Religare Commodities Ltd vs. ACIT (ITAT Delhi) (ITA No.3634/Del/2014 dtd 04.01.2017) Background: – Religare Enterprise Ltd had launched a Stock Appreciation Right Scheme (‘SARS’) effective from 01/04/2007 for employee’s retention purposes. According to the Scheme, specified employees of the appellant company (Religare Commodities Ltd) were granted a specific number of SAR. – The market price of the shares at the time of granting was fixed to be the base price which was Rs. 140/- per share. As per the Scheme, if there is an increase in the value of those shares on the date of exercise of the right by the employees then the difference between the base market price and the enhanced or increased value shall be payable to the to the holder of such rights’ holder employees. – The scheme was administered through a trust. The Trust purchased shares of Religare from the Stock exchange at the time of granting of SAR to specified employees at an average price of Rs. 503/- per share. – The funding of such purchase was by way of loan given by respective companies whose employees to whom SAR were granted. – On exercise of the SAR by an employee, the trust sold the corresponding number of shares on the stock exchange and the amount realized was paid to the respective company in the settlement of the loan. – In addition to the SAR already granted to the employees, realisation of certain bonus shares were also paid to the employees as incentive. – The company retained Rs 140/- as value of the grant and paid to the employees – the amount which was the difference between the sale price of the shares at the time of exercise and SAR value of Rs. 140/- multiplied by the number of SAR exercised by the employee, after deducting tax at source. – The company claimed deduction under section 37 in the return of income of Rs 11,47,623 alongwith Rs 27,89,501 being bonus shares. – The Assessing Officer (‘AO’) disallowed an amount of Rs 11,47,623 as a capital loss. On appeal before the CIT(A), CIT(A) enhanced the disallowance by Rs. 27,89,501/- further as distribution of bonus incentive paid to the employees holding it to be a capital expenditure and therefore it is not allowable expenses.