JSW Cement Limited Vs PCIT (ITAT Mumbai)
ESOP Expense, Deemed Dividend and MAT: PCIT’s Section 263 Revision Fails on Every Issue
Mumbai ITAT quashes revision of JSW Cement’s assessments for AYs 2020–21 and 2021–22
The power under section 263 permits the Commissioner to correct an assessment that is both erroneous and prejudicial to the interests of the Revenue. It does not permit a fresh enquiry merely because the Commissioner would have examined a disclosed transaction differently. Applying that distinction, the Mumbai ITAT quashed the revision orders passed against JSW Cement Limited for AYs 2020–21 and 2021–22 in ITA Nos. 4866 and 4867/Mum/2026, decided on 23 September 2026.
The revision for AY 2021–22 covered several substantial items: ₹44.97 crore of ESOP expenditure, ₹5.02 crore of branding fees, a proposed ₹4.53 crore adjustment to book profit based on section 14A, loans of ₹80 crore and ₹15 crore proposed to be examined as deemed dividend under section 2(22)(e), and the interest paid on those loans. For AY 2020–21, the principal issues were ₹2.42 crore of ESOP expenditure and a proposed ₹4.42 crore MAT adjustment.
ESOP discount is employee compensation
The PCIT questioned the deduction of ₹44.97 crore claimed for AY 2021–22 under section 37(1). The Department particularly objected to ₹35.40 crore, which related to employee option grants made in earlier years. It argued that the AO should have examined why that amount was recognised in the year under appeal.
JSW Cement explained that its ESOPs formed part of employee remuneration. Under Ind AS 102, the cost of share-based payments was recognised as employees rendered their services. Its audited accounts disclosed that a modification of the ESOP Plan, 2016 during the relevant year led to a re-estimation and recognition of the additional liability. The company distinguished the date of the original grants from the date on which the further cost arose through the plan modification.
The Tribunal accepted that ESOP discount represents employee compensation, even though it is not immediately paid in cash. It relied on the Special Bench decision in Biocon Ltd., its affirmation by the Karnataka High Court, and decisions of the Delhi and Madras High Courts. As to the additional ₹35.40 crore, the PCIT had not shown that the plan modification did not occur, that the recognition breached Ind AS 102, or that the liability had already crystallised and been claimed in an earlier year. The mere fact that the original grants were older did not make the additional cost a prior-period expense.
The Tribunal applied the same reasoning to the ₹2.42 crore ESOP claim for AY 2020–21. It held that the assessments could not be revised simply to reconsider deductions supported by the prevailing judicial position and the material on record.
A new objection in the final order denied a fair hearing
For AY 2021–22, the PCIT also directed examination and disallowance of ₹5.02 crore in branding-fee expenditure. Yet none of the show-cause notices in the revision proceedings had raised that issue. The Revenue’s representative accepted this factual position before the Tribunal.
The Tribunal held that the PCIT could not introduce an altogether new ground of revision in the final order without giving the company an opportunity to answer it. Relying on the Bombay High Court’s decision in PCIT v. Universal Music India (P.) Ltd., it quashed the direction concerning branding fees for breach of natural justice.
A Rule 8D figure cannot simply be added to MAT book profit
The PCIT sought to add ₹4,53,38,476 for AY 2021–22 and ₹4,42,17,615 for AY 2020–21 to book profit under section 115JB, using amounts computed under section 14A read with Rule 8D.
The Tribunal addressed the years separately. For AY 2021–22, dividend income was taxable in shareholders’ hands after the Finance Act, 2020 amendment, and no other exempt income had been identified. The PCIT had not identified either exempt income or actual expenditure debited in the accounts that called for an adjustment under clause (f) of Explanation 1 to section 115JB.
For AY 2020–21, dividend income was exempt. Even so, the Tribunal held that the Rule 8D calculation could not be mechanically imported into the MAT computation. Applying the Special Bench ruling in Vireet Investment (P.) Ltd., it held that any clause (f) adjustment must be determined independently with reference to expenditure debited in the books and relatable to exempt income. The PCIT’s directions for both years were quashed.
Common group ownership did not establish deemed dividend
The PCIT also proposed that loans of ₹80 crore from South West Mining Ltd. and ₹15 crore from JSW Dharamtar Port Pvt. Ltd. be examined as deemed dividend under section 2(22)(e). His premise was that the lenders and JSW Cement had a common ultimate economic connection through SJFT, a family trust.
The Tribunal examined the ownership chain. Although SJFT held an interest in the lender group, JSW Cement’s immediate shareholder was Adarsh Advisory Services Pvt. Ltd., a separate company. Neither the relevant shareholder of the lenders nor SJFT was shown to be a member of JSW Cement in the manner required by the second limb of section 2(22)(e).
The words “member or partner” in that provision impose an independent statutory condition. An ultimate economic interest traced through a trust and several companies cannot itself create membership of each company in the chain. The Tribunal also noted that JSW Cement was not a shareholder of either lender. Under the binding decisions discussed in the order, a proposed deemed dividend could not be assessed in its hands merely because it received the loans.
The Revenue referred to National Travel Services, where a Supreme Court Bench had expressed doubt about aspects of the existing case law and referred the issue for consideration by a larger Bench. The Tribunal held that a reference does not by itself overrule a binding precedent. It also distinguished that case’s partnership facts from the separate corporate entities involved here. Once the deemed dividend premise failed, the PCIT’s consequential directions to disallow ₹1,47,28,767 and ₹7,46,801 of interest on the loans could not survive.
Author’s comments
The important section 263 point is that an enquiry must have a lawful purpose. Explanation 2 can address an assessment made without an enquiry that the facts reasonably required. But the PCIT must still identify an error and establish prejudice in the assessment being revised. An elaborate investigation into ownership, accumulated profits or commercial terms cannot justify revision if the proposed deemed dividend is legally incapable of being taxed in the recipient company’s hands.
The decision also separates three questions that are sometimes merged: whether ESOP cost is deductible, whether a Rule 8D amount can be used for MAT, and whether indirect group ownership meets the exact conditions of section 2(22)(e). The Tribunal answered each on its statutory and factual footing. Finding no sustainable basis for revision, it quashed both section 263 orders and allowed both appeals.
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 deductible employee-compensation expenditure.
- PVR Ltd. v. CIT, [2022] 145 taxmann.com 331 (Delhi High Court) — relied upon in support of the deductibility of ESOP employee-compensation expenditure.
- CIT v. Shriram City Union Finance Ltd., [2024] 460 ITR 232 (Madras High Court) — relied upon on the character of ESOP discount as deductible employee-compensation expenditure.
- PCIT v. Universal Music India (P.) Ltd., [2023] 155 taxmann.com 230 (Bombay High Court) — relied upon for the requirement that a new basis of revision cannot be introduced in the final section 263 order without first giving the assessee notice and an effective opportunity to respond.
- ACIT v. Vireet Investment (P.) Ltd., [2017] 165 ITD 27 (Delhi-Trib.) (SB) — followed for the principle that a Rule 8D computation cannot be mechanically imported into clause (f) of Explanation 1 to section 115JB; the MAT adjustment must be independently determined from expenditure debited in the books and relatable to exempt income.
- ACIT v. Bhaumik Colour (P.) Ltd., [2009] 118 ITD 1 (Mumbai-Trib.) (SB) — relied upon on the statutory shareholder requirements and the limits of the deemed-dividend fiction under section 2(22)(e).
- CIT v. Universal Medicare (P.) Ltd., [2010] 324 ITR 263 (Bombay High Court) — relied upon for the proposition that deemed dividend cannot be assessed in the hands of a recipient concern which is not itself a shareholder in the lender company.
- CIT v. Impact Containers (P.) Ltd., [2014] 367 ITR 346 (Bombay High Court) — relied upon regarding the shareholder requirement for application of section 2(22)(e).
- CIT v. Datta Prasad Kamat, [2023] 153 taxmann.com 702 (Bombay High Court) — cited on the statutory requirements governing deemed dividend under section 2(22)(e).
- CIT v. Ankitech (P.) Ltd., [2012] 340 ITR 14 (Delhi High Court) — relied upon for restricting the deemed-dividend fiction to its prescribed statutory field and against taxing a non-shareholder recipient.
- CIT v. Madhur Housing and Development Co., [2018] 401 ITR 152 (Supreme Court) — relied upon as approving the principle stated in Ankitech concerning taxation of deemed dividend in the hands of the shareholder.
- National Travel Services v. CIT, [2018] 401 ITR 154 (Supreme Court) — considered and distinguished; the Tribunal noted that the Supreme Court Bench had expressed prima facie doubt and referred the issue to a larger Bench, which by itself did not overrule existing binding precedent.
- Central Board of Dawoodi Bohra Community v. State of Maharashtra, [2005] 2 SCC 673 (Supreme Court) — relied upon for the principle that a reference to a larger Bench does not by itself overrule or suspend an existing binding precedent.
- Malabar Industrial Co. Ltd. v. CIT, [2000] 243 ITR 83 (Supreme Court) — followed for the foundational section 263 requirement that the assessment order must be both erroneous and prejudicial to the interests of the Revenue.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The aforesaid appeals have been preferred by the assessee against the respective revisional orders passed by the learned Principal Commissioner of Income-tax under section 263 of the Income-tax Act, 1961 (“the Act”), for Assessment Years 2020–21 and 2021–22. Since certain issues involved in both the appeals are common and arise from substantially similar facts, the appeals were heard together and are being disposed of by this consolidated order. We first take up the appeal for Assessment Year 2021–22 in ITA No. 4867/Mum/2026.
2. The grounds raised by the assessee for Assessment Year 2021–22 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 24.12.2024 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 sections 144C(3) and 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 sections 144C(3) and 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 order by disallowing staff-welfare expenditure of ₹44,97,00,000 incurred on account of ESOP under section 37(1) of the Act.
V. 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 disallow branding-fee expenditure of ₹5,02,00,000 under section 37(1) of the Act.
VI. 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 add an amount of ₹4,53,38,476, disallowed under section 14A, while computing book profit under section 115JB, without appreciating that a disallowance computed under Rule 8D cannot be mechanically imported into the computation of book profit.
VII. 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 make an addition of ₹80,00,00,000 as deemed dividend under section 2(22)(e) on account of the loan received from South West Mining Limited.
VIII. 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 disallow interest expenditure of ₹1,47,28,767 under section 36(1)(iii) in respect of the aforesaid loan received from South West Mining Limited.
IX. 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 make an addition of ₹15,00,00,000 as deemed dividend under section 2(22)(e) on account of the loan received from JSW Dharamtar Port Private Limited.
X. 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 disallow interest expenditure of ₹7,46,801 under section 36(1)(iii) in respect of the aforesaid loan received from JSW Dharamtar Port Private Limited.
XI. 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 2021–22 on 08.03.2022, declaring nil income. The return was selected for scrutiny and, after issuance of statutory notices and consideration of the material and explanations furnished by the assessee, the assessment was completed under section 143(3) read with sections 144C(3) and 144B vide order dated 31.01.2024, determining the total income at ₹25,22,73,030.
4. Thereafter, the learned PCIT issued show-cause notices dated 24.12.2024 and 08.10.2025 proposing revision of the assessment order, inter alia, on the ground that the deduction claimed towards ESOP expenditure was not allowable under section 37(1) and that the disallowance purportedly made under section 14A ought to have been considered while computing book profit under section 115JB. By a further notice dated 06.02.2026, the learned PCIT also raised the issue of loans of ₹80 crore and ₹15 crore received by the assessee from South West Mining Limited (“SWML”) and JSW Dharamtar Port Private Limited (“JDPPL”), respectively, and proposed to examine their taxability as deemed dividend under section 2(22)(e). The learned PCIT further questioned the corresponding interest expenditure of ₹1,47,28,767 and ₹7,46,801 paid on the said loans.
5. The assessee furnished detailed replies explaining the nature and accounting treatment of the ESOP expenditure, the shareholding structure of the lender companies and the assessee, the commercial nature of the borrowings, the inapplicability of section 2(22)(e), and the legal position governing adjustment under section 115JB. The learned PCIT, however, did not accept the explanations and set aside the assessment order with directions to the Assessing Officer to undertake a fresh examination. The learned PCIT also directed examination and disallowance of branding-fee expenditure of ₹5,02,00,000, even though this issue had not formed part of any of the show-cause notices issued to the assessee. We shall deal with the issues forming the subject matter of revision separately.
6. Insofar as the ESOP expenditure is concerned, 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 provide 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—Share-based Payment requires the fair value of the equity instruments granted to employees to be recognised as an employee-benefit expense over the period during which the corresponding services are rendered. Note No. 40(e) to the audited financial statements, forming part of the assessment record, contained a detailed disclosure concerning the ESOP expenditure. It explained that, consequent to a modification in the ESOP Plan, 2016 during the relevant financial year, the assessee re-estimated and recognised the total liability pertaining to three grants made to its employees. Thus, while ₹9.57 crore represented the expenditure pertaining to the relevant year, the further amount of ₹35.40 crore was recognised during the year as a consequence of the modification of the scheme and crystallisation of the corresponding liability. It was, therefore, incorrect to regard ₹35.40 crore as a prior-period expenditure merely because the underlying grants had originated earlier.
8. Reliance was principally placed upon the decision of the Special Bench of the Tribunal in Biocon Ltd. v. DCIT [2013] 35 taxmann.com 335 (Bang.–Trib.)(SB), wherein it was held that discount on issue of employee stock options constitutes employee-remuneration expenditure allowable under section 37(1). The said decision 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).
9. The learned CIT–DR relied upon the impugned order and submitted that the learned PCIT had identified two components of the claim, namely ₹9.57 crore pertaining to the relevant financial year and ₹35.40 crore relatable to grants made in earlier years. According to him, the Assessing Officer had neither examined why expenditure pertaining to earlier grants had been recognised in the relevant year nor verified whether the liability had genuinely crystallised during the year. It was thus contended that the assessment had been completed without the enquiry required in the circumstances and that Explanation 2 to section 263 was attracted.
10. We have considered the rival submissions. The expenditure in question arose from equity-settled share-based payment transactions forming part of the employee-remuneration arrangement. The primary object of granting such options is not the raising of capital at a lower premium, but the securing and retention of employee services by providing the employees with a stake in the long-term growth and profitability of the enterprise. The discount embedded in the options constitutes a 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.
11. The Special Bench in Biocon Ltd. (supra) held that there is no material distinction between an employer paying an incentive in cash and compensating its employees by granting shares at a concessional price. In either situation, the economic substance is that 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 expenditure on capital account. The aforesaid decision was affirmed by the Hon’ble Karnataka High Court, and the same legal position has been reiterated by the Hon’ble Delhi High Court in PVR Ltd. (supra) and the Hon’ble Madras High Court in Shriram City Union Finance Ltd. (supra).
12. The additional objection regarding ₹35.40 crore also stands answered by the contemporaneous disclosure in Note No. 40(e) to the financial statements. The assessee did not claim the amount merely because the underlying grants had been made in earlier years. The liability was re-estimated and recognised in the relevant year consequent to the modification of the ESOP scheme, and it was this event which led to the crystallisation of the additional employee-compensation cost. The learned PCIT has not demonstrated that the accounting recognition was contrary to Ind AS 102, that the modification did not take place during the year, or that the liability had already crystallised and been claimed in an earlier period. A mere reference to the period in which the options were originally granted does not, by itself, render the expenditure a prior-period item.
13. Thus, when the Assessing Officer accepted the claim of ESOP expenditure, the view so taken was supported by the prevailing judicial position as well as the specific disclosure contained in the financial statements. The learned PCIT has not identified any factual distinction which could take the assessee’s claim outside the principle laid down in Biocon Ltd. and the subsequent High Court decisions. Once the substantive legal position recognises ESOP discount as employee-compensation expenditure deductible under section 37(1), and the additional liability stood recognised on account of modification of the scheme during the relevant year, a direction to undertake a fresh enquiry cannot, by itself, establish lawful prejudice to the Revenue. Ground No. IV is, accordingly, allowed.
