ADDL. COMMISSIONER OF INCOME TAX versus BHARAT V. PATEL on 24 April 2018

[2018] 7 S.C.R. 1067

ADDL. COMMISSIONER OF INCOME TAX

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BHARAT V. PATEL

(Civil Appeal No. 4380 of 2018)

APRIL 24, 2018

[R. K. AGRAWAL AND ABHAY MANOHAR SAPRE, JJ.]

Income Tax Act, 1961 – s.17(2) – ‘Perquisite’ – Amendmentthereto, if retrospective – Respondent, Chairman and MD of Procterand Gamble (P&G), India (subsidiary of (P&G) USA) was issuedStock Appreciation Rights (SARs) by (P&G) USA and received anamount of Rs.6,80,40,724/- on its redemption – Issue as to thetaxability of the amount so received by the Respondent on redemptionof SARs – Held: “Perquisite” is usually a non-cash benefit given byan employer to an employee in addition to entitled salary orremuneration – In order to bring the perquisite transferred by theemployer to the employees within the ambit of tax, legislature broughtan amendment u/s.17 by inserting Clause (iiia) in s.17(2) of the ITAct through the Finance Act, 1999 with effect from 01.04.2000 whichwas later omitted by the Finance Act, 2000 – Since, the transactionin the instant case pertains prior to 01.04.2000, hence, it cannot becovered under the said clause in the absence of an express provisionof retrospective effect – Finance Act, 1999 – Finance Act, 2000 –Interpretation of Statutes.

Interpretation of Statutes – Taxing Statutes – Held: Taxingprovisions to be construed strictly so that no person who is otherwisenot liable to pay tax, be made liable to pay tax.

Income Tax Act, 1961– s.28(iv) – When not applicable –Respondent, employee of (P&G), India, (subsidiary of (P&G) USA)was issued Stock Appreciation Rights (SARs.) and received anamount of Rs.6,80,40,724/- from (P&G),USA on its redemption –Alternate plea of Revenue that the case of the respondent camewithin the ambit of s.28(iv) – Held: Applicability of s.28(iv) isconfined only to the case where there is any business or professionrelated transaction involved – However, in the instant case there isnothing as such and thus cannot be covered u/s.28(iv) for thepurpose of tax liability.

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[2018] 7 S.C.R.

ADismissing the appeals, the Court

HELD: 1.1 The word “Perquisite” in common parlance maybe defined as any perk or benefit attached to an employee orposition besides salary or remuneration. These are usually non-cash benefits given by an employer to an employee in addition toBentitled salary or remuneration. It may be said that these benefitsare generally provided by the employers in order to retain thetalented employees in the organization. There are variousinstances of perquisite such as concessional rent accommodationprovided by the employer, any sum paid by an employer in respectof an obligation which was actually payable by the employee etc.CSection 17(2) of the Income Tax Act, 1961 was enacted by thelegislature to give the broad view of term perquisite. On the otherhand, the word ‘Capital Gains’ means a profit from the sale ofproperty or an investment. It may be short term or long termdepending upon the facts and circumstances of each case. ThisDgain or profit is charged to tax in the year in which transfer of thecapital assets takes place. [Para 9] [1072-G, H; 1073-A-B]

1.2 In order to bring the perquisite transferred by theemployer to the employees within the ambit of tax, legislaturebrought an amendment under Section 17 of the IT Act by insertingEClause (iiia) in Section 17(2) of the IT Act through the FinanceAct, 1999 (27 of 1999) with effect from 01.04.2000, which waslater on omitted by the Finance Act, 2000. The intention behindthe said amendment brought by the legislature was to bring thebenefits transferred by the employer to the employees as in theinstant case, within the ambit of the Income Tax Act, 1961. It wasFthe first time when the legislature specified the meaning of thecost for acquiring specific securities. Only by this amendment,legislature determined what would constitute the specificsecurities. By this amendment, legislature clearly covered thedirect or indirect transfer of specified securities from the employerGto the employees during or after the employment. On a perusalof the said clause, it is evident that the case of the Respondentfalls under such clause. However, since the transaction in theinstant case pertains to prior to 01.04.2000, hence, suchtransaction cannot be covered under the said clause in the absenceof an express provision of retrospective effect. There is no forceH

