MINTOAK INNOVATIONS PRIVATE LIMITED,ANDHERI (EAST), MAROL vs. ACIT/DCIT CIRCLE 4(3)(1), CHURCHGATE, MUMBAI

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ITA 5513/MUM/2026Status: DisposedITAT Mumbai08 September 2026AY 2022-2310 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the AO had made sufficient inquiry into the ESOP expenses, as evidenced by the notices issued and the assessee's submissions. Therefore, the PCIT's invocation of Section 263 was not justified as the assessment order was not erroneous.

What were the facts?

The assessee claimed ESOP expenses, which the Assessing Officer (AO) allowed after reviewing documents. The Principal Commissioner of Income Tax (PCIT) invoked Section 263, deeming the AO's order erroneous and prejudicial to revenue for not adequately verifying the ESOP claim.

What were the issues?

Whether the PCIT was justified in invoking Section 263 to revise an assessment order where the AO had made an inquiry into the ESOP expenses, even if the PCIT believed the inquiry was inadequate?

Which sections of the Income-tax Act were involved?

Section 263,Section 37(1),Section 142(1),Section 143(3),Section 144B

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, MUMBAI

Before: SHRI ANIKESH BANERJEE & SHRI ARUN KHODPIA

PER SHRI ANIKESH BANERJEE, JUDICIAL MEMBER:

The instant appeal of the assessee filed against the order of the Ld. Principal Commissioner of Income Tax, Mumbai-4 [for brevity “Ld. PCIT”], order passed under Section 263 of the Income Tax Act, 1961 (for brevity ‘the Act’) for Assessment Year 2022-23, date of order 10.03.2026. The impugned order emanated from the order of the Assessment Unit Income Tax Department (for brevity ‘Ld. AO’), order passed under Section 143(3) r.w.s. 144B of the Act date of order 20.03.2024.

2.

The brief facts of the case are that the assessee is a startup registered with DIPP Registration dated 02.07.2018 with effect from 04.09.2017. The assessee had filed the return by declaring total income nil as per normal provision and book profit amount to Rs.47,59,021/-. The case was selected for scrutiny under CASS for following reasons: “Large share premium received during the year (verify applicability of Sec 56(2)(viib) or any other relevant section)”. Accordingly, the Ld. AO issued notice u/sec. 142(1) of the Act with different dates. The assessee had made the compliance o the said notice. Finally, the assessment was completed without adjusting any variation in the return of income. During the impugned assessment year, the assessee had claimed Employee Stock Option Plan (ESOP) amount to Rs.81,50,000/-. In assessment proceeding, the Ld. AO had issued notice 142(1) of the Act on 31.10.2023 and ask to furnish the documents including the audited financial tax audit report, computation, bank details, valuation report as per Section 56 read with Rule 11(UA) of the Income Tax Rule, 1963 with supporting documents. The assessee had already made the disclosure under Employee Stock Option Schemes (ESOP) in Note no.28 of the Tax Audit Report (TAR) which is enclosed in APB page 23. Considering the assessee’s submission, the Ld. AO had decided not to make any addition related to expenses of ESOP u/sec. 37(1) of the Act. Later on, the Ld. PCIT by invoking provision u/sec. 263 had considered that the said ESOP expenses claimed by the assessee was not verified by the Ld. AO during passing of the impugned assessment order and the claim of said expenses u/sec. 37(1) is erroneous. So, the Ld. PCIT by exercising the revisional jurisdiction has considered the impugned assessment order is erroneous and prejudicial to the interest of revenue. By invoking provisions u/sec. 263, the Ld. PCIT set aside the impugned assessment order. Being aggrieved assessee filed an appeal before us.

3.

The Ld. AR argued filed a paper book comprising pages 1 to 113 which has been placed on record. The Ld. AR contended that assessment was initiated under CASS for valuation of share u/sec. 56(2)(vii)(b) or any other relevant section, the notice was duly issued by the Ld. AO u/sec. 142(1) and examined the assessee’s claim related to ESOP u/sec. 37(1). The copy of the notice u/sec. 142(1) dated 31.10.2023 annexed in APB page 51 to 56. In compliance of the said notice, the assessee also filed the letter dated 13.11.2023 explaining the claim of expenses which is annexed in APB page 57 to 70. The assessee had further uploaded all the submissions through online via “E-Proceeding Response Acknowledgement” dated 14.11.2023 in compliance of notice dated 31.10.2023. Due consideration of the assessee’s submission, the Ld. AO had decided not to make any addition related to this said expenses. The Ld. AR respectfully relied on the order of Hon'ble Bombay High Court in case of PCIT vs Costal Gujarat Power Ltd. reported in [2019] 103 taxmann.com 418 (Bombay), relevant observations of the Hon'ble Bombay High Court in para no.9 and 15 is reproduced as below: “9. The Revenue may be correct in contending that, the Assessing Officer had not carried out detailed enquiries with respect to this claim of assessee. However, this by itself would not be sufficient to enable the Commissioner to exercise revisional power. In a given case, as in the present one, if the answer to the legal issue can be had on the basis of the material already on record, there would be no useful purpose in asking the Assessing Officer to carry out the same exercise and come to the same conclusion as the Tribunal in the present case has. In this context, we do not accept the contention of the Counsel for the Revenue that, answer in law had to come from the Assessing Officer and not the Tribunal. He had argued that even if the Tribunal was right in law, since the Assessing Officer had not come to the said conclusion, the order of the Commissioner should not be disturbed. In our opinion, if the Tribunal has come to the correct conclusions in law and said conclusions are based on materials already on record, it would be futile to reinstate the order of the Commissioner, which in turn, would require the Assessing Officer to carry out the same exercise and axiomatically come to the same conclusion. This line, we are adopting, is within the fold of the requirement of the order of Assessing Officer being 'erroneous'. In other words, if it can be demonstrated that the order was not erroneous, the order of revision would, in any case, require an interference. The matter can be looked from slightly different angle. If while examining the order of the A..O. Commissioner notices that, though the A.O. was not examined for claim of the assessee, but the claim itself is legally tenable, would be judicial in exercising and set aside the assessment? The answer may be in the negative. xxxxxxxxxxxxxxx 15. In view of the above, we do not find that Tribunal has committed any error. We are conscious of the decision of the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 93 Taxman 502/227 ITR 172. It was a case in which assessee had invested the borrowed fund and earned income from such investments prior to the commencement of business. It was in this back-ground, Supreme Court held that said prior period income, would be taxed as assessee's income from other source. The facts of the present case are different from those in case of Tuticorin Alkali Chemicals and Fertilizers Ltd., (supra). In the result, no question of law arises.”

4.

The Ld. AR further contended that the allowability of ESOP expenditure under section 37 of the Act is no longer res integra and has been considered in favour of the assessee by various Coordinate Benches of the Tribunal as well as by the Hon'ble High Courts. The Ld. AR submitted that the issue was considered by the Special Bench of the Tribunal in Biocon Ltd, reported in 35 taxmann.com 335 (Bangalore - Trib.) (SB) wherein the claim of ESOP expenditure was considered allowable. The said decision was subsequently affirmed by the Hon'ble Karnataka High Court vide judgment dated 11.11.2020, reported in 121 taxmann.com 351 (Karnataka).

The Ld. AR further relied upon the decision of the Coordinate Bench of the ITAT, Mumbai, in ICICI Securities Limited vs. PCIT, reported in (2026) 182 taxmann.com 233 (Mumbai - Trib.), wherein the issue was considered in the context of revisional jurisdiction under section 263 of the Act. The Ld. AR invited our attention to the observations of the Coordinate Bench contained in paragraphs 17 to 23 of the said order, which are reproduced hereunder:

“17. Upon exercise of the options, the difference between the fair market value of the shares on the date of exercise and the grant price was taxed in the hands of the employees as a perquisite under section 17(2)(vi) of the Act, in accordance with Rule 3 of the Income-tax Rules, 1962. The assessee duly deducted tax at source under section 192 of the Act on the value of such perquisite. 18. During the relevant previous year, the assessee debited a total ESOP expenditure of Rs. 12,64,77,536/- to its statement of profit and loss, computed in accordance with Indian Accounting Standard (Ind AS) 102 on Share-based Payment", following the fair value method. Out of this amount, a sum of Rs.8,75,08,053/-pertained to ESOPs granted by the parent bank, while the balance amount of Rs. 3,89,69,483/- related to the ESOP scheme of the assessee company itself. 19. While computing the total income, the assessee suomotu disallowed the amount of Rs. 8,75,08,053/- in the computation of income, as reflected in Schedule BP, and claimed deduction under section 37 of the Act in respect of the balance amount of Rs. 3,89,69,483/- The learned Principal Commissioner, however, proceeded on the premise that the ESOP expenditure represented a merely notional charge without any real outflow or accrued liability and that the Assessing Officer had allowed the claim without examination. 20. The assessee, in response, submitted that the learned Principal Commissioner had completely overlooked the factual matrix, including the partial disallowance already made by the assessee, as well as the settled judicial position recognising ESOP expenditure as an allowable business expenditure. It was contended that the learned Principal Commissioner had mechanically proceeded on the basis of the audit memo and the proposal of the Assessing Officer, without independently applying his mind to the detailed submissions and supporting material placed on record. 21. It was further submitted that the allowability of ESOP expenditure under section 37(1) now stands conclusively settled by the judgment of the Hon'ble Karnataka High Court in CIT, LTU v. Biocon Ltd [2020] 121 taxmann.com 351/(2021) 276 Taxman 1/430 ITR 151 (Kar), as well as by the judgments of the Hon'ble Delhi High Court in CIT v. Lemon Tree Hotels Ltd. and CIT v. New Delhi Television Ltd., apart from a series of consistent decisions of various coordinate benches of the Tribunal.

22.

On a careful appraisal of the facts and the legal position, it is evident that the assessee had incurred ESOP expenditure in the course of its business, in accordance with statutory regulations and accounting standards. and that such expenditure had a direct nexus with employee compensation and retention. The fact that a portion of the expenditure had already been disallowed by the assessee itself further demonstrates due compliance and application of mind. 23. In view of the settled judicial position recognising ESOP expenditure as an allowable business expenditure, the Assessing Officer's action in allowing the claim cannot be regarded as erroneous or prejudicial to the interests of the Revenue. The learned Principal Commissioner, therefore, exceeded the permissible limits of section 263 in setting aside the assessment on this issue”

5.

The Ld. DR argued and relied on the order of Ld. PCIT. The Ld. DR contended that the assessee had claimed expenses u/sec. 37(1) related to ESOP. No specific verification was made by the Ld. AO. It is to be found that there is a lack of verification on the part of the Ld. AO. The Ld. DR invited our attention in para no.4.1 of the impugned revisional order which is reproduced as below:

“4.1 After considering facts in the assessment order, submission of the assessee in response to notice u/s. 263 of the Act and Audit Memo, it is noted that the assessee had debited Rs.81,50,000/-towards Expenses on Employee Stock Option (ESOP) Scheme. This issue was not at all enquired into by the A.O and nothing on this issue is mentioned in the assessment order also. In response to the show cause notice issued u/s. 263 of the Act, it has been stated that the assessee has debited Rs.81,50,000/-in the Profit and Loss Account towards amortization of intrinsic value of shares issued in the Employees Stock Option Scheme to its employees and the same is allowable u/s. 37(1) of the Act. The assessee has objected to the initiation of S.263 proceeding on the ground that the assessment order is not erroneous in so far as prejudicial to the interest of revenue and referred to several decisions of various high courts. It is argued by the assessee that the Assessing Officer examined all relevant records, including our audited financial statements, Note 19 and Note 2(11), which clearly disclose ESOP expenditure. All these documents were submitted at the time of the scrutiny proceedings. Both Note 10 and disclosure Note 2(11) has been reproduced in the submission made. The AO has thus adopted a legally permissible view, which is supported by binding judicial precedents. Hence, when two views are possible, Section 263 cannot be invoked, as held by the Supreme Court in Malabar Industrial Co. and Max India Ltd. Secondly, the ESOP cost claimed is a legitimate and accrued employee compensation expense. The company follows the mercantile system of accounting, and the expense is recognized over the vesting period, based on independent valuation, in accordance with the ICAI Guidance Note on Share-Based Payments. Vested options create a real liability and not a contingent or notional one. Thirdly, the legal position on allowability of ESOP expenditure is settled. The Karnataka High Court in Biocon Ltd. (2020) has categorically held that ESOP discount is a revenue expenditure allowable u/s 37(1). This is a detailed and reasoned judgment, and has been consistently followed by multiple Tribunals across India. Most importantly, the jurisdictional ITAT Mumbai, in Procter & Gamble Hygiene & Health Care Ltd. (2025), has reaffirmed that ESOP/ISOP expenditure is neither capital nor contingent and is allowable as a business expense. The AO's view is therefore squarely supported by binding Tribunal precedent. This contention of the assessee that the AO's view is supported by binding decision cannot be accepted as the AO did not make any enquiries on this issue neither took any view. In this regard, the judgment of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Limited v. CIT [2000] 243 ITR 83 (SC) may be referred to wherein the Hon'ble Court held... The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the Income-tax Officer, the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the revenue. The phrase prejudicial to the interests of the revenue has to be read in conjunction with an erroneous order passed by the Assessing Officer. The Hon'ble Supreme Court has further held that though the revisional jurisdiction cannot be exercised to correct each and every type of mistake or error committed by the AO, an incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall the orders which are made by the AO without application of mind. The Hon'ble Supreme Court did not accept the view that no revisional jurisdiction could be exercised unless the order of the AO suffered from some grievous error that might set a bad trend or a pattern for similar assessments. The Hon'ble Supreme Court held that such interpretation was too narrow to merit acceptance and the Act schemed to levy and collect tax in accordance with the provisions of the Act and if due to an erroneous order of the AO, the Revenue is losing tax lawfully payable by a person, then, it will be certainly prejudicial to the Revenue. It was further held by the Apex Court that the assessment order was erroneous if the assessing officer passed the assessment order without applying his mind to the case in all perspective. In view of the aforesaid judgment of the Apex Court, if assessment has been made without application of mind in all perspective and there is consequential loss of revenue the order becomes erroneous in so far it is prejudicial to the interest of revenue. In several other decisions, it has been held that it is incumbent on the AO to investigate the facts stated in the return when the circumstance would make such an inquiry prudent and when the word 'erroneous' in Section 263 includes failure to make an inquiry, the order becomes erroneous when such an inquiry. Duggal & Co. v. CIT [1994] 77 Taxman 331/[1996] 220 ITR 456 (Delhi), CIT v. Pushpa Devi [1986] 29 Taxman 377/[1987] 164 ITR 639 (Pat.) and CIT v. Pushpa Devi [1988] 40 Taxman 375/173 ITR 445 (Pat). In the current case, there is no two views possible due to the fact that the ESOP expenses are purely notional, neither accrued nor any expenses laid out by the assessee.”

6.

We have heard the rival submissions and perused the material available on record. The controversy before us is confined to the assumption of revisional jurisdiction by the Ld. PCIT under section 263 of the Act in respect of the assessee’s claim of ESOP expenditure of Rs.81,50,000/- under section 37(1) of the Act. On examination of the assessment record, we find that the issue cannot be regarded as one where the Ld. AO had made no enquiry. During the scrutiny proceedings, the Ld. AO issued notice under section 142(1) dated 31.10.2023 calling for, inter alia, the audited financial statements, tax audit report, computation of income and other supporting documents. The ESOP expenditure was specifically disclosed in Note No.28 of the Tax Audit Report. In response to the notice, the assessee furnished its detailed submission dated 13.11.2023, which was also uploaded through the e-Proceeding portal on 14.11.2023. After considering the material placed before him, the Ld. AO completed the assessment without making any disallowance in respect of the ESOP expenditure. The relevant notice and the assessee’s response are stated to be placed at APB pages 51 to 70.

7.

Therefore, the observation of the Ld. PCIT that the issue was “not at all enquired into by the A.O.” is not borne out from the assessment record. Merely because the assessment order does not contain an elaborate discussion on the issue, it cannot, on the facts of the present case, be inferred that there was complete absence of enquiry or application of mind. Once the issue was examined during the assessment proceedings and the Ld. AO, upon considering the material furnished by the assessee, accepted the claim, the Ld. PCIT cannot substitute his opinion for the view taken by the Ld. AO merely because he considers that a different view ought to have been taken.

8.

We further observe that the assessee relied upon the decision of the Hon’ble Karnataka High Court in Biocon Ltd. (supra) and the decision of the Coordinate Bench in ICICI Securities Ltd. (supra), wherein the Tribunal, in the context of section 263, held that where the Assessing Officer’s action in allowing ESOP expenditure was supported by the settled judicial position, such assessment could not be regarded as erroneous and prejudicial to the interests of the Revenue. In these circumstances, invocation of Explanation 2 to section 263 on the premise that the assessment order was passed without making enquiries or verification which should have been made is misplaced. The material on record demonstrates that verification was in fact undertaken by the Ld. AO. The distinction between lack of enquiry and an alleged inadequacy of enquiry assumes significance; section 263 cannot be invoked merely to undertake the same enquiry again or to substitute the revisional authority’s opinion for a plausible view adopted by the Assessing Officer. The decision of the Hon’ble Bombay High Court in Coastal Gujarat Power Ltd. (supra), relied upon by the assessee, also supports the proposition that absence of a more detailed enquiry, by itself, would not necessarily justify exercise of revisional jurisdiction where the assessment order cannot otherwise be demonstrated to be erroneous.

9.

Accordingly, on the facts available on record, the essential jurisdictional conditions for exercise of revisional power under section 263, namely that the assessment order must be both erroneous and prejudicial to the interests of the Revenue, are not established. The revisional jurisdiction cannot be sustained merely on account of a change of opinion regarding an issue which had already been subjected to verification by the Ld. AO. We, therefore, set aside the impugned revisional order passed by the Ld. PCIT under section 263 of the Act and restore the assessment order passed by the Ld. AO. Hence, the appeal of the assessee is allowed.

10.

In the result, the appeal of the assessee bearing ITA No.5513/Mum/2026 is allowed. Order pronounced in the open court on 08th day of September 2026 Sd/- Sd/- (ARUN KHODPIA) (ANIKESH BANERJEE) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai,िदनांक/Dated: 08/09/2026 SAUMYA Sr.PS Copy of the Order forwarded to: 1. अपीलाथ�/The Appellant , 2. �ितवादी/ The Respondent. 3. आयकरआयु� CIT 4. िवभागीय�ितिनिध, आय.अपी.अिध., मुंबई/DR, ITAT, Mumbai 5. गाड�फाइल/Guard file. BY ORDER, //True Copy// (Asstt. Registrar), ITAT, MUMBAI

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