2005 (10) TMI 427 - AT - Income Tax

Summary

Issues Involved:
1. Whether deductions on account of housing norm and auto norm made by the employer from the base pay of the assessee fall within the definition of perquisite under section 17(2)(iii) of the Indian Income-tax Act and are exigible to tax.
2. Whether a profit or benefit earned by the assessee on account of the exercise of stock options granted in terms of his employment is a perquisite as per section 17(2) of the Indian Income-tax Act or capital gain.

Issue-wise Detailed Analysis:

1. Housing Norm and Auto Norm Deductions:
The dispute centered on whether the deductions made by the employer from the base pay of the assessee for housing and car facilities provided in India should be considered taxable perquisites under section 17(2)(iii) of the Indian Income-tax Act. The assessee, an Australian citizen, was employed by Whirlpool Corporation, USA, and was provided with free housing and car facilities in India, with deductions made from his salary as per the company's policy. The Assessing Officer included these deductions in the taxable salary, arguing they formed part of the salary for computing the perquisite value.

The Tribunal noted that the deductions were part of the employer's tax equalization policy, designed to ensure that the employee paid a similar tax as if they had remained in the USA. The Tribunal emphasized that these deductions were made to align the assessee's compensation with that of employees in the USA and should not be included in the taxable salary. The Tribunal also referenced a CIT(A) decision in the employer's case, which had accepted that these deductions were not part of the salary, and the revenue had not challenged this decision. Thus, the Tribunal concluded that the deductions on account of housing norm and auto norm were reductions in pay and not liable to tax in India.

2. Stock Options:
The second issue was whether the profit or benefit derived from exercising stock options granted to the assessee in terms of his employment should be taxed as a perquisite or capital gain. The assessee had exercised stock options and sold the shares on the same date, resulting in a profit. The Assessing Officer treated the difference between the market price on the date of exercise and the grant price as a taxable perquisite under section 17(2)(iii).

The Tribunal referred to the decision of the Authority for Advance Rulings, which held that the benefit derived from the exercise of stock options is taxable as a perquisite under section 17(2)(iii). The Tribunal also noted that the Finance Act, 1999, had inserted section 17(2)(iiia) to clarify the taxability of stock options, which was later deleted by the Finance Act, 2000, with effect from 1-4-2001. The Tribunal concluded that the benefit derived from exercising stock options before 1-4-2000 was taxable as a perquisite under section 17(2)(iii), and the deletion of section 17(2)(iiia) did not change this position. Therefore, the profit derived by the assessee on account of exercising stock options was liable to tax as a perquisite, and there was no capital gain as the sale price and the price on the date of exercise were the same.

Conclusion:
The Tribunal held that the deductions on account of housing norm and auto norm were not includible in the taxable salary of the assessee and should not form the base for determining perquisites. However, the profit derived from exercising stock options was taxable as a perquisite under section 17(2)(iii), and there was no capital gain as the sale price and the exercise price were the same.