Judgment:
1. These appeals by the assessee are arising out of the common order of the CIT(A)-IV, Bangalore, dt. 8th Feb., 2001, against orders passed under Sections 201(1) and 201(1A) for the asst. yrs. 1997-98, 1998-99 and 1999-2000. Since common issues are involved therein, all these three appeals are disposed by a consolidated order.
2. Though there are as many as 30 grounds of appeal, the only issue to be decided is whether assessee can be treated as assessee in default under Section 201 for not deducting tax under Section 192 on the so-called perquisite arising to employees by way of allotment of shares under its employees stock option plan, Consequently, whether it is liable for payment of interest under Section 201(1A) of the IT Act, 1961 (hereinafter referred to as Act).
3.1 The appellant Wipro Ltd. (WL) is a company having its registered office at Bangalore and carrying on business in the field of information technology and other areas. A perusal of the annual TDS return for the assessment years under appeal, showed that the appellant had not deducted tax on the stocks issued to the employees. The appellant had formulated a scheme of employees stock option plan (ESOP) through which the employees of WL are offered the shares of the company. The appellant created a trust called Wipro Equity Reward Trust (WERT) on 9th Nov., 1984, with the primary objective of providing convenient method for conferring benefits on various qualifying employees of Wipro Products Ltd. (since renamed as Wipro Ltd.) and its affiliates by way of receiving shares in WL and its affiliates for providing better motivation to such employees. WERT subscribed to the shares of WL. Subsequently, many bonus shares were given to WERT.3.2 The trust formulated rule for achieving the objective of the trust.
As per the rule, WL or any other person or persons appointed by WL from time to time, notify the names of the beneficiaries who are entitled to receive the shares of WL or its affiliates, The notification contains directions on the number of such shares to be received by such beneficiary (employee) and intervals at which the employee is to receive such shares. Certain directions were prescribed whereby the employees who are notified by WL for allotment of shares are not free to sell the shares within the period specified in the undertaking. The employee has to give a no objection certificate for keeping the shares in the physical custody of the trust (WERT) upto the specified period in the undertaking. During the specified period the shares are registered in the joint names of the beneficiary and WERT. The undertaking also clearly mentions that unless the employee continues to remain in services of WL or its affiliates till the completion of the period mentioned in the undertaking, the ownership in the shares will be declined by him. This undertaking is binding on the employee, his legal heirs, nominees, executors, etc. and is irrevocable.
3.3. In case the employee resigns from the services of WL or its affiliates within the specified period (lock-in period) the shares will stand forfeited to WERT. The shares will be in the custody of the WERT till the lock-in period is over in the joint names of the employee and the trust. Only after the end of the lock-in period shares are transferred in favour of the employee absolutely.
3.4 Once the employees are allotted the shares in the company, the employee becomes the shareholder and all the benefits accruing to the shareholder like issue of bonus share, rights, distribution of dividends will accrue to the employee-shareholder also. The dividends can be encashed by him.
4.1 The main ground in appeal is that the order of the authorities below is bad in law and is contrary to the facts. It violates the principles of natural justice as the AO served separate show-cause notices on the appellant-company and WERT before issuing the order under Section 201(1) of the IT Act on the appellant-company. The AO erred in treating the appellant-company as an assessee in default under Section 201(1) of the Act for its alleged failure to deduct tax at source under s, 192 of the Act. He should have refrained from passing the order as the shares were received by the beneficiaries from WERT which was not the employer. As no benefit had at any time passed on from the appellant-company to WERT which, in turn, was passed on by WERT to its beneficiaries, the authorities below should not have treated WERT as a conduit.
4.2 The appellant is aggrieved by the order of the AO under Sections 201(1) and 201(1A). The number of shares received by the beneficiaries of the WERT year-wise for various years, the liability for TDS and interest are given hereunder : 5.1 It is argued by the learned authorised representative Mr. Pradeep that the authorities below erred in imposing the liability mentioned above on the assessee even though there is no employer-employee relationship between WERT (transferor) and the beneficiaries (transferees), therefore, there was no perquisite on the award of shares. It is not correct to state that the award of shares to the employees as beneficiaries under WERT results in a perquisite as per Clause (iii) of Section 17(2) of the Act. The AO should have realized that Section 17(2)(iii) covers only situations where the employer grants any benefit or amenity to the employees and it does not cover a situation where a person other than the employer confers the benefit.
