M/S. LUPIN LTD., MUMBAI V. ACIT - 3(4), MUMBAI

MA 193/MUM/2023

AI Insights

Lupin Limited filed a miscellaneous application against the order of the Income Tax Appellate Tribunal which had restored the matter to the file of the Assessing Officer (AO) regarding the deduction of ESOP expenses. The Tribunal initially did not appreciate that the discount claimed by Lupin Limited represented the second type of discount, which arises at the time of actual exercise of the ESOP options by employees. The second type of discount is not covered by SEBI guidelines and is deductible under taxation principles as it represents an employee welfare expense. The Tribunal's rectification acknowledged this oversight and corrected the earlier decision, allowing the deduction as claimed by Lupin Limited.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 136479 (ITAT-MUMBAI)
• Duration Of Justice: 6 month(s) 2 day(s)
• Appeal Type: Miscellaneous Application
• Pronouncement Date: 24-08-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 30-03-2023
• Assessment Year: 2009-2010
• Appeal Filed On: 21-02-2023
• Other Referred Cases: Biocon Ltd. vs. DCIT (144 ITD 21), 430 ITR 151
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Fair market value
• Section: 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI“A” BENCH, MUMBAI Before Shri B.R. Baskaran, AM &Ms. Kavitha Rajagopal, JM MA No.193/Mum/2023 (Arising out of ITA No. 395/Mum/2021 (Assessment Year:2009-10) M/s. Lupin Limited 7 th Floor, Kalpataru Inspire Off Western Express Highway Santacruz (E), Mumbai 400055 PAN –AAACL1069K Vs. A C I T – 3(4) 29 th Floor, Center-1 World World Cente Cuffe Parade Mumbai 400005 Appellant Respondent Appellant by: Shri Rajan Vora & Shri Hemen Chandariya Respondent by: Shri Soumendu Kumar Dash Date of Hearing: 31.03.2023 Date of Pronouncement: 25.08.2023 O R D E R Per: B.R. Baskaran, JM The assessee has filed this miscellaneous application submitting that there are mistakes apparent from record in the order dated 03.02.2023 passed by the Tribunal in the appeal of the Revenue in ITA No. 395/Mum/2021 relating to AY 2009-10. 2. The learned A.R. submitted that the AO has disallowed the claim of ESOP expenses of Rs.5.74 crores, being the difference between the fair market value of equity shares on the date of vesting of option and on the date of exercise of option. The learned A.R. submitted that the learned CIT(A) allowed the claim of the assessee and hence the Revenue challenged the said decision in its appeal filed before the Tribunal. 3. The learned A.R. submitted that the Tribunal has rightly followed the decision rendered by the Special Bench of Bangalore ITAT in the case of Biocon Ltd. vs. DCIT (144 ITD 21), which has since been upheld by the MA No. 193/Mum/2023. Lupin Limited 2 Hon’ble Karnataka High Court in the very same case reported in 430 ITR 151. However, the Tribunal has restored the matter to the file of the AO with certain directions, even though the points narrated by the Tribunal for so restoring the issue to the AO has already been decided by the Special bench. He submitted that the same constitutes mistakes apparent from record. 4. The learned AR submitted that there are also mistakes in capturing the factual aspects relating to the ESOP claim by the Tribunal. Explaining it further, the Ld A.R submitted that the ESOP scheme involves following three stages:- Stage 1 – Granting of ESOP option to the employees Stage 2 – Vesting ESOP option Stage 3 – Exercise of ESOP option He submitted that the discount in granting of ESOP arises in two stages, viz., (a) First type of discount arises at the time of granting and/or vesting of ESOP options and it represents the difference between fair market value on the date of granting/vesting date and the price at which shares are offered to the employees. This discount is usually amortised over the vesting period. The employee need not exercise option at the time of vesting itself. (b) The second type of discount arises at the time of “actual exercise of option” by the employees and it represents the difference between the fair market value of the equity shares on the date of vesting of option and the date of exercise of option. 5. The Ld A.R submitted that the first type of discount did not arise in the case of the assessee, since the shares were offered to employees at the market price on the date of grant. The learned AR submitted that the claim of Rs.5.74 crores represented the second type of discount arising at the time of exercise of option by the employees. He submitted that the Tribunal has, however, examined this issue under the impression that the above said claim represented first type of discount, which is factually not MA No. 193/Mum/2023. Lupin Limited 3 correct. In view of the above said confusion, a mistake apparent from record has occurred in the order passed by the Tribunal. He submitted that the SEBI guidelines prescribed accounting treatment for the first type of discount only and nothing has been mentioned by SEBI guidelines with regard to second type of discount. This fact has been noted down by the Special Bench in paragraph 11.2.9 of its order. However, the Tribunal has directed the AO to examine this aspect of accounting treatment, which is contrary to the decision rendered by the Special Bench. 6. Explaining further, the Ld A.R submitted that SEBI guidelines has prescribed method of accounting discount on issue of ESOP, only in respect of first type of discount. It did not prescribe any accounting treatment for the second type of discount. He submitted that the Special bench has taken note of this fact and accordingly held that the taxation principles shall apply to the second type of discount. He submitted that, under the principles of taxation, a deduction otherwise allowable under the Income tax Act could not be denied merely on account of the reason that it was not debited to the Profit and Loss account. Accordingly, he submitted that there is no mandatory requirement of passing any accounting entry for second type of discount. He submitted that the Tribunal has restored to the issue to the file of AO for examining as to whether there was any mandatory requirement for passing accounting entry, which question has since been answered by the Special bench. 