ITAT, Mumbai

Kanu Kumar Mukerji vs ACIT

IT Appeal No. 2246 (Mum.) of 2004, Assessment Year 2001-02

Asha Vijayaraghavan, Judicial Member and R.S. Syal, Accountant Member

28 May 2008

P.J. Pardiwala for the Appellant
R. Ravichandran for the Respondent

ORDER

R.S. Syal, Accountant Member - This appeal by the assessee arises out of the order passed by the Commissioner of Income-tax (Appeals) on 5-1-2004 in relation to the assessment year 2001-02.

2. The only grievance raised through different grounds is against the direction of the learned CIT(A) of bringing to tax a sum of Rs. 32,75,716 under the head 'Salaries' in respect of stock option exercised by the assessee.

3. Briefly stated the facts of the case are that the assessee is employed at the Indian Branch Headquarters of American Express Bank Limited (hereinafter referred to as "AEBL") in the position of Senior Director. AEBL is a wholly owned subsidiary of the American Express International Banking Corporation, New York, which in turn is a wholly owned subsidiary of American Express Company, New York (hereinafter called 'Amexco'). The assessee showed total income in the revised return at Rs. 66,65,177. The reason for revising the return was that he had not shown the capital gain of Rs. 2,35,310 in the original return, which resulted from sale of 385 shares of Amexco. The Assessing Officer observed that the assessee had not offered Rs. 32,75,716 for taxation, which represented sale of stock option received from Amexco. On being show caused, the assessee stated that Amexco was the parent company of his employer. He further contended that the stock option was given by Amexco and not his employer AEBL. It was therefore, contended that the employer-employee relationship was missing insofar as the acquisition of shares is concerned. The Assessing Officer did not agree with the submission advanced on behalf of the assessee on the ground that he was in the employment of the AEBL, which was wholly owned subsidiary of Amexco which had granted the stock option in recognition of assessee's continuing contribution to long-term success and development of Amexco. He further held that though the assessee was not directly in employment of Amexco but AEBL did not have any employee stock option plan of its own and as such a common plan was formulated and implemented by Amexco and was allowed to the employees of AEBL also. He further noted that all the employees were not entitled to this plan but it was in the discretion of the management of AEBL that the employees were selected for giving benefits under the scheme. Since the assessee was holding a very high position in the AEBL, stock option was granted to him also. It was further held that the employer-employee relationship, in fact, existed. Accordingly, the amount received by the assessee from sale of stock option amounting to Rs. 32,75,716 was taxed under the head "Salaries". The first appeal did not change the fortune of the assessee.

4. Before us, the learned Counsel for the assessee contended that section 15 puts to tax the amounts under the head "Salaries" received from employer or a former employer. The first submission was that the stock option was provided by Amexco, which was grandparent of the AEBL, being the assessee's employer and hence the employer-employee relationship was lacking insofar as the stock option to the assessee was concerned. He further relied on the Circular No. 710, dated 24-7-1995 to contend that where such employer-employee relationship was missing, perquisite of shares to the employees could not be taxed. Then he referred to the judgment of the Hon'ble Supreme Court in the case of CIT v. Infosys Technologies Ltd. [2008] 297 ITR 167 for the proposition that even if the employer-employee relationship remains, the stock, option could not be treated as perquisite. He referred to the language of section 17(2)(iii) to contend that only the value of any benefit or amenity granted or provided free of cost or at the concessional rate in the specified cases allotted or transferred to the assessee by the employer could be put to tax. He further submitted that since clause (iiia) was omitted by the Finance Act, 2000 with effect from 1-4-2001, the same could not be applied to the assessment year under consideration, i.e., 2001-02. He further invited our attention to section 17(2)(iii) and submitted that the proviso inserted to this clause was added as a matter of abundant caution and hence could not be considered for imposing additional liability of tax in this regard. The sum and substance of his submissions was that primarily the assessee is not employee of Amexco, which had allotted shares to him and secondly, the amount received on sale of such shares could not be put to tax under any section of the Act.

5. Per contra, the learned D.R. strenuously argued that the case of the assessee was covered within the ambit of the proviso to section 17(2)(iii). He further contended that the assessee was entitled to receive stock option of Amexco only due to his employment with AEBL and hence the employer-employee relationship cannot be lost sight of. He, therefore, relied on the impugned order.

