FAIRBRIDGE CAPITAL PRIVATE LIMITED,MUMBAI vs. PRINCIPAL COMMISSIONER OF INCOME-TAX, MUMBAI - 6, MUMBAI, MAHARASHTRA

1. On verification of the records, it is seen that during the assessment\nproceedings the AO observed that the assessee had debited "Employees Share\nBased Payment" of Rs.6,32,80,228. Vide notice dated 02.02.2022, the assessee\nwas issued a show cause notice as to why the same should not be disallowed and\nadded to the total income of the assessee. The assessee made submission on\n07.02.2022 on the basis of which the AO concluded the assessment stating that\n"assessee's submission has been examined for the issue of expenses related\nto ESOP. It is the reimbursement of expenses given to the parent holding\ncompany i.e. FFHL, not the ESOPs issued by the assessee company. ESOP\nhave been issued by the parent company and the assessee company has\nincurred the expenditure which is in the nature of remuneration to employees\nand actual cost outflow has been provided to the parent company which is a\ngenuine expense of the assessee company. Therefore, no adverse inference is\nbeing drawn on this issue”.\nThe ESOP expenses are claimed by the assessee as employee benefit\nexpenses. The loss due the ESOP, is a notional loss to the extent of receipt of lesser\namount towards share premium and the share premium as received is a capital\nreceipt and not its income. ESOP expenses are not relatable the profit and gains\narising or accruing from a business/trade. The Apex Court decision in the case of\nPunjab State Industrial Development Corp. Ltd. (1997) 225 ITR 792 (SC) and Brooke\nBond India Ltd. (1997) 225 ITR 798 (SC) have held that expenditure resulting in\n\"increase in capital\" is not allowable deduction even if such expenditure may\nincidentally help in the business of the company.\nThere is no specific provision for such deduction from section 30 to 36 of the\nIncome Tax Act, 1961. So the residuary section 37 only comes to play and primary\ncondition for allowance under section 37 is the existence of revenue expenditure\nwhich is incurred wholly and exclusively for the purpose of the business. As\ndiscussed in the above paragraph, there is neither any real / actual expenditure at the\nstage of exercising of ESOP by employees nor such expenditure can be held as\nrevenue in nature incurred wholly and exclusively for the purpose of the business.\nRather, difference between fair market value and issue price is the notional loss\nwhich is claimed as ESOP expenses.\nIn view of above discussion, the expenses debited by the assessee in its P&L\nAccount as “Employees Share Based Payment” of Rs.6,32,80,228 ought to have\nbeen disallowed u/s 37(1) of the Income Tax Act,1961. This has resulted in the\nunderassessment of income to the tune of Rs.6,32,80,228/-.\n3. In view of the above, it is seen that the order passed u/s 143(3) r.w.s.144B on\n16.09.2022 is erroneous and prejudicial to the interests of revenue and is required to\nbe set-aside on the above issue by invoking the provisions of section 263 of the Act.\nHence, it is requested to show-cause as to why the same should not be quashed/set\naside for fresh adjudication after considering the facts as discussed above.\n4. In this connection, you are hereby given an opportunity of being heard and\nyour case is fixed for hearing/making submission online on or before the date\nmentioned above. In case of non-compliance, it will be presumed that you have no\nobjection to the proposed revision u/s 263 of the Act, of the assessment order passed\nby the Assessing Officer u/s.143(3) rws 144B on 16.09.2022.\nANURAG SRIVASTAVA\nPCIT, Mumbai-6\n(In case the document is digitally signed please\nrefer Digital Signature at the bottom of the page)\n5. The issues raised by the ld. Pr. CIT in his notice were thoroughly\nexamined and scrutinized during the course of scrutiny assessment\nproceedings itself. Vide notice dated 05/01/2022 issued u/s 142(1) of\nthe Act, the AO raised the following queries:-\n\"Kindly refer the assessment proceedings for A.Y.2020-21 and furnish the following\ndetails.\n1. Please furnish he details of Legal & professional fees with name and addresses of\nthe parties with their and PAN. Also furnish the details of TDS deducted on the same\nwith justification of allowability these expenses as business expenses.\n2. Please furnish the details of employees share based payments with details note and\njustification of allowability these expenses as business expenses with documentary\nevidence.\n3. Copy of Assessment order for last three years if any?\"\n6. The assessee filed a detailed reply vide reply dated 20/01/2022.\nThe relevant reply reads as under:-\n\"Please furnish the details of employees share based payments with details\nnote and justification of allowability these expenses as business expenses\nwith documentary evidence.\nDetails of employee share-based payments\n2.

