M/S. BANDHAN BANK LTD. (ERSTWHILE GHOSH FINANCE LTD),KOLKATA vs. DCIT,CIR-5(1), KOL, KOLKATA

Present for: Appellant by : Shri Biswanath Paul, FCA Respondent by : Shri Subhro Das, Addl. CIT, Sr. DR Date of Hearing : 11.07.2024 Date of Pronouncement : 26.08.2024 O R D E R

PER RAKESH MISHRA, ACCOUNTANT MEMBER:

2. The grounds of appeal raised by the assessee are reproduced as under: “1 That the CIT(A) erred in not allowing the additional claim of ESOP (Employee Stock Option Plan) expenses.

M/s Bandhan Bank Limited: AY: 2016-17 2. That under the facts & circumstances of the case, the CIT(A) erred in confirming the disallowance of expenditure incurred under ESOP amounting to Rs. 5,95,65,043/- made by the Ld. AO. The disallowance is unjustified and needs to be deleted. 3. The assessee craves leave to add, alter, amend or withdraw any ground or grounds of appeal before or at the time of hearing.”

3. Brief facts of the case as mentioned in the written submissions filed are as under:

4. The aforesaid claim was rejected by the Assessing Officer vide the assessment order dated December 20, 2018. The reason for disallowance was that the Assessing Officer was of the opinion that such costs related to ESOP was not in the nature of revenue e xpense and in the nature of capital expenditure. Hence, expenditure cannot be claimed on such costs in terms of Section 37 of the Act.

5. In appeal, the Commissioner of Income tax (Appeals) vide the impugned order dated March 15, 2023 has merely placed reliance M/s Bandhan Bank Limited: AY: 2016-17 on the decision in the case of Goetze (India) Ltd. v. Commissioner of Income tax, [2006 284 ITR 323 (SC)]and held that for making additional claims a revised return was necessary. In absence of the same, the claim of the appellant was disallowed. Based on such finding, the appellate authority did not deem necessary to enter into the merits of the claim.

4. Aggrieved with the order of the Ld. CIT(A), the assessee has filed this appeal before the Tribunal.

“7.1 During the course of scrutiny proceedings, the assessee, in respect of claim of ESOP expenses, submitted that the assessee has not claimed ESOP cost of Rs. 5,95,65,043/- in the original return or revised return, and further, it is putting up the claim of Rs. 5,95,65,043/- during the assessment proceedings. The relevant part of the submission of the assessee for claim of ESOP cost during the course of assessment proceedings is reproduced as under. 1.1 "GRUH had filed its return of income on 15/10/2016 declaring total income at Rs.305,36,72,140/- after making certain disallowance and claim of deduction under various sections of the Income Tax Act, 1961. Along with the Tax Audit Report, GRUH had submitted audited accounts. In notes on account attached to the Balance Sheet, it has been stated that GRUH has issued / allotted equity shares to its employees and M/s Bandhan Bank Limited: AY: 2016-17 directors under ESOS 2011 ("the Scheme ") Tranche I & II at exercise price of Rs. 317.85 & 548.80 per option which includes share premium of Rs. 307.85 & 538.80 respectively. Grant price per option under ESOS 2011 has been derived as per Securities and Exchange Board of India (Employee stock option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999.

These options were exercised by those employees who had completed service with GRUH for more than three years on the date of exercise. These ESOS options are rewarded to the employees for their loyalty and commitment to GRUH during their service period.

1.2 Further, as per provisions of Section 17(2)(vi) of the Income Tax Act, 1961, when the employee exercise the option, difference between exercise price and fair market price is considered as perquisite in the hands of employee and added to salary income of respective employee. Accordingly, in the present case, the perquisites have been added to salary income of respective employees in the year in which shares have been exercised and TDS have been duly deducted under section 192 of the Income Tax Act, 1961. The calculation of perquisites has been carried out as per method prescribed under explanation of section 1 7(2)(vi) of the Income Tax Act, 1961 r.w.r. 3(8) of the Income Tax Rule, 1962.

Name, Addresses and PAN of employees who have exercised option under ESOS Scheme 2011 during the financial year 2015-16 are enclosed as per Annexure -"1"

1.3 Accordingly, it emerges that employees get benefit by way of difference between fair market price of shares on the date on which they exercise the options and grant price fixed under the ESOS Scheme. In other words, the employee is getting shares at concessional rate and derived benefit of market price. The difference between fair market price and grant price being perquisite is added to his/her salary on which he / she has paid Income-tax.

1.4 On exercise of Stock Options by employee, GRUH credits grant price received from employees to share capital for face value and share premium for the amount which in excess of face value of shares. In other words, if the face value of share is Rs. 100 and the employee gets the right of option at grant price of Rs.250 per share, then, Rs. 150 is accounted as share premium and Rs. 100 is share capital on receipt of money from employee on allotment at the time of exercise of option. Thus, though the market price of share on the date of exercising the M/s Bandhan Bank Limited: AY: 2016-17 option is much more than grant price, GRUH receives less amount, which is in nature of discount allowed by GRUH to employees. Such discount is nothing but employee cost to GRUH, fully allowable as expenditure under section 37 of the Income Tax Act, 1961, which comes to Rs. 5,95,65,043/ employees wise list is enclosed herewith marked as Annexure - "1"

2.1 In case of certain claims, to which the assessee is entitled to deduction but not claimed through oversight in the return of income, the same can be claimed during the course of assessment proceedings by making submission thereon and the Assessing Officer has to consider the same.

