The assessee was an Indian company listed on a stock exchange in India. During the assessment year (AY) 2001-02, it granted stock options to it employees for 332,250 shares whereby shares with a face value of Rs 10 were to be issued at Rs 595 per share. The market price of the shares as on the date of grant was Rs. 738.95 per share.
The assessee claimed the difference between the market price and the issue price to its employees as employee compensation in its books of accounts. The charge to its financial statements was deferred over the vesting period (5 years) as deferred employees compensation.
The assessee claimed the deferred revenue expenditure in its return of income which was disallowed by the assessing officer (AO) on the basis that no liability had arisen or been paid by the assessee during the year. The Commissioner of Income–tax (Appeals) (CIT(A)) held that the deduction is allowable in the year in which the option is exercised by the employees i.e. when the liability became certain and not proportionately over the vesting period as claimed by the assessee.
The assessee and the revenue, both filed an appeal before the Income Tax Appellate Tribunal (ITAT).
Contentions of the Revenue
