Appeal details
Counselvise Citation
[2022] 106 COUNSELVISE.COM (IT) 9266 (ITAT-HYDERABAD)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
2 year(s) 8 month(s) 25 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
07-06-2022
Appeal Filed By
Department
Order Result
PartlyAllowed
Bench Allotted
DB-A
Assessment Year
2016-2017
Appeal Filed On
12-09-2019
Judgement Text
ITA No 1413 of 2019 Next Education India (P) Ltd Hyderabad Page 1 of 17 आयकर अपील य अ धकरण, हैदराबाद पीठ IN THE INCOME TAX APPELLATE TRIBUNAL Hyderabad ‘ B ‘ Bench, Hyderabad BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI LALIET KUMAR, JUDICIAL MEMBER ITA No.1413/Hyd/2019 Assessment Year: 2016-17 Dy.Commissioner of Income Tax, Circle-16(1), Hyderabad Vs. M/s.Next Education India Private Limited, Hyderabad [PAN: AABCH9484P] (Appellant) (Respondent) C.O.31/Hyd/2019 (Arising out of ITA No.1413/Hyd/2019) Assessment Year: 2016-17 M/s.Next Education India Private Limited, Hyderabad [PAN: AABCH9484P] Vs. Dy.Commissioner of Income Tax, Circle-16(1), Hyderabad (Appellant) (Respondent) Assessee by: Sri S. Raghunathan, AR Revenue by : Sri T. Sunil Goutam,DR Date of hearing: 31/05/2022 Date of pronouncement: 08/06/2022 O R D E R PER LALIET KUMAR, J.M. : This is an appeal filed by Revenue against the order of the Ld.Commissioner of Income Tax (Appeals)-4, Hyderabad dated 07-06- 2019 u/s. 143(3) of the Income Tax Act, 1961 [Act], for the AY.2016-17. Assessee filed cross-objections against the appeal of Revenue. ITA No 1413 of 2019 Next Education India (P) Ltd Hyderabad Page 2 of 17 2. Brief facts of the case are that the assessee-company, engaged in the business of providing smart class room concepts in schools by providing projectors embedded with preloaded software, filed its original return of income for the AY.2016-17 on 14-10-2016 admitting ‘NIL’ under the normal provision after set-off of brought forward loss of Rs.17,25,54,535/- and book profit u/s.115JB of the Act at ‘NIL’ after set-off brought forward depreciation loss of Rs.13,69,49,466/-. The case was selected for manual scrutiny. Accordingly, notice u/s.143(2) of the Act dt.14-07-2017 was issued and duly served on the assessee-company. Later on, notice u/s.142(1) of the Act dt.03-11-2018, 14-11-2018 and 30-11-2018, 08-12-2018 and 15- 12-2018 were issued in e-proceedings of ITBA and duly served on the assessee-company. After going through the information, the assessment was completed by the AO by making the following additions: i. Provision for warranty - Rs. 53,50,152/- ii. ESOP expenditure disallowed - Rs. 2,47,90,730/- 2.1. Aggrieved by the act of the AO, the assessee-company filed an appeal before the Ld.CIT(A) by raising various grounds. 3. Considering the grounds raised by the assessee, the Ld.CIT(A) decided the appeal in favour of assessee. 4. Challenging the order of Ld.CIT(A), now the Revenue is in appeal before us raising the grounds that – (i) The Ld.CIT(A) erred in allowing expenditure towards ‘provision for warranty’ without appreciating that the claim is contingent in nature. (Rs.18,51,582/-) : ITA No 1413 of 2019 Next Education India (P) Ltd Hyderabad Page 3 of 17 4.1. In this regard, learned DR drawn our attention to paragraphs 4.3, 4.4, 4.5 and 4.6 of the assessment order to the following effect: “4.3. In the case of assessee, the warranty being offered is only once in the whole period of 5 years, and covers the light bulb and the UPS battery. If the warranty covered an infinite number of replacements over the period of 5 year warranty, the assessee's reliance on the case laws and the creation of provision, to be reversed only at the end of the 5 year period can be contemplated. However, when the warranty covers only one replacement per product over the period of 5 years, the assessee company should reverse the provision made in the preceding year and debit the actual expenditure incurred. 4.4 Reliance is placed on the Hon'ble Supreme Court in the case of Rotork Controls India Pvt. Ltd vs. CIT has laid down three conditions for when a provision may be recognized: 1. When an enterprise has a present obligation as result of a past event 2. It is probable that an outflow of resources will be required to settle the obligations 3. A reliable estimate can be made of the amount of the obligation. 4.5 Further the judgment clearly states that a historical trend or statistical data must exist in order for the company to claim provision for warranty as an expense: 'Thus, the decision on the warranty provision should be based on past experience of the company. A detailed assessment of the warranty provisioning policy is required particularly if the experience suggests that warranty provisions are generally reversed if they remained unutilized at the end of the period prescribed in the warranty. Therefore, the company should scrutinize the historical trend of warranty provisions made and the actual expenses incurred against it. On this basis a sensible estimate should be made. The warranty provision for the products should be based on the estimate at year end of future warranty expenses. Such estimates need reassessment every year. As one reaches close to the end of the warranty period, the probability that the warranty expenses will be incurred is considerably reduced and that should be reflected in the estimation amount." 4.6 Therefore, in view of the above facts and law, the Provision for Warranty is not an allowable expenditure since, it is only contingent, but not ascertained. The assessee has made an ITA No 1413 of 2019 Next Education India (P) Ltd Hyderabad Page 4 of 17 alternative claim stating that the actual expenditure incurred during the year for replacement of the bulbs should be allowed as deduction. But this expenditure cannot be allowed because it is not claimed in the return of income filed by the assessee, and moreover, the complete details with regard to this are not submitted by the assessee. Therefore, the alternative claim of the assessee cannot be entertained. Addition: Rs. 53,50,152/-”. 4.2. Feeling aggrieved by the order of AO, learned DR had also drawn our attention to paragraph 5.6 and 5.7 of the Ld.CIT(A)’s order, whereby the Ld.CIT(A) has allowed 20% of the cost on provisional basis. Paragraph 5.7 of the Ld.CIT(A)’s order is as under: “5.7. Based on the above perception, I am of the considered opinion that since the appellant comp[any is spread across geographical areas and each item of sale is embedded with several parts with warranty under the contractual terms sale, with a warranty period of five years from the date of sale, provision towards warranty is justifiable, Moreover, the appellant company claims that the warranty is review at year end at the time of closure of accounts and statutory audit, and if any excess provision of warranty, the same is reversed back for the purpose of computation of provision for warranty and vice-versa, and duly offered to tax. Moreover, in other words, warranty stood attached to the sale price of the product and a reliable estimate of the expenditure towards such warranty was allowable. In view of the nature of business and also the supreme Court judgement mentioned supra, the claim made by the appellant company amounting to Rs,53,50,152/-, being 20% of cost of good earmarked as provision, is justified and the ground raised on this issue is allowed”. 4.3. learned DR had submitted that the assessee has not provided the scientific basis of warranty on the basis of which, the warranty provisions were made. In this connection, learned DR had also drawn our attention to the written statement filed by the learned AR, wherein at pg.3, the following table was mentioned: “1. Summary of provision for replacement warranty allowed by tax department since FY.2011-12: During the captioned hearing, the Hon'ble Bench has requested the historical data from FY.2011-12 onwards in ITA No 1413 of 2019 Next Education India (P) Ltd Hyderabad Page 5 of 17 relation to the provision for replacement warranty granted by the Department. Given the requirement, we would like to submit the requested data in the following format: FY Provision for replacement warranty Actual expenditure Whether the AO granted claim 2011- 12 1,20,36,440 NIL Yes 2012- 13 3,75,57,677 NIL No 2013- 14 4,66,91,822 16,51,107 No 2014- 15 5,10,80,561 83,60,636 No 2015- 16 53,50,152 1,75,12,366 No; however granted by CIT(A) Considering the nature of products dealt with by the Respondent is highly volatile, it is not possible to see the goods without replacement warranty; and the Respondent provides replacement for a period of five years from the date of sale”. 4.4. On the basis of above written submissions, it was submitted that in the first two assessment years i.e., AYs.2011-12 and 2012-13, the assessee has not incurred any expenditure for the purpose of provision for warranty and similarly for the remaining assessment years i.e., AYs.2013-14 and 2014-15 the actual expenditure incurred by the assessee was far below than the provision for warranty made by the assessee. For the year under consideration, it was the submission of learned AR that the actual expenditure incurred by the assessee was more than the provision for warranty and the learned DR had submitted that the alternative ground raised by the assessee in the cross objection cannot be allowed by virtue of which, the actual expenditure, though not verified but still cannot be allowed in the year under consideration as there is no scientific basis for making the provisions. ITA No 1413 of 2019 Next Education India (P) Ltd Hyderabad