Mumbai ITAT Rejects Re. 1 Exercise Price, Allows FMV as ESOP Cost of Acquisition

Rajesh R Hemrajani Vs ITO (ITAT Mumbai)

Mumbai ITAT Considers ESOP Cost of Acquisition

The appeal arose from the final assessment order dated 25/12/2024 for A.Y. 2019-20. The assessee was an individual, a non-resident and UK resident employed with L&T Infotech Ltd., UK Branch. During the relevant year, he exercised ESOPs and acquired 1,540 shares at an exercise price of Re.1 per share. The fair market value on the exercise date was determined at Rs.1,753.58 per share. The shares were subsequently sold for an aggregate consideration of Rs.25,99,863/-. The assessee adopted the fair market value as the cost of acquisition under Section 49(2AA) and computed a short-term capital loss of Rs.1,00,650/-.

Assessment and DRP Proceedings

The Assessing Officer questioned the adoption of FMV as the cost of acquisition and proposed taxing the sale proceeds as short-term capital gains, while restricting the cost to the actual exercise price. The AO held that the ESOP perquisite did not accrue or arise in India and that Section 49(2AA) could not be applied. The AO proposed an addition of Rs.25,98,323/- against the short-term capital loss claimed.

The assessee approached the DRP. The DRP agreed with the AO and held that the cost of acquisition was limited to the actual consideration paid. It distinguished the Bangalore ITAT decision in Biplab Adhya on the ground that taxes had been paid in India in that case, whereas the assessee in the present case had paid tax on the perquisite in the UK. Following the DRP directions, the AO made an addition of Rs.29,59,332/- as unexplained short-term capital gains.

Assessee’s Submissions Before ITAT

Before the Mumbai ITAT, the assessee submitted that Section 49(2AA) specifically provides that the FMV taken into account for computing the ESOP perquisite constitutes the cost of acquisition. The assessee relied on the FMV of Rs.1,753.58 per share, determined in accordance with Rule 3(8)(ii), rather than the Re.1 exercise price.

The assessee also submitted that the difference between FMV and the exercise price had been subjected to tax as a perquisite in the UK. It was argued that restricting the cost of acquisition to the exercise price would result in the value already subjected to tax as a perquisite being included again in capital gains. The assessee also relied on Article 26 of the India-UK DTAA and the decision in Biplab Adhya v. DCIT.

The Departmental Representative supported the assessment and DRP orders and contended that capital gains from transfer of shares of an Indian company were taxable in India and that the actual exercise price should constitute the cost of acquisition.

ITAT’s Findings on Section 49(2AA)

The Mumbai ITAT noted that the assessee had exercised 1,540 ESOPs at Re.1 per share and subsequently transferred the shares. It also noted that the FMV adopted for determining the perquisite had not been disputed by the AO and had been determined in accordance with Rule 3(8)(ii).

The Tribunal examined Section 49(2AA), which provides that where capital gains arise from transfer of specified securities or sweat equity shares referred to in Section 17(2)(vi), the cost of acquisition is the FMV taken into account for the purposes of that provision. The ITAT held that the provision does not state that the FMV must actually have been subjected to tax in India. According to the Tribunal, the expression “taken into account” refers to the FMV determined under Section 17(2)(vi) read with Rule 3.

The Tribunal rejected the view that Section 49(2AA) could be made subject to an additional requirement that the perquisite must have been taxed in India. It held that such a condition was not incorporated in the provision.

Judicial Precedents and Final Decision

The Tribunal found that the judicial precedents relied upon by the Revenue primarily concerned residential status or chargeability of salary and perquisites under Sections 5 and 9 and did not directly consider the interpretation of Section 49(2AA) in determining the cost of acquisition of ESOP shares.

The ITAT also considered Ramamurthy Sridharan v. ACIT and held that it could not be read as establishing that Section 49(2AA) applies only where the perquisite has actually suffered tax in India. It also disagreed with the DRP’s distinction of Biplab Adhya based solely on the jurisdiction where the perquisite was taxed.

The Mumbai ITAT held that the assessee was entitled to adopt the FMV of the shares on the exercise date, determined under Section 17(2)(vi) read with Rule 3(8)(ii), as the cost of acquisition under Section 49(2AA). The AO was directed to recompute the capital gains accordingly. Ground A was allowed. The challenge to reassessment under Section 147 was left academic, while the consequential Ground C was not adjudicated. The appeal was accordingly allowed.

Cases Discussed

• Biplab Adhya v. DCIT, ITA No.720/Bang/2022.
• Devi Dayal vs. DCIT/ACIT International tax (Delhi ITAT), [2024] 158 taxmann.com 572 (Delhi-Trib.).
• Avdesh Kumar vs. DCIT (Delhi ITAT), [2018] 96 taxmann.com 340 (Delhi – Trib.).
• Smt. Sumana Bandyopadhyay vs. DCIT (International Tax) (Calcutta), [2017] 88 taxmann.com 847 (Calcutta).
• Utanka Roy vs. DIT (Internation Tax) (Calcutta), [2017] 82 taxmann.com 113 (Calcutta).
• CIT vs. Avatar Singh Wadhwan (Bombay), [2011] 115 Taxman 536 (Bombay).
• DIT (Internation Tax) vs. Prahlad Vijendra Rao (Karnataka), [2011] 198 Taxman 551 (Karnataka).
• DIT (International tax) vs. ylan George Smith (Karnataka), [2011] 11 taxmann.com 349 (Kar.).
• Ramamurthy Sridharan v. ACIT, ITA No.1238/Hyd/2008.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

Present appeal filed by the assessee arises out of final assessment order dated 25/12/2024 passed by ITO, IT, Ward2(2)(1), Mumbai, for A.Y. 2019-20 on following grounds of appeal:-

A. The findings of the Assessing Officer on facts and in law are erroneous based on the following grounds and hence the order of the AO is liable to be set aside:

a. The AO has erred in failing to consider the “perquisite”, being the difference between the market value of shares on the exercise date and the exercise price as the cost of acquisition merely because the perquisite did not accrue or arise in India.

b. The AO erred in failing to appreciate that the non-inclusion of the perquisite in the cost of acquisition of the shares acquired under an ESOP scheme would be tantamount to taxing the perquisites under the head capital gains, at a different point in time.

c. The AO erred in failing to appreciate that taxing the perquisites, albeit under a different head of income and at a different point in time, would be tantamount to taxing the perquisites received in respect of services outside India, which cannot be deemed to accrue or arise in India under 9(1)(ii) of the Income Tax Act, 1961.

d. The AO has erred in not considering that taxing the perquisites in the aforesaid manner would be in violation of Article 15 of the India-UK tax treaty, which restricts India from taxing perquisites earned in respect of services rendered outside India.

e. The AO has erred in concluding that the shares received under the ESOP scheme by the assessee do not constitute perquisites merely because they do not accrue or arise in India under section 9(1)(ii) of the Income-tax Act 1961.

The AO has erred in computing the assessee’s capital gains without regard Section 49(2AA) of the Income-tax Act, 1961.

f. The AO erred in computing the assessee’s capital gains by reference to the exercise price of the stock options as his cost of acquisition because this would be tantamount to taxing perquisites not deemed to accrue or arise in India.

g. The AO erred in ignoring the fact that the assessee’s cost of acquisition was the market value of the shares received under the ESOP scheme as on the exercise date.

h. The AO erred in not appreciating that the assessee had suffered a short-term capital loss of Rs. 1,00,650/- upon the sale of the shares acquired pursuant to the ESOP scheme.

B. The notice issued by the AO u/s 148 as well the order u/s 147 of the Income-tax Act, 1961 is liable to be quashed for lack of jurisdiction which was vested not in the Jurisdictional AO but in the Faceless AO.

C. The AO has erred in law and on facts in levying an interest under section 234A, 234B, and Section 234F of the Income tax Act, 1961.

D. AO has erred in initiating penalty proceedings under section 270A(8) of the Income Tax Act, 1961.

E. The assessee seeks leave to add, modify, amend or delete any of the grounds of appeal at any time during the pendency of this appeal.

2. Brief facts of the case are as under:-

Assessee is an individual and a non-resident Indian. He is a resident of the United Kingdom and is employed with L&T Infotech Ltd. in UK Branch. Based on the information with the risk management strategy, it was noted that assessee had not filed return of income for A.Y. 2018-19 and that no assessment was made in the case of assessee for the year under consideration. Based on the details/information available in the system regarding a financial transaction entered into by assessee related for foreign purchase of currency of Rs.26,89,640/- during the FY relevant to A.Y. under consideration, the case was reopened as per explanation 1 to Section 148. The revenue was of the opinion that the information suggests that income chargeable to tax represented in the form of an asset escaped assessment for the purposes of Section 148 and 148A of the Act.

2.1. Therefore, after giving opportunity of being heard as per the provisions of Section 148A(b) of the Act, the assessee was issued an order u/s 148A(d) by seeking approval from the appropriate authority on 29/03/2023 and the case was reopened by issuing notice u/s 148 vide notice dated 29/03/2023.

2.1.1. The assessee did not file any return of income in lieu of the notice issued u/s 148 and thus statutory notice issues u/s 142(1) was issued to the assessee on the primary mail registered with the ITBA portal on 24/08/2023, 20/09/2023, 18/10/2023, 19/10/2023 and 10/01/2024.

2.2. The assessee vide various replies to these statutory notices filed submissions which is summarised as under:-

(a) It was submitted that assessee did not file the return of income for the relevant assessment year under consideration, as he was unaware about the requirements to file the return of income of India. He was not aware about the legal provisions regarding the return filing and tax payment in India. It was submitted that the assessee had no intention of avoiding or evading the taxes in India by not disclosing the income in India.

(b) The assessee submitted that during the year under consideration he was a non-resident of India. During the relevant previous year, the assessee exercised Employee Stock Option Plans (ESOPs) and was allotted 1,540 shares at an exercise price of Rs.1 per share. It was submitted that the fair market value (FMV) of the shares on the date of exercise was Rs.1,754 per share.

(c) The assessee thereafter sold the said 1,540 shares on different dates during the previous year for an aggregate sale consideration of Rs.25,99,863/-, the details whereof are as under:

Date of sale	No. of shares sold	Amount of sale consideration
16/11/2018	1000	Rs.16,19,694
18/01/2019	500	Rs.9,05,030
07/02/2019	40	Rs.75,138

(d) While computing the capital gains arising on the sale of the aforesaid shares, the assessee adopted the fair market value of Rs.1,754 per share as on the date of exercise of the ESOPs as the cost of acquisition in terms of section 49(2AA) of the Income-tax Act, 1961 and accordingly computed a short-term capital loss of Rs.1,00,650/-.

