KORN FERRY INTERNATIONAL P.LTD, MUMBAI V. DCIT 3(2), MUMBAI

ITA 5152/MUM/2012

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 3222 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 7 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-03-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 21-10-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 13-08-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M MURLI
• Keywords: Fair market value
• Section: 14A; 37(1)

Judgement Text

INCOME-TAX APPELLATE TRIBUNAL -ABENCH MUMBAI , , BEFORE S/SHJOGINDER SINGH,JUDICIAL MEMBER & RAJENDRA,ACCOUNTANT MEMBER ./ITA.S.5152/MUM/2012 , / ASSESSMENT YEAR :2008-09 KORN FERRY INTERNATIONAL PVT. LTD. PIRAMAL TOWER, PENNINSULA COPORATE PARK, LOWER PAREL MUMBAI-400 013. PAN:AAACW 0577 B VS. DCIT-3(2) MUMBAI. ( /APPELLANT ) ( / RESPONDENT ) REVENUE BY: SHRI M/ MURLI ASSESSEE BY: MS. NEHA PARANJPE / DATE OF HEARING :31.03.2016 / DATE OF PRONOUNCEMENT : 31.03.2016 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA,A.M. - CHALLENGING THE ORDER DT.17.5.12 OF THE CIT(A)-4 MU MBAI THE ASSESSEE HAS FILED THE PRESENT APPEAL. ASSESSEE -COMPANY, ENGAGED IN THE BUSINESS OF EXECUTIVE SEARCH, CONSULTING AND RELATED SEARCH,FILED ITS RETURN OF INCOME ON 30.9.0 8 DECLARING TOTAL INCOME OF RS.17.16 CRORES.THE ASSESSING OFFICER (AO) COMPLETED THE ASS ESSMENT U/S.143. ON 29.3.2012,DETERMINING THE INCOME OF THE ASSESSEE AT RS.18.38 CRORES. 2. THE FIRST GROUND OF APPEAL IS ABOUT DISALLOWANCE OF RS.2.74 LAKS, MADE U/S.14A OF THE ACT. DURING THE ASSESSMENT PROCEEDINGS THE AO FOUND THAT THE ASSESSEE HAD CLAIMED DIVIDEND INCOME OF RS.18.33 LAKHS,THAT IT HAD OFFERED NO DIS ALLOWANCE U/S. 14A ON ACCOUNT OF EXPENSES RELATING TO DIVIDEND INCOME.THE AO APPLIED RULE 8D OF THE INCOME TAX RULES, 1962(RULES) AND MADE A DISALLOWANCE OF RS.2,74,489/-(0.5% OF AV ERAGE VALUE OF INVESTMENT). 3. AGGRIEVED BY THE ORDER OF THE AO,THE ASSESSEE PREFE RRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY(FAA).BEFORE HIM, IT WAS ARGUED THAT THE ASSESSEE HAD MADE INVESTMENT IN MUTUAL FUNDS ONLY, THAT INVESTMENT WAS MADE OUT OF ASSESSEES OWN FUNDS, THAT NO OTHER EXPENDITURE WAS INCURRED REGARDING DIVIDEND INCOME. AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE AN D THE ASSESSMENT ORDER THE FAA HELD THAT NO DISALLOWANCE HAD BEEN MADE UNDER THE HEAD INTERE ST EXPENDITURE, THAT MAKING OF INVESTMENT OUT OF OWN FUNDS HAD NO RELEVANCE,THAT O NLY OTHER ADMINISTRATIVE EXPENSES HAD BEEN DISALLOWED AS PER RULE 8D OF THE RULES. REFERR ING TO THE JUDGMENT OF GODREJ & BOYCE LTD.(328ITR81) THE FAA UPHELD THE ORDER OF THE AO. 4 .BEFORE US,THE AUTHORISED REPRESENTATIVE (AR) STATE D THAT IT HAD CLAIMED AN EXPENDITURE FOR EARNING THE DIVIDEND INCOME,THAT THE AO HAD MECHANI CALLY APPLIED THE PROVISIONS OF SECTION 14A R.W.RULE 8D OF THE RULES.HE RELIED UPON THE CAS E OF OM PRAKASH KHAITAN (376ITR390) OF HONBLE DELHI HIGH COURT.DEPARTMENTAL REPRESENTA TIVE (DR) LEFT THE ISSUE TO THE DISCRETION OF THE BENCH. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE AO HAD NOT MENTIONED AS TO HOW MUCH EXPENDITURE WAS INCURRED BY THE ASSESSEE FOR EARNING 5152/M/12-KORNFERRY 2 TAX FREE INCOME. WE ARE OF THE OPINION THAT, IF THE ASSESSEE HAD NOT INCURRED ANY EXPENDITURE TO EARN TAX FREE INCOME, THEN, THE AO CANNOT INVOKE THE PROVISIONS OF SECTION 14A R.W. RULE 8D OF THE RULES.FIRST OF ALL, THE AO HAS TO RECORD HIS SATISFACTION ABOUT INVOKING THE PROVISIONS AND HAS TO DECIDE THE ISSUE AFTER OBTAIN ING THE EXPLANATION OF THE ASSESSEE .WE ALSO DO NOT ENDORSE THE VIEW OF THE FAA THAT INVESTMENT OUT OF THE OWN FUNDS HAS NO RELEVANCE FOR MAKING THE DISALLOWANCE.WE FIND THAT IN THE CASE OF OM PRAKASH KHAITAN(SUPRA), THE HONBLE DELHI HIGH COURT HAS HELD THAT IN ORDER TO DISALLOW THE EXPENDITURE THERE MUST BE A NEXUS BETWEEN THE EXPENDITURE INCURRED AND THE INCOME NOT FORMING THE PART OF THE TOTAL INCOME.CONSIDERING THE ABOVE, WE REVERSE THE ORDER OF THE FAA.GROUND NO.1 IS DECIDED IN FAVOUR OF THE ASSESSEE. 6. NEXT GROUND OF APPEAL IS ABOUT ADDITION OF RS.56.40 LAKHS OUT OF THE EXPENDITURE INCURRED UNDER ESOP(EMPLOYEE STOCK OPTION SCHEME).DURING THE ASSESSMENT PROCEEDINGS,THE AO FOUND THAT THE ASSESSEE HAD DEBITED AN AMOUNT OF RS .1.07 CRORES UNDER THE HEAD COST OF STOCK AWARDED TO KF INDIA EMPLOYEES.BEFORE THE AO, THE AS SESSEE STATED THAT THE EXPENDITURE WAS ON ACCOUNT OF ESOP.ON PERUSAL OF THE TAX AUDIT REPO RT, THE AO FOUND THAT THE ASSESSEE HAD PAID FRINGE BENEFIT TAX(FBT)ONLY ON AMOUNT OF RS.50 .65 LAKHS.THE AO DIRECTED THE ASSESSEE TO EXPLAIN AS TO WHY FBT HAD NOT BEEN PAID TO WHOLE AMOUNT.THE ASSESSEE VIDE ITS LETTER,DT.29.12.12,STATED THAT THE VALUE OF FBT TAK EN FOR ESOP(RS.50.65LAKHS) AS AGAINST COST OF STOCK AWARDED TO KF EMPLOYEES(RS.1.07CRORES),THA T THE AMOUNT OF RS.50.65 REPRESENTED THE VALUE OF ESOP, THAT HAD BEEN VESTED WITH THE EM PLOYEES DURING FY 2007-08 AND CONSEQUENTLY CONSIDERED FOR FBT, THAT THE AMOUNT OF RS.1.07CRORES REPRESENTED THE AMOUNT CHARGED BY KORN FERRY INTERNATIONAL USA TO KORN FER RY INTERNATIONAL PVT. LTD. INDIA, TOWARDS STOCK AWARDED TO THE EMPLOYEES OF THE ASSESSEE . AFTER CONSIDERING THE SAME THE AO HELD THAT DURING THE YEAR UNDER CONSIDERATION ONLY A PART (RS. 50. 65 LAKHS)OUT OF THE TOTAL AMOUNT (RS.1.07C RORES) WAS DEBITED TO P&L A/C. WAS VESTED IN EMPLOYEES,THAT THE BALANCE AMOUNT WOULD BE VESTE D IN EMPLOYEES OVER A PERIOD OF TIME, THAT THE ASSESSEE HAD NOT PAID FBT ON RS.56.40 LAKH S,THAT LIABILITY COULD EVENTUALLY INCREASE OR DECREASE IN FUTURE,THAT IT HAD NOT PRODUCED ANY EVIDENCE AS TO THE FACT THAT AMOUNT IN QUESTION WAS ACTUALLY PAID.FINALLY,THE AO MADE AN A DDITION OF RS.56,40,195/- TO THE TOTAL INCOME OF THE ASSESSEE. 7. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PREF ERRED AN APPEAL BEFORE THE FAA. BEFORE HIM,IT WAS ARGUED THAT ALLOWABILITY OF ESOP EXPENSE S AND PAYMENT OF FBT FOR ESOP WERE TWO DIFFERENT CONCEPTS,THAT THE FBT WOULD BECOME PA YABLE UPON VESTING OF THE ESOP IN THE HANDS OF THE EMPLOYEES ACCORDINGLY THE ASSESSEE HAD PAID FBT DURING THE YEAR, THAT ASSESSEE HAD MADE FULL PAYMENT OF RS.1.07 CRORES TO ITS PARE NT COMPANY ,THAT IT HAD CLAIMED THE COST OF STOCK AWARDED TO ITS EMPLOYEES ENTIRELY BASED ON ES OP SCHEME GOVERNED BY THE SEBI GUIDELINES,THAT THE ESOP EXPENDITURE WAS A MEASURE IN THE NATURE OF COMPENSATION COST AND WAS FULLY DEDUCTIBLE IN COMPUTING THE TAXABLE INCOM E.THE FAA ,IN HIS ORDER, HELD THAT THE ASSESSEE ITSELF HAD NOT TREATED THE ENTIRE AMOUNT A S LIABILITY, THAT ESOP WOULD BE EFFECTIVE ONLY ON THE DISCRETION OF THE EMPLOYEES TO OPT FOR STOCKS, THAT PAYMENT FOR SHARES WAS EITHER A PROVISION OR AN INVESTMENT,THAT NO LIABILITY IN THA T REGARD HAD CRYSTALLISED. 8. BEFORE US,THE AR REITERATED THE ARGUMENTS THAT WERE ADVANCED BEFORE THE FAA.HE RELIED UPON THE CASE OF BIOCON LTD.(144ITD21)(SB)(BANG.); NOVO NORDISK INDIA PVT. LTD.(42 TAXMANN.COM168).DR SUPPORTED THE ORDER OF THE FAA. 9. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT STOCK OPTIONS OF THE PARENT COMPANY WERE OFFERED TO THE EMPLOYEES OF THE ASSESSEE COMPANY,THAT 5152/M/12-KORNFERRY 3 THE ASSESSEE HAD MADE PAYMENT OF RS.1.07 CRORES TO THE PARENT COMPANY,THAT DURING THE YEAR FBT WAS PAID FOR SUM OF RS.50.65 LAKHS.IN OUR OPINI ON,ONCE A STOCK OPTION IS GRANTED TO AND EXERCISED BY THE EMPLOYEE OF AN ASSESSEE THE LIABIL ITY IN THAT BEHALF IS ASCERTAINED AND COST IS ALLOWABLE IN THE YEAR IN WHICH STOCK OPTIONS ARE G RANTED.WE FIND THAT IN THE CASE OF NOVO NORDISK INDIA PVT. LTD.(SUPRA),IT HAS BEEN HELD THA T IN TERMS OF ESOP IF AN ASSESSEE OFFERS SHARES OF ITS PARENT COMPANY TO ITS EMPLOYEES,THE D IFFERENCE BETWEEN THE FMV OF THE SHARES OF THE PARENT COMPANY ON DATE OF ISSUE OF SHARES A ND THE PRICE AT WHICH THOSE SHARES WERE ISSUED BY THE ASSESSEE TO ITS EMPLOYEES HAD TO BE REGARDED AS EXPENDITURE INCURRED FOR BUSINESS PURPOSES ALLOWABLE U/S. 37(1) OF THE ACT.R ESPECTFULLY FOLLOWING THE ABOVE DECISION, WE DECIDE GROUND NO.2 IN FAVOUR OF THE ASSESSEE . AS A RESULT, APPEAL FILED BY THE ASSESSEE STA NDS ALLOWED. !'# $ % & '() * . ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST ,MARCH, 2016. 31 , 2016 SD /- SD/- ( /JOGINDER SINGH) ( / RAJENDRA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED : 31.03.2016. JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR A BENCH, ITAT, MUMBAI / , A , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.