2015 (2) TMI 70 - HC - Income Tax

Redemption of Stock Appreciation Rights - capital gain or perquisite under Sec.17(2)(iii) - short term capital gain or long term capital gain - Held that - The questions posed for consideration before us reproduced hereinabove and considering the decision of the Hon'ble Supreme Court in the case of Infosys Technologies Ltd. (2008 (1) TMI 17 - SUPREME COURT OF INDIA), the questions, which are raised in the present appeals are required to be answered in favour of the assessee wherein held that the revenue had erred in treating amount being difference in market value of shares on the date of exercise of option and total amount 'paid' by employees consequent upon exercise of the said options as perquisite value as during the lock-in period there was no cash inflow to employees to foresee future market value of shares and the benefit if any which arose on date when option stood exercised was only a notional benefit whose value was unascertainable. In view of the above, the questions raised for consideration in the present appeals are answered in favour of the assessee and against the revenue. The Tribunal was correct in treating the amount received on redemption of Stock Appreciation Rights as capital gain as against treated as perquisite under Sec.17(2)(iii) of the I.T. Act and in treating the amount received on exercising the opinion of Employee's Stock Option Plan (EOSP) as long term capital gains instead of treating the same as short term capital gains. However, the Tribunal was not justified in holding that capital gain arose to the assessee on redemption of Stock Appreciation Rights which were having no cost of acquisition. - Decided in favour of assessee.

Summary

Issues:
1. Interpretation of tax treatment on redemption of Stock Appreciation Rights (SARs) as capital gain or perquisite under the Income Tax Act.
2. Determination of whether gain from stock options is to be considered as short term or long term capital gain.
3. Assessment of the tax treatment on the amount received from exercising the Employee's Stock Option Plan (EOSP).

Issue 1: Interpretation of Tax Treatment on Redemption of Stock Appreciation Rights:
The High Court considered the appeal challenging the order of the Income Tax Appellate Tribunal regarding the tax treatment of the amount received on redemption of Stock Appreciation Rights (SARs). The question revolved around whether the sum should be treated as capital gain or as a perquisite under specific sections of the Income Tax Act. The Tribunal's decision to treat the amount as capital gain was contested by the assessee. The Court analyzed the nature of stock options as capital assets and the liability to capital gain tax arising from the gain on such transactions. The revenue objected to the Tribunal's finding that the amount was not taxable as salary or perquisite under the relevant sections of the Act.

Issue 2: Determination of Gain from Stock Options as Short Term or Long Term Capital Gain:
The appeals involved a common issue of whether the gain from stock options should be classified as short term or long term capital gain. The Tribunal's opinion that stock options are capital assets acquired for consideration and that the gain is subject to capital gain tax was challenged by the assessee. The Court considered the arguments presented and analyzed the legal implications of the gain arising from stock options. The revenue's dissatisfaction with the Tribunal's decision was a key point of contention in these appeals.

Issue 3: Assessment of Tax Treatment on Amount Received from Exercising EOSP:
The Court examined the tax treatment on the amount received from exercising the Employee's Stock Option Plan (EOSP). The specific question was whether the sum should be treated as long term capital gains instead of short term capital gains. The assessee's position was supported by referencing a decision of the Supreme Court which clarified the tax treatment of potential benefits in the absence of a legislative mandate. The Court considered the arguments presented by both parties and ultimately ruled in favor of the assessee, citing the Supreme Court's decision and emphasizing that the revenue had erred in treating the amount received as a perquisite value.

In conclusion, the High Court ruled in favor of the assessee in all the issues raised in the appeals. The Court upheld the Tribunal's decision to treat the amount received on redemption of Stock Appreciation Rights as capital gain rather than a perquisite under the Income Tax Act. Additionally, the Court affirmed the treatment of the amount received from exercising the Employee's Stock Option Plan as long term capital gains instead of short term capital gains. However, the Court noted that the Tribunal's finding regarding the capital gain arising from Stock Appreciation Rights without a cost of acquisition was not justified. The appeals were disposed of accordingly, with the Court providing a detailed analysis based on legal interpretations and precedents.