AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2022 (10) TMI 826
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....y the assessee is challenging the disallowance of discount amounting to Rs.320,00,00,000/- given to prepaid distributors u/s.40(a)(ia) of the Act for non-deduction of tax at source u/s.194H of the Act. The ground No.I raised by the assessee is with regard to non-adjudication of additional evidences filed before the ld. CIT(A) is interconnected with ground No.II. Hence, they are taken up together for disposal. 2.1. We have heard rival submissions and perused the materials available on record. We find that assessee is in the business of providing cellular services in the telecom circles of Maharashtra, Gujarat, Andhra Pradesh, Delhi, Uttar Pradesh (West), Uttar Pradesh East, Haryana, Kerala, Rajasthan, Himachal Pradesh and Madhya Pradesh. The company also trades in handsets and accessories which are integral part of the nature of business in which the assessee is operating. During the course of assessment proceedings, the assessee was asked to submit details of commission and discount given to dealers and tax deducted on the same. On perusal of the details furnished by the assessee, the ld. AO observed that assessee had deducted tax at source for the commission payments made but h....
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....rice from the distributors in advance and that no payment is made to the distributors or credit given in favour of the distributor and accordingly, the entire provisions of Chapter XVIIB of the Act warranting deduction of tax at source fails. The assessee stated that for deducting tax in terms of Section 194H of the Act - (a) Income should be in the nature of commission or brokerage (b) Payment should be received by a person acting on behalf of other, in the course of rendering services to third parties. (c) Such income should be paid or credited by the payer in favour of payee. (d) The payer should be a person responsible for paying such income to payee. (e) The amount of commission should be actually ascertainable. (f) The time of credit or payment should also be known. 2.2. Accordingly, it was submitted that to effectuate TDS, an amount that would be paid should be clearly determinable, the time when tax should be deducted at source should have crystallised, and the payer should be responsible for earning of such income by the distributor. Since, all these parameters fail, the assessee company is not obligated to deduct ta....
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....istributor earns income only if the said sim cards and recharge vouchers were sold further. Hence, there is no fixed amount of commission that could be determined from the agreement entered into by the assessee with the distributors. Once the amount of commission income that could be determined in the hands of the distributor is not permissible, there cannot be any obligation of deduction of tax at source that could be casted on the assessee. 2.5. From the perusal of the distributors agreement, we find that the distributor is allowed to distribute to its retailers at any price between the consideration paid to the assessee and the MRP fixed by the assessee. The distributor possesses complete freedom of pricing. Hence, the first tranche of the transaction is selling of prepaid sim cards and recharge vouchers containing the talk time for a higher value by the assessee to the distributors, on which the distributor does not earn any income at all. As stated supra, the distributors earn income only when the said sim cards and recharge vouchers were sold at a price higher than its purchase price (i.e. the price paid by the distributor to the assessee herein). Hence, it is highly impos....
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....omer is concerned and, therefore, it cannot be said that there exists a relationship of principal and agent. In the facts of the case, we are satisfied that, it is a sale of right to service. The relationship between the assessee and the distributor is that of principal to principal and, therefore, when the assessee sells the SIM cards to the distributor, he is not paying any commission; by such sale no income accrues in the hands of the distributor and he is not under any obligation to pay any tax as no income is generated in his hands. The deduction of income tax at source being a vicarious responsibility, when there is no primary responsibility, the assessee has no obligation to deduct TDS. Once it is held that the right to service can be sold then the relationship between the assessee and the distributor would be that of principal and principal and not principal and agent. The terms of the agreement set out supra in unmistakable terms demonstrate that the relationship between the assessee and the distributor is not that of principal and agent but it is that of principal to principal. 2.6. First of all, the assessee herein does not make any payment of commission or discount t....
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....d not possibly perform' , would certainly come to the rescue of the assessee herein. As stated supra, the assessee only collects the discounted price of goods from its distributors and does not make any payment thereon. This aspect is squarely covered by the decision of Hon'ble Jurisdictional High Court in the case of CIT(TDS) vs Super Religare Laboratories Ltd reported in 284 Taxman 657 (Bom) wherein the head notes are reproduced hereunder:- Section 194H of the Income-tax Act, 1961 - Deduction of tax at source - Commissions, brokerages etc. (Collection centres, discount allowed to) - Assessee-company was engaged in providing laboratory and testing services to customers through its own and through third party collection centres - It allowed certain discount to these collection centres - Assessing Officer held that such discount allowed by assessee to collection centres was in nature of commission and assessee was obligated under section 194H to deduct tax at source on same - It was noted that provision of section 194H to deduct tax was applicable only to a person who was responsible for paying, at time of credit to account of payee or at time of payment - Whether, since as....
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....ended that it was not the case of the Revenue that this difference between the principal price of the tickets and the minimum fixed commercial price amounted to payment of brokerage. We find however, that in order to deduct tax at source the income being paid out must necessarily be ascertainable in the hands of the assessee. In the facts of the present case, it is seen that the airlines would have no information about the exact rate at which the tickets were ultimately sold by their agents since the agents had been given discretion to sell the tickets at any rate between the fixed minimum commercial price and the published price and it would be impracticable and unreasonable to expect the assessee to get a feed back from their numerous agents in respect of each ticket sold. Further, if the airlines have discretion to sell the tickets at the price lower than the published price then the permission granted to the agent to sell it at a lower price, according to us, can neither amount to commission nor brokerage at the hands of the agent. We hasten to add any amount which the agent may earn over and above the fixed minimum commercial price would naturally be income in the hands of the....
