2015-VIL-1049-ITAT-DEL

Income Tax Appellate Tribunal DELHI

ITA NO. 3077/DEL/2012, ITA NO. 697/DEL/2013, C.O.No. 315/Del/2012, ITA NO. 814/DEL/2013

Date: 24.02.2015

ASSTT. COMMISSIONER OF INCOME TAX

Vs

NIIT GIS LTD., NIIT GIS LTD.

For the Appellant : Shri Ajay Vohra, Sr. Adv., Gaurav Jain
For the Respondent : Ms Shikha Sharma, CA

BENCH

Shri S. V. Mehrotra And Shri Chandramohan Garg,JJ.

JUDGMENT

Per C. M. Garg, Judicial Member

The above captioned appeals in ITA No. 3077/Del/2012 of the revenue and C.O.No.315/Del/2012 of the assessee have been preferred against the order of the CIT(A)-XXXII dated 11.4.2012 in Appeal No. 316/09-10/2011-(A)-32 for AY 2006-07.

2. ITA No. 697/Del/2013 of the revenue and ITA No. 814/D/2013 of the assessee have been preferred against the order of the CIT(A)-XVI, Delhi order dated 29.11.2012 in Appeal No. 222/2010-11 for AY 2007-08. Ground of the revenue in ITA No. 3077/Del/2012 for AY 2006-07

“1. Whether on the facts and circumstances of the case, the ld. CIT(A) has erred in not appreciating the fact that the AD had mentioned during the Remand Report that the letter dated 08 Feb 2006 regarding approval for substantial expansion of the assessee company by the Director of Industries, Himachal Pradesh was actually not the approval but the proposal for undertaking substantial expansion of the existing industrial unit for the manufacture of GIS Softwares. It was not the letter for approval for completion of the substantial expansion of the unit by the Director of Industries.

2. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in not noting the fact that the specific opportunity was granted to the assessee for clarifying the issue of 'substantial expansion' of the Parwanoo unit vide notice u/s 142(1) dated 04.11.2009, which the assessee failed to comply with. The additional evidences were filed only during the appellate proceedings.

3. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in not allowing the assessee's claim of substantial expansion without appreciating the fact that the assessee has shown Plant & Machinery at Parwanoo unit as on p1.04.2005 of Rs. 34,63,220/- only (20% of total assets), whereas the revenue of Parwanoo unit has been 60% of-total turnover on similar line of manufacturing.

4. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in holding that Books of accounts needs to be rejected for invoking provisions of section 80IC(6) read with section 80IA(10), since the provision of section 80IC(6) read with section 80IA(10) does not require that for determining the correct profit of eligible undertakings, when there is close connection, Books of account should be rejected.”

Ground of the Revenue in ITA 697/Del/13 for AY 2007-08

“1. Whether on the facts & in the circumstances of the case, the Ld. CIT(A) has erred in not appreciating the fact that the AO had mentioned in the remand report for AY 2006-07 regarding approval for substantial expansion of the assessee company was actually not the approval from Director of Industries, Himachal Pradesh but was only proposal for undertaking substantial expansion of GIS Software Unit. It was not letter for approval for completion of the substantial expansion of the unit by the Director of Industries. The revenue in appeal on the issue of 'substantial expansion' for A Y 2006-07 that was the first year of claim of deduction and order for AY 2007-08 was passed on the basis of AY 2006-07 itself.

2. Whether on the facts & in the circumstances of the case, the Ld. CIT(A) has erred in allowing the assessee's claim of substantial expansion without appreciating the fact that the assessee had shown Plant & Machinery at Parwanoo Unit as on 01.04.2005 of Rs. 34,63,220/- only (20% of total assets), whereas the revenue of Parwanoo unit has been 60% of total turnover on similar line of manufacturing. The revenue in appeal on the issue of substantial expansion for AY 2006-07 that was the first year of claim of deduction u/s 80le and order for AY 2007-08 was passed on the basis of AY 2006-07 itself.

