DCIT CIR. 7(3)(2), MUMBAI V. PEOPLE INTERACTIVE (I) PVT. LTD., MUMBAI

ITA 5132/MUM/2016

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 0233 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 6 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-02-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Assessment Year: 2010-2011
• Appeal Filed On: 11-08-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M C OMI NINGSHEN
• Assessee Lawyers: R S SAMRIA
• Keywords: Depreciation; Principle of natural justice; Fair market value; Capital receipt; Revenue expenditure; Capital expenditure
• Section: 43B; 143(3); 56(2); 37(1); 37; 56; 28

Judgement Text

IN THE INC OME TAX APPELLATE TRIBUNAL H BENCH, MUMBAI BEFORE SH. R. C. SHARMA , AM & SH. SANDEEP GOSAIN, JM ./ I.T.A. NO . 5132 & 5133 /MUM/2016 ( / ASSESSMENT YEAR: 2010 - 11 & 2011 - 12 ) DCIT CIR - 7 (3) (2) ROOM NO. 669A, 6 TH FLOOR, A AYAKARBHAVAN, M. K. ROAD, MUMBAI - 40002 0 / VS. PEOPLE INTERACTIVE (I) PVT. LTD. 205, SHIV E NUMH, 2 ND FLOOR, DR. ANNIE BESANT ROAD, WORLI, MUMBAI - 400018 . ./ ./ PAN NO. AA ECS7931B ( / APPELLANT ) : ( / RESPONDENT ) / APPELLANT BY : SHRI M. C. OMI NINGSHEN , DR / RESPONDENTBY : SHRI R. S. SAMRIA, AR / DATE OF HEARING : 06 .02 .1 8 / DATE OF PRONOUNCEMENT : 21/02/2018 / O R D E R PER SANDEEP GOSAIN, J UDICIAL MEMBER : THE PRESENT TWO APPEAL S HAVE BEEN FILED BY THE REVENUE AGAINST THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) - 2 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. 9, MUMBAI, DATED 25.05.16 FOR A.Y. 2010 - 11 AND 2011 - 12 RESPECTIVELY. 2. SINCE THE ISSUES RAISED IN THESE TWO APPEALS ARE IDENTICAL, THEREFOR E, FOR THE SAKE OF CONVENIENCE, THESE TWO APPEALS ARE CLUBBED, HEARD AND DISPOSED OF BY THIS CONSOLIDATED ORDER. I.T.A. NO. 5132 /MUM/201 6 (AY 2010 - 11 ) 3. FIRST OF ALL WE TAKE UP REVENUES APPEAL IN I.T.A. NO. 5132 /MUM/201 6 (AY 2010 - 11 ) ON THE GROUNDS MENTIONED HEREIN BELOW: - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN CONSIDERING THAT THE DISCOUNT ON ISSUE OF ESOP IS ALLOWABLE DEDUCTION IN COMPUTING THE INCOME UNDER THE HEAD PROFITS AND GAINS OF THE BUSINESS . 2. ON THE FACTS AND IN THE CIRCUMSTANC ES OF THE CASE AND IN LAW, THE L D.CIT(A) ERRED IN CONSIDERING THAT THE DIFFERENCE BETWEEN MARKET PRICE OF THE SHARES AT THE TIME OF GRANT OF OPTION AND OFFER PRICE AMOUNTS TO 3 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. DISCOUNT AND SAME HAS TO BE TREATED AS RE MUNERATION TO EMPLOYEES FOR THEIR CONTINUITY OF SERVICE. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN CONSIDERING THAT BY ISSUING SHARES AT LESSER THAN MARKET PRICE, THE ASSESSEE HAD INCURRED EXPENDITURE WITHOUT A PPRECIATING THAT IT ACTUALLY AMOUNTS TO SHORT RECEIPT OF SHARE PREMIUM. THE RECEIPT OF SHARE PREMIUM IS NOT TAXABLE AND HENCE ANY SHORT RECEIPT OF SUCH PREMIUM WILL ONLY BE A NOTIONAL LOSS AND NOT ACTUAL LOSS. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE LD.CIT(A) ERRED IN NOT EXAMINING THE SCHEME OF ESOP FROM WHICH IT IS CLEAR THAT THE EMPLOYEES WILL NOT GET ANY RIGHT IN THE SHARES TILL COMPLETION OF THE PERIOD PRESCRIBED AND THE EXPENDITURE CLAIMED IS CONTINGEIT AND NOT ACTUAL. 5. THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GROUND OR ADD A NEW GROUND WHICH MAY BE NECESSARY. 4 . THE B RIEF FACTS OF THE CASE ARE THAT THE ASSESSEE FILED E - RETURN DECLARING TOTAL LOSS OF RS. 14,93,43,914 FOR AY 2010 - 11 ON 07.10.10 AND THE SAME WAS PROCESSED U/S. 143(1) OF THE ACT. THE REAFTER, THE CASE WAS SELECTED FOR SCRUTINY AND AFTER SERVING 4 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. STATUTORY NOTICES, ORDER OF ASSESSMENT U/S 143(3) W AS COMPLET ED BY THE LD. AO ON 11. 03.14 DETERMINING TOTAL LOSS AT RS. 13,16,09,839/ - . AGG RIE VED BY THE ORDER OF AO, ASSESSEE PREFERRED APPEAL BEFORE LD. CIT(A) AND LD. CIT(A) AFTER CONSIDERING THE CASE OF BOTH THE PARTIES ALLOWED THE APPEAL OF THE ASSESSEE. NOW BEFORE US, THE REVENUE HAS PREFERRED THE PRESENT APPEAL BY RAISING THE ABOVE GROUNDS. GROUND NO. 1 & 4 . 5 . THESE GROUND RAISED BY THE REVENUE ARE INTER CONNECTED AND INTER RELATED AND RELATES TO CHALLENGING THE ORDER OF LD. CIT(A) , THEREFORE WE THOUGHT IT FIT TO DISPOSE OF THE SAME BY THIS COMMON ORDER. 6 . AT THE VERY OUTSET, LD. AR APPEARING ON BEHALF OF THE ASSESSEE SUBMITTED BEFORE US THAT THE PRESENT CASE IS FULLY COVERED BY THE ORDER OF HONBLE ITAT IN ITA NO. 6690 & 6986/MU M/13 FOR AY 2007 - 08 & 2008 - 09 IN ASSESSEES OWN CASE WHEREIN THE 5 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. IDENTICAL GROUNDS RAISED IN THE PRESENT APPEAL HAVE ALREADY BEEN DECIDED BY HONBLE ITAT ON MERITS. 7 . WE HAVE HEARD COUNSELS FOR BOTH THE PARTIES AT LENGTH AND WE HAVE ALSO PERUSED THE MAT ERIAL PLACED ON RECORD AS WELL AS THE ORDERS PASSED BY REVENUE AUTHORITIES. WE FIND THAT THE IDENTICAL GROUNDS RAISED IN THE PRESENT APPEAL HAVE ALREADY BEEN DECIDED BY HONBLE ITAT IN ITA NO. 6690 & 6986/MUM/13 FOR AY 2007 - 08 & 2008 - 09 IN ASSESSEES OWN C ASE ON MERITS AND THIS FACTS IS ALSO CONTAINED IN THE ORDERS PASSED BY LD. CIT(A). THE LD. CIT(A) HAS DEALT WITH THE ABOVE GROUNDS RAISED BY THE REVENUE IN PARA NO. 6 TO 6.3 OF ITS ORDER. THE OPERATIVE PORTION OF THE ORDER OF LD. CIT(A) IS CONTAINED IN PAR A NO. 6.1 TO 6.3 OF ITS ORDER AND THE SAME IS REPRODUCED BELOW: - 6.1 I HAVE CONSIDERED THE STAND OF THE A.O. AND THE APPELLANT FOR BOTH THE A.YS. 2010 - 11 & 2011 - 12.DURING THE COURSE OF APPELLATE PROCEEDINGS, THE LD.AR HAS FILED COPY OF APPELLATE ORDER DATED 25/09/2013 FOR A.Y. 2007 - 08 PASSED BY MY PREDECESSOR WHEREIN THE ISSUE WAS DECIDED IN FAVOUR OF APPELLANT VIDE PARA 3.3 OF THE SAID ORDER. 6 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. 6.2 FURTHER, THE ISSUE IS COVERED IN FAVOUR OF THE APPELLANT BY THE ORDER OF HON'BLE ITAT IN APPELLANT'S OWN CASE FOR ASSESSMENT YEARS 2007 - 08, 2008 - 09 & 2009 - 10 IN ITA NOS.6990, 6986, 4979/MUM/2013 DATED 21.10.2015 WHEREIN THE HON'BLE TRIBUNAL IN PARA NO.15 HAS DECIDE D THE ISSUE IN FAVOUR OF THE APPELLANT, WHICH IS AS UNDER: - '13. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD AND THE CASE LAWS RELIED UPON BY THE PARTIES. WE HAVE OBSERVED THAT THE ASSESSEE COMPANY HAS CLAIMED AS REVENUE EXP ENDITURE DURING ASSESSMENT YEAR 2007 - 08, AN AMOUNT OF RS. 81,93,150/ - ON ACCOUNT OF ESOP EXPENDITURE WHICH HAS BEEN DEBITED TO PROFIT AND LOSS A/C OF THE ASSESSEE COMPANY UNDER THE HEAD 'PERSONNEL EXPENSES' 11 PEOPLE INTERACTIVE INDIA PRIVATE LIMITED ITA N OS. 6990,6986,4979/ MUM/ 2013 ASSESSMENT YEARS : 2007 - 08,2008 - 09,2009 - 10 WHICH IS CLAIMED TO BE THE DIFFERENCE BETWEEN THE FAIR MARKET VALUE OF THE SHARES ALLOTTED TO THE EMPLOYEES AND THE PRICE AT WHICH SHARES ARE ALLOTTED TO EMPLOYEES. WE HAVE OBSERVED T HAT THE ISSUE IN HAND IS SQUARELY COVERED BY THE DECISION OF HON'BLE SPECIAL BENCH - BANGALORE TRIBUNAL IN (2013) 35 TAXMANN.COM 335(SB) BIOCON LIMITED V. DCIT(LTU) IN FAVOUR OF THE ASSESSEE COMPANY WHEREBY THE HON'BLE SPECIAL BENCH HAS HELD AS UNDER: 7. WE HAVE HEARD SHRI H. PADAM CHAND KHINCHA FOR THE APPELLANT - ASSESSEE; SHRIROHIT JAIN FOR THE INTERVENER, M/S. BHARTIAIRTEL ; SHRI SACHIN KUMAR B.P. FOR THE INTERVENER, M/S. ADVINUSTHERAPEATICS LIMITED ; AND SHRI K.R. PRADEEP FOR THE INTERVENER, M/S. NDTV MEDI A LIMITED, (ALL THE FOUR COUNSEL ARE HEREINAFTER COLLECTIVELY REFERRED TO AS 'THE ID. AR'). WE HAVE ALSO HEARD SHRI S.K. AMBASTHA, THE ID. CIT REPRESENTING THE REVENUE. THE MOOT QUESTION IS AS TO WHETHER THE DISCOUNTED PREMIUM ON ESOP ALSO CALLED AS THE 7 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. DI SCOUNT ON ISSUE OF ESOP OR THE EMPLOYEE STOCK OPTION COMPENSATION EXPENSE OR THE EMPLOYEES COMPENSATION EXPENSE OR SIMPLY THE DISCOUNT ETC., IS AN ALLOWABLE DEDUCTION IN THE COMPUTATION THE INCOME UNDER 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 ALLOWABLE? II. IF YES, THEN WHEN AND HOW MUCH? ILL. SUBSEQUENT ADJUSTMENT TO DISCOUNT 8. WE WILL TAKE UP THESE THREE STEPS ONE BY ONE F OR CONSIDERATION AND DECISION. I. WHETHER ANY DEDUCTION OF SUCH DISCOUNT IS ALLOWABLE? 9.1 THE CRUX OF THE ARGUMENTS PUT FORTH BY THE ID. AR IS THAT DISCOUNT UNDER ESOP IS NOTHING BUT EMPLOYEES COST INCURRED BY THE ASSESSEE FOR WHICH DEDUCTION IS WARRANTED . ON THE OTHER HAND, THE 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 ID. DR STATED THAT THE QU ESTION OF DEDUCTION U/S 37 CAN ARISE ONLY IF THE ASSESSEE INCURS ANY EXPENDITURE, WHICH THEREAFTER SATISFIES THE REQUISITE CONDITIONS OF THE SUB - SECTION (1). HE SUBMITTED THAT THE WORD 'EXPENDITURE' HAS BEEN DESCRIBED BY THE HON'BLE SUPREME COURT IN THE CA SE 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 12 PEOPLE INTERACTIVE INDIA PRIVATE LIMITED ITA NOS. 6990,6986,4979/ MUM/ 2013 ASSESSMENT YEA RS : 2007 - 08,2008 - 09,2009 - 10 FORTH THAT BY ISSUING SHARES AT DISCOUNTED PREMIUM, NOTHING IS PAID OUT BY THE COMPANY. ONCE THERE IS NO 'PAYING OUT OR AWAY', THE SAME CANNOT CONSTITUTE AN 8 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. EXPENDITURE AND RESULTANTLY SECTION 37(1), WHICH APPLIES TO ONLY EXPEN DITURE, CANNOT BE ACTIVATED. HE FURTHER TOOK PAINS IN EXPLAINING THAT THERE IS NO REVENUE EXPENDITURE INVOLVED IN THE TRANSACTION OF ISSUANCE OF ESOP AT DISCOUNT. THE SO CALLED 'DISCOUNT' REPRESENTS THE DIFFERENCE BETWEEN MARKET PRICE OF THE SHARES AT THE TIME OF GRANT OF OPTIONS AND THE PRICE AT WHICH SUCH OPTIONS ARE GRANTED. SINCE THE AMOUNT OVER AND ABOVE 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 PREMIUM, WOULD BE A CASE OF SHORT CAPITAL RECEIPT. IF AT ALL IT IS TO BE VIEWED IN TERMS OF EXPENDITURE, THEN, AT BEST, IT WOULD BE IN THE NATURE OF A CAPITAL EXPENDITURE. HE SUPPORTED HIS VIEW' BY RELYING ON THE ORDER PASSED BY THE DELHI BENCH OF THE TRIBUNAL INRANBAXY LABORATORIES 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 PREMIUM IS NOT TAXABLE, ANY SHORT RECEIPT OF SUCH PREMIUM ON ISSUING OPTIONS TO EMPLOYEES WILL BE NOTIONAL LOSS AND NOT ACTUAL LOSS FOR WHICH ANY LIABILITY IS INCURRED. THE LEARNED DEPARTMENTAL REPRESENTATIVE CONTENDED THAT THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF VIP INDUSTRIES V. DY. CIT [IT APPE AL NO.7242 (MUM.) OF 2008 HAS ALSO TAKEN SIMILAR VIEW VIDE ITS ORDER DATED 17.09.2010.] 9.2.2 PER CONTRA, THE LEARNED AR SUBMITTED THAT IT IS NOT A CASE OF ANY SHORT RECEIPT OF SHARE PREMIUM BUT THAT OF COMPENSATION GIVEN TO EMPLOYEES. HE SUPPORTED THE ADM ISSIBILITY OF DEDUCTION OF THE AMOUNT 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. HE SUBMITTED THAT THE ABOV E VIEW TAKEN BY THE CHENNAI BENCH HAS BEEN APPROVED BY THE HON'BLE MADRAS HIGH COURT INCIT V. PVP VENTURES LTD. [2012] 211 TAXMAN 554/23 TAXMANN.COM 286. THE LEARNED AR ARGUED THAT 9 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. PVP VENTURES LTD. (SUPRA) IS A SOLITARY JUDGMENT RENDERED BY ANY HIGH COURT ON THE ISSUE AND HENCE THE SAME NEEDS TO BE FOLLOWED IN PREFERENCE TO ANY CONTRARY TRIBUNAL ORDER. IT WAS ALSO POINTED OUT THAT THE CHENNAI BENCH'S VIEW HAS BEEN SUBSEQUENTLY FOLLOWED BY THE CHANDIGARH BENCH OF THE TRIBUNAL IN ASSTT. CIT V. SPRAY ENGINEER ING DEVICES LTD. [2012] 23 TAXMANN.COM 267/53 SOT 70 (URO). 9.2.3 LET US EXAMINE THE FACTS OF THE CASE OF RANBAXY LABORATORIES LTD. (SUPRA), WHICH HAS BEEN STRONGLY RELIED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE. IT DEALS WITH A SITUATION IN WHICH THE ASSESSEE GRANTED STOCK OPTION TO ITS EMPLOYEES. THE SHARES WE RE TO BE ISSUED AT RS. 559 PER SHARE AS AGAINST THE FACE VALUE 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 PERIOD FOR WHICH THE ASSESSEE CLAIMED DEDUCTION THAT CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL. IT WAS HELD BY THE TRIB UNAL THAT THE MARKET 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 13 PEOPLE IN TERACTIVE INDIA PRIVATE LIMITED ITA NOS. 6990,6986,4979/ MUM/ 2013 ASSESSMENT YEARS 2007 - 08,2008 - 09,2009 - 10 OF INCOME. IT WAS FURTHER NOTICED THAT BY ISSUING SHARES AT BELOW THE MARKET PRICE, THERE WAS NO INCURRING OF ANY EXPENDITURE. RATHER IT RESULTED IN TO SHORT RECEIPT OF SHARE PREMIUM 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. THE TRIBUNAL FURTHER NOTICED THAT INCURRING 10 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. 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 D ISCOUNT OVER THE VESTING PERIOD, DID NOT FIND FAVOUR WITH THE TRIBUNAL ON THE GROUND THAT THE SEBI GUIDELINES WERE NOT RELEVANT IN DETERMINING THE TOTAL INCOME CHARGEABLE TO TAX. 9.2.4 IN ORDER TO APPRECIATE THE RIVAL SUBMISSIONS, IT IS OF THE UTMOST IMPOR TANCE TO UNDERSTAND THE CONCEPT OF ESOP. SECTION 2(15A) OF THE INDIAN COMPANIES ACT, 1956 DEFINES 'EMPLOYEE STOCK OPTION' TO MEAN 'THE OPTION GIVEN TO THE WHOLE - TIME DIRECTORS, OFFICERS OR EMPLOYEES OF A COMPANY, WHICH GIVES SUCH DIRECTORS, OFFICERS OR EMP LOYEES, THE BENEFIT OR RIGHT TO PURCHASE OR SUBSCRIBE AT A FUTURE DATE, THE SECURITIES OFFERED BY THE COMPANY AT A PREDETERMINED PRICE'. IN AN ESOP, THE GIVEN COMPANY UNDERTAKES TO ISSUE SHARES TO ITS EMPLOYEES AT A FUTURE DATE AT A PRICE LOWER THAN THE CU RRENT MARKET PRICE. THIS IS ACHIEVED BY GRANTING STOCK OPTIONS TO ITS EMPLOYEES AT DISCOUNT. THE AMOUNT OF DISCOUNT REPRESENTS THE DIFFERENCE BETWEEN MARKET PRICE OF THE SHARES AT THE TIME OF THE GRANT OF OPTION AND THE 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. ON THE COMPLETION OF THE VESTING PERIOD IN THE SERVICE OF THE COMPANY, SUCH 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 COMPLETION OF VESTING PERIOD AND THE TIME FOR EXERCISING THE OPTIONS IS USU ALLY 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 CAN BE SEEN THAT IT IS DURING THE VESTING PERIOD THAT THE OPTI ONS GRANTED TO THE EMPLOYEES VEST 11 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. WITH THEM. THIS PERIOD COMMENCES WITH THE GRANT OF OPTION AND TERMINATES WHEN THE OPTIONS SO GRANTED VEST IN THE EMPLOYEES AFTER SERVING THE COMPANY FOR THE AGREED PERIOD. BY GRANTING THE OPTIONS, THE COMPANY GETS A SORT O F ASSURANCE FROM ITS EMPLOYEE FOR RENDERING UNINTERRUPTED SERVICES DURING THE VESTING PERIOD AND AS A QUID PRO QUO IT UNDERTAKES TO COMPENSATE THE EMPLOYEES WITH A CERTAIN AMOUNT GIVEN IN THE SHAPE OF DISCOUNTED PREMIUM ONTHE ISSUE OF SHARES. 9.2.5 THE COR E OF THE ARGUMENTS OF THE ID. DR IN THIS REGARD IS TWO - FOLD. FIRST, THAT IT IS NOT AN EXPENDITURE IN ITSELF AND SECONDLY, IT IS A SHORT CAPITAL RECEIPT OR AT THE MOST A SORT OF CAPITAL EXPENDITURE. IN OUR CONSIDERED OPINION BOTH THE LEGS OF THIS CONTENTION ARE LEGALLY UNSUSTAINABLE. 9.2.6 THERE IS NO DOUBT THAT THE AMOUNT OF SHARE PREMIUM IS OTHERWISE A CAPITAL RECEIPT AND HENCE NOT CHARGEABLE TO TAX IN THE HANDS OF COMPANY. THE FINANCE ACT, 2012 HAS INSERTED CLAUSE (VIIB) OF SECTION 56(2) W.E.F. 1.4.2013 P ROVIDING THAT: 'WHERE A COMPANY, NOT BEING A 14 PEOPLE INTERACTIVE INDIA PRIVATE LIMITED ITA NOS. 6990,6986,4979/ MUM/ 2013 ASSESSMENT YEARS : 2007 - 08,200809,2009 - 10 COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, RECEIVES, IN ANY PREVIOUS YEAR, FROM ANY PERSON BEING A RESIDENT, ANY CONSIDERATION FOR ISSUE OF SHARES THAT EXCEEDS THE FACE VALUE OF SUCH SHARES, THE AGGREGATE CONSIDERATION RECEIVED FOR SUCH SHARES AS EXCEEDS THE FAIR MARKET VALUE OF THE SHARES', THEN SUCH EXCESS SHARE PREMIUM SHALL B E CHARGED TO TAX UNDER THE HEAD 'INCOME FROM OTHER SOURCES'. BUT FOR THAT, THE AMOUNT OF SHARE PREMIUM HAS ALWAYS BEEN UNDERSTOOD AND ACCEPTED AS A CAPITAL RECEIPT. IF A COMPANY ISSUES SHARES TO THE PUBLIC OR THE EXISTING SHAREHOLDERS AT LESS THAN THE OTHE RWISE PREVAILING PREMIUM DUE TO MARKET SENTIMENT OR OTHERWISE, SUCH SHORT RECEIPT OF PREMIUM WOULD BE A CASE OF A RECEIPT OF A LOWER AMOUNT ON 12 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. CAPITAL ACCOUNT. IT IS SO BECAUSE THE OBJECT OF ISSUING SUCH SHARES AT A LOWER PRICE IS NOWHERE DIRECTLY CONNECTE D WITH THE EARNING OF INCOME. IT IS IN SUCH LIKE SITUATION THAT THE CONTENTION OF THE LEARNED DEPARTMENTAL REPRESENTATIVE WOULD PROPERLY FIT IN, THEREBY DEBARRING THE COMPANY FROM CLAIMING ANY DEDUCTION TOWARDS DISCOUNTED PREMIUM. IT IS QUITE BASIC THAT TH E OBJECT OF ISSUING SHARES CAN NEVER BE LOST SIGHT OF. HAVING SEEN THE RATIONALE AND MODUS OPERANDI OF THE ESOP, IT BECOMES OUT - AND - OUT CLEAR THAT WHEN A COMPANY UNDERTAKES TO ISSUE SHARES TO ITS EMPLOYEES AT A DISCOUNTED PREMIUM ON A FUTURE DATE, THE PRIM ARY OBJECT OF THIS EXERCISE IS NOT TO RAISE SHARE CAPITAL BUT TO EARN PROFIT BY SECURING THE CONSISTENT AND CONCENTRATED EFFORTS OF ITS DEDICATED EMPLOYEES DURING THE VESTING PERIOD. SUCH DISCOUNT IS CONSTRUED, BOTH BY THE EMPLOYEES AND COMPANY, AS NOTHING BUT A PART OF PACKAGE OF REMUNERATION. IN OTHER WORDS, SUCH DISCOUNTED PREMIUM ON SHARES IS A SUBSTITUTE TO GIVING DIRECT INCENTIVE IN CASH FOR AVAILING THE SERVICES OF THE EMPLOYEES. THERE IS NO DIFFERENCE IN TWO SITUATIONS VIZ., ONE, WHEN THE COMPANY IS SUES 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 COMPENSATED FOR THE IR 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. 60 WOULD BE REMUNERATION TO EMPLOYEES AND HENCE DEDUCTIB LE. IN THE SAME WAY, IF THE COMPANY, INSTEAD, ISSUES SHARES TO ITS EMPLOYEES 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 EMPLOY EES FOR THEIR CONTINUED SERVICES. IN BOTH THE CASES, THE OBJECT IS TO COMPENSATE EMPLOYEES TO THE TUNE OF RS. 60. IT FOLLOWS THAT THE DISCOUNT ON PREMIUM UNDER ESOP IS 13 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. SIMPLY ONE OF THE MODES OF COMPENSATING THE EMPLOYEES FOR THEIR SERVICES AND IS A PART O F THEIR REMUNERATION. THUS, THE CONTENTION OF THE ID. DR THAT BY ISSUINGSHARES TO EMPLOYEES AT A DISCOUNTED PREMIUM, THE COMPANY GOT A LOWER CAPITAL RECEIPT, IS BEREFT OF AN FORCE. THE SOLE OBJECT OF ISSUING SHARES TO EMPLOYEES AT A DISCOUNTED PREMIUM IS T O COMPENSATE THEM FOR THE CONTINUITY OF THEIR SERVICES TO THE COMPANY. BY NO STRETCH OF IMAGINATION, WE CAN DESCRIBE SUCH DISCOUNT AS EITHER A SHORT CAPITAL RECEIPT OR A CAPITAL EXPENDITURE. IT IS NOTHING BUT THE EMPLOYEES COST INCURRED BY THE COMPANY. THE SUBSTANCE OF THIS TRANSACTION IS DISBURSING COMPENSATION TO THE EMPLOYEES FOR THEIR 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 OF THE ID. DR IN THIS REGARD. HE CANVASSED A VIEW THAT AN EXPENDITURE DENOTES 'PAYING OUT OR AWAY' AND UNLESS THE MONEY 15 PEOPLE INTERACTIVE INDIA PRIVATE LIMITED ITA NOS. 6990,6986,4979/ MUM/ 2013 ASSESSMENT YEARS : 200708,2008 - 09,2009 - 10 GOES OUT FROM THE ASSESSEE, THERE CAN BE NO EXPE NDITURE SO AS TO QUALIFY FOR DEDUCTION U/S 37. SUB - SECTION (1) OF THE SECTION PROVIDES THAT ANY EXPENDITURE (NOT BEING EXPENDITURE IN THE NATURE DESCRIBED IN SECTIONS 30 TO 36 AND NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE A SSESSEE), 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'. TO PUT IT DIFFERENTLY, AN EXPENDITURE MUS T 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 GRANTING DEDUCTION FOR AN 'EXPENDITURE', AND THE HON'BLE SUPREME COURT IN IN DIAN MOLASSES CO. (P.) LTD. (SUPRA) HAS DESCRIBED 'EXPENDITURE' TO MEAN WHAT 14 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. IS 'PAID OUT OR AWAY' AND IS SOMETHING WHICH HAS GONE IRRETRIEVABLY. 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 BUSINESS OR PROFESSION COVERING SECTIONS 28 TO 41 .SECTION 37 OBVIOUSLY 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 COMPUTED UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION'.' WHEN WE READ THE DEFINITION OF THE WORD 'PAID' U/S 43(2) IN JUXTAPOSITION TO SECTION 37 (1), THE POSITION WHICH EMERGES IS THAT IT IS NOT ONLY PAYING OF EXPENDITURE BUT ALSO INCURRING OF THE EXPENDITURE WHICH ENTAILS DEDUCTION U/S 37(1) SUBJECT TO THE FULFILMENT OF OTHER CONDITIONS. AT THIS JUNCTURE, IT IS IMPERATIVE TO NOTE THAT THE WORD 'EX PENDITURE' HAS NOT BEEN DEFINED IN THE ACT. HOWEVER, SEC. 2(H) OF THE EXPENDITURE ACT, 1957 DEFINES 'EXPENDITURE' AS: 'ANY SUM OF MONEY OR MONEY'S WORTH SPENT OR DISBURSED OR FOR THE SPENDING OR DISBURSING OF WHICH A LIABILITY HAS BEEN INCURRED BY AN ASSES SEE........ 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 THERE 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 UNDERTAKING TO ISSUE SHARES AT DISCOUNTED PREMIUM, THE COMPANY DOES NOT PAY ANYTHING TO ITS EMPLOYEES BUT INCURS OBLIGATION OF ISSUING SHARES AT A DISCOUNTED PRICE ON A FUTURE DATE IN LIEU OF THEIR SERVICES, WHICH IS NOTHING BUT AN EXPENDITURE U/S 37(1) OF THE ACT. .2.8 THOUGH DISCOUNT ON PREMIUM IS NOTHING BUT AN EXPENDITURE 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 15 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. 'LOSS' IN CERTAIN CIRCUMSTANCES WITHIN THE PURVIEW OF 'EXPENDITURE' AS USED IN SECTION IN 37(1). IN THAT CASE, THE ASSESSEE INCURRED ADDITIONAL LIABILITY DUE TO E XCHANGE RATE FLUCTUATION ON A REVENUE ACCOUNT. THE ASSESSING OFFICER DID NOT ALLOW DEDUCTION U/S 37. WHEN THE MATTER FINALLY REACHED THE HON'BLE SUPREME COURT, THEIR LORDSHIPS NOTICED THAT THE WORD 'EXPENDITURE' HAS NOT BEEN DEFINED IN THE ACT. THEY HELD T HAT: 'THE WORD 'EXPENDITURE' IS, THEREFORE, REQUIRED TO BE UNDERSTOOD IN THE CONTEXT IN WHICH IT IS USED. SECTION 37 ENJOINS THAT ANY EXPENDITURE NOT BEING EXPENDITURE OF THE NATURE DESCRIBED INSECTIONS 30 TO 36 LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS SHOULD BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION'. IN SECTIONS 16 PEOPLE INTERACTIVE INDIA PRIVATE LIMITED ITA NOS. 6990,6986,4979/ MUM/ 2013 ASSESSMENT YEARS : 2007 - 08,2008 - 09,2009 - 10 30 TO 36 THE EXPRESSION 'EXPENDITURE INCURRED', AS WELL AS ALLOWANCE AND DEPRECIATION, HAS ALSO BEEN USED. FOR EXAMPLE DEPRECIATION AND ALLOWANCES ARE DEALT WITH IN SECTION 32, THEREFORE, THE PARLIAMENT HAS USED EXPRESSION 'ANY EX PENDITURE' 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 AMOUNT HAS NOT GONE OUT FROM THE POCKET OF THE ASSESSEE'. FROM THE ABOVE ENUNCIATION OF LAW BY THE HON'BLE SUMMIT COURT, THERE REMAINS NO DOUBT WHATSOEVER THAT THE TERM 'EXPENDITURE' IN CERTAIN CIRCUMSTANCES CAN ALSO ENCOMPASS 'LOSS' EVEN THOUGH NO AMOUNT IS ACTUALLY PAID OUT. EX CONSEQUENTI, THE A LTERNATIVE ARGUMENT OF THE ID. 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 VIEW OF THE ABOVE DISCUSSION, WE, WITH UTMOST RESPECT, ARE UNABLE TO CONCUR WITH THE V IEW TAKEN IN RANBAXY LABORATORIES LTD.(SUPRA). 16 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. B. IS DISCOUNT A CONTINGENT LIABILITY? 9.3.1 THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE IMPUGNED ORDER BY CONTENDING THAT THE ENTITLEMENT TO ESOP DEPENDS UPON THE FULFILMENT OF SEVERAL CONDITIONS LA ID DOWN UNDER THE SCHEME. IT IS ONLY WHEN ALL SUCH CONDITIONS ARE FULFILLED AND 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 AND NO DEDUCTION IS ADMISSIBLE UNDER THE PROVISIONS OF THE ACT FOR A CONTINGENT 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 CHO OSE TO EXERCISE THE OPTION EVEN AFTER RENDERING THE SERVICES DURING THE VESTING PERIOD. IT WAS, THEREFORE, ARGUED THAT THE DISCOUNT IS NOTHING BUT A CONTINGENT LIABILITY DURING THE VESTING PERIOD NOT CALLING FOR ANY DEDUCTION. IN THE OPPOSITION, THE LEARNE D AR SUBMITTED THAT THE AMOUNT OF DISCOUNT CLAIMED BY THE ASSESSEE AS DEDUCTION IS NOT A CONTINGENT LIABILITY BUT AN ASCERTAINED LIABILITY. HE STATED THAT IN THE ESOP 2000, THERE IS A VESTING PERIOD OF FOUR YEARS, WHICH MEANS THATTHE OPTIONS TO THE EXTENT OF 25% OF THE TOTAL GRANT WOULD VEST WITH THE ELIGIBLE EMPLOYEES AT THE END OF FIRST YEAR 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 SET TLED LEGAL POSITION THAT DEDUCTION IS PERMISSIBLE IN RESPECT OF AN ASCERTAINED LIABILITY AND NOT A CONTINGENT LIABILITY. SECTION 31 OF THE INDIAN CONTRACT ACT, 1872 DEFINES 'CONTINGENT CONTRACT' AS 'A CONTRACT TO DO OR NOT DO SOMETHING, IF SOME EVENT, COLL ATERAL TO SUCH CONTRACT DOES NOT HAPPEN'. WE NEED TO DETERMINE AS TO WHETHER THE LIABILITY ARISING ON THE ASSESSEE - COMPANY FOR ISSUING SHARES AT A DISCOUNTED PREMIUM CAN BE CHARACTERIZED AS A CONTINGENT LIABILITY IN THE 17 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. LIGHT OF THE DEFINITION OF CONTINGEN T CONTRACT. FROM THE STAND POINT OF THE COMPANY, THE OPTIONS UNDER ESOP 2000 VEST WITH THE EMPLOYEES AT THE RATE OF 25% ONLY ON PUTTING IN SERVICE FOR ONE YEAR BY THE EMPLOYEES. UNLESS SUCH SERVICE IS RENDERED, THE EMPLOYEES - 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 YEAR, IT BECOMES OBLIGATORY ON THE PART OF THE COMPANY TO HONOR ITS COMMITMENT OF ALLOWING THE 17 PEOPLE INTERACTIVE INDIA PRIVATE LIMITED ITA NOS.6990,6986,4979/MUM/2013 ASSESSMENT YEARS : 2007 - 08,2008 - 09,2009 - 10 VESTING OF 25% OF THE OPTION. IT IS AT THE END OF THE FIRST YEAR THAT THE COMPANY INCURS LIABILITY OF FULFILLING ITS PROMISE OF ALLO WING PROPORTIONATE DISCOUNT, WHICH LIABILITY WOULD BE ACTUALLY DISCHARGED AT THE END OF THE FOURTH YEAR WHEN THE OPTIONS 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 CONTI NGENT 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 LIABILITY TOWARDS ENCASHMENT OF EARNED LEAVE. IN THAT CASE, THE COMPANY FLOATED BENEFICIAL SCHEME FOR ITS EMPLOYEES FOR ENCASHMENT OF LEAVE. THE EARNED LEAVE COULD BE ACCUMULATED UP TO CERTAIN DAYS. THE ASSESSEE CREATED PROVISION OF RS. 62.25 LAKH FOR ENCASHMENT OF ACCRUED LEAVE AND CLAIMED DEDUCTION FOR THE SAME. THE ASSESSING OFFICER HELD IT T O BE A CONTINGENT LIABILITY AND HENCE NOT A PERMISSIBLE DEDUCTION. WHEN THE MATTER FINALLY CAME UP BEFORE THE HON'BLE SUPREME COURT, IT WAS HELD THAT THE PROVISION FOR MEETING THE LIABILITY FOR ENCASHMENT OF EARNED LEAVE BY THE EMPLOYEE WAS AN ADMISSIBLE D EDUCTION. IN HOLDING SO, THE HON'BLE APEX COURT OBSERVED THAT: 'THE LAW IS SETTLED : IF A BUSINESS LIABILITY HAS DEFINITELY ARISEN IN THE ACCOUNTING YEAR, THE DEDUCTION SHOULD BE ALLOWED 18 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. ALTHOUGH THE LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. WHAT SHOULD BE CERTAIN IS THE INCURRING OF THE LIABILITY. IT SHOULD ALSO BE CAPABLE OF BEING ESTIMATED WITH REASONABLE CERTAINTY THOUGH THE ACTUAL QUANTIFICATION MAY NOT BE POSSIBLE. IF THESE REQUIREMENTS ARE SATISFIED THE LIABILITY IS NOT A C ONTINGENT ONE. THE LIABILITY IS IN PRAESENTI THOUGH IT WILL BE DISCHARGED AT A FUTURE DATE. IT DOES NOT MAKE ANY DIFFERENCE IF THE FUTURE DATE ON WHICH THE LIABILITY SHALL HAVE TO BE DISCHARGED IS NOT CERTAIN.' FROM THE ABOVE ENUNCIATION OF LAW BY THE HON' BLE SUPREME COURT, IT IS MANIFEST THAT A DEFINITE BUSINESS LIABILITY ARISING IN AN ACCOUNTING YEAR QUALIFIES FOR DEDUCTION EVENTHOUGH THE LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. WE CONSIDER IT OUR EARNEST DUTY TO MENTION THAT T HE LEGISLATURE HAS INSERTED CLAUSE (F) TO SECTION 43B BY PROVIDING THAT 'ANY SUM PAYABLE BY THE ASSESSEE AS AN EMPLOYER IN LIEU OF ANY LEAVE AT THE CREDIT OF HIS EMPLOYEE' SHALL BE ALLOWED AS DEDUCTION IN COMPUTING THE INCOME OF THE PREVIOUS YEAR IN WHICH SUCH SUM IS ACTUALLY PAID. WITH THIS LEGISLATIVE AMENDMENT, THE APPLICATION OF THE RATIO DECIDENDI IN THE CASE OF BHARAT EARTH MOVERS (SUPRA) TO THE PROVISION FOR LEAVE ENCASHMENT HAS BEEN NULLIFIED. HOWEVER, THE PRINCIPLE LAID DOWN IN THE SAID JUDGMENT IS ABSOLUTELY INTACT THAT A LIABILITY DEFINITELY INCURRED BY AN ASSESSEE IS DEDUCTIBLE NOTWITHSTANDING THE FACT THAT ITS QUANTIFICATION MAY TAKE PLACE IN A LATER YEAR. THE MERE FACT THAT THE QUANTIFICATION IS NOT PRECISELY POSSIBLE AT THE TIME OF INCURRING T HE LIABILITY WOULD NOT MAKE AN ASCERTAINED LIABILITY A CONTINGENT. 9.3.4 ALMOST TO THE SIMILAR EFFECT, THERE IS ANOTHER JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA (P.) LTD. V. CIT [2009] 314 ITR 62/180 TAXMAN 422. IN THAT CA SE, THE ASSESSEE - COMPANY WAS ENGAGED IN SELLING CERTAIN PRODUCTS. AT THE TIME OF SALE, THE COMPANY PROVIDED A STANDARD WARRANTY THAT IN THE EVENT OF CERTAIN PART BECOMING DEFECTIVE WITHIN 12 MONTHS FROM THE DATE OF COMMISSIONING OR 18 MONTHS 19 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. FROM THE DATE OF DISPATCH, WHICHEVER IS EARLIER, THE COMPANY WOULD RECTIFY OR REPLACE THE DEFECTIVE PARTS FREE OF CHARGE. THIS WARRANTY WAS GIVEN UNDER CERTAIN CONDITIONS STIPULATED IN THE WARRANTY 18 PEOPLE INTERACTIVE INDIA PRIVATE LIMITED ITA NOS.6990,6986,4979/ MUM! 2013 ASSESSMENT YEARS 2007 - 08,2008 - 09,2009 - 10 CLAUSE. THE ASSESSEE MADE A PROVISION FOR WARRANTY AT RS. 5.18 LAKH TOWARDS THE WARRANTY CLAIM LIKELY TO ARISE ON THE SALES EFFECTED BY THE ASSESSEE. THE ASSESSING OFFICER DISALLOWED THE SAME ON THE GROUND THA T THE LIABILITY WAS MERELY A CONTINGENT LIABILITY AND HENCE NOT ALLOWABLE 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 DEDUCTION ON THE 'ACCRUAL' CONCEPT BY HOLDING THAT A PRO VISION IS RECOGNIZED WHEN : '(A) AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RESULT OF A PAST EVENT; (B) IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES WILL BE REQUIRED TO SETTLE THE OBLIGATION AND (C) A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLI GATION'. RESULTANTLY, THE PROVISION WAS HELD TO BE DEDUCTIBLE. 