2002-VIL-189-ITAT-BLR
Equivalent Citation: [2003] 86 ITD 342, [2003] 78 TTJ 598
Income Tax Appellate Tribunal BANGALORE
ITA Nos. 818/Bang/2000 ITA Nos. 819/Bang/2000 ITA Nos. 820/Bang/2000
Date: 28.06.2002
INFOSYS TECHNOLOGIES LTD.
Vs
DEPUTY COMMISSIONER OF INCOME-TAX.
BENCH
Member(s) : JOGINDER SINGH., DEEPAK R. SHAH.
JUDGMENT
Per Bench--These appeals by an assessee is arising out of the common order of the CIT(A)-IV Bangalore dated 12-9-2000 against an order passed under- section 201(1) and section 201(1A). Since common issues are involved therein all these three appeals are disposed by a consolidated order.
2. Though the assessee has raised as many as 20 grounds and various sub-grounds within the grounds, the only issue to be decided in this appeal is whether the assessee is liable to be treated as an assessee in default under section 201 of the Income-tax Act (hereinafter called Act) for failure to deduct tax as required under section 192 of the Act in respect of benefit, if any, accruing to its employees in respect of issue of shares under its Employees Stock Option Plan (ESOP) and consequently whether assessee is liable for payment of interest under section 201(1A) of the Act.
3. Infosys Technologies Ltd. is a public limited company in the Information Technology Industry. It has formulated an Employees Stock Option Plan (ESOP). A trust was set up by the Infosys Technologies Ltd. The Trust was allotted warrants of Re. 1 each, each warrant entitling the holder thereby to apply for and be allotted one equity share of face value of Rs. 10 each for a total consideration of Rs. 100. The Trust is 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 years under consideration viz., the assessment years 1997-98, 1999 and 1999-2000, warrants were offered to the employees. These warrants were offered to the employees at Re. 1 each by the Infosys Technologies Ltd. Employees Welfare Trust (Trust). The salient features of the ESOP are as under:
(i) The Trust was allotted 7,50,000 warrants of Rupees one each, each warrant entitling the holder thereof to apply for and be allotted one equity share of Rs. 10 (face value) for a total consideration to be determined by the Board of Directors of Infosys. The consideration ecommended by the Board of Directors of infosys in the present rate is Rupees one hundred per share.
(ii) The Trust is to transfer the warrants to the eligible employees at a consideration of Re. one per warrant.
(iii) The warrants held by the employees are not transferable except to the Trust during the life of the warrant. During this period. The said warrants cannot be pledged/hypothecated/charged/mortgaged/assigned or in any other manner alienated or disposed of. The physical custody of the warrants is kept with the Trust under the scheme.
(iv) The employee who is the registered Holder of the warrants is entitled to apply for and be allotted one equity share of Rupees ten each (face value) for a total consideration to be determined by the Board of Directors of Infosys. The Board of Directors have determined the consideration to be Rupees one hundred. This right of application is available during a two-month period every year within a five-year period from the date of transfer of warrants to the employee subject to a cooling period of 12 months from the date of grant of warrants. However, in case the employee does not exercise the warrants within the five-year period, the warrant will, upon the expiry of this period, lapse.
(v) The right of exercise is available at the defined times subject to the employee being in the service of the Company during the said period of five years. In case the employee were to leave the services of the Company or be removed from service for whatever reason, Hs rights under the warrants would lapse and he would be obliged to transfer the warrant back to the Trust for the same consideration of Rupees one per warrant as paid by him originally.
(vi) In case the employee was to exercise his right on the warrants and apply for the equity shares, the equity shares so allotted will be subject to a lock-in-period for the balance period of the five years from the date of transfer of the said warrants to the employee. During this period the custody of the shares will be with the Trust and the shares allotted on the conversion of the warrants shall not be capable of being transferred/charged/mortgaged/hypothecated/assigned or in any manner alienated or otherwise disposed of. This is further subject to the employee being in the service of the Company during this period.
(vii) In the event of the employee leaving the services of the Company due to resignation or whatever reason or being removed from service, he loses his right on the shares under the scheme and would have to transfer the shares to the Trust for the same consideration paid by him on application namely Rupees one hundred per equity share. Barring this right of claiming back the same consideration, the employee has no other right of compensation. The unexercised warrants will also lapse.
(viii) Under the terms of the scheme, the employee is obliged to enter into an agreement or such agreements as may be required, with the Trust to carry out his obligations including the authority to the Trust to cause the transfer of the warrants/shares back to the Trust on the happening of certain events enumerated above.
4. ESOP is intended to benefit a company by enabling the company to attract and retain the best available talent by enabling them to contribute and share in the growth of the company. The table herein captures in brief the number of warrants exercised by the employees for the various years under consideration:
Dates of allotment of stock options to the trust
Date No. of options
20-01-1995 1,44,100
27-11-1995 1,58,000
23-08-1996 1,24,600
15-01-1998 2,70,400
13-10-1998 4,14,100
---------
Total 11,11,200
---------
Dates of Exercise of stock options by employees
Date No. of options
23-01-1997 1,000
19-06-1997 13,900
20-08-1997 3,61,500
20-08-1998 6,64,300
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Total 10,40,700
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Dates of Vesting of stock options with the employees
Date No. of options
20-01-2000 1,06,300
27-11-2000 1,21,600
23-08-2001 95,700 3,23,600 vested
--------
15-01-2003 2,57,200
13-10-2003 4,07,100 6,64,300 pending
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Total 9,87,900
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5. The company has been deducting tax at source on the salaries paid to the employees under section 192 of the Income-tax Act. In estimating the salary for the purpose of deduction of at source, the company did not take into account the benefit, if any, arising to an employee by participation in the ESOP plan.
6. A notice under section 192 read with section 201(1) was issued to the company seeking reasons as to why it did not deduct tax at source on the benefits conferred through the ESOP and therefore why it should not be regarded as an assessee in default. After hearing the assessee-company, an order under section 201(1) was passed for the various years raising demands as under:
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Asst.year Tax Int.u/s.201(1A) Int.u/s.220(2)
Rs. Rs. Rs.
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1997-98 2,85,700 1,17,137 12,085
1998-99 12,82,73,415 4,15,55,996 50,94,880
1999-2000 49,52,35,650 4,82,85,475 1,63,05,630
Total 62,37,94,765 8,99,58,608 2,14,12,595
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Grand total 75,51,66,170
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7. Aggrieved by the order passed by the Assessing Officer, the company filed an appeal before the CIT(A). Various contentions were urged by the company as to why no perquisite should arise to an employee by participation in the ESOP plan, and consequently, therefore, there should not be an obligation upon the company to deduct tax at source under section 192. The CIT(A) dismissed the appeals preferred by the company and concluded by the company was in default for not having deducted the tax at source in respect of the benefit arising to the employee by exercise of the warrants. Against the orders passed by the CIT(A), the assessee is in appeal before us for all the years. Since a common point is involved in all the years, we are consolidating the appeals and passing a single order.
8. We have heard senior Advocate Shri G. Sarangan for the appellant company and Shri Amitab Kumar, senior Departmental Representative for the revenue. Elaborate arguments have been canvassed by both the representatives. Detailed paper books have also been filed.
9. Learned senior advocate, Shri Sarangan, assailing the order of the CIT(A), has urged that no perquisite arises to an employee, as a result of his participation in ESOP plan. In support of this contention various arguments have been put forth by him, In addition to the primary contention that no perquisite should arise, the learned senior counsel also submitted reasons as to why the provisions of section 192 are not attracted in the case. The learned Departmental Representative has submitted, on the other hand, various grounds to as to why the provisions of section 192 are attracted. He argued that for the reason that the employee has participated in the ESOP plan a benefit has been conf erred. This benefit is liable to be taxed as a part of salary, For this purpose, the learned Departmental Representative has laid stress on the inclusive definition of terms "income", "salary" as well as "perquisite". A number of judgments were cited by him in support of contention that the word "income" as employed in the statute is expansive in its attribute. A number of decisions from the U.K Courts were also cited for the purpose of arguing that an ESOP does give rise to a perquisite.
10. The learned Departmental Representative also relied upon the Circular No. 710. He argued that there is no ambiguity in law and the Circular and reiterated what was obvious in the law. He also argued that the Circular was in fulfilment of the legislative intent. The legislative intent was to tax the benefit arising under ESOP. This was also sought to be supported by the statement of the Finance Minister while presenting the Budget, in which the provisions relating to ESOP was introduced for the first time, the memorandum explaining the provisions of the Finance Bill. The learned Departmental Representative also urged that erstwhile section 17(2)(iii) has everything contained in it to even rope in the benefit arising from an ESOP. The insertion of section 17(2)(c)(iiia) by the Finance Act, 1999, was only by way of an abundant caution. The proviso introduced to section 17(2)(c)(iii) by Finance Act, 2000, only removed what was already there in the Income-tax Act. The learned Department Representative also stated that the employees who were granted shares on exercise of the options were registered shareholders of the company. They enjoyed all the rights as a shareholder, like dividend, right to vote, bonus shares, etc. The benefits from the ESOP, therefore, began flowing to the employees immediately on the exercise of the warrants. The fact that the shares issued under ESOP are not transferable was not at all significant. The learned Departmental Representative also contended that there was no provision in the Securities Contract Regulation Act or SEBI Act, which prohibited transferring all these shares. The shares were, according to him, freely transferable, the only rider being that the transferee would also be subject to the lock-in-conditions and that, therefore, there is an open market for these shares. The learned Departmental Representative also argued that the Trust though validly and genuinely created, is merely a conduit. The Trust was only a mechanism for fulfilling the desires of the employer and, therefore, the Trust is to be held as an extension of the employer. The learned Departmental Representative relied upon the ruling of Authority for Advance Ruling in P.No. 15 of 1998 (235 ITR 565). He stated that the ruling, though not binding because of section 245S is at least persuasive in its effect and, therefore, could be relied upon. For the purpose of arriving at the value of share, the learned Departmental Representative urged that Rule 14 of Schedule III of Wealth-tax Act should be adopted as per which, in the case of a company whose shares arc quoted on Stock Exchange, the quoted price should be the market value. The learned Departmental Representative also referred to Rule 21 of Schedule III to the Wealth-tax Act which mandates the ignorance of restriction on transferability in arriving at the value of any asset. In the end the learned Departmental Representative also contended that the appellant company has recovered (though after the demand was raised by the department) the tax demanded in the order under section 201 from its employees. Having recovered the tax from the employees he contended that the assessee-company is no longer an "aggrieved person" and, therefore, the appeal is not maintainable.
11. In the rejoinder the learned senior advocate Shii Sarangan has contested each and every point urged by the learned Departmental Representative. Briefly stated, the arguments of Shri Sarangan, in his original submissions and in the rejoinder, are as under:
(i) the inclusive definition of the terms "income", "salary" & "perquisite" was, by itself, not sufficient to regard the benefit under ESOP as chargeable to tax;
(ii) even otherwise, on the facts and in the circumstances of the case, no benefit was received or enjoyed by the employees of the appellant; that whatever benefit is alleged to be enjoyed by the employee is only notional, contingent and hypothetical;
(iii) that there was no provision of law in force at the relevant time to regard the benefit as taxable;
(iv) assuming that there was a provision, no rules were prescribed to determine the value of the perquisite, that in the absence of such rules which is mandated by section 295 of the Income-tax, the computation provision would fail and so would therefore the charge also;
(v) Circular No. 710 cannot be relied upon to fasten a liability, in the absence of any provision of law dealing with ESOP.
(vi) The English judgments are distinguishable on the facts as also in law. Even otherwise, the judgment of the House of Lords in the case of Abbot v. Philbin (Inspector of Taxes) [1962] 44 ITR 144 is not in support of the stand urged by the department.
(vii) The ruling of the Authority of Advance Ruling is not binding. Even otherwise, applying the ratio laid down thereunder, the TDS obligation would then lie upon the Trust and not the appellant-company.
(viii) The amendment made to the statute, by the Finance Act, 1999, in the absence of a specific mention to that effect is not retrospective.
(ix) That the provisions of law have to be interpreted uniformly--one set cannot be regarded as retrospective and another prospective to the convenience of the department, more so when there is nothing specific in the law to that effect;
(x) In the facts and circumstances of the case, the Wealth-tax Act and Schedule III thereunder are not applicable to determine the fair market value of the shares;
(xi) That the lock-in-condition of ESOP were valid, binding and enforceable, which conditions could not be ignored.
(xii) The appellant-company even otherwise had acted honestly, reasonably and in a bona fide manner in discharging its TDS obligations;
(xiii) There was no circular of the CBDT till 1999, detailing the obligation of the employer in deducting tax at source on the benefit if any conferred through ESOP;
(xiv) That the appellant-company had repeatedly pursued the matter in determining its TDS obligations without any response from the department;
(xv) that the department is trying to fasten a liability under section 192 read with section 201 on the basis of a law enacted much after the time of discharging the TDS obligations was over, and
(xvi) that the appeal is maintainable as the appellant-company is still all aggrieved person despite having recovered the taxes from the employees.
