Employees Stock Option Plan expense deductibility affirmed based on high court precedent, expense claim allowed for taxable income calculation.

Addition relating to employees stock option plan (ESOP) expenses addresses whether such expenditures are allowable against taxable income. The note states that the position is governed by a favourable jurisdictional high court decision recognising ESOP-related expenditures as deductible business expenditure, and that an adverse departmental challenge before the apex court does not, by itself, negate the existing high court precedent; consequently, a revenue challenge based on that ground is dismissed and the ESOP expenses are treated as allowable for computation of taxable income.

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Issues: Whether the deletion by the Commissioner of Income Tax (Appeals)/NFAC of the addition of Rs. 5,12,06,383/- made by the Assessing Officer on account of ESOP expenses for AY 2016-17 was erroneous.

Analysis: The Tribunal examined whether the ESOP-related payments (invoices and remittances to the ultimate holding company evidencing actual cash outflow) qualify as allowable business expenditure under section 37(1) of the Income-tax Act, 1961 and whether the Assessing Officer was entitled to treat them as merely notional. The Tribunal considered the factual position of invoicing and payments by the assessee, the role of the Transfer Pricing Officer regarding international transactions, and the binding precedents of the jurisdictional High Court on the allowability of such ESOP expenditures. The Tribunal found the decision of the Jurisdictional High Court in CIT vs. Lemon Tree Hotels Ltd. to be squarely in favour of allowability and held that the pendency of the Department's SLP in the Supreme Court did not justify denial of the claim where the High Court decision presently covered the assessee.

Conclusion: The deletion of the addition of Rs. 5,12,06,383/- on account of ESOP expenses is upheld and the issue is decided in favour of the assessee.

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