NEO MARKET SERVICES PRIVATE LIMITED,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX 7(1)(1), MUMBAI

The only issue in the appeal of the assessee is in respect of disallowance of ESOP expenses, treating the same as contingent liability. In spite of issuance of notice, none appeared on behalf of 1 the assessee, nor any adjournment was sought. Since the issue in appeal is squarely covered by the decision of the Special Bench of Bangalore Tribunal and also various High Courts, including the Hon’ble Jurisdictional High Court, the same is disposed of after hearing the Ld. DR.

From the assessment order, it is observed that the Assessing Officer, while completing the assessment, disallowed ESOP expenses incurred by the assessee and claimed as deduction as revenue expenditure, holding that such expenditure is contingent in nature. We observe that the issue is squarely covered by the decision of the Special Bench in the case of Biocon Limited vs. DCIT, 35 taxmann.com 335 (Bang.)(SB), which was upheld by the Hon’ble Karnataka High Court in the case of CIT vs. Biocon Limited, 430 ITR 151 (Kar.). We further observe that the Hon’ble Bombay High Court in the case of PCIT vs. Bajaj Finance Limited in ITA No. 135 of 2024, dated 17.04.2026, agreed with the decision of the Hon’ble Delhi High Court in the case of PVR Limited vs. CIT as reported in [2022] 145 taxmann.com 331 (Del) and also the decision of the Special Bench of Bangalore Tribunal in the case of Biocon Limited vs. DCIT (supra) in holding that such expenses are allowable u/s 37 of the Act and are not contingent liabilities, observing as under:

We find that the decision of the Special Bench in Biocon Limited vs. DCIT(LTU), Bangalore (supra), as affirmed by the Karataka High Court in CIT LTU vs. Biocon Ltd. (supra) was also subject matter of consideration before the Division Bench of the Delhi High Court in PVR Ltd. vs. Commissioner of Income Tax3. In the said proceedings, the following question of law fell for consideration before the Division Bench of the Delhi High Court: “Whether on the facts and in the circumstances of the case, the Tribunal erred in law in holding that difference between the price at which stock options were offered to employees of the appellant-company under ESOP and ESPS and the prevailing market price of the stock on the date of grant of such options was not allowable revenue expenditure under Section 37(I) of the I.T. Act, 1961? 7. In answering the said question, the Division Bench referred to the decision of Karataka High Court in CIT LTU vs. Biocon Ltd. (supra) when the following observations were made: “6. We have considered the submissions made by leamed 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 ie.. 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 proceeding further, it is 3 145 taxman.com 331 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". 7. 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. 8. 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 that discount on issue of ESOPs is not contingent liability but is an ascertained liability.10. From perusal of Section 37(I), 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 car profits by securing consistent services of the employees and therefore, the same cannot be construed as short receipt of capital. The tribunal therefore, in paragraph 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(I) of the Act subject to fulfillment of the condition." 8. We find that the view taken by the Karataka High Court in CIT LTU vs. Biocon Ltd. (supra) was also followed by the Delhi High Court in Principal Commissioner of Income Tax vs. New Delhi Television Ltd. 4 as noted in paragraph 3 of the decision in PVR Ltd. vs. Commissioner of Income Tax (supra). 9. Learned counsel for the revenue has submitted that the decision of the Karnataka High Court in CIT LTU vs. Biocon Ltd. (supra) was subject matter of challenge before the Supreme Court, however, the Special Leave Petition has now been disposed of, possibly on the ground of low tax effect. He fairly submitted that the decision of the Delhi High Court in PVR Ltd. Vs. Commissioner of Income Tax (supra) has been challenged by the revenue before the Supreme Court and the proceedings are pending, however, there is no order of stay operating against the said decision. 6

Having heard the learned counsel for the parties and having perused the said decisions, the provisions of Section 37(1) as also the findings rendered by the Tribunal in the impugned order, following the decision of the Special Bench in Biocon Limited vs. DCIT(LTU), Bangalore (supra), we are in complete agreement with the view taken by the Tribunal as also by the Delhi High Court (supra), which takes into consideration the effect and purport of Section 37(I) of I.T. Act in the context of ESOPs, read with the provisions of Section 2(1SA) of the Companies Act, 1956 as also the provisions of Securities And Exchange Board of 4(2018) 99 taxmann.com 401 (Del.) India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. We are, thus, not inclined to take a different view in the present proceedings. 11. For the aforesaid reasons, we are, of the opinion, that no question of law would arise for consideration in this appeal. The appeal is accordingly dismissed.” 4. We also observe that a similar view has been taken by the Coordinate Bench in the case of Strides Pharma Science Limited vs. ITO in ITA No. 5271/Mum/2024, dated 20.03.2025. Respectfully, following the decision of the Hon’ble Jurisdictional High Court, we direct the Assessing Officer to delete the disallowance of ESOP expenses. Ground No. 1 of the grounds of appeal is allowed.