, ""
IN THE INCOME TAX APPELLATE TRIBUNAL "F" BENCH, MUMBAI
BEFORE HON'BLE S/SHRI D. MANMOHAN , VICE-PRESIDENT
AND B.R.BASKARAN (AM)
, . , .. ,
./I.T.A. No.2654/Mum/2012
( / Assessment Year : 2008-09)
Future Agrovet Ltd., / Addl. CIT, Range-9(1),
Knowledge House, Vs. Aayakar Bhavan, M.K.Road,
Hoo Jogeshwari Vikhroli Link Mumbai-400020.
Road,
Shyam Nagar,
Jogeshwari (E),
Mumbai-400060.
( /Appellant) .. ( / Respondent)
. / . / PAN/G IRNo.:AAD CP5377P
/ Appellant by : Shri Vipul Joshi
/Respondent by : Shri Sambit Mishra
/ Date of Hearing
: 24.7.2014
/Date of Pronouncement : 19.9.2014
/ O R D E R
Per B.R.BASKARAN, Accountant Member:
The appeal filed by the assessee is directed against the order dated 16-
02-2012 passed by Ld CIT(A)-16, Mumbai and it relates to the assessment year
2008-09. The disallowance of claim for deduction of Rs.1.00 crore relating to the
value of Sweat Equity Shares issued by it to its key persons, having been
confirmed by Ld CIT(A), the assessee has filed this appeal before us.
2. The facts relating to the above said issue are stated in brief. The
assessee company is engaged in the business of trading in grocery, food-grains
& provision 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:-
2 I.T.A. No.2654/Mum/2012
(a) Shri Narendra Baheti - Rs. 50,00,000/-
(b) Shri Rajendra Baheti - Rs. 50,00,000/-
-----------------------
- Rs.1,00,00,000/-
============
Each of the above said people was allotted 5,00,000 equity shares at par value
of Rs.10/- per share at free of cost. The assessee claimed the above said
amount of Rs.1.00 crore as expenditure. Before the AO, the assessee submitted
that the provisions relating to Fringe Benefit Tax (sec. 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.1.00 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 u/s 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 AO held that the above said claim is not allowable u/s 37 of the
Act. In this regard, he placed reliance on the decision rendered by ITAT in the
case of Ranbaxy Laboratories ltd Vs. Addl. CIT (2009)(124 TTJ (Del) 771).
Accordingly, the AO disallowed the claim of Rs.1.00 crore made by the
assessee.
3. The Ld CIT(A) also confirmed the disallowance made by the assessing
officer, by placing reliance on the decision rendered in the case of Ranbaxy
Laboratories Ltd (supra). Aggrieved, the assessee has filed this appeal before
us.
4. Before us, the Ld A.R 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
3 I.T.A. No.2654/Mum/2012
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 (supra) 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 authorizing 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 Vs. PVP Ventures (2013)(90 DTR (Mad) 340)
(b) Biocon Ltd Vs. DCIT (2013)(25 ITR (Trib) 602)(Bangalore)(SB)
(c) SSI Limited Vs. DCIT (2004)(85 TTJ 1049)(Chennai)
(d) ACIT Vs. Spray Engineering Devices Ltd (2012)(53 SOT 70)(Chd)
(e) DCIT Vs. Accenture Services (P) Ltd (ITA No.4540/M/08 dt. 23.3.2010)
(f) Novo Nordisk India P Ltd Vs. DCIT (2013)(37 CCH 414)(Bangalore)
The Ld A.R also invited our attention to the provisions relating to fringe benefit
tax.
5. On the contrary, the Ld D.R 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 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 Ld D.R 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 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 Ld D.R 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
4 I.T.A. No.2654/Mum/2012
year, the option of sweat equity shares would lapse. Accordingly, the ld D.R
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 sec. 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 Ld D.R further pointed out that the Sweat Equity
shares have been classified as a Capital asset u/s 2(42A)(hb) of the Act.
6. In the rejoinder, the Ld A.R invited our attention to the letter dated 07-01-
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 the tax authorities have placed reliance on the decision rendered in the
case of Ranbaxy Laboratories Ltd, referred supra. A perusal of the discussions
made by Ld CIT(A) about the facts prevailing in Ranbaxy Laboratories Ltd 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 Ld A.R 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
Ld A.R invited our attention to Circular No.8 of 2005 dated 29-08-2005 issued by
the CBDT giving clarifications about the Fringe Benefit Tax. The Ld A.R invited
our attention to the 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 Ld A.R drew an inference, apparently
on reverse interpretation, that if the Fringe benefit tax is accepted, then the
5 I.T.A. No.2654/Mum/2012
expenditure is allowable as revenue expenditure. We are unable to agree with
the said contentions. As submitted by Ld D.R, the income from business has to
be necessarily computed in terms of sec. 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
CBDT in the answer to Q. No.35 given in Circular No.8 of 2005 dated 29-08-
2005, wherein it is stated that the fringe benefit tax is payable only on the amount
allowed under the provisions of 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 sec.
37(1) of the Act. Further our attention was invited to the provisions of sec.
115WKA which provide for recovery of fringe benefit tax by the employer from
employee and also to the provisions of sec. 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 u/s
115WC(1)(ba) of the Act. Hence, a specific question was put to the Ld A.R as to
whether the above said employees have disclosed the value of sweat equity
shares as their respective income, the Ld A.R submitted that they have not
declared the same as their respective income. In any case, the methodologies
prescribed in the provisions relating to Fringe benefit tax for payment / recovery
of tax may not be relevant to determine about the deductibility of an expenditure
u/s 37(1) of the Act.
9. Now we shall examine the definition given for "Sweat equity shares" in the
Explanation below to sec. 115WB(1) 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 is 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, the employees or directors
should provide "intangible assets" of the nature specified in the above said
definition to the company for obtaining the equity shares at a "discount" or "for
6 I.T.A. No.2654/Mum/2012
consideration other than cash". If shares are issued at "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 31.3.2008,
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 14th November, 2007. The share holders
had passed a special resolution in the extra-ordinary general meeting held
on 29th December, 2007 to authorize such allotment. The shares were
allotted on 16th January, 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 18-
10-2007 given by M/s Doogar & Associates, Chartered Accountants who had
valued the consideration for proposed issue of Sweat Equity Shares to both the
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 authorized with the stipulation
that they will be entitled for the same after the completion of one year from the
7 I.T.A. No.2654/Mum/2012
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 &
grocery outlets and frame the organization 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 13.04.2005.
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 the 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 Ld CIT(A) on this issue.
13. In the result, the appeal filed by the assessee is dismissed.
The above order was pronounced in the open court on 19th Sep, 2014.
19th Sep, 2014
Sd sd
(. /D. MANMOHAN) (.. ,/ B.R. BASKARAN)
/VICE- PRESIDENT /ACCOUNTANT MEMBER
Mumbai: 19th Sep,2014.
8 I.T.A. No.2654/Mum/2012
. ../ SRL , Sr. PS
/Copy of the Order forwarded to :
1. / The Appellant
2. / The Respondent.
3. () / The CIT(A)- concerned
4. / CIT concerned
5. , , /
DR, ITAT, Mumbai concerned
6. / Guard file.
/ BY ORDER,
True copy
(Asstt. Registrar)
, /ITAT, Mumbai
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