2022 (3) TMI 1190 - AT - Income Tax

Disallowing Employees Stock Option Expenses (ESOP) - HELD THAT - We find that Co-ordinate Bench of ITAT Delhi has already taken view in favour of the assessee in the case of ACIT vs. People Strong HR Services (P.) Ltd. 2021 (12) TMI 553 - ITAT DELHI . Neither side, in the present appeal before us, has brought any relevant facts or circumstances for our consideration to distinguish the present case before us from the facts and circumstances of ACIT vs. People Strong HR Services (P.) Ltd. (supra). Further, the issue has been decided in favour of the assessee in the aforesaid precedents in the cases of Pr. CIT vs. New Delhi Television Ltd. 2020 (6) TMI 409 - ITAT DELHI , CIT vs. Lemon Tree Hotels Ltd. 2018 (4) TMI 1680 - DELHI HIGH COURT ; Biocon Ltd. 2020 (11) TMI 779 - KARNATAKA HIGH COURT Neither side has brought any facts and circumstances for our consideration to distinguish the present case from the facts and circumstances of the aforesaid circumstances. - Decided in favour of assessee.

Issues Involved:
1. Disallowance of Employees Stock Option Expenses (ESOP) amounting to ?4,99,46,617/-.
2. Disallowance of expenses amounting to ?14,823/- under Section 14A read with Rule 8D.

Issue-wise Detailed Analysis:

1. Disallowance of Employees Stock Option Expenses (ESOP) amounting to ?4,99,46,617/-:

The assessee filed a return of income declaring ?48,25,80,200/-, which was assessed at ?53,27,90,720/- after disallowing ESOP expenses of ?4,99,46,617/-. The ESOP expenses represented the difference between the Fair Market Value of stock options granted to employees and the amount paid by employees upon exercising the options. The assessee claimed this as a business expenditure under Section 37(1) of the Income Tax Act.

The Assessing Officer disallowed this claim, considering it a notional loss and capital expenditure. The CIT(A) upheld this disallowance, stating that ESOP expenses did not represent actual expenditure and were not allowable under Section 37(1).

The assessee appealed to the ITAT, citing various precedents, including the Special Bench decision in Biocon Ltd. 35 taxmann.com 335, which was upheld by the Karnataka High Court in CIT vs. Biocon Ltd. 121 taxmann.com 351. The assessee also referenced decisions from the Delhi High Court in Pr. CIT vs. New Delhi Television Ltd. 398 ITR 57 and CIT vs. Lemon Tree Hotels Ltd. ITA No.107/2015.

The ITAT noted that the issue was already decided in favor of the assessee in ACIT vs. People Strong HR Services (P.) Ltd. 134 taxmann.com 351, where it was held that ESOP discounts represent consideration for services rendered by employees and are deductible business expenses. The ITAT found no distinguishing facts in the present case and followed the precedents, directing the Assessing Officer to delete the addition of ?4,99,46,617/-.

2. Disallowance of expenses amounting to ?14,823/- under Section 14A read with Rule 8D:

The Assessing Officer also made an addition of ?2,63,907/- under Section 14A read with Rule 8D, representing expenditure incurred to earn exempt income by way of dividends. The CIT(A) confirmed ?14,823/- of this amount and directed verification of the remaining ?2,49,084/-.

During the ITAT proceedings, the assessee's counsel submitted that the assessee was not pressing this ground and withdrew the appeal regarding this issue. Consequently, the ITAT dismissed this ground as not pressed and withdrawn by the assessee.

Conclusion:

The ITAT partly allowed the appeal, directing the deletion of the ESOP expenses disallowance of ?4,99,46,617/- and dismissing the ground related to disallowance under Section 14A as withdrawn by the assessee.

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