(e) The Ld. AO, after considering the return of income and the submissions made by the assessee, issued a show-cause notice dated 08.03.2024 calling upon the assessee to justify the claim of fair market value as the cost of acquisition under section 49(2AA) of the Act. The assessee was further required to explain as to why the sale consideration of Rs.25,99,863/- should not be subjected to tax as short-term capital gains taxable at the rate of 15%, instead of treating the amount as having already suffered tax as salary/perquisite.

(f) In response, vide submissions dated 15.03.2024, the assessee submitted that section 49(2AA) specifically provides that, in the case of specified securities or sweat equity shares allotted under an ESOP scheme, the fair market value adopted for the purposes of taxation of perquisite shall constitute the cost of acquisition for computing capital gains. It was submitted that the fair market value of the shares on the date of exercise was Rs.1,753.58 per share and the same had accordingly been adopted as the cost of acquisition while computing the capital loss.

(g) The assessee further submitted that the difference between the fair market value of the shares and the exercise price had already been subjected to tax as a perquisite in the United Kingdom. It was contended that, for the purposes of section 48 read with section 49(2AA) of the Act, the expression “cost of acquisition” is not confined merely to the amount actually paid by the employee towards the exercise price but also includes the value that has already been subjected to tax as a perquisite.

(h) It was further submitted that the entire sale consideration realised on transfer of the shares inherently included the value which had already suffered tax as a perquisite in the United Kingdom and, therefore, taxing the same again without allowing such value as the cost of acquisition would amount to double taxation of the same economic benefit.

(i) The assessee also drew a comparison with the position of a resident employee. It was submitted that where a resident employee is taxed on the perquisite value under section 17 of the Act at the time of exercise of ESOPs, section 49(2AA) expressly permits the fair market value so adopted to be treated as the cost of acquisition while computing capital gains. According to the assessee, a non-resident employee, whose perquisite value has been subjected to tax in the United Kingdom, should receive identical treatment by adopting the fair market value as the cost of acquisition.

(j) The assessee accordingly contended that denial of such benefit solely because the perquisite had been taxed in the United Kingdom instead of India would result in discriminatory treatment and would be contrary to the non-discrimination provisions contained in Article 26 of the India–UK Double Taxation Avoidance Agreement.

2.3. The Ld.AO examined the submissions of the assessee and analysed the issue by referring to the following judicial precedents:

• CIT vs. Avatar Singh Wadhwan [2011] 115 Taxman 536 (Bombay)
• Smt. Sumana Bandyopadhyay vs. DCIT (International Tax) [2017] 88 taxmann.com 847 (Calcutta)
• DIT (Internation Tax) vs. Prahlad Vijendra Rao [2011] 198 Taxman 551 (Karnataka)
• Utanka Roy vs. DIT (Internation Tax) [2017] 82 taxmann.com 113 (Calcutta)
• DIT (International tax) vs. ylan George Smith [2011] 11 taxmann.com 349 (Kar.)
• Devi Dayal vs. DCIT/ACIT International tax [2024] 158 taxmann.com 572 (Delhi-Trib.)
• Avdesh Kumar vs. DCIT [2018] 96 taxmann.com 340 (Delhi – Trib.)

2.4. The Ld.AO thus decided as under:-

“3.2.A].2] Just on the basis of definition of Perquisites as per the Income Tax Act, 1961 and the Salary does not entitle the assessee’s claim of the shares of M/s. LTI Mindtree Limited as perquisites in India within the meaning of Section 14, Section 15 and Section 17(2) of the Income Tax Act, 1961. As the services rendered in UK by the assessee and the perquisites are also in relation to the services rendered in UK and those not accrue and arises in India by applying the ratio of the judgments discussed above. The perquisites claimed by the assessee are outside the scope of total income as per section 5.

3.2.A].3] The taxes claimed to be paid by the assessee in UK on perquisites is of no materiality as the perquisites are not a part of the total income as per the Income Tax Act, 1961 as discussed above. The credit of the taxes paid as discussed in 3.2.B] below.

3.2.A].4] Article 16 of DTAA India UK :

“ARTICLE 16 – Dependent personal services – 1. Subject to the provisions of Article 17 (Directors’ fees), 18 (Artists and athletes), 19 (Governmental remuneration and pensions), 20 (Pensions and annuities), 21 (Students and trainees) and 22 (Teachers) of this Convention, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.

2. Notwithstanding the provisions of paragraph 1 of this Article, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall not be taxed in that other State if : (a) he is present in the other State for a period or periods not exceeding in the aggregate 183 days during the relevant fiscal year; (b) the remuneration is paid by, or on behalf of, an employer who is not resident of that other State; and (c) the remuneration is not deductible in computing the profits of an enterprise chargeable to tax in that other State.

3. Notwithstanding the preceding provisions of this Article, remuneration in respect of an employment exercised aboard a ship or aircraft in international traffic may be taxed in the Contracting State of which the person deriving the profits from the operation of the ship or aircraft is a resident.”

Thus, as per the Act and also as per the Article 16 of INDIA UK DOUBLE TAXATION AVOIDANCE TREATY the accrual of the Salary and Perquisites is outside India.

3.2.A].5] Employee and Employer Relation:

Although the employee and employer relation is of no materiality, however in the present case neither the employer is in India nor the employee is in India and also the services rendered outside India. Thus under no circumstances the shares received by the assessee of M/s. LTI Mindtree Limited can be classifies as perquisites in India for the purpose of Section 17(2) of the Income Tax Act, 1961.

3.2.1 The shares received are in fact in the nature of capital assets which are u/s 9(1)(i) of the Income Tax Act.

Section 9(1)(i) :

9. (1) The following incomes shall be deemed to accrue or arise in India :—

27(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a Capital Asset situate in India.

3.2.2 For determination of tax on capital gains, the assessee has erroneously availed the benefits of Section 49(2AA).

Section 49(2AA) :

In section 49 of the Income-tax Act, after sub-section (2A), the following sub-section shall be inserted, namely:—

“(2AA) Where the capital gain arises from the transfer of the shares, debentures or warrants, the value of which has been taken into account while computing the value of perquisite under clause (2) of section 17, the cost of acquisition of such shares, debentures or warrants shall be the value under that clause.”

3.2.3. As already proven above, the ESOP’s received by the assessee does not accrue and arises in India as per Section 5(2) r.w.s. 9(1)(ii), the cost of acquisition of the shares for the purpose of computation of capital gain can not be the fare market value determined in accordance with 49(2AA) or the ‘real cost’ as claimed by the assessee in its submission or the ‘real cost’ as claimed by the assessee in its further submission.

3.2.4. The Cost of acquisition is the actual consideration paid by the assessee for purchasing the shares which in this case is Rs.1540/- paid by the assessee for the acquisition of the capital asset.

3.2.B] CREDIT OF TAXES PAID (IF ANY):

The assessee has claimed taxes paid on the perquisites in UK. However, as discussed above in para 3.2.A], since there is no accrual of perquisites in India there is no question of credit of any taxes paid on this transactions.

3.2.B].i) Notwithstanding the above considering Article 24 of the INDIA UK DOUBLE TAXATION AVOIDANCE TREATY (DTAA)

“ARTICLE 24 – Relief from double taxation —

1. Subject to the provisions of the law of the United Kingdom regarding the allowance as a credit against United Kingdom tax of tax payable in a territory outside the United Kingdom (which shall not affect the general principle hereof): (a) Indian tax payable under the laws of India and in accordance with the provisions of this Convention, whether directly or by deduction, on profits, income or chargeable gains from sources within India (excluding, in the case of a dividend, tax payable in respect of the profits out of which the dividend is paid) shall be allowed as a credit against any United Kingdom tax computed by reference to the same profits, income or chargeable gains by reference to which the Indian tax is computed. (b) In the case of a dividend paid by a company which is a resident of India to a company which is a resident of the United Kingdom and which controls directly or indirectly at least 10 per cent of the voting power in the company paying the dividend, the credit shall take into account in [addition to any Indian tax for which credit may be allowed under the provisions of sub-paragraph (a) of this paragraph] the Indian tax payable by the company in respect of the profits out of which such dividend is paid.

2. Subject to the provisions of the law of India regarding the allowance as a credit against Indian tax of tax paid in a territory outside India (which shall not affect the general principle hereof), the amount of the United Kingdom tax paid, under the laws of the United Kingdom and in accordance with the provisions of this Convention, whether directly or by deduction, by a resident of India, in respect of income from sources within the United Kingdom which has been subjected to tax both in India and the United Kingdom shall be allowed as a credit against the Indian tax payable in respect of such income but in an amount not exceeding that proportion of Indian tax which such income bears to the entire income chargeable to Indian tax. For the purposes of the credit referred to in this paragraph, where the resident of India is a company, by which surtax is payable, the credit to be allowed against Indian tax shall be allowed in the first instance against the income-tax payable by the company in India and, as to the balance, if any, against the surtax payable by it in India.

3. Subject to paragraph 5 of this Article, for the purposes of paragraph 1 of this Article the term “Indian tax payable” shall be deemed to include: (a) any amount which would have been payable as Indian tax but for a deduction allowed in computing the taxable income or an exemption or reduction of tax granted for that year in question under the provisions of the Income-tax Act, 1961 (43 of 1961) referred to in paragraph 4(a) or (b) of this Article; (b) that proportion of any amount which would have been payable as Indian tax by a resident of India but for a deduction allowed in computing taxable income or an exemption or reduction granted for the year in question under the provisions of the Income-tax Act, 1961 (43 of 1961) referred to in paragraph 4(c) of this Article which corresponds to the proportion of that resident’s total production in that year which was actually sold in the Indian Domestic Tariff Area under order issued by the Chief Controller of Import and Export being Nos. 21/90-93, 22/90-93, 23/90-23, 25/90-23, 26/90-23, 27/90-93, dated 30-3-1990 and similar Orders from time to time published in the Official Gazette by the Central Government under power conferred on it by section 3 of the Import and Export (Control) Act, 1947 (18 of 1947).

4. The provisions referred to in this paragraph are: (a) sections 10(4), 10(4B), 10(6)(viia), 10(15)(iv), 33AB, 80HHD, 80-I and 80-IA; (b) any other provision which may subsequently be enacted granting an exemption or reduction from tax which is agreed by the competent authorities of the Contracting States to be of a substantially similar character to a provision referred to in sub-paragraph (a) of this paragraph, if it has not been modified thereafter or has been modified only in minor respects so as not to affect its general character; (c) sections 10A and 10B.

5. Relief from United Kingdom tax shall to be given by virtue of this paragraph 3 of this Article in respect of income from any source if the income relates to a period starting more than 10 fiscal years after the deduction in computing taxable income or exemption from, or reduction of, Indian tax is first granted to the resident of the United Kingdom or to the resident of India, as the case may be, in respect of that source.

6. Income which in accordance with provisions of this Convention is not to be subjected to tax in a Contracting State may be taken into account for calculating the rate of tax to be imposed in that Contracting State on other income.

7. For the purposes of paragraphs 1 and 2 of this Article profits, income and chargeable gains, owned by a resident of a Contracting State which may be taxed in the other Contracting State in accordance with the provisions of this Convention shall be deemed to arise from sources in that other Contracting State.”

3.2.B].ii) Firstly, the assessee being a UK Resident and hence as per clause 1 of Article 24 above, the assessee has to claim the credit of the taxes paid in India against the UK taxes and not the vice-versa. However, the assessee through being a UK citizen and resident is erroneously claiming tax credit as per Article 24 (2) applicable to the Indian citizen and resident.

3.2.B].iii) Secondly, also as per Article 24(7) above, the perquisites received by the assessee are deemed to be in UK and thus there is no incidence of any double taxation and thus the question of relief does not arise.

Also the Capital Gain income arise and deemed to arise in India and taxable in India.

3.2.B].iv) Thus, the TDS deducted on capital Gains is to be claimed in UK for avoidance of double taxation and not vice-versa.

3.2.C] CAPITAL ASSET: The shares of LTIMindtree Limited received by the assessee accrues in the form of capital asset as per Section 5(2) r.w.s. 9(1)(i) of the Income Tax Act, 1961. Thus, on the transfer of these capital assets, there arises liability of the capital gains which is payable in India. The cost of acquisition allowable being the actual consideration paid only.

3.2.D] COST OF ACQUISITION: The cost of acquisition is simply the consideration paid by the assessee for acquiring the assets which is the actual cost paid by the assessee for acquiring the asset and not the fair market value as claimed by the assessee or claimed in any other name like ‘real cost’ cannot be allowed.”

2.5. The Ld.AO thus proposed an addition of Rs. 25,98,323/- as short term capital gains against the short term capital loss of Rs. 1,00,650/- offered by the assessee.

On receipt of the draft assessment order, assessee preferred objections before DRP.

3. The DRP after considering various submissions of assessee, observed and held as under:

“9.4.3 The Panel is in agreement with the findings of the AO. The shares of LTIMindtree Limited received by the assessee accrues in the form of capital asset as per Section 5(2) r. w.s. 9(1)(i) of the Act. Thus, on the transfer of these capital assets, there arises liability of the capital gains, which is payable in India. The cost of acquisition allowable to the extent of the actual consideration paid. The cost of acquisition is simply the consideration paid by the assessee for acquiring the assets, which is the actual cost paid by the assessee for acquiring the asset and not the fair market value as claimed by the assessee.

9.4.4 The applicant assessee has relied upon the decision of Hon’ble ITAT Bangalore delivered in the case of Biplab Adhya IT(IT)ANO.720/Bang/2022. The Panel has perused the case. However, the Panel is of the opinion that facts of the cases are not similar. In the case of Biplab Adhya, the assessee has paid taxes in USA (as perquisite) on Rs.1,41,45,894 and in India for a sum of Rs.72,27,669.

Therefore, total amount was already taxed. However, in the instant case the assessee has not paid any tax in India. Therefore, the case is not squarely applicable.

9.4.5 The applicant assessee has paid taxes in UK on perquisite value, however capital gain, which is accrued in India is remained to be taxed. Therefore, in the considered view of the Panel, the approach of AO doesn’t require any interference. Accordingly, objections of the applicant fail.”

3.1. On receipt of the DRP directions, the Ld.AO made additions in the hands of the assessee amounting to Rs.29,59,332/- as unexplained short term capital gains.

Aggrieved by the final assessment order, the assessee is in appeal before this Tribunal.

4. The Ld.AR at the outset submitted that all sub-grounds under Ground – A, are in respect of the addition made by Ld.AO of Rs.29,59,332/- as unexplained short term capital gains as against the short term capital loss of Rs.1,00,650/- computed by assessee upon sale of shares acquired pursuant to ESOP scheme.

4.1. The Ld. AR submitted that during the year under consideration the assessee sold 1,540 equity shares of LTI Mindtree Ltd. for an aggregate sale consideration of Rs.25,99,863/-. It was submitted that these shares were acquired by the assessee on 03.09.2018 pursuant to the exercise of Employee Stock Options (ESOPs) at an exercise price of Re.1 per share. The Ld. AR submitted that the opening market price of the shares on the date of exercise was Rs.1,734/- per share and the closing market price was Rs.1,773.15 per share. Accordingly, the fair market value of the shares, being the average of the opening and closing prices, worked out to Rs.1,753.58 per share.

The Ld. AR submitted that, while the assessee paid only Re.1 per share towards the exercise price, the difference between the fair market value of Rs.1,753.58 per share and the exercise price of Re.1 per share, i.e., Rs.1,752.58 per share, represented the perquisite value within the meaning of section 17(2) of the Act. Consequently, the aggregate perquisite value in respect of 1,540 shares amounted to Rs.26,98,973.20 (Rs.1,752.58 × 1,540).

