TMI Blog2022 (12) TMI 1416X X X X Extracts X X X X X X X X Extracts X X X X ..... ] - Decided in favour of assessee. - ITA NOS. 766 AND 767/PUN/2018 AND ITA NOS. 818 AND 819/PUN/2018 - - - Dated:- 9-12-2022 - SHRI S.S. GODARA, JUDICIAL MEMBER AND DR. DIPAK P. RIPOTE, ACCOUNTANT MEMBER For the Assessee : Shri Percy Pardiwala and Ms. Vasanti B. Patel For the Revenue : Shri Sardar Singh Meena ORDER PER S.S. GODARA, JM: These assessee s and Revenue s twin cross appeals each, arise against the CIT(A), Pune-6 s separate orders dated 31.01.2018 passed in case Nos. PN/CIT(A)-6/DCIT,Cir-8/3/2015-16 PN /CIT(A)/DCIT,Cir- 8/137/2016-17, for A.Yrs 2012-13 2013-14, respectively, involving proceedings under 143(3) of the Income Tax Act, 1961 in short the Act . Heard both the parties. Case files perused. 2.1 We note during the course of hearing the assessee s twin appeals ITA Nos.766 767/PUN/2018 raise the following common substantive grounds : 1. GROUND 1 - DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D 1.1 The CIT(A) erred in upholding the action of the Assessing Officer ( AO ) in making disallowance under section 14A of the Income-tax Act, 1961 ( Act ) by applying Rule 8D of the Income Tax Rules, 1962 ( Rules ). 1.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee s suo motu disallowance of Rs. 50,000/- already exceeds the sum which has nowhere been contested during the course of hearing. We, therefore, direct the Assessing Officer to restrict the impugned section 14A read with rule 8D disallowance to a lump sum figure of Rs. 50,000/- each in both these assessment years. Ordered accordingly. Necessary computation shall follow as per law. The assessee s identical first and foremost grounds in both these appeals is partly accepted in very terms. 4. Next comes the assessee s identical second substantive grievance that both the lower authorities have erred in law and on facts in disallowing its ESOP (Employee Stock Options) deduction claim(s) of Rs.7,57,14,428/- and Rs.12,85,12,529/-, assessment year wise; respectively as not an allowable revenue expenditure u/s.37 of the Act. 5. We have given our thoughtful consideration to vehement rival contentions against and in support of the impugned disallowance. It emerges during the course of hearing that this tribunal s very recent order dated 29-08-2022 in assessee s case itself in ITA No.1393/PUN/2018 involving the preceding twin assessment years 2010-11 and 2011-12, has alr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to accept the claim of assessee which has not been made before the Assessing Officer. We deem it appropriate to remit this issue back to the file of Assessing Officer to consider the claim of the assessee in the light of decision of Special Bench of the Bangalore Tribunal in the case of Biocon Limited (supra). The assessee shall file fresh computation of income before the Assessing Officer. The Assessing Officer shall consider the same and decide the claim of assessee in accordance with law. Accordingly, this ground of appeal of the assessee is allowed for the statistical purpose. 4. Therefore, as per the remand proceedings and judicial discipline, the A.O should have only restricted himself in following the direction of the Tribunal in deciding the issue only on the basis of Special Bench decision in the case of Biocon Ltd (supra). However, we find that the A.O while adjudicating on this issue in his order from para 5 onwards has in effect tried to distinguish the Special Bench decision in the case of Biocon Ltd (supra) and has also referred to Delhi ITAT decision in the case of ACIT Vs. Ranbaxy Laboratories in ITA 2613 and 3871/Del/. The A.O has also commented that there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e discount on ESOP being a general expense, is an allowable deduction u/s 37(1) of the Act during the years of vesting on basis of percentage of vesting during such period subject to upward or downward adjustment at the time of exercise of option. When this issue was decided in favour of the assessee, the department took up this matter before the Hon ble Karnataka High Court in the case of CIT LTU vs. Biocon Ltd ((2020) in ITA No. 653 of 2013 - 121 taxman.com 351 (Karnataka). The Hon‟ble Karnataka High court analysed the facts involving the issue and the background of the case as follows: 2. Facts leading to filing of this appeal briefly stated are that the assessee is a company engaged in the business of manufacture of Enzymes and Pharmaceuticals Ingredients. The assessee filed its return of income for the Assessment Year 2004-05 on 31.10.2004 declaring total income of Rs.50,65,18,080/-. The case was selected for scrutiny by the Assessing Officer. The Assessing Officer by an order dated 29.12.2006 inter alia held that assessee has floated a scheme viz., Employees Stock Option Plans (ESOP) and under the scheme had constituted the Trust. The shares of the company were tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the shares as on the date of grant of options is allowable as a deduction under Section 37 of the Act. Before proceeding further, it is apposite to take note of Section 37(1) of the Act, which reads as under: Section 37(1) says that any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head, Profits and Gains of Business or Profession . 7. Thus, from perusal of Section 37 (1) of the Act, it is evident that the aforesaid provision permits deduction for the expenditure laid out or expended and does not contain a requirement that there has to be a pay-out. If an expenditure has been incurred, provision of Section 37(1) of the Act would be attracted. It is also pertinent to note that Section 37 does not envisage incurrence of expenditure in cash. 8. Section 2(15A) of the Companies Act, 1956 defines 'employees stock option' to mean option given to the whole time directors, officers or the employees of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be construed as short receipt of capital. The tribunal therefore, in paragraph 9.2.7 and 9.2.8 has rightly held that incurring of the expenditure by the assessee entitles him for deduction under Section 37(1) of the Act subject to fulfilment of the condition. 11. The deduction of discount on ESOP over the vesting period is in accordance with the accounting in the books of accounts, which has been prepared in accordance with Securities And Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. 12. So far as reliance place by the revenue in the case of CIT VS. INFOSYS TECHNOLOGIES LTD. is concerned, it is noteworthy that in the aforesaid decision, the Supreme Court was dealing with a proceeding under Section 201 of the Act for non-deduction of tax at source and it was held that there was no cash inflow to the employees. The aforesaid decision is of no assistance to decide the issue of allowability of expenses in the hands of the employer. It is also pertinent to mention here that in the decision rendered by the Supreme Court in the aforesaid case, the Assessment Year in question was 1997-98 to 1999- 2000 and at that time, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Accordingly, the ground No. 1.1 of assessee‟s appeal is allowed. 8. The ld. Sr. Counsel further submitted that if Ground No. 1.1 is allowed, then ground No. 1.3 would become infructuous. Since we have decided the said ground No. 1.1 in favour of the assessee, therefore, taking the submissions of the ld. Sr. counsel ground No. 1.3 is dismissed as infructuous. 9. Ground No. 1.2 reads as follows: 2. the CIT(A) has further erred in not allowing deduction for ESOP expenditure on the basis of the perquisite value taxed in the hands of employees in respect of options exercised by them during the year, to the extent such expenditure is not allowed on accrual basis in earlier years. 10. This issue has also been dealt with by the Special Bench decision in the case of Biocon Ltd (supra). The Tribunal held as follows: 11.1.5. The other side of the coin is the amount of remuneration to the employees in the hands of the company. We have noticed earlier that an expense becomes deductible on the incurring of liability under the mercantile system of accounting. Although the stage of taxability of perquisite in the hands of the employee may differ from the stage of the deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Situation I Situation II Situation III Market value per Share 110 110 130 90 Option price 10 10 10 10 Employees compensation or discount 100 100 120 80 From the above table it can be noticed that the market price of the shares at the time of grant of option was Rs. 110 against the option price of ₹ 10, which resulted in discount at ₹ 100. With the vesting period of four years with the equal vesting, the company can rightly claim deduction at the rate of Rs. 25 each at the end of first, second, third and fourth year of vesting. But this total deduction for discount of Rs. 100 over the vesting period needs to be adjusted at the time of exercise of option by the employee when the shares are issued. In Situation I, the market price of shares at the time of exercise of option is at Rs. 110, which is similar to the market price at the time of grant of option. As the total amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. The appeal is filed by the Revenue to challenge the judgment of the Income Tax Appellate Tribunal ( the Tribunal for short) raising following questions for our consideration:- (i) Whether on the facts and circumstances of the case and in law, the Tribunal was correct in disregarding the judgment of the Hon'ble Supreme Court given in the case of Southern Technologies Ltd Vs. JCIT 320 ITR 577 (SC) which says that provisions of RBI Act cannot override the provision of Section 145 of the Income Tax Act, 1961, since both the Acts operate in different fields and therefore, assessee cannot recognize interest income on NPA and yet not offer it in Profit and Loss account? (ii) Whether on the facts and in the circumstances of the case and in law, the Tribunal was correct in deleting the disallowance of Rs.71,13,261/- made by AO u/s. 14A r/w Rule 8D after treating the disallowance of Rs. 57,600/- offered by assessee as insufficient on the ground that the AO has not recorded the error in the offer of the assessee before invoking Rule 8D, without any such explicit requirement of law? 3. Question No. (i) arose in following background:- 3.1 Respondent assessee is a Non Ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4) held and observed as under:- 8. The assessee had credited only an amount of Rs.38,57,933/- as interest on loans. The Assessing Officer was of the view that the interest accrued on the entire loans should have been shown as income. The details as to how the interest income on accrual basis should have been disclosed are, therefore, referred to by the Tribunal. The Tribunal held that the said income was not realized. It held that the assessee follows the mercantile system of accounting. The Tribunal held that the loan advanced by the assessee which was in NBFC had become non-performing asset. That is how following judgments rendered by the Hon'ble Supreme Court and the Delhi High Court, the Tribunal has eventually held that once there is no dispute that the interest considered as accrued was a non-performing asset as per Reserve Bank of India guidelines, then, the income from this interest did not accrue to the assessee. It is in such circumstances, that this income in question was not and cannot be assessed on accrual basis. 9. We do not find that the Tribunal has either misdirected itself in law or its order can be termed as perverse warranting interference in our app ..... X X X X Extracts X X X X X X X X Extracts X X X X
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