KOTAK SECURITIES LTD,MUMBAI vs. ADDL CIT RG 4(3), MUMBAI

6.Second ground of appeal deals with addition made on account of AIR information. As per the AO, the assessee was not able to reconcile the difference pointed out by him with regard to AIR information.Before the FAA, the assessee argued that the AO had not given the assessee an opportunity of cross examination with regard to the transActions appearing in the report.As the assessee did not produce any evidence to prove that the transactions listed in the report did not pertain to it, the FW following the principles of natural justice, directed the AO to re-examine the AIR data. He further held that if the assessee was able to reconcile the difference, no addition should be made. However, if the assessee was not in a position to file a consideration statement the AO could AO could make necessary additions.

7.During the course of hearing before us, AR stated that in the earlier years matter was restored back to the file of the AO by the tribunal. The DR Ieft issue to the discretion of the bench. We find that while deciding the appeal for the earlier years the tribunal had dealt with the issue as under:

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“We have heard both the parties and Paris the orders of the revenue on the issue of reconciliation of AIR data qua the books of accounts of the assessee stop refining his recorded by the assessing officer that no exhaustive exercise of reconsideration is undertaken by him before making the said addition. Assessee is certain. The consideration, if one more opportunity is granted considering the same, we read remand this ground to the file of the assessing officer for fresh adjudication of the issue after granting a reasonable opportunity of being heard to the assessee. Respectfully,following the above order ground number 2, raised by the assessee is restored back to the file of the AO for fresh adjudication. He is directed to afford a reasonable opportunity of hearing to the assessee. The assessee would produce all the necessary evidences and reconcile the difference. In our opinion direction given by the FW were quite reasonable.Therefore we don’t see any infirmity in his order. Ground number two stands partly allowed in favour of the assessee.

I.T.A./2096/Mum/2014 9.First ground of appeal

, raised by the AO, deals with depreciation on uninterrupted power supply(UPS).During the course of hearing before us,the representatives of both the sides agreed that the tribunal had decided the issue in favour of the assessee, while adjudicating the appeals for the earlier years. We would like to reproduce the paragraphs 27-28 of the order of the tribunal dated (supra) and same reads as under: “We have heard both the parties and perused the orders of the revenue authorities as well as the cited order of the tribunal (supra) dated 21 five 2012 on perusal of the said order of the tribunal, we find the similar issue was decided by the tribunal in assessee’s own case for the a Y 2006 – 07 and para 13 is relevant. For the sake of completeness of this order, the said para 13 of the tribunal’s order dated 21.5.2012 is extrActed as follows

13. We have heard both the parties and perused the records. We find that the issue stands covered by the coordinate bench of the ITAT, Joe the poor in the case of surface finishing equipment (supra). We therefore, following the decision of the coordinate bench, direct the assessing officer to allow the depreciation at the rate of 80% on the UPS instead of 15%. Accordingly, ground number seven is allowed.”

28. Considering the above covered nature of the issue as well as respectfully following the decision of the coordinate bench and also following the principle of consistency, the depreciation at the rate of 80% should be allowed on UPS instead of 15% granted by the assessing officer. Accordingly ground raised by the revenue are dismissed. Respectfully following the order of the bench for the earlier years ground number one is decided against the AO.

10.Next issue is about marked to market losses (MTM).The DR and the AR,agreed that identical issue had arisen in the earlier years and the tribunal had decided the issue in favour of the assessee, that the FAA had followed the order of the tribunal. We are reproducing the order of the tribunal and it reads as under “We have heard both the parties and perused the orders of the revenue authorities as well as cited decision of the tribunal and the relevant material placed before us. It is an undisputed fact that the derivatives, which is the subject matter of impugned MTM loss, are commodities of trading account. The same are treated on exchange on par with shares and stock options and futures.The losses are held allowable against the profits of the assessee while the related profit on account of MTM are being ignored considering the consistent method of accounting followed by the assessee.The same is in accordance with guidance note/and accounting standard issued by the ICAI. It is the claim of the assessee that the same consistently accepted by the Department as well. We have also perused the order of the tribunal in the case of Kotak Mahindra investment Ltd (supra), which was decided based on the other decision of the tribunal of Bombay benches we find para three of the said order of the tribunal in the case of 3

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Kotak Mahindra investment Ltd (supra) is relevant and the facts are comparable to the instant case” After reproducing the order of Kotak Mahindra investment Ltd. the Tribunal further held as under: “The facts pertaining to decision of the Tribunal in the above mendtioned case include that the derived case which is the subject matter of impugned MTM losses was held as stock in trade in the books of accounts in the present case. The profits were not accounted for in the books. On these facts, tribunal held that the MTM loss is liable to be allowed. On the contrary, the revenue has not brought any decision in their support. Therefore, we are of the opinion that the assessee’s claim to mark – two market loss of rupees to, 85, 10, 681/-is liable to be allowed. Therefore the order of the CIT (A) in this regard needs to be preserved accordingly the ground number two raised by the assessee is allowed.” We find that the facts of the case for the year under consideration are identical to the facts for the earlier years.Therefore,following the order previous years,we uphold the order of the FAA. Ground number two is decided against the AO.

