2019 (12) TMI 1696 - AT - Income Tax

Assessee allowed deduction for ESOP discount costs and stock exchange payments as bona fide business expenses; appeals allowed

Goldman Sachs (India) Securities Pvt. Ltd. Versus Deputy Commissioner of Income Tax, Cir. 7 (1) (1), Mumbai

Goldman Sachs (India) Securities Pvt. Ltd. Versus Deputy Commissioner of Income Tax, Cir. 7 (1) (1), Mumbai - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether amortisation (discount) on Employees Stock Option Plans (ESOP) charged to profit and loss account over the vesting period is an allowable deduction under the head 'profits and gains of business or profession' or is a notional/contingent expense not allowable for tax purposes. 2. Whether amounts paid to stock exchanges for non-confirmation of clearing-house trades, client-code modifications, and similar charges are penalties/ fines outside the scope of deductible business expenditure (per the Explanation to section 37(1)), or are allowable as ordinary business expenses recoverable against business income. 3. Whether the initiation of penalty proceedings under section 271(1)(c) is premature at the stage of the assessment impugned. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Deductibility of ESOP amortisation cost Legal framework: Deduction of expenses incurred 'wholly and exclusively' for the purposes of business taxable under profits and gains of business or profession (general statutory provision for business deductions, construed with reference to the nature of the expense and established principles governing allowance of non-cash employee compensation). Precedent treatment: The Tribunal followed a prior coordinate-bench decision in the assessee's own earlier assessment year allowing ESOP discount as deductible. The Tribunal relied on the Special Bench decision in Biocon Ltd. (144 ITD 21 (Bang.) - referred to in the impugned order) where similar ESOP discount/issue-cost was held allowable. Interpretation and reasoning: The Court accepted the characterisation of ESOP amortisation/discount as a business expense attributable to employee remuneration and an ordinary business cost, not a mere notional or contingent item barred from deduction. The Assessing Officer's view treating the amortisation as notional/contingent was found to be inadequately supported and contrary to binding/precedential tribunal authority. No distinguishing facts or contrary legal authority were presented by Revenue to justify departure from the earlier Tribunal and Special Bench rulings. Ratio vs. Obiter: Ratio - ESOP discount/amortisation, when charged to profit and loss account over the vesting period pursuant to the employer's stock incentive plan, is deductible as a business expense in computing profits and gains of business. The conclusion follows established tribunal precedent (Special Bench Biocon and coordinate-bench decisions in identical factual matrix). No obiter dicta affecting unrelated law was relied upon. Conclusion: The addition disallowing ESOP amortisation was deleted; the ESOP cost is allowable as a deduction in computing business income in the year of amortisation. Issue 2 - Deductibility of payments to Stock Exchanges (treated as penalties) Legal framework: General deductibility under the head 'profits and gains of business or profession' and the applicability of the Explanation to section 37(1) which disallows deduction for fines or penalties imposed for breach of any law. Precedent treatment: The Tribunal relied on a decision of the High Court of Bombay (Angel Capital & Debit Market Ltd.) which considered whether payments to stock exchange characterised as penalties were disallowable under the Explanation to section 37(1). The High Court's view, as followed, was that where payments arise from irregularities committed by clients and are not on account of any infraction of law by the payer, such payments may constitute ordinary business expenditure and be allowable; the Explanation to section 37(1) would not apply in such factual circumstances. The Tribunal also followed its own coordinate-bench decisions in the assessee's prior years which deleted similar additions by adopting that High Court ratio. Interpretation and reasoning: The Tribunal examined the nature and cause of the charges: they were payments for non-confirmation of clearing-house trades, client-code modification, etc., primarily reflecting commercial/operational irregularities linked to clients rather than punishments for statutory breaches by the assessee. On those facts, the charges were treated as incidental business expenses necessary for continuing the brokerage/clearing business and not as penalties imposing public punishment for legal contraventions. The Explanation to section 37(1) was inapplicable because the payments were not fines imposed for infraction of law by the assessee but were compensatory/administrative charges arising out of business operations. Ratio vs. Obiter: Ratio - Payments to stock exchanges which are compensatory/administrative and arise due to client irregularities (not being statutory penalties for the assessee's breach of law) are deductible as business expenditure; Explanation to section 37(1) does not operate to disallow such amounts. This follows the High Court ratio applied by the Tribunal. Observations distinguishing penalties properly imposed under statutory/legislative provisions are instructive but not necessary for the core holding. Conclusion: The addition disallowing stock-exchange charges was deleted; the payments were treated as allowable business expenses on the facts before the Tribunal. Issue 3 - Initiation of penalty under section 271(1)(c) Legal framework: Section 271(1)(c) permits levy of penalty for concealment or furnishing inaccurate particulars of income; however, initiation and adjudication of penalty is a separate and procedural step and may be dependent on the outcome of assessment and other processes. Precedent treatment: The impugned decision treated the ground challenging initiation of penalty proceedings as premature. The Tribunal did not adjudicate merits of any substantive grounds for imposing penalty but flagged procedural timing. Interpretation and reasoning: The Tribunal considered the challenge to initiation of penalty proceedings to be premature at the stage of the present appeal against the assessment order. Since penalty proceedings are distinct and may require separate consideration of mens rea, materiality, and facts (and possibly await completion of assessment or other stages), the Tribunal declined to entertain substantive determination at that juncture. Ratio vs. Obiter: Ratio - A challenge to initiation of penalty proceedings under section 271(1)(c) may be dismissed as premature when raised in appeal against assessment before penalty adjudication has been properly and finally conducted; the Tribunal's dismissal is procedural rather than an adjudication on the merits of penalty liability. Conclusion: The ground challenging initiation of penalty proceedings under section 271(1)(c) was dismissed as premature; no substantive penalty determination was made. Cross-references and final disposition Both substantive tax deduction issues (ESOP amortisation and stock-exchange payments) were decided in favour of the taxpayer by applying and following prior coordinate-bench and higher-bench precedent (Special Bench on ESOPs; High Court on stock-exchange charges). The Tribunal emphasised the absence of distinguishing facts or contrary authority from Revenue. The penalty challenge was procedurally premature and therefore not entertained substantively. The appeal was accordingly partly allowed.