Ita/397/2010 Of Sri B V S Murthy v. The Income Tax Officer

IN THE HIGH COURT OF KARNATAKA AT BENGALURUDATED THIS THE 19 DAY OF FEBRUARY 2020. PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND| THE HON’BLE MR. JUSTICE RAVI V.HOSMANL 1LT.A. NO.397 OF 2010 BETWEEN: SRI. B.V.S. MURTHYS/O SRI. J. VENKATARAMANAIAHAGED ABOUT /3 YEARS.B-004, ‘\VVAISHNAVI PARADISE$! CROSS, 8 BLOCK|JAYANAGAR, BANGALORE-560070. ... APPELLAN[. (By Sri. R.S.V.S. PAVAN KUMAR, ADV., FOR. Sri. S. PARTHASARATHI, ADV.,) AND: THE INCOME-TAX OFFICER,WARD-15(1), NO.59HMT BHAVAN, BELLARY ROAD.BANGALORE-5600 32. .. 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 [TA|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.T7.A. COMING ON FOR HEARING, THIS DAY,ALOKARADHE J.,DELIVERED THE FOLLOWING: JUDGMENT The issue which arises for consideration in this appealunder 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 substantiaquestions of law: -.WhnetnerInlaw, thereopeningOT|assessment under Section 14/7 of the Actwas only on change of opinion andconsequently wnetner the re-assessmentas made was valid?assessment under Section 14/7 of the Actwas only on change of opinion andconsequently wnetner the re-assessmentas made was valid? --.Whether in law, the Tribunal was justifiedin nolding that there was employer- employeerelationship petweenthe.company which awarded the stock optionand tne Appellant merely because thecompany awarded the stock option wasnolding 40% shares of the employercompany of the Appellant?| ---.Whether the Tribunal was justified inholding that the gains out of sharesavailabie to the Appellant was required topeconsidered as|perquisiteandaccordingly liable to be assessed underthe head “income from salary” and not ascapitalgainsas|adeclaredDYthe.Appellant? holding that the gains out of sharesavailabie to the Appellant was required topeconsidered as|perquisiteandaccordingly liable to be assessed underthe head “income from salary” and not ascapitalgainsas|adeclaredDYthe.Appellant? -G.If the answer to the previous question isin the affirmative, wnether the Tribunalwas rignt in nolding tnat the value ofperquisite was required to be assessed intne relevant assessment year and not intne year in which the option wasexercised?in the affirmative, wnether the Tribunalwas rignt in nolding tnat the value ofperquisite was required to be assessed intne relevant assessment year and not intne year in which the option wasexercised? 2.Facts leading to filing of this appeal briefly stated are that appellant is an individual who was an employee of)Parke Davies India Ltd., (nereinafter referred to as the PDIL’ for short) for two decades. The aforesaid company is an.Indian company, in which 40% stake is neld by Warner|Lambert Company (hereinafter referred to as ‘the WLC’ for|Short), whicn is a company of the United States. The|appellant was granted stock option of WLC while he was in)employment.undertheStock.option|scheme.cated01.09.1993. The appellant had opted for the scheme in the.year 1993. Tne shares which tne appellant nad opted for|were sold in the accounting years relevant to the Assessment|Years 1998-99 to 2001-02 by WLC. 2.Facts leading to filing of this appeal briefly stated are that appellant is an individual who was an employee of)Parke Davies India Ltd., (nereinafter referred to as the PDIL’ for short) for two decades. The aforesaid company is an.Indian company, in which 40% stake is neld by Warner|Lambert Company (hereinafter referred to as ‘the WLC’ for|Short), whicn is a company of the United States. The|appellant was granted stock option of WLC while he was in)employment.undertheStock.option|scheme.cated01.09.1993. The appellant had opted for the scheme in the.year 1993. Tne shares which tne appellant nad opted for|were sold in the accounting years relevant to the Assessment|Years 1998-99 to 2001-02 by WLC. ‘3.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 optionprovided 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 snares and sold immediately and the appellant|did not nold tne snare for more tnan 12 montns. £=JTAssessing Officer held that gains from stock option are) required to be assessed as perquisites as per Section|17(2)(ili) 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.1999-2000WadapassedON)16.01.7006.Beingaggrieved,tneappellant.filedappeals|beforetneCommissioner 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 furtner|neld 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. Tne tribunal vide impugned order nas set aside the|order passed by the Commissioner of Income Tax (Appeals)and maintained the order passed by the Assessing Officer. Inthe aforesaid factual background, this appeal has been filed. 4Learned counsel for tne assessee at tne outset.Submitted that ne does not want to press substantial| question of law No.1. It is further submitted that the tribunalreversed tne 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 employeeof WLC. It ought to have been appreciated that the decisions|rendered in|KANU KUMAR MUKERJEE VS. ACIT 235 SOT565(ITAT,.MUMBAT ),AUTHORITYOF|ADVANCERULINGS DECISION REPORTED IN 235 ITR 565, SUMITBHATTACHARYA 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 snall 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| consideredunderSection17(2)(ib)OT|underSection72(3)(a), whnicn was in the statute book for Assessment Year2000-2001 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 optionwas granted to the appellant at the market rate, which is|evident from the order passed by the Commissioner of)Income Tax (Appeals). It is furtner submitted that the|perquisites arise in tne year in which the option was|exercised and not in any otner year. 5.On the other hand, learned counsel for the)revenue nas referred to para 13.1 of the order passed by thetribunal and has submitted that the relationship of employer|and employee is admitted wnicn is a finding of fact. It is|further submitted that no material was placed on record by.the assessee to snow 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 tnat in case|this court holds that the gains received on sale of snare are|not perquisites then the matter may be remitted to the| Income Tax Appellate Tribunal as the Tribunal nas not dealt|with the issue of exemptions under Section 54, 54(e)(a),|54(e)(c) or 54(f) of the Act. 6.We have considered tne SUDMISSIONS made on!botn the sides and nave perused the record. Section 4(1)(il)|of the Companies Act, 1956 defines that a company snalli bea 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 snare capital in IDBL. In.KANU KUMAR MUKERJEE,AUTHORITYOF|ADVANCERULINGS,SUMITBHATTACHARYA SUPRA,the relationsnip between theemployee of a subsidiary company and the holding company|nas 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. Tne appellant is |not an employee of WLC, therefore, the finding recorded by|the tridDunal that the appellant is the employee of WLCisperverse. Therefore, the second substantial question of law) is answered in favour of the assessee and against the.revenue. J.The Commissioner of Income Tax (Appeals) in)para 4 of its judgment has neld tnat 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 (illa) wnicn 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 concessiona! rate to an Individual wno nas or nas been Inemployment of that person. Tne 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 snould be treated as snort term capitalgains. Accordingly, the 3[,;]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. 8.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 py it that gains received on sale otfshares 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. SS Sd/-JUDGE Sd/-|JUDGE