High Court Of Karnataka
CIT & Anr. vs. Infosys Technologies Ltd.
Sections 17(2), 192, 201(1)
Asst. Years 1997-98, 1998-99, 1999-2000
A R. Gururajan & N. Ananda, JJ.
IT Appeal Nos. 430, 432 & 433 of 2002
15th December, 2006
Counsel Appeared
M.V. Seshachala, for the Appellants : G. Sarangan for S. Parthasarathi, for the Respondent
JUDGMENT
R. Gururajan, J. :
Assessee is a company having its registered office at Bangalore. It filed its annual TDS return for the asst. yr. 1997-98. This return came to be scrutinized. It was found that TDS was not deducted in respect of shares issued to the assessee’s employees. A show-cause notice dt. 8th June, 1999 was issued proposing to treat the assessee as a defaulter for failing to deduct tax at source under s. 201(1) of the Act. The assessee objected to this notice by furnishing its reply in terms of letters dt. 2nd Aug., 1999 and 28th Sept., 1999. The AO passed an order on 7th Oct., 1999. Aggrieved by the said order, an appeal was filed before the CIT(A). He also rejected the appeal filed by the assessee. A second appeal was filed and the Tribunal has allowed the appeal filed by the assessee. Revenue is therefore before us. The following two questions of law are framed :
Whether the Tribunal was correct in holding that the assessee company was not liable to deduct TDS under s. 192 of the Act over the issue of its shares under stock option plan to its employees at a concessional rate as it cannot be treated as a perquisite (salary) and therefore the assessee cannot be treated as a defaulter under s. 201(1) of the Act, and consequently no interest under s. 201(1A) of the Act can be levied ?
Whether the Tribunal was correct in holding that s. 17(2)(iiia) of the Act was not clarificatory in nature and was not applicable to the current assessment year. The facts, grounds and the questions of law raised in IT Appeal No. 432 of 2002 and IT Appeal No. 433 of 2002 are one and the same. Hence, it is unnecessary ones for us to again to refer to the facts and the questions of law raised in those two cases. Sri Seshachala, learned counsel, argues that grant of shares to employees is nothing but perquisite available to an employee in the light of his status as an employee of Infosys. Stock option provides for a benefit inasmuch as the shares are allotted at a reduced rate to the employees.
It is nothing but a concession or benefit granted to an employee and it would certainly amount to a perquisite to an employee. Such perquisites are includable in the salary and the non-reduction insofar as the perquisite would attract the proceedings as has been done in the case on hand. He would also refer to us various clauses to say that the Tribunal is wrong in reversing the orders of the authority. Heard Sri Sarangan, learned counsel appearing for the assessee. He would take us to the material on record in the case on hand. He refers to us the various case law in support of his submissions. He would refer to us the intention of the legislature in the matter of grant of shares to the employees. He refers to us a trust that has been created by the Infosys Technologies Ltd. The trust deed is dt. 15th Sept., 1994. He refers to various clauses of the trust to say that the settlor has chosen to provide an opportunity to the employees to participate in the growth or prosperity of the settlor through issue of shares or other securities or warrants which would entitle such employees to apply for shares of the company through the settlor’s employees stock offer plan (ESOP) or through any other means. He also says that the grant of share is not automatic. It depends upon various terms and conditions in terms of the scheme. He says that in the case on hand, shares were offered to its employees after applying the conditions contained in the details of the trust deed. It is the trust that allots shares and not the company. He argues that the terms ‘income’, ‘salary’ and ‘perquisite’ in terms of the IT laws would provide that s. 192 of the IT Act is wholly inapplicable to the facts of the case. He also says that the subsequent insertion of s. 17(2) (c)(iii) would also show that the intention of the legislature is to exclude these shares for not being a perquisite in terms of the Act. He refers to us s. 17(1) in this regard. He would ultimately argue that the company on the facts of this case cannot be said to be a defaulter for the purpose of TDS in the given circumstances. He says that the AO as well as the CIT have committed a serious error. He says that the CIT and the AO have committed a legal error in holding that the assessee has committed violation warranting tax liability. He would refer to various case law.
After hearing, we have seen the material on record. From the material on record it is seen that the assessee has suffered an order at the hands of the Dy. CIT (TDS) under ss. 201(1) and 201 (1A) of the IT Act for the asst. yrs. 1997-98, 1998-99 and 1999-2000. An appeal was filed. Appeal stood dismissed by the CIT. Second appeal was allowed by the Tribunal. It is also admitted before us that Infosys Technologies Ltd. formulated an employee stock plan. A trust was set up by the assessee. Shares were allotted to the employees on certain conditions. However, the company has not deducted tax in respect of these shares allotted to its employees. Notice was issued under s. 192 r/w s. 201(1) of the Act and the assessee was treated as a defaulter by the Department and tax is demanded at the hands of the assessee. As mentioned earlier, there were several adverse orders before the AO and the CIT but however, it was successful before the Tribunal. In the light of this admitted fact two questions of law are raised before us as referred to above. Regarding question No. 1 : Question No. 1 deals with ss. 192, 201(1) and 201(1A) of the Act. Sec. 192 provides for deduction at source. Sec. 192(1) would provide for deduction by any person responsible for paying any income chargeable under the head ‘Salaries’ shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year. Sec. 201 would provide consequences of failure to deduct or pay. If any person referred to in s. 200 and in the cases referred to in s. 194, the principal officer and the company of which he is the principal officer do not deduct the whole or any part of the tax or after deducting fails to pay tax as required by or under this Act, he or it shall, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee in default in respect of the tax. There is no difficulty in understanding the declaration of an assessee to be a defaulter in the event of failure to deduct tax at source in terms of Chapter XVII of the IT Act. What is argued before us is as to whether the grant of shares in terms of the option would be a salary in terms of the IT Act. Sec. 17 deals with salary, perquisite and profit in lieu of salary. Sec. 17(1)(iv) provides for inclusion of any fees, commission, perquisite or profit in lieu of or in addition to any wages or salary. Therefore, perquisite is includable in the definition of salary. Perquisite has been defined under s. 17(2) of the Act.
7. What is contended before us by the Revenue is that the grant of shares by way of option would come under s. 17(2)(iii) of the Act. To consider as to whether the grant would fit into s. 17(2)(iii), one has to notice the various factual aspects of the matter. From the material on record, it is seen that the assessee company has created a trust deed to promote the welfare of itself and its employees by providing assistance to the employees in various forms such as medical, education, housing, holiday homes, recreation facilities, activities related to sports, music, research, artistic pursuits, etc. The trust deed also provides for an opportunity to participate in the growth or prosperity of the settlor through issue of shares or other securities or warrants which would entitle such employees to apply for shares of the company through the settlor’s employees stock offer plan or through any other means. Stock offer plan is also made available to us. For implementation of the settlor’s ESOP an irrevocable trust is created. Settlor means Infosys Technologies Ltd. and shall include its successors and assigns. ‘Trustees’ shall mean the party of the other part and include the trustees for the time being and from time to time nominated/appointed under these present and the survivor or survivors of them. ‘Employee’ shall mean so far as the ESOP is concerned, employee as defined under the said ESOP and so far as other benefits under this trust are concerned, any employee of the settlor as may be notified by the settlor to the trustees.
