ITAT Rules ESOP Costs Constitute Employee Remuneration under Sec. 37(1): IBM’s ₹903 Crore Income Tax Deduction Upheld [Read Order]

In a recent ruling, the Income Tax Appellate Tribunal (ITAT), Bangalore Bench, dismissed the Revenue’s appeal against IBM India Pvt. Ltd., affirming that Employee Stock Option Plan (ESOP) costs constitute employee remuneration deductible under Section 37(1) of the Income Tax Act, 1961 and upheld the ₹903 crore income tax deduction.

The respondent, Assessee, IBM India, engaged in software development and IT services, filed its return of income for AY 2022‑23, declaring ₹40,777 crore. During scrutiny, the Assessing Officer (AO) disallowed ESOP expenditure of ₹903 crore, reasoning that the cost was “notional” and represented a capital transaction (foregoing share premium).

The AO argued that only real, incurred expenses qualify for deduction and kept the issue alive since similar matters were pending before the Supreme Court. Aggrieved, IBM appealed before the Commissioner of Income Tax (Appeals) [CIT(A)], who deleted the disallowance by relying on earlier ITAT rulings in IBM’s own case and Karnataka High Court’s decision in CIT v. Biocon Ltd.

The appellant, revenue argued that ESOP expenditure is hypothetical, not involving actual cash outflow, and a discount on shares is a capital transaction, not revenue expenditure. Also they pointed that CIT(A) erred in relying on past ITAT rulings when the issue is still pending before the Supreme Court and stated that only “real” expenditure can be allowed under Section 37(1).

On the other hand respondent counsel for IBM stated that ESOP is part of employee remuneration, akin to salary and stated that the tribunal in AY 2015‑16 allowed the claim, and the Karnataka High Court upheld it. The High Court relied on its own precedent in CIT v. Biocon Ltd. (2020), confirming that ESOP costs qualify as employee remuneration. Therefore, he submitted that the issue is already settled in favour of IBM.

After hearing the submissions, the tribunal observed that both parties acknowledged the Karnataka High Court had already upheld ESOP deductions in IBM’s own case. While the Revenue pointed to the pending Supreme Court matter, the Tribunal noted that the High Court’s ruling is binding and final for the assessee.