TMI Blog2023 (8) TMI 369X X X X Extracts X X X X X X X X Extracts X X X X ..... ee. Claim for Additional Depreciation - Depreciation had been correctly claimed at 50% of the normal depreciation for the assets put to use for less than 180 days. The confusion arose as, due to large number of additions in the second half of the year, these were stated as made and, accordingly, put to use, on one date (31/3/2016). The matter stands looked into by the AO. Now, the difference in depreciation, if any, for AY 2015-16, could in our view be rectified, pursuing a remedial course, only for that year, even if by way of rectification u/s. 154. The depreciation claimed and allowed for that year would be irrespective of the extent unabsorbed entitled to be carry-forward for this year, forming part of the current year s depreciation, reducing the open written down value (WDV) thereby. No issue therefore, in our view, arises for being considered by the AO. The Revenue has no case, with the ld. Pr. CIT having himself not made any adverse comment in the matter. Non-consideration of expenses disallowed, u/s. 115-JB - Non consideration of certain claims of expenditure for computation of book-profit., assessee in reply, admits to the said deficiency, though claims that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be compromised on the ground of consistency refer CIT v. British Paints India Ltd [ 1990 (12) TMI 2 - SUPREME COURT] , qua which there is though no finding by the AO. Why, such a contention could be raised only where there is a finding in assessment in an earlier year, even as the principle of res judicata is not applicable to the proceedings under the Act. AO shall decide on merits in accordance with law, issuing definite findings of fact, per a speaking order after hearing the assessee. We decide accordingly. Non-verification of huge claims for expenditure - As nothing on record to indicate any enquiry, much less verification, made by the AO in the matter, which was also the admitted position before us. The same would per se render the order erroneous and prejudicial to the interests of the Revenue. It is well settled that once the AO assumes jurisdiction to assess or reassess, he is duty bound to assess the total income for the relevant assessment year. Each of the expenditure referred to by the ld. Pr. CIT is material in relation to the returned income of Rs. 16314 lacs, with the AO having not made an iota of enquiry on the relevant aspects. Explanation 2(a) is cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We consider this as apposite, and adopt the same manner for adjudication purposes; the assessee having raised corresponding Grounds of Appeal. Gd. 1, though is general in nature, making an omnibus claim as to the various issues raised by the Pr. CIT as having been already enquired into by the AO. The same, even as remarked by the Bench during hearing, would necessarily require us to visit each of the issues separately. Shri Nair would for the purpose take us in the main through the assessee s reply during assessment proceedings (PB-4, pgs.21-22, 23- 36); the show-cause notice u/s. 263 dated 03/02/2021 (PB-2, pgs.328-329); and the assessee s reply dated 22/02/2021 (PB-2, pgs.330-358). 4.1 Issue # 1 : Difference in stock reporting The issue stands delineated by the ld. Pr. CIT, thus: In the ITR, part A-QD-Quantitative Units given for different products are identical, i.e., 107 units, 102 kgs, etc. AO has omitted to notice this. He has also not noticed that there is excess stock reported for raw materials Copper and PVC. With reference to the assessee s tax audit report in Form 3CD (PB-2, pgs.370- 371, 413), reflecting the quantitative details as to consumption, pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , reducing the open written down value (WDV) thereby. No issue therefore, in our view, arises for being considered by the AO. The Revenue has no case, with the ld. Pr. CIT having himself not made any adverse comment in the matter (para 6.1) 4.3 Issue #3: Non-consideration of expenses disallowed, u/s. 115-JB Perusal of the assessment order reveals that additions have been made towards (i) disallowance of reimbursement Rs. 1.15 crores, (ii) disallowance of year-end provision Rs. 7.14 crores, (iii) 35 (2AB) claim disallowed Rs. 13.57 crores, (iv) 14A disallow Rs. 16.84 lakhs, (v) club expenses disallow Rs. 12.77 lakhs and (vi) penalties, fines for late payment of taxes disallowed Rs. 43,189 have been made. However, applicability of such additions with reference to provisions of Section 115JB has not been considered by the AO, which is a mistake prejudicial to the interest of revenue. That is, non-consideration of certain claims of expenditure for computation of book-profit. The assessee, in reply, admits to the said deficiency, though claims that it would be of no consequence as the tax liability u/s. 115JB, even after considering all the adjustments referred to (aggregat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n note no.7, provision for warranty is reported at Rs. 546.29 lakhs. It can be seen that for FY 2014-15, against the provision made Rs. 1537.69 lakhs, on Rs. 1382.72 lakhs has been utilized. Therefore, the company appears to charge higher figures for provision notwithstanding its claim that it is scientific, etc. (historical figures). Auditor's qualification in clause no.21(g) w.r.t Form 3CD is that 'provision for warranty at Rs. 20,73,68,178 is not considered as a contingent liability'. AO has not considered this issue in the proper perspective and in the light of the SC decision in the case of Rotork Controls vs. CIT. The issue raised by the ld. Pr. CIT, as we were given to understand by Sh. Nair, is to seek clarification on the provision for warranty. The same cannot per se be an infirmity in the assessment order. The ld. Pr. CIT has merely raised a doubt, which would assume validity only where there is a conflict or inconsistency in the figures reported by the assessee, and which may, again, be only apparently so, and not survive as where abundantly clarified by the assessee in the revision proceedings. This is as it may well be that the doubt expressed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that such excess claims/postponed income will be subject to tax somewhere in the future. (emphasis, ours) 4.6 It may at this stage be relevant to visit the law in the matter, i.e., insofar as it relates to absence or lack of inquiry in the matter, which at heart is the charge by the revisionary authority in the instant case. Non-application of mind, as explained by the Apex Court in Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC), is one of the ingredients that renders an order as prejudicial and erroneous to the interest of the Revenue. Absence or lack of enquiry is an attribute, a manifestation, of this non-application, so that an order imbued therewith would be liable to revision. This represents trite law, since co-opted on the Statute itself vide Explanation 2(a) to s. 263(1). As explained therein, where the AO accepts the assessee s version in absence of any supporting material and without making any enquiry, his order would be erroneous and exercise of jurisdiction u/s. 263(1) justified. As an example, it, citing it s earlier decisions in Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84 (SC) and Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC), held that where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unaddressed. The Auditor, who had access to the details, states that the expenditure of Rs. 2073.68, which in fact works to 70% of the total expenditure claimed, has not been regarded as contingent. A strong statement indeed, even as in our view he ought to have been more explicit and, in fact, expressed his clear opinion if he regarded it as so, rather than putting it obliquely. We say so as there was no question of observing thus if he also did not regard it as a contingent expenditure. Further, where, one may ask, is the question of it being regarded as contingent if it is, as claimed, based on a scientific model and, w.r.t. past experience. Two, as we observe, the tabular chart forming part of the assessee s submissions before him (para 4.5); which in fact forms Note 27.8 of Disclosure under Accounting Standards, exhibits a net additional provision made during the year at Rs. 129.31 lacs (1522.03 1392.72). The difference between the two, i.e., the amount claimed (Rs. 2975.98 lacs) and provided for (Rs. 129.31 lacs), for the relevant year, could perhaps be in respect of the products sold during the year warranty on which had lapsed, which again is highly improbable. The sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay either be an expense or an income. AO has failed to probe the correctness of such claim in the light of available details. The final observations by the ld. Pr. CIT are to the same effect (para 6.3). Though Sh. Nair would during hearing, with reference to Note 2.1(o), explaining share- based remuneration to senior employees, as also the assessee s submissions before the ld. Pr. CIT (PB-4, pgs.351-356), seek to explain the accounting of the equity settled transactions, as indeed deductibility thereof u/s. 37(1), making out a case therefor, it is clear, and was an admitted position before us, that there was no enquiry by the AO in the matter in assessment, which was restricted only to the increase in share capital. The Revenue s charge of non-verification by the AO in its respect is thus valid, with there being nothing on record to exhibit it. The revision is upheld in principle. The AO shall in the set aside proceedings make full enquiry in the matter with regard to the amortization of the ESOP expenditure from the stand-point of the correctness of the assessee s claim. We also consider it relevant to bring forth certain aspects of the matter for his consideration, particula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to or in retraction of that provided earlier, that the assessee refers to in Note 2.1(o) (PB-2, pg. 526). There is, however, no reversal of the expenditure and the entire amount of Rs. 232.47 lacs is transferred to the securities premium account. It may be that the expenditure finally booked for the relevant year accounts for this difference, as it appears from a reading of Note 2.1(o). Further, the valuation of the options unexercised as at the end of the account period, inasmuch as it would only be with reference to the extant market price of the share, the provision would need to be visited at each year-end. The assessee, however, states that the cost of option is valued not at the market price, but using intrinsic value method, which we understand to be the book-value of the share, in which case it is this book-value as at the year-end (or at the relevant time), at which the outstanding stock options stand to be valued. Two, the deductibility of the expenditure is justified on the ground of securing dedicated efforts of the employees, besides of course attracting new talent. As a corollary, the employees are motivated to work over the qualifying period, if not beyond. F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r shareholding on a pro-rata basis. That is to say that neither any expenditure is incurred nor any loss suffered by the company issuing the shares on the exercise of the stock option by an employee, even as admittedly, as also afore-noted, a benefit is passed to him, and being in lieu of his services to the company, an income in his hands; the said benefit being at the expense of the shareholder s wealth. It would be a different matter, we may add, where shares of another company, even if a group company, are allotted, even though it would technically not be under ESOP. Yes, it could be for shares in the employer-company itself, where the same are acquired through trading operations under the buyback route, since allowed under the company law, i.e., where not cancelled. This is as in either case there is a release/write-off of the assets of the company in favour of the concerned employee on the exercise of the options and the corresponding allotment of shares, so that there is an expenditure by definition. A share, it may be appreciated, represents a share, to that extent, in the net assets of the company. The issue of a share, whether against value received in cash or in kind, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fying his willingness to take the shares, only promises to accept the offer of the company in future. Promise to offer or to accept is not an offer or acceptance per se. This becomes relevant as the expenditure can be said to have accrued only on the vesting of the right on the exercise of the option, and not prior thereto. There is, it may be appreciated, no legal obligation on the employer prior to the said date. As explained in CIT v. Kharwar (B.M.) [1969] 72 ITR 603 (SC), it is not permissible to ignore the legal character of the transaction on the ground of substance of the transaction . Reference in this regard may also made to the decision by the Apex Court in CIT v. Infosys Technologies Ltd. [2008] 297 ITR 167 (SC), as well as in Addl. CIT vs. Bharat V. Patel [2018] 404 ITR 37 (SC). 4.10 Our observations are without prejudice to each other, as, for example, the time of expenditure assumes relevance only where it is, firstly, regarded as so; and only seek to highlight the different issues arising for determination. They may accordingly not be construed as our final findings, though shall be taken into account, and the assessee required to meet the same, by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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