ITO,Ward-12(3), Hyderabad V. P. Sudhakar Prasad, Secunderabad

ITA 21/HYD/2012

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 5515 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 1 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-02-2014
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2008-2009
• Appeal Filed On: 05-01-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: K HARITA
• Assessee Lawyers: B SATYANARAYAN MURTHY
• Keywords: Cost of acquisition; Fair market value
• Section: 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A', HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 21/HYD/2012 ASSESSMENT YEAR 2008-09 THE INCOME TAX OFFICER WARD-12(3) HYDERABAD VS. SRI P. SUDHAKAR PRASAD SECUNDERABAD PAN: AFFPP6360J [APPELLANT] [RESPONDENT] APPELLANT BY: SMT. K. HARITA RESPONDENT BY: SRI B. SATYANARAYAN MURTHY DATE OF HEARING: 18.02.2014 DATE OF PRONOUNCEMENT: 18.02.2014 ORDER PER CHANDRA POOJARI, AM: THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE CIT(A)-II, HYDERABAD DATED 5.10.2011 F OR ASSESSMENT YEAR 2008-09. 2. THE REVENUE RAISED THE FOLLOWING GROUNDS: (1) THE LEARNED COMMISSIONER OF INCOME-TAX(APPEALS) ERR ED IN GRANTING RELIEF TO THE ASSESSEE WITH REGARD TO THE TAXATION OF CAPITAL GAINS RELATING TO SHARE TRANSACTIONS (ESOPS ). (2) THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED APPL YING PROVISIONS OF SECTION 49(2AB) R.W.S. 115WC(1)(BA) O F THE INCOME-TAX ACT, 1961 AND GIVING RELIEF ON THE SHARE S THAT VESTED ON 31/03/2007 ON THE ASSESSEE IGNORING THE F ACT THAT THESE PROVISIONS APPLY ONLY W.E.F. 01/04/2008 I.E. AY 2008- 09. (3) THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN GRANTING RELIEF WITH RESPECT TO THE FIRST INSTALMEN T OF SHARES THAT VESTED ON THE ASSESSEE ON 31/03/2007 AND EARLI ER ITA NO. 21/HYD/2012 SRI P. SUDHAKAR PRASAD =================== 2 IGNORING THE FACT THAT NO BENEFIT IS ADMISSIBLE TO ASSESSEE U/S. 115WB(1)(D) & CIRCULAR NO. 9 OF 2007. (4) THE COMMISSIONER OF INCOME-TAX (APPEALS) OUGHT TO H AVE NOTICED THAT ASSESSEE HAS NOT PRODUCED ANY EVIDENCE AS TO THE EXERCISING OF OPTION AND TAKING OVER OF THESE S HARES ON A DATE AFTER 01/04/2007 AND HENCE, HE WAS NOT ELIGIBL E FOR ANY RELIEF WITH REGARD TO SHARES THAT VESTED IN HIM ON 31/03/2007 AND EARLIER. 3. FACTS OF THE CASE ARE THAT THE ASSESSEE SRI SUDHAKA R PRASAD IS A SALARY EMPLOYEE AND WORKING AS GENERAL MANAGER IN IVY COMPTECH PVT. LTD., HYDERABAD DURING THE FIN ANCIAL YEAR 2007-08. FOR THE ASSESSMENT YEAR 2008-09 THE ASSESSEE FILED HIS RETURN OF INCOME ON 31.07.2008 FOR RS. 75 ,84,950. ALSO CLAIMED LOSSES OF CURRENT YEAR (SHORT TERM CAP ITAL LOSS ON SALE OF SHARES) TO BE CARRIED FORWARD OF RS. 65,88, 350/-. THE RETURN WAS PROCESSED U/S. 143(1) ON 25.09.2009. SUBSEQUENTLY, IT WAS NOTICED FROM THE RETURN OF INC OME FILED BY THE ASSESSEE THAT THE ASSESSEE HAD INVESTED HUGE AMOUNTS AND CLAIMED CAPITAL LOSS, MORE LESS OF THE SAME AMO UNT AND IN THE ABSENCE OF ANY DETAILS WITH REGARD TO SUCH C LAIM AND INVESTMENTS, THE THEN AO WAS UNDER BELIEF THAT INCO ME TO SUCH AN EXTENT HAD ESCAPED ASSESSMENT AND ACCORDING LY, A NOTICE U/S. 148 DATED 30.10.2009 WAS ISSUED. IN RES PONSE TO THIS NOTICE THE ASSESSEE'S AR SRI NIRAV RAVAL, CA O F M/S. JAYANTH & SADASIV, FILED A LETTER DATED 01.02.2010 AS FOLLOWS: 'IT WAS SUBMITTED THAT THE NOTICE U/S. 148 WAS ISSU ED BY THE DEPARTMENT UNDER A FEELING THAT INCOME COULD HAVE E SCAPED ASSESSMENT BY THE MERE FACT THAT THE ASSESSEE HAS C LAIMED HUGE ITA NO. 21/HYD/2012 SRI P. SUDHAKAR PRASAD =================== 3 REFUND OF RS. 1,11,45,087/-. IT WAS SUBMITTED THAT THE ASSESSEE IS A SENIOR SOFTWARE PROFESSIONAL IN A MULTINATIONA L COMPANY AND BY VIRTUE OF HIS SERVICE HE RECEIVED EMPLOYEES STOCK OPTIONS (ESOPS) OF A PARENT COMPANY. THE ASSESSEE S OLD HIS ESOPS SHARES AND HIS ANXIETY PAID 30% ADVANCE TAX O N THE RESULTING SHORT TERM GAINS. IT WAS SUBMITTED THAT T HE OBLIGATION TO PAY TAX ON SHORT TERM CAPITAL GAINS ARISING OUT OF SALES OF ESOPS SHARES BY THE ASSESSES WAS UP TO ASST. YEAR 2 007-08. FROM ASST. YEAR 2008-09 THERE IS A CHANGE IN THE ST ATUTE WHEREBY ESOPS CAME UNDER THE PURVIEW OF FBT AND THE ASSESSEE EMPLOYER PAID FBT ON THESE ESOPS. THE ASSE SSEE NOT BEING AWARE OF THE PROVISIONS PAID TAXES AS ADVANCE TAX AS A HONEST TAX PAYER. ACCORDINGLY, IT WAS SUBMITTED THA T THE COST OF ACQUISITION OF SUCH SHARES IN THE HANDS OF THE ASSE SSEE WOULD BE FAIR MARKET VALUE ON WHICH FBT WAS PAID BY THE EMPL OYER. ' 4. THE EXPLANATION OF THE ASSESSEE WAS NOT ACCEPTED BY THE AO. HE NOTED THAT THE ASSESSEE CLAIMED SHORT T ERM CAPITAL LOSS ON ESOPS AMOUNTING TO RS. 1,15,98,800/ - TO SET OFF AGAINST THE SHORT TERM CAPITAL GAIN ON ACCOUNT OF TRANSACTIONS MADE OTHER THAN ESOPS. HE FOUND THAT T HE ASSESSEE HAS NOT INVESTED ANY AMOUNT ON THE ACQUISI TION OF ESOPS, THE LOSS ARRIVED IS ONLY DUE THE FAIR MARKET VALUE AS ON THE DATE OF VESTING OF THE TRANSACTION WHICH IS DEE MED COST OF ACQUISITION AND THEREBY IT IS A NOTIONAL LOSS BUT N OT A PHYSICAL LOSS. HE OBSERVED THAT THE ASSESSEE GAINED A PROFIT ON THIS TRANSACTION AND, THEREFORE, THE LOSS INCURRED BY TH E ASSESSEE IS DISALLOWED ON SALE OF ESOPS. 5. ON APPEAL THE CIT(A) OBSERVED THAT THERE WAS AN AMENDMENT TO SEC. 49(2AB) AND THE SUB-SECTION (2AB) HAS BEEN INSERTED W.E.F. 1.4.2008 WHICH SAYS AS UNDER: ITA NO. 21/HYD/2012 SRI P. SUDHAKAR PRASAD =================== 4 'WHERE THE CAPITAL GAIN ARISES FROM THE TRANSFER OF SPECIFIED SECURITY OR SWEAT EQUITY SHARES, THE COST OF ACQUIS ITION OF SUCH SECURITY OR SHARES SHALL BE THE FAIR MARKET VALUE W HICH HAS BEEN TAKEN INTO ACCOUNT WHILE COMPUTING THE VALUE OF FRI NGE BENEFITS UNDER CLAUSE (BA) OF SUB-SECTION 1 OF SECTION 115WC '. SECTION L1SWC SPEAKS OF VALUATION OF FRINGE BENEFIT S AND CLAUSE (BA) OF SUB-SECTION 1 READS AS BELOW : 'THE FAIR MARKET VALUE OF THE SPECIFIED SECURITY OR SWEAT EQUITY SHARES REFERRED TO IN CLAUSE (D) OF SUB-SECTION 1 O F SECTION 115WB, ON THE DATE ON WHICH THE OPTION VESTS WITH T HE EMPLOYEE AS REDUCED BY THE AMOUNT ACTUALLY PAID BY, OR RECOVERED FROM, THE EMPLOYEE IN RESPECT OF SUCH SEC URITY OR SHARES.' 6. THE CIT(A) OBSERVED THAT THE AO HAS NOT TAKEN COGNIZANCE OF THE AMENDED PROVISIONS OF SEC. 49(2AB ) AND THE INTRODUCTION OF FBT FROM A.Y. 2008-2009 I.E.. F ROM THE ASSESSMENT YEAR UNDER CONSIDERATION AND HELD THAT S INCE THERE WAS NO COST OF ACQUISITION THE LOSS CLAIMED W AS ONLY NOTIONAL LOSS AND, THEREFORE, THE LOSS WAS NOT ALLO WED. THE OBSERVATION OF THE AO IS NOT CORRECT. IT MAY BE NO TED THAT THE FRINGE BENEFIT TAX HAS BEEN INTRODUCED TO BRING GRA NT OF STOCK OPTIONS BY EMPLOYEES WITHIN THE PURVIEW OF FB T AND THE SALIENT FEATURES OF SCHEME ARE AS UNDER: (I) FBT SHALL APPLY IN ALL CASES WHERE ANY SPECIFIED SECURITY OR SWEAT EQUITY SHARES HAS BEEN ALLOTTED O R TRANSFERRED BY THE EMPLOYER TO THIS EMPLOYEE; (II) FBT SHALL BE PAYABLE IN THE PREVIOUS YEAR IN WHICH SUCH ALLOTMENT OR TRANSFER HAS TAKEN PLACE; (III) THE PROVISIONS OF THIS NEW CLAUSE SHALL APPLY EVEN IF THE ALLOTMENT OR TRANSFER IS DIRECTLY OR INDIRECTLY; ITA NO. 21/HYD/2012 SRI P. SUDHAKAR PRASAD =================== 5 (IV) THE PROVISIONS OF THIS NEW CLAUSE SHALL APPLY EVEN IF THE ALLOTMENT OR TRANSFER IS FREE OF COST OR AT CONCESS IONE! RATE; (V) THE PROVISIONS OF THIS NEW CLAUSE SHALL APPLY EVEN IF THE ALLOTMENT OR TRANSFER IS TO CURRENT OR FORMER EMPLO YEE OR EMPLOYEES; (VI) THE PROVISIONS OF THIS NEW CLAUSE SHALL APPLY IN CA SES WHERE THE ALLOTMENT OR TRANSFER IS ON OR AFTER T' D AY OF APRIL, 2007. THE EXPRESSIONS 'SPECIFIED SECURITY' AND SWEAT EQUI TY SHARES' HAVE ALSO BEEN DEFINED. THE VALUE OF FRINGE BENEFIT IS SUBJECTED TO FBT AT THE PREVAILING RATE, WHICH IS C URRENTLY 30% PLUS SURCHARGE PLUS EDUCATION CESS. METHOD OF COMPU TATION OF THE VALUE OF THE FRINGE BENEFIT UNDER THE EXISTI NG PROVISIONS CONTAINED IN SEC. 115WC, THE METHOD OF COMPUTATION OF THE VALUE OF FRINGE BENEFITS REFERRE D TO IN SECTION 115WB HAS BEEN PROVIDED. A NEW CLAUSE (BA) IN SUB- SECTION (1) OF THE SAID SECTION 115WC HAS BEEN INSE RTED TO PROVIDE FOR COMPUTATION OF FRINGE BENEFIT RELATED T O ALLOTMENT OR TRANSFER OF SPECIFIED SECURITY OR SWEAT EQUITY S HARES BY EMPLOYERS TO EMPLOYEES. IT HAS BEEN PROVIDED THAT THE VALUE OF FRINGE BENEFIT IN SUCH CASES SHALL BE DETERMINED IN ACCORDANCE WITH THE FORMULA : A-B WHERE, A = THE FAIR MARKET VALUE (FMV) OF THE SPECI FIED SECURITY OR SWEAT EQUITY SHARES ON THE DATE OF VEST ING OF THE OPTION; AND B= THE AMOUNT, IF ANY, ACTUALLY PAID BY, OR RECOVER ED FROM THE EMPLOYEE. ITA NO. 21/HYD/2012 SRI P. SUDHAKAR PRASAD =================== 6 7. THE CIT(A) OBSERVED THAT THIS NEW SUB-SECTION PROVI DES THAT THE COST OF ACQUISITION OF SPECIFIED SECURITY OR SWEAT EQUITY SHARES SHALL BE THE FAIR MARKET VALUE WHICH HAS BEEN TAKEN INTO ACCOUNT WHILE COMPUTING THE VALUE OF FRI NGE BENEFIT UNDER THE NEW CLAUSE (BA) OF SUB-SECTION (1 ) OF SECTION 115WC. FROM THIS IT IS VERY CLEAR THAT THE FAIR MA RKET VALUE OF THE ESOPS NEED TO BE TAKEN AS ON THE DATE OF VES TING OF THE SHARES IN THE EMPLOYEE AND THE EMPLOYER IS OBLIGED TO PAY TAX AT THE PREVAILING RATE WHICH WAS AT THAT TIME 30% P LUS SURCHARGE PLUS EDUCATION CESS, THE EMPLOYER IVY COM PTECH PVT. LTD HAS PAID TAX ON THE FRINGE BENEFIT ADOPTIN G THE FMV AS ON THE DATE OF VESTING OF THE SHARES IN THE ASSE SSEE AND FILED THE RETURN AS REQUIRED BY THE INCOME TAX ACT. THE EMPLOYER HAS GIVEN A CERTIFICATE CONFIRMING THE PAY MENT OF FBT IN RESPECT OF ESOPS GRANTED TO THE ASSESSEE. AS PER THE PROVISIONS OF SEC. 49(2AB) THE FMV ADOPTED BY THE E MPLOYER BECOMES THE COST OF ACQUISITION FOR THE CALCULATION OF CAPITAL GAINS. THE AO'S OBSERVATION THAT THE ASSESSEE DID N OT INVEST ANY AMOUNT ON. THE ACQUISITION OF ESOPS IS WRONG AN D THE ASSESSEE HAS RECEIVED ESOPS ON THE FMV ON WHICH TAX HAS BEEN PAID BY THE EMPLOYER WHICH THEREFORE BECOMES T HE COST OF ACQUISITION AS PER THE PROVISIONS OF SEC. 49(2AB ) R.W.S. 115WC(L)(BA) OF IT ACT. THEREFORE IT IS HELD THAT T HE ASSESSEE ITA NO. 21/HYD/2012 SRI P. SUDHAKAR PRASAD =================== 7 IS ENTITLED TO THE DEDUCTION BY WAY OF COST IN RESP ECT OF ESOPS ALLOTTED TO HIM BY HIS EMPLOYER. THE AO IS DIRECTED TO ALLOW THE COST OF ACQUISITION TAKING THE FMV OF THE SHARE S ON THE DATE OF VESTING AS CALCULATED FOR THE PURPOSE OF FB T AND RE- CALCULATE THE