The Assessing Officer wants to tax what my client received on redemption of stock appreciation rights granted by the foreign parent as a perquisite. Is there Supreme Court authority on this?
There is, but read the year carefully. For a redemption before 1 April 2000 the Supreme Court held the amount was not taxable: it fell within clause (iiia) of s.17(2), which was inserted by the Finance Act 1999 with effect from 1 April 2000 and was not retrospective, and it could not be forced into s.17(2)(iii) or s.28(iv). The Court held that a receipt must be made taxable before it can be treated as income.
Decided by the Supreme Court (R.K. Agrawal J and Abhay Manohar Sapre J (judgment by R.K. Agrawal J)) on 2018-04-24, reported as Civil Appeal No. 4380 of 2018 (arising out of SLP (C) No. 24888 of 2015) with Civil Appeal No. 4381 of 2018 (arising out of SLP (C) No. 25001 of 2015) (SC); reportable. It bears on section 17(2), section 17(2)(iii), section 17(2)(iiia), section 28(iv), section 45, section 143(3) of the Income Tax Act 1961, in Salary & Perquisites, Capital Gains and How Tax Law Is Read matters.
The outcome is of historical interest only, but the route matters for share-based pay generally. Three propositions survive and are used every day. First, a benefit from an employer is not income merely because it is a benefit; the legislature must have made it taxable. Second, a charging provision and its computation machinery form an integrated code, so a valuation mechanism introduced for the first time by an amendment cannot be applied to earlier years — the reasoning taken from B.C. Srinivasa Setty and set out in the High Court passage quoted at para 15. Third, s.28(iv) reaches only benefits arising from a business or the exercise of a profession and cannot be used to catch an employment benefit. The gap the Court identified has since been closed for the current law: clause (iiia) was omitted by the Finance Act 2000, and the Finance (No. 2) Act 2009 substituted sub-clauses (vi), (vii) and (viii) in s.17(2) with effect from 1 April 2010, sub-clause (vi) bringing to tax the value of any specified security or sweat equity share allotted or transferred by the employer free of cost or at a concessional rate, that value being the fair market value on the date on which the option is exercised by the assessee, reduced by the amount actually paid by or recovered from him. So for any year from AY 2010-11 the answer is the opposite of the one in this case, and the taxing point is exercise.
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The respondent was Chairman and Managing Director of Procter and Gamble India Ltd, a subsidiary of Procter and Gamble USA through Richardson Vicks Inc. USA, which owned controlling equity. P&G USA issued stock appreciation rights to him without consideration between 1991 and 1996. The rights were redeemed on 15 October 1997 and he received Rs 6,80,40,724 from P&G USA. For AY 1998-99 he filed a return on 10 September 1998 declaring Rs 40,13,820 and claimed the redemption amount as outside the charge. The Assessing Officer completed the assessment under s.143(3) on 12 February 2001 determining income at Rs 7,23,11,013. The CIT(A) dismissed his appeal on 28 March 2002. The Tribunal partly allowed his appeal on 27 June 2003, taking the view that the rights were capital assets so that the gain was liable to capital gains tax. Giving effect to that order, the Assessing Officer by order dated 15 September 2003 treated Rs 6,80,40,649 as capital gains; that was upheld by the CIT(A) and by the Tribunal on 24 September 2010, which was not challenged further. On cross appeals a Division Bench of the Gujarat High Court in Tax Appeal Nos. 6 and 14 of 2004 dismissed the Revenue's appeal, holding that no capital gains arose because there was no cost of acquisition and that clause (iiia) of s.17(2) was not clarificatory and could not be read retrospectively. The Revenue appealed to the Supreme Court, contending that the amount was a perquisite under s.17(2)(iii) or alternatively fell under s.28(iv), relying on Sumit Bhattacharya v. ACIT 2008 112 ITD 1 (Mum) (SB).
The appeals were dismissed as devoid of merit, with parties to bear their own costs (para 19). Clause (iiia) of s.17(2), inserted by the Finance Act 1999 with effect from 1 April 2000 and later omitted by the Finance Act 2000, covered the respondent's case but could not apply to a transaction before 1 April 2000 in the absence of an express provision for retrospective effect; the receipt could not instead be brought under s.17(2)(iii), because a receipt must be made taxable before it can be treated as income (para 13), and it could not be brought under s.28(iv), which is confined to benefits arising from business or the exercise of a profession (para 17).
The Court explained the ordinary meaning of perquisite and capital gains and identified the question as the taxability of the redemption amount (para 9). It reproduced clause (iiia) as inserted by the Finance Act 1999, with its proviso making the value of specified securities taxable in the previous year in which the option is exercised, and its Explanation defining cost, specified securities, sweat equity shares and value as the difference between fair market value and cost (para 12). It held that the amendment was the first time the legislature specified what constitutes specified securities and what cost means, that the respondent's case fell within the clause, and that a transaction prior to 1 April 2000 cannot be covered by it absent an express retrospective provision; courts cannot construe the law so as to bring within the charge a person otherwise not liable (para 13). It applied CIT v. Infosys Technologies Ltd. 2008 297 ITR 167 (SC), quoting the passage that unless a benefit is made taxable it cannot be regarded as income and that in the absence of a legislative mandate a potential benefit could not be considered income chargeable under 'salaries' (para 14). It set out and approved the High Court's reasoning that, following CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294, the charging section and the computation provision form an integrated code, that the mechanism explaining cost was introduced only with effect from 1 April 2000, that there was nothing in the Memorandum to the Finance Act 1999 making it retrospective, and that clause (iiia) is not clarificatory (para 15). It held CBDT Circular No. 710 dated 24 July 1995, which deals with shares issued to employees below market price, inapplicable to stock appreciation rights, adding that a circular cannot be used to introduce a new tax provision otherwise absent from the statute (para 16). Finally it held that taxing provisions must be construed strictly (para 18).
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.
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Handle my notice → Ask a CA on WhatsAppThere is, but read the year carefully. For a redemption before 1 April 2000 the Supreme Court held the amount was not taxable: it fell within clause (iiia) of s.17(2), which was inserted by the Finance Act 1999 with effect from 1 April 2000 and was not retrospective, and it could not be forced into s.17(2)(iii) or s.28(iv). The Court held that a receipt must be made taxable before it can be treated as income. This was decided by the Supreme Court (R.K. Agrawal J and Abhay Manohar Sapre J (judgment by R.K. Agrawal J)) and bears on section 17(2), section 17(2)(iii), section 17(2)(iiia), section 28(iv), section 45, section 143(3) of the Income Tax Act 1961. It is reported as Civil Appeal No. 4380 of 2018 (arising out of SLP (C) No. 24888 of 2015) with Civil Appeal No. 4381 of 2018 (arising out of SLP (C) No. 25001 of 2015) (SC); reportable. The outcome is of historical interest only, but the route matters for share-based pay generally. Three propositions survive and are used every day. First, a benefit from an employer is not income merely because it is a benefit; the legislature must have made it taxable. Second, a charging provision and its computation machinery form an integrated code, so a valuation mechanism introduced for the first time by an amendment cannot be applied to earlier years — the reasoning taken from B.C. Srinivasa Setty and set out in the High Court passage quoted at para 15. Third, s.28(iv) reaches only benefits arising from a business or the exercise of a profession and cannot be used to catch an employment benefit. The gap the Court identified has since been closed for the current law: clause (iiia) was omitted by the Finance Act 2000, and the Finance (No. 2) Act 2009 substituted sub-clauses (vi), (vii) and (viii) in s.17(2) with effect from 1 April 2010, sub-clause (vi) bringing to tax the value of any specified security or sweat equity share allotted or transferred by the employer free of cost or at a concessional rate, that value being the fair market value on the date on which the option is exercised by the assessee, reduced by the amount actually paid by or recovered from him. So for any year from AY 2010-11 the answer is the opposite of the one in this case, and the taxing point is exercise. If it applies to you, the first step is this: Fix the year first. For a receipt before 1 April 2000 this judgment is directly in point; from AY 2010-11 the charge is under s.17(2)(vi) on exercise and this judgment does not help.
The respondent was Chairman and Managing Director of Procter and Gamble India Ltd, a subsidiary of Procter and Gamble USA through Richardson Vicks Inc. USA, which owned controlling equity. P&G USA issued stock appreciation rights to him without consideration between 1991 and 1996. The rights were redeemed on 15 October 1997 and he received Rs 6,80,40,724 from P&G USA. For AY 1998-99 he filed a return on 10 September 1998 declaring Rs 40,13,820 and claimed the redemption amount as outside the charge. The Assessing Officer completed the assessment under s.143(3) on 12 February 2001 determining income at Rs 7,23,11,013. The CIT(A) dismissed his appeal on 28 March 2002. The Tribunal partly allowed his appeal on 27 June 2003, taking the view that the rights were capital assets so that the gain was liable to capital gains tax. Giving effect to that order, the Assessing Officer by order dated 15 September 2003 treated Rs 6,80,40,649 as capital gains; that was upheld by the CIT(A) and by the Tribunal on 24 September 2010, which was not challenged further. On cross appeals a Division Bench of the Gujarat High Court in Tax Appeal Nos. 6 and 14 of 2004 dismissed the Revenue's appeal, holding that no capital gains arose because there was no cost of acquisition and that clause (iiia) of s.17(2) was not clarificatory and could not be read retrospectively. The Revenue appealed to the Supreme Court, contending that the amount was a perquisite under s.17(2)(iii) or alternatively fell under s.28(iv), relying on Sumit Bhattacharya v. ACIT 2008 112 ITD 1 (Mum) (SB). The matter was decided on 2018-04-24 by the Supreme Court (R.K. Agrawal J and Abhay Manohar Sapre J (judgment by R.K. Agrawal J)). On those facts the Supreme Court held as follows. The appeals were dismissed as devoid of merit, with parties to bear their own costs (para 19). Clause (iiia) of s.17(2), inserted by the Finance Act 1999 with effect from 1 April 2000 and later omitted by the Finance Act 2000, covered the respondent's case but could not apply to a transaction before 1 April 2000 in the absence of an express provision for retrospective effect; the receipt could not instead be brought under s.17(2)(iii), because a receipt must be made taxable before it can be treated as income (para 13), and it could not be brought under s.28(iv), which is confined to benefits arising from business or the exercise of a profession (para 17).
The Court explained the ordinary meaning of perquisite and capital gains and identified the question as the taxability of the redemption amount (para 9). It reproduced clause (iiia) as inserted by the Finance Act 1999, with its proviso making the value of specified securities taxable in the previous year in which the option is exercised, and its Explanation defining cost, specified securities, sweat equity shares and value as the difference between fair market value and cost (para 12). It held that the amendment was the first time the legislature specified what constitutes specified securities and what cost means, that the respondent's case fell within the clause, and that a transaction prior to 1 April 2000 cannot be covered by it absent an express retrospective provision; courts cannot construe the law so as to bring within the charge a person otherwise not liable (para 13). It applied CIT v. Infosys Technologies Ltd. 2008 297 ITR 167 (SC), quoting the passage that unless a benefit is made taxable it cannot be regarded as income and that in the absence of a legislative mandate a potential benefit could not be considered income chargeable under 'salaries' (para 14). It set out and approved the High Court's reasoning that, following CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294, the charging section and the computation provision form an integrated code, that the mechanism explaining cost was introduced only with effect from 1 April 2000, that there was nothing in the Memorandum to the Finance Act 1999 making it retrospective, and that clause (iiia) is not clarificatory (para 15). It held CBDT Circular No. 710 dated 24 July 1995, which deals with shares issued to employees below market price, inapplicable to stock appreciation rights, adding that a circular cannot be used to introduce a new tax provision otherwise absent from the statute (para 16). Finally it held that taxing provisions must be construed strictly (para 18). In the words reproduced by the source cited on this page: "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." The decision followed or applied CIT v. Infosys Technologies Ltd., 2008 297 ITR 167 (SC) — followed; CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) — applied through the High Court's reasoning; Sumit Bhattacharya v. ACIT, 2008 112 ITD 1 (Mum) (SB) — relied on by the Revenue, not accepted.
It was decided by the Supreme Court on 2018-04-24 and is reported as Civil Appeal No. 4380 of 2018 (arising out of SLP (C) No. 24888 of 2015) with Civil Appeal No. 4381 of 2018 (arising out of SLP (C) No. 25001 of 2015) (SC); reportable. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 17(2), section 17(2)(iii), section 17(2)(iiia), section 28(iv), section 45, section 143(3), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeals were dismissed as devoid of merit, with parties to bear their own costs (para 19). Clause (iiia) of s.17(2), inserted by the Finance Act 1999 with effect from 1 April 2000 and later omitted by the Finance Act 2000, covered the respondent's case but could not apply to a transaction before 1 April 2000 in the absence of an express provision for retrospective effect; the receipt could not instead be brought under s.17(2)(iii), because a receipt must be made taxable before it can be treated as income (para 13), and it could not be brought under s.28(iv), which is confined to benefits arising from business or the exercise of a profession (para 17). It arises in Salary & Perquisites, Capital Gains and How Tax Law Is Read matters, on section 17(2), section 17(2)(iii), section 17(2)(iiia), section 28(iv), section 45, section 143(3) of the Income Tax Act 1961, and was decided by R.K. Agrawal J and Abhay Manohar Sapre J (judgment by R.K. Agrawal J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Where the Revenue falls back on s.17(2)(iii) or on s.28(iv) because the specific clause does not fit, cite paragraphs 13 and 17 — a receipt must be made taxable before it is income, and s.28(iv) is confined to business or professional benefits. Where an amendment supplies a valuation mechanism that did not exist before, argue integrated-code and non-retrospectivity on the reasoning quoted at para 15 from the High Court, which follows CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294. Do not rely on CBDT Circular No. 710 dated 24 July 1995 to create a charge; the Court held that a circular cannot introduce a new tax provision that the statute does not contain, and that the circular in any event addressed shares issued below market price and not stock appreciation rights. For current-year share-award work, identify the date of exercise and the fair market value on that date, and check the employer's s.192 withholding on the perquisite; where the employer is an eligible start-up referred to in s.80-IAC there is a separate deferred withholding regime under s.192(1C) which must be verified against a departmental source before it is relied on.
Superseded by amendment. The interpretive propositions — that a benefit is taxable only if the legislature has made it so, that a charging provision and its computation machinery are an integrated code, and that s.28(iv) is confined to business or professional benefits — remain good law and are Supreme Court holdings. The outcome, however, states the position only for years before 1 April 2000. Clause (iiia) of s.17(2) was omitted by the Finance Act 2000, and the Finance (No. 2) Act 2009 substituted sub-clauses (vi), (vii) and (viii) in s.17(2) with effect from 1 April 2010, sub-clause (vi) charging the value of any specified security or sweat equity share allotted or transferred by the employer, valued at fair market value on the date the option is exercised less the amount paid by or recovered from the assessee. For assessment year 2010-11 onwards this judgment is not authority for non-taxability. The 2009 substitution has been dated from the amendment footnotes on the archived departmental page for s.17 (Year stamp 2009) and no later-treatment search was run on the judgment itself. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Date conflict inside the judgment: para 2 says the impugned judgment of the Gujarat High Court in Tax Appeal Nos. 6 and 14 of 2004 is dated 23.12.2014, while para 3(h) says the Division Bench decided 'vide judgment and order dated 23.12.2004'. The appeal numbers being of 2004, 23.12.2014 is the more likely date but the entry does not resolve it. Para 11 reads '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', which on the rest of the record must be missing a negative, since the whole case proceeded on there being no cost of acquisition. The clause (iiia) text reproduced at para 12 contains the printing 'sweet equity shares'. The judgment has 19 numbered paragraphs. The statement in this entry about the current s.17(2)(vi) charge on exercise is legislative history taken from the amendment footnotes and the substituted text printed on the departmental page at https://incometaxindia.gov.in/w/section-17, which carries the Year stamp 2009 and is an ARCHIVED page: it is used here only to date the Finance (No. 2) Act 2009 substitution and its 1-4-2010 commencement, not to state the current statutory text, which was not verified against a live departmental source. The s.192(1C) deferral for eligible start-ups was read only from indiankanoon's copy of section 73 of the Finance Act 2020 at https://indiankanoon.org/doc/9017941/ and has NOT been checked against a gazette or departmental source; that is why the entry flags it for verification rather than stating its machinery. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were dismissed as devoid of merit, with parties to bear their own costs (para 19). Clause (iiia) of s.17(2), inserted by the Finance Act 1999 with effect from 1 April 2000 and later omitted by the Finance Act 2000, covered the respondent's case but could not apply to a transaction before 1 April 2000 in the absence of an express provision for retrospective effect; the receipt could not instead be brought under s.17(2)(iii), because a receipt must be made taxable before it can be treated as income (para 13), and it could not be brought under s.28(iv), which is confined to benefits arising from business or the exercise of a profession (para 17).
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