Employees ESOP Compensation Expenses  allowable as the expense incurred to Retain Talent / Staff for Benefit of Company: ITAT [Read Order]

The Delhi bench of the Income Tax Appellate Tribunal (ITAT) held that the Employee’s ESOP compensation expense can be allowable as business expenditure as it was used to retain the talent /staff for the benefit of the company.

Bhartiya International Ltd,  the assessee challenged the final assessment order dated 29.07.2022 passed under Section 143(3) r.w. Section 144B r.w. Section 144C(13) passed in pursuance of directions issued by the Dispute Resolution Panel (DRP) dated 02.06.2022 read with rectification order dated 28.06.2022 passed by DRP under Rule 13 of the Dispute Resolution Panel Rules, 2009.

The AO observed that the assessee has claimed Rs.2,03,96,540/- under Section 37(1) of the Act under the head ‘employees ESOP compensation expenses’. It was submitted by the assessee that during the year under consideration, the company granted 1,64,650 options comprising an equal number of equity shares in one or more tranches to eligible employees of the company. The options are granted with a specific exercise period from the date of vesting of shares and the options are exercisable at a pre-determined price of Rs.50 each resulting in the issue of shares at a discount to the market price of the company shares at the date of grant. 

It was asserted before the lower authorities that the expenses are incurred to retain the talent/staff for the benefit of the company and consequently such expenses are allowable as business expenditures.

Before the DRP, the assessee reiterated that the expenses are neither notional nor capital in nature. The expenses incurred are revenue in character and are incurred wholly and exclusively for business.

The DRP however confirmed the proposal moved by the AO essentially on the ground that judgment rendered in the case of Lemon Tree Hotel Ltd. has been admitted in the Revenue Appeal by the  Supreme Court as reported. The additions based on the admission of SLP by the Supreme Court are not tenable.

While holding in favour of the Assessee, the two-member bench comprising Shri Saktijit Dey, Vice President & Shri Pradip Kumar Kedia, Accountant Member noticed that the assertions made on behalf of the Assessee that similar claim had been allowed in the earlier years by the AO.

While allowing the appeal, the ITAT directed the AO to reverse disallowance.

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