Issue – Whether discount on issue of Employee Stock Options is allowable as deduction in computing the income under the head profits and gains of business?
Briefly stated the facts of the case are that the assessee is engaged in the manufacture of Enzymes and Pharmaceutical ingredients. It formulated the ESOP 2000. A trust was set up under the name and style of “Biocon India Limited Employees Welfare Trust” for giving effect to the ESOP 2000 and another ESOP 2004 which was launched subsequently but during one of the years under consideration. The assessee claimed deduction of Rs. 3,38,63,779 as `Employee compensation cost’ u/s 37 of the Income-tax Act, 1961 (hereinafter called `the Act’) representing discount under the ESOP 2000. In the assessment completed u/s 143(3), the Assessing Officer (hereinafter also called `the AO’) disallowed the said claim on the ground that there was no specific provision entitling the assessee to deduction u/s 37(1) in this regard. He further held that the Securities and Exchange Board of India (Employee Stock Option Scheme And Employee Stock Purchase Scheme) Guidelines, 1999 (hereinafter called `the SEBI Guidelines’ or `the Guidelines’), on which the assessee had placed strong reliance in support of the deduction, would not apply as these cannot supersede the taxing principles.
There is no weight in the contention of the ld. AR that there is no specific provision in the Act on the ESOP discount. It is axiomatic that the taxation rules are always embodied in the relevant Act, either in a specific or a general manner. These can be specific by making a clear cut provision in respect of deductibility of a particular item of expense or taxation of a particular item of income. General provisions are those which set out the overall principles to govern the deductibility or tax ability of unspecified items. For example, the definition of `income’ u/s 2(24) has been given by the Act in an inclusive manner. There have been enshrined clauses (i) to (xvi) dealing with the items specifically listed. However, the provision has been couched in such a way so as to include general items of receipts having character of income, even though not specifically mentioned. Similar is the position regarding deductions. Under the head `Profits and gains of business or profession’, there are sections granting deductions in respect of specific expenses or allowances. Similarly, there is section 37(1), which grants deduction for expenses not specifically set out in other sections, if the conditions stipulated in the section, are fulfilled. All other items of expenses, which fulfill the requisite conditions, gain deductibility under section 37(1). To put it in simple words, this section is a specific provision for granting deduction in respect of the unspecified or the general categories of expenses. Discount on ESOP is a general expense and hence covered by the specific provision of section 37. The contention of the ld. AR that there is no provision in the Act dealing with the deductibility of ESOP discount, is therefore, devoid of any merit. This concludes the question of granting of deduction of discount during the vesting period.
Discount under ESOP is in the nature of employees cost and is hence deductible during the vesting period w.r.t. the market price of shares at the time of grant of options to the employees. The amount of discount claimed as deduction during the vesting period is required to be reversed in relation to the unvesting/lapsing options at the appropriate time. However, an adjustment to the income is called for at the time of exercise of option by the amount of difference in the amount of discount calculated with reference the market price at the time of grant of option and the market price at the time of exercise of option.
No accounting principle can be determinative in the matter of computation of total income under the Act. The question before the special bench is thus answered in affirmative by holding that discount on issue of Employee Stock Options is allowable as deduction in computing the income under the head `Profits and gains of business or profession’.