Income Tax Appellate Tribunal - Mumbai
Pramod H. Lele, Mumbai vs Department Of Income Tax on 2 June, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL,
MUMBAI "I" BENCH, MUMBAI.
Before Shri R. V. Easwar, Hon'ble President and
Shri Pramod Kumar, Accountant Member
I.T.A No.4699/ Mum/2004
Assessment year: 1998-99
Assistant Commissioner of Income Tax ........... Appellant
Circle 26(2), R.No.609,
6 th floor, Smt. K.G.Mittal Ayurvedic Hospital
Building, Charni Road, Mumbai-400 002.
Vs.
Pramod H. Lele, ........... Respondent
B 5/8, Chandrashekar CHS, S.N. Road, Andheri(E)
Mumbai 400 059.
Appearances:
S.K.Singh, for the appellant
Prakash Jotwani, for the respondent
Date of hearing : 02-06-2011
Date of pronouncement: 10 -08-2011
ORDER
Per Pramod Kumar:
1. By way of this appeal, the Assessing Officer has called into question correctness of CIT(A)'s order dated 18 th March, 2004, in the matter of assessment under section 143(3) r.w.s. 147 of the Income tax Act, 1961, for the assessment year 1998-99 on the following ground:2 I.T.A No.4699/ Mum/2004
Assessment year: 1998-99 On the f acts and in the circumstances of the case and in law, the CIT(A) directed to treat the sale proceeds on account of sale of shares which the assessee received on account of stock option, as LTCG and further directed that benefit of cost indexation as per the I.T. Act 1961 may be granted to the assessee whereas the AO considered the proceeds received as STCG and/or speculation and/or income from other sources and/or salary. The order passed by the CIT(A) is bad in law and not as per the provisions of the I.T.Act. Hence, the order passed by the AO may be restored.
2. Briefly stated, relevant material facts, as set out in the orders of the authorities below, are as follows. The assessee is an employee of Johnson & Johnson Limited ( JJ India, in short), an India based subsidiary of Johnson & Johnson Inc, USA (JJ USA, in short) . During the relevant previous year, the assessee received income of Rs 1,74,63,946 in respect of sale of 11,800 shares (stock options) in Johnson & Johnson, Inc, USA - parent company of assessee's employer. Out of this receipt of Rs 1,74,63,946, the assessee deposited Rs. 1,31,22,000 in various capital gains scheme under section 54EA and the balance amount of Rs 43,41,946 was offered to tax as long term capital gain. It was stated by the assessee that he was granted, what he termed as, stock option in respect of 30,000 shares by JJ USA as follows :
Date of grant Stock Options Cost per share at which stock Allotted options were granted December 7, 1989 4,000 US $ 28.94 June 12,1990 2,000 US $ 35.66 December 2, 1993 4,000 US $ 44.25 December 1, 1994 2,000 US $ 53.63 November 11, 1995 3,000 US $ 86.25 Total allotment 30,000 3 I.T.A No.4699/ Mum/2004 Assessment year: 1998-99
3. It was submitted by the assessee that out of the stock options so allotted, the assessee exercised the option in respect of 11,800 shares. The shares were claimed to have been sold through stock broker, and it was sated that after deducting his charges, the broker has remitted the balance amount of Rs 1,74,87,706. As assessee had incurred bank charges amounting to Rs 32,800, the receipt, net of bank commission so incurred, was disclosed as long term capital gain. The claim of the assessee was that he had acquired a valued right, i.e. right to subscribe to shares in future - though subject to certain conditions stipulated at the time of grant of options, and, therefore, the amount so received on exercise of this valuable right should be treated as a long term capital gain. The Assessing Officer did not agree with these submissions. He was of the view that since the holding period of these shares, i.e. from the date of exercising the stock option to sale of the shares, was less than twelve months, the gains on sale of such shares cannot be treated as capital gains.
