Difference between the Price offered to Employees under ESOP and Market Price of the Stock is Revenue Expenditure: Delhi High Court

Difference between the Price offered to Employees under ESOP and Market Price of the Stock is Revenue Expenditure: Delhi High Court

The Delhi High Court ruled that the difference between the price offered to employees under ESOP and market price of the stock is revenue expenditure.

Issue raised

The issue raised before the court was whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal erred in law in holding that the difference between the price at which stock options were offered to employees of the appellant company under ESOP and ESPS and the prevailing market price of the stock on the date of grant of such options was not allowable revenue expenditure under Section 37(1) of the Income Tax Act, 1961?

Decision 

The division bench of Justice Manmohan and Justice Manmeet Pritam Singh Arora said that during the pendency of the appeal, the Karnataka High Court in Commissioner of Income Tax v/s Biocon Ltd. upheld the judgment of the Special Bench of the Tribunal deciding the question of law in favour of the assessee.

“The Karnataka High Court held that the ESOPs vest in an employee over a period of four years i.e., at the rate of 25%, which means at the end of first year, the employee has a definite right to 25% of the shares and the assessee is bound to allow the vesting of 25% of the options. It is well settled in law that if a business liability has arisen in the accounting year, the same is permissible as deduction, even though, liability may have to quantify and discharged at a future date. On exercise of option by an employee, the actual amount of benefit has to be determined is only a quantification of liability, which takes place at a future date” the court noted. 

The court while setting aside the impugned judgment of the Tribunal said that following the judgment of the Karnataka High Court in CIT vs. Biocon Ltd., the question of law is decided in favour of the assessee and it is held that the Income Tax Appellate Tribunal erred in law in holding that the difference between the price at which stock options were offered to employees of the appellant company under ESOP and ESPS and the prevailing market price of the stock on the date of grant of such options was not allowable revenue expenditure under Section 37(1) of the Income Tax Act, 1961.

Case title: Pvr ltd v/s Commissioner of Income Tax

Citation:  ITA 564/2012

Click here to read the Order/Judgment

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