ACIT 26(2), Mumbai V. Mr. Pramod H. Lele, Mumbai

ITA 4699/MUM/2004

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 54846 (ITAT-MUMBAI)
• Duration Of Justice: 7 year(s) 2 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-08-2011
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 02-06-2011
• Assessment Year: 1998-1999
• Appeal Filed On: 07-06-2004
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Capital asset; Salary income; Charitable institution; Advance ruling; Cost of acquisition; Fair market value
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI I BENCH, MUMBAI. BEFORE SHRI R. V. EASWAR, HONBLE PRESIDENT AND SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER I.T.A NO.4699/ MUM/2004 ASSESSMENT YEAR: 1998-99 ASSISTANT COMMISSIONER OF INCOME TAX .. APPELL ANT CIRCLE 26(2), R.NO.609, 6 TH FLOOR, SMT. K.G.MITTAL AYURVEDIC HOSPITAL BUILDING, CHARNI ROAD, MUMBAI-400 002. VS. PRAMOD H. LELE, .. RESPONDEN T B 5/8, CHANDRASHEKAR CHS, S.N. ROAD, ANDHERI(E) MUMBAI 400 059. APPEARANCES: S.K.SINGH, FOR THE APPELLANT PRAKASH JOTWANI, FOR THE RESPONDENT DATE OF HEARING : 02-06-2011 DATE OF PRONOUNCEMENT: 10 -08-2011 O R D E R PER PRAMOD KUMAR: 1. BY WAY OF THIS APPEAL, THE ASSESSING OFFICER HAS CALLED INTO QUESTION CORRECTNESS OF CIT(A)S ORDER DATED 18 TH MARCH, 2004, IN THE MATTER OF ASSESSMENT UNDER SECTION 143(3) R.W.S. 147 OF THE INCOME TAX ACT, 1961, FOR THE ASSESSMENT YEAR 1998-99 ON THE FOLLOWING GROUND : I.T.A NO.4699/ MUM/2004 ASSESSMENT YEAR: 1998-99 2 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE CIT(A) DIRECTED TO TREAT THE SALE PROCEEDS ON ACCOU NT OF SALE OF SHARES WHICH THE ASSESSEE RECEIVED ON ACCOUNT OF ST OCK OPTION, AS LTCG AND FURTHER DIRECTED THAT BENEFIT OF COST INDE XATION AS PER THE I.T. ACT 1961 MAY BE GRANTED TO THE ASSESSEE WH EREAS THE AO CONSIDERED THE PROCEEDS RECEIVED AS STCG AND/OR SPE CULATION AND/OR INCOME FROM OTHER SOURCES AND/OR SALARY. TH E ORDER PASSED BY THE CIT(A) IS BAD IN LAW AND NOT AS PER T HE PROVISIONS OF THE I.T.ACT. HENCE, THE ORDER PASSED BY THE AO MAY BE RESTORED. 2. BRIEFLY STATED, RELEVANT MATERIAL FACTS, AS SE T OUT IN THE ORDERS OF THE AUTHORITIES BELOW, ARE AS FOLLOWS. THE ASSESSEE IS AN EMPLOYEE OF JOHNSON & JOHNSON LIMITED ( JJ INDIA, IN SHORT), AN INDIA BAS ED SUBSIDIARY OF JOHNSON & JOHNSON INC, USA (JJ USA, IN SHORT) . DURING THE R ELEVANT PREVIOUS YEAR, THE ASSESSEE RECEIVED INCOME OF RS 1,74,63,946 IN RESPE CT OF SALE OF 11,800 SHARES (STOCK OPTIONS) IN JOHNSON & JOHNSON, INC, U SA PARENT COMPANY OF ASSESSEES EMPLOYER. OUT OF THIS RECEIPT OF RS 1, 74,63,946, THE ASSESSEE DEPOSITED RS. 1,31,22,000 IN VARIOUS CAPITAL GAINS SCHEME UNDER SECTION 54EA AND THE BALANCE AMOUNT OF RS 43,41,946 WAS OFFERED TO TAX AS LONG TERM CAPITAL GAIN. IT WAS STATED BY THE ASSESSEE THAT H E WAS GRANTED, WHAT HE TERMED AS, STOCK OPTION IN RESPECT OF 30,000 SHARES BY JJ USA AS FOLLOWS : DATE OF GRANT STOCK OPTIONS COST PER SHARE AT WH ICH STOCK ALLOTTED OPTIONS WERE GRANTED DECEMBER 7, 1989 4,000 US $ 28.94 JUNE 12,1990 2,000 US $ 35.66 DECEMBER 2, 1993 4,000 US $ 44.25 DECEMBER 1, 1994 2,000 US $ 53.63 NOVEMBER 11, 1995 3,000 US $ 86.25 TOTAL ALLOTMENT 30,000 I.T.A NO.4699/ MUM/2004 ASSESSMENT YEAR: 1998-99 3 3. IT WAS SUBMITTED BY THE ASSESSEE THAT OUT OF THE STOCK OPTIONS SO ALLOTTED, THE ASSESSEE EXERCISED THE OPTION IN RESP ECT OF 11,800 SHARES. THE SHARES WERE CLAIMED TO HAVE BEEN SOLD THROUGH STOCK BROKER, AND IT WAS SATED THAT AFTER DEDUCTING HIS CHARGES, THE BROKER HAS R EMITTED THE BALANCE AMOUNT OF RS 1,74,87,706. AS ASSESSEE HAD INCURRED BANK CH ARGES AMOUNTING TO RS 32,800, THE RECEIPT, NET OF BANK COMMISSION SO INCU RRED, WAS DISCLOSED AS LONG TERM CAPITAL GAIN. THE CLAIM OF THE ASSESSEE W AS THAT HE HAD ACQUIRED A VALUED RIGHT, I.E. RIGHT TO SUBSCRIBE TO SHARES IN FUTURE THOUGH SUBJECT TO CERTAIN CONDITIONS STIPULATED AT THE TIME OF GRANT OF OPTIONS, AND, THEREFORE, THE AMOUNT SO RECEIVED ON EXERCISE OF THIS VALUABLE RIGHT SHOULD BE TREATED AS A LONG TERM CAPITAL GAIN. THE ASSESSING OFFICER DID NOT AGREE WITH THESE SUBMISSIONS. HE WAS OF THE VIEW THAT SINCE THE HOLD ING PERIOD OF THESE SHARES, I.E. FROM THE DATE OF EXERCISING THE STOCK OPTION TO SALE OF THE SHARES, WAS LESS THAN TWELVE MONTHS, THE GAINS ON SALE OF S UCH SHARES CANNOT BE TREATED AS CAPITAL GAINS. 4. THE ASSESSING OFFICER FURTHER OBSERVED THAT EVEN THOUGH ASSESSEE CONTENTS THAT HE HAD ACQUIRED THE RIGHT TO RECEIVE STOCK OPTION SHARES, WHICH ESSENTIALLY REQUIRE THE ASSESSEE TO DEMONSTRA TE THE LEGALLY ENFORCEABLE RIGHTS AS SUCH, MATERIAL ON RECORD DOES NOT EVIDENCE SO. AS A MATTER OF FACT, ACCORDING TO THE ASSESSING OFFICER, IN THE ABSENCE OF RESERVE BANK OF INDIAS APPROVAL TO PAY THE PURCHASE PRICE, IN FOREIGN CURRENCY, OF SUCH SHARES, SUCH A CONTRACT GRANTING THE ASSESSEE RIGHT TO ACQUIRE THE SHARES WILL CLEARLY BE UNLAWFUL. HE ALSO OBSERVED THAT IN ORDER TO BE HELD AS CAPITAL GAINS ARISING FROM SALE OF SHARES, PURCHASE AND SAL E OF SHARES MUST BE EFFECTED IN THE MANNER AS STATED IN CBDTS CIRCULAR NO.704 DATED 28.04.1995, BUT THE ASSESSEE HAS NOT MADE OUT THE CLAIM IN APPR OPRIATE MANNER. THE ASSESSING OFFICER FURTHER OBSERVED THAT IN ORDER TO BE A LONG TERM CAPITAL ASSET THE PERIOD OF HOLDING OF ONE YEAR IS APPLICAB LE TO SHARES VIDE PROVISO TO I.T.A NO.4699/ MUM/2004 ASSESSMENT YEAR: 1998-99 4 SECTION 2(42A) OF THE ACT AND IS NOT APPLICABLE TO ASSETS OF RIGHT TO RECEIVE STOCK OPTION SHARES, FOR WHICH MORE THAN THREE YEAR S HOLDING OF THE ASSET IS REQUIRED. THE ASSESSING OFFICER RELYING ON THE AUTH ORITY FOR