2024 (1) TMI 650 - AT - Income Tax

ITAT allows ESOP expenses as revenue expenditure following Biocon precedent, deletes section 14A disallowance

Edelweiss Asset Management Ltd. Versus ACIT, Circle-3 (1) (2), Mumbai

The ITAT Mumbai ruled in favor of the assessee on multiple grounds. The CIT(A) exceeded jurisdiction by disallowing ESOP expenditure without the AO ... Powers of the Commissioner (Appeals) u/s 251 - Disallowance of Employees Stock Option Plan (ESOP) expenditure - AR submitted that the ESOP expenditure is an allowable claim u/s 37(1) - HELD THAT:- As we are of the view that the CIT(A) has acted beyond his jurisdiction enhancing the income of the assessee by disallowing the ESOP expenses for the reason that the AO while completing the assessment has not taken into consideration the revised return of income and has not examined the taxability of ESOP expenses which the assessee has claimed in the revised return of income. While holding so we would like to add that the decision is based on the facts unique to the assessee's case. This ground of the assessee is allowed accordingly. Allowability of ESOP expenses - This issue is covered by the decision of Biocon Ltd [2020 (11) TMI 779 - KARNATAKA HIGH COURT] where it is held that expenditure on account of ESOP is a revenue expenditure and had to be allowed as deduction while computing income. The Special Bench whose order is affirmed by the Hon'ble High Court [2013 (8) TMI 629 - ITAT BANGALORE] held that the sole object of issuing shares to employees at a discounted premium is to compensate them for the continuity of their services to the company. By no stretch of imagination, we can describe such discount as either a short capital receipt or a capital expenditure. It is nothing but the employees cost incurred by the company. The substance of this transaction is disbursing compensation to the employees for their services, for which the form of issuing shares at a discounted premium is adopted. We hold that the addition made towards disallowance of ESOP expenses is not tenable on merits also. Ground raised by the assessee in this regard is allowed. Disallowance u/s 14A - expenditure incurred on earning exempt income - AR submitted that the income which is shown by the assessee as exempt is in reality is not an exempt income in order to invoke the provisions of section 14A - HELD THAT:- Section 14A provides that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. Therefore for invoking section 14A the impugned transaction should first result in an income which as per other provisions of the Act is exempt. In the given case the transaction of the consolidation of mutual funds is not considered as a transfer under section 47(xviii) and therefore it does not result in any income within the definition of section 2(24). Therefore we see merit in the contention that the assessee has not earned any income that is exempt under the Act in order invoke section 14A. As in the case of Era Infrastructure India Ltd [2022 (7) TMI 1093 - DELHI HIGH COURT] has held that the explanation to section 14A which is inserted w.e.f. 01.04.2022 is prospective in nature. Therefore for the year under consideration where the assessee has not earned any exempt income, the explanation to section 14A is not applicable. We hold that the AO is not correct in invoking the provisions of section 14A and accordingly the disallowance made in this regard is to be deleted. This ground is allowed in favour of the assessee. Issues Involved:1. Jurisdiction of CIT(A) in enhancing income/reducing loss by disallowing ESOP expenditure.2. Allowability of ESOP expenditure under Section 37(1) of the Income Tax Act.3. Disallowance under Section 14A of the Income Tax Act.4. Initiation of penalty proceedings under Section 270A of the Income Tax Act.Summary:1. Jurisdiction of CIT(A) in Enhancing Income/Reducing Loss by Disallowing ESOP Expenditure:The assessee argued that the CIT(A) exceeded its jurisdiction by disallowing ESOP expenditure, which was not considered by the AO. The Tribunal noted that the AO did not address the revised return or the ESOP expenses in the assessment order. Citing judicial precedents, the Tribunal held that the CIT(A) acted beyond its jurisdiction by introducing a new source of income not considered by the AO. Therefore, the enhancement of income by disallowing ESOP expenses was deemed beyond the CIT(A)'s jurisdiction.2. Allowability of ESOP Expenditure Under Section 37(1) of the Income Tax Act:On merits, the Tribunal referred to the Karnataka High Court's decision in the case of Biocon Ltd., which allows ESOP expenditure as a revenue expenditure under Section 37(1). The Tribunal concluded that the ESOP expenses are allowable as business expenditure, thereby rejecting the CIT(A)'s disallowance on this ground.3. Disallowance Under Section 14A of the Income Tax Act:The AO disallowed Rs. 6,30,553 under Section 14A, which was upheld by the CIT(A). The assessee contended that the income shown as exempt was actually not exempt under the Act, as it arose from the consolidation of mutual funds, not considered a transfer under Section 47(xviii). The Tribunal found merit in the assessee's argument, noting that no exempt income was earned during the year, and thus, Section 14A was not applicable. The Tribunal also referenced the Delhi High Court's decision in Era Infrastructure India Ltd., which supports the prospective application of the explanation to Section 14A. Consequently, the disallowance under Section 14A was deleted.4. Initiation of Penalty Proceedings Under Section 270A of the Income Tax Act:This ground was noted as consequential and did not warrant separate adjudication.Conclusion:The appeal of the assessee was allowed, with the Tribunal ruling in favor of the assessee on all contested grounds. The order was pronounced on 19-12-2023.