Loss on Stock Appreciation Rights is Business Loss, Allowable as Deduction: ITAT Delhi [Read Order]


In a recent ruling, the division bench of the ITAT Delhi bench held that the loss incurred by the assessee-Company on stock appreciation rights s not a capital loss, but a business loss which is deductible under section 37 of the Income Tax Act.

The assessee, a limited company engaged in the business of providing granting of loan corporate advisory services and distribution of dividends etc, filed its return of income claiming deduction of on account of stock appreciation Right expenses by treating the same a loss incidental to business. The assessing officer disallowed the same by holding the same as capital loss.

The assessee maintained that the above expenditure is incurred by the assessee in accordance with Religare enterprise Ltd’s employee stock appreciation Right scheme of 2007, according to which specified employees of the assessee-company were granted a specific number of stock appreciation Right that was at Rs. Nil.

They further submitted that each stock appreciation rights right was equivalent to one share of Religare commodities Ltd. He further explained the nature of the scheme which says that the base price which is the market price of the shares of the appellant was considered at Rs. 140/- per share, and if there is an increase in the value of those shares on the date of exercise of the right by the employees then the difference between the base market price and the enhanced or increased value shall be payable to the to the holder of such rights’ holder employees. During the relevant year, the trust initially purchased 532630 shares of the appellant from the stock exchange at an average price of Rs. 50 3.79 per share, which was financed through loans given to the trust by the respective Religare group companies employing the employees and implementing the stock option Right scheme. At the end of the year the assessee had granted 41330 stock appreciation Right to its 52 employees out of its 861 employees, out of this 52 employees 5 employees are entitled to 6860 stock appreciation Right which were transferred to Religare securities Ltd and one employee was entitled to 500 stock appreciation Right was transferred to the appellant. Therefore, only 34780 stock appreciation rights were granted to 48 employees of the appellant. With respect to the deduction available under the income tax act for the above expenses that the appellant is entitled to deduction of the total cost that it incurred in relation to the stock appreciation rights scheme of 2007 which was for awarding and retaining employees and motivating them for better performance.

Accepting the contentions of the assessee in the light of the decisions of Madras and Delhi High Courts, wherein the Courts held that loss on employee stock option plan is allowable as deduction. Accordingly, stock Appreciation right expenses claimed by the appellant, being a revenue expenditure, was allowed by the bench as allowable expenses.

Read the full text of the order below.