TaxTMI 
TaxTMI 
2009 (7) TMI 1273
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....ion Scheme (ESOP) and by directing the AO to allow the same only in the year in which the shares are allotted to employees upon exercise of the option." 3. The issues raised in both these grounds is common. This issue has been dealt with by the Tribunal while deciding the appeals in the case of assessee for assessment years 02-03 & 03-04 vide order dated 12.06.09, a copy of which is placed by the assessee at pages 589 to 637 of the paper book. This issue has been dealt with by the Tribunal in para 7 to 7.16. For the sake of clarity on facts, entire observations of Tribunal on this issue from that order are reproduced below: - 7. Ground No.2 in appeal by the assessee and ground No.4 in appeal by the revenue are against disallowance of deduction on account of shares of the company given under Employees Stock Option Scheme (ESOP). During the year the assessee granted stock option of 3,32,250 shares to its employees. The shares were to be issued at Rs. 595/- per share as against face value of Rs. 10 per share. The relevant market price on the date of grant was Rs. 738.95 per share. The assessee treated the difference between Rs. 738.95 and Rs. 595/- as Employees compe....
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....scount arising on grant of options under the ESOP Scheme amortized and claimed as expenditure by the appellant, which is explained hereunder:- - ESOP is an employee compensation scheme intended to inculcate a sense of belongingness and instill a feeling of ownership in the employees, to create partnership with the employees for a transition form being mere `employees' to `stake holders'; - ESOP's are issued in terms of ESOP scheme framed as per the SEBI guidelines; - Once grants are issued by the assessee to its employees under the ESOP, in so far as the assessee is concerned the liability crystallizes inasmuch as the option to exercise such grant is with the employees on which the assessee has no control. - Since such liability towards employee compensation can be estimated with reasonable certainty, following the mercantile system of accounting as regularly followed by the assessee, a liability towards the said compensation has definitely arisen during the year and is allowable deduction as has been similarly held in the following cases: i) Calcutta Co. Ltd. Vs. CIT, 36 ITR 1 (SC); ii) Metal Box Company vs. Their Workmen, 73 I....
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....he grant price will result into receipt of lesser amount towards share premium but the assessee does not incur any expenditure in this regard. The loss is a notional loss to the extent of receipt of lesser amount towards share premium. The share premium received by the assessee is not its income and hence if the assessee receives lesser amount by way of such share premium, the assessee does not incur any expenditure so as to claim the same as allowable. SEBI guidelines are relevant for the purpose of accounting or presentation of financial statement in respect of listed company but are not conclusive to determine the allowability of expenses. The expenses are allowable only as per the provision of Incometax Act and the SEBI guidelines do not determine the allowability or otherwise of the sums. Even this benefit accruing to the employees are not considered as their income. Hence in view of the fact that merely stock options were granted and the loss if any, is towards lesser realization of share premium, the assessee has not incurred any expenditure and hence no part thereof is allowable. 7.3 We have considered relevant facts, arguments advanced and the case laws cited. The....
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....y at Rs. 100/- per share as against market price of Rs. 150/- per share, whether, the loss of Rs. 50 can be said to be allowable where the assessee accounts for only Rs. 100/- as sales not at Rs. 150/-. In such a situation, the loss will be only a notional loss or the loss of possible benefit but not the loss or liability incurred so as to be held as allowable under the scheme of Income-tax Act. Similarly in the present case what is loss to the assessee is short receipt of share premium and not incurring any liability or loss in the course of carrying on the business. Therefore, such notional losses are not allowable under the Act. The assessee is not to defray or pay any liability under the claim. Therefore, such notional loss cannot be held to be allowable under the scheme of the Act. The decisions relied upon by the learned counsel for the assessee are distinguishable on facts. In the case of Calcutta Co. Ltd., 37 ITR 1, the Hon'ble Supreme Court was considering the allowability of estimated accrued liability to be discharged at a future date. In the said case the assessee undertook to carry out development within six months from the date of deeds of sale which was unconditional....
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....ards its contribution. The share of American promoter was contributed by way of technical know-how valued at a sum of Rs. 2,35,000/- and in view of which the assessee allotted equity shares. The same was considered as capital expenditure. The Hon'ble Supreme Court held - "That what in effect was done by the appellant in allotting equity shares of Rs. 2,80,000 to Eimco, was to reimburse the contribution by Eimco by way of know-how, which could never be treated as expenditure, much less an expenditure laid out wholly and exclusively for purposes of the business of the appellant. It was not a case where after the incorporation, the appellant-company in the course of carrying on its business, spent the said amount for acquiring any asset. The High Court had rightly concluded that allotment of equity shares by the appellant to Eimco, in the circumstances of the case, could not be termed as expenditure, much less revenue expenditure." Similar view was held by the Hon'ble Delhi High Court in the case of CIT vs. Reinz Talbros Pvt. Ltd., 252 ITR 637 wherein the Hon'ble Delhi High Court speaking through Shri Arijit Pasayat, Hon'ble Chief Justice (as his Lordship then was), held - ....
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....in law and on facts in deleting addition of Rs. 28,76,76,167/- made u/s 43B on account of provision for pension to employees and when no pension trust was constituted nor contributed the amount to any outside agency." 6. It was submitted on behalf of assessee that this issue is covered in favour of assessee by the earlier decisions of Tribunal in assessee's own case for assessment years 2001-02, 02-03 & 03-04. Reference was made to the aforementioned order of Tribunal dtd. 12.06.09. Thus, it was pleaded that this issue is covered by the earlier order of the Tribunal. Reference was invited to the paras 13 to 17 wherein the Tribunal following earlier order for A.Y. 99-00 has decided this issue in favour of assessee. For the sake of completeness the relevant portion of the order dtd. 12.06.09 on this issue is reproduced: - 13. "Ground No. 2: - A new pension scheme was introduced by the assessee w.e.f. 01.11.1997. According to the said scheme pension was payable to managerial employees who was to retire/resign after completing 10/20 years of service respectively so as to bring the total pension payable to 2.25% of basic salary for every complete year of service. Th....
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....tion of any pension to any fund and the assessee has only provided on the basis of the actuarial valuation, the additional liability. The question of disallowance of same u/s 43B is clearly mi-spelt. We, therefore, agree with the reasoning given by the CIT(A) and decline to interefere." 17. In this view of the situation, respectfully following the aforementioned order of the Tribunal, we decline to interfere in the findings of ld. CIT(A) on this issue and this ground of revenue is dismissed." 7. In this view of the situation, after hearing both the parties, respectfully following the aforementioned order dtd. 12.06.09, we decide this issue in favour of assessee and dismiss the ground of the revenue. 8. Ground no. 3 of revenue's appeal is as under: - 3. "The ld. CIT(A) erred in law and on facts in holding that the contributions of Rs. 35 lacs and Rs. 6 lacs made to RCHS and RSF are of revenue nature when they were merely donations u/s 80Gof the I.T. Act." 9. This issue is discussed by AO in para 6. A sum of Rs. 35 lakh was paid to Ranbaxy Community Health Care Society and Rs. 6 lakh was paid to Ranbaxy Science Foundation for which the deduction u/s 80G was....
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....s Limited with the implicit mission of giving impetus to research activity and help in reviving India's great scientific tradition. The foundation instituted Ranbaxy Research Awards to recognize original outstanding contributions in the field of Medical and pharmaceutical sciences. Later, Ranbaxy Research Foundation was reconstituted as a separate society and registered under the Societies Act in May 1994. The list of Governing Council of Ranbaxy Science Foundation contains various names. The name of Dr. Parvinder Singh, Chairman & Managing Director, Ranbaxy Laboratories Ltd., New Delhi figures on top in the list of members. The memorandum of Association of Ranbaxy Community Halthcare Society, available at page 86 to 93of the paper book, lays down the objects of the Society. The main objects are to provide primary comprehensive health care and to initiate and provide necessary assistance to any programme for rural development. One of the objects of the Society is to establish community based scientific research for control of various endemic diseases. The another object is to organize, convene, conduct, hold and participate in conferences, seminars, workshops and exhibitions etc. O....
