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

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, emphasizing that the liability is incurred during the vesting period. The deduction should be claimed over the vesting years on a straight-line basis. The ITAT directed the Assessing Officer to allow the deduction and verify the quantum claimed by the assessee in line with the Biocon case decision. The appeal was allowed for statistical purposes.

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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.

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