TATA CONSULTANCY SERVICES LTD, MUMBAI V. ADDL CIT 2(3), MUMBAI

ITA 6820/MUM/2010

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 2660 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 1 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-11-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 29-01-2015
• Assessment Year: 2005-2006
• Appeal Filed On: 28-09-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: N K CHAND
• Assessee Lawyers: DINESH VYAS
• Keywords: Business income; Depreciation; Business expenditure; Earning of tax free income; Question of law; Capital receipt; Capital expenditure
• Section: 14A; 37(1); 10B; 6; 90

Judgement Text

IN INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH E MUMBAI . BEFORE SH. A.D. JAIN, JUDICIAL MEMBER AND SH. RAJENDRA, ACCOUNTANT MEMBER ITA NO.6820/M/2010 ASSESSMENT YEAR: 2005-06 PAN : AAACR4849R M/S. TATA CONSULTANCY SERVICES LTD. VS. ADDL. COMMR . OF INCOME-TAX, 9 TH FLOOR, NIRMAL BUILDING, RANGE 2(3), NARIMAN POINT, MUMBAI. MUMBAI. (APPELLANT) (RESPONDENT) APPELLANT BY:SH. DINESH VYAS, SR. ADVOCATE RESPONDENT BY:SH. N.K. CHAND, CIT(DR) DATE OF HEARING : 30/07/2015 DATE OF PRONOUNCEMENT: 04/11/2015 ORDER PER A.D. JAIN, JM THIS IS ASSESSEES APPEAL FOR THE ASSESSMENT YEAR 2005-06 AGAINST THE ORDER DATED 03.08.2010, PASSED BY THE LD. CIT(A)-15 , MUMBAI. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. THE LD. CIT(A) [HEREINAFTER REFERRED TO AS THE CIT( A)] ERRED IN LAW AND ON FACTS IN NOT ALLOWING DEDUCTION OF TAXES ON ASSESSEES INCOME PAID TO THE FEDERAL GOVERNMENT OV ERSEAS OF RS.199,98,80,754/- ON THE GROUND THAT THESE TAXES A RE COVERED UNDER THE PROVISIONS OF SECTION 40(A)(II) OF THE IN COME TAX ACT, 1961 (THE ACT). ITA NO.6820/MUM/2010 ASSTT. YEAR : 2005-06 2 2. THE LD. CIT(A) ERRED IN LAW AND ON FACTS IN NOT ALLOWING DEDUCTION OF INTEREST OF RS.4,61,683/- PAID FOR DEL AY IN PAYMENT OF OVERSEAS TAX U/S 40(A) OF THE ACT. 3. THE LD. CIT(A) ERRED IN LAW AND ON FACTS IN TREA TING EXPENDITURE OF RS.38,59,97,989/- INCURRED ON PURCHASE OF APPLIC ATION SOFTWARE PRODUCTS AS CAPITAL EXPENDITURE. 4. (A) THE LD. CIT(A) ERRED IN LAW IN CONFIRMING TH E ADDITION MADE BY LD. ADDL. CIT (HEREINAFTER REFERRED TO AS T HE LD. ACIT} BY INVOKING THE PROVISIONS OF RULE 8D READ WITH SEC TION 14A OF THE ACT, ON THE GROUND THAT RULE 8D IS RETROSPECTIV E IN NATURE AND HENCE APPLICABLE TO THE ASSESSEE YEAR UNDER APP EAL. (B) WITHOUT PREJUDICE TO THE ABOVE, THE LD. CIT(A) ERRED ON FACTS IN NOT CONSIDERING THE APPELLANTS SUBMISSION THAT INTEREST EXPENDITURE OF RS.10,38,82,525/- PERTAINS TO INTERE ST ON PRE- SHIPMENT LOANS, THE SAME BEING FOR THE PURPOSE OF T HE BUSINESS OF THE COMPANY CANNOT BE CONSIDERED FOR ALLOCATION U/S 14A. 5. THE LD. CIT(A) ERRED IN TREATING THE EXPENDITUR E ACCOUNTED BY THE APPELLANTS AS PRESCRIBED BY THE ACCOUNTING STAN DARD UNDER ITS EMPLOYEE STOCK PURCHASE SCHEME AS CAPITAL EXPEN DITURE. 6. A) THE LD. CIT(A) ERRED IN LAW AND ON FACTS IN N OT ALLOWING THE CLAIM OF SET OFF OF LOSS OF RS.21,27,69,208/- P ERTAINING TO CERTAIN STP UNITS AGAINST TAXABLE BUSINESS INCOME O F THE APPELLANT AS REQUIRED U/S 70 OF THE ACT. B) WITHOUT PREJUDICE TO THE ABOVE, THE LD. CIT(A) ERRED IN NOT DIRECTING THE LD. ACIT TO CONSIDER THE REVISED LOSS AFTER MAKING ADJUSTMENT ON ACCOUNT OF DISALLOWANCE MADE I N ASSESSMENT ORDER INSTEAD OF THE LOSS OF RS.21,27,69 ,208/- AS CLAIMED IN RETURN OF INCOME. 