INCOME TAX ACT, 1961

Section 37(1)

Business expenditure - Expenditure on EDOP - Allowability -

Assessee's foreign parent company had a policy of offering ESOP to its employees to attract the best talent as its work force. In pursuance of this policy foreign parent company, allowed its subsidiaries/affiliates across the world to issue its shares to the employees. As far as the assessee was concerned, the shares were acquired by assessee from the parent company and the price at which shares were issued to employees was paid by the employee to assessee who in turn paid it to the parent company. The difference between fair market value of shares of the price at which shares were issued to the employees was met by assessee and claimed as expenditure on account of ESOP.AO disallowed deduction holding that it was the expenditure of the parent company as the obligation to issue shares at a discounted price to the employees of assessee was that of foreign parent company and not that of assessee. Held: Admittedly, shares were issued to employees of assessee and it was the Assessee who had to bear the difference in cost of the shares. The expenditure was necessary for the assessee to retain a healthy work force. Business expediency required that assessee incur such costs. The parent company was benefitted indirectly by such a motivated work force, could not be a ground to deny the deduction of a legitimate business expenditure to the assessee. Which otherwise satisfied all the conditions referred to in section 37(1).

REFERRED :

FAVOUR : In assessee's favour.

A.Y. :

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