DCIT 2(3)(2), MUMBAI V. KOTAK MAHINDRA BANK LTD, MUMBAI

ITA 698/MUM/2016

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 8030 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-12-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Assessment Year: 2009-2010
• Appeal Filed On: 11-02-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SAURABH DESHPANDE
• Keywords: Depreciation; Search and seizure; Question of law; Fair market value; Difference of opinion; Capital receipt; Change of opinion; Revenue expenditure; Reassessment proceedings; Capital expenditure
• Section: 43B; 143(3); 56(2); 37(1); 37; 56; 28; 15

Judgement Text

P A G E | 1 ITA NO. 698 /MUM/201 6 AY: 2009 - 10 DCIT 2(3)(2) VS. KOTAK MAHINDRA BANK LTD. IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, M UMBAI BEFORE SHRI P.K. BANSAL , VICE PRESIDENT AND SHRI RAVISH SOOD, JM ITA NO. 698 /MUM/201 6 ( / ASSESSMENT YEAR: 2009 - 10 ) DCIT - 2(3)(2), MUMBAI. / VS. M/S KOTAK MAHINDRA BANK LTD., 27 BKC, G BLOCK, BANDRA KURLA COMPLEX BANDRA (EAST), MUMBAI - 400 051. ./ ./ PAN NO. AAACK4409J ( / APPELLANT) : ( / RESPONDENT ) / APPELLANT BY : SHRI SAURABH DESHPANDE , D .R / RESPONDENT BY : SHRI KETAN SHAH, A.R. / DATE OF HEARING : 29.11 .2017 / DATE OF PRONOUNCEMENT : 20 .1 2 .2017 / O R D E R PER RAVISH SOOD, JUDICIAL MEMBER: THE PRESENT APPEAL FILED BY THE REVENUE IS DIRECTED A GAINST THE ORDER PASSED BY THE CIT(A) - 6 , MUMBAI, DATED 12.11.201 5 WHICH IN ITSELF ARISES FROM THE ORDER PASSED BY THE A.O UNDER SEC. 143(3) R.W.S. 147 OF THE INCOME TAX ACT, 1961 (FOR SHORT ACT), DATED 30.01.2015 . THE REVENUE ASSAILING THE ORDER OF THE CIT(A) HAD RAISED BEFORE US THE FOLLOWING GROUNDS OF APPEAL : - P A G E | 2 ITA NO. 698 /MUM/201 6 AY: 2009 - 10 DCIT 2(3)(2) VS. KOTAK MAHINDRA BANK LTD. 1. THE ORDER OF THE CIT(A) IS OPPOSED TO LAW AND FACTS OF THE CASE. 2. ON TH E FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAD ERRED IN ALLOWING THE DISCOUNT ON ISSUE OF EMPLOYEE STOCK OPTION IN ACCORDANCE WITH THE PRINCIPLE LAID DOWN BY THE PRINCIPLE LAID DOWN BY THE BANGALORE SPECIAL BENCH IN THE CASE OF BIOCON LTD (ITA NO. 368 TO 371 & 1206/BAN/2010), WHEN THE DECISION HAS NOT BEEN ACCEPTED AND FURTHER APPEAL HAS BEEN FILED BEFORE THE KARNATAKA HIGH COURT ON THIS ISSUE. 2. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY WHICH IS ENGAGED IN THE BUSINESS OF BANKING AND FINANCIAL SERVICES HAD E - FILED ITS RETURN OF INCOME FOR A.Y. 2009 - 10 ON 29.09.2009, DECLARING TOTAL INCOME OF RS. 533,53,40,480/ - . THE RETURN OF INCOME WAS THEREAFTER REVISED BY THE ASSESSEE ON 29.09.2010 A ND 18.02.2011, DECLARING TOTAL INCOME OF RS. 502,03,08,180/ - . THE CASE OF THE ASSESSEE WAS RE - OPENED U/S 147, WHEREIN ONE OF THE REASON AMONGST OTHER FOR REOPENING WAS THAT AS THE DISCOUNT ON SHARES ALLOTTED BY THE ASSESSEE TO ITS EMPLOYEES UNDER THE ESOP SCHEME OUT OF IT S SHARE CAPITAL AND CLAIMED AS AN EXPENDITURE IN THE RETURN OF INCOME WAS NOT ALLOWABLE IN VIEW OF THE CBDT CIRCULAR NO. 9/2007, DATED 20.12.2007, THEREFORE, THE INCOME OF THE ASSESSEE WAS UNDER ASSESSED TO THE EXTENT OF RS. 23,36,86,000/ - . 3. THE ASSESSEE DURING THE COURSE OF THE REASSESSMENT PROCEEDINGS ASSAILED THE VALIDITY OF THE REOPENING OF THE CONCLUDED ASSESSMENT BY THE A.O FOR DISALLOWING THE EXPENDITURE CLAIMED BY THE ASSESSEE UNDER ESOP, FOR THE REASON THAT THE A.O IN THE GARB OF THE REASSESSMENT PROCEEDINGS WAS HAVING A RELOOK AT THE FINANCIAL ACCOUNT S FURNISHED BY THE ASSESSEE DURING THE COURSE OF THE ORIGINAL ASSESSMENT PROCEEDINGS . IT WAS SUBMITTED BY THE ASSESSEE THAT IT HAD MADE TRUE AND FULL DISCLOSURE FOR THE CLAIM OF EXPENDITURE IN RESPECT OF ESOPS ISSUED TO ITS EMPLOYEES, VIDE NOTE NO. 7 IN PART B OTHER DISCLOSURES TO SCHEDULE 18 OF NOTES TO ACCOUNT S FOR THE YEAR ENDED 31.03.2009. P A G E | 3 ITA NO. 698 /MUM/201 6 AY: 2009 - 10 DCIT 2(3)(2) VS. KOTAK MAHINDRA BANK LTD. THE ASSESSEE SUBMITTED BEFORE THE A.O THAT THE REOPENING OF THE CONCLUDED ASSESSMENT IN ITS CASE ON THE BASIS OF A CHANGE OF OPINION ON THE SAME FACTS AND RECORDS AS WERE AVAILABLE BEFORE HIS PREDECESSOR WAS NOT PERMISSIBLE AS PER THE MANDATE OF LAW. HOWEVER, THE AFORESAID SUBMISSIONS OF THE ASSESSEE AS REGARDS THE VALIDITY OF THE REASSES SMENT PROCEEDINGS DID NOT FIND FAVOUR WITH THE A.O WHO UPHELD THE SAME. 4. THAT AS REGARDS THE ALLOWABILITY OF THE EXPENDITURE OF ESOPS, IT WAS SUBMITTED BY THE ASSESSEE DURING THE COURSE OF THE REASSESSMENT PROCEEDINGS THAT THE SAME HAD BEEN DELIBERATED UPON IN DETAIL BY THE SPECIAL BENCH OF THE INCOME TAX APPELLATE TRIBUNAL, BANG A LORE IN THE CASE OF BIOCON LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX (LTU) (2013) 144 ITD 21 (BANG A LORE) , WHEREIN IT WAS HELD THAT THE SAME WAS ALL OWABLE AS AN EXPENDITURE U/S 37 (1) OF THE ACT. THE ASSESSEE IN ORDER TO DRIVE HOME ITS CONTENTION THAT THE FACTS INVOLVED IN ITS CASE WERE IDENTICAL TO THOSE INVOLVED IN THE CASE OF BIOCON LTD. (SUPRA), FURNISHED A CHART DEMONSTRAT ING THE SIMILARITY OF THE FACTS INVOLVED THEREIN, AS UNDER : - PARAMETERS BIOCONS CASE & ASSESSES CASE SCHEME SCHEME IS ESOPS IS SIMILAR TO THAT OF BIOCON WHERE ESOPS ARE ISSUED TO CERTAIN EMPLOYEES TO REWARD THEIR PERFORMANCE VESTING SIMILAR TO BIOCON, THE ESOPS HAVE VESTED IN GRADED MANNER. GRANT OF ESOPS AT WHAT PRICE SIMILAR TO BIOCON, IN THE CASE OF ASSESSEE, ESOPS WERE GRANTED AT DISCOUNT TO MARKET PRICE AMORTIZATION IN THE BOOKS AMORTIZATION OF DISCOUNT IN THE BOOKS IS SIMILAR TO BIOCON WHERE THE DISCOUNT IS AMORTISED OVER THE VESTING PERIOD PE RQUISITE TAX PAID BY THE EMPLOYEE AS PER SECTION 17(2)(VII), PERQUISITE TAX IS PAID ON THE DIFFERENCE BETWEEN MARKET PRICE AT THE TIME OF P A G E | 4 ITA NO. 698 /MUM/201 6 AY: 2009 - 10 DCIT 2(3)(2) VS. KOTAK MAHINDRA BANK LTD. EXERCISE AND EXERCISE PRICE (AT WHICH ESOPS WERE GRANTED) NORTHWARD/SOUTHWARDS MOVEMENT THERE IS A PRICE MOVEMENT E ITHER UPWARD OR DOWNWARD FROM THE DATE OF VESTING TILL THE DATE OF EXERCISE. SUITABLE ADJUSTMENT I.E. NORTHWARD WHERE THE SHARE PRICE HAS GONE UP OR SOUTHWARD HERE THE SHARE PRICE HAS GONE DOWN, HAS BEEN MADE IN CLAIM ON ACCOUNT OF MOVEMENT IN THE SHARE PR ICE. THE ASSESSEE FURTHER SUBMITTED BEFORE THE A.O THAT THE SPECIAL BENCH OF THE TRIBUNAL WHILE CONCLUDING THAT THE DISCOUNT OF ESOPS WAS ALLOWABLE AS AN EXPENDITURE U/S 37(1) , HAD THEREIN HELD THAT THE SAME WAS NOTHING BUT A PART OF THE REMUNERATION PACKAGE OF THE EMPLOYEES. THE ASSESSEE FURTHER SUBMITTED BEFORE THE A.O THAT AS OBSERVED BY THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF BIOCON LTD. (SUPRA), DISCOUNT OF ESOPS COULD NEITHER BE CONSIDERED AS A SHORT RECEIPT OF CAPITA L, NOR CONSTRUED AS A CONTINGENT EXPENDITURE. THE A.O AFTER DELIBERATING ON THE CONTENTION S OF THE ASSESSEE , THOUGH ACCEPTED THAT THE FACTS IN THE CASE OF THE ASSESSEE WERE IN ACCORDANCE WITH THE PRINCIPLE LAID DOWN BY THE SPECIAL BENCH OF THE TRIBUNAL IN T HE CASE OF BIOCON LTD. (SUPRA), BUT HOWEVER, AS THE DEPARTMENT HAD NOT ACCEPTED THE SAID ORDER OF THE SPECIAL BENCH OF THE TRIBUNAL AND HAD FILED AN APPEAL WITH THE HONBLE HIGH COURT OF KARNATAKA, WHICH HAD ADMITTED THE QUESTION OF LAW RAISED IN THE APP EAL FILED BEFORE IT, THEREFORE, THE RELIANCE PLACED BY THE ASSESSEE ON THE ORDER OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF BIOCON LTD. (SUPRA) COULD NOT BE ACCEPTED. THE A.O ON THE BASIS OF HIS AFORESAID OBSERVATIONS INTER ALIA DISALLOWED THE E XPENDITURE OF RS. 23,36,86,000/ - CLAIMED BY THE ASSESSEE ON ACCOUNT OF ESOPS AND ASSESSED THE INCOME AT RS. 553,49,33,150/ - . P A G E | 5 ITA NO. 698 /MUM/201 6 AY: 2009 - 10 DCIT 2(3)(2) VS. KOTAK MAHINDRA BANK LTD. 5. AGGRIEVED , THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A) . THE CIT(A) AFTER DELIBERATING ON THE CONTENTION S RAISED BY THE ASSESSEE BEFORE HIM, THEREIN UPHELD THE VALIDITY OF THE REASSESSMENT PROCEEDINGS. HOWEVER, THE CIT(A) OBSERVING THAT THE ISSUE AS REGARDS THE ENTITLEMENT OF THE ASSESSEE TOWARDS CLAIM OF DEDUCTION ON ESOPS WAS SQUARELY COVERED BY THE DECIS ION OF THE SPECIAL BENCH OF THE INCOME TAX APPELLATE TRIBUNAL, BANG A LORE IN THE CASE OF BIOCON LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX (LTU) (2013) 144 ITD 21 (BANG A LORE) , THEREFORE CONCLUDED THAT THE DISCOUNT ALLOWED TO THE EMPLOYEES WAS NOTHING BUT A MODE OF COMPENSATING THE EMPLOYEES. THE CIT(A) FURTHER OBSERVED THAT THE ORDER OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF BIOCON LTD. (SUPRA) WAS ALSO FOLLOWED BY THE JURISDICTIONAL BENCH OF THE ITAT, MUMBAI IN THE CASE OF MAHINDRA AND MAHINDRA LTD. VS. ADDL. CIT, RANGE - 2(2) [40 TAXMANN.COM 522 (MUM)] . THUS, ON THE BASIS OF HIS AFORESAID OBSERVATIONS THE CIT(A) CONCLUDED THAT THE EXPENDITURE INCURRED BY THE ASSESSEE ON ESOPS WAS ALLOWABLE IN THE HANDS OF THE ASSESSEE. THE CIT(A) BEING PERSUADED TO ACCEPT THE CONTENTION OF ASSESSEE , T HUS DIRECTED THE A.O TO GRANT DEDUCTION OF RS. 13,84,17,686/ - BEING EXPENDITURE INCURRED ON ESOP , IN ACCORDANCE WITH THE PRINCIPLE LAID DOWN BY THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF BIOCON LTD. (SUPRA) I N LIEU OF RS. 23,36,86,000/ - CLAIMED BY THE ASSESSEE. 6. THE DEPARTMENT BEING AGGRIEVED WITH THE ORDER OF THE CIT(A) HAD CARRIED THE MATTER IN APPEAL BEFORE US. THE LEARNED DEPARTMENTAL REPRESENTATIVE (FOR SHORT D.R) SUBMITTED THAT AS THE ORDER OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF BIOCON LTD. (SUPRA) HAD NOT BEEN ACCEPTED BY THE DEPARTMENT AND A FURTHER A PPEAL HAD BEEN FILED BEFORE THE HONBLE HIGH COURT OF KARNATAKA, THEREFORE , THE CIT(A) HAD ERRED IN ALLOWING THE DISCOUNT ON ISSUE OF ESOPS TO THE ASSESSEE P A G E | 6 ITA NO. 698 /MUM/201 6 AY: 2009 - 10 DCIT 2(3)(2) VS. KOTAK MAHINDRA BANK LTD. COMPANY IN ACCORDANCE WITH THE PRINCIPLE LAID DOWN BY THE SPECIAL BENCH OF THE TRIBUNAL. PER CONT RA, THE LEA R NED AUTHORIZED REPRESENTATIVE (FOR SHORT A.R) FOR THE ASSESSEE SUBMITTED THAT AS THE CIT(A) HAD FOLLOWED THE ORDER OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF BIOCON LTD. (SUPRA), THEREFORE, NO INFIRMITY DID EMERGE FROM HIS ORDER. 7. WE HAVE HEARD THE AUTHORIZED REPRESENTATIVES FOR BOTH THE PARTIES, PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIAL PLACED ON RECORD. WE FIND THAT THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF BIOCON LTD. VS. DEPUTY COMMISSIONER OF INC OME TAX (LTU) (2013) 144 ITD 21 (BANG A LORE) AFTER DELIBERATING AT LENGTH ON THE ISSUE AS TO WHETHER THE ASSESSEE WAS ENTITLED TO CLAIM THE DISCOUNT ON ESOPS AS AN EXPENDITURE U/S 37(1) OF THE ACT, OR NOT , HAD THEREIN ANSWER ED THE SAID ISSUE IN AFFIRMATIVE AND CONCLUDED THAT THE SAME WAS ALLOWABLE AS AN EXPENDITURE U/S 37(1) IN THE HANDS OF THE ASSESSEE. THE OBSERVATIONS OF THE SPECIAL BENCH OF THE TRIBUNAL AS REGARDS THE ISSUE UNDER CONSIDERATION ARE CULLED OUT AS UNDER : - THE MOOT QUESTION IS AS TO W HETHER THE DISCOUNTED PREMIUM ON ESOP ALSO CALLED AS THE DISCOUNT 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? III. SUBSEQUENT ADJUSTMENT TO DISCOUNT 8. WE WILL TAKE UP THESE THREE STEPS ONE BY ONE FOR CONSIDERATION AND DECISION. I. WHETHER ANY DEDUCTION OF SUCH DISCOUNT IS ALLOWABLE ? 9.1. THE CRUX OF THE ARGUMENTS PUT FORTH BY THE LD. 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 P A G E | 7 ITA NO. 698 /MUM/201 6 AY: 2009 - 10 DCIT 2(3)(2) VS. KOTAK MAHINDRA BANK LTD. DEDUCTION CAN BE ALLOWED AS SUCH DISCOUNT IS NOT ONLY A SHORT CAPITAL RECEIPT BUT ALSO A CONTINGENT LIABILITY. A. IS DISCOUNT UNDER ES OP A SHORT CAPITAL RECEIPT? 9.2.1. THE LD. DR STATED THAT THE QUESTION 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 EXPEND ITURE HAS BEEN DESCRIBED BY THE HONBLE SUPREME COURT IN THE CASE OF INDIAN MOLASSES CO. LTD. V. CIT [(1959) 37 ITR 66 (SC)] AS DENOTING SPENDING OR PAYING OUT, I.E. SOMETHING GOING OUT OF THE COFFERS OF THE ASSESSEE. IT WAS PUT FORTH THAT BY ISSUING SHAR ES AT DISCOUNTED PREMIUM, NOTHING IS PAID OUT BY THE COMPANY. ONCE THERE IS NO PAYING OUT OR AWAY, THE SAME CANNOT CONSTITUTE AN EXPENDITURE AND RESULTANTLY SECTION 37(1), WHICH APPLIES TO ONLY EXPENDITURE, CANNOT BE ACTIVATED. HE FURTHER TOOK PAINS IN E XPLAINING 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 OP TIONS 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 PREM IUM, 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 IN RANBAXY LABORATORIES LIMITED V. ADDL.CIT [ITA NOS. 1855 & 3387/DEL/2004] ON 12.06.2009. 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. DCIT (ITA NO.7242/MUM/2008) HAS ALSO TAKEN SI MILAR 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 ADMISSIBILITY OF DEDUCTION OF THE AMOUNT OF DI SCOUNT ON THE STRENGTH OF THE ORDER PASSED BY THE CHENNAI BENCH OF THE TRIBUNAL IN THE CASE OF SSI LIMITED (SUPRA) GRANTING DEDUCTION OF SUCH DISCOUNT BY TREATING IT AS AN EMPLOYEE COST. HE SUBMITTED THAT THE ABOVE VIEW TAKEN BY THE CHENNAI BENCH HAS BEEN APPROVED BY THE HONBLE MADRAS HIGH COURT IN CIT V. PVP VENTURES LIMITED VIDE ITS JUDGMENT DATED 19.06.2012. THE LEARNED AR ARGUED THAT PVP VENTURES (SUPRA) IS A SOLITARY JUDGMENT RENDERED BY ANY HIGH COURT ON THE ISSUE AND HENCE THE SAME NEEDS TO BE FOLLO WED IN PREFERENCE TO ANY CONTRARY TRIBUNAL ORDER. IT WAS ALSO POINTED OUT THAT THE CHENNAI BENCHS VIEW HAS BEEN SUBSEQUENTLY FOLLOWED BY THE CHANDIGARH BENCH OF THE TRIBUNAL IN ACIT V. SPRAY ENGINEERING DEVICES LIMITED ITA NO.701/CHD/2009 VIDE ITS ORDER D ATED 22.06.2012. 9.2.3. LET US EXAMINE THE FACTS OF THE CASE OF RANBAXY LABORATORIES LIMITED (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 EMP LOYEES. THE SHARES WERE 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 P A G E | 8 ITA NO. 698 /MUM/201 6 AY: 2009 - 10 DCIT 2(3)(2) VS. KOTAK MAHINDRA BANK LTD. 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 TRIBUNAL 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 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 INTO SHORT RECEIPT OF SHARE PREMIUM WHICH THE ASSESSEE WAS OTHERWISE ENTITLED TO. AS THE RECEIPT OF SHARE PRE MIUM 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 OF SUCH NOTIONAL LOSS CANNOT BE CONSIDERED AS EXPENDITURE WITHIN THE MEANING OF SEC TION 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 DISCOUNT OVER THE VESTING PERIOD, DID NOT FIND FAVOUR WITH THE TRIBUNAL ON THE GROUND THAT THE SEBI GUIDELIN ES 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 IMPORTANCE 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 EMPLOYEES, 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 CURRENT MARKET PRICE. THIS IS ACHIEVED BY GRANTING STOCK OPTIONS TO ITS EMPLOYEES AT DISCOUNT. THE A MOUNT 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 T O 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 EMPLOY ER 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 USUALLY NEGLIGIBLE. THE COMPANY, ON THE EXERCISE OF OPTION BY THE EMPLOYEES, ALLOTS SHARES TO THEM WH O 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 OPTIONS GRANTED TO THE EMPLOYEES VEST WITH THEM. THIS PERIOD COMMENCES WITH THE GRANT OF OPTION AND TE RMINATES 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 OF ASSURANCE FROM ITS EMPLOYEE FOR RENDERING UNINTERRUPTED SERVICES DURING THE VESTING PERIOD AND A S A QUID PRO QUO IT UNDERTAKES TO COMPENSATE THE EMPLOYEES WITH A CERTAIN AMOUNT GIVEN IN THE SHAPE OF DISCOUNTED PREMIUM ON THE ISSUE OF SHARES. 9.2.5. THE CORE OF THE ARGUMENTS OF THE LD. DR IN THIS REGARD IS TWO - FOLD. FIRST, THAT IT IS NOT AN EXPENDITUR E 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 OTHERWI SE 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 PROVIDING THAT: `WHERE A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTE RESTED, RECEIVES, IN ANY PREVIOUS YEAR, FROM ANY PERSON BEING A P A G E | 9 ITA NO. 698 /MUM/201 6 AY: 2009 - 10 DCIT 2(3)(2) VS. KOTAK MAHINDRA BANK LTD. 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 BE 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 EXI STING SHAREHOLDERS AT LESS THAN THE OTHERWISE 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 CAPITAL ACCOUNT. IT IS SO BECAUSE THE OBJECT OF ISSUING SUCH SHARES AT A LOWER PRICE IS NOWHERE DIRECTLY CONNECTED 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 DISCO UNTED PREMIUM. IT IS QUITE BASIC THAT THE 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 DISCO UNTED PREMIUM ON 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 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 S ITUATIONS VIZ., ONE, WHEN THE COMPANY ISSUES 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 THEIR 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 REMUNER ATION TO EMPLOYEES AND HENCE DEDUCTIBLE. 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 O F AWARDING REMUNERATION TO EMPLOYEES 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 SIMPLY ONE OF THE MODES OF COMPENSATING THE EMPLOYEES FO R THEIR SERVICES AND IS A PART OF THEIR REMUNERATION. THUS, THE CONTENTION OF THE LD. DR THAT BY ISSUING SHARES 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 EMPLO YEES AT A DISCOUNTED PREMIUM IS TO 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 LD. DR IN THIS REGARD. HE CANVASSED A VIEW THAT AN EXPENDITURE DENOTES PAYING OUT OR AWAY AND UNLESS THE MONEY GOES OUT FROM THE ASSESSEE, THERE CAN BE NO EXPENDITURE 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 ASSESSEE), LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION SHALL BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. TO PUT IT DIFFERENTLY, AN EXPENDITURE MUST BE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE P A G E | 10 ITA NO. 698 /MUM/201 6 AY: 2009 - 10 DCIT 2(3)(2) VS. KOTAK MAHINDRA BANK LTD. OF BUSINESS SO AS TO B E 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 HONBLE SUPREME COURT IN INDIAN MOLASSES COMPANY (SUPRA) HAS DESCRIBED `EXPENDITURE TO MEAN WHAT 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 BUSINE SS 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 INCURRI NG OF THE EXPENDITURE WHICH ENTAILS DEDUCTION U/S 37(1) SUBJECT TO THE FULFILLMENT OF OTHER CONDITIONS. AT THIS JUNCTURE, IT IS IMPERATIVE TO NOTE THAT THE WORD `EXPENDITURE HAS NOT BEEN DEFINED IN THE ACT. HOWEVER, SEC. 2(H) OF THE EXPENDITURE ACT, 1957 DEFINES `EXPENDITURE AS : `ANY SUM OF MONEY OR MONEYS WORTH SPENT OR DISBURSED OR FOR THE SPENDING OR DISBURSING OF WHICH A LIABILITY HAS BEEN INCURRED BY AN ASSESSEE. WHEN SECTION 43(2) OF THE ACT IS READ IN CONJUNCTION WITH SECTION 37(1), THE MEANIN G 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 UND ERTAKING 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 TH E ACT. 9.2.8. THOUGH DISCOUNT ON PREMIUM IS NOTHING BUT AN EXPENDITURE U/S 37(1), IT IS WORTH NOTING THAT THE HONBLE SUPREME COURT IN THE CASE OF CIT V. WOODWARD GOVERNOR INDIA (P) LIMITED [(2009) 312 ITR 254 (SC)] HAS GONE TO THE EXTENT OF COVERING 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 EXCHANGE RATE FLUCTUATION ON A REVENUE ACCOUNT. THE ASSESSING OFFICER DID NOT ALLOW DEDUCTION U/S 37 . WHEN THE MATTER FINALLY REACHED THE HONBLE SUPREME COURT, THEIR LORDSHIPS NOTICED THAT THE WORD EXPENDITURE HAS NOT BEEN DEFINED IN THE ACT. THEY HELD THAT : THE WORD EXPENDITURE IS, THEREFORE, REQUIRED TO BE UNDERSTOOD IN THE CONTEXT IN WHICH IT I S USED. SECTION 37 ENJOINS THAT ANY EXPENDITURE NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIONS 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 H EAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. IN SECTIONS 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 P ARLIAMENT HAS USED EXPRESSION ANY EXPENDITURE 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 HONBLE SUMMIT COURT, THERE REMAINS NO DOUBT WHATSOEVER THAT THE TERM `EXPENDITURE IN CERTAIN CIRCUMSTANCES CAN ALSO ENCOMPASS `LOSS EVEN THOUGH NO AMOUNT IS ACT UALLY PAID OUT. EX CONSEQUENTI, THE ALTERNATIVE ARGUMENT OF THE LD. DR THAT DISCOUNT ON SHARES IS `LOSS AND HENCE CANT 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 P A G E | 11 ITA NO. 698 /MUM/201 6 AY: 2009 - 10 DCIT 2(3)(2) VS. KOTAK MAHINDRA BANK LTD. RES PECT, ARE UNABLE TO CONCUR WITH THE VIEW TAKEN IN RANBAXY LABORATORIES LIMITED (SUPRA). 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 U PON THE FULFILLMENT OF SEVERAL CONDITIONS LAID 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 EMP LOYMENT OR SOME OF THE EMPLOYEES MAY NOT CHOOSE 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 LEARNED 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 THAT THE OPTIONS TO THE EXTENT OF 25 PERCENT 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 SETTLED 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 CO NTRACT TO DO OR NOT DO SOMETHING, IF SOME EVENT, COLLATERAL 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 LIGHT OF THE DEFINITION OF CONTINGENT CONTRACT. FROM THE STAND POINT OF THE COMPANY, THE OPTIONS UNDER ESOP 2000 VEST WITH THE EMPLOYEES AT THE RATE OF 25 PERCENT ONLY ON PUTTING IN SERVICE FOR ONE YEAR BY THE EMPLOYEES. UNLESS SUCH SERVIC E 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 VESTING OF 25 PERCENT OF THE OPTION. IT IS AT THE END OF THE FIRST YEAR THAT THE COMPANY INCURS LIABILITY OF FULFILLING ITS PROMISE OF ALLOWING PROPORTIONATE DISCOUNT, WHICH LIABILITY WOULD B E 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 CONTINGENT ONE? 9.3.3. THE HONBLE SUPREME COURT IN BHARA T EARTH MOVERS V. CIT [(2000) 245 ITR 428 (SC)] 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 EARN ED 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 TO BE A CONTINGENT LIABILITY AND HENCE NOT A PERMISSIBLE DED UCTION. WHEN THE MATTER FINALLY CAME UP BEFORE THE HONBLE SUPREME COURT, IT WAS HELD THAT THE PROVISION FOR MEETING THE LIABILITY FOR ENCASHMENT OF EARNED LEAVE BY THE EMPLOYEE WAS AN ADMISSIBLE DEDUCTION. IN HOLDING SO, THE HONBLE APEX COURT OBSERVED TH AT : THE LAW IS SETTLED : IF A BUSINESS LIABILITY HAS DEFINITELY P A G E | 12 ITA NO. 698 /MUM/201 6 AY: 2009 - 10 DCIT 2(3)(2) VS. KOTAK MAHINDRA BANK LTD. ARISEN IN THE ACCOUNTING YEAR, THE DEDUCTION SHOULD BE ALLOWED ALTHOUGH THE LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. WHAT SHOULD BE CERTAIN IS THE INCURRING OF TH E 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 CONTINGENT ONE. THE LIABILITY IS IN PRAESENTI THOUGH IT WIL L 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 HONBLE SUPREME COURT, IT IS MANIFEST THAT A DEFINITE BUSINESS LIABILITY ARISING IN AN ACCOUNTING YEAR QUALIFIES FOR DEDUCTION EVEN THOUGH THE LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. WE CONSIDER IT OUR EARNEST DUTY TO MENTION THAT THE 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 AMENDMEN T, 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 B Y 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 THE LIABILITY WOULD NOT MAKE AN ASCERTAINED LIABILITY A CO NTINGENT. 9.3.4. ALMOST TO THE SIMILAR EFFECT, THERE IS ANOTHER JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA (P) . CIT [(2009) 314 ITR 62 (SC)]. IN THAT CASE, THE ASSESSEE - COMPANY WAS ENGAGED IN SELLING CERTAIN PRODUCTS. AT TH E 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 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 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 ASSE SSEE. THE ASSESSING OFFICER DISALLOWED THE SAME ON THE GROUND THAT 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 HONBLE SUPREME COURT, IT ENTITLED THE ASS ESSEE TO DEDUCTION ON THE ACCRUAL CONCEPT BY HOLDING THAT A PROVISION 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 OBLIGATION. 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 HONBLE SUPREME COURT IN B HARAT EARTH MOVERS (SUPRA) AND ROTORK CONTROLS INDIA P. LTD. (SUPRA), 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 OPTIONS 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. 9.3.6. AS REGARDS THE CONTENTION OF THE LD. DR ABOUT THE CONTINGENT LIABILITY ARISING ON ACCOUNT OF THE OPTIONS LAPSING DURING THE VESTING PERIOD OR THE EMPLOYEES NOT P A G E | 13 ITA NO. 698 /MUM/201 6 AY: 2009 - 10 DCIT 2(3)(2) VS. KOTAK MAHINDRA BANK LTD. CHOOSING TO EXERCISE THE OPTION, WE FIND THAT NORMALLY IT IS PROVIDED IN THE SCHEMES OF ESOP THAT THE VESTED OPTIONS THAT LAPSE 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 DATE OR WOULD BE AVAILABLE FOR BEING 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 TH E GROUP OF EMPLOYEES AS A WHOLE, IT LOSES THE TAG OF `CONTINGENT BECAUSE 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 DEDU CTION IS REQUIRED TO BE REVERSED AND OFFERED FOR TAXATION IN SUCH LATER 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 SECTIONS 115W TO 115WL 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 THAT : `FRINGE BENEFITS AS OUTLINED IN SECTION 115WB, MEAN ANY PRIVILEGE, SERVICE, FACILITY OR AMENITY DIRECTLY OR INDIRECTLY PROVIDED BY AN EMPLOYER TO HIS EMPLOYEES (INCLUDING FORMER EM PLOYEES) BY REASON OF THEIR EMPLOYMENT. CHARGING SECTION 115WA 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 PRO VIDED OR DEEMED TO HAVE BEEN PROVIDED BY AN EMPLOYEE TO HIS EMPLOYEES DURING THE PREVIOUS YEAR.. SECTION 115WB GIVES MEANING TO THE EXPRESSION `FRINGE BENEFITS. SUB - SECTION (1) PROVIDES THAT 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 TRANSFERRED, 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 CL AUSE (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 FR OM 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 THAT SUCH DISCOUNT I) IS AN EXPENDITURE; II) SUCH EXPENDITURE I S 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 DEDUCTION BE GRANTED ? P A G E | 14 ITA NO. 698 /MUM/201 6 AY: 2009 - 10 DCIT 2(3)(2) VS. KOTAK MAHINDRA BANK LTD. 10.2. THE ASSESSEE IS A LIMITED COMPANY AND HENCE H 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 NOTWITHSTANDING THE FACT THAT WHEN SUCH INCOME IS ACTUALLY RECEIVED. EVEN IF SUCH INCOME 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 DEDUCTIBLE 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 INCURRING THE LIABILITY ENABLES THE ASSESSEE TO CLAIM DEDUCTION UNDER MERCANTILE SYSTEM OF ACCOUNTING. WE HAVE NOTICED THE MANDATE OF THE HONBLE SUPREME COURT IN BHARAT EARTH MOVERS (SUPRA) THAT IF A BUSINESS LIABILITY HAS DEFINITELY ARISEN IN AN ACCOUNTING YEAR, THEN THE DEDUCTION SHOULD BE ALLOWED IN THAT YEAR ITSE LF 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 ON 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 LIABILITY IS INCURRED BUT ITS QUANTIFICATION IS NOT POSSIBLE AT TH E MATERIAL TIME. WHEREAS IN THE FIRST CASE, THERE CANNOT BE ANY QUESTION OF ALLOWING DEDUCTION, IN THE SECOND CASE, DEDUCTION HAS TO BE ALLOWED FOR A SUM DETERMINED ON SOME RATIONAL BASIS REPRESENTING THE AMOUNT OF LIABILITY INCURRED. 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 COMPA NY SO AS TO EARN AN ENTITLEMENT TO THE SHARES AT A DISCOUNTED PREMIUM. THE VESTING 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 DUR ING 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, BU T 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 YEA R, HE WILL STILL REMAIN ENTITLED TO EXERCISE OPTION FOR 25 SHARES AT THE DISCOUNTED 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 SHARES 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 PERI OD THAT OPTION 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 EMPLOYEE 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 OUT OF 100 SHARES VEST IN THE EMPLOYEE AFTER RENDERING ONE YEARS 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 P A G E | 15 ITA NO. 698 /MUM/201 6 AY: 2009 - 10 DCIT 2(3)(2) VS. KOTAK MAHINDRA BANK LTD. 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, TRANSPIRES THAT A COMPANY UNDER THE MERCANTILE SYSTE M 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 DISCUSSION 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 DEDUCTION FOR THE DISCOUNTED PREMIUM. IT IS DURI NG 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 OF EXERCISING THE OPTIONS. TH OUGH THE EMPLOYEES BECOME ENTITLED TO EXERCISE THE OPTION AT SUCH STAGE BUT THE FACT IS THAT 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 REALIZA TION OF INCOME EARNED DURING THE VESTING PERIOD. IN THE SAME MANNER, THOUGH THE COMPANY BECOMES 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 PERIO D BY OBTAINING THEIR SERVICES. FROM THE ABOVE IT IS APPARENT THAT THE COMPANY INCURS LIABILITY 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 OP TIONS ARE EXERCISED. 10.6. LET US CONSIDER THE FACTS OF THE CASE OF SSI INDUSTRIES LTD. (SUPRA), WHICH HAS BEEN STRONGLY RELIED BY THE LD. 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 DEDUCTION 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 R EVISED SUCH ORDER 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 EV ENTS. IT WAS FURTHER NOTICED THAT THE ASSESSEE CLAIMED DEDUCTION OF SUCH DISCOUNT ON ESOP BY FOLLOWING THE SEBI GUIDELINES. AS THE EXPENDITURE ITSELF WAS AN ASCERTAINED LIABILITY, THE TRIBUNAL HELD THAT THE SAME TO BE DEDUCTIBLE. 10.7. BEFORE PROCEEDING FU RTHER 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 SO 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 AGAINST THE MARKET PRICE OF SUCH SHARES AT RS.110 ON THAT DATE. FURTHER SUPPOSE THAT THE VESTING PERIOD IS FOUR YEARS WITH EQUAL VESTING AT 25 PERCENT AT THE END OF EACH YEAR. TOTAL DISCOUNT COMES TO RS.100 (RS.110 RS.10). THESE GUIDELINES PROVIDE FOR CLAIMING DEDUCTION 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 SSI LIMITED (SUPRA) DEALS WITH A CONTROVERSY RELATING TO ONE OF THE VESTING YEARS. THE TRIBUNAL ENTITLED THE P A G E | 16 ITA NO. 698 /MUM/201 6 AY: 2009 - 10 DCIT 2(3)(2) VS. KOTAK MAHINDRA BANK LTD. 