in the argument of the Revenue that the case of the Respondentwould fall under the ambit of Section 17(2) (iii) of the IT Act insteadof Section 17(2) (iiia) of the IT Act. It is a fundamental principleof law that a receipt under the IT Act must be made taxable beforeit can be treated as income. Courts cannot construe the law insuch a way that brings an individual within the ambit of IncomeTax Act to pay tax who otherwise is not liable to pay. In theabsence of any such specific provision, if an individual is subjectedto pay tax, it would amount to the violation of his ConstitutionalRight. [Paras 12, 13] [1074-B; 1075-A-D]

1.3 On a first look of the Section 28(iv) of the IT Act, it isapparent that such benefit or perquisite shall have arisen fromthe business activities or profession whereas in the instant casethere is nothing as such. The applicability of Section 28(iv) isconfined only to the case where there is any business or professionrelated transaction involved. Hence, the instant case cannot becovered under Section 28(iv) of the IT Act for the purpose of taxliability. [Para 17] [1078-B]

1.4 The Respondent got the Stock Appreciation Rights(SARs) and, eventually received an amount on account of itsredemption prior to 01.04.2000 on which the amendment ofFinance Act, 1999 (27 of 1999) came into force. In the absence ofany express statutory provision regarding the applicability of suchamendment from retrospective effect, there is no force in theargument of the Revenue that such amendment came into forceretrospectively. It is well established rule of interpretation thattaxing provisions shall be construed strictly so that no personwho is otherwise not liable to pay tax, be made liable to pay tax.[Para 18] [1078-C-D]

Commissioner of Income Tax v. Infosys TechnologiesLtd. [2008] 297 ITR 167 (SC) – relied on.

Sumit Bhattacharya v. ACIT Circle 16(1) Mumbai[2008] 112 ITD 1 (MUM.) (SB) – referred to.

Case Law Reference[2008] 112 ITD 1 (MUM.) referred to Para 7[2008] 297 ITR 167 (SC) relied on Para 8

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ACIVIL APPELLATE JURISDICTION: Civil Appeal No. 4380of 2018.

From the Judgment and Order dated 23.12.2014 of the High Courtof Gujarat at Ahmedabad in Tax Appeal No. 6 of 2004

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Civil Appeal No. 4381 of 2018.

Arijit Prasad, Subhash Acharya, Mrs. Anil Katiyar, Advs. for theAppellant.

Ajay Vohra, Sr. Adv., Ms. Ruby Singh Ahuja, Ms. Deepti Sarin,CShubham Saigal, Ms. Manik Karanjawala, Ms. Aakanksha Munjhal (forM/s. Karanjawala & Co.), Advs. for the Respondent.

The Judgment of the Court was delivered by

R. K. AGRAWAL, J 1. Leave granted.

2. These appeals have been preferred against the impugnedjudgment and order dated 23.12.2014 passed by the High Court of Gujaratat Ahmedabad in Tax Appeal Nos. 6 and 14 of 2004 whereby the DivisionBench of the High Court dismissed the appeals filed by the Revenuewhile upholding the decision of the Income Tax Appellant Tribunal (forbrevity ‘the Tribunal’) dated 27.06.2003.

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3. Brief facts:-

(a) On 10.09.1998, the Respondent, who is the Chairman andManaging Director of Procter and Gamble (P&G), India, filed his incometax return for the Assessment Year 1998-99 and declaring the total incomeFat Rs 40,13,820/-.

(b) The Assessing Officer, vide order dated 12.02.2001, concludedthe assessment proceeding under Section 143(3) of the Income TaxAct, 1961 (in short ‘the IT Act’) and determined the total income of theRespondent at Rs 7,23,11,013/- against the declared income.

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(c) Being aggrieved, the Respondent preferred an appeal beforethe Commissioner of Income Tax (Appeals) being No. CAB/I-643/2000-2001. After considering the case, learned CIT (Appeals), vide orderdated 28.03.2002, dismissed the appeal of the Respondent aftercomprehensively discussing the taxability of the alleged amount andupholding the Assessment Order passed by the Assessing Officer.

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(d) Being dissatisfied, the Respondent carried the matter beforethe Tribunal. The Tribunal, vide order dated 27.06.2003, in ITA No. 2241/Ahd/2002 partly allowed the appeal filed by the Respondent.

(e) At this juncture, the Respondent as well as the Revenue bothpreferred cross appeals before the High Court of Gujarat at Ahmedabad.

(f) At the same time, consequent to the decision of the Tribunaldated 27.06.2003, the Assessing Officer started the proceeding side byside to give effect to the order dated 27.06.2003. Vide order dated15.09.2003, the Assessing Officer held that the difference being sum ofRs 6,80,40,649/- paid to the Respondent by P&G, USA shall be treatedas capital gains on transfer/redemption of shares, and hence, theRespondent is liable to pay tax on capital gains. Being aggrieved withthe order dated 15.09.2003, the Respondent filed an appeal before theCIT (Appeals) being No. CAB/V-37/04-05 which was upheld by learnedCIT (Appeals) in favour of Assessing Officer while dismissing the appealof the Respondent.

(g) Being dissatisfied, the Respondent further preferred an appealbefore the Tribunal. The Tribunal, vide order dated 24.09.2010, dismissedthe appeal. The decision of the Tribunal dated 24.09.2010 was notchallenged further.

(h) The Division Bench of the High Court, vide judgment andorder dated 23.12.2004, allowed the appeal filed by the Respondent whiledismissing the appeal of the Revenue.

(i) Hence, the present appeals have been filed by the Revenuebefore this Court.

4. We have given our thoughtful consideration to the submissionsof leaned senior counsel for the parties and perused the factual matrixof the case.

Point(s) for consideration:-

5. Whether in the present facts and circumstances of the case,any interference by this Court is required with the impugned decision ofthe High Court?

Rival contentions:-

6. At the outset, learned counsel for the Revenue contended thatthe High Court erred in law while upholding that the amount received on A

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Aredemption of Stock Appreciation Rights (SARs) is to be treated ascapital gains and not perquisite under section 17(2)(iii) of the IT Act.However, the same is not taxable under the category of capital gainssince no consideration had passed from the Respondent.

7. In support of his argument, learned counsel placed reliance onBSumit Bhattacharya vs. ACIT Circle 16(1), Mumbai - [2008] 112ITD 1 (MUM.) (SB) and contended that the Respondent, having receivedan amount on redemption of Stock Appreciation Rights (SARs) as anemployee of the company and there was an employer-employeerelationship subsisting at the relevant point of time, therefore, the amountreceived on redemption of Share Appreciation Rights must be treated asCtaxable income under the head income from “Salaries”. Learned counselfinally contended that the impugned decision of the High Court deservesto be set aside.

8. Per contra, learned senior counsel appearing for the Respondentsubmitted that the amount received by the Respondent from redemptionDof Stock Appreciation Rights (SARs) can be treated only as capital gainsand cannot be treated as perquisite under Section 17(2) (iii) of the ITAct or under Section 28 (iv) of the IT Act. However, it was pointed outthat the said capital gains cannot be said to arose to the Respondentsince there was no consideration paid as the cost of acquisition by theERespondent. It was also submitted that such amount received on accountof redemption of Stock Appreciation Rights could have been taxed if atall under the provisions of Clause (iiia) of Section 17(2) of the IT Act.Finally, it was also submitted that the question of law sought to be raisedby the Revenue is no more res integra as settled by this Court in thecase of Commissioner of Income Tax vs. Infosys Technologies Ltd.,F[2008] 297 ITR 167 (SC). Hence, these appeals deserve to be dismissedat the threshold.

Discussion:-

9. Before examining the case at hand, it is pertinent to have anGunderstanding of the words “Perquisite” and “Capital Gains”. The word“Perquisite” in common parlance may be defined as any perk or benefitattached to an employee or position besides salary or remuneration.Broadly speaking, these are usually non-cash benefits given by anemployer to an employee in addition to entitled salary or remuneration.

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It may be said that these benefits are generally provided by the employersin order to retain the talented employees in the organization. There arevarious instances of perquisite such as concessional rent accommodationprovided by the employer, any sum paid by an employer in respect of anobligation which was actually payable by the employee etc. Section 17(2)of the IT Act was enacted by the legislature to give the broad view ofterm perquisite. On the other hand, the word ‘Capital Gains’ means aprofit from the sale of property or an investment. It may be short term orlong term depending upon the facts and circumstances of each case.This gain or profit is charged to tax in the year in which transfer of thecapital assets takes place. In the instant case, the fundamental questionwhich arises for consideration before this Court is with regard to thetaxability of the amount received by the Respondent on redemption ofStock Appreciation Rights (SARs.)

10. It is a matter of record that the Respondent was employed asthe Chairman-cum-Managing Director of the (P&G) India Ltd. at therelevant time and the said company is the subsidiary of (P&G) USAthrough Richardson Vicks Inc. USA and that (P&G) USA ownedcontrolling equity. It is an undisputed fact that the Respondent was workingas a salaried employee. The (P&G) USA was the company who hadissued the Stock Appreciation Rights (SARs.) to the Respondent withoutany consideration from 1991 to 1996. The said SARs were redeemedon 15.10.1997 and in lieu of that the Respondent received an amount ofRs 6,80,40,724/- from (P&G) USA. However, when the Respondentfiled his return, he claimed this amount as an exemption from the ambitof Income Tax. The issue involved in this appeal is in respect ofRs. 6,80,40,724/- made on account of amount received on redemption ofStock Appreciation Rights.

11. The Tribunal was of the view that the stock options are capitalassets and such assets in the instant case acquired for consideration,hence, gain arising therefrom is liable to capital gain tax. However, thestand of the Revenue before the Tribunal was that the amount in questionis taxable as perquisite under Section 17(2)(iii) of the IT Act or inalternatively under Section 28(iv) of the IT Act instead of capital gains.The High Court also upheld the view of the Tribunal but the High Courtdisagreed that such capital gains arose to the Respondent on redemptionof Stock Appreciation Rights since there was no cost of acquisition AB

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Ainvolved from the side of the Respondent. The meaning of the wordperquisite for the instant case is given under Section 17(2) of the IT Act.The Revenue alternatively contended that the case of the Respondentshould come under the ambit of Section 28(iv) of the IT Act.

12. It is apposite to note here that, particularly, in order to bringBthe perquisite transferred by the employer to the employees within theambit of tax, legislature brought an amendment under Section 17 of theIT Act by inserting Clause (iiia) in Section 17(2) of the IT Act throughthe Finance Act, 1999 (27 of 1999) with effect from 01.04.2000, whichwas later on omitted by the Finance Act, 2000. The said Clause (iiia) asit was then is reproduced herein below:C“(iiia) the value of any specified security allotted or transferred,directly or indirectly, by any person free of cost or at concessionalrate, to an individual who is or has been in employment of thatperson:

DProvided that in a case where allotment or transfer of specifiedsecurities is made in pursuance of an option exercised by anindividual, the value of the specified securities shall be taxable inthe previous year in which such option is exercised by suchindividual.

