ITAT allows ESOP cost deduction claim in revised return with proper documentation and employee taxation

ITAT Delhi allowed the assessee's claim for ESOP cost deduction made in revised return. The tribunal found that assessee provided sufficient evidence including invoices, bank statements, audited financials, and ESOP policy documents. ESOP expenses were properly taxed as perquisites in employees' hands with TDS deducted. CIT(A) erred in confirming AO's disallowance despite recording assessee's detailed rebuttal without proper evaluation. ITAT relied on judicial precedents from Delhi HC, Karnataka HC, and Madras HC establishing ESOP expenditure as allowable deduction. The revised return was filed within prescribed time limits under section 139(5), making the deduction claim valid and allowable.

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Issues involved:
The only issue in this appeal is whether the Learned Commissioner of Income Tax (Appeals) was justified in upholding the action of the Learned Assistant Commissioner of Income Tax in rejecting the claim made by the assessee for deduction of Employees Stock Option Plan (ESOP) cost amounting to Rs. 4,27,27,652.

Details of the Judgment:

Issue 1 - Allowability of ESOP Expenditure:
The assessee, a subsidiary of ITC Ltd, claimed deduction of expenses relating to Employee Stock Options amounting to Rs. 4,27,27,652 in the revised return for the Assessment Year 2016-17. The ESOPs were granted as per SEBI guidelines and the value of ESOPs granted was determined using the Black Scholes model. The assessee sought reimbursement of the ESOP value from ITC Ltd, which was duly paid in the subsequent assessment year. The Learned AO disallowed the deduction, citing reasons such as incomplete information provided by the assessee and the timing of vesting dates not falling within the relevant year.

Issue 2 - Disallowance by Ld. CIT(A):
The Learned Commissioner of Income Tax (Appeals) upheld the disallowance made by the Learned AO, despite the assessee providing all relevant documents. The Ld. CIT(A) failed to acknowledge the rebuttals made by the assessee against the AO's findings. However, the Tribunal found that the claim of deduction of ESOP expenditure was made within the prescribed time limit under the Income Tax Act, thus holding that the deduction is allowable.

Significant Phrases:
- ESOP expenses were duly taxed in the hands of employees as perquisites.
- Deduction of tax at source was made by the assessee treating ESOP expenses as salary.
- The issue is covered in favor of the assessee by various judicial precedents.
- The claim of deduction of ESOP expenditure was made within the time limit prescribed under the Act.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, holding that the claim of deduction of ESOP expenditure amounting to Rs. 4,27,27,652 is allowable. The judgment was pronounced on 12th January 2024.

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