2018 (4) TMI 1474 - SC - Income Tax

Amount received is in the nature of perquisite or capital receipt - Amount received on redemption of Stock Appreciation Rights (SARs) - Whether to be treated as capital gains and not perquisite under section 17(2)(iii) of the IT Act or the same is not taxable under the category of capital gains since no consideration had passed from the Respondent - taxability of the perequisite on shares issued to employees at less than market price - Taxable income under the head income from Salaries - Held that - No force in the argument of the Revenue that the case of the Respondent would fall under the ambit of Section 17(2) (iii) of the IT Act instead of Section 17(2) (iiia) of the IT Act. It is a fundamental principle of law that a receipt under the IT Act must be made taxable before it can be treated as income. Courts cannot construe the law in such a way that brings an individual within the ambit of Income Tax Act to pay tax who otherwise is not liable to pay. In the absence of any such specific provision, if an individual is subjected to pay tax, it would amount to the violation of his Constitutional Right. It is apparent that such benefit or perquisite shall have arisen from the business activities or profession whereas in the instant case there is nothing as such. The applicability of Section 28(iv) is confined only to the case where there is any business or profession related transaction involved. Hence, the instant case cannot be covered under Section 28(iv) of the IT Act for the purpose of tax liability. Respondent got the Stock Appreciation Rights (SARs) and, eventually received an amount on account of its redemption prior to 01.04.2000 on which the amendment of Finance Act, 1999 (27 of 1999) came into force. In the absence of any express statutory provision regarding the applicability of such amendment from retrospective effect, no force in the argument of the Revenue that such amendment came into force retrospectively. It is well established rule of interpretation that taxing provisions shall be construed strictly so that no person who is otherwise not liable to pay tax, be made liable to pay tax. High Court didn t erred in law while upholding that the amount received on redemption of Stock Appreciation Rights (SARs) is to be treated as capital gains and not perquisite under section 17(2)(iii) of the IT Act.

Summary

Issues Involved:
1. Taxability of the amount received on redemption of Stock Appreciation Rights (SARs).
2. Applicability of Section 17(2)(iii) and Section 28(iv) of the Income Tax Act.
3. Retrospective application of the amendment introduced by Finance Act, 1999.

Issue-wise Detailed Analysis:

1. Taxability of the amount received on redemption of Stock Appreciation Rights (SARs):

The core issue pertains to the taxability of ?6,80,40,724/- received by the Respondent on redemption of Stock Appreciation Rights (SARs) from Procter and Gamble (P&G), USA. The Respondent had claimed this amount as exempt from income tax. The Tribunal initially held that stock options are capital assets, and thus, gains from them are liable to capital gains tax. However, the Revenue contended that the amount should be taxed as a perquisite under Section 17(2)(iii) or alternatively under Section 28(iv) of the Income Tax Act, 1961. The High Court upheld the Tribunal's view but noted that such capital gains did not arise to the Respondent since there was no cost of acquisition involved.

2. Applicability of Section 17(2)(iii) and Section 28(iv) of the Income Tax Act:

The Revenue argued that the amount received should be treated as a perquisite under Section 17(2)(iii) of the IT Act, which defines perquisites as benefits attached to an employee besides salary. The Respondent countered that the amount should be considered as capital gains, not perquisites, and cited the absence of a cost of acquisition. The High Court and the Tribunal both found that the Respondent's case did not fall under Section 17(2)(iii) but rather under capital gains. Additionally, the Revenue's alternative contention that the amount should be taxed under Section 28(iv) was dismissed, as this section pertains to benefits arising from business or professional activities, which was not applicable in this case.

3. Retrospective application of the amendment introduced by Finance Act, 1999:

The Revenue contended that the amendment introduced by the Finance Act, 1999, which added Clause (iiia) to Section 17(2) of the IT Act, was clarificatory and thus retrospective. This clause defined the value of specified securities allotted or transferred to employees. The High Court, however, rejected this argument, stating that the amendment was not clarificatory and could not be applied retrospectively. The Court emphasized that the amendment came into effect on 01.04.2000 and could not be applied to transactions prior to this date. The Supreme Court upheld this view, citing that taxing provisions must be construed strictly and cannot be applied retrospectively unless explicitly stated by the legislature.

Conclusion:

The Supreme Court concluded that the appeals by the Revenue lacked merit and dismissed them, affirming the High Court's decision. The Court reiterated the principle that tax laws must be interpreted strictly, and in the absence of a clear legislative mandate, a benefit cannot be taxed retrospectively. The Court also clarified that the amount received by the Respondent on redemption of SARs could not be taxed as a perquisite under Section 17(2)(iii) or as a benefit under Section 28(iv) of the IT Act.