8. The company has passed a resolution and constituted a trust and handed over to the trustees, a sum of Rs. 10,001. ESOP provides for issue of warrants and the warrants are transferable to an employee in consideration of the payment to the trust of a sum of Re. 1 per warrant or such other form the trust may decide. It also provides for exercise of warrant exercise period and exercise date. The trust is to transfer warrants to eligible employees. Eligibility is seen from the material on record. The selection shall be based upon the performance of the employee as indicated by the annual performance appraisal, minimum period of service, the status of the employee in the company and the present and potential contribution of the employee to the success of the company and other factors deemed relevant by the advisory board. It is only such eligible employees entitled for consideration of the grant of shares. It also provides for a lock-in period in terms of the scheme. Shares allotted on the conversion of the warrants shall not be capable of being transferred/charged/mortgaged/ hypothecated/assigned or in any other manner alienated or otherwise disposed of for a period of 5 years from the date of issue of the warrants to the employees. Clause 8(4) would provide for continuation of employment. It provides for the employee holding the shares shall be entitled to the benefits of the shares, subject to the lock-in, provided that he continues to be in the employment of the company, during that period. In the event of the employee being dismissed, resigning or leaving the services of the company or in the event of the severance of employment due to non-performance or otherwise, the employee shall automatically loose his interest and right to the shares which are subject to the condition of lock-in. It further says that during the period of lock-in the shares shall be kept in the custody of the trust. However, he is entitled for all benefits as a share holder. Therefore, from a reading of the plan and the deed, what is clear to us is that the assessee allotted shares to the trust and the trust in turn allotted the same to employees subject to the eligibility with lock-in period with several conditions.
9. Now, let us see as to whether this facility of allotment would be a perquisite in terms of s. 17(2) (iii) of the Act. According to the Department, the said payment would come within s. 17(2)(iii)(c) of the Act. Perquisite is defined under s. 17(2)(iii). It would say that the value of any benefit or amenity granted or provided free of cost or at a concessional rate in some cases. It is no doubt true that the shares are allotted at a concessional rate to employees but the same are not allotted by the employer. The allotment is done by an independent trust and it is not an unconditional concessional grant but a concessional grant with several conditions including, eligibility, etc., in terms of the definition. Let us see in the light of this definition as to whether the findings of the authorities are acceptable or not in terms of the law governing such allotment. The original authority has noticed the scheme. After noticing, the AO would hold that there is a direct employer-employee relationship between Infosys and employees who have received stock option. (2) ESOP shares are taxable even before 1st April, 2000. (3) The employees stock option gives rise to income in the hands of the employee on the day of exercise of option by the employee and it is clearly a perquisite as per s. 17(2) of IT Act, 1961. (4) The value of the perquisite is the difference between the exercise price and the market value of the shares on the date of exercise of option. (5) No private arrangement can come in the way of taxing statute. (6) The trust is only a conduit. With these findings, he has directed the assessee to pay tax as a defaulter. When this was challenged before the CIT(A), he would notice the various facts and thereafter, he would come to a conclusion that the AO is right in passing the impugned order. When the same was challenged, the Tribunal has reversed this finding. At this stage, we should also notice the law for the purpose of appreciation of the order of the Tribunal. Revenue has placed before us various case law with regard to principles of interpretation of statutes.
AIR 1987 SC 1023 is a judgment of the apex Court. Apex Court has ruled at para 33 as under :
“Interpretation must depend on the text and the context. They are the bases of interpretation. One may well say if the text is the texture, context is what gives the colour. Neither can be ignored. Both are important. That interpretation is best which makes the textual interpretation match the contextual. A statute is best interpreted when we know why it was enacted. With this knowledge, the statute must be read, first, as a whole and then section by section, clause by clause, phrase by phrase and word by word. If a statute is looked at in the context of its enactment, with the glasses of the statute-maker, provided by such context, its scheme, the sections, clauses, phrases and words may take colour and appear different than when the statute is looked at without the glasses provided by the context. With those glasses we must look at the Act as a whole and discover what each section, each clause, each phrase and each word is meant and designed to say as to fit into the scheme of the entire Act. It is by looking at the definition as a whole in the setting of the entire Act and by reference to what preceded the enactment and the reasons for it that the Court construed the expression ‘prize chit’ in Srinivasa and we find no reason to depart from the Court’s construction.”
12. In State through CBI/New Delhi vs. S.J. Choudhary AIR 1996 SC 1491, the Supreme Court in para 9 noticed second edition of Statutory Interpretation by Francis Bennion. The same has been culled out reading as under : “(2) It is presumed that Parliament intends the Court to apply to an ongoing Act, a construction that continuously updates its wording to allow for changes since the Act was initially framed (an updating construction). While it remains law, it is to be treated as always speaking. This means that in its application on any date, the language of the Act, though necessarily embedded in its own time is nevertheless to be construed in accordance with the need to treat it as current law.”
