Mastek Limited, Ahmedabad V. The PCIT, Ahmedabad-1, Ahmedabad

ITA 375/AHD/2023

AI Insights

Mastek Limited appealed against the order of the Principal Commissioner of Income Tax (PCIT), which had set aside the original assessment order for the assessment year 2018-19. The PCIT's order was based on the grounds that the assessing officer had not properly verified the ESOP expenses claimed by Mastek Limited, amounting to INR 4,95,78,999. The Tribunal examined whether the assessing officer had conducted a sufficient inquiry into these expenses during the original assessment proceedings. The Tribunal concluded that the assessing officer had indeed made adequate inquiries and that the PCIT's decision to set aside the assessment was not warranted.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 125678 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-07-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 18-07-2023
• Assessment Year: 2018-2019
• Appeal Filed On: 14-05-2023
• Other Referred Cases: CIT Vs. Sunbeam Auto, Gabriel India Ltd. [1993] 203 ITR 108 (Bom), Sh. Narayan Tatu Rane Vs. ITO, I.T.A. No. 2690/2691/Mum/2016
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Revision of order; Fair market value; Revenue expenditure; TDS; Set aside
• Section: 6; 143(3); 142(1); 37(1); 143(2); 2(A); 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, AHMEDABAD BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER & SHRI SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER I .T .A . No .3 75 /A h d / 20 23 ( A s se ss m e nt Y e a r : 20 18- 19 ) Ma s te k Li mi te d, 80 4 /8 05 , Pr es id e n t H o us e , Op p. C . N . V i d ya l a ya , Ah me da bad - 3 80 00 6 V s. Pr i nc ip a l C o mm i s s i o ne r o f I nc o m e Ta x- 1, A h m e da ba d [ P AN N o. A A AC M 9 90 8 Q ] (Appellant) .. (Respondent) Appellant by : Shri Bandish Soparkar & Shri Parin Shah, A.Rs. Respondent by: Dr. Darsi Suman Ratnam, CIT D.R. D a t e of H ea r i ng 19.07.2023 D a t e of P r o no u n ce me nt 26.07.2023 O R D E R PER SIDDHARTHA NAUTIYAL - JUDICIAL MEMBER: This appeal has been filed by the Assessee against the order passed by the Ld. Principal Commissioner of Income Tax, (in short “Ld. PCIT”)-1, Ahmedabad vide order dated 30.03.2023 passed for Assessment Year 2018- 19. 2. The assessee has taken the following grounds of appeal:- “1. Ld. Pr. CIT Ahmedabad-1 erred in law and on facts revising a scrutiny assessment order which is neither erroneous nor prejudicial to the interest of revenue. The action of ld. Pr. CIT revising an order passed after verification of the details on record is without any justification to invoke revisional jurisdiction. ITA No. 375/Ahd/2023 Mastek Limited vs. PCIT Asst.Year –2018-19 - 2 - 2. Ld. Pr. CIT erred in law and on facts holding order erroneous on the alleged ground that amount of Rs. 4,95,78,999/- [ESOP expenses] claimed over and above the expenses which is debited to profit & loss account was allowed by AO without proper verification and application of mind. 3. Ld. Pr. CIT erred in law and on facts in passing impugned order on the alleged ground of AO wrongly allowing expenses claimed by the appellant u/s 37(1) of the Act to have been expended exclusively for the purpose of business and profession. 4. Ld. Pr. CIT erred in law and on facts holding scrutiny assessment order as erroneous in so far as prejudicial to the interest of revenue which was passed by AO being satisfied on due verification of the details such as entire working of ISOP expense of Rs 4,95,78,999/- including FMV of shares on date of exercise of option by the employees with complete details employee wise, their PAN, no of equity shares allotted, TDS deducted etc for allowing the expense. 5. Ld Pr. CIT grievously erred in law and on facts in holding ESOP expenses as Notional Expenses as well as a contingent liability of uncertain nature that are not an allowable expense as per law without considering the fact that such ESOP expense are ascertained liability supported by judicial precedents of various courts. ITA No. 375/Ahd/2023 Mastek Limited vs. PCIT Asst.Year –2018-19 - 3 - 6. Ld Pr. CIT further erred in law and on facts in holding ESOP expenses as a capital expenditure being a securities premium which is a capital item disregarding the judicial precedents of various courts wherein it is held that such ESOP expenses are revenue in nature. 7. Ld. Pr. CIT erred in law and on facts in holding the assessment order allowing the claim of ESOP expenses being valid under the law and supported by judicial precedence of various courts as erroneous and prejudicial to the interest of revenue. 8. Without prejudice ld. Pr. CIT erred in law and on facts holding assessment order erroneous & prejudicial to the interest of Revenue overlooking the fact that appellant is eligible to claim MAT credit of Rs. 19,86,66,917/- against the tax liability that may arise under normal provisions if ESOP expenses are disallowed but there may not arise any additional tax/interest liability on a/c of disallowance and therefore the same cannot be said to be prejudicial to the interest of Revenue. Your appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal before the appeal is heard and decided.” 