ASK Investment Managers Limited Vs DCIT (ITAT Mumbai)
ESOP Discount, Strategic Investor Fees and Year-End Performance Income: ASK Investment Managers Wins on Three Counts
Summary: The Mumbai ITAT has allowed three substantial claims of ASK Investment Managers Limited: ₹72.73 crore of ESOP discount, ₹17.08 crore of professional fees connected with business growth and the search for a strategic partner, and relief from section 234C interest attributable to performance fees that could be determined only at the end of the financial year.
The order is particularly relevant because the ESOP deduction had been claimed directly in the tax computation, without a corresponding debit in the profit and loss account. The Tribunal examined the nature and evidence of the claim instead of treating its accounting presentation as decisive.
ESOP discount: employee compensation despite no P&L debit
ASK Investment Managers provides investment advisory and portfolio-management services. During the relevant year, employees exercised options and the company issued 60,154 shares under its ESOP scheme. It claimed ₹72,73,01,711 as the difference between the fair market value of the shares on the exercise date and the employees’ exercise price.
The Assessing Officer rejected the deduction. There was no corresponding debit in the books, and he regarded the amount as notional and capital in nature. He also disagreed with the merchant banker’s valuation of ₹14,329 per share, substituting a value of ₹6,943 based on the company’s standalone figures. The first appellate authority confirmed the disallowance, placing weight on the fact that employees transferred their shares to an independent purchaser during the same financial year rather than holding them for longer.
Before the Tribunal, the company produced the ESOP scheme, grant letters, exercise applications, employee-wise share details, a Category-I merchant banker’s valuation report and Forms 16 showing that the ESOP perquisite had been subjected to tax and TDS in the employees’ hands. It explained that the exercise price at grant was equal to or higher than the fair market value then prevailing; it had therefore claimed the expenditure when employees exercised their options.
The Tribunal applied the principle in Biocon Ltd., affirmed by the Karnataka High Court, that ESOP discount is an employee compensation cost deductible under section 37(1). It also held that the absence of a debit in the accounts did not, by itself, decide tax deductibility.
The valuation evidence mattered. Existing shareholders had transferred shares contemporaneously to a strategic investor at ₹15,533 per share, above the ₹14,329 value used for the ESOP claim. The Tribunal therefore rejected the suggestion that the company’s figure was merely arbitrary or notional. Nor did the employees’ subsequent sale change the character of the discount arising under the ESOP scheme. It deleted the ₹72.73 crore disallowance, also noting that similar claims had been accepted in the company’s later scrutiny assessments and that a coordinate bench had allowed an ESOP claim in a group concern’s case.
Professional fees: examine what the advisers actually did
The second dispute concerned ₹17,08,00,832 paid to Moelis and Company India Pvt. Ltd., Shardul Amarchand Mangaldas & Co. and Alvarez & Marsal India Pvt. Ltd. The Assessing Officer considered that the expenditure principally benefited shareholders. The first appellate authority treated it as connected with expansion of share capital rather than the company’s revenue operations.
The company explained that the advisers’ work extended beyond a share transaction. Their services covered business strategy, growth and value-enhancement opportunities, scaling existing operations, and identifying and evaluating a strategic partner. It said the exercise helped it expand its international platform, reach institutional investors and develop its investment-management business. To demonstrate the commercial setting, it pointed to subsequent increases in assets under management, client folios and EBITDA.
The Tribunal focused on the scope and purpose of the services. The fact that a strategic investor was inducted, and that shareholders also benefited, did not establish that the company incurred the fees solely for shareholders or for altering its capital structure. On the material before it, the advisory work had a direct connection with the company’s existing business and its growth. Applying commercial expediency and referring to PCIT v. Lok Advisory Services Pvt. Ltd., the Tribunal allowed the entire ₹17.08 crore under section 37(1).
The decision does not suggest that every fee incurred around a share sale is deductible. Its finding depended on evidence that these particular engagements covered the company’s business operations and strategy, beyond the issue or transfer of shares.
Section 234C: performance fee known only at year-end
The company had also offered ₹18,18,28,377 of portfolio-management performance fees to tax. Its case was that entitlement and quantum depended on market performance ascertained with reference to the last day of the financial year. It could not reasonably determine that income on the earlier advance-tax instalment dates. The Assessing Officer had charged ₹16,89,641 as interest under section 234C.
The Tribunal followed a coordinate bench decision in the company’s own case for AY 2016–17. Given the nature of this performance fee and the uncertainty of the market-linked calculation, it held that the amount could not reasonably have been estimated at the relevant instalment dates. It directed deletion of section 234C interest attributable to the ₹18.18 crore performance-fee income. The finding is tied to the fee arrangement and the evidence of when its amount became ascertainable.
Author’s comment
The three findings share an emphasis on the underlying transaction rather than its label. An ESOP claim was examined as employee compensation despite the absence of a P&L debit. Advisory fees were examined by reference to the actual services rendered, despite an associated strategic-investor transaction. Performance income was examined by reference to when its quantum could reasonably be known, rather than solely to the fact that it was ultimately earned.
For ESOP claims, the scheme documents, employee records, perquisite reporting and defensible valuation were central to the outcome. For transaction-related professional fees, the engagement terms and evidence of work done for the company’s existing business are equally important. And where section 234C relief is sought for contingent performance fees, the contract and calculation mechanism must establish why the income could not be reasonably estimated on the advance-tax dates. On those facts, the Tribunal allowed the company’s appeal.
Cases Discussed
- CIT (LTU) v. Biocon Ltd., (2020) 121 taxmann.com 351 (Karnataka) — affirmed the principle that ESOP discount represents employee compensation expenditure deductible under section 37(1).
- Biocon Ltd. v. DCIT (LTU), [2013] 35 taxmann.com 335 (Bangalore-Trib.) (SB) — relied upon on allowability of ESOP discount as employee compensation expenditure.
- ACIT v. ASK Wealth Advisors Pvt. Ltd., ITA No.4215/Mum/2023, order dated 23.09.2024 — coordinate bench decision in a group concern allowing ESOP discount as revenue expenditure.
- Taparia Tools Ltd. v. JCIT, (2015) 372 ITR 605 (SC) — relied upon for the principle that treatment in books is not conclusive for determining tax deductibility.
- PCIT v. Lok Advisory Services Pvt. Ltd., (2019) 104 taxmann.com 67 (Delhi) — relied upon regarding purpose, commercial expediency and incidental shareholder benefit.
- ASK Investment Managers Ltd. v. DCIT, ITA No.1115/Mum/2022, order dated 13.12.2022 — assessee’s own case followed on section 234C interest relating to performance fees.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT MUMBAI
This appeal by the assessee arises out of the order dated 09/04/2025 passed by the Ld. Joint Commissioner of Income Tax (Appeals), Bhubaneswar [“Ld. JCIT(A)”], u/s. 250 of the Income Tax Act, 1961 (“the Act”), for Assessment Year 2017-18.
2. The assessee has raised the following revised grounds of appeal:
“1. FAIR AND PROPER OPPORTUNITY OF BEING HEARD NOT GRANTED:
(a) On the facts and in the circumstances of the case and in law, the Joint Commissioner of Income Tax (Appeals), Bhubaneswar [‘the JCIT(A)’] has erred in confirming the disallowances made by the learned Deputy Commissioner of Income Tax, Circle-6(1)(2), Mumbai (‘the Assessing Officer’) without giving the Appellant fair and proper opportunity of being heard and without following the principles and rules of natural justice.
(b) The JCIT(A) failed to appreciate that the Appellant had made a request seeking personal hearing through video conference to make further submissions in the matter before concluding the appeal, and the same was not granted.
(c) In view of the above, the order of the JCIT(A) passed under section 250 of the Income Tax Act, 1961 (‘the Act’) dated 9 April 2025 (‘the Order’) be quashed, by holding it to be bad in law.
2. DISPOSAL OF APPEAL BY JCIT(A) BEYOND JURISDICTION:
(a) On the facts and in the circumstances of the case and in law, the JCIT(A) has erred in disposing the present appeal beyond his powers.
(b) The JCIT(A) has failed to appreciate that as per the provisions of section 246(6) of the Act read with Central Board of Direct Taxes Order dated 16 June 2023, the present appeal would not be eligible for disposal by the JCIT(A), as the disputed demand is more than Rs.10 lakh.
(c) In view of the above, the order of the JCIT(A) be quashed, by holding it to be bad in law.
3. NOT PASSING ORDER ON ALL THE GROUNDS INVOLVED IN APPEAL:
(a) On the facts and in the circumstances of the case and in law, the JCIT(A) has erred in passing the order without giving a decision on all the grounds of appeal raised before him.
(b) The JCIT(A) has erred in disposing of five grounds of appeal, being Ground A to Ground E concerning the disallowance of discount on ESOP of Rs.72,73,01,711/-, on a consolidated basis, without dealing with the specific issues set out in each of the grounds of appeal and without giving a decision on each of them.
(c) In view of the above, the order of the JCIT(A) be quashed, by holding it to be bad in law.
4. CONFIRMING THE DISALLOWANCE OF EXPENDITURE BEING DISCOUNT ON ISSUE OF SHARES TO EMPLOYEES UNDER ESOP SCHEME OF Rs.72,73,01,711/- AS THE SAME IS NOT DEBITED IN PROFIT AND LOSS ACCOUNT (PARA 4.1.2 OF THE ORDER):
(a) On the facts and circumstances of the case and in law, the JCIT(A) has erred in confirming the disallowance made by the Assessing Officer being discount on issue of shares to employees under ESOP Scheme of Rs.72,73,01,711/-, as the same was not debited in the Profit and Loss Account and was claimed directly in the computation of income and return of income filed by the Appellant for the captioned year.
(b) The JCIT(A) has failed to appreciate the settled principle that entries in the books of account are not determinative or conclusive for deciding the allowability or otherwise of any expenditure for computation of income and the same needs to be examined as per the provisions of the Act.
(c) In view of the above, the JCIT(A)/Assessing Officer be directed to allow the expenditure being discount on issue of shares to employees under ESOP Scheme of Rs.72,73,01,711/- as claimed by the Appellant.
5. DISTINGUISHING THE RATIO OF THE BANGALORE SPECIAL BENCH OF ITAT IN THE CASE OF BIOCON LIMITED (25 ITR 602) AND HOLDING THAT THE SAME IS NOT APPLICABLE IN THE PRESENT CASE TO CONCLUDE THAT DISCOUNT ON ISSUE OF SHARES TO EMPLOYEES OF Rs.72,73,01,711/- IS NOT ALLOWABLE:
(a) On the facts and in the circumstances of the case and in law, the JCIT(A) erred in holding that the facts and circumstances of the Appellant are distinguishable from the authority of the Hon’ble Bangalore ITAT Special Bench in the case of Biocon Ltd. (25 ITR 602), and hence the claim for deduction of discount on issue of shares to employees under ESOP Scheme is not allowable.
(b) The JCIT(A) failed to appreciate that the Appellant’s ESOP Scheme was implemented in accordance with the applicable law, the expenditure was incurred wholly and exclusively for the purpose of business, and the valuation was obtained from a SEBI-registered Category-I Merchant Banker, similar to the facts in Biocon Ltd. (supra).
(c) The JCIT(A) has erred in not appreciating the rationale behind the issuance of shares to employees under the ESOP Scheme and has arbitrarily connected certain facts to conclude that the exercise of ESOPs by the employees in the captioned year and the subsequent sale/transfer of such shares to another investor within a short period makes the Appellant’s case beyond ordinary and, hence, the claim for deduction of discount on issue of shares to employees under the ESOP Scheme is not allowable.
(d) The JCIT(A) has not pointed out any deficiency or inconsistency in the Appellant’s ESOP Scheme or in any details or evidence submitted to substantiate the rationale of the ESOP Scheme and the basis for the allowability of discount on issue of shares to employees under the ESOP Scheme as deductible expenditure vis-à-vis the authority of the Hon’ble Bangalore ITAT Special Bench in the case of Biocon Ltd. (supra).
(e) In view of the above, the JCIT(A)/Assessing Officer be directed to allow the expenditure being discount on issue of shares to employees under ESOP Scheme of Rs.72,73,01,711/- as claimed by the Appellant.
6. CONFIRMING DISALLOWANCE OF EXPENDITURE BEING DISCOUNT ON ISSUE OF SHARES TO EMPLOYEES UNDER ESOP SCHEME OF Rs.72,73,01,711/- BY HOLDING THAT THE PURPOSE OF ESOP SCHEME IS NOT FULFILLED AND HENCE THE SAME IS NOT FOR THE PURPOSE OF BUSINESS OF THE APPELLANT (PARA 4.1.5 OF THE ORDER):
(a) On the facts and in the circumstances of the case and in law, the JCIT(A) erred in concluding that the purpose of the ESOP Scheme was not fulfilled and, hence, the same was not for the purpose of the business of the Appellant and was rightly disallowed by the Assessing Officer.
(b) The JCIT(A) has erred in assuming that since the shares allotted under the ESOP Scheme were not held by the employees for a longer period before their transfer to another investor, it appeared that the ESOP Scheme was used as a device for transferring the shares to the actual beneficiary through the employees for evading payment of legitimate taxes and, hence, the disallowance of expenditure being discount on issue of shares to employees under the ESOP Scheme was liable to be confirmed.
(c) In view of the above, the JCIT(A)/Assessing Officer be directed to treat the ESOP Scheme of the Appellant as being for the purpose of business and, consequently, the expenditure being discount on issue of shares to employees under the ESOP Scheme of Rs.72,73,01,711/- ought to be allowed.
7. NOT FOLLOWING THE PRINCIPLE OF CONSISTENCY AND IGNORING THE FACT THAT EXPENDITURE BEING DISCOUNT ON ISSUE OF SHARES TO EMPLOYEES UNDER ESOP SCHEME HAS BEEN ALLOWED AS DEDUCTIBLE EXPENDITURE IN SCRUTINY ASSESSMENTS OF SUBSEQUENT YEARS:
(a) On the facts and in the circumstances of the case and in law, the JCIT(A) has erred in not following the principle of consistency and in confirming the disallowance of expenditure being discount on issue of shares to employees under the ESOP Scheme despite bringing to his knowledge the fact that such deduction had been allowed by the Income Tax Department in the scrutiny assessments of the Appellant for the subsequent years, i.e., Assessment Years 2021-22 and 2022-23.
(b) The JCIT(A) failed to appreciate the principle that when there is no change in the facts or legal position on an issue, a different view in an earlier assessment year is not justified, especially when complete details, documents and explanations on such issue have been duly examined and accepted by the Department in the scrutiny assessments of the Appellant for the later years.
(c) In view of the above, the JCIT(A)/Assessing Officer be directed to allow the expenditure being discount on issue of shares to employees under the ESOP Scheme of Rs.72,73,01,711/-.
8. NOT FOLLOWING THE AUTHORITY OF ITAT IN THE CASE OF ANOTHER GROUP ENTITY ON ALLOWABILITY OF EXPENDITURE BEING DISCOUNT ON ISSUE OF SHARES TO EMPLOYEES UNDER ESOP SCHEME:
(a) On the facts and in the circumstances of the case and in law, the JCIT(A) has erred in disregarding the binding precedent of the Hon’ble Mumbai ITAT in the case of the Appellant’s group company, M/s. ASK Wealth Advisors Pvt. Ltd., for Assessment Year 2017-18 in ITA No.4215/Mum/2023, wherein, on the issue of allowability of discount on issue of shares to employees under the ESOP Scheme, it was held that the difference between the offer price of ESOP and the market price of shares, i.e., the discount, is allowable as revenue expenditure u/s. 37(1) of the Act.
(b) The JCIT(A) failed to appreciate the principle that when there is no change in the facts or legal position of the Appellant’s case for the captioned year and that of its group company, M/s. ASK Wealth Advisors Pvt. Ltd., on the issue of allowability of discount on issue of shares to employees under the ESOP Scheme, taking a different view from that taken by the ITAT is not justified in the case of the Appellant.
(c) In view of the above, the JCIT(A)/Assessing Officer be directed to allow the expenditure being discount on issue of shares to employees under the ESOP Scheme of Rs.72,73,01,711/-.
9. CONFIRMING DISALLOWANCE OF LEGAL AND PROFESSIONAL FEES PAID TO M/S. MOELIS AND CO. AND OTHER TWO ENTITIES OF Rs.17,08,00,832/-:
(a) On the facts and in the circumstances of the case, the JCIT(A) has erred in confirming the disallowance of legal and professional fees paid to M/s. Moelis and Co. and the other two entities amounting to Rs.17,08,00,832/-.
(b) The JCIT(A) has erred in concluding that the expenditure on legal and professional fees aggregating to Rs.17,08,00,832/- was related to capital expansion and, hence, was required to be capitalised and was not allowable u/s. 37(1) of the Act.
(c) The JCIT(A) has failed to appreciate the rationale for onboarding the new strategic partner and the benefits thereof to the Appellant, including growth of business, revenue and assets under management. The legal and professional fee expenditure incurred enabled the Appellant to realise its vision and, hence, the commercial expediency of such expenditure was established and the same was allowable u/s. 37(1) of the Act.
(d) Despite the Appellant submitting all the details, documents and particulars concerning the legal and professional fee expenditure and the benefits derived therefrom, the JCIT(A) erred in concluding that the remuneration paid to M/s. Moelis and Co. was not commensurate with the services provided to the Appellant. The JCIT(A) ignored the settled position that it is for the Appellant to decide whether any expenditure should be incurred in the course of its business and the quantum thereof, and that the authorities must not examine the matter from their own viewpoint but from that of a prudent businessman.
