GARRICK DSILVA v. JOINT COMMISSIONER OF INCOME TAX
[Citation -2005-LL-1025-6]

Citation 2005-LL-1025-6
Appellant Name GARRICK DSILVA
Respondent Name JOINT COMMISSIONER OF INCOME TAX
Court ITAT-Delhi
Relevant Act Income-tax
Date of Order 25/10/2005
Assessment Year 1998-99
Judgment View Judgment
Keyword Tags date of exercise of option • recognized provident fund • residential accommodation • rent-free accommodation • employees stock option • intellectual property • deduct tax at source • employment agreement • specified securities • revenue authorities • cost of acquisition • expatriate employee • actual expenditure • income from salary • fair market value • concessional rate • concessional rent • indian subsidiary • managing director • salaried employee • foreign company • indian currency • stock exchange • value of stock • purchase price
Bot Summary: Whether deduction on account of housing norm and auto norm made by the employer from the base pay of the assessee in lieu of free housing and transport facility provided in India as per the terms of employment, falls within the definition of perquisite enshrined in s. 17(2)(iii) of the Indian IT Act and forms part of the base pay and is exigible to tax Whether a profit or benefit earned/acquired by the assessee on account of exercise of stock option, earlier granted, in terms of his employment on subsequent dates and its sale is a perquisite as per provisions of s. 17(2) of the Indian IT Act or capital gain I have heard the parties and perused the records. The amount of salary, which has been paid to the assessee or to which the assessee is entitled to depends upon the contract between the assessee and the Whirlpool Corporation, USA. In order to appreciate as to whether housing norm and auto norm reduction made by the company is includible in the taxable salary of the assessee, it will be relevant to refer to s. 15 of the IT Act, 1961. These are as under: If the Revenue has not challenged the correctness of the law laid down by the High Court and has accepted it in the case of one assessee, then it is not open to the Revenue to challenge its correctness in the case of other assessees, without just cause. The application of r. 3(c)(ii) and r. 3 by the AO by treating the provision of residential accommodation and car facility as having been provided to the assessee at concessional rates is not justified insofar as in the terms of employment it has been clearly provided by the employer-company to the assessee that the latter would be entitled to free residential accommodation and free car facility in India. The point of difference may be stated as under: Whether a profit or benefit earned/acquired by the assessee on account of exercise of stock option, earlier granted, in terms of his employment on subsequent dates and its sale is a perquisite as per provisions of s. 17(2) of the Indian IT Act or capital gain The relevant facts relating to this issue are that during the course of assessment proceedings it was observed by the AO that as per the employment contract of the assessee with Whirlpool Corporation, USA, the assessee was entitled to be nominated for stock options. In response, the following information was furnished by the assessee in regard to grant, exercise and sale of stock options: S. No. Date of grant Grant/exercise price in US Basis of Grant/ exercise price No. of stock options Date of exercise sale Price at which sold in US -6-1994 Average of high low price at New York Stock Exchange on the date of grant -3-1998 -8-1995 do do -6-1996 do do -6-1996 do -3-1998 From the details furnished by the assessee it was observed by the AO that there was a difference between the sale price of shares and the purchase price, and that the assessee had not disclosed any perquisite value in respect of the gains on exercise of stock options. The assessee derives income from salary and it is not disputed that it is by reason of his employment with Whirlpool Corporation, USA that the assessee is entitled to the stock options scheme.


DELHI BENCH (THIRD MEMBER) JOINT COMMISSIONER GARRICK DSILVA v. OF INCOME TAX October 25, 2005 JUDGMENT ORDER M.A. Bakshi, Vice President (as third member): In consequence of difference of opinion between learned JM and learned AM of Division Bench, Hon ble President, Tribunal has nominated me as Third Member of Bench, on following points of difference: "1. Whether deduction on account of housing norm and auto norm made by employer from base pay of assessee in lieu of free housing and transport facility provided in India as per terms of employment, falls within definition of perquisite enshrined in s. 17(2)(iii) of Indian IT Act and forms part of base pay and is exigible to tax? Whether profit or benefit earned/acquired by assessee on account of exercise of stock option, earlier granted, in terms of his employment on subsequent dates and its sale is perquisite as per provisions of s. 17(2) of Indian IT Act or capital gain?" I have heard parties and perused records. I will first take up first point of dispute for consideration. Though facts of this case have been described by learned Members of Bench, I, for sake of coherence, would like to refer to some of these facts, which are considered to be of relevance for decision on points of dispute. assessee, Australian citizen, was appointed as managing director and president by Whirlpool Corporation, USA (the terms and conditions of appointment are available on pp. 27 to 29 of paper book). As per offer of appointment, assessee was to join US based company as employee on international assignment. In view of same, compensation, benefits and other working conditions of assessee were covered by company s US expatriate policies. In respect of residential accommodation, terms of offer provided that assessee would be entitled to company paid housing after deducting US housing norm of about US$ 16,000. Likewise, company provided free car facility (minor expenses whereof were to be paid by assessee) after car deduction of US$ 3,000 per year. assessee filed return of income on basis of salary drawn by him in US dollars. tax was also to be paid by company and, therefore, assessee also included tax paid by assessee-company as part of his assessable salary. There was dispute about conversion of US dollars into Indian rupees. Whereas assessee had converted salary at average exchange rate, AO calculated salary drawn in Indian currency at exchange rate prevalent on date of payment. issue relating to conversion has been decided by CIT(A) in favour of Revenue. This fact would be relevant in computation of perquisite value at rate of 10 per cent of salary, if applicable. assessee had also offered perquisite value in respect of free residential accommodation as well as free car provided to him in India. assessee worked out value of perquisite in respect of residential accommodation as under: Salary Rs. 1,16,92,572 Rent paid Rs. 7,80,000 per cent of salary Rs. 11,69,257 per cent of salary Rs. 70,15,543 Taxable value taken is actual rent paid i.e., Rs. 7,80,000 being lower. It is noteworthy that assessee has calculated salary of Rs. 1,16,92,570 on following basis: Net salary drawn Rs. 78,44,971 Tax paid by employer Rs. 38,47,601 Rs. 1,16,92,570 per cent of same has been taken at Rs. 11,69,257 AO has worked out perquisite value of residential accommodation at Rs. 15,53,803 as under: Salary for purpose of r. 3 Salary as per Appendix I Rs. 79,98,038.1 Add: Housing contribution Rs. 10,02,083.6 Auto norm Rs. 1,10,505.0 Rs. 91,10,626.7 Add: Tax perquisite (as computed in assessment order) Rs. 61,00,796 Total Rs. 1,52,11,423 per cent of above Rs. 15,21,142 per cent of salary Rs. 91,26,854 "Fair rental value" Not ascertainable Perquisite value as per r. 3(a) Rs.15,21,142 Add: Furniture provided: (10 per cent of cost) Rs.32,661 Rs.15,53,803 Less: Housing contribution Rs.10,02,084 i.e., Rs. 5,51,719 It is evident from above that AO has deducted Rs. 10,02,084 being amount reduced from salary of assessee on account of housing norm from perquisite value. net perquisite value in regard to residential accommodation has thus been worked out at Rs. 5,51,719. On other hand, assessee has offered perquisite value of residential accommodation at Rs. 7,80,000 on basis of actual rent paid by employer. It may thus appear that working made by AO is beneficial to assessee insofar as perquisite value assessed by AO is less than perquisite value disclosed by assessee. So, however, as result of working made by AO, assessee has been asked to pay tax on amount of Rs. 10,02,083, i.e., amount reduced from assessee s gross salary on account of housing norm. Moreover, said amount has also been taken into account in working out salary received by assessee for purposes of computation of perquisite value at rate of 10 per cent. Therefore, real controversy involved in this appeal is as to whether deduction made by employer on account of housing norm is includible in taxable salary of assessee for intents and purposes including determination of perquisite value of residential accommodation and free car facility. In respect of car, assessee had offered value for taxation at Rs. 1,100 per month. On other hand, AO calculated perquisite value at Rs. 1,10,505 under r. 3(c)(ii) but assessed it at nil by giving credit for reduction made by employer in salary of assessee. working is given by AO in para 5 of assessment order which is reproduced hereunder: "5. Valuation of car with driver: relevant clause in employment contract and discussion in paras 3.2 and 3.3 of this order make it very clear that car has been provided by employer at concessional rate after deduction of US $ 250 per month totally to US$ 3,000 for full year. Recovery at rate of 250 US$ per month has been made from Appendix 1. Rule 3(c)(ii) lays down that value of motor car provided by employer for use by assessee partly in performance of his duties and partly for his private or personal purposes shall be determined to be sum equal to that part of amount actually expended by employer on maintenance and running of motor car during relevant previous year and including remuneration, if any, paid by employer to chauffeur which can be reasonably attributed to use of motor car by assessee for his private or personal purposes; or where motor car is used by his employer, aggregate of such sum and of sum equal to that part of amount representing normal wear and tear of motor car which can reasonably be attributed to user of motor car by assessee for his private or personal purposes; however, that where determination on basis mentioned above presents difficulty, value of perquisite may be determined on basis of Table. Details as under were ascertained from assessee and Whirlpool Holdings India Ltd. through specific queries under s. 131, which are on record: (i) Assessee was provided with one car; Mercedes Benz (purchased on 13th Nov., 1995) (letter dt. 22nd Aug., 2000 of Authorised Representative). (ii) Company did not maintain any log book. car was provided exclusively to assessee for his official as well as personal purposes. car was not used as pool car of Company (letter dt. 13th Sept., 2000 of Authorised Representative). Driver s salary was Rs. 5,000 per month. (iii) No depreciation on this car has been claimed by assessee in its own assessment as it was foreign car and in accordance with cl. (a) of first proviso to s. 32(1) of IT Act. (letter dt. 6th Oct., 2000 of Authorised Representative). (iv) cost of import duty, registration charges and insurance of Mercedes Benz was Rs. 16,80,903 paid by Whirlpool Holdings India Ltd. Cost of car was borne by Whirlpool Corporation, USA and hence not supplied (letter dt. 20th Oct., 2000 of Whirlpool India Holdings Ltd. in response to summons under s. 131). Rs. 1,13,307 and Rs. 70,869 have been incurred on petrol and maintenance expenses by Whirlpool India Holdings Ltd. on this Mercedes car during financial year 1997-98. There were 16 cars owned by company during year 1997-98. above facts show that total expenditure on this car, which is exclusively for official and personal use by managing director Mr. Garrick D Silva is: Petrol and maintenance expenses Rs. 1,84,176 Driver s salary Rs. 60,000 Rs. 2,44,176 In addition there would be wear and tear which can be estimated to be at least Rs. 3 lakhs per annum assuming straight line depreciation over 10 years. Since no log book is said to be maintained, it is not possible to work out exact amount attributable to personal use. However, r. 3(c)(ii) requires reasonable attribution and not exact attribution . In view of fact that assessee has agreed in employment contract for deduction of US$ 3,000 per annum on monthly basis it is clear that benefit derived from this amenity can never be below this, i.e., Rs. 1,10,505 (see conversion in para 2 for auto norm). Considering overall expenditure on this vehicle, this sum is only about 1/5th of actual running, maintenance expenses and estimated wear and tear. There are total 16 cars with employer and assessee being managing director of employer-company was definitely in position to utilize any other car for official purposes as well. reasonably attributable personal use can never be, therefore, less than Rs. 1,10,505. Authorised Representatives on being asked to explain as to why minimum perquisite value of vehicle provided by employer be not taken at US $ 3,000 furnished their written submissions vide letter dt. 20th Sept., 2000. Their interpretation of r. 3(c)(ii) is that it does not leave determination of perquisite value to discretion of AO. Further US$ 3,000 being deducted from salary is hypothetical amount and not actual expenditure of employer-company. This amount, according to Authorised Representatives cannot be considered for purposes of valuation