1. Assessee is a company having its registered office at Bangalore. It filed its annual TDS returns for the assessment year 1997-98. This return came to be scrutinized. It was found that TDS was not deducted in respect of shares issued to the assessees employees. A show cause notice dated 8.6.1999 was issued proposing to treat the assessee as a defaulter for failing to deduct tax at source Under Section 201(1) of the Act. The assessee objected to this notice by furnishing its reply in terms of a letter dated 2.8.1999 and 28.9.1999. The assessing officer passed an order on 7.10.1999. Aggrieved by the said order, an appeal was filed before the Commissioner of appeals. He also rejected the appeal filed by the assessee. A second appeal was filed and the Tribunal has allowed the appeal filed by the assessee. Revenue is therefore before us. The following two questions of law are framed:
1. Whether the Tribunal was correct in holding that the assessee company was not liable to deduct TDS Under Section 192 of the Act over the issue of its shares under stock option plan to its employees at a concession rate as it cannot be treated as a perquisite(salary) and therefore the assesses cannot be treated as a defaulter Under Section 201(1) of the Act and consequentially no interest Under Section 201(1A) of the Act can be levied.
2. Whether the Tribunal was correct in holding that Section 17(2)(iiia) of the Act was not clarificatory in nature and was not applicable to the current assessment year.
2. The facts, grounds and the questions of law raised in ITA No. 432/2002 and ITA No. 433/2002 are one and the same. Hence, it is unnecessary once for us to again to refer to the facts and the questions of law raised in those two cases.
3. Sri. Seshachala, learned Counsel argues that grant of shares to employees is nothing but perquisite available to an employee in the light of his status as an employee of Infosys. Stock option provides for a benefit in as much as the shares are allotted at a reduced rate to the employees. It is nothing but a concession or benefit granted to an employee and it would certainly amount to a perquisite to an employee. Such perquisites are includable in the salary and the non reduction in as far as the perquisite would attract the proceedings as has been done in the case on hand. He would also refer to us various Clauses to say that the Tribunal is wrong in reversing the orders of the authority.
4. Heard Sri. Sarangan, learned Counsel appearing for the assessee. He would take us to the material on record in the case on hand. Be refers to us the various case laws in support of his submissions. He would refer to us the Intention of the Legislature in the matter of grant of shares to the employees. He refers to us a Trust that has been created by the Infosys Technologies Ltd. The Trust Deed is dated 15.9.1994. Re refers to various Clauses of the Trust to say that the Settlor has chosen to provide an opportunity to the employees to participate in the growth or prosperity of the Settlor through issue of shares or other securities or warrants which would entitle such employees to apply for shares of the company through the Settlor's Employees Stock Offer Plan (ESOP) or through any other means. Be also says that the grant of share is not automatic. It depends upon various terms and conditions in terms of the scheme. He says that in the case on hand, shares were offered to its employees after applying the conditions contained in the details of the Trust Deed. It is the Trust that allots shares and not the Company. He argues that the terms 'income', 'salary' and 'perquisite' in terms of the Income Tax Laws would provide that Section 192 of the Income Tax Act is wholly inapplicable to the facts of the case. He also says that the subsequent insertion of Section 17(2)(c)(iii) would also show that the intention of the Legislature is to exclude these shares for not being a perquisite in terns of the Act. He refers to us Section 17(1) in this regard. He would ultimately argue that the Company on the facts of this case cannot said to be a defaulter for the purpose of TDS in the given circumstances. He says that the assessing officer as well as the Commissioner have committed a serious error. He says that the Commissioner of Income Tax and the assessing officer have committed a legal error in holding that the assessee has admitted violation warranting tax liability. He would refer to various case laws.
5. After hearing, we have seen the material on record. From the material on record it is seen that the assessee has suffered an order at the hands of the Dy. Commissioner of Income Tax (TDS) Under Section 201(1) & 201(1A) of the I.T. Act for the assessment years 1997-98, 1998-99 and 1999-2000. An appeal was filed. Appeal stood dismissed by the Commissioner. Second appeal was allowed by the Tribunal. It is also admitted before us that Infosys Technologies Limited formulated an employee stock plan. A Trust was set up by the assessee. Shares were allotted to the employees on certain conditions. However, the Company has not deducted tax in respect of these shares allotted to its employees. Notice was issued Under Section 192 r/w. 201(1) of the Act and the assessee was treated as a defaulter by the Department and tax is demanded at the hands of the assessee. As mentioned earlier, there were several adverse orders before the assessing officer and the Commissioner but however, it was successful before the Tribunal. In the light of this admitted facts two questions of law are raised before us as referred to above.
6. Regarding Question No. 1:
Question No. 1 deals with Sections 192, 201(1) and 201(1A) of the Act. Section 192 provides for deduction at source. Section 192(1) would provide for deduction by any person responsible for paying any income chargeable under the head 'Salaries' shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the (rates in force) for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year.
Section 201 would provide Consequences of failure to deduct or per-Section 201 would provide Consequences of failure to deduct or pay. If any person (referred to in Section 200) and in the cases referred to in Section 194, the principal officer and the company of which he is the principal officer does not deduct (the whole or any part of the tax) or after deducting fails to pay tax as required by or under this Act, he or it shall, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee in default in respect of the tax. There is no difficulty in understanding the declaration of an asses see to be a defaulter in the event of failure to deduct at source in terms of Chapter 17 of the Income Tax Act. What is argued before us is as to whether the grant of shares in terms of the option would be a salary in terms of the Income Tax Act. Section 17 deals with salary, perquisite and profit in lieu of salary. Section 17(1)(4) provides for inclusion of any fees, commissions, perquisites or profits in lieu of or in addition to any wages or salary. Therefore perquisite is includable in the definition of salary. Perquisite has been defined Under Section 17(2) of the Act.
7. What is contended before us by the revenue is that the grant of shares by way of option would come Under Section 17(2)(iii) of the Act. To consider as to whether the grant would fit into Section 17(2)(3) , one has to notice the various factual aspects of the matter. Prom the material on record, it is seen that the assesses-Company has created a Trust Deed to promote the welfare of itself and its employees by providing assistance to the employees in various forms such as Medical, Education, Housing, Holiday Homes, Recreation facilities, activities related to Sports, Music, Research, Artistic pursuits etc. The Trust Deed also provides for an opportunity to participate in the growth or prosperity of the Settlor through issue of shares or other securities or warrants which would entitle such employees to apply for shares of the company through the Settlor's Employees Stock Offer Plan or through any other means. Stock Offer Plan is also made available to us. For implementation of the Settlor's ESOP and the irrevocable Trust is created. Settlor means Infosys Technologies Ltd., and shall include its successors and assigns.
'Trustees' shall mean the party of the other part and include the Trustees for the time being and from time to time nominated/appointed under these presents and the survivor or survivors of them.
'Employee' shall mean so far as the ESOP is concerned, employee as defined under the said ESOP and so far as other benefits under this Trust are concerned, any employee of the Settlor as may be notified by the Settlor to the Trustees.
8. The company has passed a resolution and constituted a Trust and handed over to the Trustees, a sum of Rs. 10,001/-. ESOP provides for issue of warrants and the warrants are transferable to employee in consideration of the payment to the Trust of a sum of Rs. 1 per warrant or such other form the Trust may decide. It also provides for exercise of warrant exercise period and exercise date. The Trust is to transfer warrants to eligible employees.
Eligibility is seen from the material on record. The selection shall be based upon the performance of the employee as indicated by the annual performance appraisal, minimum period of service, the status of the employee in the company and the present and potential contribution of the employee to the success of the company and other factors deemed relevant by the Advisory Board. It is only such eligible employees entitle for consideration of the grant of shares. It also provides for a Lock-in period in terms of the scheme. Shares allotted on the conversion of the warrants shall not be capable of being transferred/charged/mortgaged/hypothecated/assigned or in any other manner alienated or otherwise disposed off for a period of 5 years from the date of issue of the warrants to the employees.
Clause 8(4) would provide for continuation of employment. It provides for the employees holding the shares shall be entitled to the benefits of the shares, subject to the lock-in,
provided that he continues to be in the employment of the company, during that period. In the event of the employee being dismissed, resigning or leaving the services of the company or in the event of the severance of employment due to non-performance or otherwise, the employee shall automatically lose his interest and right to the shares which are subject to the condition of lock-in. It further says that during the period of lock-in the shares shall be kept in the custody of the Trust. However, he is entitled for all benefits as a share holder. Therefore, from a reading of the Plan and the Deed, what is clear to us is that the assessee allotted shares to the Trust and the Trust in turn allotted the same to employees subject to the eligibility with lock-in period with several conditions.
9. Now, let us see as to whether this facility of allotment would be a perquisite in terms of Section 17(2)(iii) of the Act. According to the department, the said payment would come within Section 17(2)(iii)(c) of the Act. Perquisite is defined under Section 17(2)(iii). It would say that the value of any benefit or amenity granted or provided free of cost or at a concessional rate in some cases. It is no doubt true that the shares are allotted at a concessional rate to employees but the same is not allotted by the employer. The allotment is done by an independent Trust and it is not an un-conditional concessional grant but a concessional grant with several conditions including eligibility etc., in terms of the definition.
10. Let us see in the light of this definition as to whether the findings of the authorities are acceptable or not in terms of the law governing such allotment. The original authority has noticed the scheme. After noticing the assessing officer would hold that there is a direct employer/employee relationship between Infosys and employees who have received stock option. 2) ESOP shares are taxable even before 1.4.2000. 3) The employees stock option gives rise to income in the hands of the employee on the day of exercise of option by the employee and it is clearly a perquisite as per Section 17(2) of I.T. Act 1961. 4) The value of the perquisite is the difference between the exercise price and the market values of the shares on the date of exercise of option. 5) No private arrangement can come in the way of taxing statute. 6) The Trust is only a conduit. With these findings, he has directed the assessee to pay tax as a defaulter. When this was challenged before the Commissioner of Appeals, he would notice the various facts and thereafter, he would come to a conclusion that the assessing officer is right in passing the impugned order. When the same was challenged, the Tribunal has reversed this finding. At this stage, we should, also notice the law for the purpose of appreciation of the order of the Tribunal.
11. Revenue has placed before us various case laws with regard to principles of interpretation of Statutes.
AIR 1987 SC 1023 is a Judgment of the Apex Court. Apex Court has ruled at para 33 as under:
Interpretation must depend on the text and the context. They are the bases of interpretation. One may well say if the text is the texture, context is what gives the colour. Neither can be ignored. Both are important. That interpretation is best which makes the textual interpretation match the contextual. A Statute is best interpreted when we know why it was enacted. With this knowledge, the statute must be read, first as a whole and then section by section, clause by clause, phase by phrase and word by word. If a statute is looked at, in the context of its enactment, with the glasses of the statute-maker, provided by such context, its scheme, the sections, clauses, phrases and words may take colour and appear different than when the statute is looked at without the glasses provided by the context. With those glasses we must look at the Act as a whole and discover what each section, each clause, each phrase and each word is meant and designed to say as to fit into the scheme of the entire Act. It is by looking at the definition as a whole in the setting of the entire Act and by reference to what preceded the enactment and the reasons for it that the Court construed the expression 'Prize Chit' in Srinivasa and we find no reason to depart from the Court's construction.
12. In AIR 1996 SC 1491 (State (through CBI/New Delhi) v. S.J. Choudhary), the Supreme Court in para 9 noticed Second Edition Statutory interpretation by Francis Bennion. The same has been culled out reading as under:
(2) It is presumed that Parliament intends the Court to apply to an ongoing Act a construction that continuously updates its wording to allow for changes since the Act was initially framed (an updating construction). While it remains law, it is to be treated as always speaking. This means that in its application on any date, the language of the Act, though necessarily embedded in its own time is nevertheless to be construed in accordance with the need to treat it as current law.
13. In : [1997]226ITR625(SC) (Commissioner of Income-Tax v. Podar Cement Pvt. Ltd. and Ors.) , the Apex Court baa noticed the interpretation particularly with reference to taxing statutes. The Supreme Court has ruled as under:
It is presumed that Parliament intends the court to apply to an ongoing Act a construction that continuously updates its wording to allow for changes, since the Act was initially framed (an updating construction). While it remains law, it is to be treated as always speaking. This means that in its application on any date, the language of the Act, though necessarily embedded in its own time, is nevertheless to be construed in accordance with the need to treat it as current law. In construing an ongoing Act, the interpreter is to presume that Parliament intended the Act to be applied at any future time in such a way as to give effect to the true original intention. Accordingly the interpreter is to make allowances for any relevant changes that have occurred, since the Act's passing, in law, social conditions, technology, the meaning of words, and other matters.
Assuming that there are two possible interpretations on Section 22 of the 1961 Act, which is akin to a charging section, it is well settled that the one which is favourable to the assessee has to be preferred.
14. In : 1959CriLJ1231 (Tahsildar Singh v. State of U.P), the Court ruled as under:
The cardinal rule of construction of the provisions of a section with a proviso is to apply the broad general rule of construction, which is that a section or enactment must be construed as a whole, each portion throwing light if need be on the rest.
The true principle undoubtedly is that the sound interpretation and meaning of the statute, on a view of the enacting clause, saving clause, and proviso, taken and construed together, is to prevail.
Unless the words are clear, the Court should not so construe the proviso as to attribute an intention to the legislature to give with one hand and take away with another. To put it in other words, a sincere attempt should be made to reconcile the enacting clause and the proviso and to avoid repugnancy between the two.
(Rule applied in construing)
15. The Supreme Court in : 1978(2)ELT355(SC) (J.K. Steel Ltd., v. Union of India) has ruled in para 37 as under:
From the above decisions, it is clear that several judges in England have referred to the subordinate legislation made under a statute for the purpose of interpreting that statute though for the limited purpose of knowing how the department which was entrusted with the task of implementing that statute, had understood that statute. In the case of fiscal statutes, it may not be inappropriate to take into consideration the exemptions granted in interpreting the nature and the scope of the impost.
16. In the light of these case laws available on record, we have to interpret the provisions of law with reference to the facts available so that the intention of the legislature is acted upon while interpreting the Statute to the given facts. The law of interpretation is also well settled that it is for the legislature to decide the quantum of tax and not for the Courts to decide the quantum. No words can be read into the Statute and no words can be omitted by the Courts while interpreting Statute for the purpose of taxation. Ho part of a statute and no word of a statute can be construed in isolation. Statutes have to be construed so that every word has a place and everything is in its place. At the same tine, the Courts also have to take into considerations particularly taxing Statute a construction beneficial to assessee in case of ambiguity. In the light of the principals in terns of the Apex Court Judgments, let us see as to whether the Tribunal has committed any error in interpreting the provision of law in the case on hand. To decide the questions that is debated before us we have to notice the history of introduction of the scheme by the Company. The State Government has itself introduced an option scheme and provided guidelines. It is thereafter, the Company thought it fit to introduce a scheme for the benefits of their employees. The Stock option is also provided definitely at a concessional rate but the same is done not by the Company but by the Trust in terms of the material available on record. Stock option also is not unconditional, it is conditional. It is also not tradable in the light of the look-in period.
17. At this stage, we must also notice how the Courts have considered perquisites in term of the case laws. A Division Bench of this Court in : [1997]224ITR186(KAR) (CIT v. Valdya) considered perqulaites and also noticed Interpretation of taxing Statutes. In that case, a reference was made in respect of assessment year 1978-79 and a question of law Under Section 256(2) was referred to this Court. The said question reads as under:
Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in rejecting the Revenue's ground that the difference in interest rate between Government loans and that on the loan obtained by the assessee should be treated as perquisite?
The facts in that case as referred to would show that the assessee was an employee of the Company called MICO. The Company advanced him certain amounts as loan free interest for the purpose of house building. That this was the policy adopted by the company and several employees had obtained such loans is not a matter in dispute. The assessing authority has held that the interest-free loan was a benefit which should be valued as a perquisite. The revenue contended that interest free loan is a benefit which should be treated as a perquisite Under Section 17(2)(iii) in the said Judgment. The Division Bench after referring to the provisions and after noticing the Statutory interpretation has ruled at page 195 reading as under:
Section 17(2) purports to include certain benefits and amenities in the term 'perquisite'. There is no exhaustive definition of the term 'perquisite' for the purposes of Section 17. Therefore, unless the provision refers to a particular subject clearly to be included in the meaning of the word 'perquisite', courts would hesitate to attribute a wider moaning to the said word. Even though here is no equity in taxation and equitable considerations are outside fiscal legislations, still, if reasonably two meanings are attributable to a word used in the fiscal law, the meaning which is more beneficial to the taxpayers will be applied, specially it is so, when the State itself at one point of time clearly acted as if the wider meaning was not attributable without adding further words.
The valuation of the perquisite is to be as per the rules. There is a specific rule covering the valuation of the alleged benefit resulting from the interest-free loans or from the loans bearing a low rate of interest. In such a situation, if it is a perquisite, it has to be valued under Rule 3(g), whereunder the Income-tax Officer shall determine its value on such basis and in such amount as he considers 'fair and reasonable'. In the case of loans, it is not possible to clearly identify the normal rate of interest and the exercise of the power to determine the value which the authority considers fair and reasonable, itself is likely to lead to different and divergent results. The rats of interest varies from subject to subject. The banks are required to charge a low rate of interest on agricultural loans; even as between
Industries and traders, distinctions are made in this regard. There is no uniform rate of interest charged on house building loans, advanced to employees by public sector undertakings. Though a loan without interest is rare and a facility to obtain a loan without paying any interest could be considered as a beneficial facility in its larger sense, having regard to the inherent difficulty involved in working out the value of the benefit, Parliament must have thought it unwise to rope in he subject of house building loans to the employees, while taxing perquisites. It is also likely that the need to encourage house building activities, in this country, where there is acute shortage of houses, would have influenced the law-making authorities in this regard. It is difficult to assume that the normal rate of interest chargeable on a house building loan is the rate of interest charged by the Central Government, to its employees; the only source of authority for such an assumption is Clause (vi) enacted in the year, 1984.
The Court ultimately ruled reading as under:
We are of the view that it was never intended to treat the interest-free loan advanced for house building purposes to the employees as a 'perquisite' Under Section 17(2)(iii). Consequently, we answer the question referred, in the affirmative and against the revenue.
18. The Supreme Court has noticed this Judgment in V.M. Salgaocar & Bros.(P) Ltd., v. Commissioner of Income Tax in : [2000]243ITR383(SC) . The Supreme Court in the said Judgment considered the following two questions:
1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in deleting addition of Rs. 5,21,241/- made by the Income-tax Officer Under Section 40A(5) and sustained by the Commissioner of Income-tax (Appeals) ?
2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that non-charging of interest on the debit balance in the running account of the directors would not constitute a perquisite?