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.... the assessee company. (8) The expenditure is also incurred as part of larger social as well as business responsibility of the assessee company, which is engaged in manufacture of drugs and in sale thereof. 6.10. The issue regarding contribution to various foundations and societies has been considered by various courts in relation to allowability of deduction of expenditure. In the case of Sri Venkata Sataynarayana Rice Mill Contractors Co. Vs. CIT 223 ITR 101 (SC), the assessee claimed deduction of the amount paid by it to Andhra Pradesh Welfare Fund as a business expenditure u/s 37(1) of the I.T. Act. The case of the assessee was that it was carrying on business of exporting rice from the state of Andhra Pradesh and for this purpose, a permit was granted by the Collector who gave permits only if payment was made to a welfare fund. The ITO disallowed the deduction by holding that the payment was neither mandatory nor statutory, but was only discretionary. The CIT(A) also disallowed the claim of the assessee. The Special Bench of the ITAT came to the conclusion that though there was no compulsion on the assessee to make contribution but still the contribution was ....
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....T and allowed the claim of the assessee by observing as under: "Held,(i) that the words "for the purpose of the business" used in section 37(1) should not be limited to the meaning of "earning profit alone". Business expediency or commercial expediency might require providing facilities like schools, hospitals, etc., for the employees or their children or for the children of the e-employees. Any expenditure laid out or expended for their benefit, if it satisfied the other requirements, must be allowed as a deduction under section 37(1) of the Act. The fact that somebody other than the assessee was also benefited or incidentally took advantage of the provision made, should not come in the way of the expenditure being allowed as a deduction under section 37(1) of the Act. Nevertheless, it is an expenditure allowable as deduction under the Act. (ii) That the word "expenditure" primarily denoted the idea of spending or paying out or away. It was something which was gone irretrievably, but should not be in respect of an unascertained liability of the future. It must be an actual liability in praesenti, as opposed to a contingent liability of the future. ....
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.... earn a living. The AO held that since the item of expenditure was an item of donation, it could not be allowed. The CIT(A) upheld the order of the AO by holding that the expenditure incurred did not have any direct connection with the business of the assessee because the beneficiaries of the expenditure were not employees of the assessee nor the assessee had any statutory obligation to incur such obligation. On second appeal, by making reference to various authorities including the decision of Hon'ble Karnataka High Court in the case of Mysore Kirloskar Ltd. Vs. CIT (supra), the ITAT upheld the claim of the assessee. We consider it proper to reproduce the relevant findings of the ITAT which are as under: "It had been held by the Karnataka High Court in the case of Mysore Kirloskar Ltd. Vs. CIT [1987] 166 ITR 836/30 Taxman 467, that while the basic requirements for invoking sections 37(1) and 80G are quite different, but nonetheless the two sections are not mutually exclusive. Thus, there are overlapping areas between the donations given by the assessee and the business expenditure incurred by the assessee. In other words, there can be certain amounts, though in the nature....
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....ations towards society as a responsible corporate citizen.[para 10]. 6.16. In view of the above authorities, it is clear that even if there is no statutory obligation on the part of the assessee to incur the expenditure, but the expenditure has been incurred to bring good-will to the assessee or is for the purpose of promoting its business then such expenditure is to be allowed as business expenditure. In view of the above, we uphold the claim of the assessee and allow ground no. 5." 32. In this view of the situation, as the above mentioned order of the Tribunal is regarding contribution to the same institution, respectfully following the above order we find no infirmity in the order of CIT(A) vide which it has been held that assessee is entitled to claim the said contribution as an expenditure. We decline to interfere and this ground of revenue is dismissed. 11. As the facts are same, after hearing both the parties, respectfully following the aforementioned order, we dismiss this ground. 12. Ground no. 4 of revenue's appeal read as under: - 4. "The ld. CIT(A) erred in law and on facts in directing to re-compute deduction u/s 80HHC i) after....
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....sheries Ltd. (2001) 72 TTJ (Mad.) 261 17. We have carefully considered the rival submissions in the light of material placed before us. We have heard both the parties and their contentions have carefully been considered. The case law relied upon by ld. AR supports the case of assessee. It is seen that recently Mumbai Bench in the case of Shah Originals Vs. ACIT 112 TTJ (Mumb.) 754 has held that gain on foreign exchange rate fluctuation under EEFC account is to be included in profits of export business for the purpose of deduction u/s 80HHC. While holding so the decision of Delhi Tribunal in the case of Smt. Sujata Grover (supra) Vs. DCIT was followed. It is seen that in the case of Smt. Sujata Grover Vs. DCIT it was held that foreign exchange fluctuation gain pertaining to exports affected in earlier years cannot be said to be "any other receipts of a similar nature" in terms of Explanation (baa) to sec. 80HHC for calculating "profits of the business". Accordingly, we hold that ld. CIT(A) has rightly held that foreign exchange gain is part of total turnover as well as part of export turnover. We decline to interfere this ground of revenue is dismissed. 18. Ground no. 5 of the....
