I.T.A. No.2654/Mum/2012

SHRI D. MANMOHAN AND B.R.BASKARAN, JJ.

ORDER

The order of the Bench was delivered by

B. R. BASKARAN (Accountant Member).-The appeal filed by the assessee is directed against the order dated February 16, 2012 passed by the learned Commissioner of Income-tax (Appeals)-16, Mumbai and it relates to the assessment year 2008-09. The disallowance of claim for deduction of Rs. 1 crore relating to the value of sweat equity shares issued by it to its key persons, having been confirmed by the learned Commissioner of Income- tax (Appeals), the assessee has filed this appeal before us.

2. The facts relating to the abovesaid issue are stated in brief. The assessee- company is engaged in the business of trading in grocery, food grains and provisions store items. It is stated that the company was earlier known as "Pantaloon Food Product India Ltd." During the year under consideration, the assessee-company issued sweat equity shares to the following persons :

Each of the abovesaid people was allotted 5,00,000 equity shares at par value of Rs. 10 per share at free of cost. The assessee claimed the abovesaid amount of Rs. 1 crore as expenditure. Before the Assessing Officer, the assessee submitted that the provisions relating to fringe benefit tax (section 115WC(1)) requires the assessee to pay fringe benefit tax on the value of sweat equity shares allotted to the employees and it has also paid the fringe benefit tax on the above said amount of Rs. 1 crores. Accordingly it was submitted that the sweat equity shares is a kind of fringe benefit given to its employees and the same is allowable as revenue expenditure. However, the Assessing Officer rejected the said explanation with the following observations :

            "This explanation is not acceptable as the loss is not on account of any expenditure or incurring any liability for such expenditure. For claiming such expenses as allowable under section 37(1), the assessee has to qualify that expenses are incurred and the same are wholly and exclusively for the purpose of business. By issuing shares at lesser than market price, the assessee cannot be said to have incurred expenditure rather it amounts to short receipt of capital."

Accordingly, the Assessing Officer held that the abovesaid claim is not allowable under section 37 of the Act. In this regard, he placed reliance on the decision rendered by the Income-tax Appellate Tribunal in the case of Ranbaxy Laboratories Ltd. v. Addl. CIT [2009] 124 TTJ (Delhi) 771. Accordingly, the Assessing Officer disallowed the claim of Rs. 1 crore made by the assessee.

3. The learned Commissioner of Income-tax (Appeals) also confirmed the disallowance made by the Assessing Officer, by placing reliance on the decision rendered in the case of Ranbaxy Laboratories Ltd. v. Addl. CIT [2009] 124 TTJ (Delhi) 771. Aggrieved, the assessee has filed this appeal before us.

4. Before us, the learned authorised representative mainly placed reliance on the provisions relating to fringe benefit tax to contend that the "sweat equity shares" issued to the employees would fall in the category of revenue expenditure. He submitted that the salary package given to the two key employees provided for issue of sweat equity shares at free of cost and their respective salary package has also been approved by the Central Government. He further submitted that the decision rendered in the case of Ranbaxy Laboratories Ltd. v. Addl. CIT [2009] 124 TTJ (Delhi) 771 will not apply to the facts of the instant case. He further submitted that the board of directors of the assessee-company has also passed a resolution authorising the issue of the sweat equity shares to the two employees. He placed his reliance on the following case law to support his contentions that the sweat equity shares are given as an incentive to motivate the employees and hence it is allowable as revenue expenditure :

            (a) CIT v. PVP Ventures Ltd. (2013)(90 DTR (Mad) 340)
             (b) Biocon Ltd v. Deputy CIT [2013] 25 ITR (Trib) 602 (Bang) [SB]
             (c) SSI Ltd. v. Deputy CIT [2004] 85 TTJ (Chennai) 1049
             (d) CIT (Asst.) v. Spray Engineering Devices Ltd. 2012)(53 SOT 70)(Chd)
             (e) Deputy CIT v. Accenture Services P. Ltd (I. T. A. No. 4540/M/08 dated March 23, 2010)
             (f) Novo Nordisk India P Ltd v. Deputy CIT [2013] 37 CCH 414 (Bang)
The learned authorised representative also invited our attention to the provisions relating to the fringe benefit tax.

