Bharti Infratel Ltd., New Delhi V. DCIT, Circle- 2(1), New Delhi

ITA 425/DEL/2018

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 8578 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 9 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-11-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2011-2012
• Appeal Filed On: 15-01-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SATPAL GULATI
• Assessee Lawyers: ROHIT JAIN
• Keywords: Non-deduction of tax; Valuation report; Commercial expediency; Capital expenditure
• Section: 37; 143(3); 115JB; 37(1); 201; 43

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL [ DELHI BENCH “A”: NEW DELHI ] BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER (Through Video Conferencing) ITA. No. 425/Del/2018 (Assessment Year : 2011-12) M/s. Indus Towers Ltd (formerly known as Barati Infratel Ltd) 901, Park Centra, ninth floor, sector 30, national highway – 8, Guarugram 122001. PAN: AADCB0274F Vs. DCIT, Circle : 2 (1) New Delhi (Appellant) (Respondent) Assessee by : Shri Rohit Jain, Advocate; & Shri Deepesh Jain, Advocate; Department by : Shri Satpal Gulati [CIT] – DR; Date of Hearing 16/08/2021 Date of pronouncement 15/11/2021 O R D E R PER PRASHANT MAHARISHI, A. M. 1. This appeal is filed by the assessee for Assessment Year 2011-12 against the order passed by the ld. Commissioner of Income Tax (Appeals)–2, New Delhi, dated 15.09.2017. The assessee by letter dated 19 March 2021 submitted revised form number 36 stating that with effect from 10 December 2020 the name as well as the communication address of the appellant has been changed from Bharti Infratel Ltd to Messer’s Indus Towers Ltd. 2. Assessee has raised following grounds of appeal:- “1. The learned Commissioner of Income Tax (Appeals) has erred both on facts and in law in not allowing ESOP expenses amounting 2 to Rs.34,27,44,274/-, which was claimed during the assessment proceedings, allegedly on the ground that the same is not allowable under section 37(1) of the Act as it is a notional loss following the decision of Delhi Tribunal in the case of M/s. Ranbaxy Laboratories Ltd. vs. ACIT (124 TTJ 771). 1.1 The learned Commissioner of Income Tax (Appeals) has failed to appreciate that since grant of option and issuance of shares was merely in the nature of employee compensation/ welfare expense, the same was allowable as revenue deduction following the decision of Special Bench in the case of Biocon Limited vs. DCIT (25 ITR (Trib) 602). 1.2 That on the facts and circumstances of the case, the difference between the fair market value of the shares and the amount receivable from the employee at the time of issue/ or exercise of the Employee stock option, debited to the profit and loss account for the year is in line with the recommendations of SEBI and have been further confirmed by Special Bench in the case of Biocon Ltd. (supra). 2. The learned Commissioner of Income Tax (Appeals) has erred both on facts and in law in confirming the disallowance of interest amounting to Rs.27,49,85,908/- paid for business purposes on the ground funds amounting to Rs.503 crores have been advanced as interest free loan to a joint venture company M/s. Indus Tower Limited. 2.1 The learned Commissioner of Income Tax (Appeals) failed to appreciate that the appellant company had sufficient interest free funds 14,246.38 crores to advance loan of Rs.503 crores to its joint venture company and grossly erred in disregarding the decision of the Hon’ble Supreme Court in Munjal Sales Corporation 168 taxmann 43 (SC) and with various jurisdictional High Court decisions. 2.2 The learned Commissioner of Income Tax (Appeals) failed to appreciate that the amount had been advanced for the purposes of business to its joint venture company Indus Tower Limited and grossly erred in disregarding the decision of the Hon’ble Supreme Court in the case of SA Builders 288 ITR 1 (SC) and Hero Cycles Ltd 379 ITR 347 (SC). 3. The learned Commissioner of Income tax has erred both on facts and in law in adding to the declared book profits under section 115JB, provision for gratuity amounting to Rs.1,32,03,725/- allegedly on the basis that the same is an unascertained liability and liable to be added as per clause (c) of Explanation (1) below subsection 2 of section 115JB of the Act. 3 4. The appellant craves leave to add, alter or amend the ground of appeal at a later stage. “ 3. Brief facts of the case shows that the assessee company is engaged in the business of providing telecom infrastructure support services to telecommunication companies providing mobile services. The support services are being provided by offering passive equipments installed at sites on non-exclusive basis. Such asset comprise of towers, green shelters, DG Sets and UPS etc. 4. Assessee filed its return of income on 30.09.2011at Rs. 172,13,82,389/- and also declared book profit of Rs. 574,43,96,793/- under Section 115JB of the Income Tax Act, 1961 (the Act). This return was revised on 29 th March, 2013. 5. Case of the assessee was picked up for scrutiny and income tax assessment was framed under Section 143(3) of the Act. 6. During Assessment Assessee requested the learned AO to allow the deduction u/s 37 (1) on account of deferred employee stock option plan amortization cost of ₹ 342,744,274/–. The fact shows that assessee has given stock option to certain employees of the Bharati Airtel Ltd and has considered the related compensation cost in its books of accounts. It employee stock option plan expenses amounting to ₹ 28,010,043/– these expenses have not been claimed by the assessee Under the normal computation of total income. Therefore there was a net deduction claimed by the assessee of ₹ 342,744,274/– on account of these expenditure. Assessee made that claim during the assessment proceedings. It also submitted the copy of the revised income tax computation. The learned assessing officer did not consider the request of the assessee holding that there is no specific provision Under the income tax act to allow such claim u/s 37 (1 of the act. He further held that the securities and exchange board of India guidelines would also not apply as those guidelines cannot supersede the provisions of income tax act. Hence he rejected the same. 4 7. The learned AO also noted that assessee has made a provision for gratuity amounting to ₹ 13,203,725 which has been debited to the profit and loss account but has not been added to the net profit while computing the book profit u/s 115JB of the act. He held that that the provision of the gratuity is and on a certain reliability and therefore required to be added to the book profit as per clause (c) of explanation (1) of subsection 2 to Section 115JB of the act. 8. The learned assessing officer also noted that assessee company has given a loan of Rs 1,896,53,52,348 to the joint-venture group companies. And therefore the learned AO after noting that the assessee has also paid term loan interest of ₹ 328,015,000, question the assessee that why the amount of advances given to Indus Tower Limited amounting to ₹ 11,164,820,000 without charging of the interest and therefore the interest to that extent should not be disallowed. Assessee submitted that it has made a strategic business promoting investment by acquiring 42% stake in the said capital of the above company. The above company provided infrastructure support to the assessee and therefore the advances were given to the above company for business purposes. The assessee also relied upon the decision of the honourable Supreme Court in case of SA builders private limited. Assessee also submitted that it has adequate own funds out of which interest free loans and advances were given to the above party and therefore even otherwise there cannot be any disallowance of interest expenditure. The learned assessing officer rejected the contention of the assessee and noted that assessee company has taken a loan of ₹ 600 crores in financial year 2008 – 09 out of which ₹ 503 crores has been given to the above company during that year as interest free advances. The assessee company has paid term loan interest of ₹ 328,015,000 therefore the assessee company has used interest-bearing funds of ₹ 503 crores and therefore he disallowed a sum of ₹ 274,985,908 out of the interest expenditure given to the above company without charging any interest. 5 9. Accordingly the assessment order u/s 143 (3) of the income tax act was passed on 21 st of March 2014 determining the total income of the assessee as per the normal computation of income at ₹ 5,784,623,293 wherein the disallowance of interest on term loan of ₹ 274,984,908 and disallowance of lease rent equalisation charges of ₹ 2,188,560,602/– was made. In the computation of the book profit u/s 115JB of the act he made an addition on account of provision of gratuity of Rs 1 32,03,725 and thereby computed the book profit at 575,76,00,518. 10. Assessee preferred an appeal before the ld. CIT (Appeals) who confirmed the disallowance of lease expenditure. With respect to the interest disallowance, he held that if the advances were not made for a business purpose, therefore, interest paid by the appellant on that part of borrowed capital, which is proportionate to the amount of interest from the advances extended by it cannot be said to have paid for the business purposes. Accordingly, he confirmed the disallowance. With respect to the deduction of employee stock option expenditure he confirmed the disallowance based on the decision of the coordinate bench in case of Ranbaxy laboratories Ltd versus Asst Commissioner of income tax 124 TTJ 771. With respect to the addition of Rs. 1,32,03,075/- as the provision of gratuity while computing book profit under Section 115JB of the Act he upheld the addition holding