INCOME TAX ACT, 1961

Section 37(1)

Business expenditure - Allowability - Payment on account of reimbursement of ESOP expenses to parent company - AO alleging no business purpose and non-deduction of tax at source

Assessee claimed deduction on account of reimbursement of ESOP expenses to parent company for granting stock options to assessee's employees. AO denied deduction on the ground that said expenses were not incurred wholly and exclusively for the purpose of business of assessee-company and further ESOP was a part of salary and since assessee did not deduct any tax at source on payment to group company, amount claimed was disallowable under section 40(a).Held: Payment under ESOP Scheme wherein reimbursement was paid to parent company, towards ESOP for granting stock options to assessee's employees was in the nature of employee's compensation and was deductible as expenditure incurred wholly and exclusively for purposes of business. The company incurred obligation of issuing shares at discounted price on a future date in lieu of services rendered by employees and said discount was an ascertained liability, since employer incurred obligation to compensate employees over vesting period, notwithstanding the fact that exact amount of discount had to be quantified only at the time of exercising options. Further, requirement to deduct tax would arise when employee exercises the option granted under ESOP and it would be treated as perquisite in the hands of employee on actual allocation/transfer of such shares, which is provided under section 17(2)(vi). Hence, there was no requirement to deduct tax at source by assessee while reimbursing amount to AE during the year under consideration. Accordingly, AO was not justified in denying deduction.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2015-16

INCOME TAX ACT, 1961

Section 1155A

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