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M/s. Religare Macquarie Wealth Management Ltd. Versus ACIT, Circle-15 (1) , New Delhi

2017 (10) TMI 589 - ITAT DELHI

Disallowance of stock appreciation right - difference between the purchase price of stock appreciation right and the sale price of stock appreciation right at the time of the exercise by the employees holding the same to be capital loss and not allowable as business deduction - Held that:- According to the particular scheme the grant price was paid by the Granti who is an employee eligible to participate under the scheme. According to that scheme the 10 employees of the assessee company opted fo .....

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hare. Therefore, the difference between the sale price of the share and the purchase price of the share was claimed by the assessee as deduction as employee compensation. In the identical circumstances. With respect to one of the group companies, Religare commodities Ltd for assessment year 2008 – 09 identical issue arose before the coordinate bench [2017 (1) TMI 783 - ITAT DELHI] claim of the assessee with respect to both the above items were allowed. The above expenditure on account of employe .....

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encing a business’ and a person ‘setting up a business’ and for the purposes of the Indian Income-tax Act the ‘setting up of the business’ and not the ‘commencement of the business’ that is to be considered for cut off of deductibility of expenditure. It is only after the business is set up that the previous year of that business commences and any expense incurred prior to the setting up of a business would not be permissible deduction. When a business is established and is ready to commence bus .....

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ture are allowable to the assessee after the businesses are set up. Therefore in view of this we are of the opinion that the assessee must be allowed the deduction of expenditure incurred w.e.f. 01/04/2007 when the employees were hired and the expenditure With respect to infrastructure was incurred by the assessee. In the result we reverse the finding of the lower authorities and direct the assessee officer to allow the expenditure of ₹ 9389552/– incurred by the assessee for the period fro .....

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incurred towards reimbursement of expenses by the other group concern and it is sharing of cost of common services utilised by those companies - Held that:- The Hon’ble Delhi High Court in case of CIT versus Fortis healthcare Ltd [2009 (1) TMI 842 - HIGH COURT OF DELHI] has held that no tax is required to be deducted on the reimbursement of the expenses. The revenue could not point out any fact that these expenses are not reimbursement of the expenses but for the purpose of rendering specific se .....

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r the Assessment Year 2008-09. 2. The assessee has raised the following grounds of appeal:- 1. That the Commissioner of Income tax (Appeals) erred on facts and in law in sustaining disallowance of ₹ 6,69,626 (as against correct amount of ₹ 7,51,482) made by the assessing officer on account of the difference between purchase price of Stock Appreciation Right ( SAFA) and the sale price of such SAR at the time of its exercise by the employees of the appellant holding the same to be capi .....

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Commissioner of Income tax (Appeals) erred on facts and in law in not appreciating that the above SAR scheme was implemented to motivate, reward and retain key employees whereby each SAR granted to the employees of the appellant stood equivalent to one share of Religare Enterprises Ltd. ( REL ) and the aforesaid differential amount was, thus, in the nature of employee benefit allowable under section 37(1) of the Income Tax Act, 1961 ( the Act ). 1.3 Without prejudice, the Commissioner of Income .....

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holding the same to be capital expenditure incurred in relation to issue of shares to employees. 2.1 That the Commissioner of Income tax (Appeals) erred on facts and in law in not appreciating that the above differential amount of ₹ 15,99,306 was in the nature of employee compensation allowable as deduction under section 37(1) of the Act. 2.2 Without prejudice, and in alternative, the Commissioner of Income tax (Appeals) erred on facts and in law in not allowing deduction of the above dif .....

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the basis that the business was set up only on 30.06.2007 when the first invoice was raised by the appellant. 4. That the Commissioner of Income tax (Appeals) erred on facts and in law in upholding disallowance of ₹ 1,96,524 made by the assessing officer under section 14A of the Act by applying Rule 8D of the Income Tax Rules, 1962 ( the Rules ). 4.1 That the Commissioner of Income tax (Appeals) erred on facts in upholding the observation of the assessing officer that the loan given by the .....