7. The Ld A.R submitted the claim of Rs.5.74 crores represented second type of discount. He submitted that the details of the same have been given in the Annual report, even though it was not debited to the Profit and Loss account. He further submitted that the assessee has also paid fringe benefit tax on the above said amount of Rs.5.74 crores, since it is a case of employee welfare expense. Hence, the assessee has claimed the above said amount as deduction under section 37(1) of the Act, which is in accordance with the taxation principles as held by the Special Bench. The second type of discount arises only when there is upward movement of market prices of equity shares. However, if the market price of shares falls MA No. 193/Mum/2023. Lupin Limited 4 down, then the assessee is required to reverse part of first type of discount. Accordingly, the learned AR submitted that the Tribunal has not properly appreciated the fact that the claim made by the assessee falls under the category of “second type of discount” and the same has resulted in a mistake apparent from record. Accordingly he prayed for rectification of the order passed by the Tribunal on the above said issue. 8. We heard Ld D.R and perused the record. We notice that the above said issue has arisen in the appeal of the revenue and the same has been dealt with by the Tribunal in Paragraph 15 to 15.5 of the order. On a perusal of the order so passed by the Tribunal, we notice that the Tribunal did not appreciate the fact that the discount on ESOP arises on two different occasions. It also did not appreciate that the deduction claimed by the assessee represented second type of discount. We also notice that the Special bench of Bangalore ITAT in the case of Biocon Ltd (supra) has appreciated the fact that there may arise second type of discount and has held that it is allowable as deduction. The Special bench has also held that the SEBI guidelines did not prescribe any mandatory accounting treatment for the second type of discount and accordingly held that the taxation principles will apply for allowing deduction of second type of discount. The relevant discussions find place in paragraph 11.1.6, 11.2.8 and 11.2.9 of the order passed by the Special Bench with illustrations. The illustration 2 given in paragraph 11.1.6 specifically deals with the situation, when there is an increase in the market price of shares at the time of actual exercise of option and it has been held that the assessee would be entitled for further deduction at the time of exercise of option. The taxation principle is discussed in paragraph 11.2.8 of the order and the matter relating to accounting treatment is discussed in 11.2.9 of the order. It is pertinent to note that the above said decision rendered by the Special bench has since been upheld by the Hon’ble Karnataka High Court. In view of the above, we agree with the submission of the assessee that there are mistakes apparent from record in the decision rendered by MA No. 193/Mum/2023. Lupin Limited 5 the Tribunal. Accordingly, the existing paragraphs 15.4 and 15.5 of the order are replaced with the following paragraphs:- “15.4We notice that the Special bench has recognised that the discount on ESOP arises on two occasions, viz., (a) First type of discount arises at the time of granting and/or vesting of ESOP options and it represents the difference between fair market value on the date of granting/vesting date and the price at which shares are offered to the employees. This discount is usually amortised over the vesting period. The employee need not exercise option at the time of vesting itself. (b) The second type of discount arises at the time of “actual exercise of option” by the employees and it represents the difference between the fair market value of the equity shares on the date of vesting of option and the date of exercise of option. In the instant case, the amount of Rs.5,74,85,066/- claimed by the assessee represents the second type of discount mentioned in (b) above, i.e., the additional discount arising at the time when the employees actually exercise option. It is the submission of the assessee that the first type of discount did not arise in the instant case, since there was no difference between market price of equity shares and the price at which the shares were offered to the assessee. As per the decision rendered by the Special bench of Bangalore ITAT in the case of Biocon Ltd (supra), the second type of discount arising at the time of actual exercise of option by the employees is also allowable as deduction. This is clear from the discussions made by the Special bench in paragraph 11.1.6 of its order, more particularly, the discussion made in respect of “Situation II” explained by way of illustration by the Tribunal. Accordingly, the above said claim of the assessee is allowable as deduction. 15.5We noticed that the assessee has claimed this amount as deduction before the AO during the course of assessment MA No. 193/Mum/2023. Lupin Limited 6 proceedings and it is the case of the AO that the assessee has not accounted for the same in the books of account. It is the submission of the assessee that the first type of discount is required to be accounted in the books of account and the second type of discount is not required to be accounted. We notice that the requirement of accounting second type of discount has been examined by the Special bench in paragraphs 11.2.8 and 11.2.9 of its order. We notice that the Special bench has stated that the SEBI guidelines did not discuss about the accounting of second type of discount. Accordingly, the Special bench held that the deduction of additional discount has to be allowed as per taxation principles. For the sake of convenience, we extract below paragraphs 11.2.8, 11.2.9 and 11.3 of the order passed by the Special bench:- “11.2.8. The plea now raised before us by the ld. AR, relying on the case of Challapalli Sugars Ltd.'s case, was also taken up before the Hon'ble Supreme