2022 (9) TMI 1036 - AT - Income Tax

Tribunal partially allows appeal, directs AO to verify ESOP, dismisses education cess claim

The Tribunal partly allowed the appeal, directing the AO to verify factual aspects related to the ESOP expenditure. The claim for deduction of education ... Deduction for ESOP Expenditure - ESOP expenditure allowable revenue expenditure u/s 37 or not? - HELD THAT:- The submission of the assessee has considerable cogency. DRs objections that the payment was made during the next year, assessee has contended that two year amount including the present year, where billed by ITC Ltd. and though the payment was made in the next year, Rs.2.58 Crores thereof belonged to present assessment year. In our considered opinion, both the submission has considerable cogency. Several factual aspects have been mentioned by assessee which need verification at the level of the AO. Hence, the factual aspects that there were employees deputed by ITC Ltd. for working for assessee and that expenditure was actually paid during the next year but it related to current year and financials of current year were duly recasted, are subject to examination by the AO and hence we direct the AO factually verify this issue and thereafter pass order as per our observations hereinabove. Appeal of the assessee is partly allowed for statistical purposes. Issues Involved:1. Deduction for ESOP Expenditure2. Deduction for Education Cess and Secondary and Higher Education CessIssue-Wise Detailed Analysis:1. Deduction for ESOP Expenditure:The primary contention revolves around the deduction of ESOP (Employee Stock Option Plan) expenditure amounting to Rs. 2,58,48,144/-. The assessee argued that the ESOP cost should be considered an 'expenditure' and thus deductible under section 37(1) of the Income Tax Act. The Ld. CIT(A) upheld the Assessing Officer's (AO) rejection of this claim, stating that the ESOP cost was not debited in the Profit and Loss Account for the Assessment Year (AY) 2016-17 and that the invoice was raised by ITC Ltd. in the subsequent financial year. The AO also considered the ESOP expenditure to be capital in nature and not an allowable expense.The assessee countered that the ESOPs were granted to employees of the appellant company to incentivize and retain them, and thus, the expense should be considered revenue expenditure. The assessee provided detailed documentation, including invoices from ITC Ltd., bank statements, and financial statements, to substantiate the claim that the ESOP expenditure was a real expense incurred for employees working on deputation from ITC Ltd.The Tribunal acknowledged the cogency of the assessee's arguments and noted that various judicial precedents, including decisions from the jurisdictional High Court and ITAT Special Bench, have upheld ESOP expenditure as an allowable revenue expense under section 37. However, the Tribunal directed the AO to verify the factual aspects, such as the deputation of employees and the recasting of financial statements, before making a final determination.2. Deduction for Education Cess and Secondary and Higher Education Cess:The assessee claimed a deduction of Rs. 17,54,051/- for education cess and secondary and higher education cess, arguing that these should be considered business expenses under section 37(1) and not disallowable under section 40(a)(ii). The Ld. CIT(A) rejected this claim, disregarding the ruling of the Hon'ble Rajasthan High Court in the case of Chambal Fertilisers and Chemicals Limited, which allowed such deductions.During the hearing, the assessee's counsel submitted that they would not be pressing this ground. Consequently, the Tribunal dismissed this ground as not pressed.Conclusion:The Tribunal partly allowed the appeal for statistical purposes, directing the AO to verify specific factual aspects related to the ESOP expenditure. The ground for deduction of education cess was dismissed as not pressed. The order was pronounced in the open court on 21st September, 2022.