TMI Blog2008 (3) TMI 407X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) grossly failed in appreciating the process of public issue of shares and consequent application of the same in asses sees case. (v) The CIT(A) has grossly erred in appreciating the fact that even in the case of a public issue, the legal ownership is established as soon as the shares are allotted to the share applicant and not either from the date of the payment for the application money or on the date of receipt of the share certificate." 3. During the previous year relevant to the assessment year under consideration, the assessee was working as senior manager in I-flex Solution Ltd. Erstwhile company was named as Citycorp Information Technology Industries Ltd. (CITIL). The assessee was granted ESOP during the course of employment by CITIL. During the financial year 2003-04, the assessee exercised the option and sold the shares and thereby earned capital gain to the extent of Rs. 1,05,61,252. The assessee treated such capital gain as long-term capital gain. According to the AO, the assessee exercised the option given under ESOP in the financial year 2003-04 and, therefore, he became the complete owner of the shares during the financial year 2003-04 and shares have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iary interest in shares. As per the AO, the assessee acquired full legal ownership of the entire ESOP of shares on 1st Jan., 2003. (3) In the document referred to in para (2) above, it is mentioned that beneficiary ownership does not give the assessee complete right to title and interest. (4) The AO called for information from the company with whom the assessee was employed. As per the information received, it is clear that the assessee exercised option for 8,000 shares on ESOP Scheme, 1998 and paid Rs. 50 per share on 29th July, 2003. Rs. 225 per share was paid on 25th Aug., 2003 for 1,800 shares. The strike price was only paid on 3rd July and 3rd August. The assessee acquired complete right of the title and interest for shares of ESOP-1998 Scheme from the date of payment. Thus, the assessee has not held the shares for more than 12 months. (5) The assessee submitted that the transfer of legal ownership under ESOP is as under: 1-1-1999 10% 200 shares 1-1-2000 15% 600 shares 1-1-2001 20% 1,600 shares 1-1-2002 25% 2,000 shares ------------ 4,000 shares ------------ The assessee sold 10,000 (s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose of assessing the income, beneficiary ownership is only considered. The learned Authorised Representative relied on Circular No. 768, dt. 24th June, 1998. From the circular, the date of transfer and period of holding of securities held in Demat form are to be considered on the basis of the date on which the beneficiary becomes a beneficial owner of securities. The CBDT Circular No. 704, dt. 28th April, 1995 [(1995) 125 CTR (St) 86] clarified that the holding period should be determined on the basis of date of transfer. In case securities are transacted through stock exchange and transactions are followed up by delivery of shares, the purchase consideration cannot be made a criteria to determine the ownership of shares allotted under ESOP. The learned Authorised Representative drew our attention to para 4 of the document mentioned as CITIL ESOP-1998-An overview. It was submitted that the assessee was given three options to acquire full legal ownership in the phased manner. The AO himself has accepted that the assessee became full legal owner on 1st Jan., 2003, though payment was not made by that date. The beneficiary ownership was converted into legal ownership on the following d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employees of the company nominated by the board to receive an offer of shares in accordance with the terms of the plan to enable them to subscribe to the said share. Company shall give an interest free loan to the trustees. The loan was repaid by the trustees to the company in instalments within one month after the receipt of the pro rata cost of the relevant shares from the selected employee. The offer to the selected employee is to be made in writing and shall be: (a) of 100 shares or multiples thereof; (b) personnel to the selected employee and not assignable; (c) accepted in whole or in part within 30 days of its being made and if accepted in part shall be accepted for as many number of shares or multiples thereof as fixed by the committee from year to year or any multiple thereof and any offer which is not so accepted shall lapse at the expiration of the said period; (d) coupled with an obligation to repay that part of the loan from the company as had been utilized for the acquisition of the shares accepted by the employee. 10. On the acceptance of the offer of shares in whole or in part, selected employee will undertake to pay within 10 days from the date of accept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of offer On 1st Jan., 2003 : 30% of shares mentioned in your letter of offer Thus; on 1st Jan., 2003, you can acquire full legal ownership of the entire ESOP shares allocated to you under ESOP-1998 provided you continue to be in the employment of the company at that time and exercise the option by paying the strike price. What is the meaning of 'beneficiary ownership'? How is it different from full legal ownership? Beneficiary ownership means that the shares have been allocated to you under certain conditions, and are being held by the trust on your behalf. However, you do not have the full ownership of the shares as yet, and you cannot sell or use them as security, or place a lien on them. You will, however, be entitled to receive the dividends (net of all taxes, costs, etc., if any) that may be declared by the company on its equity shares from time-to-time, even while you have only beneficiary ownership. Once you acquire full legal ownership, you may sell the shares, place a lien on them, etc., provided you have actually exercised your option by purchasing these shares from the trust by paying the strike price. Do I need to pay for the share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -1998 on the date of separation. Hence, the full legal ownership is allowed in the phased manner. However, on 1st Jan., 2003, the assessee acquired full legal ownership of the entire ESOP shares. It does not mean that the full legal ownership in respect of all the shares is available from 1st Jan., 2003. It is clearly mentioned in answer No. 4 that the assessee is entitled to the full legal ownership of the shares in the phased manner and has been given three options as and when he becomes full legal owner in the phased manner. After becoming full legal owner of the shares, the trust cannot enjoy the profits from sale of shares and it can only be entitled to recover strike price, which becomes payable by the assessee on account of becoming full legal owner on the date. 16. The assessee owes a debt to the trust as and when he becomes full legal owner in the phased manner. The worthy Supreme Court in the case of Kesoram Industries Cotton Mills Ltd. vs. CWT (19(6) 59 ITR 767 (SC) observed as under after considering a number of judgments: "We have briefly noticed the judgments cited at the Bar. All the decisions agree that the meaning of the expression 'debt' may take colour from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... title to the goods passed. Applying test in the instant case, it is seen that intention of the party was to convert the beneficiary ownership into full legal ownership in the phased manner and the assessee will have to be held as full legal owner in respect of shares in the phased manner. CWT vs. C. Rai 1978 CTR (Bom) 273 : (1979) 119 ITR 553 (Bom) The Bombay High Court held that the expression 'any share held by the assessee' in s. 5(1)(xx) of WT Act should be interpreted as meaning 'shares' possessed of, owned by or belonging to the assessee and it is not necessary that the shares should stand in the name of the assessee in the company's share register. Hence, for considering the period, for which the shares are held it is not necessary to see that such shares are in the name of the assessee in the company's share register. CIT vs. All India Tea Trading Co. Ltd. (1979) 117 ITR 525 (Cal) The Calcutta High Court held that the words 'held by an assessee' in the definition of capital asset included physically, actually, constructive and also symbolic possession of property of any kind. In the instant case, the employee was having constructive possession of shares in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y trustees and direct assessment of beneficiary were made. Since the direct assessments were made on beneficiary, therefore, the deposits were held to be exempt under s. 5(1)(xvi) of the WT Act on the ground that such deposits are held by the beneficiaries. 18. It will also relevant to note that Revenue has taxed the dividend income in the hands of the assessee, as dividend income. Once it is herd that the assessee is entitled to dividend income, then the assessee will have to be considered to have held the shares from the date when he became the full legal owner. In view of the discussion above, the assessee is full legal owner in a phased manner as under: On 1st Jan., 1999 - 10% of shares 1st Jan., 2000 - 15% of shares 1st Jan., 2001 - 20% of shares 1st Jan., 2002 - 25% of shares 1st Jan., 2003 - 30% of shares 19. Hence, in respect of 30 per cent of shares, the period of holding will be less than 12 months and profit arising in respect of such shares will have to be treated as short-term. In respect of other shares, the profit will have to be treated as long-term. In the result, the appeal is party allowed. - - TaxTMI - TMITax - Income Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
