THE SOULED STORE PRIVATE LIMITED,MUMBAI vs. THE PRINCIPAL COMMISSIONER OF INCOME TAX, MUMBAI-4, MUMBAI

On examination of the assessment record, the learned Pr. CIT noticed that the Assessing Officer had accepted two substantial claims without making any enquiry. The first issue was with respect to advertisement and sales promotion expenditure of ₹3,065.19 lakh. According to the learned Pr. CIT, the assessee had substantially expanded its business and the Assessing Officer had not examined whether the expenditure, or any part thereof, had any connection with such expansion and whether section 35D of the Act was attracted. The learned Pr. CIT observed that if section 35D applied, only one-fifth of the eligible expenditure would be allowable in the year under consideration. The second issue related to Employee Stock Option Plan (“ESOP”) expenditure of ₹1,05,56,000/-, which had also been allowed without any examination by the Assessing Officer.

The learned Pr. CIT therefore issued notice under section 263 of the Act on 27.10.2025. The assessee filed replies dated 07.11.2025 and 29.01.2026. In respect of advertisement and sales promotion expenditure, the assessee submitted that these were routine business expenses incurred for promoting sales and maintaining its position in a competitive market and were fully allowable under section 37(1) of the Act. The assessee further submitted that advertisement and sales promotion expenditure did not fall within the expenditure specified in section 35D(2) of the Act. In respect of ESOP expenditure, the assessee contended that the expenditure wereemployee compensation computed in accordance with Ind AS 102 and was allowable under section 37(1) of the Act. The assessee also furnished comparative financial details of advertisement and sales promotion expenditure and the working of ESOP expenditure.

The learned Pr. CIT did not accept the explanation. He observed that no query whatsoever had been raised by the Assessing Officer in the course of assessment proceedings on the advertisement and sales promotion expenditure of ₹3,065.19 lakh. He also found that the Assessing Officer had made no enquiry regarding the ESOP expenditure of ₹1,05,56,000/-. According to the learned Pr. CIT, the Assessing Officer had accepted both claims without examining the facts relevant for deciding their allowability. The Ld. Pr. CIT therefore held that the assessment order was erroneous insofar as it was prejudicial to the interests of the Revenue

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

We have heard the rival submissions and perused the material placed before us. The main contention of the learned counsel is that the two conditions required for invoking section order passed u/s 263 of the Act of the Act, that the assessment order must be both erroneous and prejudicial to the interests of the Revenue, have not been satisfied. The counsel for the assessee placed reliance on various judicial precedents in support of this contention.

There can be no dispute with the proposition that where the Assessing Officer has examined an issue and has taken one of the legally permissible views, the learned Pr. CIT cannot invoke section 263 merely because he prefers another view. However, before this principle can apply, there must first be a view taken by the Assessing Officer after applying his mind to the issue.

In the present case, the admitted factual position is different. The Assessing Officer did not raise any query regarding either of the two claims. No details were called for regarding the advertisement and sales promotion expenditure. The Assessing Officer did not examine its nature, the purpose for which it was incurred or its connection, if any, with the expansion undertaken by the assessee. Similarly, no query was raised regarding the ESOP scheme, the basis of valuation, vesting conditions, period of vesting, treatment of options which may lapse, or the basis on which ₹1,05,56,000/- was claimed as expenditure. The assessment order merely accepted the return of income filed by the assessee. In these circumstances, it cannot be said that the Assessing Officer had taken a conscious or possible view on these issues. A view can arise only after the issue is examined. Acceptance of a claim without enquiry cannot be equated with taking a possible view.

The decision in CIT v. Gabriel India Ltd. [1993] 71 Taxman 585/203 ITR 108 (Bom.) also does not assist the assessee. In that case, the Assessing Officer had made enquiries and had accepted the explanation furnished by the assessee. The Hon'ble jurisdictional High Court held that section 263 could not be used merely to substitute the Commissioner's view for that of the Assessing Officer. The facts before us are the different. Here, there was no enquiry at all. Similarly, the principle laid down in CIT v. Max India Ltd. [2008] 166 Taxman 188/[2007] 295 ITR 282 (SC) regarding two possible views presupposes consideration of the issue by the Assessing Officer. That requirement is absent in the present case.

We next deal with the contention of the learned counsel that section 35D of the Act has no application to routine advertisement and sales promotion expenditure. It was submitted that section 35D(2) of the Act contains specified categories of expenditure and normal advertisement expenditure does not fall within those categories. The counsel for the assessee placed reliance on Taparia Tools Ltd. v. Jt. CIT [2015] 55 taxmann.com 361/231 Taxman 5/372 ITR 605 (SC) and other decisions for the proposition that a revenue expenditure which was allowable in law cannot be artificially spread over several years merely by describing it as deferred revenue expenditure.

We find that this contention goes to the allowability of the expenditure, whereas the issue before us is whether the Assessing Officer was justified in accepting the entire claim without examining it. Section 35D(1)(ii) of the Act deals with expenditure incurred after commencement of business in connection with the extension of an undertaking or the setting up of a new unit. The expression used by the Statute is “extension of his undertaking”. In the present case, the material before the learned Pr. CIT showed substantial expansion in the assessee's business during the relevant period. Once such facts were available, the Assessing Officer was required to examine whether the expansion undertaken by the assessee amounted to an extension of the undertaking within the meaning of section 35D(1)(ii) of the Act and, if so, whether any part of the expenditure claimed by the assessee fell within the categories specified in section 35D(2) of the Act. No such exercise was carried out by the Assessing Officer.

We are not holding that the entire advertisement and sales promotion expenditure of ₹3,065.19 lakh is governed by section 35D of the Act. Nor are we taking the view that four-fifths thereof must necessarily be disallowed in the year under consideration. The assessee may be able to establish before the Assessing Officer that the expenditure is ordinary revenue expenditure fully allowable under section 37(1) of the Act. However, that conclusion can be reached only after examining the nature and break-up of the expenditure and the relevant facts with respect to expansion of the business. The decisions relied upon by the assessee on allowability of ordinary advertisement expenditure cannot cure the complete absence of enquiry at the assessment stage.

Coming to the ESOP expenditure, the learned counsel submitted that the legal position is settled and ESOP discount was towards employee compensation allowable under section 37(1) of the Act. the counsel for the assessee placed reliance on CIT v. Biocon Ltd. [2020] 121 taxmann.com 351/[2021] 276 Taxman 1/430 ITR 151 (Kar.), wherein ESOP discount was allowed as an expenditure incurred for business purposes, subject to the conditions governing its accrual and computation. We have no reason in the present proceedings to take a contrary view on this legal principle. The mere fact that an SLP may have been pending against a decision would also, by itself, not justify revision by Ld. Pr. CIT.

However, the legal proposition that ESOP expenditure may be allowable does not mean that every amount debited under the head “ESOP expenditure” has to be accepted without verification. The Assessing Officer was still required to examine the scheme applicable to the assessee, the grant price and relevant market value, the vesting period, the number of options actually vesting, the treatment of unvested or lapsed options, the method adopted for computing the expenditure and the amount allowable for the particular year. The assessee itself furnished detailed Ind AS 102 workings before the learned Pr. CIT. These details were admittedly never examined by the Assessing Officer. Thus, while the legal principle relied upon by the assessee may be relevant when the Assessing Officer decides the claim on merits but not if issues have not been looked into at all by the Assessing Officer.

The learned counsel has then relied upon Pr. CIT v. Coastal Gujarat Power Ltd. [2019] 103 taxmann.com 418/264 Taxman 244 (Bom.) to contend that even where the Assessing Officer has not made a detailed enquiry, no purpose would be served by restoring the matter if the correct legal conclusion can be reached from the material already on record. We find that the said principle does not apply to the facts before us. The present dispute cannot be decided merely as an abstract question of law. In the case of advertisement and sales promotion expenditure, the nature and break-up of the expenditure and its possible connection with the extension of the undertaking require factual examination. In the case of ESOP expenditure, the computation, vesting and year-wise accrual require verification. The detailed information placed before the learned Pr. CIT was not examined by the Assessing Officer during assessment. The present case is therefore not one where all relevant facts had already been examined and only a pure question of law remained to be answered.

The contention of the counsel for the assessee that the learned Pr. CIT should himself have undertaken the complete verification instead of restoring the issues to the Assessing Officer also is not convincing. Where the Assessing Officer has made an enquiry and the Commissioner merely considers that some further enquiry should have been made, section 263 of the Act cannot be used for conducting a fishing or roving exercise. That, however, is not the factual position before us. The assessment record shows complete absence of enquiry on these two issues. Once the learned Pr. CIT found that substantial claims had been accepted without the basic examination which ought to have been made, he was within his jurisdiction in restoring those limited issues to the Assessing Officer for proper examination. Section 263 of the Act does not require the learned Pr. CIT to himself perform the entire assessment exercise which the Assessing Officer omitted to perform.

