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Bomi S. Billimoria vs. ACIT (ITAT Mumbai)

DATE: (Date of pronouncement)
DATE: September 14, 2009 (Date of publication)

Click here to download the judgement (bomi_billimoria_esop_salary_perq.pdf)

Cashless ESOP benefits are not taxable

The assessee, an employee of Johnson & Johnson (“J&J”) India, received from J&J, USA, on 12.7.1989 a “cashless” option to buy 2500 shares at the then prevailing market price of $ 57.88 per share. The options were exercisable in installments over 10 years starting 11.7.1991. On 13.8.1992 (AY 1993-94), the assessee ‘sold’ the options and made a gain of Rs. 5,44,925. The AO held that the said gain was assessable in AY 1993-94 as either salary, short-term capital gain or speculation profit. On appeal, the CIT (A) held that the ‘shares’ obtained under the ESOP were a capital asset and as they were held for less than 3 years, the gain was assessable as a STCG. He rejected the argument that as there was no ‘cost of acquisition’, the capital gains were not assessable. On further appeal, HELD, allowing the appeal:

(i) As the CIT (A) had held that the shares acquired under ESOP amounted to acquisition of a capital asset, one had to proceed on that premise;

(ii) In granting approval to the ESOP, the RBI had stipulated that no payment could be made while exercising the right to purchase shares. Accordingly, there was no “cost of acquisition” and in accordance with B. C. Srinivasa Setty 128 ITR 294 (SC), the gains could not be taxed;

(iii) Even if it is assumed that the market value of the share is the benefit given to the assessee, such benefit can be said to accrue to the assessee only on the date of exercise of the option. As the date of exercise of the option as well as the date of sale is the same, there was no difference between the “deemed cost of acquisition” and the actual price realized by the assessee and thus there was no taxable gain.

See Also: Sumit Bhattacharya vs. ACIT 112 ITD 1 (Mum) (SB) where it was held that there is a fundamental distinction between ‘Stock Appreciation Rights’ and ‘Stock Options’ and that while stock options resulted in a capital asset, the value of whose benefit was taxable, stock appreciation rights resulted in a ‘cash bonus’ which was taxable as “salaries” though received from the non-employer. It was also held that the Tribunal was competent to change the head of income even at the instance of respondent if the facts were on record.
See Also: CIT vs. Infosys 297 ITR 167 (SC) where it was held that pre – 1.4.2000, the allotment of shares to employees under ESOP subject to a lock-in period of five years and other conditions was not a “perquisite” as there was no benefit and the value of benefit, if any, was unascertainable at the time when the options were exercised.
See Also: Ss. 17 (2) (iiia) & (vi).