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Income Tax Appellate Tribunal, ‘C’ BENCH, BANGALORE
Before: SHRI WASEEM AHMED & SHRI KESHAV DUBEY
PER WASEEM AHMED, ACCOUNTANT MEMBER:
This is an appeal filed by the assessee against the order passed by the NFAC, Delhi dated 19/12/2023 in DIN No. ITBA/NFAC/S/ 250/ 2023-24/1058896761(1) for the assessment year 2017-18.
The only issue raised by the assessee is that the ld. CIT(A) erred by confirming the order of the AO by substantiating the disallowance of Rs. 25,51,97,053/- under the provisions of sec. 37 of the Act.
The briefly stated facts are that the assessee in the present case, a private limited company, is engaged in the business of sale of educational products/resource materials. The assessee during the year brought a scheme known as Xseed Education Employee Stock Option Plan (ESOP) 2015. The assessee based on valuation report calculated ESOP expenses of Rs. 25,51,97,053/- and claimed the same as revenue expenses u/s 37 of the Act. However, the AO treated such expenses as notional and contingent in nature, which has not been crystallized during the year. Furthermore, the AO was also of the view that the expenses claimed under ESOP by issuing shares to the employees are capital in nature, the benefit from the same is of enduring nature. Thus, as per the AO, such capital expenditure cannot be allowed as deduction u/s 37(1) of the Act. The AO in view of the above disallowed the deduction and added to the total income of the assessee.
On appeal, the ld. CIT(A) found that the SLP was preferred before the Hon’ble Apex Court in the case of CIT Vs. Biocon reported in 131 Taxmann.com 188 and CIT Vs. Lemon Tree Hotels Pvt. Ltd. reported in 104 Taxmann.com 27. Likewise, the ld. CIT(A) also found that the Delhi Tribunal in the case of Ranbaxy Laboratories Ltd. Vs. ACIT reported in 39 SOT 17 (Delhi) has held that the expenses under ESOP are not allowable deduction under the provisions of sec. 37 of the Act. In view of the above, the ld. CIT(A) confirmed the order of the AO.
Being aggrieved by the order of the ld. CIT(A), the assessee is in appeal before us.
The ld. AR before us filed a paper book running from pages 1 to 334, case law compilation running from pages 1 to 356 and written submission supported by the various orders running from pages 1 to 18 and contended that the issue on hand has been decided by the Hon’ble Karnataka High Court in the cases of CIT Vs. Biocon Ltd. Vs. DCIT reported in 121 Taxmann.com 351 in favour of the assessee. Therefore, the assessee should be allowed the deduction under section 37 of the Act for the ESOP expenses being Revenue in nature.
6.1 As per the ld. AR, the admission of the SLP against the order of Hon’ble Karnataka High Court in the case of Biocon Limited and Lemon Tree Hotel cited supra will not change the verdict of the Hon’ble Karnatak High Court until and unless it is reversed by the Higher Forum. According to the ld. AR, the principles laid down by the Hon’ble Karnataka High Court are in force as of now and, therefore, the same should be prevailed.
On the other hand, the ld. DR fairly accepted that the ratio laid down by the Hon’ble Karnataka High Court should be applied and, therefore, the deduction to the assessee u/s 37(1) of the Act on account of ESOP expenditure cannot be denied. However, the ld. DR contented that none of the authorities below has quantified the expense for which, the assessee is entitled on account of ESOP expenses u/s 37(1) of the Act. Thus, it was prayed by the ld. DR that the matter may be set aside to the AO for the limited purpose of quantification of the expenses.
In rejoinder, the ld. AR did not object if the matter is set aside to the file of the AO for the limited purposes of quantification of ESOP expenses. However, the ld. AR brought to our notice that the revenue in the own case of the assessee for the assessment year in 2018-19 in the assessment framed u/s 143(3) of the Act vide order dated 21/09/2021 placed at pages 314 to 316 of the paper book has accepted the deduction claimed by the assessee on account of ESOP expenses.
We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussions, we note that the ld. CIT(A) upheld the order of the AO by having reliance on the order of the Delhi Tribunal in the case of Ranbaxy Laboratories Cited supra but without realizing that the same was reversed by special Bench of Bangalore Tribunal in the case of Biocon Limited Vs. DCIT reported in 35 Taxmann.com 335 which was subsequently upheld by the Hon’ble Karnataka High Court. Admittedly, the SLP filed by the revenue against the Hon’ble Karnataka High Court was admitted by the Hon’ble Supreme Court as discussed above but in our humble and considered view, the verdict given by the Hon’ble Karnataka High Court will prevail upon us. As such, mere admission of the SLP by the Hon’ble Apex Court will not change the principles laid down by the Hon’ble Karnataka High Court until and unless these are reversed. Furthermore, it is pertinent to note that there was also no stay granted by the Hon’ble Apex Court in the case of Biocon Limited, cited supra. Thus, we are bound to follow the judgment of Hon’ble Karnataka High Court, the relevant extract of the same is reproduced as under:
10. From perusal of section 37(1), which has been referred to supra, it is evident that an assessee is entitled to claim deduction under the aforesaid provision if the expenditure has been incurred. The expression 'expenditure' will also include a loss and therefore, issuance of shares at a discount where the assessee absorbs the .
difference between the price at which it is issued and the market value of the shares would also be expenditure incurred for the purposes of section 37(1) of the Act. The primary object of the aforesaid exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, the same cannot be construed as short receipt of capital. The tribunal therefore, in paragraphs 9.2.7 and 9.2.8 has rightly held that incurring of the expenditure by the assessee entitles him for deduction under section 37(1) of the Act subject to fulfilment of the condition.
9.1 It is also pertinent to note that at the time of hearing, the ld. DR has also not brought anything contrary to the arguments advanced by the ld. AR for the assessee. Similarly, it is also not out of place to mention that the revenue in the own case of the assessee in the subsequent assessment year has also allowed the deduction of the expenses incurred by the assessee under the head ESOP u/s 37(1) of the Act.
9.2 Regarding the argument of the ld. DR about the quantification of ESOP expenses, we are in agreement. Accordingly, we are inclined to set aside the issue to the file of the AO for the limited purpose of quantification of the amount, for which, the assessee is eligible for deduction on account of ESOP expenses u/s 37(1) of the Act as per the provisions of law. Hence, the appeal of the assessee is hereby partly allowed for the statistical purposes.
In the result, the appeal filed by the assessee is partly allowed for statistical purposes.
SP No. 11/Bang/2024
Since the appeal of the assessee is partly allowed for statistical purposes as discussed above, on the main issue, the stay petition filed by the assessee is dismissed as infructuous.
In the result, the stay petition is dismissed as infructuous.
In the combined result, the appeal of the assessee is partly allowed for statistical purposes and the stay petition is dismissed.