SUMMARY OF CASE LAW
In respect of shares acquired under stock option scheme, the difference between the price of shares at the time of exercise of option and the predetermined price is liable to tax as perquisite under s. 17(2)(iii) up to 31st March, 2000.
13.1 The undisputed facts in this case are that the assessee was granted a right by way of a warrant to acquire shares of Zee Telefilms Ltd. on 01-02-1999 on the payment of Rs. 212 per shares, which is admittedly much below the prevailing market rate. The terms and conditions of such allotment of the right is given in the letter dated 01-02-1999. The relevant portions are extracted below:
“1. Each warrant will be converted into one equity share at a conversion price of Rs.212/- per share.
2. As per the shareholders resolution, you shall be liable to convert eh warrants into shares within 3 months from the announcement of financial results of the company for the year ending 31st March: 1999. You shall exercise option of conversion of warrants into shares upon full payment of conversion price to ZEWT.
3. The income tax liability as may arise on the conversion of warrant into equity shares and capital gains tax liability as would arise on sale of shares, shall be borne by you.”
13.2 Section 17(2)(iiia) reads as follows:
“(iiia) the value of any specified security allotted or transferred directly or indirectly, by any person free of cost or at concessional rate, to an individual who is or has been in employment of that person
Provided that in a case where allotment of transfer of specified securities is made in pursuance of an option exercised by an individual, the value of the specified securities shall be taxable in the previous year in which such option is exercised by such individual.
Explanation- For the purposes of this clause.-
(a) cost’ means the amount actually paid for acquiring specified securities and where no money has been paid the cost shall be taken as nil;
(b) specified security means the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act. 1956 (42 of 1956), and includes employees’ stock option and sweat equity shares
(c)’sweat equity shares’ means equity shares issued by a
company to its employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions by whatever name called: and
(d) value’ means the difference between the fair market value and the cost for acquiring specified securities
13.3 Now the issues to be decided are – (a) whether the amount in question is liable to be taxed u/s 17(2)(iiia) of the Act; and (b) whether this benefit can be brought to tax in the impugned assessment year.
13.4 We find that the issue, though in the context of “stock appreciation rights” was considered by the Third Member decision of the Delhi Tribunal in the case of Garrick D’Silva vs JCIT (supra). In this decision at page 449 paragraphs 20 to 23 it is held as under:
The Finance Act. 1999 had inserted s. 17(2)(iii) to bring clarity about the taxability of the benefits arising to an employee as a result of allotment of shares under the Employee’s Stock Option Plan. The said s. 17(2)(iiia) and Explanation below s. 17(2)(iiia) was deleted by the finance Act, 2000 w.e.f. 1st April, 2001. There is an Explanatory Note by the CBDT vide circular No.794, dt. 9th Aug., 2000 in regard to the omission of s. 17(2)(iiia) and insertion of proviso to s. 17(2)(iii). The above circular makes it abundantly clear that the insertion of s. 17(2)(iiia) by the Finance Act. 1999 was to bring clarity about the taxability of the benefits arising to an employee as a result of allotment of shares and therefore, the insertion was clarificatory in nature. It has also been made abundantly clear that the omission of s. 17(2)(iiia) will be applicable only in respect of options exercise or allotments made after 31st March, 2000. In other words, the amendment made in s. 17 does not go in favour of the assessee but the intention of the legislature as explained by the CBDT is to the contrary. The intention of the legislature not to tax the benefit w.e.f. 1st April, 2000 being clear, such benefits are taxable as having accrued to any salaried employee before 1st April. 2000 The very fact that s 17(2)(iiia) was inserted to bring clarity regarding the taxation of stock options also supports the view expressed by the AAR that the benefit accruing to the salaried employee on the date of exercise of the stock option was assessable to tax as a perquisite under s. 17(2)(iii). As per the scheme of stock options, the assessee is given the right to purchase stocks at predetermined price. At the time of grant of the option, there is no benefit derived by the assessee insofar as the price fixed for the grant of shares is the average of the market price (high and low) for the day on the date of grant of the option. Therefore no benefit in monetary terms is derived by the assessee on the date of grant of option. The employee has been given the right to exercise the option after one year and two years period but not exceeding ten years When the assessee exercises the option he pays the consideration for the acquisition of shares to the company at the price fixed at the time of the grant. This is the stage at which the benefit is derived by the assessee by way of difference in the predetermined price and the market price. When the market price is higher and the assessee acquires the shares from the employer by reason of the terms of employment at a lesser value, the benefit given to the employee is by reason of his employment and such benefit is liable to tax under s. 17(2)(iii) upto 31st March, 2000. If the employee after exercising the option of purchasing the shares holds the same for a particular period, the gain on the sale of shares on subsequent dates will result in capital gain (difference between the sale price and price on the date of exercise of the option). The benefit accruing to the assessee on the date of exercise of the option would be taxed under s. 17(2)(iii). (The difference between the price on the date of excise of the option and the predetermined price). The confusion that appears to be created in this case is that he date of exercise of the option and the date of sale is same and there is no difference between the price prevalent at the time of exercise of the option and the sale of shares. Therefore, there is no capital gain that accrues to the assessee on the sale of shares allotted to the assessee. The gain derived by the assessee by exercise of option and not by the sale of shares is assessable as perquisite within the meaning of s. 17(2)(iii). (emphasis ours)
Sec. 17(2)(iii) was incorporated to bring clarity in the provisions relating to the taxability of stock option benefits. Moreover, a proviso has been added to s. 17(2)(iii) with the omission of s. 17(2)(iiia). If stock options were not taxable under s. 17(2)(iii), there would have been no necessity of inserting a proviso to s. 17(2)(iii) when the legislature intended to exclude the same from the purview of taxation. Thus, the intention of the legislature to grant exemption in respect of the benefit derived as a result of stock options provided by the company to its employees is manifestly clear to be applicable from 1st April, 2001, i.e. the date from which the proviso to s. 17(2)(iii) has been inserted. As pointed out earlier, s. 17(2)(iiia) was inserted for the sake of clarity and therefore, with its omission, the taxability of stock option benefit did come out of the taxable net. That is why there was necessity of incorporating a proviso to s. 17(2)(iii) to give effect to the legislative intent of granting exemption in respect of such benefits. For the above stated reasons, therefore, the Revenue was justified in assessing the difference between the market price on the date of exercise of option and the price paid by the assessee for the acquisition of shares as a benefit asses sable under the provisions ofs. 17(2)(iii).
Conclusion : In respect of shares acquired under stock option scheme, the difference between the price of shares at the time of exercise of option and the predetermined price is liable to tax as perquisite under s. 17(2)(iii) upto 31st March, 2000.”
13.5 Thus we respectfully follow the proposition laid down by the Third Member decision and reject the arguments of the learned counsel for the assessee raised by way of cross objection that section 17(2)(iiia) is not applicable to this case. What are granted are securities and they have been granted at a concessional rate, as they were granted at a price which is admittedly below the market price and these rights crystallize on exercising the option, within the period specified and on payment of a pre-determined amount. The undisputed fact is that there is a difference between the market price and the rate at which the assessee was entitled to acquire these shares, and this benefit is a result of employment. Thus there is a transfer of a security at a concessional rate and it has taken place in the impugned assessment year. The principles laid down in the case of Garrick D’Silva (supra) are applicable to this case also. We follow the same and reject the argument of the assessee that the benefit is not taxable u/s 17(2) of the Act.