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.... distributor does not have any freedom of pricing as it cannot sell beyond MRP; that the Intellectual Property Rights (IPR) of distributors vests with assessee company on termination of agreement ; that the distributor shall keep minimum stock and shall always order minimum quantity of IDEA products as may be prescribed by assessee from time to time; that distributor shall submit reports and other reports in relation to business in the format as intimated by the assessee company from time to time; that distributor shall permit the assessee company or its representative at all reasonable times to inspect and take copies of all materials i.e. subject matter of distributors agreement and for this purpose to enter into any premises used for the purpose of business; that in the event of any dispute arising between distributor and end user, the distributor shall forthwith inform the assessee company and provide the details of the circumstance of the dispute and shall not institute proceedings in respect of it without prior consent of the assessee company; that the assessee company may at its cost organise training programmes for the distributors and its authorised retailers to train them....
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....igh Court in the case of CIT vs. Idea Cellular Ltd., (assessee herein) reported in 189 Taxman 118 / 325 ITR 148 (Del) wherein the impugned issue was decided in favour of the Revenue. The ld. DR placed the evidences on record that against the decisions of Hon'ble Kerala High Court and the Hon'ble Delhi High Court that the assessee had withdrawn the Special Leave Petition filed before the Hon'ble Supreme Court. The evidences in this regard were placed by the ld. DR in pages 27 and 30 of the department paper book - page 4. Accordingly, he argued that the decision of Hon'ble Kerala High Court and Hon'ble Delhi High Court had attained finality wherein the impugned issue is in favour of the Revenue. 2.8.1. From the perusal of the various clauses of the distributors agreement, we are convinced that the relationship between the assessee and the distributor is only that of principal to principal and not principal to agent as alleged by the Revenue. This is clearly established from the fact that the distributor is merely purchasing the prepaid sim cards and recharge vouchers from the assessee and has got complete freedom of pricing and accordingly, it could sell the sim cards to the retai....
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....he SIM card is in the nature of a key to the consumer to have access to the telephone network established and operated by the assessee-company on its own behalf. Therefore, the SIM card, on its own but without service would hardly have any value. A customer, who wants to have its service initially, has to purchase a sim-card. When he pays for the sim-card, he gets the mobile service activated. Service can only be rendered and cannot be sold. However, right to service can be sold. What is sold by the service provider to the distributor is the right to service. Once the distributor pays for the service, and the service provider, delivers the Sim Card or Recharge Coupons, the distributor acquires a right to demand service. Once such a right is acquired the distributor may use it by himself. He may also sell the right to sub-distributors who in turn may sell it to retailers. It is a well-settled proposition that if the property in the goods is transferred and gets vested in the distributor at the time of the delivery then he is thereafter liable for the same and would be dealing with them in his own right as a principal and not as an agent. The seller may have fixed the MRP and the pri....
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....tta and Delhi) relied upon by the ld. DR hereinabove. Effectively Pune Tribunal adopted the decision of Hon'ble Karnataka High Court. The ld. DR relied on para 64 of decision of Hon'ble Karnataka High Court and argued that it is against assessee for the first 7 months since discount is separately shown in the books of the assessee as an expenditure. In our considered opinion, what is to be seen is the broader question raised before the Hon'ble Jurisdictional High Court in Income Tax Appeal No. 1129 of 2017 dated 13/01/2020 in assessee's own case against the order of Pune Tribunal. For the sake of convenience, the entire order is reproduced hereunder:- "Heard learned counsel for the parties. 2. The Appellant-Revenue challenges the order dated 4 January 2017 passed by the Income Tax Appellate Tribunal in Income Tax Appeal No.1041, 1042 and 1953 to 1955/PUN/2013. 3. This Appeal pertains to the Assessment Year is 2010-11. 4. The Appellant-Revenue has raised the following questions as a substantial questions of law :- "(a) Whether on the facts and circumstances of the case and in law, the Hon'ble Income Tax Appellate Tribunal erred in hol....
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....f examination and adjudication by the Pune Tribunal wherein the Pune Tribunal had recorded a finding of fact that the relationship between assessee and distributor is that of Principal to Principal. This Order has been approved by the Hon'ble Jurisdictional High Court. We find that the Hon'ble Jurisdictional High Court held that once Principal to Principal relationship is established, there could be no commission or discount and consequently no deduction of tax at source in terms of section 194 H of the Act is warranted. 2.8.3. With regard to reliance placed by the ld. DR vehemently on the decision of Hon'ble Delhi High Court in assessee's own case reported in 325 ITR 148 (Del) is concerned, we find that the Hon'ble Karnataka High Court in the case of Bharti Airtel Ltd (372 ITR 33) referred supra had after considering the decision of Hon'ble Delhi High Court referred supra and decided the issue in favour of the assessee. We find that the Hon'ble Karnataka High Court had also followed the decision of Hon'ble Jurisdictional High Court in the case of Qatar Airways reported in 332 ITR 253 (Bom). Hence the reliance placed on the decision of Hon'ble Delhi High Court by the ld. DR does....
