TaxTMI 
TaxTMI 
2009 (1) TMI 315
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....taxability of the gains arising on the sale of shares by the assessee. 4. Let us first take up for consideration the first four appeals relating to asst. yrs. 2000-01 to 2002-03 and 2004-05. 5. Brief facts of the case are that the assessee was in employment with M/s Parke Davis India Ltd. (PDIL) for more than 25 years and retired as deputy managing director in July, 2000. The assessee has originally filed returns of income for the asst. yrs. 2000-01 to 2002-03 and 2004-05, and those returns have been processed under s. 143(1) of the Act. The major source of income returned by the assessee in the years under consideration is income from capital gains. Assessee was granted employees stock option plan (ESOP) by Warner Lambert Co. (WLC) of USA, which held 40 per cent of the stake in PDIL. The assessee exercised the stock options and after converting into shares, sold the same in the assessment years under consideration as follows: ---------------------------------------------------- Assessment No. of shares received Capital gains year after exercising stock received ....
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....lationship between the assessee and the company which granted stock option right to the assessee. In this context, he observed that no salary was being received by the assessee from WLC and as such, gains received by the assessee on the sale of shares under ESOP are not taxable as perquisites under the head 'Salary'. In support of this conclusion, he also observed that the assessee was granted stock option, right by WLC not at any concessional rate, but at the ruling market rate of the relevant time. He also held that the stock option grants are held as capital asset, and consequently, capital gains arising therefrom are to be assessed as long-term capital gains. Consequently, he also held that the assessee is entitled for indexation on the grants from the date of grant and also exemption under ss. 54EA and 54EC or 54F of the Act, as claimed by the assessee in the computation of capital gains. He accordingly directed the AO to asses the capital gains as admitted by the assessee in the respective assessment years. 8. Aggrieved by the above common order of the CIT(A), Revenue has filed the first four of these appeals, viz., ITA Nos. 664 to 667/Hyd/2006; asst. yrs. 2000-01 to 2002-03....
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....lternatively, learned Departmental Representative submitted that since the shares were valued on the date of exercise of option, such date of exercise of option becomes the date of acquisition of shares and consequently, it is only the period between the date of exercise of the option and the date of sale of shares which should be taken into account for determining the nature of the capital gains. That being so, since in the present case, as the period for which the assessee held the shares on exercising the option, is less than 12 months, according to the learned Departmental Representative, the resultant capital gains on the transfer have to be treated as short-term capital gains. Hence, no exemption under s. 54 is allowable. For this proposition, she relied on the decision of the Calcutta High Court in the case of Mrs. A. Ghosh vs. CIT (1983) 33 CTR (Cal) 179 : (1983) 141 ITR 45 (Cal), wherein it was held that the date of acquisition of debenture is not the date of allotment, and it is only the date of exercise of option, which is crucial. 11. The learned Departmental Representative further submitted that the restriction placed by the RBI, which did not allow the assessee to se....
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....Pune)(TM) 687 : (2008) 110 ITD 1 (Pune)(TM). 13. In any event, learned Departmental Representative submitted that even if the surplus realized on sale of shares has to be taxed as capital gains, the same should be taxed at 20 per cent and not at 10 per cent as claimed by the assessee because since the shares are not listed securities, they do not qualify for tax at 10 per cent. 14. The learned counsel for the assessee, on the other hand, at the outset submitted that the issue whether the surplus realised by the assessee on the sale of shares acquired through stock options is taxable as perquisite or as capital gains, is squarely covered by the Mumbai Bench of the Tribunal in the case of Asstt. CIT vs. Venkappa Agadi (ITA Nos. 4694 and 4695/Mum/2004 for asst. yrs. 1999-2000 and 2000-01), wherein following an earlier decision of the Mumbai Bench of the Tribunal dt. 14th Dec., 2007 in the case of Sanjeev Indravadan Dani (ITA No. 7661/Mum/2004), this issue was decided in favour of the assessee and against the Revenue. He further submitted that the assessee in the above decision of the Mumbai Bench, viz.. Shri Venkappa Agadi, just as the present assessee, is also an employee of PDIL, ....
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....n the case of Asstt. CIT vs. Venkappa Agadi. The Mumbai Bench of the Tribunal in that case, by its order dt. 16th Oct., 2008, has followed its earlier decision dt. 14th Dec., 2007 in the case of Sanjeev Indravadan Dani (ITA No. 7661/Mum/2004). It is also brought to our notice that the assessee before the Mumbai Bench of the Tribunal, viz., Shri Venkappa Agadi, is also an employee of PDIL, just as the assessee before us in these appeals. Further, in the case of Bharat V. Patel vs. Addl. CIT (ITA No. 2241/Ahd/2002) relied upon by the CIT(A) himself, in one of the impugned orders, viz., for asst. yr. 1999-2000, the Ahmedabad Bench of this Tribunal also held that at the time of allotment of stock option, the assessee had a transferable right and the grant of ESOP did not result in any benefit/amenity to the assessee. Following the consistent view taken by various Benches of this Tribunal, more importantly the decision of the Mumbai Bench of the Tribunal, in the case of an assessee who is also an employee of PDIL just as the assessee before us in these appeals, we are inclined to hold that the proceeds on the sale of shares of WLC by the assessee in these matters is also to be taxed as ....
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....e was no question of any perquisite arising out in these transactions. 19. For the foregoing reasons, we uphold the orders of the CIT(A) and hold that there is no perquisite value to be assessed under the head "Salary" on account of ESOP rights conferred on the assessee by the WLC, and proceeds on sale of shares acquired through such ESOPs are assessable only as capital gains. Consequently, grounds of the Revenue on this issue are rejected. 20. With regard to the question as to the nature of the capital gains, viz., long-term or short-term capital gains, we are of the considered opinion that it is the date of grant of the stock option in favour of the assessee that is material for determining the period of holding the asset in question, and not the date on which the option was exercised and stock options were converted into shares. As already noted above, Mumbai Benches of this Tribunal in the cases cited above, specifically considered this issue also and decided the same in favour of the assessee following the decisions of the Bombay High Court in CIT vs. Sterling Investment Corporation Ltd. (1979) 12 CTR (Bom) 263 : (1980) 123 ITR 441 (Bom) and CIT vs. Tata Services Ltd. (1979)....
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....option is conferred, such right becomes a right in the nature of the property. And such stock option grants given to the assessee by WLC represented such property which were valuable and inheritable and hence were capital asset. Our view is fortified by the decision of the Delhi Bench of the Punjab High Court in the case of Hari Brors. (P) Ltd. vs. ITO (1964) 52 ITR 399 (Punj), wherein it was held that right to subscribe for shares of a company is also a capital assets. On exercising the option, the assessee gets shares, which is only conversion of one capital asset into another capital asset. It is evident from the details of the date of acquisition of such rights by the assessee. as submitted in the paper book, the shares were held by the assessee for a period more than twelve months and hence the resultant gains must be computed as long-term capital gains. 24. In view of the above discussion, we uphold the orders of the CIT(A) on this aspect and hold that the capital gains arising out of the sale of shares acquired through ESOPs have to be assessed as long-term capital gains only. Accordingly, grounds of the Revenue on this aspect are rejected. 25. Since we have held that the ....
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....he sale of shares under ESOP should be treated as long-term capital gain and consequently, assessee is entitled for all consequential benefits such as indexation and reliefs under s. 54 as claimed by the assessee. Cost of acquisition of shares should be taken at the price at which option was granted in favour of the assessee. As a consequence of our finding that the assessee is entitled for indexation, assessee is liable for tax on capital gains @ 20 per cent only. Consequently, orders of the CIT(A) on these aspects are upheld and the grounds of the Revenue are rejected. 30. In the result, these three Revenue's appeals are also dismissed. Revenue's appeals concerning Dr. T. Balakrishna Rao, ITA Nos. 306 to 308/Hyd/2006; Asst. yrs. 1998-99 to 2000-01 31. These three appeals of the Revenue are directed against a common order of the CIT(A)-VI, dt. 2nd Nov., 2007 for the asst. yrs. 1998-99 to 2000-01. 32. In these three appeals, relating to asst. yrs. 1998-99 to 2000-01, only two effective grounds have been taken by the Revenue. They relate to the following issues: (a) Whether the surplus gained by the assessee on sale of shares acquired by him under ESOP represents perquisite?; (....