REPORTABLE IN SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL No.4380 OF 2018 (Arising out of Special Leave Petition (C) No. 24888 OF 2015) Addl. Commissioner of Income Tax .... Appellant(s) Versus Bharat V. Patel .... Respondent(s) WITH CIVIL APPEAL No. 4381 OF 2018 (Arising out of Special Leave Petition (C) No. 25001 OF 2015 JUDGMENT R.K.Agrawal, J 1) Leave granted. 2) These appeals have been preferred against impugned judgment and order dated 23.12.2014 passed by High Court of Gujarat at Ahmedabad in Tax Appeal Nos. 6 and 14 of Signature Not Verified Digitally signed by SWETA DHYANI Date: 2018.04.24 17:14:43 IST 2004 whereby Division Bench of High Court dismissed Reason: appeals filed by Revenue while upholding decision 1 of Income Tax Appellant Tribunal (for brevity Tribunal ) dated 27.06.2003. 3) Brief facts: (a) On 10.09.1998, Respondent, who is Chairman and Managing Director of Procter and Gamble (P&G), India, filed his income tax return for Assessment Year 1998 99 and declaring total income at Rs 40,13,820/ . (b) Assessing Officer, vide order dated 12.02.2001, concluded assessment proceeding under Section 143(3) of Income Tax Act, 1961 (in short IT Act ) and determined total income of Respondent at Rs 7,23,11,013/ against declared income. (c) Being aggrieved, Respondent preferred appeal before Commissioner of Income Tax (Appeals) being No. CAB/I 643/2000 2001. After considering case, learned CIT (Appeals), vide order dated 28.03.2002, dismissed appeal of Respondent after comprehensively discussing taxability of alleged amount and upholding Assessment Order passed by Assessing Officer. 2 (d) Being dissatisfied, Respondent carried matter before Tribunal. Tribunal, vide order dated 27.06.2003, in ITA No. 2241/Ahd/2002 partly allowed appeal filed by Respondent. (e) At this juncture, Respondent as well as Revenue both preferred cross appeals before High Court of Gujarat at Ahmedabad. (f) At same time, consequent to decision of Tribunal dated 27.06.2003, Assessing Officer started proceeding side by side to give effect to order dated 27.06.2003. Vide order dated 15.09.2003, Assessing Officer held that difference being sum of Rs 6,80,40,649/ paid to Respondent by P&G, USA shall be treated as capital gains on transfer/redemption of shares, and hence, Respondent is liable to pay tax on capital gains. Being aggrieved with order dated 15.09.2003, Respondent filed appeal before CIT (Appeals) being No. CAB/V 37/04 05 which was upheld by learned CIT (Appeals) in favour 3 of Assessing Officer while dismissing appeal of Respondent. (g) Being dissatisfied, Respondent further preferred appeal before Tribunal. Tribunal, vide order dated 24.09.2010, dismissed appeal. decision of Tribunal dated 24.09.2010 was not challenged further. (h) Division Bench of High Court, vide judgment and order dated 23.12.2004, allowed appeal filed by Respondent while dismissing appeal of Revenue. (i) Hence, present appeals have been filed by Revenue before this Court. 4) We have given our thoughtful consideration to submissions of leaned senior counsel for parties and perused factual matrix of case. Point(s) for consideration: 5) Whether in present facts and circumstances of case, any interference by this Court is required with impugned decision of High Court? Rival contentions: 4 6) At outset, learned counsel for Revenue contended that High Court erred in law while upholding that amount received on redemption of Stock Appreciation Rights (SARs) is to be treated as capital gains and not perquisite under section 17(2)(iii) of IT Act. However, same is not taxable under category of capital gains since no consideration had passed from Respondent. 7) In support of his argument, learned counsel placed reliance on Sumit Bhattacharya vs. ACIT Circle 16(1), Mumbai [2008] 112 ITD 1 (MUM.) (SB) and contended that Respondent, having received amount on redemption of Stock Appreciation Rights (SARs) as employee of company and there was employer employee relationship subsisting at relevant point of time, therefore, amount received on redemption of Share Appreciation Rights must be treated as taxable income under head income from Salaries . Learned counsel finally contended that impugned decision of High Court deserves to be set aside. 5 8) Per contra, learned senior counsel appearing for Respondent submitted that amount received by Respondent from redemption of Stock Appreciation Rights (SARs) can be treated only as capital gains and cannot be treated as perquisite under Section 17(2) (iii) of IT Act or under Section 28 (iv) of IT Act. However, it was pointed out that said capital gains cannot be said to arose to Respondent since there was no consideration paid as cost of acquisition by Respondent. It was also submitted that such amount received on account of redemption of Stock Appreciation Rights could have been taxed if at all under provisions of Clause (iiia) of Section 17(2) of IT Act. Finally, it was also submitted that question of law sought to be raised by Revenue is no more res integra as settled by this Court in case of Commissioner of Income Tax vs. Infosys Technologies Ltd., [2008] 297 ITR 167 (SC). Hence, these appeals deserve to be dismissed at threshold. Discussion: 6 9) Before examining case at hand, it is pertinent to have understanding of words Perquisite and Capital Gains . word Perquisite in common parlance may be defined as any perk or benefit attached to employee or position besides salary or remuneration. Broadly speaking, these are usually non cash benefits given by employer to