ITAT Quashes Ex Parte Section 263 Revision Over Debatable ESOP Expense

JSW One Platforms Limited Vs PCIT (ITAT Mumbai)

ESOP Expense Gets Another Option: Ex Parte Revision u/s 263 Reset as Capital-v.-Revenue Issue Is Debatable

Summary:

Return Accepting ₹39.51-Crore Loss

JSW One Platforms Limited filed its return of income for AY 2022-23 on 5 November 2022, declaring nil income after claiming a loss of ₹39,51,41,650.

The return was selected for scrutiny. The AO completed the assessment u/s 143(3) r.w.s. 144B on 27 March 2024, accepting the income returned by the assessee.

Subsequently, the PCIT examined the assessment records & noticed that the assessee had claimed expenditure relating to ESOPs. According to the PCIT, such expenditure was capital in nature & ought to have been disallowed while computing the assessee’s taxable income.

The alleged failure to disallow the expenditure had resulted in underassessment. The PCIT therefore formed a prima facie view that the assessment order was erroneous insofar as it was prejudicial to the interests of the Revenue.

PCIT Initiates Revision u/s 263

The PCIT issued a show-cause notice requiring the assessee to explain why the assessment order should not be revised u/s 263.

The assessee neither filed a reply nor participated in the revisionary proceedings. Consequently, the PCIT proceeded ex parte.

Relying upon certain judicial precedents, the PCIT expressed the view that ESOP expenditure was not allowable as revenue expenditure. He further observed that the AO had neither enquired into the issue nor applied his mind while completing the scrutiny assessment.

The assessment order was accordingly set aside on this issue, with a direction to the AO to examine the allowability of ESOP expenditure & complete the assessment after providing the assessee an opportunity of being heard.

Why the Assessee Remained Absent

Before the ITAT, the assessee fairly admitted that it had neither complied with the show-cause notice nor participated in the proceedings u/s 263.

It explained, however, that the non-compliance was not deliberate. The assessee was completely unaware of the notices because the mobile number & email address available in the Department’s records belonged to an employee who had ceased to be associated with it.

Consequently, the notices did not reach the persons responsible for handling the assessee’s tax proceedings. The revision was therefore concluded without the assessee having an opportunity to present its factual or legal defence.

ESOP Allowability Is Not a Settled One-Way Street

Without prejudice to its explanation for non-appearance, the assessee argued that the question of allowability of ESOP expenditure was no longer res integra. Several judicial decisions had held such expenditure to be revenue in nature.

The assessee specifically relied upon the Delhi High Court ruling in PVR Limited v. CIT, reported in 145 taxmann.com 331.

It also contended that the decision in Ranbaxy Laboratories Ltd. v. Additional CIT, relied upon by the PCIT, was non-existent.

Nevertheless, considering that the revisionary proceedings had been completed ex parte, the assessee did not insist upon an immediate decision on merits. It requested that the PCIT’s order be set aside so that it could place its explanation & supporting judicial precedents before the revisionary authority.

Revenue Alleges Complete Absence of Enquiry

The Revenue opposed the assessee’s plea, contending that adequate opportunities had been granted but not utilised.

It further argued that the AO had not conducted any enquiry into the allowability of ESOP expenditure during the original assessment. Therefore, according to the Revenue, the assessment order was rightly regarded as erroneous & prejudicial to the interests of the Revenue.

Debatable Issue Needed Proper Hearing

The ITAT noted that, whatever might have been the reason, the assessee had not been represented during the revisionary proceedings, resulting in an ex parte order u/s 263.

The Tribunal observed that the precise issue on which revisionary jurisdiction had been exercised was whether ESOP expenditure was capital or revenue in nature. In its view, this was a debatable issue capable of more than one opinion.

Had the assessee appeared before the PCIT & furnished its submissions along with supporting judicial precedents, there was a possibility that the revisionary authority might have accepted its explanation & dropped the proceedings u/s 263.

The assessee’s non-appearance had therefore materially affected the manner in which the PCIT decided the issue. In the interests of justice, it deserved an effective opportunity to establish its case before the revisionary authority.

Matter Restored, Merits Kept Open

The ITAT set aside the PCIT’s order & restored the matter for de novo adjudication after granting a reasonable opportunity of hearing. The assessee was expressly directed to cooperate in finalisation of the proceedings.

The appeal was consequently allowed for statistical purposes.

The order should not be understood as holding that ESOP expenditure is necessarily deductible or that revision u/s 263 was invalid on merits. Both questions remain open for the PCIT’s fresh consideration.

Key Takeaway

Where revision u/s 263 concerns a legally debatable claim, an effective hearing becomes particularly important. An unanswered portal notice may explain an ex parte order, but it cannot replace adjudication after considering the assessee’s authorities & submissions. An ESOP gives employees an option; fairness required that the assessee receive one too-an option to be heard.

Cases Discussed

• PVR Limited v. CIT (Delhi High Court) — [2022] 145 taxmann.com 331.

FULL TEXT OF THE JUDGMENT/ORDER OF ITAT MUMBAI

Captioned appeal has been filed by the assessee challenging the order dated 28.03.2026 passed by ld. Pr. Commissioner of Income Tax (PCIT)-Mumbai u/s.263 of the Income Tax Act, 1961 for the AY.2022-23.

2. Briefly the facts are that the assessee is a resident corporate entity. For the assessment under dispute, assessee filed its return of income on 05.11.2022 declaring ‘Nil’ income after claiming loss of Rs.39,51,41,650/-. The return of income so filed by the assessee was selected for scrutiny. Ultimately, the Assessing Officer completed the assessment u/s.143(3) r.w.s. 144B of the Act vide order dated 27.03.2024 accepting the income returned by the assessee. After completion of assessment as aforesaid, the ld. PCIT called for examining the assessment records. While doing so, he was of the view the assessment order is erroneous and prejudicial to the interest of the Revenue as the expenses claimed by the assessee on account of Employees Stock Option (ESOP) being in the nature of capital expenditure has not been disallowed. Accordingly, he observed that such non-disallowance was resulted in under assessment thereby making the assessment order erroneous and prejudicial to the interest of the Revenue. Thus, on the aforesaid premises issue of show-cause notice to the assessee to explain as to why the assessment order should not be revised. As alleged the assessee neither replied to the show-cause notice nor participated in the proceedings. Therefore, ld. PCIT proceeded to complete the proceedings ex parte. While doing so, relying upon certain judicial precedents, he expressed a view that ESOP expenses not being in the nature of revenue expenses should not have been allowed. He observed while completing the assessment, the Assessing Officer had not enquired into the issue nor applied his mind. Accordingly, ld. PCIT opined that assessment order being erroneous and prejudicial to the interest of Revenue deserves to be set aside.

3. While doing so, he directed the Assessing Officer to enquire into the issue of allowability of ESOP expenses and complete the assessment after providing opportunity of being heard to the assessee. Before us ld. Counsel for the assessee while fairly admitting that the assessee had not complied with either show-cause notice issued u/s.263 of the Act or participated in the proceedings submitted that the non-compliance was not deliberate but on account of the fact that the assessee was totally unaware of the notices issued by the revisionary authority. As the telephone number and e-mail ID available with the department belong to employee who was no more with the assessee. Without prejudice, he submitted that the allowability of ESOP expenses no more res integra as there are number of judicial precedents holding such expenses to be of revenue nature. In this context, he drew our attention to decision of the Hon’ble Delhi High Court in the case of PVR Limited vs. CIT (2022) 145 taxmann.com 331 (Del). Proceeding further, he submitted that the decision in case of Ranbaxy Laboratories Ltd. vs. Additional CIT relied upon by ld. PCIT is non-existent. However, ld. Counsel submitted that since the assessee due to unavoidable circumstances was prevented from appearing before the revisionary authority resulting in ex parte conclusion of the proceeding, the impugned order be set aside to provide an opportunity to the assessee to explain his case before the revisionary authority.

4. Opposing assessee’s contention, the ld. Departmental Representative submitted though sufficient opportunity was granted to the assessee however, it failed to avail them. He submitted that allowability of such expenses were never enquired into by the Assessing Officer. Therefore, the assessment order was erroneous and prejudicial to the interest of the Revenue.

5. We have considered rival submissions and perused the materials on record. We find for whatever may be the reason, the assessee was not represented in course of revisionary proceedings resulting in ex parte order being passed us.263 of the Act. Undoubtedly, the issue on which the revisionary authority has exercised powers u/s.263 of the Act relates to allowability of ESOP expenses. In our view, whether ESOP expenses is of revenue or capital nature is a debatable issue hence, more than one opinion can be formed. Had the assessee appeared before the revisionary authority and furnished its submissions with supporting judicial precedents, there could have been a possibility of the revisionary authority getting convinced with the submissions of the assessee and dropped the proceeding initiated us.263 of the Act. Non-appearance of the assessee certainly led the revisionary authority to decide the issue in the manner he has decided. Therefore, we are of the view that the assessee deserves an opportunity to establish its case before the revisionary authority. Accordingly, we set aside the impugned order of ld. PCIT and restore the matter back to him for denovo adjudication after providing reasonable opportunity of being heard to the assessee. The assessee is directed to co-operate in finalization of the proceedings.

6. In the result, appeal is allowed for statistical purposes.

Order pronounced in the open court on 31/08/2026.