Salary — Perquisite — Stock option issued subject to conditions is not a ‘perquisite’ — Law amended by insertion of S. 17(2)(iii)(a) in the Act w.e.f. 1-4-2000 is not retrospective.

[CIT v. Infosys Technologies Ltd., (2008) 297 ITR 167
(SC)]

The respondent-assessee, a public limited IT company based in
Bangalore, to implement the Employees’ Stock Option Scheme (‘the ESOP’), 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 a 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 the ESOP. During the A.Ys. 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 the employees based on their performance, security
and other criteria. Under the ESOP scheme, every warrant had to be retained for
a minimum period of one 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 excised at any time after 12 months, but before the
expiry of the period of five years. The allotted shares were subject to a
lock-in period. During the lock-in period, the custody of the 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
the BSE that 7,34,500 equity shares were non-transferable and would not
constitute good delivery. Till September 13, 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.

For the A.Y. 1999-2000, the Assessing Officer 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
u/s.192 amounting to Rs.49.52 crores on the above perquisites value Rs.165
crores. Similar orders were also passed by the Assessing Officer for the A.Y.s
1997-98 and 1998-99. These orders were confirmed by the Commissioner of
Income-tax (Appeals). No weightage was given by both the authorities to the
lock-in period. Both 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’ u/s.17(2)(iii) of the Act. This decision of the Tribunal
stood confirmed by the judgment delivered by the Karnataka High Court on
December 15, 2006. On civil appeals by the Department, the Supreme Court noted
that during the A.Ys. 1997-98, 1998-99 and 1999-2000, there was no provision in
the Act which made the benefit by way of ESOP taxable as income specifically. It
became specifically taxable only with effect from April 1, 2000, when S. 17(2)(iii)(a)
stood inserted. However, the issue before it was not with regards to the
taxability of the perquisite, but was with regards to the value of perquisite.
The Supreme Court held that a warrant is a right without an obligation to buy.
Therefore, a ‘perquisite’ cannot be said to accrue at the time when warrants
were granted. The same would be the position when options vested in the
employees after a lapse of 12 months, as it was open to the employees not to
avail of the benefit of option. It was open to the employees to resign and there
was no certainty that the option would be exercised. Further, the shares were
not transferable for a period of 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, possession of the shares remained with the trust. The shares
were not transferable and it was not open to hypothecate or pledge the said
shares during the lock-in-period. During the said period, the shares had no
realisable value, hence, there was no cash inflow to the employees on account of
mere exercise of options. On the date when the option was exercised, it was not
possible for the employees to foresee the future market value of the shares.
Therefore, the benefit, if any, which arose on the date when the option stood
exercised was only a notional benefit whose value was unascertainable. 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
option therefore cannot be treated as perquisite. The Supreme Court further held
that S. 17(2)(iii)(a) inserted by the Finance Act, 1997 w.e.f. 1-4-2000 was not
clarificatory and retrospective in operation because till 1-4-2000, in the
absence of the definition of ‘cost’, the value of the option was
unascertainable. The Supreme Court held that the Department was not justified in
treating Rs.165 crores as the perquisite value for the A.Y.s 1997-98 to
1999-2000 and the assessee was not in default for not deducting tax thereon.