M/s Northern Operating Services Pvt Ltd , Bangalore V. Assistant Commissioner of Income Tax Circle-5(1)(1), Bangalore

ITA 759/BANG/2017

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 7805 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 4 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-09-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 30-08-2021
• Assessment Year: 2012-2013
• Appeal Filed On: 03-04-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MUZAFFAR HUSSAIN
• Assessee Lawyers: K R VASUDEVAN
• Keywords: Salary income; TDS
• Section: 143(3); 40(a)(ia); 37(1); 37; 15

Judgement Text

IT(TP)A NO.759/BANG/2017 M/S. NORTHERN OPERATING SERVICES PVT. LTD., BANGALO RE IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH: BANGALORE BEFORE SHRI B. R. BASKARAN, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(TP)A NO.759/BANG/2017 ASSESSMENT YEAR: 2012-13 M/S. NORTHERN OPERATING SERVICES PVT. LTD. 2 ND FLOOR, RMZ ECOSPACE, CAMPUS 1C, SARJAPUR OUTER RING ROAD BELLANDUR VILLAGE, VARTHUR HOBLI BENGALURU 560 103. PAN NO : AACCN1652J VS. JCIT SPECIAL RANGE-5 BENGALURU APPELLANT RESPONDENT APPELLANT BY : SHRI K.R. VASUDEVAN, A.R. RESPONDENT BY : SHRI MUZAFFAR HUSSAIN, D.R. DATE OF HEARING : 30.08.2021 DATE OF PRONOUNCEMENT : 01.09.2021 O R D E R PER B.R. BASKARAN, ACCOUNTANT MEMBER: THE ASSESSEE HAS FILED THIS APPEAL CHALLENGING THE ASSESSMENT ORDER DATED 31.1.2017 PASSED BY THE A.O. U/S 143(3) R.W.S. 144C(13) OF THE INCOME-TAX ACT,1961 ['THE ACT' FOR SHORT] FO R ASSESSMENT YEAR 2012-13. 2. THE ASSESSEE HAS FILED REVISED GROUNDS OF APPEAL AS PER WHICH, ONLY ISSUE URGED BY THE ASSESSEE RELATES TO DISALLO WANCE OF ESOP EXPENSES CLAIMED BY THE ASSESSEE. IT(TP)A NO.759/BANG/2017 M/S. NORTHERN OPERATING SERVICES PVT. LTD., BANGALO RE PAGE 2 OF 7 3. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PROVI DING TRANSACTION-BASED BUSINESS PROCESS OUTSOURCING SERV ICES TO THE GROUP COMPANIES. 4. THE FACTS RELATING TO THE ABOVE SAID ISSUE ARE S TATED IN BRIEF. THE ASSESSEE HAS FLOATED EMPLOYEES STOCK OPTION SC HEME (ESOP). DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE H AS VESTED ESOP RIGHTS TO CERTAIN EMPLOYEES. NORMALLY, THE SHARES ARE ISSUED UNDER ESOP SCHEME AT PRICE BELOW THE MARKET PRICE. ACCOR DINGLY, THE ASSESSEE CLAIMED A SUM OF RS.1,36,10,974/-, BEING T HE DIFFERENCE BETWEEN THE MARKET PRICE OF SHARES AND THE ISSUE PR ICE AS ESOP EXPENSES U/S 37(1) OF THE ACT. THE ASSESSEE PLACED ITS RELIANCE ON THE DECISION RENDERED BY THE SPECIAL BENCH, BENGALU RU IN THE CASE OF BIOCON LTD. VS. DCIT (2013) 35 TAXMANN.COM 335 IN S UPPORT OF ITS CLAIM. IN THE ABOVE SAID CASE, THE SPECIAL BENCH H AS HELD THAT THE DIFFERENCE BETWEEN THE MARKET PRICE OF SHARES AT TH E TIME OF GRANT OF ESOP OPTIONS TO THE EMPLOYEES AND THE PRICE AT WHIC H SHARES ARE OFFERED TO THE EMPLOYEES IS ALLOWABLE AS DEDUCTION U/S 37(1) OF THE ACT. THE A.O. OBSERVED THAT THE REVENUE HAS NOT AC CEPTED THE DECISION RENDERED BY TRIBUNAL IN THE CASE OF BIOCON LTD (SUPRA) AND HAS FILED FURTHER APPEAL BEFORE HONBLE KARNATAKA H IGH COURT. THE A.O. FURTHER OBSERVED THAT THE LOSS CLAIMED BY THE ASSESSEE SHOULD BE REAL AS IN THE CASE OF INCOME, WHICH SHOULD BE R EAL IN ORDER TO GET IT TAXED. ACCORDINGLY, HE HELD THAT THE LOSS CLAIM ED BY THE ASSESSEE I.E. THE DIFFERENCE BETWEEN MARKET VALUE OF SHARES AT THE TIME OF GRANT OF OPTIONS TO THE EMPLOYEES (VESTING PERIOD) AND TH E ACTUAL PRICE AT WHICH SHARES ARE OFFERED IS A NOTIONAL LOSS AND CAN NOT BE ALLOWED AS DEDUCTION U/S 37 OF THE ACT. ACCORDINGLY, HE DISAL LOWED THE CLAIM. 5. THE LD. DRP TOOK THE VIEW THAT IF THE ASSESSEE HAD TREATED THE DISCOUNT AMOUNT AS PERQUISITE IN THE HANDS OF THE E MPLOYEES AND ACCORDINGLY DEDUCTED TDS THEREFROM, THEN THE CORRES PONDING IT(TP)A NO.759/BANG/2017 M/S. NORTHERN OPERATING SERVICES PVT. LTD., BANGALO RE PAGE 3 OF 7 DISCOUNT IS ALLOWABLE AS DEDUCTION. OTHERWISE, THE SAME REQUIRES TO BE DISALLOWED U/S 40(A)(IA) OF THE ACT. THE RELEVA NT DISCUSSIONS MADE BY THE DRP ARE EXTRACTED BELOW: 76. THE PANEL HAS EXAMINED THE SUBMISSIONS OF THE ASSESSEE. THERE ARE FOUR STAGES IN THE GRANT OF THE ESOP. GRANTING OF OPTION VESTING OF OPTION EXERCISE OF OPTION SELLING OF SHARES NORMALLY, THE ESOP IS DESIGNED IN SUCH A WAY THAT T HERE IS A GAP OF ONE OR MORE YEARS BETWEEN EACH OF THE FIRST THREE STAGES. 77. THE BIOCON DECISION ALSO HOLDS THAT THE EXPEND ITURE IS ALLOWABLE AT THE TIME OF VESTING. SINCE THIS IS . POSITION AS PER THE BIOCON DECISION, THEN THE SAME BECOMES TAXABLE IN THE HANDS OF THE EMPLOYEE. WHAT HAS NOT BEEN BROUGHT BEFORE AND THEREFORE NOT CONSIDERED BY THE HON. SPECIAL BE NCH IN BIOCON IS THAT WHEN THE SAME AMOUNT BECOMES TAXABLE IN THE HANDS OF THE EMPLOYEE. THEREFORE, THE PANEL HAS EXAMINED THE ISSUE. 