2020 (11) TMI 779 - KARNATAKA HIGH COURT

Discount on issue of ESOP - allowable deduction in computing the income under the head profits and gains of the business or not? - whether tribunal was right in holding that difference between market price of the shares at the time of grant of option and offer price amounts to discount and the same has to be treated as remuneration to the employees for their continuity of service? - as per revenue employees will not get any right in the shares till completion of the period prescribed and the expenditure claimed is contingent - HELD THAT:- The expression 'expenditure' will also include a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which it is issued and the market value of the shares would also be expenditure incurred for the purposes of Section 37(1) - The primary object of the aforesaid exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, the same cannot be construed as short receipt of capital. Tribunal therefore has rightly held that incurring of the expenditure by the assessee entitles him for deduction under Section 37(1) of the Act subject to fulfillment of the condition.

Deduction of discount on ESOP over the vesting period is in accordance with the accounting in the books of accounts, which has been prepared in accordance with Securities And Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999.

The decisions relied upon by the revenue in Gajapathy Naidu [1964 (4) TMI 6 - SUPREME COURT], Morvi Industries [1971 (10) TMI 5 - SUPREME COURT] and Keshav Mills Ltd. [1953 (1) TMI 5 - SUPREME COURT] support the case of assessee as the assessee has incurred a definite legal liability and on following the mercantile system of accounting, the discount on ESOPs has rightly been debited as expenditure in the books of accounts. We are in respectful agreement with the view taken in PVP Ventures Ltd. [2012 (7) TMI 696 - MADRAS HIGH COURT] And Lemon Tree Hotels Ltd. [2015 (11) TMI 404 - DELHI HIGH COURT]

Also for Assessment Year 2009-10 onwards the Assessing Officer has permitted the deduction of ESOP expenses and in view of law laid down in Radhasoami Satsang [1991 (11) TMI 2 - SUPREME COURT] the revenue cannot be permitted to take a different stand with regard to the Assessment Year in question. - Decided against revenue.