CAPITAL GAINS ON SALE OF ESOPS AND AL LOW THE SET OFF AND THE CARRY FORWARD OF LOSS AS PER LAW. AGAI NST THIS FINDING OF THE CIT(A), THE REVENUE IS IN APPEAL BEF ORE US. 8. THE LEARNED DR DREW OUR ATTENTION TO CBDT CIRCULAR NO. 9/2007 DATED 20.12.2007 WHICH SUGGESTS THAT THE AMEN DED PROVISIONS OF SECTION 115WB ARE APPLICABLE TO CASES WHERE ALLOTMENT OR TRANSFER IS ON OR AFTER 1 ST DAY OF APRIL, 2007. SHE SUBMITTED THAT IN THE PRESENT CASE SHARES HAVE BEEN ALLOTTED TO THE ASSESSEE, AS PER THE LETTER ISSUED BY THE AS SESSEE EMPLOYER, AS FOLLOWS: DATE OF LETTER VESTING DATE NO. OF SHARES PB PAGE NO. 1.3.2007 31.3.2007 40,000 21 1.3.2007 31.3.2007 3,60,000 24 1.3.2007 31.3.2007 3,20,000 27 TOTAL 7,20,000 9. ACCORDING TO THE LEARNED DR SHARES VESTED WITH THE ASSESSEE BEFORE 31 ST MARCH 2007 AND THE AMENDED PROVISIONS OF SECTION 115WB ARE NOT APPLICABLE TO THE ASSESSEE 'S CASE AS THEY ARE APPLICABLE ONLY AFTER 1 ST DAY OF APRIL, 2007. ITA NO. 21/HYD/2012 SRI P. SUDHAKAR PRASAD =================== 8 10. ON THE OTHER HAND, THE LEARNED AR SUBMITTED THAT RELEVANT ASSESSMENT YEAR IS 2008-09. BEING SO, THE AMENDED PROVISIONS OF SECTION 115WB ARE APPLICABLE TO THE F ACTS OF THE PRESENT CASE. 11. WE HAVE HEARD BOTH THE PARTIES AND PERUSED MATERIAL AVAILABLE ON RECORD. AS CLARIFIED BY THE CBDT CIRC ULAR (SUPRA), THE AMENDED PROVISIONS OF SECTION 115WB ARE APPLICA BLE ONLY WHEN THE SHARES ALLOTTED/ TRANSFERRED ON OR AFTER TH E 1 ST DAY OF APRIL, 2007. THE CIRCULAR NO. 9/2007 DATED 20.12.20 07 READS AS UNDER: 'CIRCULAR NO 9/2007, DT. 20.12.2007 IN TERMS OF THE PROVISIONS OF CHAPTER XII-H OF THE INCOME-TAX ACT (HEREINAFTER REFERRED TO AS ACT), AN EMPLOYER , BEING A COMPANY, IS LIABLE TO PAY FRINGE BENEFIT TAX (FBT) IN RESPECT OF THE FRINGE BENEFITS PROVIDED OR DEEMED TO HAVE B EEN PROVIDED BY IT TO ITS EMPLOYEES, DIRECTLY OR INDIRECTLY, DUR ING THE PREVIOUS YEAR. WITH A VIEW TO BRING GRANT OF STOCK OPTIONS BY EMPL OYERS TO EMPLOYEES WITHIN THE PURVIEW OF FBT, FINANCE ACT, 2 007 HAS INSERTED A NEW CLAUSE (D) IN SUB-SECTION (1) OF SEC TION 115WB. THE SALIENT FEATURES OF THIS PROVISION ARE:- (I) FBT SHALL APPLY IN ALL CASES WHERE ANY SPECIFIE D SECURITY OR SWEAT EQUITY SHARES HAS BEEN ALLOTTED OR TRANSFERRE D BY THE EMPLOYER TO HIS EMPLOYEES; (II) FBT SHALL BE PAYABLE IN THE PREVIOUS YEAR IN W HICH SUCH ALLOTMENT OR TRANSFER HAS TAKEN PLACE; (III) THE PROVISIONS OF THIS NEW CLAUSE SHALL APPLY EVEN IF THE ALLOTMENT OR TRANSFER IS DIRECTLY OR INDIRECTLY; ITA NO. 21/HYD/2012 SRI P. SUDHAKAR PRASAD =================== 9 (IV) THE PROVISIONS OF THIS