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M/s. Lemon Tree Hotels Ltd., New Delhi v. Addl. Cit, New Delhi

M/s. Lemon Tree Hotels Ltd., New Delhi
v.
Addl. Cit, New Delhi

(Income Tax Appellate Tribunal, Delhi)

Income Tax Appeal No. 4588/Del/2013 | 23-06-2014


This is an appeal preferred by the assessee against the order of the ld CIT(A)- VIII, New Delhi dated 05.08.2011 for the Assessment Year 2008-09.

2. The grounds of appeal are as follows:- 1. The order passed by the Honble CIT(A)is bad in law, wrong on facts and against the principles of natural justice. 2(a) The Honble CIT(A)-VII, New Delhi has erred in confirming the disallowance of Rs. 1,28,19,169/- made by the ld Assessing Officer representing the sum debited to the Profit & Loss Account under the head
Employees Stock Option Cost (ESOP) on the grounds that no expenditure is involved in ESOP. (b) The honble CIT(A)-VII, New Delhi has erred in confirming the disallowance without appreciating the fact that the ld Assessing Officer has made this disallowance by replying upon Circular No. 9 of 2007 dated

20.12.2007 issued by CBDT without appreciating the fact that the aforesaid circular is a clarification on chargeability of Fringe Benefit Tax on ESOP and relying on the same to examine whether the expenditure on ESOP is allowable or not allowable as a deductible expenditure is incorrect. (c) The Honble CIT(A) has erred in confirming the disallowance in respect of expenditure on ESOP and has failed to consider the judicial pronouncement of honble Chennai ITAT in the case of CIT vs. PVP Ventures Ltd. TC(A) No. 1023 of 2005 (2012-TIOL-550) and honble Chennai ITAT in the Page No. 2 case of SSI Ltd. Vs. DCIT 85 TTJ 1049 wherein in identical circumstances the Honble ITAT has allowed the claim for ESOP expenses. (d) The Honble CIT(A) has confirmed the disallowance made towards ESOP expenses on the ground that even if the ESOP expenditure is to be allowed as deduction, then it shall be allowed as a deduction in the year the actual allotment of shares takes place. The honble CIT(A) has failed to appreciate the fact that as per SEBI regulations, the difference between the market price per share and the price at which such shares were allotted to be employees was to be claimed as a deduction in the year in which the option was given and exercised by the employees as the liability got ascertained at that time.


3. Apropos confirmation of disallowances of Rs. 1,28,19,169/- on sum debited to the Profit and Loss Account under the head Employees Stock Option Cost herein after (ESOP).

4. Brief facts of the case is as follows:- The appellant company is engaged in the business of running of hotels under the brand name Lemon Tree and during the year under consideration, it had income from the hotels situated at Udyog Vihar, Gurgaon, City Center, Gurgaon and Pune. The return of income for the assessment year under consideration was electronically filed by the appellant company on 30.09.2008 declaring a taxable income of Rs. 13,82,57,920/- which was processed u/s 143(1) of the Act, 1961. Subsequently, the case was picked up for scrutiny and notices u/s 143(2) and 142(1) of the IT Act, 1961 were issued as per records. In the course of assessment proceedings, the Assessing Officer subjected to detailed scrutiny the claim of ESOP expenses of Rs. 1,28,19,169/-.

5. The Assessing Officer after considering the explanation of the assessee, disallowed the claim of Rs. 1,28,19,169/- made by the appellant company in relation to ESOP

6. Aggrieved by the said order of the Assessing Officer the assessee/ appellant preferred an appeal before the ld CIT(A) who was pleased to dismiss the same. Aggrieved by the said order of the ld CIT(A) the assessee/ appellant is before us.

