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TMI Blog2015 (11) TMI 69X X X X Extracts X X X X X X X X Extracts X X X X ..... (AO for short). The subject order is contrary to facts and the legal position and is perverse and, therefore, merits being set aside; 2. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in confirming the action of the AO of assessing the income of the Appellant under the head Profits and gains of business instead of the head Capital gains as shown in the Return of Income filed by the Appellant. Further, in that context, the learned CIT(A) erred in holding that: a. The Appellant was not an investor in the equity shares of Mahindra & Mahindra Limited (M &M, for short); b. The said shares were not being acquired and held by the Appellant with a view to have any capital appreciation; c. The shares were being held only to promote the business interest of M & M; d. It was merely engaged in the business of administration of the Employees Stock Option Scheme; and, e. The Appellant had no independent real existence of its own. 3. Without prejudice to the above the learned CIT(A) failed to dispose of the submission of the Appellant that, even if income is assessable under the head profits and gains of business, the AO had over-assessed it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition from the trust a specified number of Equity Shares of the Company at a future date at Exercise Price. The Exercise Price is the price at which the Eligible Employee is entitled to acquire the Equity Shares pursuant to the Options granted and vested in him/her under the ESOS and is decided by the trust in accordance with the recommendations of the Compensation Committee at the time of Grant of Options. Thereafter, the Eligible Employees are entitled to Exercise the options after the vesting date. Exercise of the options means the act whereby the Eligible Employee actually applies to the trust to exercise the options granted to him/her. On exercise of the options by the Eligible Employees, the trust scrutinizes the details and after realizing the Exercise Price paid by the Eligible Employees, issues/distributes the corresponding underlying equity shares of the Company to the Eligible Employees. 5.2. It was further noted by the AO in the assessment order that during the year under consideration, several Eligible Employees (who were granted the options in earlier years), after the vesting date, have exercised their respective options and, in turn, have paid the corresponding Exe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue of shares by the Company till sale of these shares by the employees in the open market and contended that: i. Trust administering options has nothing to do with options and options have direct correlation between the employer and employee it is a direct incidence of employment. ii. ii. Presently employees are taxable in respect of value of options on date of exercise of options iii. The difference between the issue price of shares by the company to the trust is cost of acquisition in the hands of the trust; difference between such cost and the price at which shares are transferred to the employees (indirect transfer) pursuant to exercise of Option represents sale consideration to the trust and purchase consideration to the employee exercising the Option; iv. Purchase consideration paid by the employee minus fair market value computed under Rule 3(8) represents taxable value of perquisite in his hands. v. The essence of business is not only that it should be an activity carried on a regular basis and in a systematic and organized manner but also that such activity should be carried out with to view to earning income. The main rationale for carrying out the activity s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eligible employee actually applies to the trust to exercise the options granted to him/her. vii. On exercise of the options by the eligible employees, the trust scrutinizes the details and after realizing the exercise price paid by the eligible employees recognizes revenue and issues/distributes the underlying equity shares of the Company to the eligible employees. viii. The assessee trust's submissions in respect of fringe benefit and perquisites are from the point of view of taxation of employees and not the trust. Further the employees are taxed on concessional rate of the shares by determining difference between exercise price paid by him and fair market value (fmv) of the shares on date of exercise. 5.5. It was further observed by the AO that the asset held by the assessee trust was an „Option‟ and not „Share‟, which was exercised by the eligible employees during the year under consideration, and such options were not listed securities. According to the AO, these options would not fall within the ambit of capital asset as per provisions of Income Tax Act, and resultantly income arising there-from would not be covered under the head capital gai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plies that it should be carried on in accordance with the commercial principles. Under these circumstances, those in charge of the management of the affairs should be free to decide when, how and how much to earn income. According to ld. counsel, in the case before us, the profits have no say in the matter of "when" and "how much" for the reason that "when" is dependent upon the eligible employees exercising the options and "how much" is predetermined by the difference having the cost and exercise price and these are not attributes of business. 5.9. According to the ld. counsel in the present case, the only object for carrying out the activity by the assessee trust is to administer ESOP scheme of the employer and to transfer shares to the employees at the point of time they decide to exercise the option. There was neither a commercial motive, nor a profit motive, as is normally involved while carrying out business. According to ld. counsel the reasoning given by the AO that the activity of the assessee trust was business, inter alia, for the reason that the assessee trust had purchased certain shares from the secondary markets and held these shares for the purpose of making profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on do not change the character nor defeat ownership in the asset held by the trust. Thus, the shares held by the trust, clearly classified as investment, and had been shown in the audited accounts of the trust as such, and accordingly return of income was rightly filed by the assessee by showing the resultant gain as capital gain. 5.11. We have considered rival contentions, gone through the orders of lower authorities and very carefully and gone through the evidences shown by both the parties in the paper book and other material placed on record. We have also deliberated on the judicial pronouncements referred by lower authorities in their respective orders and also cited by ld. DR and AR in the course of hearing before us. In our considered opinion, the main issue to be decided here first is to determine the nature of shares held by the assessee trust and the resultant profit/gain/loss derived from transfer of these shares. Before we discuss about the nature of the shares held and transferred by the assessee trust during the year, we find it necessary to briefly understand and appreciate the nature and constitution of the assessee trust. The assessee trust