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<h1>ESOP expenses, BSE/NSE charges, and SEBI settlement fees allowed as business deductions under section 37(1)</h1> <h3>Goldman Sachs (India) Securities Private Limited Versus ACIT, Circle-7 (1) (1), Mumbai</h3> ITAT Mumbai allowed assessee's appeal on multiple grounds. ESOP expenses were permitted as deduction under section 37(1) following precedent decisions, ... Disallowance of ESOP (Employee stock ownership plan) - HELD THAT:- We find that on similar grounds of appeal in assessee’s own case for A.Y. 2010-11 [2022 (2) TMI 1506 - ITAT MUMBAI] wherein similar relief was allowed to the assessee ESOP expenses should not be regarded as contingent or notional and it should be allowed as deduction u/s 37(1) as relying on Accenture Services Pvt. Ltd. [2010 (3) TMI 1107 - ITAT MUMBAI] and Novo Nordisk India Private Limited [2013 (11) TMI 218 - ITAT BANGALORE] Assessee ground allowed. Disallowance of charges paid to Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) - assessee submits that the aforesaid charges were paid to BSE & NSE in respect of non-confirmation of clearing house trades and client code modification which was claimed by assessee in its return of income - HELD THAT:- We find that on similar disallowance in assessee’s own case for A.Y. 2010-11 [2022 (2) TMI 1506 - ITAT MUMBAI] the assessee was allowed relief by following decision of Jurisdiction High Court in assessee’s own case for A.Y. 2008-09 and 2009-10 [2019 (6) TMI 1003 - BOMBAY HIGH COURT] Disallowance of settlement charges paid to Security & Exchange Board of India (SEBI) - assessee claimed such charges as allowable business expenditure - AO disallowed the same on the basis of adverse report in tax audit report HELD THAT:- We find that co-ordinate bench of Mumbai Tribunal in a series of decision held that when settlement fees was paid to SEBI for some technical violation without admitting their guilt is allowable business expenditure. Considering the consistent decision of co-ordinate bench of Mumbai Tribunal in DCIT Vs VLS Finance Ltd. [2018 (7) TMI 586 - ITAT DELHI], DCIT Vs Anil Dhirajlal Ambani [2018 (6) TMI 469 - ITAT MUMBAI] and in ITO Vs Reliance Share & Stock Brokers (P) Ltd. [2014 (10) TMI 781 - ITAT MUMBAI] this ground of appeal is allowed in favour of assessee. Disallowance of gratuity payment / reversal - HELD THAT:- Considering the submissions of both the parties as well as direction of DRP, the assessing officer is directed to verify the fact and allow appropriate relief to the assessee. The assessee is also directed to provide all required details of the assessing officer. In the result, this ground of appeal is allowed for statistical purpose. The core legal questions considered by the Tribunal in this appeal include:1. Whether the final assessment order passed under section 143(3) read with section 144C(13) without involvement of the National Faceless Assessment Centre is valid or void ab initio.2. Whether the disallowance of Employee Stock Option Plan (ESOP) expenses amounting to Rs. 20,32,10,414 on the ground that such costs are notional or contingent is justified.3. Whether the charges paid to Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) for non-confirmation of clearing house trades and client code modifications, disallowed as penalties/fines, are deductible business expenses.4. Whether settlement charges paid to Securities and Exchange Board of India (SEBI) amounting to Rs. 20,80,242 are disallowable as penalties or are allowable business expenses.5. Whether gratuity payments amounting to Rs. 91,15,316, disallowed on account of alleged non-verification, should be allowed as deduction.6. Whether the computation sheet attached to the final assessment order incorrectly states the deemed total income under section 115JB and interest under section 234C, requiring rectification.7. Whether the initiation of penalty proceedings under section 270A is justified.8. Issues relating to transfer pricing adjustments under section 92CA and validity of the assessment order under section 144B were raised but subsequently not pressed by the assessee.Disallowance of ESOP ExpensesThe ESOP expenses disallowance was challenged on the basis that such costs are neither contingent nor notional but actual expenditures incurred in accordance with the accounting standards and the vesting schedule of the stock units granted to employees. The assessee relied heavily on consistent precedent in its own case for multiple assessment years (AY 2008-09 through AY 2015-16), where the Tribunal had allowed such expenses as deductible.The Tribunal examined the factual matrix, including the accounting treatment where the cost of Restricted Stock Units (RSUs) is amortized over the vesting period and the actual payment to the parent company (GSGI) is made upon delivery of RSUs to employees. The Tribunal noted that the payment is determined with reference to the value of shares on the date of vesting and constitutes a genuine compensation cost.Relevant judicial precedents cited by the assessee included decisions favoring the allowance of ESOP costs as business expenditure under section 37(1) of the Income Tax Act. The Tribunal observed that the Assessing Officer (AO) and Dispute Resolution Panel (DRP) had disallowed the expenses relying on earlier years but failed to distinguish the facts or accounting treatment in the current year.Respectfully following the consistent precedent and detailed factual findings, the Tribunal held that ESOP expenses are allowable deductions. The addition made by the AO and confirmed by the DRP was set aside, and the ground was allowed in favor of the assessee.Disallowance of Charges Paid to BSE and NSEThe Tribunal considered the disallowance of Rs. 14,22,465 paid to stock exchanges for non-confirmation of clearing house trades and client code modifications, which the AO and DRP treated as penalties or fines and disallowed under section 37.The assessee contended that these payments were procedural charges related to rectification of trade errors rather than statutory penalties. The auditor had classified these as 'other penalty or fine' in the tax audit report, but the assessee argued that the payments were not penalties in the legal sense.The Tribunal referred to multiple precedents in the assessee's own case and decisions of the jurisdictional High Court and ITAT, which had consistently held that such payments are allowable business expenses since they are not imposed for statutory violations but are charges to encourage compliance and reduce errors.The Tribunal analyzed the relevant circulars issued by NSE and NSCCL, which clarified the nature of these charges as fees for non-custodial settlement or procedural lapses, not penalties for contravention of law.Respectfully following binding precedents and the factual matrix, the Tribunal held that the disallowance was unjustified and directed deletion of the addition, allowing the ground in favor of the assessee.Disallowance of Settlement Charges Paid to SEBIThe disallowance of Rs. 20,80,242 paid as settlement charges to SEBI was challenged on the ground that these payments were made pursuant to a settlement application without admission of guilt or breach of statutory provisions.The AO and DRP disallowed the expenditure relying on the auditor's report classifying the payments as penalties or fines. The assessee relied on a series of decisions by the Mumbai Tribunal, which had allowed similar settlement fees as deductible business expenses where no admission of guilt was made.The Tribunal noted the absence of any order of settlement on record but found the consistent judicial trend favoring allowance of such settlement charges as business expenses. It distinguished such payments from statutory penalties and held that they are allowable under section 37(1).Accordingly, the Tribunal allowed the ground in favor of the assessee.Disallowance of Gratuity PaymentThe assessee claimed deduction for gratuity payments of Rs. 91,15,316, supported by an actuarial valuation report. The AO disallowed the claim on the ground of non-verification and disregarded the report. The DRP directed verification of facts and allowance of the claim.The Tribunal directed the AO to verify the facts and allow the appropriate relief, noting that the issue had been allowed in favor of the assessee in the immediately preceding assessment year. The ground was allowed for statistical purposes.Incorrect Computation Sheet under Section 115JB and Interest under Section 234CThe assessee contended that the computation sheet attached to the final assessment order incorrectly stated the deemed total income under section 115JB and incorrectly computed interest under section 234C.The Tribunal directed the AO to verify and rectify the computation sheet to ensure compliance with statutory provisions, allowing the ground for statistical purposes.Validity of Final Assessment Order under Section 144BThe assessee challenged the validity of the final assessment order on the ground that it was passed without involvement of the National Faceless Assessment Centre, thereby rendering the assessment void ab initio.However, during the hearing, the assessee did not press this ground, and the Tribunal accordingly treated it as academic in view of the relief granted on other grounds.Transfer Pricing AdjustmentsThe assessee initially challenged upward transfer pricing adjustments under section 92CA relating to international transactions for investment advisory and information technology enabled services. However, the assessee's authorized representative expressly did not press these grounds, leading to their dismissal as not pressed.Penalty Proceedings under Section 270AThe initiation of penalty proceedings under section 270A was raised as a ground but was considered consequential and not adjudicated at this stage by the Tribunal.Overall Conclusions and Principles EstablishedThe Tribunal reaffirmed the principle that ESOP expenses, when accounted for in accordance with the vesting schedule and actual payment obligations, are allowable business expenditure under section 37(1), rejecting the notion that such costs are notional or contingent.It clarified that payments to stock exchanges for procedural lapses, which are not penalties imposed for statutory violations but charges to encourage compliance, are deductible business expenses.Settlement charges paid to SEBI pursuant to settlement applications without admission of guilt are similarly allowable deductions.Gratuity payments supported by actuarial valuation reports and verified by the AO are deductible, and the AO is directed to verify and allow such claims.The Tribunal emphasized adherence to procedural fairness, directing rectification of computational errors and ensuring correct application of interest provisions.In respect of transfer pricing and validity of assessment order issues, the Tribunal deferred to the parties' positions or treated the issues as academic.In sum, the Tribunal allowed the appeal of the assessee on the grounds relating to ESOP expenses, stock exchange charges, SEBI settlement charges, gratuity payments, and computational corrections, while dismissing the transfer pricing grounds as not pressed and leaving penalty proceedings for future adjudication.