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TMI Blog2011 (8) TMI 480X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is no compulsion on the assessee to buy these shares as the assessee has been granted an option to buy, at the market rate prevailing as on the date of grant of option, the specified number of shares within certain time frame - which essentially implies that the assessee may, if so desires, buy the shares or may not buy these shares - It means the assessee was not the owner of these shares before the shares were sold, and entries, to that extent, were mere notional in nature - Section 45(1) provides that any profits or gains from the transfer of capital asset are taxable as capital gains, but then, even going by the documents produced by the assessee, here is a case in which the assessee did not own any capital asset in the form of shares when he claims to have sold the same - The impugned gains are, therefore, cannot be taxed under the head 'Capital gains' - Decided in favour of assessee. - IT APPEAL NO. 4699 (MUM.) OF 2004 - - - Dated:- 10-8-2011 - R.V. EASWAR, PRAMOD KUMAR, JJ. S.K. Singh for the Appellant. Prakash Jotwani for the Respondent. ORDER Pramod Kumar, Accountant Member. By way of this appeal, the Assessing Officer has called into question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,74,87,706. As assessee had incurred bank charges amounting to Rs. 32,800, the receipt, net of bank commission so incurred, was disclosed as long-term capital gain. The claim of the assessee was that he had acquired a valued right, i.e., right to subscribe to shares in future - though subject to certain conditions stipulated at the time of grant of options, and, therefore, the amount so received on exercise of this valuable right should be treated as a long-term capital gain. The Assessing Officer did not agree with these submissions. He was of the view that since the holding period of these shares, i.e., from the date of exercising the stock option to sale of the shares, was less than twelve months, the gains on sale of such shares cannot be treated as capital gains. 4. The Assessing Officer further observed that even though assessee contents that he had acquired the 'right to receive stock option shares', which essentially require the assessee to demonstrate the legally enforceable rights as such, material on record does not evidence so. As a matter of fact, according to the Assessing Officer, in the absence of Reserve Bank of India's approval to pay the purchase price, in fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome and/or Income from Other Sources and/or Salary'. Aggrieved, assessee carried the matter in appeal before the CIT(A). 5. The way learned CIT(A) appreciated the arrangement about transaction was this. The ld. CIT(A) was of the view that the offer of stock option has been accepted by the assessee by entering into a contract by purchase of shares at the stipulated price. The CIT(A) further observed that only because of Reserve Bank of India's stipulation contained in clause iv of its letter dated 12-2-1989 prohibiting any payments at any point of time either in India or abroad for acquiring these shares, the payment of purchase price was delayed till the time of sale of shares in USA. The CIT(A) also noted that the Reserve Bank of India has prohibited the remittance from India for acquisition to shares. Therefore, the said shares were treated to have been purchased as a casual contract between the assessee and the company on the acceptance of the offer i.e., the date on which the said shares were granted to the assessee. The CIT(A) thus held that the amount realized on exercise of the stock option, Long Term Capital Gain has arisen and benefit of cost indexation as per Income-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the offer of stock option was accepted. Johnson Johnson has also accepted the appellant as its shareholder and the owner of the shares, since it has issued bonus shares on the basis of its original holding. It is a well-settled principle in law and practice that the bonus shares can be issued only to the existing shareholders as on the date of announcement of bonus. The Bombay High Court, in the case of Tata Services 122 ITR 594 (Bom.) and in the case of Bafna Charitable Trust 230 ITR 864 (Bom.) have laid down that the right to purchase a property is a capital asset. Therefore, the appellant has acquired a capital asset in the shape of right to purchase shares. Since the holding period of this right, beginning with the acceptance of offer of stock options and ending with the sale of shares, is more than one year, the gain resulting therefrom is treated as long-term capital gain. In view of the above, I hold that the amount realized by the appellant on exercise of stock options is long-term capital gain subject to benefit of cost indexation as per the Income-tax Act. As the appellant has invested the sum of Rs. 