TMI Blog2022 (7) TMI 589X X X X Extracts X X X X X X X X Extracts X X X X ..... Member For the Appellant : Sh. Sunil M. Lala For the Respondent : Sh. Amol B. Kirtane ORDER PER GAGAN GOYAL, A.M: This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals), National Faceless Appeals Centre (NFAC), Delhi. [hereinafter referred to as the CIT(A) ] vide order dated 11.12.2018 for the Assessment Year (AY) 2016-17. The assessee has raised the following grounds of appeal: Ground 1: Disallowance of expenditure claimed towards Employee Stock Option Scheme (ESOP) under section 37(1) of the Income-tax Act, 1961 (Act) amounting to Rs 1,84,75,816. In this regard, the learned CIT(A)/ learned Assessing Officer has, on the facts and circumstances of the case and in law, erred on the following grounds: (i) In not appreciating that the ESOP cost is incurred wholly and exclusively for the purpose of business and is in the nature of revenue expenditure and thereby, deductible under section 37(1) of the Act. (ii) In erroneously concluding that the Appellant has not incurred any expenditure but has forgone the benefit or income by receiving lesser amount of premium without appreciating the fact that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dings, the assessee was given a show-cause notice regarding allowability of claim towards the cost of Employees/Options Plans (ESOP) pertaining to the prior period. 5. During the course of assessment proceedings, the assessee was again given a show-cause notice regarding dis-allowability of claim towards the cost of Employees/Options Plans (ESOP) treating the same as being capital in nature. 6. The view of the AO on the matter of allowability of ESOP are reproduced as under: ESOP is nothing more than a expenditure related to issue of shares (capital in nature). As per provisions of section 37(1) of the Act it is amply clear that any expenses which is capital in nature is not allowable as expenditure for the purpose of computing Income from Business Sec 37(1) of the Act reads as under 37(1) Any expenditure (not being expenditure of the nature described in section 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 purchases of the business or profession shall be allowed in computing the income chargeable under the head Profits and gain of business or profession. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, is usually the market value of the stock on the date that the options are granted, in most cases, employees must wait until the options are vested (usually four years (before exercising their night to buy shares at the strike price. Ideally, the market value of the stock will have increased during the vesting period, so that employees are able to purchase shares at a significant discount. The difference between the strike price and the market price at the time the options are exercised is the employees' gain. Once employees own stocks rather than options to buy stocks, they can either hold the shares or sell them on the open market. Further, various terminologies used at the time of issue of ESOP are as under a. Vesting means the process by which the employee gets the right to apply for and be issued shares of the company under the options granted to him. b. Vesting period means the period over which the vesting of the options of the employee takes place. c. Exercise period means the time period after vesting within which the employee should Exercise his night to buy the shares by payment of the option price on the options vested in him. If the exercise period lapse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of appellant. The shares of MS are listed on New York Stock Exchange and are tradable in open market. 11. MSDW makes a settlement with appellant in consideration of the stock units and subsequently charge the cost incurred by on a cost basis to appellant. Appellant makes payment to MSDW on the basis of the market price of the shares as on the date of allotment of shares to the employees of appellant, a deduction for the same is claimed in the year of payment. Hence, there is no question of prior period expenses claimed. 12. The expenses payable (stock option cost) to MSDW for the stock units are accrued MSAS over the life of the stock units (i.e. between grant and conversion) based on the market pr of the underlying shares on the date of grant of the stock units. The provision debited to the pr and loss account over the life of the stock units (including foreign exchange fluctuation loss, disallowed while computing the total income for MSAS (kindly refer to Annexure F of tax audit report furnished as Annexure 4 of our submission dated 15 May 2018). MSAS makes payment to MSDW on the basis of the market price of the shares as on date of allotment of shares to the employees of M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um/2016). 17. In the case of Goldman Sachs (I) Securities Pvt. Ltd. v. DCIT (ITA No. 6912/ Mum/2012, 222/Mum/ 2014, 902/Mum/2016), the jurisdictional bench of Tribunal held as under: 70. Brief facts are, in the course of assessment proceedings, the Assessing Officer noticing that the assessee has claimed deduction of Rs. 20,31,56,936, on account of ESOP cost called upon the assessee to justify the claim. In response, it was submitted by the assessee that it grants Restricted Stock Units (RSU), to its employees that derive their value from the shares of Goldman Sachs Group Inc. as per policy of global stock award plan. The sum payable by the assessee to Goldman Sachs Group Inc. In respect of RSUs is determined with reference to the value of the shares of GST on the date of vesting of RSU. The value of RSU is amortized over three years and assessee marks to market the value of such RSU over a three year period in its books of account. The Assessing Officer, however, did not accept the contention of the assessee. Relying upon the decision of the Tribunal, Delhi Bench in Ranbaxy Laboratories Ltd., he disallowed assessee s claim of deduction. Though, assessee challenged the disal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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