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2017 (1) TMI 783 - ITAT DELHI

2017 (1) TMI 783 - ITAT DELHI - TMI - Stock Appreciation right expenses - revenue or capital expenditure - Held that:- Hon’ble Madras High Court has also an occasion to consider the allowability of the ESOP expenditure [2012 (7) TMI 696 - MADRAS HIGH COURT] wherein Hon’ble high court has held that the claim of the ESOP is an ascertained liability for deduction on is allowable. Similarly Hon’ble Delhi High Court in case of CIT versus Lemon tree hotels Ltd [2015 (11) TMI 404 - DELHI HIGH COURT] ha .....

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be erroneous and therefore set aside - Decided in favour of assessee - ITA No. 2283/Del/2013, ITA No. 3634/Del/2014 - Dated:- 4-1-2017 - Ms Suchitra Kamble, Judicial Member And Shri Prashant Maharishi, Accountant Member Assessee by : Sh. Ajay Vohra, Sr. Adv Sh. Rohit Garg, Adv Ms. Tejasvi Jain, CA Revenue by: Sh. FR Meena, Sr. DR ORDER Per Prashant Maharishi, A. M. 1. These are the two appeals filed by the assessee against the order of the ld CIT (A)-XVIII, New Delhi dated 28.02.2013 and 03.03. .....

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for appeal of AY 2009-10. 2. The assessee has raised the following grounds of appeal for the Assessment Year 2008-09:- 1. That the Commissioner of Income tax (Appeals) erred on facts and in law in sustaining the disallowance of ₹ 11,47,623 (as against correct amount of ₹ 10,89,249) made by the assessing officer on account of the difference between purchase price of Stock Appreciation Right OSAR) and the sale price of such SAR at the time of exercise by the employees, holding the sam .....

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e SAR scheme. 1.2 That the Commissioner of Income tax (Appeals) erred on facts and in law in not appreciating that the above SAR scheme was implemented to motivate, reward and retain key employees whereby each SAR granted to the employees of the appellant stood equivalent to one share of Religare Enterprises Ltd. ('REL') and the aforesaid differential amount was, thus, in the nature of employee benefit allowable under section 37(1) of the Income Tax Act, 1961 ('the Act'). 1.3 Wit .....

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R) paid to the employees of the appellant, holding the same to be capital expenditure incurred in relation to issue of shares to employees. 2.1 That the Commissioner of Income tax (Appeals) erred on facts and in law in not appreciating that the above differential amount of ₹ 27,89,501 was in the nature of employee compensation allowable as deduction under section 37(1) of the Act. 2.2 Without prejudice, and in the alternative, the Commissioner of Income tax (Appeals) erred on facts and in .....

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tween purchase price of Stock Appreciation Right ('SAR') and the sale price of such SAR at the time of exercise by the employees, holding the same to be capital loss and not allowable business deduction. 1.1 That the Commissioner of Income tax (Appeals) erred on facts and in law in not appreciating that the above differential amount actually represents the loan granted by the appellant to Religare Enterprises Ltd. Employees SAR Trust ('the Trust') for the purpose of administering .....

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esaid differential amount was, thus, in the nature of employee benefit allowable under section 37(1) of the Income Tax Act, 1961 ('the Act'). 1.3 Without prejudice, the Commissioner of Income tax (Appeals) erred on facts and in law in not allowing deduction of the aforesaid amount of loan written off as loss incidental to business under section 28 of the Act. 4. The assessee is a limited company engaged in the business of providing granting of loan corporate advisory services and distrib .....

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nched a stock appreciation Right scheme effective from 01/04/2007 for employee s retention purposes. The grant price of this stock appreciation Right was nil. However, the value of each stock appreciation Right was ₹ 140/-. The scheme was administered through a trust. The trust purchase shares of Religare from the stock exchange at an average price of ₹ 503/- per share. The funding of such purchase was by way of loan, which was initially given by Religare enterprise Ltd, but later on .....

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xercised by the employee, after deducting tax at source. Stock appreciation rights that were granted to the employees of the company were 24220 total amount of the loan that was given by the assessee to the trust is ₹ 12182660/- being amount paid for 24220 stock appreciation rights at the rate of ₹ 503/- per right. For the purpose of exercising the right by the employee a sum of ₹ 2789501/- for 47993 units were paid to the employees as bonus and allowed by the AO as deduction. .....