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....favour of assessee and against the department In favour of assessee and against the department -- - 4. 55/2007 In favour of assessee and against the department In favour of assessee and against the department - -- -- 5. 6/2008 In favour of assessee and against the department In favour of assessee and against the department - -- - 6. 7/2008 In favour of assessee and against the department In favour of assessee and against the department - -- -- 7. 540/2009 In favour of assessee and against the department In favour of assessee and against the department - -- -- 8. 1/2014 In favour of assessee and against the department In favour of assessee and against the department In favour of assessee and against the department In favour of assessee and against the department In favour of assessee and against the department 9. 2/2014 In favour of assessee and against the department In favour of assessee and against the department In favour of assessee and against the department In favour of assessee and against the department In favour of assessee and against the ....
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.... 49/2016 Against the department and In favour of assessee Against the department and In favour of assessee -- -- -- 26. 96/2016 Against the department and In favour of assessee Against the department and In favour of assessee -- -- -- 27. 97/2016 Against the department and In favour of assessee Against the department and In favour of assessee -- -- -- 28. 98/2016 Against the department and In favour of assessee Against the department and In favour of assessee -- -- -- 29. 99/2016 Against the department and In favour of assessee Against the department and In favour of assessee Against the department and In favour of assessee Against the department and In favour of assessee Against the department and In favour of assessee 30. 100/2016 Against the department and In favour of assessee Against the department and In favour of assessee Against the department and In favour of assessee Against the department and In favour of assessee Against the department and In favour of assessee 31. 101/2016 Against the department and In favour of assessee Against the depa....
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....f assessee - -- 43. 210/2016 Against the department and In favour of assessee Against the department and In favour of assessee Against the department and In favour of assessee - -- 44. 217/2016 Against the department and In favour of assessee Against the department and In favour of assessee Against the department and In favour of assessee Against the department and In favour of assessee Against the department and In favour of assessee 61. In view of the above discussion, all the appeals of assessees are allowed and those of Department are dismissed. (BOLD PORTION PERTAINS TO ASSESSEE IN THE AFORESAID JUDGEMENT OF HON'BLE RAJASTHAN HIGH COURT) 2.8.5. We further find that the Hon'ble Rajasthan High Court in the case of CIT (TDS) Jaipur vs Idea Cellular Ltd in Income Tax Appeal No. 90/2018 dated 12/04/2018 had taken an identical view on the identical set of facts. Further we find that the Hon'ble Jurisdictional High Court in the case of CIT(TDS) Pune vs Vodafone Cellular Ltd (assessee's own case) in Income Tax Appeal Nos. 1152 , 1274, 1995, of 2017 & Income Tax Appeal Nos. 571, 1266 of 2018 dated 27/01/2020 had also taken ....
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....essee and distributor is only that of Principal to Principal. Hence this finding cannot be disturbed by this tribunal by respectfully following the judicial hierarchy. Infact no contrary materials on facts were even brought on record by the revenue before us to disturb the findings of Hon'ble High Courts. Hence we have no hesitation in holding that the relationship between assessee and distributor is only that of Principal to Principal and not that of Principal to Agent and accordingly there is no obligation for the assessee to deduct tax at source in terms of section 194H of the Act. 2.8.8. In view of the aforesaid observations and findings given thereon, we do not deem it fit to adjudicate other arguments advanced by the ld. AR on the applicability of second proviso to section 40(a)(ia) read with section 201 of the Act, as it would become academic in nature. This aspect of the issue is left open. 2.9. In view of the aforesaid observations and respectfully following the various judicial precedents relied upon hereinabove, we hold that the sale of prepaid sim cards / recharge vouchers by the assessee to distributors cannot be treated as commission / discount to attract the pr....
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....nd not ascertained. With these observations, the ld. AO disallowed the provision made on account of ESOP in the sum of Rs.3,75,90,000/- in the assessment. 3.1. The ld. CIT(A) observed that assessee has not explained or commented on reversal of the value of entries due to retirement, death, VRS, quitting etc., of eligible employees on 31/12/2008, 31/12/2009, 31/12/2010 and 31/12/2011. The ld. CIT(A) further observed that if eligible employees did not exercise their options, then the ESOP should go back to the assessee. The ld. CIT(A) by placing reliance on the decision of the Delhi Tribunal in the case of Ranbaxy Laboratories Ltd., reported in 124 TTJ 771 upheld the action of the ld. AO by stating that the provisions made for ESOP expenditure is notional and contingent in nature. 3.2. Further, the ld. CIT(A) in para 5.7.4 had also observed that since the shares were the capital of the assessee company and any loss on account of capital should be considered as capital loss and not the Revenue expenditure. Accordingly, he observed that the loss suffered by the assessee as a result of allotment of shares to its employees under ESOP scheme below market price was on capital account....
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....efit tax (FBT) is not paid by the assessee company on the amortisation cost of ESOP. In this regard, we find that the assessee had specifically mentioned in its tax audit report that the said amortisation cost has not been considered for calculation of FBT as FBT would be payable only at the time when stock options are exercised by the employees. This note has been conveniently ignored by the lower authorities. Moreover, whether the particular expenditure has suffered fringe benefit taxed or not is of no relevance for the purpose of allowability of expenditure while computing the total income of the assessee. What is relevant to be seen is that whether the said expenditure is incurred wholly and exclusively for the purpose of business of the assessee. In our considered opinion, the compensation cost of ESOP has been incurred by the assessee only as a measure of employees incentive and in order to retain employees with the assessee company. Hence, we conclude that it is purely incurred wholly and exclusively for the purpose of business of the assessee company. The ESOP scheme whether it is approved by CIT or CCIT is of no relevance for the purpose of allowability of deduction. 3.....
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....nditure, then, at best, it would be in the nature of a capital expenditure. He supported his view by relying on the order passed by the Delhi Bench of the Tribunal in Ranbaxy Laboratories Ltd. v. Addl. CIT [2010] 39 SOT 17 (URO). It was stated that the Tribunal in that case has held that since the receipt of share premium is not taxable, any short receipt of such premium on issuing options to employees will be notional loss and not actual loss for which any liability is incurred. The learned Departmental Representative contended that the Mumbai bench of the Tribunal in the case of VIP Industries v. Dy. CIT [IT Appeal No.7242 (Mum.) of 2008 has also taken similar view vide its order dated 17.09.2010.] 9.2.2 Per contra, the learned AR submitted that it is not a case of any short receipt of share premium but that of compensation given to employees. He supported the admissibility of deduction of the amount of discount on the strength of the order passed by the Chennai bench of the tribunal in the case of S.S.I. Ltd. (supra) granting deduction of such discount by treating it as an employee cost. He submitted that the above view taken by the Chennai Bench has been approved by th....
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....n order to appreciate the rival submissions, it is of the utmost importance to understand the concept of ESOP. Section 2(15A) of the Indian Companies Act, 1956 defines "employee stock option" to mean 'the option given to the whole-time Directors, Officers or employees of a company, which gives such Directors, Officers or employees, the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a predetermined price". In an ESOP, the given company undertakes to issue shares to its employees at a future date at a price lower than the current market price. This is achieved by granting stock options to its employees at discount. The amount of discount represents the difference between market price of the shares at the time of the grant of option and the offer price. In order to be eligible for acquiring the shares under the ESOP, the concerned employees are obliged to render services to the company during the vesting period as given in the scheme. On the completion of the vesting period in the service of the company, such options vest with the employees. The options are then exercised by the employees by making application to the employer f....
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..... It is in such like situation that the contention of the learned Departmental Representative would properly fit in, thereby debarring the company from claiming any deduction towards discounted premium. It is quite basic that the object of issuing shares can never be lost sight of. Having seen the rationale and modus operandi 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 discounted premium on shares is a substitute to giving direct incentive in cash for availing the services of the employees. There is no difference in two situations viz., one, when the company issues shares to public at market price and a part of the premium is given to the employees in lieu of their services and two, when the shares are directly issued to employees at a reduced rate. In both the....
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....t section 37(1) talks of granting deduction for an 'expenditure', and the Hon'ble Supreme Court in Indian Molasses Co. (P.) Ltd. (supra) has described 'expenditure' to mean what is 'paid out or away' and is something which has gone irretrievably. However, it is pertinent to note that this section does not restrict paying out of expenditure in cash alone. Section 43 contains the definition of certain terms relevant to income from profits of business or profession covering sections 28 to 41. Section 37 obviously falls under Chapter IV-D. Sub-section (2) of section 43 defines "paid" to mean: "actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head 'profits and gains of business or profession'." When we read the definition of the word "paid" u/s 43(2) in juxtaposition to section 37(1), the position which emerges is that it is not only paying of expenditure but also incurring of the expenditure which entails deduction u/s 37(1) subject to the fulfilment of other conditions. At this juncture, it is imperative to note that the word 'expenditure' has not been defined....
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.... "loss" even though the said amount has not gone out from the pocket of the assessee'. From the above enunciation of law by the Hon'ble Summit Court, there remains no doubt whatsoever that the term 'expenditure' in certain circumstances can also encompass 'loss' even though no amount is actually paid out. Ex consequenti, the alternative argument of the ld. DR that discount on shares is 'loss' and hence can't be covered u/s 37(1), also does not hold water in the light of the above judgment. In view of the above discussion, we, with utmost respect, are unable to concur with the view taken in Ranbaxy Laboratories Ltd. (supra). B. Is discount a Contingent liability ? 9.3.1 The learned Departmental Representative supported the impugned order by contending that the entitlement to ESOP depends upon the fulfilment of several conditions laid down under the scheme. It is only when all such conditions are fulfilled and the employees render services during the vesting period that the question of any ascertained liability can arise. He submitted that during the entire vesting period, it is only a contingent liability and no deduction is admi....
