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Income Tax Appellate Tribunal, DELHI BENCH ‘B’, NEW DELHI
ORDER
PER ANIL CHATURVEDI, AM :
This appeal filed by the Revenue is directed against the order dated 08.11.2019 of the Commissioner of Income Tax (Appeals)-16, New Delhi relating to Assessment Year 2016-17.
Brief facts of the case as culled out from the material on record are as under :-
Assessee is a company stated to be engaged in the business of providing ITeS, Software, Development and Sales option and ACIT vs. Cvent India Pvt. Ltd. 2 marketing services. Assessee filed its original return of income for A.Y. 2016-17 on 24.11.2016 declaring income of Rs.23,41,59,160/- which was modified as per APA on 26.05.2017 at an income of Rs.23,41,86,210/-. The case of the assessee was selected for scrutiny and, thereafter, assessment was framed u/s 143(3) of the Act vide order dated 30.12.2018 and the total income was determined at Rs.27,87,17,461/-.
Aggrieved by the order of AO, assessee carried the matter before CIT(A) who vide order dated 08.11.2019 in Appeal No.10162/2019-20 granted substantial relief to the assessee. Aggrieved by the order of CIT(A), Revenue is now in appeal and has raised the following effective ground: “1. Whether on facts and circumstances of the case and in law, the Learned CIT(A) is legally justified in holding that the employees Stock Expenses (ESOP) is an allowable expense u/s 37(1) of the Act.
During the course of assessment proceedings, AO noticed that assessee had claimed Employee Stock Option (ESOPs) expense of Rs.4,45,31,251/-. The assessee was asked to justify the claim of the expenditure. Assessee in response furnished detailed submissions but the same was not found acceptable to AO. AO noted that assessee did not furnish the break-up of expenses on shares exercise i.e. allotted during the year. He, therefore, held that the claim of the assessee cannot be allowed
ACIT vs. Cvent India Pvt. Ltd. 3 u/s 37(1) of the Act and accordingly disallowed Rs.4,45,31,251/- and made its addition.
Aggrieved by the order of AO, assessee carried the matter before CIT(A). CIT(A) after considering the facts of the case of the assessee in the light of the decision rendered by the Bangalore Bench of Tribunal in the case of Biocon Ltd. vs. Deputy Commissioner of Income Tax (LTU) reported in [2013] 35 taxmann.com 335, Delhi Tribunal decision in the case of Lemon Tree Hotels Ltd. vs. ACIT (ITA No.6070/Del/2014), Delhi High Court decision in the case of CIT vs. Lemon Tree Hotels Ltd. (ITA 107/2015), decision of Delhi High Court in the case of PCIT vs. NDTV [398 ITR 57] and Madras High Court decision in the case of CIT vs. PVP Ventures Ltd. [2012] 211 Taxman 554 held that AO was not justified in deleting the ESOP expenses. The relevant observations of CIT(A) are as under : “Discussion & Decision The facts of the case, the submission of the AR and the finding of the AO were examined at length. The brief facts of the case are that in this case, the assessee company submitted its original return declaring income of Rs. 23,41,59,160/- on 24.11.2016 which was modified as per APA on 26.05.2017 at an income of Rs. 23,41,86,210/-. The case was selected for Complete scrutiny under CASS and statutory notices were issued and served upon the assessee. The assessee company is engaged in the business of providing ITeS, Software Development and Sales option & marketing services. During the year under consideration, it was noticed by the AO that the assessee company had claimed Employee Stock Option (ESOPs) expense of Rs. 4,45,31,251/-. The AO examined the contention of the assessee company and rejected the same. The AO recorded a finding that the claim of the assessee
ACIT vs. Cvent India Pvt. Ltd. 4 company was not allowable as the expenditure so claimed had not crystallized and also was capital in nature and hence not allowable u/s 37(1) of the Income Tax Act. Before me, the ARS of the appellant vehemently contended that the AO was wrong in concluding that the expenditure pertaining to the ESOP, claimed u/s 37(1,) had not crystallized and that it was in the nature of capital expenditure and hence not allowable u/s 37(1) of the Income Tax Act. The AR also submitted that the appellant's appeal on identical facts was allowed by the CIT(A)-2 for A.Y 2015-16. The claim of the appellant was examined vis-à-vis the finding of the AO as also the principles enunciated by the jurisdictional High Court and the other courts of the land. A perusal of the assessment order shows that the AO has disallowed the expenditure u/s 37(1) of the Income Tax Act on two counts viz, expenditure had not crystallized and expenditure was not capital in nature. In regard to the former the appellant contended that the expenditure had been actually incurred by the appellant company and cross charges in this regard had been paid to the parent company. The appellant also filed a copy of Form 15CBS to authenticate payment so affected along with copy of bank statements of the appellant company. The AR also drew my attention to Note 32 of Audited financial Statements which reflects the details of cross charge. The ARs also placed reliance on the judgement of the Bangalore Tribunal in the case of Novo Nordisk India (P) Ltd, Mumbai Tribunal in the case of DCIT Vs Accenture Services (P) Ltd and ITAT Delhi in the case of Lemon Tree Hotels Ltd to strengthen his argument that such an expenditure is allowable under the aegis of Section 37(1) of the Income Tax Act. Regarding the latter the AR submitted that the expenditure was incurred to incentivize employees to continue working with the appellant company and is not in the nature of capital expenditure. The ARS of the appellant also produced a copy of the Job Offer letters to the employees and advance pricing agreement with CBDT.
