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2008 (1) TMI 655 - AT - Income TaxChargeable under Head of income - ''Salary receipts Or Capital Gain'' - ''income from other sources''- receipt pertaining to redemption of stock appreciation rights (SARs) - Nature of income or Not - whether amount can be assessed as salary income in the hands of a person when received from a person other than his employer? - absence of an employer - employee relationship - HELD THAT - The very fact that the assessee, an employee of the PGI, was granted SARs in those two years indicates that PGI was designated as a subsidiary for the purpose of P G 1983 Stock Plan. Nothing, therefore, turns on the fact that in the first two years in which SARs were granted, PGU had less than fifty per cent ownership of the PGI and that the ownership control of the PGU was not direct but through another intermediary corporate. We are unable to find merits in this submission of the assessee. Nature of income or not - The amount received by the assessee on redemption of share appreciation rights, as we have noted earlier in this order, is nothing but a deferred wage contingent upon performance of the company s shares in the market. The very preamble of the scheme, under which share redemption rights have been given to the assessee, also states that it is in the nature of deferred awards related to the increase in the price of the Common Stock of the Company . It is thus clear that the amount received on redemption of stock appreciation rights is in the nature of consideration for services rendered by the assessee. This amount is in the revenue nature because the consideration for the amount so received is the services rendered by the assessee. Therefore, the amount received by the assessee on redemption of stock appreciation rights is in the nature of income. Head of income under which the amount so received by the assessee is to be taxed - It is in consideration of the assessee agreeing not to leave employment of the Procter Gamble and any of its subsidiary company for a period of one year, and not to engage in competitive business for three years that the assessee got the SARs. The interest of the assessee s employer are also protected in this said scheme inasmuch as in case the assessee violates the said agreement, the employer company is entitled to injunctive or other appropriate relief. It is also agreed that this scheme shall constitute an agreement between the assessee and the PGU and its subsidiaries, including successors thereof. The PGI is all along an important and integral party to all these arrangements. The assessee has no other connection with PGU than the connection as an organisation connected with the company with which he has entered into an employment contract, and, therefore, anything that the assessee receives from PGU cannot be anything but the reward of his employment. As follows from the case of Justice Deoki Nandan Agarwal s case 1999 (5) TMI 2 - SUPREME COURT , what is to be taxed under the head income from salaries is whatever constitutes salary . The expression salary , though not specifically defined under the Act, is the reward or consideration for services rendered by a person in employment. The assessee s receipts of whatever nature, in connection with his employment, are, therefore, to be treated as salaries . To sum up, we are of the considered view that even if we are to hold that amount in question is received from a person other than the employer of the assessee, and that in order for an income to be taxed under the head income from salaries it is a condition precedent that the salary, benefit or the consideration must flow from employer to the employee, the amount received by the assessee on redemption of stock appreciation rights will still be taxable - though under the head income from other sources . The plea raised by the assessee that the amount in question cannot be taxed as income from salaries is thus irrelevant. As regards assessee s plea that the amount in question can only be taxed under the head capital gains as the receipt is on account of transfer of a capital asset consisting of right to receive stock appreciation rights, we see no substance in the same for the simple reason that, as we have held earlier in this order and as the very preamble of Procter Gamble (1983) Stock Plan itself states, the amount in question is in the nature of a deferred wages, in the genus of bonus, incentives and like, received as a fruit of employment-related activity which is revenue receipt in nature, and it is only the quantification of this amount which is linked to a capital asset that is value of shares. The taxability is not in respect of the stock appreciation right per se but the amount received as a fruit of employment which is measured by way of a formula envisaged in the stock appreciation rights scheme. Thus, we are of the considered view that the assessee was indeed liable to tax in respect of the amount received on redemption of stock appreciation rights. The taxability of this amount is under the head income from salaries but the assessee s plea that the amount in question is received from a person other than the de jure employer, even if it was to be accepted, would not have any material difference to the taxability per se, because, in such an event and following the judgment in the case of Emil Webber s case 1993 (2) TMI 1 - SUPREME COURT , this amount would have been taxed under the head income from other sources . Ground Nos. 1 and 2 are, therefore, dismissed.
Issues Involved:
1. Taxability of the amount received on redemption of Stock Appreciation Rights (SARs) under the head 'Salaries'. 2. Whether SARs should be considered as a capital asset and the tax implications thereof. 3. Levy of interest under section 234B of the Income-tax Act, 1961. Issue-wise Detailed Analysis: 1. Taxability of the amount received on redemption of Stock Appreciation Rights (SARs) under the head 'Salaries': The primary issue was whether the amount received on redemption of SARs should be taxed as 'Salaries'. The assessee argued that since there was no employer-employee relationship between the assessee and the grantor of the SARs (Procter & Gamble Inc., USA), the amount could not be taxed as 'Salaries'. The assessee also contended that the SARs were granted as a recognition of contributions to the Procter & Gamble Group, and were not part of the employment contract with Procter & Gamble India. The Tribunal noted that the SARs were granted as a deferred wage, contingent upon the performance of the company's shares in the market. It was concluded that the amount received on redemption of SARs is in the nature of income because it is a consideration for services rendered by the assessee. The Tribunal held that the amount received on redemption of SARs is taxable under the head 'income from salaries'. The Tribunal also considered the argument that if the amount could not be taxed under 'Salaries', it should not be taxed at all. However, it was concluded that even if the amount is received from a person other than the employer, it can still be taxed under the head 'income from other sources' as per the Supreme Court's decision in Emil Webber v. CIT. 2. Whether SARs should be considered as a capital asset and the tax implications thereof: The assessee argued that SARs should be treated as a capital asset, and since they were acquired without cost, no capital gains would arise on their transfer. The Tribunal rejected this argument, stating that the amount received on redemption of SARs is a revenue receipt in the nature of deferred wages or bonus, and not a capital receipt. The Tribunal emphasized that the taxability is not in respect of the SARs per se, but the amount received as a fruit of employment, measured by a formula based on the appreciation of market value of shares. 3. Levy of interest under section 234B of the Income-tax Act, 1961: The Tribunal referred to the Special Bench decision in the case of Motorola Inc. v. Dy. CIT, which held that when all the monies received by the assessee are subject to tax deduction at source, the assessee cannot be said to have committed a default in not paying advance tax. Since the employer had a duty to deduct tax at source on the amount taxable under 'income from salaries', the assessee was entitled to take into account the tax deductible, though not actually deducted. Consequently, the Tribunal directed the Assessing Officer to delete the levy of interest under section 234B. Conclusion: The Tribunal upheld the taxability of the amount received on redemption of SARs under the head 'income from salaries'. It rejected the argument that SARs should be treated as a capital asset and confirmed that the amount received on redemption is a revenue receipt. The Tribunal also directed the deletion of interest levied under section 234B, following the precedent set in the Motorola Inc. case.
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