INCOME TAX ACT, 1961

Section 37(1)

Business expenditure - ESOP expenditure - AO treated the expenditure as notional in nature -

Assessee had share based compensation scheme, namely Employee Stock Purchase Plan (ESPP) and Employees Stock Incentive Plan (ESIP) (Hereinafter collectively referred as ESOP Scheme). Under the ESOP scheme, employees of assessee were eligible to purchase/get shares of ultimate holding company (through ESPP/ESIP scheme). The shares of the ultimate holding company were issued under these schemes. For the relevant assessment year, namely, assessment year 2018-2019, assessee claimed a sum of Rs.35,03,19,026 as eligible deduction under section 37 towards reimbursement of ESOP expenditure cross charged by the ultimate holding company. AO held that expenditure on ESOP cross charged by the ultimate holding company was fictional/notional in nature and same did not qualify for deduction under section 37(1).Held: The 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, the foreign parent company, allowed its subsidiaries/affiliates across the world to issue its shares to the employees. As far as the assessee which was an affiliate of the foreign parent company was concerned, the shares were in fact acquired by assessee from the parent company and there was an actual outflow of cash from assessee to the foreign parent company. The price at which shares were issued to employees was paid by employee to assessee who, in turn, paid it to the parent company. The difference between fair market value of shares and the price at which shares were issued to the employees was met by asessee and, therefore, ESOP expenditure could not be held to be notional in nature and assessee was entitled to deduction under section 37 in relation to ESOP expenditure.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2018-2019

INCOME TAX ACT, 1961

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