Bajaj Finance Ltd, Pune V. Deputy Commissioner of Income-tax, Circle - 8, Pune

ITA 1392/PUN/2018

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 1509 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 11 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 03-09-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Non-deduction of tax
• Section: 37(1); 201

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH, PUNE BEFORE SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER AND SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER ITA No. 1392 & 1393/PUN/2018 A.Y. 2010-11 & 2011-12 Bajaj Finance Ltd., 3 rd floor, Panchshil Tech Park, Plot No. 43/1, 43/2, 44/2, Viman Nagar PUNE – 411 014 PAN: AABCB 1518 L Appellant Vs. The Dy. CIT Circle 8, Pune. Respondent Appellant by : Shri Percy Pardiwalla, Sr. Advocate And Ms. Vasanti B. Patel Respondent by : Shri Ramnath P. Murkunde Date of Hearing : 26-08-2022 Date of Pronouncement : 29-08-2022 ORDER PER PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER These appeals preferred by the assessee emanates from separate orders of the ld. Commissioner of Income Tax (Appeals)-6, Pune, both dated 30-07-2018 for the Assessment Years 2010-11 & 2011-12 as per the following grounds of appeal. ITA No. 1392/PUN/2018 for .Y. 2010-11 “Based on the facts and in the circumstances of the case, Bajaj Finance Ltd (the Appellant‟) respectfully submits CIT(A)-6 Pune [CIT(A)] erred in disposing the appeal of the Appellant on the following ground which is without prejudice to each other. 1. Ground No. 1 – Not allowing deduction in respect of Employee Stock Options („ESOP‟) expenditure. 1.1 The CIT(A) erred in not allowing deduction in respect of ESOP expenditure of Rs. 1,33,64,340/- u/s 37(1) of the Act. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing of the appeal, so as to enable the Hon‟ble Tribunal to decide this appeal according to law. 2 ITA 1392 & 1393/PUN/2018 Bajaj Finance Ltd. .Y. 2010-11 & 2011-12 ITA No. 1393/PUN/2018 for A.Y. 2011-12 “Based on the facts and in the circumstances of the case, Bajaj Finance Ltd (the Appellant‟) respectfully submits CIT(A)-6 Pune [CIT(A)] erred in disposing the appeal of the Appellant on the following ground which is without prejudice to each other. 1. Ground No. 1 – Not allowing deduction in respect of Employee Stock Options („ESOP‟) expenditure. 1.1 The CIT(A) erred in not allowing deduction in respect of ESOP expenditure of Rs. 2,60,65,287/- u/s 37(1) of the Act. 1.2 the CIT(A) has further erred in not allowing deduction for ESOP expenditure on the basis of the perquisite value taxed in the hands of employees in respect of options exercised by them during the year, to the extent such expenditure is not allowed on accrual basis in earlier years. 1.3 Without prejudice to Ground 1.1, the CIT(A) erred in not allowing deduction under 37 for ESOP expenditure equivalent to the entire perquisite value taxed in the hands of employees on exercise of options during the year. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing of the appeal, so as to enable the Hon‟ble Tribunal to decide this appeal according to law. 2. At the time of hearing, the ld. Sr. Counsel appearing for the assessee and the ld. D.R submitted that in respect of both these appeals, the facts and circumstances are similar and grounds are identical. Therefore, having heard the parties, these cases were heard together and disposed of by this consolidated order. 3. We would first adjudicate appeal in ITA No. 1392/PUN/2018 for A.Y. 2010-11. The only ground is with regard to not allowing deduction by the ld. CIT(A) in respect of Employee Stock Options (ESOP) expenditure of Rs. 1,33,64,340/- u/s 37 sub-clause (1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”. The ld. Sr. Counsel for the assessee submitted that in the first round of litigation the Pune Tribunal in assessee‟s own case in ITA No. 579/PUN/2014 for A.Y. 2010-11, order dated 11-04-2016 had remanded this issue back to the file of the A.O to consider the claim of the assessee in the light of decision of Special Bench Bangalore Tribunal in the case of Biocon 3 ITA 1392 & 1393/PUN/2018 Bajaj Finance Ltd. .Y. 2010-11 & 2011-12 Ltd., in (2013) 35 taxmann.com 335 (Bangalore – Trib) (SB). The relevant paragraphs of Tribunal‟s order are extracted as follows: “32. The assessee raised additional ground as ground no. 4 on account of claim of deduction in respect of Employee Stock Options (ESOP) expenditure of `1,33,64,340/-. The ld. AR submitted that the assessee is a listed company and issued stock options with a ceiling of 5% of the issued equity capital of the company to its employees pursuant to Employee Stock Option Scheme 2009. The said scheme was formulated in accordance with the SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) guidelines, 1999. The assessee as a matter of abundant caution did not claim deduction of ESOP expenditure of `1,33,64,340/- in its return of income for assessment year 2010-11 in view of conflicting decisions of various Benches of the Tribunal on the issue. Now, in the light of Bangalore Special Bench decision in the case of Biocon Limited Vs. DCIT reported as 25 ITR (Trib.) 602 the additional ground of appeal is raised before Tribunal for claiming ESOP expenditure as a tax deductible expense. 