Fresh ₹216.78 Crore ESOP Deduction Claim Can Be Raised Before Appellate Authorities: ITAT Mumbai

HDFC Bank Limited Vs DCIT-2(3)(1) (ITAT Mumbai)

The Income Tax Appellate Tribunal (ITAT), Mumbai, decided an appeal filed by HDFC Bank Limited against the order of the Commissioner of Income-tax (Appeals) for Assessment Year 2021-22 arising from an intimation issued by the Central Processing Centre (CPC), Bengaluru under Section 143(1) of the Income-tax Act, 1961. The dispute before the Tribunal concerned the assessee’s claim for deduction of Employee Stock Option Scheme (ESOP) expenditure under Section 37(1) of the Act.

The assessee had filed its return of income under Section 139(1), which was processed under Section 143(1), resulting in certain additions and disallowances. During the appellate proceedings before the CIT(A), the assessee raised an additional ground claiming deduction of ₹216,78,60,432 towards ESOP expenditure. The claim represented the difference between the perquisite value of ESOPs taxed in the hands of employees amounting to ₹555,20,52,345 and the fair value computed under the Black-Scholes Model amounting to ₹338,41,91,912. The assessee contended that this differential constituted business expenditure allowable under Section 37(1). It was, however, undisputed that the deduction had neither been claimed in the original return of income nor through a revised return, and no such claim had been made before the Assessing Officer.

The CIT(A) rejected the claim, relying on the Supreme Court decision in Goetze (India) Ltd. v. CIT. According to the CIT(A), the deduction had not been claimed before the Assessing Officer and was raised for the first time before the first appellate authority. The appellate authority observed that the decisions cited by the assessee concerned claims made before the Assessing Officer and subsequently considered by appellate forums, whereas the present claim had not been raised before the Assessing Officer at all. The CIT(A) further held that the first appellate authority could not assume powers which, according to the cited decisions, had been exercised by the Tribunal, and therefore dismissed the ground.

Before the Tribunal, the assessee submitted that the issue had already been considered by the Mumbai Bench of the ITAT in its own cases for Assessment Years 2013-14 to 2020-21. In those decisions, the Tribunal had allowed deduction of ESOP expenditure under Section 37(1), relying on earlier judicial precedents including HDFC Bank Ltd. v. DCIT and the Special Bench decision in Biocon Ltd. v. DCIT, which was subsequently approved by the Karnataka High Court in CIT v. Biocon Ltd. The assessee also relied on the Bombay High Court judgment in CIT v. Prithvi Brokers & Shareholders Pvt. Ltd., contending that appellate authorities have jurisdiction to entertain legal claims not made before the Assessing Officer where the relevant facts are already on record.

The Revenue supported the orders of the lower authorities.

After considering the rival submissions, the Tribunal observed that the claim had admittedly not been made in the original or revised return and had first been raised before the CIT(A). The Tribunal noted the Bombay High Court’s decision in Prithvi Brokers & Shareholders Pvt. Ltd., which held that appellate authorities may entertain legal claims not raised before the Assessing Officer. The Tribunal also noted that, in the assessee’s own earlier cases, the Coordinate Bench had allowed deduction of ESOP expenditure under Section 37(1) by treating it as revenue expenditure incurred wholly and exclusively for the purposes of business and had relied upon CIT v. Biocon Ltd. while doing so.

The Tribunal held that the ITAT possesses the power to admit additional legal grounds irrespective of whether the assessment was completed under Section 143(1) or Section 143(3). It observed that the Assessing Officer lacks authority to entertain a fresh claim not made through a revised return, whereas the Tribunal’s jurisdiction to admit additional legal grounds remains unaffected by the nature of the assessment.

However, the Tribunal also recorded that the ESOP claim had never been examined by the Assessing Officer and that there had been no factual verification of the actual expenditure during the proceedings under Section 143(1). Accordingly, instead of allowing the deduction outright, the Tribunal restored the matter to the Assessing Officer. It directed the assessee to furnish all necessary details and evidence supporting its claim for deduction of ESOP expenditure amounting to ₹216,78,60,432 under Section 37(1). The Assessing Officer was directed to verify the claim, decide the issue in accordance with law, and provide the assessee with a reasonable opportunity of being heard. The appeal was allowed.

