TaxTMI 
TaxTMI 
2023 (1) TMI 1380
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....e CIT(A) has erred in law and in facts in deleting the Section 1 15JB adjustment of Rs.2,84,52,008/-. (4) It is, therefore, prayed that the order of ld. CIT(A) may be set aside and that of the Assessing Officer be restored." 3. The assessee has taken the following grounds of cross objection: "1. On the facts and in the circumstances of the Respondent's case, the Ld. CIT(A) erred in not admitting the additional ground which was raised during appellate proceedings in view of the decision of Rajasthan High Court in the case of Chambal Fertilisers and Chemicals wherein the it was held that cess is not disallowable u/s. 40(a)(ii). The Ld. CIT(A) thereby disallowing cess on income taxes paid and DDT paid u/s. 40(a)(ii). 2. On the facts .and in the circumstances of the Respondent's case, disallowance of employees contribution to PF and ESI u/s. 36(l)(va) r.w.s. 2(24)(x) of the Act for Rs. 57,850/- cannot be sustained on the ground that employees PF/ESI contribution is not covered by section 43B and is only allowable as a deduction u/s. 36(l)(va) if paid by the "due date" prescribed therein as held by Hon'ble Gujarat High court in the case of CIT vs. Gujarat State Ro....
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....lowed being capital in nature. According amount of 22, 65,000/- was added to the income of the assessee by disallowing ESOP expenses. In appeal, the assessee submitted that such expenses have been paid as perquisite to the employees and TDS has been deducted thereon at the time of payment. Further, the counsel for the assessee placed reliance on various judicial precedents which have held that ESOP expenses are not notional/contingent the nature and are an allowable expense under section 37 (1) of the Act. The Ld. CIT(Appeals) allowed the appeal of the assessee on this ground with the following observations: "5.3 Decision: I have carefully considered the assessment order and the submission filed by the appellant. The AO observed that appellant has claimed ESOP expenses of Rs. 22.60 lacs as revenue expenses. Such expenditure was disallowed by AO on the ground that when ESOPs are issued, company chooses receive security premium of a lower amount or no security premium is charged in comparison of amount received in regular course of share issue. He observed that issue of shares is not crystallized till the date on which employee exercises the option hence expenditure debited d....
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....es [Para 11.1.6] [In favour ofassessee] The above issue is also decided by Hon'ble Ahmedabad ITAT in the case of Cera Sanitaryware Limited 68 taxmann.com 433 and held as under: The assessee-company had implemented employees' stock option scheme. It had offered its shares to its employees at discount and resulting loss was claimed as deduction. The Assessing Officer disallowed said loss. Held that basically the Assessing Officer was of the view that it is a capital loss. It is not materialized in this year. It would happen only when option is exercised by the employees. All these aspects have been considered by the Special Bench of the Tribunal in Biocon Ltd, v. Dy. CIT [2013] 35 taxmann.com 335/120141 114 ITD 21 (Bang.) wherein it has been explained that share premium is a capital receipt and not chargeable to tax in the hands of the company. If a company issues shares to the public or to the existing shareholders at lesser than prevailing premium due to market sentiments or otherwise such share receipts of a premium would be a case of receipt of lower amount on capital amount. As the object of issuing such share at a lower price is nowhere directly connected with ....
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....of remuneration to ESOP. Ground No. 1 is accordingly allowed." 14. We see no reasons to take any other view of the matter than the view so taken by the coordinate bench in assessee's own case for the assessment year 2008-09. Respectfully following the same, we uphold the relief granted by the learned CIT(A) and decline to interfere in the matter. Grievance of the Assessing Officer is accordingly rejected. 15. Ground No.2 is thus dismissed." As entire issue relating to ESOP expenses is decided in favour of Assessee by Hon'ble Ahmedabad ITAT, referred supra, and Hon'ble Special Bench in the case of Biocon Limited, disallowance of expenditure made by AO for Rs.22,65,000/- is not justified. On this ground disallowance made by AO is deleted. This ground of appeal is allowed. 6. The Second and Fourth Grounds of appeal relate to addition made by Assessing Officer for Rs. 2,84,52,088/- under Section 14A." 7. Before us, the Department relied upon the order of the AO and argued that these expenses are at best notional/contingent in nature and hence are not allowable under section 37(1) of the Act. In response, the counsel for the assessee reiterated the submissions ....
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.... ascertained liability. Accordingly, issuance of shares at a discount would be an expenditure incurred for purposes of section 37(1) as primary object of aforesaid exercise was not to waste capital but to earn profits by securing consistent services of employees and therefore, same could not be construed as short receipt of capital. Thus, discount on issue of ESOP was allowable deduction under section 37(1) of the Act. While deciding the issue, the High Court made the following observations: 9. In the instant case, the ESOPs vest in an employee over a period of four years i.e., at the rate of 25%, which means at the end of first year, the employee has a definite right to 25% of the shares and the assessee is bound to allow the vesting of 25% of the options. It is well settled in law that if a business liability has arisen in the accounting year, the same is permissible as deduction, even though, liability may have to quantify and discharged at a future date. On exercise of option by an employee, the actual amount of benefit has to be determined is only a quantification of liability, which takes place at a future date. The tribunal has therefore, rightly placed reliance on decisio....
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..... 8.4 The Delhi ITAT in the case of People Strong HR Services (P.) Ltd. [2022] 134 taxmann.com 351 (Delhi - Trib.) held that discount on shares allotted by assessee to its employee under ESOP Scheme is revenue expenditure allowable under section 37(1) of the Act. In this case, assessee had claimed deduction on account of amount incurred by it on stock option plan extended to its employees under section 37(1) of the Act. The Assessing Officer held that assessee had not paid notional discount on shares issued under ESOP Scheme and had no liability to make such payment and, accordingly, said sum could not be described as expenditure under section 37(1) of the Act. The ITAT held that that the High Court in CIT v. Lemon Tree Hotels Ltd. [IT Appeal No. 107 of 2015, dated 18-8-2015 held that employees' discount represents consideration for services rendered by employees and, hence, it is a deductible business expenditure and it cannot be equated with share premium and it is to be intended towards profit by securing employees' consistent services. Therefore, thus, Commissioner (Appeals) was justified in deleting addition on account of disallowance of ESOP expenses by holding notio....
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..... 2: disallowance under section 14A of the Act 10. The brief facts in relation to this ground of appeal are that during the year under consideration, the AO observed that that the assessee did not disallow any direct or indirect expenses in relation to investments made by the company during the year under consideration. However, admittedly, during the year under consideration the assessee did not earn any exempt income. During the course of assessment, the assessee submitted that investments made by the assessee in foreign subsidiaries cannot be subject matter of disallowance under section 14A for the reason that the income generated from such subsidiary is taxable in India. Further, the assessee submitted that the assessee has substantial interest free funds at its disposal and accordingly no disallowance is called for under section 14A of the Act. The assessee further submitted that during the year under consideration, the assessee did not earn any exempt income but has received a loss from the partnership firm of 94,72,835/- (the same is evident from computation of income for the same has been added back to the total income). During the year under consideration, the asse....
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....her expenses with regard to above investments. The Assessing Officer has observed that Assesses must have incurred administrative expenses such as documentation, salary to employees, administrative overheads like stationary, telephone, computer, office equipment, etc., and he relied upon Rule 8D and computed disallowance under Section 14A at Rs.2,15,04,044/-. On the other hand, Appellant has argued that as it has not earned any exempt income, disallowance under Section 14A read with Rule 8D cannot be made. The Appellant has also argued that it has sufficient own funds in form of share capital and reserves & surplus, which is in excess of investments made by it hence relying upon the various decisions of Hon'ble Gujarat High Court and SLP dismissed by Hon'ble Supreme Court in case of Sintex India Limited, the ARs of the Appellant contended that no proportionate interest disallowance is called for. The ARs of the Appellant have also contended that there was substantial increase in share capital, security premium and net profit for the year under consideration in comparison with increase in investments to justify its claim that no borrowed funds were used for the purpose of ma....
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....ab and Haryana High Court in case of CIT v Winsome Textile Industries Ltd. [2009] 319ITR 204in which also the Court had observed as under: "7. We do not find any merit in this submission. The judgement of this court in Abhishek Industries Ltd (2006) 286 ITR I was on the issue of allow ability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. The observations made therein have to be read in that context. In the present case, admittedly the assessee did not make any claim for exemption. In such a situation section 14A could have no application." 5. We do not find any question of law arising, Tax Appeal is therefore dismissed. " Further, Hon'ble Ahmedabad ITAT in case of Shah Alloys Ltd [2315/Afi(l/2010J, dated 27/03/2015 following the decision of Corrtech Energy Pvt. Ltd (referred supra), held as under: "The Authorized Representative of the assessee has relied on the decision of the Hon'ble Gujarat High Court in the case of CIT vs. Corrtech Energy (P) Ltd, repor....
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....come-tax Act, 1961, read with rule 8Dof the Incometax Rules, 1962 - Expenditure incurred in relation to income not includible in total income (General principle) - Assessment year 2011-12 - Whether section 14A can only be triggered, if, assessee seeks to square off expenditure against income which does not form part of total income under Act; rule 8D only provides for a method to determine amount of expenditure incurred in relation to income, which does not form part of total income of assessee and it cannot go beyond what is provided in section 14A - Held yes - Whether where no exempt income i.e., dividend, was earned in relevant assessment year by assessee, section 14A could not be invoked - Held yes [Para 8] [Matterremanded] Circulars and Notifications: Circular No. 5. dated 11-2-2014" (iii) Decision of High Court of Madras in case of Redington (India) Ltd.v. Additional Commissioner of Income-fax. Co. Ranee-V. Chennai T.C.A. NO. 520 OF 20-16f dated DECEMBER 23. 2016: "Section 14A of the Income-tax Act, 1961, read with rule 8Dpf the Incometax Rules, 1962 - Expenditure incurred in relation to income not includible in total income (Condition precedent) - Assessment year 20....
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....rved "during the year, the assessee has not erred any exempt income but also did not disallow any direct or indirect expenses related to investment". Further, the Ld. Counsel for the assessee submitted before us (as well as before Ld. CIT(Appeals) that the incremental interest free funds available with the assessee during the year under consideration for 125.92 crores whereas the incremental value of investments was 74.30 crores only. Accordingly, there is no basis for making disallowance under section 14A of the Act. 13. We have heard the rival contentions and perused the material on record. Admittedly, during the year under consideration, the assessee did not earn any exempt income. 13.1 It is a well-settled law on the subject that no disallowance can be made under section 14A in case the assessee has not earned any exempt income. The Hon'ble Supreme Court in the case of State Bank of Patiala [2018] 99 taxmann.com 286 (SC) held that where High Court took a view that amount of disallowance under section 14A could be restricted to amount of exempt income only, SLP filed against said order was to be dismissed. The Hon'ble Supreme Court in the case of Chettinad ....
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....issed. Grounds of Appeal No. 3: applicability of disallowance under section 14A of the Act on the computation of liability u/s 115JB of the Act 15. The brief facts in relation to this ground of appeal are that the AO while computing the liability under section 115JB of the Act added the sum of Rs. 2, 84,52,088/- disallowed under section 14A of the Act. 16. Since, we have already held that in the instant set of facts no disallowance is called for under section 14A of the Act while adjudicating ground of appeal number 2, this ground of appeal number 3 becomes academic and the same is dismissed hereby. 17. In the result, ground number 3 of the Department's appeal is dismissed. Now we shall take up the assessee's Grounds of Cross Objection Grounds of Appeal No. 1: allowability of education cess: 18. The issue for consideration in this ground of appeal of the assessee is whether education is allowable expense in the hands of the assessee while computing taxable income. 18.1 In our considered view, education cess paid by the assessee and income tax/ DDT is not an allowable expense and the issue has been affirmed in various decisions by various Courts and Tribunals. Recently, t....
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....e result, the view of the High Court could not be sustained. Thus, the words 'income-tax' in the Finance Act, 1964 in sub-section (2)(a) and sub-section (2)(b) of section 2 would include surcharge and additional surcharge. 18.2 In view of the above rulings, we are of the considered view that payment of education cess including secondary and higher education cess is not allowable as deduction. Accordingly, ground number 1 of the assessee's appeal is dismissed. 19. In the result, ground number 1 of the assessee's appeal is dismissed. Ground number 2: allowability of PF/ESI u/s 36(1)(va) of the Act 20. The assessee is in appeal before us against the disallowance of PF/ESI u/s 36(1)(va) of the Act as confirmed by Ld. CIT(Appeals). 20.1 In our view, the issue is squarely covered against the assessee by the order of Hon'ble Supreme Court in the case of Harrisons Malayalam Ltd. [2022] 145 taxmann.com 608 (SC), wherein the Supreme Court dismissed the SLP against order of High Court that where assessee-company failed to pay employees' contribution towards EPF and ESI within due date prescribed in respective Acts, deduction under section 36(1)(va) was not allowable. Again in the c....