ITAT Allows Income Tax Deduction on Employee Share Based Compensation u/s 37, Grants ₹8.46 Cr Relief [Read Order]

The Income Tax Appellate Tribunal (ITAT), Mumbai Bench has allowed the employee share based compensation to be treated as a revenue expenditure under Section 37(1) of the Income TaxAct, 1961, by cancelling an initial rejection of ₹8.46 crore by the AssessingOfficer (AO).

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The appellant, originally called Indiabulls Real Estate Limited and subsequently Equinox India Developments Limited, had sought to set off the expenditure of ₹8,46,15,358 towards share-based employee compensation for the relevant assessment year. The AO had disallowed the deduction because he considered it to be a short receipt of share premium and thus capital in nature.

The Revenue contended that the issuance of the shares at a discount was causing a notional loss and that the expenditure could not be considered to be genuine expenditure for business purposes. The assessee cited precedents of prior years in similar Tribunals where the expense was recognized as business expenditure for the purposes of compensation paid to employees.

However, it was brought out before the Tribunal that the same issue had been decided in favour of the assessee in previous years, such as in ITA No. 6602/Del/2016 for AY 2012-13 and ITA No. 5176/Mum/2024 for AY 2022-23.

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The Bench held that the compensation received by the employee through shares, fall within the ambit of business expenditure under Section 37(1). The Tribunal asked the AO to compute the expense by apportionment of discount during the vesting period.

The Bench consisting of Om Prakash Kant (Accountant Member) and Sandeep Singh Karhail (Judicial Member) rejected the Revenue's appeal and maintained the decision of the Commissioner of Income Tax (Appeals) to allow the deduction. The Tribunal has observed that the discount on the issue of the shares under the employee stock incentive plan was a permissible business expenditure.

Accordingly, the appeal of the Revenue was dismissed and the allowance of ₹8.46 crore was deleted.

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