Cases Discussed

• CIT v. Biocon Ltd. (Karnataka High Court), (2021) 430 ITR 151 (Kar)
• CIT, Central-1, Mumbai vs Prithvi Brokers and Shares Pvt Ltd (Bombay High Court), (2012) 23 taxmann.com 23 (Bom)
• Goetze (India) Ltd. v. CIT (SC), (2006) 284 ITR 323 (SC)
• HDFC Bank Ltd. vs. DCIT (ITAT Mumbai), [2015] 155 ITD 765 (Mum)
• Biocon Ltd. v. DCIT (ITAT Bangalore Special Bench), (2013) 144 ITD 21 (Bang)(SB)
• CIT v. Jai Parabolic Springs Ltd. (Delhi High Court), [2008] 306 ITR 42 / 172 Taxman 258

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The instant appeal of the assesse is filed against the order of the Learned Commissioner of Income-tax (Appeals) / Addl / JCIT(A)-4, Kolkata [hereinafter called, “Ld. CIT(A)”] passed under section 250 of the Income-tax Act, 1961 (in short, ‘the Act’) for Assessment Year 2021-22, date of order 28/01/2025. The impugned order is emanated from the order of the CPC, Bengaluru (in short, the “Ld. AO”) passed under section 143(1) of the Act, date of order 13/11/2022.

2. The assessee has raised the following grounds of appeal: –

“1. Deduction in respect of expenditure incurred on Employee Stock Option Scheme (“ESOP”)

1.1. The Id. CIT(A)/ NFAC erred in not allowing expenditure towards ESOP scheme.

1.2. The Appellant Company had made a claim with the Id.CIT(A) of the aggregate perquisite value taxed in the hands of the employees on exercise of options during the AY 2021-22 amounting to Rs. 555,20,52,345. In this regard the Appellant prays to grant the claim of Rs. 216,78,60,432 (Rs. 555,20,52,345 (perquisite value) Rs. 338,41,91,912 (fair value claimed as per Black-Scholes Model) in the Profit and Loss A/c

1.3. The Id. CIT(A) failed to appreciate that there is no bar on the powers of the CIT(A) under the Act and that the claim made for the first time in appeal before him ought to have been allowed based on binding juridical precedents.

1.4. The Id. CIT(A) ought to have appreciated that since all relevant facts relating to the ground on allowability of ESOP expense were available on records, the same ought to have been allowed following the direct judicial precedents on the subject matter as well as his own order in the Appellant’s case for AY 2013-14, AY 2015­16, AY 2016-17, AY 2017-18, AY 2018-19, AY 2019-20 and AY 2020-21.”

3. The brief facts of the case are that the assessee filed its return of income under Section 139(1) of the Act. The said return was processed under Section 143(1) of the Act by the CPC, wherein certain additions/disallowances were made under various heads. The assessee, Housing Development Finance Corporation (HDFC), is a housing finance company whose principal object is to provide loans for the purchase or construction of residential properties in India. The business activities of the assessee are regulated by the National Housing Bank, which is a wholly-owned subsidiary of the Reserve Bank of India (RBI).

During the relevant assessment year, the return filed by the assessee was processed under Section 143(1), and several claims made by the assessee were disallowed. Aggrieved by the intimation issued under Section 143(1), the assessee preferred an appeal before the Ld. CIT(A), challenging the disallowances made therein. In addition to the grounds relating to the disallowances, the assessee raised an additional ground before the Ld. CIT(A) pertaining to a deduction of Rs.216,78,60,432/- under the Employee Stock Option Scheme (ESOP). This amount represents the differential between the perquisite value of ESOPs amounting to Rs.555,20,52,345/- and the fair value computed under the Black-Scholes Model at Rs.338,41,91,912/-. The assessee sought to claim this differential as a business expenditure allowable under Section 37(1) of the Act, as debited in the Profit and Loss Account. However, it was noted that the assessee had not claimed this expenditure in its return of income, nor was a revised return filed to incorporate this claim. Accordingly, no such claim was made before the Assessing Officer. Nevertheless, the assessee contended before the Ld. CIT(A) that the said ESOP expenditure was a genuine business expense and should be allowed as a deduction under Section 37(1) of the Act.