14. Ground No. V relates to branding-fee expenditure of ₹5,02,00,000. The learned counsel submitted that although three show-cause notices had been issued during the revisionary proceedings, none of them proposed revision of the assessment on account of the branding fee. The assessee was never called upon to explain its allowability before the direction for disallowance was issued in the final order. The learned CIT–DR fairly accepted this factual position.
15. The direction concerning branding-fee expenditure cannot be sustained. The learned PCIT could not introduce an altogether new basis of revision in the final order without first putting the assessee to notice and affording it an effective opportunity to meet the proposed action. Such a direction is contrary to the elementary requirements of natural justice. The principle is supported by the decision of the Hon’ble jurisdictional High Court in PCIT v. Universal Music India (P.) Ltd. [2023] 155 taxmann.com 230 (Bom.). The impugned order under section 263 is, therefore, quashed to this extent and Ground No. V is allowed.
16. Ground No. VI concerns the direction to consider an amount of ₹4,53,38,476, disallowed under section 14A read with Rule 8D, while computing book profit under section 115JB. The learned counsel submitted that, for Assessment Year 2021–22, dividend income was taxable in the hands of the shareholder consequent to the amendment made by the Finance Act, 2020. The assessee had not earned any other exempt income during the year. Therefore, the foundational requirement for invoking section 14A itself was absent. It was further submitted that, even otherwise, a disallowance mechanically computed under Rule 8D could not be imported into clause (f) of Explanation 1 to section 115JB, as held by the Special Bench of the Tribunal in ACIT v. Vireet Investment (P.) Ltd. [2017] 165 ITD 27 (Delhi)(SB).
17. We find substance in the aforesaid contention. For Assessment Year 2021–22, dividend income was no longer exempt in the hands of the shareholder. Gains arising from transfer of shares were also chargeable to tax under the applicable provisions governing capital gains. In the absence of any other exempt income, expenditure in relation to dividend-yielding investments could not be mechanically disallowed by invoking section 14A. More importantly, the direction under section 263 concerns computation of book profit under section 115JB. The Special Bench in Vireet Investment (P.) Ltd. (supra) has held that the amount disallowable under section 14A read with Rule 8D cannot be mechanically adopted for the purposes of clause (f) of Explanation 1 to section 115JB; the adjustment under the said clause must be determined with reference to the expenditure debited in the books and relatable to exempt income.
18. Thus, the direction of the learned PCIT proceeds without identifying any exempt income or any actual expenditure debited in the books which was liable to be added under clause (f) of Explanation 1 to section 115JB. It instead seeks to import the computation under Rule 8D into the MAT provisions, which is contrary to the settled legal position. The impugned direction on this issue is, therefore, unsustainable and Ground No. VI is allowed.
19. We now proceed to Grounds Nos. VII and IX concerning the loans of ₹80 crore and ₹15 crore received from SWML and JDPPL, respectively. The learned PCIT proceeded on the premise that the lender companies and the assessee were connected through the common beneficial ownership of SJFT and that the transactions, therefore, attracted the second limb of section 2(22)(e). According to the learned PCIT, the expression “shareholder” should not necessarily be confined to a person whose name appears in the register of members and the chain of beneficial ownership through SJFT was sufficient to warrant examination of the loan transactions as deemed dividend.
20. The learned counsel explained that the entire shareholding structure stood disclosed and did not satisfy the express statutory requirements of section 2(22)(e). Insofar as the loan from SWML was concerned, SWML was wholly held by SJFT, whereas 90.54% of the shares in the assessee company were held by Adarsh Advisory Services Private Limited (“AASPL”), which, in turn, was wholly held by SJFT. Thus, SJFT was a shareholder of the lender company SWML, but was not itself a member or shareholder of the assessee company. Its interest in the assessee was only indirect through AASPL.
21. Insofar as the loan from JDPPL was concerned, 93.07% of the shares in JDPPL were held by JSW Infrastructure Limited, while 93.07% of the shares in JSW Infrastructure Limited were held by SJFT. The assessee company, on the other hand, was held to the extent of 90.54% by AASPL, which was wholly held by SJFT. Thus, neither JSW Infrastructure Limited—the immediate shareholder of JDPPL—nor SJFT was a member of the assessee company. The learned counsel submitted that the second limb of section 2(22)(e) could not be attracted merely by tracing an ultimate economic connection through separate companies and a family trust.
22. Reliance was placed upon the decision of the Special Bench in ACIT v. Bhaumik Colour (P.) Ltd. [2009] 118 ITD 1 (Mum.)(SB), the decisions of the Hon’ble jurisdictional High Court in CIT v. Universal Medicare (P.) Ltd. [2010] 324 ITR 263 (Bom.), CIT v. Impact Containers (P.) Ltd. [2014] 367 ITR 346 (Bom.) and CIT v. Datta Prasad Kamat [2023] 153 taxmann.com 702 (Bom.), as well as the decision of the Hon’ble Delhi High Court in CIT v. Ankitech (P.) Ltd. [2012] 340 ITR 14 (Delhi), which was approved by the Hon’ble Supreme Court in CIT v. Madhur Housing and Development Co. [2018] 401 ITR 152 (SC).
23. The learned counsel also distinguished the decision in National Travel Services v. CIT [2018] 401 ITR 154 (SC). It was submitted that the matter therein concerned a partnership firm whose partners held shares in the lender company for and on behalf of the firm. The relationship between a firm and its partners was materially different from the relationship between separately incorporated companies and the beneficiaries or trustees of a family trust. It was further submitted that the Bench in National Travel Services only expressed a prima facie doubt and referred the issue for consideration by a larger Bench. Such a reference, without a final decision overruling the earlier binding authorities, did not obliterate the law declared in Ankitech (P.) Ltd. and approved by the Hon’ble Supreme Court in Madhur Housing and Development Co.
24. The learned CIT–DR, on the other hand, submitted that no enquiry had been conducted by the Assessing Officer regarding the two substantial loans or the applicability of section 2(22)(e). According to him, the ownership structure was discernible from the material available on record and the Assessing Officer was required to examine the common beneficial ownership through SJFT; the accumulated profits of the lender companies; whether the loans had been advanced in the ordinary course of money-lending business; whether the transactions constituted commercial advances covered by CBDT Circular No. 19 of 2017; and whether the lenders were companies in which the public were substantially interested.
25. The learned CIT–DR further submitted that the expression “shareholder” should be understood with reference to beneficial ownership and not confined only to the person formally entered in the register of members. According to him, the principles emerging from Bhaumik Colour and Ankitech (P.) Ltd. required reconsideration in view of the observations in National Travel Services. It was also contended that the requirement that the payment should be for the individual benefit of the shareholder related to the third limb of section 2(22)(e) and was not an additional condition governing the second limb relating to a payment made to a concern in which the shareholder had a substantial interest.
26. We have considered the rival submissions and examined the statutory scheme. The second limb of section 2(22)(e) does not apply merely because the lender company and the recipient concern can, through a chain of corporate or trust relationships, be traced to a common ultimate economic interest. The provision specifically contemplates a loan or advance made to a concern in which “such shareholder” is a member or partner and in which such shareholder has a substantial interest. The expression “member or partner” is neither incidental nor redundant; it embodies an independent statutory condition which must be satisfied before a payment to a concern can be brought within the second limb.
27. Where the recipient concern is a company, the status of its member has to be understood with reference to the statutory framework governing membership of a company. Section 2(55) of the Companies Act, 2013 recognises, inter alia, a subscriber to the memorandum; a person who agrees in writing to become a member and whose name is entered in the register of members; and a person whose name is entered as a beneficial owner in the records of a depository. Membership is thus a legally cognisable status and cannot be equated, in the abstract, with control, influence, ultimate economic interest or an indirect connection through a succession of separate legal entities.
28. In the case of the loan from SWML, the shareholder of the lender company was SJFT. However, SJFT was not a member of the assessee company. The immediate shareholder holding 90.54% of the assessee’s shares was AASPL. The fact that AASPL was, in turn, wholly held by SJFT does not make SJFT a member of the assessee company. In the case of JDPPL, its immediate shareholder was JSW Infrastructure Limited. Neither JSW Infrastructure Limited nor SJFT was a member of the assessee company. The commonality of an ultimate economic interest cannot substitute the specific statutory requirement that the shareholder of the lender must itself be a member or partner of the recipient concern and possess the prescribed substantial interest therein.
29. The distinction assumes significance because the legislature has consciously employed the expressions “shareholder”, “member or partner” and “substantial interest” at different stages of the provision. Each expression must be assigned its proper legal content. Even if a person or trust may possess an ultimate economic interest in a wider corporate group, such interest cannot be used to create a deemed membership relationship in every downstream company. Such an approach would expand the legal fiction beyond the purpose for which it was enacted and disregard the independent legal personality of each incorporated entity.
30. The principle that the fiction under section 2(22)(e) cannot be extended beyond its prescribed field was recognised by the Special Bench in Bhaumik Colour (P.) Ltd. and thereafter by the Hon’ble Delhi High Court in Ankitech (P.) Ltd. The Hon’ble jurisdictional High Court in Universal Medicare (P.) Ltd. and Impact Containers (P.) Ltd. has similarly emphasised the statutory status of the shareholder and held that a loan cannot be assessed as deemed dividend in the hands of a recipient concern which is not itself the shareholder in the lender company. The judgment in Ankitech (P.) Ltd. was expressly approved by the Hon’ble Supreme Court in Madhur Housing and Development Co.
31. Reliance on National Travel Services does not displace this binding position. The Bench deciding that matter expressed a prima facie doubt and directed that the matter be placed before the Hon’ble Chief Justice for constitution of a larger Bench. A reference to a larger Bench does not, by itself, overrule or suspend an existing binding precedent. Until the earlier view is authoritatively reconsidered and overruled by a Bench of competent strength, it continues to govern the field. This principle was explained by the Constitution Bench in Central Board of Dawoodi Bohra Community v. State of Maharashtra [2005] 2 SCC 673.
32. Besides, the factual setting in National Travel Services, involving shares held by partners for and on behalf of a partnership firm, is materially different. A partnership firm and its partners do not possess the same legal separation that exists between independently incorporated companies and a trust appearing at different levels of a corporate structure. A shareholder of one company cannot, merely because of its ownership or economic interest in that company, be treated as the shareholder or member of another separately incorporated company in the chain. Section 2(22)(e), being a deeming provision, does not contain any mechanism for disregarding the separate legal identity of the entities and creating a membership relationship where none exists in law.
33. Even otherwise, the assessee is admittedly not a shareholder of either SWML or JDPPL. Consequently, even if the advances were assumed to possess the attributes of deemed dividend, they could not be assessed as such in the hands of the assessee contrary to the law declared by the Hon’ble jurisdictional High Court in Universal Medicare (P.) Ltd. Revision of the assessment of the present assessee cannot be sustained merely to undertake enquiries into a possible tax implication in the hands of another person or entity. The assessment order cannot be regarded as prejudicial to the Revenue on account of a proposed addition which is legally incapable of being made in the assessee’s hands.
34. Once the foundational statutory requirements are absent and the proposed addition cannot legally be made in the hands of the assessee, directing a fresh enquiry would serve no lawful purpose. The jurisdiction under section 263 cannot be exercised merely to order an enquiry in the abstract; the Commissioner must also establish that the assessment order is erroneous in law and that the error caused prejudice to the Revenue in the assessment sought to be revised. Both conditions are absent on these issues. Grounds Nos. VII and IX are, accordingly, allowed.
35. Grounds Nos. VIII and X concern the directions to disallow interest expenditure of ₹1,47,28,767 and ₹7,46,801 paid on the loans received from SWML and JDPPL, respectively. These directions are consequential to the learned PCIT’s conclusion that the loans represented deemed dividend. Once that foundational conclusion has been found to be legally unsustainable, the consequential directions regarding interest cannot survive. Moreover, the mere application of a deeming provision to a loan receipt would not, without examination of the independent requirements of section 36(1)(iii), automatically extinguish the commercial character of the borrowing or warrant disallowance of interest. There being no separate finding that the borrowed funds were not utilised for the purposes of business, Grounds Nos. VIII and X are also allowed.
36. This brings us to the broader jurisdictional challenge raised in Grounds Nos. I to III. 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 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 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 preferable. This principle stands authoritatively settled by the Hon’ble Supreme Court in Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC).
37. Explanation 2 to section 263 does not dilute these foundational requirements. 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, does not 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 confer an unbridled authority to reopen an issue merely because a more elaborate enquiry could conceivably have been made.
38. In the present case, the ESOP claim was supported by the specific disclosure in the financial statements and the decisions of the Special Bench and several High Courts; the branding-fee issue was introduced without any show-cause notice; the direction concerning section 115JB was contrary to the settled legal position; the proposed additions under section 2(22)(e) did not satisfy the statutory conditions and were contrary to the decisions of the Hon’ble jurisdictional High Court; and the disallowances of interest were merely consequential to that legally untenable premise. The learned PCIT has, therefore, failed to demonstrate that the assessment order was both erroneous and prejudicial to the interests of the Revenue. The impugned revisionary order for Assessment Year 2021–22 is accordingly quashed, and Grounds Nos. I to X are allowed.
39. We now take up ITA No. 4866/Mum/2026 for Assessment Year 2020–21. 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 Act vide show-cause notice dated 08.10.2025 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 sections 144C(3) and 144B, even though the 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 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 disallow staff-welfare expenditure of ₹2,42,00,000 incurred on account of ESOP under section 37(1) of the Act.
V. 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 add an amount of ₹4,42,17,615, disallowed under section 14A, while computing book profit under section 115JB, without appreciating that a disallowance computed under Rule 8D cannot be mechanically imported into the computation of book profit.
VI. The appellant craves leave to add, amend, alter or delete any of the aforesaid grounds of appeal.”
40. Ground No. IV concerns ESOP expenditure of ₹2,42,00,000. The nature of the expenditure, the accounting principles governing its recognition and the legal issue concerning its deductibility under section 37(1) are materially identical to those considered by us while adjudicating Ground No. IV for Assessment Year 2021–22. The expenditure represents employee-compensation cost and its deductibility stands supported by the Special Bench decision in Biocon Ltd. and its affirmation by the Hon’ble Karnataka High Court, as well as by the decisions of the Hon’ble Delhi and Madras High Courts referred to hereinabove. For the reasons recorded while deciding the appeal for Assessment Year 2021–22, which shall apply mutatis mutandis, we hold that the assessment order could not be revised merely to reconsider the allowability of the ESOP expenditure. Ground No. IV is accordingly allowed.
41. Ground No. V relates to the direction for adding ₹4,42,17,615, representing the disallowance computed under section 14A read with Rule 8D, while determining book profit under section 115JB. Unlike Assessment Year 2021–22, dividend income for this assessment year was exempt. However, this distinction does not sustain the direction issued by the learned PCIT under section 115JB. The question is not merely whether section 14A could apply in the normal computation, but whether the amount computed by applying Rule 8D could be directly imported into clause (f) of Explanation 1 to section 115JB.
42. The Special Bench in Vireet Investment (P.) Ltd. (supra) has held that the computation contemplated under clause (f) of Explanation 1 to section 115JB must be made independently with reference to the expenditure debited in the books and relatable to exempt income, and that the artificial computation prescribed under Rule 8D cannot be mechanically adopted for determining book profit. Thus, even though dividend income was exempt during Assessment Year 2020–21, the learned PCIT could not direct the Assessing Officer to add the entire amount of ₹4,42,17,615 computed under section 14A read with Rule 8D without identifying the expenditure debited in the profit and loss account which was actually relatable to the exempt income. The direction is contrary to the settled legal position and is accordingly quashed. Ground No. V is allowed.
43. Grounds Nos. I to III challenge the assumption of revisionary jurisdiction. For the reasons recorded while disposing of the corresponding grounds for Assessment Year 2021–22, which apply with equal force to this year, the assessment order cannot be regarded as both erroneous and prejudicial to the interests of the Revenue merely because the learned PCIT considered that a further enquiry should have been conducted into issues governed by the prevailing judicial position. The conditions precedent for exercise of jurisdiction under section 263 are not satisfied. The impugned revisionary order for Assessment Year 2020–21 is, therefore, quashed and Grounds Nos. I to V are allowed.
44. In the result, both the appeals of the assessee are allowed.
Order pronounced in the open court on 23rd September, 2026.
