TaxTMI 
TaxTMI 
2026 (10) TMI 325
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.... validity of the assessment order. 3. The necessary facts are that the assessee, a private company, filed its return of income for the A.Y. 2022-23 declaring a business loss of Rs. 325,84,48,983/- only. The assessee's case was selected for scrutiny under CASS. Accordingly, notice u/s. 143(2) of the Act was issued on 02-06-2022 by the Assessment Unit. Finally, the loss was assessed at Rs. 316,60,44,634/- after making certain additions or disallowances to the total income of the assessee. 4. The aggrieved assessee preferred an appeal before the Ld. CIT(A) and submitted that the notice u/s. 143(2) of the Act for assuming jurisdiction to make the assessment was required to be issued by the NFAC. However, in the present case, the notice was issued by the Assessment Unit. Therefore, the assessee contended that the notice u/s. 143(2) of the Act was invalid and without jurisdiction. Consequently, the assessment order passed on the basis of such notice was also invalid. However, Ld. CIT(A) rejected the assessee's argument by observing as under: 5.1 Ground of appeal No.1: In this ground, appellant challenged the Validity of Assessment Order contending specifically that....
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....43(2) of the Act issued by the Assessment Unit is invalid for want of jurisdiction. It is not in dispute that the assessee filed its return for A.Y. 2022-23 and the case was selected for scrutiny under CASS. Thereafter, the Assessment Unit issued a notice u/s. 143(2) of the Act on 02.06.2022. 8.1 The contention of the Ld. AR is that only NFAC could have issued such notice, not the Assessment Unit. We are unable to accept this contention. Section 143(2) of the Act permits issuance of notice by the AO or the prescribed income-tax authority. Under the faceless assessment framework, the Assessment Units have been constituted and empowered to perform the functions of the AO. Therefore, merely because the notice was issued by the Assessment Unit instead of NFAC, the notice cannot be treated as without jurisdiction. The Ld. CIT(A) has also recorded that the Assessment Units are legally competent to exercise such powers, including issuance of statutory notices. 8.2 We also find that the Ld. DR has relied upon the decision of the Hon'ble Delhi High Court in Ambience (P.) Ltd. vs. ACIT [2024] 167 taxmann.com 596 (Delhi) in support of the validity of notice issued by the prescribed ....
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....t since the holding company was newly incorporated and there were no comparable listed companies, the valuer adopted suitable assumptions for volatility. According to the assessee, the absence of comparable companies did not materially affect the valuation. 9.2 It was further submitted that the ESOP expenditure was incurred wholly and exclusively for the purpose of business and was therefore allowable as a deduction u/s. 37(1) of the Act. The liability was not contingent or notional. The expenditure related to F.Y. 2021-22 and, since the assessee followed the mercantile system of accounting, it was required to be accounted for in that year. 10. However, the AO did not accept the assessee's explanation. The AO observed that both the assessee and its holding company were newly incorporated and had no past business history, profits, reserves, or surplus to form a reliable basis for valuation. The AO also noted that the valuer had adopted certain figures and assumptions without supporting documentary evidence and that there were no comparable listed companies. 10.1 The AO further observed that the valuation report itself was dated 27.09.2022, i.e., after the end of F.Y. 20....
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....ear. The Appellant cites Biocon Ltd 121 taxmann.com 351 (Karnataka HC), but the facts differ materially: a. In Biocon, options were exercised, and the liability was certain. 1. Here, options vested only partially, with actual cost to the company crystallizing after the year-end, not supported by documentary evidence of contemporaneous expenditure. Whereas the appellant claimed deduction where ESOP cost was booked based on estimates or post-facto valuations without actual vesting and exercise during the relevant year. The appellant has not demonstrated a certain, unconditional liability as of March 31, 2022. The cost is hypothetical and contingent, not crystallized. The valuation report, issued well after the close of the year, cannot create a deductible expense retroactively. The AO's disallowance is sustained in full. The Ground of Appeal No.2 of the appellant is dismissed. 12. Being aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before us. 12.1 The Ld. AR before us submitted that the assessee had claimed deduction of ESOP expenditure. Its parent company, Kiranakart Pte. Ltd., Singapore had issued ESOPs to the employee....
