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TMI Blog2017 (9) TMI 1595X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Appellant denies it's liability to the levy of Interest u/s. 234-B of the Income Tax Act, 1961. 5. Any other ground that may be urged at the time of hearing of the appeal". 2. Briefly, facts of the case are that the appellant is a company duly incorporated under the Provisions of Companies Act, 1956. IT is engaged in the financial services sector, providing micro finance services to rural poor through Joint Liability Groups. The return of income for the AY. 2011-12 was filed declaring total income of Rs. 1,69,18,54,640/-. Against the said return, assessment was completed by the Addl.CIT, Range-3, vide order dt. 07-03-2014 passed u/s. 143(3) of the Income Tax Act [Act] at a total income of Rs. 2,24,43,78,149/-. While doing so, the Ld.AO disallowed the claim for deduction towards Employee Stock Option Plan (ESOP) of Rs. 2,10,56,905/- and the claim for deduction of provision for standard non-performing assets of Rs. 52,59,85,047/-. The facts set out by the Ld.AO relating to ESOP are as under: "3.1. Employee Stock Option Plan (ESOP): The assessee company provides ESOPs to all its employees and directors as an incentive to attract, retain and reward the employees working ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the capital field. In other words, it is in the process of allotment of shares and collecting of the share premium amounts that the assessee has suffered the loss. In the cases of Brooke Bond India Ltd vs CIT 225 ITR 798 (SC) and CIT vs Punjab State Industrial Development Corporation Ltd 225 ITR 792 (SC), it was categorically held by the Apex Court that any expenditure incurred in connection with the share capital of the company is capital in nature. Therefore, the expenditure claimed by the assessee cannot be allowed as a revenue expenditure and hence, an amount of Rs. 2,10,56,905/-, which is the expenditure Incurred by the assessee on account of ESOPs is not allowed and the same is added back to the total income of the assessee, Penalty proceedings u/s. 271(1)(C) of the I.T.Act, 1961 are initiated separately on this issue. Addition: Rs. 2,10,56,905/-" 2.1. As far as provision for standard and non-performing assets as under: "4.1. Provision for Standard and Non Performing Assets: It is seen from the schedule 19 of the profit and loss account that the assessee has mentioned various provisions and write offs. A specific provision was made by the assessee towards "Standard and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee will not be entitled to the relief claimed by it." 4.3. Mere setting aside of any amount does not automatically make it eligible for a deduction. The liability should have actually occurred in view of which a provision could be made. Liability that is to be allowed is that which is actually existing at the time. Putting aside of money which may become expenditure on the happening of any event is not expenditure. It becomes an expenditure only when the liability become a "fait accompli" in any accounting year. Reliance is placed on the following decisions : 1. M/s Shree Sajjan Mills Ltd vs CIT 156 ITR 585 (SC) 2. Mysore Lamps Works Ltd vs CIT 185 ITR 96 (Kar) 3. Indian Molasses Co Pvt. Ltd vs CIT 37 ITR 66 (SC) The facts of the case ace akin to the facts of the cases eeported above. The assessee has merely set aside the amounts fearing that these loans may not be recoverable during the year. The Ordinance issued by the State Government did not make the loans irrecoverable. The Ordinance only directed that the Government should be consulted before advancing the loans, so that the loans reach the correct (eligible) persons and not the genuine persons. The exposure bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inate Bench of Delhi in the case of Ranbaxy Laboratories Ltd., [124 TTJ 771] (Delhi). 6.3. We have heard the rival submissions and perused the material on record. The issue in the present ground of appeal is whether the expenditure on ESOP is allowable or not? This issue was decided in favour of assessee-company by the Special Bench of Bangalore Tribunal in the case of M/s. Biocon Ltd., in ITA 368/Bang/2010 and others dt. 16-07-2013, where in the Special Bench held as follows: "(i) The difference (discount) between the market price of the shares and their issue price is "expenditure" in the hands of the assessee because it is a substitute to giving direct incentive in cash for availing the services of the employees. There is no difference between a case where the company issues shares to the public at market price and pays a part of the premium to the employees for their services and another where the shares are directly issued to employees at a reduced rate. In both situations, the employees stand compensated for their effort. By undertaking to issue shares at a discount, the company does not pay anything to its employees but incurs the obligation of issuing shares at a discount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to decisions of Special Bench of Bangalore Tribunal in the case of M/s. Biocon Ltd., in ITA 368/Bang/2010 and others dt. 16-07-2013, even assuming that there is divergence in judicial opinion it is trite law that view which is in favour of assessee is to be adopted in view of the law laid down by the Hon'ble Supreme Court in the case of CIT Vs. Vegetable Products Ltd., reported as [88 ITR 192] (SC). Following the ratio of Hon'ble Supreme Court in the said case, we allow this ground of appeal. 