3. The appellant craves to be allowed to add any fresh grounds of appeal and/or delete or amend any of the grounds of appeal."

Ground no.1, 2 and 3 0f the revenue for AY 2006-07 and ground no.1 and 2 of the revenue for AY 2007-08

3. Apropos these grounds, ld. DR submitted that the CIT(A) has erred in appreciating the fact that the AO had mentioned during the remand report that the letter dated 8.2.2006 regarding approval of substantial expansion of the assessee company by the Director of Industries, Government of H.P. was actually not the approval but the same was the proposal for undertaking substantial expansion of the existing industrial unit for the manufacturing of GIS Software. Ld. DR further contended that it was not the letter for approval for completion of the substantial expansion of the unit by the Director of Industries, Government of HP. Ld. DR vehemently contended that the CIT(A) ignored this important fact that the specific opportunity was granted to the assessee for clarifying the issue of “substantial expansion” of the Parwanoo unit vide notice u/s 142(1) dated 4.11.2009 which the assessee failed to comply with and the assessee filed additional evidence only during the appellate proceedings. Ld. AR also contended that the CIT(A) was not justified in allowing the assessee's claim of substantial expansion without appreciating the fact that the assessee had shown Plant & Machinery at Parwanoo Unit as on 01.04.2005 of Rs. 34,63,220/- only (20% of total assets), whereas the revenue of Parwanoo unit has been 60% of total turnover on similar line of manufacturing.

4. Ld. DR also pointed out that the CIT(A) granted relief for the assessee on the same lines in 2007-08 on the basis of this order for AY 2006-07 itself which is not a proper and legal approach of first appellate authority and the issue should have been adjudicated on the facts and circumstances of the relevant assessment year not only on the basis of earlier years.

5. Replying to the above, ld. Sr. Counsel of the assessee supporting the impugned order submitted that the issue of substantial expansion was very well dealt by the CIT(A) prior to reaching to the conclusion in favour of the assessee. Ld. Sr. Counsel has further drawn our attention towards impugned order para 4.3.4 at pages 27 to 29 and submitted that the opening value of the plant and machinery cannot be doubted as it is based on the audited accounts of the Parwanoo unit which has been accepted by the AO in the immediately preceding year as the closing value of plant and machinery at Parwanoo unit. Ld. Senior counsel further pointed out that the assessee had set up the unit in Parwanoo in the year 2000 and in compliance with the provisions of the Act for entitlement of deduction u/s 80IB of the Act, separate accounts were maintained by the Parwanoo unit which were duly audited and filed along with the certificate of CA in Form 10CCB with the return of income year after year. The AR further pointed out that the account of the Parwanoo unit forming part of the record of the department disclosed the plant and machinery employed in such unit. The ld. Senior counsel further pointed out that from the balance sheet as on 31.3.2005, the closing gross block of assets amounted to Rs. 34,63,220 which became opening gross block of fixed assets at Parwanoo unit for the year under consideration i.e. AY 2006-07 which were already on record of the AO and the stand of the assessee accepted in the earlier assessment inasmuch as depreciation was allowed with respect to such value of assets at the Parwanoo unit and the said amount of depreciation was taken into account while computing the deduction u/s 80IB of the Act admissible to the Parwanoo unit. Ld. Counsel of the assessee also contended that the first appellate authority remanded the submissions and explanation of the assessee to the AO for his examination and comments but the AO has not controverted above contention of the assessee in his remand report and the AO simply referred the assessment order to state that the assessee had failed to justify the opening value of plant and machinery at Parwanoo unit. Ld. AR supporting the order of the first appellate authority has also drawn our attention to this fact that the AO has not brought on record any adverse material or fact to dislodge the audited accounts of the assessee and, therefore, the AO was not justified in concluding that the assessee had failed to justify the opening value of plant and machinery at Parwanoo unit. Ld. AR supporting the order of the first appellate authority has also drawn our attention to this fact that the AO has not brought on record any adverse material or fact to dislodge the audited accounts of the assessee and therefore, the AO was not justified in concluding that the assessee had failed to justify the opening value of plant and machinery at Parwanoo unit.

6. On careful consideration of above submissions of both the sides and careful perusal of the relevant material placed on record, we note that the CIT(A) granted relief for the assessee with following observations and findings:-

 “4.3.4 The next issue to be decided is whether the appellant actually carried out substantial expansion during the relevant previous year so as to become eligible for deduction u/s 80IC in the instant Assessment Year. Provisions of section 80IC stipulate that deduction under that section will be available to an undertaking engaged in manufacturing or producing any article or thing not included in the Thirteenth Schedule if the undertaking had undertaken 'substantial expansion' within the period 07101/2003 to 31/03/2012 in any Export Processing Zone or Integrated Infrastructure Development Centre or Industrial Growth Centre or Industrial Estate or Industrial Park or Software Technology Park or Industrial Area or Theme Park: - as notified by the Board in accordance with the scheme framed and notified by the Central Government in this regard in the state of Himachal Pradesh or the State of Uttaranchal. Since the appellant's Parwanoo Unit is situated in the State of Himachal Pradesh and is engaged in manufacture or production of software which is part of Information & Communication Technology Industry which is not included in the Thirteenth Schedule ,there can be raised no objection about its basic eligibility. However, the AO has concluded that there was no substantial expansion of the Parwanoo Unit during the previous year.

"Substantial Expansion" has been defined in the Act as under:

“(8) For the purposes of this section,-

...........

(ix) "substantial expansion" means increase in the investment in the plant and machinery by at least fifty per cent of the book value of plant and machinery (before taking depreciation in any year), as on the first day of the previous year in which the substantial expansion is undertaken;

......"

The AO has disallowed the deduction u/s 80le to the appellant on the ground that there was no 'substantial expansion' during the year. This decision of the AO is based on the following observations:

(a) That the appellant failed to substantiate opening value of ‘plant and machinery' amounting to Rs. 34, 63, 220/- at Parwanoo Unit and

(b) That addition to fixed assets to the tune of Rs. 3,34,105/- were not in the nature of purchase of plant and machinery at Parwanoo Unit. A detailed discussion in this regard has been made in the assessment order also.

As regards (a) above, the appellant has submitted that the opening value of the plant and machinery cannot be doubted as it is based on the audited accounts of the Parwanoo Unit which has been accepted by the AD in the immediately preceding year as the closing value of plant & machinery at Parwanoo unit. According to the appellant, the appellant had set up the unit in Parwanoo in the year 2000. The unit was entitled to deduction under section 80-18 of the Act and to claim deduction under the said section, the unit was required to prepare separate accounts for the said unit. In compliance with the aforesaid requirement, separate accounts were maintained by the Parwanoo unit, which were duly audited and filed along with the certificate of Chartered Accountant in Form 10CCB. The said documents were filed along with return of income year after year. The appellants contends that the accounts of the Parwanoo unit forming part of the record of the department disclosed the plant and machinery employed in such unit. A perusal of the balance sheet of the earlier year would show that as on 31.03.2005, the immediate preceding previous year, the closing gross block amounted to Rs. 34,63,220.Thus, the detail in respect of opening gross block of fixed assets at Parwanoo unit are already on record of the assessing officer and stand accepted in the earlier years' assessment in as much as (i) depreciation was allowed with respect to such value of assets at the Parwanoo unit and (ii) the said amount of depreciation was taken into account while computing deduction under section 80-IB of the Act admissible to the Parwanoo unit. As mentioned earlier, the submission of the appellant were remanded to the AO for his examination and comments, but the AO has not controverted the above contentions of the appellant in his remand report . He has simply referred to the assessment order to state that the appellant had failed to justify the opening value of plant & machinery at Parwanoo Unit. It is seen from the paper book filed that the appellant had filed before the AO copies of audited consolidated balance sheet as well as the unit balance sheet of Parwanoo Unit vide its letter dated 04/12/2009 from which is could be seen that the opening value of Plant and Machinery was as stated by the appellant. The AO has not brought on record any adverse material to dislodge the audited accounts of the appellant and therefore he was not justified in concluding that the appellant had failed to justify the opening value of Plant & Machinery at Parwanoo Unit. This issue is also, therefore, decided in favour of the appellant.”

7. From the assessment order, we note that the issue of substantial expansion at Parwanoo Unit was decided by the AO against the assessee by holding that the assessee has failed to substantiate that the plant and machinery at Parwanoo unit as on 1.4.2005 was only of Rs. 34,63,220 out of total plant and machinery. The AO also noted this fact that the revenue of Parwanoo unit accounts for 69% of the total revenue. The AO further noted that as per provisions of section 80IC of the Act, “substantial expansion” means increase in investment in plant and machinery by at least 50% of the book value of plant and machinery before taking into consideration the depreciation in any year as on first day of the previous year in which the substantial expansion is undertaken. The AO finally held that the assessee has failed to substantiate that any substantial expansion undertaken during the year and the assessee is not engaged in the manufacturing activity and with this conclusion, deduction us/ 80I of the Act was disallowed by the AO.

8. During the first appellate proceedings, the CIT(A) considered the explanation and submission of the assesssee and held that even if various amounts of internet brandwith testing charges totalling to Rs. 97,445 are considered to be revenue expenses and are not considered part of plant and machinery for the purpose of substantial expansion and another amount of Rs. 16,020 spent for site survey and commissioning of internet Bandwidth pertaining to earlier year cannot be treated as part of substantial expansion during the relevant previous year even after disallowing other capitalized charges, the assessee has been able to justify the increase of plant and machinery to the tune of Rs. 18,35,423 (Rs.19,48,888 - Rs. 1,13,465) at Parwanoo unit. We are also in agreement with the conclusion of the CIT(A) that this amount of increase of plant and machinery during the year under consideration viz. Rs. 18,35,423 is more than 50% of the opening value of the plant and machinery for Parwanoo i.e. Rs. 34,63,220 (as on 1.4.2005) then the claim of expansion of Parwanoo unit was rightly held in favour of the assessee. We also note that the Director of Industries, H.P. also acknowledged the substantial expansion of Parwanoo unit as on 24.11.2005 by the certificate dated 8.2.2006 which has not been controverted by the AO which clarifies that after substantial expansion as on 24.11.2005, the investment in plant and machinery was increased from Rs. 33.32 lakh to Rs. 52.36 lakh during the year under consideration.

9. On the basis of foregoing discussion and facts and circumstances emerged and noted by us, we are inclined to hold that the CIT(A) dealt the issue of substantial expansion as per letter and spirit of the provisions of the Act and the percentage of revenue of total turnover cannot be the sole basis for deciding the claim of substantial expansion of the assessee without appreciating the other surrounding circumstances and totality of the facts.

10. The CIT(A) also granted relief to the assessee for AY 2007-08 by following its order for AY 2006-07 which cannot be said to be an unjust or improper approach rather the CIT(A) rightly followed rule of consistency in the proceedings by following its order for immediately preceding year.

11. In view of above, we are unable to see any ambiguity, perversity or any other valid reason to interfere with the impugned order and we uphold the same. Accordingly, ground no. 1, 2 and 3 for AY 2006-07 and ground no. 1 and 2 for AY 2007-08 of the revenue being devoid of merits are dismissed.

Ground no. 4 of the revenue in AY 2006-07

12. Ld. DR supporting the action of the AO submitted that Books of accounts need to be rejected for invoking provisions of section 80IC(6) read with section 80IA(10), since the provision of section 80IC(6) read with section 80IA(10) do not require that for determining the correct profit of eligible undertakings, when there is close connection, Books of account should be rejected. Ld. DR also pointed out that the AO has been apportioned the expenses on the basis of sales ratio of Parwanoo and non-Parwanoo unit which is rational and, therefore, the impugned order may be set aside by restoring that of the AO.

