Employee stock option discount and exempt-income disallowance issues resolved in favour of the assessee; prospective amendment limited.

Employee stock option discount was treated as employee remuneration and an ascertained business liability accrued over the vesting period, so the deduction was allowable as business expenditure and the disallowance was deleted. Disallowance for exempt-income related expenditure was also held unsustainable where no exempt income arose during the year, and the later amendment was treated as prospective from assessment year 2022-23, so it did not apply to the year under review. The Revenue's appeals were rejected and the relief granted by the first appellate authority was sustained on both issues.

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Issues: (i) whether the discount on issue of shares under the Employee Stock Option Plan constituted allowable expenditure under section 37 of the Income-tax Act, 1961; (ii) whether disallowance under section 14A read with Rule 8D of the Income-tax Rules, 1962 was sustainable where no exempt income was earned during the relevant year and the amendment by the Finance Act, 2022 was in issue.

Issue (i): Whether the discount on issue of shares under the Employee Stock Option Plan constituted allowable expenditure under section 37 of the Income-tax Act, 1961.

Analysis: The deduction claimed represented the cost of employee remuneration through stock options and was treated as a business outgoing incurred over the vesting period. The binding jurisdictional precedent held that such discount is not a mere notional or contingent item, but an ascertained liability incurred for business purposes, and that the absence of immediate cash outflow does not deny deductibility under section 37.

Conclusion: The deduction was allowable, and the disallowance was rightly deleted in favour of the assessee.

Issue (ii): Whether disallowance under section 14A read with Rule 8D of the Income-tax Rules, 1962 was sustainable where no exempt income was earned during the relevant year and the amendment by the Finance Act, 2022 was in issue.

Analysis: The assessee had earned no exempt income during the year, and therefore the settled position applied that section 14A could not be invoked in the absence of exempt income. The subsequent amendment by the Finance Act, 2022 was held to operate prospectively from assessment year 2022-23 onwards and could not govern the year under appeal.

Conclusion: The disallowance under section 14A read with Rule 8D was not sustainable, and the deletion was upheld in favour of the assessee.

Final Conclusion: The Revenue's appeals were rejected in entirety, and the relief granted by the first appellate authority was sustained on both disputed issues.

Ratio Decidendi: Employee stock option discount, when incurred as part of employee remuneration and supported by an accrued business liability, is deductible under section 37; and section 14A cannot be applied in the absence of exempt income, while the 2022 amendment operates prospectively.

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