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2013 (10) TMI 1542

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....and later as an employee of SIRF, USA, from 2001 to 2004. Thereafter, the assessee returned to India and became an employee of SIRF, India. 3. SIRF, USA granted certain Stock Options to the assessee on 04.10.1996 ["grant date"] i.e., while the assessee was an independent consultant, which gave the right to the assessee to buy/acquire 35,000 shares of the common Stock of SIRF, USA, at an Exercise Price of USD 0.08 each, pursuant to a Stock Option Plan ["SOP"] CALLED "1995 Stock Plan". The assessee exercised his right under the Stock Option Plan on 2nd and 3rd of March, 2006 ("Date of Exercise") and received 5000 and 2000 shares respectively of SIRF, USA. Since such shares were sold by the assessee on the same day of exercise in a 'Cashless Exercise', the net consideration of USD 204786 and USD 78,820 aggregating to USD 283606 (Rupee equivalent ₹ 1,27,62,295) was considered by him as capital gains arising on transfer of Stock Options. According to the Assessee, he held the Stock Options for nearly 10 years i.e., from the date of grant date or in event from the date of vesting of the stock option. According to the Assessee the net consideration received upon exercise of his rig....

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...., the assessee vide letter dated 28.11.2008 submitted that the Stock Options were capital assets covered u/s. 2(14) of the Act, and exercise of such Options and conversion into shares thereafter was 'transfer' u/s 2(47) of the Act. According to the Assessee the Stock Options were transferable. The assessee took a stand that he held the Stock Options for nearly ten years, i.e., when the stock options were granted during the year 1996 by SIRF, USA. The Assessee therefore considered the consideration received on the exercise of option was 'Long Term Capital Gains' in terms of section 48 of the Act and therefore he was eligible for the deduction u/s 54F of the Act,. 8. The AO concluded the assessment u/s. 143(3) of the Act vide his order dated 26th of Dec 2008. The assessee's submissions were rejected and the AO brought to tax the difference between the market value of shares on date of exercise and the exercise price as "Income from Salary" as against his original proposition to tax the same as "Income from Other Sources" and the difference between the sale price of shares and the market value of shares on the date of exercise was considered as "Income from Short Term Capital Gains".....

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....lso produced before me a copy of the order of the Hon'ble ITAT, Delhi Abench in the case of Shri. Abhiram Seth Vs JCIT dated 30-092011 wherein the claim of long term capital gains is justified. However as the facts of that case are different from that of the case of the appellant, I am unable to accept that decision. After careful consideration of the facts of the case I am inclined to agree with the arguments of the A.O and accordingly the total income determined by the A.O is confirmed. 11. The assessee also challenged the levy of interest u/s. 234B of the Act. On the above issue, the CIT(A) held as follows:- "6. The appellant also contested the charging of interest U/S 234B of the Act on the ground that as the A.O treated the benefit from stock option as the income from salary, interest U/S 234B of the Act is not leviable in the case of the appellant. After examining this issue I am of the opinion that whenever there is income from salary the responsibility to deduct tax at source falls on the employer of the assessee. Therefore, the A.O is directed not to charge interest U/S 234B of the Act on the income of ₹ 1,23,43,050/- attributable to the benefits from stock option....

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....see should also get the benefit of deduction u/s. 54F. 17. The ld. counsel for the assessee also distinguished the decision relied upon by the AO in the case of Giridhar Krishna (supra) by pointing out that in the case of the assessee, the question was not with regard to the nature of income received on exercise of Stock Option, but it was with reference to the date on which the shares can be considered as purchase in a Stock Option. Our attention was also drawn to the fact that under the Stock Option Plan, the assessee can opt for cashless exercise of option, by which the shares can be sold through a stock broker and part of the proceeds can be deposited with SIRF, USA in discharge of the price payable to SIRF, USA, on exercising the option and the difference between the option price and the sale consideration received by the assessee. The decision of the Special Bench of ITAT in the case of Sumit Bhattacharya v. ACIT, [2008] 300 ITR (AT) 347 (MUM) (SB), relied upon by the assessee was also distinguished as a case, which did not deal with ESOP, but dealt with the case of stock appreciation rights. Our attention was drawn to paragraphs 25 to 27 of the aforesaid judgment, wherein t....