19. After noticing various case laws including the Judgment of this Court in CIT v. M.K. Vaidya, the Supreme Court answered the question in favour of the assessee. The Supreme Court in the said Judgment noticed the Judgment of CIT v. M.K. Vaidya : [1997]224ITR186(KAR) in para 21 of the said Judgment. Thereafter, the Court noticed the definition of perquisite in the said Judgment. The Supreme Court also noticed the amendment in the said Judgment. This is what the Supreme Court has ruled:
'If the loan granted to an employee without charging any interest or by charging interest at a concessional rate amounts to a benefit for the purposes of Section 17(2)(iii) of the Act, there was no need for Parliament to introduce, by the Taxation Laws (Amendment) Act, 1984, the new Sub-clause (vi) in Section 17(2) of the Act. The subsequent omission of the said sub-clause by the Finance Act of 1985 with effect from the date of its proposed insertion was also, made with a view to give relief to salaried tax-payers. It is to be noticed that Explanation 2(b) to Section 40A(5) of the Act defines a perquisite to mean, inter alia, any benefit or amenity granted or provided free of cost or at a concessional rate to the employee by the assessed. If the loan granted to an employee being a director or a person who has a substantial interest in the company or a relative of a director without charging of interest or at a concessional rate of interest constituted any benefit or amenity within the meaning of Section 40A(5), Explanation 2 (b) there was no need for Parliament to introduce the amendment in Explanation 2(b) of Section 40A(5) of the Act by introducing Sub-clause (vi). Sub-clause (vi) which was introduced in Explanation 2 (b) of Section 40A(5) of the Act included within the meaning of the expression 'perquisite' the amount treated as perquisite under Section 17(2)(vi) which also was introduced by the same Taxation Laws (Amendment) Act, 1984. In other words, a loan granted to an employee who is a director or who has a substantial interest in the company without charging any interest or at a concessional rate of interest did not amount to a benefit or amenity falling within Clause (b)(iii) of Explanation 2 to Section 40A(5) of the Act. The amendment and the immediate deletion thereof manifest clearly the intention of Parliament.
It is, therefore, evident that, without a specific provision which was sought to be introduced by Sub-clause (vi) in Section 17(2) of the Act and also the Sub-clause (vi) of Explanation 2(b) to Section 40A(5) of the Act, the grant of loan to the employee without charging any interest does not amount to any benefit for the purposes of Section 17(2) of the Act. The omission of Sub-clause (vi) in Section 17(2) and also Sub-clause (vi) of Explanation 2(b) to Section 40A(5) of the Act from the date of its proposed insertion also was to give relief to salaried taxpayers so that granting of loan to an employee without charging any interest would not be treated as benefit for the purposes of Section 17(2) of the Act.
Section 17(2) of the Act, by an inclusive definition, sought to include loans given by an employer to its employee for purchase of a building or a site or a site with building or for purchase of a motor car without charging any interest or at a concessional rate, as perquisite. The word 'includes' is often used in interpretation clauses in order to enlarge the meaning of the words or phrases occurring in the body of the statute. It in a cardinal rule of interpretation that if, by an inclusive definition, the meaning of the word is to be enlarged, it would receive a strict interpretation. It is also a cardinal rule of construction of a fiscal statute that, even if two views are possible, . the view which is favourable to the assessee must be accepted while construing the provisions of a taxing statute. For the reasons aforesaid, the non-charging of interest on the amount overdrawn in the relevant year cannot be treated as a benefit for he purposes of Section 17(2)(iii) of the Act.
20. The Tribunal notices all these aspects of the matter and thereafter holds that even Section 17(2)(iii) says that it shall be the value of the benefit that shall be taxable as a perquisite. Such value has to be arrived at a manner defined by a Statute. Unless, otherwise the value is ascertainable by a mechanism laid down in the statute, the same cannot be brought to tax. We are in agreement with this finding of the Tribunal. Assuming that the same value can be attached to the benefit that value is not ascertainable in terms of the scheme and in terms of the allotment. In fact, the Tribunal also has noticed that the benefit for being taxed has to be valued. What is allotted is not transferable till a defined period being 5 years from the date of grant of warrants. Transfer of these shares within the defined period would not be good delivery at all. The certificate of shares, has been enfaced with a stamp regarding the non-transferable period. The Tribunal has also noticed the Wealth Tax Act in the matter of valuation. After noticing all these aspects of the matter, the Tribunal, in our view has come to a right conclusion that there is no ascertainable value attached to this share option and in that view of the matter, the initiation is not possible. Me are in agreement with the findings of the Tribunal.
