REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL No.4380 OF 2018  (Arising out of Special Leave Petition (C) No. 24888 OF

2015)  

Addl. Commissioner of Income Tax    .... Appellant(s)

Versus

Bharat V. Patel           .... Respondent(s)

WITH

CIVIL APPEAL No. 4381 OF 2018  (Arising out of Special Leave Petition (C) No.

25001 OF 2015

J U D G M E N T

R.K.Agrawal, J

1) Leave granted.

2) These appeals have been preferred against the impugned

judgment and order dated  23.12.2014  passed  by the  High

Court of Gujarat at Ahmedabad in Tax Appeal Nos. 6 and 14 of

2004 whereby the Division Bench of the High Court dismissed

the appeals filed by the Revenue while upholding the decision

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of the Income Tax Appellant Tribunal (for brevity ‘the

Tribunal’) dated 27.06.2003.

3) Brief facts:­

(a) On 10.09.1998, the Respondent,  who  is the  Chairman

and Managing Director of  Procter and Gamble  (P&G),  India,

filed his income tax return for the Assessment Year 1998­99

and declaring the total income at Rs 40,13,820/­.  

(b) The Assessing Officer, vide order dated 12.02.2001,

concluded the assessment proceeding under Section 143(3) of

the Income Tax Act, 1961 (in short ‘the IT Act’) and determined

the total income of the Respondent at Rs 7,23,11,013/­

against the declared income.

(c) Being aggrieved, the Respondent preferred an appeal

before the Commissioner of Income Tax  (Appeals)  being No.

CAB/I­643/2000­2001. After considering the case, learned

CIT (Appeals), vide order dated 28.03.2002, dismissed the

appeal of the Respondent after comprehensively discussing the

taxability of the alleged amount and upholding the

Assessment Order passed by the Assessing Officer.

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(d) Being dissatisfied, the Respondent carried the  matter

before the Tribunal. The Tribunal, vide order dated

27.06.2003, in ITA  No. 2241/Ahd/2002 partly allowed the

appeal filed by the Respondent.

(e) At this juncture, the Respondent as well as the Revenue

both preferred cross appeals before the High Court of Gujarat

at Ahmedabad.  

(f) At the same time, consequent to the decision of the

Tribunal dated 27.06.2003, the Assessing Officer   started the

proceeding side by side to give effect to the order dated

27.06.2003. Vide order dated 15.09.2003, the Assessing

Officer held that the difference being sum of Rs 6,80,40,649/­

paid to the Respondent by P&G,  USA shall be treated as

capital gains on transfer/redemption of shares, and hence, the

Respondent is liable to pay tax on capital gains. Being

aggrieved with  the  order  dated 15.09.2003, the  Respondent

filed  an  appeal before the  CIT (Appeals)  being  No.  CAB/V­

37/04­05 which was upheld by learned CIT (Appeals) in favour

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of Assessing Officer while dismissing the appeal of the

Respondent.  

(g) Being dissatisfied, the Respondent further preferred an

appeal before the  Tribunal. The  Tribunal, vide order  dated

24.09.2010, dismissed the appeal.   The decision of the

Tribunal dated 24.09.2010 was not challenged further.

(h) The Division Bench of the High Court, vide judgment and

order dated 23.12.2004, allowed the appeal filed by the

Respondent while dismissing the appeal of the Revenue.

(i) Hence, the present appeals have been filed by the

Revenue before this Court.

4) We have given our thoughtful consideration to the

submissions of leaned senior counsel for the parties and

perused the factual matrix of the case.

Point(s) for consideration:­

5) Whether  in the present facts and circumstances of the

case, any interference by this Court is required with the

impugned decision of the High Court?

Rival contentions:­

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6) At the outset, learned counsel for the Revenue contended

that the  High Court  erred in law while  upholding that the

amount received on redemption of Stock Appreciation Rights

(SARs) is to  be treated  as capital gains  and  not  perquisite

under section 17(2)(iii) of the IT Act.  However, the same is not

taxable under the category of capital gains since no

consideration had passed from the Respondent.  

