ESOP discount is an ascertained business expenditure

ESOP discount is an ascertained business expenditure under Section 37(1), and no Section 14A disallowance can be made if no exempt income is earned.

Issue

Whether the discount on the issuance of Employee Stock Option Plans (ESOPs) is an allowable business expenditure under Section 37(1) rather than a national or contingent liability, and whether a disallowance under Section 14A read with Rule 8D can be sustained for an assessment year prior to A.Y. 2022-23 when no exempt income was earned.

Facts

ESOP Expenditure (Section 37(1)): For the Assessment Years 2018-19 and 2021-22, the assessee claimed a business deduction for ESOP expenses. The Assessing Officer (AO) disallowed the claim, categorizing it as a merely notional, uncrystallised, and contingent liability where no actual expense was incurred.
Exempt Income Disallowance (Section 14A): For the Assessment Year 2018-19, the assessee (an internet-based real estate platform) did not earn any exempt income or claim exemptions under Section 10(34). Despite this, the AO computed a routine disallowance under Section 14A read with Rule 8D.
Appeals History: The Commissioner (Appeals) deleted the Section 14A disallowance on the grounds that it cannot apply when exempt income is absent.

Decision

ESOP Discount is an Ascertained Liability: Held in favour of assessee. The discount on the issue of ESOPs is not a contingent liability but is a fully ascertained liability.
ESOP is a Business Expense: Held in favour of assessee. When an assessee absorbs the difference between the market value of shares and the lower price at which they are issued to employees, it constitutes an “expenditure incurred” under Section 37(1).
Not a Capital Loss: Held in favour of assessee. The primary purpose of issuing ESOPs is to secure the consistent services of employees to earn business profits, not to waste capital; thus, it cannot be treated as a short receipt of capital.
No Section 14A Disallowance Without Exempt Income: Held in favour of assessee. Since the assessee earned zero dividend or exempt income during the year, no disallowance under Section 14A read with Rule 8D is sustainable.
Prospective Nature of the 2022 Amendment: Held in favour of assessee. The amendment made to Section 14A by the Finance Act, 2022 (making disallowances applicable even without exempt income) is explicitly prospective and applies only from Assessment Year 2022-23 onwards. Therefore, it does not apply to the current dispute.

Key Takeaways

ESOP Cost is Tax-Deductible: Corporate taxpayers can legally deduct the stock option discount (Market Value minus Option Price) as a routine employee compensation expense under Section 37(1).
The “No Exempt Income, No Disallowance” Rule Retained Past-2022: For all assessment years prior to A.Y. 2022-23, the tax department cannot forcefully apply Section 14A/Rule 8D mechanics if the taxpayer’s exempt income kitty is nil.

IN THE ITAT BANGALORE BENCH ‘B’

DCIT

Nobroker Technologies Solutions (P.) Ltd.^*

SANDEEP SINGH KARHAIL, Judicial Member
and BALAKRISHNAN S., Accountant Member

IT Appeal Nos. 915 & 916 (Bang) of 2026
[Assessment years 2018-19 & 2021-22]

MAY 29, 2026

Romil Hotwani, AR and S. Vasudevan for the Appellant. Rahul Sinha, DR for the Respondent.

ORDER

Sandeep Singh Karhail, Judicial Member. – The Revenue has filed the present appeals against the separate impugned orders of even date 09.12.2025 passed u/s 250 of the Income Tax Act, 1961 (in short “The Act”) by the ld. CIT(A), National Faceless Appeal Centre, Delhi (“ld. CIT(A)”), for the assessment years 2018-19 & 2021-22.

2. Since both the appeals pertain to the same assessee involving similar issues arising out of the similar factual matrix, these appeals were heard together as a matter of convenience and are being decided by way of this consolidated order. With the consent of the parties, the Revenue’s appeal for the assessment year 2018-19 is considered as a lead case, and the decision rendered therein shall apply mutatis mutandis to the other appeal.

3. In its appeal for the assessment year 2018-19, the Revenue has raised the following revised grounds of appeal: –

“The order of the Ld. CIT(A) dated 09/12/2025 for A.Y. 2018-19 is opposed to law and facts of the case.

On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in allowing the deduction on account of ESOP expenditure, ignoring the detailed findings recorded by the Assessing Officer that the alleged expenditure was merely a notional accounting entry without any actual outflow of funds.

The learned CIT(A) has erred in holding that the discount on issue of shares under the SSPP scheme constitutes allowable revenue expenditure, without appreciating that such discount represents short receipt of share premium, which is capital in nature and therefore not allowable as deduction under the provisions of the Income-tax Act, 1961.

The order of the learned CIT(A) is erroneous in law and on facts, as it disregards the settled principle that share capital and share premium are capital receipts, and any shortfall therein cannot be treated as allowable business expenditure.

The learned CIT(A) has erred in relying upon the judgment of the Hon’ble Karnataka High Court in the case of CIT v. Biocon Ltd. (Karnataka)/[2020] 430 ITR 151 (Karnataka), without appreciating that the said decision has not been accepted by the Department on merits and the issue has not attained finality.

The learned CIT(A) has failed to appreciate that the Department has filed SLP before the Hon’ble Supreme Court on the identical issue in the case of PCIT v. Lemon Tree Hotels Pvt. Ltd. , which has been admitted and is pending adjudication.

On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the disallowance made by the Assessing Officer under section 14A f the Income-tax Act, 1961, without properly appreciating the facts and findings recorded in the assessment order.

The ld. CIT(A) has erred in holding that no disallowance under section 14A can be made in the absence of exempt income during the relevant previous year, without appreciating that the assessee had made substantial investments in Mutual Funds which are capable of yielding income not forming part of total income.

The appellant craves leave to add, alter, amend or withdraw any of the above grounds of appeal at or before the time of hearing.”

4. Ground No.1 is general in nature and therefore needs no separate adjudication.

5. Ground Nos.2 to 6, raised in Revenue’s appeal, pertain to the deletion of disallowance made on account of Employee Stock Option Plan (“ESOP”) expenses.

6. We have considered the submissions of both sides and perused the materials available on record. The brief facts pertaining to this issue are that the assessee is an internet-based Website/App, which helps connect owners and seekers of properties with each other, without the involvement of any broker. In the assessment year 201819, the assessee filed its return of income on 29.09.2018. The return filed by the assessee was selected for scrutiny, and statutory notices u/s 143(2) & 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, it was noticed that the assessee has claimed ESOP expenses of Rs.5,75,25,897/- u/s 37 of the Act. Accordingly, the assessee was asked to provide an explanation regarding the allowability of such expenses. In response, the assessee submitted that the company had incurred expenditure on ESOP for the benefit of its employees in lieu of the services rendered by them for the company. It was further submitted that the stock options provided under the ESOP policy are primarily a consideration for the services rendered by the employees, and it is in the nature of an additional remuneration for the employees. Thus, the assessee claimed that the expenditure on account of ESOP granted to the employees satisfies the conditions/criteria for allowability u/s 37 of the Act. In support of its submission, the assessee placed reliance upon the decision of the Hon’ble Karnataka High Court in the case of CIT v. Biocon Ltd. [2020] 430 ITR 151 (Karnataka).

7. The Assessing Officer (“AO”), vide order dated 23.2.2021, passed u/s 143(3) r.w.s. 143(3A) & 143(3B) of the Act, disagreed with the submissions of the assessee and held that the assessee has not incurred any expenditure for the grant of ESOP to its employees and the entire expenditure claimed by the assessee is merely notional, without the same being crystallised. Accordingly, the AO held that the ESOP expenses are contingent and unascertained. Thus, not allowable u/s 37 of the Act.

8. The ld. CIT(A), in the impugned order, following the decision of the Hon’ble Karnataka High Court in the case of Biocon Ltd. (supra) allowed the ground raised by the assessee on this issue and deleted the disallowance of ESOP expenses u/s 37 of the Act. Being aggrieved, the revenue is in appeal before us.

9. We find that the Hon’ble Jurisdictional High Court, while deciding a similar issue in M/s. Biocon Ltd. (supra) observed as follows: –

“6. We have considered the submissions made by learned counsel for the parties and have perused the record. The singular issue, which arises for consideration in this appeal is whether the tribunal is correct in holding that discount on the issue of ESOPs i.e., difference between the grant price and the market price on the shares as on the date of grant of options is allowable as a deduction under Section 37 of the Act. Before proceeding further, it is apposite to take note of Section 37(1) of the Act, which reads as under:

Section 37(1) says that any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head, “Profits and Gains of Business or Profession”.

7. Thus, from perusal of Section 37 (1) of the Act, it is evident that the aforesaid provision permits deduction for the expenditure laid out or expnded and does not contain a requirement that there has to be a pay out. If an expenditure has been incurred, provision of Section 37(1) of the Act would be attracted. It is also pertinent to note that Section 37 does not envisage incurrence of expenditure in cash.