For this purpose, the Company has also placed reliance on following decisions\nwhere the courts have held that it is permissible to defer/spread over an expenditure\nclaim over more than one accounting period to match the corresponding benefit\nderived over such period:\n• Madras Industrial Investment Corporation Ltd. v. CIT [1997] 225 ITR 802 (SC)\n• CIT v. Shree Rajasthan Syntex Limited 2004) 186 CIR 59 (Rajasthan)\n• CIT v. S.M. Holding and Finance P. Ltd. [2003] 264 ITR 370 (Bombay)\n2.11 In light of the above, it is submitted that the expenditure incurred by the\nCompany on share-based. payments of INR 63,280,228 should be allowable as\ndeduction under Section 37(1) of the Act\n5.2 The submissions made by the assessee are carefully perused and considered. At\nthe outset, it needs to be mentioned that as per assessee's own admission the ESOP\ngranted to the employees of the assessee by M/s Fairfax Financial Holding Limited\nwhich is overseas group entity of the assessee Company whose share are listed on\nstock exchange outside India and not by the assessee company. The Asociates\ncompany and assessee company are two different and independent entities. Hence,\nthe ESOP expenses of the associates company has nothing to do with the assessee\ncompany as the ESOP discount i.e. difference between the market price and issue\nprice pertained to the associates company and not to the assessee company. The core\nquestion that arises is whether the employees of the assessee company can be called\nas the employees of the overseas group company and whether shares allotted by the\noverseas group company are the shares of the assessee company. In my considered\nopinion if any of the two conditions are not satisfied, the same falls outside the\npurview of ESOP. As stated earlier the stock option granted by the overseas group\ncompany to the employees of the assessee company, who are not the eligible employees\nof its overseas group company since both overseas group company and subsidiary\ncompanies are independent entities. Further the assessee company has not granted\nany stock option to its employees and hence it is not covered by the definition of\nESOP. Secondly, the shares allotted to the employees of the assessee company are not\nthe shares of the assessee company but the shares of the overseas group company. As\nit all knows, in case of ESOP the company allots its own shares to its own eligible\nemployees. However, in this case the company is not allotting shares to its own\neligible employees but the other company is doing the same as also the shares allotted\nare not the shares of the assesse company. Therefore, both the required conditions are\nnot satisfied in this case.\n5.4 Further, the reliance placed by the assessee on the ITAT rulings are\ndistinguishable for the reason that in all those rulings, the assessee company was\nissuing its own shares as ESOP. However, in the case of the assessee, the assessee is\nclaiming an expense for the ESOPs issued by the holding company. Since the facts\nin the instant case are different, the rulings relied upon by the assessee are\ndistinguishable.\n5.

Further, the assessee has also not furnished the details of TDS deducted ESOP\nExpenses paid to M/s Fairfax Holdings Limited.\n5.6 In the light of the discussion in foregoing paras, assessee's claim on this issue\ncannot be entertained and hence Rs.6,32,80,228/- is disallowed and added back to\nthe total income of the assesee Company. Since, 1 am satisfied that the assessee has\nunderreported its income, penalty proceedings u/s 270A of the Income Tax Act, 1961\nis being initiated separately.\n(Disallowance of Rs 6,32,80,228/-)\"\nThe assessee filed a detailed reply dated 07/02/2022. The relevant\npart reads as under:-\n“Addition of ESOP Expenses\n2.

5. The Company has reimbursed the entire cost of acquisition of such shares to\nFFHL by way of an actual cost recharge. Accordingly, the amount of Rs.63,280,228\nis not a mere accounting entry in the Company's books of accounts. In fact, there has\nbeen an actual cash outflow from the Company to the overseas group company ie.,\nFFHL. Accordingly, it is not a notional expenditure, but an actual expenditure\nincurred by the Company.\n2.

The following reasons to disallow employee share-based payments are provided\nin the show cause notice:\n1. The shares do not belong to the Company, but they belong to the overseas group\nlisted parent entity of the Assessee.\n2. Since both these entities are independent entities, the employees of the Assessee\ncannot be called as the employees of the overseas group listed parent entity of the\nAssessee.\n3. Additionally, it also mentioned that share-based payment is an expenditure of the\noverseas group listed parent entity of the Assessee and not the Assessee.\n2.