namely "Mahindra & Mahi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded arm of the assessee company. Various clause of the trust deed reveals that real control for operating the scheme was retained by the settler company, inter alia, through Compensation Committee. The Compensation Committee of the trust, as per definition given in the trust deed, means, the Compensation Committee of the Directors of the settler company, as constituted by the Board of Directors. Few other terms are also worth noting in this regard e.g. the settler is entrusted with the authority to formulate and implement the plans., the exercise price as per trust deed means exercise price for equity share as decided by the trust in accordance with recommendation of the compensation committee at the time of grant of options. There are various other clauses also which indicate that de facto control of operation and implementation of employees‟ stock options scheme, in real terms, is held by the Board of Directors of the settler company. The objects and purposes of the trust as defined in clause 5 of the trust deed are, to invest the general corpus in, and hold the equity shares of the company to administer the Plans as instructed by the Compensation Committee for the benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... city. It could also be said, in other words, that the assessee trust is like a Special Purpose Vehicle (SPV) of the settler company, which has been formed for the special purpose of holding the shares of the settler company and issuing the same to the eligible employees, inter-alia, for the benefit of settler and its employees. It is acting as an extended arm of the settler company. It is not holding the shares in its own absolute rights, as has been contended by the Revenue also. Under these circumstances, it will be very difficult to categorise these shares as business assets, meant for trading by the assessee trust. In the case of a trader, the motive is to maximize the profits, as the main object of the proper is mechanized the profits by doing the business of trading. The attributes available in the transaction of the assesee trust are unlike that of a trader and are more like that of an investor. The assessee trust is not free or authorized to sell the shares, held by it on behalf of the settler company, to any person in the free market at fair market price. Under such circumstances, the assessee trust is not in a position to earn maximum profits. Thus, it could be safely sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces Ltd. 122 ITR 594, Hon‟ble Bombay High Court got occasion to explain the meaning and scope of the word „property‟ in context of section 2(14). It was observed by the Hon‟ble High Court that the word "property", used in section 2(14), is an expression of widest amplitude as the definition clause has re-emphasised this, by user of the words "..of any kind". Thus, any right which can be called as a "property", will be included in the definition of "capital asset". Further in the case of Dhurjati Gupta 127 TTJ 356 (Hyd), Hon‟ble Bench while dealing with the issues of taxability of capital gain in the hands of employees, arising on sale of ESOS shares by the employees, it was held that once option is granted, it becomes a right in the nature of property, and such stock option, given by the employer company to its employees, represents a property which is valuable and inheritable, and hence becomes capital asset. The Hon‟ble Bench relied upon the judgment of Delhi Bench of Punjab & Haryana High Court in the case of Hari Brothers Pvt. Ltd. vs. ITO 52 ITR 399, wherein it was held that right to subscribe for shares of company is also a capital asset. O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inted query to Ld DR, at the time of hearing, that whether any such action has been taken by the department against any other such ESOS trust whereby similar gain from issue of shares by the ESOS trust have been treated as income from business. In response, Ld. DR showed its inability to provide any such information. Thus, in our considered view, no case has been made out by the Revenue to disturb a consistent approach on this issue, as has been adopted by the assessee and accepted by the department, since inception, during last many years. There was no cause or justification with the Revenue to take a contrary stand in this year. 5.18. Ld. AO has mentioned in the assessment order that the Assessee had sold some shares in the secondary market, and on the basis of this, it should be inferred that the Assessee was in the business of trading of shares. We have examined even this argument of the Ld. DR and find that the facts have not been appreciated correctly by the lower authorities. In fact, there were only five instances, during the entire year, where shares have been sold in the secondary market, and as compared to the total volume of the shares transferred by the assessee trust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce was placed by the AO on the judgments of Madras Bench of ITAT in the case of Gopal Srinivasan Trust vs Addnl. CIT 46 ITD 157. According to the AO, reading of provisions of section 164(1) along with provisions of section 160 of the Act and their specific reference to "income" and not "total income" makes it very clear that entire income of such trust has to be taxed at maximum marginal rate and not at a concessional rate. 7.1. It was further held by the AO, without prejudice the above, that these "options" are not listed securities and therefore, benefit of second proviso to section 112 of the Act, which provide charging the tax @ of 10% without indexation, shall not be available to the assessee trust. 7.2. Being aggrieved the assessee carried the matter to CIT(A). The CIT(A) rejected the submissions of the assessee. It was held by him in para 1.3 of the appellate order that it was clear from the deed of the trust that individual shares are indeterminate or unknown, since individual shares of various employees have not been specified in the deed of the trust and also for the reason that trust has been found for benefit of both i.e. for present as well as future employees/direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny part of the relevant income is not exempt under section 11 or section 12 by virtue of the provisions contained in clause (c) or clause (d) of sub-section (1) of section 13, tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate.]]" 13.6 Section 164(2) does not prescribe the rate of tax but it mandates the maximum marginal rate as prescribed under the provision of Act. Section 111A is a special provision for rate of tax chargeable on such income which reads as under:- "111A. (1) Where the total income of an assessee includes any income chargeable under the head "Capital gains", arising from the transfer of a short term capital asset, being an equity share in a company or a unitof any equity oriented fund and - (a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (NO.2) Act, 2004 comes into force; and (b) such transaction is chargeable to securities transaction tax under that that chapter, the tax payable by the assessee on the total income shall be the aggregate of - (i) the amount of income tax calculated on such short-term capital gains at the rate ..... X X X X Extracts X X X X X X X X Extracts X X X X
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