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TMI Blog2018 (8) TMI 343X X X X Extracts X X X X X X X X Extracts X X X X ..... letes his part of commitment. Mere exercise of the option is not enough, it is only initial acceptance of right or proposal, which comes with certain commitments. As and when the commitment is complete, the proposal said to be accepted. The goal post of acceptance shifted until completion of the commitment which comes along with the scheme. As submitted by AR, the provisions of section 192 is applicable only on payment basis not on accrual basis. The value of the perquisite can be determined as per section 17(2)(vi) of the Act but is taxable only when the assessee makes the payment, in this case, allotment of shares. In case, it is accepted the contention of ld. CIT(A) that separation agreement should not be used to defer the tax liability, the company allots the shares and pays the withholding tax. Then, the company allots the shares without receiving full consideration on such shares. In case, Mr. Vikram fails to comply with the separation agreement, the company cannot cancel the allotment of shares. Therefore, the assessee has to safeguard its interest first. Coming to other argument that withholding tax should have been paid against the non-compete fee, in our view, the non-com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO are as under: "1. The Assessee should have withheld taxes on communication of desire to exercise shares by Mr. Vikram on 13 October 2011 itself - being the date of receipt of communication of exercise of ESOP from Mr. Vikram and not the date of allotment of shares, based on the following contentions: 2. Provisions of section 192 of the Act do not permit postponement of tax withholding till receipt of TDS amount from the employee. 3. Assessee was in possession of sufficient funds that were payable to Mr. Vikram to discharge the withholding tax on ESOP and therefore, the Assessee should have adjusted the amount payable against the withholding taxes suo moto. 4. Separation Agreement has been used by the Assessee for deferring the tax liability of Mr. Vikram. Relying on section 23 of The Indian Contract Act, 1872 and the ruling of the Mumbai Tribunal in the case of Hathway Investments (P.) Limited (104 DTR 217), the Ld. AO has held that Separation Agreement has been used to defeat the provisions of withholding tax and therefore invalid. 5. As per the Ld. AO, the Appellant should have withheld taxes on non compete fee on entering into the Separation Agreement i.e. 23 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns as under: " The provisions of Section 192 reads as under: "(1) Any person responsible for paying any income chargeable under the head "Salaries" shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year." • Accordingly, as per the provision, the withholding obligation arises when the employer makes any payment to the employee, which is chargeable under the head 'salaries'. • Section 17(2)(vi) of the Act, provides for the definition of "Perquisite", which is taxable as Salary and sub-clause (vi) to Section 17(2) reads as under: "the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assessee." • Further, the explanation to Section 17(2)(vi) defines security to include shares allotted pursuant to ESOP. ' • Therefore, as per the above provisions, a perquisite is earned/accrued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4/05/2012 after completion of certain conditions put forth by the assessee in the separation agreement. The essential conditions are : The non-compete fees payable upon fulfilment of commitments made by Mr. Vikram such as i) Non-disposal agreements entered for enforcing restriction on sale of shares to be allotted under Scheme 2007 ii) On receipt withholding tax on the allotment of shares. These are the essential conditions in order to safeguard the interest of the assessee. 9.1 In our considered view, the ex-employee has a right to exercise, once he exercises the option, the price of the shares are freezed. That means, the exercise of the option is only acceptance of the proposal as per the scheme 2007. The proposal comes with the obligation i.e. with conditions of such exercise of option. Once the option is exercised, the company which allots the shares has certain obligation on their part to safeguard their interest. The allotment cannot be completed without receiving the full price of the shares. In the given case, mere receipt of the price agreed is not enough but to receive the cost of shares exercised along with the withholding tax. These are obligations on the part o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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