High Court partially allows assessee's appeal, directs AO to adjudicate despite delay. ESOP scheme compensation deductible. Wealth tax provision not to be added to book profits.

The appeal of the assessee was partly allowed by the High Court of Madras. The tribunal directed the AO to adjudicate the grounds on merits despite a delay in filing the appeal. Regarding the disallowance of compensation paid under the ESOP scheme, the tribunal found the expenditure allowable as a deduction. The tribunal also ruled against adding the provision for wealth tax to book profits under Section 115JB and directed a reduction for the reversal of product support expenses. The tribunal's decision was issued on February 17, 2017, in Chennai.

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Issues Involved:
1. Delay in filing the appeal.
2. Disallowance of compensation paid on account of Employee Stock Option Plan (ESOP).
3. Treatment of the cost of mobile phones as capital expenditure.
4. Addition of provision for wealth tax while computing book profits under Section 115JB.
5. Non-reduction of reversal of product support expenses from book profit.

Detailed Analysis:

1. Delay in Filing the Appeal:
At the outset, there was a delay of 175 days in filing the appeal by the assessee. Initially, the tribunal had dismissed the appeal as not maintainable due to the delay. However, the Hon'ble High Court of Madras condoned the delay and directed the tribunal to adjudicate the grounds on merits. Respectfully following the directions of the Hon'ble High Court, the tribunal proceeded to adjudicate the various issues raised in the grounds of appeal on merits.

2. Disallowance of Compensation Paid on Account of ESOP:
The first issue was whether the CIT(A) was justified in upholding the disallowance of Rs. 7,41,51,630/- paid as compensation under the ESOP scheme. The assessee, a subsidiary of Caterpillar Inc., U.S.A., had allotted shares to selected employees at a price lower than the market price. The differential amount was cross-charged by Caterpillar Inc. and accounted as Employee Stock Option expense by the assessee. The AO disallowed this as a capital expenditure, relying on the decision of the Delhi Tribunal in the case of Ranbaxy Laboratories Limited, which stated that ESOP does not result in incurring any expenditure within the meaning of Section 37 of the Act.

Tribunal's Findings:
- The tribunal noted that the ESOP scheme provided for the allotment of shares even to deputed employees.
- The payment of Rs. 7,41,51,630/- was an actual expenditure and not a notional loss.
- The tribunal found that the ESOP expenditure was in the nature of staff welfare expenses and allowable as a deduction.
- The tribunal referred to the CBDT Circular No. 9/2007, which clarified that ESOP expenditure is an allowable deduction in computing the taxable income of the employer company.
- The tribunal also relied on the decision of the Hon'ble Jurisdictional High Court in the case of CIT vs PVP Ventures Ltd, which held that ESOP expenditure is allowable as a deduction.
- The tribunal directed the AO to delete the disallowance made in this regard.

3. Treatment of the Cost of Mobile Phones as Capital Expenditure:
The assessee did not press this ground as depreciation on mobile phones had been granted by the revenue, and the amount involved was small. Consequently, the tribunal dismissed this ground as not pressed.

4. Addition of Provision for Wealth Tax While Computing Book Profits Under Section 115JB:
The AO added back the provision for wealth tax amounting to Rs. 66,600/- to the book profits, considering it as a provision for meeting liabilities other than ascertained liabilities. The CIT(A) upheld this action.

Tribunal's Findings:
- The tribunal found that wealth tax is not contemplated under Clause (a) of Explanation 1 to Section 115JB.
- The tribunal held that the provision for wealth tax is an ascertained liability.
- The tribunal relied on the decision of the Hon'ble Bombay High Court in the case of CIT vs Echjay Forgings (P) Ltd, which held that wealth tax should not be added back to the book profits.
- The tribunal directed that the provision for wealth tax need not be added back to the book profits under Section 115JB.

5. Non-Reduction of Reversal of Product Support Expenses from Book Profit:
The AO did not make any adjustment for the reversal of the provision for product support expenses amounting to Rs. 34,80,251/- while computing the book profits under Section 115JB. The CIT(A) confirmed this action.

Tribunal's Findings:
- The tribunal noted that the provision for product support expenses was added back to the book profits in the previous year.
- The tribunal held that the reversal of the provision should be reduced from the book profits to avoid double taxation.
- The tribunal directed the AO to grant a reduction of Rs. 34,80,251/- towards the reversal of the provision for product support expenses while computing book profits under Section 115JB.

Conclusion:
The appeal of the assessee was partly allowed, with specific directions provided for each issue. The tribunal's order was pronounced on February 17, 2017, at Chennai.

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