2013 (10) TMI 1492 - AT - Income Tax

Tribunal upholds disallowance of interest expenditure for ESOP shares under Income Tax Act

The Tribunal upheld the CIT(Appeals) decision to proportionately disallow interest expenditure under section 37(1) of the Income Tax Act for Assessment ... - Issues involved: Appeal against disallowance of interest expenditure u/s. 37(1) of the Income Tax Act, 1961 for Assessment Year 2009-10.Summary:Issue 1: Disallowance of interest expenditure by Assessing OfficerThe assessee obtained a secured loan and paid interest on it, claiming it as expenditure u/s. 37(1) of the Act. The Assessing Officer disallowed the interest amount as expenditure, stating that not charging interest on a loan given to a Trust while paying interest on borrowed funds is not admissible. The Trust invested the loan in shares, earning tax-free income. The CIT(Appeals) allowed the appeal, citing a judgment that expenditure on Employee Stock Option Plan (ESOP) is allowable. The Revenue appealed to the Tribunal.Issue 2: Arguments of the Revenue and the AssesseeThe Revenue argued that interest paid by the assessee on borrowed funds was rightly disallowed, as the Trust received interest-bearing funds without interest. The Assessee contended that the borrowings were used for ESOP shares, a taxable perquisite for employees, making it an allowable expenditure. They cited relevant judgments to support their stance.Issue 3: Tribunal's DecisionThe Tribunal noted that borrowings were for acquiring shares under ESOP. The Trust, not limited to the assessee's shares, also held shares of group companies. The Tribunal agreed with the CIT(Appeals) that the benefit to employees through the Trust qualifies as a perquisite. It upheld the CIT(Appeals) decision to proportionately disallow expenditure if shares were allotted to employees of other group companies, with the disallowance allowed in those companies' hands. The Revenue's appeal was dismissed for lack of merit.This summary captures the key issues, arguments, and the Tribunal's decision regarding the disallowance of interest expenditure under section 37(1) of the Income Tax Act for the Assessment Year 2009-10.