KORN FERRY INTERNATIONAL P.LTD,MUMBAI vs. DCIT 3(2), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखाकार सद�य राजे�� लेखाकार सद�य राजे�� केकेकेके अनुसार लेखाकार सद�य राजे�� लेखाकार सद�य राजे�� अनुसार अनुसार PER Rajendra,A.M.- अनुसार Challenging the order dt.17.5.12 of the CIT(A)-4 Mumbai the assessee has filed the present appeal. Assessee -Company, engaged in the business of executive search, consulting and related search,filed its return of income on 30.9.08 declaring total income of Rs.17.16 crores.The Assessing Officer (AO) completed the assessment u/s.143. on 29.3.2012,determining the income of the assessee at Rs.18.38 crores. 2.The first Ground of appeal is about disallowance of Rs.2.74 laks, made u/s.14A of the Act. During the assessment proceedings the AO found that the assessee had claimed dividend income of Rs.18.33 lakhs,that it had offered no disallowance u/s. 14A on account of expenses relating to dividend income.The AO applied Rule 8D of the Income tax Rules, 1962(Rules) and made a disallowance of Rs.2,74,489/-(0.5% of average value of investment). 3.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority(FAA).Before him, it was argued that the assessee had made investment in Mutual Funds only, that investment was made out of assessee’s own funds, that no other expenditure was incurred regarding dividend income. After considering the submission of the assessee and the assessment order the FAA held that no disallowance had been made under the head interest expenditure, that making of investment out of own funds had no relevance,that only other administrative expenses had been disallowed as per Rule 8D of the Rules. Referring to the judgment of Godrej & Boyce Ltd.(328ITR81) the FAA upheld the order of the AO. 4.Before us,the Authorised Representative (AR) stated that it had claimed an expenditure for earning the dividend income,that the AO had mechanically applied the provisions of section 14A r.w.Rule 8D of the Rules.He relied upon the case of Om Prakash Khaitan (376ITR390) of Hon’ble Delhi High Court.Departmental representative (DR) left the issue to the discretion of the Bench. 5.We have heard the rival submissions and perused the material before us.We find that the AO had not mentioned as to how much expenditure was incurred by the assessee for earning 5152/M/12-KornFerry tax free income. We are of the opinion that, if the assessee had not incurred any expenditure to earn tax free income, then, the AO cannot invoke the provisions of section 14A r.w. Rule 8D of the Rules.First of all, the AO has to record his satisfaction about invoking the provisions and has to decide the issue after obtaining the explanation of the assessee .We also do not endorse the view of the FAA that investment out of the own funds has no relevance for making the disallowance.We find that in the case of Om Prakash Khaitan(supra), the Hon’ble Delhi High Court has held that in order to disallow the expenditure there must be a nexus between the expenditure incurred and the income not forming the part of the total income.Considering the above, we reverse the order of the FAA.Ground No.1 is decided in favour of the assessee. 6.Next Ground of appeal is about addition of Rs.56.40 lakhs out of the expenditure incurred under ESOP(Employee Stock Option Scheme).During the assessment proceedings,the AO found that the assessee had debited an amount of Rs.1.07 crores under the head cost of stock awarded to KF India Employees.Before the AO, the assessee stated that the expenditure was on account of ESOP.On perusal of the tax audit report, the AO found that the assessee had paid Fringe Benefit Tax(FBT)only on amount of Rs.50.65 lakhs.The AO directed the assessee to explain as to why FBT had not been paid to whole amount.The assessee vide its letter,dt.29.12.12,stated that the value of FBT taken for ESOP(Rs.50.65lakhs) as against cost of stock awarded to KF Employees(Rs.1.07crores),that the amount of Rs.50.65 represented the value of ESOP, that had been vested with the employees during FY 2007-08 and consequently considered for FBT, that the amount of Rs.1.07crores represented the amount charged by Korn Ferry International USA to Korn Ferry International Pvt. Ltd. India, towards stock awarded to the employees of the assessee . After considering the same the AO held that during the year under consideration only a part (Rs. 50. 65 lakhs)out of the total amount (Rs.1.07crores) was debited to P&L A/c. was vested in employees,that the balance amount would be vested in employees over a period of time, that the assessee had not paid FBT on Rs.56.40 lakhs,that liability could eventually increase or decrease in future,that it had not produced any evidence as to the fact that amount in question was actually paid.Finally,the AO made an addition of Rs.56,40,195/- to the total income of the assessee. 7.Aggrieved by the order of the AO, the assessee preferred an appeal before the FAA. Before him,it was argued that allowability of ESOP expenses and payment of FBT for ESOP were two different concepts,that the FBT would become payable upon vesting of the ESOP in the hands of the employees accordingly the assessee had paid FBT during the year, that assessee had made full payment of Rs.1.07 crores to its parent company ,that it had claimed the cost of stock awarded to its employees entirely based on ESOP Scheme governed by the SEBI Guidelines,that the ESOP expenditure was a measure in the nature of compensation cost and was fully deductible in computing the taxable income.The FAA ,in his order, held that the assessee itself had not treated the entire amount as liability, that ESOP would be effective only on the discretion of the employees to opt for stocks, that payment for shares was either a provision or an investment,that no liability in that regard had crystallised. 8.Before us,the AR reiterated the arguments that were advanced before the FAA.He relied upon the case of Biocon Ltd.(144ITD21)(SB)(Bang.); Novo Nordisk India Pvt. Ltd.(42 taxmann.com168).DR supported the order of the FAA. 9.We have heard the rival submissions and perused the material before us.We find that stock options of the parent company were offered to the employees of the assessee company,that