The Commissioner of Income-Tax vs M/S Biocon Ltd.

Court/Forum: HC

Bench: THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASAD

Order Date: 2020-11-11

Outcome: Assessee

Sections: Section 260A

Core Ratio

The discount on ESOPs is an allowable deduction as it constitutes remuneration to employees.

Outcome

The High Court dismissed the appeal filed by the Revenue, holding in favor of the assessee, M/S Biocon Ltd., by affirming the ITAT's decision that the discount on ESOP is an allowable deduction.

Favourability

Assessee

Core Issue

The central legal question was whether the discount on ESOPs could be considered a deductible expense under the Income Tax Act.

Facts of the Case

The Revenue challenged the ITAT's decision allowing Biocon Ltd. to claim a deduction for the discount on ESOPs, arguing it was contingent and not a deductible expense.

Arguments by Assessee

The assessee argued that the ESOP discount is a legitimate business expense as it serves as remuneration to employees.

Arguments by Revenue

The Revenue contended that the ESOP discount is contingent and should not be allowed as a deduction until the vesting period is completed.

Key Sections & Provisions

Section 260A of the Income-tax Act, 1961 was involved, concerning appeals to the High Court.

Ratio Decidendi

The court held that the discount on ESOPs represents a form of remuneration to employees and is thus deductible. The tribunal's interpretation that the difference between the market price and the offer price of shares is a discount was upheld.

Court Reasoning & Analysis

• The tribunal correctly interpreted the ESOP discount as a deductible expense.
• The discount represents remuneration to employees, aligning with business expense principles.
• The tribunal's findings were not perverse or erroneous.
• The scheme of ESOPs was adequately considered by the tribunal.

Key Observations

• The tribunal's decision aligns with the principles of business expense deductions.
• The ESOP discount is a form of employee remuneration.

Case Laws Cited

• I.T.A.No.653/2013

Related Issues

• Tax treatment of employee benefits
• Deductibility of contingent liabilities
• Valuation of stock options for tax purposes

Important Passages

• The substantial questions of law framed by a bench of this court are answered against the revenue and in favour of the assessee.

Not Decided / Remanded

No issues were explicitly left open or remanded.

Practical Takeaway

Practitioners should note that ESOP discounts can be considered deductible expenses as they constitute employee remuneration.

Full Judgment Text

1

IN THE HIGH COURT OF KARNATAKA AT BENGALURU

DATED THIS THE 11

TH

DAY OF NOVEMBER 2020

PRESENT

THE HON’BLE MR. JUSTICE ALOK ARADHE

AND

THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASAD

I.T.A. NO.651 OF 2013

BETWEEN:

1. THE COMMISSIONER OF INCOME-TAX

LTU

JSS TOWERS

BSK III STAGE

BANGALORE.

2. THE DY. COMMISSIONER OF INCOME-TAX

LTU

JSS TOWERS

BSK III STAGE

BANGALORE

... APPELLANTS

(BY SRI.K.V.ARAVIND, ADV.,)

AND:

M/S BIOCON LTD.

20TH KM, HOSUR ROAD

ELECTRONIC CITY

HEBBAGODI

BANGALORE - 560 100.

... RESPONDENT

(BY SRI.T.SURYANARAYANA, ADV.)

- - -

2

THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT,

1961 ARISING OUT OF ORDER DATED 16.07.2013 PASSED IN ITA

NO.368/BANG/2010 FOR THE ASSESSMENT YEAR 2003-04,

PRAYING TO:

(I) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW

STATED ABOVE.

(II) ALLOW THE APPEAL AND SET ASIDE THE ORDERS

PASSED BY THE ITAT, BANGALORE IN ITA NO.368/BANG/2010

DATED 16.06.2013 CONFIRMING THE ORDER OF THE APPELLATE

COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE

DEPUTY COMMISSIONER OF INCOME TAX, LTU, BANGALORE.