3. The brief facts of the case are that the assessee company filed the original return of income for assessment year 2018-19 declaring total income of ₹ 26,65,54,570/-, which was subsequently revised to ₹ ITA No. 375/Ahd/2023 Mastek Limited vs. PCIT Asst.Year –2018-19 - 4 - 21,69,75,570/-. Assessment under Section 143(3) of the Act was completed on 25-02-2021 determining total income at ₹ 21,73,09,646/-. The Principal CIT observed that assessee had revised its return of income for claiming Employee Stock Compensation Expenses (ESOP expenses) of ₹ 4,95,78,999/- which was not claimed in the original return of income. He further observed that total perquisite value on account of issue of equity shares to employees was ₹ 5,01,37,006/- and out of this an amount of ₹ 5,58,007/- was debited to the profit and loss account during the impugned assessment year and thus, the remaining amount of ₹ 4,95,78,999/- was claimed during this year as “Other Deductions” in Schedule BP of ITR. Further, the Principal CIT observed that in the profit and loss account, the assessee had claimed a sum of ₹ 174 lakhs as employee stock compensation expenses under Schedule 17 (Employee Benefit Expenses). This amount was not found to be added back in the computation of income, hence, it is clear that assessee had claimed these expenses, in excess to its claim of ₹ 4,95,78,999/- under the head “Other Deductions” for the year under consideration. In light of the above observations, the Principal CIT held that the assessee had claimed expenses of ₹ 4,95,78,999/- which were not included in the current year’s expenses and booked in the books of accounts through profit and loss account. The AO ought to have verified/investigated the issue and ought to have disallowed the same while finalising the assessment order for the year under consideration. Accordingly, the Principal CIT set aside the assessment order by holding the same to be erroneous and prejudicial to the interests of the Revenue. ITA No. 375/Ahd/2023 Mastek Limited vs. PCIT Asst.Year –2018-19 - 5 - 4. The assessee is in appeal before us against the aforesaid order passed by Principal CIT. Before us, the counsel for the assessee submitted that the Principal CIT has erred in holding that there was lack of enquiry on the part of the assessee officer. It was submitted before us that the assessing officer had made complete enquiry during the course of original assessment proceedings. The counsel for the assessee drew our attention to notice dated 23-09-2019 issued under section 143(2) of the Act to scrutinise the claim of “any other amount allowable as deduction in Schedule BP” during the year under consideration. Thereafter, the counsel drew our attention to reply dated 15-11-2019 filed by the assessee giving inter alia details of employee stock compensation expenses of ₹ 4.95 crores (at pages 35 -40 of paper book). Thereafter, the counsel for the assessee drew our attention to notice dated 17-12-2020 under section 142(1) of the Act and assessee’s reply dated 12-01-2021 in response to the same. The counsel for the assessee drew our attention to Pages 73-124 of the Paper Book in which the assessee company had submitted sample Form 16 of various employees to the assessing officer during the course of assessment proceedings, in support of genuineness of claim of employee stock compensation expenses. Further, the counsel for the assessee invited our attention to notice dated 03-02-2021 issued under section 142(1)of the Act and assessee’s reply dated 07-02-2021 and also drew our attention to page 45 onwards of the paper book in which complete details of allotment of equity shares under ESOP Scheme were furnished to the assessing officer during the course of assessment proceedings. The counsel for the assessee further drew our attention to pages 52-59 of the paper book and submitted that the details regarding as to how the stock options were computed, were also placed on record before the assessing ITA No. 375/Ahd/2023 Mastek Limited vs. PCIT Asst.Year –2018-19 - 6 - officer for his consideration during the course of assessment proceedings. Further, the counsel for the assessee drew our attention to page 33 of the paper book containing notice issued under section 142(1) of the Act and assessee’s reply dated to dated 13-02-2021 (at pages 60-64 of the paper book) wherein the assessee had given another explanation with respect to the claim of employee stock option expenses. Further, the counsel for the assessee submitted that even during the course of 263 proceedings, the assessee had submitted before the Principal CIT that the issue has been examined in detail during the course of assessment proceedings, and further on merits, it was submitted that the aforesaid expenses are genuine expenses and allowable under the Act. Accordingly, the submissions of the counsel for the assessee are twofold: firstly, that the issue was examined in detail during the course of assessment proceedings, as is