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Income Tax Appellate Tribunal, MUMBAI BENCH “D”, MUMBAI
Before: SHRI KULDIP SINGH & SHRI S RIFAUR RAHMAN
O R D E R
Per : Kuldip Singh, Judicial Member:
The appellant, M/s. Motilal Oswal Financial Services Ltd. (hereinafter referred to as ‘the assessee’) by filing the present appeal, sought to set aside the impugned order dated 20.03.2023 passed by the National Faceless Appeal Centre(NFAC) [Commissioner of Income Tax (Appeals), Delhi] (hereinafter referred to as CIT(A)] qua the assessment year 2016-17 on the grounds inter-alia that :- “i) Whether on facts and circumstance and in law CIT(A) was justified in deleting the disallowance made by the AO on ESOP
ITA No.1794/M/2023 2 M/s. Motilal Oswal Financial Services Ltd. expenses without appreciating the fact that Apex Court in its decision in the case of Punjab State Industrial Development Corp. Ltd. (1997) 225 ITR 792 (SC) and Brooke Bond India Ltd. (1997) 225 ITR 798 (SC) have held that expenditure resulting in increase in capital" is not allowable deduction even if such expenditure may incidentally help in business of the company. ii) Whether on facts and circumstance and in law CIT(A) was justified in deleting the disallowance made by the AO on ESOP expenses without appreciating the fact that the jurisdictional ITAT in the case of VIP Industries Ltd in for the AY 2005-06 has squarely applied the decision rendered by ITAT Delhi in the case of Ranbaxy Laboratories Ltd and thereby confirmed the disallowance made by the AO on account of ESOP expenses claimed by the assessee. iii) Whether on facts and circumstance and in law CIT(A) was justified in deleting the disallowance made by the AO on ESOP expenses without appreciating the fact that ESOP expenses are not actual loss for which no liability is incurred and such notional losses are not allowable under the provisions of the Income Tax Act, 1961. iv) "The appellant craves leave to amend or alter any ground or add a new ground that may be necessary at the time of hearing.”
Briefly stated facts necessary for consideration and adjudication of the issues at hand are : the assessee is a non banking financial company registered with Reserve Bank of India (RBI) under section 45-1A of the RBI, 1934 primarily engaged in lending of money and related activities. Assessee’s return of income was subjected to scrutiny. Amongst other additions, the Assessing Officer (AO) made disallowance of Rs.28,65,26,826/- on account of Employee Stock Option Plan (ESOP) expenses under section 37(1) of the Income Tax Act, 1961 (for short ‘the Act’) and thereby framed the assessment under section 143(3) of the Act.
The assessee carried the matter before the Ld. CIT(A) by way of filing appeal who has allowed the same. Feeling aggrieved with the impugned order passed by the Ld. CIT(A) the Revenue has come up before the Tribunal by way of filing present appeal. 3 M/s. Motilal Oswal Financial Services Ltd.
We have heard the Ld. Authorised Representatives of the parties to the appeal, perused the orders passed by the Ld. Lower Revenue Authorities and documents available on record in the light of the facts and circumstances of the case and law applicable thereto.
The sole issue raised by the appellant-Revenue for determination is : “As to whether the Ld. CIT(A) has erred in deleting the disallowance made by the AO on account of ESOP expenses?”
The Ld. D.R. for the Revenue challenging the impugned order contended that the Ld. CIT(A) has erred in deleting the disallowance on account of ESOP expenses claimed by the assessee and relied upon the assessment order.
7. However, on the other hand, the Ld. A.R. for the assessee contended that this issue has already been decided in favour of the assessee by the co-ordinate Bench of the Tribunal in assessee’s own case for A.Y. 2017-18 & 2018-19 vide order dated 18.08.2023 passed in & 1796/M/2023 by following the decision rendered by Special Bench of the Tribunal in case of Biocon Ltd. vs. DCIT (2013) 144 ITD 21 (Bangalore-Trib.) (SB) confirmed by Hon’ble Karnataka High Court cited as (2020) 121 taxmann.com 351 (Karn.).
8. The Ld. D.R. for the Revenue has not brought on record any decision of the higher forum so as to distinguish the order passed in Biocon Ltd. (supra). 4 M/s. Motilal Oswal Financial Services Ltd.
We have perused the order passed by the co-ordinate Bench of the Tribunal in assessee’s own case for A.Y. 2017-18 & 2018-19 which is exactly on the identical issue and decided the same in favour of the assessee by returning following findings: “7. We have considered the submissions of both sides and perused the material available on record. As per the assessee, the ESOP is provided to the employees with the right to purchase a certain number of equity shares in the company at a predetermined price after a predetermined period. The stock options are granted for the purpose of motivating, retaining, and incentivising the employees. The stock options are granted to the employees at the market price prevailing on the date of the grant of the option. The stock options vest gradually over the vesting period, as per the terms of the ESOP. On completion of the vesting period, which is ordinarily 3-5 years, the stock options can then be exercised by the employees at their discretion for the issue of shares against the options vested in them. During the year under consideration, the assessee followed the intrinsic value method to value stock options for accounting purposes. Under the intrinsic value method, the market price of the equity shares as on the date of the grant of options is reduced by the exercise price of options and since the exercise price of stock options is equal to the market price of equity shares of the assessee on the date of grant of the stock options, the assessee has not recorded any employee’s compensation expenses pertaining to ESOP in its books of accounts over the grant/vesting period. The assessee claimed the deduction in respect of the aggregate amount of excess of the fair market value of equity shares over the exercise price amounting to Rs. 28,65,26,826, under section 37(1) of the Act. As evident from the record, the AO disallowed the deduction primarily on the basis that no expenditure has been incurred by the assessee so as to claim deduction under section 37(1) of the Act and the expenditure if any is in the nature of capital expenditure and the liability is a contingent liability. We find that similar contentions of the Revenue were rejected by the Hon’ble Karnataka High Court in Biocon Ltd (supra), wherein the Hon’ble High Court dismissed the appeal filed by the Revenue and upheld the decision of the Special Bench of the Tribunal in Biocon Ltd v/s DCIT, [2013] 144 ITD 21 (Bangalore-Trib.) (SB). The relevant findings of the Hon’ble High Court, in the aforesaid decision, are reproduced as under:- “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 5 M/s. Motilal Oswal Financial Services Ltd.
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 personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head, "Profits and Gains of Business or Profession".
Thus, from perusal of section 37(1) of the Act, it is evident that the aforesaid provision permits deduction for the expenditure laid out or expended and does not contain a requirement that there has to be a pay out. If an expenditure has been incurred, provision of section 37(1) of the Act would be attracted. It is also pertinent to note that section 37 does not envisage incurrence of expenditure in cash.
Section 2(15A) of the Companies Act, 1956 defines 'employees stock option' to mean option given to the whole time directors, officers or the employees of the company, which gives such directors, officers or employees, the benefit or right to purchase or subscribe at a future rate the securities offered by a company at a free determined price. In an ESOP a company undertakes to issue shares to its employees at a future date at a price lower than the current market price. The employees are given stock options at discount and the same amount of discount represents the difference between market price of shares at the time of grant of option and the offer price. In order to 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 6 M/s. Motilal Oswal Financial Services Ltd.
that discount on issue of ESOPs is not a contingent liability but is an ascertained liability.
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 paragraphs 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 of account, which has been prepared in accordance with Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999.
So far as reliance place by the revenue in the case of Infosys Technologies Ltd.(supra) is concerned, it is noteworthy that in the aforesaid decision, the Supreme Court was dealing with a proceeding under section 201 of the Act for non-deduction of tax at source and it was held that there was no cash inflow to the employees. The aforesaid decision is of no assistance to decide the issue of allow ability of expenses in the hands of the employer. It is also pertinent to mention here that in the decision rendered by the Supreme Court in the aforesaid case, the Assessment Years in question was 1997-98 to 1999-2000 and at that time, the Act did not contain any specific provisions to tax the benefits on ESOPs. Section 17(2)(iiia) was inserted by Finance Act, 1999 with effect from 1-4-2000. Therefore, it is evident that law recognizes a real benefit in the hands of the employees. For the aforementioned reasons, the decision rendered in the case of Infosys Technologies is of no assistance to the revenue. The decisions relied upon by the revenue in A. Gajapathy Naidu,Morvi Industries Ltd. and Keshav Mills Ltd.(supra) 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 account. We are in respectful agreement with the view taken in PVP Ventures Ltd. And Lemon Tree Hotels Ltd.'case (supra).
7 M/s. Motilal Oswal Financial Services Ltd.
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 v. CIT, [1992] 60 Taxman 248/193 ITR 321, 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.”
8. Therefore, in view of the aforesaid findings of the Hon’ble Karnataka High Court, we find no infirmity in the impugned order passed by the learned CIT(A) in allowing the claim of deduction of ESOP expenses under section 37(1) of the Act. Accordingly, grounds no. (i) to (iii) raised in Revenue’s appeal are dismissed.”
10. In view of what has been discussed above and the order passed by the co-ordinate Bench of the Tribunal, we find no illegality or perversity in the impugned findings returned by the Ld. CIT(A) deleting the disallowance made by the AO on account of ESOP expenses under section 37(1) of the Act. Hence, the question framed is answered in the negative.
Resultantly, the appeal filed by the Revenue is hereby dismissed. Order pronounced in the open court on 13.09.2023.