itself. It simply means that the benefit accrued to the assessee but the same did not attract tax. The position has now been clarified beyond doubt by the legislature that the ESOP discount, which is nothing but the reward for services, is a taxable perquisite to the employee at the time of exercise of option, and its valuation is to be done by considering the fair market value of the shares on the date on which the option is exercised. 11.1.5 The other side of the coin is the amount of remuneration to the employees in the hands of the company. We have noticed earlier that an expense becomes deductible on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to 4th years: - At the time of granting option At the time of exercise of option Situation I Situation II Situation III Market value per share 110 110 130 90 Option price 10 10 10 10 Employees compensation or Discount 100 100 120 80 11.1.7 From the above table it can be noticed that the market price of the shares at the time of grant of option was ₹ 110 against the option price of ₹ 10, which resulted in discount at ₹ 100. With the vesting period of four years with the equal vesting, the company can rightly claim deduction at the rate of ₹ 25 each at the end of first, second, third and fourth year of vesting. But this total deduction for discount of ₹ 100 over the ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the time of grant of option and price at the time of exercise of option. The argument seems to be that the SEBI Guidelines do not provide for such downward adjustment. It has been argued by the ld. AR that where the provisions of the Act specifically provide for treatment of a particular source of income in a particular manner, then the germane provision should be followed. If, however, there is no specific provision dealing with an issue in the Act, then the accounting principles should be adhered to while determining the total income of the assessee. In this regard, he relied on the judgment in the case of Challapalli Sugars Ltd.'s (supra), wherein the Hon'ble Supreme Court has held that the interest payable on capital borrowed by the assessee for purchase of plant and machinery before the commencement of business should be capitalized on the basis of accepted accountancy rule. Similarly in the case of U.P. State Industrial Development Corpn. (supra), the Hon'ble Apex Court held in the case of an underwriter that it would be right to consider the net investment, that is the purchase price less the underwriting commission received by the underwriter as investment as ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manner. There have been enshrined clauses (i) to (xvi) dealing with the items specifically listed. However, the provision has been couched in such a way so as to include general items of receipts having character of income, even though not specifically mentioned. Similar is the position regarding deductions. Under the head 'Profits and gains of business or profession', there are sections granting deductions in respect of specific expenses or allowances. Similarly, there is section 37(1), which grants deduction for expenses not specifically set out in other sections, if the conditions stipulated in the section, are fulfilled. All other items of expenses, which fulfil the requisite conditions, gain deductibility under section 37(1). To put it in simple words, this section is a specific provision for granting deduction in respect of the unspecified or the general categories of expenses. Discount on ESOP is a general expense and hence covered by the specific provision of section 37. The contention of the ld. AR that there is no provision in the Act dealing with the deductibility of ESOP discount, is therefore, devoid of any merit. This concludes the question of granting of ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iple. The essence of the matter is that taxation principles are to be followed. If an accounting principle is in conformity with the mandate of taxing principle and reference is made to such accounting principle while deciding the issue, it does not mean that the accounting principle has been followed. It simply means that the taxation principle has been followed and the accounting principle, which is in line with such taxation principle, has been simply taken note of. If however, an accounting principle runs counter to the taxation principle, then there is no prize for guessing that it is only the taxation principle which shall prevail. 11.2.8 The plea now raised before us by the ld. AR, relying on the case of Challapalli Sugars Ltd. (supra), was also taken up before the Hon'ble Supreme Court in the case of Tuticorin Alkalis Chemicals Fertilizers Ltd (supra). Dealing with the same, the Hon'ble Supreme Court held that : The question in Challapalli Sugars Ltd.'s case (supra) was about computation of depreciation and development rebate under the Indian Income-tax Act, 1922. In order to calculate depreciation and development rebate it was necessary to find out th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e granting of the binding force to the SEBI Guidelines by the Hon'ble Madras High Court should be viewed in the context of the issue before it, which was about the deductibility of discount during one of the vesting years. In the earlier part of this order, we have held that the deductibility of discount during the vesting period, as prescribed under the SEBI Guidelines, matches with the treatment under the mercantile system of accounting. To that extent, we also hold that the SEBI guidelines are applicable in the matter of deduction of discount. Neither there was any issue before the Hon'ble Madras High Court nor it dealt with a situation in which the market price of the shares at the time of exercise of option is more or less than the market price at the time of grant of option. It is a situation which has also not been dealt with by the Guidelines. Accordingly, the aforenoted taxation principle of granting deduction for the additional discount and reversing deduction for the short amount of discount at the time of exercise of option, needs to be scrupulously followed. 11.3 We, therefore, sum up the position that the discount under ESOP is in the nature of employees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue in dispute are that during the year the assessee incurred expenses on rent, repairs and maintenance in respect of two parties and tax was deducted at source, having details as under: Name of Company Nature of Transaction Payment made to Group Company Tax Deducted at Source Religare Realty Limited ( RRL ) Rental expenses Rs.1,98,44,307/- Rs.51,08,760 Religare Securities Limited ( RSL ) Rental expenses Rs.1,17,61,038/- Rs.26,92,430/- Rent recorded under the head Repair and Maintenance charges Rs.11,36,028/- Rs.2,29,550/- Total Rs.3,27,41,533/- Rs.80,30,740/- 5.2 Before the Assessing Officer, the assessee did not file copy of agreement entered into with the above parties. According to the Assessing Officer, above parties falls under the definition of persons given in section 40A(2)(b) of the Act and it was not possibl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y was held by REL. Since this fact has not been verified either by the Ld. AO or by the Ld. CIT-A, we feel it appropriate to restore the issue to the file of the Assessing Officer to verify the applicability of section 40A(2)(b) of the Act and decide the issue afresh in accordance with law. The grounds no. 3 to 3.1 (wrongly mentioned as 2.3 in the grounds of appeal) are accordingly allowed for statistical purposes. 6. As far as ground no. 4 is concerned, the assessee has raised the issue relating to not taking on record Memorandum of Understanding holding that the same being in the nature of additional evidence in terms of Rule-46A of the Income Tax Rules is concerned, we find that this Memorandum of Understanding goes to the root of the matter hence, the Assessing Officer is directed to also consider this Memorandum of Understanding while adjudicating the issue no. 3. This ground of appeal is allowed. 7. In ground no. 5, the assessee has challenged the action of the Assessing Officer in allowing depreciation on UPS @ 15% as against depreciation claimed by the assessee @ 60%. 7.1 As regards to this issue, the learned counsel for the assessee submitted that the issue is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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