ITAT Bangalore Remands ESOP Share Cost Issue for Verification of Foreign Tax and TRC

Background of the Dispute

The matter in Biplab Adhya Vs ITO (ITAT Bangalore) arose from a final assessment order dated 28.07.2022 passed under section 143(3) read with section 144C(13) of the Income Tax Act 1961 for Assessment Year 2019-20.

The assessee, an individual who was employed with M/s. Wipro Limited during the relevant period, filed his return of income for AY 2019-20 in the status of non-resident on 22.07.2019. The return disclosed:

  • Salary income: Rs.5,803
  • Income from house property: Rs.3,77,352
  • Loss under the head capital gains: Rs.85,70,552
  • Income from other sources: Rs.91,262
  • Total income: Rs.3,16,670

The case was picked up for scrutiny, and a notice under section 143(2) was issued on 31.03.2021.

The only substantive controversy before the Tribunal related to the quantum of cost of acquisition of certain shares sold by the assessee, which had originally been allotted under an Employee Stock Option Plan (ESOP). The Assessing Officer (AO) confined the cost of acquisition to Rs.72,27,660, while the assessee claimed a much higher cost of Rs.2,13,73,563 / Rs.2,13,73,864 (minor rounding variations appeared in the record).

The dispute directly concerned the interpretation and application of section 49(2AA) read with section 17(2)(vi) in the context of ESOP shares and the impact of perquisite taxation both in India and overseas (USA).

Facts Relating to ESOP Allotment and Sale of Shares

ESOP Allotment and Exercise

During his employment with Wipro, the assessee was granted ESOPs, pursuant to which 73,235 shares of Wipro Limited were ultimately allotted. The stock options were exercised in Financial Year 2017-18.

For AY 2019-20, the assessee reported that 73,200 out of 73,235 shares were sold. In support of this, he furnished:

  • Allotment letter-cum-certificates for perquisite value issued by Wipro Limited, and
  • Contract notes evidencing the sale of shares.

The allotment letters specifically indicated:

  1. The market price of Wipro shares on the date of exercise of stock options.
  2. The exercise price payable by the assessee.
  3. The difference between market price and exercise price, computed as perquisite value.
  4. A further reduction in perquisite value attributable to services rendered by the assessee outside India (onsite services).

The net perquisite value after such exclusion was treated as taxable salary in accordance with section 17(2)(vi).

As per the ESOP allocation summary, the aggregate taxable perquisite value in respect of 73,235 shares worked out to Rs.72,27,660.

Assessee’s Stand on Capital Gains Computation

For the purposes of computing capital gains on sale of the ESOP shares, the assessee’s position was that, in line with section 49(2AA), the fair market value (FMV) on the date of exercise (as used for perquisite taxation under section 17(2)(vi)) should be regarded as the cost of acquisition.

Accordingly, the assessee adopted the FMV mentioned in the allotment certificate as the cost of acquisition. On this basis, he computed total cost of acquisition of the shares at Rs.2,13,73,564 (with minor spelling/rounding differences elsewhere such as Rs.2,13,73,563 and Rs.2,13,73,864).

The assessee explained that:

  • Part of the perquisite value was offered to tax in India for AY 2018-19.
  • The balance was offered to tax in the USA, where the assessee was also taxable during the relevant period.

As per the details placed on record:

  • Amount taxed in India: Rs.72,27,669 (AY 2018-19); and
  • Amount taxed in USA: Rs.1,41,45,894;

Resulting in an aggregate perquisite value of Rs.2,13,73,563 forming the basis of the claimed cost of acquisition under section 49(2AA).

Draft Assessment: AO Restricts Cost of Acquisition

AO’s Scrutiny and Show Cause

In the course of assessment, the AO issued a show cause notice dated 24.09.2021, observing that the assessee had claimed short-term capital loss of Rs.22,71,772 on sale of shares. The AO called for:

  • Complete details of shares sold,
  • Evidence supporting the cost of acquisition, and
  • Demat account details.

The assessee submitted the required information, reiterating that the shares were allotted under ESOPs, exercised in FY 2017-18, and that the cost was computed as per section 49(2AA) with reference to FMV on the exercise date.

Findings in the Draft Assessment Order

In the draft order under section 143(3) read with section 144C dated 30.09.2021, the AO: