TaxTMI 
TaxTMI 
TaxTMI 
2023 (4) TMI 889
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....e relevant expenditure by way of non-compete fees should have been spread over the period of the benefit in view of the decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. vs. CIT [225 ITR 802 (SC)]. 2. The CIT(A) erred in deleting the disallowance of Rs.22,08,494/- being the employees' stock option expenses claimed by the assessee without appreciating the fact that no such option was exercised by the assessee during the relevant previous year. 3. (a)The C1T(A) erred in directing the A.O. to grant the assessee deduction u/s. 80HHE in respect of "profit of the business" without setting off of the brought forward business loss relying on the decisions of the Mumbai ITAT in case of Unichem Laboratories Limited and Cabot India Limited, which, in turn, were based on the decision of the Hon'ble Bombay High Court in the case of Shirke Construction Equipment Limited, without appreciating the fact that the decision of the Hon'ble Bombay High Court in the case of Shirke Construction Equipment Limited has been overruled by the Hon'ble Supreme Court in the case of M/s. IPCA Laboratories Limited vs. DC IT in 266 ITR 521 (SC)....
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....ses of the assessee till new appointments to the posts of the outgoing personnel were made and was not in any way related to the nature of the impugned international transactions. 7. For these and other grounds that may be urged at the time of hearing, the decision of the CIT(A) may be set aside on such above grounds and the order of the A.O. restored." 3. The Assessee is a company engaged in the business of development and marketing of software having units at SEEPZ, Noida, Ashok Plaza and Monali, Chandigarh. The Assesse is the wholly owned subsidiary of Zensar Technologies Inc, USA. The assessee provides technical services outside India in connection with development and production of computer software. The assessee filed the return of income for A.Y. 2004-05 on 28/10/2004 declaring a total income at Nil after setting off brought forward business losses from previous years of Rs.2,36,35,058/- against business income and after adjusting the deduction claimed under section 80HHE of the Income Tax Act, 1961 (in short, "the Act") against other income of Rs.1,53,80,174/-. The return was processed under section 143(1) on 11/07/2006. Subsequently the return was selected for scrutiny ....
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....mputed below and disallowed the balance of Rs.43,90,000/-. (i) Rs.12,68,000/- for 2 months - Rs. 2,11,330/- (ii) Rs.50 lakhs for 8 months - Rs.16,66,670/- Rs.18,78,000/- 5.2 The Ld.CIT(A) deleted the disallowance by relying on the decision o the coordinate bench in Assessee's own case for A.Y. 1989-90 and on the decision of the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd 124 ITR 1 (SC). 6. The Ld.DR before us submitted that the Ld.CIT(A) has merely relied on the order of the Tribunal of earlier years without discussing the facts for the current year. The Ld.DR further submitted that the Assessing Officer has amortised the expenditure based on the agreements entered into and that this fact has not been considered or discussed by the Ld.CIT(A). The Ld.DR in this regard has placed reliance on the decision of the Supreme Court in the case of Madras Industrial Investment Corporation Ltd vs CIT (1997) 225 ITR 802(SC). 7. The Ld.AR submitted that the period of non-competing is only one year and two years and that the issue is squarely covered by the decision of co-ordinate bench in Assessee's own case where it is held that - "13.1 We have....
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....e borrowed amount. 12) The next question which arises for consideration is as to whether the assessee was estoppel from claiming deduction for the entire interest paid in the year in which it was paid merely because it had spread over this interest in its books of account over a period of five years. Here, the submission of learned counsel for the assessee was that there is no such estoppel, inasmuch as, the treatment of a particular entry (or for that matter interest entered in the instant case) in the books of accounts is entirely different from the treatment which is to be given to such entry/expenditure under the Act. His contention was that assessment was to be made in accordance with the provisions of the Act and not on the basis of entries in the books of accounts. His further argument was that had the assessee not claimed the payment of entire interest amount as tax in the income tax returns and had claimed deduction over a period of five years treating it as deferred interest payment, perhaps the AO would have been right in accepting the same in consonance with the accounting treatment which was given. However, learned counsel pointed out that in the instant case the ass....
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.... modes. As per one mode, interest was payable every year and in that case it was to be paid on six monthly basis @ 18% per annum. In such cases, the interest as paid was claimed on yearly basis over a period of five years and allowed as well and there is no dispute about the same. However, in the second mode of payment of interest, which was at the option of the debenture holder, interest was payable upfront, which means insofar as interest liability is concerned, that was discharged in the first year of the issue itself. By this, the assessee had benefited by making payment of lesser amount of interest in comparison with the interest which was payable under the first mode over a period of Civil Appeal Nos. 6366-6368 of 2003 and five years. We are, therefore, of the opinion that in order to be entitled to have deduction of this amount, the only aspect which needed examination was as to whether provisions of Section 36(1)(iii) read with Section 43(ii) of the Act were satisfied or not. Once these are satisfied, there is no question of denying the benefit of entire deduction in the year in which such an amount was actually paid or incurred. 14) The High Court has also observed that ....
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.... exceptional cases can justify spreading the expenditure and claiming it over a period of ensuing years. It is important to note that in that judgment, it was the assessee who wanted spreading the expenditure over a period of time and had justified the same. It was a case of issuing debentures at discount; whereas the assessee had actually incurred the liability to pay the discount in the year of issue of debentures itself. The Court found that the assessee could still be allowed to spread the said expenditure over the entire period of five years, at the end of which the debentures were to be redeemed. By raising the money collected under the said debentures, the assessee could utilise the said amount and secure the benefit over number of years. This is discernible from the following passage in that judgment on which reliance was placed by the learned counsel for the Revenue herself: "15.. The Tribunal, however, held that since the entire liability to pay the discount had been incurred in the accounting year in question, the assessee was entitled to deduct the entire amount of Rs.3,00,000 in that accounting year. This conclusion does not appear to be justified looking to the natu....
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....Department cannot deny the same. However, in those cases where the assessee himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of 'Matching Concept' is satisfied, which upto now has been restricted to the cases of debentures. 19) In the instant case, as noticed above, the assessee did not want spread over of this expenditure over a period of five years as in the return filed by it, it had claimed the entire interest paid upfront as deductible expenditure in the same year. In such a situation, when this course of action was permissible in law to the assessee as it was in consonance with the provisions of the Act which permit the assessee to claim the expenditure in the year in which it was incurred, merely because a different treatment was given in the books of accounts cannot be a factor which would deprive the assessee from claiming the entire expenditure as a deduction. It Civil Appeal Nos. 6366-6368 of 2003 and has been held repeatedly by this Court that entries in the books of accounts are not determinative or conclusive and the matter is to be examined on the touchstone of provisions contained in the Act [S....
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.... the same for the reason that the no option has been exercised during the year and that the Assessee did not provide any plausible reason for claiming the expenses as a deduction. The Ld.CIT(A) deducted the disallowance by relying on the decision of the Ld.CIT(A) in assessee's own case for A.Y. 2002-03. The Ld.CIT(A) further held that the Employee Stock Option expenses is an allowable deduction as the same is an ascertained liability. 12. Before us, the Ld.DR supported the order of the Assessing Officer and submitted that the Ld.CIT(A) is not correct in deleting the disallowance. 13. The Ld.AR submitted that it is a settled issue that the ESOP expenses are an allowable expenditure and in this regard relied on the following decisions:- 1. PCIT vs New Delhi Television Ltd 398 ITR 57 (Del) 2. C IT vs PVP Ventures Ltd (2012) 211 Taxman 554 (Madras) 3. CIT vs Biocon Ltd (2021) 430 ITR 151 (Karnataka) 14. We heard the rival submissions and perused the material on record. We notice that the Hon'ble Delhi High Court in the case of PCIT vs New Delhi Television Ltd (supra) has considered a similar issue and held that - "4. The Special Bench ruling in Biocon Ltd. (supra) considered....
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....fits tax. It provides that : 'Fringe benefits as outlined in section 115WB, mean any privilege, service, facility or amenity directly or indirectly provided by an employer to his employees (including former employees) by reason of their employment'. Charging section 115WA of this Chapter provides that : 'In addition to the Income-tax charged under this Act, there shall be charged for every assessment year . . .'fringe benefit tax in respect of fringe benefits provided or deemed to have been provided by an employee to his employees during the previous year'. Section 115WB gives meaning to the expression 'fringe benefits'. Sub-section (1) provides that for the purposes of this Chapter, 'fringe benefits means any consideration for employment as provided under clauses (a) to (d). Clause (d), which 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. The Explanation to this clause clarifies that for the purposes of this ....
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....r itself notwithstanding the fact that such liability is incapable of proper quantification at that stage and is dischargeable at a future date. It follows that the deduction for an expense is allowable on incurring of liability and the same cannot be disturbed simply because of some difficulty in the proper quantification. A line of distinction needs to be drawn between a situation in which a liability is not incurred and situation in which the liability is incurred but its quantification is not possible at the material time. Whereas in the first case, there cannot be any question of allowing deduction, in the second case, deduction has to be allowed for a sum determined on some rational basis representing the amount of liability incurred." 5. Having regard to the above discussion, especially that the previous order dated July 12, 2016 in ITANo. 366 of 2016 had considered the same items of expenditure, under section 34, we are of the opinion that no question of law arises. The appeal is accordingly dismissed." 15. Respectfully following the above decision we hold that the ESOP expenses be allowed as a deduction and therefore see no reason to interfere with the decision of the L....
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....ing on the decision of the CIT(A) in Assessee's own case for A.Y. 2003- 04. Aggrieved, the Revenue is contending the issue before the Tribunal. 18. The Ld.DR submitted that the Assessee is not entitled for deduction under section 80HHE since the business income of the assessee is NIL after adjusting the brought forward losses. In this regard, the Ld.DR placed reliance on the decision of the Hon'ble Supreme Court in the case of IPCA Laboratories vs DCIT reported in 266 ITR 521 (SC). 19. The Ld.AR on the other hand submitted that the issue is covered by the decision of the co-ordinate bench in Assessee's own case for A.Y. 2002-03 where it has been held that - 6.1. We find that in the assessment order dated 29/12/2004 u/s.143(3) of the Act, the ld. AO had computed the profits eligible for deduction u/s.80HHE of the Act at Rs.7,65,20,042/-. Since, the gross total income of the assessee was only Rs.2,05,57,787/-, the deduction u/s.80HHE of the Act was restricted to the said amount of gross total income. However, while computing the gross total income, the brought forward business loss of Rs.12,29,01,688/- from previous year was sought to be adjusted by the ld. AO against the busines....
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....ness income shall be computed in accordance with the provisions contained in Section 30- 43D of the Act. The second phase is the said deduction so computed above is to be restricted to the extent of gross total income as the same is to be allowed from gross total income. In the facts before the Hon'ble Madhya Pradesh High Court, in the second stage of computation, the gross total income was nil and therefore, no deduction u/s.80HHE of the Act was allowed. In the facts before the Hon'ble Supreme Court in Ipca Laboratories referred to supra, the loss from export of trading goods was higher than the profits of self-manufactured goods resulting into net negative income. The Hon'ble Supreme Court was not concerned with brought forward business loss as the issue is arising in the present case. Hence, the deduction u/s.80HHE of the Act was denied. Hence, it could be safely concluded that the two case laws relied upon by the ld. DR does not advance the case of the Revenue as they are factually distinguishable from the present case. 6.4. We find that the issue in dispute is squarely addressed by the decision of the Hon'ble Supreme Court in the case of Reliance Energy Ltd., in Civil Appeal....
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....ntives was to be allowed without setting off such net loss. We find that in this case also, the issue as arising in the present case of the assessee before us i.e. the computation of profit eligible for deduction by setting off brought forward business loss, did not arise for consideration and therefore, the decision rendered in Rohan Dyes and Intermediates Ltd., also becomes factually distinguishable with that of the assessee case. Accordingly, we hold that the ld. CIT grossly held in holding with the profits of the business for the year under consideration has to be reduced by the brought forward losses from earlier year for the purpose of computing profit eligible deduction u/s.80HHE of the Act. Accordingly, the ground No.2(a), 2(b) by the assessee are allowed." 19.1 The Ld.AR further submitted that for the purpose of computing the deduction under section 80HHE only the profits of the business before setting off of the brought forward loss to be considered and that the deduction under section 80HHE could be allowed against the "gross total income". Accordingly, it was argued that the deduction under section 80HHE cannot be denied on the ground that the Assessee is having NIL in....
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.... quantum of deductible income in the 'gross total income'. Section 80AB cannot be read to be curtailing the width of Section 80-IA. It is relevant to take note of Section 80A(1) which stipulates that in computation of the 'total income' of an assessee, deductions specified in Section 80C to Section 80U of the Act shall be allowed from his 'gross total income'. Sub-section (2) of Section 80A of the Act provides that the aggregate amount of the deductions under Chapter VI-A shall not exceed the 'gross total income' of the Assessee. We are in agreement with the Appellate Authority that Section 80AB of the Act which deals with determination of deductions under Part C of Chapter VI-A is with respect only to computation of deduction on the basis of 'net income'. 10. Sub-section (1) and sub-section (5) of Section 80-IA which are relevant for these Appeals are as under: "80-IA. Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc.- (1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) (such bu....
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..... To illustrate, the 'gross total income' of the Assessee for the assessment year 2002-03 is less than the quantum of deduction determined under Section 80-IA of the Act. The Assessee contends that income from all other heads including 'income from other sources', in addition to 'business income', have to be taken into account for the purpose of allowing the deductions available to the Assessee, subject to the ceiling of 'gross total income'. The Appellate Authority was of the view that there is no limitation on deduction admissible under Section 80-IA of the Act to income under the head 'business' only, with which we agree. 13. The other contention of the Revenue is that sub-section (5) of Section 80- IA refers to computation of quantum of deduction being limited from 'eligible business' by taking it as the only source of income. It is contended that the language of sub-section (5) makes it clear that deduction contemplated in subsection (1) is only with respect to the income from 'eligible business' which indicates that there is a cap in sub-section (1) that the deduction cannot exceed the 'business income'. On the other hand, it is the case of the Assessee that subsection (5) ....
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....quent assessment year up to and including the assessment year for which the determination is to be made." It was held in Synco Industries (supra) that for the purpose of calculating the deduction under Section 80-I, loss sustained in other divisions or units cannot be taken into account as sub-section (6) contemplates that only profits from the industrial undertaking shall be taken into account as it was the only source of income. Further, the Court concluded that Section 80-I(6) of the Act dealt with actual computation of deduction whereas Section 80-I(1) of the Act dealt with the treatment to be given to such deductions in order to arrive at the total income of the assessee. The Assessee also relied on the judgment of this Court in Canara Workshops (P) Ltd., Kodialball, Mangalore (supra) to emphasize the purpose of sub-section (5) of Section 80-IA. In this case, the question that arose for consideration before this Court related to computation of the profits for the purpose of deduction under Section 80-E, as it then existed, after setting off the loss incurred by the assessee in the manufacture of alloy steels. Section 80-E of the Act, as it then existed, permitted deductions in....
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.... did not allow depreciation on the WDV of Software expenses which were treated as capital in nature for A.Y. 2002-03. The Assessee submitted the below working of depreciation in this regard. Disallowance of software expenses in Rs. Assessment year 2002-03 66,02,000 Less : Depreciation granted vide order u/s 143(3) for assessment year 2002-03 39,61,200 Less : Depreciation granted vide order u/s 143(3) For AY 2003-04 15,84,480 Less: Depreciation @60% thereon 6,33,792 The Ld.CIT(A) after considering the submission of the Assessee directed the Assessing Officer to grant the depreciation to Assessee. 24. The Ld.DR submitted that the depreciation claim for STPI & non-STPI should be segregated since the depreciation claimed in respect of STPI units was adjustable against the income exempt under section 10A and not against the profits of other units. During the course of hearing the Bench directed the Ld.AR to submit the workings giving the break-up of depreciation between STPI & non-STPI units. The Ld.AR submitted the workings as reproduced below:- Depreciation allocated on the basis of respective turnover of STPI and Non-STPI units Turnover % A....
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.... 158,662,527 130,695,380 27,967,147 (i.e. Rs.67,322,664 46,928,338 + Rs. 20,934,326) Depreciation pertaining to STPI units) 158,662,527 146,8141,99 11,848,328 (Annexure 46,928,338 9 to computation of ROI enclosed)(excluding STPI and Software WIP Depreciation) Business Income as per 143(3) order dated 28.12.2008 48,640,751 48,640,751 29. The Ld.CIT(A) after considering the submission of the Assessee held that - "10.2. I have considered the above submission of the appellant. I agree with the same. The appellant, from its own computation as above is entitled to deduction/exemption u/s 10A to the extent of Rs.13,06,95,380/- as per IT Act in respect of STPI units. In the computation of income filed with the return of income the exemption u/s 10A has been claimed at Rs.14,68,199/- as under: Profits and Gains of Business 15,86,62,527 Less : Exempt u/s 10A:STP units i) Ashoka Plaza Unit I, Pune 3,37,07,572 ii) Orion-Unit II,Pune 4,69,33,824 iii) Building A-Unit III, Pune 6,61,72,803 Less : Dividend Exemption u/s 10(33) 3,73,884 14,71,88,083 Net Profits Chargeable 1,14,74,444 10.3 How....
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....l for specific projects and once the project is completed, the personnel return to India to join back Assessee's company. The Assessee further submitted that this is a normal practice in software industry. The Assessee also submitted that during the year under consideration 35 persons were sent to Zensas US and out of these 14 persons have rejoined Assessee in subsequent years. It was also submitted that they are not in the nature of recruitment services and in the earlier year TP adjustment has been incorrectly made applying placement agency rate of 11.25%. However, the TPO did not accept the submissions and proceeded to make an adjustment as under:- Total number of skilled software personnel seconded to the US AE 35 Total salary of these 35 personnel [converted from US $756,730 AT Rs.44.50 per US $ Rs.3,36,74,485 11.25% of the salary costs treated as arm's length price Rs. 37,88,380 Less : Human resource costs already allocated to the US AE Rs. 15,00,000 Adjustment Rs.22,88,380 34. Before the Ld.CIT(A), the Assessee made various submissions giving details of number of employees who left services and who rejoined Assessee, etc. The Ld.CIT(A) considered these submission....