9911796707
TMI Blog2007 (9) TMI 535X X X X Extracts X X X X X X X X Extracts X X X X ..... n September 9, 2001, by which the assessee was provided with a scheme of purchase of shares of a specified number and the period within which he could so obtain is only an indicator of conferment of a right to exercise the option to purchase the shares. This particular grant and vesting is always employee specific and, therefore, has no value whatsoever unlike the rights to subscribe for further shares as contained in section 81 of the Companies Act which is a transferable commodity. Therefore, the dates of grant and vesting are irrelevant because they do not result in any shares acquisition, but acquisition of shares happens only when the assessee exercises his option and is allotted the specified number of shares. He, having exercised the option as on November 7, 2002, and sold it in April/May, 2003, the period of holding is about 5 to 6 months. This being less than 12 months, even in accordance with the provisions of section 2(42A) of the Act, read with Explanation 1(i)(d), the shares sold would have to fall in the category of short-term capital asset only. The decision of the Kerala High Court relied upon by the DR in SN. Zubin George v. CIT [ 2002 (9) TMI 23 - KERALA HIGH COUR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l gain or a long term capital gain. 2. Appearing for the assessee, Ms. Yogasree, submitted that the assessee was an employee of Winphora Networks Pvt. Ltd., The parent company, viz. M/s. Winphoria Networks Inc. USA, announced the stock incentive scheme to the employees of Winphoria Networks P. Ltd., On 21.9.2000, Incentive Stock Option agreement with M/s. Winphoria Networks India P. Ltd., was entered and accordingly, the assessee was granted the right to purchase 1,25,000 shares of the parent company. The assessee came to acquire this right because the assessee was an employee of Winphoria Networks P. Ltd., According to this declaration by the said company, the assessee was vested with rights to the extent of 25% of 1,25,000 shares on 9.9.2001 and the remaining 75% to vest in every quarter at the rate of 6.25% of 1,25,000 shares. The assessee exercised the option to purchase the shares on 7.11.02 with respect to 62,500 shares. In April 2003, the assessee transferred 62,500 shares to M/s. Motorola and received a consideration of Rs. 1,16,11,554/- on 18.5.2003. In the return of income filed by the assessee this amount was claimed as long term capital gain and 10% tax was paid. The A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing the first anniversary of the first anniversary of the commencement date, through the fourth anniversary of the commencement date so that 6.25% of the shares vest on the last day of each quarter; provided that the optionee continues his or her employment with the company or a subsidiary thereof on the applicable vesting date. The right to exercise shall be cumulative so that to the extent the option is not exercised in any period to the maximum extent possible, it shall continue to be exercisable in whole or in part, with respect to all shares for which it is vested until the earlier of the final vesting date or termination of the grant.... Thus it is clear that vesting is only a process wherein the optionee becomes eligible to exercise the options so vested. On the date of vesting neither assessee has complete right over the shares so vested nor has he paid for them. (c) Para 6 Methods of Exercise further reads which is of importance to us except as may otherwise be agreed by the optionee and the company, the option will be exercisable only by a written notice in form and substance acceptable to the company, specifying the number of shares to be purchased and accompanied b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset) subscribed to by the assessee on the basis of his right to subscribe to such financial asset or subscribed to by the person in whose favour the assessee has renounced his right to subscribe to such financial asset, the period shall be reckoned from the date of allotment of such financial asset. The assessee insisted the right that was conferred on the assessee to acquire the shares of the company was something that was a continuing asset because the right continued and the right got converted into shares when the assessee exercises the option and paid for the shares. It was, accordingly, insisted that the period of holding of shares must be construed from the date of vesting of the right only and it is the only proper course. It is also insisted that the assessee was granted the right by means of a declaration dated.21.9.2000 based on which the shares got allotted subsequently. The Commissioner of Income-tax(A) summarized the events starting with the grant and ending with the exercise of the option of the right, and the same is reproduced below for the sake of facility: I have carefully gone through the facts of the case, case records and submission of the appellant. Bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ell and deliver shares upon exercise of the option are subject to all applicable laws, rules and regulations, including all applicable federal and state securities laws, and the obtaining of all such approvals by government agencies as may be deemed necessary or appropriate by the Board of Director ("Board") or the relevant committee of the Board. He, accordingly, expressed his view that the stock option was nothing more than something that was similar to the offer that was made to the public, which require the public to subscribe or the shares and pay for the same followed by allotment, and in the instant case, the assessee could subscribe for the shares followed by allotment on the basis of the declaration by the company. The only difference between the offer made to the public and the offer, made in the instant case is that in the former, the public may apply for the particular number of shares but the company may be in a position to only allot certain number of shares, but in the instant case the declaration that is made specifically to the employees show a specific number of shares. The Commissioner of Income-tax(A), accordingly, concluded that the declaration gave ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e employee. That is to say, it is employee specific and to him alone. The employer by means of the declaration of the option has in fact undertaken to comply with that declaration in regard to every employee who would fall within the conditions of that declaration. One of the conditions is that the employee must be a permanent employee. That employee, as per the declaration was intimated that the company would be willing to offer him shares numbering 1,25,000. The company further states the period within which the employee could subscribe for these shares. For e.g., it says 25% as on 9.9.01 and the remaining 75% of the total of 1,25,000 shares could be purchased/subscribed at 6.25% for every quarter for the next four years. It is in pursuance of this declaration that the assessee could exercise the right to subscribe for the shares in the company to the extent indicated by the declaration. The right to subscribe for the shares is based on the declaration made by the employer and it is specific to a particular employee. This declaration is based on the fact that the employee is a permanent employee and has satisfied the conditions laid down in the declaration and it is only that par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be for the shares would be extinguished. The granting and the vesting period are merely indicators to the employer to honour the commitment in the event of the employee exercising the option. It is an offer by the employer requiring the acceptance of the employee within a particular period. The acceptance of the said offer within a period is to be done by subscribing for the shares at the specified amount followed by allotment of those many shares to the employee. It can, therefore, be seen that the start of allotment of the shares is when the assessee intimates the exercise of his option, along with payment for the specified number of shares. The company on the basis of the said application would allot the shares and enter the name of the employee as a shareholder in its register of members and from then onwards, the assessee would considered as owning the specified number of shares. 6. We have earlier observed that the declaration as on 9.9.01 by which the assessee was provided with a scheme of purchase of shares of a specified number and the period within which he could so obtain is only a indicator of conferment of a right to exercise the option to purchase the shares. This pa ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
