In the case of Unilever India Exports Limited, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has directed deleted the income tax addition towards ESOP.
The assessee, Unilever India Exports Limited (UIEL) is a wholly-owned subsidiary of Hindustan Unilever Limited (HUL). The fast-moving consumer goods (FMCG) export business of HUL was transferred to UIEL under a court-approved scheme of arrangement with the appointed date of April 1, 2011.
The assessee company is engaged in the manufacturing of branded FMCG products, namely Foods and Beverages and Home and Personal Care (HPC) products. These brands are owned either by Unilever Plc / Unilever NV, the ultimate parent company of the Unilever Group of HUL.
The assessee has e-filed its return of income for A.Y. 2017-18 declaring a total income of Rs.156,38,060/- on Statutory notices along with a questionnaire issued by the Assessing Officer which has been complied with by the assessee by electronically submitting the details called for from time to time. Since the assessee had international transactions with its AE a reference was made to the Transfer Pricing Officer (TPO) for determination of Arms Length Price (ALP) of such transactions.
The Assessing Officer duringthe assessment noticed that the assessee has debited a sum of Rs.147.50 lakhs towards benefits provided to employees of the company in respect of the “Employees Share Option Scheme (ESOP)”.
The assessee made a detailed submission before the assessing officer explaining the nature of the ESOP and the reasons why the same is allowable under section 37(1). However, the assessing officer did not accept the contentions of the assessee by stating that the ESOP expenses have not crystalised and that the same is capital in nature. Accordingly, the AO disallowed the ESOP expenditure. The DRP upheld the disallowance.
It was evident that an assessee is entitled to claim a deduction under the aforesaid provision if the expenditure has been incurred. The primary object of the aforesaid exercise is securing consistent services of the employees and not to waste capitalbut to earn profits therefore, thesame cannot be construed as short receipt of capital. The tribunal has rightly held that incurring the expenditure by the assessee entitles him to deduction under Section 37(1) of the Act subject to fulfilment of the condition.
The deduction of discount on ESOP over the vesting period is by the accounting in the books of accounts, which has been prepared bythe Securities And Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999.
The two-member bench of Amit Shukla (Judicial Member) and Padmavathy S. (Accountant Member) has observed that ESOP expenses are capital in nature.
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