6. We have heard the rival submissions and perused the relevant material on record. The primary question to be decided is as to whether or not the employer-employee relationship is existing in the present case. The assessee is employee of AEBL, USA, branch in India, which is wholly owned subsidiary of American Express International Banking Company. Such holding company is wholly owned subsidiary company of Amexco, which had allotted shares under the employees option scheme to the assessee. On 24-2-1997, the assessee was granted Non-qualified Stock Option by Amexco to purchase 1000 shares at an exercise price of $ 66.43 per share. One-third of the stock option was exercisable on or after each of the exercise date, viz., 24-2-1998, 24-2-1999 and 24-2-2000. Similarly on 23-2-1998, the assessee was granted stock option by Amexco for purchasing its 1650 shares at an exercise price of $ 87.96 per share. One-third of stock option was exercisable on or after each of the exercise date, viz., 23-2-1999, 23-2-2000 and 23-2-2001. Such stock options could be exercised after the said dates within a period of 10 years from the respective dates of grant. On 11-7-2000, the assessee exercised stock option in respect of 333 shares granted on 24-2-1997 and 550 shares out of option granted on 23-2-1998. Such shares allotted to him were sold on 14-7-2000. The learned AR has relied on Circular No. 710, dated 24-3-1995 in which the Board had clarified that where shares held by the Government in a company have been transferred to an employee, there will be no perquisite because an employer-employee relation does not exist between the Government and the employee. From this Circular, we are unable to appreciate the view canvassed by the learned A.R. for the obvious reason that it extends only to transfer of shares by Government to the other employees for the purposes of disinvestment of shares, held by it in the Government companies or PSU's. In such circumstances, the Government is also a shareholder, who off-loads its shares to the others including inter alia, the existing shareholders. On the other hand, in our case the shares have been allotted by the wholly owned holding company of the assessee's employer. Here the relation between Amexco and AEBL, of whom the assessee is employee, cannot be lost sight of. It is further noted that this stock option was given to the assessee only by virtue of the employment with AEBL and due to the good services rendered by him. The scheme was floated by holding and subsidiary company under which only the better serving employees of the subsidiary companies were given option to purchase shares at the subsidized price of the holding company. It is further noted that this scheme only empowered the selected employees, who had given greater contribution in their job in AEBL. Further, all the employees were not entitled to this plan and it was purely the sole discretion of the management of the assessee-company that the employees were selected for giving benefit under this scheme. These facts recorded by the Assessing Officer have remained uncontroverted on behalf of the assessee. Under these circumstances, we find that the allotment of shares to the assessee by Amexco is only directly due to and by virtue of his employment with AEBL. It is an indirect allotment by AEBL through Amexco, and thus by allotting the shares the holding company has stepped into shoes of its sub-sidiary company. It would be noted infra that proviso to section 17(2)(iii) applies to the facts of the case and it covers not only direct but "indirect" allotment of shares, debentures or warrants under any Employees' Stock Option Plan. Under these circumstances, we cannot hold that the employer-employee relationship is missing insofar as stock option by Amexco to the assessee is concerned as it is an indirect allotment by AEBL.

7. Turning to the taxability of the perquisite value, we find that the assessee was given option for purchasing shares in earlier years and the event of exercising the option and selling such shares occurred in the previous year relevant to the assessment year under consideration. This entire exercise may be viewed in three stages. First, when the employee is given stock option exercisable after certain period. Second is the stage when such option is exercised and the securities are allotted to the employees. Third is the stage when such allotted shares are, in fact transferred by the employee and profit is earned. It is true that at the time when assessee is given option for purchasing the shares after certain period, there may not arise any perquisite because the allotment is generally subject to some conditions, which may or may not be fulfilled in the due course of time. Further the value of benefit cannot be conceived at that point of time, which would eventually accrue to the employee. It is further quite possible that the employee may not reach up to the stage of exercise of option or may be disqualified due to one reason or the other. Hence, any benefit of taxable nature cannot be said to have accrued or arose to employee when stock option is made available. Further stages come when such option is exercised and the shares are allotted. It is here that the question of taxability arises.

8. Now, we would proceed to determine the taxability or otherwise of the amount in the context of section 17(2). At this stage, it would be relevant to note down the provisions of sections 17(2)(iii) and (iiia), and their legislative history, which is as under :-

Section 17(2) - 'perquisite' includes -

"(iii) the value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases -

(a) by a company to an employee who is a director thereof;

(b) by a company to an employee being a person who has a substantial interest in the company;

(c) by any employer (including a company) to an employee to whom the provisions of paragraphs (a) and (b) of this sub- clause do not apply and whose income [under the head "Salaries" (whether due from, or paid or allowed by, one or more employers), exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds [fifty] thousand rupees.]

Provided that nothing contained in this sub-clause shall apply to the value of any benefit provided by a company free of cost or at a concessional rate to its employees by way of allotment of shares, debentures or warrants directly or indirectly under [any Employees' Stock Option Plan or Scheme of the company offered to such . employees in accordance with the guidelines issued in this behalf by the Central Government.]

[Explanation. - For the removal of doubts, it is hereby declared that the use of any vehicle provided by a company or an employer for journey by the assessee from his residence to his office or other place of work, or from such office or place to his residence, shall not be regarded as a benefit or amenity granted or provided to him free of cost or at concessional rate for the purposes of this sub-clause;]

(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......."

Section 17(2)(iiia) was inserted by the Finance Act, 1999 with effect from 1-4-2000 and omitted by the Finance Act, 2000 with effect from 1-4-2001. By the same Finance Act, simultaneously, a proviso was inserted to section 17(2)(iii).

9. Adverting to the facts of the case we find that insofar as clause (iiia) is concerned, that cannot be applied to the facts of the instant case for the obvious reason that it was omitted with effect from 1-4-2001, i.e., assessment year commencing from 2001-02 and thereafter. Since we are dealing with assessment year 2001-02, naturally, clause (iiia) would not govern the scene.

