2024 (10) TMI 755 - HC - Income Tax

Allowable deduction in computing the income under the heads profit and gains of the business - Discount on the issue of ESOP - AO had held that the same tantamounted to revenue expenditure and hence, disallowed the same and DRP affirmed - ITAT as relying on NOVO NORDISK INDIA PVT LTD 2013 (11) TMI 218 - ITAT BANGALORE allowed the contention of the assessee regarding disallowance of ESOP expense HELD THAT - The position of law as relied on by the Tribunal not having been disputed, considering a question of fact in the present appeal does not arise and hence the contention sought to be put forth by the Revenue in the present appeal is liable to be rejected. It is clear and forthcoming that the Revenue had sought to contend in the present appeal that the expenditure towards ESOP is not an allowable expenditure as per Section 37 (1) of the IT Act. However, this Court in the case of Biocon Ltd. 2020 (11) TMI 779 - KARNATAKA HIGH COURT having categorically held that the same is an allowable expenditure, there is no merit in the contention sought to be put forth by the Revenue. No substantial question of law would arise. Decided in favour of assessee.

Summary

Issues:
- Appeal under Section 260A of the Income Tax Act challenging ITAT order for AY 2017-18.
- Allowability of ESOP discount as a deduction in computing income.
- Disallowance of ESOP expenses by AO and DRP.
- Interpretation of Section 37(1) of the IT Act regarding ESOP expenses.

Analysis:
The High Court of Karnataka heard an appeal filed by the Revenue under Section 260A of the Income Tax Act, challenging the order passed by the Income Tax Appellate Tribunal (ITAT) for the Assessment Year 2017-18. The primary issue raised in the appeal was the allowability of ESOP (Employee Stock Ownership Plan) discount as a deduction in computing income under the heads profit and gains of the business. The Revenue contended that the ESOP expenses claimed by the assessee were not allowable under Section 37(1) of the IT Act. The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) had disallowed the ESOP expenses, but the Tribunal allowed the deduction based on precedents, including the judgment of a coordinate Bench in the case of Novo Nordisk India (P) Ltd. The respondent relied on the judgment of a coordinate Bench in the case of Commissioner of Income Tax, LTU v. Biocon Ltd., which also supported the allowability of ESOP discount as an expense under Section 37(1) of the IT Act.

The Revenue argued that the assessee did not provide sufficient material to support the deduction claimed for ESOP expenses. However, since the legal position regarding the allowability of ESOP expenses was well-established based on previous judgments, the Court held that the lack of specific material in this case did not invalidate the claim for deduction. The Court emphasized that the judgment in the case of Biocon Ltd. had conclusively established that ESOP expenses were allowable under Section 37(1) of the IT Act. Therefore, the Court dismissed the appeal, stating that no substantial question of law arose, and the appeal lacked merit for admission.

In conclusion, the High Court upheld the Tribunal's decision to allow the deduction for ESOP expenses, following established legal precedents and rejecting the Revenue's argument against the allowability of such expenses under Section 37(1) of the IT Act. The judgment reaffirmed the position that ESOP expenses are legitimate deductions in computing income, based on existing legal interpretations and case law.