ITAT Bangalore Restores ESOP Share Cost Claim for Verification of US Tax and TRC

Biplab Adhya Vs ITO (ITAT Bangalore)

Summary: The appeal by the assessee was directed against the final assessment order dated 28.07.2022 passed under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 for Assessment Year 2019-2020. The solitary issue argued before the Tribunal concerned the restriction of the cost of acquisition of shares sold by the assessee to Rs.72,27,660 as against the higher cost claimed in relation to shares allotted under an Employee Stock Option Scheme (ESOP).

The assessee, an individual employed with M/s. Wipro Limited during the relevant assessment year, filed his return as a non-resident on 22.07.2019 declaring total income of Rs.3,16,670. The return included salary income of Rs.5,803, house property income of Rs.3,77,352, capital loss of Rs.85,70,552 and income from other sources of Rs.91,262. The assessment was selected for scrutiny and notice under section 143(2) was issued on 31.03.2021. During assessment proceedings, the Assessing Officer sought details relating to the short-term capital loss claimed on sale of shares, including details of shares sold, evidence supporting the cost of acquisition and the assessee’s Demat account.

The assessee submitted that 73,235 Wipro Limited shares had been allotted under employee stock option schemes and that the options were exercised during Financial Year 2017-2018. Out of these shares, 73,200 shares were sold during the year under consideration. The assessee furnished allotment letters-cum-certificates for perquisite value and contract notes. The market value of the shares on the respective dates of exercise was considered for determining the perquisite value. After reducing the exercise price and, in the relevant calculations, the portion attributable to services rendered outside India, the net amount was treated as taxable salary under section 17(2)(vi). The perquisite value of the 73,235 shares allotted was stated to be Rs.72,27,660.

For purposes of capital gains, the assessee contended that the market value on the date of exercise was required to be considered as the cost of acquisition under section 49(2AA). The cost of acquisition claimed was stated in the assessment proceedings as Rs.2,13,73,564, although other portions of the record referred to figures including Rs.2,13,73,563 and Rs.2,13,73,864. The assessee explained that the perquisite value had been offered to tax partly in India and partly in the USA. According to the details placed before the authorities, Rs.72,27,669 was offered in India for Assessment Year 2018-2019, while Rs.1,41,45,894 was stated to have been offered to tax in the USA, resulting in an aggregate amount of Rs.2,13,73,563.

The Assessing Officer’s draft assessment order dated 30.09.2021 restricted the cost of acquisition to Rs.72,27,660, being the amount of perquisite offered to tax in the earlier assessment year. The Assessing Officer also treated the resulting gains as long-term capital gains and allowed indexation benefit and set-off of capital loss on sale of property against the long-term capital gains.

The assessee raised objections before the Dispute Resolution Panel (DRP). The DRP, by directions dated 29.06.2022, considered the assessee’s contention that section 49(2AA) read with section 17(2)(vi) required the fair market value taken into account for perquisite taxation to be considered for determining the cost of acquisition. The DRP noted the details of the 73,200 shares and the perquisite values. It also noted the assessee’s submission that taxes had been paid partly in India and partly in the USA and that the amount of Rs.1,41,45,894 had been offered to tax in the USA. The DRP directed the Assessing Officer to verify the taxes paid with reference to the Tax Residency Certificate (TRC) and other requirements and to adopt the cost of acquisition at Rs.2,13,73,563 if the requirements were found to be in order.

In the final assessment order, however, the Assessing Officer again restricted the cost of acquisition to Rs.72,27,660. The Assessing Officer stated that the assessee had failed to furnish the TRC and, consequently, disallowed the additional cost of acquisition of Rs.1,41,45,894.

Before the Tribunal, the assessee furnished a paper book containing 211 pages, including assessment notices, replies and details concerning taxes paid in the USA. The assessee also produced the TRC for the relevant period. The assessee’s authorised representative reiterated the earlier submissions and contended that the TRC was not mandatory for determining the cost of acquisition under section 49(2AA), while stating that it had nevertheless been obtained and produced before the Tribunal as an abundant precaution. The Departmental Representative supported the orders of the Assessing Officer.

