9911796707
TMI Blog2005 (12) TMI 218X X X X Extracts X X X X X X X X Extracts X X X X ..... doing so, has grossly erred in not accepting that the perquisite value of the residential accommodation should be limited to Rs. 7,80,000 being the actual rent paid since the fare rental value was less than 10 per cent of the salary. (d) Rs. 1,20,000 being maintenance charges incurred by the employer. (e) Rs. 39,79,815 being the amount of net gain on sale of exercised stock options even though the learned CIT(A) had accepted that the AO is incorrect in holding that in business, any taxable income arising at the time of exercise, the gain of sale can be treated as income under the head salaries. (f) Rs. 1,16,130 being the amount of corporate club membership paid by the employer for the purposes of its business. (g) Rs. 50,000 alleged to be the perquisite value of electricity on estimated basis even though no amount was actually incurred by the employer and therefore no amount could be attributed as perquisite in view of the provisions of r. 3(d) of the IT Rules, 1962. 2. The learned CIT(A) has omitted to adjudicate upon ground No. 12 in the assessee's appeal before him against the charging of interest of Rs. 12,39,208 under s. 234B even though there was no direction for chargin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ol India Ltd. The CIT(A) re-examined the issue in the light of assessee's contention and finally held that deductions made from salary in respect of hypo tax, housing norm and auto norm are definitely linked up to these benefits provided in India at concessional rates and not free of charge as claimed by the assessee. He, accordingly, upheld the view of the AO. 5. Now, the assessee has preferred an appeal before the Tribunal and reiterated his contention raised before the lower authorities. Learned counsel for the assessee Mr. M.S. Syali, senior advocate, has emphatically argued that in accordance with the policies, annual base salary of the assessee was reduced by US $ 27218 equivalent to Rs. 10,20,084 on account of housing and US $ 3000 on account of auto norms and the assessee was entitled to receive only the net amount of salary. In lieu thereof, the assessee was provided housing and conveyance benefits in India and an aggregate sum of Rs. 8,12,661 (Rs. 7,80,000 + Rs. 32,661) which was duly included as perquisite for rent-free accommodation and furniture and Rs. 13,200 towards conveyance at the value prescribed under the IT Act r/w IT Rules. He further reiterated that the amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mechanism provided in r. 3 of the IT Rules. He, therefore, added back the housing contribution and auto norms deducted from the salary, to the salary income of the assessee. Now, the question posed before us is whether the housing contribution and the auto norms initially reduced from the salary of the assessee can be termed to be as part of the salary in order to determine the taxable income of the assessee. The main thrust of the argument of the learned counsel for the assessee is that the salary of employees sent on overseas assignment vis-a-vis other employees in the home country is structured so as to ensure economic equity in the compensation of the employees and this parity in compensation is maintained through a book entry mechanism whereby the amount the employee would have reasonably incurred on housing and conveyance in the home country is estimated and reduced from the salary. It was also contended by Mr. Syali that the housing norm and auto norm represents the amount the expatriate employee would have paid towards housing and conveyance had he continued to render service in his own country. These amounts are reduced from the salary payable to the employee and in turn, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction of hypo tax from the salary does not make any difference to the overall taxable salary because of adding back the tax borne by employer as a perquisite. This was the main argument advanced by Mr. Dastur, the counsel of Mr. Jaidev Raja in that case as well as clear from para 5 of the Tribunal judgment. In order to demonstrate that reduction of 'hypo tax' salary and later inclusion of 'tax borne by employer' as a 'perquisite' does not affect the taxable income. Mr. Dastur gave the following illustration. If the employer pays out Rs. 1000 towards a benefit and the employee contributes Rs. 300 then employee's benefit was only Rs. 700. This according to Mr. Dastur is the principle to value a perquisite. If as per s. 17(2)(iii), payment of Indian tax was benefit, then the value of the benefit should be determined as per this principle. According to Mr. Dastur, whether it was salary or perquisite, it made no difference to the quantum. The Tribunal agreed with removal of element of hypothetical tax from the salary only because tax borne by the employer was subsequently included as a perquisite and it really did not make any difference in the salary taxable inIndia. This is evident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at several places in its order leave no doubt that they had no objection to treating the case as of 'concessional tax perquisite' as an alternative solution. The finding that hypo tax can be reduced from the salary, being salary which has not accrued cannot therefore be extended to cover 'housing contribution' and 'auto norm', without keeping in view learned Tribunal's concern regarding the impact on overall tax liability in India. Further, in cases before Tribunal and learned CIT(A), the only issue was deductibility of hypo tax, hosing contribution and auto norm as a permissible deduction from salary income under the IT Act. The AO's in those cases had perhaps added back these amounts to the salary without taking into account the corresponding effect in calculation of perquisites. The assessee's reliance on learned CIT(A)'s order in employer's case is therefore not correct, as the entire context and full facts are different in his own case. 34 In assessee's case, if the 'housing contribution' and so-called 'auto norm' are reduced straightway from the gross salary, it results into a significant less tax liability inIndia. This shall be clear form workings in paras 4 and 5 of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has deducted the housing norms and the auto norms. As observed by the AO, it is also quite evident from the appointment letter which is the only document which contains service conditions of the assessee that the company would bear the housing expenses after deducting theUShousing norm (about US $ 16000) based on survey figures. Likewise, company would also provide automobile after a car deduction of US $ 3000 per year. It means housing and conveyance facilities were provided to the assessee at a concessional rate which brings the assessee's case within the purview of s. 17(2)(ii) of the Act. We have also carefully perused the order of the Tribunal in the case of Jaidev Raja and we find that the ratio laid down in that case by the Tribunal cannot be applied in the instant case because here we are dealing with the deduction of housing norms and auto norms which cannot be equated with the hypo tax. The hypo tax was deducted by the parent company to meet the tax liabilities if accrues in the home country But deductions on account of housing norms and auto norms cannot be called to have been made to safeguard any statutory liabilities accrued in the home country. 