2025 (11) TMI 620 - AT - Income Tax

Ruling upholds ESOP expense deductibility as FMV less issue price; deferred time-share revenue treatment affirmed; capital gain remitted for reassessment

ITAT upheld treatment of ESOP expense as deductible where it represents FMV minus issue price and was provided in line with SEBI guidelines, following ... Disallowance of ESOP (Employees Stock Option Plan) expenses - HELD THAT:- From the records, we found that the identical issue already been decided by the Coordinate Bench of ITAT in assessee’s own case for the A.Y 2011-12 to 2013-14 [2019 (12) TMI 963 - ITAT MUMBAI] as held ESOP expenditure debited to the profit and loss account represents the difference between the fair market value and the issue price of the stocks. It is also evident that the assessee has provided for such cost in terms with SEBI guidelines. The Hon'ble Madras High Court in the case of PVP Ventures [2012 (7) TMI 696 - MADRAS HIGH COURT] has allowed similar expenditure claimed by the assessee. In fact, in case of Biocon Limited [2013 (8) TMI 629 - ITAT BANGALORE] has also allowed ESOP expenditure/cost. Disallowance of long term capital loss and computing of long term capital gain on the sale of Kodaikanal land - On the one hand assessee placed reliance upon valuation report for assessing fair market value of the land as on 01.04.2001 and computed long term capital loss. But the fact remains even after availing opportunities the assessee could not placed on record the collector rate as on 01.01.2001 determining the actual long term capital gain / long term capital loss. AO being the investigator is well equipped with powers to determining fair market value as on 01.04.2001 by calling the collector rate of land. Hence in our view the interest of justice would only be met if the matter is restored back to the file of Ld. CIT(A) for deciding this issue again on merits after calling the collector / circle rate of the land in question and providing opportunity to both the parties. Therefore with the above direction the matter is restored back to the file of Ld. CIT(A) in terms indicated above. Before parting, we make it clear that our decision to restore the matter back to the file of the Ld.CIT(A) shall in no way be construed as having any reflection or expression on the merits of the dispute, which shall be adjudicated by the Ld. CIT(A) independently in accordance with law. Additions made on account of deferred income - Accrual of income - From the records, we found that the identical issue has already been decided by the Coordinate Bench of ITAT in assessee’s own case for the A.Y 2011-12 to 2013-14 [2019 (12) TMI 963 - ITAT MUMBAI] it is evident that as per the consistently followed accounting method and revenue recognition policy, the assessee offers reasonably attributable time share income in the year in which the purchaser of time share units becomes a member and the balance amount of the membership fee, though, is recognized as time share income, however, it is offered as income in equal proportion over a period for which the holiday facilities are provided to the member commencing from the year in which the member is entitled to benefits of membership under the scheme. Accordingly, the assessee offers 45% as membership fee as income and defers the balance 55% to subsequent years. This method of revenue recognition is being followed by the assessee consistently from past several years. It is also evident, whether the deferred income is to be treated as income of the assessee in the year of receipt, is a subject, matter of dispute in the past years and the Tribunal while deciding the issue in AYs. 2002-03, 2006-07, 2007-08 and 2008-09 [2012 (8) TMI 1171 - ITAT CHENNAI] after following that the decision of M/s. Mahindra Holiday & Resorts (India) Limited [2010 (5) TMI 524 - ITAT, CHENNAI] has deleted the addition made by the A.O. on account of time share income. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the Employee Stock Option Plan (ESOP) expense debited to profit and loss account is deductible as business expenditure where the ESOP discount is recognized over the vesting period in accordance with SEBI guidelines and accounting principles. 2. Whether the cost of acquisition for computation of long-term capital gains/losses on sale of land can be taken as the fair market value as on 1-4-2001 under section 55(2)(b) of the Income Tax Act, and whether the assessing authority may re-compute capital gain/loss by reference to circle/collector rates when the assessee fails to place on record the collector rate. 3. Whether receipts from time-share/membership fees (membership fee receipts) can be recognized partly as deferred income (spread over the period of benefit) under consistent accounting policy and recognised accounting standards (including AS-9), or must be taxed entirely in the year of receipt. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Deductibility of ESOP expense recognized over vesting period Legal framework: Deductibility of revenue expenditure under the Income Tax Act depends on whether the expenditure is 'wholly and exclusively' laid out for the purpose of business; accounting recognition under SEBI guidelines and accepted accounting standards may inform tax treatment. Relevant accounting practice: amortisation/recognition of ESOP cost over vesting period. Precedent treatment: Coordinate benches of the Tribunal and higher judicial decisions (including decisions favouring recognition of ESOP expense - e.g., decision of a High Court and Special Bench/Tribunal authorities referred to by the assessee) have been placed before the Court. Earlier Tribunal decisions in the assessee's own case (AYs 2011-12 to 2013-14) and decisions such as PVP Ventures and Biocon (Special Bench) were followed to permit deduction. Interpretation and reasoning: The Court examined whether the ESOP expenditure represents a genuine remuneration expense (the difference between fair market value and issue price) provided for in accordance with SEBI guidelines and accounting principles. The Tribunal found that such expenditure was provided for consistently, represented employee remuneration incurred wholly and exclusively for business purposes, and was recognized over the vesting period as per accepted accounting practice. Conflicting line of authorities which treat issuance at below market price as merely short receipt of premium were considered but, on facts, the Tribunal adhered to earlier favourable precedents and the assessee's own case law. Ratio vs. Obiter: Ratio - where ESOP cost is recorded in accordance with SEBI guidelines and consistent accounting practice and represents remuneration incurred wholly and exclusively for business, the ESOP expense debited to profit & loss is allowable. The reliance on coordinate Tribunal and High Court decisions is part of the binding/precedential reasoning applied. Remarks distinguishing contrary decisions are obiter to the extent they discuss differing fact patterns and legal approaches. Conclusion: The disallowance of ESOP expense of Rs. 54,53,100 was deleted; the Tribunal applied principles of judicial consistency and followed prior favourable decisions in the assessee's own case and relevant precedents, allowing the ESOP expense as deductible. Issue 2 - Computation of long-term capital gain/loss on sale of land and use of FMV as on 1-4-2001 vs. collector/circle rate Legal framework: Sections 48 and 55(2)(b) of the Income Tax Act permit computation of capital gains by adopting indexed cost of acquisition - where an assessee opts, the fair market value as on 1-4-2001 may be substituted as cost of acquisition (with indexation) for assets acquired before that date. The AO has powers to determine fair market value and may call for collector/circle rates to verify valuation. Precedent treatment: The Tribunal considered the assessee's furnished valuation report and the assessing officer's reliance on collector/circle rates and re-computation; the issue involved assessment procedure and evidentiary burden rather than a pure legal principle unfamiliar to prior decisions. Interpretation and reasoning: The Tribunal noted that the assessee claimed substitution of fair market value as on 1-4-2001 and furnished a valuation report supporting a long-term capital loss. However, the assessee failed, despite opportunities, to place on record the collector/circle rate as on 1-4-2001. The AO, as fact-finder and investigator, is empowered to call for and determine the appropriate collector/circle rate. Given the absence of conclusive documentary evidence from the assessee and the risk of time-bar, the Tribunal concluded that the proper course was to remit the matter to the Commissioner (Appeals) for fresh adjudication with directions to call for collector/circle rates and to afford both parties opportunity of being heard on valuation and indexation issues. Ratio vs. Obiter: Ratio - where the assessee seeks to substitute FMV as on 1-4-2001 under section 55(2)(b), evidentiary support (valuation and/or collector/circle rates) must be placed on record; absence of such material permits the AO to determine indexed cost using collector/circle rates, and remand is appropriate where the matter requires fact-finding and further opportunity to both parties. Observations on the merits of the valuation report are obiter to the extent the Tribunal refrained from expressing any view on the correctness of valuation, expressly reserving adjudication to the appellate authority upon remand. Conclusion: The Tribunal restored the matter to the file of the Commissioner (Appeals) to decide the capital gain/loss computation afresh after calling for collector/circle rates and providing opportunities to both parties; the restoration was expressly stated not to reflect any view on merits. Issue 3 - Tax treatment of membership/time-share receipts: deferral of income under accounting policy and AS-9 Legal framework: Taxability of receipts depends on incidence of income under the tax law, but consistent accounting policies and recognised accounting standards (including AS-9 on revenue recognition) are relevant indicia of commercial reality and may be followed for tax purposes unless overridden by statute. The contract terms governing membership/time-share, the purpose of receipts, and whether amounts are advance subscriptions for future services are material to taxability. Precedent treatment: The Tribunal relied on its own coordinate decisions in the assessee's prior years and on the Chennai Special Bench decision in Mahindra Holiday & Resorts (India) Ltd., which treated a fair proportion of membership receipts as deferred and taxable over the period of performance of services; those precedents were applied repeatedly in the assessee's own earlier years and considered binding on the facts. Interpretation and reasoning: The Tribunal examined the nature of the membership fee: a composite receipt which, under the contract, secures future holiday facility benefits requiring future expenditure (maintenance, replacement, renovation, marketing). The assessee's consistent accounting policy recognised a portion of the membership fee as immediate income attributable to direct costs and deferred the balance as subscription for future facilities to be recognised over the benefit period. The AO's approach of taxing the entire receipt in the year of receipt was rejected because it ignored the consistent revenue recognition method and prior Tribunal decisions in the assessee's own case. The Tribunal held that prior adverse departmental contestations of Tribunal decisions do not justify ignoring co-ordinate bench precedent in the assessee's own case. Ratio vs. Obiter: Ratio - where membership receipts are contracts for future services and the assessee follows a consistent, reasonable accounting policy (in line with AS-9 and relevant precedents), a proportionate deferral of income is permissible for tax purposes; prior tribunal decisions in the same assessee's cases are to be followed. Observations regarding absence of a specific provision in the IT Act for refund or the existence/absence of a balance sheet provision for future maintenance were considered but did not alter the principal ratio given the contractual and accounting context. Conclusion: The Tribunal upheld deletion of additions treating the entire membership receipts as income and dismissed the revenue's challenge, applying prior favourable Tribunal decisions and principles of judicial consistency to permit deferral of a portion of membership receipts in accordance with the assessee's accounting policy and AS-9. Cross-references and final disposition All three issues were adjudicated with reliance on prior coordinate-bench decisions in the assessee's own case. For Issue 1 (ESOP), the Tribunal allowed the expense following earlier decisions. For Issue 2 (capital gains), the Tribunal remitted the matter for fresh factual determination (collector/circle rates) and afforded both parties opportunity; no final conclusion on merits was expressed. For Issue 3 (deferred membership income), the Tribunal upheld the deferment treatment under consistent accounting policy and precedent and dismissed the revenue's appeal on that point.