Page 6 of 17 4.5. Per contra, the learned AR has drawn our attention to pg.3 of the written submissions, wherein it was submitted as under: “1. Summary of provision for replacement warranty allowed by tax department since FY.2011-12: During the captioned hearing, the Hon'ble Bench has requested the historical data from FY.2011-12 onwards in relation to the provision for replacement warranty granted by the Department. Given the requirement, we would like to submit the requested data in the following format: FY Provision for replacement warranty Actual expenditure Whether the AO granted claim 2011-12 1,20,36,440 NIL Yes 2012-13 3,75,57,677 NIL No 2013-14 4,66,91,822 16,51,107 No 2014-15 5,10,80,561 83,60,636 No 2015-16 53,50,152 1,75,12,366 No; however granted by CIT(A) Considering the nature of products dealt with by the Respondent is highly volatile, it is not possible to see the goods without replacement warranty; and the Respondent provides replacement for a period of five years from the date of sale”. 4.6. Further, it was submitted by the learned AR that for the two assessment years viz., 2013-14 and 2014-15, as the assessee had opted for Vivad Se Viswas Scheme as the AO has denied the provision for warranty and the same have been settled by the assessee by paying the tax, the tax demand in accordance with the provisions of scheme. With respect to AY.2015-16, it was the contention of the learned AR that the matter is pending adjudication before the Ld.CIT(A). 4.7. We have heard the rival contentions and perused the material available on record including the written statement and documents filed by the parties before us. Undoubtedly, the provision for warranty is allowable if it is based on the scientific basis as provided by ITA No 1413 of 2019 Next Education India (P) Ltd Hyderabad Page 7 of 17 the Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd., Vs. CIT [314 ITR 62] (SC), wherein it was held as under: “14. In this case the High Court has principally gone by the judgment of the Supreme Court in the case of Shree Sajjan Mills Ltd. (supra). That was the case of gratuity. For the assessment year 1974-75 the assessee-company sought to deduct a sum of Rs. 18,37,727 towards the amount of gratuity payable to its employees and worked out actuarially. No provision was made for Rs. 18,37,727. The claim for deduction was made on the ground that the liability stood ascertained by actuarial valuation and, therefore, was deductible under section 37 of the 1961 Act. The ITO allowed the deduction only in respect of the amounts actually paid by the assessee and the rest was disallowed on the ground of non-compliance with the provisions of section 40A(7) of the 1961 Act. This view of the ITO was affirmed by CIT(A). The Tribunal held that for the earlier assessment year relating to 1973-74, actuarially ascertained liability for gratuity arising under Payment of Gratuity Act, 1972 was an allowable deduction. However, for the assessment year in question, the Tribunal held that the increased liability claimed by the assessee for deduction was allowable on general principles of accounting. This view was taken by the Tribunal on the basis that the actuarially determined liability was not provided for in the assessee's books of account. In appeal by the Department, the High Court held that the assessee was not entitled to deduction without complying with the provisions of section 40A(7) of the 1961 Act. This view of the High Court was affirmed by this Court. It was held that section 40A(7) which stood inserted by Finance Act, 1975 with effect from 1-4-1973 has been given an overriding effect over section 28 as well as section 37 of the 1961 Act. Consequently, the deduction allowable on general principles was ruled out as section 40A(1) made it clear that section 40A had effect notwithstanding anything contained in sections 30 to 39 of the 1961 Act. In other words, as regards deduction in respect of gratuity, the assessee was required to comply with the provisions of section 40A(7) after Finance Act, 1975. It is interesting to note that prior to 1-4-1973 actual payment or provision for payment was eligible for deduction either under section 28 or under section 37 of the 1961 Act. This has been reiterated in Shree Sajjan Mills Ltd.'s case (supra). The position got altered only after 1-4-1973. Before that date, provision made in the P & L Account for the estimated present value of the contingent liability properly ascertained and discounted on an accrued basis could be deducted either under section 28 or section 37 of the 1961 Act. This has been explained in Shree Sajjan Mills Ltd.'s case (supra) at page 599. Section 40A(7) deals only with the case of gratuity. Even in the case of gratuity but for insertion of section 40A(7), provision made in the P & L Account on the basis of present value of the contingent liability properly ascertained and discounted on an accrued basis was entitled to deduction ITA No 1413 of 2019 Next Education India (P) Ltd Hyderabad Page 8 of 17 either under section 28 or under section 37 of the said Act. This aspect, therefore, indicates that the present value of the contingent liability like the warranty expense, if properly ascertained and discounted on accrued basis, could be an item of deduction under section 37 of the said Act. This aspect is not noticed in the impugned judgment. We may add a caveat. As stated above, the principle of estimation of the contingent liability is not the normal rule. As stated above, it would depend on the nature of business, the nature of sales, the nature of the product manufactured and sold and the scientific method of accounting being adopted by the assessee. It will also depend upon the historical trend. It would also depend upon the number of articles produced. As stated above, if it is a case of single item being produced then the principle of estimation of contingent liability on pro rata basis may not apply. However, in the present case, it is not so. In the present case, we have the situation of large number of items being produced. They are sophisticated goods. They are supported by the historical trend, namely, defects being detected in some of the items. The data also indicates that the warranty cost(s) is embedded in the sale price. The data also indicates that the warranty is attached to the sale price. In the circumstances, we hold that the principle laid down by this Court in the case of Metal Box Co. of India Ltd. (supra) will apply. In that case this Court held that contingent liabilities discounted and valued as out-of-necessity could be taken into account as trading expenses if these were capable of being valued. It was further held that an estimated liability even under a gratuity scheme even if it was a contingent liability if properly ascertainable and if its present value stood fairly discounted, was deductible from the gross profits while preparing the P & L Account. In view of this decision it became permissible for an assessee to provide, in his P & L Account, for the estimated liability under a gratuity scheme by ascertaining its present value on accrued basis and claiming it as an ascertained liability to be deducted in the computation of profits and gains of the previous year either under section 28 or under section 37 of the 1961 Act. However, the above principle would not apply after insertion of section 40A(7) with effect from 1-4-1973. It may be stated that the principles of commercial accounting, mentioned above, formed the basis of the judgment of this Court in the case of Metal Box Co. of India Ltd. (supra) and those principles are affirmed by the judgment of the Supreme Court in Shree Sajjan Mills Ltd.'s case (supra) up to 1-4-1973. In this case we are concerned with warranty claims. In respect of warranty claims during the relevant assessment years in question there is no provision similar to section 40A(7) of the 1961 Act. We may add that the above principle of commercial accounting in Metal Box Co. of India Ltd.'s case (supra) also find place in the judgment of this Court in the case of Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802, in which the Court has explained the meaning of the word "expenditure" in section 37 of the 1961 Act. In other words, the principle enunciated in Metal Box Co. ITA No 1413 of 2019 Next Education India (P) Ltd Hyderabad Page 9 of 17 of India Ltd.'s case (supra) which has been reiterated in Shree Sajjan Mills Ltd.'s case (supra) (up to 1-4-1973) which deals with making of provision on the basis of estimated present value of contingent liability holds good during the assessment years in question qua warranty claims”. 5. In the present case, it is the case of the assessee that the assessee has an obligation to replace/substitute/provide the warranty for the bulbs used by the assessee in their online projector classes. For those purposes, the assessee has considered the life of the bulbs and the assessee has scattered the provision in five years. In our considered opinion, as indicated by the Hon'ble Supreme Court (supra), the assessee was required to make the provisions of warranty based on a scientific basis, historical data, or any other way as per paragraph No.14 (supra). In the present case, though the assessee has evenly distributed the provision for a warranty of @20% each year over five years, to our mind, this was not based on any scientific study or the previous year’s expenditure incurred by the assessee. In the light of the above, we are of the opinion that the assessee has not provided any scientific basis for the data, therefore, the provision of warranty cannot be granted to the assessee for the amount claimed by the assessee in the year under consideration. However, having held that the assessee is not entitled to the provision for warranty, in the year under consideration, the assessee has claimed an expenditure of Rs 1,75,12,366/- for replacing the bulbs etc and deduction for this expenditure was claimed in the year by way of CO. Regarding C.O 5.1 In our view, the assessee cannot be deprived for actual expenditure incurred by it for replacing the bulbs etc, as the said expenditure if any, was laid by it in discharge of its contractual obligation, further wholly and exclusively meant for its business activities. However, it is necessary for the assessee to prove that these ITA No 1413 of 2019 Next Education India (P) Ltd Hyderabad Page 10 of 17 expenses were incurred on account of some contractual liability relatable to the year under consideration or in the alternative if these liabilities were for previous years then suitable adjustment is required to make for earlier years and the allowability of expenditure should not be restricted for the year under consideration. The concept of the matching principle is required to be applied. As the matter is pertaining to AY.2014-15, which is pending before the Ld.CIT(A), therefore, with the above-said observation we deem it appropriate to remand the matter back to the file of Ld.CIT(A) with a direction to examine the expenditure incurred by the assessee. Needless to say that the entire expenditure incurred by the assessee in a period of five years (warranty period) cannot be allowed in one year only. In the result appeal of the Revenue is allowed for statistical purposes and CO is partly allowed. ESOP EXPENDITURE 5.2 With respect to the other issue i.e., ESOP expenditure, learned DR has drawn our attention to paragraphs Nos.5.3.2 to 5.4 and 5.5 of the assessment order passed by the AO, which is to the following effect: “5.3.2 In response to the above, the assessee has submitted that “the company had issued only share options under the Next Employees Stock Option Plan 2014 in the financial year 2014-15 with a vesting period of 1-4 years. The company has not allotted any shares through ESOP during the subject AY" 5.4 Vide notice u/s 142(1) the assessee is asked to submit details of the claim of expenditure under Employee stock option expense, "Pease refer to your submissions. You have claimed ESOP expenditure at Rs. 2,03,00,000/-. In connection with the same you are requested to furnish details of the no. of employees who have exercised the option for redemption in the financial year under consideration and rate at which they have redeemed the option." 5.5 The assessee has submitted their reply vide letter dt. 12.12.2018, stating "none of the employees of the Company have exercised the option and hence, no shares have been issued by the Company under the ESOP scheme during the captioned FY. Kindly note that the response with respect to ITA No 1413 of 2019 Next Education India (P) Ltd Hyderabad Page 11 of 17 tenability of the claim has already been submitted to your good self vide our submission dated 20 November 2018”. 5.3. Learned DR had also drawn our attention to paragraph 6.3 of the Ld.CIT(A)’s order whereby the Ld.CIT(A) has allowed the expenditure on allowable expenditure with the following observations: “6.3 I have carefully considered the assessment order and submissions made on this issue. On examination of the case laws referred by the AR, the pronouncements were made as follows :- The principle laid down in the case of Bharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61 (SC) was that a liability definitely incurred by an assessee's deductible notwithstanding the fact that its quantification may take place in a later year. The mere fact that the quantification is not precisely possible at the time of incurring the liability would not make an ascertained liability a contingent. Almost to the similar effect is the judgment of the Supreme Court in the case of Rotork Controls India (P.) Ltd. v. CIT [2009] 314 ITR 62/180 Taxman 422. [Paras 9.3.3 and 9.3.4] Considering the facts of the present case in the backdrop of the ratio laid down by the Supreme Court in Bharat Earth Movers (supra) and Rotork Controls India (P.) Ltd. (supra), it becomes vivid that the mandate of these cases is applicable with full force to the deductibility of the discount on incurring of liability on the rendition of service by the employees. The factum of the employees becoming entitled to exercise options at the end of the vesting period and it is only then that the actual amount of discount would be determined, is akin to the quantification of the precise liability