DY. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-18, DELHI, DELHI vs. M/S DELHIVERY LIMITED , DELHI

The brief facts are that the assesse has claimed deduction of this sum on issuance of options to certain eligible employees to acquire equity shares of the company at price lower than the market value in terms of ESOP scheme of the assessee. Under the Scheme, as part of the employee compensation measure, an option to purchase the shares of the appellant company after the completion of the vesting period was granted to the employees of the company at a discounted price to the fair market value of the share. The difference between the fair market value of the shares and the amount paid by the employee on actual exercise of option represented employee compensation expense. In accordance with the mandatory SEBI guidelines, the difference between the fair market value of the shares and the amount receivable from the employee at the time of exercise of option was debited/ charged to the profit and loss account as expenses. Therefore, the appellant claimed a deduction the scheme as amount of deferred compensation. The ld. AO did not allow holding that it is contingent liability. Further it was also stated that it is in the nature of bonus commission etc. and therefore not allowable u/s 40(a)(ia) of the Act. The ld. DRP upheld the order of the AO. Before us, it was contended that the above said amount is allowable u/s 37(1) of the Act as it is in lieu of the services rendered, as issue of ESOP is a standard method of remunerating employees. This scheme is also approved by SEBI guidelines. It is also submitted that it is not a contingent liability but the actual expenditure incurred. Further, it was submitted that issue is now squarely covered in favour of the assessee by ITAs No.585 & 573/Del/2025 the decision Hon ble Special Bench in case of Biocon Itd. 144 ITD 21. It was also contended that now this issue is also squarely covered in favour of the assesse by decision of Hon'ble Madras high court in case of CIT Vs. PVP Ventures ltd. 211 Taxman 554.

Against this ld. DR submitted that the liability is contingent in nature and also stated that in case of assesse itself in the prior years it has been held against the assesse. He relied on the orders of the AO and DRP.

We have carefully considered the rival contentions. The issue is now squarely covered in favour of the assesse by the decision of Honourable Madras high court inCIT Vs. PVP Ventures (supra),where in it is held that amount of difference between the market value of the shares issue under ESOP allotted to the employees debited to the profit and loss account in accordance to SEBI guidelines is an ascertain liability and allowable as revenue expenditure u/s 37(1) of the Act. It is also noteworthy that the decision in the case of the assessee in earlier years where this deduction was denied has been considered by the special bench of tribunal in case of BIOCON Limited V DCIT 35 taxmann.com 335 (SB) as under: "9.2.8 Though discount on premium is nothing but an expenditure u/s 37(1), it is worth noting that the Hon'ble Supreme Court in the case of CIT v. Woodward Governor India (P.)Ltd.[2009] 312 ITR 254/179 Taxman 326 has gone to the extent of covering "loss" in certain circumstances within the purview of "expenditure" as used in section in 37(1). In that case, the assessee incurred additional liability due to exchange rate fluctuation on a revenue account. The Assessing Officer did not allow deduction u/s 37. When the matter finally reached the Hon'ble Supreme Court, their Lordships noticed that the word "expenditure" has not been defined in the Act. They held that: "the word "expenditure" is,therefore, required to be understood in the context in which it is used. Section 37 enjoins that any expenditure not being expenditure ofthe nature described in sections 30 to 36 laid out or expended wholly and exclusively for the purposes of the business should be allowed in computing the income chargeable under the head "profits and gains of business or profession". In sections 30 to 36 the expression "expenditure incurred", as well as allowance and depreciation, has also been used. For example depreciation and allowances are dealt with in section 32, therefore, the parliament has used expression "any expenditure" in section 37 to cover both. Therefore, the expression "expenditure" as used in section 37 made in the circumstances of a particular case, covers an amount which is really a "loss" even though the said amount has not gone out from the pocket of the assessee'. From the above enunciation of law by the Hon'ble Summit Court, there remains no doubt whatsoever that the term 'expenditure' in certain circumstances can also encompass 'loss' even though no amount is actually paid out. Ex consequenti, the alternative argument of the Id. DR that discount on shares ITAs No.585 & 573/Del/2025 is 'loss' and hence can't be covered u/s 37(1), also does not hold water in the light of the above judgment. In view of the above discussion, we, with utmost respect, are unable to concur with the view taken in Ranbaxy Laboratories Ltd. (supra)." Further whether the ESOP expenditure is a contingent loss has also been considered in the same decision as under: "B. Is discount a Contingent liability? 9.3.1 The learned Departmental Representative supported the impugned order by contending that the entitlement to ESOP depends upon the fulfillment of several conditions laid down under the scheme. It is only when all such conditions are fulfilled and the employees render services during the vesting period that the question of any ascertained liability can arise. He submitted that during the entire vesting period, it is only a contingent liability and no deduction is admissible under the provisions of the Act for a contingent liability. The options so granted may lapse during the vesting period itself by reason of termination of employment or some of the employees may not choose to exercise the option even after rendering the services during the vesting period. It was, therefore, argued that the discount is nothing but a contingent liability during the vesting period not calling for any deduction. In the opposition, the learned AR submitted that the amount of discount claimed by the assessee as deduction is not a contingent liability but an ascertained liability. He stated that in the ESOP 2000, there is a vesting period of four years, which means that the options to the extent of 25% of the total grant would vest with the eligible employees at the end of first year after rendering unhindered service for one year and it would go on till the completion of four years. 9.3.2 It is a trite law and there can be no quarrel over the settled legal position that deduction is permissible in respect of an ascertained liability and not a contingent liability. Section 31 of the Indian Contract Act, 1872 defines "contingent contract" as "a contract to do or not do something, if some event, collateral to such contract does not happen". We need to determine as to whether the liability arising on the assessee company for issuing shares at a discounted premium can be characterized as a contingent liubility in the light of the definition of contingent contract. From the stand point of the company, the options under ESOP 2000 vest with the employees at the rate of 25% only on putting in service for one year by the employees. Unless such service is rendered, the employees do not qualify for such options. In other words, rendering of service for one year is sine qua non for becoming eligible to avail the benefit under the scheme. Once the service is rendered for one year, it becomes obligatory on the part of the company to honor its commitment of allowing the vesting of 25% of the option. It is at the end of the first year that the company incurs ITAs No.585 & 573/Del/2025 liability of fulfilling its promise of allowing proportionate discount, which liability would be actually discharged at the end of the fourth year when the options are exercised by the employees. Now the question arises as to whether the liability at the end of each year can be construed as a contingent one? 9.3.3 The Hon'ble Supreme Court in Bharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61 dealt with the deductibility or otherwise of provision for liability towards encashment of earned leave. In that case, the company floated beneficial scheme for its employees for encashment of leave. The earned leave could be accumulated up to certain days. The assessee created provision of Rs. 62.25 lakh for encashment of accrued leave and claimed deduction for the same. The Assessing Officer held it to be a contingent liability and hence not a permissible deduction. When the matter finally came up before the Hon'ble Supreme Court, it was held that the provision for meeting the liability for encashment of earned leave by the employee was an admissible deduction. In holding so, the Hon'ble Apex Court observed that: "the law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain." From the above enunciation of law by the Hon'ble Supreme Court, it is manifest that a definite business liability arising in an accounting year qualifies for deduction even though the liability may have to be quantified and discharged at a future date. We consider it our earnest duty to mention that the legislature has inserted clause (f) to section 43B by providing that "any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee" shall be allowed as deduction in computing the income of the previous year in which such sum is actually paid. With this legislative amendment, the application ofthe ratio decidendi in the case of Bharat Earth Movers (supra) to the provision for leave encashment has been nullified. However, the principle laid down in the said judgment is absolutely intact that a liability definitely incurred by an assessee is deductible notwithstanding the fact that its quantification may take place in a later year. The mere fact that the quantification is not precisely possible at the time of incurring the liability would not make an ascertained liability a contingent. 9.3.4 Almost to the similar effect, there is another judgment of the Hon'ble Supreme Court in the case of Rotork Controls India (P.) Ltd. v. CIT [2009] 314 ITR 62/180 Таxman 422. In that case, the assessee-company was ITAs No.585 & 573/Del/2025 engaged in selling certain products. At the time of sale, the company provided a standard warranty that in the event of certain part becoming defective within 12 months from the date of commissioning or 18 months from the date of dispatch, whichever is earlier, the company would rectify or replace the defective parts free of charge. This warranty was given under certain conditions stipulated in the warranty clause. The assessee made a provision for warranty at Rs. 5.18 lakh towards the warranty claim likely to arise on the sales effected by the assessee. The Assessing Officer disallowed the same on the ground that the liability was merely a contingent liability and hence not allowable as deduction u/s 37 of the Act. When the matter finally came up before the Hon'ble Supreme court, it entitled the assessee to deduction on the "accrual" concept by holding that a provision is recognized when: "(a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation: and (c) a reliable estimate can be made of the amount of the obligation". Resultantly, the provision was held to be deductible. 9.3.5 When we consider the facts of the present case in the backdrop of the ratio laid down by the Hon'ble Supreme Court in Bharat Earth Movers (supra) and Rotork Controls India (P.) Ltd. (supra), it becomes vivid that the mandate of these cases is applicable with full force to the deductibility of the discount on incurring of liability on the rendition of service by the employees. The factum of the employees becoming entitled to exercise options at the end of the vesting period and it is only then that the actual amount of discount would be determined, is akin to the quantification of the precise liability taking place at a future date, thereby not disturbing the otherwise liability which stood incurred at the end of the each year on availing the services. 9.3.6 As regards the contention of the Id. DR about the contingent liability arising on account of the options lapsing during the vesting period or the employees not choosing to exercise the option, we find that normally it is provided in the schemes of ESOP that the vested options that lapse due to non-exercise and/or unvested options that get cancelled due to resignation of the employees or otherwise, would be available for grant at a future date or would be available for being re-granted at a future date. If we consider it at micro level qua each individual employee, it may sound contingent, but if view it at macro level qua the group of employees as a whole, it loses the tag of 'contingent' because such lapsing options are up for grabs to the other eligible employees. In any case, if some of the options remain unvested or are not exercised, the discount hitherto claimed as deduction is required to be reversed and offered for taxation in such later year. We, therefore, hold that the discount in relation to options vesting during the year cannot be held as a contingent liability."

Ld. AO has further held that even otherwise this deduction is hit by provision of section 40a (ia) of the act and as no tax is deducted on this payment it is disallowable. No such provision for deduction of tax at sources on this expenditure has been brought to our notice. Therefore we hold that provisions of section 40a(ia) does not apply to payment of salaries for the year under appeal. Hence, this argument of the revenue is also rejected. In the result ground no 8 of the appeal is allowed.”

The ld. DR has submitted that the issue is pending before the Hon’ble Delhi High Court. However, as of now, the law is settled against the Revenue and the ld.CIT(A) has not erred in following the law as it stood at the time of adjudication of the appeal. Thus, we find no reason to interfere in the findings of the ld.CIT(A). The grounds have no substance. The appeal of the Revenue for both the years are dismissed. Order pronounced in the open court on 13.08.2025. Sd/- Sd/- (MANISH AGARWAL) (ANUBHAV SHARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 13th August, 2025. dk ITAs No.585 & 573/Del/2025