FINANCIAL INSTITUTIONAL SECURITIES LTD, MUMBAI V. DCIT 4(3)(1), MUMBAI

ITA 6891/MUM/2016

• Counselvise Citation: [2018] 124 COUNSELVISE.COM (IT) 5939 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-10-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 24-11-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: POOJA SWAROOP LD J
• Assessee Lawyers: ADITYA AJGAONKAR LD ARS
• Keywords: Capital asset; Business income; Fair market value; Valuation report; Tax effect; Capital receipt; Revenue expenditure; Capital expenditure
• Section: 143(3); 37(1); 37; 28; 11

Judgement Text

ITA NOS.6479& 6891/MUM/2016 JM FINANCIAL INSTITUTIONAL SECURITIES LTD. ASSESSMENT YEAR-2012-13 IN THE INCOME TAX APPELLATE TRIBUNAL F BENCH, MUMBAI , BEFORE SHRI SAKTIJIT DEY, JM AND SHRI MANOJ KUMAR AGGARWAL, AM I.T.A. NO.6479/MUM/2016 ( ASSESSMENT YEAR:2012-13) ASSISTANT COMMISSIONER OF INCOME TAX- 4(3)(1) ROOM NO.649, 6 TH FLOOR, AAYKAR BHAVAN, M.K. ROAD MUMBAI-400 020 VS. JM FINANCIAL INSTITUTIONAL SECURITIES LT D . (NOW MERGED WITH JM FINANCIAL LIMITED) 7 TH FLOOR, CNERGY APPASAHEB MARATHE MARG PRABHADEVI, MUMBAI-400 025 ! ' PAN/GIR NO.AABCA-2496-G ( !# APPELLANT ) : ( $%!# RESPONDENT ) & I.T.A. NO.6891/MUM/2016 ( ASSESSMENT YEAR: 2012-13) JM FINANCIAL INSTITUTIONAL SECURITIES LTD. (NOW MERGED WITH JM FINANCIAL LIMITED) 7 TH FLOOR, CNERGY APPASAHEB MARATHE MARG PRABHADEVI, MUMBAI-400 025 VS. DEPUTY COMMISSIONER OF INCOME TAX- 4(3)(1) MUMBAI ! ' PAN/GIR NO.AABCA-2496-G ( !# APPELLANT ) : ( !# APPELLANT ) REVENUE BY : POOJA SWAROOP, LD. JCIT-DR ASSESSEE BY : K. SHIVRAM & ADITYA AJGAONKAR, LD. ARS & DATE OF HEARING : 26/07/2018 '() / DATE OF PRONOUNCEMENT : 03/10/2018 2 ITA NOS.6479 & 6891/MUM/2016 JM FINANCIAL INSTITUTIONAL SECURITIES PVT.LTD. ASSESSMENT YEAR-2012-13 O R D E R PER MANOJ KUMAR AGGARWAL (ACCOUNTANT MEMBER) 1. THESE ARE CROSS APPEALS FOR ASSESSMENT YEAR [AY] 20 12-13 WHICH CONTEST THE ORDER OF THE LD. COMMISSIONER OF INCOME -TAX (APPEALS)-9 [CIT(A)], MUMBAI, APPEAL NO.CIT(A)-9/CIR.4/302/2015-16 DATED 16/08/2016 ON SEPARATE GROUNDS OF APPEAL. THE ASSESSEE, VIDE A PPLICATION DATED 19/07/2018, PLEADED FOR ADMISSION OF ADDITIONAL GRO UNDS OF APPEAL. HOWEVER, THE SAME HAS NOT BEEN URGED DURING HEARING BEFORE US AND THEREFORE, THE SAME STAND DISMISSED IN LIMINE. FIRST WE TAKE UP ASSESSEES APPEAL ITA NO.6891/MUM/2016, WHEREIN THE FOLLOWING GROUNDS OF APPEAL HAS BEEN URGED:- A. ADDITION BY WAY OF DISALLOWANCE OF EXPENDITURE INCURRED IN RESPECT OF THE EMPLOYEES STOCK OPTION SCHEME (THE ESOP) BY WAY OF THE PAYMENTS MADE TO THE HOLDING COMPANY RS.1,32,60,846/- 1. ON THE FACTS AND I THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE HONOURABLE COMMISSIONER OF INCOME TAX (APPEALS)-9 [ THE CIT(A)] ERRED IN CONFIRMING THE ACTION OF THE DEPUTY COMMISSIONER OF INCOME TAX- 4(3)(1) (THE DCIT) AND DISALLOWING THE EXPENDITUR E INCURRED IN RESPECT OF ESOP AGGREGATING TO RS.1,32,60,846/- ALLEGING THE S AME TO BE A CAPITAL EXPENDITURE. 2. THE LEARNED CIT(A) AND THE DCIT FAILED TO APPRE CIATE THAT THE APPELLANT HAS INCURRED THE EXPENDITURE ON ESOP ONLY WITH A VI EW TO RETAIN ITS EMPLOYEES, AND AS A REWARD TO THEIR CONTRIBUTIONS A ND THE LOYALTY FOR SERVING THE APPELLANT, ACCORDINGLY QUALIFYING AS BU SINESS EXPENDITURE INCURRED IN THE ORDINARY COURSE OF BUSINESS AND THE RE HAS BEEN NO INCREASE IN THE CAPITAL OF THE APPELLANT. 3. THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTI ON OF THE DCIT IN ALLEGING THAT THE VESTING PERIOD OF THE STOCK OPTION WOULD S TART FROM FINANCIAL YEAR 2012-13 AS AGAINST 21 ST APRIL, 2011 IGNORING THE FACTS AND SUBMISSIONS MADE BY THE APPELLANT IN THIS REGARD. 3 ITA NOS.6479 & 6891/MUM/2016 JM FINANCIAL INSTITUTIONAL SECURITIES PVT.LTD. ASSESSMENT YEAR-2012-13 4. THE LEARNED CIT(A) AND THE DCIT ALSO FAILED TO FOLLOW THE VARIOUS JUDGMENTS IN FAVOUR OF THE APPELLANT, PASSED BY THE JURISDICTIONAL ITAT AND THE OTHER ITAT ACROSS THE COUNTRY WHILE PASSING THE ORDER. 5. IN VIEW OF THE ABOVE, THE LEARNED DCIT BE DIREC TED TO DELETE THE ENTIRE ADDITION MADE ON ACCOUNT OF EXPENDITURE ON ESOP AGG REGATING TO RS.1,32,60,846/- THE ASSESSMENT FOR IMPUGNED AY WAS FRAMED BY LD. DEPUTY COMMISSIONER OF INCOME TAX 4(3)(1), MUMBAI [AO] U/S 143(3) OF THE INCOME TAX ACT, 1961 ON 30/03/2015 WHEREIN THE INCOME OF THE ASSESSEE HAS BEEN ASSESSED AT RS.939.20 LACS AFTER CERTAIN A DDITIONS AND DISALLOWANCES AS AGAINST RETURNED INCOME OF RS.753. 29 LACS FILED BY THE ASSESSEE ON 26/09/2012. AS EVIDENT FROM THE GROUNDS OF APPEAL, THE ASSESSEE IS AGGRIEVED BY DISALLOWANCE OF EMPLOYEES STOCK OPTION PLAN (IN SHORT ESOP) EXPENDITURE OF RS.132.60 LACS STATED TO BE PAID BY THE ASSESSEE TO ITS HOLDING COMPANY FOR THE BENEFIT OF ASSESSEES EMPLOYEES. 