TMI Blog2005 (12) TMI 218X X X X Extracts X X X X X X X X Extracts X X X X ..... pting that the perquisite value of the residential accommodation should be limited to Rs. 7,80,000 being the actual rent paid since the fare rental value was less than 10 per cent of the salary. (d) Rs. 1,20,000 being maintenance charges incurred by the employer. (e) Rs. 39,79,815 being the amount of net gain on sale of exercised stock options even though the learned CIT(A) had accepted that the AO is incorrect in holding that in business, any taxable income arising at the time of exercise, the gain of sale can be treated as income under the head salaries. (f) Rs. 1,16,130 being the amount of corporate club membership paid by the employer for the purposes of its business. (g) Rs. 50,000 alleged to be the perquisite value of electricity on estimated basis even though no amount was actually incurred by the employer and therefore no amount could be attributed as perquisite in view of the provisions of r. 3(d) of the IT Rules, 1962. 2. The learned CIT(A) has omitted to adjudicate upon ground No. 12 in the assessee's appeal before him against the charging of interest of Rs. 12,39,208 under s. 234B even though there was no direction for charging the same in the assessment order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mined the issue in the light of assessee's contention and finally held that deductions made from salary in respect of hypo tax, housing norm and auto norm are definitely linked up to these benefits provided in India at concessional rates and not free of charge as claimed by the assessee. He, accordingly, upheld the view of the AO. 5. Now, the assessee has preferred an appeal before the Tribunal and reiterated his contention raised before the lower authorities. Learned counsel for the assessee Mr. M.S. Syali, senior advocate, has emphatically argued that in accordance with the policies, annual base salary of the assessee was reduced by US $ 27218 equivalent to Rs. 10,20,084 on account of housing and US $ 3000 on account of auto norms and the assessee was entitled to receive only the net amount of salary. In lieu thereof, the assessee was provided housing and conveyance benefits in India and an aggregate sum of Rs. 8,12,661 (Rs. 7,80,000 + Rs. 32,661) which was duly included as perquisite for rent-free accommodation and furniture and Rs. 13,200 towards conveyance at the value prescribed under the IT Act r/w IT Rules. He further reiterated that the amount in fact is in the nature of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the IT Rules. He, therefore, added back the housing contribution and auto norms deducted from the salary, to the salary income of the assessee. Now, the question posed before us is whether the housing contribution and the auto norms initially reduced from the salary of the assessee can be termed to be as part of the salary in order to determine the taxable income of the assessee. The main thrust of the argument of the learned counsel for the assessee is that the salary of employees sent on overseas assignment vis-a-vis other employees in the home country is structured so as to ensure economic equity in the compensation of the employees and this parity in compensation is maintained through a book entry mechanism whereby the amount the employee would have reasonably incurred on housing and conveyance in the home country is estimated and reduced from the salary. It was also contended by Mr. Syali that the housing norm and auto norm represents the amount the expatriate employee would have paid towards housing and conveyance had he continued to render service in his own country. These amounts are reduced from the salary payable to the employee and in turn, the employer undertakes to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he salary does not make any difference to the overall taxable salary because of adding back the tax borne by employer as a perquisite. This was the main argument advanced by Mr. Dastur, the counsel of Mr. Jaidev Raja in that case as well as clear from para 5 of the Tribunal judgment. In order to demonstrate that reduction of 'hypo tax' salary and later inclusion of 'tax borne by employer' as a 'perquisite' does not affect the taxable income. Mr. Dastur gave the following illustration. If the employer pays out Rs. 1000 towards a benefit and the employee contributes Rs. 300 then employee's benefit was only Rs. 700. This according to Mr. Dastur is the principle to value a perquisite. If as per s. 17(2)(iii), payment of Indian tax was benefit, then the value of the benefit should be determined as per this principle. According to Mr. Dastur, whether it was salary or perquisite, it made no difference to the quantum. The Tribunal agreed with removal of element of hypothetical tax from the salary only because tax borne by the employer was subsequently included as a perquisite and it really did not make any difference in the salary taxable inIndia. This is evident from para 8 of the Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n its order leave no doubt that they had no objection to treating the case as of 'concessional tax perquisite' as an alternative solution. The finding that hypo tax can be reduced from the salary, being salary which has not accrued cannot therefore be extended to cover 'housing contribution' and 'auto norm', without keeping in view learned Tribunal's concern regarding the impact on overall tax liability in India. Further, in cases before Tribunal and learned CIT(A), the only issue was deductibility of hypo tax, hosing contribution and auto norm as a permissible deduction from salary income under the IT Act. The AO's in those cases had perhaps added back these amounts to the salary without taking into account the corresponding effect in calculation of perquisites. The assessee's reliance on learned CIT(A)'s order in employer's case is therefore not correct, as the entire context and full facts are different in his own case. 34 In assessee's case, if the 'housing contribution' and so-called 'auto norm' are reduced straightway from the gross salary, it results into a significant less tax liability inIndia. This shall be clear form workings in paras 4 and 5 of this order. Thus, the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... housing norms and the auto norms. As observed by the AO, it is also quite evident from the appointment letter which is the only document which contains service conditions of the assessee that the company would bear the housing expenses after deducting theUShousing norm (about US $ 16000) based on survey figures. Likewise, company would also provide automobile after a car deduction of US $ 3000 per year. It means housing and conveyance facilities were provided to the assessee at a concessional rate which brings the assessee's case within the purview of s. 17(2)(ii) of the Act. We have also carefully perused the order of the Tribunal in the case of Jaidev Raja and we find that the ratio laid down in that case by the Tribunal cannot be applied in the instant case because here we are dealing with the deduction of housing norms and auto norms which cannot be equated with the hypo tax. The hypo tax was deducted by the parent company to meet the tax liabilities if accrues in the home country But deductions on account of housing norms and auto norms cannot be called to have been made to safeguard any statutory liabilities accrued in the home country. 10. If the impugned issue is examined ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esidential accommodation at Rs. 5,51,719 after allowing a credit of housing contribution deducted by the parent company. The assessee preferred an appeal before the CIT(A) with the submission that the fair market rent can never be more than the standard rent and the standard rent has to be worked out as per the provisions of Delhi Municipal Corporation Act, 1957. In determining the rental data, the committee appointed by the assessor and collector has placed consideration on the prevailing rent in the same locality and based on the same, the rental value of the residential accommodation is Rs. 70,000. Since the assessee himself has offered the actual rent at Rs. 7,80,000 which is higher than the standard rent of Rs. 3,19,601, as such, the claim of the assessee cannot be rejected. The CIT(A) has carefully examined the contentions of the assessee and finally upheld the order of the AO after making the following observations: "I have carefully considered the contentions of the AO and the submissions of the Authorised Representatives, and I am of the view that valuation of perquisite of a rent-free accommodation as provided by s. 17(2)(ii), as already directed by me above, should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egard." 12. Aggrieved, the assessee has preferred an appeal before the Tribunal with the submission that while adopting the perquisite value of residential accommodation provided to the assessee, the AO has followed Expln. 2 to r. 3 which provides that fair rental value of an unfurnished accommodation shall be the rent which a similar accommodation will realize or the municipal valuation in respect of the accommodation, which is higher whereas in fact it is indeed trite law that the rent which a similar accommodation shall fetch cannot exceed the standard rent. In support of his contentions, he has relied upon the judgment of the apex Court in the case of Dewan Daulat Rai Kapoor vs. New Delhi Municipal Committee Anr. (1980) 122 ITR 700 (SC) and also in the case of M.A.E. Paes vs. CIT (1998) 146 CTR (Bom) 776 : (1998) 230 ITR 60 (Bom) in which the ratio laid down by the apex Court in the case of Dewan Daulat Rai Kapoor was followed. The learned counsel for the assessee further submitted that in view of the above decisions, before coming to the conclusion whether the rent paid is the fair rent, the Revenue authorities should have examined as to what would be the standard rent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , at a lesser monthly rent, for determining the perquisite value of accommodation, interest foregone be taken into consideration. In the present case, the employer of the assessee is deemed to have paid rent in excess of Rs. 65,000 per month as notional interest loss on the interest-free security of Rs. 1.6 crores. 14. Having considered the rival submissions and from a careful perusal of record, it is noticed that the residential accommodation which was given to the assessee was taken on lease by the employer at the monthly rent of Rs. 65,000 per month with interest-free security deposit of Rs. 1.6 crores. For determining the perquisite value of the residential accommodation provided to the assessee at free of cost or at a concessional rate, a specific procedure has been laid down in r. 3 of the IT Rules and according to its sub-r. (a) cl. (iii) the value of rent-free residential accommodation which is not furnished shall ordinarily be a sum equal to 10 per cent of the salary due to the assessee in respect of the period during which the said accommodation was occupied by him during the previous year but it is subject to the two provisos. The first proviso says that where the fair ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es residential accommodation with various facilities and to these farmhouses, Rent Control Act is not at all applicable. As such, there is no question of determining a standard rent as per Delhi Rent Control Act. For determining the fair rental value, one cannot lose sight of the interest-free security of Rs. 1.60 crores. We have also carefully perused the order of the Bombay High Court in the case of CIT vs. Shri Ashraf-Ur-Rehman Azimullah in which it has been held that the assessee being a director if occupied a flat of a company to whom interest-free deposits were advanced, at a lesser monthly rent, for determining the perquisite value of accommodation, interest foregone be taken into consideration. 16. In the light of aforesaid judicial pronouncements, we have examined the facts of the instant case and we find that ratio laid down by the apex Court in the Dewan Daulat Rai Kapoor and followed by the Bombay High Court in the case of M.A.E. Paes cannot apply in the instant case as it was not an ordinary building to which the Rent Control Act applies. In these type of residential accommodations, the fair rental value should be determined as per r. 3 Expln. (2) of the IT Rules and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the market or the sale price), be not treated as perquisite. In consequent, the assessee has submitted before the AO that the stock options were granted to the assessee by his employer at the average of low and high market prices prevailing on the New York Stock Exchange on the date of grant. Since there is no appreciable difference between the offer price and the prevailing market price on the date of grant, there cannot be any income arising therefrom. Whatever gain is realised on sale by the assessee, it is in the nature of capital gain which is not taxable inIndia. The claim of the assessee was examined by the AO in the light of definition of perquisite and salary given in s. 17(2) and 17(1) and 15 of the IT Act and the judgment of the Bombay High Court in the case of CIT vs. D.R. Pathak (1975) 99 ITR 14 (Bom) and the decision of Authority for Advance Rulings (AAR) reported at XYZ, In re (1998) 150 CTR (AAR) 504 : (1999) 102 Taxman 74 (AAR) and finally held that such a benefit flowing from the employment contract is obviously a perquisite within the meaning of s. 17(2)(iii) and 'salary' taxable under head A of Chapter IV of the IT Act by virtue of s. 17(1)(iv) r/w s. 15(b) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incidence, one on exercise and the other on sale, and each determining the head of income under which the same is to be taxed, the AO is incorrect in holding that in the absence of any taxable income arising at the time of exercise, the gains on sale can be treated as income under the head salaries because originally the shares so sold carne into the possession of the appellant by virtue of his employment. I am of the understanding that in case of salaried employees having income only from salaries, investments and any purchase are necessarily made from income from salaries, which is by virtue of employment. Accordingly, the action of the AO is upheld and the income from the stock option is held to be income from salary." 