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2023 (2) TMI 558 - AT - Income TaxCapital gain or salary received - Recognizing the compensation received by the assessee as the share holding of the company - AO held that the amounts received by the assessee is profits in lieu of salary as defined in Section 17(3)(iii) - CIT(A) considering the 'foregoing of right to receive equity share by the assessee was the same as giving up the capital asset of Share - CIT(A) deleted the addition holding that the assessee was employed earlier by M/s Tek Travels Pvt. Ltd. (TTPL) and entitled to yearly compensation plus 3% ESOP - HELD THAT - We find that the one reason of the settlement was allotment of shares and as per the employment agreement, the shares have to be allotted @ 7500 for each year of completed service. And since, the assessee has completed only two completed years of service, for the purpose of taxation. Keeping in view the jurisprudence laid down as in the cases of CIT Vs. J. Dalmia 1984 (5) TMI 32 - DELHI HIGH COURT , Baroda Cement Chemicals Ltd. 1985 (12) TMI 55 - GUJARAT HIGH COURT , Bhojison Infrastructure (P.) Ltd. 2018 (9) TMI 1239 - ITAT AHMEDABAD , and ACIT Vs. Jackie Shroff 2018 (9) TMI 1006 - ITAT MUMBAI with regard to taxation of amount received as compensation for giving up the Right to sue and also keeping in view of the principles of real income, eligible income, receivable income and the accounting principles thereof as laid down above, we hold that the amount received quivalent to the pro-rata value of eligible shares of 15,000 out of offered shares of 50,000 be treated as capital gains u/s 48 and the remaining amount received by the assessee from the former employee be treated as per the provisions of Section 17(3)(iii). Appeal of the Revenue is partly allowed.
Issues:
1. Recognition of compensation as shareholding 2. Treatment of right to forego equity shares 3. Existence of right to forego equity shares 4. Capital asset acquisition date and tax implications Recognition of Compensation as Shareholding: The Revenue appealed against the order recognizing compensation received by the assessee as shareholding, despite shares not being registered until a later date. The Assessing Officer contended that since the shares were never registered in the name of the assessee, no capital asset existed. The settlement agreement between the assessee and the company indicated relinquishment of rights to the shares. The AO treated the amount received as profits in lieu of salary under Section 17(3)(iii). However, the CIT(A) held that the assessee was entitled to compensation and ESOP from the company, even though shares were not physically issued until later. Treatment of Right to Forego Equity Shares: The Revenue raised concerns regarding the treatment of the right to forego equity shares as giving up a capital asset. The AO argued that the right to forego shares did not exist until the settlement agreement was reached. The CIT(A) considered the terms of the settlement agreement, where the assessee relinquished rights to enforce share registration, and concluded that the amount received was partly capital gains and partly in the nature of compensation. Existence of Right to Forego Equity Shares: The Revenue questioned the existence of the right to forego equity shares before the settlement agreement. The AO emphasized that the shares were not registered in the name of the assessee, leading to the conclusion that no capital asset was held. The CIT(A) analyzed the employment history and the terms of the settlement agreement to determine the nature of the amount received by the assessee. Capital Asset Acquisition Date and Tax Implications: The Revenue contended that the capital asset of shares could only be considered acquired when the settlement was reached, resulting in short-term capital gains. The CIT(A) reviewed the employment tenure, stock options, and the settlement agreement to differentiate between the amount attributable to shares and the compensation received. The judgment considered various legal precedents and tax principles to classify the amount received as capital gains and compensation under different tax heads. In conclusion, the judgment addressed the complexities surrounding the recognition of compensation as shareholding, the treatment of rights to forego equity shares, the timing of capital asset acquisition, and the corresponding tax implications. The decision balanced the employment history, settlement terms, and legal interpretations to categorize the amount received by the assessee for relinquishing rights as a combination of capital gains and compensation, in line with relevant tax provisions and judicial precedents.
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