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Issues: (i) Whether the Explanation inserted in section 14A by the Finance Act, 2022 operated retrospectively so as to permit disallowance even where exempt income had not accrued or arisen during the relevant year; and (ii) whether ESOP expenses were allowable as deduction under section 37(1) of the Income-tax Act, 1961.
Issue (i): Whether the Explanation inserted in section 14A by the Finance Act, 2022 operated retrospectively so as to permit disallowance even where exempt income had not accrued or arisen during the relevant year.
Analysis: The disallowance under section 14A had to be tested on the law applicable for the assessment year under appeal. The Explanation inserted with effect from 01.04.2022 was held to be prospective, and the disallowance could not be enlarged by treating the amendment as retrospective. The Tribunal also accepted the settled position that, for the year under consideration, disallowance under section 14A could not exceed the exempt income earned during the year.
Conclusion: The issue was decided in favour of the assessee and against the Revenue.
Issue (ii): Whether ESOP expenses were allowable as deduction under section 37(1) of the Income-tax Act, 1961.
Analysis: The claim for ESOP was treated as allowable revenue expenditure following the settled view in the assessee's own case and the consistent line of authority recognising such discount as deductible, subject to proper computation over the vesting period. The Assessing Officer was directed to make the arithmetical apportionment of the year-wise discount, taking into account the options granted and the perk value.
Conclusion: The issue was decided in favour of the assessee and against the Revenue.
Final Conclusion: The Revenue's appeal failed in full, and the relief granted by the first appellate authority was sustained.
Ratio Decidendi: An amendment enlarging the scope of disallowance under section 14A cannot be applied retrospectively unless the statute clearly so provides, and ESOP discount is deductible under section 37(1) when computed on a proper vesting-period basis.
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