SRI B V S MURTHY vs THE INCOME TAX OFFICER

IN THE HIGH COURT OF KARNATAKA AT BENGALURU

DATED THIS THE 19TH DAY OF FEBRUARY 2020

PRESENT

THE HON’BLE MR. JUSTICE ALOK ARADHE

AND

THE HON’BLE MR. JUSTICE RAVI V.HOSMANI

I.T.A. NO.397 OF 2010

BETWEEN:

SRI. B.V.S. MURTHY S/O SRI. J. VENKATARAMANAIAH AGED ABOUT 73 YEARS B-004, ‘VAISHNAVI PARADISE’ 47TH CROSS, 8TH BLOCK JAYANAGAR, BANGALORE-560070. ... APPELLANT (By Sri. R.S.V.S. PAVAN KUMAR, ADV., FOR Sri. S. PARTHASARATHI, ADV.,)

AND:

THE INCOME-TAX OFFICER WARD-15(1), NO.59 HMT BHAVAN, BELLARY ROAD BANGALORE-560032. ... RESPONDENT (By Sri. K.V. ARAVIND, ADV.) - - -

THIS I.T.A IS FILED UNDER SECTION 260-A OF IT ACT, 1961 ARISING OUT OF ORDER DATED 28-6-2010 PASSED IN ITA NOS.73 TO 76/BANG/2008, FOR THE ASSESSMENT YEARS 1998- 99 TO 2001-02, PARYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT, BANGALORE IN ITA

NOS.73 TO 76/BANG/2008, DATED 28/06/2010, IN THE INTEREST OF JUSTICE AND EQUITY.

THIS I.T.A. COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING:

JUDGMENT

The issue which arises for consideration in this appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as 'the Act' for short) is whether merely because the company which had offered the stock option rights to an employee of a company, in which it was holding 40% shares can be held to be employer of the company and gains out of the allotment of share can be termed as perquisites or same has to treated as capital gains. This appeal is preferred by the assessee, which was admitted by a bench of this court vide order dated 12.11.2010 on following substantial questions of law: i) Whether in law, the reopening of assessment under Section 147 of the Act was only on change of opinion and consequently whether the re-assessment as made was valid?

ii) Whether in law, the Tribunal was justified in holding that there was employer-

employee relationship between the company which awarded the stock option and the Appellant merely because the company awarded the stock option was holding 40% shares of the employer company of the Appellant?

iii) Whether the Tribunal was justified in holding that the gains out of shares available to the Appellant was required to be considered as perquisite and accordingly liable to be assessed under the head “income from salary” and not as capital gains as declared by the Appellant?

iv) If the answer to the previous question is in the affirmative, whether the Tribunal was right in holding that the value of perquisite was required to be assessed in the relevant assessment year and not in the year in which the option was exercised?

Facts leading to filing of this appeal briefly stated are that appellant is an individual who was an employee of Parke Davies India Ltd., (hereinafter referred to as 'the PDIL’

for short) for two decades. The aforesaid company is an Indian company, in which 40% stake is held by Warner Lambert Company (hereinafter referred to as 'the WLC’ for short), which is a company of the United States. The appellant was granted stock option of WLC while he was in employment under the stock option scheme dated 01.09.1993. The appellant had opted for the scheme in the year 1993. The shares which the appellant had opted for were sold in the accounting years relevant to the Assessment Years 1998-99 to 2001-02 by WLC.

The Assessing Officer issued a notice under Section 148 of the Act purporting to reopen the assessment for the years 1998-99 and 1999-2000 since, the stock option provided for is perquisite and is required to be taxed as part of salary. The Assessing Officer brought to tax the difference which was offered by way of capital gains as perquisite. It was also held by the Assessing Officer that stock option was converted into shares and sold immediately and the appellant did not hold the share for more than 12 months. The Assessing Officer held that gains from stock option are

required to be assessed as perquisites as per Section 17(2)(iii) of the Act. The orders of assessment were passed under Section 147 and 148 of the Act for the Assessment Year 1998-99 on 23.11.2005, whereas, order of assessment under Section 147 read with Section 148 for the Assessment Year 1999-2000 was passed on 16.01.2006. Being aggrieved, the appellant filed appeals before the Commissioner of Income Tax (Appeals), who vide order dated 06.11.2007 while upholding the validity of reopening for the Assessment Years 1998-99 and 1999-2000 held that stock option cannot be assessed as perquisite. It was further held that the gains could be assessed only as capital gains and the appellant was the owner of shares that were sold for more than 12 months. Being aggrieved, the revenue filed an appeal. The tribunal vide impugned order has set aside the order passed by the Commissioner of Income Tax (Appeals) and maintained the order passed by the Assessing Officer. In the aforesaid factual background, this appeal has been filed.

Learned counsel for the assessee at the outset submitted that he does not want to press substantial

question of law No.1. It is further submitted that the tribunal reversed the decision of the Commissioner of Income Tax (Appeals) by misreading the letter of Chairman and CEO of WLC and recorded a finding that the appellant is an employee of WLC. It ought to have been appreciated that the decisions rendered in KANU KUMAR MUKERJEE VS. ACIT 23 SOT 565 (ITAT, MUMBAI), AUTHORITY OF ADVANCE RULINGS DECISION REPORTED IN 235 ITR 565, SUMIT BHATTACHARYA VS. ACIT 112 ITD 1 (ITAT MUMBAI SPECIAL BENCH) have no application to the facts of the case. It is further submitted that under Section 4(1)(ii) of the Companies Act, a company shall be subsidiary company of a holding company if, but only if the holding company holds more than 50% of its equity capital. Admittedly, WLC did not hold 50% shares of IDBL. Therefore, WLC cannot be held to be holding company of IDBL and therefore, the Assessing Officer and the tribunal grossly erred in holding that the relationship of employer and employee exist between the appellant and WLC. It is also submitted that even if employer and employee relationship is assumed between WLC and the appellant, the perquisite can only be

considered under Section 17(2)(iii) or under Section 72(3)(a), which was in the statute book for Assessment Year 2000-2001 only. The aforesaid provisions would apply if value of any benefit or amenity granted or provided free of cost or at concessional rate. In the instant case, stock option was granted to the appellant at the market rate, which is evident from the order passed by the Commissioner of Income Tax (Appeals). It is further submitted that the perquisites arise in the year in which the option was exercised and not in any other year.

On the other hand, learned counsel for the revenue has referred to para 13.1 of the order passed by the tribunal and has submitted that the relationship of employer and employee is admitted which is a finding of fact. It is further submitted that no material was placed on record by the assessee to show that stock option was given to him at the market rate and therefore, the same has been rightly been held to be capital gain. It is also submitted that in case this court holds that the gains received on sale of share are not perquisites then the matter may be remitted to the

Income Tax Appellate Tribunal as the Tribunal has not dealt with the issue of exemptions under Section 54, 54(e)(a), 54(e)(c) or 54(f) of the Act.

We have considered the submissions made on both the sides and have perused the record. Section 4(1)(ii) of the Companies Act, 1956 defines that a company shall be a subsidiary company of a holding company if, but only if, the holding company holds more than 50% of its equity capital. In the instant case, admittedly WLC holds only 40% of the share capital in IDBL. In KANU KUMAR MUKERJEE, AUTHORITY OF ADVANCE RULINGS, SUMIT BHATTACHARYA SUPRA, the relationship between the employee of a subsidiary company and the holding company has been held in the aforesaid cases; the holding company had more than 50% holding in the capital of the subsidiary company. Therefore, the aforesaid decisions have no application to the fact situation of the case. The appellant is not an employee of WLC, therefore, the finding recorded by the tribunal that the appellant is the employee of WLC is perverse. Therefore, the second substantial question of law

is answered in favour of the assessee and against the revenue.

The Commissioner of Income Tax (Appeals) in para 4 of its judgment has held that appellant was granted stock option rights by WLC not at a concessional price compared to ruling market price on the date of the grant. Clause 72 (iiia) which was incorporated in the statute book with effect from 01.04.2000 to 01.04.2001 provided that perquisite is the value of any specified security allotted or transferred directly or indirectly by any person free of cost or at a concessional rate to an individual who has or has been in employment of that person. The aforesaid provision does not apply in the fact situation of the case as stock option rights were not granted to the appellant on concessional rates. Therefore, the Commissioner of Income Tax (Appeals) rightly held that receipts on sale of shares are not taxable as perquisites but same should be treated as short term capital gains. Accordingly, the 3rd substantial question of law is answered in favour of the assessee. Since, it has already been held that the gains out of the shares available to the

appellant are capital gains; therefore, the fourth substantial question of law is rendered academic.

In view of preceding analysis, the impugned order passed by the Income Tax Appellate Tribunal dated 28.06.2010 is hereby quashed. Since, the tribunal in view of the finding recorded by it that gains received on sale of shares is a perquisite, has not dealt with the issue of exemption under Section 54, 54EA, 54EC or 54F of the Act, the matter is remitted to the tribunal to examine the aforesaid issue.

In result, the appeal is disposed of.

Sd/- JUDGE

SRI B V S MURTHY vs. THE INCOME TAX OFFICER