2013 (11) TMI 218 - AT - Income Tax

Expenditure of ESOP, a revenue expenditure or capital expenditure - Held that - The law by now is well settled by the decision of the Special Bench of the ITAT Bangalore in the case of Biocon Ltd. in 2013 (8) TMI 629 - ITAT BANGALORE , wherein it was held that expenditure on account of ESOP is a revenue expenditure and had to be allowed as deduction while computing income - Expenditure in question is wholly and exclusively for the purpose of the business of the assessee and the fact that the parent company is also benefited by reason of a motivated work force would be no ground to deny the claim of the assessee for deduction, which otherwise satisfies all the conditions referred to in section 37(1) of the Act - Expenditure in question was wholly and exclusively for the purpose of the business of the assessee and had to be allowed as deduction as a revenue expenditure Decided in favor of Assessee.

Summary

Issues Involved:
1. Disallowance of expenditure incurred in providing shares under the Employee Stock Purchase Scheme (ESOP).
2. Charging of interest under Section 234D of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Expenditure Incurred in Providing Shares under ESOP:

Facts:
The assessee, a subsidiary of Novo Nordisk A/S (NNAS), Denmark, framed an Employee Stock Purchase Scheme (ESOP) offering shares of NNAS to its employees at a discounted price. The difference between the market price and the purchase price was recharged by NNAS to the assessee, which claimed this recharge as a deductible expense in its tax return.

Assessee's Argument:
The assessee argued that the expenditure was a revenue expenditure incurred wholly and exclusively for business purposes, thus deductible under Section 37(1) of the Income Tax Act. The assessee cited SEBI guidelines and a Chennai Tribunal decision (SSI Ltd. v. DCIT) supporting the treatment of ESOP expenses as employee compensation.

Assessing Officer's (AO) Decision:
The AO disallowed the deduction, reasoning that:
- The lock-in period of three years rendered the expenditure as capital in nature.
- The expenditure benefited the parent company, not the assessee.
- The SEBI guidelines and the cited Tribunal decision were not applicable as the shares were listed on a foreign stock exchange.

CIT(A)'s Decision:
The CIT(A) agreed that the expenditure was not capital but disallowed it on the grounds that:
- The liability was a reimbursement to the parent company, not an external liability.
- The arrangement was a mechanism to pass on the parent's capital expenditure to the assessee for tax deduction purposes.
- The transaction was a related-party transaction under Section 40A(2)(b) without justifiable business expediency.

Tribunal's Analysis:
The Tribunal allowed the deduction, emphasizing:
- The expenditure was an employee cost incurred for business purposes, aligning with the decision of the Special Bench of ITAT Bangalore in Biocon Ltd.
- The liability accrued to the assessee during the relevant year, and there was an actual cash outflow.
- The arrangement was not a mechanism to pass on the parent's capital expenditure but a legitimate business expenditure to retain a motivated workforce.
- The observations of the CIT(A) regarding the related-party transaction and the influence on stock prices were without basis.

2. Charging of Interest under Section 234D:
Given the decision on the merits of the primary issue, the ground relating to charging of interest under Section 234D was deemed academic and not addressed in detail.

Conclusion:
The appeal of the assessee was allowed, with the Tribunal directing that the expenditure be allowed as a deduction. The decision was pronounced in the open court on September 30, 2013.