SC Dismisses Revenue Appeal as ESOP Allotment Expense Is Allowable

PCIT Vs Lemon Tree Hotels Pvt. Ltd. (Supreme Court of India)

The Supreme Court condoned the delay, granted leave, tagged the matter with Civil Appeal No. 1564 of 2017, and dismissed the Revenue’s appeal after holding that no question of law arose on the issues raised.

The first issue concerned the allowability of expenditure claimed towards the Employee Stock Ownership Plan (ESOP). The Court noted that the same issue had already been decided in earlier proceedings involving the same assessee. For Assessment Year 2008-09, the Court had held that the Income Tax Appellate Tribunal (ITAT) correctly followed the judgment in Commissioner of Income Tax v. PVP Ventures Ltd., under which the ESOP expenditure was allowable. In another assessment year involving the same assessee, the Court had also declined to frame a question of law.

Read Delhi HC Judgment in this case: Delhi HC Rejects ESOP Disallowance as Share Allotment Reflects Commercial Reality

The Revenue argued that, in terms of Circular No. 9 of 2007, deduction should be available only where the employer actually acquires shares from a third party, and that mere allotment of shares under an ESOP represented only notional expenditure. The Supreme Court rejected this contention, observing that such an interpretation ignored the commercial realities of business operations, as it would require employers to purchase shares from the market or third parties instead of issuing or allotting their own shares. The Court held that this argument was untenable and concluded that no question of law arose on the ESOP issue.

The second issue related to disallowance under Section 14A of the Income-tax Act. The ITAT had granted relief by following the judgment in Joint Investment Pvt. Ltd. v. CIT. The Supreme Court held that no question of law arose on this issue as well.

Accordingly, the Supreme Court dismissed the Revenue’s appeal, affirming the view that neither the ESOP expenditure issue nor the Section 14A disallowance warranted interference.

FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER

Delay condoned.

Leave granted.

Tag with Civil Appeal No. 1564 of 2017.