2.2 As you are aware that the Supreme Court in the case of Goetze (India) Ltd has held that every legitimate claim has to be claimed in the return of income and not by way of submission during the course of assessment proceedings.

In the present case, the claim of ESOP cost has not been claimed by us in the original return or revised return but it is a settled law that in case of an assessment under section 143(3) of the Income Tax Act, 1961, the assessee is entitled to make a fresh claim or a modified claim at any time before completion of assessment. The various provisions under the Income Tax Act, which support the aforesaid proposition of law, can be summarized as under:

(a) It is not necessary to file a revised return of income in order to make a claim regarding certain amount of income or deduction, as the purpose of revision of return of income is quite different.

(b) Provisions of Section 139(9) of the Income Tax Act, 1961 also imply that in case of scrutiny assessment, no time limit regarding a claim by the assessee could be prescribed. Under Section 139(9) of the Income Tax Act, 1961, the Assessing Officer may allow time for rectification of defects in the return of income before the assessment is made. When the Assessing Officer has power to grant time for rectification of defects in a return of income under section 139(9) of the Income Tax Act, 1961, then how could an assessee be debarred from correcting his mistakes, of course, before the assessment is made? In this context, it may be stated that both the provisions viz. section 139(5) and 139(9) of the Income Tax Act, 1961, are enabling M/s Bandhan Bank Limited: AY: 2016-17 provisions inserted to facilitate reflection of correct income in the return and assessment thereof. These provisions can be simultaneously applied. For example, take a case where the assessee submits a valid return but without proof of TDS. The TDS proof is later given to the Assessing Officer and is placed on records it would be absurd to contend that credit for TDS could be given if the proof was asked for by the Assessing Officer in terms of section 139(9) of the Income Tax Act, 1961, but not in case where the assessee had placed the proof on record without filing a revised return under section 139(5) of the Income Tax Act, 1961. Thus, documents placed on record with or without a covering letter with the intention to remove any omission or wrong statement in the return or record, cannot be ignored simply because a revised return was not furnished unless it is shown that the purpose of the Act is not satisfied - CIT. Vs. R.B.B.M.H. Trust, 195 ITR, p. 825 (Cal).”

6. The assessee also contended that there are other provisions in the Act which clearly indicate that the assessee is entitled to make any claim in respect of an item of income or deduction before the completion of assessment under section 143(3) of the Act and also relied upon the Citizen’s Charter issued by the Income Tax Department which states that it is the duty of the Ld. AO to inform the tax payers of their rights, duties, entitlements and obligations under the law and such occasion could arise during the assessment proceedings. The assessee relied upon the following citations:

(a) National Thermal Power Co. Ltd. Vs. C.I.T., 229 ITR, p.383(SC) (b) C.I.T. Vs. Prabhu Steel Industries Pvt. Ltd., 171 ITR, p530, (Bom.) (c) Steel Ingots (P.) Ltd. Vs. C.I.T., 86 Taxman, p.440 (MP) (d) C.I.T. Vs. Bhopal Sugar Industries Ltd. 233 ITR, p.429 (MP) (e) CIT Vs. Motor Industries Co. Ltd., 229 ITR, p. 137 (Karn.)

The Ld. DR relied upon the order of the Ld. AO and the Ld. CIT(A) in this regard.

6.1 We have heard the rival submissions and perused the material available on record. As regards admission of the additional claim before the appellate authorities, the assessee also relied upon the decision of the Hon’ble Supreme Court in the case of Wipro Finance Ltd. Vs. CIT [2022] 443 ITR 250 (SC) and also the order of the Tribunal in the assessee’s own case in ITA No. 370/Kol/2022. It was submitted before us as under:

7. The appellant submits that the decision of the Hon'ble Supreme Court in the case of Goetze India (supra) is distinguishable. For the reason that the said decision only disallows fresh claim to be entertained by an assessing officer, however, the same does not prohibit an appellate authority to provide relief, till this extent. The said point of distinction has been upheld by the Hon'ble Delhi High Court in the cases of Aspentech (supra) and International Tractors (supra). Thus, placing reliance on the same, the appellant submits that the fresh claim of the appellant ought to have been allowed by the appellate authority. As a result, based on such submissions, the impugned order is bad in law, till this extent.

6.2 In this context, Hon’ble Supreme Court in the case of Wipro Finance Ltd. (supra) have held as under:

“9. A priori, we are of the considered opinion that the analysis done by the ITAT and the conclusion arrived at in respect of the subject claim of the appellant being the correct approach consistent with the exposition of this Court, needs to be upheld. In our opinion, the High Court missed the relevant aspects of the analysis of the ITAT concerning the fact situation of the present case. As a matter of fact, the High Court has not even adverted to the aforeme ntioned reported decisions, much less its usefulness in the present case.