of perquisite of motor car provided by employer. As discussed in paras 5 and 5.1 what is required to be done under r. 3(c)(ii) is reasonable attribution and there is no compulsion to adopt Table, if such reasonable attribution is possible. In view of figures in para 5.1 and fact that this reasonable attribution can never be less than amount deducted from assessee s salary, i.e., US$ 3,000 or Rs. 1,10,505 (no prudent person would agree for deduction which is more than actual benefit), value of car plus driver perquisite provided by employer, for purposes of r. 3(c)(ii), is taken at Rs. 1,10,505. This is on ground that it is minimum amount that can be reasonable attributed to personal use. Assessee s case is covered by r. 3(c)(v), i.e., he is allowed use of motor car at cost/concession. perquisite value in this case is as under: Valuation done under r. 3(c)(ii) Rs. 1,10,505 Less: Amount deducted from assessee s salary Rs. 1,10,505 Perquisite value Rs. Nil In this case value under rule 3(c)(ii) has been taken to be equal to amount recovered by employer, i.e., auto-norm . However, if value were taken at Rs. 13,200 as in return, perquisite value at concessional rate under r. 3(c)(v) would still be nil. This is due to fact that no prudent person would agree for recovery from his salary at amount higher than benefit derived." As already pointed out, CIT(A) has upheld order of AO in working out perquisite value and in including reductions made by employer on account of auto norm and housing norm as part of salary. Whereas learned counsel for assessee sought to support view expressed by learned AM, learned Departmental Representative sought to support view expressed by learned JM. At this stage I am tempted to say that view expressed in regard to first point of dispute appears to be attractive at first sight but it loses its lustre when one peeps deep into employment agreement and provisions of Act. It has been pointed out earlier that in this case value of perquisites determined by AO in respect of free residential accommodation and free car facility provided to assessee is less than value disclosed by assessee. Therefore, before I consider correctness of method adopted by AO in determining perquisite value of rent-free accommodation and free car, it is more important to determine component of salary for purposes of taxation. amount of salary, which has been paid to assessee or to which assessee is entitled to depends upon contract between assessee and Whirlpool Corporation, USA. In order to appreciate as to whether housing norm and auto norm reduction made by company is includible in taxable salary of assessee, it will be relevant to refer to s. 15 of IT Act, 1961. Sec. 15 reads as under: "15. following income shall be chargeable to income-tax under head Salaries (a) any salary due from employer or former employer to assessee in previous year, whether paid or not; (b) any salary paid or allowed to him in previous year by or on behalf of employer or former employer though not due or before it became due to him; (c) any arrears of salary paid or allowed to him in previous year by or on behalf of employer or former employer, if not charged to income-tax for any earlier previous year." Sec. 17 of IT Act, 1961 defines salary . said definition is inclusive definition and provides salary to include wages, annuity, gratuity and any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages. Sec. 17(i) is quoted hereunder: 17. For purposes of ss. 15 and 16 and of this section, "Salary" includes (i) wages; (ii) any annuity or pension; (iii) any gratuity; (iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages; (v) any advance of salary; (va) any payment received by employee in respect of any period of leave not availed of by him; (vi) annual accretion to balance at credit of employee participating in recognized provident fund, to extent to which it is chargeable to tax under r. 6 of Part of Fourth Schedule; and (vii) aggregate of all sums that are comprised in transferred balance as referred to in sub-r. (2) of r. 11 of Part of Fourth Schedule of employee participating in recognized provident fund, to extent to which it is chargeable to tax under sub-r. (4) thereof; (viii) contribution made by Central Government in previous year, to account of employee under pension scheme referred to in s. 80CCD. In Stroud s Judicial Dictionary, Fourth Edn., expression salary is explained as "where engagement is for period permanent or substantially permanent in character and is for other than manual or relatively unskilled labour, remuneration is generally called salary". In case of Gestetner Duplicators (P) Ltd. vs. CIT (1979) 8 CTR (SC) 371: (1979) 117 ITR 1 (SC), Their Lordships of Supreme Court held that in ordinary parlance, salary connotes remuneration or payment for work done or services rendered. It may be pertinent to mention that Whirlpool Corporation, USA is employer-company in case of assessee. It has tax equalization policy in respect of its employees assigned to overseas location. policy is so designed that employee is neither put to any disadvantage or advantage as result of his posting outside USA in respect of payment of income-tax. policy and scope being relevant is reproduced as under: Policy and Scope: When employee is assigned to overseas location, company policy is designed so that employee should pay similar income-tax to that which he/she would have paid had employee remained in US. To achieve this objective, company has adopted tax equalization programme under which employee s compensation will be reduced by amount similar to tax he would have paid had he/she remained in US ("hypothetical tax") and company will reimburse employee for all US and foreign taxes actually payable. In addition, to extent hypothetical tax is dissimilar, there is generally offset relating to hypothetical housing. This policy covers US citizens who are transferred from US to foreign post of assignment or from one foreign post of assignment to another. It also includes all income of US citizens including company compensation and personal investment income. It has been given in writing before me that auto norm and housing norm of company are in consonance with above policy of employer- company. It has further been stated that assessee is not entitled to any free accommodation or free car on his posting in USA and accordingly deduction is being made from his salary to put him on par with employees working in USA. Proceeding on basis that assessee was not entitled to free accommodation or free car had he been posted in USA, company having provided free accommodation and free car in India and reduced salary of assessee to put him at par with employees working in USA. Therefore, there is no doubt in my mind that intention of employer to fix basic salary at higher level and then reducing same on account of hypothetical tax, housing