SAFARI INDUSTRIES INDIA LIMITED,MUMBAI vs. PRINCIPAL COMMISSIONER OF INCOME TAX - 6, MUMBAI

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ITA 6178/MUM/2026Status: DisposedITAT Mumbai25 September 2026AY 2022-238 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 revisionary proceedings under Section 263 were not justified. The Assessing Officer had specifically examined the issue of ESOP expenditure, issued a show-cause notice, received the assessee's replies, and verified the details before accepting the claim. The Tribunal noted that the AO's acceptance of the ESOP expenditure was a legally permissible view, supported by the Karnataka High Court's decision in CIT (LTU) v. Biocon Ltd. and the jurisdictional Bombay High Court's decision in PCIT v. Bajaj Finance Ltd. The Tribunal emphasized that Section 263 cannot be invoked merely because the Commissioner prefers another view or to conduct a more elaborate inquiry than what the AO had already done. The mere admission of a Special Leave Petition (SLP) against the Biocon Ltd. decision did not render the High Court's ruling ineffective without a stay. Therefore, the twin conditions for invoking Section 263 were not satisfied. The Tribunal quashed the order passed by the PCIT under Section 263.

What were the facts?

The assessee, Safari Industries India Ltd., filed its return for Assessment Year 2022-23. The Assessing Officer (AO) completed the assessment under section 143(3) read with section 144B, increasing the total income. Subsequently, the Principal Commissioner of Income Tax (PCIT), Mumbai-6, initiated revisionary proceedings under section 263. The PCIT held that the ESOP expenditure of Rs. 15,41,066 was notional and should have been disallowed under section 37(1), deeming the assessment order erroneous and prejudicial to the revenue. The PCIT set aside the assessment order on this limited issue, directing the AO to conduct a detailed inquiry. The assessee appealed this order to the ITAT.

What were the issues?

1. Whether the revisionary proceedings under Section 263 of the Income-tax Act, 1961, were validly invoked by the PCIT, considering the twin conditions of the assessment order being erroneous and prejudicial to the interests of the revenue. - Assessee's contention: The AO had made requisite inquiries and applied his mind. The ESOP expenditure was a legally permissible view, supported by judicial precedents like Biocon Ltd. The PCIT erred in invoking Section 263 merely on a difference of opinion or to conduct a re-verification. - Revenue's contention: Not explicitly recorded in the judgment, but implied by the PCIT's order that the assessment order was erroneous and prejudicial due to the allowability of ESOP expenditure. 2. Whether the ESOP expenditure of Rs. 15,41,066 is allowable as a deductible business expenditure under Section 37(1) of the Act. - Assessee's contention: ESOP expenditure constitutes employee cost, taxable in the hands of employees, and is a well-recognized revenue expenditure. The PCIT erred in considering it notional and ignoring the ruling in Biocon Ltd. and its affirmation by the Karnataka High Court, as well as the Bombay High Court's decision in Bajaj Finance Ltd. The expenditure was incurred on an accrual basis and accounted for as employee compensation. - Revenue's contention: Not explicitly recorded in the judgment, but implied by the PCIT's order that ESOP expenditure is notional and lacks cash outflow, thus not deductible under Section 37(1).

Which sections of the Income-tax Act were involved?

Section 263,Section 37(1),Section 143(3),Section 144B,Section 17

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, MUMBAI

Before: SHRI SIDDHARTHA NAUTIYAL & SHRI PRABHASH SHANKAR

For Appellant: Shri Ninad Patade a/w Ms. Pal Jain, Shri Basavaraj Hiremath, CIT DR
For Respondent: Shri Rajgopal Parthasarathi, Sr

आदेश / ORDER

PER SHRI SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:

This appeal is filed by the Assessee against the order of Ld. Pr.CIT, Mumbai vide order dated 06-03-2026 for the Assessment Year 2022-23. The Assessee has raised the following grounds of appeal:

1.

Revisionary Proceedings under Section 263 are bad in law

1.1 The learned PCIT erred in law and on facts in invoking revisionary proceedings under section 263 of the Act, without satisfying the mandatory twin conditions that the assessment order is both erroneous and prejudicial to the interests of the Revenue.

1.2 The learned PCIT erred in law and on facts in invoking revisionary proceedings under section 263 of the Act despite there being no quantifiable loss to revenue or any demonstrated non-realization of lawful tax arising from the assessment order passed by the learned Assessing Officer:

1.3 The learned PCIT erred in establishing that the order is passed by the learned Assessing Officer without making requisite inquiries or verification. The learned PCIT erred in not appreciating that the learned Assessing Officer had duly considered all relevant material and had applied his mind to the issue while passing the assessment order. Accordingly, the revisionary proceedings under section 263 cannot be invoked merely to re-verify the issues already examined by the learned Assessing Officer.

1.4 The learned PCIT erred in exercising revisionary powers merely on account of difference of opinion, even though the learned Assessing Officer had adopted one of the possible legally permissible views supported by judicial precedents.

2.

Disallowance of expenses of Rs. 15,41,066 towards Employee Stock Option Scheme (ESOP) under section 37(1) of the Act.

2.1 The learned PCIT erred in disallowing Employee Stock Option Scheme (ESOP) expenses amounting to Rs. 15,41,066 under section 37(1) of the Act.

2.2 The learned PCIT erred in appreciating the fact that ESOP expenditure constitutes employee cost forming part of salary/perquisites, taxable in the hands of employees and hence, allowabie as a deductible business expenditure in the hands of the appellant.

2.3 The learned PCIT erred in appreciating the fact that it is a well-recognized and judicially settled position that ESOP expenses is a revenue expenditure under Section 37(1) of the Act. The learned PCIT erred in not considering the ruling of the Special Bench in the case of Biocon Ltd. and its affirmation by the Karnataka High Court on the subject matter. Therefore, the learned PCIT erred in holding that the assessment order is deemed erroneous.

2.4 The learned PCIT erred in concluding that ESOP expenditure is "notional in nature" and that no expenditure has been incurred merely because there was no cash outflow, ignoring that section 37(1) does not mandate actual cash payment and allows deduction of expenditure incurred on accrual basis.

2.5 The learned PCIT erred in relying upon the characterization of ESOP discount ignoring settled judicial precedents that issuance of shares at a discount under ESOP scheme is a mode of compensating employees for services rendered and constitutes revenue expenditure.

2.6 The learned PCIT's reliance on the decision of the Delhi High Court in the case of Ranbaxy Laboratories Ltd. v. Additional CIT is misplaced, as the facts are distinguishable with the facts of the case of the appellant. The learned PCIT erred in not appreciating that in the present case, the ESOP liability has been duly accounted for, and the expenditure is ascertainable and recorded as employee compensation in line with applicable accounting and SEBI guidelines. Accordingly, the reliance placed on the said decision, without examining the distinct factual and legal position applicable to the appellant's case, is misplaced and unsustainable.

2.7 The learned PCIT erred in disregarding and ignoring the binding effect of the decision of the Karnataka High Court in the case of Biocon Limited and merely placing reliance on the fact that SLP has been admitted before the Apex Court.

Each of the above grounds is independent and without prejudice to the other grounds of appeal preferred by the Appellant.

The Appellant prays for leave to add, alter, vary, omit, substitute, or amend the above grounds of appeal, at any time before or at the time of hearing, of the appeal

2.

The brief facts of the case are that the assessee, Safari Industries India Limited, filed its return of income for A.Y. 2022-23 declaring total income of ₹10,24,20,022/-. The Assessing Officer completed the assessment under section 143(3) read with section 144B of the Income-tax Act, 1961 vide order dated 27.03.2024, assessing the total income at ₹17,20,00,442/-. Subsequently, on the basis of an audit objection relating to ESOP expenditure of ₹15,41,066/-, the learned PCIT initiated proceedings under section 263 of the Act. The learned PCIT held that the ESOP expenditure was notional in nature and ought to have been disallowed under section 37(1) of the Act. He therefore held the assessment order to be erroneous and prejudicial to the interests of the Revenue and set it aside on this limited issue with a direction to the Assessing Officer to make a detailed enquiry.

3.

The assessee is in appeal before us against the aforesaid order passed by the learned PCIT under section 263 of the Act.

4.

We have heard the rival submissions and perused the material available on record. The issue before us is whether the learned PCIT was justified in invoking section 263 in respect of the ESOP expenditure of ₹15.41 lakhs. We find that the issue had been specifically examined by the Assessing Officer during the assessment proceedings. In the show-cause notice reproduced in the assessment order, the Assessing Officer specifically raised the following query:

“3.6. The assessee has debited an amount of Rs.15.41 Lakhs to P&L on account of share based payments under the head employee benefit expenses. The assessee has also shown this amount as non cash item in its cash flow statement as per annual report submitted to the AO. The share based payments expense is made by the company under Ind AS which is essentially in the nature of a provision without actual outflow of resources. Kindly show cause as to why such amount be not added back to the income of assessee.”

5.

In the assessment order, the Assessing Officer has observed that the assessee filed its replies dated 18.03.2024 and 19.03.2024., after considering those replies, the Assessing Officer recorded:

“Complete reply/details alongwith documentary evidence submitted by the assessee has been examined and verified.”

