Employee Stock Options

Karnataka HC affirms discount on issue of ESOPs is a tax-deductible business expenditure

Rewarding employees through share-based benefit schemes has been an effective tool for the companies to not just recognise their contribution to the company, but also retain them by imbibing a sense of belonging and ownership. One such scheme, popular among the companies for almost last two decades, has been grant of Employee Stock Option Plans (“ESOPs”). In simple terms, an ESOP is an option and not an obligation, provided by a company to its employees, to purchase its shares at a future date at a pre-determined price, which is ordinarily less than the market price, on satisfaction of certain prescribed conditions. While the issuance of ESOPs entail various tax implications for both the employer and the employees, the scope of this blog is limited to ascertaining the validity of an employer’s right to claim the perceived discount granted on the issue of shares as a tax deductible business expenditure. Recently, the Karnataka High Court (“HC”) affirmed the ruling of the special bench of the Bangalore Income Tax Appellate Tribunal (“ITAT SB”) in the case of Biocon Ltd.[1], wherein it was held that discount on issuance of ESOPs is an allowable business expenditure under Section 37(1) of the Income-tax Act, 1961 (“IT Act”) for the employer.
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