2014 (12) TMI 1192 - AT - Income Tax

ESOP gains tax claim approved by Tribunal based on share ownership history & legal principles

Asstt. Commissioner of Income, Tax -26 (2), Mumbai Versus Laxmanan Shankar

The Tribunal upheld the ld. CIT(A)'s order, allowing the assessee's claim of Long Term Capital Gains on the sale of shares acquired under the ESOP scheme. ... Long term capital asset - CIT(A) held that the assessee has been holding the 2000 shares of his employer company M/s I Flex Solutions Ltd as “Legal Owner” for more than one year and hence, it was long term capital asset” - Held that:- found from the record that the assessee has got these shares under a scheme of ESOP wherein the assessee received 250 shares in April 2000 (before the issue of the bonus in October 2000 and September 2003 and split of the shares in two of ₹ 5/- each). However, no basis has been given by the AO for holding that the shares were purchased on 18.12.2006. However, ld. CIT(A) has recorded, finding to the effect that the shares were allotted to the assessee under ESOP scheme in the year 2000 and thereafter bonus shares were issued and there was a split of shares which resulted in total number of shares at 2000, accordingly treated the same as long term capital assets. At no point of time, the ld. DR controverted the finding of CIT(A), by bringing any positive material on record. Accordingly, we do not find any infirmity in the order of ld. CIT(A) for allowing the assessee’s claim of Long Term Capital Gains. See Muthuswamy Ravikumar V/s ACIT [2008 (3) TMI 407 - ITAT BANGALORE-A] wherein held it is the date of grant of the stock option in favour of the assessee that is material for determining the period of holding the asset in question, and not the date on which the option was exercised and stock options were converted into shares. capital gains arising out of the sale of shares acquired through ESOPs have to be assessed as long-term capital gains with consequential benefits of indexation and exemption under s. 54 - Decided in favour of assessee. Issues:- Assessment of Long Term Capital Gains on sale of shares- Interpretation of ESOP scheme for determining ownership of sharesAnalysis:1. Assessment of Long Term Capital Gains: The appeal filed by the revenue was against the order of the ld. CIT(A) for the assessment year 2007-08 regarding the treatment of 2000 shares sold by the assessee as long term capital asset. The AO initially treated the gains as Short Term Capital Gains due to the purchase and sale dates being close. However, the ld. CIT(A) considered the history of share ownership under the ESOP scheme and concluded that the shares were held as long term capital assets. The Tribunal upheld this decision, emphasizing that the shares were acquired gradually over the years, and the assessee became the legal owner of all 2000 shares by 2005, well before the sale in 2006. The FIFO method was deemed applicable for determining ownership, not the LIFO method, as per legal provisions.2. Interpretation of ESOP Scheme: The Tribunal analyzed the ESOP scheme under which the assessee received 250 shares in 2000, with subsequent bonus shares and share splits leading to ownership of 2000 shares by 2005. The decision highlighted that the date of grant of stock options is crucial for determining the holding period of the asset, not the date of exercising the option. Citing precedents, the Tribunal affirmed that capital gains from shares acquired through ESOPs should be treated as long-term capital gains, allowing indexation benefits and exemptions under relevant tax laws. The Tribunal's decision was consistent with previous judgments on similar cases, reinforcing the validity of assessing such gains as long term.In conclusion, the Tribunal upheld the ld. CIT(A)'s order, allowing the assessee's claim of Long Term Capital Gains on the sale of shares acquired under the ESOP scheme. The decision was based on a detailed analysis of the share ownership history and the application of legal principles governing the taxation of ESOP-related transactions.