Staff Welfare Expenditure Incurred By Employer As Per SEBI Guidelines Is Revenue Expenditure: Delhi High Court

Emphasizing that shares which is subject to a lock-in stipulation, could not be sold in an open market, the Delhi High Court held that valuation report obtained by the employer for ascertaining its withholding tax obligations during allotment of such shares to its employees as a perquisite, cannot be considered for purpose of Fair Market Value (FMV) of those shares.Referring to the decision in case of Principal Commissioner of Income Tax vs. M/s Religare Securities Ltd. [ITA 311/2018], the Division Bench of Justice Yashwant Varma and Justice Ravinder Dudeja reiterated that Staff Welfare expenditure incurred by the assessee/employer in respect of Employees Staff Option Plan (ESOP) and Employees Staff Purchase Scheme Guidelines, is allowable expenditure. Facts of the caseThe Revenue Department had approached the order by which the ITAT had deleted the disallowance of Rs.2.04 Crore confirmed by the CIT(A) on account of the difference between purchase price of Stock Appreciation Right (SAR) and the sale price of such SAR at the time of exercise by the employees, holding the same to be revenue loss allowable as business deduction. The counsel on behalf of Revenue contended that the ITAT had failed to appreciate that it is a general practice of the companies to form a Trust, which acts merely as a custodian of the shares, during the lock-in period in order to prevent the employees from leaving the company after exercising the option whereas in the present case, the assessee has been writing off its loan given to trust ' behind the canopy of SAR granted to employees. The Revenue Department had also challenged the decision of the ITAT in failing to appreciate the fact that merchant banking license is a capital asset having enduring benefit which has been transferred by the assessee company to its sister concern without any consideration, which leads to an irrefutable conclusion that the transaction was not at Arm's Length. The Department contended that the ITAT had failed to appreciate the fact that transaction of transfer of merchant banking license, which was not at arm's length had helped the assessee in avoiding the capital the capital gain tax, which would otherwise had payable had the transaction been entered into with any other unrelated entity. Observation of the High CourtInsofar as the aspects of disallowance on account of stock appreciation and merchant banking license transfer are concerned, the Bench found that the same was concluded and answered in favour of assessee in case of Principal Commissioner of Income Tax vs. M/s Religare Securities Ltd. [ITA 311/2018 decided on 19 March 2018]. The Bench found that the Coordinate Bench in ITA 311/2018 had observed that difference between the market value of the shares and the value at which the shares were allotted to the employee is allowable as an expenditure. The allotment of shares was done by the assessee in strict compliance of SEBI regulations, which mandate that the difference between the market prices and the price at which the option is exercised by the employees is to be debited to the Profit and Loss Account as an expenditure, and hence, not contingent, added the Bench. Insofar as to whether notional income can be taken into consideration for the purposes of taxation, the Bench referred to the judgment rendered in case of Ravi Kumar Sinha vs. Commissioner of Income Tax [2024:DHC:6076-DB], where it was observed that real accrual of income and not a hypothetical accrual of income ought to be taken into consideration. “What has really accrued to the assessee has to be found out and what has accrued must be considered from the point of view of real income taking the probability or improbability of realisation in a realistic manner and dovetailing of these factors together but once the accrual takes place, on the conduct of the parties subsequent to the year of closing an income which has accrued cannot be made “no income”, reiterated the Bench. Hence, the High Court affirmed the views of the Tribunal and dismissed the Revenue's appeal. Counsel for Petitioner/ Revenue: Ruchir Bhatia, Anant Mann and Pratyaksh GuptaCounsel for Respondent/ Assessee: Rohit Jain, Aniket Agrawal and Abhishek SinghviCase Title: PCIT versus RELIGARE SECURITIES LTD.Citation: 2024 LiveLaw (Del) 1042Case Number: ITA 474/2024Click here to read/ download the Order

Staff Welfare Expenditure Incurred By Employer As Per SEBI Guidelines Is Revenue Expenditure: Delhi High Court

Pankaj Bajpai

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