2015 (8) TMI 319 - AT - Income Tax

Tribunal grants relief on ESOP deductions for 2007-08, emphasizes legal precedents for 2008-09 and 2009-10

The Tribunal partially allowed the appeal for the assessment year 2007-08, directing the Assessing Officer to decide on the deduction of Employee Stock ... Treatment of ESOS discount as deductible business expenditure over vesting period - Employee Stock Option Scheme compensation - application of the Special Bench ratio in Biocon Ltd. to ESOS accounting - allowance of depreciation on intangible assets subject to transfer and statutory conditions - disallowance under section 14A requiring Assessing Officer's recorded satisfaction - inapplicability of Rule 8D prior to AY 2008-09Treatment of ESOS discount as deductible business expenditure over vesting period - application of the Special Bench ratio in Biocon Ltd. to ESOS accounting - Employee Stock Option Scheme compensation - Deletion of addition made on account of ESOS compensation set aside and remitted to AO for fresh computation in conformity with the Special Bench decision. - HELD THAT: - The Tribunal held that the facts are squarely covered by the Special Bench decision in Biocon Ltd. Vs. DCIT , which treats the discount on issue of ESOPs as an ascertainable business liability deductible over the vesting period on a straight-line basis and prescribes adjustment on exercise. Following that precedent, the impugned order was set aside and the matter remitted to the Assessing Officer for determination in accordance with the Special Bench ratio, with opportunity of hearing to the assessee. [Paras 3, 4]Matter remitted to AO to decide ESOS deduction afresh in conformity with the Special Bench decision.Allowance of depreciation on intangible assets subject to transfer and statutory conditions - Claim for depreciation on intangible assets remitted to AO for fresh decision in conformity with the final view taken for AY 2006-07. - HELD THAT: - The Tribunal observed absence of an elaborate merits discussion in the assessment order and noted that the Assessing Officer had followed his view for AY 2006-07 without addressing the issue on its merits in the present year. As neither counsel elucidated the Tribunal's final view for AY 2006-07 on record, the Tribunal set aside the impugned order and remitted the matter to the Assessing Officer to decide in conformity with the final view taken for AY 2006-07. [Paras 5, 6]Impugned order set aside and issue remitted to AO for decision in accordance with the final view for AY 2006-07.Disallowance under section 14A requiring Assessing Officer's recorded satisfaction - inapplicability of Rule 8D prior to AY 2008-09 - Deletion of disallowance computed under Rule 8D upheld for AY 2007-08 on two independent grounds: Rule 8D not applicable before AY 2008-09 and AO failed to record requisite satisfaction under section 14A. - HELD THAT: - The Tribunal accepted the view of the jurisdictional High Court in Maxopp Investments Ltd. Vs. CIT that Rule 8D cannot be invoked for assessment years prior to 2008-09; hence Rule 8D was inapplicable to AY 2007-08. Independently, the Tribunal analysed subsection (2) and concluded that the Assessing Officer must record satisfaction, having regard to the assessee's accounts, about incorrectness of the claim of expenditure in relation to exempt income before determining any disallowance. The assessment order contained no recorded satisfaction; the AO proceeded directly to computation (invoking Rule 8D). Because the prerequisite satisfaction was absent, the AO lacked jurisdiction to make the disallowance. The CIT(A) had deleted the addition and the Tribunal upheld that deletion on these legal grounds. [Paras 7, 8, 9, 10, 11]Deletion of disallowance under section 14A/Rule 8D for AY 2007-08 upheld.Final Conclusion: The appeals are disposed as follows: for AY 2007-08 the ESOS issue and the depreciation on intangible assets are remitted to the Assessing Officer for fresh adjudication in accordance with the Tribunal's directions and relevant precedent, while the disallowance under section 14A/Rule 8D is deleted; for AY 2008-09 and AY 2009-10 the ESOS-related additions are set aside and remitted to the Assessing Officer for fresh decision in conformity with the Tribunal's directions. Issues:1. Deletion of addition of Employee Stock Option Scheme Compensation (ESOS) for assessment year 2007-08.2. Deletion of addition of depreciation on intangible assets for assessment year 2007-08.3. Deletion of addition under section 14A read with Rule 8D for assessment year 2007-08.4. Deletion of addition of ESOS for assessment years 2008-09 and 2009-10.Analysis:Issue 1: Deletion of addition of ESOS for assessment year 2007-08The Tribunal referred to the Special Bench decision in Biocon Ltd. Vs. DCIT, which allowed deduction of discount on ESOP as a business expense. The Tribunal directed the AO to decide the matter in line with the Special Bench decision, ensuring the assessee's right to a fair hearing in fresh proceedings.Issue 2: Deletion of addition of depreciation on intangible assets for assessment year 2007-08The Tribunal noted that the AO disallowed depreciation on intangible assets based on the AY 2006-07 decision without detailed discussion. Due to lack of clarity on the Tribunal's final view for the previous year, the matter was remitted to the AO for a fresh decision based on the precedent set for AY 2006-07.Issue 3: Deletion of addition under section 14A read with Rule 8D for assessment year 2007-08The AO disallowed an amount under Rule 8D, but the CIT(A) deleted the addition citing the inapplicability of Rule 8D for AY 2007-08. The Tribunal upheld the deletion, emphasizing the necessity of the AO's satisfaction regarding the incorrectness of the assessee's claim before making any disallowance under section 14A.Issue 4: Deletion of addition of ESOS for assessment years 2008-09 and 2009-10The Tribunal found the facts and circumstances similar to the AY 2007-08 case and remitted the matter to the AO for fresh consideration in line with the directions provided for the earlier year.The Tribunal partially allowed the appeal for AY 2007-08 for statistical purposes and allowed the appeals for AY 2008-09 and 2009-10 for statistical purposes. The judgment emphasized adherence to legal precedents and fair assessment procedures, ensuring proper consideration of deductions and additions in accordance with relevant laws and decisions.