2017 (12) TMI 995 - AT - Income Tax

Revision u/s 263 - AO has mechanically allowed ESOP expenditure claimed by the assessee without establishing whether the same has actually accrued or not - Held that - Special Bench of the ITAT in the case of Bicon Ltd. vs. DCIT 2013 (8) TMI 629 - ITAT BANGALORE held that the ESOP expenditure is not a contingent liability and that it is an expenditure that such expenditure is on account of ascertained (not contingent liability) and that it cannot be treated as a short capital receipt. Therefore discount on shares in the ESOP is an allowable deduction. From the above it is evident that the premise adopted by the ld. Commissioner of Income Tax in the show cause notice u/s. 263 that the ESOP expenditure were not allowable as they were contingent liability and has reliance upon the Tribunal s decision in this regard stand overruled by the Special Bench of the ITAT. Hence the final direction of the Commissioner of Income Tax that the Assessing Officer should examine the issue afresh after conducting necessary enquiry and investigation as the same had not actually accrued is not at all sustainable. It is not the case that there is any Hon ble High Court decision on the issue which the ld. Commissioner of Income Tax has followed which overruled the Special Bench decision as above. Thus in the background of the afore-said discussion and precedent we do not find the order of the ld. Commissioner of Income Tax passed u/s. 263 holding the ESOP expenditure to be contingent and directing further examination by the Assessing Officer sustainable. Accordingly we set aside the order passed by the ld. Commissioner of Income Tax u/s. 263 and decide the issue in favour of the assessee.

Summary

Issues Involved:
1. Whether the original assessment order passed under section 143(3) of the Income-tax Act, 1961 was erroneous and prejudicial to the interest of the revenue.
2. Whether the Assessing Officer (AO) conducted appropriate enquiry and raised specific queries regarding the deduction of Equity Stock Option Scheme (ESOP) expenses.
3. Whether the order under section 263 is valid, lawful, and within jurisdiction.
4. Whether the ESOP expenses claimed by the assessee were allowable as revenue expenditure or were contingent liabilities.

Issue-wise Detailed Analysis:

1. Erroneous and Prejudicial to the Interest of Revenue:
The Pr. Commissioner of Income Tax (CIT) issued a show cause notice under section 263 of the Act, stating that the original assessment order passed under section 143(3) was erroneous and prejudicial to the interest of the revenue. The CIT argued that the AO allowed the ESOP expenses claimed by the assessee without proper verification and application of mind, which constituted an unascertained liability and should have been disallowed. The CIT relied on the case laws of VIP Industries vs. DCIT and Ranbaxy vs. Addl. CIT to support this position.

2. Conduct of Enquiry by the AO:
The assessee contended that the AO had conducted appropriate enquiry and raised specific queries regarding the ESOP expenses during the original assessment proceedings. The assessee submitted that the ESOP expenses were included under 'Employee Cost' in the Profit & Loss account and were actual expenditures incurred for granting ESOPs to employees. The assessee argued that these expenses were ascertained liabilities and not contingent liabilities, and hence, the assessment order was neither erroneous nor prejudicial to the interest of the revenue.

3. Validity and Jurisdiction of the Order under Section 263:
The CIT was not convinced by the assessee's submissions and concluded that the AO had not obtained complete details and had not properly enquired into the nature of the ESOP expenses. The CIT held that the AO's lack of enquiry and non-application of mind made the assessment order erroneous and prejudicial to the interest of the revenue. The CIT directed the AO to set aside the original assessment order and pass a fresh order after conducting necessary enquiries.

4. Allowability of ESOP Expenses:
The assessee appealed against the CIT's order, arguing that the ESOP expenses were allowable as revenue expenditure. The assessee referred to the Special Bench decision in the case of Bicon Ltd. vs. DCIT, which held that ESOP expenses are not contingent liabilities and are allowable deductions. The Tribunal examined the notice issued under section 263 and found that the CIT's premise that ESOP expenses were contingent liabilities was overruled by the Special Bench decision. The Tribunal concluded that the ESOP expenses were ascertained liabilities and allowable as revenue expenditure.

Conclusion:
The Tribunal found that the CIT's observation that the AO had not obtained complete details was not mentioned in the show cause notice or the final direction. The Tribunal held that the CIT's order under section 263 was not sustainable as it was not based on any High Court decision overruling the Special Bench decision. The Tribunal set aside the CIT's order and allowed the assessee's appeal, concluding that the ESOP expenses were allowable as revenue expenditure and the original assessment order was not erroneous or prejudicial to the interest of the revenue.