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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI CHANDRA POOJARI & SHRI GEORGE GEORGE K.
Per Chandra Poojari, Accountant Member
The assessee originally had come up for appeal before the Tribunal inter alia raising the additional grounds as follows:-
“1. The CIT(Appeals)-I, Bangalore (“the CIT(A)”) erred in confirming the action of AO in, by considering the investments in Mutual Fund Growth Scheme amounting to Rs.1,000 crores made on 31.3.2008 for calculating disallowance as per Rule 8D(2), income from which is liable for income tax and not exempt.
He failed to appreciate and ought to have held that Investment in Reliance Liquidity Fund – Growth option units is not capable of generating exempt income and the Appellant has indeed offered the entire profit on redemption of the said units to tax and no dividend was received on the same.
3. The Appellant, prays that the AO be directed re-calculate disallowance u/s. 14A after excluding investments in Reliance Liquidity Fund – Growth option units being not capable of generating exempt income.” 2. The Tribunal vide order dated 17.05.2017 dismissed the additional ground without giving any specific finding. Against this, the assessee went in appeal before the Hon’ble High Court of Karnataka. The Hon’ble High Court in vide judgment dated 15.06.2021 remitted the matter back to the Tribunal as follows:-
8. For the aforementioned reasons, since, the tribunal has remitted the matter to the Assessing Officer for adjudication of certain other claims of the assessee, the tribunal ought to have remitted the additional claim of the assessee with regard to allowance of ESOP to the Assessing Officer for decision in accordance with law. For the aforementioned reasons, third substantial question of law is answered in favour of the assessee and against the revenue. It is therefore, not necessary for us to deal with the first and second substantial questions of law. In view of preceding analysis, the order passed by the tribunal dated 17.05.2017 insofar as it pertains to rejection of the additional claim of the assessee with regard to ESOP is quashed and the tribunal is directed to remit the matter to the Assessing Officer to adjudicate the additional claim made by the assessee with regard to ESOP for decision in accordance with law. It is clarified that we have not expressed any opinion on the merits of the case. In the result, appeal is disposed of.
Accordingly, the appeal was taken up for hearing before the Tribunal. We have heard both the parties and perused the material on record. In our opinion, the issue is squarely covered by the judgment of the Hon’ble jurisdictional High Court in the case of CIT (LTU) v. Biocon Ltd., [2021] 430 ITR 51 (Karn) wherein it was held as follows:-
“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.
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.
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 a contingent liability but is an ascertained liability.
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.”
Accordingly, for quantification purpose, we remit the issue to the file of Assessing Officer to adjudicate the issue in accordance with above judgment of the Hon’ble jurisdictional High Court.
In the result, the appeal is partly allowed for statistical purposes.
Pronounced in the open court on this 05th day of August, 2021.