2016 (6) TMI 1481 - AT - Income Tax

Tribunal Upholds Deductibility of ESOP Expenses, Citing Biocon Precedent; Case Remanded for Reassessment.

The ITAT Delhi allowed the Revenue's appeal concerning the disallowance of Rs. 75,65,000 related to an Employees' Stock Option Plan for AY 2010-11. The ... Nature of expenditure - Employee Stock Option Scheme Compensation - disallowance made treating it as capital in nature - HELD THAT:- Facts of the case for the present year being identical as in earlier years [2015 (8) TMI 319 - ITAT DELHI], for the same reasons and respectfully following the precedent, we set aside the impugned order of ld. CIT(A) and send the matter to the file of AO for deciding it in conformity with the decision taken in the case of Biocon Ltd. Vs. DCIT (2013 (8) TMI 629 - ITAT BANGALORE], wherein held that discount on issue of ESOP is allowable as deduction in computing income under the head 'Profits and gains of business or profession.' Since it is on account of an ascertained and not contingent liability, it cannot be treated as a short capital receipt. Thereafter, the Special Bench has laid down the mechanism for determining as to when and how much deduction should be allowed. It has been held that 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 ESOP by considering the period and percentage of vesting during such period. Deduction of the discounted premium during the years of vesting should be allowed on straight line basis. Department’s appeal stands allowed for statistical purposes. Issues:Revenue's appeal against deletion of addition of Rs. 75,65,000 made by disallowing compensation on Employees' Stock Option plan as capital in nature for AY 2010-11.Analysis:The appeal before the Appellate Tribunal ITAT Delhi involved the Revenue challenging the deletion of an addition of Rs. 75,65,000 by disallowing compensation on an Employees' Stock Option plan treated as capital in nature for the assessment year 2010-11. The Revenue contended that the CIT(A) erred in deleting the said addition. The assessee, engaged in online recruitment and other services, had charged the amount in question as Employee Stock Option Scheme Compensation based on SEBI guidelines. The AO disallowed this claim, which was subsequently allowed by the CIT(A) relying on the assessee's previous cases for AY 2008-09 and 2009-10. The ITAT Delhi Bench had set aside the CIT(A)'s decision for AY 2007-08 to 2009-10, but the facts remained unchanged, and the scheme continued in the present year.The Tribunal referred to the decision in Biocon Ltd. Vs. DCIT, where it was held that the discount on the issue of ESOP is deductible as it is an ascertained liability, not a contingent one. The mechanism for determining the deduction and subsequent adjustments were also outlined. Given the identical facts to previous years, the Tribunal set aside the CIT(A)'s order and remanded the matter to the AO to decide in line with the Biocon Ltd. case. The appeal was allowed for statistical purposes. The judgment highlighted the importance of treating ESOP expenses as deductible and provided guidance on the calculation and allowance of such expenses over the vesting period.In conclusion, the ITAT Delhi upheld the Revenue's appeal, emphasizing the deductibility of ESOP expenses and the need to follow established precedents in such matters. The judgment underscored the significance of considering ESOP expenses as ascertained liabilities and allowing deductions accordingly. The decision provided clarity on the treatment of ESOP expenses and the methodology for determining deductions, ensuring consistency and adherence to legal principles in such cases.