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Income Tax Appellate Tribunal, HYDERABAD BENCHES “A”: HYDERABAD
Before: SHRI SATBEER SINGH GODARA & SHRI LAXMI PRASAD SAHU
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES “A”: HYDERABAD (THROUGH VIRTUAL CONFERENCE) BEFORE SHRI SATBEER SINGH GODARA, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER
ITA No. 428/H/2020 Assessment Year: 2017-18 Dy. Commissioner of Income Vs. M/s Integrated Cleanroom Tax, Circle 2(1) Technologies Pvt. Ltd. Hyderabad Hyderabad [PAN: AABCI0328R] (Appellant) (Respondent) Revenue by: Sri Kiran Katta, DR Assessee by: Sri S. Rama Rao Date of hearing: 16/08/2021 Date of pronouncement: 17/09/2021
O R D E R PER L.P. SAHU, A.M.: This appeal is filed by the Revenue against the order passed by the CIT(A)-2, Hyderabad order dated 18th Feb., 2020 involving proceedings u/s 143(3) of the Income Tax Act, 1961 [in short “the Act”]; on the following grounds of appeal.
The Ld CIT(A) erred in allowing the claim of the expenses as revenue which has enduing benefit in the form of employee performance and thus need to be capitalized? Rs.78,54,960/- 2. The CIT(A) erred in allowing the expenditure claimed which was not actually spent by the assessee to be allowed as such. It is a notional loss which was claimed as expenditure in the current year. The same is not allowable to be debited to P&L Account.
ITA No. 428/Hyd/2020 AY 2017-18 DCIT vs. M/s Integrated Cleanroom Technologies Pvt. Ltd. 3. The Ld. CIT(A) erred in ignoring the fact that the issue of allowability of ESOP expenditure has not reached finality and the SLP filed against the order of Hon'ble High Court of Delhi in the matter in the case of Mis. Lemon Tree Hotels Pvt Ltd has been admitted by the Hon'ble Supreme Court. 4. Whether the CIT(A) is correct in relating the disallowances to exempt income earned during the year when Sec. 14A does not use world "income of the year" but "income under the Act" and in light of the clarification issued by the CBDT that Rule 80 r.w.s. 14A provides for disallowance of expenditure where the tax payer in a particular year has not earned any exempt income. Rs.4,57,543/- 5. Whether on the facts and circumstances of the case and in law, the CIT(A) is correct in deleting the addition uls l4A r.w.r.8D(2)(ii) is whereas disallowance in rule 8D(2)(ii) is linked to investment, income from which does not or shall not form part of total income and upheld by the Tribunal in the case on M/s Bellwether Micro Finance Funds Vs. ITO 6. Any other ground that may be urged during the course of appellate proceedings.
At the outset the ld.DR drew our attention to the affidavit filed by the revenue requesting for condonation of delay of 85 days in filing the appeal before us which was due to Covid pandemic and subsequent lock down. The delay is condoned and we proceed with the appeal.
Brief facts of the case are that the assessee filed return of income on 30th October, 2017 admitting loss of Rs.40,89,46,720/-. Later on assessee revised the return on 27th September,2018 admitting total income of Rs. 40,75,75,260/-; and the case was selected for complete scrutiny and statutory notices were issued to the assessee.
2.1. During the course of assessment proceedings the Assessing officer observed that the assessee company has debited into Profit & Loss a/c Rs. 2,31,02,825/- under the head ‘employee stock compensation expenses’. In
ITA No. 428/Hyd/2020 AY 2017-18 DCIT vs. M/s Integrated Cleanroom Technologies Pvt. Ltd. this regard the assessee was asked to submit the reply to which the assessee submitted a detailed calculation along with the value for determining the sales as well as the manuals. But the AO was not satisfied and he calculated difference on the basis of DCF method and made necessary adjustment under Rule 11 UA and accordingly he added Rs. 2,31,02,825/- and added to the total income of the assessee. Further, the AO also noticed that the assessee has made investments in equity instruments and the opening balance was Rs. 15,13,85,989/- and as on the end of the balance sheet there was a closing balance of Rs 11,77,57,652/-. After observing he applied Rule 8D for disallowance u/s 14A of the Act and calculated disallowance at Rs.13,45,777/- and added to the income of the assessee.
2.2. Feeling aggrieved from the order of the AO assessee filed appeal before the CIT(A). Before the CIT(A) the assessee filed in details after considering which, the CIT(A) allowed the appeal of the assessee.
2.3. Aggrieved from the order of the CIT(A), the Revenue is in appeal before us.
The Ld.DR relied on the order of the AO and further submitted that the AO has rightly applied the DCF method under rule 11 UA of the Act therefore he was justified to make disallowance u/s 37(1) of the Act; in respect of disallowance u/s 14A he submitted that there was certain expenditure which must have been incurred by the assessee which cannot be ruled out because there is a change in the value of the investments in opening and closing of the year, therefore, the AO has rightly calculated disallowance u/s 14A; case law relied on by the ld.AR is not applicable and is distinguishable on facts of the case on hand.
ITA No. 428/Hyd/2020 AY 2017-18 DCIT vs. M/s Integrated Cleanroom Technologies Pvt. Ltd. 4. On the other hand ld.AR relied on the order of the CIT(A) and submitted that the CIT(A) has rightly decided the issue after considering all submissions made before him. 5. After hearing rival contentions and material placed on record, case laws cited, we observe that the CIT(A) has decided the appeal on both issues in favour of the assessee, the relevant part is reproduced here under. “6. The Decision: The appellant has claimed a sum of Rs.2,31,02,825/- as ESOP expenses which were disallowed by the Assessing Officer. The appellant stated that the expenses have been claimed as per ICAI guidelines and also SEBI has given the mandate for the payment of the same as per their rules. In view of the same, the expenses should be allowed. The appellant relied on the decision of Hon'ble ITAT in the case of Mindspeed Technologies Vs ACIT which relied on the special Bench decision of Bengaluru Bench of Tribunal in the case of Biocon Limited Vs ACIT. The Assessing Officer relied on the decision of Ranbaxy Laboratories Vs Add1.CIT dated 12.06.2009 of the Hon'ble ITAT Delhi and the decision of Mumbai Bench of Hon'ble ITAT in the case of VIP Industries Vs DCIT. The Assessing Officer noted that the department has contested the decision of the jurisdictional ITAT as cited by the appellant at a higher forum. The Assessing Officer therefore, disallowed the expenses. The Assessing Officer further noted that the fair value per share was only Rs.330AO and not as claimed by the appellant as per DCF method. The Assessing Officer however disallowed the entire expenses claimed as ESOP as not allowable. It is seen that on this issue, the Hon'ble Karnataka High Court in the case of Pr.Commissioner of Income Tax vs M/ s Microchip Technology vide order dated 16.08.2018 in I.T.A. No.241/2017 has observed as under regarding the ESOP expenses: (2) Whether on the facts and in the circumstances of the case, the Tribunal is right in law admitting additional ground of assessee with regard to claim of ESOP expenses whereby the Tribunal has allowed the claim by following the decision in case of M/s. Biocon Ltd even when no such claim is made before assessing authority and as well as in return of income filed for the year in question. "
ITA No. 428/Hyd/2020 AY 2017-18 DCIT vs. M/s Integrated Cleanroom Technologies Pvt. Ltd. "23. We have considered the rival submissions as well as the relevant material on record. There is not dispute that for the year under consideration the assessee did not claim the deduction in respect of the payment made to the parent company on account of Employees Stock Option and compensation. However we find that an identical issue has been considered in assessee's own case for the Assessment Year 2008-09 and it was held that it is an allowable deduction. Therefore, so far as the issue of allowability of the deduction is concerned it has been decided in favour of the assessee by this tribunal by following the decision of the Special Date of Judgment 16-8-2018, ITA No. 241/2017 The Pr. Commissioner of Income Tax - 7 & Anr. Vs. The Hon'ble High Court of Delhi in ITA 107/2015 in the case of CIT vs Lemon Tree Hotels Ltd. vide order dated 18.08.2015 has adjudicated as under: "2. The question sought to be projected by the Revenue is whether the ITAT erred in deleting the addition of Rs. 1,28,19,169/- made by the Assesssing Officer ('AO') by way of disallowance of the expenses debited as cost of Employees Stock Option ('ESOP') in profit and loss account? http://www.itatonline.org ITA No. 107/2015 Page 2 of 23. The Court has been shown a copy of the decision dated 19th June 2012 passed by the Division Bench of Madras High Court in CIT-III Chennai v. PVP Ventures Ltd. (TC{A) No. 1023 of 2005) where a similar question was answered in favour of the Assessee by holding that the cost of ESOP could be debited to the profit and loss account of the Assessee. This Court has also in its decision dated 4th August 2015 in ITA No.2 of 2002 (CIT v. Oswal Agro Mills Ltd.) held that the expenditure incurred in connection with issue of debentures or obtaining loan should be considered as revenue expenditure. 4. In the circumstances, the impugned order of the ITAT answering the question in favour of the Assessee is affirmed. The Hon’ble ITAT Delhi in the case of Ranbaxy Laboratories has also decided the issue subsequently in the favour of the assessee for AY 2008-09 in ITA No. 196/Del/2013 vide order dated 25-4-2016 as reported in 68 taxmann.com 322. Thus, the Hon'ble ITAT of Hyderabad, the jurisdictional Bench has already decided the issue holding ESOP expenses as allowable ujs. 37(1) and further as the Hon'ble High Courts of Delhi and Karnataka have also decided the issue of allowability of ESOPs as revenue expenditure, therefore the ESOP expense claimed by the appellant has to be allowed in principle accordingly. As regards the quantum of allowance, the appellant has calculated the ESOPs on the basis of market value of Rs. 505 and has charged the employees Rs. 100 (face value being Rs. 10 and security premium Rs. 90). The difference has been considered as an expense and the relevant perquisite has been
ITA No. 428/Hyd/2020 AY 2017-18 DCIT vs. M/s Integrated Cleanroom Technologies Pvt. Ltd. accounted for in the hands of employees and the same have been taxed in their hands and due TDS has been deducted by the appellant. The Assessing Officer however has taken the value as per book value by considering the value around Rs. 335/- and the Assessing Officer has commented that the valuation taken at Rs. 505/- is very high. The appellant has followed the DCF method and no fault has been found in the same by the Assessing Officer with regard to the parameters considered for the said valuation and the AO simply brushed aside that it is based on future projections. DCF method is a method prescribed by the Income Tax Act and the valuation requires future projections, therefore, the act of the AO in not examining and not finding anything improper and merely rejecting the value was incorrect. The appellant has also justified the financials considered for DCF method in its submission dated 18.02.2020 in the para 6. The same is reproduced as under:
From the above statement actuals are little higher than the valuation as per DCF method and hence the estimates are reasonably good and are not made with intention to value share at higher price to claim expenses at a higher rate. From above, it is noted that the three years average cash flow as taken by the valuer for DCF method at the time of issuance was 31.95, whereas as per actual as on today, the three years cash flow is 32.29. Thus, the DCF method has estimated a fair value of the company by considering correct financials. In view of the above, the method adopted by the appellant is reasonable and therefore there is no change required in the valuation. To sum up, the ESOP expenses are allowable and the ESOP has been calculated at a fair value and therefore the sum of Rs. 2,31,02,829/- is allowable as revenue expenditure. In view of the above the ground no. 1 is allowed.
ITA No. 428/Hyd/2020 AY 2017-18 DCIT vs. M/s Integrated Cleanroom Technologies Pvt. Ltd. The ground no. 2 relates to addition on account of section 14A of Rs. 13,45,717/- being 1% of the investments made of Rs.13,45,71,770/-. The appellant has stated that it does not have any exempt dividend income and therefore the disallowance ix]». 14A is not called for. There is a jurisdictional ITAT decision in the situation, wherein the disallowance u/s. 14A cannot be made if the appellant has not earned any exempt income. The extract of the decision in the case of DCIT Vs. Maheshwari Mega Ventures Limited, Hyderabad in ITA No. 367/Hyd/2013 dated 03.02.2017 is reproduced as below: "22. Considered the rival submissions and perused the material facts on record. As per the P&L account and balance sheet submitted before us, the assessee had not earned any exempt income. The provisions of section 14A will be applied to find the expenditure relating to exempt income. In the absence of such exempt income, no expenditure can be disallowed in relation to exempt income. Accordingly, we uphold the decision of CIT(A) and dismiss the ground raised by the revenue. " In view of the above, as there is no exempt income, the disallowance u/s. 14A cannot be made and the Ad is directed to delete the disallowance made u/s 14A and accordingly the ground no. 2 is allowed. To sum up appeal is allowed.”
5.1. From the above order of the CIT(A), we observe that he had done well reasoned order and we do not find any infirmity in the order of the CIT(A). Ld.CIT(A) after considering submissions and case laws cited/relied on by the assessee, he has rightly allowed the appeal of the assessee on the issue of ESOP compensation expenses. We also notice from the above order of the CIT(A) that the disputed amount has already been considered as a perquisite in the hands of the employees while calculating income of the employees Therefore this ground of revenue is dismissed.
5.2. We also observe from the order of the CIT(A) and financial statements filed by the assessee before us that in the impugned AY the assessee has not received any exempt income, therefore, no disallowance can be made. In support of the above reasoning we rely on the following judgements.
ITA No. 428/Hyd/2020 AY 2017-18 DCIT vs. M/s Integrated Cleanroom Technologies Pvt. Ltd. (i) Hon’ble High Court of Karnataka in the case of CIT vs. Biocon Ltd. On 28th Aug.2019 (ii) Hon’ble High Court of Delhi in the case of CIT vs. Lemon Tree Hotels Ltd. Order dated 18.08.2015
CIT(A) also considered this issue after relying on the judgement of coordinate bench of this tribunal in ITA 369/Hyd/2013 dated 3rd Feb., 2017. Accordingly, there is no substance in the grounds raised by the revenue regarding disallowance u/s 14A in the case of the assessee. Therefore, this ground of appeal of revenue is dismissed. 6. In the result, appeal of the Revenue is dismissed. Pronounced in the open court on 17th September, 2021.
Sd/- Sd/-
(S.S. GODARA) (L. P. SAHU) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad Dated: 17th September, 2021. *gmv
Copy to :
1 Dy.CIT, Circle 2(1), Hyderabad 2 M/s Integrated Cleanroom Technologies Pvt.Ltd, 8-3-903/F/11, Flat no. 303, Surabhi Lotus Apartments, Nagarjuna Nagar Colony, Ameerpet, Hyderabad 3&4 CIT(A)-2 / Pr.CIT-2, Hyderabad ITAT, DR, Hyderabad. 5 6 Guard File.