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/12/2010. Assessee challenged the above addition to the total income before the Ld. first appellate authority. The Ld. first appellate authority confirmed the action of the Ld. assessing officer and further enhanced the total income of the assessee by ₹ 27,89,501/- further as distribution of bonus incentive paid to the employees holding it to be a capital expenditure and therefore it is not allowable expenses. Therefore, against the total disallowance made by the Ld. assessing officer of & .....

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cheme. He further took us to the trust deed between the appellant and this trust of the scheme to administer the above stock appreciation Right scheme. He further placed before us the audited financial statements of the trust for financial year 2007 - 08 and 2008 - 09. He submitted that those salient features of the stock appreciation rights scheme are to reward and retain the employees to attract best talent to provide motivation for best performance of the employees. According to that scheme e .....

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of exercise of the right by the employees then the difference between the base market price and the enhanced or increased value shall be payable to the to the holder of such rights holder employees. He further explained that the trust initially purchased 532630 shares of the appellant from the stock exchange at an average price of ₹ 50 3.79 per share, which was financed through loans given to the trust by the respective Religare group companies employing the employees and implementing the .....

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uction available under the income tax act for the above expenses that the appellant is entitled to deduction of the total cost that it incurred in relation to the stock appreciation rights scheme of 2007 which was for awarding and retaining employees and motivating them for better performance. Therefore, the above said cost represents the real tangible outflow of money and is beyond doubt revenue expenditure in nature. With respect to the enhancement is submitted that it is also related to the s .....

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e by the decision of the Hon ble Delhi High Court in case of CIT versus Lemon tree hotels Ltd, ITA No. 107 - 2015 date 18/08/2015. He further submitted that the about issue is also squarely covered in favour of the appellant in view of the decision of the Hon ble Madras High Court in case of CIT versus M/s PVP ventures Ltd reported at 211 taxman 554. He further relied on the decision of the special bench of ITAT in Biocon Ltd versus deputy Commissioner of income tax reported at 155 TTJ 649 where .....

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h in the case of Religare enterprise Ltd employees SAR trust versus ITO in ITA No. 6595/del/2013 and 4856/del/2014 dated 28/11/2014 wherein it has been held that the assessee claims that that particular trust is a pass through entity. In view of this is submitted that issue is now squarely covered in favour of the assessee. 6. Ld. departmental representative relied upon the orders of the order of the lower authority and vehemently claimed that the expenditure incurred by the assessee in stock ap .....

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ted 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 ₹ 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 respecti .....

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ant has given a loan of ₹ 17522013/- for 434780 shares. The cost of the SAR was of ₹ 363.79, being ₹ 503.79 per share less ₹ 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 appre .....

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t under ESOP is nothing but employees cost incurred by the assessee for which deduction is warranted. On the other hand, the Revenue has set up a case that no deduction can be allowed as such discount is not only a short capital receipt but also a contingent liability. A. Is discount under ESOP a short capital receipt? 9.2.1 The ld. DR stated that the question of deduction u/s 37 can arise only if the assessee incurs any expenditure, which thereafter satisfies the requisite conditions of the sub .....

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which applies to only expenditure, cannot be activated. He further took pains in explaining that there is no revenue expenditure involved in the transaction of issuance of ESOP at discount. The so called 'discount' represents the difference between market price of the shares at the time of grant of options and the price at which such options are granted. Since the amount over and above the face value of the shares, being the share premium, is itself a capital receipt, any under-recovery .....

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of share premium is not taxable, any short receipt of such premium on issuing options to employees will be notional loss and not actual loss for which any liability is incurred. The learned Departmental Representative contended that the Mumbai bench of the Tribunal in the case of VIP Industries v. Dy. CIT [IT Appeal No.7242 (Mum.) of 2008 has also taken similar view vide its order dated 17.09.2010.] 9.2.2 Per contra, the learned AR submitted that it is not a case of any short receipt of share pr .....

