Income Tax Appellate Tribunal - Agra

Income Tax Appellate Tribunal - Agra

C. N. Kuchroo, Aligarh vs Assessee on 31 August, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
AGRA BENCH, AGRA
BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI A.L. GEHLOT, ACCOUNTANT
MEMBER
ITA No.92/Agr/2011
Assessment Year: 2004-05
Shri C.N. Kuchroo, vs. Asstt. Commissioner of Income Tax, M/s. Rasool Singhal & Co., Circle - 1, Aligarh.
Railway Road,
Aligarh.
(PAN: AFBPK 7123 A)
(Appellant) (Respondent)
Appellant by : Shri M.H. Singhal, C.A. Respondent by : Km. Anuradha, Jr. D.R.
Date of Hearing : 06.08.2012 Date of Pronouncement of order : 31.08.2012
ORDER
PER A.L. GEHLOT, ACCOUNTANT MEMBER:
This is an appeal filed by the assessee against the order dated 03.01.2011
passed by the ld. CIT(A), Ghaziabad for the A.Y. 2004-05 on the following
grounds:-
"1. That the learned CIT (Appeals) has not appreciated the facts and legal issues and relied on the order made
by the learned Assessing Officer on the wrong facts and basis by treating Rs.29,35,430/- as short term capital
gain instead of long term capital gain, when the period of stock option held by assessee was more than three
years 2 ITA No.92/Agr/2011
A.Y. 2004-05.
instead of more than one years as stipulated by the Income Tax Act, 1961.
2. That the learned CIT (Appeals) erred in law as well as on facts in not appreciating that the grant date, grant
price, exercise date, and exercise price are different, and the period of capital gain should have been calculated
on the basis of grant date and exercise date which has not been done as such learned CIT (Appeals) on the
basis of wrong facts has reached to a wrong conclusion of treating the amount to be short term capital gain
instead the same being long term capital gain.
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3. That the learned CIT (Appeals) erred in law as well as on facts in treating Rs.29,35,430/- to be the short
term capital gain on the basis that grant date and exercise date to be one and the same which is not a fact, they
are definitely different dates. Even if as per the argument of learned CIT (Appeals) both dates are treated to be
the same, then there would not any difference in the in the value of stock options on the same date and the
amount is bound to be NIL and thus there would neither be any short term capital gain or long term capital
gain on the same date.
4. That learned CIT(Appeals) has not deliberated and decided all the grounds of appeal which are addressed to
him and while in doing so he has not considered the very relevant ground that due, proper and legal
opportunity was not provided to the assessee, hence therefore, natural justice was denied and the order was
passed on wrong basis and wrong notions.
5. That the learned CIT (Appeals) erred in law as well as on facts in not appreciating verbal and written
arguments stating all the legal and factual points or rather ignored them and thus arrived on a wrong
conclusion and retain the addition treating it to be a short term capital gain.
6. That the learned CIT (Appeals) has not considered the facts that the learned ITO has failed to exercise his
power under section 131 of the Income Tax Act, 1961, even after repeated requests by the assessee, thus he
has ignored his legal rights which are legally vested in him extending his authority to be that of court under
Code of Civil Procedure 1908 (act 5 of 1908). Because of not exercising his legal 3 ITA No.92/Agr/2011
A.Y. 2004-05.
rights and power assessee was denied legal, due and proper opportunity and case was completed in such a
manner, which is not only bad in law but as well as void ab initio.
7. That the learned CIT (Appeals) erred in law as well as on facts, in allowing himself to be influenced and
carried away on the basis of wrong facts relying on his own order which was approved by the Hon'ble
Tribunal of Delhi bench, which was based on different facts, and thus all other legal issues and facts were
totally ignored, and therefore, passed an order which is not relevant to law.
8. That the assessee craves leave for making any additions, deletion or alteration in the grounds of Appeals.
9. That the order of learned CIT (Appeals) is opposed to law and facts of the case and deserves to be
modified."
2. The brief facts of the case are that the assessee is a Director in M/s. Heinz
India Pvt. Ltd. During the assessment proceedings, the Assessing Officer (A.O.)
noticed that the assessee has shown income from capital gain on sale of shares
under Employees Stock Option Plan (ESOP). The assessee claimed exemption
under section 54F of the Income Tax Act, 1961 ('the Act' hereinafter) against the
said Long Term Capital Gain. The A.O., after considering the assessee's
submissions, was of the view that the date of purchase of these shares would be the
date when employee exercised his option. He accordingly assessed the said capital
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gain as Short Term Capital Gain against the Long Term Capital Gain shown by the
assessee. The CIT(A) confirmed the order of the A.O. following his predecessor's
order which has been upheld by the I.T.A.T., Delhi Bench in the case of Ajay 4 ITA No.92/Agr/2011
A.Y. 2004-05.
