Brief of the Case
ITAT Mumbai held In the case of Mahindra & Mahindra Employees Stock Option Trust vs. ADCIT that the attributes available in the transaction of the assesee trust are unlike that of a trader and are more like that of an investor. The assessee trust is not free or authorized to sell the shares to any person in the free market at fair market price. Under such circumstances, the assessee trust is not in a position to earn maximum profits. In the case of a trader, the motive is to maximize the profits, as the main object is mechanized the profits by doing the business of trading.Thus, it could be safely said that assessee trust is not in the business of trading of shares.The shares held by the assessee trust cannot be categorised as stock- in-trade of the assessee trust. Consequently, the resultant gain is to be taxed, under the head income from capital gains.
Facts of the Case
The assessee is a trust which was established in March, 2001 vide Trust Deed dated 1-3-2001 by Mahindra & Mahindra (settler), and it was mentioned in the said Trust Deed that it was established for the welfare of the employees of the settler company, namely, Mahindra & Mahindra Ltd. and its subsidiaries, for the subscription to the equity shares of the said company. The AO further noted that the activities of the trust include investing the General Corpus in the Equity Shares of the Company (ie. Mahindra & Mahindra Ltd.), to hold the Equity Shares of the Company and to administer the plans as instructed by the Compensation Committee, for the benefit of the Eligible Employees. The Compensation Committee (constituted by the Settler Company) recommends granting of Options to the Eligible Employees. The assessee trust, thus, based on the recommendations of the Compensation Committee, grants these options to the Eligible Employees in the form of Equity Shares.
The Option means a right but not an obligation granted under the Employees Stock Option Scheme (ESOS) to the Eligible Employees to apply for acquisition from the trust a specified number of Equity Shares of the Company at a future date at Exercise Price. The Exercise Price is the price at which the Eligible Employee is entitled to acquire the Equity Shares pursuant to the Options granted and vested in him/her under the ESOS and is decided by the trust in accordance with the recommendations of the Compensation Committee at the time of Grant of Options. Thereafter, the Eligible Employees are entitled to Exercise the options after the vesting date. Exercise of the options means the act whereby the Eligible Employee actually applies to the trust to exercise the options granted to him/her. On exercise of the options by the Eligible Employees, the trust scrutinizes the details and after realizing the Exercise Price paid by the Eligible Employees, issues/distributes the corresponding underlying equity shares of the Company to the Eligible Employees.
Based on proceeds received from the Eligible Employees, the trust has recognized the revenue and computed and shown Long Term Capital Gains in its return of income. The trust has also shown interest from deposits with banks under the head Income from Other Sources. However the AO was not satisfied and it was held by the AO that the impugned shares constituted business assets in the hands of the assessee and consequently income arising there-from was to be assessed under the head income from business.
Contention of the Assessee
According to the ld. Counsel of the assessee in the present case, the only object for carrying out the activity by the assessee trust is to administer ESOP scheme of the employer and to transfer shares to the employees at the point of time they decide to exercise the option. There was neither a commercial motive, nor a profit motive, as is normally involved while carrying out business. According to ld. counsel the reasoning given by the AO that the activity of the assessee trust was business, inter alia, for the reason that the assessee trust had purchased certain shares from the secondary markets and held these shares for the purpose of making profits and thus, constitute business activity, is also not correct and justified for the reason that the AO failed to appreciate the complete facts in the right context. It was submitted that the assessee trust was established on 1-3-2001 and in the last 10 years only five transactions of purchase from secondary market were made which constituted hardly 4.09% of holding at the end of the year under appeal. According to himl by any stretch of imagination, it cannot be said that these five instances were purchased from the secondary market over a period of 10 years, and thus could not have the attributes of a trader buying stock in trade for the purpose of reselling them.
With regard to the various activities carried out by the assessee trust which were branded as business activities by the AO, it has been submitted by ld. counsel that administrative activities carried out by the assessee trust were meant to give the effect to the mandate of the compensation committee constituted by the settlers of the trust and the assessee trust. It was further submitted by him on the basis of various evidences enclosed in the paper book that the period of holding of these shares was quite long and few instances were referred to showing period of holding being five years to eight years. Our attention was drawn by the him upon the Circular of the CBDT in support of the claim of the assessee that in the given facts and circumstances, the shares held by the assessee trust would constitute a capital asset.
Counsel for the assessee submitted that the shares were capital asset within the meaning of Section 2(14) and reliance was placed by him on the judgment of Hon‟ble Supreme Court in the case of Poddar Cement Ltd. 226 ITR 625, 640 for the proposition that every owner does not possess all the rights and ownership may be restricted by law or by any agreement made by the parties interse. It was submitted by the ld. counsel that whole of funds were held by the trust for the benefit of the employees and as such the ownership of these shares, in the hands of the trust, was merely circumscribed by the ESOP scheme. But in view of the decision of the Hon‟ble Supreme Court , such contractual restriction do not change the character nor defeat ownership in the asset held by the trust. Thus, the shares held by the trust, clearly classified as investment, and had been shown in the audited accounts of the trust as such, and accordingly return of income was rightly filed by the assessee by showing the resultant gain as capital gain.
Taxabiility of trust income at maximum margin rate
Ld. Counse of the assesseel had placed reliance on the judgment of Bombay Bench of ITAT in the case of Jamsetji Tata Trust Vs. JDIT (Exemption) 148 ITD 388 and it was submitted that assessee’s case is covered with these judgments, in favour of the assessee.
Contention of the Revenue
The ld counsel of the revenue strongly supported the orders of Assessing Officer and CIT (A).
Held by CIT (A)
Taxabiility of trust income at maximum margin rate
The CIT(A) rejected the submissions of the assessee. It was held by him in para 1.3 of the appellate order that it was clear from the deed of the trust that individual shares are indeterminate or unknown, since individual shares of various employees have not been specified in the deed of the trust and also for the reason that trust has been found for benefit of both i.e. for present as well as future employees/director of the settler company. These future persons are not known, and hence tax is to be charged on income of the assessee at maximum marginal rate. But no decision was given by the Ld. CIT(A) with regard to availability of benefit of second proviso of section 112, which was denied by the AO in the assessment order.
Held by ITAT
The analysis of the trust deed reveals that the trust has been created in such a manner so as to act as extended arm of the assessee company. Various clause of the trust deed reveals that real control for operating the scheme was retained by the settler company, inter alia, through Compensation Committee. There are various other clauses also which indicate that de facto control of operation and implementation of employees‟ stock options scheme, in real terms, is held by the Board of Directors of the settler company. The objects and purposes of the trust as defined in clause 5 of the trust deed are, to invest the general corpus in, and hold the equity shares of the company to administer the Plans as instructed by the Compensation Committee for the benefit of the eligible employees. As per the trust deed, the trust funds are to be applied for the purpose of the employees‟ stock option scheme and for administration of the trust. Further, it is worth noting that the scheme formulated by the company shows that equity shares of the company have been given to the trust, to be held by the trust for the benefit of eligible employees‟ scheme, called as Employees Stock Option Scheme (ESOS).
Thus, perusal of all the factual material placed before us, reveals that the assessee trust has been holding the shares in the fiduciary capacity. It could also be said, in other words, that the assessee trust is like a Special Purpose Vehicle (SPV) of the settler company, which has been formed for the special purpose of holding the shares of the settler company and issuing the same to the eligible employees, inter-alia, for the benefit of settler and its employees.
Under these circumstances, it will be very difficult to categorise these shares as business assets, meant for trading by the assessee trust. In the case of a trader, the motive is to maximize the profits, as the main object of the proper is mechanized the profits by doing the business of trading. The attributes available in the transaction of the assesee trust are unlike that of a trader and are more like that of an investor. The assessee trust is not free or authorized to sell the shares, held by it on behalf of the settler company, to any person in the free market at fair market price. Under such circumstances, the assessee trust is not in a position to earn maximum profits. Thus, it could be safely said that certainly assessee trust is not in the business of trading of shares. The shares held by the assessee trust cannot be categorised as „stock- in-trade‟ of the assessee trust.
Also, If the settler company would have issued these shares directly in the name of the employees at a value higher than their face value, then the difference amount would have been share premium in the hands of settler company, and undisputedly, the same would be treated as capital receipt in its hands. In that case, the difference amount would certainly be not treated as profit earned from business activities of the settler company. The shares of settler company, cannot certainly be stock-in-trade of the settler company. The assessee trust is like an extended arm or special purpose vehicle of the settler company, created for the purpose of carrying out certain transactions on behalf of the settler company, as discussed in detail in the above paras, and therefore, under these facts & circumstances, the nature and character of shares held by the assessee trust, on behalf of the assessee trust, and resultant gain or loss arising from the transfer of these shares, should also be same, as it would have been in the hands of settler company. Thus, viewed from this angle also the shares held by the assessee trust are capital assets in its hands and gain arising on the transfer of these shares by the assessee trust, shall be taxable under the head income from the capital gains in the hands of assessee trust.
On the matter of capital assests, it is noted by us that when the issues arose with regard taxability of sale of shares by the employees who had received these shares by exercising their options under the ESOS schemes, various contentious issues were raised by the Revenue in the assessment of such employees. Some of these issues reached before the Tribunal and were dealt by various benches of the Tribunal. In the case of Tata Services Ltd. 122 ITR 594, Hon‟ble Bombay High Court got occasion to explain the meaning and scope of the word „property‟ in context of section 2(14). It was observed by the Hon‟ble High Court that the word “property”, used in section 2(14), is an expression of widest amplitude as the definition clause has re-emphasised this, by user of the words “..of any kind”. Thus, any right which can be called as a “property”, will be included in the definition of “capital asset”. Further in the case of Dhurjati Gupta 127 TTJ 356 (Hyd), Hon‟ble Bench while dealing with the issues of taxability of capital gain in the hands of employees, arising on sale of ESOS shares by the employees, it was held that once option is granted, it becomes a right in the nature of property, and such stock option, given by the employer company to its employees, represents a property which is valuable and inheritable, and hence becomes capital asset.
We further find that the most important aspect is with regard to own history of the assessee trust. It is noted by us that since inception, the assessee trust has been filing its return of income, wherein these shares were shown as capital assets in the balance sheet. Resultant gain has been shown by the assessee its return of income under the head income from capital gains and has been accepted as such by the Revenue in all the earlier years. It was mentioned by Ld DR that, the assessments in earlier years have been framed u/s 143(1), and therefore no benefit should be given to the assessee. In our opinion, if a particular stand has been taken by the assessee, explicitly, in the return of income, consistently in many years, and the same has not been disturbed by the Revenue, in that situation, in our considered view, the Revenue does not have unfettered powers under the law to disturb such a consistent stand, and that too without there being any change in facts or law. If this kind of approach of the department is allowed, in unregulated manner, it may lead to chaos in compliance of fiscal constitute and there will be uncertainties, all around. The finality of litigation would become extinct. Our view is supported by the judgment of Hon‟ble Supreme Court in the case of Excel Industries Ltd. 358 ITR 295.
In any case, shares sold in the secondary market were also sold by the assessee as an investor and not as a trader. This feature is very significant here that assessee is not free to sell shares to any person at its own will. The assessee trust is bound by the trust deed and also with the terms of the ESOS scheme, which are in turn controlled by the settler company. The assessee is not permitted to take advantage of fluctuations of stock market. There are no attributes like that of a trader.
Thus, keeping in view the aforesaid discussion and totality of facts and circumstances of the case, it is held that the shares held by the assessee trust and transferred to the employees were in the nature of capital asset and not stock-in-trade of the assessee. Consequently, the resultant gain is to be taxed, under the head income from capital gains.
Taxabiility of trust income at maximum margin rate
The issue involved before us is that even if income is assessed as per section 164, whether the entire amount will be subjected to maximum marginal rate of tax on the entire income, or the assessee shall be given the benefit of specific concessions provided by the specific section i.e. section 112 dealing with the taxability of long term capital gains. It is noted by us that this issue is squarely covered by the judgment of Hon‟ble Bombay ITAT in the case of Jamsetji Tata Trust 148 ITD 388. It was held that the long term capital gain on shares is chargeable to tax at maximum marginal rate which cannot exceed the rate provide u/s 112.
Therefore, we hold that the action of AO in not providing the benefit of section 112 to the assessee with regard to the income assessable under the head income from capital gains is contrary to law and facts and the same is reversed. The AO is directed to charge tax on capital gains as per section 112 . With regard to other issue raised by the assessee i.e. availability of benefit of second proviso to section 112, it is seen by us that same has not been examined properly on facts. For this limited purpose, we send this issue back to the file of the AO. The assessee shall place requisite details and evidences before the AO to establish that the impugned shares were listed with stock exchange and assessee was eligible for the benefit of second proviso of section 112, as per facts. The AO shall give full opportunity to the assessee and shall confine his examination limited to this factual requirement only. In the result, ground no.4 is allowed for statistical purposes.
Accordingly appeal of the assessee partly allowed.