High Court of Karnataka affirms the ruling of Special Bench of Tribunal, allows discount on issue of Employee Stock Options as revenue expenditure
Background
• The assessee company (‘the Company’) had floated a scheme of stock options for its employees (‘ESOP’). A trust had been constituted under the scheme.
• The shares of the Company were transferred to the trust at face value and the employees of the Company were allowed to exercise the option to buy the shares of the Company from the trust within the prescribed time subject to applicable terms and conditions under the scheme.
• The Company claimed the amount of discount i.e. the difference between market price of shares as on the date of grant of options and the exercise price as an expenditure under section 37 of the Income-tax Act, 1961 (‘the Act’).
• The tax department disallowed the claim of the Company on the ground that the Company did not incur any expenditure and ESOP discount represented a contingent liability since there is no certainty of options getting vested in the employees and/or employees exercising the options.
• The first appellate authority upheld order of the tax department. The Company appealed against the order of the appellate authority before the Tribunal.
• The division bench of the Income-tax Appellate Tribunal (‘Tribunal’) referred the case to the Bangalore Bench (Special) of the Tribunal (‘the Special Bench’) in view of conflicting decisions between different benches of the Tribunal.