9.3.5 WHEN WE CONSIDER THE FACTS OF THE PRESENT CASE IN THE BACKDROP OF THE RATIO LAID DOWN BY THE HON'BLE SUPREME COURT IN BHARAT EARTH MOVERS (SUPRA) AND ROTORK CONTROLS INDIA (P.) LTD. (SUPR A), IT BECOMES VIVID THAT THE MANDATE OF THESE CASES IS APPLICABLE WITH FULL FORCE TO THE DEDUCTIBILITY OF THE DISCOUNT ON INCURRING OF LIABILITY ON THE RENDITION OF SERVICE BY THE EMPLOYEES. THE FACTUM OF THE EMPLOYEES BECOMING ENTITLED TO EXERCISE OPTION S AT THE END OF THE VESTING PERIOD AND IT IS ONLY THEN THAT THE ACTUAL AMOUNT OF DISCOUNT WOULD BE DETERMINED, IS AKIN TO THE QUANTIFICATION OF THE PRECISE LIABILITY TAKING PLACE AT A FUTURE DATE, THEREBY NOT DISTURBING THE OTHERWISE LIABILITY WHICH STOOD INCURRED AT THE END OF THE EACH YEAR ON AVAILING THE SERVICES. 20 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. 9.3.6 AS REGARDS THE CONTENTION OF THE ID. DR ABOUT THE CONTINGENT LIABILITY ARISING ON ACCOUNT OF THE OPTIONS LAPSING DURING THE VESTING PERIOD OR THE EMPLOYEES NOT CHOOSING TO EXERCISE THE OP TION, WE FIND THAT NORMALLY IT IS PROVIDED IN THE SCHEMES OF ESOP THAT THE VESTED OPTIONS THAT 'APSE DUE TO NON - EXERCISE AND/OR UNVESTED OPTIONS THAT GET CANCELLED DUE TO RESIGNATION OF THE EMPLOYEES OR OTHERWISE, WOULD BE AVAILABLE FOR GRANT AT A FUTURE D ATE OR WOULD BE AVAILABLE FORBEING RE - GRANTED AT A FUTURE DATE. IF WE CONSIDER IT AT MICRO LEVEL QUA EACH INDIVIDUAL EMPLOYEE, IT MAY SOUND CONTINGENT, BUT IF VIEW IT AT MACRO LEVEL QUA THE GROUP OF EMPLOYEES AS A WHOLE, IT LOSES THE TAG OF CONTINGENT' BEC AUSE SUCH LAPSING OPTIONS ARE UP FOR GRABS TO THE OTHER ELIGIBLE EMPLOYEES. IN ANY CASE, IF SOME OF THE OPTIONS REMAIN UNVESTED OR ARE NOT EXERCISED, THE DISCOUNT HITHERTO CLAIMED AS DEDUCTION IS REQUIRED TO BE REVERSED AND OFFERED FOR TAXATION IN SUCH LAT ER YEAR. WE, THEREFORE, HOLD THAT THE DISCOUNT IN RELATION TO OPTIONS VESTING DURING THE YEAR CANNOT BE HELD AS A CONTINGENT LIABILITY. C. FRINGE BENEFIT 9.4.1 THERE IS ANOTHER IMPORTANT DIMENSION OF THIS ISSUE. CHAPTER XII - H OF THE ACT CONSISTING OF SECTI ONS 115W TO II5WL WITH THE CAPTION: 'INCOME - TAX ON FRINGE BENEFITS' HAS BEEN INSERTED BY THE FINANCE ACT, 2005 W.E.F. 1.4.2006. MEMORANDUM EXPLAINING THE PROVISIONS OF THE FINANCE BILL, 2005 HIGHLIGHTS THE DETAILS OF THE FRINGE BENEFITS TAX. IT PROVIDES TH AT: 'FRINGE BENEFITS AS OUTLINED IN SECTION 1I5WB, MEAN ANY PRIVILEGE, SERVICE, FACILITY OR AMENITY DIRECTLY OR INDIRECTLY PROVIDED BY AN EMPLOYER TO HIS EMPLOYEES (INCLUDING FORMER EMPLOYEES) BY REASON OF THEIR EMPLOYMENT.' CHARGING SECTION 11 5W OF THIS CHAPTER PROVIDES THAT : 'IN ADDITION TO THE INCOME - TAX CHARGED UNDER THIS ACT, THERE SHALL BE CHARGED FOR EVERY ASSESSMENT YEAR...........FRINGE BENEFIT TAX IN RESPECT OF FRINGE BENEFITS PROVIDED OR 19 PEOPLE INTERACTIVE INDIA PRIVATE LIMITED ITA NOS. 6990 ,6986,4979/ MUM/ 2013 ASSESSMENT YEARS : 21 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. 200708,2008 - 09,2009 - 10 DEEMED TO HAVE BEEN PROVIDED BY AN EMPLOYEE TO HIS EMPLOYEES DURING THE PREVIOUS YEAR.............'. SECTION I15WB GIVES MEANING TO THE EXPRESSION 'FRINGE BENEFITS'. SUBSECTION (1) PROVIDES TH AT FOR THE PURPOSES OF THIS CHAPTER, 'FRINGE BENEFITS' MEANS ANY CONSIDERATION FOR EMPLOYMENT AS PROVIDED UNDER CLAUSES (A) TO (D). CLAUSE (D), WHICH IS RELEVANT FOR OUR PURPOSE, STATES THAT : 'ANY SPECIFIED SECURITY OR SWEAT EQUITY SHARES ALLOTTED OR TRAN SFERRED, DIRECTLY OR INDIRECTLY, BY THE EMPLOYER FREE OF COST OR AT CONCESSIONAL RATE TO HIS 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 SECURITIES AS DEFINED IN CLAUSE (H) OF SECTION 2 OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 (42 OF 1956) AND, WHERE EMPLOYEES' STOCK OPTION HAS BEEN GRANTED UNDER ANY PLAN OR SCHEME THEREOF, INCLUDES THE SECURITIES OFFERED UNDER SUCH PLAN OR SCHEME. THUS IT IS DISCERNIBLE FROM THE ABOVE PROVISIONS OF THE ACT THAT THE LEGISLATURE ITSELF CONTEMPLATES THE DISCOUNT ON PREMIUM UNDER ESOP AS A BENEFIT PROVIDED BY THE EMPLOYER TO ITS EMPLOYEES DURING THE COURSE OF SERVICE. IF THE LEGISLATURE CONSIDERS SUCH DISCOUNTED PREMIUM TO THE EMPLOYEES AS A FRINGE BENEFIT OR 'ANY CONSIDERATION FOR EMPLOYMENT', IT IS NOT OPEN TO ARGUE CONTRARY. ONCE IT IS HELD AS A CONSIDERATION FOR EMPLOYMENT, THE NATURAL COROLLARY WHICH FOLLOWS IS TH AT SUCH DISCOUNT (I) IS AN EXPENDITURE; (II) SUCH EXPENDITURE IS ON ACCOUNT OF AN ASCERTAINED (NOT CONTINGENT) LIABILITY ; AND (III) IT CANNOT BE TREATED AS A SHORT CAPITAL RECEIPT. IN VIEW OF THE FOREGOING DISCUSSION, WE ARE OF THE CONSIDERED OPINION THAT DISCOUNT ON SHARES UNDER THE ESOP IS AN ALLOWABLE DEDUCTION. II. IF YES, THEN WHEN AND HOW MUCH? 10.1 HAVING SEEN THAT THE DISCOUNT UNDER ESOP IS A DEDUCTIBLE EXPENDITURE U/S 37(1), THE NEXT QUESTION IS THAT WHEN' AND FOR 'HOW MUCH' AMOUNT SHOULD THE 22 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. DEDU CTION BE GRANTED ? 10.2 THE ASSESSEE IS A LIMITED COMPANY AND HENCE IT IS OBLIGED TO MAINTAIN ITS ACCOUNTS ON MERCANTILE BASIS. UNDER SUCH SYSTEM OF ACCOUNTING, AN ITEM OF INCOME BECOMES TAXABLE WHEN A RIGHT TO RECEIVE IT IS FINALLY ACQUIRED NOTWITHSTANDIN G THE FACT THAT WHEN SUCH INCOME IS ACTUALLY RECEIVED. EVEN IF SUCHINCOME IS ACTUALLY RECEIVED IN A LATER YEAR, ITS TAXABILITY WOULD NOT BE EVADED FOR THE YEAR IN WHICH RIGHT TO RECEIVE WAS FINALLY ACQUIRED. IN THE SAME MANNER, AN EXPENSE BECOMES DEDUCTIBL E WHEN LIABILITY TO PAY ARISES IRRESPECTIVE OF ITS ACTUAL DISCHARGE. THE INCURRING OF LIABILITY AND THE RESULTANT DEDUCTION CANNOT BE MARRED BY MERE REASON OF SOME DIFFICULTY IN PROPER QUANTIFICATION OF SUCH LIABILITY AT THAT STAGE. THE VERY POINT OF INCUR RING THE LIABILITY ENABLES THE ASSESSEE TO CLAIM DEDUCTION UNDER MERCANTILE SYSTEM OF ACCOUNTING. WE HAVE NOTICED THE MANDATE OF THE HON'BLE SUPREME COURT IN BHARAT EARTH MOVERS (SUPRA) THAT IF A BUSINESS LIABILITY HAS DEFINITELY ARISEN IN AN ACCOUNTING YE AR, THEN THE DEDUCTION SHOULD BE ALLOWED IN THAT YEAR ITSELF NOTWITHSTANDING THE FACT THAT SUCH LIABILITY IS INCAPABLE OF PROPER QUANTIFICATION AT THAT STAGE AND IS DISCHARGEABLE AT A FUTURE DATE. IT FOLLOWS THAT THE DEDUCTION FOR AN EXPENSE IS ALLOWABLE O N INCURRING OF LIABILITY AND THE SAME CANNOT BE DISTURBED SIMPLY BECAUSE OF SOME DIFFICULTY IN THE PROPER QUANTIFICATION. A LINE OF DISTINCTION NEEDS TO BE DRAWN BETWEEN A SITUATION IN WHICH A LIABILITY IS NOT INCURRED AND A SITUATION IN WHICH THE LIABILIT Y IS INCURRED BUT ITS QUANTIFICATION IS NOT POSSIBLE AT THE MATERIAL TIME. WHEREAS IN THE FIRST CASE, THERE CANNOT BE ANY QUESTION OF ALLOWING DEDUCTION, 20 PEOPLE INTERACTIVE INDIA PRIVATE LIMITED ITA NOS. 6990,6986,4979/ MUM/ 2013 ASSESSMENT YEARS 200708 ,2008 - 09,2009 - 10 IN THE SECOND CASE, DEDUCTION HAS TO BE ALLOWED FOR A SUM DETERMINED ON SOME RATIONAL BASIS REPRESENTING THE AMOUNT OF LIABILITY INCURRED. 23 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. 10.3 WE HAVE EARLIER UNDERLINED THE CONCEPTS OF GRANT OF OPTIONS, VESTING OF OPTIONS AND EXERCISE OF OPTIONS. THE PERIOD FROM GRANT OF OPTION TO THE VESTING OF OPTION IS THE 'VESTING PERIOD'. IT IS DURING SUCH PERIOD THAT AN EMPLOYEE IS SUPPOSED TO RENDER SERVICE TO THE COMPANY SO AS TO EARN AN ENTITLEMENT TO THE SHARES AT A DISCOUNTED PREMIUM. THE VESTI NG PERIOD MAY VARY FROM A CASE TO CASE. IF THE VESTING PERIOD IS, SAY, FOUR YEARS WITH EQUAL VESTING AT THE END OF EACH YEAR, THEN IT IS AT THE END OF THE VESTING PERIOD OR DURING THE EXERCISE PERIOD, WHICH IN TURN IMMEDIATELY SUCCEEDS THE VESTING PERIOD, THAT 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 PERIOD THAT THE ENTITLEMENT IS EARNED. IT MEANS THAT 25 OPTIONS VEST WITH THE EMPLOYEE AT THE END OF EACH YEAR ON HIS RENDERING SERVICE FOR THE RESPECTIVE YEAR. IF DURING THE INTERREGNUM, HE LEAVES THE SERVICE, SAY AFTER ONE YEAR, HE WILL STILL REMAIN ENTITLED TO EXERCISE OPTION FOR 25 SHARES AT THE DISCOUN TED PREMIUM AT THE TIME OF EXERCISE 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 FORFEITED. THUS IT BECOMES ABUNDANTLY CLEAR THAT AN EMPLOYEE BECOMES ENTITLED TO THE SHARE S AT A DISCOUNTED PREMIUM OVER THE VESTING PERIOD DEPENDING UPON THE LENGTH OF SERVICE PROVIDED BY HIM TO THE COMPANY. IN ALL SUCH SCHEMES, IT IS AT THE END OF THE VESTING PERIOD THATPTION IS EXERCISABLE ALBEIT THE PROPORTIONATE RIGHT TO OPTION IS ACQUIRED BY RENDERING SERVICE AT THE END OF EACH YEAR. 10.4 SIMILAR IS THE POSITION FROM THE STAND POINT OF THE COMPANY. AN OBLIGATION FALLS UPON THE COMPANY TO ALLOT SHARES AT THE TIME OF EXERCISE OF OPTION DEPENDING UPON THE LENGTH OF SERVICE RENDERED BY THE EMP LOYEE DURING THE VESTING PERIOD. THE INCURRING OF LIABILITY 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 24 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. OUT OF 100 SHARES VEST IN THE EMPLOYEE AFTER RENDERING ONE YEAR'S SERVICE, THE COMPANY ALSO INCURS EQUAL OBLIGATION AT THE END OF THE FIRST YEAR FOR WHICH IT BECOMES ENTITLED TO RIGHTFULLY CLAIM DEDUCTION U/S 37(1) OF THE ACT. SIMILARLY AT THE END OF THE SECOND YEAR OF SERVICE BY THE EMPLOYEES, THE COMPANY CAN CLAIM DEDUCTION FOR DISCOUNTED PREMIUM IN RESPECT OF FURTHER 25 SHARES SO ON AND SO FORTH TILL FOURTH YEAR WHEN THE LAST TRANCHE OF DISCOUNTED PREMIUM IN RESPECT OF 25 SHARES BECOMES AVAILABLE FOR DEDUCTION. IT, THEREFORE, TRANSP IRES THAT A COMPANY UNDER THE MERCANTILE SYSTEM CAN LAWFULLY CLAIM DEDUCTION FOR TOTAL DISCOUNTED PREMIUM REPRESENTING THE EMPLOYEES COST OVER THE VESTING PERIOD AT THE RATE AT WHICH THERE IS VESTING OF OPTIONS IN THE EMPLOYEES. 