2021 (9) TMI 1168 - AT - Income Tax

Allowability of ESOP compensation expenses - CIT-A allowed the claim - HELD THAT - CIT-A had done well reasoned order and we do not find any infirmity in the order of the CIT(A). Ld. CIT(A) after considering submissions and case laws cited/relied on by the assessee, he has rightly allowed the appeal of the assessee on the issue of ESOP compensation expenses. We also notice from the above order of the CIT(A) that the disputed amount has already been considered as a perquisite in the hands of the employees while calculating income of the employees Therefore this ground of revenue is dismissed. Disallowance u/s 14A - Proof of receiving exempt income - HELD THAT - We observe from the order of the CIT(A) and financial statements filed by the assessee before us that in the impugned AY the assessee has not received any exempt income, therefore, no disallowance can be made As relying on M/S MAHESWARI MEGA VENTURES LTD. 2017 (2) TMI 402 - ITAT HYDERABAD there is no substance in the grounds raised by the revenue regarding disallowance u/s. 14A in the case of the assessee. Therefore, this ground of appeal of revenue is dismissed.

Issues:
1. Allowability of expenses with enduring benefit as revenue.
2. Allowance of notional loss claimed as expenditure.
3. Allowability of ESOP expenditure.
4. Disallowance under section 14A for exempt income.
5. Deletion of addition under section 14A.
6. Other grounds raised during appellate proceedings.

Analysis:
1. The appeal by the Revenue challenged the CIT(A)'s order regarding the claim of expenses with enduring benefit as revenue. The Assessing Officer disallowed ESOP expenses of ?2,31,02,825 under Rule 11 UA, which the CIT(A) allowed based on ICAI guidelines and SEBI mandates. The CIT(A) relied on precedents like Mindspeed Technologies and Biocon Limited, while the AO cited Ranbaxy Laboratories and VIP Industries decisions. The Karnataka High Court and Delhi High Court decisions supported the allowability of ESOP expenses. The CIT(A) upheld the appeal, considering the fair value and DCF method used by the appellant, concluding that the expenses were allowable as revenue expenditure.

2. The second ground involved the allowance of notional loss claimed as expenditure. The AO added ?13,45,777 under section 14A for investments in equity instruments. The CIT(A) ruled in favor of the assessee, citing the absence of exempt income and precedents like Maheshwari Mega Ventures Limited case. The CIT(A) dismissed the Revenue's appeal, stating that no disallowance under section 14A could be made in the absence of exempt income.

3. The issue of ESOP expenditure was extensively discussed, with the CIT(A) allowing the claim based on legal guidelines and precedents. The CIT(A) considered the valuation methods used by the appellant and rejected the AO's disallowance of the entire ESOP expenses. The CIT(A) highlighted the fair valuation and justifications provided by the appellant, ultimately allowing the claim of ?2,31,02,829 as revenue expenditure.

4. The disallowance under section 14A for exempt income was addressed by the CIT(A) based on the absence of exempt income in the case. The CIT(A) relied on judgments from the High Courts of Karnataka and Delhi, along with a tribunal decision, to support the dismissal of the Revenue's appeal regarding the disallowance under section 14A.

5. The deletion of the addition under section 14A was supported by the CIT(A) due to the absence of exempt income in the relevant assessment year. The CIT(A) referenced judgments from the High Courts of Karnataka and Delhi, as well as a tribunal decision, to justify the dismissal of the Revenue's appeal on this ground.

6. The overall appeal by the Revenue was dismissed by the ITAT Hyderabad, upholding the CIT(A)'s decisions on the issues of ESOP expenses and disallowance under section 14A. The ITAT concurred with the CIT(A)'s well-reasoned orders and found no infirmity in the decisions made. The ITAT's judgment was pronounced on 17th September 2021.

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