2018 (3) TMI 1957 - AT - Income Tax

Disallowing deduction in respect of Employee Stock Option Plan ( ESOP ) scheme - HELD THAT - Respectfully following the order of the Hon ble Delhi High Court in Lemon Tree Hotels Ltd 2014 (7) TMI 165 - ITAT DELHI and Biocon Ltd. 2013 (8) TMI 629 - ITAT BANGALORE we set aside the order of the Ld. CIT(A) on this issue and direct the Assessing Officer to allow claim of ESOP expenses. Depreciation on intangible assets - non-refundable deposit paid to IRCTC - HELD THAT - Ends of justice would be met by directing the Assessing Officer to allow depreciation @25% as directed by the Ld. CIT(A).

Summary

Issues Involved:
1. Disallowance of deduction in respect of Employee Stock Option Plan (ESOP) scheme.
2. Disallowance of deduction for non-refundable deposit paid to Indian Railway Catering and Tourism Corporation Ltd. (IRCTC).

Detailed Analysis:

1. Disallowance of Deduction in Respect of Employee Stock Option Plan (ESOP) Scheme

Assessment Year: 2008-09

Facts:
The assessee provided equity-based incentives to its employees under the Employee Stock Option Scheme, 2006, and claimed a deduction of Rs. 2,33,11,692 as ESOP expenditure.

Assessing Officer's (AO) Decision:
The AO disallowed the claim, stating that ESOP expenses are notional losses and cannot be allowed as deductions under the mercantile system of accounting. The AO referenced cases such as M/s. VIP Industries Ltd. v. DCIT and Ranbaxy Laboratories Ltd. v. ACIT to support this view.

CIT(A)'s Decision:
The CIT(A) upheld the AO's decision, arguing that the expenditure must be incurred and for the purpose of the business, which was not the case here. The CIT(A) referenced the Supreme Court's decision in Southern Technologies Ltd. v. CIT and the ITAT's decision in Ranbaxy Laboratories Ltd.

Assessee's Argument:
The assessee argued that the CIT(A) failed to consider the Special Bench's decision in Biocon Ltd. v. Dy. CIT, which distinguished the Ranbaxy Laboratories Ltd. case. The assessee also cited favorable decisions from the Delhi High Court in CIT v. Lemon Tree Hotels Ltd. and Pr. CIT v. Indiamart Intelmesh Ltd.

Tribunal's Decision:
The Tribunal found the case to be squarely covered by the Special Bench decision in Biocon Ltd. and the Delhi High Court's affirmation in Lemon Tree Hotels Ltd. The Tribunal directed the AO to allow the ESOP expenses, setting aside the CIT(A)'s order.

Assessment Years: 2009-10 and 2010-11

Facts:
Similar grounds were raised for these assessment years with ESOP deductions of Rs. 76,55,886 and Rs. 42,75,966, respectively.

Tribunal's Decision:
For the same reasons as in the assessment year 2008-09, the Tribunal allowed the appeals for the assessment years 2009-10 and 2010-11, directing the AO to allow the ESOP expenses.

2. Disallowance of Deduction for Non-Refundable Deposit Paid to IRCTC

Assessment Year: 2008-09

Facts:
The assessee entered into an agreement with IRCTC to sell e-tickets and paid a non-refundable deposit of Rs. 20,00,000, claimed under section 37 of the IT Act.

Assessing Officer's (AO) Decision:
The AO allowed only a proportionate deduction of Rs. 3,33,333 for the period of 4 months out of the total agreement period.

CIT(A)'s Decision:
The CIT(A) treated the non-refundable deposit as an intangible asset under section 32(1)(ii) and allowed depreciation at 25%, but quantified it incorrectly at Rs. 4,00,000 instead of Rs. 5,00,000.

Assessee's Argument:
The primary argument was for the entire amount to be allowed, but during the hearing, the focus was on correcting the depreciation amount to Rs. 5,00,000.

Tribunal's Decision:
The Tribunal directed the AO to allow depreciation at 25% as per the CIT(A)'s direction, correcting the quantification error.

Assessment Years: 2009-10 and 2010-11

Facts:
Similar grounds were raised for these assessment years regarding the non-refundable deposit.

Tribunal's Decision:
The Tribunal allowed consequential relief of depreciation for these years, directing the AO accordingly.

Conclusion:
The appeals of the assessee in ITA Nos. 3318, 3319, and 3320/Del/2015 were partly allowed. The Tribunal directed the AO to allow the ESOP expenses and correct the depreciation quantification for the non-refundable deposit paid to IRCTC. The order was pronounced in the open court on 16.03.2018.