12. We have carefully considered the rival submissions of both the parties, the relevant facts and various case laws cited. The concept of ESOP has not been of any ancient origin in India. It is only recently that the companies have adopted such mechanism. The philosophy behind the ESOP plan is that employees are best cared for, when they have a sense of belongingness to the company and are able to participate in its growth and prosperity. This could be achieved by inviting them to become part owners of the company. ESOPs have been created for this purpose. The fact of being a shareholder and thereby a part owner of the company would inspire the employees to promote the overall growth of the company. The Government of India realizing the potential of the benefits that can be conferred through an ESOP mechanism constituted a number of committees. Thus the JR Varma Committee was formed to lay down the guidelines for a statutory framework for an ESOP. A working group was also formed to suggest modifications to the Companies Act, 1956, The working group which was formed to modify the Companies Act, 1956 observed that "sustained competitiveness by, any company hinges upon the quality of its human resources. This in turn has much to do it with employee loyalty and commitment. A widely acknowledged method of securing a greater employee participation, giving the light incentive signals and rewarding loyalty as well as years of service is through an ESOP. In today's competitive world only the most myopic will insist on making seat tight distinction between employees "who should be paid only wages, salaries and bonus (and shareholders who should get dividends). There is hardly any global corporate giant that does not have an ESOP".
13. Salaries to an employee are chargeable to tax under sections 15 to 17 of the Income-tax Act. Section 15 defines the scope of the salary income. Section 16 provides for certain deductions from salary income. Section 17 defines certain relevant terms. Section 17(1) defines the term "salary". As per section 17(1)(iv), salary includes, amongst others, a perquisite. The term "perquisite" itself is defined in section 17(2). The definition of the term "perquisite" at the relevant time had 5 sub-clauses. It is clause (iii) of the said definition that would be relevant for the purpose of the present discussion, which is reproduced below:--
"(iii) the value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases:--
(a) by a company to an employee who is a director thereof;
(b) by a company to an employee being a person who has a substantial interest in the company;
(c) by 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."
14. The questions for consideration, therefore, are whether (i) Any right granted to an employee for participating in an ESOP Plan, is, a perquisite within the meaning of section 17(2)(iii) and (ii) when does the perquisite can be said to accrue or arise, i.e. (a) Whether it arises at the time when the warrants are granted? (b) Whether it arises at the time when the options vest in an employee, which in the instant case, happens after the cooling period of 12 months? (c) Whether the benefit arises when the options are exercised? (a) Whether the benefit arises at the time when the employee, as in the instant case, is freed from lock-in-conditions to which the shares are subjected to? (e) Whether the benefit arises when the shares are sold? (iii) If there is a benefit or an amenity the further question is, whether the company in the light of prevalent position of law was obliged to deduct tax at source under section 192, and, if so, which value?
To enable an answer to the various issues, we would traverse the various arguments advanced by both the learned counsels, and the stand taken by the learned CIT(A) as well as the Assessing Officer.
15. The term "income" is defined in section 2(24) in an inclusive manner. The term "salary" is defined in section 15 is also in an inclusive manner. The term "perquisite" is defined in section 17(2) which is also in an inclusive manner. The first question therefore is whether a benefit conferred to an employee by virtue of an ESOP would fall within the inclusive definitions referred above. In other words whether a benefit arises to an employee as a result of securing a right to acquire a share at a price lesser than the market value? Assuming for a moment that there is a benefit, the question is whether every benefit received by a person is taxable as income? In our opinion, it is not so. Unless, the benefit is specifically made taxable, it cannot be regarded as income. For all the assessment years under consideration there was no provision in law which made such benefit taxable as income. Further, for these years, the income was prospective on the condition. of the future allotment of shares without any condition or encumbrance, A benefit which is prospective in nature cannot be taxed as income. In Sir Kikabhai Premchand v. CIT [1953] 24 ITR 506, the Hon'ble Supreme Court has held that the State has no power to tax any potential future advantage. Thus, there cannot in the absence of a legislative mandate to the contrary, be a tax on future income. The Gujarat High Court in CIT v. Spunpipe & Construction Co. Ltd [1965] 55 ITR 68 held that where assets are purchased for a lesser price, there can be no profit made by the purchaser on revenue account from the purchase at a lesser price.
16. Unless a benefit in the nature of income or is specifically included by the Legislature as part of income, the same is not taxable. The definition of income is no doubt inclusive. However it is not all embracive. The law seeks to tax "what is included in income as taxable". The words are not the following items shall be taxable.......". Thus, the precondition is that the receipt or benefit is treated as income first. The word income though defined in an inclusive manner, should therefore be regarded as purposeful in its import. It would not, therefore, encompass every receipt or every benefit. In the instant case also, there was no present contemplation of unencumbered allotment of the shares. In fact, the shares could not be even obtained by the employees till the lock-in-period was over and other conditions were fulfilled. The 'benefit', if any, was only notional or contingent. Even otherwise, the 'benefit' was, if at all, with reference to the market value of the share on any particular day. It is common knowledge that the price of shares fluctuate every day. The "benefit" would then fluctuate accordingly. If the employees exercised shares on different dates, and the share prices were different on these dates, the employees would be chargeable on different incomes although the services performed by them were identical. In our opinion, it would not be appropriate to compare the market price prevailing on various exercise dates more so when the exercise dates vary depending upon the choice of the employee and the share prices keep fluctuating. The comparison, therefore, seems unfounded. If at all, a benefit can be said to be derived, the shares have to be allotted free from all encumbrances. That would happen only after the lock-in-period is over. One does not know what would be the market price on that date. Whether a benefit would be realized at all is in the womb of future. The benefit, on the date of exercise, would be prospective or potential. In the absence of a legislative mandate, therefore, we would hold that a prospective or potential benefit could not be considered as income of the employees chargeable under the head "Salaries".
17. The deployment of the term "include", no doubt, in any statute would enlarge the scope of the term being defined. It would, therefore, embraced items of income having a like characteristic or resembling those that have been specifically enumerated. We are, however, afraid to attribute an "all pervasive" effect to the term "include". The Supreme Court in VM. Salgaocar & Bros. (P.) Ltd. v. CIT [2000] 243 ITR 383 stated that though the word "include" in a definition enlarges the meaning of the phrase or words occurring in the body of a statute, it is a cardinal rule of interpretation that if by an inclusive definition the meaning of any work is to be enlarged, it would receive a strict interpretation. Further, if the inclusive character of the term "income" or "perquisite" was sufficient enough to rope in all types of benefits and perquisites, why was there a need for eg. to introduce clause (vi) to section 17(2) by the Finance Act, 1994 to bringto tax "another fringe benefit or perquisite". If section 17(2) was all pervasive, there should have been no occasion for the Supreme Court in the case of V.M. Salgaocar & Bros, (P.) Ltd., to hold that interest subsidy is not chargeable to tax as a perquisite. There was an attempt by Finance Act, 1994 to tax interest subsidy as perquisite with effect from 1-4-1995. But before this law became operative, the Finance Act, 1995, deleted the provision. Keeping in mind the proposed insertion and the subsequent deletion, the Supreme Court stated that a concession in the matter of interest is not chargeable to tax, as a perquisite. If the definition of the term "Perquisite" is an inclusive one and thereby "all pervasive", the Supreme Court would have charged to tax such interest subsidy despite the deletion of sub-clause (vi) to section 17(2) by the Finance Act, 1995. We would also, therefore, concur with the conclusion drawn by the Supreme Court that the artificial enlargement of any word by the use of the term "include" is to be construed in a very strict manner. Similar view has been held by the Hon'ble Karnataka High Court in the case of CITV. M.K. Vaidya [1997] 224 ITR 186 which has been approved by the Hon'ble Supreme Court in the case of V.M. Salgaocar & Bros. (P.) Ltd.
