PVR LTD Vs CIT (Delhi High Court)
The Delhi High Court considered whether the difference between the price at which stock options were offered to employees under the Employee Stock Option Plan (ESOP) and Employee Stock Purchase Scheme (ESPS), and the prevailing market price of the stock on the date of grant, was allowable as revenue expenditure under Section 37(1) of the Income-tax Act, 1961. The appeal had been admitted by the Court on 30 April 2013 on this question of law.
During the pendency of the appeal, the Karnataka High Court in Commissioner of Income Tax vs. Biocon Ltd., [2020] 121 taxmann.com 351 (Karnataka) upheld the Special Bench decision of the Tribunal on the issue in favour of the assessee. The Delhi High Court reproduced the relevant reasoning from that judgment.
The reasoning in Biocon Ltd., as reproduced by the Delhi High Court, was that Section 37(1) permits deduction for expenditure laid out or expended wholly and exclusively for business purposes and does not require an actual cash pay-out. In an ESOP, employees receive an option to acquire shares at a predetermined price lower than the prevailing market price. The discount represents the difference between the market price at the time of grant and the offer price. Employees are required to render services during the vesting period, and upon completion of the vesting period the options vest with them.
