SAINATH IYER,MUMBAI vs. DEPUTY COMM. OF INCOME TAX 26(2),, MUMBAI

O R D E R

PER AMARJIT SINGH, JM:

1. On the facts and in the circumstances of the case and in law, the Hon. Commissioner of Income Tax Appeals-28, Mumbai erred in confirming the perquisites value of ESOPs at Rs.60,13,000/-, made by the ld. DCIT 26(2), as against Rs.20,10,060/- as per the Appellant’s Calculation.

2. On the facts and in the circumstances of the case and in Law, the Hon. Commissioner of Income Tax Appeals -28, Mumbai erred in rejecting Appellant’s contention that, the shares under Lock in Period could not have been correctly determined by the A.O.

3. On the facts and in the circumstances of the case and in law, the Hon. Commissioner of Income Tax Appeals-28, Mumbai erred in passing remarks that there was a change in appellant’s stance on the wrong presumption as stated in para 4.3 of the appellant order.

3. The brief facts of the case are that the assessee has filed his return of income on 14.09.2000 declaring total income to the tune of Rs.54,57,540/-. Subsequently, the assessment order u/s.143(3) r.w.s 147 of the Income Tax Act, 1961 ( in short “the Act”) was passed on 28.02.2005. Against the order of scrutiny assessment, assessee filed an appeal before the CIT(A), who decided the appeal on 06.01.2006. Against the order of Ld. CIT(A), assessee further filed an appeal before the Hon’ble ITAT who passed the order dated 02.09.2008 and set aside the order Dt 06-01-2006 and restored it to the file of ITA No.7483/M/2011 A.Y. 2000-01 Assessing Officer. Thereafter the notice u/s.142(1) of the Act was issued. After appearance the representative of the assessee, the matter of taxability of ESOP (Employees Stock Option Plan) issued by M/s.Zee Telefilms Ltd. was examined and the Assessing Officer was of the view that the taxability value of ESOP of Rs.60,13,000/- would be treated at the time of its allotment and also accounted the Lock Period and accordingly assessed the taxable income to the tune of Rs.94,66,340/-. Feeling aggrieved the assessee has filed an appeal before the CIT(A) who confirmed the order of the Assessing Officer, therefore the assessee filed the present appeal before us. ISSSUE NO.1 TO 3:- 4. All the issues are interconnected, therefore are being taken up together for adjudication. Under these issues the appellant raised the point for treating the perquisite value of the shares allowed under ESOP claim i.e.7000 shares which includes non-transferable shares which were in lock period of one or two years. In brief initially the assessee filed his return of income on 14.09.2000 declaring total income to the tune of Rs.54,57,540/-. Form 16 attached with the return speaks about the perquisite value of ESOP to the tune of Rs.60,13,000/- which was not included in the salary of the assessee. The assessee shown the perquisite value to the tune of Rs.20,10,060/-. M/s. Zee Telefilms Ltd. allotted warrants to its employees on 01.02.1999. Out of the 7000 shares, 1/3rd shares (2340 shares) were 3 A.Y. 2000-01 transferable shares while remaining 4660 shares were under lock in period. The assessee considered the transferable shares to the extent of 1/3rd shares i.e.2340 shares out of 7000 shares as per the perquisite and offered tax only Rs.20,10,060/- as perquisite. The assessee did not offer the tax upon the remaining shares. The details are tabulated below:- Folio Allotment No. of Dist. Nos. Cert. Remarks No. Date shares Nos. allotted 060128 09.06.99 1000 18759001-18760000 214342 Free shares 1000 18760001-18761000 214343 Lock in upto 09.06.00 1000 18761001-18762000 214344 Lock in upto 09.06.01 061516 30.09.99 1334 19078401-19079734 214540 Free shares 1333 19079735-19081067 214541 Lock in upto 30.09.00 1333 19081068-19082400 214542 Lock in upto 30.09.01 5. The contention of the assessee is that the shares which were in the lock in period is not liable to be considered as taxable upon its value in view of the law settled in Commissioner of Income Tax Vs. Infosys Technologies Ltd. (2008) 297 ITR 167 (SC). The question which has been raised in this appeal has duly been adjudicated by the Hon’ble Supreme Court in the above mentioned case i.e. Commissioner of Income Tax Vs. Infosys Technologies Ltd.(Supra).It 4 ITA No.7483/M/2011 A.Y. 2000-01 is not in dispute that the assessee has offered the tax upon the transferable 1/3rd share i.e.2340 shares out of 7000 shares value of Rs.20,10,060/- as perquisite. The remaining shares which were in the lock period as mentioned above is in dispute. The relevant para 16 of the said judgment is hereby reproduced below for ready reference:- “16. Be that as it may, proceeding on the basis that there was “benefit”, the question is whether every benefit received by the person is taxable as income? In our view, it is not so. Unless the benefit is made taxable, it cannot be regarded as income. During the relevant assessment years, there was no provision in law which made such benefit taxable as income. Further, as stated, the benefit was prospective. Unless a benefit is in the nature of income or specifically included by the legislature as part of income, the same is not taxable. In this case, the shares could not be obtained by the employees till the lock in period was over. On facts, we hold that in the absence of legislative mandate a potential benefit could not be considered as “income” of the employee(s) chargeable under the head “salaries”. The stock was non- transferable and the stock exchange was also accordingly notified. This is where the weightage ought to have been given by the AO to an important factor, namely, lock in A.Y. 2000-01 period. This has not been done. It is important to bear in mind that if the shares allotted to the employee had no realizable sale value on the day when he exercised his option then there was no cash inflow to the employee. It was not possible for the employee to know the future value of the shares allotted to him on the day he exercises his option. Even the cost of acquisition as “nil” came to be introduced in the 1961 Act by the Finance Act, 1999 only w.e.f 1st April, 2000. In fact, the later deletion of cl.(iiia) is an indicator of the ineffective charge.”

6. In view of the above said law, the value of shares is not liable to be considered as taxable which is under the lock period. Therefore, in view of the said circumstances we are of the view that the CIT(A) has decided the matter wrongly and illegally. Therefore, the order of the CIT(A) in question is not liable to be sustainable in the eyes of law. Accordingly, we set aside the order of the CIT(A) in question and allowed the appeal of the assessee by holding that the value of the shares which are in lock period are not liable to be considered as income of assessee.