Lupin Limited Vs DCIT (ITAT Mumbai)
In a recent decision by ITAT Mumbai, Lupin Limited Vs DCIT, the deductibility of ESOP expenses was scrutinized. The article explores the difference between fair market value of equity shares at the vesting and exercise dates, delineating it as allowable expenditure.
The assessee, Lupin Limited, had claimed a substantial deduction for ESOP expenses in its revised income return. However, the Assessing Officer (AO) disallowed the deduction, deeming it notional. The matter was appealed, citing the precedent set by Biocon Ltd’s case (144 ITD 21), where the Special Bench of Bangalore ITAT upheld the deduction.
The Tribunal’s analysis in the present case relied heavily on past rulings, especially Lupin Limited’s own case for AY 2009-10 and AY 2010-11. Notably, the Tribunal’s verdict for AY 2010-11 supported the deduction, following similar lines of reasoning.
The crux of the issue lay in distinguishing between two types of discounts on ESOPs:
- The first type arises at the time of granting/vesting of ESOP options, amortized over the vesting period.
- The second type occurs at the actual exercise of option by employees, representing the difference between fair market value at vesting and exercise dates.
The Tribunal acknowledged that both types of discounts are allowable as deductions.
The tribunal emphasized that the deduction for ESOP expenses should be allowable irrespective of whether it is accounted for in the books of account. It upheld that the entries in the books of account are not decisive in computing total income; rather, the deductions should be allowed in accordance with the Income Tax Act provisions.
Ultimately, the Tribunal upheld the allowance of ESOP expenses, aligning with previous decisions and emphasizing the deductibility of the second type of discount, even if not accounted for in the books.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
These appeals of the assessee and the revenue and the Cross Objection (C.O) of the assessee are against the order of the Commissioner of Income Tax (Appeals)-57, Mumbai dated 17.11.2020 [for short ‘the CIT(A)] and against the order of rectification passed by the CIT(A) under section 154 of the Income Tax Act ( (the Act). The CIT(A) has passed the impugned orders against the final order of assessment passed by the Assessing Officer (AO) under section 143(3) r.w.s. 144C(13) of the Act. The issues contended in these appeals and the C.O are common and therefore these appeals are heard together and disposed of through this common order.
2. The issues contended in the above appeals and the C.O are tabulated as under:
