JSW Jaigarh Port Limited Vs PCIT (ITAT Mumbai)
ESOP Cost Cannot Be Called “Notional” Merely Because No Cash Was Paid: ITAT Quashes Section 263 Revision
Can the Principal Commissioner revise an assessment simply because the Assessing Officer allowed ESOP expenditure without discussing it at length? The Mumbai Bench of the Income Tax Appellate Tribunal answered no in the case of JSW Jaigarh Port Ltd. The company had claimed ₹4,83,26,000 as employee stock option plan (ESOP) expenditure. The Principal Commissioner of Income Tax (PCIT) considered it a notional expense and directed a fresh assessment. The Tribunal quashed that direction, holding that the allowance of the claim was supported by the prevailing judicial position.
How the Dispute Arose
JSW Jaigarh Port filed its return for assessment year 2020–21 declaring a loss of ₹59.55 crore. After scrutiny, the Assessing Officer passed an order on 28 September 2023 determining the loss at ₹46.87 crore. The company’s audited financial statements and accompanying notes disclosed ₹4,83,26,000 of expenditure arising from equity-settled, share-based payment transactions.
The PCIT issued a show-cause notice on 24 December 2025. In his view, the ESOP claim arose from issuing shares at a discount, involved no actual payment to employees and was therefore not deductible under section 37(1). He also considered the Assessing Officer’s enquiry into the claim inadequate. Invoking Explanation 2 to section 263, he set aside the assessment on this issue and directed the Assessing Officer to examine it afresh.
The company argued that ESOPs were part of its employee compensation arrangement. They helped attract and retain employees, whose services were rendered over the vesting period. It had recognised the cost in accordance with Ind AS 102, Share-based Payment, and maintained that the discount represented a business expense rather than a mere accounting entry.
A Non-Cash Benefit Can Still Be Employee Cost
The Tribunal examined the purpose of the options. Employees were given an opportunity to acquire an equity interest in recognition of their services and continued employment. The embedded discount was a means of compensating them. Its connection with the issue of shares did not, by itself, make the cost capital in nature.
The Tribunal drew on the Special Bench ruling in Biocon Ltd. v. DCIT, subsequently affirmed by the Karnataka High Court. That line of authority treats the ESOP discount as employee remuneration allowable under section 37(1). The order also referred to the Delhi High Court’s decision in PVR Ltd. and the Madras High Court’s decision in Shriram City Union Finance Ltd.
In substance, an employer may compensate an employee in cash or by granting shares on favourable terms. The absence of an immediate cash outflow does not mean that no business expenditure has been incurred. On that reasoning, the Tribunal rejected the PCIT’s premise that the amount was necessarily contingent, notional or a short receipt of share premium.
Employee Perquisite Taxation Does Not Decide the Employer’s Deduction
The PCIT had placed weight on section 17(2)(vi), under which the employee’s perquisite is taxed at the stage of exercising the option. Because the company recognised its ESOP cost during the vesting period, the PCIT questioned whether the expenditure had actually arisen.
The Tribunal held that the two questions must be examined separately. Section 17(2)(vi) deals with the timing and valuation of a taxable benefit in the employee’s hands. Section 37(1) deals with the employer’s business expenditure. The date on which an employee becomes taxable for a perquisite cannot automatically determine when the employer incurs a cost for securing that employee’s services.
The company’s accounting treatment, the disclosed nature of the scheme and the judicial authorities supporting deduction meant that the Assessing Officer’s acceptance of the claim was a legally permissible view.
Why Explanation 2 to Section 263 Did Not Help the PCIT
For section 263 to apply, an assessment order must be both erroneous and prejudicial to the interests of the Revenue. The Tribunal acknowledged that a complete failure to make an enquiry required by the circumstances can justify revision. But an allegation that the Assessing Officer should have conducted a more elaborate enquiry is insufficient on its own.
The PCIT had to examine the assessment record, identify the indispensable enquiry, show why the view accepted by the Assessing Officer was legally or factually untenable, and establish resulting prejudice. Here, he identified no feature distinguishing the company’s ESOP claim from the judicial decisions recognising such expenditure. His proposed enquiry rested on the same “notional expense” premise that those decisions had addressed.
The Tribunal also observed that the absence of a detailed discussion in an assessment order does not, by itself, establish absence of enquiry. Explanation 2 did not remove the need to prove error and prejudice.
Author’s Comments
The decision is useful on two connected points. First, ESOP compensation does not lose its character as business expenditure merely because employees receive a non-cash benefit and the options vest over time. Secondly, section 263 cannot be used to order a fresh enquiry as an end in itself when the accepted claim follows a sustainable interpretation of law.
The ruling does not say that every amount described as ESOP expenditure must be allowed without examining its facts. Its conclusion rests on the disclosed employee compensation cost and the PCIT’s failure to identify a legal or factual defect in its allowance. On those facts, the Tribunal quashed the revisionary order and restored the assessment dated 28 September 2023.
Cases Discussed
- Biocon Ltd. v. DCIT, [2013] 35 taxmann.com 335 (Bangalore-Trib.) (SB) — relied upon for the principle that discount on employee stock options represents employee-remuneration expenditure allowable under section 37(1).
- CIT v. Biocon Ltd., [2021] 430 ITR 151 (Karnataka High Court) — relied upon as affirming the Special Bench view that ESOP discount constitutes allowable business expenditure and is neither contingent nor notional.
- PVR Ltd. v. CIT, [2022] 145 taxmann.com 331 (Delhi High Court) — relied upon for allowing the difference between the option price and market price as revenue expenditure under section 37(1).
- CIT v. Shriram City Union Finance Ltd., [2024] 460 ITR 232 (Madras High Court) — relied upon in support of the deductibility of ESOP employee-compensation expenditure.
- Malabar Industrial Co. Ltd. v. CIT, [2000] 243 ITR 83 (Supreme Court) — followed for the requirement that revision under section 263 can be exercised only when the assessment order is both erroneous and prejudicial to the interests of the Revenue.
- Comtrade Commodities Services Ltd. v. PCIT, [2023] 156 taxmann.com 369 (Ahmedabad-Trib.) — relied upon for the proposition that an AO’s allowance of ESOP expenditure in accordance with the Biocon line of authority constitutes a legally plausible view which cannot be disturbed merely by invoking section 263.
- CIT v. Vikas Polymers, [2012] 341 ITR 537 (Delhi High Court) — relied upon for the principle that absence of detailed discussion in the assessment order cannot, without examining the assessment record and establishing error and prejudice, be equated with absence of enquiry.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The aforesaid appeal has been preferred by the assessee against the revisional order dated 30.03.2026 passed by the learned Principal Commissioner of Income-tax–5, Mumbai, under section 263 of the Income-tax Act, 1961 (“the Act”), whereby the assessment order dated 28.09.2023 passed under section 143(3) read with section 144B of the Act has been set aside on the issue of allowability of expenditure of ₹4,83,26,000 incurred in relation to the Employee Stock Option Plan (“ESOP”). The assessee has challenged the assumption of revisionary jurisdiction as well as the conclusion of the learned PCIT that the assessment order was erroneous insofar as it was prejudicial to the interests of the Revenue.
2. The grounds raised by the assessee are reproduced hereunder:
I. On the facts and in the circumstances of the case and in law, the learned Principal Commissioner of Income-tax has erred in initiating proceedings under section 263 of the Income-tax Act, 1961, vide show-cause notice dated 24.12.2025 and in passing the impugned order without properly considering the facts and circumstances of the case.
II. On the facts and in the circumstances of the case and in law, the learned Principal Commissioner of Income-tax has erred in revising the assessment order passed under section 143(3) read with section 144B of the Act, even though the said assessment had been completed by the Assessing Officer after making adequate enquiries and due application of mind.
III. On the facts and in the circumstances of the case and in law, the learned Principal Commissioner of Income-tax has erred in holding that the assessment order passed under section 143(3) read with section 144B of the Act was erroneous and prejudicial to the interests of the Revenue, without appreciating the facts and circumstances of the case.
IV. On the facts and in the circumstances of the case and in law, the learned Principal Commissioner of Income-tax has erred in directing the Assessing Officer to modify the assessment by disallowing staff-welfare expenditure of ₹4,83,26,000 incurred on account of ESOP under section 37(1) of the Act.
V. The appellant craves leave to add, amend, alter or delete any of the aforesaid grounds of appeal.
3. The relevant facts, in brief, are that the assessee filed its return of income for Assessment Year 2020–21 on 12.02.2021, declaring a total loss of ₹59,55,93,258. The return was selected for scrutiny and, after issuance of statutory notices under sections 143(2) and 142(1) and consideration of the material and explanations furnished by the assessee, the assessment was completed under section 143(3) read with section 144B of the Act vide order dated 28.09.2023, determining the total loss at ₹46,87,37,559. In its audited financial statements, the assessee had recognised expenditure of ₹4,83,26,000 arising from equity-settled share-based payment transactions pertaining to ESOPs. The nature of such expenditure and its accounting treatment stood disclosed in the financial statements and the accompanying notes forming part of the assessment record.
4. Subsequently, the learned PCIT issued a show-cause notice dated 24.12.2025 proposing to revise the assessment order on the ground that the deduction of ₹4,83,26,000 claimed by the assessee under section 37(1) represented a notional expenditure arising on account of issue of shares at a discount and was, therefore, not allowable. The learned PCIT was also of the view that the Assessing Officer had failed to make adequate enquiry into the claim. In response, the assessee furnished detailed explanations contending that ESOP expenditure represented employee-compensation cost incurred wholly and exclusively for the purposes of its business; that the expenditure had been recognised in conformity with Ind AS 102 Share-based Payment; and that its deductibility under section 37(1) stood supported by the decision of the Special Bench of the Tribunal in Biocon Ltd. v. DCIT [2013] 35 taxmann.com 335 (Bang.–Trib.)(SB), which had subsequently been affirmed by the Hon’ble Karnataka High Court.
5. The learned PCIT, however, did not accept the explanation of the assessee. According to him, the employee acquired a taxable perquisite under section 17(2)(vi) only at the stage of exercise of the option, whereas the assessee had accounted for ESOP expenditure with reference to the vesting period. He held that no actual payment had been made to the employees and that the amount debited in the profit and loss account was in the nature of a notional expenditure arising from the difference between the value of the shares and the amount recoverable from the employees. The learned PCIT further observed that the Assessing Officer had not properly verified the allowability of the claim and, accordingly, invoked Explanation 2 to section 263 and set aside the assessment on this issue with a direction to the Assessing Officer to frame the assessment afresh after conducting the necessary enquiries and affording an opportunity of hearing to the assessee.
6. Before us, the learned counsel submitted that ESOPs are granted to employees as an integral part of their compensation package with the object of attracting and retaining competent personnel and aligning their interests with the long-term growth and profitability of the enterprise. The options confer upon the employees an opportunity to acquire an equity interest in recognition of the services rendered by them and their continued employment during the vesting period. The discount inherent in such options is, therefore, not a gratuitous concession or a loss arising on the capital account, but a quantified employee-compensation cost incurred for securing their services over the vesting period.
7. The learned counsel further submitted that Ind AS 102 requires the fair value of equity instruments granted to employees to be recognised as an employee-benefit expense over the period during which the corresponding services are rendered. Since the fair value of the incremental services received from individual employees cannot ordinarily be measured independently, the employee-compensation cost is determined with reference to the fair value of the options granted and is spread over the vesting period. In conformity with the said accounting standard, the assessee had recognised an expenditure of ₹4,83,26,000 in its profit and loss account. It was submitted that the absence of an immediate cash outflow did not render the expenditure notional, because an expenditure may arise by incurring a definite business obligation even though the liability is to be discharged or crystallised in its ultimate form at a later stage.
8. Reliance was principally placed upon the decision of the Special Bench in Biocon Ltd. (supra), wherein it was held that the discount on issue of employee stock options represents employee-remuneration expenditure allowable under section 37(1). The said decision, it was pointed out, has been affirmed by the Hon’ble Karnataka High Court in CIT v. Biocon Ltd. [2021] 430 ITR 151 (Karnataka). Reliance was also placed upon the decisions of the Hon’ble Delhi High Court in PVR Ltd. v. CIT [2022] 145 taxmann.com 331 (Delhi) and of the Hon’ble Madras High Court in CIT v. Shriram City Union Finance Ltd. [2024] 460 ITR 232 (Madras). Thus, it was submitted that the Assessing Officer had accepted a claim supported by the prevailing judicial position and such an order could not be regarded as erroneous merely because the learned PCIT entertained a different opinion or considered that some further enquiry ought to have been conducted.
9. The learned CIT–DR, on the other hand, strongly relied upon the impugned order. He submitted that the expenditure had been recognised with reference to the vesting period, even though the employee’s right to purchase the shares and the corresponding taxability of the perquisite under section 17(2)(vi) arose only upon exercise of the option. According to him, if the value of the shares declined between the dates of vesting and exercise, the employee might not incur any tax liability upon the differential value, whereas the assessee would already have recognised the expenditure in its books. It was, therefore, contended that the amount represented a contingent or notional liability and did not constitute expenditure actually incurred for the purposes of section 37(1). He further submitted that the Assessing Officer had not examined the allowability of the claim in the manner required by law and, consequently, the learned PCIT was justified in invoking Explanation 2 to section 263.
10. We have heard the rival submissions, perused the impugned order and considered the material forming part of the record. The jurisdiction under section 263 can be validly exercised only where the assessment order is found to be both erroneous and prejudicial to the interests of the Revenue. These two conditions are conjunctive and the absence of either is fatal to the assumption of revisionary jurisdiction. An order cannot be branded as erroneous merely because the Commissioner would have approached the issue differently or because the assessment order does not contain an elaborate discussion on every aspect examined during the assessment. Equally, where the Assessing Officer has adopted a view which is permissible in law, the Commissioner cannot substitute his opinion merely because another view appears to him to be more appropriate. This principle stands authoritatively settled by the Hon’ble Supreme Court in Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC).
11. In the present case, the expenditure of ₹4,83,26,000 arose from equity-settled share-based payment transactions concerning ESOPs granted as part of the employee-remuneration arrangement. The relevant expenditure and its accounting treatment were expressly reflected in the audited financial statements and the notes forming part of the assessment record. The primary object of granting such options is not the raising of share capital at a lower premium, but the securing and retention of employee services during the vesting period by providing the employees with a stake in the growth and profitability of the enterprise. The discount embedded in the options is thus the mode through which a part of the remuneration for employee services is quantified and discharged. Merely because such remuneration is not immediately paid in cash does not divest it of the character of expenditure. Incurrence of a definite commercial obligation towards employees is capable of constituting expenditure even though its discharge is deferred or takes a non-cash form.
12. This precise issue was considered by the Special Bench in Biocon Ltd. (supra). The Special Bench held that the primary object of an ESOP scheme is to compensate employees for their services and to secure their continued and concentrated efforts during the vesting period. It was further held that there is no material distinction between an employer paying an incentive in cash and an employer compensating its employees by granting shares at a concessional price. In either situation, the economic substance is that an employee cost has been incurred for the purposes of business. The discount on issue of options cannot, therefore, be regarded merely as a short receipt of share premium or as an expenditure on capital account.
13. More importantly, the aforesaid decision of the Special Bench was affirmed by the Hon’ble Karnataka High Court in CIT v. Biocon Ltd. (supra), wherein it was held that the difference between the market value of the shares and the value at which the employees were granted options constituted an allowable business expenditure and was neither contingent nor notional in character. The same legal position has been reiterated by the Hon’ble Delhi High Court in PVR Ltd. v. CIT (supra) and by the Hon’ble Madras High Court in CIT v. Shriram City Union Finance Ltd. (supra). Thus, when the Assessing Officer accepted the claim of ESOP expenditure, the view so taken was manifestly supported by the judicial position prevailing on the issue and could not be characterised as an unsustainable view in law.
14. The reliance placed by the learned PCIT upon section 17(2)(vi) does not advance the case of the Revenue. The said provision determines the point of taxation and the measure of the perquisite in the hands of the employee. It does not govern the character or allowability of employee-compensation expenditure in the hands of the employer under section 37(1). The timing of taxation of a perquisite in the employee’s hands cannot be transposed as the determinative test for recognising the employer’s expenditure. The liability of the employer arises from the grant of options subject to the employees rendering services during the vesting period, whereas the statutory valuation and taxation of the corresponding benefit in the hands of the employee operate within a distinct legislative framework. The two provisions address different subjects and cannot be conflated.
15. We are also unable to uphold the invocation of Explanation 2 to section 263 in the manner adopted by the learned PCIT. Undoubtedly, a complete absence of enquiry on an issue which the circumstances reasonably demand may render an assessment order amenable to revision. However, inadequacy of enquiry, by itself, cannot confer jurisdiction upon the Commissioner to substitute his perception of the enquiry for that of the Assessing Officer. The Commissioner must examine the assessment record, identify the enquiry which was indispensable, demonstrate how the view adopted by the Assessing Officer is legally or factually untenable and establish the prejudice caused to the Revenue. Explanation 2 does not dispense with the foundational requirement that the assessment order must be both erroneous and prejudicial to the interests of the Revenue; nor does it confer an unbridled authority to reopen an issue merely because, in the opinion of the Commissioner, a more elaborate enquiry could have been undertaken.
16. In the facts before us, the learned PCIT has not identified any distinguishing feature which could take the assessee’s claim outside the principle laid down in Biocon Ltd. and the subsequent High Court decisions. The revisionary order proceeds substantially on the premise that the expenditure is notional because no immediate cash payment was made and that it partakes of a capital character because it arises in relation to issue of shares. Both these premises stand answered by the judicial authorities discussed hereinabove. Once the substantive legal position recognises ESOP discount as employee-compensation expenditure deductible under section 37(1), a direction to conduct a fresh enquiry cannot, by itself, establish lawful prejudice to the Revenue. An enquiry under section 263 cannot be ordered as an end in itself when the proposed disallowance proceeds on a legal foundation which is contrary to the settled judicial position.
17. The decision of the Ahmedabad Bench of the Tribunal in Comtrade Commodities Services Ltd. v. PCIT [2023] 156 taxmann.com 369 (Ahmedabad–Trib.) also supports this conclusion. In that case, where the Assessing Officer had allowed ESOP expenditure by following the legal position emerging from the decision of the Special Bench in Biocon Ltd. and its affirmation by the Hon’ble Karnataka High Court, it was held that the acceptance of such claim constituted a legally plausible view and could not be disturbed in exercise of revisionary jurisdiction under section 263. Likewise, the principle enunciated by the Hon’ble Delhi High Court in CIT v. Vikas Polymers [2012] 341 ITR 537 (Delhi) is that the absence of a detailed discussion in the assessment order cannot, without examination of the assessment record and without demonstrating the error and consequent prejudice, be equated with a complete absence of enquiry.
18. Viewed in the aforesaid perspective, the learned PCIT has neither demonstrated that the allowance of ESOP expenditure was contrary to law nor pointed out any factual infirmity rendering the view accepted in the assessment legally untenable. The assessment order cannot be regarded as erroneous merely because the learned PCIT preferred a different understanding of the nature of ESOP expenditure or considered that a more elaborate enquiry ought to have been made. In the absence of both the essential statutory conditions contemplated under section 263, the assumption of revisionary jurisdiction cannot be sustained. We, accordingly, quash the impugned order passed under section 263 and restore the assessment order dated 28.09.2023. The grounds raised by the assessee are, therefore, allowed.
19. In the result, the appeal of the assessee is allowed.
Order pronounced on 23rd September, 2026.
