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2018 (11) TMI 468 - AT - Income TaxValidity of reopening of assessment - Employee Stock Option Scheme (ESOP) expenditure - related to business activity of the assessee or not - whether new and fresh material available with the A.O to form a belief that the income of the assessee chargeable to tax had escaped assessment - Held that - We are persuaded to subscribe to the claim of the assessee, that the very basis on which the case of the assessee had been reopened viz. that in order to get deduction of ESOP expense, the shares should have been first purchased by the assessee company and subsequently transferred to its employees, is devoid of the necessary sanction of law. As per Sec. 42(1) of the Companies Act, 1956 (as was then available on the statute), except for under certain cases provided in the said section, a body corporate cannot be a member of a company which is its holding company, and any allotment or transfer of shares in a company to its subsidiary shall be void. The only two exceptions to the aforesaid mandate are carved out in sub-section (2) of Sec. 42 viz. (a) where the subsidiary is concerned as the legal representative of a deceased member of the holding company; or (b) where the subsidiary is concerned as trustee, unless the holding company or subsidiary thereof is beneficially interested under the trust and is not so interested only by way of security for the purposes of transaction entered into by it in the ordinary course of its business which includes the lending of money. We are of the considered view that as the purchase of the shares by the assessee company of its parent/holding company viz. M/s Kotak Mahindra Bank Ltd. as sought by the A.O, does not fall within the sweep of either of the exceptions carved out in Sec. 42(2) of the Companies Act, 1956, thus, it can safely be concluded that the same was barred as per the mandate of law. We thus, have no hesitation in observing that though the A.O had conveyed the reason for reopening the case of the assessee, but had withheld the very basis for so concluding. Rather, in our considered view, on the basis of our aforesaid deliberations, it can safely be concluded that as the reasons to believe are not only vague, but are found to militate against the mandate of law, thus, the same cannot be approved and for the said reason too are liable to be struck down. We find substantial force in the contention of the Ld. A.R, that as on 13.03.2014 when the case of the assessee was reopened for the aforesaid reasons, there was an order of the jurisdictional Tribunal available before him in the case of M/s Accenture Services Pvt. Ltd. Vs. DCIT, Circle-3(1), Mumbai 2010 (3) TMI 1107 - ITAT MUMBAI wherein in the backdrop of identical facts as are there before us in the case of the present assessee, the Tribunal had observed that ESOP expense incurred by the assessee company on account of payments made by it for the shares of parent/holding company allotted to its employees was allowable as a revenue expenditure. We find that the aforesaid order of the Tribunal was accepted by the revenue, and no further appeal was filed before the Hon ble High Court of Bombay. In the backdrop of the aforesaid facts, we find ourselves to be in agreement with the contentions advanced by Mr. Irani, that it is beyond comprehension as to how the A.O on the basis of a view which clearly militated against the aforesaid order of the jurisdictional Tribunal, could have reopened the case of the assessee. - Decided in favour of assessee
Issues Involved:
1. Validity of Re-assessment Proceedings 2. Allowability of ESOP Expenses as Revenue Expenditure Detailed Analysis: 1. Validity of Re-assessment Proceedings The primary issue in the case was whether the re-assessment proceedings initiated by the Assessing Officer (AO) under Section 147 of the Income Tax Act, 1961, were valid. The assessee contended that the re-assessment was based on a mere change of opinion and no fresh material was available to justify the reopening. The original assessment was completed on 30.09.2010, and the AO had allowed the ESOP expenditure without dispute. The case was reopened on 13.03.2014, based on the AO's belief that the ESOP expenses were irregularly allowed. The Tribunal observed that the reopening was based on the same set of facts already available during the original assessment. There was no new tangible material or information that came to the AO's notice after the original assessment. The Tribunal noted that merely changing the opinion on the same set of facts does not justify reopening an assessment. Citing the Supreme Court's judgment in CIT Vs. Kelvinator of India (2010) and other relevant case laws, the Tribunal held that the reopening of the assessment was invalid as it was based on a mere change of opinion. The Tribunal also found that the reasons recorded by the AO for reopening were vague and lacked any legal basis. The AO's reasoning that the ESOP expenses should have been allowed only if the shares were first purchased by the assessee and then transferred to its employees was found to be against the mandate of law. The Tribunal quashed the reassessment proceedings on these grounds. 2. Allowability of ESOP Expenses as Revenue Expenditure The second issue was whether the ESOP expenses incurred by the assessee were allowable as revenue expenditure. The CIT(A) had observed that the issue was covered by the Tribunal's decision in the assessee's own case for A.Y. 2004-05 and other similar cases, where it was held that ESOP expenses are allowable as revenue expenditure. The Tribunal noted that in the case of M/s Accenture Services Pvt. Ltd. Vs. DCIT, the ESOP expenses were allowed as revenue expenditure. The revenue had accepted this decision and did not appeal further. The Tribunal found that the AO's action to disallow the ESOP expenses in the reassessment proceedings was contrary to the established judicial precedent. The Tribunal upheld the CIT(A)'s decision to allow the ESOP expenses as revenue expenditure, finding no infirmity in the order. The appeal of the revenue was dismissed, and the appeal of the assessee was allowed. Conclusion The Tribunal quashed the reassessment proceedings initiated by the AO, holding them invalid as they were based on a mere change of opinion without any new tangible material. The Tribunal also upheld the allowability of ESOP expenses as revenue expenditure, following the judicial precedent. The appeal of the assessee was allowed, and the appeal of the revenue was dismissed.
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