2. THE ASSESSEE BEING RESIDENT CORPORATE ASSESSEE WAS ENGAGED IN THE BUSINESS OF SHARES / STOCK BROKING, ADVISORY AND OTHER FINANCIA L SERVICES. DURING ASSESSMENT PROCEEDINGS IT WAS NOTED THAT THE ASSESSEE MADE A PAYMENT OF RS.132.60 LACS TO ITS ULTIMATE HOLDINGS COMPANY M/S JM FINANCIAL LIMITED AND CLAIMED THE SAME UNDER THE HEAD EMPLOYEE BENEFIT EXPENSES . IT WAS SUBMITTED THAT THE HOLDING COMPANY HAD FO RMULATED AN ESOP SCHEME FOR GRANT OF STOCK OPTION AND AS A COROLLAR Y, HAS GRANTED STOCK OPTIONS TO THE EMPLOYEES OF THE ASSESSEE COMP ANY ALSO. THE ASSESSEE, ACCORDINGLY, PAID / REIMBURSED DIFFERENTI AL AMOUNT OF ISSUE PRICE VS. MARKET PRICE OF THE SAID OPTION SHARES TO ITS HOLDING COMPANY. THE 4 ITA NOS.6479 & 6891/MUM/2016 JM FINANCIAL INSTITUTIONAL SECURITIES PVT.LTD. ASSESSMENT YEAR-2012-13 ASSESSEE VIDE LETTER DATED 12/03/2015 DEFENDED THE SAME BY SUBMITTING THAT THE ESOP SCHEME WAS IN RESPECT OF PARTICIPATION BY THE EMPLO YEES OF THE ASSESSEE COMPANY IN THE SCHEME OF THE ULTIMATE HOLDING COMPANY M/S JM FINANCIAL LIMITED AND THE ASSESSEE PAID THE STATE AMOUNT TO THE HOLD ING COMPANY. HOWEVER, THE SAME COULD NOT CONVINCE LD. A O FOR THE FOLLOWING REASONS:- A) ESOP DISCOUNTS ARE INCURRED IN RELATION TO ISSU E OF SHARES TO EMPLOYEES. THEY ARE NOT RELATABLE TO PROFITS AND GAINS ARISING OR A CCRUING FROM A BUSINESS / TRADE. THE APEX COURT DECISION IN THE CASE OF PUNJAB STATE INDUSTRIAL DEVL. CORP. LTD. (1997) 225 ITR 792 (SC) AND BROOKE BOND INDIA LTD., (1997) 225 ITR 798 (SC) HAVE HELD THAT EXPENDITURE RESULTING IN INCREASE I N CAPITAL IS NOT AN ALLOWABLE DEDUCTION EVEN IF SUCH EXPENDITURE MAY INCIDENTALLY HELD IN BUSINESS OF THE COMPANY. B) ESOP DISCOUNT DOES NOT DIMINISH TRADING/ BUSINE SS RECEIPTS OF THE ISSUING COMPANY. THE COMPANY DOES NOT SUFFER ANY PECUNIARY DETRIMENT. TO CLAIM A CHARGE AGAINST INCOME, IT SHOULD INFLICT A DETRIMEN T TO THE FINANCIAL POSITION. ESOP IS VOLUNTARY SCHEME LAUNCHED BY THE EMPLOYERS TO IS SUE SHARES TO EMPLOYEES. THE INTENTION IS TO ONLY GIVE A STAKE TO THE EMPL OYEES IN THE ORGANIZATION. C) THIS DISCOUNT IS NOT INCURRED TOWARDS SATISFACT ION OF ANY TRADE LIABILITY AS THE EMPLOYEES HAVE NOT GIVEN UP ANYTHING TO PROCURE SUC H ESOP. D) SHARE PREMIUMS OBTAINED ON ISSUE OF SHARES ARE ITEMS OF CAPITAL RECEIPTS. WHEN SUCH PREMIUM IS FORGONE, IT CANNOT BE CLAIMED AS AN EXPENDITURE WHOLLY AND EXCLUSIVELY LAID OUT OR EXPENDED FOR THE PURPOSES O F THE TRADE. E) IT IS FURTHER WORTHWHILE TO NOTE THAT THE SCHEM E OF ESOP INVOLVES FOUR STAGE, NAMELY, GRANTING OF OPTIONS, VESTING OF OPTIONS, EX ERCISE OF OPTIONS AND SALE OF SHARES. THE ASSESSEE COMPANY AT THE STAGE OF GRANT, MERELY EXPRESSES AN INTENT OR A WISH AND EXERCISE BY THE CONCERNED EMPLOYEE, A FTER THE VESTING PERIOD ONLY DRAWS THE EMPLOYER TO A BINDING OBLIGATION OF ENTER ING INTO AN ENFORCEABLE CONTRACT OF SALE. THEREFORE, THE ACCRUAL OF EXPENDI TURE IS NOT FROM THE DATE OF GRANT BUT ONLY FROM THE DATE OF EXERCISE OF THE OPT ION BY THE EMPLOYEE. IN THE INSTANT CASE, THE ASSESSEE HAS NOT CORRELATED THE A MOUNT OF ACTUAL LOSS INCURRED ON SUCH EXERCISE BY THE EMPLOYEES. F) THERE IS NO SPECIFIC PROVISION FOR SUCH DEDUCTI ON FROM SECTIONS 30 TO 36 OF THE INCOME TAX ACT. SO THE RESIDUARY SECTION 37 ONLY CO MES TO PLAY AND THE PRIMARY CONDITION FOR ALLOWANCE UNDER THIS SECTION IS THE E XISTENCE OF REVENUE EXPENDITURE WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSES OF THE BUSINESS. AS ELABORATED IN THE ABOVE POINT, THERE IS NEITHER ANY REAL EXPENDITURE AT THE STAGE OF GRANT OR OTHERWISE, NOR THE EXPENDITURE CAN BE Q UALIFIED AS REVENUE IN NATURE. 5 ITA NOS.6479 & 6891/MUM/2016 JM FINANCIAL INSTITUTIONAL SECURITIES PVT.LTD. ASSESSMENT YEAR-2012-13 G) IN THIS CASE, THE SHARES OF THE PARENT HOLDING COMPANY ARE CLAIMED TO HAVE BEEN ALLOTTED TO THE EMPLOYEES OF THE ASSESSEE COMPANY. THE PARENT COMPANY ALSO HAS AN INTEREST IN RETAINING THE EMPLOYEES OF ITS S UBSIDIARY AND HENCE THE NOTIONAL LOSS IF AT ALL, IS RELATED TO THE PARENT C OMPANY. AND IN NO WAY, THE ASSESSEE COMPANYS CONTRIBUTION TO THE PARENT COMPA NY IN THIS REGARD IS HAVING ANY DIRECT NEXUS WITH RESPECT TO THE ESOP EXPENSES. IT IS WORTHWHILE NOTING HERE THAT THE ASSESSEE COMPANY HAS NEVER PURCHASED ANY S HARES FROM THE HOLDING COMPANY. (DECISION OF ACCENTURE SERVICES P. LTD VS DCIT, CIRCLE 3(1), MUMBAI IN 2010 TIOL-409ITAT-MUMBAI IS DISTINGUISHED). DURING THE COURSE OF PROCEEDINGS, THE ASSESSEE, VID E LETTER DATED 30/03/2015 RAISED A NEW ARGUMENT THAT THE VESTING P ERIOD OF STOCK OPTIONS BEGAN FROM 21/04/2011 AND THE IMPUGNED AMOUNT OF RS .1.32 CRORES WAS THE PROPORTIONATE COST OF 346 DAYS FOR THE PERIOD 2 1/04/2011 TO 31/03/2012. HOWEVER LD. AO, UPON PERUSAL OF ASSESSEES COMMUNIC ATION BEFORE TDS OFFICER, NOTED THAT THE VESTING PERIOD WAS TO START FROM FY 2012-13. FINALLY, NOT CONVINCED AND PLACING RELIANCE ON CERTAIN JUDIC IAL PRONOUNCEMENTS, LD. AO DISALLOWED THE SAME. 3. THE LD. CIT(A) ALSO REJECTED THE CLAIM OF THE AS SESSEE BY OBSERVING AS UNDER:- 6.3 I HAVE CONSIDERED THE STAND OF THE AO AND THE SUBMISSIONS OF THE APPELLANT. IT IS SEEN THAT THE STOCK OPTIONS