6.

At page 25 of assessment order, the Assessing Officer observed: 3.6. The assessee has debited an amount of Rs. 15.41 Lakhs to PL on account of share based payments under the head employee benefit expenses. The assessee has also shown this amount as non cash item in its cash flow statement as per annual report submitted to the AO. The share based payments expense is made by the company under Ind As which is essentially in the nature of a provision without actual outflow of resources. Kindly show cause as to why such amount be not added back to the income of assessee.

(Proposed addition Rs. 15.41 lac)

The company has an employee stock option scheme (ESOP) which is in accordance with Securities And Exchange Board of India (Employee Stock Option Scheme and employee Stock Purchase Scheme) Guidelines, 1999.

During the year, the company has recognized ESOP expenses of Rs.15.41 lakhs which is disclosed as share based payment in the Annual Account. Under the ESOP scheme, shares are issued to employees of the company at a discount to market price at a future date

ESOP expenses are measured at the fair value of the equity instruments at the grant date using an appropriate valuation model. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period.

The primary object of issuing ESOP to employees is to carn profit by securing the consistent and concentrated efforts of its dedicated employees during the vesting period. Such discount is construed, both by the employees and company, as nothing but a part of package of remuneration. In other words, such discounted shares are a substitute to giving direct incentive in cash for availing the services of the employees.

We would like to submit that the share-based payments are considered as perquisites under section 17 of the Income-tax Act, 1961 in the hands of employees to whom such shares are granted under ESOP schemes. Accordingly, taxes are withheld and paid under Salary to whom such shares are granted.

Therefore, the company submits that share based payment of Rs.15.41 lakhs should be allowed

Reply dated 19.03.2024

7.

Thus, this is clearly not a case where the Assessing Officer failed to make an enquiry. The Assessing Officer specifically raised the ESOP issue, asked the assessee to explain why the expenditure should not be disallowed, received the replies and thereafter accepted the claim. Merely because the assessment order does not contain a detailed discussion while accepting the explanation cannot lead to the conclusion that no enquiry was made. The jurisdictional Bombay High Court in CIT v. Gabriel India Ltd. [1993] 203 ITR 108 (Bom.) has explained that where the Assessing Officer has made enquiries and taken a view, section 263 cannot be invoked merely because the Commissioner considers that further or more elaborate enquiry should have been made.

8.

There is another important aspect. The view taken by the Assessing Officer on the allowability of ESOP expenditure was a legally permissible view. The Karnataka High Court in CIT (LTU) v. Biocon Ltd. [2021] 430 ITR 151 (Karn.) held that ESOP expenditure is deductible under section 37(1) of the Act.

9.

The jurisdictional Bombay High Court has subsequently, in PCIT v. Bajaj Finance Ltd., ITA No.135 of 2024, dated 17.04.2026, agreed with the view that ESOP expenditure is allowable under section 37(1) of the Act and is not a contingent liability. The mere fact that an SLP had been admitted against the decision in Biocon Ltd., as noticed by the learned PCIT, did not render the High Court decision ineffective in the absence of any stay or reversal of the said decision.

10.

The settled principle laid down by the Hon'ble Supreme Court in CIT v. Max India Ltd. [2007] 295 ITR 282 (SC) is that where two views are possible and the Assessing Officer adopts one of the permissible views, the order cannot be treated as erroneous and prejudicial to the interests of the Revenue merely because the Commissioner prefers another view.

11.

In the present case, the learned PCIT has essentially substituted his view for the view consciously taken by the Assessing Officer after enquiry. Such substitution of opinion does not satisfy the requirements of section 263 of the Act.

12.

We therefore hold that the assessment order dated 27.03.2024 was neither passed without enquiry nor was the view taken by the Assessing Officer unsustainable in law. The twin conditions necessary for exercise of jurisdiction under section 263 are consequently not satisfied. We accordingly quash the order passed by the learned PCIT under section 263 of the Act.

13.

In the result, the appeal of the assessee is allowed.

Order pronounced in the open court on 24.09.2026

Sd/- Sd/- PRABHASH SHANKAR SIDDHARTHA NAUTIYAL ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai Dated: 24.09.2026 KRK, Sr. PS Copy to:

Safari Industries India Ltd., 1 302-303, A-Wing, The Qube, M V Road, JB Nagar, S.O Mumbai.

The Pr. CIT, Mumbai -6 501, 5th Floor, Aayakar Bhavan, MK Road, Mumbai. 2

3 THE PCIT / CIT, 4 THE D.R., ITAT, MUMBAIBENCH 5 GUARD FILE

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