Goldman Sachs Wins Tax Deduction for ESOPs as ITAT Mumbai Reaffirms Consistent Legal Precedent

Goldman Sachs Wins Tax Deduction for ESOPs as ITAT Mumbai Reaffirms Consistent Legal Precedent

Income Tax Tribunal Allows ₹56.44 Cr ESOP Deduction to Goldman Sachs, Rejects Revenue’s Appeal

In a significant reaffirmation of settled legal principles, the Income Tax Appellate Tribunal, Mumbai Bench, has upheld the allowability of Employee Stock Option Plan discount as a deductible business expenditure. This decision was rendered in the case of Goldman Sachs (India) Securities Pvt Ltd. for the assessment year 2013–14, dismissing the Revenue’s appeal and reiterating the binding precedent established by earlier tribunal rulings.

Background of the Case

The assessee, a wholly-owned subsidiary of Goldman Sachs (Mauritius) LLC, and a registered merchant banker, filed its return of income for AY 2013–14. The return was selected for scrutiny, and the Assessing Officer made two key disallowances:

• ESOP discount of ₹56.44 crore, treating it as notional and contingent.
• Stock exchange charges of ₹37.11 lakh, considering them penal in nature under Section 37(1) of the Income Tax Act.

Aggrieved by the disallowances, the assessee approached the Commissioner of Income-tax (Appeals) [CIT(A)], who deleted both additions, relying on precedents from earlier years.

ITAT's Observations on ESOP Deduction

The Revenue challenged the CIT(A)'s findings before the ITAT, primarily contending that the ESOP discount was notional and contingent, hence not deductible. However, the Tribunal, comprising Accountant Member, Shri Om Prakash Kant and Judicial Member, Shri Raj Kumar Chauhan, observed that the issue was no longer res integra, and had been consistently decided in favour of the assessee for multiple assessment years, from AY 2009–10 to AY 2018–19. The Tribunal noted that the CIT(A) had correctly followed the binding precedent set in the assessee’s own case for AY 2017–18, which was based on the Special Bench decision in Biocon Ltd.—a landmark ruling that treated ESOP discounts as an allowable expenditure under Section 37(1).

Verification of Bonus Component

While agreeing with the allowability of the ESOP deduction, the Tribunal acknowledged a factual nuance raised by the assessee during the hearing: a portion of ₹15.37 crore, classified as bonus paid to employees, had been inadvertently clubbed under ESOP costs. The Tribunal restored this limited issue to the AO for factual verification, stating that the ESOP discount remains allowable, subject to this adjustment.

Treatment of Stock Exchange Charges

The second issue involved the disallowance of ₹37.11 lakh paid to stock exchanges, which the Revenue treated as penal. The assessee’s counsel referred to the Bombay High Court judgment in ITA No. 30 of 2017, which followed the earlier ruling in CIT v. Angel Capital & Debit Market Ltd. The High Court had categorically held that such payments were compensatory in nature, arising from business exigencies, and thus allowable under Section 37(1). Following this jurisdictional High Court ruling, the ITAT dismissed the Revenue’s contention, holding that the stock exchange charges were not penal, but rather compensatory—thus eligible for deduction.

Legal Precedent and Tribunal’s Rationale

The Tribunal emphasized that its decision aligns with a consistent line of ITAT rulings in the assessee’s own case over nearly a decade. It highlighted the importance of judicial discipline and consistency, noting that the CIT(A)'s order was reasoned, well-supported, and in conformity with established legal principles. While allowing the Revenue’s appeal for statistical purposes only—due to the need for verification of the bonus element—the ITAT substantively upheld the CIT(A)'s decision, affirming the deductibility of both the ESOP discount and the stock exchange charges.

The ITAT Mumbai's ruling in the Goldman Sachs ESOP case reaffirms the legal position that ESOP discounts are allowable business expenditures under Section 37(1) of the Income Tax Act, following the landmark decision in Biocon Ltd. It also clarifies that stock exchange charges, though flagged in audit reports, are not penal in nature when arising from normal business operations. This judgment offers substantial relief to companies issuing ESOPs and facing disallowance of related expenses. It also strengthens the judicial consensus around the treatment of employee compensation and stock exchange levies for tax purposes.