10. If the impugned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on account of residential accommodation at Rs. 5,51,719 after allowing a credit of housing contribution deducted by the parent company. The assessee preferred an appeal before the CIT(A) with the submission that the fair market rent can never be more than the standard rent and the standard rent has to be worked out as per the provisions of Delhi Municipal Corporation Act, 1957. In determining the rental data, the committee appointed by the assessor and collector has placed consideration on the prevailing rent in the same locality and based on the same, the rental value of the residential accommodation is Rs. 70,000. Since the assessee himself has offered the actual rent at Rs. 7,80,000 which is higher than the standard rent of Rs. 3,19,601, as such, the claim of the assessee cannot be rejected. The CIT(A) has carefully examined the contentions of the assessee and finally upheld the order of the AO after making the following observations: "I have carefully considered the contentions of the AO and the submissions of the Authorised Representatives, and I am of the view that valuation of perquisite of a rent-free accommodation as provided by s. 17(2)(ii), as already directed by me ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clear in this regard." 12. Aggrieved, the assessee has preferred an appeal before the Tribunal with the submission that while adopting the perquisite value of residential accommodation provided to the assessee, the AO has followed Expln. 2 to r. 3 which provides that fair rental value of an unfurnished accommodation shall be the rent which a similar accommodation will realize or the municipal valuation in respect of the accommodation, which is higher whereas in fact it is indeed trite law that the rent which a similar accommodation shall fetch cannot exceed the standard rent. In support of his contentions, he has relied upon the judgment of the apex Court in the case of Dewan Daulat Rai Kapoor vs. New Delhi Municipal Committee & Anr. (1980) 122 ITR 700 (SC) and also in the case of M.A.E. Paes vs. CIT (1998) 146 CTR (Bom) 776 : (1998) 230 ITR 60 (Bom) in which the ratio laid down by the apex Court in the case of Dewan Daulat Rai Kapoor was followed. The learned counsel for the assessee further submitted that in view of the above decisions, before coming to the conclusion whether the rent paid is the fair rent, the Revenue authorities should have examined as to what would be the sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were advanced, at a lesser monthly rent, for determining the perquisite value of accommodation, interest foregone be taken into consideration. In the present case, the employer of the assessee is deemed to have paid rent in excess of Rs. 65,000 per month as notional interest loss on the interest-free security of Rs. 1.6 crores. 14. Having considered the rival submissions and from a careful perusal of record, it is noticed that the residential accommodation which was given to the assessee was taken on lease by the employer at the monthly rent of Rs. 65,000 per month with interest-free security deposit of Rs. 1.6 crores. For determining the perquisite value of the residential accommodation provided to the assessee at free of cost or at a concessional rate, a specific procedure has been laid down in r. 3 of the IT Rules and according to its sub-r. (a) cl. (iii) the value of rent-free residential accommodation which is not furnished shall ordinarily be a sum equal to 10 per cent of the salary due to the assessee in respect of the period during which the said accommodation was occupied by him during the previous year but it is subject to the two provisos. The first proviso says that wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lawns besides residential accommodation with various facilities and to these farmhouses, Rent Control Act is not at all applicable. As such, there is no question of determining a standard rent as per Delhi Rent Control Act. For determining the fair rental value, one cannot lose sight of the interest-free security of Rs. 1.60 crores. We have also carefully perused the order of the Bombay High Court in the case of CIT vs. Shri Ashraf-Ur-Rehman Azimullah in which it has been held that the assessee being a director if occupied a flat of a company to whom interest-free deposits were advanced, at a lesser monthly rent, for determining the perquisite value of accommodation, interest foregone be taken into consideration. 16. In the light of aforesaid judicial pronouncements, we have examined the facts of the instant case and we find that ratio laid down by the apex Court in the Dewan Daulat Rai Kapoor and followed by the Bombay High Court in the case of M.A.E. Paes cannot apply in the instant case as it was not an ordinary building to which the Rent Control Act applies. In these type of residential accommodations, the fair rental value should be determined as per r. 3 Expln. (2) of the IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on the date of grant, there cannot be any income arising therefrom. Whatever gain is realised on sale by the assessee, it is in the nature of capital gain which is not taxable inIndia. The claim of the assessee was examined by the AO in the light of definition of perquisite and salary given in s. 17(2) and 17(1) and 15 of the IT Act and the judgment of the Bombay High Court in the case of CIT vs. D.R. Pathak (1975) 99 ITR 14 (Bom) and the decision of Authority for Advance Rulings (AAR) reported at XYZ, In re (1998) 150 CTR (AAR) 504 : (1999) 102 Taxman 74 (AAR) and finally held that such a benefit flowing from the employment contract is obviously a perquisite within the meaning of s. 17(2)(iii) and 'salary' taxable under head A of Chapter IV of the IT Act by virtue of s. 17(1)(iv) r/w s. 15(b) of the Act. Since the value of perquisite is ascertainable only on the day option is actually exercised, which coincides with the day of sale of shares; the perquisite or the 'salary' is taxable in the year in which the date of exercise/sale of shares falls. He accordingly worked out the perquisite on exercise of the stock option as per r. 115 of the IT Rules at Rs. 39,79,814.5 and the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of his employment. I am of the understanding that in case of salaried employees having income only from salaries, investments and any purchase are necessarily made from income from salaries, which is by virtue of employment. Accordingly, the action of the AO is upheld and the income from the stock option is held to be income from salary." 20. Aggrieved, the assessee has preferred an appeal before the Tribunal with the submission that the grant price was the actual fair market value of the shares on that date and the right granted to the assessee to exercise the option was also at the same price of US $ 55.38 per share. Thus, the assessee had an option to take the granted share only at the fair market value of the shares. Since there was no difference between the grant price and the exercise price, no perquisite accrued or arose to the assessee. Learned counsel for the assessee Mr. M.S. Syali, senior advocate, further submitted that the assessee acquired and sold share on11th March, 1998. On this date, the assessee could receive sale price of US $ 68 per share and the cost of acquisition of share was US 55.38. This resulted into gain on sale for the difference between US $ 68 and U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovision i.e. sub-cl. (iii)(a) of cl. 2 of s. 17 was introduced de novo by the Finance Act, 1999 w.e.f. 1st April, 2000 whereby the income represented by arising an exercise of stock option was exigible to tax as perquisite under the head 'salaries' at the value represented by the excess of fair market value over the exercise price and the excess of the sale price over the cost price equal to exercise price arising on sale of the shares, was liable to tax as income from 'capital gains'. This sub-cl. (iii)(a) was deleted by the Finance Act, 2000 w.e.f. 1st April, 2001 and a new proviso to sub-cl. (iii) of cl. 2 of s. 17 was inserted according to which the legislature expressed their intention not to tax the benefit accrued on exercise of stock option granted by the employers as per stock option scheme. Thus, the stand of the assessee is in accordance with the legislative mandate. 22. With regard to the ruling of AAR reported at (1998) 150 CTR (AAR) 504 : (1999) 102 Taxman 74 (AAR), the learned counsel for the assessee submits that this ruling would apply only in those cases where the employees of the Indian subsidiary were granted shares by the parent foreign company at a lower val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yee sees that he is at gain, he exercises that option and earns money on it, otherwise he does not exercise that option. Thus, a stock option in all cases is meant to give benefit to the employee over and above what he is getting from the employer and hence, it is perquisite as per s. 17(2)(iii) of the IT Act. 24. Having considered the rival submissions and from a careful perusal of the orders of the authorities below and documents placed on record in the light of judgments referred to by the parties, we find that the assessee was appointed as managing director and president of Whirlpool Asia Team T.W.L. located in Madras in India. This appointment letter was issued by the vice president and the managing director of Whirlpool South East Asia PTE a foreign based company and in its appointment letter besides base pay and other incentives, the assessee was made eligible to be nominated for stock options annually. It means that whatever benefit accrued to the assessee on account of grant of stock option, it was accrued on account of employment. Now, two questions posed before us are: (i) In which year benefits are accrued to the assessee, on account of stock option, whether it was the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e find that the assessee has been granted a stock option without fixing a period of exercise as one of the incentives of his employment as per appointment letter appearing at page No. 27 of the compilation of the assessee. No doubt, the stock option was granted at the prevailing market price but the assessee was not under any obligation to exercise the same on the day of grant. He kept the offer with himself alive and exercised it when the market price of these shares has been increased to avail the pecuniary benefit. So, we have to see how much pecuniary benefit has been accrued to the assessee when he exercised the option because at the time of exercise, the assessee was only liable to pay market price of the shares on the date of grant. It means that the assessee has been given the shares at a concessional rate and the assessee derived a pecuniary benefit on account of his employment and this benefit certainly falls within the definition of perquisite, forming part of the salary. 28. We have also carefully examined the judgment of the High Court of Justice, Chancery Division in the case of Abbott vs. Philbin and the judgment of AAR reported at (1998) 150 CTR (AAR) 504 : (1999) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e option is never exercised, there would be no profit nor any accrual of benefit because the right of stock option given to the employees cannot be transferred. Therefore, the taxability of the amount to be gained by exercise of the option cannot be in doubt. It is a perquisite or profit arising out of employment. The only question is whether the amount will be taxable under the head 'salaries'. In this connection, it has to be noted that 'perquisite' and 'salary' have been specifically defined inIndia. Secs. 15 and 17 are couched in very broad terms. But, however broad the language may be, unless the relationship of employer and employee exists between the payer and the payee, the amount received by the payee cannot be taxed as salary. The amount may be profit or gain arising out of employment but if the payer is not the employer or the payment is not being made for and on behalf of the employer, the amount cannot be brought to tax as salary but will have to be brought to tax as income from other sources under s. 56. This, in short, is the case of the applicant. But salary includes perquisites or profit in lieu of or in addition to any salary or wages under s. 