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Facts
The revenue appealed an order of the CIT(A) which allowed the assessee's claim for expenditure on an Employee Stock Option Plan (ESOP) scheme as a revenue expenditure. The AO had treated this expenditure as capital in nature.
Held
The Tribunal held that the issue of ESOP expenditure being revenue in nature was no longer res-integra for the assessee, as co-ordinate benches of the ITAT Mumbai, in the assessee's own cases for several preceding years, had consistently allowed such claims under Section 37(1) of the Income-tax Act. Following these precedents and the decision in Biocon Limited, the Tribunal found no reason to interfere with the CIT(A)'s order.
Key Issues
Whether expenditure incurred on an Employee Stock Option Plan (ESOP) scheme is a capital or revenue expenditure and allowable as a deduction under Section 37(1).
Sections Cited
143(3), 37(1)
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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SHRI ANIKESH BANERJEE & SHRI GIRISH AGRAWAL
Assessment Year: 2021-22 DCIT-14(1)(1), Mumbai vs Avendus Capital Private Limited Room No. 432, 4th Floor, 901, 9th Floor Platina, Plot No. Aayakar Bhavan, M.L. Road, C-59, Bandra Kurla Complex, Mumbai 400020 Bandra East, Mumbai 400051 PAN: (AABCC2404Q) Appellant Respondent Present for: Appellant by : Shri Ashish Mehta and Shri Pulkit Pandey, Advocates Respondent by : Shri Surendra Mohan, Sr. DR Date of Hearing : 26.11.2025 Date of Pronouncement : 27.11.2025 O R D E R
PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:
This appeal filed by the revenue is against the order of CIT(A) 48, Mumbai vide Order No. ITBA/APL/S/250/2025-26/1078825129(1) dated 23.07.2025 passed against assessment order u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 28.12.2023 for AY 2021-22.
Grounds taken by the revenue are reproduced as under: “1. Whether, on the facts and in the circumstances of the case and in law, the CITIA) failed to appreciate that the expenditure incurred on the ESOP scheme is a capital expenditure and not a revenue expenditure Avendus Capital Private Limited AY 2021-22 2. Whether, on the facts and in the circumstances of the case and in law, the CIT(A) erred in holding that the ESOP expenditure is an allowable deduction under Section 37111 of the Income Tax Act, 1961. ignoring the fundamental nature of the transaction which is a capital transaction involving the issuance of shares and an increase in the company's equity base.
3. Whether, on the facts and in the circumstances of the case and in law, the CIT(A) erred in relying on the decision of the Hon'ble ITAT, Mumbai, in the appellant's own case for previous assessment years, without considering that the department has consistently appealed this issue to the higher judiciary and the dismissal of those appeals was solely due to the low tax effect, not on the merits of the case.
4. Whether, on the facts and in the circumstances of the case and in law, the CIT(A) failed to consider that the grant of an ESOP is a measure to align employee and shareholder interests and is inherently a part of the capital restructuring of the company, with no nexus to the day to day business operations.
5. Whether, on the facts and in the circumstances of the case and in law, the CIT(A) erred in not appreciating the substance over form of the transaction, whereas the difference between the fair market value and the exercise price of the shares is an opportunity cost to the company, but it does not represent a real, out-of-pocket expenditure that can be claimed as a business expense.” 2.1. Sole issue raised by the revenue in the present appeal is in respect of claim of expenditure towards “Employee Stock Option Plan (ESOP) Scheme”, whether to be treated as capital or revenue in nature.
Brief facts of the case are that assessee is engaged in the business of Management consultancy, Investment Banking, Merchant Banking advisory services for mergers and acquisitions. It filed its original return of income on 15.03.2022, reporting total income at Rs.87,99,30,130/-. This return was revised on 31.03.2022 with revised total income at Rs.89,19,17,420/-. Ld. AO noted that assessee has claimed expense on account of ESOP in its profit and loss account for Rs.5,76,56,828/- out Avendus Capital Private Limited AY 2021-22 of which amount of Rs. 1,96,21,272/- was suo moto added back in the computation of income while filing the return. Thus, out of the said total amount, assessee claimed a deduction of Rs. 3,80,35,556/- for which explanations were called for. Assessee made its detailed submissions which are reproduced in the impugned assessment order.
3.1. Assessee submitted that the issue raised by the ld. AO is no longer res-integra on account of long line of judicial precedents in assessee’s own case for past several years, listed below:
(i) For AY 2009-10 in (ii) For AY 2010-11 in (iii) For AY 2011-12 in (iv) For AY 2016-17 and 2017-18 in ITA No. 1738 and 1739/Mum/2023 3.2. Assessee also contended that the issue is squarely covered by the decision of Hon’ble Special Bench in the case of Biocon Limited vs. DCIT [2013] 144 ITD 21 (Bang) (SB).
3.3. Ld. AO after considering the submissions made by the assessee concluded that the amount spent by the assessee and claimed as deduction is for change in capital and hence, a capital expenditure not allowable u/s. 37(1). He also noted in respect of decision of Hon’ble Special Bench in the case of Biocon limited that SLP was filed against the decision of Hon’ble High Court of Karnataka in the case of Biocon limited in which is pending before the Hon’ble Supreme Court and, therefore, the matter has not attained finality.
Avendus Capital Private Limited AY 2021-22 3.4. Aggrieved, assessee went in appeal before the ld. CIT(A) reiterating the factual position as well as long line of judicial precedents on the issue and considered the same meritoriously. He noted that issue of allowability of ESOP expenditure is no longer res-integra for the assessee as Co-ordinate Bench of ITAT, Mumbai in assessee’s own case for several preceding years has consistently held that ESOP is an allowable revenue expenditure u/s.37(1). Thus, following this consistent view in assessee’s own case on identical fact pattern, he held that the disallowance made by the ld. AO is unjustified and directed to delete the same.
Aggrieved, revenue is in appeal before the Tribunal. Ld. Counsel for the assessee placed on record a paper book containing copies of orders of Co-ordinate Bench in assessee’s own case for past several years which have been perused. On confrontation of the same to the ld. Department Representative (DR), nothing distinguishable was brought on record to controvert. It was submitted that revenue has taken up the case of Biocon Limited (supra) before the Hon’ble Supreme Court which is pending for disposal.
We have heard both the parties and perused the material on record. We have also gone through the orders of Co-ordinate Bench in assessee’s own case for past several preceding years, whereby claim of the assessee towards ESOP expenditure has been held to be revenue in nature and allowed u/s. 37(1). There been no change in material facts and position of law and nothing has been brought on record to controvert the above position, respectfully following the preceding decisions as well as the decision of Hon’ble Special Bench in the case of Biocon Limited (supra), we do not find any reason to interfere with the findings arrived at by the ld. CIT(A) who upheld that the disallowance
In the result, appeal of the revenue is dismissed.