TaxTMI 
TaxTMI 
2020 (12) TMI 769
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....lowing ESOP discount of Rs. 4,62,26,300/- as a permissible expense under section 37(1) of the Act as the said ESOP expense, which is a notional expense, has been incurred relation to issue of shares to employees, therefore resulting in an increase in capital which is not an allowable deduction. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred by not considering the decision of the Hon'ble Supreme Court in the cases of Punjab State Industrial Development Corp. Ltd. (1997) 225 ITR 792 (SC) and Brooke Bond India Ltd. (1997) 225 ITR 798 (SC) where the Hon'ble Apex court has held that expenditure resulting in 'increase in capital" is not allowable deduction even if such expenditure may incidentally help in business of the company. 3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred by not appreciating that the intention behind issuing ESOPs is to only give a 'stake' to the employees in the organization and that his discount is not incurred towards satisfaction of any trade liability as the employees have not given up anything to procure such ESOP and that Share premiums obtained ....
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....ak Mahindra Bank Ltd [89 taxmann.com 223 (Mum)], Accenture Services Pvt. Ltd., [2010 TIOL 409 ITAT (Mum)] and the decision of the Hon'ble Madras High Court in the case of CIT v PVP Ventures Limited and deleted the disallowance made by the Assessing Officer observing as under: - "7.2 Decision: - I have considered the submission made by the appellant and the reasons recorded by the AO. I find that the issue is squarely in favour of appellant by the decision of the Special Bench of Hon'ble ITAT Bangalore in the case of M/s. Biocon Ltd. vs. DCIT [2013] 155TTJ 649 in which the Honourable bench has dealt with all the reasons given by the AO for making the disallowance and has held as under: - "Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Discount on ESOP] - Assessment years 2003-04 to 2007-08 - Assessee-company issued Employee's Stock Option Plan (ESOP) and claimed difference between market price and exercise price as deduction under section 37(1), spread equally over vesting period of four years, on basis of SEBI Guidelines and accounting principles -Assessing Officer disallowed same, holding it as a contingen....
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.... the hands of company, if a company issues shares to the public or the existing shareholders at less than the otherwise prevailing premium due to market sentiment or otherwise, such short receipt of premium would be a case of a receipt of a lower amount on capital account. It is so because the object of issuing such shares at a lower price is nowhere directly connected with the earning of income. It is in such like situation that the contention of the revenue would properly fit in, thereby debarring the company from claiming any deduction towards discounted premium. [Para 9.2.6] It is quite basic that the object of issuing shares can never be lost sight of. Having seen the rationale and modus operand! of the ESOP, it becomes out-and-out clear that when a company undertakes to issue shares to its employees at a discounted premium on a future date, the primary object of this exercise is not to raise share capital, but to earn profit by securing the consistent and concentrated efforts of its dedicated employees during the vesting period. Such discount is construed, both by the employees and company, as nothing but a part of package of remuneration. In other words, such discou....
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....OP vest with the employees at the rate of 25 per cent only on putting in service for one year by the employees. Unless such service is rendered, the employees do not qualify for such options. In other words, rendering of service for one year is sine qua non for becoming eligible to avail the benefit under the scheme. Once the service is rendered for one year, it becomes obligatory on the part of the company to honour its commitment of allowing the vesting of 25 per cent of the option. It is at the end of the first year that the company incurs liability of fulfilling its promise of allowing proportionate discount, which liability would actually be discharged at the end of the fourth year when the options are exercised by the employees. [Para 9.3.2] The principle laid down in the case of Bharat Earth Movers v. CIT [20001 245 ITR 428/112 Taxman 61 (SC) was that a liability definitely incurred by an assessee is deductible notwithstanding the fact that its quantification may take place in a later year. The mere fact that the quantification is not precisely possible at the time of incurring the liability would not make an ascertained liability a contingent. Almost to the similar....
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....e of exercise of option depending upon the length of service rendered by the employee during the vesting period. The incurring of liability towards the discounted premium, being compensation to employee, is directly linked with the span of service put in by the employee. It, therefore, transpires that a company, under the mercantile system can lawfully claim deduction for total discounted premium representing the employees cost over the vesting period at the rate at which there is vesting of options in the employees. [Para 10.4] Therefore, it is apparent that the company incurs liability to issue shares at the discounted premium only during the vesting period. The liability is neither incurred at the stage of the grant of options nor when such options are exercised. [Para 10.5] Considering the questions of 'when' and 'how much1 of deduction for discount on options is to be granted, it is held that the liability to pay the discounted premium is incurred during the vesting period and the amount of such deduction is to be found out as per the terms of the ESOP scheme by considering the period and percentage of vesting during such period. Therefor....
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....it itself. It simply means that the benefit accrued to the assessee but the same did not attract tax. The position has now been clarified beyond doubt by the legislature that the ESOP discount, which is nothing but the reward for services, is a taxable perquisite to the employee at the time of exercise of option, and its valuation is to be done by considering the fair market value of the shares on the date on which the option is exercised. [Para 11.1.4] It is palpable that since the remuneration to the employees under the ESOP is the amount of discount with respect to the market price of shares at the time of exercise of option, the employee cost in the hands of the company should also be with respect to the same base. [Para 11.1.5] The amount of discount at the stage of granting of options with respect to the market price of shares at the time of grant of options is always a tentative employee cost because of the impossibility in correctly visualizing the likely market price of shares at the time of exercise of option by the employees, which, in turn, would reflect the correct employees cost. Since the definite liability is incurred during the vesting period, it ....
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....) of the Act. 9. The revenue has raised following common grounds in all these appeals except for the figures: - "1. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred in fact and law in holding that the AO has not established any nexus between borrowed funds and capital work in progress and hence erred in directing the AO to delete the addition of Rs. 6,81,00,000/- under Section 36(l)(iii) which was made by the AO to the closing Work in Progress out of the interest cost claimed as revenue expense by the assessee. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred by not appreciating the very clear finding brought on record by the AO that there was always a negative balance in the bank account of the assessee on the basis of which it was concluded that whenever there was a withdrawal of funds for addition to closing work in progress, the assessee used loan funds which clearly established that there was a nexus between the borrowed funds and capital work in progress." 10. Ld. Counsel for the assessee at the outset submitted that the issue in appeals is squarely covered by the decision of....
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....ion that no part of interest can be disallowed. Accordingly, disallowance of interest amounting to Rs. 1,77,00,000 and addition of the same to the work in progress is directed to be deleted. Reliance in this regard is placed on the decisions of the Hon'ble jurisdictional High Court in CIT Vs. Reliance utilities & Power Ltd (2009) 313 ITR 340 (Bom) and in the case of CIT Vs.HDFC Bank Ltd (IT Appeal No.330 of 2012) and also Hon'ble Supreme Court decision in the case of Munjal Sales Corporation Vs. Another (2008) 298 ITR 298(SC), ITAT Mumbai in the case of Shrenuj & Co. Ltd A.Y. 2006-07 (In ITA No.8189/Mum/2010 and A.Y. 2007-08 (in ITA No.7948/Mum/2011) and ITAT, Delhi in the case of Lakhani INida Ltd., A.Y. 2006-07 (ITA No.2057/Delhi/2011)" 5. After hearing both the parties and perusing the material available on record, we observe that the assessee has sufficient funds in the form of share capital and reserves. Ld.CIT(A) noted that in the case of MCIE , CWIP was Rs. 11,79,64,135 and own funds of this entity in form of share capital and reserves were Rs. 931,51,30,000. In MCL, CWIP was Rs. 91,95,418 and own funds of this entity in form of share capital and re....