2002 (7) TMI 752 - AT - Income Tax

Summary

Issues Involved:
1. Whether the assessee can be treated as an assessee in default under section 201 for not deducting tax under section 192 on the so-called perquisite arising to employees by way of allotment of shares under its employees stock option plan (ESOP).
2. Whether the assessee is liable for payment of interest under section 201(1A) of the IT Act, 1961.
3. Whether Wipro Equity Reward Trust (WERT) is a conduit for Wipro Limited.
4. Issues relating to the valuation of shares in view of the lock-in period of 4 years.

Detailed Analysis:

1. Assessee in Default under Section 201:
The primary issue to be decided is whether the assessee can be treated as an assessee in default under section 201 for not deducting tax under section 192 on the so-called perquisite arising to employees by way of allotment of shares under its ESOP. The appellant argued that there is no employer-employee relationship between WERT (transferor) and the beneficiaries (transferees), thus no perquisite arises on the award of shares. The AO erred in treating the appellant-company as an assessee in default under section 201(1) of the Act for its alleged failure to deduct tax at source under section 192 of the Act. The shares were received by the beneficiaries from WERT, which was not the employer. The authorities below should not have treated WERT as a conduit.

2. Liability for Payment of Interest under Section 201(1A):
The appellant contended that the authorities below erred in imposing the liability mentioned above on the assessee even though there is no employer-employee relationship between WERT and the beneficiaries. The AO should have refrained from passing the order as the shares were received by the beneficiaries from WERT, which was not the employer. Consequently, the assessee is not liable to pay any interest under section 201(1A).

3. WERT as a Conduit for Wipro Limited:
The appellant argued that WERT was settled by Wipro Ltd. as an irrevocable trust, and it has been assessed to tax in its status as an employees' welfare trust. WERT has paid tax on the dividend income, capital gains, and income from other sources. The trust was created in conformity with section 79 of the Companies Act and under section 164(1)(iv) of the IT Act. The trust has been functioning within the objects enumerated in the trust deed, and there is no material on record to say that the trust was a conduit. The trust is a private discretionary trust, and the beneficiaries are the employees of the appellant and its affiliates. The income or assets of the trust, after paying the taxes distributed, do not amount to distribution in favor of the appellant.

4. Valuation of Shares in View of the Lock-in Period:
The appellant contended that the AO erred in arriving at the value of the perquisite arising on account of shares being awarded by WERT. The quoted price on a recognized stock exchange represents the price when a holder of shares is in a position to sell the shares, free from encumbrances. The employees receiving shares from WERT are prohibited from selling the shares during the period of lock-in covered by the undertaking executed by them. Thus, the employees cannot legally transfer nor deliver the shares to receive the benefit of the quoted price of the shares. Therefore, the quoted price cannot be applied in determining the value of the shares. The AO failed to address this aspect in the case of employees who have ceased to remain in the continuous employment of the company for the specified period following which the shares have reverted back to WERT.

Conclusion:
The Tribunal held that:
1. ESOP benefit is not income or perquisite taxable under section 17(2)(iii) for the assessment years 1997-98, 1998-99, and 1999-2000.
2. The assessee has acted bona fide in not deducting tax under section 192 for such benefit and hence cannot be treated as an assessee in default under section 201.
3. Consequently, the assessee is not liable to pay any interest under section 201(1A).

The Tribunal further held that the trust (WERT) is not a conduit for Wipro Limited. The trust has been in existence for more than 18 years and has been assessed to tax previously. The trust has been functioning within the objects enumerated in the trust deed, and there is no material on record to say that the trust was a conduit. The Tribunal refrained from dealing with the issue of valuation, as the orders under section 201(1) and 201(1A) were already canceled. Consequently, the appeals were allowed in favor of the appellant, and the orders of CIT(A) were set aside.