33. On the other hand ld. DR submitted that the assessee raised this issue first time before the Tribunal. The ld. DR submitted that the expenditure was never claimed by the assessee. Therefore, the same is not allowable. 34. Both sides heard. It is an admitted fact that the assessee has claimed ESOP expenditure for the first time before the Tribunal. The Hon'ble Supreme Court of India in the case of Goetze (India) Ltd. Vs. CIT has held that the powers of the Appellate Tribunal are not impinged to accept the claim of assessee which has not been made before the Assessing Officer. We deem it appropriate to remit this issue back to the file of Assessing Officer to consider the claim of the assessee in the light of decision of Special Bench of the Bangalore Tribunal in the case of Biocon Limited (supra). The assessee shall file fresh computation of income before the Assessing Officer. The Assessing Officer shall consider the same and decide the claim of assessee in accordance with law. Accordingly, this ground of appeal of the assessee is allowed for the statistical purpose.” 4. Therefore, as per the remand proceedings and judicial discipline, the A.O should have only restricted himself in following the direction of the Tribunal in deciding the issue only on the basis of Special Bench decision in the case of Biocon Ltd (supra). However, we find that the A.O while adjudicating on this issue in his order from para 5 onwards has in effect tried to distinguish the Special Bench decision in the case of Biocon Ltd (supra) and has also referred to Delhi ITAT decision in the case of ACIT Vs. Ranbaxy Laboratories in ITA 2613 and 3871/Del/. The A.O has also commented that there is no jurisdictional High Court decision that has been placed before him. Thereafter, at para 7.3 in his order, he opines that ESOP claim of the assessee is not as per the guidelines issued by the Special Bench decision in the case of Biocon Ltd 4 ITA 1392 & 1393/PUN/2018 Bajaj Finance Ltd. .Y. 2010-11 & 2011-12 (supra) on which the assessee has placed reliance. According to the A.O the assessee has not clarified on this issue. In view of the discussion, the claim of deduction of ESOP expenditure amounting to Rs. 1,33,64,340/- was disallowed by the A.O. We find that in the order of the Tribunal (supra) it has been clearly mentioned that the A.O has to adjudicate the issue in the light of the Special Bench decision Bangalore whereas the A.O has gone beyond and has tried to distinguish the judgment itself along with other cases which is not in accordance with the judicial decorum. We find that the Hon‟ble Calcutta High court in the case of Surrendra Overseas Ltd. Vs. CIT in Income-tax Reference No. 406 of 1975 - (1979) - 120 ITR 872 (Cal) wherein the facts were that the assessee preferred appeals before the Appellate Assistant Commissioner (hereinafter referred to as “the AAC” for short) against the additions made on account of hundi loans. The AAC remanded the matter for fresh consideration. While acting under AAC‟s directions the A.O withdrew development rebate allowed in respect of two ships on the ground that the assessee had sold those ships within a period of eight years from the date of acquisition. The Tribunal held that the ITO was justified in considering admissibility of rebate while acting under AAC‟s direction. Now, before the High Court a question was when specific direction has been given to the ITO by AAC to re-examine the question of genuineness of hundi loans only in such circumstances the ITO had no jurisdiction to consider the admissibility or otherwise of development rebate and it was held by the Hon‟ble High Court that the only issue which the ITO could have examined was as per what the AAC has directed him to look into and nothing further. Reverting to the facts of the present case taking guidance from the aforesaid decision, the A.O should have decided the issue taking the guidance from the Special Bench decision (supra) as has been directed by the Tribunal in the first round of litigation. Now, we find that the Special Bench 5 ITA 1392 & 1393/PUN/2018 Bajaj Finance Ltd. .Y. 2010-11 & 2011-12 Bangalore in the case of Biocon Ltd (supra) on the issue have held the discount on ESOP being a general expense, is an allowable deduction u/s 37(1) of the Act during the years of vesting on basis of percentage of vesting during such period subject to upward or downward adjustment at the time of exercise of option. When this issue was decided in favour of the assessee, the department took up this matter before the Hon‟ble Karnataka High Court in the case of CIT LTU vs. Biocon Ltd ((2020) in ITA No. 653 of 2013 - 121 taxman.com 351 (Karnataka). The Hon‟ble Karnataka High court analysed the facts involving the issue and the background of the case as follows: “2. Facts leading to filing of this appeal briefly stated are that the assessee is a company engaged in the business of manufacture of Enzymes and Pharmaceuticals Ingredients. The assessee