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Before: Shri V. Durga Rao & Shri Manjunatha, G.
O R D E R
PER V. DURGA RAO, JUDICIAL MEMBER:
This appeal filed by the assessee is directed against the order of the ld. Principal Commissioner of Income Tax, Coimbatore-1, Coimbatore dated 18.11.2022 relevant to the assessment year 2018-19 passed under section 263 of the Income Tax Act, 1961 [“Act” in short].
Brief facts of the case are that the assessee filed its return of income for the assessment year 2018-19 on 29.11.2018 declaring total income of ₹.18,51,74,670/- along with current year loss of ₹.7,29,661/-.
The return of income was processed under section 143(1) of the Act dated 20.11.2019 creating refund of ₹.27,07,317/-. Subsequently, the case was selected for complete scrutiny to examine (i) short term capital gains under section 111A of the Act, (ii) claim of any other amount allowable as deduction in Schedule BP, (iii) duty drawback, (iv) investment in intangible assets and (v) deduction on account of donation for Scientific Research. After examining the details furnished by the assessee, the Assessing Officer has completed the assessment under section 143(3) r.w.s. 144B of the Act dated 21.04.2021 by making various disallowances.
Subsequently, by exercising powers conferred under law, the ld. PCIT observed that there are certain errors in the assessment order and prima facie, prejudicial to the interest of Revenue. By invoking provisions of section 263 of the Act, the ld. PCIT issued a show-cause notice dated 12.10.2022 on the assessee for filing objections, if any, to the proposed revision for the following reasons:
1.
On verification it is seen that the assessee company has claimed a deduction of Rs.1,54,48,455/- towards cost of the company on grant stock option to employees. During the A.Y.2017-18 the same expenditure was disallowed by the assessing Officer Since the expenditure was claimed as deduction in the statement of total income, without debiting it in P & L account. While disallowing the claim, the AO had pointed out that the assessee company has quantified the expense towards ESOP before the finalization of accounts, has chosen not to debit the expenditure in its books of accounts for its own convenience to show higher profit to its share holders. The judicial interpretation on the issue of claim of expenses on ESOP discount with regard to Revenue expenditure/Capital expenditure has 3 not reached finality. The same methodology has been followed by the assessee for A.Y.2018-19 also. Hence the claim expenditure towards ESOP has to be disallowed and brought to tax.
2. On perusal of the assessment records it is noticed that the assessee has claimed Rs.10,13,73,616/- towards R & D expenditure for the A.Y.2018 19. in support of the claim the assessee has produced renewal of recognition of in-house R&D units letter from DSIR. It is seen that the claim of deduction at 150% of the expenditure is allowed in the assessment order without verifying Form 3CL. As per amended provisions e of Clause (b) to sub-rule (7A) has been substituted by the IT Rutes.2016 W.e.f.01.07.2016 the prescribed authority had to furnish electronically its report (1) in relation to approval of in-house R & D facility in part A of form No.3CL and (ii), quantifying the expenditure incurred on in-house R & D facility by the company during the previous year and eligible weighted deduction under sub-section 2AB of section 35 of the Act in part B of form No.3CL. Hence, the expenditure claimed towards R & D without submitting the Form 3CL from the prescribed authority required to be disallowed and taxed.
4. After considering the submissions of the assessee, the ld. PCIT set aside the assessment order and directed the Assessing Officer to redo the assessment to verify the claim of expenditure towards ESOP and expenses under section 35(2AB) of the Act and decide the issues afresh by affording an opportunity of being heard to the assessee.
On being aggrieved, the assessee is in appeal before the Tribunal. The ld. Counsel for the assessee has submitted that the issue of expenses toward ESOP is an allowable expense in view of the decision of the Tribunal in assessee’s own case for the assessment year 2016-17 in dated 26.02.2020. With regard to the claim of expenses under section 35(2AB) of the Act, it was submitted that the assessee had never claimed deduction under section 35(2AB) of the Act and hence applicability of Rule 6(7A) of the Rules and Form No. 3CL are not per se applicable.
On the other hand, the ld. DR supported the order of the ld. PCIT.
We have heard both the sides, perused the materials available on record and gone through the orders of authorities below. The first objection of the ld. PCIT is relating to claim of expenditure towards ESOP. With regard to the allowability of expenditure towards ESOP, vide order in dated 26.02.2020 in assessee’s own case for the assessment year 2016-17, the Tribunal has directed the Assessing Officer to allow the claim of deduction of ESOP expenditure by observing as under: “7. We heard the rival submissions and perused the material on record. The issue in the present appeal relates to allowability of ESOP expenditure. The view of the Assessing Officer that it is capital and notional expenditure had been overturned by the decision of Special Bench of the Tribunal in the case of Biocon Ltd (supra). The ratio of the decision of Special Bench of the Tribunal in the case of Biocon Ltd (supra) was followed by the Hon’ble Jurisdictional High Court in the case of PVP Ventures Ltd (supra) and Hon’ble Delhi High Court in the case of CIT vs. Lemon Tree Hotels in ITA No.107/2015, dated 18.08.2015. Following these decisions, the Co-Ordinate Bench of the Tribunal, to which one of us i.e. the Accountant Member is the author of the order, in the case of Deputy Commissioner of Income Tax vs. Shriram EPC Ltd, in ITA No.2011/CHNY/2016 for assessment year 2009-10 held as follows. “10.Grounds 2 to 2.2 challenges the decision of ld. CIT(A) in allowing ESOP expenditure as revenue expenditure. The issue in the present appeal is squarely covered in favour of the assessee by the order of Hon’ble Delhi High Court in the case of Lemon Tree Hotel (supra) and by the decision of Hon’ble Jurisdictional High Court in the case of PVP Ventures Ltd (supra), wherein it was held as follows.
29. As far as the Employees Stock Option Plan is concerned, as rightly pointed out by the Tribunal, the assessee had to follow SEBI direction and by following such direction, the assessee claimed the ascertained amount as liability for deduction. We do not find that there exists any error to disturb the order of the Tribunal and in turn the Assessing Authority. In the circumstances, we agree with the submission of learned senior counsel appearing for the assessee in this regard by upholding the order of the Tribunal . Against the above decision of the Hon’ble Jurisdictional High Court, the SLP filed by the Department was dismissed by the Hon’ble Supreme Court vide order dated 28.03.2014 (2512/2014) and hence, the law laid down by the Hon’ble Madras High Court has become final. Thus, in view of the above judicial pronouncement, we find no infirmity in the order of the ld. CIT(A) on this issue and accordingly, the ground raised by the Revenue stands dismissed. Hence, grounds of appeal No.2 to 2.2 stand dismissed. Thus, in the light of the above settled legal positions that ESOP expenditure is allowable, the reasoning of the ld. Commissioner of Income Tax (Appeals) as well as Assessing Officer is hereby overruled. As regards to other contention of the lower authorities that expenditure was not debited to Profit and Loss Account, it is well settled position of law that absence and presence of entry in the books of accounts does not decide the allowability or otherwise of an item of expenditure, reliance in this regard can be placed on the judgment of Hon’ble Supreme Court in the case of Kedamath Jute Mills Co. Ltd (1971) 82 ITR 363. It is further worth to note that SEBI had repealed the ESOP expenditure, once provision is repealed it should be deemed that it was never part of guideline note. Accordingly, the orders of the Assessing Officer and ld. Commissioner of Income Tax (Appeals) are set aside and we direct the Assessing Officer to allow the claim of deduction of ESOP expenditure.”
8. It is amply clear from the decision of the Tribunal, wherein, the decision of the Hon’ble Jurisdictional High Court has been duly affirmed by the Hon’ble Supreme Court, which was followed by the Tribunal to hold that the ESOP expenditure is allowable. Though, the above case law was placed before the ld. PCIT, the ld. PCIT rejected the same for the reason that the Department went in appeal against the order of the Tribunal before the Hon’ble Jurisdictional High Court. Once the Tribunal has already followed the decision of the Hon’ble Jurisdictional High Court, which was affirmed by the Hon’ble Supreme Court, the ground taken by the ld. PCIT to set aside the assessment order has no merits.
With regard to the claim of weighted deduction under section 35(2AB) of the Act and non-filing of Form No. 3CL, it was the submission of the assessee that the assessee company had never claimed the deduction under section 35(2AB) of the Act and hence Rule 6(7A) of Income Tax Rules, 1962 and Form No. 3CL are not per se applicable. Prima facie, despite, the ld. PCIT was of the opinion that there was substance in the said claim that the assessee had never claimed weighted deduction under section 35(2AB) of the Act, again directing the Assessing Officer to re-verify the said claim is unwarranted. Thus, we are of the considered opinion that the revision order passed by the ld. PCIT is liable to be quashed. Accordingly, we quash the order passed by the ld. PCIT under section 263 of the Act.