TaxTMI 
TaxTMI 
2011 (8) TMI 480
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.... Hence, the order passed by the Assessing Officer may be restored." 2. Briefly stated, relevant material facts, as set out in the orders of the authorities below, are as follows. The assessee is an employee of Johnson & Johnson Limited ('JJ India', in short), an India based subsidiary of Johnson & Johnson Inc, USA ('JJ USA', in short). During the relevant previous year, the assessee received income of Rs. 1,74,63,946 in respect of sale of 11,800 shares (stock options) in Johnson & Johnson, Inc, USA - parent company of assessee's employer. Out of this receipt of Rs. 1,74,63,946, the assessee deposited Rs. 1,31,22,000 in various capital gains scheme under section 54EA and the balance amount of Rs. 43,41,946 was offered to tax as long-term capital gain. It was stated by the assessee that he was granted, what he termed as, stock option in respect of 30,000 shares by JJ USA as follows : Date of grant Stock Options Allotted Cost per share at which stock options were granted December 7, 1989 4,000 US $ 28.94 June 12,1990 2,000 US $ 35.66 December 2, 1993 4,000 US $ 44.25 December 1, 1994 2,000 US $ 53.63 November 11, 1995 3,000 US $ 86.25 Total allotment 30,000  ....
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....is an income liable to be taxed as income from salary. We may, at this stage, mention that we could not find this ruling from our database, nor did the learned Departmental Representative file a copy of the same. To continue with the observations made by the Assessing Officer, we have noticed that the Assessing Officer further observed that the delivery of the shares was never taken by the assessee in view of the fact that there was a prohibition by the directions issued by Reserve Bank of India. The Assessing Officer thus observed that in such a situation, the only course for the assessee was to accept the profit on settlement and for the abovesaid reasons the profit on stock option on share transaction is speculative in character and is to be brought to tax as speculation profit. Without prejudice to the abovesaid findings, and relying upon Hon'ble Supreme Court's judgment in the cases of Emil Weber v. CIT [1993] 200 ITR 483/67 Taxman 532 and Hon'ble Allahabad High Court's judgment in the case of Kedar Narain Singh v. CIT [1938] 6 ITR 157, the Assessing Officer was further of the view that the stock option profit is alternatively income from other sources. In the computation of i....
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....nication was filed during appellate proceedings. Along with accepting the offer of stock options by signing the inter office communication, the appellant has also undertaken to abide by the conditions stipulated in the Reserve Bank of India in that regard. The copies of RBI's letter dated 2-12-1989 and 4-5-1989 stipulating the conditions in regard to the stock option scheme of Johnson & Johnson Inc, USA were also forwarded to the appellant along with the office letter. It is thus seen that the offer of stock option has been accepted by entering into a contract to purchase shares at a stipulated price; as soon as the offer is accepted, the contract for purchase of shares is complete. It is only because of RBI's stipulation contained in clause (iv) of its letter dated 12th February, 1989, prohibiting any payment at any point of time either in India or abroad for acquiring these shares, that the actual payment of consideration, i.e., purchase price, was delayed till the time of sale of shares in USA. As per clause (III) of the above referred letter, the RBI has also prohibited the remittance from India on account of acquisition of shares. Therefore, the said shares to be treated to ha....
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.... CIT(A), the assessee had taken 'constructive delivery'. The Assessing Officer's reliance on ruling given by the Authority for Advance Ruling was rejected on the ground that such rulings have no precedence value. The CIT(A) also held that the income can also not be assessed as short-term capital gain in view of the reasoning of the assessee. The income can also not be assessed as salary income as the value of benefit of ESOP was granted at market value and not free of cost or at concessional rate, and as there was no employer-employee relationship between the assessee and Johnson & Johnson Inc., USA. Accordingly, the appeal of the assessee was allowed. 7. The Assessing Officer is aggrieved of the stand so taken by the learned CIT(A), and is in appeal before us. 8. We have conscientiously heard the rival contentions, carefully perused the material on record and duly considered factual matrix of the case as also the applicable legal position. 9. In order to appreciate the true nature of rights vested in the assessee, by the virtue of allotment of stock options, it is necessary to take a look at a typical stock option offer. One of these offers made to the assessee, a copy of which....
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....l the terms and conditions relating to non-qualified stock options contained in the subject Johnson & Johnson Stock Option Plan, as amended from time to time, a copy of which is available from the office of the Secretary of the Corporation. (4) Except as may be otherwise stated herein, you must be a full time employee of Johnson & Johnson or one of its subsidiaries at the time of the exercise and that the employment must have been continuous from the date hereof. For the purposes of this Plan, persons on company authorized leaves of absence, are considered full time employees, however, long-term disability is not considered to be full time employment. (5) In the event of termination of your employment due to any cause including death, disability or retirement, your rights to exercise this option shall cease, except for those which have accrued to and including the date of termination. (6) In the event of your death, while an active employee, your right to exercise this option, which have accrued to, and including the date of death, may be exercised, subject to provisions of (11) below, within three years after the death, by your estate or by a....
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....ket rate prevailing as on the date of grant of option, the specified number of shares within certain time frame - which essentially implies that the assessee may, if so desires, buy the shares or may not buy these shares. The CIT(A) was thus clearly in error in observing that "the appellant had acquired shares when the offer of stock option was accepted". The shares are not allotted to an employee while granting a stock option under the above scheme; all that it does is that in case the share prices of the company rise after the grant of stock date, though within a specific time frame set out in the scheme of allotment of these stock options, the employee can benefit from such price increase in company's shares by being allowed to buy a limited number of shares, at the price at which the stock options were granted, and thus benefit from the difference between the market price of shares vis-à-vis the market price of shares when stock options were granted. In case, the prices of the shares come down after the grant of stock options, the employee has nothing to lose because, as we have noted above, there is no compulsion on the employee to buy the shares at the market value as ....
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....uiring the shares", but then, this stipulation, if anything, shows that the shares were not intended to be acquired at any point of time, and the scheme could be allowed to be workable only to the extent it was to benefit the employees, like the assessee before us, from appreciation in value of shares of the parent company. We are unable to understand as to how, particularly in the light of this stipulation, could it be inferred that the shares, in respect of which stock option is issued, stood transferred in the name of the employees by the virtue of his having accepted the stock option. When no payment is, or cannot be, made, and when the stock option only grants an option to the employee to buy the shares, in consideration of a specified price as on the date of grant of stock options, at a future date, not earlier than second anniversary of grant of stock options, a mere grant of option cannot result in a transfer of shares - as has been concluded by the CIT(A). The CIT(A) was clearly in error in concluding that the date of grant of stock options is to be concluded as the date on which shares were acquired by the assessee. In view of the above discussions, the date on which opti....
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....ssue in favour of the assessee by holding as follows: "We have carefully considered the rival submissions and perused the records. As could be noticed from the stock option plan and the terms of the Reserve Bank of India, no payment was made by the assessee nor exercised the right to purchase the shares before 13th August, 1992 (i.e., the date of exercise of option), and thus, so far as the assessee is concerned, there is no cost of acquisition to the assessee, in which event, by applying the decision of B.C. Srinivas Shetty 128 ITR 294, the amount received is not liable to tax under the head "Income from capital gains". Even if it is assumed that the market value of shares is the benefit given to the assessee, such benefit can be said to accrue to the assessee only on the date of exercise of the option. In the instant case, the date of exercise of option as well as the date of sale is same, and thus there is no difference between deemed cost of acquisition and the actual price realized by the assessee, and thus the learned CIT(A) was not justified in directing the Assessing Officer to bring to tax the amount of Rs. 5,44,925 in the short-term capital gain. Under these circumstance....
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....eated as part of income from salaries. Learned counsel then laboriously takes us through the Special Bench decision to demonstrate that the Stock Appreciation Rights, which the Special Bench was dealing with, are materially different from Stock Options, as in the present case. He then invites our attention to certain observations in the Special Bench decision wherein it is stated that 'stock appreciation right is not the same thing as a typical stock option plan' and that 'this distinction between the nature of stock appreciation rights and the stock options is so fundamental and that it affects the tax treatment of these two benefits'. In view of these observations, according to the learned counsel, the Special Bench decision will have no application in the case of a stock option plan, which was subject-matter of consideration in Shripad S. Nadkarni's case (supra), and the said decision, therefore, was clearly in error in following the Special Bench decision. Our attention is then invited to a copy of statement of account of the assessee, as appearing in the books of stock broker Merrill Lynch, Pierce, Fenner & Smith Inc. (at page 2 of the paper-book), which shows that the shares ....
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....sly purchase/sale of shares and the profits being repatriated to India". We may also add that, as evident from the perusal of statement of account of the assessee with the broker, the assessee was never owner of any shares. This statement shows that while 2,000 shares were sold to the account of the assessee on 6-2-1997 and a credit of US $ 1,13,723.71 was given by the stock broker, corresponding debit for purchase of shares from Johnson & Johnson for US $ 28,940 was effected on 13-2-1997. Similarly, for the sale of 3,800 shares, the sale proceeds of US $ 1,23,771.46 and US $ 1,11,398.68 were credited on 24-2-1997, corresponding debit of US $ 61,706 for purchase of these shares was given on 27-2-1997. In both these transactions, credit for shares sold were given even before the debits for purchase of shares were given. Clearly, therefore, the assessee was not the owner of these shares before the shares were sold, and entries, to that extent, were mere notional in nature. Section 45(1) provides that any profits or gains from the transfer of capital asset are taxable as capital gains, but then, even going by the documents produced by the assessee, here is a case in which the assessee....
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.... Court explained the expression 'per incuriam' thus : 'The Latin expression per incuriam means through inadvertence. A decision can be said generally to be given per incuriam when the Supreme Court has acted in ignorance of a previous decision of its own or when a High Court has acted in ignorance of a decision of the Supreme Court." 17. Viewed thus, as held by Hon'ble Andhra Pradesh High Court (Full Bench), a decision which is rendered in ignorance of an earlier decision of a Coordinate Bench of equal strength "which covered the case before it" does not have precedent value. Learned counsel does not dispute that earlier decision in Shripad's Nadkarni's case (supra) squarely covered the issue in appeal in Billimoria's case and yet Coordinate Bench did not have the benefit of considering decision in Shripad Nadkarni's case (supra) by a Bench of equal strength, yet he contends that the later decision should be followed. This submission is, suffice to say, legally unsustainable in view of the law so laid down in B.R. Construction's case (supra). We, therefore, reject learned counsel's reliance on Bomi S. Billimoria's case (supra) decision by a Division Bench, and leave it at that. ....