Full Judgment Text
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL No.4380 OF 2018
(Arising out of Special Leave Petition (C) No. 24888 OF
2015)
Addl. Commissioner of Income Tax .... Appellant(s)
Versus
Bharat V. Patel .... Respondent(s)
WITH
CIVIL APPEAL No. 4381 OF 2018
(Arising out of Special Leave Petition (C) No.
25001 OF 2015
J U D G M E N T
R.K.Agrawal, J
1) Leave granted.
2) These appeals have been preferred against the impugned
judgment and order dated 23.12.2014 passed by the High
Court of Gujarat at Ahmedabad in Tax Appeal Nos. 6 and 14 of
Signature Not Verified
Digitally signed by
SWETA DHYANI
Date: 2018.04.24
17:14:43 IST
Reason:
2004 whereby the Division Bench of the High Court dismissed
the appeals filed by the Revenue while upholding the decision
1
of the Income Tax Appellant Tribunal (for brevity ‘the
Tribunal’) dated 27.06.2003.
3) Brief facts:
(a) On 10.09.1998, the Respondent, who is the Chairman
and Managing Director of Procter and Gamble (P&G), India,
filed his income tax return for the Assessment Year 199899
and declaring the total income at Rs 40,13,820/.
(b) The Assessing Officer, vide order dated 12.02.2001,
concluded the assessment proceeding under Section 143(3) of
the Income Tax Act, 1961 (in short ‘the IT Act’) and determined
the total income of the Respondent at Rs 7,23,11,013/
against the declared income.
(c) Being aggrieved, the Respondent preferred an appeal
before the Commissioner of Income Tax (Appeals) being No.
CAB/I643/20002001. After considering the case, learned
CIT (Appeals), vide order dated 28.03.2002, dismissed the
appeal of the Respondent after comprehensively discussing the
taxability of the alleged amount and upholding the
Assessment Order passed by the Assessing Officer.
2
(d) Being dissatisfied, the Respondent carried the matter
before the Tribunal. The Tribunal, vide order dated
27.06.2003, in ITA No. 2241/Ahd/2002 partly allowed the
appeal filed by the Respondent.
(e) At this juncture, the Respondent as well as the Revenue
both preferred cross appeals before the High Court of Gujarat
at Ahmedabad.
(f) At the same time, consequent to the decision of the
Tribunal dated 27.06.2003, the Assessing Officer started the
proceeding side by side to give effect to the order dated
27.06.2003. Vide order dated 15.09.2003, the Assessing
Officer held that the difference being sum of Rs 6,80,40,649/
paid to the Respondent by P&G, USA shall be treated as
capital gains on transfer/redemption of shares, and hence, the
Respondent is liable to pay tax on capital gains. Being
aggrieved with the order dated 15.09.2003, the Respondent
filed an appeal before the CIT (Appeals) being No. CAB/V
37/0405 which was upheld by learned CIT (Appeals) in favour
3
of Assessing Officer while dismissing the appeal of the
Respondent.
(g) Being dissatisfied, the Respondent further preferred an
appeal before the Tribunal. The Tribunal, vide order dated
24.09.2010, dismissed the appeal. The decision of the
Tribunal dated 24.09.2010 was not challenged further.
(h) The Division Bench of the High Court, vide judgment and
order dated 23.12.2004, allowed the appeal filed by the
Respondent while dismissing the appeal of the Revenue.
(i) Hence, the present appeals have been filed by the
Revenue before this Court.
4) We have given our thoughtful consideration to the
submissions of leaned senior counsel for the parties and
perused the factual matrix of the case.
Point(s) for consideration:
5) Whether in the present facts and circumstances of the
case, any interference by this Court is required with the
impugned decision of the High Court?
Rival contentions:
4
6) At the outset, learned counsel for the Revenue contended
that the High Court erred in law while upholding that the
amount received on redemption of Stock Appreciation Rights
(SARs) is to be treated as capital gains and not perquisite
under section 17(2)(iii) of the IT Act. However, the same is not
taxable under the category of capital gains since no
consideration had passed from the Respondent.
7) In support of his argument, learned counsel placed
reliance on vs.
Sumit Bhattacharya ACIT Circle 16(1),
[2008] 112 ITD 1 (MUM.) (SB) and contended that
Mumbai
the Respondent, having received an amount on redemption of
Stock Appreciation Rights (SARs) as an employee of the
company and there was an employeremployee relationship
subsisting at the relevant point of time, therefore, the amount
received on redemption of Share Appreciation Rights must be
treated as taxable income under the head income from
“Salaries”. Learned counsel finally contended that the
impugned decision of the High Court deserves to be set aside.