1,31,22,000 (as is evident from the details given at page 2 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re : $ 86.25 Date : 11-30-1995 (Fair market value on this date) Subject to the terms and conditions hereinafter stated, Johnson Johnson hereby grants you an option to purchase from it the above stated number of common stock of Johnson Johnson, par value $1 per share, at the above stated price. The option shall not be exercisable until the day following the second anniversary of the above date. Thereafter, it will be exercisable in instalments as follows: Percentage of total becoming exercisable during the period Cumulative percentage of total then exercisable Day following 2nd anniversary to and Including Day of 3rd anniversary 20% 20% Day following 3rd anniversary to and Including Day of 4th anniversary 20% 40% Day following 3rd anniversary to and Including Day of 4th anniversary 20% 60% Day following 4th anniversary to and Including Day of 5th anniversary 20% 80% Day following 5th anniversary to and Including Day of 6th anniversary 20% 100% Option Price: The payment of the option price sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to exercise this option, which have accrued to and including the date of long-term disability, may be exercised, subject to provisions of (11) below, within three years the start of long-term disability by you or, should you die within the three year period, by your estate or by any person who acquires such option by inheritance or devise. Thereafter, such rights shall lapse. (8) In the event of your retirement from Johnson Johnson, your right to exercise this option which have accrued to, and including the date of retirement, may be exercised, subject to provisions of (11) below, within three years from the date of retirement or, should you die within the three year period, by your estate or by any person who acquires such option by inheritance or devise. Thereafter, such rights shall lapse. (9) In the event of termination of your employment due to any cause other than death, disability or retirement, your rights to exercise this option, which have accrued to the date of termination, may be exercised, subject to provisions of (11) below, within three years the date of termination or, should you die within the three year period, by your estate or by any person who acquire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... copy of which was placed before us at page 21 of the paperbook) specifically stipulates that "no employee will exercise the option if the market price is lower than the price at which (stock option) is offered". It is thus a win win situation for the employee which can only operate in favour of the employee-somewhat akin to deferred wages plans by way of grant of stock appreciation rights. Typically, a stock option plan allows an employee to buy the shares in employer company at a concessional rate, i.e., lower than the market price, and such an acquisition of shares at lower than prevailing market rates is then open to market risks being assumed by the employees - as was the case in say CIT v. Infosys Technologies Ltd. [2008] 297 ITR 167/166 Taxman 204 (SC) wherein the assessee could buy the shares, non-transferable for next five years, at Rs. 100 whereas the market price was over 25 times this value of the concession rate of Rs. 100 each, as evident from the admitted facts recorded by the Hon'ble Supreme Court to the effect that shares worth market price of Rs. 171 crores were sold to the employees for a consideration of Rs. 6.64 crores. However, right now we are dealing with a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . A reference has also been made by the CIT(A) about the allotment of bonus shares to the assessee employee, but then, as evident from a plain reading of letter dated 22-5-1996 issued by Johnson Johnson Inc, USA (a copy of which is placed at pages 14 and 15 of the paper-book), this observation is factually incorrect. This increase in face value of stock options is due to "2 for 1 stock split" which was done for all the shareholders and, correspondingly, the stock option rights were also accordingly adjusted. It is not even the case of the assessee that there was any bonus issue of shares or that the assessee was a registered shareholder at any point of time. The findings of the CIT(A) cannot meet our approval on this issue either. In view of these discussions, we are of the considered view that the reasoning adopted by the CIT(A) is unsustainable in law. 11. Learned Departmental Representative has also invited our attention to the fact that a Coordinate Bench of this Tribunal, in the case of another employee covered by the same Stock Options Plan of JJ USA i.e., ACIT v. Shripad S. Nadkarni (IT Appeal No. 4698/Mum/2004; order dated 20-1-2009), decided the issue against the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avour of the assessee by the above decision, which happens to be a