TaxTMI 
TaxTMI 
2018 (10) TMI 1967
X X X X Extracts X X X X
X X X X Extracts X X X X
....E INCURRED IN RESPECT OF THE EMPLOYEES STOCK OPTION SCHEME ('THE ESOP") BY WAY OF THE PAYMENTS MADE TO THE HOLDING COMPANY RS.1,32,60,846/- 1. On the facts and I the circumstances of the case and in law, the Honourable Commissioner of Income Tax (Appeals)-9 ["the CIT(A)"] erred in confirming the action of the Deputy Commissioner of Income Tax- 4(3)(1) ("the DCIT") and disallowing the expenditure incurred in respect of ESOP aggregating to Rs.1,32,60,846/- alleging the same to be a capital expenditure. 2. The learned CIT(A) and the DCIT failed to appreciate that the Appellant has incurred the expenditure on ESOP only with a view to retain its employees, and as a reward to their contributions and the loyalty for serving the Appellant, accordingly qualifying as business expenditure incurred in the ordinary course of business and there has been no increase in the capital of the Appellant. 3. The learned CIT(A) erred in confirming the action of the DCIT in alleging that the vesting period of the Stock Option would start from Financial Year 2012-13 as against 21st April, 2011 ignoring the facts and submissions made by the Appellant in this regard. 4. Th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....enditure resulting in "increase in capital" is not an allowable deduction even if such expenditure may incidentally held in business of the company. b) ESOP discount does not diminish trading/ business receipts of the issuing company. The company does not suffer any pecuniary detriment. To claim a charge against income, it should inflict a detriment to the financial position. ESOP is voluntary scheme launched by the employers to issue shares to employees. The intention is to only give a 'stake' to the employees in the organization. c) This discount is not incurred towards satisfaction of any trade liability as the employees have not given up anything to procure such ESOP. d) Share premiums obtained on issue of shares are items of capital receipts. When such premium is forgone, it cannot be claimed as an 'expenditure wholly and exclusively laid out or expended for the purposes of the trade.' e) It is further worthwhile to note that the scheme of ESOP involves four stage, namely, granting of options, vesting of options, exercise of options and sale of shares. The assessee company at the stage of grant, merely expresses an intent or a wish and exerc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t price of Rs.31.50. On examination of notes to the financial statements, under note-32, it is found that the auditors have given a specific remark that the assessee had made payment of Rs.1,32,60,846/- to the ultimate holding company, JM Financial Ltd and claimed the same under the head, Employee Benefit Expenses vide note 22 of the P& L Account. This ESOP scheme was formulated for grant of stock option and as corollary, the appellant had granted stock options to the employees of the assessee company. The payments were related to the differential amount of issue price and market price of the said option shares which were reimbursed to the holding company by the assessee company. It is further seen that the company does not suffer any pecuniary loss or detriment on account of ESOP. It is also not a trade liability. Share premiums obtained on the issue of such shares are the items of capital receipts and when such premium are foregone, it cannot be claimed as expenditure wholly and exclusively revenue in nature. The whole process consists of four stages namely, granting of options, vesting of options, exercise of options and sale of shares. Further there is no specific provisions of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....issued shares at free of cost and hence the entire value of shares is treated as part of employee benefit and accordingly the value of sweat equity shares was claimed as deductions. 8.Before us, the Ld. AR mainly placed reliance on the provisions of Fringe benefit tax to contend that the assessee, having paid the fringe benefit tax, should be allowed to claim the value of sweat equity shares as deduction. The Ld. AR invited our attention to Circular No.8 of 2005 dated 29-08- 2005 issued by the CBDT giving clarifications about the Fringe Benefit Tax. The Ld. AR invited our attention to the question No.35 and the answer given to it wherein it is clarified that the fringe benefit tax is not payable on the portion of expenses, which were disallowed. Accordingly, the Ld. AR drew an inference, apparently on reverse interpretation, that if the Fringe benefit tax is accepted, then the expenditure is allowable as revenue expenditure. We are unable to agree with the said contentions. As submitted by Ld. DR, the income from business has to be necessarily computed in terms of sec. 28 to 43 of the Act. The computation of fringe benefit tax is a subsequent exercise. Accordingly, if any ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....above said definition, in our view, the same would not fall in the category of" Sweat Equity Shares." 10.The notes of accounts attached to the Balance sheet as at 31.3.2008, which is place at page 27 of the paper book, states about the issue of sweat equity shares, as under: - "During the year the Company has issued equity shares of Rs.50,00,000/- each (5,00,000 equity shares of Rs.10/- each) to Mr. Narendra Baheti (Managing Director) and Mr. Rajendra Baheti (Zonal Head - North Zone) as per Board resolution dated 14th November, 2007. The shareholders had passed a special resolution in the extraordinary general meeting held on 29th December, 2007 to authorize such allotment. The shares were allotted on 16th January, 2008. The sweat equity shares have been issued for consideration other than cash for providing professional services." Thus it is seen that the assessee has issue equity shares for providing "Professional services", which has been considered as value addition by the assessee company. This fact has further been elaborated in the report dated 18-10-2007 given by M/s Doogar & Associates, Chartered Accountants who had valued the consideration for p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nce. Under these set of facts, in our view, the Value addition would partake the character of an intangible asset in the hands of the assessee company. Since the Sweat Equity shares were issued for acquiring the Value addition, in our view, the tax authorities are justified in holding the same as "Capital expenditure" in the hands of the assessee company. Accordingly, we uphold the order of Ld. CIT(A) on this issue. 13.In the result, the appeal filed by the assessee is dismissed. Keeping in view the above facts and circumstances of the case, the disallowance made by the AO is upheld. In the result, this ground of appeal is dismissed. Aggrieved, the assessee is in further appeal before us. 4.1 The Ld. Senior Counsel, Dr K.Shivram, submitted that the assessee's employees participated in the ESOP Scheme formulated by the parent company of the assessee and assessee reimbursed the differential amount of market price [Rs.31.50 per share] vs. issue price [Re. 1/- per share] aggregating to Rs.1.32 Crores for the aforesaid participation and the said sum was paid for retention of employees and merely a method of remunerating them. The Ld. Counsel submitted that lower ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....levant material on record including judicial pronouncements as cited before us. Some undisputed facts that emerge out of the facts as narrated by us herein- above are that there is no increase in the Share Capital of the assessee rather the shares have been issued by its holding company to the assessee's employees and the assessee has funded the differential amount i.e. difference between issue price and the market price of the shares. The Ld. CIT(A), in our opinion, has clearly flawed in equating the same with Sweat Equity Shares which is not the case here and therefore, reliance paid on the decision of Future Agrovet Limited was erroneous. 5.2 The lower authorities, in our opinion, were misled by the fact that the impugned payments were made to make up for the shortfall in the share premium account and therefore, the same was on capital account. However, in our opinion, the nature of receipts in the hands of holding company was not relevant factor to determine the true nature of payment in the hands of the assessee payer. The same is akin to a situation where the assessee acquires certain moveable properties for the benefit of its employees as a means of retaining them or rewa....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the parent company. We are of the view that the observations of the CIT(A) in para 5.6 of his order that these expenses are the expenses of the foreign parent company is without any basis and lie in the realm of surmises. The foreign parent company has a policy of offering ESOP to its employees to attract the best talent as its work force. In pursuance of this policy of the foreign parent company, allowed its subsidiaries/affiliates across the world to issue its shares to the employees. As far as the assessee in the present case which is an affiliate of the foreign parent company is concerned, the shares were in fact acquired by the assessee from the parent company and there was an actual outflow of cash from the assessee to the foreign parent company. The price at which shares were issued to the employees was paid by the employee to the Assessee who in turn paid it to the parent company. The difference between the fair market value of the shares of the price at which shares were issued to the employees was met by the Assessee. This factual position is not disputed at any stage by the revenue. In such circumstances, we do not see any basis on which it could be said that the exp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ount of payments made by it for the shares allotted to its employees in connection with the ESPP. The AO had disallowed Rs. 9,06,788/- incurred by the assessee on the ground that this expenditure is not the expenditure of assessee company but that expenditure is of parent company and the benefit of such expenditure accrues to the parent company and not assessee. The CIT(A) deleted the addition made by the AO. The CIT(A) found that the common shares of Accenture Ltd. the parent company, have been allotted to the employees of ASPL, the Indian affiliate/Assessee and not to the employees of the parent company. The CIT(A) also found that though the shares of the parent company have been allotted, the same have been given to the employees of the Assessee at the behest of the Assessee. The CIT(A) thus held that it was an expense incurred by the assessee to retain, motive and award its employees for their hard work and is akin to the salary costs of the assessee. The same was therefore business expenditure and should be allowable in computing the taxable income of the assessee. The tribunal upheld the view of the CIT(A). It can be seen from the decision in the case of Accenture Services (P....
X X X X Extracts X X X X
X X X X Extracts X X X X
....same has been provided on Page number-54 of the paperbook. The Ld. AO is directed to verify the same and allow the claim of the assessee keeping in view the fact that the deduction would be available to the assessee only to the extent of shares which are ultimately allotted by the issuer to the assessee's employees and no deduction would be available against cancelled / un-allotted shares since the amount paid by assessee in respect of those shares would accrue to the assessee as refund from holding company. Revenue's Appeal, ITA No. 6479/Mum/2016 6. The revenue, in its appeal, is aggrieved by certain relief of Rs.53.30 Lacs provided by Ld. first appellate authority to the assessee on account of disallowance u/s 14A. At the outset, it is pointed out that tax effect of the quantum additions as contested by the revenue is less than prescribed limit of Rs.20 Lacs and the same is covered by recently issued low tax effect Circular No.03/2018 dated 11/07/2018 issued by Central Board of Direct Taxes [CBDT]. The Ld. DR has controverted the same by submitting that necessary instructions / certificate, in this regard, would be required from higher authorities. 7. We have gone throug....