2023 (3) TMI 1037 - AT - Income Tax

Revision u/s 263 by CIT - Employee Stock Option (ESOP) Scheme expenses Allowability - HELD THAT - As brought to our notice that the order relied by the in the case of Ranbaxy Laboratory Ltd. 2009 (6) TMI 126 - ITAT DELHI-I wherein examined in the case of Biocon Limited ( 2013 (8) TMI 629 - ITAT BANGALORE as confirmed by hc 2020 (11) TMI 779 - KARNATAKA HIGH COURT hence the order relied upon by the ld. PCIT is no more good law. Hence, we hold that the directions given in the order u/s. 263 are not valid. Prior Period expenses - Hon'ble Delhi High Court in the case of CIT vs Anil Kumar Sharma 2010 (2) TMI 75 - DELHI HIGH COURT also held that where there was no lack of enquiry by AO even if it could be said to be inadequate, proceedings under section 263 of the Act was not valid since the AO had applied his mind to complete details filed by the assessee. In light of the facts submitted in the original assessment, the above expenses are crystallized during the year and no deduction of the same is claimed in the earlier year. Hence, the aforesaid expenses are an allowable deduction under the Act while computing the profit and gains of business and profession that the AO has correctly appreciated the said position while passing the assessment order. Hence, we hold that the directions given in the order u/s. 263 are not valid. Interest on Late Payment of TDS - as argued that the definition of tax under the Act read with provisions of section 40(a)(ii) of the Act, the interest paid under section 201(1A)/206C(7) on late payment of TDS does not fall within the meaning of 'tax' and hence no adjustment is warranted in the returned income - We find that the AO has failed to disallow above mentioned interest expenditure while passing the order u/s. 143(3) and hence rendering the assessment erroneous and prejudicial to the interest of revenue. The order of the ld. PCIT u/s. 263 is upheld on this issue.

Summary

Issues Involved:
1. Disallowance of Employee Stock Option Plan (ESOP) expenses.
2. Disallowance of Prior Period expenses.
3. Disallowance of interest on late payment of Tax Deducted at Source (TDS)/Tax Collected at Source (TCS).

Summary:

1. Disallowance of Employee Stock Option Plan (ESOP) Expenses:
The Principal Commissioner of Income Tax (Pr. CIT) invoked jurisdiction under Section 263 of the Income-tax Act, 1961, to disallow ESOP expenses of INR 3.76 crores, asserting that these do not amount to incurring of expenditure wholly and exclusively for business purposes. The assessee argued that the allowability of ESOP expenses is settled by the Special Bench of Bangalore Tribunal in the case of Biocon Limited, which held that ESOP discounts are deductible as employee costs. The Tribunal noted that the Pr. CIT relied on an outdated decision (Ranbaxy Laboratory Ltd. vs. Addl. CIT) which has been overruled by higher judicial authorities. Therefore, the Tribunal held that the directions given in the order under Section 263 are not valid.

2. Disallowance of Prior Period Expenses:
The Pr. CIT also disallowed prior period expenses amounting to INR 79,10,087, stating that the Assessing Officer (AO) did not thoroughly examine whether these expenses were actually crystallized in the year under consideration. The assessee contended that the AO had made specific inquiries and allowed the expenses after proper examination. The Tribunal emphasized that revision jurisdiction under Section 263 can be invoked for a "lack of inquiry" and not for "inadequate inquiry." Citing various judicial precedents, the Tribunal concluded that the AO had conducted proper inquiries, and therefore, the directions under Section 263 were invalid.

3. Disallowance of Interest on Late Payment of TDS/TCS:
The Pr. CIT disallowed interest on late payment of TDS/TCS amounting to INR 6,96,533, arguing that such interest is not a business expenditure. The assessee claimed that this interest is compensatory and does not fall within the definition of 'tax' under Section 2(43) of the Act. The Tribunal upheld the Pr. CIT's order on this issue, referencing judicial pronouncements that support the disallowance of such interest as a business expenditure.

Conclusion:
The Tribunal allowed the appeal of the assessee on the issues of ESOP expenses and prior period expenses, holding that the directions under Section 263 were not valid. However, the Tribunal upheld the Pr. CIT's order regarding the disallowance of interest on late payment of TDS/TCS. The appeal was thus partly allowed.