10. The learned ASG appearing for the department had faintly argued that since the appellant in its return had taken a conscious explicit plea with regard to the part of the claim being ascribable to capital expenditure and partly to revenue expenditure, i t was not open for the appellant to plead for the first time before the ITAT that the entire claim must be treated as revenue expenditure. Further, it was not open to the ITAT to entertain such fresh claim for the first time. This submission needs to be stated to be rejected. In the first place, the ITAT was conscious about the fact that this claim was set up by the appellant for the first time before it, and was clearly inconsistent and contrary to the stand taken in the return filed by the appellant for the concerned assessment year including the notings made by the officials of the appellant. Yet, the ITAT entertained the claim as permissible, even though for the first time before the ITAT, in appeal under Section 254 of the 1961 Act. by relying on the dictum of this Court in National Thermal Power Co. Ltd. Further, the ITAT has also expressly recorded the no objection given by the representative of the department, allowing the appellant to set up the fresh claim to treat the amount declared as capital expenditure in the returns (as originally filed), as revenue expenditure. As a result, the objection now taken by the department cannot be countenanced.

11. Learned ASG had placed reliance on the decision of this Court in Goetze (India) Ltd. vs. Commissioner of Income Tax in support of the objection pressed before us that it is not open to entertain fresh claim before the ITAT. According to him, the decision in National Thermal Power Co. Ltd." merely permits raising of a new ground M/s Bandhan Bank Limited: AY: 2016-17 concerning the claim already mentioned in the returns and not an inconsistent or contrary plea or a new claim. We are not impressed by this argument. For, the observations in the decision in Goetze (India) Ltd. itself make it amply clear that such limitati on would apply to the "assessing authority", but not impinge upon the plenary powers of the ITAT bestowed under Section 254 of the Act. In other words, this decision is of no avail to the department.

12. Learned counsel for the department had also relied on the decision of this Court in Assistant Commissioner of Income Tax, Vadodara us. Elecon Engineering Company Limited. This decision is on the question of application of Section 43A of the 1961 Act. Accordingly, the exposition in this decision will be of no avail to the fact situation of the present case. For, we have already noticed that the appellant had not acquired any asset from any country outside India for the purpose of his business.

13. In view of the above, this appeal ought to succeed. The impugned judgment and order of the High Court needs to be set aside and instead, the decision of the ITAT dated 3.6.2004 in favour of the appellant on the two questions examined by the High Court in the impugned judgment, needs to be affirmed and restored. We order accordingly.”

Hence, we hold that the assessee could make an allowable claim before the appellate authorities and the same has to be considered as the limitation of revised return for making a claim applies to the powers of the assessing officer and not of the appellate authorities.

7. As regards, the allowability of ESOP cost as business expenditure under section 37 of the Act, the assessee submitted before the assessing officer as under:

“3.1 In paragraph 1 above, GRUH has explained the scheme of ESOP and in the succeeding paragraphs, it is explained as to how ESOP cost is allowable in the hands of employer. 3.2 The expenditure is in nature of discount given by GRUH to its employees on issue of shares under ESOS Scheme at granted rate which is below fair market price as on the vesting date. The said difference is in nature of business expenditure and has been incurred for appreciating and encouraging employees for their loyalty and performance towards GRUH. 1.1.1. The said difference is very well in nature of business expenditure and allowable under section 37(1) of the IT Act, 1961.

