Where High Court upheld Tribunal’s order allowing Assessee’s claim for expenditure incurred on allotment of shares under Employee Stock option Plan (ESOP), SLP filed by Revenue against order of High Court was to be granted.

Facts of the case:

  • Assessee, a Private Limited Company deriving income from owning, operating and managing hotels, motels, resorts, restaurant etc. For the AY 2010-11, the Assessee filed return of income on 15.10.2010 declaring a total income of Rs.18,94,51,810.
  • Assessing Officer (AO) assessed the income of the assessee by making disallowance on account of ESOP amounting to Rs.91,89,791 alleging that the outgoing expenses are only notional and the expenditure is allowable only when the shares are purchased by the employer.
  • Income Tax Appellate Tribunal relied on the decision dated 19.06.12 passed by the Division Bench of Madras High Court in CIT-III Chennai v. PVP Ventures Ltd. (TC(A) No. 1023 of 2005) where a similar question was answered in favour of the Assessee by holding that the cost of ESOP could be debited to the profit and loss account.
  • Revenue filed an appeal with the Hon’ble High Court against the ITAT’s order urging that in terms of Circular No.9 of 2007, the expenditure ought not to be allowed given that actual expenditure towards acquisition of shares, and not mere allotment of shares by the employer can be considered as a permissible deduction.

Held by the Hon’ble Delhi High Court:-

  • Court is of the opinion that the argument of the Revenue is untenable; that was the rationale of disallowance in this case.
  • What the Revenue urges essentially is that unless the employer/assessee acquires the shares from a third party, it cannot claim any deduction and that expenditure claimed for allotment or issue of ESOP is merely notional. This Court is of the opinion that such an argument ignores the realities of functioning of commercial entities who would then be asked to purchase shares from market place or third party at prevailing rates instead of allotting them.
  • For above reasons, no question of law arises.

Held by the Hon’ble Supreme Court:-

SLP is granted by the Hon’ble Supreme Court of India.


[2019] 104 taxmann.com 27 (SC)– PR. Commissioner of Income-tax, Delhi v. Lemon Tree Hotels Private Limited.