TDS in case of ESOP is deductible at time option is exercised and shares are allotted to employees

DCIT Vs Total Energies Marketing India Pvt. Ltd. (ITAT Mumbai)

ITAT Mumbai held that TDS is not deductible at the time of grant of ESOP but is deductible at the time of option is exercised by employees of the assessee and shares are allotted to the employees.

Facts- Issues involved in the present appeal are whether tax is deductible on ESOP provisions as soon as it is granted and provided for in the books of account or at the time of allotment of shares to the employees when it becomes chargeable to tax in their hands as perquisites u/s 17(2)(vi) of the Act; whether tax is deductible on the discount offered by the assessee to its various dealers is re-characterised as commission and therefore tax is deductible there on u/s 194H of the Act and whether on the year end provisions of expenses which are made on the last day of financial year and reversed on the next day i.e. [First day] of next year and tax is deducted by the assessee as and when bills are received from vendors in subsequent year.

Conclusion- Held that Provisions of TDS are enacted with the basic objective of ‘pay [tax] as you earn’. Further TDS is considered as advance tax paid in the hands of recipient of income. Therefore, the taxes not required to be deducted at source the time of grant of ESOP but at the time of option is exercised by employees of the assessee and shares are allotted to the employees, because it is that time it is taxable in the hands of employees.

Held that where the assessee offered incentive to Distributors and stockist meeting of the sales target on ‘principal to principal’ basis that incentive could not be treated as commission payment subject to tax deduction at source under section 194H of the act.

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