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Mahindra & Mahindra Employees' Stock Option Trust v/s Additional Commissioner of Income-tax, Range -12(2)

    IT Appeal No. 2389 (Mum.) of 2015

    Decided On, 21 October 2015

    At, Income Tax Appellate Tribunal Mumbai

    By, THE HONOURABLE MR. JOGINDER SINGH
    By, JUDICIAL MEMBER & THE HONOURABLE MR. R.C. SHARMA
    By, ACCOUNTANT MEMBER

    For the Appellant: H.P. Mahajani, Advocate. For the Respondent: N.P. Singh, Advocate.



Judgment Text

R.C. Sharma, Accountant Member

1. The present appeal is filed against the order of CIT(A) -28, Mumbai, dated 26-3-2015 for A.Y.2011-12.

2. During the course of hearing the assessee has filed concise grounds of appeal. These have been considered by us for the adjudication of this appeal, and are reproduced hereunder :-

"Being aggrieved by the order u/s 250 dated 26.03.2015 passed by the CIT (Appeals) 28, Mumbai (CIT (A), for short) the Mahindra & Mahindra Employees' Stock Option Trust (Appellant, for short) submits the following grounds of appeal for your sympathetic consideration, which are raised without prejudice to each other:

1. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in confirming in its entirety the order passed u/s 143(3) by the learned Assessing Officer (AO for short).

The subject order is contrary to facts and the legal position and is perverse and, therefore, merits being set aside;

2. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in confirming the action of the AO of assessing the income of the Appellant under the head Profits and gains of business instead of the head Capital gains as shown in the Return of Income filed by the Appellant.

Further, in that context, the learned CIT(A) erred in holding that:

a. The Appellant was not an investor in the equity shares of Mahindra & Mahindra Limited (M &M, for short);

b. The said shares were not being acquired and held by the Appellant with a view to have any capital appreciation;

c. The shares were being held only to promote the business interest of M & M;

d. It was merely engaged in the business of administration of the Employees Stock Option Scheme; and,

e. The Appellant had no independent real existence of its own.

3. Without prejudice to the above the learned CIT(A) failed to dispose of the submission of the Appellant that, even if income is assessable under the head profits and gains of business, the AO had over-assessed it by Rs. 19.64 crores.

4. The learned CIT(A) further erred in upholding the order to the Aa that the income of the trust was chargeable to tax at the maximum marginal rate which conclusion is contrary to the position in law and the facts of the case.

5. The claim of the Appellant as to computation of total income, the head of income as also the tax thereon, in the manner done by it in the Return of income, be directed to be accepted.

6. The appellant prays for consequential relief in the amount of tax and interest charged on its total income."

3. We have heard rival contentions. During the course of hearing, Shri H.P.Mahajani made submissions on behalf of assessee and Shri N.P.Singh, ld. CIT DR made submissions on behalf of Revenue. After hearing both the sides, this appeal is adjudicated as under :-

4. Grounds No 1,5 & 6 are general, therefore, do not need any specific adjudication.

5. Ground No.2 : In this ground the assessee has challenged the action of ld. CIT(A) in confirming the action of AO in assessing the income of the assessee under the head the profits of business instead of the head capital gains, as was shown in the return of income filed by the assessee company.

5.1. Brief facts of the case, as culled out from the assessment order, are that the assessee is a trust which was established in March, 2001 vide Trust Deed dated 1-3-2001 by Mahindra & Mahindra (settler), and it was mentioned in the said Trust Deed that it was established for the welfare of the employees of the settler company, namely, Mahindra & Mahindra Ltd. and its subsidiaries, for the subscription to the equity shares of the said company. The AO further noted that the activities of the trust include investing the General Corpus in the Equity Shares of the Company (ie. Mahindra & Mahindra Ltd.), to hold the Equity Shares of the Company and to administer the plans as instructed by the Compensation Committee, for the benefit of the Eligible Employees. The Compensation Committee (constituted by the Settler Company) recommends granting of Options to the Eligible Employees. The assessee trust, thus, based on the recommendations of the Compensation Committee, grants these options to the Eligible Employees in the form of Equity Shares. The Option means a right but not an obligation granted under the

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Employees Stock Option Scheme (ESOS) to the Eligible Employees to apply for acquisition from the trust a specified number of Equity Shares of the Company at a future date at Exercise Price. The Exercise Price is the price at which the Eligible Employee is entitled to acquire the Equity Shares pursuant to the Options granted and vested in him/her under the ESOS and is decided by the trust in accordance with the recommendations of the Compensation Committee at the time of Grant of Options. Thereafter, the Eligible Employees are entitled to Exercise the options after the vesting date. Exercise of the options means the act whereby the Eligible Employee actually applies to the trust to exercise the options granted to him/her. On exercise of the options by the Eligible Employees, the trust scrutinizes the details and after realizing the Exercise Price paid by the Eligible Employees, issues/distributes the corresponding underlying equity shares of the Company to the Eligible Employees.

