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

The issues raised by the ld. Pr. CIT in his notice were thoroughly examined and scrutinized during the course of scrutiny assessment proceedings itself. Vide notice dated 05/01/2022 issued u/s 142(1) of the Act, the AO raised the following queries:- “Kindly refer the assessment proceedings for A.Y.2020-21 and furnish the following details. 1. Please furnish he details of Legal & professional fees with name and addresses of the parties with their and PAN. Also furnish the details of TDS deducted on the same with justification of allowability these expenses as business expenses. 2. Please furnish the details of employees share based payments with details note and justification of allowability these expenses as business expenses with documentary 3. Copy of Assessment order for last three years if any?”

The assessee filed a detailed reply vide reply dated 20/01/2022. The relevant reply reads as under:- “Please furnish the details of employees share based payments with details note and justification of allowability these expenses as business expenses with documentary evidence. Details of employee share-based payments 2.1. Fairfax Financial Holdings Limited (FFHL) is an overseas group entity of the Company whose equity shares are listed on stock exchange outside India, has framed Share Option Plan for their employees as well as employees of their affiliates. The copy of the Share Option Plan is enclosed as Annexure 3. The purpose of this plan is to: (a) encourage stock ownership, (b) motivate and retain the eligible employees, and (c) compensate the employees for their services. The benefit received by the employees forms part of their remuneration. 2.2 In accordance with this plan, FFHL has granted share options of FFHL and Fairfax India Holdings Corporation (FIC) to the eligible employees of the Company. The Company is required to reimburse the entire cost of acquisition of such shares to FFHL by way of an actual cost recharge. 2.3. During the FY 2019-20, the Company has incurred share-based expense of INR 63,280,228 on account of the cost recharge to FFHL in respect of the equity shares allotted/options granted to the eligible employees of the Company. The amount of INR 63,280,228 is not a mere accounting entry in the Company's books of accounts. In fact, this amount is payable by the Company to FFHL, which is settled by way of payments resulting in actual expenditure. Hence, it is not a notional expenditure, but an actual expenditure incurred. 2.4. The Company has claimed deduction for the cost recharge of INR 63,280,288 appearing under the subheading 'compensation to employees (any other benefit to employees in respect of which an expenditure is incurred)' in the Schedule profit and loss account of the return of income for FY 2019-20, based on the following: (a) The expense in question was incurred to secure consistent efforts from the employees by motivating and retaining them and not to increase the share capital of I.T.A. No. 3626/Mum/2025

The deduction of discount on ESOP over the vesting period is in accordance with the accounting in the books of accounts, which has been prepared in accordance with Securities And Exchange Board of Andise (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999." The relevant extracts of the Special bench Tribunal ruling in case of Biocon Ltd. (supra) are reproduced below: "10.2 The assessee is a limited company and hence it is obliged to maintain its accounts on mercantile basis. Under such system of accounting, an item of income becomes taxable when a right to receive it is finally acquired notwithstanding the fact that when such income is actually received. Even if such income is actually received in a later year, its taxability would not be evaded for the year in which right to receive was finally acquired. In the same manner, an expense becomes deductible when liability to pay arises irrespective of its actual discharge. The incurring of liability and the resultant deduction cannot be marred by mere reason of some difficulty in proper quantification of such lability at that stage. The very point of incurring the liability enables the assessee to claim deduction under mercantile system of accounting." 2.7 Reliance has also been placed on following judicial precedents wherein the employee share-based cost is allowed as a deduction: • M/S Novozymes South Asia Put Ltd v. ACIT [2021] IT(TP)A no. 894/Bang/2018 (Bangalore) • DCIT v. Kotak Mahindra Bank Ltd [2018] 168 ITD 529 (Mumbai) •ACIT v. Spray Engineering Devices Limited [2012] TS-516-ITAT-2012 (Chand) • CIT v. PVP Ventures Ltd [2012] 211 Taxman 554 (Madras) • SSI Limited. v. DCIT [2004] 85 TTJ 1049 (Chennai) 2.8. Additionally, the Guidance Note of ICAI states that if the shares or stock options granted do not vest until the employee completes a specified period of service, the Company should presume that the services to be rendered by the employee as consideration for those instruments will be received in the future, during the vesting period. The Company should account for those services as they are rendered by the employee during the vesting period, on a time proportion basis, with a corresponding credit. Also, the Schedule I of the SEBI Guidelines states that where the employee shared based scheme does not provide for graded vesting, the amount shall be amortised on a straight-line basis over the vesting period. Hence, the Guidance Note of ICAI as well as the SEBI Guidelines both require expenses to be accounted by the employer as employee remuneration to be charged to the profit and loss account during the vesting period. 2.9. Accordingly, the Company in the financial statement for FY 19-20 has amortised the amount of cost-recharge over the period of vesting. Also, the Company has claimed only the amortised amount as tax deductible in the computation of the income. 2.10. For this purpose, the Company has also placed reliance on following decisions where the courts have held that it is permissible to defer/spread over an expenditure claim over more than one accounting period to match the corresponding benefit derived over such period: • Madras Industrial Investment Corporation Ltd. v. CIT [1997] 225 ITR 802 (SC) • CIT v. Shree Rajasthan Syntex Limited 2004) 186 CIR 59 (Rajasthan) • CIT v. S.M. Holding and Finance P. Ltd. [2003] 264 ITR 370 (Bombay)

11 In light of the above, it is submitted that the expenditure incurred by the Company on share-based. payments of INR 63,280,228 should be allowable as deduction under Section 37(1) of the Act 3 Copy of Assessment order for last three years if any? Assessment orders are not passed for AY 2017-18, AY 2018-19 and AY 2019-20. We request you to take the above on record and oblige. We would be glad to provide any details, clarifications and documents that you may require.” 7. After examining the reply of the assessee, a showcause notice was issued by the AO vide notice dated 02/02/2022. The relevant part of the notice reads as under:- “5. Addition of ESOP Expenses:- 5.1 During the assessment proceedings, it was observed from the Schedule 20 of the financial statements, the assessee had debited Employees Sahre Based Payment of Rs. 6,32,80,228. The assessee vide notice u/s 142(1) dated 05/01/2022 was asked furnish the details of employee share base payment with detailed not and justification of allowability of these expenses as business expenses with documentary evidence. In response, the assessee company vide letter dated 20/01/2022 has submitted its reply as under:- 2. Please furnish the details of employees share based payments with details note and justification of allowability these expenses as business expenses with documentary evidence. Details of employee share-based payments 2.1 Fairfax Financial Holdings Limited ('FFHL') is an overseas group entity of the Company whose equity shares are listed on stock exchange outside India, has framed Share Option Plan for their employees as well as employees of their affiliates. The copy of the Share Option Plan is enclosed as Annexure 3. The purpose of this plan is to: (a) encourage stock ownership, (b) motivate and retain the eligible employees, received by the employees forms part of their remuneration. and (c) compensate the employees for their services. The benefit received by the employees forms part of their remuneration. 2.2 In accordance with this plan, FFHL has granted share options of FFHL and Fairfax India Holdings Corporation ('FIHC) to the eligible employees of the Company. The Company is required to reimburse the entire cost of acquisition of such shares to FFHL by way of an actual cost recharge. 2.3 During the FY 2019-20, the Company has incurred share-based expense of INR 63,280,228 on account of the cost recharge to FFHL in respect of the equity shares allotted/options granted to the eligible employees of the Company. The amount of INR 63,280,228 is not a mere accounting entry in the Company's books of accounts. In fact, this amount is payable by the Company to FFHL, which is settled by way of payments resulting in actual expenditure. Hence, it is not a notional expenditure, but an actual expenditure incurred. 2.4 The Company has claimed deduction for the cost recharge of INR 63,280,288 appearing under the sub-heading compensation to employees (any other benefit to employees in respect of which an expenditure is incurred)' in the Schedule profit and loss account of the return of income for FY 2019-20, based on the following:

2.8 has rightly held that incurring of the expenditure by the assessee entitles him for deduction under Section 37(1) of the Act subject to fulfillment of the condition. 11. The deduction of discount on ESOP over the vesting period is in accordance with the accounting in the books of accounts, which has been prepared in accordance with Securities And Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999." The relevant extracts of the Special bench Tribunal ruling in case of Biocon Ltd. (supra) are reproduced below: "10.2 The assessee is a limited company and hence it is obliged to maintain its accounts on mercantile basis. Under such system of accounting, an item of income becomes taxable when a right to receive it is finally acquired notwithstanding the fact that when such income is actually received. Even if such income is actually received in a later year, its taxability would not be evaded for the year in which right to receive was finally acquired. In the same manner, an expense becomes deductible when liability to pay arises irrespective of its actual discharge. The incurring of liability and the resultant deduction cannot be marred by mere reason of some difficulty in proper quantification of such liability at that stage. The very point of incurring the liability enables the assessee to claim deduction under mercantile system of accounting." 2.7 Reliance has also been placed on following judicial precedents wherein the employee share-based cost is allowed as a deduction: • M/S Novozymes South Asia Pvt Ltd v. ACIT [2021] IT(TP)A no. 894/Bang/2018 (Bangalore) • DCIT v. Kotak Mahindra Bank Ltd [2018] 168 ITD 529 (Mumbai) •ACIT v. Spray Engineering Devices Limited [2012] TS-516-ITAT-2012 (Chand) • CIT v. PVP Ventures Ltd [2012] 211 Taxman 554 (Madras) SSI Limited. v. DCIT (2004] 85 TTJ 1049 (Chennai) 2.8 Additionally, the Guidance Note of ICAl states that if the shares or stock options granted do not vest until the employee completes a specified period of service, the Company should presume that the services to be rendered by the employee as consideration for those instruments will be received in the future, during the vesting period. The Company should account for those services as they are rendered by the employee during the vesting period, on a time proportion basis, with a corresponding credit. Also, the Schedule / of the SEBI Guidelines states that where the employee shared based scheme does not provide for graded vesting, the amount shall be amortised on a straight-line basis over the vesting period. Hence, the Guidance Note of ICAl as well as the SEB/ Guidelines both require expenses to be accounted by the employer as employee remuneration to be charged to the profit and loss account during the vesting period. 2.9 Accordingly, the Company in the financial statement for FY 19-20 has amortised the amount of cost-recharge over the period of vesting. Also, the Company has claimed only the amortised amount as tax deductible in the computation of the income. 2.10 For this purpose, the Company has also placed reliance on following decisions where the courts have held that it is permissible to defer/spread over an expenditure claim over more than one accounting period to match the corresponding benefit derived over such period: • Madras Industrial Investment Corporation Ltd. v. CIT [1997] 225 ITR 802 (SC) • CIT v. Shree Rajasthan Syntex Limited [2004] 186 CTR59 (Rajasthan)

The assessee filed a detailed reply dated 07/02/2022. The relevant part reads as under:- “Addition of ESOP Expenses

1. Background and facts 2.1.1. The Company wishes to reiterate that Fairfax Financial Holdings Limited (FFHI) is an overseas group listed parent entity of the Company whose equity shares are listed on stock exchange outside India., FFHL has floated Share Option Plan for their employees as well as employees of their affiliates (i.e., eligible employees). The copy of the Share Option Plan was provided vide submission dated 20 January 2022. 2.1.2. The purpose of this plan is to: (a) encourage stock ownership amongst employees of the Company, (b) motivate and retain the eligible employees of the Company, and (c) compensate the employees of the Company for their services. Hence, this plan is for the benefit of the employees of the Company. 2.1.3. Additionally, the expense in question was incurred to secure consistent efforts from the employees by motivating and retaining them. Accordingly, this expenditure is in the nature of employee compensation for the Company i.e., it is a part of employee salary. 2.1.4. The Company has amortised the cost recharge on a straight-line basis in the profit and loss account during the vesting period (i.e., 10 years) as per the Guidance Note of the Institute of Chartered Accountant of India (ICAI) and the guidelines issued by the Securities and Exchange Board of India (SEBI Guidelines'). During the FY 2019-20, the Company has incurred share-based expense of Rs. 63,280,228 on account of the pure cost recharge reimbursement to FFHL in respect of equity shares allotted/granted to the eligible employees of the Company. 2.1.5. The Company has reimbursed the entire cost of acquisition of such shares to FFHL by way of an actual cost recharge. Accordingly, the amount of Rs. 63,280,228 is not a mere accounting entry in the Company's books of accounts. In fact, there has been an actual cash outflow from the Company to the overseas group company ie., FFHL. Accordingly, it is not a notional expenditure, but an actual expenditure incurred by the Company. 2.1.6. The payment of employee share-based expenses to FFHL is in the nature of reimbursement of expenses. Such, reimbursement does not have any income element and hence, it is a pure cost recharge. 2.1.7. The Company has adopted a 'cost plus mark-up' method for determining its revenue for transfer pricing purposes - mark up of 20% is applied on the cost for computing revenue. Accordingly, to compute revenue and profit for the year under consideration, the Company has considered a 20% mark-up on every item of operating cost (including the cost recharge i.e., employee share-based expenditure). Response to the Show Cause Notice It has been provided in the show cause notice that for the following reasons the employee share-based expenses are disallowed: 1. Firstly, the shares were allotted by the overseas group listed parent entity of the Assessee (i.e., shares were not allotted by the Assessee itself to the employees of the Assessee. As both Assessee and overseas group company are independent entities, the employees of the Assessee cannot be called as the employees of the overseas group company. Also, it is an expenditure of the overseas group listed parent entity and not the Assessee. 2. Secondly, it is indicated in the captioned notice that the Company has placed reliance on ITAT rulings, wherein the assessee had issued its own shares and not the shares of the holding company.

Lastly, the captioned notice states that the details of tax deducted at source on share-based payments to FFHL are not furnished by the Company. In response to each of the above points, the Company submits as under. [A] Response to the Show Cause Notice-shares belong to the overseas group company and not the assessee. Also, the employees of the Assessee are not the employees of the overseas group company 2.3. The following reasons to disallow employee share-based payments are provided in the show cause notice: 1. The shares do not belong to the Company, but they belong to the overseas group listed parent entity of the Assessee. 2. Since both these entities are independent entities, the employees of the Assessee cannot be called as the employees of the overseas group listed parent entity of the Assessee. 3. Additionally, it also mentioned that share-based payment is an expenditure of the overseas group listed parent entity of the Assessee and not the Assessee. 2.4. In this regard, as mentioned in the facts above, the employee share-based expense is incurred to secure consistent efforts from the employees by motivating and retaining them. If these employees were not in employment with the Company, they would not be eligible for such share-based benefits. An employer could remunerate its employees either by way of payment of salary. bonus or by providing car, or any other benefit, etc, which is taxed in the hands of the employees in accordance with the provisions of the Act. 26. In this case, the Company remunerated its employees by providing the shares of its group company, tied forms part of their salary. Accordingly, the expense incurred by the Company by way of reimbursement of actual cost incurred by FFHL is indeed in the nature of employee remuneration. Further, the Company has reimbursed the entire cost of acquisition by way of an actual cost recharge i.e. there is an actual cash outflow from the Company to the overseas group company ie., FFHL. Therefore, the share-based payment is an expenditure of the Company and not FFHL. In light of the above, the cost recharge incurred by the company by way of reimbursement of expenses incurred by the group company is a revenue expenditure eligible for deduction under the Act. [B]Response to the Show Cause Notice-the Company in the submission dated 20January 20222 has placed reliance on ITAT rulings wherein shares were issued by the assessee company 2.8. Further, your goodself has specially emphasised in the show cause notice that the Assessee has placed reliance on ITAT rulings wherein the Assessee company has issued its own shares as ESOP. In this regard, the Company wishes to submit that this is an inaccurate observation, as the submission of the Assessee dated 20 January 2022 highlights the decisions of the Bangalore and Mumbai Tribunal in the case of Novo Nordisk India (P). Ltd. v. DCTT [2014] 42 Taxmann 168 (Bangalore Tribunal) and M/S Novozymes South Asia Put Ltd v. ACIT [2021]IT(TP)A no.894/Bang/2018(Bangalore Tribunal) and M/s. Goldman Sachs (India) Securities Pot. Ltd v. DCIT [2015] I.TA No.222/Mum/2014 (Mumbai) respectively, wherein shares were issued by the overseas parent company and not the company itself. 2.9. To reiterate the decision of the Bangalore Tribunal in the case of Novo Nordisk India (P). Ltd.v. DCIT [2014] 42 Taxmann 168 (Bangalore Tribunal) wherein it was I.T.A. No. 3626/Mum/2025

After satisfying himself, the AO framed the impugned assessment order. The ld. PCIT is of the firm view that the AO has not made any further enquiry thereby making the assessment order erroneous insofar as it is prejudicial to the interest of the revenue. We do not find any merit in such observation of the ld. PCIT. Firstly, the ld. PCIT has not invoked provisions of Section 263 of the Act suo moto but was compelled by the audit objections as mentioned in the body of the order of the ld. PCIT which means that without applying his own mind, the ld. PCIT was simply carried away with the audit objections raised by the audit party. 10. As mentioned hereinabove, the AO raised a specific query on the issue of the claim of ESOP expenditure to which the assessee not only furnished a detailed reply but also supported its claim by quoting

Similar view was taken by the Hon’ble High Court of Bombay in the case of CIT vs. Nirav Modi 390 ITR 292. The relevant findings read as under:- “12. In the present facts, the Assessing Officer was satisfied, consequent to making an enquiry and examining the evidence produced by the Assessing Officer, establishing the identity and creditworthiness of the donor as also the genuineness of the gift. The CIT in his order of Revision, does not indicate any doubts in respect of the genuineness of the evidence produced by the Assessee. The satisfaction of the Assessing Officer on the basis of the documents produced is not shown to be erroneous in the absence of making a further enquiry. It is made clear that our above observations should not be inferred to mean that it is open to the Assessing Officer to enquire into the source of source for the purpose of the present facts. This is a case where a view has been taken by the Assessing Officer on enquiry. Even if this view, in the opinion of the CIT is not correct, it would not permit him to exercise power under Section 263 of the Act. In fact, the Apex Court in Amitabh Bachchan (supra) has observed that there can be no doubt that where the view taken by the Assessing Officer is a possible view, interference under Section 263 of the Act, is not permissible.”

The Hon’ble High Court of Delhi in the case of PCIT vs. Clix Finance India (P) Ltd. [2025] 473 ITR 650 (Delhi) interalia held as under:- 27. Considering the aforesaid judicial pronouncements, it can be safely concluded that inadequacy of enquiry by the AO with respect to certain claims would not in itself be a reason to invoke the powers enshrined in Section 263 of the Act. The Revenue in the instant case has not been able to make out a sufficient case that the CIT has exercised the power in accordance with law. Rather, in our considered opinion, the facts of the case do not indicate that the twin conditions contained in Section 263 of the Act are fulfilled in its letter and spirit. 28. Notably, the ITAT, while making a categorical finding that the CIT had failed to point out any definite or specific error in the assessment order, has satisfactorily explained both the claims in question in Paragraph 8.2 of its order, which reads as under:- "8.2 In the Impugned Order, the Ld. Commissioner of Income Tax-IV, Delhi held that the AO had not examined the aforesaid two issues properly and, therefore, set aside the issues for further inquiries to be conducted by the AO. As regards the first issue is concerned, we note that out of total provision of Rs. 1114.68 lacs, a sum of Rs. 7,60,76,105/- was suo moto added back in the computation of income and a further sum of Rs. 73,46,160- was disallowed by the AO in the original assessment order dated 30.3.2005. Therefore, out of Rs. 1114.68 lacs, Rs. 834.22 lacs already stood disallowed in the original assessment order. The balance amount represented actual write off which was palpably clear from page 2 of the impugned order itself. No deduction on account of any such provision was, therefore, allowed to the assessee. Hence, there is no error or prejudice to the interest of revenue. As regards second issue it was noted that interest rate swap was an actual loss and only the net loss of Rs. 114.05 lacs after setting of gain of interest rate swap was claimed as deduction. However, we find that both these issues were duly examined by the AO vide Questionnaire dated 2.11.2004 (Page 1-2 of the Paper Book) to which replies dated 9.12.2004, 20.12.2004 and 6.1.2005 (Page No. 3-39 of Paper Book-1) were furnished and, therefore, the finding of the Ld. CIT that the issues were not examined properly was not correct. Even the Ld. CIT has not pointed out the definite and specific error in the original assessment order and observed that the inquiry made by the AO was inadequate or improper without first pointing out the error in the original assessment order passed by the AO, particularly because both the aforesaid issues were duly examined at the stage of the original assessment proceedings, hence, the impugned order is beyond juri iction, bad in law and void-ab-initio." 29. It is discernible from the aforenoted findings of the ITAT that both the claims were duly examined during the original assessment proceedings itself and neither there was any error nor the same was prejudicial to the interests of the Revenue. Thus, the findings of fact arrived at by the ITAT do not warrant any interference of this Court. 30. So far as the reliance placed by the CIT on Umashankar Rice Mill is concerned, the same is misplaced, particularly in light of the insertion of Explanation 2 to Section 263 of the Act, brought in place by the Finance Act, 2015. The said amendment markedly specifies various conditions to exercise the authority vested in the Commissioner under Section 263 of the Act, leaving no ambiguity in the interpretation of the said provision.

In view of the aforesaid, the appeal preferred by the Revenue is dismissed alongwith the pending application(s), if any.”

The ld. D/R has relied upon the decision of the Hon’ble High Court of Delhi in the case of Goetze (India) Ltd. 361 ITR 505, but in our considered opinion, the said decision of the Hon’ble Delhi High Court is misplaced inasmuch as in that case, the Hon’ble Delhi High Court interalia held as under:- “In such cases the order of the Assessing Officer is erroneous provided the Commissioner holds and is able to demonstrate that the view taken by the Assessing Officer was not plausible, being legally unsustainable and incorrect. But the finding must be recorded. This would satisfy the statutory requirement that the order passed and made the subject-matter of revision was erroneous, subject to the second condition that the order under review should also be prejudicial to the interests of the Revenue.”

If the aforementioned findings of the Hon’ble High Court is considered in the light of the facts and circumstances of the case in hand, we find that in the present case, due to plethora of decision on the issue of ESOP expenditure, the AO has taken the most plausible view and it cannot be said that the view taken by the AO is erroneous. Merely because the decision of the Hon’ble Karnataka High Court in the case of CIT vs. Biocon Ltd. [121 taxmann.com 351] is sub-judice before the Hon’ble Supreme Court would not make the assessment order erroneous simply because the AO has followed the decision of the Hon’ble Karnataka High Court. 16. Considering the facts of the case in totality in light of the judicial decision discussed hereinabove, we do not find any merit in the findings of the ld. PCIT in the impugned order insofar as ESOP expenditure is concerned and we do not find the impugned assessment order as erroneous inasmuch as it is prejudicial to the interest of the revenue.

Considering the facts in totality in light of the judicial discussions hereinabove, we set aside the order of the ld. Pr. CIT dated 22/03/2025 and restore that of the AO dated 16/09/2022. 18. In the result, appeal of the assessee is allowed. Order pronounced in the Court on 24th October, 2025 at Mumbai. (SAKTIJIT DEY) ACCOUNTANT MEMBER

अपीलाथ / The Appellant 2.  थ / The Respondent 3. संबंिधत आयकर आयु" / Concerned Pr. CIT 4. आयकर आयु")अपील (/ The CIT(A)- 5. िवभागीय ितिनिध ,आयकर अपीलीय अिधकरण, मुंबई /DR,ITAT, Mumbai, 6. गाड& फाई/ Guard file.