Case Law Details
ITAT DELHI BENCH ‘A’
Assistant Commissioner of Income-tax
versus
Ambrish Kumar Jhamb
IT Appeal No. 4107 (Delhi) of 2011
[ASSESSMENT YEAR 2006-07]
Date of Pronouncement- 05.10.2012
ORDER
J. Sudhakar Reddy, Accountant Member
This is an appeal filed by the Revenue directed against the order of CIT(A)-XXX, New Delhi, dt. 30th June, 2011 pertaining to asst. yr. 2006-07 on the following grounds :
“On the facts and circumstances of the case and in law, the learned CIT(A) has erred in holding that the case of the assessee falls under Expln. 1 to cl. (d) or cl. (e) of section 2(42A) of the IT Act, 1961 as against the AO holding that the gain from sale of ESOP was chargeable as short-term capital gain ignoring the fact that as per ruling in the case of Girdhar Kirshna M. v. Asstt. CIT [2008] 117 TTJ (Bang.) 965 with regard to the capital gain, date of grant and vesting are irrelevant because they do not result in any share acquisition.”
2. The facts of the case are as brought out in the AO’s order as follows :
“In this case, assessee was given ESOP by Gillette Co. In his submissions and ESOP plan it has been observed that these ESOPs are cashless. Assessee has to pay nothing on exercise of ESOP. The assessee has been granted ESOP in earlier years without any cost. On the date of exercise the amount under ESOP to the assessee was deducted from the sale proceeds and the difference amount between sale proceed and exercise price amounting to Rs. 1,07,35,727 (less transfer expenses) has directly been credited on 7th March, 2006 in assessee’s bank account. During his submissions also Authorized Representative submitted that date of exercise of employee stock option plan i.e. 27th Feb., 2006 was the similar date when they have been sold. It means, on the same date, the options were not only exercised but shares were also sold by the assessee which was obtained by the assessee on exercise of the option. Hence, the date of exercise of option was the same as the date of sale. The sale consideration received by the assessee by way of foreign reward remittance from the parent company but the assessee reckoned the time period from date of grant and not from date of exercise for calculating the capital gain purposes. Accordingly, the period from the date of grant exceeded 12 months, the assessee treated the same as long-term capital gain and claimed to be taxed the same @ 20 per cent.
The assessee was asked to submit bifurcation/clarification in respect of the income under the head capital gains. In response to this, the Authorized Representative vide his letter dt. 8th Oct., 2010 has stated :
The assessee has received total of Rs. 1,07,35,728 from the sale of employee stock option. These options were cashless. The assessee has paid taxes on these stock options as under :
• On Rs. 19,16,656 taxes at the maximum tax rate @ 33.66 per cent has been paid by considering it as short-term capital gain.
• On Rs. 8,81,907 taxes at the maximum tax rate @ 22.44 per cent has been paid by considering it as long-term capital gain.”
3. The AO after giving an opportunity to the assessee concluded as follows :
“In the present case assessee is not transferring the rights, he is transferring the shares allotted by the company to him. The purchaser of these shares has not to exercise options. He has already got shares on point of sale by assessee. Accordingly, assessee cannot claim that he has transferred options and accordingly he cannot take the plea that for the purposes of calculating the time period for capital gain, the date on which the option were granted should be treated as initial point.”
Further it is clarified in the Giridhar Krishna M. v. Asst. CIT [2008] 117 TTJ (Bang.) 965 that with regard to the capital gains dates of grant and vesting are irrelevant because they do not result in any share acquisition. The relevant part of judgment reads as follows :
‘Capital gains, short-term or long-term shares acquired under employees stock option scheme granting and resting period are merely indicators to the employer to honor the commitment in the employee exercising the option start allotment of the shares is when the assessee intimates the exercise of his option along with payment for the specified number of shares. Therefore, the dates of grant and resting are irrelevant because they do not result in any share acquisition. They have no value unlike the rights to subscribe for further shares under section 81 of the Companies Act, which is a transferable commodity. Requisition (sic-Relinquishment) of shares under ESOP happens only when the assessee has exercised option and is allotted the specified number of shares.’
From the above it is clear that in cases of cashless sale of stock options and even in the other cases where the difference between the date of exercise of the option and the date of sale of the shares is less than the prescribed period of one year, the capital gain from such sale should be considered as short-term capital gains.”
4. Aggrieved the assessee carried the matter in appeal.
5. The first appellate authority concluded that the rights which were relinquished by the assessee to earn income of Rs. 88,19,071 were held by the assessee for more than 3 years and therefore taxable as long-term capital gain.
6. Aggrieved the Revenue is in appeal before us.
7. Mr. Pirthi Lal, learned senior Departmental Representative submitted mat assessee acquired a right only on the date of exercising of option and not before that. He contends that, as the date of exercising of option is the same as the date of surrender of right, the gain in question is held for less than 36 months and hence it is a short-term capital gain. He relied on the following case law :
(i) Giridhar Krishna M. v. Asstt. CIT [2009] 118 ITD 177 (Bang.)
(ii) Dy. CIT v. Vijay Gopal Jindal [2009] 120 ITD 589 (Delhi)
8. The learned counsel for the assessee Mr. Salil Kapoor on the other hand submitted that from the facts culled out by the AO it is clear that what was acquired was not shares but only a right in the form of stock options which is a valuable right and thus is a capital asset. He emphasized the fact that the stock option grant was cashless and was held by the assessee for more than 36 months for option grants obtained on 15th June 2001, 21st June 2001 and 20th June 2002. He filed a paper book running into 104 pages. He also filed a case law paper book and relied on the following case laws :
(i) Asst. CIT v. Rajesh Jhaveri Stock Brokers (P) Ltd. [2007] 291 ITR 500
(ii) Apogee International Ltd. v. Union of India [1996] 220 ITR 248
(iii) HV Transmissions Ltd. v. ITO in ITA No. 2230/Mum/2010
(iv) Tribunal Delhi in case of Abhiram Seth v. Jt. CIT [2012] 150 TTJ (Delhi) 228
(v) Bomi S. Billimoria v. Asstt. CIT [2010] 35 SOT 18 (Mum.) (URO)
(vi) Asst. CIT v. Dr. Dhurjati Gupta [2010] 127 TTJ (Hyd.) 356
He distinguished the case laws relied upon by the learned Departmental Representative by submitting that, in those cases the employees stock options were first converted into shares and thereafter, these shares were sold after holding the same for some time. Mr. Salil Kapoor invoked r. 27 of the ITAT Rules and argued that the reopening of the assessment is bad in law.
9. Rival contentions heard. On a careful consideration of the facts and circumstances of the case, material on record and various case laws cited, we hold as follows : The undisputed fact is that the assessee acquired the right in the form of employees stock option plan (ESOP) from Gillette Co. ESOPs are cashless. The assessee surrendered these rights and obtained certain amount, being the difference of the price of shares between the date of grant and the date of surrender. On these facts, in our opinion the issues are covered in favour of assessee by the decision of the Delhi Bench of the Tribunal in the case of Abhiram Seth (supra) wherein at para 7 it was held as follows :
“7. We have heard rival submissions and gone through the entire material available on record. The facts have been narrated in detail above. A perusal of the clauses of allotment clearly reveals that the particular number of shares were allotted to assessee in different years at different prices; only distinctive numbers were not allotted which has not been disputed by Department. The apparent benefit to assessee out of ESOP Scheme was that it had not to pay the purchase price immediately at the time of allotment but the same was to be deducted at the time of sale or redemption of shares. Since there was an apparent fixed consideration of ESOP shares, the right to allotment of particular quantity of shares accrued to the assessee at relevant time. The benefit of deferment of purchase price cannot lead to an inference that no right accrued to assessee. The sales of such valuable rights after three years are liable to be taxed under the head long-term capital gains and not short-term capital gains. CIT(A) out of conflicting Tribunal judgments has preferred to rely on only favorable to Revenue i.e. Jaswinder Singh Ahuja (supra), overlooking others and without commenting about the relevant facts. It has not been dealt on that acquisition of valuable rights in a property amounts to a capital asset. In case of Jaswinder Singh (supra), the shares were of the same company, whereas in this case there are group companies held through trustee and there were certain RBI guidelines about non-payment of price of shares and the option being exercised by assessee on the date of sale of shares. There was no trustee whereas in assessee’s case there was a fixed price of allotment of rights to fixed quantity of shares and the indistinctive shares were held by a trust on behalf of assessee. Non-allotment of distinctive number of shares by trust cannot be detremental to the proposition that assessee’s valuable right of claiming shares was held in trust and stood sold by Pepsico. Therefore, there was a definite, valuable and transferable right which can be termed as a capital asset in favour of the assessee.
7.1 In our view, the assessee’s claim of taxability of gains on the transfer of such rights under the head ‘Long-term capital gains’ is justified and deserves to be accepted. If we accept AO’s stand, then there will be no capital gain, if the date of allotment of shares and sale thereof is the same, the price of purchase of shares cannot be the price paid for right which is not held as purchase, which becomes unascertainable. According to AO, the earlier right of allotment does not constitute a purchase of shares and thus leads to a presumptive situation. In that case, as rightly observed by the Tribunal in the case of Bomi S. Billimoria (supra), the purchase price will be unascertainable. If we apply the case of Dr. Dhurjati Gupta (supra), then allotment constitutes new right of purchase and the price will be same as the sale consideration. In both situations there will be no taxability.
7.2 In our view, these propositions are of no avail insofar as we have held that, the assessee acquired a valuable and transferable right on these shares as on the respective dates in 1995-96 to 1999-2000, as mentioned above. The cases of Bomi S. Billimoria (supra) and Dr. Dhurjati Gupta (supra), are squarely applicable in favour of assessee. The right of shares constitute capital assets and the gains should be taxed as long-term capital gains as the holding period is more than 3 years. We reverse the orders of lower authorities on this issue, treating the gains as short-term capital gains. The ground is allowed.”
10. Coming to the decision relied upon by the learned Departmental Representative in the case of Giridhar Krishna M. (supra), the assessee had first exercised the option to purchase shares on 7th Nov., 2002 and thereafter transferred these shares so acquired in April, 2003. In these circumstances the Tribunal has held that the right conferred by means of a grant and indicating the period within which the employee could subscribe to the shares are indicators of the fact that the assessee could exercise the option within the specific period and to the extent indicated in that period. On the expiry of the period, the option automatically lapses unless the employee agrees to extend the period. It held that the dates of grant and vesting are relevant because they do not result in any share acquisition and that acquisition of shares happens only when the assessee exercises his option and is allotted the specific number of shares. In the case on hand the assessee has not been allotted any shares nor has he acquired them. He had surrendered the right to exercise the option for purchase of shares. Thus the case law is not applicable.
11. In the case of Vijay Gopal Jindal (supra), the assessee was issued equity warrant certificates and the assessee made payments for acquiring of shares in lieu of warrants. The same is not the position in the case on hand. The first appellate authority has in an annexure to his order analyzed the period of holding. We uphold the findings based on this analysis and dismiss the appeal of the Revenue.
12. In the result the appeal filed by the Revenue is dismissed.