5. On the contrary, the learned Departmental representative submitted that the case law relied upon by the assessee relate to the shares issued under ESOP scheme and hence the ratio of those decisions could not applied to the facts prevailing in the instant case, as the objective of issuing shares under ESOP scheme and sweat equity scheme is different. He submitted that the approval given by the Government of India for issuing shares to Mr. Narendra Baheti provided for issuing shares "for a consideration other than cash" and further it states that the shares have to be issued after one year from the date of commencement of business and within the period of 5 years. Accordingly, the learned Departmental representative submitted that these shares have to be issued for a non- monetary consideration. He further submitted that the condition No. 11 stated in the approval given by the Government of India clearly states that the approval given under the Companies Act should not be construed to convey the approval of the Central Government or any other statutory authority under it, under any other law or regulations for the time being in force. Referring to the valuation report placed at pages 30 to 54 of the paper book, more particularly to page 38 of the paper book, the learned Departmental representative submitted that the issuance of sweat equity shares is dependent upon the development to be achieved by the employees and if the developments are not satisfactorily achieved in the first year, the option of sweat equity shares would lapse. Accordingly, the learned Departmental representative submitted that the issuance of sweat equity shares cannot be considered as part of salary package, but it is only an optional one, which is dependent upon the developments achieved. He further submitted that the business income of the assessee has to be computed in accordance with the provisions of sections 28 to 43 of the Act and the fact that value of free shares allotted to the key employees has suffered fringe benefit tax would not give ticket to convert a capital expenditure into revenue expenditure. The learned Departmental representative further pointed out that the sweat equity shares have been classified as a capital asset under section 2(42A)(hb) of the Act.

6. In the rejoinder, the learned authorised representative invited our attention to the letter dated January 7, 2008 given to the Assessing Officer, which is placed at page 29 of the paper book, and submitted that the assessee has given prior intimation the Assessing Officer about the approval given by the Government of India for issuing sweat equity shares for the purpose of fringe benefit tax.

7. We have heard the rival contentions and perused the record. We notice that both tax authorities have placed reliance on the decision rendered in the case of Ranbaxy Laboratories Ltd. v. Addl. CIT [2009] 124 TTJ 771 (Delhi) referred supra. A perusal of the discussions made by the learned Commissioner of Income-tax (Appeals) about the facts prevailing in Ranbaxy Laboratories Ltd. v. Addl. CIT [2009] 124 TTJ (Delhi) 771 would show that the issue considered therein was different one, i.e., the assessee therein claimed the difference between the "market value" of shares and the "issue price" as expenditure. However, in the instant case, the assessee has issued shares at free of cost and hence the entire value of shares is treated as part of employee benefit and accordingly the value of sweat equity shares was claimed as deduction.

8. Before us, the learned authorised representative mainly placed reliance on the provisions of fringe benefit tax to contend that the assessee, having paid the fringe benefit tax, should be allowed to claim the value of sweat equity shares as deduction. The learned authorised representative invited our attention to Circular No. 8 of 2005 dated August 29, 2005 issued by the Central Board of Direct Taxes giving clarifications about the fringe benefit tax. The learned authorised representative invited our attention to question No. 35 and the answer given to it, wherein it is clarified that the fringe benefit tax is not payable on the portion of expenses, which were disallowed. Accordingly, the learned authorised representative drew an inference, apparently on reverse interpretation, that if the fringe benefit tax is accepted, then the expenditure is allowable as revenue expenditure. We are unable to agree with the said contentions. As submitted by the learned Departmental representative, the income from business has to be necessarily computed in terms of sections 28 to 43 of the Act. The computation of fringe benefit tax is a subsequent exercise. Accordingly, if any expenditure is disallowed while computing the business income, then the assessee may not be liable to pay the fringe benefit tax. This position has been made clear by the Central Board of Direct Taxes in the answer to Question No. 35 given in Circular No. 8 of 2005 dated August 29, 2005 ([2005] 277 ITR (St.) 20 ) wherein it is stated that the fringe benefit tax is payable only on the amount allowed under the provisions of the Income tax Act. Hence, in our view, the Assessing Officer was right in holding that the question of allowability of the impugned claim should be independently tested in terms of the provisions of section 37(1) of the Act. Further our attention was invited to the provisions of section 115WKA which provide for recovery of fringe benefit tax by the employer from employee and also to the provisions of section 115WKB of the Act which states that the fringe benefit tax so recovered shall be deemed to be the tax paid by such employee in respect of the value of fringe benefit as determined under section 115WC(1)(ba) of the Act. Hence, a specific question was put to the learned authorised representative as to whether the above said employees have disclosed the value of sweat equity shares as their respective income, the learned authorised representative submitted that they have not declared the same as their respective income. In any case, the methodologies prescribed in the provisions relating to the fringe benefit tax for payment/recovery of tax may not be relevant to determine about the deductibility of an expenditure under section 37(1) of the Act.

9. Now we shall examine the definition given for "sweat equity shares" in the Explanation below to section 115WB(1)(ii) of the Act :

            "'Sweat equity shares' means equity shares issued by a company to its employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called."

Thus, it is seen that the sweat equity shares are issued for consideration "other than cash" for providing know-how or for making available rights in the nature of intellectual property rights or value additions. Thus, employees or directors should provide "intangible assets" of the nature specified in the above said definition to the company for obtaining equity shares at a "discount" or "for consideration other than cash". If shares are issued "free of cost" without acquiring any intangible assets of the nature specified in the above said definition, in our view, the same would not fall in the category of "sweat equity shares".

10. The notes of accounts attached to the balance-sheet as at March 31, 2008, which is placed at page 27 of the paper book, states about the issue of sweat equity shares as under :

              "During the year the company has issued equity shares of Rs. 50,00,000 each (5,00,000 equity shares of Rs. 10 each) to Mr.Narendra Baheti (Managing Director) and Mr. Rajendra Baheti (Zonal Head North Zone) as per board resolution dated November 14, 2007. The shareholders had passed a special resolution in the extraordinary general meeting held on December 29, 2007 to authorise such allotment. The shares were allotted on January 16, 2008. The sweat equity shares have been issued for consideration other than cash for providing professional services."

Thus it is seen that the assessee has issued equity shares for providing "professional services", which has been considered as value addition by the assessee-company. This fact has further been elaborated in the report dated October 18, 2007 given by M/s. Doogar and Associates, Chartered Accountants who had valued the consideration for proposed issue of sweat equity shares to both employees. In the said report, it is stated that the business concept of selling staples such as sugar, rice, pulses, wheat/atta etc., in open drums was introduced by Mr. Baheti (one of the employees) for the first time in the name of "Food bazaar", which became a great hit with the consumers. Considering the vast experience in the trading, procurement, business development and managing qualities of Mr. Narendra Baheti, he was made the managing director of the assessee-company. Another employee Shri Rajendra Baheti is a chartered accountant and he had joined hands with Mr. Narendra Baheti in developing food bazaars and was in-charge of procurement of staples. Hence he was appointed as Zonal Head-North.

11. From the valuation report furnished by the consultant cited above, we notice that the issuing of sweat equity shares was authorised with the stipulation that they will be entitled for the same after the completion of one year from the date of commencement of business subject to the condition that he will develop the supply chain to meet PRIL (holding company) requirement for their food and grocery outlets and frame the organisation structure in such a way that PFPIL (old name of the assessee herein) develop its system with the development of PRIL's business. The sweat equity shares shall be issued within first five years and if developments are not achieved satisfactorily in the first year, aforesaid option of sweat equity will lapse. From the report given under the heading "Business activities of the company", it is seen that the assessee-company was formed originally in the name of Pantaloon Food Product India Ltd (PFPIL) as a wholly owned subsidiary of Pantaloon Retail (India) Ltd (PRIL) on April 13, 2005. The turnover target was fixed at Rs. 50 crores for the first year of operations and the same was achieved. Hence both the persons cited above were allotted sweat equity shares during the year under consideration.

12. The foregoing discussions would show that the sweat equity shares were issued to the above said two persons for "value addition" as given in the definition of the expression "sweat equity shares". As discussed earlier, the value addition was given by the above said persons to the assessee- company in the form of their vast experience in new business concepts and professional experience. Under these set of facts, in our view, the value addition would partake the character of an intangible asset in the hands of the assessee-company. Since the sweat equity shares were issued for acquiring value addition, in our view, the tax authorities are justified in holding the same as "capital expenditure" in the hands of the assessee- company. Accordingly, we uphold the order of the learned Commissioner of Income-tax (Appeals) on this issue.

13. In the result, the appeal filed by the assessee is dismissed.

The order pronounced in the open court on 19th September, 2014.