5.2. It was further noted by the AO in the assessment order that during the year under consideration, several Eligible Employees (who were granted the options in earlier years), after the vesting date, have exercised their respective options and, in turn, have paid the corresponding Exercise Price to the trust and the trust has issued underlying shares to such Eligible Employees in view of their exercise of the options. Based on these proceeds received from the Eligible Employees, the trust has recognized the revenue and computed and shown Long Term Capital Gains in its return of income. The trust has also shown interest from deposits with banks under the head Income from Other Sources. After perusing the return of the assessee, the AO raised following issues during the course of assessment proceedings.

1. Whether the asset involved is a capital asset and whether the income arising from the proceeds received in respect of exercise of options qualifies to 'be considered under the head Capital Gains?

2. Whether the provisions of section 160 (Representative Assessee) as well as provisions of section 164(1} (Charge of tax where shares of beneficiaries unknown) are applicable?

3. If provisions of section 164(1) are applicable, whether the assessee trust is covered by the exception given under proviso (iv) of section 164{1}?

5.3. Thus, the relevant question for adjudication of this ground, as was raised by the AO was - whether the shares held by the assessee on behalf of its settler i.e. Mahindra & Mahindra Ltd. was capital asset and whether the income arising from sale proceeds of these shares in pursuant to exercise of the options by the eligible employees was to be determined under the head capital gains or under the head income from business. In response to the queries raised by the AO, following submissions were made by the assessee to the AO in support of its claim that the shares held by the assessee were capital assets and consequently, income arising from the sale proceeds of these shares was to be assessed under the head income from capital gains.

"i. The assets transferred are not options but the shares of M&M Ltd. which are quoted shares held by the trust.

ii. Till the time the employee exercises the option, the shares remain in the name of the trust and it is the absolute owner of the shares though of course with attendant obligations envisaged in the Trust deed and ESOS.

iii. The resultant capital gains are taxable only because such transfers are without payment of STI.

iv. Referring to provisions of sections 115WB,115WC, 17(2),49(2AA) and 2(42A), the assessee has shown the incidence of tax at different stages from issue of shares by the Company till sale of these shares by the employees in the open market and contended that:

i. Trust administering options has nothing to do with options and options have direct correlation between the employer and employee it is a direct incidence of employment.

ii. Presently employees are taxable in respect of value of options on date of exercise of options

iii. The difference between the issue price of shares by the company to the trust is cost of acquisition in the hands of the trust; difference between such cost and the price at which shares are transferred to the employees (indirect transfer) pursuant to exercise of Option represents sale consideration to the trust and purchase consideration to the employee exercising the Option;

iv. Purchase consideration paid by the employee minus fair market value computed under Rule 3(8) represents taxable value of perquisite in his hands.

v. The essence of business is not only that it should be an activity carried on a regular basis and in a systematic and organized manner but also that such activity should be carried out with to view to earning income. The main rationale for carrying out the activity should be earning of income.

vi. In the present case the only rationale for carrying out the activity is to administer the ESOS of the employer and to transfer shares to the employees at the point of time they decide to exercise the options.

vii. The shares purchased from the market were not purchased for the purpose of trading or dealing in them or for holding them as stock in trade. The purpose was only to make available more shares for administering the ESOP Scheme of the employer"

5.4. However, the AO was not satisfied and it was held by the AO that the impugned shares constituted business assets in the hands of the assessee and consequently income arising there-from was to be assessed under the head income from business. This conclusion was drawn by the AO on the basis of following observations:-