THIS ITA COMING ON FOR FINAL HEARING, THIS DAY,

ALOK ARADHE J., DELIVERED THE FOLLOWING:

JUDGMENT

This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the revenue. The subject matter of the appeal pertains to the Assessment year 2003-04. The appeal was admitted by a bench of this Court vide order dated 31.01.2014 on the following substantial questions of law: (i) Whether on the facts and in the circumstances of the case and in law the

3 tribunal was right in holding that the discount on issue of ESOP is allowable deduction in computing the income under the head profits and gains of the business? (ii) Whether on the facts and in the circumstances of the case and in law the tribunal was right in holding that difference between market price of the shares at the time of grant of option and offer price amounts to discount and the same has to be treated as remuneration to the employees for their continuity of service? (iii) Whether on the facts and in the circumstance of the case and in law the tribunal committed an error in not in not examining the scheme of ESOP from which it is clear that the employees will not get any right in the shares till completion of the period prescribed and the expenditure claimed is contingent and recorded perverse finding? 2. For the reasons assigned by us in the judgment passed today in I.T.A.No.653/2013, the substantial questions of law framed by a bench of this

4 court are answered against the revenue and in favour of the assessee. In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed. Sd/-

JUDGE

Sd/-

JUDGE

ss

Supporting Judgments

• DCIT-7(1)(1) vs Goldman Sachs (India) Securities Pvt. Ltd. (ITAT) — Discount on issue of employees stock options is allowable as deduction in computing the income under the head profits and gains of business.
• PR. COMMISSIONER OF INCOME TAX CENTRAL-2 NEW DELHI vs MEETA GUTGUTIA PROP. M/S FERNS 'N' PETALS (HC) — Completed assessments can be interfered with by the AO under Section 153A only on the basis of some incriminating material unearthed during the course of search
• Nuvama Wealth Management Limited vs DCIT (ITAT) — ESOP discount represents consideration for services rendered by employees and is therefore deductible as business expenditure.
• M/S. W. T. Suren & Co. Ltd. Vs. The Commissioner of Income Tax. Bombay (SC, 1998) — Payment of gratuity made by the assessee to Rallis India Ltd. was an allowable deduction as it was incurred wholly and exclusively for the purpose of business.
• DCIT Cir-3(1) Kol. vs. M/s Narayani Ispat Pvt. Ltd. (ITAT, 2017) — Interest paid for late deposit of service tax and TDS is allowable as a deduction under Section 37(1) of the Income-tax Act, 1961.
• Dy. Commissioner of Income Tax vs Sahil Vachani (ITAT, 2025) — Merely because the assessee had claimed a deduction which was not accepted by the Revenue, it does not attract penalty under Section 271(1)(c) if all facts were

Contrary Judgments

• SAP Labs India Private Limited vs Income Tax Officer, Circle 6, Bangalore (SC) — The High Court can scrutinize the Tribunal's determination of the arm's length price if it is alleged to be perverse or not in accordance with the guidelines un
• J K Investo Trade (India) Limited vs DCIT (ITAT, 2023) — The assessee is eligible to claim deduction under Section 80G irrespective of the fact that the corpus contribution relates to CSR activities.
• T.R.F. Limited vs Commissioner of Income Tax, Ranchi (SC) — Post-1st April 1989, it is sufficient for the assessee to write off the bad debt in its accounts to claim a deduction under Section 36(1)(vii).
• Delhi Duty Free Service [P] Ltd Vs. The Dy. CI.T. (ITAT, 2025) — CSR expenses can qualify for deduction under Section 80G if they meet the necessary criteria outlined in the Income Tax Act.
• The Deputy Commissioner of Income Tax, LTU, Bangalore vs M/s. Biocon Limited (ITAT) — The provisions of Section 10B are exemption provisions, and profits of the eligible unit should not be set off against losses of non-eligible units.
• Checkmate Services P. Ltd. vs Commissioner of Income Tax-1 (SC) — The non-obstante clause in Section 43B does not absolve the assessee from the liability to deposit employees' contributions on or before the due date as a condi