PCIT Vs Delhivery Pvt. Ltd. (Delhi High Court)
ESOP Discount Is Allowable Business Expenditure; Merchant Banker Valuation Requirement Cannot Be Applied Retrospectively to Reject CA Valuation
The Revenue challenged the order of the Income-tax Appellate Tribunal before the Delhi High Court on two substantial questions of law.
The first issue concerned the allowability of ₹51,48,28,498 claimed as expenditure on account of the Employee Stock Option Scheme. The second issue concerned an addition of ₹62,72,719 under section 56(2)(viib) arising from the valuation of shares.
The High Court decided both issues in favour of the assessee and dismissed the Revenue’s appeal in its entirety.
ESOP Discount Is an Allowable Revenue Expenditure
The assessee had debited ₹51.48 crore to its Profit and Loss Account as the cost of employee stock options. The Revenue contended that the expenditure was not allowable.
The assessee relied upon the Delhi High Court’s earlier decision in CIT v. Lemon Tree Hotels Ltd., wherein the Court had accepted the deduction of ESOP cost debited to the Profit and Loss Account.
In Lemon Tree Hotels, the Delhi High Court had followed the Madras High Court decision in CIT v. PVP Ventures Ltd., which held that the cost associated with an Employee Stock Option Scheme could be charged to the Profit and Loss Account and claimed as expenditure.
The Revenue’s counsel was unable to dispute that the question was already covered by the binding decision in Lemon Tree Hotels.
Following its earlier judgment, the Delhi High Court held that the Tribunal was correct in deleting the disallowance of ₹51,48,28,498. The question was therefore answered in favour of the assessee.
CA Valuation Valid for AY 2018-19
The second dispute related to an addition of ₹62,72,719 under section 56(2)(viib).
The Assessing Officer rejected the share valuation obtained by the assessee on the ground that the valuation had been conducted by a Chartered Accountant, whereas, according to the AO, the valuation was required to be carried out by a Merchant Banker.
The AO relied upon CBDT Notification No. 23/2018 dated 24-05-2018, under which the earlier provision permitting valuation by a Chartered Accountant was withdrawn and the Merchant Banker became the prescribed person for furnishing the relevant valuation report.
The High Court noticed that the assessment year involved was AY 2018-19, corresponding to FY 2017-18. The CBDT notification changing the prescribed valuer was issued only on 24-05-2018 and operated for the period subsequent thereto.
Therefore, during the relevant financial year, valuation by a Chartered Accountant was permissible. The subsequent amendment could not be applied retrospectively to invalidate a valuation report that was valid when obtained.
The AO was consequently not justified in discarding the valuation report merely because it had been prepared by a Chartered Accountant rather than a Merchant Banker.
The High Court upheld the orders of the CIT(A) and Tribunal deleting the addition of ₹62,72,719 under section 56(2)(viib).
Both substantial questions of law were answered against the Revenue, and the departmental appeal was dismissed in full.
Author’s Comments
The decision settles two significant issues for start-ups and closely held companies.
First, the discount arising under an ESOP represents an employee-compensation cost incurred to remunerate and retain employees. The fact that the expenditure is discharged through issue of shares rather than immediate payment in cash does not, by itself, make it a contingent or capital expenditure. The ESOP discount is deductible as a business expenditure when recognised in accordance with the applicable scheme and accounting principles.
Secondly, the eligibility of a valuer must be tested according to the rule in force during the relevant period. CBDT Notification No. 23/2018 dated 24-05-2018 cannot be employed retrospectively to reject a valuation made by a Chartered Accountant for FY 2017-18.
The judgment is particularly relevant for pending section 56(2)(viib) disputes where the AO has rejected a valuation report solely because it was issued by a CA. For periods before the amendment became operative, such rejection would be legally unsustainable if the applicable rule then permitted valuation by a Chartered Accountant.
However, the decision does not mean that every valuation furnished by a CA must automatically be accepted. The AO may still examine the assumptions, projections, methodology and underlying financial data. The limited proposition is that a valuation cannot be rejected merely because the valuer was a Chartered Accountant when the law prevailing during the relevant year recognised a CA as an eligible valuer.
The ruling also reinforces the principle that a later procedural or substantive restriction cannot be projected backwards to invalidate an act validly performed under the law then in force.
Cases Discussed
- CIT v. Lemon Tree Hotels Ltd. — Delhi High Court
- CIT-III Chennai v. PVP Ventures Ltd. — Madras High Court
- CIT v. Oswal Agro Mills Ltd. — Delhi High Court
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
1. The present appeal was admitted for the following questions vide orders dated 17.03.2025 and 16.12.2025:
“(i) Whether in the given facts and circumstances, the learned Income Tax Appellate Tribunal (ITAT) was correct in not sustaining the disallowance of deduction claimed on account of Employee Stock Option Scheme (ESOP) amounting to Rs. 51,48,28,498/-; and.
(ii) Whether in the given facts and circumstances, the addition of Rs.62,72,719/- is required to be made on account of undisclosed income under the provisions of Section 56(2) (viib) of the Income Tax Act, 1961?”
2. Mr. Sachit Jolly, learned Senior Counsel for the respondent/assessee, at the outset, submitted that question (i) has been set at rest by Delhi High Court vide judgment dated 18.08.2015 rendered in ITA No. 107/2015, Commissioner of Income Tax v. Lemon Tree Hotels Ltd., and the same has been followed in various other judgments.
3. In the case of Lemon Tree Hotels Ltd. (supra), this Court has held as under:
“2. The question sought to be projected by the Revenue is whether the ITAT erred in deleting the addition of Rs. 1,28,19,169/- made by the Assesssing Officer (‘AO’) by way of disallowance of the expenses debited as cost of Employees Stock Option (‘ESOP’) in profit and loss account?
3. The Court has been shown a copy of the decision dated 19th June 2012 passed by the Division Bench of Madras High Court in CIT-III Chennai v. PVP Ventures Ltd. (TC(A) No. 1023 of 2005) where a similar question was answered in favour of the Assessee by holding that the cost of ESOP could be debited to the profit and loss account of the Assessee. This Court has also in its decision dated 4th August 2015 in ITA No.2 of 2002 (CIT v. Oswal Agro Mills Ltd.) held that the expenditure incurred in connection with issue of debentures or obtaining loan should be considered as revenue expenditure.
4. In the circumstances, the impugned order of the ITAT answering the question in favour of the Assessee is affirmed.”
4. Mr. Siddhartha Sinha, learned Senior Standing Counsel for the appellant is not in a position to dispute the aforesaid position of facts and law. Following the judgment of this Court, question (i) is answered in affirmative and in favour of the assessee.
5. So far as the question (ii) is concerned, the Assessing Officer (AO) had made the addition on the ground that the valuation which the respondent/assessee had got done, was by a Chartered Accountant (CA), whereas it ought to have been done by a Merchant Banker. While holding so, the AO had observed that the Central Board of Direct Taxes (‘hereinafter referred to as CBDT’) had done away with certification by a CA and only Merchant Banker was eligible to give the valuation report in light of the notification No. 23/2018 issued on 24.05.2018.
6. It is to be noted that the Assessment Year in question is 2018-19, i.e., Financial Year 2017-18, whereas the CBDT has done away with the certification by a CA from the Financial Year subsequent thereto, by way of issuing order on 24.05.2018. Therefore, the AO was not justified in discarding the valuation report given by or the valuation done by the CA.
7. The Commissioner, Income Tax (Appeals,) as also the Tribunal, have rightly set aside the disallowance or addition made by the AO on this count.
8. We, therefore, do not find any infirmity in the orders so passed by the appellate authorities. The above-referred question is also answered against the Revenue and in favour of the assessee.
9. The present appeal is thus rejected in toto.
