BHARTI INFRATEL LTD.,NEW DELHI vs. DCIT, CIRCLE- 2(1), NEW DELHI

Brief facts of the case shows that the assessee company is engaged in the business of providing telecom infrastructure support services to telecommunication companies providing mobile services. The support services are being provided by offering passive equipments installed at sites on non-exclusive basis. Such asset comprise of towers, green shelters, DG Sets and UPS etc.

Assessee filed its return of income on 30.09.2011at Rs. 172,13,82,389/- and also declared book profit of Rs. 574,43,96,793/- under Section 115JB of the Income Tax Act, 1961 (the Act). This return was revised on 29th March, 2013. 5. Case of the assessee was picked up for scrutiny and income tax assessment was framed under Section 143(3) of the Act. 6. During Assessment Assessee requested the learned AO to allow the deduction u/s 37 (1) on account of deferred employee stock option plan amortization cost of ₹ 342,744,274/–. The fact shows that assessee has given stock option to certain employees of the Bharati Airtel Ltd and has considered the related compensation cost in its books of accounts. It employee stock option plan expenses amounting to ₹ 28,010,043/– these expenses have not been claimed by the assessee Under the normal computation of total income. Therefore there was a net deduction claimed by the assessee of ₹ 342,744,274/– on account of these expenditure. Assessee made that claim during the assessment proceedings. It also submitted the copy of the revised income tax computation. The learned assessing officer did not consider the request of the assessee holding that there is no specific provision Under the income tax act to allow such claim u/s 37 (1 of the act. He further held that the securities and exchange board of India guidelines would also not apply as those guidelines cannot supersede the provisions of income tax act. Hence he rejected the same.

The ld. DR vehemently supported the orders of the lower authorities.

We have carefully considered the rival contentions and perused the orders of the lower authorities. We have also considered the several judicial precedents cited by the lower authorities as well as referred to by the learned authorised representative.

The first issue involved in this appeal is with respect to the allowance of employee stock option plan expenses amounting to ₹ 342,744,274 which was claimed by the assessee during the assessment proceedings, the lower authorities have disallowed the claim holding 6 that it is a notional loss following the decision of the coordinate bench in case of Ranbaxy laboratories Ltd versus ACIT (supra). Now we find that this issue is squarely covered in favour of the assessee by the decision of the honourable Karnataka High Court in Commissioner of income tax LTU versus Biocon Ltd [2020] 121 taxmann.com 351 (Karnataka) wherein it has been held as Under:- “6. We have considered the submissions made by learned counsel for the parties and have perused the record. The singular issue, which arises for consideration in this appeal is whether the tribunal is correct in holding that discount on the issue of ESOPs i.e., difference between the grant price and the market price on the shares as on the date of grant of options is allowable as a deduction under section 37 of the Act. Before proceeding further, it is apposite to take note of section 37(1) of the Act, which reads as under: Section 37(1) says that any expenditure (not being expenditure of 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".

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 requirement that there has to be a pay out. If an expenditure has been incurred, provision of section 37(1) of the Act would be attracted. It is also pertinent to note that section 37 does not envisage incurrence of expenditure in cash.

Section 2(15A) of the Companies Act, 1956 defines 'employees stock option' to mean option given to the 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 securities offered by a company at a free determined price. In an ESOP a company undertakes to issue shares to its employees at a future date at a price lower than the current market price. The employees are given stock options at discount and the same amount of discount represents 7 the difference between market price of shares at the time of grant of option and the offer price. In order to be eligible for acquiring shares under the scheme, the employees are under an obligation to render their services to the company during the vesting period as provided in the scheme. On completion of the vesting period in the service of the company, the option vest with the employees.

In the instant case, the ESOPs vest in an employee over a period of four years i.e., at the rate of 25%, which means at the end of first year, the employee has a definite right to 25% of the shares and the assessee is bound to allow the vesting of 25% of the options. It is well settled in law that if a business liability has arisen in the accounting year, the same is permissible as deduction, even though, liability may have to quantify and discharged at a future date. On exercise of option by an employee, the actual amount of benefit has to be determined is only a quantification of liability, which takes place at a future date. The tribunal has therefore, rightly placed reliance on decisions of the Supreme Court in Bharat Movers supra and Rotork Controls India P. Ltd., supra and has recorded a finding that discount on issue of ESOPs is not a contingent liability but is an ascertained liability.

From perusal of section 37(1), which has been referred to supra, it is evident that an assessee is entitled to claim deduction under the aforesaid provision if the expenditure has been incurred. The expression 'expenditure' will also include a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which it is issued and the market value of the shares would also be expenditure incurred for the purposes of section 37(1) of the Act. The primary object of the aforesaid exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, the same cannot be construed as short receipt of capital. The tribunal therefore, in paragraphs 9.2.7 and 9.2.8 has rightly held that incurring of the expenditure by the assessee entitles him for deduction under section 37(1) of the Act subject to fulfilment of the condition.

The deduction of discount on ESOP over the vesting period is in accordance with the accounting in the books of account, which has been prepared in accordance with Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999.

