ESOP price difference between Exercise Price and Market Price are allowable Deduction: ITAT rules in favour of Mahindra [Read Order]

In a significant ruling in favour of Mahindra, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that the ESOP price difference between the exercise price and the market price isan allowable deduction.

Shri H.P. Mahajaniand MsBabita Singh appeared on behalf of the assessee and MsVatsala Jha appeared for the revenue.

Mahindra & Mahindra Limited, the assessee company, is engaged in manufacturing and selling on-road automobiles, agricultural tractors and implements, engine parts and accessories of motor vehicles, rendering services, property development activity, financing and investment and transport solutions etc. The assessee filed its return of income on 30/09/2010 declaring a total income of Rs. 19,13,56,45,771/-and had revised its return of income on 29/03/2012 declaring a total income of Rs. 18,99,47,48,506/-.

The disallowance of the deduction of Rs.4,50,62,837/- in respect of stock options granted to employees under the ESOP scheme was challenged by the assessee. It was observed that the amount is the difference between the fair market value of shares offered to employees on the date of the grant of the option and the price at which they were offered to employees.

The assessee company had granted 41,790 ESOP out of which 20,850 lapsed during the year under consideration.  It was further observed that the assessee company claimed Rs.4,50,62,836/- as the difference between the market price and option exercise price and claimed the same as a deduction in the computation of income. 

The Assessing Officer disallowed the same on the grounds that the expenses incurred are for increasing the company’s share capital base and arecapital in nature.  Further, the employees’ stock option will provide enduring benefit to the assessee company from the employees who have availed of the scheme and the mere approval of SEBI is not for the admissibility of the expenditure which is not for business. 

The ITAT viewed that in the return of income, the assessee had claimed a deduction for the difference between the exercise price and the market price on the date of grant of the option.

Respectfully following the above decision of the co-ordinate bench, the ITAT bench of Shri M. Balaganesh (accountant member) and Smt. Kavitha Rajagopal (judicial member) allowed the appeal filed by the assessee.

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