norm and auto norm, etc. was for purpose of equalization of pay and other facilities of US employees and employees assigned to overseas location. It is also interesting to note that AO has not included hypo-tax deduction made by employer as part of salary of assessee. amount has been deducted on account of tax equalization policy and AO has rightly deducted same from gross salary but included actual tax component paid by employer-company as perquisite for purposes of determination of salary received by assessee. In my considered view, there is no reason for taking different view in regard to deduction made on account of housing norm and auto norm. As pointed out earlier, intention of employer-company appears to be abundantly clear that there is no confusion on assessee s right to receive salary in USA after completion of assignment in India or overseas location. It may be pertinent to mention that as per terms and conditions of employment, company had assured assessee that after completion of three years working in India, he would be considered for assignment outside India. In my considered view treatment given by AO to deductions on account of housing norm and auto norm is not justified more so when different treatment has been given to deductions on account of hypo-tax. In my view, deduction on account of hypo- tax and housing norm and auto norm deserves same treatment. Apart from facts stated above, another factor which assumes importance is that in case of Whirlpool India Holdings Ltd. (the employer- company), dispute was raised by AO for purposes of provisions of ss. 201 and 201(1A) of IT Act, 1961 claiming that there was short-deduction of tax from salary paid to assessee. AO had invoked aforementioned provisions of Act in case of Whirlpool India Holdings Ltd. on ground that in working out tax deductible at source, deductions on account of hypo-tax in respect of housing norm and auto norm had not been included by company. demand of Rs. 19,36,629 for financial year 1999-2000 relevant to asst. yr. 2000-01 was created under ss. 201 and 201(1A) accordingly in name of Whirlpool India Holdings Ltd. vide order dt. 28th Feb., 2001 by Dy. CIT, TDS, Circle-XXVII, New Delhi. When matter came up before CIT(A)-XXX, New Delhi, he had called for comments of AO on written submissions filed by assessee. AO vide his comments dt. 26th Nov., 2002 reported to CIT(A) that as per facts on record, hypo-tax, housing norm and auto norm have actually been reduced from salary of expatriate employee under tax equalization policy. It was also pointed out that since above reduction finds mention in pay slips issued to expatriate employee, TDS officer has wrongly concluded that these were actually disbursed to employee and AO reported to CIT(A) that it appears to be mistake. CIT(A) vide order dt. 6th May, 2003 accepted appeal of assessee and held that company, namely, Whirlpool India Holdings Ltd., was not defaulter in terms of ss. 201 and 201(1A) of IT Act, 1961 with reference to housing norm and auto norm. In other words, opinion of Whirlpool India Holdings Ltd. that hypo-tax, housing norm and auto norm are actually reductions from salary and, therefore, do not constitute part of salary has been confirmed by CIT(A). I have been informed by learned counsel for assessee that no appeal has been filed against said decision of CIT(A) and that order has become final. Therefore, controversy at this stage appears to be unnecessary insofar as Department is not at liberty to take different view in case of company and in case of assessee without assigning any reason. principle is applicable in this case insofar as Revenue has accepted view taken by CIT(A) in case of employer-company and, therefore, it would not be open to Department to take different view in case of employee on same issue. observations of Hon ble Supreme Court in case of Berger Paints India Ltd. vs. CIT (2004) 187 CTR (SC) 193: (2004) 266 ITR 99 (SC), may be relevant. These are as under: "If Revenue has not challenged correctness of law laid down by High Court and has accepted it in case of one assessee, then it is not open to Revenue to challenge its correctness in case of other assessees, without just cause." Another factor for deciding issue is treatment of perks in form of residential accommodation and car facility in India. AO having held that deduction of pay on account of housing norm and auto norm was part of salary received for purposes of taxation in India further held that residential accommodation and car facility have been provided to assessee at concessional rates. AO has accordingly calculated perquisite value on same basis. question that requires to be considered is as to whether perquisite value is to be determined on basis of free residential accommodation and free car facilities or on basis of such facilities having been provided at concessional rate. It has been pointed out earlier that in this case, value of perquisites determined by AO in respect of residential accommodation and car facility provided to assessee is less than value disclosed by assessee. So, however, determination of perquisite value of aforementioned facilities is dependent on treatment given to reduction on account of housing norm and auto norm. As per terms of contract of employment, copy of which is on record, it is abundantly clear that assessee is entitled to free residential accommodation and free car while posted in India. provision of free residential accommodation and free car is with condition of reduction in salary on basis of norms of company. effect of terms of agreement is that assessee is entitled to free residential accommodation and free car facility in India to which he was not entitled to in USA. Since he was not entitled to free residential accommodation and free car facility had he worked in USA as per company s policy, it would entail deduction in his salary to be calculated on basis of norms of company. Though agreement provides for estimated reduction by US$ 16,000, however, as per certificate, more reduction has been made. For free car facility, reduction of salary is US$ 3,000. As per above terms and conditions of agreement of employment after reduction of salary, assessee has been ensured free residential accommodation and free car facility in India. In my considered view, fixation of salary at US$ 15,000 per month to assessee was for purposes of employment in USA and terms and conditions of agreement clearly stipulate that salary receivable by assessee in India would be after reduction of hypo-tax, housing norm and auto norm. agreement does not stipulate that assessee would be entitled to residential accommodation and car in India at concessional rates. On other hand, agreement makes it abundantly clear that assessee would be entitled to rent-free accommodation and free car facility while in India. Therefore, application of rules for determination of perquisite value on basis of residential accommodation and car provided at concessional rates is not warranted. Rule 3(a) of IT Rules as applicable for relevant assessment year provides for computation of perquisite value in respect of rent-free accommodation. On other hand, r. 3(b), which has been applied by AO provides as under: 3. For purpose of computing income chargeable under head "Salaries", value of perquisites provided by employer directly or indirectly to assessee (hereinafter referred to as employee) or to any member of his household by reason of his employment shall be determined in accordance with following sub-rules, namely: (b) value of residential accommodation provided at concessional rent shall be determined as sum by which value computed in accordance with cl. (a), as if accommodation were provided free of rent, exceeds rent actually payable by assessee for period of his occupation during relevant previous year. As result of this decision, in my view, AO will be required to redetermine perquisite value of free residential accommodation and free car facility provided to assessee. application of r. 3(c)(ii) and r. 3 by AO by treating provision of residential accommodation and car facility as having been provided to assessee at concessional rates is not justified insofar as in terms of employment it has been clearly provided by employer-company to assessee that latter would be entitled to free residential accommodation and free car facility in India. Since assessee was not entitled to free residential accommodation and free car facility while working in USA, deduction in salary has been provided. It is also pertinent to mention that deduction on account of free residential accommodation is more than Rs. 10 lakhs as against actual rent paid of Rs. 7,80,000. I am therefore, of considered view that AO was not justified in treating deductions made from salary on account of housing norm and auto norm as part of salary. I, therefore, agree with view expressed by learned AM in regard to this issue. Now, I take up second point of dispute involved in this appeal. point of difference may be stated as under: "Whether profit or benefit earned/acquired by assessee on account of exercise of stock option, earlier granted, in terms of his employment on subsequent dates and its sale is perquisite as per provisions of s. 17(2) of Indian IT Act or capital gain?" relevant facts relating to this issue are that during course of assessment proceedings it was observed by AO that as per employment contract of assessee with Whirlpool Corporation, USA, assessee was entitled to be nominated for stock options. AO, accordingly, made inquiries about exercise of any stock option by assessee in previous year relevant to asst. yr. 1998-99. In response, following information was furnished by assessee in regard to grant, exercise and sale of stock options: S. No. Date of grant Grant/exercise price in US $ Basis of Grant/ exercise price No. of stock options Date of exercise & sale Price at which sold in US $ -6-1994 Average of high & low price at New York Stock Exchange on date of grant -3-1998 -8-1995 do do -6-1996 do do -6-1996 do -3-1998 From details furnished by assessee it was observed by AO that there was difference between sale price of shares and purchase price, and that assessee had not disclosed any perquisite value in respect of gains on exercise of stock options. When asked to explain as to why benefit derived by assessee by exercise of stock option may not be assessed as perquisite within meaning of s. 15 r/w s. 17 of Act, it was claimed that right to purchase shares was granted to assessee at average of high and low price at New York Stock Exchange on date of grant and, therefore, there was no difference between grant price and market price. Accordingly, there was no benefit derived by assessee by grant of stock options. It was pointed out that profit derived by assessee on sale of shares granted to assessee was on sale of capital asset resulting in capital gains which in case of assessee was not taxable in India. AO rejected claim of assessee with reference to provisions of ss. 15, 17(1) and 17(2) of IT Act, 1961. AO referred to decision of Bombay High Court in case of CIT vs. D.R. Phatak (1975) 99 ITR 14 (Bom), and decision of Authority for Advance Rulings in P. No. 15 of 1998, XYZ, In re (1998) 150 CTR (AAR) 504: (1999) 235 ITR 565 (AAR), and held that benefit flowing from employment contract was perquisite within meaning of s. 17(2)(iii) and taxable under Act. AO further held that value of perquisite was ascertainable only on date option was actually exercised by assessee and since in this case date of exercise of option and date of sale of shares coincided, profit derived on sale of shares was liable to tax. AO worked out difference at Rs. 39,79,814 which was brought to tax. On appeal, CIT(A) upheld view of AO with particular reference to Circular No. 710 of CBDT [(!995) 127 CTR (St) 1] and decision of Authority for Advance Rulings in P. No. 15 of 1998 s case (supra). On further appeal before Tribunal, learned JM upheld view of Revenue authorities by relying upon decision of Authority for Advance Rulings in P. No. 15 of 1998 s case (supra). It has been pointed out by learned JM that issue involved in this appeal was similar to issue decided by Authority for Advance Rulings in P. No. 15 of 1998 s case (supra) and, therefore, difference between market price on date of exercise of option and price paid by assessee was chargeable to tax. It has been held by learned JM that assessee had acquired shares in year under appeal at concessional rate as result of which pecuniary benefit accrued to assessee in form of perquisite which is taxable under head salary under s. 17(2)(iii) of IT Act, 1961. learned AM has differed with learned JM mainly on ground that issue was covered by decision of House of Lords in case of Abbot vs. Philbin (Inspector of Taxes) (1962) 44 ITR 144 (HL), wherein it was held that taxable perk results at time of grant and acceptance of offer and not at time shares are acquired on exercise of option accepted earlier. learned AM has expressed view in para 31 of his order on ground that there was no question before Advance Ruling Authority as to whether any part of consideration received on sale of shares could be taken to fall within head capital gains and not salary . learned AM has further held that in this case difference between cost at which assessee has acquired shares and sale price is liable to capital gains tax. Before me, it hardly needs to be mentioned that learned counsel for assessee sought to support view expressed by learned AM and learned Departmental Representative, on other hand, sought to support view expressed by learned JM in regard to this issue. I have given my thoughtful consideration to rival contentions. assessee derives income from salary and it is