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Income Tax Appellate Tribunal, DELHIBENCH ‘A’, NEW DELHI
Before: Dr. B. R. R. KumarSh. Yogesh Kumar US
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the Revenue against the order of ld. CIT(A)-10, New Delhi dated 21.02.2018.
2. Following grounds have been raised by the Revenue:
“1. “Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was correct in recognizing the compensation received by the assessee as the share holding of the company even though the assessee has himself admitted that the shares were not registered by the company on 08.06.2010 and it was registered only on 23.01.2014.”
2. “Whether on the facts and circumstances of case and in law, the Ld. CIT(A) was correct in considering the ‘ foregoing of right to receive equity share’ by the assessee was the same as giving up the capital asset of Share.”
Akash Poddar 3. “Whether on the facts and circumstances of case and in law, the Ld. CIT(A) was correct in not appreciating the fact that the right to forego equity shares did not exist till the company agreed on the terms of settlement with the share holders.”
4. “Whether on the facts and circumstances of case and in law, the Ld. CIT(A) was correct in not appreciating the fact that the capital asset of share can be said to be acquired only on 23.01.2014 when the settlement was reached between company and the assessee. Hence the capital asset was held for less than a year and is a Short Term Capital Assest and thus gains arising out of the transaction are a STCG.”
The assessee is an individual derived income from salary and capital gains during the year. It was submitted before the Assessing Authority that the assessee purchased shares of Tek Travels Pvt. Ltd. on 08.06.2010 for a purchase cost of Rs.00/- and sold the same shares on 23.01.2014 for Rs.3,03,75,000/- thus earning a long term capital gain of same amount. The Assessing Officer called the details of Grant date, Vesting date, Exercise date and Exercise price with reference to the said shares sold.
The Assessing Officer held that the shares were never registered in the name of the assessee and hence no capital asset came into existence. The AO held that the amount of Rs. 3.03 crores from Tek Travels Pvt. Ltd. has been received as settlement in compliance with the agreement dated 23.01.2014 between the assessee and Tek Travels Pvt. Ltd. The relevant part of the settlement agreement relied upon by the Assessing Officer is as under:
In consideration for and subject to payment of the settlement amount, the First Party : (i) hereby unconditionally and irrevocably relinquishes his claim to any right and entitlement to enforce registration of the shares in his favour; (ii) shall immediately, upon payment of the settlement Amount, hand over all share certificates in relation to the shares, in original, to the second party; (iii) shall not seek to enforce any right, title or interest in the shares or the share certificates; (iv) shall not seek to enforce any right, title or interest in the Second Party arising out of or with respect to his previous employment with the second party; and (v) shall withdraw the company petitions filed against the second party within 5 business days of the receipt of payment of the settlement amount.
The AO held that the fact, that these shares have not been registered in the name of the assessee was never in dispute. The assessee has only surrendered rights in the shares as the shares were never registered in the name of the assessee and hence the AO held that the amounts received as per the settlement cannot be treated as capital gains. The AO has also held that the payer has treated the amount as salary and also deducted TDS as per the provisions of the Act. Under these circumstances, the AO held that the amounts received by the assessee is profits in lieu of salary as defined in Section 17(3)(iii).
6. The ld. CIT(A) deleted the addition holding that the assessee was employed earlier by M/s Tek Travels Pvt. Ltd. (TTPL) and entitled to yearly compensation plus 3% ESOP.
Akash Poddar 7. However, no shares were actually issued to the assessee till 31.03.2010 but after increase in its share capital, the assessee’s ownership towards 50,000 (30,000) shares of TTPL. However, due to severance of employment with TTPL, the assessee was refused recognition
8. The entire history of the case is as under:
01.12.2007 – As per the terms of appointment, the assessee was offered stock option plan for 30,000 equity shares at face value of Rs.10/- each vested over a four years with 7500 options maturing on completion of each year of service of the company.
The 30,000 shares represent 3% of paid up equity of the company.
3. 08.06.2010 – Shares certificate for 7500 + 42500 issued.
4. 09.08.2010 – Appointment terminated
5. 29.03.2012 – CLB order sheet for status quo maintenance
23.01.2014 – Settlement agreement and date of payment
Admittedly the assessee has worked from 01.12.2007 to 29.08.2010, thus, completing two full years to be eligible for 15,000 shares.
This leads to a question whether the receipts in pursuance to the agreement for relinquishing the right which has been accrued be considered as capital gains or not.
Akash Poddar 9. The provisions of Section 17(3)(iii) reads as under:
“Section 17………. (3) "profits in lieu of salary includes— (i) the amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto; (ii) any payment (other than any payment referred to in clause (10), clause (10A), clause (10B), clause (11), clause (12), clause (13) or clause (13A) of section 10), due to or received by an assessee from an employer or a former employer or from a provident or other fund, to the extent to which it does not consist of contributions by the assessee or interest on such contributions or any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy. Explanation.—For the purposes of this sub-clause, the expression Keyman insurance policy" shall have the meaning assigned to it in clause (10D) of section 10; (iii) any amount due to or received, whether in lump sum or otherwise, by any assessee from any person— (A) before his joining any employment with that person; or (B) after cessation of his employment with that person.
Akash Poddar 10. From the entire events, since the assessee was on job for a period of 2 completed years i.e. from 01.12.2007 to 09.08.2010 only 01.12.2007 to 01.12.2008 – one completed year, 01.12.2008 to 01.12.2009 – two completed years 01.12.2009 to 09.08.2010 – Appointment terminated, hence not completed one full year service.
Thus, at the first instance, the assessee is eligible to receive 15,000 shares as stock options. These stock options have not been given to the assessee by the way of not registering though the share certificates have been issued. Subsequently, there has been a settlement between the assessee and employer wherein one clause (5)(i) being unconditional and irrecoverable relinquishment of his rights to enforce registration of the shares. We are also conscious of the fact that the assessee has received one lump sum amount towards the settlement, hence a deep thought went into as to whether the entire amounts has to be taxed under one head of income or not.
At first sight, it might be thought that the determination of tax for variables such as salary, capital gain, income from other sources should be the same in the case of the instant assessee. But there are circumstances in which different sources are to be treated appropriately as per the reasons of arising of such source of income. The fundamental point, of course, is that taxation exist for different reasons for different sources. The variation between the amounts received out of the one composite settlement agreement has been duly examined and Akash Poddar found that this amount consists of two different part. The relationship between the amounts received and the shares accrued has been duly examined. There could be different reasons for an agreement for the interested parties, at such time, the taxation principles have to be precisely based on the nature of income earned by the assessee. Reliance is placed on the following judgments of the Hon’ble Courts which are mentioned as under:
CIT vs. Sarangpur Cotton Manufacturing Co. Ltd., 6 ITR 36 CIT vs. A. Krishnaswami Mudaliar & Ors., 53 I.T.R. 122, 128 and 132 CIT Vs. Mc-Milan & Co., 33 I.T.R. 182; S.N. Namasivayam Chettiar vs. CIT 38 ITR 579, 588 Commissioners of Inland Revenue v. Cock, Russell and Co. Ltd., 29 Tax Cases 387, 392,
From the facts, we find that the one reason of the settlement was allotment of shares and as per the employment agreement, the shares have to be allotted @ 7500 for each year of completed service. And since, the assessee has completed only two completed years of service, for the purpose of taxation. Keeping in view the jurisprudence laid down as in the cases of CIT Vs. J. Dalmia (149 ITR 215) (Del.), Baroda Cement & Chemicals Ltd. Vs. CIT (158 ITR 636) (Guj.), Bhojison Infrastructure (P.) Ltd. Vs. ITO (173 ITD 436), and ACIT Vs. Jackie Shroff (172 ITD 425) with regard to taxation of amount received as compensation for giving up the “Right to sue” and also keeping in view of the principles of real income, eligible income, receivable income and the accounting principles thereof as laid down above, we hold that the amount received quivalent
Akash Poddar to the pro-rata value of eligible shares of 15,000 out of offered shares of 50,000 be treated as capital gains u/s 48 and the remaining amount received by the assessee from the former employee be treated as per the provisions of Section 17(3)(iii).
In the result, the appeal of the Revenue is partly allowed. Order Pronounced in the Open Court on 15/12/2022.