Full Judgment
3. That on the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in approving the ratio of decision of Hon'ble Supreme Court in the case of Emit Webber v. CIT reported in 200 ITR 483.
4. That on the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in sustaining the addition of Rs. 2,05,520 being the perquisite value of interest-free loan given by SRF Employees Co. Ltd. 5. That on the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in not disposing the ground relating to the penalty proceedings initiated by assessing officer under Section 271(l)(c) of the Income Tax Act.
6. Assessee prays for leave to add, alter, amend or vary any of the grounds either before or at the time of hearing the appeal.
2. Rival contentions have been heard and record perused. Brief facts in this case are that the assessee was the CEO and Group Head of SRF Ltd. The SRF Ltd. had, under a scheme, conferred a right in respect of certain employees to subscribe for the shares of such employer company.
The ligible employees were required to pay Rs. 10 towards the value of one equity share and Rs. 5 as premium in respect of such share depending upon the status, position and other circumstances the eligibility related to each one of such employees to the quantum of such shares which can be subscribed for. In the group of which M/s. SRF Ltd. is a part, a welfare company has been constituted and is existing.
Such welfare company attends to various aspects of the employees of the group companies in general and in respect of certain special matters also. At the occasion of the eligibilities to subscribe for shares, as arisen to each employee the welfare company provided bonds to each employees to avail of such benefit and to subscribe for the shares of SRF Ltd. The loans were granted on the following cumulative conditions : (ii) The share certificates so obtained by the employees are to be lodged with the welfare company, such lodging will be during the "lock-in-period" during which such employee/shareholder cannot be deal in such shares.
(iii) On the expiry of the lock-in-period, the shares shall be pledged with the welfare company, supported by a proper "pledge Agreement".
(iv) An irrevocable power of attorney in favour of the welfare company enabling it to deal with such shares during the currency of the loan.
3. During year ending 31-3-2002, the welfare company has waived and abandoned its right to recover part of the debt owed by such employees and subsisting from the preceding accounting year(s). The assessing officer has subjected such quantum of loan, waived by the A welfare company, as income from "other sources". The assessing officer did so on the basis of the ratio laid down by the Hon'ble Supreme Court of India in Emil Webber v. CIT .
4. The Commissioner (Appeals) confirmed the addition after considering the arguments of the assessee and perusing the impugned assessment order and the case law cited both by the assessing officer and the assessee. Following was the observation of Commissioner (Appeals) :g It is an admitted fact that the assessee is only and employee and the amount in question was both advanced to him as loan and waived as an employee of one of the group companies. The benefit to him directly as an employee of the group company and for any other consideration.
Evidently the case law cited by him is not even remotely applicable to the circumstances of the present case. This case is best covered by the one cited by the assessing officer as Emil Webber v. CIT 200 ITR 483 (SC). As regards the nature of the receipt, it may be capital when given, but it can change subsequently. With the cessation of the liability to repay because of the employment of the applicant with a group company, it cannot but assume the colour of income on such cessation. This has been clearly postulated by the Hon'ble Supreme Court in the case of CIT v. T.V. Sundram lyenger & Sons Ltd. 222 ITR 344 (SC). Thus the entire amount has been tightly taxed in the hands of the assessee.
5. Aggrieved by the above order of the Commissioner (Appeals), the assessee is now before us. It was argued by learned AR Shri Ajay Vohra that obtaining a loan is a transaction in the capital field, the loan obtained is not income there is no section in the Income Tax Act, 1961 which treats capital transaction as income. He further contended that under the Income-tax Act, a specific provision is made in Section 41(1), which it provides that if any allowance or claim is allowed in a year in the computation of business income, then the benefit received in respect of such transaction will be deemed as income in the year the benefit is obtained. This is the special law, therefore, the item must be on the revenue again. Such item must have been allowed in determination of business income. Such sum allowed, if comes back by way of a benefit, then the benefit is treated as income. In the present case, the assessee has received a loan. It is not any sum connected with any other obligation by the assessee. Moreover, the assessee is an employee. Case of an employer cannot be compared with that of a businessman. Such a comparison made by the assessing officer is unsustainable in law. Assessee has not received the sum in the course of any business. Therefore, provisions of Section 41(1) are not applicable. The loan received by the assessee is on the capital account. The amount waived does not partake the character of income.
The assessing officer is, therefore, wrong in treating it as income.
The assessing officer has applied the ratio laid down by the Hon'ble Supreme Court of India in Emil Webber's case (supra). Such ratio is not applicable to the assessee's case. In that case, Mr. Webber rendered services in India. His remuneration is agreed to be free of tax.
Therefore, the quantum of tax was discharged by Ballarpur Industries in compliance with such contract. Payment of tax and the liability therefore are those of the person receiving such income. Section 4 provides that every person having income shall be eligible to discharge the tax liability thereon. In Webber's case, the foreign concern provided the services of Webber. Such services are to be rendered in respect of setting up a plant for Ballarpur Industries. Under such arrangement, Ballarpur Industries undertook to pay salaries and the other emoluments to those personnel. It was understood that the salaries were to be free from any Indian Income-tax. This is what was paid by Ballarpur Industries to the Income-tax department. Therefore, it is the obligation of Webber under Section 4 of the Income Tax Act, 1961, the obligation was taken over by Ballarpur Industries, so such company paid the tax. Since the payment of tax is the discharge by Ballarpur Industries on behalf of Webber, therefore, it is income.
Since foreign employer had not paid and Ballarpur Industries paying the tax is not employer, such income is taxed under 'other sources'. In the present case, the assessee took the loan. He has undertaken to repay the loan. He has to pay interest. Therefore, such loan transaction and the part waiver are not based on any agreement that welfare company would assist the assessee in any matter. It is only to help the assessee and the other employees to subscribe for shares. Such shares are the properties of employees only. Therefore, the circumstances in the assessee's case are not in any may similar. The Hon'ble Supreme Court has only held in Emil Webbers case (supra) that an assessee's obligation, though met by somebody else, will be income. Therefore, such judgment is not applicable here.
6. Learned AR further explained that the assessing officer has wrongly held that the arrangement for the welfare company providing loan is in effect a loan on behalf of SRF Ltd. SRF has provided funds on various occasions. The welfare company has used such funds for purposes other than providing loans. A legal arrangement for SRF providing loan cannot be understood in a different way. The legal effect of the same has to be understood as SRF, the lender and the welfare company, a borrower.
The Hon'ble Supreme Court of India held in CIT v. B.M. Kharwar that the legal transaction cannot be ignored. To infer and decide that the transaction disclosed is not correct and is otherwise, there are no materials or evidences in this case. Such tendency was adversely considered by the Hon'ble Supreme Court in Union of India v. Azadi Bachao Andolan (2003) 263 ITR 706, the assessing officer cannot treat the loan given by the welfare company and the waiver of the interest thereon as flowing from the employer. The welfare company is not the employer. It has only rendered financial assistance. Only the burden of certain part of loan and interest was waived. The welfare company is not akin to A Ballarpur Industries in Emil Webbers case (supra) Ballarpur Industries avails of services of Webber and is undertaking to pay remuneration and obligation. This is not the case here.
7. On the other hand, learned CIT(DR) Shri Rajnesh Kumar supported the findings recorded by the lower authorities and contended that as per there solution passed by the board of M/s. SRFEWC Ltd. at its meeting held on 29-9-1999, the loans were given by the SRFEWC Ltd. to employees of g SRF Ltd. owing to there being an employment of SRF Ltd. The alleged amount of funds came to the SRFEWC Ltd. from SRF Ltd., the employer of the assessee. Thus, it was circuitous way of giving loans to the assessee and other employees of SRF Ltd. by routing the same through different entities.
8. We have considered the rival contentions, carefully gone through the orders of the authorities below and also deliberated on the case laws relied on by the lower authorities in their respective orders for coming to the conclusion that waiver of the loan was in the nature of income inassessee's hands. We have also deliberated on the case laws cited by the learned AR and DR during the course of hearing before us in the context of factual matrix of the case. From the record, we found that assessee was CEO and Group Head of SRF Ltd. The company floated a stock option scheme wherein equity shares were offered and the same was accepted by the assessee and other employees of the company. To assist their d employees for subscribing the shares, the associates of the employer company M/s. SRF Employees Welfare Co. Ltd. (SRFEWC) had given a loan at certain rate of interest repayable in 46 months.
Subsequently, the interest bearing loan was converted to interest-free loans. The stock option scheme was opted by the assessee in the assessment year 2000-01 and loan was also taken during; this year.
After two years, i.e. Assessment Year 2002-03, under consideration, the loan was waived and the assessee company included the amount of loan waived and notional perquisite E value in respect of interest due thereon, in Form No. XVI under the head 'Any other item reported by the employees'. Tax was also deducted at source on this amount, but the assessee did not offer this amount in its return of income for taxation. The assessing officer found that M/s. SRF Ltd. being employer of the assessee had advanced huge amount of loan to M/s. SRFEWC Ltd., which was in turn given as a loan to the employee of the SRF Ltd. including the assessee for subscribing the shares issued by p the SRF Ltd. These shares were allotted to the assessee in the employees purchase scheme. The assessing officer has examined the balance sheet of SRFEWC Ltd. and found the source of loans advanced to the employees of SRF Ltd. and came to the conclusion that entire aimount of loan given to the employees came to the SRFEWC Ltd. from SRF Ltd. As per the board's resolution of M/s. SRFEWC Ltd. dated 29-9-1999, the assessing officer found that loans were given by SRFEWC Ltd. to the employees of SRF Ltd. owing to there being in employment of SRF Ltd. When the loan amount was waived by SRFEWC Ltd., the assessing officer found that it was a circuitous way of benefiting the assessee and other employees of the SRF Ltd. by routing the amount through a different entity. There is no dispute to the fact that when loan was given to the assessee, it was transaction in the capital field and not in the nature of revenue/ income. However, when the loan was waived, the assessee was not supposed to return the loan back. The lower authorities held that with the waiver of these loans, there remained no liability to repay back the loan, therefore, it became income of the assessee liable to tax. As per our considered view the transaction for taking loan and waiver of such loan is on account of the capital field therefore, it will go to reduce the cost of acquisition of the shares under stock option scheme, which will result in income only in the year such shares will be sold by the assessee. Thus, taking into account totality of facts and circumstances of the case vis-avis finding recorded by lower authorities, the actual effect of such waiver of loan, is on the cost of acquisition of the shares, and it will not amount to any income in the year of the waiver. We, therefore, direct the assessing officer to give effect to this waiver in the cost of acquisition of shares under stock option scheme resulting into reduction of such cost of acquisition equivalent to the amount of loan waived, which will actually result in income either short-term or long-term capital gains, as and when the assessee will sale these shares. The assessing officer had all liberty to bring such income to the net of the tax in the relevant year of sale. We direct accordingly.
9. In the result, the appeal of the assessee is allowed in part in terms indicated hereinabove.