ESOP Expenditure is Revenue in Nature: ITAT Allows Deduction [Read Order]

The Income Tax Appellate Tribunal (ITAT), Delhi Bench, has recently, in an appeal filed before it, allowed deduction, by holding that ESOP expenditure is Revenue in nature.

The aforesaid observation was made by the Delhi ITAT, when an appeal was filed before it by the Revenue, as directed against the order of the CIT(A), New Delhi, pertaining to Assessment Year 2016- 17.

The ground of the assessee’s appeal being the question as to whether the CIT(A) has erred in deleting the addition of Rs.1,88,82,824/- made on account of share premium receipt under Section 56(2)(viib) ,despite the fact that the valuation report submitted by the assessee company was not substantiated by the assessee company, the brief facts of the case were that he assessee company was a software company developing and promoting Indian Languages technologies with emphasis on language localization of websites, mobile apps and web based enterprise applications.  And, during the year, it had issued preference shares and received Rs.2,54,50,003/- as share premium.

It so happened that during the course of the assessment proceedings, the Assessing Officer asked the assessee company to submit justification as per Section 56(2)(vi) (b) of the Income Tax Act, for the share value, along with 11UA valuation report. Further, vide questionnaire, the assessee company was also asked to show cause as to why the share premium received in excess of Face value on issue of preference shares be not added to income us 56(2) (viib) of the Income Tax Act, as valuation report is, in respect of equity shares and not preference share, as well as to provide comparable data of amounts considered in DCF method and actual figures for the assessment years of 2016-17, 2017-18 and 2018-19.

In reply thereto it was submitted on behalf of the assessee company that the fair market value was arrived at, by applying the Discounted Cash Flow (DCF) method, as per the valuation report furnished by M/s Ashwani & Associates, Chartered Accountants, on the basis of the projections furnished by the assessee company. It was further submitted that the projections were made by the assessee company on the basis, expected further scenario, trends, its plans for the future, and considering a host of other factors, relevant in this regard, some or more of which were not only estimates but dependent on a complex interplay of factors, internal as well as external, over which it may have only nominal or notional control.

It was further submitted that, considering the benefit of hindsight based on the actual subsequent performance cannot be the basis for rejecting the DC valuation, and that the projections on the basis of which the DC based valuation was arrived at was correct, at the time at which it was made, which is a factor relevant for determining the applicability of section 56(2) (viib).

 However, the above arguments were not found acceptable by the Assessing Officer, who thereby made an addition of Rs. 1,88,82,824/- representing the amount of share premium received during the year us 56(20(viib) of the Income Tax Act.

 Aggreived by the same, the asssessee filed its appeal before the CIT(A), and upon the assessee’s appeal, the CIT(A) deleted the addition. And it is against this order of the CIT(A), that the Revenue has preferred the instant appeal before the Delhi ITAT.

In the proceedings before the Delhi ITAT, Sh. Shankar Gupta, the Sr. DR, on behalf of the Revenue, relied upon the order of the AO, while on the other hand, Sh. Ashwani Kumar, CA, the counsel for the assessee, submitted that the CIT(A) has passed a well-reasoned order.

Hearing the opposing contentions of both sides as well as perusing the materials available on record, the ITAT panel comprising of Challa Nagendra Prasad, the Judicial Member and Shamim Yahya, the Accountant Member thus held:

“We have heard both the parties and perused the records. We find that this issue is squarely covered by the decision of the jurisdictional Delhi High Court in the case of Lemon Tree Hotels and New Delhi Television Ltd. wherein it has been held that expenditure under ESOP is an allowable expense. Hence, we find that the Ld. CIT(A) has passed a correct order and we do not need to interference on our part. Accordingly, this appeal by the Revenue is dismissed.”

To Read the full text of the Order CLICK HERE

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