2016 (1) TMI 641 - AT - Income Tax

Appeal partially allowed, ESOP charges & salary disallowance to be reconsidered; section 14A disallowance deleted

M/s Voith Paper Technology India Ltd Versus Asstt Commissioner Of Income Tax

M/s Voith Paper Technology India Ltd Versus Asstt Commissioner Of Income Tax - TMI Issues Involved:1. Disallowance of ESOP charges.2. Disallowance of portion of salary paid to deputed employees.3. Application of Rule 8D for computing disallowance under section 14A.Issue-wise Detailed Analysis:1. Disallowance of ESOP Charges:The first issue addressed by the Tribunal was whether the Commissioner of Income Tax (Appeals) erred in confirming the disallowance of ESOP charges amounting to Rs. 35,28,333/-. The assessee argued that these ESOP expenses reimbursed to L&T Ltd. for deputed employees were incurred for business purposes and should be allowable under section 37(1) of the Act. The Assessing Officer had disallowed the amount on the grounds that the shares were issued by L&T Ltd., not the assessee, and considered it a notional expenditure. The Commissioner of Income Tax (Appeals) upheld this disallowance. The Tribunal referred to a similar case involving L&T Valdel Engineering P. Ltd., where the Bangalore Bench had remitted the issue back to the Assessing Officer for fresh consideration. Following this precedent, the Tribunal directed the Assessing Officer to reconsider the issue afresh, taking into account the observations made in the L&T Valdel Engineering P. Ltd. case and providing the assessee with adequate opportunity to be heard.2. Disallowance of Portion of Salary Paid to Deputed Employees:The second issue was the disallowance of Rs. 1,10,31,518/-, part of the salary paid to the parent company for deputed employees. The Assessing Officer had disallowed this amount, claiming it was inflated through invoices. The Commissioner of Income Tax (Appeals) allowed the expenditure only for invoices mentioning the cost center 'Voith Paper Technology' and not '8036'. The assessee contended that both cost centers represented deputation costs, supported by a letter from L&T. The Tribunal found merit in the assessee's argument and remitted the issue back to the Assessing Officer to verify whether 'Voith' and '8036' were indeed the same cost center. If they were, the disallowance should not be made. The Assessing Officer was directed to call for details and decide the issue accordingly after providing the assessee with an adequate opportunity to be heard.3. Application of Rule 8D for Computing Disallowance under Section 14A:The third issue involved the disallowance of Rs. 5,71,602/- under section 14A read with Rule 8D, related to the earning of exempt income (dividends). The Assessing Officer had applied Rule 8D mechanically without recording any satisfaction regarding the correctness of the assessee's claim that no expenses were incurred for earning the exempt income. The Tribunal noted that for attracting section 14A, there must be a proximate cause for disallowance related to tax-exempt income, as held by the Supreme Court in CIT Vs. Walfort Share & Stock Brokers P. Ltd. Additionally, the Tribunal cited decisions from the Punjab & Haryana High Court and Delhi High Court, emphasizing that disallowance under section 14A requires a finding of incurred expenditure and that the Assessing Officer must provide cogent reasons for rejecting the assessee's claim. Since the Assessing Officer failed to record any satisfaction or provide reasons, the Tribunal directed the deletion of the addition made under section 14A.Conclusion:The Tribunal partly allowed the appeal for statistical purposes, directing the Assessing Officer to reconsider the ESOP charges and salary disallowance issues afresh and to delete the disallowance made under section 14A due to the lack of recorded satisfaction. The decision ensures that the assessee is given a fair opportunity to present their case and that disallowances are made based on proper verification and reasoning.