IN THE ITAT,
Makarand Gadre
v.
Assistant Commission of Income-tax, Circle 12(1),
PRADEEP
PARIKH, VICE PRESIDENT
AND N.R.S.
GANESAN, JUDICIAL MEMBER
I.T. APPEAL
NOS. 1278 (HYD) OF 2003 AND 940 (HYD) OF 2005
[Assessment
years - 2000-01 and 2001-02]
December 31,
2007
Section 6 read with Section 5 of the Income-tax Act, 1961 -
Residential status - Assessment year 2001-02 - For relevant assessment year
2001-02, assessee filed his return of income claiming his status as ‘resident
but not ordinarily resident’ - In this regard assessee explained that he left
India on 27-10-1989, for taking up employment in USA, that he worked with
various American companies till 5-7-1993 and joined an American company ‘M’ on
6-7-1993, and that he returned to India on 1-5-1999 and joined an Indian
company ‘MI’ which was a 100 per cent subsidiary company of American company
‘M’, on 15-5-1999 - He further referred to section 5(1)(c), and submitted that
in case of a person not ordinarily resident in India within meaning of sub-section (6) of section 6,
income accruing to that person shall not be included in total income -
Department however, rejected explanation of assessee and treated him as
‘resident’ on ground that he had not fulfilled conditions of section 6(6)(a)
and taxed his income in India - Whether in order to claim status of resident,
but not ordinarily resident assessee has to satisfy one of two conditions
prescribed under section 6(6)(a) i.e. (i) he has to be non-resident in India in
9 out of 10 previous years or (ii) he has during 7 previous years preceding
relevant previous year, been in India for a period of 730 days or less - Held,
yes - Whether since in instant case assessee was in India only for 420 days out
of seven years, assessee fulfilled condition prescribed in second part of
section 6(6)(a) for purpose of claiming status as ‘resident but not ordinarily
resident’ - Held, yes - Whether since assessee satisfied one of conditions
provided in section 6(6)(a), it was eligible for claiming status as ‘resident
but not ordinarily resident’ - Held, yes
Section 5 of
the Income -tax Act, 1961 - Income - Accrual of - Assessment year 2001-02 -
Assessee left India on 27-10-1989 for taking up employment in USA and during
period of his stay in USA he joined an American company ‘M’ on 6-7-1993 -
American company ‘M’ had framed a stock option scheme for its employees - In
year 1994, assessee acquired certain shares of company ‘M’ under stock option
scheme - Assessee returned to India on 1-5-1999 and joined an Indian company
MI, which was a 100 per cent subsidiary company of American company ‘M’, on
15-5-1999 - Assessee exercised stock option on 20-4-2000 and sold aforesaid
shares - Assessee claimed that since option was granted by ‘M’ in year 1994
even before incorporation of subsidiary company ‘MI’ in India, income on
account of sale of shares on 20-4-2000 accrued or arose to him outside India,
and that since for relevant assessment year 2001-02 he claimed status as
‘resident but not ordinarily resident’ income in question was not liable for
taxation in India - Assessing Officer however in view of decision of Authority
for Advance Ruling rendered in case of American Company ‘M’ in Advance Rulings
P.No. 15 of 1998, In re [1999] 235 ITR 565/102 Taxman 74 came to conclusion
that stock option was nothing but a salary to employees working in Indian
company - He, therefore, treated income in question as income accrued to
assessee in India and, accordingly, taxed same in hands of assessee - Whether
since Authority for Advance Ruling in case of American company ‘M’ held that
gain made by employees of ‘MI’ after exercising stock option was taxable as
salary in India and further since in view of section 245S (1)(b), decision of
Authority for Advance Ruling in respect of Stock Option Scheme was binding on
assessee and Indian subsidiary company ‘MI’, profit arising out of exercising
of stock option by assessee was only a salary within meaning of section 15 -
Held, yes - Whether since from decision of Authority for Advance Ruling
rendered in case of American company ‘M’ it was obvious that option was given
to assessee only in respect of services rendered in India in Indian subsidiary
company ‘MI’ and to retain such service in Indian company ‘MI’, it could not be
said that said option was given to assessee in respect of services, if any,
rendered outside India - Held, yes - Whether, therefore, income on profit in
exercise of stock option accrued to assessee only in India and even though
status of assessee was ‘resident but not ordinarily resident' Indian’, same was
taxable in India - Held, yes
Circulars and
Notifications :-
Circulars No.
710, dated 24-7-1995
FACTS
For the
relevant assessment year 2001-02, the assessee filed the return of income
claiming his status as ‘resident but not ordinarily resident’ and in this
regard assessee explained to the Assessing Officer that he left India on
27-10-1989 for taking up employment in the USA, that he worked with various
American companies till 5-7-1993 and joined an American company ‘M’ on
6-7-1993, and that he returned to India on 1-5-1999 and joined an Indian
company ‘MI’, which was a 100 per cent subsidiary company of the American
company ‘M’, on 15-5-1999. He further
referred to section 5(1)(c) and submitted that in case of a person ‘not
ordinarily resident in India’ within meaning of sub-section (6) of section 6,
income accruing to that person shall not be included in the total income. However, the Assessing Officer treated the
assessee as a resident. The assessee had also submitted before the Assessing
Officer that the American company ‘M’ had framed a Stock Option Scheme for its
employees, that in the year 1994 he acquired certain shares of company ‘M’
under the Stock Option Scheme, that he exercised the stock option on 20-4-2000
and sold the said shares, that since the stock option was granted by ‘M’ in the
year 1994 even before the incorporation of the subsidiary company ‘MI’ in
India, the income on account of sale of shares on 20-4-2000 accrued or arose to
him outside India, and that since he claimed the status as ‘resident but not
ordinarily resident’, the income in question was not liable for taxation in
India. The Assessing Office, however, he
in view of the decision of the Authority for Advance Ruling rendered in the case
of American company ‘M’ in Advance Ruling P.No. 15 of 1998, In re [1999] 235
ITR 565/102 Taxman 74 came to the conclusion that the stock option was nothing
but a salary to the employees working in the Indian company. He, therefore, treated the income in question
as the income accrued to the assessee in
On appeal, the
Commissioner (Appeals) following the judgment of the Gujarat High Court in the
case of Pradip J. Mehta v. CIT (2002) 256 ITR 647 123 Taxman 1118
held that the assessee was a resident for three years out of 10 preceding
accounting year. He, therefore, held the
status of the assessee as resident. He
further held that the assessee’s income in question was rightly taxed in
On second
appeal :
HELD
The issue for
consideration in the instant case was as to whether the assessee was a
‘resident’ or a ‘resident but not ordinarily resident’. Sub - Clause (a) of section 6(6)
says that an individual who has been a non-resident in
The second
part of clause (a) of sub-section (6) of section 6 throws light on the
interpretation of the first part. Under
the second part, an individual is said to be ‘not ordinarily resident’ for the
purposes of the Act if he has not been in India for a period of seven hundred
and thirty days or more during the seven years preceding the relevant previous
year. That means, if an individual has
been in
In view of the
judgment of the Gujarat High Court, it is obvious that the stress is on
‘presence of the assessee’ in
Admittedly,
the assessee left
Proviso to
section 5(1)(c) says that in the case of a person not ordinarily
resident in India within the meaning of clause (6) of section 6, income
which accrues or arises to him outside India shall not be included in the total
income of the assessee. [
Now the
question for consideration arose as to whether the income accrued or arose to
the assessee in
The CBDT had
also considered the issue regarding taxability of the perquisite on shares
issued to the employees at less than market price and issued instructions in
Circular No. 710, dated 24-7-1995.
Clause 2(iii) of the circular clearly says that where the
employer has offered its shares to its employees at a price lower than the one
at which the shares have been offered to the other shareholders/public, the
difference between the two prices would be taxed as perquisite. Therefore, the difference between the price
offered by M and the ruling market price was liable to be taxed. [
In view of the
judgment of the Bombay High Court in the case of CIT v. Avtar Singh
Wadhwan [2001] 247 ITR 260 115 Taxman 536 wherein the Court had an occasion
to consider the place of accrual of income, it was to be held that even though
the income in question was received by the assessee as a non-resident Indian,
it was taxable under the Act if the said income was received in respect of
services rendered in India. [
Now the
question for consideration arose where the assessee rendered services for the
purpose of exercising the stock option under the scheme promoted by ‘M’. The fact as found by the Authority for
Advance Ruling showed that the employees of the Indian company ‘MI’ had the
option to subscribe to the shares of ‘M’.
The purpose of the stock option plan was to attract and retain the best
available personnel for positions of substantial responsibility, to provide
additional incentive to such individuals and to promote the success of the
company’s business by aligning employees with financial interests with
long-term shareholder value. From the
above object of promoting the stock option scheme, it was obvious that it was
just to attract and retain the best available personnel for responsible
positions. In other words, it was a
privilege given to the employees working with the Indian company ‘MI’.
Therefore, it
was obvious that the option was given to the assessee only in respect of the
services rendered in
The assessee
had relied on judgment of the Karnataka High Court in the case of CIT v.
Infosys Technologies Ltd. [2007] 293 ITR 146/159 Taxman 440, but it stood on a
different footing and was of no help to the assessee. In view of section 245S, the decision
rendered by the Authority for Advance Ruling in respect of transaction viz.
stock option granted to the employees of the Indian subsidiary company of the
American company ‘M’ was binding not only on the company but also on the
employees since the subject matter of transaction is one and the same. Therefore, in view of the specific provisions
contained in section 245S, the decision of the Authority for Advance Ruling has
to be preferred. [
In view of the
above discussion, it was to be held that the profit accrued to or received by
the assessee on exercising the stock option accrued or was received in
EDITOR’S NOTE
Where tax was
deducted on the income accrued or arose to the assessee both by the tax
authorities in U.S.A and
CASE REVIEW
Pradep J.
Mehta
v. CIT [2002] 256 ITR 647/123 Taxman 1118 [Para 7] ; Advance Rulings P.
No. 15 of 1998, In re [1999] 235 ITR 565/102 Taxman 74 (AAR) [Para 11]; CIT v. Avtar Singh Wadhwan [2001]
247 ITR 260/115 Taxman 536 (Bom.) -[Para 13] Followed; CIT v. Infosys Technologies Ltd.
(2007) 293 ITR 146/159 Taxman 440 (Kar.)
[