8. Section 2(15A) of the Companies Act, 1956 defines ’employees stock option’ to mean option given to the whole time directors, officers or the employees of the company, which gives such directors, officers or employees, the benefit or right to purchase or subscribe at a future rate the securities offered by a company at a free determined price. In an ESOP a company undertakes to issue shares to its employees at a future date at a price lower than the current market price. The employees are given stock options at discount and the same amount of discount represents the difference between market price of shares at the time of grant of option and the offer price. In order to be eligible for acquiring shares under the scheme, the employees are under an obligation to render their services to the company during the vesting period as provided in the scheme. On completion of the vesting period in the service of the company, the option vest with the employees.

9. In the instant case, the ESOPs vest in an employee over a period of four years i.e., at the rate of 25%, which means at the end of first year, the employee has a definite right to 25% of the shares and the assessee is bound to allow the vesting of 25% of the options. It is well settled in law that if a business liability has arisen in the accounting year, the same is permissible as deduction, even though, liability may have to quantify and discharged at a future date. On exercise of option by an employee, the actual amount of benefit has to be determined is only a quantification of liability, which takes place at a future date. The tribunal has therefore, rightly placed reliance on decisions of the Supreme Court in Bharat Movers supra and Rotork Controls India P. Ltd., supra and has recorded a finding that discount on issue of ESOPs is not a contingent liability but is an ascertained liability.

10. From perusal of Section 37(1), which has been referred to supra, it is evident that an assessee is entitled to claim deduction under the aforesaid provision if the expenditure has been incurred. The expression ‘expenditure’ will also include a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which it is issued and the market value of the shares would also be expenditure incurred for the purposes of Section 37(1) of the Act. The primary object of the aforesaid exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, the same cannot be construed as short receipt of capital. The tribunal therefore, in paragraph 9.2.7 and 9.2.8 has rightly held that incurring of the expenditure by the assessee entitles him for deduction under Section 37(1) of the Act subject to fulfillment of the condition.

11. The deduction of discount on ESOP over the vesting period is in accordance with the accounting in the books of accounts, which has been prepared in accordance with Securities And Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999.

12. So far as reliance place by the revenue in the case of CIT v. INFOSYS TECHNOLOGIES LTD. is concerned, it is noteworthy that in the aforesaid decision, the Supreme Court was dealing with a proceeding under Section 201 of the Act for non deduction of tax at source and it was held that there was no cash inflow to the employees. The aforesaid decision is of no assistance to decide the issue of allowability of expenses in the hands of the employer. It is also pertinent to mention here that in the decision rendered by the Supreme Court in the aforesaid case, the Assessment Year in question was 1997-98 to 1999- 2000 and at that time, the Act did not contain any specific provisions to tax the benefits on ESOPs. Section 17(2)(iiia) was inserted by Finance Act, 1999 with effect from 01.04.2000. Therefore, it is evident that law recognizes a real benefit in the hands of the employees. For the aforementioned reasons, the decision rendered in the case of Infosys Technologies is of no assistance to the revenue. The decisions relied upon by the revenue in Gajapathy Naidu, Morvi Industries and Keshav Mills Ltd. supra support the case of assessee as the assessee has incurred a definite legal liability and on following the mercantile system of accounting, the discount on ESOPs has rightly been debited as expenditure in the books of accounts. We are in respectful agreement with the view taken in PVP Ventures Ltd. And Lemon Tree Hotels Ltd. Supra.

13. It is also pertinent to mention here that for Assessment Year 2009-10 onwards the Assessing Officer has permitted the deduction of ESOP expenses and in view of law laid down by Supreme Court in Radhasoami Satsang v. CIT, [1992] 193 ITR 321 (SC), the revenue cannot be permitted to take a different stand with regard to the Assessment Year in question.

In view of preceding analysis, the substantial questions of law framed by a bench of this court are answered against the revenue and in favour of the assessee. In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed.”

9.1 During the hearing, the learned Departmental Representative (“ld. DR”) submitted that the Revenue has not accepted the decision in Biocon Ltd. (supra) and an appeal against the same is currently pending before the Hon’ble Supreme Court. It is now well-established that mere pendency of the appeal does not affect the binding nature of the decision. Thus, unless the decision is overruled by a higher forum, it continues to be binding precedent. Therefore, in view of the aforesaid findings of the Hon’ble Jurisdictional High Court, we do not find any infirmity in the order passed by the ld. CIT(A) in allowing the claim of deduction of ESOP expenses u/s 37 of the Act. Accordingly, the Grounds Nos 2 to 6 raised in the Revenue’s appeal are dismissed.