M/s Bandhan Bank Limited: AY: 2016-17 We support our contention on the basis of various judicial pronouncements wherein it has been held that the difference between the market rate of shares and the rate at which shares are issued to the employees under ESOS, is allowable as expenditure to the company. This view is supported by various judicial pronouncements is as under: The Madras High Court's decision in the case of CIT v. PVP Ventures Ltd (23) taxmann.com 286) dealt with one of the issues which were whether the difference between the market price of the shares and the price at which the shares were allotted to the employee is allowable as expenditure. On this issue, the High Court held as under: "As far as the Employees Stock Option Plan is concerned, as rightly pointed out by the Tribunal, the assessee had to follow SEBI direction and by following such direction, the assessee claimed the ascertained amount as liability for deduction. We do not find that there exists any error to disturb the order of the Tribunal and in turn the Assessing Authority. In the circumstances, we agree with the submission of learned senior counsel appearing for the assessee in this regard by upholding the order of the Tribunal." i. In case of CIT v. Lemon Tree Hotels Ltd. - ITA 107/2015 (Del HC), the High Court held as follows: 2. The question sought to be projected by the Revenue is whether the IT AT erred in deleting the addition of Rs. 1,28,19,169/- made by the Assessing Officer ('AO) by way of disallowance of the expenses debited as cost of Employees Stock Option ('ESOP') in profit and loss account? 3. The Court has been shown a copy of the decision dated 19th June 2012 passed by the Division Bench of Madras High Court in CIT-III Chennai v. PVP Ventures Ltd. (TC(A) No. 1023 of 2005) where a similar question was answered in favour of the Assessee by holding that the cost of ESOP could be debited to the profit and loss account of the Assessee This Court has also in its decision dated 4th August 2015 in of 2002 (CIT v. Oswal Agro Mills Ltd.) held that the expenditure incurred in connection with issue of debentures or obtaining loan should be considered as revenue expenditure In the circumstances the impugned order of the ITAT answering the question in favour of the Assessee is affirmed. iii. In the decision of the Bangalore Special Bench in the case of Biocon Ltd vs. DCIT-(2013) 25 ITR(T) 602, the special bench held as under: a. Allotment of shares to the employees at a price lower than the market price a mode of compensating to the employees for their continued services to the company and is a part of their remuneration and cannot be M/s Bandhan Bank Limited: AY: 2016-17 described as a short receipt of share premium or a capital expenditure. b. The discount on options under ESOS is an ascertained liability and not contingent liability. C. Discount on option under ESOS is in nature of employee cost and allowable deduction under section 37(1) of the Income Tax Act, 1961, during the years of vesting on the basis of percentage of vesting during such period. d. The amount of perquisite in the hands of the employee and the amount of discount can never be different and appropriate adjustment needs to be made in income in respect of difference in amount of discount computed with respect to market price at the time of grant and exercise of option IV The above referred decision have also been pronounced in favour of the assessee in below mentioned judgments as well Dr. Reddy's Lab Ltd vs. ACIT (2014) 30 ITR(T) 393 (Hyd- Trib) Novo Nordisk India (P) Ltd. Vs. DCIT-(2014) 42 taxmann.com 168 (Bang-Trib) HDFC Bank Ltd. Vs. DCIT-(2016) 130 DTR 219 (Mum- Trib) Dr. Reddy's Laboratories Ltd vs. ACIT-(2017) 53 ITR(T) 285 (Hyd-Trib) Caterpillar India (P) Ltd. Vs. DCIT- (2017) 80 taxmann.com 325 (Chennai- Trib) DCIT vs. Kotak Mahindra Bank Ltd. - (2018) 89 taxmann.com 223 (Mum-Trib) 1.2 Further, in order to understand whether ESOS expenditure satisfies all the conditions as mentioned under section 37(1) of the Income Tax Act, 1961, each limb of the definition is analyzed below taking into consideration the characteristics of ESOS expe nditure There should be an expenditure: The term "expenditure" is not defined in the Act. Hence, one may rely on the commercial understanding of the term. Accordingly, any sum of money or money's worth spent or disbursed or for the spending or disbursing of fund for a liability incurred by an assessee can be termed as an expenditure. The term includes any amount which, under the provision of the Expenditure Act. is required to be included in the taxable expenditure.

Judicial precedents provide that expenditure can be said to be incurred when an assessee "forgoes profit out of commercial considerations and the same must be determined upon facts of the case. Amount forgone represents an act of relinquishment, it is a relinquishment of commercial or pecuniary prospect. If the relinquishment is for the purposes of business, it would fall to be considered under section 37. Even a loss may be allowed as expenditure under section 37. Based on the above, ESOS discount can either be said to be an expenditure or profit forgone or loss, and applying the ruling laid down by various courts referred above, it satisfies the first condition to qualify as deductible expenditure under section 37 of the Act. The expenditure should not be capital in nature: Another criterion which needs to be satisfied in order to make a claim under section 37 of the Act is that the expenditure should not be capital in nature. Accordingly, ESOS discount is revenue in nature since it is compensation to the employee for his services in employment considering the following aspect. i. Employees eligible for an ESOS are granted the options considering their duration of service with GRUH, responsibilities, shouldered, designation, performance etc. ii. The vesting of ESOS is spread over three years. iii. The scheme provides for lapse of options on termination of employment or resignation. The expenditure should not be in personal in nature: Considering that the employees are being compensated for their services rendered for benefit of business ESOS discount cannot not be treated as personal expenditure of the company Wholly and exclusively for the purpose of business: The term 'wholly and exclusively for business has not been defined under the Act. However, judicial authorities have time and again interpreted this phrase. The adverb 'wholly' in the phrase 'laid out or expended for business' refers to the quantum of expenditure. The adverb 'exclusively has reference to the object or motive of the act behind the expenditure. Unless such motive is solely for promoting the business, the expenditure will not qualify for deduction. The expression wholly and exclusively' does not mean necessarily. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed if it otherwise satisfies the tests laid down by law.

Sum of money expended, not only and with a view to a direct and immediate benefit to the trade, but also voluntarily on the ground of commercial expediency, in order to indirectly facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade. Since ESOS discount is expenditure for compensating employees for their services to GRUH, it is to be considered to be expended wholly and exclusively for the business of the employer ie. GRUH. Granting of ESOS discount is called for by commercial expediency to reward its employees for his/her services to GRUH, ESOS discount is incurred wholly and exclusively for the purpose of business and necessitated by commercial expediency and hence allowable as deduction.” 7.1 As regards, not passing of any entry for such expenditure in the books of account, it was submitted before the Ld. AO that recording of transactions through books of account is not mandatory condition for allowance of deduction and under that there are many deductions/additions which do not form part of the books of account and still allowable by the Act to be deducted/added. The assessee relied upon the following judicial pronouncements in this regard. (a) Tuticorin Alkali Chemicals and Fertilizers Ltd. Vs. CIT [227 ITR 172 (SC)] (b) CIT Vs. Shoorji Vallabhdas & Co. [46 ITR 144 (SC)] (c) CIT Vs. Mogul Line Ltd. [46 ITR 590 (Bom)

