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Facts
The assessee company claimed deduction for Employee Stock Option Plan (ESOP) expenses. The Assessing Officer (AO) completed the assessment accepting the return. However, the Principal Commissioner of Income Tax (PCIT) initiated revisionary proceedings under Section 263, holding the assessment order erroneous and prejudicial to revenue for allowing ESOP expenses without proper enquiry.
Held
The Tribunal held that the PCIT erred in initiating revisionary proceedings. The AO's assessment order was based on available facts and followed established judicial precedents. The PCIT's view that the ESOP expense was notional and not a business expenditure was contrary to various High Court and Tribunal decisions.
Key Issues
Whether the PCIT was justified in invoking Section 263 to revise an assessment order where ESOP expenses were allowed without proper enquiry, and whether ESOP expenses are allowable as a deduction under Section 37(1) of the Income Tax Act.
Sections Cited
263, 143(3), 144B, 142(1), 37(1)
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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SHRI NARENDRA KUMAR BILLAIYASHRI SANDEEP SINGH KARHAIL
Date of Hearing – 03/07/2025 Date of Order - 09/07/2025 O R D E R PER SANDEEP SINGH KARHAIL, J.M.
The assessee has filed the present appeal against the impugned order dated 07.03.2025, passed under section 263 of the Income Tax Act, 1961 (“the Act”) by the learned Principal Commissioner of Income Tax, Mumbai-4 [“learned PCIT”], for the assessment year 2020-21.
In this appeal, the assessee has raised the following grounds: - “
1. Re.: Validity of Order u/s. 263: 1.1 On the facts and in the circumstances of the case and in law, the impugned Order dated
07. March 2025 passed under section 263 of the Act is without jurisdiction and bad in law.
Without prejudice to the above, 1.2 On the facts and circumstances of the case and in law, the Principal Commissioner of Income ("PCIT") has erred in passing the Order dated 07 March 2025 u/s. 263 of the Act. 1.2.1 On the facts and circumstances of the case and in law, the PCIT has erred in holding that the Assessment Order dated 09 September 2022 passed u/s. 143(3) r.w.s 144B of the Act was erroneous and prejudicial to the interests of revenue. 1.2.2 On the facts and circumstances of the case and in law, the Appellant submits that, the AO prior to passing the Assessment Order dated 09 September 2022 had undertaken necessary verification basis the details/ documents sought from the Appellant during the course of assessment proceedings, and hence, the Assessment Order passed is neither 'erroneous' nor 'prejudicial' to the interest of the revenue. 1.2.3 On the facts and circumstances of the case and in law, the Appellant submits that, the order passed under section 263 amounts to change of view by PCIT and hence the revision u/s. 263 of the Act is bad in law. 1.2.4 The learned PCIT has passed the revisionary order on the issues disregarding binding judicial precedents (also submitted during the revisionary proceedings). 1.3 On the facts and circumstances of the case and in law, the Appellant prays that the impugned Order passed u/s. 263 of the Act by the PCIT is to be struck down. Without prejudice to the aforesaid grounds: 2. Re: Deduction in respect of Employee Stock Compensation Expenses (ESOP) under section 37(1) of the Act 2.1 On the facts and in circumstance of the case and in law, the learned PCIT has erred in passing the order u/s 263 for re-examination of the deduction claimed by the Appellant in respect of Employee Stock Compensation Expenses under section 37(1) of the Act. 2.2 On the facts and in circumstance of the case and in law, the learned PCIT erred in not appreciating the fact that the Employee Stock Compensation Expenses was claimed by the Appellant as deductible expenses over the ESOP tenure and the same has been consistently accepted by the tax department. 2.3 On the facts and in circumstance of the case and in law, the Order of the PCIT directing the AO to reexamine the issue needs to be struck down.”
The solitary grievance of the assessee is against the exercise of revisionary jurisdiction under section 263 of the Act by the learned PCIT.
We have considered the submissions of both sides and perused the material available on record. The brief facts of the case are that the assessee is engaged in providing cloud storage facilities to its customers. For the year under consideration, assessee filed its return of income on 29.01.2021, declaring a total income of ₹ ‘Nil’. The return filed by the assessee was selected for scrutiny under CASS, and statutory notices under section 143(2) and section 142(1) were issued and served on the assessee. Vide order dated 09.09.2022 passed under section 143(3) read with section 144B of the Act, the learned Assessing Officer (“AO”) concluded the scrutiny assessment accepting the return of income filed by the assessee.
5. Subsequently, vide notice under section 263 of the Act, the learned PCIT initiated revisionary proceedings on the basis that the assessee has debited an amount of ₹ 1,30,58,706/- towards Employee Stock Option Plan (“ESOP”) expenses in its profit and loss account. As per the learned PCIT, ESOP expenses were incurred in relation to the issue of shares to employees and they are not relatable to profit and gains arising or accruing from business or trade. Thus, it was alleged that the ESOP is nothing more than expenditure related to the issue of shares, and therefore, is capital in nature. The learned PCIT alleged that the AO vide assessment order, did not carry out any enquiry on the issue of ESOP expenses debited to the profit and loss account. Therefore, to this extent, the assessment completed under section 143(3) read with section 144B of the Act on 09.09.2022 is erroneous and prejudicial to the interest of the Revenue.
In response to the notice issued under section 263 of the Act, the assessee submitted that the return filed was selected for complete scrutiny and vide notice dated 12.11.2021 issued under section 142(1) of the Act the assessee, inter alia, was asked to submit the copy of cash flow statement. It was further submitted that vide its replies dated 23.11.2021 and 05.08.2021, the assessee submitted the computation of income, audited financial statements and cash flow statement, which duly reflected the ESOP expenses incurred by the assessee, as evident from note 23 and further note 33 of the financial statement containing detailed note on the employee share-based payment. Therefore, the assessee submitted that the AO after making relevant enquiry and after considering the facts and circumstances, documents/information on record came to the valid conclusion to allow ESOP expenditure claimed by the assessee. The assessee also placed reliance upon the decision of the Hon’ble Karnataka High Court in CIT vs. Biocon Ltd., reported in 2020 121 taxman.com 351 (Kar), whereby the Hon’ble High Court upheld the decision of the Special Bench of the Tribunal allowing the claim of ESOP expenditure.
The learned PCIT, vide impugned order, disagreed with the submissions of the assessee and held that neither any notice issued under section 142(1) nor any show cause notice or submission of the assessee brought out the fact that there was any enquiry on this issue by the AO. Thus, it was held that this issue was not at all inquired by the AO and nothing on this issue is mentioned in the assessment order. On merits, the learned PCIT held that expenditure under the head ESOP by its method of calculation is notional expenditure, which is calculated as the difference between the market price and the pre- determined offer price of the share on the date of vesting of the share to the employees. Thus, the learned PCIT held that such expenditure is merely a notional expenditure and not a real expenditure as neither any liability to pay arose to the assessee nor was it the case of any loss to the assessee company. As regards the decision of the Hon’ble High Court in Biocon Ltd. (supra), the learned PCIT held that the Department has filed the Special Leave Petition against the decision, and its appeal has been admitted by the Hon’ble Supreme Court. Therefore, the learned PCIT held that the assessment order suffers from infirmity wherein the notional expenditure under the head ESOP as employee benefit expenses has been allowed without any enquiry and to this extent, the assessment order is erroneous as well as prejudicial to the interest of the revenue. Accordingly, the learned PCIT set aside the assessment order and directed the AO to pass a modified assessment order after making the proper enquiries pertaining to ESOP expenses. The relevant findings of the learned PCIT, vide impugned order, are reproduced as follows:-
“4.1 After considering facts in the assessment order, submission of the assessee in response to the 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 claim under the head Employee Benefit Expenses-Rs.1,30,58,706/- towards Employee Stock Compensation Expenses. 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. 1,30,58,706/-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 assessment order passed u/s143(3) of the Act deems it that the AO has passed the order after proper application of mind and this cannot fall under the category of erroneous order so to assume revisionary power u/s 263 of the Act. This contention of the assessee is not tenable as neither the notices u/s 142(1) or show cause notice nor the assessee's submission bring out that there was any enquiry on this issue by the AO There are several decisions of the high courts wherein no enquiry or lack of enquiry by the AO on any issue in assessment proceeding has been held fit for revision u/s263 of the Act. On merits also, the assessee has argued that the ESOP expenditure was allowable and referred to various decisions on this issue including the decision of CIT Biocon Limited 121 taxmann.com 351 (Karnataka High Court) to support its contention that difference between the market price of the shares and the offer price (at the time of grant of ESOP) amounts to discount and expenditure incurred by the assessee company is allowable. 4.2 Section 37(1) of the Act is reproduced hereunder: 37(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". Explanation 1.— For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. Explanation 2.— For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession. On the issue of claim of allowable expenses u/s. 37(1) of the Act, pertaining to ESOP, it is noted that section 37(1) of the Act allows for deduction of expenses "laid out" or "expended" wholly and exclusively for the purpose of business and such expenses are not in the nature of capital. The expenditure under the head "ESOP" by its method of calculation, is a notional expenditure, which is calculated as difference between the market price and predetermined offer price of share on the date of vesting of shares to the employees. The moot question for the expenditure to be eligible for deduction is whether there is any accrued the liability of such expenditure or actual loss to the assessee on the date of exercise of option by the employees. ESOP expenditure does not fall into either liability of payment accruing to the assessee or any loss arising to the assessee on the date of vesting of ESOP shares to the employees. Such expenditure is merely a notional expenditure and not a real expenditure as neither any liability to pay arose to the assessee nor there is a case of any loss to the assessee company. In real sense, the assessee company will receive share issue proceeds pertaining to ESOP shares set aside for employees which will be received at a strike price (predetermined price as per valuation method adopted) higher than the book value of the shares. Thus. in the year of vesting of shares to the employees, the assessee company will receive Share issue proceeds pertaining to ESOP shares and if the amount received is more than book value of shares, where is the loss to the company or where is the liability to incur any expenses under the ESOP share issue process. Even this proceeds of ESOP share issue will fall under the capital receipts category and loss, if any will be capital loss only. The so called loss on vesting shares to the employee is a notional loss only as compared to market price of the share on that date. 4.3 As regards the decision of Karnataka High Court in the case of Biocon Ltd. (supra), the Hon'ble High court held that for allowabilty of expenses u/s37(1) of the Act, there is no requirement of actual payout by the assessee as there may be a case of loss or liability to incur expenses accrued during the AY. However, as analysed in Para 4.2 above, the assessee could not show that by virtue of ESOP issued to employees, any liability to incur expenses accrued or any loss occurred. Moreover, it is pointed out that the Department has filed SLP against the said decision of Hon'ble Karnataka High Court in the case of Biocon Ltd. which has been admitted by the Hon'ble Apex Court.
In view of these facts and legal position, it is apparent that the assessment order suffers from infirmity wherein the notional expenditure under ESOP head as Employee benefit expenses has been allowed without any enquiry and to this extent, the assessment order of current assessment year 2020-21 is erroneous as well as prejudicial to the interest of revenue. Hence, the assessment order is partly set aside and the A.O is directed to pass modified assessment order by making proper enquiries pertaining to ESOP expenses as per findings given in this order. Order u/s. 263 of the Act, 1961 is passed accordingly.”
Being aggrieved, the assessee is in appeal before us.
During the hearing, the learned Authorised Representative (“learned AR”) by placing reliance upon the decision of Hon’ble Karnataka High Court in CIT vs. Biocon Ltd. (supra) submitted that the issue as regards the deductibility of ESOP expenses under section 37 of the Act is no longer res integra and has been decided in favour of the taxpayer. The learned AR further submitted that the mere admissibility of the Revenue’s appeal against the decision of the Hon’ble High Court in no way affects the finality of the decision at this moment. The learned AR also placed reliance upon the decision of the Mumbai Bench of the Tribunal in LearningMate Solutions Private Limited vs. PCIT, in order dated 31.07.2023.
From the perusal of the aforesaid decision, we find that the validity of the revisionary proceedings under section 263 of the Act initiated on a similar basis, i.e., as regards the deduction of the ESOP expenses, came up for consideration before the Co-ordinate Bench of the Tribunal. While quashing the revisional order passed under section 263 of the Act, the Co-ordinate Bench of the Tribunal observed as follows: -
“4.1 On perusal of the above, it emerges that the PCIT formed a view that the order passed by the Assessing Officer was erroneous in so far as it is prejudicial to the interest of Revenue by placing reliance on the judgment of the Hon’ble Supreme Court in the case of Indian Molasses Co. (P.) Ltd. v. CIT [1959] 37 ITR 66 (SC) and the decision of the Delhi Bench of the Tribunal in the case of Ranbaxy Laboratories Ltd. Vs. Additional Commissioner of Income Tax: [2010] 39 SOT 17 (Delhi) (URO) without appreciating that both the aforesaid decisions were considered by the Special Bench of the Tribunal in the case of Biocon Ltd. Vs. Deputy Commissioner of Income Tax – LTU, Bangalore: 2013] 35 taxmann.com 335 (Bangalore - Trib.) (SB)/[2013] 25 ITR(T) 602 (Bangalore - Trib.) (SB) while holding that the deduction under Section 37(1) of the Act is allowable for ESOP expenses. The relevant extract of the decision of Special Bench of the Tribunal reads as under: 8. We will take up these three steps one by one for consideration and decision. I. WHETHER ANY DEDUCTION OF SUCH DISCOUNT IS ALLOWABLE ? 9.1 The crux of the arguments put forth by the ld. AR is that discount under ESOP is nothing but employees cost incurred by the assessee for which deduction is warranted. On the other hand, the Revenue has set up a case that no deduction can be allowed as such discount is not only a short capital receipt but also a contingent liability. A. Is discount under ESOP a short capital receipt? 9.2.1The ld. DR stated that the question of deduction u/s 37 can arise only if the assessee incurs any expenditure, which thereafter satisfies the requisite conditions of the sub-section (1). He submitted that the word "expenditure" has been described by the Hon'ble Supreme Court in the case of Indian Molasses Co. (P.) Ltd. v. CIT [1959] 37 ITR 66 as denoting spending or paying out, i.e. something going out of the coffers of the assessee. It was put forth that by issuing shares at discounted premium, nothing is paid out by the company. Once there is no "paying out or away", the same cannot constitute an expenditure and resultantly section 37(1), which applies to only expenditure, cannot be activated. He further took pains in explaining that there is no revenue expenditure involved in the transaction of issuance of ESOP at discount. The so called 'discount' represents the difference between market price of the shares at the time of grant of options and the price at which such options are granted. Since the amount over and above the face value of the shares, being the share premium, is itself a capital receipt, any under-recovery of such share premium on account of obligation to issue shares to employees in future at a lower premium, would be a case of short capital receipt. If at all it is to be viewed in terms of expenditure, then, at best, it would be in the nature of a capital expenditure. He supported his view by relying on the order passed by the Delhi Bench of the Tribunal in Ranbaxy Laboratories Ltd. v. Addl. CIT [2010] 39 SOT 17 (URO). It was stated that the Tribunal in that case has held that since the receipt of share premium is not taxable, any short receipt of such premium on issuing options to employees will be notional loss and not actual loss for which any liability is incurred. The learned Departmental Representative contended that the Mumbai bench of the Tribunal in the case of VIP Industries v. Dy. CIT [IT Appeal No.7242 (Mum.) of 2008 has also taken similar view vide its order dated 17.09.2010.] xx xx 9.2.7 Now we espouse the second part of the submission of the ld. DR in this regard. He canvassed a view that an expenditure denotes "paying out or away" and unless the money goes out from the assessee, there can be no expenditure so as to qualify for deduction u/s 37. Sub-section (1) of the section provides that any expenditure (not being expenditure in the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". To put it differently, an expenditure must be laid out or expended wholly and exclusively for the purpose of business so as to be eligible for deduction u/s 37(1). There is absolutely no doubt that section 37(1) talks of granting deduction for an 'expenditure', and the Hon'ble Supreme Court in Indian Molasses Co. (P.) Ltd. (supra) has described 'expenditure' to mean what is 'paid out or away' and is something which has gone irretrievably. However, it is pertinent to note that this section does not restrict paying out of expenditure in cash alone. Section 43 contains the definition of certain terms relevant to income from profits of business or profession covering sections 28 to 41. Section 37 obviously falls under Chapter IV-D. Sub-section (2) of section 43 defines "paid" to mean: "actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head 'profits and gains of business or profession'." When we read the definition of the word "paid" u/s 43(2) in juxtaposition to section 37(1), the position which emerges is that it is not only paying of expenditure but also incurring of the expenditure which entails deduction u/s 37(1) subject to the fulfilment of other conditions. At this juncture, it is imperative to note that the word 'expenditure' has not been defined in the Act. However, sec. 2(h) of the Expenditure Act, 1957 defines 'expenditure' as : 'Any sum of money or money's worth spent or disbursed or for the spending or disbursing of which a liability has been incurred by an assessee……'. When section 43(2) of the Act is read in conjunction with section 37(1), the meaning of the term 'expenditure' turns out to be the same as is there in the afore quoted part of the definition under section 2(h) of the Expenditure Act, 1957, viz., not only 'paying out' but also 'incurring'. Coming back to our context, it is seen that by undertaking to issue shares at discounted premium, the company does not pay anything to its employees but incurs obligation of issuing shares at a discounted price on a future date in lieu of their services, which is nothing but an expenditure u/s 37(1) of the Act. 9.2.8 Though discount on premium is nothing but an expenditure u/s 37(1), it is worth noting that the Hon'ble Supreme Court in the case of CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254/179 Taxman 326 has gone to the extent of covering "loss" in certain circumstances within the purview of "expenditure" as used in section in 37(1). In that case, the assessee incurred additional liability due to exchange rate fluctuation on a revenue account. The Assessing Officer did not allow deduction u/s 37. When the matter finally reached the Hon'ble Supreme Court, their Lordships noticed that the word "expenditure" has not been defined in the Act. They held that : "the word "expenditure" is, therefore, required to be understood in the context in which it is used. Section 37 enjoins that any expenditure not being expenditure of the nature described in sections 30 to 36 laid out or expended wholly and exclusively for the purposes of the business should be allowed in computing the income chargeable under the head "profits and gains of business or profession". In sections 30 to 36 the expression "expenditure incurred", as well as allowance and depreciation has also been used. For example depreciation and allowances are dealt with in section 32, therefore, the parliament has used expression "any expenditure" in section 37 to cover both. Therefore, the expression "expenditure" as used in section 37 made in the circumstances of a particular case, covers an amount which is really a "loss" even though the said amount has not gone out from the pocket of the assessee'. From the above enunciation of law by the Hon'ble Summit Court, there remains no doubt whatsoever that the term 'expenditure' in certain circumstances can also encompass 'loss' even though no amount is actually paid out. Ex consequenti, the alternative argument of the ld. DR that discount on shares is 'loss' and hence can't be covered u/s 37(1), also does not hold water in the light of the above judgment. In view of the above discussion, we, with utmost respect, are unable to concur with the view taken in Ranbaxy Laboratories Ltd. (supra).”(Emphasis Supplied) 4.2. On perusal of the above it becomes clear that the reasoning given by the Ld. PCIT for forming the view that the deduction for ESOP Expenses was not allowable under Section 37(1) of the Act stands rejected by the Special Bench of the Tribunal. Further, In the case of DCIT Vs. Kotak Mahindra Bank Ltd.: 89 taxmann.com 223, relied upon by the Ld. Authorised Representative for the Appellant during the course of hearing, the Mumbai Bench of the Tribunal had made following observations while dismissing the appeal preferred by the Revenue against the order passed by CIT(A) deleting the addition of ESOP expenses made by the Assessing Officer in that case: “8. We find that the A.O while framing the assessment had specifically observed that the claim of the assessee towards entitlement of discounted premium on ESOP's as an expenditure under sec. 37(1) was though found to be in accordance with the principle laid down by the 'Special Bench' of the Tribunal in the case of Biocon Ltd. (supra), however, as the order of the 'Special Bench' of the Tribunal had not been accepted by the department and had been assailed before the Hon'ble High Court of Karnataka, therefore, the claim of the assessee as regards allowability of discounts on ESOP's could not be accepted. We are unable to persuade ourselves to subscribe to the aforesaid view of the A.O that the order of the 'Special Bench' of the Tribunal was not to be followed for the reason that an appeal had been filed by the department against the said order before the Hon'ble High Court of Karnataka. We find that it is not the case of the department that either the order of the 'Special Bench' of the Tribunal in the case of Biocon Ltd. (supra) had been set aside or the operation of the same had been stayed by the Hon'ble High Court. We are unable to comprehend that as to how the A.O despite conceding that the claim of the assessee as regards allowability of the discount of ESOP's was in accordance with the principle laid down by the 'Special Bench' of the Tribunal in the case of Biocon Ltd. (supra), could still decline to adjudicate the issue under consideration in terms with the order of the 'Special Bench'. We are seriously taken aback by the aforesaid observations of the A.O, and are of a strong conviction that as on the date on which the assessment was framed, the order of the 'Special Bench' of the Tribunal did hold the ground, therefore, he remained under a statutory obligation to have passed his order in conformity with the view taken by the 'Special Bench', which we find had also been followed by the jurisdictional Tribunal, viz. ITAT, Mumbai in the case of Mahindra and Mahindra Ltd. (supra). We are afraid that the conduct of the A.O in declining to follow the order of the 'Special Bench' of the Tribunal in the case of Biocon Ltd. (supra), which as observed by us had neither been set aside or stayed by the Hon'ble High Court has to be deprecated. We find that the Ld. CIT (A) duly appreciating the serious infirmity in the order of the A.O, therein going by the principle of judicial discipline had set aside the order of the A.O by observing that the issue under consideration was covered by the order of the 'Special Bench' of the Tribunal in the case of Biocon Ltd. (supra). We find that the department had assailed the order of the CIT (A) before us for the reason that the latter had erred in directing the A.O to follow the order of the 'Special Bench' of the Tribunal in the case of Biocon Ltd. (supra). We would not hesitate to observe that it is absolutely beyond our comprehension that as to how the department could be aggrieved with the order of the Ld. CIT (A) who had set aside the observations of the A.O which were palpably found to be in serious contradiction of the order of the 'Special Bench' of the Tribunal in the case of Biocon Ltd. (supra). We may herein clarify that neither anything has been placed on record nor averred before us which could persuade us to conclude that the order of the 'Special Bench' of the Tribunal in the case of Biocon Ltd. (supra) had either been stayed or set aside by the Hon'ble High Court of Karnataka, or a view taken by the 'Special Bench' no more holds the ground on account of a contrary view taken by any other High Court. We thus in the backdrop of our aforesaid observations are unable to persuade ourselves to accept the ground of appeal raised by the revenue before us, therefore, finding no infirmity in the well reasoned order of the CIT (A), uphold the same.
9. The appeal of the revenue is dismissed in terms of our aforesaid observations. 4.3. In view of the above decision of the Tribunal, we hold that the order passed by the Assessing Officer cannot be regarded as erroneous or prejudicial to the interest of the Revenue. Further, in any case, it cannot be denied that the view taken by the Assessing Officer was a plausible view and therefore, the Ld. PCIT would not be justified in exercising powers of revision under Section 263 of the Act. We also note that the Ld. PCIT was cognizant of the fact that the decision of the Special Bench of the Tribunal in the case of Biocon Limited (supra) has been confirmed by the Hon‟ble High Court of Karnataka vide judgment dated 11/11/2020 passed in IT Appeal No. 653 Of 2013 reported in [2020] 121 taxmann.com 351 (Karnataka)/[2021]; and the issue is now pending the Hon‟ble Supreme Court. Despite that, the Ld. PCIT had, possibly to keep the issue alive, exercised the powers of revision under Section 263 of the Act by invoking provision of Explanation 2 to Section 263(1) of the Act to contend that the claim for ESOP expenses has been allowed without proper enquiry/verification by the Assessing Officer. In this regard, we note that, firstly, all the relevant facts were already on record and therefore, the question of further enquiry/verification did not arise. Secondly, on perusal of contents of the notice under Section 263(1) of the Act, as reproduced in paragraph 2 of the order impugned, we find that the Ld. PCIT had issued notice under Section 263(1) of the Act on forming a view that proper inquiry/verification as warranted in the facts and circumstances of the case - which falls within the ambit of Explanation 2(a) to Section 263(1) of the Act, was not conducted. Therefore, in our view, the Assessment Order cannot be set aside on the ground that the same has been passed allowing deduction under Section 37(1) of the Act without inquiring into the claim - which falls within the ambit of Explanation 2(b) to Section 263(1) of the Act without confronting the Appellant. For this reason also the order passed by the Ld. PCIT cannot be sustained. 4.4. In view of the above, the order, dated 17/03/2023, passed by the Ld. PCIT is under Section 263 of the Act is set aside and the Assessment Order, dated 28/01/2021, passed under Section 143(3) read with Sections 143(3A) & 143(3B) of the Act is reinstated.”
During the hearing, the Revenue, apart from vehemently relying upon the impugned order, could not bring any material on record to deviate from the findings as rendered by the Co-ordinate Bench in the aforesaid decision. Therefore, respectfully following the decision of the Co-ordinate Bench of the Tribunal, which has been rendered in similar factual matrix, the impugned order passed by the learned PCIT under section 263 of the Act is quashed and assessment order passed under section 143(3) read with section 144B of the Act is reinstated. Accordingly, the grounds raised by the assessee are allowed.
In the result, the appeal by the assessee is allowed. Order pronounced in the open Court on 09/07/2025