10.5 FROM THE ABOVE DISCUSS ION IT IS LUCID THAT AT THE EVENT OF GRANTING OPTIONS, THE COMPANY DOES NOT INCUR ANY OBLIGATION TO ISSUE THE SHARES AT DISCOUNTED PREMIUM. MERE GRANTING OF OPTION DOES NEITHER ENTITLE THE EMPLOYEE TO EXERCISE SUCH OPTION NOR ALLOW THE COMPANY TO CLAIM DED UCTION FOR THE DISCOUNTED PREMIUM.. IT IS DURING THE VESTING PERIOD THAT THE COMPANY INCURS OBLIGATION 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 21 PEOPLE INTERACTIVE INDIA PRIVATE LIMITED ITA NOS.6990,6986,4979/ MUM! 2013 ASSESSMENT YEARS : 2007 - 08,2008 - 09,2009 - 10 OF EXERCISING THE OPTIONS. THOUGH THE EMPLOYEES BECOME ENTITLED TO EXERCISE THE OPTION AT SUCH STAGE BUT THE FACT IS T HAT IT IS SIMPLY A RESULT OF VESTING OF OPTIONS WITH THEM OVER THE VESTING PERIOD ON THE RENDITION OF SERVICES TO THE COMPANY. IN OTHER WORDS, IT IS A STAGE OF REALIZATION OF INCOME EARNED DURING THE VESTING PERIOD. IN THE SAME MANNER, THOUGH THE COMPANY B ECOMES 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. 25 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. FROM THE ABOVE IT IS APPARENT THAT THE COMPANY INCURS LIAB ILITY TO ISSUE SHARES AT THE DISCOUNTED PREMIUM ONLY DURING THE VESTING PERIOD. THE LIABILITY IS NEITHER INCURRED AT THE STAGE OF THE GRANT OF OPTIONS NOR WHEN SUCH OPTIONS ARE EXERCISED. 10.6 LET US CONSIDER THE FACTS OF THE CASE OF S.S.I. LTD. (SUPRA), W HICH HAS BEEN STRONGLY RELIED BY THE ID. AR IN SUPPORT OF HIS CLAIM FOR DEDUCTION OF DISCOUNT DURING THE YEARS OF VESTING OF OPTIONS. IN THAT CASE THE VESTING PERIOD WAS THREE YEARS AND THE ASSESSMENT ORDER WAS PASSED U/S 143(3), INTER ALIA, ALLOWING DEDUC TION OF RS. 66.82 LAKH UNDER THE HEAD 'STAFF WELFARE EXPENSES' ON ACCOUNT OF AMORTIZATION OF DISCOUNTED VALUE OF OPTION OVER A PERIOD OF THREE YEARS. THE CIT REVISED SUCH O RDER BY DIRECTING THE A.O. TO DISALLOW ESOP EXPENDITURE OF RS. 66.82 LAKH. WHEN THE MATTER CAME UP BEFORE THE TRIBUNAL, IT WAS HELD THAT THE EXPENDITURE IN THAT BEHALF WAS AN ASCERTAINED LIABILITY AND NOT CONTINGENT UPON HAPPENING OF CERTAIN EVENTS. IT WAS FURTHER NOTICED THAT THE ASSESSEE CLAIMED DEDUCTION OF SUCH DISCOUNT ON ESOP BY FOL LOWING THE SEBI GUIDELINES. AS THE EXPENDITURE ITSELF WAS AN ASCERTAINED LIABILITY, THE TRIBUNAL HELD THAT 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 DISCOUNT ON ISSUE OF OPTIONS DURING THE VESTING PERIOD. IT HAS BEEN S O EXPLAINED WITH THE HELP OF AN EXAMPLE IN SCHEDULE I TO THE GUIDELINES. FOR THE SAKE OF SIMPLICITY, WE ARE TAKING AN INSTANCE UNDER WHICH AN OPTION OF SHARE WITH FACE VALUE OF RS. 10 IS GIVEN UNDER ESOP TO EMPLOYEES AT THE OPTION PRICE OF RS. 10 AS AGAINS T 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 YEAR. TOTAL DISCOUNT COMES TO RS. 100 (RS. 110 - RS. 10). THESE GUIDELINES PROVIDE 26 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. FOR CLAIMING DED UCTION IN THE ACCOUNTS FOR A TOTAL DISCOUNT OF RS. 100 DIVIDED OVER THE VESTING PERIOD OF FOUR YEARS ON STRAIGHT LINE BASIS AT THE RATE OF RS. 25 EACH. THE CASE OF S.S.I. LTD. (SUPRA) DEALS WITH A CONTROVERSY RELATING TO ONE OF THE VESTING YEARS. THE TRIBU NAL ENTITLED THE ASSESSEE TO PROPORTIONATE DEDUCTION. THUS IT IS EVIDENT THAT THE VIEW TAKEN BY THE TRIBUNAL IN THAT CASE NOT ONLY MATCHES WITH THE SEBI GUIDELINES BUT ALSO THE 'ACCRUAL CONCEPT' IN THE MERCANTILE SYSTEM OF ACCOUNTING, THEREBY ALLOWING DEDU CTION 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 FOUND 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 CASE 22 PEOPLE INTE RACTIVE INDIA PRIVATE LIMITED ITA NOS.6990,6986,4979/ MUM/ 2013 ASSESSMENT YEARS : 2007 - 08,2008 - 09,2009 - 10 (SUPRA) ALLOWING DEDUCTION OF THE DISCOUNTED PREMIUM DURING THE YEARS 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 AFFIRMATIVE THAT THE DISCOUNT ON OPTIONS UNDER ESOP IS AN ASCERTAINED LIABILITY AND THE SECOND MAJOR ISSUE THAT THE DISCOUNT IS DEDUCTIBLE OVER THE VESTING PERIOD ON STR AIGHT LINE BASIS UNLESS THE VESTING IS NOT UNIFORM, THEN ARISES THE PRESENT ISSUE AS TO WHETHER ANY SUBSEQUENT ADJUSTMENT IS WARRANTED AT THE TIME OF EXERCISE OF OPTIONS, TO THE DEDUCTIONS EARLIER ALLOWED FOR THE AMOUNT OF DISCOUNT. IT IS NOTICED THAT THE ASSESSMENT YEARS 2003 - 2004 TO 2007 - 2008 ARE UNDER CONSIDERATION AND DURING THESE YEARS ESOP 2000 HAS COME TO AN END AND THE ESOP 2004 HAS STARTED. FURTHER, THE EXTANT ISSUE IS A VITAL PART OF THE OVERALL 27 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. QUESTION OF THE DEDUCTIBILITY OR OTHERWISE OF THE AM OUNT OF DISCOUNT UNDER ESOP. 111.2 WE HAVE NOTICED ABOVE THAT THE COMPANY INCURS A DEFINITE LIABILITY DURING THE VESTING PERIOD, BUT ITS PROPER QUANTIFICATION IS NOT POSSIBLE AT THAT STAGE AS THE ACTUAL AMOUNT OF EMPLOYEES COST TO THE COMPANY, CAN BE FINAL LY DETERMINED AT THE TIME OF THE 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. 111.3 AS REGARDS THE ADJUSTMENT OF DISCOUNT WHEN THE OPTIONS REMAIN UNVESTED OR LAPSE AT THE END OF THE EXERCISE PERIOD, IT IS BUT NATURAL THAT THERE IS NO EMPLOYEE COST TO THAT EXTENT AND HENCE THERE CAN BE NO DEDUCTION OF DISCOUNT QUA SUCH PART OF UNVESTED OR LAPSING OPTIONS. BUT, AS THE AMOUNT WAS CLAIMED AS DEDUCTION BY THE COMPANY DURING THE PERIOD STARTING WITH THE DATE OF GRANT TILL THE HAPPENING OF TH IS EVENT, SUCH DISCOUNT NEEDS TO BE REVERSED AND TAKEN AS INCOME. IT IS SO BECAUSE LOGICALLY WHEN THE OPTIONS HAVE NOT EVENTUALLY VESTED IN THE EMPLOYEES, TO THAT EXTENT, THE COMPANY HAS INCURRED NO EMPLOYEE COST. AND IF THERE IS NO COST TO THE COMPANY, TH E TENTATIVE AMOUNT OF DEDUCTION EARLIER CLAIMED ON THE BASIS OF THE MARKET PRICE AT THE TIME OF GRANT OF OPTION CEASES TO BE ADMISSIBLE AND HENCE NEEDS TO BE REVERSED. THE ID. AR STATED THAT THE DISCOUNT IN RESPECT OF THE UNVESTED/LAPSING OPTIONS HAS BEEN REVERSED ON THE HAPPENING OF SUCH EVENTS AND THE OVERALL EMPLOYEE COST HAS BEEN CORRESPONDINGLY REDUCED. WE FIND THAT THE SEBI GUIDELINES ALSO PROVIDE THAT THE DISCOUNT WRITTEN OFF IN RESPECT OF UNVESTED OPTIONS AND THE OPTIONS LAPSING AT THE END OF THE EX ERCISE PERIOD SHALL BE REVERSED AT THE APPROPRIATE TIME. AS THE ACCOUNTING TREATMENT DIRECTED THROUGH THE GUIDELINES ACCORDS WITH 28 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. THE TAXATION PRINCIPLE OF NOT ALLOWING DEDUCTION FOR THE AMOUNT OF DISCOUNT ON UNVESTED/LAPSING OPTIONS AND FURTHER THE ASSESS EE HAS ADMITTED TO HAVE OFFERED SUCH AMOUNT AS INCOME IN THE RELEVANT YEARS, WE STOP HERE BY HOLDING THAT THE AMOUNT OF DISCOUNT CLAIMED AS DEDUCTION EARLIER IN RESPECT OF 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 OPTIONS ARE EXERCISED BY THE EMPLOYEES AFTER PUTTING IN SERVICE DURING THE VESTING PERIOD. IN SUCH A SCENARIO, THE ACTUAL 23 PEOPLE INTERACTIVE INDIA PRIVATE LIMITED ITA NOS.6990,6986,4979/ MUM/ 201 3 ASSESSMENT YEARS : 200708,2008 - 09,2009 - 10 AMOUNT OF REMUNERATION TO THE EMPLOYEES WOULD BE ONLY THE AMOUNT OF ACTUAL DISCOUNTED PREMIUM AT THE TIME OF EXERCISE OF OPTION. THE HON'BLE SUPREME COURT IN THE CASE OF CITY. INFOSYS TECHNOLOGIES LTD. [2008] 297 ITR 167/166 TAXMAN 204 RELEVANT TO THE ASSESSMENT YEARS 1997 - 98 TO 1999 - 2000 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 WHEN OPTIONS WERE EXERCISED. THE FINANCE ACT, 1999 INSERTED SECTION 1 7(2)(IIIA) WITH EFFECT FROM 1ST APRIL, 2000 PROVIDING THAT : 'THE VALUE OF ANY SPECIFIED SECURITY ALLOTTED OR TR ANSFERRED, DIRECTLY OR INDIRECTLY, BY ANY PERSON FREE OF COST OR AT A CONCESSIONAL RATE TO AN INDIVIDUAL WHO IS OR HAS BEEN IN EMPLOYMENT OF THAT PERSON' SHALL BE TREATED AS A PERQUISITE. IT FURTHER PROVIDES THAT IN A CASE THE AL LOTMENT OR TRANSFER OF SPEC IFIED SECURITIES IS MADE IN PURSUANCE OF AN OPTION EXERCISED BY AN INDIVIDUAL, THE VALUE OF THE SPECIFIED SECURITIES SHALL BE TAXABLE IN THE PREVIOUS YEAR IN WHICH SUCH OPTION IS EXERCISED BY SUCH INDIVIDUAL. SUCH CLAUSE (IIIA) WAS SUBSEQUENTLY DELETED WIT H EFFECT FROM 1ST APRIL, 2001. AFTER CERTAIN CHANGES TO THE RELEVANT PROVISIONS IN THIS 29 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. 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 SHARE S ALLOTTED OR TRANSFERRED, DIRECTLY OR INDIRECTLY, BY THE EMPLOYER, OR FORMER EMPLOYER, FREE OF COST OR AT CONCESSIONAL RATE TO THE ASSESSEE'. CLAUSE(C) OF EXPLANATION TO SECTION 17(2)(VI) PROVIDES THAT: 'THE VALUE OF ANY SPECIFIED SECURITY OR SWEAT EQUITY SHARES SHALL BE THE FAIR MARKET VALUE OF THE SPECIFIED SECURITY OR SWEAT EQUITY SHARES, AS THE CASE MAY BE, ON THE DATE ON WHICH 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 THE FAIR MARKET VALUE OF THE SHARES ON 'THE DATE ON WHICH THE OPTION 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 CONSIDERING THE OCCASION AND THE A MOUNT OF BENEFIT ACCRUING TO THE EMPLOYEE UNDER ESOP. ANY EXEMPTION OR THE DEDUCTIBILITY OF AN ALLOWANCE OR BENEFIT TO EMPLOYEE FROM TAXATION DOES NOT OBLITERATE THE BENEFIT ITSELF. IT SIMPLY MEANS THAT THE BENEFIT ACCRUED TO THE ASSESSEE BUT THE SAME DID NOT ATTRACT TAX. THE POSITION HAS NOW BEEN CLARIFIED BEYOND DOUBT BY THE LEGISLATURE THAT THE ESOP DISCOUNT, WHICH IS NOTHING BUT THE REWARD FOR SERVICES, IS A TAXABLE PERQUISITE TO THE EMPLOYEE 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 WHICH THE OPTION IS EXERCISED. 11.1.5 THE OTHER SIDE OF THE COIN IS THE AMOUNT OF REMUNERATION TO THE EMPLOYEES IN THE HANDS OF THE COMPANY. WE HAVE NOTICED EARLIER THAT AN EXPENSE BEC OMES DEDUCTIBLE ON THE INCURRING OF LIABILITY UNDER THE MERCANTILE SYSTEM OF ACCOUNTING. ALTHOUGH THE 30 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. STAGE OF TAXABILITY OF PERQUISITE IN THE HANDS OF THE EMPLOYEE MAY DIFFER FROM THE STAGE OF THE DEDUCTIBILITY OF EXPENSE IN THE HANDS OF THE COMPANY DEPEN DING UPON THE METHOD OF ACCOUNT FOLLOWED BY THE COMPANY, BUT THE AMOUNT OF SUCH DISCOUNT OR EMPLOYEES REMUNERATION CAN NEVER BE DIFFERENT. IF THE VALUE OF PERQUISITE IN THE HANDS OF THE EMPLOYEE, WHETHER OR NOT 24 PEOPLE INTERACTIVE INDIA PRIVATE LIMITED I TA NOS.6990,6986,4979/ MUM/ 2013 ASSESSMENT YEARS : 2007 - 08,2008 - 09,2009 - 10 TAXABLE, IS 'X', THEN ITS COST IN THE HANDS OF THE COMPANY HAS ALSO TO BE 'X'. IT CAN NEITHER BE 'X+L' NOR 'X - L'. IT IS SIMPLE AND PLAIN THAT THE AMOUNT OF REMUNERATION WHICH PERCO LATES TO THE EMPLOYEES WILL ALWAYS BE EQUAL TO THE AMOUNT FLOWING FROM THE COMPANY AND SUCH REMUNERATION TO THE EMPLOYEE IN THE PRESENT CONTEXT IS THE AMOUNT WHICH HE ACTUALLY BECOMES ENTITLED TO ON THE EXERCISE OF OPTIONS. THUS, IT IS PALPABLE THAT SINCE THE REMUNERATION TO THE EMPLOYEES UNDER THE ESOP IS THE AMOUNT OF DISCOUNTW.R.T. THE MARKET PRICE OF SHARES AT THE TIME OF EXERCISE OF OPTION, THE EMPLOYEES COST IN THE HANDS OF THE COMPANY SHOULD ALSO BE W.R.T. THE SAME BASE. 11.1.6 THE AMOUNT OF DISCOUNT AT THE STAGE OF GRANTING OF OPTIONS W.R.T. THE MARKET PRICE OF SHARES AT THE TIME OF GRANT OF OPTIONS IS ALWAYS A TENTATIVE EMPLOYEES COST BECAUSE OF THE IMPOSSIBILITY IN CORRECTLY VISUALIZING THE LIKELY MARKET PRICE OF SHARES AT THE TIME OF EXERCISE OF O PTION BY THE EMPLOYEES, WHICH, IN TURN, WOULD REFLECT THE CORRECT EMPLOYEES COST. SINCE THE DEFINITE LIABILITY IS INCURRED DURING THE VESTING PERIOD, IT HAS TO BE QUANTIFIED ON SOME LOGICAL BASIS. IT IS THIS MARKET PRICE AT THE TIME OF THE GRANT OF OPTIONS WHICH IS CONSIDERED FOR WORKING OUT THE AMOUNT OF DISCOUNT DURING THE VESTING PERIOD. BUT, SINCE ACTUAL AMOUNT OF EMPLOYEES COST CAN BE PRECISELY DETERMINED ONLY AT THE TIME OF THE EXERCISE OF OPTION BY THE EMPLOYEES, THE PROVISIONAL AMOUNT OF DISCOUNT AV AILED AS DEDUCTION DURING THE VESTING PERIOD NEEDS TO BE ADJUSTED IN THE LIGHT OF THE ACTUAL DISCOUNT ON THE BASIS OF THE MARKET PRICE OF THE 31 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. SHARES AT THE TIME OF EXERCISE OF OPTIONS. IT CAN BE DONE BY MAKING SUITABLE NORTHWARDS OR SOUTHWARDS ADJUSTMENT A T THE TIME OF EXERCISE OF OPTION. THIS CAN BE EXPLAINED WITH THE FOLLOWING EXAMPLE WITH THE ASSUMPTION OF VESTING PERIOD OF FOUR YEARS AND THE BENEFIT VESTING AT 25% EACH AT THE END OF 1ST TO 4TH YEARS: -- AT THE TIME OF GRANTING OPTION 11.1.7 FROM THE ABOVE TABLE IT CAN BE NOTICED THAT THE MARKET PRICE OF THE SHARES AT THE TIME OF GRANT OF OPTION WAS RS. 110 AGAINST THE OPTION PRICE OF RS. 10, WHICH RESULTED IN DISCOUNT AT RS. 100. WITH THE VESTING PERIOD O F FOUR YEARS WITH THE EQUAL VESTING, THE COMPANY CAN RIGHTLY CLAIM DEDUCTION AT THE RATE OF RS. 25 EACH AT THE END OF FIRST, SECOND, THIRD AND FOURTH YEAR OF VESTING. BUT THIS TOTAL DEDUCTION FOR DISCOUNT OF RS. 100 OVER THE VESTING PERIOD NEEDS TO BE ADJU STED AT THE TIME OF EXERCISE OF OPTION BY THE EMPLOYEE WHEN THE SHARES ARE ISSUED. IN SITUATION I, THE MARKET PRICE OF SHARES AT THE TIME OF EXERCISE OF OPTION IS AT RS. 110, WHICH IS SIMILAR TO THE MARKET PRICE AT THE TIME OF GRANT OF OPTION. AS THE TOTAL AMOUNT OF DISCOUNT OF RS. 100 OVER THE VESTING PERIOD IS ACTUALLY QUANTIFIED AT RS. 100, NO FURTHER ADJUSTMENT TO THE DISCOUNT IS REQUIRED AT THE TIME OF EXERCISE OF OPTION. IN SITUATION II, THE MARKET PRICE OF THE SHARE AT THE TIME OF EXERCISE OF OPTION HAS GONE UP TO RS. 130. THE AMOUNT OF REAL COMPENSATION TO EMPLOYEE IS RS. 120 AS AGAINST THE TENTATIVE COMPENSATION OF RS. 100 PER 25 PEOPLE INTERACTIVE INDIA PRIVATE LIMITED ITA NOS.6990,6986,4979/ MUM! 2013 ASSESSMENT YEARS : 2007 - 08,2008 - 09,2009 - 10 SHA RE WHICH WAS ACCOUNTED FOR AND ALLOWED AS DEDUCTION DURING THE VESTING PERIOD. AS THE ACTUAL QUANTIFICATION OF THE COMPENSATION HAS TURNED OUT TO BE RS. 120, THE COMPANY IS ENTITLED TO A FURTHER DEDUCTION OF RS. 20 AT THE TIME OF EXERCISE OF OPTION. IN SIT UATION III, THE MARKET PRICE OF THE SHARE AT THE TIME OF EXERCISE OF OPTION HAS COME DOWN TO RS. 90. THE AMOUNT OF REAL COMPENSATION TO EMPLOYEES IS RS. 80 AS AGAINST THE TENTATIVE COMPENSATION OF RS. 100, 32 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. WHICH WAS ALLOWED AS DEDUCTION DURING THE VESTING PERIOD. AS THE ACTUAL QUANTIFICATION OF THE COMPENSATION HAS TURNED OUT TO BE RS. 80, THE COMPANY IS LIABLE TO REVERSE THE DEDUCTION OF RS. 20 AT THE TIME OF EXERCISE OF OPTION. TAXATION VIS - - VIS ACCOUNTANCY PRINCIPLES 11.2.1 IT HAS BEEN NOTICED THAT BROA DLY THERE ARE THREE STAGES HAVING EFFECT ON THE TOTAL INCOME OF THE COMPANY IN THE LIFE CYCLE OF ESOP, VIZ., (I)URING THE VESTI NG PERIOD, (II) AT THE TIME OF I NVESTING/LAPSE OF OPTIONS AND (III) FINALLY AT THE TIME OF EXERCISE OF OPTIONS. IT HAS BEEN ARGUE D THAT THE ASSESSEE COMPANY CLAIMED DEDUCTION FOR THE AMOUNT OF DISCOUNT DURING THE VESTING PERIOD ON THE BASIS OF THE MARKET PRICE OF SHARES AT THE TIME OF GRANT OF OPTIONS AND ALSO REVERSED THE PROPORTIONATE DISCOUNT ON I NVESTING/LAPSING OF OPTIONS AT TH E 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 GIVEN EFFECT TO. BUT THE APPELLANT ASSESSEE DOES NOT APPEAR TO HAVE MADE ANY DOWNWARD ADJUSTMENT TO THE AMOUNT OF DISCOUNT AT THE TIME OF EXERCISE OF OPTION BY THE EMPLOYEES WITH THE DIFFERENCE IN THE MARKET PRICE OF THE SHARES AT THE TIME OF GRANT OF OPTION AND PRICE AT THE TIME OF EXERCISE OF OPTION. THE ARGUMENT SEEMS TO BE THAT THE SEBI GUIDELINES DO NOT PROVID E FOR SUCH DOWNWARD ADJUSTMENT. IT HAS BEEN ARGUED BY THE ID. AR THAT WHERE THE PROVISIONS OF THE ACT SPECIFICALLY PROVIDE FOR TREATMENT OF A PARTICULAR SOURCE OF INCOME IN A PARTICULAR MANNER, THEN THE GERMANE PROVISION SHOULD BE FOLLOWED. IF, HOWEVER, TH ERE IS NO SPECIFIC PROVISION DEALING WITH AN ISSUE IN THE ACT, THEN THE ACCOUNTING PRINCIPLES SHOULD BE ADHERED TO WHILE DETERMINING THE TOTAL INCOME OF THE ASSESSEE. IN THIS REGARD, HE 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 PURCHASE OF PLANT AND MACHINERY BEFORE THE COMMENCEMENT OF BUSINESS SHOULD BE CAPITALIZED ON THE BASIS OF ACCEPTED 33 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. ACCOUNTANCY RULE. SIMILARLY IN THE CASE OF U.P. STATE INDUSTRIAL DEVELOPMENT 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 UNDERWRITING COMMISSION RECEIVED BY THE UNDE RWRITER AS INVESTMENT AS AGAINST TREATING THE GROSS AMOUNT BY TAKING INTO CONSIDERATION 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 COMPUTATI ON OF TOTAL INCOME, THE ACCOUNTING PRINCIPLES FORMULATED BY WAY OF THE SEBI GUIDELINES ARE REQUIRED TO BE FOLLOWED. 11.2.2 IN THE OPPUGNATION, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE SEBI GUIDELINES CANNOT MANDATE THE DEDUCTIBILITY OR OT HERWISE OF AN AMOUNT UNDER THE PROVISIONS OF THE ACT. HE RELIED ON THE JUDGMENTS OF THE HON'BLE SUPREME COURT IN TUTICORIN ALKALI CHEMICALS & FERTILIZERS 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 ID. AR THAT, IN THE ABSENCE OF ANY SPECIFIC PROVISION IN THE ACT, THE ACCOUNTING PRINCIPLES SHOULD BE FOLLOWED FOR DETERMINING THE TOTAL INCOME OF THE ASSESSEE. WHAT IS TRUE FOR ACCOUNTING PURPOSE NEED NOT NEC ESSARILY BE TRUE FOR TAXATION. TAXATION PRINCIPLES ARE ENSHRINED IN THE LEGISLATURE. POWER TO LEGISLATE LIES WITH THE PARLIAMENT. ACCOUNTING STANDARDS OR GUIDANCE NOTE OR GUIDELINES ETC., BY WHATEVER NAME CALLED, ISSUED BY ANY AUTONOMOUS OR EVEN STATUTORY BODIES INCLUDING THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, OR FOR THAT MATTER, THE SEBI ARE MEANT ONLY TO PRESCRIBE THE WAY IN WHICH THE TRANSACTIONS SHOULD BE RECORDED IN BOOKS OR REFLECTED IN THE ANNUAL ACCOUNTS. THESE GUIDELINES DO NOT HAVE THE F ORCE OF AN ACT OF PARLIAMENT. SINCE THE SUBJECT MATTER OF TAX ON INCOME FALLS IN THEUNION LIST AS PER PART XI OF THE INDIAN 34 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. CONSTITUTION, IT IS ONLY THE PARLIAMENT WHICH CAN LEGISLATE ON ITS SCOPE. 11.2.4 BE THAT AS IT MAY, THERE IS NO WEIGHT IN THE CONTEN TION OF THE ID. AR THAT THERE IS NO SPECIFIC PROVISION IN THE ACT ON THE ESOP DISCOUNT. IT IS AXIOMATIC THAT THE TAXATION RULES ARE ALWAYS EMBODIED IN THE RELEVANT ACT, EITHER IN A SPECIFIC OR A GENERAL MANNER. THESE CAN BE SPECIFIC BY MAKING A CLEAR CUT P ROVISION IN RESPECT OF DEDUCTIBILITY OF A PARTICULAR ITEM OF EXPENSE OR TAXATION OF A PARTICULAR ITEM OF INCOME. GENERAL PROVISIONS ARE THOSE WHICH SET OUT THE OVERALL PRINCIPLES TO GOVERN THE DEDUCTIBILITY OR TAXABILITY OF UNSPECIFIED ITEMS. FOR 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 GENERAL ITEMS OF RECEIPTS HAVING CHARACTER OF INCOME, EVEN THOUGH NOT SPECIFICALLY MENTIONED. SIMILAR IS THE POSITION REGARDING DEDUCTIONS. UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION', THERE ARE SECTIONS GRANTING DEDUCTIONS IN RESPECT OF SPECIFIC EXPENSES OR ALLOWANCES. SIMILARLY, THERE IS SECTION 37(1), WHICH GRANTS DEDUCTION FOR EXPENSES NOT SPECIFICALLY SET OUT IN OTHER SECTIONS, IF THE CONDITIONS STIPULATED IN THE SECTION, ARE FULFILLED. ALL OTHER ITEMS OF EXPENSES, WHICH FULFIL THE REQUISITE 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 GENERAL CATEGORIES OF EXPENSES. DISCOUNT ON ESOP IS A GENERAL EXPENSE AND HENCE COVERED BY THE SPECIFIC PROVISION OF SECTION 37. THE CONTENTION OF THE ID. AR THAT THERE IS NO PROVISION IN THE ACT DEALING WITH THE DEDUCTIBILITY OF ESOP DISCOUNT, IS THEREFORE, DEVOID OF ANY MERIT. THIS CONCLUDES THE QUESTION OF GRANTING OF DEDUCTION OF DISCOUNT DURING THE VESTING PERIOD. 35 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. 