13. In CIT vs. Podar Cement (P) Ltd. (1997) 141 CTR (SC) 67 : (1997) 226 ITR 625 (SC), the apex Court has noticed the interpretation particularly with reference to taxing statutes. The Supreme Court has ruled as under : “It is presumed that Parliament intends the Court to apply to an ongoing Act, a construction that continuously updates its wording to allow for changes, since the Act was initially framed (an updating construction). While it remains law, it is to be treated as always speaking. This means that in its application on any date, the language of the Act, though necessarily embedded in its own time, is nevertheless to be construed in accordance with the need to treat it as current law. In construing an ongoing Act, the interpreter is to presume that Parliament intended the Act to be applied at any future time in such a way as to give effect to the true original intention. Accordingly, the interpreter is to make allowances for any relevant changes that have occurred, since the Act’s passing, in law, social conditions, technology, the meaning of words, and other matters. Assuming that there are two possible interpretations on s. 22 of the Act, 1961 which is akin to a charging section, it is well settled that the one which is favourable to the assessee has to be preferred.”
14. In Tahsildar Singh vs. State of U.P. AIR 1959 SC 1012, the Court ruled as under : “The cardinal rule of construction of the provisions of a section with a proviso is to apply the broad general rule of construction, which is that a section or enactment must be construed as a whole, each portion throwing light if need be on the rest. The true principle undoubtedly is that the sound interpretation and meaning of the statute, on a view of the enacting clause, saving clause, and proviso, taken and construed together, is to prevail. Unless the words are clear, the Court should not so construe the proviso as to attribute an intention to the legislature to give with one hand and take away with another. To put it in other words, a sincere attempt should be made to reconcile the enacting clause and the proviso and to avoid repugnancy between the two. (Rule applied in construing)”
15. The Supreme Court in J.K. Steel Ltd. vs. Union of India AIR 1970 SC 1173, has ruled in para 37 as under : “From the above decisions, it is clear that several Judges in England have referred to the subordinate legislation made under a statute for the purpose of interpreting that statute though for the limited purpose of knowing how the Department which was entrusted with the task of implementing that statute, had understood that statute. In the case of fiscal statutes, it may not be inappropriate to take into consideration the exemptions granted in interpreting the nature and the scope of the impost.”
16. In the light of these case law available on record, we have to interpret the provisions of law with reference to the facts available so that the intention of the legislature is acted upon while interpreting the statute to the given facts. The law of interpretation is also well settled that it is for the legislature to decide the quantum of tax and not for the Courts to decide the quantum. No words can be read into the statute and no words can be omitted by the Courts while interpreting statute for the purpose of taxation. No part of a statute and no word of a statute can be construed in isolation. Statutes have to be construed so that every word has a place and everything is in its place. At the same time, the Courts also have to take into consideration particularly taxing statute a construction beneficial to assessee in case of ambiguity. In the light of the principles in terms of the apex Court judgments, let us see as to whether the Tribunal has committed any error in interpreting the provision of law in the case on hand. To decide the questions that are debated before us, we have to notice the history of introduction of the scheme by the company. The State Government has itself introduced an option scheme and provided guidelines. It is thereafter, the company thought it fit to introduce a scheme for the benefits of their employees. The stock option is also provided definitely at a concessional rate but the same is done not by the company but by the trust in terms of the material available on record. Stock option also is not unconditional, it is conditional. It is also not tradable in the light of the lock-in period.
