As a relief to Vodafone Idea ltd, the Mumbai Bench of the Income Tax Appellate Tribunal ( ITAT ) has held that the deduction of discount on the Employee Stock Option Scheme ( ESOP ) over the vesting period by the Securities and Exchange Board of India ( SEBI ) Guidelines is allowable.
The assessee challenged the order of CIT(A) in upholding the disallowance of compensation cost of ESOP amounting to Rs.3,75,90,000/- which was charged to the profit and loss account represents the amortisation of the intrinsic value of ESOP option.
The assessee submitted before the AO that the said expenditure has been claimed based on SEBI guidelines i.e. SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. Each option when exercised would be converted into one equity share of Rs.10/- fully paid up by the company. The options vest 25% each on a specified date in four subsequent years from the date of the grant. The maximum period of exercise is five years from the date of vesting. The compensation cost of stock options granted to employees has been arrived at by the company by using the intrinsic value method.
The AO observed that the assessee had not sought approval of the relevant scheme from the concerned CIT / CCIT as envisaged in Circular No.323 of 2001 dated 11/10/2001. He observed that the stock option has not been exercised by the employees of the assessee and that the scheme was eventually revised at a lower price for the employees of the assessee. Further observed that the liability on account of the difference in the market price and the ESOP price is purely contingent and not ascertained and disallowed the provision made on account of ESOP in the sum of Rs.3,75,90,000/- in the assessment.
On appeal, CIT(A) viewed that if eligible employees did not exercise their options, then the ESOP should go back to the assessee and uphold the action of AO by stating that the provisions made for ESOP expenditure are notional and contingent in nature.
The ITAT bench consisting of Shri Vikas Awasthy, a judicial member & Shri M Balaganesh, an accountant member observed that the entire amortisation of ESOP expenditure based on intrinsic value has been made by SEBI guidelines on the ESOP segment. The said guidelines prescribed to amortise the ESOP cost over the vesting period of the options as per Schedule J of the guidelines.
The assessee is listed on the stock exchange and SEBI guidelines are mandatory to be followed by the assessee and the CIT(A) had grossly erred in stating that the assessee is not a listed company at all. The ESOP scheme whether it is approved by CIT or CCIT is of no relevance for the allowability of deduction.
The bench held that the deduction of discount on ESOP over the vesting period is by the accounting in the books of account, which has been prepared by the Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. Respectfully following the judicial precedents, the appeal of the assessee was allowed.
Shri J D Mistry appeared on behalf of the assessee and Shri T Shankar appeared on behalf of the revenue.
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