2. APROPOS GROUND NO.1, THE AO MADE DISALLOWANCE OF RS. 216,27,28,117/- REPRESENTING OVERSEAS TAX PAID, BEI NG FEDERAL TAX PAID IN USA, CANADA AND OTHER OVERSEAS BRANCHES AND STATE T AXES IN USA AND ITA NO.6820/MUM/2010 ASSTT. YEAR : 2005-06 3 CANADA CLAIMED AS DEDUCTION IN THE RETURN OF INCOME . THE AO HELD THAT SUCH TAXES WERE COVERED BY THE PROVISIONS OF SECTION 40( A)(II) OF THE INCOME-TAX ACT, 1961 (IN SHORT, THE ACT). 3. THE LD. CIT(A) UPHELD THE DISALLOWANCE, OBSERVI NG THAT THE AMENDED PROVISIONS OF SECTION 40(A)(II) OF THE ACT BY WAY OF INSERTION OF EXPLANATION-1 IS CLARIFICATORY IN NATURE AND, THUS, RETROSPECTIVE IN EFFECT. 4. SECTION 40(A)(II) AND EXPLANATION-1 THERETO READ S AS FOLLOWS: 40. NOTWITHSTANDING ANYTHING CONTRARY IN SECTION 3 0 TO 38, THE FOLLOWING AMOUNTS SHALL NOT BE DEDUCTED IN COMPUTIN G THE INCOME CHARGEABLE UNDER THE HEAD PROFITS & GAINS OF BUSIN ESS OR PROFESSION. IN THE CASE OF ANY ASSESSEE- (II) ANY SUM PAID ON ACCOUNT OF ANY RATE OR TAX LEV IED ON THE PROFITS OR GAINS OF ANY BUSINESS OR PROFESSION OR ASSESSED AT A PROPORTION OF, OR OTHERWISE ON THE BASIS OF, ANY SUCH PROFITS OR G AINS; EXPLANATION-1- FOR THE REMOVAL OF DOUBTS, IT IS HE REBY DECLARED THAT FOR THE PURPOSES OF THIS SUB-CLAUSE, ANY SUM PAID O N ACCOUNT OF ANY RATE OR TAX LEVIED INCLUDES AND SHALL BE DEEMED ALW AYS TO HAVE INCLUDED ANY SUM ELIGIBLE FOR RELIEF OF TAX U/S 90 OR, AS THE CASE MAY BE, DEDUCTION FROM THE INDIAN INCOME-TAX PAYABLE UN DER SECTION 91. 5. AS FAIRLY CONTENDED ON BEHALF OF THE ASSESSEE, T HE MATTER STANDS DECIDED AGAINST THE ASSESSEE BY THE MUMBAI BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE, IN ITA NO.4776/M/2004. AN APPE AL AGAINST THE SAID TRIBUNAL ORDER STANDS ADMITTED BEFORE THE HONBLE H IGH COURT IN THE CASE OF ITA NO.6820/MUM/2010 ASSTT. YEAR : 2005-06 4 THE ASSESSEE IN ITA NO.2024 OF 2011, ON THE FOLLOWI NG SUBSTANTIAL QUESTION OF LAW: WHETHER ON THE FACTS AND CIRCUMSTANCES AND IN LAW, THE TRIBUNAL WAS RIGHT IN HOLDING THAT THE STATE TAXES PAID BY THE ASSESSEE IN JURISDICTION OTHER THAN INDIA WERE NOT DEDUCTIBLE AS BUSINESS EXPENDITURE ? 6. A COPY OF THE ORDER OF THE HONBLE HIGH COURT, A DMITTING THE ABOVE QUESTION, AS PASSED ON 20.02.2013, HAS BEEN PLACED IN THE CASE LAWS PAPER BOOK. HOWEVER, SINCE THE OPERATION OF THE ORDER OF THE TRIBUNAL HAS NOT BEEN STAYED, THE EFFECTIVE ORDER IN OPERATION AS ON DATE IS THAT OF THE TRIBUNAL, WHEREBY THE MATTER STANDS DECIDED AGAINST THE ASSES SEE. THEREFORE, GROUND NO.1 IS REJECTED. 7. IN SO FAR AS REGARDS GROUND NO.2, AS PER THE RE CORD, THE ASSESSEE HAD PAID RS.4,61,683/- AS PENAL INTEREST IN USA TOWARDS LATE PAYMENT OF TAX. THIS WAS CLAIMED AS A DEDUCTION. THE AO DISALLOWED THE CLAIM, HOLDING THE PROVISIONS OF SECTION 40(A)(II) OF THE ACT TO BE A PPLICABLE. IT WAS OBSERVED THAT THE LATE FILING OF RETURN OR LATE PAYMENT OF A DVANCE TAX OR IMPROPER PAYMENT OF ADVANCE TAX IS COMPENSATORY IN NATURE AN D IS A PART AND PARCEL OF THE TAX COVERED U/S 40(A)(II) OF THE ACT. THE LD. C IT(A) UPHELD THE DISALLOWANCE OF PENAL INTEREST. ITA NO.6820/MUM/2010 ASSTT. YEAR : 2005-06 5 8. THIS MATTER IS ALSO COVERED AGAINST THE ASSESSEE BY THE TRIBUNAL DECISION IN ASSESSEES OWN CASE IN ITA NO.4776/M/20 04 (SUPRA). THEREFORE, GROUND NO.2 IS ALSO REJECTED. 9. AS PER GROUND NO.3, THE LD. CIT(A) ERRED IN TRE ATING EXPENDITURE OF RS.38,59,97,989/-, INCURRED ON PURCHASE OF APPLICAT ION SOFTWARE PRODUCTS AS CAPITAL EXPENDITURE. 