2007 (12) TMI 302 - AT - Income Tax

Summary

Issues Involved:
1. Residential status of the assessee.
2. Taxability of income arising from exercising stock options.
3. Refund of Tax Deducted at Source (TDS).

Issue-wise Detailed Analysis:

1. Residential Status of the Assessee:

The first issue concerns the residential status of the assessee. The assessee claimed the status of "Resident but not Ordinarily Resident" (RNOR), arguing that he left India in 1989 for employment in the USA and returned in 1999. The assessee cited Section 5(1)(c) and Section 6(6) of the Income-tax Act, 1961, asserting that income accruing outside India should not be included in total income for RNOR. The CIT(A) treated the assessee as a Resident, finding that the income earned outside India was subject to Indian taxation.

The Tribunal examined the provisions of Section 6(6), which specifies that an individual is RNOR if they were non-resident in 9 out of 10 preceding years or were in India for 729 days or less during the 7 preceding years. The Tribunal found that the assessee was non-resident for 7 out of 10 years and was in India for only 420 days during the 7 preceding years. Therefore, the assessee satisfied the second condition of Section 6(6)(a) and was entitled to RNOR status.

2. Taxability of Income from Exercising Stock Options:

The second issue pertains to the taxability of income from stock options exercised by the assessee. The assessee argued that the stock options were granted in 1994 while he was in the USA, and thus, the income should not be taxable in India. The revenue contended that the stock options were exercised in India in 2000, and the income should be treated as salary for services rendered in India, as per the Authority for Advance Ruling (AAR) in the case of Microsoft Corporation.

The Tribunal referred to the AAR's decision, which held that the stock option scheme was devised to provide pecuniary incentive to employees of the Indian subsidiary and should be treated as salary. The Tribunal noted that the stock options were granted in connection with services rendered in India and were exercised in India. Thus, the profit from exercising the stock options accrued in India and was taxable as salary income.

3. Refund of Tax Deducted at Source (TDS):

For the assessment year 2000-01, the assessee sought a refund of TDS on the grounds that taxes were also paid in the USA. The CIT(A) directed the Assessing Officer to refund the TDS. However, the Tribunal held that since the income from exercising stock options was taxable in India, the assessee was not entitled to a refund of TDS. The Tribunal set aside the CIT(A)'s order and restored the Assessing Officer's decision.

Conclusion:

The Tribunal concluded that the assessee was entitled to RNOR status for the assessment year 2001-02, and the income from exercising stock options was taxable in India as salary income. The assessee was not entitled to a refund of TDS for the assessment year 2000-01. The Tribunal partly allowed the assessee's appeal for the assessment year 2001-02 and allowed the revenue's appeal for the assessment year 2000-01.