Morgan Stanley Advantage Services Pvt. Ltd Vs CIT (A) (ITAT Mumbai)
ITAT Held that discount on issue of ESOP is allowable as deduction under the head Profits & Gains of Business or Profession.
Facts- The assessee-company is engaged in the business of rendering front office and back office support to the Morgan Stanley group of companies globally. The assessee-company has shown income under the heads “Business & Profession”, “Capital Gains” and “Income from Other Sources”. During the proceedings, the assessee was given a show-cause notice regarding dis-allowability of claim towards the cost of Employees/Options Plans (ESOP) treating the same as being capital in nature.
Conclusion- Held that the Co-ordinate Bench of Tribunal also in case of Goldman Sachs (I) Securities Pvt. Ltd. has held that discount on issue of ESOP is allowable as deduction under the head “Profits & Gains of Business or Profession”. So, the expenditure claimed by the assessee on account of ESOP under section 37(1) of the Act is allowable.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals), National Faceless Appeals Centre (NFAC), Delhi. [hereinafter referred to as ‘the CIT(A)’] vide order dated 11.12.2018 for the Assessment Year (AY) 2016-17. The assessee has raised the following grounds of appeal:
“Ground 1: Disallowance of expenditure claimed towards Employee Stock Option Scheme (ESOP) under section 37(1) of the Income-tax Act, 1961 (Act) amounting to Rs 1,84,75,816.
In this regard, the learned CIT(A)/ learned Assessing Officer has, on the facts and circumstances of the case and in law, erred on the following grounds:
(i) In not appreciating that the ESOP cost is incurred wholly and exclusively for the purpose of business and is in the nature of revenue expenditure and thereby, deductible under section 37(1) of the Act.
(ii) In erroneously concluding that the Appellant has not incurred any expenditure but has forgone the benefit or income by receiving lesser amount of premium without appreciating the fact that the amount paid by the Appellant is merely towards the recharge of stock option units granted to its employees by group entity and no shares are issued by the Appellant.
Ground 2: In Initiating penalty under section 271(1Xc) of the Act for disallowance made in respect of expenditure claimed towards ESOP cost.
On the facts and circumstances of the case, the learned Assessing Officer erred in initiating penalty proceedings under section 271(1)(c) of the Act for the disallowance made in respect of expenditure claimed towards ESOP cost in the Final Assessment Order.
Ground 3: Erroneously dismissing the appeal filed by the Appellant with the Commissioner of Income Tax (Appeals)-20 [now migrated to the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre) on the ground that the appeal is infructuous since the Appellant has opted for the Vivad Se Vishwas Scheme (VSV),
In this regard, the learned CIT(A) has, on the facts and circumstances of the case and in law, erred on the following ground:
(i) In erroneously concluding that the appeal by the Appellant filed against the CIT(A) Order is settled under the Direct tax Vivad se Vishwas Act 2020, and consequentially, erroneously dismissing the appeal by treating it as infructuous.
Each of the grounds of appeal referred above is separate and may kindly be considered independent of each other.
The Appellant craves leave to add to, alter, amend or withdraw all or any of the Grounds of appeal herein above and to submit such statements, documents and papers as may be considered necessary either at or before the hearing of this appeal as per law.”
2. Brief facts of the case are that the assessee is company filed its return of income on 17.11.2016 for AY 2016-17 declaring total income of Rs. 2,38,13,60,120/-.The case was selected for scrutiny and notices were issued under section 143(2) of the Income Tax Act, 1961 (for short ‘the Act’). In response to the aforesaid notices, Authorized Representative (AR) of the assessee furnished the details as called for.
3. The assessee-company is engaged in the business of rendering front office and back office support to the Morgan Stanley group of companies globally. The assessee-company has shown income under the heads “Business & Profession”, “Capital Gains” and “Income from Other Sources”.
4. During the course of assessment proceedings, the assessee was given a show-cause notice regarding allowability of claim towards the cost of Employees/Options Plans (ESOP) pertaining to the prior period.
5. During the course of assessment proceedings, the assessee was again given a show-cause notice regarding dis-allowability of claim towards the cost of Employees/Options Plans (ESOP) treating the same as being capital in nature.
6. The view of the AO on the matter of allowability of ESOP are reproduced as under:
“ESOP is nothing more than a expenditure related to issue of shares (capital in nature). As per provisions of section 37(1) of the Act it is amply clear that any expenses which is capital in nature is not allowable as expenditure for the purpose of computing “Income from Business”
Sec 37(1) of the Act reads as under
37(1) Any expenditure (not being expenditure of the nature described in section 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purchases of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gain of business or profession.”
Reliance is also placed on Explanatory circular on Fringe Benefit Tax arising on allotment or transfer of specified securities or sweat equity shares (Circular No. 9/2007 F.No. 142/25/2007 TPL) Vide Question no. 16 CBDT has mentioned as under:
Q-16 Whether the fringe benefit arising on account of shares allotted or transferred under an ESOP is allowed as deduction in calculating the taxable income of the employer company?
Ans: In case whether the employer purchases the shares and then subsequently transfers such shares to its employees, the expenditure so incurred is allowable as deduction in computing the taxable income of the employer company. However, if the shares are allotted to the employees from the share capital of the company, no deduction is allowable in computing the taxable income of the company since no expenditure has been incurred by it.
At the outset, we wish to state that there is no specific provision under the A the deductibility of stock based incentive cost recharged/allocated to the local entity the present case) on account of shares allotted by foreign entity (in the instant cased MSDW to the employees of MSAS) under a global incentive plain.
We wish to invite your attention to the provisions of section 37(1) of the Act which grants deduction for expenses not specifically set out in other sections, stated below:
“Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the Assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession.
Thus, as per the provisions of sections of section 37(1) of the Act, a general deduction is allowed for an expense which is not covered under specific provisions, if the following conditions are satisfied:
