of Income Tax, Bangalore Vs. Infosys Technologies Ltd.
 Insc 4 (4
Kapadia & B. Sudershan Reddy
Civil Appeal No. 16 of 2008 @ S.L.P.(C) No. 16926 of 2007 KAPADIA, J.
Respondent-assessee is public limited IT company based in Bangalore. To implement Employees Stock
Option Scheme (ESOP), the assessee created a Trust known as
Technologies Employees Welfare Trust and allotted 7,50,000 warrants at Re. 1/-
each to the said Trust. Each warrant entitled the Holder thereof to apply for
and be allotted one equity share of the face value of Rs. 10/- each for total
consideration of Rs. 100/-. The Trust was to hold the warrant and transfer the
same to the employees of the company under the Terms and Conditions of the
scheme governing ESOP. During the assessment years 1997-98, 1998-99 and
1999-2000, warrants were offered to the eligible employees at Re. 1/- each by
the Trust. They were issued to employees based on their performance, security
and other criteria. Under the ESOP Scheme, every warrant had to be retained for
a minimum period of 1 year. At the end of that period, the employee was
entitled to elect and obtain shares allotted to him on payment of the balance Rs.
99. The option could be exercised at any time after 12 months but before expiry
of the period of 5 years. The allotted shares were subject to a lock in period.
During the lock in period, the custody of shares remained with the Trust. The
shares were non-transferable. The employee had to continue to be in service for
5 years. If he resigned or if his services be terminated for any reason, he
lost his right under the scheme and the shares were to be re- transferred to
the Trust for Rs. 100 per share. Intimation was also given to BSE that 734500
equity shares were non- transferable and would not constitute good delivery.
Till 13.9.1999 all the shares were stamped with the remark non-
transferable. Thus the said shares were incapable of being converted into
money during the lock in period.
the assessment year 1999-2000, the AO held that the total amount paid by the employees
consequent to the exercise of option was Rs. 6.64 crores whereas the market
value of those shares was Rs. 171 crores. He held that the perquisite
value was the difference between the market value and the price paid by
the employees for exercise of the option. He, therefore, treated Rs. 165 crores
as perquisite value on which TDS was charged at 30%. It was held that
the respondent-assessee was a defaulter for not deducting TDS under Section 192
amounting to Rs. 49.52 crores on the above perquisite value of Rs. 165 crores.
Similar orders were also passed by the AO for assessment years 1997-98 and
1998-99. These orders were confirmed by CIT(A). No weightage was given by both
the authorities to the lock in period.
the authorities took into account the perquisite value as on the date
of exercise of option.
Aggrieved by the aforesaid decisions, the respondent- assessee carried the
matter in appeal to the Tribunal, which took the view that the right granted to
the employee for participating in the scheme was not a perquisite
under Section 17(2)(iii) of the Income Tax Act, 1961 (1961 Act). This
decision of the Tribunal stood confirmed by the impugned judgment delivered by
the Karnataka High Court on 15.12.2006. Hence, these civil appeals by the
Whether tax had to be deducted under Section 192 of the 1961 Act, by the
respondent-assessee, on the amount earned by its employees from exercise of
stock option granted to them by the company through the Trust, is the question
which arises for determination in these civil appeals.
the case of Govind Saran Ganga Saran v. Commissioner of Sales Tax and Ors.
[(1985) 155 ITR 144 (SC)] this Court held that there are four components of
tax. The first component is the character of the imposition, the second is the
person on whom the levy is imposed, the third is the rate at which tax is
imposed and the fourth is the value to which the rate is applied for computing
tax liability. It was further held that if there is ambiguity in any of the
four concepts then levy would fail. In this case, we are concerned with the
forth concept. There is one more principle which is required to be noted. A
benefit/receipt under the 1961 Act must be made taxable before it can be
regarded as income.
During the assessment years 1997-98, 1998-99 and 1999- 2000 there was no
provision in the said 1961 Act which made the benefit by way of ESOP taxable as
income specifically. It became specifically taxable only with effect from
1.4.2000 when Section 17(2)(iiia) stood inserted.
the outset, we may state that in these civil appeals we are not concerned with
taxability but with the value of a perquisite.
question for consideration is whether perquisite could be said to
accrue at the time when warrants were granted or at the time when the option
vested in the employee or at the time when the options stood exercised or at
the time when the lock-in conditions were removed or at the time when the
shares were to be sold in the share market. According to the AO, the
perquisite value was the difference between the total amount paid by
the employee(s) consequent to the exercise of option amounting to Rs. 6.46 crores
on which date the market value of the shares was in all Rs. 171 crores.
