2024 (1) TMI 656 - AT - Income Tax

Deduction of Employees Stock Option Plan (ESOP) cost - claim made by the assessee in the revised return - HELD THAT - The assessee furnished the Copy of invoice raised by ITC Ltd. towards ESOP expenses and period wise breakup thereof; Copy of relevant extracts of bank statement and RTGS details of the assessee company showing the payment made to ITC Ltd.; Relevant extract of audited financial statements of the assessee company for the year under 31/03/2017 i.e., immediately succeeding year to the year under consideration with comparative financial statements for financial year 2015-16 and Copy of ITC Employees Stock Option Scheme-2010 policy. We further find that as per the ESOP Scheme, such expenses had been duly taxed in the hands of the employees as perquisites and included in Form-16 of the employees and due deduction of tax at source were indeed made by the assessee treating them as salary. CIT(A) had confirmed the disallowance of the AO on the ground that assessee had not rebutted the findings of the Ld. AO. This is factually incorrect as the CIT(A) himself has reproduced the various rebuttal made by the assessee on the findings of the Ld. AO and the same are duly reproduced - CIT(A) having recorded the rebuttal of the assessee on the findings of the AO in his appellate order ought to have at least given a preliminary finding as to how the rebuttal given by the assessee does not advance the case of the assessee. Without doing the preliminary work, and by ignoring the various judicial precedents available on the impugned issue, where it had been categorically held that ESOP expenditure is allowable expenditure in the hands of the company, the Ld. CIT(A) grossly erred in confirming the disallowance. See NEW DELHI TELEVISION LTD. 2017 (2) TMI 1399 - DELHI HIGH COURT , M/S. BIOCON LTD. 2020 (11) TMI 779 - KARNATAKA HIGH COURT and LEMON TREE HOTELS LTD 2015 (11) TMI 404 - DELHI HIGH COURT and M/S. PVP VENTURES LIMITED 2012 (7) TMI 696 - MADRAS HIGH COURT Thus claim of deduction of ESOP expenditure was made by the assessee in the revised return filed on 31/03/2019 which is well within the time limit prescribed u/s 139(5) of the Act. Hence, we have no hesitation to hold that assessee s claim of deduction is squarely allowable as deduction.

Summary

Issues involved:
The only issue in this appeal is whether the Learned Commissioner of Income Tax (Appeals) was justified in upholding the action of the Learned Assistant Commissioner of Income Tax in rejecting the claim made by the assessee for deduction of Employees Stock Option Plan (ESOP) cost amounting to Rs. 4,27,27,652.

Details of the Judgment:

Issue 1 - Allowability of ESOP Expenditure:
The assessee, a subsidiary of ITC Ltd, claimed deduction of expenses relating to Employee Stock Options amounting to Rs. 4,27,27,652 in the revised return for the Assessment Year 2016-17. The ESOPs were granted as per SEBI guidelines and the value of ESOPs granted was determined using the Black Scholes model. The assessee sought reimbursement of the ESOP value from ITC Ltd, which was duly paid in the subsequent assessment year. The Learned AO disallowed the deduction, citing reasons such as incomplete information provided by the assessee and the timing of vesting dates not falling within the relevant year.

Issue 2 - Disallowance by Ld. CIT(A):
The Learned Commissioner of Income Tax (Appeals) upheld the disallowance made by the Learned AO, despite the assessee providing all relevant documents. The Ld. CIT(A) failed to acknowledge the rebuttals made by the assessee against the AO's findings. However, the Tribunal found that the claim of deduction of ESOP expenditure was made within the prescribed time limit under the Income Tax Act, thus holding that the deduction is allowable.

Significant Phrases:
- ESOP expenses were duly taxed in the hands of employees as perquisites.
- Deduction of tax at source was made by the assessee treating ESOP expenses as salary.
- The issue is covered in favor of the assessee by various judicial precedents.
- The claim of deduction of ESOP expenditure was made within the time limit prescribed under the Act.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, holding that the claim of deduction of ESOP expenditure amounting to Rs. 4,27,27,652 is allowable. The judgment was pronounced on 12th January 2024.