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TMI Blog2022 (12) TMI 1416X X X X Extracts X X X X X X X X Extracts X X X X ..... ax Act, 1961 ('Act') by applying Rule 8D of the Income Tax Rules, 1962 ('Rules'). 1.2 The CIT(A) have erred in not appreciating the fact that the disallowance under section 14A of the Act of Rs. 50,000 made by the Appellant in the Return of Income is reasonable. 1.3 The CIT(A) erred in observing that the Appellant claimed that it has not incurred any expenditure for earning exempt income, whereas, as evident from the facts of the case, the Appellant had itself disallowed an amount of Rs. 50,000 under section 14A of the Act. 1.4 The CIT(A) should have appreciated that the disallowance under section 14A read with Rule 8D cannot be invoked without recording objective satisfaction. 1.5 Without prejudice to the above, the CIT(A) erred in not restricting the disallowance under section 14A read with Rule 8D to Rs. 42,964, being the amount of exempt income earned by the Appellant during the subject year. 2. GROUND 2 - DISALLOWANCE OF CLAIM FOR DEDUCTION IN RESPECT OF EMPLOYEE STOCK OPTIONS ('ESOP') EXPENDITURE. 2.1 The CIT(A) erred in not allowing deduction in respect of ESOP expenditure of Rs.7,57,14,428 under section 37(1) of the Act. 3. GROUND 3 - NOT ALLOWING CLAIM OF DE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lving the preceding twin assessment years 2010-11 and 2011-12, has already rejected the Revenue's arguments as follows : "3. We would first adjudicate appeal in ITA No. 1392/PUN/2018 for A.Y. 2010-11. The only ground is with regard to not allowing deduction by the ld. CIT(A) in respect of Employee Stock Options (ESOP) expenditure of Rs. 1,33,64,340/- u/s 37 sub-clause (1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act". The ld. Sr. Counsel for the assessee submitted that in the first round of litigation the Pune Tribunal in assessee's own case in ITA No. 579/PUN/2014 for A.Y. 2010-11, order dated 11-04-2016 had remanded this issue back to the file of the A.O to consider the claim of the assessee in the light of decision of Special Bench Bangalore Tribunal in the case of Biocon Ltd., in (2013) 35 taxmann.com 335 (Bangalore - Trib) (SB). The relevant paragraphs of Tribunal's order are extracted as follows: "32. The assessee raised additional ground as ground no. 4 on account of claim of deduction in respect of Employee Stock Options (ESOP) expenditure of Rs. 1,33,64,340/-. The ld. AR submitted that the assessee is a listed company and issued stock options with a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 3871/Del/. The A.O has also commented that there is no jurisdictional High Court decision that has been placed before him. Thereafter, at para 7.3 in his order, he opines that ESOP claim of the assessee is not as per the guidelines issued by the Special Bench decision in the case of Biocon Ltd (supra) on which the assessee has placed reliance. According to the A.O the assessee has not clarified on this issue. In view of the discussion, the claim of deduction of ESOP expenditure amounting to Rs. 1,33,64,340/- was disallowed by the A.O. We find that in the order of the Tribunal (supra) it has been clearly mentioned that the A.O has to adjudicate the issue in the light of the Special Bench decision Bangalore whereas the A.O has gone beyond and has tried to distinguish the judgment itself along with other cases which is not in accordance with the judicial decorum. We find that the Hon'ble Calcutta High court in the case of Surrendra Overseas Ltd. Vs. CIT in Income-tax Reference No. 406 of 1975 - (1979) - 120 ITR 872 (Cal) wherein the facts were that the assessee preferred appeals before the Appellate Assistant Commissioner (hereinafter referred to as "the AAC" for short) against t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstituted the Trust. The shares of the company were transferred to the trust at the face value and the employees of the assessee were allowed to exercise the option to buy the shares within the time prescribed under the scheme subject to terms and conditions mentioned therein. The assessee claimed the difference of market price and allotment price as a discount and claimed the same as an expenditure under Section 37 of the Act. The Assessing Officer rejected the claim on the ground that the assessee has not incurred any expenditure and the expenditure is contingent in nature and therefore, the assessee is not entitled to claim the difference between the market price and the allotment price as an expenditure under Section 37 of the Act. The assessee thereupon filed an appeal before the Commissioner of Income Tax (Appeals) who by an order dated 13.11.2009 dismissed the appeal preferred by the assessee. 3. The assessee thereupon filed an appeal before the Income Tax Appellate Tribunal (hereinafter referred to as 'the tribunal' for short). The division bench of the tribunal made a reference to the special bench. The special bench referred the question 'whether discount on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whole time directors, officers or the employees of the company, which gives such directors, officers or employees, the benefit or right to purchase or subscribe at a future rate the securities offered by a company at a free determined price. In an ESOP a company undertakes to issue shares to its employees at a future date at a price lower than the current market price. The employees are given stock options at discount and the same amount of discount represents the difference between market price of shares at the time of grant of option and the offer price. In order to be eligible for acquiring shares under the scheme, the employees are under an obligation to render their services to the company during the vesting period as provided in the scheme. On completion of the vesting period in the service of the company, the option vest with the employees. 