ITAT Delhi Allows ESOP Expenses Deduction, Citing Biocon Case

The Appellate Tribunal ITAT Delhi allowed the appeal by the assessee against the CIT(A)'s order disallowing Employee Stock Option Plan (ESOP) expenses for the assessment year 2007-08. Citing the Special Bench decision in Biocon Ltd. Vs. DCIT, the Tribunal held that ESOP discounts are deductible under 'Profits and gains of business or profession' as an ascertained liability. The Tribunal remanded the matter to the AO for a decision consistent with the Special Bench's ruling, allowing the appeal for statistical purposes. The order was pronounced on 10.07.2015.

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Issues: Disallowance of Employee Stock Option Plan (ESOP) expenses.

Analysis:
The judgment by the Appellate Tribunal ITAT Delhi pertains to an appeal by the assessee against the CIT(A)'s order for the assessment year 2007-08. The sole issue raised in the appeal concerns the disallowance of Rs.3,04,04,500/- made by the AO on account of ESOP expenses. The Tribunal referred to a similar issue addressed by the Special Bench in Biocon Ltd. Vs. DCIT (2013) 144 ITD 21 (Bang.) (SB). The Special Bench held that the discount on the issue of ESOP is deductible under the head 'Profits and gains of business or profession' as it represents an ascertained liability and not a contingent one. The mechanism for determining the deduction amount was outlined, emphasizing that the liability arises during the vesting period, with the deduction to be allowed on a straight-line basis over the vesting years. Any subsequent adjustment to income is required at the time of option exercise based on the difference in discount calculated at the grant and exercise times.

Both parties acknowledged that the facts of the case align with the Special Bench decision. Consequently, the Tribunal set aside the impugned order and remanded the matter to the AO for a decision consistent with the Special Bench's ruling. The appeal was allowed for statistical purposes, with the order pronounced in open court on 10.07.2015.

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