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argued that PVP Ventures Ltd. (supra) is a solitary judgment rendered by any High Court on the issue and hence the same needs to be followed in preference to any contrary Tribunal order. It was also pointed out that the Chennai bench's view has been subsequently followed by the Chandigarh Bench of the Tribunal in Asstt. CIT v. Spray Engineering Devices Ltd. [2012] 23 taxmann.com 267/53 SOT 70 (URO). 9.2.3 Let us examine the facts of the case of Ranbaxy Laboratories Ltd. (supra), which has b .....

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ading it over the vesting period. It was one of the years of the vesting period for which the assessee claimed deduction that came up for consideration before the Tribunal. It was held by the Tribunal that the market price of ₹ 738.55 per share would have resulted in realization of higher share premium. Since the assessee did not account for the difference between ₹ 738.55 and ₹ 10 as its income during the year, there was no loss of income. It was further noticed that by issuin .....

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ding" or "paying out or away". The contention of the assessee that SEBI Guidelines recommend claim for deduction of discount over the vesting period, did not find favour with the Tribunal on the ground that the SEBI Guidelines were not relevant in determining the total income chargeable to tax. 9.2.4 In order to appreciate the rival submissions, it is of the utmost importance to understand the concept of ESOP. Section 2(15A) of the Indian Companies Act, 1956 defines "employee .....

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t discount. The amount of discount represents the difference between market price of the shares at the time of the grant of option and the offer price. In order to be eligible for acquiring the shares under the ESOP, the concerned employees are obliged to render services to the company during the vesting period as given in the scheme. On the completion of the vesting period in the service of the company, such options vest with the employees. The options are then exercised by the employees by mak .....

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commences with the grant of option and terminates when the options so granted vest in the employees after serving the company for the agreed period. By granting the options, the company gets a sort of assurance from its employee for rendering uninterrupted services during the vesting period and as a quid pro quo it undertakes to compensate the employees with a certain amount given in the shape of discounted premium on the issue of shares. 9.2.5 The core of the arguments of the ld. DR in this reg .....

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pany, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares', then such excess share premium shall be charged to tax under the head 'Income from other sources'. But for that, the amount of share premium has always been under .....

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sentative would properly fit in, thereby debarring the company from claiming any deduction towards discounted premium. It is quite basic that the object of issuing shares can never be lost sight of. Having seen the rationale and modus operandi of the ESOP, it becomes out-and-out clear that when a company undertakes to issue shares to its employees at a discounted premium on a future date, the primary object of this exercise is not to raise share capital but to earn profit by securing the consist .....

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s in lieu of their services and two, when the shares are directly issued to employees at a reduced rate. In both the situations, the employees stand compensated for their effort. If under the first situation, the company, say, on receipt of premium amounting to ₹ 100 from issue of shares to public, gives ₹ 60 as incentive to its employees, such incentive of ₹ 60 would be remuneration to employees and hence deductible. In the same way, if the company, instead, issues shares to i .....

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contention of the ld. DR that by issuing shares to employees at a discounted premium, the company got a lower capital receipt, is bereft of an force. The sole object of issuing shares to employees at a discounted premium is to compensate them for the continuity of their services to the company. By no stretch of imagination, we can describe such discount as either a short capital receipt or a capital expenditure. It is nothing but the employees cost incurred by the company. The substance of this .....

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expenditure in the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". To put it differently, an expenditure must be laid out or expended wholly and exclusively for the purpose of business so as to be eligibl .....

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vant to income from profits of business or profession covering sections 28 to 41. Section 37 obviously falls under Chapter IV-D. Sub-section (2) of section 43 defines "paid" to mean: "actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head 'profits and gains of business or profession'." When we read the definition of the word "paid" u/s 43(2) in juxtaposition to section 37(1), t .....

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y has been incurred by an assessee……'. When section 43(2) of the Act is read in conjunction with section 37(1), the meaning of the term 'expenditure' turns out to be the same as is there in the aforequoted part of the definition under section 2(h) of the Expenditure Act, 1957, viz., not only 'paying out' but also 'incurring'. Coming back to our context, it is seen that by undertaking to issue shares at discounted premium, the company does not pay anythin .....

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"expenditure" as used in section in 37(1). In that case, the assessee incurred additional liability due to exchange rate fluctuation on a revenue account. The Assessing Officer did not allow deduction u/s 37. When the matter finally reached the Hon'ble Supreme Court, their Lordships noticed that the word "expenditure" has not been defined in the Act. They held that : "the word "expenditure" is, therefore, required to be understood in the context in which it .....

