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TMI Blog2022 (9) TMI 239X X X X Extracts X X X X X X X X Extracts X X X X ..... d it has been categorically held that the expenditure on ESOP entitles the assessee for deduction u/s 37(1) - Decided in favour of assessee. - ITA No. 1392 & 1393/PUN/2018 - - - Dated:- 29-8-2022 - Shri Inturi Rama Rao, Accountant Member And Shri Partha Sarathi Chaudhury, Judicial Member For the Appellant : Shri Percy Pardiwalla, Sr. Advocate And Ms. Vasanti B. Patel For the Respondent : Shri Ramnath P. Murkunde ORDER PER PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER These appeals preferred by the assessee emanates from separate orders of the ld. Commissioner of Income Tax (Appeals)-6, Pune, both dated 30-07-2018 for the Assessment Years 2010-11 2011-12 as per the following grounds of appeal. ITA No. 1392/PUN/2018 for .Y. 2010-11 Based on the facts and in the circumstances of the case, Bajaj Finance Ltd (the Appellant ) respectfully submits CIT(A)-6 Pune [CIT(A)] erred in disposing the appeal of the Appellant on the following ground which is without prejudice to each other. 1. Ground No. 1 Not allowing deduction in respect of Employee Stock Options ( ESOP ) expenditure. 1.1 The CIT(A) erred in not allowing deduction in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.Y. 2010-11, order dated 11-04-2016 had remanded this issue back to the file of the A.O to consider the claim of the assessee in the light of decision of Special Bench Bangalore Tribunal in the case of Biocon Ltd., in (2013) 35 taxmann.com 335 (Bangalore Trib) (SB). The relevant paragraphs of Tribunal s order are extracted as follows: 32. The assessee raised additional ground as ground no. 4 on account of claim of deduction in respect of Employee Stock Options (ESOP) expenditure of ₹ 1,33,64,340/-. The ld. AR submitted that the assessee is a listed company and issued stock options with a ceiling of 5% of the issued equity capital of the company to its employees pursuant to Employee Stock Option Scheme 2009. The said scheme was formulated in accordance with the SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) guidelines, 1999. The assessee as a matter of abundant caution did not claim deduction of ESOP expenditure of ₹ 1,33,64,340/- in its return of income for assessment year 2010-11 in view of conflicting decisions of various Benches of the Tribunal on the issue. Now, in the light of Bangalore Special Bench decision in the case of Biocon Li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal (supra) it has been clearly mentioned that the A.O has to adjudicate the issue in the light of the Special Bench decision Bangalore whereas the A.O has gone beyond and has tried to distinguish the judgment itself along with other cases which is not in accordance with the judicial decorum. We find that the Hon ble Calcutta High court in the case of Surrendra Overseas Ltd. Vs. CIT in Income-tax Reference No. 406 of 1975 - (1979) - 120 ITR 872 (Cal) wherein the facts were that the assessee preferred appeals before the Appellate Assistant Commissioner (hereinafter referred to as the AAC for short) against the additions made on account of hundi loans. The AAC remanded the matter for fresh consideration. While acting under AAC s directions the A.O withdrew development rebate allowed in respect of two ships on the ground that the assessee had sold those ships within a period of eight years from the date of acquisition. The Tribunal held that the ITO was justified in considering admissibility of rebate while acting under AAC s direction. Now, before the High Court a question was when specific direction has been given to the ITO by AAC to re-examine the question of genuineness of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 deduction in computing the income under the head 'profits and gains' of business'?. The Special bench of the tribunal by an order dated 16.07.2013 while answering the reference inter alia held different amount of between the market value and the face value at which shares are allotted are part of remuneration, which are paid to the employees in order to compensate them for the continuity of their services to the company and therefore, the same is allowable as an expenditure under Section 37 of the Act. It was further held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be eligible for acquiring shares under the scheme, the employees are under an obligation to render their services to the company during the vesting period as provided in the scheme. On completion of the vesting period in the service of the company, the option vest with the employees. 9. In the instant case, the ESOPs vest in an employee over a period of four years i.e., at the rate of 25%, which means at the end of first year, the employee has a definite right to 25% of the shares and the assessee is bound to allow the vesting of 25% of the options. It is well settled in law that if a business liability has arisen in the accounting year, the same is permissible as deduction, even though, liability may have to quantify and discharged at a future date. On exercise of option by an employee, the actual amount of benefit has to be determined is only a quantification of liability, which takes place at a future date. The tribunal has therefore, rightly placed reliance on decisions of the Supreme Court in Bharat Movers supra and Rotork Controls 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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. And Lemon Tree Hotels Ltd. Supra. 13. It is also pertinent to mention here that for Assessment Year 2009-10 onwards the Assessing Officer has permitted the deduction of ESOP expenses and in view of law laid down by Supreme Court in Radhasoami Satsang vs. CIT, (1992) 193 ITR 321 (SC), the revenue cannot be permitted to take a different stand with regard to the Assessment Year in question. In view of preceding analysis, the substantial questions of law framed by a bench of this court are answered against the revenue and in favour of the assessee. In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed. 6. We find that Ranbaxy Laboratories 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company and such remuneration to the employee in the present context is the amount which he actually becomes entitled to on the exercise of options. Thus, it is palpable that since the remuneration to M/s.Biocon Limited. the employees under the ESOP is the amount of discount w.r.t. the market price of shares at the time of exercise of option, the employees cost in the hands of the company should also be w.r.t. the same base. 11.1.6. The amount of discount at the stage of granting of options w.r.t. the market price of shares at the time of grant of options is always a tentative employees cost because of the impossibility in correctly visualizing the likely market price of shares at the time of exercise of option by the employees, which, in turn, would reflect the correct employees cost. Since the definite liability is incurred during the vesting period, it has to be quantified on some logical basis. It is this market price at the time of the grant of options which is considered for working out the amount of discount during the vesting period. But, since actual amount of employees cost can be precisely determined only at the time of the exercise of option by the employees, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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