10. AS PER THE RECORD, THE ASSESSEE INCURRED EXPENS ES OF RS.38,59,97,989/- ON ACCOUNT OF SOFTWARE ACQUIRED WITHIN INDIA FOR FA CILITATING ITS BUSINESS OPERATION. THE AO DISALLOWED THE EXPENDITURE CLAIME D AND TREATED IT AS A CAPITAL EXPENDITURE. THE LD. CIT(A) CONFIRMED THE D ISALLOWANCE, OBSERVING THAT SINCE THE SOFTWARE HAD BEEN UTILISED FOR A PER IOD OF MORE THAN ONE YEAR, THE EXPENDITURE COULD NOT BE ALLOWED IN ONE YEAR. T HE TREATMENT OF CAPITALIZING THE EXPENDITURE AND ALLOWING DEPRECI ATION WAS CONFIRMED. 11. THE LD. COUNSEL FOR THE ASSESSEE HAS CONTENDED THAT SINCE DEPRECIATION HAS BEEN ALLOWED WITH A VIEW TO AVOID LITIGATION R EQUIRING THE INTERPRETATION OF A LARGE NUMBER OF SOFTWARE PURCHASE AGREEMENTS, THE ASSESSEE ACCEPTS THE DEDUCTION OF DEPRECIATION. 12. ACCORDINGLY, GROUND NO.3 IS REJECTED, AS INFRUC TUOUS. 13. GROUND NO. 4(A) STATES THAT THE LD. CIT(A) HAS ERRED IN CONFIRMING THE ADDITION MADE BY THE AO BY INVOKING THE PROVISIONS OF RULE 8D OF THE RULES ITA NO.6820/MUM/2010 ASSTT. YEAR : 2005-06 6 READ WITH SECTION 14A OF THE ACT, ON THE GROUND THA T RULE 8D IS RETROSPECTIVE IN NATURE AND HENCE APPLICABLE TO THE YEAR UNDER AP PEAL I.E., 2005-06. 14. AS PER GROUND NO.4(B), WITHOUT PREJUDICE, THE L D. CIT(A) HAS ERRED IN NOT CONSIDERING THE ASSESSEES CONTENTION THAT INTE REST EXPENDITURE OF RS.10,38,82,525/- PERTAINS TO INTEREST ON PRE-SHIP MENT LOANS AND THE SAME BEING FOR THE PURPOSE OF ASSESSEES BUSINESS, IT CA NNOT BE CONSIDERED FOR ALLOCATION U/S 14A OF THE ACT. 15. APROPOS THE MAIN GRIEVANCE OF THE ASSESSEE, DIS ALLOWANCE OF RS.32,24,49,976/- WAS MADE TOWARDS EXPENDITURE INCU RRED TO EARN EXEMPT INCOME. IN THE PROCESS, RULE 8D OF THE RULES WAS AP PLIED RETROSPECTIVELY. THIS DISALLOWANCE WAS CONFIRMED BY THE LD. CIT(A). 16. FOR THE PROPOSITION THAT RULE 8D OF THE RULES H AS NO RETROSPECTIVE APPLICATION, ON BEHALF OF THE ASSESSEE, RELIANCE HA S BEEN PLACED ON GODREJ & BOYCE MANUFACTURING CO. LTD., 328 ITR 81 (BOM.). 17. APROPOS THE ALTERNATIVE CONTENTION, IT HAS BEEN CONTENDED THAT THE INTEREST EXPENDITURE OF PRE-SHIPMENT LOANS AMOUNTIN G TO RS.10,38,82,525/- INCURRED FOR BUSINESS PURPOSES SHOULD NOT BE CONSID ERED FOR DISALLOWANCE U/S 14A OF THE ACT R.W.S. 8D OF THE RULES. IT HAS BEEN CONTENDED THAT FOR THE ASSESSMENT YEARS 2006-07 & 2007-08, THIS STAND OF T HE ASSESSEE HAS BEEN ACCEPTED. ITA NO.6820/MUM/2010 ASSTT. YEAR : 2005-06 7 18. HERE AGAIN, THE LD. DR HAS PLACED STRONG RELIAN CE ON THE IMPUGNED ORDER. 19. NO DECISION CONTRARY TO GODREJ & BOYCE MANUFA CTURING CO. LTD., (SUPRA), HAS BEEN PLACED BEFORE US. AS PER THIS DEC ISION, RULE 8D HAS NO RETROSPECTIVE APPLICATION. THEREFORE, IT WAS NOT AP PLICABLE TO THE YEAR UNDER CONSIDERATION, I.E., 2005-06 AND IT HAS BEEN WRONGL Y APPLIED. IN THIS REGARD, THE DEPARTMENTS CONTENTION THAT THE AO HAS NOT APP LIED THE PROVISIONS OF RULE 8D, BUT HAS RATHER MERELY TAKEN GUIDANCE THERE FROM IS OF NO AVAIL TO THE DEPARTMENT. ONCE RULE 8D IS NOT APPLIED, ACCORDING TO THE ASSESSEE, THE ADDITION IS TO BE SUSTAINED FOR RS.17,000,686/- ONL Y. THIS AMOUNT REPRESENTS THE ACTUAL APPORTIONED EXPENDITURE, THIS BASIS OF D ISALLOWANCE, AS PER THE ASSESSEE, AS WORKED OUT BY THE ASSESSEE HAS BEEN AC CEPTED BY THE DEPARTMENT IN THE ASSESSMENT YEARS 2006-07 & 2007-08. 20. A PERUSAL OF THE ASSESSMENT ORDER FOR AY 2006- 07, A COPY WHEREOF HAS BEEN PLACED ON RECORD, SHOWS THAT THE AO HAS FO LLOWED/CARRIED OUT THE DRPS DIRECTION. SIMILAR IS THE CASE FOR THE A.Y. 2 007-08. 