17. At this stage, we must also notice how the Courts have considered perquisites in terms of the case law. A Division Bench of this Court in CIT vs. M.K. Vaidya (1995) 126 CTR (Kar) 420 : (1997) 224 ITR 186 (Kar) considered perquisites and also noticed interpretation of taxing statutes. In that case, a reference was made in respect of asst. yr. 1978-79 and a question of law under s. 256(2) was referred to this Court. The said question reads as under : “Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in rejecting the Revenue’s ground that the difference in interest rate between Government loans and that on the loan obtained by the assessee should be treated as perquisite ?” The facts in that case as referred to would show that the assessee was an employee of the company called MICO. The company advanced him certain amounts as loan free of interest for the purpose of house building. That this was the policy adopted by the company and several employees had obtained such loans is not a matter in dispute. The assessing authority has held that the interest-free loan was a benefit which should be valued as a perquisite. The Revenue contended that interest-free loan is a benefit which should be treated as a perquisite under s. 17(2)(iii) in the said judgment. The Division Bench after referring to the provisions and after noticing the statutory interpretation has ruled at p. 195 reading as under :
“Sec. 17(2) purports to include certain benefits and amenities in the term ‘perquisite’. There is no exhaustive definition of the term ‘perquisite’ for the purposes of s. 17. Therefore, unless the provision refers to a particular subject clearly to be included in the meaning of the word ‘perquisite’, Courts would hesitate to attribute a wider meaning to the said word. Even thought there is no equity in taxation and equitable considerations are outside fiscal legislations, still, if reasonably two meanings are attributable to a word used in the fiscal law, the meaning which is more beneficial to the taxpayers will be applied, specially it is so, when the State itself at one point of time clearly acted as if the wider meaning was not attributable without adding further words.
The valuation of the perquisite is to be as per the rules. There is a specific rule covering the valuation of the alleged benefit resulting from the interest-free loans or from the loans bearing a low rate of interest. In such a situation, if it is a perquisite, it has to be valued under r. 3(g), whereunder the ITO shall determine its value on such basis and in such amount as he considers ‘fair and reasonable’. In the case of loans, it is not possible to clearly identify the normal rate of interest and the exercise of the power to determine the value which the authority considers fair and reasonable, itself is likely to lead to different and divergent results. The rate of interest varies from subject to subject. The banks are required to charge a low rate of interest on agricultural loans; even as between industries and traders, distinctions are made in this regard. There is no uniform rate of interest charged on house building loans advanced to employees by public sector undertakings. Though a loan without interest is rare and a facility to obtain a loan without paying any interest could be considered as a beneficial facility in its larger sense, having regard to the inherent difficulty involved in working out the value of the benefit, Parliament must have thought it unwise to rope in the subject of house building loans to the employees, while taxing perquisites. It is also likely that the need to encourage house building activities, in this country, where there is an acute shortage of houses, would have influenced the law-making authorities in this regard. It is difficult to assume that the normal rate of interest chargeable on a house building loan is the rate of interest charged by the Central Government to its employees; the only source of authority for such an assumption is cl. (vi) enacted in the year, 1984.” The Court ultimately ruled reading as under : “We are of the view that it was never intended to treat the interest-free loan advanced for house building purposes to the employees as a ‘perquisite’ under s. 17(2)(iii). Consequently, we answer the question referred, in the affirmative and against the Revenue.”
18. The Supreme Court has noticed this judgment in V.M. Salgaocar & Bros. (P) Ltd. vs. CIT (2000) 160 CTR (SC) 225 : (2000) 243 ITR 383 (SC). The Supreme Court in the said judgment considered the following two questions : “(1) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in deleting addition of Rs. 5,21,241 made by the ITO under s. 40A(5) and sustained by the CIT(A) ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that non-charging of interest on the debit balance in the running account of the directors would not constitute a perquisite ?”
