Income Tax | ESOP Expenditure Is Allowable As Revenue Deduction; AO Cannot Apply Post-Facto Valuation Norms Retrospectively: Delhi High Court

"The cost of ESOP could be debited to the profit and loss account of the Assessee." Delhi High Court, in a judgment dated 17th September 2026, has reaffirmed that expenses incurred by an assessee on account of the Employee Stock Option Scheme (ESOP) are deductible as revenue expenditure.

A bench of Justice Dinesh Mehta and Justice Rajneesh Kumar Gupta also held that tax authorities cannot retrospectively apply valuation norms prescribed by the Central Board of Direct Taxes (CBDT) to an assessment year that predates the issuance of such notifications.

Settled Law on ESOP Expenditure

The appeal challenged the Income Tax Appellate Tribunal's (ITAT) decision to delete the disallowance of over Rs 51 crores claimed by the assessee as ESOP costs. Relying on the precedent set in Commissioner of Income Tax v. Lemon Tree Hotels Ltd., the court observed that ESOP costs are a legitimate business expenditure. The court reiterated that the cost of ESOP is a valid debit to the profit and loss account, a position consistent with existing judicial pronouncements.

Consistency in Judicial Precedent

The court noted that the principle permitting the deduction of ESOP costs is well-settled. Referring to the Madras High Court’s decision in CIT-III Chennai v. PVP Ventures Ltd. and its own previous ruling in CIT v. Oswal Agro Mills Ltd., the bench dismissed the Revenue's challenge. Counsel for the Revenue was unable to distinguish the facts of the present case from these established precedents, leading the court to answer the question in favour of the assessee.

AO Cannot Apply Notification Retrospectively

Regarding the second question, the court addressed the Assessing Officer’s (AO) rejection of a valuation report certified by a Chartered Accountant. The AO had insisted upon a Merchant Banker's certification, citing a CBDT notification dated 24th May 2018. The bench clarified that the notification mandated Merchant Banker certification only for periods subsequent to the assessment year in question, which was 2018-19.

Invalidity of Procedural Imposition

The court held that since the assessment year involved was 2018-19 (Financial Year 2017-18), the AO could not demand compliance with a procedural requirement that had not yet been enacted. By attempting to enforce the new rule on a period prior to its inception, the AO acted without legal justification. The court consequently affirmed the decision of the Commissioner of Income Tax (Appeals) and the ITAT, which had correctly set aside the AO’s addition.

The court found no infirmity in the orders passed by the appellate authorities. Concluding that both legal issues stood resolved against the Revenue, the bench rejected the appeal in its entirety. This ruling serves as a vital reminder to tax authorities regarding the non-retrospective application of procedural guidelines in valuation and confirms the established tax treatment of employee-related stock expenses.

Date of Decision: 17 September 2026