Deduction for ESOP expenses and CA-certified share valuation for Section 56(2)(viib) are legally allowable.

By | September 22, 2026
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Deduction for ESOP expenses and CA-certified share valuation for Section 56(2)(viib) are legally allowable.
Issue
Whether deduction for Employee Stock Option Scheme (ESOP) expenditure is allowable as business expenditure, and whether a share valuation report from a Chartered Accountant under Section 56(2)(viib) for AY 2018-19 can be rejected solely on the ground that it was not issued by a Merchant Banker under CBDT Notification No. 23/2018.
Facts
  • ESOP Expenditure Claim: The assessee claimed a deduction towards Employee Stock Option Scheme (ESOP) expenses as business expenditure during the relevant assessment year.
  • AO Disallowance on ESOP: The Assessing Officer (AO) disallowed the claimed ESOP expenditure, which was subsequently deleted by the Income Tax Appellate Tribunal (ITAT).
  • Share Valuation Report: For Assessment Year 2018-19, the assessee submitted a share valuation report prepared by a Chartered Accountant to support the valuation of shares under Section 56(2)(viib).
  • AO Rejection of CA Valuation: The AO rejected the CA’s valuation report, contending that in light of CBDT Notification No. 23/2018 dated May 24, 2018, the valuation should have been performed by a Merchant Banker.
  • Appellate Relief on Valuation: Both the Commissioner (Appeals) and the ITAT set aside the addition/disallowance made by the AO regarding the share valuation.
Decision
  • Allowability of ESOP Expenditure: The deletion of the disallowance was upheld, holding that expenditure incurred toward Employee Stock Option Schemes is an allowable business deduction under Section 37(1) of the 1961 Act (Section 34 of the 2025 Act).
  • Validity of CA Share Valuation Report: The lower appellate authorities rightly set aside the AO’s addition under Section 56(2)(viib) (Section 92 of the 2025 Act), affirming that a valid CA valuation report furnished by the assessee could not be discarded merely because it was not conducted by a Merchant Banker for AY 2018-19.
Key Takeaways
  • ESOP Expenses Recognized as Revenue Outgo: Discounts or expenses associated with issuing ESOPs to employees constitute legitimate business expenses incurred for employee compensation and retention.
  • Procedural Rejections Disallowed: Valuations backed by a Chartered Accountant’s report under statutory rules for AY 2018-19 cannot be arbitrarily invalidated or replaced by the AO on rigid procedural interpretations of notification dates.
  • Substantive Exemption Upheld: Lower appellate orders deleting revenue additions that lack statutory backing must be affirmed in favor of the assessee.
HIGH COURT OF DELHI
Principal Commissioner of Income-tax
v.
Delhivery (P.) Ltd.
Dinesh Mehta and Rajneesh Kumar Gupta, JJ.
IT Appeal No. 479 of 2024
SEPTEMBER  17, 2026
Siddhartha Sinha, SSC and Lakshya, Adv. for the Appellant. Sachit Jolly, Sr. Adv., Mrs. Mansha Anand, Sohum Dua, Ghunaim Siddiqui, Ms. Manvi, Abhyudaya S. Bajpai, Ms. Saloni Ray and Ms. Yahavi Sharma, Advs. for the Respondent.
JUDGMENT
Dinesh Mehta, J. – The present appeal was admitted for the following questions vide orders dated 17.03.2025 and 16.12.2025:
“(i) Whether in the given facts and circumstances, the learned Income Tax Appellate Tribunal (ITAT) was correct in not sustaining the disallowance of deduction claimed on account of Employee Stock Option Scheme (ESOP) amounting to Rs. 51,48,28,498/-; and.
(ii) Whether in the given facts and circumstances, the addition of Rs.62,72,719/- is required to be made on account of undisclosed income under the provisions of Section 56(2) (viib) of the Income Tax Act, 1961?”
2. Mr. Sachit Jolly, learned Senior Counsel for the respondent/assessee, at the outset, submitted that question (i) has been set at rest by Delhi High Court vide judgment rendered in CIT v. Lemon Tree Hotels Ltd. [ITA No. 107/2015, dated 18-8-2015], Lemon Tree Hotels Ltd. (supra), and the same has been followed in various other judgments.
3. In the case of Lemon Tree Hotels Ltd. (supra), this Court has held as under:
“2. The question sought to be projected by the Revenue is whether the ITAT erred in deleting the addition of Rs. 1,28,19,169/- made by the Assesssing Officer (‘AO’) by way of disallowance of the expenses debited as cost of Employees Stock Option (‘ESOP’) in profit and loss account?
3. The Court has been shown a copy of the decision dated 19th June 2012 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 of the Assessee. This Court has also in its decision dated 4th August 2015 in ITA No.2 of 2002 (CIT v. Oswal Agro Mills Ltd. ) held that the expenditure incurred in connection with issue of debentures or obtaining loan should be considered as revenue expenditure.
4. In the circumstances, the impugned order of the ITAT answering the question in favour of the Assessee is affirmed.”
4. Mr. Siddhartha Sinha, learned Senior Standing Counsel for the appellant is not in a position to dispute the aforesaid position of facts and law. Following the judgment of this Court, question (i) is answered in affirmative and in favour of the assessee.
5. So far as the question (ii) is concerned, the Assessing Officer (AO) had made the addition on the ground that the valuation which the respondent/assessee had got done, was by a Chartered Accountant (CA), whereas it ought to have been done by a Merchant Banker. While holding so, the AO had observed that the Central Board of Direct Taxes (‘hereinafter referred to as CBDT’) had done away with certification by a CA and only Merchant Banker was eligible to give the valuation report in light of the notification No. 23/2018 issued on 24.05.2018.
6. It is to be noted that the Assessment Year in question is 2018-19, i.e., Financial Year 2017-18, whereas the CBDT has done away with the certification by a CA from the Financial Year subsequent thereto, by way of issuing order on 24.05.2018. Therefore, the AO was not justified in discarding the valuation report given by or the valuation done by the CA.
7. The Commissioner, Income Tax (Appeals,) as also the Tribunal, have rightly set aside the disallowance or addition made by the AO on this count.
8. We, therefore, do not find any infirmity in the orders so passed by the appellate authorities. The above-referred question is also answered against the Revenue and in favour of the assessee.
9. The present appeal is thus rejected in toto.