ACIT, CHENNAI v. Murugappa Management Services Ltd., CHENNAI

ITA 304/CHNY/2013 | 2009-2010
Pronouncement Date: 15-10-2013 | Result: Dismissed

Appeal Details

RSA Number 30421714 RSA 2013
Assessee PAN AAACT1164F
Bench Chennai
Appeal Number ITA 304/CHNY/2013
Duration Of Justice 7 month(s) 26 day(s)
Appellant ACIT, CHENNAI
Respondent Murugappa Management Services Ltd., CHENNAI
Appeal Type Income Tax Appeal
Pronouncement Date 15-10-2013
Appeal Filed By Department
Order Result Dismissed
Bench Allotted C
Tribunal Order Date 15-10-2013
Date Of Final Hearing 19-08-2013
Next Hearing Date 19-08-2013
Assessment Year 2009-2010
Appeal Filed On 19-02-2013
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : CHENNAI BEFORE DR. O.K. NARAYANAN VICE PRESIDENT & SHRI VIKAS AWASTHY JUDICIAL MEMBER I.T.A. NO. 304/MDS/2013 ASSESSMENT YEAR : 2009-10 ASST. COMMISSIONER OF INCOME TAX COMPANY CIRCLE IV(3) AAYAKAR BHAVAN MAIN BUILDING IV FLOOR 121 M.G. ROAD NUNGAMBAKKAM CHENNAI 600 034. (APPELLANT) VS M/S. MURUGAPPA MANAGEMENT SERVICES LTD. DARE HOUSE EXTENSION 234 NSC BOSE ROAD CHENNAI 600 001. [PAN: AAACT 1164 F] (RESPONDENT) REVENUE BY : SHRI ARUN C. BHARAT CIT ASSESSEE BY : SHRI R.VIJAYARAGHAVAN ADVOCATE DATE OF HEARING : 19-08-2013 DATE OF PRONOUNCEMENT : 15-10-2013 O R D E R PER VIKAS AWASTHY JUDICIAL MEMBER: THE APPEAL HAS BEEN FILED BY THE REVENUE AGAINST T HE ORDER OF THE COMMISSIONER OF INCOME TAX(APPEALS)-V CHENN AI DATED 30-11-2012 RELEVANT TO THE ASSESSMENT YEAR (AY) 200 9-10. 2. THE ASSESSEE FILED ITS RETURN OF INCOME FOR THE AY. 2009-10 ON 25-09-2009 DECLARING ITS TOTAL INCOME AS ` 87 84 643/-. THE I.T.A. NO. 304/MDS/2013 2 CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY AND NOTICE U/S. 143(2) OF THE INCOME TAX ACT 1961 (HEREIN AFTER RE FERRED TO AS THE ACT) WAS ISSUED TO THE ASSESSEE ON 19-08-2010. DU RING THE COURSE OF ASSESSMENT THE ASSESSING OFFICER OBSERVE D THAT THE ASSESSEE HAS OBTAINED SECURED LOAN OF ` 5.50 CRORES FROM HDFC BANK. THE ASSESSEE HAS PAID INTEREST TO THE TUNE O F ` 79.95 LAKHS THEREON AND HAS CLAIMED THE SAME AS EXPENDITURE UND ER THE PROVISIONS OF SECTION 37(1) OF THE ACT. THE ASSESS EE-COMPANY HAS FORMED MURUGAPPA EMPLOYEES FOUNDATION TRUST TO IMPLEMENT EXECUTE AND ADMINISTER EMPLOYEES WELFAR E CUM SHARE PURCHASE OPTION SCHEME. IN PURSUANCE THEREOF THE TRUST HOLDS THE SHARES OF THE GROUP COMPANIES TO BE ALLOT TED UNDER EMPLOYEES STOCK OPTION SCHEME (ESOP) FOR THE BENEFI T OF THE EMPLOYEES THE SHARES ARE ALLOTTED BY THE TRUST AS AND WHEN THE EMPLOYEES OPT FOR THE SCHEME. THE ASSESSEE ADVANCE D A LOAN OF ` 5.50 CRORES TO THE TRUST WITHOUT CHARGING INTEREST. THE ASSESSING OFFICER WAS OF THE VIEW THAT SINCE THE ASSESSEE HAS NOT CHARGED ANY INTEREST ON LOAN OF ` 5.50 CRORES GIVEN TO MURUGAPPA EMPLOYEES FOUNDATION WHEREAS IT HAS PAID INTEREST T O THE TUNE OF ` 79.95 LAKHS THE EXPENDITURE ON PAYMENT OF INTEREST IS NOT ADMISSIBLE AS EXPENDITURE. THE TRUST HAS INVESTED THE LOAN FUND IN SHARES OF MURUGAPPA GROUP COMPANIES FROM WHICH I T HAD I.T.A. NO. 304/MDS/2013 3 EARNED A DIVIDEND INCOME OF ` 31 LAKHS WHICH EXEMPT FROM TAX. ON THE ONE HAND THE ASSESSEE-COMPANY BEARS AN INTE REST COST WHEREAS ON THE OTHER THE TRUST ENJOYS TAX FREE INC OME ON INVESTMENTS MADE BY THE GROUP COMPANIES. THE ASSES SING OFFICER VIDE ASSESSMENT ORDER DATED 28-12-2011 DIS -ALLOWED THE INTEREST AMOUNTING TO ` 79 94 594/- CLAIMED BY THE ASSESSEE AS EXPENDITURE U/S. 37(1) OF THE ACT. AGGRIEVED AGAINST THE ASSESSMENT ORDER THE ASSESS EE PREFERRED AN APPEAL BEFORE THE CIT(APPEALS). THE C IT(APPEALS) HELD THAT THE EXPENDITURE INCURRED BY THE COMPANY I N PROVIDING ANY BENEFIT OR AMENITY THE VALUE OF WHICH IS TAXABLE I N THE HANDS OF THE EMPLOYEES AS SALARIES (PERQUISITES) IS AN ALLOWABLE EXPENDITURE IN THE HANDS OF THE COMPANY. THE CIT(APPEALS) RELIED ON THE JUDGMENT OF THE HONBLE MADRAS HIGH COURT IN THE CA SE OF CIT VS. PVP VENTURES LTD. REPORTED AS 211 TAXMAN 554 (MAD) WHEREIN IT HAS BEEN HELD THAT EXPENDITURE ON ESOP IS ALLOWABLE EXPENDITURE U/S. 37(1) OF THE ACT. THE CIT(APPEALS) ALLOWED TH E APPEAL OF THE ASSESSEE FOR STATISTICAL PURPOSES WITH THE FOLLOWIN G DIRECTIONS: THE MADRAS HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME TAX-III CHENNAI VS. M/S. PVP VENTURES LIMIT ED (SUPRA) HAS HELD THAT EXPENDITURE ON ESOP IS AN AL LOWABLE EXPENDITURE. THEREFORE THE EXPENDITURE INCURRED BY THE COMPANY BY WAY OF INTEREST PAYABLE ON LOANS BORROWE D FOR I.T.A. NO. 304/MDS/2013 4 ACQUIRING SHARES TO BE GIVEN TO THEIR EMPLOYEES AS PART OF THE ESOP SCHEME IS AN ALLOWABLE EXPENDITURE. HOWEVER THE AO MAY VERIFY THAT THE EXPENDITURE CLAIMED BY THE APPE LLANT COMPANY IS ONLY IN RESPECT OF ESOP SCHEME OF THEIR EMPLOYEES. IF THE BENEFIT HAD ACCRUED TO EMPLOYEES OF ANY OTHER COMPANY THEN THE PRO RATA EXPENDITURE RELATA BLE TO THE SHARES ALLOTTED TO EMPLOYEES OF THEIR GROUP COMPANI ES WILL BE DISALLOWED IN THE HANDS OF THE APPELLANT THOUGH MA Y BY ALLOWED IN THE HANDS OF THOSE RESPECTIVE COMPANIES. SUBJECT TO THIS VERIFICATION THE CLAIM OF THE APPELLANT IS ALLOWABLE. THE AO THEREFORE IS DIRECTED TO ALLOW THE CLAIM OF TH E APPELLANT COMPANY AFTER VERIFICATION. THE GROUNDS ARE CONSID ERED ALLOWED FOR STATISTICAL PURPOSES. AGGRIEVED AGAINST THE ORDER OF THE CIT(APPEALS) TH E REVENUE HAS COME IN APPEAL BEFORE THE TRIBUNAL. 