In this regard, as mentioned in the facts above, the employee share-based expense\nis incurred to secure consistent efforts from the employees by motivating and\nretaining them. If these employees were not in employment with the Company, they\nwould not be eligible for such share-based benefits.\nAn employer could remunerate its employees either by way of payment of salary.\nbonus or by providing car, or any other benefit, etc, which is taxed in the hands of\nthe employees in accordance with the provisions of the Act.\n26. In this case, the Company remunerated its employees by providing the shares of\nits group company, tied forms part of their salary. Accordingly, the expense incurred\nby the Company by way of reimbursement of actual cost incurred by FFHL is indeed\nin the nature of employee remuneration. Further, the Company has reimbursed the\nentire cost of acquisition by way of an actual cost recharge i.e. there is an actual cash\noutflow from the Company to the overseas group company ie., FFHL. Therefore, the\nshare-based payment is an expenditure of the Company and not FFHL.\nIn light of the above, the cost recharge incurred by the company by way of\nreimbursement of expenses\nincurred by the group company is a revenue expenditure eligible for deduction under\nthe Act.\n[B]Response to the Show Cause Notice-the Company in the submission dated\n20January 20222 has placed reliance on ITAT rulings wherein shares were issued by\nthe assessee company\n2.

Further, your goodself has specially emphasised in the show cause notice that the\nAssessee has placed reliance on ITAT rulings wherein the Assessee company has\nissued its own shares as ESOP. In this regard, the Company wishes to submit that\nthis is an inaccurate observation, as the submission of the Assessee dated 20 January\n2022 highlights the decisions of the Bangalore and Mumbai Tribunal in the case of\nNovo Nordisk India (P). Ltd. v. DCTT [2014] 42 Taxmann 168 (Bangalore\nTribunal) and M/S Novozymes South Asia Put Ltd v. ACIT [2021]IT(TP)А\nno.894/Bang/2018(Bangalore Tribunal) and M/s.\nGoldman Sachs (India) Securities Pot. Ltd v. DCIT [2015] respectively, wherein shares were issued by the overseas parent company\nand not the company itself.\n2.

To reiterate the decision of the Bangalore Tribunal in the case of Novo Nordisk\nIndia (P). Ltd.v. DCIT [2014] 42 Taxmann 168 (Bangalore Tribunal) wherein it was\nheld that the cost recharge by Indian affiliate to foreign parent company was wholly\nand exclusively for the purpose of the business of the Indian affiliate and had to be\nallowed as deduction as a revenue expenditure. Additionally, it was also held that\nthe fact that the parent company is also benefited by the reason of a motivated\nworkforce is not a ground to deny deduction to the assessee. The relevant extract of\nthe ruling is reproduced below for your reference:\n\"The foreign parent company has a policy of offering ESOP toits employees to attract\nthe best talent as its workforce. In pursuance ofthis policy ofthe foreign parent\ncompany, allowed its subsidiaries/affiliates across the world to issue its shares to the\nemployees. As far as the assessee in the present case which is an affiliate of the foreign\nparent company is concerned, the shares were in fact acquired by the assessee from\nthe parent company and there was an actual outflow of cash from the assessee to the\nforeign parent company. The price at which shares were issued to the employees was\npaid by the employee to the Assessee who in turn paid it to the parent company. The\ndifference between the fair market value of the shares of the price at which shares were\nissued to the employees was met by the Assessee. This factual position is not disputed\nat any stage by the revenue. In such circumstances, we do not see any basis on which\nit could be said that the expenditure in question was a capital expenditure of the\nforeign parent company. As far as the assessee is concerned, the difference between\nthe fair market value of the shares of the parent company and the price at which those\nshares were issued to its employees in India was paid to the employee and was an\nemployee cost which is a revenue expenditure incurred for the purpose of the business\nof the company and had to be allowed as deduction. There is no reason why this\nexpenditure should not be considered as expenditure wholly and exclusively incurred\nfor the purpose of business of the assessee.\"\n9. After satisfying himself, the AO framed the impugned assessment\norder. The ld. PCIT is of the firm view that the AO has not made any\nfurther enquiry thereby making the assessment order erroneous insofar\nas it is prejudicial to the interest of the revenue. We do not find any merit\nin such observation of the ld. PCIT. Firstly, the ld. PCIT has not invoked\nprovisions of Section 263 of the Act suo moto but was compelled by the\naudit objections as mentioned in the body of the order of the ld. PCIT\nwhich means that without applying his own mind, the ld. PCIT was\nsimply carried away with the audit objections raised by the audit party.