Employee Stock Option Scheme benefits not taxable as perquisites before section 17(2) amendment; TDS penalty cancelled.

Employee Stock Option Scheme benefits were not taxable perquisites before the insertion of clause (iiia) in section 17(2) of the Income-tax Act, 1961, effective from 1 April 2000. The Tribunal treated shares allotted under the scheme as becoming perquisites only from assessment year 2001-02 onwards, so no taxable benefit arose to employees for the relevant years. As no tax was deductible at source on those benefits for 1998-99 and 1999-2000, penalty under section 271C for failure to deduct tax at source was not leviable. The cancellation of penalties was upheld and the Department's appeals were rejected.

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Issues: Whether benefits arising under an Employee Stock Option Scheme were taxable perquisites before insertion of clause (iiia) in section 17(2) of the Income-tax Act, 1961, and whether penalty under section 271C could be levied for failure to deduct tax at source on such benefits.

Analysis: The Tribunal followed the view that participation in an Employee Stock Option Scheme did not confer a taxable benefit on employees prior to the insertion of clause (iiia) to section 17(2) by the Finance Act, 1999, effective from 1 April 2000. It held that shares allotted under the scheme became perquisites only from assessment year 2001-02 onwards. For the financial years in question, 1998-99 and 1999-2000, no taxable benefit had accrued to the employees on account of the scheme, and therefore there was no obligation to deduct tax at source on that account.

Conclusion: No tax was deductible at source on the Employee Stock Option Scheme benefits for the relevant years, and the penalty under section 271C was not exigible. The cancellation of penalties was upheld and the Department's appeals were rejected.

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