M/S. JSW CEMENT LIMITED,MUMBAI vs. PRINCIPAL COMMISSIONER OF INCOME TAX OFFICER, MUMBAI 5, MUMBAI

The grounds raised by the assessee for Assessment Year 2021–22 are reproduced hereunder: “I. On the facts and in the circumstances of the case and in law, the learned Principal Commissioner of Income-tax has erred in initiating proceedings under section 263 of the Income- tax Act, 1961, vide show-cause notice dated 24.12.2024 and in passing the impugned order without properly considering the facts and circumstances of the case. II. On the facts and in the circumstances of the case and in law, the learned Principal Commissioner of Income-tax has erred in revising the assessment order passed under section 143(3) read with sections 144C(3) and 144B of the Act, even though the said assessment had been completed by the Assessing Officer after making adequate enquiries and due application of mind. III. On the facts and in the circumstances of the case and in law, the learned Principal Commissioner of Income-tax has erred in holding that the assessment order passed under section 143(3) read with sections 144C(3) and 144B of the Act was erroneous and prejudicial to the interests of the Revenue, without appreciating the facts and circumstances of the case. IV. On the facts and in the circumstances of the case and in law, the learned Principal Commissioner of Income-tax has erred in directing the Assessing Officer to modify the assessment order by disallowing staff-welfare expenditure of ₹44,97,00,000 incurred on account of ESOP under section 37(1) of the Act.

Thereafter, the learned PCIT issued show-cause notices dated 24.12.2024 and 08.10.2025 proposing revision of the assessment order, inter alia, on the ground that the deduction claimed towards ESOP expenditure was not allowable under section 37(1) and that the disallowance purportedly made under section 14A ought to have been considered while computing book profit under section 115JB. By a further notice dated 06.02.2026, the learned PCIT also raised the issue of loans of ₹80 crore and ₹15 crore received by the assessee from South West Mining Limited (“SWML”) and JSW Dharamtar Port Private Limited (“JDPPL”), respectively, and proposed to examine their taxability as deemed dividend under section 2(22)(e). The learned PCIT further questioned the corresponding interest expenditure of ₹1,47,28,767 and ₹7,46,801 paid on the said loans.

The assessee furnished detailed replies explaining the nature and accounting treatment of the ESOP expenditure, the shareholding structure of the lender companies and the assessee, the commercial nature of the borrowings, the inapplicability of section 2(22)(e), and the legal position governing adjustment under section 115JB. The learned PCIT, however, did not accept the explanations and set aside the assessment order with directions to the Assessing Officer to undertake a fresh examination. The learned PCIT also directed examination and disallowance of branding-fee expenditure of ₹5,02,00,000, even though this issue had not formed part of any of the show-cause notices issued to the assessee. We shall deal with the issues forming the subject matter of revision separately.

Insofar as the ESOP expenditure is concerned, the learned counsel submitted that ESOPs are granted to employees as an integral part of their compensation package with the object of attracting and retaining competent personnel and aligning their interests with the long-term growth and profitability of the enterprise. The options provide the employees an opportunity to acquire an equity interest in recognition of the services rendered by them and their continued employment during the vesting period. The discount inherent in such options is, therefore, not a gratuitous concession or a loss

The learned counsel further submitted that Ind AS 102— Share-based Payment requires the fair value of the equity instruments granted to employees to be recognised as an employee-benefit expense over the period during which the corresponding services are rendered. Note No. 40(e) to the audited financial statements, forming part of the assessment record, contained a detailed disclosure concerning the ESOP expenditure. It explained that, consequent to a modification in the ESOP Plan, 2016 during the relevant financial year, the assessee re-estimated and recognised the total liability pertaining to three grants made to its employees. Thus, while ₹9.57 crore represented the expenditure pertaining to the relevant year, the further amount of ₹35.40 crore was recognised during the year as a consequence of the modification of the scheme and crystallisation of the corresponding liability. It was, therefore, incorrect to regard ₹35.40 crore as a prior-period expenditure merely because the underlying grants had originated earlier.

Reliance was principally placed upon the decision of the Special Bench of the Tribunal in Biocon Ltd. v. DCIT [2013] 35 taxmann.com 335 (Bang.–Trib.)(SB), wherein it was held

The learned CIT–DR relied upon the impugned order and submitted that the learned PCIT had identified two components of the claim, namely ₹9.57 crore pertaining to the relevant financial year and ₹35.40 crore relatable to grants made in earlier years. According to him, the Assessing Officer had neither examined why expenditure pertaining to earlier grants had been recognised in the relevant year nor verified whether the liability had genuinely crystallised during the year. It was thus contended that the assessment had been completed without the enquiry required in the circumstances and that Explanation 2 to section 263 was attracted.

We have considered the rival submissions. The expenditure in question arose from equity-settled share-based payment transactions forming part of the employee- remuneration arrangement. The primary object of granting

The Special Bench in Biocon Ltd. (supra) held that there is no material distinction between an employer paying an incentive in cash and compensating its employees by granting shares at a concessional price. In either situation, the economic substance is that employee cost has been incurred for the purposes of business. The discount on issue of options cannot, therefore, be regarded merely as a short receipt of share premium or as expenditure on capital account. The aforesaid decision was affirmed by the Hon’ble Karnataka High Court, and the same legal position has been reiterated by the Hon’ble Delhi High Court in PVR Ltd. (supra) and the Hon’ble Madras High Court in Shriram City Union Finance Ltd. (supra).

Thus, when the Assessing Officer accepted the claim of ESOP expenditure, the view so taken was supported by the prevailing judicial position as well as the specific disclosure contained in the financial statements. The learned PCIT has not identified any factual distinction which could take the assessee’s claim outside the principle laid down in Biocon Ltd. and the subsequent High Court decisions. Once the substantive legal position recognises ESOP discount as employee-compensation expenditure deductible under section 37(1), and the additional liability stood recognised on account

Ground No. V relates to branding-fee expenditure of ₹5,02,00,000. The learned counsel submitted that although three show-cause notices had been issued during the revisionary proceedings, none of them proposed revision of the assessment on account of the branding fee. The assessee was never called upon to explain its allowability before the direction for disallowance was issued in the final order. The learned CIT–DR fairly accepted this factual position.

The direction concerning branding-fee expenditure cannot be sustained. The learned PCIT could not introduce an altogether new basis of revision in the final order without first putting the assessee to notice and affording it an effective opportunity to meet the proposed action. Such a direction is contrary to the elementary requirements of natural justice. The principle is supported by the decision of the Hon’ble jurisdictional High Court in PCIT v. Universal Music India (P.) Ltd. [2023] 155 taxmann.com 230 (Bom.). The impugned order under section 263 is, therefore, quashed to this extent and Ground No. V is allowed.

We find substance in the aforesaid contention. For Assessment Year 2021–22, dividend income was no longer exempt in the hands of the shareholder. Gains arising from transfer of shares were also chargeable to tax under the applicable provisions governing capital gains. In the absence of any other exempt income, expenditure in relation to dividend-yielding investments could not be mechanically disallowed by invoking section 14A. More importantly, the direction under section 263 concerns computation of book profit under section 115JB. The Special Bench in Vireet Investment (P.) Ltd. (supra) has held that the amount

Thus, the direction of the learned PCIT proceeds without identifying any exempt income or any actual expenditure debited in the books which was liable to be added under clause (f) of Explanation 1 to section 115JB. It instead seeks to import the computation under Rule 8D into the MAT provisions, which is contrary to the settled legal position. The impugned direction on this issue is, therefore, unsustainable and Ground No. VI is allowed.

We now proceed to Grounds Nos. VII and IX concerning the loans of ₹80 crore and ₹15 crore received from SWML and JDPPL, respectively. The learned PCIT proceeded on the premise that the lender companies and the assessee were connected through the common beneficial ownership of SJFT and that the transactions, therefore, attracted the second limb of section 2(22)(e). According to the learned PCIT, the expression “shareholder” should not necessarily be confined to a person whose name appears in the register of members and the chain of beneficial ownership through SJFT was

The learned counsel explained that the entire shareholding structure stood disclosed and did not satisfy the express statutory requirements of section 2(22)(e). Insofar as the loan from SWML was concerned, SWML was wholly held by SJFT, whereas 90.54% of the shares in the assessee company were held by Adarsh Advisory Services Private Limited (“AASPL”), which, in turn, was wholly held by SJFT. Thus, SJFT was a shareholder of the lender company SWML, but was not itself a member or shareholder of the assessee company. Its interest in the assessee was only indirect through AASPL.

