TaxTMI 
TaxTMI 
2007 (9) TMI 535
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....t 30% and whereas the Appellant has considered the period of holding from the date of vesting to the date of sale which exceeded 12 months and treated the income as long term capital gain subject to tax at 20% rate and remitted to tax. The other grounds, namely, ground No. 4 onwards are argumentative and touches upon the various aspects of the issue concerning whether the transfer resulted in a short term capital gain or a long term capital gain. 2. Appearing for the assessee, Ms. Yogasree, submitted that the assessee was an employee of Winphora Networks Pvt. Ltd., The parent company, viz. M/s. Winphoria Networks Inc. USA, announced the stock incentive scheme to the employees of Winphoria Networks P. Ltd., On 21.9.2000, Incentive Stock Option agreement with M/s. Winphoria Networks India P. Ltd., was entered and accordingly, the assessee was granted the right to purchase 1,25,000 shares of the parent company. The assessee came to acquire this right because the assessee was an employee of Winphoria Networks P. Ltd., According to this declaration by the said company, the assessee was vested with rights to the extent of 25% of 1,25,000 shares on 9.9.2001 and the remaining 75% to ....
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....ll/transfer the shares. (b) Reference is drawn to Winphoria Networks Inc - Incentive Stock Option Plant' hence forth referred as 'the plant'. (i) Para 1 reads as under the company hereby grants the right and option to purchase upto 125000 shares.... (ii) Para 3 reads further the option will vest and become exercisable with respect to 25% of shares on the first anniversary and with respect to the remaining 75% of the shares, in equal increments on the last day of each quarter following the first anniversary of the first anniversary of the commencement date, through the fourth anniversary of the commencement date so that 6.25% of the shares vest on the last day of each quarter; provided that the optionee continues his or her employment with the company or a subsidiary thereof on the applicable vesting date. The right to exercise shall be cumulative so that to the extent the option is not exercised in any period to the maximum extent possible, it shall continue to be exercisable in whole or in part, with respect to all shares for which it is vested until the earlier of the final vesting date or termination of the grant.... Thus ....
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.... as Long Term Capital Cain as he had 'held' the capital asset as required by Section 2(42A) for less than 12 months (from 7.11.2002 to 16.5.2003). The gain so arising should be computed as Short Term Capital Cain and charged to tax. Before the Commissioner of Income-tax(A), reference was made to the provisions of Section 2(42A) of the Income-tax Act, (hereinafter referred to as the 'Act') read with Explanation-1(i)(d) and the same is reproduced for the sake of facility: In the case of capital asset, being a share or any other security (hereafter in this Clause referred to as the financial asset) subscribed to by the assessee on the basis of his right to subscribe to such financial asset or subscribed to by the person in whose favour the assessee has renounced his right to subscribe to such financial asset, the period shall be reckoned from the date of allotment of such financial asset. The assessee insisted the right that was conferred on the assessee to acquire the shares of the company was something that was a continuing asset because the right continued and the right got converted into shares when the assessee exercises the option and paid for the ....
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.... the shares would have to be considered from the date of purchase of the shares which was 7.11.2002 because in order that he may be in a position to sell the shares, it was necessary to purchase them and, therefore, the purchase date would be relevant. The Commissioner of Income-tax(A) further noted that the rights to apply for the shares of the company contained two conditions, namely (1) only a stock certificate has been issued and (2) shares are fully paid for. Clause xiv) of the declaration of the stock option scheme was also considered and the same is reproduced below: Compliance with laws: The obligations of the company to sell and deliver shares upon exercise of the option are subject to all applicable laws, rules and regulations, including all applicable federal and state securities laws, and the obtaining of all such approvals by government agencies as may be deemed necessary or appropriate by the Board of Director ("Board") or the relevant committee of the Board. He, accordingly, expressed his view that the stock option was nothing more than something that was similar to the offer that was made to the public, which require the public to subscribe or the shares....
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....inance Ltd. v. CIT [2001] 252 ITR 491 (Delhi) and Miss. Dhun Dadabhoy Kapadia v. CIT [1967] 63 ITR 651 (SC) ; AIR 1967 SC 614. The Departmental representative placed reliance on the Kerala High Court decision in SN. Zubin George v. CIT [2004] 265 ITR 683 (Ker) and Garrick D'Silva v. Joint CIT [2006] 5 SOT 132 (Delhi) [TM]. 5. After considering the well placed arguments and the various materials to which our attention was drawn to, we give our conclusion in the following paragraphs. The Employees Stock Option is a document that binds the employer vis-a-vis the employee of the company. The binding of the employer is also specific to the employee. That is to say, it is employee specific and to him alone. The employer by means of the declaration of the option has in fact undertaken to comply with that declaration in regard to every employee who would fall within the conditions of that declaration. One of the conditions is that the employee must be a permanent employee. That employee, as per the declaration was intimated that the company would be willing to offer him shares numbering 1,25,000. The company further states the period within which the employee could subscribe for thes....
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....gal heirs for the simple reason that the fundamental requirement to subscribe for the shares is that it is for the employee and for the employee alone. The right conferred by means of grant and indicating the period within which the employee could subscribe for the shares are indicators of the fact that the assessee could exercise the option within the specific period and to the extent indicated in the period. On the expiry of the period, the option automatically lapses unless the employer agrees to extend the period. To put it in other words, if the assessee fails to exercise the option as indicated, within the period, his right to subscribe for the shares would be extinguished. The granting and the vesting period are merely indicators to the employer to honour the commitment in the event of the employee exercising the option. It is an offer by the employer requiring the acceptance of the employee within a particular period. The acceptance of the said offer within a period is to be done by subscribing for the shares at the specified amount followed by allotment of those many shares to the employee. It can, therefore, be seen that the start of allotment of the shares is when the....