LARSEN & TOUBRO INFOTECH LTD.,MUMBAI vs. PRINCIPAL COMMISSIONER OF INCOME TAX -2, MUMBAI

This appeal by assessee under section 253 of Income Tax Act is directed against the order of Principle Commissioner of Income Tax-2 ( ld. PCIT) dated 8th February 2016 for Assessment Year 2009-10. The assessee has raised the following ground of appeal: (i) On the facts and in the circumstances of the case and in law, learned PCIT erred in holding that order passed under section 143(3) of Income Tax Act on 15th January 2014 is erroneous and prejudicial to the interest of revenue on account of allowance of amortisation of ESOP expenses of Rs. 6,16,09,455/-. (ii) Without prejudice to the ground No.1, on the fact and in the circumstances of the case and in law, learned PCIT erred in holding that amortisation of ESOP expenses is a notional loss on account of shortlisted of share premium and hence it is not allowable as expenses under section 37(1) of the Income Tax Act.

Brief facts of the case are that assessee company is engaged in the business of software development, filed its return of income for assessment year 2009-10 on 26th September 2010 declaring taxable income of Rs. 30,25,87,218/-. The return of income was accompanied by the tax audit report, audited accounts and report under section 92 E (in Form 3CEB). The return of income was selected for scrutiny. The assessing officer while passing assessment order made transfer pricing adjustment and addition /disallowance under section 10A in the assessment order passed under section 143(3) on 15 January 2014. The assessment order was revised by learned PCIT vide its order dated 8th February 2016.

The notice under section 263 dated 04.12.2015 was served on the assessee. The assessee filed its reply dated 22.01.2016 in response to the show cause notice. In the reply the assessee contended that the assessment order was passed by assessing officer after considering the record and made various adjustment /disallowances while passing assessment order under section 143(3). The assessing officer subsequently issued notice under section 154, vide notice dated 19th January 2015. In the notice under section 154 the assessing officer pointed out an amount of Rs. 6,16,09,445/- claimed as Employees Stock Option Amortisation Expenses (ESOP) represented a national loss to the assessee on account of shortlisted of share premium and not on account of 2 incurring any liability or loss in the course of carrying of the business.

The contention of assessee was not accepted by learned PCIT holding it that the assessment order passed by assessing officer is erroneous and so far as prejudicial to the interest of revenue as the assessing officer has not verified whether the claim of assessee for Employees Stock Option Amortisation Expenses (‘ESOP’) is allowable, and if so, how the claim 3 has been calculated. The assessee has not brought on record the term and condition of ESOP plan, details of the scheme, options outstanding at the beginning of year, options granted during the year, option lapsed during the year, option exercise during the year, option cancelled during the year, option outstanding at the end of year, fair value pricing model used for valuation of absence, policies about amortisation of compensation cost, accounting treatment of amortised amount of compensation cost, weighted average exercise price, assumptions, risk-free interest rate, expected life, expected volatility expected dividend, price of the underlying share in the market at the time of option grant for the current and previous year. The assessing officer was directed to make fresh assessment order after giving opportunity to the assessee as per law.

We have heard learned authorised representative (‘AR’) for the assessee and learned departmental (‘DR’) for the revenue and perused the material available on record. We have also deliberated on various case law relied by lower authority as well as by learned representative of the parties. The learned AR of the assessee submits that the assessing officer considered all the relevant material available on record and passed the assessment order. The assessee made complete discloser and disclosed all the related information in its Audited financial statement for the year ending on 31 4 March 2009. The assessee in the Note of account has clearly mentioned all the details relating to the ESOP expenses. The assessing officer passed assessment order after considering all the computation of income and details of Audited accounts. After passing the assessment order the assessing officer issued notice under section 154 and proposed to rectify the assessment order vide notice dated 19th of January 2015. The assessee vide its reply dated 28th January 2015 brought in his notice that that ESOP discount represent the employee remuneration and thus represent revenue expenditure, although incurred in kind, allowable as deduction under section 37 of the Act. Section 37 provides that any expenditure incurred wholly and exclusively for the purpose of business or profession shall be allowed as deduction in computing the taxable income amongst other things. In support of his submission the learned AR of the assessee relied upon the decision of Hon’ble Supreme Court in case of Malabar industrial Co Ltd Versus CIT 243 ITR 83(SC), CIT Versus Max India [2007 ] 295 ITR 282 (SC ), decision of Hon’ble Bombay High Court in case of CIT versus Gabriel India Ltd 203 ITR 108(Bombay), decision of Delhi High Court in case of CIT versus Escort Ltd [2011] 338 ITR 435(Delhi), Calcutta High Court in Russell properties Private Ltd Versus ACIT (109 ITR 229 (Calcutta).

On merit the ld AR for the assessee strongly relied upon the decision of Special Bench of Bangalore Tribunal in case of Bicon Ltd Versus DCIT 5 (35 taxmann.com 335) wherein it was been held that discount on ESOP is an allowable expenses under section 37 during the year of vesting. The assessing officer on the basis of information available on record issued notice under section 154. The assessee filed its reply, which was taken on record and the assessing officer has not passed order rectifying the proposed mistake; therefore, the assessing officer accepted the contention of the assessee. The assessing officer was satisfied with the contention of the assessee therefore; the order passed by assessing officer while passing the original assessment is neither erroneous nor prejudicial to the interest of revenue.

The learned AR of the assessee further submits that even on merit the issue on which the learned PCIT revise the assessment order is covered in favour of assessee by the decision of Special Bench in Bicon Ltd versus DCIT [2013] 35 taxmann.com 335(Bangalore–Trib) (SB), Mumbai Tribunal in DBOI Global Services Private Ltd versus PCIT in dated 11 December 2017 and the decision of Madras High Court in case of CIT Versus PVP Venture Ltd [2012] 23 taxmann.com 286 (Madras).

On the other hand the learned AR for the revenue supported the order of learned PCIT. The learned DR for the revenue submits that during the assessment the assessing officer simply accepted the computation of income furnished by the assessee. The assessing officer has not verified 6 whether the claim of ESOP assessee is allowable or not. The assessing officer has not examined the various details and the scheme of ESOP. It is the duty of the assessing officer to ascertain the truth, the fact stated by the assessee in the return of income, when the circumstance of the cases is such to provoke and inquiry. The order passed by assessing officer is erroneous if the same is passed without making any enquiry or such inquiry which was necessary, has not been made. The learned PCIT in its order has clearly brought on record that the assessing officer without proper enquiry and in investigation allowed the claim of the assessee, therefore, the order passed by assessing officer is not only erroneous it is prejudicial to the interest of revenue as well, thus, the twin condition prescribed under section are fulfilled in the present case.

We have considered the rival submission of the parties and have gone through the orders of authorities below. We have also deliberated on various case laws cited by learned PCIT or by learned representative during their submissions.

The Hon’ble Supreme Court in Malabar Industrial Co Ltd (supra) has laid down the following principal;

From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an ITO acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of the judgment of the Commissioner for that of the ITO, who passed the order, unless the decision is held to be erroneous. Cases may be visualised where the ITO while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner, he would have estimated the income at a figure higher than the one determined by the ITO. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the ITO has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interests of the revenue. But that by itself will not be enough to vest the Commissioner with the power of suo motu revision because the first requirement, viz., that the order is erroneous, is absent. Similarly, if an order is erroneous but not prejudicial to the interests of the revenue, then also the power of suo motu revision

Now, we shall examine the issue on which the assessment order was cancelled and was directed to be passed afresh after giving proper opportunity to the assessee. We have seen that assessment order under section 143(3) was passed on 15 January 2014. The assessing officer issued notice under section 154 for rectification of the mistake in the assessment order, copy of which is placed on record vide page No.10 of Paper Book (PB). In the notice under section 154 the assessing officer 10 mentioned that he has seen from significant accounting policies (Schedule-P of the annual accounts) in respect of ESOP granted by Assessee Company the excess of the fair value of share over exercise price of option is treated as discount and accounted as employee compensation cost over the vesting period. It was further mentioned that ( Sl No. 2 of the Notes of account) that the assessee had granted 25,31,159 options to its employee to issue shares of face value of Rs. 5/- each (with option price of Rs.25/- under I,II,& III series and Rs.10/- for IV-XVI and XVII-XVIII) outstanding at March 31st 2009 under different ESOP scheme. It is also mentioned in the notice that it was seen from the cash flow statement that an amount of Rs. 6,61,09,445/- was accounted as employee stock option amortization expenses which is obviously the discount amount treated as employee cost. Thus, from the perusal of the notice under section 154 it is clear that all the details related with ESOP discount were available with the assessing officer. The assessee file its reply vide reply dated 28.01.2015, copy of which is filed on record vide page No. 11 to 18 of PB. In the reply the assessee explained the legislative history ESOP and relied on the decision of Special Bench in Biocon Limited (supra), wherein it was held that discount on ESOP is an allowable deduction under section 37(1) during years of vesting on basis of percentage of vesting during such period, subject to adjustment at time of exercise of option. The ld AR for the assessee while making 11 submissions submitted that after taking the reply of assessee and the details relating to the ESOP, the assessing officer has not conveyed his decision on proposed rectification and the contention of the assessee is deemed to be accepted as allowable expenses under the Act. The ld. DR for the revenue has not disputed the contention of the ld. AR for the assessee nor filed any material on record rejecting the contention of the assessee, which was conveyed by them to the assessing officer in reply to the notice under section 154 of the ACT.

Considering the factual matrix of the case we find that, though the assessing officer has not discussed the issue of ESOP at the time of original assessment proceedings, however, in the proceedings initiated under section 154 the assessing officer after examining the details of ESOP discount was satisfied and not disallowed it, being allowable expenses and the assessing officer has taken a possible view. Though, the assessing officer has not communicated his order, it should have been communicated to the assessee or the ld. PCIT ought to have confirmed from the assessing officer of his finding on proposed action initiated under section 154, before proceeding further in the matter. Hence, in our view the order passed by assessing officer is not erroneous and therefore the twin condition as enunciated under section 263 are not fulfilled. We are also of the view that no revision under section 263 was warranted, on the facts of present case, when the assessing officer on the basis of the 12 material available before him initiated action under section 154 and after examining the issue made no disallowance and taken a possible view in accordance with the law. It is settled law that every loss of revenue as a consequence of a view taken by the Assessing Officer cannot be treated as prejudicial to the interest of the revenue. For example, when the Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner (PCIT) does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue, unless the view taken by the Income-tax Officer is unsustainable in law. In the result the grounds of appeal raised by assessee are allowed.

In the result the appeal of the assessee is allowed.