7) In support of his argument, learned counsel placed

reliance on  Sumit Bhattacharya  vs.  ACIT Circle 16(1),

Mumbai  ­  [2008] 112 ITD 1 (MUM.) (SB) and contended that

the Respondent, having received an amount on redemption of

Stock Appreciation Rights (SARs) as an employee of the

company  and there  was  an employer­employee relationship

subsisting at the relevant point of time, therefore, the amount

received on redemption of Share Appreciation Rights must be

treated as taxable income under the head income from

“Salaries”.   Learned counsel finally contended that the

impugned decision of the High Court deserves to be set aside.

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8)  Per contra, learned senior counsel appearing for the

Respondent submitted 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. However, it was pointed out

that the said capital gains cannot  be said to arose to the

Respondent since there was no consideration paid as the cost

of acquisition by the Respondent. It was also submitted that

such amount received on account of redemption of Stock

Appreciation Rights could have been taxed if at all under the

provisions of Clause (iiia) of Section 17(2) of the IT Act.

Finally, it was also submitted that the question of law sought

to be raised by the Revenue is no more res integra as settled

by this Court in the case of Commissioner of Income Tax vs.

Infosys Technologies Ltd.,  [2008] 297 ITR 167 (SC). Hence,

these appeals deserve to be dismissed at the threshold.

Discussion:­

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9) Before examining the case at hand, it is pertinent to have

an understanding of the words “Perquisite” and “Capital

Gains”.  The  word “Perquisite” in common parlance  may  be

defined  as  any  perk  or  benefit  attached to  an employee  or

position besides salary or remuneration.  Broadly speaking,

these are usually non­cash benefits given by an employer to

an employee in addition to entitled salary or remuneration. It

may be said that these benefits are generally provided by the

employers in  order to retain the talented  employees in the

organization. There are various instances of perquisite such as

concessional rent accommodation provided by the employer,

any sum paid by an employer in respect of an obligation which

was actually payable by the employee etc. Section 17(2) of the

IT Act was enacted by the legislature to give the broad view of

term perquisite. On the other hand, the word ‘Capital Gains’

means a profit from the sale of property or an investment. It

may be short term or long term depending upon the facts and

circumstances of each case. This gain or profit is charged to

tax in the year in which transfer of the capital assets takes

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place. In  the  instant  case, the fundamental  question which

arises for consideration before this Court is with regard to the

taxability of the amount received by the Respondent on

redemption of Stock Appreciation Rights (SARs.)   

10) It is a matter of record that the Respondent was

employed as the Chairman­cum­Managing Director of the

(P&G) India Ltd. at the relevant time and the said company is

the subsidiary of (P&G) USA through Richardson Vicks Inc.

USA and that  (P&G) USA owned controlling equity. It is an

undisputed fact that the Respondent was working as a

salaried employee. The (P&G) USA was the company who had

issued the Stock Appreciation Rights (SARs.) to the

Respondent without any consideration from 1991 to 1996. The

said SARs were redeemed on 15.10.1997 and in lieu of that

the Respondent received an amount of Rs 6,80,40,724/­ from

(P&G) USA. However, when the Respondent filed his return, he

claimed this amount as an exemption from the ambit of

Income Tax. The issue involved in this appeal is in respect of

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Rs  6,80,40,724/­  made on account of amount received on

redemption of Stock Appreciation Rights.

11) The Tribunal was of the view that the stock options are

capital assets and such assets in the instant case acquired for

consideration, hence, gain arising therefrom is liable to capital

gain tax. However, the stand of the Revenue before the

Tribunal was that the amount in question is taxable as

perquisite under Section 17(2)(iii) of the IT Act or in

alternatively under Section 28(iv) of the IT Act instead of

capital gains. The  High  Court also  upheld the view of the

Tribunal but the High Court disagreed that such capital gains

arose to the Respondent on redemption of Stock Appreciation

Rights since there was no cost of acquisition involved from the

side of the Respondent. The meaning of the word perquisite for

the instant case is given under Section 17(2) of the IT Act. The

Revenue alternatively contended that the case of the

Respondent should come under the ambit of Section 28(iv) of

the IT Act.  