Court in the case of Tuticorin Alkalis (supra). Dealing with the same, the Hon'ble Supreme Court held that : "The question in Challapalli Sugars Ltd.'s case [1975] 98 ITR 167 (SC) was about computation of depreciation and development rebate under the Indian Income-tax Act, 1922. In order to calculate depreciation and development rebate it was necessary to find out "the actual cost" of the plant and machinery purchased by the company. This court held that "cost" is a word of wider connotation than "price". There was a difference between the price of a machinery and its cost. This court thereafter pointed out that the expression "actual cost" had not been defined in the Act. It was, therefore, necessary to find out the commercial sense of the phrase. .............The judgment in Challapalli's case [1975] 98 ITR 167 (SC), goes to show that the court was not in any way departing from legal principles because of any opinion expressed by the Institute of Chartered Accountants." From the above observations there is not even an iota of doubt in our minds that there can be no question of following the accounting principle or Guidance notes etc. in the matter of determination of total income. 11.2.9. The trump card of the ld. AR to bolster his submission for assigning the status of binding force to the SEBI Guidelines is the order in the case of SSI Limited (supra) which came to be affirmed by the Hon'ble Madras High Court in PVP Ventures (supra). We have noticed above that the said case dealt a situation falling within one of the three years of the vesting period, in which it was held that one third of the total amount of discount computed on the basis of the market price of the MA No. 193/Mum/2023. Lupin Limited 7 shares at the time of grant of option, is deductible. It is evident from the SEBI Guidelines that these deal with the deductibility of discount in the hands of company during the years of vesting period. These Guidelines are silent on the position emanating from variation in the market price of the shares at the time of exercise of option by the employees vis-à-vis the market price at the time of grant of option. In other words, the SEBI Guidelines prescribe accounting treatment only in respect of the period of vesting of the options and the situation arising out of unvested options or vested options lapsing. The very reference by the Chennai Bench of the Tribunal in SSI Limited (supra) to the SEBI Guidelines is indicative of the fact that it dealt with a year during which the options were vesting with the employees and the company claimed discount during the vesting period. The Hon'ble Madras High Court in the case of PVP Ventures (supra) has upheld the view taken by the Chennai Bench in the case of SSI Limited (supra). The granting of the binding force to the SEBI Guidelines by the Hon'ble Madras High Court should be viewed in the context of the issue before it, which was about the deductibility of discount during one of the vesting years. In the earlier part of this order, we have held that the deductibility of discount during the vesting period, as prescribed under the SEBI Guidelines, matches with the treatment under the mercantile system of accounting. To that extent, we also hold that the SEBI guidelines are applicable in the matter of deduction of discount. Neither there was any issue before the Hon'ble Madras High Court nor it dealt with a situation in which the market price of the shares at the time of exercise of option is more or less than the market price at the time of grant of option. It is a situation which has also not been dealt withby the Guidelines. Accordingly, the afore noted taxation principle of granting deduction for the additional discount and reversing deduction for the short amount of discount at the time of exercise of option, needs to be scrupulously followed. 11.3. We, therefore, sum up the position that the discount under ESOP is in the nature of employees cost and is hence deductible during the vesting period w.r.t. the market price of shares at the time of grant of options to the employees. The amount of discount claimed as deduction during the vesting period is required to be reversed in relation to the unvesting/lapsing options at the appropriate time. However, an adjustment to the income is called for at the time of exercise of option by the amount of difference in the amount of discount calculated with reference the market price at the time of grant of option and the market price at the time of exercise of option. No accounting principle can be determinative in the matter of computation of total income under the Act. The question before the special bench is thus answered in affirmative by holding that discount on issue of Employee Stock Options is allowable as deduction in computing the income under the head `Profits and gains of business or profession'.” MA No. 193/Mum/2023. Lupin Limited 8 We notice that the assessee has also paid “fringe benefit tax” on the second type of discount (referred supra). It is well settled principle of taxation that the entries made or otherwise in the books of account are not relevant for computing total income, i.e., the total income has to be computed as per the provisions of Income tax Act. If the deduction is otherwise allowable as deduction in computing total income, the same is allowable irrespective of the fact whether the same is accounted in the books of account or not. We notice that this principle has been applied by the Special bench with regard to second type of discount. Accordingly, we are of the view that the Ld CIT(A) was justified in allowing the deduction of Rs.5,74,85,065/- claimed by the assessee. Accordingly, we uphold the order passed by Ld CIT(A) on this issue.” 8. In the result, the miscellaneous application filed by the assessee is allowed. Pronounced in the open Court on 25 th August, 2023. Sd/- Sd/- (Kavitha Rajagopal) (B.R. Baskaran) Judicial Member Accountant Member Mumbai, Dated: 25 th August, 2023 Copy to: 1. The Appellant 2. The Respondent 3. The CIT concerned 4. The DR, ITAT, Mumbai 5. Guard File By Order //True Copy// Assistant Registrar ITAT, Mumbai PS