TMI Blog2005 (10) TMI 427X X X X Extracts X X X X X X X X Extracts X X X X ..... oyment on subsequent dates and its sale is a perquisite as per provisions of section 17(2) of the Indian Income-tax Act or capital gain ? 2. I have heard the parties and perused the records. I will first take up the first point of dispute for consideration. 3. Though the facts of this case have been described by the learned Members of the Bench, I, for the sake of coherence, would like to refer to some of these facts, which are considered to be of relevance for a decision on the points of dispute. 4. The assessee, an Australian citizen, was appointed as Managing Director and President by Whirlpool Corporation, USA (The terms and conditions of appointment are available on pages 27 to 29 of the paper book). As per the offer of appointment, the assessee was to join the US based company as an employee on an international assignment. In view of the same, the compensation, benefits and other working conditions of the assessee were covered by the company s U.S. expatriate policies. In respect of the residential accommodation, the terms of offer provided that the assessee would be entitled to company paid housing after deducting U.S. housing norm of about US$ 16,000. Likewise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Perquisite value as per Rule 3( a ) Rs. 15,21,142 Add: Furniture provided: (10 per cent of cost) Rs. 32,661 Rs. 15,53,803 Less : Housing Contribution Rs. 10,02,084 i.e. Rs. 5,51,719" It is evident from the above that the Assessing Officer has deducted Rs. 10,02,084 being the amount reduced from the salary of the assessee on account of housing norm from the perquisite value. The net perquisite value in regard to residential accommodation has thus been worked out at Rs. 5,51,719. On the other hand, the assessee has offered the perquisite value of the residential accommodation at Rs. 7,80,000 on the basis of actual rent paid by the employer. It may thus appear that the working made by the Assessing Officer is beneficial to the assessee insofar as the perquisite value assessed by the Assessing Officer is less than the perquisite value disclosed by the assessee. So, however, as a result of the working made by the Assessing Officer, the assessee has been asked to pay tax on the amount of Rs. 10,02,083 i.e. the amount reduced from assessee s gross ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee and Whirlpool Holdings India Ltd. through specific queries under section 131, which are on record; ( i )Assessee was provided with one car; Mercedes Benz (purchased on 13-11-1995) (letter dated 22-8-2000 of AR). ( ii )Company did not maintain any log book. The car was provided exclusively to the assessee for his official as well as personal purposes. The car was not used as a pool car of the Company (letter dated 13-9-2000 of the AR). Driver s salary was Rs. 5,000 p.m. ( iii )No depreciation on this car has been claimed by the assessee in its own assessment as it was a foreign car and in accordance with clause ( a ) of first proviso to section 32(1) of I.T. Act. (letter dated 6-10-2000 of AR). ( iv )The Cost of import duty, registration charges and insurance of the Mercedes Benz was Rs. 16,80,903 paid by Whirlpool Holdings India Ltd. Cost of the car was borne by Whirlpool Corporation, USA and hence not supplied (letter dated 20-10-2000 of Whirlpool India Holdings Ltd. in response to summons under section 131). Rs. 1,13,307 and Rs. 70,869 has been incurred on petrol and maintenance expenses by Whirlpool India Holdings Ltd. on this Mercedes car during F.Y. 1997-98. There w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .e. US$3000 or Rs. 1,10,505 (no prudent person would agree for a deduction which is more than the actual benefit), the value of the car plus driver perquisite provided by the employer, for the purposes of rule 3( c )( ii ), is taken at Rs. 1,10,505. This is on the ground that it is the minimum amount that can be reasonable attributed to the personal use. Assessee s case is covered by rule 3( c )( v ), i.e. he is allowed use of motor car at a cost/concession. The perquisite value in this case is as under : Valuation done under rule 3( c ) (ii ) Rs. 1,10,505 Less : Amount deducted from Assessee s salary Rs. 1,10,505 Perquisite value Rs. Nil In this case the value under rule 3( c )( ii ) has been taken to be equal to the amount recovered by the employer, i.e. the auto-norm . However, if the value were taken at Rs. 13,200 as in the return, the perquisite value at a concessional rate under rule 3( c )( v ) would still be nil . This is due to the fact that no prudent person would agree for recovery from his salary at an amount higher than the benefit derived." As already pointed out, the CIT(A) has upheld t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry or wages. Section 17( i ) is quoted hereunder: 17. For the purposes of sections 15 and 16 and of this section. "Salary" includes ( i )wages; ( ii )any annuity or pension; ( iii )any gratuity; ( iv )any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages; ( v )any advance of salary; ( va )any payment received by an employee in respect of any period of leave not availed of by him; ( vi )the annual accretion to the balance at the credit of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax under rule 6 Part A of the Fourth Schedule; and ( vii )the aggregate of all sums that are comprised in the transferred balance as referred to in sub-rule (2) of rule 11 of Part A of the Fourth Schedule of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax under sub-rule (4) thereof; ( viii )the contribution made by the Central Government in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD. 9. In Stroud s Judicial Dictionary , Fourth Edition, the expression salary is e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... car in India and reduced the salary of the assessee to put him at par with the employees working in USA. Therefore, there is no doubt in my mind that the intention of the employer to fix the basic salary at a higher level and then reducing the same on account of hypothetical tax, housing norm and auto norm etc. was for the purpose of equalization of pay and other facilities of the US employees and the employees assigned to overseas location. It is also interesting to note that the Assessing Officer has not included the hypo-tax deduction made by the