not disputed that it is by reason of his employment with Whirlpool Corporation, USA that assessee is entitled to stock options scheme. All employees of Whirlpool Corporation, USA are not entitled to stock options but company through its human resources department provides list of employees who are eligible to grant of stock options from time to time. It is not in dispute that assessee was eligible to stock options which were granted in years 1994, 1995 and 1996. It will be relevant to refer to scheme of stock options copy whereof is placed on record. As per said scheme, shares are granted to selected employees as incentive to promote continuity of management and increased incentive and personal interest in welfare of company. plan objectives of scheme are as under: "Whirlpool Corporation shareholders and board of directors adopted in 1989, 1996 and 1998 Omnibus Stock and Incentive Plans (the "Plans") to enable company to attract and retain superior talent and to link interests of participating employees with interests of company s shareholders. It is intent of Plans to promote continuity of management and increased incentive and personal interest in welfare of company by those who are responsible for shaping and carrying out long-range plans of company and securing its continued growth and financial success. To encourage such employees to secure or increase, on reasonable terms, their stock ownership in company, board of directors may, from time to time, award options to purchase shares of company s stock. exercise and retention of stock options is way for you to share in company s future growth. There are various methods to achieve stock ownership through Plans." stock options as per scheme are described in scheme to represent right to purchase company common stock at future time at price set at time option is granted. Option price is set at time Human Resources Committee approves grant and is average of high and low market price for day. As per scheme, value of stock option is described as under: "The company s stock options can be used as valuable tool to build estate either through direct purchase at exercise or through process termed swapping , where currently owned stock can be turned into company to pay for option exercises. Because there are so many variables that may reflect your personal status, we encourage you to consult financial planner or stock broker to review your personal financial strategies and how stock options may best fit into those strategies." methods of exercise options have also been given as under: "To exercise option means to buy share of stock. There are various methods to achieve stock ownership through Plan; payment with personal check, by wire transfer, bank or broker loan, use of presently owned company common stock to exchange or swap for additional shares, or short- term loan. Vested options may be exercised at any time by contacting stock option administrator at 800-446-2574, ext. 3973, or 616-923-3973. option exercise cannot be processed until Whirlpool receives both payment and completed exercise form. You may be required to pay taxes in addition to option price, depending on country you reside in. stock option administrator will calculate amount of taxes due in addition to option made. exercise form may be faxed to administrator." As is evident from scheme of stock options, as indicated above, there are three stages for acquisition of stock options One is eligibility, second is grant of option and third is exercise of option. Once option is exercised by employee, he acquires shares at predetermined price. There is fourth stage in scheme of stock option, i.e., sale of shares, which according to my understanding of scheme, is not compulsory. question that is involved in this appeal is stage at which benefit derived by assessee by stock option is taxable under provisions of IT Act, 1961. As already pointed out, learned AM has referred to decision of House of Lords in case of Abbott (supra), where similar issue had been decided by majority opinion in favour of taxpayer. It will be relevant to point out that Lord Keith (of Avonholm) and Lord Denning had given dissenting opinion in aforementioned decision by House of Lords, which is quoted hereunder: "An option is not itself perquisite or profit. It is on exercise of option that benefit accrues and if capable of being valued in terms of money is assessable to tax." This decision by House of Lords has been taken notice of by Authority for Advance Rulings in P. No. 15 of 1998 s case (supra) wherein it has been held that value of benefit derived by assessee at time of exercise of stock option is liable to tax under s. 17(2)(iii) of Act in year of excise of option. issue before Authority for Advance Rulings was as to whether benefit received by employees of Indian company by exercise of option to purchase shares of parents foreign company constitutes additional remuneration and perquisite taxable as income from salary. Hon ble Authority for Advance Rulings held that gain made by employee after exercise of stock option is taxable as salary. It has further been held that foreign company selling its shares at concessional rate to employees of its Indian subsidiary has to deduct tax at source under s. 192 since gain made by employee after exercising option would be taxable as salary. Hon ble Authority for Advance Rulings has taken conscious decision on basis of provisions of s. 17(2)(iii) of Act. learned AM has preferred to rely on decision of House of Lords in case of Abbott (supra) and has not followed decision of Authority for Advance Rulings in P. No. 15 of 1998 s case (supra) on ground that issue involved in this appeal was not before said authority. In my considered view, as pointed out earlier, issue involved in this appeal was before Authority for Advance Rulings in P. No. 15 of 1998 s case (supra), and conscious decision has been taken to hold that value of benefit granted to assessee by way of stock option is valuable perquisite assessable with reference to exercise of option on basis of difference in market price on said date with price paid by employee. In my considered view, decision of House of Lords though deserves utmost respect yet when there is decision of Authority for Advance Rulings in P. No. 15 of 1998 s case (supra), directly in respect of s. 17(2)(iii) of IT Act, 1961, and even if one were to choose between two decisions, decision of Authority for Advance Rulings shall have to be preferred to decision of House of Lords. Moreover, provisions of IT Act, 1961 are not pari materia with those of provisions of United Kingdom. In any case, as pointed out earlier, it is not matter of choice between decision of House of Lords and decision of Authority for Advance Rulings insofar as provisions of s. 17(2)(iii) of IT Act, 1961 were not subject-matter of decision before House of Lords. On contrary, Hon ble