ADVANCE RULING REPORTED IN TAXMAN (122 TAXMAN 227) WHEREIN IT WAS SAID TO HAVE BEEN HELD THAT THE STOCK OPTION PROFIT IS AN INCOME LIABLE TO BE TAXED AS INCOME FROM SALARY. WE MAY, AT THIS STAGE, MENTION THAT WE COUL D NOT FIND THIS RULING FROM OUR DATABASE, NOR DID THE LEARNED DEPARTMENTAL REPR ESENTATIVE FILE A COPY OF THE SAME. TO CONTINUE WITH THE OBSERVATIONS MADE BY THE ASSESSING OFFICER, WE HAVE NOTICED THAT THE ASSESSING OFFICER FURTHER OBSERVED THAT THE DELIVERY OF THE SHARES WAS NEVER TAKEN BY THE ASSESSEE IN VI EW OF THE FACT THAT THERE WAS A PROHIBITION BY THE DIRECTIONS ISSUED BY RESER VE BANK OF INDIA. THE ASSESSING OFFICER THUS OBSERVED THAT IN SUCH A SIT UATION, THE ONLY COURSE FOR THE ASSESSEE WAS TO ACCEPT THE PROFIT ON SETTLEMENT AND FOR THE ABOVE SAID REASONS THE PROFIT ON STOCK OPTION ON SHARE TRANSAC TION IS SPECULATIVE IN CHARACTER AND IS TO BE BROUGHT TO TAX AS SPECULATIO N PROFIT. WITHOUT PREJUDICE TO THE ABOVE SAID FINDINGS, AND RELYING UPON HONBL E SUPREME COURTS JUDGMENT IN THE CASES OF EMIL WEBER VS CIT (200 ITR 483) AND HONBLE ALLAHABAD HIGH COURTS JUDGMENT IN THE CASE OF KED AR NARAIN SINGH VS CIT (6 ITR 157), THE ASSESSING OFFICER WAS FURTHER OF THE VIEW THAT THE STOCK OPTION PROFIT IS ALTERNATIVELY INCOME FROM OTHER SOURCES. IN THE COMPUTATION OF INCOME ASSESSED BY THE ASSESSING OFFICER, PERHAPS N OT TOO SURE ABOUT MERITS OF HIS STAND OF TAXABILITY UNDER A PARTICULAR HEAD OF INCOME, THE ASSESSING OFFICER INCLUDED THE SAID INCOME OF RS 1,74,96,746 AS PART OF THE INCOME OF THE ASSESSEE WITH THE DESCRIPTION SHORT TERM CAP ITAL GAINS AND/OR SPECULATION INCOME AND/OR INCOME FROM OTHER SOURCES AND/OR SALARY. AGGRIEVED, ASSESSEE CARRIED THE MATTER IN APPEAL BE FORE THE CIT(A). I.T.A NO.4699/ MUM/2004 ASSESSMENT YEAR: 1998-99 5 5. THE WAY LEARNED CIT(A) APPRECIATED THE ARRANGEME NT ABOUT TRANSACTION WAS THIS. THE LD. CIT(A) WAS OF THE VIE W THAT THE OFFER OF STOCK OPTION HAS BEEN ACCEPTED BY THE ASSESSEE BY ENTERIN G INTO A CONTRACT BY PURCHASE OF SHARES AT THE STIPULATED PRICE. THE CIT (A) FURTHER OBSERVED THAT ONLY BECAUSE OF RESERVE BANK OF INDIAS STIPULATION CONTAINED IN CLAUSE IV OF ITS LETTER DATED 12.02.1989 PROHIBITING ANY PAYMENT S AT ANY POINT OF TIME EITHER IN INDIA OR ABROAD FOR ACQUIRING THESE SHARE S, THE PAYMENT OF PURCHASE PRICE WAS DELAYED TILL THE TIME OF SALE OF SHARES I N USA. THE CIT(A) ALSO NOTED THAT THE RESERVE BANK OF INDIA HAS PROHIBITED THE R EMITTANCE FROM INDIA FOR ACQUISITION TO SHARES. THEREFORE, THE SAID SHARES W ERE TREATED TO HAVE BEEN PURCHASED AS A CASUAL CONTRACT BETWEEN THE ASSESSEE AND THE COMPANY ON THE ACCEPTANCE OF THE OFFER I.E. THE DATE ON WHICH THE SAID SHARES WERE GRANTED TO THE ASSESSEE. THE CIT(A) THUS HELD THAT THE AMOUNT REALIZED ON EXERCISE OF THE STOCK OPTION, LONG TERM CAPITAL GAIN HAS ARISEN AND BENEFIT OF COST INDEXATION AS PER I.T. ACT IS TO BE ALLOWED. THE O PERATIVE PORTION OF LEARNED CIT(A)S IMPUGNED ORDER, IN THIS RESPECT, IS AS FOL LOWS: I HAVE CONSIDERED THE FACTS OF THE CASE. IN ORDER T O DETERMINE/ DECIDE THE APPROPRIATE HEAD OF INCOME, UNDER WHICH THE GAINS FROM SALE OF STOCK OPTIONS SHOULD BE CHARGED TO TAX , A CAREFUL EXAMINATION OF RELEVANT EVENTS LEADING TO THE INCOM E FROM STOCK OPTIONS IS NECESSARY. THE ACIT LOOKED AT THE ISSUE AS IF IT IS A SIMPLE TRANSACTION OF PURCHASE AND SALE OF NORMAL S HARES, WHICH, HOWEVER, IS NOT THE CASE. THE ACIT HAS NOT GIVEN DU E IMPORTANCE TO THE OFFERS OF STOCK OPTIONS MADE TO THE APPELLAN T. IT IS SEEN THAT EACH OFFER OF STOCK OPTION WAS FORWARDED TO TH E APPELLANT THROUGH AN INTER OFFICE COMMUNICATION ADDRESSED TO THE APPELLANT AND EVERY TIME THE INTER OFFICE COMMUNICATION HAS B EEN DULY SIGNED BY THE APPELLANT AS A TOKEN OF ACCEPTANCE. A COPY EACH OF SUCH COMMUNICATION WAS FILED DURING APPELLATE PROCE EDINGS. ALONGWITH ACCEPTING THE OFFER OF STOCK OPTIONS BY S IGNING THE INTER OFFICE COMMUNICATION, THE APPELLANT HAS ALSO UNDERT AKEN TO ABIDE BY THE CONDITIONS STIPULATED IN THE RESERVE BANK OF INDIA IN THAT I.T.A NO.4699/ MUM/2004 ASSESSMENT YEAR: 1998-99 6 REGARD. THE COPIES OF RBIS LETTER DATED 2/12/1989 AND 4/5/1989 STIPULATING THE CONDITIONS IN REGARD TO THE STOCK O PTION SCHEME OF JOHNSON & JOHNSON INC USA WERE ALSO FORWARDED TO T HE APPELLANT ALONG WITH THE OFFICE LETTER. IT IS THUS SEEN THAT THE OFFER OF STOCK OPTION HAS BEEN ACCEPTED BY ENTERING INTO A CONTRAC T TO PURCHASE SHARES AT A STIPULATED PRICE; AS SOON AS THE OFFER IS ACCEPTED, THE CONTRACT FOR PURCHASE OF SHARES IS COMPLETE. IT IS ONLY BECAUSE OF RBIS STIPULATION CONTAINED IN CLAUSE (IV) OF ITS L ETTER DATED 12 TH FEBRUARY, 1989, PROHIBITING ANY PAYMENT AT ANY POIN T OF TIME EITHER IN INDIA OR ABROAD FOR ACQUIRING THESE SHARE S, THAT THE ACTUAL PAYMENT OF CONSIDERATION, I.E. PURCHASE PRI CE, WAS DELAYED TILL THE TIME OF SALE OF SHARES IN USA. AS PER CLAU SE (III) OF THE ABOVE REFERRED LETTER, THE RBI HAS ALSO PROHIBITED THE REMITTANCE FROM INDIA ON ACCOUNT OF ACQUISITION OF SHARES. THE REFORE, THE SAID SHARES TO BE TREATED TO HAVE BEEN PURCHASED AS A RE SULT OF CONTRACT BETWEEN THE APPELLANT AND THE COMPANY, WHE N THE APPELLANT ACCEPTED THE OFFER OF THE COMPANY. THE AC CEPTANCE OF THE OFFER HAS TAKEN PLACE ON 8 TH JANUARY 1990 AND 30 TH JANUARY 1991 RESPECTIVELY AS STATED ABOVE. IT IS, THEREFORE , TO BE HELD THAT THE APPELLANT HAD ACQUIRED SHARES WHEN THE OFFER OF STOCK OPTION WAS ACCEPTED. JOHNSON & JOHNSON HAS ALSO ACCEPTED THE APPELLANT AS ITS SHAREHOLDER AND THE OWNER OF THE SHARES, SIN CE IT HAS ISSUED BONUS SHARES ON THE BASIS OF ITS ORIGINAL HOLDING. IT