employer as part of salary of the assessee. The amount has been deducted on account of tax equalization policy and the Assessing Officer has rightly deducted the same from the gross salary but included the actual tax component paid by the employer-company as a perquisite for the purposes of determination of the salary received by the assessee. In my considered view, there is no reason for taking a different view in regard to deduction made on account of housing norm and auto norm. As pointed out earlier, the intention of the employer-company appears to be abundantly clear that there is no confusion on the assessee s right to receive th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that the company, namely, Whirlpool India Holdings Ltd., was not a defaulter in terms of sections 201 and 201(1A) of the Income-tax Act, 1961 with reference to the housing norm and auto norm. In other words, the opinion of Whirlpool India Holdings Ltd. that hypo-tax, housing norm and auto norm are actually reductions from the salary and, therefore, do not constitute part of the salary has been confirmed by the CIT(A). I have been informed by the ld. counsel for the assessee that no appeal has been filed against the said decision of the CIT(A) and that the order has become final. Therefore, the controversy at this stage appears to be unnecessary insofar as the Department is not at liberty to take a different view in the case of the company and in the case of the assessee without assigning any reason. The principle is applicable in this case insofar as the revenue has accepted the view taken by the CIT(A) in the case of the employer-company and, therefore, it would not be open to the Department to take a different view in the case of the employee on the same issue. The observations of the Hon ble Supreme Court in the case of Berger Paints India Ltd. v. CIT [2004] 266 ITR 99, m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction of salary is US$ 3000. As per the above terms and conditions of agreement of employment after the reduction of salary, assessee has been ensured free residential accommodation and free car facility in India. In my considered view, the fixation of salary at US$ 15000 per month to the assessee was for the purposes of employment in USA and the terms and conditions of the agreement clearly stipulates that the salary receivable by the assessee in India would be after reduction of hypo-tax, housing norm and auto norm. The agreement does not stipulate that assessee would be entitled to residential accommodation and car in India at concessional rates. On the other hand, the agreement makes it abundantly clear that the assessee would be entitled to rent-free accommodation and free car facility while in India. Therefore, the application of the rules for determination of the perquisite value on the basis of residential accommodation and car provided at concessional rates is not warranted. Rule 3( a ) of the Income-tax Rules as applicable for the relevant assessment year provides for computation of perquisite value in respect of rent-free accommodation. On the other hand, rule 3( b ), w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome-tax Act or capital gain?" The relevant facts relating to this issue are that during the course of assessment proceedings it was observed by the Assessing Officer that as per the employment contract of the assessee with Whirlpool Corporation, USA, the assessee was entitled to be nominated for stock options. The Assessing Officer, accordingly, made inquiries about the exercise of any stock option by the assessee in the previous year relevant to assessment year 1998-99. In response, the following information was furnished by the assessee in regard to grant, exercise and sale of stock options : S. No. Date of Grant Grant/Exercise Price in US $ Basis of Grant Exercise Price No. of stock options Date of exercise sale Price at which sold in US $ 1. 21-6-1994 53.38 Average of high low price at New York Stock Exchange on the date of grant 1000 11-3-1998 68 2. 15-8-1995 55.81 do 3200 do 68 3. 18-6-1996 50.44 do 2300 do 68.3125 4. 18-6-1996 40.44 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the Authority for Advance Rulings in P. No. 15 of 1998 s case ( supra ). It has been pointed out by the ld. Judicial Member that the issue involved in this appeal was similar to the issue decided by the Authority For Advance Rulings in P. No. 15 of 1998 s case ( supra ) and, therefore, the difference between the market price on the date of exercise of option and the price paid by the assessee was chargeable to tax. It has been held by the ld. Judicial Member that the assessee had acquired the shares in the year under appeal at concessional rate as a result of which a pecuniary benefit accrued to the assessee in the form of perquisite which is taxable under the head salary under section 17(2)( iii ) of the Income-tax Act, 1961. 18. The ld. Accountant Member has differed with the ld. Judicial Member mainly on the ground that the issue was covered by the decision of the House of Lords in the case of Abbot v. Philbin (Inspector of Taxes) [1962] 44 ITR 144, wherein it was held that taxable perk results at the time of grant and acceptance of the offer and not at the time the shares are acquired on exercise of the option accepted earlier. The ld. Accountant Member has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir stock ownership in the Company, the Board of Directors may, from time to time, award options to purchase shares of the Company s stock. The exercise and retention of stock options is a way for you to share in the Company s future growth. There are various methods to achieve stock ownership through the Plans." The stock options as per the scheme are described in the scheme to represent the right to purchase the companying common stock at a future time at a price set at the time the option is granted. Option price is set at the time the Human Resources Committee approves the grant and is the average of the high and low market price for the day. As per the scheme, the value of stock option is described as under : "The Company s stock options can be used as a valuable tool to build an estate either through direct purchase at exercise or through a process termed "swapping", where currently owned stock can be turned into the Company to pay for option exercises. Because there are so many variables