TaxTMI 
TaxTMI 
TaxTMI 
2024 (9) TMI 1045
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.... incurred under ESOP amounting to Rs. 5,95,65,043/- made by the Ld. AO. The disallowance is unjustified and needs to be deleted. 3. The assessee craves leave to add, alter, amend or withdraw any ground or grounds of appeal before or at the time of hearing." 3. Brief facts of the case as mentioned in the written submissions filed are as under: 3. Prior entering into the merits of case, it is pertinent to briefly state the facts which is applicable to the aforementioned issue. The brief facts are herein below: (a) The appellant had filed its return for the financial year 2015-16 on October 15, 2016, declaring total income of Rs. 3,05,36,72,140/- (b) However, due to unavoidable circumstances, the appellant was not able to claim certain deduction of an amount of Rs. 5,95,65,043/- towards expenses incurred by the appellant towards cost of Employees Stock Option (hereinafter, referred to as "ESOP"). (c) Such costs were attributable towards the difference is value of stock options sold to specific employees of the appellant and the fair market value of such shares. (d) Such difference in costs between the stock options sold to employees and the fair market value of shares is ....
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.....1 During the course of scrutiny proceedings, the assessee, in respect of claim of ESOP expenses, submitted that the assessee has not claimed ESOP cost of Rs. 5,95,65,043/- in the original return or revised return, and further, it is putting up the claim of Rs. 5,95,65,043/- during the assessment proceedings. The relevant part of the submission of the assessee for claim of ESOP cost during the course of assessment proceedings is reproduced as under. 1.1 "GRUH had filed its return of income on 15/10/2016 declaring total income at Rs. 305,36,72,140/- after making certain disallowance and claim of deduction under various sections of the Income Tax Act, 1961. Along with the Tax Audit Report, GRUH had submitted audited accounts. In notes on account attached to the Balance Sheet, it has been stated that GRUH has issued / allotted equity shares to its employees and directors under ESOS 2011 ("the Scheme ") Tranche I & II at exercise price of Rs. 317.85 & 548.80 per option which includes share premium of Rs. 307.85 & 538.80 respectively. Grant price per option under ESOS 2011 has been derived as per Securities and Exchange Board of India (Employee stock option Scheme and Employee Stock P....
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....Tax Act, 1961, which comes to Rs. 5,95,65,043/ employees wise list is enclosed herewith marked as Annexure-"1" 1. Expenses not claimed in original or revised Income Tax Return but Claim put up during assessment proceedings: 2.1 In case of certain claims, to which the assessee is entitled to deduction but not claimed through oversight in the return of income, the same can be claimed during the course of assessment proceedings by making submission thereon and the Assessing Officer has to consider the same. 2.2 As you are aware that the Supreme Court in the case of Goetze (India) Ltd has held that every legitimate claim has to be claimed in the return of income and not by way of submission during the course of assessment proceedings. In the present case, the claim of ESOP cost has not been claimed by us in the original return or revised return but it is a settled law that in case of an assessment under section 143(3) of the Income Tax Act, 1961, the assessee is entitled to make a fresh claim or a modified claim at any time before completion of assessment. The various provisions under the Income Tax Act, which support the aforesaid proposition of law, can be summarized as under....
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....he law and such occasion could arise during the assessment proceedings. The assessee relied upon the following citations: (a) National Thermal Power Co. Ltd. Vs. C.I.T., 229 ITR, p.383(SC) (b) C.I.T. Vs. Prabhu Steel Industries Pvt. Ltd., 171 ITR, p530, (Bom.) (c) Steel Ingots (P.) Ltd. Vs. C.I.T., 86 Taxman, p.440 (MP) (d) C.I.T. Vs. Bhopal Sugar Industries Ltd. 233 ITR, p.429 (MP) (e) CIT Vs. Motor Industries Co. Ltd., 229 ITR, p. 137 (Karn.) The Ld. DR relied upon the order of the Ld. AO and the Ld. CIT(A) in this regard. 6.1 We have heard the rival submissions and perused the material available on record. As regards admission of the additional claim before the appellate authorities, the assessee also relied upon the decision of the Hon'ble Supreme Court in the case of Wipro Finance Ltd. Vs. CIT [2022] 443 ITR 250 (SC) and also the order of the Tribunal in the assessee's own case in ITA No. 370/Kol/2022. It was submitted before us as under: 2. The short question of law raised in the appeal is whether an additional or fresh claim of deduction can be made in course of assessment proceedings under Section 143 of the Act, when such claim was not part of the original re....
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....nder: "9. A priori, we are of the considered opinion that the analysis done by the ITAT and the conclusion arrived at in respect of the subject claim of the appellant being the correct approach consistent with the exposition of this Court, needs to be upheld. In our opinion, the High Court missed the relevant aspects of the analysis of the ITAT concerning the fact situation of the present case. As a matter of fact, the High Court has not even adverted to the aforementioned reported decisions, much less its usefulness in the present case. 10. The learned ASG appearing for the department had faintly argued that since the appellant in its return had taken a conscious explicit plea with regard to the part of the claim being ascribable to capital expenditure and partly to revenue expenditure, it was not open for the appellant to plead for the first time before the ITAT that the entire claim must be treated as revenue expenditure. Further, it was not open to the ITAT to entertain such fresh claim for the first time. This submission needs to be stated to be rejected. In the first place, the ITAT was conscious about the fact that this claim was set up by the appellant for the first tim....
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....r accordingly." Hence, we hold that the assessee could make an allowable claim before the appellate authorities and the same has to be considered as the limitation of revised return for making a claim applies to the powers of the assessing officer and not of the appellate authorities. 7. As regards, the allowability of ESOP cost as business expenditure under section 37 of the Act, the assessee submitted before the assessing officer as under: "3.1 In paragraph 1 above, GRUH has explained the scheme of ESOP and in the succeeding paragraphs, it is explained as to how ESOP cost is allowable in the hands of employer. 3.2 The expenditure is in nature of discount given by GRUH to its employees on issue of shares under ESOS Scheme at granted rate which is below fair market price as on the vesting date. The said difference is in nature of business expenditure and has been incurred for appreciating and encouraging employees for their loyalty and performance towards GRUH. 1.1.1. The said difference is very well in nature of business expenditure and allowable under section 37(1) of the IT Act, 1961. We support our contention on the basis of various judicial pronouncements wherein it ....
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....ployees at a price lower than the market price a mode of compensating to the employees for their continued services to the company and is a part of their remuneration and cannot be described as a short receipt of share premium or a capital expenditure. b. The discount on options under ESOS is an ascertained liability and not contingent liability. C. Discount on option under ESOS is in nature of employee cost and allowable deduction under section 37(1) of the Income Tax Act, 1961, during the years of vesting on the basis of percentage of vesting during such period. d. The amount of perquisite in the hands of the employee and the amount of discount can never be different and appropriate adjustment needs to be made in income in respect of difference in amount of discount computed with respect to market price at the time of grant and exercise of option IV The above referred decision have also been pronounced in favour of the assessee in below mentioned judgments as well Dr. Reddy's Lab Ltd vs. ACIT (2014) 30 ITR(T) 393 (Hyd-Trib) Novo Nordisk India (P) Ltd. Vs. DCIT-(2014) 42 taxmann.com 168 (Bang-Trib) HDFC Bank Ltd. Vs. DCIT-(2016) 130 DTR 219 (Mum-Trib) Dr. Reddy....
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....uld not be in personal in nature: Considering that the employees are being compensated for their services rendered for benefit of business ESOS discount cannot not be treated as personal expenditure of the company Wholly and exclusively for the purpose of business: The term 'wholly and exclusively for business has not been defined under the Act. However, judicial authorities have time and again interpreted this phrase. The adverb 'wholly' in the phrase 'laid out or expended for business' refers to the quantum of expenditure. The adverb 'exclusively has reference to the object or motive of the act behind the expenditure. Unless such motive is solely for promoting the business, the expenditure will not qualify for deduction. The expression wholly and exclusively' does not mean necessarily. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed if it otherwise satisfies the tests laid down by law. Sum of money expended, not only and with a view to a direct and immediate benefit to the trade, but also voluntarily on the ground of commercial expediency, in order ....
