2024 (12) TMI 1584 - AT - Income Tax

ITAT allows ESOP expenses deduction following Goldman Sachs precedent, remands multiple expenditure issues for fresh examination

Goldman Sachs (India) Securities Pvt. Ltd. Versus The National Faceless Assessment Centre, Delhi

ITAT Mumbai allowed the assessee's appeal on ESOP expenses deduction, following its earlier precedent in Goldman Sachs case. The tribunal remanded issues ... Disallowance made on account of Employee Stock Option Plan (“ESOP”) expenses - HELD THAT:- We find that while considering a similar issue pertaining to the deduction of ESOP expenses on account of the grant of Restrictive Stock Units by the assessee to its employees, the coordinate bench of the Tribunal in assessee’s own case in Goldman Sachs (India) Securities Pvt Ltd [2016 (7) TMI 1495 - ITAT MUMBAI] to hold that discount on issue of employees stock options is allowable as deduction in computing the income under the head profits and gains of business of profession. Decided in favour of assessee. Disallowance of expenditure debited to the profit and loss account - AO sustained the addition primarily on the basis that the invoices/bills submitted by the assessee do not tally with the journal entries submitted before the DRP - HELD THAT:- As AR submitted that all the details pertaining to the expenditure debited to the profit and loss account are available with the assessee and if given an opportunity all these details will be produced before the AO for necessary examination. Having considered the submissions, we deem it appropriate to restore this issue to the file of the jurisdictional AO for de novo adjudication after the necessary examination/verification of the details pertaining to the expenditure incurred by the assessee. Needless to mention, no order shall be passed without affording reasonable opportunity of hearing to the assessee. Disallowance of gratuity payment made by the assessee - HELD THAT:- It is evident from the record that due to lack of evidence/proof, the AO made the addition on account of gratuity vide impugned final assessment order. Therefore, we deem it appropriate to restore this issue to the file of the jurisdictional AO for de novo adjudication after the necessary examination/verification of the details filed by the assessee. Needless to mention, no order shall be passed without affording reasonable opportunity of hearing to the assessee. Further, the assessee is also directed to produce any other information as may be sought by the AO for complete adjudication of this issue and also to cooperate in the assessment proceedings. Addition made on account of leave encashment paid by the assessee on or before the due date of filing the return of income - HELD THAT:- In order to substantiate the aforesaid claim, reference was made to clause 26 of the Tax Audit Report, which specifically provides that leave encashment was paid on or before the due date for furnishing the return of income for the previous year 2016-17. Therefore, having considered the aforesaid facts, we are of the considered view that the assessee is entitled to claim deduction under section 43B(f) read with first proviso to section 43B of the Act in respect of leave encashment paid by it for the year under consideration. We direct accordingly. As a result, the impugned order on this issue is set aside and ground raised in assessee’s appeal is allowed. Disallowance on account of the late payment of employees’ contribution to Provident Fund - HELD THAT:- Upon enquiry, we find that the concerned authority neither granted any specific exemption to the assessee in this regard nor extended the due date for making the payment due on 15/04/2017. We find that the Hon'ble Supreme Court in Checkmate Services Pvt. Ltd. [2022 (10) TMI 617 - SUPREME COURT (LB)] held that the payment towards employees’ contribution to Provident Fund after the due date prescribed under the relevant statute is not allowable as a deduction under section 36(1)(va) of the Act. Therefore we find no merits in assessee’s submissions. Denial of deduction claimed u/s 80G on Corporate Social Responsibility (“CSR”) expenses - HELD THAT:- Claim for deduction under section 80G of the Act in respect of CSR expenses cannot be denied. In the present case, the lower authorities denied the deduction claimed by the assessee u/s 80G of the Act without verifying the conditions as laid down in the said section. Therefore, we remit this issue to the file of the jurisdictional AO to verify the conditions necessary for claiming deduction under the said section. The assessee is also directed to file all the details for the purpose of claiming deduction under section 80G of the Act. We further direct that if the conditions as laid down in section 80G are found to be satisfied then deduction be granted to the assessee. Accordingly, ground raised in assessee’s appeal is allowed for statistical purposes. Levy of interest u/s 234C - HELD THAT:- As per provisions of section 234C of the Act, the interest is levied either on failure to pay the advance tax by the assessee or on shortfall in payment of advance tax as compared to tax due on returned income. Thus, it is pertinent to note that section 234C refers to the term “returned income” in comparison to section 234B which refers to the term “assessed tax” for levying interest. Accordingly, we direct the AO to compute the interest under section 234C of the Act on the returned income of the assessee. Accordingly, ground raised in assessee’s appeal is allowed for statistical purposes. The core legal questions considered by the Appellate Tribunal ('the Tribunal') in this appeal pertain to the following issues:1. Whether the disallowance of Employee Stock Option Plan ('ESOP') expenses, specifically the amortization cost of Restrictive Stock Units ('RSUs') and stock options granted to employees, was justified under the Income Tax Act, 1961 ('the Act').2. The validity of the disallowance of various business expenditures debited to the profit and loss account, including stock exchange settlement cost, professional fees, publication and subscription expenses, and communication and technology expenses, on grounds of insufficient substantiation.3. The correctness of the disallowance of gratuity payments made by the assessee, including the treatment of reversal of excess provision in earlier years.4. The allowability of deduction for leave encashment payments made on or before the due date of filing the return of income under section 43B of the Act.5. The validity of disallowance of employees' contribution to Provident Fund for late deposit beyond the prescribed due date.6. The entitlement to deduction under section 80G of the Act for donations made towards Corporate Social Responsibility ('CSR') activities.7. The correctness of levy of interest under sections 234C and 234B of the Act.8. The initiation and continuation of penalty proceedings under section 270A of the Act.Issue-wise Detailed Analysis1. Disallowance of ESOP Expenses (Ground No. 3)Legal Framework and Precedents: The allowance of ESOP expenses as a deductible business expenditure is governed by section 37(1) of the Act, which permits deduction of any expenditure incurred wholly and exclusively for business purposes. The Tribunal has previously considered this issue in the assessee's own case for multiple assessment years, including AY 2008-09, 2009-10, 2010-11, 2011-12, 2012-13, 2014-15, and 2015-16. The Special Bench decision in Biocon Ltd. v/s DCIT and other coordinate bench rulings have held that the discount on issue of ESOPs is allowable as a deduction.Court's Interpretation and Reasoning: The Tribunal examined the accounting treatment of RSUs and stock options, noting that the grant price is amortized over the vesting period as per the accounting standards followed by the assessee and its group globally. The payment to the parent company for shares delivered to employees is an actual expenditure and part of employee compensation cost. The Tribunal found no material difference in facts or law from earlier years where the deduction was allowed.Key Evidence and Findings: The assessee's submissions included details of the ESOP scheme, accounting policy, and reliance on prior Tribunal decisions. The Assessing Officer ('AO') had disallowed the expenses due to lack of breakup of actual payments and amortized expenditure.Application of Law to Facts: Respectfully following the coordinate bench decisions, the Tribunal held that ESOP expenses are not contingent or notional but actual business expenditure deductible under section 37(1).Treatment of Competing Arguments: The AO's contention regarding lack of breakup and verification was rejected in light of consistent accounting treatment and prior rulings. The learned Departmental Representative ('DR') failed to distinguish the precedents.Conclusion: The disallowance of ESOP expenses was deleted, and the ground was allowed.2. Disallowance of Business Expenditure Debited to Profit and Loss Account (Ground No. 4)Legal Framework: Deduction of business expenses requires substantiation with proper documentation and compliance with tax deduction at source ('TDS') provisions under the Act.Court's Interpretation and Reasoning: The AO disallowed 5% of the aggregate expenditure on grounds of insufficient substantiation, including lack of supporting bills, vouchers, and reconciliation of ledger entries. The learned DRP directed the AO to verify expenses on a test-check basis and allow them if verified.Key Evidence and Findings: The assessee submitted lists of expenses but failed to provide adequate supporting documentation during assessment. Subsequent submissions of sample invoices did not tally with journal entries. The AO found discrepancies and non-reconcilability of claimed expenses.Application of Law to Facts: Given the deficiencies, the AO made an ad hoc disallowance. However, the Tribunal found that the assessee had the requisite details and was willing to produce them for verification.Treatment of Competing Arguments: The AO's reliance on incomplete verification was challenged by the assessee's undertaking to furnish full details. The Tribunal emphasized the need for de novo adjudication with opportunity to the assessee.Conclusion: The issue was remitted to the AO for fresh examination and verification with due opportunity to the assessee. The disallowance was set aside for statistical purposes.3. Disallowance of Gratuity Payment (Ground No. 5)Legal Framework: Deduction of gratuity payments is governed by the provisions of the Act, including section 40A(7) relating to disallowance of provisions not actually paid.Court's Interpretation and Reasoning: The AO disallowed gratuity payments due to lack of proof. The assessee submitted actuarial valuation reports and detailed computations showing actual payments made during the year and payments made before the due date of filing return but in subsequent assessment year.Key Evidence and Findings: The actuarial valuation report and payment details were on record. The AO failed to verify these documents before disallowing the claim.Application of Law to Facts: The Tribunal found merit in the assessee's claim and directed the AO to verify the documents and payments afresh.Treatment of Competing Arguments: The AO's objection based on lack of proof was addressed by the detailed submissions of the assessee.Conclusion: The matter was remitted to the AO for de novo adjudication with opportunity to the assessee, and the disallowance was set aside for statistical purposes.4. Disallowance of Leave Encashment Paid on or Before Due Date of Filing Return (Ground No. 6)Legal Framework: Section 43B(f) of the Act allows deduction for sums paid on or before the due date of filing return, even if pertaining to an earlier year.Court's Interpretation and Reasoning: The AO and DRP disallowed the claim on the ground that payment was not made in the relevant previous year. The Tribunal noted the first proviso to section 43B(f) which permits deduction if payment is made on or before the return filing due date.Key Evidence and Findings: The assessee produced tax audit report clause confirming payment within the prescribed time.Application of Law to Facts: The Tribunal held that the payment qualifies for deduction under section 43B(f) and directed the AO to allow the claim.Treatment of Competing Arguments: The AO's narrow interpretation was rejected in favor of the statutory proviso.Conclusion: The disallowance was set aside, and deduction was allowed.5. Disallowance of Employees' Contribution to Provident Fund (Ground No. 7)Legal Framework: Section 36(1)(va) disallows deduction for employees' contribution to Provident Fund if not deposited by the due date prescribed under relevant laws.Court's Interpretation and Reasoning: The assessee made the deposit three days after the due date due to a technical glitch. The Tribunal relied on the Supreme Court decision in Checkmate Services Pvt. Ltd. v/s CIT, which held that late deposit beyond prescribed date is not deductible.Key Evidence and Findings: No extension or exemption was granted by authorities for the late deposit.Application of Law to Facts: The Tribunal upheld the disallowance as per binding precedent.Treatment of Competing Arguments: The technical glitch argument was found insufficient to override statutory provisions and judicial pronouncements.Conclusion: The disallowance was upheld, and the ground dismissed.6. Denial of Deduction Under Section 80G for CSR Donations (Ground No. 8)Legal Framework: Section 80G provides deduction for donations to specified funds and institutions. Section 135 of the Companies Act mandates CSR expenditure. Explanation 2 to section 37(1) disallows CSR expenditure as business expenditure. However, section 80G deductions are claimed while computing total taxable income, distinct from business income computation.Court's Interpretation and Reasoning: The AO denied deduction on the ground that CSR expenses are mandatory and not voluntary donations eligible under section 80G. The Tribunal examined coordinate bench decisions, including Allegis Services (India) Pvt. Ltd. and Societe Generale Securities India (P.) Ltd., which held that CSR expenses are disallowed under section 37(1) but may qualify for deduction under section 80G if conditions are met.Key Evidence and Findings: The assessee submitted donation receipts and claimed 50% deduction for qualifying donations. The AO did not verify eligibility conditions under section 80G before denial.Application of Law to Facts: The Tribunal held that denial of deduction under section 80G without verification of eligibility was erroneous and remitted the matter to AO for verification and grant of deduction if conditions are satisfied.Treatment of Competing Arguments: The AO's conflation of CSR disallowance under section 37(1) with section 80G deductions was rejected. The Tribunal emphasized that double disallowance is not intended by legislature.Conclusion: The denial was set aside, and the matter remitted for verification and appropriate allowance.7. Levy of Interest Under Section 234C (Ground No. 10) and Section 234B (Ground No. 11)Legal Framework: Section 234C imposes interest for deferment or shortfall in advance tax payment based on returned income, whereas section 234B relates to interest on shortfall based on assessed tax.Court's Interpretation and Reasoning: The AO computed interest under section 234C on assessed income. The Tribunal noted that the statute requires computation on returned income and directed recomputation accordingly.Key Evidence and Findings: The assessee's returned income was available for computation.Application of Law to Facts: The Tribunal directed AO to compute interest under section 234C on returned income. The interest under section 234B being consequential required no separate adjudication.Treatment of Competing Arguments: The AO's approach was corrected in line with statutory provisions.Conclusion: Interest under section 234C was to be recomputed; ground allowed for statistical purposes.8. Penalty Proceedings Under Section 270A (Ground No. 12)Legal Framework: Penalty proceedings require completion of assessment and determination of concealment or misreporting.Court's Interpretation and Reasoning: The Tribunal found penalty proceedings premature as the assessment was under challenge and certain issues were remitted.Conclusion: Penalty proceedings were dismissed as premature.Significant Holdings'The ESOP expenses should not be regarded contingent or notional and it should be allowed as deduction u/s 37(1) of the IT. Act.''Section 43B(f) allows deduction for sums paid on or before the due date of filing the return of income even if pertaining to an earlier year.''Late deposit of employees' contribution to Provident Fund beyond the prescribed due date is not deductible under section 36(1)(va) as per binding Supreme Court precedent.''Deduction under section 80G of the Act in respect of CSR expenses cannot be denied merely because such payments form part of mandatory CSR obligations; denial without verification of eligibility conditions is erroneous.''Interest under section 234C of the Act is to be computed on returned income and not on assessed income.''Penalty proceedings under section 270A of the Act are premature if the assessment is under challenge and certain issues remain to be adjudicated.'In conclusion, the Tribunal allowed the appeal partly for statistical purposes, setting aside disallowances related to ESOP expenses, business expenditure, gratuity payments, leave encashment, and CSR deductions, remitting these issues for fresh verification and adjudication. The disallowance relating to Provident Fund contributions was upheld. Interest under section 234C was directed to be recomputed, and penalty proceedings were dismissed as premature.