8. The Ld. AO, vide paragraph 7.3 onwards of the assessment order, has discussed the matter. The Ld. AO examined the provisions of section 37 of the Act and relied upon several decisions and rejected the claim of the assessee as according to him, the same was not allowable. Further, he mentions that the Delhi ITAT in the case of ACIT Vs Ranbaxy Laboratories & 3871 has held that the ESOP expense debited to P&L is notional in nature since the assessee has neither laid out or expended any amount while choosing to receive no/lesser M/s Bandhan Bank Limited: AY: 2016-17 securities premium. The alternative argument that this ITAT has supported is since the receipt of securities premium is not chargeable to tax being a capital receipt any short collection of securities premium should also be considered as capital outlay and cannot be allowed as expenditure. The Delhi ITAT in the case of Ranbaxy (Supra) has relied on the following court rulings which have held that shares issued against assets/Technical know-how contributed by shareholders cannot be claimed as revenue expenditure: (a) Eimco K.C.P Ltd. Vs. CIT 159 CTR 137 (Supreme Court) (b) CIT Vs. Reinz Talbros Pvt. Ltd. 252 ITR 637 (Delhi HC)

The above views of Delhi ITAT in the case of Ranbaxy (supra) were also upheld subsequently by the following judicial courts: - Hyderabad ITAT in the case of Medha Servo Drivers Limited, ITA No. 1114/Hyd/2008. - Mumbai Tribunal in the cases of : (a) DCIT Vs. Blow Plast Limited, (b) Mahindra & Mahindra Vs. DCIT (c) M/s VIP Industries Vs. DCIT, ITA No. 7242/Mum/2008

9. The Ld. CIT(A), after elaborate discussion upheld the view of the Ld. AO. Further submissions filed in this regard before us are as under:

“8. That apart from the above, the appellant submits that the cost incurred towards ESOP is a revenue expenditure and ought to have been allowed as deduction in terms of Section 37 of the Act, for the following reasons:

M/s Bandhan Bank Limited: AY: 2016-17 (a) The primary objective of ESOP is to earn profit by securing consistent and concentrated efforts of dedicated employees during the vesting period. (b) The said expenses represent the incentives provided to employees who stay with the assessee over a longer period of time and therefore, is in the nature of 'employee compensation'. (c) ESOP is taxable in the hands of the employees as 'perquisites' under section 17(2)(vi) of the Act. (d) Accordingly, there cannot be different treatment for a transaction in the hands of recipient of income and payer of income. Given that the ESOP forms part of an employee's salary, it supports the claim for the same being treated as revenue expenditure in the hands of the employer. (e) ESOP expenditure is not in the nature of capital expense or personal expense. Discount on ESOP represents the amount foregone on shares to be issued to employees in lieu of services rendered by them qualifies as 'expenditure' under section 37 of the Act. (f) The discount on options under ESOP is an ascertained liability and not contingent liability. It is a settled principle that the deduction is permissible in respect of an ascertained liability. The provision, which is scientifically or actuarially ascertained, is construed as an accrued liability and deduction will be allowed on the same. (g) In view of the above, ESOP expenditure is an ascertained liability and accordingly, the same should be allowed under section 37 of the Act.

9. In support of the aforesaid contention, reliance is placed on the following decision, wherein, cost towards ESOP has been allowed to be deducted under Section 37 of the Act. (i) PVR v. CIT, [2022 (8) TMI 1234-DELHI HIGH COURT), (ii) CIT v. PVP Ventures Ltd., [2012 (7) TMI 696 MADRAS HIGH COURT], affirmed by the Hon'ble Supreme Court in 2014 (3) TMI 1127-SC ORDER, (iii) PCIT v. Goldman Sachs (India) Securities Pvt. Ltd., (2019 (6) TMI 1003 BOMBAY HIGH COURT], (iv) CIT v. Lemon Tree Hotels Ltd., [2015 (11) TMI 404 HIGH COURT), DELHI (v) Northern Operating Services Pvt. Ltd. v. JCIT, [2023 (4) TMI 793 - ITAT BANGALORE), (vi) DCIT v. Bandhan Bank Ltd., (2023 (4) TMI 143, ITAT, KOLKATA M/s Bandhan Bank Limited: AY: 2016-17 (vii) ACIT v. Cvent India Pvt. Ltd., [2023 (2) TMI 1063 ITAT DELHI], (viii) Biocon Ltd. v. Dy. CIT [2013] 35 taxmann.com 335 (ITAT - Bangalore), affirmed by the Hon'ble High Court in [2021] 430 ITR 151 (Kar) and the Hon'ble Supreme Court in 2021 (8) TMI 1322SC ORDER, and (ix) Novo Nordisk India Pvt. Ltd. v. DCIT, (2013 (11) TMI 218 - ITAT BANGALORE.

