The tribunal's decision on the nature of employee stock options as business deductions was upheld, affirming the distinction between real and notional income.

ORDER

% 02.09.2024

CM APPL. 50667/2024 (819 Days Delay in Refiling)

1. Bearing in mind the disclosures made, the delay in refiling the appeal is condoned.

2. The application shall stand disposed of.

ITA 474/2024

3. A request is orally made by Mr. Bhatia, learned counsel appearing for the appellant, to amend the cause title in light of M/s Religare Securities Ltd. having subsequently amalgamated. The prayer as made is granted. Let appropriate steps be taken within a period of24 hours and an amended memo of parties placed on the record.

4. The Principal Commissioner impugns the order of the Income Tax Appellate Tribunal1 dated 13 December 2019 and has posited the following questions of law for our consideration:-

“2.1 Whether ld. ITAT erred on facts and in law in deleting the disallowance of Rs.2,04,87,736/- confirmed by the ld. CIT(A) on account of the difference between purchase price of Stock Appreciation Right ( SAR) and the sale price of such SAR at the time of exercise by the employees, holding the same to be revenue loss allowable as business deduction?

2.2 Whether ld. ITAT erred on facts and in law not appreciating the fact that it is a general practice of the companies to form a Trust, which acts merely as a custodian of the shares, during the lock-in period in order to prevent the employees from leaving the company after exercising the option whereas in the present case, the assessee has been writing off its loan given to trust ' behind the canopy of SAR granted to employees?

2.3 Whether ld. ITAT erred on facts and in law in not appreciating the fact that merchant banking license is a capital asset having enduring benefit which has been transferred by the assessee company to its sister concern without any consideration, which leads to an irrefutable conclusion that the transaction was not at Arm's Length?

2.4 Whether ld. ITAT erred on facts and in law in not appreciating the fact that transaction of transfer of merchant banking license, which was not at arm's length had helped the assessee in avoiding the capital the capital gain tax, which would otherwise had payable had the transaction been entered into with any other unrelated entity?”

5. We note that insofar as the aspects of disallowance on account of stock appreciation and merchant banking license transfer are concerned, the same admittedly stands concluded and answered in favour of the assessee by the Court inter partes in Principal Commissioner of Income Tax – 7 vs. M/s Religare Securities Ltd.[ITA 311/2018 decided on 19 March 2018].

6. The aforesaid appeal had come to be dismissed on 19 March2018 in the following terms:-

“The Revenue’s appeal under Section 260A of the Income Tax Act alleges that the Income Tax Appellate Tribunal (ITAT) erred in allowing ₹ 2,09,63,780/- as a capital expense. That amount was the quantum of discount given in respect of the SAR (Stock Appreciation Rights) – similar to Employee Stock Option (ESO) offered by the employer to the work force. The ITAT followed its previous decision and also cited a judgment of this Court in ITA 474/2024 Page 2 of 6 Commissioner of Income Tax vs. Lemon Tree Hotels Ltd. (ITA 107/2015 decided on 18.08.2015). The ITAT also relied upon the judgment of Madras High Court in Commissioner of Income Tax-III, Chennai vs. PVP Ventures Ltd. , TC(A) 1023 of 2005.

In PVP Ventures Ltd. (supra), Madras High Court discussed the relevant issues in the following manner :

“7. On the issue of Staff Welfare expenditure, the Commissioner pointed out that the assessee had debited a sum of Rs.66.82 lakhs under the head of Staff Welfare expenditure. The said sum was incurred by the assessee in respect of Employees Staff Option Plan and Employees Staff Purchase Scheme Guidelines. As per SEBI guidelines, the differe