filed its return of income for the Assessment Year 2004-05 on 31.10.2004 declaring total income of Rs.50,65,18,080/-. The case was selected for scrutiny by the Assessing Officer. The Assessing Officer by an order dated 29.12.2006 inter alia held that assessee has floated a scheme viz., Employees Stock Option Plans (ESOP) and under the scheme had constituted the Trust. The shares of the company were transferred to the trust at the face value and the employees of the assessee were allowed to exercise the option to buy the shares within the time prescribed under the scheme subject to terms and conditions mentioned therein. The assessee claimed the difference of market price and allotment price as a discount and claimed the same as an expenditure under Section 37 of the Act. The Assessing Officer rejected the claim on the ground that the assessee has not incurred any expenditure and the expenditure is contingent in nature and therefore, the assessee is not entitled to claim the difference between the market price and the allotment price as an expenditure under Section 37 of the Act. The assessee thereupon filed an appeal before the Commissioner of Income Tax (Appeals) who by an order dated 13.11.2009 dismissed the appeal preferred by the assessee. 3. The assessee thereupon filed an appeal before the Income Tax Appellate Tribunal (hereinafter referred to as 'the tribunal' for short). The division bench of the tribunal made a reference to the special bench. The special bench referred the question 'whether discount on the issue of employees for options is allowable as deduction in computing the income under the head 'profits and gains' of business'?. The Special bench of the tribunal by an order dated 16.07.2013 while answering the reference inter alia held different amount of between the market value and the face value at which shares are allotted are part of remuneration, which are paid to the employees in order to compensate them for the continuity of their services to the company and therefore, the same is allowable as an expenditure under Section 37 of the Act. It was further held that the expenditure is not contingent in nature. The appeal preferred by the assessee was directed to be placed before the division bench for decision in the light of findings recorded by the special bench. In the aforesaid factual background, the revenue has filed this appeal.” 5. Thereafter, the Hon‟ble High court has held as follows: 6 ITA 1392 & 1393/PUN/2018 Bajaj Finance Ltd. .Y. 2010-11 & 2011-12 6. We have considered the submissions made by learned counsel for the parties and have perused the record. The singular issue, which arises for consideration in this appeal is whether the tribunal is correct in holding that discount on the issue of ESOPs i.e., difference between the grant price and the market price on the shares as on the date of grant of options is allowable as a deduction under Section 37 of the Act. Before proceeding further, it is apposite to take note of Section 37(1) of the Act, which reads as under: Section 37(1) says that any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head, "Profits and Gains of Business or Profession". 7. Thus, from perusal of Section 37 (1) of the Act, it is evident that the aforesaid provision permits deduction for the expenditure laid out or expended and does not contain a requirement that there has to be a pay-out. If an expenditure has been incurred, provision of Section 37(1) of the Act would be attracted. It is also pertinent to note that Section 37 does not envisage incurrence of expenditure in cash. 8. Section 2(15A) of the Companies Act, 1956 defines 'employees stock option' to mean option given to the whole time directors, officers or the employees of the company, which gives such directors, officers or employees, the benefit or right to purchase or subscribe at a future rate the securities offered by a company at a free determined price. In an ESOP a company undertakes to issue shares to its employees at a future date at a price lower than the current market price. The employees are given stock options at discount and the same amount of discount represents the difference between market price of shares at the time of grant of option and the offer price. In order to be eligible for acquiring shares 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 of Section 37(1), which has been referred to supra, it is evident that an assessee is entitled to claim deduction under the aforesaid provision if the expenditure has been incurred. The expression 'expenditure' will also include a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which it is issued and the market value of the shares would also be expenditure incurred for the purposes of Section 37(1) of the Act. The primary object of the aforesaid exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, the same cannot be construed as short receipt of capital. The tribunal therefore, in paragraph 9.2.7 and 9.2.8 has rightly held that incurring of the expenditure by the assessee entitles him for deduction under Section 37(1) of the Act subject to fulfilment of the condition. 