2006 (12) TMI 62 - HC - Income Tax

Perquisites - AO contended that the stock option under Employees Stock Offer Plan was a perquisite and it includible in the salary of the employee - Held that AO contention was not correct and assessee not liable to deduct tax on value of share to employees

Summary

Issues Involved:
1. Liability of the assessee-company to deduct TDS under section 192 of the Income-tax Act for shares issued under a stock option plan.
2. Applicability of section 17(2)(iiia) of the Income-tax Act to the assessment year in question.

Issue-wise Detailed Analysis:

1. Liability of the assessee-company to deduct TDS under section 192 of the Income-tax Act:

The primary issue revolves around whether the assessee-company was required to deduct TDS on shares issued to employees under a stock option plan, treating them as perquisites (salary). The Revenue argued that the shares granted at a concessional rate constituted a perquisite and should be included in the salary, thus attracting TDS under section 192. The Tribunal, however, held that the shares issued under the stock option plan could not be treated as a perquisite and thus the company was not liable for TDS deduction under section 192.

The court examined the relevant sections:

- Section 192 mandates TDS deduction on any income chargeable under the head "Salaries."
- Section 201 outlines the consequences of failure to deduct or pay TDS, deeming such a person as a defaulter.
- Section 17 defines "salary" and includes perquisites under section 17(1)(iv) and section 17(2).

The court noted that the shares were allotted by a trust, not directly by the employer, and were subject to various conditions, including a lock-in period and eligibility criteria. The court concluded that this arrangement did not constitute a direct employer-employee benefit and thus could not be classified as a perquisite under section 17(2)(iii). The court emphasized that the value of such a benefit must be ascertainable, which was not possible in this case due to the conditional and non-transferable nature of the shares.

2. Applicability of section 17(2)(iiia) of the Income-tax Act:

The second issue was whether section 17(2)(iiia), introduced later, was clarificatory and applicable to the assessment year in question. The court referred to the legislative intent and the timing of the amendment, noting that the subsequent insertion of section 17(2)(iiia) indicated that the legislature did not intend for such shares to be treated as perquisites for the relevant assessment year.

The court also considered various case laws and principles of statutory interpretation, emphasizing that in cases of ambiguity in taxing statutes, the interpretation favorable to the assessee should be preferred. The court found that the Tribunal had correctly interpreted the law and the facts, concluding that the stock option did not amount to a perquisite and was not taxable as salary.

Concluding Remarks:

The court highlighted the importance of stock options in promoting industrial harmony and economic growth, recognizing them as a laudable scheme. It stressed that the Department should not hastily label an assessee as a defaulter without clear evidence and should support welfare measures within the legal framework. The court affirmed the Tribunal's findings, ruling in favor of the assessee and urging the Department to expedite any pending refund claims.