AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2026 (4) TMI 907
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....nafter referred to as the "Act") and relates to Assessment Year (A.Y.) 2020-21. 2. The ground of appeal no.1 raised by the Revenue reads as under: 1. "Whether, given the facts and circumstances of the case and in accordance with the law, the Id.CIT(A) is justified in deleting the disallowance of Rs. 12,53,69,635/- made u/s 14A of the Act, without adequately considering the provisions of section 14A of the Act r.w. Rule 8D of the IT Rules and overruling the Board's Circular no 05/2024 dated 11-02-2014?" 3. The issue raised by the Revenue in the above ground relates to disallowance made of expenses allegedly incurred for earning exempt income in terms of the provisions of Section 14A of the Act. The disallowance so made by ....
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....nce made by the AO u/s.14A of the Act. 4. The Ld. DR before us contended that the AO had relied on CBDT Circular No.5 of 2014 which directed disallowance to be made even when no exempt income was earned by the assessee. He heavily relied on the order of the AO. 5. Ld. Counsel for the assessee countered by pointing out that the Ld. CIT(A) had taken note of the said CBDT Circular and held at para 8.32 of his order that CBDT Circular being administrative clarification cannot override the binding decisions of the Hon'ble Supreme Court and the Jurisdictional High Court. 6. We have heard the rival contentions. We do not find any merit in the ground raised by the Revenue. The law with regard to the applicability of the provisions of Secti....
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....Ld. CIT(A) at para 8.11 of his order as under: "8.11 The Ld. AO in the remand report dated 06.11.2025 at paragraph 3.3.4 has observed that the appellant has claimed deduction on account of Employee Stock Option Plan (ESOP), representing the discount between the market price of shares on the date of grant of options and the exercise price paid by employees. The AO has observed that the submission filed by the assessee is found to be not acceptable since the option shall be granted at a predetermined price and the discount eligible to be allowed as revenue expenditure shall be the difference between market price of the shares at the time of the grant of option and actual exercise price. The AO has observed that merely by exercising s....
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.... on merits in the subsequent paras. It is observed that even if the AO is disallowing the deduction claimed on account of ESOP cost, the same cannot be the basis of rejection of books of accounts since it requires pervasive defects rendering books wholly unreliable. The appellant's books are audited under Companies Act and Ind AS, with statutory auditor certification. ESOP accounting follows mandatory standards, not a defect. Isolating ESOP disallowance for rejection cannot be accepted. 8.13 So far as merits of the deduction on account of ESOP cost is concerned, without prejudice to the primary findings given supra, the findings of the AO on the ESOP claim in the Remand Report (Para 3.3.4) is hereby adjudicated. The Ld. AO in t....
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.... and subsequently the Hon'ble Delhi High Court in CIT vs. Lemon Tree Hotels Ltd. have held that the primary object of ESOP is "not to waste capital but to earn profits by securing consistent services of the employees." Therefore, the expenditure is unequivocally revenue in nature and allowable under Section 37(1). The objections raised by the Ld. AO are found to be contrary to settled judicial principles. This view is further fortified by the order of the jurisdictional Hon'ble ITAT, Ahmedabad, in the appellant's group case, Arvind Limited (ITA No. 466/Ahd/2024 for A.Y. 2018-19), where the Tribunal vide order dated 03.07.2025 dismissed the Revenue's appeal on this very issue, thereby confirming the allowability of the ESOP e....
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.... taxation of the same sum. This is against the fundamental principles of equity and natural justice. The amount taxed as income for the employee is, by its very nature, a cost of compensation for the employer. 8.17 In view of the detailed findings given supra and in light of the above referred judicial precedents including in the case of appellant's own group concern the observation of the AO in the remand report on allowability of the ESOP cost cannot be accepted and the deduction claimed by the appellant needs to be allowed. 8.18 In light of the findings in the above paras, no adverse inference in the case of appellant is required to be made for findings in the Remand Report at Para 3.3.4 are set aside. The Ld. AO is dir....