TaxTMI 
TaxTMI 
2019 (2) TMI 2153
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....learned CIT A further erred inter alia in not appreciating the fact that i) The grant of options and the exercise price per equity share pursuant to grant of option under the ESOS was clearly specified and quantified at the time of grant of option itself to the respective employee and therefore the liability incurred by the appellant was definite and ascertained at the time of grant of option in the relevant previous year to its employees ii) The discount amount being the amount of difference between the par value of equity share and the exercise price per share pursuant to grant of option to the employee was benefit granted by the appellant to the employees in consideration of employment and represented employee cost and expenditure incurred wholly and exclusively by the appellant for its legitimate business purpose in the relevant previous year iii) The inference that the exercise price per share was determinable only at the time of vesting and exercise of options in the hands of the respective employees of the appellant and would reflect the correct employees cost was wholly unwarranted and bereft of proper appreciation of facts on record. 3. Brief ....
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....the number of years of working in the company. So appellant had computed the difference between the market price of the shares and value at which it was offered to the employees. The difference of this amount is claimed as ESOP charges of the appellant at Rs. 31,19,00,848/-. In the appellant's submission, appellant states that the company had claimed entire deduction in the first year of the grant. According to the appellant, once ESOP was granted to the employee, it's liability is crystallized. According to the appellant whether the employee would exercise the option granted on the vesting date is a future event which would quantify the company's overall discount it would offer to the employees as well as deduction to claimed. Accordingly appellant pleads that entire expenditure may be allowed as deduction in the first year itself. In support of its claim, appellant refers to decisions in the case of Bharat Earth Movers v CIT [245 ITR 428] and Taparia Tools Ltd. vs. JCIT [Civil Appeal Nos. 6366-6368 of 2003] and states that liability has crystallized at the time of grant of options and hence the entire ESOP expense should be allowed as deduction. Appellant fu....
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....it is only then that the actual amount of discount would be determined, is akin to the quantification of the precise liability taking place at a future date, thereby not disturbing the otherwise liability which stood incurred at the end of the each year on availing the services. It is clearly held in the Biocon decision in the above para that employee become entitled to option at the end of vesting period and it is only then the actual amount of disallowance would be determined. Further in Biocon decision after referring to various Supreme Court decision, in para 10.3 to 10.5 it is held as under: 10.3 We have earlier underlined the concepts of grant of options, vesting of options and exercise of options. The period from grant of option to the vesting of option is the vesting period. It is during such period that an employee is supposed to render service to the company has to earn an entitlement to the shares at a discounted premium. The vesting period may vary from a case to case, if the vesting period is, say four years with equal vesting at the end of each year, then it is the end of the vesting period or during the exercise period, which in turn immediately suc....
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.... options, the company does not incur any obligation to issue the shares at discounted premium. Mere granting of option does neither entitle the employee to exercise such option nor allow the company to claim deduction for the discounted premium. It is during the vesting period that the company incurs obligation to issue discounted shares at the time of exercise of option. Thus the event of granting options does not cast any liability on the company. On the other end is the date of exercising the options. Though the employees become entitled to exercise the option at such stage but the fact is that it is simply a result of vesting of options with them over the vesting period on the rendition of services to the company. In other words, it is a stage of realization of income earned during the vesting period. In the same manner, though the company becomes liable to issue shares at the time of the exercise of option, but it is in lieu of the employees compensation liability which it incurred over the vesting period by obtaining their services. From the above it is apparent that the company incurs liability to issue shares at the discounted premium only during the vesting period. The lia....
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....s proportionately after ESOP scheme was announced for the vesting period of 3 years, appellant is eligible for the claim at the end of the year of the vesting period. In the case of the appellant, ESOP scheme 3 was announced on 22.08.2011 and first vesting period of the appellant comes in the year 22.8.2012. So appellant can claim 1/3rd of the ESOP scheme from the end of the vesting period of 22.8.2012 ie. at the end of 31.3.2013 financial year appellant can claim 1/3rd of the amount of ESOP scheme as per Biocon decision. Further in the case of ESOP 4 the grant date was 14.12.2011. First vesting period starts from 22,8.2014 and 1/3rd can be claimed by the appellant in the F.Y. ending 31.3.2015. By the above discussion, in view of the Biocon decision, it is clear that appellant is not eligible for deduction on ESOP expenses on grant of option to the employee. Here in the appellant's own case appellant claimed deduction on ground of option on ESOP 3 & 4 in the year the schemes were granted. Following the above decision of Biocon, appellant is not eligible for ES0P expenses on grant of option as deduction. Hence, in view of the detailed discussion, appellant is not eligible for de....
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...., the company does not incur any obligation to issue the shares at discounted premium. Mere granting of option does neither entitle the employee to exercise such option nor allow the company to claim deduction for the discounted premium. It is during the vesting period that the company incurs obligation to issue discounted shares at the time of exercise of option. Thus the event of granting options does not cast any liability on the company. On the other end is the date of exercising the options. Though the employees become entitled to exercise the option at such stage but the fact is that it is simply a result of vesting of options with them over the vesting period on the rendition of services to the company. In other words, it is a stage of realization of income earned during the vesting period. In the same manner, though the company becomes liable to issue shares at the time of the exercise of option, but it is in lieu of the employees compensation liability which it incurred over the vesting period by obtaining their services. From the above it is apparent that the company incurs liability to issue shares at the discounted premium only during the vesting period. The liability i....