ITAT Mumbai Clarifies Scope of Section 263 When Jurisdictional Precedent Is Under Challenge Before Supreme Court

Background of the Dispute

The Mumbai Bench of the Income Tax Appellate Tribunal in ASK Wealth Advisors Private Limited Vs PCIT was called upon to decide whether the Principal Commissioner of Income Tax (Ld. PCIT) could exercise powers under Section 263 of the Income Tax Act 1961 solely on the ground that the decision of the Karnataka High Court in CIT vs Biocon Ltd. (2021) 430 ITR 151 (Karnataka)—which supported the assessee’s claim—was under challenge before the Hon’ble Supreme Court via an admitted SLP.

The revision order under Section 263 targeted an assessment completed under Section 143(3) r.w.s. 144B, where the Assessing Officer (Ld. AO) had allowed a large deduction on account of Employee Stock Option Plan / Employee Stock Appreciation Rights (ESOP/ESAR) expenditure claimed by the assessee.

The core legal issues before the Tribunal were:

  • Whether a pending SLP against a High Court decision, without any stay or reversal, can render an assessment order “erroneous and prejudicial to the interests of the Revenue” under Section 263.
  • Whether the PCIT can invoke Section 263 when the AO has already conducted detailed enquiry and adopted one of the legally permissible views.

Facts of the Case in Brief

Return and Assessment Proceedings

  1. The assessee filed its return of income under Section 139(1) declaring nil income for Assessment Year 2022-23.
  2. The case was selected for scrutiny and assessment was completed under Section 143(3) r.w.s. 144B vide order dated 28.03.2024.
  3. The Ld. AO accepted the returned income and made no additions. The nil income declared was fully adopted in the assessment order.

Claim of ESOP/ESAR Expenditure

The controversy centred around a substantial deduction claimed by the assessee towards ESOP/ESAR related expenses, namely:

  • Discount on issue of shares under ESOP/ESAR amounting to Rs.1,01,77,23,473/-.
  • Additionally, in the revisional order, reference was made to payment of Rs.20,59,19,000/- to the holding company towards ESOP/ESAR granted by the holding company to employees of the assessee.

The assessee treated these amounts as deductible business expenditure under Section 37(1).

Earlier Year Precedent in Assessee’s Own Case

For A.Y. 2017-18, the same ESOP/ESAR issue had arisen in the assessee’s own case. The relevant developments were:

  • The Assessing Officer had disallowed the claim.
  • The Ld. Commissioner of Income Tax (Appeals), NFAC allowed the deduction.
  • The decision of the Ld. CIT(A) was affirmed by the ITAT in assessee’s favour, relying on the decision of the Karnataka High Court in CIT vs Biocon Ltd. (2021) 430 ITR 151 (Karnataka).

However, Revenue did not pursue appeal under Section 260A owing to the CBDT monetary limits prescribed in CBDT Circular No.9/2024 dated 17.09.2024 and CBDT Circular No.5/2024 dated 15.03.2024. The Department nevertheless maintained that it disagreed with the merits of the decision.

PCIT’s Invocation of Section 263

Basis of the Revisionary Proceedings

The Ld. PCIT issued notice under Section 263, asserting that:

  • The assessee had claimed a substantial deduction towards discount on ESOP/ESAR.
  • Though for A.Y. 2017-18 the issue had been decided in favour of the assessee, the Revenue had never accepted the view on merits.
  • The Karnataka High Court judgment in Biocon Ltd. had been challenged before the Hon’ble Supreme Court via SLP, which had been admitted and was pending (CIT Vs. Biocon Ltd. [131 taxmann.com 188 (SC)]).
  • Since the matter was sub judice before the Apex Court, reliance on Biocon Ltd. by the AO and CIT(A) could not be treated as a conclusive legal foundation.

On this footing, the Ld. PCIT concluded that the assessment order dated 28.03.2024 was:

  • Erroneous, and
  • Prejudicial to the interests of the Revenue

and set aside the assessment order for de novo examination on the ESOP/ESAR issue, directing the AO to conduct detailed enquiries and reassess the income.

Extract of Key Reasoning in PCIT’s Order

In substance, the PCIT’s reasoning was that:

Since the SLP against `CIT vs Biocon Ltd.