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12) It is apposite to note here that, particularly, in order to

bring the perquisite transferred by the employer to the

employees  within the ambit of tax, legislature brought an

amendment under Section 17 of the IT Act by inserting Clause

(iiia) in Section 17(2) of the IT Act through the Finance Act,

1999 (27 of 1999) with effect from 01.04.2000, which was later

on omitted by the Finance Act, 2000. The said Clause (iiia) as

it was then is reproduced herein below:

“(iiia) the value of any specified security allotted or transferred, directly or indirectly, by any person free of cost or at concessional rate, to an individual who is or has been in employment of that person:

Provided that in a case where allotment or transfer of specified securities is made in pursuance of an option exercised  by  an  individual, the value  of the specified securities shall be taxable in the previous year in which such option is exercised by such individual.

Explanation­ For the purposes of this clause,­ (a) “cost’ means the amount actually paid for acquiring specified securities and where no money has been paid, the cost shall be taken as nil; (b) “specified securities” means the securities as defined in clause(h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and includes employees’ stock option and sweet equity shares; (c) “sweat equity shares” means equity shares issued by a company to its employees or directors at a discount or for consideration other than cash for providing know­ how or making available rights in the nature of

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intellectual property rights or value additions, by whatever name called; and (d) “value” means the difference between the fair market value and the cost for acquiring specified securities;”

13) The intention behind the said amendment brought by the

legislature was to bring the benefits transferred by the

employer to the employees as in the instant case, within the

ambit of the Income Tax Act, 1961. It was the first time when

the legislature specified the meaning of the cost for acquiring

specific securities. Only by this amendment, legislature

determined what would constitute the specific securities. By

this amendment, legislature clearly covered the direct or

indirect transfer of  specified securities  from the employer to

the employees during or after the employment. On a perusal of

the said clause, it is evident that the case of the Respondent

falls under such clause. However, since the transaction in the

instant case pertains to prior to 01.04.2000, hence, such

transaction cannot be covered under the said clause  in the

absence of an express provision of retrospective effect. We also

do not find any force in the argument of the Revenue that the

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case of the Respondent would fall under the ambit of Section

17(2) (iii) of the IT Act instead of Section 17(2) (iiia) of the IT

Act. It is a fundamental principle of law that a receipt under

the IT Act must be made taxable before it can be treated as

income. Courts cannot construe the law in such a way that

brings an individual within the ambit of Income Tax Act to pay

tax who otherwise is not liable to pay. In the absence of any

such specific provision, if an individual is subjected to pay tax,

it would amount to the violation of his Constitutional Right.

14) It is pertinent to note that on the point of applicability of

clause (iiia) of Section 17(2) of the IT Act, this Court settled the

position in  Infosys Technologies Ltd  (supra), and has held

as under:­

“17. Be that as it may, proceeding on the basis that there was “benefit” the question is whether every benefit received by the person is taxable as income? In our view, it is not so. Unless the benefit is made taxable, it cannot be regarded as income. During the relevant assessment years, there was no provision in law which made such benefit taxable as income. Further, as stated, the  benefit  was  prospective.  Unless a benefit is in the nature of income or specifically included by the legislature as part of income, the same is not taxable. In this case, the shares could not be obtained by the employees till the lock­in period was over. On facts, we hold that in the

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absence of legislative mandate a potential benefit could not be considered as “income” of the employee(s) chargeable under the head “salaries”…..”

