TaxTMI 
TaxTMI 
2005 (12) TMI 218
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....d as income and while doing so, has grossly erred in not accepting that the perquisite value of the residential accommodation should be limited to Rs. 7,80,000 being the actual rent paid since the fare rental value was less than 10 per cent of the salary. (d) Rs. 1,20,000 being maintenance charges incurred by the employer. (e) Rs. 39,79,815 being the amount of net gain on sale of exercised stock options even though the learned CIT(A) had accepted that the AO is incorrect in holding that in business, any taxable income arising at the time of exercise, the gain of sale can be treated as income under the head salaries. (f) Rs. 1,16,130 being the amount of corporate club membership paid by the employer for the purposes of its business. (g) Rs. 50,000 alleged to be the perquisite value of electricity on estimated basis even though no amount was actually incurred by the employer and therefore no amount could be attributed as perquisite in view of the provisions of r. 3(d) of the IT Rules, 1962. 2. The learned CIT(A) has omitted to adjudicate upon ground No. 12 in the assessee's appeal before him against the charging of interest of Rs. 12,39,208 under s. 234B even though th....
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....IT(A) in the aforesaid case of Whirlpool India Ltd. The CIT(A) re-examined the issue in the light of assessee's contention and finally held that deductions made from salary in respect of hypo tax, housing norm and auto norm are definitely linked up to these benefits provided in India at concessional rates and not free of charge as claimed by the assessee. He, accordingly, upheld the view of the AO. 5. Now, the assessee has preferred an appeal before the Tribunal and reiterated his contention raised before the lower authorities. Learned counsel for the assessee Mr. M.S. Syali, senior advocate, has emphatically argued that in accordance with the policies, annual base salary of the assessee was reduced by US $ 27218 equivalent to Rs. 10,20,084 on account of housing and US $ 3000 on account of auto norms and the assessee was entitled to receive only the net amount of salary. In lieu thereof, the assessee was provided housing and conveyance benefits in India and an aggregate sum of Rs. 8,12,661 (Rs. 7,80,000 + Rs. 32,661) which was duly included as perquisite for rent-free accommodation and furniture and Rs. 13,200 towards conveyance at the value prescribed under the IT Act r/w IT Ru....
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....valued the perquisite in accordance with the mechanism provided in r. 3 of the IT Rules. He, therefore, added back the housing contribution and auto norms deducted from the salary, to the salary income of the assessee. Now, the question posed before us is whether the housing contribution and the auto norms initially reduced from the salary of the assessee can be termed to be as part of the salary in order to determine the taxable income of the assessee. The main thrust of the argument of the learned counsel for the assessee is that the salary of employees sent on overseas assignment vis-a-vis other employees in the home country is structured so as to ensure economic equity in the compensation of the employees and this parity in compensation is maintained through a book entry mechanism whereby the amount the employee would have reasonably incurred on housing and conveyance in the home country is estimated and reduced from the salary. It was also contended by Mr. Syali that the housing norm and auto norm represents the amount the expatriate employee would have paid towards housing and conveyance had he continued to render service in his own country. These amounts are reduced from the....
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....mbai Bench was mainly guided by the fact that reduction of hypo tax from the salary does not make any difference to the overall taxable salary because of adding back the tax borne by employer as a perquisite. This was the main argument advanced by Mr. Dastur, the counsel of Mr. Jaidev Raja in that case as well as clear from para 5 of the Tribunal judgment. In order to demonstrate that reduction of 'hypo tax' salary and later inclusion of 'tax borne by employer' as a 'perquisite' does not affect the taxable income. Mr. Dastur gave the following illustration. If the employer pays out Rs. 1000 towards a benefit and the employee contributes Rs. 300 then employee's benefit was only Rs. 700. This according to Mr. Dastur is the principle to value a perquisite. If as per s. 17(2)(iii), payment of Indian tax was benefit, then the value of the benefit should be determined as per this principle. According to Mr. Dastur, whether it was salary or perquisite, it made no difference to the quantum. The Tribunal agreed with removal of element of hypothetical tax from the salary only because tax borne by the employer was subsequently included as a perquisite and it really did not make any difference....
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....Shri Dastur and illustrations by the learned Tribunal itself at several places in its order leave no doubt that they had no objection to treating the case as of 'concessional tax perquisite' as an alternative solution. The finding that hypo tax can be reduced from the salary, being salary which has not accrued cannot therefore be extended to cover 'housing contribution' and 'auto norm', without keeping in view learned Tribunal's concern regarding the impact on overall tax liability in India. Further, in cases before Tribunal and learned CIT(A), the only issue was deductibility of hypo tax, hosing contribution and auto norm as a permissible deduction from salary income under the IT Act. The AO's in those cases had perhaps added back these amounts to the salary without taking into account the corresponding effect in calculation of perquisites. The assessee's reliance on learned CIT(A)'s order in employer's case is therefore not correct, as the entire context and full facts are different in his own case. 34 In assessee's case, if the 'housing contribution' and so-called 'auto norm' are reduced straightway from the gross salary, it results into a significant less tax liability inInd....
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....eyance facilities provided in India for which the parent company has deducted the housing norms and the auto norms. As observed by the AO, it is also quite evident from the appointment letter which is the only document which contains service conditions of the assessee that the company would bear the housing expenses after deducting theUShousing norm (about US $ 16000) based on survey figures. Likewise, company would also provide automobile after a car deduction of US $ 3000 per year. It means housing and conveyance facilities were provided to the assessee at a concessional rate which brings the assessee's case within the purview of s. 17(2)(ii) of the Act. We have also carefully perused the order of the Tribunal in the case of Jaidev Raja and we find that the ratio laid down in that case by the Tribunal cannot be applied in the instant case because here we are dealing with the deduction of housing norms and auto norms which cannot be equated with the hypo tax. The hypo tax was deducted by the parent company to meet the tax liabilities if accrues in the home country But deductions on account of housing norms and auto norms cannot be called to have been made to safeguard any statutor....
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....sidential accommodation. He, accordingly, worked out the perquisites on account of residential accommodation at Rs. 5,51,719 after allowing a credit of housing contribution deducted by the parent company. The assessee preferred an appeal before the CIT(A) with the submission that the fair market rent can never be more than the standard rent and the standard rent has to be worked out as per the provisions of Delhi Municipal Corporation Act, 1957. In determining the rental data, the committee appointed by the assessor and collector has placed consideration on the prevailing rent in the same locality and based on the same, the rental value of the residential accommodation is Rs. 70,000. Since the assessee himself has offered the actual rent at Rs. 7,80,000 which is higher than the standard rent of Rs. 3,19,601, as such, the claim of the assessee cannot be rejected. The CIT(A) has carefully examined the contentions of the assessee and finally upheld the order of the AO after making the following observations: "I have carefully considered the contentions of the AO and the submissions of the Authorised Representatives, and I am of the view that valuation of perquisite of a rent-free a....
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....the fair rental value is less than 10 per cent. The IT Rules are very clear in this regard." 12. Aggrieved, the assessee has preferred an appeal before the Tribunal with the submission that while adopting the perquisite value of residential accommodation provided to the assessee, the AO has followed Expln. 2 to r. 3 which provides that fair rental value of an unfurnished accommodation shall be the rent which a similar accommodation will realize or the municipal valuation in respect of the accommodation, which is higher whereas in fact it is indeed trite law that the rent which a similar accommodation shall fetch cannot exceed the standard rent. In support of his contentions, he has relied upon the judgment of the apex Court in the case of Dewan Daulat Rai Kapoor vs. New Delhi Municipal Committee & Anr. (1980) 122 ITR 700 (SC) and also in the case of M.A.E. Paes vs. CIT (1998) 146 CTR (Bom) 776 : (1998) 230 ITR 60 (Bom) in which the ratio laid down by the apex Court in the case of Dewan Daulat Rai Kapoor was followed. The learned counsel for the assessee further submitted that in view of the above decisions, before coming to the conclusion whether the rent paid is the fair rent, ....
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....a director if occupied a flat of a company to whom interest-free deposits were advanced, at a lesser monthly rent, for determining the perquisite value of accommodation, interest foregone be taken into consideration. In the present case, the employer of the assessee is deemed to have paid rent in excess of Rs. 65,000 per month as notional interest loss on the interest-free security of Rs. 1.6 crores. 14. Having considered the rival submissions and from a careful perusal of record, it is noticed that the residential accommodation which was given to the assessee was taken on lease by the employer at the monthly rent of Rs. 65,000 per month with interest-free security deposit of Rs. 1.6 crores. For determining the perquisite value of the residential accommodation provided to the assessee at free of cost or at a concessional rate, a specific procedure has been laid down in r. 3 of the IT Rules and according to its sub-r. (a) cl. (iii) the value of rent-free residential accommodation which is not furnished shall ordinarily be a sum equal to 10 per cent of the salary due to the assessee in respect of the period during which the said accommodation was occupied by him during the previou....
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....h Rent Control Act applies. It is rather a big farmhouse containing sprawling lawns besides residential accommodation with various facilities and to these farmhouses, Rent Control Act is not at all applicable. As such, there is no question of determining a standard rent as per Delhi Rent Control Act. For determining the fair rental value, one cannot lose sight of the interest-free security of Rs. 1.60 crores. We have also carefully perused the order of the Bombay High Court in the case of CIT vs. Shri Ashraf-Ur-Rehman Azimullah in which it has been held that the assessee being a director if occupied a flat of a company to whom interest-free deposits were advanced, at a lesser monthly rent, for determining the perquisite value of accommodation, interest foregone be taken into consideration. 16. In the light of aforesaid judicial pronouncements, we have examined the facts of the instant case and we find that ratio laid down by the apex Court in the Dewan Daulat Rai Kapoor and followed by the Bombay High Court in the case of M.A.E. Paes cannot apply in the instant case as it was not an ordinary building to which the Rent Control Act applies. In these type of residential accommodati....
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....; USI) --------------------------------------------------------------- 1. 21-6-1994 53.38 Average of high 1000 11-3-1998 68 & low price at New York Stock Exchange on the date of grant 2. 15-8-1995 55.81 -do- &n....
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....ion, the AO has also observed that the assessee has not filed a return of income for this period in this regard in any country including USA other than India, as this fact is evident from the assessee's letter dt.13th Sept., 2002, which shows that the assessee has also treated this income as arising inIndiaand not inUSAas capital gain. 19. Against this addition, an appeal was preferred before the CIT(A) and the CIT(A) re-examined the issue in the light of Circular No. 710 of the CBDT and the ruling of AAR in the case reported at (1998) 150 CTR (AAR) 504 : (1999) 102 Taxman 74 (AAR) and upheld the additions made by the AO after making the following observations: "I have carefully considered the rival contentions of the AO and the Authorised Representatives and submissions and I am of the view that in the given case, the point regarding deliberation is the essence of the benefit arising to the appellant consequent to entitlement of stock options and their subsequent exercise and sale especially in view of the absence of a direct provision in the Act governing stock options during the year under appeal. Accordingly, I am of the view that m the absence of specific provisions, the....
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....rose on sale of an asset and not in the nature of perquisite as the perquisite has actually arisen on21st June, 1994on which date the assessee acquired right to the share. Since there was no difference between the fair market value and the price at which right had been acquired, no perquisite has accrued to the assessee. 21. Learned counsel further submits that during the year under appeal i.e. asst. yr. 1998-99, there was no express provision in the Act for taxation of the stock options granted by the employer to its employee. However, s. 17(2)(iii) r/w Circular No. 710, dt.24th July, 1995provides for taxability of the shares issued to the employees at less than the market price. Other than this, the aforesaid circular which covered allotment of shares at below market price, there was no provision in the Act, Rules or the Board's Notification/Circular in respect of taxability of any perquisite whatever arising on any grant and/or exercise of stock option by an employer to his employee. With reference to definition of perquisite given under s. 17(2)(iii) of the IT Act, Mr. Syali contended that the benefits in terms of a 'concession' to an employee shall arise when an employee is....
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.... value only and hence no perquisite arose. The learned counsel Mr. Syali has placed heavy reliance upon the judgment of High Court of justice Chancery Division in the case of Abbott vs. Philbin (Inspector of Taxes) (1962) 44 ITR 144 (HL) in support of his contentions that difference between the option price and the middle market value constituted a taxable perquisite at the time of grant. Accordingly, the gain on sales of shares can only be regarded as income under the head capital gain. 23. In oppugnation, the learned Departmental Representative, besides relying upon the order of the CIT(A), has emphatically argued that judgments quoted by the assessee in the case of Abbott vs. Philbin was analysed in detail by the Authority of Advance Ruling in its judgment reported at (1998) 150 CTR (AAR) 504 : (1999) 102 Taxman 74 (AAR) before arriving at a conclusion that the benefit has accrued to the assessee in those years in which the assessee has exercised its option and not in those years in which the grant of share was done. He further submitted that though the stock option was offered on different dates and there was no difference between the offer/grant price and the prevailing mar....
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....in which the stock option was exercised; (ii) whether the benefit accruing to the assessee is in the nature of perquisite and forms part of the salary or a capital gain. 25. It is also an admitted position that this stock option was granted to the assessee during the financial years 1994-95 to 1996-97 by his employer at the prevailing market price on the date of grant. Since the assessee did not exercise the option on the date of grant, the grant remained an offer of stock option to the assessee and the assessee did not enjoy the status of ownership of these shares. As such, there is no question of any benefit accrued to the assessee at that time. Admittedly, the assessee exercised his stock option on11th March, 1998and12th March, 1998and by doing so, he enjoyed the status of ownership of these shares and became entitled to deal with these shares in any manner as he liked. Now we have to examine whether some benefit is accrued to the assessee at that moment when he exercised the option and became the owner of the shares. If benefit is accrued, we have to further examine whether it is a perquisite and forms a part of the salary of the assessee or a capital gain. At the time of ex....
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....f question was referred to the AAR and while dealing with that question, the learned authority has examined the judgment in the case of Bentley vs. Evans 39 Tax Cases 132, Abbott vs. Philbin (1960) 2 All ER 763 and State of UP vs. Renusagar Power Co. AIR 1988 SC 1737 very minutely in the light of relevant provisions of the Act and has held as under: "The applicant-company, incorporated inUSA, set up another company inIndia, which is a fully owned subsidiary of the American company. It has made a proposal to enter into a stock option agreement with the employees of the Indian subsidiary with a view to give encouragement and pecuniary incentive to them. Under this agreement, the employees of the Indian company shall have the option to subscribe to the shares of theUScompany at a predetermined price called the option price which will be lower than the ruling market price of the shares. The employees will have the option to subscribe and become the owners of the shares on any date of their choice. As and when such option is exercised, the employees will have to sell the shares in the open market in theUSAat the ruling stock market price. The applicant-company sought advance ruling o....
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....ng the benefit of purchase of shares of the American company at a concessional rate will have to be treated as perquisite under s. 17(2)(iii). But then such perquisite will have to be given by the employer as laid down in the given definition. If the definition of 'salary' as given in ss. 15 and 17 is examined, it will be seen that any salary paid by an employer to an employee as well as salary paid 'by or on behalf of an employer or a former employer' have been brought within the ambit of 'salary' chargeable to tax under s. 15. In this case, stock option is being given to the employees of the Indian company. It is true that the American parent company is making this offer. This is with a view to give an incentive to employees of the Indian company. There would have been no problem had the stock option been offered by the Indian company. But the position in law will not be different only because the stock option is offered not by the Indian company but by its parent company. If the 'salary' is paid for or on behalf of the employer that will also have to be included in the 'salary' income by virtue of cl. (b) of s. 15. In this case, stock option has been offered to the employees of ....
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....t will have to be treated as income from 'salary'. In the instant case, the American company has floated an Indian subsidiary. It has devised a scheme to give encouragement and pecuniary incentive to the employees of the Indian company by offering to them an option to purchase its own shares at a pre-determined price. This sort of transaction is not possible unless the parent company treats its own business and the business of the Indian company as one: As regards the question whether there should be a deduction of tax at source by the American company in respect of the income arising on account of stock option, the gain made by an employees after exercise of the stock option may be taxable as salary. The American company has taken upon itself the responsibility of paying this salary. The provision of s. 192 will be clearly attracted. It will have to deduct tax at source before payment of any salary to the employees of the subsidiary company. By devising the stock option scheme, the American company has taken upon itself the responsibility for paying, what must be regarded as 'salary' to the employees of the Indian company? They are under obligation under s. 192 to deduct income....
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....ary. Accordingly, this issue is decided against the assessee. 30. Apropos ground No. 1(g), it is noticed from the order of the lower authorities that the assessee is entitled to free electricity and water charges and these charges are to be borne by the employer. The AO, therefore, treated this benefit as perquisite under s. 17(2)(iii) of the Act and estimated its value at Rs. 50,000 and made addition of the same. The assessee preferred an appeal before the CIT(A) with the submission that the effect of free electricity/water is governed by provisions of r. 3(d) of the Rules. Rule 3(d) provides, "the value of the benefit to the assessee resulting from supply of gas, electricity, and water for his household consumption free of any charge shall be determined as a sum equal to the amount paid on that account by the employer to the agency supplying gas, electricity and water. The learned counsel for the assessee, therefore, pleaded that in view of the provisions of r. 3(d) and the absence of any amount of bill actually paid due to non-receipt of bill from DESU, the benefit of free electricity, water cannot be considered on estimate basis. The CIT(A) has examined the issue but confirm....
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....artly allowed for statistical purposes. KESHAW PRASAD, A.M.: November, 2003 I have perused the order authorized by my learned brother and am in agreement with the findings given by him on all the grounds of appeal except ground No. 1(b) and No. 1(e). In spite of my best efforts, I have not been able to persuade myself to agree with the findings of my learned brother on these grounds, hence the following note of dissent: 2. This ground agitates the grievance of the appellant on being taxed on the sums of Rs. 10,02,084 and Rs. 1,10,505 being housing norm and auto norm reduced from the base salary in the pay slip. The appellant is an employee of US Co. deputed to its Indian counterpart. As noted by the AO and CIT(A) to infuse economic parity, the employees' salary was reduced by a notional sum equivalent to the provision of house and car with driver according to US Standard, as if the employees had continued to work in the home State. In other words, had he continued to work in US, house and car would not have been provided by the employer, but, was to be arranged by himself. Since, he was deputed to another country, and a house and car provided, notional reduction of sums at....
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....perquisites to be provided in the country of posting is to be reduced by that figure. The deduction from gross salary accords with the economic parity in case of an employee posted inUSAand the one posted outside. The reduction has no link to the perquisites provided in the country of posting. 8. Reliance was placed on the order passed for the same year in the case of employer. M/s Whirlpool Corpn. where on examination of the salary slips, the corporate policy and other decisions on the issue, it was held that auto norm and housing norm were not includible in the base salary, and hence, tax was not to be deducted at source on such amount. Since the amounts had not accrued in the first place, the same cannot be treated as a contribution towards perks provided inIndia. It was also pointed out, that, in the very next financial year i.e. financial year 1999-2000, a remand report has been sought by the CIT(A) before following the order of his predecessor for the financial year 1995-96 to 1998-99, and, in the said remand report, it was admitted by the AO that the appellant is correct in submitting that the amounts of housing norm and auto norm are actual reductions from the base salar....
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....was not an obligation of the employer to provide such perquisite. Even the AO does not hold so. He agrees on the contrary, and holds, that, it is a contribution by the appellant towards the perquisite provided to him by the employer, which clearly establishes that the original liability was never of the employer. The factual presumption thus has led to an erroneous decision. 14. Further, why the effect of matter having been accepted in the hands of the employer has no relevant bearing on the present conclusion is entirely missing from the order. Once it is accepted that the amounts were a notional reduction and that, the salary due to the appellant was only the gross, as reduced by the notional amount, and, that, tax was not deductible on the 'gross' as having accrued to the appellant, but, only on the net amount, its taxation in the hands of the appellant obviously loses force. This decision in the case of the employer having been accepted by the Department tilts the matter in favour of the appellant conclusively. 15. The Hon'ble JM has further distinguished the decision of the Mumbai Bench relied upon by the appellant on apparently erroneous grounds. The analysis of the dec....
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.... opinion, the issue has been complicated for no reason". It is indeed trite that to appreciate the applicability of a decision, the principles emerging from the ratio need be applied. In crux, the question was whether, the hypo tax and in akin circumstance the housing norm or auto norm accrued to the appellant in the first place. The Mumbai Bench held that the hypo tax in that case did not accrue. To distinguish that ratio on the ground that housing norm and auto norm cannot be equated with hypo tax, because, hypo tax is a statutory liability, whereas, housing and auto norm are not, will indeed be sidetracking the issue The distinction is of no avail and one, which is invalid in law. 18. The Hon'ble JM further has observed that the tax equalization policy of the company has not been placed before the Bench hearing the appeal and that nothing has been placed on behalf of the appellant to establish that the employer had provided some additional accommodation or conveyance in the home country beside the housing and conveyance facilities provided in India. It was never argued before the Bench that any additional accommodation or conveyance was provided inUSA(the home country), and, ....
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....e to purchase 3200 and 2300 shares respectively at US $ 55.81 and 50.44 per share. An offer was also made onthe 18th of June, 1996for purchase of 500 shares at 50.44 US $ per share. The appellant accepted the offer and agreed to purchase at the price at which the stock option had been offered. 22. According to the scheme, the appellant had ten years time from the date of offer to purchase the shares. It was for the appellant to see when, within the span of ten years to purchase the shares and how much, so that, he could benefit to the maximum depending upon the price at which the shares will be quoted. As such, before the end of ten years, the appellant on the 11th and 12th of March, 1998 exercised the option accruing on acceptance of the offer and sold the shares on the same day at prices ranging from 68 to 68.3125/68:4375 US $ per share. In the process, the appellant gained a sum of Rs. 1,01,733.5 US $, the equivalent of which was worked out by the AO at Rs. 39,79,814.5 @ 39.12 per US $). The entire amount of Rs. 39.79 lakhs was added back as perquisite under s. 17(2)(iii) r/w s. 17(1)(iv) and s. 15(b) of the IT Act. 23. Aggrieved, an appeal was filed before the CIT(A). The....
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....8s.6d., which was then the market price. The options were not transferable and were to endure for ten years if the purchaser remained so long in the company's service. The price of the option was Pound 1 per 100 shares, and in October, 1954, the appellant acquired an option on 2,000 shares for which he paid Pound 20. The market price rose and in March, 1956, when the price was 82s., the appellant exercised his option to the extent of 250 shares and acquired them at 68s.6d., If he had immediately sold those shares he would have made a profit of Pound 166, and he has been assessed on this sum under Sch. E in the year 1955-56.....Appellant says that the option was the perquisite, and he admits that he was liable to be assessed for the year 1954-55 in respect of the value of the option when it was granted, minus the price he paid for it. He maintains that the subsequent appreciation of its value is not taxable. On the other hand, the crown maintains that he received no perquisite in 1954, the perquisite being the shares which were allotted to him when he exercised his option: if that is right, the shares when allotted were worth Pound 166 more than he paid for them and he has been prop....
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....... How, then, can it be said that an option to take up shares at a certain price is not a valuable, or at least a potentially valuable, right? Its genesis is in the desire of the company to give a benefit to its employees, and at the same time, no doubt, to enhance their interest in its prosperity. It is something which the employee thinks it worth his while to pay for : not a large sum, truly, but Pound 20 deserves a second thought. And it is something which can assuredly be turned to pecuniary account. This was challenged because the option was itself not transferable, but this objection is without substance. There was no bar, express or implied, to a sale of the shares as soon as the option was exercised, and there could be no difficulty in the grantee arranging with a third party that he would exercise the option and transfer the shares to him.......The test is whether it is something which is by its nature capable of being turned into money: Nor is it relevant that it is "unvalued". I have little doubt that, if the Revenue authorities had addressed their minds to the proper question, they could have ascertained whether it had any, and what, value. My Lords, as I have said,....
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....ins. While recording the conclusion, the brother JM has held as follows: "(a) Since, the appellant did not exercise the option on the date of the offer/grant, the grant remained an offer of stock option and the appellant never became the owner of the shares, as such, there is no question of any benefit having accrued to the appellant at that time. The benefit accrued only at the time stock option was exercised and the shares so acquired on exercise sold; (b) The benefit of exercise of stock option and sale of the shares so acquired do not result in capital gain, but are inextricably linked with the employment; (c) Since, the appellant was granted the stock option without fixing a period of exercise, the appellant was under no obligation to exercise the same on the day of grant. It was only an offer which was kept alive to be encashed as and when the market price rises or not to exercise at all if it results in a loss; (d) The decision of Abbott vs. Philbin may be in favour and negating the above stands, but all legal contentions raised in that case have been examined at length in the Advance Ruling reported at XYZ, In re (1998) 150 CTR (AAR) 504 : (1999) 102 Taxman 74 (....
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....n and Bentley vs. Evans have been cited but only to be distinguished on the premise that the issue raised therein has not been raised before the Advance Ruling Authority. This is apparent from the portion reproduced in the order of the brother JM. In the matter being considered by the Advance Ruling Authority shares had been offered and the offer accepted at a value less than the market value of the shares as on the date of offer. There was no question before the Advance Ruling Authority as to whether any part of the consideration received on sale of shares could be taken to fall within the head capital gains and not salary. In the extract reproduced by the Hon'ble JM at p. 27 of the decision para 28, the Advance Ruling Authority is said to have observed that: "it is nobody's case that mere receipt of the option is perquisite and taxable in the year in which the offer is received. Since, the shares are to be issued and sold simultaneously, it is no ground that the amount will be taxable only when the option is exercised." 32. Thus, the issue raised in the present appeal was not before the Advance Ruling Authority and there is no question of the Advance Ruling Authority, there....
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....made by the employer from the base pay of the assessee in lieu of free housing and transport facility provided in India as per the terms of employment, falls within the definition of perquisite enshrined in s. 17(2)(iii) of the Indian IT Act and forms part of the base pay and is exigible to tax? 2. Whether a profit or benefit earned/acquired by the assessee on account of exercise of stock option, earlier granted, in terms of his employment on subsequent dates and its sale is a perquisite as per provisions of s. 17(2) of the Indian IT Act or capital gain?" 2. I have heard the parties and perused the records. I will first take up the first point of dispute for consideration. 3. Though the facts of this case have been described by the learned Members of the Bench, I, for the sake of coherence, would like to refer to some of these facts, which are considered to be of relevance for a decision on the points of dispute. 4. The assessee, an Australian citizen, was appointed as managing director and president by Whirlpool Corporation,USA(the terms and conditions of appointment are available on pp. 27 to 29 of the paper book). As per the offer of appointment, the assessee was ....
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....nbsp; 70,15,543 Taxable value taken is actual rent paid i.e., Rs. 7,80,000 being lower. It is noteworthy that the assessee has calculated the salary of Rs. 1,16,92,570 on the following basis: Net salary drawn Rs. 78,44,971 Tax paid by the employer Rs. 38,47,601 --------------- Rs. 1,16,92,570 10 per cent of the same has be....
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....nbsp; 32,661 --------------- Rs. 15,53,803 Less: Housing contribution Rs. 10,02,084 --------------- i.e.,&n....
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....er month totally to US$ 3;000 for full year. Recovery at the rate of 250US$ per month has been made from Appendix 1. Rule 3(c)(ii) lays down that the value of motor car provided by the employer for use by the assessee partly in performance of his duties and partly for his private or personal purposes shall be determined to be a sum equal to that part of the amount actually expended by the employer on the maintenance and running of the motor car during the relevant previous year and including remuneration, if any, paid by the employer to the chauffeur which can be reasonably attributed to the use of the motor car by the assessee for his private or personal purposes; or where the motor car is used by his employer, the aggregate of such sum and of a sum equal to that part of the amount representing the normal wear and tear of the motor car which can reasonably be attributed to the user of motor car by the assessee for his private or personal purposes; however, that where a determination on the basis mentioned above presents difficulty, the value of the perquisite may be determined on the basis of the Table. 5.1 Details as under were ascertained from the assessee and Whirlpool Holdi....
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....ion there would be wear and tear which can be estimated to be at least Rs. 3 lakhs per annum assuming straight line depreciation over 10 years. Since no log book is said to be maintained, it is not possible to work out the exact amount attributable to personal use. However, r. 3(c)(ii) requires a 'reasonable attribution' and not 'exact attribution'. In view of the fact that the assessee has agreed in the employment contract for a deduction of US$ 3,000 per annum on a monthly basis it is clear that the benefit derived from this amenity can never be below this, i.e., Rs. 1,10,505. Considering the overall expenditure on this vehicle, this sum is only about 1/5th of the actual running, maintenance expenses and estimated wear and tear. There are total 16 cars with the employer and the assessee being managing director of the employer-company was definitely in a position to utilize any other car for official purposes as well. The reasonably attributable personal use can never be, therefore, less than Rs. 1,10,505. 5.2 The Authorised Representatives on being asked to explain as to why the minimum perquisite value of the vehicle provided by the employer be not taken at US $ 3,000 furnish....
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....e for recovery from his salary at an amount higher than the benefit derived." As already pointed out, the CIT(A) has upheld the order of the AO in working out the perquisite value and in including the reductions made by the employer on account of auto norm and housing norm as part of the salary. 7. Whereas learned counsel for the assessee sought to support the view expressed by the learned AM, the learned Departmental Representative sought to support the view expressed by the learned JM. At this stage I am tempted to say that the view expressed in regard to the first point of dispute appears to be attractive at first sight but it loses its lustre when one peeps deep into the employment agreement and the provisions of the Act. It has been pointed out earlier that in this case the value of perquisites determined by the AO in respect of free residential accommodation and free car facility provided to the assessee is less than the value disclosed by the assessee. Therefore, before I consider the correctness of the method adopted by the AO in determining the perquisite value of rent-free accommodation and free car, it is more important to determine the component of salary for the ....
