ACIT vs. Spray Engineering Devices Ltd (ITAT Chandigarh)

DATE: (Date of pronouncement)
DATE: July 19, 2012 (Date of publication)

Click here to download the judgement (spray_engg_ESOP_expenditure.pdf)

Value of shares allotted free of cost to employees is deductible revenue expenditure

The assessee allotted 3,94,692 Sweat Equity shares (ESOP) to its employees free of cost for rewarding them for past services or providing know how for making available rights in the IPR as per s. 79A of the Companies Act, 1956. Though the shares were allotted for no consideration, the assessee accounted for the shares at Rs.106.26 each (face value Rs. 10) at its arms length price and claimed Rs. 4.19 crores as a deduction towards “employees benefit expenses”. The shares were not allotted as at 31.3.2006. The AO disallowed the claim on the ground that it was not an ascertained liability but was a contingent liability though the CIT (A) allowed the claim. In appeal before the Tribunal, the department relied on Ranbaxy Laboratories 124 TTJ 771 (Del) & VIP Industries (ITAT Mum). HELD dismissing the appeal:

Though the allotment of the ESOP shares was not done as of 31.3.2006, the number of shares to be allotted to the employees as on 31.3.2006 was specified and immediately thereafter the said shares were so allotted. Consequently, the mere non-allotment of the shares pending completion of certain formalities does not merit the disallowance of said expenditure as being a contingent liability. The fact that the scheme provided for a lock in period of five years under which in case the employee left employment before the expiry of five years, the shares so allotted to him would revert to the assessee, did not make the liability contingent because where the shares were forfeited, the value thereof would be offered to tax in that year (S.S.I. Ltd. vs. DCIT 85 TTJ 1049 (Chennai) followed; Ranbaxy Laboratories 124 TTJ 771 (Del) & VIP Industries (ITAT Mum) distinguished)

Note: S.S.I. Ltd 85 TTJ 1049 (Che) has been approved in PVP Ventures (Mad). For more see article

2 comments on “ACIT vs. Spray Engineering Devices Ltd (ITAT Chandigarh)
  1. Ramakrishnan B says:

    The decision of the Madras ITAT in SSI Ltd (85 TTJ 1049) on ESOP has been confirmed by the Madras High Court in TC No.1023 of 2005 CIT vs PVP Ventures Ltd. (formerly SSI Ltd.) in June 2012.

  2. Ramakrishnan B says:

    The Madras High Court has affirmed the decision of the Chennai ITAT in SSI Ltd. (85 TTJ 1049) in TC No. 1023 of 2005 in CIT vs. PVP Ventures Ltd (formerly SSI Ltd) in June 2012

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