ITAT: Expenditure under ESOP is an Allowable Expense

ITAT: Expenditure under ESOP is an Allowable Expense

The Income Tax Appellate Tribunal (ITAT), Delhi by its two-member bench of Challa Nagendra Prasad (Judicial Member) and Shamim Yahya (Accountant Member) while adjudicating an appeal filed by the Revenue has observed that the expenditure incurred under Employee Stock Option Plan (ESOP) is an allowable expense.

In the present case, the assessee- M/s Process Nine Technologies (P) Ltd., claimed to be a software company, which is engaged in developing and promoting Indian languages technologies, had issued preference shares and had received a share premium of Rs. 2,54,50,003 during the year.

The Assessing Officer (AO) had made an addition of Rs. 1,88,82,824 representing the amount of share premium received during the year under section 56(2)(viib) of the Income Tax Act, 1961.

Further, the AO had disallowed the claim of Rs. 3,40,297 made by the assessee company on account of Employee Stock Option Plan (ESOP) expenses.

The ITAT while noting that the assessee company had used a discounted cash flow method, held that it is duly accepted as a recognized method as per section 56(2)(viib) of the Income Tax Act read with Rule 11UA of the Income Tax Rules. It further opined that the AO was not correct in rejecting this method by comparing the subsequent performance with the projections.

“However as noted by the Ld. CIT(A) that the AO’s rejection of the DCA value on the basis of variation between the projections used for arriving at the DCF valuation and the subsequent performance is not correct. The Ld. CIT(A) has passed a well-reasoned order and rightly relied upon the order of the ITAT in the case of Cinestaan Entertainment (P) Ltd. vs Income Tax Officer, (2019),” the ITAT held.

Apropos the issue of ESOP Expenses, the ITAT placed reliance on the decision of the Delhi High Court in the case of Commissioner of Income Tax vs. Lemon Tree Hotels Ltd, wherein it was held that the expenditure incurred under Employee Stock Option Plan (ESOP) is an allowable expense.

Accordingly, the ITAT did not find any infirmity in the order of the Ld. CIT(A), hence upheld the same.