ESOP discount as business expenditure under section 37: deduction accrues over the vesting period, not as a contingent liability.

Discount on Employee Stock Option Plan shares was treated as allowable business expenditure under section 37 of the Income-tax Act, 1961 because it represented a benefit conferred on employees in the course of employment and an expenditure incurred by the employer. CBDT Circular No. 9 of 2007 was held inapplicable, as it addressed fringe benefit tax on specified securities and sweat equity shares, not the allowability of ESOP cost. Following the Special Bench ruling in Biocon Ltd., the discount was regarded as an ascertained liability rather than a contingent liability or mere short receipt, and the deduction accrued over the vesting period under the ESOP scheme.

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Issues: Whether the discount on Employee Stock Option Plan shares constituted an allowable business expenditure under section 37 of the Income-tax Act, 1961 and, if so, when such deduction was to be allowed.

Analysis: The disallowance was based on CBDT Circular No. 9 of 2007, but that circular dealt with fringe benefit tax on specified securities and sweat equity shares and did not govern the allowability of ESOP cost as business expenditure. The discount on ESOP shares represented a benefit conferred on employees during the course of employment and was therefore an expenditure incurred by the employer. Following the Special Bench ruling in Biocon Ltd., such discount was treated as an ascertained liability and not as a contingent liability or short receipt. The deduction was held to accrue over the vesting period in accordance with the ESOP scheme.

Conclusion: The ESOP expenditure was allowable as deduction under section 37 of the Income-tax Act, 1961, and the assessee succeeded on the timing and allowability of the claim.

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