21. FOR ASSESSMENT YEAR 2006-07, THE AMOUNT OF RS.1 6,73,399/-(EMPLOYEE AND OTHER COST OF TREASURY GROUP) AND INTEREST COS T OF RS.30,4000/- WAS TAKEN TO BE DIRECT AND INDIRECT EXPENSES HAVING PROXIMI TY WITH THE EARNING OF EXEMPTED INCOME. THEREFORE, A TOTAL OF RS.19,77,399 /- WAS DISALLOWED. THE ITA NO.6820/MUM/2010 ASSTT. YEAR : 2005-06 8 ASSESSEE GOT A RELIEF OF RS.3,44,60,044/-. FOR THE ASSESSMENT YEAR 2007-08, THE AMOUNT OF RS.29,17,084/- (EMPLOYEE COST AND SU CH OTHER COST OF TREASURY GROUPS) AND ( INTEREST COST OF RS.70,792/- WAS TAKE N TO BE DIRECT AND INDIRECT EXPENDITURE HAVING PROXIMITY OF EXEMPTED INCOME). T HUS, A TOTAL OF RS.29,876/- WAS DISALLOWED. 22. ACCORDINGLY, FOR THE YEAR UNDER CONSIDERATION, THE AO SHALL VERIFY AND ALLOW, ON SUCH VERIFICATION, THE SUSTAINED ADDI TION TO THE EXTENT OF RS.17,00,686/- ONLY, AS PER THE CONTENTION OF THE A SSESSEE, ACCORDING TO WHICH, IT IS THIS AMOUNT WHICH REPRESENTS ACTUAL AP PORTIONED EXPENDITURE. 23. IN VIEW OF THE ABOVE, GROUND NO.4(B), WHICH IS THE ALTERNATIVE GROUND TO GROUND NO. 4(A), BECOMES INFRUCTUOUS AND IS REJECTED, AS SUCH. 24. COMING TO GROUND NO.5, DURING THE YEAR THE ASSE SSEE COMPANY ISSUED AND ALLOTTED SHARES TO ITS EMPLOYEES AND DIRECTORS UNDER THE EMPLOYEES STOCK PURCHASE SCHEME, OR ESPS SCHEME. THE ISSUE WAS MADE IN ACCORDANCE WITH THE EMPLOYEES STOCK OPTION PLAN OR SCHEME OF THE CENTRAL GOVERNMENT. AN AMOUNT OF RS.186.65 CRORES INCURRED BY THE ASSESSEE- COMPANY UNDER THE ESPS WAS CLAIMED AS A DEDUCTION. THE AO TREATED THIS EXPENDITURE AS CAPITAL EXPENDITURE. IT WAS OBSERVED THAT THE SCHEME HAD RESULTED IN ISSUANCE OF SHARES AND THE SHARES SO IS SUED AND ALLOCATED UNDER THE STOCK OPTION SCHEME WAS GOING TO INCREASE THE S HARE CAPITAL OF THE ITA NO.6820/MUM/2010 ASSTT. YEAR : 2005-06 9 ASSESSEE; THAT AS PER THE SETTLED PROVISIONS OF LAW , ANY EXPENDITURE IN RELATION TO INCREASE IN SHARE CAPITAL OF ANY ASSESSEE IS CAP ITAL EXPENDITURE. THE AO PLACED RELIANCE ON PUNJAB STATE INDUSTRIAL CORPORA TION LTD. VS. CIT, 225 ITR 792 (SC) AND BROOK BOND INDIA LTD. VS. CIT, 2 23 ITR 776 (SC), WHEREIN, THE HONBLE SUPREME COURT HELD THAT THOU GH INCREASE IN THE CAPITAL RESULTS IN EXPANSION IN THE CAPITAL BASE O F THE COMPANY AND INCIDENTLY THAT WOULD HELP IN THE BUSINESS OF THE C OMPANY AND MAY ALSO HELP IN PROFIT MAKING, THE EXPENSES INCURRED IN THAT CON NECTION STILL RETAIN THE CHARACTER OF A CAPITAL IN NATURE, SINCE THE EXPENDI TURE IS DIRECTLY RELATED TO THE EXPANSION OF THE CAPITAL BASE OF THE COMPANY A ND THAT THEREFORE, THE EXPENDITURE INCURRED ON ISSUING SHARES TO INCREASE THE CAPITAL BY THE COMPANY WOULD NOT BE ALLOWABLE AS REVENUE EXPENDIT URE. 25. WHILE CONFIRMING THE ADDITION, THE LD. CIT(A) OBSERVED THAT THE ISSUE WAS NOT WHETHER THE EXPENDITURE WAS FOR THE PURPOSE OF BUSINESS, SINCE THE EXPENDITURE WAS DEFINITELY FOR THE PURPOSE OF BUSIN ESS; THAT THE ISSUE WAS AS TO WHETHER THE EXPENDITURE WAS CAPITAL EXPENDITURE OR NOT; THAT THE TWO SUPREME COURT DECISIONS CITED BY THE AO WERE DIRECT LY IN CONNECTION WITH THE EXPENDITURE INCURRED TO EXPAND THE CAPITAL BASE AND THE HONBLE SUPREME COURT HAD HELD THAT THE EXPENDITURE WAS CAP ITAL IN NATURE AND THAT THE SAME PRINCIPLE WAS APPLICABLE TO THE ASSESSEE S CASE ALSO. ITA NO.6820/MUM/2010 ASSTT. YEAR : 2005-06 10 26. THE LD. DR STRONGLY RELIED ON THE IMPUGNED ORDE R. 27. IN THIS REGARD, ON BEHALF OF THE ASSESSEE, IT H AS BEEN ASSERTED THAT THE EXPENDITURE IS FOR THE PURPOSE OF THE ASSESSEES BU SINESS, AS THE SHARES ARE ALLOTTED TO THE EMPLOYEES TO INCENTIVISE AND REMUNE RATE THEM FOR THEIR PERFORMANCE. IT HAS FURTHER BEEN CONTENDED THAT THE EXPENDITURE ACCOUNTED FOR BY THE ASSESSEE IS AS PER THE SEBI GUIDELINES. RELIANCE HAS BEEN PLACED ON THE FOLLOWING CASE LAWS: I) BIOCON LIMITED, 25 ITR (T) 402 (SB) BANGALORE II) NOVA NORDISK INDIA (P) LTD., 63 SOT 242 (ITAT BANGLORE) III) SSI LTD., 85 TTJ 1049 (CHENNAI ITAT) IV) PVP VENTURES LIMITED, ( 211 TAXMAN 554) (MAD) V) SPRAY ENGINEERING, 53 SOT 70 (ITAT CHANDIGARH) VI) DR. REDDYS LABORATORIES LIMITED, 30 ITR (T) 393 (ITAT HYD) VII) SEASSOON DAVID, 118 ITR 261 (SC). 