2012 (10) TMI 1030 - AT - Income Tax

ESOP gains taxed as long-term capital gains by Tribunal, recognizing rights as capital assets

The Tribunal upheld the first appellate authority's decision, ruling that the gain from the transfer of Employee Stock Option Plan (ESOP) rights should be ... Sale of ESOP shares - LTCG or STCG - Date of acquisition - date of allotment - Held that:- The undisputed fact is that the assessee acquired the right in the form of employees stock option plan (ESOP) from Gillette Co. ESOPs are cashless. The assessee surrendered these rights and obtained certain amount, being the difference of the price of shares between the date of grant and the date of surrender. On these facts, in our opinion the issues are covered in favour of assessee by the decision of the Delhi Bench of the Tribunal in the case of Abhiram Seth (2011 (9) TMI 186 - ITAT, New Delhi)wherein held that the right of shares constitute capital assets and the gains should be taxed as “Long Term Capital Gains” as the holding period is more than 3 years. - Decided in favor of assessee. Issues:1. Interpretation of section 2(42A) of the IT Act regarding the classification of gain from the sale of ESOP.2. Determination of whether the gain from ESOP should be considered as short-term or long-term capital gain based on the date of exercise and sale.3. Assessment of whether the rights acquired through ESOP should be treated as a capital asset for tax purposes.4. Application of relevant case laws to support the arguments presented by both the Revenue and the assessee.Analysis:1. The primary issue in this case pertains to the interpretation of section 2(42A) of the IT Act regarding the classification of the gain from the sale of Employee Stock Options (ESOP). The Revenue contended that the gain should be treated as short-term capital gain, while the assessee argued for long-term capital gain classification based on the date of exercise and sale.2. The Assessing Officer (AO) concluded that the gain should be considered as short-term capital gain since the assessee transferred shares obtained through ESOP on the same date as the exercise of the option, irrespective of the period from the date of grant. The AO emphasized that the date of exercise is crucial for determining the capital gain classification.3. The first appellate authority ruled in favor of the assessee, considering the rights relinquished by the assessee as held for more than 3 years, thereby taxable as long-term capital gain. The authority highlighted the distinction between acquiring shares and acquiring rights through ESOP, emphasizing the valuable nature of the rights as a capital asset.4. The Appellate Tribunal analyzed various case laws, including the decision in the case of Abhiram Seth, to support the assessee's claim that the gains from transferring ESOP rights should be taxed as long-term capital gains. The Tribunal rejected the Revenue's arguments based on the date of exercise, emphasizing the valuable and transferable nature of the rights acquired through ESOP.5. The Tribunal differentiated the case of Giridhar Krishna M. where shares were acquired and transferred, from the current case where only rights were surrendered. The Tribunal also distinguished the case of Vijay Gopal Jindal, where payments were made for acquiring shares, which was not the scenario in the present case.6. Ultimately, the Tribunal upheld the first appellate authority's decision, dismissing the Revenue's appeal and affirming that the gain from the transfer of ESOP rights should be taxed as long-term capital gains. The Tribunal's decision was based on the valuable and transferable nature of the rights acquired through ESOP, holding them as a capital asset deserving long-term capital gain treatment.