TaxTMI 
TaxTMI 
2017 (12) TMI 995
X X X X Extracts X X X X
X X X X Extracts X X X X
....enses, in response to which appellants had filed submissions during the original assessment proceedings and hence the assessment order was neither erroneous nor prejudicial to the interest of the revenue. 3) The appellants submit that the order under section 263 is bad in law, void, in excess of and/or want of jurisdiction and otherwise illegal and should be quashed. 4) The CIT erred in directing the AO to set aside the original assessment order, on the issue of claim of ESOP expenses of Rs. 11,19,35,000 and pass afresh order after conducting necessary enquiries in the matter. 3. In this case, a show cause notice u/s. 263 of the Act was issued to the assessee as under: Kindly refer to the assessment order passed u/s. 143(3) r.w.s 144C(13) of the I. T. Act, 1961 dated 21.10.2012 passed by the erstwhile DCIT-8(1), Mumbai. On perusal of the relevant assessment order/case records maintained for this purpose (notes to accounts at Sr.Nos. 15 & 18) it is noticed that an amount of Rs. 11,19,35,000/- has been charged by the assesses company under employees costs on account of equity stock options, which is accordingly allowed by the Assessing Officer in the sai....
X X X X Extracts X X X X
X X X X Extracts X X X X
....assessee's response to the above notice was noted by the ld. Commissioner of Income Tax as under: 2. In response to the show cause notice issued, the A.R of the appellant Ms. Bahroze Kamdin, Mrs. Smita Paruikar and Ms. Vidhya Shenoy, CAs attended the proceedings and submitted that the ESOP expense incurred by the assessee company is included under the head 'Employee Cost' in schedule (13) of its P & L account for the relevant assessment year. It was further submitted that it is an actual expenditure incurred by the assessee company on account of charge for granting ESOPs to its eligible employees. These expense being in the nature of share based payments are charged to its P & L account by the assessee company which is an ascertained liability, therefore, no disallowance ought to be made with regard to these expenses. It was further submitted that these expense is claimed as deduction in the year of vesting of shares and not in the year of grant of the stock options. Therefore, it is not a contingent liability or unascertained liability in the year of vesting of the HSOPs. Elaborating more facts with regard to the issue of ESOPs, the AR has further submitted that i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Ranbaxy & VIP, the shares of those companies were to be issued and only a notional loss of share premium which otherwise would have been received is claimed as deduction while in the case of the assessee company, the company is not issuing its own shares but the shares of its parent company will be allotted to the employees of the assessee company the payment for which is made by the assessee company. Therefore, on account of the above, it was submitted that the ESOP expenses i.e. share based payments are in the nature of charge to the company and are ascertained liability / expenditure and hence no disallowance ought to be made with respect to these expenses. 4. In addition to the above, the AR has further submitted that the assessment order passed by the AO is neither erroneous nor prejudicial to the interest of revenue as the AO during the course of assessment proceedings has already raised a specific query on the issue of allowance of ESOP expenses during the scrutiny proceedings and has allowed the expenditure so claimed after due application of mind and considering to the submission /explanation furnished by the assessee. Therefore, it was submitted that the deductio....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... claim of expenditure towards employee cost on account of equity stock options, was payable in future and was an unascertained liability. That the said expenditure related to issue of equity options in future to the Employees and constituted a contingent liability which cannot be allowed as an expenditure since the same is relatable towards future pending obligation not determinable with reasonable certainty in the year of accounting. The ld. Commissioner of Income Tax has referred to certain tribunal's decisions in support of this proposition. It is trite law that the final directions/order u/s. 263 cannot be with respect to issues different from that mentioned in the show cause notice. Being aware of this proposition of law, the ld. Commissioner of Income Tax in his concluding para 20 of his order has held that the Assessing Officer has mechanically allowed ESOP expenditure claimed by the assessee without establishing whether the same has actually accrued or not, which has direct implication on the computation of the taxable income of the assessee company for the year under consideration. 9. In this regard, we note that the proposition that ESOP expenditure is not contingent l....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... force. By no stretch of imagination, such discount can be described as either a short capital receipt or a capital expenditure. It is nothing but the employees cost incurred by the company. [9.2.6] * The revenue also canvassed a view that an expenditure denotes "paying out or away" and unless the money goes out from the assessee, there can be no expenditure so as to qualify for deduction under section 37. Section 37(1) provides that an expenditure must be laid out or expended wholly and exclusively for the purpose of business so as to be eligible for deduction. There is absolutely no doubt that section 37(1) talks of granting deduction for an 'expenditure'. However, it is pertinent to note that this section does not restrict paying out of expenditure in cash alone. When the definition of the word "paid" under section 43(2) is read in juxtaposition to section 37(1), the position which emerges is that it is not only paying of expenditure, but also incurring of the expenditure which entails deduction under section 37(1) subject to the fulfilment of other conditions. Therefore, by undertaking to issue shares at discounted premium, the company does not pay anything to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... place at a future date, thereby not disturbing the otherwise liability which stood incurred at the end of each year on availing the services. It is, therefore, held that the discount in relation to options vesting during the year cannot be held as a contingent liability. [Paras 9.3.5 and 9.3.6] Whether deduction is allowable m Also, it is discernible from the above provisions of Fringe Benefit tax that the legislature itself contemplates the discount on premium under ESOP as a benefit provided by the employer to its employees during the course of service. If the legislature considers such discounted premium to the employees as a fringe benefit or 'any consideration for employment', it is not open to argue contrary. Once it is held as a consideration for employment, the natural corollary which follows is that such discount i) is an expenditure; ii) such expenditure is on account of an ascertained (not contingent) liability ; and iii) it cannot be treated as a short capital receipt. Therefore, discount on shares under the ESOP is an allowable deduction. [Para 9.4.1] Quantum of deduction * An employee becomes entitled to the shares at a dis....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ny has incurred no employee cost. And if there is no cost to the company, the tentative amount of deduction earlier claimed on the basis of the market price at the time of grant of option ceases to be admissible and, hence, needs to be reversed. [Para 11.1.3] * The second situation is when the options are exercised by the employees after putting in service during the vesting period. In such a scenario, the actual amount of remuneration to the employees would be only the amount of actual discounted premium at the time of exercise of option. The Supreme Court in the case of LD. COMMISSIONER OF INCOME TAX v. Infosys Technologies Ltd. [2008] 297 ITR 167/116 Taxman 204 held that the allotment of shares to employees under ESOP, subject to a lock in period of five years and other conditions could not be treated as a perquisite as there was no benefit and the value of benefit, if any, was unascertainable at the time when options were exercised. [Para 11.1.4] * From the provisions of section 17(2), two things surface. First, that the perquisite arises on the 'allotment1 of shares and second, the value of such perquisite is to be computed by considering the fair market ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....principles should be followed for determining the total income of the assessee are not acceptable. What is true for accounting purpose need not necessarily be true for taxation. Taxation principles are enshrined in the legislature. Power to legislate lies with the Parliament. Accounting standards or Guidance Note or Guidelines etc., issued by any autonomous or even statutory bodies including the Institute of Chartered Accountants of India, or the SEBI are meant only to prescribe the way the transactions should be recorded in books or reflected in the annual accounts. These guidelines do not have the force of an Act of Parliament. Since the subject matter of tax on income falls in the Union List as per Part XI of the Indian Constitution, it is only the Parliament which can legislate on its ps. [Para 11.2.3] Conclusion * In the present case, the assessee-company was a closely held company in the previous year relevant to the assessment year 2003-04 and as such there was no question of listing of its shares and having some market price at the time of grant of options. Ordinarily, the amount of discount on premium which is written off over the vesting period represent....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Tax has no impact in the final 263 order. Be that as it may, the ld. Departmental Representative has stated that this observation of the ld. Commissioner of Income Tax is in accordance with the Explanation 2 inserted in section 263(1) w.e.f. 01.06.2015 as under: "Explanation 2.-For the purposes of this section, it is hereby declared that an order passed by the AO shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner,- (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person." 13. The ld. Departmental Representative pleaded that this explanation should be read retrospectively and is ....