Category: Tribunal News: Part A-Domestic Taxation

Facts:

The assessee, a motor sports club, registered as a society, was also having registration under erstwhile section 12A(a). The objectives of the assessee, inter alia, were to promote sports of motor car and motorcycle and conduct motor races competitions, etc. As per DIT (Exemptions), though the objects and activities were covered under the category of “advancement of general public utility” coming within the ambit of section 2(15), assessee’s receipts were in the nature of business receipts and were more than Rs. 10 lakh (this limit is now raised to Rs. 25 lakh w.e.f. 01-04-2012). Therefore, the objects and activities of the assessee could no more be considered as charitable in nature as per the first and second provisos to section 2(15). In this view of the matter, he cancelled registration granted to the assessee u/s. 12A(a).

Held:

A harmonious reading of both the provisos to section 2(15) will only mean that in the years in which the receipts of nature mentioned in first proviso exceeded Rs. 10 lakh, the assessee will not be eligible for exemption u/ss 11 and 12. It will not mean that an otherwise charitable object of general public utility will become a non-charitable one merely because its aggregate receipts of the nature mentioned in the first proviso to section 2(15) exceeded Rs. 10 lakh. Therefore, registration granted to the assessee u/s. 12A(a) cannot be cancelled only on that ground. If in the very next year, assessee’s receipts are less than Rs. 10 lakhs, then it will have to be granted the exemption available u/ss. 11 and 12, if other conditions are satisfied. In other words, nature of objects of the assessee cannot fluctuate in tandem with the quantum of receipts mentioned in the first proviso.

Facts:

The assessee, owner of land since 1962, entered into an agreement with a developer in 2001. Under the agreement, while transferring interest in the land to the extent of 45 % for a consideration of Rs. 61 lakh, assessee retained the balance 55 % of land together with right to corresponding built up area thereon. As regards transfer of 45 % of land, assessee paid capital gains tax in A.Y.: 2002-03. Assessee was handed over possession of the built up area vide occupation certificate dated 24-2-2005. During A.Y.: 2007-08, assessee sold two flats and returned capital gains on sale of flats as long-term capital gains on the plea that it was under the right created under agreement of 2001 that assessee acquired and sold the flats. The Assessing Officer did not accept the computation of capital gain made by the assessee taking gain as long term capital gain. The Assessing Officer observed that the assessee had taken possession of the flats as per full occupation certificate dated 24-02-2005 and therefore, assessee was holding the said flats from the said date and since flats were sold in A.Y.: 2007- 08, the period of holding was less than three years and therefore capital gain had to be treated as short term capital gain.

Held:

Right to claim the flat as per agreement in the year 2001 was an asset but the assessee had not sold the right to acquire the flats. The assessee had sold the flats of which he was owner. The right to acquire the flats, no longer subsisted once the assessee acquired the flats and took possession of the same on 24-02- 2005. The right to acquire the flats and ownership of the flats are two different assets. The capital gain had therefore to be computed in respect of sale of flats and not in respect of right to acquire the flats.

However the assessee alongwith flats had also sold his right in the land which was an independent asset and which was being held by him since 1962 as an owner. Therefore sale consideration also included price paid in respect of right in the land in addition to price for superstructure. It would be reasonable to adopt a profit margin of 25% on the cost of construction of the flats to arrive at the sale consideration pertaining to the superstructure. The balance sale consideration of the flats will be appropriated towards the sale price for the transfer of right in the land.

Thus, the capital gain in respect of transfer of right of assessee in the land has to be computed separately as long term capital gains and gain in respect of sale of superstructure has to be treated as short term capital gain.

The assessee-company floated an ESOP scheme, under which it granted option of shares with face value of Rs. 10 at the same rate by claiming that the market price of such shares was Rs. 919, thereby claiming the total discount per option at Rs. 909. The difference between the alleged market price and the exercise price, at Rs. 909 per option was claimed as compensation to the employees to be spread over the vesting period of four years on the strength of the SEBI Guidelines and accounting principles. The assessee claimed that the employee stock option compensation expense was deductible u/s. 37(1).

The revenue did not accept the assessee’s contention of the supremacy of the accounting principles and SEBI Guidelines for the purposes of computation of total income on ground that it was a short capital receipt and a contingent liability. The revenue also canvassed a view that expenditure denotes “paying out or away” and unless the money goes out from the assessee, there can be no expenditure so as to qualify for deduction u/s. 37.

A Special Bench was constituted by the Division bench to decide whether discount on issue of Employee Stock Options is allowable as deduction in computing the income under the head profits and gains of business.

Held:

The Special Bench analysed this issue by sub-dividing it into three questions , viz.,

I. Whether any deduction of such discount is allowable?

When a company undertakes to issue shares to its employees at a discount on a future date, the primary object of this exercise is not to raise share capital, but to earn profit by securing the consistent and concentrated efforts of its dedicated employees during the vesting period. Such discount is simply one of the modes of compensating the employees for their services and is a part of their remuneration. Thus, the contention of the revenue that by issuing shares to employees at a discount, the company got a lower capital receipt, is bereft of any force.

From the stand point of the company, the options under ESOP vest with the employees at the rate of 25 % only on putting in service for one year by the employees. Once the service is rendered for one year, it becomes obligatory on the part of the company to honour its commitment of allowing the vesting of 25 % of the option. The mere fact that the quantification is not precisely possible at the time of incurring the liability would not make an ascertained liability a contingent. It is, therefore, held that the discount in relation to options vesting during the year cannot be regarded as a contingent liability.

When the definition of the word “paid” u/s. 43(2) is read in juxtaposition to section 37(1), the position which emerges is that it is not only paying of expenditure, but also incurring of the expenditure which entails deduction u/s. 37(1) subject to the fulfillment of other conditions. Thus discount on shares under the ESOP is an allowable deduction.

II. If deductible, then when and how much?

Mere granting of option does neither entitle the employee to exercise such option nor allow the company to claim deduction for the discounted premium. It is during the vesting period that the company incurs obligation to issue discounted shares at the time of exercise of option. Thus the event of granting options does not cast any liability on the company. On the other end is the date of exercising the options. Though the employees become entitled to exercise the option at such stage but the fact is that it is simply a result of vesting of options with them over the vesting period on the rendition of services to the company. In the same manner, though the company becomes liable to issue shares at the time of the exercise of option, but it is in lieu of the liability which it incurred over the vesting period by obtaining their services. Thus, the liability is neither incurred at the stage of the grant of options nor when such options are exercised.

The company incurs liability to issue shares at the discount only during the vesting period and the amount of such deduction is to be found out as per the terms of the ESOP scheme by considering the period and percentage of vesting during such period.

III. Subsequent adjustment to discount

The company incurs a definite liability during the vesting period, but its proper quantification is not possible at that stage as the actual amount of employees cost to the company, can be finally determined at the time of the exercise of option or when the options remain unvested or lapse at the end of the exercise period. It is at this later stage that the provisional amount of discount on ESOP, initially quantified on the basis of market price at the time of grant of options, needs to be suitably adjusted with the actual amount of discount.

As regards the adjustment of discount when the options remain unvested or lapse at the end of the exercise period, it is but natural that there is no employee cost to that extent and hence there can be no deduction of discount qua such part of unvested or lapsing options. But, as the amount was claimed as deduction by the company, such discount needs to be reversed and taken as income.

In the second situation in which the options are exercised by the employees after putting in service during the vesting period, the actual amount of remuneration to the employees would be only the amount of actual discount at the time of exercise of option. After certain changes to the relevant provisions in this regard , the position which now stands is that the discount on ESOP is taxable as perquisite u/s. 17(2)(vi). The position has been clarified beyond doubt by the legislature that the ESOP discount, which is nothing but the reward for services, is a taxable perquisite to the employee at the time of exercise of option, and its valuation is to be done by considering the fair market value of the shares on the date on which the option is exercised. Thus, it is palpable that since the remuneration to the employees under the ESOP is the amount of discount with respect to the market price of shares at the time of exercise of option, the employees cost in the hands of the company should also be with respect to the same base.

The amount of discount at the stage of granting of options with respect to the market price of shares at the time of grant of options is always a tentative employee cost because of the impossibility in correctly visualising the likely market price of shares at the time of exercise of option by the employees, which, in turn, would reflect the correct employees cost. Since the definite liability is incurred during the vesting period, it has to be quantified on some logical basis. It is this market price at the time of the grant of options which is considered for working out the amount of discount during the vesting period. But, since actual amount of employee cost can be precisely determined only at the time of the exercise of option by the employees, the provisional amount of discount availed as deduction during the vesting period needs to be adjusted in the light of the actual discount on the basis of the market price of the shares at the time of exercise of options.

Facts:

The assessee, an administrator to the Estate of Late Mr. E. F. Dinshaw held landed properties and other tenanted properties with EF Dinshaw Trust & EF Dinshaw Charities jointly. During the previous year relevant to the assessment year 2005-06, two properties of the estate whose stamp duty value was Rs. 5,95,78,500 were sold for Rs. 42,55,045 and profit arising from the sale was computed by considering the consideration as per sale deed to be full value of consideration. The profit so computed was declared under the head `long term capital gain’. The assessee had not disputed the stamp duty value adopted by the stamp valuation authorities.

In the course of assessment proceedings, the assessee was asked to explain the vast difference between the sale consideration and the stamp duty value of the properties sold. The assessee explained that the properties were agreed to be sold in the year 1997 and 1999 and the completion of sale was delayed due to delay in obtaining the requisite permissions from the Charity Commissioner and RBI and under UL(C&R) Act. The difference in value had arisen because of a long time gap between the date when the properties were agreed to be sold and the date of actual sale. The explanation offered by the assessee was substantiated with requisite evidence in the form of correspondence, permissions, etc. The AO worked out the profit by considering the stamp duty value to be consideration and following the past practice assessed the income under the head `profits and gains of business or profession’.

Aggrieved, the assessee preferred an appeal to CIT(A) who held that profit on sale was to be charged to tax under the head `Capital Gains’ and section 50C applied to the transaction under consideration. He rejected the contention that the agreement was entered into before the date of section 50C becoming effective. He held that section 50C applied to transactions after 01-04-2003.

Aggrieved, the assessee preferred an appeal to the Tribunal where it was contended that in the facts and circumstances involved in the case of the assessee, provisions of section 50C have to be read with reference to the date of agreement instead of date of transfer and accordingly the value of the properties made for the purpose of stamp duty as on date of agreement should be taken and not as on the date of execution of conveyance deed.

Held:

The Tribunal noted that (i) for a property agreed to be sold to Avadh Narayan Singh & Ors on 12-03-1999 for Rs. 25 lakh the entire consideration was received upto 03-05-1999 and assessee had moved an application to the Charity Commissioner for sale on 05-04-1999; and (ii) the delay in executing the final conveyance of the property was because of delay in getting the required clearances from the concerned authorities, which was beyond the control of the assessee. It also noted that in respect of the other property the agreement was executed on 07-02- 1997 and the consideration of Rs 10 lakhs was partly received by the assessee on the date of agreement itself. The Tribunal mentioned that the delay in execution of conveyance was satisfactorily explained with reference to sequence of events that occurred with the supporting evidence which was beyond the control of the assessee.

The Tribunal noted that in the case of M. Siva Parvathi & Ors vs. ITO (37 DTR 124)(Vishakapatnam)(ITAT) similar issue arose. In the said case both the parties confirmed having entered into a sale agreement in August 2001 and the vendors had received part payment of total consideration in August 2001 itself. The delay in registering the sale deed was on account of the fact that vendors were under an obligation to obtain urban land clearance permission and were also under an obligation to settle certain disputes and the explanation offered by the assessee was supported by documentary evidence. There was no material brought on record by revenue to show that there was any suppression of actual sale consideration. In these facts, the Tribunal held that the provisions of section 50C could not be applied to the sale agreement as the section was not available in the statute at the time when the transaction was initially entered into. The Tribunal held that the final registration of the sale agreement was only in fulfillment of the contractual obligation and the provisions, which did not apply at the time of entering into the transaction initially could not be applied at the time the transaction was completed. It held that section 50C cannot be applied to sales agreement entered into before the introduction of the said section especially when delay in registration of sale deed was sufficiently explained and there was no suppression of actual consideration.

Following the above mentioned decision, the Tribunal held that section 50C cannot be applied to the sale agreement entered into before the introduction of the said section especially when delay in registration of sale deed was sufficiently explained and there was no suppression of actual consideration. The addition made by the AO and confirmed by CIT(A) was deleted. The appeal filed by the assessee was allowed.

Facts :

The assessee with an objective to raise funds for general corporate purposes issued unsecured, redeemable, non-convertible debentures to Mahindra & Mahindra Ltd on private placement basis. The principal terms and conditions of the placement specified only the Tenor/Maturity & Coupon Rate. There was no mention for payment of any pre-closure charges. Mahindra & Mahindra Ltd. sold these debentures to Deutsche Bank. Pending utilisation of funds, the proceeds of debenture issue were deposited in short term deposit with Standard Chartered Bank. Upon realising that the company is paying heavy interest on debentures for a period of 3 years, the debentures were cancelled and money paid back to Deutsche Bank. However, in the process, the Company had to pay pre-payment charges of Rs. 43,34,000.

The Assessing Officer (AO) held that the expenditure was not contractual but voluntary since there was no provision in the terms of issue of debentures for payment of pre-closure charges. He held the payment to be discretionary decision by the assessee who was not under any legal compulsion to make the payment. He disallowed the pre-payment charges.

Aggrieved, the assessee preferred an appeal to CIT(A) who upheld the action of the AO by relying on the decision of the Punjab & Haryana High Court in the case of Associated Hotels of India Ltd. vs. CIT (231 ITR 134)(P & H). Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:

The Tribunal noted that there was no dispute about genuineness of the expenditure. The only dispute was as regards its allowability. The Tribunal did not find any merit in the contentions on behalf of the revenue that there was no contractual obligation to pay the amount under consideration. Also, that the assessee had not incurred the expenditure for raising the money but had incurred it to return the money already raised and that issue of debentures is not the business of the assessee. The Tribunal found merit in the contention of the assessee that the assessee had to incur the expenditure to relieve it from further financial burden and this was a commercial decision.

The Tribunal held that the decision relied upon by the CIT(A) was not applicable to the facts of the present case. In that case the debentures were redeemed before maturity by paying bonus and fresh debentures were issued before maturity. In the instant case, the assessee has not issued fresh debentures after prepayment of the debentures.

The Tribunal held that the sum of Rs. 43,34,000 incurred by the assessee towards prepayment charges in respect of debentures issued to be an expenditure incurred for the purpose of business and therefore allowable.
This ground was decided in favour of the assessee.

Facts I:

On 05-01-2009, there was a survey action u/s. 133A of the Act on the assessee. The assessee engaged in the business of aviation i.e. transportation of passengers and goods by air, received payments from banks for tickets booked through credit cards. The assessee received from the banks only the net amounts after retention of service charges. The Assessing Officer (AO) noted that the amounts retained by the banks for the assessment years 2007-08, 2008-09 and 2009-10 was Rs. 1,21,61,091; Rs. 4,23,31,210; and Rs. 18,24,57,871 respectively. The AO rejected the contention of the assessee that the amounts retained by the banks are in the nature of discounting charges in consideration of the immediate payment made by the banks to the assessee. He held that these amounts constituted commission u/s. 194H and since the assessee had not deducted tax on these amounts he held the assessee to be an assessee-in-default and directed the assessee to pay the amount of TDS along with interest u/s. 201(1A) of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A) who decided the issue in favor of the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Facts II:

Two banks viz. American Express Bank Ltd. and Citibank NA had obtained from the AO a certificate u/s. 195(3) for receiving payments without deduction of tax at source. The certificate mentioned that it was applicable for the financial year. However, the AO held that the certificate would apply only from the date of its issuance though the specified period mentioned in the certificate is the financial year.

The CIT(A) held that the AO is not justified in applying the certificate from the date of its issuance and bringing to tax the amount retained by the bank to tax for the concerned month by applying the provisions of section 194H of the Act. Aggrieved, the revenue preferred an appeal to the Tribunal.

Held I:

The Tribunal agreed with the contention on behalf of the assessee that the issue is square covered in favor of the assessee by the decision of the Jaipur Bench of the Tribunal in the case of M/s. Gems Paradise vs. ACIT (ITA No. 746/Jp/2011)(AY 2008-09)(order dated 02-12-2012) which was followed by the same bench of the Jaipur Tribunal in Shri Bhandari Jewellers vs. ACIT (ITA No. 746/Jp/2011)(AY 2008-09)(order dated 02- 12-2012). It also observed that similar issue was also considered by the Bangalore Bench of the Tribunal in the case of Tata Teleservices Ltd. vs. DCIT (140 ITD 451)(Bang) which has been decided by following the decision of the Hyderabad Bench of the Tribunal in the case of DCIT vs. Vah Magna Retail (P) Ltd. (ITA No. 905/Hyd/2011)(AY 2007-08)(order dated 10-04-2012) where it has been held that payments made to the banks on account of utilisation of credit card facilities would amount to bank charges and not commission within the meaning of section 194H of the Act.

Following the ratio laid down by these decisions, the Tribunal held that section 194H is not applicable to amounts retained by the bank out of payments made by it to the assessee for tickets booked by credit card.

Held II:

The Tribunal observed that the assessee had filed copies of certificates issued by AO u/s. 195(3)( dated 27-04-2006, 30-03-2007, 31-03-2008 and 31-03-2008 which were addressed to Citibank NA for financial year 2006-07 to 2008-09 respectively. It noted that the said certificates specifically mention that the said bank is authorised to receive the payments, interest without deduction of income-tax u/s. 195(1) in the respective financial years. The Tribunal considered Rule 29B(5) of the Rules and held that the certificates issued u/s. 195(3) of the Act are applicable for the concerned financial years and will not be effective only from the date of issuance thereof. The Tribunal upheld the order of CIT(A) for all the three assessment years.

The appeals filed by the department were dismissed.

Facts I:

The assessee was in the business of production and distribution of advertising films. It also provided other assistance like making available locations, equipments, models and crew to the foreign as well as domestic companies. The assessee claimed depreciation on certain paintings purchased by it on the ground that these are utilised in the said preparation/advertising films, etc.

The AO was of the view that the presence of paintings is immaterial for the conduct of business. He, accordingly, disallowed depreciation claimed by the assessee on paintings. Aggrieved, the assessee preferred an appeal to CIT(A) who upheld the action of the AO. Aggrieved, the assessee preferred an appeal to the Tribunal.

Held I:
The Tribunal agreed with the contentions made by the assessee viz. that hiring of the painting for original shoots was unaffordable. Considering the nature of the assessee’s business, they have purchased and utilised the paintings which were either hung in the office or given to the producer for the original shoots, or used in various settings. Therefore, the paintings were also part of furniture. The Tribunal relied on the decision of Chennai Bench of ITAT in the case of Tribunal news Burnside Investments & Holdings Ltd. vs. DCIT (61 ITD 601) where it was held as under

“From the dictionary meaning of the word `furniture’ it is clear that all articles of convenience or decoration used for the purpose of furnishing a place of business or an office are articles of furniture. In the instant case, there was no dispute that these paintings were used as decorations in the office and the office was used for the purpose of business. Therefore, these paintings constitute interior decoration to give a good look to the place of business. Therefore, the assessee was entitled to depreciation on these paintings.”

Following the ratio of the above mentioned decision, the Tribunal decided the issue in favour of the assessee. This ground of appeal was allowed.

Facts II:
In the course of assessment proceedings the Assessing Officer (AO) noticed that the assessee had in respect of certain items of expenditure deducted tax u/s. 194C whereas the applicable provision, according to the AO, was section 194I or section 194J. The AO held that the assessee has short deducted tax. The AO relying on the decisions in the case of CIT vs. Prasar Bharti (292 ITR 580)(Del) and Chambers of Commerce of Income-tax Consultant vs. CBDT 75 Taxman 669 (Bom) and All Gujarat Federation vs. CBDT (214 ITR 2) disallowed the expenditure on which there was short deduction. Aggrieved, the assessee preferred an appeal to CIT(A) who confirmed the action of the AO. Aggrieved, the assessee preferred an appeal to the Tribunal where interalia relying on the ratio of Calcutta High Court decision in the case of CIT vs S. K. Tekriwal (2012-TIOL-1057-HC-KOL-IT) it was contended that provisions of section 40(a)(ia) can be only invoked if there is no deduction of tax but not in a case where there was short deduction.

Held II: Section 40(a)(ia) can be invoked only when tax has not been deducted or has not been paid as per the provisions. Since the assessee had deducted tax u/s. 194C instead of section 194I or section 194J, the Tribunal held that it is not a case of non-deduction of tax. The Tribunal held that when tax was deducted by the assessee, even under bonafide impression under wrong provisions of TDS, provisions of section 40(a) (ia) cannot be invoked. It observed that this principle is being uniformly followed by various co-ordinate Benches and has approval of Calcutta High Court in the case of CIT vs. S. K. Tekriwal (supra). Therefore, disallowance u/s. 40(a)(ia) cannot be upheld. It was also observed that the revenue had not taken any steps u/s. 201 wherein the issue whether the deduction has to be made u/s. 194I or 194J or 194C can be considered /examined. This ground was decided in favour of the assessee.