2025 (1) TMI 1124 - AT - Income Tax

ITAT quashes revision order under Section 263 for ESOP expenses to Mauritius parent company

The ITAT Delhi quashed a revision order u/s 263 regarding ESOP expenses claimed by the assessee. The PCIT had contended that the AO failed to conduct ... Revision u/s 263 - Employees Stock Option Plan (‘ESOP’) expenses claimed by assessee - as per CIT(A) AO failed to conduct adequate inquiry and verification before allowing the ESOP expenses as a deduction. Whether the deduction claimed by the assessee for the Employee Stock Option Plan (ESOP) expenses paid to its parent company, MakeMyTrip, Mauritius, was allowable under the Income Tax Act? HELD THAT:- We noted that the assessee has filed information in regard to ESOP charges claimed as deduction while furnishing information before TPO i.e., copy of information and documents maintained in TP report u/s 92D(1) including Executive Summary of ESOP cross charges. The assessee in its TP report has disclosed the ESOP cross charges which is part of assessment record and TP report. The assessee has filed entire details and AO has carried out enquiry into the details and after verifying the details he has allowed the claim of the assessee, and hence, it is not a case that the AO has not carried out verification or has not made in enquires in regard to this claim. We noted that the shares of MakeMy Trip, Mauritius got listed on NASDAQ Stock Exchange w.e.f., 17/08/2010 and since that date the market price of MakeMy Trip, Mauritius are readily available on the stock exchange. We noted that that the assessee has accounted for all the entries related to ESOP in term of guidelines note provided by ICAI on accounting of employees shares based payments and assessee has carried out the accounting treatment skill in compliance with the same. Assessee has undertaken ESOP costs as part of the salary and compensation under personnel expenses in the profit and loss account. Assessee has provided complete list of employees, as subscribed to these shares and their current employment status and benefit provided to them and consequent benefit to the assessee company. Assessee also explained before the AO and now before us that the earning under ESOP accrues to eligible employees by virtue of their employment with the assessee company. The company benefits from the services of an enthused and motivated work force, who remain committed and loyal to the company in anticipation of potential benefits under ESOP. Assessee has also provided valuation report for issuing such ESOP scheme and as per schedule reflected in Annexure-5 of the scheme the grant price of ESOPs during the year sum up to US$ 5,27,28 as per graded vesting schedule and corresponding amount of Rs. 2,41,51,868 has been booked in the audited financial statements and duly reflected in F. No.3CBE of assessee company for the Financial Year 2010-11 relevant to AY 2011-12. The complete benefit, if any, share shall be derived by employee and consequent benefit to the company is described is entity. Hence, on merits also the PCIT could not find fault with the scheme. He has simply directed revision on the assessment order that no verification or enquiry was carried out by the AO. Thus the revision order quashed and allowed the appeal of the assessee. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:Whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking jurisdiction under Section 263 of the Income Tax Act, 1961, to revise the assessment order passed by the Assessing Officer (AO) on the grounds that it was erroneous and prejudicial to the interests of the revenue.Whether the deduction claimed by the assessee for the Employee Stock Option Plan (ESOP) expenses paid to its parent company, MakeMyTrip, Mauritius, was allowable under the Income Tax Act.Whether the AO failed to conduct adequate inquiry and verification before allowing the ESOP expenses as a deduction.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Jurisdiction under Section 263 of the Income Tax ActRelevant legal framework and precedents: Section 263 of the Income Tax Act allows the PCIT to revise an assessment order if it is erroneous and prejudicial to the interests of the revenue. The law is well-settled that revision jurisdiction can be invoked for 'lack of enquiry' and not for 'inadequate enquiry'.Court's interpretation and reasoning: The Tribunal examined whether the AO had conducted sufficient inquiry into the ESOP expenses claimed by the assessee. It was noted that the AO had issued a detailed questionnaire and received responses from the assessee, indicating that an inquiry was indeed conducted.Key evidence and findings: The assessee had provided extensive documentation and explanations regarding the ESOP expenses to the AO during the original assessment proceedings, which were part of the assessment records.Application of law to facts: The Tribunal found that the AO had made adequate inquiries into the ESOP expenses, and the PCIT's invocation of Section 263 was based on an incorrect assumption of lack of inquiry.Treatment of competing arguments: The Tribunal considered the PCIT's argument that the AO failed to verify the ESOP expenses adequately but found that the AO had indeed conducted a detailed examination.Conclusions: The Tribunal held that the PCIT was not justified in invoking Section 263 as the AO had conducted sufficient inquiry, and the assessment order was neither erroneous nor prejudicial to the interests of the revenue.Issue 2: Allowability of ESOP ExpensesRelevant legal framework and precedents: The Income Tax Act allows deductions for business expenses incurred wholly and exclusively for the purposes of the business. The Tribunal referred to the Special Bench decision in Biocon Ltd., which dealt with the accounting treatment of ESOP expenses.Court's interpretation and reasoning: The Tribunal examined whether the ESOP expenses were incurred for the business purposes of the assessee and whether they were allowable as a deduction.Key evidence and findings: The assessee had provided evidence that the ESOP expenses were part of the employee compensation structure and were incurred to motivate and retain employees, which benefited the business.Application of law to facts: The Tribunal found that the ESOP expenses were incurred as part of the employee compensation package and were allowable as a business expenditure.Treatment of competing arguments: The Tribunal considered the PCIT's argument that the ESOP expenses were related to the parent company and not the assessee. However, it found that the expenses were incurred for the benefit of the assessee's employees and thus allowable.Conclusions: The Tribunal concluded that the ESOP expenses were allowable as a deduction under the Income Tax Act.3. SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: 'The law is now very well settled that the revision jurisdiction u/s. 263 of the Act could be invoked only for 'lack of enquiry' and not for 'inadequate enquiry'. Hence, we have no hesitation in quashing the revision order passed by the Id. PCIT in this regard.'Core principles established: The Tribunal reaffirmed that for the PCIT to invoke Section 263, there must be a lack of inquiry by the AO, not merely inadequate inquiry. Additionally, ESOP expenses incurred as part of employee compensation are allowable as business expenditures if they benefit the business.Final determinations on each issue: The Tribunal quashed the PCIT's revision order under Section 263, holding that the AO had conducted adequate inquiry into the ESOP expenses. It also held that the ESOP expenses were allowable as a deduction under the Income Tax Act.