Tribunal allows appeal, directs AO to allow deductions. SAR disallowance, income enhancement reversed.

The Tribunal allowed the assessee's appeal on all grounds, reversing the CIT(A)'s decisions and directing the AO to allow the claimed deductions. The Tribunal held that the disallowance of Stock Appreciation Rights (SAR) as capital loss, enhancement of income related to SAR, pre-commencement expenditure disallowance, disallowance under Section 14A, and disallowance under Section 40(a)(ia) were not justified. The order was pronounced on 09/10/2017.

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Issues Involved:
1. Disallowance of Stock Appreciation Rights (SAR) as capital loss.
2. Enhancement of income by disallowance related to SAR.
3. Disallowance of pre-commencement expenditure.
4. Disallowance under Section 14A of the Income Tax Act.
5. Disallowance under Section 40(a)(ia) for non-deduction of tax at source.

Issue-wise Detailed Analysis:

1. Disallowance of Stock Appreciation Rights (SAR) as Capital Loss:
The Commissioner of Income Tax (Appeals) [CIT(A)] sustained the disallowance of Rs. 6,69,626 made by the Assessing Officer (AO) on account of the difference between the purchase price and the sale price of SAR, holding it to be a capital loss not allowable as a business deduction. The CIT(A) did not appreciate that the differential amount represented a loan granted by the appellant to the Religare Enterprises Ltd. Employees SAR Trust for administering the SAR scheme, which was not meant to be recovered. The CIT(A) also failed to recognize that the SAR scheme was implemented to motivate and retain key employees and should be allowable under Section 37(1) of the Income Tax Act, 1961.

2. Enhancement of Income by Disallowance Related to SAR:
The CIT(A) enhanced the income of the appellant by directing a further disallowance of Rs. 15,99,306 on account of the difference between the sale price of SAR and the exercise price, holding it to be capital expenditure. The assessee argued that this differential amount was in the nature of employee compensation allowable under Section 37(1). Alternatively, it should be deductible under Section 36(1)(ii) of the Act, as it was not in accordance with the Payment of Bonus Act, 1965.

3. Disallowance of Pre-commencement Expenditure:
The CIT(A) confirmed the disallowance of Rs. 93,89,552 made by the AO, considering it as pre-operative expenses since the business was set up only on 30.06.2007 when the first invoice was raised. The assessee contended that the business activities essential for carrying on the business had started earlier, and thus, the expenses incurred from April 2007 to June 2007 should be deductible.

4. Disallowance under Section 14A of the Income Tax Act:
The CIT(A) upheld the disallowance of Rs. 1,96,524 under Section 14A by applying Rule 8D of the Income Tax Rules, 1962. The assessee argued that the loan given to the Trust did not constitute an investment for disallowance purposes under Section 14A, and Rule 8D should not apply as no investments appeared on the audited annual accounts.

5. Disallowance under Section 40(a)(ia) for Non-deduction of Tax at Source:
The CIT(A) upheld the disallowance of Rs. 34,34,000 made by the AO under Section 40(a)(ia), alleging that tax was not deducted at source. The assessee argued that the amount represented reimbursements of actual expenditure to group companies, and thus, there was no requirement to deduct tax at source on such payments.

Decision and Reasons:

1. Disallowance of SAR as Capital Loss:
The Tribunal allowed the assessee's appeal, reversing the CIT(A)'s decision and directing the AO to allow the sum of Rs. 6,69,626 as revenue expenditure. The Tribunal relied on the decision of the coordinate bench in Religare Commodities Ltd and the special bench decision in Biocon Ltd, which allowed similar claims.

2. Enhancement of Income by Disallowance Related to SAR:
The Tribunal reversed the CIT(A)'s enhancement, holding that the differential amount of Rs. 15,99,306 was also revenue expenditure related to the SAR scheme. The Tribunal followed the decisions of the Madras High Court in the case of PVP Ventures Ltd and the Delhi High Court in CIT vs. Lemon Tree Hotels Ltd, which allowed such expenditures as revenue expenses.

3. Disallowance of Pre-commencement Expenditure:
The Tribunal allowed the assessee's claim, holding that the business was set up when the essential activities commenced, which was in April 2007. The Tribunal relied on the Bombay High Court's decision in Western India Vegetable Products Ltd, which distinguished between the setting up and commencement of business, allowing expenses incurred after the business was set up.

4. Disallowance under Section 14A:
The Tribunal directed the AO to delete the disallowance of Rs. 1,96,524 under Section 14A, following the Delhi High Court's decision in Cheminvest Ltd vs. CIT, which held that no disallowance can be made when no exempt income is earned during the year.

5. Disallowance under Section 40(a)(ia) for Non-deduction of Tax at Source:
The Tribunal allowed the assessee's appeal, directing the AO to delete the disallowance of Rs. 34,34,000. The Tribunal relied on the Delhi High Court's decision in CIT vs. Fortis Healthcare Ltd, which held that no tax is required to be deducted on reimbursement of expenses.

Conclusion:
The Tribunal allowed the assessee's appeal on all grounds, reversing the CIT(A)'s decisions and directing the AO to allow the claimed deductions. The order was pronounced in the open court on 09/10/2017.

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