5
8) Per contra , learned senior counsel appearing for the
Respondent submitted that the amount received by the
Respondent from redemption of Stock Appreciation Rights
(SARs) can be treated only as capital gains and cannot be
treated as perquisite under Section 17(2) (iii) of the IT Act or
under Section 28 (iv) of the IT Act. However, it was pointed out
that the said capital gains cannot be said to arose to the
Respondent since there was no consideration paid as the cost
of acquisition by the Respondent. It was also submitted that
such amount received on account of redemption of Stock
Appreciation Rights could have been taxed if at all under the
provisions of Clause (iiia) of Section 17(2) of the IT Act.
Finally, it was also submitted that the question of law sought
to be raised by the Revenue is no more res integra as settled
by this Court in the case of vs.
Commissioner of Income Tax
Infosys Technologies Ltd., [2008] 297 ITR 167 (SC). Hence,
these appeals deserve to be dismissed at the threshold.
Discussion:
6
9) Before examining the case at hand, it is pertinent to have
an understanding of the words “Perquisite” and “Capital
Gains”. The word “Perquisite” in common parlance may be
defined as any perk or benefit attached to an employee or
position besides salary or remuneration. Broadly speaking,
these are usually noncash benefits given by an employer to
an employee in addition to entitled salary or remuneration. It
may be said that these benefits are generally provided by the
employers in order to retain the talented employees in the
organization. There are various instances of perquisite such as
concessional rent accommodation provided by the employer,
any sum paid by an employer in respect of an obligation which
was actually payable by the employee etc. Section 17(2) of the
IT Act was enacted by the legislature to give the broad view of
term perquisite. On the other hand, the word ‘Capital Gains’
means a profit from the sale of property or an investment. It
may be short term or long term depending upon the facts and
circumstances of each case. This gain or profit is charged to
tax in the year in which transfer of the capital assets takes
7
place. In the instant case, the fundamental question which
arises for consideration before this Court is with regard to the
taxability of the amount received by the Respondent on
redemption of Stock Appreciation Rights (SARs.)
10) It is a matter of record that the Respondent was
employed as the ChairmancumManaging Director of the
(P&G) India Ltd. at the relevant time and the said company is
the subsidiary of (P&G) USA through Richardson Vicks Inc.
USA and that (P&G) USA owned controlling equity. It is an
undisputed fact that the Respondent was working as a
salaried employee. The (P&G) USA was the company who had
issued the Stock Appreciation Rights (SARs.) to the
Respondent without any consideration from 1991 to 1996. The
said SARs were redeemed on 15.10.1997 and in lieu of that
the Respondent received an amount of Rs 6,80,40,724/ from
(P&G) USA. However, when the Respondent filed his return, he
claimed this amount as an exemption from the ambit of
Income Tax. The issue involved in this appeal is in respect of
8
Rs 6,80,40,724/ made on account of amount received on
redemption of Stock Appreciation Rights.
11) The Tribunal was of the view that the stock options are
capital assets and such assets in the instant case acquired for
consideration, hence, gain arising therefrom is liable to capital
gain tax. However, the stand of the Revenue before the
Tribunal was that the amount in question is taxable as
perquisite under Section 17(2)(iii) of the IT Act or in
alternatively under Section 28(iv) of the IT Act instead of
capital gains. The High Court also upheld the view of the
Tribunal but the High Court disagreed that such capital gains
arose to the Respondent on redemption of Stock Appreciation
Rights since there was no cost of acquisition involved from the
side of the Respondent. The meaning of the word perquisite for
the instant case is given under Section 17(2) of the IT Act. The
Revenue alternatively contended that the case of the
Respondent should come under the ambit of Section 28(iv) of
the IT Act.
9
12) It is apposite to note here that, particularly, in order to
bring the perquisite transferred by the employer to the
employees within the ambit of tax, legislature brought an
amendment under Section 17 of the IT Act by inserting Clause
(iiia) in Section 17(2) of the IT Act through the Finance Act,
1999 (27 of 1999) with effect from 01.04.2000, which was later
on omitted by the Finance Act, 2000. The said Clause (iiia) as
it was then is reproduced herein below:
“(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 securities” 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 sweet 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
10
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;”
13) The intention behind the said amendment brought by the
legislature was to bring the benefits transferred by the
employer to the employees as in the instant case, within the
ambit of the Income Tax Act, 1961. It was the first time when
the legislature specified the meaning of the cost for acquiring
specific securities. Only by this amendment, legislature
determined what would constitute the specific securities. By
this amendment, legislature clearly covered the direct or
indirect transfer of specified securities from the employer to
the employees during or after the employment. On a perusal of
the said clause, it is evident that the case of the Respondent
falls under such clause. However, since the transaction in the
instant case pertains to prior to 01.04.2000, hence, such
transaction cannot be covered under the said clause in the
absence of an express provision of retrospective effect. We also
do not find any force in the argument of the Revenue that the
11
case of the Respondent would fall under the ambit of Section
17(2) (iii) of the IT Act instead of Section 17(2) (iiia) of the IT
Act. It is a fundamental principle of law that a receipt under
the IT Act must be made taxable before it can be treated as
income. Courts cannot construe the law in such a way that
brings an individual within the ambit of Income Tax Act to pay
tax who otherwise is not liable to pay. In the absence of any
such specific provision, if an individual is subjected to pay tax,
it would amount to the violation of his Constitutional Right.
