ING Vysya Bank Limited, Bangalore V. Addl.C.I.T., Bangalore

ITA 934/BANG/2014

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 8925 (ITAT-BANGALORE)
• Duration Of Justice: 7 year(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-08-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2008-2009
• Appeal Filed On: 17-07-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PRADEEP KUMAR CIT BENGALURU
• Keywords: Earning of tax free income; Question of law; Rule 8D
• Section: 14A; 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI GEORGE GEORGE K., JUDICIAL MEMBER IT A NO. 934/BANG/2014 ASSESSMENT YEAR: 2008 - 09 KOTAK MAHINDRA BANK LTD., (SUCCESSOR IN BUSINESS TO ERSTWHILE ING VYSYA BANK LTD.), ING VYSYA HOUSE, NO.22, M G ROAD, BANGALORE 560 001. PAN: AABCT 0529M VS. THE ADDITIONAL COMMISSIONER OF INCOME TAX, RANGE 11, BANGALORE. APPELLANT RESPONDENT APPELLANT BY : S HRI S. ANANTHAN, CA RES PONDENT BY : SHRI PRADEEP KUMAR, C IT(DR)(ITAT ), BENGALURU. DATE OF HEARING : 05 .0 8 .202 1 DATE OF PRONOUNCEMENT : 05 .0 8 .202 1 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THE ASSESSEE ORIGINALLY HAD COME UP FOR APPEAL B EFORE THE TRIBUNAL INTER ALIA RAISING THE ADDITIONAL GROUNDS AS FOLLOWS:- 1. THE CIT(APPEALS)-I, BANGALORE (THE CIT(A)) E RRED IN CONFIRMING THE ACTION OF AO IN, BY CONSIDERING THE INVESTMENTS IN MUTUAL FUND GROWTH SCHEME AMOUNTING TO RS.1,000 CRORES MADE ON 31.3.2008 FOR CALCULATING DISALLOWANCE AS PER RULE 8D(2), INCOME FROM WHICH I S LIABLE FOR INCOME TAX AND NOT EXEMPT. ITA NO.934/BANG/2014 PAGE 2 OF 5 2. HE FAILED TO APPRECIATE AND OUGHT TO HAVE HELD T HAT INVESTMENT IN RELIANCE LIQUIDITY FUND GROWTH OPTI ON UNITS IS NOT CAPABLE OF GENERATING EXEMPT INCOME AND THE APPELLANT HAS INDEED OFFERED THE ENTIRE PROFIT ON REDEMPTION OF THE SAID UNITS TO TAX AND NO DIVIDEND WAS RECEIVED ON THE SA ME. 3. THE APPELLANT, PRAYS THAT THE AO BE DIRECTED RE- CALCULATE DISALLOWANCE U/S. 14A AFTER EXCLUDING INVESTMENTS I N RELIANCE LIQUIDITY FUND GROWTH OPTION UNITS BEING NOT CAPABLE OF GENERATING EXEMPT INCOME. 2. THE TRIBUNAL VIDE ORDER DATED 17.05.2017 DISMIS SED THE ADDITIONAL GROUND WITHOUT GIVING ANY SPECIFIC FINDING. AGAINS T THIS, THE ASSESSEE WENT IN APPEAL BEFORE THE HONBLE HIGH COURT OF KARNATAK A. THE HONBLE HIGH COURT IN ITA NO.762/2017 VIDE JUDGMENT DATED 15.06. 