(e) In view of the above, the JCIT(A)/Assessing Officer be directed to allow the expenditure on legal and professional fees of Rs.17,08,00,832/- paid to M/s. Moelis and Co. and the other two entities.
10. CONFIRMING LEVY OF INTEREST UNDER SECTION 234C OF THE ACT ON PERFORMANCE FEES EARNED WHICH CANNOT BE ESTIMATED:
(a) On the facts and circumstances of the case and in law, the JCIT(A) has erred in directing the Assessing Officer to recompute interest u/s. 234C of the Act without adjudicating the applicability of interest u/s. 234C on performance fees earned, which cannot be estimated beforehand.
(b) In doing so, the JCIT(A) failed to appreciate that the Appellant is engaged in the business of providing portfolio-management services. The performance fees earned by the Appellant from its clients could be ascertained only on the last day of the year, based on the position of the stock market at the end of that day. Hence, having regard to the volatility and uncertainty of the stock market, it was impossible to estimate the performance fees that would be earned based on the position of the stock market on the last day of the year.
(c) The JCIT(A) has also erred in disregarding the binding precedent of the Hon’ble Mumbai ITAT in the Appellant’s own case for Assessment Year 2016-17 in ITA No.1115/Mum/2022, wherein it was held that there was no failure on the part of the assessee to pay advance tax in accordance with the provisions of sections 208 and 209 of the Act because, owing to uncertainty in the equity market, the assessee could not have estimated beforehand the amount of performance fees for the purpose of calculating advance tax and, hence, no interest u/s. 234C was leviable on the performance fees earned by the Appellant.
(d) In view of the above, the JCIT(A)/Assessing Officer be directed to recalculate interest u/s. 234C of the Act after excluding the performance fees of Rs.18,18,28,377/- included in the income of the Appellant.
11. CONFIRMING INITIATION OF PENALTY PROCEEDINGS UNDER SECTION 274 READ WITH SECTION 270A OF THE ACT:
(a) On the facts and in the circumstances of the case, the JCIT(A) erred in confirming the initiation of penalty proceedings u/s. 274 r.w.s. 270A of the Act in respect of the disallowance of expenditure being discount on issue of shares to employees under the ESOP Scheme amounting to Rs.72,73,01,711/- and legal and professional fees amounting to Rs.17,08,00,832/-, by alleging that the Appellant had under-reported/misreported its income.
(b) In doing so, the JCIT(A) failed to appreciate the following:
(i) The Appellant had fully and truly disclosed all the material facts relating to the claim of expenditure towards discount on issue of shares under the ESOP Scheme and legal and professional fees in the computation of income and return of income filed and had offered a bona fide explanation to substantiate its claims.
(ii) The disallowances made by the Assessing Officer were only on account of a difference of opinion, which did not amount to under-reporting/misreporting of income.
(iii) In view of the above, the Assessing Officer be directed to drop the penalty proceedings forthwith.
12. GENERAL:
(a) All the above grounds of appeal are independent of and without prejudice to each other.
(b) The order of the JCIT(A), being contrary to the law, evidence and facts of the case, should be set aside, quashed or modified on the grounds set out above.
(c) The Appellant craves leave to add, modify or delete any ground at or before the hearing.”
2. Brief facts of the case are as under:-
Assessee is a company engaged in the business of providing investment advisory, portfolio management, financial advisory and support services. For the year under consideration, the assessee filed its original return of income on 30/11/2017 declaring loss of Rs.33,54,68,080/- and book profit u/s. 115JB of the Act at Rs.38,04,46,654/-. Subsequently, the assessee filed a revised return of income on 29/03/2018 declaring the same loss and book profit. The case was selected for scrutiny and statutory notices were issued to the assessee. In response thereto, the assessee filed requisite details and submissions as called for.
2.1. The Ld.AO completed the assessment u/s.143(3) of the Act vide order dated 28/12/2019, by disallowing the discount on issue of shares to employees under the ESOP Scheme amounting to Rs.72,73,01,711/- and legal and professional fees amounting to Rs.17,08,00,832/-. The Ld.AO also charged interest u/s. 234C of the Act at Rs.16,89,641/-.
Aggrieved by the assessment order, the assessee preferred appeal before the Ld.CIT(A).
3. The Ld.CIT(A) confirmed the disallowances made by the Ld.AO and directed Ld.AO to recompute the interest u/s. 234C of the Act in accordance with law.
Aggrieved by the order of the Ld.CIT(A), the assessee is in appeal before this Tribunal.
4. At the outset, the Ld.AR submitted that Ground Nos. 1 to 3, being technical in nature, are not pressed.
Accordingly, Ground Nos. 1 to 3 are dismissed as not pressed.
