ACIT Vs Hero Fincorp Ltd. (ITAT Delhi)
Summary: The Revenue challenged the order dated 23.12.2025 passed by the CIT(A)/NFAC for AY 2021-22, whereby the assessee’s appeal was allowed and various additions made in assessment were deleted. The Revenue’s second appeal before the ITAT was confined to two issues: deduction of ESOP expenditure of Rs. 4.24 crores under Section 37(1) of the Income-tax Act, 1961 and deduction of Rs. 54,34,253/- under Section 57 in respect of expenses claimed against interest income from an Alternative Investment Fund.
Hero Fincorp Ltd had implemented ESOP 2017 for attracting, retaining and rewarding employees and creating a sense of ownership. The scheme was approved by shareholders on 09.06.2017 and covered 26,39,703 options. The fair value of the options was computed using the Black Scholes Option Pricing Model and the ESOP expenditure was amortised over the vesting period. During the relevant year, Rs. 4.24 crores was debited under employee benefit expense in the audited financial statements. The Revenue contended that the expenditure was notional and involved no actual cash outflow.
The Tribunal considered the judicial authorities on ESOP expenditure, including CIT v. Biocon Ltd., the Special Bench decision in Biocon Ltd., PVR Ltd. v. CIT and Principal CIT v. New Delhi Television Ltd. The Tribunal noted that the Karnataka High Court and Delhi High Court decisions establish that ESOP discount is an allowable business expenditure under Section 37(1), and that Section 37(1) does not require an actual cash payout. The liability arising in the vesting period was regarded as an ascertained liability rather than a contingent liability. The Tribunal also noted that the Assessing Officer had allowed the ESOP claim in AYs 2018-19, 2019-20 and 2020-21 and applied the rule of consistency. It consequently held that the assessee was entitled to deduction of Rs. 4.24 crores under Section 37(1).