EExplanation- For the purposes of this clause,-(a) “cost’ means the amount actually paid for acquiring specifiedsecurities and where no money has been paid, the cost shall betaken as nil; (b) “specified securities” means the securities as defined inFclause(h) of section 2 of the Securities Contracts (Regulation)Act, 1956 (42 of 1956) and includes employees’ stock option andsweet equity shares;

(c) “sweat equity shares” means equity shares issued by acompany to its employees or directors at a discount or forGconsideration other than cash for providing know-how or makingavailable rights in the nature of intellectual property rights or valueadditions, by whatever name called; and (d) “value” means the difference between the fair market valueand the cost for acquiring specified securities;”

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13. The intention behind the said amendment brought by thelegislature was to bring the benefits transferred by the employer to theemployees as in the instant case, within the ambit of the Income TaxAct, 1961. It was the first time when the legislature specified the meaningof the cost for acquiring specific securities. Only by this amendment,legislature determined what would constitute the specific securities. Bythis amendment, legislature clearly covered the direct or indirect transferof specified securities from the employer to the employees during orafter the employment. On a perusal of the said clause, it is evident thatthe case of the Respondent falls under such clause. However, since thetransaction in the instant case pertains to prior to 01.04.2000, hence,such transaction cannot be covered under the said clause in the absenceof an express provision of retrospective effect. We also do not find anyforce in the argument of the Revenue that the case of the Respondentwould fall under the ambit of Section 17(2) (iii) of the IT Act instead ofSection 17(2) (iiia) of the IT Act. It is a fundamental principle of law thata receipt under the IT Act must be made taxable before it can be treatedas income. Courts cannot construe the law in such a way that brings anindividual within the ambit of Income Tax Act to pay tax who otherwiseis not liable to pay. In the absence of any such specific provision, if anindividual is subjected to pay tax, it would amount to the violation of hisConstitutional Right.

14. It is pertinent to note that on the point of applicability of clause(iiia) of Section 17(2) of the IT Act, this Court settled the position inInfosys Technologies Ltd (supra), and has held as under:- “17. Be that as it may, proceeding on the basis that there was“benefit” the question is whether every benefit received by theperson is taxable as income? In our view, it is not so. Unless thebenefit is made taxable, it cannot be regarded as income. Duringthe relevant assessment years, there was no provision in law whichmade such benefit taxable as income. Further, as stated, the benefitwas prospective. Unless a benefit is in the nature of income orspecifically included by the legislature as part of income, the sameis not taxable. In this case, the shares could not be obtained by theemployees till the lock-in period was over. On facts, we hold thatin the absence of legislative mandate a potential benefit could notbe considered as “income” of the employee(s) chargeable underthe head “salaries”…..”

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A15. The Revenue also contended before the High Court that theamendment brought in by Section 17(2) of the IT Act was clarificatory,hence, retrospective in nature. However, the High Court rejected thestand of the Revenue. The High Court, in its impugned judgment, on thepoint of the applicability of clause has held as under:-

B“15. In the case of Commissioner of Income-Tax, Bangalore vsB.C. Srinivasa Setty [(1981) 128 ITR 294 (SC)] this Court heldthat the charging section and computation provision under the 1961Act constituted an integrated code. The mechanism introducedfor the first time under the Finance Act, 1999 by which cost wasexplained in the manner stated above was not there prior toC1.4.2000. The new mechanism stood introduced w.e.f. 1.4.2000only. With the above definition of the word cost introduced videclause (iiia), the value of option became ascertainable. There isnothing in the Memorandum to the Finance Act, 1999 to say thatthis new mechanism would operate retrospectively. Further, aDmechanism which explains cost in the manner indicated abovecannot be read retrospectively unless the Legislature expresslysays so. It was not capable of being implemented retrospectively.Till 1.4.2000, in the absence of the definition of the word costvalue of the option was not ascertainable. In our view, clause(iiia) is not clarificatory. Moreover, the meaning of the wordsEspecified securities in section (iiia) was defined or explained forthe first time vide Finance Act , 1999 w.e.f. 1.4.2000.Morevover,the words allotted or transferred in clause (iiia) made things clearonly after 1.4.2000. Lastly, it may be pointed out that even clause(iiia) has been subsequently deleted w.e.f. 1.4.2001. For the aforeFstated reasons, we are of the view the clause (iiia) cannot be readas retrospective.”

16. Circular No. 710 dated 24.07.1995 which was issued by theCBDT deals with the taxability of shares issued at less than the marketprice. For ready reference, Circular No. 710 issued by the CBDT isGreproduced hereinbelow:- “202. Taxability of the perequisite on shares issued toemployees at less than market price:

1. Chief Commissioners and corporate assessees have beenseeking clarification regarding taxability of the perquisite on sharesHissued to the employees at less than market price.

ADDL. COMMISSIONER OF INCOME TAX v.BHARAT V. PATEL [R.K. AGRAWAL, J.]

2. The matter has been considered by the Board. The benefitdoes amount to a perquisite within the meaning of clause (iii) ofsub-section (2) of Section 17 of the Income-Tax Act, 1961. Thevarious situations in this regard have to be dealt with as under:

(i) where the shares held by the Government have beentransferred to the employee, there will be no perquisite becausethe employer-employee relationship does not exist betweenGovernment and the employee (transferor and the transferee);

(ii) where the company offers shares to the employees at thesame price as have been offered to the other shareholdersor the general public, there will be no perquisite;

(iii) where the employer has offered the shares to itsemployees at a price lower than the one at which the shareshave been offered to the other shareholders/public, thedifference between the two prices will be taxed as perquisite;

(iv) where the shares have been offered only to theemployees, the value of perqusite will be the differencebetween the market price of the shares on the date ofacceptance of the offer by the employee and the price atwhich the shares have been offered.”

On a perusal of the above, prima facie, it appears that suchCircular dealt with the cases where the employer issued shares to theemployees at less than the market price. In the instant case, theRespondent was allotted Stock Appreciation Rights (SARs.) by the(P&G) USA which is different from the allotment of shares. Hence, inour opinion such Circular has no applicability on the instant case.Moreover, a Circular cannot be used to introduce a new tax provision ina Statute which was otherwise absent.

17. Alternatively, the Revenue also contended that the case of theRespondent shall come within the ambit of the Section 28(iv) of the ITAct. At this juncture, we deem it appropriate, for the sake of convenience,to refer Section 28(iv) of the IT Act which is reproduced herein below:- “28. Profits and gains of business or profession.-Thefollowing income shall be chargeable to income-tax under the head“Profits and gains of business or profession”- A

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1078SUPREME COURT REPORTS

[2018] 7 S.C.R.

A(iv) the value of any benefit or perquisite, whether convertibleinto money or not, arising from business or the exercise of aprofession.”

On a first look of the said provision, it is apparent that such benefitor perquisite shall have arisen from the business activities or professionBwhereas in the instant case there is nothing as such. The applicability ofSection 28(iv) is confined only to the case where there is any businessor profession related transaction involved. Hence, the instant case cannotbe covered under Section 28(iv) of the IT Act for the purpose of taxliability.

C18. To sum up, the Respondent got the Stock Appreciation Rights(SARs) and, eventually received an amount on account of its redemptionprior to 01.04.2000 on which the amendment of Finance Act, 1999 (27of 1999) came into force. In the absence of any express statutory provisionregarding the applicability of such amendment from retrospective effect,we do not find any force in the argument of the Revenue that suchDamendment came into force retrospectively. It is well established rule ofinterpretation that taxing provisions shall be construed strictly so that noperson who is otherwise not liable to pay tax, be made liable to pay tax.

19. In view of above discussion, we are of the considered viewthat these instant appeals are devoid of merits and deserve to beEdismissed. Accordingly, these are hereby dismissed leaving parties tobear their own cost.

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Appeals dismissed.

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