taking place at a future date, thereby not disturbing the otherwise liability which stood incurred at the end of each year on availing the services. It is, therefore, held that the discount in relation to options vesting during the year cannot be held as a contingent liability. [Paras 9.3.5 and 9.3.6]. Whether deduction is allowable • Also it is discernible from the above provisions of Fringe Benefit tax that the legislature itself contemplates the discount on premium under ESOP as a benefit provided by the employer to its employees during the course of service. If the legislature considers such discounted premium to the employees as a fringe benefit or 'any consideration for employment', it is not open to argue contrary. Once it is held as a consideration for employment, the natural corollary which follows is that such discount i) is an expenditure; ii) such expenditure is on account of an ascertained (not contingent) liability; and iii) it cannot be treated as a short ~a, receipt. Therefore, discount on shares under the ESOP is an allowable deduction. [Para 9.4.1] Law is settled- If a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date should be ITA No 1413 of 2019 Next Education India (P) Ltd Hyderabad Page 12 of 17 certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one, The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain. A few principles were laid down by this court, the relevant of which for our purpose are extracted and reproduced as under :- (i) For an assessee maintaining his accounts on mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the pro his and gains of his business, regard being had to the accepted principles of commercial practice and accountancy, It is not as if such deduction is paid; permissible only in case of amounts actually expended or (ii) Just as receipts, though not actual receipts but accrued due are brought in for Income-tax assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business; (iii) A condition subsequent the fulfilment of which may result in the reduction or even extinction of the liability, would not have the effect of converting that liability into a contingent liability; (iv) A trader computing his taxable profits for a particular year may property deduct not only the payments actually made to his employees but also the present value of any payments in respect of their services in that year to be made in a subsequent year if it can be satisfactorily estimated. In view of the above conclusions, I am of the considered opinion that the ESOP claimed by the appellant-company amounting to Rs. 2,47,90,730/- is an allowable expenditure and the addition made by the AO on this account, treating it to be of a contingent nature is not justified, Hence, the addition made is deleted and the ground raised on this regard is allowed”. 5.4. Learned DR has submitted that no crystalised liability accrued in favour of the assessee for the year under consideration as none of the employees of the assessee had exercised their right either of opting for the scheme as per Article 12 of the Employee Agreement or for the redemption of the shares, if any, on such allotment to any of its employee. 5.5. Per contra learned AR has submitted at paragraph No.2 as under: “2. Details requested in relation to ESOP ITA No 1413 of 2019 Next Education India (P) Ltd Hyderabad Page 13 of 17 In accordance with guidance note issued by the Institute of Chartered Accountants of India ('ICAI'), the excess of the intrinsic value of shares, at the date of grant of options under the ESOP scheme of the Respondent, over the exercise period is treated as employee compensation and recognized on a straight-line basis across the period over which the employees would become unconditionally entitled to apply for the shares. In this regard, the Respondent had arrived the value of shares based on Discounted Cash Flow ('DCF') method for the year. The valuation report based on which the ESOP cost was arrived for AY 2015-16 and 2016-17 is attached as Annexure 1 for your kind reference. Further the Appellant has accounted the ESOP expenditure every year after reducing the expenditure: in relation to the options lapsed during the year. The year wise data of ESOP expenditure accounted is attached as Annexure 2. During the captioned hearing, the Hon'ble Bench had requested the details of ESOP options allotted to the employees. The details of same is enclosed as Annexure 3. Due to the sensitivity nature of the data, the Respondent would like to humbly submit the data in a separate sealed envelope marked as 'CONFIDENTIAL' ” 5.6 Learned AR has also relied upon the decision of the Hon'ble Karnataka High Court in the matter of CIT Vs. M/s. Biocon Ltd., [2020] 121 taxmann.com 351 (Karnataka) decided by the Hon'ble Karnataka High Court, wherein it was held as under: “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 ITA No 1413 of 2019 Next Education India (P) Ltd Hyderabad Page 14 of 17 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. 