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TMI Blog2024 (9) TMI 1045X X X X Extracts X X X X X X X X Extracts X X X X ..... jay Garg, Judicial Member And Shri Rakesh Mishra, Accountant Member For the Appellant : Shri Biswanath Paul, FCA For the Respondent : Shri Subhro Das, Addl. CIT, Sr. DR ORDER PER RAKESH MISHRA, ACCOUNTANT MEMBER: This appeal filed by the assessee is against the order of the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi (hereinafter referred to as the Ld. CIT(A) passed u/s. 250 of the Income Tax Act, 1961 (hereinafter referred to as the Act ) for AY 2016-17 dated 15.03.2023, passed against the assessment order u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the Act ), dated 26.12.2018. 2. The grounds of appeal raised by the assessee are reproduced as under: 1 That the CIT(A) erred in not allowing the additional claim of ESOP (Employee Stock Option Plan) expenses. 2. That under the facts circumstances of the case, the CIT(A) erred in confirming the disallowance of expenditure incurred under ESOP amounting to Rs. 5,95,65,043/- made by the Ld. AO. The disallowance is unjustified and needs to be deleted. 3. The assessee craves leave to add, alter, amend or withdraw any ground or grounds of appeal before or at the time of hear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate authority did not deem necessary to enter into the merits of the claim. 4. Aggrieved with the order of the Ld. CIT(A), the assessee has filed this appeal before the Tribunal. 5. We have heard the rival contention and gone through the submissions filed during the course of the hearing before us. Before the Ld. AO, the assessee explained as to how the claim of the expenses not claimed in the return of income could be put up during the course of assessment proceedings. It was also explained in the said letter that ESOP cost is eligible as a business expenditure and the assessee requested the Ld. AO to entertain the claim and allow the same while finalising the assessment. However, the Ld. AO rejected the claim stating that ESOP cost could not be allowed as business expenditure, there is no expenditure incurred by the company towards ESOP cost. The relevant extract from the assessment order is as under: 7.1 During the course of scrutiny proceedings, the assessee, in respect of claim of ESOP expenses, submitted that the assessee has not claimed ESOP cost of Rs. 5,95,65,043/- in the original return or revised return, and further, it is putting up the claim of Rs. 5,95,65,043/- during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and grant price being perquisite is added to his/her salary on which he / she has paid Income-tax. 1.4 On exercise of Stock Options by employee, GRUH credits grant price received from employees to share capital for face value and share premium for the amount which in excess of face value of shares. In other words, if the face value of share is Rs. 100 and the employee gets the right of option at grant price of Rs. 250 per share, then, Rs. 150 is accounted as share premium and Rs. 100 is share capital on receipt of money from employee on allotment at the time of exercise of option. Thus, though the market price of share on the date of exercising the option is much more than grant price, GRUH receives less amount, which is in nature of discount allowed by GRUH to employees. Such discount is nothing but employee cost to GRUH, fully allowable as expenditure under section 37 of the Income Tax Act, 1961, which comes to Rs. 5,95,65,043/ employees wise list is enclosed herewith marked as Annexure- 1 1. Expenses not claimed in original or revised Income Tax Return but Claim put up during assessment proceedings: 2.1 In case of certain claims, to which the assessee is entitled to deduction bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t filing a revised return under section 139(5) of the Income Tax Act, 1961. Thus, documents placed on record with or without a covering letter with the intention to remove any omission or wrong statement in the return or record, cannot be ignored simply because a revised return was not furnished unless it is shown that the purpose of the Act is not satisfied -CIT. Vs. R.B.B.M.H. Trust, 195 ITR, p. 825 (Cal). 6. The assessee also contended that there are other provisions in the Act which clearly indicate that the assessee is entitled to make any claim in respect of an item of income or deduction before the completion of assessment under section 143(3) of the Act and also relied upon the Citizen s Charter issued by the Income Tax Department which states that it is the duty of the Ld. AO to inform the tax payers of their rights, duties, entitlements and obligations under the law and such occasion could arise during the assessment proceedings. The assessee relied upon the following citations: (a) National Thermal Power Co. Ltd. Vs. C.I.T., 229 ITR, p.383(SC) (b) C.I.T. Vs. Prabhu Steel Industries Pvt. Ltd., 171 ITR, p530, (Bom.) (c) Steel Ingots (P.) Ltd. Vs. C.I.T., 86 Taxman, p.440 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (SC)). 7. The appellant submits that the decision of the Hon'ble Supreme Court in the case of Goetze India (supra) is distinguishable. For the reason that the said decision only disallows fresh claim to be entertained by an assessing officer, however, the same does not prohibit an appellate authority to provide relief, till this extent. The said point of distinction has been upheld by the Hon'ble Delhi High Court in the cases of Aspentech (supra) and International Tractors (supra). Thus, placing reliance on the same, the appellant submits that the fresh claim of the appellant ought to have been allowed by the appellate authority. As a result, based on such submissions, the impugned order is bad in law, till this extent. 6.2 In this context, Hon ble Supreme Court in the case of Wipro Finance Ltd. (supra) have held as under: 9. A priori, we are of the considered opinion that the analysis done by the ITAT and the conclusion arrived at in respect of the subject claim of the appellant being the correct approach consistent with the exposition of this Court, needs to be upheld. In our opinion, the High Court missed the relevant aspects of the analysis of the ITAT concerning the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Learned counsel for the department had also relied on the decision of this Court in Assistant Commissioner of Income Tax, Vadodara us. Elecon Engineering Company Limited. This decision is on the question of application of Section 43A of the 1961 Act. Accordingly, the exposition in this decision will be of no avail to the fact situation of the present case. For, we have already noticed that the appellant had not acquired any asset from any country outside India for the purpose of his business. 13. In view of the above, this appeal ought to succeed. The impugned judgment and order of the High Court needs to be set aside and instead, the decision of the ITAT dated 3.6.2004 in favour of the appellant on the two questions examined by the High Court in the impugned judgment, needs to be affirmed and restored. We order accordingly. Hence, we hold that the assessee could make an allowable claim before the appellate authorities and the same has to be considered as the limitation of revised return for making a claim applies to the powers of the assessing officer and not of the appellate authorities. 7. As regards, the allowability of ESOP cost as business expenditure under section 37 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Division Bench of Madras High Court in CIT-III Chennai v. PVP Ventures Ltd. (TC(A) No. 1023 of 2005) where a similar question was answered in favour of the Assessee by holding that the cost of ESOP could be debited to the profit and loss account of the Assessee This Court has also in its decision dated 4th August 2015 in ITA No.2 of 2002 (CIT v. Oswal Agro Mills Ltd.) held that the expenditure incurred in connection with issue of debentures or obtaining loan should be considered as revenue expenditure In the circumstances the impugned order of the ITAT answering the question in favour of the Assessee is affirmed. iii. In the decision of the Bangalore Special Bench in the case of Biocon Ltd vs. DCIT-(2013) 25 ITR(T) 602, the special bench held as under: a. Allotment of shares to the employees at a price lower than the market price a mode of compensating to the employees for their continued services to the company and is a part of their remuneration and cannot be described as a short receipt of share premium or a capital expenditure. b. The discount on options under ESOS is an ascertained liability and not contingent liability. C. Discount on option under ESOS is in nature of employ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... qualify as deductible expenditure under section 37 of the Act. The expenditure should not be capital in nature: Another criterion which needs to be satisfied in order to make a claim under section 37 of the Act is that the expenditure should not be capital in nature. Accordingly, ESOS discount is revenue in nature since it is compensation to the employee for his services in employment considering the following aspect. i. Employees eligible for an ESOS are granted the options considering their duration of service with GRUH, responsibilities, shouldered, designation, performance etc. ii. The vesting of ESOS is spread over three years. iii. The scheme provides for lapse of options on termination of employment or resignation. The expenditure should not be in personal in nature: Considering that the employees are being compensated for their services rendered for benefit of business ESOS discount cannot not be treated as personal expenditure of the company Wholly and exclusively for the purpose of business: The term 'wholly and exclusively for business has not been defined under the Act. However, judicial authorities have time and again interpreted this phrase. The adverb 'wholly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L is notional in nature since the assessee has neither laid out or expended any amount while choosing to receive no/lesser securities premium. The alternative argument that this ITAT has supported is since the receipt of securities premium is not chargeable to tax being a capital receipt any short collection of securities premium should also be considered as capital outlay and cannot be allowed as expenditure. The Delhi ITAT in the case of Ranbaxy (Supra) has relied on the following court rulings which have held that shares issued against assets/Technical know-how contributed by shareholders cannot be claimed as revenue expenditure: (a) Eimco K.C.P Ltd. Vs. CIT 159 CTR 137 (Supreme Court) (b) CIT Vs. Reinz Talbros Pvt. Ltd. 252 ITR 637 (Delhi HC) The above views of Delhi ITAT in the case of Ranbaxy (supra) were also upheld subsequently by the following judicial courts: - Hyderabad ITAT in the case of Medha Servo Drivers Limited, ITA No. 1114/Hyd/2008. - Mumbai Tribunal in the cases of : (a) DCIT Vs. Blow Plast Limited, ITA No. 512/Mum/2009 (b) Mahindra Mahindra Vs. DCIT ITA No. 8597/Mum/2010 (c) M/s VIP Industries Vs. DCIT, ITA No. 7242/Mum/2008 9. The Ld. CIT(A), after elaborate d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pvt. Ltd. v. JCIT, [2023 (4) TMI 793 - ITAT BANGALORE), (vi) DCIT v. Bandhan Bank Ltd., (2023 (4) TMI 143, ITAT, KOLKATA (vii) ACIT v. Cvent India Pvt. Ltd., [2023 (2) TMI 1063 ITAT DELHI], (viii) Biocon Ltd. v. Dy. CIT [2013] 35 taxmann.com 335 (ITAT- Bangalore), affirmed by the Hon'ble High Court in [2021] 430 ITR 151 (Kar) and the Hon'ble Supreme Court in 2021 (8) TMI 1322SC ORDER, and (ix) Novo Nordisk India Pvt. Ltd. v. DCIT, (2013 (11) TMI 218 - ITAT BANGALORE. 10. Therefore, in light of the aforesaid submissions, it is humbly prayed that the impugned order ought to be partly set aside, till this extent. In addition, it is humbly prayed that the cost incurred towards ESOP be treated as revenue expenditure and allowed as deduction in terms of Section 37 of the Act. 9.1 It was also submitted that in the case of assessee s own case ITA No. 370/Kol/2022, order dated 27.03.2023 have allowed the claim. The relevant extract from which is as under: 5. Ld. Sr. DR referred to the conditions stipulated u/s. 37(1) of the Act and asserted that claim of ESOP expenditure by the assessee does not satisfy the conditions stated therein. Ld. Sr. DR also submitted that assessee has not i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Held, yes - Whether discount on issue of ESOPs was not a contingent liability but was an ascertained liability - Held, yes - Whether issuance of shares at a discount would be an expenditure incurred for purposes of section 37(1) as primary object of aforesaid exercise was not to waste capital but to earn profits by securing consistent services of employees and therefore, same could not be construed as short receipt of capital - Held, yes - Whether thus, discount on issue of ESOP was allowable deduction under section 37(1) - Held, yes [Para 10] [In favour of assessee] 6.1. Ld. Counsel also referred to the decision of Hon ble High Court of Delhi in the case of CIT Vs. Lemon Tree Hotels Ltd. in ITA No. 107/2015 dated 18.08.2015 on a similar issue which was considered by the Coordinate bench of ITAT, Delhi in the case of ACIT Vs. People Strong HR Services (P) Ltd. (2022) 134 taxmann.com 351 (Del.Tri.). In this decision, judgments of Hon ble High Court of Karnataka and of the Hon ble Special Bench were also considered, allowing the claim of the assessee. Relevant extract from the said decision of ITAT, Delhi is reproduced as under: 6. After considering the rival submissions and going th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court in the case of Biocon Ltd. (supra) and very recent decision dated 07-12- 2021 of the Hon'ble ITAT Delhi Bench in the case of ACIT vs. People Strong HR Services (P.) Ltd., it is held that expenditure on ESOP is in the nature of employee cost and hence is allowable u/s. 37(1) as deduction in computing the income under the head profits and gains of business and profession during the vesting period. The ground raised by the appellant regarding this issue is allowed. 7.1. Considering the facts on record and the judicial precedents referred above as well as going through the analysis of the test contemplated u/s. 37(1) of the Act by the ld. CIT(A), we do not find any reason to interfere with the finding arrived at by the Ld. CIT(A). Accordingly, ground taken by the revenue in this respect is dismissed. 9.2 It was informed that the order of the ITAT has been upheld by the Hon ble Calcutta High Court vide order in ITAT/286/2023 IA No:GA/1/2023, GA/2/2023 Principal Commissioner of Income Tax 2 Kolkata V Bandhan Bank Ltd, order dated 7th February, 2024 whereby the appeal of the Revenue has been dismissed and the order of the Tribunal has been upheld. Vide second written submis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial question of law is answered against the revenue. 