ESOP discount deduction under section 37(1) allowed, with expenditure apportioned over the vesting period.

ESOP discount treated as employee compensation is deductible as business expenditure under section 37(1) and is not capital merely because it arises from share issuance. The deduction, however, must be correctly quantified by apportioning the discount over the vesting period with reference to the options granted and the relevant perquisite value. The appellate view followed earlier year and coordinate bench reasoning, and the Assessing Officer was directed to make the arithmetical apportionment and allow the deduction accordingly.

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Issues: Whether ESOP discount/expenditure is allowable as a deduction under section 37(1) of the Income-tax Act, 1961, and, if allowable, whether the year-wise discount has to be apportioned over the vesting period after arithmetical computation.

Analysis: The claim related to ESOP expenses was treated as an allowable business deduction following the assessee's own earlier year decision and the coordinate bench view relied upon by the appellate authority. The expenditure was not accepted as capital in nature merely because it arose in connection with share issuance. At the same time, the allowance was subject to correct computation by spreading the discount over the vesting period with reference to the options granted and the relevant perquisite value.

Conclusion: The ESOP expenditure was held allowable under section 37(1), and the Assessing Officer was directed to make the requisite arithmetical apportionment and allow the deduction accordingly.

Ratio Decidendi: ESOP discount, when incurred as employee compensation, constitutes an allowable deduction under section 37(1), but its deduction must be quantified by apportioning the benefit over the vesting period.

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