28. ON THE OTHER HAND, THE LD. DR HAS PLACED STRONG RELIANCE ON THE IMPUGNED ORDER. 29. IN THIS REGARD, THE SPECIAL BENCH OF THE TRIBUN AL IN BIOCON LIMITED (SUPRA), HAS HELD THAT IN THE EMPLOYEES STOCK OPTI ON SCHEME, THE ASSESSEE COMPANY UNDERTAKES TO ISSUE SHARES TO ITS EMPLOYEES AT A FUTURE DATE, AT A PRICE LOWER THAN THE CURRENT MARKET PRICE. THIS IS ACHIEVED BY GRANTING STOCK ITA NO.6820/MUM/2010 ASSTT. YEAR : 2005-06 11 OPTIONS TO ITS EMPLOYEES AT A DISCOUNT. THE AMOUNT OF DISCOUNT REPRESENTS THE DIFFERENCE BETWEEN THE MARKET PRICE OF THE SHARES A T THE TIME OF THE GRANT OF OPTION AND THE OFFER PRICE. IN ORDER TO BE ELIGIBLE FOR ACQUIRING THE SHARES UNDER THE EMPLOYEES STOCK OPTION SCHEME, THE CONCE RNED EMPLOYEES ARE OBLIGED TO RENDER SERVICES TO THE COMPANY DURING TH E VESTING PERIOD AS GIVEN IN THE SCHEME. ON THE COMPLETION OF THE VESTING PE RIOD 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 THE VESTING PERIOD AND THE TIME FOR E XERCISING THE OPTIONS IS USUALLY NEGLIGIBLE. THE COMPANY, ON THE EXERCISE OF OPTION BY THE EMPLOYEES, ALLOTS SHARES TO THEM AND THEY CAN FREEL Y SELL SUCH SHARES IN THE OPEN MARKET SUBJECT TO THE TERMS OF THE EMPLOYEES STOCK OPTION SCHEME. THUS, IT IS DURING THE VESTING PERIOD THAT THE OPTI ONS GRANTED TO THE EMPLOYEES VEST WITH THEM. THIS PERIOD COMMENCES WIT H THE GRANT OF OPTION AND TERMINATES WHEN THE OPTIONS SO GRANTED VEST IN THE EMPLOYEES AFTER SERVING THE COMPANY FOR THE AGREED PERIOD. BY GRANT ING THE OPTIONS, THE COMPANY GETS A SORT OF ASSURANCE FROM ITS EMPLOYEES FOR RENDERING UNINTERRUPTED SERVICES DURING THE VESTING PERIOD AN D AS A QUID PRO QUO IT ITA NO.6820/MUM/2010 ASSTT. YEAR : 2005-06 12 UNDERTAKES TO COMPENSATE THE EMPLOYEES WITH A CERTA IN AMOUNT GIVEN IN THE SHAPE OF DISCOUNTED PREMIUM ON THE ISSUE OF SHARES. 29.1. SHARE PREMIUM IS A CAPITAL RECEIPT AND NOT CH ARGEABLE TO TAX IN THE HANDS OF COMPANY. IF A COMPANY ISSUES SHARES TO TH E PUBLIC OR THE EXISTING SHAREHOLDERS AT LESS THAN THE OTHERWISE PREVAILING PREMIUM DUE TO MARKET SENTIMENT OR OTHERWISE, SUCH SHORT RECEIPT OF PREMI UM WOULD BE A CASE OF A RECEIPT OF A LOWER AMOUNT ON CAPITAL ACCOUNT, BECA USE THE OBJECT OF ISSUING SUCH SHARES AT A LOWER PRICE IS NOWHERE DIRECTLY CO NNECTED WITH THE EARNING OF INCOME. HOWEVER, WHEN A COMPANY UNDERTAKES TO IS SUE SHARES TO ITS EMPLOYEES AT A DISCOUNTED PREMIUM AT A FUTURE DATE, THE PRIMARY OBJECT OF THIS EXERCISE IS NOT TO RAISE SHARE CAPITAL, BUT TO EARN PROFIT BY SECURING THE CONSISTENT AND CONCENTRATED EFFORTS OF ITS DEDICATE D EMPLOYEES DURING THE VESTING PERIOD. SUCH DISCOUNT IS CONSTRUED, BOTH BY THE EMPLOYEES AND THE COMPANY, AS NOTHING BUT A PART OF PACKAGE OF REMUNE RATION, A SUBSTITUTE TO GIVING DIRECT INCENTIVE IN CASH FOR AVAILING OF TH E SERVICES OF THE EMPLOYEES. THERE IS NO DIFFERENCE BETWEEN THE TWO SITUATIONS: ONE, WHEN THE COMPANY ISSUES SHARES TO THE PUBLIC AT MARKET PRICE AND A P ART 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 THEIR EFFORT. IT FO LLOWS THAT THE DISCOUNT ON ITA NO.6820/MUM/2010 ASSTT. YEAR : 2005-06 13 PREMIUM UNDER THE EMPLOYEES STOCK OPTION SCHEME IS SIMPLY ONE OF THE MODES OF COMPENSATING THE EMPLOYEES FOR THEIR SERVI CES AND IS A PART OF THEIR REMUNERATION. THUS, SUCH DISCOUNT CANNOT BE DESCRIB ED AS EITHER A SHORT CAPITAL RECEIPT OR A CAPITAL EXPENDITURE. 29.2. AN EXPENDITURE MUST BE LAID OUT OR EXPENDED W HOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS, SO AS TO BE ELIGIBLE F OR DEDUCTION U/S 37(1) OF THE INCOME-TAX ACT, 1961. HOWEVER, THIS SECTION DOES NO T RESTRICT PAYING OUT OF EXPENDITURE IN CASH ALONE. SUB-SECTION (2) OF SECTI ON 43 DEFINES PAID TO MEAN ACTUALLY PAID OR INCURRED ACCORDING TO THE ME THOD OF ACCOUNTING, UPON THE BASIS OF WHICH, THE PROFITS OR GAINS ARE COMPUT ED UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. WHEN THE DEFI NITION OF THE WORD PAID U/S 43(2) IS READ IN JUXTAPOSITION TO SECTION 37(1) , NOT ONLY PAYING OF EXPENDITURE, BUT ALSO INCURRING OF EXPENDITURE QUAL IFIES FOR DEDUCTION U/S 37(1) SUBJECT TO THE FULFILLMENT OF OTHER CONDITION S. THE MEANING OF THE TERM EXPENDITURE IS NOT ONLY PAYING OUT, BUT ALSO I NCURRING. BY UNDERTAKING TO ISSUE SHARES AT A DISCOUNT PREMIUM, THE COMPANY DOES NOT PAY ANYTHING TO ITS EMPLOYEES, BUT INCURS AN OBLIGATION OF ISSUING SHARES AT A DISCOUNTED PRICE AT A FUTURE DATE IN LIEU OF THEIR SERVICES, WHICH IS NOTHING BUT AN EXPENDITURE U/S 37(1) OF THE ACT. ITA NO.6820/MUM/2010 ASSTT. YEAR : 2005-06 14 30. THUS, THE SPECIAL BENCH HAS HELD THAT THE DISCO UNT ON PREMIUM UNDER ONE OF THE MODES, COMPENSATING EMPLOYEES FOR THEIR SERVICES IS A PART OF THEIR REMUNERATION AND AS SUCH, THIS DISCOUNT CANNO T BE HELD TO BE EITHER A SHORT CAPITAL RECEIPT, OR A CAPITAL EXPENDITURE. NO DECISION TO THE CONTRARY HAS BEEN PLACED BEFORE US. BESIDES, THE OTHER DECISIONS CITED BY THE ASSESSEE ARE ALSO ON SIMILAR LINES. THEREFORE, FOLLOWING BIOCON LIMITED (SUPRA) AND THE OTHER CASE LAWS CITED BY THE ASSESSEE, GROUND NO.5 IS ACCEPTED AND IT IS HELD THAT THE EMPLOYEES STOCK OPTION SCHEME BENEF IT IN QUESTION IS TAXABLE IN THE HANDS OF THE ASSESSEES EMPLOYEES AS PERQUIS ITE UNDER SECTION 43(2) OF THE ACT. THE PAYMENT HAVING BEEN ESTABLISHED AS SAL ARY/EMPLOYEE COST, THE SAME IS REVENUE IN NATURE. THIS EXPENDITURE CLAIMED BY THE ASSESSEE IS TO BE TREATED AS A BUSINESS EXPENDITURE OF THE ASSESSEE. THE GRIEVANCE OF THE ASSESSEE BY WAY OF GROUND NO.5, ACCORDINGLY, IS ACC EPTED. 31. TURNING TO GROUND NO.6, GROUND NO. 6(A) STATES THAT THE LD. CIT(A) HAS ERRED IN NOT ALLOWING THE ASSESSEES CLAIM OF SET OFF OF LOSS OF RS.21,27,69,208/- PERTAINING TO CERTAIN STP UNITS, AGAINST THE TAXABLE BUSINESS INCOME OF THE ASSESSEE, AS PER SECTION 70 OF THE ACT. 32. GROUND NO.6(B) STATES THAT WITHOUT PREJUDICE, T HE LD. CIT(A) ERRED IN NOT DIRECTING THE AO TO CONSIDER THE REVISED LOSS AFTER MAKING ADJUSTMENT ITA NO.6820/MUM/2010 ASSTT. YEAR : 2005-06 15 ON ACCOUNT OF DISALLOWANCE MADE IN THE ASSESSMENT O RDER, INSTEAD OF THE LOSS OF RS.21,27,69,208/-, AS CLAIMED BY THE ASSESSEE IN THE RETURN OF INCOME. 33. AS PER THE RECORD, DURING THE YEAR UNDER CONSID ERATION, THE FOLLOWING UNITS OF THE ASSESSEE, WHICH WERE OTHERWISE ELIGIBL E FOR DEDUCTION, HAD LOSSES: SR.NO. NAME OF THE UNDERTAKING BUSINESS LOSS (IN RS.) 1. MALAD STP 1 2,08,24,076 2. KOLKATA GDC STP 2,57,83,149 3. NEW DELHI (TCS TOWERS)-STP 6,20,09,085 4. ABHILASH-STP 1,40,71,059 5. THANE-STP 5,93,12,566 6. VIKHROLI-STP 3,07,69,272 34. THE ASSESSEES SET OFFS OF THE ABOVE LOSSES WER E AGAINST THE TAXABLE BUSINESS INCOME U/S 70 OF THE ACT. FURTHER, THESE L OSSES WERE SET OFF AGAINST THE TAXABLE INCOME OF OTHER STP UNITS. THE AO DISAL