TMI Blog2008 (7) TMI 841X X X X Extracts X X X X X X X X Extracts X X X X ..... (ZEWT). During the year the assessee had filed the return of income on June 30, 2000 declaring income of Rs. 10,13,860. The same was processed under section 143(1) of the Income-tax Act, 1961. Thereafter notice was issued under section 148 subsequent to which the Assessing Officer completed the assessment under section 143(3) read with section 147 on September 23, 2003. The assessee had contended that the ESOP is not taxable for the assessment year 2000-01 as the amendments regarding the taxability of ESOP, came subsequent to the filing of the return for the assessment year 2000-01. She further explained that the option to receive ESOP was exercised on February 1, 1999, prior to the amendment. The Assessing Officer rejected this contention on the ground that the benefit to the assessee has accrued by way of accretion to her capital due to exercise of her profession and vocation while working in Zee Telefilms Ltd., It was a perquisite within the meaning of section 17(2)(iiia) of the Act. Thus he brought to tax a sum of Rs. 25,77,000. The assessee carried the matter in appeal. The first appellate authority after considering the arguments of the assessee held that the benefits ari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... leting the addition of the amount of Rs. 25.77 lakhs received by the assessee under the Employees' Stock Option Plan on the merits of the case. The learned Commissioner of Income-tax (Appeals) ought to have held that the amount of Rs. 25.77 lakhs, being perquisite value worked out by the Assessing Officer, is not liable to tax." Shri Bharat Bhushan, the learned Departmental representative submitted that the assessee had during this year exercised her option and taken the benefit of the ESOP. He filed before the Bench photostat copies of the equity warrant certificate issued by Zee Telefilms Ltd., to the assessee and submitted that this certificate was issued on the terms and conditions mentioned in the resolution passed by the board of directors of the company, Zee Telefilms Ltd., on its meeting held on July 27, 1998, and these warrants are dated February 1, 1999. The terms and conditions of the warrants as agreed between the assessee and the employee-company were in the form of a letter dated February 1, 1999, and this letter only gives an option to the assessee to be able to convert the warrants into shares within three months from the announcement of the financial results of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion and thus there is no income at all in the assessment year 2000-01. Conversely he argued that the benefit, if any had accrued to the assessee on February 1, 1999, i.e., the date on which the warrants were issued by the employee-company under its signature. He submitted that the warrant was a valuable right and therefore, a capital asset. He relied on the judgment of the hon'ble Punjab High Court in the case of Hari Brothers P. Ltd. v. ITO [1964] 52 ITR 399 and submitted that it is a settled position of law that the right to acquire the share is also a capital right. Thus he argued that once it is held that the assessee acquired some valuable rights in the assessment year 1999-2000, there cannot be any benefit or perquisite in the assessment year 2000-01, as the shares were acquired for a consideration of payment of Rs. 212 per share as well as relinquishment of her rights in the warrants which were already assets. On the provisions of section 17(2)(iiia) Shri Vijay Mehta submitted that clause (iii)(a) can be invoked, only if there is an allotment or transfer of specified securities free of cost or at concessional rate. His case is that this allotment was not free of cos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld by the hon'ble Tribunal that in the year in which the option has been granted, there cannot be any tax liability, he submitted that the ratio of these two decisions is not applicable to the facts in the present case for the following reasons : (a) Both the above decisions were concerning any stock appreciation right and not stock option rights. In the case of stock appreciation rights, on the date of grant of option there is no gain as the option is always granted at the market value as on the date of option and thus there would be no difference between the market value as on the date of grant of option and the option price whereas it is not the same in the case of stock option rights ; (b) That the issue of taxability in the year of acquisition of shares has to be decided, on the basis of the existing provisions applicable to the year of acquisition of shares. Merely because tax cannot be levied in the year of grant of option, tax should not be levied in the year of exercising that option. Thus he submitted that no benefit or advantage has accrued or income arisen under the general law in this case nor the case falls under section 17(2)(iii) of the Act nor can the ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (b) `specified security' means the securities as defined in clause (h) of section 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 making available rights in the nature of intellectual property rights or value additions, by whatever name called ; and (d) `value' means the difference between the fair market value and the cost for acquiring specified securities." Now the issues to be decided are (a) whether the amount in question is liable to be taxed under section 17(2)(iiia) of the Act ; and (b) whether this benefit can be brought to tax in the impugned assessment year. We find that the issue, though in the context of "stock appreciation rights" was considered by the Third Member decision of the Delhi Tribunal in the case of Garrick D'Silva v. Joint CIT [2006] 105 TTJ 445. In this decision at page 449 paragraphs 20 to 23 it is held as under : "The Finance Act, 1999 had inserted section 17(2)(iiia) to bring cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grant. This is the stage at which the benefit is derived by the assessee by way of difference in the predetermined price and the market price. When the market price is higher and the assessee acquires the shares from the employer by reason of the terms of employment at a lesser value, the benefit given to the employee is by reason of his employment and such benefit is liable to tax under section 17(2)(iii) up to March 31, 2000. If the employee * See [200] 245 ITR (St.) 21.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 section 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. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and on payment of a pre-determined amount. The undisputed fact is that there is a difference between the market price and the rate at which the assessee was entitled to acquire these shares, and this benefit is a result of employment. Thus there is a transfer of a security at a concessional rate and it has taken place in the impugned assessment year. The principles laid down in the case of Garrick D'Silva [2006] 105 TTJ (Delhi) 445 are applicable to this case also. We follow the same and reject the argument of the assessee that the benefit is not taxable under section 17(2) of the Act. Coming to the year of taxability we find that the hon'ble Supreme Court in the case of CIT v. Infosys Technologies Ltd. reported in [2008] 297 ITR 167 at page 172 held as follows : "A warrant is a right without an obligation to buy. Therefore, a `perquisite' cannot be said to accrue at the time when warrants were granted in this case. The same would be the position when options vested in the employees after a lapse of 12 months, it is important to note that in this case options were exercisable only after the cooling period of 12 months. Further, it was open to the employees not to avail of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taking or obligation given by the assessee that she would pay the price specified and buy the shares. Thus only on the date of exercise of the option the perquisite in question arises. This is also by virtue of the proviso to section 17(2)(iii)(c). In the case of Infosys Technologies Ltd. [2008] 297 ITR 167, the hon'ble Supreme Court was considering a case where, even after exercising the option, there were some conditions imposed on the employee in the matter of sale, etc. There are no such conditions on the shares acquired by the assessee on exercise of the option. Thus the conclusion of the first appellate authority that the right has accrued during the financial year 1998-99 relevant to the assessment year 1999-2000 and has to be brought to tax as a perquisite in that year, in our considered opinion, is erroneous and has to be necessarily reversed. As the assessee had exercised her option during the year and had chosen to convert the warrants into shares and had chosen to avail of the rights on offer to her by payment of the requisite cost during the impugned assessment year we hold that the perquisite had arisen in terms of section 17(2)(iiia) during the impugned assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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