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2022 (9) TMI 239 - AT - Income TaxEmployee Stock Options (ESOP) expenditure - Disallowance u/s 37 - difference between the grant price and the market price on the shares as on the date of grant of options - HELD THAT - Special Bench Bangalore in the case of Biocon Ltd 2013 (8) TMI 629 - ITAT BANGALORE on the issue have held the discount on ESOP being a general expense, is an allowable deduction u/s 37(1) of the Act during the years of vesting on basis of percentage of vesting during such period subject to upward or downward adjustment at the time of exercise of option. When this issue was decided in favour of the assessee, the department took up this matter before the Hon ble Karnataka High Court in the case of CIT LTU vs. Biocon Ltd 2020 (11) TMI 779 - KARNATAKA HIGH COURT wherein permitted the deduction of ESOP expenses. We find that Ranbaxy Laboratories 2009 (6) TMI 126 - ITAT DELHI-I judgment which has been referred to by the department was also considered in the aforesaid judicial pronouncement. The decision of the Special Bench Bangalore has been upheld by the Hon ble Karnataka High court (supra) and it has been categorically held that the expenditure on ESOP entitles the assessee for deduction u/s 37(1) - Decided in favour of assessee.
Issues Involved:
1. Deduction of Employee Stock Options (ESOP) expenditure under Section 37(1) of the Income-tax Act, 1961. 2. Deduction of ESOP expenditure based on the perquisite value taxed in the hands of employees. 3. Additional ground regarding Education Cess. Detailed Analysis: 1. Deduction of Employee Stock Options (ESOP) expenditure under Section 37(1) of the Income-tax Act, 1961: The primary issue in both appeals (ITA No. 1392/PUN/2018 for A.Y. 2010-11 and ITA No. 1393/PUN/2018 for A.Y. 2011-12) was the non-allowance of deduction for ESOP expenditure. The Tribunal noted that in the first round of litigation, the Pune Tribunal had remanded the issue back to the Assessing Officer (A.O) to consider the claim in light of the Special Bench decision in the case of Biocon Ltd. The A.O, however, went beyond this directive and attempted to distinguish the Biocon Ltd. decision, which was not in accordance with judicial decorum. The Tribunal reiterated that the A.O should have adhered strictly to the Special Bench decision, which held that the discount on ESOPs is an allowable deduction under Section 37(1) during the vesting period, subject to adjustments at the time of exercise of the option. The Tribunal cited the Karnataka High Court's affirmation of the Biocon Ltd. decision and concluded that the expenditure on ESOPs entitles the assessee to a deduction under Section 37(1). Consequently, the Tribunal allowed the appeal for A.Y. 2010-11 and applied the same rationale to A.Y. 2011-12, allowing the ground of appeal for both years. 2. Deduction of ESOP expenditure based on the perquisite value taxed in the hands of employees: For A.Y. 2011-12, the assessee raised an additional ground regarding the deduction of ESOP expenditure based on the perquisite value taxed in the hands of employees. The Special Bench decision in Biocon Ltd. was again referenced, which clarified that the amount of remuneration to employees should match the cost in the hands of the company, adjusted for the market price of shares at the time of exercise of the option. The Tribunal allowed this ground as per the terms of the Special Bench decision, ensuring that the ESOP expenditure is correctly quantified and adjusted. 3. Additional ground regarding Education Cess: The assessee raised an additional ground concerning the Education Cess but chose not to press this issue. Consequently, the Tribunal dismissed this additional ground as not pressed. Conclusion: The Tribunal allowed the appeal for A.Y. 2010-11 and partly allowed the appeal for A.Y. 2011-12, providing relief to the assessee by recognizing the deductibility of ESOP expenditure under Section 37(1) and ensuring accurate quantification based on the perquisite value taxed in the hands of employees. The additional ground regarding Education Cess was dismissed as not pressed. The order was pronounced in the open Court on 29th August 2022.
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