20. Aggrieved, the assessee has preferred an appeal before the Tribunal with the submission that the grant price was the actual fair market value of the shares on that date and the right granted to the assessee to exercise the option was also at the same price of US $ 55.38 per share. Thus, the assessee had an option to take the granted share only at the fair market value of the shares. Since there was no difference between the grant price and the exercise price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res opted for is income chargeable under the head salary or capital gain. During the financial year 1997-98, the applicable provisions existing then i.e. s. 17(2)(iii), s. 17(1)(iv) and s. 15(b) of the Act did not seek to expressly tax perquisite, if any, on exercise by an employee of stock option granted by an employer unless the same were obtained at a concessional rate. A more specific provision i.e. sub-cl. (iii)(a) of cl. 2 of s. 17 was introduced de novo by the Finance Act, 1999 w.e.f. 1st April, 2000 whereby the income represented by arising an exercise of stock option was exigible to tax as perquisite under the head 'salaries' at the value represented by the excess of fair market value over the exercise price and the excess of the sale price over the cost price equal to exercise price arising on sale of the shares, was liable to tax as income from 'capital gains'. This sub-cl. (iii)(a) was deleted by the Finance Act, 2000 w.e.f. 1st April, 2001 and a new proviso to sub-cl. (iii) of cl. 2 of s. 17 was inserted according to which the legislature expressed their intention not to tax the benefit accrued on exercise of stock option granted by the employers as per stock option sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no risk of loss attached to it because no one exercised the stock option if it is resulting in loss on the date of exercise of stock option. In stock option, there is no possibility of loss being incurred by the exerciser of the option because this option has been given to employees to be exercised on or before a certain date. On a particular date, within the stipulated period when the employee sees that he is at gain, he exercises that option and earns money on it, otherwise he does not exercise that option. Thus, a stock option in all cases is meant to give benefit to the employee over and above what he is getting from the employer and hence, it is perquisite as per s. 17(2)(iii) of the IT Act. 24. Having considered the rival submissions and from a careful perusal of the orders of the authorities below and documents placed on record in the light of judgments referred to by the parties, we find that the assessee was appointed as managing director and president of Whirlpool Asia Team T.W.L. located in Madras in India. This appointment letter was issued by the vice president and the managing director of Whirlpool South East Asia PTE a foreign based company and in its appointment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carefully perused the provisions of ss. 15 and 17 which deal with the definition of salary and perquisite. According to s. 17(2)(iii), the value of any benefit or amenity rented or provided free of cost or at a concessional rate by a company to an employee who is the director thereof is a perquisite and forms part of the salary as per s. 17(1)(iv) of the Act. 27. Turning to the case in hand, we find that the assessee has been granted a stock option without fixing a period of exercise as one of the incentives of his employment as per appointment letter appearing at page No. 27 of the compilation of the assessee. No doubt, the stock option was granted at the prevailing market price but the assessee was not under any obligation to exercise the same on the day of grant. He kept the offer with himself alive and exercised it when the market price of these shares has been increased to avail the pecuniary benefit. So, we have to see how much pecuniary benefit has been accrued to the assessee when he exercised the option because at the time of exercise, the assessee was only liable to pay market price of the shares on the date of grant. It means that the assessee has been given the share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing offered not by the employer, the Indian company, but by the American company which is the parent company of the Indian company. It is nobody's case that mere receipt of the option is perquisite and taxable in the year in which offer is received. Since the shares are to be issued and sold simultaneously, it is common ground that the amount will be taxable only when the option is exercised. If the option is never exercised, there would be no profit nor any accrual of benefit because the right of stock option given to the employees cannot be transferred. Therefore, the taxability of the amount to be gained by exercise of the option cannot be in doubt. It is a perquisite or profit arising out of employment. The only question is whether the amount will be taxable under the head 'salaries'. In this connection, it has to be noted that 'perquisite' and 'salary' have been specifically defined inIndia. Secs. 15 and 17 are couched in very broad terms. But, however broad the language may be, unless the relationship of employer and employee exists between the payer and the payee, the amount received by the payee cannot be taxed as salary. The amount may be profit or gain arising out of empl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence. This has been made clear by cl. (b) of s. 15. As regards the question whether the amount is paid for or on behalf of the employer, the object of making such offer can only be the desire to give a benefit to the employees and at the same time to enhance their interest in the company. The parent company has made such an offer to the employees of the subsidiary company only because it regards its subsidiary