So far as reliance place by the revenue in the case of Infosys Technologies Ltd.(supra) is concerned, it is noteworthy that in the aforesaid decision, the Supreme Court was dealing with a proceeding under section 201 of the Act for non-deduction of tax at source and it was held that there was no cash inflow to the employees. The aforesaid decision is of no assistance to decide the issue of allowability of expenses in the hands of the employer. It is also pertinent to mention here that in the decision rendered by the Supreme Court in the aforesaid case, the Assessment Years in question was 1997-98 to 1999-2000 and at that time, the Act did not contain any specific provisions to tax the benefits on ESOPs. Section 17(2)(iiia) was inserted by Finance Act, 1999 with effect from 1-4-2000. Therefore, it is evident that law recognizes a real benefit in the hands of the employees. For the aforementioned reasons, the decision rendered in the case of Infosys Technologies is of no assistance to the revenue. The decisions relied upon by the revenue in A. Gajapathy Naidu,Morvi Industries Ltd. and Keshav Mills Ltd.(supra) support the case of assessee as the assessee has incurred a definite legal liability and on following the mercantile system of accounting, the discount on ESOPs has rightly been debited as expenditure in the books of account. We are in respectful agreement with the view taken in PVP Ventures Ltd. And Lemon Tree Hotels Ltd.'case (supra).

It is also pertinent to mention here that for Assessment Year 2009-10 onwards the Assessing Officer has permitted the deduction of ESOP expenses and in view of law laid down by Supreme Court in Radhasoami Satsang v. CIT, [1992] 60 Taxman 248/193 ITR 321, the revenue cannot be permitted to take a different stand with regard to the Assessment Year in question. In view of preceding analysis, the substantial questions of law framed by a bench of this court are answered against the revenue and in favour of the assessee. In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed.’

Therefore, respectfully following the decision of the honourable Karnataka High Court, we allow ground number 1 of the appeal of the assessee and direct the learned assessing officer to allow employee stock option expenses amounting to ₹ 342,744,274/–.

Ground number 2 of the appeal of the assessee is with respect to the disallowance of interest amounting to ₹ 274,985,908/– on the ground that funds amounting to ₹ 503 crores have been advanced as interest free loan to a joint-venture company M/s Indus Tower Ltd. We find that assessee has interest free funds available in the form of share capital and reserve and surplus to the extent of ₹ 14,246,38,33,000 and interest free loan given to Indus Towers Ltd was to the extent of ₹ 503 crores on which the interest disallowance has been made. As the assessee has huge non-interest-bearing funds available with it against the amount advanced interest free to a joint-venture company, the issue is squarely covered in favour of the assessee by the decision of the honourable Supreme Court in case of CIT versus Reliance Industries Ltd [2019] 102 taxmann.com 52 (SC)/[2019] 261 Taxman 165 (SC) as Under:- “7. Insofar as the first question is concerned, the issue raises a pure question of fact. The High Court has noted the finding of the Tribunal that the interest free funds available to the assessee were sufficient to meet its investment. Hence, it could be presumed that the investments were made from the interest free funds available with the assessee. The Tribunal has also followed its own order for Assessment Year 2002-03. 8. In view of the above findings, we find no reason to interfere with the judgment of the High Court in regard to the first question. Accordingly, the appeals are dismissed in regard to the first question.” Therefore, we direct the learned assessing officer to delete the disallowance of interest expenditure of ₹ 274,985,908/–. Accordingly, ground number 2 of the appeal of assessee is allowed. 19. Ground number 3 is with respect to the addition of Rs 132,03,725 being provision of the gratuity expenditure Provision for gratuity liability is being created in compliance with revised Accounting 10 Standard-15 issued by the Institute of Chartered Accountants of India (ICAI), relating to accounting of employee benefits. The said Accounting Standard, it may also be mentioned here, makes it mandatory for all companies to estimate and accrue liability in respect of post-retirement benefits provided to employees. The incremental provision on account of post-retirement gratuity to employees has been made in respect of liability in presenti, viz., entitlement earned by the employee while in service until the end of the relevant previous year, on the basis of actuarial valuation. Assessee also placed a copy of actuarial valuation report at pages 154-162 of paperbook. Since the aforesaid liability was quantified and recognized on a scientific and rational basis based on report of the actuarial valuer, the liability therefore crystallized and accrued in the relevant assessment year itself and was allowable deduction in that year. We further find that Honourable Delhi High Court in the case of CIT vs. Hewlett Packard India: 314 ITR 55 (Del) wherein the High Court while referring to decision of Supreme Court in the case of Metal Box Co. of India Ltd. v. Their Workmen (supra) observed that since the provision for gratuity was made on the basis of actuarial valuation and hence, deduction in respect of provision was allowable while computing the book profit for the purposes of section 115JB of the Act. Honourable Delhi i High Court in the case of CIT vs. ILPEA Paramount (P) Ltd.: 336 ITR 54, while following the decision in the case of CIT v. Hewlett Packard India: 314 ITR 55 (Del), held that the provision for Gratuity made on actuarial basis was to be deducted to arrive at book-profits. Honourable Bombay High Court also in case of Protos Engg. Co. (P) Ltd. vs. DCIT: 282 ITR 550 has held that liability is considered as ascertained if the same is determined on actuarial valuation. The court held that the provision made for contingent liability was entitled to deduction if the provision was determined accurately and scientifically. In view of this we hold that provision of gratuity made in accordance with AS 15 and backed by actuarial valuation is an ascertained and current liability which 11 cannot be added to the book profit while working MAT . Thus Ground no 3 is allowed.

In the result appeal of assessee is allowed.