S. 37(1): Stock Options (appreciation rights) are intended to motivate employees and so the expenditure thereon is a deductible revenue expenditure. The discount (difference between market price and vesting price) is allowable upon vesting subject to reversal if the options lapse

Religare Commodities Ltd vs. ACIT (ITAT Delhi)

The discount under ESOP is in the nature of employees cost and is hence deductible during the vesting period w.r.t. the market price of shares at the time of grant of options to the employees. The amount of discount claimed as deduction during the vesting period is required to be reversed in relation to the unvesting/lapsing options at the appropriate time. However, an adjustment to the income is called for at the time of exercise of option by the amount of difference in the amount of discount calculated with reference the market price at the time of grant of option and the market price at the time of exercise of option. No accounting principle can be determinative in the matter of computation of total income under the Act