4. The Assessing Officer further observed that even though assessee contents that he had acquired the 'right to receive stock option shares', which essentially require the assessee to demonstrate the legally enforceable rights as such, material on record does not evidence so. As a matter of fact, according to the Assessing Officer, in the absence of Reserve Bank of India's approval to pay the purchase price, in foreign currency, of such shares, such a contract granting the assessee right to acquire the shares will clearly be unlawful. He also observed that in order to be held as capital gains arising from sale of shares, purchase and sale of shares must be effected in the manner as stated in CBDT's Circular No.704 dated 28.04.1995, but the assessee has not made out the claim in appropriate manner. The Assessing Officer further observed that in order to be a long term capital asset the period of holding of one year is applicable to shares vide proviso to 4 I.T.A No.4699/ Mum/2004 Assessment year: 1998-99 Section 2(42A) of the Act and is not applicable to assets of right to receive stock option shares, for which more than three years holding of the asset is required. The Assessing Officer relying on the authority for Advance Ruling reported in Taxman (122 Taxman 227) wherein it was said to have been held that the stock option profit is an income liable to be taxed as income from salary. We may, at this stage, mention that we could not find this ruling from our database, nor did the learned Departmental Representative file a copy of the same. To continue with the observations made by the Assessing Officer, we have noticed that the Assessing Officer further observed that the delivery of the shares was never taken by the assessee in view of the fact that there was a prohibition by the directions issued by Reserve Bank of India. The Assessing Officer thus observed that in such a situation, the only course for the assessee was to accept the profit on settlement and for the above said reasons the profit on stock option on share transaction is speculative in character and is to be brought to tax as speculation profit. Without prejudice to the above said findings, and relying upon Hon'ble Supreme Court's judgment in the cases of Emil Weber Vs CIT (200 ITR 483) and Hon'ble Allahabad High Court's judgment in the case of Kedar Narain Singh Vs CIT (6 ITR 157), the Assessing Officer was further of the view that the stock option profit is alternatively income from other sources. In the computation of income assessed by the Assessing Officer, perhaps not too sure about merits of his stand of taxability under a particular head of income, the Assessing Officer included the said income of Rs 1,74,96,746 as part of the income of the assessee with the description 'Short Term Capital gains and/or Speculation Income and/or Income from Other Sources and/or Salary'. Aggrieved, assessee carried the matter in appeal before the CIT(A).
5 I.T.A No.4699/ Mum/2004Assessment year: 1998-99
5. The way learned CIT(A) appreciated the arrangement about transaction was this. The Ld. CIT(A) was of the view that the offer of stock option has been accepted by the assessee by entering into a contract by purchase of shares at the stipulated price. The CIT(A) further observed that only because of Reserve Bank of India's stipulation contained in clause iv of its letter dated 12.02.1989 prohibiting any payments at any point of time either in India or abroad for acquiring these shares, the payment of purchase price was delayed till the time of sale of shares in USA. The CIT(A) also noted that the Reserve Bank of India has prohibited the remittance from India for acquisition to shares. Therefore, the said shares were treated to have been purchased as a casual contract between the assessee and the company on the acceptance of the offer i.e. the date on which the said shares were granted to the assessee. The CIT(A) thus held that the amount realized on exercise of the stock option, Long Term Capital Gain has arisen and benefit of cost indexation as per I.T. Act is to be allowed. The operative portion of learned CIT(A)'s impugned order, in this respect, is as follows:
I have considered the facts of the case. In order to determine/ decide the appropriate head of income, under which the gains from sale of stock options should be charged to tax, a careful examination of relevant events leading to the income from stock options is necessary. The ACIT looked at the issue as if it is a simple transaction of purchase and sale of normal shares, which, however, is not the case. The ACIT has not given due importance to the offers of stock options made to the appellant.... It is seen that each offer of stock option was forwarded to the appellant through an inter office communication addressed to the appellant and every time the inter office communication has been duly signed by the appellant as a token of acceptance. A copy each of such communication was filed during appellate proceedings. Alongwith accepting the offer of stock options by signing the inter office communication, the appellant has also undertaken to abide by the conditions stipulated in the Reserve Bank of India in that 6 I.T.A No.4699/ Mum/2004 Assessment year: 1998-99 regard. The copies of RBI's letter dated 2/12/1989 and 4/5/1989 stipulating the conditions in regard to the stock option scheme of Johnson & Johnson Inc USA were also forwarded to the appellant along with the office letter. It is thus seen that the offer of stock option has been accepted by entering into a contract to purchase shares at a stipulated price; as soon as the offer is accepted, the contract for purchase of shares is complete. It is only because of RBI's stipulation contained in clause (iv) of its letter dated 12 th February, 1989, prohibiting any payment at any point of time either in India or abroad for acquiring these shares, that the actual payment of consideration, i.e. purchase price, was delayed till the time of sale of shares in USA. As per clause (III) of the above referred letter, the RBI has also prohibited the remittance from India on account of acquisition of shares. Therefore, the said shares to be treated to have been purchased as a result of contract between the appellant and the company, when the appellant accepted the offer of the company. The acceptance of the offer has taken place on 8 th January 1990 and 30 th January 1991 respectively as stated above. It is, therefore, to be held that the appellant had acquired shares when the offer of stock option was accepted. Johnson & Johnson has also accepted the appellant as its shareholder and the owner of the shares, since it has issued bonus shares on the basis of its original holding. It is a well settled principle in law and practice that the bonus shares can be issued only to the existing shareholders as on the date of announcement of bonus.
The Bombay High Court, in the case of Tata Services 122 ITR 594 (Bom) and in the case of Bafna Charitable Trust 230 ITR 864 (Bom) have laid down that the right to purchase a property is a capital asset. Therefore, the appellant has acquired a capital asset in the shape of right to purchase shares. Since the holding period of this right, beginning with the acceptance of offer of stock options and ending with the sale of shares, is more than one year, the gain resulting therefrom is treated as long term capital gain.7 I.T.A No.4699/ Mum/2004
Assessment year: 1998-99 In view of the above, I hold that the amount realized by the appellant on exercise of stock options is long term capital gain subject to benefit of cost indexation as per the Income Tax Act. As the appellant has invested the sum of Rs 1,31,22,000 ( as is evident from the details given at page 2 of the order of the AO) in various capital gains schemes u/s 54EA viz UTI, LIC-Dhanvarsha, Alliance Liquid Income Fund, Templeton India Income Fund, IDBI Mutual Fund, I-NIT 97, the remaining amount of Rs 43,41,946 is correctly offered to tax by the appellant as long term capital gain.
6. Learned CIT(A) thus approved the stand of the assessee, and held that the gains on sale of stock option shares are to be taxed as long term capital gains. The assessee had also raised the plea against the order of AO in assessing the said income under multiple heads of income and the CIT(A) held that once it is established that the gain arising on exercise of stock option is on account of capital assets income cannot be assessed as income from other sources. It was also held that it cannot be said that sale was effected without delivery, because, according to the CIT(A), the assessee had taken 'constructive delivery'. The Assessing Officer's reliance on ruling given by the Authority for Advance Ruling was rejected on the ground that such rulings have no precedence value. The CIT (A) also held that the income can also not be assessed as short term capital gain in view of the reasoning of the assessee. The income can also not be assessed as salary income as the value of benefit of ESOP was granted at market value and not free of cost or at concessional rate, and as there was no employer - employee relationship between the assessee and Johnson & Johnson Inc. USA. Accordingly, the appeal of the assessee was allowed. .
8 I.T.A No.4699/ Mum/2004Assessment year: 1998-99
7. The Assessing Officer is aggrieved of the stand so taken by the learned CIT(A), and is in appeal before us.
8. We have conscientiously heard the rival contentions, carefully perused the material on record and duly considered factual matrix of the case as also the applicable legal position.
9. In order to appreciate the true nature of rights vested in the assessee, by the virtue of allotment of stock options, it is necessary to take a look at a typical stock option offer. One of these offers made to the assessee, a copy of which is placed at page 18 of the paper book filed before us, is reproduced below for ready reference :
NON QUALIFIED STOCK OPTION (1995 PLAN) (570) Presented to : Pramod H Lele Total Shares: 3,000 Option No. 080990 Social Security No. 999-85-0191 Option Price per share : $ 86.25 Date : 11/30/95 (Fair market value on this date) Subject to the terms and conditions hereinafter stated, Johnson & Johnson hereby grants you an option to purchase from it the above stated number of common stock of Johnson & Johnson, par value $ 1 per share, at the above stated price. The option shall not be exercisable until the day following the second anniversary of the avove date. Thereafter, it will be exercisable in instalments as follows:9 I.T.A No.4699/ Mum/2004
Assessment year: 1998-99 Percentage of Cumulative percentage total becoming of total then exercisable during exercisable the period Day following 2 nd anniversary to and Including Day of 3 rd anniversary 20% 20% Day following 3 nd anniversary to and Including Day of 4 th anniversary 20% 40% Day following 3 rd anniversary to and Including Day of 4 th anniversary 20% 60% Day following 4 th anniversary to and Including Day of 5 th anniversary 20% 80% Day following 5 th anniversary to and Including Day of 6 th anniversary 20% 100% Option Price:
The payment of the option price shall be made in the US Dollars, or, in the discretion of Johnson & Johnson, in common stock of the company valued at its fair market value (as the same shall be determined by Johnson & Johnson), or a combination of such common stock and cash. However, payment may not be made with common stock issued to you from company compensation plan unless the stock has been held for at least six months. Payment shall be made to Johnson & Johnson at its home office, One Johnson & Johnson Plaza, New Brunswick, New Jersey 08933.
Conditions:
(1) The option shall not be exercisable by you unless at the time of exercise, there is current registration statement or amendment thereto under 1933 Securities Act covering the shares of common stock to be issued upon exercise of this option.10 I.T.A No.4699/ Mum/2004
Assessment year: 1998-99 (2) The option shall not be exercisable by you unless at the time of exercise, the shares of common stock to be issued upon its exercise are authorized for listing on the New York Stock Exchange.
(3) The exercise of this option is subject to all the terms and conditions relating to non qualified stock options contained in the subject Johnson & Johnson Stock Option Plan, as amended from time to time, a copy of which is available from the office of the Secretary of the Corporation.
(4) Except as may be otherwise stated herein, you must be a full time employee of Johnson & Johnson or one of its subsidiaries at the time of the exercise and that the employment must have been continuous from the date hereof. For the purposes of this Plan, persons on company authorized leaves of absence, are considered full time employees, however, long term disability is not considered to be full time employment.
(5) In the event of termination of your employment due to any cause including death, disability or retirement, your rights to exercise this option shall cease, except for those which have accrued to and including the date of termination.
(6) In the event of your death, while an active employee, your right to exercise this option, which have accrued to, and including the date of death, may be exercised, subject to provisions of (11) below, within three years after the death, by your estate or by any person who acquires such option by inheritance or devise. Thereafter, such rights shall lapse.
(7) In the event of termination of your employment due to long term disability, your rights to exercise this option, which have accrued to and including the date of long term disability, may be exercised, subject to provisions of (11) below, within three years the start of long term disability by you or, should you die within the three year period , by your estate or by any person who acquires such option by inheritance or devise. Thereafter, such rights shall lapse 11 I.T.A No.4699/ Mum/2004 Assessment year: 1998-99 (8) In the event of your retirement from Johnson & Johnson, your right to exercise this option which have accrued to, and including the date of retirement, may be exercised, subject to provisions of (11) below, within three years from the date of retirement or, should you die within the three year period , by your estate or by any person who acquires such option by inheritance or devise. Thereafter, such rights shall lapse (9) In the event of termination of your employment due to any cause other than death, disability or retirement, your rights to exercise this option, which have accrued to the date of termination, may be exercised, subject to provisions of (11) below, within three years the date of termination or, should you die within the three year period , by your estate or by any person who acquires such option by inheritance or devise. Thereafter, such rights shall lapse.
(10) This option is exercisable during your lifetime only by you, and is not transferable other than by will or by the laws of descent and distribution.
(11) This option is not, in any event, exercisable after the expiration of ten (10) years plus one day from this date.
Please retain this copy for your files, Johnson & Johnson By Director - Extra Compensation Services
10. A plain reading of the above document shows that by the virtue of this letter, what the assessee has been offered by JJ USA is not specified number of shares in the company at the specified price but only an option to exercise the right to buy, in a specified time frame, a specified number of shares at a specified price- subject to fulfillment of certain further conditions set out in the document. There is no compulsion on the assessee to buy these shares as 12 I.T.A No.4699/ Mum/2004 Assessment year: 1998-99 the assessee has been granted an option to buy , at the market rate prevailing as on the date of grant of option, the specified number of shares within certain time frame - which essentially implies that the assessee may, if so desires, buy the shares or may not buy these shares. The CIT(A) was thus clearly in error in observing that " the appellant had acquired shares when the offer of stock option was accepted". The shares are not allotted to an employee while granting a stock option under the above scheme; all that it does is that in case the share prices of the company rise after the grant of stock date, though within a specific time frame set out in the scheme of allotment of these stock options, the employee can benefit from such price increase in company's shares by being allowed to buy a limited number of shares, at the price at which the stock options were granted, and thus benefit from the difference between the market price of shares vis-à-vis the market price of shares when stock options were granted. In case, the prices of the shares come down after the grant of stock options, the employee has nothing to lose because, as we have noted above, there is no compulsion on the employee to buy the shares at the market value as on the time of grant of options; the employee has an option, which he may or may not exercise, and he cannot be forced to buy the shares at all. As a matter of fact, Reserve Bank of India's approval dated February 1989 ( a copy of which was placed before us at page 21 of the paperbook) specifically stipulates that "no employee will exercise the option if the market price is lower than the price at which (stock option) is offered". It is thus a win win situation for the employee which can only operate in favour of the employee- somewhat akin to deferred wages plans by way of grant of stock appreciation rights. Typically, a stock option plan allows an employee to buy the shares in employer company at a concessional rate, i.e. lower than the market price, and such an acquisition of shares at lower than prevailing market rates is then open to market risks being assumed by the employees - as was the case in say CIT Vs Infosys Limited ( 297 ITR 167) wherein the assessee could buy the 13 I.T.A No.4699/ Mum/2004 Assessment year: 1998-99 shares, non transferable for next five years, at Rs 100 whereas the market price was over 25 times this value of the concession rate of Rs 100 each, as evident from the admitted facts recorded by the Hon'ble Supreme Court to the effect that shares worth market price of Rs 171 crores were sold to the employees for a consideration of Rs 6.64 crores. However, right now we are dealing with a scheme which grants employees an option to buy, should they so desire, the shares at the market price as on the date of grant of such rights, and, therefore, strictly speaking, it is not a kind of stock option plan which have so far come up for scrutiny of the Hon'ble Courts above. It is a sophisticated compensation plan which, in essence, allows employees, at the time of exercise of options, to benefit from the increase in value of parent company's shares - without actually exposing them to the market risks associated with actual acquisition of shares. We have also noted that the learned CIT(A) has laid a lot of emphasis on the restriction placed by the Reserve Bank of India in view of which the assessee could not have paid the agreed purchase consideration. Undoubtedly, it is one of the conditions on which Reserve Bank of India has granted approval to this stock option plan that " no payment, at any point of time - either in India or abroad, should be made for acquiring the shares", but then, this stipulation, if anything, shows that the shares were not intended to be acquired at any point of time, and the scheme could be allowed to be workable only to the extent it was to benefit the employees, like the assessee before us, from appreciation in value of shares of the parent company. We are unable to understand as to how, particularly in the light of this stipulation, could it be inferred that the shares, in respect of which stock option is issued, stood transferred in the name of the employees by the virtue of his having accepted the stock option. When no payment is, or cannot be, made, and when the stock option only grants an option to the employee to buy the shares, in consideration of a specified price as on the date of grant of stock options, at a future date, not earlier than second anniversary of grant of stock options, a mere grant of 14 I.T.A No.4699/ Mum/2004 Assessment year: 1998-99 option cannot result in a transfer of shares - as has been concluded by the CIT (A). The CIT(A) was clearly in error in concluding that the date of grant of stock options is to be concluded as the date on which shares were acquired by the assessee. In view of the above discussions, the date on which option to buy the shares is granted, in our humble understanding, cannot be treated as 'date of acquisition of shares'. The very foundation of reasoning adopted by the learned CIT(A) is thus devoid of legally sustainable basis. A reference has also been made by the CIT(A) about the allotment of bonus shares to the assessee employee, but then, as evident from a plain reading of letter dated 22 nd May 1996 issued by Johnson & Johnson Inc USA ( a copy of which is placed at pages 14 and 15 of the paper-book), this observation is factually incorrect. This increase in face value of stock options is due to "2 for 1 stock split" which was done for all the shareholders and, correspondingly, the stock option rights were also accordingly adjusted. It is not even the case of the assessee that there was any bonus issue of shares or that the assessee was a registered shareholder at any point of time. The findings of the CIT(A) cannot meet our approval on this issue either. In view of these discussions, we are of the considered view that the reasoning adopted by the CIT(A) is unsustainable in law.
11. Learned Departmental Representative has also invited our attention to the fact that a coordinate bench of this Tribunal, in the case of another employee covered by the same Stock Options Plan of JJ USA i.e. ACIT Vs Shripad S Nadkarni ( ITA No. 4698/Mum/2004; order dated 20 th January 2009), decided the issue against the assessee and observed that "stock option plan is akin to the stock appreciation rights and the gains arising on exercising the option are to be included as income from salary in the hands of the employee". In doing so, the coordinate bench has elaborately discussed the Special Bench decision of this Tribunal in the case of Sumit Bhattacharya Vs ACIT (112 ITD SB 1) and relied upon the same. It is 15 I.T.A No.4699/ Mum/2004 Assessment year: 1998-99 submitted that once a coordinate bench takes a particular view in the case of another employee covered by the same Stock Options Plan offered by the same company, there is no good reason to deviate from the stand so taken on admittedly the same set of facts. We are thus urged to vacate the order of the CIT(A) for this reason also. Learned counsel for the assessee, on the other hand, cites decision of another coordinate bench, in the case of Bomi S Billimoria Vs. ACIT ( ITA No. 2120/Mum/1998; order dated 30 th June 2009), which, admittedly on the same set of facts, has decided the issue in favour of the assessee by holding as follows:
We have carefully considered the rival submissions and perused the records. As could be noticed from the stock option plan and the terms of the Reserve Bank of India, no payment was made by the assessee nor exercised the right to purchase the shares before 13 th August 1992 ( i.e. the date of exercise of option), and thus, so far as the assessee is concerned, there is no cost of acquisition to the assessee, in which event, by applying the decision of B C Srinivas Shetty 128 ITR 294, the amount received is not liable to tax under the head 'income from capital gains". Even if it is assumed that the market value of shares is the benefit given to the assessee, such benefit can be said to accrue to the assessee only on the date of exercise of the option. In the instant case, the date of exercise of option as well as the date of sale is same, and thus there is no difference between deemed cost of acquisition and the actual price realized by the assessee, and thus the learned CIT(A) was not justified in directing the Assessing Officer to bring to tax the amount of Rs 5,44,925 in the short term capital gain. Under these circumstances, we set aside the orders passed by the tax authorities and direct the Assessing Officer to exclude the impugned amount from the computation of income.
12. Learned counsel thus contends that the issue is covered in favour of the assessee by the above decision, which happens to be a later decision, and 16 I.T.A No.4699/ Mum/2004 Assessment year: 1998-99 urges us to hold that since the stock options, on exercise of which assessee received the amount of Rs 1,74,96,746 which have been brought to tax by the Assessing Officer, did not have a cost of acquisition, the capital gains in question cannot be brought to tax. When learned counsel's attention was invited to the fact that, in taking the above stand, the coordinate bench was not informed of the fact that the issue in appeal is no longer res integra and stood concluded against the assessee, by another coordinate bench's decision dated 20 th January 2009 on undisputedly materially similar facts in Shripad S Nadkarni's case (supra), learned counsel submitted that it was not in his duty to invite bench's attention to a decision him. It is for the Departmental Representative to invite bench's attention to a precedent in support of the revenue He, however, admits that in both of these cases, i.e. Bomi S Billimoria's case (supra) and Shripad S Nadkarni's case (supra), he represented the assessees and that he did not bring the decision in Shripad S Nadkarni's case (supra) to the notice of the later bench in Bomi S Billimoria's case (supra). Learned counsel then submits that in any case, Shripaid S Nadkarni decision is per incurium because it does not take into account the vital fact that the shares were actually allotted to the assessee and sold by a stock broker, and it is actual difference on sale consideration and cost of acquisition of these shares which has been received by the assessee. Learned counsel submits that this division bench was clearly in error in applying the ratio of Special Bench decision in the case of Sumit Bhattacharya (supra) which dealt with a situation in which no shares were actually allotted and the assessee was simply paid the difference between the market price of shares, in respect of which option was given, as on the date of exercise of option vis-à-vis the market price as on the date of grant of option. Learned counsel submits that once shares are actually transferred to the employee, the gains on sale of transfer cannot be treated as part of income from salaries. Learned counsel then laboriously takes us through the Special Bench decision to demonstrate that the Stock Appreciation Rights, which the 17 I.T.A No.4699/ Mum/2004 Assessment year: 1998-99 Special Bench was dealing with, are materially different from Stock Options, as in the present case. He then invites our attention to certain observations in the Special Bench decision wherein it is stated that 'stock appreciation right is not the same thing as a typical stock option plan' and that 'this distinction between the nature of stock appreciation rights and the stock options is so fundamental and that it affects the tax treatment of these two benefits'. In view of these observations, according to the learned counsel, the Special Bench decision will have no application in the case of a stock option plan, which was subject matter of consideration in Shripad S Nadkarni's case (supra), and the said decision, therefore, was clearly in error in following the Special Bench decision. Our attention is then invited to a copy of statement of account of the assessee, as appearing in the books of stock broker Merrill Lynch, Pierce, Fenner & Smith Inc. ( at page 2 of the paper-book), which shows that the shares were actually sold on behalf of the assessee and purchased on behalf of the assessee, and it was only the difference between sale price and purchase price, after deducting broker's charges, was paid over to the assessee. It is thus pointed out that what has been paid to the assessee is not a notional gain but a real gain on the sale of shares. On the strength of these arguments, learned counsel urges us to hold that the decision in the case of Shripad S Nadkarni (supra) cannot be followed, and urges us to follow the later decision in favour of the assessee in Bomi S Billimoria's case (supra).
13. Learned Departmental Representative vehemently opposes the submissions so made by the learned counsel. He submits that the decision obtained by the learned counsel in Bomi S Billimoria's case (supra) is per incurium . He submits that whatever be the nomenclature given to the arrangement, the Stock Option Plan is basically to give benefit of appreciation in the value of parent company's shares, and this is precisely 18 I.T.A No.4699/ Mum/2004 Assessment year: 1998-99 what the Tribunal has held in the case of Shripad S Nadkarni. It is also submitted that Tribunal's decision in Billimoria's case (supra), having been rendered unmindful of binding coordinate bench decision in Nadkarni's case (supra) - an inadvertent mistake to which learned counsel has passively contributed by not pointing out, as was expected of him in all fairness, the earlier decision which was argued by him only, does not constitute a binding judicial precedent.
14. We see substance in the plea of the learned Departmental Representative. As he rightly points out, the issue is also squarely covered by a coordinate bench's decision in the case of Shripad S Nadkarni (supra) wherein the coordinate bench, on the same set of material facts- as is the undisputed position, concluded that "we are of the view that in the case of the assessee, the stock option plan is akin to the stock appreciation rights and the gains arising from exercise of option are to be included as income from salary in the hands of the assessee" and that "there is no merit in the stand of the assessee in including the said gains as income from capital gains as the assessee had at no point of time become owner of the assets whereas it was only entitled to the benefit of exercising option under the scheme, in receiving the gain on exercising the option simultaneously purchase/ sale of shares and the profits being repatriated to India". We may also add that, as evident from the perusal of statement of account of the assessee with the broker, the assessee was never owner of any shares. This statement shows that while 2,000 shares were sold to the account of the assessee on 6th February 1997 and a credit of US $ 1,13,723.71 was given by the stock broker, corresponding debit for purchase of shares from Johnson & Johnson for US $ 28,940 was effected on 13th February 1997. Similarly, for the sale of 3,800 shares, the sale proceeds of US $ 1,23,771.46 and US $ 1,11,398.68 were credited on 24th February 1997, corresponding debit of US $ 61,706 for purchase of these shares was given on 27th February 1997. In both these transactions, credit for shares sold were given even before the debits for purchase of shares were given. Clearly, 19 I.T.A No.4699/ Mum/2004 Assessment year: 1998-99 therefore, the assessee was not the owner of these shares before the shares were sold, and entries, to that extent, were mere notional in nature. Section 45 (1) provides that any profits or gains from the transfer of capital asset are taxable as capital gains, but then, even going by the documents produced by the assessee, here is a case in which the assessee did not own any capital asset in the form of shares when he claims to have sold the same. The impugned gains are, therefore, cannot be taxed under the head 'capital gains'. In any event, even if it is assumed that the income is taxable as gains on sale of shares, because shares were not held even for a single day, the gains can only a short term capital gain, and such a treatment does not bring any relief to the assessee either.
15. In Billimoria's case (supra), the coordinate bench was not aware of a direct decision on the same issue by another coordinate bench in Nadkarni's case (supra). Learned counsel does not dispute this, but defends it by submitting that what it was duty of the learned Departmental Representative to invite bench's decision to judicial precedents in favour of the revenue.
16. As to what should be binding value of a judicial precedent, which is rendered in ignorance of the earlier binding precedents on the issue, we can do no better than to may refer to the observations made by Hon'ble Andhra Pradesh High Court Full Bench, in the case of CIT Vs B R Constructions (202 ITR 222). While dealing with the rule of precedents, Their Lordships have, inter alia, qualified the binding nature of precedents by observing as follows:
It may be noticed that precedent ceases to be a binding precedent:
(i) if it is reversed or overruled by a higher Court,
(ii) when it is affirmed or reversed on a different ground,
(iii) when it is inconsistent with the earlier decisions of the same rank,
(iv) when it is sub silentio, and
(v) when it is rendered per incuriam.
In para 578 at p. 297 of Halsbury's Laws of England, Fourth Edition, the rule of per incuriam is stated as follows :
20 I.T.A No.4699/ Mum/2004Assessment year: 1998-99 'A decision is given per incuriam when the Court has acted in ignorance of a previous decision of its own or of a Court of co-ordinate jurisdiction which covered the case before it, in which case it must be decided which case to follow; or when it has acted in ignorance of a House of Lords decision, in which case it must follow that decision; or when the decision is given in ignorance of the terms of a statute or rule having statutory force.' In Punjab Land Development & Reclamation Corpn. Ltd. vs. Presiding Officer, Labour Court (1990) 3 SCC 682 : (1990) 77 FJR 17 (SC), the Supreme Court explained the expression 'per incuriam' thus :
'The Latin expression per incuriam means through inadvertence. A decision can be said generally to be given per incuriam when the Supreme Court has acted in ignorance of a previous decision of its own or when a High Court has acted in ignorance of a decision of the Supreme Court.
17. Viewed thus, as held by Hon'ble Andhra Pradesh High Court (Full Bench), a decision which is rendered in ignorance of an earlier decision of a coordinate bench of equal strength "which covered the case before it" does not have precedent value. Learned counsel does not dispute that earlier decision in Nadkarni's case squarely covered the issue in appeal in Billimoria's case and yet coordinate bench did not have the benefit of considering decision in Nadkarni's case by a bench of equal strength, yet he contends that the later decision should be followed. This submission is, suffice to say, legally unsustainable in view of the law so laid down in BR Construction's case (supra). We, therefore, reject learned counsel's reliance on Billimoria's decision by a division bench, and leave it at that.
18. In any case, what the coordinate bench has held in Billimoria's case is that " no payment was made by the assessee nor exercised the right to purchase the shares before 13 th August 1992 ( i.e. the date of exercise of option), and thus, so far as the assessee is concerned, there is no cost of acquisition to the assessee, in which event, by applying the decision of B C Srinivas Shetty 128 ITR 294, the amount received is not liable to tax under the head 'income from capital gains", but then it is not even 21 I.T.A No.4699/ Mum/2004 Assessment year: 1998-99 assessee's case before us that the shares did not have a cost of acquisition. The assessee has taken the cost of acquisition of shares as on the value at the point of time when related stock option was granted, and the short question requiring our adjudication is whether the gains should be treated as long term capital gains, with indexation benefits, or as short term capital gains. There is no cross objection by the assessee, nor there is even any petition under Rule 27 of the Income Tax Appellate Tribunal Rules. The issue of taxability of gains arising on exercise of stock options has never been a subject matter of controversy before any of the authorities below; the issue has remained confined to the question as to whether these gains are short term capital gains or long term capital gains. The decision of the coordinate bench does not even touch upon this issue. We need not address ourselves to this issue. We are, for this reason also, unable to find any merits in learned counsel's reliance on coordinate bench's decision in the case of Billimoria (supra).
19. The only other observation made by the coordinate bench, in operative portion of the decision in Billimoria's case is that, "Even if it is assumed that the market value of shares is the benefit given to the assessee, such benefit can be said to accrue to the assessee only on the date of exercise of the option" and that " In the instant case, the date of exercise of option as well as the date of sale is same, and thus there is no difference between deemed cost of acquisition and the actual price realized by the assessee" . Learned counsel could not, however, explain to us as to under which provision of law, on the facts of this case before us, we can we take the market value of share as on the date of sale of shares as 'deemed cost of acquisition' of these shares; as a matter of fact, it has never been the case of the assessee either. The gains have been brought to tax only when the option is exercised and not when option is granted, and that is 22 I.T.A No.4699/ Mum/2004 Assessment year: 1998-99 what the said decision holds. The cost of acquisition, in the present case, is stated to be the value of shares as on the date of grant of options and that is precisely what has been taken into account for computation of the capital gains, and as the shares were admittedly not held for more than 12 months, the gains on sale of these shares have been treated as short term capital gains. We are unable to understand as to how the above observations help the case of the assessee. As a matter of fact, whether the income on exercise of stock options is to be treated as short term capital gain or as income from salaries, this aspect of the matter is wholly academic and tax neutral. Viewed thus, the assessee does not derive any advantage from the observations so made in the case of Billimoria (supra).
20. For the reasons set out above, we vacate the impugned relief granted by the CIT(A) and restore the order of the Assessing Officer to the extent that the gains on exercise of stock options, on the admitted facts of this case, is taxable as short term capital gains. The reasoning adopted by the CIT(A), in treating the gains on sale of stock option shares as 'long term capital gain', is, for the detailed reasons set out earlier in this order - particularly in paragraph 10 above, erroneous and it does not meet our approval. In this view of the matter, and as we are dealing with limited issue in appeal as raised by the Revenue, it is not really necessary for us to deal with other aspects of this matter.
21. In the result, appeal is allowed .
Pronounced in the open court on 10 th August, 2011
Sd/- Sd/-
(R.V.Easwar) (Pramod Kumar)
President Accountant Member
Mumbai, Dated 10 th August, 2011
Parida
23 I.T.A No.4699/ Mum/2004
Assessment year: 1998-99
Copy to:
1. The appellant
2. The respondent
3. Commissioner of Income Tax (Appeals),XXVIII, Mumbai
4. Commissioner of Income Tax, XXVIII , Mumbai
5. Departmental Representative, Bench I, Mumbai //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI