2010 (9) TMI 1097 - AT - Income Tax

Tribunal grants relief on repair expenses but upholds disallowance on ESOP costs.

M/s VIP Industries Ltd., Versus Deputy Commissioner of Income Tax, CC 32, Mumbai

The Tribunal partly allowed both appeals, providing relief on certain issues such as disallowance of expenses incurred on repairs to the factory building ... Enduring benefits - Disallowance of expenses incurred on repairs - According to the A.O., expenses incurred by the assessee company resulted in enduring benefit to it and the same therefore were treated by him as capital expenditure. Accordingly, depreciation @ 10% was allowed by him resulting in the net disallowance. The ld. CIT(A) confirmed the said disallowance. On perusal of the assessee’s paper book shows that expenses incurred on repairs to the factory building of similar nature have been allowed by the Tribunal observing that the assessee had not derived any advantage of enduring nature by incurring the repair expenses. Respectfully following the said decision of the Tribunal in assessee’s own case for the immediately preceding year i.e. A.Y. 2004-05, we delete the disallowance made by the A.O. and confirmed by the ld. CIT(A) and allow ground No. 1 of the assessee’s appeal. Disallowance on employees contribution to PF and ESIC - it is observed that the disallowance made by the A.O. and confirmed by the ld. CIT(A) on account of employees contribution to PF and ESIC which was paid beyond the grace period but before the due date for filing of return u/s 139(1) is squarely covered in favour of the assessee by the decision of Hon’ble Supreme Court in the case of CIT vs. Alom Extrusions Ltd.[2009 (11) TMI 27 - SUPREME COURT]. Respectfully following the said decision, we delete the disallowance made by the A.O. and confirmed by the ld. CIT(A) on this issue and allow ground No. 2 of the assessee’s appeal. Disallowance on outstanding liability for purchases - It is observed that a similar issue was involved in assessee’s case for the immediately preceding year i.e. A.Y. 2002-03, 2003-04 & 2004-05 and the same was restored by the Tribunal restore the matter back to A.O. Respectfully following the decision of the Tribunal in assessee’s own case for earlier years on the similar issue, we set aside the impugned order of the ld. CIT(A) and restore the matter back to A.O. Ground No. 3 is accordingly treated as allowed for statistical purpose. Quantum of Disallowance u/s 14A - administrative expenses - the assessee company had earned income by way of dividend and interest from tax free bonds which was exempt from tax. According to the A.O., administrative expenses incurred by the assessee were partly attributable to earning of the said exempt income and by estimating such quantum at 5% of tax free income earned by the assessee by dividend and interest from tax free bonds, he made a disallowance to that extent by invoking the provisions of section 14A. HELD THAT:- In its recent judgment delivered in the case of Godrej Boyce Mfg. Co. Ltd.[2010 (8) TMI 77 - BOMBAY HIGH COURT] Hon’ble Bombay High Court held that Rule 8D of the Income Tax Rules 1962 is applicable only prospectively i.e. from A.Y. 2008-09. Respectfully following the said judgment, we hold that the enhancement of income of the assessee made by the ld. CIT(A) by directing the A.O. to determine the quantum of disallowance to be made u/s 14A by applying Rule 8D is not sustainable. In the said judgment, the Hon’ble Bombay High Court has also held that the quantum of disallowance u/s 14A for the years earlier to A.Y. 2008-09 has to be worked out by adopting some reasonable method. In our opinion, the disallowance computed by the A.O. u/s 14A on account of administrative expenses @ 5% of the exempt income earned by the assessee by way of dividend and interest from tax free bonds is quite fair and reasonable and even the learned counsel for the assessee has not been able to raise any material contention to dispute the same. We, therefore, sustain the disallowance made out of administrative expenses by invoking the provisions of section 14A. Accordingly, ground No. 4 of the assessee’s appeal is dismissed whereas ground No. 5 is allowed. Deduction on ESOP expenditure - nature of expenditure '' capital or revenue'' - disallowance made by the A.O. and confirmed by the ld. CIT(A) on account of expenses claimed to be incurred by the assessee company on account of Employees Stock Option Scheme (ESOP). the assessee company had allotted shares to its employees under the ESOP. The said ESOP was granted on 22.11.2004 in respect of 8 lacs shares of the assessee company at Rs. 30/- per share as against the market price of Rs. 53.80/- per share. There was thus a price difference of Rs. 23.80 per share which came a total of Rs. 190.40 lacs in respect of 8 lacs shares given under ESOP. Out of this total amount, the assessee company had charged Rs. 66.25 lacs to its P&L account for the year under consideration and the balance amount of Rs. 124.15 lacs claimed in the immediately succeeding year i.e. A.Y. 2006-07. the A.O. held that the loss suffered by the assessee as a result of allotment of shares to its employees under ESOP below the market price was on capital account and the same was not allowable as deduction. CIT Confirmed the order of A.O. HELD THAT:- In our opinion, the decision of Delhi Bench of ITAT in the case of Ranbaxy Laboratories Ltd.[2009 (6) TMI 126 - ITAT DELHI-I] cited by the ld. D.R. is directly applicable in the present case and the same squarely covers the issue under consideration against the assessee and in favour of the Revenue. As held by the Tribunal, any short receipt of share premium would only be a notional loss to the assessee and not an actual loss. As further held by the Tribunal, any benefit or income foregone by the assessee cannot be considered as an expenditure and since the assessee had not incurred any expenditure but had merely received lesser amount of premium, the same could not amount to expenditure within the meaning of section 37. What is allowable u/s. 37 is any expenditure not being expenditure of the nature described in ss. 30 to 36 and not being in the nature of capital expenditure or personal expenditure of the assessee. Such expenditure should be wholly and exclusively for the purpose of business. Therefore, we uphold the impugned order of the ld. CIT(A) confirming the disallowance made by the A.O. on account of ESOP expenses claimed by the assessee and dismiss ground No. 6 of the assessee’s appeal. Issues Involved:1. Disallowance of expenses incurred on repairs to the factory building.2. Disallowance of employees' contribution to PF and ESIC paid beyond the grace period.3. Disallowance of outstanding liability for purchases.4. Disallowance of administrative expenses under Section 14A.5. Disallowance of expenses claimed under the Employees Stock Option Scheme (ESOP).Detailed Analysis:1. Disallowance of Expenses Incurred on Repairs to the Factory Building:- A.Y. 2005-06: The assessee incurred expenses on fabrication work, electrical concealed wiring, foundation work, and glass totaling Rs. 6,78,542/-. The A.O. treated these as capital expenditure, allowing 10% depreciation and disallowing Rs. 6,10,688/-. The CIT(A) confirmed this disallowance. However, the Tribunal noted that similar expenses were allowed in A.Y. 2004-05, as they did not provide any enduring benefit. Respectfully following its previous decision, the Tribunal deleted the disallowance.- A.Y. 2006-07: Similar expenses totaling Rs. 2,72,079/- were incurred. The A.O. treated these as capital expenditure, allowing 10% depreciation and disallowing Rs. 2,44,871/-. The CIT(A) confirmed this disallowance. The Tribunal, following its decision for A.Y. 2004-05, deleted the disallowance.2. Disallowance of Employees' Contribution to PF and ESIC Paid Beyond the Grace Period:- A.Y. 2005-06: The A.O. disallowed Rs. 3,387/- for late payment of employees' contribution to PF and ESIC, confirmed by the CIT(A). The Tribunal, following the Supreme Court's decision in CIT vs. Alom Extrusions Ltd., deleted the disallowance.- A.Y. 2006-07: The A.O. disallowed Rs. 1,368/- for the same reason, confirmed by the CIT(A). The Tribunal, again following the Supreme Court's decision, deleted the disallowance.3. Disallowance of Outstanding Liability for Purchases:- A.Y. 2005-06: The A.O. disallowed Rs. 25,95,602/- for outstanding liability for purchases, confirmed by the CIT(A). The Tribunal noted that similar issues for earlier years were restored to the A.O. for fresh consideration. Following this precedent, the Tribunal set aside the CIT(A)'s order and restored the matter to the A.O.- A.Y. 2006-07: The A.O. disallowed Rs. 36,75,706/-, confirmed by the CIT(A). The Tribunal, following its decision for earlier years, restored the matter to the A.O. for fresh consideration.4. Disallowance of Administrative Expenses Under Section 14A:- A.Y. 2005-06: The A.O. disallowed Rs. 29,175/- (5% of tax-free income) for administrative expenses related to exempt income. The CIT(A) upheld this but directed the A.O. to apply Rule 8D, enhancing the disallowance. The Tribunal, following the Bombay High Court's decision in Godrej Boyce Mfg. Co. Ltd., held that Rule 8D applies prospectively from A.Y. 2008-09. It sustained the A.O.'s disallowance of Rs. 29,175/- and dismissed ground No. 4 while allowing ground No. 5.- A.Y. 2006-07: The A.O. disallowed Rs. 6,06,719/- (5% of tax-free income) for administrative expenses, confirmed by the CIT(A) with enhancement by applying Rule 8D. The Tribunal, following the Bombay High Court's decision, sustained the A.O.'s disallowance of Rs. 6,06,719/- and dismissed ground No. 5 while allowing grounds No. 6 and 7.5. Disallowance of Expenses Claimed Under the Employees Stock Option Scheme (ESOP):- A.Y. 2005-06: The assessee claimed Rs. 66,24,877/- as ESOP expenses. The A.O. disallowed this, treating it as a capital expenditure. The CIT(A) confirmed the disallowance, disagreeing with the Chennai ITAT's decision in SSI vs. DCIT. The Tribunal, following the Delhi ITAT's decision in Ranbaxy Laboratories Ltd. vs. Addl. CIT, upheld the disallowance, noting that ESOP expenses result in a notional loss, not an actual expenditure.- A.Y. 2006-07: The assessee claimed similar ESOP expenses. The A.O. disallowed this, confirmed by the CIT(A). The Tribunal, following its decision for A.Y. 2005-06, upheld the disallowance.Conclusion:Both appeals were partly allowed, with the Tribunal providing relief on certain issues while upholding the disallowances on others, particularly the ESOP-related expenses.