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000 made by the assessing officer under section 40(a)(ia) of the Act alleging that tax was not deducted at source. 5.1 That the Commissioner of Income tax (Appeals) erred in not appreciating that the above sum of ₹ 34,34,000 were paid to the group companies towards reimbursements of actual expenditure and thus, there was no requirement to deduct tax at source on such payments. Brief facts 3. The assessee is a company which is engaged in the business of wealth management services including .....

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77; 140/- per share. The difference between the grant price and cost price is treated as a bonus to the employees in the books of the company and the difference between the sale price of the share and the cost of shares is taken as a loan written off by the company in books of the company. Therefore, during the year the difference between the sale price of the share and the purchase price was debited of ₹ 6 69626/- in the books of accounts of the company and same was claimed as allowable e .....

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efore, all the expenditure incurred prior to that period are treated as pre commencement expenses and are not allowable. 6. Further as the stock appreciation right in holding investment in shares of company through trust, The Ld. AO held that it will attract the provisions of section 14 A of the income tax act and therefore applying provisions of rule 8D of the income tax rules, 1962 he disallowed a sum of ₹ 196524/- under section 14 A of the income tax act. 7. The assessee further shown r .....

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act 1961 was passed on 31/12/2010 determining net loss of ₹ 2364 4815/- against the returned loss of ₹ 3 733 4517/-. Appellate proceedings 9. Assessee aggrieved with the order of the Ld. assessing officer preferred an appeal before the Ld. CIT (A), who vide order dated 28/02/2013 disposed off the appeal of the assessee. He confirmed the disallowance of ₹ 669626/- on account of the difference between the purchase price of stock appreciation rights and the sale price of such stoc .....

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under section 40(a)(ia) of the act. 10. The Ld. CIT appeal further enhanced the assessment of the assessee on account of loss on sale of shares difference between the purchase price o the SAR of ₹ 503/- per share and SAR value of RS 140/- per share being ₹ 363/- per share which is claimed by the assessee as loss on sale of shares . According to ld CIT (A) assessee has claimed total expenses of ₹ 2268932/- whereas the ld AO has disallowed only ₹ 669626/- therefore the bala .....

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t now the issue is squarely covered in favour of the assessee by the decision of the coordinate bench in case of Religare commodities Ltd in ITA No. 2283/del/2013 for assessment year 2008 - 09. He further referred to para No. 7 of that decision stating that coordinate benches allowed the claim of the assessee following the special bench decision in case of Biocon Ltd versus DCIT, Bangalore 144 ITD 21. He therefore submitted that ground No. 1 and 2 of the appeal of the assessee is covered in favo .....

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of the assessee was open on 27/04/2007 at the share capital was allotted on 11/05/2007. He further submitted that merely because the 1st debit note was issued on 30/06/2007, it cannot be said that the business have been set up on that particular date because before that date, the assessee has already rendered the services and for which various activities commenced in the month of April 2007 only. He further referred to the copy of the salary Ledger account showing payment of salary on 30/04/2007 .....

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of the assessee with respect to disallowance under section 14 A of the income tax act he submitted that there is no exempt income earned by the assessee during the year and when there is no exempt income, no disallowance can be made. He further referred to the decision of the Hon ble Delhi High Court in case of Cheminvest limited versus CIT, wherein identical issue was considered in para No. 23 of that order. 15. With respect to ground No. 5 of the appeal of the assessee against the confirmatio .....

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Lacs. He submitted that the Ld. CIT-A has wrongly stated that the amount of reimbursement is for actual services rendered by this group entities to the assessee. He submitted that these are the expenditure of reimbursement of salary, travelling, conveyance, insurance etc made by the appellant without deduction of the tax at source. He further referred to MOU with Religare securities Ltd for reimbursement of rent and maintenance charges placed at page No. 170 - 175 of the paper book. He further .....

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see. For that reason he submitted that there is no requirement of tax deduction at source on the above payment and hence disallowance made by the Ld. assessing officer as well as by confirmed by the Ld. CIT (A) is erroneous. He further referred to decision of Honourable Delhi high court in case of Fortis Healthcare Limited . Arguments of the revenue 16. The Ld. departmental representative vehemently contested the grounds raised by the assessee relying on the order of the Ld. assessing officer as .....

