2022 (4) TMI 24 - AT - Income Tax

Tribunal directs deduction for ESOP expenses, following Biocon case precedent.

The Tribunal ruled in favor of the Appellant, directing the Assessing Officer to allow the deduction for employees' stock option expenses under Section 37 ... Discount on share under the ESOP as an allowable deduction - HELD THAT:- The assessee has not placed on record the stock of option plan 2009, namely, 'Flight Raja Employees Stock Option Plan 2009' nor the further amended plan vide 'Flight Raja Employees Stock Option Plan 2013' (ESOP). The Hon'ble High Court in the case of CIT v. Biocon Limited [2020 (11) TMI 779 - KARNATAKA HIGH COURT] had held that deduction of discount on ESOP is to be spread over the vesting period in accordance with the accounting in the books of account. The assessee has not produced the employee stock option plan 2009 and the amended plan, hence, we are not in a position to determine whether the vesting was in a graded manner over the period of four years or not. Therefore, in the interest of justice and equity, the matter is restored to the files of the A.O. A.O. is directed to follow the judgment of the Hon'ble jurisdictional High Court in the case of CIT v. Biocon Limited [2020 (11) TMI 779 - KARNATAKA HIGH COURT] - AO shall afford a reasonable opportunity of hearing to the assessee. The assessee shall cooperate with the A.O. for the expeditious disposal of the matter. Issues Involved:1. Disallowance of employees stock option expenses.2. Interpretation of CBDT Circular No. 9/2007 regarding ESOP expenses.3. Application of past years' disallowance to the current assessment year.4. Vesting period for shares under ESOP.5. Allowability of deduction for ESOP expenses under Section 37 of the Income Tax Act.Issue 1: Disallowance of employees stock option expensesThe Appellant challenged the disallowance of employees stock option expenses by the CIT(A). The A.O. disallowed the claim based on the CBDT Circular No. 9/2007, stating that no deduction is allowable when shares are allotted to employees from the share capital of the company. The Appellant contended that the shares were issued to employees for the business's benefit, thus should be allowable under Section 37 of the Act. The Appellant also argued that the liability was ascertained when employees exercised the options, making it allowable in full. The Tribunal referred to the Biocon Limited case, where it was held that ESOP discounts are deductible and should be spread over the vesting period. The Tribunal directed the A.O. to follow the judgment of the High Court and afford a hearing to the assessee for further proceedings.Issue 2: Interpretation of CBDT Circular No. 9/2007The A.O. and CIT(A) relied on the CBDT Circular No. 9/2007 to disallow the ESOP expenses, stating that no deduction is allowed when shares are allotted from the company's share capital. The Appellant argued that the shares were issued for business purposes and should be deductible under Section 37. The Tribunal referenced the Biocon Limited case and the High Court's interpretation, emphasizing that discounts on ESOPs are allowable deductions and should be spread over the vesting period. The Tribunal directed the A.O. to reevaluate the matter in line with the High Court's judgment.Issue 3: Application of past years' disallowanceThe A.O. cited disallowances in previous assessment years based on the CBDT Circular. The Appellant contested this decision, emphasizing the business purpose behind issuing shares to employees. The CIT(A) upheld the disallowance, considering the vesting period for shares under ESOP. The Tribunal, following the Biocon Limited case and the High Court's ruling, directed the A.O. to reconsider the matter and provide a fair hearing to the assessee.Issue 4: Vesting period for shares under ESOPThe CIT(A) determined that shares would vest beyond the relevant assessment year due to the required service period. The Tribunal noted the importance of the vesting period and the gradual allocation of shares over time. The Tribunal stressed the need for proper accounting treatment and adherence to ESOP guidelines. The matter was remanded to the A.O. for further review in accordance with the High Court's decision.Issue 5: Allowability of deduction for ESOP expensesThe Appellant sought deduction for ESOP expenses under Section 37 of the Act, arguing that the shares were issued for business purposes. The A.O. and CIT(A) disallowed the claim based on the CBDT Circular and the vesting period. The Tribunal, following the Biocon Limited case and the High Court's ruling, emphasized the deductibility of ESOP discounts and directed the A.O. to reconsider the matter in light of the High Court's judgment.This comprehensive summary provides a detailed analysis of the judgment, addressing each issue involved in the case.