CIT Vs Biocon Ltd. (Karnataka High Court)
In CIT vs. Biocon Ltd., the Karnataka High Court examined whether discounts on the issuance of Employee Stock Option Plans (ESOPs) qualify as deductible expenses under Section 37(1) of the Income Tax Act, 1961. The Revenue filed the appeal for Assessment Year 2004–05, challenging the decision of the Income Tax Appellate Tribunal (ITAT), which had ruled in favour of Biocon Ltd. The primary legal questions focused on whether the difference between the market value of shares at the time of granting the options and the offer price constitutes a deductible expense and whether such a liability could be considered contingent.
The assessee contended that the ESOP discount represents a form of employee compensation and should be treated as a business expenditure incurred wholly and exclusively for business purposes. Biocon maintained that even though employees do not gain ownership of the shares immediately upon the grant of options, the company incurs a definite liability based on the mercantile accounting system. The court agreed that under Section 37(1), expenses not specifically covered under Sections 30 to 36 and not of a capital or personal nature are deductible if incurred for business purposes. The court also noted that from AY 2009–10 onwards, the same deduction had been accepted by the Assessing Officer, and consistent treatment should apply, based on the principle set in Radhasoami Satsang v. CIT.
