2023 (8) TMI 924 - AT - Income Tax

Tribunal affirms ESOP & CSR expense deductions under Income Tax Act

The Tribunal upheld the CIT(A)'s decisions to allow the deduction of ESOP expenses under section 37(1) and CSR expenses under section 80G of the Income ... Nature of expenses - Employee Stock Option Plan (“ESOP”) expenses - assessee submitted that the ESOP expenses are employee compensation costs - AO held that the assessee nowhere has incurred any expenditure so as to claim the same is allowable u/s 37(1) and the assessee has issued shares to the employees at a concessional rate which has increased the capital base of the company and therefore, such expenditure is to be considered as capital expenditure - HELD THAT:- We find that similar contentions of the Revenue were rejected in Biocon Ltd [2020 (11) TMI 779 - KARNATAKA HIGH COURT] wherein High Court dismissed the appeal filed by the Revenue and upheld the decision of the Special Bench of the Tribunal in Biocon Ltd [2013 (8) TMI 629 - ITAT BANGALORE] As in view of the aforesaid findings of the Hon’ble Karnataka High Court, we find no infirmity in the impugned order passed by the learned CIT(A) in allowing the claim of deduction of ESOP expenses under section 37(1) of the Act. Decided in favour of assessee. Corporate Social Responsibility (“CSR”) expenses - Deduction claimed u/s 80G when disallowed u/s 37(1) - HELD THAT:- We find that the coordinate benches of the Tribunal have consistently taken the view in favour of the assessee and held that the CSR expenses even though not allowed under section 37 of the Act pursuant to insertion of Explanation-2 to section 37 vide Finance Act, 2014 with effect from 01/04/2015. However, the said expenditure is allowable u/s 80G - no infirmity in the impugned order passed by the learned CIT(A) in allowing the claim of deduction u/s 80G of the Act on CSR expenses incurred by the assessee. Appeal by the Revenue is dismissed. Issues Involved:1. Deletion of disallowance made on account of Employee Stock Option Plan (ESOP) expenses.2. Deletion of disallowance of deduction claimed under section 80G of the Income Tax Act, 1961 on Corporate Social Responsibility (CSR) expenses.Summary:Issue 1: Deletion of disallowance made on account of ESOP expensesThe Revenue challenged the deletion of disallowance made by the Assessing Officer (AO) on ESOP expenses. The AO disallowed the ESOP expenses claimed by the assessee, arguing that these expenses are notional losses and do not constitute actual expenditure under section 37(1) of the Income Tax Act, 1961. The AO also considered these expenses as capital expenditure and contingent liabilities.The learned Commissioner of Income Tax (Appeals) [CIT(A)] allowed the assessee's claim by following the decision of the Karnataka High Court in CIT v/s Biocon Ltd, which held that the discount on ESOPs is allowable as a deduction under section 37(1) of the Act. The Tribunal upheld the CIT(A)'s decision, stating that the ESOP expenses are employee compensation costs and are deductible under section 37(1) of the Act. The Tribunal found no infirmity in the CIT(A)'s order and dismissed the Revenue's appeal on this issue.Issue 2: Deletion of disallowance of deduction claimed under section 80G on CSR expensesThe Revenue also challenged the deletion of disallowance of deduction claimed under section 80G of the Act on CSR expenses. The AO disallowed the deduction, arguing that CSR expenses are mandatory contributions under the Companies Act, 2013, and not voluntary donations eligible for deduction under section 80G.The learned CIT(A) allowed the assessee's claim, following judicial precedents from coordinate benches of the Tribunal, which held that CSR expenses, although not deductible under section 37 due to Explanation-2, are allowable under section 80G if they meet the specified conditions. The Tribunal upheld the CIT(A)'s decision, finding no infirmity in allowing the deduction under section 80G for CSR expenses. The Tribunal dismissed the Revenue's appeal on this issue as well.Conclusion:Both appeals by the Revenue were dismissed, and the Tribunal upheld the CIT(A)'s decisions on both issues. The Tribunal found that the CIT(A) correctly allowed the deduction of ESOP expenses under section 37(1) and the deduction of CSR expenses under section 80G of the Income Tax Act, 1961.