Pvr Ltd v. Commissioner Of Income Tax

$~16 IN THE HIGH COURT OF DELHI AT NEW DELHI +ITA 564/2012 PVR LTD..... AppellantThrough:Mr. Salil Kapoor and Mr. SumitLalchandani, Advocates versus COMMISSIONER OF INCOME TAX ..... RespondentThrough:Mr. Sanjay Kumar and Ms. EashaKadian, Advocates % Date of Decision: 23[rd]August, 2022 CORAM:HON'BLE MR. JUSTICE MANMOHANHON'BLE MS. JUSTICE MANMEET PRITAM SINGH ARORA J U D G M E N T MANMOHAN, J (Oral): 1.Present appeal had been admitted by this Court on 30[th]April, 2013 on the following question of law:- “Whether on the facts and in the circumstances of the case, theIncome Tax Appellate Tribunal erred in law in holding that thedifference between the price at which stock options were offered toemployees of the appellant company under ESOP and ESPS and theprevailing market price of the stock on the date of grant of suchoptions was not allowable revenue expenditure under Section 37(1) ofthe Income Tax Act, 1961?” 2.During the pendency of the present appeal, the Karnataka High Courtin Commissioner of Income Tax vs. Biocon Ltd. [2020] 121 taxmann.com351 (Karnataka) has upheld the judgment of the Special Bench of theTribunal deciding the aforesaid question of law in favour of the assessee.The relevant portion of the aforesaid judgment is reproduced hereinbelow:- “2. The shares of the company were transferred to the trust at the facevalue and the employees of the assessee were allowed to exercise theoption to buy the shares within the time prescribed under the schemesubject to terms and conditions mentioned therein. The assesseeclaimed the difference of market price and allotment price as adiscount and claimed the same as an expenditure under Section 37 ofthe Act. The Assessing Officer rejected the claim on the ground thatthe assessee has not incurred any expenditure and the expenditure iscontingent in nature and therefore, the assessee is not entitled toclaim the difference between the market price and the allotment priceas an expenditure under Section 37 of the Act.The assessee thereuponfiled an appeal before the Commissioner of Income Tax (Appeals)who by an order dated 13.11.2009 dismissed the appeal preferred bythe assessee.value and the employees of the assessee were allowed to exercise theoption to buy the shares within the time prescribed under the schemesubject to terms and conditions mentioned therein. The assesseeclaimed the difference of market price and allotment price as adiscount and claimed the same as an expenditure under Section 37 ofthe Act. The Assessing Officer rejected the claim on the ground thatthe assessee has not incurred any expenditure and the expenditure iscontingent in nature and therefore, the assessee is not entitled toclaim the difference between the market price and the allotment priceas an expenditure under Section 37 of the Act.The assessee thereuponfiled an appeal before the Commissioner of Income Tax (Appeals)who by an order dated 13.11.2009 dismissed the appeal preferred bythe assessee. 6. We have considered the submissions made by learned counsel forthe parties and have perused the record. The singular issue, whicharises for consideration in this appeal is whether the tribunal iscorrect in holding that discount on the issue of ESOPs i.e., differencebetween the grant price and the market price on the shares as on thedate of grant of options is allowable as a deduction under Section37 of the Act. Before proceeding further, it is apposite to take noteof Section 37(1) of the Act, which reads as under: 6. We have considered the submissions made by learned counsel forthe parties and have perused the record. The singular issue, whicharises for consideration in this appeal is whether the tribunal iscorrect in holding that discount on the issue of ESOPs i.e., differencebetween the grant price and the market price on the shares as on thedate of grant of options is allowable as a deduction under Section37 of the Act. Before proceeding further, it is apposite to take noteof Section 37(1) of the Act, which reads as under: Section37(1) saysthatanyexpenditure(notbeingexpenditure of the nature described in sections 30 to 36 andnot being in the nature of capital expenditure or personalexpenses of the assessee), laid out or expended wholly andexclusively for the purposes of the business or professionshall be allowed in computing the income chargeable underthe head, "Profits and Gains of Business or Profession".expenditure of the nature described in sections 30 to 36 andnot being in the nature of capital expenditure or personalexpenses of the assessee), laid out or expended wholly andexclusively for the purposes of the business or professionshall be allowed in computing the income chargeable underthe head, "Profits and Gains of Business or Profession". 