evident from the various notices issued by the assessing officer during the course of assessment proceedings and the assessee’s reply to the same and secondly, even otherwise on merits, it has not been doubled that the aforesaid expenses are allowable expenses and there is no doubt regarding the genuineness of the same. 5. In response, the Ld. DR submitted that the assessee had launched four ESOP schemes and no separate details regarding each of the scheme was furnished to the assessing officer during the course of assessment proceedings. Further, the assessment order has also not made any quantification in the audit report regarding the aforesaid schemes. On merits, the Ld. DR submitted that there is no quantification by the assessee of the FMV of shares and further, there is no clarity as to under which of the ITA No. 375/Ahd/2023 Mastek Limited vs. PCIT Asst.Year –2018-19 - 7 - four schemes the aforesaid expenses have been claimed. Accordingly, the Principal CIT has correctly held that the assessment order is erroneous and prejudicial to the interests of Revenue. 6. We have heard the rival contentions and perused the material on record. On going to the facts of the case, we observe that firstly the issue with respect to the claim of ESOP expenses has been examined in detail during the course of assessment proceedings. In the instant facts, it cannot be inferred that there was any lack of enquiry on part of the assessing officer during the course of assessment proceedings with respect to the claim of aforesaid ESOP expenses. This is evident from notices dated 23- 09-2019, 17-12-2020, 03-02-2021 and 11-02-2021 issued by the assessing officer during the course of assessment proceedings inquiring into the aspect of claim of ESOP expenses. Further, the assessee had also filed various responses dated 15-11-2019, 12-01-2021, 07-02-2021 and 13-02- 2021 giving detailed explanation regarding the claim of ESOP expenses, referred to above. Accordingly, there is evidently no lack of enquiry or non- application of mind by the assessing officer with respect to the claim of ESOP expenses. Further, the Principal CIT in the 263 order has not pointed out to any specific finding to the effect that the aforesaid ESOP expenses had been incorrectly claimed by the assessee company. There has been no specific finding that there was any infirmity/irregularity in claim of ESOP expenses by the assessee company, referred to above. 7. An inquiry made by the Assessing Officer, considered inadequate by the Commissioner of Income Tax, cannot make the order of the Assessing Officer erroneous. In our view, the order can be erroneous if the Assessing ITA No. 375/Ahd/2023 Mastek Limited vs. PCIT Asst.Year –2018-19 - 8 - Officer fails to apply the law rightly on the facts of the case. As far as adequacy of inquiry is considered, there is no law which provides the extent of inquiries to be made by the Assessing Officer. It is Assessing Officer’s prerogative to make inquiry to the extent he feels proper. The Commissioner of Income Tax by invoking revisionary powers under Section 263 of the Act cannot in our view, impose his own understanding of the extent of inquiry. There were a number of judgments by various High Courts in this regard. 8. The Delhi High Court in the case of CIT Vs. Sunbeam Auto 332 ITR 167 (Del.), made a distinction between lack of inquiry and inadequate inquiry. The Hon’ble court held that where the AO has made inquiry prior to the completion of assessment, the same cannot be set aside u/s 263 on the ground of inadequate inquiry:- “12...... There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between “lack of inquiry” and “inadequate inquiry”. If there was any inquiry, even inadequate, that would not by itself, give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of “lack of inquiry”, that such a course of action would be open. ——— ITA No. 375/Ahd/2023 Mastek Limited vs. PCIT Asst.Year –2018-19 - 9 - From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decision is held to be erroneous. Cases may be visualised where the Income-tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of ITA No. 375/Ahd/2023 Mastek Limited vs. PCIT Asst.Year –2018-19 - 10 - the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed. 15. Thus, even the Commissioner conceded the position that the Assessing Officer made the inquiries, elicited replies and thereafter passed the assessment order. The grievance of the Commissioner was that the Assessing Officer should have made further inquires rather than accepting the explanation. Therefore, it cannot be said that it is a case of ‘lack of inquiry’.” 9. In Gabriel India Ltd. [1993] 203 ITR 108 (Bom), law on this aspect was discussed in the following manner (page 113):- “The consideration of the Commissioner as to whether an order is erroneous in so far as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction. The Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. Such action will be against the well-accepted policy of law that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial ITA No. 375/Ahd/2023 Mastek Limited vs. PCIT Asst.Year –2018-19 - 11 - and quasi-judicial controversies as it must in other spheres of human activity. 