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TMI Blog2023 (8) TMI 1478X X X X Extracts X X X X X X X X Extracts X X X X ..... ated the fact that there may arise second type of discount and has held that it is allowable as deduction. The Special bench has also held that the SEBI guidelines did not prescribe any mandatory accounting treatment for the second type of discount and accordingly held that the taxation principles will apply for allowing deduction of second type of discount. The illustration 2 given in paragraph 11.1.6 specifically deals with the situation, when there is an increase in the market price of shares at the time of actual exercise of option and it has been held that the assessee would be entitled for further deduction at the time of exercise of option.It is pertinent to note that the above said decision rendered by the Special bench has since been upheld by the Hon ble Karnataka High Court [ 2020 (11) TMI 779 - KARNATAKA HIGH COURT] . Thus we agree with the submission of the assessee that there are mistakes apparent from record in the decision rendered by the Tribunal. Miscellaneous application filed by the assessee is allowed. - Shri B.R. Baskaran, AM And Ms. Kavitha Rajagopal, JM For the Appellant : Shri Rajan Vora Shri Hemen Chandariya For the Respondent : Shri Soumendu Kumar Dash ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the assessee, since the shares were offered to employees at the market price on the date of grant. The learned AR submitted that the claim of Rs.5.74 crores represented the second type of discount arising at the time of exercise of option by the employees. He submitted that the Tribunal has, however, examined this issue under the impression that the above said claim represented first type of discount, which is factually not correct. In view of the above said confusion, a mistake apparent from record has occurred in the order passed by the Tribunal. He submitted that the SEBI guidelines prescribed accounting treatment for the first type of discount only and nothing has been mentioned by SEBI guidelines with regard to second type of discount. This fact has been noted down by the Special Bench in paragraph 11.2.9 of its order. However, the Tribunal has directed the AO to examine this aspect of accounting treatment, which is contrary to the decision rendered by the Special Bench. 6. Explaining further, the Ld A.R submitted that SEBI guidelines has prescribed method of accounting discount on issue of ESOP, only in respect of first type of discount. It did not prescribe any accounti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discount. We also notice that the Special bench of Bangalore ITAT in the case of Biocon Ltd (supra) has appreciated the fact that there may arise second type of discount and has held that it is allowable as deduction. The Special bench has also held that the SEBI guidelines did not prescribe any mandatory accounting treatment for the second type of discount and accordingly held that the taxation principles will apply for allowing deduction of second type of discount. The relevant discussions find place in paragraph 11.1.6, 11.2.8 and 11.2.9 of the order passed by the Special Bench with illustrations. The illustration 2 given in paragraph 11.1.6 specifically deals with the situation, when there is an increase in the market price of shares at the time of actual exercise of option and it has been held that the assessee would be entitled for further deduction at the time of exercise of option. The taxation principle is discussed in paragraph 11.2.8 of the order and the matter relating to accounting treatment is discussed in 11.2.9 of the order. It is pertinent to note that the above said decision rendered by the Special bench has since been upheld by the Hon ble Karnataka High Court. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We notice that the requirement of accounting second type of discount has been examined by the Special bench in paragraphs 11.2.8 and 11.2.9 of its order. We notice that the Special bench has stated that the SEBI guidelines did not discuss about the accounting of second type of discount. Accordingly, the Special bench held that the deduction of additional discount has to be allowed as per taxation principles. For the sake of convenience, we extract below paragraphs 11.2.8, 11.2.9 and 11.3 of the order passed by the Special bench:- 11.2.8. The plea now raised before us by the ld. AR, relying on the case of Challapalli Sugars Ltd.'s case, was also taken up before the Hon'ble Supreme Court in the case of Tuticorin Alkalis (supra). Dealing with the same, the Hon'ble Supreme Court held that : The question in Challapalli Sugars Ltd.'s case [1975] 98 ITR 167 (SC) was about computation of depreciation and development rebate under the Indian Income-tax Act, 1922. In order to calculate depreciation and development rebate it was necessary to find out the actual cost of the plant and machinery purchased by the company. This court held that cost is a word of wider connotation th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was about the deductibility of discount during one of the vesting years. In the earlier part of this order, we have held that the deductibility of discount during the vesting period, as prescribed under the SEBI Guidelines, matches with the treatment under the mercantile system of accounting. To that extent, we also hold that the SEBI guidelines are applicable in the matter of deduction of discount. Neither there was any issue before the Hon'ble Madras High Court nor it dealt with a situation in which the market price of the shares at the time of exercise of option is more or less than the market price at the time of grant of option. It is a situation which has also not been dealt withby the Guidelines. Accordingly, the afore noted taxation principle of granting deduction for the additional discount and reversing deduction for the short amount of discount at the time of exercise of option, needs to be scrupulously followed. 11.3. We, therefore, sum up the position that the discount under ESOP is in the nature of employees cost and is hence deductible during the vesting period w.r.t. the market price of shares at the time of grant of options to the employees. The amount of disc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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