Relinquishing ESOP right accrued are taxable as capital gains not profits in lieu of salary

Relinquishing ESOP right accrued are taxable as capital gains not profits in lieu of salary u/s 17(3)(iii)  – ITAT

ABCAUS Case Law Citation
ABCAUS 3625 (2022) (12) ITAT

Important Case Laws relied upon:
CIT vs. Sarangpur Cotton Manufacturing Co. Ltd., 6 ITR 36
CIT vs. A. Krishnaswami Mudaliar & Ors.  53 I.T.R. 122, 128, 132
CIT Vs. Mc-Milan & Co., 33 I.T.R. 182
S. N. Namasivayam Chettiar vs. CIT 38 ITR 579, 588
Commissioners of Inland Revenue v. Cock, Russell and Co. Ltd., 29 Tax Cases 387, 392
CIT Vs. J. Dalmia (149 ITR 215) (Del.),
Baroda Cement & Chemicals Ltd. vs. CIT (158 ITR 636) (Guj.), 
Bhojison Infrastructure  (P.)  Ltd.  Vs.  ITO (173 ITD 436)
ACIT vs. Jackie  Shroff  (172  ITD  425)

In the instant case, the Revenue had challenged the order passed by the CIT(A) in treating compensation received by the assessee as  the share holding of the company even though the shares were not  registered in his name.

The assessee was an employee. As per the terms of the appointment, the assessee was offered stock option plan in a phased manner over four years with 7500 options maturing on completion of each year of service of the company.

The AO held that shares have not been registered in the name of and he had only surrendered rights in the shares as the shares. The AO held that the amounts received as per the settlement cannot be treated as capital gains. The AO also held that the employer company had treated the amount as salary and also deducted TDS as per the provisions of the Income Tax Act, 1961 (the Act). Under these circumstances, the AO held that the amounts received by the assessee was profits in lieu of salary as defined in Section 17(3)(iii) of the Act.

The Tribunal noted that the assessee had completed two years before his termination and as compensation received certificate for 50000 shares.

The Tribunal observed that the assessee was eligible to receive 15,000 shares as stock options. Those stock options had not been given to the assessee by the way of not registering though the share certificates had been issued. Subsequently, there had been a settlement between the assessee and the employer wherein by an unconditional and irrecoverable relinquishment of his rights to enforce registration of the shares, the assessee received one  lump sum amount towards the settlement.

The Tribunal examined the variation between the amounts received out of the one composite settlement agreement and found that the amount consisted of two different parts and hence taxation principles have to be precisely based on the nature of income earned by the assessee.

The Tribunal held that the amount received equivalent to the pro-rata value of eligible shares of 15,000 out of offered shares of  50,000  was to be treated as capital gains u/s 48 and the remaining  amount received by the assessee to be treated as per the provisions of Section 17(3)(iii).

Download Full Judgment Click Here >>

• Draft assessment order cannot give rise to any enforceable demand 
• No disallowance u/s 43B if expenditure not claimed in Profit and Loss Account
• Assessee developing infrastructure facility of Govt. not contractor for denying 80IA deduction
• Jurisdictional PCIT/CIT to condone delay in filing Form No. 10A for Registration u/s 12A
• AO not justified in making addition by adopting extrapolation without any material evidence