2022 (7) TMI 589 - AT - Income Tax

Tribunal rules ESOP expenditure deductible, penalties unnecessary. CIT(A) decision overturned.

Morgan Stanley Advantage Services Pvt. Ltd. Versus Commissioner of Income Tax (Appeals), National Faceless Appeals Centre, Delhi.

The Tribunal allowed the appeal of the assessee, directing the deletion of the disallowance of ESOP expenditure under section 37(1) of the Income-tax Act. ... Nature of expenditure - cost of Employees/Options Plans (ESOP) pertaining to the prior period - revenue or capital expenditure - HELD THAT:- As issue raised in this case by the assessee as to allowability of ESOP cost being in the nature of Revenue expenditure has already been decided by the Special Bench of Tribunal in case of Biocon Ltd. [2013 (8) TMI 629 - ITAT BANGALORE] - The Co-ordinate Bench of Tribunal also in case of Goldman Sachs (I) Securities Pvt. Ltd. (2015 (12) TMI 966 - ITAT MUMBAI] decided the issue in favour of the assessee by holding that discount on issue of ESOP is allowable as deduction under the head “Profits & Gains of Business or Profession”. So the expenditure claimed by the assessee on account of ESOP under section 37(1) of the Act is allowable. So, the impugned order passed by ld. CIT(A) directing the AO to delete the disallowance. Appeal of assessee allowed. Issues Involved:1. Disallowance of expenditure claimed towards Employee Stock Option Scheme (ESOP) under section 37(1) of the Income-tax Act, 1961.2. Initiation of penalty under section 271(1)(c) of the Income-tax Act for disallowance made in respect of expenditure claimed towards ESOP cost.3. Dismissal of the appeal by the Commissioner of Income Tax (Appeals) on the ground that the appeal is infructuous due to the appellant opting for the Vivad Se Vishwas Scheme (VSV).Issue-wise Detailed Analysis:1. Disallowance of Expenditure Claimed Towards ESOP:The assessee argued that the ESOP cost is incurred wholly and exclusively for the purpose of business and is in the nature of revenue expenditure, thereby deductible under section 37(1) of the Act. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] concluded that the ESOP cost is capital in nature and not deductible under section 37(1). The AO relied on the explanatory circular on Fringe Benefit Tax (Circular No. 9/2007) which distinguishes between allowable and disallowable situations for ESOP-related expenses. The Tribunal, however, found that the assessee's case falls under the allowable category as per the circular, and this circular is binding on the Income Tax Authorities.The Tribunal also referred to several judicial precedents, including the Special Bench decision in Biocon Limited v. CIT and the jurisdictional bench decision in Goldman Sachs (I) Securities Pvt. Ltd. v. DCIT, which held that the discount on the issue of ESOP is allowable as a deduction under the head 'Profits and Gains of Business or Profession.' Consequently, the Tribunal directed the AO to delete the disallowance, allowing the expenditure claimed by the assessee on account of ESOP under section 37(1) of the Act.2. Initiation of Penalty Under Section 271(1)(c):The initiation of penalty proceedings under section 271(1)(c) for the disallowance made in respect of expenditure claimed towards ESOP cost was consequential in nature. Since the Tribunal allowed the ESOP expenditure as a deductible expense, the penalty proceedings under section 271(1)(c) were rendered moot. Therefore, no separate adjudication was required for this ground.3. Dismissal of Appeal by CIT(A) Due to Vivad Se Vishwas Scheme:The CIT(A) dismissed the appeal filed by the assessee on the ground that the appeal was infructuous because the appellant had opted for the Vivad Se Vishwas Scheme (VSV). The Tribunal found this dismissal to be erroneous. The CIT(A) had concluded that the appeal was settled under the Direct Tax Vivad Se Vishwas Act, 2020, and treated the appeal as dismissed for statistical purposes. However, the Tribunal considered the CIT(A)'s order to be absurd and passed without considering the facts and applicable law. Consequently, the Tribunal allowed this ground of appeal as well.Conclusion:The Tribunal allowed the appeal of the assessee, directing the deletion of the disallowance of ESOP expenditure, and deemed the penalty proceedings under section 271(1)(c) as unnecessary. The Tribunal also found the dismissal of the appeal by CIT(A) due to the Vivad Se Vishwas Scheme to be erroneous. The order was pronounced in the open court on 27th June 2022.