I-T - ESOP discount (difference between market price and issue price) - Deductible expenditure - ITAT SB
THE question before the Special Bench of the ITAT headed by the President was, "Whether discount on issue of Employee Stock Options is allowable as deduction in computing the income under the head profits and gains of business?"
The assessee claimed deduction of Rs. 3,38,63,779 as `Employee compensation cost' u/s 37 of the Income-tax Act, 1961 representing discount under the ESOP 2000. In the assessment completed u/s 143(3), the Assessing Officer disallowed the said claim on the ground that there was no specific provision entitling the assessee to deduction u/s 37(1) in this regard.
Concept of ESOP: Section 2(15A) of the Indian Companies Act, 1956 defines "employee stock option" to mean the option given to the whole-time Directors, Officers or employees of a company, which gives such Directors, Officers or employees, the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a predetermined price".
In an ESOP, the given company undertakes to issue shares to its employees at a future date at a price lower than the current market price. This is achieved by granting stock options to its employees at 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 making application to the employer for the issue of shares against the options vested in them. The gap between the completion of vesting period and the time for exercising the options is usually negligible. The company, on the exercise of option by the employees, allots shares to them who can then freely sell such shares in the open market subject to the terms of the ESOP.
Thus it can be seen that it is during the vesting period that the options granted to the employees vest with them. This period 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.
The Special Bench 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 question before the special bench is thus answered in affirmative by holding 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'.
We bring you today this SB decision delivered on 16th July. Breaking News