M/s. Caterpillar India Private Limited, CHENNAI V. DCIT, CHENNAI

ITA 1722/CHNY/2012

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 7786 (ITAT-CHENNAI)
• Duration Of Justice: 4 year(s) 5 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-02-2017
• Appeal Filed By: Assessee
• Bench Allotted: C
• Next Hearing Date: 15-02-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 12-09-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Depreciation; Retrospective amendment; Wholly owned subsidiary; Non-deduction of tax; Revenue expenditure; Capital expenditure; TDS; Set aside
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 143(3); 92; 115JB; 40(a)(ia); 201; 251

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI , ' # . $ & ' BEFORE SHRI M. BALAGANESH, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER ./ I.T.A. NO. 1722/MDS/2012 / ASSESSMENT YEAR : 2007-08 M/S. CATERPILLAR INDIA PRIVATE LIMITED (FORMERLY KNOWN AS CATERPILLAR COMMERCIAL PRIVATE LIMITED & SINCE MERGED), 7TH FLOOR, INTERNATIONAL TECH PARK, TARAMANI ROAD, TARAMANI, CHENNAI - 600 113. [PAN: AABCC 2295D] VS. DEPUTY COMMISSIONER OF INCOME TAX, LARGE TAXPAYER UNIT, CHENNAI. ( / APPELLANT) ( / RESPONDENT) ) * / APPELLANT BY : SHRI R. VIJAYARAGHAVAN, ADVOCATE & SHRI S.P. CHIDAMBARAM, ADVOCATE -.) * / RESPONDENT BY : SHRI A.V. SREEKANTH, JCIT * /DATE OF HEARING : 15.02.2017 * /DATE OF PRONOUNCEMENT : 17.02.2017 /O R D E R PER M. BALAGANESH, ACCOUNTANT MEMBER: THIS APPEAL OF THE ASSESSEE ARISE OUT OF THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS)-IV, CHENNAI VI DE PROCEEDINGS IN ITA NO. 413/11-12/A-IV, DATED 30.12.2011 FOR THE ASSESS MENT YEAR 2007-08. :-2-: I.T.A. NO. 1722/MDS/2012 2. AT THE OUTSET, THERE IS A DELAY OF 175 DAYS I N FILING THE APPEAL BEFORE US BY THE ASSESSEE. IN THE ORIGINAL ROUND, THIS TRIBUNAL HAD DISMISSED THE APPEAL AS NOT MAINTAINABLE BY NOT CONDONING THE DELAY WHICH WAS S UBJECTED TO FURTHER APPEAL BEFORE THE HONBLE HIGH COURT OF MADRAS BY THE ASSE SSEE. THE HONBLE HIGH COURT HAD VIDE ITS ORDER IN TAX CASE APPEAL NO. 117 5 OF 2015 DATED 4.2.2016 CONDONED THE DELAY AND HAD DIRECTED THIS TRIBUNAL T O ADJUDICATE THE GROUNDS ON MERITS OF THE CASE. RESPECTFULLY FOLLOWING THE DIR ECTIONS OF THE HONBLE MADRAS HIGH COURT, WE PROCEED TO ADJUDICATE THE VARIOUS IS SUES RAISED IN THE GROUNDS OF APPEAL ON MERITS OF THE CASE. 3. THE FIRST ISSUE TO BE DECIDED IN THIS APPEAL IS AS TO WHETHER THE LD CITA WAS JUSTIFIED IN UPHOLDING THE DISALLOWANCE OF COM PENSATION PAID ON ACCOUNT OF EMPLOYEE STOCK OPTION PLAN (ESOP) AMOUNTING TO RS. 7,41,51,630/- IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 3.1. THE BRIEF FACTS OF THIS ISSUE IS THAT THE ASS ESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF PROVIDING MARKETING SERVICES TO ITS GROUP COMPANIES. THE ASSESSEE IS A 100% SUBSIDIARY OF CATERPILLAR INC., U.S.A. CATERPILLAR INC., INTRODUCED THE CATERPILLAR INC, 1996 STOCK OPTION AND LONG TERM INCENTIVE PLAN WHICH PROVIDED FOR GRANT OF STOCK OPTIONS, STOCK AP PRECIATION RIGHTS, RESTRICTED STOCK, RESTRICTED STOCK UNITS AND PERFORMANCE AWARD S TO CERTAIN OFFICERS, KEY EMPLOYEES AND NON-EMPLOYEE DIRECTORS OF CATERPILLAR GROUP COMPANIES. THE ASSESSEE BEING ONE OF THE CATERPILLAR GROUP COMPANI ES FRAMED THE CATERPILLAR :-3-: I.T.A. NO. 1722/MDS/2012 COMMERCIAL 2006 STOCK OPTION AND LONG TERM INCENTIV E PLAN (HEREINAFTER REFERRED TO ESOP SCHEME) WHICH IS EFFECTIVE FROM 1 ST JANUARY 2006. THE ESOP SCHEME PROVIDED FOR GRANT OF