Income Tax Appellate Tribunal - Mumbai
Sterlite Technologies Ltd, Mumbai vs Department Of Income Tax on 14 November, 2014
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IN THE INCOME TAX APPELLATE TRIBUNAL "E", BENCH MUMBAI
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BEFORE : SHRI I.P.BANSAL, JM
&
SHRI R.C.SHARMA, AM
ITA No.4841/Mum/2013
( Assessment Year : 2007-2008)
ACIT, Large Tax payer Unit, Vs. M/s Sterlite Technologies Ltd.,
Centre-1, 28th Floor, World 4th Floor, Godrej Millennium, 9
Trade Centre, Cuffe Parade, Koregaon Road, Pune-411 001
Mumbai-400 005
PAN/GIR No. : AAECS 8719 B
( Appellant) .. ( Respondent)
/Revenue by : Shri Permanand J.
/Assessee by : Shri B.V.Jhaveri
Date of Hearing : 13th Oct. 2014
Date of Pronouncement : 14th Nov, 2014
ORDER
PER R.C.SHARMA (A.M.) :
This is an appeal filed by the Revenue against the order of CIT(A), dated 1-3-2013 for assessment year 2007-08, in the matter of order passed u/s.143(3) of the I.T. Act, wherein following grounds have been taken :-
"1. On the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in allowing the disallowance of ESOP expenses of Rs.1,86,63,187/-.
2. On the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in holding that the preponement of deferred sales tax loan amounting to Rs.34,79,580/- is a capital receipt and not chargeable u/s.41(1) of the Income Tax Act.
3. The appellant prays that the order of the Learned CIT(A) on the above grounds be set aside and that of the AO is restored."2 ITA No.4841/13
2. Rival contentions have been heard and record perused. Facts in brief are that the assessee was engaged in the business of manufacturing of telecom cables, telecommunication equipments, ally/aluminum conductors and networking solutions. During the year under consideration, erstwhile wholly owned subsidiaries of the assessee company, viz, Sterlite Telelink Ltd. (STLL) and Sterlite Telecom Ltd. (STL) have been amalgamated with the assessee company w.e.f 1st April, 2006. The company has also acquired PTL Division of M/s Sterlite Industries (I) Ltd., as a going concern. In the case of assessee survey proceedings u/s.133A of the Act was carried out on 01.12.2006 at its unit S.R.No.209 Pipria, Silvassa. The cash, jewellery and stock found during the course of survey was tallied with the books of accounts. The assessee filed its return electronically declaring total income at Rs. NIL on 31.10.2007. The assessee has computed profit of Rs. 52,61,65,646/- under MAT provisions. The assessee has also filed photocopy of the F-return acknowledgement, computation of income, etc., on 18.11.2007. The case was processed u/s 143(1)(a) of the Act on 06.11.2008 and was selected for scrutiny and notice u/s 143(2) of the Act was issued on 18.09.2008. Notice u/s 142(1) of the Act was issued on 09.03.2009. The assessee opted for joining Large Taxpayer Unit and the case of the assessee was transferred to the ACIT, LTU, Mumbai. Thereafter, case of the assessee was assigned to the Addl. CIT, LTU, for completion of assessment vide order No. CIT-LTU/ Assignment/120/2008-09/429 dated 25/08/2009, by the CIT, LTU, Mumbai. Again, notice u/s 143(2) and 142(1) of the Act were issued on 11.09.2009. In response, authorized representative of the Assessee Company, attended from time to time and filed replies. The 3 ITA No.4841/13 case was discussed with them. Assessment completed u/s 143(3) making certain addition and disallowances.
3. Aggrieved thereby the assessee preferred appeal before the CIT(A). The CIT(A) following the decision of the ITAT Mumbai bench in appellant‟s own case passed in ITA No.7136/Mum/2004 (A.Y.2001-02), order dated 8-1-2008, allowed the ground raised by the assessee regarding EOP expenses after having the following observations :-
"5.2 Decision:-
First ground of appeal elaborated in ground no. 2 to 4 states that A.O. erred in disallowing claim for deduction of ESOP expenses of Rs. 1,86,63,187/-. These ESOP expenses of Rs. 1,86,63,187/- represented the option discount, that is, the excess of the market price of the share on the date of grant of the option under ESOP 2006 over the exercise price of the option. It has been submitted that (1) SEBI guidelines mandate that the ESOP expenses should be debited to the P&L Account, (2) the liability was not a contingent or notional liability but an ascertained liability and it was also not a capital expenditure, (3) ESOPs were granted to the employees of the company as per the scheme for motivating them to work for the company for a certain number of years and since these were taxable in the hands of the employees, the expenditure was allowable as revenue deduction. In this connection, assessee has relied on ITAT's decision in its own case for A.Y. 2001-02 & 2002- 03 and plethora of other indirect judgments. A.O. disallowed assessee's claim for deduction of ESOP expenses of Rs.
