ITAT allows Employee Stock Option Scheme compensation as revenue expenditure, overturns section 37(1) disallowance

ITAT Delhi allowed assessee's claim for Employee Stock Option Scheme compensation as revenue expenditure, following previous decisions in assessee's own case and PVP Ventures Ltd. The AO's disallowance under section 37(1) was overturned by CIT(A), who correctly treated it as ascertained liability rather than capital loss. Regarding section 14A disallowance, ITAT upheld CIT(A)'s restriction to investments earning exempt income during the year, following ACB India Ltd precedent. Revenue's appeal dismissed on both grounds.

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Issues:
1. Disallowance of Employee Stock Option Scheme Compensation
2. Disallowance under section 14A r.w. Rule 8D

Issue 1: Disallowance of Employee Stock Option Scheme Compensation
The appeal was filed by the Assessing Officer (AO) against the order of the ld CIT(A) for the Assessment Year 2012-13. The AO raised grounds of appeal regarding the deletion of the addition on account of Employee Stock Option Scheme Compensation and disallowance under section 14A r.w. Rule 8D. The assessee, a public limited company providing online services, had filed its return of income and later a revised return. The AO made additions related to ESOP and disallowances under section 14A. The CIT(A) partly allowed the appeal, deleting the disallowances to a certain extent. The AO challenged this decision, arguing that the ESOP compensation was not a revenue expenditure. The CIT(A) allowed the claim, citing precedents and decisions in favor of the assessee. The tribunal upheld the CIT(A)'s decision, stating that the issue was already decided in favor of the assessee in previous assessment years.

Issue 2: Disallowance under section 14A r.w. Rule 8D
The second ground of appeal related to the disallowance under section 14A, which was partially deleted by the CIT(A). The AO had asked for a working of the disallowance based on the investments made by the assessee. The assessee had disallowed a sum in the original and revised returns, but the AO recomputed the disallowance, leading to a dispute. The CIT(A found the assessee's computation in the revised return acceptable and restricted the disallowance. The tribunal noted that only investments yielding exempt income should be considered for the disallowance under rule 8D, in line with a Delhi High Court decision. Consequently, the tribunal dismissed the AO's appeal on this issue.

In conclusion, the tribunal dismissed the appeal of the AO, upholding the decisions of the CIT(A) regarding the disallowance of Employee Stock Option Scheme Compensation and the disallowance under section 14A r.w. Rule 8D. The judgment was pronounced in open court on 08/01/2020.

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