The Ld. CIT(A), however, did not accept the assessee’s contention and dismissed the appeal. The observations of the Ld. CIT(A) with respect to this ground are recorded in paragraph no. 4 at page 14 of the impugned appellate order, which is reproduced below:

“Ground No. 4: The Appellant has claimed that an amount of Rs. 3,43,18,72,328/- is allowable as ESOP expenses u/s 37(1) of the Income Tax Act though the same was not claimed in the ITR. The Appellant has mentioned that by virtue of the decision of the Hon’ble Supreme Court in the case of Goetze (India) Ltd Vs CIT, the same is not allowable as no revised ITR has been filed and such expenses are not claimed before the Ld. AO. The Appellant has further mentioned some decisions and claimed that the Hon’ble ITAT and the Hon’ble High Court have allowed the same ever after discussion of the decision of Goetze (India) Ltd Vs CIT. I have carefully perused the submissions and the decisions mentioned. 1 find that in not a single decision, it is mentioned that the first appellant authority has allowed such deductions and the Hon’ble ITAT/Hon’ble High Court has confirmed the same. The Appellant has mentioned that such deductions are allowed by the ITAT mentioning that the respective appellant authority has power to allow the same where the Ld AO has not allowed the same as no revised ITR is filed. Here in this case, the Appellant has not claimed the

Deduction before the Ld.AO. In all the decisions cited, the issue is totally different. There the claim of deduction was made before the Ld.AO without claiming the same in the ITR or with a REVISED ITR. But in this case, the deduction is not at all claimed before the Ld AO and claimed before the First Appellate Authority for the First Time. Hence, the decisions cited are not applicable in this case.

It is apparent that as per the above decisions, the deductions are allowed by the Hon’ble ITAT and not by the first appellant authority. The lower appellate authority cannot assume the power of a higher appellant authority and act accordingly. Hence, such deductions cannot be allowed by the undersigned in contravention of the decision of the Hon’ble Supreme Court in the case of Goetze (India) Ltd Vs CIT. The Appeal is to be decided as to whether the Ld AO has erred in not allowing the deduction on ESOP. As the issue was not raised before, the Ld AO and there is no order rejecting the claim, it can’t be said at all that the Ld AO has erred in not allowing the deduction on ESOP Expenses. Hence, this Ground of Appeal is DISMISSED.”

The Ld.CIT(A) rejected the assessee’s claim on this issue and the issue is narrated before the ITAT for adjudication.

5. The Ld.AR in argument stated that the said issue related to claim of ESOP expenses under section 37(1) of the Act was duly rejected by appellate authority by considering the order of Goetze (India) Ltd vs CIT, (2006) 284 ITR 323 (SC). But the same issue is duly considered by the ITAT, “E” Bench, Mumbai in assessee’s own case bearing ITA No.4315 and 4316/MUM/2007 and others date of pronouncement 28/01/2025. The relevant paragraphs on page 92 to 95 are extracted below:

“XX. Deduction in respect of expenditure incurred on Employee Stock Option Scheme (‘ESOS’). 28. This issue arises in the following appeals:

28.1. Assessee granted stock option to its eligible employees under its ESOS. Upon exercise of the option, difference between the market price and the issue price is taxed as perquisite in the hands of the employee u/s.17 of the Act read with Rule 3 of the Rules. Assessee claimed ESOS expenditure being incurred wholly and exclusively for the purpose of its business since it forms part of compensation cost to its employees, allowable u/s.37(1) of the Act. On this account, assessee made appropriate disclosure in its audited financial statements. Assessee also submitted that on exercise of options, its employees were taxed on the perquisite value arising therefrom. Ld. CIT(A) held that ESOS deduction is allowable only when the discount offered is taxable as perquisite in the hands of employees and is subjected to TDS as applicable. He placed reliance on the decision of Co-ordinate Bench in the case of HDFC Bank Ltd. vs. DCIT [2015] 155 ITD 765 (Mum) for allowing the claim of assessee. He also took note of the fact about relief granted by ld. CIT(A) in assessee’s own case for Assessment Years 2013-14, 2016-17 to 2020- 21.