LOWED THE ASSESSEES CLAIM OF LOSS OF RS.21,27,69,208/- PERTAINING TO CE RTAIN STP UNITS. THE AO APPLIED THE PROVISIONS OF SECTION 14A OF THE ACT. F URTHER, THE AO DISALLOWED THE ABOVE LOSS AS CLAIMED IN THE RETURN OF INCOME, INSTEAD OF THE REVISED LOSS AFTER MAKING ADJUSTMENT ON ACCOUNT OF DISALLOWANCE MADE IN THE ASSESSMENT ORDER. THE LD. CIT(A) UPHELD THE AOS ACTION, OBSER VING AS FOLLOWS: ITA NO.6820/MUM/2010 ASSTT. YEAR : 2005-06 16 8.17. I HAVE CONSIDERED THE SUBMISSION OF THE APPE LLANT BUT I AM NOT INCLINED TO ACCEPT IT. SECTION 10A IS PART OF CHAPT ER III OF THE INCOME-TAX ACT, WHICH RELATES TO EXEMPT INCOME. PROFITS EARNED BY ELIGIBLE UNIT FROM EXPORT OF SOFTWARE IS EXEMPT FROM THE TAX AND IS N OT SET OFF AGAINST LOSS UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PR OFESSION. THE EXEMPTION PROVIDED BY THE STATUTE SHOULD BE INTERPR ETED IN A MANNER TO MEET THE INTENTION OF THE LEGISLATURES. PROFITS AND LOSS ES ARE TWO SIDES OF THE SAME COIN. ONE CANNOT HAVE THE PRIVILEGE OF CHOOSING ONL Y ONE SIDE OF THE COIN. IF THE PROFIT EARNED IS TO BE TREATED AS EXEMPT, THE L OSS INCURRED BY THE SAME UNIT CANNOT BE PERMITTED TO BE SET OFF AGAINST THE PROFIT UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. VARI OUS COURTS HAVE ALSO HELD THAT PROFITS INCLUDE LOSSES. AS SUCH THIS GROU ND OF THE APPELLANT IS REJECTED AND ACTION OF THE AO IS UPHELD. 35. AGGRIEVED, THE CONTENTION OF THE ASSESSEE IS TH AT THE PROVISIONS OF SECTION 10A OF THE ACT, AS AMENDED BY THE FINANCE A CT, 2000, ARE THOSE OF A DEDUCTION AND THEY ARE NOT EXEMPTION PROVISIONS. RE LIANCE HAS BEEN PLACED ON THE FOLLOWING CASE LAWS: I) HINDUSTAN UNILEVER LTD., 325 ITR 102 (BOM. H C) II) GALAXY SURFACTANTS LTD., 343 ITR 108 (BOM. HC) III) ASSESSEES OWN CASE BEING YOKOGAWA INDIA LTD. AND OTHER CONNECTED APPEALS, 341 ITR 385 (KAR. HC) IV) BLACK AND VEATCH CONSULTING PVT. LTD., 348 ITR 72 (BOM., HC) V) SCIENTIFIC ATLANTA INDIA TECHNOLOGY PVT. LTD., 2 ITR (T) 66 (CHENNAI TRIBUNAL SB) VI) SOVIKA INFOTECH LIMITED V. ITO, 23STO 271 (MUM. I TAT) VII) MINDTREE CONSULTING PVT. LTD VS. ACIT, (102 TTJ 6 91) (BANG.ITAT) ITA NO.6820/MUM/2010 ASSTT. YEAR : 2005-06 17 VIII) A.V.THOMAS LEATHER & ALLIED PRODUCTS LTD., (ITA NO.1021/MAD/2008) (CHENNAI ITAT). IX) HONEYWELL INTERNATIONAL INDIA (P) LTD. V. DCIT, ( 108 TTJ 924) (DELHI ITAT). X) ENERCON WIND FARMS (KRISHNA ) LTD., (21 SOT 29) ( MUM. ITAT). XI) FORD BUSINESS SERVICES CENTRE PVT. LTD., (114 TTJ 881) (CHENNAI ITAT). 36. APROPOS THIS GROUND NO.6, THE LD. COUNSEL FOR T HE ASSESSEE HAS CONTENDED THAT WITHOUT PREJUDICE, THE REVISED LOSS OF RS.19,47,56,123/-, AFTER ADJUSTMENTS BY THE AO, SHOULD BE CONSIDERED FOR DIS ALLOWANCE, INSTEAD OF THE RETURNED LOSS OF RS.21,27,69,208/-. 37. THE LD. DR, ON THE OTHER HAND, HAS STRONGLY RE LIED UPON THE IMPUGNED ORDER. 38. WITH REGARD TO THIS ISSUE, IT IS SEEN THAT IN HINDUSTAN UNILEVER LTD. (SUPRA), THE JURISDICTIONAL HIGH COURT, WHILE DEALI NG WITH THE PROVISIONS OF SECTION 10B OF THE ACT, THE PROVISIONS WHEREOF ARE LIKE THOSE OF SECTION 10A, WERE AMENDED BY THE FINANCE ACT, 2000, HELD, THAT T HE PROVISIONS, POST AMENDMENT, ARE FOR DEDUCTION AND THAT U/S 10B, LOS S IN AN ELIGIBLE UNIT COULD BE SET OFF AGAINST THE PROFITS OF BUSINESS. THE PRO VISIONS OF SECTION 10A AND THOSE OF SECTION 10B ARE, MUTATIS MUTANDIS, UNDISPU TEDLY PARI-MATERIA INTER- SE. THEREFORE, HINDUSTAN UNILEVER LTD. IS SQUAREL Y APPLICABLE TO THE FACTS ITA NO.6820/MUM/2010 ASSTT. YEAR : 2005-06 18 OF THE PRESENT CASE ALSO. NO DECISION