Delhi High Court Upholds ESOP Deduction and CA Valuation for AY 2018-19

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.