Authority for Advance Rulings has decided issue relating to taxability of benefit derived by employee in respect of stock options on basis of provisions of s. 17(2)(iii) and, therefore, in my considered view, decision of Authority for Advance Rulings is required to be followed in preference to decision of House of Lords. It is also pertinent to mention that Finance Act, 1999 had inserted s. 17(2)(iiia) to bring clarity about taxability of benefits arising to employee as result of allotment of shares under Employees Stock Option Plan. said s. 17(2)(iiia) and Explanation below s. 17(2)(iiia) was deleted by Finance Act, 2000 w.e.f. 1st April, 2001. There is Explanatory Note by CBDT vide Circular No. 794, dt. 9th Aug., 2000 reported in (2000) 245 ITR (St) 21 in regard to omission of s. 17(2)(iiia) and insertion of proviso to s. 17(2)(iii) as under: "19. Taxation of securities received under Employees Stock Option Plan: Finance Act, 1999, inserted certain provisions in Act to bring clarity about taxability of benefits arising to employee as result of allotment of shares under Employees Stock Option Plan. existing provisions provide that difference between market price on date of exercise of option and price paid by employee for acquiring shares will be regarded as perquisites and difference between fair market value on date of exercise of option and actual sale price in event of transfer of shares by employee shall be regarded as capital gains. (Emphasis, italicised in print, supplied) Act makes departure and provides that no perquisite shall be charged to tax in hands of employee in respect of benefits derived as result of allotment of shares/debentures or warrants directly or indirectly under employees stock option plan or scheme. This is sought to be done by deleting s. 17(2)(iiia) and providing Explanation below s. 17(2)(iii). Sub-s. (2B) in s. 49 inserted by Finance Act, 1999, has also been deleted. Under amended provisions, such shares will only be subjected to capital gains tax at time of sale by employee. difference between consideration and cost of acquisition will be regarded as amount of capital gains under normal provisions of law. However, new provisions shall be applicable only in respect of options exercised or allotments made after 31st March, 2000. taxability of shares in respect of which option has been exercised by employee prior to 31st March, 2000, shall continue to be governed by old provisions." above Explanatory Note makes it abundantly clear that insertion of s. 17(2)(iiia) by Finance Act, 1999 was to bring clarity about taxability of benefits arising to employee as result of allotment of shares and, therefore, insertion was clarificatory in nature. It has also been made abundantly clear that omission of s. 17(2)(iiia) will be applicable only in respect of options exercised or allotments made after 31st March, 2000. In other words, amendment made in s. 17 does not go in favour of assessee but intention of legislature as explained by CBDT is to contrary. intention of legislature not to tax benefit w.e.f. 1st April, 2000 being clear, such benefits are taxable as having accrued to any salaried employee before 1st April, 2000. very fact that s. 17(2)(iiia) was inserted to bring clarity regarding taxation of stock options also supports view expressed by Hon ble Authority for Advance Rulings that benefit accruing to salaried employee on date of exercise of stock option was assessable to tax as perquisite under s. 17(2)(iii). Sec. 17(2)(iii) may be quoted hereunder for sake of ready reference: 17. For purposes of ss. 15 and 16 and of this section, (1) Salary includes (i) to (viii)** (2) "perquisite" includes (i) & (ii)** (iii) value of any benefit or amenity granted or provided free of cost or at concessional rate in any of following cases (a) by company to employee who is director thereof; (b) by company to employee being person who has substantial interest in company; (c) by any employer (including company) to employee to whom provisions of paras (a) and (b) of this sub-clause do not apply and whose income under head Salaries (whether due from, or paid or allowed by, one or more employers), exclusive of value of all benefits or amenities not provided for by way of monetary payment, exceeds fifty thousand rupees. With effect from 1st April, 2001 (to be ignored for year under appeal): Provided that nothing contained in this sub-clause shall apply to value of any benefit provided by company free of cost or at concessional rate to its employees by way of allotment of shares, debentures or warrants directly or indirectly under any Employees Stock Option Plan or Scheme of company offered to such employees in accordance with guidelines issued in this behalf by Central Government. It is pertinent to mention that stock options have been granted to employees to derive benefit with sole purpose of promoting continuity of management and increased incentive and personal interest in welfare of company. Sec. 17(2)(iii) brings benefit derived by employee within ambit of perquisites taxable as income from salary. As per scheme of stock options, assessee is given right to purchase stocks at predetermined price. At time of grant of option, there is no benefit derived by assessee insofar as price fixed for grant of shares is average of market price (high and low) for day on date of grant of option. Therefore, no benefit in monetary terms is derived by assessee on date of grant of option. employee has been given right to exercise option after one year and two years period but not exceeding ten years. When assessee exercises option, he pays consideration for acquisition of shares to company at price fixed at time of grant. In my view, this is stage at which benefit is derived by assessee by way of difference in predetermined price and market price. When market price is higher and assessee acquires shares from employer by reason of terms of employment at lesser value, benefit given to employee is by reason of his employment and such benefit is liable to tax under s. 17(2)(iii) upto 31st March, 2000. It may be pertinent to mention that assessee has option of purchasing shares after expiry of one year from date of grant. assessee may acquire shares at particular time and may hold shares in order to derive more benefits as result of appreciation of value in market. If employee after exercising option of purchasing shares holds same for particular period, gain on sale of shares on subsequent dates will result in capital gain (difference between sale price and price on date of exercise of option). benefit accruing to assessee on date of exercise of option would be taxed under s. 17(2)(iii). (The difference between price on date of exercise of option and predetermined price). confusion that appears to be created in this case is that date of exercise of option and date of sale is same and there is no difference