Pandey. The relevant finding of the CIT(A) is reproduced as under :- (Page
anos.14 to 17)
"5. After having carefully considered the appellant's contentions and the facts brought out by the AO in the
assessment order, my conclusions on the issue involved in appeal are as under :-
"5.1 The only issue in this appeal is against the action of the AO in treating the capital gain arising on sale of
shares under Employees Stock Option Plan (ESOP) as 'Short Term Capital Gain' as against Long Term
Capital Gain shown by the assessee and thereby disallowing assessee's claim for exemption u/s 54F.
The appellant's case fails because the issue is squarely covered by the judgements of the undersigned and also
my predecessor CIT(A), upheld by Hon'ble ITAT, Delhi, in the case of Shri Ajay Pande, Alok Vihar,
Sector-50, Noida for assessment year 2005-06 & 2004-05, in which it was held that capital gain in such facts
and circumstances is taxable as Shot-term Capital Gain. The relevant para of the order in case of Shri Ajay
Pande (in appeal No.118/07- 08/GZB/Noida dated 24.03.2009 for A.Y. 2005-06) is reproduced hereunder :-
"5.2 The relevant para of conclusion of the said order is as under :
............4.3. The submission of the learned AR have been examined along with the fact brought on record by
the AO in the assessment order. Briefly, the plea of the learned AR is that since the date of option in the
instant case was 1st June, 1999, the stock option right has been acquired on 1.6.1999 and since the appellant
sold the stock option by way of cashless exercise on 2nd May, 2003 and 6th November, 2003, the resultant
gain is the result of holding of stock option for more than 3 years and accordingly, the gain arising out of this
transaction should be treated as long term capital gain. The submission put forward by the learned AR
requires deeper scrutiny because the status of the transaction as 5 ITA No.92/Agr/2011
A.Y. 2004-05.
on 1.6.1999 remains that of an offer. This offer materialize only when the appellant exercise his option. Here,
exercising the option is the crucial act in as much as the date on which the option is exercised is the date on
which the unilateral offer turns into a bilateral contract. In the instant case, the appellant exercised his option
only on 03.05.2003 and 06.11.2003 when the impugned right is acquired and the same is disposed off. As
long as this option is not availed off by the appellant, it remains only an offer. Therefore, the argument of the
appellant that the date of offer i.e. 1.6.1999 should be treated as the date of acquisition of right does not have
any material basis. From the perusal of terms of offer, for the appellant, the acquisition materializes on
acceptance of written notice by the Board and allotment of shares and prior to this stage the element of finality
is missing. It is the decision of the appellant to enter into this transaction and the acceptance of the other party
makes it a bilateral transaction and till that time there is no transaction because the offer remains an offer, it
does not partake the character of final transaction. The said offer does not compulsorily mandate the appellant
to acquire the offer. In the above facts and circumstances, the acquisition date and the disposal date in the
instant case appear to be the same i.e. 2nd May, 2003 and 6th November, 2003. In view of the above, since
the aforesaid right has been held by the appellant only for a part of a singled day, the gain arising out of the
said transaction has been correctly treated as short term capital gain by the Assessing Officer ......."
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It is pertinent to note that the decision of the undersigned and the predecessor CIT(A) in the case of Shri Ajay
Pande was upheld by the Hon'ble ITAT, New Delhi vide their order in ITA No.100 & 2209/Del/2008 & 2009
dated 31.12.2009.
The concluding para of the order of Hon'ble ITAT in the case of Shri Ajay Pande is reproduced hereunder, for
ready reference: 6 ITA No.92/Agr/2011
A.Y. 2004-05.
"8. ........ But this difference in fact is not material because the date of holding has to be counted from the date
when the shares are actually acquired by the assessee. In the present case, such acquisition of shares is on the
date of sale only and hence the resultant capital gain has to be assessed as short term capital gain. We,
therefore, decide this issue against the assessee by respectfully following this Tribunal decision rendered in
the case of Giridhar Krishna M (supra).
9. Other arguments raised in the written submissions filed by the assessee are that as per clause (e) of
Exaplanation-1 to section 2 (42A), in the case of renouncement of right to subscribe to any financial asset,
holding period should be reckoned from the date of such right by the company or institution as the case may
be making such offer. It is the claim of the assessee that as per this explanation to section 2(42A), the period
of holding of shares should be counted from the date of offer i.e. 1.6.1999. We are not in agreement with Ld.