13. Replying to the above, ld. Senior counsel appearing for the assessee submitted that the AO could be allowed to disturb amount of deduction only if he had rejected books of accounts of the assessee on the basis of adverse material brought on record and consequently, the AO could have recast the entire profit and loss account of the Parwanoo unit on the basis of such adverse material. Ld. Senior counsel further contended that the audit certificate in Form 10CCB issued by the CA as prescribed in Rule 18BBB of the Income Tax Rules 1962 cannot be disputed unless and until any adverse material is brought on record to dispute this audit certificate. On behalf of the assessee, it was also contended that the recalculation of eligible deduction us/ 80IC of the Act on the basis of sales ratio between the eligible and non-eligible business was not legally valid because in the earlier year in assessee’s own case the method of allocation of expenses to Parwanoo and non-Parwanoo business has been approved by the revenue authorities and the same was also followed for the year under consideration which could not be disturbed.

14. On careful consideration of above submissions, at the outset, we note that as per section 80IC(7) of the Act, the provisions contained in sub-section (5), (7) to (12) of section 80IA shall, also so far as may be, apply to the eligible undertaking or enterprise under the section.

15. As per section 80IA(7) of the Act, the deduction claimed to have been audited by the accountant as defined in the explanation below, sub-section (2) of section 282 of the Act and the assessee furnishes the report of such audit in the prescribed form no. 10CCB as per Rule 18BBB of the Income Tax Rules, 1962 duly signed and verified by such accountant. In the present case, the CIT(A) has also noted this fact while allowing ground of the assssee on this issue. The relevant operative part of the impugned order reads as under:-

“5.3 I have carefully considered the facts on issue, the contentions of the appellant and the position of law. The AO has recalculated the eligible amount of deduction u/s 80lC on the basis of sales ratio on the ground that the method of allocation of common expenses between eligible and noneligible businesses as employed by the appellant was not acceptable. However, the appellant has brought on record earlier decisions of the Hon. ITAT and the Hon. Delhi High Court on the issue of allocation of expenses with reference of computation of eligible profits for determining the amount of deduction u/s 801B in earlier years in the appellant's own case wherein the method of allocation of expenses to Parwanoo and non-Parwanoo business has been approved. The AO has not controverted this contention of the appellant in his remand report. Further, according to sub section 801C(7), provisions of subsection (5) and subsections (7) to (12) of section 80lA shall apply to the eligible undertaking under section 801C also. According to subsection 801A(5):

"(5) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made." It is clear from a bare reading of the-above provisions that the quantum of deduction has to be computed as if the Parwanoo unit is the only source of income of the appellant company during the previous year relevant and therefore the action of the AO in recalculating the same on the basis of sales ratio is not legally correct. The AO could disturb the amount of deduction only if he had rejected the books of accounts of the appellant on the basis of adverse material brought on record and had recast the entire profit and loss account of the Parwanoo Unit on the basis of such adverse material . However, no such action has been taken by the AO in the instant case. The deduction has been claimed on the basis of Audit Certificate in Form 10CCB issued by a Chartered Accountant as prescribed in Rule 18BBB. The AO has not brought any adverse material on record so as to dispute this Audit Certificate either. Therefore, it is held that the recalculation of eligible deduction u/s 801C on the basis of sales ratio between the eligible and non-eligible businesses was not legally valid and, therefore, cannot be upheld. This ground of appeal is ,therefore, decided in favour of the appellant. ”

