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TMI Blog2021 (11) TMI 1119X X X X Extracts X X X X X X X X Extracts X X X X ..... e Appellant. 2.1. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred in observing that the Appellant did not furnish evidence of vesting and disbursal of ESOP in as much as the Ld. CIT(A) failed to understand the scheme of grant of the ESOP as evidenced by the Agreements entered into by the Appellant with its eligible employees. Also, the Ld. CIT(A) failed to take note of the pro-rata claim of expenditure charged over the period of vesting of the ESOP in the audited financial statements. Further, the Ld. CIT(A) has failed to take note of the fact that the actual allotment of ESOP will take place only upon exercise of the option at the end of vesting period. 2.2. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred in observing that the Appellant failed to furnish evidence of tax deduction at source at the time of paying the exercise price. The Ld. CIT(A) has failed to take into account the fact that there was no exercise of option during the AY under consideration. The liability to deduct tax at source, if any, would arise only upon exercise of options by the employees. 2.3. That on the facts and in the circumstances of the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses were in the nature of capital expenditure. The Ld. CIT(A) has failed to take note of the categorical submission of the Appellant that the R&D expenditure were in the nature of revenue expenditure. 3.3. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred on facts and in law in ignoring the detailed submissions of the Appellant which clearly explain the business activity of the Appellant and that it is for the said business activity that it entered into a research/consultancy agreement. 3.4. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred on facts and in law in holding that the Appellant failed to provide evidence of payment made for consultancy work in as much as the genuineness of the transaction/payment was neither doubted by the Ld. AO nor by the Ld. CIT(A) and thus no query with regard to payment as ever raised. 3.5. Without prejudice to the grounds above, the Ld. CIT(A) erred in not appreciating that even if the R&D expenditure is not considered as revenue expenditure under section 37(1), the same is deductible as per section 35(1)(iv) r.w.s. 35(2)(ia) of the Act." ESOP 3. The assessee instituted the Curade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowability of the deduction is concerned it has been decided in favour of the assessee by this tribunal by following the decision of the Special Date of Judgment 16-8-2018, ITA No. 241/2017 The Pr. Commissioner of Income Tax - 7 & Anr. Vs. The Hon'ble High Court of Delhi in ITA 107/2015 in the case of CIT vs Lemon Tree Hotels Ltd. vide order dated 18.08.2015 has adjudicated as under: "2. The question sought to be projected by the Revenue is whether the ITAT erred in deleting the addition of Rs. 1,28,19,169/- made by the Assesssing Officer ('AO') by way of disallowance of the expenses debited as cost of Employees Stock Option ('ESOP') in profit and loss account? 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 ITA No.2 of 2002 (CIT v. Oswal Agro Mills Ltd.) held that the expenditure incurred in connection w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er rate. From above, it is noted that the three years average cash flow as taken by the valuer for DCF method at the time of issuance was 31.95, whereas as per actual as on today, the three years cash flow is 32.29. Thus, the DCF method has estimated a fair value of the company by considering correct financials. In view of the above, the method adopted by the appellant is reasonable and therefore there is no change required in the valuation. To sum up, the ESOP expenses are allowable and the ESOP has been calculated at a fair value and therefore the sum of Rs. 2,31,02,829/- is allowable as revenue expenditure." 7. The Hon'ble Madras High Court in the case of CIT Vs. Vs. M/s. PVP Ventures Limited T. Nagar, Chennai in TC(A). No. 1023 of 2005, vide order dated 19.06.2021, while the order has been passed in relation to appeal against the order u/s 263, we find that the issue of the allowability of the expenditure pertaining to ESOP has been clearly dealt by the Hon'ble High Court. The relevant portion is as under: "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee 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 ITA No.2 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. 4. In the circumstances, the impugned order of the ITAT answering the question in favour of the Assessee is affirmed." 9. Since, it can be gauged from the above judgments that the expenditure incurred in connection with the ESOP is treated as revenue expenditure, we hereby allow the ground of appeal on this issue. Since, the grounds have been allowed on merits of the case in principle, the additional evidences filed by the assessee are not required to be considered by this Court. R&D Expenditure: 10. With regard to the R&D expenditure, the same has been disallowed by the AO and enhanced by the ld. CIT(A) in absence of the relevant details. The assessee has filed additional evidences under Rule 29 of the ITAT rules, 1963. The submission of the assessee before the Tribunal is as under: "The Ld. CIT(A) confirmed and enhanced the disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch is either done independently or in collaboration with the other research institutes. In the AY 2012-13, the Appellant entered into a collaboration agreement with Greenwich University Enterprises Limited, UK, to jointly carry out research work for a novel preparation of an injectable form of B- Cyclodextrin drug. The duration of the research project was an year, starting from August 2011 and ending in July 2012, as stipulated in the agreement. As per the terms of collaboration agreement, the Appellant was to pay the stipulated amount to GUE as research fees. Accordingly, for the AY under consideration the Appellant paid an amount of Rs. 64,59,150/- as research consultancy fee to GUE. The Ld. AO disallowed the claim said expense on the ground that it is capital in nature and results in creation of an intangible asset, being in the nature of capital asset as mentioned in Section 32(1)(ii) of the Act. Accordingly, under the erroneous assumption that section 32(1) (ii) of the Act is applicable, the Ld. AO after allowing depreciation at the rate of 25% on the said amount of Rs. 64,59,150/-, disallowed an amount of Rs. 48,44,362/-. Aggrieved by the order of the Ld. AO the Appella ..... X X X X Extracts X X X X X X X X Extracts X X X X
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