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 DEDUCTION AT THE STAGE OF INC URRING 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 DEDU CTION 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 SSI LTD.S CASE ALLOWING DEDUCTION OF THE DISCOUNTED PREM IUM 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 STRAIGHT LINE BASIS UNLESS THE VESTING IS NOT UNIFORM, THEN ARISES THE PRESENT ISSUE AS TO WHETHER ANY SUBSEQUENT ADJUSTMENT IS WARRANTED AT THE TIM E 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 QUESTION OF THE DEDUCTIBILITY OR OTHERWISE OF THE AMOUNT OF DISCOUNT UNDER ESOP. 11.1.2. 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 FINALLY 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 TH IS 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. 11.1.3. AS REGARDS THE ADJUSTMENT OF DISCOU NT 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 THIS EVENT, SUCH DISCOUNT NEEDS TO BE REVERSED AND TAKEN AS INCOME. IT IS SO BECAUSE LOGICALLY WHEN THE OPTIONS HAVE NOT EVENTUALLY VESTED IN T HE EMPLOYEES, TO THAT EXTENT, THE COMPANY HAS INCURRED NO EMPLOYEE COST. AND IF THERE IS NO COST TO THE COMPANY, THE 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 H ENCE NEEDS TO BE REVERSED. THE LD. 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 ALS O PROVIDE THAT THE DISCOUNT WRITTEN OFF IN RESPECT OF UNVESTED OPTIONS AND THE OPTIONS LAPSING AT THE END OF THE EXERCISE PERIOD SHALL BE REVERSED AT THE APPROPRIATE TIME. AS THE ACCOUNTING TREATMENT DIRECTED THROUGH THE GUIDELINES ACCORDS WITH THE TAXATIO N PRINCIPLE OF NOT ALLOWING DEDUCTION FOR THE AMOUNT OF DISCOUNT ON UNVESTED/LAPSING OPTIONS AND FURTHER THE ASSESSEE HAS ADMITTED TO HAVE OFFERED P A G E | 17 ITA NO. 698 /MUM/201 6 AY: 2009 - 10 DCIT 2(3)(2) VS. KOTAK MAHINDRA BANK LTD. SUCH AMOUNT AS INCOME IN THE RELEVANT YEARS, WE STOP HERE BY HOLDING THAT THE AMOUNT OF DISCOUNT CLAIMED AS D EDUCTION 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 AMOUNT OF REMUNERATION TO THE EMPLOYEES WOULD BE ONLY THE AMOUNT OF ACTUAL DISCOUNTED PREMIUM AT THE TIME OF EXERCISE OF OPTION. THE HONBLE SUPREME COURT IN THE CASE OF CIT V. INFOSYS TECHNOLOGIES LIMITED [(2008) 297 ITR 167 (SC)] 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 A ND THE VALUE OF BENEFIT, IF ANY, WAS UNASCERTAINABLE AT THE TIME WHEN OPTIONS WERE EXERCISED. THE FINANCE ACT, 1999 INSERTED SECTION 17(2)(IIIA) WITH EFFECT FROM 1ST APRIL, 2000 PROVIDING THAT : THE VALUE OF ANY SPECIFIED SECURITY ALLOTTED OR TRANSFERRED, 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 ALLOTMENT OR TRANSFER OF SPECIFIED SECU RITIES 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 WITH EFFECT F ROM 1ST APRIL, 2001. AFTER CERTAIN CHANGES TO THE RELEVANT PROVISIONS IN THIS 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 SHARES ALLOTT ED 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 SHAR ES 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 SU CH 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 AMOUNT 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 A TTRACT 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 BECOMES DEDUCTIBLE ON THE INCURRING OF LIABILITY UNDER THE MERCANTILE SYSTEM OF ACCOUNTING. ALTHOUGH THE 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 DEPENDING 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 P A G E | 18 ITA NO. 698 /MUM/201 6 AY: 2009 - 10 DCIT 2(3)(2) VS. KOTAK MAHINDRA BANK LTD. TAXABLE, IS `X, THEN ITS COST IN THE HANDS OF TH E COMPANY HAS ALSO TO BE `X. IT CAN NEITHER BE `X+1 NOR `X - 1. IT IS SIMPLE AND PLAIN THAT THE AMOUNT OF REMUNERATION WHICH PERCOLATES TO THE EMPLOYEES WILL ALWAYS BE EQUAL TO THE AMOUNT FLOWING FROM THE COMPANY AND SUCH REMUNERATION TO THE EMPLOYEE IN T HE 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 DISCOUNT W.R.T. THE MARKET PRICE OF SHARES AT THE TIME OF E XERCISE 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 TENTATIV E EMPLOYEES COST BECAUSE OF THE IMPOSSIBILITY IN CORRECTLY VISUALIZING THE LIKELY MARKET PRICE OF SHARES AT THE TIME OF EXERCISE OF OPTION 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 EMPLOYEE S COST CAN BE PRECISELY DETERMINED ONLY AT THE TIME OF THE EXERCISE OF OPTION BY THE EMPLOYEES, THE PROVISIONAL AMOUNT OF DISCOUNT AVAILED AS DEDUCTION DURING THE VESTING PERIOD NEEDS TO BE ADJUSTED IN THE LIGHT OF THE ACTUAL DISCOUNT ON THE BASIS OF THE M ARKET PRICE OF THE SHARES AT THE TIME OF EXERCISE OF OPTIONS. IT CAN BE DONE BY MAKING SUITABLE NORTHWARDS OR SOUTHWARDS ADJUSTMENT AT 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 PERCENT EACH AT THE END OF 1ST TO 4TH YEARS: - AT THE TIME OF GRANTING OPTION AT THE TIME OF EXERCISE OF OPTION SITUATION I SITUATION II SITUATION III MARKET VALUE PER SHARE 110 110 130 90 OPTION PRICE 10 10 10 10 EMPLOYEES COMPENSATION OR DISCOUNT 100 100 120 80 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 OF FOUR YEARS WITH THE EQUAL VESTI NG, 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 ADJUSTED AT THE TIME OF EXERCISE OF OPT ION 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 T HE 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 R EAL COMPENSATION TO EMPLOYEE IS RS.120 AS AGAINST THE TENTATIVE COMPENSATION OF RS.100 PER SHARE WHICH WAS ACCOUNTED FOR AND ALLOWED AS DEDUCTION DURING THE VESTING PERIOD. AS P A G E | 19 ITA NO. 698 /MUM/201 6 AY: 2009 - 10 DCIT 2(3)(2) VS. KOTAK MAHINDRA BANK LTD. THE ACTUAL QUANTIFICATION OF THE COMPENSATION HAS TURNED OUT TO BE RS.120, THE C OMPANY IS ENTITLED TO A FURTHER DEDUCTION OF RS.20 AT THE TIME OF EXERCISE OF OPTION. IN SITUATION 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, 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 BROADLY THERE ARE THREE STAGES HAVING EFFECT ON THE TOTAL INCOME OF THE COMPANY IN THE LIFE CYCLE OF ESOP, VIZ., I) DURING THE VESTING PERIOD, II) AT THE TIME OF UNVESTING/ LAPSE OF OPTIONS AND III) FINALLY AT THE TIME OF EXERCISE OF OPTIONS. IT HAS BEEN ARGUED 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 OPT IONS AND ALSO REVERSED THE PROPORTIONATE DISCOUNT ON UNVESTING/LAPSING OF OPTIONS AT THE 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 PROVIDE FOR SUCH DOWNWARD ADJUSTMENT. IT HAS BEEN ARGUED BY THE LD. 