16. On bare reading of above operative part, we observe that the CIT(A) has also taken cognizance of the earlier decision of Hon’ble Delhi High Court and the Tribunal on the issue of allocation of expenses with reference to the computation of eligible profit for determining the amount of deduction u/s 80IB of the Act in the earlier years in the assessee’s own case wherein the method of allocation of expenses to Parwanoo and non-Parwanoo business has been approved by the jurisdictional High Court of Delhi. The CIT(A) has also noted that the AO has not controverted this contention of the assessee in his remand report submitted during first appellate proceedings. Although we note that deduction u/s 80IC was claimed for the first time by the assessee company during the year under consideration i.e. AY 2006-07 but as the scheme of statutory provisions of the Act is itself clear on this issue that on the issue of allocation of expenses with reference to computation of eligible profits for determination of the amount of deduction u/s either 80IB or 80IC is concerned, provisions of section 80IA(5), (7) to (12) of the Act shall apply. In this situation, it is also relevant to note that the conclusion of the Tribunal in assessee’s own case for AY 2001-02 in ITA No. 510/D/2005 dated 17.8.2007, which has been upheld by the Hon’ble High Court, wherein approving apportionment of expenses placed by assessee has been approved by holding that the revenue has not pointed out any item which has been incurred for Parwanoo business and charged to non-Parwanoo business so as to increase the profit of the Parwanoo business which may result in higher deduction u/s 80IB of the Act. The relevant operative part of this order reads as under:-

“6. We have heard both the parties and perused the material available on record. From the order of CIT(A) we find that he has discussed each and every expense in detail which could be allocated to Parwanoo and Non Parwanoo units. The Assessing Officer had not brought on record any instance of any expenditure being charged in another unit. The assessee has maintained separate books of accounts and expenditure exclsively incurred for Parvanoo and Non Parwanoo account. Therefore, the expenditure which is common to both tile businesses can only be apportioned in the ratio of turnover. This is what the assessee has done. Ld. CIT (A) has examined the issue in detail and has found himself in agreement with the allocation made by assessee. The Revenue has not pointed out any item which has been incurred for Parwanoo business and charged to Non Parwanoo business so as to increase the profit of Parwanoo business which may result in higher deduction under section 80IB of the Act In the absence of such material on record, in our considered view, Ld CIT (A) was justified in deleting the addition made by Assessing Officer. Accordingly, we do not find any infirmity in the order passed by Id CIT (A) in deleting the addition u/s 80IB of the Act.”

17. On the basis of foregoing discussion, we reach to a fortified conclusion that the CIT(A) considered provisions of the Act and also considered audited certificate in Form No. 10CCB issued by the competent CA as prescribed in Rule 18BBB of the Act as per provisions of section 80IA(7) of the Act which are also applicable to section 80IC of the Act. We cannot ignore that the order of the Tribunal for AY 2001-02 (supra) has been upheld by the Hon’ble High Court dismissing the appeal of the assessee in ITA No. 1209/2008 order dated 21.10.2008 (available on paper book page no.126) wherein aforesaid conclusion of the Tribunal has been upheld dismissing the appeal of the revenue on this issue.

18. Therefore, we are inclined to hold that the CIT(A) granted relief for the assessee on legal and cogent reasons and by following the statutory provisions of the Act and earlier orders of the Tribunal and Jurisdictional High Court in assessee’s own case for AY 2001-02. We are unable to see any infirmity, perversity or any other valid reason to interfere with the same and we uphold the conclusion of the CIT(A) on this issue. Accordingly, ground no. 4 of the revenue being devoid of merits is dismissed.

C.O.No.315/Del/2012 of the assessee for AY 2006-07

19. The assessee company has raised sole cross objection for this year which reads as under:-

“l. That the Commissioner of Income Tax (Appeals) erred on facts and in law in holding that expenditure incurred towards Internet bandwith testing charges aggregating to Rs. 97,445/- and site survey and commissioning charges for Internet bandwith amounting to Rs. 16,0201-, cannot be treated as addition/capitalization to "Plant and Machinery" in order to determine "substantial expansion" of Parwanoo unit for the purposes of claiming deduction under section 80lC of the Income Tax Act, 1961 ('the Act').”