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4 A of the act cannot be made. He further referred that the provisions of section 14 A does not provide that the year in which no income is earned disallowances not to be made. He further referred that the expenditure incurred by the assessee with respect to the sister concern is not in the nature of reimbursement of expenditure as already held by the Ld. CIT (A) but in the nature of rendition of the services. Therefore, the tax would have been deducted thereon on these payments made by the asse .....

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ight being the difference between the purchase price of stock appreciation right and the sale price of stock appreciation right at the time of the exercise by the employees holding the same to be capital loss and not allowable as business deduction. With respect to the enhancement made by the CIT - A of ₹ 1 599306/- on account of difference between the sale price of stock appreciation right and the exercise price of stock appreciation right holding the same to be capital expenditure incurr .....

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scheme which entitles them to receive stock appreciation rights compensation under the scheme provided the participant satisfy the requirement of that particular scheme, the compensation is paid by the company to the participant in respect of this surrendered vested stock appreciation rights according to the scheme. According to the particular scheme the grant price was paid by the Granti who is an employee eligible to participate under the scheme. According to that scheme the 10 employees of th .....

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ees was ₹ 140/- per share. Therefore, the difference between the sale price of the share and the purchase price of the share was claimed by the assessee as deduction as employee compensation. In the identical circumstances. With respect to one of the group companies, Religare commodities Ltd for assessment year 2008 - 09 identical issue arose before the coordinate bench, which decided this issue in ITA No. 2283/Del/2013 by order dated 04/01/2017 wherein relying upon the decision of the spe .....

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A No. 107/2015 has also held that the expenses debited is cost of employee stock option plan in the profit and loss account is an allowable expenditure. The Ld. departmental representative also could not point out any other judicial precedent against the above judicial precedents cited by the Ld. authorised representative. In view of this ground No. 1 and 2 of the appeal of the assessee is allowed reversing the decision of the Ld. CIT - A and directing the assessing officer to allow the sum of & .....

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employees of the appellant as it has already been held to be the revenue expenditure in relation to the stock appreciation rights scheme of the assessee to appreciate the performance of the employees holding the same as revenue expenditure. Therefore ground no 1 & 2 of the appeal of the assessee is allowed. 19. The 3rd ground of appeal is with respect to the issue that whether the assessee is eligible for deduction of expenditure incurred by it from April 2007 to June 2007. The Ld. assessin .....

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well as all other incidental expenditure are incurred. Merely because the invoices was raised on 30/06/2070 cannot be said that the business has been set up on that particular date, because without the employees as well as without proper infrastructure the assessee could not have rendered these services which assessee has started putting in place w.e.f. 01/04/2007. At page No. 148 of the paper book assessee has given the detail of the salary for the month of April 2007. Hon ble Bombay High Cour .....

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the business of the assessee was set up by employment of the employees as well as by hiring the requisite infrastructure which happened in the month of April 2007. The courts have held that there is a clear distinction between a person commencing a business and a person setting up a business and for the purposes of the Indian Income-tax Act the setting up of the business and not the commencement of the business that is to be considered for cut off of deductibility of expenditure. It is only afte .....

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hat interval would be permissible deductions. We also draw support from the decision of Hon ble Bombay High Court in case of CIT versus Axis Equity private limited in ITA No . 1204 of 2017 dated 30/01/2017 wherein on identical facts, issue has been decided that the expenditure are allowable to the assessee after the businesses are set up. Therefore in view of this we are of the opinion that the assessee must be allowed the deduction of expenditure incurred w.e.f. 01/04/2007 when the employees we .....

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he income tax act applying the provisions of rule 8D of the income tax rules, 1962 even in the absence of any exempt income earned by the assessee. Hon ble Delhi High Court has decided the identical issue in Cheminvest Ltd versus CIT [378 ITR 33], wherein in para No. 23, it is been held that where the assessee has not earned any exempt income during the year there cannot be any disallowance under section 14 A of the income tax act. Undisputedly there is no exempt income during the year, earned b .....

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