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Income Tax Appellate Tribunal, E BENCH, MUMBAI
Per Rahul Chaudhary, Judicial Member:
By way of the present appeal the Appellant/Department has challenged the order, dated 31.10.2019, passed by the Commissioner of Income Tax (Appeals)-16, Mumbai [for short, CIT(A)] under Section 250 of the Income Tax Act, 1961 [Act] in appeal [CIT(A)-16/ACIT-9(2)(2)/IT-10218/2017-18] for the assessment year 2015-16, whereby the CIT(A) had allowed the appeal filed by the Assessee against the Assessment Order, dated 15.12.2017, passed under section 143(3) of the Act.
The Revenue has raised the following grounds of appeal:
“ 1.(a) Whether in the facts and circumstances of the case, the ld. CIT(A) was justified in deleting the disallowance of Rs. 2,49,24,388/- on account of Employee Stock option Plan (ESOP) in the absence of employees not offering the same for tax purpose and also option has not been exercised by the employees.
(b) Whether in the facts and circumstances of the case the ld.CIT(A) erred in appreciating the fact that the expenses claimed u/s 37(1) by tax payer are contingent and notional as well as capital in nature in view of the facts of the case.”
Brief facts of the case are that the Assessee, a private limited company, filed its return of income for the Assessment Year 2015-16 on 29.09.2015 declaring total loss of INR 8,84,52,933/-. The case of the Assessee was selected for scrutiny. During the assessment proceedings, the Assessing Officer (AO) noticed that the Assessee had claimed deduction for expenses related to Employee Stock Options Plan (ESOP) amounting to INR 2,49,24,388/- (hereinafter referred to as „ESOP Expenses‟). The Assessing Officer disallowed the same holding that the stock options have not been exercised as there was no change in the share holding pattern of the company. The AO concluded that the ESOP Expenses were notional in nature as there had neither been any actual expenditure nor any outflow. Therefore, no deduction could be allowed for the ESOP Expenses. Further, according to the AO no deduction could have been allowed for the ESOP Expenses in any case as the same were capital in nature.
Being aggrieved, the Assessee preferred appeal before the Ld. Commissioner of Income Tax (Appeals) challenging the disallowance 2
Assessment Year: 2015-16 of ESOP Expenses. The CIT(A) allowed the appeal of the Assessee following the decision of the Special Bench of the Tribunal in the case of Biocon Ltd. v. DCIT (2013) 35 Taxmann.com 335 (Bangalore- Trib.). The CIT(A) held as under:
“4.1.2 I have gone through the assessment order and also appellant‟s submission submitted during the course of appellate proceedings. During the year appellant has granted ESOP of eligible employees and charged the expenses on prorate basis over the vesting period of one year. I find merit in the appellants contention that ESOP expenses is incurred to retain and motivate high performing employees. The employee becomes entitled to the shares over the vesting period and an obligation falls upon the company to allot the shares at the time of exercise of option based on the service rendered by the employee during the vesting period. Therefore the ESOP expenses is an ascertained liability not in the nature of contingent liability nor capital expenditure. This proposition has been upheld by Special Bench in the case of Biocon Ltd. v. DCIT (2013) 35 Taxmann.com 335 (Bangalore-Trib.) as discussed above.” (Emphasis Supplied) 5. Being aggrieved by the relief granted by the Ld. CIT(A), the Revenue is in appeal before us. The learned Departmental Representative (DR) contended that the CIT(A) had erred in allowing deduction for ESOP Expenses and relied upon the order passed by the Assessing Officer as well as judgment of the Tribunal in the case of Mahindra Engineering Services Limited vs. Dy.CIT, Circle – 2(2), dated 13.02.2019 passed in ITA No. 4483/Mum/2017. Per Contra, the Counsel for the Assessee/Respondent submitted that the judgment in the case of Mahindra Engineering Services Limited (supra) is not applicable to the facts of the present case and that the case of the assesses is covered by the decision of the Special Bench of the Tribunal in the case of Biocon Ltd. (supra). 3
We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position. The Special Bench of the Tribunal has in the case of Biocon Ltd. v. DCIT (2013) 35 Taxmann.com 335 (Bangalore-Trib.) held as under:
“11.3 We, therefore, sum up the position that the discount under ESOP is in the nature of employees cost and is hence deductible during the vesting period w.r.t. the market price of shares at the time of grant of options to the employees. The amount of discount claimed as deduction during the vesting period is required to be reversed in relation to the unvesting/lapsing options at the appropriate time. However, an adjustment to the income is called for at the time of exercise of option by the amount of difference in the amount of discount calculated with reference the market price at the time of grant of option and the market price at the time of exercise of option. No accounting principle can be determinative in the matter of computation of total income under the Act. The question before the special bench is thus answered in affirmative by holding that discount on issue of Employee Stock Options is allowable as deduction in computing the income under the head 'Profits and gains of business or profession'. (Emphasis Supplied) 7. The Special Bench of the Tribunal in the case of Biocon Ltd. (supra) rejected the contention of the Revenue that the discount under ESOP is notional/contingent/capital in nature and allowed deduction for discount under Employees Stock Option Plan holding the same to be employee cost and deductible during vesting period. The reliance placed by the Ld. Departmental Representative on the decision of the Tribunal in the case of Mahindra Engineering Services Limited (supra) also does not advance the case of the Revenue. In that case, the assessee had claimed deduction at the time of grant of options
Assessment Year: 2015-16 which was rejected by the Tribunal. However, in the present case, as correctly noted by the Ld. CIT(A), the Assessee has claimed deduction for expenses on pro-rata basis over the vesting period of one year.
We find that the Special Bench of Bangalore Tribunal in the case of Biocon Ltd., has been subsequently approved by the Hon'ble Karnataka High Court in the case of CIT vs. Biocon Ltd., reported in 121 Taxmann.com 351, dated 11.11.2020, wherein while dismissing the appeal of the Revenue the Hon‟ble Bombay High Court held as under:
“10. From perusal of section 37(1), 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 earn profits by securing consistent services of the employees and therefore, the same cannot be construed as short receipt of capital. The tribunal therefore, in paragraphs 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(1) of the Act subject to fulfilment of the condition.
The deduction of discount on ESOP over the vesting period is in accordance with the accounting in the books of account, which has been prepared in accordance with Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999.” (Emphasis Supplied) 5
In view of the above, we hold that there is no infirmity in the order of the Ld. CIT(A) granting relief to the Assessee. Accordingly, the appeal by the Revenue is dismissed.
Order pronounced in the open court on 23.02.2022.