TMI Blog2007 (9) TMI 535X X X X Extracts X X X X X X X X Extracts X X X X ..... on September 9, 2001, by which the assessee was provided with a scheme of purchase of shares of a specified number and the period within which he could so obtain is only an indicator of conferment of a right to exercise the option to purchase the shares. This particular grant and vesting is always employee specific and, therefore, has no value whatsoever unlike the rights to subscribe for further shares as contained in section 81 of the Companies Act which is a transferable commodity. Therefore, the dates of grant and vesting are irrelevant because they do not result in any shares acquisition, but acquisition of shares happens only when the assessee exercises his option and is allotted the specified number of shares. He, having exercised the option as on November 7, 2002, and sold it in April/May, 2003, the period of holding is about 5 to 6 months. This being less than 12 months, even in accordance with the provisions of section 2(42A) of the Act, read with Explanation 1(i)(d), the shares sold would have to fall in the category of short-term capital asset only. The decision of the Kerala High Court relied upon by the DR in SN. Zubin George v. CIT [ 2002 (9) TMI 23 - KERALA HIGH ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer resulted in a short term capital gain or a long term capital gain. 2. Appearing for the assessee, Ms. Yogasree, submitted that the assessee was an employee of Winphora Networks Pvt. Ltd., The parent company, viz. M/s. Winphoria Networks Inc. USA, announced the stock incentive scheme to the employees of Winphoria Networks P. Ltd., On 21.9.2000, Incentive Stock Option agreement with M/s. Winphoria Networks India P. Ltd., was entered and accordingly, the assessee was granted the right to purchase 1,25,000 shares of the parent company. The assessee came to acquire this right because the assessee was an employee of Winphoria Networks P. Ltd., According to this declaration by the said company, the assessee was vested with rights to the extent of 25% of 1,25,000 shares on 9.9.2001 and the remaining 75% to vest in every quarter at the rate of 6.25% of 1,25,000 shares. The assessee exercised the option to purchase the shares on 7.11.02 with respect to 62,500 shares. In April 2003, the assessee transferred 62,500 shares to M/s. Motorola and received a consideration of Rs. 1,16,11,554/- on 18.5.2003. In the return of income filed by the assessee this amount was claimed as long term cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oria Networks Inc - Incentive Stock Option Plant' hence forth referred as 'the plant'. (i) Para 1 reads as under the company hereby grants the right and option to purchase upto 125000 shares.... (ii) Para 3 reads further the option will vest and become exercisable with respect to 25% of shares on the first anniversary and with respect to the remaining 75% of the shares, in equal increments on the last day of each quarter following the first anniversary of the first anniversary of the commencement date, through the fourth anniversary of the commencement date so that 6.25% of the shares vest on the last day of each quarter; provided that the optionee continues his or her employment with the company or a subsidiary thereof on the applicable vesting date. The right to exercise shall be cumulative so that to the extent the option is not exercised in any period to the maximum extent possible, it shall continue to be exercisable in whole or in part, with respect to all shares for which it is vested until the earlier of the final vesting date or termination of the grant.... Thus it is clear that vesting is only a process wherein the optionee becomes eligible to exer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2003). The gain so arising should be computed as Short Term Capital Cain and charged to tax. Before the Commissioner of Income-tax(A), reference was made to the provisions of Section 2(42A) of the Income-tax Act, (hereinafter referred to as the 'Act') read with Explanation-1(i)(d) and the same is reproduced for the sake of facility: In the case of capital asset, being a share or any other security (hereafter in this Clause referred to as the financial asset) subscribed to by the assessee on the basis of his right to subscribe to such financial asset or subscribed to by the person in whose favour the assessee has renounced his right to subscribe to such financial asset, the period shall be reckoned from the date of allotment of such financial asset. The assessee insisted the right that was conferred on the assessee to acquire the shares of the company was something that was a continuing asset because the right continued and the right got converted into shares when the assessee exercises the option and paid for the shares. It was, accordingly, insisted that the period of holding of shares must be construed from the date of vesting of the right only and it is the only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sary to purchase them and, therefore, the purchase date would be relevant. The Commissioner of Income-tax(A) further noted that the rights to apply for the shares of the company contained two conditions, namely (1) only a stock certificate has been issued and (2) shares are fully paid for. Clause xiv) of the declaration of the stock option scheme was also considered and the same is reproduced below: Compliance with laws: The obligations of the company to sell and deliver shares upon exercise of the option are subject to all applicable laws, rules and regulations, including all applicable federal and state securities laws, and the obtaining of all such approvals by government agencies as may be deemed necessary or appropriate by the Board of Director ( Board ) or the relevant committee of the Board. He, accordingly, expressed his view that the stock option was nothing more than something that was similar to the offer that was made to the public, which require the public to subscribe or the shares and pay for the same followed by allotment, and in the instant case, the assessee could subscribe for the shares followed by allotment on the basis of the declaration by the company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kerala High Court decision in SN. Zubin George v. CIT [2004] 265 ITR 683 (Ker) and Garrick D Silva v. Joint CIT [2006] 5 SOT 132 (Delhi) [TM]. 5. After considering the well placed arguments and the various materials to which our attention was drawn to, we give our conclusion in the following paragraphs. The Employees Stock Option is a document that binds the employer vis-a-vis the employee of the company. The binding of the employer is also specific to the employee. That is to say, it is employee specific and to him alone. The employer by means of the declaration of the option has in fact undertaken to comply with that declaration in regard to every employee who would fall within the conditions of that declaration. One of the conditions is that the employee must be a permanent employee. That employee, as per the declaration was intimated that the company would be willing to offer him shares numbering 1,25,000. The company further states the period within which the employee could subscribe for these shares. For e.g., it says 25% as on 9.9.01 and the remaining 75% of the total of 1,25,000 shares could be purchased/subscribed at 6.25% for every quarter for the next four years. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of grant and indicating the period within which the employee could subscribe for the shares are indicators of the fact that the assessee could exercise the option within the specific period and to the extent indicated in the period. On the expiry of the period, the option automatically lapses unless the employer agrees to extend the period. To put it in other words, if the assessee fails to exercise the option as indicated, within the period, his right to subscribe for the shares would be extinguished. The granting and the vesting period are merely indicators to the employer to honour the commitment in the event of the employee exercising the option. It is an offer by the employer requiring the acceptance of the employee within a particular period. The acceptance of the said offer within a period is to be done by subscribing for the shares at the specified amount followed by allotment of those many shares to the employee. It can, therefore, be seen that the start of allotment of the shares is when the assessee intimates the exercise of his option, along with payment for the specified number of shares. The company on the basis of the said application would allot the shares and enter ..... X X X X Extracts X X X X X X X X Extracts X X X X
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