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February 2018

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Tax deductibility of ESOP costs - Recent judgement of far reaching implications.

One of the thorny issue discouraging companies from issuing ESOPs was the Accounting charge and its non-deductibility for tax computations. A judgement from the special bench of ITAT, Bengaluru in 2013 in the case of Biocon Ltd. had decided in favour of the company and allowed its claim for the tax computation. The judgement not only allowed the deduction for the accounting charge but went a step ahead and allowed the company to claim the Perquisite value (on which employees paid Perquisite tax at the time of exercise) as a deduction.

This judgement somehow was not taken seriously by the Assessing officers as well as the companies. The Assessing officers in other jurisdictions disallowed the claims since they felt the matter was sub-judice and the Companies thought claiming anything more than the Accounting charge would be too ambitious.

Recent judgement of the Mumbai bench of ITAT (in the case of Kotak Mahindra Bank), re-in forced the thinking of the Bengaluru bench and reprimanded the Department for incorrectly presuming that the matter was sub-judice. The Mumbai Bench squarely applied the ratio laid down in the case of Biocon Limited and clarified that unless the jurisdictional High Court stays or sets aside or any other High Court takes a contrary view, the principles laid down by Special Bench in Biocon’s case shall prevail.

    What do both these judgements re-inforce?


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