Tribunal allows appeals, directs deletion of ESOP disallowance, permits education cess deduction.

The Tribunal allowed both appeals of the assessee, directing the A.O. to delete the disallowance of ESOP expenditure and to allow the deduction of education cess and higher education cess.

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Issues Involved:
1. Disallowance of expenditure incurred in respect of ESOP (Employees Stock Option Programme) to its employees.
2. Claim for deduction of Education Cess and Higher Education Cess.

Detailed Analysis:

1. Disallowance of Expenditure Incurred in Respect of ESOP:

The assessee claimed expenditures of Rs. 1,25,49,035 and Rs. 1,06,34,674 under employees benefit expenses for the assessment years 2012-13 and 2013-14, respectively. The claim was based on the ESOP scheme where employees could purchase shares of the holding company, Novozymes A/S Denmark, at a price lower than the prevailing market price. The difference between the market price and the issue price was reimbursed by the assessee to the holding company and claimed as an expenditure.

The Assessing Officer (A.O.) disallowed the claim, arguing that the ESOP was not part of the compensation package, the revenue from the sale of shares increased the capital base of the holding company, and the loss was notional. The A.O. held that such notional or fictitious losses are not allowable under the Income Tax Act. The CIT(A) confirmed this disallowance.

Upon appeal, the Tribunal referred to a coordinate bench decision in the assessee’s own case for the assessment year 2006-07, which allowed the ESOP expenditure as a deductible expense. The Tribunal observed that the ESOP expenditure is a revenue expenditure and should be allowed as a deduction while computing income, as established by the Special Bench of ITAT Bangalore in the case of Biocon Ltd. v. Dy. CIT. The Karnataka High Court in CIT v. Biocon Ltd. upheld this view, stating that the liability accrued in respect of ESOP is an ascertained liability and the discount given on shares is an expenditure under section 37(1) of the Act. The Tribunal concluded that the assessee’s expenditure on ESOP is allowable as it is a staff welfare program and directed the A.O. to delete the disallowance.

2. Claim for Deduction of Education Cess and Higher Education Cess:

The assessee raised the claim for deduction of education cess and higher education cess for the first time before the Tribunal. The Tribunal noted that this issue is a legal one and does not involve fresh evidence. The claim was supported by the decision of the Bombay High Court in Sesagoa Ltd. v. ACIT, which allowed the deduction of education cess. The Tribunal also referred to the coordinate bench decision in Wipro Ltd. v. ACIT, which followed the Sesagoa Ltd. decision.

The Tribunal extracted the relevant portions of the Sesagoa Ltd. judgment, which clarified that the term “any rate or tax levied” in section 40(a)(ii) of the IT Act does not include “cess.” The legislative history showed that the word “cess” was deliberately omitted from the section, indicating that the legislature did not intend to disallow the deduction of cess. The CBDT Circular No. F. No. 91/58/66-ITJ(19) dated 18th May 1967 also supported this interpretation. The Tribunal concluded that the education cess is allowable as a deduction and directed the A.O. to allow the deduction in both years.

Conclusion:

The Tribunal allowed both appeals of the assessee, directing the A.O. to delete the disallowance of ESOP expenditure and to allow the deduction of education cess and higher education cess. The order was pronounced in the open court on 29th June 2021.

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