later decision, and urges us to hold that since the stock options, on exercise of which assessee received the amount of Rs. 1,74,96,746 which have been brought to tax by the Assessing Officer, did not have a cost of acquisition, the capital gains in question cannot be brought to tax. When learned counsel's attention was invited to the fact that, in taking the above stand, the Coordinate Bench was not informed of the fact that the issue in appeal is no longer res integra and stood concluded against the assessee, by another Coordinate Bench's decision dated 20-1-2009 on undisputedly materially similar facts in Shripad S. Nadkarni's case (supra), learned counsel submitted that it was not in his duty to invite Bench's attention to a decision him. It is for the Departmental Representative to invite Bench's attention to a precedent in support of the revenue He, however, admits that in both of these cases, i.e., Bomi S. Billimoria's case (supra) and Shripad S. Nadkarni's case (supra), he represented the assessees and that he did not bring the decision in Shripad S. Nadkarni's case (supra) to the notice of the later Bench i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thus pointed out that what has been paid to the assessee is not a notional gain but a real gain on the sale of shares. On the strength of these arguments, learned counsel urges us to hold that the decision in the case of Shripad S. Nadkarni (supra) cannot be followed, and urges us to follow the later decision in favour of the assessee in Bomi S. Billimoria's case (supra). 13. Learned Departmental Representative vehemently opposes the submissions so made by the learned counsel. He submits that the decision obtained by the learned counsel in Bomi S. Billimoria's case (supra) is per incurium. He submits that whatever be the nomenclature given to the arrangement, the Stock Option Plan is basically to give benefit of appreciation in the value of parent company's shares, and this is precisely what the Tribunal has held in the case of Shripad S. Nadkarni (supra). It is also submitted that Tribunal's decision in Billimoria's case (supra), having been rendered unmindful of binding Coordinate Bench decision in Shripad S. Nadkarni's case (supra) - an inadvertent mistake to which learned counsel has passively contributed by not pointing out, as was expected of him in all fairness, the earli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is taxable as gains on sale of shares, because shares were not held even for a single day, the gains can only a short-term capital gain, and such a treatment does not bring any relief to the assessee either. 15. In Bomi S. Billimoria's case (supra), the Coordinate Bench was not aware of a direct decision on the same issue by another Coordinate Bench in Shripad S. Nadkarni's case (supra). Learned counsel does not dispute this, but defends it by submitting that what it was duty of the learned Departmental Representative to invite Bench's decision to judicial precedents in favour of the revenue. 16. As to what should be binding value of a judicial precedent, which is rendered in ignorance of the earlier binding precedents on the issue, we can do no better than to may refer to the observations made by Hon'ble Andhra Pradesh High Court Full Bench, in the case of CIT v. B.R. Constructions [1993] 202 ITR 222/[1994] 73 Taxman 473. While dealing with the rule of precedents, Their Lordships have, inter alia, qualified the binding nature of precedents by observing as follows: "It may be noticed that precedent ceases to be a binding precedent: (i) if it is reversed or overruled by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the assessee is concerned, there is no cost of acquisition to the assessee, in which event, by applying the decision of B.C. Srinivas Shetty 128 ITR 294, the amount received is not liable to tax under the head 'Income from capital gains", but then it is not even assessee's case before us that the shares did not have a cost of acquisition. The assessee has taken the cost of acquisition of shares as on the value at the point of time when related stock option was granted, and the short question requiring our adjudication is whether the gains should be treated as long-term capital gains, with indexation benefits, or as short-term capital gains. There is no cross objection by the assessee, nor there is even any petition under Rule 27 of the Income-tax Appellate Tribunal Rules. The issue of taxability of gains arising on exercise of stock options has never been a subject matter of controversy before any of the authorities below; the issue has remained confined to the question as to whether these gains are short-term capital gains or long-term capital gains. The decision of the Coordinate Bench does not even touch upon this issue. We need not address ourselves to this issue. We are, for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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