Case Law Details

Case Name : Abhiram Seth Vs. JCIT (ITAT Delhi)- ITA No. 2302/Del/2010]
Appeal Number : 30/09/2011
Date of Judgement/Order : 2004- 05
Related Assessment Year :
Courts : All ITAT (6336) ITAT Delhi (1450)

Abhiram Seth Vs. JCIT (ITAT Delhi)

Facts :- Abhiram Seth (the assessee) was employed in an executive position with M/s. PepsiCo India Holdings (P) Ltd., part of PepsiCo Inc.The assessee was granted valuable rights in shares of Pepsi Co Inc. Employees’ Stock Options [ESOP] held with Barry Group of Merrill Lynch [Trust], USA. Such rights were granted on various dates between 1995 and 2000.The assessee could redeem or encash the ESOPs any time after the lock in period of three years as a part of employee retention strategy.The employee was required to pay the purchase price at the time of sale of shares.

The assessee sold the shares on 25 February, 2004 and offered the proceeds to tax under long term capital gains. Besides, the assessee also claimed exemption for the gains by virtue of alternate investment made by him. The Assessing Officer [AO] accepted the return and issued intimation u/s 143(1 )(a) of the Income-tax Act [the Act].The AO issued a notice to re-open the case in 2009 on the ground that the shares were not transferred to the assessee and that he received only the differential price.The AO held that shares were allotted to the assessee and sold on the same day and hence profits on the same need to be taxed as short term capital gains and not as claimed by the assessee. The gains being short term in nature, the AO held that no exemption could be claimed thereon. The Commissioner of Income-tax (Appeals) upheld the AO’s decision stating the gains were short term and hence liable to tax at normal rates since no securities transaction tax had been paid.

Issues before the Tribunal- Whether valuable right to exercise options is a capital asset that is to be charged to capital gains tax?

Tribunal ruling – The particular number of shares was allotted to the assessee in different years at different prices; only distinctive numbers were not allotted. Since there was an apparent fixed consideration of ESOPs 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 the assessee. Non-allotment of distinctive number of shares by trust cannot be detrimental to the proposition that assessee’s valuable right of claiming shares was held in trust and stood sold by PepsiCo. Accordingly, there was a definite, valuable and transferable right which can be termed as a capital asset in favour of the assessee. There will be no taxability if the date of allotment of shares and sale thereof is the same as was held by the assessing officer.

The Tribunal held that the right in shares constitute capital asset and that the gains should be taxed as “long-term capital gains” as the holding period was more than three years.

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