Neo Market Services Private Limited Vs DCIT (ITAT Mumbai)
Mumbai ITAT Allows ESOP Deduction; Discounts on Employee Stock Options Are Not Contingent Liabilities
The ITAT Mumbai allowed the assessee’s appeal and directed deletion of the disallowance of ESOP expenses claimed as revenue expenditure under Section 37. The Assessing Officer had disallowed the expenditure by treating it as a contingent liability. The Tribunal observed that the issue was squarely covered by the Special Bench decision in Biocon Limited v. DCIT, affirmed by the Karnataka High Court, and followed by the Bombay High Court in PCIT v. Bajaj Finance Limited, which also agreed with the Delhi High Court decision in PVR Ltd. v. CIT. The Tribunal noted that these decisions held that the discount on ESOPs is an allowable deduction under Section 37, is not a contingent liability, and that expenditure under Section 37 does not require an actual cash outflow. It also referred to a similar view taken by the Coordinate Bench in Strides Pharma Science Limited v. ITO. Respectfully following the binding decision of the jurisdictional High Court, the Tribunal directed the Assessing Officer to delete the disallowance of ESOP expenses and allowed the assessee’s appeal.
The Mumbai ITAT allowed the assessee’s appeal and held that ESOP (Employee Stock Option Plan) expenses are allowable as a deduction u/s 37, rejecting the AO’s view that such expenditure constitutes a contingent liability. The AO had disallowed the ESOP discount claimed as revenue expenditure on the ground that no actual expenditure had been incurred. The Tribunal observed that the issue is no longer res integra and is squarely covered by the Special Bench decision in Biocon Ltd., which has been affirmed by the Karnataka High Court and subsequently followed by the Delhi High Court as well as the Bombay High Court.
The Tribunal noted that Section 37 does not require an actual cash outflow for claiming deduction. The difference between the market price of shares and the grant price under an ESOP represents the cost incurred by the employer to secure continued employee services during the vesting period. Such expenditure is an ascertained business liability arising over the vesting period and not a contingent liability merely because its final quantification takes place when the options are exercised. The Tribunal also observed that the accounting treatment prescribed under the SEBI ESOP Guidelines supports recognition of the expense over the vesting period.
Relying on the Bombay High Court’s recent decision in PCIT v. Bajaj Finance Ltd., which approved the views expressed in Biocon Ltd. and PVR Ltd., the Tribunal held that ESOP discounts are incurred wholly and exclusively for business purposes by incentivising and retaining employees and, therefore, qualify for deduction u/s 37. Following the jurisdictional High Court and its own earlier decisions, the Tribunal directed the AO to delete the disallowance of ESOP expenses and allowed the assessee’s appeal.
Recent Cases Discussed:
- PCIT v. Bajaj Finance Limited (Bombay High Court), ITA No. 135 of 2024, dated 17.04.2026
- Strides Pharma Science Limited v. ITO, ITA No. 5271/Mum/2024, dated 20.03.2025
- PVR Limited v. CIT, [2022] 145 taxmann.com 331 (Del.)
- Principal Commissioner of Income Tax v. New Delhi Television Ltd., (2018) 99 taxmann.com 401 (Del.)
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal is filed by the Assessee against the order of Ld. Commissioner of Income Tax (Appeals), NFAC, Delhi [“Ld. CIT(A)”] dated 22.01.2026 for the Assessment Year 2023-14.
