Navi General Insurance Limited Vs Assessment Unit (ITAT Bangalore)
ITAT Allows Section 35D & ESOP Claims, But Upholds Disallowance of Share Issue Expenses
The Bangalore ITAT partly allowed the appeal of Navi General Insurance Ltd. for AY 2021-22, granting relief on deduction of preliminary expenses under section 35D and ESOP expenses, while confirming the disallowance of share issue expenses as capital expenditure.
The assessee had claimed deduction of ₹1.74 crore under section 35D, representing one-fifth of pre-operative expenses incurred for obtaining the IRDAI licence and commencing insurance operations. The Tribunal noted that the same claim had already been accepted by the Department in the preceding four years and held that the Revenue could not disallow the fifth and final instalment without disturbing the allowance granted in the initial years. Relying on the Karnataka High Court decision in Subex Ltd., the Tribunal directed deletion of the disallowance.
The Tribunal also deleted the disallowance of ₹68.95 lakh towards ESOP expenses. It observed that the holding company had granted stock options to employees of the assessee and subsequently recovered the related cost from the assessee. Since the expenditure pertained to the assessee’s own employees, had been incurred wholly and exclusively for business purposes, and represented employee compensation, the reimbursement could not be treated as a notional expense. Accordingly, the deduction was held allowable under section 37(1).
However, the Tribunal upheld the disallowance of ₹18.57 lakh incurred towards issue of share capital. Rejecting the argument that the capital was raised merely to meet working capital and IRDA solvency requirements, the Tribunal relied on the Supreme Court ruling in Brooke Bond India Ltd. and held that expenditure incurred for raising share capital remains capital in nature irrespective of the purpose for which the funds are utilised. Since such expenditure expands the capital base of the company, it cannot be allowed as a revenue deduction.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