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, THERE 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 HONBLE 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 ACCOUNTANCY RULE. SIMILARLY IN THE CASE OF U.P. STATE INDUSTRIAL DEVELOPMENT CORPORATION (SUPRA), THE HONBLE APEX COURT HELD IN THE CASE OF AN UNDERWRITER THAT IT WOULD BE RIGHT TO CONSIDER THE NE T INVESTMENT, THAT IS THE PURCHASE PRICE LESS THE UNDERWRITING COMMISSION RECEIVED BY THE UNDERWRITER 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 COMPUTATION 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 DEPART MENTAL REPRESENTATIVE SUBMITTED THAT THE SEBI GUIDELINES CANNOT MANDATE THE DEDUCTIBILITY OR OTHERWISE OF AN AMOUNT UNDER THE PROVISIONS OF THE ACT. HE RELIED ON THE JUDGMENTS OF THE HONBLE SUPREME COURT IN TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. (S UPRA) AND GODHRA ELECTRICITY COMPANY LTD. (SUPRA) IN SUPPORT OF THIS PROPOSITION. 11.2.3. WE ARE NOT PERSUADED BY THE SUBMISSIONS PUT FORTH BY THE LD. AR THAT, IN THE ABSENCE OF ANY SPECIFIC PROVISION IN THE ACT, THE ACCOUNTING PRINCIPLES SHOULD BE FOLLOWE D FOR DETERMINING THE TOTAL INCOME OF THE ASSESSEE. WHAT IS TRUE FOR ACCOUNTING PURPOSE NEED NOT NECESSARILY BE TRUE FOR TAXATION. TAXATION PRINCIPLES ARE ENSHRINED IN THE LEGISLATURE. POWER TO LEGISLATE LIES WITH THE PARLIAMENT. P A G E | 20 ITA NO. 698 /MUM/201 6 AY: 2009 - 10 DCIT 2(3)(2) VS. KOTAK MAHINDRA BANK LTD. ACCOUNTING STANDARDS OR GU IDANCE 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 FORCE OF AN ACT OF PARLIAMENT. SINCE THE SUBJECT MATTER OF TAX ON INCOME FALLS IN THE UNION LIST AS PER PART XI OF THE INDIAN CONSTITUTION, IT IS ONLY THE PA RLIAMENT WHICH CAN LEGISLATE ON ITS SCOPE. 11.2.4. BE THAT AS IT MAY, THERE IS NO WEIGHT IN THE CONTENTION OF THE LD. 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 PROVISION IN RESPECT OF DEDUCTIBILITY OF A PARTICULAR ITEM OF EXPENSE OR TAXATION OF A PARTICULAR ITEM OF INCOME. GENERAL PROVISIONS ARE THOSE WHICH SET OU T 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 ITE MS 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 `PROFI TS 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 CONDITI ONS STIPULATED IN THE SECTION, ARE FULFILLED. ALL OTHER ITEMS OF EXPENSES, WHICH FULFILL 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 LD. AR THAT THERE IS NO PROVISION IN THE ACT DEALING WITH THE DEDUCTIBILITY OF ESO P DISCOUNT, IS THEREFORE, DEVOID OF ANY MERIT. THIS CONCLUDES THE QUESTION OF GRANTING OF DEDUCTION OF DISCOUNT DURING THE VESTING PERIOD. 11.2.5. THE SEBI 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. IN TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. (SUPRA), THE HONBLE SUPREME COURT HAS LAID DOWN IN SO MANY WORDS THAT 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 FOLLOW ING OBSERVATIONS OF THE HONBLE SUPREME COURT IN THE AFORE NOTED CASE: `IT IS TRUE THAT THIS COURT HAS VERY OFTEN REFERRED TO ACCOUNTING PRACTICE FOR ASCERTAINMENT OF PROFIT MADE BY A COMPANY OR VALUE OF THE ASSETS OF A COMPANY. BUT WHEN THE QUESTION IS WH ETHER 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. ACCOUNTING 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. [1970] 77 ITR 857, 860 (CA), THE INCOME - TAX LAW DOES NOT MARCH STEP BY STEP IN THE FOOTPRINTS OF THE ACCOUNTANCY PROFESS ION. 11.2.6. THE SAME VIEW HAS BEEN ADOPTED BY THE HONBLE SUPREME COURT IN GODHRA ELECTRICITY COMPANY LTD. (SUPRA), BY HOLDING THAT : P A G E | 21 ITA NO. 698 /MUM/201 6 AY: 2009 - 10 DCIT 2(3)(2) VS. KOTAK MAHINDRA BANK LTD. `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, 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 JUDICIARY, THEN THERE IS AN U NDERLYING 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 IN CONFORMITY WITH THE MANDA TE 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 AND 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 PRINCIPLE WHICH SHALL PREVAIL. 11.2 .8. THE PLEA NOW RAISED BEFORE US BY THE LD. AR, RELYING ON THE CASE OF CHALLAPALLI SUGARS LTD.S CASE, WAS ALSO TAKEN UP BEFORE THE HONBLE SUPREME COURT IN THE CASE OF TUTICORIN ALKALIS (SUPRA). DEALING WITH THE SAME, THE HONBLE SUPREME COURT HELD THAT : THE QUESTION IN CHALLAPALLI SUGARS LTD.S CASE (1975) 98 ITR 167 (SC) WAS ABOUT COMPUTATION OF DEPRECIATION AND DEVELOPMENT REBATE UNDER THE INDIAN INCOME - TAX ACT, 1922. IN ORDER TO CALCULATE DEPRECIATION AND DEVELOPMENT 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 CHALLAPALLIS CASE (1975) 98 ITR 167 (SC), GOES TO SHOW THAT THE COURT WAS NOT IN ANY WAY DEPAR TING 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 GUIDA NCE NOTES ETC. IN THE MATTER OF DETERMINATION OF TOTAL INCOME. 11.2.8. THE TRUMP CARD OF THE LD. AR TO BOLSTER HIS SUBMISSION FOR ASSIGNING THE STATUS OF BINDING FORCE TO THE SEBI GUIDELINES IS THE ORDER IN THE CASE OF SSI LIMITED (SUPRA) WHICH CAME TO BE AFFIRMED BY THE HONBLE MADRAS HIGH COURT IN PVP VENTURES (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 THAT ONE THIRD OF THE TOTAL AMOUNT OF DISCOUNT C OMPUTED 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 GUIDELINES THAT THESE DEAL WITH THE DEDUCTIBILITY OF DISCOUNT IN THE HANDS OF COMPANY DURING THE YEARS OF VESTING PERIOD. THES E 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 A CCOUNTING 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 I S INDICATIVE OF THE FACT THAT IT DEALT WITH A YEAR DURING WHICH THE P A G E | 22 ITA NO. 698 /MUM/201 6 AY: 2009 - 10 DCIT 2(3)(2) VS. KOTAK MAHINDRA BANK LTD. OPTIONS WERE VESTING WITH THE EMPLOYEES AND THE COMPANY CLAIMED DISCOUNT DURING THE VESTING PERIOD. THE HONBLE MADRAS HIGH COURT IN THE CASE OF PVP VENTURES (SUPRA) HAS UPHELD THE VIEW TA KEN BY THE CHENNAI BENCH IN THE CASE OF SSI LIMITED (SUPRA). THE GRANTING OF THE BINDING FORCE TO THE SEBI GUIDELINES BY THE HONBLE MADRAS HIGH COURT SHOULD BE VIEWED IN THE CONTEXT OF THE ISSUE BEFORE IT, WHICH WAS ABOUT THE DEDUCTIBILITY OF DISCOUNT DUR ING ONE OF THE VESTING YEARS. IN THE EARLIER PART OF THIS ORDER, WE HAVE HELD 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 TH AT EXTENT, WE ALSO HOLD THAT THE SEBI GUIDELINES ARE APPLICABLE IN THE MATTER OF DEDUCTION OF DISCOUNT. NEITHER THERE WAS ANY ISSUE BEFORE THE HONBLE MADRAS HIGH COURT NOR IT DEALT WITH A SITUATION IN WHICH THE MARKET PRICE OF THE SHARES AT THE TIME OF EX ERCISE 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 NATURE 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 T HE 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 THE TIME OF GRANT OF OPTION AND THE MARKET PRICE A T 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 S TOCK OPTIONS IS ALLOWABLE AS DEDUCTION IN COMPUTING THE INCOME UNDER THE HEAD `PROFITS AND GAINS OF BUSINESS OR PROFESSION. 8. WE FIND THAT THE A.O WHILE FRAMING THE ASSESSMENT HAD SPECIFICALLY OBSERVED THAT THE CLAIM OF THE ASSESSEE TOWARDS ENTITLEMENT OF DISCOUNTED PREMIUM ON ESOPS AS AN EXPENDITURE UNDER SEC. 37(1) WAS THOUGH FOUND TO BE IN ACCORDANCE WITH THE PRINCIPLE LAID DOWN BY THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF BIOCON LTD. (SUPRA), HOWEVER, AS THE ORDER OF THE SPECIAL BENCH OF THE TRIBUNAL HAD NOT BEEN ACCEPTED BY THE DEPARTMENT AND HAD BEEN ASSAILED BEFORE THE HONBLE HIGH COURT OF KARNATAKA, THEREFORE , THE CLAIM OF THE ASSESSEE AS REGARDS ALLOWABILITY OF DISCOUNTS ON ESOPS COULD NOT BE ACCEPTED. WE ARE UNABLE TO PERSUADE OURS ELVES TO SUBSCRIBE TO THE AFORESAID VIEW OF THE A.O THAT THE ORDER OF THE SPECIAL BENCH OF THE TRIBUNAL WAS NOT TO BE FOLLOWED FOR THE REASON THAT AN P A G E | 23 ITA NO. 698 /MUM/201 6 AY: 2009 - 10 DCIT 2(3)(2) VS. KOTAK MAHINDRA BANK LTD. APPEAL HAD BEEN FILED BY THE DEPARTMENT AGAINST THE SAID ORDER BEFORE THE HONBLE HIGH COURT OF KARNATAK A. WE FIND THAT IT IS NOT THE CASE OF THE DEPARTMENT THAT EITHER THE ORDER OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF BIOCON LTD. (SUPRA) HAD BEEN SET ASIDE OR THE OPERATION OF THE SAME HAD BEEN STAYED BY THE HONBLE HIGH COURT. WE ARE UNABLE TO COMPREHEND THAT AS TO HOW THE A.O DESPITE CONCEDING THAT THE CLAIM OF THE ASSESSEE AS REGARDS ALLOWABILITY OF THE DISCOUNT OF ESOPS WAS IN ACCORDANCE WITH THE PRINCIPLE LAID DOWN BY THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF BIOCON LTD. (SUPRA) , COULD STILL DECLINE TO ADJUDICAT E THE ISSUE UNDER CONSIDERATION IN TERMS WITH THE ORDER OF THE SPECIAL BENCH. WE ARE SERIOUSLY TAKEN ABACK BY THE AFORESAID OBSERVATIONS OF THE A.O, AND ARE OF A STRONG CONVICTION THAT AS ON THE DATE ON WHICH THE ASSESSME NT WAS FRAMED , THE ORDER OF THE SPECIAL BENCH OF THE TRIBUNAL DID HOLD THE GROUND, THEREFORE, HE REMAINED UNDER A STATUTORY OBLIGATION TO HAVE PASSED HIS ORDER IN CONFORMITY WITH THE VIEW TAKEN BY THE SPECIAL BENCH, WHICH WE FIND HAD ALSO BEEN FOLLOWED BY THE JURISDICTIONAL TRIBUNAL, VIZ. ITAT, MUMBAI IN THE CASE OF MAHINDRA AND MAHINDRA LTD. VS. ADDL. CIT, RANGE - 2(2) [40 TAXMANN.COM 522 (MUM)] . WE ARE AFRAID THAT THE CONDUCT OF THE A.O IN DECLINING TO FOLLOW THE ORDER OF THE SPECIAL BENCH OF THE TRIB UNAL IN THE CASE OF BIOCON LTD. (SUPRA), WHICH AS OBSERVED BY US HAD NEITHER BEEN SET ASIDE OR STAYED BY THE HONBLE HIGH COURT HAS TO BE DEPRECATED. WE FIND THAT THE LD. CIT(A) DULY APPRECIATING THE SERIOUS INFIRMITY IN THE ORDER OF THE A.O, THEREIN GOING BY THE PRINCIPLE OF JUDICIAL DISCIPLINE HAD SET ASIDE THE ORDER OF THE A.O BY OBSERVING THAT THE ISSUE UNDER CONSIDERATION WAS COVERED BY THE ORDER OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF BIOCON LTD. (SUPRA). WE FIND THAT THE DEPARTMENT HAD ASSAILED THE ORDER OF THE CIT(A) BEFORE US FOR THE REASON THAT THE LATTER HAD ERRED IN DIRECTING THE A.O TO FOLLOW THE ORDER OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE P A G E | 24 ITA NO. 698 /MUM/201 6 AY: 2009 - 10 DCIT 2(3)(2) VS. KOTAK MAHINDRA BANK LTD. CASE OF BIOCON LTD. (SUPRA). W E WOULD NOT HESITATE TO OBSERVE THAT IT IS ABSOLUTELY B EYOND OUR COMPREHENSION THAT AS TO HOW THE DEPARTMENT COULD BE AGGRIEVED WITH THE ORDER OF THE LD. CIT(A) WHO HAD SET ASIDE THE OBSERVATIONS OF THE A.O WHICH WERE PALPABLY FOUND TO BE IN SERIOUS CONTRADICTION OF THE ORDER OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF BIOCON LTD. (SUPRA). WE MAY HEREIN CLARIFY THAT NEITHER ANYTHING HAS BEEN PLACED ON RECORD NOR AVERRED BEFORE US WHICH COULD PERSUADE US TO CONCLUDE TH AT THE ORDER OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF BIOCON LTD. (SUPRA) HAD EITHER BEEN STAYED OR SET ASIDE BY THE HONBLE HIGH COURT OF KARNATAKA, OR A VIEW TAKEN BY THE SPECIAL BENCH NO MORE HOLDS THE GROUND ON ACCOUNT OF A CONTRARY VIEW TAKEN BY ANY OTHER HIGH COURT. WE THUS IN THE BACKDROP OF OUR AFORESAID OBSERVATIONS ARE UNABLE TO PERSUADE OURSELVES TO ACCEPT THE GROUND OF APPEAL RAISED BY THE REVENUE BEFORE US, THEREFORE, FINDING NO INFIRMITY IN THE WELL REASONED ORDER OF THE CIT(A), UPHOLD THE SAME. 9 . THE APPEAL OF THE REVENUE IS DISMISSED IN TERMS OF OUR AFORESAID OBSERVATIONS . ORDER PRONOU NCED IN THE OPEN COURT ON 20. 12 .2017 SD/ - SD/ - ( P.K. BANSAL ) ( RAVISH SOOD ) VICE PRESIDENT JUDICIAL MEMBER MUMBAI ; 20 .1 2 .2017 PS. ROHIT KUMAR P A G E | 25 ITA NO. 698 /MUM/201 6 AY: 2009 - 10 DCIT 2(3)(2) VS. KOTAK MAHINDRA BANK LTD. / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE . //TRUE COPY// / BY ORDER, / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI