2021 (9) TMI 104 - AT - Income Tax

ESOP expenses - non deduction of tds on discount given - taxability as perquisite - assessee has vested ESOP rights to certain employees - assessee claimed a sum being the difference between the market price of shares and the issue price as ESOP expenses u/s 37(1) - Whether the TDS is to be deducted during the current year itself or not - HELD THAT - DRP has understood that there are 4 stages in grant of ESOP i.e. granting of option, vesting of option, exercise of option and selling of shares - there will be time different between vesting of option and exercise of option and accordingly the period of taxability of ESOP benefits as perquisite may also differ - we are of the view that the tax authorities are not justified in holding that the assessee should have deducted tax at source from the discount amount by assessing the same as perquisite in the hands of the assessee in the year in which ESOP was vested in them. We hold that the assessee is entitled for deduction of ESOP expenses when the rights are vested in the hands of the assessee as held in the case of Biocon Ltd 2013 (8) TMI 629 - ITAT BANGALORE - we direct the AO to allow the claim - AO is entitled to satisfy himself that the assessee has either deducted tax at source when the option is exercised by the employee or has reversed the expenditure when the concerned employee did not exercise the option, if it is considered necessary by the AO. - Decided in favour of assessee.

Summary

Issues:
Challenge to assessment order disallowing ESOP expenses claimed by the assessee.

Analysis:
The appellant challenged the assessment order disallowing ESOP expenses claimed for the assessment year 2012-13. The assessee, engaged in providing business process outsourcing services, vested ESOP rights to employees at a price below market value, claiming the difference as expenses under section 37(1) of the Income-tax Act, 1961. The AO disallowed the claim, considering it a notional loss. The DRP suggested disallowance under section 40(a)(ia) if TDS on perquisite was not deducted. The AO disallowed the claim as TDS was not deducted when ESOP was vested. The appellant argued that ESOP expenses are deductible when rights are vested, not when exercised, citing the Biocon Ltd. case upheld by the Karnataka High Court. The Tribunal agreed, directing the AO to allow the claim after ensuring TDS deduction upon exercise or reversal if necessary.

The key issue revolved around the timing of deductibility of ESOP expenses claimed by the assessee. The AO disallowed the claim due to non-deduction of TDS when ESOP was vested, treating it as a notional loss. The DRP suggested disallowance under section 40(a)(ia) if TDS was not deducted on perquisite. However, the Tribunal held that ESOP expenses are deductible when rights are vested, following the Biocon Ltd. case upheld by the Karnataka High Court. The Tribunal emphasized the distinction between the taxability of perquisite and deductibility of expenditure, allowing the claim and directing TDS deduction upon exercise or reversal if required.

The dispute centered on the tax treatment of ESOP expenses claimed by the assessee. The AO disallowed the claim, considering it a notional loss due to non-deduction of TDS when ESOP was vested. The DRP suggested disallowance under section 40(a)(ia) if TDS on perquisite was not deducted. However, the Tribunal upheld the claim, stating that ESOP expenses are deductible when rights are vested, not when exercised. The Tribunal highlighted the importance of timing in deductibility, directing the AO to ensure TDS deduction upon exercise or reversal if deemed necessary, ultimately allowing the appeal filed by the assessee.