Therefore, according to the AO, the benefit arose on the date when the options
stood exercised. In this case we are concerned with the period prior to
quote hereinbelow Sections 17(1) and (2), which read as follows:
"perquisite" and "profits in lieu of salary" defined.
For the purposes of sections 15 and 16 and of this section,-
annuity or pension;
fees, commissions, perquisites or profits in lieu of or in addition to any
salary or wages;
advance of salary;
any payment received by an employee in respect of any period of leave not
availed of by him;
the annual accretion to the balance at the credit of an employee participating
in a recognised provident fund, to the extent to which it is chargeable to tax
under Rule 6 of Part A of the Fourth Schedule; and
the aggregate of all sums that are comprised in the transferred balance as
referred to in sub-rule (2) of Rule 11 of Part A of the Fourth Schedule of an
employee participating in a recognised provident fund, to the extent to which
it is chargeable to tax under sub-rule (4) thereof;
value of rent-free accommodation provided to the assessee by his employer;
value of any concession in the matter of rent respecting any accommodation
provided to the assessee by his employer;
value of any benefit or amenity granted or provided free of cost or at concessional
rate in any of the following cases:-
a company to an employee who is a director thereof;
a company to an employee being a person who has a substantial interest in the
any employer (including a company) to an employee to whom the provisions of
paragraphs (a) and (b) of this sub-clause do not apply and whose income under
the head "Salaries" (whether due from, or paid or allowed by, one or
more employers), exclusive of the value of all benefits or amenities not
provided for by way of monetary payment, exceeds twenty-four thousand rupees;
Explanation. -For the removal of doubts, it is
hereby declared that the use of any vehicle provided by a company or an
employer for journey by the assessee from his residence to his office or other
place of work, or from such office or place to his residence, shall not be
regarded as a benefit or amenity granted or provided to him free of cost or at concessional
rate for the purposes of this sub-clause. (emphasis supplied)
Warrant is a right without obligation to buy. Therefore, perquisite
cannot be said to accrue at the time when warrants were granted in this case.
Same would be the position when options vested in the employees after lapse of 12
months. It is important to note that in this case options were exercisable only
after the cooling period of 12 months. Further, it was open to the employees
not to avail of the benefit of option. It was open to the employees to resign.
There was no certainty that the option would be exercised. Further, the shares
were not transferable for 5 years (lock-in period). If an employee resigned
during the lock-in period the shares had to be retransferred. During the
lock-in period, the possession of the shares, which is an important ingredient
of shares, remained with the Trust. The Stock Exchange was duly notified about
non-transferability of the shares during the lock-in period. The shares were
stamped with the remark non-transferable during the lock-in period.
It was not open to the employees to hypothecate or pledge the said shares
during the lock-in period. During the said period, the said shares have no realisable
value, hence, there was no cash in flow to the employees on account of mere
exercise of options. On the date when the options were exercised, it was not
possible for the employees to foresee the future market value of the shares.
in our view, the benefit, if any, which arose on the date when the option stood
exercised was only a notional benefit whose value was unascertainable.
Therefore, in our view, the Department had erred in treating Rs. 165 crores as
perquisite value being the difference in the market value of shares on the date
of exercise of option and the total amount paid by the employees consequent
upon exercise of the said options.
also do not find merit in the contention advanced on behalf of the Department
that Section 17(2)(iiia) inserted by Finance Act, 1999 w.e.f. 1.4.2000 was clarificatory
and, therefore, retrospective in nature.
quote hereinbelow Section 17(2)(iiia), which reads as under:
the value of any specified security allotted or transferred, directly or
indirectly, by any person free of cost or at concessional rate, to an
individual who is or has been in employment of that person :
that in a case where allotment or transfer of specified securities is made in
pursuance of an option exercised by an individual, the value of the specified
securities shall be taxable in the previous year in which such option is
exercised by such individual.
Explanation.-For the purposes of this clause,-
means the amount actually paid for acquiring specified securities and where no
money has been paid, the cost shall be taken as nil;
specified security means the securities as defined in clause (h) of section 2
of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and includes
employees stock option and sweat equity shares;
sweat equity shares means equity shares issued by a company to its employees or
directors at a discount or for consideration other than cash for providing
know-how or making available rights in the nature of intellectual property
rights or value additions, by whatever name called; and
means the difference between the fair market value and the cost for acquiring
specified securities; (emphasis supplied)
stated above, unless a benefit/receipt is made taxable, it cannot be regarded
as income. This is an important principle of taxation under the 1961
Act. Applying the above principle to the insertion of clause (iiia) in Section
17(2) one finds that for the first time w.e.f. 1.4.2000 the word cost
stood explained to mean the amount actually paid for acquiring specified
securities and where no money had been paid, the cost was required to be taken
the case of Commissioner of Income-Tax, Bangalore v. B.C. Srinivasa Setty [(1981) 128 ITR 294 (SC)] this Court held that
the charging section and computation provision under the 1961 Act constituted
an integrated code. The mechanism introduced for the first time under the
Finance Act, 1999 by which cost was explained in the manner stated
above was not there prior to 1.4.2000. The new mechanism stood introduced w.e.f.
1.4.2000 only. With the above definition of the word cost introduced
vide clause (iiia), the value of option became ascertainable. There is nothing
in the Memorandum to the Finance Act, 1999 to say that this new mechanism would
operate retrospectively. Further, a mechanism which explains cost in
the manner indicated above cannot be read retrospectively unless the
Legislature expressly says so. It was not capable of being implemented
retrospectively. Till 1.4.2000, in the absence of the definition of the word
cost, value of the option was not ascertainable. In our view, clause
(iiia) is not clarificatory.
the meaning of the words specified securities in section (iiia) was
defined or explained for the first time vide Finance Act, 1999 w.e.f. 1.4.2000.
Moreover, the words allotted or transferred in clause (iiia) made things clear
only after 1.4.2000. Lastly, it may be pointed out that even clause (iiia) has
been subsequently deleted w.e.f. 1.4.2001. For the aforestated reasons, we are
of the view the clause (iiia) cannot be read as retrospective.
that as it may, proceeding on the basis that there was benefit, the
question is whether every benefit received by the person is taxable as income?
In our view, it is not so. Unless the benefit is made taxable, it cannot be
regarded as income. During the relevant assessment years, there was no
provision in law which made such benefit taxable as income. Further, as stated,
the benefit was prospective. Unless a benefit is in the nature of income or
specifically included by the Legislature as part of income, the same is not
taxable. In this case, the shares could not be obtained by the employees till
the lock-in period was over.
facts, we hold that in the absence of legislative mandate a potential benefit
could not be considered as income of the employee(s) chargeable under
the head salaries. The stock was non-transferable and the stock
exchange was also accordingly notified. This is where the weightage ought to
have been given by the AO to an important factor, namely, lock in period. This
has not been done. It is important to bear in mind that if the shares allotted
to the employee had no realizable sale value on the day when he exercised his
option then there was no cash inflow to the employee. It was not possible for
the employee to know the future value of the shares allotted to him on the day
he exercises his option. Even the cost of acquisition as nil came to
be introduced in the 1961 Act by the Finance Act, 1999 only with effect from
1.4.2000. In fact, the later deletion of clause (iiia) is an indicator of the
For the aforestated reasons, we are of the view that the Department had erred
in treating Rs. 165 crores as a perquisite value for the assessment years
1997-98, 1998-99 and 1999- 2000. During those years, the fifth anniversary had
not taken place and, therefore, it was not possible for the assessee company to
estimate the value of the perquisite during that period. It was not open to the
Department to ignore the lock in period.
the Department had erred in treating the respondent herein as an assessee in
default for not deducting the TDS at 30% as stated in the order of assessment.
This is not the case of tax evasion. The assessee had floated the Trust because
of the buy back problems, which were genuine problems in cases where the
employees stood dismissed, removed or in the case of resignation in which cases
they were required to return the allotment.
Estimation of TDS under Section 192 in the absence of clear provisions on
valuation of perquisite in this case would not justify the Department
in treating the respondent as assessee in default. Therefore, in our view, the
AO and the CIT(A) had erred in treating the respondent as defaulter for not
deducting TDS under Section 192. Consequently, Section 201(1) and 201(1A) were
also not applicable to the facts of this case and that the Department had erred
in invoking the said two sections against the assessee.
Before concluding, we express no opinion on the law prevailing after 1.4.2000
except to the extent indicated hereinabove.
Accordingly, we find no merit in these civil appeals which stand dismissed with
no order as to costs.