2025 (4) TMI 137 - AT - Income Tax

ESOP expenses allowed as deduction, clinical trial expenditure gets weighted deduction, CSR expenses eligible for 80G benefits

Strides Pharma Science Limited Versus ITO 15 (3) (2), Mumbai

ITAT Mumbai allowed assessee's appeal partially on multiple issues. Tribunal held ESOP expenses deductible under section 37(1) based on consistent ... Disallowance of ESOP expenses u/s 37(1) - ESOP expenses is notional in nature and not backed up by an underlying transaction - HELD THAT:- Department has also allowed the deduction in several earlier years in similar facts and circumstances in assessee’s own case. Also, Ld. AO while making the addition has duly noted the above decision as well as the decision in the case of Lemon Tree Hotel [2018 (4) TMI 1680 - DELHI HIGH COURT]. However, he has stated in the assessment order that he is making the addition as the department’s SLP on this issue has been admitted by the Hon’ble Apex Court in the case of Lemon Tree Hotel [PCIT v/s Lemon Tree Hotels Pvt. Ltd. [2019 (4) TMI 602 - SC ORDER]]. Deduction has been allowed in several earlier years, we are of the view that the assessee’s claim for ESOP expenses u/s 37(1) is allowable for this year also. Claim of weighted deduction u/s 35(2AB) - Whether expenditure on clinical trials is eligible u/s 35(2AB)? - HELD THAT:- Admissibility of expenditure incurred on clinical trials for weighted deduction u/s 35(2AB) has been decided in favour of the assessee in several decisions of the co-ordinate benches, some of which have been quoted by the assessee during his submissions. We are of the view that the expenditure incurred by the assessee on clinical trials which has also been certified by the prescribed authority in part b, column 6 of the Form 3CL is eligible for weighted deduction u/s 35(2AB). We therefore hold that the assessee is entitled to claim expenses on the clinical trials, incurred outside the approved R&D facility u/s 35(2AB) of the Act. Whether the amount eligible for deduction u/s 35(2AB) can only be expenditure quantified DSIR in Form 3CL? - AO was justified in restricting the allowance of expenditure on in-house R&D to the amounts mentioned in Form 3CL. The assessee should have taken up the matter with the prescribed authority in case he did not accept the quantification given in the Form 3CL. Therefore, the decision of the Ld. AO in restricting the amount eligible for deduction u/s 35(2AB) to Rs. 3,76,93,000/- as against the claim of the assessee amounting to Rs. 44,91,93,361/- is correct as per the provisions of the section and is therefore upheld. However, the alternative claim of the assessee to allow deduction u/s 37 in respect of the balance amount deserves consideration. Accordingly, we deem it proper to restore the issue to Ld. AO for the limited purpose of verification of these expenses u/s 37 of the Act. Needless to add, the assessee should be allowed adequate opportunity to substantiate its claim for allowance of deduction u/s 37(1) of the Act. Disallowance u/s 14A and adding the same to book profit u/s 115JB - We direct the AO to delete addition made to book profit computed u/s 115JB, towards disallowances computed u/s 14A. Disallowance of business promotion expenses - We deem it proper to remand back the matter to the Ld. AO for verification of these expenses. He is directed to give opportunity to furnish requisite details and supporting evidences and the expenses incurred for business promotion and not for providing gifts, freebies to the doctors etc. should be allowed after due verification. Disallowance of deduction claimed u/s 80G in respect of CSR expenses - We hold that the assessee is eligible for deduction u/s 80G in respect of CSR expenses provided other conditions are satisfied. We, therefore, direct the Ld. AO to allow the deduction u/s 80G subject to verification of other prescribed conditions of this section. The issue is, therefore, restored for the limited purpose of such verification subject to which the assessee is entitled to claim deduction u/s 80G in respect of CSR expenses. Claim of deduction u/s 35DD - As this claim has been made for the first time before us on the basis of a similar allowance for AY 2017-18, we deem it appropriate to restore the issue back to the file of Ld. AO for considering the assessee’s claim after verification of the same as per provisions of section 35DD. Claim of 1/5th of write-down value of inventory and other Assets disallowed - Since this issue has been raised for the first time before us, we deem it appropriate to restore it to the file of the Ld. AO for the purpose of verification and allow the same in case admissible. Non-grant of TDS credit to M/s. Strides Emerging Market Limited which was merged with the assessee during the year. Ld. AO is directed to verify and allow the claim of TDS as per the rules. ISSUES PRESENTED and CONSIDEREDThe Tribunal considered several core legal issues in this appeal:Whether the disallowance of ESOP expenses under Section 37(1) of the Income-tax Act, 1961 was justified.Whether the disallowance of weighted deduction under Section 35(2AB) was appropriate.Whether the disallowance under Section 14A of the Act, read with Rule 8D of the Income Tax Rules, 1962, was correctly applied, and its impact on book profits under MAT provisions.Whether the disallowance of business promotion expenses under Section 37(1) was warranted.Whether the disallowance of deduction claimed under Section 80G for CSR activities was justified.Whether the claim for deduction under Section 35DD was admissible.Whether the claim of 1/5th of write-down value of inventory and other assets was allowable.Whether the non-grant of TDS credit was justified.Whether the initiation of penalty proceedings under Section 270A was appropriate.ISSUE-WISE DETAILED ANALYSISDisallowance of ESOP ExpensesThe relevant legal framework involved Section 37(1) of the Income-tax Act. The Tribunal referred to precedents, including the Karnataka High Court's decision in CIT v. Biocon Ltd., which established that ESOP expenses are allowable as deductions under Section 37(1). The Tribunal found that the ESOP expenses were not notional but represented a real business expenditure. The Court concluded that the assessee's claim for ESOP expenses was allowable, aligning with past consistent treatment by tax authorities.Disallowance of Weighted Deduction under Section 35(2AB)The Tribunal examined whether the assessee was entitled to a weighted deduction for R&D expenses. The legal framework required certification by the DSIR. The Tribunal noted that clinical trials conducted outside approved facilities were eligible for weighted deduction, as supported by various judicial precedents. However, the Tribunal upheld the AO's decision to restrict the deduction to amounts certified by DSIR, while remanding the issue for verification under Section 37 for any unapproved expenses.Disallowance under Section 14A and MAT ProvisionsThe Tribunal considered the disallowance under Section 14A and its impact on MAT provisions. The Tribunal referenced its own past decisions and other judicial precedents, concluding that only investments yielding exempt income should be considered for disallowance calculations. It remanded the issue for recomputation. Regarding MAT provisions, the Tribunal followed precedents disallowing additions to book profits based on Section 14A disallowances.Disallowance of Business Promotion ExpensesThe Tribunal analyzed the disallowance of business promotion expenses under Section 37(1), which included expenses for providing freebies to doctors. The Tribunal remanded the issue for verification, directing the AO to allow expenses genuinely related to business promotion.Disallowance of Deduction under Section 80GThe Tribunal considered whether CSR expenses were eligible for deduction under Section 80G. It referred to judicial precedents supporting the eligibility of CSR expenses for deduction under Section 80G, provided other conditions were met. The Tribunal remanded the issue for verification of compliance with Section 80G conditions.Claim of Deduction under Section 35DDThe Tribunal addressed the claim for deduction under Section 35DD, which was raised for the first time at the appellate stage. It remanded the issue for verification by the AO, allowing consideration of the claim based on past allowances.Claim of 1/5th Write-down of Inventory and Other AssetsThe Tribunal considered the claim for write-down of inventory and other assets, which was also raised for the first time. It remanded the issue for verification and potential allowance by the AO.Non-grant of TDS CreditThe Tribunal directed the AO to verify and allow the TDS credit claim, ensuring compliance with the rules.Initiation of Penalty ProceedingsThe Tribunal dismissed the issue as premature, as the penalty proceedings were still in the initiation stage.SIGNIFICANT HOLDINGSThe Tribunal's decision established several core principles:ESOP expenses are allowable under Section 37(1) if they represent genuine business expenditure.Weighted deductions under Section 35(2AB) require DSIR certification, but unapproved expenses may be considered under Section 37.Disallowance calculations under Section 14A should consider only income-yielding investments, and such disallowances should not impact MAT calculations.CSR expenses may qualify for deduction under Section 80G, subject to verification of compliance with statutory conditions.Claims raised for the first time at the appellate stage may be considered if supported by past allowances and subject to verification.In conclusion, the Tribunal allowed the appeal in part, remanding several issues for further verification and consideration by the AO.