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....ubes Ltd.: 218 ITR 164 (SC) -Kedarnath Jute Manufacturing Co. Ltd. Vs. CIT : 82 ITR 363 (SC) -CIT Vs. Jamnadass Ram Krishan: 250 ITR 155 (Del.) -CIT Vs. Ganga Glass Works (P) Ltd.: 276 ITR 394 (All.) -CIT Vs. Apollo Textiles Agency: 142 Taxman 396 (All.) -CIT Central Circle 1 Vs. Century Enka Ltd.: 130 ITR 267 (Cal.) 22. It is also claimed that for A.Y. 03-04 the order of CIT(A) vide which similar addition was deleted has been upheld by the Tribunal vide its order dtd. 12.06.09 in ITA No. 3871/D/04 and reference is made to paras 48 to 53 on pages 44 to 48. Thus, it was pleaded that addition deserves to be deleted. 23. On the other hand, ld. DR relied on the order of AO and pleaded that addition should be upheld. 24. We have carefully considered the rival submissions in the light of material placed before us. Similar issue was decided by the Tribunal wherein the similar claim of the assessee for a sum of Rs. 2,59,76,070/- was disallowed and on the similar arguments the Tribunal has upheld the order of CIT(A) vide which such addition for AY 03-04 was deleted. Reference can be made to para 51 to 53 of the said order which is reprod....
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....as stated in ground no. 5 are similar, considering our decision given in ground no. 5, we decide this ground in favour of assessee after hearing both the parties. This ground of revenue is dismissed. 28. Ground no. 7 of revenue's appeal read as under: - 7. "The ld. CIT(A) erred in law and on facts in directing to allow weighted deduction u/s 35(2AB) on the cost of computer, motor-car and other assets provided to R&D employees." 29. The assessee company carries on in house research and development activities related to its business at the facilities approved by the department of science and industrial research u/s 35(2AB) of I.T. Act, 1961 (Act). In computing total income capital expenditure on assets provided to the employees working at such approved research and development facilities aggregating to Rs. 1,60,90,091/- were only considered for 100% deduction u/s 35(2)(ia) of the Act. Vide note no. 11 forming integral part of the return income, the assessee claim weighted deduction on such assets allowable at the rate of 50% of expenditure incurred, thereby claiming additional deduction by 50%. It was claimed that similar issue was considered by the Tribunal in earlier....
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.... u/s 35(2AB) while dealing with the claim of the assessee for A.Y. 01-02 in respect of similar expenses. There is no reason to deny the same in the year in question. Accordingly, we direct the AO to allow the weighted deduction in respect of these expenses u/s 35(2AB) of the Act." 30. Respectfully following the same, we find no merit in this ground and this ground is dismissed. 31. Ground No.2 of assessee's appeal reads as under:- "That on law, facts and in the circumstances of the case, the Ld. CIT (A) has erred in upholding the disallowance of Rs. 4,16,84,678/- on account of demand raised by Department of Chemicals & Petrochemicals, Ministry of Chemical and Fertilizers, Government of India." 32. Ground No.3 in assessee's appeal relates to disallowance of Rs. 4,16,84,678/- on account of demand raised by the Department of Chemicals and Petro Chemicals, M/o of Chemicals and Fertilizers, Government of India. The assessee utilized its own production of bulk drugs in the manufacture of its formulation. According to Government, namely, M/o Chemicals and Fertilizers, the then prevailing market price of said drug utilized in manufacturing the formulations was lower than ....
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....s liability to pay the demand raised by NPPA claiming the actions of NPPA as arbitrary and illegal and has sought quashing of the show cause notice. Since the assessee has denied the liability there could not be any question of law being crystalised during the Assessment Year. The liability is only contingent in nature and Hon'ble Supreme Court in its order had remitted the matter back to the Hon'ble High Court for their consideration which means that the issue of liability to pay the demand raised by the authority is not decided and is contingent on the facts and interpretations of High Courts. The claim of the assessee was disallowed. The claim has been upheld by Ld. CIT (A) as per discussion found at pages 16 to 18 of the impugned order. The submissions made before the Assessing Officer were reiterated and reference was made to the decision of Hon'ble Supreme Court in the case of Bharat Earth Movers 245 ITR 428 to contend that such liability was allowable. It was submitted that liability of the assessee arose when report was submitted by DPLRC to the Government of India on 14th January, 2004 quantifying the liability of the assessee company under the provisions of dr....
