The Bangalore Bench of Income Tax Appellate Tribunal ( ITAT ) affirmed the deductibility of Employee Stock Option Plan ( ESOP ) expenses as legitimate business expenditures under Section 37 of the Income Tax Act,1961.
The Revenue-appellant directed its appeal against the orders of the Commissioner of Income Tax (Appeals) [CIT(A)], focusing on disallowances related to ESOP expenses. Algonomy Software Pvt. Ltd., the respondent-assessee, had debited Rs. 1,86,40,000 as expenses for ESOP in the assessment year 2016-17.
Get a Complete Kit of Essential Books for Daily Practice, Click Here
The Assessing Officer ( AO ) disallowed these expenses, arguing that they were contingent in nature and lacked specific provisions for deduction under Section 37 of the Act. Additionally, the AO disallowed a provision for doubtful debts amounting to Rs. 48,95,064, claiming these provisions lacked the necessary clarity for deductibility.
The AO maintained that ESOP expenses represented contingent liabilities, asserting that such expenses could not be claimed as deductions without definitive obligations. The AO expressed concerns about the ambiguity surrounding the provisions for doubtful debts, contending that they did not align with the requirements for tax deductibility as per the relevant sections of the Act.
In response to the AO’s disallowances, CIT(A) conducted a thorough review and found merit in the assessee’s arguments. Citing a previous tribunal decision that favored the assessee for the assessment years 2012-13 to 2015-16, the CIT(A) ruled that disallowing ESOP expenses was inappropriate. The CIT(A) emphasized that ESOP expenses were essential for employee retention and overall business growth, and that such expenses had been consistently recognized as valid deductions in prior rulings.
Get a Complete Kit of Essential Books for Daily Practice, Click Here
The tribunal upheld the CIT(A)’s decision, asserting that ESOP expenses constituted legitimate business expenditures aimed at enhancing employee motivation. The tribunal reiterated that the nature of these expenses aligned with fostering employee loyalty and performance, thus meeting the criteria for deduction under Section 37.
The two-member bench, consisting of George George K ( Vice President ) and Padmavathy S ( Accountant Member ), ruled in favor of the assessee, affirming that the disallowance of ESOP expenses was unwarranted and should be deleted.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
