2021 (12) TMI 553 - AT - Income Tax

Disallowance of ESOP expenses - CIT-A deleted addition holding the notional discount on shares issued under ESOP scheme as revenue expenditure allowable u/s 37(1) - Whether allowability of expenditure u/s 37(1) of the Act cannot be determined on the basis of SEBI guidelines? - HELD THAT - The issue of allowability of ESOP discount being the difference between the market value of shares and the value at which employees had been given the shares is covered, not only by the decision of Hon ble jurisdictional High Court in CIT Vs. Lemon Tree Hotels Ltd 2015 (11) TMI 404 - DELHI HIGH COURT , but also by the judgement of the Special Bench in the case of Biocon Ltd. 2014 (12) TMI 838 - ITAT BANGALORE also approved by the Hon ble Karnataka High Court 2020 (11) TMI 779 - KARNATAKA HIGH COURT and held that employees discount represents consideration for services rendered by employees and hence it is a deductible business expenditure and it cannot be equated with share premium and it is to be intended towards profit by securing employees consistent services. As it is an ascertain liability since employees incurred obligation over the distinct period, notwithstanding the fact that exact amount as quantified at the time of exercising options - Decided against revenue.

Summary

Issues:
- Allowability of ESOP expenses under Section 37(1) of the Income Tax Act, 1961.

Analysis:
The appeal by the Revenue challenged the deletion of the addition of ?3,01,60,201 on account of disallowance of ESOP expenses by the Commissioner of Income Tax (Appeals). The Revenue contended that the notional discount on shares issued under ESOP scheme should not be considered as revenue expenditure under Section 37(1) of the IT Act. The assessee justified the ESOP cost as business-related and referred to various judicial precedents supporting the deductibility of ESOP expenses. The Assessing Officer, however, held that the ESOP expenses were not allowable as expenditure under Section 37(1) since the company had not paid out anything for issuing shares at a discount. He disallowed the claim of ?3,01,60,201.

The Commissioner of Income Tax (Appeals) relied on judgments of the Hon'ble Delhi High Court and a Special Bench of ITAT in similar cases to decide in favor of the assessee. The Commissioner held that ESOP expenses are deductible as employee costs under Section 37(1) during the vesting period. The Assessing Officer was directed to compute the allowable deduction for ESOP expenses based on the method provided by the Special Bench of ITAT. The Commissioner also directed the Assessing Officer to consider relevant factors while determining the quantum of deduction, especially since the appellant company was not a listed entity.

The ITAT, after considering the submissions and precedents, affirmed the decision of the Commissioner. It noted that the issue of ESOP discount's allowability had been settled by the Hon'ble jurisdictional High Court and the Special Bench's judgment, which was subsequently approved by the Hon'ble Karnataka High Court. The High Courts held that ESOP discount represents consideration for services rendered by employees and is a deductible business expenditure. The ITAT found no infirmity in the Commissioner's order and dismissed the Revenue's appeal.

In conclusion, the ITAT upheld the allowability of ESOP expenses as deductible business expenditure under Section 37(1) of the Income Tax Act, 1961, based on the judicial precedents and reasoning provided in the judgment.