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Asst. CIT, Room No. 447, Mumbai Versus Pramod H. Lele

2015 (11) TMI 1367 - ITAT MUMBAI

Taxability of the gain on the transfer of sweat equity shares allotted to the assessee - Revenue seeks to bring the entire gain to tax as short-term capital gain, the assessee concedes it to be income by way of capital gains, albeit long term in nature and, accordingly, exempt u/s.10(38) of the Act. The Revenue’s alternate claims are of the income being assessable as speculation income u/s. 43(5) or even as income from other sources u/s. 56 - Held that:- In essence and substance though the co-or .....

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ternative (as did the assessing authority in that case). The shares were not intended to be held in-as-much as the payment of cost, a precondition for their acquisition, could not be made. The assessee’s account was accordingly settled, for all intents and purposes, otherwise than through delivery, yielding speculative gain, assessable u/s. 43(5), and which could itself fall under any head of income, including ‘capital gains’.

Thus we confirm the assessment of income on the sale of sh .....

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mmissioner of Income Tax (Appeals)-XI, Mumbai ( CIT(A) for short) arising out of separate orders, partly allowing the Assessee s appeal contesting its assessment u/s.143(3) of the Income Tax Act, 1961 ( the Act hereinafter) for the assessment years (A.Ys.) 2002-03 and 2004-05. 2. The only issue arising in the instant appeal is the taxability of the gain on the transfer of sweat equity shares during the relevant previous years allotted to the assessee. While the Revenue seeks to bring the entire .....

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was accepted by him forthwith. This, it is claimed, gives him a right in the said shares, i.e., 1100 in number, at an acquisition cost of US $ 1, which the assessee could acquire within a period of ten years. It is this right that translates into equity shares on the exercise of the option by the assessee on 19.10.2001, on which date the shares were, both, allotted and sold, resulting in the impugned gain. The details of the acquisition of shares, including the manner in which the same stood in .....

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e Davis thereafter & ultimately Parke Davis got merged with Pfizer. 4. We have heard the parties, perused the material on record, and given our careful consideration to the matter. In our considered view, the assessee s stand cannot be accepted. What the assessee s employer-company did on 20.2.1998, was to make an offer to its employees, including the assessee, and what the assessee, by endorsing his signature thereon, assuming it to have been at the relevant time, did was to acknowledge hav .....

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sement thus does not signify anything and no right crystallizes in favour of the assessee thereat. It is only when the assessee exercises the option thereto, much later, which the Offer entailed, complying with the terms and conditions thereof, including the payment of cost of US $ 1 (Rs.42/-), that a right in terms of shares or rights therein accrued to the assessee. In fact, in-as-much as the assessee, under the extant RBI Rules, could not transmit any payment, only upon effecting which the sh .....

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transmitted to the assessee. We believe this would be consistent with the terms and conditions of the Offer - which has not been placed on record, or perhaps in pursuance to an understanding/arrangement with the employees in modification of the terms and conditions of the offer, i.e., upon considering that in the absence of a relaxation of the condition of payment of cost - which is otherwise secured, for allotment of shares, the scheme shall become inoperable in view of the bar on remittance ( .....

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non-interest bearing, permissible by law, crystallizing in favour of the employer- company. Clearly, therefore, it is only upon allotment and transfer of shares, which per force the circumstances had to be simultaneous, that a benefit in terms of excess of sale price over cost, or net gain, arises to the assessee. The allotment/acquisition and sale of shares being (almost) simultaneous, the capital gain arising would only be a short term capital gain (STCG). What, then, we wonder, is the contro .....

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e had on offer is a contingent right, which may or may not be availed, depending on the market value of the shares at the relevant time, as well as the foreign exchange regulation in-as-much as the cost had to be remitted in foreign exchange, which could not be under the existing regime. Sure, one can conceive of an option in terms of a right and not an obligation, as in fact stood defined u/s. 17(2)(iii), vide proviso thereto, i.e., prior to its omission, excluding the perquisite value of the b .....

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es as being in agreement with the decision by the tribunal in the assessee s own case on an earlier occasion (in ITA No. 4699/Mum/2004 dated 10.08.2011 for A.Y. 1998-999/copy on record). Each of the difference aspects of the transaction, representing a part of the sophisticated plan of compensation to its employees, stands discussed in detailed. In essence and substance though, as afore-stated, the co-ordinate Bench express the same opinion, i.e., that the rights to the assessee, undoubtedly a c .....

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st, a precondition for their acquisition, could not be made. The assessee s account was accordingly settled, for all intents and purposes, otherwise than through delivery, yielding speculative gain, assessable u/s. 43(5), and which could itself fall under any head of income, including capital gains . Again, the tribunal also upheld the Revenue s view that the benefit arising is in the nature of income, assessable as income from other sources, with reference to the decisions in the case of Emil W .....

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the admitted facts of the case, is taxable as short term capital gains. The reasoning adopted by the CIT(A), in treating the gains on sale of stock option shares as long term capital gain, is, for the detailed reasons set out earlier in this order - particularly in paragraph 10 above, erroneous and it does not meet our approval. In this view of the matter, and as we are dealing with limited issue in appeal as raised by the Revenue, it is not really necessary for us to deal with other aspects of .....

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imself admits to the same being without reference to the decision by the tribunal in the case of Shripad S. Nadkarni (supra) and himself (supra) (refer para 6 of the written submissions dated 21.11.2013), even as found earlier by the tribunal in the assessee s own case vide its order dated 10.8.2011 for A.Y. 1998-99 with reference to the reliance by the assessee on the decision in Bomi S. Billimoria (supra). The said decision by the tribunal in the assessee s own case can thus be said as coverin .....

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