17(1)(iv); any benef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s subsidiary and itself as the same concern. It wants to reward and encourage the employees of the subsidiary company. Even if the subsidiary is treated as a separate juristic entity, the stock option offered by the American company must be treated to have been made for and on behalf of the Indian company. Otherwise, there is no reason why an independent and altogether separate American company will try to give encouragement to the employees by paying salary and giving other benefits. If some other company pays additional benefits to the employees, then it must be held to have been done for and on behalf of the employer. Moreover, in a case like this the corporate veil will have to be lifted to see the real nature of the transaction. The only possible explanation for the offer to stock option by the American company to the employees of the Indian company can be that it regards its business and the business of the Indian company as one. There is no difficulty in law in recognizing the reality of the transaction and treating the benefit to be given to the Indian employees as one by the employer himself or by the American company for or on behalf of the employer. In either view of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee as and when he accepts/exercises the offer/option. Admittedly, the option was exercised in the financial year relevant to the impugned assessment year and at the time of the exercise; one has to work out the pecuniary benefit accrued to the assessee. In the instant case, assessee was benefited with the pecuniary benefit of Rs. 39,79,814.5 as worked out by the AO as per r. 115 of the IT Rules inasmuch as at the time when he exercised the option and became the owner of the shares, the assessee was required to pay a price of shares prevailing at the time of grant. Since the shares were acquired by the assessee at a concessional rate, this pecuniary benefit accrued to the assessee is a perquisite and forms part of the salary Having exercised the option of shares, assessee became the owner of shares, which is a capital asset of which value is market value prevailing on the date of exercise. As such, when these were sold at the same rate, assessee did not acquire any capital gain. Whatever benefit is earned by the assessee, it was only in the nature of perquisite and forms part of salary. We, therefore, do not find any infirmity in the order of the lower authorities who have treated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee is before us and reiterated the submissions. In support of his contention, he has also placed reliance upon a certificate issued by the employer. 31. Learned Departmental Representative, on the other hand, has relied upon the order of the CIT(A). 32. Having considered the rival submissions, we are of the view that it is not a case of the assessee where no electricity or water is provided to it by the employer. Once the facilities are provided to the assessee through any means, some perquisites are to be determined and added in the hands of the assessee. 33. We have carefully perused the order of the CIT(A) and find that he has properly adjudicated the impugned issue. We, therefore, uphold his order. 34. Apropos ground No. 2, it is noticed that this ground has not been adjudicated upon by the CIT(A) though a specific ground to this effect has been raised before him. Since the CIT(A) has not adjudicated this ground, we are of the view that the matter be restored back to him for re-adjudication of this ground. We, therefore, restore the matter to the file of the CIT(A) with the direction to adjudicate the issue by passing a speaking order. 35. In the result, the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... qualization is a concept common to expatriate contracts and principles are the same. He, therefore, held that housing norm and auto norm are a part of salary and a contribution by the employer towards perks provided. In effect, the AO holds that the amounts of auto norm and housing norm reduced from the salary in the first place have accrued to the appellant and were actually given up as the employee's contribution towards perquisites provided to him inIndia. 5. The CIT(A) upheld this argument in para 6.7 of his order which has been challenged before us. 6. The matter was initially heard by the Bench on11th Sept., 2002,13th Sept., 2002and16th Sept., 2002. Therefore, at our instance written submissions from the appellant, were filed onthe 18th Feb., 2003and in response to which, the Department filed their submissions onthe 3rd of March, 2003. 7. In these submissions as well as in the submissions filed before the CIT(A), the main thrust of the appellant was that the amounts reduced on account of housing norm/auto norm never accrued to the appellant. As a term of employment, his monthly base salary is reduced by these amounts (though notional). In other words, the gross salary de h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing norms and auto norms had he continued to render services in his home country against the housing accommodation and conveyance provided to the assessee by its employer". 12. The supposition that, had the employee continued to stay inUSAthe employer was to provide the housing accommodation and conveyance does not emerge from either the order of the AO or the CIT(A) or the paper book or the written submissions. It appears that on this erroneous promise, brother JM supposed that "according to the terms of the employment, the assessee has been provided a free housing accommodation and conveyance against deduction of housing norms and auto norms, which was supposed to be deducted had he continued to render service in his home country against residential accommodation and conveyance provided by the employer." 13. It is this supposition, which has led the Hon'ble JM to feel that the reduction of auto and housing norms do not emerge out of any notional sum but represents a liability, which instead of being given to the employee in the home country, is being given in the country of his posting The very fact that, the amounts were to be reduced from the salary indicates that it was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... doubt receive Rs. 1500 as tax but, only Rs. 1000 has accrued to the assessee as salary. Hence, it was perfectly justifiable to remove the element of Rs. 500 from the total income as it never accrued to the assessee. 