TMI Blog2002 (6) TMI 157X X X X Extracts X X X X X X X X Extracts X X X X ..... nfosys Technologies Ltd. is a public limited company in the Information Technology Industry. It has formulated an Employees Stock Option Plan (ESOP). A trust was set up by the Infosys Technologies Ltd. The Trust was allotted warrants of Re. 1 each, each warrant entitling the holder thereby to apply for and be allotted one equity share of face value of Rs. 10 each for a total consideration of Rs. 100. The Trust is to hold the warrant and transfer the same to the employees of the company under the terms and conditions of the scheme governing the ESOP. During the years under consideration viz., the assessment years 1997-98, 1999 and 1999-2000, warrants were offered to the employees. These warrants were offered to the employees at Re. 1 each by the Infosys Technologies Ltd. Employees Welfare Trust (Trust). The salient features of the ESOP are as under: (i) The Trust was allotted 7,50,000 warrants of Rupees one each, each warrant entitling the holder thereof to apply for and be allotted one equity share of Rs. 10 (face value) for a total consideration to be determined by the Board of Directors of Infosys. The consideration ecommended by the Board of Directors of infosys in the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... removed from service, he loses his right on the shares under the scheme and would have to transfer the shares to the Trust for the same consideration paid by him on application namely Rupees one hundred per equity share. Barring this right of claiming back the same consideration, the employee has no other right of compensation. The unexercised warrants will also lapse. (viii) Under the terms of the scheme, the employee is obliged to enter into an agreement or such agreements as may be required, with the Trust to carry out his obligations including the authority to the Trust to cause the transfer of the warrants/shares back to the Trust on the happening of certain events enumerated above. 4. ESOP is intended to benefit a company by enabling the company to attract and retain the best available talent by enabling them to contribute and share in the growth of the company. The table herein captures in brief the number of warrants exercised by the employees for the various years under consideration: Dates of allotment of stock options to the trust Date No. of options 20-01-1995 1,44,100 27-11-1995 1,58,000 23 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... --------------------------------------- Grand total 75,51,66,170 ------------------------------------------------------------------------------ 7. Aggrieved by the order passed by the Assessing Officer, the company filed an appeal before the CIT(A). Various contentions were urged by the company as to why no perquisite should arise to an employee by participation in the ESOP plan, and consequently, therefore, there should not be an obligation upon the company to deduct tax at source under section 192. The CIT(A) dismissed the appeals preferred by the company and concluded by the company was in default for not having deducted the tax at source in respect of the benefit arising to the employee by exercise of the warrants. Against the orders passed by the CIT(A), the assessee is in appeal before us for all the years. Since a common point is involved in all the years, we are consolidating the appeals and passing a single order. 8. We have heard senior Advocate Shri G. Sarangan for the appellant company and Shri Amitab Kumar, senior Departmental Representative for the revenue. Elaborate arguments have been canvassed by both the representatives. Detailed paper books have also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ike dividend, right to vote, bonus shares, etc. The benefits from the ESOP, therefore, began flowing to the employees immediately on the exercise of the warrants. The fact that the shares issued under ESOP are not transferable was not at all significant. The learned Departmental Representative also contended that there was no provision in the Securities Contract Regulation Act or SEBI Act, which prohibited transferring all these shares. The shares were, according to him, freely transferable, the only rider being that the transferee would also be subject to the lock-in-conditions and that, therefore, there is an open market for these shares. The learned Departmental Representative also argued that the Trust though validly and genuinely created, is merely a conduit. The Trust was only a mechanism for fulfilling the desires of the employer and, therefore, the Trust is to be held as an extension of the employer. The learned Departmental Representative relied upon the ruling of Authority for Advance Ruling in P.No. 15 of 1998 (235 ITR 565). He stated that the ruling, though not binding because of section 245S is at least persuasive in its effect and, therefore, could be relied upon. For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Even otherwise, applying the ratio laid down thereunder, the TDS obligation would then lie upon the Trust and not the appellant-company. (viii) The amendment made to the statute, by the Finance Act, 1999, in the absence of a specific mention to that effect is not retrospective. (ix) That the provisions of law have to be interpreted uniformly--one set cannot be regarded as retrospective and another prospective to the convenience of the department, more so when there is nothing specific in the law to that effect; (x) In the facts and circumstances of the case, the Wealth-tax Act and Schedule III thereunder are not applicable to determine the fair market value of the shares; (xi) That the lock-in-condition of ESOP were valid, binding and enforceable, which conditions could not be ignored. (xii) The appellant-company even otherwise had acted honestly, reasonably and in a bona fide manner in discharging its TDS obligations; (xiii) There was no circular of the CBDT till 1999, detailing the obligation of the employer in deducting tax at source on the benefit if any conferred through ESOP; (xiv) That the appellant-company had repeatedly pursued the matter in determining its T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant terms. Section 17(1) defines the term "salary". As per section 17(1)(iv), salary includes, amongst others, a perquisite. The term "perquisite" itself is defined in section 17(2). The definition of the term "perquisite" at the relevant time had 5 sub-clauses. It is clause (iii) of the said definition that would be relevant for the purpose of the present discussion, which is reproduced below:-- "(iii) the value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases:-- (a) by a company to an employee who is a director thereof; (b) by a company to an employee being a person who has a substantial interest in the company; (c) by any employer (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." 14. The questions for consideration, therefore, are whether (i) Any right granted to an employee for participating in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture income. The Gujarat High Court in CIT v. Spunpipe Construction Co. Ltd [1965] 55 ITR 68 held that where assets are purchased for a lesser price, there can be no profit made by the purchaser on revenue account from the purchase at a lesser price. 16. Unless a benefit in the nature of income or is specifically included by the Legislature as part of income, the same is not taxable. The definition of income is no doubt inclusive. However it is not all embracive. The law seeks to tax "what is included in income as taxable". The words are not the following items shall be taxable.......". Thus, the precondition is that the receipt or benefit is treated as income first. The word income though defined in an inclusive manner, should therefore be regarded as purposeful in its import. It would not, therefore, encompass every receipt or every benefit. In the instant case also, there was no present contemplation of unencumbered allotment of the shares. In fact, the shares could not be even obtained by the employees till the lock-in-period was over and other conditions were fulfilled. The 'benefit', if any, was only notional or contingent. Even otherwise, the 'benefit' was, if at all, wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at interest subsidy is not chargeable to tax as a perquisite. There was an attempt by Finance Act, 1994 to tax interest subsidy as perquisite with effect from 1-4-1995. But before this law became operative, the Finance Act, 1995, deleted the provision. Keeping in mind the proposed insertion and the subsequent deletion, the Supreme Court stated that a concession in the matter of interest is not chargeable to tax, as a perquisite. If the definition of the term "Perquisite" is an inclusive one and thereby "all pervasive", the Supreme Court would have charged to tax such interest subsidy despite the deletion of sub-clause (vi) to section 17(2) by the Finance Act, 1995. We would also, therefore, concur with the conclusion drawn by the Supreme Court that the artificial enlargement of any word by the use of the term "include" is to be construed in a very strict manner. Similar view has been held by the Hon'ble Karnataka High Court in the case of CITV. M.K. Vaidya [1997] 224 ITR 186 which has been approved by the Hon'ble Supreme Court in the case of V.M. Salgaocar Bros. (P.) Ltd. 18. It was only by the Finance Act, 1999, that provisions to tax benefit arising under an ESOP was introduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Legislature. Further, the observation of the Supreme Court in the case of V.M. Salgaocar Bros. (P.) Ltd. stating that subsequent omission of particular clause from the statute could also to be relied upon to interpret a law for a earlier charge would strengthen our conclusion that the law did not specifically desire the taxability of benefit arising to an employee under the ESOP as perquisite under section 17(2)(iii) of the Act. 19. ESOP, in its concept, normally has a uniform philosophy. However, the procedures adopted by the companies in the implementation of such an ESOP may not be uniform, e.g., in the case of the appellant-company, all the options vested on the expiry of 12 months from the date of its grant. There are companies in which these options may vest evenly over the defined period of time. In the alternative, it may vest in a varying proportion over the defined period. It is also likely that the employees who are to be taxed are not assessed by the same Assessing Officer. There would, therefore, be an element of subjectiveness in each Assessing Officer trying to formulate his own value in taxing the employees. This is because there would, in the absence of any sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom other sources in respect of which it is accepted that it is the normal commercial income that is taxable unlike in the case of salary income where a "computed income" is taxable. It is only when normal commercial income is taxable that one can rely upon the dictum that a receipt satisfying the test of income in its common parlance is taxable. It is to such commercial income that the adage is applied "every income is taxable unless it is otherwise specifically exempted". The principles of commercial income do not attract to cases like property income, capital gains, as also salary income. These incomes are chargeable on the basis of a particular formula prescribed in the statute. If no formula is prescribed, the receipt should be regarded as outside the net of taxation. It was for this reason that in a number of decisions, it was held that arrears of rent are not chargeable to tax under the head "Income from house property". On the facts of the present case, salary income is the subject-matter of discussion and not business income or income from other sources. Therefore, the judgments relied upon by the learned Departmental Representative would not be relevant. The decision in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quisite the value of any specified security allotted or transferred, directly or indirectly, by any person free of cost or at concessional rate to an individual who is or has been in employment of that person in the year of exercise of option of such shares. Explanation to the proposed sub-clause (iiia) defines the expression 'cost', 'specified security', 'sweat equity shares' and 'value' used in that sub-clause. This amendment will take effect from 1st April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent assessment years." It is, therefore, clear that but for the specific definition of perquisite under section 17(2) which included the benefit under ESOP, prior to insertion to such clause (iiia) to section 17(2), there was either no specific provision or there were all sorts of ambiguity and uncertainty in taxing the benefit under ESOP as "perquisite". In such a situation, it cannot be logically or legally concluded that such perquisite accrue to the employees and the employer failed to deduct tax thereon. 22. There is another facet to the taxability of the benefit. It has been stated repeatedly that what is to be taxed is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enjoyed. It has been submitted before us that 1,25,500 number of warrants have been surrendered by 176 employees back to the Trust for non-fulfilment of the conditions of ESOP. If an employee were to be taxed on a perceived benefit that would be a taxing of a notional income in the case of such employees. The risk of forfeiture, in our opinion, makes the entire benefit, a contingent one. 23. There is an added dimension as to why the benefit is not taxable. The benefit for being taxed has to be valued. What would be the value of shares in the instant case is the question for consideration. The term "fair market value" is defined in section 2(22B) of the Act to mean the price the asset would fetch if sold in the open market on the relevant date. There is a second limb to this definition referring to a value of an asset being the one arrived at in accordance with the prescribed rules. The same is not relevant, as no rules have yet been prescribed under the Income-tax Act for the purpose of valuing any asset. We, therefore, have to limit ourselves to the first aspect, namely, what shall be the amount that the asset would fetch if sold in the open market. A reference to the conditions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h of Hyderabad ITAT had occasion to deal with similar situation in the case of K.N.B. Investments (P.) Ltd. v. Asstt. CIT [2000] 79 ITD 238, wherein at page 267, it observed as follows: "The shares cannot be quoted in the market because of the compulsory lock-in-period of three years. Therefore, those shares were not quoted in the market. In the circumstances, those shares that could not be quoted in the market, cannot be a subject matter of comparison with the existing shares already quoted and traded in the stock market. There is no basis of justification in making a comparison between unequals. Such a comparison is hypothetical." We are in agreement with the above observations. 24. Another question that arises in this connection is the point of time at which the benefit, if any, is taxable? We have already outlined the different situations under which the possibility of taxing the benefit may arise. The ld. Jt. Commissioner of Income-tax, TDS, went into the aspect of the timing of taxing the benefit. Incidentally he discarded three of the four alternatives and presumed that the tax liability arises in the fourth alternative by default. Tax incidence, in our opinion, is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in both the statutes. In the instant case, the provisions of Wealth-tax Act and Income-tax Act are not similar, at least in the context of ESOP taxation. 26. There was a Circular of CBDT dealing with ESOP taxation, viz., Circular No. 710. In the said circular the mechanism of arriving at the value of perquisite has been stated. The ld. Departmental representative has relied upon this Circular only to support the legislative intent and not for the purpose of quantification of the benefit. The Circular, no doubt, deals with the value of the benefit. However, what has not been prescribed in a statute cannot be done so, in our opinion, by way of a circular. During the relevant year, there was no law or rule dealing with the aspect of quantification of the benefit. Prescribing a methodology for quantifying the benefit through a circular, in our opinion, would be usurpation of powers beyond the competence and powers of CBDT. Circular No. 710 was relied upon by the ld. Departmental Representative for the purpose of indicating the legislative intent. The legislative intent, by itself, cannot be the basis for any item being taxed. A circular cannot lay down any law. Circular cannot create ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xable only as capital gains at the time of sale. Having made the benefit taxable as capital gains, there was probably a need to clear this issue under the head "salaries". It would have been appropriate had this proviso been introduced in the law dealing with the taxation of ESOPs. A proviso was, therefore, needed for this purpose. As noted already, the particular clause (iiia) to section 17(2) dealing with ESOP taxation was itself removed from the statute. The proviso clarifying the issue that the stock options are no longer to be taxed under the head 'salaries' could, therefore, not have been inserted under section 17(2)(iiia). Having no other place but, nevertheless, looking at the need for clarifying the issue, the proviso has probably been added to section 17(2)(iii)(c) only. The learned Departmental Representative strenuously argued about the functions of a proviso, that it carves out an exception from the main body of law. In our opinion, however, that is not the only function of a proviso. The role of a proviso is not limited to carving out an exception to the main body of the enactment. It may, in certain situations, also explain ambiguous matters. There may be and are man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17(2)(iii). In view of the aforesaid decision in Allied Motor (P.) Ltd's case; we hold that there was no specific provision to tax the ESOP benefit as perquisite under section 17(2)(iii) during the years under appeal which has been more than aptly clarified by insertion of proviso to section 17(2)(iii). The introduction of the proviso to section 17(2) iii)(c) indicates that the provision existing till that time were ambiguous. As held by the Hon'ble Bombay High Court in the case of CIT v. Hico Products (P.) Ltd. [1993] 201 ITR 567 a different construction may be given to a proviso in the peculiar facts and circumstances of the case. To say therefore that the proviso was introduced by an over enthusiastic Legislature or that it was introduced out of abundant caution is not correct. 28. The notes to the Finance Bill, 1999 states that a provision for ESOP is made to remove any uncertainty. This indicates that there was a lot of uncertainty and thus no assurance was available that section 17(2)(iii) was all embracing. The uncertainty in law would be evident, if one were to note the following: (a) a decision in the House of Lords in Abbot's case, by a majority saying an ESOP benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... language, which is fairly capable of either interpretation, it ought to be construed as prospective only. A fiscal legislation cannot be regarded as retrospective by implication. 30. The learned Departmental Representative also relied upon a number of decisions rendered in the United Kingdom to argue that the benefit under ESOP is taxable; that it is taxable at the time of exercise and that the difference between the fair market value and the cost of the acquisition should be the value of the perquisite. We may, at the outset, state that the law laid down by an English Court is not binding upon any judicial authority in India. It may have only a persuasive value. Even this persuasive effect may lose much of its sheen if one were to compare the differences in the schemes between the cases before the English Courts and the one presently under discussion. The law in England on taxation of perquisite is also different. Further, in none of the cases before the English Court, was there restriction on transferability. Even otherwise, if the decision of the House of Lords in the case of Abbot were applied, the result would not be in favour of the department. This would be so because, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions of the Planning Commission for the software industries. The Gazette notification contained a directive to the various Ministries to forthwith give effect to directives notified in the Official Gazette. One of the directives in the Official Gazette was to tax the benefits arising under an ESOP only at the time of sale of an underlying share. (v) There was no specific provision in the Act dealing with treatment of ESOP benefit as taxable perquisite. In the light of these prevailing circumstances any reasonable person would have come to a conclusion that the benefit in an ESOP is not required to be taxed at the time of exercise of the option. The ld. Departmental Representative has tried to fasten the liability upon the assessee-company by looking at the law that was subsequently introduced. Can an assessee be expected to foresee what the future law would be? As held by the Supreme Court in the case of CIT v. Hindustan Electro Graphites Ltd. [2000] 243 ITR 48 clairvoyance cannot be expected of an assessee. An assessee could, therefore, not be charged guilty of not being able to predict the law that, will be enacted in future and mould his current conduct to the possible futu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts are also retrospective in effect. By virtue of this retrospective amendment, a company would be liable for an action under section 201 if there is a failure to pay even a part of the tax that it was required to deduct at source. Hon'ble Karnataka High Court in case of MittalSteel Ltd. v. Asstt. CIT [1999] 240 ITR 707 has held that proceedings under section 201 are penal in nature. We are, therefore, of the considered opinion that no provision, which are penal in nature can be so interpreted which have, a retrospective effect, to be applicable in present situation. The amendment was brought about after the company had deducted the tax at source which in opinion of revenue authorities is short deduction and not a case of total failure to deduct. In our opinion, the amendment is not to be taken into account fastening of an obligation for an earlier period. in our opinion, the amendment can be used in respect of action initiated on or after the law was put into the statute books. An action initiated after the amendment may be even for an earlier period of time. To this extent only, the law, in our opinion, is retrospective. 34. The ld. Departmental Representative also made an atte ..... X X X X Extracts X X X X X X X X Extracts X X X X
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