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TMI Blog2006 (12) TMI 62X X X X Extracts X X X X X X X X Extracts X X X X ..... oner (Appeals). He also rejected the appeal filed by the assessee. A second appeal was filed and the Tribunal has allowed the appeal filed by the assessee. Revenue is, therefore, before us. The following two questions of law are framed: "1. Whether the Tribunal was correct in holding that the assessee-company was not liable to deduct TDS under section 192 of the Act over the issue of its shares under stock option plan to its employees at a concessional rate as it cannot be treated as a perquisite (salary) and, therefore, the assessee cannot be treated as a defaulter under section 201(1) of the Act and consequentially no interest under section 201(1A) of the Act can be levied ? 2. Whether the Tribunal was correct in holding that section 17(2) (iiia) of the Act was not clarificatory in nature and was not applicable to the current assessment year ?" 2 The facts, grounds and the questions of law raised in I. T. A. No. 432/2002 and I. T. A. No. 433/2002 are one and the same. Hence, it is unnecessary for us once again to refer to the facts and the questions of law raised in those two cases. 3 Sri Seshachala, learned counsel argues that grant of shares to employees is nothing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er have committed a serious error. He says that the Commissioner of Income-tax and the Assessing Officer have committed a legal error in holding that the assessee has committed violation warranting tax liability. He would refer to various case law. 5 After hearing, we have seen the material o record. From the material on record it is seen that the assessee has suffered an order at the hands of the Deputy Commissioner of Income-tax (TDS) under sections 201(1) and 201(1A) of the Income-tax Act for the assessment years 1997-98, 1998-99 and 1999-2000. An appeal was filed. Appeal stood dismissed by the Commissioner. Second appeal was allowed by the Tribunal. It is also admitted before us that infosys Technologies Limited formulated an employee stock plan. A trust was set up by the assessee. Shares were allotted to the employees on certain conditions. However, the company has not deducted tax in respect of these shares allotted to its employees. Notice was issued under section 192, read with section 201(1) of the Act and the assessee was treated as a defaulter by the Department and tax is demanded at the hands of the assessee. As mentioned earlier, there were several adverse orders b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch as medical, education, housing, holiday homes, recreation facilities, activities related to sports, music, research, artistic pursuits, etc. The trust deed also provides for an opportunity to participate in the growth or prosperity of the settlor through issue of shares or other securities or warrants which would entitle such employees to apply for shares of the company through the Settlor's Employees Stock Offer Plan or through any other means. Stock Offer Plan is also made available to us. For implementation of the Settlor's ESOP the irrevocable trust is created. Settlor means Infosys Technologies Ltd. and shall include its successors and assigns. 9 "Trustees" shall mean the party of the other part and include the trustees for the time being and from time to time nominated/appointed under these presents and the survivor or survivors of them. 10 "Employee" shall mean so far as the ESOP is concerned, employee as defined under the said ESOP and so far as other benefits under this trust are concerned, any employee of the settlor as may be notified by the settlor to the trustees. 11 The company has passed a resolution and constituted a trust and handed over to the trus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er section 17(2)(ii). It would say that the value of any benefit or amenity granted or provided free of cost or at a concessional rate in some cases. It is no doubt true that the shares are allotted at a concessional rate to the employees but the same is not allotted by the employer. The allotment is done by an independent trust and it is not an unconditional concessional grant but a concessional grant with several conditions including eligibility, etc., in terms of the definition. 14 Let us see in the light of this definition as to whether the findings of the authorities are acceptable or not in terms of the law governing such allotment. The original authority has noticed the scheme. After noticing the Assessing Officer would hold that there is a direct employer/employee relationship between Infosys and employees who have received stock option. (2) ESOP shares are taxable even 'before April 1, 2000. (3) The employees stock option gives rise to income in the hands of the employee on the day of exercise of option by the employee and it is clearly a perquisite as per section 17(2) of the Income-tax Act, 1961. (4) The value of the perquisite is the difference b the exercise price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion by Francis Bennion. The same has been culled out reading as under (page 194) "(2) It is presumed that Parliament intends the court to apply to an ongoing Act a construction that continuously updates its wording to allow for changes since the Act was initially framed (an updating construction). While it remains law, it is to be treated as always speaking. This means that in its application on any date, the language of the Act, though necessarily embedded in its own time is nevertheless to be construed in accordance with the need to treat it as current law." 18 In CIT v. Podar Cement P. Ltd. [1997] 226 ITR 625, the apex court has noticed the interpretation particularly with reference to taxing statutes. The Supreme Court has ruled as under (page 648) "it is presumed that Parliament intends the court to apply to an ongoing Act a construction that continuously updates its wording to allow for changes, since the Act was initially framed (an updating construction). While it remains law, it is to be treated as always speaking. This means that in its application on any date, the language of the Act, though necessarily embedded in its own time, is nevertheless to be construed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while interpreting the statute to the given facts. The law of interpretation is also well-settled that it is for the Legislature to decide the quantum of tax and not for the courts to decide the quantum. No words can be read into the statute and no words can be omitted by the courts while interpreting statute for the purpose of taxation. No part of a statute and no word of a statute can be construed in isolation. Statutes have to be construed so that every word has a place and every thing is in its place. At the same time, the courts also have to take into consideration particularly taxing statute a construction beneficial to the assessee in case of ambiguity In the light of the principles in terms of the apex court judgments, let us see as to whether the Tribunal has committed any error in interpreting the provision of law in the case on hand. To decide the questions that is debated before us we have to notice the history of introduction of the scheme by the company. The State Government has itself introduced an option scheme and provided guidelines. It is thereafter, the company thought it fit to introduce a scheme for the benefit of their employees. The stock option is also pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... point of time clearly acted as if the wider meaning was not attributable without adding further words. The valuation of the perquisite is to be as per the rules. There is a specific rule covering the valuation of the alleged benefit resulting from the interest-free loans or from the loans bearing a low rate of interest. In such a situation, if it is a perquisite, it has to be valued under rule 3(g), whereunder the Income-tax Officer shall determine its value on such basis and in such amount as he considers 'fair and reasonable'. In the case of loans, it is not possible to clearly identify the normal rate of interest and the exercise of the power to determine the value which the authority considers fair and reasonable, itself is likely to lead to different and divergent results. The rate of interest varies from subject to subject. The banks are required to charge a low rate of interest on agricultural loans; even as between industries and traders, distinctions are made in this regard. There is no uniform rate of interest charged on house building loans advanced to employees by public sector undertakings. Though a loan without interest is rare and a facility to obtain a loan without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thout charging any interest or by charging interest at a concessional rate amounts to a benefit for the purposes of section 17(2)(iii) of the Act, there was no need for Parliament to introduce, by the Taxation Laws (Amendment) Act, 1984, the new sub-clause (vi) in section 17(2) of the Act. The subsequent omission of the said sub-clause by the Finance Act of 1985 with effect from the date of its proposed insertion was also made with a view to give relief to salaried taxpayers. It is to be noticed that Explanation 2(b) to section 40A(5) of the Act defines a perquisite to mean, inter alia, any benefit or amenity granted or provided free of cost or at concessional rate to the employee by the assessee. If the loan granted to an employee being a director or a person who has a substantial interest in the company or a relative of a director without charging of interest or at a concessional rate of interest constituted any benefit or amenity within the meaning of section 40A(5), Explanation 2(b)(iii), there was no need for Parliament to introduce the amendment in Explanation 2(b) of section 40A(5) of the Act by introducing sub-clause (vi). Sub-clause (vi) which was introduced in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spects of the matter and thereafter holds that even section 17(2)(iii) says that it shall be the value of the benefit that shall be taxable as a perquisite. Such value has to be arrived at in a manner defined by a statute. Unless, otherwise the value is ascertainable by a mechanism laid down in the statute, the same cannot be brought to tax. We are in agreement with this finding of the Tribunal. Assuming that the same value can be attached to the benefit that value is not ascertainable in terms of the scheme and in terms of the allotment. In fact, the Tribunal also has noticed that the benefit for being taxed has to be valued. What is allotted is not transferable till a defined period being 5 years from the date of grant of warrants. Transfer of these shares within the defined period would not be good delivery at all. The certificate of shares has been enfaced with a stamp regarding the non-transferable period. The Tribunal has also noticed the Wealth-tax Act in the matter of valuation. After noticing all these aspects of the matter, the Tribunal in our view has come to a right conclusion that there is no ascertainable value attached to this share option and in that view of the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s ruled that the amount gained by excrcise of the option would be taxable under the head "Salary". We have seen the facts in the said Advance Ruling case. It is seen from the ruling that the applicant-company was incorporated in the USA. It set up another company in India, which was a fully owned subsidiary of the American company. The American company made a proposal to enter into a stock option agreement with the employees of the Indian subsidiary. Under this agreement, the employees of the Indian company would have the option to subscribe to the shares of the US company at a pre-determined price called the option price which would be lower than the ruling market price of the shares. The employees would have the option to subscribe and become owners of the shares on any date of their choice. As and when such option was exercised, the employee would have to sell the shares in the open market in the USA at the ruling stock market price. The net gain is to be repatriated to India through the banking channels. The purpose of this stock option plan is stated to be to attract and retain the best available personnel for positions of substantial responsibility, to provide additional ince ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner. Material on record would reveal that the shares were allotted to the trust and the trust after noticing the eligibility and entitlement has chosen to provide a stock option to the employees. In light of this, as, rightly ruled by the Tribunal that the benefit is not confined by the employer and by the trust. Trust is not doubted by the Department. The Tribunal, after noticing these materials on record, has to our mind, given acceptable and reasonable finding that the grant has been done by the trust and that too with conditions. The Tribunal finding on this aspect of the matter requires confirmation by us. Assuming that the grant is benefit, even then, the authorities have to show to the satisfaction of the court that a liability in such benefit cases is caused to the employees strictly in terms of section 192 for the purpose of proceeding under section 201 of the Act. The material has noticed that the Department has not disputed that infosys has discharged its duty in a fair and bona fide manner. In fact, the material on record would reveal that the company was consistently approaching the Department seeking clarification about the taxability of ESOP. Correspondence is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vities of an employer. Of course, we do not mean that if law provides for taxation, no concession is to be shown. But wherever there are gray areas, it is preferable for the Department to wait and not hurriedly proceed and arrest the well intended scheme of the welfare of the employer. We would be failing in our duty if we do not note the directive principles of the Constitution in the matter of labour participation. Article 43A provides that the State shall take steps by suitable legislation or by any other way to secure participation of workers in the management of undertakings, establishment or other organisation engaged in other industries. The apex court has considered this aspect in Gujarat Steel Tubes Ltd. v. Gujarat Steel Tubes Mazdoor Sabha [1980] 56 FJR 137; AIR 1980 SC 1896. The laudable object of article 43A is to a certain extent achieved by this company. That laudable object is sought to be either diluted or destroyed by taking an unsustainable plea by the Department. We would ultimately conclude by saying that any welfare measure has to be encouraged but of course within the four corners of law. We do hope that other employers would follow this so that the econom ..... X X X X Extracts X X X X X X X X Extracts X X X X
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