Case Law Details
Brief of the Case
ITAT Mumbai held In the case of ACIT vs. People Interactive India Private Ltd. that the issue in hand is squarely covered by the decision of Hon’ble Special Bench-Bangalore Tribunal in (2013) 35 taxmann.com 335(SB) Biocon Limited v. DCIT (LTU) in favour of the assessee company whereby the Hon’ble Special Bench has held that the discount under ESOP is in the nature of employees cost and is hence deductible during the vesting period w.r.t. the market price of shares at the time of grant of options to the employees. The amount of discount claimed as deduction during the vesting period is required to be reversed in relation to the unvesting /lapsing options at the appropriate time. However, an adjustment to the income is called for at the time of exercise of option by the amount of difference in the amount of discount calculated with reference the market price at the time of grant of option and the market price at the time of exercise of option. No accounting principle can be determinative in the matter of computation of total income under the Act.
Ratio decidendi – Discount under ESOP deductible during the vesting period. However discount claimed as deduction during the vesting period is required to be reversed in relation to the unvesting /lapsing options.
Facts of the Case
ITA No.6990/Mum/2013
Disallowance of ESOP expenses
The assessee company filed its return of income for the assessment year 2007-08 declaring loss of Rs.24,51,11,643/- and the assessment was completed by the AO accepting the loss claimed by the assessee company. The assessment was re-opened u/s 147 read with section 148 on the ground that the assessee company has claimed an amount of Rs.81,93,150/- as ESOP expenses which is actually the difference between the fair market value of the shares allotted to the employees and the price at which shares are allotted to employees and the same were claimed as revenue expenses by the assessee company. In the view of the AO, the said expenses are notional expenditure which cannot be allowed as deduction under the Act as the same is not revenue expenditure rather the same is merely share premium foregone on allotment of shares which cannot be allowed as expenditure under the Act.
The assessee company submitted that reopening is not authorized in accordance with Section 151 and hence not legal. It is a case of change of opinion of the AO based on same set of facts , material and evidences which were already on record with the AO . Further on merits he submitted that the assessee company has not claimed any notional expenses and the expenses are fully allowable u/s 37 and are not capital in nature. It was submitted that it is not share premium foregone on allotment of shares rather it is a benefit given to employees and hence allowable as revenue expenditure.
The AO did not accepted the contentions of the assessee company and held that these are notional expenses and assessee has not actually incurred any expenditure. The said expenditure relates to increase in share capital of the company and hence are capital expenditure. The AO relied upon the decision of Hon’ble Supreme Court in M/s Punjab State Industrial Corporation Limited v. CIT (1997) 225 ITR 792(SC) and Brooke Bond India Limited v. CIT (1997) 225 ITR 798 (SC) and held these expenses as capital expenditure not allowable as revenue expenses , more so these are merely share premium foregone and no such actual expenditure is incurred by the assessee company .Thus, AO disallowed the ESOP expenditure of Rs.81,93,150/- and added the same to income of the assessee.
Contention of the Assessee
The ld counsel of the assessee submitted that the assessee company has not claimed any notional expenses and the expenses are fully allowable u/s 37 of the Act and are not capital in nature. It was submitted that it is not share premium foregone on allotment of shares rather it is a benefit given to employees and hence allowable as revenue expenditure. The ESOP expenses of Rs.81,93,150/- are incurred by the assessee company in accordance with Employees Stock Option Scheme, 2006 of the company and are in accordance with the Securities Exchange Board of India guidelines and guidelines issued by Institute of Chartered Accountants of India.
ESOP is an employee compensation scheme intended to encourage a sense of belongingness and feeing of ownership in the employees to create partnership with the employees to make them stakeholder in the assessee company so that the employees are encouraged to work in the best interest of the assessee company. The liability of the assessee company get crystallized upon the grant of options to the employees and thereafter the option is with employees to exercise such grant and on which the assessee company had no control.
The liability of the assessee company under ESOP can be measured with reasonable certainty under the mercantile method of accounting as per guidelines issued by the SEBI and is definite liability and an allowable expenditure. The liability under the an ESOP is easily comparable with provision made for leave encashment and relied upon Hon’ble Supreme Court decision in Bharat Earth Movers v. CIT (2000) 245 ITR 428(SC) had held that provision made for leave encashment is an allowable expenditure.
These ESOP expenses are taxable as perquisite in the hands of the employees u/s 17(2)(vi) read with section 115WB(1)(d) and hence the same are allowable expenses in the hands of the assesse company. The ESOP expenses are not capital as there is no increase in the capital base of the company which is Rs.3,46,75,325 as at 31-03-2006 and also as at 31-03-2007.
The assessee company also relied upon the decision of Hon’ble Special Bench- ITAT Bangalore in the case of (2013) 35 taxmann.com 335(SB)- Biocon Ltd. V.DCIT(LTU) in appeal no. 368 to 371 & 1026 all of 2010 for assessment year 2003- 04, 2004-05, 2005-06, 2006-07 and 2007-08 and appeal no. 248/Bang/2010 in CIT(LTU) Bangalore v. Biocon Ltd. for assessment year 2004-05 and submitted that the Special Bench has held that the difference(discount) between the market price of the shares and their issue price is “expenditure” in the hands of the tax payer because it is a substitute to giving direct incentive in cash for availing the services of employees and is a mode of compensating employees for their continued services to company and is a part of their remuneration which is an ascertained liability and cannot be described as a notional or contingent liability nor it could be described as a share capital/share premium receipt or capital expenditure .
Contention of the Revenue
The ld counsel of the revenue relied upon the orders of the AO.
Held by CIT (A)
Disallowance of ESOP expenses
The CIT (A) held that the issue in hand is squarely covered by the judgment of Hon’ble Special Bench of Bangalore Tribunal in Biocon Ltd. v. DCIT9LTU) in ITA no 368 to 371 & 1206 /Bang/2010 which was pronounced on 16th July 2013 by Special Bench , Bangalore and allowed the appeal of the assessee company.
Held by ITAT
Disallowance of ESOP expenses
We have observed that the assessee company has claimed as revenue expenditure during assessment year 2007-08, an amount of Rs. 81,93,150/- on account of ESOP expenditure which has been debited to Profit and Loss A/c of the assessee company under the head ‘personnel expenses’ which is claimed to be the difference between the fair market value of the shares allotted to the employees and the price at which shares are allotted to employees
We have observed that the issue in hand is squarely covered by the decision of Hon’ble Special Bench-Bangalore Tribunal in (2013) 35 taxmann.com 335(SB) Biocon Limited v. DCIT (LTU) in favour of the assessee company whereby the Hon’ble Special Bench has held that the discount under ESOP is in the nature of employees cost and is hence deductible during the vesting period w.r.t. the market price of shares at the time of grant of options to the employees. The amount of discount claimed as deduction during the vesting period is required to be reversed in relation to the unvesting /lapsing options at the appropriate time. However, an adjustment to the income is called for at the time of exercise of option by the amount of difference in the amount of discount calculated with reference the market price at the time of grant of option and the market price at the time of exercise of option. No accounting principle can be determinative in the matter of computation of total income under the Act. Thus discount on issue of Employee Stock Options is allowable as deduction in computing the income under the head ‘Profits and gains of business or profession’.
No contrary decision is brought to our notice by the Revenue. We hold that this discount of Rs.81,93,150/- on issue of ESOP being revenue expenditure is squarely covered in favour of the assessee company by above decision which is binding on us. Respectfully following decision of Hon’ble Special Bench, Bangalore Tribunal in Biocon Limited, we decide this issue in favour of the assessee company and against the Revenue that discount under ESOP is in the nature of employees cost and is hence deductible during the vesting period w.r.t the market price of share at the time of grant of options to the employees. The amount of discount claimed as deduction during the vesting period is required to be reversed in relation to the unvesting/lapsing options at the appropriate time, however, an adjustment to the income is called for at the time of exercise of option by the amount of difference in the amount of discount calculated with reference to the market price at the time of grant of option and the market price at the time of exercise of option.
In the instant case we have noticed that the AO has refused to grant the deduction of the discount on ESOP at the very threshold and the CIT (A) has allowed the said claim based on the decision of Hon’ble Special Bench in the case of Biocon Limited). Resultantly, the verification of correctness of calculation of discount stood ousted and have become now imperative in view of our directions in light of Hon’ble Special Bench, Bangalore Tribunal orders in Biocon Ltd. which are binding on us and also followed by us. We, therefore, remit the matter to the file of AO for finding out the correct amount of deduction. The fact should also be verified by AO to ensure that the overall expenditure booked by the assessee company is restricted only to the extent of the exercised options
Accordingly appeals partly allowed for statistical purpose.
