Stock Appreciation Rights received prior to 01.04.2000 not perquisite u/s 17(2)(iiia) such provisions being not retrospective-Supreme Court
The Revenue had filed the instant appeal against the judgment of the High Court in upholding that the amount received on redemption of Stock Appreciation Rights (SARs) was to be treated as capital gains and not perquisite u/s 17(2)(iii) of the Income Tax Act, 1961 (the Act).
ABCAUS Case Law Citation:
ABCAUS 2307 (2018) (04) SC
Stock Appreciation Rights received held not perquisite
The respondent was the Chairman and Managing Director (CMD) of a listed company. The holding company had issued the SARs to the respondent without any consideration in several years. The said SARs were redeemed firing the relevant assessment year and in lieu of that the respondent received an amount of Rs 6,80,40,724/- from the holding company of USA. However, when the respondent filed his return, he claimed it as exempt.
However the AO completed the assessment proceeding under Section 143(3) of the Income Tax Act, 1961 (‘the Act’) by adding the amount received on account of redemption of Stock Appreciation Rights as perquisite under section 17(2)(iii) of the Act.
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 was taxable as perquisite under Section 17(2)(iii) of the Act or in alternatively under Section 28(iv) of the 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 on redemption of SARs since there was no cost of acquisition involved from the side of the respondent assessee.
Before the Supreme Court, the Revenue contended that the respondent had received the amount on redemption of SARs in the capacity as an employee of the company and there was an employer employee 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”.
The Hon’ble Supreme Court observed that 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. 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. This gain or profit is charged to tax in the year in which transfer of the capital assets takes place.
The Hon’ble Supreme Court observed that clause (iiia) in Section 17(2) of the Act was inserted through the Finance Act, 1999 (27 of 1999) with effect from 01.04.2000, which was later on omitted by the Finance Act, 2000. Since the transaction pertained 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.
The Hon’ble Supreme Court stated that 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.
The Hon’ble Supreme Court opined that the Stock Appreciation Rights 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, there was no 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 be construed strictly so that no person who is otherwise not liable to pay tax, be made liable to pay tax.
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