The Tribunal noted that the assessee had furnished proof of payment of taxes in the USA on the perquisite amounting to Rs.1,41,45,894 and in India amounting to Rs.72,27,669 for Assessment Year 2018-2019. It further noted that the DRP had already considered these facts and had directed the Assessing Officer to verify the taxes paid with reference to the TRC and to adopt the cost of acquisition at Rs.2,13,73,563 if the verification was satisfactory.

The Tribunal observed that the Assessing Officer had restricted the cost of acquisition solely because the TRC had not been produced. Since the assessee produced the TRC before the Tribunal, the Tribunal expressly refrained from adjudicating whether a TRC was mandatory for determining the cost of acquisition under section 49(2AA). Instead, it affirmed the directions of the DRP and restored the issue to the Assessing Officer.

The Assessing Officer was directed to examine the TRC and, if it was found to be in order, take the cost of acquisition at Rs.2,13,73,563 as claimed by the assessee in the return of income. The Tribunal also directed the Assessing Officer to provide a reasonable opportunity of hearing to the assessee and decide the issue in accordance with law. Thus, the Tribunal did not finally adjudicate the mandatory nature of the TRC or finally allow the disputed cost of acquisition; the matter was restored to the Assessing Officer for verification in accordance with the DRP’s directions.

The Tribunal accordingly allowed the assessee’s appeal for statistical purposes. The order was pronounced on 10.10.2022.

For related discussion of ESOP taxation and the treatment of the fair market value for capital gains purposes, see Taxability: ESOP, ESPP & RSU received from Indian or Foreign Company. TaxGuru has also discussed the cost of acquisition of ESOP shares and the interaction between perquisite taxation and capital gains in Capital Gains on ESOP Shares: Cost of Acquisition & Perquisite vs Capital Gains. A related TaxGuru discussion on ESOP taxation and section 49(2AA) is also available in ESOP Taxation Guide: Perquisite Tax, Capital Gains and Compliance.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

This appeal at the instance of the assessee is directed against final assessment order dated 28.07.2022 passed u/s 143(3) r.w.s. 144C(13) of the I.T.Act. The relevant assessment year is 2019-2020.

2. The solitary issue that was argued is with regard to the restriction of cost of acquisition in respect of shares sold to Rs.72,27,660 as compared to the amount of Rs.2,13,73,864 claimed by the assessee.

3. The brief facts of the case are as follows:

The assessee is an individual, who was employed with M/s.Wipro Limited during the relevant assessment year. For the assessment year 2019-2020, the return of income was filed in the capacity of “non-resident” on 22.07.2019 declaring total income of Rs.3,16,670. The total income comprised of (a) income from salary of Rs.5,803, (b) income from house property Rs.3,77,352, (c) loss under the head capital gains of Rs.85,70,552 and (d) income from other sources of Rs.91,262. The assessment was selected for scrutiny and notice dated 31.03.2021 was issued u/s 143(2) of the I.T.Act. During the course of assessment proceedings, a show cause notice dated 24.09.2021 was issued seeking clarification with respect to loss claimed under the head “capital gains”. The said notice mentioned that the assessee had declared “short term capital loss” amounting to Rs.22,71,772 from sale of shares. The notice specifically called for the following details / documents with respect to the transaction of sale of shares:-

(i) Details of the shares sold;

(ii) Evidence in support of cost of acquisition claimed;

(iii) Dmat account held.

4. The assessee in response vide letter dated 25.09.2021 submitted that he had during his employment, was allotted 73235 shares of Wipro Limited under the employee stock option scheme. The assessee exercised the stock option granted during the financial year 2017-2018. The copies of the “allotment letter-cum-certificate for perquisite value” issued by Wipro Limited were submitted. Out of the aforesaid shares, it was stated that 73,200 shares were sold during the year under consideration. The copies of the contract note in support of the same were submitted. In the “allotment letter- cum-certificate for perquisite value”, the market price on the date of exercise was identified. From the said price, the exercise price paid by the assessee was reduced to arrive at the perquisite value. From the said perquisite value, the portion allocable to services rendered by the assessee outside India at onsite location was reduced. The net value post such reduction was treated as perquisite value for the shares allotted and accordingly treated as taxable salary in accordance with section 17(2)(vi) of the I.T.Act. The total amount of taxable perquisite value in respect of 73,235 shares allotted amounted to Rs.72,27,660. The assessee also submitted that the calculation of capital gains in respect of the said transaction in respect to the aforesaid show cause notice. In the said calculation, the market price on the date of exercise for calculating perquisite as appearing in the allotment certificate was adopted as “cost of acquisition”, which according to the assessee, was as per section 49(2AA) of the I.T.Act. Therefore, the total cost of acquisition claimed amounted to Rs.2,13,73,564.

5. The Assessing Officer passed draft assessment order u/s 143(3) r.w.s. 144C on 30.09.2021. In the said order, with respect of transaction of shares sold, the cost of acquisition was restricted to the amount of perquisite that offered to tax in the earlier assessment year (i.e. A.Y. 2018-2019). Thus, in the draft assessment order, the cost of acquisition with respect ot shares sold was restricted to Rs.72,27,660 as compared to an amount of Rs,2,13,73,564 claimed by the assessee in the return of income. Accordingly, the capital gains on shares was computed by the A.O. The A.O. however incorrectly characterized such gains as “long term capital gains” and provided indexation benefit on cost of acquisition. Further, the A.O. had also allowed set off of capital loss on sale of property (assessee’s share) against the long term capital gains.

6. Aggrieved by the draft assessment order, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP vide its directions dated 29.06.2022 disposed of the objections of the assessee. The objections of the assessee and the directions of the DRP read as follows:-

“2.4 Ground of objection No.4: Objection No

4.1: The learned AO has erred in

(i) Restricting the cost of acquisition with respect to shares sold to Rs.72,27,660 as compared to an amount of Rs,2,13,73,864 claimed by the assessee in the return of income.

(ii) Not appreciating that, as per section 49(2AA) read with section 17(2)(vi), the cost of acquisition of shares granted under Employee Stock Option scheme shall be the fair market value which has been computed as per rule 3(8) and taken into account for the purposes of section 17(2)(vi);

(iii) Considering the `perquisite value’ computed under section 17(2)(vi) even though section 49(2AA) specifically refers to the `fair market value’ taken into account for the purposes of section 17(2)(vi)

(iv) Not appreciating that, the assessee is entitled to claim the entire fair market value as computed as per rule 3(8) which is taken into account for the purposes of section 17(2)(vi), as cost of acquisition of shares sold;

(v) Not appreciating that, the expression “taken into account” used in section 49(2AA) does not imply that it should be restricted to the amount ultimately included in the total income. 

2.4.1 Having considered the submissions, the assessee declared loss on sale of ESOP shares of M/s.Wipro Ltd. at Rs.22,71,772/-, the details of which are as under:-

Full value of consideration received Rs.1,92,01,792

receivable Less: Cost of acquisition Rs.2,13,73,864

Long Term Capital Loss Rs.22,71,772

2.4.2 The details of allotment of Rs.73,200 shares of Wipro Ltd. are as under:-

2.4.3 The AO has mentioned that (as evident from the table above),

(i) the assessee has exercised his ESOP option during the F.Y. 2017-18;

(ii) since the market value of the shares exercised by the assessee is more than the exercise value, the difference amount should have been offered by the assessee as perquisites in the return, which the assessee has failed to do.

2.4.4 The AO restricted the cost of acquisition to Rs.72,27,660/- being the perquisite value as against Rs.2,12,27,464/- claimed by the assessee.

2.4.5 The assessee has objected to the proposed addition. He has submitted as under:

(i) The cost of acquisition of the shares were determined in accordance with section 49(2AA) r.w.s. 17(2)(vi);

(ii) The perquisites were offered partly to tax in India and partly in USA, the details of which are culled out as under:

No.of India Offered in USA USD Offered in shares A.Y. FTR https://taxguru.inL 6 Sri.Biplab Adhya.

