TaxTMI 
TaxTMI 
2024 (9) TMI 1045
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.... CIT(A) erred in confirming the disallowance of expenditure 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 ....
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....penditure, there is no expenditure incurred by the company towards ESOP cost. The relevant extract from the assessment order is as under: "7.1 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 respective....
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....es less amount, which is in nature of discount allowed by GRUH to employees. Such discount is nothing but employee cost to GRUH, fully allowable as expenditure under section 37 of the Income 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 ....
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....tion 143(3) of the Act and also relied upon the Citizen's Charter issued by the Income Tax Department which states that it is the duty of the Ld. AO to inform the tax payers of their rights, duties, entitlements and obligations under the 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....
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....supra) and International Tractors (supra). Thus, placing reliance on the same, the appellant submits that the fresh claim of the appellant ought to have been allowed by the appellate authority. As a result, based on such submissions, the impugned order is bad in law, till this extent. 6.2 In this context, Hon'ble Supreme Court in the case of Wipro Finance Ltd. (supra) have held as under: "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 expendit....
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....ad not acquired any asset from any country outside India for the purpose of his business. 13. In view of the above, this appeal ought to succeed. The impugned judgment and order of the High Court needs to be set aside and instead, the decision of the ITAT dated 3.6.2004 in favour of the appellant on the two questions examined by the High Court in the impugned judgment, needs to be affirmed and restored. We order 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 whic....
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....ugust 2015 in ITA No.2 of 2002 (CIT v. Oswal Agro Mills Ltd.) held that the expenditure incurred in connection with issue of debentures or obtaining loan should be considered as revenue expenditure In the circumstances the impugned order of the ITAT answering the question in favour of the Assessee is affirmed. iii. In the decision of the Bangalore Special Bench in the case of Biocon Ltd vs. DCIT-(2013) 25 ITR(T) 602, the special bench held as under: a. Allotment of shares to the employees 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 d....
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....needs to be satisfied in order to make a claim under section 37 of the Act is that the expenditure should not be capital in nature. Accordingly, ESOS discount is revenue in nature since it is compensation to the employee for his services in employment considering the following aspect. i. Employees eligible for an ESOS are granted the options considering their duration of service with GRUH, responsibilities, shouldered, designation, performance etc. ii. The vesting of ESOS is spread over three years. iii. The scheme provides for lapse of options on termination of employment or resignation. The expenditure should 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' ....
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....&L is notional in nature since the assessee has neither laid out or expended any amount while choosing to receive no/lesser securities premium. The alternative argument that this ITAT has supported is since the receipt of securities premium is not chargeable to tax being a capital receipt any short collection of securities premium should also be considered as capital outlay and cannot be allowed as expenditure. The Delhi ITAT in the case of Ranbaxy (Supra) has relied on the following court rulings which have held that shares issued against assets/Technical know-how contributed by shareholders cannot be claimed as revenue expenditure: (a) Eimco K.C.P Ltd. Vs. CIT 159 CTR 137 (Supreme Court) (b) CIT Vs. Reinz Talbros 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....
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....Sachs (India) Securities Pvt. Ltd., (2019 (6) TMI 1003 BOMBAY HIGH COURT], (iv) CIT v. Lemon Tree Hotels Ltd., [2015 (11) TMI 404 HIGH COURT), DELHI (v) Northern Operating Services Pvt. Ltd. v. JCIT, [2023 (4) TMI 793 - ITAT BANGALORE), (vi) DCIT v. Bandhan Bank Ltd., (2023 (4) TMI 143, ITAT, KOLKATA (vii) ACIT v. Cvent India Pvt. Ltd., [2023 (2) TMI 1063 ITAT DELHI], (viii) Biocon Ltd. v. Dy. CIT [2013] 35 taxmann.com 335 (ITAT- Bangalore), affirmed by the Hon'ble High Court in [2021] 430 ITR 151 (Kar) and the Hon'ble Supreme Court in 2021 (8) TMI 1322SC ORDER, and (ix) Novo Nordisk India Pvt. Ltd. v. DCIT, (2013 (11) TMI 218 - ITAT BANGALORE. 10. Therefore, in light of the aforesaid submissions, it is humbly prayed that the impugned order ought to be partly set aside, till this extent. In addition, it is humbly prayed that the 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 wh....
