2014 (3) TMI 21 - AT - Income Tax

Tribunal rules in favor of Revenue, denies assessee's claim for cost of acquisition.

The Tribunal allowed the Revenue's appeal, determining that the amended provisions of section 115WB do not apply to the assessee as the shares vested ... Scope of FBT u/s 115WC(1)(ba) of the Act - Whether the CIT(A) erred in applying provisions of section 49(2AB) r.w.s. 115WC(1)(ba) of the Act, 1961 and giving relief on the shares that vested on 31/03/2007 on the assessee ignoring the fact that these provisions apply only w.e.f. 01/04/2008 i.e. AY 2008- 09 - Relief with regard to the taxation of capital gains relating to share transactions (ESOPs) – Held that:- The amended provisions of section 115WB are applicable to the facts of the present case - As clarified by the CBDT circular No. 9/2007 dated 20.12.2007, the amended provisions of section 115WB are applicable only when the shares allotted/ transferred on or after the 1st day of April, 2007 - As seen from the letter produced by the Revenue, the shares are vested with the assessee on 31st March, 2007 which is before the 1st day of April, 2007 –thus, the assessee's claim cannot be allowed u/s 115WB(1)(d) of the Act – thus, the order of the CIT(A) set aside – Decided in faovur of Revenue. Issues Involved:1. Taxation of capital gains relating to share transactions (ESOPs).2. Application of provisions of section 49(2AB) read with section 115WC(1)(ba) of the Income-tax Act, 1961.3. Eligibility for benefits under section 115WB(1)(d) and Circular No. 9 of 2007.4. Evidence of exercising option and taking over of shares after 01/04/2007.Issue-wise Detailed Analysis:1. Taxation of Capital Gains Relating to Share Transactions (ESOPs):The Revenue contested the relief granted by the Commissioner of Income-tax (Appeals) [CIT(A)] regarding the taxation of capital gains from ESOPs. The assessee, a General Manager at IVY Comptech Pvt. Ltd., filed a return claiming short-term capital loss on the sale of ESOPs, which was disallowed by the Assessing Officer (AO) on the grounds that the loss was notional and not physical since the assessee did not invest any amount in acquiring the ESOPs. The CIT(A) observed that the AO did not consider the amended provisions of section 49(2AB) and the introduction of Fringe Benefit Tax (FBT) from the assessment year 2008-09, which allows the fair market value (FMV) on which FBT was paid by the employer to be considered as the cost of acquisition.2. Application of Provisions of Section 49(2AB) Read with Section 115WC(1)(ba):The CIT(A) noted that section 49(2AB) was amended to state that the cost of acquisition of specified security or sweat equity shares should be the FMV considered while computing the value of fringe benefits under section 115WC(1)(ba). The CIT(A) held that the AO's observation that the loss was notional was incorrect because the FMV on which FBT was paid by the employer becomes the cost of acquisition as per the amended provisions. Therefore, the assessee was entitled to claim the FMV as the cost of acquisition for calculating capital gains.3. Eligibility for Benefits under Section 115WB(1)(d) and Circular No. 9 of 2007:The CIT(A) observed that the AO did not consider the introduction of FBT from the assessment year 2008-09, which brought the grant of stock options within the purview of FBT. The salient features of the scheme include that FBT applies to all cases where specified security or sweat equity shares are allotted or transferred by the employer to the employee, and the value of the fringe benefit is subjected to FBT at the prevailing rate. The CIT(A) concluded that the FMV adopted by the employer for FBT purposes becomes the cost of acquisition for capital gains calculation, and the AO should allow the cost of acquisition based on the FMV on the date of vesting.4. Evidence of Exercising Option and Taking Over of Shares after 01/04/2007:The Revenue argued that the shares vested with the assessee before 31st March 2007, and the amended provisions of section 115WB are applicable only after 1st April 2007. The CIT(A) had allowed the assessee's claim based on the relevant assessment year being 2008-09. However, the Tribunal referred to CBDT Circular No. 9/2007, which clarified that the amended provisions apply only when shares are allotted or transferred on or after 1st April 2007. Since the shares vested with the assessee on 31st March 2007, the Tribunal held that the assessee's claim could not be allowed under section 115WB(1)(d) and reversed the findings of the CIT(A).Conclusion:The Tribunal allowed the Revenue's appeal, concluding that the amended provisions of section 115WB and the associated benefits do not apply to the assessee's case as the shares vested before 1st April 2007. The Tribunal directed the AO to reverse the relief granted by the CIT(A) and disallowed the assessee's claim for the cost of acquisition based on the FMV on the date of vesting. The appeal of the Revenue was allowed, and the order was pronounced in the open court on 18th February 2014.