ESOP Cost Rightly Allowed as Business Expenditure: ITAT Sets Aside PCIT Order against Nuvama Wealth after Finding Proper AO Inquiry [Read Order]

The Mumbai Bench of Income Tax Appellate Tribunal ( ITAT ) has set aside the revisional order passed by the Principal Commissioner of Income Tax (PCIT) under section 263 of the Income Tax Act,1961, holding that the Assessing Officer (AO) had carried out a detailed and pointed enquiry before allowing the assessee’s claim of deduction towards Employee Stock Option Plan (ESOP) expenditure under section 37(1) of the Act.

The assessee, Nuvama Wealth Management Ltd. (formerly Edelweiss Securities Ltd.), questioned the PCIT’s finding that out of the total ESOP cost of ₹73,30,24,968 claimed by it, a sum of ₹58.02 crore had been “recovered” from its holding company, Edelweiss Financial Services Ltd. (EFSL), and therefore only ₹15.27 crore could be legitimately allowed as deducted on that basis. The PCIT held the assessment order to be erroneous and prejudicial to the interests of the Revenue.

The PCIT accordingly set aside the assessment with a direction to the AO to examine the issue afresh.

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The Tribunal observed that the AO had issued multiple notices under sections 143(2) and 142(1), specifically calling for justification and supporting documents regarding the ESOP claim.

The assessee had furnished a comprehensive note, detailed computations, Tax Deducted at Source (TDS) components, employee-wise details, and financial statements, which explained that the ESOP plan was framed by EFSL in accordance with SEBI Guidelines and that the discount represented employee remuneration and was taxed as a perquisite.

After examining these documents, the AO issued a further show-cause notice (SCN) proposing disallowance of the claim.

The assessee responded to the notice by reiterating its legal and factual submissions and enclosing relevant ledgers, reconciliations, and financial extracts.

The AO accepted the same by carefully considering these explanations and documents. After being satisfied that the claim was in accordance with law and supported by established jurisprudence, including the decision in Biocon Ltd. v. DCIT (2013), and concluded the assessment accordingly.

The Bench comprising Amit Shukla (Judicial Member) and Padmavathy S (Accountant Member) held that the assessment order reflected a conscious and judicious application of mind, and the inference of “lack of enquiry” drawn by the PCIT was contrary to the record.

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The tribunal further noted that the alleged “recovery” of ₹58.02 crore was factually incorrect, as the amounts received from EFSL represented only TDS funding collected centrally for remittance to the Government.

The bench concluded that the PCIT’s assumption of jurisdiction under section 263 was based on a mistaken understanding of facts and law, and the Tribunal ruled that the order was neither erroneous nor prejudicial to the interests of the Revenue.

Accordingly, the tribunal quashed the revisional order and restored the assessment made under section 143(3) read with section 144B.

The assessee was represented by Madhur Agarwal, along with Ravikant S Pathak, while Kishor Dhule appeared for the Revenue.

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