TMI Blog2008 (8) TMI 403X X X X Extracts X X X X X X X X Extracts X X X X ..... r. 2000-01 as in the return filed by the assessee for the asst. yr. 1999-2000, the income on transaction had been offered for tax." 3. The assessee herein is an individual. At the relevant time he was working as managing director of M/s Zee Telefilms Ltd. During the year the assessee declared capital gain on sale of 66,668 shares of Zee Telefilms Ltd. When asked to substantiate, the following facts emerged: The employer, M/s Zee Telefilms Ltd. by its letter dt. 1st Feb., 1999 informed the assessee that in terms of the 1998 Employees' Stock option Plan (ESOP) of the company, the assessee was selected for issuance of 2,00,000 warrants which can be converted into 2,00,000 equity shares. Relevant portion of the letter is extracted hereunder: "We are pleased to inform you that the committee has selected you for issuance of 2.00,000 (two hundred thousand only) warrants which can be converted into 2,00,000 (two hundred thousand) equity shares subject to the following terms and conditions: 1. Each warrant will be converted into one equity share at a conversion price of Rs. 212 per share. 2. As per the shareholders resolution, you shall be able to convert the warrants into shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 999 3,28,60,000 1,55,000 ----------- -------- 4,24,00,000 2,00,000 ----------- -------- The company by its letter dt. June, 2002 confirmed the above facts of payment. It was also stated that 1/3rd of the total shares were tinder lock-in for a period of one year and another 1/3 were for lock-in period of two years. The company also confirmed that the date of exercise of stock option was 30th April, 1999, though the payment was made later. It was the contention of the assessee before the AO that since equity warrant certificates were issued on 1st Feb., 1999 and the terms of offer letter dt. 1st Feb., 1999 were accepted on 1st Feb., 1999 itself, the shares shall he deemed to have been acquired on 1st Feb., 1999. The assessee had taken the perquisite value in financial year relevant to asst. yr. 1999-2000 wherein the value of shares as on the date of acceptance, i.e., 1st Feb., 1999 being Rs. 386 per share and the offer price being Rs. 212 per share, difference was assessable in the financial year 1998-99 relevant to asst. yr. 1999-2000. The AO held that since the option was exercised on 30th April, 1999 and the payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rants into shares by paying appropriate price, only then the assessee will be entitled to receive the shares. As per the letter of offer of warrants, the assessee could not have converted the warrants into shares before 31st March, 1999 as the same was to be exercised within the period of three months from the announcement of financial results of the company for the year ending 31st March, 1999. It was also obligatory to make full payment for conversion of warrants into shares. Thus, unless and until the option is exercised and full payment is made, the assessee did not acquire any right merely by letter dt. 1st Feb., 1999. Letter dt. 1st Feb., 1999 is merely an intimation whereby it was communicated to the assessee that he was selected for issuance of warrants and which could be converted into shares subject to fulfilment of certain conditions. Thus, so long as these terms and conditions are not fulfilled the assessee does not acquire any right into the shares which were sold. The warrants do not carry any value unless and until the option of converting the warrants into shares is exercised and the full payment is made reliance was placed on the decision of Hon'ble Supreme Court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1999 resolved that by exercising option for allotment of shares, Mr. Vijay Jindal was allowed 3 months time for making payment for the shares allotted i.e. before 31st July, 1999. Thus, it is clear that the option was exercised only on 30th April, 1999 and not prior thereto as the same was not feasible even in terms of letter dt. 1st Feb., 1999. He accordingly pleaded that the order of the AO be upheld and that of the learned CIT(A) be set aside. 6. The learned counsel for the assessee, Shri Vinod Bindal, on the other hand, placed strong reliance on the decision of the learned CIT(A). He submitted that the circular issued by CBDT is binding upon all the officers working under it. The circular is very categorical wherein it has been opined that the perquisite value will be difference between market price of the shares on the date of acceptance of offer and the price at which the shares have been offered. Since the shares were offered by letter dt. 1st Feb., 1999 and which was accepted on that date itself, the perquisite value, if any, has to be taken with reference to 1st Feb., 1999 only. The assessee has already offered for tax the perquisite value in the financial year 1998-99 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es include all securities convertible into shares. The definition of securities as per cl. 2(h)(iii) under the Securities Contract (Regulation) Act, 1956 includes all rights or interest in securities which as per cl. (1) therein also includes shares. Thus, the offer of warrants convertible Into shares by the employer to the assessee on 1st Feb., 1999 meant offer for shares only in terms of the said Circular No. 710. It is also undisputed fact, that there is no discussion of the said definitions prescribed by the legislature and the regulator in the Infosys Technologies Ltd. judgment of the apex Court as there was no occasion also as the issue involved was different. Further, the said judgment of the apex Court and the decision of the Tribunal were delivered considering the amendments made in the statute for the purpose after 1st Feb., 1999 by the time the assessee