Appeal allowed for ESOP expenses, R&D expenditure remanded for reconsideration with additional evidence. Order pronounced 01/11/2021. &D

The ITAT allowed the appeal regarding the disallowance of ESOP expenses, recognizing them as revenue expenditure based on precedents and valuation methods. The matter of R&D expenditure was remanded to the CIT(A) for reconsideration in light of additional evidence provided by the assessee, with the ITAT admitting the evidence to address previous queries. The appeal was allowed, and the order was pronounced on 01/11/2021.

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Issues Involved:

1. Disallowance of expenses incurred under the Employee Stock Option (ESOP) scheme.
2. Disallowance of business product and research development expenses (R&D expenditure).

Issue-wise Detailed Analysis:

1. Disallowance of ESOP Expenses:

The assessee instituted the Curadev Employee Stock Option Scheme (ESOP) on 01.04.2010 to attract and retain talented employees. The scheme provided for the grant of shares to employees, vesting over five years. The assessee claimed the value of vested options amounting to Rs. 96,30,345/- as revenue expenditure. The Assessing Officer disallowed this expenditure, considering it notional and capital in nature, hence not allowable under Section 37 of the Income Tax Act, 1961.

The CIT(A) affirmed the disallowance, citing the lack of evidence of vesting, TDS on the exercise price, and the list of employees granted ESOP. The CIT(A) relied on various case laws to support the decision.

The ITAT referred to several precedents, including the case of DCIT Vs. Integrated Cleanroom, where ESOP expenses were deemed allowable under Section 37(1). The ITAT noted that the ESOP expenses were calculated based on the market value and charged to employees, with the difference considered as an expense and taxed in their hands. The ITAT found the valuation method (DCF method) reasonable and upheld the ESOP expenses as revenue expenditure.

The ITAT also referred to the Madras High Court's decision in CIT Vs. PVP Ventures Limited and the Delhi High Court's decision in CIT Vs. Lemon Tree Hotels Ltd., which held that ESOP expenses could be debited to the profit and loss account as revenue expenditure. Consequently, the ITAT allowed the appeal on this issue, recognizing the ESOP expenses as revenue expenditure.

2. Disallowance of R&D Expenditure:

The assessee incurred R&D expenditure amounting to Rs. 64,59,150/- for a research project in collaboration with Greenwich University Enterprises Limited, UK. The Assessing Officer disallowed this expenditure, considering it capital in nature and allowing depreciation at 25%, resulting in a disallowance of Rs. 48,44,362/-.

The CIT(A) upheld the disallowance and further enhanced it, stating that the assessee failed to provide details of the consultancy services, correlate the consultancy agreement with its business, and provide evidence of payment for consultancy work. The CIT(A) disallowed the entire amount of Rs. 64,59,150/-, stating that the expenditure did not qualify for deduction under Sections 37(1) or 35(1)(iv) r.w.s. 35(2)(ia) of the Act.

The assessee filed additional evidence under Rule 29 of the ITAT rules, 1963, including proof of payment, outcome of the research, and applications for patent grants. The ITAT admitted the additional evidence, noting that it would address the queries raised by the CIT(A) and serve the interest of justice. The ITAT remanded the matter to the CIT(A) to consider the additional evidence and pass a speaking order in accordance with the provisions of the Act.

Conclusion:

The ITAT allowed the assessee's appeal on the ESOP expenses, recognizing them as revenue expenditure. The matter of R&D expenditure was remanded to the CIT(A) for reconsideration in light of additional evidence provided by the assessee. The appeal was allowed, and the order was pronounced in the open court on 01/11/2021.

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