AR of the assessee on this issue because as per us, this clause(e) of Explanatin-1 to section 2(42A) is
applicable in the case of renouncement of right to subscribe to any financial asset and we have seen that in the
present case, the assessee has not renounced his right to acquire the shares because such right is not
transferable in the present case. In the present case, the assessee has sold the shares and assigned part of sale
proceeds of shares to the company towards cost of shares. Since, in the present case, the shares are sold, date
of holding has to be counted from the date of acquisition of shares which is the date of sale in the present case.
No other argument is advanced by the Ld. AR of the assessee and hence we decide this issue against the
assessee as discussed above. Ground no.1 is rejected in both the years.
10. Regarding ground No.2 in both the years, it was submitted by ld. AR of the assessee that this issue is
consequential and this has to be decided only if it is held that the capital gain in question is long term capital
gain. 7 ITA No.92/Agr/2011
A.Y. 2004-05.
We find that in both the years, the assessee is claiming deduction u/s 54F and 54EC which are allowable
against long term capital gain if prescribed conditions are fulfilled. Since the capital gain in question is held to
be short term capital gain, the claim of deductions u/s 54F & 54EC are not allowable against short term
capital gain. Ground No.2 is also rejected in both the years.
11. In the result, both the appeals of the assessee are dismissed."
Keeping in view the aforesaid decision of Hon'ble ITAT, I hold that the AO was justified in assessing the
capital gain under the head 'Short Term Capital Gain' and also disallowing assessee's claim for exemption u/s
54F. The grounds taken by the appellant accordingly fail."
3. The ld. Authorised Representative submitted that the issue is not covered by
the order of the I.T.A.T. which has been followed by the CIT(A) on the ground that
the facts of the case under consideration are different. Ld. Authorised
C. N. Kuchroo, Aligarh vs Assessee on 31 August, 2012
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Representative submitted that in the case under consideration there is no actual
transfer of shares but because of the difference in prices on the grant date and
exercise date.
4. The ld. Departmental Representative relied upon the order of the CIT(A) and
submitted that on identical set of facts the issue is covered in favour of the
Revenue by the order of I.T.A.T., Mumbai Bench in ITA No.4699/Mum/2004 in 8 ITA No.92/Agr/2011
A.Y. 2004-05.
the case of ACIT vs. Pramod H. Lele, order dated 10.08.2011. The relevant
finding of the I.T.A.T. is reproduced as under :-
"14. We see substance in the plea of the learned Departmental Representative. As he rightly points out, the
issue is also squarely covered by a coordinate bench's decision in the case of Shripad S Nadkarni (supra)
wherein the coordinate bench, on the same set of material facts- as is the undisputed position, concluded that
"we are of the view that in the case of the assessee, the stock option plan is akin to the stock appreciation
rights and the gains arising from exercise of option are to be included as income from salary in the hands of
the assessee" and that "there is no merit in the stand of the assessee in including the said gains as income from
capital gains as the assessee had at no point of time become owner of the 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
evident from the perusal of statement of account of the assessee with the broker, the assessee was never owner
of any shares. This statement shows that while 2,000 shares were sold to the account of the assessee on 6th
February 1997 and a credit of US $ 1,13,723.71 was given by the stock broker, corresponding debit for
purchase of shares from Johnson & Johnson for US $ 28,940 was effected on 13th February 1997. Similarly,
for the sale of 3,800 shares, the sale proceeds of US $ 1,23,771.46 and US $ 1,11,398.68 were credited on
24th February 1997, corresponding debit of US $ 61,706 for purchase of these shares was given on 27th
February 1997. In both these transactions, credit for shares sold were given even before the debits for
purchase of shares were given. Clearly, therefore, the assessee was not the owner of these shares before the
shares were sold, and entries, to that extent, were mere notional in nature. Section 45 (1) provides that any
profits or gains from the transfer of capital asset are taxable as capital gains, but then, even going by the
documents produced by the assessee, here is a case in which the assessee did not own any capital 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 9 ITA No.92/Agr/2011
A.Y. 2004-05.
'capital gains'. In any event, even if it is assumed that the income is taxable as gains on sale of shares, because
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 Billimoria's case (supra), the coordinate bench was not aware of a direct decision on the same issue by
another coordinate bench in Nadkarni's case (supra). Learned counsel does not dispute this, but defends it by
submitting that what it was duty of the learned Departmental Representative to invite bench's decision to
judicial precedents in favour of the revenue.
