TMI Blog2020 (5) TMI 84X X X X Extracts X X X X X X X X Extracts X X X X ..... ftware - @25% OR 60% depreciation claimed by the assessee - CIT (A) deleted the addition on the grounds that the AO has mislead himself treating the software as intangible asset - HELD THAT:- we find that the nature of the software acquired were licenses, which do not confer any enduring right and could be used for the duration as acquired for by the licensor. The taxpayer s objective was to use computer software to maximize its performance and streamline efficiency. The Hon ble Bombay High Court in the case of M/s IFlex Solutions Ltd. . [ 2014 (3) TMI 1162 - BOMBAY HIGH COURT] held that there is no reason to differentiate the computer and the software as the latter is an integral part of the former. The software cannot be seen in isolation delinked from the computers. The issue of depreciation @60% on the software is now a settled issue beyond any perplexity. Employee Compensation Expenses - allowable expenditure u/s 37(1) - HELD THAT:- Discount offered on the shares under the ESOP of scheme is allowable deduction u/s 37(1) of the Act, we hereby remand the matter to the file of the AO for the limited purpose of arithmetic calculation of apportioning the year wise discount o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds investment activities. The Assessing Officer further held that the earning of income is not in the nature of passive activity but in fact, it is a well coordinated management decision regarding the deployment of funds. The Assessing Officer relied on the judgment of the ITAT Special Bench New Delhi in the case of Cheminvest Ltd. in ITA No. 87/Del/2008. 6. Before us, during the arguments, the ld. DR relied on the assessment order and the ld. AR supported the order of the ld. CIT (A). 7. The relevant portion of the Assessing Officer is as under: Para 2: The assessee company is engaged in the business of projects, engineering, industrial and technical consultancy, construction and development of real estate properties and other related and ancillary activities. The books of accounts were produced which have been examined on text check basis. para 4 .During the assessment proceedings, the AR of the assessee was asked to explain as to why the disallowance u/s 14A should not be made in accordance with Rule 8D. In response, the assessee filed its reply vide letter dated 15.01.2015 wherein it stated that the assessee has already made disallowance u/s14A amounting to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. Rule 8D(1) of Income Tax Rules, 1962 prescribed the applicability of the procedure. In case, the Assessing Officer is not satisfied with the correctness of the claim of the expenditure made by the assessee, the procedural provisions of Rule 8D are very much applicable to compute the expenditure which are incurred in relation to such income which does not form part of the total income. 8. The ld. DR argued relying on the following case judicial pronouncement and submitted the arguments in writing. 1. Maxopp Investment Ltd. Vs CIT [2018] 91 taxmann.com 154 (SiC)/[2018] 254 Taxman 325 (SC)/[2018] 402 ITR 640 (SC)/[2018] 301 CTR 489 (SC) where Hon ble Supreme Court held that (1) When the shares are held by the assessee not to earn exempt income but to retain controlling stake in the investee company, the dominant purpose test cannot be said to be relevant for the purpose of Sec 14A and disallowance u/s 14A can be made. It is not the dominant purpose test but the principle of apportionment which is ingrained in the provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot satisfied with the correctness of the claim of assessee in respect of expenditures incurred to earn exempt income. 7. Avon Cycles Ltd Vs CIT [2015] 53 taxmann.com 297 (Punjab Haryana)/[2015] 228 Taxman 368 (Punjab Haryana HMAG.) where Hon ble Punjab Haryana High Court held that where funds utilized by assessee was mixed funds and, hence, interest paid on borrowed fund was also relatable to interest on investment made in tax free funds, interest expenditure relatable to investment in tax free funds was to be computed under provisions of Rule 8D(2)(ii). 8. Nahar Spinning Mills Ltd. Vs CIT [2017] 82 taxmann.com 154 (Punjab Haryana)/[2017] 395 ITR 12 (Punjab Haryana) where Hon ble Punjab Haryana High Court held that disallowance of proportionate administrative expenditure made for earning exempted dividend income computed on reasonable basis would be just (A.Y.2006-07). 9. Dy. CIT v. Viraj Profiles Ltd. f20151 64 taxmann.com 52 (Mumbai - Trib.)/[2016] 46 ITR(T) 626 (Mumbai - Trib.)/[2016] 156 ITD 72 (Mumbai - Trib.)/[2016] 177 TTJ 466 (Mumbai - Trib.) where Hon ble ITAT Mumbai held that disallowance of expenditure - Addition on account of disallowance under S. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty, the Assessing Officer will have to record its satisfaction to this effect. 11. In the instant case, we find that no such satisfaction has been recorded by the A.O to come to the conclusion to invoke the provisions of Section 14A(2). Hence, we decline to interfere with the order of the ld. CIT (A) and the disallowance is directed to be deleted. 12. The similar ratio applies to ground no. 1 in ITA No. 6603/Del/2016. Depreciation: 13. The Assessing Officer allowed the claim of depreciation on software @25% against the 60% depreciation claimed by the assessee. The ld. CIT (A) deleted the addition on the grounds that the Assessing Officer has mislead himself treating the software as intangible asset. 14. Having gone through the record, we find that the nature of the software acquired were licenses, which do not confer any enduring right and could be used for the duration as acquired for by the licensor. The taxpayer s objective was to use computer software to maximize its performance and streamline efficiency. The Hon ble Bombay High Court in the case of M/s IFlex Solutions Ltd. reported in 225 Taxmann 37 held that there is no reason to differentiate the computer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld 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. 21. The Special Bench held that the 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 the situations, (a) when the companies issues shares to public at market price and a part of premium is given to the employees in lieu of their services, (b) When the shares are directly issued to employees at a reduced rate. 22. In both the situations, the employees stand compensated for their efforts. ESOP is one such mode of compensating the employees for their services. Since, it is an expenditure for the company, the same needs to be allowed u/s 37(1) of the Act. 23. As to when and how much deduction is to be claimed, the Special Bench observed that the period from grant of option to the vesting of option is the vesting period and it is during such period th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed from ₹ 635/- to ₹ 134/- and ₹ 101/-. The perk value of the share on the date of vesting i.e. 01.11.2011 was ₹ 6158/-. The discount given in the ESOP 2008 scheme was ₹ 110.50. Further, no material was placed as to what was the value of the shares as per the market at different years of vesting (page 143 to 154 PB). The details in the case of Indiabulls Real Estate Ltd. are as per the table below: Scheme Name ESOP Exp (FY 06-07) ESOP Exp (FY 07-08) ESOP Exp (FY 08-09) ESOP Exp (FY 09-10) ESOP Exp (FY 10-11) ESOP Exp (FY 11-12) ESOP Exp (FY 12-13) ESOP Exp (FY 13-4) IBREL-ESOP2006 246,370,340 354,992,832 41,052,997 12,051,561 3,051,602 210,003 96,248 33,613 IBREL-ESOP-2008 929,482 4,740,358 Total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,68,255 IBPSL-ICSL-ESOP-2006Regrant 54,30,664 81,28,900 71,25,968 63,38,096 44,33,448 IBFSL-ICSL-ESOP-II-2006Regrant 28,57,241 42,99,699 38,05,747 34,05,190 23,74,034 TOTAL 24,78,799 3,85,73,635 5,49,23,158 10,51,13,769 7,49,70,109 5,87,93,364 4,16,95,519 1,97,86,972 Cumulative ESOP Cost 4,10,52,433 9,S9,75,591 20,10,89,360 27,60,59,469 33,48,52,833 37,65,48,352 39,63,35,325 Actual ESoP Cost, allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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