28.2. In so far as this claim is concerned, the following would be relevant:

i. For Assessment Year 2013-14, this issue is raised by way of filing an additional ground before the Tribunal on 13.09.2024. Additional ground was permitted to be filed by the assessee since claim made in this ground was raised originally in the appeal filed against “order giving effect” assessment made by the ld. Assessing Officer. Revenue is in appeal before the Tribunal against the “order giving effect” assessment in ITA No.4217/Mum/2023 wherein the issue contested is in respect of expenditure incurred on ESOS. The scope of making assessment for giving effect to the appellate order is limited to the findings arrived at in the said appeal. Assessee had, for the first time, raised this claim before the ld. CIT(A) while contesting on the assessment made pursuant to “order giving effect” which in our considered view does not fall within the scope of assessment made for giving effect to the first appeal. Since, appeal against the original assessment made u/s. 143(3) is also before us, assessee sought liberty to raise its claim by filing additional ground in this appeal in ITA No.4983/Mum/2017. Since, we have already held for allowing the assessee to raise the additional claim in view of finding of Hon’ble Supreme Court in the case of Goetze India Ltd. (Supra), additional ground raised by the assessee herein is admitted for adjudication.

i. For Assessment Year 2014-15 to 2017-18, the said issue was raised as additional grounds of appeal filed before the ld. CIT(A).

ii. For Assessment Year 2018-19 to 2020-21, the said issue was raised in the course of assessment proceedings itself before the ld. Assessing Officer.

28.3. This issue is no longer res integra as has been dealt by Co-ordinate Bench in the case of HDFC Bank Ltd. (supra) with similar view taken by Hon’ble Special Bench, ITAT, Bangalore in the case of Biocon Ltd., vs. DCIT (2013) 144 ITD 21 (Bang)(SB), the same having been approved by Hon’ble Court of Karnataka reported in CIT vs. Biocon Ltd. (2021) 430 ITR 151 (Kar).

28.4. Considering the facts on record and the judicial precedents relied upon, claim made by the assessee by way of additional ground is allowed in respect of Assessment Year 2013-14. However, based on our reasoning given while admitting the additional ground raised by the assessee for Assessment Year 2013­14 in ITA No.4983/Mum/2017, being the original assessment u/s.143(3) whereby we have observed that the scope of assessment for giving effect to the appellate order is limited to the extent of finding arrived at in the appeal, ground contested by Revenue is to be allowed. In other words, on the claim of expenditure towards ESOS expenditure, assessee gets a relief in its appeal against the original assessment made u/s. 143(3) by way of additional ground in ITA No.4983/Mum/2017 and at the same time its claim made in the assessment pursuant to giving effect to the appellate order is rejected, while allowing the appeal of the Revenue. For other years as tabulated above, grounds raised by the Revenue are dismissed and those by assessee are allowed.”

6. But the Ld. AR further mentioned that the said order of ITAT is duly considered in the assessment order passed under section 143(3); but the current issue is related to order passed under section 143(1) of the Act. He further relied on the order of the jurisdictional High Court in the case of CIT, Central-1, Mumbai vs Prithvi Brokers and Shares Pvt Ltd (2012) 23 taxmann.com 23 (Bom). The relevant observation of the jurisdictional High Court is reproduced as below:-

“22. It was then submitted by Mr. Gupta that the Supreme Court had taken a different view in Goetze (India) Ltd (supra). We are unable to agree. The decision was rendered by a Bench of two learned Judges and expressly refers to the judgment of the Bench of three learned Judges in National Thermal Power Comp. Ltd. (supra). The question before the Court was whether the appellant-assessee could make a claim for deduction, other than by filing a revised return. After the return was filed, the appellant sought to claim a deduction by way of a letter before the Assessing Officer. The claim, therefore, was not before the appellate authorities. The deduction was disallowed by the Assessing Officer on the ground that there was no provision under the Act to make an amendment in the return of income by modifying an application at the assessment stage without revising the return. The Commissioner of Income-tax (Appeals) allowed the assessee’s appeal. The Tribunal, however, allowed the department’s appeal. In the Supreme Court, the assessee relied upon the judgment in National Thermal Power Co. Ltd. (supra) contending that it was open to the assessee to raise the points of law even before the Tribunal. The Supreme Court held :-

“4. The decision in question is that the power of the Tribunal under section 254 of the Income-tax Act, 1961, is to entertain for the first time a point of law provided the fact on the basis of which the issue of law can be raised before the Tribunal. The decision does not in any way relate to the power of the Assessing Officer to entertain a claim for deduction otherwise than by filing a revised return. In the circumstances of the case, we dismiss the civil appeal. However, we make it clear that the issue in this case is limited to the power of the assessing authority and does not impinge on the power of the Income-tax Appellate Tribunal under section 254 of the Income-tax Act, 1961. There shall be no order as to costs.” [Emphasis supplied]

23. It is clear to us that the Supreme Court did not hold anything contrary to what was held in the previous judgments to the effect that even if a claim is not made before the assessing officer, it can be made before the appellate authorities. The jurisdiction of the appellate authorities to entertain such a claim has not been negated by the Supreme Court in this judgment. In fact, the Supreme Court made it clear that the issue in the case was limited to the power of the assessing authority and that the judgment does not impinge on the power of the Tribunal under section 254.

24. A Division Bench of the Delhi High Court dealt with a similar submission in CIT v. Jai Parabolic Springs Ltd. [2008] 306 ITR 42 / 172 Taxman 258. The Division Bench, in paragraph 17 of the judgment held that the Supreme Court dismissed the appeal making it clear that the decision was limited to the power of the assessing authority to entertain a claim for deduction otherwise than by a revised return and did not impinge on the powers of the Tribunal. In paragraph 19, the Division Bench held that there was no prohibition on the powers of the Tribunal to entertain an additional ground which, according to the Tribunal, arises in the matter and for the just decision of the case.

25. In the circumstances, it is not necessary to decide the other questions raised by Mr. Mistri.

26. The appeal is, therefore, dismissed.”

7. The Ld. DR advanced arguments in support of the orders passed by the revenue authorities and placed full reliance thereon.

8. We have heard the rival submissions, perused the materials available on record, and considered the judgments cited by both parties. The core issue for adjudication pertains to the claim of deduction of Rs.216,78,60,432/- towards ESOP expenses under Section 37(1) of the Act. It is an admitted fact that the assessee did not claim the said expenditure either in the original return of income filed under Section 139(1) or through a revised return. The said claim was raised for the first time before the Ld. CIT(A), who rejected the same by placing reliance on the judgment of the Hon’ble Supreme Court in Goetze (India) Ltd. v. CIT (supra), on the ground that no revised return had been filed and such claim was not before the Assessing Officer. The Ld. CIT(A) observed that it had no power to entertain such fresh claims at the appellate stage in light of the binding precedent.

However, the assessee has placed reliance on the decision of the Hon’ble Jurisdictional High Court in the case of Prithvi Brokers & Shareholders Pvt. Ltd. (supra), wherein it was clearly held that the appellate authorities, including the ITAT, are empowered to entertain legal claims not made before the Assessing Officer, provided the facts are already on record and the issue is purely legal in nature.

9. Further, we note that in the assessee’s own case, the Coordinate Bench of the ITAT, “E” Bench, Mumbai, in ITA No. 4315 & 4316/Mum/2007 and others (supra), has allowed the deduction on account of ESOP expenses under Section 37(1) of the Act by treating it as a revenue expenditure incurred wholly and exclusively for the purpose of business. The Tribunal also took note of the earlier orders passed in assessee’s favour in respect of the same issue for AYs 2013-14 to 2020-21 and applied the decision of the Hon’ble Karnataka High Court in CIT v. Biocon Ltd. [(2021) 430 ITR 151 (Kar)].

10. In view of the consistent judicial precedents in favour of the assessee and the legal position that the ITAT has wide powers to admit additional grounds and adjudicate legal issues, we are inclined to allow the assessee the opportunity to raise the said claim. However, since the claim was never made before the Assessing Officer and there is no factual verification of the actual ESOP expenditure in the present assessment proceedings under Section 143(1), we deem it appropriate to remand the matter to the file of the Assessing Officer for fresh adjudication.

11. The Ld. AR, Mr. J.D. Mistri, Senior Council in all fairness, submitted that the decisions relied upon by him pertain to assessments made under Section 143(3) of the Act, whereas the impugned order in the present case has been passed by the CPC under Section 143(1) of the Act. We have duly noted his submission. However, it is well settled that the power to admit an additional ground lies exclusively with the Appellate Authority. Therefore, the nature of the assessment—whether under Section 143(1) or 143(3) of the Act—has no bearing on the Tribunal’s jurisdiction to entertain such a claim, particularly when the Assessing Officer lacks the authority to consider a fresh claim not made through a revised return as the Ld. AO has no power to amend the return.

12. Accordingly, we direct the assessee to file the necessary details and evidence substantiating its claim of ESOP expenditure of Rs.216,78,60,432/- under Section 37(1) of the Act. The Ld. AO is directed to verify the claim and decide the issue in accordance with law, after affording a reasonable opportunity of being heard to the assessee.

13. In the result, the appeal of the assessee bearing ITA No.1828/Mum/2025 is allowed.

Order pronounced in the open court on 18^th day of July, 2025.