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16. As to what should be binding value of a judicial precedent, which is rendered in ignorance of the earlier
binding precedents on the issue, we can do no better than to may refer to the observations made by Hon'ble
Andhra Pradesh High Court Full Bench, in the case of CIT Vs B R Constructions (202 ITR 222). While
dealing with the rule of precedents, Their Lordships have, inter alia, qualified the binding nature of precedents
by observing as follows:
It may be noticed that precedent ceases to be a binding precedent:
(i) if it is reversed or overruled by a higher Court, (ii) when it is affirmed or reversed on a different ground,
(iii) when it is inconsistent with the earlier decisions 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 Halsbury's Laws of England, Fourth Edition, the rule of per incuriam is stated as
follows :
'A decision is given per incuriam when the Court has acted in ignorance of a previous decision of its own or of
a Court of co- ordinate jurisdiction which covered the case before it, in which case it must be decided which
case to follow; or when it has acted in ignorance of a House of Lords decision, in which case it must follow
that decision; or when the decision is given in 10 ITA No.92/Agr/2011
A.Y. 2004-05.
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 (SC), the Supreme Court explained the expression 'per incuriam' thus:
'The Latin expression per incuriam means through inadvertence. 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 own or when a High
Court has acted in ignorance of a decision of the Supreme Court.
17. Viewed thus, as held by Hon'ble Andhra Pradesh High Court (Full Bench), a decision which is rendered in
ignorance of an earlier decision of a coordinate bench of equal strength "which covered the case before it"
does not have precedent value. Learned counsel does not dispute that earlier decision in Nadkarni's case
squarely covered the issue in appeal in Billimoria's case and yet coordinate bench did not have the benefit of
considering decision in Nadkarni's 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 the law so laid down in
BR Construction's case (supra). We, therefore, reject learned counsel's reliance on Billimoria's decision by a
division bench, and leave it at that.
18. In any case, what the coordinate bench has held in Billimoria's case is that "no payment was made by the
assessee nor exercised the right to purchase the shares before 13th 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 decision of B C Srinivas Shetty 128 ITR 294, the amount received is not liable to tax
under the head 'income from capital gains", but then it is not even assessee's case before us that the shares did
not have a cost of acquisition. The assessee has taken the cost of acquisition of shares 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 should be treated as long term capital gains, with indexation benefits, or as short term 11
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A.Y. 2004-05.
capital gains. There is no cross objection by the assessee, nor there 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 options has
never been a subject matter of controversy before any of the authorities 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 counsel's reliance on coordinate
bench's decision in the case of Billimoria (supra).
19. The only other observation made by the coordinate bench, in operative portion of the decision in
Billimoria's case is that, "Even if it is assumed that the market value of shares is the benefit 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 same, and thus there is no
difference between deemed cost of acquisition and 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 date 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 have been brought to tax
only when the option is exercised and not when option is granted, and that is what the said decision holds. The
cost of acquisition, 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 computation of the capital gains, and as the shares were
admittedly not held for 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 above observations help the case of the assessee. As
a matter of fact, whether the income on exercise of stock options is to be treated as short term capital gain or
as income from salaries, this aspect of the matter is wholly academic and tax neutral. Viewed thus, the
assessee does not derive any advantage from the observations so made in the case of Billimoria (supra).
12 ITA No.92/Agr/2011
A.Y. 2004-05.
20. For the reasons set out above, we vacate the impugned relief granted by the CIT(A) and restore the order
of the Assessing 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 reasoning adopted by the CIT(A), in treating the gains on sale
of stock option shares as 'long term capital gain', is, for the detailed reasons set out earlier in this 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 limited issue in appeal as raised by the Revenue, it is not really necessary for us to
deal with other aspects of this matter."
5. We notice that on identical set of facts the issue is covered in favour of the
Revenue by the order of I.T.A.T., Mumbai Bench in ITA No.4699/Mum/2004 in
the case of ACIT vs. Pramod H. Lele, order dated 10.08.2011. By respectfully
following the above order of I.T.A.T., Mumbai Bench, order of the CIT(A) is
confirmed.
6. In the result, appeal of the assessee is dismissed.
(Order pronounced in the open Court)
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Sd/- Sd/- (BHAVNESH SAINI) (A.L. GEHLOT) Judicial Member Accountant Member PBN/*
Copy of the order forwarded to:
Appellant/Respondent/CIT (Appeals) concerned/CIT concerned/ D.R., ITAT, Agra Bench, Agra/Guard File.
By Order
Sr. Private Secretary
Income-tax Appellate Tribunal, Agra
True Copy
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