Redemption of stock appreciation rights Amount is income: Special Bench

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Redemption of stock appreciation rights Amount is income: Special Bench

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MUMBAI. Special Bench of ITAT vide a recent ruling AIT-2008-24-ITAT has decided the following significant issue:

“Whether or not the amount received by the assessee employee on redemption of stock appreciation rights constitutes income liable to tax in his hands, irrespective of the fact that no shares or stock are actually allowed to him and that the assessee does not have any rights to receive such shares and stock?”

Special Bench has ruled as under:

The amount received by the assessee on redemption of share appreciation rights, as we have noted earlier in this order, is nothing but a deferred wage contingent upon performance of the company’s shares in the market. The very preamble of the scheme, under which share redemption rights have been given to the assessee, also states that it is in the nature of deferred awards related to the increase in the price of the Common Stock of the Company. It is thus that the amount received on redemption of stock appreciation rights is in the nature of consideration for services rendered by the assessee. This amount is in the revenue nature because the consideration for the amount so received is the services rendered by the assessee. In our considered view, therefore, the amount received by the assessee on redemption of stock appreciation rights is in the nature of income.(Para 34)
As there is no dispute about the fact the assessee employer had a duty to deduct tax at source in respect of the entire amount taxable under the head ‘income from salaries’ and all the relevant facts were in the notice of the employer, the assessee is entitled to take into account the amount of tax deductible, though not actually deducted. (Para 58)
As regards assessee’s plea that the amount in question can only be taxed under the head ‘capital gains’ as the receipt is on account of transfer of a capital asset consisting of right to receive stock appreciation rights, we see no substance in the same for the simple reason that, as we have held earlier in this order and as the very preamble of Procter & Gamble (1983) Stock Plan itself states, the amount in question is in the nature of a fruit of employment related activity which is revenue receipt in nature, and it is only the quantification of this amount which is linked to a capital asset that is value of shares. The taxability is not respect of the stock appreciation right per se but the amount received as a fruit of employment which is mentioned by way of formula envisaged in the stock appreciation rights scheme.(Para 54)
The assessee was indeed liable to tax in respect of the amount of Rs. 4,79,13,851 received on redemption of stock appreciation rights. The taxability of this amount is under the head ‘income from salaries’ but the assessee’s plea that the amount in question is received from a person other than the de jure employer, even if it was to be accepted, would not have any material difference to the taxability per se, because, in such an event and following Hon’ble Supreme Court’s judgment in the case Emil Webber’s case, this amount would have been taxed under the head ‘income from other sources’. (Para 55)

(Click here for full text of Ruling AIT-2008-24-ITAT)

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