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....ros Pvt. Ltd. 252 ITR 637 (Delhi HC) The above views of Delhi ITAT in the case of Ranbaxy (supra) were also upheld subsequently by the following judicial courts: - Hyderabad ITAT in the case of Medha Servo Drivers Limited, ITA No. 1114/Hyd/2008. - Mumbai Tribunal in the cases of : (a) DCIT Vs. Blow Plast Limited, ITA No. 512/Mum/2009 (b) Mahindra & Mahindra Vs. DCIT ITA No. 8597/Mum/2010 (c) M/s VIP Industries Vs. DCIT, ITA No. 7242/Mum/2008 9. The Ld. CIT(A), after elaborate discussion upheld the view of the Ld. AO. Further submissions filed in this regard before us are as under: "8. That apart from the above, the appellant submits that the cost incurred towards ESOP is a revenue expenditure and ought to have been allowed as deduction in terms of Section 37 of the Act, for the following reasons: (a) The primary objective of ESOP is to earn profit by securing consistent and concentrated efforts of dedicated employees during the vesting period. (b) The said expenses represent the incentives provided to employees who stay with the assessee over a longer period of time and therefore, is in the nature of 'employee compensation'. (c) ESOP is taxable in the ha....
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.... cost incurred towards ESOP be treated as revenue expenditure and allowed as deduction in terms of Section 37 of the Act." 9.1 It was also submitted that in the case of assessee's own case ITA No. 370/Kol/2022, order dated 27.03.2023 have allowed the claim. The relevant extract from which is as under: "5. Ld. Sr. DR referred to the conditions stipulated u/s. 37(1) of the Act and asserted that claim of ESOP expenditure by the assessee does not satisfy the conditions stated therein. Ld. Sr. DR also submitted that assessee has not incurred any expenditure as nothing was going out of the assessee rather it resulted in the short receipt of share premium which the assessee otherwise entitled to and as the receipt of share premium was not taxable, any short receipt of such premium would only amount to a notional loss and not actual loss requiring any deduction u/s. 37(1) of the Act as it was a capital expenditure. 6. Per contra, Ld. AR reiterated the submissions made before the Ld. AO. He stated that difference between the exercise price and fair market price is considered as perquisite in the hands of the employees and added under salary income of the respective employees and is fur....
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.... the case of CIT Vs. Lemon Tree Hotels Ltd. in ITA No. 107/2015 dated 18.08.2015 on a similar issue which was considered by the Coordinate bench of ITAT, Delhi in the case of ACIT Vs. People Strong HR Services (P) Ltd. (2022) 134 taxmann.com 351 (Del.Tri.). In this decision, judgments of Hon'ble High Court of Karnataka and of the Hon'ble Special Bench were also considered, allowing the claim of the assessee. Relevant extract from the said decision of ITAT, Delhi is reproduced as under: "6. After considering the rival submissions and going through the material placed on record, we find that it is now well settled proposition that the issue of allowability of ESOP discount being the difference between the market value of shares and the value at which employees had been given the shares is covered, not only by the decision of Hon'ble jurisdictional High Court in Lemon Tree Hotels Ltd. (supra), but also by the judgement of the Special Bench in the case of Biocon Ltd. (supra). This judgment of special bench has now been approved by the Hon'ble Karnataka High Court vide order dated 11.11.2020 and held that employees' discount represents consideration for services rendered b....
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.... Act by the ld. CIT(A), we do not find any reason to interfere with the finding arrived at by the Ld. CIT(A). Accordingly, ground taken by the revenue in this respect is dismissed. 9.2 It was informed that the order of the ITAT has been upheld by the Hon'ble Calcutta High Court vide order in ITAT/286/2023 IA No:GA/1/2023, GA/2/2023 Principal Commissioner of Income Tax 2 Kolkata V Bandhan Bank Ltd, order dated 7th February, 2024 whereby the appeal of the Revenue has been dismissed and the order of the Tribunal has been upheld. Vide second written submission filed on 27.02.2024, it is mentioned that the order of the Hon'ble ITAT has been upheld by the Hon'ble Calcutta High Court and the appeal of the Revenue has been dismissed as under: "3. The appellant at the time of hearing inadvertently failed to bring this Hon'ble Tribunal's attention that the said decision of the Tribunal was challenged before the Hon'ble High Court at Calcutta in ITAT/286/2023 by the revenue. The Hon'ble Division Bench by an order dated February 07, 2024, was pleased to dismiss the revenue's appeal on the ground that the issue is settled in favour of the appellant. A copy of the decision....
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....e singular issue, which arises for consideration in this appeal is whether the tribunal is correct in holding that discount on the issue of ESOPs i.e., difference between the grant price and the market price on the shares as on the date of grant of options is allowable as a deduction under section 37 of the Act. Before proceeding further, it is apposite to take note of section 37(1) of the Act, which reads as under: Section 37(1) says that any expenditure (not being expenditure of the nature de-scribed in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head, "Profits and Gains of Business or Profession". 7. Thus, from perusal of section 37(1) of the Act, it is evident that the aforesaid provision permits deduction for the expenditure laid out or expended and does not contain a requirement that there has to be a pay out. If an expenditure has been incurred, provision of section 37(1) of the Act would be attracted. It is also pertinent to note that section 37 does not en....
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....e purposes of section 37(1) of the Act. The primary object of the aforesaid exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, the same cannot be construed as short receipt of capital. The tribunal therefore, in para-graphs 9.2.7 and 9.2.8 has rightly held that incurring of the expenditure by the assessee entitles him for deduction under section 37(1) of the Act subject to fulfilment of the condition. 11. The deduction of discount on ESOP over the vesting period is in accordance with the accounting in the books of account, which has been prepared in accordance with Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. 12. So far as reliance place by the revenue in the case of Infosys Technologies Ltd.(supra) is concerned, it is noteworthy that in the aforesaid decision, the Supreme Court was dealing with a proceeding under section 201 of the Act for non-deduction of tax at source and it was held that there was no cash inflow to the employees. The aforesaid decision is of no assistance to decide the issue of allow-ability of expenses in the hands....
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....a deductible expenditure and the amount spent by an assessee for labour/employees' welfare, would be deductible as revenue expenditure. In Dalmia Jain & Co. Ltd. v. CIT [81 ITR 754], the Hon'ble supreme court held that "expenditure incurred for maintenance of business is revenue in nature". 8.7 According to the assessees, the ESOP benefit is taxable in the hands of employees as 'perquisite' under section 17(2) of the Act and it was brought within the purview of Fringe Benefit Tax, which is an employee related expenditure. It is further pointed out by the assessees that similar claim of ESOP expenses for de-duction raised for the assessment years 2006-07, 2007-08 and 2008-09, was allowed by the assessing officer. However, the same was disallowed by the assessing officer relating to the assessment year 2009-10, by placing reliance on the decision of the Hon'ble supreme court in Brooke Bond India Ltd. (cited supra), wherein, it was held that "though the increase in capital results in expansion of the capital base of the company and incidentally that would help in the business of the company and may also help in the profit making, the expenses incurred in that con....
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....ure in this behalf was an ascertained liability, thus the expenditure incurred being on lines of the SEBI guidelines, there could be no interference in the relief granted by the Assessing Authority for the expenditure arising on account of Employees Stock Option Plan. This expenditure incurred as per SEBI guidelines and granted by the Officer could not be considered as erroneous one calling for exercise of jurisdiction under section 263 of the Act." 8.9 It is also to be noted at this juncture that as against the aforesaid decision of this Court, SLP (C) No. 9091 of 2014 was filed and it was ultimately, dismissed on 28-3-2014, as a result of which the judgment of this Court thus, attained final-ity. 8.10 Further, in the decision of the Karnataka High Court in Biocon Ltd. [(2020) 121 taxmann.com 351 (Karnataka)], the question as to whether the expenditure towards ESOP is allowable as deduction under section 37(1) of the Act, was considered and was ultimately decided that the same amounted to definite legal liability, which has to be allowed as deduction, after considering the definition of "employees stock option" under section 2(15A) of the Companies Act, 1956. The new provision....