TaxTMI 
TaxTMI 
2016 (7) TMI 1710
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....come and expenditure and no such nexus has been established in the in the appellants case 1.2The Hon. Commissioner of Income Tax (Appeals) grossly erred in ignoring the fact that the Appellant incurred INR 50,000 in earning the exempt income and the Appellants have suo-moto made a disallowance of Rws.50,000/- in the computation of income submitted while filing their Return of Income. 1.3 The Hon. Commissioner of Income Tax (Appeals) grossly erred in ignoring the fact, without rendering any opinion on the correctness of Appellant's claim of not spending any amount for earning exempt income the learned Assessing Officer could not have made a disallowance by applying the provisions of section 14A r.w.r. 8D. 1.4 Hon. Commissioner of Income-tax (Appeals) grossly erred in overlooking the fact that the principle of apportionment embedded in section 14A had no application where no direct expenditure was incurred to earn exempt income and entire expenditure was incurred for business purposes only. 2 The Hon Commissioner of Income Tax (Appeals), grossly erred in confirming the disallowance of ESOP expenses, amounting to Rs 36,74,845/-, being the difference....
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....he assessee company's holding company to the employees of the assessee company. 7. The brief facts in this regard are that during the year, the Assessee Company reimbursed Rs36,74,845/- to its ultimate holding company Korn Ferry International Inc ('KFII'), USA. Such reimbursement was made on account of the cost of restricted stock units (stocks) which have been allotted by KFII to the employees of the assessee on behalf of the Assessee Company under the Employees Stock Option Plan ('ESOP). The difference in the market price and the allotment price (i.e. Rs, 3,674,845) was reimbursed by the assessee to its ultimate holding company and same was charged to the P&L account and was claimed as a deduction in its tax return. The above payment is in the nature of compensation to the employees and the same was taxed in the hands of the employees as perquisite under relevant provisions of the Act and appropriate tax was deducted at the time of vesting of these stocks. During the course of assessment proceedings the AO followed his order of A.Y. 2010-11 and held that such expenditure was not allowable under the law on the following grounds: a. The shares were the capital of the ....
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....or the purpose of allowability of expenditure under the Act the same has to be in consonance with the scheme of the Act. In the Assessee Company's case the entry made in the books of accounts as per direction of SEBI cannot be held to be conclusive for the purpose of allowing expenditure under section 37 of the Act. f. The has relied on the decision in the case of New India Industries Ltd. vs ACIT 112 TTJ (Del) (SB) 917 and TVS Finance & Services Ltd. Vs. Joint CIT [23 DTR (Mad) 33] wherein it has been held that unless the provisions of section 37 of the Act are complied with, the deduction is not permissible. 8. Being aggrieved, assessee filed appeal before Ld. CIT(A) and made detailed submissions. Relevant part of the submissions made before Ld.CIT(A) are as follows: 5.4.1 At the outset, it is submitted that the understanding of the Ld. AO on this issue is completely erroneous. The Appellant has never issued any share to its employees under ESOP. This can be verified from the Schedule I to the audited financials which demonstrate the movement in the share capital of the Appellant. It is KFII (listed ultimate holding company) which has issued stocks to the emp....
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....the facts and circumstances of the case. Undisputed facts are that the appellant company allotted "restricted stock units" (stocks) to its employees under the Employee Stock Option Plan (ESOP). Such shares were not allotted as per market price. The difference in the market price and allotment price i.e. Rs.52,08,592/- was debited by the assessee in its Profit & Loss Account. 6.2. Before me, the LAR vehemently argued that the previously mentioned difference of Rs.52,08,5921- in the market price and allotment price was in the nature of compensation to the employees and was taxed in the hands of the employees and that ESOP expenses have been claimed on the basis of SEBI guidelines. He also contended that SEBI Rules being statutory rules and since there was no specific provisions in the Act dealing with this issue, hence SEBI Rules should be applied and deduction in the difference in the market price and the allotment price should be allowed. He strongly contended that the said difference in the market price and the allotment price is deductible u/s 37(1) of the Act. He has relied on the following decision in support of the proposition that the difference in market price....
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....k exchange. Therefore SEBI guidelines are not applicable in the case of the present private exchange. Secondly, SEBI norms or for that matter the RBI norms cannot override the provisions of I.T. Act in the matter of allowing of expenditure under the provisions of I.T. Act. Strong reliance is placed on the following decisions: (i) New India Industries Ltd. Vs ACIT18 SOT 51 (SB) Delhi. (ii) TVS Finance and Services Ltd. Vs JCIT (2009) 23 CTR (MAD) 33. 6.5. Thirdly, it is well stated that the way in which entries are made by the appellant in its books of accounts is not determinative of the question that the appellant has earned any profit or suffered any loss. Therefore, it is necessary to consider the true nature of the transaction and whether it has actually resulted in profit or loss to the assessee. The reliance is placed on the following decisions: (i) Kedarnath Jute Mfg. Co. Ltd. Vs CIT (1971) 82 ITR 363 (SC) (ii) Chowringhee Sales Bureau Pvt. Ltd. Vs CIT (1973) 87 ITR 542 (SC) (iii) Satluj Cotton Mills vs CIT (1979) 116 ITR 01 (SC) In the present case, the appellant has not incurred any actual expenditure which accrue....
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....hat the Tribunal has deliberated upon the issue and has decided it as under: "6.Next Ground of appeal is about addition of Rs.56.40 lakhs out of the expenditure incurred under ESOP(Employee Stock Option Scheme). During the assessment proceedings, the AO found that the assessee had debited an amount of Rs.1.07 crores under the head cost of stock awarded to KF India Employees. Before the AO, the assessee stated that the expenditure was on account of ESOP. On perusal of the tax audit report, the AO found that the assessee had paid Fringe Benefit Tax(FBT)only on amount of Rs.50.65 lakhs. The AO directed the assessee to explain as to why FBT had not been paid to whole amount. The assessee vide its letter,dt.29.12.12,stated that the value of FBT taken for ESOP(Rs.50.65lakhs) as against cost of stock awarded to KF Employees(Rs.1.07crores),that the amount of Rs.50.65 represented the value of ESOP, that had been vested with the employees during FY 2007-08 and consequently considered for FBT, that the amount of Rs.1.07crores represented the amount charged by Korn Ferry International USA to Korn Ferry International Pvt. Ltd. India, towards stock awarded to the employees of the assess....
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....dia Pvt. Ltd.(supra),it has been held that in terms of ESOP if an assessee offers shares of its parent company to its employees, the difference between the FMV of the shares of the parent company on date of issue of shares and the price at which those shares were issued by the assessee to its employees had to be regarded as expenditure incurred for business purposes allowable u/s. 37(1) of the Act. Respectfully following the above decision, we decide Ground No.2 in favour of the assessee ." Respectfully following the above order, we allow the appeal of the assessee with regard to second ground." 10. It may be thus noted from the above that once a stock option is granted to and exercised by the employee of the assessee, then liability in that option was ascertained and the cost is allowable in the year in which stock options were granted. It is further noted that all the contentions raised by the AO in the assessment order have duly considered by the Tribunal while deciding this issue. It is further noted that no distinction has been brought before us by Ld DR on facts or law. Thus, respectfully following the order of the Tribunal, we decide this issue in favour of the a....
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....itted that buyback is a legitimate transaction and was undertaken by the assessee company in accordance with the provisions of the Companies Act, 1956. The assessee made exhaustive submissions before the Ld. CIT(A) and explained that the said transaction was a legitimate transaction within the four corners of law. The relevant portion of the submissions made by the assessee before Ld. CIT(A) are reproduced hereunder: "Buyback is a legitimate transaction and has been undertaken by the Appellant in accordance with the provisions of Companies Act, 1956 ('Companies Act') is submitted that buyback is a legally recognized transaction and that it was Undertaken in accordance with the provisions of the Companies Act. Section 77A of the Companies Act is the specific section which contains the basic framework for companies to buy back its own securities (provisions of section 77A of the Act are enclosed as 'Annexure 7'). Section 77A provides various guidelines which the company needs to fulfil for doing a buyback of shares. In the instant case, the Board of Directors of the company took such decision and complied with all such conditions for affecting the buy back. I....
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....ome-tax Act by inserting a new clause to provide that dividend does not include any payment made by a company on purchase of its own shares in accordance with the provisions contained in section 77A of the Companies Act 1956. It has also inserted a new section, namely, section 46A in the Income-tax Act, to provide that any consideration received by a shareholder or a holder of other specified securities from any company on purchase of its own shares or other specified securities shall be, subject to provisions contained in section 48, deemed to be the capital gains." In view of above, it can be concluded that the current law does not deem (or empower the assessing officer to deem) the buyback of shares as declaration of dividend by the company purchasing its own shares. The express provision of the Act (i.e. section 2(22)(e) read with section 46A of the Act) leaves no discretion to the assessing officer to choose between the taxability as capital gain or treating it as dividend. It is well settled that tax implications of a valid transaction need to be determined as per provisions applicable to the transaction and that the taxpayer is entitled to plan his affairs ....
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.... this issue was already decided in favour of the assessee by Ld.CIT|(A) in earlier assessment year i.e. A.Y. 2010-11. The relevant part of order of Ld. CIT(A) Is reproduced below: "5.5.1 Having carefully and dispassionately considered the rival submissions, it is noted that this issue has been decided by me while deciding the appeal of the appellant for A.Y.2010-11 vide paragraph No.7.1 to 7.18 of Order bearing No. CIT(A)-4/IT-68/DCIT.3(2)/2012-13 dated 06.08.2013. The relevant paragraphs may be extracted as under:- 77.1. I have carefully and dispassionately considered the facts and circumstances of the case. The LAO has charged dividend tax @ 15% and corollary surcharge on the buyback of shares as deemed dividend. However, he has not made any addition, whatsoever, in the computation of total income on this account. There is no separate addition on account of treatment of buyback of shares and appellant's profit/income has not been increased by any amount, whatsoever, on account of buyback of the shares of the appellant company. The briefly stated facts are that the appellant is a wholly owned subsidiary of Korn/Ferry Investment India Limited, Mauritius ("Korn....
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.... submissions. 7.4 It was contended that buyback is not a colorable device to avoid DDT implications. Further, it was submitted that in terms of clause (iv) to Section 2(22) of the Act, buyback which is effected as per Section 77A of the Companies Act is excluded from the scope of definition of "dividend". The provisions of Act itself provide that buyback transactions are subject to dividend implications. It was also submitted that as per the prevailing law (i.e. as applicable for AY) income on buyback of shares is taxed in the hands of as capital gains under Section 46A of the Act. Section 46A was introduced by Finance Act, 1999. In the course of debate, the Finance Minister made the following assurance to the House: "Very recently, the Companies Act, 1956 has been amended to permit transactions relating to buyback of shares. There is some ambiguity in the interpretation of the law as to whether such transactions would be treated as subject to dividend tax in addition to capital gains tax. In view of this, I propose to amend the law to put it beyond doubt that on buyback of shares, the shareholders will not be subject to dividend tax, and would only be li....
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.... planning within the framework of the law to save taxes is allowed. The right to conduct the affairs of a business falls within the prerogative of the taxpayer. The taxman/tax authorities can only intervene in cases where there has been a deliberate attempt by the taxpayer to illegally evade taxes through use of dubious methods or colorable device. In this regard, reliance was placed on following judgments: i. Azadi Bachao Ando tan v UOI (263 ITR 706) ii. Banyan and Berry vs. Commissioner of Income-tax iii. Vodafone International vs. UOI (341 ITR 1) iv. Walfort Share & Stock Brokers Pvt. Ltd. (Supra) 7.9. The LAR vociferously contended that the consideration paid by the Appellant towards buyback of shares cannot be terms as dividend and accordingly cannot be taxed under section 115-O of the Act. 7.10. In this connection, it may be noted that the Finance Act 2013 has introduced Section 115AQA of the Act whereby tax of 20% is proposed to be levied on distributed income on buyback of shares by an unlisted domestic company. Consequently, such income shall be exempt in the hands of the shareholder by virtue of newly inserted Section ....
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....e facts of 'A Limited' and the buyback transaction in the Appellant's case is not a colorable device to avoid tax and is a genuine transaction. 7.16. It was reiterated that in the case of Vodafone International Holding B.V [341 ITR 1(SC) and Azadi Bachao Andolan [263 ITR 706 (SC), it has been held that not all tax planning is illegal/ illegitimate/impermissible and the instant case at best be classified as tax planning measure and not tax avoidance measure. 7.17. In the instant case, since the meaning of "any other transaction" is not very clear (and inclusion of all possible transactions does not correspond to the basic intent behind introduction of TP regulations), the phrase "any other transaction" should take colour from the preceding clauses viz, purchase, sale or lease tangible or intangible property, or provision of services, or lending or borrowing money. Therefore, 'any other transaction' must be a transaction in the nature of transfer of goods or provision of services or in nature of lending or borrowing, which would impact the reportable profits/income of the taxpayer. In view of the above discussion, it is humbly submitted that the transaction of b....
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....AO had held that assessee had indulged in activity of buy back of shares, that the same was a colourable device for the purpose of avoiding dividend distribution tax, that the assessee had not declared dividend inspite of making regular profit. In the appellate proceedings, the FAA had upheld the disallowance of Rs.52.08 lakhs. But he did not agree with the AO that buyback of shares was an instrument to avoid dividend distribution tax. 5. During the course of hearing before us, the DR and the AR stated that identical issue had arisen in the matter of Goldman Sachs (India) Securities Pvt. Ltd (ITA/3726/Mum/2015, AY 2011- 12, dtd.12. 02. 2016), that the Tribunal had decided the issue in favour of the assessee. We find that the Tribunal had deliberated upon the issue and had decided as under: "The assessee is a wholly owned subsidiary of Goldman Sachs (Mauritius) LLC(GS-M). It was set up to undertake merchant banking and security business in India. Registered under the STPI scheme, it had set up a 100% export oriented unit in Bangalore to serve as a global support centre for the Goldman Sachs Group entities. On 24.11.2010, the assessee had remitted an amount Rs.1,88,....
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....rning profits after tax for each of those years, that the reserves and surplus increased from Rs.81,01,34,000/-for the year ending 31.03.2008 to Rs.3,46,03,20,000/-for the year ending 31.03.2010,that inspite of regular profits being earned by it Directors of the assessee-company did not recommend any dividend payment on its equity shares, that money had a time value and postponement of grant of a share in the profits to a shareholder would be for purposes of re-investment in the business for the purposes of enhancing future profits, that the assessee had not shown any such requirement or compulsion as a justification for the non-grant of dividend in the regular course, inspite of the continuous accumulation of profits in its books, that the AO had specifically required the assessee to explain the commercial reason, if any, for the non issue of dividend although the profits were being accumulated year after year, that it chose to remain silent on this show cause notice issued by the AO, that by permitting the profits to accumulate in its books it had avoided the payment of DDT that would have been payable if such accumulated profits had been distributed to its share-holders, that a ....
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....action as not being in the nature of a receipt of dividend but a capital gain of the concerned share holder, that the arrangement was made to use of the provisions of section 46A of the Act and to claim exemption from tax in India on the basis of Article 13(4) of the India Mauritius Tax Treaty. The FAA referred to the case of a Indian Company that was decided by the AAR in Case No. P of 2010 vide its order dated 22.03.2012 and held that it had persuasive value. He further held that section 100 to 105 of the Companies Act dealt with reduction of capital, that the annual accounts of the assessee showed that its share-capital actually got reduced and was so reflected in the books after the buy-back of the shares, that buy-back of shares was one of the ways of capital reduction, that reliance by the AO on the provisions of section 2(22)(d) of the Act dealing with capital reduction, as including a transaction of buy-back of shares was justified, that the provisions of section 10(34) would apply only if DDT had been paid u/s.115-0 of the Act, that no DDT was paid by the assessee, that the recipient would not be entitled to any exemption u/s. 10(34) of the Act, that the receipt in its han....
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....s ; or (ii) the securities premium account ; or (iii) the proceeds of any shares or other specified securities : Provided that no buy-back of any kind of shares or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities. (2) No company shall purchase its own shares or other specified securities under sub-section (1) unless- (a) the buy-back is authorised by its articles ; (b) a special resolution has been passed in general meeting of the company authorising the buy-back Provided that nothing contained in this clause shall apply in any case where-(A) the buy-back is or less than ten per cent of the total paid-up equity capital and free reserves of the company; and (B) such buy-back has been authorised by the board by means of a resolution passed at its meeting: Provided further that no offer of buy-back shall be made within a period of three hundred and sixty-five days reckoned from the date of the preceding offer of buy-back, if any. Explanation - For the purposes of this clause, the expression "offer of buy-....
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....ce the company is evading its liability to pay tax. 5. One of the contentions raised by the petitioner is that a view of the Circular dated 15th January 2014, the Regional Director has no locus in respect of tax matters, particularly when the Income tax Authorities have not raised any objection. This aspect has been considered in detail by this Court in the case of Casby CFS Pvt. Ltd. and it has-been held that the Regional Director has the requisite locus standi to raise all objections in respect of a scheme including objections pertaining to taxation laws. He can do so even if the Income Tax Authorities do not raise any objection. It has been held that this is the duty and obligation of the Regional Director. In view of the aforesaid decision of this Court the objection of the Petitioner with regard to the locus of the Regional Director is untenable and deserves to be rejected. 6. The Petitioner has submitted that it is open to the Petitioner to follow either the procedure under section 77A/section 68 or the procedure under section 391 read with Sections 100 to 104 to effectuate the buyback of shares and there is no compulsion for the Petitioner to follow only th....
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....does not supplant or take away any part of the pre-existing jurisdiction of the company court to sanction a scheme for such reduction under sections 100 to 104 and section 391. 23. The submission of the appellants that the non obstante clause in section 77A gives precedence to that section over provisions of sections 100 to 104, section 391 is misconceived. The non obstante clause in section 77 A namely "notwithstanding anything contained in this Act .... " Only means that notwithstanding the provisions of section 77 and sections with the conditions mentioned in that section without approaching the court under sections 100 to 104 or section 77A to indicate that the jurisdiction of the court under section 391 or 394 has taken away or substituted. It is well settled that the exclusion of the jurisdiction of the court should not readily be inferred, such exclusion should be explicitly or clearly implied. There is nothing in the language of section 77 that gives rise to such an inference. We are, therefore, inclined to hold that section 77 A is merely an enabling provision and the courts powers under sections 100 to 104 and section 391 are not in any way affected. The conditio....
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....1st day of April, 1933, whether such accumulated profits have been capitalised or not ;" "46A. Where a shareholder or a holder of other specified securities receives any consideration from any company for purchase of its own shares or other specified securities held by such shareholder or holder of other specified securities, then, subject to the provisions of section 48, the difference between the cost of acquisition and the value of consideration received by the shareholder or the holder of other specified securities, as the case may be, shall be deemed to be the capital gains arising to such shareholder or the holder of other specified securities, as the case may be, in the year in which such shares or other specified securities were purchased by the company. Explanation.-For the purposes of this section, "specified securities" shall have the meaning assigned to it in Explanation to section 77A of the Companies Act, 1956 (1 of 1956)." The reasonable conclusions that can be drawn from the scrutiny of the above sections are that buy back of shares and reduction of share-capital are different concepts, that buyback of shares of a corporate entity ca....
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....tion 77A of the Companies Act, 1956. It has also inserted a new section, namely, section 46A in the Income-tax Act, to provide that any consideration received by a shareholder or a holder of other specified securities from any company on purchase of its own shares or other specified securities shall be, subject to provisions contained in section 48, deemed to be the capital gains. 28.4 This amendment will take effect from 1st day of April, 2000 and will, accordingly apply in relation to the assessment year 2000-2001 and subsequent years." It is worth mentioning that provisions of section 115Q have been amended w.e.f. 01.04.2013 and profit arising out of buyback of shares is to be taxed at a particular tax rate. But, the AY before us, is prior to the April1, 2013.Therefore, we have to decide the issue as per the prevailing law applicable on the date of the transaction in question. There is no ambiguity about the provisions that would govern the buyback of shares. Section 2(22)(d)(iv) r.w.s.46A of the Act would be applicable to the buyback scheme. Accordingly, the transaction cannot be treated as deemed dividend. 5.2. Now, we would deal with the issue of tr....
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....amount to it being a device to evade tax. 7. Even the argument of the Regional Director that foreign exchange amounting to Rs.248 crores will be drained away if the Scheme is sanctioned, is of no avail once it is held that the procedure adopted by the company is permissible in law. Moreover, the Regional Director has not shown that the law prohibits the transfer of shares by a non-resident to resident. In fact, he does not dispute that the same is permissible. The Petitioner has placed on record RBI's Circular No.49 dated 4th May 2010 which provides that shares of an unlisted Indian company can be transferred by a non-resident to a resident under the general permission of the RBI if the transfer price does not exceed the fair market value as determined by a Chartered Accountant or a SEBl registered Merchant Banker as per the DCF method. In the present case the transfer price has been arrived at in accordance with the aforesaid circular of the RBI. The Regional Director has not disputed the fair market value of the shares so determined. In these circumstances it is clear that the buyback of shares under the Scheme is in accordance with the RBI Guidelines and that being ....