Stock appreciation right expenditure treated as revenue cost when employee liability crystallises during the vesting period.

Expenditure under a stock appreciation right scheme was treated as revenue expenditure because the scheme was designed to reward and retain employees, and the liability crystallised during the vesting period as an ascertained business cost. The amount was regarded as employee compensation rather than a capital outlay or a mere contingent liability, with the same principle applied consistently to both assessment years on identical facts. On that basis, the disallowance and enhancement were held unsustainable and the additions relating to the scheme were deleted.

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Issues: Whether the expenditure arising from the stock appreciation right scheme was allowable as revenue expenditure under section 37(1) and whether the related disallowance and enhancement were sustainable.

Analysis: The scheme was implemented to reward and retain employees, and the liability attached to the employee benefit crystallized during the vesting period. The amount represented employees' cost and was not a capital outlay or a mere contingent liability. The reasoning applied to the scheme was consistent with the treatment of employee stock option expenditure as an ascertained business liability deductible under the Act. Since the two assessment years involved identical facts and the same issue, the conclusion for one year governed the other as well.

Conclusion: The stock appreciation right expenditure was deductible as revenue expenditure and the disallowance as well as the enhancement were unsustainable; the assessee succeeded.

Final Conclusion: The appeals were allowed and the additions made on account of the stock appreciation right scheme were deleted.

Ratio Decidendi: Expenditure incurred under an employee incentive scheme that creates an ascertained business liability during the vesting period is allowable as revenue expenditure and cannot be treated as a capital loss or contingent liability.

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