Case Law Details
Brief of the Case
ITAT Chandigarh held In the case of M/s GlaxoSmithKline Consumer Healthcare Ltd vs. The JCIT that it is a settled law that an unascertained liability has to be allowed even if the same is quantified on a future date. In this case the incentive plan so formulated by the assessee is a very common form of scheme formed by many of the companies popularly known as ‘ESOP’ scheme.
The terms and conditions of the investment plan of the assessee are same as in any general scheme of ESOP. The question of liability of this type of provision came before the Bangalore Bench of the Tribunal in the case of Biocon Limited 155 TTJ 649 (SB), in which it was held that in any case, if some of the options remain unvested or are not exercised, the discount hitherto claimed as deduction is required to be reversed and offered for taxation in such later year. Therefore, the discount in relation to options vesting during the year cannot be held as a contingent liability. Accordingly, discount on shares under the ESOP is an allowable expenditure.
Facts of the Case
ITA No.290/Chd/2014
ALP adjustment on account of AMP expenses
The assessee did detailed transfer pricing study relating to export of manufactured malted food biscuits, export of raw material, IT services received and cost reimbursement to and from Group Company, during the year under consideration. The said study was not disputed by the TPO and all these international transactions were treated at arms’ length. However, the TPO under took the bench marking analysis of advertisement, marketing and sales production (AMP) expenses aggregating to Rs.12847.66 lacs incurred by the assessee on product ‘Horlicks’ during the year . The bench marking was done applying the ‘Bright Line Test ’.
The TPO was of the view that the AMP expenses to the extent incurred for creating marketing intangibles of ‘Horlicks ’brand which belongs to the Associated Enterprise (AE), requires consideration along with a mark up for the brand promotion services. For applying Bright Line Test, the TPO compared AMP expenditure of the assessee, being 7.076% of total turnover with average expenditure of 1% of the three comparables, viz . Herman Milk Foods, Milk Specialties Ltd. and Mohan Dairies Ltd. In this way, in order passed under sect ion 92CA (3), the TPO proposed an adjustment of Rs.1,26,87,00,171/- .
Deduction of balance lying in PLA account
On perusal of the return filed by the assessee, the Assessing Officer noted that the assessee has calculated an amount of Rs.5,50,049/- by arriving at the difference between the figures of 31.3.2008 Rs.32,62,786/- and as on 31.3.2009 Rs.27,12,737/- on account of excise duty. The assessee had added this amount from the book profit before taxation. The assessee submitted before the Assessing Officer that the assessee had in fact, added this amount of Rs.5,50,049/- in its return of income. Since the same issue was also there in assessment year 2008-09, the Assessing Officer was of the view that since such claim for deduct ion was not accepted in the previous year, in order to maintain judicial consistency in the stand taken by the Department in earlier years in assessee’s own case, the addition of Rs.5,50,049/- is not called for in the current assessment year also. Accordingly, he proposed to lessen the returned income by the said amount.
Market Research Expenses
The assessee has claimed an amount of Rs.10,14,36,000/- in the Profit & Loss Account on account of market research expenses. The details of these expenses were filed before the Assessing Officer. After analyzing the details given by the assessee, the Assessing Officer was of the view that the consumer, product research expenses on existing and new products are capital in nature. It was also observed by the Assessing Officer that the assessee in the preceding year i .e. assessment year 2008-09 on the similar issue raised an object ion before the DRP, whereby the DRP confirmed the action of the Assessing Officer in treating the expenses to be capital in nature. In this way, he proposed to add this amount of Rs.10,14,36,000/- in the income of the assessee.
Liability for post retirement medical benefits
In the Profit & Loss Account the assessee has claimed expenditure of Rs.5.97 crores on account of medical reimbursement liability for ex-employees. The assessee filed detailed reply together with the actuarial valuation certificate on the basis of which the liability was shown in the Profit & Loss Account. The Assessing Officer was of the view that reading of this valuation certificate reveals that the purpose of this valuation is to make incremental provisions in the books of account as required under AS-15 on an ongoing basis. He was of the view that the actuary has calculated/estimated liability of the company towards post retirement medical assistance to the retired employees over a period of time to comply with the revised AS-15. This provision has been made by debiting the general reserves of company from the point of view of transparent accounting practices for the benefit of the share holders of the company and its other stake holders. As per the Assessing Officer, this liability is totally unascertained and cannot be allowed to be set off against the taxable income of the assessee. In this way, the Assessing Officer proposed to disallow the said expenditure.
