The Bangalore Bench of Income Tax Appellate Tribunal (ITAT) has held that the expenditure towards “Erroneous disallowance of Payment of Employee Stock Option Plan (ESOP) would be eligible for deduction under Section 37 of the Income Tax Act1961.
The assessee Northern Operating Services Pvt. Ltd. is a company engaged in the business of providing back-office services in the nature of processing of securities, banking operational activities, administrative services, etc. to its AE.
The assessee had participated in the Northern Trust Corporation 2012 Stock Plan issued by its parent, The Northern Trust Company, whereby awards based in shares of the NT Corporation were granted directly by ‘The Compensation and Benefit Committee’ of NT Corporation’s board of directors to the Assessee’s employees through the stock option (ESOP) scheme or the restricted stock unit (RSU) scheme.
Accordingly, employees were eligible to participate in the scheme and option was given to the employees to purchase a defined number of shares at concessional price by way of exercising the options.
The ESOP expenses represented the discount offered to Assessee’s employees on issue of shares of its ultimate holding company. The said expense was initially incurred by NT Corporation and was subsequently reimbursed by the assessee to NT Corporation.
The assessee claimed expenses towards Employee share-based payments while filing the return of income for the year under consideration. The AO in the draft assessment order disallowed the amount claimed by the assessee towards Employee share-based payment expenses.
Section 37 deals with expenditure (other than capital expenditure or personal expenses of the assessee) which is set out or spent entirely and solely for the purposes of the company or profession shall be allowed in calculating the income liable to be paid under the “profits and gains of business or profession.”
K.R. Vasudevan, on behalf of the assessee contended that the ESOP would form parts of the employee’s compensation as ‘perquisite. He also contented that ESOP expenditure was an ascertained liability and accordingly, the same should be allowed under section 37 of the Income Tax Act.
K. N. Suresh Babu, on behalf of the revenue, relied on the orders of lower authorities.
The Division Bench of George George K (Judicial Member) and Padmavathy S, (Accountant Member) allowed the appeal referring to the decision in Novo Nordisk India P. Ltd. v. DCIT, and held that the expenditure towards ESOP would be eligible for deduction under Section 37 of the Income Tax Act 1961.
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