Deputy Commissioner of Income Tax vs IBM India Private Limited

Case Commentary: ITAT Bangalore Dismisses Revenue’s Appeal on ESOP Expenditure Disallowance – IBM India Private Limited

Case Title: Deputy Commissioner of Income Tax vs. IBM India Private Limited
ITA No.: 36/Bang/2026
Assessment Year: 2022-23
Bench: ‘A’ Bench, Bangalore
Before: Shri Prashant Maharishi, Vice-President, and Shri Keshav Dubey, Judicial Member
Date of Pronouncement: 30th March 2026

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Introduction

In a significant ruling on the allowability of Employee Stock Option Plan (ESOP) expenditure under the Income Tax Act, 1961, the Income Tax Appellate Tribunal (ITAT), Bangalore Bench, dismissed the Revenue’s appeal against the deletion of a disallowance of ₹90,30,35,787/-. The Tribunal held that the issue was squarely covered in favor of the assessee, IBM India Private Limited, by the jurisdictional Karnataka High Court’s decision in CIT vs. Biocon Limited and the Tribunal’s own earlier order in the assessee’s case for Assessment Year (AY) 2015-16, which was upheld by the High Court. This commentary analyzes the facts, legal issues, reasoning, and implications of the order.

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Facts of the Case

The assessee, IBM India Private Limited, is engaged in computer software development, IT services, and hardware leasing. For AY 2022-23, it filed a return of income on 25th November 2022, declaring total income of ₹40,77,72,04,140. The return was selected for scrutiny, and the Assessing Officer (AO) passed an assessment order under Section 143(3) of the Act on 26th March 2025. Among other disallowances, the AO disallowed ESOP expenditure of ₹90,30,35,787/-, treating it as notional, capital in nature, and not allowable under Section 37(1) of the Act. The AO noted that similar issues were pending before the Supreme Court and made the disallowance to keep the issue alive.

Aggrieved, the assessee appealed to the National Faceless Appeal Centre (NFAC), Delhi. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the disallowance, relying on the Coordinate Bench’s decision in the assessee’s own case for AY 2015-16 (dated 14th February 2022) and subsequent orders for AYs 2016-17 to 2018-19. The Revenue then appealed to the ITAT.

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Issues Raised by the Revenue

The Revenue raised six grounds of appeal, primarily arguing that:
1. ESOP expenditure is notional, involves no actual outflow of funds, and is not allowable under Section 37(1).
2. The discount on shares under ESOP represents a capital transaction (foregoing of share premium) and cannot be treated as revenue expenditure.
3. The CIT(A) erred in relying on the Tribunal’s earlier order without considering that the issue is pending before the Supreme Court in CIT vs. Biocon Ltd.
4. The accounting treatment or compliance with accounting standards cannot override the provisions of the Income Tax Act.

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Reasoning and Decision of the ITAT

The Tribunal, after hearing both parties, dismissed the Revenue’s appeal. The key reasoning was as follows:

– Binding Precedent: The Tribunal noted that the issue of ESOP expenditure deductibility was covered in favor of the assessee by the Karnataka High Court’s decision in CIT vs. Biocon Limited (2020) 121 taxmann.com 351 (Karnataka). Additionally, the Tribunal’s own order in the assessee’s case for AY 2015-16 (ITA No. 289/Bang/2021) had been upheld by the Karnataka High Court in ITA No. 451 of 2023. The High Court’s decision in the assessee’s own case had attained finality, as the special leave petition (SLP) filed by the Revenue was dismissed.

– Rejection of Revenue’s Argument: The Revenue’s contention that the matter was pending before the Supreme Court was rejected. The Tribunal held that since the High Court’s decision in the assessee’s own case was binding, the AO’s disallowance was unsustainable. The Tribunal observed, “Though the revenue might have challenged the deductibility of ESOP expenditure before the Honourable Supreme Court, however, as in the case of the assessee, the issue is settled by the Honourable Karnataka High Court against which the special limitation filed by the assessee is also dismissed.”

– No Merit in Revenue’s Appeal: The Tribunal found no merit in any of the Revenue’s grounds. It held that the ESOP expenditure, being part of employee remuneration, was allowable as revenue expenditure under Section 37(1) of the Act. The notional or capital nature arguments were rejected in light of the binding precedent.

The appeal was dismissed, and the order was pronounced in open court on 30th March 2026.

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Analysis and Implications

This ruling reinforces the settled legal position that ESOP expenditure is deductible as revenue expenditure under Section 37(1) of the Income Tax Act, provided it is incurred wholly and exclusively for business purposes. The Karnataka High Court’s decision in Biocon Limited has been consistently followed by the ITAT and High Courts, establishing that:

– ESOP discount is a form of employee compensation and not a capital transaction.
– The expenditure is real and incurred, even if no immediate cash outflow occurs, as it represents a cost to the company for issuing shares at a discount.
– Accounting standards and treatment cannot override tax provisions, but where the tax law is silent, accounting principles can guide the allowability of expenditure.

For taxpayers, this decision provides clarity and reduces litigation on ESOP deductibility. However, the Revenue may still pursue the matter before the Supreme Court in other cases. Companies should maintain proper documentation and follow the guidelines laid down in Biocon Limited to support their claims.

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