{"id":394,"date":"2020-12-09T04:51:51","date_gmt":"2020-12-09T04:51:51","guid":{"rendered":"http:\/\/www.rnm.in\/blog\/?p=394"},"modified":"2025-01-30T10:55:44","modified_gmt":"2025-01-30T10:55:44","slug":"esop-discount-is-business-expenditure-for-earning-profits","status":"publish","type":"post","link":"https:\/\/www.rnm.in\/blog\/esop-discount-is-business-expenditure-for-earning-profits\/","title":{"rendered":"ESOP Discount is business expenditure for earning profits"},"content":{"rendered":"\n

On 11-11-20, the hon\u2019ble 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.<\/p>\n\n\n\n

The decision was pronounced in the case of Commissioner of Income Tax, LTU<\/em> <\/em>v<\/em>.<\/em> <\/em>Biocon Ltd<\/em>. The High Court held\nthat the difference between the grant price to employees and market price of\nthe shares (\u2018the discount\u2019), as on the date of the grant, is an expenditure\nincurred for the purpose of business under section 37(1) of the Income Tax Act,\n1961. The High Court clearly spelt out that the discount offered by the company\nwas not short receipt of capital but expenditure for securing consistent\nservices of the employees in order to earn\/enhance its business profits. The\nHigh Court reiterated that it is a settled law that if a business\nliability has arisen in the accounting year, the same is permissible as\ndeduction, even though, liability may have to be quantified and discharged at a\nfuture date. That is, on exercise of option by an employee, the actual amount\nof benefit has to be determined is only a quantification of liability, which\ntakes place at a future date. The High Court stated that where an ESOP vests\nover a period of four years, then, it implies that employee has a definite\nright to 25% of the shares at the end of first year and accordingly, the\nemployer (taxpayer) is bound to allow vesting of 25% of the options and same\nbecomes permissible business expenditure to that extent.<\/p>\n\n\n\n

 Important Statutory Developments<\/strong><\/em><\/p>\n\n\n\n