19. After noticing various case law including the judgment of this Court in CIT vs. M.K. Vaidya (supra), the Supreme Court answered the question in favour of the assessee. The Supreme Court in the said judgment noticed the judgment of CIT vs. M.K. Vaidya (supra) in para 21 of the said judgment. Thereafter, the Court noticed the definition of perquisite in the said judgment. The Supreme Court also noticed the amendment in the said judgment. This is what the Supreme Court has ruled : “If the loan granted to an employee without charging any interest or by charging interest at a concessional rate amounts to a benefit for the purposes of s. 17(2)(iii) of the Act, there was no need for Parliament to introduce, by the Taxation Laws (Amendment) Act, 1984, the new subcl. (vi) in s. 17(2) of the Act. The subsequent omission of the said sub-clause by the Finance Act of 1985 with effect from the date of its proposed insertion was also made with a view to give relief to salaried taxpayers. It is to be noticed that Expln. 2(b) to s. 40A(5) of the Act defines a perquisite to mean, inter alia, any benefit or amenity granted or provided free of cost or at a concessional rate to the employee by the assessee. If the loan granted to an employee being a director or a person who has a substantial interest in the company or a relative of a director without charging of interest or at a concessional rate of interest constituted any benefit or amenity within the meaning of s. 40A(5), Expln. 2(b), there was no need for Parliament to introduce the amendment in Expln. 2 (b) to s. 40A(5) of the Act by introducing sub-cl. (vi). Sub-cl. (vi) which was introduced in Expln. 2 (b) to s. 40A(5) of the Act included within the meaning of the expression ‘perquisite’ the amount treated as perquisite under s. 17(2)(vi) which also was introduced by the same Taxation Laws (Amendment) Act, 1984. In other words, a loan granted to an employee who is a director or who has a substantial interest in the company without charging any interest or at a concessional rate of interest did not amount to a benefit or amenity falling within cl. (b)(iii) of Expln. 2 to s. 40A(5) of the Act. The amendment and the immediate deletion thereof manifest clearly the intention of Parliament.
It is, therefore, evident that, without a specific provision which was sought to be introduced by sub-cl. (vi) in s. 17(2) of the Act and also the sub-cl. (vi) of Expln. 2(b) to s. 40A(5) of the Act, the grant of loan to the employee without charging any interest does not amount to any benefit for the purposes of s. 17(2) of the Act. The omission of sub-cl. (vi) in s. 17(2) and also sub-cl. (vi) of Expln. 2(b) to s. 40A(5) of the Act from the date of its proposed insertion also was to give relief to salaried taxpayers so that granting of loan to an employee without charging any interest would not be treated as benefit for the purposes of s. 17(2) of the Act. Sec. 17(2) of the Act, by an inclusive definition, sought to include loans given by an employer to its employee for purchase of a building or a site or a site with building or for purchase of a motor car without charging any interest or at a concessional rate, as perquisite. The word ‘includes’ is often used in interpretation clauses in order to enlarge the meaning of the words or phrases occurring in the body of the statute. It is a cardinal rule of interpretation that if, by an inclusive definition, the meaning of the word is to be enlarged, it would receive a strict interpretation. It is also a cardinal rule of construction of a fiscal statute that, even if two views are possible, the view which is favourable to the assessee must be accepted while construing the provisions of a taxing statute. For the reasons aforesaid, the non- charging of interest on the amount overdrawn in the relevant year cannot be treated as a benefit for the purposes of s. 17(2)(iii) of the Act.”
