M/S AVENDUS CAPITAL PRIVATE LIMITED,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX CENTRAL CIRCLE-2(1), MUMBAI

On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in confirming the action of the Ld. AO in making disallowance of INR 89.63,694/- under section 14A of the IT Act read with Rule 8D of the Income-tax Rules, 1962 ("IT Rules") by merely applying the Rule 8D formula without appreciating the facts of the Appellant.

On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in confirming the action of the Ld. AO in making disallowance of INR 89,63,694/- in the ‘book profits’ under section 115JB of the IT Act by invoking provisions of section 14A of the IT Act read with Rule 8D of the IT Rules.

On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in confirming the action of the Ld AO in levying interest under section 234C and 234D. The Appellant craves leave to add, alter, amend, delete all or any of the grounds of appeal before or at the time of hearing.”

The fact in brief is that return of income declaring total income of Rs.30,77,08,160/- was filed on 30.11.2016. The case was subject to scrutiny assessment and notice u/s 143(2) of the Act was issued on 07.07.2016. During the course of assessment the assessing officer noticed that assessee company has debited an amount of Rs.167,97,854/- in the profit and loss account as Employee Stock Option Plan (ESOP) expenses. The assessing officer asked the assessee vide notice u/s 142(1) dated 10.11.2018 to explain why the same should not be treated as capital expenses. The assesse explained that similar expenses it had claimed in assessment year 2009-10 and 2010-11 and the ITAT has decided the issue for both the years in its favour. The assessee further explained that in the scheme of ESOP’s the company gives an option to its employees to purchase its securities at a price lower than the market price. This was a practise which was exercised in order to benefit the employees in order to retain the employees and reward them for their contribution in the growth of the company. It is P a g e | 3 ITA Nos. 1738 & 1739/Mum/2023 M/s Avendus Capital Pvt. Ltd. Vs. ACIT ,CC-2(1) also explained that its employees were the main assets, therefore, ESOP was issued to them purely from business perspective would qualify as business expenditure and the same was entitled to deduction under the guidelines prescribed by the Institute of Chartered Accountant of India. Therefore, the assessee claimed that ESOP issued to the employees was revenue expenditure for the company in the interest of the business of the company so that talent is retained in the company so as to enable company to perform and compete in the market place. However, the assessing officer has not agreed with the submission of the assessee company. The assessing officer was of the view that in the scheme of ESOP, the company gives an option to its employee to purchase its securities at a price lower than the market price. As per the scheme, the difference between the exercise value and the market value was paid by the company. Therefore, the assessing officer was of the view that ESOP expenses were of capital nature, and cannot be allowed u/s 37 of the Act. Accordingly, the assessing officer has disallowed the total expenses of Rs.167,97,854/- and added to the total income of the assesse.

Aggrieved, the assesse filed the appeal before the ld. CIT(A). The ld. CIT(A) has dismissed the appeal of the assessee.

Heard both the sides and perused the material on record. In the assessment order passed u/s 143(3) of the Act the assessing officer treated the ESOP expenses as capital expenditure and disallowed the claim of deduction as revenue expenditure of the assessee company. During the year under consideration the assessee company had granted options to its employees under the scheme of ESOP’s to purchase its securities at a price lower than the market value price. The assesse had followed the intrinsic value-based method of accounting for stock options granted based on the Guidance Note on Accounting for Employees Share-based payments issued by ICAI. The assesse company