TaxTMI 
TaxTMI 
2026 (8) TMI 964
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.... issued and served on the assessee. Thereafter, notice u/s. 142(1) along with a questionnaire was also issued and served on the assessee in response to which the assessee filed the requisite details from time to time. 3. During the course of assessment proceedings the Assessing Officer noted that the assessee has debited Rs. 37,66,77,026/- on account of depreciation u/s. 32 on goodwill. He noted that this issue is a legacy issue which has been the subject matter of litigation in earlier years. He observed that there is no change in fact or business model. He, therefore, following the principle of consistency asked the assessee to provide detailed break-up of the depreciation claimed on intangible assets. Rejecting the various explanations given by the assessee, the Assessing Officer made addition of Rs. 37,66,77,026/- on account of depreciation on goodwill by observing as under: 3.3. I have considered the submissions of the assessee which are not acceptable because of the following reasons. In this regard the following observations are made: - In the judgment delivered by the Hon'ble Supreme Court in the case of Commissioner of Income Tax v. Smifs Ltd., Civ....
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....3.4 In view of the above, the undersigned is left with no alternative but to make an addition of Rs. 37,66,77,026/- on account of depreciation on goodwill is being made to the total income. Having regard to the nature of addition made to the declared income as discussed above, I am satisfied that the assessee company has furnished inaccurate particulars of its income on this issue. Hence, penalty proceedings u/s. 270 A of the Act are also initiated for under reporting which is in consequence of misreporting of income. (Addition of Rs. 37,66,77,026/-) 4. The Assessing Officer similarly noted that the assessee has claimed a total stock option expenses of Rs. 24,99,16,706/- which has been debited to Profit and Loss Account of the assessee. This relates to ESOPs given to the employees of the assessee. He, therefore, asked the assessee to explain as to why the ESOP expenses should not be disallowed and added back to the income of the assessee since it is not an allowable expenditure. The assessee in response to the same filed its submission which has been reproduced by the Assessing Officer at para 4.1 of his order which reads as under: 4.1. The submission of the assessee....
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....ion of the specified conditions as agreed under the plan. Date of vesting refers to the dale on which the employee has unconditional right to receive cash or shares under the ESOP scheme. Vesting period is the period between the grant date and the vesting date. The third stage is termed as 'exercise'. It means making of an application by the employee to the employer for issue of shares against the option vested in him. The last stage is characterized by the sale of these shares which entails capital gains lax. 3. Hon'ble Bangalore bench of ITAT in the case of Biocon Ltd vs. DCIT (144 ITD 21) has mentioned that the actual amount of employee costs to the company could be finally determined only at the time of the exercise of the options or when the options remained unvested or lapsed at the end of the exercise period." 4. There is no specific section under which ESOP expenditure is allowable under the Income Tax Act 1961 ('Act'). The only provision where a company can claim the expenditure is section 37 of the Act. Hence, it is pertinent to lest the conditions mentioned in section 37 in order to conclude whether the expenditure is allowable. Sect....
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....s DCIT (144 ITD 21, has also been challenged in the | Ugh Court and is pending. 14. ESOP is considered a part of salary and since the assessee has claimed the expenses on account of ESOP in salary and payment was made to non- resident without deduction of TDS, it cannot allowed u/s. 40(a) of Income-tax Act. 1961. 4.3. Since, the assessee has failed to bring on record any objective evidence for the justification of the same and has filed merely a subjective explanation. Hence an amount of Rs. 24,99,16,706/-is disallowed and added back to the income of the assessee Company. Having regard to the nature of addition made to the declared income as discussed above. I am satisfied that the assessee company has furnished inaccurate particulars of its income on this issue. Hence, penalty proceedings u/s. 270 A of the Act are also initiated for under reporting which is in consequence of misreporting of income. (Addition of Rs. 24,99,16,706/-) 6. In appeal, the Ld. CIT(A) / NFAC, following the decision of the Tribunal in assessee's own case for the preceding assessment years, deleted both the additions. So far as the disallowance of goodwill on depreciation is conce....
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....e block of assets" shall have the same meaning as in section 43 (6)(c). This section lays down the meaning of the term "written down value", as under: 43(6) "written down value" means- (a) in the case of assets acquired in the previous year, the actual cost to the assessee; (b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act, or under the Indian Income-tax Act, 1922 (11 of 1922), or any Act repealed by that Act, or under any executive orders issued when the Indian Income-tax Act, 1886 (2 of 1886), was in force: Provided that in determining the written down value in respect of buildings, machinery or plant for the purposes of clause (ii) of sub-section (1) of section 32, "depreciation actually allowed" shall not include depreciation allowed under sub-clauses (a), (b) and (c) of clause (vi) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922 (11 of 1922), where such depreciation was not deductible in determining the written down value for the purposes of the said clause (vi); (c) in the case of any block of assets, ....
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....y by any other --- person or authority. Explanation 7 of section 43(1) reads as below: Explanation 7. - Where, in a scheme of amalgamation, any capital asset is transferred by the amalgamating company to the amalgamated company and the amalgamated company is an Indian company, the actual cost of the transferred capital asset to the amalgamated company shall be taken to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the purposes of its own business. 57. In the case before us, goodwill was transferred by the amalgamating company (FSL and FSSL) to amalgamated company (assessee). According to this explanation, the 'actual cost' of goodwill to the amalgamated company (i.e the assessee) shall be same as it would have been if the amalgamating companies (FSL and FSSL) had continued to hold the capital asset (i.e. goodwill) for the purpose of its own business. Since the actual cost of goodwill in the case of amalgamating companies is zero, the actual cost in the case of amalgamated company (i.e. assessee) shall also be zero (and not the amount it paid to acquire the goodwill). 58. To clarify furthe....
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.... in the hands of the amalgamating companies the depreciation on goodwill would have been zero there cannot be deprecation in the hand of the amalgamated company. In support reliance was placed on the decision of the coordinate bench of the Tribunal Bangalore in ITA No.722, 801 and 1065/ Bang/ 2014. Once again the DR is not appreciating the facts of the case in hand in their true perspective. It has to be understood that there was no goodwill in the books of amalgamating companies and only after the scheme of amalgamation, when the amalgamating companies amalgamated, goodwill came into existence being the difference between the consideration paid by amalgamated company over and above the net asset value of the amalgamating companies. The reliance placed on the judgment of coordinate bench is misplaced in as much as in that case the value of the goodwill in the books of amalgamating company was only Rs. 7.45 crores which has been shown by the assessee at Rs. 62.30 croes and on this it was held by the appellate authority that the assessee has failed to justify the valuation of goodwill at Rs. 62.30 crores. The facts of the case in hand clearly show the valuation of goodwill as per the....
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....identical issue, the depreciation on goodwill amounting to Rs. 37,66,77,206/- is allowed u/s. 32 of the Act. Accordingly, the disallowance made by the AO is deleted, and Ground No. 2 stands ALLOWED. 7. So far as the disallowance of ESOP expenses is concerned, he deleted the same by observing as under: 9. Ground No. 3 relates to the disallowance of ESOP expense claimed by the appellant. The AO disallowed the employee compensation expense on the grounds that it was not incurred wholly and exclusively for the purposes of the business and did not represent a crystallized liability. The AO also treated ESOP as part of salary and held that, since no tax was deducted at source, the claim was disallowable u/s. 40(a) of the Act. 9.1. During the course of appellate proceedings, the appellant has submitted that the Hon'ble ITAT Delhi vide ITA No. 7637[Del/2018 dt. 29.11.2019 allowed the claim of disallowance of ESOP expense in appellant's own case for AY 2014-15. The relevant extract of the Hon'ble ITAT's order is reproduced as under :- "104. The issue raised in Ground of appeal Nos. 4 to 4.6 is against the disallowance of ESOP expenses of Rs. 6.5....
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....d by the Assessing Officer in the final assessment order. 108. The assessee is in appeal against the order of the Assessing Officer. 109. It was pointed out by the Ld.AR for the assessee that the fair market value of the shares was USD 0.77 dollars per share and options were exercised at USD 0.01 per shares. The difference was reimbursed to the AE in Cayman Island. Since the liability accrued /crystallized during the year and as the assessee was following mercantile system of accounting then the same is to be allowed as a deduction u/s. 37(1) of the Act. In this regard reliance was placed on the following decisions :- [i] CIT vs M/s PVP Ventures Ltd. 211 Taxman 554 (Madras High Court); [ii] CIT vs Lemon Tree Hotels Ltd. 104 taxmann.com 26 (Delhi High Court); and [iii] Biocon Limited vs DCIT 155 TTJ 649 (Banglore) (Special Bench) 110. It was also pointed out that the Assessing Officer has placed reliance on the decision of Special Bench but u/s. 192 r.w.s 17(2), when the option is exercised by the employee, then tax is to be deducted at source. 111. The Ld.DR for the Revenue placed reliance on the order of the Assessing ....
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....f the Act. 116. Further, the Special Bench in Biocon Ltd. vs DCIT (supra) held that discount on issue of ESOP, i.e. the difference between the market price of shares on date of exercise was deductible as business expenditure, since the same represents consideration/compensation for services rendered by employees. The Special Bench observed that the company incurs obligation of issuing shares at a discounted price on a future date in lieu of services rendered by the employees, which is allowable as deduction under section 37(1) of the Act. The Special Bench further held that the said discount was an ascertained liability, since the employer incurred obligation to compensate the employees over the vesting period, notwithstanding the fact that the exact amount of discount which is quantified only at the time of exercising the options. 117. Following the same parity of reasoning, we hold that the said expenses are allowable as a business expenditure in the hands of the assessee. 118. Now coming to the second aspect of the case that whether aforesaid payment requires tax deduction or not. The requirement to deduct tax would arise when the employee exercises the option ....
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....nsidered as expenditure, it could only be in the nature of capital expenditure. 5. On the facts and circumstances of the case and in law, the Ld. CIT(A) is not justified by ignoring the fact that the said ESOP expenses are part of salary paid without deduction of TDS, is not allowed as per section 40(a) of the Act. 6. The appellant craves to add amend, alter or delete the above ground of appeal during the course of appellate proceeding before the Hon'ble Tribunal. 9. We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and Ld. CIT(A) / NFAC and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. Grounds of appeal No.1 and 2 by the Revenue relate to the order of the Ld. CIT(A) / NFAC in deleting the depreciation on goodwill of Rs. 37,66,77,206/ -. 10. After hearing both the sides, we find this issue is consistently being decided by the Tribunal in assessee's own case from assessment year 2008-09 onwards. We find the Tribunal vide ITA Nos.90/DEL/2013 and 2671/DEL/2014 order dated 26.07.2019 for assessment years 2008-09 and 2009-10 respectively ha....
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....ed. Ground number 14 is accordingly disposed off." 15. We find, following the above directions, the Assessing Officer in the final assessment order dated 31.03.2022 for assessment year 2017-18 has allowed the claim of depreciation on goodwill. Since the Ld. CIT(A) / NFAC while deleting the disallowance made by the Assessing Officer on account of goodwill has followed the consistent decisions of the Tribunal in assessee's own case for the preceding years, therefore, we do not find any infirmity in the order of the Ld. CIT(A) / NFAC allowing the claim of depreciation on goodwill. Accordingly the same is upheld. 16. So far as the decision of the Coordinate Bench of the Tribunal in the case of Aptara Technologies Private Limited vs. DCIT vide ITA No.63/PUN/2020 order dated 17.02.2026 for assessment year 2015-16 relied on by the Ld. CIT-DR is concerned, we find the facts in that case are different from that of the facts of the present case. In that case, the Assessing Officer, the Ld. CIT(A) as well as the Tribunal have given a finding that the transaction between the assessee and the holding company was a mere colourable transaction and in the garb of inflating the value of a....