16. In para 11 of the decision at p. 50 of the paper book, it is observed: "what perhaps misled the Departmental authority is, the way it was presented to them. The assessee in his computation has added Rs. 50,00,000 as income and deducted Rs. 15,00,000 from the income. Thus, the Departmental authorities thought that the assessee is claiming a deduction of Rs. 15,00,000 from the total income. In fact, he is not claiming deduction of Rs. 15,00,000, but he is only showing that out of the total tax liability of Rs. 50,00,000, Rs. 15,00,000 will be made by him out of his salary of Rs. 77,00,000. 17. It is indeed erroneous to presume that the Mumbai Bench decided the issue on there being no loss of revenue. What the AO reproduced in his order are the arguments of the counsel for the appellant, which do not find mention in the conclusion drawn by the Bench. In fact, the Bench was pleased to observe in para 8 beginning p. 46 of the paper book that "in our opinion, the issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng survives once the Department accepts the stand of the employer, which is nothing but a mirror image. 19. Following the decision of the Mumbai Bench and keeping in view the fact that the Department has accepted the stand of the appellant in the hands of the employer after further examination, the order of the CIT(A) in the case of the employer having become final, the reduction of housing norm and auto norm only result in the base salary being reduced. It does not represent sums accruing to the appellant first, which in turn have been appropriated towards perquisites provided to the appellant inIndia. Accordingly, addition sustained by the CIT(A) is deleted. Ground No. 1(e): 20. The appellant was granted a stock option in accordance with a scheme formulated by the employer. The stock option scheme was duly furnished before the AO and is also a part of the paper book before the CIT(A). 21. The broad facts emerging from the scheme are that on 21st June, 1994 an offer was made to the appellant to purchase 1000 shares at a price of 55.38 US $ per share. Similarly, onthe 15th of August, 1995as well as onthe 18th of June, 1996, an identical offer was made to purchase 3200 and 2300 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant. Considering that there are clearly two points of tax incidence, one on exercise and the other on sale, and each determining the head of income under which the same is to be taxed, the AO is correct in holding that in the absence of any taxable income arising at the time of exercise, the gain on sale can be treated as income under the head salaries because originally the shares so sold came into the possession of the appellant by virtue of his employment." 24. On appeal before us, the mainstay of the argument before the Bench was the decision of the House of Lords (and not of Chancery Division as noted by the Hon'ble JM) in the case of Abbott vs. Philbin (Inspector of Taxes) (1962) 44 ITR 144 (HL). The point of issue was whether the taxable perk results at the time of grant and acceptance of the offer, or when the shares are acquired on exercise of the option accepted earlier. In allowing the appeal, the House of Lords held that there arose a taxable perquisite in the year of grant of the option. 25. In that case as per the decision of Lord Reid: "The company offered to its executives options to buy a number of its unissued shares at 68s.6d., which was then the market price. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad been exactly the same except that it was to last for ten years whether the appellant remained in the service of the company or not. It could hardly be that change so completely altered the nature of the option as to change the basis of taxation and make the granting of the option, and not the issue of the shares, the perquisite. If, then, it was exercised years after the servant had retired, what would the position be: would the issue of shares then be the perquisite, and for what year of assessment would it be a perquisite? There would be no assessment under Sch. E for the year in which the shares were issued because the servant had retired. I realize that one ought not to be surprised at anything that happens under the IT Act, but nevertheless all this does seem a little strange". 26. In other words of Lord Viscount Simonds: "My Lords, I cannot entertain any doubt that, when the company granted the option to the appellant, he acquired something of potential value. I do not think that it matters whether it falls into the category of proprietary or contractual right or into some dim twilight that divides those juristic conceptions...... How, then, can it be said that an optio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an incentive to future services. Unlike the realized value it owes nothing to the adventitious prosperity of the company in later years. On this ground also I should reject the claim of the crown." 27. By majority view comprising Lord Reid, Lord Radcliffe and Viscount Simonds, the House of Lords held that the difference between the option price and the market value on the date of offer of option constituted a taxable perquisite at the time the option was accepted. 28. In the present case, it is not disputed by the AO and has been accepted by the CIT(A) that the grant/exercise price was the average of the NYSE as on the date of grant. Therefore, in view of the ratio in Abbott's case, the difference between the option price (viz., grant/exercise price) and the fair market value is taxable as a perquisite in the year of grant. In the assessee's case, the option price is equal to the fair market value and hence there arises no taxable perquisite at the time of grant/acceptance of the option. Accordingly, the gain on sale of shares is only attributable to sale and the increase in value is assessable as income under the head capital gains. While recording the conclusion, the brother J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acceptance is a perquisite and what will be its value is no more res integra. The answer is evident in the decision of Abbott vs. Philbin cited before the Bench. The decision categorically affirms that acceptance/vesting of the offer is a perquisite and the value thereof is the difference between the market value as on the date of the offer as reduced by the value at which it has been offered. It further holds that only the difference between the market value and the value at which the option vests emanates from employment. Later accretion cannot be reelated back to the employment Even though, an interregnum exists between the acceptance of option and actual acquisition of shares on exercise thereof, offer is not valueless or something which can be ignored for determining perquisites. 31. The question still remains is whether this decision of Abbott vs. Philbin has been adversely commented upon by the decision of Advance Ruling Authority at XYZ, In re (1998) 150 CTR (AAR) 504 : (1999) 102 Taxman 74 (AAR) (quoted in extenso by the brother JM). The answer is clearly in the negative. The decision of Abbott vs. Philbin and Bentley vs. Evans have been cited but only to be distinguished ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the dictum of Abbott vs. Philbin the appellant deserves to succeed on this ground. REFERENCE UNDER S. 255(4) OF THE IT ACT, 1961 1. Whether deduction on account of housing norm and auto norm made by the employer from the base pay of the assessee in lieu of free housing and transport facility provided in India as per the terms of employment, falls within the definition of perquisite enshrined in s. 17(2)(iii) of the Indian IT Act and forms part of the base pay and is exigible to tax? 2. Whether a profit or benefit earned/acquired by the assessee on account of exercise of stock option, earlier granted, in terms of his employment on subsequent dates and its sale is a perquisite as per provisions of s. 17(2) of the Indian IT Act or capital gain? M.A. BAKSHI, VICE PRESIDENT (AS THIRD MEMBER): 25th Oct, 2005 In consequence of the difference of opinion between the learned JM and learned AM of the Division Bench, the Hon'ble President, Tribunal has nominated me as Third Member of the Bench, on the following points of difference: "1. Whether deduction on account of housing norm and auto norm made by the employer from the base pay of the assessee in lieu of free housing and transpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o offered the perquisite value in respect of the free residential accommodation as well as free car provided to him inIndia. The assessee worked out the value of perquisite in respect of residential accommodation as under: 'Salary Rs. 1,16,92,572 Rent paid Rs. 7,80,000 10 per cent of salary Rs. 11,69,257 60 per cent of salary Rs. 70,15,543 Taxable value taken is actual rent paid i.e., Rs. 7,80,000 being lower. It is noteworthy that the assessee has calculated the salary of Rs. 1,16,92,570 on the following basis: Net salary drawn Rs. 78,44,971 Tax paid by the employer Rs. 38,47,601 --------------- Rs. 1,16,92,570 10 per cent of the same has been taken at Rs. 11,69,257 The AO has worked out the perquisite value of residential accommodation at Rs. 15,53,803 as under: Salary for the purpose of r. 3 Salary as per Appendix I Rs. 79,98,038.1 Add: Housing contribution Rs. 10,02,083.6 Auto norm Rs. 1,10,505.0 --------------- Rs. 91,10,626.7 Add: Tax perquisite (as computed in the assessment order) Rs. 61,00,796 Total Rs. 1,52,11,423 10 per cent of above Rs. 15,21,142 60 per cent of the salary Rs. 91,26,854 "Fair rental value" Not ascertainable Rs. 15,21,142 Pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the employer for use by the assessee partly in performance of his duties and partly for his private or personal purposes shall be determined to be a sum equal to that part of the amount actually expended by the employer on the maintenance and running of the motor car during the relevant previous year and including remuneration, if any, paid by the employer to the chauffeur which can be reasonably attributed to the use of the motor car by the assessee for his private or personal purposes; or where the motor car is used by his employer, the aggregate of such sum and of a sum equal to that part of the amount representing the normal wear and tear of the motor car which can reasonably be attributed to the user of motor car by the assessee for his private or personal purposes; however, that where a determination on the basis mentioned above presents difficulty, the value of the perquisite may be determined on the basis of the Table. 5.1 Details as under were ascertained from the assessee and Whirlpool Holdings India Ltd. through specific queries under s. 131, which are on record: (i) Assessee was provided with one car; Mercedes Benz (purchased on13th Nov., 1995) (letter dt.22nd Au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be, therefore, less than Rs. 1,10,505. 5.2 The Authorised Representatives on being asked to explain as to why the minimum perquisite value of the vehicle provided by the employer be not taken at US $ 3,000 furnished their written submissions vide letter dt.20th Sept., 2000. Their interpretation of r. 3(c)(ii) is that it does not leave the determination of perquisite value to the discretion of the AO. Further US$ 3,000 being deducted from salary is a hypothetical amount and not the actual expenditure of employer-company. This amount, according to Authorised Representatives cannot be considered for the purposes of valuation of the perquisite of motor car provided by the employer. 5.3 As discussed in paras 5 and 5.1 what is required to be done under r. 3(c)(ii) is a 'reasonable attribution' and there is no compulsion to adopt the Table, if such reasonable attribution is possible. In view of the figures in para 5.1 and the fact that this 'reasonable attribution' can never be less than the amount deducted from assessee's salary, i.e., US$ 3,000 or Rs. 1,10,505 (no prudent person would agree for a deduction which is more than the actual benefit), the value of the car plus driver perqui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to refer to s. 15 of the IT Act, 1961. Sec. 15 reads as under: "15. The following income shall be chargeable to income-tax under the head 'Salaries'- (a) any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not; (b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him; (c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to income-tax for any earlier previous year." Sec. 17 of the IT Act, 1961 defines 'salary'. The said definition is an inclusive definition and provides the salary to include wages, annuity, gratuity and any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages. Sec. 17(i) is quoted hereunder: "17. For the purposes of ss. 15 and 16 and of this section,- "Salary" includes- (i) wages; (ii) any annuity or pension; (iii) any gratuity; (iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages; (v) any advance of salary; (va) any payment received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers US citizens who are transferred from theUSto a foreign post of assignment or from one foreign post of assignment to another. It also includes all income of US citizens including company compensation and personal investment income." It has been given in writing before me that the auto norm and housing norm of the company are in consonance with the above policy of the employer-company. It has further been stated that the assessee is not entitled to any free accommodation or free car on his posting inUSAand accordingly deduction is being made from his salary to put him on par with the employees working inUSA. 