ACIT vs. Cvent India Pvt. Ltd. 5
Here, it is pertinent to examine the principles enunciated in Biocon Ltd. V. Deputy Commissioner of Income-tax (LTU), Bangalore (2013) 35 taxmann.com 335 wherein it has been held: 9.2.7 Sub-section (1) of section 37 provides that any expenditure (not being expenditure in the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". To put it differently, an expenditure must be laid out or expended wholly and exclusively for the purpose of business so as to be eligible for deduction u/s 37(1). There is absolutely no doubt that section 37(1) talks of granting deduction for an 'expenditure', and the Hon'ble Supreme Court in Indian Molasses Co. (P.) Ltd. (supra) has described 'expenditure' to mean what is 'paid out or away' and is something which has gone irretrievably. However, it is pertinent to note that this section does not restrict paying out of expenditure in cash alone. Section 43 contains the definition of certain terms relevant to income from profits of business or profession covering sections 28 to 41. Section 37 obviously falls under Chapter IV-D. Sub-section (2) of section 43 defines "paid" to mean: "actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head 'profits and gains of business or profession." When we read the definition of the word "paid" u/s 43(2) in juxtaposition to section 37(1), the position which emerges is that it is not only paying of expenditure but also incurring of the expenditure which entails deduction u/s 37(1) subject to the fulfilment of other conditions. At this juncture, it is imperative to note that the word 'expenditure' has not been defined in the Act. However, sec. 2(h) of the Expenditure Act, 1957 defines 'expenditure' as: 'Any sum of money or money's worth spent or disbursed or for the spending or disbursing of which a liability has been incurred by an assessee........ When section 43(2) of the Act is read in conjunction with section 37(1), the meaning of the term 'expenditure' turns out to be the same as is there in the aforequoted part of the definition under section ACIT vs. Cvent India Pvt. Ltd. 6
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. The Hon'ble Delhi ITAT in the case of Lemon Tree Hotels Ltd vs ACIT (ITA No. 6070/Del/2014) has also held that ESOP expenses are allowable under section 37(1) of the Act. The order reads as under: Now, turning to Ground No.2, the AO made an addition of Rs.91,89,791/- in respect of ESOP alleging the outgoing expenses are only notional and the pg. 3 expenditure is allowable only when the shares are purchased by the employer. However, in view of the fact that this issue was covered in assessee's own case in respect of the AYS 2008-09 & 2009-10 in ITA No.4588/Del/2013 in Lemon Tree Hotels Ltd. vs Addl. CIT vide order dated 23.06.2014 and ITA No.209/Del/2014 in DCIT vs M/s Lemon Tree Hotels Pvt. Ltd. vide order dated 18.01.2016 in assessee's favour, Ld.CIT(A) took note of the same and followed the decision of the Tribunal for those two years. It is brought to our notice by the Ld. AR that these two decisions of the Co-ordinate Bench of this Tribunal are upheld by the Hon'ble Jurisdictional High Court in ITA No.107/Del/2015 decided on 18.08.2015 and ITA No.862/Del/2016 decided on 02.12.2016. In view of these binding decisions of the Hon'ble High Court, we cannot interfere with the findings of the Ld. CIT(A) on this aspect, as such upholding the same, we dismiss this ground of appeal. The decision of the Hon'ble Tribunal was subsequently affirmed by the Hon'ble High Court of Delhi in CIT vs Lemon Tree Hotels Ltd (ITA 107/2015). The Hon'ble Delhi High Court in the case of PCIT v NDTV [398 ITR 57] has also relied on the ruling in the Lemon Tree Hotels judgment and held that expenditure arising on account of ACIT vs. Cvent India Pvt. Ltd. 7
ESOP is an ascertained liability. Madras High Court in the case of CIT v PVP Ventures Ltd [2012] 211 Taxman 554 also held that discount on issue of shares to the employee under stock option scheme is an allowable expense in computing the income in profit and loss of business or profession. It is also noted that the case of the appellant, on identical facts, for A.Y 2015-16 has been decided in favour of the Appellant by the CIT(A)-2, New Delhi in Appeal No 10338/17-18 vide order dated 28.03.2019. The finding of the CIT(A) is extracted as under: 6.2 Ground No. 2 & 3:- These grounds are directed against addition of Rs. 1,58,93,019/- on account of disallowance of Employee Stock Ownership Plan (ESOP). The ESOP or restricted share unit (RSU) plan is a scheme of allotment of stocks of the companies at a discount to its employees. The option is given as per the job offer letter and the option is exercised when the vesting period starts or when the company actually allows the employee to exercise the option. Thereafter, the employee after giving a notice to the company, can exercise the option and get the stocks at a discount. The discount is borne by the company and the same is claimable as revenue expenditure. Moreover, such benefits granted to the employee are subject to TDS on allotment as this is an ingredient of salary package. According to the court decisions, the expenses are incurred when the right of option is vested in the employee. 6.3 The AO has raised many issues viz. the stocks are from the parent company Cvent Inc. USA and not from the appellant company Cvent India P. Ltd., these are notional expenses not allowable as business expenses. He has also relied on the decision of ITAT, Delhi in the case of Ranbaxy laboratories Ltd versus additional CIT (2010) 39 SOT 17. However, the AO has allowed Rs. 30,56,762/- out of Rs. 1,58,93,019/- as actually incurred expenses on account of allotted stocks. 6.4 The appellant has relied on Novo Nordisk India Vs DCIT, ITA 1275/Bang/2011 and DCIT Vs Accenture Services ITA 4540/Mum/2008 to support its claim that stocks of parent
ACIT vs. Cvent India Pvt. Ltd. 8 company can be allotted in ESOP and they are claimable. 6.5 Further, Delhi High Court has decided the issue in the case of CIT VS Lemon Tree Hotels Ltd ITA 107/2015 order dt. 18.08.2015 in favour of assessee and allowing the expenditure as claimable expenditure in P&L a/c. The relevant portion is quoted below:- "The Court has been shown a copy of the decision dated 19th June 2012 passed by the Division Bench of Madras High Court in CIT-III Chennai v. PVP Ventures Ltd. (TC(A) No. 1023 of 2005) where a similar question was answered in favour of the Assessee by holding that the cost of ESOP could be debited to the profit and loss account of the Assessee. This Court has also in its decision dated 4 August 2015 in 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." 6.6 The appellant was asked to show the job offer letters, advance pricing agreement with CBDT showing ESOP as part of the expenditure as well as copy of invoices for reimbursement of the cost. The appellant has shown all these documents. The invoices for reimbursement of employee related cost of $51565, $57763, $65731 & $132681 are payable by the parent company Cvent Inc. USA. 6.7 On the basis of the fact of incurring the cost and support of the Court of Judicature, Delhi, the expenditure is allowable as business expenditure. These grounds are allowed. In the light of the facts of the case and the finding of the CIT(A) in Appeal No 10338/17-18 dated 28.03.2019 and respectfully following the principles enunciated by the Jurisdictional High Court and jurisdictional Tribunal, I direct the deletion of addition of Rs 4,45,31,251/- made by AO on account of disallowance of ESOP expenses u/s 37(1) of the Income Tax Act.”
Aggrieved by the order of CIT(A), Revenue is now before us.
ACIT vs. Cvent India Pvt. Ltd. 9
Before us, Learned DR took us through the order of lower authorities and supported the order of AO.
9. Learned AR on the other hand reiterated the submissions made before the lower authorities and submitted that the expense on account of ESOP is an incentive/compensation to the employees and has direct nexus with their employment and therefore such expenses can be said to have been incurred wholly for the purpose of business and are revenue in nature and, therefore, allowable u/s 37(1) of the Act. He also placed reliance on the decision cited before CIT(A) and which are reproduced by CIT(A) in his order. He, therefore, submitted that in view of the various decisions, CIT(A) has rightly allowed the claim of expenses. He thus supported the order of CIT(A).
We have heard the rival submissions and perused the material available on record. The issue in the present ground is with respect to the allowability of expenses towards ESOP expenses. AO had disallowed the expenditure by holding it to be capital in nature and not allowable u/s 37(1) of the Act. We find that CIT(A) after considering the various High Court’s and Tribunal’s decisions cited in the order held the ESOP expenses to be allowable u/s 37(1) of the Act. Before us, Revenue has not placed any material on record to point out any fallacy in the findings of CIT(A) nor has placed any contrary binding decision in ACIT vs. Cvent India Pvt. Ltd. 10 its support. In such a situation, we find no reason to interfere with the order of CIT(A) and thus the ground of Revenue is dismissed.
In the result, appeal of Revenue is dismissed.
Order pronounced in the open court on 24.02.2023