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2009 (1) TMI 315 - AT - Income TaxNature and taxability of the gains arising on the sale of shares - employer-employee relationship - stock options granted by the WLC, which is holding a 40 per cent stake in PDIL, employer of the assessee - assessee after claiming deduction u/s. 54EA computed and paid the tax only at 10 per cent on the capital gain, AO issued notice u/s. 148 - AO, besides the issue of lower rate of tax on capital gain, and ultimately concluded that the gain arising on the sale of the shares, has to be taxed as perquisite under the head 'Salary' or as 'Short-term capital gains' and no exemption u/s. 54 is allowable. He also held that as provided u/s. 112, the capital gains ought to be taxed at 20 per cent and the benefit of indexation is also not allowable. HELD THAT - It is pertinent to mention here that even though as per s. 17(2)(iiia) as amended w.e.f. 1st April, 2000, the value of any specified security allotted or transferred, directly or indirectly by any person free of cost or at concessional rate to an individual, who is/or has been in employment of that person will be regarded as perquisite, a careful examination of the facts of the case before us in the light of the stock option plan in this case, a copy of which is furnished before us, reveals that the stock options were given to the assessee by WLC at fair market value. In the case under consideration, there is no dispute that the options were given at fair market value and without any concession and hence the provisions of s. 17(2)(iiia) would not apply to the facts of the present case, as the grant of option has to be treated as date of acquisition of the shares for the reasons discussed. There is no employer-employee relationship between the assessee and WLC and therefore, the income from grant of option to the assessee cannot be brought to tax as income from salary. Moreover, the options were not granted at any concessional price, rather options were granted to the assessee at prevailing market price which can be understood by definitions part of the stock option plan of WLC. The reliance placed by the ld DR on the AAR 1998 (11) TMI 672 - AUTHORITY FOR ADVANCE RULINGS reported in the case of Microsoft USA may not also be of any assistance to the Revenue. In that case, Indian company is the wholly owned subsidiary company of Microsoft USA. As against this, the company WLC in our case does not have a controlling stake i.e., more than 50 per cent stake in PDIL and it holds only 40 per cent stake in PDIL. Further, an Advance Ruling delivered by the AAR is not binding in other cases. They are binding only on the applicant who seeks such ruling. The undisputed fact in the case under consideration is that the rights under the ESOP were granted to the assessee by WLC at the then prevailing market price of its shares in the US market. Since the options were granted at the prevailing market rate itself, there was no question of any perquisite arising out in these transactions. Therefore, we uphold the orders of the CIT(A) and hold that there is no perquisite value to be assessed under the head Salary on account of ESOP rights conferred on the assessee by the WLC, and proceeds on sale of shares acquired through such ESOPs are assessable only as capital gains. Consequently, grounds of the Revenue on this issue are rejected. Nature of the capital gains - long-term or short-term capital gains - we are of the considered opinion that it is the date of grant of the stock option in favour of the assessee that is material for determining the period of holding the asset in question, and not the date on which the option was exercised and stock options were converted into shares. Mumbai Benches of this Tribunal, specifically considered this issue also and decided the same in favour of the assessee following the decisions of the Bombay High Court in CIT vs. Sterling Investment Corporation Ltd. 1979 (2) TMI 19 - BOMBAY HIGH COURT and CIT vs. Tata Services Ltd. 1979 (1) TMI 26 - BOMBAY HIGH COURT . Our considered view is that once the grant of option is conferred, such right becomes a right in the nature of the property. And such stock option grants given to the assessee by WLC represented such property which were valuable and inheritable and hence were capital asset. Our view is fortified by the decision in the case of Hari Brors. (P) Ltd. vs. ITO 1963 (3) TMI 61 - PUNJAB HIGH COURT , wherein it was held that right to subscribe for shares of a company is also a capital assets. On exercising the option, the assessee gets shares, which is only conversion of one capital asset into another capital asset. It is evident from the details of the date of acquisition of such rights by the assessee. as submitted in the paper book, the shares were held by the assessee for a period more than twelve months and hence the resultant gains must be computed as long-term capital gains. Therefore, we uphold the orders of the CIT(A) on this aspect and hold that the capital gains arising out of the sale of shares acquired through ESOPs have to be assessed as long-term capital gains only. Accordingly, grounds of the Revenue on this aspect are rejected. Reliefs u/s. 54 - Since we have held that the proceeds on sale of shares are assessable as long-term capital gains, assessee is entitled for all consequential benefits such as indexation, and all the reliefs u/s. 54 as claimed by the assessee. Cost of acquisition of shares should be taken at the price at which option was granted in favour of the assessee. In view of our decision that there is no element of perquisite arising out of the ESOPs, there is no merit in the contentions of the ld DR based on the provisions of s. 49(AA) that the cost of acquisition should be taken as the value of perquisite taken. As a consequence of our finding that the assessee is entitled for indexation, assessee is liable for tax on capital gains @ 20 per cent only. Consequently, orders of the CIT(A) on these aspects are upheld and the grounds of the Revenue are rejected. In the result, Revenue's appeals are dismissed. Validity of reopening of the assessment - We find that assessment initially was made u/s.143(1). The reopening of such assessment made u/s.143(1), cannot be said to have been made on the basis of any change of opinion, since in the absence of any scrutiny assessment, there was no opinion at all arrived at by the AO at the stage of initial assessment, which was completed in a summary manner without going into the merits of the claims or verifying any material in support of such claims. Consequently, the reopening of the assessment was legal and valid and we find no justification to interfere with the order of the CIT(A) on this aspect. Assessee's grounds on this aspect are accordingly rejected.
Issues Involved:
1. Nature and taxability of gains arising from the sale of shares acquired under the Employee Stock Option Plan (ESOP). 2. Whether the surplus gained on the sale of shares represents a perquisite. 3. Whether the gain on the sale of shares under ESOP should be treated as long-term or short-term capital gains. 4. Determination of the acquisition date for shares under ESOP: date of grant or date of exercise. 5. Applicability of tax exemptions under sections 54EA, 54EC, and 54F. 6. Validity of reopening assessments under section 148. 7. Charging of interest under section 234B. Detailed Analysis: 1. Nature and Taxability of Gains from ESOP: The primary issue was whether the gains from the sale of shares acquired under ESOP should be treated as a perquisite under the head 'Salary' or as capital gains. The Tribunal upheld the CIT(A)'s decision that there was no employer-employee relationship between the assessee and Warner Lambert Co. (WLC), which granted the stock options. Consequently, the gains were not taxable as perquisites but as capital gains. 2. Surplus Gained as Perquisite: The Tribunal agreed with the CIT(A) that since the stock options were granted at the fair market value and not at a concessional rate, they did not qualify as perquisites. The Tribunal cited the Mumbai Bench's decision in Asstt. CIT vs. Venkappa Agadi, which held that proceeds from the sale of shares acquired through stock options should be taxed as long-term capital gains. 3. Long-term vs. Short-term Capital Gains: The Tribunal held that the gains should be treated as long-term capital gains. It was determined that the date of acquisition of the shares was the date of grant of the stock options, not the date of exercise. This decision was supported by the Tribunal's previous rulings and the Bombay High Court's decisions in CIT vs. Sterling Investment Corporation Ltd. and CIT vs. Tata Services Ltd. 4. Determination of Acquisition Date: The Tribunal emphasized that the date of grant of the stock option is crucial for determining the period of holding the asset. This was further supported by the amendment to section 115WC(1), which shifted the date of liability for fringe benefit tax (FBT) to the date on which the option vests on the employee. 5. Applicability of Tax Exemptions: Since the gains were treated as long-term capital gains, the assessee was entitled to indexation benefits and exemptions under sections 54EA, 54EC, and 54F. The Tribunal upheld the CIT(A)'s decision that the cost of acquisition should be taken at the price at which the option was granted. 6. Validity of Reopening Assessments: The Tribunal found the reopening of assessments under section 148 to be valid. Since the initial assessments were made under section 143(1) without scrutiny, there was no change of opinion, making the reopening legal and valid. 7. Charging of Interest under Section 234B: The Tribunal noted that the issue of charging interest under section 234B was consequential and did not require independent consideration. Conclusion: The Tribunal dismissed all the Revenue's appeals and upheld the CIT(A)'s orders, confirming that the gains from the sale of shares acquired under ESOP should be treated as long-term capital gains and not as perquisites. The reopening of assessments was deemed valid, and the assessee was entitled to all consequential benefits, including indexation and tax exemptions. The cross-objections raised by the assessee regarding the legality of reopening assessments and interest under section 234B were also dismissed.
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