2012 (7) TMI 696 - HC - Income Tax

s.263 revision impermissible without proving order was erroneous and prejudicial; share issue FX gains capital; ESOP issue costs allowed

Commissioner of Income Tax - III Chennai Versus M/s. PVP Ventures Limited

HC held for the assessee: revision under s.263 is impermissible absent proof the order was erroneous and prejudicial to Revenue; receipts from exchange ... Revision u/s 263 - Nature of receipts on account of exchange fluctuations - expenditure on issue of shares under the Employees Stock Option - AO treated the receipts on account of exchange fluctuation as a capital receipt and the same was reduced from the profits and gains while working out the relief under Section 80HHE. Held that:- Any and every erroneous order cannot be the subject matter for revision under Section 263 of the Act, unless the second requirement of it being prejudicial to the interest of the Revenue exists. - Having thus agreed with the assessee as well as with the Assessing Officer, the Commissioner of Income Tax however issued a letter dated 21.1.2004 taking the view that the receipt arising on account of exchange fluctuation was revenue in character. There are no reasons indicated as to why he suddenly shifted his stand as regards the character of the receipt from capital to revenue. - there are no materials to show that as to how the order of the Officer was erroneous to become prejudicial to the Revenue to initiate jurisdiction under Section 263 of the Act. Merely because part of the share capital is used as a working capital, the character of the receipt would not become a revenue receipt. Thus, once this aspect becomes clear and the entire money raised through issue of equity shares is to be treated as share capital, the gains on account of foreign exchange fluctuations, in the event such share capital collected in foreign exchange, hence is only capital receipts and the determination as to whether it is to be treated as capital receipt or revenue receipt cannot depend upon the end use of the share capital. - Following the decision in CIT v. JAGATJIT INDUSTRIES LIMITED [2009 (9) TMI 62 - DELHI HIGH COURT], decided in favor of assessee. Regarding ESOP - the assessee had to follow SEBI direction and by following such direction, the assessee claimed the ascertained amount as liability for deduction. - the expenditure on issue of shares under the Employees Stock Option could be allowed as staff welfare expenditure - Decided in favor of assessee. Issues Involved:1. Whether the receipts on account of exchange fluctuations should be treated as capital receipts.2. Whether the expenditure on issue of shares under the Employees Stock Option could be allowed as staff welfare expenditure.3. Whether the Commissioner can partially revise the assessment order.4. Whether the Commissioner has the power to record his opinion and direct the assessing officer to redo the assessment, but has to give final conclusions to the controversy.Detailed Analysis:Issue 1: Treatment of Receipts on Account of Exchange FluctuationsThe Tribunal held that the receipts on account of exchange fluctuations should be treated as capital receipts. The assessee had kept a part of the money abroad, and when it was brought to India, the strong dollar position resulted in a gain. This was claimed as a capital receipt. The Commissioner of Income Tax did not dispute that the amount had a direct nexus with the capital raised. However, the Commissioner felt that the computation of deduction under Section 80HHE should have restricted it to 90% of the receipt. The Tribunal pointed out that the Commissioner did not question the character of the receipt as capital but only the computation of relief under Section 80HHE. The Tribunal held that the Commissioner's change of view through a letter treating the receipt as revenue in nature was not a valid continuation of the initial proceedings under Section 263.Issue 2: Expenditure on Issue of Shares under the Employees Stock OptionThe Tribunal found that the expenditure on the issue of shares under the Employees Stock Option Plan (ESOP) could be allowed as staff welfare expenditure. The shares were issued to employees to induce them to work in the best interest of the assessee, in strict compliance with SEBI regulations. The Tribunal noted that the difference between the market value of the shares and the value at which they were allotted was a benefit conferred on the employees and thus an ascertained liability, not a notional or contingent expenditure. The Tribunal upheld the Assessing Officer's decision to allow this expenditure.Issue 3: Partial Revision of Assessment Order by the CommissionerThe Tribunal agreed with the assessee's contention that the Commissioner cannot partially revise the assessment order under Section 263 of the Act. The Tribunal held that the Commissioner could either enhance, modify, or cancel the assessment and direct a fresh assessment, but not partially revise it. The Tribunal found that the Commissioner's order was unworkable and thus had to be set aside.Issue 4: Commissioner's Power to Record Opinion and Direct ReassessmentThe Tribunal held that the Commissioner does not have the power to merely record his opinion and direct the assessing officer to redo the assessment. The Commissioner must give final conclusions to the controversy. The Tribunal found that the Commissioner's order did not meet this requirement and thus set it aside.Conclusion:The High Court upheld the Tribunal's decisions on all issues. It agreed that the receipts on account of exchange fluctuations were capital receipts and should not be included in the computation of relief under Section 80HHE. The expenditure on the issue of shares under the ESOP was correctly allowed as staff welfare expenditure. The Court also concurred that the Commissioner could not partially revise the assessment order or merely record an opinion without giving final conclusions. The appeal by the Revenue was dismissed, and the Tribunal's order was confirmed.