"i. The name and style of the assessee trust is "Mahindra & Mahindra Employees' Stock Option Trust" and it is governed by the Trust deed dated 01.03.2001 and the Employees Stock Option Scheme (ESOS) of the Company. As mentioned above the Objects and purpose of the trust (Clause 5 of Trust deed) are to invest the General Corpus in Equity shares of the Company, hold these Equity shares and to administer the plans as instructed by the Compensation Committee. These plans instructed or recommended by the Compensation Committee are in respect of grant of options to the eligible employees. Hence, it is not correct contention that the trust has nothing to do with the options.

ii. The facts of the case indicate that the Compensation Committee only recommends the grant of options to the eligible employees to the assessee trust. Thereafter the assessee trust decides the exercise price and grants options to the eligible employees.

ii. The Exercise Price is the price at which the Eligible Employee is entitled to acquire the Equity Shares pursuant to the Options granted and vested in him/her under the ESOS.

iv. The option granted is a right but not an obligation granted under the ESOS to the eligible employees to apply for acquisition from the trust a specified number of Equity Shares of the Company at a future date at Exercise Price.

v. These options are vested with the eligible employees over a period of certain years and eligible employees are entitled to exercise the options after the vesting date.

vi. Exercise of the options means the act whereby the eligible employee actually applies to the trust to exercise the options granted to him/her.

vii. On exercise of the options by the eligible employees, the trust scrutinizes the details and after realizing the exercise price paid by the eligible employees recognizes revenue and issues/distributes the underlying equity shares of the Company to the eligible employees.

viii. The assessee trust's submissions in respect of fringe benefit and perquisites are from the point of view of taxation of employees and not the trust. Further the employees are taxed on concessional rate of the shares by determining difference between exercise price paid by him and fair market value (fmv) of the shares on date of exercise.

5.5. It was further observed by the AO that the asset held by the assessee trust was an 'Option' and not 'Share', which was exercised by the eligible employees during the year under consideration, and such options were not listed securities. According to the AO, these options would not fall within the ambit of capital asset as per provisions of Income Tax Act, and resultantly income arising there-from would not be covered under the head capital gains. It was further held by the AO that the activities carried out by the assessee trust were conducted on regular basis and in systematic and organized manner showing income/profits since last several years and these were characteristics of business activity, and, therefore, income of the assessee trust was to be assessed under the head income from business. As a result, the AO assessed the amount of capital gain shown by the assessee in its return of income as profit and gains of business. The assessee contested this matter before the Ld CIT(A) and made detailed submissions before the him, assailing the reasoning given by the AO and filed detailed submissions in support of his claim that the shares constituted capital asset in the hands of the assessee trust and resultant gain was to be assessed as capital gain. The CIT(A) rejected all the contentions of the assessee and upheld the action of the AO in assessing the amount of gain as profits or business arising on transfer of shares and confirmed the action of the AO in assessing the same as business income.

5.6 Before us, both the parties have made detailed submissions.

5.7 Ld. CIT DR reiterated observations made by the AO, and supported contentions AO in treating the impugned amount as business income of the assessee.

5.8 On the other hand, ld. counsel appearing on behalf of the assessee took us through various pages of the paper book including the trust deed, in support of his claim that the return filed by the assessee was as per law and the impugned amount was to be assessed as income under the head capital gains, as was shown by the assessee trust. It has been submitted by him that first of all we have to look into the rationale and object behind setting up the trust by the settler company. It was submitted that essence of business activity would not be judged only from the fact it is an activity carried on a regular basis and in a systematic and organized manner, but the other important factor is that such activity should be carried out with a view to earn income. The main object for carrying out the activity should be earning of profits. It is also inherent in the definition of the word "business" as per Section 2(13) of the Act and in the words "trade", "commerce" or "manufacture", in all of these inherent motive is of making 'profits'. The activity of earning income necessarily implies that it should be carried on in accordance with the commercial principles. Under these circumstances, those in charge of the management of the affairs should be free to decide when, how and how much to earn income. According to ld. counsel, in the case before us, the profits have no say in the matter of "when" and "how much" for the reason that "when" is dependent upon the eligible employees exercising the options and "how much" is predetermined by the difference having the cost and exercise price and these are not attributes of business.

