Section 45 — Gain arising on sale of shares, acquired under an ESOP Scheme whereby right was conferred on the assessee, but the purchase price of shares was to be paid at the time of sale of shares or their redemption, after a period of 3 years from the date of grant of right under ESOP Scheme is chargeable as long-term capital gain.

Section
45 — Gain arising on sale of shares, acquired under an ESOP Scheme
whereby right was conferred on the assessee, but the purchase price of
shares was to be paid at the time of sale of shares or their redemption,
after a period of 3 years from the date of grant of right under ESOP
Scheme is chargeable as long-term capital gain.

The assessee was an employee of M/s. Pepsico India Holdings (P) Ltd. (PIHL). Consequent to employment with PIHL, the assessee was granted valuable rights in shares of Pepsico Inc. The rights were conferred on various dates from 27-7-1995 to 27-1-2000. The assessee sold these shares on 25-2- 2004 i.e., A.Y. 2004-05. Consequent to sales, the assessee claimed the gains as long-term capital gains as the assessee held the rights for more than 3 years. The assessee also claimed deduction u/s. 54F. In reassessment proceedings the AO held that since the shares were actually held by a trustee i.e., Barry Group at USA and the assessee received the differential amount between gross sale consideration and cost price, the AO taxed the gain as short-term capital gain and consequently he denied deduction claimed u/s.54F. According to the AO, the earlier right of allotment does not constitute purchase of shares. Aggrieved the assessee preferred an appeal to the CIT(A) who upheld the order passed by the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal, where the following facts relating to the ESOP scheme were pointed out. The shares were offered to the employee at prices which were commensurate with US market. Upon the employee accepting the offer an agreement was signed for eligible shares and he became the owner. Distinctive shares were not issued by Pepsico Inc in the name of the employee, but the shares in the form of stock were held by an appointed trustee who held the shares on behalf of the employee and the employer. Shares were encashable within a period of ten years after a lapse of initial period of 3 years from the date of acceptance of the ESOP offer. The employee was to pay consideration for shares at the time of sale /redemption. The ESOP agreement provided for transferability in case of death, etc. from the employee to his legal heirs. It also provided that after option became exercisable, the Trustees at their sole discretion and without the assessee’s consent could sell such an option and pay the difference between the option price and the prevalent fair market value of the shares by giving written notice called as the ‘Buy-out notice’. Payments of such buy-out amounts pursuant to this provision was to be effected by Pepsico and could be paid in cash, in shares of capital stock or partly in cash and partly in capital stock, as the trust deemed advisable.

Held:

A perusal of the clauses of the allotment clearly reveal that the particular number of shares were allotted to the assessee in different years at different prices; only distinctive numbers were not allotted. The apparent benefit to the assessee out of the ESOP scheme was that it had not to pay the purchase price immediately at the time of allotment, but the same was to be deducted at the time of sale or redemption of shares. Since there was an apparent fixed consideration of ESOP shares, the right to allotment of particular quantity of shares accrued to the assessee at the relevant time. The benefit of deferment of purchase price cannot lead to an inference that no right accrued to the assessee. The sale of such valuable rights after three years is liable to be taxed as ‘long-term capital gains’ and not as ‘short-term capital gains’. The CIT(A) has not considered that the acquisition of valuable rights in a property amounts to a capital asset. In the case under consideration, there was a fixed price of allotment of right to fixed quantity of shares and the indistinctive shares were held by a trust on behalf of the assessee. Non-allotment of distinctive number of shares by trust cannot be detrimental to the proposition that the assessee’s valuable right of claiming shares was held in trust and stood sold by Pepsico. Therefore, there was a definite, valuable and transferable right which can be termed as capital asset. The claim of taxability of gains as ‘long-term capital gains’ is justified.

 The Tribunal allowed the appeal filed by the assessee.