10. Therefore, in light of the aforesaid submissions, it is humbly prayed that the impugned order ought to be partly set aside, till this extent. In addition, it is humbly prayed that the cost incurred towards ESOP be treated as revenue expenditure and all owed as deduction in terms of Section 37 of the Act.”

9.1 It was also submitted that in the case of assessee’s own case order dated 27.03.2023 have allowed the claim. The relevant extract from which is as under: “5. Ld. Sr. DR referred to the conditions stipulated u/s. 37(1) of the Act and asserted that claim of ESOP expenditure by the assessee does not satisfy the conditions stated therein. Ld. Sr. DR also submitted that assessee has not incurred any expenditure as nothing was going out of the assessee rather it resulted in the short receipt of share premium which the assessee otherwise entitled to and as the receipt of share premium was not taxable, any short receipt of such premium would only amount to a notional loss and not actual loss requiring any deduction u/s. 37(1) of the Act as it was a capital expenditure.

6. Per contra, Ld. AR reiterated the submissions made before the Ld. AO. He stated that difference between the exercise price and fair market price is considered as perquisite in the hands of the employees and added under salary income of the respective employees and is further subjected to TDS as applicable u/s. 192 of the Act. According to him, calculation of perquisite is done as per Section 17(2)(vi) read with Rule 3(8) of the Income Tax Rules, 1962. In this respect all the details relating to name, address, PAN of employees and the calculation of perquisites were submitted before the Ld. AO. It was stated that the discount allowed to the employees is nothing but employee cost to the assessee, which is allowable as expenditure u/s. 37(1) of the Act. Ld. Counsel placed reliance on the decision of Hon’ble Special Bench of ITAT in the case of BIOCON Ltd. Vs. DCIT (Supra) and the judgment of Hon’ble High Court of Karnataka confirming the order of Hon’ble Special Bench in the case of BIOCON Ltd. wherein Hon’ble Court held that discount on issue of ESOP was allowable as a deduction u/s. 37(1) as primary object was not to waste capital but to earn profits by securing consistent service of employees. The head note of the said judgment is reproduced for reference: "Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of (Discount of issue of ESOP) - Assessment year 2004-05 - Assessee floated Employees Stock Option Plans (ESOP) - It provided employees discount - There was difference between grant price to employees and market price as on date of grant of ESOPs - ESOPs were vested in employee over a period of four years - Deduction of discount on ESOP over vesting period was in accordance with accounting in books of M/s Bandhan Bank Limited: AY: 2016-17 account, which had been prepared in accordance with SEBI Guidelines - Whether on exercise of option by an employee, actual amount of benefit that had to be determined was only a quantification of liability, which would take place at a future date - Held, yes - Whether discount on issue of ESOPs was not a contingent liability but was an ascertained liability - Held, yes - Whether issuance of shares at a discount would be an expenditure incurred for purposes of section 37(1) as primary object of aforesaid exercise was not to waste capital but to earn profits by securing consistent services of employees and therefore, same could not be construed as short receipt of capital - Held, yes - Whether thus, discount on issue of ESOP was allowable deduction under section 37(1) - Held, yes [Para 10] [In favour of assessee]” 6.1. Ld. Counsel also referred to the decision of Hon’ble High Court of Delhi in the case of CIT Vs. Lemon Tree Hotels Ltd. in dated 18.08.2015 on a similar issue which was considered by the Coordinate bench of ITAT, Delhi in the case of ACIT Vs. People Strong HR Services (P) Ltd. (2022) 134 taxmann.com 351 (Del.Tri.). In this decision, judgments of Hon’ble High Court of Karnataka and of the Hon’ble Special Bench were also considered, allowing the claim of the assessee. Relevant extract from the said decision of ITAT, Delhi is reproduced as under: "6. After considering the rival submissions and going through the material placed on record, we find that it is now well settled proposition that the issue of allowability of ESOP discount being the difference between the market value of shares and the value at which employees had been given the shares is covered, not only by the decision of Hon'ble jurisdictional High Court in Lemon Tree Hotels Ltd. (supra), but also by the judgement of the Special Bench in the case of Biocon Ltd. (supra). This judgment of special bench has now been approved by the Hon'ble Karnataka High Court vide order dated 11.11.2020 and held that employees' discount represents consideration for services rendered by employees and hence it is a deductible business expenditure and it cannot be equated with share premium and it is to be intended towards profit by securing employees' consistent services. Apart from that, it was further held that it is an ascertain liability since employees' incurred obligation over the distinct period, notwithstanding the fact that exact amount as quantified at the time of exercising options. The Hon'ble Karnataka High Court has also concurred with the view of Hon'ble Delhi High Court in the case of Lemon Tree Hotels Ltd. (supra). Accordingly, we do not find any infirmity in the order of the Id. CIT (Appeals) following the judgement of Hon'ble jurisdictional High Court and also the Special Bench which has now been confirmed by the Hon'ble Karnataka High Court. The appeal of the Revenue is thus dismissed." 6.2. Reference was also made to the decision of Hon’ble High Court of Madras in the case of CIT Vs. PVP Ventures Ltd. 23 taxmann.com 286 wherein also the claim of assessee was allowed.

M/s Bandhan Bank Limited: AY: 2016-17 “Respectfully following the above cited decisions of Hon'ble Delhi High Court in CIT Vs. Lemon Tree Hotels Ltd. and decision of the Hon'ble Karanataka High Court in the case of Biocon Ltd. (supra) and very recent decision dated 07-12- 2021 of the Hon'ble ITAT Delhi Bench in the case of ACIT vs. People Strong HR Services (P.) Ltd., it is held that expenditure on ESOP is in the nature of employee cost and hence is allowable u/s. 37(1) as deduction in computing the income under the head profits and gains of business and profession during the vesting period. The ground raised by the appellant regarding this issue is allowed.” 7.1. Considering the facts on record and the judicial precedents referred above as well as going through the analysis of the test contemplated u/s. 37(1) of the Act by the ld. CIT(A), we do not find any reason to interfere with the finding arrived at by the Ld. CIT(A). Accordingly, ground taken by the revenue in this respect is dismissed. 9.2 It was informed that the order of the ITAT has been upheld by the Hon’ble Calcutta High Court vide order in ITAT/286/2023 IA No:GA/1/2023, GA/2/2023 Principal Commissioner of Income Tax

2. Kolkata V Bandhan Bank Ltd, order dated 7th February, 2024 whereby the appeal of the Revenue has been dismissed and the order of the Tribunal has been upheld. Vide second written submission filed on 27.02.2024, it is mentioned that the order of the Hon’ble ITAT has been upheld by the Hon’ble Calcutta High Court and the appeal of the Revenue has been dismissed as under: “3. The appellant at the time of hearing inadvertently failed to bring this Hon'ble Tribunal's attention that the said decision of the Tribunal was challenged before the Hon'ble High Court at Calcutta in ITAT/286/2023 by the revenue. The Hon'ble Division Bench by an order dated February 07, 2024, was pleased to dismiss the revenue's appeal on the ground that the issue is settled in favour of the appellant. A copy of the decision in the appeal is enclosed herewith as Annexure A. The relevant portion of the decision is reproduced hereinbelow: "(a) WHETHER on the facts and in the circumstances of the case the Learned Income Tax Appellate Tribunal was erred in law in sustaining the order of CIT(A) wherein addition made on account of the disallowance of expenses incurred in relation to ESOP cost was deleted without appreciating the fact that ESOP expense is notional and that too of capital nature?" We have elaborately heard the leamed Advocates for the parties and carefully perused the materials on record.

M/s Bandhan Bank Limited: AY: 2016-17 The legal issue involved in this appeal is squarely covered by the decision of three High Courts in favour of the assessee. The first of which is in the case of CIT v. PVP Ventures Ltd. [2012] 23 taxmann.com 286 and followed by the decision in CIT-v.-Lemon Tree Hotels Ltd., [2019] of 2015 dated 18.08.2015, High Court of Delhi which was followed in CIT LTU-v.-Biocon Ltd., [2020] 121 taxmann.com 351(Karnataka). In all the decisions it has been held that ESOPs was allowable as a deduction under Section 37(1) of the Act as primary object was not to waste capital but to earn profits by securing consistent service to the employees. The three decisions which were relied on by the assessee were taken note of by the learned Tribunal and the appeal filed by the revenue was dismissed. All the three decisions which were referred above have attained finality as it appears that the revenue has not preferred any appeal against those decisions. Thus, we find that Tribunal was well justified in dismissing the appeal filed by the revenue and we find no ground to interfere with the order passed by the learned Tribunal. Accordingly, the appeal is dismissed and substantial question of law is answered against the revenue."

The Ld. DR, on the other hand, relied upon the order of the Ld. CIT(A).

M/s Bandhan Bank Limited: AY: 2016-17 7. Thus, from perusal of section 37(1) of the Act, it is evident that the aforesaid provision permits deduction for the expenditure laid out or expended and does not contain a requirement that there has to be a pay out. If an expenditure has been incurred, provision of section 37(1) of the Act would be attracted. It is also perti- nent to note that section 37 does not envisage incurrence of expenditure in cash.

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 para- graphs 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 fulfil- ment of the condition.

11. The deduction of discount on ESOP over the vesting period is in accordance with the accounting in the books of account, which has been prepared in accord- ance with Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999.

13. It is also pertinent to mention here that for Assessment Year 2009-10 onwards the Assessing Officer has permitted the deduction of ESOP expenses and in view of law laid down by Supreme Court in Radhasoami Satsang v. CIT, [1992] 60 Taxman 248/193 ITR 321, the revenue cannot be permitted to take a different stand with regard to the Assessment Year in question. In view of preceding analysis, the substantial questions of law framed by a bench of this court are answered against the revenue and in favour of the assessee. In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed.

10.1 Further, in the case of Commissioner of Income tax v. Shriram City Union Finance Ltd. [2024] 161 taxmann.com 218 (Madras) it has been held that as under: 8.6 Admittedly, the ESOP scheme is a voluntary scheme launched by the employer to issue shares to their employees, with an intent to give a stake to the employees in the organisation as incentives for performing better. Such an expenditure is incurred to facilitate and promote the business and there is no enduring benefit or advantage or creation of asset to the company, rather it is to earn more revenue and the expenses incurred for such purpose is nothing but revenue expenditure. It is a general principle that any expenditure incurred for the purpose of business is a deductible expenditure and the amount spent by an assessee for labour/em- ployees' welfare, would be deductible as revenue expenditure. In Dalmia Jain & Co. Ltd. v. CIT [81 ITR 754], the Hon'ble supreme court held that "expenditure incurred for maintenance of business is revenue in nature". 8.7 According to the assessees, the ESOP benefit is taxable in the hands of em- ployees as 'perquisite' under section 17(2) of the Act and it was brought within the purview of Fringe Benefit Tax, which is an employee related expenditure. It is further pointed out by the assessees that similar claim of ESOP expenses for de- duction raised for the assessment years 2006-07, 2007-08 and 2008-09, was allowed by the assessing officer. However, the same was disallowed by the as- sessing officer relating to the assessment year 2009-10, by placing reliance on the decision of the Hon'ble supreme court in Brooke Bond India Ltd. (cited supra), wherein, it was held that "though the increase in capital results in expansion of the capital base of the company and incidentally that would help in the business of the company and may also help in the profit making, the expenses incurred in that connection still retain the character of a capital expenditure since the expendi- ture is directly related to the expansion of the capital base of the company". Whereas the learned senior counsel appearing for the assessees submitted that the decision in Brooke Bond India Ltd, does not relate to ESOP expenditure and it M/s Bandhan Bank Limited: AY: 2016-17 was a plain case of increase in authorised capital and therefore, the said decision cannot be applicable to the facts of the present case, wherein, the grant of ESOP is a benefit given to the employees and not to the public. 8.8 This court agrees with the contentions so raised on the side of the assessees. Importantly, it is to be noted here that the issue involved herein is squarely cov- ered by the decision of this court in PVP Ventures Ltd. (cited supra) which was followed by the Tribunal while passing the orders impugned herein. In the said decision, this court held the order of the Tribunal allowing the deduction of ESOP expenditure, as an ascertained expenditure. The following passage is relevant and is extracted below: "11. As regards the second issue which is now canvassed before this Court viz., on the issue of expenditure of 66.82 lakhs towards the issue of shares to the Employees Stock Option is concerned, the Tribunal pointed out that the shares were issued to the employees only for the interest of the business of the assessee to induce employees to work in the best interest of the assessee. The allotment of shares was done by the assessee in strict compliance of SEBI regulations, which mandate that the difference between the market prices and the price at which the option is exercised by the employees is to be debited to the Profit and Loss Account as an expenditure. The Tribunal pointed out that what had been adopted was not notional or contingent as had been submitted by the Revenue. Pointing out to the Employees Stock Option Plan, the Tribunal in its order stated that it was a benefit conferred on the employee. So far as the company is concerned, once the option was given and exercised by the employee, the liability in this behalf got ascertained. This was recognised by SEBI and the entire Employees Stock Option Plan was governed by guidelines issued by SEBI. On the facts thus found, the Tribunal held that it was not a case of contingent liability depending on the various factors on which the as- sessee had no control. The expenditure in this behalf was an ascertained lia- bility, thus the expenditure incurred being on lines of the SEBI guidelines, there could be no interference in the relief granted by the Assessing Authority for the expenditure arising on account of Employees Stock Option Plan. This expendi- ture incurred as per SEBI guidelines and granted by the Officer could not be considered as erroneous one calling for exercise of jurisdiction under section 263 of the Act." 8.9 It is also to be noted at this juncture that as against the aforesaid decision of this Court, SLP (C) No. 9091 of 2014 was filed and it was ultimately, dismissed on 28-3-2014, as a result of which the judgment of this Court thus, attained final- ity. 8.10 Further, in the decision of the Karnataka High Court in Biocon Ltd. [(2020) 121 taxmann.com 351 (Karnataka)], the question as to whether the expenditure towards ESOP is allowable as deduction under section 37(1) of the Act, was con- sidered and was ultimately decided that the same amounted to definite legal lia- bility, which has to be allowed as deduction, after considering the definition of "employees stock option" under section 2(15A) of the Companies Act, 1956. The new provision under section 2(37) of the Companies Act, 2013 also is in similar lines. 8.11 In the light of the aforesaid legal proposition, this court comes to a conclusion that the Tribunal was correct in holding that the ESOP expenditure is revenue in nature and the assessee is entitled for deduction. Accordingly, the orders passed by the Tribunal in deleting the disallowances of ESOP expenses by the assessing officer, do not require any interference in these appeals. Resultantly, this issue stands answered in favour of the assessees."

M/s Bandhan Bank Limited: AY: 2016-17 4. In view of the above, the substantial questions of law raised herein are an- swered in favour of the assessee and these Tax case Appeals filed by the Revenue are dismissed. No cost.

12. Ground No. 3 is general in nature does not require any separate adjudication.

Order pronounced in the open court on 26th August, 2024.