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Facts
The Assessing Officer (AO) disallowed ESOP expenditure claimed by the assessee, IBM India Private Limited. The assessee's appeal to the CIT(A) resulted in the deletion of this disallowance. The Revenue is in appeal before the Tribunal against the CIT(A)'s order.
Held
The Tribunal held that the issue regarding the allowability of ESOP expenditure in the assessee's own case is settled in favour of the assessee by the Karnataka High Court, which upheld the Tribunal's earlier decision. Therefore, the Revenue's appeal has no merit.
Key Issues
Whether ESOP expenditure, specifically the discount on issue of shares, is an allowable business expenditure under Section 37(1) of the Income Tax Act, 1961.
Sections Cited
37(1)
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Income Tax Appellate Tribunal, ‘A’BENCH: BANGALORE
Before: SHRI PRASHANT MAHARISHI, VICE – & SHRI KESHAV DUBEY
ORDER
PER PRASHANT MAHARISHI, VICE – PRESIDENT
1. Above appeal is filed in case of IBM India private Limited [ Assessee] by the Deputy Commissioner of Income Tax, Circle, 3(1)(1), Bangalore (the learned AO) for Assessment Year 2022-23 against the appellate order passed by the National Faceless Appeal Centre NFAC Delhi (the learned CIT-A) dated 30th October, 2025 wherein appeal filed by the assessee on 24th April, 2025 against assessment order dated 26th March, 2025 passed under Section 143(3) of the Income Tax Act, 1961 (the Act) by the Deputy Page 2 of 7 Commissioner of Income Tax Circle 3(1)(1) Bengaluru, was partly allowed.
The learned Assessing Officer aggrieved with the same has preferred this appeal raising following grounds of appeal: - i. On the facts and in law the learned CIT – A has erred in deleting the disallowance of ESOP expenditure amounting to ₹ 903,035,787/–, without properly appreciating that the said expenditure is notional in nature, does not involve any actual outflow of funds, and therefore does not qualify as an allowable expenditure under section 37. (1) of the income tax act, 1961 ii. The learned CIT – A has failed to appreciate that the so-called discount on issue of shares under ESOP represents foregoing of share premium, which is a capital transaction, and hence cannot be treated as revenue expenditure incurred wholly and exclusively for the purposes of the business iii. The learned CIT – A has erred in relying solely on the decision of the jurisdictional ITAT in the assessee’s own case for earlier assessment years without considering that the issue of allowability of ESOP expenditure has not attained finality and is pending adjudication before the Honourable Supreme Court in the case of CIT versus Biocon Ltd iv. The learned CIT – A has erred in law and on facts in holding that ESOP discount forms part of employee remuneration, ignoring this settled principle that only real and incurred expenditure and not hypothetical or Page 3 of 7 contingent expenditure, can be allowed under section 37. (1). v. The learned CIT – A has failed to appreciate that the accounting procedure followed by the assessee or compliance with the accounting standards cannot overwrite the provisions of the income tax act, particularly when the transaction is capital in nature. vi. The order of the learned CIT – A is erroneous, contrary to law, based on incorrect appreciation of facts, and therefore liable to be set aside.
Brief facts of the case shows that the Assessee Company is engaged in the business of development of computer software for export, Information Technology Services, Software Services, trading, leasing and financing of hardware and maintenance of computer equipments. The assessee filed Return of Income on 25thNovember 2022 at a total income of Rs 40,77,72,04,140. The Return of Income was picked up for scrutiny by issuing notice under Section 143(2) of the Act on 2ndJune 2023. The learned Assessing Officer passed the Assessment Order under Section 143(3) on 26thMarch 2025 wherein one of the disallowances was Employee’s Stock Option Plan Expenditure of Rs. 90,30,35,787/-. This disallowance was made by the learned Assessing Officer because though assessee has stated so many judicial precedents, however similar issues on such ESOP expenses allowance are pending before the Honorable Supreme Court and therefore to keep the issue alive the learned AO made the disallowance.
Aggrieved with the Assessment Order, assessee preferred appeal before the learned CIT-A wherein as per ground No. 3 of the Order following the decision of the Coordinate Bench in assessee’s own case for Assessment Year 2015-16 dated 14thFebruary 2022 deleted the disallowance. The learned CIT-A further mentioned that for Page 4 of 7 Assessment Year 2016-17 to 2018-19, the Tribunal has also followed in assessee’s case the same order thus the addition was deleted.
The learned Departmental Representative Sri. ShivanandKalakeri CITDR submitted that identical issue is pending before the Honourable Supreme Court and therefore the learned Assessing Officer has made the disallowance.
The learned Authorised Representative ShriAjay Rotti, CA firstly referred to the order of the Coordinate Bench in for Assessment Year 2015-16 dated 14thFebruary 2022 vide paragraph No. 7 of this order has allowed the claim of the assessee. He further submitted that the above order of the Coordinate Bench travelled to the Honourable Karnataka High Court wherein in of 2023 the order of the Coordinate Bench is upheld by following the decision of the Honourable Karnataka High Court in case of CIT vs. Biocon Limited (2020) 121 ttaxman.com 351(Karnataka). Therefore, according to him this issue is squarely covered in favour of the assessee.
We have carefully considered the rival contentions and perused the orders of the ld revenue authorities. Both the parties confirmed that issues are covered in favour of the assessee by the decision of the honourable Karnataka High court in NC: 2025: KHC:1851-DB of 2023 where in order of theITAT in assessee’s own case is confirmed.Though the revenue might have challenged the deductibility of ESOP expenditure before the Honourable Supreme Court however, as in the case of the assessee the issue is settled by the Honourable Karnataka High Court against which the special limitation filed by the assessee is also dismissed, we do not find any merit in the appeal of the learned assessing officer.
In the result all the grounds raised by the learned assessing officer has issue is squarely covered in favour of the assessee by the decision of the Honourable Karnataka High Court, are dismissed.
Order pronounced in the open court on 30th March 2026.