A taxpayer must be given a reasonable time to procure supporting documents from a group entity before an expense claim is disallowed.

By | October 1, 2025
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A taxpayer must be given a reasonable time to procure supporting documents from a group entity before an expense claim is disallowed.

Issue

Should a disallowance of expenses be sustained if the taxpayer was not given sufficient time by the tax authorities to collate the required supporting documents from a third party, particularly from a group entity?

Facts

  • The assessee claimed a deduction for occupancy expenses, which were payments made to a related group entity (GSISPL) for rented space, based on a cost allocation agreement.
  • The Assessing Officer (AO) disallowed the entire claim on the grounds that the assessee had failed to submit the supporting documents that explained the basis of the cost allocation by the group entity.
  • The assessee explained that the required details pertained to the other company, and they needed more time to gather this information. However, the lower authorities did not grant this additional time and proceeded with the disallowance.

Decision

The court ruled in favour of the assessee and remanded the matter.

  • It held that in the interest of natural justice and fair play, the assessee should have been given a reasonable opportunity to collate the necessary details from its group entity.
  • The issue was remitted back to the AO with a direction to examine the claim afresh. The AO was instructed to call for the necessary details from the assessee and to allow them sufficient time to furnish the information.

Key Takeways

  • The Right to a Reasonable Opportunity: The principles of natural justice require that a taxpayer be given a reasonable opportunity to present their case. This includes being given adequate time to gather evidence, especially when that evidence needs to be sourced from a third party.
  • A Group Entity is Still a Third Party: For procedural purposes, a group company is still a separate legal entity. An assessee cannot be expected to have immediate and unfettered access to another company’s internal records and should be given time to coordinate and collect them.
  • Remand is the Remedy for a Lack of Fair Hearing: When a fair opportunity to present evidence has been denied by a lower authority, the standard judicial remedy is to remand the case back to that same authority to ensure a proper and just hearing is conducted.

ESOP expenses are a legally allowable deduction in principle, but the factual basis of the amount claimed, especially when allocated by a parent company, requires verification.

Issue

Are ESOP (Employee Stock Option Plan) expenses, which represent the discount on stock options, an allowable business deduction, and what is the extent of verification required when the cost is allocated by a foreign parent company?

Facts

  • The assessee claimed a deduction for ESOP expenses. This cost was related to Restricted Stock Units (RSUs) that were allotted to the assessee’s employees by the foreign parent company (GSGI). The parent company then allocated a portion of this cost to the assessee.
  • The Assessing Officer (AO) disallowed the claim on two grounds:
    1. The liability was contingent and not an actual expense.
    2. The assessee had failed to furnish necessary details to support the claim (such as the basis of the cost allocation, employee details, TDS compliance, etc.).

Decision

The court remanded the matter back to the AO for a limited verification.

  • On the legal principle: It held that the issue of the allowability of ESOP expenses is settled law. Citing the High Court’s binding decision in the Biocon Ltd. case, it confirmed that such expenses are not a contingent liability and are deductible in principle. Therefore, the AO’s primary legal ground for the disallowance was incorrect.
  • On the factual verification: However, the court agreed with the AO that the factual aspects of the claim needed to be properly verified.
  • The remand was for the limited purpose of allowing the AO to examine the basis of the cost that was recharged by the parent company and other supporting details. The AO was directed to then allow the deduction on its merits, keeping in mind the established legal precedent.

Key Takeways

  • ESOP Expense is a Deductible Employee Cost: It is a well-settled legal principle that the discount on stock options granted to employees is a form of employee compensation. As such, it is an allowable business expenditure under Section 37(1) of the Income-tax Act, 1961.
  • Distinguishing a Legal Principle from Factual Verification: An appellate authority can decide a question of law (like the allowability of ESOPs in principle) in favour of the assessee but can still remand the matter back to the AO for the limited purpose of verifying the quantum and the factual basis of the specific amount claimed.
  • The Onus is on the Assessee for Quantum: While the expense is allowable in principle, the burden of proof is still on the assessee to provide all necessary documentation to prove the amount that they have claimed, especially when it involves a cross-border cost allocation from a parent company.

A disallowance of an ad hoc provision for expenses made in one year should be deleted if the taxpayer can prove that the same provision was reversed and offered to tax in a subsequent year.

Issue

Should a disallowance of an ad-hoc provision for expenses be sustained if the taxpayer can demonstrate that this very provision was reversed in its books in a subsequent assessment year, with the reversed amount being offered to tax?

Facts

  • The Assessing Officer (AO) disallowed a portion of the assessee’s claim for legal and professional expenses. This disallowed portion was an ad-hoc provision that had been made for services that the assessee claimed had already been received but for which bills had not yet arrived.
  • The assessee’s main argument on appeal was that this same provision had been subsequently reversed in its books of account in a later year, and the reversed amount had been duly offered to tax in that later year’s return.
  • They contended that sustaining the disallowance in the current year would therefore result in the same amount being taxed twice—once through the disallowance now, and a second time through the reversal that was offered to tax later.

Decision

The court remanded the matter back to the Assessing Officer.

  • It directed the AO to factually examine and verify the assessee’s specific claim that the provision was indeed reversed and offered to tax in a subsequent year.
  • The court held that if this claim is found to be correct upon verification, then the disallowance that was made in the year under consideration must be deleted in order to avoid double taxation.

Key Takeways

  • The Principle of Avoiding Double Taxation: A fundamental principle of tax law is that the same income or amount should not be taxed twice in the hands of the same person. A disallowance of a provision, followed by the taxation of its reversal in a later year, is a clear instance of such double taxation.
  • The Importance of the Full Accounting Cycle: When dealing with provisions for expenses, it is important for the tax authorities to look at the full accounting cycle. A provision that is made in one year is often either utilized (in which case the actual expense is booked) or reversed (in which case the provision is written back to profit) in a subsequent year.
  • Remand for Factual Verification is the Correct Approach: When a taxpayer makes a factual claim that can be easily verified by looking at the records of a subsequent year (like the reversal of a provision in the next year’s P&L account), the standard and most efficient appellate procedure is to remand the case back to the AO for this limited verification.
IN THE ITAT MUMBAI BENCH ‘G’
Goldman Sachs (India) Finance (P.) Ltd.
v.
Assessment Unit, Income-tax Department
SAKTIJIT DEY, Vice President
and Ms. Padmavathy S., Accountant Member
IT Appeal Nos. 6761, 6762, 6763 & 6765 (Mum.) OF 2024
[Assessment years 2017-18, 2018-19, 2020-21 and 2022-23]
SEPTEMBER  9, 2025
Hitesh Thakkar, AR for the Appellant. Swapnil Choudhary, Sr. DR for the Respondent.
ORDER
Padmavathy S, Accountant Member.- These appeals by the assessee are against the separate orders of the Commissioner of Income Tax (Appeals)/ National Faceless Appeal Centre, Delhi, [In short ‘CIT(A)’] passed under section 250 of the Income Tax Act, 1961 (the Act) all dated 01.10.2024 for Assessment Years (AY) 2017-18, 2018-19, 2020-21, 2022-23. Since the issues contented in all these appeals are common, the appeals are heard together and disposed off through this common order. The common issues contended in all the AYs under consideration pertain to disallowance of Occupancy Expenses and disallowance of ESOP Expenses. For AY 2022-23, besides the above two issues the assessee has raised grounds pertaining to disallowance of legal and professional expenses and disallowance of service charges and cost recharges from affiliates.
ITA No. 6763/Mum/2024 – AY 2020-21
2. The assessee is a private limited company and is a non-deposit taking nonbanking finance company (NBFC). The assessee filed the return of income for AY 2020-21 on 15.02.2021 declaring a total income of Rs. 187,36,66,790/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. The Assessing Officer (AO) completed the assessment by making the following additions / disallowances:
(i)Disallowance of depreciation component in Occupancy Expenses under section 32(1) – Rs. 35,18,927/-.
(ii)Disallowance of ESOP Expenses – Rs. 1,89,23,119/-
(iii)Disallowance of reversal of provision for gratuity – Rs. 13,86,724/
3. Aggrieved the assessee filed further appeal before the CIT(A). The CIT(A) confirmed the disallowance of ESOP Expenses and deleted the disallowance made towards reversal of provision for gratuity. With regard to the disallowance of depreciation on Occupancy Expenses the CIT(A) enhanced the disallowance to the entire amount allocated by Goldman Sachs India Securities Pvt Ltd (GSISPL) assessee’s group entity towards Occupancy Expenses to the assessee to the tune of Rs. 1,87,40,284/-.
Addition towards Occupancy expenses
4. The ld. AR with regard to enhancing the disallowance towards cost allocation of Occupancy Expenses submitted that the AO did not issue any showcause notice to the assessee stating that he is proposing to enhance the disallowance. The ld. AR further submitted that though the CIT(A) called for various details there was no intimation to the assessee that there is a proposal to enhance the disallowance made by the AO. The ld. AR also submitted that the CIT(A) has stated that the AO during the assessment proceedings for AY 2022-23 has made disallowance of the entire expenditure and that the assessee could not substantiate with documents supporting the claim of Occupancy Expenditure. The ld. AR argued that enhancing the disallowance made by the AO without issue of show-cause notice cannot be sustained.
5. The ld. DR on the other hand submitted that the Occupancy Expenses claimed by the assessee has been disallowed by the AO in AY 2022-23 for want of evidence. The ld. DR further submitted that the CIT(A) called on the assessee to furnish the supporting documents with regard to cost allocation towards Occupancy Expenses and that the assessee failed to substantiate the claim. Accordingly, the CIT(A) has directed the AO to disallow the entire amount as has been done in AY 2022-23. Therefore, the ld. DR argued that the claim of the assessee that separate show-cause notice is required to be issued on the impugned issue cannot be entertained.
6. We heard the parties and perused the material on record. With regard to the disallowance of depreciation on Occupancy Expenses, the CIT(A) noticed that the assessee has claimed total occupancy expenses of Rs. 1,87,40,284/- which includes the depreciation disallowed by the AO. The CIT(A) further noticed that the assessee is claiming the said expenses towards the space rented from its group entity GSISPL with which the assessee has entered into a cost allocation agreement. The CIT(A) also noticed that the AO has disallowed the entire Occupancy Expenses in assessee’s case for AY 2022-23 for the reason that the assessee has not discharged the onus of substantiating the claim of the said expenses. The CIT(A) held that the expenses claimed need to be verified based on the actual expenditure incurred by GSISPL and since the assessee has not produced any details as called for the CIT(A) directed the AO to disallow the entire amount claimed as Occupancy Expenses as has been done in AY 2022-23. In this regard we notice that the only reason for making the disallowance is that the assessee has not submitted any supporting documents or the basis of cost allocation by GSISPL. The ld. AR during the course hearing submitted that the details called for pertain to the group entity and therefore the assessee needed time to collate the details which was not provided by the lower authorities. Accordingly the ld AR prayed for one more opportunity to submit the relevant details called for. Considering the facts and circumstances of the case, we see merit in the plea of the assessee that details called for is time consuming to collate and accordingly in the interest of natural justice and fair play we deem it fit to remit the issue back to the AO. The AO is directed to examine the impugned issue afresh by calling for necessary details and decide on merits in accordance with law. The assessee is directed to furnish the details as may be called without seeking unnecessary adjournments and cooperate with the proceedings. It is ordered accordingly.
Disallowance of ESOP expenses
7. During the course assessment proceedings it is noticed that the assessee has debited a sum of Rs.1,89,23,119/- towards ESOP expenses. The assessee submitted that Goldman Sachs Group Inc (GSGI) under the stock award plan allots Restricted Stock Units (RSU) the employees of the assessee and the cost towards the same allocated to the assessee. The assessee further submitted that the after the vesting period when the shares are delivered to the employees of the assessee, the payments towards the same is required to be made by the assessee to GSGI. The AO disallowed the claim for the reason that the assessee has not submitted the details of shares delivered to the employees of the assessee during the year under consideration and that RSU would vest over a period of time after grant date subject to fulfilment of vesting conditions. Therefore the AO held that the liability to pay towards ESOP is contingent in nature which is not ascertainable and accordingly cannot be claimed as a deduction. The CIT(A) upheld the disallowance made by the AO.
8. We heard the parties and perused the material on record. The issue of allowability of ESOP expenditure is no longer res-integra and is covered by the decision of the Hon’ble Karnataka High Court in the case of CIT v. Biocon Ltd. 1/430 ITR 151 (Karnataka). Accordingly in our view, the disallowance on basis that the ESOP expenses is contingent in nature cannot be sustained. However, the amount claimed as expenditure, the basis of allocation of ESOP cost by GSGI etc., needs to be factually examined. From the perusal of the orders of the lower authorities we notice that one more reason for disallowance of ESOP expenses is that the assessee failed to furnish the details called for with regard to the claim of expenditure such number of employees towards whose ESOP cost GSGI has recharged the assessee, whether TDS has been deducted under section 192 etc. Therefore to the limited extent of verifying the cost recharged by GSGI we are remitting the issue back to the AO with a direction to examine the issue on merits and allow keeping in mind the above judicial precedence. The AO is further directed to provide a reasonable opportunity of being heard.
ITA No. 6761 & 6762/Mum/2024 – AY 2017-18 & AY 2018-19
9. We heard the parties and perused the material on record. From the perusal of records we notice that the facts pertaining to the issues contended by the assessee with regard to disallowance of Occupancy Expenses and disallowance of ESOP Expenses for AY 2017-18 & AY 2018-19 are identical to facts in AY 2020-21. This is substantiated by the findings of the CIT(A), where the CIT(A) has relied on the findings of the AO for AY 2020-21 with regard to the impugned issues and the reasons for upholding the disallowance are based on his own findings in AY 202021. Therefore in our considered view our decision on these two issues in AY 2020-21 is mutatis mutandis applicable for AYs 2017-18 & 2018-19 also. Accordingly we remit the issues back to the AO with similar directions. It is ordered accordingly.
ITA No. 6765/Mum/2024 – AY 2022-23
10. From the perusal of records we notice that the facts pertaining to the issues contended by the assessee with regard to disallowance of Occupancy Expenses and disallowance of ESOP Expenses for AY 2022-23 are identical to facts in AY 2020-21. This is substantiated by the findings of the CIT(A), where the CIT(A) has relied on the findings of the AO for AY 2020-21 with regard to the impugned issues and the reasons for upholding the disallowance are based on his own findings in AY 2020-21. Therefore in our considered view our decision on these two issues in AY 2020-21 is mutatis mutandis applicable for AY 2022-23 also. Accordingly we remit the issues back to the AO with similar directions. It is ordered accordingly.
Disallowance of legal and professional expenses
11. During the year under year under consideration, the assessee has claimed a sum of Rs.43,17,804 towards legal and professional expenses. The AO during the course of hearing noticed that the claim includes a sum of Rs.10,23,393 which is claimed on adhoc basis. The AO did not accept the submission of the assessee that these are provision made towards services already received by the assessee and disallowed the said amount. The CIT(A) upheld the disallowance.
12. We heard the parties and perused the material on record. The ld AR during the course of hearing submitted that the adhoc provision made towards services received is subsequently reversed and offered to tax by the assessee and therefore the impugned disallowance if sustained would result in taxing the same twice disallowance. We therefore deem it appropriate that the issue should be remitted back to the AO for factually examining the claim of the assessee. The AO is directed to examine whether amount claimed as deduction in the year under consideration is subsequently reversed and offered to tax and in that case delete the disallowance made in the year under consideration. Needless to say that the assessee be given a reasonable opportunity of being heard.
Disallowance of service charges and cost recharges from affiliates
13. We heard the parties and perused the material on record. From the perusal of the lower authorities, we notice that the reason for the lower authorities to make the disallowance is that the assessee has not furnished the required documents supporting the claim. We further notice that the assessee before the CIT(A) has sought some more time for collating the details which the CIT(A) denied stating that the assessee is seeking adjournments only. The ld AR during course of hearing before us submitted that since these details are to be received from affiliates, the assessee could not file them in time before the lower authorities and therefore prayed that one more opportunity be given. Considering the facts and circumstances of the case, we see merit in the plea of the assessee that details called for is time consuming to collate and accordingly in the interest of natural justice and fair play we deem it fit to remit the issue back to the AO for consideration afresh. The assessee is directed to furnish the necessary details in support of the claim without seeking unnecessary adjournments and cooperate with the proceedings. It is ordered accordingly.
14. In result, the appeal of the assessee for AY 2017-18, AY 2018-19, AY 2020-21 & AY 2022-23 are allowed for statistical purposes.