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th in section 32, therefore, the parliament has used expression "any expenditure" in section 37 to cover both. Therefore, the expression "expenditure" as used in section 37 made in the circumstances of a particular case, covers an amount which is really a "loss" even though the said amount has not gone out from the pocket of the assessee'. From the above enunciation of law by the Hon'ble Summit Court, there remains no doubt whatsoever that the term 'expe .....

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he learned Departmental Representative supported the impugned order by contending that the entitlement to ESOP depends upon the fulfilment of several conditions laid down under the scheme. It is only when all such conditions are fulfilled and the employees render services during the vesting period that the question of any ascertained liability can arise. He submitted that during the entire vesting period, it is only a contingent liability and no deduction is admissible under the provisions of th .....

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deduction is not a contingent liability but an ascertained liability. He stated that in the ESOP 2000, there is a vesting period of four years, which means that the options to the extent of 25% of the total grant would vest with the eligible employees at the end of first year after rendering unhindered service for one year and it would go on till the completion of four years. 9.3.2 It is a trite law and there can be no quarrel over the settled legal position that deduction is permissible in res .....

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nd point of the company, the options under ESOP 2000 vest with the employees at the rate of 25% only on putting in service for one year by the employees. Unless such service is rendered, the employees do not qualify for such options. In other words, rendering of service for one year is sine qua non for becoming eligible to avail the benefit under the scheme. Once the service is rendered for one year, it becomes obligatory on the part of the company to honor its commitment of allowing the vesting .....

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h the deductibility or otherwise of provision for liability towards encashment of earned leave. In that case, the company floated beneficial scheme for its employees for encashment of leave. The earned leave could be accumulated up to certain days. The assessee created provision of ₹ 62.25 lakh for encashment of accrued leave and claimed deduction for the same. The Assessing Officer held it to be a contingent liability and hence not a permissible deduction. When the matter finally came up .....

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should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain." From the above enunciation of law by the Hon'ble Supreme Court, it is manifest that a definite bu .....

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th this legislative amendment, the application of the ratio decidendi in the case of Bharat Earth Movers (supra) to the provision for leave encashment has been nullified. However, the principle laid down in the said judgment is absolutely intact that a liability definitely incurred by an assessee is deductible notwithstanding the fact that its quantification may take place in a later year. The mere fact that the quantification is not precisely possible at the time of incurring the liability woul .....

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f dispatch, whichever is earlier, the company would rectify or replace the defective parts free of charge. This warranty was given under certain conditions stipulated in the warranty clause. The assessee made a provision for warranty at ₹ 5.18 lakh towards the warranty claim likely to arise on the sales effected by the assessee. The Assessing Officer disallowed the same on the ground that the liability was merely a contingent liability and hence not allowable as deduction u/s 37 of the Act .....

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.5 When we consider the facts of the present case in the backdrop of the ratio laid down by the Hon'ble Supreme Court in Bharat Earth Movers (supra) and Rotork Controls India (P.) Ltd. (supra), it becomes vivid that the mandate of these cases is applicable with full force to the deductibility of the discount on incurring of liability on the rendition of service by the employees. The factum of the employees becoming entitled to exercise options at the end of the vesting period and it is only .....

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ided in the schemes of ESOP that the vested options that lapse due to non-exercise and/or unvested options that get cancelled due to resignation of the employees or otherwise, would be available for grant at a future date or would be available for being re-granted at a future date. If we consider it at micro level qua each individual employee, it may sound contingent, but if view it at macro level qua the group of employees as a whole, it loses the tag of 'contingent' because such lapsin .....

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115W to 115WL with the caption : "Income-Tax on Fringe Benefits" has been inserted by the Finance Act, 2005 w.e.f. 1.4.2006. Memorandum explaining the provisions of the Finance Bill, 2005 highlights the details of the Fringe Benefits Tax. It provides that : 'Fringe benefits as outlined in section 115WB, mean any privilege, service, facility or amenity directly or indirectly provided by an employer to his employees (including former employees) by reason of their employment.' Cha .....

