Tribunal Confirms SARs Redemption as Taxable Salary Income; Deletes Interest Due to Employer's TDS Responsibility.

The Tribunal upheld the taxability of the amount received on redemption of Stock Appreciation Rights (SARs) under 'income from salaries', rejecting the argument that SARs should be treated as a capital asset. It confirmed that the amount received is a revenue receipt akin to deferred wages. Additionally, the Tribunal directed the deletion of interest levied under section 234B, as the employer was responsible for tax deduction at source, referencing the precedent in Motorola Inc. v. Dy. CIT.

---

---

Issues Involved:
1. Taxability of the amount received on redemption of Stock Appreciation Rights (SARs) under the head 'Salaries'.
2. Whether SARs should be considered as a capital asset and the tax implications thereof.
3. Levy of interest under section 234B of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Taxability of the amount received on redemption of Stock Appreciation Rights (SARs) under the head 'Salaries':

The primary issue was whether the amount received on redemption of SARs should be taxed as 'Salaries'. The assessee argued that since there was no employer-employee relationship between the assessee and the grantor of the SARs (Procter & Gamble Inc., USA), the amount could not be taxed as 'Salaries'. The assessee also contended that the SARs were granted as a recognition of contributions to the Procter & Gamble Group, and were not part of the employment contract with Procter & Gamble India.

The Tribunal noted that the SARs were granted as a deferred wage, contingent upon the performance of the company's shares in the market. It was concluded that the amount received on redemption of SARs is in the nature of income because it is a consideration for services rendered by the assessee. The Tribunal held that the amount received on redemption of SARs is taxable under the head 'income from salaries'.

The Tribunal also considered the argument that if the amount could not be taxed under 'Salaries', it should not be taxed at all. However, it was concluded that even if the amount is received from a person other than the employer, it can still be taxed under the head 'income from other sources' as per the Supreme Court's decision in Emil Webber v. CIT.

2. Whether SARs should be considered as a capital asset and the tax implications thereof:

The assessee argued that SARs should be treated as a capital asset, and since they were acquired without cost, no capital gains would arise on their transfer. The Tribunal rejected this argument, stating that the amount received on redemption of SARs is a revenue receipt in the nature of deferred wages or bonus, and not a capital receipt. The Tribunal emphasized that the taxability is not in respect of the SARs per se, but the amount received as a fruit of employment, measured by a formula based on the appreciation of market value of shares.

3. Levy of interest under section 234B of the Income-tax Act, 1961:

The Tribunal referred to the Special Bench decision in the case of Motorola Inc. v. Dy. CIT, which held that when all the monies received by the assessee are subject to tax deduction at source, the assessee cannot be said to have committed a default in not paying advance tax. Since the employer had a duty to deduct tax at source on the amount taxable under 'income from salaries', the assessee was entitled to take into account the tax deductible, though not actually deducted. Consequently, the Tribunal directed the Assessing Officer to delete the levy of interest under section 234B.

Conclusion:

The Tribunal upheld the taxability of the amount received on redemption of SARs under the head 'income from salaries'. It rejected the argument that SARs should be treated as a capital asset and confirmed that the amount received on redemption is a revenue receipt. The Tribunal also directed the deletion of interest levied under section 234B, following the precedent set in the Motorola Inc. case.

---