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TMI Blog2020 (11) TMI 779X X X X Extracts X X X X X X X X Extracts X X X X ..... ng that difference between market price of the shares at the time of grant of option and offer price amounts to discount and the same has to be treated as remuneration to the employees for their continuity of service? (iii) Whether on the facts and in the circumstance of the case and in law the tribunal committed an error in not in not examining the scheme of ESOP from which it is clear that the employees will not get any right in the shares till completion of the period prescribed and the expenditure claimed is contingent and recorded perverse finding? 2. Facts leading to filing of this appeal briefly stated are that the assessee is a company engaged in the business of manufacture of Enzymes and Pharmaceuticals Ingredients. The assessee filed its return of income for the Assessment Year 2004-05 on 31.10.2004 declaring total income of Rs. 50,65,18,080/-. The case was selected for scrutiny by the Assessing Officer. The Assessing Officer by an order dated 29.12.2006 inter alia held that assessee has floated a scheme viz., Employees Stock Option Plans (ESOP) and under the scheme had constituted the Trust. The shares of the company were transferred to the trust at the face value a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following mercantile system of accounting, the expenditure is not allowable during the year. It was also submitted that expenditure claimed by the assessee is not real and same is hypothetical, notional and imaginary. It is also urged that the shares are not handed over to the employees and the aforesaid exercise is liable for termination in any situation either at the instance of the employer or the employee. It is also urged that in a case where mercantile system of accounting is followed unless a legal liability is incurred, the expenditure is not allowable as accrued. It is also contended that in the instant case, as the control of shares remains with the assessee for the period of scheme, the assessee has neither assumed any liability nor has incurred the same. It is also argued that the tribunal has failed to appreciate that no amount was paid to claim the same as expenditure under Section 37(1) of the Act. It is also urged that the tribunal has failed to appreciate mercantile system of accounting. In support of aforesaid submissions, reliance has been placed on decisions of Supreme Court in 'COMMISSIONER OF INCOME-TAX, BANGALORE VS. INFOSYS TECHNOLOGIES LTD.', (2008 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on by the revenue does not support its case and the issue with regard to deduction of ESOP has been decided by different High Courts. In this connection, reference has been made to 'CIT VS. PVP VENTURES LTD.', (2012) 23 TAXMANN.COM 286 (MAD), 'CIT VS. LEMON TREE HOTELS LIMITED', ITA NO.107/2015 DECIDED ON 18.08.2015,'CIT VS. LEMON TREE HOTELS LIMITED', (2019) 104 TAXMANN.COM 26 (DEL). It is also pointed out that from the Assessment Year 2009-10, the Assessing Officer has accepted the claim of the assessee and has permitted ESOP expenses as deduction. Therefore, the revenue cannot be now permitted to alter its stand. 5. By way of rejoinder reply, learned counsel for the revenue submitted that judgment of the Supreme Court in Bharat Earth Movers is no applicable to the fact situation of the case as in the aforesaid decision the Supreme Court was dealing with statutory liability pending fixation of liability, whereas, in the instant case, the assessee has a liability, therefore, the aforesaid decision of the Supreme Court does not apply. It is also pointed out that in Rotork Controls India, the Supreme Court was dealing with allowability of provision as ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the time of grant of option and the offer price. In order to be eligible for acquiring shares under the scheme, the employees are under an obligation to render their services to the company during the vesting period as provided in the scheme. On completion of the vesting period in the service of the company, the option vest with the employees. 9. In the instant case, 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 tribunal has therefore, rightly placed reliance on decisions of the Supreme Court in Bharat Movers supra and Rotork Controls India P. Ltd., supra and has recorded a finding that discount on issue of ESOPs is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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