4.1. Ground No. 12 being general in nature does not require separate adjudication.
5. Ground Nos.4 to 8 relate to the disallowance of expenditure towards discount on issue of shares to employees under the ESOP Scheme amounting to Rs.72,73,01,711/-.
During the year under consideration, the assessee issued 60,154 shares to its employees upon exercise of the stock options and claimed the difference between the fair market value of the shares on the date of exercise and the exercise price as expenditure. It was submitted that, since the exercise price of the stock options on the date of grant was either equal to or higher than the fair market value on that date, there was no occasion to claim any expenditure over the vesting period. The expenditure was, therefore, claimed during the year in which the employees exercised its stock options.
5.1. The Ld.AO disallowed the claim on the ground that, no corresponding entry was passed in the books of account. The Ld.AO further noted that that the expenditure was notional and capital in nature and that the decision of Hon’ble Special Bench of Bangalore Tribunal in case of Biocon Ltd. v. DCIT (LTU) reported in [2013] 35 taxmann.com 335 was distinguishable and had not been accepted by the Department. The Ld.AO also rejected the fair market value of Rs.14,329/- per share determined by the merchant banker and computed the same at Rs.6,943/- per share by considering the standalone financial figures of the assessee.
5.2. The Ld.CIT(A) confirmed the disallowance, inter alia, observing that the decision in Biocon Ltd. (supra) was distinguishable on facts and that the object of the ESOP Scheme had not been fulfilled since the shares allotted to the employees were transferred by them to an independent purchaser during the same financial year instead of being retained for a longer period.
5.3. Before us, the Ld.AR submitted that the discount arising on issue of shares to employees under the ESOP Scheme constituted an employee compensation cost incurred wholly and exclusively for the purposes of the assessee’s business and was, therefore, allowable u/s. 37(1) of the Act. Reliance was placed on the decision of Hon’ble Special Bench in Biocon Ltd. v. DCIT (LTU) (supra), which was subsequently affirmed by the Hon’ble Karnataka High Court in CIT (LTU) v. Biocon Ltd. reported (2020) 121 taxmann.com 351.
5.4. The Ld.AR submitted that complete supporting material, including the ESOP Scheme, sample grant letters, applications for exercise of options, employee-wise particulars of the shares issued, valuation report determining the fair market value on the date of exercise and Form No. 16 evidencing the perquisite value subjected to tax and deduction of tax at source, had been furnished before the authorities below. It was further submitted that the assessee had duly complied with Rule 3(8)(iii) of the Income Tax Rules, 1962, read with section 17(2)(vi) of the Act, by obtaining a valuation report from a Category-I merchant banker.
5.5. The Ld.AR further submitted that the fair market value determined by the merchant banker stood corroborated by the transfer of 5,49,592 shares by the existing shareholders to M/s.AI Global Investments (Cyprus) PCC Ltd. for an aggregate consideration of Rs.853,66,19,188/-, translating into a price of Rs.15,533/- per share, as against the fair market value of Rs.14,329/- adopted by the assessee. It was further submitted that an identical claim was accepted by the Revenue in the assessee’s scrutiny assessments for Assessment Years 2021-22 and 2022-23. Reliance was also placed on the decision of the Coordinate Bench in the case of the assessee’s group concern, ACIT v. ASK Wealth Advisors Pvt. Ltd., ITA No.4215/Mum/2023, order dated 23/09/2024, wherein the discount on issue of shares under an ESOP Scheme was held to be allowable as revenue expenditure u/s. 37(1) of the Act.
5.6. The Ld.AR also relied upon the decision of the Hon’ble Supreme Court in Taparia Tools Ltd. v. JCIT reported in (2015) 372 ITR 605, to submit that the treatment accorded to an item in the books of account is not determinative of its allowability while computing taxable income under the Act.
5.7. The Ld.DR relied upon the orders passed by the authorities below and supported the impugned disallowances.
We have perused the submissions advanced by both sides in light of records placed before us.
6. The issue relating to the allowability of discount arising on issue of shares to employees under an ESOP Scheme as an employee compensation expenditure is no longer res integra. The Hon’ble Special Bench of the Tribunal in Biocon Ltd. v. DCIT (LTU) (supra), after examining the nature and allowability of ESOP discount, held that the discount on issue of shares under an ESOP Scheme represents an expenditure incurred on account of employee compensation and is allowable as deduction under section 37(1) of the Act. The said decision has subsequently been affirmed by Hon’ble Karnataka High Court in CIT (LTU) v. Biocon Ltd.(supra).
