DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 4(2), NEW DELHI, I.P.ESTATE, NEW DELHI V. CBRE SOUTH ASIA PRIVATE LIMITED, PARLIAMENT STREET, NEW DELHI

ITA 2776/DEL/2024

AI Insights

The case involves the Deputy Commissioner of Income Tax (DCIT), Circle-4(2), New Delhi as the appellant and CBRE South Asia Private Ltd. as the respondent. The dispute centered on the disallowance of Rs.4,93,63,939/- claimed by the assessee as expenses on the Employee Stock Option (ESOP) Scheme, which the Assessing Officer (AO) treated as capital in nature and not allowable under section 37(1) of the Income Tax Act. The Commissioner of Income-tax (Appeals) reversed the AO's decision, leading to the Revenue's appeal to the ITAT. The ITAT upheld the CIT(A)'s decision, referencing similar cases and judicial precedents that supported the allowability of such expenses as business deductions.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 474531 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-04-2025
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Assessment Year: 2019-2020
• Other Referred Cases: ACIT Vs Cvent India Pvt. Ltd., ITA No. 523/Del/2020
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIJAY B.VASANTA; HONBLE JURISDICTIONAL HIGH COURT OF
• Assessee Lawyers: SUPRIYA MEHTA
• Keywords: Business expenditure
• Section: 143(3); 37(1)

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: D : NEW DELHI BEFORE SHRI ANUBHAV SHARMA, JUDICIAL MEMBER AND SHRI NAVEEN CHANDRA, ACCOUNTANT MEMBER ITA No.2776/Del/2024 Assessment Year: 2019-20 DCIT, Circle-4(2), New Delhi. Vs CBRE South Asia Private Ltd., PTI Building, 4 Ground Floor, Parliament Street, Parliament House, New Delhi – 110 001. PAN: AAACC9308A (Appellant) (Respondent) Assessee by : CA Supriya Mehta Revenue by : Shri Vijay B. Vasanta, CIT-DR Date of Hearing : 25.03.2025 Date of Pronouncement : 02.04.2025 ORDER PER ANUBHAV SHARMA, JM: This appeal is preferred by the Revenue against the order dated 14.03.2024 of the Commissioner of Income-tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi (hereinafter referred to as the ld. First Appellate Authority or ‘the Ld. FAA’ for short) in Appeal No.NFAC/2018-19/10143436 arising out of the appeal before it against the order dated 28.03.2022 passed u/s 143(3) r.w.s. 144B of the Income Tax Act, 1961 (hereinafter referred as ‘the ITA No.2776/Del/2024 2 Act’) by the National Faceless Assessment Centre, Delhi (hereinafter referred to as the Ld. AO). 2. Heard and perused the record. On hearing both the sides we find that the assessee has challenged the action of AO in disallowing the amount of Rs.4,93,63,939/- being expenses incurred on Employee Stock Option (ESOP) Scheme. The assessee had submitted before the ld. CIT(A), that the AO has erred in treating it to be capital in nature and has, thus, erred in not allowing the same u/s 37(1) of the Act. Thus, the assessee submitted that this is an allowable expenditure u/s 37(1). In this regard, the assessee had placed reliance on various case laws. 3. The ld. CIT(A) has sustained the contention of assessee with following observation; “I have considered the submissions made by the assessee. I have also perused the assessment order. The AO has made the disallowance observing in the assessment order that:- \"3.14 Thus, to sum up, it is apparent that the ESOP claimed as expenditure is a) Actually just notional or a provision created i.e., there is no actual expense incurred. b) The expense is contingent in nature, because it is not necessary that the employees who are being lured in, would ultimately stay with the organization and thus whether the share so allotted would be ultimately issued or not is absolutely uncertain. The agreement in ESOP contains various terms and conditions which are to be abided by, by the employees during the vesting period. The restrictions and various other eligibility criteria's are to be fulfilled, which may include performance or achievement of certain target, lock-in periods, etc. in order to make them eligible for ESOP. The option materializes ITA No.2776/Del/2024 3 only at the time of the exercise of ESOP options by employees. That too if the employees adhere to or agree to the terms and conditions laid. c) Further, since the provisional expenses so claimed, reap no benefit during the year it has been created, but rather targets a long term benefit for the company, it is in no manner a revenue expense. At best it can be construed as capital plans of the company, which may or may not reap benefit for the organization as well as the employees, depending upon the circumstances, after the fulfillment of the preconditions and after the vesting period. Thus these provision for expenses, if materialized, may be a capital expense in nature but can't be accepted to be a revenue expense. d) Furthermore, there is no way of accounting which can determine the definite amount of income that should be offered to tax in cases where no specific provisions are available. The employees become the legal and rightful owners of the shares only on the date on which they exercise the option, if at all. The discount on ESOP must be computed based on the market price of the share as on the date of exercise of options. Alternatively it can be said that the actual expense/ loss born by the company in an ESOP arrangement is the difference between the market price of the shares as on the date of exercise of options and value that is received from the employees against such ESOP. Thus, this amount can be decided only at the time of exercising the option by the employees, e) The difference, if any, arising from the quantum of discount computed based on the market value of shares as on the date of grant should be appropriately adjusted to taxable income in the year of exercise and should he offered to tax/claimed as expenditure. f) Though in this case, the assesses is claiming that it is actually just reimbursing the expenses incurred by the parent company on allotment of ESOP to its employees, but even under this condition, the fact remains that there is no actual expense but just a notional expense (till the exercising period is over and the employees actually opt for the scheme) on the part of the parent company which is being reimbursed by the assessee company. Secondly, there is no denial of the fact that this expense is actually an expense which is Capital in nature, as discussed above. In view of the above discussion, the ESOP expenditure of Rs.4,93,63,939/- claimed by the assessee as reimbursement paid to the parent company, is being disallowed and added back to the total income of the assessee u/s 37(1) of the IT Act, 1961.\" ITA No.2776/Del/2024 4 I find that this issue i.e. allowability of ESOP expenses u/s 37(1), has been decided in favour of the Appellant by Hon'ble Jurisdictional High Court of Delhi and Hon'ble High Court of Madras, In a recent decision, the Hon'ble Jurisdictional ITAT Delhi in the case of ACIT Vs Cvent India Pvt. Ltd., ITA No. 523/Del/2020, date of Order 24/02/2023, has placed reliance on the decisions of Hon’ble High Courts of Delhi and Madras and has held that the ESOP expenses are allowable business expenses u/s 37(1) of the Act.” 4. We find that the issue is squarely covered in the assessee’s own case for AY 2018-19 vide ITA No.3489/Del/2023, order dated 31.03.2024 and except for the amounts involved, there is no change in the facts and circumstances. The relevant conclusions for AY 2018-19 (supra) in para No.14 are reproduced below:- “14. In view of the discussion above, we find that allowability of the ESOP expenses actually incurred and cross charged by the parent from an assessee has been decided in favour of the assessee in a plethora of cases including the Hon'ble jurisdictional High Court and the Coordinate Bench of ITAT Delhi Benches. Respectfully following the decision of the Hon'ble High Courts [supra] and Delhi ITAT (supra), we decline to interfere with the findings of the ld. CIT(A) and dismiss the ground raised by the Revenue.” 5. In the light of the aforesaid, there is no error in the findings of the ld.CIT(A). The appeal of revenue is dismissed. Order pronounced in the open court on 02.04.2025. Sd/- Sd/- (NAVEEN CHANDRA) (ANUBHAV SHARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 02nd April, 2025. dk ITA No.2776/Del/2024 5 Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asstt. Registrar, ITAT, New Delhi "