20. Ld. Senior counsel submitted that the CIT(A) was not justified on fact and in law in holding that expenditure incurred towards Internet bandwith testing charges aggregating to Rs. 97,445/- and site survey and commissioning charges for Internet bandwith amounting to Rs. 16,020/-, cannot be treated as addition/capitalization to "Plant and Machinery" in order to determine "substantial expansion" of Parwanoo unit for the purposes of claiming deduction under section 80IC of the Income Tax Act.

21. Supporting the assessment order as well as appellate order of the CIT(A), ld. DR submitted that when the assessee company itself has accepted that even if various amount of internet bandwith with testing charges are considered to be revenue expenditure, then also the amount of new plant and machinery will be more than 50% of the opening of the value of plant and machinery at Parwanoo unit which will qualify for substantial expansion. Ld. DR further contended that another amount of Rs. 16,020 was spent for site survey and commissioning charges for internet bandwith pertaining to earlier year cannot be treated as part of substantial expansion during the relevant previous year. Ld. DR vehemently contended that when assessee company itself could not substantiate that the said impugned expenses were part of substantial expansion, then the revenue authorities have no option but to exclude the same at the time of calculation of amount of substantial expansion.

22. On careful consideration of above submissions, we note that since the issue of substantial expansion has been decided in favour of the assessee by the earlier part of this order and if assessee company itself has given an alternate calculation excluding amount of internet brandwith testing charges, then the same cannot be considered for the purpose of calculation of substantial expansion. We further observe that undisputedly an amount of Rs. 16,020 was spent for site survey and commissioning of internet brandwith during earlier financial year, therefore, the same cannot be treated as part of substantial expansion during the relevant financial year. Hence, we are of the view that the CIT(A) was right in excluding the said amounts at the time of calculation of substantial expansion. We are unable to see any valid reason to interfere with these findings of the CIT(A) and therefore cross objection of the assessee for AY 2006-07 is dismissed.

Assessee’s appeal in ITA No.814/Del/2013 for AY 2007-08

23. The assessee has raised following grounds in this appeal:-

“1. That the CIT(A) erred on facts and in law in confirming the disallowance of Rs. 1,29,7911- made in the assessment order in respect of discount offered to the employees on allotment of shares of the parent company, viz., NIIT Technologies Ltd. under a Employees Stock Option Plan ("ESOP Scheme") on the ground that the same was notional loss, not allowable expenditure under Section 37(1) of the Act.

1.1 That the CIT(A) erred on facts and in law in not appreciating that discount offered to the employees under ESOP Scheme, being in the nature of compensation to employees, in lieu of services, was allowable deduction under section 37(1) of the Act.

1.2 That the CIT(A) erred on facts and in law in holding that re-imbursement of discount to parent company was not actual loss, since no payment was made to employees.

1.3 That the CIT(A) erred on facts and in law in holding that since discount allowed to employees under ESOP was notional loss in the hands of. the parent company, reimbursement of the same by the appellant to parent company was not allowable in the hands of the subsidiary company (the appellant).

2. That the CIT(A) erred on facts and in law in upholding charging of interest under sections 234B/234D of the Act. ”

24. Having heard arguments of both the sides and careful perusal of the relevant material placed on record before us, at the outset, we note that the ld. Senior counsel of the assessee submitted that the issue is squarely covered in favour of the assessee by the decision of ITAT Bangalore Bench “C” in the case of Nova Nordisk India (P) Ltd. vs DCIT (2014) 42 Taxman.com 168 (Bangalore Tribunal). Ld. DR supported the orders of the authorities below and at the same time, he fairly accepted that the view taken by the Bangalore Bench in the case of Nova Nordisk India (P) Ltd. (supra) is holding field as the same has not been set aside or modified by any higher competent authority. From the order of the Bangalore Tribunal (supra), we observe that similar issue in similar set of facts and circumstances has been decided in favour of the assessee and against the revenue by following the decision of Hon’ble Karnataka High Court in the case of Mysore Kirloskar Ltd. vs CIT (Kar.).

25. The relevant operative part of this judgment reads as under:-

“22. With regard to the decision of the ITAT in the case of Accenture (supra), we find that the facts of the case of Accenture (supra) are identical. In the case of Accenture (supra), the facts were that the ITA No.1275/Bang/2011 Page 18 of 20 assessee company incurred certain expenses on account of payments made by it for the shares allotted to its employees in connection with the ESPP. The AO had disallowed Rs. 9,06,788/- incurred by the assessee on the ground that this expenditure is not the expenditure of assessee company but that expenditure is of parent company and the benefit of such expenditure accrues to the parent company and not assessee. The CIT(A) deleted the addition made by the AO. The CIT(A) found that the common shares of Accenture Ltd. the parent company, have been allotted to the employees of ASPL, the Indian affiliate/Assessee and not to the employees of the parent company. The CIT(A) also found that though the shares of the parent company have been allotted, the same have been given to the employees of the Assessee at the behest of the Assessee. The CIT(A) thus held that it was an expense incurred by the assessee to retain, motive and award its employees for their hard work and is akin to the salary costs of the assessee. The same was therefore business expenditure and should be allowable in computing the taxable income of the assessee. The tribunal upheld the view of the CIT(A). It can be seen from the decision in the case of Accenture (supra) that the shares of the foreign company were allotted and given to the employees of affiliate in India at the behest of the affiliate in India. The CIT(Appeals), however, presumed that the facts in the instant case of the assessee was that the shares were allotted to the employees of the affiliate in India at the behest of the foreign company. This is not the factual position in the assessee’s case, as the assessee had ITA No.1275/Bang/2011 Page 19 of 20 on its own framed the NNIPL ESOP Scheme, 2005, to benefit its employees. NNAS may have a global policy of rewarding employees of affiliates with its shares being given at a discount and that policy might be the basis for the Assessee to frame ESOP. That by itself will not mean that the ESOP was at the behest of the parent company. In any event the immediate beneficiary is the Assessee though the parent company may also be indirect beneficiary of a motivated work force of a subsidiary. We are of the view that the factual basis on which the CIT(Appeals) distinguished the decision of the Mumbai Bench of ITAT in the case of Accenture (supra) is erroneous.

23. With regard to the observations of the CIT(Appeals) that the ESOP actually benefits only the parent company, we are of the view that the expenditure in question is wholly and exclusively for the purpose of the business of the assessee and the fact that the parent company is also benefited by reason of a motivated work force would be no ground to deny the claim of the assessee for deduction, which otherwise satisfies all the conditions referred to in section 37(1) of the Act. The decision of the Hon’ble Supreme Court in the case of Sassoon J. David & Co. (P) Ltd. (supra) and the Hon’ble Karnataka High Court decision in the case of Mysore Kirloskar Ltd. (supra) clearly support the plea of the assessee in this regard. ”

26. In view of above, we are inclined to hold that the expenditure in question is wholly for the purpose of business of the assessee and the fact that the parent company is also benefitted by a reason for motivated work benefits would be no ground to deny the claim of the assessee for deduction, which otherwise satisfies all the conditions referred to in section 137(1) of the Act. Hence, respectfully following the decision of Hon’ble Supreme Court, Hon’ble Karnataka High Court and Coordinate Bench of Bangalore Tribunal, ground no.1, 1.1, 1.2 and 1.3 are allowed and the AO is directed to allow the expenditure as deduction.

Ground no.2 of the assessee

27. In view of our conclusion on ground no.1, viz. main issue to ground relating to charging of interest u/s 234B/234D of the Act being consequential becomes academic which needs no adjudication and we dismiss the same as infructuous.

Order pronounced in the open court on 24.02.2015.

 

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