11. Proceeding on the basis that the assessee was not entitled to free accommodation or free car had he been posted inUSA, the company having provided free accommodation and free car inIndiaand reduced the salary of the assessee to put him at par with the employees working inUSA. Therefore, there is no doubt in my mind that the intention of the employer to fix the basic salary at a higher level and then reducing the same on account of hypothetical tax, housing norm and auto norm, etc. was for the purpose of equalization of pay and other facilities of the US employees and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submissions filed by the assessee. The AO vide his comments dt.26th Nov., 2002reported to the CIT(A) that as per the facts on record, the hypo tax, housing norm and auto norm have actually been reduced from the salary of expatriate employee under the tax equalization policy. It was also pointed out that since the above reduction finds mention in the pay slips issued to the expatriate employee, the TDS officer has wrongly concluded that these were actually disbursed to the employee and the AO reported to the CIT(A) that it appears to be a mistake. The CIT(A) vide order dt.6th May, 2003accepted the appeal of the assessee and held that the company, namely, Whirlpool India Holdings Ltd., was not a defaulter in terms of ss. 201 and 201(1A) of the IT Act, 1961 with reference to the housing norm and auto norm. In other words, the opinion of Whirlpool India Holdings Ltd. that hypo tax, housing norm and auto norm are actually reductions from the salary and, therefore, do not constitute part of the salary has been confirmed by the CIT(A). I have been informed by the learned counsel for the assessee that no appeal has been filed against the said decision of the CIT(A) and that the order has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of norms of the company. The effect of the terms of the agreement is that assessee is entitled to free residential accommodation and free car facility inIndiato which he was not entitled to inUSA. Since he was not entitled to free residential accommodation and free car facility had he worked inUSAas per company's policy, it would entail the deduction in his salary to be calculated on the basis of norms of the company. Though the agreement provides for estimated reduction by US$ 16,000. however, as per the certificate, more reduction has been made. For the free car facility, a reduction of salary is US$ 3,000. As per the above terms and conditions of agreement of employment after the reduction of salary, assessee has been ensured free residential accommodation and free car facility inIndia. In my considered view, the fixation of salary at US$ 15,000 per month to the assessee was for the purposes of employment inUSAand the terms and conditions of the agreement clearly stipulate that the salary receivable by the assessee inIndiawould be after reduction of hypo tax, housing norm and auto norm. The agreement does not stipulate that assessee would be entitled to residential accomm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the salary. I, therefore, agree with the view expressed by the learned AM in regard to this issue. 15. Now, I take up the second point of dispute involved in this appeal. The point of difference may be stated as under: "Whether a profit or benefit earned/acquired by the assessee on account of exercise of stock option, earlier granted, in terms of his employment on subsequent dates and its sale is a perquisite as per provisions of s. 17(2) of the Indian IT Act or capital gain?" The relevant facts relating to this issue are that during the course of assessment proceedings it was observed by the AO that as per the employment contract of the assessee with Whirlpool Corporation,USA, the assessee was entitled to be nominated for stock options. The AO, accordingly, made inquiries about the exercise of any stock option by the assessee in the previous year relevant to asst. yr. 1998-99. In response, the following information was furnished by the assessee in regard to grant, exercise and sale of stock options: --------------------------------------------------------------- S. Date of Grant/ Basis of Grant No. of Date of Price No. Grant Exercise Exercise price stock exercise at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Circular No. 710 of the CBDT [(1995) 127 CTR (St) 1] and the decision of theAARin P. No. 15 of 1998. 17. On further appeal before the Tribunal, the learned JM upheld the view of the Revenue authorities by relying upon the decision of theAARin P. No. 15 of 1998. It has been pointed out by the learned JM that the issue involved in this appeal was similar to the issue decided by the AAR in P. No. 15 of 1998 and, therefore, the difference between the market price on the date of exercise of option and the price paid by the assessee was chargeable to tax. It has been held by the learned JM that the assessee had acquired the shares in the year under appeal at concessional rate as a result of which a pecuniary benefit accrued to the assessee in the form of perquisite which is taxable under the head 'salary' under s. 17(2)(iii) of the IT Act, 1961. 18. The learned AM has differed with the learned JM mainly on the ground that the issue was covered by the decision of the House of Lords in the case of Abbot vs. Philbin (Inspector of Taxes) (1962) 44 ITR 144 (HL), wherein it was held that taxable perk results at the time of grant and acceptance of the offer and not at the time the shares ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or increase, on reasonable terms, their stock ownership in the company, the board of directors may, from time to time, award options to purchase shares of the company's stock. The exercise and retention of stock options is a way for you to share in the company's future growth. There are various methods to achieve stock ownership through the Plans." The stock options as per the scheme are described in the scheme to represent the right to purchase the company common stock at a future time at a price set at the time the option is granted. Option price is set at the time the Human Resources Committee approves the grant and is the average of the high and low market price for the day. As per the scheme, the value of stock option is described as under: "The