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”. 5.7. Learned AR has also drawn our attention to the Annexure A- 2, wherein for the year under consideration i.e., for the AY.2016-17, the assessee has given the details of the employees, who had opted for the ESOP and the following table was submitted, which was contradicted by the DR, as it was contrary to the submissions before the AO. Table provides as under:- 5.8. It was the contention of learned AR that the above said fact was not before the AO as mentioned by the AO in the paragraph ITA No 1413 of 2019 Next Education India (P) Ltd Hyderabad Page 15 of 17 pointed by the learned DR. However, it was submitted that the matter be remanded back to AO for verification. 6. We have heard the rival contentions and perused the material available on record including the written statement and documents filed by the parties before us. During the assessment proceedings the AO has categorically put to the assessee whether any of the employees of the assessee had exercised the option for redemption in the financial year under consideration and also about the date on which such redemption option was exercised. In reply to that the assessee, vide reply dated December 2018 (Para 5.5 of AO order supra ) had submitted that none of the employees of the company have exercised the option and hence no shares have been issued by the assessee under ESOP during the financial year under consideration. However, contrary to the stand before the AO, the assessee in Annexure-II to the written submission filled before us had enclosed a chart reproduced in Para 5.5 (Supra) wherein the assessee in financial year 2016-17 had mentioned the amount of Rs.2,47,90,730/- has been debited to the P&L A/c. Thus, two contrary stands were taken by the assessee. Hence the assessee is required to reconcile his stand before the AO. As mentioned herein above the Hon’ble Karnataka High Court in the case of CIT vs. Biocon Ltd in ITA No.653/2013 dated 11.11.2020 in Para 9 to 11 has held that “ 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.”. From the bare reading of the above said quoted portion of the decision, it is abundantly clear that there has to be (i) issuance of shares by the assessee to its employees, (ii) the issuance of shares should be at discounted price by the assessee to its employees and (iii) Thereafter difference in the price at which the shares have been issued and the ITA No 1413 of 2019 Next Education India (P) Ltd Hyderabad Page 16 of 17 market price would be considered as expenditure incurred by the assessee. For the purpose of claiming the expenditure on account of ESOP the abovesaid is required to be proved. It is essential for the assessee to prove that during the A.Y under consideration, the assessee had issued ESOP to its employees at a discounted rate. However, in the chart Annexure -II supra, it is clear the amount debited by the assessee on account of ESOP was Rs.2,47,90,730/- but nothing further like date of issuance of the shares, number of employees to whom the shares have been issued and the market price of the shares and rate at which the shares were issued are available. 7. Since we have already remanded back the matter pertaining to the first issue for the purpose of computing the actual expenditure in respect of replacement of the project lamps , we also deem it fit and appropriate to remand this issue of allowability of ESOP expenditure ,also to the file of the learned CIT (A) with the above observations. The learned CIT (A) is directed to decide the issues in accordance with law after affording sufficient opportunities to the assessee for availing the benefit of natural justice. Needless to say, if any document is filed by the assessee in support of its claim, then the said document shall be put to the AO by him as per the Income Tax law. 8. In the result, appeal of the Revenue and cross appeal filed by the assessee are partly allowed. Order pronounced in the Open Court on 8 th June, 2022. Sd/- Sd/- (R.K. PANDA) ACCOUNTANT MEMBER (LALIET KUMAR) JUDICIAL MEMBER Hyderabad, dated 8 th June, 2022. Vinodan/sps ITA No 1413 of 2019 Next Education India (P) Ltd Hyderabad Page 17 of 17 Copy to: S.No Addresses 1 Dy.CIT, Circle 16(1) 1 st Floor, B Block, IT Towers,AC Guards, Masab Tank, Hyderabad 2 M/s. Next Education India P Ltd 8-2-269/A/2/1 to 6, 1 st Floor, Sri Nilaya Cyber Spazio, East Wing Road No.2, Banjara Hills, Hyderabad 500034 3 CIT (A)-4 ,Hyderabad 4 Pr. CIT-,4, Hyderabad 5 DR, ITAT Hyderabad Benches 6 Guard File By Order