WERE I SSUED AT AN EXERCISE PRICE OF RS.1/- PER STOCK AS AGAINST THE PREVAILING MARKET P RICE OF RS.31.50. ON EXAMINATION OF NOTES TO THE FINANCIAL STATEMENTS, U NDER NOTE-32, IT IS FOUND THAT THE AUDITORS HAVE GIVEN A SPECIFIC REMARK THAT THE ASSESSEE HAD MADE PAYMENT OF RS.1,32,60,846/- TO THE ULTIMATE HOLDING COMPANY , JM FINANCIAL LTD AND CLAIMED THE SAME UNDER THE HEAD, EMPLOYEE BENEFIT E XPENSES VIDE NOTE 22 OF THE P& L ACCOUNT. THIS ESOP SCHEME WAS FORMULATED F OR GRANT OF STOCK OPTION AND AS COROLLARY, THE APPELLANT HAD GRANTED STOCK O PTIONS TO THE EMPLOYEES OF THE ASSESSEE COMPANY. THE PAYMENTS WERE RELATED TO THE DIFFERENTIAL AMOUNT OF ISSUE PRICE AND MARKET PRICE OF THE SAID OPTION SHA RES WHICH WERE REIMBURSED TO THE HOLDING COMPANY BY THE ASSESSEE COMPANY. 6 ITA NOS.6479 & 6891/MUM/2016 JM FINANCIAL INSTITUTIONAL SECURITIES PVT.LTD. ASSESSMENT YEAR-2012-13 IT IS FURTHER SEEN THAT THE COMPANY DOES NOT SUFFE R ANY PECUNIARY LOSS OR DETRIMENT ON ACCOUNT OF ESOP. IT IS ALSO NOT A TRAD E LIABILITY. SHARE PREMIUMS OBTAINED ON THE ISSUE OF SUCH SHARES ARE THE ITEMS OF CAPITAL RECEIPTS AND WHEN SUCH PREMIUM ARE FOREGONE, IT CANNOT BE CLAIMED AS EXPENDITURE WHOLLY AND EXCLUSIVELY REVENUE IN NATURE. THE WHOLE PROCESS CO NSISTS OF FOUR STAGES NAMELY, GRANTING OF OPTIONS, VESTING OF OPTIONS, EXERCISE O F OPTIONS AND SALE OF SHARES. FURTHER THERE IS NO SPECIFIC PROVISIONS OF SUCH CLA IM OF EXPENSES TO BE ALLOWED AS DEDUCTION U/S 30 TO 36 OF THE IT ACT, 1961. ANOTHER ASPECT OF SUCH SCHEME IS THAT THE PARENT COMPANY ALSO HAS AN INTEREST IN RETAININ G THE EMPLOYEES OF ITS SUBSIDIARY AND HENCE, NOTIONAL LOSS IF AT ALL, IS R ELATED TO PARENT COMPANY. IT IS FURTHER SEEN FROM THE PARA 4.5 OF THE ASSESS MENT ORDER THAT AS PER COMMUNICATION RECEIVED BY THE AO VIDE LETTER NO. DC IT-TDS- 2(1)/JM.FIN.INST/JURIAO/S.201/2013-14 DATED 04.03.2 014 ACCORDING TO WHICH, THE VESTING PERIOD OF ESOP IN THE ASSESSEES CASE IS TO START FROM FINANCIAL YEAR 2012-13 I.E. ASSESSMENT YEAR 2013-14 WHEREAS, THE P RESENT APPEAL RELATES TO AY 2012-13 FINANCIAL YEAR BEING 2011-12. IN VIEW OF TH IS, IT CANNOT BE SAID THAT THIS DIFFERENCE OF OFFER PRICE OF THE ACTUAL COST OF SHA RES AND MARKET PRICE OF THE SHARE, CAN BE TREATED AS ANY REMUNERATION TO THE EM PLOYEES FOR THEIR CONTINUITY IN SERVICE OF THE APPELLANT COMPANY. IT CAN BE ALSO SE EN THAT THE APPELLANT HAS CLAIMED SUCH EXPENSES OR DIFFERENCE WITHOUT SUBSTAN TIATING THAT IT ACTUALLY AMOUNTED TO SHORT RECEIPT OF SHARE PREMIUM. SINCE T HE RECEIPT OF SHARE PREMIUM IS NOT TAXABLE, ANY SHORT RECEIPT OF SUCH PREMIUM B Y THE APPELLANT CAN BE ONLY NOTIONAL LOSS AND NOT ACTUAL LOSS. IT IS ALSO NOT C LEAR THAT THE EMPLOYEES WILL NOT GET RIGHT IN SHARES TILL COMPLETION OF THE PERIOD P RESCRIBED AND THE EXPENDITURE CLAIMED TO BE IS CONTINGENT AND NOT ACTUAL OR REAL. IN VIEW OF THIS, THE CASE LAWS REFERRED AND APPLIE D BY THE LD. AR CANNOT BE APPLIED TO THE PRESENT FACTS OF THE CASE. FURTHER, THE NATURE OF SCHEME OF ESOP OF THE APPELLANT IS MORE AKIN TO SWEAT EQUITY SHARE S SCHEMES AND THEREFORE, THE SAME CANNOT BE ALLOWED AS DECIDED BY THE HONBLE IT AT MUMBAI IN THE CASE OF FUTURE AGROVET LTD. VS ADDL. CIT RANGE-9(1) MUMBAI (2015) 63 TAXMANN.COM 140, WHERE IT WAS DECIDED AS UNDER: 7.WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED T HE RECORD. WE NOTICE THAT BOTH THE TAX AUTHORITIES HAVE PLACED RELIANCE ON THE DECISION RENDERED IN THE CASE OF RANBAXY LABORATORIES LTD. (SUPRA). A PERUSAL OF THE DISCUSSIONS MADE BY LD. CIT(A) ABOUT THE FACTS PREV AILING IN RANBAXY LABORATORIES LTD WOULD SHOW THAT THE ISSUE CONSIDER ED THEREIN WAS DIFFERENT ONE, I.E., THE ASSESSEE THEREIN CLAIMED T HE DIFFERENCE BETWEEN THE MARKET VALUE OF SHARES AND THE ISSUE PRICE AS EXPENDITURE. HOWEVER, IN THE INSTANT CASE, THE ASSESSEE HAS ISSUED SHARES AT FREE OF COST AND HENCE THE ENTIRE VALUE OF SHARES IS TREATED AS PART OF EMPLOYEE BENEFIT AND ACCORDINGLY THE VALUE OF SWEAT EQUITY SHARES WAS CL AIMED AS DEDUCTIONS. 8.BEFORE US, THE LD. AR MAINLY PLACED RELIANCE ON T HE PROVISIONS OF FRINGE BENEFIT TAX TO CONTEND THAT THE ASSESSEE, HAVING PA ID THE FRINGE BENEFIT TAX, 7 ITA NOS.6479 & 6891/MUM/2016 JM FINANCIAL INSTITUTIONAL SECURITIES PVT.LTD. ASSESSMENT YEAR-2012-13 SHOULD BE ALLOWED TO CLAIM THE VALUE OF SWEAT EQUIT Y SHARES AS DEDUCTION. THE LD. AR INVITED OUR ATTENTION TO CIRCULAR NO.8 O F 2005 DATED 29-08- 2005 ISSUED BY THE CBDT GIVING CLARIFICATIONS ABOUT THE FRINGE BENEFIT TAX. THE LD. AR INVITED OUR ATTENTION TO THE QUESTI ON NO.35 AND THE ANSWER GIVEN TO IT WHEREIN IT IS CLARIFIED THAT THE FRINGE BENEFIT TAX IS NOT PAYABLE ON THE PORTION OF EXPENSES, WHICH WERE DISA LLOWED. ACCORDINGLY, THE LD. AR DREW AN INFERENCE, APPARENTLY ON REVERSE INTERPRETATION, THAT IF THE FRINGE BENEFIT TAX IS ACCEPTED, THEN THE EXPEND ITURE IS ALLOWABLE AS REVENUE EXPENDITURE. WE ARE UNABLE TO AGREE WITH TH E SAID CONTENTIONS. AS SUBMITTED BY LD. DR, THE INCOME FROM BUSINESS HA S TO BE NECESSARILY COMPUTED IN TERMS OF SEC. 28 TO 43 OF THE ACT. THE COMPUTATION OF FRINGE BENEFIT TAX IS A SUBSEQUENT EXERCISE. ACCORDINGLY, IF ANY EXPENDITURE IS DISALLOWED WHILE COMPUTING THE BUSINESS INCOME, THE N THE ASSESSEE MAY NOT BE LIABLE TO PAY THE FRINGE BENEFIT TAX. THIS P OSITION HAS BEEN MADE CLEAR BY THE CBDT IN THE ANSWER TO Q.NO.35 GIVEN IN CIRCULAR NO.8 OF 2005, WHEREIN IT IS STATED THAT THE FRINGE BENEFIT TAX IS PAYABLE ONLY ON THE AMOUNT ALLOWED UNDER THE PROVISIONS OF INCOME TAX A CT. HENCE, IN OUR VIEW, THE ASSESSING OFFICER WAS RIGHT IN HOLDING TH AT THE QUESTION OF ALLOWABILITY OF THE IMPUGNED CLAIM SHOULD BE INDEPE NDENTLY TESTED IN TERMS OF THE PROVISIONS OF SEC. 37(1) OF THE ACT. FURTHER OUR ATTENTION WAS INVITED TO THE PROVISIONS OF SEC. 115WKA WHICH PROVIDE FOR RECOVERY OF FRINGE BENEFIT TAX BY THE EMPLOYER FROM EMPLOYEE AND ALSO TO THE PROVISIONS OF SEC.115WKB OF THE ACT WHICH STATES THAT THE FRINGE BENEFIT TAX SO RECOVERED SHALL BE DEEMED TO BE THE TAX PAID BY SUC H EMPLOYEE IN RESPECT OF THE VALUE OF FRINGE BENEFIT AS DETERMINED U/S 11 15WC(1)(BA) OF THE ACT. HENCE, A SPECIFIC QUESTION WAS PUT TO THE LD AR AS TO WHETHER THE ABOVE SAID EMPLOYEES HAVE DISCLOSED THE VALUE OF SWEAT EQ UITY SHARES AS THEIR RESPECTIVE INCOME, THE LD. A.R SUBMITTED THAT THEY HAVE NOT DECLARED THE SAME AS THEIR RESPECTIVE INCOME. IN ANY CASE, THE M ETHODOLOGIES PRESCRIBED IN THE PROVISIONS RELATING TO FRINGE BEN EFIT TAX FOR PAYMENT/RECOVERY OF TAX MAY NOT BE RELEVANT TO DETE RMINE ABOUT THE DEDUCTIBILITY OF AN EXPENDITURE U/S 37(1) OF THE AC T. 9.NOW WE SHALL EXAMINE THE DEFINITION GIVEN FOR SW EAT EQUITY SHARES IN THE EXPLANATION BELOW TO SEC. 115WB (1) OF THE ACT SWEAT EQUITY SHARES MEANS EQUITY SHARES ISSUED BY A COMPANY TO ITS EMPLOYEES OR DIRECTORS AT A DISCOUNT OR FOR CON SIDERATION OTHER THAN CASH FOR PROVIDING KNOW-HOW OR MAKING AVAILABL E RIGHTS IN THE NATURE OF INTELLECTUAL PROPERTY RIGHTS OR VALUE ADD ITIONS, BY WHATEVER NAME CALLED. THUS, IT IS SEEN THAT THE SWEAT EQUITY SHARES IS IS SUED FOR CONSIDERATION OTHER THAN CASH FOR PROVIDING KNOW-HOW OR FOR MAK ING AVAILABLE RIGHTS IN THE NATURE OF INTELLECTUAL PROPERTY RIGHTS OR VALUE ADDITIONS. THUS, THE EMPLOYEES OR DIRECTORS SHOULD PROVIDE INTANGIBLE A SSETS OF THE NATURE 8 ITA NOS.6479 & 6891/MUM/2016 JM FINANCIAL INSTITUTIONAL SECURITIES PVT.LTD. ASSESSMENT YEAR-2012-13 SPECIFIED IN THE ABOVE SAID DEFINITION TO THE COMPA NY FOR OBTAINING THE EQUITY SHARES AT A DISCOUNT OR FOR CONSIDERATION OTHER THAN CASH. IF SHARES ARE ISSUED AT FREE OF COST WITHOUT ACQUIRI NG ANY INTANGIBLE ASSETS OF THE NATURE SPECIFIED IN THE ABOVE SAID DEFINITIO N, IN OUR VIEW, THE SAME WOULD NOT FALL IN THE CATEGORY OF SWEAT EQUITY SHA RES. 10.THE NOTES OF ACCOUNTS ATTACHED TO THE BALANCE SH EET AS AT 31.3.2008, WHICH IS PLACE AT PAGE 27 OF THE PAPER BOOK, STATES ABOUT THE ISSUE OF SWEAT EQUITY SHARES, AS UNDER: - DURING THE YEAR THE COMPANY HAS ISSUED EQUITY SHAR ES OF RS.50,00,000/- EACH (5,00,000 EQUITY SHARES OF RS.1 0/- EACH) TO MR. NARENDRA BAHETI (MANAGING DIRECTOR) AND MR. RAJENDR A BAHETI (ZONAL HEAD NORTH ZONE) AS PER BOARD RESOLUTION D ATED 14 TH NOVEMBER, 2007. THE SHAREHOLDERS HAD PASSED A SPECI AL RESOLUTION IN THE EXTRAORDINARY GENERAL MEETING HEL D ON 29 TH DECEMBER, 2007 TO AUTHORIZE SUCH ALLOTMENT. THE SHA RES WERE ALLOTTED ON 16 TH JANUARY, 2008. THE SWEAT EQUITY SHARES HAVE BEEN ISSUED FOR CONSIDERATION OTHER THAN CASH FOR PROVID ING PROFESSIONAL SERVICES. THUS IT IS SEEN THAT THE ASSESSEE HAS ISSUE EQUITY SHARES FOR PROVIDING PROFESSIONAL SERVICES, WHICH HAS BEEN CONSIDERED AS VALUE ADDITION BY THE ASSESSEE COMPANY. THIS FACT HAS FURTHER BEEN EL ABORATED IN THE REPORT DATED 18-10-2007 GIVEN BY M/S DOOGAR & ASSOCIATES, CHARTERED ACCOUNTANTS WHO HAD VALUED THE CONSIDERATION FOR PR OPOSED ISSUE OF SWEAT EQUITY SHARES TO BOTH THE EMPLOYEES. IN THE S AID REPORT, IT IS STATED THAT THE BUSINESS CONCEPT OF SELLING STAPLES SUCH A S SUGAR, RICE, PULSES, WHEAT/ATTA ETC., IN OPEN DRUMS WAS INTRODUCED BY MR . BAHETI (ONE OF THE EMPLOYEES) FOR THE FIRST TIME IN THE NAME OF FOOD BAZAR, WHICH BECAME A GREAT HIT WITH THE CONSUMERS. CONSIDERING THE VAST EXPERIENCE IN THE TRADING, PROCUREMENT, BUSINESS DEVELOPMENT AND MANA GING QUALITIES OF MR. NARENDRA BAHETI, HE WAS MADE THE MANAGING DIREC TOR OF THE ASSESSEE COMPANY. ANOTHER EMPLOYEE SHRI RAJENDRA BAHETI IS A CHARTERED ACCOUNTANT AND HE HAD JOINED HANDS WITH MR. NARENDR A BAHETI IN DEVELOPING FOOD BAZAARS AND WAS IN-CHARGE OF PROCUR EMENT OF STAPLES. HENCE HE WAS APPOINTED AS ZONAL HEAD NORTH. 11.FROM THE VALUATION REPORT FURNISHED BY THE CONSU LTANT CITED ABOVE, WE NOTICE THAT THE ISSUING OF SWEAT EQUITY SHARES WAS AUTHORIZED WITH THE STIPULATION THAT THEY WILL BE ENTITLED FOR THE SAME AFTER THE COMPLETION OF ONE YEAR FROM THE DATE OF COMMENCEMENT OF BUSINESS SUBJECT TO THE CONDITION THAT HE WILL DEVELOP THE SUPPLY CHAIN TO MEET PRIL (HOLDING COMPANY) REQUIREMENT FOR THEIR FOOD & GROCERY OUTLE TS AND FRAME THE ORGANIZATION STRUCTURE IN SUCH A WAY THAT PFPIL (O LD NAME OF THE ASSESSEE HEREIN) DEVELOP ITS SYSTEM WITH THE DEVELO PMENT OF PRILS BUSINESS. THE SWEAT EQUITY SHARES SHALL BE ISSUED W ITHIN FIRST FIVE YEARS 9 ITA NOS.6479 & 6891/MUM/2016 JM FINANCIAL INSTITUTIONAL SECURITIES PVT.LTD. ASSESSMENT YEAR-2012-13 AND IF DEVELOPMENTS ARE NOT ACHIEVED SATISFACTORILY IN THE FIRST YEAR, AFORESAID OPTION OF SWEAT EQUITY WILL LAPSE. FROM T HE REPORT GIVEN UNDER THE HEADING BUSINESS ACTIVITIES OF THE COMPANY, I T IS SEEN THAT THE ASSESSEE COMPANY WAS FORMED ORIGINALLY IN THE NAME OF PANTALOON FOOD PRODUCT INDIA LTD (PFPIL) AS A WHOLLY OWNED SUBSIDI ARY OF PANTALOON RETAIL (INDIA) LTD (PRIL) ON 13.04.2005. THE TURNOV ER TARGET WAS FIXED AT RS.50 CRORES FOR THE FIRST YEAR OF OPERATIONS AND T HE SAME WAS ACHIEVED. HENCE BOTH THE PERSONS CITED ABOVE WERE ALLOTTED SW EAT EQUITY SHARES DURING THE YEAR UNDER CONSIDERATION. 12.THE FOREGOING DISCUSSIONS WOULD SHOW THAT THE SW EAT EQUITY SHARES WERE ISSUED TO THE ABOVE SAID TWO PERSONS FOR VALU E ADDITION AS GIVEN IN THE DEFINITION OF THE EXPRESSION SWEAT EQUITY SHAR ES. AS DISCUSSED EARLIER, THE VALUE ADDITION WAS GIVEN BY THE ABOVE SAID PERSONS TO THE ASSESSEE COMPANY IN THE FORM OF THEIR VAST EXPERIEN CE IN NEW BUSINESS CONCEPTS AND PROFESSIONAL EXPERIENCE. UNDER THESE S ET OF FACTS, IN OUR VIEW, THE VALUE ADDITION WOULD PARTAKE THE CHARACTE R OF AN INTANGIBLE ASSET IN THE HANDS OF THE ASSESSEE COMPANY. SINCE THE SWE AT EQUITY SHARES WERE ISSUED FOR ACQUIRING THE VALUE ADDITION, IN OU R VIEW, THE TAX AUTHORITIES ARE JUSTIFIED IN HOLDING THE SAME AS C APITAL EXPENDITURE IN THE HANDS OF THE ASSESSEE COMPANY. ACCORDINGLY, WE UPHO LD THE ORDER OF LD. CIT(A) ON THIS ISSUE. 13.IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS DISMISSED. KEEPING IN VIEW THE ABOVE FACTS AND CIRCUMSTANCES O F THE CASE, THE DISALLOWANCE MADE BY THE AO IS UPHELD. IN THE RESULT, THIS GROUN D OF APPEAL IS DISMISSED. AGGRIEVED, THE ASSESSEE IS IN FURTHER APPEAL BEFORE US. 4.1 THE LD. SENIOR COUNSEL, DR K.SHIVRAM , SUBMITTED THAT THE ASSESSEES EMPLOYEES PARTICIPATED IN THE ESOP SCHEME FORMULATED BY THE PARENT COMPANY OF THE ASSESSEE AND ASSESSEE REIMBURSED THE DIFFERENTIAL AMOUNT OF MARKET PRICE [RS.31.50 PER SHARE] VS. ISSUE PRIC E [RE. 1/- PER SHARE] AGGREGATING TO RS.1.32 CRORES FOR THE AFORESAID PAR TICIPATION AND THE SAID SUM WAS PAID FOR RETENTION OF EMPLOYEES AND MERELY A METHOD OF REMUNERATING THEM. THE LD. COUNSEL SUBMITTED THAT L OWER AUTHORITIES FAILED TO APPRECIATE THAT THE EXPENDITURE WAS NOT A CAPITA L EXPENDITURE IN THE 10 ITA NOS.6479 & 6891/MUM/2016 JM FINANCIAL INSTITUTIONAL SECURITIES PVT.LTD. ASSESSMENT YEAR-2012-13 HANDS OF THE ASSESSEE SINCE NO ADVANTAGE IN THE CAP ITAL FIELD ACCRUED TO THE ASSESSEE AND THE IMPUGNED EXPENDITURE NEITHER GAVE RISE TO ANY CAPITAL ASSET-TANGIBLE OR INTANGIBLE IN THE HANDS OF THE AS SESSEE NOR DID IT AFFECT THE CAPITAL OF THE ASSESSEE. THE SHARES WERE ALLOTTED B Y THE HOLDING COMPANY TO THE EMPLOYEES OF THE ASSESSEE AND THE ASSESSEE C OMPANY MERELY MADE GOOD THE DIFFERENCE. SINCE THERE WAS NO ADVANTAGE I N THE CAPITAL FILED, THE EXPENDITURE WAS REVENUE EXPENDITURE IN TERMS OF DEC ISION OF HONBLE APEX COURT RENDERED IN EMPIRE JUTE COMPANY LTD VS. CIT [124 ITR 1]. THE LD. COUNSEL FURTHER SUBMITTED THAT THE SAID EXPENDITURE WAS IN THE NATURE OF INCENTIVE FOR THE EMPLOYEES AS A MEANS OF RETAINING / REWARDING THE EMPLOYEES AND THEREFORE ALLOWABLE U/S 37(1). IT IS FURTHER SUBMITTED THAT THE ASSESSEE MADE THE ACTUAL PAYMENT TO THE HOLDING COM PANY AND NEITHER THE PARENT COMPANY NOR THE ASSESSEE COMPANY HAD TO FORE GO ANY PREMIUM. THE PARENT COMPANY RECEIVED THE FULL PRICE FOR ITS SHARE AND THE ASSESSEE HAD ACTUALLY PAID THE SAME THROUGH ITS BANK ACCOUNT AS EMPLOYEES BENEFIT EXPENDITURE. RELIANCE HAS BEEN PLACED ON NUMBER OF JUDICIAL PRONOUNCEMENTS RENDERED BY THIS TRIBUNAL AT DIFFERE NT POINT OF TIME. 4.2 AT THE SAME TIME, LD. COUNSEL DISTINGUISH THE C ASE LAWS RELIED UPON BY LOWER AUTHORITIES BY SUBMITTING THAT THE DECISIO N RENDERED IN RANBAXY LABORATORIES LTD. & VIP INDUSTRIES LTD. HAS ALREADY BEEN CONSIDERED IN THE FAVORABLE DECISION RENDERED BY THE SPECIAL BENCH OF BANGALORE TRIBUNAL IN THE CASE OF BIOCON LIMITED VS. DCIT [ 144 ITD 21]. THE CASE OF PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION LIMITED DEALT WITH THE ISSUE OF 11 ITA NOS.6479 & 6891/MUM/2016 JM FINANCIAL INSTITUTIONAL SECURITIES PVT.LTD. ASSESSMENT YEAR-2012-13 FEES PAID TO REGISTRAR OF COMPANIES FOR INCREASE IN SHARE CAPITAL AND HENCE NOT APPLICABLE. IT IS FURTHER SUBMITTED THAT THE CASE OF FUTURE AGROVET LTD. VS. ACIT [155 ITD 786] DEALT WITH THE ISSUE OF SWEAT EQUITY SHARES WHICH IS NOT THE CASE HERE. 4.3 PER CONTRA, LD. DEPARTMENTAL REPRESENTATIVE, MS. POOJA SWAROOP SUPPORTED THE STAND OF LOWER AUTHORITIES BY SUBMITT ING THAT THE IMPUGNED EXPENDITURE WAS RELATED WITH INCREASE IN SHARE CAPI TAL AND WAS IN THE NATURE OF COMPENSATION OF SHARE PREMIUM AND THEREFORE, CAPITAL IN NATURE WHICH COULD NOT BE ALLOWED TO THE ASSESSEE. 5.1 WE HAVE CAREFULLY HEARD THE RIVAL CONTENTIONS A ND PERUSED RELEVANT MATERIAL ON RECORD INCLUDING JUDICIAL PRONOUNCEMENT S AS CITED BEFORE US. SOME UNDISPUTED FACTS THAT EMERGE OUT OF THE FACTS AS NARRATED BY US HERE- IN-ABOVE ARE THAT THERE IS NO INCREASE IN THE SHARE CAPITAL OF THE ASSESSEE RATHER THE SHARES HAVE BEEN ISSUED BY ITS HOLDING C OMPANY TO THE ASSESSEES EMPLOYEES AND THE ASSESSEE HAS FUNDED TH E DIFFERENTIAL AMOUNT I.E. DIFFERENCE BETWEEN ISSUE PRICE AND THE MARKET PRICE OF THE SHARES. THE LD. CIT(A), IN OUR OPINION, HAS CLEARLY FLAWED IN E QUATING THE SAME WITH SWEAT EQUITY SHARES WHICH IS NOT THE CASE HERE AND THEREFORE, RELIANCE PAID ON THE DECISION OF FUTURE AGROVET LIMITED WAS ERRONEOUS. 5.2 THE LOWER AUTHORITIES, IN OUR OPINION, WERE MIS LED BY THE FACT THAT THE IMPUGNED PAYMENTS WERE MADE TO MAKE UP FOR THE SHOR TFALL IN THE SHARE PREMIUM ACCOUNT AND THEREFORE, THE SAME WAS ON CAPITAL ACCOUNT. HOWEVER, IN OUR OPINION, THE NATURE OF RECEIPTS IN THE HANDS OF HOLDING 12 ITA NOS.6479 & 6891/MUM/2016 JM FINANCIAL INSTITUTIONAL SECURITIES PVT.LTD. ASSESSMENT YEAR-2012-13 COMPANY WAS NOT RELEVANT FACTOR TO DETERMINE THE TR UE NATURE OF PAYMENT IN THE HANDS OF THE ASSESSEE PAYER. THE SAME IS AKIN T O A SITUATION WHERE THE ASSESSEE ACQUIRES CERTAIN MOVEABLE PROPERTIES FOR T HE BENEFIT OF ITS EMPLOYEES AS A MEANS OF RETAINING THEM OR REWARDING THEM, WHICH IS CLEARLY ALLOWABLE TO THE ASSESSEE AS BUSINESS EXPEN DITURE U/S 37(1). THE MOVEABLE PROPERTY, IN THE INSTANT CASE, HAPPENS TO BE EQUITY SHARES OF THE ASSESSEES HOLDING COMPANY WHICH HAS LED THE LOWER AUTHORITIES TO TREAT THE SAME AS EXPENDITURE IN THE CAPITAL FIELD. HOWEVER, THE SAME, IN OUR OPINION WAS AN ERRONEOUS APPROACH AND THEREFORE, COULD NOT BE SUSTAINED. 5.3 THE FACTS OF THE ABOVE CASE, AS CORRECTLY POINT ED OUT BY LD. SR. COUNSEL ARE COVERED IN ASSESSEES FAVOR BY THE NUMB ER OF JUDGMENTS RENDERED BY THIS TRIBUNAL. FOR EASE OF REFERENCE, W E WOULD LIKE TO EXTRACT RELEVANT PORTION OF THE JUDGMENT RENDERED BY BANGALORE TRIBUNAL IN NOVO NORDISK INDIA (P.) LTD. VS. DCIT [42 TAXMANN.COM 16 8] WHICH IS AS FOLLOWS:- 18. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IT IS CL EAR FROM THE FACTS ON RECORD THAT THERE WAS AN ACTUAL ISSUE OF SHARES OF THE PARENT C OMPANY BY THE ASSESSEE TO ITS EMPLOYEES. THE DIFFERENCE, BETWEEN THE FAIR MARKET VALUE OF THE SHARES OF THE PARENT COMPANY ON THE DATE OF ISSUE OF SHARES AND THE PRIC E AT WHICH THOSE SHARES WERE ISSUED BY THE ASSESSEE TO ITS EMPLOYEES, WAS REIMBU RSED BY THE ASSESSEE TO ITS PARENT COMPANY. THIS SUM SO REIMBURSED WAS CLAIMED AS EXPE NDITURE IN THE PROFIT & LOSS ACCOUNT OF THE ASSESSEE AS AN EMPLOYEE COST. THE LA W BY NOW IS WELL SETTLED BY THE DECISION OF THE SPECIAL BENCH OF THE ITAT BANGALORE IN THE CASE OF BIOCON LTD. V. DY. CIT [2013] 35 TAXMANN.COM 335 AND OTHER CONNECTED A PPEALS, BY ORDER DATED 16.07.2013, WHEREIN IT WAS HELD THAT EXPENDITURE ON ACCOUNT OF ESOP IS A REVENUE EXPENDITURE AND HAD TO BE ALLOWED AS DEDUCTION WHIL E COMPUTING INCOME. THE SPECIAL BENCH HELD THAT THE SOLE OBJECT OF ISSUING SHARES T O EMPLOYEES AT A DISCOUNTED PREMIUM IS TO COMPENSATE THEM FOR THE CONTINUITY OF THEIR S ERVICES TO THE COMPANY. BY NO STRETCH OF IMAGINATION, WE CAN DESCRIBE SUCH DISCOUNT AS EI THER A SHORT CAPITAL RECEIPT OR A CAPITAL EXPENDITURE. IT IS NOTHING BUT THE EMPLOYEE S COST INCURRED BY THE COMPANY. THE 13 ITA NOS.6479 & 6891/MUM/2016 JM FINANCIAL INSTITUTIONAL SECURITIES PVT.LTD. ASSESSMENT YEAR-2012-13 SUBSTANCE OF THIS TRANSACTION IS DISBURSING COMPENS ATION TO THE EMPLOYEES FOR THEIR SERVICES, FOR WHICH THE FORM OF ISSUING SHARES AT A DISCOUNTED PREMIUM IS ADOPTED. 19. IN THE PRESENT CASE, THERE IS NO DISPUTE THAT THE LIABILITY HAS ACCRUED TO THE ASSESSEE DURING THE PREVIOUS YEAR. THE ONLY QUESTION TO BE D ECIDED IS AS TO WHETHER IT IS THE EXPENDITURE OF THE ASSESSEE OR THAT OF THE PARENT C OMPANY. WE ARE OF THE VIEW THAT THE OBSERVATIONS OF THE CIT(A) IN PARA 5.6 OF HIS ORDER THAT THESE EXPENSES ARE THE EXPENSES OF THE FOREIGN PARENT COMPANY IS WITHOUT A NY BASIS AND LIE IN THE REALM OF SURMISES. THE FOREIGN PARENT COMPANY HAS A POLICY O F OFFERING ESOP TO ITS EMPLOYEES TO ATTRACT THE BEST TALENT AS ITS WORK FORCE. IN PU RSUANCE OF THIS POLICY OF THE FOREIGN PARENT COMPANY, ALLOWED ITS SUBSIDIARIES/AFFILIATES ACROSS THE WORLD TO ISSUE ITS SHARES TO THE EMPLOYEES. AS FAR AS THE ASSESSEE IN THE PRESEN T CASE WHICH IS AN AFFILIATE OF THE FOREIGN PARENT COMPANY IS CONCERNED, THE SHARES WER E IN FACT ACQUIRED BY THE ASSESSEE FROM THE PARENT COMPANY AND THERE WAS AN ACTUAL OUT FLOW OF CASH FROM THE ASSESSEE TO THE FOREIGN PARENT COMPANY. THE PRICE AT WHICH SHAR ES WERE ISSUED TO THE EMPLOYEES WAS PAID BY THE EMPLOYEE TO THE ASSESSEE WHO IN TUR N PAID IT TO THE PARENT COMPANY. THE DIFFERENCE BETWEEN THE FAIR MARKET VALUE OF THE SHARES OF THE PRICE AT WHICH SHARES WERE ISSUED TO THE EMPLOYEES WAS MET BY THE ASSESSE E. THIS FACTUAL POSITION IS NOT DISPUTED AT ANY STAGE BY THE REVENUE. IN SUCH CIRCU MSTANCES, WE DO NOT SEE ANY BASIS ON WHICH IT COULD BE SAID THAT THE EXPENDITURE IN Q UESTION WAS A CAPITAL EXPENDITURE OF THE FOREIGN PARENT COMPANY. AS FAR AS THE ASSESSEE IS CONCERNED, THE DIFFERENCE BETWEEN THE FAIR MARKET VALUE OF THE SHARES OF THE PARENT COMPANY AND THE PRICE AT WHICH THOSE SHARES WERE ISSUED TO ITS EMPLOYEES IN INDIA WAS PAID TO THE EMPLOYEE AND WAS AN EMPLOYEE COST WHICH IS A REVENUE EXPENDITURE INCURRED FOR THE PURPOSE OF THE BUSINESS OF THE COMPANY AND HAD TO BE ALLOWED AS DE DUCTION. THERE IS NO REASON WHY THIS EXPENDITURE SHOULD NOT BE CONSIDERED AS EXPEND ITURE WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF BUSINESS OF THE ASSESSE E. 20. WE FAIL TO SEE ANY BASIS FOR THE OBSERVATION OF TH E CIT(A) THAT THE OBLIGATION TO ISSUE SHARES AT A DISCOUNTED PRICE TO THE EMPLOYEES OF TH E ASSESSEE WAS THAT OF THE FOREIGN PARENT COMPANY AND NOT THAT OF THE ASSESSEE. ADMITT EDLY, THE SHARES WERE ISSUED TO EMPLOYEES OF THE ASSESSEE AND IT IS THE ASSESSEE WH O HAS TO BEAR THE DIFFERENCE IN COST OF THE SHARES. THE EXPENDITURE IS NECESSARY FO R THE ASSESSEE TO RETAIN A HEALTH WORK FORCE. BUSINESS EXPEDIENCY REQUIRED THAT THE A SSESSEE INCUR SUCH COSTS. THE PARENT COMPANY WILL BE BENEFITTED INDIRECTLY BY SUC H A MOTIVATED WORK FORCE. THIS WILL BE NO GROUND TO DENY THE DEDUCTION OF A LEGITIMATE BUS INESS EXPENDITURE TO THE ASSESSEE AS LAID DOWN BY THE HON'BLE SUPREME COURT IN THE CA SE OF SASSOON J. DAVID& CO. (P.) LTD. (SUPRA). 21. THE REFERENCE BY THE CIT(A) TO THE PROVISIONS OF S EC.40A(2)(B) OF THE ACT IS AGAIN WITHOUT ANY BASIS. THE PRICE OF THE SHARES OF NNAS IS ARRIVED AT BY APPLYING THE AVERAGE MARKET PRICE FOR THE PERIOD 3RD OCTOBER, - 17THE OC TOBER, 2005 IN THE COPENHAGEN STOCK EXCHANGE. THE PRICE SO ARRIVED AT AND THE PRI CE AT WHICH SHARES ARE ISSUED TO THE EMPLOYEES OF THE ASSESSEE IS THE BENEFIT WHICH THE EMPLOYEES GET UNDER THE ESOP. THE ASSESSEE OR ITS PARENT COMPANY CAN NEVER INFLUE NCE THE STOCK MARKET PRICES ON A 14 ITA NOS.6479 & 6891/MUM/2016 JM FINANCIAL INSTITUTIONAL SECURITIES PVT.LTD. ASSESSMENT YEAR-2012-13 PARTICULAR DATE. THERE IS NO EVIDENCE OR EVEN A SUG GESTION MADE BY THE CIT(A) IN HIS ORDER. THERE IS NO BASIS TO APPLY THE PROVISIONS OF SEC.40A(2)(B) OF THE ACT. 22. WITH REGARD TO THE DECISION OF THE ITAT IN THE CAS E OF ACCENTURE SERVICES (P.) LTD. (SUPRA), WE FIND THAT THE FACTS OF THE CASE OF ACCE NTURE SERVICES (P.) LTD. (SUPRA) ARE IDENTICAL. IN THE CASE OF ACCENTURE SERVICES (P.) L TD. (SUPRA), THE FACTS WERE THAT THE ASSESSEE COMPANY INCURRED CERTAIN EXPENSES ON ACCOU NT OF PAYMENTS MADE BY IT FOR THE SHARES ALLOTTED TO ITS EMPLOYEES IN CONNECTION WITH THE ESPP. THE AO HAD DISALLOWED RS. 9,06,788/- INCURRED BY THE ASSESSEE ON THE GROUND THAT THIS EXPENDITURE IS NOT THE EXPENDITURE OF ASSESSEE COMPANY BUT THAT EXPENDITURE IS OF PARENT COMPANY AND THE BENEFIT OF SUCH EXPENDITURE ACCRUES TO THE PARENT COMPANY AND NOT ASSESSEE. THE CIT(A) DELETED THE ADDITION MADE BY THE AO. THE CIT(A) FOUND THAT THE COMMON SHARES OF ACCENTURE LTD. THE PARENT COMPANY, HAVE B EEN ALLOTTED TO THE EMPLOYEES OF ASPL, THE INDIAN AFFILIATE/ASSESSEE AND NOT TO THE EMPLOYEES OF THE PARENT COMPANY. THE CIT(A) ALSO FOUND THAT THOUGH THE SHARES OF THE PARENT COMPANY HAVE BEEN ALLOTTED, THE SAME HAVE BEEN GIVEN TO THE EMPLOYEES OF THE ASSESSEE AT THE BEHEST OF THE ASSESSEE. THE CIT(A) THUS HELD THAT IT WAS AN E XPENSE INCURRED BY THE ASSESSEE TO RETAIN, MOTIVE AND AWARD ITS EMPLOYEES FOR THEIR HA RD WORK AND IS AKIN TO THE SALARY COSTS OF THE ASSESSEE. THE SAME WAS THEREFORE BUSIN ESS EXPENDITURE AND SHOULD BE ALLOWABLE IN COMPUTING THE TAXABLE INCOME OF THE AS SESSEE. THE TRIBUNAL UPHELD THE VIEW OF THE CIT(A). IT CAN BE SEEN FROM THE DECISIO N IN THE CASE OF ACCENTURE SERVICES (P.) LTD. (SUPRA) THAT THE SHARES OF THE FOREIGN CO MPANY WERE ALLOTTED AND GIVEN TO THE EMPLOYEES OF AFFILIATE IN INDIA AT THE BEHEST OF TH E AFFILIATE IN INDIA. THE CIT(APPEALS), HOWEVER, PRESUMED THAT THE FACTS IN THE INSTANT CAS E OF THE ASSESSEE WAS THAT THE SHARES WERE ALLOTTED TO THE EMPLOYEES OF THE AFFILI ATE IN INDIA AT THE BEHEST OF THE FOREIGN COMPANY. THIS IS NOT THE FACTUAL POSITION IN THE AS SESSEE'S CASE, AS THE ASSESSEE HAD ON ITS OWN FRAMED THE NNIPL ESOP SCHEME, 2005, TO B ENEFIT ITS EMPLOYEES. NNAS MAY HAVE A GLOBAL POLICY OF REWARDING EMPLOYEES OF AFFILIATES WITH ITS SHARES BEING GIVEN AT A DISCOUNT AND THAT POLICY MIGHT BE THE BASIS FO R THE ASSESSEE TO FRAME ESOP. THAT BY ITSELF WILL NOT MEAN THAT THE ESOP WAS AT THE BE HEST OF THE PARENT COMPANY. IN ANY EVENT THE IMMEDIATE BENEFICIARY IS THE ASSESSEE THO UGH THE PARENT COMPANY MAY ALSO BE INDIRECT BENEFICIARY OF A MOTIVATED WORK FORCE O F A SUBSIDIARY. WE ARE OF THE VIEW THAT THE FACTUAL BASIS ON WHICH THE CIT(APPEALS) DISTING UISHED THE DECISION OF THE MUMBAI BENCH OF ITAT IN THE CASE OF ACCENTURE SERVICES (P. ) LTD. (SUPRA) IS ERRONEOUS. 