5.9. According to the ld. counsel in the present case, the only object for carrying out the activity by the assessee trust is to administer ESOP scheme of the employer and to transfer shares to the employees at the point of time they decide to exercise the option. There was neither a commercial motive, nor a profit motive, as is normally involved while carrying out business. According to ld. counsel the reasoning given by the AO that the activity of the assessee trust was business, inter alia, for the reason that the assessee trust had purchased certain shares from the secondary markets and held these shares for the purpose of making profits and thus, constitute business activity, is also not correct and justified for the reason that the AO failed to appreciate the complete facts in the right context. It was submitted that the assessee trust was established on 1-3-2001 and in the last 10 years only five transactions of purchase from secondary market were made which constituted hardly 4.09% of holding at the end of the year under appeal. According to ld. Counsel by any stretch of imagination, it cannot be said that these five instances were purchased from the secondary market over a period of 10 years, and thus could not have the attributes of a trader buying stock in trade for the purpose of reselling them. According to ld. counsel, these purchases were made in view of the deployment of surplus funds. With regard to the various activities carried out by the assessee trust which were branded as business activities by the AO, it has been submitted by ld. counsel that administrative activities carried out by the assessee trust were meant to give the effect to the mandate of the compensation committee constituted by the settlers of the trust and the assessee trust. It was further submitted by him on the basis of various evidences enclosed in the paper book that the period of holding of these shares was quite long and few instances were referred to showing period of holding being five years to eight years. Our attention was drawn by the him upon the Circular of the CBDT in support of the claim of the assessee that in the given facts and circumstances, the shares held by the assessee trust would constitute a capital asset.

5.10. In nutshell, ld. counsel for the assessee submitted that the shares were capital asset within the meaning of Section 2(14) of the Income Tax Act and reliance was placed by him on the judgment of Hon'ble Supreme Court in the case of Poddar Cement Ltd. 226 ITR 625, 640 for the proposition that every owner does not possess all the rights and ownership may be restricted by law or by any agreement made by the parties interse. It was submitted by the ld. counsel that whole of funds were held by the trust for the benefit of the employees and as such the ownership of these shares, in the hands of the trust, was merely circumscribed by the ESOP scheme. But in view of the decision of the Hon'ble Supreme Court in the case of Podar Cement (supra), such contractual restriction do not change the character nor defeat ownership in the asset held by the trust. Thus, the shares held by the trust, clearly classified as investment, and had been shown in the audited accounts of the trust as such, and accordingly return of income was rightly filed by the assessee by showing the resultant gain as capital gain.

5.11. We have considered rival contentions, gone through the orders of lower authorities and very carefully and gone through the evidences shown by both the parties in the paper book and other material placed on record. We have also deliberated on the judicial pronouncements referred by lower authorities in their respective orders and also cited by ld. DR and AR in the course of hearing before us. In our considered opinion, the main issue to be decided here first is to determine the nature of shares held by the assessee trust and the resultant profit/gain/loss derived from transfer of these shares. Before we discuss about the nature of the shares held and transferred by the assessee trust during the year, we find it necessary to briefly understand and appreciate the nature and constitution of the assessee trust. The assessee trust namely "Mahindra & Mahindra Employees' Stock Option Trust, was established on 1st March, 2001 for the welfare of the employees of settler company namely Mahindra & Mahindra Ltd. and its subsidiaries for the subscription to the equity shares of the company, which was to be held by the assessee trust exclusively for the benefit of the employees of the said company/its subsidiaries. The object and the purpose of the trust as per the trust deed is to invest the general corpus of the trust in, and hold, the equity shares of the said company and to administer the plans as may be instructed by the compensation committee for the benefit of the eligible employees. The brief procedure of option exercise that transfer to the employees' 'Dmat' account, as followed by the assessee trust, was that the compensation committee would grant shares to the employees based on criteria like length of services, grade, performance etc., to be vested as per the scheme. Thereafter, the HR Department of the said settler company would send grant letter to each such employee, and after the vesting date the concerned employee could exercise option for acquiring these shares by paying exercise price per share and perquisite tax payable on the fair market value as on the date of exercise. The employee was required to send exercise application form along with cheques and demat account proof to ESOP Trust (i.e. the assessee trust). Thereafter, the assessee trust would scrutinize application form, cheque and demat account no., and deposit both the cheques in respect of bank account. After reconciling the receipt of amount for exercise and perquisite tax, the assessee trust would transfer shares to the employee's demat account. The procedure has been stated to have been carried out by the assessee trust in this manner. The issue arose, whether the exercise price received by the assessee trust would give rise to capital gain or business income in the hands of the assessee trust. For analyzing this issue, we have first, analysed, the trust deed of the assessee trust under which the assessee trust has been established. It has been enclosed at page no. 51 to 73 of the paper book. We have also analysed employees stock option scheme (ESOS) which is enclosed at paper book page no.74-88. The analysis of the trust deed reveals that the trust has been created in such a manner so as to act as extended arm of the assessee company. Various clause of the trust deed reveals that real control for operating the scheme was retained by the settler company, inter alia, through Compensation Committee. The Compensation Committee of the trust, as per definition given in the trust deed, means, the Compensation Committee of the Directors of the settler company, as constituted by the Board of Directors. Few other terms are also worth noting in this regard e.g. the settler is entrusted with the authority to formulate and implement the plans., the exercise price as per trust deed means exercise price for equity share as decided by the trust in accordance with recommendation of the compensation committee at the time of grant of options. There are various other clauses also which indicate that de facto control of operation and implementation of employees' stock options scheme, in real terms, is held by the Board of Directors of the settler company. The objects and purposes of the trust as defined in clause 5 of the trust deed are, to invest the general corpus in, and hold the equity shares of the company to administer the Plans as instructed by the Compensation Committee for the benefit of the eligible employees. As per the trust deed, the trust funds are to be applied for the purpose of the employees' stock option scheme and for administration of the trust. It has also been provided in the trust deed that the trust may, if required for the purposes of meeting with the expenses of the trust, borrow such amounts in the form of loans or obtain grants from the settler company.

5.12. Further, it is worth noting that the scheme formulated by the company, available at page 70 to 78 of the paper book, shows that equity shares of the company have been given to the trust, to be held by the trust for the benefit of eligible employees' scheme, called as Employees Stock Option Scheme (ESOS). Para 4 of the said scheme, at page 79 of the paper book, is worth reading, to appreciate this issue. Relevant portion is reproduced below for ready reference:

"4. Total number of Equity Shares in respect of which Options could be Granted The existing issued and paid-up capital of the Company consists of 11,04,84,380 Equity Shares of the face value of Rs.10 each. The Equity Shares aggregating to 55,24,219 to be issued to the Trust constitute 5% of the total issued and paid-up share capital of the Company as on March 31, 2000.

The Company reserves the right to issue further Equity Shares to the Trust at its discretion, for the purposes of the ESOS or any further scheme/plan as may be determined by the Company, subject to compliance with the applicable laws. The Trust shall hold the said Equity Shares for the benefit of the Eligible Employees.

The Trust shall in turn issue Options to the Eligible Employees in accordance with the terms and conditions specified herein. The Trust would, on the basis of the decision of the Compensation Committee, Grant from time to time the Options to the Eligible Employees.

The Compensation Committee in its absolute discretion would be authorized to determine the number of tranches in which the Trust would Grant the Options.

Subject to the terms and conditions mentioned in the Trust Deed, the. Trust may, at the discretion of the Trustees, from time to time, purchase Equity Shares of the Company on any of the stock exchanges where the shares of the Company are listed."

5.13. Thus, perusal of all the factual material placed before us, reveals that the assessee trust has been holding the shares in the fiduciary capacity. It could also be said, in other words, that the assessee trust is like a Special Purpose Vehicle (SPV) of the settler company, which has been formed for the special purpose of holding the shares of the settler company and issuing the same to the eligible employees, inter-alia, for the benefit of settler and its employees. It is acting as an extended arm of the settler company. It is not holding the shares in its own absolute rights, as has been contended by the Revenue also. Under these circumstances, it will be very difficult to categorise these shares as business assets, meant for trading by the assessee trust. In the case of a trader, the motive is to maximize the profits, as the main object of the proper is mechanized the profits by doing the business of trading. The attributes available in the transaction of the assesee trust are unlike that of a trader and are more like that of an investor. The assessee trust is not free or authorized to sell the shares, held by it on behalf of the settler company, to any person in the free market at fair market price. Under such circumstances, the assessee trust is not in a position to earn maximum profits. Thus, it could be safely said that certainly assessee trust is not in the business of trading of shares. The shares held by the assessee trust cannot be categorised as 'stock- in-trade' of the assessee trust.

