AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2026 (5) TMI 1541
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.... technical and consultancy services in the field of software, filed its return of income for Assessment Year 2022-23 on 31.10.2022 declaring a loss of Rs. 43,41,13,464/-. The case of the assessee was selected for scrutiny under CASS and accordingly, notice under section 143(2) of the Income Tax Act, 1961 ("the Act") dated 23.06.2023 was issued by the Learned Assessing Officer ("Ld. AO"). After considering the submissions of the assessee, the Ld. AO made additions of (a) Rs. 9.68 crores on account of ESOP expenses and Rs. 8.97 crores on account of disallowance of other employee benefit expenses out of the total employee benefit expenses Rs. 20.20 crores, (b) Rs. 21,92,36,162/- on account of loss on sale of investment in subsidiary company and (c) Rs. 59,49,06,130/- on account of receipt of share premium. Accordingly, the Ld. AO completed the assessment under section 143(3) read with section 144B of the Act dated 20.03.2024, assessing the total income of the assessee at Rs. 56,65,28,828/-, making total additions of Rs. 100,06,42,292/-. 3. Aggrieved by the order of the Ld. AO, the assessee filed an appeal before the Ld. CIT(A). During the pendency of the appeal before the Ld. CIT (....
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....d the principle that the additions cannot be made on pure estimations in absence of any valid material or evidence. 1.3. On the facts and in the circumstances of the case, and in law, the Hon'ble CIT(A), failed to consider the well-settled principles upheld in various judicial precedents that the business expenditure to be incurred is a prerogative of the Appellant and that it is out of the purview of income tax authorities to question the functioning of the business. In view of the above, the Appellant prays that the learned AO be directed to delete the addition amounting to INR 7,17,55,667 as the same is unwarranted and ought to be deleted. 2. Ground 2 - Addition made as unexplained money under section 69A of the Act amounting to INR 59,49.06.130: 2.1. On the facts and in the circumstances of the case, and in law, the Hon'ble CIT(A) / learned AO erred in adding the share premium received on issuance of shares amounting to INR 59,49,06,130 as unexplained money under section 69A of the Act. 2.2. On the facts and in circumstances of the case, and in law, the Hon'ble CIT(A) / learned AO has legally erred in not applying one of ....
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.... expenses of the assessee for the year under consideration is Rs. 20.20 crores (including ESOP expenses of Rs. 9.68 crores), whereas in the immediately preceding financial year, it was Rs. 9.06 crore. The Ld. AR further invited our attention to the statement of profit and loss account placed at page No. 13 of the paper book and submitted that the revenue from operations of the assessee for the year under consideration is Rs. 6.70 crores, whereas in the immediately preceding financial year, the revenue operations was Rs. 1.33 crores. The Ld. AR submitted that the Ld. AO, merely by comparing the turnover of the assessee with the employee benefit expenses, held that 50% of the revenue would be a reasonable salary expenditure and accordingly restricted the allowance to Rs. 3.35 crores and disallowed the balance amount, including Rs. 9.68 crores on account of ESOP expenses and Rs. 7,17,55,667/- on account of other employee benefit expenses. The Ld. AR further invited our attention to the detailed salary statement placed at page nos. 161 to 163 of the paper book containing PAN, name, designation, and amount of salary paid to each employee and submitted that complete details were furnishe....
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....ss expenditure. Since Rs. 9.68 crore on account of ESOP is already disallowed as discussed above, the remaining amount of Rs. 8.97 crore is being disallowed and added back to the income of assessee. (Addition :- 8,97,00,000/-)" 10. On perusal of the above, it is observed that the Ld. AO has made the disallowance primarily on the basis of comparison between the revenue and employee benefit expenses and restricted the same to 50% of the revenue, which is purely an ad hoc approach. At the same time, the assessee has also attempted to justify the claim on the basis of ratio of earlier years. In our considered opinion, both these approaches are not determinative of the allowability of expenditure under the Act. At the same time, on perusal of the material placed on record, we find that certain crucial aspects require proper verification. As per the details furnished by the assessee placed at page No. 127 of the paper book, the total gross salary paid by the assessee is Rs. 16.33 crores, which is to the following effect: 11. However, as per Note No. 21 of the audited financial statements placed at page No.33 of the paper book, the total employee benefit expenses are reflec....
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....the owner of any money, bullion, jewellery or other valuable article which is not recorded in the books of account. It was submitted that in the present case, the entire amount of share premium is duly recorded in the books of account of the assessee and therefore, the provisions of section 69A of the Act are not applicable. The Ld. AR thus contended that the addition made by the Ld. AO under section 69A of the Act is liable to be deleted. 14. Per contra, the Ld. DR invited our attention to the assessment order and submitted that the Ld. AO has categorically mentioned that the assessee has not submitted any evidence such as calculation of fair market value of share premium as required under the provisions of the Act. It was submitted that though the Ld. AO has mentioned section 69A, in substance, the addition has been made on account of failure of the assessee to substantiate the share premium received with reference to fair market value as required under the provisions of the Act. The Ld. DR further invited our attention to para Nos. 5.4.1 to 5.4.5 of the order of the Ld. CIT(A) and submitted that the Ld. CIT(A), after analyzing the provisions of section 56(2)(viib) of the Act,....
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....me-tax Rules, 1962 ("the Rules") to justify the fair market value of the shares issued at premium. It is also an undisputed fact that the assessee has not substantiated the justification for issuance of shares at premium so as to come out of the purview of section 56(2)(viib) of the Act. The contention of the assessee that it was never asked to furnish the valuation report cannot be accepted. We have gone through the show cause notice issued by the Ld. AO dated 05.03.2024 placed at page No. 82 of the paper book, which is to the following effect: 17. On perusal of the above, it is evident that the Ld. AO has specifically asked the assessee to furnish a brief note on applicability of section 56(2)(viib) of the Act and to explain as to why the share premium of Rs. 59,49,06,130/- should not be treated as income from other sources. We further observe that the Ld. AO has clearly called upon the assessee to justify the receipt of share premium in accordance with the provisions of section 56(2)(viib) of the Act, which itself caste a duty upon the assessee to file the working/ the valuation report before the Ld. AO as per the mandate of section 56(2)(viib) of the Act r.w.r. 11UA of the R....
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....investors, the Appellant submits that the shares were subscribed by a reputed NBFC and a high net worth individual, Mr. R Prabhuram, whose return of income demonstrate the credit worthiness of the investors. 5.4.2 AO has questioned the calculation of FMV of the share premium as per Income Tax Rules. The appellant did not furnished any calculation of discounted cash flow method during the assessment proceedings. The AO has pointed out that the appellant is incurring regular loss in previous year. In light of this AO found the introduction of Rs. 59,49,06,130/- as share premium as unexplained money u/s 69A of the Act. To discuss it in detail, firstly the provision of section 56(2)(viib) of the Act, introduced by the Finance Act, 2012 w.e.f. 1-4-2013 and is applicable to A.Y. 2013-14 is to be examined. The applicable law as enunciated u/s. 56(2)(viib) of the Act, is reproduced for ease of reference: 56(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely: - (viib) where a company, not being a company ....
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....and will, accordingly, apply in relation to the assessment year 2013-14 and subsequent assessment years. The provision of the Act as well as the Memorandum for introduction of this provision made it explicit that if the consideration was received for issue of shares that exceeded the fair value of such shares, then the consideration received for such shares, as exceeding the fair market value of the shares, shall be chargeable to tax under the head income from other sources. There is no stipulation in the section that it will be applicable only in the case of receipt of any 'amount' or 'money' on account of share application money. Rather the word used in the section is 'any consideration for issue of shares' which has a very wide implication. 5.4.4 Further, about the prescribed method of valuation of shares during the year, it will be relevant here to reproduce the Explanation to Section 56(2)(viib) of the Act, which is as under: Explanation: - For the purposes of this clause,- (a) the "fair market value" of the shares shall be the value- (i) as may be determined in accordance with such method as may be prescribe....
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....hold that the application was not maintainable or the order passed thereon would be a nullity". Hence, the Hon'ble Supreme Court has held that the substance of the transaction and not the label of the Article governs the taxability. Therefore, in our considered opinion, mentioning of a wrong section would not invalidate the addition if the same is otherwise sustainable in law on the basis of material on record. Further, the financial position of the assessee, as brought on record by the Ld. DR, including continuous losses and doubts regarding going concern, also does not support the justification for issuance of shares at a substantial premium, particularly in the absence of any valuation report. In view of the present facts and circumstances, we are of the considered opinion that the assessee has failed to discharge the onus cast upon it under section 56(2)(viib) of the Act read with Rule 11UA of the Rules. Accordingly, we do not find any infirmity in the order of the Ld. CIT(A) in confirming the addition of Rs. 59,49,06,130/-. Accordingly, the ground no.2 of the appeal of the assessee is dismissed. 20. Without prejudiced to our above findings, it is also pertinent to note ....
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....ed before the Assessing Officer during assessment proceedings and without affording the Assessing Officer an opportunity to examine or verify the same, contrary to Rule 46A of the Income-tax Rules, 1962. 5. The Ld. CIT(A) failed to appreciate that, in the absence of a finding that the above evidences were part of the assessment record, reliance on such materials without affording an opportunity to the Assessing Officer to examine or verify the same is contrary to the procedure prescribed under Rule 46A of the Income-tax Rules, 1962. 6. The Ld. CIT(A) thus erred in law in granting relief on the issue of loss on sale of investment without proper verification of facts from the assessment records and without calling for a remand report or comments from the Assessing Officer, thereby rendering the appellate findings unsustainable in law. 7. The appellant craves leave to add to, alter, amend or withdraw any of the above grounds of appeal at the time of hearing. Sd/- (R NIYER) Dy. Commissioner of Income Tax, Circle-5(1), Hyderabad. 23. At the outset, the Ld. DR submitted that ground nos. 1 and 2 of the Revenue relate to the deletion made by the Ld....
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....apital, and board resolutions approving such allotment. The Ld. AR further submitted that ESOP is a recognized mode of compensating employees and the difference between the fair market value and the exercise price constitutes business expenditure. It was contended that the claim of the assessee is fully supported by the decision of the Hon'ble Karnataka High Court in the case of CIT v. Biocon Ltd (Supra), wherein it has been held that ESOP expenditure is allowable under section 37(1) of the Act. It was further submitted that merely because certain documents were not furnished in a particular format, the claim cannot be denied when the expenditure is otherwise genuine and incurred for business purposes. Accordingly, the Ld. AR prayed that the order of the Ld. CIT(A) be upheld. 25. We have carefully considered the rival submissions and perused the material available on record including the case laws relied upon. The issue for our consideration is whether the ESOP expenditure claimed by the assessee amounting to Rs. 9.68 crores is allowable under section 37(1) of the Act. There is no dispute with regard to the settled legal position that the discount on issuance of shares under....
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.... under the scheme, the employees are under an obligation to render their services to the company during the vesting period as provided in the scheme. On completion of the vesting period in the service of the company, the option vest with the employees. 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 decisions of the Supreme Court in Bharat Movers supra and Rotork Controls India P. Ltd., supra and has recorded a finding that discount on issue of ESOPs is not a contingent liability but is an ascertained liability. 10. From perusal o....
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....f expenditure claimed by the assessee cannot be correctly ascertained. We have also gone through the para no. 5.2.1 of the order of the Ld. CIT (A), which is to the following effect: 5.2.1 The Appellant has submitted that the requisite details such as the list of allotees, number of shares to be allotted to each employee, amount to be paid by the employees, board resolution copies in respect of such allotment, break-up of the ESOP cost etc. were submitted during the assessment. As per the appellant, through ESOPs, a company gets an assurance from its employee that they will render uninterrupted services during the vesting period, and as a quid pro quo the company undertakes to compensate the employees with a certain amount given in the form of discounted premium on the issuance of shares. In simple terms, an ESOP is an option and not an obligation, provided by a company to its employees, to purchase its shares at a future date at a pre-determined price. which is ordinarily less than the market price, on satisfaction of certain prescribed conditions. The appellant has placed reliance on the decisions of the Hon'ble Supreme Court ('SC') in the case of PC....
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....on sale of investment in subsidiary company, namely M/s Payswiff Pte. Ltd., Singapore. The Ld. DR submitted that during the year under consideration, the assessee had claimed loss on sale of investment in subsidiary company amounting to Rs. 21,92,36,162/- under the head "income from business", which has been disallowed by the Ld. AO. Inviting our attention to the relevant portion of page no.4 of the assessment order, the Ld. DR submitted that the Ld. AO disallowed the claim on the ground that the assessee failed to furnish proper evidences to substantiate the said loss. The Ld. DR further invited our attention to para nos. 5.3.1 and 5.3.2 of the order of the Ld. CIT(A) and submitted that the assessee had filed a valuation report from an independent valuer before the Ld. CIT(A) with regard to determination of fair market value of the subsidiary company. It was contended that the said valuation report was not filed before the Ld. AO and therefore constituted additional evidence. It was submitted that the Ld. CIT(A), without calling for a remand report from the Ld. AO as mandated under Rule 46A of the Income Tax Rules, 1962 ("the Rules"), proceeded to allow the claim of the assessee, ....
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.... Ld. CIT(A) has not relied upon the said valuation report while allowing the claim of the assessee. Accordingly, it was submitted that there is no infirmity in the order of the Ld. CIT(A). 30. We have considered the rival submissions and perused the material available on record including the case laws relied upon. In this regard, we have gone through para nos. 5.3.1 and 5.3.2 of the order of the Ld. CIT(A), which is to the following effect: 5.3.1 Appellant had claimed loss on sale of investments/loan amounting to INR 21,92,36,162. Out of the said amount, an amount of INR 2,12,048,145 pertains to loss on sale of investment/ loan to subsidiary and the balance amount of INR 71,88,018 pertains to other adjustments made in the profit and loss statement. As per the appellant, it had made investment/ extended loan in the subsidiary with the intention to expand Appellant's existing business in the international market i.e. it was made for the purpose of business and hence the disposal of such investments/ loan undertaken on account of commercial expediency, are also considered to be the purpose of such business. As per AO, the appellant had made investment....
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....argument and which was canvassed without prejudice need not detain us. 7. The Commissioner and the Tribunal concurrently found that the Camelot was fully owned subsidiary of the Assessee and engaged in the manufacturing of tooth brushes exclusively for the sole client namely the Assessee. Shares purchased of Camelot were also sold by the Assessee to one Ramesh Sukharam Vaidya for consideration of Rs. 45,00,000/-. The Assessing Officer held that the sum of Rs. 5,50,00,000/- which was invested by the Assessee in the equity of Camelot on 17 March 2003 and which have been used to repay the loan to the Assessee company, amounting to Rs. 5.5 crores, before 1 March 2003 would demonstrate that the purpose of investment was to give a Long Term Enduring Benefit to the Assessee. Merely because it was made in the normal course of business, it cannot be termed as anything but long term investment. This conclusion of the Assessing Officer was challenged in the Appeal before the First Appellate Authority and the Commissioner concluded that the main reason for setting up Camelot was to manufacture tooth brushes exclusively for the Assessee. Since the Assessee was relying on Camelot for ma....
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....as made with an intention to realise any enhancement value thereof or to earn dividend income and the investment was made to separately house the integral part of the business activity. Hon ble Court held in favour of the assessee allowing the claim of business loss of Rs. 5.50 crore towards the writing off of investment made in the Equity of Camelot Investment Pvt. Ltd. 31. On perusal of the above, we find that the Ld. CIT(A) has recorded the fact that the assessee had submitted valuation report before him. Therefore, the contention of the Ld. AR that the Ld. CIT(A) has not considered the valuation report is factually not correct and the same is not acceptable. Further, we find that the valuation report, which constitutes additional evidence, was admittedly filed before the Ld. CIT(A). However, the Ld. CIT(A) has not called for a remand report from the Ld. AO as mandated under Rule 46A of the Rules. Thus, the Ld. CIT(A) has violated the statutory provisions contained in Rule 46A of the Rules as well as the principles of natural justice. Furthermore, there is no dispute with regard to the settled legal position that if the investment is made in a subsidiary company on account of....
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....022 03/01/2022 9108279 9308773 ORIGNAL 65183 Poursh Kumar Mehrotra AAGPMINCE 8450941 4450943 11/01/2022 11/01/2022 1522543 1127548 OREAUML 65183 Phani Eran Movva 192 1021823 11/01/2022 11/01/2022 1729489 65183 Praneeth Chunta AAMPC4726M 1582027 1512027 01/01/2022 31/01/2022 477992 477993 ORIGNAL 69828: 11/01/2022 31/01/2022 212048 65383 ARICE PRADEEP KUMAR AUSPASSAR 192 2794779 31/01/2022 01/01/2072 65383 THARUN KUMAR MALLAVARAPU 192 309943 31/01/2022 01/01/2022 104 65183 ME RAO AIAPGISMOC 098283 01/01/2022 01/01/2022 217063 217063 ORIGINAL 21518848 11/01/2022 01/01/2022 8198201 ORIGINAL 65 183 MUKÄ° Ä°HSINGH OMPRAKASHSINGH RATHAUR ASVPR4PILA 149547 01/01/2022 31/01/2022 04 65383 Prateek Rathi AQXP453410 522301 522101 01/01/2021 01/01/2022 16:1020 ORGNA 65383 VÃ ath Chaturbrd 690281 11/01/2022 09/21/2022 04 65183 RANGA RAO SANIVAS BCGPS1513M 192 149947 349947 01/01/2022 01/01/2022 309181 109183 CAIGNAL 994378 11/01/2042 31/01/2022 285286 281286 ORIGINAL 04 65IRI CHEERALA SAIOMAR 192 699096 11/91/2022 01/01/2022 218347/ORIGNAL A/VP:16421 1198174 31/01/2022 01/01/2022 436230 4362 1....
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....sion along with evidence has been made in this regard. In absence of evidence, you have to show cause why Loan and advances of Rs. 13,66,71,529/- may not be treated as unexplained. Please also furnish the details alongwith evidence of interest received from these Loans and advances given. You were asked to furnish the details of compensation paid to employees. In this regard, you have not submitted complete details of Form 24Q, 26Q etc. so that payment made to employees could not be verified. Therefore, in absence of evidence, you have to show cause why the amount of Rs. 20,20,55,667/- claimed as expenditure may not be disallowed. Gr.1 Document 4 You were asked to furnish the explanation regarding the Loss on sale of Investments of Rs.21,92,36,162/-, but no proper reply about which circumstances loss was incurred. You have also not filed the Fair Market value of shares and calculation of determination of loss incurred. In absence of proper explanation alongwith the substantiating evidences, You have to show cause why the amount of Rs.21,92,36,162/- may not be disallowed and added back to your Total Income. In this regard, you are also required to furnish the Copy of Bank ....