IN THE ITAT MUMBAI BENCH
‘C’ (Special Bench)
Sumit Bhattacharya
v.
Assistant Commissioner of
Income-tax, Circle 16(I), Mumbai
And Pramod Kumar,
Accountant Member
IT Appeal No. 238(Mum.) of
2005
[Assessment year 1998-99]
Section 15 read with section 56 of the
Income-tax Act, 1961 - Salaries - Chargeable as - Assessment year 1998-99 -
Whether, salary, is a reward or
consideration for services rendered by a person in employment and question of
reward of his employment flowing from employer to employee in order to bring
same within ambit of taxability under head ‘income from salaries’ is redundant
- Held, yes - Whether merely because an
employment related income/benefit cannot be taxed under head ‘income from
salaries’, such a benefit cannot go outside ambit of taxable income and such an
income can be taxed under head ‘income from other sources’ - Held, yes -
Whether stock appreciation rights plan is a method for companies to give their management
or employees a bonus if company performs well financially and, therefore, said
plan is nothing other than a form of deferred cash compensation which is
contingent upon financial performance of company - Held, yes - Whether in case
of redemption of stock appreciation rights redemption amount being dependent on
market price of shares which can move in any direction at any time, income
arises only when stock appreciation right is redeemed - Held, yes - Whether,
therefore, income/benefit earned on account of redemption of stock appreciation
rights can only be taxed in year of redemption and not in year of grant or
vesting - Held, yes - Assessee was employed as Managing Director of Procter
& Gamble India Ltd. [PGI], which was a part of group of companies headed by
Procter & Gamble Co., Inc., USA (PGU) - In January, 1998, assessee received
certain amount from PGU on account of redemption of certain stock appreciation
rights [SARS] in terms of Procter & Gamble 1983 stock plan - Assessee did
not admit any tax liability on said amount - Assessee submitted before
Assessing Officer that since he did not have any employer- employee
relationship with PGU, i.e. grantor of SARs, amount received by him on
redemption of SARs could not be considered as perquisite in his hands and,
therefore, could not be taxed in his
hands as income from salaries - Whether amount received by assessee on
redemption of stock appreciation rights was in nature of consideration for
services rendered by assessee which was in nature of income - Held, yes -
Whether since assessee had no other connection with PGU than connection as an
organization connected with company PGI with which he had entered into an
employment contract, anything that assessee received from PGU could not be
anything but reward of his employment - Held, yes - Whether, therefore, amount
in question received by assessee on redemption of share appreciation rights was
taxable under head income from salaries - Held, yes - Whether even if it was
said that amount in question was received from a person other than employer of
assessee, said amount would still be taxable though under head ‘income from
other sources’ – Held, yes - Section 45 of the Income-tax Act, 1961 – Capital
gains – Chargeable as – Assessment year 1998-99 – Whether in view of facts
stated under heading ‘salaries-chargeable as’ amount in question received by
assessee would not be taxable under
head ‘capital gains’ - Held, yes
FACTS
The assessee, in the relevant previous
year ended on 31-3-1998, was employed
as Managing Director of the Procter & Gamble India Ltd. (PGI), which was a
part of the group of companies headed by Procter & Gamble Co., Inc., USA
(‘PGU’). In January, 1998, the assessee received certain amount from PGU on account of redemption of certain
stock appreciation rights [SAR] granted by PGU to the assessee from time to
time on various dates. The assessee did not admit any tax liability on the said
amount. The assessee in this regard submitted before the Assessing Officer that these SAR were granted to him by the PGU in recognition of
his continuing contributions to the long term success and development of the
business of Procter & Gamble group, that these grants were in accordance
with and subject to the terms of the Procter & Gamble 1983 Stock Plan and
the regulations of the Stock Options Committee of the Board of Governors
[P&G 1983 Stock Plan], that PGU, had decided to redeem all the stock
appreciation rights by paying the difference between market price of shares and
the grant price of the shares of the PGU, and that no shares were actually
allotted or given to him by PGU. The
assessee further submitted before the Assessing Officer that since he did not have any employer-employee
relationship with PGU, i.e., the grantor of the SARs, the amount received
by him on redemption of SARs could not be considered as perquisite in his hands
and therefore could not be taxed in his hands as income from salaries. The assessee further submitted that the
right to receive stock appreciation was in the nature of a capital asset, and
since this asset was without any ascertainable cost of acquisition, the amount
on sale of these rights would be liable to taxation in his hands under the head
‘Capital gains’. The assessee also submitted
that he was in employment with PGI, which was an ultimate subsidiary of the
PGU, but since the PGU did not have more than 50 per cent shares in the PGI in
the first two years of SARS grant, it could not be said that PGI, in that
period, was even a subsidiary company of the PGU. The assessee further on being
asked by the Assessing Officer to show cause as to why the payment on
redemption of SARs not be treated as ‘salary’ within the meaning assigned to
that expression under section 17(1)(iv) also submitted that at best the
SARs could be taxed at the point of time when the same were granted but then
since grant was at market value of shares, no advantage accrued to him. The
Assessing Officer though agreed that the assessee was indeed not in employment
of PGU, but observed that the true test of any income
in such cases was to see whether the amount had been received by the assessee
by virtue of his (employee's) office.
The Assessing Officer, further held that these payments were profits of
the assessee's employment. The Assessing Officer, therefore, held that the
grant of SAR to the assessee was due to employer- employee relationship and so
the same would form part of income from salaries. The Assessing Officer also
observed that there was no gain to the assessee when SARs were granted and since
the gain crystallised only in the year in which SARs were redeemed, the same
could only be taxed in the year in which SARs were redeemed. The Assessing
Officer also observed that the payment received by the assessee might be
gratuitous but still the same was taxable under section 17(1). The Assessing Officer therefore taxed
the said amount in the hands of the assessee under the head ‘Income from
salaries’. On appeal, the Commissioner (Appeals) upheld the action of the
Assessing Officer aggrieved by the said order the assessee filed the instant
appeal before the Tribunal. But as divergent views prevailed among the
co-ordinate Benches of the Tribunal on the issue the matter was referred to the
Special Bench for deciding the taxability of the amount received by the
assessee on redemption of SARS.
HELD
BASIC FEATURES OF STOCK APPRECIATION RIGHTS
On going through the terms of the P&G
1983 Stock Plan under which the assessee was granted the SAR, it was clear that
the redemption value of the SAR was primarily a deferred wage or bonus payment,
in cash or otherwise, measurable with reference to the appreciation of market
price of company's shares. In contrast, under the stock options scheme, the
beneficiary of the same is allowed to buy the shares in the company, though
subject to several conditions attached, at a price lower than the prevailing
market price as at the point of time when the stock option is exercised.
Further, the said stock plan clearly showed that connotations of the expression
‘stock options’ and ‘stock appreciation rights’ are quite distinct and these
two expressions can not be used interchangeably. The tax implications of stock
options and stock appreciation rights are also at variance. [Para 25]
By way of stock appreciation
rights, a person is allowed a reward contingent upon performance of the company
in the stock market. By way of a stock option, on the other hand, a person is
allowed to acquire the shares of a company at a price lower than prevailing
market price. The exact quantum of benefit or reward is thus ascertained at the
point of time when stock appreciation rights are redeemed, while the exact
quantum of benefit, in the case of share acquisition at concessional rate i.e.
stock plan, can only be ascertained when the shares are actually sold. However,
from a theoretical point of view and assuming that the shares are acquired
without any special conditions attached, which is seldom the case, the quantum
of benefit can indeed be divided into two parts - reward for employment to the
extent of excess of market price of shares as on the time of acquisition vis-a-vis
the acquisition price of such shares, and capital gain or loss to the extent of
difference in sale consideration of shares vis-a-vis the market price of shares
as on the time of acquisition of such shares. The legal position regarding the
amount received on redemption of stock appreciation rights and the value of
benefit received by way of acquisition of shares at concessional prices cannot,
therefore, be decided by the same yardstick. These two benefits have several
and significant distinguishing features.
Exercise of a stock appreciation right
involves payment to the beneficiary, while exercise of a stock option
involves payment, albeit concession, by the beneficiary. The former results in
receipt of a reward, though measurable in terms of the money value by which the
share price has gone up, to the beneficiary, while the latter results in
acquisition of an asset at a concessional
price by the beneficiary. There cannot be a loss situation in the stock
appreciation right because the exercise of stock appreciation rights is not
mandatory and the same can be allowed to expire at the option of the
beneficiary. There can, however, be a loss situation in the acquisition of
shares in the stock options scheme, because no matter how much below market
price the shares are offered under the scheme, market forces can drive the
shares to even lower levels. On a conceptual frame, thus, the stock appreciation rights plan can be
said to be a method for companies to give their management or employees a bonus
if the company performs well financially. It is, however, very distinct from a
typical stock options plan which involves allowing the employees to buy the
shares of the company on a concessional or nominal price. SARS provide the
employee with a cash payment based on the increase in the value of a stated
number of shares over a specific period of time. SARs generally do not have a
specific settlement date and the employees have flexibility in when to choose
to exercise the SARs - of course within an outer limit on the expiry of which
the right would lapse. In effect, therefore, SARs plan is nothing other than a
form of deferred cash compensation which is contingent upon financial
performance of the company. In character, therefore, a stock appreciation right
is not the same thing as a typical stock option. Unlike a stock option plan,
which aims at what can be termed as employee’s participation in ownership, a
stock appreciation right is a scheme of bonus payment which is on the basis of
financial performance of the company. That is the reason perhaps of the stock
appreciation right being generally confined to key personnel of the company who
can make a significant contribution to financial success of the company. [Para 26]
Further, the distinction
between the nature of stock appreciation rights and the stock option is so
fundamental that it affects the tax treatment of these two benefits. While in
stock option, the assessee gets a capital asset at a concessional or nominal
price and what is to be taxed is the value of this benefit. In the case of the
stock appreciation rights, what the assessee actually receives is a kind of
cash bonus, which is in the nature of deferred wages and which is contingent
upon the company doing well in financial terms. There is no need, as in the
case of stock options, in converting the benefit into monetary terms because
what is received by the assessee is itself in monetary terms. One cannot
convert money into money. There cannot be a serious dispute about the point of
time when the taxability is to be triggered because the redemption amount being
dependent on the market price of shares which can move in any direction at any
time, the income arises only when the stock appreciation right is redeemed.
Even if one is
to proceed on the basis that grant of a stock appreciation right gives
some benefit to the assessee, it is beyond dispute that such a benefit is
contingent upon the market behaviour for value of shares in question. It is
well settled, based on the principle of conservatism, that an anticipated
income can not be brought to tax until it actually accrues or unless there is a
specific provision to that effect. Therefore, the assessee’s contention that
the benefit on account of stock appreciation right could only be taxed in the
year of grant or vesting, and not in the year of redemption, was thus devoid of
legally sustainable. [Para 27]
Further, on going through the meaning of
the expression ‘subsidiary’ as defined in P&G 1983 stock plan it was clear
that what was material for the purpose of PGI was that fifty per cent or more
of the shares - whether directly or indirectly - were held by the PGU. It was
therefore, immaterial whether or not
the shares were held directly by the PGU or through another company. Therefore,
there was no relevancy of the assessee
repeatedly highlighting the fact that PGU’s shareholding in the PGI was
through another company. Further so far as SARs were concerned, even this
benchmark of fifty per cent was not really relevant because the aforesaid
meaning of the expression ‘subsidiaries’ also specifically, provides that ‘the
board may designate for participation in this plan as ‘subsidiary’, except for
the granting of incentive stock options, those additional company affiliated
with the company, in which direct or indirect ownership is less than fifty per
cent of the total combined voting powers of all classes of such company’s
stock. Nothing, therefore, turned on the fact that in the first two years of
SARs grant, in which SARs were granted by PGU to the assessee PGU had less than
fifty percent ownership of the PGI and that the ownership control of the PGU
was not direct but through another intermediary corporate. [Para 31]
NATURE OF RECEIPT OF MONEY RECEIVED ON
ACCOUNT OF REDEMPTION OF STOCK APPRECIATION RIGHTS
The amount received by the assessee on
redemption of share appreciation rights was nothing but a deferred wage
contingent upon performance of the company’s shares in the market. The very
preamble of the plan, under which share appreciation rights had been given to
the assessee, also stated that it was in the nature of the ‘deferred awards
related to the increase in the price of the common stock of the company. Thus,
the amount received by the assessee on redemption of stock appreciation rights
was in the nature of consideration for services rendered by the assessee.
Therefore, the amount received by the assessee on redemption of stock
appreciation rights was in the nature of income. [Para 34]
TAXABILITY OF AMOUNT RECEIVED ON
REDEMPTION OF STOCK APPRECIATION RIGHTS
There was no dispute that the amount
received by the assessee was in the nature of, as admitted by the assessee,
‘fruits of employment’. The natural corollary of this undisputed factual
position was that the said amount/income should be
taxed under the head 'income from salaries', but one of the basic arguments of
the assessee against such a taxability was that since there was no
employer-employee relationship between PGU and the assessee, the amount
received by him from PGU, on redemption of his stock appreciation rights, could
not be taxed under the head 'income from salaries'. This argument rested on the
assumption that taxability under the head 'income from salaries' was confined
to what was received by an employee from his employer. [Para 36]
The Supreme Court in the case of Justice
Deoki Nandan v. Union of India [1999] 237 ITR 872, has held that the theory of
compensation for services rendered flowing from employer to
the employee being sine qua non for taxability under the head 'income from salaries' is no longer valid. What is material is that the
amount received by the assessee should be in the nature of salaries. The ratio decidendi of the said judgment
is that what Judges receive, as salary, is reward for their services and it is
for this reason that such reward is brought within the scope of salary. This
decision thus has the effect of expanding the scope of head of income 'salary'
as it holds that what is relevant is
the salary being a reward for
employment rather than existence of an
employer in conventional
sense of the
expression. The question of reward for
employment flowing from employer to employee, in order to bring the same
within the ambit of taxability under the head 'income from salaries', is thus
redundant. [Para 39]
As per the dictionary meaning the
expression ‘salary’ means recompense or consideration given to a person for his pains bestowed upon another man’s
business’. It was not even the assessee’s case that the stock appreciation
rights that he had received were not in the nature of ‘recompense or
consideration’ given to him for anything other than his employment. The only
defence for his non taxability under the head ‘income from salaries’ was that
the stock appreciation rights were not received from the employer, and,
therefore, the same could not be taxed under the head ‘income from salaries’.
This plea of the assessee was therefore not sustainable in law. [Para 40]
Further, it was not the case of the assessee that PGU
was a rank outsider so far as PGI, i.e. the company with which the assessee had
entered into contract of employment, was concerned. There was also no dispute
that PGI was treated as a subsidiary of the PGU because unless it was so, the
assessee could not have been granted stock appreciation rights in the first
place. The PGI was a party to the entire scheme of granting of stock
appreciation rights, as evident from the P & G 1983 Stock Plan. A plain reading of the various clauses of
the P&G 1983 stock plan showed that the assessee’s employer had got
valuable rights and protection under the scheme of allotment of stock
appreciation rights. It was in consideration of the assessee agreeing not to
leave employment of the Procter & Gamble and any of its subsidiary company
for a period of one year, and not to engage in competitive business for three
years that the assessee got the SARs. The interest of the assessee’s employer
were also protected in the said scheme inasmuch as in case the assessee would
violate the said agreement, the employer company was entitled to injunctive or
other appropriate relief. It was also agreed that this scheme would constitute
an agreement between the assessee and the PGU and its subsidiaries, including
successors thereof. The PGI was all along an important and integral party to
all these arrangements. The assessee had no
other connection with PGU than the connection as an organisation connected with
the company PGI with which he had entered into an employment contract, and,
therefore, anything that the assessee received from PGU could not be anything
but the reward of his employment. It is well settled that what is to be taxed under the head 'income
from salaries' is whatever constitutes 'salary'. The expression 'salary',
though not specifically defined under the Act is the reward or consideration
for services rendered by a person in employment. The assessee's receipts of
whatever nature, in connection with his employment, were, therefore, to be
treated as 'salaries'. [Paras 44 and
46]
It is well settled that the Tribunal is competent to change the head of income even
at the instance of the respondent when all the relevant facts are already on
record and as long as both the parties are heard on that issue. In the instant
case it was the alternate contention of
the revenue that in the event Tribunal came to the conclusion that the amount
in question was not taxable under the head income from salaries, the Tribunal
might also adjudicate on the question whether or not the impugned amount be held as income from other
sources. [Para 47]
The Supreme Court in the case of Emil
Webber v. CIT (200 ITR 483) has held that merely because an employment related
income/benefit cannot be taxed under the head ‘income from salaries’, such a
benefit cannot go outside the ambit of taxable income and such an income can be
taxed under the head ‘income from other sources’. [Para 50]
Therefore, even if the amount received
by the assessee on redemption of share appreciation rights was held to be not
taxable under the head 'income from salaries', this fact, by itself, would not
take the same outside the ambit of taxable income. Since, in such an
eventuality and following Supreme Court’s judgment in Emil Webber’s case
(supra), the said amount would be taxable under the head ‘income from other
sources’. Therefore, even if it
was held that the amount in question was received
from a person other than the employer of the assessee, and that in order for an
income to be taxed under the head 'income from salaries' it is a condition
precedent that the salary, benefit or the consideration must
flow from employer
to the employee,
the amount received by the
assessee on redemption of stock appreciation rights would still be taxable -
though under the head ‘income from other sources’. The plea raised by the
assessee that the amount in question could not be taxed as ‘income from
salaries’ was thus irrelevant. [Para
51]
Further, there was also no merit in the
plea of the assessee that the amount in question
could only be taxed under the head 'capital gains' as the receipt was on
account of transfer of a capital asset consisting of right to receive stock
appreciation rights. As held earlier the
amount in question was revenue receipt in nature, and it was only the
quantification of this amount which was linked to a capital asset and that was
value of shares. The taxability was not in respect of the stock appreciation
right its per se but the amount received as a fruit of employment which
was measured by way of a formula envisaged in the stock appreciation rights
scheme. [Para 54]
Therefore, the assessee was indeed liable to tax in respect of the
amount received on redemption of stock appreciation rights. The taxability of
this amount was under the head 'income from salaries' but the assessee's plea
that the amount in question was received from a person other than the de
jure employer, even if it was
to be accepted, would not
have any material difference to the taxability per
se, because, in such an event the amount would have been taxed under the head
'income from other sources'.
Therefore, the appeal was liable to be
dismissed.