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Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
Before: SHRI ABY T. VARKEY, JM & SHRI S. RIFAUR RAHMAN, AM
O R D E R
PER ABY T. VARKEY, JM:
This is an appeal preferred by the assessee against the action of the Ld. Principal Commissioner of Income Tax-3, Mumbai dated 07.03.2022 for assessment year 2017-18 passed under section 263 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”).
The grounds of appeal
of the assessee are as under: -
1. On the facts and circumstances of the case and in law, the Learned Principal Commissioner of Income-Tax (Central) - 3, Mumbai (“the PCIT”) erred in invoking the provisions of section 263 of the Act and directing setting aside of the assessment order passed under section 143(3) of the Act by the Assistant Commissioner of Income Tax, Circle 11(1)(1), Mumbai (“the AO”) dated 3.4.2019 on the alleged ground that the said assessment order was erroneous and prejudicial to the interest of the revenue.
2 A.Y. 2017-18 Invesco Asset Management India 2. The learned PCIT erred in invoking the provisions of section 263 of the Act without specifying as to how the prejudice is caused to the Revenue in as much as it is not pointed out as to where the order of the Assessing Officer is erroneous in law and therefore how the interest of the Revenue is affected adversely. The Appellant prays that it be held that the action of the Learned PCIT in invoking provisions of section 263 of the Act and directing the AO to pass a fresh assessment order be held to be ab-initio and/or otherwise void and bad in law. WITHOUT PREJUDICE TO GROUND NO.1: GROUND NO. II: ISSUE OF CLAIM OF ESOP EXPENSES 3. On the facts and in the circumstances of the case and in law, the learned PCIT erred in setting aside the assessment order passed under section 143(3) of the Act by the AO in respect of issue of allowability of claim of ESOP expenses of Rs.11,30,93,503. The Appellant prays that in the facts and in the circumstances of the case, there is no reason for setting aside the assessment order on this count and that the order of the Assessing Officer is neither erroneous nor prejudicial to the interest of the Revenue and the action of the Learned PCIT in invoking provisions of section 263 of the Act and directing the AO to pass a fresh assessment order is ab-initio and/or otherwise void and bad in law.
4. On the facts and in the circumstances of the case and in law, the learned PCIT erred in setting aside the assessment order passed u/s. 143(3) of the Act on the grounds of non-verification by the Assessing Officer of allowability of ESOP expenses of Rs.11,30,93,503 by holding that the appellant’s case was selected for ‘complete scrutiny” and that the Assessing Officer ought to have verified the issue of allowability of ESOP expenses inspite of the fact that the appellant’s case was selected “limited scrutiny” under CASS and that verification 3 A.Y. 2017-18 Invesco Asset Management India of ESOP expenses of Rs.11,30,93,503 was not one of the CASS reasons. The appellant prays that it be held that the appellant’s case was selected for “limited scrutiny” and the action of the learned PCIT in setting aside the assessment made u/s.143(3) on the grounds that the Assessing Officer ought to have conducted inquiries on the allowability of ESOP expenses is incorrect and bad-in-law.
5. On the facts and in the circumstances of the case and in law, the learned PCIT erred in setting aside the assessment order passed u/s.143(3) of the Act on the issue of allowability of ESOP expenses even after accepting and acknowledging that the said issue is a debatable issue having judicial precedents in favour of the assessee as well as Income Tax department. The appellant prays that it be held that the issues which are contentious, debatable and on which two views are possible are outside the scope of revisionary proceedings u/s.263 of the Income Tax Act and therefore the order u/s.263 passed by the PCIT ought to be quashed.
On the facts and in the circumstances of the case and in law, the learned PCIT erred in holding that the Assessing Officer has failed to apply his mind on issue of claim of ESOP expenses on all perspectives and therefore there was consequential loss of revenue. The appellant prays that it be held that the action of PCIT in setting aside the assessment u/s.143(3) on the grounds that the Assessing Officer has not conducted any inquiry on the issue of ESOP expenses is incorrect and that there is no loss of revenue on this account. GROUND NO. lll: GENERAL: 7. Your appellant craves leaves to add to, alter, amend or vary all or any of the aforesaid ground of appeal as they/their representative may deem fit.”
4 A.Y. 2017-18 Invesco Asset Management India
From a perusal of the aforesaid ground of appeal of the assessee, it is noted that the assessee by raising the ground no. 1 has challenged the action of the Ld. PCIT to have invoked revisional jurisdiction u/s 263 of the Act without satisfying the condition precedent (i.e, that the AO’s action was erroneous as well as prejudicial to the revenue) as stipulated u/s 263 of the Income Tax Act,1961 (herein after “the Act”).
Brief facts of the case is that the assessee had filed return of income declaring loss of Rs.16,81,60,356/- on 30.11.2017. The AO notes that the case was selected for limited scrutiny under CASS and while doing the scrutiny of the assessment, he noticed that the assessee company is engaged in the business of Asset Management and Investment advisory services and after issuing statutory notices u/s 143(2) as well as questionnaire u/s 142(1) of the Act dated 06.02.2019 and 26.02.2019 and having gone through the in response, of the assessee wherein it had filed various details and submission, which was acknowledged by AO to have been considered by him, the AO accepted the return income (loss of Rs.16,81,60,356/-) by order dated 31.03.2019. The Ld. PCIT had found fault with the action of the AO on the following reasons: - “The assessee debited an amount of RS. 77,30,93,503/- on account of Employee share Based Expenses (ESBE). In Note 2.10 of the Annual accounts, it has been mentioned that the Company Issues Restricted Stock Units (RSUs) convertible into shares of the parent company, 5 A.Y. 2017-18 Invesco Asset Management India Invesco Ltd. (listed on New Your Stock Exchange, NYSE) to eligible employees in accordance with the terms of vanous Global Equity Incentive Plans (GEIP). The assessee company allows its employees to purchase share of the parent company, Invesco Ltd. at a discount of 15% to the market value and in accordance with the terms and conditions prescribed under the Employee Stock Purchase Plan (ESPP) The ESBe expenses were thus liabilities which were contingent in nature and payable only on fulfilment of certain conditions and needed to be disallowed. ESBs/ESOP expenses debited to P & L are notional in nature since the assessee had neither laid out or expended any - ount while choosing to receive lesser securities premium. The Assessing Officer was required to examine/enquire into this aspect and disallow the ESBs/ESOP debited to profit and loss account However, no such examination or disallowance made. The failure of the Assessing Officer to make the enquiries which were warranted under the provisions of law and failure to disallow the prima facie claim of expenses of contingent and notional nature have rendered the assessment order dt 03.04.2019 erroneous in so far it is prejudicial to the interest of revenue.”
And after hearing the assessee’s reply to the aforesaid reasons which has been reproduced by Ld. PCIT at page 2 to 9 of the impugned order, the Ld. PCIT observed that from examination of the assessment records it came to his notice that the assessee’s case was not selected for “limited scrutiny” but it was a case of complete scrutiny, and the AO has wrongly mentioned that the assessee’s case was selected for “limited scrutiny assessment”. According to the Ld. PCIT, the fact that the return of income filed by the assessee has been 6 A.Y. 2017-18 Invesco Asset Management India selected for complete scrutiny was in the knowledge of the assessee because the Ld.AR of the assessee has initialed to that effect in the order-sheet which endorses that the assessee’s case was selected for complete scrutiny. Therefore, the Ld. PCIT repelled the contentions of the assessee that its case was selected only for limited scrutiny and therefore the Ld. PCIT could not have racked up a new issue by invoking the jurisdiction u/s 263 of the Act. Thereafter, the Ld. PCIT has noted that the AO did not examine this issue of debiting an amount of Rs.11,30,93,503/- on account of Employees Share based Expenses (ESBE) and took note of Note 2.10 of the Annual Accounts, wherein it has been mentioned that the assessee company had issued Restricted Stock Units (RSUs) convertible into shares of the parent company viz, [M/s. Invesco Ltd. listed at New Your Stock Exchange, NYSE] to eligible employees in accordance with the terms of various Global Equity Incentive Plans (GEIP). The Ld. PCIT noted that assessee company had allowed its employees to purchase shares of the parent company (M/s Invesco Ltd) at a discount of 15% than the market value and in accordance with the terms and conditions prescribed under the Employees Stock Purchase Plan (ESPP). According to the Ld. PCIT, these expenses (ESBE) were thus liabilities which were contingent in nature and payable only on fulfilment of certain conditions and needed to be disallowed. Accordingly the Ld. PCIT was of the opinion that ESBE/ESOP expenses which were debited to profit & loss account are notional in nature since the assessee had neither laid out or expended any amount while choosing to receive lesser securities premium. And since the AO did not examine/enquire into this aspect at all on the 7 A.Y. 2017-18 Invesco Asset Management India mistaken belief that it was for limited scrutiny, according to the Ld. PCIT, the AO failed to inquire into the issue, therefore, clause (1) to Explanation to Section 263 of the Act (Amended by Finance Act, 2015 w.e. f. 01.06.2015) i.e, the deeming fiction gets attracted (if an order is passed without making inquiry and verification by the AO then it is deemed to be erroneous insofar as its prejudicial to the interest of the revenue). And therefore he set aside the order of the AO and directed him to pass a fresh assessment order on the issue of ESOP expenditure. Aggrieved the assessee is before us.
We have heard both the parties and perused the records. Since 6. the assessee has challenged the jurisdiction of the Ld. PCIT to pass the impugned order, let us first examine the scope of revisional jurisdiction u/s. 263 of the Act. For that, let us take the guidance of judicial precedence laid down by the Hon'ble Apex Court in Malabar Industries Ltd. vs. CIT [2000] 243 ITR 83(SC) wherein their Lordship have held that twin conditions should be satisfied before jurisdiction u/s 263 of the Act is exercised by the ld. CIT. The twin conditions which need to be satisfied are that (i) the order of the Assessing Officer must be erroneous and (ii) as a consequence of passing an erroneous order, prejudice is caused to the interest of the Revenue. In the following circumstances, the order of the AO can be held to be erroneous i.e. (i) if the Assessing Officer's order was passed on assumption of incorrect facts; or assumption of incorrect law; (ii) Assessing Officer's order is in violation of the principles of natural 8 A.Y. 2017-18 Invesco Asset Management India justice; (iii) if the AO's order is passed without application of mind; or (iv) if the AO has not investigated the issue before him. In the circumstances enumerated above the order passed by the Assessing Officer can be termed as erroneous for the purpose of section 263 of the Act. It has to be borne in mind that even if the Ld. PCIT/CIT finds that the assessment order is erroneous, he cannot invoke the revisional jurisdiction u/s 263 of the Act without satisfying the requirement of second limb [i.e. the Ld. PCIT/CIT has to show that due to the erroneous assessment order, prejudice has been caused to the interest of revenue]. This essential requirement of law needs to be satisfied before the Ld PCIT/CIT invokes revisional jurisdiction. This proposition of law has been laid down by the Hon'ble Supreme Court in the case of Malabar Industries (supra) wherein their Lordship’s held that this phrase i.e. "prejudicial to the interest of the revenue'' has to be read in conjunction with an "erroneous" order passed by the Assessing Officer. Further the Hon’ble Supreme Court held ‘that for invoking powers conferred by section 263 of the Act, the CIT should not only show that the AO's order is erroneous as a result of any of the situations enumerated above but CIT must also further show that as a result of an erroneous order, some loss is caused to the interest of the revenue’. At this juncture, one has to understand what is prejudicial to the interest of revenue. Their Lordship explaining about this in the said judgment (Malabar supra) held that every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as 9 A.Y. 2017-18 Invesco Asset Management India prejudicial to the interest of the revenue. It was further held that when the Assessing Officer adopts one of the course permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the Ld. CIT does not agree, it cannot be treated as an order prejudicial to the interest of the revenue unless the view taken by the Assessing Officer is unsustainable in law.
When tested on the aforesaid judicial precedent, we note that the AO while assessing the income of the assessee was duty bound to discharge the dual role of investigator as well as that adjudicator. If he fails in carrying out any of this duty, the order of the AO would be erroneous. In this case, we note that the AO has recorded in assessment order that the assessee’s case was selected for limited scrutiny (as recorded by AO in the first paragraph of assessment order dated 31.03.2019) though the return of assessee was selected for complete scrutiny; and the AO did not carry out any inquiry into the claim of the assessee in respect of debit of Rs.11.30,93,503/- on account of Employees Share Based Expenses (ESBE). Since no inquiry was done by, the AO about this debit claimed by the assessee; and such a finding of fact by Ld. PCIT stands undisputed (since Ld.AR could not bring on record any evidence that inquiry was done by AO on this issue), the AO’s omission not to inquire on this issue attracts the deeming fiction as per the clause (a) to Explanation to Section 263 of the Act to the effect that if AO has not made inquiry on an issue then it shall be deemed to be erroneous insofar as its prejudicial to the 10 A.Y. 2017-18 Invesco Asset Management India interest of the revenue. In the light of the undisputed fact that the AO has not made any inquiry on the issue of expenditure claimed by the assessee to the tune of Rs.11.30 crores on (ESOP), the deeming fiction as per clause (a) to Explanation to Section 263 of the Act is attracted and the Ld. PCIT has rightly invoked the revisional jurisdiction. And therefore, we dismiss the appeal of the assessee.
Before we part, we note from the submission of Ld. AR, that the issue of debiting the amount of Rs.11,30,93,503/- was disclosed at Note 23 of the Annual Account, so according to Ld. AR when all the relevant facts regarding ESBE has been clearly disclosed in the ROI and in the audited financial, the AO must be presumed to have enquired into the same. However, we cannot accept such a contention because first of all assessee’s return was selected for complete scrutiny and mere disclosure in the financial’s cannot be construed as inquiry carried out by the AO on the disclosure as contented by assessee and the Judicial Precedents cited are not relevant to revisional proceedings u/s 263 of the Act and are clearly distinguishable and not supporting the case of assessee on the facts discussed, so there is no merit in this contention raised by the assessee and so, rejected. 9. In the result, the appeal of the assessee is dismissed. Order pronounced in the open court on this 30/11/2022. (S. RIFAUR RAHMAN) JUDICIAL MEMBER Mumbai; Dated 30/11/2022. Vijay Pal Singh, (Sr. PS)