CIT(A) Has No Jurisdiction To Enhance Income U/S 251(1) By Disallowing ESOP Expenses In Revised Return If AO Has Not Dealt With It: Mumbai ITAT

While setting aside the CIT(A)'s order enhancing assessee's income under Section 251(1)(a) of Income tax Act, 1961 by disallowing Employees Stock Option Plan (ESOP) expenses under Section 37(1), the Mumbai ITAT held that the CIT(A) has acted beyond his jurisdiction in enhancing assessee's income, since the AO during the course of assessment, has not taken into consideration the assessee's revised return and has not examined the taxability of ESOP expenses.

The Coram comprising of Kuldip Singh (Judicial Member) and Padmavathy S. (Accountant Member) observed that “the power to enhance is restricted to the subject matter of assessment or the source of income which have been considered expressly or by clear implications by the AO from the point of view of the taxability of the assessee”. (Para 11)

The Coram also added that “In cases where the AO has not dealt with the issue at and has not applied his mind on the taxability or non-taxability of a certain matter then the CIT(A) has no jurisdiction to enhance under section 251(1)”.

As per the facts of the case, the assessee company, engaged in the business of investment managing services to mutual funds, filed return declaring certain loss. The AO although considered the loss as disclosed in the original return, however, made disallowance under Section 14A. On appeal, the CIT(A) upheld the disallowance under Section 14A and noting that the loss was enhanced in the revised return on account of ESOP expenses claimed as a deduction by the assessee, he held that the ESOP expenditure cannot be claimed by assessee. Challenging such denial of ESOP expenses, the assessee approached the ITAT.

The ITAT noted that increase in the returned loss is due to the claim of ESOP expenses in the revised return by the assessee, which was disallowed by the CIT(A) by invoking the powers to enhance assessee's income under section 251(1)(a).

Perusing Section 251, the ITAT observed that CIT(A) can exercise the power to enhance under section 251(1) in a case where the Revenue has considered a particular issue of disallowance or addition and while doing so has under assessed the income of assessee.

The Coram further observed that the cases where the Revenue has not dealt with the issue at and has not applied his mind on the taxability or non-taxability of a certain matter then the CIT(A) has no jurisdiction to enhance under section 251(1) but should resort to alternate course of action either under section 263 or 147 or 154 as the case may be.

The Coram found that in the present case, the Ao had not recorded the fact that the assessee had filed a revised return anywhere in the assessment order, considered the loss as per the original return, but not the loss as recorded under revised return.

The Coram also noted that the assessee had filed the revised return well within the prescribed time limit and that it is not the case where the revised return is filed beyond the time limit under section 139(5) to ignore the revised return.

Therefore, the ITAT allowed the assessee's appeal and concluded that the CIT(A) had acted beyond his jurisdiction in enhancing assessee's income by disallowing the ESOP expenses.

Counsel for Appellant: Dhanesh Bafna, Hinal Shah & Hirali Desai

Counsel for Respondent: P.D. Chougule

Case Title: Edelweiss Asset Management Ltd verses ACIT

Case Number: ITA No. 3020/Mum/2023

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