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Income Tax Appellate Tribunal, DELHI BENCH ‘H’, NEW DELHI
Before: Sh. C. N. PrasadDr. B. R. R. Kumar
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the assessee against the order of ld. PCIT-3, Delhi dated 16.03.2020.
Following grounds have been raised by the assessee:
1. On the facts and circumstances of the case & in law, the Learned Principal Commissioner of Income Tax -3 (“Ld. Pr. CIT”) erred in passing the impugned order under Section 263 of the Income-tax Act, 1961 (‘the Act’) without giving due consideration to the submissions of the Appellant and is thus, bad in law and void-ab-initio.
2. On the facts and circumstances of the case & in law, the Ld. Pr. CIT erred in invoking jurisdiction u/s 263 of the Act while concluding that the assessment order passed by the Deputy Commissioner of Income Tax, Circle 7(1), New Delhi (‘Ld. AO’) is erroneous in 2 Delhivery Pvt. Ltd. nature and is prejudicial to the interest of revenue in terms of section 263 of the Act.
3. Disallowance of Employee Stock Option Plan (ESOP) expenses of INR 3,76,75,732.
3.1 On the facts and circumstances of the case & in law, the Ld. Pr. CIT erred in observing that the grant of ESOPs to the employee does not amount to incurring of expenditure wholly and exclusively for the purpose of business, thereby upholding revision proceedings under section 263 of the Act.
3.2 On the facts and circumstances of the case & in law, the Ld Pr. CIT grossly erred in not appreciating that claim of the Appellant on account of ESOP expenditure is duly allowable under section 37 of the Act.
4. Disallowance of Prior Period expenses of INR 79,10,087
4.1 On the facts and circumstances of the case & in law, the Ld. Pr. CIT erred in invoking the provisions of section 263 of the Act for an issue which has been examined, considered and concluded by the Ld. AO during the assessment proceedings.
4.2 On the facts and circumstances of the case & in law, the Ld. Pr. CIT erred in ignoring the submissions of the Appellant that the expenses had crystallized in the current year, that the Appellant has complied with tax withholding provisions (wherever applicable) in current year and accordingly, the same should be allowed as deduction in the current year.
5. Disallowance of interest on late payment of Tax Deducted at Source (TDS)/Tax Collected at Source (TCS) of INR 6,96,533
On the facts and circumstances of the case & in law, the Ld. Pr. CIT erred in invoking the provisions of section 263 of the Act by holding that interest on late payment of TDS/TCS of INR 6,96,533 paid under 3 Delhivery Pvt. Ltd. section 201(1A)/206C(7) is not allowable as business expenditure under section 37(1) of the Act.”
The assessee filed revised return of income on 05.02.2016 declaring loss of Rs.68,69,71,022/-. The assessee company is engaged in the business of providing warehousing and last mile logistics services. It is also involved in designing and deploying logistics management systems. The assessee was incorporated as SSN Logistics Private Limited on June 22, 2011 under the provisions of Companies Act, 1956. Its name was changed to Delhivery Private Limited as of December 8, 2015 and currently called as Delhivery Limited.
The Assessment Order under Section 143(3) was passed by making addition of Rs.68,41,731/- resulting in assessed loss of Rs.68,01,29,291/-. The following additions were made:
• Disallowance u/s 14A of the Act - Rs. 14,19,351/- • Disallowance of bad debts - Rs. 19,15,657/- • Difference of income as per Form 26AS - Rs. 11,74,968/- • Ad hoc disallowance of 15% of certain expenses - Rs. 23,31,755/-
Subsequently, based on an audit objection, the Ld. PCIT while exercising the revisionary powers vested in him under the Act, issued a show cause notice u/s 263 of the Act on following issues after taking into account the Audit Objection of Revenue with respect to the taxability of: a. Employee Stock Option (ESOP) Scheme expenses b. Prior Period expenses c. Interest on late payment of TDS 4 Delhivery Pvt. Ltd.
At the outset, it was argued that the AO made additions on account of disallowance u/s 14A, bad debts, non-reconciled income as per Form 26AS, ad-hoc disallowance which makes it evident that the taxability of the prior period expenses and all other claims were examined and accepted by the AO in the course of original assessment proceedings. It was argued that the computation of income TAR & Audited Accounts were duly submitted being examined and accepted towards the ESOP expenses and interest on TDS.
Employee Stock Option (ESOP) Scheme expenses:
The ld. PCIT held that the ESOP expenses of Rs.3.76 Cr. needs to be disallowed. The relevant part of the order of the ld. PCIT is as under:
“3. I have carefully considered the facts on record of submissions of the Ld. ARs. Undisputedly, the assessee has claimed ESOP expenses at Rs. 3,76,85,732/- during the year under consideration which is on account of difference between the market price and the price at which stock option was allowed to the employees. Admittedly, ESOPS is granted at the time of appointment of an employee, but the shares are actually allotted on reaching a particular milestone such as completion of specific number of years of service, satisfactory performance etc. Further, shares are allotted in phased manner in different years. Accordingly, the assessee has not incorporated the value of ESOPS as perquisite in the salary of employees of the year under consideration. As per the detail furnished during the course of proceedings u/s. 263, it emerges that the tax has been deducted on amount booked for ESOPS in October and December, 2019 only. This fact also shows the assessee has recognized ESOPS expenditure only in financial year 2019-20 The Hon’ble jurisdictional ITAT in the case
5 Delhivery Pvt. Ltd. of Ranbaxy Laborations Ltd. Vs Addl. CIT, (2009) 124 TTJ (Del) 771: (2009) 26 DTR 420 has very clearly held that granting of ESOPS to the employees does not amount to incurring of expenditure wholly and exclusively for the purposes of business as contemplated u/s. 37(1). Accordingly, disallowance of ESOPS expenses made in that case was confirmed. I find that the AO failed to consider the above position of facts and law while completing the assessment u/s. 143(3) and hence the assessment order requires review u/s. 263.”
Against this direction, the ld. AR argued that the issue of allowability of the ESOP expenses is no more res-integra, the Special Bench of Bangalore Tribunal in the case of Biocon Limited ([2013] 35 taxmann.com 335) held that discount on shares under the ESOP is an allowable deduction for the following words:
...11.3 We, therefore, sum up the position that the discount under ESOP is in the nature of employees cost and is hence deductible during the vesting period w.r.t. the market price of shares at the time of grant of options to the employees. The amount of discount claimed as deduction during the vesting period is required to be reversed in relation to the unvesting/lapsing options at the appropriate time. However, an adjustment to the income is called for at the time of exercise of option by the amount of difference in the amount of discount calculated with reference the market price at the time of grant of option and the market price at the time of exercise of option. No accounting principle can be determinative in the matter of computation of total income under the Act. The question before the special bench is thus answered in affirmative by holding that discount on issue of Employee Stock Options is allowable as deduction in computing the income under the head 'Profits and gains of business or profession'.
6 Delhivery Pvt. Ltd. 9. The decision of the Hon’ble Special Bench has been affirmed by the Hon’ble Karnataka High Court in the case of CIT vs. Biocon Ltd.
Further, it was argued that the allowance of ESOP expenses being revenue expenditure and being deductible under section 37(1) of the Act was considered in the below cases:
PCIT v. Lemon Tree Hotels (P.) Ltd. - [2019] 104 taxmann.com 26 (Delhi) PCIT v. New Delhi Television Ltd. - [2018] 99 taxmann.com 401 (Delhi) SSI Limited v. Deputy Commissioner of Tax [(2004) 85 TTJ1049] Murugappa Management Services Ltd. [2013] 40 taxmann.com 451 (Chennai - Trib.)
It was brought to our notice that the order relied by the ld. PCIT in the case of Ranbaxy Laboratory Ltd. Vs. Addl. CIT (2009) 124 TTJ 771: (2009) 26 DTR 420 stands considered by Special Bench wherein the case of Ranbaxy Laboratory Ltd. Vs. Addl. CIT has been examined in the case of Biocon Limited (supra) which has been confirmed by the Hon’ble Karnataka High Court and hence the order relied upon by the ld. PCIT is no more good law. Hence, we hold that the directions given in the order u/s 263 are not valid.
Prior Period expenses:
It was submitted that for the subject year, the Appellant claimed prior period expenses amounting to Rs. 79,10,087
7 Delhivery Pvt. Ltd. which were debited to the Profit and Loss Account which are as under:
S.No. Description Amount (in INR)
Power & Fuel 12,44,725 2. Miscellaneous Expenses 32,654 3. Rent 4,84,287 4. Repair and Maintenance - Building 8,68,925 - Computers 10,02,567 5. Travelling and conveyance 76,674 Vehicle Rental Expenses 42,00,255 6. TOTAL 79,10,087
It was submitted that the AO had made specific inquiries pertaining to prior period expenses during the course of assessment. The Appellant had vide response dated November 29, 2017 and December 28, 2017 in response to notice dated 12 December 2017 provided the details of prior period expenses and made submissions on its allowability. Hence, it can be reasonably concluded that it was only after being satisfied with the documents filed and the submissions made that the AO decided to allow the claim of prior period expenses. Thus, it is specific submission of the appellant that the AO had allowed the above claim in the original assessment after making proper enquires and examining the issue in light of the facts and position of law.
The relevant part of the order u/s 263 is as under:
“3.1 It is also noticed that Prior Period Expenses of Rs. 79,10,087/- have been allowed by the AO without examining them from the angle of year in which the same were actually incurred. This aspect needs to examine
8 Delhivery Pvt. Ltd. thoroughly by the AO and if these expenses are actually crystalized in the year under consideration and not claimed in any earlier years, then only the same cap be allowed in this year. Failure on the part of the AO on this account also renders the assessment orders erroneous and prejudicial to the interest of the revenue in view of Explanations below section 263(1).”
We find that the ld. PCIT held that on this issue the AO had not thoroughly examined the issue in hand and Explanation 2 below section 263(1) of the Act was invoked by the Ld. PCIT. The Ld. PCIT had admitted that the enquiries in respect of the above have been undertaken by the AO while completing the original assessment and it is not the case of ‘no enquiry’/’lack of enquiry’ but the case of ‘inadequate enquiries’ were conducted by the AO on this issue. It is well settled that the revision jurisdiction u/s.263 of the Act could be invoked only for 'lack of enquiry' and not for 'inadequate enquiry'. This is also being evident from the Explanation 2 below section 263(1) of the Act which reads as under:
“Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer or the Transfer Pricing Officer, as the case may be, shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner,— (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or 9 Delhivery Pvt. Ltd. (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.”
The clause (a) of Explanation to section 263 of the Act states that an order shall be deemed to be erroneous, if it has been passed without making enquiries or verification, which should have been made and not were enquires have been made by the AO in the course of original assessment. In the present case, the appellant already submitted above that the AO not only made sufficient enquiries but had also issued show cause that why such expenses would not be disallowed in the year under consideration. In addition to the above, the assessee not only provided justification of its allowability but also submitted the additional that the expenses are relatable to immediately preceding year, but the liability is confirmed in the year under consideration, and these were not claimed as deduction in the said preceding year. Incidentally, the Ld. PCIT had in fact alleged the same issue i.e. whether deduction in the earlier is claimed by the assessee and prior period expenses belonged to which year. Thus, from the above facts on record, it is clearly evident that the proper enquiry was done by the AO on this issue.
Reliance is being placed on the judgment of Hon’ble Delhi High Court in case of CIT vs. Vikas Polymers 236 CTR 476 (Del) wherein it was held that “13. It is also trite that there is a fine though suhtle distinction between "lack of inquiry" and "inadequate inquiry". It is only in cases of "lack of inquiry" that the Commissioner is empowered to exercise his revisional powers by 10 Delhivery Pvt. Ltd. calling for and examining the records of any proceedings under the Act and passing orders thereon.”
Further, we find that the Hon’ble Delhi High Court in the case of CIT vs. Sunbeam Auto Ltd. 189 Taxman 436 (Del) held as under:
12. We have considered the rival submissions of the counsel on the other side and have gone through the records. The first issue that arises for our consideration is about the exercise of power by the Commissioner of Income Tax under Section 263 of the Income Tax Act. As noted above, the submission of learned counsel for the Revenue was mat while passing the assessment order, the AO did not consider this aspect specifically whether the expenditure in question was revenue or capital expenditure. This argument predicates on the assessment order, which apparently does not give any reasons while allowing the entire expenditure as Revenue expenditure. However, that by itself would not be indicative of the fact that the AO had not applied his mind on the issue. There are judgments galore laying down the principle that the AO in the assessing order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between lack of inquiry" and "inadequate inquiry". If there was any inquiry, even inadequate that would not by itself give occasion to the Commissioner to pass orders under Section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of "lack of inquiry" that such a course of action would be open.’’
The Hon’ble Delhi High Court in the case of CIT vs Anil Kumar Sharma [335 ITR 83], also held that where there was no "lack of enquiry" by AO even if it could be said to be inadequate, proceedings under section 263 of the Act was not 11 Delhivery Pvt. Ltd. valid since the AO had applied his mind to complete details filed by the assessee.
In light of the facts submitted in the original assessment, the above expenses are crystallized during the year and no deduction of the same is claimed in the earlier year. Hence, in view of the above facts and circumstances and the position of law, the aforesaid expenses are an allowable deduction under the Act while computing the profit and gains of business and profession & that the AO has correctly appreciated the said position while passing the assessment order. Hence, we hold that the directions given in the order u/s 263 are not valid.
Interest on Late Payment of TDS:
For the year under consideration in Tax Audit Report, the Tax Auditor had in clause 34c had reported the liability of interest under section 201(1A) or section 206C(7) of the Act amounting to Rs.6,96,533/-. The appellant in the course of original assessment duly placed the said Tax Audit Report and the Computation of Income. The appellant in the computation of income also carried out adjustments taking into account the disclosures in the Tax Audit Report such as allowances under section 43B of the Act. The appellant had claimed deduction of interest on late payment of TDS for the year under consideration as the term ‘tax’ defined in section 2(43) of the Act does not include such amount.
It was argued that Section 201(1A) of the Act, any person who defaults in deducting whole or any part of the tax or after deducting fails to pay such tax as required by under this Act, is 12 Delhivery Pvt. Ltd. liable to pay simple interest as prescribed under the said section. Further, as per section 40(a)(ii) of the Act, any amount paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of any such profits or gains is concerned, the same shall not be deducted in computing the income chargeable under the head 'Profits and gains of business or profession'.
It was argued that the definition of tax under the Act read with provisions of section 40(a)(ii) of the Act, the interest paid under section 201(1A)/206C(7) of the Act on late payment of TDS amounting to Rs. 6,96,533/- does not fall within the meaning of ‘tax’ and hence no adjustment is warranted in the returned income for the year under consideration.
It was argued that the above claim is allowed after verification. It was further submitted that the allowability of the interest on late payment of TDS have been allowed in favour taxpayer as the payment in question are compensatory in nature and in the absence of specific provision no such disallowance is warranted. The above view expressed in the following decisions:
Harshad Shantilal Mehta vs. Custodian [1998] 231 ITR 871 (SC) Arthur Anderson & Co. vs. ACIT [2010] 324 ITR 240 Mukand Ltd. [2019] 101 taxmann.com 214 (Mumbai - Trib.) Rungta Mines Ltd. in I.TA No. 1531/Kol./2017) Mahalaxmi Sugar Mills Co. (1980) 123 ITR 429
13 Delhivery Pvt. Ltd. 25. In the course of revisionary proceedings, the Ld. PCIT on verification of record and Audit party objections observed that such sum related to payment of interest on late payment of TDS was neither added by the assessee in the taxable income for the year nor the AO had added the same while completing the original assessment. The Ld. PCIT after considering the submission of the appellant in revisionary proceedings and held as under:
“Undisputedly, the assessee has claimed interest paid u/s 201(1A)/206C(7) on late payment of TDS/TCS at Rs. 6,96,533/- as business expenditure. I find that interest u/s 201(1A)/206C(7) is not a business expenditure. In this regard, it is worthwhile to mention following judicial pronouncements.
Bharat Commerce & Industries Ltd. vs. CIT (1988) 230 ITR 733 (SC) Aruna Mills Ltd. vs. CIT (1957) 31 ITR 153 (Bom) CIT vs. Chennai Properties and Ors. (1999) 239 ITR 435 (Mad.)
In view of the facts narrated above, we find that the AO has failed to disallow above mentioned interest expenditure while passing the order u/s 143(3) and hence rendering the assessment erroneous and prejudicial to the interest of revenue. The order of the ld. PCIT u/s 263 is upheld on this issue.
In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 16/03/2023.