2018 (11) TMI 1112 - AT - Income Tax

Amount receive on liquidation of the stock held - short term capital gain - Held that - It is obvious that the findings of the AO as well as that of the CIT(A) and their decision to treat the entire amount receive on liquidation of the stock held by him under the ESO scheme as perquisites under the head income from salary is erroneous. It is further pertinent to mention that the income should be assessed in the hands of the assessee not in accordance with what is stated in the Form 16 issued by the employer but only based on the actual facts and as per the provisions of the Act. As pointed out by AR we find that there is discrepancy in the observation made by the Ld.AO in his order and the return of income filed by the assessee. In the assessment order, the Ld.AO has mentioned that the assessee had claimed short term capital gain however as observed from the return of income, the short term capital gain earned by the assessee is stated as ₹ 8,14,232/-. It is further stated in the assessment order that the assessee had offered income as ₹ 4,18,23,600/- however in the return of income, the assessee has declared income from salary as ₹ 2,74,92,222/-, short term capital gain ₹ 8,14,232/-, and income from other source ₹ 9,705/-, thus the total income returned by the assessee was for ₹ 2,83,16,159/-. Since there is discrepancy with respect to facts observed by the Ld.AO and the return of income filed by the assessee, in the interest of justice, we hereby remit the entire matter back to the file of Ld.AO to verify the facts from the records and thereafter decide the matter in accordance with merit and law and as per our observations made herein above. Assessee allowed for statistical purposes

Summary

Issues Involved:
1. Classification of income from the sale of shares allotted under the Employee Stock Option Plan (ESOP) as perquisites or capital gains.
2. Determination of the correct taxable amount based on discrepancies between the return of income filed by the assessee and the assessment order.

Detailed Analysis:

Issue 1: Classification of Income from ESOPs

The core issue in this appeal is whether the sale proceeds from shares allotted under the ESOP scheme should be treated as perquisites (taxable as salary) or as capital gains. The assessee contended that the gain should be assessed as capital gain, whereas the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] treated it as perquisites under the head of salary.

The assessee, an individual earning income from salary, filed his return for the assessment year 2011-12, declaring a total income of ?4,18,23,600. The AO reopened the case under Section 147 and issued a notice under Section 148. The AO observed that the assessee had claimed a Short Term Capital Gain of ?1,45,19,170, which was treated as perquisites by the employer and included in the salary income in Form-16.

The CIT(A) upheld the AO's order, stating that the stock option was given to the employees of the Indian company by the American parent company. The CIT(A) reasoned that the stock option constituted an additional benefit over and above the regular salary, thereby falling under the definition of "salary" as per Section 15(b) and Section 17(1) and (2) of the Income Tax Act. The CIT(A) further emphasized that the stock options provided by the parent company should be considered as benefits provided for or on behalf of the Indian employer, thereby lifting the corporate veil to see the real nature of the transaction.

However, the Tribunal noted that the entire stock option was exercised by the assessee when he was a non-resident in earlier assessment years. The Tribunal observed that the value of the shares allotted could not be treated as income in the relevant assessment year or earlier years as it accrued outside India for services rendered abroad. The Tribunal emphasized that the gain from the sale of shares should be treated as capital gain (long-term or short-term) as per the provisions of the Act, considering the cost of acquisition as the value of the stock allotted. Thus, the Tribunal found the AO's and CIT(A)'s decision to treat the entire sale proceeds as perquisites erroneous.

Issue 2: Discrepancies in Taxable Amount

The Tribunal identified discrepancies in the AO's observations and the return of income filed by the assessee. The AO mentioned that the assessee claimed a short-term capital gain of ?1,45,19,170, whereas the return of income showed a short-term capital gain of ?8,14,232. Similarly, the AO stated that the assessee offered an income of ?4,18,23,600, while the return of income declared ?2,74,92,222 as income from salary, ?8,14,232 as short-term capital gain, and ?9,705 as income from other sources, totaling ?2,83,16,159.

Due to these discrepancies, the Tribunal remitted the matter back to the AO to verify the facts from the records and decide the matter in accordance with the law and the Tribunal's observations.

Conclusion:

The Tribunal allowed the appeal for statistical purposes, directing the AO to reassess the case by verifying the facts and correctly classifying the income from ESOPs as capital gains rather than perquisites. The Tribunal emphasized the importance of assessing income based on actual facts and the provisions of the Income Tax Act, rather than solely relying on Form-16 issued by the employer.