Delhi High Court upholds Delhivery’s ₹51.48 crore ESOP expenditure deduction and rejects ₹62.72 lakh addition under Section 56(2)(viib) over valuation rules.
Case Name: Pr. Commissioner of Income Tax (Central)-2 v. M/s Delhivery Pvt. Ltd.
Case No.: ITA No. 479/2024
Court: Delhi High Court
Date of Judgment: 17 September 2026
Assessment Year: 2018-19
The Delhi High Court has dismissed the Income Tax Department’s appeal against Delhivery Pvt. Ltd., upholding the company’s claim for deduction of ₹51.48 crore towards Employee Stock Option Plan (ESOP) expenditure. The Court also rejected an addition of ₹62.72 lakh under Section 56(2)(viib) of the Income Tax Act, 1961, holding that the Assessing Officer could not reject a valuation report prepared by a Chartered Accountant by applying a requirement introduced only subsequently.
The Division Bench comprising Justice Dinesh Mehta and Justice Rajneesh Kumar Gupta answered both questions of law in favour of Delhivery and dismissed the Revenue’s appeal in its entirety.
Dispute Over ₹51.48 Crore ESOP Expenditure
The first issue before the High Court concerned Delhivery’s claim for deduction of ₹51,48,28,498 representing expenditure relating to its Employee Stock Option Scheme.
The Assessing Officer had disallowed the expenditure claimed by the company. The matter subsequently reached the appellate authorities, and the Income Tax Appellate Tribunal (ITAT) deleted the disallowance.
The Revenue challenged the ITAT’s decision before the Delhi High Court, questioning whether ESOP expenditure could be allowed as a deduction when it had been debited to the company’s profit and loss account.
Delhivery relied upon the Delhi High Court’s earlier decision in CIT v. Lemon Tree Hotels Ltd., where the Court had considered the tax treatment of ESOP expenditure.
In Lemon Tree Hotels, the Delhi High Court had held that the cost of ESOPs could be debited to the assessee’s profit and loss account. The decision had also considered the judgment of the Madras High Court in CIT-III, Chennai v. PVP Ventures Ltd., which dealt with the deductibility of ESOP-related expenditure.
In the present case, the Revenue was unable to dispute the legal position established by the earlier Delhi High Court judgment. Consequently, the Court followed the precedent and upheld the ITAT’s decision deleting the ₹51.48 crore ESOP disallowance.
Dispute Over Chartered Accountant’s Valuation Report
The second issue involved an addition of ₹62,72,719 under Section 56(2)(viib) of the Income Tax Act.
The Assessing Officer had questioned the valuation report relied upon by Delhivery. According to the assessment order, the valuation had been prepared by a Chartered Accountant, whereas the Assessing Officer considered that the valuation was required to be undertaken by a Merchant Banker.
The Assessing Officer relied upon CBDT Notification No. 23/2018 dated 24 May 2018 while making the addition.
However, the High Court examined the relevant assessment period and the chronology of the regulatory change. The assessment year involved was AY 2018-19, corresponding to FY 2017-18. The Court noted that the change relied upon by the Assessing Officer, which removed certification by a Chartered Accountant and required valuation by a Merchant Banker, operated from the subsequent financial year.
Therefore, the Court held that the Assessing Officer was not justified in retrospectively rejecting the Chartered Accountant’s valuation report for the relevant assessment year.
Delhi High Court’s Decision
After considering both issues, the Delhi High Court found no reason to interfere with the orders passed by the appellate authorities.
On the ESOP issue, the Court followed the principle laid down in Lemon Tree Hotels and upheld the deletion of the ₹51.48 crore disallowance.
On the valuation issue, the Court held that a subsequent regulatory requirement could not be used to invalidate a valuation report that was permissible during the relevant financial year.
The Revenue’s appeal was consequently dismissed in toto.
Key Tax Takeaways
The judgment is significant for companies using Employee Stock Option Plans as part of their employee compensation structure. It reiterates the Delhi High Court’s position regarding the treatment of ESOP expenditure and reinforces the importance of following the legal framework applicable during the relevant assessment period.
The decision also highlights an important principle of tax administration: a taxpayer’s compliance should ordinarily be examined with reference to the law and procedural requirements applicable during the relevant period. A later regulatory change cannot automatically be applied to an earlier assessment year.
For companies involved in share issuance, valuation and ESOP arrangements, the judgment also demonstrates the importance of maintaining contemporaneous valuation reports and supporting documentation.
Conclusion
The Delhi High Court’s ruling in Pr. CIT (Central)-2 v. M/s Delhivery Pvt. Ltd. provides clarity on two important income-tax issues—deductibility of ESOP expenditure and the validity of valuation reports under Section 56(2)(viib).
By upholding the ₹51.48 crore ESOP deduction and deleting the ₹62.72 lakh addition arising from the disputed valuation, the Court affirmed the relief granted to Delhivery by the lower appellate authorities.
The judgment is particularly relevant to companies implementing ESOP schemes and businesses undertaking share issuances during periods in which valuation requirements undergo regulatory changes.