STOCKS OF CATERPILLAR INC, RE STRICTED STOCK OPTIONS AND STOCK APPRECIATION RIGHTS. DURING THE FINANCIAL YEAR 2006 -07 RELEVANT TO ASST YEAR 2007- 08 , SELECTED EMPLOYEES WERE ALLOTTED SHARES OF CAT ERPILLAR INC AS PER THE ESOP SCHEME. THE DIFFERENCE BETWEEN THE SHARE PRICE OF CATERPILLAR INC AS AT THE DATE OF EXERCISE AND THE PRICE AT WHICH OPTIONS WERE EXE RCISED BY EMPLOYEES MULTIPLIED BY THE NUMBER OF SHARES ISSUED TO EMPLOY EES AGGREGATED TO USD 1694120 (INR EQUIVALENT RS. 7,41,51,630/-) . THE S AID DIFFERENTIAL AMOUNT WAS CROSS CHARGED BY CATERPILLAR INC, USA ON THE ASSESS EE DURING THE FINANCIAL YEAR 2006-07. THIS SUM OF RS. 7,41,51,630/- WHICH WAS CROSS CHARGED BY CATERPILLAR INC WAS ACCOUNTED AS EMPLOYEE STOCK OPTION EXPENSE BY THE ASSESSEE AND PAID TO CATERPILLAR INC IN JULY 2007. THE EMPLOYEE STOCK OPTION EXPENSE WAS CLAIMED AS REVENUE EXPENDITURE BY THE ASSESSEE IN THE RETUR N OF INCOME. THE LD AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS OBSERVE D THAT THE ABOVE PAYMENT OF COMPENSATION ON ESOP OF RS. 7,41,51,630/- IS A C APITAL EXPENDITURE , THE ASSESSEE WAS SHOW CAUSED TO EXPLAIN WHY THE SAME SH OULD NOT BE DISALLOWED AND ADDED TO THE TOTAL INCOME. THE LD AO NOTED THA T THE ASSESSEE REPLIED THAT THE SAME HAS BEEN INCURRED ON ACCOUNT OF BUSINESS E XPEDIENCY AND ALSO THE ABOVE PAYMENT WAS SUBJECTED TO FRINGE BENEFIT TAX ( FBT) DURING THE CURRENT YEAR. ACCORDINGLY IT WAS PLEADED THAT THE SAME CAN NOT BE DISALLOWED AND ADDED TO THE TOTAL INCOME. THE LD AO BY PLACING RELIANCE ON THE DECISION OF DELHI TRIBUNAL IN THE CASE OF M/S RANBAXY LABORATORIES LI MITED VS ADDL.CIT REPORTED IN :-4-: I.T.A. NO. 1722/MDS/2012 26 DTR 420 (DELHI TRIB) , HELD THAT THE ESOP CANNOT BE ALLOWED AS REVENUE EXPENDITURE AS THE ISSUE OF SHARES UNDER ESOP AT LE SS THAN MARKET PRICE ONLY RESULTS IN SHORT RECEIPT OF SHARE PREMIUM AND NOT I NCURRING OF ANY EXPENDITURE WITHIN THE MEANING OF SECTION 37 OF THE ACT AND THE REFORE SUCH NOTIONAL LOSS IS NOT ALLOWABLE AS DEDUCTION. 3.2. THE LD CITA CONFIRMED THE DISALLOWANCE OF CO MPENSATION PAID ON ACCOUNT OF ESOP MADE BY THE LD AO ON THE FOLLOWING GROUNDS :- (A) ISSUE OF ESOP CREATES AN ENDURING BENEFIT TO TH E COMPANY AND HENCE AMOUNT SPENT ON ALLOTTING ESOP SHARES TO THE EMPLOYEES HAS TO BE TREATED AS CAPITAL EXPENDITURE. (B) ESOP SCHEME IS A DEVICE CREATED BY THE ASSESSEE TO EVADE TAX AS THE SCHEME IS NOT IN ACCORDANCE WITH THE CENTRAL GOVERNMENT GU IDELINES. (C) ESOP IS, IN A WAY EXTRA REMUNERATION PAID TO EM PLOYEES AND HENCE CAN BE BROUGHT UNDER THE HEAD SALARIES. HENCE, IF THE TAX IS NOT DEDUCTED AT SOURCE IN RESPECT OF SUCH ESOP, THE ESOP EXPENDITURE IS NOT E LIGIBLE TO BE DEDUCTED U/S 40(A)(IA) OF THE ACT. 3.3. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE U S ON THE FOLLOWING GROUNDS :- A) THE LD. COMMISSIONER OF INCOME TAX (APPEALS) -IV ['THE LEARNED CIT(A) '] ERRED IN CONFIRMING THE ACTION OF ASSESSI NG OFFICER ('AO') OF DISALLOWING THE COMPENSATION PAID ON ACCOUNT OF ESO P AS NOTIONAL LOSS. :-5-: I.T.A. NO. 1722/MDS/2012 B) THE LD. CIT(A) ERRED IN HOLDING THE ESOP WILL CR EATE AN ENDURING BENEFIT TO THE COMPANY AND HENCE TO BE TREATED AS C APITAL EXPENDITURE C) THE LD. CIT(A) ERRED IN TREATING THE ENTIRE ESOP SCHEME AS A DEVICE CREATED BY THE APPELLANT TO EVADE TAX. D) THE LD. CIT(A) ERRED IN UPHOLDING THE DISALLOWAN CE DESPITE CONCLUDING THAT THE ESOP EXPENSE IS IN THE NATURE O F SALARY EXPENSE. E) THE LD. CIT(A) ERRED IN NOT PLACING RELIANCE ON JUDICIAL PRECEDENTS IN THIS REGARD. ' 3.4. THE LD AR STATED THAT THE ESOP WAS GRANTED TO THE SELECTED EMPLOYEES OF THE COMPANY. HE DREW THE ATTENTION OF THE BENCH TO THE SCHEME (WHICH IS PART OF THE PAPER BOOK FILED BEFORE US) STATING THAT THE EMPLOYEES OF THE COMPANY AS WELL AS EMPLOYEES DEPUTED TO THE COMPANY FROM GROUP COMPANY ARE ENTITLED FOR ESOP. HE STATED THAT AS PER THE SCHEME THE SHARES OF THE PARENT COMPANY CATERPILLAR INC. WAS TO BE ALLOTTED TO THE SELECTED EMPLOYEES AT A PRICE LESS THAN THE PREVAILING MARKET PRICE. IN FACT THE SAME WERE DONE BY CATERPILLAR INC. U.S.A. IN ABROAD AND DEBIT NOTE TO THAT EFFECT WAS RAISED ON THE ASSESSEE COMPANY AS THOSE SELECTED EMPLOYEES WERE DEPUTED TO THE ASSESSEE AND WERE RENDERING SERVICES TO THE ASSESSEE COMPANY IN INDIA . HENCE AS PER THE GROUP POLICY, THE ENTIRE COST INCURRED ON THE RESPECTIVE EMPLOYEES ARE DEBITED TO THE RESPECTIVE COST CENTRES WHERE THEY ARE POSTED / DEP UTED. BASED ON THE DEBIT NOTE RAISED BY CATERPILLAR INC, U.S.A., THE ASSESSE E HAD MADE THE PAYMENT OF RS. 7,41,51,630/- . HE ARGUED THAT THE VERSION OF THE LD CITA THAT THE ESOP SCHEME SHOULD BE IN ACCORDANCE WITH THE GUIDELINES PRESCRI BED BY THE CENTRAL :-6-: I.T.A. NO. 1722/MDS/2012 GOVERNMENT AS MANDATED IN SECTION 17 OF THE ACT IS TO BE APPLIED ONLY FOR THE PURPOSE OF VALUATION OF PERQUISITES AND THE SAME WA S OPERATED THROUGH A PROVISO TO SECTION 17(2)(III) OF THE ACT. THE SAID PROVISO WAS ALSO OMITTED FROM THE STATUTE WITH EFFECT FROM 1.4.2008. THE SAID PROVI SO NO WHERE CONTEMPLATED THE ELIGIBILITY OF ALLOWABILITY OF DEDUCTION OF ESOP EX PENDITURE FOR AN ASSESSEE. IN ANY CASE, IF THE PROVISO IS APPLIED AND PERQUISITES VALUATION IS MADE ACCORDINGLY, THEN THE SAME WOULD HAVE TO BE CONSTRUED AS SALARY TO THE EMPLOYEES WHICH IS AN ALLOWABLE DEDUCTION FOR THE EMPLOYER. IF THERE IS ANY VIOLATION THEREON IN THE FORM OF NON DEDUCTION OF TAX AT SOURCE, THEN THE S AME WOULD FASTEN SOME TDS LIABILITY ON THE EMPLOYER U/S 201 AND 201(1A) OF TH E ACT AND THAT WOULD NOT IN ANY CASE HAMPER THE ALLOWABILITY OF DEDUCTION TOWAR DS SALARIES IN THE HANDS OF THE EMPLOYER. HE ARGUED THAT THE LD CITA HAD ALSO STATED THAT THE ASSESSEE HAD PAID ONLY SALARY OR EXTRA REMUNERATION IN THE FORM OF ESOP AND ONCE THE TAX IS NOT DEDUCTED AT SOURCE ON THE SAME, THE EXPENDITURE NEEDS TO BE DISALLOWED U/S 40(A)(IA) OF THE ACT. IN THIS REGARD, HE DREW THE ATTENTION OF THE BENCH TO THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT WHEREIN THE PROVISION FOR NON-DEDUCITON OF TAX AT SOURCE ON SALARY PAYMENTS AND CONSEQUENTI AL DISALLOWANCE THEREON WAS BROUGHT IN THE STATUTE ONLY AT A LATER POINT OF TIM E AND WAS NOT APPLICABLE FOR THE YEAR UNDER APPEAL. HENCE IN ANY CASE, THERE CANNOT BE ANY DISALLOWANCE OF ESOP EXPENDITURE AS PER THE PROVISIONS OF THE ACT. HE ARGUED THAT THE CBDT HAD ISSUED A CIRCULAR IN THE CONTEXT OF FRINGE BENEFIT TAX VIDE CIRCULAR NO. 9/2007 DATED 20.12.2007, WHEREIN, IN RESPONSE TO QUESTION NO. 16 , THEY HAD SPECIFICALLY REPLIED THAT ESOP EXPENDITURE IS AN ALLOWABLE DEDUC TION IN COMPUTING THE TAXABLE :-7-: I.T.A. NO. 1722/MDS/2012 INCOME OF THE EMPLOYER COMPANY. HE FINALLY PLACED R ELIANCE ON THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS PVP VENTURES LTD IN TC(A) NO. 1023 OF 2005 DATED 19.6.2012 REPORTED IN 2012-TIOL- 550-HC-MAD-IT WHEREIN IT HAD BEEN CATEGORICALLY HELD THAT ESOP EXPENDITURE I S IN THE NATURE OF STAFF WELFARE EXPENSES AND IS SQUARELY ALLOWABLE AS DEDUC TION IN COMPUTING THE TAXABLE INCOME OF AN ASSESSEE. 3.5. IN RESPONSE TO THIS, THE LD DR ARGUED THAT IN THE INSTANT CASE , ESOP WAS GIVEN TO EMPLOYEES WHO HAD COME ON DEPUTATION TO AS SESSEE COMPANY AND NOT TO THE EMPLOYEES OF THE COMPANY AND HENCE IT IS GIV EN ONLY TO SELECT EMPLOYEES AS PER THE WHIMS AND FANCIES OF THE DIRECTOR OR THE ADMINISTRATORS OF THE ASSESSEE COMPANY. HE PLACED RELIANCE ON THE FINDING S OF THE LD CITA WHEREIN IT WAS STATED THAT THE SCHEME IS ONLY A COLORABLE DEVI CE IN ORDER TO EVADE TAX. 3.6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE MATERIALS AVAILABLE ON RECORD INCLUDING THE PAPER BOOKS FILED BY THE AS SESSEE. THE BRIEF FACTS OF THE CASE IS THAT THREE EMPLOYEES WHO HAD BEEN DEPUTED T O ASSESSEE COMPANY WERE ALLOTTED THE SHARES OF CATERPILLAR INC, U.S.A. AT A PRICE LESS THAN THE PREVAILING MARKET PRICE AND THE DIFFERENTIAL AMOUNT OF USD 169 4120 (INR EQUIVALENT RS. 7,41,51,630/-) WAS RAISED AS A DEBIT NOTE BY CATERP ILLAR INC, U.S.A. ON THE ASSESSEE COMPANY WHICH WAS PAID BY THE ASSESSEE. SINCE THE CONCERNED EMPLOYEES WERE DEPUTED / WORKING IN THE ASSESSEE CO MPANY AT THE TIME OF ISSUANCE OF ESOP, THE PRICE DIFFERENTIALS IN THE F ORM OF ESOP EXPENDITURE WAS :-8-: I.T.A. NO. 1722/MDS/2012 DEBITED IN THE BOOKS OF THE ASSESSEE COMPANY AS PAR T OF STAFF WELFARE MEASURES. ADMITTEDLY, THE SCHEME PROVIDES FOR ALLOTMENT OF SH ARES OF CATERPILLAR INC EVEN TO DEPUTED EMPLOYEES. THE SAID PAYMENT OF RS. 7,41,51 ,630/- WAS ACTUALLY MADE BY THE ASSESSEE AND HENCE IT IS NOT A NOTIONAL LOSS . MOREOVER, THE SHARES OF THE PARENT COMPANY WERE ISSUED TO THOSE EMPLOYEES. HEN CE THE FINDING GIVEN BY DELHI TRIBUNAL THAT ISSUE OF SHARES UNDER ESOP AT L ESS THAN MARKET PRICE ONLY RESULTS IN SHORT RECEIPT OF SHARE PREMIUM DOES NOT ARISE AT ALL. ACCORDINGLY, THE CASE LAW RELIED UPON BY THE LOWER AUTHORITIES ON TH E DECISION OF THE CO-ORDINATE BENCH OF DELHI TRIBUNAL IN THE CASE OF RANBAXY LABO RATORIES LTD VS ACIT REPORTED IN 26 DTR 420 IS NOT APPLICABLE IN THE INSTANT CASE . WE FIND THAT THE EXPENSES IN CONNECTION WITH THE ISSUE OF SHARES OF CATERPILLAR INC. U.S.A. UNDER ESOP SCHEME BY THE ASSESSEE TO THE EMPLOYEES IS AN ASCERTAINED LIABILITY AND MORE IN THE NATURE OF WELFARE MEASURES FOR THE EMPLOYEES. ACCO RDINGLY THE COMPENSATION PAID IN THE FORM OF PRICE DIFFERENTIALS IS SQUARELY ALLOWABLE AS DEDUCTION AS AN EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. WE FIND THAT THE LD CITA HAD ERRONEOUSLY APPLIED THE PROVIS IONS OF SECTION 40(A)(IA) OF THE ACT BY HOLDING THAT THE ESOP EXPENDITURE IS ONLY IN THE NATURE OF SALARY OR EXTRA REMUNERATION AND HENCE THE SAME WOULD ANY WAY DESER VES TO BE DISALLOWED FOR NON-DEDUCTION OF TAX AT SOURCE. WE FIND FROM THE P ROVISIONS OF SECTION 40(A)(IA) OF THE ACT AS PREVAILING AT THE RELEVANT POINT OF T IME AND AS APPLICABLE TO THE YEAR UNDER APPEAL, THAT SALARY EXPENDITURE WAS NOT INCLUDED IN THE LIST OF ITEMS WARRANTING DISALLOWANCE. HOWEVER THE SAME WAS INTR ODUCED IN THE STATUTE AT A MUCH LATER POINT OF TIME. HENCE THE ARGUMENT OF TH E REVENUE FAILS ON THAT COUNT. :-9-: I.T.A. NO. 1722/MDS/2012 WITH REGARD TO THE VERSION OF THE LD CITA THAT THE ESOP SCHEME SHOULD BE IN ACCORDANCE WITH THE GUIDELINES PRESCRIBED BY THE CE NTRAL GOVERNMENT AS MANDATED IN SECTION 17 OF THE ACT , WE AGREE WITH T HE LD AR THAT THE SAME IS TO BE APPLIED ONLY FOR THE PURPOSE OF VALUATION OF PER QUISITES. WE FIND THAT EVEN THE PROVISO TO SECTION 17(2)(III) OF THE ACT NO WHERE C ONTEMPLATED THE ELIGIBILITY OF ALLOWABILITY OF DEDUCTION