2017 (1) TMI 783 - AT - Income Tax

Tribunal allows deduction of Stock Appreciation Rights expenses as revenue expenditures under Income Tax Act

The Tribunal ruled in favor of the assessee, allowing the deduction of Stock Appreciation Rights (SAR) expenses as revenue expenditures under section ... Stock Appreciation right expenses - revenue or capital expenditure - Held that:- Hon’ble Madras High Court has also an occasion to consider the allowability of the ESOP expenditure [2012 (7) TMI 696 - MADRAS HIGH COURT] wherein Hon’ble high court has held that the claim of the ESOP is an ascertained liability for deduction on is allowable. Similarly Hon’ble Delhi High Court in case of CIT versus Lemon tree hotels Ltd [2015 (11) TMI 404 - DELHI HIGH COURT] has held that the expenses debited as cost of employee stock option plan in the profit and loss account is allowable. Thus we respectfully hold that stock Appreciation right expenses claimed by the appellant is not in a capital expenses, but revenue expenditure and ascertained liability therefore it is allowable expenses. In the result the disallowance made by the Ld. and assessing officer and enhancement made to that taxable income of the appellant by Ld. 1st appellate authority is held to be erroneous and therefore set aside - Decided in favour of assessee Issues Involved:1. Disallowance of Stock Appreciation Rights (SAR) expenses.2. Treatment of SAR expenses as capital or revenue expenditure.3. Enhancement of disallowance by the Commissioner of Income Tax (Appeals) (CIT(A)).Issue-wise Detailed Analysis:1. Disallowance of Stock Appreciation Rights (SAR) expenses:The assessee contested the disallowance of SAR expenses amounting to Rs. 11,47,623 for AY 2008-09 and Rs. 15,12,621 for AY 2009-10 by the Assessing Officer (AO). The AO disallowed these expenses, treating them as capital losses. The assessee argued that the differential amount between the purchase price and the sale price of SARs represented loans granted to the Religare Enterprises Ltd. Employees SAR Trust for administering the SAR scheme, which was not recovered. The assessee claimed that the SAR scheme aimed to motivate, reward, and retain key employees, making the differential amount an employee benefit allowable under section 37(1) of the Income Tax Act, 1961.2. Treatment of SAR expenses as capital or revenue expenditure:The CIT(A) upheld the AO's disallowance and further enhanced the disallowance by Rs. 27,89,501 for AY 2008-09, treating the differential amount as capital expenditure related to the issue of shares to employees. The assessee contended that the differential amount was employee compensation allowable as a deduction under section 37(1). Alternatively, the assessee argued that the amount should be allowed as a deduction under section 36(1)(ii) of the Act.3. Enhancement of disallowance by the Commissioner of Income Tax (Appeals) (CIT(A)):The CIT(A) enhanced the disallowance by Rs. 27,89,501 for AY 2008-09, holding that the differential amount between the sale price of SARs and the exercise price paid to employees was capital expenditure. The assessee argued that this amount was in the nature of employee compensation and should be allowable as a revenue expenditure.Judgment:The Tribunal, after considering the rival contentions and judicial precedents, held that the SAR expenses claimed by the assessee were revenue expenditures and ascertained liabilities, thus allowable under section 37(1). The Tribunal relied on the Special Bench decision in Biocon Ltd. vs. DCIT, which held that the discount on the issue of Employee Stock Options (ESOP) is an allowable deduction. The Tribunal also referred to the decisions of the Hon'ble Delhi High Court in CIT vs. Lemon Tree Hotels Ltd. and the Hon'ble Madras High Court in CIT vs. PVP Ventures Ltd., which supported the allowance of ESOP expenses.The Tribunal concluded that the SAR expenses were not capital expenditures but revenue expenditures and allowed the deduction of Rs. 11,47,623 and Rs. 27,89,501 for AY 2008-09 and Rs. 15,12,621 for AY 2009-10. Consequently, the appeals of the assessee for both assessment years were allowed, and the disallowances made by the AO and the enhancements made by the CIT(A) were set aside.Order Pronounced:The appeals of the assessee for AY 2008-09 and 2009-10 were allowed, and the order was pronounced in the open court on 04/01/2017.