Income Tax Appellate Tribunal - HyderabadDy. Commissioner Of Income Tax , ... vs Integrated Cleanroom Technologies ... on 17 September, 2021IN THE INCOME TAX APPELLATE TRIBUNAL\n               HYDERABAD BENCHES "A": HYDERABAD\n\n                  (THROUGH VIRTUAL CONFERENCE)\n\n      BEFORE SHRI SATBEER SINGH GODARA, JUDICIAL MEMBER\n                           AND\n         SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER\n\n\n                       ITA No. 428/H/2020\n                     Assessment Year: 2017-18\n\nDy. Commissioner of Income        Vs.    M/s Integrated Cleanroom\nTax, Circle 2(1)                         Technologies Pvt. Ltd.\nHyderabad                                Hyderabad\n\n                                         [PAN: AABCI0328R]\n         (Appellant)                            (Respondent)\n\n                    Revenue by: Sri Kiran Katta, DR\n                    Assessee by: Sri S. Rama Rao\n\n               Date of hearing:          16/08/2021\n       Date of pronouncement:             17/09/2021\n\n\n                                 O R D E R\n\n PER L.P. SAHU, A.M.:This appeal is filed by the Revenue against the order passed by the CIT(A)-2,\n Hyderabad order dated 18th Feb., 2020 involving proceedingsu/s 143(3)of\n the Income Tax Act, 1961 [in short "the Act"]; on the following grounds of\n appeal.1. The Ld CIT(A) erred in allowing the claim of the expenses as revenue\n       which has enduing benefit in the form of employee performance and thus\n       need to be capitalized?Rs.78,54,960/-2. The CIT(A) erred in allowing the expenditure claimed which was not\n       actually spent by the assessee to be allowed as such. It is a notional\n       loss which was claimed as expenditure in the current year. The same\n       is not allowable to be debited to P&L Account.ITA No. 428/Hyd/2020AY 2017-18\n                         DCIT vs. M/s Integrated Cleanroom Technologies Pvt. Ltd.3. The Ld. CIT(A) erred in ignoring the fact that the issue of allowability of\n        ESOP expenditure has not reached finality and the SLP filed against the\n        order of Hon'ble High Court of Delhi in the matter in the case of Mis.\n        Lemon Tree Hotels Pvt Ltd has been admitted by the Hon'ble Supreme\n        Court.4. Whether the CIT(A) is correct in relating the disallowances to exempt\n        income earned during the year whenSec. 14Adoes not use world\n        "income of the year" but "income under the Act" and in light of the\n        clarification issued by the CBDT that Rule 80 r.w.s. 14A provides for\n        disallowance of expenditure where the tax payer in a particular year has\n        not earned any exempt income.Rs.4,57,543/-5. Whether on the facts and circumstances of the case and in law, the CIT(A)\n        is correct in deleting the addition uls l4A r.w.r.8D(2)(ii) is whereas\n        disallowance in rule 8D(2)(ii) is linked to investment, income from which\n        does not or shall not form part of total income and upheld by the Tribunal\n        in the case on M/s Bellwether Micro Finance Funds Vs. ITO6. Any other ground that may be urged during the course of appellate\n        proceedings.At the outset the ld.DR drew our attention to the affidavit filed by the revenue\nrequesting for condonation of delay of 85 days in filing the appeal before us\nwhich was due to Covid pandemic and subsequent lock down.\nThe delay is condoned and we proceed with the appeal.2.      Brief facts of the case are that the assessee filed return of income on\n30th October, 2017 admitting loss of Rs.40,89,46,720/-. Later on assessee\nrevised the return on 27th September,2018 admitting total income of Rs.\n40,75,75,260/-; and the case was selected for complete scrutiny and\nstatutory notices were issued to the assessee.2.1. During the course of assessment proceedings the Assessing officer\nobserved that the assessee company has debited into Profit & Loss a/c Rs.\n2,31,02,825/- under the head 'employee stock compensation expenses'. In2ITA No. 428/Hyd/2020AY 2017-18\n                       DCIT vs. M/s Integrated Cleanroom Technologies Pvt. Ltd.this regard the assessee was asked to submit the reply to which the assessee\nsubmitted a detailed calculation along with the value for determining the\nsales as well as the manuals. But the AO was not satisfied and he calculated\ndifference on the basis of DCF method and made necessary adjustment under\nRule 11 UA and accordingly he added Rs. 2,31,02,825/- and added to the\ntotal income of the assessee. Further, the AO also noticed that the assessee\nhas made investments in equity instruments and the opening balance was\nRs. 15,13,85,989/- and as on the end of the balance sheet there was a closing\nbalance of Rs 11,77,57,652/-.               After observing he applied Rule 8D for\ndisallowance    u/s   14A      of    the       Actand       calculated      disallowance   at\nRs.13,45,777/- and added to the income of the assessee.2.2.   Feeling aggrieved from the order of the AO assessee filed appeal before\nthe CIT(A). Before the CIT(A) the assessee filed in details after considering\nwhich, the CIT(A) allowed the appeal of the assessee.2.3.   Aggrieved from the order of the CIT(A), the Revenue is in appeal before\nus.3.     The Ld.DR relied on the order of the AO and further submitted that the\nAO has rightly applied the DCF method under rule 11 UA of the Act therefore\nhe was justified to make disallowanceu/s 37(1)of the Act; in respect of\ndisallowanceu/s 14Ahe submitted that there was certain expenditure which\nmust have been incurred by the assessee which cannot be ruled out because\nthere is a change in the value of the investments in opening and closing of the\nyear, therefore, the AO has rightly calculated disallowanceu/s 14A; case law\nrelied on by the ld.AR is not applicable and is distinguishable on facts of the\ncase on hand.3ITA No. 428/Hyd/2020AY 2017-18\n                       DCIT vs. M/s Integrated Cleanroom Technologies Pvt. Ltd.4.    On the other hand ld.AR relied on the order of the CIT(A) and submitted\nthat the CIT(A) has rightly decided the issue after considering all submissions\nmade before him.5.       After hearing rival contentions and material placed on record, case\nlaws cited, we observe that the CIT(A) has decided the appeal on both issues\nin favour of the assessee, the relevant part is reproduced here under."6. The Decision:The appellant has claimed a sum of Rs.2,31,02,825/- as ESOP expenses\nwhich were disallowed by the Assessing Officer. The appellant stated that the\nexpenses have been claimed as per ICAI guidelines and also SEBI has given\nthe mandate for the payment of the same as per their rules. In view of the same,\nthe expenses should be allowed.The appellant relied on the decision of Hon'ble ITAT in the case ofMindspeed Technologies Vs ACITwhich relied on the special Bench decision of\nBengaluru Bench of Tribunal in the case of Biocon Limited Vs ACIT.The\nAssessing Officer relied on the decision ofRanbaxy Laboratories Vs Add1.CITdated 12.06.2009 of the Hon'ble ITAT Delhi and the decision of Mumbai Bench\nof Hon'ble ITAT in the case ofVIP Industries Vs DCIT. The Assessing Officer\nnoted that the department has contested the decision of the jurisdictional ITAT\nas cited by the appellant at a higher forum. The Assessing Officer therefore,\ndisallowed the expenses.The Assessing Officer further noted that the fair value per share was only\nRs.330AO and not as claimed by the appellant as per DCF method.\nThe Assessing Officer however disallowed the entire expenses claimed as ESOP\nas not allowable.It is seen that on this issue, the Hon'ble Karnataka High Court in the case\nof Pr.Commissioner of Income Tax vs M/ s Microchip Technology vide order\ndated 16.08.2018 in I.T.A. No.241/2017 has observed as under regarding the\nESOP expenses:(2) Whether on the facts and in the circumstances of the case, the Tribunal\nis right in law admitting additional ground of assessee with regard to claim of\nESOP expenses whereby the Tribunal has allowed the claim by following the\ndecision in case of M/s. Biocon Ltd even when no such claim is made before\nassessing authority and as well as in return of income filed for the year in\nquestion. "4ITA No. 428/Hyd/2020AY 2017-18\n                       DCIT vs. M/s Integrated Cleanroom Technologies Pvt. Ltd."23. We have considered the rival submissions as well as the relevant\nmaterial on record. There is not dispute that for the year under consideration\nthe assessee did not claim the deduction in respect of the payment made to the\nparent company on account of Employees Stock Option and compensation.