|The Tax Publishers2020 TaxPub(DT) 4924 (Karn-HC) : (2021) 430 ITR 0151 : (2021) 276 TAXMAN 0001
INCOME TAX ACT, 1961
Discount on issuance of ESOPs was not a contingent liability but an ascertained liability and following the mercantile system of accounting, discount on ESOPs was rightly debited as expenditure in books of account though there was no actual pay out, therefore, AO was not justified in disallowing deduction.
Business expenditure - Allowability - Discount of ESOP - Disallowance on the ground of no cash outflow and alleged contingent nature
Assessee has floated a scheme, viz., Employees' Stock Option Plans (ESOP) and under the scheme constituted the trust. Shares of company were transferred to the trust at face value and employees of assessee were allowed to exercise option to buy shares within time prescribed under the scheme subject to terms and conditions mentioned therein. Assessee claimed difference of between market price and allotment price as a discount and claimed the same as an expenditure under section 37(1). AO rejected assessee's claim on the ground that expenses claimed by assessee towards ESOP were neither incurred nor accrued during assessment year 2004-05 and further, expenditure was contingent in nature and, therefore, assessee was not entitled to claim difference between market price and the allotment price as an expenditure under section 37. Held: Section 37(1) permits deduction for expenditure laid out or expended and does not contain a requirement that there has to be a pay out. If an expenditure has been incurred, provision of section 37(1) would get attracted. Also, section 37 does not envisage incurrence of expenditure in cash. In the instant case, ESOP were vest in an employee over a period of four years, i.e., at the rate of 25% therefore, at the end of first year, employee had a definite right to 25% of shares and assessee was bound to allow vesting of 25% of options. It is well settled in law that if a business liability has arisen in the accounting year, same is permissible as deduction, even though, liability may have to quantify and discharged at a future date. On exercise of option by an employee, actual amount of benefit has to be determined is only a quantification of liability, which takes place at a future date. Therefore, discount on issuance of ESOPs was not a contingent liability but an ascertained liability and following the mercantile system of accounting, discount on ESOPs was rightly debited as expenditure in books of account. Accordingly, AO was not justified in disallowing deduction.
Supported by:Morvi Industries Ltd. v. CIT (1971) 82 ITR 835 (SC) : 1971 TaxPub(DT) 397 (SC), Keshav Mills Ltd. v. CIT (1953) 23 ITR 230 (SC) : 1953 TaxPub(DT) 46 (SC) and CIT v. A. Gajapathy Naidu, (1964) 53 ITR 114 (SC) : 1964 TaxPub(DT) 323 (SC)
FAVOUR : In assessee's favour.
A.Y. : 2004-05
IN THE KARNATAKA HIGH COURT
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