Capital gain or perquisite- Sections. 45 and 17(2) – A. Ys. 1998-99 and 2002-03 – Amount received by assessee on redemption of Stock Appreciation Rights received under ESOP was to be taxed as capital gain and not as perquisite u/s. 17(2)(iii) –

In the course of assessment, the Assessing Officer made addition to assessee’s income in respect of amount received on redemption of Stock Appreciation Rights received under ESOP as a perquisite u/s. 17(2)(iii). The Tribunal held that stock options were capital assets and gain therefrom was liable to capital gain tax.

On appeal by the Revenue the Gujarat High Court held as under:

“i) In the case of CIT vs. Infosys Technologies Ltd. [2008] 297 ITR 167/166 Taxman 204, it is held by the Supreme Court that the revenue had erred in treating amount being difference in market value of shares on the date of exercise of option and total amount ‘paid’ by employees consequent upon exercise of the said options as perquisite value as during the lock-in period there was no cash inflow to employees to foresee future market value of shares and the benefit if any which arose on date when option stood exercised was only a notional benefit whose value was unascertainable.

ii) In view of the above, the Tribunal was correct in treating the amount received on redemption of Stock Appreciation Rights as capital gain as against treated as perquisite u/s. 17(2)(iii) and in treating the amount received on exercising the option of Employee’s Stock Option Plan (EOSP) as long term capital gains instead of treating the same as short term capital gains.

iii) However, the Tribunal was not justified in holding that capital gain arose to the assessee on redemption of Stock Appreciation Rights which were having no cost of acquisition. Tax Appeals stand disposed of accordingly”