Discount on ESOP Expenses rightly Debited as Expenditure in Books of Account : ITAT deletes Addition [Read Order]

The Bangalore bench of the Income Tax Appellate Tribunal ( ITAT ) has ruled in favor of the taxpayer, affirming that the deduction for ESOP ( Employee Stock Ownership Plan ) expenses was rightfully accounted for as expenditure in the books of accounts.

ESOPs typically vest in an employee over a four-year period, at a rate of 25% annually. This means that by the end of the first year, the employee has a definite right to 25% of the shares, and the company is obligated to allow the vesting of 25% of the options. It is well established in law that if a business liability arises in the accounting year, it is permissible as a deduction, even if the liability needs to be quantified and discharged at a later date.

When an employee exercises an option, determining the actual amount of benefit is merely a matter of quantifying the liability, which occurs at a future date. Therefore, the tribunal has appropriately relied on Supreme Court decisions such as Bharat Movers and Rotork Controls India P. Ltd., establishing that the discount on the issuance of ESOPs is not a contingent liability but an ascertained one.

The revenue relied upon the judgment in case of CIT vs. Infosys Technologies Ltd, which has also been taken care by the Jurisdictional High Court and distinguished to this effect that the question raised therein the ESOP benefit was not in the provision of law at that material point of time rather the same was inserted by the Finance Act, 1999.

Ultimately, the Commissioner of Income Tax ( Appeals ), guided by the jurisdictional High Court order, granted relief to the taxpayer by removing the addition made by the Assessing Officer for ESOP expenses.

The Tribunal, comprising Laxmi Prasad Sahu ( Accountant Member ) and Madhumitha Roy ( Judicial Member ), found no grounds to interfere with this decision, deeming it just and proper. Consequently, the revenue’s appeal failed, and the cross objections filed by the assessee regarding maintainability were not pursued.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates