Ramamootrthy Sridharan, Hyderabad V. ITO, Hyderabad

ITA 1238/HYD/2008

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 3155 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 11 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2010
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 26-04-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 04-07-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: A PATRA
• Keywords: Capital asset; Salary income; Double taxation relief; Advance ruling; Cost of acquisition; Fair market value; Revised return; Reason to believe; Reassessment proceedings; TDS; Capital Gains
• Section: 143(3); 234B; 143(1); 143(2); 147; 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A , HYDERABAD BEFORE SHRI N.R.S. GANESAH, JUDICIAL MEMBER AND SHRI CHANDRA POOJARI ACCOUNTANT MEMBER ITA NO: 1238/HYD/2008 : AY 2004-2005 SHRI RAMAMOORTHY SRIDHARAN HYDERABAD (PAN AETPR5134D) VS ITO, WARD NO.12(4), HYDERABAD (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI RAGHUNATHAN SAMPATH RESPONDENT BY : SHRI A. PATRA, CIT, DR O R D E R PER : CHANDRA POOJARI, ACCOUNTANT MEMBER THIS APPEAL PREFERRED BY THE ASSESSEE IS DIRECTED AGA INST THE ORDER OF THE CIT(A)-II, HYDERABAD DATED 6/5/2008 AND PERTAINS TO THE AY 2004-05. 2. THE FIRST GROUND IN THIS APPEAL IS WITH REGARD T O REOPENING OF THE ASSESSMENT. THE CONTENTION OF THE ASSESSEE IS THAT THE A SSESSMENT ORDER PASSED U/S 143(3) READ WITH SEC.147 WAS BEYOND JUR ISDICTION, BAD IN LAW AND VOID AB INITIO. ACCORDING TO LEARNED COUNSE L FOR THE ASSESSEE THE SCOPE OF REASSESSMENT U/S 148 WAS ERRONEOUSLY WIDENED B Y THE ASSESSING OFFICER BY GOING INTO REASONS OTHER THAN THOSE GI VEN FOR REOPENING OF THE ASSESSMENT BY FISHING AND ROVING ENQUIR IES. IN THIS CASE, ACCORDING TO THE ASSESSEE COMPUTATION OF SHORT TERM CAPI TAL GAIN WAS NOT SUBJECT MATTER OF NOTICE GIVEN U/S 148. THE REO PENING OF NOTICE WAS ISSUED ON THE FOLLOWING GROUNDS: I) THE FOREIGN TAX CREDIT IS TREATED AT PAR WITH T AX DEDUCTED AT SOURCE OR ADVANCE TAX FOR THE PURPOSE OF CALCULATING INTEREST UNDE R THE ACT. THE ITA NO.1238/HYD/2008 SHRI RAMAMORRTHY SRIDHARAN, HYDERABAD 2 2 PROVISIONS OF SECTION 209 OR SECTION 234B OF THE ACT DO NO T SPECIFICALLY PERMIT THE FOREIGN TAX CREDIT TO BE TREATED AT PAR W ITH THE ADVANCE TAX OR TDS. THE EXPLANATION TO SEC.234B AND 234C WHICH SAYS T HAT THE CREDIT OF TAXES PAID OUTSIDE INDIA IS TO BE ALLOWED IN ARRIV ING AT ASSESSED TAX, IS EFFECTIVE FROM ASSESSMENT YEAR 2007-08 ONWARDS AND CANNOT BE APPLIED RETROSPECTIVELY TO THE PRIOR ASSESSMENT YEARS AND II) AS PER PROVISIONS OF SEC.17(2) OF THE ACT READ WITH R ULE 3 OF THE IT RULES 1962 (THE RULES), THE VALUE OF PERQUISITE IN RESP ECT OF ACCOMMODATION SHOULD BE 10% OF THE SALARY, WHICH ARRIVE S TO RS.1,36,253 WHEREAS THE VALUE OF PERQUISITE IN THE RET URN OF INCOME FILED BY THE ASSESSEE IS COMPUTED AT RS.1,34,713/-. 3. ACCORDING TO ASSESSEE COUNSEL, THE ASSESSING OFFICER IN SUBSEQUENT HEARINGS HAS SOUGHT CLARIFICATIONS RELATING TO U S SOURCED INTEREST AND DIVIDED INCOME DISCLOSED IN THE INDIAN TAX RETURN AND CALCULATIONS OF THE FOREIGN TAX CREDIT. HE FURTHER SOUG HT INFORMATION RELATED TO LONG TERM CAPITAL GAINS AND GAINS ON SHARES A CQUIRED THROUGH ESOP. THE ABOVE INFORMATION SOUGHT BY ASSESSING OFFICER H AS NO NEXUS WITH THE REASONS FOR WHICH THE NOTICE U/S 148 WAS ISSUED. THE ASSESSEE HAS GIVEN INFORMATION TO THE ASSESSING OFFICER UNDER PRO TEST TO BUY PEACE WITH THE IT DEPARTMENT. HE SUBMITTED THAT IN P ROCEEDINGS U/S 147, IT IS ONLY THE ESCAPED INCOME WHICH HAS TO BE ASSESSED O R REASSESSED. THUS, AS PER THE LAW LAID DOWN BY THE APEX C OURT IN THE CASE OF SUN ENGINEERING WORKS (P) LTD. 198 ITR 297 WHEN PROCEEDINGS U/S 147 ARE INITIATED, THE PROCEEDINGS ARE OPEN ONLY QUA ITEMS OF UNDER ASSESSMENT. THE FINALITY OF ASSESSMENT PROCE EDINGS ON OTHER ISSUES REMAINS UNDISTURBED. IT MAKES NO DIFFERENCE WHETHER THE ASSESSMENT PROCEEDINGS HAS BECOME FINAL ON ACCOUNT OF FRAMI NG OF AN ASSESSMENT U/S 143(3) OR ON ACCOUNT OF NO ISSUE OF A NOTICE U/S 143(2) ITA NO.1238/HYD/2008 SHRI RAMAMORRTHY SRIDHARAN, HYDERABAD 3 3 WITHIN THE STIPULATED PERIOD. THE AMENDMENTS MADE IN SECTIONS 143 AND 147 WITH EFFECT FROM 1.4.1989 DO NOT IN ANY MAN NER NEGATE THIS PROPOSITION OF LAW AS ENUNCIATED BY THE SUPREME COURT IN THE CASE OF SUN ENGINEERING WORKS (P) LTD. (SUPRA.). HE ALSO RELI ED ON THE JUDGEMENT OF PUNJAB & HARYANA HIGH COURT IN THE CASE O F VIPAN KHANNA VS. CIT (255 ITR 220). ON THE OTHER HAND THE DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE ORIGINAL ASSESSMENT W AS COMPLETED U/S 143(1) AND THE REOPEN WAS VALIDLY INITIATED AND T HEREAFTER WHILE CONSIDERING THE ISSUE RELATING TO THE PURPOSE FOR WHICH THE REOPEN WAS MADE, THE ASSESSING OFFICER ALSO CONSIDERED THE ISSUE RELATIN G TO LONG TERM CAPITAL GAIN AND GAINS ON SHARES ACQUIRED THROUGH E SOP. THE ACT OF CONSIDERING THESE ISSUE IN THE REASSESSMENT PROCEEDINGS I S WITHIN THE EXPLANATION PROVIDED IN THE SEC.147 AND HE STRONGLY RELIED ON THE ORDER OF THE CIT(A). 4. WE HAVE HEARD BOTH THE PARTIES AND PERUSED MATER IAL ON RECORD. IN THIS CASE, REASSESSMENT WAS VALIDLY INITIATED. THE GRIEVANCE OF THE ASSESSEE IS THAT THE ISSUE RELATING TO DETERMINATIO N OF LONG TERM CAPITAL GAIN IS NOT AT ALL SUBJECT MATTER OF REOPENING OF THE ASSESSMENT. AS SUCH, THIS ISSUE CANNOT BE CONSIDERED IN THE REASSESSMENT. T HIS ARGUMENTS OF THE ASSESSEE COUNSEL IS DEVOID OF MERIT. ONCE THE REASSESSMENT IS VALIDLY INITIATED, THE ASSESSING OFFICER IS A T LIBERTY TO BRING ALL THE INCOME ESCAPED FROM THE ASSESSMENT TO TAKE A ND IT IS NOT LIMITED TO THE ISSUE FOR WHICH THE REASSESSMENT NOTICE IS I SSUED. THIS VIEW OF OURS IS FORTIFIED BY THE JUDGEMENT OF HONBLE SUPREME IN THE CASE OF ITO VS. MEWALAL DWARAKA PRASAD (176 ITR 5 29). IN THE INSTANT CASE DURING THE ORIGINAL ASSESSMENT YEAR PR OCEEDINGS FOR THE ASSESSMENT YEAR 1965-66, THE ITO HAD FOUND THRE E CASH CREDITS IN THE ACCOUNT BOOKS OF THE ASSESSEE AND, A FTER CALLING ITA NO.1238/HYD/2008 SHRI RAMAMORRTHY SRIDHARAN, HYDERABAD 4 4 UPON THE ASSESSEE TO SUBSTANTIATE THE GENUINENESS O F THE TRANSACTIONS, ACCEPTED THE MATERIAL PRODUCED BY THE ASSESSEE AND TREATED THE TRANSACTIONS AS GENUINE. THEREAFTE R, THE ITO ISSUED A NOTICE U/S 148 OF THE IT ACT, 1961 DATED M ARCH 7, 1973, I.E., MORE THAN SEVEN YEARS AFTER THE ASSESSMENT YE AR HAD BEEN COMPLETED, FOR BRINGING TO TAX THE CASH CREDITS AS THE ASSESSEES INCOME. ON A WRIT PETITION FILED BY THE ASSESSEE C HALLENGING THE VALIDITY OF THE NOTICE THE HIGH COURT HELD THAT THE NOTICE WAS WITHIN JURISDICTION ONLY IN REGARD TO ONE OF THE CA SH CREDITS AND DIRECTED THE ITO NOT TO REOPEN THE ASSESSMENT IN RE LATION TO THE OTHER TWO CASH CREDITS AND DIRECTED THE ITO NOT TO REOPEN THE ASSESSMENT IN RELATION TO THE OTHER TWO CASH CREDIT S, AS HE COULD HAVE NO REASON TO BELIEVE THAT THEY HAD ESCAPED ASS ESSMENT TO TAX; AND, IN THIS VIEW, FELT IT NECESSARY TO DECIDE WHETHER THE NOTICE WAS BARRED BY TIME ON THE FOOTING THAT IT WA S COVERED BY SEC.147 (B). ON CROSS APPEAL BY BOTH THE DEPARTMEN T AND THE ASSESSEE: HELD (I) THAT IT WAS NOT FOR THE HIGH COURT TO EXAM INE THE VALIDITY OF THE NOTICE U/S 148 IN REGARD TO TWO OF THE ITEM OF CASH CREDITS IF IT CAME TO THE CONCLUSION THAT THE NOTICE WAS VA LID AT LEAST IN RESPECT OF THE REMAINING ITEM. WHETHER ITO, WHILE MAKING HIS ASSESSMENT WOULD TAKE INTO ACCOUNT THE OTHER TWO IT EMS SHOULD HAVE BEEN LEFT TO BE CONSIDERED BY THE ITO IN THE F RESH ASSESSMENT PROCEEDINGS. IN VIEW OF THE ABOVE, WE DISMISS THIS GROUND. ITA NO.1238/HYD/2008 SHRI RAMAMORRTHY SRIDHARAN, HYDERABAD 5 5 5. THE NEXT GROUND IS GROUND NO.2 WITH REGARD TO CO MPUTATION OF LONG TERM CAPITAL GAIN. 6. BRIEF FACTS OF THIS GROUND ARE THAT THE ASSESSING OF FICER HAS OBSERVED THAT FOR THE YEAR 2003, THE ASSESSEE HAD FILED IN USA ONE ORIGINAL RETURN OF INCOME AND ONE AMENDED RETURN OF INCOME. THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY THE CAPITAL GAIN AM OUNTING TO US $ 5,80,433/- OFFERED IN THE ORIGINAL RETURN OF I NCOME HAD NOT BEEN REFLECTED IN THE REVISED RETURN OF INCOME. THE ASSESSEE E XPLAINED THAT WHILE COMPUTING THE CAPITAL GAINS ON SALE OF MICROSOFT SHA RES, RELEVANT COST WAS WRONGLY ADOPTED WHICH WAS RECTIFIED IN THE AMEN DED US TAX RETURN WHERE THE CORRECT COST WAS ADOPTED AND SAME HAS B EEN OFFERED FOR INDIAN TAXATION. THE ASSESSEE HAS SUBMITTED THE TRANSACTION DETAILS OF THE SALE TRANSACTION OF MICROSOFT SHARE. THE A SSESSING OFFICER FOUND THAT THE ASSESSEE HAS GOT 20285 MICROSOFT SHARES UNDER EMPLOYEES STOCK OPTION AND THE GRANT PRINCE FOR EACH SHARE WAS US $ 0.3194 AS ON 17.11.88 AND THE FMV OF EACH SHARE AS ON 5.11.96 @ US $ 8.8047. LIKEWISE, ON 30.6.99, THE ASSESSEE HAS GOT 174 50 MICROSOFT SHARES BY EXERCISING HIS OPTION AND THE GRANT PRINCE OF E ACH SHARE WAS US $ 0.3611 AS ON 25.7.89 AND THE FMV OF EACH SHARE AS ON 30.6.99 WAS US $ 44.9063. APPARENTLY, AS PER THE STATEMENT OF LTCG ANNEXED TO THE RETURN OF INCOME FILED BY THE ASSESSEE, THE ASSESSE E HAS ADOPTED THE RESPECTIVE FAIR MARKET VALUE OF THE SHARE AS COST OF ACQUISITION INSTEAD OF ADOPTING THE RESPECTIVE GRANT PRICE. ACCORD INGLY, THE ASSESSEE WAS ASKED TO EXPLAIN WHY THE GRANT PRINCE SHOULD N OT BE TAKEN AS COST OF ACQUISITION FOR COMPUTATION OF CAPITAL GAIN AS ALSO TO EXPLAIN WHETHER AT ANY POINT OF TIME ON THE ABOVE MICROSOFT SH ARES NO.37735, THE ASSESSEE OFFERED THE DIFFERENTIAL AMOUNT BETWEEN TH E GRANT PRICE AND FMV FOR INDIAN TAXATION. THE ASSESSEE FILED A WRIT TEN SUBMISSION ITA NO.1238/HYD/2008 SHRI RAMAMORRTHY SRIDHARAN, HYDERABAD 6 6 STATING THAT UNDER THE PROVISIONS OF THE IT ACT, PRIOR TO 1 ST APRIL, 2001, IN A CASE WHERE AN EMPLOYEE RECEIVED ANY SECURITY UNDER ESO P OF SCHEME, THE DIFFERENCE BETWEEN THE FMV ON THE DATE OF EXERCISE AND THE GRANT PRICE OF THE SHARE WAS TAXABLE AS SALARY. DURING THE RE LEVANT PREVIOUS YEAR 1996-97 AND 99-00, WHEN THE OPTIONS WERE EXERCISE D, THE ASSESSEE WAS IN USA AND A NON RESIDENT FOR THE PURPOSE OF INDIA N TAXATION AND ACCORDINGLY, THE DIFFERENTIAL AMOUNT WAS NOT LIABLE TO TAX IN INDIA. SUBSEQUENTLY, THE SHARES WERE SOLD AFTER 1 ST APRIL 2001 DURING THE PREVIOUS YEAR 2003-04 AND THEREFORE THE COST OF ACQUISIT ION OF THE SHARES FOR THE PURPOSE OF COMPUTING THE CAPITAL GAINS IN RESPECT OF THE SHARES ISSUED UNDER ESOP SHOULD BE THE FMV AS ON THE DATE OF EXERCISE. HOWEVER, THE ABOVE EXPLANATION OF THE ASSESSEE WAS NOT ACCE PTED BY THE ASSESSING OFFICER. THE ASSESSING OFFICER REFERRED TO SUB SECTION 2(AA) OF SEC.49 INSERTED IN THE IT ACT W.E.F. 1.4.200 1, WHICH DEALS WITH COST OF SHARES FOR THE PURPOSE OF COMPUTING CAPITAL GAINS. HE ALSO REFERRED TO PROVISO TO SUB SECTION 2 OF SEC. 17, STATING T HAT NOTHING CONTAINED IN THIS SUB CLAUSE SHALL APPLY WITH THE VALUE OF ANY BENEFIT PROVIDED BY A COMPANY FREE OF COST OR AT A CONCESSIONAL RA TE TO ITS EMPLOYEES BY WAY OF ALLOTMENT OF SHARES, DEBENTURES OR WARRANTS DIRECTLY OR INDIRECTLY UNDER ANY EMPLOYEES STOCK OPTION PLAN OR SCHEME OF THE COMPANY OFFERED TO SUCH EMPLOYEES IN ACCORDANCE WIT H THE GUIDELINES ISSUED IN THIS BEHALF BY THE CENTRAL GOVT. T HE ASSESSING OFFICER WAS OF THE VIEW THAT THE AMENDMENT CLEARLY SH OWS THAT FROM 1.4.2001, THE INTENTION OF THE LEGISLATURE WAS NOT TO TAX THE DIFFERENCE BETWEEN THE FMV AND THE GRANT PRICE AS PERQUISITE. ACC ORDINGLY, THE ASSESSING OFFICER ADOPTED THE GRANT PRICE AS THE COST OF A CQUISITION SINCE THIS WAS THE ACTUAL COST INCURRED BY THE ASSESSEE. THE ASSESSIN G OFFICER ALSO OBSERVED THAT VERIFICATION OF THE TRANSACTION DETAI LS RELATING TO ITA NO.1238/HYD/2008 SHRI RAMAMORRTHY SRIDHARAN, HYDERABAD 7 7 COMPUTATION OF SHORT TERM CAPITAL GAIN ON SALE OF SIMILA R MICROSOFT SHARES, THE ASSESSEE HAD ADOPTED THE GRANT PRICE AS COST OF EACH SHARE. 7. THE AUTHORISED REPRESENTATIVE SUBMITTED THAT DURING TH E FINANCIAL YEAR 2003-04 (ASSESSMENT YEAR 2004-05), THE ASSESSEE WAS A RESIDENT AS PER THE ACT IN INDIA. HE SOLD A PART OF TH E ABOVE SHARES DURING THIS YEAR. IN HIS RETURN OF INCOME FOR THE ASSE SSMENT 2004-05, HE COMPUTED THE CAPITAL GAINS, BY DEDUCTING FROM THE SAL E VALUE THE FAIR MARKET VALUE OF THE SHARES AS EXISTING AT THE TIME OF E XERCISE (I.E. 1996 AND 1999 RESPECTIVELY) AS THE COST OF ACQUISITION IN TE RMS OF SEC.48(II) OF THE ACT. THE ASSESSING OFFICER ASSESSED THE CAPITAL GAINS B Y RE- COMPUTING THE COST OF ACQUISITION TO BE THE GRANT PRICE ( I.E. THE PRICE AT WHICH THE ESOP WERE GRANTED IN 1988 AND 1989). HE SUBM ITTED THAT THE WORD COST IS NOT DEFINED IN SEC.48(II) OF THE ACT. HE E XPLAINED THE LITERAL MEANING OF THE WORD COST WHICH IS AS FOLLOWS: THE MODERN LIBRARY DICTIONARY OF THE ENGLISH LANGUAG E PROVIDES THE FOLLOWING MEANS FOR THE WORD COST. A) THE PRICE PAID TO ACQUIRE, PRODUCE, ACCOMPLISH OR MAINTAI N ANYTHING B) XXXX C) ANY OUTLAY, EXPENDITURE OF MONEY, TIME, LABOR ETC. D) TO REQUIRE THE EXPENDITURE OF MONEY, TIME LABOUR, I) IN EXCHANGE, PURCHASE OF PAYMENT II) BE OF THE PRICE OF (SUCH MONEY, TIME LABOUR ETC.) III) BE ACQUIRED IN RETURN FOR (SUCH MONEY, TIME, LABOR ETC. ) 7.1. HE DREW OUR ATTENTION TO THE SECURITIES & EXCHANGE BOA RD OF INDIA (EMPLOYEES STOCK OPTION SCHEME AND EMPLOYEE STOCK PURCHASE SCHEME) GUIDELINES 1999-SCHEDULE 1(CLAUSE 13.1) ACCOUNTING ITA NO.1238/HYD/2008 SHRI RAMAMORRTHY SRIDHARAN, HYDERABAD 8 8 POLICIES FOR EMPLOYEES STOCK OPTION SCHEME (ESOP) WHEREI N SPECIFICALLY STATED AS FOLLOWS: A) IN RESPECT OF OPTIONS GRANTED DURING ANY ACCOUNTING PERI OD, THE ACCOUNTING VALUE OF THE OPTIONS SHALL BE TREATED AS ANO THER FORM OF EMPLOYEE COMPENSATION IN THE FINANCIAL STATEMENTS OF THE COMPANY. B) THE ACCOUNTING VALUE OF THE OPTIONS SHALL BE EQUAL TO T HE AGGREGATE, OVERALL EMPLOYEE OPTIONS GRANTED DURING T HE ACCOUNTING PERIOD, OF THE INTRINSIC VALUE OF THE OPTIO N, IF THE COMPANY SO CHOOSES, THE FAIR VALUE OF THE OPTION; 7.2. HE SUBMITTED THAT U/S 49 OF THE ACT DEALING WITH COST WITH REFERENCE TO CERTAIN MODES OF ACQUISITION, DEALS UNDER SUB SECTION (2AA) AS FOLLOWS: WHERE THE CAPITAL GAIN ARISES FROM THE TRANSFER OF THE SHARES , DEBENTURES OR WARRANTS, THE VALUE OF WHICH HAS BEEN TAK EN INTO ACCOUNT WHILE COMPUTING THE VALUE OF PERQUISITE UNDER CLAUSE (2 ) OF SEC.17 THE COST OF ACQUISITION OF SUCH SHARES, DEBENTURES OR WARRANTS SHALL BE THE VALUE UNDER THAT CLAUSE. 7.3: FURTHER HE SUBMITTED THAT THE COST FOR THE PUR POSE OF DETERMINING THE COST OF ACQUISITION U/S 48(II) OF THE ACT SHOULD NOT BE RESTRICTED TO THE AMOUNT OF ACTUAL MONETARY PAYMENT. IT SHOULD ALSO INCLUDE THE COST ARISING ON ACCOUNT OF THE INCOME THAT AROSE AND P UT TO TAX AS A PERQUISITE VALUE THEREOF. THE ORGANIZATION FOR WHICH THE ASSESSEE WAS WORKING IN US HAD A SALARY PACKAGE INVOLVING BOTH MON ETARY AND NON MONETARY BENEFITS. WHILE THE MONETARY FACTOR RESULTED IN DIRECT WAGES AND SALARY, THE NON MONETARY PART OF THE PACKAGE RESUL TED IN TAXABLE PERQUISITE. BOTH THE PARTS OF THE PACKAGE WAS OFFERED AS INCOME. THE NON MONETARY VALUE OF THE ESOP SHARES BEING THE DIFFE RENCE BETWEEN ITA NO.1238/HYD/2008 SHRI RAMAMORRTHY SRIDHARAN, HYDERABAD 9 9 THE FAIR MARKET VALUE OF THE SHARES ON THE DATE OF EX ERCISE AND THE GRANT PRICE WAS TAXED AS SALARY IN US IN 1996 AND 1999. ACCORDING TO THE LEARNED AR, THE ASSESSEE ACCOUNTED IN HIS I NDIVIDUAL BALANCE SHEET FOR 1996 AND 1999, THE FAIR MARKET VALU E OF ESOP SHARES AS HIS INVESTMENT VALUE AND DETERMINED IN HIS PROFIT AN D LOSS ACCOUNT FOR THOSE YEARS AND PERQUISITE VALUE BEING THE DIFFERENCE B ETWEEN THE FAIR MARKET VALUE OF THE SHARES ON THE DATE OF EXERCISE AND THE GRANT PRICE PAID AT THE TIME OF EXERCISE) AS AN ACCRUED SALARY INCOM E AND OFFERED SUCH INCOME FRO TAX IN THOSE RESPECTIVE YEARS IN US. HE SUBMITTED THAT IT IS IMPERATIVE TO NOTE THE PRINCIPL E EMANATING FROM THE FOLLOWING EXPLANATIONS U/S 5 OF THE IT ACT DEFININ G THE SCOPE OF TOTAL INCOME CHARGEABLE UNDER THE ACT. EXPLANATION1: INCOME ACCRUING OR ARISING OUTSIDE INDI A SHALL NOT BE DEEMED TO BE RECEIVED IN INDIA WITHIN THE MEANING OF THIS SECTION BY REASON ONLY OF THE FACT THAT IT IS TAKEN INTO ACCOUNT IN A BALANCE SHEET PREPARED IN INDIA. EXPLANATION:2: FOR THE REMOVAL OF DOUBTS, IT IS HERE BY DECLARED THAT INCOME WHICH HAS BEEN INCLUDED IN THE TOTAL INCOME OF A PERSON ON THE BASIS THAT IT HAS ACCRUED OR ARISEN OR IS DEEMED TO HAVE A CCRUED OR ARISEN TO HIM SHALL NOT AGAIN BE SO INCLUDED ON THE BA SIS THAT IT IS RECEIVED OR DEEMED TO BE RECEIVED BY HIM IN INDIA. 8. HE SUBMITTED THAT IN THE CASE OF ASSESSEE, THE PERQU ISITE VALUE OF THE ESOP SHARES WAS ALREADY ACCRUED AS SALARY INCO ME IN FINANCIAL YEARS 1996-97 AND 1999-2000. WHEN THE ASSESSE E SOLD THE SHARES IN FINANCIAL YEAR 2003-04 (ASSESSMENT YEAR 2004-05) , HE RECEIVED THE ENTIRE SALE VALUE, A PART OF WHICH WAS ALR EADY SO CONSIDERED ITA NO.1238/HYD/2008 SHRI RAMAMORRTHY SRIDHARAN, HYDERABAD 10 10 AS INCOME ACCRUED IN 1996-97 AND 1999-2000 CANNOT BE BRO UGHT TO TAX IN INDIA. 8.1. HE DREW OUR ATTENTION TO THE FOLLOWING ARTICLE S OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) BETWEEN INDIA AN D US : ARTICLE 16: SUBJECT TO THE PROVISION OF ARTICLE 17 SALA RIES WAGES, AND OTHER SIMILAR REMUNERATION DERIVED BY A RESIDENT OF A CONTRACTING STATE IN RESPECT OF AN EMPLOYMENT SHALL BE TAXABLE ONLY IN T HAT STATE UNLESS THE EMPLOYMENT IS EXERCISED IN THE OTHER CONTRACTING STA TE . 9. HE SUBMITTED THAT IN THE ASSESSEES CASE, THE REMUNERA TION ON ACCOUNT OF THE PERQUISITE VALUE OF ESOP WAS DERIVED IN RESPECT OF HIS EMPLOYMENT WITH MICROSOFT CORPORATION IN US. NO PART OF SUCH EMPLOYMENT WAS EXERCISED BY THE ASSESSEE IN INDIA IN THO SE YEARS. BY MEANS OF THE ABOVE SPECIFIC ARTICLE 16 OF THE DTAA BETW EEN INDIA AND US, THE RIGHT OF TAXATION OF SUCH SALARY AND REMUNERAT ION IS ONLY WITH US AND NOT WITH INDIA. ANY ATTEMPT BY THE ASSESSING OFFICE R TO TAX SUCH PORTION OF THE EMPLOYMENT INCOME IN INDIA, AS CAPITAL GAINS, WOULD BE CONTRARY TO THE PROVISION OF THE DTAA BETWEEN INDIA A ND US. 9.1.: HE DREW OUR ATTENTION TO THE JUDGEMENT OF HON BLE SUPREME COURT IN THE CASE OF UNION OF INDIA VS. AZADI BACHAO ANDOLAN (263 ITR 706 AT 743 744). THEREAFTER, HE SUBMITTED THAT IN THIS CASE THE HONBLE SUPREME COURT CONSIDERED THE INTERPRETATION OF TREAT Y QUOTING REFERENCES FROM THE COMMENTARIES OF DR KLAUS VOGEL IN HIS BOOK DOUBLE TAXATION CONVENTION ITA NO.1238/HYD/2008 SHRI RAMAMORRTHY SRIDHARAN, HYDERABAD 11 11 HE SUBMITTED THAT ACCORDING TO KLAUS VOGEL DOUBLE TAXAT ION CONVENTION ESTABLISHES AN INDEPENDENT MECHANISM TO AVOID DOUBLE T AXATION THROUGH RESTRICTION OF TAX CLAIMS IN AREAS WHERE OVERLAPPING TAX CLAIMS ARE EXPECTED, OR AT LEAST THEORETICALLY POSSIBLE. 10. ACCORDING TO LEARNED AR, THE CONTRACTING STATES MU TUALLY BIND THEMSELVES NOT TO LEVY TAXES OR TO TAX ONLY TO LI MIT EXTENT IN CASES WHEN THE TREATY RESERVES TAXATION FOR THE OTHER CONTR ACTING STATES EITHER ENTIRELY OR IN PART. CONTRACTING STATES ARE SAID TO WAIVE TAX CLAIMS OR MORE ILLUSTRATIVELY TO DIVIDE TAX SOURCES, THE TAXABLE OBJECTS, AMONGST THEMSELVES. DOUBLE TAXATION AVOIDANCE TREATIES WERE IN VOGUE EVEN FROM THE TIME OF LEAGUE OF NATIONS. THE EXPERTS APPO INTED IN THE EARLY 1920 BY THE LEAGUE OF NATIONS DESCRIBED THIS METHOD OF CLASSIFICATION OF ITEMS AND THEIR ASSIGNMENTS TO THE CONTRACTING STATES. 10.1. HE SUBMITTED THAT TO THE EXTENT THAT AN EXEMP TION IS AGREED TO, ITS EFFECT IS IN PRINCIPLE INDEPENDENT OF BOTH WHET HER THE OTHER CONTRACTING STATE IMPOSES A TAX IN THE SITUATION TO WHICH THE EXEMPTION APPLIES, AND OF WHETHER THAT STATE ACTUALLY LEVIES THE TAX AND THUS IT SAID THAT THE TREATY PREVENTS NOT ONLY CURRENT, BUT AL SO MERELY POTENTIAL DOUBLE TAXATION. FURTHER, ACCORDING TO VOGEL, ONLY I N EXCEPTIONAL CASES AND ONLY WHEN EXPRESSLY AGREED TO BY THE PARTIES, IS EX EMPTION IN ONE CONTRACTING STATE DEPENDENT UPON WHETHER IT IS ACTUALLY TAXED THERE. THUS THE TREATY CLAUSE PREVENTS NOT ONLY THE CURRENT TAX (FOR YEARS 1996-97, 1999-2000) BUT ALSO ANY POTENTIAL DOUBLE TA XATION FINANCIAL YEAR 2003-04 I.E. ASSESSMENT YEAR 2004-05. ITA NO.1238/HYD/2008 SHRI RAMAMORRTHY SRIDHARAN, HYDERABAD 12 12 1.6. HE DREW OUR ATTENTION TO THE RULING OF THE HON BLE AUTHORITY FOR ADVANCING RULING IN THIS ADVANCE RULING A.NO.P.12 OF 1995 (228 ITR 61). IN THIS CASE THE QUESTION RAISED BEFORE THE HONBLE AUTHO RITY FOR AAR WAS AS FOLLOWS: A NON RESIDENT RESIDING IN US FROM 1968 CONTRIBUTED FOR INDIVIDUAL RETIREMENT ARRANGEMENT (IRA) WHILE WORKING IN US AN SUCH CONTRIBUTIONS WERE CONSIDERED UNDER TAX LAWS IN US AS TAX DEFERRED ( I.E. A PAYMENT IS STATED TO BE TAX DEFERRED IF SUCH PAYMENT ARE TAX DEDU CTIBLE AT THE TIME OF CONTRIBUTION BUT LIABLE TO TAX AT THE TIME THE SAM E IS WITHDRAWN). THE NON RESIDENT SOUGHT A CLARIFICATION FROM HONBLE AAR WHETHER AT THE TIME OF WITHDRAWAL OF THE IRA CONTRIBUTION, IF SUCH N ON RESIDENT HAPPENS TO BE A RESIDENT IN INDIA, WHETHER TAX WOULD BE LEVI ED UNDER THE IT ACT IN INDIA. THE HONBLE AAR IN ITS ORDER CLEARLY STATED AS UNDER: THE AMOUNT LYING IN IRA ACCOUNT IN US REPRESENTS PART OF THE SALARY INCOME RECEIVED BY THE ASSESSEE IN EARLIER YEARS AND DEPO SITED IN IRA ACCOUNT AS A FORM OF COMPULSORY SAVINGS AUGMENTED BY INTER EST, CAPITAL GAIN AND OTHER ACCRETION THERETO. THE WITHDRAWALS M OSTLY REPRESENT SALARY AND OTHER INCOME WHICH HAD ACCRUED TO THE ASSESSEE A T A POINT OF TIME WHEN HE WAS A NO RESIDENT IN INDIA. HE WILL THE REFORE BE LIABLE TO PAY NO INDIAN TAX THEREON. THE PRINCIPLE IN THE PRESENT CASE BEFORE THE ITAT IS ALSO IN THE SAME LINE AS MENTIONED ABOVE. ITA NO.1238/HYD/2008 SHRI RAMAMORRTHY SRIDHARAN, HYDERABAD 13 13 10.3. IT IS SUBMITTED THAT THE DEFINITION OF COST MU ST BE GIVEN A BROADER MEANING TO COVER BOTH THE ACTUAL MONETARY PAY MENT AND THE OTHER MONETARY INCOME ELEMENT COMPRISED THEREIN. THE INDIAN IT ACT ALSO CONTAINED A SIMILAR PROVISION FO R DETERMINING THE COST OF ACQUISITION WITH RESPECT TO SHARES ALLOTTED AS ESOP SHARES AND TAXED AS A PERQUISITE. HE INVITED OUR ATTENTION TO THE FINANCE ACT, 1999 WHI CH INSERTED A NEW SUB CLAUSE (IIIA) U/S 17(2) OF THE ACT W.E.F. 1.4.2000 READING AS UNDER: (IIIA) THE VALUE OF ANY SPECIFIED SECURITY ALLOTTED OR TRANSFERRED, DIRECTLY OR INDIRECTLY, BY ANY PERSON FREE OF COST OR AT CONCESSION AL RATE, TO AN INDIVIDUAL WHO IS OR HAS BEEN IN EMPLOYMENT OF THAT P ERSON. PROVIDED THAT IN A CASE WHERE ALLOTMENT OR TRANSFER OF SPECIFIED SECURITIES IS MADE IN PURSUANCE OF AN OPTION EXERCISED BY A N INDIVIDUAL, THE VALUE OF THE SPECIFIED SECURITIES SHALL BE TAXABLE I N THE PREVIOUS YEAR IN WHICH SUCH OPTIONAL IS EXERCISED BY SUCH INDIVIDUAL. CORRESPONDINGLY U/S 49 OF THE ACT, COST WITH REFERENCE T O CERTAIN MODES OF ACQUISITION, A NEW SUB SECTION (2B) WAS INSERTED BY FIN ANCE ACT, 1999 W.E.F. 1.4.2000 READING AS UNDER: (2B) WHERE THE CAPITAL GAIN ARISES FROM THE TRANSFER O F THE SPECIFIED SECURITY REFERRED TO IN SUB CLAUSE (IIIA) OF CLAUSE (2) O F SEC.17 THE COST OF ACQUISITION OF SUCH SPECIFIED SECURITY SHALL BE THE FAIR M ARKET VALUE ON THE DATE OF EXERCISE OF OPTION. ITA NO.1238/HYD/2008 SHRI RAMAMORRTHY SRIDHARAN, HYDERABAD 14 14 10.4. HE DREW OUR ATTENTION TO THE CBDT IN A CIRCULAR NO.781 DATED 5/11/1999, 240 ITR 148 (1999) EXPLAINING THE ABOVE PROVISIONS STATED AT PAGE NOS.156-157 WHICH IS AS FOLLOWS: IN ORDER TO CLARIFY IT FURTHER, IN CASE ANY SUCH SHAR E, SECURITY IS DIRECTLY OR INDIRECTLY, OFFERED TO ANY ASSESSEE BY THE COM PANY OR ANY OTHER PERSON ON BEHALF OF SUCH COMPANY, THE DIFFERENCE B ETWEEN THE MARKET VALUE OR STOCK AND THE COST AT WHICH IT IS OFFERED TO THE EMPLOYEE SHALL BE TAXED AS PERQUISITE. THIS BENEFIT SHALL BE TAX ED IN THE YEAR IN WHICH THE RIGHT FOR SUCH OPTION IS EXERCISED BY THE EMPL OYEE OR IS EXERCISED AND TRANSFERRED IN THE NAME OF ANY OTHER PER SON BY HIM. IT IS FURTHER PROVIDED THAT THE DIFFERENCE BETWEEN THE MAR KET VALUE AND THE DATE OF EXERCISE OF OPTION AND THE SALE CONSIDERATION IN THE EVEN OF SALE BY THE EMPLOYEE WOULD BE TAXED AS CAPITAL GAINS IN TH E HANDS. SEC.79 OF THE COMPANIES (AMENDMENT) ACT, 1999 (21 OF 1 999) PROVIDES THAT A COMPANY MAY ISSUE SWEAT EQUITY SHARES OF A CLASS OF SH ARES TO ITS EMPLOYEES OR DIRECTORS. THESE SHARES MAY BE ISSUED AT A D ISCOUNT OR FOR CONSIDERATION OTHER THAN CASH FOR PROVIDING KNOW HOW OR MAKING AVAILABLE RIGHTS IN THE NATURE OF INTELLECTUAL PROPER TY RIGHTS BY WHATEVER NAME CALLED. THE VALUE OF SUCH SHARES WILL BE TREATE D AS PERQUISITE IN THE YEAR IN WHICH SUCH OPTIONS ARE EXERCISED BY THE EMPLO YEE OR DIRECTOR AS THE CASE MAY BE. WHERE THE AMOUNT PAID FOR SUCH SECU RITIES IS NIL THE PERQUISITE VALUE SHALL BE THE MARKET VALUE OF SUC H SHARES. 10.5. HE DREW OUR ATTENTION TO THE LATER AMENDMEN T TO THIS PROVISION WHICH IS AS FOLLOWS: I)THE FINANCE ACT 2000 BROUGHT FURTHER AMENDMENTS REST RICTING THE TAX LIABILITY WITH RESPECT TO ESOP, WHICH ARE ISSUED IN ACCOR DANCE WITH ITA NO.1238/HYD/2008 SHRI RAMAMORRTHY SRIDHARAN, HYDERABAD 15 15 GUIDELINES ISSUED BY CENTRAL GOVT. AND CONSEQUENT TO THIS AMENDMENT, THE ABOVE CLAUSES GOT SUBSTITUTED WITH MODIFICATIONS. A NEW SUB SECTION (2AA) WAS INSERTED U/S 49 OF THE ACT. (2AA) WHERE THE CAPITAL GAIN ARISES FROM THE TRANSFER OF SHARES, DEBENTURES OR WARRANTS, THE VALUE OF WHICH HAS BEEN TAK EN INTO ACCOUNT WHILE COMPUTING THE VALUE OF PERQUISITE UNDER CLAUSE (2 ) OF SECTION, 17 THE COST OF ACQUISITION OF SUCH SHARES, DEBENTURES OR WARRAN TS SHALL BE THE VALUE UNDER THAT CLAUSE. II). THE FINANCE ACT, 2007 BY AN AMENDMENT EFFECTIVE F ROM 1.4.2008 HAS TREATED THE BENEFIT OF STOCK OPTION AS A FRINGE BEN EFIT. THE VALUE OF THE BENEFIT ON THE DATE OF EXERCISE OF THE OPTION BY THE EMPLOYEE AS REDUCED BY THE AMOUNT ACTUALLY PAID BY, OR RECOVERED F ROM THE EMPLOYEE IN RESPECT OF SUCH STOCK OPTION, WOULD BE TREAT ED AS FRINGE BENEFIT. THE DETERMINATION OF FAIR MARKET VALUE, OR THE VALUATION OF THE OPTION HAS BEEN PRESCRIBED BY INSERTION OF RULE 40C TO THE IT RULES, 1962 (THE RULES). THE BENEFIT OF STOCK OPTION, IN CERT AIN CIRCUMSTANCES, IS NOT CHARGEABLE AS PERQUISITE. TO THE EXTENT THE V ALUE OF THE BENEFIT OF STOCK OPTION IS NOT CHARGED IN THE HANDS OF THE EMPLOYE E AS PERQUISITE THE VALUE OF SUCH BENEFIT WILL BE TAXED IN THE HANDS OF THE EMPLOYER OF FRINGE BENEFIT. THE RULES FOR DETERMINATION OF THE QUANTUM OF SUCH CHARGEABLE BENEFITS ARE NOTIFIED. (RULE 40D OF THE R ULES). CONSEQUENT TO THIS FINANCE ACT 2007, W.E.F. 1.4.2008 INSERTED A NEW SUB SECTION (2AB) U/S 49 OF THE ACT READING AS FOLLOWS: (2AB) WHERE THE CAPITAL GAIN ARISES FROM THE TRANSFER OF SPECIFIED SECURITY OR SWEAT EQUITY SHARES, THE COST OF ACQUISITION O F SUCH SECURITY OR SHARES SHALL BE THE FAIR MARKET VALUE WHICH AS BEEN T AKEN INTO ITA NO.1238/HYD/2008 SHRI RAMAMORRTHY SRIDHARAN, HYDERABAD 16 16 ACCOUNT WHILE COMPUTING THE VALUE OF FRIENGE BENEFITS U NDER CLAUSE (BOOKS OF ACCOUNT) OF SUB SECTION (1) OF SECTION 115WC. 10.6. ACCORDING TO LEARNED AR, IT IS ACCEPTED PHENOME NON IN INDIAN TAX LEGISLATION TO GO WITH THE FAIR MARKET VA LUE OF THE SECURITY WHICH AS BEEN CONSIDERED AS A TAXABLE PERQUISITE OR TAXED WITH FBT. 10.7: HE SUBMITTED THAT THE HONBLE CALCUTTA HC IN TH E CASE OF A. GHOSH VS. CIT, WB (141 ITR 45) HAD AN OCCASION TO DETERM INE THE COST OF ACQUISITION OF EQUITY SHARES, WHICH HAVE BEEN OBTAINE D BY CONVERSION OF WARRANTS/DEBENTURES. IN THIS CASE, THE COST OF ACQUISITION OF SHARES HAS BEEN TA KEN BY THE TRIBUNAL TO BE THE COST OF ACQUISITION OF THE DEBENTUR ES. CONTENDING THAT THE ABOVE POSITION ASSUMED BY THE TRIB UNAL IS NOT ACCEPTABLE THE HONBLE HC POINTED OUT AS FOLLOWS: DEBENTURES WERE BROUGHT AND AFTER SOME TIME WERE EX CHANGED FOR SHARES XXXX. IN VIEW OF THE TERMS AND CONDITIONS OF THE ISSUE OF DEBENTURES, IT CANNOT BE SAID THAT WHEN THE SHARES WERE ISSUED BY THE COMPAN Y IN LIEU OF DEBENTURES, THE ASSESSEE MERELY GAVE UP THE LOAN GIVEN TO THE C OMPANY IN EXCHANGE FOR THE SHARES. IT IS TRUE THAT THE DEBENTURES WERE IS SUED IN ACKNOWLEDGEMENT OF THE INDEBTEDNESS OF THE COMPANY TO THE ASSESSEE. BUT DEBENTURES VERY OFTEN HAVE A MARKET VALUE OF THEIR OWN, QUITE DISTINCT AN D APART FROM THE LOAN AMOUNT. THE MARKET PRICE WILL DEPEND UPON THE PERI OD OF REDEMPTION OF THE DEBENTURES, THE RATE OF INTEREST AND VARIOUS OTHER TAXES EMBODIED IN THE TERMS AND CONDITIONS IN THE ISSUE OF DEBENTURES AND ITS PRICE FLUCTUATES AS THE MARKET RATE OR BANK RATE OF INTEREST GOES UP OR DOW N. THERE WAS AN ADDITIONAL FACTOR IN THIS CASE THAT THE DEBENTURES WERE CONVERTIBLE DEBENTURES. THE DEBENTURE HOLDER HAD AN OPTION TO CONVERT THE DEBENTURES INTO EQUITY SHARES OF THE COMPANY. A CONVERTIBLE D EBENTURE OF A COMPANY WHOSE SHARES PRICE IS VERY HIGH IS LIKELY TO HAVE A MARKET VALUE MUCH HIGHER THAN ITS FACE VALUE. THE COST OF ACQUISITIONS IN C ASE OF AN EXCHANGE MUST BE THE MARKET PRICE OF THE PROPERTY THAT HAS BEEN GIVE N UP OR TRANSFERRED BY THE ASSESSEE. ITA NO.1238/HYD/2008 SHRI RAMAMORRTHY SRIDHARAN, HYDERABAD 17 17 11. FINALLY HE SUBMITTED THAT THE CAPITAL GAINS TAX AIMS TO TAX ONLY WHAT IS UNTAXED BY INCOME TAX AS INCOME. THERE WI LL BE NO CAPITAL GAINS TAX ON THE PORTION OF THE INCOME WHICH IS ALREADY CHARGED ON INCOME TAX AS INCOME. CAPITAL GAIN TAX IS CHARGEABLE ON ONLY SO MUCH OF THE TRANSACTION AS IS NOT CHARGED ON INCOME TAX. IN T HE GIVEN CASE, THE PERQUISITE VALUE BASED ON THE FAIR MARKET VALUE OF THE SHARES IS ALREADY OFFERED BY THE ASSESSEE FOR INCOME TAX AS SALARY INCOME IN US, ON WHICH INDIA DOES NOT HAVE ANY RIGHT TO RE TAX. T HE FAIR MARKET VALUE OF THE SHARES SO ACCRUED TO THE ASSESSEE AT THE TIME OF EXER CISE SHOULD RIGHTFULLY BE CONSTRUED AS THE COST OF ACQUISITION FOR THE PURPOSE OF SECTION 48(II) OF THE ACT. 12. THE DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT FOR THE PURPOSE OF ACQUISITION OF MICROSOFT SHARES WHAT THE ASSESSEE INCURRED IS ONLY THE GRANT PRICE. AS PER SEC.48, THE PRICE ACTUALLY PAID FOR ACQUISITION OF THE ASSET TO BE CONSIDERED AS COST OF ACQUISI TION. AS PER SEC. 2 (22B) OF THE IT ACT, FAIR MARKET VALUE MEANS THA T THE CAPITAL ASSET WOULD ORDINARILY FETCH ON SALE IN THE OPEN MARKET ON THE RELEVANT DATE AND IT IS ONLY AN HYPOTHETICAL PRICE AND NOT ACTUAL PRI CE. THE GRANT PRICE IS THE PRICE WHICH IS ACTUALLY PAID AT THE TIME OF EXER CISING THE OPTION TO ACQUIRE THE UNDERLINE SECURITY IN THE STOCK OPTION. AS SU CH, WHILE COMPUTING THE CAPITAL GAIN UNDER THE PROVISIONS OF THE IT ACT, IT IS THE GRANT PRICE WHICH IS ACTUALLY PAID BY THE OPTION HOLDER TO ACQUIRE THE SECURITY TO BE REDUCED FROM THE FULL VALUE OF CONSIDERAT ION TO DETERMINE THE CAPITAL GAIN OR LOSS. AS PER SEC. 49 (2AA) AND READ WITH SEC.17(2), ADOPTION OF FAIR MARKET VALUE AS COST OF ACQUISITION BY THE ASSESSEE FOR THE DETERMINATION OF LONG TERM CAPITAL GAIN IS TOTALL Y INCONSISTENT WHICH CANNOT BE CONSIDERED. HE RELIED ON THE ORDER OF THE CI T(A). ITA NO.1238/HYD/2008 SHRI RAMAMORRTHY SRIDHARAN, HYDERABAD 18 18 13. WE HAVE HEARD BOTH THE PARTIES AND PERUSED MATE RIAL AVAILABLE ON RECORD. AS PER ORIGINAL PROVISIONS OF SUB CLAUSE (IIIA) INSERTED IN SEC. 17(2) OF THE IT ACT, 1961 BY THE FINA NCE ACT 1999 EFFECTIVE ASSESSMENT YEAR 2000-01 EXCESS OF MARKET PRICE OV ER THE ISSUE PRICE OF EQUITY SHARES WAS TAXABLE AS PERQUISITE IN THE YEAR OF ACCEPTANCE OF THE OFFER. IN OTHER WORDS, AMOUNT OF DISCO UNT WAS DEEMED TO BE PERQUISITE VALUE. FURTHER, FOR CAPITAL GAIN TAX PURPOSE, WHEN SUCH SHARES WERE EVENTUALLY DISPOSED OFF, THE MARKE T PRICE ON THE DATE OF EXERCISE OF THE OPTION WAS TO BE DEEMED THE CO ST OF ACQUISITION VIDE SUB CLAUSE (2B) OF SEC.49 OF THE ACT. LATER, THER E WAS AMENDMENT TO SECTION 17(2) BY THE FINANCE ACT 2000 FROM ASSESSMENT YE AR 2001-02 WHEREBY (1) OMISSION OF SUB CLAUSE (IIIA), AND (2) INSERT ION OF THE PROVISO TO SEC. 17(2) (III). CONCURRENTLY, SUB SECTION 2B OF SEC.49 WAS OMITTED AND SUB SECTION 2AA IN SECTION 49 WAS INSERTED BY FINANCE ACT, 2000. THE EFFECT OF THESE AMENDMENTS WAS THAT TAXATION WAS POSTPONED TO THE YEAR OF DISPOSAL OF THE EQUITY SHARES B Y WAY OF CAPITAL GAIN AND THE COST OF ACQUISITION WAS THE ACTUAL PRICE IF ANY PAID BY THE EMPLOYEE. THESE PROVISO WAS IN STATUTE BOOK UP TO SUBSTI TUTION OF NEW SEC.2AA IN EARLIER PLACE BY FINANCE ACT W.E.F. 1.4.2010 I.E., IN RELATION TO ASSESSMENT YEAR 2010 2011 AND SUBSEQUENT YEARS. AS PER NEW AMENDMENT, IT PROVIDES THAT WHERE THE CAPITAL GAIN AR ISES FROM THE TRANSFER OF SPECIFIED SECURITY OR SWEAT EQUITY SHARES REFER RED TO IN SUB CLAUSE (VI) OF CLAUSE 2 OF SEC.17, THE COST OF ACQUISITIO N OF SUCH SECURITY OR SHARES SHALL BE THE FAIR MARKET VALUE WHICH HAS BEEN TAKEN INTO ACCOUNT FOR THE PURPOSE OF THE SAID SUB CLAUSE. NOW THE A SSESSEE IN THE PRESENT CASE, WANTS APPLICATION AMENDED PROVISO. IN OUR OPINION, WHICH IS NOT THE INTENTION OF LEGISLATURE TO MAKE RETR OSPECTIVE AMENDMENT. NOW, WE WILL GO THROUGH THE APPLICABLE PROVISIONS TO THE PRESENT CASE. ITA NO.1238/HYD/2008 SHRI RAMAMORRTHY SRIDHARAN, HYDERABAD 19 19 SEC.49(2AA) READS AS FOLLOWS WHICH WAS INSERTED IN THE IT ACT W.E.F. 1.4.2001 : (2AA) WHERE THE CAPITAL GAIN ARISES FROM THE TRANSFER OF SHARES, DEBENTURES OR WARRANTS, THE VALUE OF WHICH HAS BEEN TAK EN INTO ACCOUNT WHILE COMPUTING THE VALUE OF PERQUISITE UNDER CLAUSE (2 ) OF SECTION, 17 THE COST OF ACQUISITION OF SUCH SHARES, DEBENTURES OR WARRAN TS SHALL BE THE VALUE UNDER THAT CLAUSE. THE ABOVE SUB SECTION WAS INTRODUCED FROM 1.4.2001. F ROM THE SAME DATE, A NEW PROVISO WAS INTRODUCED TO SUB SECTION OF SEC.1 7 WHICH READS AS UNDER: PROVIDED THAT NOTHING CONTAINED IN THIS SUB CLAUSE SHALL APPLY TO THE VALUE OF ANY BENEFIT PROVIDED BY A COMPANY FREE OF CO ST OR AT A CONCESSIONAL RATE TO ITS EMPLOYEES BY WAY ALLOTMENT OF SHA RES, DEBENTURES OR WARRANTS DIRECTLY OR INDIRECTLY UNDER ANY EMPLOYEE STOCK OPTION PLAN OR SCHEME OF THE COMPANY OFFERED TO SUCH EM PLOYEES IN ACCORDANCE WITH THE GUIDELINES ISSUED IN THIS BEHALF BY T HE CENTRAL GOVERNMENT. 13.1. FROM THE ABOVE TWO AMENDMENTS CLEARLY SHOW THA T FROM 1.4.2001 IN RESPECT OF SHARES ALLOTTED UNDER ESOPS THE INTENTION OF THE LEGISLATURE IS NOT TO TAX THE DIFFERENCE BETWEEN THE F MV AND GRANT PRICE AS PERQUISITE U/S 17(2). BEFORE THAT DATE THE SAME IS TAXABLE U/S 17(2) ONLY WHEN IT IS TAXED UNDER THIS SECTION, FMV OF SUCH SHAR ES SHOULD BE TAKEN AS COST VIDE SUB SECTION (2AA) TO SEC.49 FOR THE PUR POSE OF ARRIVING AT CAPITAL GAINS. IN THE PRESENT CASE, AS STATED BY THE ASSESSEE HIMSELF, THESE SHARES WERE NOT SUBJECTED TO INDIAN TAXATI ON AT THE TIME OF EXERCISE OF OPTIONS UNDER ESOP SCHEME. HENCE, FOR THE PURPOSE OF ITA NO.1238/HYD/2008 SHRI RAMAMORRTHY SRIDHARAN, HYDERABAD 20 20 COMPUTATION OF CAPITAL GAINS COST TO BE TAKEN IS ACTU AL COST AND NOT THE FMV. SINCE THE ACTUAL COST INCURRED BY THE ASSESSEE IN THIS CASE IS GRANT PRICE, ONLY THIS VALUE IS TO BE TAKEN AS COST WITH REFERENCE TO THE COMPUTATION OF CAPITAL GAINS. THIS GROUND OF THE ASSESSE E IS DISMISSED. 14. THE THIRD GROUND WHICH IS NOT PRESSED BEFORE US. ACCORDINGLY, THIS GROUND IS DISMISSED AS NOT PRESSED. 15. IN THE RESULT, THE APPEAL OF THE ASSESSEE STANDS D ISMISSED. ORDER PRONOUNCED IN THE COURT 30 .6. 2010 SD.- SD/- N.R.S. GANESAN CHANDRA POOJARI JUDICIAL MEMBER ACCOUNTANT MEMBER DATED THE 30TH JUNE, 2010 COPY FORWARDED TO: 1. SHRI RAMAMOORTHY SRIDHARAN, PLOT NO.1060 A, ROAD NO.52, JUBILEE HILLS, HYDERABAD, ANDHRA PRADESH 2. ITO, WARD 12(4), HYDERABAD 3. CIT(A)- II, HYDERABAD. 4. CIT, HYDERABAD 5. THE D.R., ITAT, HYDERABAD. NP