The Income Tax Appellate Tribunal (ITAT), Bangalore Bench, has recently in an appeal filed before it, allowed deduction of expenditure by Flipkart India towards ESOP u/s 37 of income tax act.
The aforesaid observation was made by Bangalore ITAT, when cross appeals by the assessee and revenue were preferred before it, as against the order of the CIT(A), Bangalore, dated 19.10.2022, for the assessment year 2017-18.
The facts of the case were that the assesseewas engaged in the business of wholesale distribution of books, mobile, media, computers, gaming console and other related accessories, apart from developing technology solutions, website solutions, supply chain management, financial solutions, logistic solutions, engineering & outsourcing solutions for e-commerce business. And, the assesseehad filed the return of income for AY 2017-18 on 30.11.2017, declaring a loss of Rs.139,61,48,741.
Subsequently, the case of the assesseewas selected for scrutiny, and statutory notices were duly served on the assessee, wherein the AO completed the assessment by making additions/disallowances, namely anaddition on account of valuation of marketing intangibles of assessee, amounting to Rs.1708,39,07,538, and a disallowance u/s. 37 towards ESOP expenses, amounting to Rs.15,80,70,000.
On further appeal, the CIT(A) deleted the addition made towards valuation of marketing intangible assets, by relying on the decision of the coordinate Bench in assessee’s own case. However, the disallowance of ESOP expenses was upheld by the CIT(A). And it is being aggrieved by these decisions of the CIT(A) that the assessee and the revenue,have preferred the present appeal before the Bangalore ITAT.
The ground of the assessee’s appeal being that the CIT(A) has erred in confirming the disallowance of the expenditure on ESOP of INR 15,50,70,000/- under Section 37 of the Income Tax Act, both in facts and in law and by erroneously distinguishing binding precedents and by rendering perverse findings contrary to the record, it was submitted by S/Shri Ajay Vohra, Sr. Counsel, Kishore Kunal & Parth, the Advocates on behalf of the assessee that the ESOP expenses qualify the conditions prescribed u/s. 37 of the Act, that It is an unascertained liability and not a contingent liability, and further that the ESOP expenses are recognized in accordance with the Accounting Principles i.e., INDAS 102.
The counsels for the assessee added that ESOP expenses are recognized by following a consistent accounting method year on year, thereby based on various judicial pronouncements, contenting that it is well settled that there is no liability to withhold tax in the case of cost-to-cost reimbursement, as is in the assessee’s case.
However, on the other hand, Ms. Neera Malhotra, the CIT(DR), through the written submissions, brought to the attention of the ITAT, the relevant parts of the CIT(A)’s order, in order to distinguish the assessee’s case from Biocon Ltd. (2013) 25 ITR (T) 602 (Bang. Trib), and submitted that the assessee has not submitted the relevant details in this regard.
Hearing the opposing contentions of either sides and thereby perusing the materials available on record, the Bangalore ITAT observed:
“We notice that the issue of whether ESOP cross charge expenses are allowable u/s. 37 of the Act has already been decided bythis Tribunal in favour of the assessee in the case of Biocon Ltd., which has also been affirmed by the Hon’ble Karnataka High Court in [2021] 430 ITR 151 (Karnataka) by categorically holding that “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 assessee’s case being identical, respectfully following the above decision of the coordinate Bench, we hold that the expenditure towards ESOP is eligible for deduction u/s 37 of the Act.”, the ITAT coram comprising of George George K, the Judicial Member and Padmavathy S, the Accountant Member, added.
Thus, allowing the assessee’s appeal, while dismissing that of the Revenue, the Bangalore ITAT held:
“Respectfully following the above decision of the Tribunal, we find no reason to interfere with the order of the CIT(Appeals) and uphold the same. The grounds taken by the revenue are dismissed.In the result, appeal of the assessee is allowed and appeal of revenue is dismissed.”
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