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Chapter, 'fringe benefits' means any consideration for employment as provided under clauses (a) to (d). Clause (d), which is relevant for our purpose, states that : 'any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer free of cost or at concessional rate to his employees (including former employee or employees)' shall be taken as fringe benefit. Explanation to this clause clarifies that for the purposes of this clause,- .....

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ring the course of service. If the legislature considers such discounted premium to the employees as a fringe benefit or 'any consideration for employment', it is not open to argue contrary. Once it is held as a consideration for employment, the natural corollary which follows is that such discount (i) is an expenditure; (ii) such expenditure is on account of an ascertained (not contingent) liability ; and (iii) it cannot be treated as a short capital receipt. In view of the foregoing di .....

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ecomes taxable when a right to receive it is finally acquired notwithstanding the fact that when such income is actually received. Even if such income is actually received in a later year, its taxability would not be evaded for the year in which right to receive was finally acquired. In the same manner, an expense becomes deductible when liability to pay arises irrespective of its actual discharge. The incurring of liability and the resultant deduction cannot be marred by mere reason of some dif .....

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stage and is dischargeable at a future date. It follows that the deduction for an expense is allowable on incurring of liability and the same cannot be disturbed simply because of some difficulty in the proper quantification. A line of distinction needs to be drawn between a situation in which a liability is not incurred and a situation in which the liability is incurred but its quantification is not possible at the material time. Whereas in the first case, there cannot be any question of allow .....

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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 at the end of the vesting period or during the exercise period, which in turn immediately succeeds the vesting period, that the employee becomes entitled to exercise 100 options or qualify for receipt of 100 shares at discount. Though the shares are allotted at the end of the vesting period, but it is during such vesting period that the entitl .....

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an employee becomes entitled to the shares at a discounted premium over the vesting period depending upon the length of service provided by him to the company. In all such schemes, it is at the end of the vesting period that option is exercisable albeit the proportionate right to option is acquired by rendering service at the end of each year. 10.4 Similar is the position from the stand point of the company. An obligation falls upon the company to allot shares at the time of exercise of option .....

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) of the Act. Similarly at the end of the second year of service by the employees, the company can claim deduction for discounted premium in respect of further 25 shares so on and so forth till fourth year when the last tranche of discounted premium in respect of 25 shares becomes available for deduction. It, therefore, transpires that a company under the mercantile system can lawfully claim deduction for total discounted premium representing the employees cost over the vesting period at the rat .....

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on. 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 .....

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ch has been strongly relied by the ld. AR in support of his claim for deduction of discount during the years of vesting of options. In that case the vesting period was three years and the assessment order was passed u/s 143(3), inter alia, allowing deduction of ₹ 66.82 lakh under the head "Staff welfare expenses" on account of amortization of discounted value of option over a period of three years. The CIT revised such order by directing the A.O. to disallow ESOP expenditure of & .....

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of the SEBI Guidelines in this regard. These Guidelines provide for granting of deduction on account of discount on issue of options during the vesting period. It has been so explained with the help of an example in Schedule I to the Guidelines. For the sake of simplicity, we are taking an instance under which an option of share with face value of ₹ 10 is given under ESOP to employees at the option price of ₹ 10 as against the market price of such shares at ₹ 110 on that date. .....

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roportionate deduction. Thus it is evident that the view taken by the tribunal in that case not only matches with the SEBI Guidelines but also the 'accrual concept' in the mercantile system of accounting, thereby allowing deduction at the stage of incurring of liability. 10.8 Reverting to the questions of 'when' and 'how much' of deduction for discount on options is to be granted, we hold that the liability to pay the discounted premium is incurred during the vesting peri .....

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that the discount on options under ESOP is an ascertained liability and the second major issue that the discount is deductible over the vesting period on straight line basis unless the vesting is not uniform, then arises the present issue as to whether any subsequent adjustment is warranted at the time of exercise of options, to the deductions earlier allowed for the amount of discount. It is noticed that the assessment years 2003-2004 to 2007-2008 are under consideration and during these years .....

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main unvested or lapse at the end of the exercise period. It is at this later stage that the provisional amount of discount on ESOP, initially quantified on the basis of market price at the time of grant of options, needs to be suitably adjusted with the actual amount of discount. 11.1.3 As regards the adjustment of discount when the options remain unvested or lapse at the end of the exercise period, it is but natural that there is no employee cost to that extent and hence there can be no deduct .....

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n the basis of the market price at the time of grant of option ceases to be admissible and hence needs to be reversed. The ld. AR stated that the discount in respect of the unvested/lapsing options has been reversed on the happening of such events and the overall employee cost has been correspondingly reduced. We find that the SEBI Guidelines also provide that the discount written off in respect of unvested options and the options lapsing at the end of the exercise period shall be reversed at th .....

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e second situation in which the options are exercised by the employees after putting in service during the vesting period. In such a scenario, the actual amount of remuneration to the employees would be only the amount of actual discounted premium at the time of exercise of option. The Hon'ble Supreme Court in the case of CIT v. Infosys Technologies Ltd. [2008] 297 ITR 167/166 Taxman 204 relevant to the assessment years 1997-98 to 1999-2000 has held that the allotment of shares to employees .....

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r has been in employment of that person" shall be treated as a perquisite. It further provides that in a case the allotment or transfer of specified securities is made in pursuance of an option exercised by an individual, the value of the specified securities shall be taxable in the previous year in which such option is exercised by such individual. Such clause (iiia) was subsequently deleted with effect from 1st April, 2001. After certain changes to the relevant provisions in this regard, .....

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sweat equity shares, as the case may be, on the date on which the option is exercised by the assessee as reduced by the amount actually paid by, or recovered from, the assessee in respect of such security or shares'. Two things surface from the above provisions. First, that the perquisite arises on the 'allotment' of shares and second, the value of such perquisite is to be computed by considering the fair market value of the shares on 'the date on which the option is exercised .....

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ition has now been clarified beyond doubt by the legislature that the ESOP discount, which is nothing but the reward for services, is a taxable perquisite to the employee at the time of exercise of option, and its valuation is to be done by considering the fair market value of the shares on the date on which the option is exercised. 11.1.5 The other side of the coin is the amount of remuneration to the employees in the hands of the company. We have noticed earlier that an expense becomes deducti .....

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hands of the company has also to be 'x'. It can neither be 'x+1' nor 'x-1'. It is simple and plain that the amount of remuneration which percolates to the employees will always be equal to the amount flowing from the company and such remuneration to the employee in the present context is the amount which he actually becomes entitled to on the exercise of options. Thus, it is palpable that since the remuneration to the employees under the ESOP is the amount of discount w. .....

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t employees cost. Since the definite liability is incurred during the vesting period, it has to be quantified on some logical basis. It is this market price at the time of the grant of options which is considered for working out the amount of discount during the vesting period. But, since actual amount of employees cost can be precisely determined only at the time of the exercise of option by the employees, the provisional amount of discount availed as deduction during the vesting period needs t .....

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tuation III Market value per share 110 110 130 90 Option price 10 10 10 10 Employee s compensation or Discount 100 100 120 80 11.1.7 From the above table it can be noticed that the market price of the shares at the time of grant of option was ₹ 110 against the option price of ₹ 10, which resulted in discount at ₹ 100. With the vesting period of four years with the equal vesting, the company can rightly claim deduction at the rate of ₹ 25 each at the end of first, second, .....

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stment to the discount is required at the time of exercise of option. In Situation II, the market price of the share at the time of exercise of option has gone up to ₹ 130. The amount of real compensation to employee is ₹ 120 as against the tentative compensation of ₹ 100 per share which was accounted for and allowed as deduction during the vesting period. As the actual quantification of the compensation has turned out to be ₹ 120, the company is entitled to a further ded .....

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cise of option. Taxation vis-à-vis Accountancy principles 11.2.1 It has been noticed that broadly there are three stages having effect on the total income of the company in the life cycle of ESOP, viz., (i) during the vesting period, (ii) at the time of unvesting/lapse of options and (iii) finally at the time of exercise of options. It has been argued that the assessee company claimed deduction for the amount of discount during the vesting period on the basis of the market price of shares .....

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of grant of option and price at the time of exercise of option. The argument seems to be that the SEBI Guidelines do not provide for such downward adjustment. It has been argued by the ld. AR that where the provisions of the Act specifically provide for treatment of a particular source of income in a particular manner, then the germane provision should be followed. If, however, there is no specific provision dealing with an issue in the Act, then the accounting principles should be adhered to wh .....

