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Facts
The assessee claimed ESOP expenses under section 37(1) of the Income Tax Act, which was disallowed by the Assessing Officer as capital in nature. The assessee relied on a Special Bench decision in the case of Biocon Ltd. vs. DCIT, which was affirmed by the Karnataka High Court. The CIT(A) dismissed the appeal, citing the admission of an SLP by the Apex Court against the High Court's decision.
Held
The Tribunal held that the discount on issue of ESOP is allowable as deduction under section 37(1) of the Act, as it is a mode of compensating employees for their continued services and a part of remuneration. The Tribunal noted that this view was upheld by the Special Bench and affirmed by the Karnataka High Court.
Key Issues
The primary issue was the disallowance of ESOP expenses claimed by the assessee. Other grounds concerning disallowance under section 14A, initiation of penalty proceedings under section 270A, and charging of interest under section 234B were also raised.
Sections Cited
37(1), 14A, 270A, 234B
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Income Tax Appellate Tribunal, MUMBAI BENCH “F”, MUMBAI
ORDER
PER VIKAS AWASTHY, JM:
This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [in short ‘the CIT(A)’] dated 14/08/2023,for Assessment Year 2017-18.
Shri Sukhsagar Syal appearing on behalf of the assessee submits that the assessee has raised primarily two grounds in appeal i.e. : (i) Disallowance of ESOP Expenses; and (ii) Disallowance u/s. 14A of the Income Tax Act, 1961 [in short ‘the Act’] The ld. Counsel for the assessee made a statement at Bar that he is not pressing ground No.2 of appeal on account of smallness of the amount involved. 2.1 In respect of ground No.1, the ld. Counsel for the assessee submits that the assessee had claimed ESOP compensation expenses to the tune of Rs.8,59,87,403/- u/s. 37(1) of the Act during the relevant year. The Assessing Officer disallowed the same holding it to be capital in nature. In First Appellate proceedings, the assessee pointed that the issue is squarely covered by the decision of Special Bench of Tribunal in the case of Biocon Ltd. vs. DCIT, 35 taxmann.com 335 (Bng.-SB). The said decision of Special Bench has been affirmed by the Hon’ble Karnataka High Court in CIT vs. Biocon Ltd, 121 taxmann.com 351. The CIT(A) records this fact but refused to grant relief merely for the reason that the Department’s SLP against decision of Hon’ble High Court has been admitted by Hon’ble Apex Court.
Ms. Rejeshwari Menon representing the Department defending the impugned order reiterated the findings of CIT(A). 4. We have heard the submissions made by rival sides. The solitary issue on which submissions have been made by both sides in this appeal is with respect to disallowance of ESOP expenses. The assessee placing reliance on the decision of Special Bench in the case of Biocon Ltd.(supra) has claimed the said expenses u/s. 37(1) of the Act, whereas the Department has classified the expenditure as capital in nature. The Special Bench in the case of CIT vs. Biocon Ltd. (supra) has held that the discount on issue of ESOP is allowable as deduction u/s. 37(1) of the Act as it is a mode of compensating employees for their continued services to the company and is a part of remuneration. The Special Bench categorically rejected Departments view that ESOP expenses can be termed as short term capital receipt or a capital expenditure. The decision of Special Bench has been affirmed by Hon’ble Karnataka High Court. Thus, in light of aforesaid decisions, we have no hesitation in allowing ground No.1 of appeal.
In ground No.2 of appeal, the assessee has assailed disallowance made u/s. 14A. The ld. Counsel for the assessee stated at Bar that he is not pressing this ground on account of smallness of the amount involved. In view of the statement made by ld. Counsel for the assessee, ground No.2 is dismissed as not pressed.
In ground No.3 of appeal, the assessee has assailed initiation of penalty proceedings u/s. 270A of the Act. Challenge to penalty proceedings at this stage is premature, hence, ground No.3 of appeal is dismissed as such.
In ground No.4 of appeal, the assessee has assailed charging of interest u/s. 234B of the Act. Levy of interest u/s. 234B of the Act is consequential and mandatory, hence, ground No.4 of appeal is dismissed being without any merit.
In the result, appeal of the assessee is partly allowed. Order pronounced in the open court on Tuesday the 27th day of February, 2024.