The learned counsel has further contended that Explanation 2 to section 263 was not specifically referred to in the show-cause notice and the counsel for the assessee placed reliance on Pr. CIT v. Shreeji Prints (P.) Ltd. [2021] 130 taxmann.com 293 (Guj.), the SLP against which was dismissed in Pr. CIT v. Shreeji Prints (P.) Ltd. [2021] 130 taxmann.com 294/282 Taxman 464 (SC), and CIT (Exemptions) v. Impact Foundation (India) [2026] 186 taxmann.com 134 (Bom.). We have considered this objection. In the present case, the very foundation of the show-cause notice was that the Assessing Officer had not made enquiry on the two specific issues of advertisement and sales promotion expenditure and ESOP expenditure. The assessee understood this charge and filed detailed replies on both issues. The final order does not introduce any new item or a new factual basis for revision. The reference to Explanation 2 in the final order only supports the same charge of lack of enquiry which had already been specifically put to the assessee.

More importantly, even without placing reliance upon Explanation 2, the impugned order is sustainable under the main provision of section 263(1) of the Act itself on the facts of the present case. The complete failure of the Assessing Officer to examine a substantial claim in circumstances which necessarily required enquiry by the Assessing Officer in our view has rendered the assessment erroneous and, where such failure has a potential tax consequence, the order is prejudicial to the interests of the Revenue. We therefore sustain the revision on the substantive requirements of section 263(1) of the Act and not merely on the deeming provision contained in Explanation

In our view, even without taking assistance from Explanation 2 to section 263, the present case is covered by the main provision of section 263(1) itself. For A.Y. 2022-23, the relevant part of section 263(1) reads as under:

Thus, under the main provision itself, the learned Pr. CIT can revise an assessment where the order is both erroneous and prejudicial to the interests of the Revenue. In the present case, the Assessing Officer admittedly made no enquiry at all regarding the advertisement and sales promotion expenditure of ₹3,065.19 lakh or the ESOP expenditure of ₹1,05,56,000/-. These were substantial claims which were required to be examined before the Assessing Officer allowed the same. The failure of the Assessing Officer to examine them in our view, shows absence of application of mind and renders the assessment order erroneous. Since the claims were allowed without examining whether they satisfied the conditions of the Act, the order was also prejudicial to the interests of the Revenue. The requirements of section 263(1) of the Act are therefore satisfied on the facts of the case itself. We accordingly sustain the exercise of revisional jurisdiction under the main provision of section 263(1) of the Act, and it is not necessary for us to rely upon the deeming provisions contained in Explanation 2 to section 263 of the Act.

The assessee has also contended that the proceedings were initiated on the basis of an internal audit objection and therefore there was lack of independent application of mind by the learned Pr. CIT. We find no merit in this contention. The source from which an issue comes to the notice of the learned Pr. CIT is not decisive. What is relevant is whether the learned Pr. CIT examined the assessment record and independently satisfied himself that the assessment order was erroneous and prejudicial to the interests of the Revenue. In paragraph 4.1 of the impugned order, the learned Pr. CIT specifically considered the assessment order, the issue raised in audit and the assessee's reply and thereafter gave his own finding that the Assessing Officer had not raised any query regarding the expenditure. The Pr. CIT examined the ESOP issue separately. The final satisfaction is therefore that of the learned Pr. CIT and the order cannot be set aside merely because the matter had initially come to his notice through an audit objection.

In our view, the prejudice to the interests of the Revenue is also evident. Advertisement and sales promotion expenditure of ₹3,065.19 lakh and ESOP expenditure of ₹1,05,56,000/- were accepted without examining whether the statutory conditions governing their allowability were satisfied. We are not holding that these amounts are liable to be disallowed. The prejudice lies in allowing substantial claims without the enquiry which the law and the facts required.

We accordingly hold that this is not a case of the learned Pr. CIT substituting his opinion for a possible view taken by the Assessing Officer. No view was taken by the Assessing Officer because no enquiry was made on either of the two issues. The learned Pr. CIT was therefore justified in exercising jurisdiction under section 263 of the Act and in restoring these limited issues to the Assessing Officer.

In view of the above, we find no reason to interfere with the order passed by the learned Pr. CIT under section 263 of the Act. The grounds raised by the assessee are dismissed.

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