5.2 The AO has erred in stating that the appellant-company ought to have deducted tax at source under Section 192 of the Act and it postulates a payment from which tax can be deducted and, therefore, no deduction of tax was necessary at the time WERT received the pro-rated cost from the beneficiaries to whom the shares were awarded.
5.3 The AO having observed that the provisions of Section 194B of the Act are analogous to Section 192 erred in stating that the appellant-company should have deducted tax at source at the time of award of shares, He should have observed that the second proviso under Section 194B specifically deals with the payer's obligation where the lottery or crossword winnings are partly or wholly in kind whereas a similar proviso is not found under Section 192. He should have appreciated that in making the estimate of salary of an employee for the purpose of TDS, the appellant-company acted honestly, reasonably and in a bona fide manner.
5.4 The AO has erred by treating the WERT, an irrevocable employees welfare trust, settled by the appellant-company, as a private arrangement aimed at defeating the tax law and an irrevocable trust conferring benefits on the employees is expressly recognized in the taxation laws. Besides, no benefit was vested on the beneficiaries at the point of award of shares as at that point the shares were given on a condition that the employees remain in continuous employment of the appellant-company failing which the shares will stand forfeited. It was further submitted that the AO erred in placing reliance on the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC). He has alleged that receiving the shares from the WERT and not from the appellant is a device to avoid tax. The trust was legally constituted and has been accepted by the AO assessing the trust for more than a decade. Further, the decision of the Hon'ble Supreme Court in the case of CIT v. Arvind Narottam (1988) 173 ITR 479 (SC), is applicable to the facts of the case. It has been clarified that where the deed of settlement is plain and admits of no ambiguity there is no scope for considerations of tax avoidance. It is stated that the case of McDowell (supra) is not applicable in this case due to the following reasons : (b) WERT is being assessed to tax in its status as an employees welfare trust and has paid tax on the dividend income, capital gains and income from other sources. The appellant has filed intimation under Section 143(1)(a) for two years.
(c) WERT is an employee welfare trust created by WL for the benefit of its employees. Conferring benefits through a trust is recognised by Clause (iv) of the proviso under Section 164(1) of the Act.
(d) WERT originally acquired the shares in WL through subscription at a time when the allotment price and market price was similar. The purchase consideration was duly paid to Wipro Ltd. WERT also received bonus shares from Wipro Ltd. which lead to the swelling of the number of shares. Under the circumstances, when the shares are received by the beneficiaries from WERT pursuant to the trust deed it cannot be construed that Wipro Ltd. is passing on perquisites through WERT to the employees. WERT received no benefit from Wipro Ltd. (e) The appellant invited attention to the Companies Act, 1956, as per which it is mandated that a company cannot buy back its own shares and no new share shall be allotted to any person other than existing shareholders without appropriate resolutions. An employees welfare trust is the only recognized legal form from which the employees received shares. Thus, the entity formed in compliance of law cannot be construed as a device to avoid tax.
(f) When the shares received from WERT are sold by the employees the difference between the sale consideration and the cost of acquisition paid to WERT gets taxed as capital gains in the hands of the employees. Thus, no income escapes the levy of tax.
(g) WERT is also constituted to provide assistance, monetary or otherwise, to the beneficiaries, besides awarding shares.
(h) The restraints on sale for a reasonable specified period of 4 years ensure employees participation in the management of the company. Thus, the benefit to the employees is not the only criteria for which the shares are allotted.
(i) Wipro Ltd. claims no deduction in its assessments for the shares received by the employees from WERT. In any case, in the absence of any payment by WL it cannot be regarded as persons responsible for deduction of TDS.It is vehemently argued that the orders under Section 201(1) do not clarify as to the provisions under which the perquisite is being determined. If the perquisite is determined under Clause (iiia) under Sub-section (2) of Section 17 then it must be appreciated that the said clause was introduced by the Finance Act, 1999, w.e.f. 1st April, 2000.
Thus, the said clause has only prospective effect [Reliance Jute & Industries Ltd. v. CIT (1979) 120 ITR 921 (SC)). There is no reason to arrive at the conclusion that the clause is of clarificatory nature. In such a case, if it was clarificatory or meant to be retrospective in effect then the section would make it abundantly clear. Assuming, that Section 17(2)(iiia) of the IT Act is only clarificatory, the fact that it has been introduced only from 1st April, 2000, amply demonstrates that there was good and sufficient reason for not deducting tax under Section 192 of the IT Act during the years prior to the introduction of the said clause. The law for creating a liability has to be the law at the time of filing of return of income. [CIT v. Hindustan Electro Graphites Ltd. (2000) 243 ITR 48 (SC)).
5.6 If the perquisite was liable to tax then the AO ought to have referred to the CBDT Circular No. 710, dt. 24th July, 1995, which was binding on him. It clarifies that if there is no employer and employee relationship between the transferor and transferee as is the case when shares are received by a beneficiary from WERT, no perquisite arises.
Assuming that perquisite is required to be determined the AO erred in arriving at the value of the perquisite arising on account of shares being awarded by WERT. He adopted the quoted value of shares on a recognized stock exchange on the date of the grant of the award as the basis for arriving at the market (sic-value of) perquisite. The quoted price on a recognized stock exchange represents the price when a holder of shares is in a position to sell the shares, free from encumbrances, as per the stock exchange regulations. The shares should be delivered to the exchange within 2 or 3 days after the weekly settlements.
5.7 The employees receiving shares from WERT are prohibited from selling the shares during the period of lock-in covered by the undertaking executed by them. To ensure that no sale is made, the shares are held jointly in the names of the employees and WERT during the said period. Thus, the employees who receive the benefit of the WERT cannot legally transfer nor deliver the shares in order to receive the benefit of the quoted price of the shares. Therefore, the quoted price cannot be applied in determining the value of the shares. The restraints are not empty conditions but are mandatory and important conditions and manifest the very essence of the scheme. If the employee fails to adhere to the conditions then the shares automatically revert back to WERT. The AO failed to address this aspect in the case of employees who have ceased to remain in the continuous employment of the company for the specified period following which the shares have reverted back to WERT. Since the employee is not in a position to sell the shares during the stipulated time he cannot meet the conditions of the stock exchange and, therefore, it is incorrect to equate the value of the share so received to the quoted price.
5.8 The AO has stated that even if the shares are not tradable, does not make the value of the shares less and the value can be easily found out. It is well-known that when any private company is required by its articles to place restrictions on the transferability of its shares, such shares are valued on a principle which is different from that of quoted shares. Thus, shares received by a beneficiary from WERT are also subjected to restraints with regard to their transferability.
Hence, the valuation principles should be akin to the principles normally applied to valuation of shares from a private company. The shares can only be surrendered back to WERT on the violation of the stipulated conditions. In such a case the employee can only get back that amount which he was liable to pay for receiving the shares. Thus, value of the share is no more than the amount paid for receiving the share from WERT.5.9 When the employee receives shares with restraints on sale, he becomes a part stakeholder only to the extent of the book value of the share, The market value of the shares on the date of participation by the employee would at best be regarded as a guide and such a price will be required to be adjusted to the date/period of realization. The market price can be realised by the employee only at the end of the lock-in period which is 4 years in the appeal. Thug, the net present value of the market price adjusted for 4 years should be arrived as to value the perquisites. The WT Act has evolved procedures with regard to determining the value of shares with constraints and the same should be adopted. Therefore, it is requested in appeal that directions should be given to value the shares having regard to the restrictions attached to the shares. And thus prayed that the order of the AO is cancelled and liability for TDS and interest is deleted.
6. A reference was made to CBDT Circular No. 710, according to which if the shares are allotted to the employees at concessional rate the same was opined to be a taxable perquisite. At this juncture, we will only observe that CBDT circular is binding on the officers working under it and not on the assessee but for the statutory provision in the Act.
Every year CBDT is issuing a circular after the enactment of the Finance Act as to the liability of the employer to deduct tax. In none of the circulars prior to insertion of Section 17(2)(iiia) any liability for deducting tax on perquisite in the form of ESOP benefit is prescribed. The assessee, therefore, cannot be expected to interpret various complex provisions of the Act, other enactments, or the circulars, in preference to a specific circular issued by the CBDT, explaining the scope of liability to deduct tax from the payment to the employees. In such a situation, an assessee can be said to have bona fide belief for non-deducting tax on ESOP benefit. The assessee, therefore, cannot be fastened with the liability under Section 201.
These appeals were heard together with other appeals in JTA Nos. 818, 819 & 820/Bang/2000 the case of Infosys Technologies Ltd. v. Dy. CIT [reported at (2003) 78 TTJ (Bang) 598--Ed.]. Since common issues were involved in said case and the assessee's case, common arguments were advanced by learned Departmental Representative for both the cases. In the said case of Mosys (supra), dt. 30th June, 2002, we have held that : (i) ESOP benefit is not income or perquisite taxable under Section 17(2)(iii) for asst. yrs. 1997-98, 1998-99 and 1999-2000.
(ii) The assessee has acted bona fide in not deducting tax under Section 192 for such benefit and hence assessee cannot be treated as assessee in default under Section 201.
(iii) Consequently, assessee is not liable to pay any interest under Section 201(1A).
For the detailed reasons given therein as also in present case, we hold, that assessee cannot be treated as an assessee in default under Section 201. Consequently, assessee is not liable to pay any interest under Section 201(1A).
7.1 Only certain aspects of the issue were raised which are different from the aforesaid order of Infosys (supra) are addressed here separately and they are : (ii) Issues relating to valuation of shares in view of the lock-in period of 4 years.
7.2 Insofar as the aspect of conduit is concerned, the argument of the appellant has been already recorded above. The argument of the Departmental Representative in reply was that entire purpose of the trust was to administer the equity reward scheme/ESOP and all other purposes were minor in comparison. Secondly, the fact that the trust was separately assessed could not militate against separate assessment in the hands of the appellant, as anyone paying remuneration on behalf of appellant partakes the character of salary. Thirdly, the trust has not been assessed under Section 143(3) of the Act. Further, he relied on various decisions of English Courts, which have been mentioned in our order supra. He further argued that, though the trust has been legally created and separate, Sections 161 and 164 of the IT Act prescribe the procedure of taxing the trust and its beneficiaries, yet the decision of the Supreme Court in (1985) 154 ITR 148 (SC) (supra) overrides these provisions as the trust is only a conduit to achieve larger object of conferring benefits on the employees.
7.3 In reply, the learned authorised representative submitted that the English case laws should not be relied upon without first establishing that the legal provisions under both UK and Indian enactments are pari materia. As per Section 161, once the representative assessee, i.e., the trust is taxed, there cannot be tax on the same income in the hands of the beneficiaries. Award of shares by the trust amounts to distribution of assets/income by the trust in favour of the beneficiaries, such a distribution is not a taxable event under the IT Act, as the beneficiaries had a pre-existing beneficial interest in the assets of the trust and mere determination of interest does not give rise to any taxable event. It was further submitted that WERT is a private discretionary trust and has been taxed already at the applicable rate as prescribed under Section 164. The trust has already paid taxes running to several crores for various years and the assessment in the hands of the trust has been completed. In spite of this, if it is held that the trust as a conduit then, the taxes paid in the hands of the trust should be first refunded to avoid the double taxation. Section 166 prescribes that once a representative assessee or beneficiary is chosen for taxation, the same cannot be reversed at a later date. It was further submitted that the trust was created in conformity with Section 79 of the Companies Act and under Section 164(1)(iv) of the IT Act. Such a trust cannot be treated as conduit.
Once Wipro Ltd. parted with the shares in the year 1984, no benefit, directly or indirectly, has resulted to WIL. Factually, WIL nominates the beneficiaries among its employees, who are entitled to receive the shares and none of them are relatives of the dominant shareholders of the company. On these facts, it was submitted that the trust cannot be treated as a conduit.
7.4 We have perused the documents submitted before us and also heard both the sides. It is true that the trust has been in existence for more than 18 years and has been assessed to tax previously. The existence of the trust as a separate independent entity has not been questioned in the hands of the trust. It is only for TDS purposes in this order under appeal that the trust has been held as a conduit. It is seen that the trust has been functioning within the objects enumerated in the trust deed. The manner of its functioning also does not give rise to any question. Thus, there is no material on record to say that the trust was a conduit. No income or asset is held for and on behalf of the appellant by the trust. The trust is a private discretionary trust and the beneficiaries are the employees of the appellant and its affiliates. The income or assets of the trust, after paying the taxes distributed, it is not possible to say that the same amounts to distribution in favour of the appellant. Further, the trust has been validly created under the Trust Act as well as under the Companies Act and IT Act. Such a trust is created by every corporation and this mode too well-known, cannot be treated as a conduit. Further, Section 161 r/w Sections 164 and 166 governs the method of taxation of representative assessee and the beneficiaries. Such a procedure has overwhelming judicial approval. In view of this we hold the trust is not a conduit.
7.5 We refrain from dealing with the issue of valuation, as we have already cancelled the orders under Section 201(1) and 201(1A). Hence, the issue of valuation of shares, need not be addressed at this juncture.
7.6 Accordingly, the appeals are allowed in favour of the appellant and the orders of CIT(A) are set aside.