employee in addition to entitled salary or remuneration. It may be said that these benefits are generally provided by employers in order to retain talented employees in organization. There are various instances of perquisite such as concessional rent accommodation provided by employer, any sum paid by employer in respect of obligation which was actually payable by employee etc. Section 17(2) of IT Act was enacted by legislature to give broad view of term perquisite. On other hand, word Capital Gains means profit from sale of property or investment. It may be short term or long term depending upon facts and circumstances of each case. This gain or profit is charged to tax in year in which transfer of capital assets takes 7 place. In instant case, fundamental question which arises for consideration before this Court is with regard to taxability of amount received by Respondent on redemption of Stock Appreciation Rights (SARs.) 10) It is matter of record that Respondent was employed as Chairman cum Managing Director of (P&G) India Ltd. at relevant time and said company is subsidiary of (P&G) USA through Richardson Vicks Inc. USA and that (P&G) USA owned controlling equity. It is undisputed fact that Respondent was working as salaried employee. (P&G) USA was company who had issued Stock Appreciation Rights (SARs.) to Respondent without any consideration from 1991 to 1996. said SARs were redeemed on 15.10.1997 and in lieu of that Respondent received amount of Rs 6,80,40,724/ from (P&G) USA. However, when Respondent filed his return, he claimed this amount as exemption from ambit of Income Tax. issue involved in this appeal is in respect of 8 Rs 6,80,40,724/ made on account of amount received on redemption of Stock Appreciation Rights. 11) Tribunal was of view that stock options are capital assets and such assets in instant case acquired for consideration, hence, gain arising therefrom is liable to capital gain tax. However, stand of Revenue before Tribunal was that amount in question is taxable as perquisite under Section 17(2)(iii) of IT Act or in alternatively under Section 28(iv) of IT Act instead of capital gains. High Court also upheld view of Tribunal but High Court disagreed that such capital gains arose to Respondent on redemption of Stock Appreciation Rights since there was no cost of acquisition involved from side of Respondent. meaning of word perquisite for instant case is given under Section 17(2) of IT Act. Revenue alternatively contended that case of Respondent should come under ambit of Section 28(iv) of IT Act. 9 12) It is apposite to note here that, particularly, in order to bring perquisite transferred by employer to employees within ambit of tax, legislature brought amendment under Section 17 of IT Act by inserting Clause (iiia) in Section 17(2) of IT Act through Finance Act, 1999 (27 of 1999) with effect from 01.04.2000, which was later on omitted by Finance Act, 2000. said Clause (iiia) as it was then is reproduced herein below: (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 securities means securities as defined in clause(h) of section 2 of Securities Contracts (Regulation) Act, 1956 (42 of 1956) and includes employees stock option and sweet 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 10 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; 13) intention behind said amendment brought by legislature was to bring benefits transferred by employer to employees as in instant case, within ambit of Income Tax Act, 1961. It was first time when legislature specified meaning of cost for acquiring specific securities. Only by this amendment, legislature determined what would constitute specific securities. By this amendment, legislature clearly covered direct or indirect transfer of specified securities from employer to employees during or after employment. On perusal of said clause, it is evident that case of Respondent falls under such clause. However, since transaction in instant case pertains to prior to 01.04.2000, hence, such transaction cannot be covered under said clause in absence of express provision of retrospective effect. We also do not find any force in argument of Revenue that 11 case of Respondent would fall under ambit of Section 17(2) (iii) of IT Act instead of Section 17(2) (iiia) of IT Act. It is fundamental principle of law that receipt under IT Act must be made taxable before it can be treated as income. Courts cannot construe law in such way that brings individual within ambit of Income Tax Act to pay tax who otherwise is not liable to pay. In absence of any such specific provision, if individual is subjected to pay tax, it would amount to violation of his Constitutional Right. 14) It is pertinent to note that on point of applicability of clause (iiia) of Section 17(2) of IT Act, this Court settled position in Infosys Technologies Ltd (supra), and has held as under: 17. Be that as it may, proceeding on basis that there was benefit question is whether every benefit received by person is taxable as income? In our view, it is not so. Unless benefit is made taxable, it cannot be regarded as income. During relevant assessment years, there was no provision in law which made such benefit taxable as income. Further, as stated, benefit was prospective. Unless benefit is in nature of income or specifically included by legislature as part of income, same is not taxable. In this case, shares could not be obtained by employees till lock in period was over. On facts, we hold that in 12 absence of legislative mandate potential benefit could not be considered as income of employee(s) chargeable under head salaries .. 15) Revenue also contended before High Court that amendment brought in by Section 17(2) of IT Act was clarificatory, hence, retrospective in nature. However, High Court rejected stand of Revenue. High Court, in its impugned judgment, on point of applicability of clause has held as under: 15. In case of Commissioner of Income Tax, Bangalore vs B.C. Srinivasa Setty [(1981) 128 ITR 294 (SC)] this Court held that charging section and computation provision under 1961 Act constituted integrated code. mechanism introduced for first time under Finance Act, 1999 by which cost was explained in manner stated above was not there prior to 1.4.2000. new mechanism stood introduced w.e.f. 1.4.2000 only. With above definition of word cost introduced vide clause (iiia), value of option became ascertainable. There is nothing in Memorandum to Finance Act, 1999 to say that this new mechanism would operate retrospectively. Further, mechanism which explains cost in manner indicated above cannot be read retrospectively unless Legislature expressly says so. It was not capable of being implemented retrospectively. Till 1.4.2000, in absence of definition of word cost value of option was not ascertainable. In our view, clause (iiia) is not clarificatory. Moreover, meaning of words specified securities in section (iiia) was defined or explained for first time vide Finance Act , 1999 w.e.f. 1.4.2000.Morevover, words allotted or transferred in clause (iiia) made things clear only after 1.4.2000. Lastly, it may be pointed out that even clause (iiia) has been 13 subsequently deleted w.e.f. 1.4.2001. For afore stated reasons, we are of view clause (iiia) cannot be read as retrospective. 16) Circular No. 710 dated 24.07.1995 which was issued by CBDT deals with taxability of shares issued at less than market price. For ready reference, Circular No. 710 issued by CBDT is reproduced hereinbelow: 202. Taxability of perequisite on shares issued to employees at less than market price: 1. Chief Commissioners and corporate assessees have been seeking clarification regarding taxability of perquisite on shares issued to employees at less than market price. 2. matter has been considered by Board. benefit does amount to perquisite within meaning of clause (iii) of sub section (2) of Section 17 of Income Tax Act, 1961. various situations in this regard have to be dealt with as under: (i) where shares held by Government have been transferred to employee, there will be no perquisite because employer employee relationship does not exist between Government and employee (transferor and transferee); (ii) where company offers shares to employees at same price as have been offered to other shareholders or general public, there will be no perquisite; (iii) where employer has offered shares to its employees at price lower than one at which shares have been offered to other shareholders/public, difference between two prices will be taxed as perquisite; (iv) where shares have been offered only to employees, value of perqusite will be difference between market price of shares on date of 14 acceptance of offer by employee and price at which shares have been offered. On perusal of above, prima facie, it appears that such Circular dealt with cases where employer issued shares to employees at less than market price. In instant case, Respondent was allotted Stock Appreciation Rights (SARs.) by (P&G) USA which is different from allotment of shares. Hence, in our opinion such Circular has no applicability on instant case. Moreover, Circular cannot be used to introduce new tax provision in Statute which was otherwise absent. 17) Alternatively, Revenue also contended that case of Respondent shall come within ambit of Section 28(iv) of IT Act. At this juncture, we deem it appropriate, for sake of convenience, to refer Section 28(iv) of IT Act which is reproduced herein below: 28. Profits and gains of business or profession. following income shall be chargeable to income tax under head Profits and gains of business or profession 15 (iv) value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of profession. On first look of said provision, it is apparent that such benefit or perquisite shall have arisen from business activities or profession whereas in instant case there is nothing as such. applicability of Section 28(iv) is confined only to case where there is any business or profession related transaction involved. Hence, instant case cannot be covered under Section 28(iv) of IT Act for purpose of tax liability. 18) To sum up, Respondent got Stock Appreciation Rights (SARs) and, eventually received amount on account of its redemption prior to 01.04.2000 on which amendment of Finance Act, 1999 (27 of 1999) came into force. In absence of any express statutory provision regarding applicability of such amendment from retrospective effect, we do not find any force in argument of Revenue that such amendment came into force retrospectively. It is well established rule of interpretation that taxing provisions shall 16 be construed strictly so that no person who is otherwise not liable to pay tax, be made liable to pay tax. 19) In view of above discussion, we are of considered view that these instant appeals are devoid of merits and deserve to be dismissed. Accordingly, these are hereby dismissed leaving parties to bear their own cost. ..... J. (R.K. AGRAWAL) . . J. (ABHAY MANOHAR SAPRE) NEW DELHI; APRIL 24, 2018. 17 Addl.CommissionerofIncome-tax v. BharatV.Patel