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TMI Blog2023 (3) TMI 1035X X X X Extracts X X X X X X X X Extracts X X X X ..... 11.2017 declaring a loss of Rs.139,61,48,741. The case was selected for scrutiny and statutory notices were duly served on the assessee. The AO completed the assessment by making following additions/disallowances:- (i) Addition on account of valuation of marketing intangibles of assessee - Rs.1708,39,07,538. (ii) Disallowance u/s. 37 towards ESOP expenses - Rs.15,80,70,000. 3. On further appeal, the CIT(A) deleted the addition made towards valuation of marketing intangible assets by relying on the decision of the coordinate Bench in assessee's own case. The CIT)(A) upheld the disallowance of ESOP expenses. The assessee and the revenue are in appeal against the order of the CIT(A). 4. The grounds raised by the assessee and by the revenue are as under:- Grounds of Assessee's appeal 1. That on the facts and in the circumstances of the case and in law, the Learned Commissioner of Income Tax Appeals - 11, Bangalore ("Ld. CIT(A)") erred in upholding the action of the Learned Assessing Officer ("Ld. AO") in disallowing the ESOP expenditure amounting to INR 15,50,70,000/-for Assessment Year (AY") 2017 -18. Disallowance of expenditure claimed towards Employee Stock Option Scheme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al discipline, has failed to follow the binding judgments and orders of Hon'ble Courts and this Hon'ble Tribunal, wherein it has been held that withholding obligations under Section 195 would not arise on reimbursement of expenses. Instead the Ld. CIT(A) has proceeded on extraneous considerations while relying on case laws decided in different context and not applicable to the facts of the Appellant. 11. The Ld. CIT(A), has erred in law and on facts, in failing to quash the penalty proceedings initiated under Section 270A of the Act by Ld. AO. 12. The Ld. CIT(A) has erred in law and on facts, in failing to delete interest levied under Section 234B of the Act. The Appellant craves leave to add, alter, amend, substitute or withdraw all or any of the Grounds of Appeal herein and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing to enable the Hon'ble Tribunal members to decide these according to the law." 5. We will first consider the appeal of the assessee with regard to disallowance of ESOP expenses. The ld AR and ld. DR submitted a detailed written submissions with regard to the ESOP expenses whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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. 19. In the present case, there is no dispute that the liability has accrued to the assessee during the previous year. The only question to be decided is as to whether it is the expenditure of the assessee or that of the parent company. We are of the view that the observations of the CIT(A) in para 5.6 of his order that these expenses are the expenses of the foreign parent company is without any basis and lie in the realm of surmises. The foreign parent company has a policy of offering ESOP to its employees to attract the best talent as its work force. In pursuance of this policy of the foreign parent company, allowed its subsidiaries/affiliates across the world to issue its shares to the employees. As far as the assessee in the present case which is an affiliate of the foreign parent company is concerned, the shares were in fact acquired by the assessee from the parent company and there was an actual outflow of cash from the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o evidence or even a suggestion made by the CIT(A) in his order. There is no basis to apply the provisions of Sec.40A(2)(b) of the Act. 22. With regard to the decision of the ITAT in the case of AccentureServices (P.) Ltd. (supra), we find that the facts of the case of Accenture Services (P.) Ltd. (supra)are identical. In the case of Accenture Services (P.) Ltd. (supra), the facts were that the assessee company incurred certain expenses on account of payments made by it for the shares allotted to its employees in connection with the ESPP. The AO had disallowed Rs. 9,06,788/- incurred by the assessee on the ground that this expenditure is not the expenditure of assessee company but that expenditure is of parent company and the benefit of such expenditure accrues to the parent company and not assessee. The CIT(A) deleted the addition made by the AO. The CIT(A) found that the common shares of Accenture Ltd. the parent company, have been allotted to the employees of ASPL, the Indian affiliate/Assessee and not to the employees of the parent company. The CIT(A) also found that though the shares of the parent company have been allotted, the same have been given to the employees of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure in question was wholly and exclusively for the purpose of the business of the assessee and had to be allowed as deduction as a revenue expenditure. 25. For the reasons given above, we direct the expenditure be allowed as deduction." 