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Income Tax Appellate Tribunal, ‘C’ BENCH : BANGALORE
Before: SMT. BEENA PILLAI & SHRI LAXMI PRASAD SAHU
BEFORE SMT. BEENA PILLAI, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER Assessment Year : 2015-16 Shri Sriram Rupanagunta, The Assistant 34 purva park ridge, Commissioner of Goshala Road, Income Tax, Garudachar palya, Circle – 5(3)(2), Bangalore – 560 048. Vs. Banglore. PAN: AHLPR7578N APPELLANT RESPONDENT Assessee by : Shri Kodhanda Pani, CA : Shri Kiran .D, Addl. CIT Revenue by (DR) Date of Hearing : 13-04-2023 Date of Pronouncement : 18-05-2023 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against order dated 24.11.2022 passed by NFAC for Assessment Year 2015-16 on following grounds of appeal:
1. The ld.Assessing officer erred in passing the assessment order in the manner in which it is done on the basis of presumptions, assumptions and surmises and inferences, conjecture and hypothetical, than on the basis of the facts.
The Ld. Assessing officer erred in not appreciating that the capital asset held is a long term capital asset ignoring the provisions of section 2(42A). (a) The Ld Assessing Officer did not consider that the definition of capital asset u/s 2(14) includes interest in property vide Sec 2(14) r.w Explanation 2 to Section 2(47) of the Act namely the term "transfer" includes and shall be deemed to include the asset and the right or interest in the asset in any manner whatsoever, which matter has not been considered by the Lower Authorities.
3. The Ld AO erred in not considering that the right to acquire an ESOP originates from the time ESOP is granted and vested, not from the date of exercising, and it is not necessary that the any amount should have been paid to acquire such asset and the date of right so vested must be considered for the purpose of computing the period of holding and such period of holding shall include the period of holding in the earlier company before merger as well u/s 2(42A) read with section 47(vii). 4. The Id. Assessing officer factually ignored the Virident common stock statement, Virident corporate announcement of acquisitions, WDC terms and conditions on which the shares were issued. 5. The Id. Assessing officer erred in computing the period of holding at less than 12 months instead of more than 12 months on the facts of the case. 6. The Id. Assessing officer erred in not giving the benefit of deduction u/s 54EC despite of the fact that the appellant being eligible and having furnished relevant documents and made the claim in the return of income. 7. The Ld Lower authorities erred in considering all the decisions similar in nature and are applicable in the Appellant's case also including that of the Jurisdictional Bench as prayed and placed before the Authority. 8. The Id. Assessing officer erred in traversing beyond the scope of powers of limited scrutiny and board instructions and directions vide LETTER [F,NO.DGIT(VIG.)/HQ/SI/2017-18], DATED 30-11-2017 under section 143 of the Income tax Act, 1961. The Ld AO exceeded the scope of limited scrutiny and made complete scrutiny ignoring the instructions given.
The Ld. Assessing officer erred in charging tax on STCG arising on sale of equity oriented mutual funds at regular rates than at concessional specified rates u/s 111A of IT Act.
The Ld Assessing Officer erred in relying on the case law Shri Muthuswamy Ravikumar Vs The Asst. Commissioner of Income-tax. ITAT (Income Tax Appellate Tribunal), the facts of which are nor relevant in the said case for the said AY 2015-16 and hence misplaced. The facts in the said case related to beneficial ownership vested with the Employees Trust and the legal ownership vested with the employee in a graded manner, which is not the case in appeal. 11. The Lower Authorities erred in not considering the ratio of decisions taken and the ignoring the jurisdictional Tribunal Decision replied upon. 12. The appellant denies himself liable to interest under section 234 B & 234 C of the Act. Further the appellant contends that the rate, period and quantum on which interest has been levied is not discernible. The levy is not in accordance with law and further the appellant was not given the basis and method of calculation of interest under section 234 B 234 C of the Act for verification of the correctness of the charge of interest. 13. The Appellant hereby denies every contention taken by the Ld Assessing Officer against him in the impugned order of assessment, which has not been specifically addressed. The contentions taken by the Ld Assessing Officer are not factually correct and require to be rejected for the advancement of substantial cause of justice. 14. The Hon CIT (A) NFAC, ignored the settled law that relief not found on pleadings should not be granted. If a Court considers or grants a relief for which no prayer or pleading was made depriving the respondent of an opportunity to oppose or resist such relief, it would lead to miscarriage of justice. The Ld CIT(A), NFAC remanded the matter in a casual and inappropriate manner and for the sake of remand only or as a short cut without adjudicating the grounds and legal issues, which is not in the interest of justice. 15. The appellant craves leave to add, alter, amend, substitute or delete any of the grounds at the time of hearing of the appeal.
The appellant humbly prays that the appeal of the appellant be allowed or pass any such further orders for the advancement of substantial cause of justice. I, Sriram Rupanagunta the appellant, do hereby declare that what is stated above are true to the best of my information and belief. Prayer In view of the above and other grounds to be adduced at the time of hearing, it is prayed before the Hon'ble Tribunal to: a. The addition made in the Assessment Order passed by the ACIT, Circle 5(3)(2) be deleted, exemption claimed under sec 54EC be granted and the foreign tax paid be allowed. b. Annual the order passed by the Hon CIT (Appeals) c. Interest u/s 234 B & C amounting to Rs 9,88,891 and Rs 1,77,631 respectively be deleted. d. Grant an opportunity to furnish and submit any other evidence or document that may be required to justify the stand taken by the Appellant pursuant to the Rule 29 of the Income tax Appellate Tribunal Rules. I, Sriram Rupanagunta the appellant, do hereby declare that what is stated above are true to the best of my information and belief.” 2. Brief facts of the case are as under: 2.1 The assessee is an Individual and was an employee of Virident Systems Pvt. Ltd. a subsidiary of Virident Systems Inc US. The company was engaged in the business of data storage software development. The assessee derived income from salaries, income from house property, income from capital gains and income from other sources, claimed exemption u/s 54EC, deductions under chapter VIA, filed the return of income for year under consideration declaring total income of Rs.1,24,27,840/-. 2.2 The assessee being an employee of MNC, was granted 1,00,000 stock options by its US parent company by name Virident Systems Inc, vide Stock Option Agreement dated letter of grant dated 29.06.2011. Subsequently the assessee was granted additional 75,000 stock options in Virident Systems Inc. vide Page 5 of Stock Option on 30.05.2013. It was submitted that the assessee held the above stock options grant as capital asset since 29.06.2011 and 30.05.2013 respectively. 2.3 Subsequently assessee’s company being Virident Systems Pvt. Ltd. along with its subsidiaries were acquired by HGST Inc. and the employees of Virident Systems Pvt. Ltd. became the employees of HGST Inc. Group. It is submitted that HGST Inc. was part of Western Digital Corporation and thus the employees of Virident Systems was ultimately acquired by the Western Digital Corporation. It is submitted that as a consequent the share holder of Virident Systems became the share holders of Western Digital Corporation. 2.4 The assessee submitted before the Ld.AO that, Western Digital Corporation being a listed company ported all its share holding including Virident Systems share holders past the acquisition on e-trade platform. It was submitted by the assessee that assessee was thus vested with a total of 1755 stock options that were sold by the assessee in two lots during Assessment Year 2015-16: 1) The first lot of 961 options were sold on 02.07.2014 for an amount of Rs.53,24,188/- 2) The second lot of 794 stock options were sold on 27.02.2015 for an amount of Rs.54,78,397/- 2.5 The assessee declared capital gains in the return of income that was filed for A.Y. 2015-16, as long term based on the period of holding. It was submitted that the holding period of 794 shares sold on 27.02.2015 was 43 months 25 days, being more than 36 months as per the provisions of sec 2(42A). The Page 6 of Rs. 49 lakhs in the form of capital gain bonds and claimed the same as deduction u/s. 54EC of the act. 2.6 The Ld.AO while passing the assessment order treated the above gain as short term by considering the holding period from 17.10.2013 on the basis of e-trade statement of Western Digital Corporation. Aggrieved by the order of the Ld.AO, assessee preferred appeal before the Ld.CIT(A).
The Ld.CIT(A) after referring to various submissions and statement of facts by assessee decided the issue as under: “3. DECISION 3.1 The taxation of shares sold under ESOP is straight forward. This is explained as under; ESOPs are taxed twice - first as a perquisite when the options are exercised and as capital gains when the shares are sold. In the year of exercising, ESOPs are treated as perquisite and under "Income from Salaries", the difference between Acquisition cost and Fair Market Value (FMV) is the taxable amount. The FMV of listed companies will be the average of opening and closing prices on the day of exercise. In case of unlisted shares, the FMV will be decided by a merchant banker. Capital gains tax is levied when the shares are sold. Here the tax would be applied on the difference between the sale proceeds and the FMV at the time of exercising the ESOP. ; the period of holding will determine whether it is long term capital gain (LTCG) or short-term capital gain (STCG). Let us take an example : Employee X of ABC company which is listed, received ESOPs of 1000 shares at 11100 ; on the date of exercise the lowest price was 102 and highest was 112 so the FMV will be r 107 ;the taxable amount will be (107-100) X 1000 i.e., 7000, to be taxed under income from salaries. Now assuming the shares have been held for more than 12 months, it would be considered as long term capital gains and taxed at 10 percent (Short term capital gains Page 7 of 15 percent) on gains over ]1 lakh (shares acquired after February 1, 2018). Assuming Mr. X held the shares for more than 12 months and then sells at the price of 220. Then LTCG would arise and the gain here will be i 113000 (1000 *(220-107) therefore, the taxable amount will be 11 13,000 and tax payable will be L1300 (10 per cent of i13000). 3.2 The argument of assessee that right to receive property would be a capital asset would not be a good argument against a stated law as per which ESOP are 1st to be taxed as perquisite, and only later at the time of sale as capital gains. 3.3 Hence the appeal is Partly Allowed and the AO is directed to compute the income from perquisite at the time of exercise of option and later to tax the income from sale of shares as capital gains and allow assessee the benefit of investment made u/s 54EC of the Income Tax Act, 1961.” Aggrieved by the order of the Ld.CIT(A), assessee is in appeal before this Tribunal.
The only issue that is alleged by the assessee in various ground raised before this Tribunal are in respect of the treatment of ESOP sold by the assessee as short term capital gains by the revenue authorities. The Ld.AR submitted as under: 4.1 The Ld.AR submitted that the Ld.AO did not appreciate and consider that the holding period is from the day, the right to acquire shares came into existence in the previous company being the grant followed by vesting, and merely because of exchange of shares consequent to the amalgamation/merger under a statue is done at a later date, the benefit of holding in the hands of the previous company cannot be ignored. 4.2 He submitted that the assessee is put to hardship and the beneficial provisions of earlier holding period is taken away for no fault of the assessee. He submitted that the provisions of Section 2(42A) and section 47(vii) are clear that, in the scheme of Page 8 of amalgamation, the cost of the share in the previous company shall be deemed to be the cost of the owner, and thus for the period of holding, the date of original acquisition shall have to be reckoned for the purpose of reckoning the period of holding. 