ITAT clarifies deductibility of discount on ESOP

Recently, the Bangalore Special Bench of the Income Tax Appellate Tribunal (ITAT), in the case of M/s Biocon Ltd v DCIT, has held that discount on employee stock option plans (ESOPs) is an allowable expenditure. In the past, various judicial precedents have delivered conflicting views on this subject.

Typically, ESOPs are a mechanism used by companies to provide incentives to their employees. Generally, companies issue options to purchase stock below the market price in order to motivate and strengthen employees’ trust in the company and increase their interest in the growth of the company. Based on commercial needs, a company devises an ESOP to align the goals of the company with those of its employees.

The ESOPs devised by companies can involve setting up an employee trust, phantom equity schemes, stock appreciation rights, etc.

Economic Laws Practice is a full-service law firm with headquarters in Mumbai and offices in New Delhi, Pune, Ahmedabad, Bangalore and Chennai. Pranay Bhatia is a tax partner at the firm and Hardik Choksi is an associate.