In a recent ruling, the Karnataka High Court dismissed the revenue’s petition challenging the Income Tax Tribunal Appellate decision on Employee Stock Ownership Plan ( ESOP ) deduction, the court upheld that ESOP as a legitimate Business expense.
SAP India Pvt. Ltd., the assessee claimed a deduction for the discount on ESOP as a business expenditure, which was disallowed by the Assessing Officer ( AO ) and the Dispute Resolution Panel ( DRP ) treating it as a capital loss.
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The assessee appealed before the Income Tax Tribunal Appellate ( ITAT ), Bangalore which allowed their appeal and held that ESOP expenses were allowable as revenue expenditure. The Revenue ( Income Tax Department ) challenged the Income Tax Tribunal Appellate ( ITAT )’s decision for SAP India Pvt. Ltd. ( the assessee ).
The Revenue’s legal representative Sushal Tiwari N argued that the ESOP expenses amounted to revenue expenditure. On this basis, the assessing officer disallowed the deduction and the DRP upheld the same.
On the contrary, the respondent’s counsel, Nageswar Rao D D relied on the ITAT’s decision and the Karnataka High Court ruling in Commissioner of Income Tax, LTU v. Biocon Ltd where it was held that the discount on ESOP was a valid business expense and was allowable expense under Section 37(1) of the IT Act.
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The Bench comprising Justice S. G. Pandit and Justice C.M. Poonacha heard the arguments of both sides. The court observed that the Tribunal’s ruling was based on the Biocon Ltd. case, which held that ESOP discounts are valid business expenditures under Section 37(1).
Since the Tribunal followed a well-established legal precedent, no substantial question of law was involved. Thus, the court dismissed the Revenue’s appeal, upholding the ITAT’s order that allowed SAP India’s deduction for ESOP expenses.
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