Religare Commodities Ltd vs. ACIT (ITAT Delhi) (ITA No.3634/Del/2014 dtd 04.01.2017)

Background:

– Religare Enterprise Ltd had launched a Stock Appreciation Right Scheme (‘SARS’) effective from 01/04/2007 for employee’s retention purposes. According to the Scheme,  specified employees of the appellant company (Religare Commodities Ltd) were granted a specific number of SAR.
– The market price of the shares at the time of granting was fixed to be the base price which was Rs. 140/- per share. As per the Scheme, if there is an increase in the value of those shares on the date of exercise of the right by the employees then the difference between the base market price and the enhanced or increased value shall be payable to the to the holder of such rights’ holder employees.
– The scheme was administered through a trust. The Trust purchased shares of Religare from the Stock exchange at the time of granting of SAR to specified employees at an average price of Rs. 503/- per share.
– The funding of such purchase was by way of loan given by respective companies whose employees to whom SAR were granted.
– On exercise of the SAR by an employee, the trust sold the corresponding number of shares on the stock exchange and the amount realized was paid to the respective company in the settlement of the loan. – In addition to the SAR already granted to the employees, realisation of certain bonus shares were also paid to the employees as incentive.
– The company retained Rs 140/- as value of the grant and paid to the employees – the amount which was the difference between the sale price of the shares at the time of exercise and SAR value of Rs. 140/- multiplied by the number of SAR exercised by the employee, after deducting tax at source.
– The company claimed deduction under section 37 in the return of income of Rs 11,47,623 alongwith Rs 27,89,501 being bonus shares.
– The Assessing Officer (‘AO’) disallowed an amount of Rs 11,47,623 as a capital loss. On appeal before the CIT(A), CIT(A) enhanced the disallowance by Rs. 27,89,501/- further as distribution of bonus incentive paid to the employees holding it to be a capital expenditure and therefore it is not allowable expenses.

HELD:

• The stock option scheme was introduced to motivate, reward and retain the employees including employees of its subsidiaries and it was implemented through separate employees stock option trust.
• The assessee company’s employees were granted SAR, which were equivalent to one share of Religare Enterprise Ltd. To honour its commitment, the trust purchased the equal number of the equity shares from the stock market at an average price of Rs. 503.79 per share. The trust sold equal number of the shares on exercise by the employees every year and the money was remitted to the respective companies.
• The companies on their part and in accordance with the scheme retained Rs. 140/- per share and paid the balance amount to the employees as SAR compensation. The loan amount given to the trust by the company was adjusted towards the acquisition of shares to the extent of sale price and the balance amount was the loss incurred by the appellant, as it was not recoverable from the trust.
• The cost of the SAR was of Rs. 363.79, being Rs. 503.79 per share less Rs. 140/- and that crystallized at the beginning itself on purchase of the shares by the trust. This amount was amortized on estimated basis by the management over a period of 3 years, which was the vesting period over which the SAR would be exercised by the employees equally each year.
• The issue of deductibility of ESOP expenditure has been decided extensively by the special bench of ITAT in Biocon Limited V DCIT (LTU ) Bangalore in 144 ITD 21 wherein it was held that the discount under ESOP is in the nature of employees cost and is hence deductible during the vesting period w.r.t. the market price of shares at the time of grant of options to the employees. The amount of discount claimed as deduction during the vesting period is required to be reversed in relation to the unvesting/lapsing options at the appropriate time. However, an adjustment to the income is called for at the time of exercise of option by the amount of difference in the amount of discount calculated with reference the market price at the time of grant of option and the market price at the time of exercise of option. No accounting principle can be determinative in the matter of computation of total income under the Act.
• Madras High Court in the case of CIT vs. PVP Ventures Limited  (211 taxman 554) has held that the claim of the ESOP is an ascertained liability for deduction on is allowable.
• Delhi High Court in case of CIT v Lemon Tree Hotels Ltd in ITA No. 107/2015 has held that the expenses debited as cost of employee stock option plan in the profit and loss account is allowable.
• Thus, it is held that SAR expenses claimed by the appellant aggregating Rs 39,37,124 (including bonus incentive) is not in the nature of capital expenses, but revenue expenditure and ascertained liability therefore it is allowable expenses.