NEW CLAUSE SHALL APPLY EVEN IF THE ALLOTMENT OR TRANSFER IS FREE OF COST OR AT CONCESS IONAL RATE; (V) THE PROVISIONS OF THIS NEW CLAUSE SHALL APPLY E VEN IF THE ALLOTMENT OR TRANSFER IS TO CURRENT OR FORMER EMPLO YEE OR EMPLOYEES; (VI) THE PROVISIONS OF THIS NEW CLAUSE SHALL APPLY IN CASES WHERE THE ALLOTMENT OR TRANSFER IS ON OR AFTER 1ST DAY OF APRIL, 2007. THE EXPRESSIONS SPECIFIED SECURITY AND SWEAT EQU ITY SHARES HAVE ALSO BEEN DEFINED. THE VALUE OF FRINGE BENEFIT IS SUBJECTED TO FBT AT THE PREVAILING RATE, WHICH IS C URRENTLY 30% PLUS SURCHARGE PLUS EDUCATION CESS. METHOD OF COMPUTATION OF THE VALUE OF THE FRINGE BE NEFIT 2. METHOD OF COMPUTATION OF THE VALUE OF THE FRINGE BENEFIT UNDER THE EXISTING PROVISIONS CONTAINED IN SECTION 115WC, THE METHOD OF COMPUTATION OF THE VALUE OF FRINGE BENEFI TS REFERRED TO IN SECTION 115WB HAS BEEN PROVIDED. A NEW CLAUSE (BA) IN SUB-SECTION (1) OF THE SAID SECTION 115WC HAS BEEN INSERTED TO PROVIDE FOR COMPUTATION OF FRINGE BENEFIT RELATED T O ALLOTMENT OR TRANSFER OF SPECIFIED SECURITY OR SWEAT EQUITY S HARES BY EMPLOYERS TO EMPLOYEES. IT HAS BEEN PROVIDED THAT THE VALUE OF FRINGE BENEF IT IN SUCH CASES SHALL BE DETERMINED IN ACCORDANCE WITH THE FO RMULA A B WHERE, A = THE FAIR MARKET VALUE (FMV) OF THE SPECIFIED SECURITY OR SWEAT EQUITY SHARES ON THE DA TE OF VESTING OF THE OPTION; AND B = THE AMOUNT, IF ANY, ACTUALLY PAID BY, OR RECOVE RED FROM THE EMPLOYEE; THE EXPRESSION FAIR MARKET VALUE HAS BEEN DEFINED TO MEAN THE VALUE DETERMINED IN ACCORDANCE WITH THE METHOD AS MAY BE PRESCRIBED BY THE BOARD. OPTION HAS BEEN DEFINED TO MEAN A RIGHT BUT NOT A N OBLIGATION GRANTED TO AN EMPLOYEE TO APPLY FOR THE SPECIFIED SECURITY OR SWEAT EQUITY SHARES AT A PREDETERMINED PRICE. THE CENTRAL BOARD OF DIRECT TAXES (CBDT) VIDE NOTIF ICATION S.O. NUMBER 1805(E) DATED 23RD OCTOBER, 2007 HAS IN SERTED RULE 40C IN THE INCOME-TAX RULES; WHICH HAS PRESCRI BED THE ITA NO. 21/HYD/2012 SRI P. SUDHAKAR PRASAD =================== 10 METHOD FOR DETERMINATION OF FAIR MARKET VALUE OF SP ECIFIED SECURITY OR SWEAT EQUITY SHARE, BEING A SHARE IN TH E COMPANY. SALIENT FEATURES OF THIS RULE ARE: (I) IN A CASE WHERE, ON THE DATE OF THE VESTING OF THE OPTION, THE SHARE IN THE COMPANY IS LISTED ON A RECOGNIZED STOC K EXCHANGE, THE FAIR MARKET VALUE SHALL BE THE AVERAGE OF THE O PENING PRICE AND CLOSING PRICE OF THE SHARE ON THAT DATE ON THE SAID STOCK EXCHANGE; (II) IF ON THE DATE OF VESTING OF THE OPTION, THE S HARE IS LISTED ON MORE THAN ONE RECOGNIZED STOCK EXCHANGES, THE FAIR MARKET VALUE SHALL BE THE AVERAGE