6.1. In the present case, the assessee has furnished the ESOP Scheme, grant letters, exercise applications, employee-wise details of shares issued, valuation report of the Category-I merchant banker and the relevant Form No.16 evidencing taxation of the ESOP perquisite in the hands of the employees. The fact that the assessee did not make a corresponding debit entry in its books of account, by itself, cannot determine the allowability of the expenditure under the Act. Hon’ble Supreme Court in Taparia Tools Ltd. v. JCIT (supra) has held that the treatment of an item in the books of account is not conclusive for determining its allowability under the provisions of the Act.
6.2. As regards the fair market value adopted by the assessee, we find that the same was supported by the valuation report obtained from a Category-I merchant banker and, significantly, the assessee has also placed on record the contemporaneous transfer of shares by the existing shareholders to M/s. AI Global Investments (Cyprus) PCC Ltd. at Rs.15,533/- per share, as against the value of Rs.14,329/- per share adopted for determining the ESOP perquisite. The valuation adopted by the assessee, therefore, cannot be characterised as a mere notional or arbitrary figure. Further, the subsequent transfer of shares by the employees, by itself, does not alter the character of the discount as employee compensation expenditure incurred pursuant to the ESOP Scheme.
6.3. We also take note of the fact that an identical claim made by the assessee in the scrutiny assessments for Assessment Years 2021-22 and 2022-23 was accepted by the Revenue. The issue has also been considered by the Coordinate Bench in the case of the assessee’s group concern in ACIT v. ASK Wealth Advisors Pvt. Ltd., in ITA No.4215/Mum/2023, order dated 23.09.2024, following the principle laid down in Biocon Ltd. (supra).
6.4. In view of the settled legal position and having regard to the facts and evidences placed on record in the present case, we hold that the discount arising on issue of shares to employees pursuant to the ESOP Scheme constitutes employee compensation expenditure allowable under section 37(1) of the Act. Accordingly, the disallowance of Rs.72,73,01,711/- made by the Ld.AO and sustained by the Ld.CIT(A) is deleted.
Accordingly, Ground Nos.4 to 8 raised by the assessee stands allowed.
7. Ground No. 9 relates to the disallowance of legal and professional fees amounting to Rs.17,08,00,832/-. During the year under consideration, the assessee incurred professional fees of Rs.15,66,50,181/- paid to M/s. Moelis and Company India Pvt. Ltd., Rs.1,00,83,667/- paid to M/s. Shardul Amarchand Mangaldas & Co. and Rs.40,66,984/- paid to M/s. Alvarez & Marsal India Pvt. Ltd. for obtaining advisory and allied services in connection with the evaluation of business-growth and value-enhancement opportunities, formulation of business strategy, scaling up of its existing operations and identification and evaluation of a suitable strategic partner.
7.1. The Ld.AO disallowed the expenditure on the ground that it had primarily benefited the shareholders of the assessee and was not incurred for the purposes of its business.
7.2. The Ld.CIT(A) confirmed the disallowance, holding that the expenditure related to expansion of the assessee’s share capital and that the assessee had failed to establish commensurate business benefits arising therefrom.
7.3. Before us, the Ld.AR submitted that the expenditure was revenue in nature and had been incurred wholly and exclusively for the purposes of the assessee’s existing business. The services were availed with a view to expanding the assessee’s operations beyond India, developing an international platform, obtaining access to institutional investors and seed funding, enlarging its global client base and strengthening its asset-management and alternative-investment platform. It was submitted that the induction of the strategic partner resulted in substantial business growth, inasmuch as the assets under management increased from Rs.6,286.40 crores to Rs.27,069.30 crores, the number of client folios increased from 4,487 to 23,692 and the EBITDA increased from Rs.8.42 crores to Rs.331.88 crores.
7.4. The Ld.AR submitted that the scope of the professional services was not confined to the transfer or issue of shares but formed part of a broader business-transformation exercise, which included vendor due diligence and other advisory services. It was contended that expenditure incurred on the ground of commercial expediency would not cease to be allowable merely because an incidental benefit accrued to the shareholders or a third party. In support of these submissions, reliance was placed on the decision of the Hon’ble Delhi High Court in PCIT v. Lok Advisory Services Pvt. Ltd. reported in (2019) 104 taxmann.com 67.
7.5. The Ld.DR relied upon the orders passed by the authorities below and supported the impugned disallowances.
We have perused the submissions advanced by both sides in light of records placed before us.
7.6. The undisputed fact is that the impugned expenditure was incurred towards professional and advisory services obtained from Moelis and Company India Pvt. Ltd., Shardul Amarchand Mangaldas & Co. and Alvarez & Marsal India Pvt. Ltd. in connection with evaluation of business-growth and value-enhancement opportunities, formulation of business strategy, scaling up of existing operations and identification and evaluation of a suitable strategic partner.
7.7. The mere fact that the exercise also resulted in an induction of a strategic investor and consequently benefited the shareholders cannot, by itself, lead to the conclusion that the expenditure was not incurred for the purposes of the assessee’s business. The relevant test is whether the expenditure was incurred on grounds of commercial expediency and for the purposes of the existing business. An expenditure does not lose its revenue character merely because, in the course of carrying on the business, it also results in an incidental benefit to the shareholders.
7.8. In the present facts of the case, materials placed before us reveals that professional services were not confined merely to the issue or transfer of shares or alteration of the capital structure. The services extended to business strategy, growth opportunities, scaling up of operations, identification of a strategic partner and broader business-transformation objectives. The subsequent substantial increase in the assessee’s assets under management, client folios and EBITDA also lends support to its contention that the exercise had a direct nexus with its business operations. The expenditure, therefore, cannot be regarded as expenditure incurred merely for the benefit of the shareholders.
7.9. We also find support for the above proposition from the decision of the Hon’ble Delhi High Court in PCIT v. Lok Advisory Services Pvt. Ltd. (supra), wherein the allowability of expenditure has been examined with reference to the purpose and commercial expediency of the expenditure rather than merely the incidental benefit accruing to the shareholders.
7.10. In the facts of the present case, we are of the considered view that the impugned professional expenditure was incurred wholly and exclusively for the purposes of the assessee’s business and is allowable under section 37(1) of the Act. The finding of the Ld.CIT(A) that the expenditure was essentially towards expansion of share capital is not borne out from the overall nature and scope of the services rendered. Accordingly, the disallowance of Rs.17,08,00,832/- is deleted.
Accordingly, Ground No.9 raised by the assessee stands allowed.
8. Ground No. 10 relates to the levy of interest u/s.234C of the Act on the performance fees earned by the assessee. During the year under consideration, the assessee earned performance fees of Rs.18,18,28,377/- from portfolio-management services and offered the same to tax. The assessee contended that its entitlement to the performance fees depended upon the market position prevailing on the last day of the financial year and, therefore, the amount could not have been estimated in advance for the purposes of payment of advance tax.
8.1. The Ld.AO rejected the contention and charged interest u/s.234C of the Act at Rs.16,89,641/-.
8.2. The Ld.CIT(A), without conclusively adjudicating the legal issue, directed the Ld.AO to recompute the interest in accordance with the provisions of the Act and treated the ground as allowed for statistical purposes.
8.3. Before us, the Ld.AR submitted that the issue stood covered in favour of the assessee by the decision of the Coordinate Bench in the assessee’s own case in ASK Investment Managers Ltd. v. DCIT, ITA No.1115/Mum/2022, vide order dated 13/12/2022. It was submitted that, considering the uncertainty and volatility of the equity market, the assessee could not have estimated the performance fees before the end of the financial year and, consequently, there was no failure on its part to pay advance tax in accordance with sections 208 and 209 of the Act on such income.
8.4. The Ld.DR relied upon the orders passed by the authorities below and supported the impugned disallowances.
We have perused the submissions advanced by both sides in light of the record placed before us.
9. The issue is squarely covered in favour of the assessee by the decision of the Coordinate Bench in the assessee’s own case in ASK Investment Managers Ltd. v. DCIT,(supra)
9.1. We find that the performance fee of Rs.18,18,28,377/- was dependent upon the market position and performance of the portfolio ascertained with reference to the last day of the financial year. Thus, the quantum of such fee could not be reasonably ascertained or estimated during the relevant instalment dates prescribed for payment of advance tax. Consequently, the assessee could not be said to have committed a default in payment of advance tax in respect of such income merely because the performance fee was ultimately earned and offered to tax at the end of the financial year.
9.2. Respectfully following the aforesaid decision of the Coordinate Bench in the assessee’s own case, we hold that interest under section 234C of the Act is not leviable in respect of the performance fees of Rs.18,18,28,377/- earned by the assessee during the year under consideration. The Ld.AO is accordingly directed to delete the interest charged under section 234C on such income.
Accordingly, Ground No.10 raised by the assessee stands allowed.
In the result, the appeal filed by the assessee stands allowed.
Order pronounced in the open court on 21-09-2026.
