Difference between market price & option price of ESOP shares deductible

CIT vs. PVP Ventures Limited (Madras High Court)

The assessee allotted shares to its employees under an ESOP scheme. In accordance with the Employees Staff Option Plan and Employee Staff Purchase Scheme Guidelines, 1999 issued by SEBI, the difference between the market value of the shares and the value at which they were allotted to the employees was debited to the P&L A/c. This was claimed as a deduction under the head “staff welfare expenditure”. The AO allowed the claim though the CIT revised the assessment u/s 263 and held that the expenditure was notional and contingent in nature and not allowable as a deduction. On appeal, the Tribunal (S.S.I Ltd vs. DCIT 85 TTJ 1049) held that as the SEBI regulations required the difference between the market price of the shares and the price at which the option is exercised by the employees to be debited to the P&L A/c as expenditure, it was an ascertained expenditure and not contingent in nature. On appeal by the department to the High Court, HELD dismissing the appeal: