Delhi High Court Allows Deduction To PVR On Difference Between Market Price & Issue Price Of ESOP

The division bench of Justice Manmohan and Justice Manmeet Pritam Singh Arora has relied on the decision of the Karnataka High Court in the case of Commissioner of Income Tax vs. Biocon Ltd. and has observed that an assessee is entitled to claim a deduction under Section 37(1) if the expenditure has been incurred. The expression "expenditure" will also include a loss, and therefore, the issuance of shares at a discount where the assessee absorbs the difference between the price at which they are issued and the market value of the shares would also be expenditure incurred for the purposes of Section 37(1). The primary object is not to waste capital but to earn profits by securing the consistent services of the employees. Therefore, it cannot be construed as a short receipt of capital.

The appellant/assessee, PVR Ltd., has raised the issue in respect of the allowability of the difference between the market price and the issue price of ESOP.

The Income Tax Appellate Tribunal (ITAT) has held that the difference between the price at which stock options were offered to employees of the appellant company under ESOP and ESPS and the prevailing market price of the stock on the date of grant of options was not allowable revenue expenditure.

As per Section 37(1), any expenditure laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head, "Profits and Gains of Business or Profession". The provision permits deduction for the expenditure laid out or expanded 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 be attracted. Section 37 does not envisage the incurrence of cash.

The Companies Act, 1956 defines "employee stock option" as an option given to the whole time directors, officers, or employees of the company, which gives directors, officers, or employees the benefit or right to purchase or subscribe at a future rate to the securities offered by a company at a free determined price. In an ESOP, a company undertakes to issue shares to its employees at a future date at a price lower than the current market price. The employees are given stock options at a discount, and the amount of the discount represents the difference between the market price of shares at the time of the grant of the option and the offer price. In order to be eligible to acquire shares under the scheme, employees are under an obligation to render their services to the company during the vesting period as provided in the scheme. On completion of the vesting period in the service of the company, the option vests with the employees.

The court set aside the order passed by the tribunal and decided the issue in favour of the assessee by allowing the difference between the market price and the issue price of ESOP as a revenue expenditure under Section 37(1) of the Income Tax Act, 1961.

Case Title: PVR Ltd. Versus Commissioner Of Income Tax

Citation: 2022 LiveLaw (Del) 817

Dated: 23.08.2022

Counsel For Appellant: Advocates Salil Kapoor and Sumit Lalchandani

Counsel For Respondent: Advocates Sanjay Kumar and Easha Kadian

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