2008 (5) TMI 452 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of stock options under the head 'Salaries.'
2. Employer-employee relationship concerning stock options.
3. Applicability of Section 17(2)(iii) and 17(2)(iiia) of the Income Tax Act.
4. Relevance of Circular No. 710 and Supreme Court judgment in CIT v. Infosys Technologies Ltd.
5. Compliance with guidelines issued by the Central Government for Employee Stock Option Plans (ESOP).

Detailed Analysis:

1. Taxability of Stock Options under the Head 'Salaries':
The primary issue is whether the amount of Rs. 32,75,716 from the sale of stock options should be taxed under 'Salaries.' The Assessing Officer taxed this amount under 'Salaries,' asserting that the stock options were granted due to the assessee's employment with the Indian Branch Headquarters of American Express Bank Limited (AEBL), a wholly-owned subsidiary of American Express International Banking Corporation, New York, which in turn is a subsidiary of American Express Company (Amexco), New York.

2. Employer-Employee Relationship Concerning Stock Options:
The assessee argued that the stock options were provided by Amexco, not by AEBL, thus lacking an employer-employee relationship. However, the Tribunal observed that the stock options were granted due to the assessee's employment with AEBL. The stock options were part of a common plan formulated by Amexco for employees of its subsidiaries, including AEBL. Therefore, the employer-employee relationship was deemed to exist indirectly.

3. Applicability of Section 17(2)(iii) and 17(2)(iiia) of the Income Tax Act:
The Tribunal analyzed the legislative history of Sections 17(2)(iii) and 17(2)(iiia). Section 17(2)(iiia) was omitted by the Finance Act, 2000, effective from 1-4-2001, and thus not applicable to the assessment year 2001-02. The proviso to Section 17(2)(iii), inserted simultaneously, was applicable. This proviso covers the value of any benefit provided by a company free of cost or at a concessional rate to its employees through stock options, provided the scheme complies with guidelines issued by the Central Government.

4. Relevance of Circular No. 710 and Supreme Court Judgment in CIT v. Infosys Technologies Ltd.:
The assessee relied on Circular No. 710, which clarifies that shares transferred by the Government to employees do not constitute a perquisite due to the absence of an employer-employee relationship. However, the Tribunal found this circular inapplicable as it pertains to government disinvestment, not relevant to the case at hand. The assessee also cited the Supreme Court judgment in CIT v. Infosys Technologies Ltd., which was deemed inapplicable as it pertained to assessment years prior to 1-4-2000.

5. Compliance with Guidelines Issued by the Central Government for ESOP:
The Tribunal noted that the taxability of the stock options depended on whether the ESOP scheme complied with the guidelines issued by the Central Government. The authorities below had not verified this compliance. Therefore, the Tribunal set aside the impugned order and remanded the matter to the Assessing Officer for fresh consideration, specifically to verify if the ESOP scheme adhered to the Central Government's guidelines.

Conclusion:
The appeal was allowed for statistical purposes, with the Tribunal remanding the case to the Assessing Officer to reassess the taxability of the stock options, considering the compliance with the Central Government's guidelines for ESOPs. The Tribunal emphasized the indirect employer-employee relationship and the applicability of the proviso to Section 17(2)(iii) in determining the taxability under 'Salaries.'