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TMI Blog2008 (1) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment years 1997-98, 1998-99 and 1999-2000, warrants were offered to the eligible employees at Re. 1/- each by the Trust. They were issued to employees based on their performance, security and other criteria. Under the ESOP Scheme, every warrant had to be retained for a minimum period of 1 year. At the end of that period, the employee was entitled to elect and obtain shares allotted to him on payment of the balance Rs. 99. The option could be exercised at any time after 12 months but before expiry of the period of 5 years. The allotted shares were subject to a lock in period. During the lock in period, the custody of shares remained with the Trust. The shares were non-transferable. The employee had to continue to be in service for 5 years. If he resigned or if his services be terminated for any reason, he lost his right under the scheme and the shares were to be re-transferred to the Trust for Rs. 100 per share. Intimation was also given to BSE that 734500 equity shares were non-transferable and would not constitute good delivery. Till 13.9.1999 all the shares were stamped with the remark "non-transferable". Thus the said shares were incapable of being converted into mone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 Act must be made taxable before it can be regarded as "income". 7. During the assessment years 1997-98, 1998-99 and 1999-2000 there was no provision in the said 1961 Act which made the benefit by way of ESOP taxable as income specifically. It became specifically taxable only with effect from 1.4.2000 when Section 17(2)(iiia) stood inserted. 8. At the outset, we may state that in these civil appeals we are not concerned with taxability but with the value of a perquisite. 9. The question for consideration is whether "perquisite" could be said to accrue at the time when warrants were granted or at the time when the option vested in the employee or at the time when the options stood exercised or at the time when the lock-in conditions were removed or at the time when the shares were to be sold in the share market. According to the AO, the "perquisite value" was the difference between the total amount paid by the employee(s) consequent to the exercise of option amounting to Rs. 6.46 crores on which date the market value of the shares was in all Rs. 171 crores. Therefore, according to the AO, the benefit arose on the date when the options stood exercised. In this case we ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal rate for the purposes of this sub-clause." (emphasis supplied) 11. A warrant is a right without obligation to buy. Therefore, "perquisite" cannot be said to accrue at the time when warrants were granted in this case. Same would be the position when options vested in the employees after lapse of 12 months. It is important to note that in this case options were exercisable only after the cooling period of 12 months. Further, it was open to the employees not to avail of the benefit of option. It was open to the employees to resign. There was no certainty that the option would be exercised. Further, the shares were not transferable for 5 years (lock-in period). If an employee resigned during the lock-in period the shares had to be retransferred. During the lock-in period, the possession of the shares, which is an important ingredient of shares, remained with the Trust. The Stock Exchange was duly notified about non-transferability of the shares during the lock-in period. The shares were stamped with the remark "non-transferable" during the lock-in period. It was not open to the employees to hypothecate or pledge the said shares during the lock-in period. During the said period ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as "income". This is an important principle of taxation under the 1961 Act. Applying the above principle to the insertion of clause (iiia) in Section 17(2) one finds that for the first time w.e.f. 1.4.2000 the word "cost" stood explained to mean the amount actually paid for acquiring specified securities and where no money had been paid, the cost was required to be taken as nil. 15. In the case of CIT v. B.C. Srinivasa Setty [(1981) 128 ITR 294 (SC)] this Court held that the charging section and computation provision under the 1961 Act constituted an integrated code. The mechanism introduced for the first time under the Finance Act, 1999 by which "cost" was explained in the manner stated above was not there prior to 1.4.2000. The new mechanism stood introduced w.e.f. 1.4.2000 only. With the above definition of the word "cost" introduced vide clause (iiia), the value of option became ascertainable. There is nothing in the Memorandum to the Finance Act, 1999 to say that this new mechanism would operate retrospectively. Further, a mechanism which explains "cost" in the manner indicated above cannot be read retrospectively unless the Legislature expressly says so. It was not c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the assessment years 1997-98, 1998-99 and 1999-2000. During those years, the fifth anniversary had not taken place and, therefore, it was not possible for the assessee company to estimate the value of the perquisite during that period. It was not open to the Department to ignore the lock in period. Therefore, the Department had erred in treating the respondent herein as an assessee in default for not deducting the TDS at 30% as stated in the order of assessment. This is not the case of tax evasion. The assessee had floated the Trust because of the buy back problems, which were genuine problems in cases where the employees stood dismissed, removed or in the case of resignation in which cases they were required to return the allotment. 18. Estimation of TDS under Section 192 in the absence of clear provisions on valuation of "perquisite" in this case would not justify the Department in treating the respondent as assessee in default. Therefore, in our view, the Assessing Officer and the CIT(A) had erred in treating the respondent as defaulter for not deducting TDS under Section 192. Consequently, Section 201(1) and 201(1A) were also not applicable to the facts of this case an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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