14) It is pertinent to note that on the point of applicability of
clause (iiia) of Section 17(2) of the IT Act, this Court settled the
position in Infosys Technologies Ltd (supra), and has held
as under:
“17. Be that as it may, proceeding on the basis that there
was “benefit” 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 lockin period was over. On facts, we hold that in the
12
absence of legislative mandate a potential benefit could not
be considered as “income” of the employee(s) chargeable
under the head “salaries”…..”
15) The Revenue also contended before the High Court that
the amendment brought in by Section 17(2) of the IT Act was
clarificatory, hence, retrospective in nature. However, the High
Court rejected the stand of the Revenue. The High Court, in its
impugned judgment, on the point of the applicability of clause
has held as under:
“15. In the case of Commissioner of IncomeTax, Bangalore
vs 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 cost 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 cost 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 cost 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 cost value of the option was not ascertainable. In
our view, clause (iiia) is not clarificatory. Moreover, the
meaning of the words specified securities in section (iiia) was
defined or explained for the first time vide Finance Act , 1999
w.e.f. 1.4.2000.Morevover, 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
13
subsequently deleted w.e.f. 1.4.2001. For the afore stated
reasons, we are of the view the clause (iiia) cannot be read as
retrospective.”
16) Circular No. 710 dated 24.07.1995 which was issued by
the CBDT deals with the taxability of shares issued at less
than the market price. For ready reference, Circular No. 710
issued by the CBDT is reproduced hereinbelow:
“ 202. Taxability of the perequisite on shares issued to
employees at less than market price:
1. Chief Commissioners and corporate assessees have
been seeking clarification regarding taxability of the
perquisite on shares issued to the employees at less than
market price.
2. The matter has been considered by the Board. The
benefit does amount to a perquisite within the meaning of
clause (iii) of subsection (2) of Section 17 of the IncomeTax
Act, 1961. The various situations in this regard have to be
dealt with as under:
(i) where the shares held by the Government have
been transferred to the employee, there will be no
perquisite because the employeremployee relationship
does not exist between Government and the employee
(transferor and the transferee);
(ii) where the company offers shares to the
employees at the same price as have been offered to
the other shareholders or the general public, there will
be no perquisite;
(iii) where the employer has offered the shares to its
employees at a price lower than the one at which the
shares have been offered to the other
shareholders/public, the difference between the two
prices will be taxed as perquisite;
(iv) where the shares have been offered only to the
employees, the value of perqusite will be the difference
between the market price of the shares on the date of
14
acceptance of the offer by the employee and the price
at which the shares have been offered.”
On a perusal of the above, prima facie, it appears that such
Circular dealt with the cases where the employer issued
shares to the employees at less than the market price. In the
instant case, the Respondent was allotted Stock Appreciation
Rights (SARs.) by the (P&G) USA which is different from the
allotment of shares. Hence, in our opinion such Circular has
no applicability on the instant case. Moreover, a Circular
cannot be used to introduce a new tax provision in a Statute
which was otherwise absent.
17) Alternatively, the Revenue also contended that the case
of the Respondent shall come within the ambit of the Section
28(iv) of the IT Act. At this juncture, we deem it appropriate,
for the sake of convenience, to refer Section 28(iv) of the IT Act
which is reproduced herein below:
“28. Profits and gains of business or profession. The
following income shall be chargeable to incometax
under the head “Profits and gains of business or
profession”
15
(iv) the value of any benefit or perquisite, whether
convertible into money or not, arising from business or
the exercise of a profession.”
On a first look of the said provision, it is apparent that such
benefit or perquisite shall have arisen from the business
activities or profession whereas in the instant case there is
nothing as such. The applicability of Section 28(iv) is confined
only to the case where there is any business or profession
related transaction involved. Hence, the instant case cannot be
covered under Section 28(iv) of the IT Act for the purpose of
tax liability.
18) To sum up, the Respondent got the Stock Appreciation
Rights (SARs) and, eventually received an amount on account
of its redemption prior to 01.04.2000 on which the
amendment of Finance Act, 1999 (27 of 1999) came into force.
In the absence of any express statutory provision regarding
the applicability of such amendment from retrospective effect,
we do not find any force in the argument of the Revenue that
such amendment came into force retrospectively. It is well
established rule of interpretation that taxing provisions shall
16
be construed strictly so that no person who is otherwise not
liable to pay tax, be made liable to pay tax.
19) In view of above discussion, we are of the considered view
that these instant appeals are devoid of merits and deserve to
be dismissed. Accordingly, these are hereby dismissed leaving
parties to bear their own cost.
…….....…………………………………J.
(R.K. AGRAWAL)
…….…………….………………………J.
(ABHAY MANOHAR SAPRE)
NEW DELHI;
APRIL 24, 2018.
17