9. In the instant case, the ESOPs vest in an employee over a period of four years i.e., at the rate of 25%, which means at the end of first year, the employee has a definite right to 25% of the shares and the assessee is bound to allow the vesting of 25% of the options. It is well settled in law that if a business liability has arisen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on was 1997-98 to 1999- 2000 and at that time, the Act did not contain any specific provisions to tax the benefits on ESOPs. Section 17(2)(iiia) was inserted by Finance Act, 1999 with effect from 01.04.2000. Therefore, it is evident that law recognizes a real benefit in the hands of the employees. For the aforementioned reasons, the decision rendered in the case of Infosys Technologies is of no assistance to the revenue. The decisions relied upon by the revenue in Gajapathy Naidu, Morvi Industries and Keshav Mills Ltd. supra support the case of assessee as the assessee has incurred a definite legal liability and on following the mercantile system of accounting, the discount on ESOPs has rightly been debited as expenditure in the books of accounts. We are in respectful agreement with the view taken in PVP Ventures Ltd. And Lemon Tree Hotels Ltd. Supra. 13. It is also pertinent to mention here that for Assessment Year 2009-10 onwards the Assessing Officer has permitted the deduction of ESOP expenses and in view of law laid down by Supreme Court in Radhasoami Satsang vs. CIT, (1992) 193 ITR 321 (SC), the revenue cannot be permitted to take a different stand with regard to the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay differ from the stage of the deductibility of expense in the hands of the company depending upon the method of account followed by the company, but the amount of such discount or employees remuneration can never be different. If the value of perquisite in the hands of the employee, whether or not taxable, is `x', then its cost in the hands of the company has also to be `x'. It can neither be `x+1' nor `x-1'. It is simple and plain that the amount of remuneration which percolates to the employees will always be equal to the amount flowing from the company and such remuneration to the employee in the present context is the amount which he actually becomes entitled to on the exercise of options. Thus, it is palpable that since the remuneration to M/s.Biocon Limited the employees under the ESOP is the amount of discount w.r.t. the market price of shares at the time of exercise of option, the employees cost in the hands of the company should also be w.r.t. the same base. 11.1.6. The amount of discount at the stage of granting of options w.r.t. the market price of shares at the time of grant of options is always a tentative employees cost because of the impossibility ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e tentative compensation of Rs. 100 per share which was accounted for and allowed as deduction during the vesting period. As the actual quantification of the compensation has turned out to be Rs. 120, the company is entitled to a further deduction of Rs. 20 at the time of exercise of option. In Situation III, the market price of the share at the time of exercise of option has come down to Rs. 90. The amount of real compensation to employees is Rs. 80 as against the tentative compensation of Rs. 100, which was allowed as deduction during the vesting period. As the actual quantification of the compensation has turned out to be Rs. 80, the company is liable to reverse the deduction of Rs. 20 at the time of exercise of option. 11. Having heard the parties, this ground is allowed as per the aforesaid terms of decision of the Special Bench." 6. We do not see any distinction on facts and law pinpointing at the Revenue's behest during the course of hearing. We thus adopt the foregoing total discussion mutatis mutandis and accept the assessee's corresponding substantive ground Nos. 2 to 3.2 in both these appeals. Ordered accordingly. 7. Learned counsel does not press for the assessee's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound that the assessee which was following the mercantile system of banking had to pay tax on interest on accrual basis. 3.2 The issue eventually reached the Tribunal. The Tribunal, by the impugned judgment, allowed the assessee's claim, upon which, the Revenue has filed this appeal. 4. Learned counsel for the Revenue submitted that the assessee had to offer the interest income to tax on accrual basis. The special provision for taxing interest income on NPAs on the basis of receipt has been made under Section 43D of the Income Tax Act, 1961 ("the Act" for short) which does not apply to NBFC. By necessary implication, therefore, the legislature desired that such benefit would be restricted only to such of the entities as are referred to in Section 43D of the Act. 5. On the other hand, learned counsel for the assessee brought to our notice several judgments of the different High Courts holding that on the principle of real income theory, interest on NPAs cannot be charged on accrual basis. 6. Gujarat High Court in case of Principal CIT Vs. Mahila Sewa Sahakari Bank Ltd1 had held that in case of a co-operative bank, the interest on NPAs would not be chargeable to tax on me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that in case of Nationalized Bank it treated something which is doubtful, and therefore, kept it in a suspense account, was held to be a permissible exercise. In respect of the loans which are advanced, recovery of some of them if considered doubtful, then, even the interest on the loans advanced may not be realized. That is how the amount is not brought to the profit and loss account because they are not likely to be realized by the bank or a NBFC as well. It is permissible therefore to disclose or to show them as income in assessment year in which either the interest amount or part of it is recovered. The Tribunal in this case, namely, of the assessee before us, has precisely followed this course. We do not find that the course permitted and upheld by the Tribunal is in any way in conflict with any legal provisions or the settled principles. Rather as held by us, it is in accordance with the same. Once the view taken by the Tribunal was possible and in the given facts and circumstances the income has not been realized by the assessee, the addition was rightly deleted. We, therefore, do not find that the appeal raises any substantial question of law. It is accordingly dismissed. N ..... X X X X Extracts X X X X X X X X Extracts X X X X
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