21. We must also notice the application in terns of Section 192 of the I.T. Act. Section 192 would provide an application or a responsibility with regard to deduction of tax at source. As mentioned earlier, it refers to salary and salary is defined Under Section 17. Salary would include perquisite. Perquisite would provide for a benefit granted by an employer. In terms of the Trust Deed, the shares are allotted to the Trust and not to the employees. We are unable to appreciate the findings of the Commissioner that the Trust is only a conduit. There exists a Trust Deed and there exists a scheme framed by the Government. In the light of the scheme of the Government and in the light of the existence of a Trust and in the light of no malafide intention available on record, we are not inclined to accept the findings of the Commissioner now set aside by the Tribunal that the Trust is only a conduit. On the other hand, the material on record would reveal that the shares have been allotted to a Trust and the Trust after noticing the eligibility etc., has chosen to provide a stock option to its employees. Therefore, from the point of grant by the Trust, it cannot be treated as a benefit at the hands of the employer. The Tribunal has considered the material in a detailed manner and to our mind that finding is reasonable and the same finding has to be accepted in the given circumstances. Therefore, we are clear in our mind that the stock option made by Infosys cannot be treated as a perquisite as held by the Tribunal which is accepted by us in this order. Assuming that it is a benefit, even then, the authorities have to show that a liability is caused on the employer in terms of Section 192 for the purpose of proceedings Under Section 201 of the Act. The authorities cannot forget that the tax is calculated at the hands of the employer on the ground of default. Department must be careful in branding an assessee as a defaulter unless the department is able to satisfy the default condition in terms of the taxing statute with material facts.
22. However, the Revenue would place before us the Advance Rulings issued by Suhas C. Sen J. and Dr. Subhash C. Jain for the purpose of acceptance of the plea of the revenue. It is no doubt true that the authority in the said case has ruled that the amount gained by exercise of the option would be taxable under the head 'salary' . We have seen the fact* in the said Advance Ruling case. It is seen from the ruling that the applicant-company was incorporated in USA. It set up another Company in India, which was a fully owned subsidiary of the American company. The American Company made a proposal to enter into a stock option agreement with the employees of the Indian subsidiary. Under this agreement, the employees of the Indian company would have the option to subscribe to the shares of the US company at a pre-determined price called the option price which would be lower than the ruling market price of the shares. The employees would have the option to subscribe and become owners of the shares on any date of their choice. As and when such option was exercised, the employee would have to sell the shares in the open market in the USA at the ruling stock market price. The net gain in to be repatriated to India through the banking channels. The purpose of this stock option plan is stated to be to attract and retain the beat available personnel for positions of substantial responsibility, to provide additional incentive to such individuals, and to promote the success of the company's business by aligning employees with financial interests. It is in the light of those given facts, it ruled that it is a 'salary' in the said Judgment. In fact, the Advance Ruling would say in the last paragraph that the American Company has taken upon itself the responsibility for paying what must be regarded as 'salary' to the employees of the Indian Company. They are under obligation Under Section 192 to deduct income-tax at source on the amount payable to the employees. The facts in the said case would stand on a different footing. The Company strictly had provided shares for the purpose of attraction and the company has undertaken the responsibility. The said Advance Ruling does not in any way support the revenue.
23. CBDT Circular dated 9.8.2000 was also placed before us. In the said case, the CBDT Circular considered the Finance Act of 1999 and the subsequent amendment. The subsequent amendment would show that under the amended provision such shares will only be subjected to capital gains tax at the time of sale by the employee. The difference between the consideration and the coat of acquisition will be regarded as the amount of capital gains under normal provisions of law. However, the new provisions shall be applicable only in respect of options exercised or allotments made after 31st March 2000. The said Circular may not in any way help the assessee since the allotment here is prior to the relevant date in terms of the Circular.
24. At this stage, we must also notice the application of Section 192 of the I.T. Act. Section 192 would provide a responsibility with regard to deduction of tax at source. It refers to salary. Salary is defined under the Act. Salary would include perquisite. Perquisite would provide for a benefit granted by an employer. In the case on hand in terms of the Trust Deed, shares are allotted to the Trust and not to the employees by the Company. There exists a Trust Deed and there exists a scheme framed by the Government. In the light of the scheme of the Government and in the light of the existence of a Trust, it is not possible to accept the findings of the Commissioner that Trust is only a conduit as held by the Tribunal. Tribunal rightly has chosen to reject the findings of the Commissioner. Material on record would reveal that the shares were allotted to the Trust and the Trust after noticing the eligibility and entitlement has chosen to provide a stock option to the employees. In the light of this, as rightly ruled by the Tribunal that the benefit is not confirmed by the employer and by the Trust. That is not doubted by the Department. The Tribunal, after noticing these materials on record, has to our mind, given acceptable and reasonable finding that the grant has been done by the Trust and that too with conditions. The Tribunal finding on this aspect of the matter requires confirmation by us. Assuming that the grant is benefit, even then, the authorities have to show to the satisfaction of the Court that a liability in such benefit cases is caused to the employees strictly in terms of Section 192 for the purpose of proceedings Under Section 201 of the Act. The Tribunal has noticed that the department has not disputed that Infosys has discharged its duty in a fair and bonafide manner. In fact, the material on record would reveal that the company was consistently approaching the department seeking clarification about the taxability of ESOP. Correspondence is not wanting in this regard. In fact, the matter was referred to Central Board of Direct Taxes by the Income Tax Department, Karnataka and Goa Circulars seeking clarification of its taxability. Clarification issue was pending. It is at this stage, proceedings were initiated against the company. When the department itself is not sure about its stand, the department cannot in a hurry lable the assessee as a defaulter and proceed to Initiate proceedings against the assessee. Authorities cannot forget that the tax is calculated at the hands of the employer in terms of the provisions of law on the ground of default. Default is serious in character. Default sometimes would tell upon the conduct and respect of a person or a firm. Unless the department is sure on facts then only the department has to act otherwise it has to be slow in labeling the person as a defaulter in the matter. In the case on hand, the Tribunal rightly in our view has chosen to take a right decision In its order. We have no hesitation in accepting the findings of the Tribunal. In these circumstances, the first question is answered in favour of the assessee.
25. Regarding question No. 2:
In the light of our answer that the stock option in the given circumstances does not amount to perquisite and that it does not come under 'salary' , we are not inclined to answer the second question in the case on band.
26. Concluding remarks:
India is a growing country. The technological development of this country has resulted in economical prosperity of this country. Several giant undertakings have shown interest in his great country after taking note of the manpower and the intelligence available in this country. Stock option is nothing new and it is being continued in the larger interest of industrial harmony industrial relations, better growth, bettor understanding with employees etc. It is a laudable scheme evolved and accepted by the Government. Good old days of only master and only servant is no longer the mantra of todays economy. Today sharing of wealth of an employer with him employees by way of stock option is recognised, respected and acted upon. Such stock option is way of participation and it has to be encouraged. It is for this reason, that subsequently the same is not taxed by the Government. The department, in our view, must approve such welfare participatory pro-labour activities of an employer. Of course, we do not mean that if law provides for taxation, no concession is to be shown. But wherever there are gray areas, it is preferable for the department to wait and not hurridly proceed and arrest the wall intended scheme of the welfare of the employer. He would be failing in our duty if we do not note the directive principles of the Constitution in the matter of labour participation. Article 43A provides that the State shall take steps by suitable legislation or by any other way to secure participation of workers in the management of undertakings, establishment or other organisation engaged in other industries. The Apex Court has considered this aspect in 1980 SC 1896. The laudable object of Article 43A is to a certain extent achieved by this company. That laudable object is sought to be either diluted or destroyed by taking an unsustainable plea by the Department. We would ultimately conclude by saying that any welfare measure has to be encouraged but of course within the four corners of law. We do hope that other employers would follow this so that the economic and social justice is made available to a weaker section of the society also. With these concluding remarks, we hereby answer the first question against the revenue and in favour of the assessee and do not answer question No. 2. The findings of the Tribunal is confirmed. We further dawn it proper to may that UP refund applications are pending, then the department has to settle the claim as early as, possible. No coats.