2026 (3) TMI 1483 - AT - Income Tax

ESOP cross-charge treated as revenue expenditure, with employee compensation cost held allowable under business expenditure principles.

ESOP cross-charge incurred by an Indian entity for shares granted to employees by a foreign parent was treated as employee compensation cost incurred to ... Nature of expenses - treatment of the employee share-based payments expenditure - Revenue versus capital expenditure - expenditure towards ESOP Deductibility of ESOP cross-charge - Revenue versus capital expenditure - Section 37(1) - HELD THAT: - The Tribunal held that, though the Act contains no specific provision dealing with ESOPs, the claim had to be tested under section 37(1). Following the Special Bench decision in Biocon Ltd [2013 (8) TMI 629 - ITAT BANGALORE] and the judgment of the jurisdictional High Court affirming that view [2020 (11) TMI 779 - KARNATAKA HIGH COURT] the discount or cost relatable to employee stock options represents employee compensation incurred for securing and retaining employee services during the vesting period. The mere fact that the parent company issued shares did not convert the assessee's cross-charged liability into capital expenditure. The Tribunal also noted that coordinate bench decisions had allowed similar cross-charge claims in the hands of the Indian entity. On that binding line of authority, the disallowance was unsustainable. [Paras 16] The disallowance of the ESOP cross-charge was deleted and the assessee's claim was allowed. Final Conclusion: The Tribunal allowed the assessee's claim for deduction of the ESOP cross-charge by holding it to be revenue expenditure covered by the binding precedent of the jurisdictional High Court and coordinate benches. The appeal was accordingly partly allowed, with the disallowance deleted and the other grounds dismissed as not pressed, consequential, or premature. Issues: (i) Whether the ESOP cross-charge incurred by the Indian entity for shares granted to its employees by the foreign parent company was allowable as a revenue expenditure under section 37(1) of the Income-tax Act, 1961.Analysis: The expenditure was treated as employee compensation cost incurred to secure and retain employee services during the vesting period. The binding jurisdictional precedent held that ESOP discount/cross-charge constitutes expenditure for business purposes and that such liability is ascertained rather than contingent. The fact that the parent company issued the shares did not alter the character of the payment in the hands of the Indian entity, and the coordinate bench decisions followed the same view. The pendency of challenge before the Supreme Court did not displace the binding force of the jurisdictional High Court ruling.Conclusion: The ESOP cross-charge was allowable as revenue expenditure, and the disallowance was deleted in favour of the assessee.