OF ESOP EXPENDITURE FOR A N ASSESSEE. IN ANY CASE, IF THE PROVISO IS APPLIED AND PERQUISITES VALUATION IS MADE ACCORDINGLY, THEN THE SAME WOULD HAVE TO BE CONSTRUED AS SALARY TO THE EM PLOYEES WHICH IS AN ALLOWABLE DEDUCTION FOR THE EMPLOYER. IF THERE IS ANY VIOLATION THEREON IN THE FORM OF NON DEDUCTION OF TAX AT SOURCE, THEN THE S AME WOULD FASTEN SOME TDS LIABILITY ON THE EMPLOYER U/S 201 AND 201(1A) OF TH E ACT AND THAT WOULD NOT IN ANY CASE HAMPER THE ALLOWABILITY OF DEDUCTION TOWAR DS SALARIES IN THE HANDS OF THE EMPLOYER. WE FIND THAT THE CBDT HAD ISSUED A CIRCULAR IN THE CONTEXT OF FRINGE BENEFIT TAX VIDE CIRCULAR NO. 9/2007 DATED 2 0.12.2007 , WHEREIN , IN RESPONSE TO QUESTION NO. 16 , THEY HAD SPECIFICALLY REPLIED THAT ESOP EXPENDITURE IS AN ALLOWABLE DEDUCTION IN COMPUTING THE TAXABLE INCOME OF THE EMPLOYER COMPANY. FOR THE SAKE OF CONVENIENCE, THE SAME IS R EPRODUCED HEREUNDER :- 16. WHETHER THE FRINGE BENEFIT ARISING ON ACCOUNT O F SHARES ALLOTTED OR TRANSFERRED UNDER ESOP IS ALLOWED AS DEDUCTION IN C ALCULATING THE TAXABLE INCOME OF THE EMPLOYER COMPANY ? ANSWER. IN CASE WHERE THE EMPLOYER PURCHASES THE S HARES AND THEN SUBSEQUENTLY TRANSFERS SUCH SHARES TO ITS EMPLOYEES , THE EXPENDITURE SO INCURRED IS ALLOWABLE AS DEDUCTION IN COMPUTING THE TAXABLE INCOME OF THE EMPLOYER COMPANY. HOWEVER, IF THE SHARES ARE ALLOT TED TO THE EMPLOYEES :-10-: I.T.A. NO. 1722/MDS/2012 FROM THE SHARE CAPITAL OF THE COMPANY, NO DEDUCTION IS ALLOWABLE IN COMPUTING THE TAXABLE INCOME OF THE COMPANY SINCE N O EXPENDITURE HAS BEEN INCURRED BY IT. IN THE INSTANT CASE, THE SHARES OF CATERPILLAR INC. U.S.A. HAS BEEN ALLOTTED TO THE EMPLOYEES AND THE PRICE DIFFERENTIAL IS DEBITED TO THE ASSESSEE COMPANY BY WAY OF A DEBIT NOTE AND AS STATED SUPRA, SINCE THE EMP LOYEES WERE UNDER THE CONTROL OF THE ASSESSEE COMPANY ON DEPUTATION AND MORE SO T HE ESOP SCHEME ALSO PROVIDED FOR ALLOTMENT OF SHARES UNDER ESOP TO DEPU TED EMPLOYEES ALSO, THE ASSESSEE HAD DEBITED THE PRICE DIFFERENTIALS AS ESO P EXPENDITURE IN ITS PROFIT AND LOSS ACCOUNT. THIS IN OUR CONSIDERED OPINION, IS A N ALLOWABLE EXPENDITURE AND IS IN TUNE WITH THE REPLY GIVEN IN THE FREQUENTLY ASKE D QUESTIONS (FAQ) IN THE CBDT CIRCULAR NO. 9/2007 DATED 20.12.2007. THE CIRCUL AR ISSUED BY THE CBDT IS BINDING ON THE TAX AUTHORITIES AND THE SAME COULD B E USED BY THE ASSESSEE IF PROVED BENEFICIAL TO THE ASSESSEE. WE ALSO FIND THAT THE ISSUE UNDER DISPUTE IS SQUARE LY COVERED BY THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CI T VS PVP VENTURES LTD IN TC(A) NO. 1023 OF 2005 DATED 19.6.2012 REPORTED IN 2012-TIOL-550-HC-MAD-IT WHEREIN IT HAD BEEN HELD CATEGORICALLY HELD THAT ES OP EXPENDITURE IS IN THE NATURE OF STAFF WELFARE EXPENSES AND IS SQUARELY AL LOWABLE AS DEDUCTION IN COMPUTING THE TAXABLE INCOME OF AN ASSESSEE. THE R ELEVANT OPERATIVE PORTION OF THE SAID JUDGEMENT IS REPRODUCED HEREUNDER:- :-11-: I.T.A. NO. 1722/MDS/2012 ' AS FAR AS THE EMPLOYEES STOCK OPTION PLAN IS CON CERNED, A RIGHTLY POINTED OUT BY THE TRIBUNAL, THE ASSESSEE HAD TO FO LLOW SEBI DIRECTION AND BY FOLLOWING SUCH DIRECTION, THE ASSESSEE CLAIMED T HE ASCERTAINED AMOUNT AS LIABILITY FOR DEDUCTION. WE DO NOT FIND THAT TH ERE EXISTS ANY ERROR TO DISTURB THE ORDER OF THE TRIBUNAL AND IN TURN THE A SSESSING AUTHORITY. IN THE CIRCUMSTANCES, WE AGREE WITH THE SUBMISSION OF LEARNED SENIOR COUNSEL APPEARING FOR THE ASSESSEE IN THIS REGARD BY UPHOLD ING THE ORDER OF THE TRIBUNAL. ' WE ALSO FIND THAT THE DECISION OF