4.3 The Ld.AR further submitted that the right to acquire and subscribe and get the stock options vested, begins from the date of grant of the asset to the assessee and not from the date of vesting of the shares. It is submitted that, vesting of grant is a mode of procedural conversion of grant to vested shares or clear shares, which is an internal process in the hands of the company. He submitted that the said accrued right could not have been taken away and any benefit derived by the assessee cannot be denied. 4.4 He submitted that in the case of the assessee, the shares of the US Parent Company were granted to the assessee on 29.06.2011 and were held by the assessee till the date of sale or relinquishment. The Ld.AR submitted that the assessee had interest in grants ever since the date of grant, for good and sufficient reasons, and the beneficial interest in the capital asset could not be taken away merely because certain procedural formalities attached to it. He also submitted that subsequent satisfaction of the formalities pre-supposes that the asset came into existence on the date of the grant itself. 4.5 He submitted that as per the provisions of Section 2(14) of the Act, the meaning of the term “capital asset” includes not only property but also right and interest in the property. It is submitted that as per the Explanation 2 to Section 2(47) of the Act, the term “transfer” includes and shall be deemed to include Page 9 of the asset and the right or interest in the asset in any manner whatsoever. The Ld.AR relied on Explanation 2 to section 2(47) of the act in support of his contention. 4.6 The Ld.AR heavily relied on the decision of Hon’ble Supreme Court in case of Miss Dhun Dadabhoy Kapadia vs. CIT reported in (1967) 63 ITR 651 (SC) wherein the Hon’ble Court held that, in the case of acquiring a share, the date of acquisition is the day on which offer was made by the Company to subscribe to the shares in the case of rights issued but not the date of the allotment or the date of physical issue of shares or date on which the payment was made. 4.7 He thus submitted that, based on similar principles, in the present facts of the case, the assessee was offered options by the employer company, which was accepted by the assessee for acquiring certain specified shares in the company. It is submitted that the stock option being the right to purchase the shares underlying the options is a capital asset in the hands of the assessee u/s. 2(14) of the act. It was also submitted that, the assessee was granted the shares on 29.06.2011 and 30.05.2013 and the date of sale being 02.07.2014 and 27.02.2015 respectively, was to be considered as long term, and based on the period of holding was to be treated as long term capital asset. He relied on the following decisions in support of this contention, regarding the period of holding. ACIT vs. Dr. Dhurjati Gupta reported in 127 TTJ 356 (Hyd) ACIT vs. Ambarish Kumar Jhamb reported in 32 taxmann.com 210 (Delhi-Trib)
Page 10 of Gopi G Nambiar vs. JCIT in dated 26.07.2013 (Delhi-Trib.) ACIT vs. Shri Param Paul Uberoi in ITA No. 4477/Del/2011 dated 13.04.2012 (Delhi-Trib) Kamlesh Bahedia vs. ACIT reported in 50 taxmann.com 236 (Delhi-Trib) 4.8 He thus prayed for the claim made by assessee in respect of the gross capital gain to be treated as long term and to grant the exemption u/s. 54EC as computed by assessee. 4.9 On the contrary, the Ld.DR relied on the orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us.
It is noted that the assessee is an employee of MNC who received ESOP of the US parent company. Scanned and annexed herewith the stock statement issued by Virident Systems.
5.1 The stock option agreement statement between the assessee and Virident Systems is placed in the paper book at Page 12 of page...........wherein the date of grant is 29.06.2011 of 1,00,000 shares that was vested from 26.05.2011. The type of option as mentioned in the agreement is incentive stock option. It is also mentioned that the option shall be exercisable in whole or in part according to the vesting schedule which is as under: 1) 25% of shares subject to above shall vest on first anniversary of the service commencement date. 2) 1/48th of the shares subject to the above shall vest each month thereafter on the same day of the month as the service commencement date. Both the option conditions is subjected to the condition that the assessee continuing to be employee through each such date. 5.2 Subsequently, after the merger date, assessee became an employee of Western Digital Corporation and an additional stock of 75,000 was granted to assessee on 30.05.2015. Consequent to the merger, the assessee was thus holding a total of 1,75,000 options and also became a share holder of Western Digital Corporation, holding 3236 nos. of shares. 5.3 The Ld.AO noted that, Western Digital Corporation was a listed company and has ported all its share holders particularly including Virident share holders on e-trade platform. At this juncture, we once again refer to the stock statement issued by Virident Systems to assessee which is scanned and reproduced hereinabove. From the statement, it is very clear that as on 17.10.2013 (being the merger close date order, assessee was holding a total of vested and unvested Virident common option Page 13 of 1,75,000. Out of this, the vested Virident option shares amounted to 64,583. 5.4 It is the submission of the assessee that the options sold during the FY is out of these vested shares and therefore the period holding which was in excess of 12 months. The details of the sale of the options are as under: Period of Date of Date of No of Consideration holding acquisition sale Options (months)
29-6-2011 27-7-2014 961 @ $ 80,843.96 2Y OM 28D 17-10-2011 /12-10-2014 $91.78/share Rs 48,81,358 29-6-2011 24-2-2015/ 794 @ $ 87,794.83 3Y 7M- 25D 27-2-2015 $110.6 Rs 50,83,147 5.5 In our view, once the option is accepted and the shares are also vested with the assessee, the right to sale such options are conferred on assessee and such right is in the nature of a property and hence was a capital asset. In support of his view, we rely on the decision of Hon’ble Punjab and Haryana High Court in case of Hari Brothers Pvt. Ltd. vs. ITO reported in (1964) 54 ITR 399. In case of Infosys Technologies Ltd. reported in 86 ITD 342 Coordinate Bench of this Tribunal has observed that ESOP is subjected to various conditions and an employee would become eligible to exercise its right to purchase the shares only upon fulfilling the conditions and that to after the respective dates of maturity of the stipulated shares. 5.6 We also refer to the decision of Hon’ble Mumbai Tribunal in case of Sumit Bhattacharya vs. ACIT reported in 113 ITD 1 wherein the Hon’ble Special Bench was dealing with the nature of Page 14 of ESOPs are concerned, there is an outright purchase by the assessee and the benefit is not conferred on the assessee in the shape of money, but in the form of shares at the time of purchase by exercising options and thus it is a capital asset. 5.7 In the present facts also, as has been observed in the paragraphs hereinabove, it is clear that the option shall not be exercisable unless the first anniversary of service commencement date is not reached which means in the present facts of the case, 25% of the shares, assessee shall be vested with only after 26.05.2012 and thereafter the remaining options shall stand vested every month at 1/48th proportion. One more condition is necessary and mandatory that assessee shall remain an employee throughout such period until the options get vested in him. 5.8 Now the question that needs to be addressed is the period of holding disputed by the revenue authorities to be less than 12 months. The revenue authorities considered the date from the date of merger close date being 17.10.2013. It is the submission of the Ld.DR that the options that has been sold by assessee on 02.07.2014 does not fulfil the criteria to be categorised as a long term capital. Hon’ble Karnataka High Court in a similar case decided the issue in case of Chittharanjan A. Dasannacharya vs. CIT reported in (2020) 122 taxmann.com 162. Hon’ble High Court in this case was dealing with a similar situation wherein, the revenue authorities had held the income to be taxable under the heads income from salaries and short term capital gains as against income under the head long term capital gains that was Page 15 of claimed by the assessee therein. Hon’ble High Court has also dealt with the question as to whether holding of stock options were constituted a capital asset u/s. 2(14) of the act and exercise of stock option would constitute a transfer u/s. 2(47) as long term capital asset. Hon’ble Court rejected the contention of the revenue as well as the finding of the Tribunal that the consideration received on transfer by sale of such stock options would be in the nature of income for salaries and held that such argument cannot be sustained in the eyes of law. 5.9 Hon’ble Court further held that right to purchase of shares of companies is a capital asset u/s. 2(14) of the act. However it cannot be disputed that at the time of grant of option, in the year 2011 would be considered to perquisite in the hands of the assessee u/s. 17(2)(iiia). But on transfer or sale of such options, the consideration received by assessee is necessarily to be income under the head income from capital gains. In support of the above observations, we refer to and rely on the decision of Hon’ble Bombay High Court in case of Sumit Bhattacharya vs. ACIT reported in (2020) 118 taxmann.com 371 and the decision of Hon’ble Court relied on in case of CIT vs. Bharat V Patel reported in (2018) 92 taxmann.com 386. 5.10 We also refer to the decision of Coordinate Bench of this Tribunal in case of Girdhar Krishna M. vs. ACIT reported in (2008) 117 TTJ 965, wherein, this Tribunal expressed its view with regard to the capital gains that arose in the hands of the assessee has no relevance with the dates of grant and vesting because it does not result in any share acquisition. This Tribunal specifically observed as under in respect of this view.
Page 16 of Granting and resting period re merely indicators to the employer to honour the commitment in the employee exercising the option Start allotment of the shares is when the assessee intimates the exercise of his option along with payment for the specified number of shares. Therefore, the dates of grant and resting are irrelevant because they do not result in any shares ;acquisition. They have no value unlike the rights to subscribe for further shares under S.81 of the Companies Act, which is a transferable commodity. Requisition of shares under ESOP happens only when the assessee exercise has opinion and is allotted the specified number of shares.” 5.11 Undisputedly, assessee has acquired the right in the form of ESOP in the year 2011 from virident systems which is cashless. The assessee sold these rights and obtained certain amount in the year 2014. Relying on the decision of Coordinate Bench of this Tribunal in case of Giridhar (supra), the capital gain that arose from such sale has to be treated to be long term capital gains as the assessee has held the right in the options for more than 12 months. 5.12 At this juncture, we note a peculiar observation by the Ld.AO as well as the Ld.CIT(A), wherein they have treated the income from sale of such ESOPs to be perquisite/ short term capital gain. The revenue has treated the income earned by the assessee under various heads without verifying the relevant documents / evidences on record. It is strange to note that at the point of sale of such option, the authorities are not sure of the head under which the amount in question has to be taxed. We also note that the Ld.CIT(A) has decided the issue in a very cryptic manner. There is no dispute with the revenue authorities that the shares sold were out of ESOP offered by Virident Page 17 of Systems. The only contention of the revenue is that the date of vesting which was not verified by the revenue authorities. 5.13 At the cost of repetition we once again refer to the stock statement issued by the Virident Systems to assessee which is scanned and reproduced hereinabove that clearly indicates that assessee on the date 17.10.2013 was vested with 1,75,000 shares options and out of which as per the stock option agreement that is placed at page 38, assessee was vested with 1,00,000 options as on 26.05.2011 with an exercise price of $0.09 per option. As per the conditions mentioned in this stock option agreement, assessee was vested with 25,000 options being 25% of the total on the first anniversary date being 28.06.2012 and the assessee had sold 961 options from this particular lot on 02.07.2014 thereby making the sale proceeds to fall under the long term. Similar the remaining 1/48th shares of the options that vested with assessee each month after the first year anniversary of the service commencement date amounted to 2083 options out of which 794 stock options were sold by assessee on 27.02.2015 thus the total consideration received by assessee would constitute a long term capital gain. 5.14 It is submitted that the assessee is still holding on to the balance options and therefore it satisfies the conditions of assessee being an employee through each such date on which the options were vested with him. 5.15 All these facts though was available on record has not been looked into and considered by the authorities below and the Ld.CIT(A) has passed the order merely based on the observations of the Ld.AO.
Page 18 of We thus direct the Ld.AO to consider the claim of assessee to be a long term capital gain and to recompute the benefit u/s. 54EC of the act accordingly. Accordingly, the grounds raised by assessee stands allowed. In the result, the appeal filed by the assessee stands allowed. Order pronounced in the open court on 18th May, 2023.