1,86,63,187/- on the ground that the ESOP expenses were notional and contingent in nature and capital in nature. It is seen from the submissions, the Hon'ble ITAT, Mumbai in assessee's own case decided the issue in its favour. Respectfully following the decision of Hon'ble ITAT the ESOP expenses claimed has to be allowed. Thus, this ground of appeal is allowed."
4. Against the aforesaid findings of the CIT(A), Revenue is in appeal before us.
5. Learned DR submitted that the assessee in this case has not valued stock of shares and securities in its books of account in accordance with the method of "cost or market price", whichever is lower. He further submitted that if this method is not followed in writing and preparing accounts consistently, the assessee cannot claim a notional 4 ITA No.4841/13 method of stock valuation only for computation of income by the income tax authorities without following the same method in writing and preparing accounts. He also submitted that an assessee after having made entries in the books of account consistent with the method of accounting followed by him cannot be permitted to seek assessment of his income for income tax purposes on a different basis on the ground that another basis may also be permissible under the method of accounting followed by the assessee or has been upheld in certain judgment of a High Court or Supreme Court. He also submitted that the treatment given by the assessee to these amounts as integral part of cost of assets is in accordance with accepted principles of accountancy and that being so, assessee is not entitled to claim in his assessment deduction of these amounts as revenue expenditure. Learned DR also stated that the assessee has not brought anything on record to prove the actual number of options exercised by the employees of the assessee company. Since the expenditure has not been crystallized in the previous year, which is contingent, notional and moreover capital in nature, therefore, the claim of the assessee in regard to ESOP expenses should be rejected.
6. Learned AR, on the other hand, submitted that the assessee is a listed company governed by the SEBI guidelines and was required to follow the Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 2006 (in short the „ESOS‟ Guidelines). The ESOS guidelines, then in force, required the option discount to be amortised on a straight line basis over the vesting period. The learned AO disallowed the expenses mainly 5 ITA No.4841/13 on account of reasons that the similar expenses which were claimed in the earlier year were also disallowed. However, the AO did not consider order of the Tribunal on identical ground wherein the similar claim of ESOP expenses were allowed in favour of the appellant in ITA No.7136/Mum/2004 for A.Y.2001-02 & 2002-03. Therefore, the order of the CIT(A) deleting the disallowance in respect of ESOP expenses may be upheld. In support of his contentions, learned AR relied on the decision of the Special Bench in the case of Biocon Ltd. vs. DCIT (155 TTJ 649), wherein the decision of the Tribunal in the case of the assessee company for A. Y. 2001-02 is approved. The Tribunal has followed the aforesaid decision of the Special Bench in the case of Biocon Ltd. in the following cases:
(i) Mylan Laboratories Ltd. vs. Addl. CIT, [(2014) 46 taxmann.com 76 (Hyd.)],
(ii) Bharti Airtel Ltd. vs. Addl.CIT [( 014) 161 TTJ 283 (Del.)] and
(iii) Mahindra & Mahindra Ltd, Addl.CIT [(2013) 40 taxmann.com 522(Mum.)].
7. We have heard the parties and carefully gone through the material available on record. We found that the CIT(A) in its appellate order has observed that the ESOP expenses of Rs. 1,86,63,187/- represented the option discount, that is, the excess of the market price of the share on the date of grant of the option under ESOP 2006 over the exercise price of the option. It has been submitted that (1) SEBI guidelines mandate that the ESOP expenses should be debited to the P&L Account, (2) the liability was not a contingent or notional liability but an ascertained liability and it was also not a capital expenditure, (3) ESOPs were granted to the employees of the company as per the scheme for motivating them to work 6 ITA No.4841/13 for the company for a certain number of years and since these were taxable in the hands of the employees, the expenditure was allowable as revenue deduction. We found that the very similar issue has been decided by the Mumbai Bench of the Tribunal in assessee‟s own case in ITA No.7136/Mum/2004 for A.Y.2001-02 & 2002-03 in favour of assessee regarding the claim of assessee for ESOP expenses. The CIT(A) after considering the aforesaid decision of the Tribunal allowed the claim of assessee for ESOP expenses. Respectfully following the order of the Tribunal in assessee‟s own case, we are of the considered view that the CIT(A) has rightly allowed the claim of the assessee. Hence, we uphold the decision of the CIT(A) regarding allowing ESOP expenses claimed by the assessee and dismiss the ground No.1 of the Revenue.
8. So far as ground No.2 is concerned, the Revenue is aggrieved by the action of the CIT(A) in holding that the preponement of deferred sales tax loan amounting to Rs.34,79,580/- is a capital receipt and not chargeable u/s.4(1) of the Act.
9. The AO in its assessment order has stated that the Sales Tax liability of Rs. 1,95,60,750/- has been taken over by SICOM at the Net Asset Value during the current financial year of Rs. 1,60,81,170. The AO did not convince with the contention of the assessee that they have not received any benefit by this finance arrangement since the sales tax liability which the assessee company was supposed to pay back to the Government at a future date has been settled by an immediate one-time payment by the company. The AO observed that the provisions of section 41(1) of the Income-tax Act are clearly applicable in the case of the assessee and the benefit received by the assessee company of Rs. 7 ITA No.4841/13 34,79,580/- cannot be treated as a capital receipt and treating the same as revenue receipt added back to the total income of the assessee.
