2007 (9) TMI 535 - AT - Income Tax

Sale of Shares - Determination of Period of holding - Date of acquisition - Stock option schemes - Whether the transfer resulted in a short-term capital gain or a long-term capital gain - HELD THAT - In the present case the assessee has exercised the option only on November 7 2002 and only on November 7 2002 he became the owner of 62, 500 shares so exercised by paying for the cost on the same date. This is evidenced from the following documents produced during the course of assessment. The employees stock option is a document that binds the employer vis-a-vis the employee of the company. The binding of the employer is also specific to the employee. That is to say it is employee specific and to him alone. The employer by means of the declaration of the option has in fact undertaken to comply with that declaration in regard to every employee who would fall within the conditions of that declaration. We have earlier observed that the declaration as on September 9 2001 by which the assessee was provided with a scheme of purchase of shares of a specified number and the period within which he could so obtain is only an indicator of conferment of a right to exercise the option to purchase the shares. This particular grant and vesting is always employee specific and therefore has no value whatsoever unlike the rights to subscribe for further shares as contained in section 81 of the Companies Act which is a transferable commodity. Therefore the dates of grant and vesting are irrelevant because they do not result in any shares acquisition but acquisition of shares happens only when the assessee exercises his option and is allotted the specified number of shares. He having exercised the option as on November 7 2002 and sold it in April/May 2003 the period of holding is about 5 to 6 months. This being less than 12 months even in accordance with the provisions of section 2(42A) of the Act read with Explanation 1(i)(d) the shares sold would have to fall in the category of short-term capital asset only. The decision of the Kerala High Court relied upon by the DR in SN. Zubin George v. CIT 2002 (9) TMI 23 - KERALA HIGH COURT was concerning the determination of the date of acquisition of the shares and the conclusion of the court was that the date of acquisition is the date on which the share certificates were issued and accordingly it was held that the period has to be considered from the date on which the shares were issued to the assessee. We have observed very clearly that the events that preceded the exercise of option for purchase of the shares followed by allotment have no relevance other than remaining in the background. This is for the reason that the employee s specific grant and vesting of right are not transferable unlike the right to subscribe for further shares as contained in section 81 of the Companies Act and hence have no value. Further till the shares are allotted the assessee is not a subscriber to the shares of the company and is not considered a member and therefore he could not have transferred any shares prior to the date on which he became a member. Thus we are of the view that there is no merit in the appeal and the same is dismissed.

Issues Involved:
1. Classification of capital gain as short-term or long-term.
2. Determination of the period of holding of shares.
3. Interpretation of the Stock Option Scheme.
4. Applicability of Section 2(42A) of the Income-tax Act.

Detailed Analysis:

1. Classification of Capital Gain as Short-Term or Long-Term:
The primary issue in this case was whether the sum of Rs. 87,08,665/- should be treated as short-term capital gain or long-term capital gain. The assessee contended that the gain should be classified as long-term capital gain, as the period of holding should be considered from the date of vesting of the shares. The Department, however, argued that the period of holding should be calculated from the date the shares were actually purchased.

2. Determination of the Period of Holding of Shares:
The assessee argued that the holding period should be considered from the date of vesting, which exceeded 12 months, thus qualifying the gain as long-term capital gain. However, the Assessing Officer and the Commissioner of Income-tax (A) determined that the period of holding should be from the date of exercise of the option (7.11.2002) to the date of sale (16.5.2003), which was less than 12 months, thereby classifying it as short-term capital gain.

3. Interpretation of the Stock Option Scheme:
The Stock Option Scheme involved three major steps: Granting, Vesting, and Exercise of options and payment of price. The assessee was granted the right to purchase shares, which vested over a period, and the option was exercised on 7.11.2002. The Commissioner of Income-tax (A) concluded that the right to exercise the option was not equivalent to ownership of shares until the shares were actually purchased and paid for.

4. Applicability of Section 2(42A) of the Income-tax Act:
The relevant provision under Section 2(42A) of the Income-tax Act was considered, which states that the period of holding for a share or security should be reckoned from the date of allotment. The Commissioner of Income-tax (A) and the Tribunal concluded that the period of holding should be from the date the shares were purchased (7.11.2002) and not from the date of vesting.

Conclusion:
The Tribunal upheld the decision of the Commissioner of Income-tax (A) that the period of holding should be calculated from the date of purchase of the shares (7.11.2002) to the date of sale (16.5.2003). Since this period was less than 12 months, the capital gain was correctly classified as short-term capital gain. The appeal was dismissed, and the gain was subjected to tax at the short-term capital gain rate. The Tribunal also noted that the rights conferred by the Stock Option Scheme were employee-specific and non-transferable, further supporting the conclusion that the period of holding begins from the date of actual purchase and not from the date of vesting.

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