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....ntingent one? 9.3.3 The Hon'ble Supreme Court in Bharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61 dealt with the deductibility or otherwise of provision for liability towards encashment of earned leave. In that case, the company floated beneficial scheme for its employees for encashment of leave. The earned leave could be accumulated up to certain days. The assessee created provision of Rs. 62.25 lakh for encashment of accrued leave and claimed deduction for the same. The Assessing Officer held it to be a contingent liability and hence not a permissible deduction. When the matter finally came up before the Hon'ble Supreme Court, it was held that the provision for meeting the liability for encashment of earned leave by the employee was an admissible deduction. In holding so, the Hon'ble Apex Court observed that : "the law is settled : if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though th....
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....7 of the Act. When the matter finally came up before the Hon'ble Supreme court, it entitled the assessee to deduction on the "accrual" concept by holding that a provision is recognized when : "(a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation : and (c) a reliable estimate can be made of the amount of the obligation". Resultantly, the provision was held to be deductible. 9.3.5 When we consider the facts of the present case in the backdrop of the ratio laid down by the Hon'ble Supreme Court in Bharat Earth Movers (supra) and Rotork Controls India (P.) Ltd. (supra), it becomes vivid that the mandate of these cases is applicable with full force to the deductibility of the discount on incurring of liability on the rendition of service by the employees. The factum of the employees becoming entitled to exercise options at the end of the vesting period and it is only then that the actual amount of discount would be determined, is akin to the quantification of the precise liability taking place at a future date, thereby not disturbing the otherwise liability which....
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....ich is relevant for our purpose, states that : 'any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer free of cost or at concessional rate to his employees (including former employee or employees)' shall be taken as fringe benefit. Explanation to this clause clarifies that for the purposes of this clause,- (i) "specified security" means the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and, where employees' stock option has been granted under any plan or scheme thereof, includes the securities offered under such plan or scheme. Thus it is discernible from the above provisions of the Act that the legislature itself contemplates the discount on premium under ESOP as a benefit provided by the employer to its employees during the course of service. If the legislature considers such discounted premium to the employees as a fringe benefit or 'any consideration for employment', it is not open to argue contrary. Once it is held as a consideration for employment, the natural corollary which follows is that such discount (i) is an expenditure; (ii) s....
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.... grant of options, vesting of options and exercise of options. The period from grant of option to the vesting of option is the 'vesting period'. It is during such period that an employee is supposed to render service to the company so as to earn an entitlement to the shares at a discounted premium. The vesting period may vary from a case to case. If the vesting period is, say, four years with equal vesting at the end of each year, then it is at the end of the vesting period or during the exercise period, which in turn immediately succeeds the vesting period, that the employee becomes entitled to exercise 100 options or qualify for receipt of 100 shares at discount. Though the shares are allotted at the end of the vesting period, but it is during such vesting period that the entitlement is earned. It means that 25 options vest with the employee at the end of each year on his rendering service for the respective year. If during the interregnum, he leaves the service, say after one year, he will still remain entitled to exercise option for 25 shares at the discounted premium at the time of exercise of option. In that case, the benefit which would have accrued to him at the end....
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....them over the vesting period on the rendition of services to the company. In other words, it is a stage of realization of income earned during the vesting period. In the same manner, though the company becomes liable to issue shares at the time of the exercise of option, but it is in lieu of the employees compensation liability which it incurred over the vesting period by obtaining their services. From the above 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. 10.6 Let us consider the facts of the case of S.S.I. Ltd. (supra), which has been strongly relied by the ld. AR in support of his claim for deduction of discount during the years of vesting of options. In that case the vesting period was three years and the assessment order was passed u/s 143(3), inter alia, allowing deduction of Rs. 66.82 lakh under the head "Staff welfare expenses" on account of amortization of discounted value of option over a period of three years. The CIT revised such order by directing the A.O. to disallow ESOP expe....
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.... III. SUBSEQUENT ADJUSTMENT TO DISCOUNT 11.1.1 Having answered the first major issue in affirmative that the discount on options under ESOP is an ascertained liability and the second major issue that the discount is deductible over the vesting period on straight line basis unless the vesting is not uniform, then arises the present issue as to whether any subsequent adjustment is warranted at the time of exercise of options, to the deductions earlier allowed for the amount of discount. It is noticed that the assessment years 2003-2004 to 2007-2008 are under consideration and during these years ESOP 2000 has come to an end and the ESOP 2004 has started. Further, the extant issue is a vital part of the overall question of the deductibility or otherwise of the amount of discount under ESOP. 11.1.2 We have noticed above that the company incurs a definite liability during the vesting period, but its proper quantification is not possible at that stage as the actual amount of employees cost to the company, can be finally determined at the time of the exercise of option or when the options remain unvested or lapse at the end of the exercise period. It is at this lat....
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.... that the allotment of shares to employees under ESOP subject to a lock in period of five years and other conditions could not be treated as a perquisite as there was no benefit and the value of benefit, if any, was unascertainable at the time when options were exercised. The Finance Act, 1999 inserted section 17(2)(iiia) with effect from 1st April, 2000 providing that : "the value of any specified security allotted or transferred, directly or indirectly, by any person free of cost or at a concessional rate to an individual who is or has been in employment of that person" shall be treated as a perquisite. It further provides that in a case the allotment or transfer of specified securities is made in pursuance of an option exercised by an individual, the value of the specified securities shall be taxable in the previous year in which such option is exercised by such individual. Such clause (iiia) was subsequently deleted with effect from 1st April, 2001. After certain changes to the relevant provisions in this regard, the position which now stands is that the discount on ESOP is taxable as perquisite u/s 17(2)(vi) for : 'the value of any specified security or sweat equity shares....