10. The Mumbai ITAT in the case of Sh. Narayan Tatu Rane Vs. ITO, I.T.A. No. 2690/2691/Mum/2016, dt. 06.05.2016 examined the scope of enquiry under Explanation 2(a) to section 263 in the following words:- “20. Further clause (a) of Explanation states that an order shall be deemed to be erroneous, if it has been passed without making enquiries or verification, which should have been made. In our considered view, this provision shall apply, if the order has been passed without making enquiries or verification which a reasonable and prudent officer shall have carried out in such cases, which means that the opinion formed by Ld Pr. CIT cannot be taken as final one, without scrutinising the nature of enquiry or verification carried out by the AO vis-à-vis its reasonableness in the facts and circumstances of the case. Hence, in our considered view, what is relevant for clause (a) of Explanation 2 to sec. 263 is whether the AO has passed the order after carrying our enquiries or verification, which a reasonable and prudent officer would have carried out or not. It does not authorise or give unfettered powers to the Ld Pr. CIT to revise each and every order, if in his opinion, the same has been passed without making enquiries or verification which should have been made. In our view, it is the responsibility of the Ld Pr. CIT to show that the enquiries or verification conducted by the AO was not in accordance with the enquries or verification that would have been carried out by a prudent officer. Hence, in our ITA No. 375/Ahd/2023 Mastek Limited vs. PCIT Asst.Year –2018-19 - 12 - view, the question as to whether the amendment brought in by way of Explanation 2(a) shall have retrospective or prospective application shall not be relevant.” 11. Now coming to the facts before us, from the records we observe that during the course of assessment, the AO called for details with respect to the claim of ESOP expenses and the assessee filed various replies to the queries raised by the assessing officer, during the course of assessment proceedings. We observe that this is not a case where there was an omission on part of the AO to examine this aspect of ESOP expenses at all. The AO had put a specific queries before the assessee during the course of assessment by way of issuance of various notices and had taken assessee’s replies on record. Further, in the instant facts, there is no specific finding that the aforesaid expenses are not genuine or that there was any irregularity with respect to the aforesaid claim of ESOP expenses. So, in our view, this is not a case where no enquiry has been made by the assessee officer during the course of assessment proceedings. As held by various Courts, Principal CIT cannot in 263 proceedings set aside an assessment order merely because he has a different opinion in the matter. In our view, s. 263 of the Act does not visualise a case of substitution of the judgment of the Principal CIT for that of the Assessing Officer, who passed the order unless the decision is held to be wholly erroneous. As noted in various judicial precedents highlighted above, the Principal CIT, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax ITA No. 375/Ahd/2023 Mastek Limited vs. PCIT Asst.Year –2018-19 - 13 - Officer. That would not vest the Commissioner with power to re-visit the entire assessment and determine the income himself at a higher figure. We thus find no error in the order of Ld. AO so as to justify initiation of 263 proceedings in the instant case. The Grounds of appeal raised by the assessee are thus allowed. 12. In the result, the appeal of the assessee is allowed. This Order pronounced in Open Court on 26/07/2023 Sd/- Sd/- (WASEEM AHMED) (SIDDHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad; Dated 26/07/2023 TANMAY, Sr. PS TRUE COPY आदेश क त ल प अ े षत/Copy of the Order forwarded to : 1. अपीलाथ / The Appellant 2. यथ / The Respondent. 3. संबं धत आयकर आय ु त / Concerned CIT 4. आयकर आय ु त(अपील) / The CIT(A)- 5. वभागीय त न ध, आयकर अपील!य अ धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड' फाईल / Guard file. आदेशान ु सार/ BY ORDER, उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील य अ धकरण, अहमदाबाद / ITAT, Ahmedabad 1. Date of dictation 24.07.2023 (Dictated in his Dragon Software) 2. Date on which the typed draft is placed before the Dictating Member 24.07.2023 3. Other Member..................... 4. Date on which the approved draft comes to the Sr.P.S./P.S 24.07.2023 5. Date on which the fair order is placed before the Dictating Member for pronouncement .07.2023 6. Date on which the fair order comes back to the Sr.P.S./P.S 26.07.2023 7. Date on which the file goes to the Bench Clerk 26.07.2023 8. Date on which the file goes to the Head Clerk.......................................... 9. The date on which the file goes to the Assistant Registrar for signature on the order.......................... 10. Date of Despatch of the Order..........................................