company's stock options can be used as a valuable tool to build an estate either through direct purchase at exercise or through a process termed 'swapping', where currently owned stock can be turned into the company to pay for option exercises. Because there are so many variables that may reflect your personal status, we encourage you to consult a financial planner or stock broker to review your personal financial strategies and how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 17(2)(iii) of the Act in the year of exercise of the option. The issue before theAARwas as to whether the benefit received by the employees of Indian company by exercise of option to purchase shares of the parents foreign company constitutes additional remuneration and perquisite taxable as income from salary. The Hon'ble AAR held that the gain made by an employee after exercise of the stock option is taxable as salary. It has further been held that a foreign company selling its shares at concessional rate to the employees of its Indian subsidiary has to deduct tax at source under s. 192 since the gain made by the employee after exercising the option would be taxable as salary. The Hon'ble AAR has taken the conscious decision on the basis of provisions of s. 17(2)(iii) of the Act. The learned AM has preferred to rely on the decision of the House of Lords in the case of Abbott and has not followed the decision of theAARin P. No. 15 of 1998 on the ground that the issue involved in this appeal was not before the said authority. In my considered view, as pointed out earlier, the issue involved in this appeal was before the AAR in P. No. 15 of 1998 and a conscious decision has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be regarded as perquisites and the difference between the fair market value on the date of exercise of option and the actual sale price in the event of transfer of shares by the employee shall be regarded as capital gains. 19.2 The Act makes a departure and provides that no perquisite shall be charged to tax in the hands of the employee in respect of benefits derived as a result of allotment of shares/debentures or warrants directly or indirectly under the employees stock option plan or scheme. This is sought to be done by deleting s. 17(2)(iiia) and providing an Explanation below s. 17(2)(iii). Sub-s. (2B) in s. 49 inserted by the Finance Act, 1999, has also been deleted. Under the amended provisions, such shares will only be subjected to capital gains tax at the time of sale by the employee. The difference between the consideration and the cost of acquisition will be regarded as the amount of capital gains under normal provisions of law. However, the new provisions shall be applicable only in respect of options exercised or allotments made after31st March, 2000. The taxability of shares in respect of which option has been exercised by the employee prior to31st March, 2000, shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s' Stock Option Plan or Scheme of the company offered to such employees in accordance with the guidelines issued in this behalf by the Central Government." 22. It is pertinent to mention that stock options have been granted to the employees to derive benefit with the sale purpose of promoting continuity of management and increased incentive and personal interest in the welfare of the company. Sec. 17(2)(iii) brings the benefit derived by the employee within the ambit of perquisites taxable as income from salary. As per the scheme of stock options, the assessee is given the right to purchase stocks at predetermined price. At the time of grant of the option, there is no benefit derived by the assessee insofar as the price fixed for the grant of shares is the average of the market price (high and low) for the day on the date of grant of the option. Therefore, no benefit in monetary terms is derived by the assessee on the date of grant of option. The employee has been given the right to exercise the option after one year and two years period but not exceeding ten years. When the assessee exercises the option, he pays the consideration for the acquisition of shares to the company at th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... April, 2001 and the same having been deleted by the Finance Act, 2000 w.e.f. 1st April, 2001, the difference between the price at the time of exercise of the option and the grant price of shares are taxable only in the asst. yr. 2000-01 and not in earlier years. This contention of the assessee is not well-founded. Sec. 17(2)(iiia) was inserted by the Finance Act, 1999 which reads as under: "17(2) 'perquisite' includes- (i) the value of rent-free accommodation provided to the assessee by his employer; (ii) the value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer; (iii) the value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases- (a) by a company to an employee who is a director thereof; (b) by a company to an employee being a person who has a substantial interest in the company; (c) by any employer (including a company) to an employee to whom the provisions of paras (a) and (b) of this sub-clause do not apply and whose income under the head "Salaries" (whether due from, or paid or allowed by, one or more employers), exclusive of the value of all benefi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17(2)(iii) when the legislature intended to exclude the same from the purview of taxation. The said proviso reads as under: "Provided that nothing contained in this sub-clause shall apply to the value of any benefit provided by a company free of cost or at a concessional rate to its employees by way of allotment of shares, debentures or warrants directly or indirectly under any Employees' Stock Option Plan or Scheme of the company offered to such employees in accordance with the guidelines issued in this behalf by the Central Government." Thus, the intention of the legislature to grant exemption in respect of the benefit derived as a result of stock options provided by the company to its employees is manifestly clear to be applicable from 1st April, 2001, i.e., the date from which the proviso to s. 17(2)(iii) has been inserted. As pointed out earlier, s. 17(2)(iiia) was inserted for the sake of clarity and therefore, with its omission, the taxability of stock option benefit did come out of the taxable net. That is why there was necessity of incorporating a proviso to s. 17(2)(iii) to give effect to the legislative intent of granting exemption in respect of such benefits. For the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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