ESOP expenses can be classified as revenue expenditure; revising a tax assessment requires showing an actual lack of inquiry, not mere disagreement with AO's judgment.

ORDER

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-1, (in short “Ld. PCIT”), Ahmedabad, vide order dated 11.03.2022 passed for A.Y. 2017-18.

2. The Assessee has taken the following grounds of appeal:-

“1. The Learned Pr. Commissioner of Income - Tax, Ahmedabad-1 has erred in passing an order u/s.263 of the T.T. Act,1961 setting aside the assessment order dtd. 31/10/2019 passed u/s. 143(3) of the Act which is neither erroneous nor prejudicial to the interest of revenue.

2. The Learned Pr. Commissioner of Income - Tax, Ahmedabad-1 has erred in passing an order u/s.263 of the I.T. Act,1961 setting aside the Assessment Order passed u/s. 143(3) of the I.T. Act, 1961 dtd.31. 10.2019 and directing the Assessing officer to make fresh assessment after considering in depth investigation in respect of issue of ESOP expenditure as to whether said expenses arc revenue expenditure or capita] expenditure and decide the allowability of expenditure u/s. 37 of the Act on the basis of final outcome of Supreme Court in the case of M/s. Lemon Tree Hotels 3. The Learned Pr. Commissioner of Income - Tax, Ahmcdabad-1 has erred in passing an order u/s.263 of the I.T. Act, 1961 which is barred by limitation since the issues sought to be revised have been examined in the assessment proceedings hence the same being illegal and bad in law requires to be quashed.4. The Learned Pr. Comm. of Income Tax, Ahmedabad-1, has erred in erred in passing revision order u/s.263 of the Act prematurely holding that ESOP expenditure is capital expenditure and not allowable u/s.37 of the Act as clarity for allowability of the same is not available in the Act and SLP of the Revenue is pending with the Supreme Court in the case of M/s. Lemon Tree Hotels Pvt.5. The Learned Pr. Comm. of Income Tax, Ahmedabad-1, has erred in holding that the Assessing Officer has not appreciated the facts of the case in proper perspective and legality involved and the order passed by him is silent for allowability of ESOP expenses debited to Profit and Loss A/c and which have been allowed as business expenses without any inquiry, examination and independent verification and to that extent the order passed by him is erroneous and prejudicial to the interest of the revenue.6. The appellant craves leave to add. alter, amend or modify any of the grounds of appeal on or before the date of hearing of appeal.”

3. The brief facts of the case are that upon reviewing the case records, PCIT observed that the Assessee Company has recorded an expense of Rs. 9.55 crore under 'Employee Benefit Expenses' in its Profit and Loss Account, of which Rs. 3.67 crore pertains specifically to Employee Stock Option Plan (ESOP) expenses claimed for the financial year in question. PCIT observed that a perusal of Note 28 of the Financial Statements reveals that the company issued shares to its employees under the ESOP at a significantly subsidized rate of Rs. 10 per share, despite the fair market values being Rs. 990 and Rs. 425. This results in a premium forgone ranging from 97.65% to 100%, with the difference in value recognized by the company as an expense in its financial records. PCIT observed that there is no explicit provision in the Income Tax Act that allows for the deduction of ESOP expenses. The only relevant section for such claims is Section 37 , which lays out specific conditions that must be satisfied for an expenditure to qualify as deductible. These conditions state that the expenditure must be genuine, it should not be covered under Sections 30 to 36, it must not constitute capital or personal expenses, and it must be incurred wholly and exclusively for business purposes. In light of these criteria, PCIT was of the view that it is evident that the expenses claimed by the Assessee Co