18. It was only by the Finance Act, 1999, that provisions to tax benefit arising under an ESOP was introduced for the first time w.e.f. 1-4-2000. Even these provisions were deleted by the Finance Act, 2000 w.e.f. 1-4-2001. The benefit to an employee from participating in ESOP plan is now taxable only under the head capital gains, provided the ESOP fulfils the guidelines laid down by the Central Government. The amendment brought about by the Finance Act, 1999, in our opinion, is not retrospective. As held by the Hon'ble Madras High Court recently in S. Subash v. CIT [2001] 248 ITR 512 retrospectively is not to be read into a legislation unless it is specifically so stated. The Hon'ble High Court observed as follows:
"The normal rule of any statutory provision is that its operation is prospective. It is only in case of procedural provisions that in the absence of any intention to the contrary whether explicit or implicit, such procedural provisions are regarded as being applicable to pending proceedings, even though such proceedings may have commenced at a point of time anterior to the introduction of the relevant statutory provisions. Where the statute confers a substantive power for the first time, it cannot be held on any known principle of construction of statute that such power is meant to be exercised in respect of past periods as well, so as to undo what had been properly done, and confer a benefit which the plain words of the statute did not intend. It has always been the normal legislative practice to make explicit the intention to make a provision retrospective in operation wherever a substantive alteration is made in the law. It is only in case where the amendment is to be regarded as clarificatory or declaratory that such provision is even in the absence of express language to that effect in the relevant provision, applied even in respect of matters relating to periods prior to the date of introduction of the provision."
The Hon'ble Supreme Court very recently in the case of K.M Sharma v. ITO [2002] 254 ITR 772 has held that retrospectivity is not to be readily attributed to an amendment imposing a liability. Even as per Halsbury's Laws in England, the general rule is that all statutes other than those which are merely declaratory or which relate only to matters of procedure are prima facie prospective, and retrospective effect is not to be given to them unless by express words or necessary implication, it appears that this was the intention of the Legislature. Further, the observation of the Supreme Court in the case of V.M. Salgaocar & Bros. (P.) Ltd. stating that subsequent omission of particular clause from the statute could also to be relied upon to interpret a law for a earlier charge would strengthen our conclusion that the law did not specifically desire the taxability of benefit arising to an employee under the ESOP as perquisite under section 17(2)(iii) of the Act.
19. ESOP, in its concept, normally has a uniform philosophy. However, the procedures adopted by the companies in the implementation of such an ESOP may not be uniform, e.g., in the case of the appellant-company, all the options vested on the expiry of 12 months from the date of its grant. There are companies in which these options may vest evenly over the defined period of time. In the alternative, it may vest in a varying proportion over the defined period. It is also likely that the employees who are to be taxed are not assessed by the same Assessing Officer. There would, therefore, be an element of subjectiveness in each Assessing Officer trying to formulate his own value in taxing the employees. This is because there would, in the absence of any statutory guidelines regarding the quantification of values, be determined by the Assessing Officer in his own fanciful way. The employees would then suffer tax in varying manners, although the benefit received by them would have been the same. It should, therefore, not have been left to the discretion of the Assessing Officer to tax the perquisite. There has to be a certainty as well as uniformity in valuing and taxing a perquisite. It is for this reason that section 295(2)(c) of the Act provides for the determination of the value of the perquisite on the basis of rules framed by the Central Board of Direct Taxes. Even section 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, therefore, the value is ascertainable by a mechanism laid down in the statute, the same cannot be brought to tax. In the absence of a mechanism for computation, the charge itself would fail. It was so held by the Hon'ble Supreme Court in the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294. The Hon'ble Supreme Court therein held that the charging section and the computation provisions constitute an integrated code. When there is a case to which a computation provision cannot be applied at all, it is evident that such a case was not intended to fall within the charging section. In the absence of any law or rules providing for a methodology of quantifying the benefit under an ESOP, applying the ratio enunciated by the Supreme Court in B.C. Srinivasa Setty's case, we hold that no benefit arose to an employee by participating in an ESOP in the relevant year.
20. The learned Departmental Representative, to support the argument that the definition of the term "income" is inclusive and number of receipts/items in those judgments, were, therefore, held taxable, relied upon the following decisions:
(i) Karamchari Union v. Union of India [2000] 243 ITR 143 (SC);
(ii) CIT v. G.R. Karthikeyan [1993] 201 ITR 866 (SC);
(iii) CIT v. Premanand Industrial Co-op. Service Society Ltd. [1980] 124 ITR 772 (Guj.) and
(iv) FatherEpharam v. CIT [1989] 176 ITR 78 (Ker.).
A perusal of these judgments would indicate that these are distinguishable, both on facts as well as on law. The judgments relied upon by the learned Departmental Representative are on business income or income from other sources in respect of which it is accepted that it is the normal commercial income that is taxable unlike in the case of salary income where a "computed income" is taxable. It is only when normal commercial income is taxable that one can rely upon the dictum that a receipt satisfying the test of income in its common parlance is taxable. It is to such commercial income that the adage is applied "every income is taxable unless it is otherwise specifically exempted". The principles of commercial income do not attract to cases like property income, capital gains, as also salary income. These incomes are chargeable on the basis of a particular formula prescribed in the statute. If no formula is prescribed, the receipt should be regarded as outside the net of taxation. It was for this reason that in a number of decisions, it was held that arrears of rent are not chargeable to tax under the head "Income from house property". On the facts of the present case, salary income is the subject-matter of discussion and not business income or income from other sources. Therefore, the judgments relied upon by the learned Departmental Representative would not be relevant. The decision in the case of Karamchari Union relied upon by the learned Departmental Representative is, in fact, in favour of the assessee. It has been held therein that in interpreting tax laws, equity cannot be taken into account. Therefore, unless there is a clear provision of law to bring to tax any particular item/receipt, legislative intent or equitable consideration, in our opinion, cannot make the same taxable. The case of Karamchari Union involved taxability of dearness allowance and city compensatory allowance. The same was held taxable in view of the specific provision in sub-clauses (iiia) & (iiib) to sub-section (24) of section 2 defining the word "income". In the present case, no such specific clause is included either in section 2(24) defining "income" or in section 17(2) defining the word perquisite". If at all any such provision is intended, the same is inserted as per clause (iiia) to section 17(2) w.e.f. 1-4-2000 and not for the assessment years under appeal.
21. The learned Departmental Representative sought to invoke the principle of legislative history, intent, purpose of taxing to support the claim for taxing the benefit arising under an ESOP legislative intent, etc. would be relevant only when the "mischief rule" is sought to be invoked which, in our opinion, is not the case here, When section 17(2)(iiia) was introduced by Finance Act, 1999, w.e.f. 1-4-2000, the Hon'ble Finance Minister noted as under:
"In some of the 'sunrise' sectors of the economy, the management is adopting a policy of offering stock options and Sweat Equity, to their employees. The tax implications of such transactions are somewhat ambiguous. Therefore, I propose in this budget to make certain amendments in the law, to put it beyond doubt that such stock options will be taxed as a perquisite at the time of exercise of the option by the employee, and later as capital gains at the time of sale of the security. These amendments, I expect, will remove the grey areas which exist in the current law relating to such transactions.
The Notes on Clauses of Finance Bill, 1999, reads as under:
"Clause 10 seeks to amend section 17 of the Income-tax Act relating to the definition of "salary", "perquisite" and "profits in lieu of salary".
It is proposed to insert a new sub-clause (iiia) in clause (2) of the said section. The proposed amendment seeks to include in the definition of perquisite 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 in the year of exercise of option of such shares.
Explanation to the proposed sub-clause (iiia) defines the expression 'cost', 'specified security', 'sweat equity shares' and 'value' used in that sub-clause.
This amendment will take effect from 1st April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent assessment years."
It is, therefore, clear that but for the specific definition of perquisite under section 17(2) which included the benefit under ESOP, prior to insertion to such clause (iiia) to section 17(2), there was either no specific provision or there were all sorts of ambiguity and uncertainty in taxing the benefit under ESOP as "perquisite". In such a situation, it cannot be logically or legally concluded that such perquisite accrue to the employees and the employer failed to deduct tax thereon.
22. There is another facet to the taxability of the benefit. It has been stated repeatedly that what is to be taxed is the real income and not any hypothetical/notional or an imaginary income. In other words, the benefit or an amenity should be capable of being enjoyed by the employee without any let or latches or any hindrance. It should not be a contingent interest...The benefit should not be subjected to a number of conditionalities or obligations to be fulfilled in an ongoing manner. In the case of E.D. Sassoon & Co. Ltd v. CIT [1954] 26 ITR 27, Hon'ble Supreme Court held that unless and until the assessee acquires a right to receive the income, the income cannot be said to have accrued to him. In the instant case, the physical custody of shares is not with the employees. It lies with the Trust. The Trust is empowered to retransfer the same to its name in situations where the condition precedent of an ESOP are not fulfilled. Thus the possessory right, being the most important attribute of ownership is not available with the employees. No doubt, the employees are entitled to dividend, bonus shares, etc. But these benefits are dependent upon the financial position of the company. They also depend upon the decision of the Board of Directors of the company. The employees cannot, as a matter of right, demand the same. These benefits may or may not be available to an employee. These benefits, therefore, do not flow to a person in the status o an employee. They are, there not to be regarded as emanating from his status of an employee. The shares received by the employee are subjected to risk of forfeiture. The employee is required to fulfil a number of conditions in an ongoing manner before he becomes absolutely entitled to the shares. In the instant case, the lock-in period would expire on the 5th anniversary of the date of grant of warrants. During this period an employee should continue to remain in employment. He should not have resigned, he should not have been discontinued from the service. Only when these conditions are fulfilled the employee will become free to be possessed of the shares. If within this period of lock in, the conditions of employment are not fulfilled, the employee shall be perforced to transfer the shares to the Trust and get back Rs. 100 only being the amount that had been paid originally on the exercise of the warrants. The employee, therefore, in these situations does not get anything more than what he has paid for. Thus, therefore, no real income is enjoyed. It has been submitted before us that 1,25,500 number of warrants have been surrendered by 176 employees back to the Trust for non-fulfilment of the conditions of ESOP. If an employee were to be taxed on a perceived benefit that would be a taxing of a notional income in the case of such employees. The risk of forfeiture, in our opinion, makes the entire benefit, a contingent one.
23. There is an added dimension as to why the benefit is not taxable. The benefit for being taxed has to be valued. What would be the value of shares in the instant case is the question for consideration. The term "fair market value" is defined in section 2(22B) of the Act to mean the price the asset would fetch if sold in the open market on the relevant date. There is a second limb to this definition referring to a value of an asset being the one arrived at in accordance with the prescribed rules. The same is not relevant, as no rules have yet been prescribed under the Income-tax Act for the purpose of valuing any asset. We, therefore, have to limit ourselves to the first aspect, namely, what shall be the amount that the asset would fetch if sold in the open market. A reference to the conditions and arrangements entered into with the stock exchange would indicate that the shares kept apart for being allotted under ESOP are not transferable till a defined period being 5 years from the date of grant of warrants. The notice from Stock Exchange very clearly states that transfer of these shares within the defined period would not be good delivery at all. The notice also mentions that the certificate of shares has been enfaced with transferable period. For the shares under the a stamp regarding the non ESOP, therefore, there is no open market at all. These shares by virtue of conditionalities under the ESOP, which scheme has been approved by the shareholders in the Annual General Body Meeting and which, therefore, is binding upon the company, makes it abundantly clear that the shares are not transferable for a certain period of time. To put it differently, it can be interpreted that there exists no market for the shares under lock-in. In other words, no market value can be assigned to such shares. It is only in certain circumstances that the shares are compulsorily taken by the Trust and employees get Rs. 100 being the amount that they have paid for on exercise of the warrants. To the employee, therefore, what he is going to get during the period of 5 years for these shares is Rs. 100. This is the maximum amount of consideration that he could hope to obtain for. The market value of shares for him is, therefore, defined and remains Rs. 100 only. The fact that in the Stock Exchange the shares are quoted at substantial value is not relevant to him at all because there is no way in which he could realize the high value. In our opinion, for the shares in respect of which there is a legend marked on stock certificate that the shares are not transferable and the value or price that the same would fetch in any eventuality is Rs. 100 only means that employee has not in any way secured any benefit at all greater than what he had paid to acquire the shares. As has already noted, there have been real instances where a number of employee have had to surrender the shares. If these employees should be construed to have enjoyed the benefit or amenity and, therefore, called upon to pay the tax they would have paid the tax on a perquisite, which they did not enjoy. They would in effect have paid the tax on an income, which is an imaginary or hypothetical. The Hon'ble Bench of Hyderabad ITAT had occasion to deal with similar situation in the case of K.N.B. Investments (P.) Ltd. v. Asstt. CIT [2000] 79 ITD 238, wherein at page 267, it observed as follows:
"The shares cannot be quoted in the market because of the compulsory lock-in-period of three years. Therefore, those shares were not quoted in the market. In the circumstances, those shares that could not be quoted in the market, cannot be a subject matter of comparison with the existing shares already quoted and traded in the stock market. There is no basis of justification in making a comparison between unequals. Such a comparison is hypothetical."
We are in agreement with the above observations.
24. Another question that arises in this connection is the point of time at which the benefit, if any, is taxable? We have already outlined the different situations under which the possibility of taxing the benefit may arise. The ld. Jt. Commissioner of Income-tax, TDS, went into the aspect of the timing of taxing the benefit. Incidentally he discarded three of the four alternatives and presumed that the tax liability arises in the fourth alternative by default. Tax incidence, in our opinion, is not to be arrived at by a process of elimination. There has to be clear legal support for any proposition to tax a benefit. The Commissioner (Appeals) has not also dealt that aspect at all, although it was specifically mentioned in the appeal papers. We have already indicated the reason as to why no perquisite should be held to arise to an employee for participation in an ESOP. We would, therefore, not go into the aspect of the timing of taxability at all as, in our opinion, the conclusion would remain the same irrespective of whichever alternative is considered.
25. In quantifying the benefit the ld. Departmental Representative wanted us to adopt the methodology prescribed in Rule 14 of Schedule HI of Wealth-tax Act. We have already held that no perquisite accrues to an employee in the circumstances of the case. Nevertheless, for the sake of completeness, we would deal with this aspect also. The relevant portion of Sch. III, viz., Part C comprising of rules 9 to 13 was deleted from the WT Act from 1993 itself. During the years under consideration, the concerned rule was not in operation at all. To make a reference to a deleted provision, in our opinion, would not be appropriate. For the reason that Part C is deleted, reference to Rule 21 would also be inappropriate. Even otherwise, from 1993, Wealth-tax is payable not on the market value of an asset but on the scheduled value of the asset. Even then, WT Act provided for a tax on the market value of the asset. For the purpose of taxation as salaries, it is the fair market value that is relevant. The term "market value" and the "fair market value" are not the same and cannot be used interchangeably. The term "value", for the purpose of ESOP, was, for the first time, defined by the Finance Act, 1999. There was thus no methodology of computation prescribed prior to this date. The Hon'ble Supreme Court very recently, in the case of Jagatram Ahuja v. CGT [2000] 246 ITR 609 at page 620, observed that words or expressions defined in one statute do not afford as guide to the construction of words or expressions in another statute unless both are pari materia legislations. It was, accordingly, held that the Gift Tax Act and Estate Duty Act are not similar. The provisions of an allied legislation could be referred to only when the subject-matter of discussion is the same and further when there is an existing provision in both the statutes. In the instant case, the provisions of Wealth-tax Act and Income-tax Act are not similar, at least in the context of ESOP taxation.
26. There was a Circular of CBDT dealing with ESOP taxation, viz., Circular No. 710. In the said circular the mechanism of arriving at the value of perquisite has been stated. The ld. Departmental representative has relied upon this Circular only to support the legislative intent and not for the purpose of quantification of the benefit. The Circular, no doubt, deals with the value of the benefit. However, what has not been prescribed in a statute cannot be done so, in our opinion, by way of a circular. During the relevant year, there was no law or rule dealing with the aspect of quantification of the benefit. Prescribing a methodology for quantifying the benefit through a circular, in our opinion, would be usurpation of powers beyond the competence and powers of CBDT. Circular No. 710 was relied upon by the ld. Departmental Representative for the purpose of indicating the legislative intent. The legislative intent, by itself, cannot be the basis for any item being taxed. A circular cannot lay down any law. Circular cannot create any law. Under section 119, circulars can be issued only for the purpose of proper administration of law. We also agree with the ld. Senior Counsel for the assessee that the circulars are not binding on the assessees. We have also instances where circulars trying to create a law were even held to be invalid. Thus, the Authority for Advance Ruling in the case of TVM Ltd v. CIT [1999] 237 ITR 230 struck down Circular No. 742 as not binding. Circular No. 742 was itself withdrawn by Circular No. 6 of 2001. There cannot be, through an administrative body like the CBDT, an introduction of and withdrawal of any item being regarded as an income. Without any legislative mandate, any law created by any body or authority is to be regarded as invalid and hence of no effect. Even otherwise, Circulars can be useful in understanding the legislative intent or the background on the basis of which a particular law is in force. Circulars can, therefore, be regarded as contemporaneous expositio. To that extent, they can be a good aid in understanding the purpose of a statute. However, in the instant case, at the relevant point of time, there was no law in force at all. Resort to CBDT Circular would, therefore, be inappropriate in the absence of any law in force.
27. Both the counsels made a good deal of reference to section 17(2)(iiia) introduced with effect from 1-4-2000 as well as proviso enacted below. Section 17(2)(iii) inserted with effect from 1-4-2000. The Learned Departmental Representative stated that the function of proviso is to carve something out of the main body of law. The proviso introduced to section 17(2)(iii)(c) thus carved out an exception to the main body of the section. This should mean that the main body did intend to treat stock options as a benefit. If it is not so interpreted, the Learned DR. asserted, that the insertion of the proviso would be meaningless. Section 17(2)(iii)(c) of the Act, taxes generally, a benefit or an amenity accorded to an employee. Section 17(2)(iiia) was added by the Finance Act, 1999, to deal specifically with the taxation of a benefit arising under an ESOP. Section 17(2)(iiia) was itself deleted from the statute book by the Finance Act, 2000. In other words, the benefit under stock options is no longer taxable under the head "salaries". The difference between the sale price and cost of shares acquired under ESOP will be taxable only as capital gains at the time of sale. Having made the benefit taxable as capital gains, there was probably a need to clear this issue under the head "salaries". It would have been appropriate had this proviso been introduced in the law dealing with the taxation of ESOPs. A proviso was, therefore, needed for this purpose. As noted already, the particular clause (iiia) to section 17(2) dealing with ESOP taxation was itself removed from the statute. The proviso clarifying the issue that the stock options are no longer to be taxed under the head 'salaries' could, therefore, not have been inserted under section 17(2)(iiia). Having no other place but, nevertheless, looking at the need for clarifying the issue, the proviso has probably been added to section 17(2)(iii)(c) only. The learned Departmental Representative strenuously argued about the functions of a proviso, that it carves out an exception from the main body of law. In our opinion, however, that is not the only function of a proviso. The role of a proviso is not limited to carving out an exception to the main body of the enactment. It may, in certain situations, also explain ambiguous matters. There may be and are many cases in which the terms of an intelligible proviso may throw considerable light on the ambiguous import of the words in a statute. A proviso thus is a useful guide in the selection of one or the other of two possible constructions of words in the enactment or to show the scope of the latter in a doubtful case. Therefore, the context setting and purpose of a section may warrant a different construction. A proviso may, therefore, not always be regarded as an exception to the main body of the law.
