ESOP expenses held to be allowed if recognised in compliance of SEBI norms

In this case, the assessee had debited a sum of Rs. 66.82 lakhs in respect of Employees Staff Option Plan. The shares were allotted by the assessee in compliance of SEBI regulations, which mandate that the difference between the market prices of shares and the price at which the option is exercised by the employees is to be debited to the Profit and Loss Account as expenditure. During assessment proceedings the AO allowed the ESOP expenses. However, during proceeding under section 263 the CIT held that the accounting treatment prescribed by SEBI, nowhere suggests that it was revenue expenditure, to be debited to the Profit and Loss account, as it was only a notional and contingent expenditure. On appeal, the Tribunal held that it was not a case of contingent liability. The expenditure in this behalf was an ascertained liability, thus the expenditure incurred being on lines of the SEBI guidelines, was correctly claimed by the assessee. On further appeal, the High Court upheld the order of Tribunal and allowed deduction in respect of difference between market prices of shares and the price at which the option was exercised - CIT v. PVP VENTURES LTD. [2012] 23 taxmann.com 286 (Madras) (View full judgment)