2015 (7) TMI 1412 - AT - Income Tax

Disallowance on account of Employee Stock Option Plan (ESOP) expenses - HELD THAT - We find that similar issue came up for consideration before the Special Bench of the Tribunal in Biocon Ltd. 2013 (8) TMI 629 - ITAT BANGALORE . In this case, the Tribunal has held that discount on issue of ESOP is allowable as deduction in computing income under the head Profits and gains of business or profession. Since it is on account of an ascertained and not contingent liability, it cannot be treated as a short capital receipt. Thereafter, the Special Bench has laid down the mechanism for determining as to when and how much deduction should be allowed. It has been held that the liability to pay the discounted premium is incurred during the vesting period and the amount of such deduction is to be found out as per the terms of ESOP by considering the period and percentage of vesting during such period. Deduction of the discounted premium during the years of vesting should be allowed on straight line basis. Then, dealing with the subsequent adjustment to discount, the Special Bench laid down that any adjustment to 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 market price at the time of exercise of option. Thus we set aside the impugned order and send the matter to the file of AO for deciding the issue in conformity with the decision taken by the Special Bench in the aforenoted case. Assessee appeal is allowed for statistical purposes.

Summary

Issues: Disallowance of Employee Stock Option Plan (ESOP) expenses.

Analysis:
The judgment by the Appellate Tribunal ITAT Delhi pertains to an appeal by the assessee against the CIT(A)'s order for the assessment year 2007-08. The sole issue raised in the appeal concerns the disallowance of Rs.3,04,04,500/- made by the AO on account of ESOP expenses. The Tribunal referred to a similar issue addressed by the Special Bench in Biocon Ltd. Vs. DCIT (2013) 144 ITD 21 (Bang.) (SB). The Special Bench held that the discount on the issue of ESOP is deductible under the head 'Profits and gains of business or profession' as it represents an ascertained liability and not a contingent one. The mechanism for determining the deduction amount was outlined, emphasizing that the liability arises during the vesting period, with the deduction to be allowed on a straight-line basis over the vesting years. Any subsequent adjustment to income is required at the time of option exercise based on the difference in discount calculated at the grant and exercise times.

Both parties acknowledged that the facts of the case align with the Special Bench decision. Consequently, the Tribunal set aside the impugned order and remanded the matter to the AO for a decision consistent with the Special Bench's ruling. The appeal was allowed for statistical purposes, with the order pronounced in open court on 10.07.2015.