Difference between market price and issue price of the ESOP is not an allowable expenditure
Recently, the Delhi Bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of Ranbaxy Laboratories Ltd. has held that the difference between the market price and the issue price of the shares offered to employees under the Employee Stock Option Scheme (ESOP) is not an allowable expenditure since the loss incurred due to issue of shares at a discount is a notional loss and such notional loss cannot be considered as an allowable expenditure under the provisions of the Income-tax Act, 1961 (the Act). Though it was mandatory to record it as an expenditure as per the Securities Exchange Board of India (SEBI) guidelines.
Facts of the case
- The taxpayer granted stock option of 332,250 shares to its employees under an Employee Stock Option Plan during the year. The vesting period of such ESOP was spread over five years. As per the scheme the shares were to be issued at INR 595 (exercise price) and the market price of the share on the date of grant was INR 738.95. The taxpayer treated the difference between the market price and the exercise price as employee compensation and the difference was charged to Profit and Loss Account (P & L A/c). The charge to P & L A/c was deferred over vesting period i.e. 5 years.
- The Assessing Officer (AO) disallowed the claim of the taxpayer on the ground that the said deduction was not permissible under the Act unless a liability has either been paid or arisen during the year.
- The Commissioner of Income-tax (Appeals) held that the liability will become a certain liability only when employees exercise their option by making payment of the offer price and get their share. Accordingly, the expenditure will be allowed only in the year in which the option will be exercised.
Issue before the Tribunal :- Whether the deferred expenditure charged to P & L A/c was allowable under the Act?
Contentions of the taxpayer
