Expenses Incurred as Payment to Parent Company that Issued Shares to Employees of Assessee Allowable as Deduction: ITAT [Read Order]

The Chennai Bench of Income Tax Appellate Tribunal (ITAT) has held that the expenses incurred as payment to parent company that issued shares to employees of assessee shall be allowed as deduction.

 AO during the course of assessment proceedings noticed that the assessee Amec Foster Wheeler India Pvt. Ltd had debited an amount of as payment made to Foster Wheeler AG, Switzerland, the holding company, which had charged with respect to shares allotted to the employees of the assessee company under employee’s stock exchange plan. The AO required the assessee to give details along with justification for claiming the same as revenue expenditure and disallowed the claim.

K.Amulya, on behalf of the appellant held that the Foster Wheeler AG Switzerland, the ultimate holding company, operated a Performance Share Plan (PSP) covering certain eligible employees of its subsidiaries. PSP for conditional shares were awarded to eligible employees based on their sustained performance and value. Foster Wheeler Energy Ltd., on behalf of Foster Wheeler AG had charged out stock option recharged to the assessee, at the prevailing market value of shares at the time of delivery. The managing director of the assessee for the impugned assessment year was eligible to receive stock options under the said scheme. 

He further submitted that the issue of stock options to employees, being in the nature of ‘employee compensation’, the assessee debited the corresponding cost in its profit and loss account and made payment for the same to its AE based on the debit notes received from the AE.

The Chennai Bench of Mahavir Singh, (Vice President) and Shri Manoj Kumar Aggarwal (Accountant Member) allowed the appeal observing that “we noted that the expenses incurred by assessee by way of payment to its parent company, which has in turn issued shares to the employees of the assessee, the expenditure seems towards disbursing compensation to the employees for their services and hence, the same is to be treated as revenue in nature.”

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