2.4.6 As regard cost of acquisitions the documents produced indicate that the assessee has been allotted shares under ESOP by US company. The assessee has paid taxes on transfer of such shares partly in India and partly in USA. The cost of acquisition of shares including the shares on which taxes have been paid in USA need to be considered for computation of capital gains. The assessee has furnished proof that Rs.1,41,45,894/- was offered to tax in USA and also in India. In views of the above, AO is directed to verify the taxes paid with reference to TRC and other requirements and adopt the cost of acquisition of Rs.2,13,73,563/-. If found to be in order, while computing the capital gains in respect to transition of shares sold by the assessee.”

7. Pursuant to the DRP’s directions, the final assessment order was passed wherein the cost of acquisition of the said shares was adopted at Rs.72,27,660 instead of Rs.2,13,73,864 claimed by the assessee solely for the reason that the assessee had not produced Tax Residency Certificate (TRC) as directed by the DRP. The relevant finding of the A.O. in the final assessment order in this regard reads as follows:-

“B: With regard to the cost of acquisition of shares of M/s Wipro Limited amounting to Rs.1,41,45,894/- claimed by the assessee, the Hon’ble DRP directed the undersigned to obtain and verify the copy of Tax Residency Certificate obtained from USA for the relevant A.Y’s and copy of the returns filed in the USA for the relevant A.Y’s, duly evidencing the taxes paid with reference to TRC and other requirements. However, the assessee failed to submit the TRC even after affording sufficient time. In view of the same since the assessee has failed to furnish the details required, the cost of acquisition amounting ot Rs.1,41,45,894/- is hereby disallowed.”

8. Aggrieved by the final assessment order, the assessee has filed the present appeal before the Tribunal. The assessee has filed a paper book comprising of 211 pages inter alia enclosing therein notices issued by the A.O., the replies filed by the assessee, the details of tax paid in USA etc. The learned AR reiterated the submissions made before the Income Tax Authorities. The learned AR has also produced before the Tribunal, the TRC of the assessee for the relevant period. It was contended that the TRC is not mandatory to adjudicate the issue. However, it was stated that as an abundant caution, the same was obtained by the assessee.

9. The learned Departmental Representative supported the orders of the AO.

10. We have heard rival submissions and perused the material on record. The assessee had furnished the proof that he has paid taxes in USA (as perquisite) for a sum of Rs.1,41,45,894 (refer page 179 to 188 of the paper book filed by the assessee) and in India for a sum of Rs.72,27,669 (for assessment year 2018-2019). The DRP has noticed the above fact in para 2.4.6 of its directions dated 29.06.2022. The DRP further directed the A.O. to verify the taxes paid with reference to the TRC and adopt the cost of acquisition of Rs,2,13,73,563. The A.O. in the final assessment order had again adopted the cost at Rs.72,27,660 instead of Rs.2,13,73,864 solely for the reason that the assessee has not produced TRC. The learned AR though had contended that the TRC is not required for determining the cost of acquisition as per the terms of section 49(2AA) of the I.T.Act, as a matter of abundant caution, the assessee had produced the TRC before the Tribunal. In the instant case, since, the assessee had produced the TRC as per the directions of the DRP, we refrain from adjudicating whether TRC is mandatory for determining the cost of acquisition u/s 49(2AA) of the I.T.Act. Hence, we affirm the directions of the DRP. In the interest of justice and equity, we restore the issue to the files of the A.O. The A.O. is directed to examine the TRC and the same if it is found to be in order, the cost of acquisition shall be taken at Rs.2,13,73,563 as claimed by the assessee in his return of income. With these observations, we restore the matter to the files of the A.O. The A.O. is directed to afford a reasonable opportunity of hearing to the assessee and decide the issue in accordance with law. It is ordered accordingly.

11. In the result, the appeal filed by the assessee is allowed for statistical purposes.

Order pronounced on this 10th day of October, 2022.