TMI Blog2017 (9) TMI 1595X X X X Extracts X X X X X X X X Extracts X X X X ..... Technologies Ltd., Vs. JCIT [2010 (1) TMI 5 - SUPREME COURT OF INDIA] wherein it was held that the provision on non-performing assets and debited to P&L A/c in terms of the guidelines of the RBI governing the income recognition cannot be allowed to be deductible expenditure either u/s. 36(1)(vii) or (viia) and it was further held that the guidelines of RBI does not override the provisions of Income Tax Act, 1961. Also the Hon’ble Delhi High Court in the case of Housing & Urban Development Corporation Ltd. vs. Addl. CIT (2017 (7) TMI 144 - DELHI HIGH COURT) observed that based on guidelines issued by the Reserve Bank of India governing recognition of income, no deduction can be claimed. - Decided against assessee - I.T.A. No. 1316/HYD/2015 - - - Dated:- 27-9-2017 - Shri D. Manmohan, Vice President And Shri Inturi Rama Rao, Accountant Member For the Assessee : Shri K. C. Devdas, AR For the Revenue : Smt. Nivedita Biswas, DR ORDER Per Inturi Rama Rao, A. M. This appeal filed by assessee is directed against the order of the learned Commissioner of Income Tax (Appeals)-3, Hyderabad, dated 10-08-2015 for the AY. 2011-12. The appellant raised the following Grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company is in turn debited to the share premium account. The assessee maintains a separate ESOP allotments for passing the relevant entries. Every year, certain amounts are provided in the accounts towards ESOP allotment (purely provisional) and the same is added back to the income in the computation. All the employees to whom stock options have been allotted may not exercise the options during the year. Therefore, depending on the actual exercise of the options, the loss suffered by the company is calculated and claimed as expenditure in the computation of income. 3.2. It is seen from the computation for the current year that the assessee has added back an amount of ₹ 4.93 crores as ESOP expenditure disallowed to the extent of options not exercised during the year . From the profit and loss account, it is observed that the actual debit to the profit and loss account is at ₹ 7.30 crores. This implies that the assessee has added back the entire provision of ₹ 7.30 crores and claimed an amount of ₹ 2.10 crores which is the amount of loss suffered by the company on account of stock options being exercised by the employees. The balance amount of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be approved by the Government before advancing them to the rural clientele, The field operations were disrupted in most part of the centers and there was drastic fall in the loan repayments from the earlier borrowers. Accordingly, the company made a provision of ₹ 52.60 crores which has resulted in the first ever loss suffered by the company in the past seven years of its existence. 4.2. It was submitted that many other players in the same line of business had to even go for a corporate debt restructuring scheme because the banks also greatly reduced their exposure to micro finance sector. It was submitted that the assessee also suffered during the said period. Thereafter, the company referred to the RBI guidelines and also relied on certain decisions wherein it was held that a provision should be made towards doubtful advances and that such provisions made are deductible under the Act. It was categorically put to the assessee as to whether its claim on the said amount of ₹ 52.59 crores was forgone and whether the same has been written off from books. The assessee has confirmed in negative. In other words, the assessee has neither given up its right to receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mployees Welfare Trust. 3. Being aggrieved, appellant preferred an appeal before the CIT(A), who vide impugned order had allowed the claim towards the advance given for Employees Welfare Trust following the order of the Hon'ble Tribunal in assessee s own case for earlier years. 4. However, as regards the claim for deduction of ESOP, the claim came to be rejected by the CIT(A) holding to be capital in nature. 4.1. As regards the claim for provision for standard and nonperforming assets, the Ld.CIT(A) placing reliance on the decision of the Hon'ble Supreme Court in the case of Southern Technologies Ltd., Vs. JCIT [320 ITR 577] (SC) confirmed the disallowance. Being aggrieved, appellant is in appeal before us in the present appeal. 5. In the present appeal, the appellant raised five grounds of appeal. Out of which, Ground Nos. 1, 4 and 5 are general in nature and does not require any adjudication. 6. In Ground No. 2, appellant challenges in confirming the disallowance of ESOP of ₹ 2,10,56,905/-. 6.1. Before us, the Ld.AR vehemently contended that this issue is no longer res integra as Special Bench of Bangalore Tribunal in the case of M/s. Biocon Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e end of the first year though it is discharged at the end of the fourth year when the options are exercised by the employees. The fact that some options may lapse due to non-exercise/ resignation etc does not make the entire liability contingent; (iii) However, the obligation to issue shares at a discounted premium does not arise at the stage the options are granted. It arises at the stage that the options are vested in the employees. The amount deductible has to be determined based on the period and percentage of vesting under the ESOP scheme; (iv) There is likely to be a difference in the quantum of discount at the stage of vesting of the stock options (when the deduction is allowable) and at the stage of exercise of the options. The difference has to be adjusted by making suitable northwards or southwards adjustment at the time of exercise of the option depending on the market price of the shares then prevailing. The fact that the SEBI Guidelines do not provide for the adjustment of discount at the time of exercise of options is irrelevant because accounting principles cannot affect the position under the Incometax Act. (v) On facts, the assessee's method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 577] (SC), wherein it was held that the provision on non-performing assets and debited to P L A/c in terms of the guidelines of the RBI governing the income recognition cannot be allowed to be deductible expenditure either u/s. 36(1)(vii) or (viia) and it was further held that the guidelines of RBI does not override the provisions of Income Tax Act, 1961. The relevant paragraph of the said judgment is extracted below: Scope and applicability of RBI Directions 1998 32. RBI Directions 1998 have been issued under s. 45JA of RBI Act. Under that section, power is given to RBI to enact a regulatory framework involving prescription of prudential norms for NBFCs which are deposit taking to ensure that NBFCs function on sound and healthy lines. The primary object of the said 1998 Directions is prudence, transparency and disclosure. Sec. 45JA comes under Chapter IIIB which deals with provisions relating to financial institutions, and to non-banking institutions receiving deposits from the public. The said 1998 Directions touch various aspects such as income recognition; asset classification; provisioning, etc. As stated above, basis of the 1998 Directions is that anticipated loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... example, treat write offs or expenses or liabilities as contingent liabilities. For example, there are companies which do not recognize mark-to-market loss on its derivative contracts either by creating reserve as suggested by ICAI or by charging the same to the P L a/c in terms of Accounting Standards. Consequently, their profits and reserves and surplus of the year are projected on the higher side. Consequently, such losses are not accounted in the books, at the highest, they are merely disclosed as contingent liability in the Notes to Accounts. The point which we would like to make is whether such losses are contingent or actual cannot be decided only on the basis of presentation. Such presentation will not bind the authority under the IT Act. Ultimately, the nature of transaction has to be examined. In each case, the authority has to examine the nature of expense/loss. Such examination and finding thereon will not depend upon presentation of expense/loss in the financial statements of the NBFC in terms of the 1998 Directions. Therefore, in our view, the RBI Directions 1998 and the IT Act operate in different fields. 34. The question still remains as to what is the nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits can be ascertained only by making the permissible deductions . 38. The point to be noted is that the IT Act is a tax on real income , i.e., the profits arrived at on commercial principles subject to the provisions of the IT Act. Therefore, if by Explanation to s. 36(1)(vii) a provision for doubtful debt is kept out of the ambit of the bad debt which is written off then, one has to take into account the said Explanation in computation of total income under the IT Act failing which one cannot ascertain the real profits. This is where the concept of add back comes in. In our view, a provision for NPA debited to P L a/c under the 1998 Directions is only a notional expense and, therefore, there would be add back to that extent in the computation of total income under the IT Act. 39. One of the contentions raised on behalf of NBFC before us was that in this case there is no scope for add back of the provision against NPA to the taxable income of the assessee. We find no merit in this contention. Under the IT Act, the charge is on profits and gains, not on gross receipts (which, however, has profits embedded in it). Therefore, subject to the requirements of the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce, as far as income recognition is concerned, s. 145 of the IT Act has no role to play in the present dispute. Analysis of s. 36(1)(viia) 41. Sec. 36(1)(vii) provides for a deduction in the computation of taxable profits for the debt established to be a bad debt. Sec. 36(1)(viia) provides for a deduction in respect of any provision for bad and doubtful debt made by a scheduled bank or non-scheduled bank in relation to advances made by its rural branches, of a sum not exceeding a specified percentage of the aggregate average advances by such branches. Having regard to the increasing social commitment, s. 36(1)(viia) has been amended to provide that in respect of provision for bad and doubtful debt made by a scheduled bank or a non-scheduled bank, an amount not exceeding a specified per cent of the total income or a specified per cent of the aggregate average advances made by rural branches, whichever is higher, shall be allowed as deduction in computing the taxable profits. 42. Even s. 36(1)(vii) has been amended to provide that in the case of a bank to which s. 36(1)(viia) applies, the amount of bad and doubtful debt shall be debited to the provision for b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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