Chittharanjan A. Dasannacharya Vs CIT-V (Karnataka High Court)
The Karnataka High Court considered an appeal under Section 260A of the Income-tax Act relating to AY 2006-07. The appeal challenged the Tribunal’s decision holding that gains arising from the cashless exercise of stock options were taxable partly as salary and partly as short-term capital gains, instead of as long-term capital gains. The appeal also questioned the Tribunal’s findings that stock options were not capital assets, that cashless exercise did not constitute a transfer under Section 2(47), and that an employer-employee relationship existed between the assessee and SiRF USA.
The assessee, a software engineer, had been employed with an Indian company before being deputed to SiRF Technology Inc., USA as an independent consultant between 1995 and 1998, later serving as an employee of SiRF USA from 2001 to 2004, and thereafter returning to India. While acting as an independent consultant, he was granted stock options entitling him to purchase 30,000 shares of SiRF USA at an exercise price of US $0.08 per share. The stock option plan also permitted cashless exercise, under which the broker sold the underlying shares, deducted the exercise price, and remitted the balance proceeds without allotting the shares to the assessee. During AY 2006-07, the assessee exercised the options through the cashless mechanism, received net consideration of US $283,606, treated the gain as long-term capital gains, and claimed deduction under Section 54F.
