The Difference between the fair market value of the equity shares on the date of vesting of option and the date of exercise of option is an allowable expenditure : ITAT Mumbai

 

Lupin Limited (ITA Nos. 77/M /21, 1241 to 1242/M/ 2021 & C.O. 01/M /2022)

Facts:

1. The assessee had claimed a deduction of Rs.34,65,39,003 as ESOP expenses in the revised return of income. The AO disallowed the same holding the said expenses to be notional.

2. First type of discount arises at the time of granting and/or vesting of ESOP options and it represents the difference between fair market value on the date of granting/vesting date and the price at which shares are offered to the employees. This discount is usually amortised over the vesting period. The employee need not exercise option at the time of vesting itself.

3. The second type of discount arises at the time of “actual exercise of option” by the employees and it represents the difference between the fair market value of the equity shares on the date of vesting of option and the date of exercise of option.

4. In the instant case, the amount of deduction claimed by the assessee represents the second type of discount mentioned in (b) above, i.e., the additional discount arising at the time when the employees actually exercise option.

5. It is the submission of the assessee that the first type of discount did not arise in the instant case, since there was no difference between market price of equity shares and the price at which the shares were offered to the assessee.

ITAT Mumbai held as below:

1. The assessee has claimed this amount as deduction before the AO during the course of assessment proceedings and it is the case of the AO that the assessee has not accounted for the same in the books of account.

2. It is the submission of the assessee that the first type of discount is required to be accounted in the books of account and the second type of discount is not required to be accounted.

3. It is evident from the SEBI Guidelines that these deal with the deductibility of discount in the hands of company during the years of vesting period. These Guidelines are silent on the position emanating from variation in the market price of the shares at the time of exercise of option by the employees vis-à-vis the market price at the time of grant of option.

4. Accordingly, we are of the view that the Ld CIT(A) was justified in allowing the deduction claimed by the assessee. Accordingly, we uphold the order passed by Ld CIT(A) on this issue.”

The copy of the order is as under:

1657264382-ITA NO. 1241 OF 2022 MILAN KAVIN PARIKH-FINAL