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2015 (11) TMI 867 - AT - Income TaxDisallowance of ESOP (Employee Stock Option) expenses claimed by the assessee company as revenue expenditure - Held that - In the case of Biocon Limited (2014 (12) TMI 838 - ITAT BANGALORE) has held that discount under ESOP is in the nature of employees cost and is hence deductible during the vesting period w.r.t the market price of share at the time of grant of options to the employees. The Hon ble Special Bench has held that the amount of discount claimed as deduction during the vesting period is required to be reversed in relation to the unvesting/lapsing options at the appropriate time , however, an adjustment to the income is called for at the time of exercise of option by the amount of difference in the amount of discount calculated with reference to the market price at the time of grant of option and the market price at the time of exercise of option. No contrary decision is brought to our notice by the Revenue. Respectfully following the decision of Hon ble Special Bench, Bangalore Tribunal in Biocon Limited(supra), we decide this issue in favour of the assessee company and against the Revenue that discount under ESOP is in the nature of employees cost and is hence deductible during the vesting period w.r.t the market price of share at the time of grant of options to the employees. The amount of discount claimed as deduction during the vesting period is required to be reversed in relation to the unvesting/lapsing options at the appropriate time, however, an adjustment to the income is called for at the time of exercise of option by the amount of difference in the amount of discount calculated with reference to the market price at the time of grant of option and the market price at the time of exercise of option. Thus, we hold that discount on issue of Employees Stock option is allowable as deduction in computing the income under the head Profit and gains of Business or Profession In the instant case we have noticed that the AO has refused to grant the deduction of the discount on ESOP at the very threshold and the CIT(A) has allowed the said claim based on the decision of Hon ble Special Bench in the case of Biocon Limited(supra). Resultantly, the verification of correctness of calculation of discount stood ousted and have become now imperative in view of our directions in light of Hon ble Special Bench, Bangalore Tribunal orders in Biocon Ltd (supra) which are binding on us and also followed by us. We , therefore, remit the matter to the file of AO for finding out the correct amount of deduction accordingly in light of our orders which are based on the binding orders of Hon ble Special Bench, Banaglore Tribunal in the case of Biocon Limited(supra). - Decided in favour of assessee for statistical purposes.
Issues Involved:
1. Reopening of assessment under Section 147/148 of the Income Tax Act. 2. Allowability of Employee Stock Option (ESOP) expenses as revenue expenditure under Section 37 of the Income Tax Act. Detailed Analysis: 1. Reopening of Assessment under Section 147/148: The assessee company challenged the reopening of the assessment under Section 147 read with Section 148 of the Income Tax Act, arguing that the Assessing Officer (AO) did not have any tangible material, additional information, or fresh evidence to justify the reopening. The assessee contended that the reopening was based on a change of opinion by the AO on the same set of facts and evidence already on record, making the reopening bad in law and illegal. The assessee also argued that the reopening was not authorized in accordance with Section 151 of the Act, thus rendering it illegal. 2. Allowability of ESOP Expenses as Revenue Expenditure: The primary issue in all appeals was the disallowance of ESOP expenses claimed by the assessee company as revenue expenditure. The assessee argued that the ESOP expenses were fully allowable under Section 37 of the Act and were not capital in nature. The expenses were incurred as part of the Employee Stock Option Scheme, 2006, in accordance with SEBI guidelines and ICAI guidelines. The assessee contended that ESOPs were meant to encourage a sense of belonging and ownership among employees, thereby benefiting the company by motivating employees to work in its best interest. The AO, however, disallowed the ESOP expenses, considering them as notional and not actual expenditures. The AO viewed these expenses as related to the increase in share capital of the company, thus treating them as capital expenditure. The AO relied on Supreme Court decisions in Punjab State Industrial Corporation Limited v. CIT and Brooke Bond India Limited v. CIT to support the disallowance. On appeal, the CIT(A) allowed the ESOP expenses, relying on the judgment of the Special Bench of the Bangalore Tribunal in Biocon Ltd. v. DCIT, which held that the discount on ESOP is an expenditure in the hands of the assessee, deductible under Section 37(1) as it represents employee compensation. Tribunal's Findings: The Tribunal upheld the CIT(A)'s decision, emphasizing that the issue was squarely covered by the Special Bench decision in Biocon Ltd. v. DCIT. The Tribunal noted that the ESOP expenses are in the nature of employee costs and are deductible during the vesting period concerning the market price of shares at the time of grant of options to employees. The Tribunal also highlighted that the amount of discount claimed as a deduction during the vesting period must be reversed for unvested or lapsed options at the appropriate time. An adjustment to the income is required at the time of exercise of the option by the amount of difference in the discount calculated with reference to the market price at the time of grant and the market price at the time of exercise. The Tribunal remitted the matter back to the AO for verification of the correctness of the calculation of the discount, ensuring that the overall expenditure booked by the company is restricted only to the extent of exercised options. The AO was directed to provide the assessee with an opportunity to present fresh evidence and ensure compliance with the principles of natural justice. Conclusion: The Tribunal's order applied mutatis mutandis to other appeals with identical issues, thereby partly allowing the appeals of both the Revenue and the assessee company for statistical purposes. The decision emphasized the need for accurate calculation and verification of ESOP expenses as per the guidelines provided by the Special Bench in Biocon Ltd. v. DCIT.
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