Shares held by trust for issuance to employees as ESOPs is not in nature of stock in trade, any resultant gain will be taxed as capital gains

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.

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