10. Ground Nos.7 & 8 raised in revenue’s appeal, pertaining to the deletion of disallowance made u/s 14A of the Act.

11. We have considered the submissions of both sides and perused the materials available on record. In the present case, on perusal of the audited financial statements and the computation of income for the year under consideration, we find that the assessee did not earn any exempt income and, accordingly, claimed no exemption u/s 10(34) of the Act while filing its return of income. We find that the Hon’ble Delhi High Court in the case of Cheminvest Ltd. v. CIT-IV (Delhi), held that Section 14A of the Act will not apply if no exempt income is received or receivable during the relevant previous year. We further found that the Hon’ble Bombay High Court in Pr. CIT v. Kohinoor Project (P.) Ltd.[2020] 425 ITR 700 (Bombay), rendered similar findings and dismissed the Revenue’s appeal on a similar issue. Since, in the present case, the assessee has not earned any dividend income, therefore, respectfully following the judicial precedents, cited (supra), disallowance of expenditure u/s 14A r.w. Rule 8D of the Income Tax Rules, 1962, is not sustainable.

12. We further find that vide amendment by the Finance Act, 2022, the non-obstante clause and an Explanation were inserted in section 14A of the Act to the effect that the section shall apply even if no exempt income has accrued or arisen or has been received during the year. We find that while dealing with the issue of whether the aforesaid amendment by the Finance Act, 2022, is prospective or retrospective in operation, the Hon’ble Delhi High Court in Pr. CIT (Central) v. Era Infrastructure (India) Ltd. [2022] (Delhi), held that the amendment by the Finance Act, 2022, in section 14A of the Act is prospective and will apply in relation to the assessment year 2022-23 and subsequent years. Thus, in view of the aforesaid amendment, the disallowance u/s 14A of the Act, read with Rule 8D, is not permissible in the present case.

13. Therefore, we are of the considered view that a disallowance computed by the AO u/s 14A read with Rule 8D of the Rules is completely unwarranted in the facts and circumstances of the present case. Accordingly, we do not find any infirmity in the findings of the ld. CIT(A) on this issue and the same are upheld. As a result, Ground Nos.7 & 8 raised in Revenue’s appeal are dismissed.

14. In the result, the appeal by the Revenue for the assessment year 2018-19 is dismissed.

ITA No.916/Bang/2026 (AY 2021-22):

15. In its appeal for the assessment year 2021-22, the revenue has raised the following revised grounds of appeal: –

The order of the Ld. CIT(A) dated 09/12/2025 for A.Y. 2021-22 is opposed to law and facts of the case.

On the facts and in the circumstances of the case, the learned CIT(A) has erred in allowing the deduction on account of ESOP expenditure, ignoring the detailed findings recorded by the Assessing Officer that the alleged expenditure was merely a notional accounting entry without any actual outflow of funds.

The learned CIT(A) has erred in law in holding that the discount on issue of shares under ESOP scheme constitutes allowable revenue expenditure without appreciating that such discount represents short receipt of share premium, which is capital in nature and therefore not allowable as deduction under the provisions of the Income-tax Act, 1961.

The order of learned CIT(A) has erred in relying upon the judgement of. the Hon’ble Karnataka High Court in the case of Biocon Ltd. (supra), despite the fact that the said decision has not been accepted by the Department on merits and the issue has not attained finality.

The Learned CIT(A) has failed to appreciate that the Department has filed SLP before the Hon’ble Supreme Court on the identical issue in the case of PCIT v. Lemon Tree Hotels Pvt. Ltd. , which has been admitted and pending adjudication.

The appellant craves leave to add, alter, amend, or withdraw any of the above grounds of appeal at or before the time of hearing.

16. The solitary grievance of the Revenue, in the present appeal, pertains to the deletion of the disallowance made on account of ESOP expenses. As a similar issue arising out of the similar factual matrix has been adjudicated by us in the Revenue’s appeal in the preceding year, our findings/conclusions as rendered therein shall apply mutatis mutandis to the present appeal. Accordingly, we do not find any infirmity in the findings of the ld. CIT(A) on this issue, and the same are upheld. As a result, the grounds raised by the Revenue are dismissed.

17. In the result, the appeal by the Revenue for the AY 2021-22 is dismissed.

18. To sum up, both the appeals by the Revenue are dismissed.