23. WITH REGARD TO THE OBSERVATIONS OF THE CIT(APPEALS ) THAT THE ESOP ACTUALLY BENEFITS ONLY THE PARENT COMPANY, WE ARE OF THE VIEW THAT TH E EXPENDITURE IN QUESTION IS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE AND THE FACT THAT THE PARENT COMPANY IS ALSO BENEFITED BY REASON OF A MOT IVATED WORK FORCE WOULD BE NO GROUND TO DENY THE CLAIM OF THE ASSESSEE FOR DEDUCT ION, WHICH OTHERWISE SATISFIES ALL THE CONDITIONS REFERRED TO IN SECTION 37(1) OF THE ACT. THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF SASSOON J. DAVID & CO. (P)LTD. (SUPRA) AND THE HON'BLE KARNATAKA HIGH COURT DECISION IN THE CASE OF MYSORE KIRLOSKAR LTD. (SUPRA) CLEARLY SUPPORT THE PLEA OF THE ASSESSEE IN THIS REGARD. 15 ITA NOS.6479 & 6891/MUM/2016 JM FINANCIAL INSTITUTIONAL SECURITIES PVT.LTD. ASSESSMENT YEAR-2012-13 24. WE ARE OF THE VIEW THAT IN THE FACTS AND CIRCUMSTA NCES OF THE PRESENT CASE, THE EXPENDITURE IN QUESTION WAS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE AND HAD TO BE ALLOWED AS DEDUCTION AS A REVENUE EXPENDITURE. 25. FOR THE REASONS GIVEN ABOVE, WE DIRECT THE EXPENDI TURE BE ALLOWED AS DEDUCTION. IN VIEW OF THE ABOVE STATED POSITION, THE SOLE GROU ND RAISED IN ASSESSEES APPEAL STAND ALLOWED. 5.4 SO FAR AS THE QUANTIFICATION OF THE EXPENDITURE IS CONCERNED, THE WORKING OF THE SAME HAS BEEN PROVIDED ON PAGE NUMBER-54 OF THE PAPER- BOOK. THE LD. AO IS DIRECTED TO VERIFY THE SAME AND ALLOW THE CLAIM OF THE ASSESSEE KEEPING IN VIEW THE FACT THAT THE DEDUCTIO N WOULD BE AVAILABLE TO THE ASSESSEE ONLY TO THE EXTENT OF SHARES WHICH ARE ULTIMATELY ALLOTTED BY THE ISSUER TO THE ASSESSEES EMPLOYEES AND NO DEDUC TION WOULD BE AVAILABLE AGAINST CANCELLED / UN-ALLOTTED SHARES SI NCE THE AMOUNT PAID BY ASSESSEE IN RESPECT OF THOSE SHARES WOULD ACCRUE TO THE ASSESSEE AS REFUND FROM HOLDING COMPANY. REVENUES APPEAL, ITA NO. 6479/MUM/2016 6. THE REVENUE, IN ITS APPEAL, IS AGGRIEVED BY CERT AIN RELIEF OF RS.53.30 LACS PROVIDED BY LD. FIRST APPELLATE AUTHORITY TO T HE ASSESSEE ON ACCOUNT OF DISALLOWANCE U/S 14A. AT THE OUTSET, IT IS POINTED OUT THAT TAX EFFECT OF THE QUANTUM ADDITIONS AS CONTESTED BY THE REVENUE IS LE SS THAN PRESCRIBED LIMIT OF RS.20 LACS AND THE SAME IS COVERED BY RECENTLY I SSUED LOW TAX EFFECT CIRCULAR NO.03/2018 DATED 11/07/2018 ISSUED BY CENTRAL BOARD OF DIRECT TAXES [CBDT]. THE LD. DR HAS CONTROVERTED THE SAME BY SUBMITTING THAT 16 ITA NOS.6479 & 6891/MUM/2016 JM FINANCIAL INSTITUTIONAL SECURITIES PVT.LTD. ASSESSMENT YEAR-2012-13 NECESSARY INSTRUCTIONS / CERTIFICATE, IN THIS REGAR D, WOULD BE REQUIRED FROM HIGHER AUTHORITIES. 7. WE HAVE GONE THROUGH THE CIRCULAR AND FIND THAT THE TAX EFFECT OF QUANTUM IN DISPUTE IS BELOW PRESCRIBED LIMIT OF RS. 20 LACS AND THE ASSESSEE STOOD BENEFITTED BY THE ABOVE CIRCULAR ISS UED BY CBDT WHEREIN THE MINIMUM MONETARY LIMIT FOR FILING THE APPEALS B EFORE VARIOUS APPELLATE AUTHORITIES HAVE BEEN FIXED AS UNDER:- S. NO. APPEALS/ SLPS IN INCOME-TAX MATTERS MONETARY LIMIT (RS.) 1 BEFORE APPELLATE TRIBUNAL 20.00,000 2 BEFORE HIGH COURT 50.00,000 3 BEFORE SUPREME COURT 1,00.00,000 THE AFORESAID LIMITS, AS PER PARA 13 OF THE CIRCULAR APPLIES TO PENDING APPEALS ALSO. IN VIEW OF THE ADMITTED POSITION, WE DISMISS THE REVENUES APPEAL. 8. SO FAR AS THE CONTENTIONS RAISED BY LD. DR IS CO NCERNED, WE FIND THAT AFORESAID CIRCULAR DOES NOT ENVISAGE OBTAINING OF A NY CERTIFICATE FROM ANY AUTHORITIES, IN ANY MANNER. NEVERTHELESS, THE REVEN UE IS FREE TO MOVE APPROPRIATE APPLICATION TO RECALL THIS ORDER, IF AT A LATER STAGE, IT IS FOUND THAT THE MATTER IS COVERED BY ANY EXCEPTIONS PROVIDED IN THE AFORESAID CIRCULAR OR IN CASE THE TAX EFFECT OF THE QUANTUM ADDITIONS AS AGITATED BY REVENUE EXCEEDS THE PRESCRIBED MONETARY LIMIT. 9. THE REVENUES APPEAL STAND DISMISSED. 17 ITA NOS.6479 & 6891/MUM/2016 JM FINANCIAL INSTITUTIONAL SECURITIES PVT.LTD. ASSESSMENT YEAR-2012-13 CONCLUSION 10. THE ASSESSEES APPEAL ITA NO. 6891/MUM/2016 STA ND ALLOWED WHEREAS THE REVENUES APPEAL ITA NO. 6479/MUM/2016 STAND DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 03 RD OCTOBER, 2018. SD/- SD/- (SAKTIJIT DEY) (MANOJ KUMAR AGGARWAL) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED : 03.10.2018 SR.PS:-THIRUMALESH ) COPY OF THE ORDER FORWARDED TO : 1. *+,-./ ) THE APPELLANT 2. 345./ ) THE RESPONDENT 3. 85985 :; < *+,- = ) THE CIT=A< 4. 85985 :; ) CIT CONCERNED 5. DEFG,53H;HIJ K 859*+,-L5*IJ9M K ) DRK ITATK MUMBAI 6. GOP- ) GUARD FILE ! ' # $/ BY ORDERK & / #' ()*+ $ =DY.)ASSTT.REGISTRAR< ($+ ,(-.$/ 0 / ITAT0 MUMBAI