1960 (6) TMI 24 - HC - Income Tax

Summary

Issues Involved:
1. Whether the grant of an option to acquire shares at a fixed price constitutes a taxable perquisite or profit under Schedule E of the Income Tax Act, 1952.
2. Whether the subsequent exercise of the option and the acquisition of shares at a price below the market value constitutes a taxable perquisite or profit.
3. The appropriate year of assessment for taxing the perquisite or profit arising from the grant and/or exercise of the option.

Detailed Analysis:

1. Grant of Option as a Taxable Perquisite or Profit:

Viscount Simonds' Judgment:
The court examined whether the grant of the option itself constituted a taxable perquisite or profit. It was determined that the option granted to the appellant had potential value and could be turned to pecuniary account, despite being non-transferable. The court emphasized that the language of the taxing statute, "perquisite or profit whatsoever," is broad and should be interpreted to include any benefit that can be converted into money. The court rejected the Crown's argument that the option was not a perquisite until exercised, stating that the option had intrinsic value at the time of its grant.

Lord Reid's Judgment:
Lord Reid agreed that the option was a perquisite at the time of its grant, as it could be turned to pecuniary account. He noted that the option had value because it allowed the appellant to acquire shares at a fixed price, which could be sold for a profit. The non-transferability of the option did not negate its value, as the appellant could still arrange to sell the shares once acquired.

Lord Radcliffe's Judgment:
Lord Radcliffe concurred, stating that the option itself was a taxable perquisite when granted, provided it had a monetary value. He emphasized that the option enabled the appellant to acquire shares at a fixed price, which constituted a valuable right.

Lord Keith of Avonholm's Judgment:
Lord Keith argued that the option was merely a standing personal offer and did not constitute a taxable perquisite until exercised. He emphasized that the option's value only emerged upon exercise, and the profit should be assessed at that time.

Lord Denning's Judgment:
Lord Denning highlighted that the option, even if paid for with a nominal sum, did not constitute a perquisite or profit until exercised. He argued that the right to make profits in the future is not taxable, only the profits themselves are.

2. Exercise of Option as a Taxable Perquisite or Profit:

Viscount Simonds' Judgment:
The court held that if the option itself was a taxable perquisite, the subsequent exercise of the option and acquisition of shares at a price below the market value would not constitute a separate taxable perquisite. The profit arose from the grant of the option, not its exercise.

Lord Reid's Judgment:
Lord Reid noted that taxing the exercise of the option would result in multiple perquisites being assessed in different years, which was not consistent with the nature of the benefit. He argued that the profit should be assessed at the time of the option's grant.

Lord Radcliffe's Judgment:
Lord Radcliffe agreed that the exercise of the option did not constitute a separate taxable perquisite. The profit arose from the grant of the option, and the exercise merely realized that profit.

Lord Keith of Avonholm's Judgment:
Lord Keith argued that the profit should be assessed when the option is exercised, as that is when the benefit is realized.

Lord Denning's Judgment:
Lord Denning emphasized that the profit arises when the shares are acquired, not when the option is granted. He argued that the exercise of the option should be the taxable event.

3. Appropriate Year of Assessment:

Viscount Simonds' Judgment:
The court held that the perquisite or profit should be assessed in the year the option was granted, as that is when the appellant acquired a valuable right.

Lord Reid's Judgment:
Lord Reid agreed, stating that the profit should be assessed in the year the option was granted, as it constituted a perquisite at that time.

Lord Radcliffe's Judgment:
Lord Radcliffe concurred, emphasizing that the profit arose from the grant of the option and should be assessed in that year.

Lord Keith of Avonholm's Judgment:
Lord Keith argued that the profit should be assessed in the year the option is exercised, as that is when the benefit is realized.

Lord Denning's Judgment:
Lord Denning emphasized that the profit should be assessed when the shares are acquired, not when the option is granted. He argued that the exercise of the option should determine the year of assessment.

Conclusion:
The majority of the judges concluded that the grant of the option itself constituted a taxable perquisite or profit, provided it had a monetary value. The exercise of the option did not constitute a separate taxable event. The appropriate year of assessment was the year in which the option was granted. The appeal was allowed, overturning the decision of the Court of Appeal and the Court of Session in Forbes's Trustees v. Inland Revenue Commissioners.