9. We also notice that the issue of whether ESOP cross charge expenses are allowable u/s. 37 of the Act has already been decided by this Tribunal in favour of the assessee in the case of Biocon Ltd. (supra) which has also been affirmed by the Hon'ble Karnataka High Court in [2021] 430 ITR 151 (Karnataka) by categorically holding that "the expression 'expenditure' will also include a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which it is issued and the market value of the shares would also be expenditure incurred for the purposes of Section 37(1) of the Act." 10. The assessee's case being identical, respectfully following the above decision of the coordinate Bench, we hold that the expenditure towards ESOP is eligible for deduction u/s 37 of the Act. Revenue's appeal 11. The assessee is a wholesale dealer in various items. It purchases goods from various persons an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee as we have seen is a wholesale trader. He purchases goods for the purpose of trading at say Rs. 100/- from unrelated parties. He sells it to retailers at Rs. 80/-. The retailers are also unrelated parties. The retailers sell the goods through the Assessee's web portal "flipkar.com". The trading by the retailers to the end user is through E-Commerce. The customers browse the website and see the various products and place orders electronically. The products are delivered physically to the customers at their desired place. The payment is also made electronically or by cash at the point of deliver to the customers. As far as the Assessee is concerned it deals only with retailers. On sale to the retailers the Assessee incurs loss. The case of the AO is that a wholesale trader normally sells his products at cost + his mark-up (margin) + indirect costs incurred in the business of wholesale trading. The plea of the Assessee is that E-commerce was at a nascent stage and therefore to attract customers to purchase goods through ECommerce, the only way was to offer goods at a lesser price than what the retailers in physical market in show room offer (referred to as retailers in brick an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordinary connotation of the said term as income can be regarded as income even though they do not fall within any of the categories of income set out in various subclauses of Sec. 2(24) of the Act. The aspect to be noted is that there should be income and its receipt or accrual because it is only income which accrues or arises that can be subject matter of total income u/s.5 of the Act. Sec.14 lays down that income for the purpose of computation of total income has to be classified under the following heads of income viz., Salaries, Income from house property, Profits and gains of business or profession, Capital gains and Income from other sources. Sec.28 of the Act lays down various categories of income that shall be chargeable to income-tax under the head "Profits and gains of business or profession". The income of the Assessee in the present case would fall within Sec.28(i) of the Act viz., "the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year". Section 145 of the Act provides how income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" has to be compute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of Calcutta Discount Co. Ltd. (supra), that where a trader transfers his goods to another trader at a price less than the market price and the transaction is a bona fide one, the taxing authority cannot take into account the market price of those goods, ignoring the real price fetched to ascertain the profit from the transaction. The Hon'ble Court explained that the only exception was if Section 40(A)(2)(a) of the Act applies viz., where the parties to the transaction are related. Following the aforesaid decisions, we hold that the AO was not right in proceeding to ignore the books results of the Assessee and resorting to a process of estimating total income of the Assessee in the manner in which he did. We find force in the submission of the learned counsel for the Assessee that what can be taxes is only income that accrues or arises as laid down in Sec.5 of the Act. Nothing beyond Sec.5 of the Act can be brought to tax. As contended by him there was nothing to show accrual of income so as to disregard the loss declared by the Assessee in the return of income filed. As we have already seen there is no provision in the Act by which the AO can ignore the sale price de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o accrual of any liability on account of any expenditure or actual outflow of funds towards expenditure. One cannot proceed on the basis of presumption that the profit foregone is expenditure incurred and further that expenditure so incurred was for acquiring intangible assets like brand, goodwill etc. As pointed by the Hon'ble Supreme Court and the Hon'ble Bombay High Court in the case of B.C. Srinivasa Setty (supra) and Evans Frazer (supra), for creation of intangibles like say goodwill it is not possible to ascertain in terms of money the cost of acquisition of goodwill; it is equally impossible to ascertain in terms of money the cost of addition or alteration to the quality of goodwill which led to the increase in its value. It is therefore not possible to say that profits foregone created goodwill or any other intangibles or brand to the Assessee. The argument of the learned DR on the existence of intangibles/brands or goodwill was on the basis of purchase of Assessee's shares at a premium by investors. Despite making losses, the Assessee's shares were purchased by investors at a high premium. In this regard two instances of purchase by venture capitalists of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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