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....salary' is explained as "where the engagement is for a period permanent or substantially permanent in character and is for other than manual or relatively unskilled labour, the remuneration is generally called a salary". In the case of Gestetner Duplicators (P) Ltd. vs. CIT (1979) 8 CTR (SC) 371 : (1979) 117 ITR 1 (SC), their Lordships of the Supreme Court held that in ordinary parlance, salary connotes remuneration or payment for work done or services rendered. 10. It may be pertinent to mention that the Whirlpool Corporation,USAis an employer-company in the case of the assessee. It has a tax equalization policy in respect of its employees assigned to overseas location. The policy is so designed that the employee is neither put to any disadvantage or advantage as a result of his posting outsideUSAin respect of payment of income-tax. The policy and scope being relevant is reproduced as under: "Policy and Scope: When an employee is assigned to an overseas location, the company policy is designed so that the employee should pay a similar income-tax to that which he/she would have paid had the employee remained in theUS. To achieve this objective, the company has adopted a ta....
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....ter completion of the assignment inIndiaor overseas location. It may be pertinent to mention that as per the terms and conditions of employment, the company had assured the assessee that after completion of three years' working inIndia, he would be considered for assignment outsideIndia. In my considered view the treatment given by the AO to the deductions on account of housing norm and auto norm is not justified more so when different treatment has been given to the deductions on account of hypo tax. In my view, deduction on account of hypo tax and housing norm and auto norm deserves same treatment. 12. Apart from the facts stated above, another factor which assumes importance is that in the case of Whirlpool India Holdings Ltd. (the employer-company), the dispute was raised by the AO for the purposes of provisions of ss. 201 and 201(1A) of the IT Act, 1961 claiming that there was short-deduction of tax from the salary paid to the assessee. The AO had invoked the aforementioned provisions of the Act in the case of Whirlpool India Holdings Ltd. on the ground that in working out the tax deductible at source, the deductions on account of hypo tax in respect of housing norm and aut....
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....urt and has accepted it in the case of one assessee, then it is not open to the Revenue to challenge its correctness in the case of other assessees, without just cause." 14. Another factor for deciding the issue is the treatment of perks in the form of residential accommodation and car facility inIndia. The AO having held that deduction of pay on account of housing norm and auto norm was part of salary received for the purposes of taxation inIndiafurther held that the residential accommodation and car facility have been provided to the assessee at concessional rates. The AO has accordingly calculated the perquisite value on the same basis. The question that requires to be considered is as to whether the perquisite value is to be determined on the basis of free residential accommodation and free car facilities or on the basis of such facilities having been provided at a concessional rate. It has been pointed out earlier that in this case, the value of perquisites determined by the AO in respect of the residential accommodation and car facility provided to the assessee is less than the value disclosed by the assessee. So, however, the determination of the perquisite value of the a....
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....directly to the assessee (hereinafter referred to as employee) or to any member of his household by reason of his employment shall be determined in accordance with the following sub-rules, namely:.......... (b) The value of residential accommodation provided at a concessional rent shall be determined as the sum by which the value computed in accordance with cl. (a), as if the accommodation were provided free of rent, exceeds the rent actually payable by the assessee for the period of his occupation during the relevant previous year.' As a result of this decision, in my view, the AO will be required to redetermine the perquisite value of free residential accommodation and free car facility provided to the assessee. The application of r. 3(c)(ii) and r. 3(b) by the AO by treating the provision of residential accommodation and car facility as having been provided to the assessee at concessional rates is not justified insofar as in the terms of employment it has been clearly provided by the employer-company to the assessee that the latter would be entitled to free residential accommodation and free car facility in India. Since the assessee was not entitled to the free residential....
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.... (in USI) --------------------------------------------------------------- 1. 21-6-1994 53.38 Average of high 1000 11-3-1998 68 & low price at New York Stock Exchange on the ....
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....te of exercise of the option and the date of sale of shares coincided, the profit derived on the sale of shares was liable to tax. The AO worked out the difference at Rs. 39,79,814 which was brought to tax. 16. On appeal, the CIT(A) upheld the view of the AO with particular reference to the Circular No. 710 of the CBDT [(1995) 127 CTR (St) 1] and the decision of theAARin P. No. 15 of 1998. 17. On further appeal before the Tribunal, the learned JM upheld the view of the Revenue authorities by relying upon the decision of theAARin P. No. 15 of 1998. It has been pointed out by the learned JM that the issue involved in this appeal was similar to the issue decided by the AAR in P. No. 15 of 1998 and, therefore, the difference between the market price on the date of exercise of option and the price paid by the assessee was chargeable to tax. It has been held by the learned JM that the assessee had acquired the shares in the year under appeal at concessional rate as a result of which a pecuniary benefit accrued to the assessee in the form of perquisite which is taxable under the head 'salary' under s. 17(2)(iii) of the IT Act, 1961. 18. The learned AM has differed with the learne....
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....s to promote continuity of management and increased incentive and personal interest in the welfare of the company by those who are responsible for shaping and carrying out the long-range plans of the company and securing its continued growth and financial success. To encourage such employees to secure or increase, on reasonable terms, their stock ownership in the company, the board of directors may, from time to time, award options to purchase shares of the company's stock. The exercise and retention of stock options is a way for you to share in the company's future growth. There are various methods to achieve stock ownership through the Plans." The stock options as per the scheme are described in the scheme to represent the right to purchase the company common stock at a future time at a price set at the time the option is granted. Option price is set at the time the Human Resources Committee approves the grant and is the average of the high and low market price for the day. As per the scheme, the value of stock option is described as under: "The company's stock options can be used as a valuable tool to build an estate either through direct purchase at exercise or through a ....
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....if capable of being valued in terms of money is assessable to tax." This decision by the House of Lords has been taken notice of by the AAR in P. No. 15 of 1998, XYZ, In re wherein it has been held that the value of the benefit derived by the assessee at the time of exercise of stock option is liable to tax under s. 17(2)(iii) of the Act in the year of exercise of the option. The issue before theAARwas as to whether the benefit received by the employees of Indian company by exercise of option to purchase shares of the parents foreign company constitutes additional remuneration and perquisite taxable as income from salary. The Hon'ble AAR held that the gain made by an employee after exercise of the stock option is taxable as salary. It has further been held that a foreign company selling its shares at concessional rate to the employees of its Indian subsidiary has to deduct tax at source under s. 192 since the gain made by the employee after exercising the option would be taxable as salary. The Hon'ble AAR has taken the conscious decision on the basis of provisions of s. 17(2)(iii) of the Act. The learned AM has preferred to rely on the decision of the House of Lords in the case ....
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....Act to bring clarity about the taxability of benefits arising to an employee as a result of allotment of shares under Employees Stock Option Plan. The existing provisions provide that the difference between market price on the date of exercise of the option and the price paid by the employee for acquiring the shares will be regarded as perquisites and the difference between the fair market value on the date of exercise of option and the actual sale price in the event of transfer of shares by the employee shall be regarded as capital gains. 19.2 The Act makes a departure and provides that no perquisite shall be charged to tax in the hands of the employee in respect of benefits derived as a result of allotment of shares/debentures or warrants directly or indirectly under the employees stock option plan or scheme. This is sought to be done by deleting s. 17(2)(iiia) and providing an Explanation below s. 17(2)(iii). Sub-s. (2B) in s. 49 inserted by the Finance Act, 1999, has also been deleted. Under the amended provisions, such shares will only be subjected to capital gains tax at the time of sale by the employee. The difference between the consideration and the cost of acquisition ....
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....ees.With effect from 1st April, 2001 (to be ignored for the year under appeal): Provided that nothing contained in this sub-clause shall apply to the value of any benefit provided by a company free of cost or at a concessional rate to its employees by way of allotment of shares, debentures or warrants directly or indirectly under any Employees' Stock Option Plan or Scheme of the company offered to such employees in accordance with the guidelines issued in this behalf by the Central Government." 22. It is pertinent to mention that stock options have been granted to the employees to derive benefit with the sale purpose of promoting continuity of management and increased incentive and personal interest in the welfare of the company. Sec. 17(2)(iii) brings the benefit derived by the employee within the ambit of perquisites taxable as income from salary. As per the scheme of stock options, the assessee is given the right to purchase stocks at predetermined price. At the time of grant of the option, there is no benefit derived by the assessee insofar as the price fixed for the grant of shares is the average of the market price (high and low) for the day on the date of grant of the ....
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....that would be against the intention of the legislature insofar as the profits arising as a result of stock options are not intended to be taxed as a perquisite w.e.f. 1st April, 2001. It is also the claim of the assessee in written submissions filed before the Tribunal that s. 17(2)(iiia) having been incorporated by the Finance Act, 1999 w.e.f. 1st April, 2001 and the same having been deleted by the Finance Act, 2000 w.e.f. 1st April, 2001, the difference between the price at the time of exercise of the option and the grant price of shares are taxable only in the asst. yr. 2000-01 and not in earlier years. This contention of the assessee is not well-founded. Sec. 17(2)(iiia) was inserted by the Finance Act, 1999 which reads as under: "17(2) 'perquisite' includes- (i) the value of rent-free accommodation provided to the assessee by his employer; (ii) the value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer; (iii) the value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases- (a) by a company to an employee who is a director thereof; (b) by a c....
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....ed the Explanatory Notes of the CBDT to clarify that the s. 17(2)(iii) was incorporated to bring clarity in the provisions relating to the taxability of stock option benefits. Moreover, a proviso has been added to s. 17(2)(iii) with the omission of s. 17(2)(iiia). If stock options were not taxable under s. 17(2)(iii), there would have been no necessity of inserting a proviso to s. 17(2)(iii) when the legislature intended to exclude the same from the purview of taxation. The said proviso reads as under: "Provided that nothing contained in this sub-clause shall apply to the value of any benefit provided by a company free of cost or at a concessional rate to its employees by way of allotment of shares, debentures or warrants directly or indirectly under any Employees' Stock Option Plan or Scheme of the company offered to such employees in accordance with the guidelines issued in this behalf by the Central Government." Thus, the intention of the legislature to grant exemption in respect of the benefit derived as a result of stock options provided by the company to its employees is manifestly clear to be applicable from 1st April, 2001, i.e., the date from which the proviso to s. ....