I.he Hon'ble Tribunal Was Right In.concluding That Cashless Exercise Of Stockoptions Does Not Constitute Transfer Of Along Term Capital Asset Under Section 2(47 v. The Finding Of The Hon Bie Tribunalthattherewas An Employer-Employee.relationsnip Between Sirf, Usa And Theappellant Is Contrary To Tne Material On.record And T

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 23RD DAY OF OCTOBER 20272 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND| THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASAD BETWEEN: LT.A.NOCO.153 OF 2014 CHITTHARANJAN A. DASANNACHAR YAAGED ABOUT 45 YEARS|R/AT. NO.C-302, TEMPLE MEADOWS2/1H CROSS, BANASHANKARI2ND STAGE, BANGALORE-5600/70. (BY Mr. T. SURYANARAYANA, ADV.,) — APPELLANT— AND" 1.|THE COMMISSIONER OF INCOME TAX-V HMT BHAVAN, 59 BELLARY ROAD GANGANAGAR, BANGALORE-560032. 2 |THE ASSISTANT COMMISSIONER OF INCOME-TAX CIRCLE 14(1), HMT BHAVAN. 99, BELLARY ROAD, GANGANAGAR| BANGALORE-560032. .., RESPONDENTS| (BY Mr. JEEVAN J. NEERALGI, ADV.) THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT,|1961L ARISING OUT OF ORDER DATED 31.10.20L3 PASSED IN ITANO.235/BANG/2012 FOR THE ASSESSMENT YEAR 2006-07,PRAYING THAT THIS HON’ BLE COURT MAY BE PLEASED TO: (I) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW.STATED ABOVE. (11) ALLOW THE APPEAL AND SET ASIDE THE ORDER OF.THE INCOME TAX APPELLATE TRIBUNAL DATED 31-10-2013 IN ITA.235/BANG/2012. THIS|LIACOMING|ONFOR.HEARING,THISDAY, |ALOK ARADHE J.,DELIVERED THE FOLLOWING: | JUDGMENT This appeal under Section 260A of the Income TaxAct, 1961 (nereinafter referred to as the Act for short)has been preferred by the assessee. The subject matter|of the appeal pertains to the Assessment year2006-0/ The appeal was admitted by a bench of this Court videorder dated 07.10.2014 on the following substantial|question of law: Whetner,Of)thefacts,Inthecircumstances and on the grounds urged: i, Tne Hon ble Tribunal was right or|justified in confirming the order passed bythe CIT(A) nolding that the gains arising on.cashless exercise of stock options would betaxable as Income under the heads ‘Incomefrom salaries’ and ‘short term capital gains’,as against income under tne head long: term capital gains as claimed by theAppellant? Wt, The Hon'ble Tribunal was correct Innoiding that stock options did not constitutea ‘capital asset’ under Section 2(14) of theAct? I.he Hon'ble Tribunal was right in.concluding that cashless exercise of stockoptions does not constitute transfer of along term capital asset under Section 2(47)of the Act?| IV.ne Hon bie Tribunal was rignt inholding that the difference between the.option/exercise price of the stock optionand the fair market value of the sheres onthe date of exercise of the stock options bythe Appellant would be taxable under the.head ‘income from salaries' despite therebeing no employer-employee_ relationsnipbetween SIRF, USA and the Appellant? v. The finding of the Hon bie Tribunal|thattherewas an employer-employee.relationsnip between SiRF, USA and theAppellant is contrary to tne material on.record and thus perverse? 2. Facts leading to filing of this appeal brieflystated are that the assessee is a software engineer who|was employed with Aerospace Systems Pvt. Ltd., acompany registered in India between the period from|1995-1998. He was deputed to SIRF Technology Inc.,|U.S. in the year 1995 by Aerospace Systems Pvt. Ltd.,India aS an independent consultant. The appellant:served SiRF USA from 1995-1998 as an independentconsultant and later as an employee of SIRF USA from.2001-2004. The assessee thereafter returned to India|and was employed in SIRF India. While on deputation to.SIRF USA, the assessee was granted stock option by SIRF USA whereunder the assessee was given right to purchase 30,000 shares of SIRF USA at an exercise price.of US $0.08 per share. The assessee also had an option|of cashless exercise of stock options which is anirrevocable direction to the broker to sell the underlying.Shares and deliver the proceeds of sale of shares after deducting the exercise / option price which was to be|delivered to SiRF USA. In cashless exercise, theunderlying shares are not allotted to the assessee andhe is only entitled to receive the sale proceeds less theexercise price. The assessee in assessment year 2006-07 exercised his right under stock option plan by way of.cashless exercise and received a net consideration of US|$ 283,606 and offered the gain as a long term capital|gain as the stock options were held nearly for ten years.The assessee also claimed deduction under Section 54F|of the Act. | 3The Assessing Officer by an order dated26.12.2018 passed an order under Section 143(3) of theAct and artificially split the transaction into two and.brought to tax the difference between the market value|of shares on the date of exercise and the exercise price.as income from salary and the difference between the.sale price of shares and market value of shares on the.date of exercise of ‘income from short term capital gains. The claims for deduction under Section 54F was|disallowed. The assessee thereupon approached theCommissioner of Income Tax (Appeals) who by an order.dated 31.10.2011 dismissed the appeal on merits.However, the interest levied under Section 234B of the)Act was set aside. The assessee as well as the revenue|filed the appeals before the Income Tax AppellateTribunal (hereinafter referred to as the tribunal’ forsnort). The tribunal by an order dated 31.10.2013 Dyplacing reliance on a decision Special Bench of the|tribunal InACIT vs. SUMIT BHATTACHARYA, (2008)300 ITR (AT) 34 (MUM) (SB)held that the assessee|was to be regarded as employee for the purposes of the|Plan and the benefits arising there from was to betreated as income in the nature of salary in the hands ofthe assessee. The tribunal dismissed both the appeals.In the aforesaid factual background, the assessee has—approached this court. 4Learned counsel for the assessee submittedthat the finding recorded by the tribunal that assessee.was an employee of SiRF USA is perverse and therefore,the finding of the tribunal that consideration received ontransfer of stock options is in the nature of income from.salaries cannot be sustained in the eye of law. It isfurther submitted that the tribunal ought to Nave!appreciated that there was no relationship of employer.and employee between SIRF USA and therefore, no partof the income from exercise of stock option can be.treated as ‘income from salaries. It is further pointedout that the tribunal ought to have appreciated that|stock option was granted to the assessee when he was|an independent consultant with SiRF USA and therefore,cannot be treated to be an employee for the purposes ofSections 15 to 17 of the Act. Our attention has also beeninvited to Clause 11 of the Stock Option Plan. It is.contended that the tribunal has failed to take note of thecommunication dated 03.08.2006 issued by SiRF USA. which clearly shows that the amount was to be treatedon the gains and the tax was withheld in the USA. It is.also argued that once the amount is received fortransfer of the stock options is not in the nature ofsalaries, it can only be income from capital gains as theright to purchase the shares of the companies is acapital asset under Section 2(14) of the Act andrelingquisnment / extinguisnment of a right in the same isa transfer within the meaning of Section 2(4/7) of theAct. It is urged that cashless exercise option was a|transfer of capital asset by way of extinguisnment ofright in the capital asset. It is also pointed out that|reliance of the tribunal on the decision on the specialDeENCDoftnetribunalIn|ACI TVS,SUMMITBHATTACHARYA, (2008) 300 ITR (AT) 34 (MUM)(SB)is misconceived as the aforesaid decision was/reversedDY|Bombay|HignCourt|In|SUMIT|BHATTACHARYA|VS,ACIT(2020)118TAXMANN.COM 371 (Bom)by placing reliance on the) decision of the Supreme Court in.Addl. CIT vs.BHARAT V. PATEL (2018) 98 TAXMANN.COM 386It is also pointed out that at the time of grant of option.in the year 1996 Section 1/7(2)(ilia) was not inexistence. It is also urged that revenue in case of two.other assessees placed in similar circumstances has—accepted the fact that on cashless exercise of options,there arises income in the nature of capital gains andthe revenue Nas not challenged the correctness of theview taken by the tribunal in the aforesaid decisions andtherefore, it is not open for the revenue to challenge its.correctness in case of other assesses. In Support of.aforesaid submissions, reliance has been placed on.decisions In-"CIT VS. L.W.RUSSEL', (1964) 53 ITR 91.(SC) AT PAGE 5, ‘DHUN DADABHOY KAPADIA VS.CIT’, (1967) 63 ITR 651 (SC), ‘MANGALOREELECTRIC SUPPLY CO. LTD. VS. CIT’, (1978) 113°ITR 655 (SC), ‘BERGER PAINTS INDIA LTD. VS.CIT’, (2004) 135 TAXMAN 586 (SC). 5.|On the other hand, learned counsel for therevenue while inviting the attention of this court toclause 2(f) of the stock plan submitted that even anconsultant who performs services for the company or asubsidiary shall be treated as an employee. Therefore,the assessee shall be treated as an employee of SIRF.USA. It is further submitted that the tribunal has taken.into account various provisions of the stock plan.including clause 11 and has rightly conciuded that tneassessee was an employee of SiRF USA and the amount.received by the assessee has rightly been treated asincome from salary. The order passed by the tribunal is.based on meticulous appreciation of material on recordand does not call for any interference. 6.|We have considered the submissions made.by learned counsel for the parties and have perused therecord. Before proceeding further, it is apposite to take.note of the relevant clauses of the stock plan viz., clause.2(f) and 11, which reads as under: 2(F)|EmployeeShallneal)(1)|dhlyindividual who is a common-law employee ofthe company or of a subsidiary, (ii) a member|of the Board of Directors, or (iii) a consultant|who performs services for the Company or asubsidiary. Service as a member of the Board|of Directors or as a consultant shall be!considered employment for all purposes under|the Plan except the second sentence of Section4(a). 11. No Employment Rights: No provisionof the Plan, nor any Option granted or other|right to acquire shares awarded under the)Pian, snall be construed to give any person any|right to become, to be treated as, or to remain|an Employee. The company and its subsidiariesreserve the right to terminate any person's|service at any time and for any reason. 7FromperusalOf communication dated|03.08.2006 sent by the SIRF USA to the assessee, it isevidenttnat|theaSSeSSC2EWaSalnindependent|consultant to SIRF USA and was not an employee of SIRF USA at the relevant time. Thus, there was _ nrelationship of employer and employee between the SIRF.USA and the assessee and therefore, the findingrecorded by the tribunal that the income from theexercise of stock option has to be treated as incomefrom salaries is perverse as it is trite law that unless the.relationship of employer and employee exists, theincome cannot be treated as salary. [See: CIT VS.L.W.RUSSEL supra]. 8 _The Supreme Court in'‘DHUN DADABHOYKAPADIA AND HARI BROTHERS (P.) LTDSupra hasheld that right to subscribe to shares of a company was|treated to be a capital asset under Section 2(14) of theAct. The stock option being a right to purchase theShares underlying the options is a capital asset in the|hands of the assessee under Section 2(14) of the Act,which is also evident from Explanation 1(e) to Section.2(42A) of the Act, which uses the expression ‘in case of.a capital asset being a right to subscribe any financial 8 _The Supreme Court in'‘DHUN DADABHOYKAPADIA AND HARI BROTHERS (P.) LTDSupra hasheld that right to subscribe to shares of a company was|treated to be a capital asset under Section 2(14) of theAct. The stock option being a right to purchase theShares underlying the options is a capital asset in the|hands of the assessee under Section 2(14) of the Act,which is also evident from Explanation 1(e) to Section.2(42A) of the Act, which uses the expression ‘in case of.a capital asset being a right to subscribe any financial asset. The cashless exercise of option therefore was atransfer of capital asset by way of a relingquishment /extinguishment of right in capital asset in terms ofSection 2(47) of the Act. It is also pertinent to mentionthat the assessee never received the shares in stock|options. The tribunal also erred in placing reliance on.specialbenchdecisionACITVS.SUMITBHATTACHARYAwhich was reversed by Bombay High.Court in|Sumit Bhattacharya vs. ACITsupra. It Is also|pertinent to mention here that at the time of grant of.options to the assessee in the year 1996, Section.17(2)(ilia) of the Act was not there in the statute. oiIt is pertinent to mention here that therevenue in case of several other assessee's haveaccepted the fact that on cashless exercise of option,there arises a income in the nature of capital gains.However, in the case of the assessee the aforesaid stand was not taken. It is also pertinent to mention here thatnothing was brought to our notice that the view taken. by the tribunal in the following cases has been|challenged by the revenue. (1) SHRI KAMLESH BAHEDIA VS. ACIT (2014SCC ONLINE ITAT 3857), (it) N.R.RAVIKRISHNAN VS. ACIT, 2018 SCCONLINE ITAT 2O272 Cia)DR,.MUTHIANSTVATHANUVS,ACIT|IT.T.A.NO.553/CHNY/2018 DATED 24.10.2018. 10. Therefore, in view of law laid down by theSupreme Court in Berger paints supra, it was not open.for the revenue to take one stand in case of the'assessee and to challenge the correctness of the same|in case of other assessee. For this reason also, the)revenue cannot be permitted to take a different view in-this appeal. In view of preceding analysis, the substantialquestions of law framed by in this appeal are answeredin favour of the assessee and against the revenue. In. ����������,�������$��������$��������"����������!������������������$���$�/)�)-��-)/�����������������$��"������������,���������������������$�� ���������� � ��� ��������� �