Intel Technology India Private Limited Vs DCIT (ITAT Bangalore)
The ITAT Bangalore held that ESOP cross-charge incurred by an Indian company towards shares granted by its foreign parent to employees is a revenue expenditure allowable under section 37(1).
In this case, the assessee (Intel India) claimed deduction of ₹721 crore being actual ESOP cost cross-charged by the parent company. The AO and CIT(A) treated the expenditure as capital in nature on the ground that it related to issuance of shares and increase in parent company’s capital.
The Tribunal rejected this view and followed binding precedents, particularly the Karnataka High Court ruling in Biocon Ltd., holding that ESOP discount/cost represents employee compensation incurred to retain and incentivize employees, and is therefore a business expenditure.
It was emphasized that such expenditure is not capital merely because shares are issued by the parent company; from the assessee’s perspective, it is a cost incurred wholly and exclusively for business purposes.
The Tribunal also noted that judicial precedents consistently allow such cross-charges and that pending SLPs do not dilute binding High Court decisions.
Accordingly, the disallowance was deleted and the appeal was partly allowed, reaffirming that ESOP expenses are deductible as revenue expenditure.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
1. This appeal is filed by Intel technology India private limited (assessee/appellant) for assessment year 2022 – 23 against appellate order passed by National faceless appeal Centre Delhi (the learned CIT – A) on 4 September 2025 wherein appeal filed by the assessee against the assessment order dated 22 March 2024 under section 143 (3) read with section 144B of The Income Tax Act, 1961 (The Act) passed by Assessment Unit, Income Tax Department (The Learned AO) determining the total income of the assessee at ₹ 29,550,814,617/– against the returned income of the assessee at 2,233,79,39,620/- wherein the only addition was with respect to the employee share-based payments [ ESOP] amounting to ₹ 7,212,874,997 was confirmed.
2. The assessee is aggrieved by the above appellate order wherein as per ground No. 1 it has challenged the validity of adjudication and as per ground No. 2 it has challenged the disallowance and treatment of the employee share-based payments expenditure disallowance confirmed by the learned CIT – A. Ground No. 3 is with respect to the levy of interest and further ground No. 4 is with respect to initiation of penalty proceedings under section 270 of the act.
3. Ground No. 3 & 4 are consequential as well as premature respectively, hence dismissed. Ground No. 1, no arguments were advanced and therefore some are also dismissed.
4. The substance of the appeal is ground no 2 against the disallowance and treatment of the employee share-based payments expenditure of ₹ 7,212,874,997 wherein such expenditure has been treated by the learned revenue authorities as capital in nature and therefore disallowable under section 37 of the act.
5. Fact shows that assessee is an Indian company engaged in rendering technological hardware designed and software services, information technology services and information technology enabled support services to its group entities outside India. The assessee filed its return of income on 30 November 2022 at a total income of ₹ 2,233,79,39,620/-. This return of income was picked up for scrutiny, and the necessary notices were issued.
6. During assessment proceedings, it was found that Intel Corporation, the ultimate holding company of the assessee, has employee share-based payment plans under which employees of the assessee are granted shares of the parent company. The parent company for granting employee stock option plan to the employees of the assessee company, cross charged the cost of equity shares granted to them to the assessee. In the assessee’s books of account, the assessee debited the same to the profit and loss account. Assessee also deducted tax at sources on such amount u/s 192 of the Act in the hands of the employees to whom such ESOP were allotted. Form no 16 were also issued demonstrating the same. Thus, for the assessment year 2022 – 23 the assessee has accounted these expenses amounting to ₹ 11,175,688,072/– which is debited to the profit and loss account of the assessee. This sum is not actually the actual amount spent by the assessee, but it is accordingly charged to the profit and loss account of the assessee. The expenses debited to the statement of profit and loss account on accrual basis over the vesting period is not eligible for deduction under section 37 of the act and therefore the amount debited to the profit and loss account of ₹ 11,175,688,072 /- was added back to the total income of the assessee by the assessee at the time of filing of the return of income. However, the assessee has incurred the expenditure of ₹ 721,28,74,997/- towards the ESOP expenses being actual amount which was charged by the Intel Corporation (the parent company) to the assessee in respect of share of the parent company that were allotted to the employees of the assessee company.
7. The learned assessing officer asked assessee to file the details of such expenses incurred by the assessee and issued a show cause notice stating that there is no such provision in the income tax act for the claim of deduction of employee stock option plan expenditure. Further the expenditure is not part of the profit and loss account and therefore same is construed to be capital expenditure as the liability is not in the nature of revenue expenditure. Further the learned AO also stated that income tax department has filed the special leave petition before the honourable Supreme Court against the decision of honourable Delhi High Court in the case of Lemon Tree Hotels Private Limited versus CIT where the decision of the honourable Karnataka High Court in case of CIT versus Biocon Ltd (2020) 121 taxmann.com351 (Karnataka) is contested.
8. The assessee explained to the learned assessing officer that such expenses are revenue in nature and further the issue is squarely decided by the honourable High Court’s in favour of the assessee. Merely because the special leave petition is pending before the honourable Supreme Court, the binding precedent of the decision of the honourable Karnataka High Court in case of Biocon Ltd is not obliterated as it is in favour of the assessee. On the merits assessee also contended that the expenditure towards ESOP is incurred for retention of the employees and relates to the business of the assessee.
9. The learned assessing officer held that the cost of ESOP to the employees is capital in nature as it results in increase of capital of the parent company and it is in fact the nature of subscribing to the capital of the parent company by sifting of profits out of the country in foreign exchange through banking channel by the assessee. The learned assessing officer therefore disallowed the expenditure of ₹ 7,212,874,997 under section 37 of the act.
10. Assessee aggrieved with the order of the learned assessing officer reiterated the same facts before the learned CIT – A. The learned CIT – A held that issue of shares of the parent company directly impacts the capital of the parent company. There is no sound basis on which the amount to be discounted for as determined, when it gets communicated to the employees, when the assessee debited the amount, or, whether all these are part of the stock option plan in the absence of this information and ESOP plan being silent on these aspects, there is no merit in the plea that the ESOP expenses are revenue in nature to motivate the employees. The expenditure in question pertains to issue of shares which is a capital asset/liability; the corresponding expenditure also bears the nature of capital expenditure. The learned CIT – A also considered the various decisions cited by the assessee and held that the expenditure in question was utilized to enhance share capital of the appellant and any enhancement to share capital is made for extension of business, the said expenditure bears the nature of capital expenditure and not the revenue expenditure. He also relied upon the decision of the honourable Supreme Court in (2000) 109 taxman 151 and confirmed the action of the learned assessing officer. He held that expenditure is capital expenditure not revenue expenditure and hence not allowable for deduction under section 37 of the act
11. Assessee is aggrieved with the same. The learned authorized representative Shri Ketan Ved chartered accountant and the ld. DR shri N Balu swamy, JCIT were heard.
12. The facts are already described above. Section 37(1) of the Income Tax Act, 1961 allows deduction of expenditure (not capital or personal) to be laid out wholly and exclusively for business purposes, outside Sections 30-36. No specific provision addresses ESOPs.
13. Biocon Ltd. v. DCIT [2013) 35 com335 (Bang.) (SB)], decided 16 July 2013 by the ITAT Bangalore Special Bench established four enduring principles. First, ‘expenditure’ in S.37(1) includes a ‘loss’ per CIT v. Woodward Governor India [(2009) 312 ITR 254 (SC)]. Second, the ESOP discount is employee compensation cost — the sole objective is to secure dedicated employee services during vesting. Third, the liability is ascertained (not contingent) per Bharat Earth Movers v. CIT [(2000) 122 Taxman 61 (SC)] — at macro level, lapsing options are available to other employees. Fourth, accounting principles are supportive but not determinative but tax principles are independent.
14. Honourable Karnataka High court in CIT (LTU) v. Biocon Ltd. [(2020) 430 ITR 151 (Karn.)] [11 November 2020] upheld the Special Bench decision partly and part question were not required to be answered. Revenue’s SLPs dismissed by the Supreme Court in August and October 2021. While SLP dismissal does not technically constitute merger under Kunhayammed v. State of Kerala [(2000) 6 SCC 359], it shows disinclination of Honourable Supreme court to interfere and thus, the decision of Honourable Karnataka high court being jurisdictional high court has operated as strong binding precedent.
15. The coordinate bench in Flipkart India (P.) Ltd. vs. Assistant Commissioner of Income-tax [2023] 150 com272 (Bangalore – Trib.)/[2023] 200 ITD 670 (Bangalore – Trib.)[09-03-2023] relying on Novo Nordisk India (P.) Ltd. vs. Deputy Commissioner of Income-tax, Circle -12(2), Bangalore [2014] 42 taxmann.com 168 (Bangalore – Trib.)/[2014] 63 SOT 242 (Bangalore – Trib.)[30-09-2013] has also allowed the cross charge in hands of Indian entity made by foreign parent for ESOP of Employees of Indian Entity.
16. Thus, in view of above discussion and respectfully following binding judicial precedents, Ground No 2 of the appeal is allowed and orders of the ld. revenue authorities are reverse directing the ld. AO to delete the disallowance of Rs. 7212874997/- on account of ESOP cross charge from the parent of the assessee company to the Indian entity for employees of the Indian entity.
17. In the Result, appeal of the assessee is partly allowed.
Order pronounced in the open court on 25th March, 2026.