that the provision itself is based upon assessment which vary with the passage of time and are not fixed on the date of the balance sheet. The provision of the gratuity is contingent or conditional liability and is not eligible for deduction while computing the book profit. Thus, he upheld the same. The assessee is aggrieved with the above order of the ld. CIT (Appeals) has preferred appeal before us. 11. First ground of appeal is with relation to the claim of ESOP expenses amounting Rs.34.27 crores. The ld. AR submitted that above issue is squarely covered in favour of the assessee by the decision of Hon’ble Karnataka High Court in CIT Vs. Biocon Ltd. 430 ITR 131 (Kar.) and 6 also of Hon’ble Delhi High Court in CIT Vs. Lemon Tree Hotels Ltd. He, therefore, submitted that the above deduction is allowable to the assessee. 12. With respect to ground No. 2 relating to interest disallowance of Rs.27.49 crores on the amount of funds, Rs.503 crores advance as interest free loan to a joint venture company M/s. Indus Tower Ltd., he submitted that the interest free funds in the above case exceed the advances made and, therefore, the presumption is available in favour of the assessee that such funds are advanced out of own funds and no disallowance can be made under Section 36(1)(iii) of the Act. He referred to the decision of the Hon’ble Supreme Court in the case of CIT Vs. Reliance Industries Ltd. 410 ITR 466. Even otherwise explaining the facts of the case he submitted that advances are made out of commercial expediency and, therefore, no disallowance could have been made. He relied upon the decision of Hon’ble Supreme Court in the case of S. A. Builders Vs. CIT 288 ITR 1 (SC). 13. Coming to ground No.3 with respect to the adjustment of provision of gratuity of Rs.1,32,03,725/-, he submitted that such a provision for gratuity is on accrual basis and is an ascertain liability, therefore, same is deductible while computing book profit under Section 115JB of the Act. Accordingly, he submitted that the adjustment made to the total book profit is not correct. He referred to the decision of the Hon’ble Delhi High Court in CIT Vs. Hewlett Packard India 314 ITR 55 (Del.) for the above proposition. 14. The ld. DR vehemently supported the orders of the lower authorities. 15. We have carefully considered the rival contentions and perused the orders of the lower authorities. We have also considered the several judicial precedents cited by the lower authorities as well as referred to by the learned authorised representative. 16. The first issue involved in this appeal is with respect to the allowance of employee stock option plan expenses amounting to ₹ 342,744,274 which was claimed by the assessee during the assessment proceedings, the lower authorities have disallowed the claim holding 7 that it is a notional loss following the decision of the coordinate bench in case of Ranbaxy laboratories Ltd versus ACIT (supra). Now we find that this issue is squarely covered in favour of the assessee by the decision of the honourable Karnataka High Court in Commissioner of income tax LTU versus Biocon Ltd [2020] 121 taxmann.com 351 (Karnataka) wherein it has been held as Under:- “6. We have considered the submissions made by learned counsel for the parties and have perused the record. The singular issue, which arises for consideration in this appeal is whether the tribunal is correct in holding that discount on the issue of ESOPs i.e., difference between the grant price and the market price on the shares as on the date of grant of options is allowable as a deduction under section 37 of the Act. Before proceeding further, it is apposite to take note of section 37(1) of the Act, which reads as under: Section 37(1) says that any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head, "Profits and Gains of Business or Profession". 7. Thus, from perusal of section 37(1) of the Act, it is evident that the aforesaid provision permits deduction for the expenditure laid out or expended and does not contain a requirement that there has to be a pay out. If an expenditure has been incurred, provision of section 37(1) of the Act would be attracted. It is also pertinent to note that section 37 does not envisage incurrence of expenditure in cash. 8. Section 2(15A) of the Companies Act, 1956 defines 'employees stock option' to mean option given to the whole time directors, officers or the employees of the company, which gives such directors, officers or employees, the benefit or right to purchase or subscribe at a future rate the securities offered by a company at a free determined price. In an ESOP a company undertakes to issue shares to its employees at a future date at a price lower than the current market price. The employees are given stock options at discount and the same amount of discount represents 8 the difference between market price of shares at the time of grant of option and the offer price. In order to be eligible for acquiring shares under the scheme, the employees are under an obligation to render their services to the company during the vesting period as provided in the scheme. On completion of the vesting period in the service of the company, the option vest with the employees. 9. In the instant case, the ESOPs vest in an employee over a period of four years i.e., at the rate of 25%, which means at the end of first year, the employee has a definite right to 25% of the shares and the assessee is bound to allow the vesting of 25% of the options. It is well settled in law that if a business liability has arisen in the accounting year, the same is permissible as deduction, even though, liability may have to quantify and discharged at a future date. On exercise of option by an employee, the actual amount of benefit has to be determined is only a quantification of liability, which takes place at a future date. The tribunal has therefore, rightly placed reliance on decisions of the Supreme Court in Bharat Movers supra and Rotork Controls India P. Ltd., supra and has recorded a finding that discount on issue of ESOPs is not a contingent liability but is an ascertained liability. 10. From perusal of section 37(1), which has been referred to supra, it is evident that an assessee is entitled to claim deduction under the aforesaid provision if the expenditure has been incurred. The expression 'expenditure' will also include a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which it is issued and the market value of the shares would also be expenditure incurred for the purposes of section 37(1) of the Act. The primary object of the aforesaid exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, the same cannot be construed as short receipt of capital. The tribunal therefore, in paragraphs 9.2.7 and 9.2.8 has rightly held that incurring of the expenditure by the assessee entitles him for deduction under section 37(1) of the Act subject to fulfilment of the condition. 11. The deduction of discount on ESOP over the vesting period is in accordance with the accounting in the books of account, which has been prepared in 9 accordance with Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. 12. So far as reliance place by the revenue in the case of Infosys Technologies Ltd.(supra) is concerned, it is noteworthy that in the aforesaid decision, the Supreme Court was dealing with a proceeding under section 201 of the Act for non-deduction of tax at source and it was held that there was no cash inflow to the employees. The aforesaid decision is of no assistance to decide the issue of allowability of expenses in the hands of the employer. It is also pertinent to mention here that in the decision rendered by the Supreme Court in the aforesaid case, the Assessment Years in question was 1997-98 to 1999-2000 and at that time, the Act did not contain any specific provisions to tax the benefits on ESOPs. Section 17(2)(iiia) was inserted by Finance Act, 1999 with effect from 1-4-2000. Therefore, it is evident that law recognizes a real benefit in the hands of the employees. For the aforementioned reasons, the decision rendered in the case of Infosys Technologies is of no assistance to the revenue. The decisions relied upon by the revenue in A. Gajapathy Naidu,Morvi Industries Ltd. and Keshav Mills Ltd.(supra) support the case of assessee as the assessee has incurred a definite legal liability and on following the mercantile system of accounting, the discount on ESOPs has rightly been debited as expenditure in the books of account. We are in respectful agreement with the view taken in PVP Ventures Ltd. And Lemon Tree Hotels Ltd.'case (supra). 13. It is also pertinent to mention here that for Assessment Year 2009-10 onwards the Assessing Officer has permitted the deduction of ESOP expenses and in view of law laid down by Supreme Court in Radhasoami Satsang v. CIT, [1992] 60 Taxman 248/193 ITR 321, the revenue cannot be permitted to take a different stand with regard to the Assessment Year in question. In view of preceding analysis, the substantial questions of law framed by a bench of this court are answered against the revenue and in favour of the assessee. In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed.’ 10 17. Therefore, respectfully following the decision of the honourable Karnataka High Court, we allow ground number 1 of the appeal of the assessee and direct the learned assessing officer to allow employee stock option expenses amounting to ₹ 342,744,274/–. 18. Ground number 2 of the appeal of the assessee is with respect to the disallowance of interest amounting to ₹ 274,985,908/– on the ground that funds amounting to ₹ 503 crores have been advanced as interest free loan to a joint-venture company M/s Indus Tower Ltd. We find that assessee has interest free funds available in the form of share capital and reserve and surplus to the extent of ₹ 14,246,38,33,000 and interest free loan given to Indus Towers Ltd was to the extent of ₹ 503 crores on which the interest disallowance has been made. As the assessee has huge non-interest-bearing funds available with it against the amount advanced interest free to a joint-venture company, the issue is squarely covered in favour of the assessee by the decision of the honourable Supreme Court in case of CIT versus Reliance Industries Ltd [2019] 102 taxmann.com 52 (SC)/[2019] 261 Taxman 165 (SC) as Under:- “7. Insofar as the first question is concerned, the issue raises a pure question of fact. The High Court has noted the finding of the Tribunal that the interest free funds available to the assessee were sufficient to meet its investment. Hence, it could be presumed that the investments were made from the interest free funds available with the assessee. The Tribunal has also followed its own order for Assessment Year 2002-03. 8. In view of the above findings, we find no reason to interfere with the judgment of the High Court in regard to the first question. Accordingly, the appeals are dismissed in regard to the first question.” Therefore, we direct the learned assessing officer to delete the disallowance of interest expenditure of ₹ 274,985,908/–. Accordingly, ground number 2 of the appeal of assessee is allowed. 19. Ground number 3 is with respect to the addition of Rs 132,03,725 being provision of the gratuity expenditure Provision for gratuity liability is being created in compliance with revised Accounting 11 Standard-15 issued by the Institute of Chartered Accountants of India (ICAI), relating to accounting of employee benefits. The said Accounting Standard, it may also be mentioned here, makes it mandatory for all companies to estimate and accrue liability in respect of post-retirement benefits provided to employees. The incremental provision on account of post-retirement gratuity to employees has been made in respect of liability in presenti, viz., entitlement earned by the employee while in service until the end of the relevant previous year, on the basis of actuarial valuation. Assessee also placed a copy of actuarial valuation report at pages 154-162 of paperbook. Since the aforesaid liability was quantified and recognized on a scientific and rational basis based on report of the actuarial valuer, the liability therefore crystallized and accrued in the relevant assessment year itself and was allowable deduction in that year. We further find that Honourable Delhi High Court in the case of CIT vs. Hewlett Packard India: 314 ITR 55 (Del) wherein the High Court while referring to decision of Supreme Court in the case of Metal Box Co. of India Ltd. v. Their Workmen (supra) observed that since the provision for gratuity was made on the basis of actuarial valuation and hence, deduction in respect of provision was allowable while computing the book profit for the purposes of section 115JB of the Act. Honourable Delhi i High Court in the case of CIT vs. ILPEA Paramount (P) Ltd.: 336 ITR 54, while following the decision in the case of CIT v. Hewlett Packard India: 314 ITR 55 (Del), held that the provision for Gratuity made on actuarial basis was to be deducted to arrive at book-profits. Honourable Bombay High Court also in case of Protos Engg. Co. (P) Ltd. vs. DCIT: 282 ITR 550 has held that liability is considered as ascertained if the same is determined on actuarial valuation. The court held that the provision made for contingent liability was entitled to deduction if the provision was determined accurately and scientifically. In view of this we hold that provision of gratuity made in accordance with AS 15 and backed by actuarial valuation is an ascertained and current liability which 12 cannot be added to the book profit while working MAT . Thus Ground no 3 is allowed. 20. In the result appeal of assessee is allowed. Order pronounced in the open court on : 15/11/2021. Sd/- Sd/- ( AMIT SHUKLA ) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated : 15/11/2021 *MEHTA* Copy forwarded to 1. Appellant; 2. Respondent 3. CIT 4. CIT (Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, New Delhi 13 Date of dictation 15.11.2021 Date on which the typed draft is placed before the dictating member 15.11.2021 Date on which the typed draft is placed before the other member 15.11.2021 Date on which the approved draft comes to the Sr. PS/ PS 15.11.2021 Date on which the fair order is placed before the dictating member for pronouncement 15.11.2021 Date on which the fair order comes back to the Sr. PS/ PS 15.11.2021 Date on which the final order is uploaded on the website of ITAT 15.11.2021 date on which the file goes to the Bench Clerk 15.11.2021 Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant Registrar for signature on the order Date of dispatch of the order