TMI Blog2024 (1) TMI 650X X X X Extracts X X X X X X X X Extracts X X X X ..... while computing income. The Special Bench whose order is affirmed by the Hon'ble High Court [ 2013 (8) TMI 629 - ITAT BANGALORE] held that the sole object of issuing shares to employees at a discounted premium is to compensate them for the continuity of their services to the company. By no stretch of imagination, we can describe such discount as either a short capital receipt or a capital expenditure. It is nothing but the employees cost incurred by the company. The substance of this transaction is disbursing compensation to the employees for their services, for which the form of issuing shares at a discounted premium is adopted. We hold that the addition made towards disallowance of ESOP expenses is not tenable on merits also. Ground raised by the assessee in this regard is allowed. Disallowance u/s 14A - expenditure incurred on earning exempt income - AR submitted that the income which is shown by the assessee as exempt is in reality is not an exempt income in order to invoke the provisions of section 14A - HELD THAT:- Section 14A provides that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Prejudice to Ground No.2, 3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A)-NFAC erred in bolding that ESOP expenses of the Appellant amounting to Rs. 2,04,91,503/- was not allowable as a business expenditure under section 37(1) of the Act and treating as capital expenditure. The Appellant prays that its claim be allowed as business expenditure under the provisions of the Act. Disallowance under section 14A of the Act: 4. On the facts and in the circumstances of the case and in law, the Ld. NFAC erred in upholding the action of the Assistant Commissioner of Income-tax, Circle 3(1)(2), Mumbai ('Ld. AO') in disallowing an amount of Rs. 6,30.553 under section 14A of the Act r.w.r. 8D of the Income-tax Rules, 1962 (the Rules') The Appellant prays that the disallowance made under section 144 of the Act be deleted. Initiating penalty under section 270A of the Act: 5. On the facts and in the circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under section 270A of the Act. The Appellant craves leave to add, alter, amend, substitute or withdraw all or any of the Groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oked the powers vested by provisions of section 251(1)(a) r.w. Explanation sent enhancement notice asking the assessee to explain why the ESOP of expenses should not be disallowed. The assessee submitted that the amount claimed as ESOP expenses is arising out of the difference between the market value and offer price on the date of exercise in respect of shares offered to employees under the ESOP scheme. The assessee further submitted that the difference is taxed as perquisite in the hands of employees on which tax is deducted. The assessee therefore, submitted that the expenditure on ESOP is eligible for deduction under section 37(1) of the Act. The assessee also relied on various High Court and Tribunal's decisions wherein ESOP expenses are held to be ascertained liability and allowable under section 37(1) of the Act. 5. The CIT(A) held that the expenditure cannot be claimed as a deduction on the ground that the same is tax as perquisite subject to TDS in the hands of the employees. The CIT(A) further held that the expenditure claimed is only a loss of capital that could have been earned by the assessee had the shares being sold in the open market and therefore is capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the taxability of the assessee . The ld. AR also relied on the decision of the Kolkata Bench of the Tribunal in the case of Apeejay Shipping Ltd. Vs. ACIT (2023) 152 taxmann.com 298 (Kol. Trib.) in which a similar view has been expressed by the Tribunal. 7. On merits the ld. AR submitted that the ESOP expenditure is an allowable claim under section 37(1) of the Act and in this regard relied on the decision of the Karnataka High Court in the case of CIT Vs. Biocon Ltd. Accordingly, the ld. AR made a without prejudice submission that even on merits the ESOP expenditure is an allowable claim and this fact has been admitted by the CIT(A) himself in the appellate order. 8. The ld. DR on the other hand relied on the order of the lower authorities. 9. We have heard the parties and perused the material on record. Before proceedings we recapitulate the facts pertaining to the issue under consideration. The assessee filed the original return of income declaring a loss of Rs. 8,64,09,139/- which was subsequently revised vide revised return filed on 07.03.2019 to Rs. 10,69,00,642/-. The increase in the returned loss is due to the claim of ESOP expenses in the revised return by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h such item or items of income in the body of order of assessment but he under-assessed such sums; or (c) He makes no addition in respect of some of the items, though in the course of hearing before him holds a discussion of such items of income (d) Yet, there can be another situation where the Assessing Officer inadvertently omits to tax amount which ought to have been taxed and in respect of which he does not make a enquiry. (e) Further another situation may arise, where an item or items of income or expenditure incurred and claimed is not at all considered and an assessment is framed, as a res thereof, a prejudice is caused to the revenue, or (f) Where an item of income which ought to have been taxed remained untaxed, and there is escapement of income, as a result of the assessee's failure to disclose fully and truly material facts necessary for computation of income. To ensure for each of such situations, an income which ought to have been taxed and remain untaxed, the legislature has provided different remedial measures as are contained in section 251(1)(a), 263, 154 and 147 of the Act. In the category stated in (a), obviously if an income escapes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eral examination, that itself would not have given power to the CIT(A) unless the issue was specifically dealt with by the AO in t body of the order of the assessment. It is this aspect which needs consideration in the present case. (emphasis supplied) 11. When we consider the provisions of section 251 and the above judicial pronouncements, certain principles emerge as to that the power to enhance is restricted to the subject matter of assessment or the source of income which have been considered expressly or by clear implications by the AO from the point of view of the taxability of the assessee. In other words the CIT(A) can exercise the power to enhance under section 251(1) in a case where the AO has considered a particular issue of disallowance or addition and while doing so has under assessed the income of the assessee. In cases where the AO has not dealt with the issue at and has not applied his mind on the taxability or non-taxability of a certain matter then the CIT(A) has no jurisdiction to enhance under section 251(1) but should resort to alternate course of action either under section 263 or 147 or 154 as the case may be. The Hon'ble Supreme Court in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowing the ESOP expenses for the reason that the AO while completing the assessment has not taken into consideration the revised return of income and has not examined the taxability of ESOP expenses which the assessee has claimed in the revised return of income. While holding so we would like to add that the decision is based on the facts unique to the assessee's case. This ground of the assessee is allowed accordingly. 14. On merits the issue of allowability of ESOP expenses is covered by the decision of the Karnataka High Court in the case of Biocon Ltd (supra) where it is held that expenditure on account of ESOP is a revenue expenditure and had to be allowed as deduction while computing income. The Special Bench whose order is affirmed by the Hon'ble High Court held that the sole object of issuing shares to employees at a discounted premium is to compensate them for the continuity of their services to the company. By no stretch of imagination, we can describe such discount as either a short capital receipt or a capital expenditure. It is nothing but the employees cost incurred by the company. The substance of this transaction is disbursing compensation to the em ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. In absence of exempt income, the assessee submits that it has not incurred any expenditure for earning exempt income and accordingly the provision of section 14A of the IT Act are not applicable to the assessee. 16. The AO did not consider this submission of the assessee and proceeded to make a disallowance of Rs. 6,30,553/- under section 14A of the Act. On further appeal, the CIT(A) upheld the decision of the AO. Aggrieved, the assessee is in appeal before the Tribunal. 17. The ld. AR submitted that the income which is shown by the assessee as exempt is in reality is not an exempt income in order to invoke the provisions of section 14A. The ld. AR further submitted that the income has arisen out of consolidation of certain mutual funds of the assessee and since the same is not considered as a transfer under section 47, the assessee had claimed the income as exempt. The ld. AR also submitted that this fact has been submitted before the AO which has not been considered. The ld. AR drew our attention to the submissions made before the CIT(A) explaining the details of the income treated as exempt as extracted below from which it would be clear that the impugned income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies and perused the material on record. From the perusal of records we notice that during the year under consideration, the assessee in the statement of income has shown an amount of Rs. 9,15,629/- as not taxable under the head Long Term Capital Gains (page 7 of PB). Further from the note submitted before the AO and break up submitted before the CIT(A), the income is claimed as not taxable under the head Long Term Capital Gains for the reason that the transaction of consolidation of mutual funds is not considered as transfer under section 47(xviii). Section 14A provides that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. Therefore for invoking section 14A the impugned transaction should first result in an income which as per other provisions of the Act is exempt. In the given case the transaction of the consolidation of mutual funds is not considered as a transfer under section 47(xviii) and therefore it does not result in any income within the definition of section 2(24) of the Act. Therefore we see merit in the contention that the assessee has not earned any income ..... X X X X Extracts X X X X X X X X Extracts X X X X
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