2019 (5) TMI 751 - HC - Income Tax

Taxability of employees stock option plan - perquisite chargeable to tax - employer - employee relationship - assessing officer held that the gains on the sale of shares constituted a perquisite chargeable to tax and alternatively to treat the same as short term capital gains without any exemption u/s 54 - HELD THAT - It is seen from the impugned order of the tribunal that the tribunal has recorded a finding of fact that there was no employer employee relationship between the respondent and the company whose shares were offered to the respondent for purchase. Therefore, the first question of law, which proceeds as though there was employer employee relationship, has no legs to stand in the light of the factual finding. Deduction u/s 54 EA - sale of shares allegedly, converted into Employees Stock Option Plan and paid long term capital gains at 10% - HELD THAT - The second question of law should fail as a consequence of the factual finding recorded in para 16 of the judgment of the tribunal. The tribunal has recorded a finding in para 16 that stock options were granted by a company by name WLC, which is holding a 40% stake in M/s.Parke-Davis. Therefore, the tribunal was right in holding that proceeds on sale of shares are assessable as long-term capital gains and assessee is entitled all the reliefs u/s 54 as claimed by the assessee

Summary

Issues:
1. Whether the gains from the sale of shares under an Employees Stock Option Plan are to be treated as a perquisite chargeable to tax.
2. Whether the gains from the sale of shares held for less than 12 months are liable to be treated as short term capital gains and entitled to any exemption under Section 54 of the Income Tax Act.

Analysis:

Issue 1:
The respondent, an individual, was an employee of a company and claimed deduction under Section 54 EA of the Income Tax Act for the sale of shares acquired through an Employees Stock Option Plan. The assessing officer considered the gains on the sale of shares as a perquisite chargeable to tax. However, the Commissioner of Appeals allowed the appeal of the assessee, and the tribunal upheld this decision. The tribunal found that there was no employer-employee relationship between the respondent and the company offering the shares, which led to the conclusion that the gains could not be treated as a perquisite chargeable to tax. The tribunal also referenced a decision from the Mumbai Bench regarding a similar case involving another employee of the same company, supporting their conclusion. Therefore, the first substantial question of law was deemed irrelevant and the appeal was dismissed.

Issue 2:
Regarding the second issue, the tribunal's judgment highlighted that the stock options were granted by a company holding a substantial stake in the employer company. The tribunal's factual finding in this regard supported the conclusion that the gains from the sale of shares held for less than 12 months could not be treated as short term capital gains entitled to exemption under Section 54 of the Income Tax Act. The tribunal's decision was in line with the Mumbai Bench's ruling in a related case, further strengthening the position that the gains in question were not eligible for the exemption under consideration. Consequently, the appeal was found to lack merit and was dismissed, with no order as to costs.

In conclusion, the High Court dismissed the appeal by the revenue, upholding the tribunal's decision that the gains from the sale of shares under the Employees Stock Option Plan were not to be treated as a perquisite chargeable to tax and were not eligible for exemption as short term capital gains under Section 54 of the Income Tax Act.