ESOP Benefits Taxable for Exercised Options: Tribunal Decision

The Tribunal upheld the Assessing Officer's decision to tax the ESOP benefits in the assessment year 2000-01, following the Third Member decision in Garrick D'Silva v. Joint CIT [2006] 105 TTJ 445. The Tribunal determined that the benefits were taxable under section 17(2)(iiia) as they were granted at a concessional rate and crystallized upon exercising the option and payment. The perquisite was held to be taxable in the assessment year 2000-01, reversing the first appellate authority's decision. The cross-objection filed by the assessee was dismissed.

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Issues Involved:
1. Taxability of Employee Stock Option Plan (ESOP) benefits u/s 17(2)(iiia) of the Income-tax Act, 1961.
2. Determination of the assessment year in which the ESOP benefits should be taxed.

Summary:

Issue 1: Taxability of ESOP Benefits u/s 17(2)(iiia)
The assessee, an employee of Zee Telefilms Ltd., was granted 3000 warrants under an ESOP on February 1, 1999, which could be converted into equity shares at Rs. 212 per share, below the market price. The Assessing Officer (AO) taxed the benefit as a perquisite u/s 17(2)(iiia) of the Income-tax Act, 1961, amounting to Rs. 25,77,000. The first appellate authority agreed that the benefits arising out of ESOP are taxable but held that the amount should be taxed in the assessment year 1999-2000, not 2000-01. The Tribunal, following the Third Member decision in Garrick D'Silva v. Joint CIT [2006] 105 TTJ 445, held that the ESOP benefits are taxable u/s 17(2)(iiia) as they were granted at a concessional rate and crystallized upon exercising the option within the specified period and on payment of a pre-determined amount.

Issue 2: Determination of the Assessment Year
The Tribunal examined whether the benefit should be taxed in the assessment year 1999-2000 or 2000-01. The Tribunal noted that the right to acquire shares was granted on February 1, 1999, but could only be exercised within three months from the announcement of the financial results for the year ending March 31, 1999. The Tribunal concluded that the right was inchoate and crystallized only when the assessee exercised the option and made the payment in the assessment year 2000-01. Therefore, the perquisite should be taxed in the assessment year 2000-01, reversing the first appellate authority's decision.

Conclusion:
The Tribunal upheld the AO's decision to tax the ESOP benefits in the assessment year 2000-01 and dismissed the cross-objection filed by the assessee. The order was pronounced on July 31, 2008.

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