TDS not necessary at time of ESOP grant: ITAT

The bench stressed that taxes should be deducted when employees exercise their ESOP options and receive shares, as it becomes taxable income for them at that point


The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has recently ruled that there is no need to deduct TDS when granting an employee stock ownership plan. The bench noted that the primary purpose of TDS is to pay tax when one earns.

The respondent/assessee operates in various business sectors, including automotive and industrial lubricants, domestic and commercial liquefied petroleum gas, miscellaneous products, and specialised fluids. The assessing officer believed that taxes should be deducted when the amount is recorded in the accounts. However, the assessee argued that the deduction should occur at the source when the ESOP becomes taxable for the assessee.

The assessing officer dismissed the assessee’s argument and determined that because the right to exercise the option was granted in the 2012-13 financial year, tax should have been deducted at source during that year. The assessee did not withhold taxes on the share-based payments to employees.

During an appeal to the CIT (A), it was concluded that the assessee had provided evidence that tax deductions at source were indeed carried out when employees exercised their ESOP options each year.

The tribunal ruled that when employees are given shares through the ESOP programme after they’ve met certain conditions, it’s considered a benefit for those employees. So, when the employees get the shares by using their ESOP option after a certain time has passed, they look at the difference between the market value of the shares and the price the employees paid. This difference is calculated, and the employees are taxed on it. This extra amount is what the company has to pay taxes on.

Furthermore, the bench emphasised that taxes need not be withheld at the point of granting an ESOP; instead, they should be deducted when employees of the assessee exercise their options and receive shares because, at that moment, it becomes taxable income for the employees.


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