2015 (1) TMI 364 - AT - Income Tax

Tax Tribunal Allows Deduction for ESOP Share Discounts, Sets Method for Claiming

M/s Educomp Solutions Limited Versus Additional Commissioner of Income Tax, Range-11, New Delhi

The Special Bench of ITAT held that the discount on shares under ESOP is an allowable deduction. They provided a method for calculating the deduction, ... ESOP expenses disallowed – Facts properly appreciated or not - Whether the CIT(A) erred in confirming the action of AO in making an addition by disallowing the expenditure debited to P&L account on account of amount amortized under the Employees Stock Option Scheme (ESOP) without appreciating the facts of the case – Held that:- Following the decision in M/s. Biocon Limited and others Versus The Dy. Commissioner of Income-tax (LTU) and others [2013 (8) TMI 629 - ITAT BANGALORE] discount on shares under the ESOP is an allowable deduction – the AO is directed to allow the deduction for discount on shares under the ESOP. Computation of quantum of deduction – Held that:- An employee becomes entitled to the shares at a discounted premium over the vesting period depending upon the length of service provided by him to the company - In all such schemes, it is at the end of the vesting period that option is exercisable albeit the proportionate right to option is acquired by rendering service at the end of each year - the company incurs liability to issue shares at the discounted premium only during the vesting period - The liability is neither incurred at the stage of the grant of options nor when such options are exercised - the liability to pay the discounted premium is incurred during the vesting period and the amount of such deduction is to be found out as per the terms of the ESOP scheme by considering the period and percentage of vesting during such period - deduction of the discounted premium is to be allowed during the years of vesting on a straight line basis – Decided in favour of assessee. Issues:Disallowance of expenditure under Employee Stock Option Scheme (ESOP) for AY 2008-09.Analysis:The appeal was against the order of the CIT(A) confirming the Assessing Officer's addition of Rs. 8,27,17,775 for disallowing the expenditure debited to the Profit and Loss account under ESOP. The assessee, a limited company, claimed this deduction in the return of income. The Assessing Officer disallowed it, stating no actual expenditure was incurred. The CIT(A) upheld this decision. The assessee argued citing the decision of the Special Bench of ITAT in the case of Biocon Ltd., where a similar issue was considered. The ITAT in the Biocon case allowed the deduction for discount on shares under ESOP and prescribed a method for computing the deduction. The Special Bench held that the discount on shares under ESOP is an allowable deduction and provided a detailed method for calculating the quantum of deduction.The Special Bench of ITAT concluded that the discount on shares under ESOP is an allowable deduction. They also outlined the method for computing the quantum of deduction, emphasizing that the liability to pay the discounted premium is incurred during the vesting period. The company can claim deduction for the total discounted premium representing the employee's cost over the vesting period. The liability is linked to the span of service put in by the employee, and the deduction should be allowed during the years of vesting on a straight-line basis. The ITAT directed the Assessing Officer to verify the quantum of deduction claimed by the assessee in line with the decision of the Special Bench in the Biocon case and allow the deduction for discount on shares under ESOP accordingly.The ITAT found that the issue was squarely covered by the decision of the Special Bench in the Biocon case. Therefore, they directed the Assessing Officer to allow the deduction for discount on shares under ESOP and to verify the quantum of deduction claimed by the assessee as per the method prescribed by the Special Bench. The appeal of the assessee was deemed to be allowed for statistical purposes.