11.Last ground of appeal deals with disallowance made with regard to employee stock option scheme(ESOP).During the assessment proceedings, the AO found that the assessee is a subsidiary of Kotak Mahindra bank Ltd (KMBL),that it was listed company on the Bombay stock exchange and the national stock exchange,that KMBL had formulated ESOP in accordance with SEBI guidelines,1999,that the scheme provided the employee of the assessee to acquire the equity share of KMBL,that the employees of the assessee were granted option at a discount to the prevailing market price, that the assessee made payment to KMBL in respect of its share of discount and debited such payment to P and L account.The assessee claimed the direction of such is payment on the ground that it was nothing but compensation paid to the employees.However,the AO rejected the claim of the assessee holding that ESOP discounts were incurred in relation to the issue of shares to the employees, that same were not relatable to profits and gains arising or accruing from business/trade, that ESOP discount did not diminish trading/business receipts of the issuing company, that the company did not suffer any pecuniary detriment,, that the discount was not incurred towards satisfaction of any trading liability, that share premiums received on issue of shares were items of capital receipt, that there was no specific provision for such direction under section 30 -36 of the Act, that the expenditure was not also allowable under section 37 of the Act,that the expenditure was not revenue in nature, that the appellant company had allotted shares to the employees of the assessee, that the appellant company had an interest in the assessee, that it was only a notional loss and that it was related to the parent company, that the argument of the assessee that the said sum was for retention of employees and was a method of generating than was not acceptable, that the assessee’s reliance on fringe benefit tax right lines had to be rejected, that it was no way related to the deductibility of the notional expenses with respect to the employer.Finally,the AO made a disallowance of Rs. 519.19 lakhs.

12.Aggrieved by the order of the AO, the assessee preferred an appeal before the FAA.Before him it was argued that issue of allowability of ESOP expenses had been deliberated upon extensively by the special bench of the tribunal in the case of Biocon Ltd.(ITA/368-371 and 1206/BANG/2010),that the Tribunal had held that conceptually the discount on issue of ESOP was an allowable deduction in computing taxable income, that the discount was nothing but a part of remuneration packages, that it was neither a short receipt of capital not a capital expenditure, that the discount on issue of ESOP was not a contingent expenditure, that the expenditure was allowable in the hands of the assessee since the amount was already paid.

2096/14&1232/14-Kotak Securites After considering the submission of the assessee,the FAA held that issue in hand was squarely covered by the order of the Biocon Ltd.(supra).He reproduced the order and facts of the case of Accenture Services Pvt. Ltd.(2110-IIOL-409-ITAT-Mumbai) and held that payment made by the subsidiary company to its holding company for granting of ESOP was a revenue expenditure.He further held that in case, if some of the options remained untested or were not exercise the discount claimed as deduction would be reversed and would be offered for taxation in such later year.

13.Before us,the DR relied upon the cases of Vodafone India services(P.)Ltd (50 Taxmann.com 300)and consolidated African selection Trust Ltd.(8 ITR 88) and supported the order of the AO.The AR referred to the cases of Accenture Services Pvt. Ltd.(supra) and Novo Nordisk India Private Limited (ITA/1275/BANG/2011).

14.We have heard the rival submissions and carriers the matter before us. We find that parent company of the assessee, KMBL,had offered ESOP to the employees of the assessee, that the assessee had made a payment of Rs. 519.19 lakhs to the parent company on account of discount for ESOP,that the AO had rejected the claim made by the assessee.We find that in the case of Biocon Ltd.the issue of allowability of expenditure with regard to ESOP has been deliberated upon at length.The order of the special bench is being followed by other benches. In our opinion the facts of the cases,relied upon by the DR i.e.Vodafone and Consolidated African Selection Process Ltd.(supra)are not relevant for deciding the issue before us. In the case of Vodafone issue to be decided was issue of shares at a premium by assessee to its non- resident holding company and applicability of provisions of chapter X of the Act.In the second case,the company had issued shares to its employees at par value while shares to public were issued at premium. In the case under consideration offer was made by the parent company to the employees of the assessee for ESOP and the assessee had made payment for the discount allowed by the parent company.We would like to refer to the case of Nova Nordisk India Private Limited(supra), wherein the identical issue has been dealt as under; 18. We have considered the rival submissions. It is clear from the facts on record that there was an accruel issue of shares of the parent company by the assessee to its employees the difference between the fair market value of the share of the parent company on the date of issue of shares and the price at which those shares were issued by the assessee to its employees was reimbursed by the assessee to its parent company.This sum so reimbursed was claimed as expenditure in the profit and loss account of the assessee as an employee cost. The law by now is well settled by the decision of the special bench of the ITAT Bangalore in the case of Biocon Ltd in ITA number 248/BANG/2010, AY. 2004-05 and other connected appeals by order dated 16. 07. 2013, wherein it was held that expenditure on account of ESOP is a revenue expenditure and had to be allowed as deduction while computing income. The special bench held that the sole object of issuing shares to employees at a discounted premium is to compensate them for the continuity of their service to the company.By no stretch of imagination,we can describe such discount is either short capital receipt or a capital expenditure. It is nothing but the employees costs incurred by the company. The substance of this transaction is disbursing compensation to the employees for their services for which the form of issuing shares at a discounted premium is that the.

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