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....either be 'x+1' nor 'x-1'. It is simple and plain that the amount of remuneration which percolates to the employees will always be equal to the amount flowing from the company and such remuneration to the employee in the present context is the amount which he actually becomes entitled to on the exercise of options. Thus, it is palpable that since the remuneration to the employees under the ESOP is the amount of discount w.r.t. the market price of shares at the time of exercise of option, the employees cost in the hands of the company should also be w.r.t. the same base. 11.1.6 The amount of discount at the stage of granting of options w.r.t. the market price of shares at the time of grant of options is always a tentative employees 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 has to be quantified on some logical basis. It is this market price at the time of the grant of options which is considered for working out the amount of discou....
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....me of exercise of option has come down to Rs. 90. The amount of real compensation to employees is Rs. 80 as against the tentative compensation of Rs. 100, which was allowed as deduction during the vesting period. As the actual quantification of the compensation has turned out to be Rs. 80, the company is liable to reverse the deduction of Rs. 20 at the time of exercise of option. Taxation vis-à-vis Accountancy principles 11.2.1 It has been noticed that broadly there are three stages having effect on the total income of the company in the life cycle of ESOP, viz., (i) during the vesting period, (ii) at the time of unvesting/lapse of options and (iii) finally at the time of exercise of options. It has been argued that the assessee company claimed deduction for the amount of discount during the vesting period on the basis of the market price of shares at the time of grant of options and also reversed the proportionate discount on unvesting/lapsing of options at the appropriate time on the basis of the SEBI Guidelines. If this contention is correct, it would mean that the first two stages have been rightly given effect to. But the appellant assessee does not appear to h....
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....ue for taxation. Taxation principles are enshrined in the legislature. Power to legislate lies with the Parliament. Accounting standards or Guidance Note or Guidelines etc., by whatever name called, issued by any autonomous or even statutory bodies including the Institute of Chartered Accountants of India, or for that matter, the SEBI are meant only to prescribe the way in which the transactions should be recorded in books or reflected in the annual accounts. These guidelines do not have the force of an Act of Parliament. Since the subject matter of tax on income falls in the Union List as per Part XI of the Indian Constitution, it is only the Parliament which can legislate on its scope. 11.2.4 Be that as it may, there is no weight in the contention of the ld. AR that there is no specific provision in the Act on the ESOP discount. It is axiomatic that the taxation rules are always embodied in the relevant Act, either in a specific or a general manner. These can be specific by making a clear cut provision in respect of deductibility of a particular item of expense or taxation of a particular item of income. General provisions are those which set out the overall principles t....
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....ipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override section 56 or any other provision of the Act. As was pointed out by Lord Russell in the case of B.S. C. Footwear Ltd. v. Ridguary (Inspector of Taxes [1970] 77 ITR 857 (CA), the income-tax law does not march step by step in the footprints of the accountancy profession.' 11.2.6 The same view has been adopted by the Hon'ble Supreme Court in Godhra Electricity Co. Ltd. (supra), by holding that : 'Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a hypothetical income, which does not materialise.' 11.2.7 It follows that accounting principles have absolutely no role to play in the matter of determination of total income under the Act. If an accounting principle is referred to by ....
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....d by the Hon'ble Madras High Court in PVP Ventures Ltd. (supra). We have noticed above that the said case dealt a situation falling within one of the three years of the vesting period, in which it was held that one third of the total amount of discount computed on the basis of the market price of the shares at the time of grant of option, is deductible. It is evident from the SEBI Guidelines that these deal with the deductibility of discount in the hands of company during the years of vesting period. These Guidelines are silent on the position emanating from variation in the market price of the shares at the time of exercise of option by the employees vis-à-vis the market price at the time of grant of option. In other words, the SEBI Guidelines prescribe accounting treatment only in respect of the period of vesting of the options and the situation arising out of unvested options or vested options lapsing. The very reference by the Chennai Bench of the Tribunal in SSI Limited (supra) to the SEBI Guidelines is indicative of the fact that it dealt with a year during which the options were vesting with the employees and the company claimed discount during the vesting period.....
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....ved by the Hon'ble Karnataka High Court in the case of CIT vs. Biocon Ltd., reported 430 ITR 151 / 121 taxmann.com 351. The relevant operative portion of the judgement of the Hon'ble Karnataka High Court are reproduced hereunder:- "10. From perusal of section 37(1), which has been referred to supra, it is evident that an assessee is entitled to claim deduction under the aforesaid provision if the expenditure has been incurred. The expression 'expenditure' will also include a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which it is issued and the market value of the shares would also be expenditure incurred for the purposes of section 37(1) of the Act. The primary object of the aforesaid exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, the same cannot be construed as short receipt of capital. The tribunal therefore, in paragraphs 9.2.7 and 9.2.8 has rightly held that incurring of the expenditure by the assessee entitles him for deduction under section 37(1) of the Act subject to fulfilment of the condition. 11. The deduc....
