PCIT Vs Bajaj Finance Ltd. (Bombay High Court)
The Bombay High Court dismissed the Revenue’s appeal under Section 260A of the Income-tax Act relating to Assessment Year 2013-14, which challenged the Income Tax Appellate Tribunal’s order allowing the assessee’s claim for deduction of expenditure on Employee Stock Options (ESOPs). The principal issue was whether the discount on the issue of ESOPs, being the difference between the grant price and the market price of shares on the date of grant of options, was allowable as a deduction under Section 37 of the Income-tax Act.
The Court noted that the Tribunal had relied on the Special Bench decision in Biocon Limited vs. DCIT (LTU), Bangalore, which held that ESOP discount is a general business expenditure allowable under Section 37(1) during the vesting period, subject to adjustment at the time of exercise of the option. It further observed that the Karnataka High Court had affirmed that decision, holding that Section 37(1) permits deduction of expenditure incurred and does not require actual cash outflow. The Karnataka High Court had also held that issuance of shares at a discount constitutes expenditure for the purposes of Section 37(1), as the object is to secure continued employee services and not to incur a capital loss. The Court also referred to the provisions of Section 2(15A) of the Companies Act, 1956 and the Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999.