7. In Ground No. 3 assessee challenges in confirming the disallowance of provision for standard and non-performing assets for Rs. 52,59,85,047/- 7.1. The Ld.AR submitted that the appellant is NBFC, engaged in the business of micro finance. The appellant provided the provision on non-performing assets in terms of guidelines issued by the RBI and this was claimed as 'deductible expenditure'. The AO disallowed the same holding that it is a contingent expenditure and it cannot be claimed as 'deduction'. The Ld.AR vehemently contended that even otherwise also this claim is allowable as bad debt since the provision was debited to P&L A/c and reduced from the Sundry Debtors. He placed reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , para 9(1) of RBI Directions 1998 stipulates that every NBFC shall separately disclose in its balance sheet the provision for NPAs without netting them from the income or against the value of assets. That, the provision for NPA should be shown separately on the "liabilities side" of the balance sheet under the head "Current liabilities and provisions" and not as a deduction from "sundry debtors/advances". Therefore, RBI has taken a position as a matter of disclosure, with which we agree, that if an NBFC deducts a provision for NPA from "sundry debtors/loans and advances", it would amount to netting from the value of assets which would constitute breach of para 9 of RBI Directions 1998. Consequently, NPA provisions should be presented on the "liabilities side" of the balance sheet under the head "Current liabilities and provisions" as a disclosure norm and not as accounting or computation of income norm under the IT Act. At this stage, we may clarify that the entire thrust of RBI Directions 1998 is on presentation of NPA provision in the balance sheet of an NBFC. Presentation/disclosure is different from computation/taxability of the provision for NPA. The nature of expenditure und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts by Shukla, Grewal, Gupta, Chapter 26, p. 26.50]. If one keeps these concepts in mind, it is very clear that RBI Directions 1998 are merely prudential norms. They can also be called as disclosure norms or norms regarding presentation of NPA provisions in the balance sheet. They do not touch upon the nature of expense to be decided by the AO in the assessment proceedings. Theory of "real income" 35. An interesting argument was advanced before us to say that a provision for NPA, under commercial accounting, is not an "income" hence the same cannot be added back as is sought to be done by the Department. In this connection, reliance was placed on "real income theory". 36. We find no merit in the above contention. In the case of Poona Electric Supply Co. Ltd. vs. CIT (1965) 57 ITR 521 (SC) at p. 530, this is what the Supreme Court had to say : "Income-tax is a tax on the "real income", i.e., the profits arrived at on commercial principles subject to the provisions of the IT Act. The real profit can be ascertained only by making the permissible deductions under the provisions of the IT Act. There is a clear distinction between the real profits and statutory profits. The latter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) read with the Explanation, a "write off" is a condition for allowance. If "real profit" is to be computed one needs to take into account the concept of "write off" in contradistinction to the "provision for doubtful debt". Applicability of Section 145 40. At the outset, we may state that in essence RBI Directions 1998 are prudential/provisioning norms issued by RBI under Chapter III-B of the RBI Act, 1934. These norms deal essentially with income recognition. They force the NBFCs to disclose the amount of NPA in their financial accounts. They force the NBFCs to reflect "true and correct" profits. By virtue of s. 45Q, an overriding effect is given to the Directions 1998 vis-à-vis "income recognition" principles in the Companies Act, 1956. These Directions constitute a code by itself. However, these Directions 1998 and the IT Act operate in different areas. These Directions 1998 have nothing to do with computation of taxable income. These Directions cannot over-rule the "permissible deductions" or "their exclusion" under the IT Act. The inconsistency between these Directions and Companies Act is only in the matter of income recognition and presentation of financial state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is made as the loan is irrecoverable. However, in view of Explanation which keeps such a provision outside the scope of "written off" bad debt, s. 37 cannot come in. If an item falls under ss. 30 to 36, but is excluded by an Expln. to s. 36(1)(vii) then s. 37 cannot come in. Sec. 37 applies only to items which do not fall in ss. 30 to 36. If a provision for doubtful debt is expressly excluded from s. 36(1)(vii) then such a provision cannot claim deduction under s. 37 of the IT Act even on the basis of "real income theory" as explained above. Analysis of Section 43D 45. It is similar to Section 43B. The reason for enacting this section is that interest from bad and doubtful debts in the case of bank and financial institutions is difficult to recover; taxing such income on accrual basis reduces the liquidity of the bank without generation of income. With a view to improve their viability, the IT Act has been amended by inserting s. 43D to provide that such interest shall be charged to tax only in the year of receipt or the year in which it is credited to the P&L a/c, whichever is earlier. 46. Before concluding, we may state that none of the judgments cited on behalf of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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