7. The ld AR submitted that the appellant company had claimed a sum of Rs. 1,28,19,169/- as deduction under the head Employees Stock Option Cost (ESOP). Further it was submitted by the ld AR that as per the ESOP, shares were allotted to the employees by the assessee company; and the difference between the issue price of shares and market price of shares on the date of issue represented the benefit provided to the employees; and therefore that amount is an allowable Page No. 3 expenditure as held by the Madras Tribunal in the case of SSI Ltd. Vs. DCIT 85 TTJ 1049, wherein, identical circumstances the ITAT has allowed the claim of the company incurred in respect to ESOP expenses. It was further submitted by the ld AR, that the said order of the Tribunal has been upheld by the Honble Madras High Court. It was also submitted by the ld AR that in Biocon Ltd. Vs. DCIT, the special bench of the Tribunal has held that discount on issue of Employee Stock Options is allowable as deduction in computing the income under the head Profit and gains of business or profession. And the said expenditure is on account of an ascertained (not contingent) liability; and it cannot be treated as a short receipt. Therefore the ld AR contends that the ld CIT(A) has erred in not allowing the said expenditure as held by the Special Bench of the Tribunal and the Honble Madras High Court. Therefore it was prayed by the ld AR that disallowance of the claim made by the assessee may be set-aside and the claim of the assessee in respect of ESOP may be allowed. On the other hand the ld DR relied on the decision of the Assessing Officer and ld CIT(A) and contended that the CBDT Circular No. 9 of 2007 makes it amply clear that only in case where the employer purchases the shares at market price and then subsequently transfers such shares to its employees, then only the expenditure so incurred is allowable as deduction in computing the taxable income of the employer company. It was added by the ld AR that if the shares are allotted to the employees from its own share capital of the company, no deduction is allowable in computing the taxable income of the company since no expenditure would be incurred by it. Therefore as per the ld DR, since the assessee has allotted shares from its own share capital, ESOP expenditure is not an allowable expenditure and therefore it was rightly held so by the Assessing Officer and thereafter the same was rightly upheld by the ld CIT(A), so, no interference in the impugned order is necessary.

8. We have heard both the parties and have perused the records and have gone through the case laws cited by both the sides. Admittedly there is no dispute with regard to the veracity of the claim of the appellant/ assessee in respect to the allotment or number of shares and about the value of the same earmarked to the employees as per the scheme under Employees Stock Option. The only issue is that whether the assessee/ appellants claim for deduction under the head Employees Stock Option Cost (ESOP) is an allowable expenditure u/s 37 of the Income Tax Act, 1961 (herein after the Act). The Assessing Officer and the ld CIT(A) Page No. 4 has relied upon the circular issued by the CBDT NO. 9 of 2007, for refusing the said claim of the appellant/ assessee. A perusal of the said circular reveals that the subject it deals with is given as
Explanatory circular on Fringe Benefit Tax Arising on allotment or transfer of specified securities or sweat equity shares
. The contents of the said circular reveals that it is a circular issued by CBDT in respect of charging of Fringe Benefit Tax (FBT) arising on sweat equity share and therefore the reliance of the authorities below on the circular for adjudication of the issue in hand is misplaced and is therefore erroneous. The question whether employee stock option cost incurred by the employer company is an allowable expenditure as per section 37 of the Act is no longer res-integra. The Special Bench of the Tribunal in Biocon Ltd. Vs. DCIT vide order dated 16 th July 2013 (36 CCh 268, Bangalore Special Bench of the Tribunal) has held that the discount on issue of Employee Stock Option is an allowable deduction in computing the income under the head Profit and gains of business or profession. The relevant ratio-decidenti of the Special Bench is reproduced below:-
9.4.1 There is another important dimension of this issue. Chapter XII_H of the Act consisting of section 115W to 115WL with the caption:
Income-Tax on Fringe Benefits has been inserted by the Finance Act, 2005 w.e.f. 1.04.2006. Memorandum explaining the provisions of the Finance Bill, 2005 highlights the details of the Fringe Benefits tax. It provides that : Fringe benefit as outlined in section 115WB, mean any privilege, service, facility or amenity directly or indirectly provided by an employer to his employees (including former employees) by reason of their employment. Charging section 115WA of this Chapter provides that :In addition to the income-tax charged under this Act, there shall be charged for every assessment year . fringe benefit tax in respect of fringe benefits provided or deemed to have been provided by an employee to his employees during the previous yearSection 115WB gives meaning to the expression fringe benefits. Sub-section (1) provides that for the purposes of this chapter, fringe benefits means any consideration for employment as provided under clause (a) to (d), clause (d), which is relevant for our purpose, states that: any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer free of cost or at concessional rate to his employees (including former employee or employees), shall be taken as fringe benefit. Explanation to this clause clarifies that for the purposes of this clause, -(i) specified security means the securities as defined in clause (h) of section 2 of the securities contracts (Regulation) Act, 1956 (42 of 1956) and, where employees stock option has been granted under any plan or scheme thereof, includes the securities offered under such plan or scheme. Thus it is discernible from the above provisions of the Act that the legislature itself contemplates the discount on premium under ESOP as a benefit provides by the employer to its employees during the course of service. If the legislature considers such discounted premium to the employees as a fringe benefit or any consideration for employment. It not open to argue contrary. Once it is held as a Page No. 5 consideration for employment, the natural corollary which follows is that such discount i) is an expenditure ii) such expenditure is on account of an ascertained (not contingent) liability; iii) it cannot be treated as a short capital receipt. In view of the foregoing discussion, we are of the considered opinion that discount on shares under the ESOP is an allowable deduction. ..

