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TMI Blog2005 (10) TMI 427X X X X Extracts X X X X X X X X Extracts X X X X ..... equent dates and its sale is a perquisite as per provisions of section 17(2) of the Indian Income-tax Act or capital gain ? 2. I have heard the parties and perused the records. I will first take up the first point of dispute for consideration. 3. Though the facts of this case have been described by the learned Members of the Bench, I, for the sake of coherence, would like to refer to some of these facts, which are considered to be of relevance for a decision on the points of dispute. 4. The assessee, an Australian citizen, was appointed as Managing Director and President by Whirlpool Corporation, USA (The terms and conditions of appointment are available on pages 27 to 29 of the paper book). As per the offer of appointment, the assessee was to join the US based company as an employee on an international assignment. In view of the same, the compensation, benefits and other working conditions of the assessee were covered by the company's U.S. expatriate policies. In respect of the residential accommodation, the terms of offer provided that the assessee would be entitled to company paid housing after deducting U.S. housing norm of about US$ 16,000. Likewise, the company provided f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer has deducted Rs. 10,02,084 being the amount reduced from the salary of the assessee on account of housing norm from the perquisite value. The net perquisite value in regard to residential accommodation has thus been worked out at Rs. 5,51,719. On the other hand, the assessee has offered the perquisite value of the residential accommodation at Rs. 7,80,000 on the basis of actual rent paid by the employer. It may thus appear that the working made by the Assessing Officer is beneficial to the assessee insofar as the perquisite value assessed by the Assessing Officer is less than the perquisite value disclosed by the assessee. So, however, as a result of the working made by the Assessing Officer, the assessee has been asked to pay tax on the amount of Rs. 10,02,083 i.e. the amount reduced from assessee's gross salary on account of housing norm. Moreover, the said amount has also been taken into account in working out the salary received by the assessee for the purposes of computation of perquisite value at the rate of 10 per cent. Therefore, the real controversy involved in this appeal is as to whether the deduction made by the employer on account of housing norm is i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pool car of the Company (letter dated 13-9-2000 of the AR). Driver's salary was Rs. 5,000 p.m. (iii)No depreciation on this car has been claimed by the assessee in its own assessment as it was a foreign car and in accordance with clause (a) of first proviso to section 32(1) of I.T. Act. (letter dated 6-10-2000 of AR). (iv)The Cost of import duty, registration charges and insurance of the Mercedes Benz was Rs. 16,80,903 paid by Whirlpool Holdings India Ltd. Cost of the car was borne by Whirlpool Corporation, USA and hence not supplied (letter dated 20-10-2000 of Whirlpool India Holdings Ltd. in response to summons under section 131). Rs. 1,13,307 and Rs. 70,869 has been incurred on petrol and maintenance expenses by Whirlpool India Holdings Ltd. on this Mercedes car during F.Y. 1997-98. There were 16 cars owned by the Co. during the year 1997-98. The above facts show that the total expenditure on this car, which is exclusively for official and personal use by the Managing Director Mr. Garrick D'Silva is : Petrol and maintenance expenses Rs. 1,84,176 Driver's salary Rs. 60,000 Rs. 2,44,176 In addition there would be wear and tear which can be estimated to be at least ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perquisite value in this case is as under :- Valuation done under rule 3(c) (ii) Rs. 1,10,505 Less :Amount deducted from Assessee's salary Rs. 1,10,505 Perquisite value Rs. Nil In this case the value under rule 3(c)( ii) has been taken to be equal to the amount recovered by the employer, i.e. the 'auto-norm'. However, if the value were taken at Rs. 13,200 as in the return, the perquisite value at a concessional rate under rule 3(c)( v) would still be 'nil'. This is due to the fact that no prudent person would agree for recovery from his salary at an amount higher than the benefit derived." As already pointed out, the CIT(A) has upheld the order of the Assessing Officer in working out the perquisite value and in including the reductions made by the employer on account of auto norm and housing norm as part of the salary. 7. Whereas ld. counsel for the assessee sought to support the view expressed by the ld. Accountant Member, the ld. Departmental Represen- tative sought to support the view expressed by the ld. Judicial Member. At this stage I am tempted to say that the view expressed in regard to the first point of dispute appears to be attractive at first sight but it lose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s chargeable to tax under rule 6 Part A of the Fourth Schedule; and (vii)the aggregate of all sums that are comprised in the transferred balance as referred to in sub-rule (2) of rule 11 of Part A of the Fourth Schedule of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax under sub-rule (4) thereof; (viii)the contribution made by the Central Government in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD.' 9. In Stroud's Judicial Dictionary, Fourth Edition, the expression 'salary' is explained as "where the engagement is for a period is permanent or substantially permanent in character and is for other than manual or relatively unskilled labour, the remuneration is generally called a salary. In the case of Gestetner Duplicators (P.) Ltd. v. CIT 117 ITR 1, Their Lordships of the Supreme Court held that in ordinary parlance, salary connotes remuneration or payment for work done or services rendered. 10. It may be pertinent to mention that the Whirlpool Corporation, USA is an employer-company in the case of the assessee. It has a tax equalization policy in respect of its emplo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en deducted on account of tax equalization policy and the Assessing Officer has rightly deducted the same from the gross salary but included the actual tax component paid by the employer-company as a perquisite for the purposes of determination of the salary received by the assessee. In my considered view, there is no reason for taking a different view in regard to deduction made on account of housing norm and auto norm. As pointed out earlier, the intention of the employer-company appears to be abundantly clear that there is no confusion on the assessee's right to receive the salary in USA after completion of the assignment in India or overseas location. It may be pertinent to mention that as per the terms and conditions of employment, the company had assured the assessee that after completion of three years working in India, he would be considered for assignment outside India. In my considered view, the treatment given by the Assessing Officer to the deductions on account of housing norm and auto norm is not justified more so when different treatment has been given to the deductions on account of hypo-tax. In my view, deduction on account of hypo-tax and housing norm and auto nor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appears to be unnecessary insofar as the Department is not at liberty to take a different view in the case of the company and in the case of the assessee without assigning any reason. The principle is applicable in this case insofar as the revenue has accepted the view taken by the CIT(A) in the case of the employer-company and, therefore, it would not be open to the Department to take a different view in the case of the employee on the same issue. The observations of the Hon'ble Supreme Court in the case of Berger Paints India Ltd. v. CIT [2004] 266 ITR 99, may be relevant. These are as under :- "If the revenue has not challenged the correctness of the law laid down by the High Court and has accepted it in the case of one assessee, then it is not open to the revenue to challenge its correctness in the case of other assessees, without just cause." 14. Another factor for deciding the issue is the treatment of perks in the form of residential accommodation and car facility in India. The Assessing Officer having held that deduction of pay on account of housing norm and auto norm was part of salary received for the purposes of taxation in India further held that the residential accom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concessional rates. On the other hand, the agreement makes it abundantly clear that the assessee would be entitled to rent-free accommodation and free car facility while in India. Therefore, the application of the rules for determination of the perquisite value on the basis of residential accommodation and car provided at concessional rates is not warranted. Rule 3(a) of the Income-tax Rules as applicable for the relevant assessment year provides for computation of perquisite value in respect of rent-free accommodation. On the other hand, rule 3(b), which has been applied by the Assessing Officer, provides as under :- '3. For the purpose of computing the income chargeable under the head "Salaries", the value of perquisites provided by the employer directly or indirectly to the assessee (hereinafter referred to as employee) or to any member of his household by reason of his employment shall be determined in accordance with the following sub-rules, namely :- ****** (b) The value of residential accommodation provided at a concessional rent shall be determined as the sum by which the value computed in accordance with clause (a), as if the accommodation were provided free of rent, e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Basis of Grant Exercise Price No. of stock options Date of exercise & sale Price at which sold in US $ 1. 21-6-1994 53.38 Average of high & low price at New York Stock Exchange on the date of grant 1000 11-3-1998 68 2. 15-8-1995 55.81 -do- 3200 -do- 68 3. 18-6-1996 50.44 -do- 2300 -do- 68.3125 4. 18-6-1996 40.44 -do- 500 12-3-1998 68.4375 From the details furnished by the assessee it was observed by the Assessing Officer that there was a difference between the sale price of shares and the purchase price, and that the assessee had not disclosed any perquisite value in respect of the gains on exercise of stock options. When asked to explain as to why the benefit derived by the assessee by exercise of stock option may not be assessed as a perquisite within the meaning of section 15 read with section 17 of the Act, it was claimed that the right to purchase the shares was granted to the assessee at the average of high and low price at New York Stock Exchange on the date of grant and, therefore, there was no difference between the grant price and the market price. Accordingly, there was no benefit derived by the assessee by the grant of stock options. It w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Abbot v. Philbin (Inspector of Taxes) [1962] 44 ITR 144, 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 are acquired on exercise of the option accepted earlier. The ld. Accountant Member has expressed the view in para 31 of his order on the ground that there was no question before the Advance Ruling Authority as to whether any part of the consideration received on sale of shares could be taken to fall within the head 'capital gains' and not 'salary'. The ld. Accountant Member has further held that in this case the difference between the cost at which the assessee has acquired the shares and the sale price is liable to capital gains tax. 19. Before me, it hardly needs to be mentioned that the ld. Counsel for the assessee sought to support the view expressed by the ld. Accountant Member and the ld. Departmental Representative, on the other hand, sought to support the view expressed by the ld. Judicial Member in regard to this issue. 20. I have given my thoughtful consideration to the rival contentions. The assessee derives income from salary and it is not disputed that it is by reason of h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 stock options may best fit into those strategies." The methods of exercise options have also been given as under :- "To exercise an option means to buy a share of stock. There are various methods to achieve stock ownership through the Plan; payment with a personal check, by a wire transfer, a bank or broker loan, use of presently owned Company common stock to exchange or "swap" for additional shares, or a short-term loan. Vested options may be exercised at any time by contacting the Stock Option Administrator at 800-446-2574, ext. 3973, or 616-923-3973. The option exercise cannot be processed until Whirlpool receives both payment and a completed exercise form. You may be required to pay taxes in addition to the option price, depending on the country you reside in. The Stock Option Administrator will calculate the amount of taxes due in addition to the option made. The exercise form may be faxed to the Administrator." As is evident from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ld. Accountant Member has preferred to rely on the decision of the House of Lords in the case of Abbott (supra) and has not followed the decision of the Authority for Advance Rulings in P. No. 15 of 1998's case (supra) 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 Authority for Advance Rulings in P. No. 15 of 1998's case (supra), and a conscious decision has been taken to hold that the value of the benefit granted to the assessee by way of stock option is a valuable perquisite assessable with reference to exercise of the option on the basis of the difference in the market price on the said date with the price paid by the employee. In my considered view, the decision of the House of Lords though deserves utmost respect yet when there is a decision of Authority for Advance Rulings in P. No. 15 of 1998's case (supra), directly in respect of section 17(2)(iii) of the Income-tax Act, 1961, and even if one were to choose between the two decisions, the decision of the Authority for Advance Rulings shall have to be preferred to the decision of the Hous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scheme. This is sought to be done by deleting section 17(2)(iiia) and providing an Explanation below section 17(2)(iii). Sub-section (2B) in section 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 after 31st March, 2000. The taxability of shares in respect of which option has been exercised by the employee prior to 31st March, 2000, shall continue to be governed by the old provisions." The above explanatory notes make it abundantly clear that the insertion of section 17(2)(iiia) by the Finance Act, 1999 was to bring clarity about the taxability of the benefits arising to an employee as a result of allotment of shares and, therefore, the insertion was clarificatory in nature. It has also been made abundantly clear that the omission of section 17(2)(iiia) will be applicable only in respect of options ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rived 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 pre-determined 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 the price fixed at the time of the grant. In my view, this is the stage at which the benefit is derived by the assessee by way of difference in the pre-determined price and the market price. When the market price is higher and the assessee acquires the shares from the employer by reason of the terms of employment at a lesser value, the benefit given to the employee is by reason of his employment and such benefit is liable to tax un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i )the value of rent-free accommodation provided to the assesee 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 paragraphs (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 benefits of amenities not provided for by way of monetary payment, exceeds fifty thousand rupees; Explanation.-For the removal of doubts, it is hereby declared that the use of any vehicle provided by a company or an employer for journey by the assessee from the residence to his office or other place of work, or from such office or place to his residence, shall not be regarded as a benefit or amenity granted or provided to him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k 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 1-4-2001 i.e., the date from which the proviso to section 17(2)(iii) has been inserted. As pointed out earlier, section 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 section 17(2)(iii) to give effect to the Legislature intent of granting exemption in respect of such benefits. For the above stated reasons, I, therefore, agree with the view expressed by the ld. Judicial Member that the revenue was justified in assessing the difference between the market price on the date of exercise of option and the price paid by the assessee for the acquisition of shares as a benefit assessable under the provisions of section 17(2)(iii). 24. In the final analysis, whereas I agree wit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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