7 ITA 1392 & 1393/PUN/2018 Bajaj Finance Ltd. .Y. 2010-11 & 2011-12 11. The deduction of discount on ESOP over the vesting period is in accordance with the accounting in the books of accounts, which has been prepared in accordance with Securities And Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. 12. So far as reliance place by the revenue in the case of CIT VS. INFOSYS TECHNOLOGIES LTD. is concerned, it is noteworthy that in the aforesaid decision, the Supreme Court was dealing with a proceeding under Section 201 of the Act for non-deduction of tax at source and it was held that there was no cash inflow to the employees. The aforesaid decision is of no assistance to decide the issue of allowability of expenses in the hands of the employer. It is also pertinent to mention here that in the decision rendered by the Supreme Court in the aforesaid case, the Assessment Year in question was 1997-98 to 1999- 2000 and at that time, the Act did not contain any specific provisions to tax the benefits on ESOPs. Section 17(2)(iiia) was inserted by Finance Act, 1999 with effect from 01.04.2000. Therefore, it is evident that law recognizes a real benefit in the hands of the employees. For the aforementioned reasons, the decision rendered in the case of Infosys Technologies is of no assistance to the revenue. The decisions relied upon by the revenue in Gajapathy Naidu, Morvi Industries and Keshav Mills Ltd. supra support the case of assessee as the assessee has incurred a definite legal liability and on following the mercantile system of accounting, the discount on ESOPs has rightly been debited as expenditure in the books of accounts. We are in respectful agreement with the view taken in PVP Ventures Ltd. And Lemon Tree Hotels Ltd. Supra. 13. It is also pertinent to mention here that for Assessment Year 2009-10 onwards the Assessing Officer has permitted the deduction of ESOP expenses and in view of law laid down by Supreme Court in Radhasoami Satsang vs. CIT, (1992) 193 ITR 321 (SC), the revenue cannot be permitted to take a different stand with regard to the Assessment Year in question. In view of preceding analysis, the substantial questions of law framed by a bench of this court are answered against the revenue and in favour of the assessee. In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed.” 6. We find that Ranbaxy Laboratories‟ judgment which has been referred to by the department was also considered in the aforesaid judicial pronouncement. The decision of the Special Bench Bangalore has been upheld by the Hon‟ble Karnataka High court (supra) and it has been categorically held that the expenditure on ESOP entitles the assessee for deduction u/s 37(1) of the Act. Respectfully following the aforesaid judicial pronouncement we allow the ground of appeal of the assessee. In the result, the appeal of the assessee in ITA 1392/PUN/2018 for A.Y. 2010-11 is allowed. 7. Both the parties, at the time of hearing, submitted that this issue also finds place in ITA No. 1393/PUN/2018. Under similar facts and circumstances therefore, having heard the parties, our decision on this issue in ITA No. 8 ITA 1392 & 1393/PUN/2018 Bajaj Finance Ltd. .Y. 2010-11 & 2011-12 1392/PUN/2018 for A.Y. 2010-11 except for the amounts involved shall apply mutatis mutandis also for ITA No. 1393.PUN/2018 for A.Y. 2011-12. Accordingly, the ground No. 1.1 of assessee‟s appeal is allowed. 8. The ld. Sr. Counsel further submitted that if Ground No. 1.1 is allowed, then ground No. 1.3 would become infructuous. Since we have decided the said ground No. 1.1 in favour of the assessee, therefore, taking the submissions of the ld. Sr. counsel ground No. 1.3 is dismissed as infructuous. 9. Ground No. 1.2 reads as follows: .2 the CIT(A) has further erred in not allowing deduction for ESOP expenditure on the basis of the perquisite value taxed in the hands of employees in respect of options exercised by them during the year, to the extent such expenditure is not allowed on accrual basis in earlier years. 10. This issue has also been dealt with by the Special Bench decision in the case of Biocon Ltd (supra). The Tribunal held as follows: 11.1.5. The other side of the coin is the amount of remuneration to the employees in the hands of the company. We have noticed earlier that an expense becomes deductible on the incurring of liability under the mercantile system of accounting. Although the stage of taxability of perquisite in the hands of the employee may differ from the stage of the deductibility of expense in the hands of the company depending upon the method of account followed by the company, but the amount of such discount or employees remuneration can never be different. If the value of perquisite in the hands of the employee, whether or not taxable, is `x', then its cost in the hands of the company has also to be `x'. It can neither be `x+1' nor `x-1'. It is simple and plain that the amount of remuneration which percolates to the employees will always be equal to the amount flowing from the company and such remuneration to the employee in the present context is the amount which he actually becomes entitled to on the exercise of