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TMI Blog2002 (6) TMI 157X X X X Extracts X X X X X X X X Extracts X X X X ..... terest under section 201(1A) of the Act. 3. Infosys 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esignation or whatever reason or being 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 23-08-1996 1,24,600 15-01-1998 2,70 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 been filed. 9. Learned senior advocate, Shri Sarangan, assailing the order of the CIT(A), has urged that no perquisite arises to an employee, as a result of his participation in ESOP plan. In support of this contention various arguments have been put forth by him, In addition to the primary contention that no perquisite should arise, the learned senior counsel also submitted reasons as to why the provisions of section 192 are not attracted in the case. The learned Departmental Representative has submitted, on the other hand, various grounds to as to why the provisions of section 192 are attracted. He argued that for the reason that the employee has participated in the ESOP plan a benefit has been conf erred. This benefit is liable to be taxed as a part of salary, Fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rust 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 the purpose of arriving at the value of share, the learned Departmental Representative urged that Rule 14 of Schedule III of Wealth-tax Act should be adopted as per which, in the case of a company whose shares arc quoted on Stock Exchange, the quoted price should be the market value. The learned Departmental Representative also referred to Rule 21 of Schedule III to the Wealth-tax Act which mandates the ignorance of restriction on transferability in arriving at the value of any asset. In the end the learned Departmental Representative also contended that the appellant company has recovered (though after the demand was raised by the department) the tax demanded in the order under section 201 from its employees. Having recovered the tax from the employees he contended th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 TDS obligations without any response from the department; (xv) that the department is trying to fasten a liability under section 192 read with section 201 on the basis of a law enacted much after the time of discharging the TDS obligations was over, and (xvi) that the appeal is maintainable as the appellant-company is still all aggrieved person despite having recovered the taxes from the employees. 12. We have carefully considered the rival submissions of both the parties, the relevant facts and various case laws cited. The concept of ESOP has not been of any ancient origin in India. It is only recently that the companies have adopted such mechanism. The philosophy behind the ESOP plan is that employees are best cared for, when they have a sense of belongingness to the company and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 an ESOP Plan, is, a perquisite within the meaning of section 17(2)(iii) and (ii) when does the perquisite can be said to accrue or arise, i.e. (a) Whether it arises at the time when the warrants are granted? (b) Whether it arises at the time when the options vest in an employee, which in the instant case, happens after the cooling period of 12 months? (c) Whether the benefit arises when the options are exercised? (a) Whether the benefit arises at the time when the employee, as in the instant case, is freed from lock-in-conditions to which the shares are subjected to? (e) Whether the benefit arises when the shares are sold? (iii) If there is a benefit or an amenity the further question is, whether the company in the light of prevalent position of law was obliged to deduct tax at source under se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, with reference to the market value of the share on any particular day. It is common knowledge that the price of shares fluctuate every day. The "benefit" would then fluctuate accordingly. If the employees exercised shares on different dates, and the share prices were different on these dates, the employees would be chargeable on different incomes although the services performed by them were identical. In our opinion, it would not be appropriate to compare the market price prevailing on various exercise dates more so when the exercise dates vary depending upon the choice of the employee and the share prices keep fluctuating. The comparison, therefore, seems unfounded. If at all, a benefit can be said to be derived, the shares have to be allotted free from all encumbrances. That would happen only aft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 introduced for the first time w.e.f. 1-4-2000. Even these provisions were deleted by the Finance Act, 2000 w.e.f. 1-4-2001. The benefit to an employee from participating in ESOP plan is now taxable only under the head capital gains, provided the ESOP fulfils the guidelines laid down by the Central Government. The amendment brought about by the Finance Act, 1999, in our opinion, is not retrospective. As held by the Hon'ble Madras High Court recently in S. Subash v. CIT [2001] 248 ITR 512 retrospectively is not to be read into a legislation unless it is specifically so stated. The Hon'ble High Court observed as follows: "The normal rule of any statutory provision is that its operation is prospective. It is only in case of procedural provisions that in the absence of any intention to the contrary whether exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 statutory guidelines regarding the quantification of values, be determined by the Assessing Officer in his own fanciful way. The employees would then suffer tax in varying manners, although the benefit received by them would have been the same. It should, therefore, not have been left to the discretion of the Assessing Officer to tax the perquisite. There has to be a certainty as well as uniformity in valuing and taxing a perquisite. It is for this reason that section 295(2)(c) of the Act provides for the determination of the value of the perquisite on the basis of rules framed by the Central Board of Direct Taxes. Even section 17(2)(iii) says that it shall be the value of the benefit that shall be taxable as a perquisite. Such value has to be arrived at a manner defined by a statute. Unless, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umber 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 the case of Karamchari Union relied upon by the learned Departmental Representative is, in fact, in favour of the assessee. It has been held therein that in interpreting tax laws, equity cannot be taken into account. Therefore, unless there is a clear provision of law to bring to tax any particular item/receipt, legislative intent or equitable consideration, in our opinion, cannot make the same taxable. The case of Karamchari Union involved taxability of dearness allowance and city compensatory allowance. The same was held taxable in view of the specific provision in sub-clauses (iiia) & (iiib) to sub-section (24) of section 2 defining the word "income". In the present case, no such specific clause is included either in section 2(24) defining "income" or in section 17(2) defining the word perquisite". If at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the real income and not any hypothetical/notional or an imaginary income. In other words, the benefit or an amenity should be capable of being enjoyed by the employee without any let or latches or any hindrance. It should not be a contingent interest...The benefit should not be subjected to a number of conditionalities or obligations to be fulfilled in an ongoing manner. In the case of E.D. Sassoon & Co. Ltd v. CIT [1954] 26 ITR 27, Hon'ble Supreme Court held that unless and until the assessee acquires a right to receive the income, the income cannot be said to have accrued to him. In the instant case, the physical custody of shares is not with the employees. It lies with the Trust. The Trust is empowered to retransfer the same to its name in situations where the condition precedent of an ESOP are not fulfilled. Thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et 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 and arrangements entered into with the stock exchange would indicate that the shares kept apart for being allotted under ESOP are not transferable till a defined period being 5 years from the date of grant of warrants. The notice from Stock Exchange very clearly states that transfer of these shares within the defined period would not be good delivery at all. The notice also mentions that the certificate of shares has been enfaced with transferable period. For the shares under the a stamp regarding the non ESOP, therefore, there is no open market at all. These shares by virtue of conditionalities under the ESOP, which scheme has been approved by the shareholders in the Annual General Body Meeting and which, therefore, is binding upon the company, makes it abundantly clear that the shares are not transferable for a ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined 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 to be arrived at by a process of elimination. There has to be clear legal support for any proposition to tax a benefit. The Commissioner (Appeals) has not also dealt that aspect at all, although it was specifically mentioned in the appeal papers. We have already indicated the reason as to why no perquisite should be held to arise to an employee for participation in an ESOP. We would, therefore, not go into the aspect of the timing of taxability at all as, in our opinion, the conclusion would remain the same irrespective of whichever alternative is considered. 25. In quantifying the benefit the ld. Departmental Representative wanted us to adopt the methodology prescribed in Rule 14 of Schedule HI of Wealth-tax Act. We have already held that no perquisite accrues to an employee in the circumstances of the case. Neverthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 any law. Under section 119, circulars can be issued only for the purpose of proper administration of law. We also agree with the ld. Senior Counsel for the assessee that the circulars are not binding on the assessees. We have also instances where circulars trying to create a law were even held to be invalid. Thus, the Authority for Advance Ruling in the case of TVM Ltd v. CIT [1999] 237 ITR 230 struck down Circular No. 742 as not binding. Circular No. 742 was itself withdrawn by Circular No. 6 of 2001. There cannot be, through an administrative body like the CBDT, an introduction of and withdrawal of any item being regarded as an income. Without any legislative mandate, any law created by any body or authority is to be regarded as invalid and hence of no effect. Even otherwise, Circulars can be useful in understanding th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... renuously 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 many cases in which the terms of an intelligible proviso may throw considerable light on the ambiguous import of the words in a statute. A proviso thus is a useful guide in the selection of one or the other of two possible constructions of words in the enactment or to show the scope of the latter in a doubtful case. Therefore, the context setting and purpose of a section may warrant a different construction. A proviso may, therefore, not always be regarded as an exception to the main body of the law. Hon'ble Supreme Court in case of Allied Motors (P.) Ltd v. CIT [1997] 224 ITR 677 had an occasion to consider the effect of insertion of proviso to section 43B with effect from 1-4-1988. The three Judges-Bench of the Court held as under: "Section 43B(a), the first proviso to section 43B and Explanation have to be read together ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 is taxable at the time of grant, (b) That in England, the law itself was changed soon after the decision in the House of Lords in the case referred to above. (c) Prior to 1999, there was no circular issued under section 192 dealing the obligations of an employer in relation to ESOP taxation. (d) Circulars of CBDT (more specifically Circular No. 710 which was the relevant circular on the topic) are not binding on the assessee. At any rate, the learned Departmental Representative has also conceded that apart from indicating the legislative intent, he does not wish to rely upon the circular in any other respect. (e) The ruling of the Authority for Advance Ruling made the parent company liable to deduct tax at source, being the person who granted the shares. In the present case, since the Trust has transferred the warrants/shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly 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 the present case, the department has tried to fix the obligation upon the employer at the time of exercise of the warrants. In English case, however, it was held that the benefits arise at the time of the grant of the options. 31. There are also number of important features that should not be lost sight off. With regard to the obligation of the company in deducting tax at source, provisions of section 192 are applicable for the purpose of deducting tax at source from the salaries paid to an employee. Under section 192, an employer is required to deduct tax at source on the estimated income of the employee under the head "salaries". An estimation would involve guess work. Precision is not demanded nor expected. What is, however, required is that the employer has to do his job in fair, honest and bona fide manner. The ld. Departmental ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 future pattern of law. That win be asking an assessee to do the impossible. The argument of the ld. Departmental Representative in fastening the liability of the company only on the basis of a future law, (which he himself became aware of after the expiry of the relevant years) is, therefore, without merit. 32. The provisions of Chapter XVII referring to tax deduction at source are one of the mechanisms of ensuring the taxes being paid by an assessee. The payer of any specific sum is required to deduct tax at source and pay the same to the Government on behalf of the payee. The payer, therefore, acts as an agent on behalf of the Government. In this role of an agent or Trustee, it is expected that all the actions are reasonable and fair. If that is demonstrated to have been done, then, in our opinion, no further obligation can be cast upon the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 attempt that the assessee has recovered the tax deducted in the order under section 201 from its employees. He argued that having recovered the tax from the employees, the assessee-company is no longer an 'aggrieved person' and, therefore, the appeal is not maintainable. An order has been passed against the assessee-company raising demand of tax under section 201(1). An order under section 201(1) is specifically appealable under section 246A. There are no conditions laid down in section 246A that merely because the amount deducted is recovered, an appeal is not maintainable. An order under section 201(1) is passed on a person who is deemed to be an assessee in default. A stigma is, therefore, attached to a person on whom an order under section 201 is passed. He is held guilty of short deduction. An appeal, in our opinion, would, therefore, be maintain ..... X X X X Extracts X X X X X X X X Extracts X X X X
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