2025 (7) TMI 1296 - AT - Income Tax

ITAT allows appellate authorities to entertain fresh ESOP deduction claims when facts recorded and issue purely legal

HDFC Bank Limited (as successor to Housing Development Corporation Finance Limited) Versus The Deputy Commissioner of Income-tax-2 (3) (1), Mumbai

HDFC Bank Limited (as successor to Housing Development Corporation Finance Limited) Versus The Deputy Commissioner of Income-tax-2 (3) (1), Mumbai - TMI ISSUES: Whether expenditure incurred on Employee Stock Option Scheme (ESOP) can be claimed as a deduction under Section 37(1) of the Income-tax Act, 1961, when not claimed in the original or revised return of income but raised for the first time before the appellate authority.Whether the Commissioner of Income-tax (Appeals) has jurisdiction to allow a fresh claim of deduction not made before the Assessing Officer, particularly in light of the Supreme Court decision in Goetze (India) Ltd. v. CIT.The scope of appellate authorities' power, including the Income-tax Appellate Tribunal (ITAT), to entertain additional grounds or legal claims not raised before the Assessing Officer.The applicability of judicial precedents, including decisions of coordinate benches and High Courts, on the allowability of ESOP expenses as business expenditure under Section 37(1).Whether the nature of the assessment order (under Section 143(1) versus Section 143(3)) affects the power of appellate authorities to admit additional grounds or claims. RULINGS / HOLDINGS: The claim for ESOP expenditure of Rs. 216,78,60,432/- under Section 37(1) of the Act, though not made in the original or revised return nor before the Assessing Officer, is allowable as a business expenditure, subject to verification, as it is 'incurred wholly and exclusively for the purpose of business.'The Commissioner of Income-tax (Appeals) erred in rejecting the claim solely on the ground that no revised return was filed and the claim was not made before the Assessing Officer, as the appellate authorities have jurisdiction to entertain legal claims not previously raised, provided the facts are on record.The ITAT has the power to admit additional grounds and adjudicate legal issues even if not raised before the Assessing Officer, consistent with the Supreme Court's clarification that the limitation in Goetze (India) Ltd. v. CIT pertains only to the Assessing Officer's powers, not the appellate authorities.Judicial precedents, including the ITAT's own orders in the assessee's earlier years and the Karnataka High Court decision in CIT v. Biocon Ltd., support the allowability of ESOP expenses as revenue expenditure under Section 37(1).The nature of the assessment order (Section 143(1) or 143(3)) does not restrict the appellate authority's jurisdiction to entertain additional claims; the Assessing Officer lacks power to amend returns or entertain fresh claims without a revised return. RATIONALE: The legal framework revolves around Section 37(1) of the Income-tax Act, which allows deduction of any expenditure 'not being in the nature of capital expenditure' incurred wholly and exclusively for business purposes.The Supreme Court decision in Goetze (India) Ltd. v. CIT restricts the Assessing Officer from allowing fresh claims not made in the original or revised return but does not curtail the appellate authorities' power under Sections 250 and 254 to entertain such claims if the facts are on record.Coordinate Bench ITAT decisions and High Court rulings have consistently held that ESOP expenses, representing the perquisite value taxable in employees' hands, qualify as business expenditure deductible under Section 37(1).The appellate authorities' jurisdiction to admit additional grounds is well-established and is not negated by the mode of assessment or the absence of a revised return; this ensures just adjudication of legal issues.The matter is remanded to the Assessing Officer for fresh adjudication with directions to verify the claim and afford the assessee a reasonable opportunity of being heard, ensuring procedural fairness and adherence to substantive law.