COMMISSIONER OF INCOME TAX, BANGALORE vs. INFOSYS TECHNOLOGIES LTD.

CIVIL APPEAL No. 3725/2007Supreme Court[2008] 1 S.C.R. 13604 January 2008Bench: 2 JudgesAuthor: S.H. KAPADIA, B. SUDERSHAN REDDY14 pages
AI SummaryDismissed

What were the facts?

The assessee, Infosys Technologies Ltd., allotted warrants to its employees through the Technologies Employees Welfare Trust for its Employees Stock Option Scheme (ESOP) during assessment years 1997-98, 1998-99, and 1999-2000. Each warrant, costing Re. 1, entitled the holder to an equity share of Rs. 10 for a total consideration of Rs. 100. Employees had to retain warrants for one year, after which they could exercise the option to buy shares by paying the balance Rs. 99. The option could be exercised within five years, during which the shares were non-transferable and held by the Trust. For AY 1999-2000, the Assessing Officer (AO) determined the market value of shares at Rs. 171 crores against employee payment of Rs. 6.64 crores, treating the difference of Rs. 165 crores as a perquisite and holding the assessee liable for TDS under Section 192. Similar orders were passed for other years. CIT(A) confirmed the AO's orders. The Tribunal's order, which held the right not to be a perquisite, was affirmed by the High Court, leading to these appeals by the Revenue.

What did the Supreme Court hold?

The Supreme Court dismissed the appeals, holding that the assessee was not liable for TDS. The Court reasoned that during the assessment years 1997-98, 1998-99, and 1999-2000, there was no specific provision in the Income Tax Act, 1961, that made the benefit from an ESOP taxable as income. Such benefits became specifically taxable only from April 1, 2000, with the insertion of Section 17(2)(iii a). The Court emphasized that a warrant is a right without an obligation, and a perquisite does not accrue at the time of grant. Crucially, the shares were non-transferable during the lock-in period, rendering them without realizable value and thus no cash inflow to employees. The benefit was only notional and unascertainable at the time of option exercise. The Court also held that Section 17(2)(iii a) was not retrospective. Therefore, the Revenue erred in treating the difference as a perquisite value and holding the assessee in default for not deducting TDS. The Court expressed no opinion on the law prevailing after April 1, 2000.

What were the issues?

1. Whether the benefit arising from the Employees Stock Option Scheme (ESOP) was taxable as 'perquisite' under Section 17(2) of the Income Tax Act, 1961, for the assessment years 1997-98, 1998-99, and 1999-2000, thereby making the assessee liable for Tax Deducted at Source (TDS) under Section 192. Assessee's contentions: - The shares allotted under the ESOP were non-transferable for five years, hence they had no realizable value and no cash inflow to employees upon exercise of the option. Therefore, the difference between market value and exercise price was not a perquisite. - Section 17(2)(iii a), which defines 'cost' for specified securities, was inserted only on April 1, 2000, and is not applicable to the assessment years in question. - A potential benefit cannot be considered income chargeable to tax in the absence of a legislative mandate. Revenue's contentions: - The difference between the market value of the shares and the price paid by employees constituted a perquisite value on which TDS was deductible. - The AO's calculation of perquisite value and the consequent demand for TDS were justified.

Which sections of the Income-tax Act were involved?

Section 17(2)(iii a),Section 20,Section 192,Section 201(1),Section 201(1A)

AI-generated summary — verify with the full judgment below

(2008) 1 S.C.R. 136 A COMMISSIONER OF INCOME TAX, BANGALORE ~- j II. INFOSYS TECHNOLOGIES LTD. (C.A. No. 3725 of 2007) 8 JANUARY 4, 2008 (S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ.)

Income Tax Act, 1961; S. 17(2)(iii a) as inserted .by amendment; Ss.20 & 192: c Perquisite value - Employees Stock Option Scheme - Issuance of warrant convertible into equity by Employees Welfare Trust of a company - Non-transferable for five years - Liability of assessee to deduct tax on perquisite value/ difference between market value of share and price paid by D the employees - Held: Not liable - Income earned from shares allotted under the Scheme not taxable in terms of extant provisions under the Act - Since shares allotted not transferable for five years, they have no realizable value - -l~ Thus, there was no cash in flow to employees on account of E mere exercise of option for allotment of shares in lieu of warrant - Under the circumstances, Revenue erred in treating the difference between market value of share and consideration price of share paid by employees as perquisite value for the purpose of levy of tax - Since Clause (iii a) of S. 17 defining F cost introduced i

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