options. Thus, it is palpable that since the remuneration to M/s.Biocon Limited. the employees under the ESOP is the amount of discount w.r.t. the market price of shares at the time of exercise of option, the employees cost in the hands of the company should also be w.r.t. the same base. 11.1.6. The amount of discount at the stage of granting of options w.r.t. the market price of shares at the time of grant of options is always a tentative employees cost because of the impossibility in correctly visualizing the likely market price of shares at the time of exercise of option by the employees, which, in turn, would reflect the correct employees cost. Since the definite liability is incurred during the vesting period, it has to be quantified on some logical basis. It is this market price at the time of the grant of options which is considered for working out the amount of discount during the vesting period. But, since actual amount of employees cost can be precisely determined only at the time of the exercise of option by the employees, the provisional amount of discount availed as deduction during the vesting period needs to be adjusted in the light of the actual discount on the basis of the market price of the shares at the time of exercise of options. It can be done 9 ITA 1392 & 1393/PUN/2018 Bajaj Finance Ltd. .Y. 2010-11 & 2011-12 by making suitable northwards or southwards adjustment at the time of exercise of option. This can be explained with the following example with the assumption of vesting period of four years and the benefit vesting at 25% each at the end of 1st to 4th years:- At the time of granting option At the time of exercise of option Situation I Situation II Situation III Market value per share 110 110 130 90 Option price 10 10 10 10 Employees compensation or discount 100 100 120 80 11.1.7. From the above table it can be noticed that the market price of the shares at the time of grant of option was Rs. 110 against the option price of `10, which resulted in discount at `100. With the vesting period of four years with the equal vesting, the company can rightly claim deduction at the rate of Rs. 25 each at the end of first, second, third and fourth year of vesting. But this total deduction for discount of Rs. 100 over the vesting period needs to be adjusted at the time of exercise of option by the employee when the shares are issued. In Situation I, the market price of shares at the time of exercise of option is at Rs. 110, which is similar to the market price at the time of grant of option. As the total amount of discount of Rs. 100 over the vesting period is actually quantified at Rs. 100, no further adjustment to the discount is required at the time of exercise of option. In Situation II, the market price of the share at the time of exercise of option has gone up to Rs. 130. The amount of real compensation to employee is Rs. 120 as against the tentative compensation of Rs. 100 per share which was accounted for and allowed as deduction during the vesting period. As the actual quantification of the compensation has turned out to be Rs. 120, the company is entitled to a further deduction of Rs. 20 at the time of exercise of option. In Situation III, the market price of the share at the time of exercise of option has come down to Rs. 90. The amount of real compensation to employees is Rs. 80 as against the tentative compensation of `100, which was allowed as deduction during the vesting period. As the actual quantification of the compensation has turned out to be Rs. 80, the company is liable to reverse the deduction of Rs. 20 at the time of exercise of option.” 11. Having heard the parties, this ground is allowed as per the aforesaid terms of decision of the Special Bench. 12. There is an additional ground with regard to Education Cess. The ld. Sr. Counsel submits that they are not pressing this additional ground. Having heard the submissions, this additional ground is dismissed as not pressed. 13. In the combined result, assessee’s appeal in ITA No. 1392/PUN/2018 is allowed and appeal in ITA No. 1393/PUN/2018 is partly allowed. 10 ITA 1392 & 1393/PUN/2018 Bajaj Finance Ltd. .Y. 2010-11 & 2011-12 Order pronounced in the open Court on this 29 th August 2022. Sd/- sd/- (INTURI RAMA RAO) (PARTHA SARATHI CHAUDHURY) ACCOUNTANT MEMBER JUDICIAL MEMBER Pune; Dated, the 29 th August , 2022 Ankam Copy of the Order forwarded to : 1. The Appellant. 2. The Respondent. 3. The CIT – (A)-6 Pune 4. Pr. C.I.T. 5, Pune 5. D.R. ITAT „A‟ Bench 5. Guard File BY ORDER, /// TRUE COPY /// Sr. Private Secretary ITAT, Pune. 11 ITA 1392 & 1393/PUN/2018 Bajaj Finance Ltd. .Y. 2010-11 & 2011-12 1 Draft dictated on 26-08-2022 Sr.PS/PS 2 Draft placed before author 29-08-2022 Sr.PS/PS 3 Draft proposed and placed before the second Member JM/AM 4 Draft discussed/approved by second Member AM/JM 5 Approved draft comes to the Sr. PS/PS Sr.PS/PS 6 Kept for pronouncement on 29-08-2022 Sr.PS/PS 7 Date of uploading of order 29-08-2022 Sr.PS/PS 8 File sent to Bench Clerk 29-08-2022 Sr.PS/PS 9 Date on which the file goes to the Head Clerk 10 Date on which file goes to the A.R 11 Date of dispatch of order