Pre-2000 Stock Appreciation Rights Redemption Not Taxable as Perquisite: Bombay High Court

Background and Context

The Bombay High Court in Sumit Bhattacharya Vs ACIT examined whether the amount received on redemption of stock appreciation rights (SARs) by an employee, for a period prior to 01.04.2000, could be brought to tax as a perquisite under the head “income from salaries”. The Court ultimately aligned its view with the later judgment of the Supreme Court in Additional Commissioner of Income Tax Vs. Bharat V. Patel, deciding the issue in favour of the assessee.

The controversy centres around:

  • The correct head of income under which SARs redemption should be taxed, if at all
  • The effect and timing of insertion of clause (iiia) in Section 17(2) by the Finance Act, 1999 with effect from 01.04.2000
  • Whether such provision could be applied to transactions that occurred in earlier years
  • The implications of employer–employee relationship for characterisation of the receipt

Facts of the Case

Return and Reassessment

  1. For Assessment Year (AY) 1998-99, the assessee, an individual having income from salary and from profession, filed a return declaring total income of Rs. 26,76,900.00.
  2. The Assessing Officer reopened the assessment on the ground that certain income had escaped assessment.
  3. The trigger for reopening was the information that the assessee, an employee of M/s. Procter & Gamble (India) Ltd, had received stock appreciation rights (SARs) as part of his employment package and had redeemed those rights during the previous year relevant to AY 1998-99.

SARs Redemption

  • The assessee, by virtue of his employment with M/s. Procter & Gamble (India) Ltd, was granted SARs.
  • During the financial year 1997-98, those SARs were redeemed.
  • On redemption, the assessee received Rs. 4,79,13,852.00.
  • The Assessing Officer treated this entire amount as income chargeable under the head “salaries”, considering it as a perquisite arising from employment.

Stand of the Assessee

In response to reassessment proceedings, the assessee argued that:

  • The amount received on redemption of SARs represented capital gains, arising from a capital asset;
  • The receipt could not be categorised as a perquisite within the meaning of Section 17 for the relevant assessment year;
  • Consequently, the amount was not taxable as salary income.

Orders of Lower Authorities

  1. Assessment Order

    • By order dated 20.03.2002 under Section 143(3) read with Section 147 of the Income Tax Act 1961, the Assessing Officer rejected the assessee’s claim.
    • The amount of Rs. 4,79,13,852.00 was added to the total income as salary income, being treated as a perquisite under the head “income from salaries”.

  2. First Appellate Authority

    • The assessee preferred an appeal before the Commissioner of Income Tax (Appeals)-XVII, Mumbai.
    • By appellate order dated 25.11.2002, the CIT(A) confirmed the Assessing Officer’s view that the SARs redemption constituted part of salary, and dismissed the appeal.

  3. Appeal Before the Tribunal and Reference to Special Bench

    • The assessee further appealed to the Income Tax Appellate Tribunal, Mumbai.
    • Due to conflicting decisions of different Benches of the Tribunal on similar issues — including Bharat V. Patel Vs. Additional Commissioner of Income Tax (Ahmedabad Bench) and Infosys Technologies Ltd Vs. DCIT (Bangalore Bench) — the matter was referred to a Special Bench.
    • The precise question referred was whether the amount of `Rs.