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....acquire capital asset. It was submitted that the argument of the ld. counsel for the assessee that by exercising option, rights in the option are extinguished, is not correct as under ESOP, options are not transferable at all. It was pointed out that the only way in which options can be availed is to acquire the shares either by the employer or its successors in interest. A transfer intrvivos is not possible at all. 22. The second event of taxability is when the shares acquired pursuant to the exercise of option are sold by the assessee. 23. It was submitted by the ld. DR that the assessee cannot consider only one taxable event viz., sale of options and treat it as giving rise to long term capital gains. The stand taken by the AO and CIT(Appeals) in their orders were again reiterated. 24. We have considered the rival submissions. The assessee was a software engineer. He was in employment with a company in India by name Aerospace Systems Pvt. Ltd. ["ASPL"]. He was sent on deputation as an independent consultant to SIRF, USA by his employer. He served SIRF, USA from 1995 to 1998 as an employee of Aerospace Systems Pvt. Ltd., on deputation and as independent consultant. Thereafter ....

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....rsary of the Date of Grant. (c) The option granted cannot be transferred or assigned. Option can only be exercised. It can be bequeathed. It cannot be sold or otherwise transferred. (d) Unless and until a certificate for option shares are issued none can claim to rights as a shareholder of the company. 25. The Assessee had a right to opt to acquire 35000 shares at $ 0.08. The option was granted on 4.10.1996 and would vest starting from 4.10.1996 over a period of 4 years in proportions which we have described in the earlier paragraph. Thus as on 4.10.2000 the Assessee had a right to exercise option for purchase of 35000 shares at $ 0.08. 26. The first event of taxability is triggered on the date when the option to acquire the shares is exercised by the Assessee. Till such time the Assessee has no right to any shares of SIRF, USA. The benefit arising to an employee, being the difference between the Fair Market Value (FMV) on the date on which the option is exercised less the amount actually paid or recovered from the employee, would be subject to tax as part of the salary income. It is the plea of the Assessee that this off course would be the case where there is employer emplo....

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....ause what is received by the assessee is itself in monetary terms and one cannot convert money into money. On the point of time when taxable event occurs the Special Bench held that the taxability is triggered when SAR is redeemed because the redemption amount being dependent on the market price of shares which can move in any direction at any time. The Special Bench further held that amount received by the assessee is assessable under the head 'Salaries' as the theory of compensation for services rendered flowing from employer to the employee being sine qua non for taxability under the head 'Income from salaries' is no longer valid. The Special Bench found that PGU is not a rank outsider qua PGI of which the assessee is employee and as per Parts. M and G of the 1983 Stock Plan, PGI is party to the entire scheme of granting SAR. The Bench also observed that the Assessee has no other connection with PGU than the connection as an organisation connected with the company with which he has entered into an employment contract, and, therefore, anything that the assessee receives from PGU cannot be anything but the reward of his employment. The Special Bench held that the amount in questio....

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....enefit under the stock options, include the same as part of the salary income and, accordingly, withhold the tax on the same from the employee. This has been done by SIRF, USA. The same treatment should follow in India as well. 31. The next event of taxability under the stock options would arise in the event of sale/transfer of shares. The difference between the sale consideration and the fair market value on the date of exercise would be treated as capital gains and subject to capital gains tax. The capital gains could be long term or short term, depending upon the period of holding of such shares/securities. Admittedly in the present case, the shares were held for a period of less than 1 year by the Assessee and therefore the gain in question was "Short Term Capital Gain". We therefore uphold the order of the revenue authorities in this regard. 32. With regard to the decision of the Delhi Tribunal in the case of Ambarish Kumar Jhamb (supra) and Abhiram Sheth (supra), those were cases where as per the stock option plan there was actual transfer of shares which were subject matter of stock option by the employer to a trustee, who held the shares for and on behalf of the employee.....

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....Person" making payment in the form of salary. Thus it can be said that Sec.192 of the Act will operate so as to impose an obligation on SIRF, USA to deduct tax at source on payment made to Assessee, as the Assessee as on the date of payment was "resident" in India and his entire global income is taxable in India. In that view of the matter, we hold that the Assessee can be heard to say that he had taken into account the "tax deductible" at source by SIRF, USA while estimating his tax liability for payment of advance tax u/s. 209 of the Act. We therefore uphold the order of CIT(A) and dismiss appeal by the Revenue. ITA No.1342/Bang/11 38. This is an appeal by the Revenue against the order dated 31.10.2011 of CIT(A)-V, Bengaluru, relating to AY 06-07, whereby the CIT(A) cancelled penalty imposed on the Assessee u/s. 271(1)(c ) of the Act. 39. The effective ground raised by the Revenue reads thus: "2. The learned CIT(A) ought to have noted that the assessee represented the capital gains as LTCG while being fully aware that in essence it was a cashless transaction, for which he had all the evidence. Further the assessee acted on his own volition on exercising the option and would....

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.... by the assessee were erroneous or incorrect. It was only because of the legal position as understood by the assessee and as adopted by AO that the impugned addition came to be made. 41. The AO, however, did not agree with the submissions made by the assessee. He held that the assessee was a highly educated professional. According to him, the assessee ought not to have claimed deduction u/s. 54F of the Act treating income as long term capital gain. The AO found the following was the disclosure made by the assessee in the return of income:- "INCOME FROM CAPITAL GAINS Long term capital gains Sale of stock options in US Recd from Parent Co. Grant year of stock options 1996 Sale year of stock options 2006 Long term capital gain on sale of stock options First Trade Second Trade Total Gain Convr. Rate US $ US $ US $ Gains 78820 204786 283606 45 12762295 Less: Deduction u/s 54F Investment in Residential House Property Amount paid towards purchase of residential House Property at:- SV-II-05-TF, Eldeco Utopia Plot 3, Sector 93 A Noida 6238598 Taxable long term capital gains 6523697" 42. The AO was of the view that the above computation gives an impression t....

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....and of the revenue as reflected in the grounds of appeal. Incidentally, the grounds of appeal are nothing but reiteration of the stand taken by the AO in the order imposing penalty. 46. We have considered the rival submissions. We need to briefly explain as to how Employees Stock Option Plan (ESOP) were taxed at various point of time in India. ESOP (Employees Stock Option Plan) were taxed Vide circular no.710 dated July 24, 1995. The CBDT in the said Circular clarified that shares issued to employees at less than market price amounted to a perquisite under section 17(2)(ii). Later sub-clause (iiia) was added to section 17(2) by the Finance Act, 1999 to provide that when any share, security etc. was offered directly or indirectly by the employer, the difference between market value of the stock and the cost at which it was offered was to be taxed as perquisite in the year in which the right was exercised. The difference between the market value on the date of exercise of the option and the sale consideration was to be taxed as capital gains in the year of sale. In the year 2000, ESOPs granted at concessional rate were not treated as perquisite and the employees were subjected to on....

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....bears to the length of the grant period. Unquote As explained above, Q4 of the series specifically covers the situation of proportionate taxation in cross border employment. Other relevant questions which cover foreign taxation include Q3 and Q5 reproduced below: Quote Question 3. Will FBT apply in case of employees of the Indian subsidiary for shares awarded by the foreign holding company if the employees of the Indian subsidiary are allotted or transferred shares while outside India ? Answer : In the answer to Question No.20 of CBDT Circular No. 8/2005 dt. 29.8.2005, it has been clarified that an employer is liable to fringe benefit tax on the value of fringe benefits provided or deemed to have been provided to employees based in India. Therefore, an Indian subsidiary would be liable to pay FBT in respect of the value of the shares allotted or transferred by the foreign holding company if the employee was based in India at any time during the period beginning with the grant of the option and ending with the date of vesting of such option (hereafter such period is referred to as 'grant period'), irrespective of the place of location of the employee at the time of all....