Insofar as the loan from JDPPL was concerned, 93.07% of the shares in JDPPL were held by JSW Infrastructure Limited, while 93.07% of the shares in JSW Infrastructure Limited were held by SJFT. The assessee company, on the other hand, was held to the extent of 90.54% by AASPL, which was wholly held by SJFT. Thus, neither JSW Infrastructure Limited—the immediate shareholder of JDPPL—nor SJFT was a member of the assessee company. The learned counsel submitted that the second limb of section 2(22)(e) could not be attracted merely by tracing an ultimate economic connection through separate companies and a family trust.

The learned counsel also distinguished the decision in National Travel Services v. CIT [2018] 401 ITR 154 (SC). It was submitted that the matter therein concerned a partnership firm whose partners held shares in the lender company for and on behalf of the firm. The relationship between a firm and its partners was materially different from the relationship between separately incorporated companies and the beneficiaries or trustees of a family trust. It was further submitted that the Bench in National Travel Services only expressed a prima facie doubt and referred the issue for consideration by a larger Bench. Such a reference, without a final decision overruling the earlier binding authorities, did not obliterate the law declared in Ankitech (P.) Ltd. and

The learned CIT–DR, on the other hand, submitted that no enquiry had been conducted by the Assessing Officer regarding the two substantial loans or the applicability of section 2(22)(e). According to him, the ownership structure was discernible from the material available on record and the Assessing Officer was required to examine the common beneficial ownership through SJFT; the accumulated profits of the lender companies; whether the loans had been advanced in the ordinary course of money-lending business; whether the transactions constituted commercial advances covered by CBDT Circular No. 19 of 2017; and whether the lenders were companies in which the public were substantially interested.

The learned CIT–DR further submitted that the expression “shareholder” should be understood with reference to beneficial ownership and not confined only to the person formally entered in the register of members. According to him, the principles emerging from Bhaumik Colour and Ankitech (P.) Ltd. required reconsideration in view of the observations in National Travel Services. It was also contended that the requirement that the payment should be for the individual benefit of the shareholder related to the third limb of section

We have considered the rival submissions and examined the statutory scheme. The second limb of section 2(22)(e) does not apply merely because the lender company and the recipient concern can, through a chain of corporate or trust relationships, be traced to a common ultimate economic interest. The provision specifically contemplates a loan or advance made to a concern in which “such shareholder” is a member or partner and in which such shareholder has a substantial interest. The expression “member or partner” is neither incidental nor redundant; it embodies an independent statutory condition which must be satisfied before a payment to a concern can be brought within the second limb.

Where the recipient concern is a company, the status of its member has to be understood with reference to the statutory framework governing membership of a company. Section 2(55) of the Companies Act, 2013 recognises, inter alia, a subscriber to the memorandum; a person who agrees in writing to become a member and whose name is entered in the register of members; and a person whose name is entered as a beneficial owner in the records of a depository. Membership is thus a legally cognisable status and cannot be

In the case of the loan from SWML, the shareholder of the lender company was SJFT. However, SJFT was not a member of the assessee company. The immediate shareholder holding 90.54% of the assessee’s shares was AASPL. The fact that AASPL was, in turn, wholly held by SJFT does not make SJFT a member of the assessee company. In the case of JDPPL, its immediate shareholder was JSW Infrastructure Limited. Neither JSW Infrastructure Limited nor SJFT was a member of the assessee company. The commonality of an ultimate economic interest cannot substitute the specific statutory requirement that the shareholder of the lender must itself be a member or partner of the recipient concern and possess the prescribed substantial interest therein.

The distinction assumes significance because the legislature has consciously employed the expressions “shareholder”, “member or partner” and “substantial interest” at different stages of the provision. Each expression must be assigned its proper legal content. Even if a person or trust may possess an ultimate economic interest in a wider corporate group, such interest cannot be used to create a deemed membership relationship in every downstream

Reliance on National Travel Services does not displace this binding position. The Bench deciding that matter expressed a prima facie doubt and directed that the matter be placed before the Hon’ble Chief Justice for constitution of a larger Bench. A reference to a larger Bench does not, by itself, overrule or suspend an existing binding precedent. Until the earlier view is authoritatively reconsidered and overruled by a Bench of competent strength, it continues to govern the field. This principle was explained by the Constitution Bench in

Besides, the factual setting in National Travel Services, involving shares held by partners for and on behalf of a partnership firm, is materially different. A partnership firm and its partners do not possess the same legal separation that exists between independently incorporated companies and a trust appearing at different levels of a corporate structure. A shareholder of one company cannot, merely because of its ownership or economic interest in that company, be treated as the shareholder or member of another separately incorporated company in the chain. Section 2(22)(e), being a deeming provision, does not contain any mechanism for disregarding the separate legal identity of the entities and creating a membership relationship where none exists in law.