\n10. As mentioned hereinabove, the AO raised a specific query on the\nissue of the claim of ESOP expenditure to which the assessee not only\nfurnished a detailed reply but also supported its claim by quoting\nvarious judicial decisions in favour of the assessee. The judicial decisions\nare discussed hererinbelow:-\n11. The Hon'ble High Court of Bombay in the case of PCIT vs. Cartier\nLeafin (P) Ltd. 112 taxmann.com 63, had the occasion to consider a similar\ngrievance and held as under:-\n“7. We find that the finding of fact order of the Tribunal that the proceedings under\nsection 263 of the Act, on the face of it, have been initiated without examination of\nrecords before the Assessing Officer is not shown to be perverse. It is clear that the\nshow cause notice proceeds on the basis that the books of accounts, transaction\naccounts of share trading carried out by the assessee vis-a-vis D-mat accounts have\nnot been examined by the Assessing Officer during the course of assessment\nproceedings. However, we note that in the assessment order dated 28 March 2014 itself\nin paragraph-5.2, the Assessing Officer has recorded that he examined D-mat account\nin order to verify the share trading activities claimed by the assessee. Moreover the\nbefore passing the assessment order, sale, purchase and closing stocks were also\nexamined by the Assessing Officer. Thus, the basis to invoke section 263 of the Act\nfactually did not exist as there was due enquiry by the Assessing Officer during the\nassessment proceedings leading to the assessment order dated 28 March 2014. Thus,\nit is amply clear that the Assessing Officer has applied his mind while accepting the\nclaim of the Respondent of operating loss of Rs.8.79 crore making the proceedings\nunder section 263 of the Act bad in law. In any event, the view taken on fact by the\nAssessing Officer is a possible view and the same is not shown to be bad.”\n12. Similar view was taken by the Hon'ble High Court of Bombay in\nthe case of CIT vs. Nirav Modi 390 ITR 292. The relevant findings read as\nunder:-\n“12. In the present facts, the Assessing Officer was satisfied, consequent to making an\nenquiry and examining the evidence produced by the Assessing Officer, establishing\nthe identity and creditworthiness of the donor as also the genuineness of the gift. The\nCIT in his order of Revision, does not indicate any doubts in respect of the genuineness\nof the evidence produced by the Assessee. The satisfaction of the Assessing Officer on\nthe basis of the documents produced is not shown to be erroneous in the absence of\nmaking a further enquiry. It is made clear that our above observations should not be\ninferred to mean that it is open to the Assessing Officer to enquire into the source of\nsource for the purpose of the present facts. This is a case where a view has been taken\nby the Assessing Officer on enquiry. Even if this view, in the opinion of the CIT is not\ncorrect, it would not permit him to exercise power under Section 263 of the Act. In\nfact, the Apex Court in Amitabh Bachchan (supra) has observed that there can be no\ndoubt that where the view taken by the Assessing Officer is a possible view,\ninterference under Section 263 of the Act, is not permissible.\"\n13. The Hon'ble High Court of Delhi in the case of PCIT vs. Clix Finance\nIndia (P) Ltd. [2025] 473 ITR 650 (Delhi) interalia held as under:-\n27. Considering the aforesaid judicial pronouncements, it can be safely concluded\nthat inadequacy of enquiry by the AO with respect to certain claims would not in\nitself be a reason to invoke the powers enshrined in Section 263 of the Act. The\nRevenue in the instant case has not been able to make out a sufficient case that the\nCIT has exercised the power in accordance with law. Rather, in our considered\nopinion, the facts of the case do not indicate that the twin conditions contained in\nSection 263 of the Act are fulfilled in its letter and spirit.\n28. Notably, the ITAT, while making a categorical finding that the CIT had failed to\npoint out any definite or specific error in the assessment order, has satisfactorily\nexplained both the claims in question in Paragraph 8.2 of its order, which reads as\nunder:-\n\"8.2 In the Impugned Order, the Ld. Commissioner of Income Tax-IV, Delhi held\nthat the AO had not examined the aforesaid two issues properly and, therefore, set\naside the issues for further inquiries to be conducted by the AO. As regards the first\nissue is concerned, we note that out of total provision of Rs.1114.68 lacs, a sum of\nRs.7,60,76,105/- was suo moto added back in the computation of income and a\nfurther sum of Rs.73,46,160- was disallowed by the AO in the original assessment\norder dated 30.3.2005. Therefore, out of Rs.1114.68 lacs, Rs.834.22 lacs already\nstood disallowed in the original assessment order. The balance amount represented\nactual write off which was palpably clear from page 2 of the impugned order itself.