Receipt from Redemption of Stock Appreciation Rights is Capital Gain, prior to 1999: Supreme Court [Read Judgment]

Ambiguity - Supreme Court - Tax - Taxscan

In Addl. Commissioner of Income Tax vs. Bharat V. Patel, the Supreme Court held that the amount received from redemption of Stock Appreciation Rights (SARs) can be treated only as capital gains and cannot be treated as perquisite under Section 17(2) (iii) of the Income Tax Act or under Section 28 (iv) of the Income Tax Act, prior to the Finance Act, 1999 (27 of 1999).

In this case, the respondent-assessee, Bharat V. Patel, was the Chairman-cum-Managing Director of (P&G) India Ltd., which is a subsidiary of (P&G) USA through Richardson Vicks Inc, USA. The respondent was working as a salaried employee and the company issued Stock Appreciation Rights (SARs) to him without any consideration from 1991 to 1996.  The respondent redeemed the SARs in 1997 and received an amount of Rs.6.80 Crores from (P&G) the USA. At the time of filing returns, he claimed this amount as an exemption from the ambit of income tax.

The Assessing Officer (A.O.) treated the said amount of Rs.6.80 Crores as capital gains. Aggrieved, respondent filed the appeal before the Commissioner of Income Tax (Appeals) (CIT(A)). CIT(A) upheld the order of the A.O. Dissatisfied, the respondent filed an appeal before the Tribunal, which dismissed it. The Division Bench of the High Court allowed the appeal of the respondent. Thereafter, the Revenue approached the Supreme Court.

The Counsel for the Revenue argued that the amount received on redemption of Stock Appreciation Rights (SARs) should not be treated as capital gains but as perquisite under section 17(2)(iii) of the IT Act. He also contended that the amount was received by the respondent as an employee of the company and that there was an employee-employee relationship subsisting and therefore the amount so received must be treated as taxable income.

The Counsel for the respondent contended that the amount received by the Respondent from redemption of Stock Appreciation Rights (SARs) can be treated only as capital gains and cannot be treated as perquisite under Section 17(2) (iii) of the IT Act or under Section 28 (iv) of the IT Act. He further submitted that as there was no consideration involved in acquisition of the SARs, the said capital gains cannot be said to arose to the respondent.

The court observed that the amendment brought by the legislature in the form of Clause (iiia) in Section 17(2) of the Income Tax Act,1961 through the Finance Act, 1999 (27 of 1999) with effect from 01.04.2000 to bring the perquisite transferred by the employer to the employees, does not apply to the instant case as the transaction had happened before the amendment came into force. The Court rejected the contention that the amendment is applicable retrospectively and held that the amendment was not a clarification. It was observed by the Court that Section 28(iv) of the Income Tax Act,1961 will not be applicable as the benefit or perquisite didn’t arise from the business activities or profession.

The Bench comprising of Justice R.K. Agrawal & Justice Abhay Manohar Sapre observed “To sum up, the Respondent got the Stock Appreciation Rights (SARs) and, eventually received an amount on account of its redemption prior to 01.04.2000 on which the amendment of Finance Act, 1999 (27 of 1999) came into force. In the absence of any express statutory provision regarding the applicability of such amendment from retrospective effect, we do not find any force in the argument of the Revenue that such amendment came into force retrospectively. It is well established rule of interpretation that taxing provisions shall be construed strictly so that no person who is otherwise not liable to pay tax, be made liable to pay tax.”

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