HONBLE MADRAS HI GH COURT WAS SUBSEQUENTLY FOLLOWED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS LEMO N TREE HOTELS LTD IN ITA NO. 107/2015 DATED 18.8.2015 REPORTED IN 2015-TIOL-2636-HC-DEL- IT . IN VIEW OF OUR AFORESAID FINDINGS IN THE FACTS AND CIRCUMSTANCES OF THE CASE, RESPECTFULLY FOLLOWING THE CBDT CIRCULAR AND THE JU DICIAL PRECEDENTS RELIED UPON HEREINABOVE, WE HOLD THAT THE COMPENSATION PAID IN THE FORM OF ESOP EXPENDITURE IS AN ALLOWABLE DEDUCTION AS AN EXPENDI TURE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. HENCE WE HAVE NO HESITATION IN DIRECTING THE LD AO TO DELETE THE DISALLOWANCE MADE IN THIS R EGARD. ACCORDINGLY, THE GROUNDS 1A) TO 1E) RAISED BY THE ASSESSEE ARE ALLOW ED. :-12-: I.T.A. NO. 1722/MDS/2012 4. THE NEXT ISSUE TO BE DECIDED IN THIS APPEAL IS AS TO WHETHER THE LD CITA WAS JUSTIFIED IN UPHOLDING THE TREATMENT OF THE LD AO IN TREATING THE COST OF MOBILE PHONES AS CAPITAL EXPENDITURE AS AGAINST THE CLAIM OF REVENUE EXPENDITURE IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 4.1. THE LD AR DURING THE COURSE OF HEARING STATED THAT HE IS NOT PRESSING THIS GROUND SINCE DEPRECIATION ON MOBILE PHONES HAS BEEN GRANTED BY THE REVENUE AND IN VIEW OF THE SMALLNESS OF THE AMOUNT INVOLVED THEREIN. ACCORDINGLY, THE GROUND NOS. 2 A) AND 2 B) ARE DISMISSED AS NOT PRES SED. 5. THE NEXT ISSUE TO BE DECIDED IN THIS APPEAL IS AS TO WHETHER THE LD CITA WAS JUSTIFIED IN CONFIRMING THE ACTION OF THE LD AO IN ADDING BACK THE PROVISION FOR WEALTH TAX WHILE COMPUTING THE BOOK PROFITS U/S 115JB OF THE ACT. 5.1. THE BRIEF FACTS OF THIS ISSUE IS THAT THE ASS ESSEE MADE PROVISION FOR WEALTH TAX AMOUNTING TO RS. 66,600/- AND DEBITED THE SAME IN THE PROFIT AND LOSS ACCOUNT. WHILE COMPUTING THE BOOK PROFITS U/S 115J B OF THE ACT, THE ASSESSEE DID NOT ADD BACK THE SAME TO THE BOOK PROFITS. THE LD AO ADDED BACK THE SAME HOLDING IT TO BE THE AMOUNTS OR AMOUNTS SET ASIDE TO PROVISIONS MADE FOR MEETING LIABILITIES, OTHER THAN ASCERTAINED LIABILI TIES. THIS ACTION WAS UPHELD BY THE LD CITA BY PLACING RELIANCE ON THE DECISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF ACIT VS CHETTINAD CEMENT CO RPORATION LTD REPORTED IN :-13-: I.T.A. NO. 1722/MDS/2012 (2011) 133 ITD 317 (CHENNAI TRIBUNAL) . AGGRIEVED , THE ASSESSEE IS IN APPEAL BEFORE US ON THE FOLLOWING GROUNDS :- 'A) THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTI ON OF AO OF ADDING BACK THE PROVISION FOR WEALTH-TAX IN COMPUTING THE BOOK PROFIT. B) THE LEARNED CIT(A) OUGHT TO HAVE OBSERVED THAT C LAUSE(A) OF EXPLANATION 1 TO SECTION 115JB DOES NOT COVER WEALT H TAX. C) THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED THA T THE SAME WAS ASCERTAINED LIABILITY.' 5.2. THE LD AR ARGUED THAT THIS ISSUE IS COVERED I N FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN TH E CASE OF CIT VS ECHJAY FORGINGS (P) LTD REPORTED IN (2001) 251 ITR 15 (BOM ). IN RESPONSE TO THIS, THE LD DR VEHEMENTLY RELIED ON THE ORDER OF THE LD CITA 5.3. WE HAVE HEARD THE RIVAL SUBMISSIONS. WE FIN D THAT SECTION 115JB OF THE ACT STARTS WITH A NON-OBSTANTE CLAUSE AND OVERRIDES ALL OTHER PROVISIONS OF THE ACT. THE ONLY ADJUSTMENTS THAT MAY BE MADE TO THE BOOK PROFITS OF AN ASSESSEE SHALL BE THE ADJUSTMENTS SPECIFIED IN EXPLANATION 1 TO SECTION 115JB OF THE ACT. WE FIND THAT EXPLANATION 2 TO SECTION 115JB OF THE ACT PROVIDES THE AMOUNTS THAT WOULD CONSTITUTE INCOME TAX FOR THE PURPOSE OF SECT ION 115JB OF THE ACT, WHICH CONTEMPLATES DIVIDEND DISTRIBUTION