2015 (2) TMI 761 - HC - Income Tax

Supreme Court affirms treatment of Stock Appreciation Rights & ESOPs as capital gains

BHARAT V. PATEL Versus CIT. -I

The Supreme Court ruled in favor of the assessee, affirming the Tribunal's treatment of the amount received on redemption of Stock Appreciation Rights as ... Redemption of Stock Appreciation Rights (SARs) - Capital gain v/s perquisite under Sec.17(2)(iii)or under Sec. 28(iv) of the Act - Employee's Stock Option Plan (EOSP) - LTCG v/s STCG - Held that:- Considering the decision of Infosys Technologies Ltd. (2008 (1) TMI 17 - SUPREME COURT OF INDIA) wherein held the revenue had erred in treating amount being difference in market value of shares on the date of exercise of option and total amount ‘paid’ by employees consequent upon exercise of the said options as perquisite value as during the lock-in period there was no cash inflow to employees to foresee future market value of shares and the benefit if any which arose on date when option stood exercised was only a notional benefit whose value was unascertainable. The Tribunal was correct in treating the amount received on redemption of Stock Appreciation Rights as capital gain as against treated as perquisite under Sec.17(2)(iii) of the I.T. Act and in treating the amount received on exercising the opinion of Employee's Stock Option Plan (EOSP) as long term capital gains instead of treating the same as short term capital gains. However, the Tribunal was not justified in holding that capital gain arose to the assessee on redemption of Stock Appreciation Rights which were having no cost of acquisition. - Decided in favour of assessee. Issues involved:1. Treatment of amount received on redemption of Stock Appreciation Rights as capital gain or perquisite under the Income Tax Act.2. Classification of gain from stock options as short term or long term capital gain.3. Interpretation of legislative provisions regarding taxation of Employee Stock Option Plans (ESOPs).Analysis:Issue 1: Treatment of amount received on redemption of Stock Appreciation RightsThe appeals challenged the Tribunal's decision to treat the sum received on redemption of Stock Appreciation Rights (SARs) as capital gain instead of a perquisite under Sec.17(2)(iii) or Sec. 28(iv) of the Income Tax Act. The key question was whether the gain should be considered as short term or long term capital gain. The Tribunal considered stock options as capital assets acquired for consideration, leading to capital gain tax liability. The revenue disputed this, arguing that the amount was not taxable as salary or perquisite. The Supreme Court's decision in the Infosys case clarified that, in the absence of a legislative mandate, a potential benefit cannot be considered income chargeable under the head 'Salaries.'Issue 2: Classification of gain from stock optionsThe Tribunal's decision to treat the amount received on exercising the Employee's Stock Option Plan (EOSP) as long term capital gains instead of short term capital gains was also contested. The Supreme Court's ruling in the Infosys case was crucial in determining that the benefit arising from the exercise of options during the lock-in period was not a cash inflow to employees and was only a notional benefit. This decision influenced the Court's conclusion that the questions raised in the appeals should be answered in favor of the assessee, as the revenue had erred in treating the market value difference of shares as a perquisite value.Issue 3: Interpretation of legislative provisions on ESOP taxationThe Supreme Court's decision highlighted the significance of legislative provisions in determining the taxability of ESOPs. It emphasized that the introduction of Section 17(2)(iiia) in 2000 specifically made ESOP benefits taxable as income. The retrospective nature of this provision was debated, with the Court concluding that, until its introduction, the value of options was not ascertainable. The Court's analysis of the legislative framework underlined the importance of clarity and specificity in tax provisions.In conclusion, the Court ruled in favor of the assessee, affirming the Tribunal's treatment of the amount received on redemption of Stock Appreciation Rights as capital gain and the classification of the EOSP amount as long term capital gains. The decision was influenced by the Supreme Court's interpretation of ESOP taxation and the absence of legislative clarity on potential benefits as taxable income.