2014 (7) TMI 1175 - HC - Income Tax

Taxability of employee stock option - Held that - The salary paid to the respondent-assessee of ₹ 1,51,07,902/- was duly disclosed by the assessee in the return of income filed for the Assessment Year 2007-08 and tax of ₹ 50,29,219/- was deducted at source. Aforesaid salary including ₹ 8,66,634/-, which was computed as gain on account of difference in market price of the shares in USA allotted to the assessee under the stock option. The actual difference between the market price and the shares allotted upon conversion in Indian rupees was ₹ 32,09,756/-. The assessee had taken to proportionate amount and declared ₹ 8,66,634/- as taxable in India, keeping in view the period/time when he was employed in India with reference to the dates 9th January, 2004 to 1st February, 2007. Thus, proportionately on the basis of the period spent in India, the employee stock option was brought to tax and taxed in India. The assessees in question, as noticed above, was an employee of a company registered and listed in USA. The option which was given to the assessee was pursuant to the respondent-assessee working in the said company way back in January, 2004. At that time he was working in USA. The decision of the tribunal is just and fair and does not require interference7,

Summary

Issues:
1. Hypothetical tax covered by a previous decision.
2. Taxation of employee stock options granted by a US company to an Indian resident.

Analysis:

1. The first issue raised in the appeal pertains to hypothetical tax and is in reference to a decision in ITA No. 1308/2008 titled Commissioner of Income Tax versus Dr. Percy Batlivala. The Revenue impugned the order of the Income Tax Appellate Tribunal (Tribunal) dated 24th May, 2013. The Senior Standing Counsel for the Revenue acknowledged that the decision in the mentioned case is applicable and not distinguishable, thus, no question of law arises on this aspect. Consequently, the first issue was resolved based on the previous decision.

2. The second issue involves the taxation of employee stock options granted by a US company to an Indian resident. The respondent-assessee, while working in the USA, was granted 34000 shares of the employer company as part of an employee stock option on 9th January, 2004. The shares were to vest after three years, subject to the condition that the assessee remained employed with the company until at least 8th January, 2007. During the assessment year 2007-08, the assessee was sent on deputation to the Indian Liaison Office of the US company and was a resident but not an ordinary resident in India. The stock options were exercised within the assessment year 2007-08. The salary paid to the assessee, including the gain on the shares, was disclosed in the return of income filed for the same assessment year. The assessee declared a proportionate amount of the gain as taxable in India based on the period spent in India. The Tribunal found the decision to tax the employee stock option in India to be just and fair, considering the circumstances of the case. Therefore, the appeal challenging the taxation of the employee stock options was dismissed by the High Court.

In conclusion, the High Court upheld the Tribunal's decision on both issues, stating that the first issue was resolved based on a previous decision, and the taxation of employee stock options granted by a US company to an Indian resident was deemed fair and did not require interference.