2023 (8) TMI 1626 - AT - Income Tax

Disallowance on account of Employees Stock Option Plan ( ESOP ) claimed by the Appellant u/s 37(1) - HELD THAT - During the year under consideration the assessee company had granted options to its employees under the scheme of ESOP s to purchase its securities at a price lower than the market value price. Assessee had followed the intrinsic value-based method of accounting for stock options granted based on the Guidance Note on Accounting for Employees Share-based payments issued by ICAI. The assessee company during the course of assessment explained that ESOP issued to the employees was revenue expenditure for the company in the interest of the business of the company so that talents of the employees is retained in the company to perform and compete in the market place. As in assessee case itself for assessment year 2009-10 2011-12 2015 (6) TMI 1200 - ITAT MUMBAI 2010-11 2017 (11) TMI 1860 - ITAT MUMBAI as held that ESOP expenses is an allowable deduction u/s. 37(1). Disallowance u/s 14A r.w.Rule 8D - CIT(A) has dismissed the ground of appeal of the assessee by referring the amendment made by Finance Act 2022 to Sec.14A by inserting a non-obstante clause that the provision of this section shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the previous year relevant to assessment year and the expenditure has been incurred during the said previous year in relation to such exempt income - HELD THAT -The Hon ble Delhi High Court in the case of Chem Investment Ltd. 2015 (9) TMI 238 - DELHI HIGH COURT held that provision of Sec. 14A will not be applied in case no exempt income is received or receivable during the relevant previous year. As in the case of PCIT Vs. Era Infrastructure (I) Ltd. 2022 (7) TMI 1093 - DELHI HIGH COURT held that amendment made by Finance Act 2022 to Sec. 14A by inserting non-obstante clause and explanation will take effect from 01.04.2022 and cannot be presumed to have retrospective effect. Therefore we delete the addition made by the assessing officer u/s 14A of the Act. Disallowance u/s 14A in computing book profit u/s 115JB - We find that in the case of ACIT Vs. Vireet Investment Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI held that disallowance made u/s 14A cannot be added for computing book profit u/s 115JB of the Act. Therefore we find that decision of ld. CIT(A) in sustaining the addition is not justified.

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

Whether the disallowance of the Employee Stock Option Plan (ESOP) expenses under Section 37(1) of the Income-tax Act, 1961, as capital expenditure was justified.
Whether the disallowance under Section 14A of the Income-tax Act, read with Rule 8D of the Income-tax Rules, 1962, was appropriate, particularly in the absence of exempt income during the assessment year.
Whether the disallowance under Section 14A should be added to the book profits under Section 115JB of the Income-tax Act.
Whether the imposition of interest under Sections 234C and 234D was justified.

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Disallowance of ESOP Expenses

Relevant legal framework and precedents: Section 37(1) of the Income-tax Act allows deduction of revenue expenses incurred wholly and exclusively for business purposes. The Tribunal referenced previous decisions, including the case of Biocon, which held that ESOP expenses are allowable as revenue expenditure.
Court's interpretation and reasoning: The Tribunal found that the ESOP expenses were incurred to retain talent and ensure employee motivation, thus qualifying as revenue expenditure under Section 37(1).
Key evidence and findings: The assessee cited prior favorable ITAT decisions for similar claims in earlier years, emphasizing the business purpose of the ESOP.
Application of law to facts: The Tribunal applied the precedent set in Biocon and other cases, determining that the ESOP expenses should be treated as revenue expenditure.
Treatment of competing arguments: The Tribunal rejected the assessing officer's view that ESOP expenses are capital in nature, emphasizing the business rationale behind such expenses.
Conclusions: The Tribunal allowed the appeal, directing the assessing officer to treat the ESOP expenses as revenue expenditure.

Issue 2: Disallowance under Section 14A read with Rule 8D

Relevant legal framework and precedents: Section 14A disallows expenses incurred in relation to income not includible in total income. The Tribunal referenced the Delhi High Court's decision in Chem Investment Ltd., which held that Section 14A does not apply where no exempt income is earned.
Court's interpretation and reasoning: The Tribunal noted that the Finance Act 2022 amendments to Section 14A do not have retrospective effect and should not apply to the assessment year in question.
Key evidence and findings: The assessee had not earned any exempt income during the relevant year, supporting non-applicability of Section 14A.
Application of law to facts: The Tribunal applied the Delhi High Court's interpretation, concluding that disallowance under Section 14A was unwarranted.
Treatment of competing arguments: The Tribunal dismissed the CIT(A)'s reliance on the Finance Act 2022 amendments, emphasizing the lack of retrospective application.
Conclusions: The Tribunal deleted the addition made under Section 14A.

Issue 3: Addition of Disallowance under Section 14A to Book Profits under Section 115JB

Relevant legal framework and precedents: Section 115JB pertains to the computation of book profits for minimum alternate tax. The Tribunal referenced the Special Bench decision in Vireet Investment Pvt. Ltd., which held that disallowance under Section 14A should not be added to book profits.
Court's interpretation and reasoning: The Tribunal followed the Special Bench's reasoning, finding that the addition of Section 14A disallowance to book profits was unjustified.
Key evidence and findings: The Tribunal relied on established precedents to support its decision.
Application of law to facts: The Tribunal applied the Vireet Investment Pvt. Ltd. decision, determining that the CIT(A)'s decision to sustain the addition was incorrect.
Treatment of competing arguments: The Tribunal overruled the CIT(A)'s decision, emphasizing the Special Bench's interpretation.
Conclusions: The Tribunal allowed the assessee's appeal, removing the Section 14A disallowance from the book profit computation.

Issue 4: Imposition of Interest under Sections 234C and 234D

The judgment does not provide detailed analysis or conclusions regarding the imposition of interest under Sections 234C and 234D, suggesting that these were not central to the Tribunal's decision.

SIGNIFICANT HOLDINGS

Verbatim quotes of crucial legal reasoning: "An identical issue was considered by the Tribunal Special Bench Bangalore in the case of Biocon... has held that ESOP expenses is an allowable deduction u/s. 37(1) of the Act."
Core principles established: ESOP expenses are considered revenue expenditure under Section 37(1). Section 14A disallowance is inapplicable in the absence of exempt income, and such disallowance should not be added to book profits under Section 115JB.
Final determinations on each issue: The Tribunal allowed the appeals, reversing the CIT(A)'s decisions on all grounds, and directed the assessing officer to treat ESOP expenses as revenue expenditure, delete the Section 14A disallowance, and exclude the disallowance from book profits.

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