2014 (8) TMI 843 - AT - Income Tax

Reopening of assessment u/s 148 - Rectification of order u/s 154 Held that - The information was not in the possession of the AO prior to the passing of the order of rectification u/s 154 - the assessee neither opted for allotment of shares nor was allotted shares but has only sold rights ESOP, the AO has come to conclusion that income chargeable to tax has escaped assessment - the material has nexus with the reason to believe that income chargeable to tax has escaped assessment - there is no change of opinion as the original R.O.I. was processed u/s 143(3)(a) - The order passed u/s 154 of the Act cannot be a case of formation of an opinion. If it has to be held that the AO formed an opinion while passing an order u/s 154, Only mistakes apparent on record can be corrected u/s 154 of the Act - when the documents were not with the AO in any of the proceedings, prior to issue of notice u/s 148, the question of exercising one s mind on these documents and forming of opinion does not arise - there was fresh material and as it has been held that there is no change in opinion Decided against Assessee. Treatment of LTCG on sale of equity shares Employee stock option scheme Held that - On the date of grant the assessee has acquired certain rights i.e. the right to purchase shares in Adobe System Inc., at a particular rate by exercising the option - This right to acquire shares is a capital asset - The date of acquisition of the right is the date of grant - The assessee has exercised the option to purchase the shares only on the date on which he choose to sell the shares - what was acquired by the assessee on the date of grant was a right, which was held by him until he exercised his option to purchase share - The period of holding of the capital amount would be the period of holding of the ESOP right, which is a capital assets, is from the date of grant to the date of exercising the option - The fact as to whether the capital gain in question is a short term or long term capital gain or not has to be decided based on the period of holding of this right - If the period of holding is more than 36 months then it is a long term capital gain - The right in question is not a share held by the assessee and hence the period of 12 months does not apply - the assessee has sold the shares on the date of exercising the option itself - the transaction of sale of shares is a short term capital gain. The assessee acquired certain rights on the date of grant, which is a capital assets and he transferred these rights on the date of exercise of option to purchase share and the date of sale, which is the same date in this case, and the period of holding of these rights being less than 36 months, the gain is to be assessed as short term capital gain - the contention of the assessee that the appeal against the order passed u/s 147 and the appeal against the order passed u/s 154 are separate proceedings and there is no question of merger - the AO has passed an ex-parte order, the issue of AO is set aside for fresh adjudication Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of reopening the assessment under Section 147.
2. Classification of capital gains from ESOP transactions as short-term or long-term.
3. Entitlement to deductions under Sections 54F and 54EC.
4. Legality of the order passed under Section 154 of the Income Tax Act.

Detailed Analysis:

1. Validity of Reopening the Assessment under Section 147:
The assessee challenged the reopening of the assessment for the A.Y. 2001-02, arguing that it was based on a mere change of opinion and without fresh material. The Tribunal noted that the reopening was based on information gathered during the assessment of other employees of Adobe Systems India Pvt. Ltd., which revealed that the ESOP shares were sold under a cashless exercise option scheme. This information was not available during the original processing of the return or the rectification under Section 154. Therefore, the Tribunal held that there was fresh material justifying the reopening and dismissed the argument of change of opinion. However, the Tribunal acknowledged the procedural lapse of not disposing of the objections before passing the assessment order but deemed it an empty formality as the objections were addressed in the assessment order and adjudicated in appeal.

2. Classification of Capital Gains from ESOP Transactions:
The core issue was whether the gains from the sale of ESOP shares should be classified as short-term or long-term capital gains. The Tribunal observed that the assessee acquired rights to purchase shares (ESOP) on the grant date, which is a capital asset. The period of holding these rights (from the grant date to the exercise date) determines the nature of the capital gain. Since the shares were sold on the same date the option was exercised, the holding period of the rights was less than 36 months, making the gains short-term. The Tribunal upheld the CIT(A)'s order, which relied on the decision in the case of Ajay Pandey, an employee of Adobe Systems Pvt. Ltd., with similar ESOP transactions.

3. Entitlement to Deductions under Sections 54F and 54EC:
For A.Y. 2005-06, the assessee claimed deductions under Sections 54F and 54EC, arguing that the gains were long-term. The Tribunal, consistent with its finding for A.Y. 2001-02, held that the gains were short-term and thus, the assessee was not entitled to these deductions. The Tribunal dismissed the appeal for A.Y. 2005-06, upholding the CIT(A)'s decision.

4. Legality of the Order Passed under Section 154:
The assessee challenged the order under Section 154 for A.Y. 2004-05, which withdrew excess exemption granted under Section 54F. The Tribunal agreed with the assessee that appeals against orders under Sections 147 and 154 are separate and should be disposed of independently. The Tribunal set aside the ex-parte order passed under Section 154 and remanded the matter to the AO for fresh adjudication after giving the assessee an opportunity to present their case.

Conclusion:
The Tribunal dismissed the appeals for A.Y. 2001-02 and 2005-06, upholding the classification of the gains as short-term capital gains and the validity of the reopening of the assessment. The appeal for A.Y. 2004-05 was allowed for statistical purposes, with the matter remanded to the AO for fresh adjudication of the Section 154 order.