ACIT Vs Embassy Developments Limited (ITAT Mumbai)
The appeal before the Tribunal was filed by the Revenue against the order passed by the Commissioner of Income Tax (Appeals) [CIT(A)] for the assessment year 2023–24. The central issue in dispute was whether the assessee was entitled to claim deduction of Employee Stock Option Plan (ESOP) expenses under Section 37(1) of the Income Tax Act, 1961.
The assessee is engaged in various real estate-related activities, including property advisory, marketing, maintenance, engineering consultancy, construction, and development. For the relevant assessment year, the assessee filed its return declaring a loss of ₹22.63 crore. During the assessment proceedings, it was observed that the assessee had claimed ESOP expenditure amounting to ₹8.46 crore.
In response to queries, the assessee explained that the ESOP expenses represented share appreciation benefits granted to employees during the year. It relied on earlier Tribunal decisions in its own case, particularly for assessment year 2012–13, where such ESOP-related expenses were allowed as a deduction.
The Assessing Officer (AO), however, rejected the claim. The AO held that ESOP expenditure was not a revenue expense but capital in nature, as it related to issuance of shares at a discount. According to the AO, issuing shares below market value resulted in a short receipt of share premium, which is a capital transaction. It was further held that since share premium is not taxable, any shortfall in its receipt constitutes only a notional loss and not an actual expenditure incurred by the assessee. Therefore, the AO disallowed the ESOP expenses and added the amount back to the total income.
