ESOP discount deduction and NPA provision disallowance clarify when employee compensation and write-offs are tax-deductible.

ESOP discount was treated as deductible revenue expenditure because the difference between market value and issue price represents employee compensation, the liability accrues on vesting, and it is not contingent merely because exercise occurs later; where views conflicted, the view favourable to the assessee was applied. A mere provision for standard and non-performing assets was held not deductible, because RBI prudential directions govern disclosure and income recognition but do not override the Income-tax Act's computation rules, and deduction requires an actual write off or another statutorily permitted claim. The assessee thus succeeded on the ESOP issue and failed on the NPA provision.

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Issues: (i) Whether expenditure incurred on employee stock options was allowable as revenue expenditure; (ii) Whether provision for standard and non-performing assets was deductible under the Income-tax Act, 1961.

Issue (i): Whether expenditure incurred on employee stock options was allowable as revenue expenditure.

Analysis: The allowance of ESOP-related expenditure was held to be governed by the principle that the discount between market value and issue price represents expenditure incurred to compensate employees for services rendered. The Court followed the Special Bench view that such liability arises on vesting, is not contingent merely because actual exercise may occur later, and is deductible under section 37(1). Where conflicting views existed, the view favourable to the assessee was adopted.

Conclusion: The ESOP expenditure was allowable and the issue was decided in favour of the assessee.

Issue (ii): Whether provision for standard and non-performing assets was deductible under the Income-tax Act, 1961.

Analysis: The claim was examined in the light of the Supreme Court ruling that RBI prudential directions govern disclosure and income recognition but do not override the computation provisions of the Income-tax Act. A mere provision for NPA, without actual write off, was treated as not deductible. The claim could not be allowed either as a general business deduction or on the basis of the RBI guidelines.

Conclusion: The provision for standard and non-performing assets was not deductible and the issue was decided against the assessee.

Final Conclusion: The appeal succeeded only on the ESOP issue, while the disallowance of the NPA provision was sustained, leaving the assessee partly successful.

Ratio Decidendi: ESOP discount becomes deductible business expenditure when the employee's right vests, whereas a mere provision for non-performing assets remains non-deductible because prudential RBI norms do not override the Income-tax Act and deduction requires an actual write off or a statutorily permissible claim.

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