2021 (11) TMI 1119 - AT - Income Tax

Disallowance of the expenses incurred under employee stock option ( ESOP ) scheme - HELD THAT - Hon ble Madras High Court in the case M/s. PVP Ventures Limited T. Nagar, Chennai 2012 (7) TMI 696 - MADRAS HIGH COURT while the order has been passed in relation to appeal against the order u/s 263, we find that the issue of the allowability of the expenditure pertaining to ESOP has been clearly dealt by the Hon ble High Court. In the case of CIT Vs. Lemon Tree Hotels Ltd. 2015 (11) TMI 404 - DELHI HIGH COURT allowed the ESOP expenditure as expenses has revenue expenditure. Since, it can be gauged from the above judgments that the expenditure incurred in connection with the ESOP is treated as revenue expenditure, we hereby allow the ground of appeal on this issue. Since, the grounds have been allowed on merits of the case in principle, the additional evidences filed by the assessee are not required to be considered by this Court. Allowability R D Expenditure - HELD THAT - DR vehemently objected to the admission of additional evidences. On going through the evidences, we have come to a conclusion that the queries raised by the CIT(A) would be answered in proper prospective and the interest of justice would be well served by admitting the additional evidences. Since, the revenue did not have the benefit of going through the evidences, we hereby remand the matter to the file of the CIT(A) to take into consideration the evidences filed and to pass a speaking order in accordance with the provisions of the Act. Appeal of the assessee is allowed.

Summary

Issues Involved:

1. Disallowance of expenses incurred under the Employee Stock Option (ESOP) scheme.
2. Disallowance of business product and research development expenses (R&D expenditure).

Issue-wise Detailed Analysis:

1. Disallowance of ESOP Expenses:

The assessee instituted the Curadev Employee Stock Option Scheme (ESOP) on 01.04.2010 to attract and retain talented employees. The scheme provided for the grant of shares to employees, vesting over five years. The assessee claimed the value of vested options amounting to Rs. 96,30,345/- as revenue expenditure. The Assessing Officer disallowed this expenditure, considering it notional and capital in nature, hence not allowable under Section 37 of the Income Tax Act, 1961.

The CIT(A) affirmed the disallowance, citing the lack of evidence of vesting, TDS on the exercise price, and the list of employees granted ESOP. The CIT(A) relied on various case laws to support the decision.

The ITAT referred to several precedents, including the case of DCIT Vs. Integrated Cleanroom, where ESOP expenses were deemed allowable under Section 37(1). The ITAT noted that the ESOP expenses were calculated based on the market value and charged to employees, with the difference considered as an expense and taxed in their hands. The ITAT found the valuation method (DCF method) reasonable and upheld the ESOP expenses as revenue expenditure.

The ITAT also referred to the Madras High Court's decision in CIT Vs. PVP Ventures Limited and the Delhi High Court's decision in CIT Vs. Lemon Tree Hotels Ltd., which held that ESOP expenses could be debited to the profit and loss account as revenue expenditure. Consequently, the ITAT allowed the appeal on this issue, recognizing the ESOP expenses as revenue expenditure.

2. Disallowance of R&D Expenditure:

The assessee incurred R&D expenditure amounting to Rs. 64,59,150/- for a research project in collaboration with Greenwich University Enterprises Limited, UK. The Assessing Officer disallowed this expenditure, considering it capital in nature and allowing depreciation at 25%, resulting in a disallowance of Rs. 48,44,362/-.

The CIT(A) upheld the disallowance and further enhanced it, stating that the assessee failed to provide details of the consultancy services, correlate the consultancy agreement with its business, and provide evidence of payment for consultancy work. The CIT(A) disallowed the entire amount of Rs. 64,59,150/-, stating that the expenditure did not qualify for deduction under Sections 37(1) or 35(1)(iv) r.w.s. 35(2)(ia) of the Act.

The assessee filed additional evidence under Rule 29 of the ITAT rules, 1963, including proof of payment, outcome of the research, and applications for patent grants. The ITAT admitted the additional evidence, noting that it would address the queries raised by the CIT(A) and serve the interest of justice. The ITAT remanded the matter to the CIT(A) to consider the additional evidence and pass a speaking order in accordance with the provisions of the Act.

Conclusion:

The ITAT allowed the assessee's appeal on the ESOP expenses, recognizing them as revenue expenditure. The matter of R&D expenditure was remanded to the CIT(A) for reconsideration in light of additional evidence provided by the assessee. The appeal was allowed, and the order was pronounced in the open court on 01/11/2021.