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TMI Blog2020 (11) TMI 779X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be construed as short receipt of capital. Tribunal therefore has rightly held that incurring of the expenditure by the assessee entitles him for deduction under Section 37(1) of the Act subject to fulfillment of the condition. Deduction of discount on ESOP over the vesting period is in accordance with the accounting in the books of accounts, which has been prepared in accordance with Securities And Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. The decisions relied upon by the revenue in Gajapathy Naidu [ 1964 (4) TMI 6 - SUPREME COURT] , Morvi Industries [ 1971 (10) TMI 5 - SUPREME COURT] and Keshav Mills Ltd. [ 1953 (1) TMI 5 - SUPREME COURT] support the case of assessee as the assessee has incurred a definite legal liability and on following the mercantile system of accounting, the discount on ESOPs has rightly been debited as expenditure in the books of accounts. We are in respectful agreement with the view taken in PVP Ventures Ltd. [ 2012 (7) TMI 696 - MADRAS HIGH COURT] And Lemon Tree Hotels Ltd. [ 2015 (11) TMI 404 - DELHI HIGH COURT] Also for Assessment Year 2009-10 onwards the Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transferred to the trust at the face value and the employees of the assessee were allowed to exercise the option to buy the shares within the time prescribed under the scheme subject to terms and conditions mentioned therein. The assessee claimed the difference of market price and allotment price as a discount and claimed the same as an expenditure under Section 37 of the Act. The Assessing Officer rejected the claim on the ground that the assessee has not incurred any expenditure and the expenditure is contingent in nature and therefore, the assessee is not entitled to claim the difference between the market price and the allotment price as an expenditure under Section 37 of the Act. The assessee thereupon filed an appeal before the Commissioner of Income Tax (Appeals) who by an order dated 13.11.2009 dismissed the appeal preferred by the assessee. 3. The assessee thereupon filed an appeal before the Income Tax Appellate Tribunal (hereinafter referred to as 'the tribunal' for short). The division bench of the tribunal made a reference to the special bench. The special bench referred the question 'whether discount on the issue of employees for options is allowable as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ANGALORE VS. INFOSYS TECHNOLOGIES LTD.', (2008) 166 TAXMAN 204 (SC), 'MORVI INDUSTRIES LTD VS. COMMISSIONER OF INCOME-TAX', (1971) 82 ITR 835 (SC), 'KESHAV MILLS LTD. VS. COMMISSIONER OF INCOME-TAX', (153) 23 ITR 230 (SC), 'COMMISSIONER OF INCOME-TAX VS. A. GAJAPATHY NAIDU', (1964) 53 ITR 114 (SC). 4. On the other hand, learned counsel for the assessee submitted that discount on the issue of ESOPs is not a contingent liability but is an ascertained one. It is further submitted that ESOPs vest over a period of 4 years at the rate of 24%, which means that at the end of first year the employee has a definite right of 25% of the shares and the assessee is bound to allow the vesting of 25% of the options. In this connection, our attention has been invited to paragraphs 9.3.1 to 9.3.6 of the order passed by the tribunal and reliance has been placed on decision of the Supreme Court in 'BHARAT EARTH MOVERS VS. CIT', (2000) 112 TAXMAN 61 (SC), 'ROTORK CONTROLS INDIA PVT. LTD VS. CIT', (2009) 180 TAXMAN 422 (SC). It is also argued that for the purposes of Section 37(1) of the Act, it is sufficient if the expenditure has been incurred and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia, the Supreme Court was dealing with allowability of provision as deduction and it has been held that subject to compliance of certain conditions on matching principle, the deduction is permissible. It has further been held in the aforesaid decision that income from sale of goods is subjected to tax, therefore, the corresponding expenditure is to be allowed in the same year. The aforesaid decision is also of no assistance to the assessee as the assessee has not incurred any expenditure. 6. We have considered the submissions made by learned counsel for the parties and have perused the record. The singular issue, which arises for consideration in this appeal is whether the tribunal is correct in holding that discount on the issue of ESOPs i.e., difference between the grant price and the market price on the shares as on the date of grant of options is allowable as a deduction under Section 37 of the Act. Before proceeding further, it is apposite to take note of Section 37(1) of the Act, which reads as under: Section 37(1) says that any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or persona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India P. Ltd., supra and has recorded a finding that discount on issue of ESOPs is not a contingent liability but is an ascertained liability. 10. From perusal of Section 37(1), which has been referred to supra, it is evident that an assessee is entitled to claim deduction under the aforesaid provision if the expenditure has been incurred. The expression 'expenditure' will also include a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which it is issued and the market value of the shares would also be expenditure incurred for the purposes of Section 37(1) of the Act. The primary object of the aforesaid exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, the same cannot be construed as short receipt of capital. The tribunal therefore, in paragraph 9.2.7 and 9.2.8 has rightly held that incurring of the expenditure by the assessee entitles him for deduction under Section 37(1) of the Act subject to fulfillment of the condition. 11. The deduction of discount on ESOP over the vesting period is in accordance with the accounting in the books o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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