Expenses on Stock Options are deductible Revenue Expenditure

The Income Tax Appellate Tribunal at Delhi in the case of ITA No.2283/Del/2013 Religare Commodities Ltd, D3, P3B, District Centre, Saket, New Delhi vs. ACIT, Circle-15(1), New Delhi having PAN – AAACF8356R in connection with the Assessment Year 2008-09 has held that expenses on Stock Options are deductible revenue expenditure.

Expenses on Stock Options are deductible revenue expenditure- Decision of Tribunal

The Tribunal Bench:

The Bench that passed the judgment comprised of Suchitra Kamble, Judicial member and Shri Prasant Maharishi, accountant member.

Date of judgment:

The judgment was passed on 4.1.2017. The order was pronounced in the open court on the same day.

Facts and circumstances of the case:

The appeals were filed by the assessee against the order of the ld CIT (A)-XVIII, New Delhi passed on 28.02.2013 and 03.03.2014 in connection with the Assessment Year 2008-09 and 2009-10 where in the dis allowance of stock appreciation rights by the Ld. Assessing Officer was confirmed by the Ld. C.I.T. and the dis allowance was enhanced in connection with the Assessment Year 2008-09 considering certain amount of expenses as capital expenditure relating to Stock Options.

The issues involved in both the appeals were identical, as such; they were disposed of by a common order stating the facts for the assessment year 2008 -2009 and then was applied for the appeal in connection with the Assessment Year 2009-10.

Grounds of appeal:

The assessee raised the following grounds in the appeal connection with the Assessment Year 2008-09:

1. That the Ld. Commissioner of Income Tax (Appeals) was wrong both in facts and in law in confirming the disallowance of Rs.11, 47,623 made by the Assessing Officer due to the difference between purchase price of Stock Appreciation Rights and their sale price during the exercise by the employees, considering them as capital loss not allowable business deduction.
2. That the Ld. Commissioner of Income Tax (Appeals) erred in not appreciating that the above differences in amount represented the loan granted by the appellant to Religare Enterprises Ltd. Employees Trust for administering Employee Stock Appreciation Right Scheme which was not recovered from the latter according to the SAR scheme.
3. That the Commissioner of Income Tax (Appeals) was absolutely wrong in not appreciating that the above scheme was implemented to motivate employees whereby each SAR granted to the employees was equivalent to one share of Religare Enterprises Ltd. and the aforesaid difference in amount was employee benefit allowable under section 37(1) of the Income Tax Act, 1961.
4. The Ld. Commissioner of Income Tax (Appeals) was not justified in not allowing deduction of the amount of loan as loss incidental to business under section 28 of the Income Tax Act.
5. That the Ld. Commissioner of Income Tax (Appeals) was wrong in enhancing the income of the appellant and also directing dis allowance of Rs.27, 89,501 due to difference between the sale price and the exercise price of SAR paid to the employees holding them to be capital expenditure incurred for issue of shares to employees.
6. That the ld. Commissioner of Income Tax (Appeals) erred in not appreciating that the above differential amount was employee compensation allowable as deduction under section 37(1) of the Income Tax Act.
7. The Ld. Commissioner of Income Tax (Appeals) erred on facts and in law in not allowing deduction of the above differential amount as per the provisions of section 36(1)(ii) of the Act alleging that they were not according to the provisions of the Payment of Bonus Act, 1965.‖

The assessee was a limited company running the business of providing granting of loan corporate advisory services and also providing distribution of dividends.

The assessee company filed its return of income on 27.9.2000 declaring the total income of Rs. 22807670/- Thereafter the return was revised on 29.3.2010 declaring total income of Rs. 2,24,90,250/-.

In the return, the assessee claimed an amount of Rs. 147623/- as deduction for Stock Appreciation Right expenses and considered the same as a loss similar to business.

Before the Assessing Officer, the assessee company explained that the Religare enterprise Ltd launched a stock appreciation Right scheme on and from 1.4.2007 for retention of employees.

The grant price of this Right was zero but the value of each Right was Rs. 140/-. The scheme was administered by means of a trust. The price of trust purchase shares from the stock exchange was an average of Rs. 503/- per share.

The funding of such purchase was through loan initially given by Religare enterprise Ltd. However, the respective companies made payments to Religare Enterprise Ltd.

On exercise of the Right by an employee, the trust sold the shares on the stock exchange and the amount gained was paid to the respective company as settlement of the loan.

The company paid the amount which was the difference between the sale price of the shares and the stock appreciation Right value multiplied by the number of rights exercised to the employees, after deducting TDS.

Stock appreciation rights granted to the employees were 24,220 and total amount of the loan given by the assessee to the trust was Rs. 1, 21, 82,660/-.

For exercising the right a sum of Rs. 2789501/- for 47993 units were paid to the employees as bonus and the same was allowed by the Assessing Officer as deduction.

Later on, the outstanding amount written off during the year was claimed as deduction under section 37 of the Act in the computation of the total income of the assessee company.

The total income of the assessee was assessed at Rs. 2, 36, 37,870/- against the returned income of Rs. 2, 24, 90,250/- by an order passed on 29.12.2010.

The Assessee challenged the addition to the total income before the Ld. first appellate authority which confirmed the order of the Assessing officer and enhanced the total income of the assessee by Rs. 27, 89,501/-

Being aggrieved by the said order of the Ld. first appellate authority, the assessee filed the appeal before the Tribunal.

Arguments of the parties:

The Ld. authorized representative of the assessee company contended that that expenditure was incurred by the assessee in accordance with stock appreciation Right scheme of 2007 of the assessee company.  The scheme was placed on record.

The trust deed of the appellant was referred. The counsel further placed s the audited financial statements of the trust for financial year 2007-08 and 2008-09.

It was submitted that the object of the stock appreciation rights scheme were to reward the employees to attract best talent by awarding for best performance of the employees.

According to that scheme certain employees of the appellant were granted a specified number of stock appreciation Right that was at zero price and that each stock appreciation right was equivalent to one share of the company. The trust initially purchased 532630 shares of the appellant at an average price of Rs. 503.79 per share financed through loans given to the trust by the companies implementing the scheme.

The above cost represented the true outflow of money and it was beyond doubt revenue expenditure.

Regarding the enhancement it was submitted that it was related to the same scheme and eligible for deduction as revenue expenditure.

The decision of the Hon’ble Delhi High Court in case of C.I.T. vs. Lemon tree hotels Ltd, being ITA No. 107 – 2015 passed on 18.8.2015 was referred.

The decision of the Hon’ble Madras High Court in case of C.I.T. vs. M/s PVP ventures Ltd reported at 211, Taxman 554 was also cited. The counsel relied on the decision of the special bench of ITAT in Biocon Ltd. vs. Deputy Commissioner of Income Tax , 155 TTJ 649 .

The Ld. departmental representative relied upon the orders of the lower authority and claimed that the expenditure incurred by the assessee in stock appreciation rights scheme was not revenue expenditure but capital expenditure and contingent in nature.

The judgment- whether Expenses on Stock Options are De:

The Tribunal heard both the sides at length and carefully considered the material placed before them. The various judicial precedent placed were also perused.

In view of the judicial precedents of the Hon’ble Delhi and Madras High Courts, it was held that stock Appreciation right expenses claimed by the appellant, was not capital expenses, but revenue expenditure and liability was allowable expenses.

As a result the dis allowance made by the Ld. Assessing officer of Rs. 1147623/– and enhancement made to that taxable income of the appellant by Ld. CIT was held to be erroneous and were set aside. The appeal of the assessee for AY 2008-09 was accordingly allowed.

Also read:

Income from stocks—business income or capital gains