Royalty expenses
The assessee had paid royalty of Rs.6167.79 lacs to M/s Glaxo Smithkline Asia Pvt. Ltd. for use of trade mark ‘Horlicks’. The assessee is paying every year royalty @ 5% of the net sales of the products bearing the trademark ‘Horlicks’ and claiming it as revenue expenditure. On a query raised by the Assessing Officer, the assessee submitted that it has been paying royalty in terms of an agreement with M/s Glaxo Smithkline Asia Pvt. Ltd. dated 7.2.1997, which has always been admitted in all the earlier assessment years treating it as revenue in nature. However, in assessment year 2008-09, the Assessing Officer disallowed the said expenses holding the same to be capital in nature simply on the ground that similar issue has been raised by the Revenue in the case of Swaraj Engines Ltd. , 309 ITR 443 (SC) , wherein the matter has been remitted back to the Punjab & Haryana High Court .
Disallowance of interest
During the year under consideration, the assessee had shown closing capital work- in-progress amounting to Rs.1573.86 lacs and opening capital work- in-progress amounting to Rs.1812.21. Further , it was observed by the Assessing Officer that an amount of Rs.541.19 lacs were incurred by the assessee on account of interest expenses being interest on deposits from dealers, wholesalers, interest on cheque discounting with banks, differential interest on housing loan to employees and interest on others. The Assessing Officer observed that the value of capital work- in-progress has decreased from Rs.1812.21 lacs to Rs.1573.86 lacs and no interest has been capitalized during the year. On questioning about the disallowance of interest under the provisions of sect ion 36(1) ( iii ) of the Act , the assessee submitted that as per assessee’s accounting policy, interest on borrowings for capital assets, if any, is capitalized till the date of commencement of commercial use of the asset . It was also submitted that the assessee is a debt free company having no borrowings at al l and there is no increase in capital work- in-progress during the year under consideration. Since the assessee has not borrowed any funds for the assets purchased or lying in capital work- in-progress, therefore, there was no long term or short term loan appearing in the balance sheet. Hence, there was no interest paid or payable on account of borrowed funds for assets purchased or lying in capital work- in-progress.
Further, it was submitted that from the details of interest expenditure, it may be appreciated that no interest was relatable to any loan taken during the relevant year. The interest on deposits from dealers and wholesalers was paid in the course of running of the business. The interest to banks was paid for various banking services also in the regular course of running the business. The differential interest on housing loans to employees was also incurred in the regular business of the assessee. Since no par t of the business claimed under the Act having been incur red for the purposes of business was attributable towards acquiring any capital assets and thus, no disallowance under sect ion 36(1) ( i i i ) of the Act can be made. Rejecting the submissions of the assessee and making his own calculation, the Assessing Officer proposed to capitalize an amount of Rs.203.16 lacs.
Disallowance u/s 14A
During the year under consideration, the assessee has made investments in shares amounting to Rs.0.05 lacs. The assessee has earned dividend income amounting to Rs.1265.21 lacs and claimed that it incur red expenses amounting to Rs.6,38,304/- for earning the said income. The assessee has allocated the salary of employees directly and indirectly involved and also added communication expenses, audit fees and taxation fees to arrive at this figure of Rs.6,38,304/- . The Assessing Officer was of the view that the assessee has not justified the nominal expenses of Rs.6.38 lacs against the huge income of Rs.1265.21 lacs. Therefore, not satisfying with the correctness of the expenses so claimed by the assessee, the Assessing Officer invoking the provisions of sect ion 14A of the Act made the disallowance computed under Rule 8D of the Income Tax Rules. In this way, a disallowance of Rs.162.30 lacs was proposed.
Provision towards long term incentive plan
During the course of assessment proceedings, the Assessing Officer noticed that the assessee has debited an amount of Rs.158.96 lacs in the Profit & Loss Account towards long term incentive plan, . On a query raised by the Assessing Officer, it was submitted that the assessee had initiated a long term incentive plan to maintain its competitiveness in attracting and retaining Senior Grade Manager. In terms of the said plan, the option granted to the employees was valued at the prevailing market price of the shares of the parent company of the assessee. This amount is converted into Indian Rupee and liability is provided by the assessee, which is re-valued every quarter for both share value and the exchange value.
The employee receives cash equivalent of the market price of the shares granted under the options on the date of exercise of the option after the expiry of three years from the date of grant of the opt ion provided the employee is in continuous employment till such date. The payment is made to the employee which is equivalent to market price of the shares on the date of exercise of the option. In this background, the assessee had made a provision of Rs.158.96 lacs for proportionate liability of the relevant year in respect of the amount payable to the employees relatable to services rendered by the employees until the end of the relevant year. The said amount represents the value of options granted during the current year as well as the differential amount on revaluing the opt ions granted in earlier years by applying the share value as well as the exchange rate as at the end of the year . It was submitted that under the mercantile system of accounting deduction of expenditure is allowable in the year in which liability is quantified and accrued notwithstanding that the same has to be discharged at a later date. Since the liability is in respect of subsisting liability of incentive payable to employees in relation to services rendered until the end of the relevant year, which got accrued during such year, the same is allowable as business deduction in accordance with the mercantile system of accounting.
Contention of the Assessee
ALP adjustment on account of AMP expenses
The ld counsel of the assessee submitted that on the similar issue of adjustment on account of AMP expenditure, Special Bench of the Tribunal was constituted in the case of L.G. Electronics India Pvt. Ltd. , 140 ITD 41 (Del ) (SB) , where the assessee also intervened in its case for a preceding assessment year, i.e. assessment year 2007-08. Though the facts of the assessee, being an intervener , were not considered by the Special Bench, the Bench laid down certain criterion to compute the adjustment to be made, holding that the AMP expenditure may result in international transact ion. The case of the assessee for assessment years 2007-08 and 2008-09 was, thus, sent back to the file of the TPO to decide the issue as per the directions laid down by the Special Bench, by the Chandigarh Bench of the Tribunal.
It was further brought to our notice that the said order of the Special Bench of the I.T.A.T. was considered by the Hon’ble Delhi High Court in the case of Sony Ericsson Mobile Communication India Pvt. Ltd. Vs. CIT (2015) 374 ITR 118 (Del), whereby in the case of lim ted risk distributors, the existence of international transact ion on account of AMP expenditure was admitted and it was held that adjustment on account of TP can be made. However, i t was also held that adjustment in the case of full risk assuming manufacturer has to be considered in a different perspective. In view of this, it was further submitted by the learned counsel for the assessee that the assessee being a full – fledged manufacturer and not a distributor , the entire expenditure on AMP is incurred at its own discretion and for its own benefits for sale of ‘Horlicks’ products in India. In such circumstances, the activity does not result in international transaction and the assessee is not expected to seek compensation for the allegedly excess AMP expenditure incurred by it. Therefore, no such adjustment on account of AMP activity should be made.
Deduction of balance lying in PLA account
The learned counsel for the assessee explained that the deduct ion of closing balance of excise deposit amounting to Rs.27,12,737/- being balance in PLA as on 31.3.2009 under sect ion 43B was claimed by the assessee. Correspondingly, an amount of Rs.32,62,786/- representing the opening balance of excise deposit lying in PLA, which was claimed as deduct ion in the return of income in the preceding assessment year 2008-09 was added back. The assessee in fact, has offered to tax an amount of Rs.5,50,049/- as par t of i ts taxable income being decremental difference between the Excise deposits with the Excise Department . Further it was submitted that the issue stands covered in favour of the assessee in its own case by the Special Bench of the Tribunal in assessment year 2001-2002, reported in 107 ITD 343. It was also explained that similar issue has arisen in a number of years preceding the relevant assessment year, whereby the issue has been decided in favour of the assessee in all the years starting from 1998-99 to assessment year 2008-09.
Market Research Expenses
The learned counsel for the assessee submitted that the assessee during its business operation incur red expenses for carrying out the consumer surveys, market research and consumer analysis, data analysis, product designing, promotional samples of manufactured and traded goods, etc. The said expenditure was incur red wholly and exclusively for the purposes of the existing business of the assessee and did not result in acquisition of any asset. It was submitted that the issue is covered in favour of the assessee by the orders of the Tribunal in assessee’s own case for assessment years 1998-99 to 2008- 09, wherein the Tribunal allowed the claim holding it to be revenue in nature. Without prejudice, it was prayed that the Assessing Officer has made transfer pricing adjustment to the total AMP expenses, which includes market research expenses also. Accordingly, the disallowance of market research expenses of Rs.7,19,98,000/- by treating the same to be capital expenditure as well as the entire adjustment of AMP expenses as transfer pricing addition, has resulted in double disallowance and adjustment .
Liability for post retirement medical benefits
The learned counsel for the assessee submitted before us that the assessee company provides benefit of medical assistance and reimbursement of medical expenses to employees post retirement. In pursuance to the issuance of revised AS-15 by the Institute of Chartered Accountants of India, the assessee got the incremental liability on account of post retirement medical benefits, determined on actuarial basis and accounted for the same in the books of account. In this way, provision of Rs.5.97 crores was made in the books of the assessee. I t was brought to our notice that the issue is covered in favour of the assessee by the orders of the Chandigarh Bench of the I .T.A.T. for assessment years 2007-08 and 2008-09.
Royalty expenses
The ld counsel of the assessee submitted that the issue is covered in favour of the assessee by the order of the Chandigarh Bench of the Tribunal in assessee’s own case for assessment year 2008- 09. Further, it was submitted that the decision of the Hon’ble Supreme Court in the case of Swaraj Engines Ltd. 309 ITR 443 as refer red to by the Assessing Officer , i t is held that the provisions of sect ion 35AB are not attracted as the same were applicable till assessment year 1997-98. Therefore, the said decision is not applicable to the facts of the case.
Disallowance of interest
The ld counsel of the assessee submitted that the assessee is a debt free company having no borrowings at all. Therefore, no disallowance on account of interest can be made. Secondly, it was submitted that al l the heads of interest expenditure on account of which the said addition has been computed pertain to the regular business of the assessee and has been made on account of business expediency only. Therefore, no such disallowance can be made. Further, it was submitted that similar disallowance has been deleted by the Chandigarh Bench of the Tribunal in assessee’s own case for assessment year 2008-09.
Disallowance u/s 14A
The learned counsel for the assessee submitted before us that the assessee had suo moto disallowed expenses of Rs.6,38,304/- computed on the basis of salary and over heads of certain employees involved in investment activity, administration and other expenses to be attributed to earning of exempt income. The details of suo moto disallowance were also placed in the Paper Book. The submissions were made before us to the effect that Rule 8D of the Income Tax Rules cannot be applied mechanically. Further, it was reiterated that the assessee is a debt free company and in the business of any borrowings made by the assessee, no disallowance under sect ion 14A of the Act read with Rule 8D can be made on account of interest expenditure.
In so far as the disallowance of administration expenses is concerned, i t was submitted that no part of the expenditure has actually incurred for earning dividend income. Still the assessee has made suo moto disallowance of Rs.6,38,504/- on a scientific and rational basis to cover the expenditure. Further the Assessing Officer has not been able to pinpoint any error on the said suo moto disallowance made by the assessee. Certain error were also pointed out in the computation made by the Assessing Officer under Rule 8D of the income Tax Rules. Reliance was placed on a number of judicial pronouncements by various High Courts and various Benches of the I .T.A.T. on all the issues raised before us. Our at tent ion was also invited to the order of the Chandigarh Bench of the Tribunal in assessee’s own case for assessment year 2008-09, wherein the Tribunal has held that in the absence of any borrowings made by the assessee no disallowance on account of interest can be made. For disallowance made under Rule 8D (iii ) of the income Tax Rules, the I .T.A.T. had directed the Assessing Officer to reduce the amount suo moto disallowed by the assessee.
Provision towards long term incentive plan
The ld counsel of the assessee submitted that the amount represents the value of opt ion granted during the current year as well as the differential amount on revaluing the opt ions granted in earlier years by applying the share value as well the exchange rate as at the end of the year . The method also takes into account reversal of the provision made in earlier years in respect of employees who left or ceased to be eligible for the benefit. The provisions reversed during the year are accordingly credited to the Prof i t & Loss Account and duly offered to tax. The computation par t was explained with the help of a char t f i led. In view of the same, i t was submitted that the provision of incentive payable to employees is in respect of services rendered by employees until the end of the relevant year and the same accrued or crystallized into a liability during the relevant year on grant of the option to the employee.
Therefore, it is necessary to the assessee to make provision of such accrued or crystallized liability under the mercantile system of accounting mandatorily to be followed. Reliance was heavily placed on the order of the Special Bench of the Tribunal in the case of Biocon Limited Vs. DCIT, 155 TTJ 649 (SB), copy of which was placed before the Bench, wherein it has been held that the said discount was an ascertained liability since the employer incurs obligation to compensate the employee over the vesting period notwithstanding the fact that the exact amount of discount is quantified only at the time of exercising the opt ions. Further, it has been held in the same order that incurring of liability and the resultant deduct ion cannot be marred by mere reason of some difficulty in proper quantification of such liability at that stage. The very point of incurring the liability enables the assessee to claim deduct ion under mercantile system of accounting. The reliance was placed on the judgment of Hon’ble Madras High Court in the case of CIT Vs. M/s PVP Ventures Ltd., 211 Taxman 554 and that of the Chennai Bench of the Tribunal in the case of SSI Ltd. Vs. DCIT, 85 TJ 1049. In view of the above, it was prayed that the disallowance made by the Assessing Officer be deleted.
Contention of the Revenue
ALP adjustment in relation to AMP expenses
The ld counsel of the revenue filed a copy of the order of the Delhi Bench of the I .T.A.T. in the case of Perfect Van Mel le India Pvt . Ltd. Vs. DCIT, ITA No.407/Del/2015, dated 2.6.2015, which was the case of manufacturer. The case was sent back to the TPO to follow the judgment of the Hon’ble Delhi High Court in the case of Sony Ericsson Mobile Communication India Pvt. Ltd. In this background, he prayed to send this case also back to the file of the TPO.
Deduction of balance lying in PLA account
The learned D.R. relied upon the orders of the Assessing Officer and that of the DRP.
Liability for post retirement medical benefits
The learned D.R. relied upon the orders of the Assessing Officer and DRP.
Held by DRP
ITA No.290/Chd/2014
ALP adjustment on account of AMP expenses
DRP confirmed the addition made by AO.
Liability for post retirement medical benefits
The DRP held that since the issue has also come up earlier for the consideration of the DRP in assessee’s case for assessment years 2007-08 and 2008-09 and the same was rejected by the DRP for the reasons that the element of uncertainty in respect of this liability is very high, thus following the direct ion of the DRP for assessment years 2007-08 and 2008-09, the object ion was rejected by the DRP.
Royalty expenses
The DRP had directed the Assessing Officer to redetermine the issue of allowability of royalty after verification of facts with reference to the agreement entered into by the assessee wi th M/s Glaxo Smi thkl ine Asia Pvt . Ltd. in view of the direction of the Hon’ble Supreme Court in the case of Swaraj Engines Ltd. Considering the reply of the assessee, holding that the Department is already before the Hon’ble Punjab & Haryana High Court in the case of Swaraj Engines Ltd. and issue is pending for decision before the Hon’ble Court , hence the claim of the assessee to treat this expenditure as revenue cannot be entertained. In this way, an expenditure of Rs.6167.79 lacs was proposed to be treated as capital expenditure and depreciation was proposed to be accordingly allowed.
Disallowance of interest
The object ion raised by the assessee was rejected by the DRP. In this way, an addition of Rs.203.16 lacs was made by the Assessing Officer.
Held by ITAT
ITA No.290/Chd/2014
ALP adjustment in relation to AMP expenses
In view of the developments happening after the order of the Special Bench in the case of L.G. Electronics India Pvt. Ltd, as stated by the counsels appearing before us, we are in agreement that since the order of the Hon’ble High Court in the case of Sony Ericsson Mobile Communication India Pvt. Ltd. (2015) 374 ITR 118 (Del ) was not available at the time of the order for assessment years 2007-08 and 2008-09 in case of the assessee, the same cannot be followed as such. Since the issue is now to be decided in the background of the decision of the Hon’ble Delhi High Court in the case of Sony Ericsson Mobile Communication India Pvt . Ltd., we have very carefully gone through the said judgment.
From the overall reading of the judgment, the proposition laid down by the Hon’ble Court can be summarized in simple terms to the effect that in case of a manufacturer, there are two activities, which are to be segregated one is prime manufacturing activity and the other relating to AMP. Further, for a manufacturer, TNMM is not an appropriate method. Therefore, in the result, the ALP of the AMP activity has to be computed by using any other suitable method. However, it is to be taken care that if cost plus method is used, the selling expenses are to be excluded from the total AMP expense, which has been held by the Hon’ble High Court elsewhere in this order. This is also one of the observations of the Special Bench in the case of L.G. Electronics India Pvt. Ltd. which has been affirmed by the Delhi High Court.
Since it was admitted at Bar that the present case is that of a manufacturer and this fact was not cont rover ted by the learned D.R. also, we find it proper to set aside the matter to the file of the TPO/Assessing Officer to decide the issue of AMP afresh as per law laid down by the Hon’ble Delhi High Court in the case of Sony Ericsson Mobile Communication India Pvt. Ltd. and also the analysis made by us hereinabove. Needless to add that the assessee should be given a fair and adequate opportunity of being heard. The assessee is free to adduce any evidence in this regard.
Deduction of balance lying in PLA account
On perusal of the order of the Chandigarh Bench of the Tribunal in assessee’s own case for assessment year 2008- 09, we observe that on similar issue the Tribunal had held that we direct the AO to allow the claim of expenditure claimed under the provisions of section 43B. Since no distinguishing facts were brought to our notice during the course of hearing, respectfully following the order of the Coordinate Bench of the Tribunal , we also send back the issue to the file of the Assessing Officer to decide it as per the direction of the I .T.A.T. in earlier year .
Market Research Expenses
From the perusal of above order of the I .T.A.T, we infer that the ground was raised together with the issue of adjustment on account of ALP of AMP expenditure and since the request of assessee to enlarge the ground so raised, the Hon’ble Bench discussed the issue of market research expenditures together with the TP issue. It was decided that the expenses in connection with the sale do not lead to brand promotion and thus cannot be brought within the ambit of advertisement, marketing and promotion expenses for determining the cost/ value of the international transactions. Since no distinguishing features were brought to our notice, respectfully following the order of the Coordinate Bench of the Tribunal, the claim of the assessee is allowed. The ground of appeal raised by the assessee is decided in its favour.
Liability for post retirement medical benefits
On perusal of the order of the I .T.A.T , Chandigarh Bench in assessee’s own case for assessment year 2007-08, we observe that similar disallowance made by the Assessing Officer was deleted by the Tribunal. It was held that where the provisions were estimated on the basis of actuarial calculations, the deduction claimed by the assessee has to be allowed.
Relying on the said order of the Chandigarh Bench of the I .T.A.T. for assessment year 2007-08, similar disallowance made by the Assessing Officer in assessment year 2008-09 was also deleted by the Chandigarh Bench of the I .T.A.T. in assessee’s own case. Since no distinguishing facts were brought to our notice, respectfully following order of the Coordinate Bench of the Tribunal, the claim of the assessee is allowed. The ground of appeal raised by the assessee is decided in its favour.
Royalty expenses
On perusal of the order of the I .T.A.T. for assessment year 2008-09, we observe that on similar issue the I .T.A.T. deleted the disallowance made by the Assessing Officer on account of royalty paid to M/s Glaxo Smithkline Asia Pvt. Ltd. It was held that the expenditure has been incurred for the right to use the trademark which does not result into acquisition of any rights of enduring nature and the same cannot be held to be an expenditure of capital in nature. The assessee has not acquired the title to the said trademark as it apparent from the agreement between the parties. The royalty was being paid at prescribed percentage of the net sale value of the contracted product and hence was linked to the sales of the assessee. Since no distinguishing features were brought to our notice, respectfully following the order of the Coordinate Bench of the Tribunal, the claim of the assessee is allowed.
The ground of appeal No.6 raised by the assessee is decided in its favour.
Disallowance of interest
On perusal of the order of the Tribunal is assessee’s own case for assessment year 2008-09 on similar disallowance being made by the I .T.A.T. , deleted the same.
From the perusal of the above order, we see that exactly the same circumstances are in the current year also as the head of interest expenditure are identical in both the years and no distinguishing facts were brought to our notice, respectfully following the order of the Coordinate Bench of the Tribunal, the claim of the assessee is allowed. The ground of appeal No.7 raised by the assessee is decided in its favour.
Disallowance u/s 14A
On perusal of the order of the I .T.A.T. in assessee’s own case for assessment year 2008-09, we observe that in the background of similar facts, the disallowance made by the Assessing Officer under sect ion 14A of the Act read with Rule 8D of the Income Tax Rules, the I .T.A.T. deleted the same.
It is seen from the perusal of the balance sheet that no new investments have been made by the assessee during the year as total investments have reduced from 33,221.23 lacs on 31.3.2008 to Rs.0.05 lacs as on 31.3.2009. Further , in the order of the earlier years, I .T.A.T. has held that no interest bearing funds are used for the purposes of investments, no disallowance on account of interest expenditure can be made under sect ion 14A of the Act
Provision towards long term incentive plan
This is an undisputed fact that the assessee has created liability in respect of long term incentives plan of Rs.158.96 lacs during the year. It is also a fact that the assessee has adopted a standard method to value the said provision year after year. The only content ion of the Assessing Officer to make the disallowance seems the fact that there is no certainty of the payment on account of this incentive plan, which was dependent on a number of unforeseeable conditions.
The existence of variables definitely made the quantification of the incentive claim uncertain. In view of the same, the only issue to be decided by us is whether the provision for investment plan made by the assessee during the year is allowable in this year or not. We have to see whether the said provision come under the ambit of deductible expenditure under sect ion 37(1) of the Act or not .The content ion of the Assessing Officer seems that he is considering the said liability to be contingent as at various places in his order, he has mentioned that there is uncertainty as to the quantum of expenses to be incur red in any particular year. It is a known fact that in this type of incentive scheme, opt ions are reversed due to non-exercise or under vested opt ion that get cancel led due to leaving of office by any of the employees. This fact weighed very heavily in the mind of the Assessing Officer while making this disallowance.
Now the issue arises whether the liability in question is contingent liability or an unascertained liability. I t is a trite law that the liability which is ascertained during the year is an allowable expenditure, while contingent liability is not. It is also a settled law that an unascertained liability has to be allowed even i f the same is quantified on a future date. The incentive plan so formulated by the assessee is a very common form of scheme formed by many of the companies popularly known as ‘ESOP’ scheme. The terms and conditions of the investment plan of the assessee are same as in any general scheme of ESOP. The quest ion of liability of this type of provision came before the Bangalore Bench of the Tribunal in the case of Biocon Limited 155 TTJ 649 (SB) In was held that In any case, if some of the options remain unvested or are not exercised, the discount hitherto claimed as deduction is required to be reversed and offered for taxation in such later year.
Therefore, the discount in relation to options vesting during the year cannot be held as a contingent liability. Provisions to section 115WB contemplates that the discount on premium under ESOP as a benefit provided by the employer to its employees during the course of service. It was held that if the legislature considers such discounted premium to the employees as a fringe benefit or ‘any consideration for employment’, it was not open to argue contrary. Once it was held as a consideration for employment, the natural corollary which follows is that such discount is an expenditure; such expenditure is on account of an ascertained (not contingent) liability and it cannot be treated as a short capital receipt. In view of the forgoing discussion, it was held that discount on shares under the ESOP is an allowable deduction.”
Since reliance was placed on this judgment and other judgments of various Benches of the Tribunal, who had in turn relied upon the Special Bench, during the course of hearing and no distinguishing facts were brought to our notice by the learned D.R., respectfully following the order of the Special Bench, we also hold that the provision on account of incentive plan made by the assessee during the year is an ascertained liability. Further, we see that the Assessing Officer has nowhere objected to the method of quantifying the said provision by the assessee.
Accordingly, the appeal of the assessee is partly allowed.
