By TIOL News Service

MUMBAI, SEPT 05, 2018: THE ISSUE BEFORE THE BENCH IS - Whether discount offered on ESOP is an ascertained liability and the same is allowable deduction u/s 37(1). AND THE VERDICT IS YES.

Facts of the case

The assessee-company filed return for the relevant AY. During the course of assessment proceedings, the AO noticed that the assessee had claimed an amount of around Rs 1.62 cr being Employee Compensation Expense as revenue expenditure, but it was found from Form No. 3CD that the auditors had mentioned such amount as capital expenditure. On being asked, the assessee contended that in the light of amendment to section 115WB and based on legal advice, it had claimed the said Employees Stock Purchase Scheme (ESOP) expenditure as business expenditure. Also it was stated before the AO that such position of law was confirmed from the proviso to section 17(2)(iii) as it stood for the relevant year which specifically exempted ESOP benefit from being treated as perquisite though it was an expenditure of the employer.

However, the AO was not convinced with such explanation of the assessee and observed that the amendment to section 115WB w.e.f. April 1, 2008 and hence, not applicable to AY 2006-07. Further, the AO relied on the Explanatory Circular on Fringe Benefit Tax arising on allotment or transfer of specified securities or sweat equity shares (Circular no. 9/2007). The AO also held that the taxability of perquisite under the head 'salary' is independent of allowability of expenditure in the hands of the company which has provided the perquisite to the assessee. The AO also held that when the shares are issued at below market price then forgoing of the share premium by issuing the shares at cost under ESOP scheme cannot result into loss of income to the taxpayer. Though the SEBI guidelines and the accounting standards require the taxpayer to account for short receipt of share premium as employee compensation expenditure, the allowability of the expenditure should be determined as per the provisions of Income Tax Act. Being aggrieved, the assessee filed appeal before the CIT(A). However, the CIT(A) upheld the decision of the AO.

The Tribunal held that,

++ the ratio laid down in the case of Biocon Ltd, where is was held that "....where liability in respect of ESOP is incurred at end of each year, which is quantified at the end of vesting period when employees become entitled to exercise options, discount on ESOP is an ascertained liability and not a contingent liability. Further, it held that discount on ESOP being a general expense, is an allowable deduction u/s 37(1) during years of vesting on basis of percentage of vesting during such period, subject to upward or downward adjustment at time of exercise of option...." is identical to the present facts. Therefore, the AO is directed to allow the claim of ESOP of Rs.1,62,49,300/- after examining the valuation of shares as pointed out in Biocon Ltd. We direct the assessee to file the relevant documents/evidence regarding valuation of shares before the AO.

(See 2018-TIOL-1429-ITAT-MUM)