TMI Blog1998 (11) TMI 672X X X X Extracts X X X X X X X X Extracts X X X X ..... l for positions of substantial responsibility, to provide additional incentive to such individuals, and to promote the success of the company s business by aligning employees with financial interests with long-term shareholder value. The questions on which advance ruling is sought are as under : 1. Whether money received by the employees of its Indian subsidiary, by exercise of stock option granted to them constitutes income from salaries ? 2. Whether tax has to be deducted under section 192 of the Income- tax Act, 1961, by the applicant-company on the amount earned by the employees of subsidiary from exercise of stock option granted to them by applicant company ? The sum and substance of the scheme is that an employee of the Indian company by exercising the option to subscribe will be able to get shares in the parent company (the American company) and immediately sell the same at the ruling market rate in U. S. A. If this scheme was evolved by the Indian company, this would have constituted an additional remuneration to the employees. The only difficulty is that the stock option is being offered not by the employer, the Indian company but by the American company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . from the parent company. In the case before us, the employee of the Indian company has no such option. The shares will be issued and sold immediately thereafter. In the case of Abbott v. Philbin (Inspector of Taxes) [1960] 2 All ER 763 (HL), the offer was made by a company to its employees giving them an option to purchase shares of the company at less than market price. This offer was given not only to the executives of the company but also of its subsidiaries. The appellant was secretary of the company and was also given this option. He exercised this option on March 20, 1956, when 250 shares were allotted to him. He subsequently sold the shares in the year 1955-56 and made profit which was brought to tax under Schedule E. There was no dispute that the amount was assessable under Schedule E, but the dispute was in respect of the year of assessment. The Crown s case was that the shares, which were allotted to the employee, were ultimately sold. The employee became liable to pay tax in that year in which profit was made by such sale. The assessee s case was that the option was the perquisite and he was liable to be assessed for the year 1954-55 in respect of the value of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If the option was never exercised, there would be no profit nor any accrual of benefit because the right of stock option given to the employees could not be transferred. Therefore, the taxability of the amount to be gained by exercise of the option cannot be in doubt. It is a perquisite or profit arising out of employment. The only question is whether the amount will be taxable under the head salary . In this connection, it has to be noted that perquisite and salary have been specifically defined in India. The scope and effect of these definitions will have to be examined. What is a perquisite under English law, may not be so under our law. Section 15 of the Income-tax Act lays down : 15. Salaries.-The following income shall be chargeable to income- tax under the head Salaries - (a) any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not ; (b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him ; (c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r (including a company) to an employee to whom the provisions of paragraphs (a) and (b) of this 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 twenty-four thousand rupees ; Explanation.-For the removal of doubts, it is hereby declared that the use of any vehicle provided by a company or an employer for journey by the assessee from his residence to his office or other place of work, or from such office or place to his residence, shall not be regarded as a benefit or amenity granted or provided to him free of cost or at concessional rate for the purposes of this sub-clause ; (iv) any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee ; and (v) any sum payable by the employer, whether directly or through a fund, other than a recognised provident fund or any approved superannuation fund or a Deposit-linked Insurance Fund established under section 3G of the Coal Mines Provident Fund and Miscellaneous Provisions A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reholder was held to be perquisite or other profit. However, the law in India is different. Because of the express provisions of the Act, there is no difficulty in holding that the benefit to be given to the employees will be additional remuneration. Salary has been defined in section 17(iv) to include, inter alia, perquisites or profits in lieu of or in addition to any salary or wages. The employees, in this case, are going to receive something in addition to their salary and wages. The stock option scheme will enable them to get something in addition to their remuneration. This addition will clearly come within the definition of the expression salary . Whether it is paid by the employer or by somebody else for or on behalf of the employer will not make any difference. This has been made clear by clause (b) of section 15. The next question is whether the amount is paid for or on behalf of the employer ? To answer this question, we have to bear in mind that the offer is being made to the employees of the Indian company which is a fully owned subsidiary. Its business is completely controlled by the parent company. The object of making such offer can only be the desire to give a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employees of the Indian company by offering to them an option to purchase its own shares at a pre-determined price. This sort of transaction is not possible unless the parent company treats its own business and the business of the Indian company as one. There is yet another aspect of the case. In the case of Bentley v. Evans [1959] 39 TC 132 (Ch D) Roxburgh J., held that an option to buy shares given by a Canadian company to the employees of its English subsidiary will be perquisite or other profit and taxable as such under Schedule E. Perquisite or any other profit of employment will clearly come within the ambit of the definition of the expression salary given in section 17(1). Moreover, perquisite has also been broadly defined in section 17(2) and will include the value of any benefit or amenity provided at a concessional rate. The next question is whether there should be a deduction of tax at source by the American company in respect of the income arising on account of stock option. The gain made by an employee after exercise of the stock option may be taxable as salary. The American company has taken upon itself the responsibility of paying this salary. The provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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