Income Tax Act, 1961, Section 37(1)

Business expenditure--Allowability--Expenditure incurred on issue of shares under Employee Stock Ownership Plan

Conclusion: Assessee was eligible for deduction in respect of expenditure incurred for allotment or issue of Employee Stock Ownership Plan, as such expenditure was incurred for welfare of its business staff.

Revenue disallowed assessee’s claim of expenditure towards Employee Stock Ownership Plan (ESOP) alleging that expenditure claimed for allotment or issue of ESOP was merely notional and unless the employer/assessee acquire shares from a third party, it could not claim any deduction. Held: Revenue’s argument essentially was that unless the employer/assessee acquires shares from a third party, it could not claim any deduction. Such an argument ignored the realities of functioning of commercial entities, which would then be asked to purchase shares from market place or third party at prevailing rates, instead of allotting them. Therefore, Revenue was not justified in disallowing assessee’s claim of expenditure towards ESOP.

Decision: In assessee’s favour.

Referred: CIT v. M/s. PVP Ventures Ltd. [TC (A) No. 1023 of 2005]: 2014 TaxPub (DT) 1924 (Mad-HC) and CIT v. Lemon Tree Hotels Ltd. [ITA No. 107/2017]: 2015 TaxPub (DT) 4978 (Del-HC).

 

IN THE DELHI HIGH COURT

S. RAVINDRA BHAT & A.K. CHAWLA, JJ.

Pr. CIT v. Lemon Tree Hotels (P) Ltd.

ITA No. 443/2018

13 April, 2018

Appellant by: Zoheb Hossain, Sr. Standing Counsel for Revenue

Respondent by: Ved Jain, Pranjal Srivastava and Devina Sharma, Advocates

ORDER

The question of law urged with respect to expenditure claimed towards case of Employee Stock Ownership Plan (ESOP) has been subject matter of previous orders of this Court in respect of the present assessee. For assessment year 2008-09 in ITA No. 107/2017 : 2015 TaxPub(DT) 4978 (Del-HC) (Commissioner of Income Tax v. Lemon Tree Hotel Ltd.), the Court held that since the ITAT followed the previous judgments in Commissioner of Income Tax v. PVP Ventures Ltd. [TC(A) No. 1023 of 2005] : 2014 TaxPub(DT) 1924 (Mad-HC) the expenditure had to be allowed. Likewise, for another assessment year, this court did not frame the question of law.

Although the Revenue urges that in terms of Circular No. 9 of 2007, the expenditure ought not to be allowed given that actual expenditure towards acquisition of shares, and not mere allotment of shares by the employer can be considered as a permissible deduction, this Court is of the opinion that such an argument is untenable; that was the rationale of disallowance in this case. What the Revenue urges essentially is that the unless the employer/assessee acquires the shares from a third party, it cannot claim any deduction and that expenditure claimed for allotment or issue of ESOP is merely notional. This Court is of the opinion that such an argument ignores the realities of functioning of commercial entities who would then be asked to purchase shares from market place or third party at prevailing rates instead of allotting them.

For above reasons, no question of law arises.

The second issue is with respect to the disallowance under section 14(A) of the Act. The ITAT granted relief following the judgment of this Court in Joint Investment Pvt. Ltd. v. CIT (2015) 372 ITR 694 (Del) : 2015 TaxPub(DT) 1375 (Del-HC).

This question of law does not arise.

Appeal is consequently dismissed.