The Mumbai bench of the Income Tax Appellate Tribunal ( ITAT ) has held that deduction of discount on an Employee Stock Option Plan ( ESOP ) over the vesting period is by the accounting in the books of account.
M/s. Lupin Limited, the assessee is engaged in the business of manufacture and sale of pharmaceuticals products. The assessee filed its return of income for the year under consideration u/s 139(1) of the Act on 30-09-2009 declaring a total income of Rs.77.29 crores under normal provisions of the Act and declaring book profit of Rs.459.47 crores u/s 115JB of the Act.
The revenue challenged the claim for deduction of ESOP expenses. The assessee had floated ESOP schemes titled “Lupin Employee Stock Option Plan 2003” and Lupin Employee Stock Option Plan 2005.
During the year under consideration, certain employees have exercised the option and the value of the fringe benefit was computed at Rs.5,74,85,065/-, being the difference between the fair market value of equity shares on the date of vesting of the option and the amount recovered from or paid by the employee on exercising of option.
The assessee paid Fringe benefits tax on the above-said amount and claimed a deduction of above said the amount of Rs.5.74 crores even though it is not debited to the Profit and Loss account. The AO noticed that the CBDT, in its Circular No.9 of 2007, has clarified that this fringe benefit is not allowable as a deduction. Further, the assessee has also made the new claim without filing a revised return of income, which is not by the procedure and the AO rejected the claim of the assessee.
Under section 37(1), it is evident that an assessee is entitled to claim a deduction under the aforesaid provision if the expenditure has been incurred. The expression ‘expenditure’ will also include a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which it is issued and the market value of the shares would also be expenditure incurred for section 37(1) of the Act.
The deduction of discount on ESOP over the vesting period is by the accounting in the books of account, which has been prepared by Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999.”
A Coram comprising of Shri B.R. Baskaran (AM) & Smt. Kavitha Rajagopal (JM) held thatthe deduction of discount on ESOP over the vesting period is by the accounting in the books of account, which has been prepared bythe Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999.
The Coram viewed that it was required to be examined as to whether there is a mandatory statutory requirement to account for a discount or not and further its impact on the computation of income. The Tribunal set aside the order passed by the CIT(A) and restoredit to the file of AO.
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