Expenditure towards Issue of ESOP at Discounted Rate Allowable as Income Tax Deduction: ITAT [Read Order]

The Bangalore bench of the Income Tax Appellate Tribunal (ITAT) has allowed income tax deduction in respect of the expenditure towards the issue of ESOP to the employees at discount rates.

The assessee, M/s. TE Connectivity Services India Private Limited had incurred expense by way of payment to its parent company which has in-turn issued shares to the employees of the assessee. There was an actual issue of shares of the parent company by the assessee to its employees. The difference, between the fair market value of the shares of the parent company on the date of issue of shares and the price at which those shares were issued by the assessee to its employees, was reimbursed by the assessee to its parent company. the assessee claimed the sum so reimbursed as expenditure in the profit & loss account of the assessee as an employee cost.

Relying on a catena of decisions, a division bench comprising Shri N. V. Vasudevan, Vice President and Ms. Padmavathy S, Accountant Member observed that the law by now is well settled that expenditure on account of ESOP is a revenue expenditure and had to be allowed as deduction while computing income.

The Special Bench in the case of Biocon Ltd, held that the sole object of issuing shares to employees at a discounted premium is to compensate them for the continuity of their services to the company.

Allowing the claim of the assessee, the Tribunal held that “By no stretch of imagination, we can describe such a discount as either a short capital receipt or a capital expenditure. It is nothing but the employees cost incurred by the company. The substance of this transaction is disbursing compensation to the employees for their services, for which the form of issuing shares at a discounted premium is adopted. The said decision has been upheld by the Hon’ble Karnataka High Court in the case of BIOCON Ltd. (supra). Therefore the issue in so far as this Bench of ITAT is concerned is concluded by the decision of the Hon’ble Jurisdictional High Court. Pendency of identical issue before the Hon’ble Supreme Court cannot be thebasis not to follow decision of jurisdictional High Court. In the present case, there is no dispute that the liability has accrued to the assessee during the previous year. There is no reason why this expenditure should not be considered as expenditure wholly and exclusively incurred for the purpose of business of the assessee.”

To Read the full text of the Order CLICK HERE

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