In landmark ruling, Delhi HC affirms ITAT's decision favoring Delhivery Pvt. Ltd., confirming ESOP expenses as deductible and valuation reports by Chartered Accountants valid for FY 2017-18
The Delhi High Court, in a significant judgment dated 17th September 2026, dismissed the appeal filed by the Principal Commissioner of Income Tax (Central)-2 against M/s Delhivery Pvt. Ltd., thereby affirming key principles related to the deductibility of Employee Stock Option Scheme (ESOP) expenses and the validity of valuation reports prepared by Chartered Accountants (CAs) under the Income Tax Act, 1961.
The case arose from a dispute regarding two principal issues: first, whether the ESOP expenses debited in the profit and loss account were allowable as expenditure under Section 37 of the Income Tax Act; and second, whether a valuation report prepared by a CA instead of a Merchant Banker could be relied upon for assessing undisclosed income under Section 56(2)(viib).
The Revenue had challenged the allowance of ESOP expenses amounting to over Rs. 51 crore, contending these should not be deducted. Additionally, the Assessing Officer (AO) made an addition of approximately Rs. 62 lakh on the ground that the valuation report for Financial Year 2017-18 was invalid as it was certified by a CA rather than a Merchant Banker, citing a Central Board of Direct Taxes (CBDT) notification dated 24.05.2018.
However, the Delhi High Court bench, comprising Justices Dinesh Mehta and Rajneesh Kumar Gupta, relying on precedent including its earlier judgment in Commissioner of Income Tax v. Lemon Tree Hotels Ltd. (2015), held that the ESOP expenses recorded in the profit and loss account are legitimate business expenditures and thus allowable under Section 37. This principle had been consistently upheld by various courts, including the Madras High Court and this Court itself.
Regarding the valuation report, the Court noted that the CBDT notification requiring Merchant Banker certification for valuation reports was applicable prospectively from Financial Year 2018-19 onwards. Since the assessment year in dispute was 2018-19, corresponding to Financial Year 2017-18, the valuation report by the CA was valid and could not be disregarded.
The Court affirmed the decisions of the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal (ITAT) that had ruled in favor of the assessee on both counts, thereby rejecting the Revenue's appeal in its entirety.
This ruling brings clarity and relief to companies issuing ESOPs by confirming that such expenses are deductible. It also provides certainty on the valuation norms for shares under Section 56(2)(viib), clarifying the retrospective applicability of CBDT notifications.
Bottom Line:
Employee Stock Option Scheme (ESOP) expenses debited in the profit and loss account are allowable as expenditure. Further, valuation reports by Chartered Accountants (CAs) for Financial Year 2017-18 are valid, as the Central Board of Direct Taxes (CBDT) notification requiring Merchant Banker certification applied prospectively from Financial Year 2018-19.
Statutory provision(s):
Income Tax Act, 1961 Section 37, Section 56(2)(viib)