and itself as the same concern. It wants to reward and encourage the employees of the subsidiary company. Even if the subsidiary is treated as a separate juristic entity, the stock option offered by the American company must be treated to have been made for and on behalf of the Indian company. Otherwise, there is no reason why an independent and altogether separate American company will try to give encouragement to the employees by paying salary and giving other benefits. If some other company pays additional benefits to the employees, then it must be held to have been done for and on behalf of the employer. Moreover, in a case like this the corporate veil will have to be lifted to see the real nature of the transaction. The only possible explanation for the offer to stock op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. If the facts of the impugned case are examined in the light of aforesaid judgment of the Authority of Advance Rulings and relevant provisions of s. 17(2)(iii) of the Act, we would find that stock option was granted to the assessee by virtue of employment contract as part of composite package. At the time of grant of option it was the offer to the assessee and the benefit only accrues to the assessee as and when he accepts/exercises the offer/option. Admittedly, the option was exercised in the financial year relevant to the impugned assessment year and at the time of the exercise; one has to work out the pecuniary benefit accrued to the assessee. In the instant case, assessee was benefited with the pecuniary benefit of Rs. 39,79,814.5 as worked out by the AO as per r. 115 of the IT Rules inasmuch as at the time when he exercised the option and became the owner of the shares, the assessee was required to pay a price of shares prevailing at the time of grant. Since the shares were acquired by the assessee at a concessional rate, this pecuniary benefit accrued to the assessee is a perquisite and forms part of the salary Having exercised the option of shares, assessee became the ow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income of the appellant. 12.4 I have considered the arguments of the appellant carefully. It appears that the premises have no power connection or the same has illegal connection. It is also possible that the premises is maintained on a separate personal generator. In the circumstances, the AO has been quire reasonable in estimating the power cost are Rs. 50,000. The action of the AO is upheld" Now, the assessee is before us and reiterated the submissions. In support of his contention, he has also placed reliance upon a certificate issued by the employer. 31. Learned Departmental Representative, on the other hand, has relied upon the order of the CIT(A). 32. Having considered the rival submissions, we are of the view that it is not a case of the assessee where no electricity or water is provided to it by the employer. Once the facilities are provided to the assessee through any means, some perquisites are to be determined and added in the hands of the assessee. 33. We have carefully perused the order of the CIT(A) and find that he has properly adjudicated the impugned issue. We, therefore, uphold his order. 34. Apropos ground No. 2, it is noticed that this ground has n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stand of the appellant that the amounts reduced were not a set off against the perquisites provided inIndia, but were an ad hoc reduction towards what would have been due had the employee continued to work in the home country. 4. The AO took note of the fact that in cases of other expatriates coming fromUSA, housing norm has been adjusted against the perquisites provided inIndiavoluntarily. According to him "tax equalization is a concept common to expatriate contracts and principles are the same. He, therefore, held that housing norm and auto norm are a part of salary and a contribution by the employer towards perks provided. In effect, the AO holds that the amounts of auto norm and housing norm reduced from the salary in the first place have accrued to the appellant and were actually given up as the employee's contribution towards perquisites provided to him inIndia. 5. The CIT(A) upheld this argument in para 6.7 of his order which has been challenged before us. 6. The matter was initially heard by the Bench on11th Sept., 2002,13th Sept., 2002and16th Sept., 2002. Therefore, at our instance written submissions from the appellant, were filed onthe 18th Feb., 2003and in respons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us is whether the housing contribution and auto norm initially reduced from the salary of the assessee can be termed to be a part of the salary to determine the taxable income of the assessee." 11. However, while deciding the issue, certain assumptions, not borne out from records have been made. The notional reduction of amounts towards housing and auto norms indicates that: "the assessee was supposed to pay towards housing norms and auto norms had he continued to render services in his home country against the housing accommodation and conveyance provided to the assessee by its employer". 12. The supposition that, had the employee continued to stay inUSAthe employer was to provide the housing accommodation and conveyance does not emerge from either the order of the AO or the CIT(A) or the paper book or the written submissions. It appears that on this erroneous promise, brother JM supposed that "according to the terms of the employment, the assessee has been provided a free housing accommodation and conveyance against deduction of housing norms and auto norms, which was supposed to be deducted had he continued to render service in his home country against residential accommod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xt of hypo tax) comes to say Rs. 1500, then as per tax equalization policy, the company will compensate the assessee (employee) for his tax liability in India not on Rs. 1500 but at Rs. 1000 (1500-500). The Rs. 500 being the tax that the employee would have borne had he continued to work in the home country. The Bench went on to observe that it is not proper to say that Rs. 1500 has accrued to the assessee, the exchequer will no doubt receive Rs. 1500 as tax but, only Rs. 1000 has accrued to the assessee as salary. Hence, it was perfectly justifiable to remove the element of Rs. 500 from the total income as it never accrued to the assessee. 