OF OPENING PRICE AND CLO SING PRICE OF THE SHARE ON THE RECOGNISED STOCK EXCHANGE WHICH RE CORDS THE HIGHEST VOLUME OF TRADING IN THE SHARE; (III) IF ON THE DATE OF VESTING OF THE OPTION, THER E IS NO TRADING IN THE SHARE ON ANY RECOGNIZED STOCK EXCHANGE, THE FAI R MARKET VALUE SHALL BE,- (A) THE CLOSING PRICE OF THE SHARE ON ANY RECOGNISE D STOCK EXCHANGE ON A DATE CLOSEST TO THE DATE OF VESTING O F THE OPTION AND IMMEDIATELY PRECEDING SUCH DATE; OR (B) THE CLOSING PRICE OF THE SHARE ON A RECOGNISED STOCK EXCHANGE, WHICH RECORDS THE HIGHEST VOLUME OF TRADI NG IN SUCH SHARE, IF THE CLOSING PRICE, AS ON THE DATE CLOSEST TO THE DATE OF VESTING OF THE OPTION AND IMMEDIATELY PRECEDING SUC H DATE, IS RECORDED ON MORE THAN ONE RECOGNIZED STOCK EXCHANGE . (IV) IN A CASE WHERE, ON THE DATE OF VESTING OF THE OPTION, THE SHARE IN THE COMPANY IS NOT LISTED ON A RECOGNIZED STOCK EXCHANGE, THE FAIR MARKET VALUE SHALL BE SUCH VALUE OF THE SHARE IN THE COMPANY, AS DETERMINED BY A CATEGORY 1 MERCH ANT BANKER REGISTERED WITH THE SECURITY AND EXCHANGE BO ARD OF INDIA, ON THE SPECIFIED DATE. (V) THE SPECIFIED DATE HAS BEEN DEFINED AS TO MEAN, - (I) THE DATE OF VESTING OF THE OPTION; OR (II) ANY DATE EARLIER THAN THE DATE OF THE VESTING OF THE OPTION, NOT BEING A DATE WHICH IS MORE THAN 180 DAYS EARLIE R THAN THE DATE OF THE VESTING. DETERMINATION OF THE COST OF ACQUISITION FOR CAPITA L GAINS PURPOSES ITA NO. 21/HYD/2012 SRI P. SUDHAKAR PRASAD =================== 11 3. CONSEQUENT TO INSERTION OF CLAUSE (BA) IN SUB-SE CTION (1) OF SECTION 115WC PROVIDING FOR THE VALUATION OF FRINGE BENEFITS REFERRED TO IN CLAUSE (D) OF SUB-SECTION (1) OF SEC TION 115WB, A NEW SUB-SECTION (2AB) HAS BEEN INSERTED IN SECTION 49. THIS NEW SUB-SECTION PROVIDE THAT THE COST OF ACQUI SITION OF SPECIFIED SECURITY OR SWEAT EQUITY SHARES SHALL BE THE FAIR MARKET VALUE WHICH HAS BEEN TAKEN INTO ACCOUNT WHIL E COMPUTING THE VALUE OF FRINGE BENEFIT UNDER THE NEW CLAUSE (BA) OF SUB-SECTION (1) OF SECTION 115WC. DETERMINATION OF THE PERIOD OF HOLDING 4. A NEW SUB-CLAUSE (HB) HAS ALSO BEEN INSERTED IN CLAUSE (I) OF EXPLANATION 1 TO CLAUSE (42A) OF SECTION 2. THIS NE W SUB-CLAUSE PROVIDE THAT THE PERIOD OF HOLDING IN CASE OF SUCH SPECIFIED SECURITY OR SWEAT EQUITY SHARES, IN THE HAND OF THE EMPLOYEE, SHALL BE RECKONED FROM THE DATE OF ALLOTMENT OR TRA NSFER OF SUCH SECURITY OR SHARES. RECOVERY OF FBT BY THE EMPLOYER FROM ITS EMPLOYEE 5. A NEW SECTION 115WK HAS ALSO BEEN INSERTED ENABL ING THE EMPLOYER TO RECOVER THE FRINGE BENEFIT TAX FROM THE EMPLOYEE IN RESPECT OF SPECIFIED SECURITY OR SWEAT EQUITY SHARE S, IF SUCH SECURITY OR SHARES ARE TRANSFERRED OR ALLOTTED TO T HE EMPLOYEE ON OR AFTER 1ST APRIL, 2007. IT HAS BEEN PRESCRIBED THAT THE EMPLOYER CAN VARY T HE AGREEMENT OR SCHEME UNDER WHICH SUCH SPECIFIED SECU RITY OR SWEAT EQUITY SHARES HAS BEEN ALLOTTED OR TRANSFERRE D. THE AGREEMENT OR SCHEME CAN BE VARIED WITH A PURPOSE TO RECOVER FROM THE EMPLOYEE THE FRINGE BENEFIT TAX TO THE EXT ENT TO WHICH SUCH EMPLOYER IS LIABLE TO PAY THE FRINGE BENEFIT T AX IN RELATION TO THE ALLOTMENT OR TRANSFER OF SUCH SPECIFIED SECU RITY OR SWEAT EQUITY SHARES TO SUCH EMPLOYEE. ILLUSTRATION 6. THE ABOVE AMENDMENTS ARE EXPLAINED WITH THE HELP OF AN ILLUSTRATION. ILLUSTRATION: A COMPANY X GRANTS OP TION TO ITS EMPLOYEE R ON 1ST APRIL, 2004 TO APPLY FOR 100 SH ARES OF THE COMPANY AT A PREDETERMINED PRICE OF RS. 50/- PER SH ARE WITH DATE OF VESTING OF THE OPTION BEING 1ST APRIL, 2006 AND EXERCISE PERIOD BEING 1ST APRIL, 2006 TO 31 ST MARCH, 2010. EMPLOYEE R EXERCISES HIS OPTION ON 31ST MARCH, 20 07 AND SHARES ARE ALLOTTED/TRANSFERRED TO HIM ON 3RD APRIL , 2007. ON 25TH OCTOBER, 2007 THESE SHARES ARE SOLD FOR RS. 20 0/- EACH. ON THE DATE OF VESTING OF THE OPTION, FAIR MARKET VALU E OF THE SHARE ITA NO. 21/HYD/2012 SRI P. SUDHAKAR PRASAD =================== 12 WAS RS. 80/- PER SHARE. THE TAX IMPLICATION OF ABOV E SITUATION WILL BE AS UNDER:- SINCE SHARES ARE ALLOTTED OR TRANSFERRED ON OR AFTE R 1ST APRIL, 2007, PROVISION OF FRINGE BENEFIT TAX ARE ATTRACTED . FRINGE BENEFIT WITH RESPECT TO EMPLOYEE R IS (RS. 80 R S. 50) X 100 = RS. 3,000/-. COMPANY X WILL PAY FRINGE BENEFIT TAX ON RS. 3,00 0/-. COST OF ACQUISITION IN THE HAND OF EMPLOYEE R = R S. 80/- PER SHARE.' 12. AS SEEN FROM THE LETTER PRODUCED BY THE DR, THE SHA RES ARE VESTED WITH THE ASSESSEE ON 31 ST MARCH, 2007 WHICH IS BEFORE THE 1 ST DAY OF APRIL, 2007. HENCE, THE ASSESSEE'S CLAIM CANNOT BE ALLOWED U/S. 115WB(1)(D) OF THE ACT. ACCO RDINGLY, WE REVERSE THE FINDINGS OF THE CIT(A) AND THE GROUN DS RAISED BY THE REVENUE ARE ALLOWED. 13. IN THE RESULT, APPEAL OF THE REVENUE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 18 TH FEBRUARY, 2014. SD/- (SAKTIJIT DEY) JUDICIAL MEMBER SD/- (CHANDRA POOJARI) ACCOUNTANT MEMBER HYDERABAD, DATED THE 18 TH FEBRUARY, 2014 TPRAO COPY FORWARDED TO: 1. THE INCOME TAX OFFICER, WARD-12(3), 2 ND FLOOR, AAYAKAR BHAVAN, HYDERABAD. 2. SHRI P. SUDHAKAR PRASAD, 503, SMR SOWMYA APARTME NTS, ROAD NO. 2, WEST MARREDPALLY, SECUNDERABAD-500 026. 3. THE CIT(A)-II, HYDERABAD. 4. THE CIT-I, HYDERABAD 5. THE DR BENCH 'A', ITAT, HYDERABAD