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....ht in disallowing the same and the ground of the assessee was dismissed. The arguments submitted before the Assessing Officer and Ld. CIT (A) were reiterated before us. 35. Reliance was placed on the Hon'ble High Court in the case of Addl. CIT vs. Rattan Chand Kapoor 149 ITR 1 to contend that the entire demand was deductible when it was demanded by the statutory authority. It was submitted that demand was raised during the year under consideration vide DPLRC report submitted to the Government on 14th January, 2004 and, thus, the entire amount was deductible. It was submitted that according to the decision of Hon'ble Bombay High Court in the case of CIT vs. Nagri Mills Company Ltd. 33 ITR 681 (Bom) when rate of tax for the years is same and deduction is obviously a permissible deduction Department will not be right in raising dispute as to the year in which the deduction should be allowed and it was observed that one should have thought that the Department would not fritter away its energies in fighting matters of such kind. Thus, it was pleaded that the liability having been crystalised during the year under consideration and demand being raised by the report of DPLRC the en....
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....ied vide this report. It is further mentioned in para 2 that quantification has been done on the basis of certified data submitted to DPLRC by the petitioners relating to consumption and sale of bulk drug and data on retention price, pool price and allied price for the same drug supplied by the Department. Detailed computation are annexed as Annexure-A to C. Further, the liability period has been mentioned as April, 1979 onwards and upto 25th August, 1987. It has further been mentioned that the assessee company did not furnish any details of consumption of Ampicillin Trihydrate to the Department despite several letters and it was claimed by the assessee that they did not procure the drug from outside sources and it was internal manufacture to meet the requirement of production of formulations and sales in the internal as well as export markets. The details of consumption of bulk drug Ampicillin Trihydrate were submitted to DPLRC by the assessee in the audited statements enclosed with the letter dated 20th February, 2001 containing the data related to period from January, 1979 to December, 1987. Taking note from those documents and keeping in view the trend of captive consumption of....
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.... demand amount deposited by the assessee being a sum of Rs. 2,44,19,500/- further amount due was calculated at Rs. 1,72,65,178/-. These are the brief contents of the report of DPLRC dated 14th January, 2004. 38. It was vehemently pleaded by Ld. AR that the said report dated 14th January, 2004 is outcome of the order of Hon'ble High Court dated 28th October, 1998 passed in Civil Writ Petition 106/97 and CM No.233/97 by the assessee wherein the assessee had challenged the liability created by DPLRC in the year 1995. Extract of the said order of Hon'ble High Court is as under:- "28.10.1998 Present : Mr. V.P. Singh, Senior Advocate, with Mr. Anil Bhatnagar, Ms Kum Kum Sen and Ms Sushmita Banerjee for the petitioner. Mr. H.S. Phoolak with Mr. Lallan Chaudhary for the respondent - UOI. CWP No.106/97 and C.M. No.233/97 It is agreed between the parties that the petitioner will file representation before the Drugs Prices Liabilities Review Committee with regard to the questions raised in the writ petition. After hearing the parties the D.P.L.R.C will determine the liability, if any, of the petitioner. Learned counsel for the respond....
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....ulk drug and also pooled this for sale of such bulk drugs. Paragraph 7 sub-clause (2) provides that where a manufacturer of formulation utilized in his formulation in bulk drugs either from his own production or procured by him from any other source, the price of such bulk drug being lower than the price allowed to him in the price of such formulation, then the Government may require such manufacturer to deposit the said amount as may be determined with Drug Price Equalization Account referred to in paragraph 17, the excess amount as determined by the Government. Vide notice dated 13th December, 1995 received by assessee from Drug Price Liability Review Committee (DPLRC) it was informed that assessee had a liability of Rs. 4,88,38,997/- in respect of bulk drug Ampicillin Trihydrate under the provisions of DPCO. Consequently, vide notice dated 25th July, 1996 a demand of Rs. 12,37,26,920/- was raised which included aforementioned sum of Rs. 4,88,38,997/- and interest of Rs. 7,48,87,923/- (these facts are stated by the assessee in the Writ Petition filed by the assessee before Hon'ble High Court of Delhi in 2004 a copy of which is placed at pages 118 to 158 of the paper book). Th....
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....Whereas your company utilize in its formulations bulk drug Ampicillin Trihydrate from its own production, the price of said bulk drug being lower than the price allowed in the price of formulations to your company; and Whereas your company was communicated DPEA liability of Rs. 4,88,38,997.00 under para 7(2) of the Drugs (Prices Control) Order 1979 vide letter no.6 (28-S)/86-D-11/388, 389 dated 21.4.1995; and Whereas in pursuance of directions of the Hon'ble Supreme Court of India in the case of Union of India vs. M/s Cynamid India Ltd. (AIR 1987 SC 1802) upholding the right of the Government to fix price of essential drugs and formulations, your company has been given due opportunity, by the Government to be heard by the Three Member Committee namely Drug Prices Liability Review Committee (DPLRC) constituted in 1994 head by a Delhi High Court Judge (since retired) and; Whereas the DPLRC based on the written submissions/representations made and arguments advanced by your company during the hearing has submitted its Report to the Government on 14.1.2004 quantifying the liability of your company under the provisions of DPCO, 1979 as Rs. 4,16,84,678/- (Rs. Four c....
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..... Thus, it can be observed that though the report was submitted by DPLRC on 14th January, 2004, but the same was yet to be accepted by the Government of India and the time taken between the submission of the report and creating the demand also suggests that such procedure was to be adopted. Thus, when demand was re-quantified by DPLRC, that event cannot be said to have created any enforceable demand against the assessee. The demand has to be considered to have accrued only vide letter dated 15th April, 2004 which does not fall within the financial year under consideration. No doubt, that the liability in the present case is a statutory liability. According to the decision of Hon'ble Supreme Court in the case of CIT vs. Kalinga Tubes Ltd. 218 ITR 164 (SC), which has been relied upon by Ld. AR while submitting the arguments in respect of ground No.5 of the Departmental appeal, when the assessee is following mercantile system of accounting the liability to pay the tax will arise at the stage of obligation to pay. This being statutory liability pertains to the period of April, 1979 till 25th August, 1987. The demand with regard to which was first raised vide notice dated 25th July,....
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....n arises or the liability to pay arises. The entries are made in anticipation of actual payments. It was further observed that in such a case the entry could be made only when the demand was raised and not earlier. It was found in the said case that the liabilities pertaining to earlier years, namely, Assessment Years 1953-54 to 1958-59, the demand was raised in 1964 and there being no occasion or possibilities of filing the revised return, even if the liability arises at the time of each sale, but where the assessee took the view that no liability arises and he could not even quantify the liability, it was difficult to see how an entry could be made earlier. Thus, it was observed that in any case the matter for the assessee was to be dealt with in its own way. It was observed that it was open to the assessee to make the entry either on the basis of accrual of liability or on the basis of demand raised by the Department. Keeping in view the fact that assessee was maintaining account on hybrid accountancy method and also taking note that the determination of liability was not earlier than 1964, the sales-tax demand was held to be deductible in Assessment Year 1964-65 when liability ....
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....aw can claim such deduction in the year when such deduction can legally be claimed and assessee can utilize its right accordingly in accordance with law by filing the appropriate claim with the revenue authorities. 45. A reference can also be made to the Full Bench decision of Hon'ble Supreme Court in the case of ITO vs. Murlidhar Bhagwan Das (1964) 52 ITR 335 (SC) wherein the Hon'ble Supreme Court after referring to the decision of Apex Court in the case of Kikabhai Premchand v. CIT (1953) 24 ITR 506 it has been held that for the income-tax purposes, each year is a self-contained accounting period and we can only take into consideration income, profits and gains made in that year and are not concerned with potential profits which may be made in another year any more than we are with losses which may occur in the future, it was observed that the decision should be confined to the year of assessment. It will be relevant to reproduce the following observations from the said decision:- " Indeed. This court in Kikabhai Premchand v. CIT [1953] 24 ITR 506, 508; [1954] SCR 219, 222 accepted this legal position when it said : "for income-tax purposes, each year is a ....