16. In para 11 of the decision at p. 50 of the paper book, it is observed: "what perhaps misled the Departmental authority is, the way it was presented to them. The assessee in his computation has added Rs. 50,00,000 as income and deducted Rs. 15,00,000 from the income. Thus, the Departmental authorities thought that the assessee is claiming a deduction of Rs. 15,00,000 from the total income. In fact, he is not claiming deduction of Rs. 15,00,000, but he is only showing that out of the total tax liability of Rs. 50,00,000, Rs. 15,00,000 will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opriate that reduction towards the perquisites provided inIndia. On the other hand, the appellant submits that there was no compensation, given to the employer towards perquisites provided inIndia. He has actually received less by virtue of employment contract, which admittedly is on record. Hence, his salary is a net amount after reduction of the aforesaid amounts. This, precisely is the dictum of the Mumbai Bench. Factually, nothing survives once the Department accepts the stand of the employer, which is nothing but a mirror image. 19. Following the decision of the Mumbai Bench and keeping in view the fact that the Department has accepted the stand of the appellant in the hands of the employer after further examination, the order of the CIT(A) in the case of the employer having become final, the reduction of housing norm and auto norm only result in the base salary being reduced. It does not represent sums accruing to the appellant first, which in turn have been appropriated towards perquisites provided to the appellant inIndia. Accordingly, addition sustained by the CIT(A) is deleted. Ground No. 1(e): 20. The appellant was granted a stock option in accordance with a scheme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment. There is also no dispute that the exercise price was same as the grant price hence resulting in no gain/loss on exercise. There is no dispute regarding the taxability of the gains on sale of such shares as acquired by exercise of the stock option entitlement. In my view the only question is whether such gains on sale are taxable as income from salaries as contended by the AO or as income from capital gains, as contended by the appellant. Considering that there are clearly two points of tax incidence, one on exercise and the other on sale, and each determining the head of income under which the same is to be taxed, the AO is correct in holding that in the absence of any taxable income arising at the time of exercise, the gain on sale can be treated as income under the head salaries because originally the shares so sold came into the possession of the appellant by virtue of his employment." 24. On appeal before us, the mainstay of the argument before the Bench was the decision of the House of Lords (and not of Chancery Division as noted by the Hon'ble JM) in the case of Abbott vs. Philbin (Inspector of Taxes) (1962) 44 ITR 144 (HL). The point of issue was whether the taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r his option, he would have made precisely the same profit on each share-the difference between 68s.6d., the price under the option, and the then market price. But he would have been taxed very differently in respect of each parcel, the tax depending on the market price at the date when he had acquired it, for it is not suggested that further appreciation after shares have been allotted can be taxed. Moreover, let me suppose that the option had been exactly the same except that it was to last for ten years whether the appellant remained in the service of the company or not. It could hardly be that change so completely altered the nature of the option as to change the basis of taxation and make the granting of the option, and not the issue of the shares, the perquisite. If, then, it was exercised years after the servant had retired, what would the position be: would the issue of shares then be the perquisite, and for what year of assessment would it be a perquisite? There would be no assessment under Sch. E for the year in which the shares were issued because the servant had retired. I realize that one ought not to be surprised at anything that happens under the IT Act, but neverthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny sense arises from the office. It will be due to numerous factors which have no relation to the office of the employee, or to his employment in it. The contrast is plain between the realized value, as it has been called, of the option when the shares are taken up though the realization falls short of money in hand and the value of the option when it is granted. For the latter is nothing else than the reward for services rendered or, it may be, an incentive to future services. Unlike the realized value it owes nothing to the adventitious prosperity of the company in later years. On this ground also I should reject the claim of the crown." 27. By majority view comprising Lord Reid, Lord Radcliffe and Viscount Simonds, the House of Lords held that the difference between the option price and the market value on the date of offer of option constituted a taxable perquisite at the time the option was accepted. 28. In the present case, it is not disputed by the AO and has been accepted by the CIT(A) that the grant/exercise price was the average of the NYSE as on the date of grant. Therefore, in view of the ratio in Abbott's case, the difference between the option price (viz., grant/e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t as if an offer was made, there was no acceptance on behalf of the appellant and yet, the offer continued to be available. The offer had to be accepted. Once the offer is not accepted, the appellant or any other employee, for that matter, ceases to participate in the stock option scheme and cannot later avail the shares at the price offered. Thus, the appellant acquired a tangible right in the shares on the date he accepted the offer. 30. Whether this acceptance is a perquisite and what will be its value is no more res integra. The answer is evident in the decision of Abbott vs. Philbin cited before the Bench. The decision categorically affirms that acceptance/vesting of the offer is a perquisite and the value thereof is the difference between the market value as on the date of the offer as reduced by the value at which it has been offered. It further holds that only the difference between the market value and the value at which the option vests emanates from employment. Later accretion cannot be reelated back to the employment Even though, an interregnum exists between the acceptance of option and actual acquisition of shares on exercise thereof, offer is not valueless or somet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the cost at which it has acquired and the sale price is liable to capital gains tax. There is no necessity of comparing the market price as on date of exercise with market price as on the date of sale to hold that there are no capital gains. Capital gains have to be worked out on the sale consideration less the cost of acquisition and cost of acquisition in this case is a price at which the offer was accepted. 35. Thus, there being no impediment to acceptance of the dictum of Abbott vs. Philbin the appellant deserves to succeed on this ground. REFERENCE UNDER S. 255(4) OF THE IT ACT, 1961 1. Whether deduction on account of housing norm and auto norm made by the employer from the base pay of the assessee in lieu of free housing and transport facility provided in India as per the terms of employment, falls within the definition of perquisite enshrined in s. 17(2)(iii) of the Indian IT Act and forms part of the base pay and is exigible to tax? 2. Whether a profit or benefit earned/acquired by the assessee on account of exercise of stock option, earlier granted, in terms of his employment on subsequent dates and its sale is a perquisite as per provisions of s. 17(2) of the In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was a dispute about the conversion of US dollars into Indian rupees. Whereas assessee had converted the salary at the average exchange rate, the AO calculated the salary drawn in Indian currency at the exchange rate prevalent on the date of payment. The issue relating to conversion has been decided by the CIT(A) in favour of the Revenue. This fact would be relevant in computation of the perquisite value at the rate of 10 per cent of the salary, if applicable. The assessee had also offered the perquisite value in respect of the free residential accommodation as well as free car provided to him inIndia. The assessee worked out the value of perquisite in respect of residential accommodation as under: 'Salary Rs. 1,16,92,572 Rent paid Rs. 7,80,000 10 per cent of salary Rs. 11,69,257 60 per cent of salary Rs. 70,15,543 Taxable value taken is actual rent paid i.e., Rs. 7,80,000 being lower. It is noteworthy that the assessee has calculated the salary of Rs. 1,16,92,570 on the following basis: Net salary drawn Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oreover, the said amount has also been taken into account in working out the salary received by the assessee for the purposes of computation of perquisite value at the rate of 10 per cent. Therefore, the real controversy involved in this appeal is as to whether the deduction made by the employer on account of housing norm is includible in the taxable salary of the assessee for intents and purposes including determination of perquisite value of the residential accommodation and free car facility. 6. In respect of the car, the assessee had offered the value for taxation at Rs. 1,100 per month. On the other hand, the AO calculated the perquisite value at Rs. 1,10,505 under r. 3(c)(ii) but assessed it at nil by giving credit for the reduction made by the employer in the salary of the assessee. The working is given by the AO in para 5 of the assessment order which is reproduced hereunder: "5. Valuation of car with driver: The relevant clause in the employment contract and the discussion in paras 3.2 and 3.3 of this order make it very clear that the car has been provided by employer at a concessional rate after deduction of US $ 250 per month totally to US$ 3;000 for full year. Recov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere 16 cars owned by the company during the year 1997-98. The above facts show that the total expenditure on this car, which is exclusively for official and personal use by the managing director Mr. Garrick D'Silva is: Petrol and maintenance expenses Rs. 1,84,176 Driver's salary Rs. 60,000 ------------ Rs. 2,44,176 ------------ In addition there would be wear and tear which can be estimated to be at least Rs. 3 lakhs per annum assuming straight line depreciation over 10 years. Since no log book is said to be maintained, it is not possible to work out the exact amount attributable to personal use. However, r. 3(c)(ii) requires a 'reasonable attribution' and not 'exact attribution'. In view of the fact that the assessee has agreed in the employment contract for a deduction of US$ 3,000 per annum on a monthly basis it is clear that the benefit derived from this amenity can never be below this, i.e., Rs. 1,10,505. Considering the overall expenditure on this vehicle, this sum is only about 1/5th of the actual running, maintenance expenses and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree for recovery from his salary at an amount higher than the benefit derived." As already pointed out, the CIT(A) has upheld the order of the AO in working out the perquisite value and in including the reductions made by the employer on account of auto norm and housing norm as part of the salary. 7. Whereas learned counsel for the assessee sought to support the view expressed by the learned AM, the learned Departmental Representative sought to support the view expressed by the learned JM. At this stage I am tempted to say that the view expressed in regard to the first point of dispute appears to be attractive at first sight but it loses its lustre when one peeps deep into the employment agreement and the provisions of the Act. It has been pointed out earlier that in this case the value of perquisites determined by the AO in respect of free residential accommodation and free car facility provided to the assessee is less than the value disclosed by the assessee. Therefore, before I consider the correctness of the method adopted by the AO in determining the perquisite value of rent-free accommodation and free car, it is more important to determine the component of salary for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as "where the engagement is for a period permanent or substantially permanent in character and is for other than manual or relatively unskilled labour, the remuneration is generally called a salary". In the case of Gestetner Duplicators (P) Ltd. vs. CIT (1979) 8 CTR (SC) 371 : (1979) 117 ITR 1 (SC), their Lordships of the Supreme Court held that in ordinary parlance, salary connotes remuneration or payment for work done or services rendered. 10. It may be pertinent to mention that the Whirlpool Corporation,USAis an employer-company in the case of the assessee. It has a tax equalization policy in respect of its employees assigned to overseas location. The policy is so designed that the employee is neither put to any disadvantage or advantage as a result of his posting outsideUSAin respect of payment of income-tax. The policy and scope being relevant is reproduced as under: "Policy and Scope: When an employee is assigned to an overseas location, the company policy is designed so that the employee should pay a similar income-tax to that which he/she would have paid had the employee remained in theUS. To achieve this objective, the company has adopted a tax equalization prog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assignment inIndiaor overseas location. It may be pertinent to mention that as per the terms and conditions of employment, the company had assured the assessee that after completion of three years' working inIndia, he would be considered for assignment outsideIndia. In my considered view the treatment given by the AO to the deductions on account of housing norm and auto norm is not justified more so when different treatment has been given to the deductions on account of hypo tax. In my view, deduction on account of hypo tax and housing norm and auto norm deserves same treatment. 12. Apart from the facts stated above, another factor which assumes importance is that in the case of Whirlpool India Holdings Ltd. (the employer-company), the dispute was raised by the AO for the purposes of provisions of ss. 201 and 201(1A) of the IT Act, 1961 claiming that there was short-deduction of tax from the salary paid to the assessee. The AO had invoked the aforementioned provisions of the Act in the case of Whirlpool India Holdings Ltd. on the ground that in working out the tax deductible at source, the deductions on account of hypo tax in respect of housing norm and auto norm had not been in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of one assessee, then it is not open to the Revenue to challenge its correctness in the case of other assessees, without just cause." 14. Another factor for deciding the issue is the treatment of perks in the form of residential accommodation and car facility inIndia. The AO having held that deduction of pay on account of housing norm and auto norm was part of salary received for the purposes of taxation inIndiafurther held that the residential accommodation and car facility have been provided to the assessee at concessional rates. The AO has accordingly calculated the perquisite value on the same basis. The question that requires to be considered is as to whether the perquisite value is to be determined on the basis of free residential accommodation and free car facilities or on the basis of such facilities having been provided at a concessional rate. It has been pointed out earlier that in this case, the value of perquisites determined by the AO in respect of the residential accommodation and car facility provided to the assessee is less than the value disclosed by the assessee. So, however, the determination of the perquisite value of the aforementioned facilities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereinafter referred to as employee) or to any member of his household by reason of his employment shall be determined in accordance with the following sub-rules, namely:.......... (b) The value of residential accommodation provided at a concessional rent shall be determined as the sum by which the value computed in accordance with cl. (a), as if the accommodation were provided free of rent, exceeds the rent actually payable by the assessee for the period of his occupation during the relevant previous year.' As a result of this decision, in my view, the AO will be required to redetermine the perquisite value of free residential accommodation and free car facility provided to the assessee. The application of r. 3(c)(ii) and r. 3(b) by the AO by treating the provision of residential accommodation and car facility as having been provided to the assessee at concessional rates is not justified insofar as in the terms of employment it has been clearly provided by the employer-company to the assessee that the latter would be entitled to free residential accommodation and free car facility in India. Since the assessee was not entitled to the free residential accommodation and free car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... --------------------------------------- From the details furnished by the assessee it was observed by the AO that there was a difference between the sale price of shares and the purchase price, and that the assessee had not disclosed any perquisite value in respect of the gains on exercise of stock options. When asked to explain as to why the benefit derived by the assessee by exercise of stock option may not be assessed as a perquisite within the meaning of s. 15 r/w s. 17 of the Act, it was claimed that the right to purchase the shares was granted to the assessee at the average of high and low price at New York Stock Exchange on the date of grant and, therefore, there was no difference between the grant price and the market price. Accordingly, there was no benefit derived by the assessee by the grant of stock options. It was pointed out that the profit derived by the assessee on the sale of shares granted to the assessee was on the sale of capital asset resulting in capital gains which in the case of the assessee was not taxable inIndia. The AO rejected the claim of the assessee with reference to the provisions of ss. 15, 17(1) and 17(2) of the IT Act, 1961. The AO referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... difference between the cost at which the assessee has acquired the shares and the sale price is liable to capital gains tax. 19. Before me, it hardly needs to be mentioned that the learned counsel for the assessee sought to support the view expressed by the learned AM and the learned Departmental Representative, on the other hand, sought to support the view expressed by the learned JM in regard to this issue. 20. I have given my thoughtful consideration to the rival contentions. The assessee derives income from salary and it is not disputed that it is by reason of his employment with Whirlpool Corporation,USAthat the assessee is entitled to the stock options scheme. All employees of Whirlpool Corporation,USAare not entitled to stock options but the company through its human resources department provides the list of employees who are eligible to the grant of stock options from time to time. It is not in dispute that assessee was eligible to the stock options which were granted in the years 1994, 1995 and 1996. It will be relevant to refer to the scheme of stock options copy whereof is placed on record. As per the said scheme, the shares are granted to the selected employees as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... additional shares, or a short-term loan.Vested options may be exercised at any time by contacting the stock option administrator at 800-446-2574, ext. 3973, or 616-923-3973. The option exercise cannot be processed until Whirlpool receives both payment and a completed exercise form. You may be required to pay taxes in addition to the option price, depending on the country you reside in. The stock option administrator will calculate the amount of taxes due in addition to the option made. The exercise form may be faxed to the administrator." As is evident from the scheme of stock options, as indicated above, there are three stages for acquisition of the stock options-one is the eligibility, second is the grant of option and the third is the exercise of the option. Once the option is exercised by an employee, he acquires the shares at a predetermined price. There is a fourth stage in the scheme of stock option, i.e., the sale of shares, which according to my understanding of the scheme, is not compulsory. The question that is involved in this appeal is the stage at which the benefit derived by the assessee by the stock option is taxable under the provisions of the IT Act, 1961. As al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of AAR in P. No. 15 of 1998, directly in respect of s. 17(2)(iii) of the IT Act, 1961, and even if one were to choose between the two decisions, the decision of the AAR shall have to be preferred to the decision of the House of Lords. Moreover, the provisions of the IT Act, 1961 are not pari materia with those of provisions of United Kingdom In any case, as pointed out earlier, it is not a matter of choice between the decision of the House of Lords and the decision of AAR insofar as the provisions of s. 17(2)(iii) of the IT Act, 1961 were not the subject-matter of decision before the House of Lords. On the contrary, the Hon'ble AAR has decided the issue relating to the taxability of the benefit derived by an employee in respect of the stock options on the basis of provisions of s. 17(2)(iii) and, therefore, in my considered view, the decision of the AAR is required to be followed in preference to the decision of the House of Lords. 21. It is also pertinent to mention that the Finance Act, 1999 had inserted s. 17(2)(iiia) to bring clarity about the taxability of the benefits arising to an employee as a result of allotment of shares under the Employees' Stock Option Plan. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r that the omission of s. 17(2)(iiia) will be applicable only in respect of options exercised or allotments made after31st March, 2000. In other words, the amendment made in s. 17 does not go in favour of the assessee but the intention of the legislature as explained by the CBDT is to the contrary. The intention of the legislature not to tax the benefit w.e.f. 1st April, 2000 being clear, such benefits are taxable as having accrued to any salaried employee before 1st April, 2000. The very fact that s. 17(2)(iiia) was inserted to bring clarity regarding the taxation of stock options also supports the view expressed by the Hon'ble AAR that the benefit accruing to the salaried employee on the date of exercise of the stock option was assessable to tax as a perquisite under s. 17(2)(iii). Sec. 17(2)(iii) may be quoted hereunder for the sake of ready reference: "17. For the purposes of ss. 15 and 16 and of this section,- (1) 'Salary' includes- (i) to (viii)........ (2) "perquisite" includes- (i) (ii)......... (iii) the value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases- (a) by a company to an employee who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s by reason of his employment and such benefit is liable to tax under s. 17(2)(iii) upto31st March, 2000. It may be pertinent to mention that assessee has the option of purchasing the shares after the expiry of one year from the date of grant. The assessee may acquire the shares at a particular time and may hold the shares in order to derive more benefits as a result of an appreciation of the value in the market. If the employee after exercising the option of purchasing the shares holds the same for a particular period, the gain on the sale of shares on subsequent dates will result in capital gain (difference between the sale price and price on the date of exercise of the option). The benefit accruing to the assessee on the date of exercise of the option would be taxed under s. 17(2)(iii). (The difference between the price on the date of exercise of the option and the predetermined price). The confusion that appears to be created in this case is that the date of exercise of the option and the date of sale is same and there is no difference between the price prevalent at the time of exercise of the option and the sale of shares. Therefore, there is no capital gain that accrues to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be regarded as a benefit or amenity granted or provided to him free of cost or at concessional rate for the purposes of this sub-clause. (iiia) the value of any specified security allotted or transferred, directly or indirectly, by any person free of cost or at concessional rate, to an individual who is or has been in employment of that person: Provided that in a case where allotment or transfer of specified securities is made in pursuance of an option exercised by an individual, the value of the specified securities shall be taxable in the previous year in which such option is exercised by such individual. Explanation.-For the purposes of this clause,- (a) 'cost' means the amount actually paid for acquiring specified securities and where no money has been paid, the cost shall be taken as nil; (b) 'specified security' means the securities as defined in cl. (h) of s. 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and includes employees' stock option and sweat equity shares; (c) 'sweat equity shares' means equity shares issued by a company to its employees or directors at a discount or for consideration other than cash for providing know-how or mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al analysis, whereas I agree with the learned AM in regard to the first point of difference of opinion, I agree with the learned JM in regard to the second point of difference of opinion. I render my opinion as a Third Member on both these points of difference as under: First point of difference: The deduction on account of housing norm and auto norm made by the employer from the base pay of the assessee in lieu of free housing and transport facility provided in India as per the terms of employment is in fact a reduction in the pay and, therefore, not liable to tax in India. The said reduction from the base pay will also not form the base for determination of the perquisites. Second point of difference: That the profit/benefit (difference between the price of shares at the time of exercise of the option and the predetermined price) derived by the assessee on account of exercise of stock options granted to the assessee in terms of his employment is liable to tax [as perquisite under s. 17(1)(iii), of the IT Act, 1961] and that there was no capital gain derived by the assessee on the sale of shares as the sale price and the price on the date of exercise of the option was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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