Hon'ble Supreme Court in case of Allied Motors (P.) Ltd v. CIT [1997] 224 ITR 677 had an occasion to consider the effect of insertion of proviso to section 43B with effect from 1-4-1988. The three Judges-Bench of the Court held as under:
"Section 43B(a), the first proviso to section 43B and Explanation have to be read together as giving effect to the true intention of section so considered. Without the first proviso, Explanation 2 would not obviate the hardship or the unitended consequences of section 43B. The proviso supplies an obvious omission. But for this proviso the ambit of section 43B becomes unduly wide bringing within its scope those payments which were not intended to be prohibited from the category of permissible deductions. The first proviso to section 43B, therefore, has to be treated as retrospective. The rule of reasonable construction must be applied while construing a statute.
A proviso which is inserted to remedy unintended consequences and to make the provision workable, a proviso which supplies an obvious omission in the section and is required to be read into the section to give the section a reasonable interpretation, requires to be treated as retrospective in operation, so that a reasonable interpretation can be given to the section as a whole."
In the present case also section 17(2)(iiia) was introduced specifically to tax the ESOP benefits with effect from 1-4-2000. The said sub-section was deleted with effect from 1-4-2001 with the obvious intention not to tax the ESOP benefits. Simultaneously proviso to section 17(2)(iii) was inserted with effect from 1-4-2001 to exclude from tax net benefit under ESOP as perquisite. But for insertion of such proviso, there may still be some ambiguity in taxing the ESOP benefits and hence the proviso is apparently introduced to remove the undue hardship which may cause while interpreting section 17(2)(iii). In view of the aforesaid decision in Allied Motor (P.) Ltd's case; we hold that there was no specific provision to tax the ESOP benefit as perquisite under section 17(2)(iii) during the years under appeal which has been more than aptly clarified by insertion of proviso to section 17(2)(iii). The introduction of the proviso to section 17(2) iii)(c) indicates that the provision existing till that time were ambiguous. As held by the Hon'ble Bombay High Court in the case of CIT v. Hico Products (P.) Ltd. [1993] 201 ITR 567 a different construction may be given to a proviso in the peculiar facts and circumstances of the case. To say therefore that the proviso was introduced by an over enthusiastic Legislature or that it was introduced out of abundant caution is not correct.
28. The notes to the Finance Bill, 1999 states that a provision for ESOP is made to remove any uncertainty. This indicates that there was a lot of uncertainty and thus no assurance was available that section 17(2)(iii) was all embracing. The uncertainty in law would be evident, if one were to note the following:
(a) a decision in the House of Lords in Abbot's case, by a majority saying an ESOP benefit is taxable at the time of grant,
(b) That in England, the law itself was changed soon after the decision in the House of Lords in the case referred to above.
(c) Prior to 1999, there was no circular issued under section 192 dealing the obligations of an employer in relation to ESOP taxation.
(d) Circulars of CBDT (more specifically Circular No. 710 which was the relevant circular on the topic) are not binding on the assessee. At any rate, the learned Departmental Representative has also conceded that apart from indicating the legislative intent, he does not wish to rely upon the circular in any other respect.
(e) The ruling of the Authority for Advance Ruling made the parent company liable to deduct tax at source, being the person who granted the shares. In the present case, since the Trust has transferred the warrants/shares, it should have been the Trust, if at all, that was liable for deducting tax at source.
29. The learned Departmental Representative tried to argue that the insertion of clause (iiia) to section 17(2) by Finance Act, 1999, should be regarded as clarificatory and hence retrospective. However, it was also contended by him that the amendments made in the Finance Act, 2000 and 2001 are not clarificatory and hence not retrospective. The ld. Departmental Representative has not given any cogent reason as to why one set of amendments are to be regarded as retrospective and other not so. At any rate, the interpretation to a statute, in the absence of any words to a particular effect, has to be in a consistent manner, i.e. treating all the amendments as either retrospective or prospective in their entirety. The general rule is that all statutes other than those which are merely declaratory or which relate only to matters of procedure of evidence are prima facie prospective. There are no indications that the amendment made by the Finance Act, 1999, is declaratory. The amendment is also not in the realm of procedure of evidence. The same, therefore, should not be held to be of retrospective effect. Unless the terms of a statute expressly so provide or necessarily imply, retrospective operation should not be given to a statute. In the instant case, there are no words, which would manifest a clear intention to retroact. It was held by the Supreme Court in the case of Govindas v. CIT [1976] 103 ITR 123 that if the enactment is expressed in a language, which is fairly capable of either interpretation, it ought to be construed as prospective only. A fiscal legislation cannot be regarded as retrospective by implication.
30. The learned Departmental Representative also relied upon a number of decisions rendered in the United Kingdom to argue that the benefit under ESOP is taxable; that it is taxable at the time of exercise and that the difference between the fair market value and the cost of the acquisition should be the value of the perquisite. We may, at the outset, state that the law laid down by an English Court is not binding upon any judicial authority in India. It may have only a persuasive value. Even this persuasive effect may lose much of its sheen if one were to compare the differences in the schemes between the cases before the English Courts and the one presently under discussion. The law in England on taxation of perquisite is also different. Further, in none of the cases before the English Court, was there restriction on transferability. Even otherwise, if the decision of the House of Lords in the case of Abbot were applied, the result would not be in favour of the department. This would be so because, in the present case, the department has tried to fix the obligation upon the employer at the time of exercise of the warrants. In English case, however, it was held that the benefits arise at the time of the grant of the options.
31. There are also number of important features that should not be lost sight off. With regard to the obligation of the company in deducting tax at source, provisions of section 192 are applicable for the purpose of deducting tax at source from the salaries paid to an employee. Under section 192, an employer is required to deduct tax at source on the estimated income of the employee under the head "salaries". An estimation would involve guess work. Precision is not demanded nor expected. What is, however, required is that the employer has to do his job in fair, honest and bona fide manner. The ld. Departmental Representative has not disputed that the Appellant company has discharged its duties in a fair, honest and bona fide manner. The Appellant also did make a strong submission that it has been consistently approaching the department seeking a clarification about the taxability of ESOP. The assessee also produced the correspondence exchanged with the department evidencing this. It also produced paper reports wherein there is a mention that the matter of taxation of stock options was referred to the CBDT. The Learned Departmental Representative faintly tried to contest this submissions. He has, however, not categorically refuted the same. The following was the scenario prevailing at the point of time when the company was supposedly required to deduct the tax at source.
(i) The committee constituted by the Central Government to recommend the suggestions and amendments to Companies Act did, suggest that the ESOP benefit has to be taxed only at the point of sale and not at the time of exercise or any other time.
(ii) The CBDT has been issuing circulars each year dealing with the obligations of the employer while deducting tax at source. None of the circulars; prior to the year 1999 had made even a feeble attempt to discuss the obligation of the employer to deduct tax at source from the 'supposed' benefit.
(iii) The assessee-company had approached the CBDT for clarification on the TDS obligation and, however, no clarification was forthcoming.
(iv) The President of India had issued a Gazette notification accepting the recommendations of the Planning Commission for the software industries. The Gazette notification contained a directive to the various Ministries to forthwith give effect to directives notified in the Official Gazette. One of the directives in the Official Gazette was to tax the benefits arising under an ESOP only at the time of sale of an underlying share.
(v) There was no specific provision in the Act dealing with treatment of ESOP benefit as taxable perquisite.
In the light of these prevailing circumstances any reasonable person would have come to a conclusion that the benefit in an ESOP is not required to be taxed at the time of exercise of the option. The ld. Departmental Representative has tried to fasten the liability upon the assessee-company by looking at the law that was subsequently introduced. Can an assessee be expected to foresee what the future law would be? As held by the Supreme Court in the case of CIT v. Hindustan Electro Graphites Ltd. [2000] 243 ITR 48 clairvoyance cannot be expected of an assessee. An assessee could, therefore, not be charged guilty of not being able to predict the law that, will be enacted in future and mould his current conduct to the possible future pattern of law. That win be asking an assessee to do the impossible. The argument of the ld. Departmental Representative in fastening the liability of the company only on the basis of a future law, (which he himself became aware of after the expiry of the relevant years) is, therefore, without merit.
32. The provisions of Chapter XVII referring to tax deduction at source are one of the mechanisms of ensuring the taxes being paid by an assessee. The payer of any specific sum is required to deduct tax at source and pay the same to the Government on behalf of the payee. The payer, therefore, acts as an agent on behalf of the Government. In this role of an agent or Trustee, it is expected that all the actions are reasonable and fair. If that is demonstrated to have been done, then, in our opinion, no further obligation can be cast upon the payer of the specified sums. This view is being consistently approved by various Tribunals and Courts. To cite an instance, reliance is placed on decision in casq of Gwalior Rayon Silk Co. Ltd. v. CIT [1983] 140 ITR 832 (MP). The Supreme Court has dismissed SLPs of the department wherein the High Courts have held that once the assessee is known to have acted fairly, honestly and reasonably, no further amount relating to the alleged shortfall would be demanded from the assessee by an action under section 20 1 (1), in following cases:
(i) CIT v. Mahindra & Mahindra Ltd;
(ii) CIT v.Air France Ltd [2000] 243 ITR 185.
We are inclined to agree with the argument that no further liability can be imposed upon a person for any perceived default in his obligation when the person has acted fairly and honestly. There is no reason to doubt the genuineness of the attempt by the assessee-company in discharging its TDS obligation. In our opinion, therefore, the provisions of section 201(1) are not applicable.
33. Even otherwise, section 201 (1) is applicable only when there is a failure in deducting tax at source. The AP High Court in the case of P.V. Rai Gopal v. Union of India [1998] 233 ITR 678 held that the provisions of section 201(1) are attracted only when there is a failure to deduct the whole of the tax. It is not attracted when there is a shortfall in the amount of tax deducted at source. We are also inclined to agree to this rationale. We are aware that the provisions of section 201 were amended recently. These amendments are also retrospective in effect. By virtue of this retrospective amendment, a company would be liable for an action under section 201 if there is a failure to pay even a part of the tax that it was required to deduct at source. Hon'ble Karnataka High Court in case of MittalSteel Ltd. v. Asstt. CIT [1999] 240 ITR 707 has held that proceedings under section 201 are penal in nature. We are, therefore, of the considered opinion that no provision, which are penal in nature can be so interpreted which have, a retrospective effect, to be applicable in present situation. The amendment was brought about after the company had deducted the tax at source which in opinion of revenue authorities is short deduction and not a case of total failure to deduct. In our opinion, the amendment is not to be taken into account fastening of an obligation for an earlier period. in our opinion, the amendment can be used in respect of action initiated on or after the law was put into the statute books. An action initiated after the amendment may be even for an earlier period of time. To this extent only, the law, in our opinion, is retrospective.
34. The ld. Departmental Representative also made an attempt that the assessee has recovered the tax deducted in the order under section 201 from its employees. He argued that having recovered the tax from the employees, the assessee-company is no longer an 'aggrieved person' and, therefore, the appeal is not maintainable. An order has been passed against the assessee-company raising demand of tax under section 201(1). An order under section 201(1) is specifically appealable under section 246A. There are no conditions laid down in section 246A that merely because the amount deducted is recovered, an appeal is not maintainable. An order under section 201(1) is passed on a person who is deemed to be an assessee in default. A stigma is, therefore, attached to a person on whom an order under section 201 is passed. He is held guilty of short deduction. An appeal, in our opinion, would, therefore, be maintainable to remove the stigma attached. Even otherwise, a person against whom an order is passed under section 201(1) is entitled to recover the amount stated to be short deducted from the person to whom the relevant income is paid. If the assessee had not recovered this money, the amount of tax deducted under section 201(1) paid would have been regarded as additional remuneration and further tax would have to be deducted at source, as the same would have been construed as additional remuneration. Form No. 16 issued by the assessee-company, a copy of which was furnished to us, also carries a clear note to the effect that the certificate is being issued on the perquisite value as assessed by the Dy. Commissioner of Income-tax (TDS) in the order passed under section 201(1). In our opinion, on the facts and circumstances of the case, the appeal is maintainable. Even otherwise, in our opinion, the issue of the appeal being maintainable or not is not open to question at the stage of the appeal before the Income Tax Appellate Tribunal.
35. On an overall consideration of the facts and circumstances of the case, we are of the opinion that no perquisite arises to an employee on the exercise of stock options. For this reason and other reasons elaborated upon by us, the provisions of section 201(1) are not attracted and the assessee cannot be treated as an assessee in default.
36. Since we have held that the assessee cannot be treated as an assessee in default under section 201(1) of the Act, consequently the assessee is not liable for any interest under section 201(1A) of the Act.
37. In the result all the appeals of the assessee are allowed.
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