2018 (12) TMI 1255 - AT - Income Tax

Deduction claimed u/s 54EC denied - Treatment by the authorities of LTCG on transfer of ESOP options as STCG - Held that - If ESOP options had been exercised, and the shares allotted thereby would have been sold after their allotment, then undisputedly the gains arising therefrom would have to be treated as STCG. In the case on hand, however, the 3750 options have been transferred as such, without any exercise of options. In the absence of exercise of options, no shares were allotted to the assessee. It is a case of buy back of ESOP options by Infosys Technologies Ltd., with Infosys BPO Ltd., the assessee s employer, as a confirming party. It is not in dispute that ESOP options provided valuable right to the assessee to exercise and have allotment of shares. They were thus capital asset held by the assessee from the date of grant i.e., 28.02.2003 and 02.02.2004 for which a consideration was paid to the assessee under the option Transfer Agreement. The contention that the assessee cannot exercise option in the absence of vesting is not relevant as the options were transferred without any exercise in the case on hand. The capital gain arising from the transfer of 3750 options should be considered as LTCG. AO is accordingly directed. Consequently, grounds 1.2 to 1.6 are allowed. Deduction u/s 54EC - There is no dispute in the matter that the deduction claimed u/s 54EC is to be allowed to the assessee as the AO in the original order of assessment for Assessment Year 2007-08 passed u/s 143(3) of the Act vide order dated 31.12.2009 on page 2 at para 5 thereof has recorded that the Assessee s claim for deduction u/s 54EC is to be allowed. Charging of Interest u/s 234B and 234D - Held that - The assessee denies itself liable to be charged interest u/s 234B and 234D of the Act. The charging of interest is consequential and mandatory and the AO has no discretion in the matter. This proposition has been upheld in the case of Anjum H. Ghaswala ( 2001 (10) TMI 4 - SUPREME COURT) and therefore uphold the AO s action in charging the same. The AO is however directed to re-compute the interest chargeable u/s 234B and 234D of the Act, if any, while giving effect to this order.

Summary

Issues Involved:
1. Treatment of ESOP options as Long Term Capital Gains (LTCG) vs. Short Term Capital Gains (STCG).
2. Denial of deduction under section 54EC of the Income Tax Act.
3. Charging of interest under sections 234B and 234D of the Income Tax Act.

Detailed Analysis:

1. Treatment of ESOP Options as LTCG vs. STCG:
The primary issue was whether the gains from the transfer of 3750 ESOP options should be treated as Long Term Capital Gains (LTCG) or Short Term Capital Gains (STCG). The assessee argued that the options were held for more than three years and thus should be considered as LTCG, thereby qualifying for the deduction under section 54EC of the Income Tax Act. The Revenue, on the other hand, contended that the period of holding should be counted from the date of vesting, not the date of grant, and thus treated the gains as STCG.

The Tribunal noted that the options were transferred without being exercised, meaning no shares were allotted to the assessee. It was a case of buy-back of ESOP options by Infosys Technologies Ltd. without any exercise of the options. The Tribunal relied on previous judgments from the ITAT Delhi Benches (ACIT vs. Ambrish Kumar Jhamb, Gopi G. Nambiar vs. JCIT) which held that the date of grant should be considered for determining the holding period. Therefore, the Tribunal concluded that the gains from the transfer of 3750 options should be treated as LTCG.

2. Denial of Deduction under Section 54EC:
The Tribunal addressed the assessee’s claim for deduction under section 54EC of the Act. The Revenue had denied this deduction based on their classification of the gains as STCG. However, since the Tribunal determined that the gains should be treated as LTCG, the deduction under section 54EC was allowed. The Tribunal referred to the original assessment order, which had accepted the proof of investment in REC Bonds and allowed the deduction under section 54EC.

3. Charging of Interest under Sections 234B and 234D:
The assessee contested the charging of interest under sections 234B and 234D of the Act. The Tribunal noted that the charging of interest is consequential and mandatory as upheld by the Hon’ble Apex Court in the case of Anjum H. Ghaswala (252 ITR 1) (SC). However, the Tribunal directed the AO to re-compute the interest chargeable under sections 234B and 234D, if any, while giving effect to the Tribunal's order.

Conclusion:
The Tribunal ruled in favor of the assessee, holding that the gains from the transfer of 3750 ESOP options should be treated as LTCG and allowed the deduction under section 54EC. The Tribunal also upheld the charging of interest under sections 234B and 234D but directed a re-computation of the interest. The assessee’s appeal for Assessment Year 2007-08 was allowed.