TaxTMI 
TaxTMI 
2008 (8) TMI 403
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....n 15th April, 1999, but the perquisite value would not be taxable in asst. yr. 2000-01 as in the return filed by the assessee for the asst. yr. 1999-2000, the income on transaction had been offered for tax." 3. The assessee herein is an individual. At the relevant time he was working as managing director of M/s Zee Telefilms Ltd. During the year the assessee declared capital gain on sale of 66,668 shares of Zee Telefilms Ltd. When asked to substantiate, the following facts emerged: The employer, M/s Zee Telefilms Ltd. by its letter dt. 1st Feb., 1999 informed the assessee that in terms of the 1998 Employees' Stock option Plan (ESOP) of the company, the assessee was selected for issuance of 2,00,000 warrants which can be converted into 2,00,000 equity shares. Relevant portion of the letter is extracted hereunder: "We are pleased to inform you that the committee has selected you for issuance of 2.00,000 (two hundred thousand only) warrants which can be converted into 2,00,000 (two hundred thousand) equity shares subject to the following terms and conditions: 1. Each warrant will be converted into one equity share at a conversion price of Rs. 212 per share. 2. As per th....
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....sp; Amount No. of shares 10-5-1999 21,20,000 10,000 10-6-1999 74,20,000 35,000 10-7-1999 3,28,60,000 1,55,000 ----------- -------- 4,24,00,000 2,00,000 ----------- -------- The company by its letter dt. June, 2002 confirmed the above facts of payment. It was also stated that 1/3rd of the total shares were tinder lock-in for a period of one year and another 1/3 were for lock-in period of two years. The company also confirmed that the date of exercise of stock option was 30th April, 1999, though the payment was made later. It was the contention of the assessee before the AO that since equity warrant certificates were issued on 1st Feb., 1999 and the terms of o....
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....999 itself, the perquisite value should be computed with reference to said date which has already been offered for tax in earlier year. However, he directed to recompute short-term capital gain as a consequence of his direction. The Revenue is now in further appeal before us. 5. The learned Departmental Representative, Shri S. Venkateswarlu, submitted that the letter dt. 1st Feb., 1999 merely granted the right to the assessee to obtain the warrants. If after accepting the terms of offer of warrants, the assessee accepts offer for converting the warrants into shares by paying appropriate price, only then the assessee will be entitled to receive the shares. As per the letter of offer of warrants, the assessee could not have converted the warrants into shares before 31st March, 1999 as the same was to be exercised within the period of three months from the announcement of financial results of the company for the year ending 31st March, 1999. It was also obligatory to make full payment for conversion of warrants into shares. Thus, unless and until the option is exercised and full payment is made, the assessee did not acquire any right merely by letter dt. 1st Feb., 1999. Letter dt. ....
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....se of CIT vs. Aatur Holdings (P) Ltd. (2008) 4 DTR (Bom) 331 : (2008) 219 CTR (Bom) 251 : (2008) TIOL 194. The learned Departmental Representative also submitted that by letter dt. 15th April, 1999, the assessee submitted to Zee Telefilms Ltd. that with reference to letter of offer dt. 1st Feb., 1999, the option for acquiring shares was being exercised but requested for time to make the payment before 31st July, 1999. This letter was sent to the company on 15th April, 1999 only. The company at the meeting of its board of directors held on 30th April, 1999 resolved that by exercising option for allotment of shares, Mr. Vijay Jindal was allowed 3 months time for making payment for the shares allotted i.e. before 31st July, 1999. Thus, it is clear that the option was exercised only on 30th April, 1999 and not prior thereto as the same was not feasible even in terms of letter dt. 1st Feb., 1999. He accordingly pleaded that the order of the AO be upheld and that of the learned CIT(A) be set aside. 6. The learned counsel for the assessee, Shri Vinod Bindal, on the other hand, placed strong reliance on the decision of the learned CIT(A). He submitted that the circular issued by CBDT is....
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....o obtain ESOP shares then he would not have paid the taxes. The ESOP scheme is not designed to issue warrants but to issue shares to the employees and for which certain steps are prescribed by allowing time to the employees to raise funds for acquisition of the shares. In order to assure the employees of the ESOP shares, the warrants are issued for the intermittent period and thus the employer binds himself. 6,1 It has also been placed on record that as per definition of shares for the purpose of ESOP mandated by the regulatory authority, SEBI, the shares include all securities convertible into shares. The definition of securities as per cl. 2(h)(iii) under the Securities Contract (Regulation) Act, 1956 includes all rights or interest in securities which as per cl. (1) therein also includes shares. Thus, the offer of warrants convertible Into shares by the employer to the assessee on 1st Feb., 1999 meant offer for shares only in terms of the said Circular No. 710. It is also undisputed fact, that there is no discussion of the said definitions prescribed by the legislature and the regulator in the Infosys Technologies Ltd. judgment of the apex Court as there was no occasion also ....
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....g the employment, etc. were different, 1/3rd of the total shares received by the assessee here did not have any lock in period. The assessee also executed a non-compete agreement for 2 years. It is also stated that the restrictive covenants for transfer during a fixed period do not render the asset valueless. There is always a value of such asset may be at a discounted price to compensate the buyer for optional cost as well as risk. 6.5 In the end, Shri Bindal submitted that in case where two views are possible for construction of law, it is a settled proposition that the same should be construed as beneficial to the assessee. It has not been mentioned in the s. 17(2)(iiia) whether the date of exercise of option was the date when the option was exercised to obtain warrants or for conversion of warrants into shares. It has been shown that as per the mandatory ESOP guidelines Issued by SEBI, shares include warrants. Thus, by all means, when an employee exercises the option to take warrants convertible into shares, it amounts to exercise the option and further action is a process to obtain delivery of the said shares. Any subsequent amendment cannot influence an action taken in pur....
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....ent @ Rs. 212 per share. What the assessee agreed on 1st Feb., 1999 is merely the terms that if the assessee exercises the option, it will pay a conversion price of Rs. 212 per share. However, the equity warrant certificate issued on 1st Feb., 1999 did not have any value in itself. The warrant does not create any financial liability on the part of the company. The warrants issued by company are neither tradable nor marketable. It is merely a right to acquire share and not share itself. The benefit, if any, arose only on exercise of option of conversion of warrants into shares upon full payment of conversion price. Till the option was exercised, the right, if any, was inchoate right and not in the nature of perquisite referred to in s. 17(2)(iiia) of the Act. For the first time, s. 17(2)(iiia) was introduced in the IT Act by Finance Act, 1999 w.e.f. 1st April, 2000 i.e. applicable for asst. yr. 2000-01. Sec. 17(2)(iiia) is extracted hereunder: "17 (2) 'Perquisite' includes- (i) ........ (ii) ........ (iii) ........ (iiia) the value of any specified security allotted or transferred, directly or indirectly, by any person free of cost or at concessional rate, to an indiv....
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....ive definitions referred to above. In other words, whether a benefit to an employee is as a result of securing a right to acquire a share at a price lesser than the market value. Assuming for a moment that there is a benefit, the question is whether every benefit received by a person is taxable as income. It is not so. Unless the benefit is specifically made taxable, it cannot be regarded as income. For all the assessment years under consideration there was no provision in law which made such benefit taxable as income. Further, for these years, the income was prospective on the condition of the future allotment of shares without any condition or encumbrance. A benefit which is prospective in nature cannot be taxed as income. Unless a benefit is in the nature of income or is specifically included by the legislature as part of income, the same is not taxable. The definition of 'income' is no doubt inclusive, However, it is not all embracing, The law seeks to tax 'what is included in income as taxable'. The words are not 'the following items shall be taxable.....' Thus, the precondition is that the receipt/benefit is treated as income first. The word 'income' though defined in an i....
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....ase of the appellant company, all the options vested on the expiry of 12 months from the date of its grant. There are companies in which these options may vest evenly over the defined period of time. In the alternative, it may vest in a varying proportion over the defined period. It is also likely that the employees who are to be taxed are not assessed by the same AO. There would, therefore, be an element of subjectiveness in each AO trying to formulate his own value in taxing the employees. This is because it would, in the absence of any statutory guidelines regarding the quantification of values, be determined by the AO in his own fanciful way. The employees would then suffer tax in varying manners although the benefit received by them would have been the same. It should, therefore, not have been left to the discretion of the AO to tax the perquisite. There has to be a certainty as well as uniformity in valuing and taxing a perquisite. It is for that reason that s. 295(2)(c) provides for the determination of the value of the perquisite on the basis of rules framed by the CBDT. Even s. 17(2)(iii) says that it shall be the value of the benefit that shall be taxable as a perquisite.....
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....al benefit could not be considered as 'income' of the employee chargeable under the head 'Salaries'. (iv) That the insertion of sub-cl. (iiia) in s. 17(2) whereby the word 'cost' stood explained, was inserted for the first time w.e.f. 1st April, 2000, and the amendment was prospective and could not be read as retrospective. (v) That, therefore, the Department had erred in treating the potential benefit as 'perquisite'." It is the contention of the assessee that equity warrant certificate was issued which also amounts to securities within the meaning of s. 2(h) of the Securities Contracts (Regulation) Act, 1956. We are unable to accept such contention. The equity warrant certificate issued to the assessee merely makes the assessee eligible to exercise option to obtain shares at a predetermined price. The warrants are not convertible into shares automatically. It requires the assessee to exercise his option which could have been exercised only after the financial results for the year ending 31st March, 1999 are announced and that too on payment of necessary amount. The definition includes the likes of shares, scrips, stocks, bonds, debentures, debenture stock or other market....