4.2. The Ld. AR submitted that before the authorities below the assessee had furnished the computation of short-term capital gains wherein a short-term capital loss of Rs.1,00,650/- was computed by adopting the fair market value of the ESOP shares as on the date of exercise as the cost of acquisition in terms of section 49(2AA) of the Act. It was submitted that section 49(2AA) specifically provides that where capital gains arise from the transfer of specified securities or sweat equity shares referred to in section 17(2)(vi), the cost of acquisition shall be the fair market value which has been taken into account for the purposes of the said provision. It was further submitted that the fair market value was determined in accordance with Rule 3(8)(ii) of the Income-tax Rules.

4.3. The Ld. AR submitted that for the purposes of computing capital gains under section 48 of the Act, the expression “cost of acquisition” cannot be confined merely to the actual monetary payment made by the employee towards the exercise price of the ESOPs. According to him, the cost of acquisition necessarily includes the value which has already been subjected to tax as a perquisite under section 17(2)(vi). In support of the aforesaid proposition, reliance was placed on the decision of Hon’ble Bangalore Bench of the Tribunal in Biplab Adhya v. DCIT in ITA No.720/Bang/2022.

4.4. The Ld. AR submitted that the Ld. AO, however, proceeded on the premise that the cost of acquisition is confined to the actual consideration paid by the assessee for acquiring the shares and cannot include the fair market value adopted by the assessee. According to the Ld. AR, such an interpretation is contrary to the express language of section 49(2AA), which provides that where capital gains arise from the transfer of specified securities or sweat equity shares referred to in section 17(2)(vi), the cost of acquisition shall be the fair market value which has been taken into account for the purposes of the said provision.

Section 49(2AA) of the Act which reads as under:

“Where the capital gain arises from the transfer of specified security or seat equity shares referred to in sub-clause (vi) of clause (2) of section 17, the cost of acquisition of such security or shares shall be the fair market value which has been taken into account for the purposes of the said sub-clause.”

4.5. Elaborating the statutory provision, the Ld. AR submitted that the expression “taken into account” occurring in section 49(2AA) is of significance. According to him, the Legislature has consciously linked the cost of acquisition with the fair market value adopted for the purposes of section 17(2)(vi), and not with the amount actually paid by the employee. Therefore, once the fair market value is determined in accordance with section 17(2)(vi) read with Rule 3, the same necessarily constitutes the cost of acquisition for the purposes of computing capital gains under section 48 of the Act.

4.6. Without prejudice to the above, the Ld. AR submitted that in the facts of the present case the perquisite value itself was not chargeable to tax in India. It was submitted that the assessee was admittedly a non-resident during the relevant previous year and the ESOPs were exercised outside India in respect of employment rendered outside India. Consequently, the alleged perquisite neither accrued nor arose in India, nor could it be deemed to accrue or arise in India within the meaning of section 5 of the Act. It was contended that section 4, being the charging provision, brings to tax only such income as forms part of the total income under the Act. Since the perquisite did not fall within the ambit of section 5, the same could not be regarded as taxable income in India.

4.7. The Ld.AR further submitted that once the perquisite itself does not accrue or arise, or is not deemed to accrue or arise in India under section 5, the deeming provisions contained in section 9(1)(ii) would also have no application. It was contended that the authorities below erred in invoking Article 16 of the India-UK Double Taxation Avoidance Agreement dealing with dependent personal services. According to the Ld.AR, the perquisite value had already been subjected to tax as salary income in the United Kingdom and India had no right under the Treaty to tax the same again. It was submitted that once the Treaty allocates taxing rights to one Contracting State, the same income cannot again be subjected to tax in the other Contracting State except to the extent specifically permitted under the Treaty.

4.8. The Ld.AR submitted that the fair market value representing the perquisite had already suffered tax in the United Kingdom and, therefore, the same ought to be recognised as the cost of acquisition while computing capital gains under section 48 read with section 49(2AA) of the Act. According to him, adoption of only the exercise price as the cost of acquisition would result in taxation of an amount which had already suffered tax as employment income in the United Kingdom, thereby defeating the statutory scheme embodied in section 49(2AA).

4.9. The Ld.AR further submitted that restricting the cost of acquisition to the exercise price would also violate the non-discrimination clause contained in Article 26 of the India-UK DTAA. Referring to Article 26(1), it was submitted that nationals of one Contracting State cannot be subjected in the other Contracting State to taxation or any connected requirement that is more burdensome than that applicable to nationals of that other State in the same circumstances.

“1. The nationals of a contracting state shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subjected.”

4.10. Elaborating the aforesaid contention, the Ld. AR submitted that where a resident employee in India exercises ESOPs, the fair market value taken into account for taxation under section 17(2)(vi) is expressly recognised as the cost of acquisition under section 49(2AA). According to him, denying the same benefit merely because the assessee is a UK resident and the perquisite has been subjected to tax in the United Kingdom would result in discriminatory treatment prohibited by Article 26 of the India-UK DTAA.

4.11. Insofar as the judicial precedents relied upon by the Ld.AO are concerned, the Ld.AR submitted that the same are distinguishable on facts. It was contended that those decisions primarily dealt with the residential status of the assessees and the determination of whether they qualified as non-residents during the relevant period. In the present case, however, the residential status of the assessee as a non-resident was never in dispute. Attention was invited to the assessment order itself, wherein the Ld. AO had accepted the assessee’s non-resident status, as also to the Tax Residency Certificate issued by the UK tax authorities, placed at page 204 of the paper book, certifying that the assessee was a tax resident of the United Kingdom for the period from 01.04.2018 to 31.03.2019. It was, therefore, submitted that the authorities below erred in relying upon decisions rendered in materially distinguishable factual circumstances and that the perquisite value was not chargeable to tax in India.

4.12. On the contrary, the Ld. DR supported the orders of the authorities below. He submitted that the shares transferred by the assessee were equity shares of LTI Mindtree Ltd., an Indian company, though allotted under the ESOP scheme of its group entity, LTI Mindtree UK Limited. It was, therefore, contended that the capital gains arising on the transfer of shares of an Indian company were chargeable to tax in India in accordance with the provisions of the Act. The Ld. DR further submitted that the Ld. AO had correctly adopted the actual exercise price as the cost of acquisition while computing the capital gains and justified the addition made in the assessment order. He accordingly relied upon the reasoning and computation adopted by the Ld. AO and the directions issued by the DRP.

We have perused the submissions advance by both sides in light of the records placed before us.

5. It is an admitted position that the assessee was employed with L&T Infotech Ltd., UK Branch and was a non-resident during the year under consideration. As part of his remuneration package, the assessee was granted 7,700 ESOPs by his employer during A.Y. 2017-18 in respect of equity shares of L&T Infotech Ltd., an Indian listed company, at an exercise price of Re.1 per share. The options were to vest in five equal instalments of 20% each in the hands of assessee (as per page 192 of the paper book) as under:

20% 09/11/2017

20% 09/11/2018

20% 09/11/2019

20% 09/11/2020

20% 09/11/2021

5.1. During the year under consideration, the assessee exercised the first tranche of 1,540 vested options on 03.09.2018 by paying the stipulated exercise price of Re.1 per share. Pursuant thereto, 1,540 equity shares of L&T Infotech Ltd. were credited to the assessee’s demat account on 25.10.2018. The demat statement evidencing the credit and subsequent sale of the shares is placed at pages 194 to 203 of the paper book. It is an admitted position that during the relevant previous year the assessee sold the said 1,540 shares through the recognized stock exchange for an aggregate sale consideration of Rs.25,99,863/-.

During the course of assessment proceedings, the assessee furnished the computation of short-term capital gains by adopting the fair market value as on the date of exercise as the cost of acquisition. The computation furnished by the assessee is reproduced below:

Sale date	No of shares	Sale consideration	Date of purchase	Cost of acquisition	Short term capital loss
16/11/2018	1000	16,19,694	03/09/2018	17,53,580	-1,33,886
18/01/2019	500	9,05,031	03/09/2018	8,76,790	28,241
07/02/2019	40	75,138	03/09/2018	70,143	4,995
Total					-1,00,650

5.3. From the aforesaid undisputed facts, it emerges that the assessee exercised 1,540 ESOPs granted in respect of the shares of an Indian listed company at an exercise price of Re.1 per share and subsequently transferred those shares through the stock exchange. It is further noted that the fair market value adopted by the assessee for determining the perquisite value has not been disputed by the Ld.AO. Rather, the Ld.AO proceeded on the basis that the fair market value adopted by the assessee has been determined in accordance with Rule 3(8)(ii) of the Income-tax Rules. Thus, there is no dispute before us regarding the determination of the fair market value of the shares on the date of exercise of the options.

5.4. It is submitted by the Ld.AR that the difference between the fair market value of the shares on the date of exercise and the exercise price was subjected to tax in the UK as perquisite forming part of the assessee’s salary income. However, the Ld.AO proceeded on the footing that the difference between the fair market value of the shares on the date of exercise and the exercise price is not taxable as per the DTAA and provisions of section 5 of the Act. The Ld.AO therefore denied the benefit under the provisions of section 49(2AA) to the assessee.

5.5. In the above factual backdrop, the controversy that falls for our consideration is two-fold. Firstly, whether, on the facts of the present case, the transfer of the shares of an Indian company gives rise to capital gains chargeable to tax in India. Secondly, if the gains are so chargeable, whether for the purposes of computing capital gains under section 48 of the Act, the cost of acquisition is to be taken as the fair market value of the shares on the date of exercise in terms of section 49(2AA), as contended by the assessee, or is to be restricted to the actual exercise price of Re.1 per share, as held by the authorities below.

5.6. The expression “cost of acquisition” assumes significance in the scheme of computation of capital gains under Chapter IV-E of the Act. Ordinarily, the cost of acquisition denotes the amount incurred by an assessee for acquiring a capital asset. However, the Legislature has recognised that a capital asset may be acquired otherwise than by purchase and, therefore, the actual amount paid may not always represent the true cost for the purposes of computing capital gains. Accordingly, section 49 of the Act provides for deeming provisions governing the determination of the cost of acquisition in specified situations where the asset is acquired by modes other than direct purchase. Section 49(2AA), is the provision that specifically deals with specified securities or sweat equity shares referred to in section 17(2)(vi) of the Act. The provision stipulates that where capital gains arise on the transfer of such specified securities or sweat equity shares, the cost of acquisition shall be the fair market value which has been taken into account for the purposes of valuation of the perquisite under section 17(2)(vi). Thus, in respect of ESOPs and sweat equity shares, the Legislature has consciously departed from the general rule of actual cost and has statutorily substituted the fair market value adopted for perquisite valuation as the cost of acquisition for the purposes of computing capital gains.

5.7. A careful reading of section 49(2AA) shows that the Legislature has consciously employed the expression “fair market value which has been taken into account for the purposes of section 17(2)(vi)”. The provision does not state that such fair market value should have actually been subjected to tax in India or included in the total income of the assessee under section 17. The expression “taken into account” is of wider import and merely refers to the fair market value determined in accordance with the statutory mechanism prescribed under section 17(2)(vi) read with Rule 3 of the Income-tax Rules. The chargeability of such perquisite to tax is governed independently by sections 4, 5 and 9 of the Act and, where applicable, by the provisions of the relevant DTAA.

5.8. In other words, it refers to the fair market value which enters into the determination of the value of the perquisite in accordance with the mechanism prescribed under section 17(2)(vi) read with Rule 3 of the Income-tax Rules. The provision does not stipulate that such perquisite should have actually been subjected to tax in India or included in the total income of the assessee. The distinction is significant because the computation of the perquisite under section 17(2)(vi) and its ultimate chargeability to tax operate in different fields. In other words, it refers to the fair market value which enters into the determination of the value of the perquisite in accordance with the mechanism prescribed under section 17(2)(vi) read with Rule 3 of the Income-tax Rules. The provision does not stipulate that such perquisite should have actually been subjected to tax in India or included in the total income of the assessee. The distinction is significant because the computation of the perquisite under section 17(2)(vi) and its ultimate chargeability to tax operate in different fields.

5.9. To read into section 49(2AA) an additional requirement that the perquisite must have been taxed in India would amount to supplying words which the Legislature has consciously omitted. It is a settled principle of statutory interpretation that courts cannot add words to a statute under the guise of interpretation when the language employed by Parliament is plain and unambiguous. Be that as it may, Ld.AO has recorded factual finding submitted by assessee that a perquisite has been taxed in the hands of assessee as part of his salary in UK. This fact has not been objected by Ld.AO in the assessment order.

5.10. Before parting, we may also deal with the judicial precedents relied upon by the Revenue. The authorities below have placed reliance upon various decisions dealing with the taxability of salary and perquisites in the hands of non-residents. On a careful perusal of those decisions, we find that the controversy therein primarily centred around the residential status of the assessee or the chargeability of salary/perquisite under sections 5 and 9 of the Act. None of those decisions directly considered the scope and interpretation of section 49(2AA) of the Act while determining the cost of acquisition of ESOP shares for the purpose of computing capital gains. They are, therefore, distinguishable on facts as well as on the issue involved before us.

5.11. We have also considered the decision in Ramamurthy Sridharan v. ACIT, in ITA No.1238/Hyd/2008 for assessment year 2004-05 vide order dated 30/06/2010, wherein section 49(2AA) came up for consideration. However, in our considered view, the said decision proceeds on the peculiar facts of that case and cannot be read as laying down an absolute proposition that the benefit of section 49(2AA) is available only where the perquisite has actually suffered tax in India. The issue that arises in the present appeal, namely, whether the expression “taken into account for the purposes of section 17(2)(vi)” necessarily requires that the perquisite should have been subjected to tax in India notwithstanding that the fair market value has been determined in accordance with the statutory mechanism prescribed under section 17(2)(vi) read with Rule 3, did not directly arise for consideration therein. We have, therefore, independently examined the language employed in section 49(2AA) and, for the reasons recorded hereinabove, are unable to read into the provision a condition which the Legislature has consciously not incorporated.

5.12. Equally, we are unable to subscribe to the reasoning adopted by the DRP while distinguishing the decision of Hon’ble Bangalore Bench of this Tribunal in case of Biplab Adhya(supra) solely on the ground that, in that case, the perquisite had suffered tax in India whereas, in the present case, it has suffered tax in the United Kingdom. In our considered opinion, the applicability of section 49(2AA) cannot depend upon the jurisdiction in which the perquisite has been subjected to tax, since the provision itself makes no such distinction. Once the fair market value has been determined and taken into account for the purposes of section 17(2)(vi), the statutory requirement of section 49(2AA) stands satisfied. To import an additional condition that the perquisite must have been taxed in India would amount to supplying words to the statute, which is impermissible in law.

6. In view of the foregoing discussion, we hold that the assessee was entitled to adopt the fair market value of the shares as on the date of exercise, determined in accordance with section 17(2)(vi) read with Rule 3(8)(ii), as the cost of acquisition under section 49(2AA) while computing the capital gains arising on the subsequent transfer of the shares. The contrary view adopted by the Ld.AO and affirmed by the DRP, by restricting the cost of acquisition to the exercise price of Re.1 per share, is contrary to the plain language of section 49(2AA) and, therefore, cannot be sustained. The Ld.AO is thus directed to recompute the capital gains by adopting the fair market value as the cost of acquisition in accordance with section 49(2AA) of the Act. In view of our conclusion on the interpretation of the statutory provision, we do not consider it necessary to render a conclusive finding on the alternative contention based on Article 26 of the India-UK DTAA.

Accordingly, the ground A raised by the assessee stands allowed.

7. Ground No.B raised by the assessee is challenging the validity of the notice issued under section 147 of the Act.

As we have decided the issue on merits, this ground is left academic at this stage.

8. Ground No.C is consequential and premature at this stage and do not need adjudication.

In the result, appeal filed by the assessee stands allowed.

Order pronounced in the open court on 31/07/2026.