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n the case of an underwriter that it would be right to consider the net investment, that is the purchase price less the underwriting commission received by the underwriter as investment as against treating the gross amount by taking into consideration the principles of commercial accounting. He stated that since there is no specific provision in the Act providing for the treatment of discount on ESOP in the computation of total income, the accounting principles formulated by way of the SEBI Guid .....

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in the absence of any specific provision in the Act, the accounting principles should be followed for determining the total income of the assessee. What is true for accounting purpose need not necessarily be true for taxation. Taxation principles are enshrined in the legislature. Power to legislate lies with the Parliament. Accounting standards or Guidance Note or Guidelines etc., by whatever name called, issued by any autonomous or even statutory bodies including the Institute of Chartered Acco .....

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specific provision in the Act on the ESOP discount. It is axiomatic that the taxation rules are always embodied in the relevant Act, either in a specific or a general manner. These can be specific by making a clear cut provision in respect of deductibility of a particular item of expense or taxation of a particular item of income. General provisions are those which set out the overall principles to govern the deductibility or taxability of unspecified items. For example, the definition of ' .....

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cific expenses or allowances. Similarly, there is section 37(1), which grants deduction for expenses not specifically set out in other sections, if the conditions stipulated in the section, are fulfilled. All other items of expenses, which fulfil the requisite conditions, gain deductibility under section 37(1). To put it in simple words, this section is a specific provision for granting deduction in respect of the unspecified or the general categories of expenses. Discount on ESOP is a general e .....

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ace the proposition anywhere from the Act that the accounting principles are also determinative of the tax liability. The jurisprudence is rather the other way around. In Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), the Hon'ble Supreme Court has laid down in so many words that the taxing principles cannot walk on the footsteps of the accounting principles. At this juncture, it would be useful to have a glimpse at the following observations of the Hon'ble Supreme Court in th .....

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other provision of the Act. As was pointed out by Lord Russell in the case of B.S. C. Footwear Ltd. v. Ridguary (Inspector of Taxes [1970] 77 ITR 857 (CA), the income- tax law does not march step by step in the footprints of the accountancy profession.' 11.2.6 The same view has been adopted by the Hon'ble Supreme Court in Godhra Electricity Co. Ltd. (supra), by holding that : 'Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which .....

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then there is an underlying presumption that such accounting principle is in conformity with and not in conflict with the taxation principle. The essence of the matter is that taxation principles are to be followed. If an accounting principle is in conformity with the mandate of taxing principle and reference is made to such accounting principle while deciding the issue, it does not mean that the accounting principle has been followed. It simply means that the taxation principle has been follow .....

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lizers Ltd (supra). Dealing with the same, the Hon'ble Supreme Court held that : "The question in Challapalli Sugars Ltd.'s case (supra) was about computation of depreciation and development rebate under the Indian Income-tax Act, 1922. In order to calculate depreciation and development rebate it was necessary to find out "the actual cost" of the plant and machinery purchased by the company. This court held that "cost" is a word of wider connotation than "pr .....

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d Accountants." From the above observations there is not even an iota of doubt in our minds that there can be no question of following the accounting principle or Guidance notes etc. in the matter of determination of total income. 11.2.9 The trump card of the ld. AR to bolster his submission for assigning the status of binding force to the SEBI Guidelines is the order in the case of S.S.I. Ltd. (supra) which came to be affirmed by the Hon'ble Madras High Court in PVP Ventures Ltd. (supr .....

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rom variation in the market price of the shares at the time of exercise of option by the employees vis-à-vis the market price at the time of grant of option. In other words, the SEBI Guidelines prescribe accounting treatment only in respect of the period of vesting of the options and the situation arising out of unvested options or vested options lapsing. The very reference by the Chennai Bench of the Tribunal in SSI Limited (supra) to the SEBI Guidelines is indicative of the fact that it .....

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of the vesting years. In the earlier part of this order, we have held that the deductibility of discount during the vesting period, as prescribed under the SEBI Guidelines, matches with the treatment under the mercantile system of accounting. To that extent, we also hold that the SEBI guidelines are applicable in the matter of deduction of discount. Neither there was any issue before the Hon'ble Madras High Court nor it dealt with a situation in which the market price of the shares at the t .....

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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 .....

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