10.8 Reverting to the questions of when and how much of deduction for discount on options is to be granted, we hold that the liability to pay the discounted premium is incurred during the vesting period and the amount of such deduction is to be found out as per the terms of the ESOP scheme by considering the period and percentage of vesting during such period. We, therefore, agree with the conclusion drawn by the tribunal in SSI Ltd.s case allowing deduction of the discounted premium during the years of vesting on a straight line basis, which coincides with out above reasoning.

9. Moreover, it has been brought to our notice that in assessees own case, the very same issue for Assessment Year 2009-10 as well as for Assessment Year 2007-08 has been adjudicated in favor of the assessee and the claim in respect to discount on ESOP was allowed by the ld CIT(A).

10. Therefore we set-aside the order of the authorities below and direct the Assessing Officer to allow the expenditure incurred by the assessee in respect to the ESOP claim of the assessee/ appellant as per the law laid by Special Bench in Biocon Ltd.(supra)

11. In the result the appeal of the assessee is allowed. Order pronounced in the open court on 23.06.2014. -Sd/- -Sd/- (G. D. AGARWAL) (A. T. VARKEY) VICE PRESIDENT JUDICIAL MEMBER Dated:23/06/2014 A K Keot Copy forwarded to

1. Applicant

2. Respondent

3. CIT

4. CIT (A)

5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi

Advocates List

For Petitioner
  • Shekhar Naphade
  • Mahesh Agrawal
  • Tarun Dua
For Respondent
  • S. Vani
  • B. Sunita Rao
  • Sushil Kumar Pathak

Bench List

SHRI G. D. AGARWAL, VICE PRESIDENT

SHRI A. T. VARKEY, JUDICIAL MEMBER

Eq Citation

LQ/ITAT/2014/4956

HeadNote

TAXATION — Income from business or profession — Employee stock option cost (ESOP) — Deduction in respect of — Allowed — CBDT Circular No. 9 of 2007 — Reliance on — Held, Circular No. 9 of 2007 is a circular issued by CBDT in respect of charging of Fringe Benefit Tax (FBT) arising on sweat equity share and therefore reliance of authorities below on circular for adjudication of issue in hand is misplaced and is therefore erroneous — Question whether employee stock option cost incurred by employer company is an allowable expenditure as per S. 37 is no longer res-integra — Tribunal in Biocon Ltd., held that discount on issue of Employee Stock Option is an allowable deduction in computing income under the head ?Profit and gains of business or profession? — Moreover, in assessee's own case, very same issue for AY 2009-10 as well as for AY 2007-08 has been adjudicated in favour of assessee and claim in respect of discount on ESOP was allowed by ld CIT(A) — Hence, order of authorities below set-aside and Assessing Officer directed to allow expenditure incurred by assessee in respect of ESOP claim of assessee as per law laid down by Special Bench in Biocon Ltd. — Income-tax — Fringe Benefit Tax — Sweat equity shares — Explanatory circular on Fringe Benefit Tax Arising on allotment or transfer of specified securities or sweat equity shares — Securities Act, 1956 — S. 2(h) — Securities Contracts (Regulation) Act, 1956, S. 2(h) — Income-tax Act, 1961, S. 115W to 115WL, S. 115WB(d), S. 115WA and S. 37