10. At this juncture, we would like to deal with contention raised on behalf of the assessee whereby reliance has been placed on the judgment of the Hon'ble Supreme Court in the case Infosys Technologies Ltd. (supra). In our considered opinion this judgment would not assist the assessee's case any further for the reason that the assessment years involved in that case were 1997-98 to 1999-2000 and it has been specifically mentioned in one of the last paras of the judgment that this decision would be applicable only in relation to the law prevailing before 1-4-2000 and hence would not apply to the law after 1-4-2000. Hence, the reliance of the learned A.R. on this judgment is of no consequence as it dealt with the law prevailing prior to the year in question.

11. Now, we have to examine as to whether clause (iii) to section 17(2) can be applied to the facts of the case. As noted above that simultaneous with the omission of clause (iiia), proviso to clause (iii) was added, which is therefore, applicable to the year in question. The learned A.R. has argued that the proviso inserted by the Finance Act, 2000 should be considered as inserted by way of abundant caution. He further contended that the omission of clause (iiia), which contained a specific provision for treating the employees' stock option as perquisite under section 17(2) should be considered as the omission of a specific provision and hence this benefit could not be considered to be falling under section 17(2)(iii) of the Act. He relied on the judgment of the Hon'ble Supreme Court in the case of V.M. Salgaocar and Bros. (P.) Ltd. v. CIT [2000] 243 ITR 383. We are fully in agreement with the learned AR insofar as the ratio of this judgment is concerned, which lays down that that the insertion of clause (vi) in section 17(2) and section 40A(5) by Taxation Laws (Amendment) Act, 1984 and its subsequent repeal by the Finance Act, 1985, provided clear distinction to interpret the provisions of sections 17(2) and 40A(5) before insertion of clause (vi). The effect of this judgment is that where a specific provision has been enacted, the general provision would exclude the subject-matter of this specific provision and if at a later stage such specific provision is omitted, that by necessary implication, should not be construed as having been included in the general provision. Coming back to the point, we note that clause (iiia) contained a specific provision for treating the value of any security allotted or transferred to employees free of cost or at a concessional rate as perquisite. It impliedly meant that such benefit was the subject-matter of coverage under this clause only and should be deemed to be not part of any other clause of section 17(2). When this clause was removed from the statute, ordinarily, it should have been presumed that the Legislature has intended not to tax this benefit under any other provisions of section 17(2). However, we find that this general rule of interpretation is exceptionable in the present case. Whereas clause (iii), a general provision for treating the value of any benefit or amenity granted or provided free of cost or at concessional rate by the employer to the employees ought to have excluded the perquisite value in respect of shares allotted free of cost or at a concessional rate, which was hitherto subject-matter of clause (iiia), but by the insertion of the 'proviso to clause (iii) the Legislature made its intention loud and clear that the scope of the general provision has been simultaneously extended to cover the perquisite earlier covered in clause (iiia). No authority is required to be cited for the rule of interpretation that a proviso generally carves out an exception to the main section. The inclusion of an item in the scope of section is sine qua non, which is sought to be taken away by the proviso. The contention of the learned A.R. in this regard would have merited acceptance, if there had been only the omission of clause (iiia) without the simultaneous insertion of the proviso to clause (iii) taking within its sweep the free or concessional allotment of shares, debentures or warrants directly or indirectly under the stock option schemes to its employees. If the contention of the ld. AR is accepted and brought to a logical conclusion, that would make the provision redundant. It, therefore, clearly reveals that the perquisite which was hitherto subject-matter of clause (iiia) would henceforth be considered as subject-matter of clause (iii). Now, when clause (iii) is read in entirety, it brings out that the value of benefit or amenity granted or provided free of cost or at concessional rate by the employer to the employees, etc., including concession in respect of allotment of shares and securities, etc., free of cost or at concessional price would be covered under section 17(2)(iii). The effect of proviso to this clause is that where shares, debentures, warrants, etc., are provided by the company free of cost or at concessional rate to its employee by way of allotment, directly or indirectly, under any employees' stock option plan, that would not be considered within the ambit of this clause provided such plan or scheme is in accordance with the guidelines issued in this behalf by the Central Government. It therefore, boils down that if the scheme is in accordance with the guidelines issued by the Central Government, no perquisite value on account of stock option would be considered for taxation as perquisite under section 17(2) and vice versa. It is further noted that the guidelines regarding employees' stock option plan or scheme have been notified under Notification No. SO 1021(E), dated 11-10-2001. From the orders of the authorities below, we find that no exercise has been done by the authorities below for determining that whether the employees' stock option scheme is in accordance with the guidelines issued in this behalf by the Central Government or not. Further there is no material on record for verifying this fact. In these circumstances, we are of the considered opinion that it would be just and fair if the impugned order on this score is set aside and the matter is restored to the file of the Assessing Officer. We order accordingly and direct him to decide this case afresh in accordance with our observations contained hereinabove.

12. In result, the appeal is allowed for statistical purposes.