5.14. There is one more angle to decide this issue. We have examined and visualized that what would have been the character and nature of gain/loss arising from transfer of these shares to the employees, if this exercise/transaction would have been done directly by the settler trust. If the settler company would have issued these shares directly in the name of the employees at a value higher than their face value, then the difference amount would have been share premium in the hands of settler company, and undisputedly, the same would be treated as capital receipt in its hands. In that case, the difference amount would certainly be not treated as profit earned from business activities of the settler company. The shares of settler company, cannot certainly be stock-in-trade of the settler company. The assessee trust is like an extended arm or special purpose vehicle of the settler company, created for the purpose of carrying out certain transactions on behalf of the settler company, as discussed in detail in the above paras, and therefore, under these facts & circumstances, the nature and character of shares held by the assessee trust, on behalf of the assessee trust, and resultant gain or loss arising from the transfer of these shares, should also be same, as it would have been in the hands of settler company. Thus, viewed from this angle also the shares held by the assessee trust are capital assets in its hands and gain arising on the transfer of these shares by the assessee trust, shall be taxable under the head income from the capital gains in the hands of assessee trust.

5.15. Finally, we deal with the doubts expressed by the AO and the Ld. CIT(A), that impugned shares were not in the nature of 'capital asset' in the hands of assessee trust. In this regard, it is noted by us that when the issues arose with regard taxability of sale of shares by the employees who had received these shares by exercising their options under the ESOS schemes, various contentious issues were raised by the Revenue in the assessment of such employees. Some of these issues reached before the Tribunal and were dealt by various benches of the Tribunal. In the case of Tata Services Ltd. 122 ITR 594, Hon'ble Bombay High Court got occasion to explain the meaning and scope of the word 'property' in context of section 2(14). It was observed by the Hon'ble High Court that the word "property", used in section 2(14), is an expression of widest amplitude as the definition clause has re-emphasised this, by user of the words "..of any kind". Thus, any right which can be called as a "property", will be included in the definition of "capital asset". Further in the case of Dhurjati Gupta 127 TTJ 356 (Hyd), Hon'ble Bench while dealing with the issues of taxability of capital gain in the hands of employees, arising on sale of ESOS shares by the employees, it was held that once option is granted, it becomes a right in the nature of property, and such stock option, given by the employer company to its employees, represents a property which is valuable and inheritable, and hence becomes capital asset. The Hon'ble Bench relied upon the judgment of Delhi Bench of Punjab & Haryana High Court in the case of Hari Brothers Pvt. Ltd. v. ITO 52 ITR 399, wherein it was held that right to subscribe for shares of company is also a capital asset. On exercising the option, the assessee gets shares, which is only conversion of one capital asset into other capital assets. Similar view has been followed by Honb'le Delhi Bench ITAT in the case of Abhiram Seth v JCIT 150 TTJ 228 (Delhi) and many other cases of similar nature. We further derive support from the judgment of Hon'ble Delhi High Court in the case of PNB Finance Ltd. v. CIT 252 ITR 191(Delhi), wherein it was held that as per section 2(14), the term "property" is of wide amplitude. It signifies every possible interest which a person can acquire, hold and enjoy. Thus, all these judgments dispels doubts expressed by the AO and the Ld. CIT(A) that these shares were not in nature of capital asset in the hands of assessee trust, and therefore, viewed from this angle also, actions of AO as well as Ld. CIT(A), in not treating the impugned shares as capital assets in the hands of assessee trust, were contrary to law and facts.

5.16. Apart from the aforesaid reasoning, last but not the least, we further find that the most important aspect is with regard to 'own history' of the assessee trust. It is noted by us that since inception, the assessee trust has been filing its return of income, wherein these shares were shown as capital assets in the balance sheet. Resultant gain has been shown by the assessee its return of income under the head income from capital gains and has been accepted as such by the Revenue in all the earlier years. It was mentioned by Ld DR that, the assessments in earlier years have been framed u/s 143(1), and therefore no benefit should be given to the assessee. In our opinion, if a particular stand has been taken by the assessee, explicitly, in the return of income, consistently in many years, and the same has not been disturbed by the Revenue, in that situation, in our considered view, the Revenue does not have unfettered powers under the law to disturb such a consistent stand, and that too without there being any change in facts or law. If this kind of approach of the department is allowed, in unregulated manner, it may lead to chaos in compliance of fiscal constitute and there will be uncertainties, all around. The finality of litigation would become extinct. Our view is supported by the judgment of Hon'ble Supreme Court in the case of Excel Industries Ltd. 358 ITR 295.

5.17 Further we raised a pointed query to Ld DR, at the time of hearing, that whether any such action has been taken by the department against any other such ESOS trust whereby similar gain from issue of shares by the ESOS trust have been treated as income from business. In response, Ld. DR showed its inability to provide any such information. Thus, in our considered view, no case has been made out by the Revenue to disturb a consistent approach on this issue, as has been adopted by the assessee and accepted by the department, since inception, during last many years. There was no cause or justification with the Revenue to take a contrary stand in this year.

5.18 Ld. AO has mentioned in the assessment order that the Assessee had sold some shares in the secondary market, and on the basis of this, it should be inferred that the Assessee was in the business of trading of shares. We have examined even this argument of the Ld. DR and find that the facts have not been appreciated correctly by the lower authorities. In fact, there were only five instances, during the entire year, where shares have been sold in the secondary market, and as compared to the total volume of the shares transferred by the assessee trust to the employees, these secondary market shares were of negligible value. In any case, shares sold in the secondary market were also sold by the assessee as an investor and not as a trader. This feature is very significant here that assessee is not free to sell shares to any person at its own will. The assessee trust is bound by the trust deed and also with the terms of the ESOS scheme, which are in turn controlled by the settler company. The assessee is not permitted to take advantage of fluctuations of stock market. There are no attributes like that of a trader. Detailed discussion has been already been made in this record in earlier paras.

5.19 Thus, keeping in view the aforesaid discussion and totality of facts and circumstances of the case, it is held that the shares held by the assessee trust and transferred to the employees were in the nature of capital asset and not stock-in-trade of the assessee. Consequently, the resultant gain is to be taxed, under the head income from capital gains. All the consequences shall follow accordingly, as per law, with regard to assessment of income of the assessee. Thus, ground no.2 of the appeal is allowed.

6. Ground No.3: In this ground, the assessee has submitted that even if income is assessable under the head profits and gains of the business, the AO has over assessed its income.

6.1. Since, we have allowed Ground No.2 of the assessee's appeal, holding that impugned income is to be assessed under the head capital gains, as was shown by the assessee in the Return filed by it, and therefore, Ground no.3 becomes infructuous and dismissed.

7. Ground No.4: In this ground, the assessee has challenged the action of Ld. CIT(A) in confirming the action of the AO that the income of the assessee trust was chargeable to tax at maximum margin rate. It has been held by the AO in the assessment order at para 10 that provisions of section 164(1) of the Act will be applicable in the case of assessee trust as it is a discretionary trust. The provisions of section 164 are very clear that tax will be charged at maximum marginal rate on such income which is covered by the said provision i.e. section 164(1). It was further held that section 164 has been in force from a date much earlier than that of section 112 and it deals with special cases, whereas the provision of section 112 deal with certain other special cases. Reliance was placed by the AO on the judgments of Madras Bench of ITAT in the case of Gopal Srinivasan Trust v Addnl. CIT 46 ITD 157. According to the AO, reading of provisions of section 164(1) along with provisions of section 160 of the Act and their specific reference to "income" and not "total income" makes it very clear that entire income of such trust has to be taxed at maximum marginal rate and not at a concessional rate.

7.1. It was further held by the AO, without prejudice the above, that these "options" are not listed securities and therefore, benefit of second proviso to section 112 of the Act, which provide charging the tax @ of 10% without indexation, shall not be available to the assessee trust.

7.2. Being aggrieved the assessee carried the matter to CIT(A). The CIT(A) rejected the submissions of the assessee. It was held by him in para 1.3 of the appellate order that it was clear from the deed of the trust that individual shares are indeterminate or unknown, since individual shares of various employees have not been specified in the deed of the trust and also for the reason that trust has been found for benefit of both i.e. for present as well as future employees/director of the settler company. These future persons are not known, and hence tax is to be charged on income of the assessee at maximum marginal rate. But no decision was given by the Ld. CIT(A) with regard to availability of benefit of second proviso of section 112, which was denied by the AO in the assessment order.

7.3. Before us, Ld. Counsel has reiterated the submissions made before Ld. CIT(A). Ld. Counsel had placed reliance on the judgment of Bombay Bench of ITAT in the case of Jamsetji Tata Trust v. JDIT (Exemption) 148 ITD 388 and it was submitted that assessee's case is covered with these judgments, in favour of the assessee.

On Other hand, Ld. DR has placed reliance on the orders of lower authorities. We have gone through the submissions made by both the sides as well as cases relied upon by the Ld. Counsel. The issue involved before us is that even if income is assessed as per section 164, whether the entire amount will be subjected to maximum marginal rate of tax on the entire income, or the assessee shall be given the benefit of specific concessions provided by the specific section i.e. section 112 dealing with the taxability of long term capital gains. It is noted by us that this issue is squarely covered by the judgment of Hon'ble Bombay ITAT in the case of Jamsetji Tata Trust (supra), relevant observations of the bench which are directly applicable on the issue before us, are reproduced herein for ready reference:

"13.5 Having considered the rival submissions as well as relevant material on record, we note that the rate of tax on short term capital gain arising from sale of equity shares is provided u/s 111A as 15%. However relevant income which is derived from the property held under trust wholly for charitable or religious purpose is charged to tax as per the provisions of section 164(2) which reads as under:-"[(2) In the case of relevant income which is derived from property held under trust wholly for charitable or religious purposes, [or which is of the nature referred to in sub-clause (iia) of clause (24) of section 2,] [or which is of the nature referred to in sub-section (4A) of section 11,] tax shall be charged on so much of the relevant income as is not exempt under section 11[or section 12], as if the relevant income not so exempt were the income of an association of persons :

[Provided that in a case where the whole or any part of the relevant income is not exempt under section 11 or section 12 by virtue of the provisions contained in clause (c) or clause (d) of sub-section (1) of section 13, tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate.]]"

13.6 Section 164(2) does not prescribe the rate of tax but it mandates the maximum marginal rate as prescribed under the provision of Act. Section 111A is a special provision for rate of tax chargeable on such income which reads as under:-

"111A. (1) Where the total income of an assessee includes any income chargeable under the head "Capital gains", arising from the transfer of a short term capital asset, being an equity share in a company or a unitof any equity oriented fund and-

(a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (NO.2) Act, 2004 comes into force; and

(b) such transaction is chargeable to securities transaction tax under that that chapter, the tax payable by the assessee on the total income shall be the aggregate of-

(i) the amount of income tax calculated on such short-term capital gains at the rate of [fifteen] per cent; and

(ii) the amount of income tax payable on the balance amount of the total income as if such balance amount were the total income of the assessee: Provided that in the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by such short-term capital gains is below the maximum amount which is not chargeable to income tax, then , such income as so reduced falls short of the maximum amount which is not chargeable income tax and the tax on the balance of such short term capital gains shall be computed at the rage of [fifteen] per cent.

2. Where the gross total income of an assessee includes any short-term capital gains referred to in sub-section (1), the deduction under Chapter VI-A shall be allowed from the gross total income as reduced by such capital gains.

3. Where the total income of an assessee includes any short-term capital gains referred to in sub-section(1), the rebate under section 88 shall be allowed from the income tax on the total income as reduced by such capital gains. Explanation – for the purpose of this section, the expression "equity oriented fund" shall have the meaning assigned to it in the Explanation to clause (38) of Section 10.

13.7 When the short term capital gain arising from the sale of shares subjected to STT is chargeable to tax at 15% then the maximum marginal rate on such income cannot exceed the maximum rate of tax provided under the Act. Accordingly, we are of the view that the short term capital gain on sale of shares already subjected to STT, is chargeable to tax at maximum marginal rate which cannot exceed the rate provided u/s IIIA of the income Tax Act. Accordingly this issue is decided in favour of the assessee".

7.4. As has been held by the Hon'ble Bombay Bench in the aforesaid case, the long term capital gain on shares is chargeable to tax at maximum marginal rate which cannot exceed the rate provide u/s 112 of the Act. Therefore, we hold that the action of AO in not providing the benefit of section 112 to the assessee with regard to the income assessable under the head income from capital gains is contrary to law and facts and the same is reversed. The AO is directed to charge tax on capital gains as per section 112 of the Act. With regard to other issue raised by the assessee i.e. availability of benefit of second proviso to section 112, it is seen by us that same has not been examined properly on facts. For this limited purpose, we send this issue back to the file of the AO. The assessee shall place requisite details and evidences before the AO to establish that the impugned shares were listed with stock exchange and assessee was eligible for the benefit of second proviso of section 112, as per facts. The AO shall give full opportunity to the assessee and shall confine his examination limited to this factual requirement only. In the result, ground no.4 is allowed for statistical purposes.

8. As a result, appeal of the assessee is partly allowed.
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