15) The Revenue also contended before the High Court that

the amendment brought in by Section 17(2) of the IT Act was

clarificatory, hence, retrospective in nature. However, the High

Court rejected the stand of the Revenue. The High Court, in its

impugned judgment, on the point of the applicability of clause

has held as under:­

“15. In the case of Commissioner of Income­Tax, Bangalore vs B.C. Srinivasa Setty [(1981) 128 ITR 294 (SC)] this Court held that the  charging  section and computation  provision under the 1961 Act constituted an integrated code. The mechanism introduced for the first time under the Finance Act, 1999 by which cost was explained in the manner stated above was not there prior to 1.4.2000. The new mechanism stood introduced w.e.f. 1.4.2000 only. With the above definition of the word cost introduced vide clause (iiia), the value of option became ascertainable. There is nothing in the Memorandum to the Finance Act, 1999 to say that this new mechanism would operate retrospectively. Further, a mechanism  which explains cost in the  manner indicated above cannot be read retrospectively unless the Legislature expressly says so. It was not capable of being implemented retrospectively. Till 1.4.2000, in the absence of the definition of the word cost value of the option was not ascertainable. In our view, clause (iiia) is not clarificatory. Moreover, the meaning of the words specified securities in section (iiia) was defined or explained for the first time vide Finance Act , 1999 w.e.f. 1.4.2000.Morevover, the words allotted or transferred in clause (iiia) made things clear only after 1.4.2000. Lastly, it may be pointed out that even clause (iiia) has been

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subsequently  deleted  w.e.f.  1.4.2001.  For the  afore  stated reasons, we are of the view the clause (iiia) cannot be read as retrospective.”

 16) Circular No. 710 dated 24.07.1995 which was issued by

the CBDT deals with the taxability  of  shares  issued at less

than the market price. For ready reference, Circular No. 710

issued by the CBDT is reproduced hereinbelow:­

“202. Taxability of the perequisite on shares issued to  employees at less than market price:

1. Chief Commissioners and corporate assessees have been seeking clarification regarding  taxability of the perquisite on shares issued to the employees at  less than market price. 2. The  matter  has  been  considered  by the  Board.  The benefit does amount to a perquisite within the meaning of clause (iii) of sub­section (2) of Section 17 of the Income­Tax Act, 1961.   The various situations in this regard have to be dealt with as under:

(i) where the shares held by the Government have been transferred to the employee, there  will be no perquisite because the employer­employee relationship does not exist between Government and the employee (transferor and the transferee); (ii) where the company offers shares to the employees at the same price as have been  offered to the other shareholders or the general public, there will be no perquisite; (iii) where the employer has offered the shares to its employees at a price lower than the one at which the shares have been offered to the other shareholders/public, the  difference  between the two prices will be taxed as perquisite; (iv) where the shares have been offered only to the employees, the value of perqusite will be the difference between the market price of the shares on the date of

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acceptance of the offer by the employee and the price at which the shares have been offered.”   

On a perusal of the above,  prima facie,  it appears that such

Circular dealt with the cases where the employer issued

shares to the employees at less than the market price. In the

instant case, the Respondent was allotted Stock Appreciation

Rights (SARs.) by the (P&G) USA which is different from the

allotment of shares. Hence, in our opinion such Circular has

no applicability on the instant case.  Moreover, a Circular

cannot be used to introduce a new tax provision in a Statute

which was otherwise absent.

17)  Alternatively, the Revenue also contended that the case

of the Respondent shall come within the ambit of the Section

28(iv) of the IT Act. At this juncture, we deem it appropriate,

for the sake of convenience, to refer Section 28(iv) of the IT Act

which is reproduced herein below:­

“28. Profits and gains of business or profession.­The following income shall be chargeable to income­tax under the head “Profits and gains of business or profession”­

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(iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession.”

On a first look of the said provision, it is apparent that such

benefit or perquisite shall have arisen from the business

activities  or profession whereas  in  the  instant case there  is

nothing as such. The applicability of Section 28(iv) is confined

only to the  case  where  there  is  any business  or  profession

related transaction involved. Hence, the instant case cannot be

covered under Section 28(iv) of the IT Act for the purpose of

tax liability.

18)  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

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be construed strictly so that no person who is otherwise not

liable to pay tax, be made liable to pay tax.  

19) In view of above discussion, we are of the considered view

that these instant appeals are devoid of merits and deserve to

be dismissed. Accordingly, these are hereby dismissed leaving

parties to bear their own cost.

…….....…………………………………J.       (R.K. AGRAWAL)

…….…………….………………………J.   (ABHAY MANOHAR SAPRE)

NEW DELHI; APRIL 24, 2018.  

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