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CASE NO.: Appeal (civil)  3725 of 2007

PETITIONER: Commissioner of Income Tax, Bangalore

RESPONDENT: Infosys Technologies Ltd.

DATE OF JUDGMENT: 04/01/2008

BENCH: S.H. Kapadia & B. Sudershan Reddy

JUDGMENT: J U D G M E N T with Civil Appeal No. 16 of 2008 @ S.L.P.(C) No. 16926 of 2007

KAPADIA, J.         Leave granted. 2.      Respondent-assessee is public limited  IT company based in  Bangalore. To implement Employees Stock Option Scheme  (\023ESOP\024), 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 \023non- transferable\024. Thus the said shares were incapable of being  converted into money during the lock in period.

3.      For 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 \023perquisite value\024  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  \023perquisite value\024 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

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weightage was given by both the authorities to the lock in period.  Both the authorities took into account the \023perquisite value\024 as  on the date of exercise of option.

4.      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 \023perquisite\024 under Section 17(2)(iii) of  the Income Tax Act, 1961 (\0231961 Act\024). 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 Department.

5.      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.

6.      In 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 \023income\024.

7.      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.

8.      At the outset, we may state that in these civil appeals we are  not concerned with taxability but with the value of a perquisite.  

9.      The question for consideration is whether \023perquisite\024 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 \023perquisite  value\024 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 1.4.2000.

10.     We quote hereinbelow Sections 17(1) and (2), which read as  follows: \023"Salary", "perquisite" and "profits in lieu of  salary" defined.  

17.  For the purposes of sections 15 and 16  and of this section,-   (1) "salary" includes-  

(i) wages;

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(ii) any annuity or pension;

(iii) any gratuity;

(iv) any fees, commissions, perquisites or  profits in lieu of or in addition to any salary or  wages;

(v) any advance of salary;

(va) any payment received by an employee in  respect of any period of leave not availed of by  him;

(vi) 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

(vii) 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;

(2) "perquisite" includes-  

(i) the value of rent-free accommodation  provided to the assessee by his employer;

(ii) the value of any concession in the matter of  rent respecting any accommodation provided to  the assessee by his employer;

(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;

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

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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.\024                                                          (emphasis supplied) 11.     Warrant is a right without obligation to buy. Therefore,  \023perquisite\024 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 \023non-transferable\024 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.  Therefore, 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.       12.     We 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. 13.     We quote hereinbelow Section 17(2)(iiia), which reads as  under: \023(iiia)        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 :

Provided 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,-

       (a)     cost means the amount actually paid  for acquiring specified securities and  where no money has been paid, the cost  shall be taken as nil;

       (b)     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

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sweat equity shares;

       (c)     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

       (d)     value means the difference between  the fair market value and the cost for  acquiring specified securities;\024                                            (emphasis supplied)       14.     As stated above, unless a benefit/receipt is made taxable, it  cannot be regarded as \023income\024. 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 \023cost\024 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  as nil.

15.     In 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 \023cost\024 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 \023cost\024  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 \023cost\024 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 \023cost\024, value of the option was not  ascertainable. In our view, clause (iiia) is not clarificatory.  Moreover, the meaning of the words \023specified securities\024 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.       16.     Be that as it may, proceeding on the basis that there was  \023benefit\024, 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.  On facts, we hold that in the absence of legislative mandate a  potential benefit could not be considered as \023income\024 of the  employee(s) chargeable under the head \023salaries\024. The stock was  non-transferable and the stock exchange was also accordingly

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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 \023nil\024 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 Ineffective Charge.       17.     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.  Therefore, 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.  

18.     Estimation of TDS under Section 192 in the absence of clear  provisions on valuation of \023perquisite\024 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.

19.     Before concluding, we express no opinion on the law  prevailing after 1.4.2000 except to the extent indicated  hereinabove.

20.     Accordingly, we find no merit in these civil appeals which  stand dismissed with no order as to costs.