CONTRARY TO THIS JURISDICTIONAL HIGH COURT JUDGMENT HAS BEEN PLACED BEFORE US. FURTHER, IN GALAXY SURFACTANTS LTD. (SUPRA), AGAIN RENDERED BY THE JURISDICTIONA L HIGH COURT AND IN THE CONTEXT OF SECTION 10B OF THE ACT, IT HAS BEEN HELD THAT LOSS IN AN ELIGIBLE UNIT CAN BE SET OFF AGAINST THE PROFITS OF BUSINESS. HI NDUSTAN UNILEVER LTD. WAS REFERRED TO. 39. BESIDES, YOKOGAWA INDIA LTD. (SUPRA), ACCORD ING TO THE ASSESSEE, IS THE ASSESSEES OWN CASE, THE DECISION WHEREIN HAS B EEN RENDERED BY THE HONBLE KARNATAKA HIGH COURT. THEREIN, THE SCOPE OF SECTION 10A OF THE ACT HAS BEEN CONSIDERED. HINDUSTAN UNILEVER LTD. (SU PRA) HAS BEEN REFERRED TO. IT HAS BEEN HELD THAT THE PRINCIPLE IN HINDUST AN UNILEVER LTD. (SUPRA), QUA SECTION 10B OF THE ACT, EQUALLY APPLIES TO A CA SE FALLING U/S 10A OF THE ACT. 40. SINCE NONE OF THE ABOVE DECISIONS, BESIDES THE OTHER ONES REFERRED TO BY THE ASSESSEE, HAS BEEN COUNTERED BY ANY DECISION IN FAVOUR OF THE DEPARTMENT, THE GRIEVANCE OF THE ASSESSEE IS ACCEPT ED. 41. THE ASSESSEE HAS FURTHER CONTENDED THAT THE TER M LOSS IS DIFFERENT FROM THE EXPENDITURE REFERRED TO SECTION 14A OF T HE ACT AND THAT, THEREFORE, SECTION 14A IS NOT APPLICABLE TO THE PRESENT CASE. THE FOLLOWING CASE LAWS HAVE BEEN RELIED ON : ITA NO.6820/MUM/2010 ASSTT. YEAR : 2005-06 19 I. HINDUSTAN UNILEVER LTD., 325 ITR 102 (BOM. HC) II. GALAXY SURFACTANTS LTD., 343 ITR 108 (BOM. HC) III. ASSESSEES OWN CASE BEING YOKOGAWA INDIA LTD. AND OTHER CONNECTED APPEALS, 341 ITR 385 (KAR. HC) IV) BLACK AND VEATCH CONSULTING PVT. LTD., 348 ITR 72 (BOM. HC) V) SCIENTIFIC ATLANTA INDIA TECHNOLOGY PVT. LTD., 2 ITR (T) 66 (CHENNAI TRIBUNAL SB). VI) NAVIN BHARAT INDUSTRIES, 90 ITD 1 (MUMBAI ITAT) VII) CAPGENIMI INDIA (P) LIMITED, 141 TTJ 33 (MUMBAI I TAT) 42. IN THIS REGARD, A CO-ORDINATE BENCH OF THE TRI BUNAL IN NAVIN BHARAT INDUSTRIES (SUPRA), HAS HELD THAT WHERE EXP ENDITURE IS INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN THE TOTAL INC OME, LOSS CANNOT BE CONSTRUED TO BE EXPENDITURE AND SECTION 14A OF TH E ACT IS APPLICABLE QUA EXPENDITURE AND NOT QUA LOSS. 43. THEN, IN CAPGENIMI INDIA (P) LIMITED, (SUPRA) , AGAIN, A CO-ORDINATE BENCH OF THIS TRIBUNAL, THROUGH ONE OF US, I.E. THE LD. AM, HAS HELD THAT IN CASE OF LOSS OF UNITS, ELIGIBLE FOR DEDUCTION U/S 1 0A, SECTION 10A IS A DEDUCTION PROVISION AND NOT AN EXEMPTION PROVISION AFTER ITS AMENDMENT WITH EFFECT FROM THE ASSESSMENT YEAR 2001-02 AND TH AT, THEREFORE, THE LOSS FROM THE SECTION 10A UNIT HAS TO BE ADJUSTED AGAINS T THE TAXABLE PROFITS OF OTHER UNITS AFTER DEDUCTION U/S 10A HAS BEEN ALLOW ED IN RESPECT OF EACH ITA NO.6820/MUM/2010 ASSTT. YEAR : 2005-06 20 ELIGIBLE UNIT. THE OTHER CASE LAWS RELIED ON BY THE ASSESSEE ALSO HOLD THAT SET OFF OF LOSS OF THE ELIGIBLE UNIT IS ALLOWABLE AGAIN ST THE OTHER TAXABLE INCOME. 44. FOR THE ABOVE DISCUSSION, THIS GRIEVANCE OF THE ASSESSEE IS ACCEPTED. 45. ACCORDINGLY, GROUND NO.6(A) RAISED BY THE ASSES SEE IS ACCEPTED AND THAT BEING SO, GROUND NO.6(B) IS NOT REQUIRED TO BE GONE INTO, IT BEING A GROUND ALTERNATIVE TO GROUND NO.6(A). 46. CONSEQUENTLY, THE APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 4 TH NOVEMBER, 2015. SD/- SD/- (RAJENDRA) (A.D. JAIN) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 04/11/2015 COPY OF THE ORDER, FORWARDED TO : 1. THE ASSESSEE: M/S. TATA CONSULTANCY SERVICES LIMITE D, MUMBAI. 2. THE ADDL. CIT, RANGE 2(3), MUMBAI 3. THE CIT(A)-15, MUMBAI. 4. THE CIT, MUMBAI 5. THE SR DR, ITAT MUMBAI TRUE COPY BY ORDER (ASSISTANT REGISTRAR)