between price prevalent at time of exercise of option and sale of shares. Therefore, there is no capital gain that accrues to assessee on sale of shares allotted to assessee. gain derived by assessee by exercise of option and not by sale of shares is assessable as perquisite within meaning of s. 17(2)(iii). question which appears to be pertinent may arise as to with omission of s. 17(2)(iiia) w.e.f. 1st April, 2001, old provisions of Act are restored and, therefore, if interpretation of provisions of s. 17(2)(iii) as advanced by Revenue is accepted, that would be against intention of legislature insofar as profits arising as result of stock options are not intended to be taxed as perquisite w.e.f. 1st April, 2001. It is also claim of assessee in written submissions filed before Tribunal that s. 17(2)(iiia) having been incorporated by Finance Act, 1999 w.e.f. 1st April, 2001 and same having been deleted by Finance Act, 2000 w.e.f. 1st April, 2001, difference between price at time of exercise of option and grant price of shares are taxable only in asst. yr. 2000-01 and not in earlier years. This contention of assessee is not well-founded. Sec. 17(2)(iiia) was inserted by Finance Act, 1999 which reads as under: 17(2) "perquisite" includes (i) value of rent-free accommodation provided to assessee by his employer; (ii) value of any concession in matter of rent respecting any accommodation provided to assessee by his employer; (iii) value of any benefit or amenity granted or provided free of cost or at concessional rate in any of following cases (a) by company to employee who is director thereof; (b) by company to employee being person who has substantial interest in company; (c) by any employer (including company) to employee to whom provisions of paras (a) and (b) of this sub-clause do not apply and whose income under head "Salaries" (whether due from, or paid or allowed by, one or more employers), exclusive of value of all benefits of amenities not provided for by way of monetary payment, exceeds fifty thousand rupees: Explanation. For removal of doubts, it is hereby declared that use of any vehicle provided by company or employer for journey by assessee from his residence to his office or other place of work, or from such office or place to his residence, shall not be regarded as benefit or amenity granted or provided to him free of cost or at concessional rate for purposes of this sub-clause. (iiia) value of any specified security allotted or transferred, directly or indirectly, by any person free of cost or at concessional rate, to individual who is or has been in employment of that person: Provided that in case where allotment or transfer of specified securities is made in pursuance of option exercised by individual, value of specified securities shall be taxable in previous year in which such option is exercised by such individual. Explanation. For purposes of this clause, (a) "cost" means amount actually paid for acquiring specified securities and where no money has been paid, cost shall be taken as nil; (b) "specified security" means securities as defined in cl. (h) of s. 2 of Securities Contracts (Regulation) Act, 1956 (42 of 1956) and includes employees stock option and sweat equity shares; (c) "sweat equity shares" means equity shares issued by company to its employees or directors at discount or for consideration other than cash for providing know-how or making available rights in nature of intellectual property rights or value additions, by whatever name called; and (d) "value" means difference between fair market value and cost for acquiring specified securities; This provision was deleted by Finance Act, 2000 w.e.f. 1st April, 2001. It may appear that law relating to taxability of stock option was incorporated only w.e.f. 1st April, 2000 by insertion of s. 17(2)(iiia). I have earlier quoted Explanatory Notes of CBDT to clarify that s. 17(2)(iii) was incorporated to bring clarity in provisions relating to taxability of stock option benefits. Moreover, proviso has been added to s. 17(2)(iii) with omission of s. 17(2)(iiia). If stock options were not taxable under s. 17(2)(iii), there would have been no necessity of inserting proviso to s. 17(2)(iii) when legislature intended to exclude same from purview of taxation. said proviso reads as under: "Provided that nothing contained in this sub-clause shall apply to value of any benefit provided by company free of cost or at concessional rate to its employees by way of allotment of shares, debentures or warrants directly or indirectly under any Employees Stock Option Plan or Scheme of company offered to such employees in accordance with guidelines issued in this behalf by Central Government." Thus, intention of legislature to grant exemption in respect of benefit derived as result of stock options provided by company to its employees is manifestly clear to be applicable from 1st April, 2001, i.e., date from which proviso to s. 17(2)(iii) has been inserted. As pointed out earlier, s. 17(2)(iiia) was inserted for sake of clarity and therefore, with its omission, taxability of stock option benefit did come out of taxable net. That is why there was necessity of incorporating proviso to s. 17(2)(iii) to give effect to legislature intent of granting exemption in respect of such benefits. For above stated reasons, I, therefore, agree with view expressed by learned JM that Revenue was justified in assessing difference between market price on date of exercise of option and price paid by assessee for acquisition of shares as benefit assessable under provisions of s. 17(2)(iii). In final analysis, whereas I agree with learned AM in regard to first point of difference of opinion, I agree with learned JM in regard to second point of difference of opinion. I render my opinion as Third Member on both these points of difference as under: First point of difference: deduction on account of housing norm and auto norm made by employer from base pay of assessee in lieu of free housing and transport facility provided in India as per terms of employment is in fact reduction in pay and, therefore, not liable to tax in India. said reduction from base pay will also not form base for determination of perquisites. Second point of difference: That profit/benefit (difference between price of shares at time of exercise of option and predetermined price derived by assessee on account of exercise of stock options granted to assessee in terms of his employment is liable to tax [as perquisite under s. 17(1)(iii), of IT Act, 1961] and that there was no capital gain derived by assessee on sale of shares as sale price and price on date of exercise of option was same. matter may now be placed before regular Bench for passing order in accordance with majority opinion. *** GARRICK DSILVA v. JOINT COMMISSIONER OF INCOME TAX
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