2017 (2) TMI 1399 - HC - Income Tax

Court upholds Tribunal decision on claimed expenditure, clarifies ESOP deduction rules.

Principal Commissioner of Income-Tax Versus New Delhi Television Ltd.

The court dismissed the Revenue's appeal regarding the claimed expenditure under section 37 for the assessment year 2007-08, upholding the Income-tax ... Disallowance of expenses debited as cost of ESOP in profit and loss account - allowable deduction u/s 37 - Held that:- The issue stands covered in favour of the assessee and against the Revenue by the order of this court in CIT v. Lemon Tree Hotels Ltd. [2015 (11) TMI 404 - DELHI HIGH COURT]. The court had affirmed the order of the Income-tax Appellate Tribunal deciding the issue in favour of the assessee in the said case where the addition made by the Assessing Officer by way of dis allowance of the expenses debited as cost of ESOP in profit and loss account was deleted by the Income-tax Appellate Tribunal. In the present case, the Income-tax Appellate Tribunal has by the impugned order restored the matter to the file of the Assessing Officer for re-adjudication. The impugned order of the Income-tax Appellate Tribunal is consistent with what has been held by this court in CIT v. Lemon Tree Hotels (supra) wherein held Tribunal held that it was not a case of contingent liability depending on the various factors on which the assessee had no control. The expenditure in this behalf was an ascertained liability, thus the expenditure incurred being on lines of the SEBI guidelines, there could be no interference in the relief granted by the assessing authority for the expenditure arising on account of the employees' stock option plan. This expenditure incurred as per the SEBI guidelines and granted by the Officer could not be considered as erroneous. No substantial question of law. Issues:1. Whether the expenditure claimed by the assessee under section 37 was taxable for the assessment year 2007-08.2. Whether the Income-tax Appellate Tribunal's approach was correct in restoring the matter to the file of the Assessing Officer for re-adjudication.3. Whether the discount on shares under the Employees Stock Option Plan (ESOP) is an allowable deduction under section 37(1).4. When and how much amount of deduction should be granted for the discount under ESOP.Issue 1:The Revenue appealed against the assessee's expenditure claimed under section 37 for the assessment year 2007-08. The Income-tax Appellate Tribunal's decision in favor of the assessee was based on the Special Bench ruling in Biocon Limited v. Deputy CIT. The court had previously refused to entertain a similar appeal for the previous assessment year 2006-07. The Revenue contended that the reliance on CIT v. Lemon Tree Hotels Ltd. was not justified, and the appeal was rejected on the ground of delay. The court had affirmed the Tribunal's decision in favor of the assessee in the Lemon Tree case, and the Income-tax Appellate Tribunal's order was consistent with this decision. Thus, the court found no substantial question of law in this issue.Issue 2:The Income-tax Appellate Tribunal had restored the matter to the Assessing Officer for re-adjudication. The court found that the Tribunal's decision was in line with the Lemon Tree case and that no substantial question of law arose in this regard. The court upheld the Tribunal's approach and dismissed the Revenue's appeal.Issue 3:The court referred to the ruling in CIT v. PVP Ventures Ltd. where the Madras High Court held that the expenditure on shares issued under ESOP was an ascertained liability and not a contingent liability. The court also discussed the Special Bench ruling in Biocon, which elaborately examined ESOPs and the liability on the rendition of service by employees. The court concluded that the discount on shares under ESOP is an allowable deduction under section 37(1) as it is considered a fringe benefit provided by the employer to its employees.Issue 4:Regarding the timing and amount of deduction for the discount under ESOP, the court explained that under a mercantile system of accounting, an expense becomes deductible when the liability to pay arises, even if the actual payment occurs later. The court cited the Supreme Court's mandate that if a business liability has arisen in an accounting year, the deduction should be allowed in that year. The deduction for an expense is allowable on incurring the liability, even if its quantification is difficult at that stage. The court emphasized the importance of distinguishing between a liability not incurred and a liability incurred but difficult to quantify. The court dismissed the appeal, considering the previous order and finding no question of law arising.In conclusion, the court dismissed the appeal as it found no substantial question of law in the issues raised by the Revenue, affirming the decisions of the Income-tax Appellate Tribunal and previous court orders.