2021 REMITTED THE MATTER BACK TO THE TRIBUNAL AS FOLLOWS:- 8. FOR THE AFOREMENTIONED REASONS, SINCE, THE TRI BUNAL HAS REMITTED THE MATTER TO THE ASSESSING OFFICER FOR AD JUDICATION OF CERTAIN OTHER CLAIMS OF THE ASSESSEE, THE TRIBUNAL OUGHT TO HAVE REMITTED THE ADDITIONAL CLAIM OF THE ASSESSEE WITH REGARD TO ALLOWANCE OF ESOP TO THE ASSESSING OFFICER FOR DECI SION IN ACCORDANCE WITH LAW. FOR THE AFOREMENTIONED REASONS , THIRD SUBSTANTIAL QUESTION OF LAW IS ANSWERED IN FAVOUR O F THE ASSESSEE AND AGAINST THE REVENUE. IT IS THEREFORE, NOT NECES SARY FOR US TO DEAL WITH THE FIRST AND SECOND SUBSTANTIAL QUESTION S OF LAW. IN VIEW OF PRECEDING ANALYSIS, THE ORDER PASSED BY THE TRIBUNAL DATED 17.05.2017 INSOFAR AS IT PERTAINS TO REJECTION OF THE ADDITIONAL CLAIM OF THE ASSESSEE WITH REGARD TO ESO P IS QUASHED AND THE TRIBUNAL IS DIRECTED TO REMIT THE MATTER TO THE ASSESSING OFFICER TO ADJUDICATE THE ADDITIONAL CLAIM MADE BY THE ASSESSEE WITH REGARD TO ESOP FOR DECISION IN ACCORDANCE WITH LAW. IT IS CLARIFIED THAT WE HAVE NOT EXPRESSED ANY OPINION ON THE MERITS OF THE CASE. IN THE RESULT, APPEAL IS DISPOSED OF. 3. ACCORDINGLY, THE APPEAL WAS TAKEN UP FOR HEARING BEFORE THE TRIBUNAL. WE HAVE HEARD BOTH THE PARTIES AND PERUS ED THE MATERIAL ON ITA NO.934/BANG/2014 PAGE 3 OF 5 RECORD. IN OUR OPINION, THE ISSUE IS SQUARELY COVE RED BY THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT (LTU) V. BIOCON LTD., [2021] 430 ITR 51 (KARN) WHEREIN IT WAS HELD AS FOLLOWS:- 7. THUS, FROM PERUSAL OF SECTION 37(1) OF THE ACT, IT IS EVIDENT THAT THE AFORESAID PROVISION PERMITS DEDUCTION FOR THE EXPENDITURE LAID OUT OR EXPENDED AND DOES NOT CONTAIN A REQUIRE MENT THAT THERE HAS TO BE A PAY OUT. IF AN EXPENDITURE HAS BE EN INCURRED, PROVISION OF SECTION 37(1) OF THE ACT WOULD BE ATTR ACTED. IT IS ALSO PERTINENT TO NOTE THAT SECTION 37 DOES NOT ENVISAGE INCURRENCE OF EXPENDITURE IN CASH. 8. SECTION 2(15A) OF THE COMPANIES ACT, 1956 DEFINE S 'EMPLOYEES STOCK OPTION' TO MEAN OPTION GIVEN TO TH E WHOLE TIME DIRECTORS, OFFICERS OR THE EMPLOYEES OF THE COMPANY , WHICH GIVES SUCH DIRECTORS, OFFICERS OR EMPLOYEES, THE BENEFIT OR RIGHT TO PURCHASE OR SUBSCRIBE AT A FUTURE RATE THE SECURITI ES OFFERED BY A COMPANY AT A FREE DETERMINED PRICE. IN AN ESOP A CO MPANY UNDERTAKES TO ISSUE SHARES TO ITS EMPLOYEES AT A FU TURE DATE AT A PRICE LOWER THAN THE CURRENT MARKET PRICE. THE EMPL OYEES ARE GIVEN STOCK OPTIONS AT DISCOUNT AND THE SAME AMOUNT OF DISCOUNT REPRESENTS THE DIFFERENCE BETWEEN MARKET PRICE OF S HARES AT THE TIME OF GRANT OF OPTION AND THE OFFER PRICE. IN ORD ER TO BE ELIGIBLE FOR ACQUIRING SHARES UNDER THE SCHEME, THE EMPLOYEE S ARE UNDER AN OBLIGATION TO RENDER THEIR SERVICES TO THE COMPA NY DURING THE VESTING PERIOD AS PROVIDED IN THE SCHEME. ON COMPLE TION OF THE VESTING PERIOD IN THE SERVICE OF THE COMPANY, THE O PTION VEST WITH THE EMPLOYEES. 9. IN THE INSTANT CASE, THE ESOPS VEST IN AN EMPLOY EE OVER A PERIOD OF FOUR YEARS I.E., AT THE RATE OF 25%, WHIC H MEANS AT THE END OF FIRST YEAR, THE EMPLOYEE HAS A DEFINITE RIGH T TO 25% OF THE SHARES AND THE ASSESSEE IS BOUND TO ALLOW THE VESTI NG OF 25% OF THE OPTIONS. IT IS WELL SETTLED IN LAW THAT IF A BU SINESS LIABILITY HAS ARISEN IN THE ACCOUNTING YEAR, THE SAME IS PERMISSI BLE AS DEDUCTION, EVEN THOUGH, LIABILITY MAY HAVE TO QUANT IFY AND DISCHARGED AT A FUTURE DATE. ON EXERCISE OF OPTION BY AN EMPLOYEE, THE ACTUAL AMOUNT OF BENEFIT HAS TO BE DE TERMINED IS ONLY A QUANTIFICATION OF LIABILITY, WHICH TAKES PLA CE AT A FUTURE DATE. THE TRIBUNAL HAS THEREFORE, RIGHTLY PLACED RE LIANCE ON DECISIONS OF THE SUPREME COURT IN BHARAT MOVERS SUP RA AND ITA NO.934/BANG/2014 PAGE 4 OF 5 ROTORK CONTROLS INDIA P. LTD., SUPRA AND HAS RECORD ED A FINDING THAT DISCOUNT ON ISSUE OF ESOPS IS NOT A CONTINGENT LIABILITY BUT IS AN ASCERTAINED LIABILITY. 10. FROM PERUSAL OF SECTION 37(1), WHICH HAS BEEN R EFERRED TO SUPRA, IT IS EVIDENT THAT AN ASSESSEE IS ENTITLED T O CLAIM DEDUCTION UNDER THE AFORESAID PROVISION IF THE EXPENDITURE HA S BEEN INCURRED. THE EXPRESSION 'EXPENDITURE' WILL ALSO IN CLUDE A LOSS AND THEREFORE, ISSUANCE OF SHARES AT A DISCOUNT WHERE T HE ASSESSEE ABSORBS THE DIFFERENCE BETWEEN THE PRICE AT WHICH I T IS ISSUED AND THE MARKET VALUE OF THE SHARES WOULD ALSO BE EXPEND ITURE INCURRED FOR THE PURPOSES OF SECTION 37(1) OF THE ACT. THE P RIMARY OBJECT OF THE AFORESAID EXERCISE IS NOT TO WASTE CAPITAL B UT TO EARN PROFITS BY SECURING CONSISTENT SERVICES OF THE EMPLOYEES AN D THEREFORE, THE SAME CANNOT BE CONSTRUED AS SHORT RECEIPT OF CA PITAL. THE TRIBUNAL THEREFORE, IN PARAGRAPHS 9.2.7 AND 9.2.8 H AS RIGHTLY HELD THAT INCURRING OF THE EXPENDITURE BY THE ASSESSEE E NTITLES HIM FOR DEDUCTION UNDER SECTION 37(1) OF THE ACT SUBJECT TO FULFILMENT OF THE CONDITION. 11. THE DEDUCTION OF DISCOUNT ON ESOP OVER THE VEST ING PERIOD IS IN ACCORDANCE WITH THE ACCOUNTING IN THE BOOKS OF A CCOUNT, WHICH HAS BEEN PREPARED IN ACCORDANCE WITH SECURITIES AND EXCHANGE BOARD OF INDIA (EMPLOYEE STOCK OPTION SCHEME AND EM PLOYEE STOCK PURCHASE SCHEME) GUIDELINES, 1999. 4. ACCORDINGLY, FOR QUANTIFICATION PURPOSE, WE REMI T THE ISSUE TO THE FILE OF ASSESSING OFFICER TO ADJUDICATE THE ISSUE IN ACC ORDANCE WITH ABOVE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT. 5. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 05 TH DAY OF AUGUST, 2021. SD/- SD/- ( GEORGE GEORGE K. ) ( CHANDRA POOJARI ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 05 TH AUGUST, 2021. / DESAI S MURTHY / ITA NO.934/BANG/2014 PAGE 5 OF 5 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.