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....i Tribunal) and other decisions following Biocon Ltd. in support of the allowability of ESOP expenditure. 12.9 With regard to ESOP expenditure cross-charged by a foreign parent company, the Ld. AR specifically relied upon the following judicial precedents: (i) Korn Ferry International Pvt Ltd. (ITA No. 7367/Mum/2014) (Mumbai Tribunal) (ii) Novo Nordisk India (P.) Ltd. [2014] 63 SOT 242 (Bangalore Tribunal), (iii) Caterpillar India (P.) Ltd. [2017] 80 taxmann.com 325 (Chennai Tribunal), (iv) Flipkart India (P.) Ltd. v. ACIT [2023] 150 taxmann.com 272 (Bangalore Tribunal) and (v) Northern Operating Services (P.) Ltd. v. JCIT [2023] 149 taxmann.com 52 (Bangalore Tribunal). 12.10 It was submitted that these decisions support the deduction of ESOP expenditure where the parent company grants shares or options to employees of the Indian subsidiary and recovers the corresponding cost from the subsidiary. 12.11 Accordingly, the Ld. AR submitted that the ESOP expenditure cross-charged by the parent company was an expenditure incurred for the assessee's employees and for the purpose of its business. The same was an ascertained liabilit....
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.... ESOPs are granted to attract, retain and motivate employees and to compensate them for their services. Therefore, the cost attached to such options is employee compensation and it is incurred for carrying on the business. 14.3 We note that the Special Bench of the Tribunal in Biocon Ltd. v. DCIT, reported in [2013] 35 taxmann.com 335 (Bang. Trib-SB.), held that a discount on ESOP represents deferred employee remuneration. It further held that such expenditure gives rise to an ascertained liability during the vesting period and is allowable as a deduction. The relevant observation of the Hon'ble Special Bench of the Tribunal with respect to allowability of the ESOP for reference is extracted as under: 9.2.6 There is no doubt that the amount of share premium is otherwise a capital receipt and hence not chargeable to tax in the hands of company. The Finance Act, 2012 has inserted clause (viib) of section 56(2) w.e.f. 1.4.2013 providing that: 'where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such sh....
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....ng but a different mode of awarding remuneration to employees for their continued services. In both the cases, the object is to compensate employees to the tune of Rs. 60. It follows that the discount on premium under ESOP is simply one of the modes of compensating the employees for their services and is a part of their remuneration. Thus, the contention of the ld. DR that by issuing shares to employees at a discounted premium, the company got a lower capital receipt, is bereft of an force. The sole object of issuing shares to employees at a discounted premium is to compensate them for the continuity of their services to the company. By no stretch of imagination, we can describe such discount as either a short capital receipt or a capital expenditure. It is nothing but the employees cost incurred by the company. The substance of this transaction is disbursing compensation to the employees for their services, for which the form of issuing shares at a discounted premium is adopted. 9.2.7 Now we espouse the second part of the submission of the ld. DR in this regard. He canvassed a view that an expenditure denotes "paying out or away" and unless the money goes out from the ass....
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....7, 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 held that : "the word "expenditure" is, therefore, required to be understood in the context in which it is used. Section 37 enjoins that ....
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.... claimed by the assessee as deduction is not a contingent liability but an ascertained liability. He stated that in the ESOP 2000, there is a vesting period of four years, which means that the options to the extent of 25% of the total grant would vest with the eligible employees at the end of first year after rendering unhindered service for one year and it would go on till the completion of four years. 9.3.2 It is a trite law and there can be no quarrel over the settled legal position that deduction is permissible in respect of an ascertained liability and not a contingent liability. Section 31 of the Indian Contract Act, 1872 defines "contingent contract" as "a contract to do or not do something, if some event, collateral to such contract does not happen". We need to determine as to whether the liability arising on the assessee-company for issuing shares at a discounted premium can be characterized as a contingent liability in the light of the definition of contingent contract. From the stand point of the company, the options under ESOP 2000 vest with the employees at the rate of 25% only on putting in service for one year by the employees. Unless such service is rendere....
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....bility may have to be quantified and discharged at a future date. We consider it our earnest duty to mention that the legislature has inserted clause (f) to section 43B by providing that "any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee" shall be allowed as deduction in computing the income of the previous year in which such sum is actually paid. With this legislative amendment, the application of the ratio decidendi in the case of Bharat Earth Movers (supra) to the provision for leave encashment has been nullified. However, the principle laid down in the said judgment is absolutely intact that a liability definitely incurred by an assessee is deductible notwithstanding the fact that its quantification may take place in a later year. The mere fact that the quantification is not precisely possible at the time of incurring the liability would not make an ascertained liability a contingent. 9.3.4 Almost to the similar effect, there is another judgment of the Hon'ble Supreme Court in the case of Rotork Controls India (P.) Ltd. v. CIT [2009] 314 ITR 62/180 Taxman 422. In that case, the assessee-company was engaged in selling ....
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....or grant at a future date or would be available for being re-granted at a future date. If we consider it at micro level qua each individual employee, it may sound contingent, but if view it at macro level qua the group of employees as a whole, it loses the tag of 'contingent' because such lapsing options are up for grabs to the other eligible employees. In any case, if some of the options remain unvested or are not exercised, the discount hitherto claimed as deduction is required to be reversed and offered for taxation in such later year. We, therefore, hold that the discount in relation to options vesting during the year cannot be held as a contingent liability. 14.4 The Hon'ble Karnataka High Court in CIT v. Biocon Ltd. reported in [2020] 121 taxmann.com 351 (Karnataka) upheld the view taken by the Hon'ble Special Bench of the Tribunal as discussed above. 14.5 Further, we note that the reasoning of the Ld. CIT(A) that the ratio laid down in Biocon Ltd (supra) is distinguishable because the options in the present case had not been fully vested or exercised also cannot be accepted. The very concept of allowing ESOP expenditure is based upon accrual of employee compens....
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....ure where a foreign holding company grants options or shares to employees of its Indian subsidiary and the corresponding cost is cross-charged to the subsidiary. 14.9 We now consider the objection regarding the date of the valuation report. The report was prepared on 27.09.2022, whereas the relevant financial year ended on 31.03.2022. In our view, the date on which the valuation exercise is completed cannot by itself determine the year of accrual of expenditure. What is relevant is the date with reference to which the options have been valued and the period to which the expenditure relates. The assessee has also pointed out that the valuation was available before completion of the statutory audit and the audit report itself was dated 29.09.2022. The material placed before us also explains that the date of submission of a valuation report is distinct from the valuation date and that a post-year-end report does not, by itself, invalidate recognition of expenditure relating to the relevant period. 14.10 We also find no sufficient basis to reject the claim merely because comparable listed companies were not used to determine volatility. The assessee and its holding company were i....
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....t vesting period. Accordingly, we set aside the finding of the Ld. CIT(A) and direct the AO to allow the ESOP expenditure of Rs. 7,00,54,349/-, being the amount attributable to the year under consideration. Needless to say, if any of the options subsequently lapse or remain unvested, the corresponding adjustment shall be made in accordance with law. Hence, the ground of appeal raised by the assessee is hereby allowed. 15. Vide Ground No. 4, the assessee has challenged the order of the Ld. CIT(A) in confirming the disallowance of payment made towards extinguishment of the right to sue on account of non-deduction of TDS. 17. The necessary facts are that during the year, the assessee company made a payment of Rs. 7,45,00,001/- to a person named Shri Anish Nikhil Nanda. It claimed that the said person was about to file a suit against the assessee company for alleged damage caused to him. To protect its reputation, the assessee company reached an out-of-court settlement and paid Rs. 7,45,00,001/-, and the said person, in lieu thereof, extinguished his right to file a suit. 17.1 The assessee further claimed that the amount paid for extinguishment of the right is a capital receip....
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....im. In the case of GE India Technology Centre Pvt Ltd v. CIT 327 ITR 456 (SC), Hon'ble Supreme Court held that TDS obligation exists if there is any doubt over taxability or if the Revenue reasonably establishes the payment has income character for the recipient. The Appellant failed to seek determination under section 195(2) or provide irrefutable evidence of capital nature. Revenue was right to presume liability in absence of clear documentary proof. The Appellant cites ITO v. Vinay P. Karve 52 taxmann.com 24, but in that case, the recipient's circumstances (criminal fraud, police complaint) were fully documented, and the payment was supported by evident contractual breach and settlement. Absent similar legal and factual foundation, such precedent does not apply. Similarly, in CIT v. J. Dalmia [149 ITR 215] (Delhi HC), compensation was held as capital only where awarded through arbitration, on concrete facts. Here, the record lacks court documents, arbitration award, or credible third-party confirmation. In the absence of robust documentary evidence of capital nature and settlement basis, and since the Appellant did not seek a lower/nil deduction....
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....ed payment. 21.2 In our considered view, this aspect goes to the root of the matter. Disallowance u/s. 40(a)(ia) of the Act can be made only when the payment is of a nature on which tax was deductible under Chapter XVII-B of the Act. Compensation paid for giving up a right to sue is not a payment for carrying out any work, commission or brokerage, or professional or technical services. Thus, sections 194C, 194H and 194J of the Act do not apply merely because compensation has been paid. The material placed before us also does not show that the payment was in the nature of a non-compete fee falling within section 28(va) of the Act. 21.3 Thus, the basic condition for invoking section 40(a)(ia) of the Act has not been established. The Revenue cannot first presume a liability to deduct tax and thereafter make a disallowance without showing the provision under which such tax was deductible. The Ld. CIT(A), therefore, was not justified in confirming the disallowance merely because the assessee had not obtained a lower or nil deduction certificate. 21.4 We also find support from the decision in Satyam Food Specialities (P.) Ltd. v. DCIT [2015] 57 taxmann.com 194 (Jaipur Tribunal).....