11.2.5 THE SEB1 GUIDELINES HAVE BEEN TAKEN SHELTER OF TO CONTEND THAT THERE IS NO REQUIREMENT FOR THE ADJUSTMENT OF DISCOUNT AT THE TIME OF EXERCISE OF OPTIONS. PRIMARILY, WE ARE UNABLE TO TRACE THE PROPOSITION ANYWHERE FROM THE ACT THAT THE ACCOUNTING PRINCIPLES ARE ALSO DETERMINATIVE OF THE TAX LIABILITY. THE JURISPRUDENCE IS RATHER THE OTHER WAY AROUND. INTUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. (SUPRA), THE HON'BLE SUPREME COURT HAS LAID DOWN IN SO MANY WORDS THA T THE TAXING PRINCIPLES CANNOT WALK ON THE FOOTSTEPS OF THE ACCOUNTING PRINCIPLES. AT THIS JUNCTURE, IT WOULD BE USEFUL TO HAVE A GLIMPSE AT THE FOLLOWING OBSERVATIONS OF THE HON'BLE SUPREME COURT IN THE AFORE NOTED CASE: 'IT IS TRUE THAT THIS COURT HAS VE RY OFTEN REFERRED TO ACCOUNTING PRACTICE FOR ASCERTAINMENT OF PROFIT MADE BY A 27 PEOPLE INTERACTIVE INDIA PRIVATE LIMITED ITA NOS.6990,6986,4979/ MUM/ 2013 ASSESSMENT YEARS : 2007 - 08,2008 - 09,2009 - 10 COMPANY OR VALUE OF THE ASSETS OF A COMPANY. BUT WHEN TH E QUESTION IS WHETHER A RECEIPT OF MONEY IS TAXABLE OR NOT OR WHETHER CERTAIN DEDUCTIONS FROM THAT RECEIPT ARE PERMISSIBLE IN LAW OR NOT, THE QUESTION HAS TO BE DECIDED ACCORDING TO THE PRINCIPLES OF LAW AND NOT IN. ACCORDANCE WITH ACCOUNTANCY PRACTICE. AC COUNTING PRACTICE CANNOT OVERRIDE SECTION 56 OR ANY OTHER PROVISION OF THE ACT. AS WAS POINTED OUT BY LORD RUSSELL IN THE CASE OF B.S. C. FOOTWEAR LTD. V. RIDGUARY (INSPECTOR OF TAXES [1970] 77 R 857 (CA), THE INCOME - TAX LAW DOES NOT MARCH STEP BY STEP IN THE FOOTPRINTS OF THE ACCOUNTANCY PROFESSION. 11.2.6 THE SAME VIEW HAS BEEN ADOPTED BY THE HON'BLE SUPREME COURT IN GODHRA ELECTRICITY CO. LTD. (SUPRA), BY HOLDING THAT : 'INCOME - TAX IS A LEVY ON INCOME. NO DOUBT, THE INCOME - TAX ACT TAKES INTO ACCOUNT TWO POINTS OF TIME AT WHICH THE LIABILITY TO TAX IS ATTRACTED, VIZ., THE ACCRUAL OF THE INCOME OR ITS RECEIPT; BUT THE SUBSTANCE OF THE MATTER IS THE INCOME. IF INCOME DOES NOT RESULT AT ALL, THERE CANNOT BE A TAX, EVEN THOUGH IN BOOK - KEEPING, 36 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. AN ENTRY IS MADE ABOUT A HYPOTHETICAL INCOME, WHICH DOES NOT MATERIALISE.' 11.2.7 IT FOLLOWS THAT ACCOUNTING PRINCIPLES HAVE ABSOLUTELY NO ROLE TO PLAY IN THE MATTER OF DETERMINATION OF TOTAL INCOME UNDER THE ACT. IF AN ACCOUNTING PRINCIPLE IS REFERRED TO BY THE HIGHER JU DICIARY, 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 MATTER IS THAT TAXATION PRINCIPLES ARE TO BE FOLLOWED. IF AN ACCOUNTING PRINCIPLE IS I N CONFORMITY WITH THE MANDATE OF TAXING PRINCIPLE AND REFERENCE IS MADE TO SUCH ACCOUNTING PRINCIPLE WHILE DECIDING THE ISSUE, IT DOES NOT MEAN THAT THE ACCOUNTING PRINCIPLE HAS BEEN FOLLOWED. IT SIMPLY MEANS THAT THE TAXATION PRINCIPLE HAS BEEN FOLLOWED A ND THE ACCOUNTING PRINCIPLE, WHICH IS IN LINE WITH SUCH TAXATION PRINCIPLE, HAS BEEN SIMPLY TAKEN NOTE OF. IF HOWEVER, AN ACCOUNTING PRINCIPLE RUNS COUNTER TO THE TAXATION PRINCIPLE, THEN THERE IS NO PRIZE FOR GUESSING THAT IT IS ONLY THE TAXATION PRINCIPL E WHICH SHALL PREVAIL. 11.2.8 THE PLEA NOW RAISED BEFORE US BY THE ID. AR, RELYING ON THE CASE OF CHALLAPALLI SUGARS LTD. (SUPRA), WAS ALSO TAKEN UP BEFORE THE HON'BLE SUPREME COURT IN THE CASE OFTUTICORIN ALKALIS CHEMICALS & FERTILIZERS LTD (SUPRA). DEALI NG WITH THE 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 INDIAN INCOME - TAX ACT, 1922. IN ORDER TO CALCULATE DEPRECIATION AND DEVELO PMENT REBATE IT WAS NECESSARY TO FIND OUT 'THE ACTUAL COST' OF THE PLANT AND MACHINERY PURCHASED BY THE COMPANY. THIS COURT HELD THAT 'COST' IS A WORD OF WIDER CONNOTATION THAN 'PRICE'. THERE WAS A DIFFERENCE BETWEEN THE PRICE OF A MACHINERY AND ITS COST. THIS COURT THEREAFTER POINTED OUT THAT THE EXPRESSION 'ACTUAL COST' HAD NOT BEEN DEFINED IN THE ACT. IT WAS, THEREFORE, NECESSARY TO FIND OUT THE COMMERCIAL SENSE OF THE PHRASE . ............. THE JUDGMENT IN CHALLAPALLI SUGAR LTD'S CASE (SUPRA), GOES 37 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. TO S HOW THAT THE COURT WAS NOT IN ANY WAY DEPARTING FROM LEGAL PRINCIPLES BECAUSE OF ANY OPINION EXPRESSED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS.' FROM THE ABOVE OBSERVATIONS THERE IS NOT EVEN AN IOTA OF DOUBT IN OUR MINDS THAT THERE CAN BE NO QUESTION OF FOLLOWING THE ACCOUNTING PRINCIPLE OR GUIDANCE NOTES ETC. IN THE MATTER OF DETERMINATION OF TOTAL INCOME. 11.2.9 THE TRUMP CARD OF THE ID. AR TO BOLSTER HIS SUBMISSION FOR ASSIGNING THE STATUS OF BINDING FORCE TO THE SEBI GUIDELINES IS THE ORDER IN THE CAS E OF S.S.I. LTD. (SUPRA) WHICH CAME TO BE AFFIRMED BY THE HON'BLE MADRAS HIGH COURT IN PVP VENTURES LTD. (SUPRA). WE HAVE NOTICED ABOVE THAT THE SAID CASE DEALT A SITUATION FALLING WITHIN ONE OF THE THREE YEARS OF THE VESTING PERIOD, IN WHICH IT WAS HELD T HAT ONE THIRD OF THE TOTAL AMOUNT OF DISCOUNT COMPUTED ON THE BASIS OF THE MARKET PRICE OF THE SHARES AT THE TIME OF GRANT OF OPTION, IS DEDUCTIBLE. IT IS EVIDENT FROM THE SEBI GUIDELINESAT THESE DEAL WITH THE DEDUCTIBILITY OF DISCOUNT IN THE HANDS OF COMP ANY DURING THE YEARS OF VESTING PERIOD. THESE GUIDELINES ARE SILENT ON THE POSITION EMANATING FROM VARIATION IN THE MARKET PRICE OF THE SHARES AT THE TIME OF EXERCISE OF OPTION BY THE EMPLOYEES VIS - - VIS THE MARKET PRICE AT THE TIME OF GRANT OF OPTION. IN OTHER WORDS, THE SEBI GUIDELINES PRESCRIBE ACCOUNTING TREATMENT ONLY IN RESPECT OF THE PERIOD OF VESTING OF THE OPTIONS AND THE SITUATION ARISING OUT OF UNVESTED OPTIONS OR VESTED OPTIONS LAPSING. THE VERY REFERENCE BY THE CHENNAI BENCH OF THE TRIBUNAL IN SSI LIMITED (SUPRA) TO THE SEBI GUIDELINES IS INDICATIVE OF THE FACT THAT IT DEALT WITH A YEAR DURING WHICH THE OPTIONS WERE VESTING WITH THE EMPLOYEES AND THE COMPANY 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, 38 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. WHICH WAS ABOUT THE DEDUCTIBILITY OF DISCOUNT DURING ONE OF THE VESTING YEARS. IN THE EARLIER PART OF THIS ORDER, WE HAVEHELD THAT THE DEDUCTIBILITY OF DISCOUNT DURING THE VESTING PERIOD, AS PRESCRIBED UNDER THE SEBI GUIDELINES, MATCHES WITH THE TREATMENT UNDER THE MERCANTILE SYSTEM OF ACCOUNTING. TO THAT EXTENT, WE ALSO HOLD THAT THE SEBI GUIDELINES ARE APPLICABLE IN THE MATTER OF DEDUCTION OF DISCOUNT. NEITHER THERE WAS ANY ISSUE BEFORE THE HON'BLE MADRAS HIGH COURT NOR IT DEALT WITH A SITUATION IN WHICH THE MARKET PRICE OF THE SHARES AT THE TIME OF EXERCISE OF OPTION IS MORE 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 GUIDELINES. ACCORDINGLY, THE AFORENOTED TAXATION PRINCIPLE OF GRANTING DEDUCTION FOR THE ADDITIONAL DISCOUNT AND REVERSING DEDUCTION FOR THE SHORT AMOUNT OF DISCOUNT AT THE TIME OF EXERCISE OF OPTION, NEEDS TO BE SCRUPULOUSLY FOLLOWED. 11.3 WE, THEREFORE, SUM UP THE POSITION THAT THE DISCOUNT UNDER ESOP IS IN THE NA TURE OF EMPLOYEES COST AND IS HENCE DEDUCTIBLE DURING THE VESTING PERIOD W.R.T. THE MARKET PRICE OF SHARES AT THE TIME OF GRANT OF OPTIONS TO THE EMPLOYEES. THE AMOUNT OF DISCOUNT CLAIMED AS DEDUCTION DURING THE VESTING PERIOD IS REQUIRED TO BE REVERSED IN RELATION TO THE UNVESTING/ LAPSING OPTIONS AT THE APPROPRIATE TIME. HOWEVER, AN ADJUSTMENT TO THE INCOME IS CALLED FOR AT THE TIME OF EXERCISE OF OPTION BY THE AMOUNT OF DIFFERENCE IN THE AMOUNT OF DISCOUNT CALCULATED WITH REFERENCE THE MARKET PRICE AT TH E TIME OF GRANT OF OPTION AND THE MARKET PRICE AT THE TIME OF EXERCISE OF OPTION. NO ACCOUNTING PRINCIPLE CAN BE DETERMINATIVE IN THE MATTER OF COMPUTATION OF TOTAL INCOME UNDER THE ACT. THE QUESTION BEFORE THE SPECIAL BENCH IS THUS ANSWERED IN AFFIRMATIVE BY HOLDING THAT DISCOUNT ON ISSUE OF EMPLOYEE STOCK OPTIONS IS ALLOWABLE AS DEDUCTION IN COMPUTING THE INCOME UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION'. 39 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. 29 PEOPLE INTERACTIVE INDIA PRIVATE LIMITED ITA NOS.6990,6986,4979/ MUM/ 2013 ASSES SMENT YEARS2007 - 08,2008 - 09,2009 - 10 SOME RELEVANT FACTORS IN ASSESSEE'S CASE 12.1 HAVING ANSWERED THE QUESTION IN AFFIRMATIVE, LET US EXAMINE ITS APPLICABILITY TO THE FACTS OF THE APPELLANT'S CASE. IT HAS BEEN SEEN ABOVE THAT THE AUTHORITIES BELOW REFUSED T O GRANT DEDUCTION OF THE DISCOUNT AT THE VERY THRESHOLD. RESULTANTLY, THE VERIFICATION OF THE CORRECTNESS OF CALCULATION OF DISCOUNT OUSTED. SINCE WE HAVE OVERTURNED SUCH VIEW IN ABOVE TERMS, THE VERIFICATION OF CALCULATION IN ACCORDANCE WITH OUR DIRECTION S BECOMES IMPERATIVE. WE, THEREFORE, SET ASIDE THE IMPUGNED ORDERS ON THIS ISSUE AND REMIT THE MATTER TO THE FILE OF THE AO FOR FINDING OUT THE CORRECT AMOUNT OF DEDUCTION ACCORDINGLY. 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, INTER ALIA, INTO THESE ASPECTS IN QUANTIFYING THE AMOUNT OF ELIGIBLE DEDUCTION. A. THE ASSESSEE - COMPANY WAS A CLOSELY HELD COMPANY IN THE PREVIOUS YEAR REL EVANT TO THE ASSESSMENT YEAR 2003 - 2004 AND AS SUCH THERE WAS NO QUESTION OF THE LISTING OF ITS SHARES 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 R EPRESENTS THE MARKET PRICE OF THE SHARES LISTED ON THE STOCK EXCHANGE ON THE DATE OF GRANT OF OPTION AS REDUCED BY THE PRICE AT WHICH OPTION IS GIVEN TO THE EMPLOYEES. HOWEVER, PRESENTLY THERE IS NO AVAILABILITY OF ANY MARKET PRICE OF SUCH SHARES ON THE DA TE OF GRANT OF OPTION AS THE COMPANY CAME TO BE LISTED ON A STOCK EXCHANGE IN A SUBSEQUENT YEAR. ON A POINTED QUERY, THE ID. AR FURNISHED THE DETAILS OF SUCH CLAIM BY SHOWING THAT IT GRANTED 71,510 OPTIONS WITH DISCOUNT OF RS. 909 PER OPTION MAKING TOTAL D ISCOUNT AT RS. 6.50 CRORE. HE STATED THAT THE FACE VALUE OF SHARES 40 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. 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 RS. 919. NO MATERIAL WORTH THE NAME HAS BEEN PLACED ON RECORD TO INDICATE AS TO HOW A SHARE WITH FACE VALUE OF RS. 10 HAS BEEN VALUED AT RS. 919 FOR CLAIMING DEDUCTION TOWARDS DISCOUNT AT RS. 909 PER SHARE. THIS ASPECT OF VALUATION O F SHARES AT RS. 919 PER SHARE NEEDS TO BE EXAMINED BY THE ASSESSING OFFICER. B. WE HAVE HELD ABOVE THAT THE DEDUCTION OF THE DISCOUNTED PREMIUM IS TO BE CLAIMED OVER THE VESTING PERIOD. THE ASSESSEE CLAIMED DEDUCTION FOR DISCOUNT AMOUNTING TO RS. 3.38 CROR E FOR THE A.Y. 2003 - 04. ON BEING CALLED UPON TO FURNISH BIFURCATION OF SUCH CLAIM, THE ASSESSEE FILED A CHART SHOWING ITS DETAIL COMPRISING OF FOUR AMOUNTS. FIRST AMOUNT OF RS. 1.62 CRORE HAS BEEN SHOWN AS THE FIRST TRANCHE OF 25% OPTION. SECOND AMOUNT OF RS. 81.25 LAKH AS THE SECOND TRANCHE OF 25% OPTION; 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 TRANCHE OF 25% OPTION. WE ARE UNABLE TO UNDERSTAND AS TO HOW THE LAST THREE AMOUNTS CA N QUALIFY FOR DEDUCTION AT THE END OF THE FIRST YEAR ITSELF. ON A SPECIFIC QUERY, IT WAS STATED BY THE ID. AR THAT THE ASSESSEE CLAIMED DEDUCTION FOR THE PROPORTIONATE PART OF DISCOUNT FOR THE SECOND, THIRD AND FOURTH YEAR AT THE END OF THE FIRST YEAR ITSE LF BECAUSE 25% OF OPTIONS VESTED IN THE EMPLOYEES AT THE END OF THE FIRST TO FOURTH YEAR EACH. THIS DEFIES ALL LOGICS AND RATIONALITIES. WHEN THE OPTIONS VEST EQUALLY OVER A PERIOD OF FOUR' YEARS, IT IS BUT NATURAL THAT THE COMPANY WOULD INCUR EQUAL 30 PEO PLE INTERACTIVE INDIA PRIVATE LIMITED ITA NOS.6990,6986,4979/ MUM! 2013 ASSESSMENT YEARS : 2007 - 08,2008 - 09,2009 - 10 LIABILITY FOR THE DIS COUNTED PREMIUM @ 25% OF TOTAL DISCOUNT ON RECEIPT OF SERVICES OF THE EMPLOYEES AT THE END OF EACH YEAR. THE WAY IN WHIC H THE ASSESSEE HAS CLAIMED DEDUCTION RUNS CONTRARY EVEN TO THE SEBI GUIDELINES, 41 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. WHICH ALSO PROVIDE FOR DEDUCTION ON STRAIGHT LINE BASIS. THE MANNER OF THE ASSESSEE'S CLAIMING DEDUCTION HAS RESULTED IN NEEDLESSLY INCREASING THE AMOUNT OF DEDUCTION FOR THE F IRST YEAR AT THE COST OF DEDUCTION FOR THE SUBSEQUENT THREE YEARS. IT NEEDS TO BE SET RIGHT BY APPORTIONING THE TOTAL AMOUNT OF THE DISCOUNTED PREMIUM EVENLY OVER THE VESTING PERIOD OF FOUR YEARS. C. IT HAS BEEN NOTICED ABOVE THAT THE STAGE FOR THE GRANT O F DEDUCTION OF DISCOUNT IS ON THE RESPECTIVE VESTING OF THE OPTIONS. IN ESOP 2000, THE VESTING TAKES PLACE @ 25% AFTER EACH YEAR OF SERVICE. IT MEANS THAT THE FIRST PART OF 25% DEDUCTION WOULD BE AVAILABLE ON THE COMPLETION OF ONE YEAR FROM THE DATE OF GRA NT OF OPTION. THE ASSESSEE WAS REQUIRED TO INDICATE THE DATE OF GRANT OF OPTIONS IN RESPECT OF WHICH DEDUCTION HAS BEEN CLAIMED IN THE INSTANT YEAR. TWO LETTERS GRANTING OPTIONS TO SHRIMURALI KRISHNAN K.N. AND NEVILLE BAIN HAVE BEEN RANDOMLY FILED WHICH AR E DATED 2ND APRIL, 2002. IF THE OPTIONS ARE GRANTED ON 2ND APRIL, 2002, THEN 25% OF THE TOTAL OPTION SHALL VEST 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 DEDUCTIBLE I N THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2004 - 2005 AND NOT 2003 - 2004. THE ID. AR CONTENDED THAT THOUGH THESE LETTERS ARE DATED 2ND APRIL, 2002, BUT IN FACT THE OPTIONS WERE GRANTED ON 1ST APRIL, 2002. THE CORRECT DATE OF GRANT AND VESTING NEEDS TO B E VERIFIED AT THE AO'S END. D. THE ID. AR HAS STATED THAT THE AMOUNT OF DISCOUNT CLAIMED AS DEDUCTION IN THE EARLIER YEARS IN RESPECT OF UNVESTING/LAPSING OPTIONS HAS BEEN REVERSED AT THE RELEVANT TIME. THERE IS NO FINDING EITHER IN THE ASSESSMENT OR THE I MPUGNED ORDER IN THIS REGARD. THIS FACT SHOULD ALSO BE VERIFIED BY THE AO TO ENSURE THAT THE OVERALL EXPENDITURE BOOKED BY THE COMPANY IS RESTRICTED ONLY TO THE EXTENT OF THE EXERCISED OPTIONS.' 42 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. THE HON'BLE SPECIAL BENCH IN THE CASE OF BIOCON LIMITED(SUPRA ) HAS HELD THAT DISCOUNT UNDER ESOP IS IN THE NATURE OF EMPLOYEES COST AND IS HENCE DEDUCTIBLE DURING THE VESTING PERIOD W.R.T THE MARKET PRICE OF SHARE AT THE TIME OF GRANT OF OPTIONS TO THE EMPLOYEES. THE HON'BLE 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 UNVESTING/LAPSING OPTIONS AT THE APPROPRIATE TIME HOWEVER, AN 31 PEOPLE INTERACTIVE INDIA PRIVATE LIMITED ITA NOS.6990,6986,4979/ MUM/ 2013 ASSESSMENT YE ARS : 2007 - 08,2008 - 09,2009 - 10 ADJUSTMENT TO THE INCOME IS CALLED FOR AT THE TIME OF EXERCISE OF OPTION BY THE AMOUNT OF DIFFERENCE IN THE AMOUNT OF DISCOUNT CALCULATED WITH REFERENCE TO THE MARKET PRICE AT THE TIME OF GRANT OF OPTION AND THE MARKET PRICE A T THE TIME OF EXERCISE OF OPTION. NO CONTRARY DECISION IS BROUGHT TO OUR NOTICE BY THE REVENUE. WE HOLD THAT THIS DISC OUNT OF RS.81,93,150/ - ON ISSUE OF ESOP BEING REVENUE EXPENDITURE ISSQUARELY COVERED IN FAVOUR OF THE ASSESSEE COMPANY BY DECISION OF HON' BLE SPECIAL BENCH BAN GALORE TRIBUNAL IN THE ORDERS OF BIOCON LIMITED(SUPRA) WHICH IS BINDING ON US. RESPECTFULLY FOLLOWING THE DECISION OF HON'BLE SPECIAL BENCH, BANGALORE TRIBUNAL IN BIOCONLIMITED(SUPRA), WE DECIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE COM PANY AND AGAINST THE REVENUE THAT DISCOUNT UNDER ESOP IS IN THE NATURE OF EMPLOYEES COST AND IS HENCE DEDUCTIBLE DURING THE VESTING PERIOD W.R.T THE MARKET PRICE OF SHARE AT THE TIME OF GRANT OF OPTIONS TO THE EMPLOYEES. THE AMOUNT OF DISCOUNT CLAIMED AS D EDUCTION DURING THE VESTING PERIOD IS REQUIRED TO BE REVERSED IN RELATION TO THE I NVESTING/LAPSING OPTIONS AT THE APPROPRIATE TIME, HOWEVER, AN ADJUSTMENT TO THE INCOME IS CALLED FOR AT THE TIME OF EXERCISE OF OPTION BY THE AMOUNT OF DIFFERENCE IN THE AMOU NT OF DISCOUNT CALCULATED WITH REFERENCE TO THE MARKET PRICE AT THE TIME OF GRANT OF OPTION AND THE MARKET PRICE AT THE TIME 43 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. OF EXERCISE OF OPTION. THUS, WE HOLD THAT DISCOUNT ON ISSUE OF EMPLOYEES STOCK OPTION IS ALLOWABLE AS DEDUCTION IN COMPUTING THE IN COME UNDER THE HEAD 'PROFIT AND GAINS OF BUSINESS OR PROFESSION' IN LIGHT OF DECISION BY HON'BLE SPECIAL BENCH ,BANGALORE TRIBUNAL IN THE CASE OF BIOCON LIMITED (SUPRA) IN THE INSTANT CASE WE HAVE NOTICED THAT THE AO HAS REFUSED TO GRANT THE DEDUCTION OF T HE DISCOUNT ON ESOP AT THE VERY THRESHOLD AND THE CIT(A) HAS ALLOWED THE SAID 32 PEOPLE INTERACTIVE INDIA PRIVATE LIMITED ITA NOS. 6990,6986,4979/ MUM/ 2013 ASSESSMENT YEARS : 200708,2008 - 09,2009 - 10 CLAIM BASED ON THE DECISION OF HON'BLE SPECIAL BENCH IN T HE CASE OF BIOCON LIMITED(SUPRA) . RESULTANTLY, THE VERIFICATION OF CORRECTNESS OF CALCULATION OF DISCOUNT STOOD OUSTED AND HAVE BECOME NOW IMPERATIVE IN VIEW OF OUR DIRECTIONS IN LIGHT OF HON'BLE SPECIAL BENCH, BANGALORE TRIBUNAL ORDERS IN BIOCON LTD (SUP RA) WHICH ARE BINDING ON US AND ALSO FOLLOWED BY US. WE, THEREFORE, REMIT THE MATTER TO THE FILE OF AO FOR FINDING OUT THE CORRECT AMOUNT OF DEDUCTION ACCORDINGLY IN LIGHT OF OUR ORDERS WHICH ARE BASED ON THE BINDING ORDERS OF HON'BLE SPECIAL BENCH, BANAGL ORE TRIBUNAL IN THE CASE OF BIOCON LIMITED(SUPRA). WE ORDER ACCORDINGLY. 14. BEFORE PARTING IT IS IMPORTANT TO MENTION THAT THE AMOUNT OF DISCOUNT CLAIMED AS DEDUCTION WITH RESPECT TO THE ESOP I S TO BE REVERSED IN RESPECT OF I NVESTING/LAPSING OPTIONS DURIN G RELEVANT ASSESSMENT AS PER THE ORDERS OF HON'BLE SPECIAL BENCH IN BIOCON LIMITED(SUPRA) FOR WHICH THERE IS NO FINDING OF FACT IN THE ASSESSMENT ORDER OR THE IMPUGNED ORDERS. THIS FACT SHOULD ALSO BE VERIFIED BY AO TO ENSURE THAT THE OVERALL EXPENDITURE B OOKED BY THE ASSESSEE COMPANY IS RESTRICTED ONLY TO THE EXTENT OF THE EXERCISED OPTIONS FOR WHICH THE ASSESSEE COMPANY WILL BE GIVEN LIBERTY TO LEAD ANY FRESH EVIDENCE IN ITS DEFENCE AND PROPER AND ADEQUATE OPPORTUNITY IN ACCORDANCE WITH LAW WILL BE GIVEN BY THE AO TO THE ASSESSEE COMPANY IN ACCORDANCE WITH PRINCIPLES OF NATURAL JUSTICE. 44 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. 15. OUR DECISION IN ABOVE ORDER IN THE APPEAL NO. ITA NO.6990/MUM./2013 FOR ASSESSMENT YEAR2007 - 08 SHALL APPLY MUTATIS MUTANDIS TO THE APPEAL NOS. ITA NO.6986/MUM/2013 AND ITA NO.4979/MUM/2013 FOR ASSESSMENT YEAR 2008 - 09 AND 2009 - 10 WHERE IDENTICAL ISSUE IS RAISED.' 6.3 AS OF NOW, THE ISSUE HAS TO BE DECIDED IN FAVOUR OF THE APPELLANT BECAUSE IT IS COVERED BYTHE DECISION OF THE HON'BLE ITAT MUMBAI IN APPELLANT'S OWN CASE. TH E HON'BLE ITAT HAS DECIDEDTHE ISSUE WITH THE SPECIAL BENCH IN THE CASE OF BIOCON LIMITED VS. DOT (LTU) (2013) 35 TAXMANN.COM 33 (SB), BANGALORE. HOWEVER, THIS IS SUBJECT TO CHANGE DEPENDING UPON THE FINAL OUTCOME OF BIOCON LIMITED IN HIGH COURT/SUPREME COU RT. AFTER HAVING GONE THROUGH THE FACTS OF THE PRESENT CASE AS WELL AS CONSIDERING THE ORDERS PASSED BY REVENUE AUTHORITIES AND SUBMISSIONS MADE BY BOTH THE PARTIES, WE FIND THAT THE PRESENT CASE IS FULLY COVERED BY THE ORDER OF HONBLE ITAT IN ASSESSEES OWN CASE , THEREFORE , RESPECTFULLY FOLLOWING THE DECISION OF THE COORDINATE BENCH OF HONBLE ITAT IN ITA NO. 6690 & 6986/MUM/13 FOR AY 2007 - 08 & 2008 - 09 IN ASSESSEES OWN CASE . WE HAVE NO REASON S TO INTERFERE INTO OR DEVIATE FROM THE FINDINGS RECORDED BY THE LD. CIT (A) AS THE SAME ARE BASED ON THE ORDERS PASSED BY HONBLE ITAT. HENCE , WE ARE OF THE 45 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. CONSIDERED VIEW THAT THE FINDINGS SO RECORDED BY THE LD. CIT (A) ARE JUDICIOUS AND ARE WE LL REASONED. RESULTANTLY, THESE GROUND S RAISED BY THE REVENUE STANDS DISMISSED . ITA NO. 5133/MUM/2016 (AY 2011 - 12) 8. NOW WE TAKE UP REVENUE S APPEAL IN ITA NO. 5133/MUM/2016 FOR AY 2011 - 12 . SINCE WE HAVE ALREADY DECIDED THE SIMILAR GROUNDS OF APPEAL IN ITA NO. 5132 /M UM/2016 FOR AY 2010 - 11 ON MERITS. THEREFORE , FOLLOWING OUR OWN DECISION IN ITA NO. 5132 /MUM /16 , WE APPLY THE SAME FINDINGS IN THE PRESENT APPEAL IN ORDER TO MAINTAIN JUDICIAL CONSISTENCY WHICH IS APPLICABLE MUTATIS MUT ANDIS . 9. IN THE NET RESULT, BOTH THE APPEALS FILED BY THE REVENUE STA NDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST FEB , 2018 SD/ - SD/ - ( R. C. SHARMA ) (SANDEEP GOSAIN) / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI ; DATED : 21 . 02 .201 8 SR.PS . DHANANJAY 46 I.T.A. NO. 5 132 & 5133 /MUM/201 6 PEOPLE INTERACTIVE (I) PVT. LTD. / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. ( ) / THE CIT(A) 4. / CIT - CONCERNED 5. , , / DR, ITAT, MUMBAI 6. / GUARD F I LE / BY ORDER, . / (DY./ASSTT.REGISTRAR) , / ITAT, MUMBAI