Even otherwise, the assessee is admittedly not a shareholder of either SWML or JDPPL. Consequently, even if the advances were assumed to possess the attributes of deemed dividend, they could not be assessed as such in the hands of the assessee contrary to the law declared by the Hon’ble jurisdictional High Court in Universal Medicare (P.) Ltd. Revision of the assessment of the present assessee cannot be sustained merely to undertake enquiries into a possible tax implication in the hands of another person or

Once the foundational statutory requirements are absent and the proposed addition cannot legally be made in the hands of the assessee, directing a fresh enquiry would serve no lawful purpose. The jurisdiction under section 263 cannot be exercised merely to order an enquiry in the abstract; the Commissioner must also establish that the assessment order is erroneous in law and that the error caused prejudice to the Revenue in the assessment sought to be revised. Both conditions are absent on these issues. Grounds Nos. VII and IX are, accordingly, allowed.

Grounds Nos. VIII and X concern the directions to disallow interest expenditure of ₹1,47,28,767 and ₹7,46,801 paid on the loans received from SWML and JDPPL, respectively. These directions are consequential to the learned PCIT’s conclusion that the loans represented deemed dividend. Once that foundational conclusion has been found to be legally unsustainable, the consequential directions regarding interest cannot survive. Moreover, the mere application of a deeming provision to a loan receipt would not, without examination of the independent requirements of

This brings us to the broader jurisdictional challenge raised in Grounds Nos. I to III. The jurisdiction under section 263 can be validly exercised only where the assessment order is found to be both erroneous and prejudicial to the interests of the Revenue. These conditions are conjunctive, and the absence of either is fatal to the assumption of revisionary jurisdiction. An order cannot be branded as erroneous merely because the Commissioner would have approached the issue differently or because the assessment order does not contain an elaborate discussion on every aspect examined during assessment. Equally, where the Assessing Officer has adopted a view which is permissible in law, the Commissioner cannot substitute his opinion merely because another view appears to him to be preferable. This principle stands authoritatively settled by the Hon’ble Supreme Court in Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC).

Explanation 2 to section 263 does not dilute these foundational requirements. Undoubtedly, a complete absence of enquiry on an issue which the circumstances reasonably

In the present case, the ESOP claim was supported by the specific disclosure in the financial statements and the decisions of the Special Bench and several High Courts; the branding-fee issue was introduced without any show-cause notice; the direction concerning section 115JB was contrary to the settled legal position; the proposed additions under section 2(22)(e) did not satisfy the statutory conditions and were contrary to the decisions of the Hon’ble jurisdictional High Court; and the disallowances of interest were merely consequential to that legally untenable premise. The learned PCIT has, therefore, failed to demonstrate that the assessment order was both erroneous and prejudicial to the interests of the Revenue. The impugned revisionary order for

We now take up ITA No. 4866/Mum/2026 for Assessment Year 2020–21. The grounds raised by the assessee are reproduced hereunder:

Ground No. V relates to the direction for adding ₹4,42,17,615, representing the disallowance computed under section 14A read with Rule 8D, while determining book profit under section 115JB. Unlike Assessment Year 2021–22,

The Special Bench in Vireet Investment (P.) Ltd. (supra) has held that the computation contemplated under clause (f) of Explanation 1 to section 115JB must be made independently with reference to the expenditure debited in the books and relatable to exempt income, and that the artificial computation prescribed under Rule 8D cannot be mechanically adopted for determining book profit. Thus, even though dividend income was exempt during Assessment Year 2020–21, the learned PCIT could not direct the Assessing Officer to add the entire amount of ₹4,42,17,615 computed under section 14A read with Rule 8D without identifying the expenditure debited in the profit and loss account which was actually relatable to the exempt income. The direction is contrary to the settled legal position and is accordingly quashed. Ground No. V is allowed.

Grounds Nos. I to III challenge the assumption of revisionary jurisdiction. For the reasons recorded while

In the result, both the appeals of the assessee are allowed.