2023 (8) TMI 1478 - AT - Income Tax

Rectification of mistake - Disallowance of claim of ESOP expenses being the difference between the fair market value of equity shares on the date of vesting of option and on the date of exercise of option - Tribunal as rightly followed the decision rendered by the Special Bench of Bangalore ITAT in the case of Biocon Ltd 2013 (8) TMI 629 - ITAT BANGALORE has restored the matter to the file of the AO with certain directions, even though the points narrated by the Tribunal for so restoring the issue to the AO has already been decided by the Special bench constituting mistakes apparent from record. HELD THAT - Tribunal, we notice that the Tribunal did not appreciate the fact that the discount on ESOP arises on two different occasions. It also did not appreciate that the deduction claimed by the assessee represented second type of discount. We also notice that the Special bench of Bangalore ITAT in the case of Biocon Ltd 2013 (8) TMI 629 - ITAT BANGALORE has appreciated the fact that there may arise second type of discount and has held that it is allowable as deduction. The Special bench has also held that the SEBI guidelines did not prescribe any mandatory accounting treatment for the second type of discount and accordingly held that the taxation principles will apply for allowing deduction of second type of discount. The illustration 2 given in paragraph 11.1.6 specifically deals with the situation, when there is an increase in the market price of shares at the time of actual exercise of option and it has been held that the assessee would be entitled for further deduction at the time of exercise of option.It is pertinent to note that the above said decision rendered by the Special bench has since been upheld by the Hon ble Karnataka High Court 2020 (11) TMI 779 - KARNATAKA HIGH COURT . Thus we agree with the submission of the assessee that there are mistakes apparent from record in the decision rendered by the Tribunal. Miscellaneous application filed by the assessee is allowed.

Summary

Issues Involved:

1. Disallowance of ESOP expenses by the AO.
2. Tribunal's restoration of the matter to the AO.
3. Mistakes in capturing factual aspects of the ESOP claim.
4. Accounting treatment for the second type of discount.

Summary:

Issue 1: Disallowance of ESOP expenses by the AO:
The AO disallowed the claim of ESOP expenses amounting to Rs. 5.74 crores, which represents the difference between the fair market value of equity shares on the date of vesting of option and the date of exercise of option. The CIT(A) allowed the claim, prompting the Revenue to challenge the decision before the Tribunal.

Issue 2: Tribunal's restoration of the matter to the AO:
The Tribunal followed the decision of the Special Bench of Bangalore ITAT in Biocon Ltd. vs. DCIT, which was upheld by the Karnataka High Court. However, the Tribunal restored the matter to the AO with directions, despite the Special Bench having already decided the points narrated by the Tribunal. This was contended as a mistake apparent from the record.

Issue 3: Mistakes in capturing factual aspects of the ESOP claim:
The Tribunal misunderstood the nature of the ESOP claim, treating it as the first type of discount (arising at the time of granting/vesting of options) instead of the second type (arising at the time of actual exercise of options). This confusion led to a mistake apparent from the record, as the SEBI guidelines only prescribe accounting treatment for the first type of discount.

Issue 4: Accounting treatment for the second type of discount:
The Special Bench noted that SEBI guidelines did not prescribe any accounting treatment for the second type of discount, and thus, taxation principles should apply. The Tribunal's direction to the AO to examine the mandatory requirement for passing accounting entries was contrary to the Special Bench's decision. The Tribunal failed to appreciate that the claim of Rs. 5.74 crores represented the second type of discount, which is allowable as a deduction under taxation principles, irrespective of its accounting treatment.

Conclusion:
The Tribunal acknowledged the mistakes apparent from the record and replaced the existing paragraphs 15.4 and 15.5 of the order with new paragraphs, clarifying that the second type of discount is allowable as a deduction. The Tribunal upheld the CIT(A)'s order allowing the deduction of Rs. 5.74 crores claimed by the assessee, emphasizing that the total income must be computed as per the provisions of the Income Tax Act, irrespective of the accounting entries. The miscellaneous application filed by the assessee was allowed.