By TIOL News Service

AHMEDABAD, JUNE 02, 2016: THE issue is - Whether cost of ESOP could be debited in Profit & Loss Account of the assessee and claimed as deduction on account of remuneration. YES is the answer.

Facts of the case

The assessee is a Company belonging to the entertainment industry and is engaged in operating of multiplexes. The assessee filed return for relevant AY. During scrutiny assessment, AO noticed that assessee had disallowed an amount being amount debited in Profit & Loss account in respect of remuneration to employees by way of ESOP. Assessee contends that aforesaid deduction was allowable as it was a charge to P& L and also submitted a computation in this respect. However, AO observed that no payment was made by the assessee either in this year or any earlier year or any later year. The assessee had merely allotted shares to the employees and allotment of shares cannot be considered as an allowable expenditure. The AO accordingly disallowed the claim of deduction. CIT (A) also confirmed the same. During scrutiny AO also found that assessee had claimed exemption of entertainment tax which was reflected in the box office revenues in respect of its multiplexes. Assessee had claimed it as capital receipts not chargeable to tax. AO observed that during the previous AYs entertainment tax was treated as revenue receipt. AO treated the same as revenue receipt. Assessee carried the matter before CIT(A), who directed the AO to delete the impugned addition. Aggrieved revenue prefers an appeal.

After hearing parties, Tribunal held that,

++ the Tribunal considered the decision of the Special Bench in the case of Biocon Ltd. and after considering the decision of the Special Bench directed the A.O to claim of deduction

++ the High Court of Madras in the case of PVP Ventures Ltd. has allowed such claim as business expenditure and the High Court of Delhi in the case of Lemon Tree Hotels Ltd. has followed the decision of the High Court of Madras held that cost of ESOP could be debited in Profit and Loss account of the assessee. Respectfully following the aforementioned decisions, we direct the AO to allow the claim of deduction on account of remuneration to ESOP

++ there is no dispute that the AO has made the additions based upon the findings given in earlier assessment years. It is also an undisputed fact that in earlier assessment years, the issue has been decided in favour of the assessee and against the revenue. The High Court of Gujarat had the occasion to consider the question of law - whether Tribunal was right in upholding the decision of the CIT(A) directing the AO to treat the entertainment tax exemption in respect of Multiplexes as capital receipt, not eligible to tax, without appreciating that the subsidy received by the assessee was after the completion of the cinema house and commencement of operation and used entirely for the business operation, and therefore, revenue in nature. While answering this question in favour of the assessee and against the revenue, the High Court thus concluded "Under the circumstances, the appeal is meritless and deserves to be dismissed..."

(See 2016-TIOL-921-ITAT-AHM)