3. SHRI ARUN C. BHARAT APPEARING ON BEHALF OF THE REVENUE SUBMITTED THAT THE ASSESSING OFFICER HAS RIGHTLY DI S-ALLOWED THE INTEREST PAID BY THE ASSESSEE ON BORROWED FUNDS AS THE ASSESSEE HAS ADVANCED INTEREST BEARING FUNDS TO THE TRUST W ITHOUT CHARGING ANY INTEREST. IN AN APPEAL BEFORE THE CIT(APPEALS) THE CIT(APPEALS) HAS ERRONEOUSLY MIXED UP THE ISSUE OF DIS-ALLOWANCE OF INTEREST WITH THE ESOP SCHEME. THE MURUGAPPA E MPLOYEES FOUNDATION HAS INVESTED BORROWED FUNDS IN THE SHARE S OF MURUGAPPA GROUP COMPANIES. FROM THE INVESTMENTS S O MADE IT I.T.A. NO. 304/MDS/2013 5 HAS EARNED TAX FREE DIVIDEND INCOME OF ` 31 LAKHS. THE ASSESSEE HAS TO BEAR THE INTEREST COST OF THE LOAN AMOUNT W HICH IS LENT TO THE TRUST WITHOUT CHARGING ANY INTEREST. THE LD. D R PRAYED FOR SETTING ASIDE THE IMPUGNED ORDER AND STRONGLY SUPPO RTED THE ASSESSMENT ORDER. 4. ON THE OTHER HAND SHRI R. VIJAYARAGHAVAN ADVOC ATE APPEARING ON BEHALF OF THE ASSESSEE SUBMITTED THAT THE ASSESSEE- COMPANY IS IN THE BUSINESS OF RENDERING MANAGEMENT SERVICES TO THE GROUP COMPANIES AS WELL AS HOLDING OF SHARES. THE GROUP COMPANIES FLOAT ESOP SCHEMES FOR THE EMPLOYEES. SO ME OF THE EMPLOYEES DO NOT OPT FOR THE ALLOTMENT OF SHARES UN DER THE SCHEME. THE SHARES TO BE ALLOTTED UNDER ESOP SCHEME ARE VESTED IN MURUGAPPA EMPLOYEES FOUNDATION. AS AND W HEN THE EMPLOYEES OPT FOR THE ALLOTMENT OF SHARES UNDER THE SCHEME SHARES ARE ALLOTTED TO THE EMPLOYEES BY THE TRUST. THE FUNDS BORROWED BY THE ASSESSEE ARE UTILIZED BY THE TRUST IN ACQUIRING THE SHARES OF THE GROUP COMPANIES. THE TRUST IS ALLOTT ING SHARES UNDER ESOP SCHEME TO THE EMPLOYEES OF THE ASSESSEE AS WELL AS TO THE EMPLOYEES OF THE GROUP COMPANIES. THE LD. C OUNSEL FURTHER SUBMITTED THAT THE ESOP IS A PERQUISITE WHICH IS TA XABLE IN THE HANDS OF EMPLOYEES. THE COST OF PERQUISITES WHICH IS TAXABLE IN I.T.A. NO. 304/MDS/2013 6 THE HANDS OF THE EMPLOYEES IS ON ALLOWABLE EXPENDIT URE IN THE HANDS OF THE ASSESSEE-COMPANY. THE LD. COUNSEL FOR THE ASSESSEE FURTHER CONTENDED THAT THE ENTIRE AMOUNT O F BORROWINGS IS USED FOR PURCHASE OF THE SHARES OF GROUP COMPANIES UNDER ESOP SCHEME ONLY. IN ORDER TO SUPPORT HIS CONTENTIONS T HE LD. COUNSEL RELIED ON THE JUDGMENT OF HONBLE MADRAS HIGH COURT IN THE CASE OF PVP VENTURES LTD. (SUPRA) AND THE ORDER OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF DCIT VS. M/S. BIOCON LTD. REPORTED AS 2013-TIOL-625-ITAT-BANG-SB. 5. WE HAVE HEARD THE SUBMISSIONS MADE BY THE REPRESENTATIVES OF BOTH THE SIDES AND HAVE PERUSED THE ORDERS OF THE AUTHORITIES BELOW AS WELL AS THE JUDGMENT/ORDER RELIED UPON BY THE LD. COUNSEL FOR THE ASSESSEE. IT IS AN UN-DISP UTED FACT THAT THE BORROWINGS HAVE BEEN MADE BY THE ASSESSEE FOR ADVAN CING THE AMOUNT TO THE TRUST FORMED BY THE ASSESSEE FOR ACQU IRING SHARES OF THE GROUP COMPANIES TO BE ALLOTTED UNDER ESOP SC HEME. THE ASSESSEE HAS CLAIMED INTEREST AS EXPENDITURE U/S. 3 7(1) OF THE ACT. THE PROVISIONS OF SECTION 77 OF THE COMPANIES ACT 1956 PUT RESTRICTIONS ON THE COMPANIES TO PURCHASE ITS OWN S HARES OR GRANT LOANS FOR THE PURCHASE OF ITS OWN SHARES OR ITS HOL DING COMPANIES. THUS FOR ADMINISTERING THE ESOP SCHEME THE ASSESS EE HAS I.T.A. NO. 304/MDS/2013 7 FORMED A TRUST FOR HOLDING THE SHARES OF THE ASSESS EE-COMPANY AND OTHER GROUP COMPANIES WHICH WILL BE TRANSFERRED TO THE EMPLOYEES AS AND WHEN THE EMPLOYEES EXCISE THEIR OP TION TO ACQUIRE SHARES UNDER ESOP SCHEME. ONE OF THE OBJEC TIONS RAISED BY THE REVENUE IS THAT THE TRUST IS NOT EXCL USIVELY HANDING THE SHARES OF THE ASSESSEE-COMPANY AND IS NOT ONLY DEALING WITH THE EMPLOYEES OF THE ASSESSEE-COMPANY THE TRUST IS HOLDING SHARES OF GROUP COMPANIES AS WELL. THE LD. COUNSEL FOR THE ASSESSEE HAS CATEGORICALLY STATED THAT THE ASSESSEE -COMPANY HAS BEEN INCORPORATED WITH THE PURPOSE OF PROVIDING MAN AGEMENT SERVICES TO THE GROUP COMPANIES AS WELL AS HOLDING OF SHARES. THE TRUST HAS BEEN FLOATED BY THE ASSESSEE-COMPANY TO A CHIEVE ITS OBJECTIVES. THE BENEFITS ACCRUING TO EMPLOYEES BY ALLOTMENT OF SHARES UNDER THE SCHEME IS IN THE FORM OF PERQUISIT E. THE DIFFERENCE BETWEEN THE MARKET VALUE AT WHICH THE SH ARES ARE ACQUIRED BY THE TRUST AND THE VALUE AT WHICH THE EM PLOYEES WERE ALLOTTED SHARES IS ASSESSABLE AS PERQUISITE IN THE HANDS OF THE EMPLOYEES. AS HAS BEEN RIGHTLY POINTED OUT BY THE CIT(APPEALS) WHEN THE COMPANY PROVIDES THE BENEFIT OR AMENITY TO ITS EMPLOYEES THROUGH INTERMEDIARY INSTITUTION IT IS N OT NECESSARY TO THAT SUCH INTERMEDIARY INSTITUTE SHOULD OPERATE SOL ELY FOR THE SIMILAR COMPANY. WHAT IS IMPORTANT IS THAT THE VALUE OF BE NEFIT HAS BEEN I.T.A. NO. 304/MDS/2013 8 CONFERRED TO THE EMPLOYEES IRRESPECTIVE OF THE MANN ER IN WHICH OR THROUGH WHOM THEY OBTAIN THE BENEFIT AS LONG AS THE SOURCE OF THE BENEFIT IS THE EMPLOYER OF THE BENEFIT GET TAXED IN THE HANDS OF THE EMPLOYEES. WE AGREE WITH THE OBSERVATIONS OF THE C IT(APPEALS). 6. THE CIT(APPEALS) HAS REMITTED THE FILE BACK TO A SSESSING OFFICER WITH A DIRECTION TO PROPORTIONATELY DISALLO W THE EXPENDITURE IF SHARES HAVE BEEN ALLOTTED TO THE EMPLOYEES OF OT HER GROUP COMPANIES. HOWEVER THE DIS-ALLOWANCE SO MADE SHAL L BE ALLOWED IN THE HANDS OF THE RESPECTIVE GROUP COMPANIES. WE DO NOT FIND ANY INFIRMITY IN THE IMPUGNED ORDER OF CIT(APPEALS) . THE FINDINGS OF THE CIT(APPEALS) ARE CONFIRMED AND THE APPEAL OF THE REVENUE IS DISMISSED BEING DEVOID OF MERIT. ORDER PRONOUNCED ON TUESDAY THE 15 TH OCTOBER 2013 AT CHENNAI. SD/- SD/- (DR. O.K. NARAYANAN) (VIK AS AWASTHY) VICE PRESIDENT JUDICIAL MEMBER DATED: 15 TH OCTOBER 2013 TNMM COPY TO: APPELLANT/RESPONDENT/CIT(A)/CIT/DR