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....page 513 of the paper book filed before us, wherein the tax auditor had duly clarified that a sum of Rs.51,96,46,461/- had been actually reduced from the cost of fixed assets, being the foreign exchange gain on loans taken in foreign currency utilised for acquisition of fixed assets in accordance with Section 43A of the Income Tax Act. The ld. CIT(A) ignores this certificate without even mentioning the fact of filing of the said certificate and upheld the action of the ld. AO. 4.4. Before us, the ld. DR vehemently argued that the tax audit certificate dated 10/04/2013 is purely an afterthought and was given after five years from the time of filing the return. The ld. DR argued that the assessee had not proved that the foreign exchange gain of Rs.51.96 Crores had been reduced from the cost of fixed assets. When this was put to the ld. AR, he fairly submitted that in case if this matter is to be verified by the ld. AO, he has been instructed to state, that assessee is willing to do so. Primafacie on reading note No.3(a) to the income tax depreciation schedule enclosed in page 56 of the factual paper book, we find that Rs.519.65 million representing foreign exchange gain relatable ....
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....tively. It is also pertinent to note that the said decision of Mumbai Tribunal relied upon supra has considered various Hon'ble Supreme Court decisions and had arrived at the conclusion in favour of the assessee. In any case, we further find that recent decision of the Hon'ble Delhi High Court in the case of PCIT vs. M/s. Era Infrastructure (India) Ltd., in ITA No.204 of 2022 dated 20/07/2022 had categorically held that the amendment bought in Finance Act 2022 is prospective in operation. For the sake of convenience, the relevant order is hereby reproduced:- "Present Income-tax Appeal has been filed challenging the Order passed by the Income-tax Appellate Tribunal ('ITAT') in ACIT v. Era Infrastructure (India) Ltd. [ITA No. 798/Del/2018, dated 10th March, 2021] for the Assessment Year 2013-14. 2. Learned Counsel for the Appellant states that ITAT has erred in law in deleting the disallowance of Rs. 3,61,53,268/- made by the Assessing Officer under Rule 8D of Income-tax Rules, 1962 read with section 14A of the Income-tax Act, 1961 ('the Act'). 3. He submits that the ITAT erred in relying on the decision of this Court in Pr. CIT v. IL&FS Ene....
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....l apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such exempt income. 5. This amendment will take effect from 1st April, 2022. 6. It is also proposed to amend sub-section (1) of the said section, so as to include a non-obstante clause in respect of other provisions of the Income-tax Act and provide that no deduction shall be allowed in relation to exempt income, notwithstanding anything to the contrary contained in this Act. 7. This amendment will take effect from 1st April, 2022 and will accordingly apply in relation to the assessment year 2022-23 and subsequent assessment years." (emphasis supplied) 6. Furthermore, the Supreme Court in Sedco Forex International Drill. Inc. v. CIT [2005] 149 Taxman 352/279 ITR 310 has held that a retrospective provision in a tax act which is "for the removal of doubts" cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood. T....
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....t any change. 13. The Explanation as introduced in 1983 was construed by the Kerala High Court in CIT v. S.R. Patton [(1992) 193 ITR 49 (Ker.)] while following the Gujarat High Court's decision in S.G. Pgnatale [(1980) 124 ITR 391 (Guj.)] to hold that the Explanation was not declaratory but widened the scope of Section 9(1)(ii). It was further held that even if it were assumed to be clarificatory or that it removed whatever ambiguity there was in Section 9(1)(ii) of the Act, it did not operate in respect of periods which were prior to 1-4-1979. It was held that since the Explanation came into force from 1-4-1979, it could not be relied on for any purpose for an anterior period. 14. In the appeal preferred from the decision by the Revenue before this Court, the Revenue did not question this reading of the Explanation by the Kerala High Court, but restricted itself to a question of fact viz. whether the Tribunal had correctly found that the salary of the assessee was paid by a foreign company. This Court dismissed the appeal holding that it was a question of fact. (CIT v. SR Patton [(1998) 8 SCC 608] .) 15. Given this legislative history of Section 9(1)....
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....ared" or "for the removal of doubts".' (emphasis supplied) 7. The aforesaid proposition of law has been reiterated by the Supreme Court in M.M. Aqua Technologies Ltd. v. CIT [2021] 129 taxmann.com 145/282 Taxman 281/436 ITR 582. The relevant portion of the said judgment is reproduced hereinbelow:- "22. Second, a retrospective provision in a tax act which is "for the removal of doubts" cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood. This was stated in Sedco Forex International Drill Inc. v. CIT, (2005) 12 SCC 717 as follows : 17. As was affirmed by this Court in Goslino Mario [(2000) 10 SCC 165] a cardinal principle of the tax law is that the law to be applied is that which is in force in the relevant assessment year unless otherwise provided expressly or by necessary implication. (See also Reliance Jute and Industries Ltd. v. CIT [(1980) 1 SCC 139].) An Explanation to a statutory provision may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section [See Sonia Bhatia v. State of UP., (1981) 2 S....