10. By the impugned order, the CIT(A) allowed the above ground of the assessee after having the following observations :-
"6.2 Decision:-
Second ground mentioned at serial number 5, 6 and 7 of grounds of appeal states that Assessing Officer erred in holding that the preponement of deferred sales tax loan amounting to Rs. 34,79,580/- as chargeable to tax u/s 41(1) of I.T Act, 1961. Assessing Officer noticed that the surplus of Rs. 34,79,580/- representing remission of principal amount of sales tax loan was not offered for taxation and when queried assessee submitted that the sum of Rs. 34,79,580/- being remission of principal amount of loan is a capital receipt and is therefore not chargeable to tax under the Income-tax Act, 1961. It was also submitted that the company availed of the benefit offered SICOM scheme and decided to pay the discounted value of deferred liability which resulted in capital receipt of Rs. 34,79,580/-. Assessing Officer examined the entire issue and held that the discounted surplus of sales tax loan represents sales tax subsidy and was taxable as revenue receipt chargeable to tax u/s 41(1) of I.T. Act, 1961 because assessee's liability to pay had been extinguished. The assessee submitted that in the earlier years the issue has been decided by the Hon'ble ITAT, Mumbai in its favour. In view of this, the Assessing Officer is directed to treat the deferred sales tax liability as capital receipt. Accordingly, this ground of appeal is allowed."
11. Learned DR submitted that provisions of section 41(1) of the Income-tax Act are clearly applicable in the case of the assessee and the benefit received by the assessee company of Rs. 34,79,580/- is revenue receipt, therefore, the CIT(A) has erred in allowing the same.
12. Learned AR, on the other hand, submitted that in assessee‟s case sales tax liability amounting to Rs.1,95,60,750/- is taken over by SICOM at the Net Present Value during the financial year ending on 31st march, 2007 of Rs.1,60,81,170/-. The AO did not follow the decision of the Tribunal in assessee‟s own case for AY.2001-02 (ITA No.7136&7177/Mum/2004, dated 8-1-2008. The learned AR further submitted that the substance of the transaction as contained in the 8 ITA No.4841/13 Maharashtra Sales Tax Act as well as the circulars issued by the CBDT is that sales tax is deemed to have been actually collected by the sales tax authorities and disbursed as loans. Such government order also provide that the entries shall be made in the government accounts giving effect to deemed collections by crediting the appropriate receipt heads relating to sales tax collection and debiting the head relating to disbursal of loans. From the various provisions as laid down in the law, it is abundantly clear that even the entries in government records have to be passed regarding amount received by the government from the industrial unit and thereafter as a separate and independent transaction, the government disbursing loan to the industrial unit. Therefore, the provisions of section 41 (1) cannot be invoked.
13. We have considered the rival contentions and perused the record. We found that the AO noticed that the surplus of Rs. 34,79,580/- representing remission of principal amount of sales tax loan was not offered for taxation and when queried assessee submitted that the sum of Rs. 34,79,580/- being remission of principal amount of loan is a capital receipt and is therefore not chargeable to tax under the Income-tax Act, 1961. It was also submitted that the company availed of the benefit offered SICOM scheme and decided to pay the discounted value of deferred liability which resulted in capital receipt of Rs. 34,79,580/-. The AO held that the discounted surplus of sales tax loan represents sales tax subsidy and was taxable as revenue receipt chargeable to tax u/s 41(1) of I.T. Act, 1961 because assessee's liability to pay had been extinguished. The assessee submitted that in the earlier years the issue has been decided by the Hon'ble ITAT, Mumbai in its favour. The CIT(A) after 9 ITA No.4841/13 following the order of the Tribunal has allowed the ground of assessee in regard to treating the deferred sales tax liability as capital receipt. We have also gone through the order of the Tribunal decided in assessee‟s own case in ITA No.7136&7177/Mum/2004, dated 8-1-2008 for A.Y.2001- 02 & 2002-03, which has been decided in favour of assessee. Respectfully following the same, we uphold the findings of the CIT(A) in regard to directing the AO to treat the deferred sales tax liability as capital receipt. This ground of the Revenue is dismissed.
14. In the result, appeal of the Revenue is dismissed.
Order pronounced in the open court on this 14/11/2014.
14/11/2014
Sd/- Sd/-
( ) ( )
(I.P.BANSAL) (R.C.SHARMA)
/ JUDICIAL MEMBER / ACCOUNTANT MEMBER
Mumbai; Dated 14/11/2014
/pkm, PS
Copy of the Order forwarded to :
1. / The Appellant
2. / The Respondent.
3. / The CIT(A), Mumbai.
4. / CIT
5. / DR, ITAT, Mumbai
6. Guard file.
//True Copy//
/ BY ORDER,
(Asstt. Registrar)
/ ITAT, Mumbai