The Tribunal notices all these aspects of the matter and thereafter holds that even s. 17(2)(iii) says that it shall be the value of the benefit that shall be taxable as a perquisite. Such value has to be arrived at a manner defined by a statute. Unless otherwise the value is ascertainable by a mechanism laid down in the statute, the same cannot be brought to tax. We are in agreement with this finding of the Tribunal. Assuming that the some value can be attached to the benefit, that value is not ascertainable in terms of the scheme and in terms of the allotment. In fact, the Tribunal also has noticed that the benefit for being taxed has to be valued. What is allotted is not transferable till a defined period being 5 years from the date of grant of warrants. Transfer of these shares within the defined period would not be good delivery at all. The certificate of shares has been enfaced with a stamp regarding the non-transferable period. The Tribunal has also noticed the WT Act in the matter of valuation. After noticing all these aspects of the matter, the Tribunal in our view has come to a right conclusion that there is no ascertainable value attached to this share option and in that view of the matter, the initiation (sic–valuation) is not possible. We are in agreement with the findings of the Tribunal. We must also notice the application in terms of s. 192 of the IT Act. Sec. 192 would provide an application or a responsibility with regard to deduction of tax at source. As mentioned earlier, it refers to salary and salary is defined under s. 17. Salary would include perquisite. Perquisite would provide for a benefit granted by an employer. In terms of the trust deed, the shares are allotted to the trust and not to the employees. We are unable to appreciate the findings of the CIT(A) that the trust is only a conduit. There exists a trust deed and there exists a scheme framed by the Government. In the light of the scheme of the Government and in the light of the existence of a trust and in the light of no mala fide intention available on record, we are not inclined to accept the findings of the CIT, now set aside by the Tribunal, that the trust is only a conduit. On the other hand, the material on record would reveal that the shares have been allotted to a trust and the trust after noticing the eligibility, etc., has chosen to provide a stock option to its employees. Therefore, from the point of grant by the trust, it cannot be treated as a benefit at the hands of the employer. The Tribunal has considered the material in a detailed manner and to our mind that finding is reasonable and the same finding has to be accepted in the given circumstances. Therefore, we are clear in our mind that the stock option made by Infosys cannot be treated as a perquisite as held by the Tribunal which is accepted by us in this order. Assuming that it is a benefit, even then, the authorities have to show that a liability is caused on the employer in terms of s. 192 for the purpose of proceedings under s. 201 of the Act. The authorities cannot forget that the tax is calculated at the hands of the employer on the ground of default. Department must be careful in branding an assessee as a defaulter unless the Department is able to satisfy the default condition in terms of the taxing statute with material facts.
However, the Revenue would place before us the advance rulings issued by Suhas C. Sen, J. and Dr. Subhash C. Jain [reference seems to the ruling in the case of XYZ, In re (1998) 150 CTR (AAR) 504 : (1999) 235 ITR 565 (AAR)—Ed.] for the purpose of acceptance of the plea of the Revenue. It is no doubt true that the Authority in the said case has ruled that the amount gained by exercise of the option would be taxable under the head ‘Salary’. We have seen the facts in the said advance ruling case. It is seen from the ruling that the applicant company was incorporated in USA. It set up another company in India, which was a fully owned subsidiary of the American company. The American company made a proposal to enter into a stock option agreement with the employees of the Indian subsidiary. Under this agreement, the employees of the Indian company would have the option to subscribe to the shares of the US company at a pre-determined price called the option price which would be lower than the ruling market price of the shares. The employees would have the option to subscribe and become owners of the shares on any date of their choice. As and when such option was exercised, the employee would have to sell the shares in the open market in the USA at the ruling stock market price. The net gain is to be repatriated to India through the banking channels. The purpose of this stock option plan is stated to be 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. It is in the light of those given facts, it ruled that it is a ‘salary’ in the said judgment. In fact, the advance ruling would say in the last para that the American company has taken upon itself the responsibility for paying what must be regarded as ‘salary’ to the employees of the Indian company. They are under obligation under s. 192 to deduct income-tax at source on the amount payable to the employees. The facts in the said case would stand on a different footing. The company strictly had provided shares for the purpose of attraction and the company has undertaken the responsibility. The said advance ruling does not in any way support the Revenue.
23. CBDT Circular dt. 9th Aug., 2000 was also placed before us. In the said case, the CBDT circular considered the Finance Act of 1999 and the subsequent amendment. The subsequent amendment would show that under the amended provision such shares will only be subjected to capital gains tax at the time of sale by the employee. The difference between the consideration and the cost of acquisition will be regarded as the amount of capital gains under normal provisions of law. However, the new provisions shall be applicable only in respect of options exercised or allotments made after 31st March, 2000. The said circular may not in any way help the assessee since the allotment here is prior to the relevant date in terms of the circular.
24. At this stage, we must also notice the application of s. 192 of the IT Act. Sec. 192 would provide a responsibility with regard to deduction of tax at source. It refers to salary. Salary is defined under the Act. Salary would include perquisite. Perquisite would provide for a benefit granted by an employer. In the case on hand in terms of the trust deed, shares are allotted to the trust and not to the employees by the company. There exists a trust deed and there exists a scheme framed by the Government. In the light of the scheme of the Government and in the light of the existence of a trust, it is not possible to accept the findings of the CIT that trust is only a conduit as held by the Tribunal. Tribunal rightly has chosen to reject the findings of the CIT. Material on record would reveal that the shares were allotted to the trust and the trust after noticing the eligibility and entitlement has chosen to provide a stock option to the employees. In the light of this, as rightly ruled by the Tribunal that the benefit is not conferred by the employer but by the trust. Trust is not doubted by the Department. The Tribunal, after noticing these materials on record, has to our mind, given acceptable and reasonable finding that the grant has been done by the trust and that too with conditions. The Tribunal finding on this aspect of the matter requires confirmation by us. Assuming that the grant is benefit, even then, the authorities have to show to the satisfaction of the Court that a liability in such benefit cases is caused to the employees strictly in terms of s. 192 for the purpose of proceedings under s. 201 of the Act. The Tribunal has noticed that the Department has not disputed that Infosys has discharged its duty in a fair and bona fide manner. In fact, the material on record would reveal that the company was consistently approaching the Department seeking clarification about the taxability of ESOP. Correspondence is not wanting in this regard. In fact, the matter was referred to CBDT by the IT Department, Karnataka and Goa, seeking clarification of its taxability. Clarification issue was pending. It is at this stage, proceedings were initiated against the company. When the Department itself is not sure about its stand, the Department cannot in a hurry lable the assessee as a defaulter and proceed to initiate proceedings against the assessee. Authorities cannot forget that the tax is calculated at the hands of the employer in terms of the provisions of law on the ground of default. Default is serious in character. Default sometimes would tell upon the conduct and respect of a person or a firm. Unless the Department is sure on facts then only the Department has to act; otherwise, it has to be slow in labelling the person as a defaulter in the matter. In the case on hand, the Tribunal rightly, in our view, has chosen to take a right decision in its order. We have no hesitation in accepting the findings of the Tribunal. In these circumstances, the first question is answered in favour of the assessee.
25. Regarding question No. 2 : In the light of our answer that the stock option in the given circumstances does not amount to perquisite and that it does not come under ‘salary’, we are not inclined to answer the second question in the case on hand.
26. Concluding remarks : India is a growing country. The technological development of this country has resulted in economical prosperity of this country. Several giant undertakings have shown interest in this great country after taking note of the manpower and the intelligence available in this country. Stock option is nothing new and it is being continued in the larger interest of industrial harmony, industrial relations, better growth, better understanding with employees, etc. It is a laudable scheme evolved and accepted by the Government. Good old days of only master and only servant is no longer the mantra of today’s economy. Today sharing of wealth of an employer with his employee by way of stock option is recognised, respected and acted upon. Such stock option is way of participation and it has to be encouraged. It is for this reason, that subsequently the same is not taxed by the Government. The Department, in our view, must approve such welfare participatory pro-labour activities of an employer. Of course, we do not mean that if law provides for taxation, no concession is to be shown. But wherever there are gray areas, it is preferable for the Department to wait and not hurriedly proceed and arrest the well intended scheme of welfare of the employer. We would be failing in our duty if we do not note the Directive Principles of the Constitution in the matter of labour participation. Article 43A provides that the State shall take steps by suitable legislation or by any other way to secure participation of workers in the management of undertakings, establishment or other organisation engaged in other industries. The apex Court has considered this aspect in AIR 1980 SC 1896. The laudable object of Art. 43A is to a certain extent, achieved by this company. That laudable object is sought to be either diluted or destroyed by taking an unsustainable plea by the Department. We would ultimately conclude by saying that any welfare measure has to be encouraged but of course within the four corners of law. We do hope that other employers would follow this so that the economic and social justice is made available to the weaker sections of the society also. With those concluding remarks, we hereby answer the first question against the Revenue and in favour of the assessee, and do not answer question No. 2. The findings of the Tribunal are confirmed. We further deem it proper to say that if refund applications are pending, then the Department has to settle the claim as early as possible. No costs.
[Citation : 293 ITR 146]
