2025 (1) TMI 644 - AT - Income Tax

Allowability of Employee Stock Option Plan (ESOP) expenditure - AO observed that the assessee had neither claimed this expenditure in the return of income filed nor during the course of assessment proceedings / appeal proceedings before the CIT(A). HELD THAT - As fact on record that on account of Nil expenditure charged to profit loss account for the year under consideration for ESOP expenditure, no deduction was claimed by the assessee in the return of income. Considering the fact that this issue was raised first time before ITAT, the same needs examination at the lower level, therefore, the coordinate Bench has remitted back the issue to the file of AO. AO has rejected the claim of the assessee without considering the decision of the ITAT, Special Bench, Bangalore 2013 (8) TMI 629 - ITAT BANGALORE and Hon ble Karnataka High Court 2020 (11) TMI 779 - KARNATAKA HIGH COURT . In our considered view, as far as the lower authorities are concerned, the abovesaid two decisions are binding on the authorities below as well as for us. After the decision of higher wisdom, still the authorities are not respecting the same. It is clearly disrespecting the principles of judicial precedents and judicial discipline. Violating the principles of judicial discipline - Assessing Officer has applied his lower wisdom and rejected the claim of the assessee without considering the higher wisdom of Hon ble High Court and ITAT Special Bench. The coordinate Bench felt that this issue needs examination and gave one opportunity to the Revenue, but lower authorities does not care for the opportunity and in order to keep the issue alive since the ESOP issue was pending before Hon ble Supreme Court, they have grossly rejected the claim of the assessee. Therefore, respectfully following the decision of Hon ble High Court in Biocon Ltd. 2020 (11) TMI 779 - KARNATAKA HIGH COURT , we direct the Assessing Officer to allow the claim of the assessee

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

Whether the Employee Stock Option Plan (ESOP) expenditure claimed by the assessee is allowable as a business expenditure under the Income Tax Act, 1961.
Whether the lower authorities erred in not following the binding directions of the Income Tax Appellate Tribunal (ITAT) regarding the ESOP expenditure claim.
Whether the principles of judicial discipline were violated by the lower authorities in rejecting the ESOP expenditure claim despite precedents set by higher judicial authorities.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Allowability of ESOP Expenditure

Relevant Legal Framework and Precedents: The case revolves around the interpretation of the Income Tax Act, specifically Sections 30 to 37, which deal with allowable business expenditures. The precedents include the Special Bench decision in Biocon Limited vs. DCIT and its affirmation by the Karnataka High Court, which held that ESOP discounts are deductible as business expenses.
Court's Interpretation and Reasoning: The Tribunal acknowledged that ESOP expenditure, as a form of employee cost, is deductible. The ITAT had previously remanded the issue for verification of the amounts claimed, not for questioning the allowability of the expenditure itself.
Key Evidence and Findings: The assessee had two ESOP schemes compliant with SEBI guidelines. The ESOP expenditure was initially not claimed in the return due to the use of the "intrinsic value" method, which resulted in no charge to the profit and loss account. However, using the "fair value" method, a charge was computed and disclosed in the financial statements.
Application of Law to Facts: The Tribunal applied the principles established in the Biocon case, which allows the deduction of ESOP expenses during the vesting period. The Tribunal noted that the lower authorities failed to consider these binding precedents.
Treatment of Competing Arguments: The Tribunal dismissed the Revenue's argument that ESOP expenses are notional and not allowable, emphasizing the binding nature of the Biocon decision.
Conclusions: The Tribunal concluded that the ESOP expenditure is allowable as a business deduction and directed the Assessing Officer to allow the claim.

Issue 2: Adherence to Judicial Precedents and Discipline

Relevant Legal Framework and Precedents: The principles of judicial discipline require lower authorities to follow the decisions of higher appellate bodies. This is supported by Supreme Court rulings such as UOI vs. Kamlakshi Finance Corporation Ltd and CCE vs. Dunlop India Ltd.
Court's Interpretation and Reasoning: The Tribunal criticized the lower authorities for not adhering to the principles of judicial discipline by disregarding the ITAT's directions and the Karnataka High Court's decision in Biocon.
Key Evidence and Findings: The Tribunal found that the lower authorities exceeded their jurisdiction by questioning the Tribunal's power to admit a fresh claim via cross-objection.
Application of Law to Facts: The Tribunal applied the principles of judicial discipline, emphasizing that the lower authorities must respect and implement the decisions of higher appellate bodies.
Treatment of Competing Arguments: The Tribunal rejected the Revenue's reliance on pending litigation before the Supreme Court as a basis for denying the ESOP claim, noting that existing precedents must be followed until overturned.
Conclusions: The Tribunal directed the lower authorities to comply with its earlier directions and allow the ESOP expenditure claim, reinforcing the importance of judicial discipline.

3. SIGNIFICANT HOLDINGS

Verbatim Quotes of Crucial Legal Reasoning: "The principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities."
Core Principles Established: The judgment reaffirms that ESOP expenditure is deductible as a business expense and underscores the necessity for lower authorities to adhere to judicial precedents and directions from higher appellate bodies.
Final Determinations on Each Issue: The Tribunal allowed the assessee's appeal, directing the Assessing Officer to allow the ESOP expenditure claim for both assessment years 2012-13 and 2013-14, thus upholding the principles of judicial discipline and the allowability of ESOP expenses.

The judgment emphasizes the importance of judicial consistency and adherence to established legal precedents, particularly in the context of tax law and the treatment of business expenditures like ESOPs.

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