TMI Blog2013 (10) TMI 1542X X X X Extracts X X X X X X X X Extracts X X X X ..... F, USA, from 2001 to 2004. Thereafter, the assessee returned to India and became an employee of SIRF, India. 3. SIRF, USA granted certain Stock Options to the assessee on 04.10.1996 [ grant date ] i.e., while the assessee was an independent consultant, which gave the right to the assessee to buy/acquire 35,000 shares of the common Stock of SIRF, USA, at an Exercise Price of USD 0.08 each, pursuant to a Stock Option Plan [ SOP ] CALLED 1995 Stock Plan . The assessee exercised his right under the Stock Option Plan on 2nd and 3rd of March, 2006 ( Date of Exercise ) and received 5000 and 2000 shares respectively of SIRF, USA. Since such shares were sold by the assessee on the same day of exercise in a Cashless Exercise , the net consideration of USD 204786 and USD 78,820 aggregating to USD 283606 (Rupee equivalent ₹ 1,27,62,295) was considered by him as capital gains arising on transfer of Stock Options. According to the Assessee, he held the Stock Options for nearly 10 years i.e., from the date of grant date or in event from the date of vesting of the stock option. According to the Assessee the net consideration received upon exercise of his right, being the value of the sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... letter dated 28.11.2008 submitted that the Stock Options were capital assets covered u/s. 2(14) of the Act, and exercise of such Options and conversion into shares thereafter was transfer u/s 2(47) of the Act. According to the Assessee the Stock Options were transferable. The assessee took a stand that he held the Stock Options for nearly ten years, i.e., when the stock options were granted during the year 1996 by SIRF, USA. The Assessee therefore considered the consideration received on the exercise of option was Long Term Capital Gains in terms of section 48 of the Act and therefore he was eligible for the deduction u/s 54F of the Act,. 8. The AO concluded the assessment u/s. 143(3) of the Act vide his order dated 26th of Dec 2008. The assessee s submissions were rejected and the AO brought to tax the difference between the market value of shares on date of exercise and the exercise price as Income from Salary as against his original proposition to tax the same as Income from Other Sources and the difference between the sale price of shares and the market value of shares on the date of exercise was considered as Income from Short Term Capital Gains . This treatment r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before me a copy of the order of the Hon ble ITAT, Delhi Abench in the case of Shri. Abhiram Seth Vs JCIT dated 30-092011 wherein the claim of long term capital gains is justified. However as the facts of that case are different from that of the case of the appellant, I am unable to accept that decision. After careful consideration of the facts of the case I am inclined to agree with the arguments of the A.O and accordingly the total income determined by the A.O is confirmed. 11. The assessee also challenged the levy of interest u/s. 234B of the Act. On the above issue, the CIT(A) held as follows:- 6. The appellant also contested the charging of interest U/S 234B of the Act on the ground that as the A.O treated the benefit from stock option as the income from salary, interest U/S 234B of the Act is not leviable in the case of the appellant. After examining this issue I am of the opinion that whenever there is income from salary the responsibility to deduct tax at source falls on the employer of the assessee. Therefore, the A.O is directed not to charge interest U/S 234B of the Act on the income of ₹ 1,23,43,050/- attributable to the benefits from stock options. 12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee should also get the benefit of deduction u/s. 54F. 17. The ld. counsel for the assessee also distinguished the decision relied upon by the AO in the case of Giridhar Krishna (supra) by pointing out that in the case of the assessee, the question was not with regard to the nature of income received on exercise of Stock Option, but it was with reference to the date on which the shares can be considered as purchase in a Stock Option. Our attention was also drawn to the fact that under the Stock Option Plan, the assessee can opt for cashless exercise of option, by which the shares can be sold through a stock broker and part of the proceeds can be deposited with SIRF, USA in discharge of the price payable to SIRF, USA, on exercising the option and the difference between the option price and the sale consideration received by the assessee. The decision of the Special Bench of ITAT in the case of Sumit Bhattacharya v. ACIT, [2008] 300 ITR (AT) 347 (MUM) (SB), relied upon by the assessee was also distinguished as a case, which did not deal with ESOP, but dealt with the case of stock appreciation rights. Our attention was drawn to paragraphs 25 to 27 of the aforesaid judgment, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only seeks to acquire capital asset. It was submitted that the argument of the ld. counsel for the assessee that by exercising option, rights in the option are extinguished, is not correct as under ESOP, options are not transferable at all. It was pointed out that the only way in which options can be availed is to acquire the shares either by the employer or its successors in interest. A transfer intrvivos is not possible at all. 22. The second event of taxability is when the shares acquired pursuant to the exercise of option are sold by the assessee. 