TAX, INTEREST, S URCHARGE, PRIMARY AND SECONDARY EDUCATION CESS. IN FACT THIS AMENDMENT WAS INTRODUCED IN THE STATUTE VIDE FINANCE ACT 2008 WITH RETROSPECTIVE EFFECT FRO M 1.4.2001. HENCE IT WAS :-14-: I.T.A. NO. 1722/MDS/2012 NEVER THE INTENTION OF THE LEGISLATURE TO INCLUDE W EALTH TAX WITHIN THE AMBIT OF INCOME TAX SO AS TO FALL WITHIN THE MISCHIEF OF EXP LANATION 1. WE HOLD THAT THE PROVISION MADE TOWARDS WEALTH TAX AMOUNTING TO RS 6 6,600/- WOULD BE AN ASCERTAINED LIABILITY. WE ALSO FIND THAT THE ISSUE UNDER DISPUTE IS COVERED IN FAVOUR OF THE ASSESSEE AS RIGHTLY RELIED UPON BY TH E LD AR ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS ECH JAY FORGINGS (P) LTD REPORTED IN (2001) 251 ITR 15 (BOM) , WHEREIN IT WAS HELD THAT :- THE NET PROFIT, AS SHOWN IN THE P&L A/C, WILL NOT B E INCREASED BY THE AMOUNT OF WEALTH-TAX PAID BECAUSE UNDER CL.(A) OF T HE EXPLANATION TO S.115J(1A) , WHAT IS CONTEMPLATED IS THE AMOUNT OF INCOME-TAX PAID. UNDER THE SAID CLAUSE, PAYMENT OF WEALTH-TAX IS NOT CONTEMPLATED. THEREFORE, THE NET PROFIT SHALL NOT BE INCREASED BY THE AMOUNT OF WEALTH- TAX PAID BY THE ASSESSEE. IN VIEW OF OUR AFORESAID FINDINGS AND RESPECTFULLY FOLLOWING THE JUDICIAL PRECEDENT RELIED UPON HEREINABOVE, WE HOLD THAT THE PROVISION FOR WEALTH TAX NEED NOT BE ADDED BACK TO THE BOOK PROFITS U/S 115JB OF THE ACT AND ACCORDINGLY THE GROUNDS RAISED BY THE ASSESSEE IN THIS REGARD ARE ALLOWED. 6. THE LAST ISSUE TO BE DECIDED IN THIS APPEAL IS AS TO WHETHER THE LD CITA WAS JUSTIFIED IN CONFIRMING THE ACTION OF THE LD AO OF NOT REDUCING THE REVERSAL OF PRODUCT SUPPORT EXPENSES FROM BOOK PROFIT IN THE FA CTS AND CIRCUMSTANCES OF THE CASE. :-15-: I.T.A. NO. 1722/MDS/2012 6.1. THE BRIEF FACTS OF THIS ISSUE IS THAT DURING THE ASST YEAR 2006-07, THE ASSESSEE HAD MADE A PROVISION OF RS. 35,43,000/- TO WARDS PRODUCT SUPPORT EXPENSES. THE SAID PROVISION WAS CLAIMED AS AN ALL OWABLE EXPENDITURE IN THE RETURN OF INCOME AND ALSO UNDER THE COMPUTATION OF BOOK PROFITS U/S 115JB OF THE ACT. THE LD AO DURING THE COURSE OF ASSESSMENT PRO CEEDINGS FOR THE ASST YEAR 2006-07 VIDE ORDER U/S 143(3) OF THE ACT DATED 29.1 2.2009 ADDED BACK THE SAID PROVISION AMOUNTING TO RS. 35,43,000/- WHILE COMPUT ING BOOK PROFITS U/S 115JB OF THE ACT CONSIDERING THE SAME TO BE CONTINGENT IN NATURE. THE ASSESSEE DID NOT PREFER ANY APPEAL FOR THE ASST YEAR 2006-07 IN RESP ECT OF ADJUSTMENT MADE TOWARDS PRODUCT SUPPORT EXPENSES. DURING THE ASST YEAR 2007-08 (I.E THE YEAR UNDER APPEAL), THE ASSESSEE HAD WRITTEN BACK THE PR OVISION TOWARDS PRODUCT SUPPORT EXPENSES AMOUNTING TO RS. 34,80,251/- WHICH WAS CREDITED TO THE PROFIT AND LOSS ACCOUNT AND WAS INCLUDED AS PART OF ITS BO OK PROFITS. THE LD AO DID NOT MAKE ANY ADJUSTMENT IN RESPECT OF WRITE BACK OF PRO VISION TOWARDS PRODUCT SUPPORT SERVICES WHILE COMPUTING THE BOOK PROFITS U /S 115JB OF THE ACT FOR THE ASST YEAR 2007-08. THE LD CITA CONFIRMED THE ACTIO N OF THE LD AO BY OBSERVING THAT THE LD AO HAD NOT MADE ANY ADDITION IN THE CUR RENT YEAR AND HENCE NO ADJUSTMENT COULD BE MADE IN RESPECT OF THE AFORESAI D WRITE BACK OF PROVISION. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US ON T HE FOLLOWING GROUNDS :- 4. A) THE LEARNED CIT(A) ERRED IN CONFIRMING THE AC TION OF THE AO OF NOT REDUCING THE REVERSAL OF PRODUCT SUPPORT EXPENSES F ROM BOOK PROFIT :-16-: I.T.A. NO. 1722/MDS/2012 B) THE LEARNED CIT(A) OUGHT TO HAVE OBSERVED THAT P ROVISION FOR PRODUCT SUPPORT EXPENSES WAS ADDED BACK IN COMPUTAT ION OF BOOK PROFIT FOR AY 2006-07 BY THE ASSESSING OFFICER VIDE ASSESS MENT ORDER DATED 29 DECEMBER 2009 AND HENCE REVERSAL OF SUCH PROVISION IN AY 2007-08 OUGHT TO BE REDUCED FROM BOOK PROFIT.' 