TaxTMI 
TaxTMI 
2016 (1) TMI 641
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.... the assessee company. The cost of the employees have to be reimbursed by the assessee to the parent company. During the assessment year under consideration, the parent company has allotted eshares to the deputed employees of the assessee company under stock option scheme. The Assessing Officer disallowed the amount of Rs. 35,28,333/- being ESOP charges on the ground that assessee has not allotted the shares to its deputed employees and the expenditure claimed pertaining to L & T Ltd. and it is a notional expenditure. On appeal, the Commissioner of Income Tax (Appeals) sustained the disallowance accepting the view of the Assessing Officer. 4. At the outset, counsel for the assessee submits that an identical issue came up for consideration before the Bangalore bench of the Tribunal in the case of L & T Valdel Engineering P.Ltd. in ITA No.506 to 508 and 518 to 520/Bang/2014 dated 29.06.2015 which is a subsidiary to L & T. Ltd. claimed ESOP expenses which were reimbursed to the parent company. Counsel for the assessee submits that in that case also L & T Ltd. deputed certain employees to its subsidiary company L & T Valdel Engineering P. Ltd. and the subsidiary company reimbursed t....
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....ised by its parent company for defraying the ESOP charges of employees deputed by it. Amount disallowed was of Rs. 2,70,99,347/- for A. Y.2008-09 Rs. 5,27,68,682/- for A. Y. 2009-10 and Rs. 2,48,75,779/- for A. Y. 2010-11. 28. Facts apropos are that assessee had debited the above amounts under the head 'professional charges. Assessee was a subsidiary of L & T Ltd which had deputed certain employees of it to the assessee. AO required from the assessee details of the payments made by it to the employeessent by L & T Ltd, on deputation. In so far as the amounts paid to these employees in relation to allotment of shares under ESOP scheme, the AO was of the opinion that assessee had no such contractual obligation and assessee was unable to provide any contract between it and its holding company, for supporting such payments. Though the assessee claimed that payments were effected based on debit notes raised by M/s. L & T Ltd, AO was of the opinion that there was no proof for actual payment and it was not a genuine expenditure supported with necessary calculation. He treated the outgo as capital in nature and disallowed the claim. 29. In its appeal before the CIT (A....
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.... ssessee. Assessee was supposed to reimburse the holding company on cost to cost basis. It had produced a letter from L & T Ltd, placed at page124 which would show that the payments were reimbursement of cost incurred by L & T Ltd. As per the Ld. AR, L & T Ltd, had shown such receipts from the assessee as a part of its income. Discount in the value of shares under an ESOP scheme was held to be allowable by the Special Bench in the case of Biocon Ltd, (supra), over the period of vesting. When the employees were being used by the assessee for its own business, the benefit of the ESOP which would have otherwise been that of the holding company was actually enjoyed by the assessee. According to him, nature of such expenditure was not doubted, but a disallowance was made on an erroneous reasoning that it was a capital outgo. 32. Per contra, Ld. DR strongly supporting the order of CIT (A) submitted that on mere debit notes a claim could not be allowed. As per the Ld. DR the debit notes produced were dumb without any details.Claim for revenue expenditure should be based on tangible evidence which support the business need of such expenditure. Assessee had not demonstrated this. D....
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....ing Limited on cost- recovery basis. The amortized ESOP costs of such employees are being recovered on a quarterly basis. For the Financial Year 2007-08 an amount of Rs. 29,397,155/- has been recovered and the same has been treated as "Other income" in the books of Larsen & Toubro Limited and has also been offered to tax. For Larsen & Toubro Limited Sd/- Arun Kirtania Deputy General Manager" Absence of a written contract by itself might not be fatal to the claim of an expenditure especially when such expenditure is based on an understanding between a holding company and a subsidiary company,but nevertheless, it is the duty of the assessee to show that what has been reimbursed as amortised ESOP cost by its holding company were actually charged by such holding company in its P & L account as expenditure and the reimbursements made by the assessee were shown as a part of its income. Assessee has to demonstrate that the services received by it from such employees were commensurate with the payment. We are, therefore, of the opinion that the claim of the assessee requires a fresh look by the AO. We , therefore, set aside the orders of the lower authorities on this i....
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....ented total salary cost paid towards both deputed as well as own employees of the assessee and expenditure to the extent of Rs. 1,10,31,518/- was inflated through invoices. The Commissioner of Income Tax (Appeals) in his order accepted the fact that amount paid to L&T of Rs. 1,10,31,518/- as salary of deputed employees is over and above Rs. 1,28,07,828/- which was paid towards salary of own employees of the assessee and that it was not an inflated claim of expenditure. However, having said that the Commissioner of Income Tax (Appeals) held that invoices bearing cost centre "Voith" should only be allowed and balance invoices bearing cost centre "8036" did not pertain to assessee's business and hence should be disallowed. While doing so, the Commissioner of Income Tax (Appeals) disregarded letter dated 3rd February 2014 signed by Mr. UD Patil, Manager Accounts of L&T issued on the letterhead of L&T, copy of the letter is placed at page 73 of Paper book. This letter clearly stated that cost centre "8036" and "Voith" represented deputation cost on employees deputed to the assessee . The Commissioner of Income Tax (Appeals) while disallowing invoices bearing cost centre "8036" state....
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....the submissions of the assessee. In fact, the Commissioner of Income Tax (Appeals) initially agreed to the extent where the payments made to the deputed employees where the cost centre is shown as "voith" is to be allowed. The question now is whether cost centre "voith" and "8036" are one and the same or not. For this limited purpose of examining as to whether "voith" and "8036" are one and the same, we remit this issue to the file of the Assessing Officer to find out whether these two cost centres are one and the same and if they are one and the same, no disallowance towards reimbursement by the company to the parent company on account of deputed employees shall be made. The Assessing Officer may call for details and decide the issue accordingly after providing adequate opportunity of being heard to the assessee. 13. The last issue in the appeal of the assessee is that Commissioner of Income Tax (Appeals) erred in confirming the action of the Assessing Officer in applying Rule 8D while computing disallowance under section 14A when the assessee had not incurred any expenses in relation to earning of such dividend. 14. The Assessing Officer while completing the assessment disa....
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....s relationship with the tax exempt income. Pay-back or return of investment is not such proximate cause, hence, Section 14A is not applicable in the present case. Thus, in the absence of such proximate cause for disallowance, Section 14A cannot be invoked." 19. The Punjab & Haryana High Court in the case of CIT Vs. Hero Cycles Ltd.(supra) held as under:- "The contention of the revenue that directly or indirectly some expenditure is always incurred which must be disallowed under Section 14A and the impact of expenditure so incurred cannot be allowed to be set off against the business income which may nullify the mandate of Section 14A cannot be accepted. Disallowance under Section 14A requires finding of incurring of expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance under Section 14A cannot stand." 20. The Delhi High Court in the case of Maxopp Investment Ltd. Vs. CIT (supra) held as under:- "While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the s....