2017 (4) TMI 1138 - AT - Income Tax

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.

M/s. Caterpillar India Private Limited, (Formerly known as Caterpillar Commercial Private Limited & since merged), Chennai Versus Deputy Commissioner of Income Tax, Chennai

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 ... Disallowance of compensation paid on account of Employee Stock Option Plan (ESOP) - Business expenditure - CBDT circular - Held that:- In the instant case, the shares of Caterpillar Inc. U.S.A. has been allotted to the employees and the price differential is debited to the assessee company by way of a debit note and as stated supra, since the employees were under the control of the assessee company on deputation and more so the ESOP scheme also provided for allotment of shares under ESOP to deputed employees also, the assessee had debited the price differentials as ESOP expenditure in its profit and loss account. This in our considered opinion, is an allowable expenditure and is in tune with the reply given in the Frequently Asked Questions (FAQ) in the CBDT Circular No. 9/2007 dated 20.12.2007. The Circular issued by the CBDT is binding on the tax authorities and the same could be used by the assessee if proved beneficial to the assessee. We also find that the issue under dispute is squarely covered by the decision of the Hon’ble Jurisdictional High Court in the case of CIT vs PVP Ventures LTd [2012 (7) TMI 696 - MADRAS HIGH COURT ] wherein it had been held categorically held that ESOP expenditure is in the nature of staff welfare expenses and is squarely allowable as deduction in computing the taxable income of an assessee. Thus we hold that the compensation paid in the form of ESOP expenditure is an allowable deduction as an expenditure incurred wholly and exclusively for the purpose of business. - Decided in favour of assessee Adding back the provision for wealth tax while computing the book profits u/s 115JB - Held that:- We find that Explanation 2 to Section 115JB of the Act provides the amounts that would constitute income tax for the purpose of section 115JB of the Act, which contemplates dividend distribution tax, interest, surcharge, primary and secondary education cess. In fact this amendment was introduced in the statute vide Finance Act 2008 with retrospective effect from 1.4.2001. Hence it was never the intention of the legislature to include wealth tax within the ambit of income tax so as to fall within the mischief of Explanation 1. We hold that the provision made towards wealth tax amounting to ₹ 66,600/- would be an ascertained liability. Provision for wealth tax need not be added back to the book profits u/s 115JB of the Act and accordingly the grounds raised by the assessee in this regard are allowed. See CIT vs Echjay Forgings (P) Ltd [2001 (2) TMI 56 - BOMBAY High Court ] - Decided in favour of assessee Non reducing the reversal of product support expenses from book profit - Held that:- In the instant case, admittedly, the ld AO had duly added back the sum of ₹ 35,43,000/- towards provision for product support expenses in Asst Year 2006-07 vide his order u/s 143(3) dated 29.12.2009 while computing book profits u/s 115JB of the Act. When a part of the said provision is reversed in the subsequent year and credited to the profit and loss account, that should not go to add to the book profits u/s 115JB of the Act. If it is so done, then the assessee would be unwarrantedly be invited with double taxation u/s 115JB of the Act for the same amount. In view of explicit provisions of the Act as reproduced supra, we have no hesitation in directing the ld AO to grant reduction of sum towards reversal of provision for product support expenses while computing book profits u/s 115JB of the Act for the Asst Year 2007-08. Accordingly the Grounds raised in this regard are allowed. 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.