7. Thus, from perusal of Section 37 (1) of the Act, it is evident that theaforesaid provision permits deduction for the expenditure laid out orexpnded and does not contain a requirement that there has to be apay out. If an expenditure has been incurred, provision of Section37(1) of the Act would be attracted. It is also pertinent to notethat Section 37 does not envisage incurrence of expenditure in cash. 8. Section 2(15A) of the Companies Act, 1956 defines 'employeesstock option' to mean option given to the whole time directors, officersor the employees of the company, which gives such directors, officersor employees, the benefit or right to purchase or subscribe at a futurerate the securities offered by a company at a free determined price. Inan ESOP a company undertakes to issue shares to its employees at afuture date at a price lower than the current market price.The employees are given stock options at discount and the sameamount of discount represents the difference between market price ofshares at the time of grant of option and the offer price. In order to beeligible for acquiring shares under the scheme, the employees areunder an obligation to render their services to the company duringthe vesting period as provided in the scheme. On completion of thevesting period in the service of the company, the option vest with theemployees. 9. In the instant case, the ESOPs vest in an employee over a period offour years i.e., at the rate of 25%, which means at the end of firstyear, the employee has a definite right to 25% of the shares and theassessee is bound to allow the vesting of 25% of the options. It is wellsettled in law that if a business liability has arisen in the accountingyear, the same is permissible as deduction, even though, liability mayhave to quantify and discharged at a future date. On exercise ofoption by an employee, the actual amount of benefit has to bedetermined is only a quantification of liability, which takes place at afuture date. The tribunal has therefore, rightly placed reliance ondecisions of the Supreme Court in Bharat Movers supra and RotorkControls India P. Ltd., supra and has recorded a finding that discounton issue of ESOPs is not a contingent liability but is an ascertainedliability. 10. From perusal of Section 37(1), which has been referred to supra,it is evident that an assessee is entitled to claim deduction under theaforesaid provision if the expenditure has been incurred. Theexpression 'expenditure' will also include a loss and therefore,issuance of shares at a discount where the assessee absorbs thedifference between the price at which it is issued and the market valueof the shares would also be expenditure incurred for the purposesof Section 37(1) of the Act. The primary object of the aforesaidexerciseisnottowastecapitalbuttoearnprofitsbysecuring consistent services of the employees and therefore, the samecannot be construed as short receipt of capital. The tribunaltherefore, in paragraph 9.2.7 and 9.2.8 has rightly held that incurringof the expenditure by the assessee entitles him for deductionunder Section 37(1) of the Act subject to fulfillment of the condition.” (emphasis supplied) 3.This Court in Principal Commissioner of Income-tax vs. New DelhiTelevisionLtd., [2018] 99 taxmann.com 401 (Delhi) has followed thejudgment passed by the Special Bench in CIT vs. Biocon Ltd. (Supra).4.The subsequent appeals being ITA 107/2015 and ITA 214/2019 filedby the Commissioner of Income Tax on similar issues have been dismissedby this Court following the judgment of the Karnataka High Court in BioconLtd. vs. DCIT (LTU), Bangalore. 5.Consequently, following the judgment of the Karnataka High Court inCIT vs. Biocon Ltd. (Supra), the question of law is decided in favour of theassessee and it is held that the Income Tax Appellate Tribunal erred in lawin holding that the difference between the price at which stock options wereoffered to employees of the appellant company under ESOP and ESPS andthe prevailing market price of the stock on the date of grant of such optionswas not allowable revenue expenditure under Section 37(1) of the Income Tax Act, 1961. Accordingly, the impugned judgment of the Tribunal is setaside. 6.With the aforesaid directions, the present appeal is disposed of. MANMOHAN, J AUGUST 23, 2022AS MANMEET PRITAM SINGH ARORA, J