78 THE ASSESSEE IS CLAIMING THAT THE PROVISIONS F OR ESOP EXPENSES ARE ASCERTAINED LIABILITY. HOWEVER, IT IS CONTENDED THA T THE TAXABILITY ARISES IN THE HANDS OF THE EMPLOYEE ON THE DATE OF EXERCISE. THE TDS ON PERQUISITE AMOUNT ARISING OUT OF THE VESTING TRANSACTION MUST HAVE BE EN DEDUCTED BY THE ASSESSEE. HOWEVER, FROM THE RECORDS IT IS NOT CLEAR WHEN THE TDS IS MADE. 79. THUS, THE GAP BETWEEN THE DATE OF VESTING AND THE D ATE OF EXERCISE IS THE PERIOD FOR WHICH THERE IS A TAX LOSS TO THE REV ENUE. EACH TRANSACTION HAS TWO SIDES. ONE IS 'EXPENDITURE SIDE' AND THE OTHER IS 'INCOME SIDE'. IN THE HANDS OF THE COMPANY IT IS AN EXPENSE AND IN THE HANDS OF THE EMPLOYEE IT IS INCOME THE SECOND QUESTION ARISES IS WHETHER THE INCOME IS TAXABLE. 80. IN THE HANDS OF THE EMPLOYEE THE TAXABILITY CAN NOT BE SEEN ON A DIFFERENT BASIS. THUS, THE SAME TRANSACTION BECOMES ALLOWABLE EXPENDITURE IN THE HANDS OF THE ASSESSEE BUT DOES NOT BECOME INCOME IN THE H ANDS OF THE EMPLOYEE. THIS SITUATION IS NOT PERMISSIBLE AS PER THE LAW. LITHE LIABILITY IN THE HANDS OF THE ASSESSEE IS ASCERTAINED THEN THE PERQUISITE/SALARY IN THE HANDS OF THE EMPLOYEE ALSO BECOMES ASCERTAINED BECAUSE IT IS THE SAME TRA NSACTION WHICH IS TRIGGERING BOTH, AND THE SALARY/ PERQUISITE IS TAXABLE ON THE 'DUE BASIS' AS PER THE SECTION 15 OF THE IT ACT IT(TP)A NO.759/BANG/2017 M/S. NORTHERN OPERATING SERVICES PVT. LTD., BANGALO RE PAGE 4 OF 7 81. SECTION 15 IN THE INCOME- TAX ACT, 1995 IS EXTR ACTED HEREUNDER: '15. SALARIES THE FOLLOWING INCOME SHALL BE CHARGEABLE TO INCOME- TAX UNDER THE HEAD' SALARIES' (A)ANY SALARY DUE FROM AN EMPLOYER OR A FORMER EMPL OYER TO AN ASSESSEE IN THE PREVIOUS YEAR, WHETHER PAID OR NOT; (B) ANY SALARY PAID OR ALLOWED TO HIM IN THE PREVIO US YEAR BY OR ON BEHALF OF AN EMPLOYER OR A FORMER EMPLOYER THOUGH NOT DUE OR BEFORE IT BECAME DUE TO HIM; (C) ANY ARREARS OF SALARY PAID OR ALLOWED TO HINT IN THE PREVIOUS YEAR BY OR ON BEHALF OF AN EMPLOYER OR A FORMER EMPLOYER, IF N OT CHARGED TO INCOME- TAX FOR ANY EARLIER PREVIOUS YEAR. FURTHER, U/S 17 OF THE ACT THE SALARY AND PERQUISIT ES ARE INCLUSIVE DEFINITIONS AND ESOP IS COVERED WITHIN THESE PROVISIONS. 82. TO SUMMARIZE, THE.13LOCON DECISION HOLDS THAT THE E XPENDITURE IS ALLOWABLE AT THE TIME OF VESTING. THEREFORE, BY COROLLARY THE , INCOME BECOMES TAXABLE AT THE TIME OF VESTING ITSELF. THEREFORE, TWO SITUATIO NS ARISE. A. FIRST, THE ASSESSEE. HAS NOT CONSIDERED THE 'PERQUI SITE AMOUNT AT THE TIME OF VESTING' AS SALARY INCOME OF THE EMPLOYEE A ND HAS NOT DEDUCTED TAX ON THE SAME. IN SUCH A SITUATION THE EXPENDITUR E IS TO BE DISALLOWED BY THE AO U/S 40(A)(IA). B. SECOND, THE ASSESSEE HAS CONSIDERED 'PERQUISITE AMO UNT AT THE TIME OF VESTING' AS SALARY INCOME OF THE EMPLOYEE AND HAS D EDUCTED TAX ON THE SAME. IN SUCH A SITUATION, THE EXPENDITURE IS TO BE ALLOWED BY THE AO. 83. ACCORDINGLY, THE OBJECTION IS DECIDED AS ABOVE. 6. ACCORDINGLY, WHILE PASSING FINAL ASSESSMENT ORD ER, THE A.O. CALLED FOR THE DETAILS OF ESOP GIVEN TO THE EMPLOYE ES. FROM THE DETAILS FURNISHED, THE A.O. NOTICED THAT THE ASSESS EE HAS NOT DEDUCTED TAX AT SOURCE WHEN THE ESOP WAS VESTED WIT H THE EMPLOYEES. ACCORDINGLY, HE DISALLOWED THE CLAIM. 7. THE LD. A.R. PLACED HIS RELIANCE ON THE DECISION RENDERED BY THE SPECIAL BENCH IN THE CASE OF BIOCON LTD. (SUPRA ) AND SUBMITTED THAT THE ESOP EXPENDITURE IS ALLOWABLE AS DEDUCTION WHEN THE OPTION OF ESOP WAS GRANTED TO THE ASSESSEE I.E. WHEN THE R IGHT IS VESTED WITH THE EMPLOYEES. HE SUBMITTED THAT THE ASSESSEE WOUL D BE DEDUCTING IT(TP)A NO.759/BANG/2017 M/S. NORTHERN OPERATING SERVICES PVT. LTD., BANGALO RE PAGE 5 OF 7 TDS WHEN THE OPTIONS ARE ACTUALLY EXERCISED BY THE EMPLOYEES. HE INVITED OUR ATTENTION TO PARAGRAPH 11.1.5 OF THE OR DER PASSED BY THE SPECIAL BENCH AND SUBMITTED THAT THE SPECIAL BENCH HAS VISUALIZED THE SITUATION THAT THE STAGE OF TAXABILITY OF PERQU ISITE IN THE HANDS OF THE EMPLOYEE MAY DIFFER FROM THE STAGE OF THE DEDUC TIBILITY OF EXPENSE IN THE HANDS OF THE COMPANY, DEPENDING UPON THE MET HOD OF ACCOUNTING FOLLOWED BY THE COMPANY. ONLY CONDITION MENTIONED BY THE SPECIAL BENCH IS THAT THE AMOUNT OF SUCH DISCOU NT OR THE PERQUISITE AMOUNT TAXED IN THE HANDS OF EMPLOYEES C ANNOT BE DIFFERENT. ACCORDINGLY, THE LD. A.R. SUBMITTED THA T IT IS NOT CORRECT TO SAY THAT THE ESOP DISCOUNT CLAIMED BY THE ASSESSEE SHOULD BE ASSESSED AS PERQUISITE IN THE CURRENT YEAR ITSELF. HE FURTHER SUBMITTED THAT THE DECISION RENDERED BY SPECIAL BEN CH IN THE CASE OF BIOCON LTD. (SUPRA) HAS SINCE BEEN UPHELD BY HONBL E KARNATAKA HIGH COURT, VIDE ITS ORDER DATED 11.11.2020 PASSED IN IT A NO.653 OF 2013. 8. THE LD. D.R., ON THE CONTRARY, RELIED UPON THE O RDER PASSED BY LD. DRP AND A.O. 9. WE HEARD THE RIVAL CONTENTIONS AND PERUSED THE R ECORD. WE NOTICE THAT THE A.O. HAS MADE THE IMPUGNED DISALLOW ANCE OF RS.136,10,974/-, ONLY FOR THE REASON THAT THE ASSES SEE HAS NOT DEDUCTED TAX AT SOURCE FROM THE ABOVE SAID AMOUNT I N THE CURRENT YEAR ITSELF, I.E. IT IS THE CASE OF THE A.O THAT TH E ESOP DISCOUNT AMOUNT SHOULD HAVE BEEN ASSESSED AS PERQUISITE IN THE HAND S OF THE CONCERNED EMPLOYEES IN THE CURRENT YEAR ITSELF AND TDS SHOULD HAVE BEEN DEDUCTED THERE FROM. THUS, THERE IS NO DISPUT E NOW THAT THE ESOP EXPENSES CLAIM IS ALLOWABLE U/S 37 OF THE ACT. THE DISPUTE IS WHETHER THE TDS IS TO BE DEDUCTED DURING THE CURREN T YEAR ITSELF OR NOT. IT(TP)A NO.759/BANG/2017 M/S. NORTHERN OPERATING SERVICES PVT. LTD., BANGALO RE PAGE 6 OF 7 10. WE HAVE NOTICED THAT THE TRIBUNAL HAS MADE A SP ECIFIC MENTION ABOUT THE TAXABILITY OF THE DISCOUNT AMOUNT AS PERQ UISITE IN THE HANDS OF THE EMPLOYEES IN PARAGRAPH 11.11.5 OF ITS ORDER. THE SPECIAL BENCH HAS OBSERVED THAT THE STAGE OF TAXABI LITY OF PERQUISITE IN THE HANDS OF THE EMPLOYEE MAY DIFFER FROM THE ST AGE OF DEDUCTIBILITY OF EXPENDITURE. THE ASSESSEE WOULD BE LIABLE TO DE DUCT TAX WHEN THE DISCOUNT AMOUNT BECOMES PERQUISITE IN THE HANDS OF THE CONCERNED EMPLOYEE. IT IS THE SUBMISSION OF THE LD. A.R. THA T THE SAME WILL BE CONSIDERED AS PERQUISITE IN THE YEAR IN WHICH THE O PTION IS EXERCISED BY THE CONCERNED EMPLOYEE AND TDS WOULD BE DEDUCTED THEREFROM AT THAT POINT OF TIME. 11. WE HAVE NOTICED THAT THE LD. DRP HAS UNDERST OOD THAT THERE ARE 4 STAGES IN GRANT OF ESOP I.E. GRANTING OF OPTI ON, VESTING OF OPTION, EXERCISE OF OPTION AND SELLING OF SHARES. HENCE TH ERE WILL BE TIME DIFFERENT BETWEEN VESTING OF OPTION AND EXERCISE OF OPTION AND ACCORDINGLY THE PERIOD OF TAXABILITY OF ESOP BENEFI TS AS PERQUISITE MAY ALSO DIFFER. HENCE, WE ARE OF THE VIEW THAT TH E TAX AUTHORITIES ARE NOT JUSTIFIED IN HOLDING THAT THE ASSESSEE SHOULD H AVE DEDUCTED TAX AT SOURCE FROM THE DISCOUNT AMOUNT BY ASSESSING THE SAME AS PERQUISITE IN THE HANDS OF THE ASSESSEE IN THE YEAR IN WHICH ESOP WAS VESTED IN THEM. 12. ACCORDINGLY, WE HOLD THAT THE ASSESSEE IS E NTITLED FOR DEDUCTION OF ESOP EXPENSES WHEN THE RIGHTS ARE VESTED IN THE HANDS OF THE ASSESSEE AS HELD BY HON'BLE KARNATAKA HIGH COURT IN THE CASE OF BIOCON LTD (SUPRA). ACCORDINGLY, WE DIRECT THE AO TO ALLOW THE CLAIM. HOWEVER, THE AO IS ENTITLED TO SATISFY HIMSELF THAT THE ASSESSEE HAS EITHER DEDUCTED TAX AT SOURCE WHEN THE OPTION IS EX ERCISED BY THE EMPLOYEE OR HAS REVERSED THE EXPENDITURE WHEN THE C ONCERNED EMPLOYEE DID NOT EXERCISE THE OPTION, IF IT IS CONS IDERED NECESSARY BY THE AO. IT(TP)A NO.759/BANG/2017 M/S. NORTHERN OPERATING SERVICES PVT. LTD., BANGALO RE PAGE 7 OF 7 13. IN THE RESULT, THE APPEAL FILED BY THE ASS ESSEE IS TREATED AS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 1 ST SEPT, 2021 SD/- (BEENA PILLAI) JUDICIAL MEMBER SD/- (B.R. BASKARAN) ACCOUNTANT MEMBER BANGALORE, DATED 1 ST SEPT, 2021. VG/SPS COPY TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.