\nHowever we find that an identical issue has been considered in assessee's own\ncase for the Assessment Year 2008-09 and it was held that it is an allowable\ndeduction. Therefore, so far as the issue of allowability of the deduction is\nconcerned it has been decided in favour of the assessee by this tribunal by\nfollowing the decision of the Special Date of Judgment 16-8-2018, ITA No.\n241/2017 The Pr. Commissioner of Income Tax - 7 & Anr. Vs.\n\n     The Hon'ble High Court of Delhi in ITA 107/2015 in the case ofCIT vs\nLemon Tree Hotels Ltd.vide order dated 18.08.2015 has adjudicated as under:"2. The question sought to be projected by the Revenue is whether the ITAT\nerred in deleting the addition of Rs. 1,28,19,169/- made by the Assesssing\nOfficer ('AO') by way of disallowance of the expenses debited as cost of\nEmployees Stock Option ('ESOP') in profit and loss account?\nhttp://www.itatonline.org ITA No. 107/2015 Page 2 of 23. The Court has been\nshown a copy of the decision dated 19th June 2012 passed by the Division\nBench of Madras High Court inCIT-III Chennai v. PVP Ventures Ltd. (TC{A) No.1023 of 2005) where a similar question was answered in favour of the Assessee\nby holding that the cost of ESOP could be debited to the profit and loss account\nof the Assessee.This Court has also in its decision dated 4th August 2015 in\nITA No.2 of 2002 (CIT v. Oswal Agro Mills Ltd.) held that the expenditure\nincurred in connection with issue of debentures or obtaining loan should be\nconsidered as revenue expenditure. 4. In the circumstances, the impugned\norder of the ITAT answering the question in favour of the Assessee is affirmed.The Hon'ble ITAT Delhi in the case of Ranbaxy Laboratories has also\ndecided the issue subsequently in the favour of the assessee for AY 2008-09 inITA No. 196/Del/2013 vide order dated 25-4-2016 as reported in 68taxmann.com 322.Thus, the Hon'ble ITAT of Hyderabad, the jurisdictional Bench has\nalready decided the issue holding ESOP expenses as allowable ujs. 37(1) and\nfurther as the Hon'ble High Courts of Delhi and Karnataka have also decided\nthe issue of allowability of ESOPs as revenue expenditure, therefore the ESOP\nexpense claimed by the appellant has to be allowed in principle accordingly.As regards the quantum of allowance, the appellant has calculated the\nESOPs on the basis of market value of Rs. 505 and has charged the employees\nRs. 100 (face value being Rs. 10 and security premium Rs. 90). The difference\nhas been considered as an expense and the relevant perquisite has been5ITA No. 428/Hyd/2020AY 2017-18\n                       DCIT vs. M/s Integrated Cleanroom Technologies Pvt. Ltd.accounted for in the hands of employees and the same have been taxed in their\nhands and due TDS has been deducted by the appellant.The Assessing Officer however has taken the value as per book value by\nconsidering the value around Rs. 335/- and the Assessing Officer has\ncommented that the valuation taken at Rs. 505/- is very high. The appellant\nhas followed the DCF method and no fault has been found in the same by the\nAssessing Officer with regard to the parameters considered for the said\nvaluation and the AO simply brushed aside that it is based on future\nprojections. DCF method is a method prescribed by theIncome Tax Actand the\nvaluation requires future projections, therefore, the act of the AO in not\nexamining and not finding anything improper and merely rejecting the value\nwas incorrect. The appellant has also justified the financials considered for DCF\nmethod in its submission dated 18.02.2020 in the para 6. The same is\nreproduced as under:From the above statement actuals are little higher than the valuation as\nper DCF method and hence the estimates are reasonably good and are not\nmade with intention to value share at higher price to claim expenses at a higher\nrate.From above, it is noted that the three years average cash flow as taken\nby the valuer for DCF method at the time of issuance was 31.95, whereas as\nper actual as on today, the three years cash flow is 32.29. Thus, the DCF\nmethod has estimated a fair value of the company by considering correct\nfinancials.In view of the above, the method adopted by the appellant is reasonable\nand therefore there is no change required in the valuation. To sum up, the ESOP\nexpenses are allowable and the ESOP has been calculated at a fair value and\ntherefore the sum of Rs. 2,31,02,829/- is allowable as revenue expenditure. In\nview of the above the ground no. 1 is allowed.6ITA No. 428/Hyd/2020AY 2017-18\n                       DCIT vs. M/s Integrated Cleanroom Technologies Pvt. Ltd.The ground no. 2 relates to addition on account ofsection 14Aof Rs.\n13,45,717/- being 1% of the investments made of Rs.13,45,71,770/-. The\nappellant has stated that it does not have any exempt dividend income and\ntherefore the disallowance ix]». 14A is not called for. There is a jurisdictional\nITAT decision in the situation, wherein the disallowanceu/s. 14Acannot be\nmade if the appellant has not earned any exempt income. The extract of the\ndecision in the case ofDCIT Vs. Maheshwari Mega Ventures Limited,\nHyderabadin ITA No. 367/Hyd/2013 dated 03.02.2017 is reproduced as\nbelow:"22. Considered the rival submissions and perused the material facts on\nrecord. As per the P&L account and balance sheet submitted before us, the\nassessee had not earned any exempt income. The provisions ofsection 14Awill\nbe applied to find the expenditure relating to exempt income. In the absence of\nsuch exempt income, no expenditure can be disallowed in relation to exempt\nincome. Accordingly, we uphold the decision of CIT(A) and dismiss the ground\nraised by the revenue. "In view of the above, as there is no exempt income, the disallowanceu/s. 14Acannot be made and the Ad is directed to delete the disallowance\nmadeu/s 14Aand accordingly the ground no. 2 is allowed.To sum up appeal is allowed."5.1. From the above order of the CIT(A), we observe that he had done well\nreasoned order and we do not find any infirmity in the order of the CIT(A).\nLd.CIT(A) after considering submissions and case laws cited/relied on by the\nassessee, he has rightly allowed the appeal of the assessee on the issue of\nESOP compensation expenses. We also notice from the above order of the\nCIT(A) that the disputed amount has already been considered as a perquisite\nin the hands of the employees while calculating income of the employees\nTherefore this ground of revenue is dismissed.5.2. We also observe from the order of the CIT(A) and financial statements\nfiled by the assessee before us that in the impugned AY the assessee has not\nreceived any exempt income, therefore, no disallowance can be made.               In\nsupport of the above reasoning we rely on the following judgements.7ITA No. 428/Hyd/2020AY 2017-18\n                         DCIT vs. M/s Integrated Cleanroom Technologies Pvt. Ltd.(i) Hon'ble High Court of Karnataka in the case ofCIT vs. Biocon Ltd. On28th\nAug.2019(ii) Hon'ble High Court of Delhi in the case ofCIT vs. Lemon Tree Hotels Ltd.Order dated 18.08.2015\n\n\n\nCIT(A) also considered this issue after relying on the judgement of coordinate\nbench of this tribunal in ITA 369/Hyd/2013 dated 3rd Feb., 2017.\nAccordingly, there is no substance in the grounds raised by the revenue\nregarding disallowanceu/s 14Ain the case of the assessee. Therefore, this\nground of appeal of revenue is dismissed.6.        In the result, appeal of the Revenue is dismissed.Pronounced in the open court on 17 t h                     September, 2021.Sd/-                                         Sd/-\n\n\n          (S.S. GODARA)                           (L. P. SAHU)\n         JUDICIAL MEMBER                     ACCOUNTANT MEMBER\n\nHyderabad\nDated: 17 t h September, 2021.\n*gmv\n\n\n\nCopy to :\n\n\n\n     1    Dy.CIT, Circle 2(1), Hy derabad\n     2    M/s Integrated Cleanroom Technologies Pvt.Ltd, 8 -3-903/F/11,Flat no. 303, Surabhi Lotus Apartments, Nagarjuna Nagar\n          Colony, Ameerpet, Hyderabad\n 3&4      CIT(A)-2 / Pr.CIT-2, Hyderabad\n  5       ITAT, DR, Hyderabad.6       Guard File.8