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....it is clarified that the order passed in the present appeal shall abide by the final decision of the Supreme Court in the SLP filed in the case of IL & FS Energy Development Co. Ltd. (supra)." 5.3. Respectfully following the same, we direct the ld. AO to delete the disallowance made u/s.14A of the Act. Accordingly, the ground No.V raised by the assessee is allowed. 6. The ground No.VI raised by the assessee is challenging the disallowance of Revenue sharing license fees amounting to Rs.415,08,45,362/-. 6.1. We have heard rival submissions and perused the materials available on record. The ld. AO observed that assessee had debited license fee amounting to Rs.4150.84 million in its profit and loss account. The ld. AO observed that assessee was claiming depreciation on license fee and deduction u/s.35ABB of the Act. This payment is made by the assessee to Government authorities to carry on the business of telecom service provider. The ld. AO observed that assessee had claimed license fees as deduction u/s.35ABB of the Act by amortising the expenditure over the period of license. He also observed that the assessee had to pay license fees on revenue sharing basis from A.Y.2000-....
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....tinued by the assessee even after takeover of the said company in respect of that one circle alone. In respect of other circles operated by the assessee, the assessee had been consistently claiming deduction as revenue expenditure u/s.37(1) of the Act. Accordingly, he submitted that there is absolutely no double deduction claimed by the assessee at all. This fact was submitted before the ld. CIT(A) by the assessee but no finding has been given by the ld. CIT(A) in this regard. Hence, in the interest of justice and fair play, we remand this issue to the file of the ld. AO for limited purpose on verification of the fact as to whether the assessee has claimed double deduction in respect of this expenditure for the same circle where the assessee is operating its telecom services. If it is found that there is no double deduction claimed by the assessee, the assessee would be eligible for deduction as revenue expenditure u/s.37(1) of the Act which would be in tune with the decisions rendered by the Hon'ble Jurisdictional High Court in assessee's own case for A.Yrs. 2003-04, 2006-07 and 2007-08 referred to supra. With these observations, the ground No.VI raised by the assessee is allowed ....
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....peration only if there is exempt income credited in the profit and loss account. Accordingly, the ground No.X raised by the assessee is allowed. 11. The ground No.XI raised by the assessee is general in nature and does not require any specific adjudication. Let us take up the Revenue appeal in ITA No.2273/Mum/2014 for A.Y.2008-09. 12. The ground No.1 raised by the Revenue is common with ground No.VI raised by the assessee. The decision rendered hereinabove for ground No.VI of assessee's appeal would hold good for ground No.1 of the Revenue appeal. Hence, the ground No.1 raised by the Revenue is dismissed. 13. The ground No.2 raised by the Revenue is challenging the deletion of disallowance of interest paid on borrowed funds in respect of interest free loans / advances to subsidiary company. 13.1. We have heard rival submissions and perused the materials available on record. During the year under consideration, the assessee paid interest of Rs.4,38,12,50,000/- on interest bearing loans. The assessee had advanced an interest free loans to its subsidiaries to the tune of Rs.27,21,60,000/-. The ld. AO observed that the lending to subsidiary companies is not meant for bus....
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....e ground No.3 raised by the Revenue is challenging the deletion of disallowance on account of club entrance fees amounting to Rs.37,79,021/-. 14.1. We have heard rival submissions and perused the materials available on record. We find that assessee had debited expenses on account of club entrance fees paid to various clubs amounting to Rs.37.79,021/- and claimed the same as revenue expenditure u/s.37(1) of the Act. The ld. AO disallowed the same on the ground that it is capital in nature as it is giving enduring benefit to the assessee. The ld. CIT(A) by following the order passed by his predecessor for A.Y.2007-08 deleted the disallowance. 14.2. We find that these amounts were paid for membership of various clubs in order to enable the Senior Executives to socialise and develop contacts with various persons for promoting the assessee's business. The membership of any club, in our considered opinion, does not bring in any enduring benefit to the club member. We find that this Tribunal for A.Yrs. 2006-07 and 2007-08 in assessee's own case vide this order dated 27/05/2016 had deleted the disallowance. It is also pertinent to note that the Revenue though challenged the Tribunal ....
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....ected ld. AO to consider the claim of the assessee and allow the same on proper verification of relevant vouchers, invoices, genuineness of services, payment and in accordance with the provisions of section 37 of the Act. 15.5. As it could be seen from the above that out of total payment of Rs.207,10,72,067/- paid by the assessee pursuant to an agreement entered into with IBM, the ld. AO had already allowed a sum of Rs.192,60,80,504/-. One of the main grievance of the ld. AO that the additional claim of Rs.14,49,91,563/- was not made by way of a valid return but instead the claim was made by way of a letter during the course of assessment proceedings. This aspect has already been addressed by the Hon'ble Jurisdictional High Court in the case of CIT vs. Pruthvi Brokers & Shareholders Ltd., reported in 349 ITR 336 wherein any claim made by the assessee even by way of a letter could be entertained by the Revenue even if it is not supported by way of a valid return. In the instant case, the assessee had duly explained that the time limit for filing revised return u/s.139(5) had expired and hence, it could not have made the said claim by way of a revised return. However, the entire d....