23. It was submitted by the ld. DR that the assessee cannot consider only one taxable event viz., sale of options and treat it as giving rise to long term capital gains. The stand taken by the AO and CIT(Appeals) in their orders were again reiterated. 24. We have considered the rival submissions. The assessee was a software engineer. He was in employment with a company in India by name Aerospace Systems Pvt. Ltd. [ ASPL ]. He was sent on deputation as an independent consultant to SIRF, USA by his employer. He served SIRF, USA from 1995 to 1998 as an employee of Aerospace Systems Pvt. Ltd., on deputation and as independent co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On the Fourth anniversary of the Vesting Start Date 100% (b) The option will expire at the close of business at company headquarters on the day before the 10th anniversary of the Date of Grant. (c) The option granted cannot be transferred or assigned. Option can only be exercised. It can be bequeathed. It cannot be sold or otherwise transferred. (d) Unless and until a certificate for option shares are issued none can claim to rights as a shareholder of the company. 25. The Assessee had a right to opt to acquire 35000 shares at $ 0.08. The option was granted on 4.10.1996 and would vest starting from 4.10.1996 over a period of 4 years in proportions which we have described in the earlier paragraph. Thus as on 4.10.2000 the Assessee had a right to exercise option for purchase of 35000 shares at $ 0.08. 26. The first event of taxability is triggered on the date when the option to acquire the shares is exercised by the Assessee. Till such time the Assessee has no right to any shares of SIRF, USA. The benefit arising to an employee, being the difference between the Fair Market Value (FMV) on the date on which the option is ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f deferred wages and which is contingent upon the company doing well in financial terms. The Special Bench further held that there is no need, as in the case of stock options, in converting the benefit into monetary terms because what is received by the assessee is itself in monetary terms and one cannot convert money into money. On the point of time when taxable event occurs the Special Bench held that the taxability is triggered when SAR is redeemed because the redemption amount being dependent on the market price of shares which can move in any direction at any time. The Special Bench further held that amount received by the assessee is assessable under the head Salaries as the theory of compensation for services rendered flowing from employer to the employee being sine qua non for taxability under the head Income from salaries is no longer valid. The Special Bench found that PGU is not a rank outsider qua PGI of which the assessee is employee and as per Parts. M and G of the 1983 Stock Plan, PGI is party to the entire scheme of granting SAR. The Bench also observed that the Assessee has no other connection with PGU than the connection as an organisation connected with the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore hold that income in question was not cable of being assessed under the head Capital Gain as there was no transfer of any capital asset giving rise to capital gain. 30. Accordingly, an employer is required to compute the benefit under the stock options, include the same as part of the salary income and, accordingly, withhold the tax on the same from the employee. This has been done by SIRF, USA. The same treatment should follow in India as well. 31. The next event of taxability under the stock options would arise in the event of sale/transfer of shares. The difference between the sale consideration and the fair market value on the date of exercise would be treated as capital gains and subject to capital gains tax. The capital gains could be long term or short term, depending upon the period of holding of such shares/securities. Admittedly in the present case, the shares were held for a period of less than 1 year by the Assessee and therefore the gain in question was Short Term Capital Gain . We therefore uphold the order of the revenue authorities in this regard. 32. With regard to the decision of the Delhi Tribunal in the case of Ambarish Kumar Jhamb (supra) and Ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he basis of the rates in force for the financial year in which the payment is made on the estimated income of the assessee under this head for that financial year. 37. The provisions of Sec.192 of the Act cast an obligation on Any Person making payment in the form of salary. Thus it can be said that Sec.192 of the Act will operate so as to impose an obligation on SIRF, USA to deduct tax at source on payment made to Assessee, as the Assessee as on the date of payment was resident in India and his entire global income is taxable in India. In that view of the matter, we hold that the Assessee can be heard to say that he had taken into account the tax deductible at source by SIRF, USA while estimating his tax liability for payment of advance tax u/s. 209 of the Act. We therefore uphold the order of CIT(A) and dismiss appeal by the Revenue. ITA No.1342/Bang/11 38. This is an appeal by the Revenue against the order dated 31.10.2011 of CIT(A)-V, Bengaluru, relating to AY 06-07, whereby the CIT(A) cancelled penalty imposed on the Assessee u/s. 271(1)(c ) of the Act. 39. The effective ground raised by the Revenue reads thus: 2. The learned CIT(A) ought to have note ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee cannot be found fault with. The assessee submitted that he had not concealed any particulars of income and has given all the details with regard to the stock option. The assessee also pointed out that none of the details furnished by the assessee were erroneous or incorrect. It was only because of the legal position as understood by the assessee and as adopted by AO that the impugned addition came to be made. 41. The AO, however, did not agree with the submissions made by the assessee. He held that the assessee was a highly educated professional. According to him, the assessee ought not to have claimed deduction u/s. 54F of the Act treating income as long term capital gain. The AO found the following was the disclosure made by the assessee in the return of income:- INCOME FROM CAPITAL GAINS Long term capital gains Sale of stock options in US Recd from Parent Co. Grant year of stock options ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case are being taken into account to arrive at the quantum of penalty to be imposed:- 1) There was misrepresentation of STCG as LTCG leading to wrong claim of exemption u/s 54 F and therefore lower payment of tax. 2) The details regarding the transactions were available with the assessee. 3) During course of scrutiny, there appeared to be no attempt at noncooperation on the part of the assessee. 4) The assessed taxes were paid up forthwith. 43. Aggrieved by the order of the AO imposing penalty, the assessee filed appeal before the CIT(Appeals). The CIT(A) cancelled the penalty imposed by the AO on the assessee observing as under:- 6. The appellant along with his authorized representatives appeared before me and stated that he had been a regular income tax payer for many years in India and abroad and he never had any intention to conceal the particulars of his income. In the return of income filed by him for the assessment year 2006-07 on 31.08.2006 he declared all the facts and as advised by his consultant he claimed long term capital gains but there was no malafide intention on his part to evade taxes. The authorized representative of the appellant had filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olished FBT and brought various benefits offered to employees by employers including ESOPs within the ambit of perquisite tax and consequently made ESOPs taxable under the head salaries in the hands of employees. Presently ESOP s are specifically included as perquisite by Section 17(2)(vi). Employees are now required to pay perquisite tax on the difference between the FMV on the date of exercise as reduced by the exercise price. In both the FBT and perquisite tax regime, capital gains on alienation of shares are chargeable to tax in the hands of employees at the time of transfer of the shares on the difference between the sale price and the FMV. 47. The question as to when ESOP s are granted by foreign entities for services rendered in subsidiaries of the foreign entities outside India as well as in India, the taxation of the benefit in the hands of the employee in India became difficult. Under the FBT regime, the CBDT had specifically prescribed the methodology for taxing fringe benefit when employees were present in India only for part of the grant period. The extract of the relevant CBDT circular 9/2007 dated September 20, 2007 - Frequently Asked Question 4 and the reply are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the grant period bears to the length of the grant period. (The value of fringe benefit means the fair market value of the specified security or sweat equity shares, on the date on which the option vests with the employee, as reduced by the amount actually paid by, or recovered from, the employee in respect of such shares.) Unquote 48. When employees work only for part of the period which enables them to avail of ESOP in India and when they go abroad and complete the remaining period which enables them to avail of ESOP, they might exercise option outside India. In that event it can be argued no perquisite value arises in India for the proportionate period of time that employees stay in India if the options are exercised outside India. The chargeable event is the date of exercise of option and this argument would be very difficult to deal with. Conversely, as in the present case, the Assessee was based outside India at the time of grant of ESOPs and also for the period for which he has to serve the employer to be able to exercise the option, but had come back to India and exercised the option under ESOP. Because the event of chargeability to tax in India has happened ..... X X X X Extracts X X X X X X X X Extracts X X X X
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