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....with accounting in books of account, which had been prepared in accordance with SEBI Guidelines - Whether on exercise of option by an employee, actual amount of benefit that had to be determined was only a quantification of liability, which would take place at a future date - Held, yes - Whether discount on issue of ESOPs was not a contingent liability but was an ascertained liability - Held, yes - Whether issuance of shares at a discount would be an expenditure incurred for purposes of section 37(1) as primary object of aforesaid exercise was not to waste capital but to earn profits by securing consistent services of employees and therefore, same could not be construed as short receipt of capital - Held, yes - Whether thus, discount on issue of ESOP was allowable deduction under section 37(1) - Held, yes [Para 10] [In favour of assessee]" 6.1. Ld. Counsel also referred to the decision of Hon'ble High Court of Delhi in 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.). I....
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....including the Hon'ble High Court of Karnataka, Delhi and Madras (supra). The finding given by the Ld. CIT(A) in this respect is reproduced as under: "Respectfully following the above cited decisions of Hon'ble Delhi High Court in CIT Vs. Lemon Tree Hotels Ltd. and decision of the Hon'ble Karanataka High Court in the case of Biocon Ltd. (supra) and very recent decision dated 07-12- 2021 of the Hon'ble ITAT Delhi Bench in the case of ACIT vs. People Strong HR Services (P.) Ltd., it is held that expenditure on ESOP is in the nature of employee cost and hence is allowable u/s. 37(1) as deduction in computing the income under the head profits and gains of business and profession during the vesting period. The ground raised by the appellant regarding this issue is allowed." 7.1. Considering the facts on record and the judicial precedents referred above as well as going through the analysis of the test contemplated u/s. 37(1) of the 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 ....
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....the three decisions which were referred above have attained finality as it appears that the revenue has not preferred any appeal against those decisions. Thus, we find that Tribunal was well justified in dismissing the appeal filed by the revenue and we find no ground to interfere with the order passed by the learned Tribunal. Accordingly, the appeal is dismissed and substantial question of law is answered against the revenue." 4. Hence, in light of the above, the appellant humbly submits that the said view maybe adopted in the present case, as the facts and circumstances are identical." The Ld. DR, on the other hand, relied upon the order of the Ld. CIT(A). 10. We have considered the rival contentions and examined the submissions filed. In the case of Commissioner of Income Tax, LTU v. Biocon Ltd. [2020] 121 taxmann.com 351 (Karnataka), on this issue it has been held as under: 6. We have considered the submissions made by learned counsel for the parties and have perused the record. The 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 g....
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....s arisen in the accounting year, the same is permissible as deduction, even though, liability may have to quantify and discharged at a future date. On exercise of option by an employee, the actual amount of benefit has to be determined is only a quantification of liability, which takes place at a future date. The tribunal has therefore, rightly placed reliance on decisions of the Supreme Court in Bharat Movers supra and Rotork Controls India P. Ltd., supra and has recorded a finding that discount on issue of ESOPs is not a contingent liability but is an ascertained liability. 10. From perusal of section 37(1), which has been referred to supra, it is evident that an assessee is entitled to claim deduction under the aforesaid provision if the expenditure has been incurred. The expression 'expenditure' will also include a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which it is issued and the market value of the shares would also be expenditure incurred for the 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 ....
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....e permitted to take a different stand with regard to the Assessment Year in question. In view of preceding analysis, the substantial questions of law framed by a bench of this court are answered against the revenue and in favour of the assessee. In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed. 10.1 Further, in the case of Commissioner of Income tax v. Shriram City Union Finance Ltd. [2024] 161 taxmann.com 218 (Madras) it has been held that as under: 8.6 Admittedly, the ESOP scheme is a voluntary scheme launched by the employer to issue shares to their employees, with an intent to give a stake to the employees in the organisation as incentives for performing better. Such an expenditure is incurred to facilitate and promote the business and there is no enduring benefit or advantage or creation of asset to the company, rather it is to earn more revenue and the expenses incurred for such purpose is nothing but revenue expenditure. It is a general principle that any expenditure incurred for the purpose of business is a deductible expenditure and the amount spent by an assessee for labour/employees' welfare, would be....
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.... shares were issued to the employees only for the interest of the business of the assessee to induce employees to work in the best interest of the assessee. The allotment of shares was done by the assessee in strict compliance of SEBI regulations, which mandate that the difference between the market prices and the price at which the option is exercised by the employees is to be debited to the Profit and Loss Account as an expenditure. The Tribunal pointed out that what had been adopted was not notional or contingent as had been submitted by the Revenue. Pointing out to the Employees Stock Option Plan, the Tribunal in its order stated that it was a benefit conferred on the employee. So far as the company is concerned, once the option was given and exercised by the employee, the liability in this behalf got ascertained. This was recognised by SEBI and the entire Employees Stock Option Plan was governed by guidelines issued by SEBI. On the facts thus found, the Tribunal held that it was not a case of contingent liability depending on the various factors on which the assessee had no control. The expenditure in this behalf was an ascertained liability, thus the expenditure incurred bein....