IS A WELL SETTLED PRINCIPLE IN LAW AND PRACTICE THAT THE BONU S SHARES CAN BE ISSUED ONLY TO THE EXISTING SHAREHOLDERS AS ON THE DATE OF ANNOUNCEMENT OF BONUS. THE BOMBAY HIGH COURT, IN THE CASE OF TATA SERVICES 122 ITR 594 (BOM) AND IN THE CASE OF BAFNA CHARITABLE TRUST 230 ITR 864 (BOM) HAVE LAID DOWN THAT THE RIGHT TO PURCHASE A P ROPERTY IS A CAPITAL ASSET. THEREFORE, THE APPELLANT HAS ACQUIRE D A CAPITAL ASSET IN THE SHAPE OF RIGHT TO PURCHASE SHARES. SINCE THE HOLDING PERIOD OF THIS RIGHT, BEGINNING WITH THE ACCEPTANCE OF OFF ER OF STOCK OPTIONS AND ENDING WITH THE SALE OF SHARES, IS MORE THAN ONE YEAR, THE GAIN RESULTING THEREFROM IS TREATED AS LONG TER M CAPITAL GAIN. I.T.A NO.4699/ MUM/2004 ASSESSMENT YEAR: 1998-99 7 IN VIEW OF THE ABOVE, I HOLD THAT THE AMOUNT REALIZ ED BY THE APPELLANT ON EXERCISE OF STOCK OPTIONS IS LONG TERM CAPITAL GAIN SUBJECT TO BENEFIT OF COST INDEXATION AS PER THE IN COME TAX ACT. AS THE APPELLANT HAS INVESTED THE SUM OF RS 1,31,22,00 0 ( AS IS EVIDENT FROM THE DETAILS GIVEN AT PAGE 2 OF THE ORD ER OF THE AO) IN VARIOUS CAPITAL GAINS SCHEMES U/S 54EA VIZ UTI, LIC -DHANVARSHA, ALLIANCE LIQUID INCOME FUND, TEMPLETON INDIA INCOME FUND, IDBI MUTUAL FUND, I-NIT 97, THE REMAINING AMOUNT OF RS 4 3,41,946 IS CORRECTLY OFFERED TO TAX BY THE APPELLANT AS LONG T ERM CAPITAL GAIN. 6. LEARNED CIT(A) THUS APPROVED THE STAND OF THE AS SESSEE, AND HELD THAT THE GAINS ON SALE OF STOCK OPTION SHARES ARE TO BE TAXED AS LONG TERM CAPITAL GAINS. THE ASSESSEE HAD ALSO RAISED THE PLEA AGAINS T THE ORDER OF AO IN ASSESSING THE SAID INCOME UNDER MULTIPLE HEADS OF I NCOME AND THE CIT(A) HELD THAT ONCE IT IS ESTABLISHED THAT THE GAIN ARIS ING ON EXERCISE OF STOCK OPTION IS ON ACCOUNT OF CAPITAL ASSETS INCOME CANNO T BE ASSESSED AS INCOME FROM OTHER SOURCES. IT WAS ALSO HELD THAT IT CANNOT BE SAID THAT SALE WAS EFFECTED WITHOUT DELIVERY, BECAUSE, ACCORDING TO TH E CIT(A), THE ASSESSEE HAD TAKEN CONSTRUCTIVE DELIVERY. THE ASSESSING OFFIC ERS RELIANCE ON RULING GIVEN BY THE AUTHORITY FOR ADVANCE RULING WAS REJEC TED ON THE GROUND THAT SUCH RULINGS HAVE NO PRECEDENCE VALUE. THE CIT (A) ALSO HELD THAT THE INCOME CAN ALSO NOT BE ASSESSED AS SHORT TERM CAPITAL GAIN IN VIEW OF THE REASONING OF THE ASSESSEE. THE INCOME CAN ALSO NOT BE ASSESS ED AS SALARY INCOME AS THE VALUE OF BENEFIT OF ESOP WAS GRANTED AT MARKET VALU E AND NOT FREE OF COST OR AT CONCESSIONAL RATE, AND AS THERE WAS NO EMPLOYER EMPLOYEE RELATIONSHIP BETWEEN THE ASSESSEE AND JOHNSON & JOHNSON INC. USA . ACCORDINGLY, THE APPEAL OF THE ASSESSEE WAS ALLOWED. . I.T.A NO.4699/ MUM/2004 ASSESSMENT YEAR: 1998-99 8 7. THE ASSESSING OFFICER IS AGGRIEVED OF THE STAND SO TAKEN BY THE LEARNED CIT(A), AND IS IN APPEAL BEFORE US. 8. WE HAVE CONSCIENTIOUSLY HEARD THE RIVAL CONTENTI ONS, CAREFULLY PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CASE AS ALSO THE APPLICABLE LEGAL POSITION. 9. IN ORDER TO APPRECIATE THE TRUE NATURE OF RIGHTS VESTED IN THE ASSESSEE, BY THE VIRTUE OF ALLOTMENT OF STOCK OPTIONS, IT IS NECESSARY TO TAKE A LOOK AT A TYPICAL STOCK OPTION OFFER. ONE OF THESE OFFERS MAD E TO THE ASSESSEE, A COPY OF WHICH IS PLACED AT PAGE 18 OF THE PAPER BOOK FILED BEFORE US, IS REPRODUCED BELOW FOR READY REFERENCE : NON QUALIFIED STOCK OPTION (1995 PLAN) (570) PRESENTED TO : PRAMOD H LELE TOTAL SHARES: 3,000 OPTION NO. 080990 SOCIAL SECURITY NO. 999-85-0191 OPTION PRICE PER SHARE : $ 86.25 DATE : 11/30/95 (FAIR MARKET VALUE ON THIS DATE) SUBJECT TO THE TERMS AND CONDITIONS HEREINAFTER STA TED, JOHNSON & JOHNSON HEREBY GRANTS YOU AN OPTION TO PURCHASE FROM IT THE ABOVE STATED NUMBER OF COMMON STOCK OF JOHNSON & JOHNSON, PAR VALUE $ 1 PE R SHARE, AT THE ABOVE STATED PRICE. THE OPTION SHALL NOT BE EXERCISABLE U NTIL THE DAY FOLLOWING THE SECOND ANNIVERSARY OF THE AVOVE DATE. THEREAFTER, I T WILL BE EXERCISABLE IN INSTALMENTS AS FOLLOWS: I.T.A NO.4699/ MUM/2004 ASSESSMENT YEAR: 1998-99 9 PERCENTAGE OF CUMULATIVE PERCENTAGE TOTAL BECOMING OF TOTAL THEN EXERCISABLE DURING EXERCISABLE THE PERIOD DAY FOLLOWING 2 ND ANNIVERSARY TO AND INCLUDING DAY OF 3 RD ANNIVERSARY 20% 20% DAY FOLLOWING 3 ND ANNIVERSARY TO AND INCLUDING DAY OF 4 TH ANNIVERSARY 20% 40% DAY FOLLOWING 3 RD ANNIVERSARY TO AND INCLUDING DAY OF 4 TH ANNIVERSARY 20% 60% DAY FOLLOWING 4 TH ANNIVERSARY TO AND INCLUDING DAY OF 5 TH ANNIVERSARY 20% 80% DAY FOLLOWING 5 TH ANNIVERSARY TO AND INCLUDING DAY OF 6 TH ANNIVERSARY 20% 100% OPTION PRICE: THE PAYMENT OF THE OPTION PRICE SHALL BE MADE IN TH E US DOLLARS, OR, IN THE DISCRETION OF JOHNSON & JOHNSON, IN COMMON STOCK OF THE COMPANY VALUED AT ITS FAIR MARKET VALUE (AS THE SAME SHALL BE DETERMINED BY JOHNSON & JOHNSON), OR A COMBINATION OF SUCH COMMON STOCK AND CASH. HOWEVER, PAYMENT MAY NOT BE MADE WITH COMMON STOCK ISSUED TO YOU FROM COMPANY C OMPENSATION PLAN UNLESS THE STOCK HAS BEEN HELD FOR AT LEAST SIX MONTHS. PA YMENT SHALL BE MADE TO JOHNSON & JOHNSON AT ITS HOME OFFICE, ONE JOHNSON & JOHNSON PLAZA, NEW BRUNSWICK, NEW JERSEY 08933. CONDITIONS: (1) THE OPTION SHALL NOT BE EXERCISABLE BY YOU UNLE SS AT THE TIME OF EXERCISE, THERE IS CURRENT REGISTRATION STATEMENT OR AMENDMEN T THERETO UNDER 1933 SECURITIES ACT COVERING THE SHARES OF COMMON STOCK TO BE ISSUED UPON EXERCISE OF THIS OPTION. I.T.A NO.4699/ MUM/2004 ASSESSMENT YEAR: 1998-99 10 (2) THE OPTION SHALL NOT BE EXERCISABLE BY YOU UNLE SS AT THE TIME OF EXERCISE, THE SHARES OF COMMON STOCK TO BE ISSUED UPON ITS EXERCI SE ARE AUTHORIZED FOR LISTING ON THE NEW YORK STOCK EXCHANGE. (3) THE EXERCISE OF THIS OPTION IS SUBJECT TO ALL T HE TERMS AND CONDITIONS RELATING TO NON QUALIFIED STOCK OPTIONS CONTAINED IN THE SUB JECT JOHNSON & JOHNSON STOCK OPTION PLAN, AS AMENDED FROM TIME TO TIME, A COPY O F WHICH IS AVAILABLE FROM THE OFFICE OF THE SECRETARY OF THE CORPORATION. (4) EXCEPT AS MAY BE OTHERWISE STATED HEREIN, YOU M UST BE A FULL TIME EMPLOYEE OF JOHNSON & JOHNSON OR ONE OF ITS SUBSIDIARIES AT THE TIME OF THE EXERCISE AND THAT THE EMPLOYMENT MUST HAVE BEEN CONTINUOUS FROM THE DATE HEREOF. FOR THE PURPOSES OF THIS PLAN, PERSONS ON COMPANY AUTHORIZE D LEAVES OF ABSENCE, ARE CONSIDERED FULL TIME EMPLOYEES, HOWEVER, LONG TERM DISABILITY IS NOT CONSIDERED TO BE FULL TIME EMPLOYMENT. (5) IN THE EVENT OF TERMINATION OF YOUR EMPLOYMENT DUE TO ANY CAUSE INCLUDING DEATH, DISABILITY OR RETIREMENT, YOUR RIGHTS TO EXE RCISE THIS OPTION SHALL CEASE, EXCEPT FOR THOSE WHICH HAVE ACCRUED TO AND INCLUDIN G THE DATE OF TERMINATION. (6) IN THE EVENT OF YOUR DEATH, WHILE AN ACTIVE EMP LOYEE, YOUR RIGHT TO EXERCISE THIS OPTION, WHICH HAVE ACCRUED TO, AND INCLUDING T HE DATE OF DEATH, MAY BE EXERCISED, SUBJECT TO PROVISIONS OF (11) BELOW, WIT HIN THREE YEARS AFTER THE DEATH, BY YOUR ESTATE OR BY ANY PERSON WHO ACQUIRES SUCH OPTION BY INHERITANCE OR DEVISE. THEREAFTER, SUCH RIGHTS SHALL LAPSE. (7) IN THE EVENT OF TERMINATION OF YOUR EMPLOYMENT DUE TO LONG TERM DISABILITY, YOUR RIGHTS TO EXERCISE THIS OPTION, WHICH HAVE ACC RUED TO AND INCLUDING THE DATE OF LONG TERM DISABILITY, MAY BE EXERCISED, SUB JECT TO PROVISIONS OF (11) BELOW, WITHIN THREE YEARS THE START OF LONG TERM DI SABILITY BY YOU OR, SHOULD YOU DIE WITHIN THE THREE YEAR PERIOD , BY YOUR ESTATE O R BY ANY PERSON WHO ACQUIRES SUCH OPTION BY INHERITANCE OR DEVISE. THEREAFTER, SUCH RIGHTS SHALL LAPSE I.T.A NO.4699/ MUM/2004 ASSESSMENT YEAR: 1998-99 11 (8) IN THE EVENT OF YOUR RETIREMENT FROM JOHNSON & JOHNSON, YOUR RIGHT TO EXERCISE THIS OPTION WHICH HAVE ACCRUED TO, AND INC LUDING THE DATE OF RETIREMENT, MAY BE EXERCISED, SUBJECT TO PROVISIONS OF (11) BELOW, WITHIN THREE YEARS FROM THE DATE OF RETIREMENT OR, SHOULD YOU DI E WITHIN THE THREE YEAR PERIOD , BY YOUR ESTATE OR BY ANY PERSON WHO ACQUIR ES SUCH OPTION BY INHERITANCE OR DEVISE. THEREAFTER, SUCH RIGHTS SHA LL LAPSE (9) IN THE EVENT OF TERMINATION OF YOUR EMPLOYMENT DUE TO ANY CAUSE OTHER THAN DEATH, DISABILITY OR RETIREMENT, YOUR RIGHTS T O EXERCISE THIS OPTION, WHICH HAVE ACCRUED TO THE DATE OF TERMINATION, MAY BE EXE RCISED, SUBJECT TO PROVISIONS OF (11) BELOW, WITHIN THREE YEARS THE DATE OF TERMI NATION OR, SHOULD YOU DIE WITHIN THE THREE YEAR PERIOD , BY YOUR ESTATE OR BY ANY PERSON WHO ACQUIRES SUCH OPTION BY INHERITANCE OR DEVISE. THEREAFTER, SUCH RIGHTS SHALL LAPSE. (10) THIS OPTION IS EXERCISABLE DURING YOUR LIFETIM E ONLY BY YOU, AND IS NOT TRANSFERABLE OTHER THAN BY WILL OR BY THE LAWS OF D ESCENT AND DISTRIBUTION. (11) THIS OPTION IS NOT, IN ANY EVENT, EXERCISABLE AFTER THE EXPIRATION OF TEN (10) YEARS PLUS ONE DAY FROM THIS DATE. PLEASE RETAIN THIS COPY FOR YOUR FILES, JOHNSON & JOHNSON BY DIRECTOR EXTRA COMPENSATION SERVICES 10. A PLAIN READING OF THE ABOVE DOCUMENT SHOWS THA T BY THE VIRTUE OF THIS LETTER, WHAT THE ASSESSEE HAS BEEN OFFERED BY JJ US A IS NOT SPECIFIED NUMBER OF SHARES IN THE COMPANY AT THE SPECIFIED PRICE BUT ONLY AN OPTION TO EXERCISE THE RIGHT TO BUY, IN A SPECIFIED TIME FRAME, A SPEC IFIED NUMBER OF SHARES AT A SPECIFIED PRICE- SUBJECT TO FULFILLMENT OF CERTAIN FURTHER CONDITIONS SET OUT IN THE DOCUMENT. THERE IS NO COMPULSION ON THE ASSESS EE TO BUY THESE SHARES AS I.T.A NO.4699/ MUM/2004 ASSESSMENT YEAR: 1998-99 12 THE ASSESSEE HAS BEEN GRANTED AN OPTION TO BUY , AT THE MARKET RATE PREVAILING AS ON THE DATE OF GRANT OF OPTION, THE SPECIFIED N UMBER OF SHARES WITHIN CERTAIN TIME FRAME - WHICH ESSENTIALLY IMPLIES THAT THE ASSESSEE MAY, IF SO DESIRES, BUY THE SHARES OR MAY NOT BUY THESE SHARES . THE CIT(A) WAS THUS CLEARLY IN ERROR IN OBSERVING THAT THE APPELLANT HAD ACQUIRED SHARES WHEN THE OFFER OF STOCK OPTION WAS ACCEPTED. THE SHARES ARE NOT ALLOTTED TO AN EMPLOYEE WHILE GRANTING A STOCK OPTION UNDER THE AB OVE SCHEME; ALL THAT IT DOES IS THAT IN CASE THE SHARE PRICES OF THE COMPAN Y RISE AFTER THE GRANT OF STOCK DATE, THOUGH WITHIN A SPECIFIC TIME FRAME SET OUT IN THE SCHEME OF ALLOTMENT OF THESE STOCK OPTIONS, THE EMPLOYEE CAN BENEFIT FROM SUCH PRICE INCREASE IN COMPANYS SHARES BY BEING ALLOWED TO BU Y A LIMITED NUMBER OF SHARES, AT THE PRICE AT WHICH THE STOCK OPTIONS WER E GRANTED, AND THUS BENEFIT FROM THE DIFFERENCE BETWEEN THE MARKET PRICE OF SHA RES VIS--VIS THE MARKET PRICE OF SHARES WHEN STOCK OPTIONS WERE GRANTED. IN CASE, THE PRICES OF THE SHARES COME DOWN AFTER THE GRANT OF STOCK OPTIONS, THE EMPLOYEE HAS NOTHING TO LOSE BECAUSE, AS WE HAVE NOTED ABOVE, THERE IS N O COMPULSION ON THE EMPLOYEE TO BUY THE SHARES AT THE MARKET VALUE AS O N THE TIME OF GRANT OF OPTIONS; THE EMPLOYEE HAS AN OPTION, WHICH HE MAY O R MAY NOT EXERCISE, AND HE CANNOT BE FORCED TO BUY THE SHARES AT ALL. AS A MATTER OF FACT, RESERVE BANK OF INDIAS APPROVAL DATED FEBRUARY 1989 ( A COPY O F WHICH WAS PLACED BEFORE US AT PAGE 21 OF THE PAPERBOOK) SPECIFICALLY STIPUL ATES THAT NO EMPLOYEE WILL EXERCISE THE OPTION IF THE MARKET PRICE IS LOWER TH AN THE PRICE AT WHICH (STOCK OPTION) IS OFFERED. IT IS THUS A WIN WIN S ITUATION FOR THE EMPLOYEE WHICH CAN ONLY OPERATE IN FAVOUR OF THE EMPLOYEE- S OMEWHAT AKIN TO DEFERRED WAGES PLANS BY WAY OF GRANT OF STOCK APPRE CIATION RIGHTS. TYPICALLY, A STOCK OPTION PLAN ALLOWS AN EMPLOYEE TO BUY THE S HARES IN EMPLOYER COMPANY AT A CONCESSIONAL RATE, I.E. LOWER THAN THE MARKET PRICE, AND SUCH AN ACQUISITION OF SHARES AT LOWER THAN PREVAILING MARK ET RATES IS THEN OPEN TO MARKET RISKS BEING ASSUMED BY THE EMPLOYEES AS W AS THE CASE IN SAY CIT VS INFOSYS LIMITED ( 297 ITR 167) WHEREIN THE ASSES SEE COULD BUY THE I.T.A NO.4699/ MUM/2004 ASSESSMENT YEAR: 1998-99 13 SHARES, NON TRANSFERABLE FOR NEXT FIVE YEARS, AT R S 100 WHEREAS THE MARKET PRICE WAS OVER 25 TIMES THIS VALUE OF THE CONCESSIO N RATE OF RS 100 EACH, AS EVIDENT FROM THE ADMITTED FACTS RECORDED BY THE HON BLE SUPREME COURT TO THE EFFECT THAT SHARES WORTH MARKET PRICE OF RS 171 CRORES WERE SOLD TO THE EMPLOYEES FOR A CONSIDERATION OF RS 6.64 CRORES. H OWEVER, RIGHT NOW WE ARE DEALING WITH A SCHEME WHICH GRANTS EMPLOYEES AN OPT ION TO BUY, SHOULD THEY SO DESIRE, THE SHARES AT THE MARKET PRICE AS ON THE DATE OF GRANT OF SUCH RIGHTS, AND, THEREFORE, STRICTLY SPEAKING, IT IS NO T A KIND OF STOCK OPTION PLAN WHICH HAVE SO FAR COME UP FOR SCRUTINY OF THE HONB LE COURTS ABOVE. IT IS A SOPHISTICATED COMPENSATION PLAN WHICH, IN ESSENCE, ALLOWS EMPLOYEES, AT THE TIME OF EXERCISE OF OPTIONS, TO BENEFIT FROM THE IN CREASE IN VALUE OF PARENT COMPANYS SHARES WITHOUT ACTUALLY EXPOSING THEM T O THE MARKET RISKS ASSOCIATED WITH ACTUAL ACQUISITION OF SHARES. WE H AVE ALSO NOTED THAT THE LEARNED CIT(A) HAS LAID A LOT OF EMPHASIS ON THE R ESTRICTION PLACED BY THE RESERVE BANK OF INDIA IN VIEW OF WHICH THE ASSESSEE COULD NOT HAVE PAID THE AGREED PURCHASE CONSIDERATION. UNDOUBTEDLY, IT IS ONE OF THE CONDITIONS ON WHICH RESERVE BANK OF INDIA HAS GRANTED APPROVAL TO THIS STOCK OPTION PLAN THAT NO PAYMENT, AT ANY POINT OF TIME EITHER IN INDIA OR ABROAD, SHOULD BE MADE FOR ACQUIRING THE SHARES, BUT THEN, THIS STIP ULATION, IF ANYTHING, SHOWS THAT THE SHARES WERE NOT INTENDED TO BE ACQUIRED AT ANY POINT OF TIME, AND THE SCHEME COULD BE ALLOWED TO BE WORKABLE ONLY TO THE EXTENT IT WAS TO BENEFIT THE EMPLOYEES, LIKE THE ASSESSEE BEFORE US, FROM APPRECIATION IN VALUE OF SHARES OF THE PARENT COMPANY. WE ARE UNAB LE TO UNDERSTAND AS TO HOW, PARTICULARLY IN THE LIGHT OF THIS STIPULATION, COULD IT BE INFERRED THAT THE SHARES, IN RESPECT OF WHICH STOCK OPTION IS ISSUED, STOOD TRANSFERRED IN THE NAME OF THE EMPLOYEES BY THE VIRTUE OF HIS HAVING A CCEPTED THE STOCK OPTION. WHEN NO PAYMENT IS, OR CANNOT BE, MADE, AND WHEN TH E STOCK OPTION ONLY GRANTS AN OPTION TO THE EMPLOYEE TO BUY THE SHARES, IN CONSIDERATION OF A SPECIFIED PRICE AS ON THE DATE OF GRANT OF STOCK OP TIONS, AT A FUTURE DATE, NOT EARLIER THAN SECOND ANNIVERSARY OF GRANT OF STOCK O PTIONS, A MERE GRANT OF I.T.A NO.4699/ MUM/2004 ASSESSMENT YEAR: 1998-99 14 OPTION CANNOT RESULT IN A TRANSFER OF SHARES AS H AS BEEN CONCLUDED BY THE CIT (A). THE CIT(A) WAS CLEARLY IN ERROR IN CONCLU DING THAT THE DATE OF GRANT OF STOCK OPTIONS IS TO BE CONCLUDED AS THE DATE ON WHICH SHARES WERE ACQUIRED BY THE ASSESSEE. IN VIEW OF THE ABOVE DISC USSIONS, THE DATE ON WHICH OPTION TO BUY THE SHARES IS GRANTED, IN OUR HUMBLE UNDERSTANDING, CANNOT BE TREATED AS DATE OF ACQUISITION OF SHARES. THE VER Y FOUNDATION OF REASONING ADOPTED BY THE LEARNED CIT(A) IS THUS DEVOID OF LEG ALLY SUSTAINABLE BASIS. A REFERENCE HAS ALSO BEEN MADE BY THE CIT(A) ABOUT T HE ALLOTMENT OF BONUS SHARES TO THE ASSESSEE EMPLOYEE, BUT THEN, AS EVIDE NT FROM A PLAIN READING OF LETTER DATED 22 ND MAY 1996 ISSUED BY JOHNSON & JOHNSON INC USA ( A C OPY OF WHICH IS PLACED AT PAGES 14 AND 15 OF THE PAPER-BOO K), THIS OBSERVATION IS FACTUALLY INCORRECT. THIS INCREASE IN FACE VALUE O F STOCK OPTIONS IS DUE TO 2 FOR 1 STOCK SPLIT WHICH WAS DONE FOR ALL THE SHARE HOLDERS AND, CORRESPONDINGLY, THE STOCK OPTION RIGHTS WERE ALSO ACCORDINGLY ADJUSTED. IT IS NOT EVEN THE CASE OF THE ASSESSEE THAT THERE WAS AN Y BONUS ISSUE OF SHARES OR THAT THE ASSESSEE WAS A REGISTERED SHAREHOLDER AT A NY POINT OF TIME. THE FINDINGS OF THE CIT(A) CANNOT MEET OUR APPROVAL ON THIS ISSUE EITHER. IN VIEW OF THESE DISCUSSIONS, WE ARE OF THE CONSIDERED VIEW THAT THE REASONING ADOPTED BY THE CIT(A) IS UNSUSTAINABLE IN LAW. 11. LEARNED DEPARTMENTAL REPRESENTATIVE HAS ALSO IN VITED OUR ATTENTION TO THE FACT THAT A COORDINATE BENCH OF THIS TRIBUNA L, IN THE CASE OF ANOTHER EMPLOYEE COVERED BY THE SAME STOCK OPTIONS PLAN OF JJ USA I.E. ACIT VS SHRIPAD S NADKARNI ( ITA NO. 4698/MUM/2004; ORDER D ATED 20 TH JANUARY 2009), DECIDED THE ISSUE AGAINST THE ASSESSEE AND O BSERVED THAT STOCK OPTION PLAN IS AKIN TO THE STOCK APPRECIATION RIGHT S AND THE GAINS ARISING ON EXERCISING THE OPTION ARE TO BE INCLUDED AS INCOME FROM SALARY IN THE HANDS OF THE EMPLOYEE. IN DOING SO, THE COORDINATE BENCH HAS ELABORATELY DISCUSSED THE SPECIAL BENCH DECISION OF THIS TRIBUN AL IN THE CASE OF SUMIT BHATTACHARYA VS ACIT (112 ITD SB 1) AND RELIED UPON THE SAME. IT IS I.T.A NO.4699/ MUM/2004 ASSESSMENT YEAR: 1998-99 15 SUBMITTED THAT ONCE A COORDINATE BENCH TAKES A PART ICULAR VIEW IN THE CASE OF ANOTHER EMPLOYEE COVERED BY THE SAME STOCK OPTIONS PLAN OFFERED BY THE SAME COMPANY, THERE IS NO GOOD REASON TO DEVIATE FR OM THE STAND SO TAKEN ON ADMITTEDLY THE SAME SET OF FACTS. WE ARE THUS URGED TO VACATE THE ORDER OF THE CIT(A) FOR THIS REASON ALSO. LEARNED COUNSEL FOR TH E ASSESSEE, ON THE OTHER HAND, CITES DECISION OF ANOTHER COORDINATE BENCH, I N THE CASE OF BOMI S BILLIMORIA VS. ACIT ( ITA NO. 2120/MUM/1998; ORDER DATED 30 TH JUNE 2009), WHICH, ADMITTEDLY ON THE SAME SET OF FACTS, HAS DEC IDED THE ISSUE IN FAVOUR OF THE ASSESSEE BY HOLDING AS FOLLOWS: WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE RECORDS. AS COULD BE NOTICED FROM THE STOCK OPT ION PLAN AND THE TERMS OF THE RESERVE BANK OF INDIA, NO PAYMENT WAS MADE BY THE ASSESSEE NOR EXERCISED THE RIGHT TO PURCHASE TH E SHARES BEFORE 13 TH AUGUST 1992 ( I.E. THE DATE OF EXERCISE OF OPTION) , AND THUS, SO FAR AS THE ASSESSEE IS CONCERNED, THERE IS NO COST OF ACQUISITION TO THE ASSESSEE, IN WHICH EVENT, BY APPLYING THE DECIS ION OF B C SRINIVAS SHETTY 128 ITR 294, THE AMOUNT RECEIVED I S NOT LIABLE TO TAX UNDER THE HEAD INCOME FROM CAPITAL GAINS. EVE N IF IT IS ASSUMED THAT THE MARKET VALUE OF SHARES IS THE BENE FIT GIVEN TO THE ASSESSEE, SUCH BENEFIT CAN BE SAID TO ACCRUE TO THE ASSESSEE ONLY ON THE DATE OF EXERCISE OF THE OPTION. IN THE INSTANT CASE, THE DATE OF EXERCISE OF OPTION AS WELL AS THE DATE OF S ALE IS SAME, AND THUS THERE IS NO DIFFERENCE BETWEEN DEEMED COST OF ACQUISITION AND THE ACTUAL PRICE REALIZED BY THE ASSESSEE, AND THUS THE LEARNED CIT(A) WAS NOT JUSTIFIED IN DIRECTING THE A SSESSING OFFICER TO BRING TO TAX THE AMOUNT OF RS 5,44,925 IN THE SH ORT TERM CAPITAL GAIN. UNDER THESE CIRCUMSTANCES, WE SET ASIDE THE ORDERS PASSED BY THE TAX AUTHORITIES AND DIRECT THE ASSESSING OFF ICER TO EXCLUDE THE IMPUGNED AMOUNT FROM THE COMPUTATION OF INCOME. 12. LEARNED COUNSEL THUS CONTENDS THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE ABOVE DECISION, WHICH HAPPENS T O BE A LATER DECISION, AND I.T.A NO.4699/ MUM/2004 ASSESSMENT YEAR: 1998-99 16 URGES US TO HOLD THAT SINCE THE STOCK OPTIONS, ON E XERCISE OF WHICH ASSESSEE RECEIVED THE AMOUNT OF RS 1,74,96,746 WHICH HAVE BE EN BROUGHT TO TAX BY THE ASSESSING OFFICER, DID NOT HAVE A COST OF ACQUISITI ON, THE CAPITAL GAINS IN QUESTION CANNOT BE BROUGHT TO TAX. WHEN LEARNED CO UNSELS ATTENTION WAS INVITED TO THE FACT THAT, IN TAKING THE ABOVE STAND , THE COORDINATE BENCH WAS NOT INFORMED OF THE FACT THAT THE ISSUE IN APPEAL I S NO LONGER RES INTEGRA AND STOOD CONCLUDED AGAINST THE ASSESSEE, BY ANOTHER CO ORDINATE BENCHS DECISION DATED 20 TH JANUARY 2009 ON UNDISPUTEDLY MATERIALLY SIMILAR FA CTS IN SHRIPAD S NADKARNIS CASE (SUPRA), LEARNED COUNSEL SUBMITTED THAT IT WAS NOT IN HIS DUTY TO INVITE BENCHS ATTENTION TO A DECISI ON HIM. IT IS FOR THE DEPARTMENTAL REPRESENTATIVE TO INVITE BENCHS ATTEN TION TO A PRECEDENT IN SUPPORT OF THE REVENUE HE, HOWEVER, ADMITS THAT IN BOTH OF THESE CASES, I.E. BOMI S BILLIMORIAS CASE (SUPRA) AND SHRIPAD S NADKARNIS CASE (SUPRA), HE REPRESENTED THE ASSESSEES AND THAT HE DID NOT BRING THE DECISION IN SHRIPAD S NADKARNIS CASE (SUPRA) TO THE NOTICE OF THE LATER BENCH IN BOMI S BILLIMO RIAS CASE (SUPRA). LEARNED COUNSEL THEN SUBMITS THAT IN ANY CASE, SHRI PAID S NADKARNI DECISION IS PER INCURIUM BECAUSE IT DOES NOT TAKE INTO ACCOUNT THE VITAL FACT THAT THE SHARES WERE ACTUALLY ALLOTTED T O THE ASSESSEE AND SOLD BY A STOCK BROKER, AND IT IS ACTUAL DIFFERENCE ON SALE C ONSIDERATION AND COST OF ACQUISITION OF THESE SHARES WHICH HAS BEEN RECEIVED BY THE ASSESSEE. LEARNED COUNSEL SUBMITS THAT THIS DIVISION BENCH WAS CLEARL Y IN ERROR IN APPLYING THE RATIO OF SPECIAL BENCH DECISION IN THE CASE OF SUMI T BHATTACHARYA (SUPRA) WHICH DEALT WITH A SITUATION IN WHICH NO SHARES WER E ACTUALLY ALLOTTED AND THE ASSESSEE WAS SIMPLY PAID THE DIFFERENCE BETWEEN THE MARKET PRICE OF SHARES, IN RESPECT OF WHICH OPTION WAS GIVEN, AS ON THE DATE OF EXERCISE OF OPTION VIS--VIS THE MARKET PRICE AS ON THE DATE OF GRANT OF OPTION. LEARNED COUNSEL SUBMITS THAT ONCE SHARES ARE ACTUALLY TRANS FERRED TO THE EMPLOYEE, THE GAINS ON SALE OF TRANSFER CANNOT BE TREATED AS PART OF INCOME FROM SALARIES. LEARNED COUNSEL THEN LABORIOUSLY TAKES US THROUGH THE SPECIAL BENCH DECISION TO DEMONSTRATE THAT THE STOCK APPREC IATION RIGHTS, WHICH THE I.T.A NO.4699/ MUM/2004 ASSESSMENT YEAR: 1998-99 17 SPECIAL BENCH WAS DEALING WITH, ARE MATERIALLY DIFF ERENT FROM STOCK OPTIONS, AS IN THE PRESENT CASE. HE THEN INVITES OUR ATTENTI ON TO CERTAIN OBSERVATIONS IN THE SPECIAL BENCH DECISION WHEREIN IT IS STATED THAT STOCK APPRECIATION RIGHT IS NOT THE SAME THING AS A TYPICAL STOCK OPTI ON PLAN AND THAT THIS DISTINCTION BETWEEN THE NATURE OF STOCK APPRECIATIO N RIGHTS AND THE STOCK OPTIONS IS SO FUNDAMENTAL AND THAT IT AFFECTS THE T AX TREATMENT OF THESE TWO BENEFITS. IN VIEW OF THESE OBSERVATIONS, ACCORDING TO THE LEARNED COUNSEL, THE SPECIAL BENCH DECISION WILL HAVE NO APPLICATION IN THE CASE OF A STOCK OPTION PLAN, WHICH WAS SUBJECT MATTER OF CONSIDERATION IN SHRIPAD S NADKARNIS CASE (SUPRA), AND THE SAID DECISION, THEREFORE, WAS CLEA RLY IN ERROR IN FOLLOWING THE SPECIAL BENCH DECISION. OUR ATTENTION IS THEN INVIT ED TO A COPY OF STATEMENT OF ACCOUNT OF THE ASSESSEE, AS APPEARING IN THE BOO KS OF STOCK BROKER MERRILL LYNCH, PIERCE, FENNER & SMITH INC. ( AT PAGE 2 OF T HE PAPER-BOOK), WHICH SHOWS THAT THE SHARES WERE ACTUALLY SOLD ON BEHALF OF THE ASSESSEE AND PURCHASED ON BEHALF OF THE ASSESSEE, AND IT WAS ONL Y THE DIFFERENCE BETWEEN SALE PRICE AND PURCHASE PRICE, AFTER DEDUCTING BROK ERS CHARGES, WAS PAID OVER TO THE ASSESSEE. IT IS THUS POINTED OUT THAT W HAT HAS BEEN PAID TO THE ASSESSEE IS NOT A NOTIONAL GAIN BUT A REAL GAIN ON THE SALE OF SHARES. ON THE STRENGTH OF THESE ARGUMENTS, LEARNED COUNSEL URGES US TO HOLD THAT THE DECISION IN THE CASE OF SHRIPAD S NADKARNI (SUPRA) CANNOT BE FOLLOWED, AND URGES US TO FOLLOW THE LATER DECISION IN FAVOUR OF THE ASSESSEE IN BOMI S BILLIMORIAS CASE (SUPRA). 13. LEARNED DEPARTMENTAL REPRESENTATIVE VEHEMENTLY OPPOSES THE SUBMISSIONS SO MADE BY THE LEARNED COUNSEL. HE SUBM ITS THAT THE DECISION OBTAINED BY THE LEARNED COUNSEL IN BOMI S BILLIMORI AS CASE (SUPRA) IS PER INCURIUM . HE SUBMITS THAT WHATEVER BE THE NOMENCLATURE GIV EN TO THE ARRANGEMENT, THE STOCK OPTION PLAN IS BASICALLY TO GIVE BENEFIT OF APPRECIATION IN THE VALUE OF PARENT COMPANYS SHARE S, AND THIS IS PRECISELY I.T.A NO.4699/ MUM/2004 ASSESSMENT YEAR: 1998-99 18 WHAT THE TRIBUNAL HAS HELD IN THE CASE OF SHRIPAD S NADKARNI. IT IS ALSO SUBMITTED THAT TRIBUNALS DECISION IN BILLIMORIAS CASE (SUPRA), HAVING BEEN RENDERED UNMINDFUL OF BINDING COORDINATE BENCH DECI SION IN NADKARNIS CASE (SUPRA) AN INADVERTENT MISTAKE TO WHICH LEARNED C OUNSEL HAS PASSIVELY CONTRIBUTED BY NOT POINTING OUT, AS WAS EXPECTED OF HIM IN ALL FAIRNESS, THE EARLIER DECISION WHICH WAS ARGUED BY HIM ONLY, DOE S NOT CONSTITUTE A BINDING JUDICIAL PRECEDENT. 14. WE SEE SUBSTANCE IN THE PLEA OF THE LEARNED DE PARTMENTAL REPRESENTATIVE. AS HE RIGHTLY POINTS OUT, THE ISSUE IS ALSO SQUARELY C OVERED BY A COORDINATE BENCHS DECISION IN THE CASE OF SHRIPAD S NADKARNI (SUPRA) WHEREIN THE COORDINATE BENCH, ON THE SAME SET OF MATERIAL FACTS- AS IS THE UNDISPUTE D POSITION, CONCLUDED THAT WE ARE OF THE VIEW THAT IN THE CASE OF THE ASSESSEE, THE S TOCK OPTION PLAN IS AKIN TO THE STOCK APPRECIATION RIGHTS AND THE GAINS ARISING FROM EXER CISE OF OPTION ARE TO BE INCLUDED AS INCOME FROM SALARY IN THE HANDS OF THE ASSESSEE A ND THAT THERE IS NO MERIT IN THE STAND OF THE ASSESSEE IN INCLUDING THE SAID GAINS A S INCOME FROM CAPITAL GAINS AS THE ASSESSEE HAD AT NO POINT OF TIME BECOME OWNER OF TH E ASSETS WHEREAS IT WAS ONLY ENTITLED TO THE BENEFIT OF EXERCISING OPTION UNDER THE SCHEME, IN RECEIVING THE GAIN ON EXERCISING THE OPTION SIMULTANEOUSLY PURCHASE/ SALE OF SHARES AND THE PROFITS BEING REPATRIATED TO INDIA. WE MAY ALSO ADD THAT, AS EV IDENT FROM THE PERUSAL OF STATEMENT OF ACCOUNT OF THE ASSESSEE WITH THE BROKER, THE ASS ESSEE WAS NEVER OWNER OF ANY SHARES. THIS STATEMENT SHOWS THAT WHILE 2,000 SHAR ES WERE SOLD TO THE ACCOUNT OF THE ASSESSEE ON 6 TH FEBRUARY 1997 AND A CREDIT OF US $ 1,13,723.71 WAS GIVEN BY THE STOCK BROKER, CORRESPONDING DEBIT FOR PURCHASE OF S HARES FROM JOHNSON & JOHNSON FOR US $ 28,940 WAS EFFECTED ON 13 TH FEBRUARY 1997. SIMILARLY, FOR THE SALE OF 3,800 SHARES, THE SALE PROCEEDS OF US $ 1,23,771.46 AND U S $ 1,11,398.68 WERE CREDITED ON 24 TH FEBRUARY 1997, CORRESPONDING DEBIT OF US $ 61,706 FOR PURCHASE OF THESE SHARES WAS GIVEN ON 27 TH FEBRUARY 1997. IN BOTH THESE TRANSACTIONS, CREDIT FOR SHARES SOLD WERE GIVEN EVEN BEFORE THE DEBITS FOR PURCHASE OF S HARES WERE GIVEN. CLEARLY, I.T.A NO.4699/ MUM/2004 ASSESSMENT YEAR: 1998-99 19 THEREFORE, THE ASSESSEE WAS NOT THE OWNER OF THESE SHARES BEFORE THE SHARES WERE SOLD, AND ENTRIES, TO THAT EXTENT, WERE MERE NOTION AL IN NATURE. SECTION 45 (1) PROVIDES THAT ANY PROFITS OR GAINS FROM THE TRANSFE R OF CAPITAL ASSET ARE TAXABLE AS CAPITAL GAINS, BUT THEN, EVEN GOING BY THE DOCUMENT S PRODUCED BY THE ASSESSEE, HERE IS A CASE IN WHICH THE ASSESSEE DID NOT OWN ANY CAP ITAL ASSET IN THE FORM OF SHARES WHEN HE CLAIMS TO HAVE SOLD THE SAME. THE IMPUGNED GAINS ARE, THEREFORE, CANNOT BE TAXED UNDER THE HEAD CAPITAL GAINS. IN ANY EVENT, EVEN IF IT IS ASSUMED THAT THE INCOME IS TAXABLE AS GAINS ON SALE OF SHARES, BECAU SE SHARES WERE NOT HELD EVEN FOR A SINGLE DAY, THE GAINS CAN ONLY A SHORT TERM CAPITAL GAIN, AND SUCH A TREATMENT DOES NOT BRING ANY RELIEF TO THE ASSESSEE EITHER. 15. IN BILLIMORIAS CASE (SUPRA) , THE COORDINATE BENCH WAS NOT AWARE OF A DIRECT DECISION ON THE SAME ISSUE BY ANOTHER COORDI NATE BENCH IN NADKARNIS CASE (SUPRA). LEARNED COUNSEL DOES NOT DISPUTE THIS, BUT DEFEND S IT BY SUBMITTING THAT WHAT IT WAS DUTY OF THE LEARNED DE PARTMENTAL REPRESENTATIVE TO INVITE BENCHS DECISION TO JUDICIAL PRECEDENTS I N FAVOUR OF THE REVENUE. 16. AS TO WHAT SHOULD BE BINDING VALUE OF A JUDICIA L PRECEDENT, WHICH IS RENDERED IN IGNORANCE OF THE EARLIER BINDING PRECED ENTS ON THE ISSUE, WE CAN DO NO BETTER THAN TO MAY REFER TO THE OBSERVATIONS MADE BY HONBLE ANDHRA PRADESH HIGH COURT FULL BENCH, IN THE CASE OF CIT V S B R CONSTRUCTIONS (202 ITR 222). WHILE DEALING WITH THE RULE OF PRECEDENTS , THEIR LORDSHIPS HAVE, INTER ALIA, QUALIFIED THE BINDING NATURE OF PRECEDE NTS BY OBSERVING AS FOLLOWS: IT MAY BE NOTICED THAT PRECEDENT CEASES TO BE A BIN DING PRECEDENT: (I) IF IT IS REVERSED OR OVERRULED BY A HIGHER COUR T, (II) WHEN IT IS AFFIRMED OR REVERSED ON A DIFFERENT GROUND, (III) WHEN IT IS INCONSISTENT WITH THE EARLIER DECI SIONS OF THE SAME RANK, (IV) WHEN IT IS SUB SILENTIO, AND (V) WHEN IT IS RENDERED PER INCURIAM. IN PARA 578 AT P. 297 OF HALSBURYS LAWS OF ENGLAND , FOURTH EDITION, THE RULE OF PER INCURIAM IS STATED AS FOLLOWS : I.T.A NO.4699/ MUM/2004 ASSESSMENT YEAR: 1998-99 20 A DECISION IS GIVEN PER INCURIAM WHEN THE COURT HA S ACTED IN IGNORANCE OF A PREVIOUS DECISION OF ITS OWN OR OF A COURT OF CO-OR DINATE JURISDICTION WHICH COVERED THE CASE BEFORE IT, IN WHICH CASE IT MUST B E DECIDED WHICH CASE TO FOLLOW; OR WHEN IT HAS ACTED IN IGNORANCE OF A HOUS E OF LORDS DECISION, IN WHICH CASE IT MUST FOLLOW THAT DECISION; OR WHEN TH E DECISION IS GIVEN IN IGNORANCE OF THE TERMS OF A STATUTE OR RULE HAVING STATUTORY FORCE. IN PUNJAB LAND DEVELOPMENT & RECLAMATION CORPN. LTD . VS. PRESIDING OFFICER, LABOUR COURT (1990) 3 SCC 682 : (1990) 77 FJR 17 (S C), THE SUPREME COURT EXPLAINED THE EXPRESSION PER INCURIAM THUS : THE LATIN EXPRESSION PER INCURIAM MEANS THROUGH IN ADVERTENCE. A DECISION CAN BE SAID GENERALLY TO BE GIVEN PER INCURIAM WHEN THE SUPREME COURT HAS ACTED IN IGNORANCE OF A PREVIOUS DECISION OF ITS OW N OR WHEN A HIGH COURT HAS ACTED IN IGNORANCE OF A DECISION OF THE SUPREME COU RT. 17. VIEWED THUS, AS HELD BY HONBLE ANDHRA PRADESH HIGH COURT (FULL BENCH), A DECISION WHICH IS RENDERED IN IGNORANCE O F AN EARLIER DECISION OF A COORDINATE BENCH OF EQUAL STRENGTH WHICH COVERED T HE CASE BEFORE IT DOES NOT HAVE PRECEDENT VALUE. LEARNED COUNSEL DOES NOT DISPUTE THAT EARLIER DECISION IN NADKARNIS CASE SQUARELY COVERED THE IS SUE IN APPEAL IN BILLIMORIAS CASE AND YET COORDINATE BENCH DID NOT HAVE THE BENEFIT OF CONSIDERING DECISION IN NADKARNIS CASE BY A BENCH OF EQUAL STRENGTH, YET HE CONTENDS THAT THE LATER DECISION SHOULD BE FOLLOWED . THIS SUBMISSION IS, SUFFICE TO SAY, LEGALLY UNSUSTAINABLE IN VIEW OF TH E LAW SO LAID DOWN IN BR CONSTRUCTIONS CASE (SUPRA). WE, THEREFORE, REJECT LEARNED COUNSELS RELIANCE ON BILLIMORIAS DECISION BY A DIVISION BENCH, AND L EAVE IT AT THAT. 18. IN ANY CASE, WHAT THE COORDINATE BENCH HAS HELD IN BILLIMORIAS CASE IS THAT NO PAYMENT WAS MADE BY THE ASSESSEE NOR EXERCISE D THE RIGHT TO PURCHASE THE SHARES BEFORE 13 TH AUGUST 1992 ( I.E. THE DATE OF EXERCISE OF OPTION), AND THUS, SO FAR AS THE ASSESSEE IS CONCER NED, THERE IS NO COST OF ACQUISITION TO THE ASSESSEE, IN WHICH EVENT, BY APP LYING THE DECISION OF B C SRINIVAS SHETTY 128 ITR 294, THE AMOUNT RECEIV ED IS NOT LIABLE TO TAX UNDER THE HEAD INCOME FROM CAPITAL GAINS, BUT THEN IT IS NOT EVEN I.T.A NO.4699/ MUM/2004 ASSESSMENT YEAR: 1998-99 21 ASSESSEES CASE BEFORE US THAT THE SHARES DID NOT H AVE A COST OF ACQUISITION. THE ASSESSEE HAS TAKEN THE COST OF ACQUISITION OF S HARES AS ON THE VALUE AT THE POINT OF TIME WHEN RELATED STOCK OPTION WAS GRANTED , AND THE SHORT QUESTION REQUIRING OUR ADJUDICATION IS WHETHER THE GAINS SHO ULD BE TREATED AS LONG TERM CAPITAL GAINS, WITH INDEXATION BENEFITS, OR AS SHORT TERM CAPITAL GAINS. THERE IS NO CROSS OBJECTION BY THE ASSESSEE, NOR TH ERE IS EVEN ANY PETITION UNDER RULE 27 OF THE INCOME TAX APPELLATE TRIBUNAL RULES. THE ISSUE OF TAXABILITY OF GAINS ARISING ON EXERCISE OF STOCK OP TIONS HAS NEVER BEEN A SUBJECT MATTER OF CONTROVERSY BEFORE ANY OF THE AUT HORITIES BELOW; THE ISSUE HAS REMAINED CONFINED TO THE QUESTION AS TO WHETHER THESE GAINS ARE SHORT TERM CAPITAL GAINS OR LONG TERM CAPITAL GAINS. THE DECISION OF THE COORDINATE BENCH DOES NOT EVEN TOUCH UPON THIS ISSUE. WE NEED NOT ADDRESS OURSELVES TO THIS ISSUE. WE ARE, FOR THIS REASON ALSO, UNABLE TO FIND ANY MERITS IN LEARNED COUNSELS RELIANCE ON COORDINATE BENCHS DE CISION IN THE CASE OF BILLIMORIA (SUPRA). 19. THE ONLY OTHER OBSERVATION MADE BY THE COORDINA TE BENCH, IN OPERATIVE PORTION OF THE DECISION IN BILLIMORIAS C ASE IS THAT, EVEN IF IT IS ASSUMED THAT THE MARKET VALUE OF SHARES IS THE BENE FIT GIVEN TO THE ASSESSEE, SUCH BENEFIT CAN BE SAID TO ACCRUE TO THE ASSESSEE ONLY ON THE DATE OF EXERCISE OF THE OPTION AND THAT IN THE INSTANT CASE, THE DATE OF EXERCISE OF OPTION AS WELL AS THE DATE OF SALE IS S AME, AND THUS THERE IS NO DIFFERENCE BETWEEN DEEMED COST OF ACQUISITION AN D THE ACTUAL PRICE REALIZED BY THE ASSESSEE . LEARNED COUNSEL COULD NOT, HOWEVER, EXPLAIN TO US AS TO UNDER WHICH PROVISION OF LAW, ON THE FACTS OF THIS CASE BEFORE US, WE CAN WE TAKE THE MARKET VALUE OF SHARE AS ON THE DA TE OF SALE OF SHARES AS DEEMED COST OF ACQUISITION OF THESE SHARES; AS A MATTER OF FACT, IT HAS NEVER BEEN THE CASE OF THE ASSESSEE EITHER. THE GAINS HAV E BEEN BROUGHT TO TAX ONLY WHEN THE OPTION IS EXERCISED AND NOT WHEN OPTION IS GRANTED, AND THAT IS I.T.A NO.4699/ MUM/2004 ASSESSMENT YEAR: 1998-99 22 WHAT THE SAID DECISION HOLDS. THE COST OF ACQUISITI ON, IN THE PRESENT CASE, IS STATED TO BE THE VALUE OF SHARES AS ON THE DATE OF GRANT OF OPTIONS AND THAT IS PRECISELY WHAT HAS BEEN TAKEN INTO ACCOUNT FOR COMP UTATION OF THE CAPITAL GAINS, AND AS THE SHARES WERE ADMITTEDLY NOT HELD F OR MORE THAN 12 MONTHS, THE GAINS ON SALE OF THESE SHARES HAVE BEEN TREATED AS SHORT TERM CAPITAL GAINS. WE ARE UNABLE TO UNDERSTAND AS TO HOW THE A BOVE OBSERVATIONS HELP THE CASE OF THE ASSESSEE. AS A MATTER OF FACT, WHE THER THE INCOME ON EXERCISE OF STOCK OPTIONS IS TO BE TREATED AS SHORT TERM CAP ITAL GAIN OR AS INCOME FROM SALARIES, THIS ASPECT OF THE MATTER IS WHOLLY ACADE MIC AND TAX NEUTRAL. VIEWED THUS, THE ASSESSEE DOES NOT DERIVE ANY ADVANTAGE FR OM THE OBSERVATIONS SO MADE IN THE CASE OF BILLIMORIA (SUPRA). 20. FOR THE REASONS SET OUT ABOVE, WE VACATE THE IM PUGNED RELIEF GRANTED BY THE CIT(A) AND RESTORE THE ORDER OF THE ASSESSIN G OFFICER TO THE EXTENT THAT THE GAINS ON EXERCISE OF STOCK OPTIONS, ON THE ADMITTED FACTS OF THIS CASE, IS TAXABLE AS SHORT TERM CAPITAL GAINS. THE REASONI NG ADOPTED BY THE CIT(A), IN TREATING THE GAINS ON SALE OF STOCK OPTION SHARE S AS LONG TERM CAPITAL GAIN, IS, FOR THE DETAILED REASONS SET OUT EARLIER IN THI S ORDER PARTICULARLY IN PARAGRAPH 10 ABOVE, ERRONEOUS AND IT DOES NOT MEET OUR APPROVAL. IN THIS VIEW OF THE MATTER, AND AS WE ARE DEALING WITH LIMI TED ISSUE IN APPEAL AS RAISED BY THE REVENUE, IT IS NOT REALLY NECESSARY F OR US TO DEAL WITH OTHER ASPECTS OF THIS MATTER. 21. IN THE RESULT, APPEAL IS ALLOWED . PRONOUNCED IN THE OPEN COURT ON 10 TH AUGUST, 2011 SD/- (R.V.EASWAR) PRESIDENT SD/- (PRAMOD KUMAR) ACCOUNTANT MEMBER MUMBAI, DATED 10 TH AUGUST, 2011 PARIDA I.T.A NO.4699/ MUM/2004 ASSESSMENT YEAR: 1998-99 23 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS),XXVIII, MU MBAI 4. COMMISSIONER OF INCOME TAX, XXVIII , MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, BENCH I, MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI