ICICI SECURITIES LIMITED,MUMBAI vs. PRINCIPAL COMMISSIONER OF INCOME TAX, MUMBAI -4, MUMBAI

Based on the aforesaid proposal of the Assessing Officer, a show-cause notice under section 263 of the Act was issued to the assessee, alleging that the assessment order had been passed without making requisite enquiries or verifications in respect of the above issues and that the expenditures in question were not allowable either under section 37(1) of the Act or, in the case of interest, under section 36(1)(iii). In response, the assessee furnished detailed submissions on each and every issue, which have been reproduced in the impugned order from pages 4 to 33.

We have heard the rival submissions at length, perused the material placed on record, and carefully examined the impugned order. In substance, the central allegation of the learned Principal Commissioner across all issues is that the Assessing Officer failed to make adequate enquiries, thereby rendering the assessment order erroneous and prejudicial to the interests of the Revenue within the meaning of section 263 of the Act.

Before us, the learned counsel for the assessee submitted that each of the issues sought to be revised had been specifically examined by the Assessing Officer during the course of assessment proceedings; that detailed replies along with documentary evidence were furnished; and that the Assessing Officer, after due consideration, had taken a plausible and legally sustainable view. It was further submitted that even during the revisionary proceedings, voluminous submissions were filed, copies of which form part of the paper book placed before us. Club Expenses 9. From the tax audit report, it is noted that the assessee had incurred an amount of ₹40,23,516/- under the head ICICI Securities Limited “club expenses”, comprising primarily of club membership fees and subscription charges. According to the learned Principal Commissioner, such expenditure could not be regarded as having been incurred wholly and exclusively for the purposes of business and, therefore, was not allowable under section 37(1) of the Act. It was further alleged that the Assessing Officer had allowed the said expenditure without conducting any meaningful enquiry into the nature and purpose thereof.

Before the learned Principal Commissioner, the assessee had categorically submitted that this issue was no longer res integra and stood squarely covered by binding judicial precedents. It was explained that the expenditure had been incurred towards corporate membership of various clubs, obtained in the name of the company, and was intended to facilitate business meetings, professional networking, and business development. It was also emphasised that there was no element of personal expenditure or private benefit accruing to any individual employee.

On a careful consideration of the facts and the legal position, it is evident that the expenditure in question relates to corporate club membership obtained for business purposes and does not partake the character of personal expenditure. The allowability of such expenditure is now well-settled by authoritative pronouncements of the Hon’ble Supreme Court as well as the Hon’ble jurisdictional High Court. In view of these binding precedents, the Assessing Officer’s action in allowing the expenditure cannot be regarded as erroneous or unsustainable in law.

Therefore, on this issue, the learned Principal Commissioner was not justified in invoking the revisionary ICICI Securities Limited jurisdiction under section 263 of the Act. The revision on this count is accordingly set aside. ESOP Expenses of ₹12,65,00,000/- 15. The next issue pertains to the revision of allowance of Employee Stock Option Plan (ESOP) expenditure. The brief facts, as emanating from the record, are that the assessee had formulated ESOP schemes in accordance with the Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999, as well as the Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014, as amended from time to time. Under these schemes, options were granted to eligible employees of the assessee, each option being convertible into one fully paid-up equity share of ₹5 each upon exercise.

It is also an admitted fact that the parent company of the assessee, namely ICICI Bank Limited, had granted ESOPs to eligible employees of the assessee under its own ESOP scheme. Typically, the exercise period under these schemes extended up to five years from the date of vesting, and the options were non-transferable, vesting in a staggered manner subject to fulfilment of prescribed vesting conditions. The primary object of these schemes was to attract, motivate, retain, and appropriately reward employees for their contribution to the growth and performance of the organisation.

During the relevant previous year, the assessee debited a total ESOP expenditure of ₹12,64,77,536/- to its statement of profit and loss, computed in accordance with Indian Accounting Standard (Ind AS) 102 on “Share-based Payment”, following the fair value method. Out of this amount, a sum of ₹8,75,08,053/- pertained to ESOPs granted by the parent bank, while the balance amount of ₹3,89,69,483/- related to the ESOP scheme of the assessee company itself.

While computing the total income, the assessee suo motu disallowed the amount of ₹8,75,08,053/- in the computation of income, as reflected in Schedule BP, and claimed deduction under section 37 of the Act in respect of the balance amount of ₹3,89,69,483/-. The learned Principal Commissioner, however, proceeded on the premise that the ESOP expenditure represented a merely notional charge without any real outflow or accrued liability and that the Assessing Officer had allowed the claim without examination.

The assessee, in response, submitted that the learned Principal Commissioner had completely overlooked the factual matrix, including the partial disallowance already made by ICICI Securities Limited the assessee, as well as the settled judicial position recognising ESOP expenditure as an allowable business expenditure. It was contended that the learned Principal Commissioner had mechanically proceeded on the basis of the audit memo and the proposal of the Assessing Officer, without independently applying his mind to the detailed submissions and supporting material placed on record.

It was further submitted that the allowability of ESOP expenditure under section 37(1) now stands conclusively settled by the judgment of the Hon’ble Karnataka High Court in CIT v. Biocon Ltd. (2021) 430 ITR 151, as well as by the judgments of the Hon’ble Delhi High Court in CIT v. Lemon Tree Hotels Ltd. and CIT v. New Delhi Television Ltd., apart from a series of consistent decisions of various coordinate benches of the Tribunal.

On a careful appraisal of the facts and the legal position, it is evident that the assessee had incurred ESOP expenditure in the course of its business, in accordance with statutory regulations and accounting standards, and that such expenditure had a direct nexus with employee compensation and retention. The fact that a portion of the expenditure had already been disallowed by the assessee itself further demonstrates due compliance and application of mind.

In view of the settled judicial position recognising ESOP expenditure as an allowable business expenditure, the Assessing Officer’s action in allowing the claim cannot be regarded as erroneous or prejudicial to the interests of the ICICI Securities Limited Revenue. The learned Principal Commissioner, therefore, exceeded the permissible limits of section 263 in setting aside the assessment on this issue. Deduction under section 80G amounting to ₹7,22,00,000/- (CSR Expenditure) 24. The next issue for consideration relates to the deduction claimed by the assessee under section 80G of the Act amounting to ₹7,22,00,000/-, being donations made during the year which also formed part of the Corporate Social Responsibility expenditure under section 135 of the Companies Act, 2013. The learned Principal Commissioner, while invoking revisionary jurisdiction, held that since the expenditure incurred towards CSR was mandatory in nature, it lacked the essential attribute of voluntariness and, therefore, could not qualify as a “donation” eligible for deduction under section 80G of the Act.

According to the learned Principal Commissioner, the Assessing Officer had failed to examine the interplay between Explanation 2 to section 37(1) and the provisions of section 80G, and had mechanically allowed the claim without proper verification. On this premise, it was concluded that the assessment order was erroneous and prejudicial to the interests of the Revenue.

Before the learned Principal Commissioner, the assessee had categorically submitted that it had already disallowed the entire CSR expenditure while computing business income under section 37(1) of the Act, in compliance with ICICI Securities Limited Explanation 2 thereto. It was further submitted that the deduction claimed under section 80G was not from business income, but from the gross total income under Chapter VIA, which operates in a distinct statutory field. The assessee also placed on record donation certificates evidencing that the donations were made to institutions duly approved and notified under section 80G of the Act.

The assessee contended that there is no statutory prohibition under section 80G which mandates that a donation must necessarily be voluntary in the sense contended by the Revenue. It was further submitted that wherever the legislature intended to exclude CSR-related donations from the ambit of section 80G, it has done so explicitly, as in clauses (iihk) and (iiihl) of section 80G(2)(a), pertaining to contributions to Swachh Bharat Kosh and Clean Ganga Fund. Admittedly, the assessee’s claim did not fall within these excluded categories.

At this juncture, it is relevant to note that this precise controversy namely, the allowability of deduction under section 80G in respect of donations made out of CSR expenditure after disallowance under section 37(1) now stands squarely covered by a series of decisions of coordinate benches of the Tribunal. The issue has been examined in detail and discussed threadbare in those decisions.

This issue stands covered by the following decision(s) of the Tribunal, wherein the matter has been discussed threadbare. The relevant observations are as under:-

This clarification being issued by the Ministry of Corporate Affairs, Government of India clarifies that donation covered under CSR Expenses which not are eligible for the deduction under section 80G of the Income-tax Act, 1961, but are allowed under different sections. Ergo, there is nothing that if any expenditure is disallowable u/s 37 the same cannot be allowed under other provisions of Act, if the conditions of allowability are satisfied. Thus, allowing the claim of deduction u/s.80G by the ld. AO cannot be held to be unsustainable in law or amounts to erroneous and prejudicial to the interest of the Revenue. Thus order of the Ld. PCIT is reversed on this point.

Thus, we hold that ld. PCIT is not correct in law in cancelling the assessment order by the ld. AO on this issue. Accordingly, the order of the ld. PCIT is quashed. Consequently, the appeal of the assessee is allowed.

The principles flowing from the aforesaid decision apply on all fours to the present case. The assessee has duly placed on record donation certificates, established that the donees were notified institutions under section 80G, and significantly, it is not even the case of the Revenue that the claim falls within the statutory exclusions carved out in clauses (iihk) and (iiihl) of section 80G(2)(a).

Therefore, the order passed by the Assessing Officer cannot be said to be erroneous or prejudicial to the interests of the Revenue. The learned PCIT has merely substituted his own opinion in place of that taken by the Assessing Officer, which is not permissible under section 263.”

Respectfully following the binding judicial position emanating from the aforesaid decisions, and applying the same to the facts of the present case, it is evident that once the assessee has disallowed CSR expenditure under section 37(1), there is no embargo in law on claiming deduction under section 80G, provided the statutory conditions thereof are satisfied. The Assessing Officer, having examined the claim and allowed the deduction, had taken a plausible and legally sustainable view.

In such circumstances, the learned Principal Commissioner could not have invoked section 263 merely because he held a different opinion on the matter. Substitution of one plausible view by another is impermissible in revisionary proceedings. Accordingly, on this issue also, the assumption of jurisdiction under section 263 is held to be unsustainable. Penalties paid to Stock Exchange amounting to ₹64,64,367/- ICICI Securities Limited 32. The next issue pertains to the allowability of expenditure incurred by the assessee towards penalties paid to the stock exchange amounting to ₹64,64,367/-. The learned Principal Commissioner observed that the Assessing Officer had allowed the said expenditure without examining whether it was hit by Explanation 1 to section 37(1) of the Act, which disallows expenditure incurred for any purpose which is an offence or which is prohibited by law.

It was noted by the learned Principal Commissioner that the tax auditor had reported the said amount under the head “expenditure by way of any other penalty or fine” in Form 3CD, and that the Assessing Officer had failed to enquire into the true nature of the payments so made.

Before the learned Principal Commissioner as well as before us, the assessee submitted that mere reporting of an amount as “penalty” in the tax audit report is only a disclosure requirement and cannot, by itself, lead to the conclusion that the expenditure is hit by Explanation 1 to section 37(1). It was submitted that the nature of the levy and the context in which it is imposed must be examined to determine its allowability.

It was explained that out of the total amount of ₹64,64,367/-, a sum of ₹35,95,617/- pertained to charges levied by the stock exchange during the financial year on account of bad delivery/short delivery, late reporting, security deposit shortages, fund shortages, client code modification, and shortfall of margin money, as per various circulars issued ICICI Securities Limited by the National Stock Exchange. The balance amount of ₹28,68,750/- was paid pursuant to a settlement order passed by the Securities and Exchange Board of India under section 15JB of the SEBI Act, 1992.

The assessee further placed reliance on the relevant SEBI and stock exchange circulars, clarifying that such charges are regulatory and compensatory in nature, intended to streamline compliance and discipline in the functioning of the market, and are not punitive in the sense of being imposed for an offence or an act prohibited by law.

The relevant extract of the stock exchange circular, explaining the nature of such penalties and disciplinary actions, has been reproduced in the original draft and demonstrates that the charges levied depend upon the frequency and gravity of the violation and are designed to ensure adherence to compliance requirements.

Upon a careful consideration of the material on record, it is evident that the penalties in question are not statutory penalties imposed for violation of law, but are in the nature of compensatory charges levied for operational and procedural lapses under the bye-laws and regulations of the stock exchange. Such payments do not fall within the mischief of Explanation 1 to section 37(1).

The distinction between expenditure incurred for an offence or for a purpose prohibited by law, and expenditure incurred in the ordinary course of business for regulatory non-compliances of a technical or procedural nature, is well ICICI Securities Limited recognised in law. The latter category of expenditure has consistently been held to be allowable.

In this context, reliance placed by the assessee on judicial precedents, including the decision of the Hon’ble Karnataka High Court in J.K. Panthaki & Co. v. ITO (2012) 344 ITR 329, clearly brings out the scope and ambit of Explanation 1 to section 37(1) and supports the assessee’s case.

It is also an undisputed fact that in the assessee’s own case for an earlier assessment year, the Tribunal has held that penalties levied by the stock exchange on account of similar operational lapses are allowable as business expenditure. The Assessing Officer, by allowing the claim, had thus followed a consistent view.

In view of the above factual and legal position, it cannot be said that the Assessing Officer committed any error in allowing the expenditure, much less an error prejudicial to the interests of the Revenue. The learned Principal Commissioner was, therefore, not justified in invoking revisionary jurisdiction on this issue. Disallowance of Interest Expenditure of ₹26,45,160/- under section 36(1)(iii) 43. The last issue which arises for consideration pertains to the disallowance of interest expenditure amounting to ₹26,45,160/- under section 36(1)(iii) of the Act, which the learned Principal Commissioner held to be relatable to capital ICICI Securities Limited work-in-progress (CWIP) and, therefore, liable to be capitalised.

The learned Principal Commissioner, in the impugned order, observed that the Assessing Officer had failed to verify the utilisation of borrowed funds and their nexus with assets under CWIP. Invoking the proviso to section 36(1)(iii), it was held that interest attributable to acquisition of assets not yet put to use could not be allowed as a revenue deduction.

Per contra, the assessee consistently maintained that the borrowed funds were utilised entirely for regular business purposes and not for acquisition of capital assets or for CWIP. In support of this contention, detailed submissions along with supporting documents were placed on record before the learned Principal Commissioner and also before us, forming part of the paper book.

From the material placed on record, it is evident that the amounts reflected under CWIP broadly pertain to advances paid to vendors for software, vehicles, leasehold improvements, and laptops, which were not in a “ready-to- use” condition during the relevant financial year. It is also an undisputed fact that no depreciation was charged on CWIP either in the books of account or claimed in the return of income.

It has further been explained that once the relevant assets are ready for use, the corresponding amounts are transferred from the CWIP account to the appropriate head under Property, Plant and Equipment or Intangible Assets, ICICI Securities Limited and depreciation is thereafter claimed in accordance with law. These assets are ultimately utilised wholly for the purposes of the assessee’s business.

As directed during the course of hearing, the assessee furnished a detailed statement giving date-wise capitalisation of advances from the CWIP account as on 31.03.2020. From a perusal of the same, it is seen that the statement sets out the closing balance, date of capitalisation, amount capitalised, nature of work, and asset type, thereby clearly establishing that capitalisation occurred only when the assets became ready for use.

The assessee further demonstrated that during the relevant previous year, borrowings were raised by way of issuance of commercial papers, which were utilised exclusively for business purposes such as trade funding for clients, placement of fixed deposits as margin with the stock exchange, and meeting working capital requirements. It was categorically stated, and substantiated through sample offer letters of commercial papers, that none of the borrowings were raised for acquisition of fixed assets or for funding CWIP.

It is also material to note that the commercial papers issued by the assessee were of a short-term nature, with maturities ranging between 7 to 365 days. Such short-term borrowings, by their very nature, are inconsistent with financing acquisition of capital assets or long-term projects. Apart from commercial papers, the assessee did not have any other borrowings during the year.

However, while computing the total income, the assessee reversed the entire impact of Ind AS adjustments, including the interest component on lease liabilities, and disallowed the same in the computation of income. It was also pointed out that no depreciation was claimed on ROU assets. Thus, the Ind AS-related accounting entries had no bearing on the allowability of interest under section 36(1)(iii).

From the cumulative appreciation of the above facts, it clearly emerges that the interest expenditure in question was incurred wholly in relation to general business borrowings and not for acquisition of capital assets or for CWIP. There is no material on record to establish any direct or indirect nexus between the borrowings and the CWIP.

In the absence of such nexus, the proviso to section 36(1)(iii) has no application. The Assessing Officer, having examined the nature of borrowings and their utilisation, was justified in allowing the interest expenditure as a revenue deduction.

In these circumstances, the assessment order cannot be said to be erroneous or prejudicial to the interests of the Revenue on this issue. The assumption of revisionary jurisdiction under section 263 is, therefore, unsustainable even on this count.

On an overall consideration of the facts and the legal position governing the scope of section 263 of the Act, it is evident that in respect of each of the issues sought to be revised, the Assessing Officer had either conducted enquiries and taken a plausible view, or the view adopted was squarely supported by binding judicial precedents.

It is trite law that where two views are possible and the Assessing Officer has adopted one such view, the same cannot be branded as erroneous merely because the Principal Commissioner prefers another view. The revisionary jurisdiction under section 263 cannot be invoked to substitute the subjective satisfaction of the revisional authority in place of a legally tenable view taken by the Assessing Officer.

In the present case, the learned Principal Commissioner has not demonstrated any error of law or fact in the assessment order which could be said to be prejudicial to the ICICI Securities Limited interests of the Revenue. The impugned order has been passed primarily on the premise of alleged inadequacy of enquiry, without establishing that the assessment order suffered from any inherent infirmity.

Accordingly, the impugned order passed by the learned Principal Commissioner under section 263 of the Act is set aside on all issues.

In the result, the appeal filed by the assessee is allowed.