In a major relief to Axis Bank, the Income Tax Appellate Tribunal (ITAT) Ahmedabad bench has ruled that the ESOP scheme under consideration was part of the Annual Report of the assessee and further the specific details of ESOP benefit granted to its employees had been duly disclosed to the assessing officer during the course of assessment proceedings, being the difference between the market price of shares at the time of grant of option to these employees and the market price of such shares as on the date of exercise by employees of the assessee company.
Therefore, even from this perspective, the expenses so claim were not contingent the nature, since the assessee had claimed the ESOP expenses at the time of actual exercise of option by its employees, during the year under consideration. It is also noteworthy that the assessee had reflected such ESOP expenses as “perquisites” in the hands of its employees and TDS at appropriate rate had also been deducted by the assessee company at the time of grant of ESOP benefits to its employees.
Accordingly, in view of the judicial precedents on the subject as on date, which have consistently taken the view that ESOP expenses are allowable in the hands of assessees under Section 37 of the Act and looking into the facts of the assessee’s case, as highlighted above, we are of the considered view that CIT(Appeals) has not erred in facts and in law in deciding this issue in favour of the assessee.
Issue Raised
The sole/single issue for consideration is regarding the disallowance of ESOP expenses, which was allowed by the Ld. CIT(Appeals) in favour of the assessee.
Facts
The assessee had raised an additional ground before the ITAT and claimed deduction on account of Employees Stock Option Scheme (ESOP) expenses of Rs. 250.63 crores while computing its total income. The ITAT has restored back the said issue to the file of AO to examine the same as per the provisions of the I.T Act. The AO observed that the assessee, as part of it’s policy of rewarding it’s employees and key management people, has formulated an Employee Stock Option Plan (ESOP) Scheme in accordance with the Securities and Exchange Board of India Guidelines, 1999/Securities and Exchange Board of India (Share Based Employee Benefits) Regulations under the name and style of “Axis Bank Limited Employees Stock Option Scheme Grant”. During the year under consideration the assessee claimed ESOP expenditure of Rs. 250.63 crores being difference between market price as on date of exercise of options and the exercise price (i.e. the market price on the grant date) as a deduction for computing its income under the head ‘profits and gains from business or profession’.
For claiming such expenditure, reliance was placed by assessee on the decision of Hon’ble Bangalore Special Bench in case of Biocon Ltd. 144 ITD 21. The assessee vide its letter dated 04.04.2022 submitted its reply before the AO which was not found acceptable by the AO as according to the Assessing Officer, the decision relied upon by the assessee was not applicable, looking to the facts of assessee’s case. The AO observed that in the facts of the case of the case of Biocon decision supra, the assessee had floated ESOP under which it granted option of shares with face value of Rs. 10 at the same rate by claiming that market value of such share on the date of grant of option was Rs. 919, thereby claiming the total discount per option at Rs. 909/-. The difference between market price and exercise price as on the date of grant of option was claimed as revenue expenditure to be spread over the vesting period.
However, the treatment followed by the assessee was in line with provisions of Section 2(15A) of the Indian Companies Act, 1956 which defined ESOP to mean the option given to the whole-time Directors, Officers or employees of a company, which gives such Directors, officers or employees the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a predetermined price.’ The AO was of the view that the crux of the above decision was that discount on issue of ESOP shall be allowed as revenue expenditure.
The discount represented difference between the market price of options and exercise price as on the date of grant of option. The AO has observed that in the present case, the assessee seeks to claim an expenditure of Rs. 250.63 crores which represents difference between market price as on date of exercise of option and actual exercise price.
Assessing Officer invited reference to the provisions of Section 2(15A) of the Indian Companies Act, 1956 which defines ESOP to mean the option given to employees which gives them the right to purchase or subscribe to securities at a future date but at a predetermined price. Therefore, the AO was of the view that in view of such Section, the option shall be granted at a predetermined price.
Even in the decision relied by the assessee in case of Biocon, it has been clarified that the discount eligible to be allowed as revenue expenditure shall be the difference between market price of the shares at the time of the grant of option and actual exercise price. Such difference is calculated on the basis of predetermined price as on the date of grant of option and has been allowed as revenue expenditure. The assessee in the present case, while computing discount, has erred in taking market price on the date of exercise of option. Such market value has to be taken on the date of grant of option. If discount in the present case is calculated considering market price of option as on the date of grant of option and actual exercise price, it is observed that there is no actual discount passing on to the employees of the assessee company which means that market price on the date of grant of option and actual exercise price are the same. Hence, no benefit has actually been offered to the employees in terms of discount. Therefore, no discount has actually been offered to the employees in the present case and value of discount calculated by taking market value as on the date of exercise of option is incorrect. The AO was also of the view that the reply of the assessee was also not acceptable on merits as the assessee had failed to substantiate as to how the expenditure that the company was incurring or laying out. The expenses of Rs. 250.63 crores claimed by the assessee is the difference between the market value of share as computed under the guidelines of SEBI and the value at which the share are issued to employees. While issuing the shares under ESOP, the company is choosing to either receive securities premium of a lower amount or no securities premium when compared to that of which it would have received during a normal course of share issue. Hence there is no expenditure that the company was incurring or laying out. The issue of shares was also not crystallized till the date on which the employee exercised the option and hence any expenditure debited during the vesting period remained contingent in nature. The AO was of the view that the ESOP expense even if treated as expenditure was a capital expenditure since securities premium being a capital item.
The Department was in appeal before us against the order passed by Ld. CIT(Appeals) deleting the addition in the hands of the assessee. The learned DR raised several contentions before us in respect of the order passed by the CIT(Appeals). Firstly, the department submitted that the case of the assessee is not covered by the decision of Tribunal special bench in the case of Biocon supra. The assessing officer has clearly brought about the distinction between the facts of the assessee’s case and the facts in the case of Tribunal special bench in the case of Biocon supra, wherein, it has been pointed out that in the instant case, the discount claimed by the assessee was difference in market price of options and exercise price as on the date of grant of option, whereas in the case of Biocon supra, the ESOPs had been issued in terms of provisions of Section 2(15A) of the Indian Companies Act, 1956 which defines ESOP to mean the option given to employees which gives them right to purchase or subscribe to securities at a future date but at a predetermined price. Therefore, the AO was correct in taking the view, the option shall be granted at a predetermined price, so as to be eligible for deduction.
Case Name : Axis Bank Ltd. Versus ACIT
Judicial Level & Location : Ahmedabad ITAT
Case Number : I.T.A. Nos.142&143/Ahd/2024
Date of Ruling : 24.07.2024
Ruling in favour of: Assessee
Judges: Annapurna Gupta (Accountant Member) & Siddhartha Nautiyal (Judicial Member)
Petitioner Advocate: Tushar Hemani, Sr. Advocate & Shri Parimalsinh B. Parmar, A.R.
Respondent Advocate: Darsi Suman