4. Hence, in light of the above, the appellant humbly submits that the said view maybe adopted in the present case, as the facts and circumstances are identical. The Ld. DR, on the other hand, relied upon the order of the Ld. CIT(A). 10. We have considered the rival contentions and examined the submissions filed. In the case of Commissioner of Income Tax, LTU v. Biocon Ltd. [2020] 121 taxmann.com 351 (Karnataka), on this issue it has been held as under: 6. We have considered the submissions made by learned counsel for the parties and have perused the record. The singular issue, which arises for consideration in this appeal is whether the tribunal is correct in holding that discount on the issue of ESOPs i.e., difference between the grant price and the market price on the shares as on the date of grant of options is allowable as a deduction under section 37 of the Act. Before proceeding further, it is apposite to take note of section 37(1) of the Act, which reads as under: Section 37(1) says that any expenditure (not being expenditure of the nature de-scribed in sections 30 to 36 and not being in the nature of capital expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia P. Ltd., supra and has recorded a finding that discount on issue of ESOPs is not a contingent liability but is an ascertained liability. 10. From perusal of section 37(1), which has been referred to supra, it is evident that an assessee is entitled to claim deduction under the aforesaid provision if the expenditure has been incurred. The expression 'expenditure' will also include a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which it is issued and the market value of the shares would also be expenditure incurred for the purposes of section 37(1) of the Act. The primary object of the aforesaid exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, the same cannot be construed as short receipt of capital. The tribunal therefore, in para-graphs 9.2.7 and 9.2.8 has rightly held that incurring of the expenditure by the assessee entitles him for deduction under section 37(1) of the Act subject to fulfilment of the condition. 11. The deduction of discount on ESOP over the vesting period is in accordance with the accounting in the books of accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een held that as under: 8.6 Admittedly, the ESOP scheme is a voluntary scheme launched by the employer to issue shares to their employees, with an intent to give a stake to the employees in the organisation as incentives for performing better. Such an expenditure is incurred to facilitate and promote the business and there is no enduring benefit or advantage or creation of asset to the company, rather it is to earn more revenue and the expenses incurred for such purpose is nothing but revenue expenditure. It is a general principle that any expenditure incurred for the purpose of business is a deductible expenditure and the amount spent by an assessee for labour/employees' welfare, would be deductible as revenue expenditure. In Dalmia Jain Co. Ltd. v. CIT [81 ITR 754], the Hon'ble supreme court held that expenditure incurred for maintenance of business is revenue in nature . 8.7 According to the assessees, the ESOP benefit is taxable in the hands of employees as 'perquisite' under section 17(2) of the Act and it was brought within the purview of Fringe Benefit Tax, which is an employee related expenditure. It is further pointed out by the assessees that similar claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een submitted by the Revenue. Pointing out to the Employees Stock Option Plan, the Tribunal in its order stated that it was a benefit conferred on the employee. So far as the company is concerned, once the option was given and exercised by the employee, the liability in this behalf got ascertained. This was recognised by SEBI and the entire Employees Stock Option Plan was governed by guidelines issued by SEBI. On the facts thus found, the Tribunal held that it was not a case of contingent liability depending on the various factors on which the assessee had no control. The expenditure in this behalf was an ascertained liability, thus the expenditure incurred being on lines of the SEBI guidelines, there could be no interference in the relief granted by the Assessing Authority for the expenditure arising on account of Employees Stock Option Plan. This expenditure incurred as per SEBI guidelines and granted by the Officer could not be considered as erroneous one calling for exercise of jurisdiction under section 263 of the Act. 8.9 It is also to be noted at this juncture that as against the aforesaid decision of this Court, SLP (C) No. 9091 of 2014 was filed and it was ultimately, dism ..... X X X X Extracts X X X X X X X X Extracts X X X X
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