Appeal Details
Counselvise Citation
[2015] 140 COUNSELVISE.COM (IT) 101050 (ITAT-MUMBAI)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
2 year(s) 5 month(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
03-09-2015
Appeal Filed By
Department
Order Result
Partly Allowed
Bench Allotted
I
Next Hearing Date
03-09-2015
Assessment Year
2008-2009
Appeal Filed On
02-04-2013
Judgement Text
, , , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES I, MUMBAI , , , BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER, AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER ITA NO.2490/MUM/2013 ASSESSMENT YEAR: 2008-09 DCIT-9(2), ROOM NO.218, 2 ND FLOOR, AAYAKAR BHAVAN, M.K.ROAD, MUMBAI-400020 / VS. M/S INDIA INFOLINE LTD. IIFL CENTER, KAMALA CITY, SENAPATI BAPAT MARG, LOWER PAREL WEST, MUMBAI-400013 ( / REVENUE) ( !' # /ASSESSEE) P.A. NO. AABCI0745G ITA NO.2620/MUM/2013 ASSESSMENT YEAR: 2008-09 M/S INDIA INFOLINE LTD. IIFL CENTER, KAMALA CITY, SENAPATI BAPAT MARG, LOWER PAREL WEST, MUMBAI-400013 / VS. DCIT-9(2), ROOM NO.218, 2 ND FLOOR, AAYAKAR BHAVAN, M.K.ROAD, MUMBAI-400020 ( !' # /ASSESSEE) ( / REVENUE) P.A. NO.AABCI0745G !' # / ASSESSEE BY SHRI PRITESH MEHTA / REVENUE BY SHRI SAMUEL DARSE CIT-DR $ % # & / DATE OF HEARING : 03/09/2015 % # & / DATE OF ORDER: 01/12/2015 M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 2 / O R D E R PER JOGINDER SINGH (JUDICIAL MEMBER) THESE CROSS APPEALS BY THE ASSESSEE COMPANY AND THE REVENUE ARE DIRECTED AGAINST THE ORDER DATED 03.01.2013 OF THE COMMISSIONER OF INCOME TAX (APPEALS)-20,MUMBAI(HEREINAFTER CALLED THE CIT(A) ) FOR THE ASSESSMENT YEAR 2008-09 2. THE ASSESSEE COMPANY HAS RAISED FOLLOWING GROUN DS OF APPEAL IN THE MEMO OF APPEAL FILED BY THE ASSESS EE COMPANY , THE APPEAL BEING ITA NO. 2620/MUM/2013: - 1 THE LEARNED CIT(A) FAILED TO APPRECIATE THAT DEF ERRED COMPENSATION EXPENSES OF RS.5,99,74,467/- ON ACCOUNT OF ESOP WER E INCURRED IN THE NORMAL COURSE OF ACTIVITIES OF THE ASSESSEE AND ARE ALLOWABLE EXPENSES. 2. THE LEARNED CIT(A) FAILED TO APPRECIATE THE DECI SION OF THE ITAT CHENNAI IN THE CASE OF SSI LTD. V. DCIT(2004) 85 TTJ 1049(C HEN.) WHERE DIFFERENCE BETWEEN THE MARKET PRICE AND THE ISSUE PRICE OF THE SHARES OFFERED TO EMPLOYEES UNDER THE STOCK OPTION SCHEME WAS HELD TO BE ALLOWABLE EXPENDITURE UNDER SIMILAR CIRCUMSTANCES. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APP EAL IN THE MEMO OF APPEAL FILED BY THE REVENUE , THE AP PEAL BEING ITA NO. 2490/MUM/2013:- 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) IS CORRECT IN EXCLUDING RS.4,61,37,00,00 0/- BEING INVESTMENT MADE BY THE ASSESSEE IN THE SHARES OF ITS SUBSIDIAR Y M/S INDIA INFOLINE INVESTMENT SERVICES LIMITED WHILE WORKING OUT THE A VERAGE VALUE OF INVESTMENT FOR THE PURPOSE OF COMPUTATION OF DISALL OWANCE U/S 14A R.W.R. 8D. 2. THE APPELLANT PRAYS THAT THE ORDER OF THE CIT(A) ON THE GROUNDS BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE REST ORED. M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 3 3. THE ASSESSEE COMPANY IS AGGRIEVED BY THE DISALLO WANCE OF DEFERRED COMPENSATION EXPENSES OF RS. 5,99,74,467/- DEBITED UNDER THE HEAD EMPLOYEE COST , BY THE ASSES SING OFFICER(HEREINAFTER CALLED THE AO) WHICH WAS CON FIRMED BY THE CIT(A). 4. DURING THE COURSE OF ASSESSMENT PROCEEDINGS U/S 143(3) READ WITH SECTION 143(2) OF THE ACT, THE ASS ESSEE COMPANY WAS ASKED BY THE AO THAT WHY THE DEFERRED EMPLOYEE COMPENSATION EXPENSES OF RS. 5,99,74,467/- DEBITED UNDER THE HEAD EMPLOYEE COST WAS CLAIMED AS REVENUE EXPENDITURE BY THE ASSESSEE COMPANY AS THES E EXPENSES BEING RELATED TO ISSUE OF FRESH EQUITY SHA RES (ESOP) BY THE ASSESSEE COMPANY AND HENCE ARE CAPITA L IN NATURE NOT ALLOWABLE AS REVENUE EXPENDITURE U/S 37( 1) OF THE ACT. THE ASSESSEE COMPANY REPLIED THAT THE SAID EX PENSES ARE ON ACCOUNT OF THE DIFFERENCE BETWEEN THE FAIR M ARKET VALUE OF THE SHARES AND THE ISSUE PRICE AT WHICH TH E SHARES ARE MADE AVAILABLE TO THE EMPLOYEES WHICH IS THE IN COME OF THE EMPLOYEES BEING TAXABLE PERQUISITE IN THE HAND S OF THE EMPLOYEES ON WHICH TAX HAS BEEN DEDUCTED AT SOURCE BY THE ASSESSEE COMPANY. EMPLOYEES ARE GIVEN ESOP AS AN INCENTIVE TO IMPROVE THEIR PERFORMANCE AND LEADS TO HIGHER PROFITABILITY FOR THE ASSESSEE COMPANY WHICH IS NOT HING BUT A MEANS OF REMUNERATING EMPLOYEES IN THE NORMAL COURS E OF BUSINESS AND HENCE THESE EXPENSES ARE IN THE NATURE OF ESOP AND ARE INCURRED WHOLLY AND EXCLUSIVELY FOR TH E M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 4 PURPOSES OF BUSINESS OF THE ASSESSEE COMPANY IN THE NORMAL COURSE OF OPERATIONS AND SHOULD BE ALLOWED AS BUSIN ESS DEDUCTIONS WHILE COMPUTING INCOME FROM BUSINESS OF THE ASSESSEE COMPANY. THE ASSESSEE COMPANY RELIED UPON THE JUDGMENT OF SSI LTD. V. DCIT (2004) 85 TTJ 1049 (CH EN.). 5. THE AO REJECTED THE CONTENTIONS OF THE ASSESSEE COMPANY AND HELD THAT ESOP IS EXPENDITURE RELATING TO ISSUE OF SHARES AND IS CAPITAL IN NATURE AND HENCE AS PER SECTION 37 OF THE ACT, THE CAPITAL EXPENDITURE IS N OT ALLOWABLE AS THE EXPENDITURE FOR THE PURPOSE OF COM PUTATION OF INCOME FROM BUSINESS. HE ALSO RELIED ON THE CI RCULAR NO.9 OF 2007, FILE NO.142/25/2007-TPL, WHEREBY CBDT HAS CLARIFIED THAT IF SHARES ARE ALLOTTED TO THE EMPLOY EES OF THE COMPANY, NO DEDUCTION IS ALLOWABLE IN COMPUTING TA XABLE INCOME OF THE COMPANY. THE AO ALSO HELD THAT EVEN IF IT IS PERQUISITE IN THE HANDS OF THE EMPLOYEE BUT THE SAM E IS NOT ALLOWABLE AS BUSINESS EXPENDITURE IN THE HANDS OF T HE ASSESSEE COMPANY WHICH IS PROVIDING PERQUISITE TO T HE EMPLOYEE AS IT IS INDEPENDENT OF THE PERQUISITE . THE AO RELIED UPON THE DECISION IN THE CASE OF RANBAXY LAB ORATORIES LTD. V. ACIT [124 TTJ 771] (2009) (DELHI TRIBUNAL) TO HOLD THAT SUCH EXPENDITURE SHALL NOT BE ALLOWED AS REVEN UE EXPENDITURE. THE DIFFERENCE BETWEEN THE MARKET PRI CE AND THE ISSUE PRICE/GRANT PRICE, DOES NOT RESULT INTO I NCURRING OF ANY EXPENDITURE RATHER IT RESULTS INTO SHORT RECEIP T OF SHARE PREMIUM WHICH THE ASSESSEE COMPANY WAS OTHERWISE ENTITLED TO. THE RECEIPT OF SHARE PREMIUM IS NOT TA XABLE AND M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 5 HENCE ANY SHORT RECEIPT OF SUCH SHARE PREMIUM WILL BE A NOTIONAL LOSS AND NOT ACTUAL LOSS FOR WHICH NO LIAB ILITY IS INCURRED AND SUCH NOTIONAL LOSSES ARE NOT ALLOWABLE UNDER THE PROVISIONS OF THE INCOME TAX ACT, 1961. SIMILA RLY, THE AO HELD THAT NO EXPENDITURE HAS BEEN INCURRED BY TH E ASSESSEE COMPANY AND THE BENEFIT OR INCOME FOREGONE CANNOT BE CONSIDERED AS BUSINESS EXPENDITURE. IN VI EW OF THE ABOVE, THE EXPENDITURE OF RS. 5,99,74,467/- ON ESOP WAS DISALLOWED BY THE AO. 6. AGGRIEVED BY THE ASSESSMENT ORDER OF THE AO PASS ED U/S 143(3) OF THE ACT, THE ASSESSEE COMPANY CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A) AND REITERATED I TS SUBMISSIONS AS WERE SUBMITTED BEFORE THE AO WHICH A RE DETAILED IN THE PRECEDING PARAS, WHICH ARE NOT REP EATED FOR THE SAKE OF BREVITY. THE ASSESSEE COMPANY FURTHER RELIED UPON THE DECISION OF ACIT V. SPRAY ENGINEERING DEVI CES LTD. ITAT- ITA NO.701/CHD/2009 AND CIT V. PVP VENTURES L TD. - HONBLE CHENNAI HIGH COURT AND SSI LTD. V. DCIT (2 004) 85 TTJ 1049 (ITAT CHENNAI). THE CIT(A) REJECTED THE CONTENTIONS OF THE ASSESSEE COMPANY AND HELD THAT ESOP IS NOT A BUSINESS EXPENDITURE BUT IT IS MERELY RECEIPT OF LESSER AMOUNT OF SHARE PREMIUM AND HENCE THE SAME IS NOT ALLOWABLE EXPENDITURE. THE CIT(A) HELD THAT THE DE CISIONS RELIED UPON BY THE AO IN THE RANBAXY LABORATORIES L TD. V. ACIT 124 TTJ 771 (DELHI TRIBUNAL) AND M/S VIP INDUS TRIES LTD. TIOL 654, SUPPORTS THE FINDING OF ASSESSING OF FICER THAT SUCH ESOP IS NOT ALLOWABLE EXPENDITURE, HENCE THE M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 6 CONTENTIONS OF THE ASSESSEE WERE REJECTED AND THE A PPEAL OF THE ASSESSEE COMPANY WAS DISMISSED ON THIS GROUND. 7. AGGRIEVED BY THE ORDERS OF THE CIT(A), THE ASSES SEE COMPANY IS IN APPEAL BEFORE THE TRIBUNAL. THE ASSES SEE COMPANY SUBMITTED THAT THE DECISION OF BANGALORE SP ECIAL BENCH OF THE TRIBUNAL IN BIOCON LTD. V. DCIT IN ITA NOS. 368 TO 371/BANG/2010 IS SQUARELY APPLICABLE TO THE ISSU E IN HAND IN FAVOUR OF THE ASSESSEE COMPANY, WHEREBY THE SPECIAL BENCH OF THE TRIBUNAL HAS HELD THE DISCOUNT UNDER ESOP IS IN THE NATURE OF EMPLOYEES COST AND IS HENC E DEDUCTIBLE DURING THE VESTING PERIOD W.R.T. MARKET PRICE OF THE SHARES AT THE TIME OF GRANT OF OPTIONS TO THE E MPLOYEES. HENCE, THE ASSESSEE COMPANY CONTENDED BEFORE US THA T THE EXPENDITURE INCURRED OF RS .5,99,74,467/- (ESOP) BEING DEFERRED EMPLOYEE COMPENSATION EXPENSE DEBITED UNDE R THE HEAD EMPLOYEE COST SHOULD BE ALLOWED AS REVENUE EXPENDITURE WHILE COMPUTING INCOME FROM BUSINESS OF THE ASSESSEE COMPANY. THE ASSESSEE COMPANY ALSO REITER ATED THE SUBMISSIONS AS SUBMITTED BEFORE THE AUTHORITIES BELOW WHICH ARE DETAILED IN PRECEDING PARAS AND NOT REPE ATED AGAIN FOR THE SAKE OF BREVITY. ON THE OTHER HAND, THE LD. DR RELIED UPON THE ORDER OF THE AUTHORITIES BELOW AND CONTENDED THAT SUCH EXPENSES CANNOT BE ALLOWED AS IT IS MEREL Y SHORT RECEIPT OF SHARE PREMIUM ON ISSUE OF FRESH SHARE CA PITAL BY THE ASSESSEE COMPANY. M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 7 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE HAVE OBSERVED THAT THE DEDUCTIBILITY OF EXPENSES ON ACCO UNT OF ESOP BEING DISCOUNT UNDER THE ESOP HAS BEEN DECIDED BY THE SPECIAL BENCH OF THE TRIBUNAL IN BIOCON LTD. (S UPRA), WHEREBY, THE ITAT SPECIAL BENCH , BANGALORE HAS HEL D THAT DISCOUNT UNDER THE ESOP IS IN THE NATURE OF EMPLOYE ES COST AND HENCE DEDUCTIBLE DURING THE VESTING PERIOD W.R. T. THE MARKET PRICE OF SHARE AT THE TIME OF GRANT OF OPTIO NS TO THE EMPLOYEES. WE HAVE OBSERVED THAT THE ISSUE IN HAND IS SQUARELY COVERED BY THE DECISION OF HONBLE SPECIAL BENCH- BANGALORE TRIBUNAL REPORTED IN (2013) 35 TAXMANN.CO M 335(SB) BIOCON LIMITED V. DCIT(LTU) IN FAVOUR OF TH E ASSESSEE COMPANY WHEREBY THE HONBLE SPECIAL BENCH HAS HELD AS UNDER : 7. WE HAVE HEARD SHRI H. PADAM CHAND KHINCHA FOR THE A PPELLANT- ASSESSEE; SHRI ROHIT JAIN FOR THE INTERVENER, M/S. BHARTI AIRTEL ; SHRI SACHIN KUMAR B.P. FOR THE INTERVENER, M/S. ADVINUS THERAPEATICS LIMITED ; AND SHRI K.R. PRADEEP FOR THE INTERVENER, M/S. NDTV MEDIA LIMITED, (ALL THE FOUR COUNSEL ARE HEREINAFTER COLL ECTIVELY REFERRED TO AS 'THE LD. AR'). WE HAVE ALSO HEARD SHRI S.K. AMBA STHA, THE LD. CIT REPRESENTING THE REVENUE. THE MOOT QUESTION IS AS T O WHETHER THE DISCOUNTED PREMIUM ON ESOP ALSO CALLED AS THE DISCO UNT ON ISSUE OF ESOP OR THE EMPLOYEE STOCK OPTION COMPENSATION EXPE NSE OR THE EMPLOYEES COMPENSATION EXPENSE OR SIMPLY THE DISCOU NT ETC., IS AN ALLOWABLE DEDUCTION IN THE COMPUTATION THE INCOME U NDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION'? THIS LARGER QUESTION CAN BE ANSWERED IN THE FOLLOWING THREE STEPS, VIZ., I. WHETHER ANY DEDUCTION OF SUCH DISCOUNT IS ALLOWA BLE ? II. IF YES, THEN WHEN AND HOW MUCH? III. SUBSEQUENT ADJUSTMENT TO DISCOUNT M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 8 8. WE WILL TAKE UP THESE THREE STEPS ONE BY ONE FOR C ONSIDERATION AND DECISION. I. WHETHER ANY DEDUCTION OF SUCH DISCOUNT IS ALLOWA BLE ? 9.1 THE CRUX OF THE ARGUMENTS PUT FORTH BY THE LD. AR IS THAT DISCOUNT UNDER ESOP IS NOTHING BUT EMPLOYEES COST INCURRED B Y THE ASSESSEE FOR WHICH DEDUCTION IS WARRANTED. ON THE OTHER HAND, TH E REVENUE HAS SET UP A CASE THAT NO DEDUCTION CAN BE ALLOWED AS SUCH DISCOUNT IS NOT ONLY A SHORT CAPITAL RECEIPT BUT ALSO A CONTINGENT LIABILITY. A. IS DISCOUNT UNDER ESOP A SHORT CAPITAL RECEIPT? 9.2.1 THE LD. DR STATED THAT THE QUESTION OF DEDUCTION U /S 37 CAN ARISE ONLY IF THE ASSESSEE INCURS ANY EXPENDITURE, WHICH THEREAFTER SATISFIES THE REQUISITE CONDITIONS OF THE SUB-SECTI ON (1). HE SUBMITTED THAT THE WORD 'EXPENDITURE' HAS BEEN DESCRIBED BY T HE HON'BLE SUPREME COURT IN THE CASE OF INDIAN MOLASSES CO. (P .) LTD. V. CIT [1959] 37 ITR 66 AS DENOTING SPENDING OR PAYING OUT, I.E. SOMETHING GOING OUT OF THE COFFERS OF THE ASSESSEE. IT WAS PUT FORTH THAT BY ISSUING SHARES AT DISCOUNTED PREMIUM, NOTHI NG IS PAID OUT BY THE COMPANY. ONCE THERE IS NO 'PAYING OUT OR AWAY', THE SAME CANNOT CONSTITUTE AN EXPENDITURE AND RESULTANTLY SECTION 3 7(1), WHICH APPLIES TO ONLY EXPENDITURE, CANNOT BE ACTIVATED. H E FURTHER TOOK PAINS IN EXPLAINING THAT THERE IS NO REVENUE EXPEND ITURE INVOLVED IN THE TRANSACTION OF ISSUANCE OF ESOP AT DISCOUNT. TH E SO CALLED 'DISCOUNT' REPRESENTS THE DIFFERENCE BETWEEN MARKET PRICE OF THE SHARES AT THE TIME OF GRANT OF OPTIONS AND THE PRIC E AT WHICH SUCH OPTIONS ARE GRANTED. SINCE THE AMOUNT OVER AND ABOV E THE FACE VALUE OF THE SHARES, BEING THE SHARE PREMIUM, IS ITSELF A CAPITAL RECEIPT, ANY UNDER-RECOVERY OF SUCH SHARE PREMIUM ON ACCOUNT OF OBLIGATION TO ISSUE SHARES TO EMPLOYEES IN FUTURE AT A LOWER PREM IUM, WOULD BE A CASE OF SHORT CAPITAL RECEIPT. IF AT ALL IT IS TO B E VIEWED IN TERMS OF EXPENDITURE, THEN, AT BEST, IT WOULD BE IN THE NATU RE OF A CAPITAL EXPENDITURE. HE SUPPORTED HIS VIEW BY RELYING ON TH E ORDER PASSED BY THE DELHI BENCH OF THE TRIBUNAL IN RANBAXY LABORATO RIES LTD. V. ADDL. CIT [2010] 39 SOT 17 (URO) . IT WAS STATED THAT THE TRIBUNAL IN THAT CASE HAS HELD THAT SINCE THE RECEIPT OF SHARE PREMI UM IS NOT TAXABLE, ANY SHORT RECEIPT OF SUCH PREMIUM ON ISSUING OPTION S TO EMPLOYEES WILL BE NOTIONAL LOSS AND NOT ACTUAL LOSS FOR WHICH ANY LIABILITY IS INCURRED. THE LEARNED DEPARTMENTAL REPRESENTATIVE C ONTENDED THAT THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF VIP INDUSTRIES V. DY. CIT [IT APPEAL NO.7242 (MUM.) OF 2008 HAS ALSO TAKE N SIMILAR VIEW VIDE ITS ORDER DATED 17.09.2010.] 9.2.2 PER CONTRA, THE LEARNED AR SUBMITTED THAT IT IS NO T A CASE OF ANY SHORT RECEIPT OF SHARE PREMIUM BUT THAT OF COMPENSA TION GIVEN TO EMPLOYEES. HE SUPPORTED THE ADMISSIBILITY OF DEDUCT ION OF THE AMOUNT M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 9 OF DISCOUNT ON THE STRENGTH OF THE ORDER PASSED BY THE CHENNAI BENCH OF THE TRIBUNAL IN THE CASE OF S.S.I. LTD. (SUPRA) GRANTING DEDUCTION OF SUCH DISCOUNT BY TREATING IT AS AN EMPLOYEE COST. H E SUBMITTED THAT THE ABOVE VIEW TAKEN BY THE CHENNAI BENCH HAS BEEN APPROVED BY THE HON'BLE MADRAS HIGH COURT IN CIT V. PVP VENTURES LT D. [2012] 211 TAXMAN 554/23 TAXMANN.COM 286 . THE LEARNED AR ARGUED THAT PVP VENTURES LTD. (SUPRA) IS A SOLITARY JUDGMENT RENDER ED BY ANY HIGH COURT ON THE ISSUE AND HENCE THE SAME NEEDS TO BE F OLLOWED IN PREFERENCE TO ANY CONTRARY TRIBUNAL ORDER. IT WAS A LSO POINTED OUT THAT THE CHENNAI BENCH'S VIEW HAS BEEN SUBSEQUENTLY FOLLOWED BY THE CHANDIGARH BENCH OF THE TRIBUNAL IN ASSTT. CIT V. S PRAY ENGINEERING DEVICES LTD. [2012] 23 TAXMANN.COM 267/53 SOT 70 (U RO) . 9.2.3 LET US EXAMINE THE FACTS OF THE CASE OF RANBAXY LAB ORATORIES LTD. (SUPRA), WHICH HAS BEEN STRONGLY RELIED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE. IT DEALS WITH A SITUAT ION IN WHICH THE ASSESSEE GRANTED STOCK OPTION TO ITS EMPLOYEES. THE SHARES WERE TO BE ISSUED AT RS. 559 PER SHARE AS AGAINST THE FACE VAL UE OF RS. 10 AND THE MARKET PRICE ON THE DATE OF GRANT AT RS. 738.95 PER SHARE. THE ASSESSEE TREATED THE DIFFERENCE BETWEEN RS. 738.95 AND RS. 595 AS EMPLOYEES COMPENSATION IN THE BOOKS OF ACCOUNT AND CHARGED THE SAME TO ITS PROFIT AND LOSS ACCOUNT BY SPREADING IT OVER THE VESTING PERIOD. IT WAS ONE OF THE YEARS OF THE VESTING PERI OD FOR WHICH THE ASSESSEE CLAIMED DEDUCTION THAT CAME UP FOR CONSIDE RATION BEFORE THE TRIBUNAL. IT WAS HELD BY THE TRIBUNAL THAT THE MARK ET PRICE OF RS. 738.55 PER SHARE WOULD HAVE RESULTED IN REALIZATION OF HIGHER SHARE PREMIUM. SINCE THE ASSESSEE DID NOT ACCOUNT FOR THE DIFFERENCE BETWEEN RS. 738.55 AND RS. 10 AS ITS INCOME DURING THE YEAR, THERE WAS NO LOSS OF INCOME. IT WAS FURTHER NOTICED THAT BY ISSUING SHARES AT BELOW THE MARKET PRICE, THERE WAS NO INCURRING OF A NY EXPENDITURE. RATHER IT RESULTED INTO SHORT RECEIPT OF SHARE PREM IUM WHICH THE ASSESSEE WAS OTHERWISE ENTITLED TO. AS THE RECEIPT OF SHARE PREMIUM IS NOT TAXABLE, ANY SHORT RECEIPT OF SUCH PREMIUM WILL ONLY BE A NOTIONAL LOSS AND NOT ACTUAL LOSS REQUIRING ANY DEDUCTION. T HE TRIBUNAL FURTHER NOTICED THAT INCURRING OF SUCH NOTIONAL LOSS CANNOT BE CONSIDERED AS EXPENDITURE WITHIN THE MEANING OF SECTION 37(1) AS THERE WAS NO 'SPENDING' OR 'PAYING OUT OR AWAY'. THE CONTENTION OF THE ASSESSEE THAT SEBI GUIDELINES RECOMMEND CLAIM FOR DEDUCTION OF DISCOUNT OVER THE VESTING PERIOD, DID NOT FIND FAVOUR WITH THE TR IBUNAL ON THE GROUND THAT THE SEBI GUIDELINES WERE NOT RELEVANT I N DETERMINING THE TOTAL INCOME CHARGEABLE TO TAX. 9.2.4 IN ORDER TO APPRECIATE THE RIVAL SUBMISSIONS, IT IS OF THE UTMOST IMPORTANCE TO UNDERSTAND THE CONCEPT OF ESOP. SECTI ON 2(15A) OF THE INDIAN COMPANIES ACT, 1956 DEFINES 'EMPLOYEE STOCK OPTION' TO MEAN 'THE OPTION GIVEN TO THE WHOLE-TIME DIRECTORS, OFFI CERS OR EMPLOYEES OF M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 10 A COMPANY, WHICH GIVES SUCH DIRECTORS, OFFICERS OR EMPLOYEES, THE BENEFIT OR RIGHT TO PURCHASE OR SUBSCRIBE AT A FUTU RE DATE, THE SECURITIES OFFERED BY THE COMPANY AT A PREDETERMINE D PRICE'. IN AN ESOP, THE GIVEN COMPANY UNDERTAKES TO ISSUE SHARES TO ITS EMPLOYEES AT A FUTURE DATE AT A PRICE LOWER THAN THE CURRENT MARKET PRICE. THIS IS ACHIEVED BY GRANTING STOCK OPTIONS TO ITS EMPLOYEES AT DISCOUNT. THE AMOUNT OF DISCOUNT REPRESENTS THE DIFFERENCE BETWEE N MARKET PRICE OF THE SHARES AT THE TIME OF THE GRANT OF OPTION AND T HE OFFER PRICE. IN ORDER TO BE ELIGIBLE FOR ACQUIRING THE SHARES UNDER THE ESOP, THE CONCERNED EMPLOYEES ARE OBLIGED TO RENDER SERVICES TO THE COMPANY DURING THE VESTING PERIOD AS GIVEN IN THE SCHEME. O N THE COMPLETION OF THE VESTING PERIOD IN THE SERVICE OF THE COMPANY, S UCH OPTIONS VEST WITH THE EMPLOYEES. THE OPTIONS ARE THEN EXERCISED BY THE EMPLOYEES BY MAKING APPLICATION TO THE EMPLOYER FOR THE ISSUE OF SHARES AGAINST THE OPTIONS VESTED IN THEM. THE GAP BETWEEN THE COM PLETION OF VESTING PERIOD AND THE TIME FOR EXERCISING THE OPTI ONS IS USUALLY NEGLIGIBLE. THE COMPANY, ON THE EXERCISE OF OPTION BY THE EMPLOYEES, ALLOTS SHARES TO THEM WHO CAN THEN FREELY SELL SUCH SHARES IN THE OPEN MARKET SUBJECT TO THE TERMS OF THE ESOP. THUS IT CA N BE SEEN THAT IT IS DURING THE VESTING PERIOD THAT THE OPTIONS GRANTED TO THE EMPLOYEES VEST WITH THEM. THIS PERIOD COMMENCES WITH THE GRAN T OF OPTION AND TERMINATES WHEN THE OPTIONS SO GRANTED VEST IN THE EMPLOYEES AFTER SERVING THE COMPANY FOR THE AGREED PERIOD. BY GRANT ING THE OPTIONS, THE COMPANY GETS A SORT OF ASSURANCE FROM ITS EMPLO YEE FOR RENDERING UNINTERRUPTED SERVICES DURING THE VESTING PERIOD AN D AS A QUID PRO QUO IT UNDERTAKES TO COMPENSATE THE EMPLOYEES WITH A CERTAIN AMOUNT GIVEN IN THE SHAPE OF DISCOUNTED PREMIUM ON THE ISSUE OF SHARES. 9.2.5 THE CORE OF THE ARGUMENTS OF THE LD. DR IN THIS REG ARD IS TWO- FOLD. FIRST, THAT IT IS NOT AN EXPENDITURE IN ITSEL F AND SECONDLY, IT IS A SHORT CAPITAL RECEIPT OR AT THE MOST A SORT OF CAPI TAL EXPENDITURE. IN OUR CONSIDERED OPINION BOTH THE LEGS OF THIS CONTEN TION ARE LEGALLY UNSUSTAINABLE. 9.2.6 THERE IS NO DOUBT THAT THE AMOUNT OF SHARE PREMIUM IS OTHERWISE A CAPITAL RECEIPT AND HENCE NOT CHARGEABL E TO TAX IN THE HANDS OF COMPANY. THE FINANCE ACT, 2012 HAS INSERTE D CLAUSE (VIIB) OF SECTION 56(2) W.E.F. 1.4.2013 PROVIDING THAT: 'WHER E A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIAL LY INTERESTED, RECEIVES, IN ANY PREVIOUS YEAR, FROM ANY PERSON BEI NG A RESIDENT, ANY CONSIDERATION FOR ISSUE OF SHARES THAT EXCEEDS THE FACE VALUE OF SUCH SHARES, THE AGGREGATE CONSIDERATION RECEIVED FOR SU CH SHARES AS EXCEEDS THE FAIR MARKET VALUE OF THE SHARES', THEN SUCH EXCESS SHARE PREMIUM SHALL BE CHARGED TO TAX UNDER THE HEAD 'INC OME FROM OTHER SOURCES'. BUT FOR THAT, THE AMOUNT OF SHARE PREMIUM HAS ALWAYS BEEN M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 11 UNDERSTOOD AND ACCEPTED AS A CAPITAL RECEIPT. IF A COMPANY ISSUES SHARES TO THE PUBLIC OR THE EXISTING SHAREHOLDERS A T LESS THAN THE OTHERWISE PREVAILING PREMIUM DUE TO MARKET SENTIMEN T OR OTHERWISE, SUCH SHORT RECEIPT OF PREMIUM WOULD BE A CASE OF A RECEIPT OF A LOWER AMOUNT ON CAPITAL ACCOUNT. IT IS SO BECAUSE THE OBJ ECT OF ISSUING SUCH SHARES AT A LOWER PRICE IS NOWHERE DIRECTLY CONNECT ED WITH THE EARNING OF INCOME. IT IS IN SUCH LIKE SITUATION THA T THE CONTENTION OF THE LEARNED DEPARTMENTAL REPRESENTATIVE WOULD PROPE RLY FIT IN, THEREBY DEBARRING THE COMPANY FROM CLAIMING ANY DED UCTION TOWARDS DISCOUNTED PREMIUM. IT IS QUITE BASIC THAT THE OBJECT OF ISSUING SHARES CAN NEVER BE LOST SIGHT OF. HAVING S EEN THE RATIONALE AND MODUS OPERANDI OF THE ESOP, IT BECOMES OUT-AND- OUT CLEAR THAT WHEN A COMPANY UNDERTAKES TO ISSUE SHARES TO ITS EM PLOYEES AT A DISCOUNTED PREMIUM ON A FUTURE DATE, THE PRIMARY OB JECT OF THIS EXERCISE IS NOT TO RAISE SHARE CAPITAL BUT TO EARN PROFIT BY SECURING THE CONSISTENT AND CONCENTRATED EFFORTS OF ITS DEDICATE D EMPLOYEES DURING THE VESTING PERIOD. SUCH DISCOUNT IS CONSTRUED, BOT H BY THE EMPLOYEES AND COMPANY, AS NOTHING BUT A PART OF PACKAGE OF RE MUNERATION. IN OTHER WORDS, SUCH DISCOUNTED PREMIUM ON SHARES IS A SUBSTITUTE TO GIVING DIRECT INCENTIVE IN CASH FOR AVAILING THE SE RVICES OF THE EMPLOYEES. THERE IS NO DIFFERENCE IN TWO SITUATIONS VIZ., ONE, WHEN THE COMPANY ISSUES SHARES TO PUBLIC AT MARKET PRICE AND A PART OF THE PREMIUM IS GIVEN TO THE EMPLOYEES IN LIEU OF THEIR SERVICES AND TWO, WHEN THE SHARES ARE DIRECTLY ISSUED TO EMPLOYEES AT A REDUCED RATE. IN BOTH THE SITUATIONS, THE EMPLOYEES STAND COMPENSATE D FOR THEIR EFFORT. IF UNDER THE FIRST SITUATION, THE COMPANY, SAY, ON RECEIPT OF PREMIUM AMOUNTING TO RS. 100 FROM ISSUE OF SHARES TO PUBLIC , GIVES RS. 60 AS INCENTIVE TO ITS EMPLOYEES, SUCH INCENTIVE OF RS. 6 0 WOULD BE REMUNERATION TO EMPLOYEES AND HENCE DEDUCTIBLE. IN THE SAME WAY, IF THE COMPANY, INSTEAD, ISSUES SHARES TO ITS EMPLOYEE S AT A PREMIUM OF RS. 40, THE DISCOUNTED PREMIUM OF RS. 60, BEING THE DIFFERENCE BETWEEN RS. 100 AND RS. 40, IS AGAIN NOTHING BUT A DIFFERENT MODE OF AWARDING REMUNERATION TO EMPLOYEES FOR THEIR CONTIN UED SERVICES. IN BOTH THE CASES, THE OBJECT IS TO COMPENSATE EMPLOYE ES TO THE TUNE OF RS. 60. IT FOLLOWS THAT THE DISCOUNT ON PREMIUM UND ER ESOP IS SIMPLY ONE OF THE MODES OF COMPENSATING THE EMPLOYEES FOR THEIR SERVICES AND IS A PART OF THEIR REMUNERATION. THUS, THE CONT ENTION OF THE LD. DR THAT BY ISSUING SHARES TO EMPLOYEES AT A DISCOUNTED PREMIUM, THE COMPANY GOT A LOWER CAPITAL RECEIPT, IS BEREFT OF A N FORCE. THE SOLE OBJECT OF ISSUING SHARES TO EMPLOYEES AT A DISCOUNT ED PREMIUM IS TO COMPENSATE THEM FOR THE CONTINUITY OF THEIR SERVICE S TO THE COMPANY. BY NO STRETCH OF IMAGINATION, WE CAN DESCRIBE SUCH DISCOUNT AS EITHER A SHORT CAPITAL RECEIPT OR A CAPITAL EXPENDITURE. I T IS NOTHING BUT THE EMPLOYEES COST INCURRED BY THE COMPANY. THE SUBSTAN CE OF THIS TRANSACTION IS DISBURSING COMPENSATION TO THE EMPLO YEES FOR THEIR M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 12 SERVICES, FOR WHICH THE FORM OF ISSUING SHARES AT A DISCOUNTED PREMIUM IS ADOPTED. 9.2.7 NOW WE ESPOUSE THE SECOND PART OF THE SUBMISSION O F THE LD. DR IN THIS REGARD. HE CANVASSED A VIEW THAT AN EXPENDI TURE DENOTES 'PAYING OUT OR AWAY' AND UNLESS THE MONEY GOES OUT FROM THE ASSESSEE, THERE CAN BE NO EXPENDITURE SO AS TO QUAL IFY FOR DEDUCTION U/S 37. SUB-SECTION (1) OF THE SECTION PROVIDES THA T ANY EXPENDITURE (NOT BEING EXPENDITURE IN THE NATURE DESCRIBED IN S ECTIONS 30 TO 36 AND NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE), LAID OUT OR EXPENDED WHO LLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION SHAL L BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD 'PRO FITS AND GAINS OF BUSINESS OR PROFESSION'. TO PUT IT DIFFERENTLY, AN EXPENDITURE MUST BE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS SO AS TO BE ELIGIBLE FOR DEDUCTION U/S 37( 1). THERE IS ABSOLUTELY NO DOUBT THAT SECTION 37(1) TALKS OF GRA NTING DEDUCTION FOR AN 'EXPENDITURE', AND THE HON'BLE SUPREME COURT IN INDIAN MOLASSES CO. (P.) LTD. (SUPRA) HAS DESCRIBED 'EXPENDITURE' T O MEAN WHAT IS 'PAID OUT OR AWAY' AND IS SOMETHING WHICH HAS GONE IRRETR IEVABLY. HOWEVER, IT IS PERTINENT TO NOTE THAT THIS SECTION DOES NOT RESTRICT PAYING OUT OF EXPENDITURE IN CASH ALONE. SECTION 43 CONTAINS THE DEFINITION OF CERTAIN TERMS RELEVANT TO INCOME FROM PROFITS OF BU SINESS OR PROFESSION COVERING SECTIONS 28 TO 41. SECTION 37 O BVIOUSLY FALLS UNDER CHAPTER IV-D. SUB-SECTION (2) OF SECTION 43 DEFINES 'PAID' TO MEAN: 'ACTUALLY PAID OR INCURRED ACCORDING TO THE METHOD OF ACCOUNTING UPON THE BASIS OF WHICH THE PROFITS OR GAINS ARE CO MPUTED UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION'. ' WHEN WE READ THE DEFINITION OF THE WORD 'PAID' U/S 43(2) IN JUXTAPOS ITION TO SECTION 37(1), THE POSITION WHICH EMERGES IS THAT IT IS NOT ONLY PAYING OF EXPENDITURE BUT ALSO INCURRING OF THE EXPENDITURE W HICH ENTAILS DEDUCTION U/S 37(1) SUBJECT TO THE FULFILMENT OF OT HER CONDITIONS. AT THIS JUNCTURE, IT IS IMPERATIVE TO NOTE THAT THE WO RD 'EXPENDITURE' HAS NOT BEEN DEFINED IN THE ACT. HOWEVER, SEC. 2(H) OF THE EXPENDITURE ACT, 1957 DEFINES 'EXPENDITURE' AS : 'ANY SUM OF MONEY O R MONEY'S WORTH SPENT OR DISBURSED OR FOR THE SPENDING OR DISBURSIN G OF WHICH A LIABILITY HAS BEEN INCURRED BY AN ASSESSEE'. WHEN SECTION 43(2) OF THE ACT IS READ IN CONJUNCTION WITH SECTION 37(1), THE MEANING OF THE TERM 'EXPENDITURE' TURNS OUT TO BE THE SAME AS IS T HERE IN THE AFOREQUOTED PART OF THE DEFINITION UNDER SECTION 2( H) OF THE EXPENDITURE ACT, 1957, VIZ., NOT ONLY 'PAYING OUT' BUT ALSO 'INCURRING'. COMING BACK TO OUR CONTEXT, IT IS SEEN THAT BY UNDE RTAKING TO ISSUE SHARES AT DISCOUNTED PREMIUM, THE COMPANY DOES NOT PAY ANYTHING TO ITS EMPLOYEES BUT INCURS OBLIGATION OF ISSUING SHAR ES AT A DISCOUNTED PRICE ON A FUTURE DATE IN LIEU OF THEIR SERVICES, W HICH IS NOTHING BUT AN EXPENDITURE U/S 37(1) OF THE ACT. M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 13 9.2.8 THOUGH DISCOUNT ON PREMIUM IS NOTHING BUT AN EXPEN DITURE U/S 37(1), IT IS WORTH NOTING THAT THE HON'BLE SUPREME COURT IN THE CASE OF CIT V. WOODWARD GOVERNOR INDIA (P.) LTD. [2009] 312 ITR 254/179 TAXMAN 326 HAS GONE TO THE EXTENT OF COVERING 'LOSS' IN CERTA IN CIRCUMSTANCES WITHIN THE PURVIEW OF 'EXPENDITURE' A S USED IN SECTION IN 37(1). IN THAT CASE, THE ASSESSEE INCURRED ADDIT IONAL LIABILITY DUE TO EXCHANGE RATE FLUCTUATION ON A REVENUE ACCOUNT. THE ASSESSING OFFICER DID NOT ALLOW DEDUCTION U/S 37. WHEN THE MATTER FIN ALLY REACHED THE HON'BLE SUPREME COURT, THEIR LORDSHIPS NOTICED THAT THE WORD 'EXPENDITURE' HAS NOT BEEN DEFINED IN THE ACT. THEY HELD THAT : 'THE WORD 'EXPENDITURE' IS, THEREFORE, REQUIRED TO BE UN DERSTOOD IN THE CONTEXT IN WHICH IT IS USED. SECTION 37 ENJOINS THA T ANY EXPENDITURE NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SE CTIONS 30 TO 36 LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURP OSES OF THE BUSINESS SHOULD BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PR OFESSION'. IN SECTIONS 30 TO 36 THE EXPRESSION 'EXPENDITURE INCUR RED', AS WELL AS ALLOWANCE AND DEPRECIATION, HAS ALSO BEEN USED. FOR EXAMPLE DEPRECIATION AND ALLOWANCES ARE DEALT WITH IN SECTI ON 32, THEREFORE, THE PARLIAMENT HAS USED EXPRESSION 'ANY EXPENDITURE ' IN SECTION 37 TO COVER BOTH. THEREFORE, THE EXPRESSION 'EXPENDITURE' AS USED IN SECTION 37 MADE IN THE CIRCUMSTANCES OF A PARTICULAR CASE, COVERS AN AMOUNT WHICH IS REALLY A 'LOSS' EVEN THOUGH THE SAID AMOUN T HAS NOT GONE OUT FROM THE POCKET OF THE ASSESSEE'. FROM THE ABOVE EN UNCIATION OF LAW BY THE HON'BLE SUMMIT COURT, THERE REMAINS NO DOUBT WHATSOEVER THAT THE TERM 'EXPENDITURE' IN CERTAIN CIRCUMSTANCE S CAN ALSO ENCOMPASS 'LOSS' EVEN THOUGH NO AMOUNT IS ACTUALLY PAID OUT. EX CONSEQUENTI, THE ALTERNATIVE ARGUMENT OF THE LD. DR THAT DISCOUNT ON SHARES IS 'LOSS' AND HENCE CAN'T BE COVERED U/S 37( 1), ALSO DOES NOT HOLD WATER IN THE LIGHT OF THE ABOVE JUDGMENT. IN V IEW OF THE ABOVE DISCUSSION, WE, WITH UTMOST RESPECT, ARE UNABLE TO CONCUR WITH THE VIEW TAKEN IN RANBAXY LABORATORIES LTD.(SUPRA). B. IS DISCOUNT A CONTINGENT LIABILITY ? 9.3.1 THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE IMPUGNED ORDER BY CONTENDING THAT THE ENTITLEMENT T O ESOP DEPENDS UPON THE FULFILMENT OF SEVERAL CONDITIONS LAID DOWN UNDER THE SCHEME. IT IS ONLY WHEN ALL SUCH CONDITIONS ARE FULFILLED A ND THE EMPLOYEES RENDER SERVICES DURING THE VESTING PERIOD THAT THE QUESTION OF ANY ASCERTAINED LIABILITY CAN ARISE. HE SUBMITTED THAT DURING THE ENTIRE VESTING PERIOD, IT IS ONLY A CONTINGENT LIABILITY A ND NO DEDUCTION IS ADMISSIBLE UNDER THE PROVISIONS OF THE ACT FOR A CO NTINGENT LIABILITY. THE OPTIONS SO GRANTED MAY LAPSE DURING THE VESTING PERIOD ITSELF BY REASON OF TERMINATION OF EMPLOYMENT OR SOME OF THE EMPLOYEES MAY NOT CHOOSE TO EXERCISE THE OPTION EVEN AFTER RENDER ING THE SERVICES M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 14 DURING THE VESTING PERIOD. IT WAS, THEREFORE, ARGUE D THAT THE DISCOUNT IS NOTHING BUT A CONTINGENT LIABILITY DURING THE VE STING PERIOD NOT CALLING FOR ANY DEDUCTION. IN THE OPPOSITION, THE L EARNED AR SUBMITTED THAT THE AMOUNT OF DISCOUNT CLAIMED BY THE ASSESSEE AS DEDUCTION IS NOT A CONTINGENT LIABILITY BUT AN ASCERTAINED LIABI LITY. HE STATED THAT IN THE ESOP 2000, THERE IS A VESTING PERIOD OF FOUR YEARS, WHICH MEANS THAT THE OPTIONS TO THE EXTENT OF 25% OF THE TOTAL GRANT WOULD VEST WITH THE ELIGIBLE EMPLOYEES AT THE END OF FIRST YEA R AFTER RENDERING UNHINDERED SERVICE FOR ONE YEAR AND IT WOULD GO ON TILL THE COMPLETION OF FOUR YEARS. 9.3.2 IT IS A TRITE LAW AND THERE CAN BE NO QUARREL OVER THE SETTLED LEGAL POSITION THAT DEDUCTION IS PERMISSIBLE IN RES PECT OF AN ASCERTAINED LIABILITY AND NOT A CONTINGENT LIABILIT Y. SECTION 31 OF THE INDIAN CONTRACT ACT, 1872 DEFINES 'CONTINGENT CONTR ACT' AS 'A CONTRACT TO DO OR NOT DO SOMETHING, IF SOME EVENT, COLLATERAL TO SUCH CONTRACT DOES NOT HAPPEN'. WE NEED TO DETERMINE AS TO WHETHER THE LIABILITY ARISING ON THE ASSESSEE-COMPANY FOR ISSUI NG SHARES AT A DISCOUNTED PREMIUM CAN BE CHARACTERIZED AS A CONTIN GENT LIABILITY IN THE LIGHT OF THE DEFINITION OF CONTINGENT CONTRACT. FROM THE STAND POINT OF THE COMPANY, THE OPTIONS UNDER ESOP 2000 VEST WI TH THE EMPLOYEES AT THE RATE OF 25% ONLY ON PUTTING IN SERVICE FOR O NE YEAR BY THE EMPLOYEES. UNLESS SUCH SERVICE IS RENDERED, THE EMP LOYEES DO NOT QUALIFY FOR SUCH OPTIONS. IN OTHER WORDS, RENDERING OF SERVICE FOR ONE YEAR IS SINE QUA NON FOR BECOMING ELIGIBLE TO AVAIL THE BENEFIT UNDER THE SCHEME. ONCE THE SERVICE IS RENDERED FOR ONE YE AR, IT BECOMES OBLIGATORY ON THE PART OF THE COMPANY TO HONOR ITS COMMITMENT OF ALLOWING THE VESTING OF 25% OF THE OPTION. IT IS AT THE END OF THE FIRST YEAR THAT THE COMPANY INCURS LIABILITY OF FULFILLIN G ITS PROMISE OF ALLOWING PROPORTIONATE DISCOUNT, WHICH LIABILITY WO ULD BE ACTUALLY DISCHARGED AT THE END OF THE FOURTH YEAR WHEN THE O PTIONS ARE EXERCISED BY THE EMPLOYEES. NOW THE QUESTION ARISES AS TO WHETHER THE LIABILITY AT THE END OF EACH YEAR CAN BE CONSTRUED AS A CONTINGENT ONE? 9.3.3 THE HON'BLE SUPREME COURT IN BHARAT EARTH MOVERS V. CIT [2000] 245 ITR 428/112 TAXMAN 61 DEALT WITH THE DEDUCTIBILITY OR OTHERWISE OF PROVISION FOR LIABILI TY TOWARDS ENCASHMENT OF EARNED LEAVE. IN THAT CASE, THE COMPA NY FLOATED BENEFICIAL SCHEME FOR ITS EMPLOYEES FOR ENCASHMENT OF LEAVE. THE EARNED LEAVE COULD BE ACCUMULATED UP TO CERTAIN DAY S. THE ASSESSEE CREATED PROVISION OF RS. 62.25 LAKH FOR ENCASHMENT OF ACCRUED LEAVE AND CLAIMED DEDUCTION FOR THE SAME. THE ASSESSING O FFICER HELD IT TO BE A CONTINGENT LIABILITY AND HENCE NOT A PERMISSIB LE DEDUCTION. WHEN THE MATTER FINALLY CAME UP BEFORE THE HON'BLE SUPRE ME COURT, IT WAS HELD THAT THE PROVISION FOR MEETING THE LIABILITY F OR ENCASHMENT OF EARNED LEAVE BY THE EMPLOYEE WAS AN ADMISSIBLE DEDU CTION. IN M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 15 HOLDING SO, THE HON'BLE APEX COURT OBSERVED THAT : 'THE LAW IS SETTLED : IF A BUSINESS LIABILITY HAS DEFINITELY ARISEN IN TH E ACCOUNTING YEAR, THE DEDUCTION SHOULD BE ALLOWED ALTHOUGH THE LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. WHAT SH OULD BE CERTAIN IS THE INCURRING OF THE LIABILITY. IT SHOULD ALSO BE C APABLE OF BEING ESTIMATED WITH REASONABLE CERTAINTY THOUGH THE ACTU AL QUANTIFICATION MAY NOT BE POSSIBLE. IF THESE REQUIREMENTS ARE SATI SFIED 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 D IFFERENCE IF THE FUTURE DATE ON WHICH THE LIABILITY SHALL HAVE TO BE DISCHARGED IS NOT CERTAIN.' FROM THE ABOVE ENUNCIATION OF LAW BY THE HON'BLE SUPREME COURT, IT IS MANIFEST THAT A DEFINITE BUSINESS LIAB ILITY ARISING IN AN ACCOUNTING YEAR QUALIFIES FOR DEDUCTION EVEN THOUGH THE LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DA TE. WE CONSIDER IT OUR EARNEST DUTY TO MENTION THAT THE LEGISLATURE HA S INSERTED CLAUSE (F) TO SECTION 43B BY PROVIDING THAT 'ANY SUM PAYAB LE BY THE ASSESSEE AS AN EMPLOYER IN LIEU OF ANY LEAVE AT THE CREDIT O F HIS EMPLOYEE' SHALL BE ALLOWED AS DEDUCTION IN COMPUTING THE INCOME OF THE PREVIOUS YEAR IN WHICH SUCH SUM IS ACTUALLY PAID. WITH THIS LEGIS LATIVE AMENDMENT, THE APPLICATION OF THE RATIO DECIDENDI IN THE CASE OF BHARAT EARTH MOVERS (SUPRA) TO THE PROVISION FOR LEAVE ENCASHMEN T HAS BEEN NULLIFIED. HOWEVER, THE PRINCIPLE LAID DOWN IN THE SAID JUDGMENT IS ABSOLUTELY INTACT THAT A LIABILITY DEFINITELY INCUR RED BY AN ASSESSEE IS DEDUCTIBLE NOTWITHSTANDING THE FACT THAT ITS QUANTI FICATION MAY TAKE PLACE IN A LATER YEAR. THE MERE FACT THAT THE QUANT IFICATION IS NOT PRECISELY POSSIBLE AT THE TIME OF INCURRING THE LIA BILITY WOULD NOT MAKE AN ASCERTAINED LIABILITY A CONTINGENT. 9.3.4 ALMOST TO THE SIMILAR EFFECT, THERE IS ANOTHER JUD GMENT OF THE HON'BLE SUPREME COURT IN THE CASE OF ROTORK CONTROL S INDIA (P.) LTD. V. CIT [2009] 314 ITR 62/180 TAXMAN 422 . IN THAT CASE, THE ASSESSEE-COMPANY WAS ENGAGED IN SELLING CERTAIN PRO DUCTS. AT THE TIME OF SALE, THE COMPANY PROVIDED A STANDARD WARRA NTY THAT IN THE EVENT OF CERTAIN PART BECOMING DEFECTIVE WITHIN 12 MONTHS FROM THE DATE OF COMMISSIONING OR 18 MONTHS FROM THE DATE OF DISPATCH, WHICHEVER IS EARLIER, THE COMPANY WOULD RECTIFY OR REPLACE THE DEFECTIVE PARTS FREE OF CHARGE. THIS WARRANTY WAS G IVEN UNDER CERTAIN CONDITIONS STIPULATED IN THE WARRANTY CLAUSE. THE A SSESSEE MADE A PROVISION FOR WARRANTY AT RS. 5.18 LAKH TOWARDS THE WARRANTY CLAIM LIKELY TO ARISE ON THE SALES EFFECTED BY THE ASSESS EE. THE ASSESSING OFFICER DISALLOWED THE SAME ON THE GROUND THAT THE LIABILITY WAS MERELY A CONTINGENT LIABILITY AND HENCE NOT ALLOWAB LE AS DEDUCTION U/S 37 OF THE ACT. WHEN THE MATTER FINALLY CAME UP BEFORE THE HON'BLE SUPREME COURT, IT ENTITLED THE ASSESSEE TO DEDUCTIO N ON THE 'ACCRUAL' CONCEPT BY HOLDING THAT A PROVISION IS RECOGNIZED W HEN : '(A) AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RESULT OF A PAST EVENT; (B) IT IS M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 16 PROBABLE THAT AN OUTFLOW OF RESOURCES WILL BE REQUI RED TO SETTLE THE OBLIGATION : AND (C) A RELIABLE ESTIMATE CAN BE MAD E OF THE AMOUNT OF THE OBLIGATION'. RESULTANTLY, THE PROVISION WAS HEL D TO BE DEDUCTIBLE. 9.3.5 WHEN WE CONSIDER THE FACTS OF THE PRESENT CASE IN T HE BACKDROP OF THE RATIO LAID DOWN BY THE HON'BLE SUPREME COURT IN BHARAT EARTH MOVERS (SUPRA) AND ROTORK CONTROLS INDIA (P.) LTD. (SUPRA), IT BECOMES VIVID THAT THE MANDATE OF THESE CASES IS AP PLICABLE WITH FULL FORCE TO THE DEDUCTIBILITY OF THE DISCOUNT ON INCUR RING OF LIABILITY ON THE RENDITION OF SERVICE BY THE EMPLOYEES. THE FACT UM 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 NO T DISTURBING THE OTHERWISE LIABILITY WHICH STOOD INCURRED AT THE END OF THE EACH YEAR ON AVAILING THE SERVICES. 9.3.6 AS REGARDS THE CONTENTION OF THE LD. DR ABOUT THE C ONTINGENT LIABILITY ARISING ON ACCOUNT OF THE OPTIONS LAPSING DURING THE VESTING PERIOD OR THE EMPLOYEES NOT CHOOSING TO EXERCISE TH E OPTION, WE FIND THAT NORMALLY IT IS PROVIDED IN THE SCHEMES OF ESOP THAT THE VESTED OPTIONS THAT LAPSE DUE TO NON-EXERCISE AND/OR UNVES TED OPTIONS THAT GET CANCELLED DUE TO RESIGNATION OF THE EMPLOYEES O R OTHERWISE, WOULD BE AVAILABLE FOR GRANT AT A FUTURE DATE OR WOULD BE AVAILABLE FOR BEING RE-GRANTED AT A FUTURE DATE. IF WE CONSIDER IT AT M ICRO LEVEL QUA EACH INDIVIDUAL EMPLOYEE, IT MAY SOUND CONTINGENT, BUT I F VIEW IT AT MACRO LEVEL QUA THE GROUP OF EMPLOYEES AS A WHOLE, IT LOS ES THE TAG OF 'CONTINGENT' BECAUSE SUCH LAPSING OPTIONS ARE UP FO R GRABS TO THE OTHER ELIGIBLE EMPLOYEES. IN ANY CASE, IF SOME OF T HE OPTIONS REMAIN UNVESTED OR ARE NOT EXERCISED, THE DISCOUNT HITHERT O CLAIMED AS DEDUCTION IS REQUIRED TO BE REVERSED AND OFFERED FO R TAXATION IN SUCH LATER YEAR. WE, THEREFORE, HOLD THAT THE DISCOUNT I N RELATION TO OPTIONS VESTING DURING THE YEAR CANNOT BE HELD AS A CONTING ENT LIABILITY. C. FRINGE BENEFIT 9.4.1 THERE IS ANOTHER IMPORTANT DIMENSION OF THIS ISSUE . CHAPTER XII- H OF THE ACT CONSISTING OF SECTIONS 115W TO 115WL W ITH THE CAPTION : 'INCOME-TAX ON FRINGE BENEFITS' HAS BEEN INSERTED B Y THE FINANCE ACT, 2005 W.E.F. 1.4.2006. MEMORANDUM EXPLAINING TH E PROVISIONS OF THE FINANCE BILL, 2005 HIGHLIGHTS THE DETAILS OF TH E FRINGE BENEFITS TAX. IT PROVIDES THAT : 'FRINGE BENEFITS AS OUTLINE D IN SECTION 115WB, MEAN ANY PRIVILEGE, SERVICE, FACILITY OR AMENITY DI RECTLY OR INDIRECTLY PROVIDED BY AN EMPLOYER TO HIS EMPLOYEES (INCLUDING FORMER EMPLOYEES) BY REASON OF THEIR EMPLOYMENT.' CHARGING SECTION 115WA OF THIS CHAPTER PROVIDES THAT : 'IN ADDITION TO THE INCOME-TAX CHARGED UNDER THIS ACT, THERE SHALL BE CHARGED FOR EVERY AS SESSMENT M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 17 YEAR..FRINGE BENEFIT TAX IN RESPECT OF FRINGE BE NEFITS PROVIDED OR DEEMED TO HAVE BEEN PROVIDED BY AN EMPLOYEE TO HIS EMPLOYEES DURING THE PREVIOUS YEAR.'. SECTION 115WB GIVES MEANING TO THE EXPRESSION 'FRINGE BENEFITS'. SUB-SECTION (1) P ROVIDES THAT FOR THE PURPOSES OF THIS CHAPTER, 'FRINGE BENEFITS' MEANS A NY CONSIDERATION FOR EMPLOYMENT AS PROVIDED UNDER CLAUSES (A) TO (D). CL AUSE (D), WHICH IS RELEVANT FOR OUR PURPOSE, STATES THAT : 'ANY SPECIF IED SECURITY OR SWEAT EQUITY SHARES ALLOTTED OR TRANSFERRED, DIRECTLY OR INDIRECTLY, BY THE EMPLOYER FREE OF COST OR AT CONCESSIONAL RATE TO HI S EMPLOYEES (INCLUDING FORMER EMPLOYEE OR EMPLOYEES)' SHALL BE TAKEN AS FRINGE BENEFIT. EXPLANATION TO THIS CLAUSE CLARIFIES THAT FOR THE PURPOSES OF THIS CLAUSE,- (I) 'SPECIFIED SECURITY' MEANS THE SE CURITIES AS DEFINED IN CLAUSE (H) OF SECTION 2 OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 (42 OF 1956) AND, WHERE EMPLOYEES' STOCK OPTIO N HAS BEEN GRANTED UNDER ANY PLAN OR SCHEME THEREOF, INCLUDES THE SECURITIES OFFERED UNDER SUCH PLAN OR SCHEME. THUS IT IS DISCE RNIBLE FROM THE ABOVE PROVISIONS OF THE ACT THAT THE LEGISLATURE IT SELF CONTEMPLATES THE DISCOUNT ON PREMIUM UNDER ESOP AS A BENEFIT PROVIDE D BY THE EMPLOYER TO ITS EMPLOYEES DURING THE COURSE OF SERV ICE. IF THE LEGISLATURE CONSIDERS SUCH DISCOUNTED PREMIUM TO TH E 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 DISCOU NT (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 CAPITAL RECEIPT. IN VIEW OF THE FOREGOING DISCUSSIO N, WE ARE OF THE CONSIDERED OPINION THAT DISCOUNT ON SHARES UNDER TH E ESOP IS AN ALLOWABLE DEDUCTION. II. IF YES, THEN WHEN AND HOW MUCH? 10.1 HAVING SEEN THAT THE DISCOUNT UNDER ESOP IS A DEDU CTIBLE EXPENDITURE U/S 37(1), THE NEXT QUESTION IS THAT 'W HEN' AND FOR 'HOW MUCH' AMOUNT SHOULD THE DEDUCTION BE GRANTED ? 10.2 THE ASSESSEE IS A LIMITED COMPANY AND HENCE IT IS OBLIGED TO MAINTAIN ITS ACCOUNTS ON MERCANTILE BASIS. UNDER SU CH SYSTEM OF ACCOUNTING, AN ITEM OF INCOME BECOMES TAXABLE WHEN A RIGHT TO RECEIVE IT IS FINALLY ACQUIRED NOTWITHSTANDING THE FACT THAT WHEN SUCH INCOME IS ACTUALLY RECEIVED. EVEN IF SUCH INCOME IS ACTUALLY RECEIVED IN A LATER YEAR, ITS TAXABILITY WOULD NOT BE EVADED FO R THE YEAR IN WHICH RIGHT TO RECEIVE WAS FINALLY ACQUIRED. IN THE SAME MANNER, AN EXPENSE BECOMES DEDUCTIBLE WHEN LIABILITY TO PAY ARISES IRR ESPECTIVE OF ITS ACTUAL DISCHARGE. THE INCURRING OF LIABILITY AND TH E RESULTANT DEDUCTION CANNOT BE MARRED BY MERE REASON OF SOME D IFFICULTY IN PROPER QUANTIFICATION OF SUCH LIABILITY AT THAT STA GE. THE VERY POINT OF INCURRING THE LIABILITY ENABLES THE ASSESSEE TO CLA IM DEDUCTION UNDER M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 18 MERCANTILE SYSTEM OF ACCOUNTING. WE HAVE NOTICED TH E MANDATE OF THE HON'BLE SUPREME COURT IN BHARAT EARTH MOVERS (SUPRA ) THAT IF A BUSINESS LIABILITY HAS DEFINITELY ARISEN IN AN ACCO UNTING YEAR, THEN THE DEDUCTION SHOULD BE ALLOWED IN THAT YEAR ITSELF NOT WITHSTANDING THE FACT THAT SUCH LIABILITY IS INCAPABLE OF PROPER QUA NTIFICATION AT THAT STAGE AND IS DISCHARGEABLE AT A FUTURE DATE. IT FOL LOWS THAT THE DEDUCTION FOR AN EXPENSE IS ALLOWABLE ON INCURRING OF LIABILITY AND THE SAME CANNOT BE DISTURBED SIMPLY BECAUSE OF SOME DIF FICULTY IN THE PROPER QUANTIFICATION. A LINE OF DISTINCTION NEEDS TO BE DRAWN BETWEEN A SITUATION IN WHICH A LIABILITY IS NOT INCURRED AN D A SITUATION IN WHICH THE LIABILITY IS INCURRED BUT ITS QUANTIFICATION IS NOT POSSIBLE AT THE MATERIAL TIME. WHEREAS IN THE FIRST CASE, THERE CAN NOT BE ANY QUESTION OF ALLOWING DEDUCTION, IN THE SECOND CASE, DEDUCTIO N HAS TO BE ALLOWED FOR A SUM DETERMINED ON SOME RATIONAL BASIS REPRESE NTING THE AMOUNT OF LIABILITY INCURRED. 10.3 WE HAVE EARLIER UNDERLINED THE CONCEPTS OF GRANT O F OPTIONS, VESTING OF OPTIONS AND EXERCISE OF OPTIONS. THE PER IOD FROM GRANT OF OPTION TO THE VESTING OF OPTION IS THE 'VESTING PER IOD'. IT IS DURING SUCH PERIOD THAT AN EMPLOYEE IS SUPPOSED TO RENDER SERVI CE TO THE COMPANY SO AS TO EARN AN ENTITLEMENT TO THE SHARES AT A DIS COUNTED PREMIUM. THE VESTING PERIOD MAY VARY FROM A CASE TO CASE. IF THE VESTING PERIOD IS, SAY, FOUR YEARS WITH EQUAL VESTING AT THE END O F EACH YEAR, THEN IT IS AT THE END OF THE VESTING PERIOD OR DURING THE EXER CISE PERIOD, WHICH IN TURN IMMEDIATELY SUCCEEDS THE VESTING PERIOD, TH AT THE EMPLOYEE BECOMES ENTITLED TO EXERCISE 100 OPTIONS OR QUALIFY FOR RECEIPT OF 100 SHARES AT DISCOUNT. THOUGH THE SHARES ARE ALLOTTED AT THE END OF THE VESTING PERIOD, BUT IT IS DURING SUCH VESTING PERIO D THAT THE ENTITLEMENT IS EARNED. IT MEANS THAT 25 OPTIONS VES T WITH THE EMPLOYEE AT THE END OF EACH YEAR ON HIS RENDERING S ERVICE FOR THE RESPECTIVE YEAR. IF DURING THE INTERREGNUM, HE LEAV ES THE SERVICE, SAY AFTER ONE YEAR, HE WILL STILL REMAIN ENTITLED TO EX ERCISE OPTION FOR 25 SHARES AT THE DISCOUNTED PREMIUM AT THE TIME OF EXE RCISE OF OPTION. IN THAT CASE, THE BENEFIT WHICH WOULD HAVE ACCRUED TO HIM AT THE END OF THE SECOND, THIRD AND FOURTH YEARS WOULD STAND FORF EITED. THUS IT BECOMES ABUNDANTLY CLEAR THAT AN EMPLOYEE BECOMES E NTITLED TO THE SHARES AT A DISCOUNTED PREMIUM OVER THE VESTING PER IOD DEPENDING UPON THE LENGTH OF SERVICE PROVIDED BY HIM TO THE C OMPANY. IN ALL SUCH SCHEMES, IT IS AT THE END OF THE VESTING PERIOD THA T OPTION IS EXERCISABLE ALBEIT THE PROPORTIONATE RIGHT TO OPTIO N IS ACQUIRED BY RENDERING SERVICE AT THE END OF EACH YEAR. 10.4 SIMILAR IS THE POSITION FROM THE STAND POINT OF TH E COMPANY. AN OBLIGATION FALLS UPON THE COMPANY TO ALLOT SHARES A T THE TIME OF EXERCISE OF OPTION DEPENDING UPON THE LENGTH OF SER VICE RENDERED BY THE EMPLOYEE DURING THE VESTING PERIOD. THE INCURRI NG OF LIABILITY M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 19 TOWARDS THE DISCOUNTED PREMIUM, BEING COMPENSATION TO EMPLOYEE, IS DIRECTLY LINKED WITH THE SPAN OF SERVICE PUT IN BY THE EMPLOYEE. IN THE ABOVE ILLUSTRATION, WHEN 25 OUT OF 100 SHARES VEST IN THE EMPLOYEE AFTER RENDERING ONE YEAR'S SERVICE, THE COMPANY ALS O INCURS EQUAL OBLIGATION AT THE END OF THE FIRST YEAR FOR WHICH I T BECOMES ENTITLED TO RIGHTFULLY CLAIM DEDUCTION U/S 37(1) OF THE ACT. SI MILARLY AT THE END OF THE SECOND YEAR OF SERVICE BY THE EMPLOYEES, THE CO MPANY CAN CLAIM DEDUCTION FOR DISCOUNTED PREMIUM IN RESPECT OF FURT HER 25 SHARES SO ON AND SO FORTH TILL FOURTH YEAR WHEN THE LAST TRAN CHE OF DISCOUNTED PREMIUM IN RESPECT OF 25 SHARES BECOMES AVAILABLE F OR DEDUCTION. IT, THEREFORE, TRANSPIRES THAT A COMPANY UNDER THE MERC ANTILE SYSTEM CAN LAWFULLY CLAIM DEDUCTION FOR TOTAL DISCOUNTED P REMIUM REPRESENTING THE EMPLOYEES COST OVER THE VESTING PE RIOD AT THE RATE AT WHICH THERE IS VESTING OF OPTIONS IN THE EMPLOYEES. 10.5 FROM THE ABOVE DISCUSSION IT IS LUCID THAT AT THE EVENT OF GRANTING OPTIONS, THE COMPANY DOES NOT INCUR ANY OB LIGATION TO ISSUE THE SHARES AT DISCOUNTED PREMIUM. MERE GRANTING OF OPTION DOES NEITHER ENTITLE THE EMPLOYEE TO EXERCISE SUCH OPTIO N NOR ALLOW THE COMPANY TO CLAIM DEDUCTION FOR THE DISCOUNTED PREMI UM. IT IS DURING THE VESTING PERIOD THAT THE COMPANY INCURS OBLIGATI ON TO ISSUE DISCOUNTED SHARES AT THE TIME OF EXERCISE OF OPTION . THUS THE EVENT OF GRANTING OPTIONS DOES NOT CAST ANY LIABILITY ON THE COMPANY. ON THE OTHER END IS THE DATE OF EXERCISING THE OPTIONS. TH OUGH THE EMPLOYEES BECOME ENTITLED TO EXERCISE THE OPTION AT SUCH STAG E BUT THE FACT IS THAT IT IS SIMPLY A RESULT OF VESTING OF OPTIONS WI TH THEM OVER THE VESTING PERIOD ON THE RENDITION OF SERVICES TO THE COMPANY. IN OTHER WORDS, IT IS A STAGE OF REALIZATION OF INCOME EARNE D DURING THE VESTING PERIOD. IN THE SAME MANNER, THOUGH THE COMPANY BECO MES LIABLE TO ISSUE SHARES AT THE TIME OF THE EXERCISE OF OPTION, BUT IT IS IN LIEU OF THE EMPLOYEES COMPENSATION LIABILITY WHICH IT INCURRED OVER THE VESTING PERIOD BY OBTAINING THEIR SERVICES. FROM THE ABOVE IT IS APPARENT THAT THE COMPANY INCURS LIABILITY TO ISSUE SHARES AT THE DISCOUNTED PREMIUM ONLY DURING THE VESTING PERIOD. THE LIABILI TY IS NEITHER INCURRED AT THE STAGE OF THE GRANT OF OPTIONS NOR W HEN SUCH OPTIONS ARE EXERCISED. 10.6 LET US CONSIDER THE FACTS OF THE CASE OF S.S.I. LT D. (SUPRA), WHICH HAS BEEN STRONGLY RELIED BY THE LD. AR IN SUPPORT O F HIS CLAIM FOR DEDUCTION OF DISCOUNT DURING THE YEARS OF VESTING O F OPTIONS. IN THAT CASE THE VESTING PERIOD WAS THREE YEARS AND THE ASS ESSMENT ORDER WAS PASSED U/S 143(3), INTER ALIA, ALLOWING DEDUCTION O F RS. 66.82 LAKH UNDER THE HEAD 'STAFF WELFARE EXPENSES' ON ACCOUNT OF AMORTIZATION OF DISCOUNTED VALUE OF OPTION OVER A PERIOD OF THRE E YEARS. THE CIT REVISED SUCH ORDER BY DIRECTING THE A.O. TO DISALLO W ESOP EXPENDITURE OF RS. 66.82 LAKH. WHEN THE MATTER CAME UP BEFORE T HE TRIBUNAL, IT M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 20 WAS HELD THAT THE EXPENDITURE IN THAT BEHALF WAS AN ASCERTAINED LIABILITY AND NOT CONTINGENT UPON HAPPENING OF CERT AIN EVENTS. IT WAS FURTHER NOTICED THAT THE ASSESSEE CLAIMED DEDUCTION OF SUCH DISCOUNT ON ESOP BY FOLLOWING THE SEBI GUIDELINES. AS THE EX PENDITURE ITSELF WAS AN ASCERTAINED LIABILITY, THE TRIBUNAL HELD THA T THE SAME TO BE DEDUCTIBLE. 10.7 BEFORE PROCEEDING FURTHER IT WOULD BE BEFITTING TO TAKE STOCK OF THE NUTSHELL OF THE SEBI GUIDELINES IN THIS REGARD. THESE GUIDELINES PROVIDE FOR GRANTING OF DEDUCTION ON ACCOUNT OF DIS COUNT ON ISSUE OF OPTIONS DURING THE VESTING PERIOD. IT HAS BEEN SO E XPLAINED WITH THE HELP OF AN EXAMPLE IN SCHEDULE I TO THE GUIDELINES. FOR THE SAKE OF SIMPLICITY, WE ARE TAKING AN INSTANCE UNDER WHICH A N OPTION OF SHARE WITH FACE VALUE OF RS. 10 IS GIVEN UNDER ESOP TO EM PLOYEES AT THE OPTION PRICE OF RS. 10 AS AGAINST THE MARKET PRICE OF SUCH SHARES AT RS. 110 ON THAT DATE. FURTHER SUPPOSE THAT THE VESTING PERIOD IS FOUR YEARS WITH EQUAL VESTING @ 25% AT THE END OF EACH Y EAR. TOTAL DISCOUNT COMES TO RS. 100 (RS. 110 - RS. 10). THESE GUIDELINES PROVIDE FOR CLAIMING DEDUCTION IN THE ACCOUNTS FOR A TOTAL DISCOUNT OF RS. 100 DIVIDED OVER THE VESTING PERIOD OF FOUR YEARS ON ST RAIGHT LINE BASIS AT THE RATE OF RS. 25 EACH. THE CASE OF S.S.I. LTD. (S UPRA) DEALS WITH A CONTROVERSY RELATING TO ONE OF THE VESTING YEARS. T HE TRIBUNAL ENTITLED THE ASSESSEE TO PROPORTIONATE DEDUCTION. THUS IT IS EVIDENT THAT THE VIEW TAKEN BY THE TRIBUNAL IN THAT CASE NOT ONLY MA TCHES WITH THE SEBI GUIDELINES BUT ALSO THE 'ACCRUAL CONCEPT' IN T HE MERCANTILE SYSTEM OF ACCOUNTING, THEREBY ALLOWING DEDUCTION AT THE STAGE OF INCURRING OF LIABILITY. 10.8 REVERTING TO THE QUESTIONS OF 'WHEN' AND 'HOW MUCH ' OF DEDUCTION FOR DISCOUNT ON OPTIONS IS TO BE GRANTED, WE HOLD THAT THE LIABILITY TO PAY THE DISCOUNTED PREMIUM IS INCURRED DURING THE VESTING PERIOD AND THE AMOUNT OF SUCH DEDUCTION IS TO BE FO UND OUT AS PER THE TERMS OF THE ESOP SCHEME BY CONSIDERING THE PERIOD AND PERCENTAGE OF VESTING DURING SUCH PERIOD. WE, THEREFORE, AGREE WITH THE CONCLUSION DRAWN BY THE TRIBUNAL IN S.S.I. LTD.'S C ASE (SUPRA) ALLOWING DEDUCTION OF THE DISCOUNTED PREMIUM DURING THE YEAR S OF VESTING ON A STRAIGHT LINE BASIS, WHICH COINCIDES WITH OUR ABOVE REASONING. III. SUBSEQUENT ADJUSTMENT TO DISCOUNT 11.1.1 HAVING ANSWERED THE FIRST MAJOR ISSUE IN AFFIRMATI VE THAT THE DISCOUNT ON OPTIONS UNDER ESOP IS AN ASCERTAINED LI ABILITY AND THE SECOND MAJOR ISSUE THAT THE DISCOUNT IS DEDUCTIBLE OVER THE VESTING PERIOD ON STRAIGHT LINE BASIS UNLESS THE VESTING IS NOT UNIFORM, THEN M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 21 ARISES THE PRESENT ISSUE AS TO WHETHER ANY SUBSEQUE NT ADJUSTMENT IS WARRANTED AT THE TIME OF EXERCISE OF OPTIONS, TO TH E DEDUCTIONS EARLIER ALLOWED FOR THE AMOUNT OF DISCOUNT. IT IS NOTICED T HAT THE ASSESSMENT YEARS 2003-2004 TO 2007-2008 ARE UNDER CONSIDERATIO N AND DURING THESE YEARS ESOP 2000 HAS COME TO AN END AND THE ES OP 2004 HAS STARTED. FURTHER, THE EXTANT ISSUE IS A VITAL PART OF THE OVERALL QUESTION OF THE DEDUCTIBILITY OR OTHERWISE OF THE AMOUNT OF DISCOUNT UNDER ESOP. 11.1.2 WE HAVE NOTICED ABOVE THAT THE COMPANY INCURS A DE FINITE LIABILITY DURING THE VESTING PERIOD, BUT ITS PROPER QUANTIFICATION IS NOT POSSIBLE AT THAT STAGE AS THE ACTUAL AMOUNT OF EMPL OYEES COST TO THE COMPANY, CAN BE FINALLY DETERMINED AT THE TIME OF T HE EXERCISE OF OPTION OR WHEN THE OPTIONS REMAIN UNVESTED OR LAPSE AT THE END OF THE EXERCISE PERIOD. IT IS AT THIS LATER STAGE THAT THE PROVISIONAL AMOUNT OF DISCOUNT ON ESOP, INITIALLY QUANTIFIED ON THE BASIS OF MARKET PRICE AT THE TIME OF GRANT OF OPTIONS, NEEDS TO BE SUITABLY ADJUSTED WITH THE ACTUAL AMOUNT OF DISCOUNT. 11.1.3 AS REGARDS THE ADJUSTMENT OF DISCOUNT WHEN THE OPT IONS REMAIN UNVESTED OR LAPSE AT THE END OF THE EXERCISE PERIOD, IT IS BUT NATURAL THAT THERE IS NO EMPLOYEE COST TO THAT EXTE NT AND HENCE THERE CAN BE NO DEDUCTION OF DISCOUNT QUA SUCH PART OF UN VESTED OR LAPSING OPTIONS. BUT, AS THE AMOUNT WAS CLAIMED AS DEDUCTIO N BY THE COMPANY DURING THE PERIOD STARTING WITH THE DATE OF GRANT T ILL THE HAPPENING OF THIS EVENT, SUCH DISCOUNT NEEDS TO BE REVERSED AND TAKEN AS INCOME. IT IS SO BECAUSE LOGICALLY WHEN THE OPTIONS HAVE NOT E VENTUALLY VESTED IN THE EMPLOYEES, TO THAT EXTENT, THE COMPANY HAS INCU RRED NO EMPLOYEE COST. AND IF THERE IS NO COST TO THE COMPANY, THE T ENTATIVE AMOUNT OF DEDUCTION EARLIER CLAIMED ON THE BASIS OF THE MARKE T PRICE AT THE TIME OF GRANT OF OPTION CEASES TO BE ADMISSIBLE AND HENC E NEEDS TO BE REVERSED. THE LD. AR STATED THAT THE DISCOUNT IN RE SPECT OF THE UNVESTED/LAPSING OPTIONS HAS BEEN REVERSED ON THE H APPENING OF SUCH EVENTS AND THE OVERALL EMPLOYEE COST HAS BEEN CORRE SPONDINGLY REDUCED. WE FIND THAT THE SEBI GUIDELINES ALSO PROV IDE THAT THE DISCOUNT WRITTEN OFF IN RESPECT OF UNVESTED OPTIONS AND THE OPTIONS LAPSING AT THE END OF THE EXERCISE PERIOD SHALL BE REVERSED AT THE APPROPRIATE TIME. AS THE ACCOUNTING TREATMENT DIREC TED THROUGH THE GUIDELINES ACCORDS WITH THE TAXATION PRINCIPLE OF N OT ALLOWING DEDUCTION FOR THE AMOUNT OF DISCOUNT ON UNVESTED/LA PSING OPTIONS AND FURTHER THE ASSESSEE HAS ADMITTED TO HAVE OFFER ED SUCH AMOUNT AS INCOME IN THE RELEVANT YEARS, WE STOP HERE BY HOLDI NG THAT THE AMOUNT OF DISCOUNT CLAIMED AS DEDUCTION EARLIER IN RESPECT OF M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 22 UNVESTED/LAPSING OPTIONS, HAS TO BE TAXED AS INCOME ON THE HAPPENING OF SUCH EVENTS. 11.1.4 NOW WE TAKE UP THE SECOND SITUATION IN WHICH THE O PTIONS ARE EXERCISED BY THE EMPLOYEES AFTER PUTTING IN SERVICE DURING THE VESTING PERIOD. IN SUCH A SCENARIO, THE ACTUAL AMOUNT OF RE MUNERATION TO THE EMPLOYEES WOULD BE ONLY THE AMOUNT OF ACTUAL DISCOU NTED PREMIUM AT THE TIME OF EXERCISE OF OPTION. THE HON'BLE SUPR EME COURT IN THE CASE OF CIT V. INFOSYS TECHNOLOGIES LTD. [2008] 297 ITR 167/166 TAXMAN 204 RELEVANT TO THE ASSESSMENT YEARS 1997-98 TO 1999-2 000 HAS HELD THAT THE ALLOTMENT OF SHARES TO EMPLOYEES UNDER ESOP SUBJECT TO A LOCK IN PERIOD OF FIVE YEARS AND OTHER CONDITIONS COULD NOT BE TREATED AS A PERQUISITE AS THERE WAS NO BENEFIT AND THE VALUE OF BENEFIT, IF ANY, WAS UNASCERTAINABLE AT THE TIME WH EN OPTIONS WERE EXERCISED. THE FINANCE ACT, 1999 INSERTED SECTION 1 7(2)(IIIA) WITH EFFECT FROM 1ST APRIL, 2000 PROVIDING THAT : 'THE V ALUE OF ANY SPECIFIED SECURITY ALLOTTED OR TRANSFERRED, DIRECTLY OR INDIR ECTLY, BY ANY PERSON FREE OF COST OR AT A CONCESSIONAL RATE TO AN INDIVI DUAL WHO IS OR HAS BEEN IN EMPLOYMENT OF THAT PERSON' SHALL BE TREATED AS A PERQUISITE. IT FURTHER PROVIDES THAT IN A CASE THE ALLOTMENT OR TR ANSFER OF SPECIFIED SECURITIES IS MADE IN PURSUANCE OF AN OPTION EXERCI SED BY AN INDIVIDUAL, THE VALUE OF THE SPECIFIED SECURITIES S HALL BE TAXABLE IN THE PREVIOUS YEAR IN WHICH SUCH OPTION IS EXERCISED BY SUCH INDIVIDUAL. SUCH CLAUSE (IIIA) WAS SUBSEQUENTLY DELETED WITH EF FECT FROM 1ST APRIL, 2001. AFTER CERTAIN CHANGES TO THE RELEVANT PROVISI ONS IN THIS REGARD, THE POSITION WHICH NOW STANDS IS THAT THE DISCOUNT ON ESOP IS TAXABLE AS PERQUISITE U/S 17(2)(VI) FOR : 'THE VALUE OF ANY SPECIFIED SECURITY OR SWEAT EQUITY SHARES ALLOTTED OR TRANSFERRED, DIRECT LY OR INDIRECTLY, BY THE EMPLOYER, OR FORMER EMPLOYER, FREE OF COST OR A T CONCESSIONAL RATE TO THE ASSESSEE'. CLAUSE (C) OF EXPLANATION TO SECT ION 17(2)(VI) PROVIDES THAT : 'THE VALUE OF ANY SPECIFIED SECURIT Y OR SWEAT EQUITY SHARES SHALL BE THE FAIR MARKET VALUE OF THE SPECIF IED SECURITY OR SWEAT EQUITY SHARES, AS THE CASE MAY BE, ON THE DATE ON W HICH THE OPTION IS EXERCISED BY THE ASSESSEE AS REDUCED BY THE AMOUNT ACTUALLY PAID BY, OR RECOVERED FROM, THE ASSESSEE IN RESPECT OF SUCH SECURITY OR SHARES'. TWO THINGS SURFACE FROM THE ABOVE PROVISIONS. FIRST , THAT THE PERQUISITE ARISES ON THE 'ALLOTMENT' OF SHARES AND SECOND, THE VALUE OF SUCH PERQUISITE IS TO BE COMPUTED BY CONSIDERING TH E FAIR MARKET VALUE OF THE SHARES ON 'THE DATE ON WHICH THE OPTIO N IS EXERCISED' BY THE ASSESSEE AS REDUCED BY THE AMOUNT ACTUALLY PAID . THE POSITION THAT SUCH AMOUNT WAS OR WAS NOT TAXABLE DURING SOME OF THE YEARS IN THE HANDS OF THE EMPLOYEES IS NOT RELEVANT IN CONSI DERING THE OCCASION AND THE AMOUNT OF BENEFIT ACCRUING TO THE EMPLOYEE UNDER ESOP. ANY EXEMPTION OR THE DEDUCTIBILITY OF AN ALLOWANCE OR B ENEFIT TO EMPLOYEE M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 23 FROM TAXATION DOES NOT OBLITERATE THE BENEFIT ITSEL F. IT SIMPLY MEANS THAT THE BENEFIT ACCRUED TO THE ASSESSEE BUT THE SA ME DID NOT ATTRACT TAX. THE POSITION HAS NOW BEEN CLARIFIED BEYOND DOU BT BY THE LEGISLATURE THAT THE ESOP DISCOUNT, WHICH IS NOTHIN G BUT THE REWARD FOR SERVICES, IS A TAXABLE PERQUISITE TO THE EMPLOY EE AT THE TIME OF EXERCISE OF OPTION, AND ITS VALUATION IS TO BE DONE BY CONSIDERING THE FAIR MARKET VALUE OF THE SHARES ON THE DATE ON WHIC H THE OPTION IS EXERCISED. 11.1.5 THE OTHER SIDE OF THE COIN IS THE AMOUNT OF REMUNE RATION TO THE EMPLOYEES IN THE HANDS OF THE COMPANY. WE HAVE NOTI CED EARLIER THAT AN EXPENSE BECOMES DEDUCTIBLE ON THE INCURRING OF L IABILITY 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 CO MPANY DEPENDING UPON THE METHOD OF ACCOUNT FOLLOWED BY THE COMPANY, BUT THE AMOUNT OF SUCH DISCOUNT OR EMPLOYEES REMUNERATION C AN NEVER BE DIFFERENT. IF THE VALUE OF PERQUISITE IN THE HANDS OF THE EMPLOYEE, WHETHER OR NOT TAXABLE, IS 'X', THEN ITS COST IN TH E 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 PER COLATES TO THE EMPLOYEES WILL ALWAYS BE EQUAL TO THE AMOUNT FLOWIN G FROM THE COMPANY AND SUCH REMUNERATION TO THE EMPLOYEE IN TH E PRESENT CONTEXT IS THE AMOUNT WHICH HE ACTUALLY BECOMES ENT ITLED TO ON THE EXERCISE OF OPTIONS. THUS, IT IS PALPABLE THAT SINC E THE REMUNERATION TO THE EMPLOYEES UNDER THE ESOP IS THE AMOUNT OF DISCO UNT W.R.T. THE MARKET PRICE OF SHARES AT THE TIME OF EXERCISE OF O PTION, 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 GR ANT OF OPTIONS IS ALWAYS A TENTATIVE EMPLOYEES COST BECAUSE OF THE IM POSSIBILITY IN CORRECTLY VISUALIZING THE LIKELY MARKET PRICE OF SH ARES AT THE TIME OF EXERCISE OF OPTION BY THE EMPLOYEES, WHICH, IN TURN , WOULD REFLECT THE CORRECT EMPLOYEES COST. SINCE THE DEFINITE LIABILIT Y 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 OPTIO NS WHICH IS CONSIDERED FOR WORKING OUT THE AMOUNT OF DISCOUNT D URING THE VESTING PERIOD. BUT, SINCE ACTUAL AMOUNT OF EMPLOYEES COST CAN BE PRECISELY DETERMINED ONLY AT THE TIME OF THE EXERCISE OF OPTI ON BY THE EMPLOYEES, THE PROVISIONAL AMOUNT OF DISCOUNT AVAIL ED AS DEDUCTION DURING THE VESTING PERIOD NEEDS TO BE ADJUSTED IN T HE 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 BY MAKI NG SUITABLE NORTHWARDS OR SOUTHWARDS ADJUSTMENT AT THE TIME OF EXERCISE OF M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 24 OPTION. THIS CAN BE EXPLAINED WITH THE FOLLOWING EX AMPLE 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 MA RKET PRICE OF THE SHARES AT THE TIME OF GRANT OF OPTION WAS RS. 110 AGAINST THE OPTION PRICE OF RS. 10, WHICH RESULTED IN DISCOUNT AT RS. 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 R S. 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 EXERCI SE 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. 10 0, NO FURTHER ADJUSTMENT TO THE DISCOUNT IS REQUIRED AT THE TIME OF EXERCISE OF OPTION. IN SITUATION II, THE MARKET PRICE OF THE SH ARE AT THE TIME OF EXERCISE OF OPTION HAS GONE UP TO RS. 130. THE A MOUNT OF REAL COMPENSATION TO EMPLOYEE IS RS. 120 AS AGAINST THE TENTATIVE COMPENSATION OF RS. 100 PER SHARE WHICH WAS ACCOUNT ED FOR AND ALLOWED AS DEDUCTION DURING THE VESTING PERIOD. AS THE ACTUAL QUANTIFICATION OF THE COMPENSATION HAS TURNED OUT T O BE RS. 120, THE COMPANY IS ENTITLED TO A FURTHER DEDUCTION OF R S. 20 AT THE TIME OF EXERCISE OF OPTION. IN SITUATION III, THE M ARKET PRICE OF THE SHARE AT THE TIME OF EXERCISE OF OPTION HAS COM E DOWN TO RS. 90. THE AMOUNT OF REAL COMPENSATION TO EMPLOYEES IS RS. 80 AS AGAINST THE TENTATIVE COMPENSATION OF RS. 100, WHIC H WAS ALLOWED AS DEDUCTION DURING THE VESTING PERIOD. AS THE ACTUAL QUANTIFICATION OF THE COMPENSATION HAS TURNED OUT T O BE RS. 80, M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 25 THE COMPANY IS LIABLE TO REVERSE THE DEDUCTION OF R S. 20 AT THE TIME OF EXERCISE OF OPTION. TAXATION VIS--VIS ACCOUNTANCY PRINCIPLES 11.2.1 IT HAS BEEN NOTICED THAT BROADLY THERE ARE THREE S TAGES HAVING EFFECT ON THE TOTAL INCOME OF THE COMPANY IN THE LIFE CYCLE OF ESOP, VIZ., (I) DURING THE VESTING PERIOD, (II) AT THE TIME OF UNVESTING/LAPSE OF OPTIONS AND (III) FINALLY AT THE TIME OF EXERCISE OF OPTIONS. IT HAS BEEN ARGUED THAT THE ASSESSEE CO MPANY CLAIMED DEDUCTION FOR THE AMOUNT OF DISCOUNT DURING THE VESTING PERIOD ON THE BASIS OF THE MARKET PRICE OF SHARES A T THE TIME OF GRANT OF OPTIONS AND ALSO REVERSED THE PROPORTIONAT E DISCOUNT ON UNVESTING/LAPSING OF OPTIONS AT THE APPROPRIATE TIME ON THE BASIS OF THE SEBI GUIDELINES. IF THIS CONTENTION IS CORRECT, IT WOULD MEAN THAT THE FIRST TWO STAGES HAVE BEEN RIGHTLY GI VEN EFFECT TO. BUT THE APPELLANT ASSESSEE DOES NOT APPEAR TO HAVE MADE ANY DOWNWARD ADJUSTMENT TO THE AMOUNT OF DISCOUNT AT TH E TIME OF EXERCISE OF OPTION BY THE EMPLOYEES WITH THE DIFFER ENCE IN THE MARKET PRICE OF THE SHARES AT THE TIME OF GRANT OF OPTION AND PRICE AT THE TIME OF EXERCISE OF OPTION. THE ARGUME NT SEEMS TO BE THAT THE SEBI GUIDELINES DO NOT PROVIDE FOR SUCH DO WNWARD ADJUSTMENT. IT HAS BEEN ARGUED BY THE LD. AR THAT W HERE THE PROVISIONS OF THE ACT SPECIFICALLY PROVIDE FOR TREA TMENT OF A PARTICULAR SOURCE OF INCOME IN A PARTICULAR MANNER, THEN THE GERMANE PROVISION SHOULD BE FOLLOWED. IF, HOWEVER, THERE IS NO SPECIFIC PROVISION DEALING WITH AN ISSUE IN THE ACT , THEN THE ACCOUNTING PRINCIPLES SHOULD BE ADHERED TO WHILE DE TERMINING THE TOTAL INCOME OF THE ASSESSEE. IN THIS REGARD, H E RELIED ON THE JUDGMENT IN THE CASE OF CHALLAPALLI SUGARS LTD.'S ( SUPRA), WHEREIN THE HON'BLE SUPREME COURT HAS HELD THAT THE INTEREST PAYABLE ON CAPITAL BORROWED BY THE ASSESSEE FOR PUR CHASE OF PLANT AND MACHINERY BEFORE THE COMMENCEMENT OF BUSI NESS SHOULD BE CAPITALIZED ON THE BASIS OF ACCEPTED ACCO UNTANCY RULE. SIMILARLY IN THE CASE OF U.P. STATE INDUSTRIAL DEVE LOPMENT CORPN. (SUPRA), THE HON'BLE APEX COURT HELD IN THE CASE OF AN UNDERWRITER THAT IT WOULD BE RIGHT TO CONSIDER THE NET INVESTMENT, THAT IS THE PURCHASE PRICE LESS THE UND ERWRITING COMMISSION RECEIVED BY THE UNDERWRITER AS INVESTMEN T AS AGAINST TREATING THE GROSS AMOUNT BY TAKING INTO CO NSIDERATION THE PRINCIPLES OF COMMERCIAL ACCOUNTING. HE STATED THAT SINCE THERE IS NO SPECIFIC PROVISION IN THE ACT PROVIDING FOR THE TREATMENT OF DISCOUNT ON ESOP IN THE COMPUTATION OF TOTAL INCOME, THE ACCOUNTING PRINCIPLES FORMULATED BY WAY OF THE SEBI GUIDELINES ARE REQUIRED TO BE FOLLOWED. M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 26 11.2.2 IN THE OPPUGNATION, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE SEBI GUIDELINES C ANNOT MANDATE THE DEDUCTIBILITY OR OTHERWISE OF AN AMOUNT UNDER THE PROVISIONS OF THE ACT. HE RELIED ON THE JUDGMENTS O F THE HON'BLE SUPREME COURT IN TUTICORIN ALKALI CHEMICALS & FERTI LIZERS LTD. (SUPRA) AND GODHRA ELECTRICITY CO. LTD. (SUPRA ) IN SUPPORT OF THIS PROPOSITION. 11.2.3 WE ARE NOT PERSUADED BY THE SUBMISSIONS PUT FORTH BY THE LD. AR THAT, IN THE ABSENCE OF ANY SPECIFIC PROVISI ON IN THE ACT, THE ACCOUNTING PRINCIPLES SHOULD BE FOLLOWED FOR DETERM INING THE TOTAL INCOME OF THE ASSESSEE. WHAT IS TRUE FOR ACCO UNTING PURPOSE NEED NOT NECESSARILY BE TRUE FOR TAXATION. TAXATION PRINCIPLES ARE ENSHRINED IN THE LEGISLATURE. POWER TO LEGISLATE LIES WITH THE PARLIAMENT. ACCOUNTING STANDARDS OR GUIDAN CE NOTE OR GUIDELINES ETC., BY WHATEVER NAME CALLED, ISSUED BY ANY AUTONOMOUS OR EVEN STATUTORY BODIES INCLUDING THE I NSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, OR FOR THAT MATTER, THE SEBI ARE MEANT ONLY TO PRESCRIBE THE WAY IN WHICH THE TRANSA CTIONS SHOULD BE RECORDED IN BOOKS OR REFLECTED IN THE ANN UAL ACCOUNTS. THESE GUIDELINES DO NOT HAVE THE FORCE OF AN ACT OF PARLIAMENT. SINCE THE SUBJECT MATTER OF TAX ON INCOME FALLS IN THE UNION LIST AS PER PART XI OF THE INDIAN CONSTITUTION, IT IS ON LY THE PARLIAMENT WHICH CAN LEGISLATE ON ITS SCOPE. 11.2.4 BE THAT AS IT MAY, THERE IS NO WEIGHT IN THE CONTE NTION OF THE LD. AR THAT THERE IS NO SPECIFIC PROVISION IN T HE ACT ON THE ESOP DISCOUNT. IT IS AXIOMATIC THAT THE TAXATION RU LES ARE ALWAYS EMBODIED IN THE RELEVANT ACT, EITHER IN A SPECIFIC OR A GENERAL MANNER. THESE CAN BE SPECIFIC BY MAKING A CLEAR CUT PROVISION IN RESPECT OF DEDUCTIBILITY OF A PARTICULAR ITEM OF EX PENSE OR TAXATION OF A PARTICULAR ITEM OF INCOME. GENERAL PR OVISIONS ARE THOSE WHICH SET OUT THE OVERALL PRINCIPLES TO GOVER N THE DEDUCTIBILITY OR TAXABILITY OF UNSPECIFIED ITEMS. F OR EXAMPLE, THE DEFINITION OF 'INCOME' U/S 2(24) HAS BEEN GIVEN BY THE ACT IN AN INCLUSIVE MANNER. THERE HAVE BEEN ENSHRINED CLAUSES (I) TO (XVI) DEALING WITH THE ITEMS SPECIFICALLY LISTED. HOWEVER , THE PROVISION HAS BEEN COUCHED IN SUCH A WAY SO AS TO INCLUDE GEN ERAL ITEMS OF RECEIPTS HAVING CHARACTER OF INCOME, EVEN THOUGH NO T SPECIFICALLY MENTIONED. SIMILAR IS THE POSITION REG ARDING DEDUCTIONS. UNDER THE HEAD 'PROFITS AND GAINS OF BU SINESS OR PROFESSION', THERE ARE SECTIONS GRANTING DEDUCTIONS IN RESPECT OF SPECIFIC EXPENSES OR ALLOWANCES. SIMILARLY, THERE I S SECTION 37(1), WHICH GRANTS DEDUCTION FOR EXPENSES NOT SPECIFICALL Y SET OUT IN OTHER SECTIONS, IF THE CONDITIONS STIPULATED IN THE SECTION, ARE FULFILLED. ALL OTHER ITEMS OF EXPENSES, WHICH FULFI L THE REQUISITE M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 27 CONDITIONS, GAIN DEDUCTIBILITY UNDER SECTION 37(1). TO PUT IT IN SIMPLE WORDS, THIS SECTION IS A SPECIFIC PROVISION FOR GRANTING DEDUCTION IN RESPECT OF THE UNSPECIFIED OR THE GENE RAL CATEGORIES OF EXPENSES. DISCOUNT ON ESOP IS A GENERAL EXPENSE AND HENCE COVERED BY THE SPECIFIC PROVISION OF SECTION 37. TH E CONTENTION OF THE LD. AR THAT THERE IS NO PROVISION IN THE ACT DE ALING WITH THE DEDUCTIBILITY OF ESOP DISCOUNT, IS THEREFORE, DEVOI D OF ANY MERIT. THIS CONCLUDES THE QUESTION OF GRANTING OF DEDUCTIO N OF DISCOUNT DURING THE VESTING PERIOD. 11.2.5 THE SEBI GUIDELINES HAVE BEEN TAKEN SHELTER OF TO CONTEND THAT THERE IS NO REQUIREMENT FOR THE ADJUST MENT OF DISCOUNT AT THE TIME OF EXERCISE OF OPTIONS. PRIMAR ILY, WE ARE UNABLE TO TRACE THE PROPOSITION ANYWHERE FROM THE A CT THAT THE ACCOUNTING PRINCIPLES ARE ALSO DETERMINATIVE OF THE TAX LIABILITY. THE JURISPRUDENCE IS RATHER THE OTHER WAY AROUND. I NTUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. (SUPRA), THE HO N'BLE SUPREME COURT HAS LAID DOWN IN SO MANY WORDS THAT THE TAXIN G PRINCIPLES CANNOT WALK ON THE FOOTSTEPS OF THE ACCOUNTING PRIN CIPLES. AT THIS JUNCTURE, IT WOULD BE USEFUL TO HAVE A GLIMPSE AT T HE FOLLOWING OBSERVATIONS OF THE HON'BLE SUPREME COURT IN THE AF ORE NOTED CASE: 'IT IS TRUE THAT THIS COURT HAS VERY OFTEN RE FERRED TO ACCOUNTING PRACTICE FOR ASCERTAINMENT OF PROFIT MAD E BY A COMPANY OR VALUE OF THE ASSETS OF A COMPANY. BUT WH EN THE QUESTION IS WHETHER A RECEIPT OF MONEY IS TAXABLE O R NOT OR WHETHER CERTAIN DEDUCTIONS FROM THAT RECEIPT ARE PE RMISSIBLE IN LAW OR NOT, THE QUESTION HAS TO BE DECIDED ACCORDIN G TO THE PRINCIPLES OF LAW AND NOT IN ACCORDANCE WITH ACCOUN TANCY PRACTICE. ACCOUNTING PRACTICE CANNOT OVERRIDE SECTI ON 56 OR ANY OTHER PROVISION OF THE ACT. AS WAS POINTED OUT BY L ORD RUSSELL IN THE CASE OF B.S. C. FOOTWEAR LTD. V. RIDGUARY (INSP ECTOR OF TAXES [1970] 77 ITR 857 (CA), THE INCOME-TAX LAW DO ES NOT MARCH STEP BY STEP IN THE FOOTPRINTS OF THE ACCOUNT ANCY PROFESSION.' 11.2.6 THE SAME VIEW HAS BEEN ADOPTED BY THE HON'BLE SUPRE ME COURT IN GODHRA ELECTRICITY CO. LTD. (SUPRA), BY HO LDING THAT : 'INCOME-TAX IS A LEVY ON INCOME. NO DOUBT, THE INCO ME-TAX ACT TAKES INTO ACCOUNT TWO POINTS OF TIME AT WHICH THE LIABILITY TO TAX IS ATTRACTED, VIZ., THE ACCRUAL OF THE INCOME OR IT S RECEIPT; BUT THE SUBSTANCE OF THE MATTER IS THE INCOME. IF INCOME DO ES NOT RESULT AT ALL, THERE CANNOT BE A TAX, EVEN THOUGH IN BOOK- KEEPING, AN ENTRY IS MADE ABOUT A HYPOTHETICAL INCOME, WHICH DO ES NOT MATERIALISE.' 11.2.7 IT FOLLOWS THAT ACCOUNTING PRINCIPLES HAVE ABSOLUTE LY NO ROLE TO PLAY IN THE MATTER OF DETERMINATION OF TOTA L INCOME UNDER M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 28 THE ACT. IF AN ACCOUNTING PRINCIPLE IS REFERRED TO BY THE HIGHER JUDICIARY, THEN THERE IS AN UNDERLYING PRESUMPTION THAT SUCH ACCOUNTING PRINCIPLE IS IN CONFORMITY WITH AND NOT IN CONFLICT WITH THE TAXATION PRINCIPLE. THE ESSENCE OF THE MAT TER IS THAT TAXATION PRINCIPLES ARE TO BE FOLLOWED. IF AN ACCOU NTING PRINCIPLE IS IN CONFORMITY WITH THE MANDATE OF TAXING PRINCIP LE AND REFERENCE IS MADE TO SUCH ACCOUNTING PRINCIPLE WHIL E DECIDING THE ISSUE, IT DOES NOT MEAN THAT THE ACCOUNTING PRI NCIPLE HAS BEEN FOLLOWED. IT SIMPLY MEANS THAT THE TAXATION PR INCIPLE HAS BEEN FOLLOWED AND THE ACCOUNTING PRINCIPLE, WHICH I S IN LINE WITH SUCH TAXATION PRINCIPLE, HAS BEEN SIMPLY TAKEN NOTE OF. IF HOWEVER, AN ACCOUNTING PRINCIPLE RUNS COUNTER TO TH E TAXATION PRINCIPLE, THEN THERE IS NO PRIZE FOR GUESSING THAT IT IS ONLY THE TAXATION PRINCIPLE WHICH SHALL PREVAIL. 11.2.8 THE PLEA NOW RAISED BEFORE US BY THE LD. AR, RELYIN G ON THE CASE OF CHALLAPALLI SUGARS LTD. (SUPRA), WAS AL SO TAKEN UP BEFORE THE HON'BLE SUPREME COURT IN THE CASE OFTUTI CORIN ALKALIS CHEMICALS & FERTILIZERS LTD (SUPRA). DEALING WITH T HE SAME, THE HON'BLE SUPREME COURT HELD THAT : 'THE QUESTION IN CHALLAPALLI SUGARS LTD.'S CASE (SUPRA) WAS ABOUT COMPUTATION OF DEPRECIATION AND DEVELOPMENT REBATE UNDER THE INDIA N INCOME- TAX ACT, 1922. IN ORDER TO CALCULATE DEPRECIATION A ND DEVELOPMENT REBATE IT WAS NECESSARY TO FIND OUT 'TH E ACTUAL COST' OF THE PLANT AND MACHINERY PURCHASED BY THE C OMPANY. THIS COURT HELD THAT 'COST' IS A WORD OF WIDER CONN OTATION THAN 'PRICE'. THERE WAS A DIFFERENCE BETWEEN THE PRICE O F A MACHINERY AND ITS COST. THIS COURT THEREAFTER POINTED OUT THA T THE EXPRESSION 'ACTUAL COST' HAD NOT BEEN DEFINED IN TH E ACT. IT WAS, THEREFORE, NECESSARY TO FIND OUT THE COMMERCIAL SEN SE OF THE PHRASE. .THE JUDGMENT IN CHALLAPALLI SUGAR LTD' S CASE (SUPRA), GOES TO SHOW THAT THE COURT WAS NOT IN ANY WAY DEPARTING FROM LEGAL PRINCIPLES BECAUSE OF ANY OPIN ION EXPRESSED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS .' FROM THE ABOVE OBSERVATIONS THERE IS NOT EVEN AN IOTA OF DOU BT IN OUR MINDS THAT THERE CAN BE NO QUESTION OF FOLLOWING TH E ACCOUNTING PRINCIPLE OR GUIDANCE NOTES ETC. IN THE MATTER OF D ETERMINATION OF TOTAL INCOME. 11.2.9 THE TRUMP CARD OF THE LD. AR TO BOLSTER HIS SUBMIS SION FOR ASSIGNING THE STATUS OF BINDING FORCE TO THE SEBI G UIDELINES IS THE ORDER IN THE CASE OF S.S.I. LTD. (SUPRA) WHICH CAME TO BE AFFIRMED BY THE HON'BLE MADRAS HIGH COURT IN PVP VENTURES LT D. (SUPRA). WE HAVE NOTICED ABOVE THAT THE SAID CASE DEALT A SI TUATION FALLING WITHIN ONE OF THE THREE YEARS OF THE VESTIN G PERIOD, IN WHICH IT WAS HELD THAT ONE THIRD OF THE TOTAL AMOUN T OF DISCOUNT M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 29 COMPUTED ON THE BASIS OF THE MARKET PRICE OF THE SH ARES AT THE TIME OF GRANT OF OPTION, IS DEDUCTIBLE. IT IS EVIDE NT FROM THE SEBI GUIDELINES THAT THESE DEAL WITH THE DEDUCTIBILITY O F DISCOUNT IN THE HANDS OF COMPANY DURING THE YEARS OF VESTING PE RIOD. THESE GUIDELINES ARE SILENT ON THE POSITION EMANATING FRO M VARIATION IN THE MARKET PRICE OF THE SHARES AT THE TIME OF EX ERCISE OF OPTION BY THE EMPLOYEES VIS--VIS THE MARKET PRICE AT THE TIME OF GRANT OF OPTION. IN OTHER WORDS, THE SEBI GUIDELINES PRES CRIBE ACCOUNTING TREATMENT ONLY IN RESPECT OF THE PERIOD OF VESTING OF THE OPTIONS AND THE SITUATION ARISING OUT OF UNVEST ED OPTIONS OR VESTED OPTIONS LAPSING. THE VERY REFERENCE BY THE C HENNAI BENCH OF THE TRIBUNAL IN SSI LIMITED (SUPRA) TO THE SEBI GUIDELINES IS INDICATIVE OF THE FACT THAT IT DEALT WITH A YEAR DU RING WHICH THE OPTIONS WERE VESTING WITH THE EMPLOYEES AND THE COM PANY CLAIMED DISCOUNT DURING THE VESTING PERIOD. THE HON 'BLE MADRAS HIGH COURT IN THE CASE OF PVP VENTURES LTD. (SUPRA) HAS UPHELD THE VIEW TAKEN BY THE CHENNAI BENCH IN THE CASE OF S.S.I. LTD. (SUPRA). THE GRANTING OF THE BINDING FORCE TO THE SEBI GUIDELINES BY THE HON'BLE MADRAS HIGH COURT SHOULD BE VIEWED IN THE CONTEXT OF THE ISSUE BEFORE IT, WHICH WAS AB OUT THE DEDUCTIBILITY OF DISCOUNT DURING ONE OF THE VESTING YEARS. IN THE EARLIER PART OF THIS ORDER, WE HAVE HELD THAT THE D EDUCTIBILITY OF DISCOUNT DURING THE VESTING PERIOD, AS PRESCRIBED U NDER THE SEBI GUIDELINES, MATCHES WITH THE TREATMENT UNDER THE ME RCANTILE SYSTEM OF ACCOUNTING. TO THAT EXTENT, WE ALSO HOLD THAT THE SEBI GUIDELINES ARE APPLICABLE IN THE MATTER OF DEDUCTIO N OF DISCOUNT. NEITHER THERE WAS ANY ISSUE BEFORE THE HON'BLE MADR AS HIGH COURT NOR IT DEALT WITH A SITUATION IN WHICH THE MA RKET PRICE OF THE SHARES AT THE TIME OF EXERCISE OF OPTION IS MOR E OR LESS THAN THE MARKET PRICE AT THE TIME OF GRANT OF OPTION. IT IS A SITUATION WHICH HAS ALSO NOT BEEN DEALT WITH BY THE GUIDELINE S. ACCORDINGLY, THE AFORENOTED TAXATION PRINCIPLE OF G RANTING DEDUCTION FOR THE ADDITIONAL DISCOUNT AND REVERSING DEDUCTION FOR THE SHORT AMOUNT OF DISCOUNT AT THE TIME OF EXE RCISE OF OPTION, NEEDS TO BE SCRUPULOUSLY FOLLOWED. 11.3 WE, THEREFORE, SUM UP THE POSITION THAT THE DISCOU NT UNDER ESOP IS IN THE NATURE OF EMPLOYEES COST AND IS HENC E DEDUCTIBLE DURING THE VESTING PERIOD W.R.T. THE MARKET PRICE O F SHARES AT THE TIME OF GRANT OF OPTIONS TO THE EMPLOYEES. THE AMOU NT OF DISCOUNT CLAIMED AS DEDUCTION DURING THE VESTING PE RIOD IS REQUIRED TO BE REVERSED IN RELATION TO THE UNVESTIN G/LAPSING OPTIONS AT THE APPROPRIATE TIME. HOWEVER, AN ADJUST MENT TO THE INCOME IS CALLED FOR AT THE TIME OF EXERCISE OF OPT ION BY THE AMOUNT OF DIFFERENCE IN THE AMOUNT OF DISCOUNT CALC ULATED WITH REFERENCE THE MARKET PRICE AT THE TIME OF GRANT OF OPTION AND THE M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 30 MARKET PRICE AT THE TIME OF EXERCISE OF OPTION. NO ACCOUNTING PRINCIPLE CAN BE DETERMINATIVE IN THE MATTER OF COM PUTATION OF TOTAL INCOME UNDER THE ACT. THE QUESTION BEFORE THE SPECIAL BENCH IS THUS ANSWERED IN AFFIRMATIVE BY HOLDING TH AT DISCOUNT ON ISSUE OF EMPLOYEE STOCK OPTIONS IS ALLOWABLE AS DEDUCTION IN COMPUTING THE INCOME UNDER THE HEAD 'PROFITS AND GA INS OF BUSINESS OR PROFESSION'. SOME RELEVANT FACTORS IN ASSESSEE'S CASE 12.1 HAVING ANSWERED THE QUESTION IN AFFIRMATIVE, LET U S EXAMINE ITS APPLICABILITY TO THE FACTS OF THE APPEL LANT'S CASE. IT HAS BEEN SEEN ABOVE THAT THE AUTHORITIES BELOW REFU SED TO GRANT DEDUCTION OF THE DISCOUNT AT THE VERY THRESHOLD. RE SULTANTLY, THE VERIFICATION OF THE CORRECTNESS OF CALCULATION OF D ISCOUNT STOOD OUSTED. SINCE WE HAVE OVERTURNED SUCH VIEW IN ABOVE TERMS, THE VERIFICATION OF CALCULATION IN ACCORDANCE WITH OUR DIRECTIONS BECOMES IMPERATIVE. WE, THEREFORE, SET ASIDE THE IM PUGNED ORDERS ON THIS ISSUE AND REMIT THE MATTER TO THE FI LE OF THE AO FOR FINDING OUT THE CORRECT AMOUNT OF DEDUCTION ACCORDI NGLY. 12.2 IT WOULD BE IMPERATIVE TO HIGHLIGHT CERTAIN POINTS HAVING BEARING ON THE ISSUE WHICH HAVE COME TO OUR NOTICE DURING THE COURSE OF HEARING. THE AO IS DIRECTED TO LOOK, INTE R ALIA, INTO THESE ASPECTS IN QUANTIFYING THE AMOUNT OF ELIGIBLE DEDUCTION. A. THE ASSESSEE-COMPANY WAS A CLOSELY HELD COMPANY IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 2003- 2004 AND AS SUCH THERE WAS NO QUESTION OF THE LISTING OF ITS SH ARES AND HAVING SOME MARKET PRICE AT THE TIME OF GRANT OF OPTIONS. ORDINARILY, THE AMOUNT OF DISCOUNT ON PREMIUM WHICH IS WRITTEN OFF OVER THE VESTING PERIOD REPRESENTS THE MARKET PRICE OF THE S HARES LISTED ON THE STOCK EXCHANGE ON THE DATE OF GRANT OF OPTIO N AS REDUCED BY THE PRICE AT WHICH OPTION IS GIVEN TO THE EMPLOY EES. HOWEVER, PRESENTLY THERE IS NO AVAILABILITY OF ANY MARKET PR ICE OF SUCH SHARES ON THE DATE OF GRANT OF OPTION AS THE COMPAN Y CAME TO BE LISTED ON A STOCK EXCHANGE IN A SUBSEQUENT YEAR. ON A POINTED QUERY, THE LD. AR FURNISHED THE DETAILS OF SUCH CLA IM BY SHOWING THAT IT GRANTED 71,510 OPTIONS WITH DISCOUNT OF RS. 909 PER OPTION MAKING TOTAL DISCOUNT AT RS. 6.50 CRORE. HE STATED THAT THE FACE VALUE OF SHARES IS AT RS. 10 AGAINST WHICH THE DEDUCTION FOR DISCOUNTED PREMIUM OVER THE VESTING PERIOD HAS BEEN CLAIMED AT RS. 909, MEANING THEREBY THAT THE MARKET PRICE OF THE SHARE ON THE DATE OF GRANT OF OPTION WAS TAKEN AT R S. 919. NO MATERIAL WORTH THE NAME HAS BEEN PLACED ON RECORD T O INDICATE AS TO HOW A SHARE WITH FACE VALUE OF RS. 10 HAS BEE N VALUED AT RS. 919 FOR CLAIMING DEDUCTION TOWARDS DISCOUNT AT RS. 909 PER M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 31 SHARE. THIS ASPECT OF VALUATION OF SHARES AT RS. 91 9 PER SHARE NEEDS TO BE EXAMINED BY THE ASSESSING OFFICER. B. WE HAVE HELD ABOVE THAT THE DEDUCTION OF THE DIS COUNTED PREMIUM IS TO BE CLAIMED OVER THE VESTING PERIOD. T HE ASSESSEE CLAIMED DEDUCTION FOR DISCOUNT AMOUNTING TO RS. 3.3 8 CRORE FOR THE A.Y. 2003-04. ON BEING CALLED UPON TO FURNISH B IFURCATION OF SUCH CLAIM, THE ASSESSEE FILED A CHART SHOWING ITS DETAIL COMPRISING OF FOUR AMOUNTS. FIRST AMOUNT OF RS. 1.6 2 CRORE HAS BEEN SHOWN AS THE FIRST TRANCHE OF 25% OPTION. SECO ND AMOUNT OF RS. 81.25 LAKH AS THE SECOND TRANCHE OF 25% OPTI ON; THIRD AMOUNT OF RS. 54.16 LAKH AS THE THIRD TRANCHE OF 25 % OPTION AND THE LAST AMOUNT OF RS. 40.62 LAKH AS THE FOURTH TRA NCHE OF 25% OPTION. WE ARE UNABLE TO UNDERSTAND AS TO HOW THE L AST THREE AMOUNTS CAN QUALIFY FOR DEDUCTION AT THE END OF THE FIRST YEAR ITSELF. ON A SPECIFIC QUERY, IT WAS STATED BY THE L D. AR THAT THE ASSESSEE CLAIMED DEDUCTION FOR THE PROPORTIONATE PA RT OF DISCOUNT FOR THE SECOND, THIRD AND FOURTH YEAR AT T HE END OF THE FIRST YEAR ITSELF BECAUSE 25% OF OPTIONS VESTED IN THE EMPLOYEES AT THE END OF THE FIRST TO FOURTH YEAR EACH. THIS D EFIES ALL LOGICS AND RATIONALITIES. WHEN THE OPTIONS VEST EQUALLY OV ER A PERIOD OF FOUR YEARS, IT IS BUT NATURAL THAT THE COMPANY WOUL D INCUR EQUAL LIABILITY FOR THE DISCOUNTED PREMIUM @ 25% OF TOTAL DISCOUNT ON RECEIPT OF SERVICES OF THE EMPLOYEES AT THE END OF EACH YEAR. THE WAY IN WHICH THE ASSESSEE HAS CLAIMED DEDUCTION RUN S CONTRARY EVEN TO THE SEBI GUIDELINES, WHICH ALSO PROVIDE FOR DEDUCTION ON STRAIGHT LINE BASIS. THE MANNER OF THE ASSESSEE'S C LAIMING DEDUCTION HAS RESULTED IN NEEDLESSLY INCREASING THE AMOUNT OF DEDUCTION FOR THE FIRST YEAR AT THE COST OF DEDUCTI ON FOR THE SUBSEQUENT THREE YEARS. IT NEEDS TO BE SET RIGHT BY APPORTIONING THE TOTAL AMOUNT OF THE DISCOUNTED PREMIUM EVENLY O VER THE VESTING PERIOD OF FOUR YEARS. C. IT HAS BEEN NOTICED ABOVE THAT THE STAGE FOR THE GRANT OF DEDUCTION OF DISCOUNT IS ON THE RESPECTIVE VESTING OF THE OPTIONS. IN ESOP 2000, THE VESTING TAKES PLACE @ 25% AFTER E ACH YEAR OF SERVICE. IT MEANS THAT THE FIRST PART OF 25% DEDUCT ION WOULD BE AVAILABLE ON THE COMPLETION OF ONE YEAR FROM THE DA TE OF GRANT OF OPTION. THE ASSESSEE WAS REQUIRED TO INDICATE TH E DATE OF GRANT OF OPTIONS IN RESPECT OF WHICH DEDUCTION HAS BEEN CLAIMED IN THE INSTANT YEAR. TWO LETTERS GRANTING OPTIONS T O SHRI MURALI KRISHNAN K.N. AND NEVILLE BAIN HAVE BEEN RANDOMLY F ILED WHICH ARE DATED 2ND APRIL, 2002. IF THE OPTIONS ARE GRANT ED ON 2ND APRIL, 2002, THEN 25% OF THE TOTAL OPTION SHALL VES T IN THE EMPLOYEES AT THE END OF THE FIRST YEAR FROM THIS DATE, WHICH DATE WOULD BE 1ST APRIL, 2003. AS SUCH, THE AMOUNT WOULD BECOME M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 32 DEDUCTIBLE IN THE PREVIOUS YEAR RELEVANT TO ASSESSM ENT YEAR 2004-2005 AND NOT 2003-2004. THE LD. AR CONTENDED T HAT THOUGH THESE LETTERS ARE DATED 2ND APRIL, 2002, BUT IN FACT THE OPTIONS WERE GRANTED ON 1ST APRIL, 2002. THE CORREC T DATE OF GRANT AND VESTING NEEDS TO BE VERIFIED AT THE AO'S END. D. THE LD. AR HAS STATED THAT THE AMOUNT OF DISCOUN T CLAIMED AS DEDUCTION IN THE EARLIER YEARS IN RESPECT OF UNVEST ING/LAPSING OPTIONS HAS BEEN REVERSED AT THE RELEVANT TIME. THE RE IS NO FINDING EITHER IN THE ASSESSMENT OR THE IMPUGNED OR DER IN THIS REGARD. THIS FACT SHOULD ALSO BE VERIFIED BY THE AO TO ENSURE THAT THE OVERALL EXPENDITURE BOOKED BY THE COMPANY IS RE STRICTED ONLY TO THE EXTENT OF THE EXERCISED OPTIONS. THE HONBLE SPECIAL BENCH OF TRIBUNAL IN THE CASE O F BIOCON LIMITED(SUPRA) HAS HELD THAT DISCOUNT UNDER ESOP IS IN THE NATURE OF EMPLOYEES COST AND IS HENCE DEDUCT IBLE DURING THE VESTING PERIOD W.R.T. THE MARKET PRICE O F SHARE AT THE TIME OF GRANT OF OPTIONS TO THE EMPLOYEES. THE HONBLE SPECIAL BENCH HAS HELD THAT THE AMOUNT OF DISCOUNT CLAIMED AS DEDUCTION DURING THE VESTING PERIOD IS REQUIRED TO BE REVERSED IN RELATION TO THE UN-VESTING/LAPSING OPTI ONS AT THE APPROPRIATE TIME, HOWEVER, AN ADJUSTMENT TO THE INC OME IS CALLED FOR AT THE TIME OF EXERCISE OF OPTION BY THE AMOUNT OF DIFFERENCE IN THE AMOUNT OF DISCOUNT CALCULATED WIT H REFERENCE TO THE MARKET PRICE AT THE TIME OF GRANT OF OPTION AND THE MARKET PRICE AT THE TIME OF EXERCISE OF OPT ION. NO CONTRARY DECISION IS BROUGHT TO OUR NOTICE BY THE R EVENUE TO CONTROVERT THE DECISION OF THE SPECIAL BENCH OF BAN GALORE M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 33 ITAT WITH RESPECT TO THIS ISSUE. RESPECTFULLY FOLL OWING THE DECISION OF SPECIAL BENCH ITAT BANGALORE, WE HOLD T HAT THE ASSESSEE COMPANY IS ENTITLED TO THE DEDUCTION OF RS .5,99,74,467/- BEING DEFERRED EMPLOYEE COMPENSATION EXPENSE (ESOP) DEBITED UNDER THE HEAD EMPLOYEE COS T AS AN ALLOWABLE BUSINESS EXPENDITURE UNDER THE HEAD PROF IT AND GAINS OF BUSINESS OR PROFESSION INCURRED WHOLLY AN D EXCLUSIVELY FOR THE PURPOSES OF BUSINESS OF THE ASS ESSEE COMPANY. WE FURTHER HOLD THAT T HE AMOUNT OF DISCOUNT CLAIMED AS DEDUCTION DURING THE VESTING PERIOD IS R EQUIRED TO BE REVERSED IN RELATION TO THE UN-VESTING/LAPSING O F OPTIONS AT THE APPROPRIATE TIME. HOWEVER, AN ADJUSTMENT TO THE INCOME IS CALLED FOR AT THE TIME OF EXERCISE OF OPT ION BY THE AMOUNT OF DIFFERENCE IN THE AMOUNT OF DISCOUNT CALC ULATED WITH REFERENCE THE MARKET PRICE AT THE TIME OF GRAN T OF OPTION AND THE MARKET PRICE AT THE TIME OF EXERCISE OF OPT ION . WE ORDER ACCORDINGLY AND HENCE THE APPEAL OF THE ASSES SEE COMPANY IS ALLOWED. 9. THE REVENUE IS AGGRIEVED BY THE EXCLUSION OF RS.4,61,37,00,000/- BEING INVESTMENT MADE BY THE AS SESSEE COMPANY IN THE SHARES OF ITS SUBSIDIARY M/S INDIA I NFOLINE M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 34 INVESTMENT SERVICES LTD. WHILE WORKING OUT THE AVER AGE VALUE OF INVESTMENT FOR THE PURPOSE OF COMPUTATION OF DISALLOWANCE U/S 14A OF THE ACT READ WITH RULE 8D O F THE INCOME TAX RULES, 1962. 10. DURING THE COURSE OF SCRUTINY PROCEEDINGS, THE AO NOTED THAT THE ASSESSEE COMPANY HAS RECEIVED DIVIDE ND INCOME OF RS. 4,78,44,562/- AND TOTAL INVESTMENT OF RS.9,15,68,01,378/- WAS REFLECTED UNDER THE BALANCE SHEET . THE AO NOTED THAT THE ASSESSEE COMPANY HAD NOT ATT RIBUTED ANY EXPENSES WHICH HAVE BEEN INCURRED TO CARRY OUT THE ACTIVITY OF MAKING EXEMPT INCOME BEARING INVESTMENT , WHEREAS, IT IS ACCEPTED FACT AS PER THE AO FOR CARR YING OUT ANY SUCH ACTIVITY, SOME KIND OF EXPENDITURE ARE NE CESSARILY TO BE INCURRED . 10.1. THE ASSESSEE COMPANY SUBMITTED BEFORE THE A O THAT THE ASSESEE COMPANY HAS NOT INCURRED ANY EXPEN SES FOR EARNING SUCH EXEMPT INCOME IN THE FORM OF DIVIDEND INCOME. THE ASSESSEE COMPANY HAS MADE INVESTMENT IN SHORT T ERM SURPLUS FUNDS IN LIQUID SCHEMES OF MUTUAL FUNDS OUT OF OWN FUNDS AND NO BORROWED FUNDS HAVE BEEN USED TO MAKE INVESTMENTS. SIMILARLY, ASSESSEE COMPANY HAS MADE INVESTMENT IN SUBSIDIARY COMPANIES TO RETAIN MANAGE MENT CONTROL OF THE SAID SUBSIDIARIES NOT TO EARN INCOME AND THE INVESTMENT HAVE BEEN MADE OUT OF OWN FUNDS AND NO BORROWED FUNDS HAVE BEEN USED. THE AO REJECTED THE M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 35 CONTENTIONS OF THE ASSESSEE COMPANY AND HELD THAT T HE ASSESSEE COMPANY CANNOT EARN ANY INCOME FROM INVESTMENTS WITHOUT SYSTEMATIC MANAGEMENT. THE INVESTMENT DECISIONS ARE VERY COMPLEX IN NATURE WHI CH REQUIRES SUBSTANTIAL MARKET RESEARCH AND DAY TO DAY ANALYSIS OF THIS MARKET TRENDS AND DECISIONS AT THE MOST APPROPRIATE TIME. THE AO ALSO RELIED UPON THE DECI SION OF GODREJ & BOYCE MANUFACTURING CO. LTD. VS. DCIT IN I TOA NO.626/2010 & WRIT PETITION NO.758/2010, WHEREBY TH E HONBLE BOMBAY HIGH COURT HAS HELD IN FAVOUR OF THE REVENUE, THUS, THE TOTAL DISALLOWANCE WAS MADE OF RS.9,20,55,758/- UNDER RULE 8D (2)(II) & (III) OF I NCOME TAX RULES,1962 READ WITH SECTION 14A OF THE ACT AS PER DETAILS IN PARA 4.6 OF THE AO ORDER CONSISTING OF THE DISALLOW ANCE OF RS.6,61,27,995/- MADE UNDER RULE 8D(2)(II) WHILE RS.2,59,27,763/- WAS DISALLOWED BY THE AO UNDER RUL E 8D(2)(III) OF INCOME TAX RULES, 1962. THE ASSESSEE COMPANY FILED ITS REPRESENTATIVE LETTER DATED 08/11/2011 BE FORE THE AO WHEREBY DISALLOWANCE U/S 14A OF THE ACT READ WIT H RULE 8D OF INCOME TAX RULES,1962 WAS COMPUTED AS RS.6,66,57,095/- BY THE ASSESSEE COMPANY. 