ESOP Discount is business expenditure for earning profits

On 11-11-20, the hon’ble High Court of Karnataka has held that the deduction of discount on ESOP over vesting period per books of account is an admissible tax allowance in computation of business income of the employer company. The legal principle emphasized by the High Court is that the discount on issue of ESOPs is not a contingent liability but an ascertained liability.

The decision was pronounced in the case of Commissioner of Income Tax, LTU v. Biocon Ltd. The High Court held that the difference between the grant price to employees and market price of the shares (‘the discount’), as on the date of the grant, is an expenditure incurred for the purpose of business under section 37(1) of the Income Tax Act, 1961. The High Court clearly spelt out that the discount offered by the company was not short receipt of capital but expenditure for securing consistent services of the employees in order to earn/enhance its business profits. The High Court reiterated that it is a settled law that if a business liability has arisen in the accounting year, the same is permissible as deduction, even though, liability may have to be quantified and discharged at a future date. That is, on exercise of option by an employee, the actual amount of benefit has to be determined is only a quantification of liability, which takes place at a future date. The High Court stated that where an ESOP vests over a period of four years, then, it implies that employee has a definite right to 25% of the shares at the end of first year and accordingly, the employer (taxpayer) is bound to allow vesting of 25% of the options and same becomes permissible business expenditure to that extent.

 Important Statutory Developments

• From 12-11-2020 to 30-06-2021, section 43CA and section 56(2)(x) not to apply, for primary sale of residential units having value up to Rs 2 crores, if the difference between the agreement value and circle rate is up to 20%. This is as per CBDT Press Release dated 13.11.20. Legislative amendments to follow in due course.
• Income-tax e-filing portal integrated with ICAI portal for validation of UDIN generated from ICAI portal for e-filing of documents (audit reports/certificates) certified by CA’s.
• CBDT authorizes CIT to condone the delay in filing audit report in Form No. 10BB.
• Cash voucher scheme for payment of deemed LTC fare extended to non-central government employees.
• Standard Operating Procedures laid down for various IT-Units to conduct assessment under Faceless Assessment Scheme-19.

Important Judicial Precedents

• Reassessment cannot be made on basis of subsequent decision of Supreme Court reversing legal position prevailing at time of regular assessment.

Calcutta Club Ltd. (Cal HC)

• Guarantee commission is to be charged to extent of actual exposure of facility availed instead of gross amount of facility.

Associated Capsules Pvt. Ltd. (Mum–ITAT)

• Successor Company is eligible to claim depreciation on Intangible assets acquired under succession.

Padmini Products (P.) Ltd. (Kar HC)

• MAT Computation [clause (f) of Explanation 1 to s. 115JB(2)] is to be made without resorting to computation u.s. 14A read with rule 8D.

Edelweiss Commodities Services Ltd. (Mumbai – Trib.)

• Rejection of registration u.s. 12AA cannot be justified unless evidence on record substantiates that assessee society does not work or use funds for fulfillment of its objects.

Shree Durga Mata Mandir (P&H HC)

• ‘Look Out Circular’ issued against CA recalled as he co-operated in proceedings initiated against him.

Lakshmi Satyanarayana Dutt Tadikonda (Delhi HC)

• Disallowance u/s 14A can never exceed exempted income earned, and same can be computed as per rule 8D only after recording of proper satisfaction.

Marg Ltd. (Madras HC)

• Plea of genuine hardship for interest waiver [section 220(2A)] could not be rejected by revenue stating that assessee was having land and machineries, ignoring that its balance sheet did not reflect any liquid cash.

TCV Engineering Ltd. (Madras HC)

• Schools running with no free education or scholarship were to be held established with profit motive.

Rajah Sir Annamalai Chettiar Foundation (Madras HC)

• Where revenue had provisionally attached fixed deposit receipts of two bank accounts of assessee, assessee’s prayer to operate said bank accounts was to be allowed.

Best Oasis Ltd. (Guj HC)

• Interest u.s. 234B & 234C is not liable to be paid with respect to tax liability determined under MAT.

Mangalore Refinery & Petrochemicals Ltd. (Bom HC)

• Waiver of loan cannot be brought to tax under section 28(iv).

Essar Shipping Ltd. (Bom HC)