ITAT Mumbai allows rectification application on ESOP expense deduction following Biocon Ltd precedent

ITAT Mumbai allowed the assessee's rectification application regarding ESOP expense disallowance. The Tribunal had initially restored the matter to AO despite the issue being already decided by Bangalore ITAT Special Bench in Biocon Ltd case. The Special Bench had held that second type of discount arising from difference between fair market value at vesting and exercise dates is allowable as deduction under taxation principles. Karnataka HC upheld this decision. ITAT Mumbai found mistakes apparent from record in the original order and allowed the miscellaneous application.

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Issues Involved:

1. Disallowance of ESOP expenses by the AO.
2. Tribunal's restoration of the matter to the AO.
3. Mistakes in capturing factual aspects of the ESOP claim.
4. Accounting treatment for the second type of discount.

Summary:

Issue 1: Disallowance of ESOP expenses by the AO:
The AO disallowed the claim of ESOP expenses amounting to Rs. 5.74 crores, which represents the difference between the fair market value of equity shares on the date of vesting of option and the date of exercise of option. The CIT(A) allowed the claim, prompting the Revenue to challenge the decision before the Tribunal.

Issue 2: Tribunal's restoration of the matter to the AO:
The Tribunal followed the decision of the Special Bench of Bangalore ITAT in Biocon Ltd. vs. DCIT, which was upheld by the Karnataka High Court. However, the Tribunal restored the matter to the AO with directions, despite the Special Bench having already decided the points narrated by the Tribunal. This was contended as a mistake apparent from the record.

Issue 3: Mistakes in capturing factual aspects of the ESOP claim:
The Tribunal misunderstood the nature of the ESOP claim, treating it as the first type of discount (arising at the time of granting/vesting of options) instead of the second type (arising at the time of actual exercise of options). This confusion led to a mistake apparent from the record, as the SEBI guidelines only prescribe accounting treatment for the first type of discount.

Issue 4: Accounting treatment for the second type of discount:
The Special Bench noted that SEBI guidelines did not prescribe any accounting treatment for the second type of discount, and thus, taxation principles should apply. The Tribunal's direction to the AO to examine the mandatory requirement for passing accounting entries was contrary to the Special Bench's decision. The Tribunal failed to appreciate that the claim of Rs. 5.74 crores represented the second type of discount, which is allowable as a deduction under taxation principles, irrespective of its accounting treatment.

Conclusion:
The Tribunal acknowledged the mistakes apparent from the record and replaced the existing paragraphs 15.4 and 15.5 of the order with new paragraphs, clarifying that the second type of discount is allowable as a deduction. The Tribunal upheld the CIT(A)'s order allowing the deduction of Rs. 5.74 crores claimed by the assessee, emphasizing that the total income must be computed as per the provisions of the Income Tax Act, irrespective of the accounting entries. The miscellaneous application filed by the assessee was allowed.

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