M/S FLIGHT RAJA TRAVELS PVT LTD ,BANGALORE vs. THE ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-3(1)(1), BANGALORE

O R D E R

Per George George K, JM :

“1. The Learned. CIT (A) erred in passing the order in the manner which he did.

2. The learned CIT (A) erred in disallowing employees stock option expenses incurred for the benefit of the employees including directors without proper appreciating the explanation of the Appellant.

4. The learned CIT (A) ought to have appreciated that the Appellant had to follow SEBI directions, which is statutory body with regard to employees stock option and accordingly claimed the same as ascertain liabilities for deduction.

M/s.Flight Raja Travels Private Limited.

5. The learned CIT (A) further ought to have appreciated that the shares were issued to the employees only for the interest of business of the Appellant to induce employees to work in the least interest of Appellant and hence same was in the course of business and for the purpose of business and same ought to have being allowable u/s 37 of the Act.

6. The learned CIT (A) further failed to appreciate that the option given was exercised by the employees hence the liability in this behalf got ascertained and same ought to have being allowed in toto. 7. Without prejudice, the additions/disallowances made are excessive and ought to be reduced substantially. 8. For these and other grounds of appeal

may be raised at the time of hearing, the appellant prays that the appeal may be allowed.”

3. The brief facts of the case are as follows: The assessee is a company, engaged in the business of online based selling of travel products and solutions. For the assessment year 2013-2014, the return of income was filed on 30.11.2013 declaring a loss of Rs.12,86,42,391. The return was selected for scrutiny by issuance of notice u/s 143(2) of the I.T.Act. During the course of assessment proceedings, the A.O. noticed that the assessee had debited an amount of Rs.31,51,995 to profit and loss account towards “Employees Stock Option Expenses”, which includes an amount of Rs.18,54,502 pertaining to prior years. The assessee’s claim on this issue was disallowed in the previous assessment years, namely, A.Ys 2010-2011 to 2012-2013. The A.O. for A.Y. 2010-2011 to 2012-2013 by placing reliance on the CBDT Circular No.9/2007 dated 20.12.2007 held that the shares are allotted to the employees from the share capital of the company, hence, no deduction is allowable in M/s.Flight Raja Travels Private Limited. computing the taxable income of the assessee as there is no expenditure has been incurred. In view of the past years disallowance, the A.O. directed the assessee to explain why ESOP expenses should not be disallowed for the relevant assessment year also. The assessee filed objections, which is reproduced at para 3 of the assessment order. The A.O., however, rejected the contentions of the assessee by observing as under:-

“1. The CBDT had clarified in circular No.9/2007 dated 20/12/2007, FAQ No.16 that if the shares are allotted to the employees from the share capital of the company, no deduction is allowable in computing the taxable income of the company since no expenditure has been incurred by it. Further when asset is acquired by allotting shares as consideration, there is no `expenditure’. What happens is that share capital is increased and instead of capital coming in as cash, it comes in the form of assets. Thus, deduction may not be available to corporate assessees if they allot shares as consideration as issue of shares is not an `expenditure’. The case laws relied upon by the assessee company are also found to be not squarely applicable on the facts and circumstances of the case in hand. In the light of the above discussion, and amount of Rs.31,51,995/- is disallowed and added back to returned income.”

M/s.Flight Raja Travels Private Limited. Rs.6,45,597 instead of Rs.31,51,995 claimed by the assessee in its profit and loss account. [refer para 4.5 of the impugned order of CIT(A)]

M/s.Flight Raja Travels Private Limited. Date of grant of option 17.04.2009 Fair value of the share at the time of Rs.13.02 per share grant of option The price at which shares were offered Rs.11.70 per share to employee Discount offered to the employee Rs.1.32 per share No.of grants given to Shri Vinay 19,52,943 Gupta under ESOP Total discount offered to Shri Vinay RS.25,82,389 Gupta through ESOP Total vesting period for being eligible 4 years to ESOP 7.1 The CIT(A) has gone through various clauses in the scheme of ESOP and held that employee has the right of vesting only after completion of service of four years. The CIT(A) alternatively also held that the vesting if it is to be considered in a graded manner over a period of four years, the allowable deduction for the relevant assessment year is only Rs.6,45,597 instead of Rs.31,51,995. The assessee has not placed on record the stock of option plan 2009, namely, “Flight Raja Employees Stock Option Plan 2009” nor the further amended plan vide “Flight Raja Employees Stock Option Plan 2013” (ESOP). The Hon’ble High Court in the case of CIT v. Biocon Limited (supra) had held that deduction of discount on ESOP is to be spread over the vesting period in accordance with the accounting in the books of account. The relevant finding of the Hon’ble jurisdictional High Court in the case of CIT v. Biocon Limited (supra) reads as follow:-

“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 M/s.Flight Raja Travels Private Limited. 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 a contingent liability but is an ascertained liability.

M/s.Flight Raja Travels Private Limited. The assessee shall cooperate with the A.O. for the expeditious disposal of the matter. It is ordered accordingly.