6.2. THE LD AR ARGUED THAT SINCE THE PROVISION FOR PRODUCT SUPPORT EXPENSES WAS DISALLOWED BY THE LD AO WHILE COMPUTING BOOK PR OFITS U/S 115JB OF THE ACT FOR THE ASST YEAR 2006-07 FOR RS. 35,43,000/- , REV ERSAL OF THE PART OF THE SUM AMOUNTING TO RS. 34,80,251/- FROM THE SAME DURING T HE ASST YEAR 2007-08 SHOULD BE AUTOMATICALLY REDUCED FROM THE BOOK PROFI T AS MANDATED IN CLAUSE (I) OF EXPLANATION 1 DEFINING BOOK PROFIT WHEREIN IT STATES THAT :- EXPLANATION 1 FOR THE PURPOSES OF THIS SECTION, BOOK PROFIT MEANS THE NET PROFIT AS SHOWN IN THE PROFIT AND LOSS ACCOUNT FOR THE RELEVANT PREVIOUS YEAR PREPARED UNDER SUB-SECTION (2) , AS INCREASED BY --------------------------------------------------- ------------ IF ANY AMOUNT REFERRED TO IN CLAUSES (A) TO (I) IS DEBITED TO PROFIT AND LOSS ACCOUNT OR IF ANY AMOUNT REFERRED TO IN CLAUSE (J) IS NOT CREDITED TO THE PROFIT AND LOSS ACCOUNT, AND AS REDUCED BY (I) THE AMOUNT WITHDRAWN FROM ANY RESERVE OR PROVIS ION (EXCLUDING A RESERVE CREATED BEFORE THE 1 ST DAY OF APRIL 1997 OTHERWISE THAN BY WAY OF A DEBIT TO THE PROFIT AND LOSS ACCOUNT), IF ANY SUC H AMOUNT IS CREDITED TO THE PROFIT AND LOSS ACCOUNT: PROVIDED THAT WHERE THIS SECTION IS APPLICABLE TO A N ASSESSEE IN ANY PREVIOUS YEAR, THE AMOUNT WITHDRAWN FROM RESERVES C REATED OR PROVISIONS MADE IN A PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR COMMENCING ON :-17-: I.T.A. NO. 1722/MDS/2012 OR AFTER THE 1 ST DAY OF APRIL 1997 SHALL NOT BE REDUCED FROM THE BO OK PROFIT UNLESS THE BOOK PROFIT OF SUCH YEAR HAS BEEN INCREA SED BY THOSE RESERVES OR PROVISIONS (OUT OF WHICH THE SAID AMOUNT WAS WIT HDRAWN) UNDER THIS EXPLANATION OR EXPLANATION BELOW THE SECOND PROVISO TO SECTION 115JA , AS THE CASE MAY BE; OR ----------------------------- WE FIND THAT THE AFORESAID SECTION IS VERY CLEAR FO R GRANTING REDUCTION FROM BOOK PROFITS IN RESPECT OF AMOUNTS WITHDRAWN FROM PROVIS IONS ALREADY MADE WHICH WAS ADDED BACK TO THE BOOK PROFITS IN THE YEAR OF MAKIN G PROVISIONS. IN THE INSTANT CASE, ADMITTEDLY, THE LD AO HAD DULY ADDED BACK THE SUM OF RS. 35,43,000/- TOWARDS PROVISION FOR PRODUCT SUPPORT EXPENSES IN A SST YEAR 2006-07 VIDE HIS ORDER U/S 143(3) DATED 29.12.2009 WHILE COMPUTING B OOK PROFITS U/S 115JB OF THE ACT. WHEN A PART OF THE SAID PROVISION IS REVERSED IN THE SUBSEQUENT YEAR AND CREDITED TO THE PROFIT AND LOSS ACCOUNT, THAT SHOUL D NOT GO TO ADD TO THE BOOK PROFITS U/S 115JB OF THE ACT. IF IT IS SO DONE, TH EN THE ASSESSEE WOULD BE UNWARRANTEDLY BE INVITED WITH DOUBLE TAXATION U/S 1 15JB OF THE ACT FOR THE SAME AMOUNT. IN VIEW OF EXPLICIT PROVISIONS OF THE ACT AS REPRODUCED SUPRA, WE HAVE NO HESITATION IN DIRECTING THE LD AO TO GRANT REDUC TION OF SUM OF RS. 34,80,251/- TOWARDS REVERSAL OF PROVISION FOR PRODUCT SUPPORT E XPENSES WHILE COMPUTING BOOK PROFITS U/S 115JB OF THE ACT FOR THE ASST YEAR 2007 -08. ACCORDINGLY THE GROUNDS RAISED IN THIS REGARD ARE ALLOWED. :-18-: I.T.A. NO. 1722/MDS/2012 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED ON FRIDAY, THE 17TH DAY OF FEBRUAR Y, 2017 AT CHENNAI. SD/ - ( ' # . $ ) (DUVVURU RL REDDY) /JUDICIAL MEMBER SD/ - ( ) (M. BALAGANESH) / ACCOUNTANT MEMBER /CHENNAI, 3 /DATED: 17TH FEBRUARY, 2017 JPV * -&45 65 /COPY TO: 1. ) APPELLANT 2. -.) /RESPONDENT 3. 7 ( )/CIT(A) 4. 7 /CIT 5. 5 -&& /DR 6. 9 /GF