The Delhi High Court has rejected the Income Tax Department’s appeal against Delhivery Pvt. Ltd., affirming the company’s claim for a deduction of ₹51.48 crore towards Employee Stock Option Plan (ESOP) expenditure and deleting a separate addition of ₹62.73 lakh under Section 56(2)(viib) of the Income Tax Act, 1961.
The Bench of Justice Dinesh Mehta and Justice Rajneesh Kumar Gupta held that the controversy over the deductibility of ESOP expenditure already stood settled in favour of taxpayers by the High Court’s earlier ruling in Commissioner of Income Tax v. Lemon Tree Hotels Ltd.
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On the share-valuation issue, the Court held that the Assessing Officer was not justified in rejecting a valuation report merely because it had been prepared by a chartered accountant rather than a merchant banker. The assessment related to Assessment Year 2018–19, corresponding to Financial Year 2017–18, while the Central Board of Direct Taxes removed the option of certification by a chartered accountant only through a notification issued on May 24, 2018, applicable from the subsequent financial year.
The High Court consequently found no infirmity in the orders passed by the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal and dismissed the Revenue’s appeal in its entirety.
The appeal arose from relief granted to Delhivery by the appellate authorities. The High Court had admitted the Revenue’s appeal on two questions of law through orders dated March 17, 2025 and December 16, 2025.
The first question was whether the ITAT was correct in refusing to sustain the disallowance of ₹51,48,28,498 claimed by Delhivery on account of its ESOP scheme.
The second question concerned an addition of ₹62,72,719 as alleged income under Section 56(2)(viib). The provision, commonly associated with taxation of excess share premium, applies where a closely held company receives consideration for issuing shares that exceeds their prescribed fair market value, subject to the statutory conditions and exceptions.
Appearing for Delhivery, Senior Advocate Sachit Jolly submitted at the outset that the first issue was no longer open for consideration. He relied on the Delhi High Court’s August 18, 2015 judgment in Commissioner of Income Tax v. Lemon Tree Hotels Ltd., which had recognised the cost of ESOPs debited to the profit and loss account.
In Lemon Tree Hotels, the High Court had affirmed the ITAT’s deletion of an addition made by the Assessing Officer through disallowance of ESOP expenses. That decision referred to the Madras High Court’s ruling in CIT-III Chennai v. PVP Ventures Ltd., where a similar issue had been decided in favour of the taxpayer by holding that the cost of an ESOP could be debited to the profit and loss account.
The Delhi High Court had also drawn support from its ruling in CIT v. Oswal Agro Mills Ltd., in which expenditure incurred in connection with issuing debentures or obtaining a loan was treated as revenue expenditure.
During the hearing of Delhivery’s case, the Revenue’s Senior Standing Counsel, Siddhartha Sinha, was unable to dispute the legal and factual position flowing from the earlier judgment.
Following Lemon Tree Hotels, the Bench answered the first question in favour of Delhivery and upheld the deletion of the ₹51.48 crore ESOP disallowance.
The second dispute arose from the valuation relied upon by Delhivery in relation to the Section 56(2)(viib) addition.
The Assessing Officer had rejected the valuation on the ground that it was conducted by a chartered accountant, whereas, according to the officer, the valuation should have been performed by a merchant banker.
The Assessing Officer referred to CBDT Notification No. 23/2018 dated May 24, 2018. Under the amended framework relied upon by the officer, certification by a chartered accountant was discontinued and a merchant banker became the eligible person for furnishing the relevant valuation report.
The central question was whether that later change could be used to invalidate a chartered accountant’s valuation for an earlier financial year.
The High Court noted that the assessment before it concerned Assessment Year 2018–19, corresponding to Financial Year 2017–18.
The CBDT change relied upon by the Assessing Officer was brought about only on May 24, 2018 and operated from the financial year following the year relevant to Delhivery’s assessment. The Court therefore held that the Assessing Officer was not justified in discarding the valuation report prepared by the chartered accountant.
In effect, the eligibility of the valuer had to be tested against the legal framework applicable to the relevant financial year. A restriction introduced subsequently could not be applied to reject a valuation that was permissible under the regime governing Financial Year 2017–18.
The Bench accordingly approved the approach taken by the Commissioner of Income Tax (Appeals) and the ITAT in setting aside the addition.
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