10.2. AGGRIEVED BY THE ORDERS OF THE AO, THE ASSES SEE COMPANY CARRIED THE MATTER BEFORE THE CIT(A) AND SU BMITTED THAT THE ASSESSEE COMPANY IS IN THE BUSINESS OF PRO VIDING INTERNET & IT ENABLES STOCK BROKING SERVICES. IT IS ALSO SUBMITTED THAT THE AO HAS ERRED IN APPLYING THE PRO VISION OF RULE 8D(2)(II) AND (III) OF INCOME TAX RULES, 1962 WITHOUT APPLICATION OF MIND AND THE AO FAILED TO APPRECIATE THAT NO M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 36 EXPENSES HAVE BEEN INCURRED BY THE ASSESSEE COMPANY IN ORDER TO EARN EXEMPT INCOME BEING DIVIDEND INCOME. THE ASSESSEE COMPANY SUBMITTED THAT IT HAS INVESTED ITS OWN FUNDS AND NO BORROWED FUNDS WERE UTILIZED. IT IS M INIMAL ACTIVITY RELATING TO EXEMPT INCOME AND STRATEGIC INVESTMENTS ARE MADE IN SUBSIDIARY COMPANY TO RETAI N MANAGEMENT CONTROL AND HENCE IN NUTSHELL THE ASSESS EE COMPANY CONTENDED THAT NO EXPENDITURE HAS BEEN INCU RRED TO EARN THE EXEMPT INCOME. THE CIT(A) CONSIDERED T HE CONTENTION OF THE ASSESSEE THAT COMPUTING THE DISAL LOWANCE U/S 14A READ WITH RULE 8D BEING UNREASONABLE AND INCORRECT AND THE CIT(A) HELD THAT ASSESSEE COMPANY HAS RECEIVED DIVIDEND INCOME OF RS.4,78,44,562/- AND TH ERE ARE EMPLOYEES COST OF RS.134,78,55,834/-, ADMINISTRATIO N AND OTHER EXPENSES OF RS. 93,78,29,789/- AND INTEREST EXPENDITURE OF RS.21,16,26,394/- AND IT IS WRONG TO CLAIM ON THE PART OF THE ASSESSEE COMPANY THAT NO DIRECT OR INDIRECT EXPENDITURE HAS BEEN INCURRED IN RELATION TO THE EXEMPT INCOME. THE CIT(A) WHILE RESTRICTING THE DISALLOWANCE HELD THAT OUT OF THE TOTAL INVESTMENT S OF RS.915,68,01,378/- AS APPEARING IN SCHEDULE G INV ESTMENT IN NON 115O DIVIDEND FOREIGN SUBSIDIARY IS OF RS.21,15,15,974/- AND FURTHER INVESTMENT IN SERIES A NCD ORDYN TECHNOLOGY PRIVATE LIMITED, SERIES B OCD ORDY N TECHNOLOGY PRIVATE LIMITED AND EQUITY FUND TRUST IS OF RS.30,02,00,000/- ON SUCH INVESTMENT THERE IS A INT EREST INCOME OFFERED DURING THE YEAR, HENCE , IS NOT INVE STMENT RELATING TO EXEMPT INCOME . THE CIT(A) ALSO HELD TH AT THERE IS M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 37 INVESTMENT IN SUBSIDIARIES OF RS.755,92,38,775/- ON WHICH NO DIVIDEND HAS BEEN RECEIVED. WITH THIS BACKGROUND THE CIT(A) HELD THAT RULE 8D IS SQUARELY APPLICABLE AND RESTRICTED THE ADDITION BASED UPON THE FOLLOWING CH ART AND HENCE THE DISALLOWANCE WAS RESTRICTED TO RS.39,427, 835/-. I. INVESTMENT AS ON 1 APRIL 2007 1,714,503,772 LESS: INVESTMENT IN DEBENTURES, ETC YIELDING TAXABL E INCOME 200,000,000 LESS: INVESTMENT IN SHARES OF FOREIGN COMPANIES LIK ELY TO YIELD 11,755,102 TAXABLE DIVIDEND ELIGIBLE INVESTMENT AS ON 1 APRIL 2007 1,502,748 ,670(A) TOTAL ASSETS AS ON 1 APRIL 2007 6,662,626,622(B) INVESTMENT AS ON 31 MARCH 2008 9,156,801,378 LESS: INVESTMENT MADE IN INDIA INFOLINE INVESTMENT SERVICES 4,613,700,000 LIMITED ON 4 FEBRUARY 2008 OUT OF PROCEEDS OF SHARE S ISSUE IN JANUARY 2008 LESS: INVESTMENT IN DEBENTURES, ETC YIELDING TAXABL E INCOME 300,200,000 LESS: INVESTMENT IN SHARES OF FOREIGN COMPANIES LIK ELY TO YIELD 211,515,974 TAXABLE DIVIDEND ELIGIBLE INVESTMENT AS ON 31 MARCH 2008 4,631,785 ,404(C) TOTAL ASSETS AS ON 31 MARCH 2008 18,517,933,554( D) AVERAGE INVESTMENT OUT OF BORROWED FUNDS FOR F.Y. 2 007-08 3,067,267,037 (A+C)/2=(E) AVERAGE TOTAL ASSETS FOR F.Y. 2007-08 12,590,280,088(B+D)/2+(F) INTEREST PAID DURING F.Y. 2007-08 98,888,920(G) DIS-ALLOWANCE U/R 8D(2)(II) 24,091,499(G*E/F) II AVERAGE INVESTMENT OUT OF BORROWED FUNDS FOR F.Y. 2007-08 3,067,267,037(E) 0.5% OF AVERAGE INVESTMENT OUT OF BORROWED FUNDS FO R F.Y. 2007-08 15,336,335 DIS-ALLOWANCE U/R 8D(2)(III) 15,336,335 TOTAL DISALLOWANCE U/R 8D 39,427,835(I +II) 11. AGGRIEVED BY THE ORDERS OF THE CIT(A), THE REV ENUE IS IN APPEAL BEFORE US AND CONTENDED THAT THE CIT(A ) ERRED IN EXCLUDING RS.4,61,37,00,000/- BEING THE INVESTMEN T MADE IN M/S INDIA INFOLINE INVESTMENT SERVICES LTD. , IT S SUBSIDIARY COMPANY WHILE WORKING OUT THE AVERAGE VA LUE OF INVESTMENT FOR THE PURPOSE OF COMPUTATION OF DISAL LOWANCE U/S 14A OF THE ACT R.W.R. 8D OF INCOME TAX RULES, 1 962 . M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 38 THE REVENUE CONTENDED BEFORE US THAT THE LD CIT(A) HAS ERRED IN EXCLUDING STRATEGIC INVESTMENT OF RS.4,61,37,00,000/- WHILE COMPUTING THE DISALLOWANC E FOR THE PURPOSE OF RULE 8D OF INCOME TAX RULES, 1962. 12. THE ASSESSEE COMPANY ON THE OTHER HAND CONTENDE D BEFORE US THAT THE INVESTMENT OF RS.4,61,37,00,000/ - HAVE BEEN MADE IN THE SUBSIDIARY COMPANY M/S INDIA INFOL INE INVESTMENT SERVICES LTD. AS STRATEGIC INVESTMENT IN FEBRUARY 2008 OUT OF THE PROCEEDS OF FRESH SHARES ISSUED BY THE ASSESSEE COMPANY IN JANUARY 2008 WHICH IS ALSO REFL ECTED IN THE CIT(A) ORDERS AND NO BORROWED FUNDS WHATSOEV ER HAD BEEN UTILIZED FOR THE PURPOSE OF INVESTMENT. THE AS SESSEE COMPANY SUBMITTED THAT THE COMPANY HAS MADE FRESH I SSUE OF SHARES IN JANUARY 2008 AND THE PROCEEDS THEREOF WERE UTILIZED FOR MAKING INVESTMENT IN THE SUBSIDIARY CO MPANY M/S INDIA INFOLINE INVESTMENT SERVICES LTD.AND HENC E NO INTEREST EXPENSES WHATSOEVER HAS BEEN INCURRED FOR MAKING THIS INVESTMENT OF RS.4,61,37,00,000/- IN M/S INDIA INFOLINE INVESTMENT SERVICES LTD. AND HENCE THE CIT(A) HAS R IGHTLY EXCLUDED THE SAID INVESTMENT FOR THE COMPUTATION OF AVERAGE INVESTMENT. 13. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE HAVE O BSERVED THAT THE ASSESSEE COMPANY HAS MADE INVESTMENT IN TH E SUBSIDIARY COMPANY NAMELY M/S INDIA INFOLINE INVEST MENT SERVICES LTD. OF RS.4,61,37,00,000/- ON 4 TH FEBRUARY, 2008 OUT OF PROCEEDS OF FRESH SHARES ISSUED BY THE ASSES SEE M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 39 COMPANY IN JANUARY 2008 WHICH IS DULY REFLECTED FRO M THE ORDERS OF THE AUTHORITIES BELOW AND IT IS STATED BY THE LD. COUNSEL OF THE ASSESSEE COMPANY BEFORE US THAT NO BORROWED FUNDS WHATSOEVER HAS BEEN UTILIZED BY THE ASSESSEE COMPANY FOR THE PURPOSE OF MAKING THE INVE STMENT IN THE SAID SUBSIDIARY COMPANY NAMELY M/S INDIA INF OLINE INVESTMENT SERVICES LTD. AMOUNTING TO RS.4,61,37,00 ,000/-. IN FACT IT IS STATED BEFORE US THAT THE ENTIRE OWN FUNDS ARE UTILIZED BY THE ASSESSEE COMPANY FOR MAKING THIS IN VESTMENT IN SUBSIDIARY COMPANY NAMELY M/S INDIA INFOLINE INVESTMENT SERVICES LTD. OF RS.4,61,37,00,000/- . WE ARE OF THE CONSIDERED OPINION THAT THE CIT(A) HAS RIGHTLY EXCLUDED THE SAID INVESTMENT OF RS.4,61,37,00,000/- FOR THE PURPOSES OF DISALLOWANCE UNDER RULE 8D (2)(II) OF THE INCOME TAX RULES, 1962 R.W.S. 14A OF THE ACT. COMING TO THE SUBMISSION OF THE ASSESSEE COMPANY THAT THESE ARE S TRATEGIC INVESTMENTS AND NO DISALLOWANCE CAN BE MADE TOWARDS THE ADMINISTRATIVE, INTEREST AND OTHER EXPENSES. WE WOU LD LIKE TO MENTION THAT UNDER NORMAL CIRCUMSTANCES STRATEGI C INVESTMENT ARE MADE FOR THE PURPOSES OF DOING BUSIN ESS WITH A LONG TERM HORIZON AND NO DOUBT THAT THE OBJECTIV E IS TO EARN PROFITS/RETURNS FROM THE INVESTMENT BUT NORMAL LY THE SAID PROFIT / RETURNS WILL COME BY WAY OF DIVIDEND( S) WHEN THE COMPANIES COME INTO PROFIT AND DECLARE DIVIDEND TO THE SHAREHOLDERS. SUCH DIVIDENDS IN THE HANDS OF SHAREH OLDERS SHALL BE EXEMPT FROM TAX. NO DOUBT , THE RETURNS CA N ALSO COME BY WAY OF DIVESTMENTS OF THESE INVESTMENTS BUT NORMALLY STRATEGIC INVESTMENTS ARE MADE WITH LONG T ERM M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 40 HORIZON WHERE OBJECTIVE IS TO SET UP BUSINESS (OR A CQUIRE CONTROLLING STAKE TO RUN BUSINESS )AND GROWTH OF TH ESE BUSINESS OVER A LONG PERIOD OF TIME MOREOVER CAPITA L GAIN ON SALE OF SHARES IS NOT INCOME ARISING FROM INVESTMEN T BUT IT IS ARISING FROM THE SALE OF INVESTMENT AND CANNOT JUST IFIABLY IN OUR CONSIDERED VIEW BE CONSIDERED FOR EXCLUSION OF THE STRATEGIC INVESTMENT FOR COMPUTATION OF DISALLOWANC E UNDER RULE 8D OF INCOME TAX RULES, 1962 READ WITH SECTION 14A OF THE ACT. IN THESE TYPE OF STRATEGIC INVESTMENTS, TH E INVESTOR HAS TO NORMALLY DEVOTE SIGNIFICANT TIME TO PLAN, EX ECUTE AND MONITOR THESE INVESTMENTS REGULARLY AND PERIODICALL Y TO ENSURE THAT THESE STRATEGIC INVESTMENTS ARE TURNED VIABLE AND PROFITABLE. THESE INVESTMENT DECISIONS ARE VER Y COMPLEX IN NATURE. THEY REQUIRE SUBSTANTIAL MARKET RESEARCH , DAY-TO- DAY ANALYSIS OF MARKET TRENDS AND DECISIONS WITH REGARD TO ACQUISITION, RETENTION AND SALE OF SHARES AT THE MO ST APPROPRIATE TIME. THEY REQUIRE HUGE INVESTMENT IN S HARES AND CONSEQUENTIAL BLOCKING OF FUNDS. IT IS WELL-KNO WN THAT CAPITAL HAS COST AND THAT ELEMENT OF COST IS REPRES ENTED BY INTEREST. BESIDES, INVESTMENT DECISIONS ARE GENERAL LY TAKEN IN THE MEETINGS OF THE BOARD OF DIRECTORS / SHAREHO LDERS FOR WHICH ADMINISTRATIVE AND MANAGEMENT EXPENSES ARE INCURRED AND IN SOME BUSINESSES REGULATORY APPROVAL S ARE REQUIRED BEFORE SETTING UP THE SAME. THERE WILL BE REGULAR MONITORING OF THESE INVESTMENTS WHICH ALSO MAY REQU IRE PARTICIPATION IN THE MEETINGS OF COMMITTEES, BOARD OF DIRECTOR AND SHAREHOLDER MEETINGS. THERE WILL DEFIN ITELY BE AN EXPENDITURE INCURRED TOWARDS ADMINISTRATIVE AND M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 41 MANAGEMENT COST ETC. TOWARDS PLANNING, EXECUTING AN D MAINTAINING THESE INVESTMENTS. OUR VIEW IS FORTIFIE D BY THE FOLLOWING DECISIONS : I). THE OBSERVATION MADE BY HONBLE SUPREME COURT I N THE CASE OF CIT V. WALFORT SHARE & STOCK BROKERS PVT. LTD. (2010) 326 ITR 1(SC) DEFINING THE SCOPE OF SECTION 14A OF THE ACT INCORPORATED RETROSPECTIVELY W.E.F. 1 ST APRIL 1962. THE RELEVANT OBSERVATIONS ARE REPRODUCED AS UNDER: THE INSERTION OF SECTION 14A WITH RETROSPECTIVE EF FECT IS THE SERIOUS ATTEMPT ON THE PART OF THE PARLIAMENT NOT T O ALLOW DEDUCTION IN RESPECT OF ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT AGAINST THE TAXABLE INCOME (SEE CIRCULAR NO. 14 OF 2001 DATED 22-11-2001). IN OTHER WORDS, SECTION 14A CLARIFIES THAT EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO TH E EARNING OF TAXABLE INCOME. IN MANY CASES THE NATURE OF EXPENSE S INCURRED BY THE ASSESSEE MAY BE RELATABLE PARTLY TO THE EXEM PT INCOME AND PARTLY TO THE TAXABLE INCOME. IN THE ABSENCE OF SECTION 14A, THE EXPENDITURE INCURRED IN RESPECT OF EXEMPT INCOME WAS BEING CLAIMED AGAINST TAXABLE INCOME. THE MANDA TE OF SECTION 14A IS CLEAR. IT DESIRES TO CURB THE PRACTI CE TO CLAIM DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMP T INCOME AGAINST TAXABLE INCOME AND AT THE SAME TIME AVAIL T HE TAX INCENTIVE BY WAY OF EXEMPTION OF EXEMPT INCOME WITH OUT MAKING ANY APPORTIONMENT OF EXPENSES INCURRED IN RE LATION TO M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 42 EXEMPT INCOME. THE BASIC REASON FOR INSERTION OF SE CTION 14A IS THAT CERTAIN INCOMES ARE NOT INCLUDIBLE WHILE CO MPUTING TOTAL INCOME AS THESE ARE EXEMPT UNDER CERTAIN PROV ISIONS OF THE ACT. IN THE PAST, THERE HAVE BEEN CASES IN WHIC H DEDUCTION HAS BEEN SOUGHT IN RESPECT OF SUCH INCOMES WHICH IN EFFECT WOULD MEAN THAT TAX INCENTIVES TO CERTAIN INCOMES W AS BEING USED TO REDUCE THE TAX PAYABLE ON THE NON-EXEMPT IN COME BY DEBITING THE EXPENSES, INCURRED TO EARN THE EXEMPT INCOME, AGAINST TAXABLE INCOME. THE BASIC PRINCIPLE OF TAXA TION IS TO TAX THE NET INCOME, I.E., GROSS INCOME MINUS THE EX PENDITURE. ON THE SAME ANALOGY THE EXEMPTION IS ALSO IN RESPEC T OF NET INCOME. EXPENSES ALLOWED CAN ONLY BE IN RESPECT OF EARNING OF TAXABLE INCOME. THIS IS THE PURPORT OF SECTION 14A. IN SECTION 14A, THE FIRST PHRASE IS 'FOR THE PURPOSES OF COMPU TING THE TOTAL INCOME UNDER THIS CHAPTER' WHICH MAKES IT CLE AR THAT VARIOUS HEADS OF INCOME AS PRESCRIBED UNDER CHAPTER IV WOULD FALL WITHIN SECTION 14A. THE NEXT PHRASE IS, 'IN RE LATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UND ER THE ACT'. IT MEANS THAT IF AN INCOME DOES NOT FORM PART OF TOTAL INCOME, THEN THE RELATED EXPENDITURE IS OUTSIDE THE AMBIT OF THE APPLICABILITY OF SECTION 14A. FURTHER, SECTION 14 SPECIFIES FIVE HEADS OF INCOME WHICH ARE CHARGEABLE TO TAX. I N ORDER TO BE CHARGEABLE, AN INCOME HAS TO BE BROUGHT UNDER ON E OF THE FIVE HEADS. SECTIONS 15 TO 59 LAY DOWN THE RULES FO R COMPUTING INCOME FOR THE PURPOSE OF CHARGEABILITY TO TAX UNDE R THOSE HEADS. SECTIONS 15 TO 59 QUANTIFY THE TOTAL INCOME CHARGEABLE TO TAX. THE PERMISSIBLE DEDUCTIONS ENUMERATED IN SE CTIONS 15 M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 43 TO 59 ARE NOW TO BE ALLOWED ONLY WITH REFERENCE TO INCOME WHICH IS BROUGHT UNDER ONE OF THE ABOVE HEADS AND I S CHARGEABLE TO TAX. IF AN INCOME LIKE DIVIDEND INCOM E IS NOT A PART OF THE TOTAL INCOME, THE EXPENDITURE/DEDUCTION THOUGH OF THE NATURE SPECIFIED IN SECTIONS 15 TO 59 BUT RELAT ED TO THE INCOME NOT FORMING PART OF TOTAL INCOME COULD NOT B E ALLOWED AGAINST OTHER INCOME INCLUDIBLE IN THE TOTAL INCOME FOR THE PURPOSE OF CHARGEABILITY TO TAX. THE THEORY OF APPO RTIONMENT OF EXPENDITURES BETWEEN TAXABLE AND NON-TAXABLE HAS , IN PRINCIPLE, BEEN NOW WIDENED UNDER SECTION 14A. READ ING SECTION 14 IN JUXTAPOSITION WITH SECTIONS 15 TO 59, IT IS CLEAR THAT THE WORDS 'EXPENDITURE INCURRED' IN SECTION 14 A REFERS TO EXPENDITURE ON RENT, TAXES, SALARIES, INTEREST, ETC . IN RESPECT OF WHICH ALLOWANCES ARE PROVIDED FOR (SEE SECTIONS 30 TO 37). II) THE HONBLE BOMBAY HIGH COURT IN THE JUDGMENT I N GODREJ AND BOYCE MANUFACTURING COMPANY LIMITED V. D CIT (2010)328 ITR 0081 ON APPLICABILITY OF SECTION 14A OF THE ACT READ WITH RULE 8D OF INCOME TAX RULES, 1962 HAS LAID DOWN THE LEGAL PROPOSITIONS AND DETAILED SUMMATION ON THE SUBJECT WITH THE FACTUAL BACKGROUND THAT GODREJ AND BOYCE MANUFACTURING COMPANY LIMITED, THE ASSESSEE INVESTE D IN SHARE CAPITAL OF GROUP COMPANY PROMOTED BY IT NAMEL Y GODREJ SOAPS LIMITED SEVERAL YEARS BACK AND RECEIVE D DIVIDEND FROM THE SAID INVESTEE COMPANY DURING THE ASSESSMENT YEAR. THE RELEVANT EXTRACTS ARE AS UNDER : B. FACTS 7. THE ASSESSEE FILED ITS RETURN OF INCO ME FOR THE ASSESSMENT YEAR 2002-03 ON 29-10-2002, DECLARING A LOSS OF RS. M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 44 45.90 CRORES. THE ASSESSEE HAD CLAIMED A DIVIDEND O F RS. 34.34 CRORES AS EXEMPT FROM THE TOTAL TAXABLE INCOME UNDE R SECTION 10(33). DURING THE COURSE OF SCRUTINY PROCEEDINGS, THE ASSESSEE WAS CALLED UPON TO EXPLAIN WHY THE NET DIVIDEND INC OME FROM TAX FREE SECURITIES SHOULD NOT BE EXEMPTED INSTEAD OF THE GROSS DIVIDEND RECEIPTS AS CLAIMED IN THE RETURN. IN ITS REPLY DATED 25- 11-2004, THE ASSESSEE CLAIMED THAT A MAJOR PORTION OF ITS DIVIDEND AMOUNTING TO RS. 19.86 CRORES WAS RECEIVED FROM GROUP COMPANIES AND OF THE TOTAL SHARES, 95 PER CENT, CONSISTED OF BONUS SHARES FOR WHICH NO COST HAD BEEN INCURRED. THE SHARES OF GODR EJ SOAPS LIMITED WERE STATED TO HAVE BEEN ACQUIRED SEVERAL YEARS EARLIER, THE ASSESSEE BEING A PROMOTER OF THAT COMPANY . THE ASSESSEE CONTENDED THAT AT NO STAGE IN THE PAST, 'EXCEPT IN A FEW RECENT ASSESSMENT YEARS, HAS THE INCOME-TAX DEPARTMENT ATTRIBUTED ANY INTEREST OR EX PENDITURE TOWARDS THE EARNING OF THIS DIVIDEND INCOME'. THE A SSESSEE CONTENDED THAT IT HAD RESERVES OF RS. 274 CRORES AN D CAPITAL OF RS. 6.55 CRORES WHICH WOULD BE MORE THAN ADEQUATE T O COVER THE INVESTMENTS. THE ASSESSING OFFICERS WERE, ACCOR DING TO THE ASSESSEE, SATISFIED IN THE EARLIER YEARS WITH ITS E XPLANATION AND IT WAS CONTENDED THAT THERE WAS CONSEQUENTLY NO ALL OCATION OF INTEREST TO THE EARNING OF DIVIDEND INCOME. DURING THE YEAR IN QUESTION, THE ASSESSEE CLAIMED THAT IT HAD NOT INVE STED ANY AMOUNT IN INVESTMENTS ON WHICH INCOME WAS EXEMPT UN DER SECTION 10(33) AND IT HAD DISPOSED OF SOME OF ITS I NVESTMENTS AT A SUBSTANTIAL PROFIT.. .. . CONCLUSION 88. OUR CONCLUSIONS IN THIS JUDGMENT ARE AS FOLLOWS : (I) DIVIDEND INCOME AND INCOME FROM MUTUAL FUNDS FA LLING WITHIN THE AMBIT OF SECTION 10(33) OF THE INCOME TA X ACT, 1961, AS WAS APPLICABLE FOR THE ASSESSMENT YEAR 2002-03 I S NOT INCLUDIBLE IN COMPUTING THE TOTAL INCOME OF THE ASS ESSEE. M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 45 CONSEQUENTLY, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, BY VIRTUE OF THE PROVISIONS OF SECTION 14A(1); (II) THE PAYMENT BY A DOMESTIC COMPANY UNDER SECTIO N 115- O(1) OF ADDITIONAL INCOME-TAX ON PROFITS DECLARED, DISTRIBUTED OR PAID IS A CHARGE ON A COMPONENT OF THE PROFITS OF T HE COMPANY. THE COMPANY IS CHARGEABLE TO TAX ON ITS PROFITS AS A DISTINCT TAXABLE ENTITY AND IT PAYS TAX IN DISCHARGE OF ITS OWN LIABILITY AND NOT ON BEHALF OF OR AS AN AGENT FOR ITS SHAREHO LDERS. IN THE HANDS OF THE SHAREHOLDER AS THE RECIPIENT OF DIVIDE ND, INCOME BY WAY OF DIVIDEND DOES NOT FORM PART OF THE TOTAL INCOME BY VIRTUE OF THE PROVISIONS OF SECTION 10(33). INCOME FROM MUTUAL FUNDS STANDS ON THE SAME BASIS; (III) THE PROVISIONS OF SUB-SECTIONS (2) AND (3) OF SECTION 14A OF THE INCOME TAX ACT 1961, ARE CONSTITUTIONALLY VALID ; (IV) THE PROVISIONS OF RULE 8D OF THE INCOME-TAX RU LES AS INSERTED BY THE INCOME-TAX (FIFTH AMENDMENT) RULES, 2008, ARE NOT ULTRA VIRES THE PROVISIONS OF SECTION 14A, MORE PARTICULARLY SUB-SECTION (2) AND DO NOT OFFEND ARTICLE 14 OF THE CONSTITUTION; (V) THE PROVISIONS OF RULE 8D OF THE INCOME-TAX RUL ES WHICH HAVE BEEN NOTIFIED WITH EFFECT FROM 24-3-2008, SHALL APP LY WITH EFFECT FROM THE ASSESSMENT YEAR 2008-09; (VI) EVEN PRIOR TO THE ASSESSMENT YEAR 2008-09, WHE N RULE 8D WAS NOT APPLICABLE, THE ASSESSING OFFICER HAS TO EN FORCE THE PROVISIONS OF SUB-SECTION (1) OF SECTION 14A. FOR T HAT PURPOSE, THE ASSESSING OFFICER IS DUTY BOUND TO DETERMINE TH E EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE ASSESSING OFFICER MUST ADOPT A REASONABLE BASIS OR METHOD CONSISTENT WITH ALL THE RELEVANT FACTS AND CIRCUMST ANCES AFTER FURNISHING A REASONABLE OPPORTUNITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON THE RECORD; M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 46 (VII ) THE PROCEEDINGS FOR THE ASSESSMENT YEAR 2002-03 SHALL STAND REMANDED BACK TO THE ASSESSING OFFICER. THE ASSESSING OFFICER SHALL DETERMINE AS TO WHETHER THE ASSESSEE HAS INCURRED ANY EXPENDITURE (DIRECT O R INDIRECT) IN RELATION TO DIVIDEND INCOME/INCOME FRO M MUTUAL FUNDS WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED UNDER SECTION 14A. THE ASSESSING OFFICER CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPORTIONMENT. WHILE MAKING THAT DETERMINATION, THE ASSESSING OFFICER SHALL PROVIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUNTS AND RELEVANT OR GERMANE MATERIAL HAVIN G A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CAS E . III) THE ITAT,MUMBAI IN THE CASE OF ACIT V. CITICO RP FINANCE (INDIA ) LIMITED (2007)108 ITD 457 HAS NEGA TED THE CONTENTION OF THE ASSESSEE THAT IT HAD INCURRED NO EXPENDITURE FOR EARNING HIGH DIVIDENDS AS UNDER: IT IS DIFFICULT TO ACCEPT THE HYPOTHESIS THAT ONE CAN EARN SUBSTANTIAL DIVIDEND INCOME WITHOUT INCURRING ANY E XPENSES WHATSOEVER INCLUDING MANAGEMENT OR ADMINISTRATIVE E XPENSES. BY SAME LOGIC, IT IS EQUALLY DIFFICULT TO ACCEPT TH AT THE ONLY EXPENSES INVOLVED IN EARNING THE DIVIDEND INCOME AR E THOSE INCURRED ON COLLECTION OF DIVIDEND OR ON ENCASHING A FEW DIVIDEND WARRANTS. A COMPANY CANNOT EARN DIVIDEND W ITHOUT ITS EXISTENCE AND MANAGEMENT. INVESTMENT DECISIONS ARE VERY COMPLEX IN NATURE. THEY REQUIRE SUBSTANTIAL MARKET RESEARCH, DAY-TO-DAY ANALYSIS OF MARKET TRENDS AND DECISIONS WITH REGARD TO ACQUISITION, RETENTION AND SALE OF SHARES AT THE MOST APPROPRIATE TIME. THEY REQUIRE HUGE INVESTMENT IN S HARES AND CONSEQUENTIAL BLOCKING OF FUNDS. IT IS WELL KNOWN T HAT CAPITAL HAS COST AND THAT ELEMENT OF COST IS REPRESENTED BY INTEREST. BESIDES, INVESTMENT DECISIONS ARE GENERALLY TAKEN I N THE MEETINGS OF THE BOARD OF DIRECTORS FOR WHICH ADMINI STRATIVE EXPENSES ARE INCURRED. IT IS THEREFORE NOT CORRECT TO SAY THAT M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 47 DIVIDEND INCOME CAN BE EARNED BY INCURRING NO OR NO MINAL EXPENDITURE. THIS ASPECT OF THE MATTER HAS ALSO REC EIVED CAREFUL ATTENTION OF CHENNAI BENCH OF THIS TRIBUNAL IN SOUT HERN PETRO CHEMICAL INDUSTRIES V. DY. CIT (2005) 3 SOT 157 (CH ENNAI-TRIB). AFTER COMPREHENSIVE CONSIDERATION OF ALL THE RELEVA NT ASPECTS OF THE CASE INCLUDING THE PROVISIONS OF LAW, THE CHENN AI BENCH HAS HELD THAT INVESTMENT DECISIONS ARE VERY STRATEGIC D ECISIONS IN WHICH TOP MANAGEMENT IS INVOLVED AND THEREFORE PROP ORTIONATE MANAGEMENT EXPENSES ARE REQUIRED TO BE DEDUCTED WHI LE COMPUTING THE EXEMPT INCOME FROM DIVIDEND. IN HARIS H KRISHNAKANT BHATT V. INCOME TAX OFFICER (2004) 91 I TD 311 (AHD.), THE AHMEDABAD BENCH OF THIS TRIBUNAL HAS HE LD THAT, THE DIVIDEND INCOME BEING EXEMPT UNDER SECTION 10(33), THE INTEREST ON CAPITAL BORROWED FOR ACQUISITION OF REL EVANT SHARES YIELDING SUCH DIVIDEND CANNOT BE ALLOWED DEDUCTION BY OPERATION OF SECTION 14A. IN DY. CIT V. SG INVESTME NTS &INDUSTRIES LTD. (2004) 89 ITD 44 (CAL.), THE CALCU TTA BENCH OF THIS TRIBUNAL HAS LAID DOWN TWO PROPOSITIONS: ONE, IN VIEW OF SECTION 14A INSERTED IN THE INCOME TAX ACT WITH RET ROSPECTIVE EFFECT FROM 1-4-1962, PRO RATA EXPENSES ON ACCOUNT OF INTEREST RELATABLE TO INVESTMENT IN SHARES FOR EARNING EXEMP T INCOME FROM DIVIDEND ARE TO BE DISALLOWED AGAINST TAXABLE INCOME AND ONLY THE NET DIVIDEND INCOME IS TO BE ALLOWED EXEMP TION AFTER DEDUCTING THE EXPENSES; AND TWO, THE EXPRESSION 'EX PENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME' IN SECTION 14A HAS T O BE GIVEN A WIDER MEANING AND WOULD INCLUDE BOTH DIRECT AND IND IRECT RELATIONSHIP BETWEEN EXPENDITURE AND EXEMPT INCOME. FOLLOWING THE DECISION OF THE HON'BLE SUPREME COURT IN CIT V. UNITED GENERAL TRUST LTD. (1993) 200 ITR 488 (SC), THE CALCUTTA BENCH OF THE TRIBUNAL HAS ALSO HELD THAT THE INTERE ST PAID BY THE ASSESSEE BEING ATTRIBUTABLE TO THE MONEY BORROWED F OR THE PURPOSE OF MAKING THE INVESTMENT WHICH YIELDED THE DIVIDEND AND OTHER EXPENSES INCURRED IN CONNECTION WITH OR F OR MAKING OR EARNING THE DIVIDEND INCOME CAN BE REGARDED AS E XPENDITURE INCURRED IN RELATION TO DIVIDEND INCOME. IN EVERPLU S SECURITIES & FINANCE LTD. V. DY. CIT (2006) 101 ITD 151 (DEL), T HE DELHI BENCH OF THIS TRIBUNAL HAS HELD THAT MERELY BECAUSE THE A SSESSEE DID NOT EARN THE DIVIDEND OUT OF INVESTMENT IN CERTAIN SHARES DOES NOT IMPLY THAT THE PROVISIONS OF SECTION 14A WOULD NOT APPLY TO M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 48 THAT EXTENT. IN ASSTT. CIT V. PREMIER CONSOLIDATED CAPITAL TRUST (I). LTD. (2004) 83 TTJ (MUM.) 843, THE MUMBAI BENC H OF THIS TRIBUNAL HAS HELD THAT THE ASSESSING OFFICER IS JUS TIFIED IN ATTRIBUTING A PART OF THE FINANCIAL AND ADMINISTRAT IVE EXPENSES AS EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOM E AND DISALLOWING THE SAME IN VIEW OF THE PROVISIONS OF S ECTION 14A. IV) THE ITAT, CHENNAI BENCH HAS HELD IN THE CASE O F SOUTHERN PETRO CHEMICALS INDUSTRIES V. DCIT(2005) 3 SOT 157 AS UNDER: WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSE D THE RECORDS OF THE CASE. ADMITTEDLY, THESE INVESTMENTS IN SHARES WERE MADE DURING THE COURSE OF THE CARRYING ON OF B USINESS AND AS IS EVIDENT FROM THE RECORDS, SUBSTANTIAL INV ESTMENTS HAD BEEN MADE BY THE ASSESSEE IN EARLIER YEARS, AND DURING THE CURRENT YEAR AS WELL THE ASSESSEE MADE AN INVES TMENT OF RS. 19 CRORES. WHETHER TO INVEST OR NOT TO INVEST A ND WHETHER TO RETAIN THE INVESTMENTS OR TO LIQUIDATE THE SAME ARE VERY STRATEGIC DECISIONS WHICH THE MANAGEMENT IS CALLED UPON TO TAKE. THESE ARE MIND-BOGGLING DECISIONS AND TOP MANAGEMENT IS INVOLVED IN TAKING THESE DECISIONS. T HIS DECISION MAKING PROCESS IS VERY COMPLICATED AND REQ UIRES VERY CAREFUL ANALYSIS. MOREOVER, THE ASSESSEE HAS T O KEEP TRACK OF VARIOUS DIVIDEND INCOMES DECLARED BY THE I NVESTEE COMPANIES AND ALSO TO KEEP TRACK OF THE DIVIDEND IN COME HAVING BEEN REGULARLY RECEIVED BY THE ASSESSEE. THI S ACTIVITY ITSELF CALLS FOR CONSIDERABLE MANAGEMENT ATTENTION AND CANNOT BE LEFT TO A JUNIOR CLERK. THE HON'BLE SUPRE ME COURT IN THE CASE OF UNITED GENERAL TRUST LTD. (SUPRA), APPL YING THE DECISION OI HON'BLE SUPREME COURT IN THE CASE OF DI STRIBUTORS (BARODA) (P) LTD. V. UNION OF INDIA (1985) 47 CTR ( SC) 349: (1985) 155 ITR 120 (SC), REVERSED THE DECISION OF THE HON' BLE BOMBAY HIGH COURT IN CIT V. UNITED GENERAL TRUST (P ) LTD. (SUPRA), WHEREIN THE QUESTION WAS AS UNDER: 'WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE TRIBUNAL WAS JUSTIFIED IN APPLYING THE DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF CIT V. NEW GREAT INSURANCE CO. LTD. (1973) 90 ITR 348 (BOM) TO THE ASSESSMENT M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 49 YEAR IN QUESTION WITHOUT CONSIDERING THE EFFECT OF THE AMENDMENT OPERATIVE FROM IST APRIL, 1968, AND IN TH US HOLDING THAT THE ASSESSEE WOULD BE ENTITLED TO THE DEDUCTION UNDER SECTION 80M ON THE GROSS DIVIDEND BEFORE DEDU CTION OF THE PROPORTIONATE MANAGEMENT EXPENSES ?' THUS, WHEN THE DECISION OF THE HONBLE BOMBAY HIGH COURT HAS BEEN REVERSED, THE PROPORTIONATE MANAGEMENT EXP ENSES ARE REQUIRED TO BE DEDUCTED WHILE COMPUTING THE DIV IDEND INCOME. IN THE DECISION OF THE HON'BLE CALCUTTA HIG H COURT, RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE , MR. DASTUR, IN THE CASE OF CIT V. UNITED COLLIERIES LTD . (SUPRA), IT HAS BEEN HELD THAT IF THE FACTS OF A PARTICULAR CAS E SO WARRANT, THE ALLOCATION CAN BE MADE TOWARDS EXPENSE S. IN VIEW OF THE AFOREMENTIONED DISCUSSION AND KEEPING I N VIEW THE SUBMISSIONS OF THE LEARNED DEPARTMENTAL REPRESE NTATIVE, WE RESTORE THIS MATTER TO THE ASSESSING OFFICER TO VERIFY THE QUANTUM OF DEDUCTION CLAIMED BY THE ASSESSEE IN EAR LIER YEARS UNDER SECTION 57(I) FROM THE DIVIDEND INCOME (WHEN IT WAS TAXABLE) AND MAKE A PRO RATA ADJUSTMENT ON THE BASIS OF SUBSEQUENT INVESTMENTS MADE, INFLATION, ETC. THIS G ROUND IS, ACCORDINGLY, ALLOWED FOR STATISTICAL PURPOSES V) THE ITAT, KOLKATTA BENCH IN RECENT REPORTED JUDGME NT IN COAL INDIA LIMITED V. ACIT 2015 TAX PUB(DT)2496 IN ITA NO 1032/KOL/2012 PRONOUNCED RECENTLY ON 13 TH MAY 2015 HAS CATEGORICALLY HELD THAT EVEN STRATEGIC INVESTME NT IN GROUP CONCERNS FOR THE PURPOSE OF CONTROL AND NOT F OR EARNING DIVIDEND ATTRACT DISALLOWANCE U/S 14A OF TH E ACT READ WITH RULE 8D OF THE INCOME TAX RULES, 1962. SINCE THE RELEVANT A.Y. IS 2008-09, THE HONBLE BOMBAY HIGH COURT IN GODREJ & BOYCE MFG. CO. LTD. (SUPRA) HAS ALREADY HELD THAT THE RULE 8D IS APPLICABLE FOR A.Y . 2008-09 AND HENCE IN OUR CONSIDERED VIEW, THE INVESTMENT OF M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 50 RS.4,61,37,00,000/- MADE BY THE ASSESSEE COMPANY IN ITS SUBSIDIARY NAMELY M/S INDIA INFOLINE INVESTMENT SER VICES LTD. OF RS.4,61,37,00,000/- WILL BE INCLUDED IN THE AVERAGE INVESTMENT FOR THE PURPOSE OF COMPUTATION OF DISALL OWANCE U/S 14A R.W.R 8D(2)(III) OF THE INCOME TAX RULES, 1 962 AND HENCE TO THAT EXTENT, THE CONTENTION OF THE REVENUE IS ACCEPTED WHILE THE ASSESSEE COMPANY HAS DEMONSTRATE D THAT THE INVESTMENTS IN THE SHARE CAPITAL OF INDIA INFOL INE INVESTMENT SERVICES LIMITED ON 4TH FEBRUARY 2008 HAS BEEN MADE OUT OF PROCEEDS OF FRESH ISSUE OF SHARES OF THE ASSESSEE COMPANY IN JANUARY 2008 , THUS NO DISALLOW ANCE UNDER RULE 8D(2)(II) OF INCOME TAX RULES, 1962 READ WITH SECTION 14A OF THE ACT IS JUSTIFIED. WE ORDER ACCOR DINGLY 14 . IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED WHILE THE APPEAL OF THE REVENUE IS PARTLY ALLOWED. THIS ORDER IS PRONOUNCED IN THE OPEN COURT ON 01/12/2015. SD/ - (RAMIT KOCHAR) SD/ - (JOGINDER SINGH) ' # / ACCOUNTANT MEMBER $ # / JUDICIAL MEMBER MUMBAI; ( DATED : 01/12/2015 F{X~{T? P.S/. .. !%$&'()(*& / COPY OF THE ORDER FORWARDED TO : 1. *+,- / THE APPELLANT 2. ./,- / THE RESPONDENT. M/S INDIA INFOLINE LTD.. ITA NO.2490 & 2620/MUM/2013 51 3. 0# ( *+ ) / THE CIT, MUMBAI. 4. 0# / CIT(A)- , MUMBAI 5. 23.# , *+&* 4 , / DR, ITAT, MUMBAI 6. 5!6 / GUARD FILE. ! / BY ORDER, /2+#.# //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI
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