had already exercised the option and the said circular was the only guidance for assessability of the said perquisite under the Act. 6.2 Shri Bindal further submitted that the said circular only would have governed the taxability of the ESOP benefit being binding on the Revenue and no action in any other manner could be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sition that the same should be construed as beneficial to the assessee. It has not been mentioned in the s. 17(2)(iiia) whether the date of exercise of option was the date when the option was exercised to obtain warrants or for conversion of warrants into shares. It has been shown that as per the mandatory ESOP guidelines Issued by SEBI, shares include warrants. Thus, by all means, when an employee exercises the option to take warrants convertible into shares, it amounts to exercise the option and further action is a process to obtain delivery of the said shares. Any subsequent amendment cannot influence an action taken in pursuance of a circular at the relevant time. Undisputedly, the entire amount realized by the assessee over and above the amount paid for ESOP has been assessed to income-tax and there is no underassessment at all. The dispute has been raised by the AO only in respect of perquisite quantum, the difference in which has been assessed as capital gains otherwise. 7. In reply, the learned Departmental Representative submitted that what was agreed by the company on 1st Feb., 1999 is mere eligibility of the assessee to apply for and being allotted shares at predetermi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts into shares upon full payment of conversion price. Till the option was exercised, the right, if any, was inchoate right and not in the nature of perquisite referred to in s. 17(2)(iiia) of the Act. For the first time, s. 17(2)(iiia) was introduced in the IT Act by Finance Act, 1999 w.e.f. 1st April, 2000 i.e. applicable for asst. yr. 2000-01. Sec. 17(2)(iiia) is extracted hereunder: "17 (2) 'Perquisite' includes- (i) ........ (ii) ........ (iii) ........ (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 def ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the condition of the future allotment of shares without any condition or encumbrance. A benefit which is prospective in nature cannot be taxed as income. Unless a benefit is in the nature of income or is specifically included by the legislature as part of income, the same is not taxable. The definition of 'income' is no doubt inclusive, However, it is not all embracing, The law seeks to tax 'what is included in income as taxable'. The words are not 'the following items shall be taxable.....' Thus, the precondition is that the receipt/benefit is treated as income first. The word 'income' though defined in an inclusive manner, should, therefore, be regarded as purposeful in its import. It would not, therefore, encompass every receipt/every benefit. In the instant case also, there was no present contemplation of unencumbered allotment of the shares. In fact, the shares could not be even obtained by the employees till the lock in period was over and other conditions were fulfilled. The 'benefit', if any, was only notional or contingent. Even otherwise, the 'benefit' was, if at all, with reference to the market value of the shares on any particular day, It is common knowledge that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntification of values, be determined by the AO in his own fanciful way. The employees would then suffer tax in varying manners although the benefit received by them would have been the same. It should, therefore, not have been left to the discretion of the AO to tax the perquisite. There has to be a certainty as well as uniformity in valuing and taxing a perquisite. It is for that reason that s. 295(2)(c) provides for the determination of the value of the perquisite on the basis of rules framed by the CBDT. Even s. 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 a manner defined by a statute. Unless, therefore, the value is ascertainable by a mechanism laid down in the statute, the same cannot be brought to tax. In absence of a mechanism for computation, the charge itself would fail. It is, therefore, clear that but for the specific definition of perquisite under s. 17(2) which included the benefit under ESOP, prior to insertion of such cl. (iiia) to s. 17(2). there was either no specific provision or there were all sorts of ambiguity and uncertainty in taxing the benefit under ESOP as 'perquisite'. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Contracts (Regulation) Act, 1956. We are unable to accept such contention. The equity warrant certificate issued to the assessee merely makes the assessee eligible to exercise option to obtain shares at a predetermined price. The warrants are not convertible into shares automatically. It requires the assessee to exercise his option which could have been exercised only after the financial results for the year ending 31st March, 1999 are announced and that too on payment of necessary amount. The definition includes the likes of shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature. The share warrants as understood under the Securities Contract (Regulation) Act or under the Companies Act are warrants issued in lieu of fully paid equity shares. Thus, warrants which make a person eligible to apply for and being allotted equity shares on exercise of option and on payment of sum cannot be considered as securities within the meaning of s. 2(h) of Securities Contracts (Regulation) Act, 1956; letter dt. 1st Feb., 1999 of the company is merely an invitation to make an offer and not an offer itself. Thus, the first offer has to come from ..... X X X X Extracts X X X X X X X X Extracts X X X X
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