that may reflect your personal status, we encourage you to consult a financial planner or stock broker to review your personal financial strategies and how stock options may best fit in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of exercise of stock option is liable to tax under section 17(2)( iii ) of the Act in the year of excise of the option. The issue before the Authority for Advance Rulings was as to whether the benefit received by the employees of Indian company by exercise of option to purchase shares of the parents foreign company constitutes additional remuneration and perquisite taxable as income from salary. The Hon bel Authority for Advance Rulings held that the gain made by an employee after exercise of the stock option is taxable as salary. It has further been held that a foreign company selling its shares at concessional rate to the employees of its Indian subsidiary has to deduct tax at source under section 192 since the gain made by the employee after exercising the option would be taxable as salary. The Hon ble Authority for Advance Rulings has taken the conscious decision on the basis of provisions of section 17(2)( iii ) of the Act. The ld. Accountant Member has preferred to rely on the decision of the House of Lords in the case of Abbott ( supra ) and has not followed the decision of the Authority for Advance Rulings in P. No. 15 of 1998 s case ( supra ) on the ground that the iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under : "19. Taxation of securities received under Employees Stock Option Plan : 19.1 The Finance Act, 1999, inserted certain provisions in the Act to bring clarity about the taxability of benefits arising to an employee as a result of allotment of shares under Employees Stock Option Plan . The existing provisions provide that the difference between market price on the date of exercise of the option and the price paid by the employee for acquiring the shares will be regarded as perquisites and the difference between the fair market value on the date of exercise of option and the actual sale price in the event of transfer of shares by the employee shall be regarded as capital gains. [Emphasis supplied]. 19.2 The Act makes a departure and provides that no perquisite shall be charged to tax in the hands of the employee in respect of benefits derived as a result of allotment of shares/debentures or warrants directly or indirectly under the employees stock option plan or scheme. This is sought to be done by deleting section 17(2)( iiia ) and providing an Explanation below section 17(2)( iii ). Sub-section (2B) in section 49 inserted by the Finance Act, 1999, has also been de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is sub-clause do not apply and whose income under the head Salaries (whether due from, or paid or allowed by, one or more employers), exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds fifty thousand rupees. With effect from 1-4-2001 (to be ignored for the year under appeal) : Provided that nothing contained in this sub-clause shall apply to the value of any benefit provided by a company free of cost or at a concessional rate to its employees by way of allotment of shares, debentures or warrants directly or indirectly under any Employees Stock Option Plan or Scheme of the company offered to such employees in accordance with the guidelines issued in this behalf by the Central Government. 22. It is pertinent to mention that stock options have been granted to the employees to derive benefit with the sole purpose of promoting continuity of management and increased incentive and personal interest in the welfare of the company. Section 17(2)( iii ) brings the benefit derived by the employee within the ambit of perquisites taxable as income from salary. As per the scheme of stock options, the assessee is given the right t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )( iii ). 23. A question which appears to be pertinent may arise as to with the omission of section 17(2)( iiia ) w.e.f. 1-4-2001, the old provisions of the Act are restored and, therefore, if the interpretation of provisions of section 17(2)( iii ) as advanced by the revenue is accepted, that would be against the intention of the Legislature insofar as the profits arising as a result of stock options are not intended to be taxed as a perquisite w.e.f.1-4-2001. It is also the claim of the assessee in written submissions filed before the Tribunal that section 17(2)( iiia ) having been incorporated by the Finance Act, 1999 w.e.f. 1-4-2000 and the same having been deleted by the Finance Act, 2000 w.e.f. 1-4-2001, the difference between the price at the time of exercise of the option and the grant price of shares are taxable only in the assessment year 2000-01 and not in earlier years. This contention of the assessee is not well-founded. Section 17(2)( iiia ) was inserted by the Finance Act, 1999 which reads as under : 17(2) "Perquisite" includes ( i )the value of rent-free accommodation provided to the assesee by his employer; ( ii )the value of any concession in the mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the fair market value and the cost for acquiring specified securities; This provision was deleted by the Finance Act, 2000 w.e.f. 1-4-2001. It may appear that the law relating to taxability of stock option was incorporated only w.e.f. 1-4-2000 by insertion of section 17(2)( iiia ). I have earlier quoted the explanatory notes of the CBDT to clarify that the section 17(2)( iii ) was incorporated to bring clarity in the provisions relating to the taxability of stock option benefits. Moreover, a proviso has been added to section 17(2)( iii ) with the omission of section 17(2)( iiia ). If stock option were not taxable under section 17(2)( iii ), there would have been no necessity of inserting a proviso to section 17(2)( iii ) when the Legislature intended to exclude the same from the purview of taxation. The said proviso reads as under : " Provided that nothing contained in this sub-clause shall apply to the value of any benefit provided by a company free of cost or at a concessional rate to its employees by way of allotment of shares, debentures or warrants directly or indirectly under any Employees Stock Option Plan or Scheme of the company offered to such employees i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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