2014 (7) TMI 165 - AT - Income Tax

Tribunal allows ESOP expenses as deductible under Income Tax Act

Lemon Tree Hotels Ltd. (Formerly Krizm Hotels Pvt. Ltd.) Versus Addl. CIT Range-5, New Delhi

Lemon Tree Hotels Ltd. (Formerly Krizm Hotels Pvt. Ltd.) Versus Addl. CIT Range-5, New Delhi - TMI Issues:Confirmation of disallowance of ESOP expenses by Assessing Officer and CIT(A).Analysis:Issue 1: Disallowance of ESOP expensesThe appellant appealed against the disallowance of Rs. 1,28,19,169 representing the sum debited to the Profit & Loss Account under the head 'Employees Stock Option Cost (ESOP).' The Assessing Officer disallowed the claim after detailed scrutiny, which was upheld by the CIT(A). The appellant argued that the ESOP expenses were allowable as a deduction, citing judicial pronouncements and SEBI regulations. The appellant contended that the expenditure was an ascertained liability and not a contingent one. The Department, however, relied on Circular No. 9 of 2007 by CBDT, stating that ESOP expenditure is not allowable if shares are allotted from the company's own share capital.Issue 2: Interpretation of CBDT Circular and Legal PrecedentsThe Tribunal analyzed the CBDT Circular No. 9 of 2007 and found it irrelevant to the issue at hand, as it pertained to Fringe Benefit Tax on specified securities. The Tribunal referred to the decision in Biocon Ltd. Vs. DCIT, where the Special Bench held that the discount on issue of Employee Stock Option is an allowable deduction under the Income Tax Act. The Tribunal emphasized that the discounted premium under ESOP is considered a fringe benefit provided by the employer to employees, constituting an allowable expenditure. The Tribunal also noted that in previous assessment years, the appellant's claim for ESOP expenses was allowed by the CIT(A).Judgment:The Tribunal set aside the orders of the lower authorities and directed the Assessing Officer to allow the expenditure incurred by the appellant in respect of the ESOP claim, in accordance with the legal precedent established by the Special Bench in Biocon Ltd. The appeal of the assessee was allowed, emphasizing the deductibility of ESOP expenses as per the law laid down in the mentioned case.This detailed analysis of the judgment provides insights into the legal reasoning and application of precedents in resolving the issue of disallowance of ESOP expenses, ensuring a comprehensive understanding of the case.