The Bangalore Bench of Income Tax Appellate Tribunal (ITAT) recently ruled that the expenditure towards the Employees Stock Option Plan (ESOP) is eligible for deduction under Section 37 of Income Tax Act 1961.
The assessee M/s. Northern Operating Services Private Limited is a company engaged in the business of providing transaction based business process outsourcing services to its group companies. For the assessment year 2014-2015, the return of income was filed declaring income of Rs.68,09,26,340/-.
The case was selected for scrutiny and notice under Section 143(2) of the Act .During the course of assessment proceedings, the case was referred to the Transfer Pricing Officer (TPO) to determine the Arm’s Length Price (ALP) of the international transactions undertaken by the assessee with its Associate Enterprises (AEs).
The Transfer Pricing Officer (TPO) passed an order under Section 92CA of the Income Tax Act, proposing total transfer pricing adjustment amounting to Rs.30,49,62,139/-. The Assessing Officer passed a draft assessment order incorporating the TP adjustment suggested by the TPO.
Apart from the TP adjustment, the Assessing Officer disallowed an amount of Rs.1,07,29,828 claimed as deduction under Section 37 of the Income Tax Act. The expenditure claimed was towards Employees Stock Option Plan (ESOP).
Aggrieved assessee filed objections before the Dispute Resolution Panel (DRP). The TP adjustment was reduced to Rs.19,35,28,445. However, the ESOP disallowances were sustained by the DRP. On receipt of the DRP’s directions.
Counsel for the assessee submitted that as regards the disallowance of ESOP expenses are concerned, the issue is squarely covered in assessee’s own case for assessment year 2015-2016 in IT(TP)A No.2395/Bang/2019 (order dated 31.01.2023).
The Counsel for the revenue was unable to contradict the assertion of the Counsel for the assessee. In the assessment year 2015-2016, the Bangalore Bench of the Tribunal made a decision regarding the deductibility of ESOP (Employee Stock Ownership Plan) expenses in the case of the assessee.
The Bangalore Bench concluded that the ESOP expenses were eligible for deduction based on the facts presented. This decision was consistent with a previous ruling by the Co-ordinate Bench in the case of Novo Nordisk India P. Ltd. v. DCIT.
The Bench consisting of an Advocate Member Laxmi Prasad Sahu and a Judicial Member George George K observed that “We are of the view that in the facts and circumstances of the present case, the expenditure in question was wholly and exclusively for the purpose of the business of the assessee and had to be allowed as deduction as a revenue expenditure. The facts of the instant case are identical to assessment year 2015-2016, following the co-ordinate Bench order in assessee’s own case for assessment year 2015-2016 (supra), we hold that the expenditure towards ESOP is an allowable deduction under Section 37 of the Income Tax Act.”
In result, the appeal filed by the assessee was partly allowed.
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