|CORAM:||Prashant Maharishi (AM), Suchitra Kamble (JM)|
|CATCH WORDS:||capital vs. revenue expenditure, ESOP|
|COUNSEL:||Ajay Vohra, Rohit Garg|
|DATE:||January 4, 2017 (Date of pronouncement)|
|DATE:||January 18, 2017 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|S. 37(1): Stock Options (appreciation rights) are intended to motive employees and so the expenditure thereon is a deductible revenue expenditure. The discount (difference between market price and vesting price) is allowable upon vesting subject to reversal if the options lapse|
(i) The claim of the assessee was that the assessee has introduced the writ stock option scheme to motivate reward and retained the employees including employees of its subsidiaries and it was implemented through separate employees stock option trust. The assessee was granted stock appreciation rights, which were equivalent to one share of the assessee aggregating to 532630 stock appreciation rights. To honour its commitment the trust purchased the equal number of the equity shares from the stock market at an average price of Rs. 503.79 per share. The assessee trust sold equal number of the shares of the appellant on the stock exchange with respect to the stock appreciation Right exercised by the employees every year and the money was remitted to the respective companies. The companies on their part and in accordance with the scheme retained Rs. 140/- per share and paid the balance amount to the employees SAR compensation. The loan amount given to the trust by the company was adjusted towards the acquisition of shares to the extent of sale price and the balance amount was the loss incurred by the appellant, as it was not recoverable from the trust. For the appellant 34780 stock appreciation rights for granted to 52 employees for which the appellant has given a loan of Rs. 17522013/- for 434780 shares. The cost of the SAR was of Rs. 363.79, being Rs. 503.79 per share less Rs. 140/- and that crystallized at the beginning itself on purchase of the shares by the trust. This amount was amortized on estimated basis by the management over a period of 3 years, which was the vesting period over which this stock appreciation rights would be exercised by the employees equally each year. On analyzing the scheme of these stock appreciation rights. It was held by the Ld. first appellate authority that it is akin to the employee’s stock option schemes.
(ii) The issue of deductibility of ESOP expenditure has been decided extensively by the special bench of ITAT in Biocon Limited V DCIT (LTU ) Bangalore in 144 ITD 21 where it was held that the discount under ESOP is in the nature of employees cost and is hence deductible during the vesting period w.r.t. the market price of shares at the time of grant of options to the employees. The amount of discount claimed as deduction during the vesting period is required to be reversed in relation to the unvesting/lapsing options at the appropriate time. However, an adjustment to the income is called for at the time of exercise of option by the amount of difference in the amount of discount calculated with reference the market price at the time of grant of option and the market price at the time of exercise of option. No accounting principle can be determinative in the matter of computation of total income under the Act. The special bench held that discount on issue of Employee Stock Options is allowable as deduction in computing the income under the head ‘Profits and gains of business or profession’.
(iii) The Hon’ble Madras High Court has also an occasion to consider the allowability of the ESOP expenditure in 211 taxman 554 wherein Hon’ble high court has held that the claim of the ESOP is an ascertained liability for deduction on is allowable.
(iv) Similarly Hon’ble Delhi High Court in case of CIT versus Lemon Tree Hotels Ltd in ITA No. 107/2015 has held that the expenses debited as cost of employee stock option plan in the profit and loss account is allowable. In view of the above judicial precedents of special bench of tribunal and decision of the Hon’ble Delhi and Madras High Courts, we respectfully hold that stock Appreciation right expenses claimed by the appellant, amounting to Rs. 393714/– is not in a capital expenses, but revenue expenditure and ascertained liability therefore it is allowable expenses. In the result the disallowance made by the Ld. and assessing officer of Rs. 1147623/– and enhancement made to that taxable income of the appellant by Ld. 1st appellate authority of Rs. 2789501/– is held to be erroneous and therefore set aside. In the result the appeal of the assessee for AY 2008-09 is allowed.