Top Stories Axis Bank’s ESOP Expenses Treated as Perquisites with TDS Deduction: ITAT allows Expenses u/s 37 [Read Order] The Tribunal observed that the ESOP expenses were reflected as “perquisites” for employees, with appropriate TDS deductions By Sneha Sukumaran Mullakkal – On August 5, 2024 4:34 pm – 3 mins read The Ahmedabad bench of the Income Tax Appellate Tribunal ( ITAT ), upholding the CIT(A)’s decision, allowed deduction for Axis Bank’s ESOP expenses under Section 37 of the Income Tax Act as it is treated as perquisites with appropriate TDS ( Tax Deduction at Source ) deduction.

The bench observed that ESOP expenses were not contingent, as they were recorded when employees actually exercised their options. These expenses were classified as “perquisites” for employees, with appropriate TDS deducted at the time of grant. Axis Bank Ltd., the appellant-assessee, claimed a deduction of Rs. 250.63 crores for Employees Stock Option Scheme (ESOP) expenses when computing its income. The deduction was based on the difference between the market price at the time of option exercise and the exercise price, referring to the Biocon Ltd. case. The ITAT has directed the AO to examine this claim further. The AO noted that the ESOP was part of the company’s policy to reward employees and was in line with SEBI guidelines. The AO observed that even in the Biocon case, the allowed discount as revenue expenditure was the difference between the market price at the time of the grant and the exercise price, not the price at the time of exercise.

The AO rejected the assessee’s claim of Rs. 250.63 crores for ESOP expenses, arguing that this amount, representing the difference between market value and the lower price at which shares were issued to employees, was not an actual expenditure and also submitted that the company did not incur any real expense, as it only chose to receive a lower or no securities premium, and the expense was contingent on the options being exercised. The AO argued that even if the expense was valid, it would be considered capital expenditure, not revenue, based on the Delhi ITAT’s ruling in the ACIT Vs Ranbaxy Laboratories ITA Nos. 2613 & 3871 which treated securities premium as a capital item.

Thus, the AO concluded that the claim was not permissible under tax regulations.The assessee being dissatisfied with the decision of the AO filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) relying upon the decision in the case Biocon Ltd vs. DCIT. The observation made in the case is : “i) The discount under ESOP is in the nature of employees cost and is hence deductible as a business expenditure under Section 37 of the Act. ii) The amount of discount being the difference between the market price as on date of exercise and the exercise price is eligible as deduction. iii) The amount of deduction claimed by the company on ESOP should match with the quantum of perquisite in the hands of the employee.” The CIT(A) allowed the appeal in favour of the  assessee. The Department, the respondent filed an appeal against the order passed by the CIT(A). The Drepartment Representative ( DR ) argued that the assessee’s case differs from Biocon, where ESOPs were issued under a predetermined price as per Section 2(15A) of the Companies Act. The department claimed that the assessee claimed a discount based on the market price versus exercise price, not a predetermined price.

Additionally, the assessee did not provide the relevant ESOP scheme details during the assessment. Therefore, the CIT(A) wrongly relied on the Biocon decision for granting relief. The Counsel for the assessee argued that the ESOP scheme allowed claiming the discount between the market price at grant and exercise dates as revenue expenditure. They provided detailed charts and evidence showing actual discounts, not notional claims. The scheme’s benefits were reported, and taxes were deducted at source. The Counsel asserted that the Biocon decision, supported by the Karnataka High Court, covers their case, and all relevant details were submitted during the assessment. The Tribunal after reviewing the arguments stated that the law on ESOP expenses has been decided in favor of the assessee.

The Tribunal Special Bench in Biocon Ltd and the Karnataka High Court in CIT v. Biocon Ltd affirmed that the discount on ESOPs is an ascertained liability and deductible under Section 37(1), as it aims to secure employee services and not merely to reduce capital. Subsequent rulings by the Mumbai ITAT, Hyderabad ITAT, and Delhi ITAT also supported this view, recognizing ESOP compensation as an allowable deduction and confirming proper taxation and Tax Deducted at Source ( TDS ) treatment for such expenses, noted the bench The tribunal observed that the ESOP scheme details were included in the Annual Report and disclosed to the assessing officer, showing the claimed expenses as non-contingent and based on actual exercises.

The ESOP expenses were reflected as “perquisites” for employees, with appropriate TDS deductions. The two member bench comprising Siddhartha Nautiyal (Judicial Member) and Annapurna Gupta (Accountant Member) contended that the CIT(A) did not erred in fact or law by deciding this issue in favor of the assessee and therefore, dismissed the appeal of the Department.