Faceless assessment notices remain valid while accrued ESOP costs and non-withholding compensation support tax deductions
Under the faceless assessment framework, an Assessment Unit may perform Assessing Officer functions, including issuing a scrutiny notice; the National Faceless Assessment Centre need not issue such notices exclusively. ESOP expenditure incurred to attract, retain and compensate employees qualifies as business expenditure where the reimbursement liability is accrued and ascertainable as employees render services during the vesting period. Later exercise, lapse or forfeiture affects discharge or adjustment rather than accrual. Disallowance for withholding failure requires an identified applicable tax-deduction provision and, for non-resident payments, chargeability to tax in India. Compensation for extinguishing a right to sue does not attract withholding merely because payment was made.
Issues: (i) Whether a scrutiny notice under section 143(2) of the Income-tax Act, 1961, issued by the Assessment Unit rather than the National Faceless Assessment Centre, is valid; (ii) Whether ESOP expenditure of Rs. 7,00,54,349 claimed under section 37(1) of the Income-tax Act, 1961, is allowable; and (iii) Whether 30% of compensation paid for extinguishment of a right to sue could be disallowed under section 40(a)(ia) of the Income-tax Act, 1961, for non-deduction of tax at source.
Issue (i): Whether a scrutiny notice under section 143(2) of the Income-tax Act, 1961, issued by the Assessment Unit rather than the National Faceless Assessment Centre, is valid.
Analysis: Section 143(2) permits issuance of a scrutiny notice by the Assessing Officer or prescribed income-tax authority. Under the faceless assessment framework, an Assessment Unit is empowered to perform functions of the Assessing Officer, including issuance of statutory notices. The National Faceless Assessment Centre is not the sole authority competent to issue such notice.
Conclusion: The notice issued by the Assessment Unit was valid and the jurisdictional challenge fails against the assessee.
Issue (ii): Whether ESOP expenditure of Rs. 7,00,54,349 claimed under section 37(1) of the Income-tax Act, 1961, is allowable.
Analysis: ESOP cost incurred to attract, retain and compensate employees constitutes employee compensation incurred wholly and exclusively for business. The reimbursement obligation towards the foreign holding company, coupled with valuation and recognition in the accounts, established an accrued and ascertainable liability. Liability accrues as employees render services during the vesting period; future exercise, allotment, lapse or forfeiture affects discharge or subsequent adjustment, not the accrual of expenditure. A valuation report prepared after year-end does not by itself alter the period to which the expense relates, and the absence of comparable listed companies cannot render the valuation or expenditure non-existent.
Conclusion: The ESOP expenditure attributable to the relevant year is allowable under section 37(1) of the Income-tax Act, 1961, in favour of the assessee.
Issue (iii): Whether 30% of compensation paid for extinguishment of a right to sue could be disallowed under section 40(a)(ia) of the Income-tax Act, 1961, for non-deduction of tax at source.
Analysis: A disallowance under section 40(a)(ia) requires establishment that tax was deductible under a specified provision of Chapter XVII-B. The payment for giving up a right to sue was not shown to be consideration for work, commission or brokerage, professional or technical services, or a non-compete fee. No applicable withholding provision was identified. Section 195 applies to a non-resident payment only where the amount is chargeable to tax in India, and no finding of such chargeability was recorded. A lower or nil deduction certificate was not a prerequisite where no withholding obligation was established.
Conclusion: No tax was deductible at source on the impugned payment on the facts found; the disallowance under section 40(a)(ia) is deleted in favour of the assessee.
Final Conclusion: The assessment remains jurisdictionally valid, but the taxable loss must be recomputed after allowing the ESOP cost and removing the disallowance founded on alleged withholding default.