\nNo deduction on account of any such provision was, therefore, allowed to the\nassessee. Hence, there is no error or prejudice to the interest of revenue. As regards\nsecond issue it was noted that interest rate swap was an actual loss and only the net\nloss of Rs.114.05 lacs after setting of gain of interest rate swap was claimed as\ndeduction. However, we find that both these issues were duly examined by the AO\nvide Questionnaire dated 2.11.2004 (Page 1-2 of the Paper Book) to which replies\ndated 9.12.2004, 20.12.2004 and 6.1.2005 (Page No. 3-39 of Paper Book-1) were\nfurnished and, therefore, the finding of the Ld. CIT that the issues were not examined\nproperly was not correct. Even the Ld. CIT has not pointed out the definite and\nspecific error in the original assessment order and observed that the inquiry made by\nthe AO was inadequate or improper without first pointing out the error in the\noriginal assessment order passed by the AO, particularly because both the aforesaid\nissues were duly examined at the stage of the original assessment proceedings, hence,\nthe impugned order is beyond jurisdiction, bad in law and void-ab-initio.\"\n29. It is discernible from the aforenoted findings of the ITAT that both the claims\nwere duly examined during the original assessment proceedings itself and neither\nthere was any error nor the same was prejudicial to the interests of the Revenue.\nThus, the findings of fact arrived at by the ITAT do not warrant any interference of\nthis Court.\n30. So far as the reliance placed by the CIT on Umashankar Rice Mill is concerned,\nthe same is misplaced, particularly in light of the insertion of Explanation 2 to\nSection 263 of the Act, brought in place by the Finance Act, 2015. The said\namendment markedly specifies various conditions to exercise the authority vested in\nthe Commissioner under Section 263 of the Act, leaving no ambiguity in the\ninterpretation of the said provision.\n31. In view of the aforesaid, the appeal preferred by the Revenue is dismissed\nalongwith the pending application(s), if any.\"\n14. The ld. D/R has relied upon the decision of the Hon'ble High Court\nof Delhi in the case of Goetze (India) Ltd. 361 ITR 505, but in our considered\nopinion, the said decision of the Hon'ble Delhi High Court is misplaced\ninasmuch as in that case, the Hon'ble Delhi High Court interalia held as\nunder:-\n“In such cases the order of the Assessing Officer is erroneous provided the\nCommissioner holds and is able to demonstrate that the view taken by the Assessing\nOfficer was not plausible, being legally unsustainable and incorrect. But the finding\nmust be recorded. This would satisfy the statutory requirement that the order passed\nand made the subject-matter of revision was erroneous, subject to the second condition\nthat the order under review should also be prejudicial to the interests of the Revenue.”\n15. If the aforementioned findings of the Hon'ble High Court is\nconsidered in the light of the facts and circumstances of the case in hand,\nwe find that in the present case, due to plethora of decision on the issue\nof ESOP expenditure, the AO has taken the most plausible view and it\ncannot be said that the view taken by the AO is erroneous. Merely\nbecause the decision of the Hon'ble Karnataka High Court in the case of\nCIT vs. Biocon Ltd. [121 taxmann.com 351] is sub-judice before the Hon'ble\nSupreme Court would not make the assessment order erroneous simply\nbecause the AO has followed the decision of the Hon'ble Karnataka High\nCourt.\n16. Considering the facts of the case in totality in light of the judicial\ndecision discussed hereinabove, we do not find any merit in the findings\nof the ld. PCIT in the impugned order insofar as ESOP expenditure is\nconcerned and we do not find the impugned assessment order as\nerroneous inasmuch as it is prejudicial to the interest of the revenue.\n17. Considering the facts in totality in light of the judicial discussions\nhereinabove, we set aside the order of the ld. Pr. CIT dated 22/03/2025\nand restore that of the AO dated 16/09/2022.\n18. In the result, appeal of the assessee is allowed.\nOrder pronounced in the Court on 24th October, 2025 at Mumbai.\nSd/-\n(SAKTIJIT DEY)\nVICE PRESIDENT\nMumbai, Dated 24/10/2025\nSd/-\n(NARENDRA KUMAR BILLAIYA)\nACCOUNTANT MEMBER\nआदेश की प्रतिलिपि अग्रेषित/