TaxTMI 
TaxTMI 
TaxTMI 
2023 (7) TMI 1583
X X X X Extracts X X X X
X X X X Extracts X X X X
.... order u/s 143(3) of the Act dated January 28, 2021 passed by the Id. National eAssessment Centre ("the NeAC) is erroneous in so far as it was prejudicial to the interest of the revenue thereby setting aside the order passed u/s 143(3) by the NeAC. 2. In the facts of the case and under the circumstances and in law, the ld. PCIT has completely misdirected himself in holding that the Employee Stock Option (ESOP) expenses debited by the appellant to the Profit and Loss Statement were not actual expenses but merely short-receipt of security premium in the hands of the appellant, despite the fact that the said ESOP expenses fulfilled all the necessary requirements of 37(1) of the Act and had been accounted for in compliance of accepted accounting norms and guidelines. 3. In the facts of the case and under the circumstances and in law, the Ld. PCIT has erred in disregarding the various applicable and binding judicial pronouncements made by the Hon'ble Courts which cover the issue at hand of ESOP expenses squarely, thereby transgressing the principle of judicial discipline. 4. In the facts of the case and under the circumstances and in law, the Id. PCIT has failed to apprecia....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ere called for and examined. On examination of the case records, it was noticed that the assessee company has debited in the profit and loss account an amount of Rs. 73,55,180/- on account of Employee Stock Option Plan (ESOP). This amount was debited u/s 37 of the Act. However, this amount of debit is prima facies not an allowable expense u/s 37(1) of the Act. When a company grants benefits to its employees by way of allotment of shares under ESOP at a concessional rate, it does not part with any money or asset nor does it incur any liability. Therefore, as per the ratio of the Hon'ble Supreme Court judgment in the case of Indian Molasses Company Ltd., the company cannot be said to have incurred any expenditure by providing the said benefit to the employees and as such the value of the benefit cannot be allowed as a deduction under the provisions of section 37 of the Act. Accordingly, the assessee was issued a notice u/s 263 of the Act on 03.03.2023. The contents of the notice are as under: "On perusal of the case records, it is noticed that you had debited Rs. 73,55,180/- in P & L a/c on account of ESOP. The same is not allowable deduction as the debit of the amount of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s. 73,55,180/- during the year is not allowable as business expenditure u/s 37 of the Act. 5. However, it is also seen that the issue of Employees Stock Option Plan is pending before the Hon'ble Supreme Court in the case of M/s Biocon Ltd. vide Diary No. 14965 of 2021. Thus, it is seen that the issue of ESOP is subjudice in the highest court of land and not settled. 6. In view of the legal position and the facts discussed above, the Assessing Officer's failure in not examining the impugned issue by way of enquiries/verification that were required in this case, has rendered the assessment order dtd. 28.01.2021 erroneous in so far as, it is a prejudicial to the interests of the revenue. Both the conditions specified u/s 263 of the Act are satisfied in this case and it is a fit case to invoke provisions of Explanation 2 to the said section Accordingly, the assessment order dtd. 28.01.2021 passed by the Assessing Officer u/s 143(3) r.w.s. 143(3A) & 143(3B) of the Act is set aside, and the Assessing Officer is directed to conduct requisite enquiries along the lines discussed above and frame the order of assessment de novo." (Emphasis Supplied) 4.1. On perusal of the abov....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t price of the shares at the time of grant of options and the price at which such options are granted. Since the amount over and above the face value of the shares, being the share premium, is itself a capital receipt, any under-recovery of such share premium on account of obligation to issue shares to employees in future at a lower premium, would be a case of short capital receipt. If at all it is to be viewed in terms of expenditure, then, at best, it would be in the nature of a capital expenditure. He supported his view by relying on the order passed by the Delhi Bench of the Tribunal in Ranbaxy Laboratories Ltd. v. Addl. CIT [2010] 39 SOT 17 (URO). It was stated that the Tribunal in that case has held that since the receipt of share premium is not taxable, any short receipt of such premium on issuing options to employees will be notional loss and not actual loss for which any liability is incurred. The learned Departmental Representative contended that the Mumbai bench of the Tribunal in the case of VIP Industries v. Dy. CIT [IT Appeal No.7242 (Mum.) of 2008 has also taken similar view vide its order dated 17.09.2010.] xx xx 9.2.7 Now we espouse the second part of the sub....
X X X X Extracts X X X X
X X X X Extracts X X X X
....39;expenditure' turns out to be the same as is there in the afore quoted part of the definition under section 2(h) of the Expenditure Act, 1957, viz., not only 'paying out' but also 'incurring'. Coming back to our context, it is seen that by undertaking to issue shares at discounted premium, the company does not pay anything to its employees but incurs obligation of issuing shares at a discounted price on a future date in lieu of their services, which is nothing but an expenditure u/s 37(1) of the Act. 9.2.8 Though discount on premium is nothing but an expenditure u/s 37(1), it is worth noting that the Hon'ble Supreme Court in the case of CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254/179 Taxman 326 has gone to the extent of covering "loss" in certain circumstances within the purview of "expenditure" as used in section in 37(1). In that case, the assessee incurred additional liability due to exchange rate fluctuation on a revenue account. The Assessing Officer did not allow deduction u/s 37. When the matter finally reached the Hon'ble Supreme Court, their Lordships noticed that the word "expenditure" has not been defined in the Act. They ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gh found to be in accordance with the principle laid down by the 'Special Bench' of the Tribunal in the case of Biocon Ltd. (supra), however, as the order of the 'Special Bench' of the Tribunal had not been accepted by the department and had been assailed before the Hon'ble High Court of Karnataka, therefore, the claim of the assessee as regards allowability of discounts on ESOP's could not be accepted. We are unable to persuade ourselves to subscribe to the aforesaid view of the A.O that the order of the 'Special Bench' of the Tribunal was not to be followed for the reason that an appeal had been filed by the department against the said order before the Hon'ble High Court of Karnataka. We find that it is not the case of the department that either the order of the 'Special Bench' of the Tribunal in the case of Biocon Ltd. (supra) had been set aside or the operation of the same had been stayed by the Hon'ble High Court. We are unable to comprehend that as to how the A.O despite conceding that the claim of the assessee as regards allowability of the discount of ESOP's was in accordance with the principle laid down by the 'Specia....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ations are unable to persuade ourselves to accept the ground of appeal raised by the revenue before us, therefore, finding no infirmity in the well reasoned order of the CIT (A), uphold the same. 9. The appeal of the revenue is dismissed in terms of our aforesaid observations." 4.3. In view of the above decision of the Tribunal, we hold that the order passed by the Assessing Officer cannot be regarded as erroneous or prejudicial to the interest of the Revenue. Further, in any case, it cannot be denied that the view taken by the Assessing Officer was a plausible view and therefore, the Ld. PCIT would not be justified in exercising powers of revision under Section 263 of the Act. We also note that the Ld. PCIT was cognizant of the fact that the decision of the Special Bench of the Tribunal in the case of Biocon Limited (supra) has been confirmed by the Hon'ble High Court of Karnataka vide judgment dated 11/11/2020 passed in IT Appeal No. 653 Of 2013 reported in [2020] 121 taxmann.com 351 (Karnataka)/[2021]; and the issue is now pending the Hon'ble Supreme Court. Despite that, the Ld. PCIT had, possibly to keep the issue alive, exercised the powers of revision under Section 263 o....