Case: ADD. COMMISSIONER OF INCOME TAX Vs. BHARAT V. PATEL

3. Brief facts:-a. On 10.09.1998, the Respondent, who is the Chairman and Managing Director of Procter and Gamble (P&G), India, filed his income tax return for the Assessment Year 1998-99 and declaring the total income at Rs 40,13,820/-.b. The Assessing Officer, vide order dated 12.02.2001, concluded the assessment proceeding under Section 143(3) of the Income Tax Act, 1961 (in short the IT Act) and determined the total income of the Respondent at Rs 7,23,11,013/- against the declared income.c. Being aggrieved, the Respondent preferred an appeal before the Commissioner of Income Tax (Appeals) being No. CAB/I-643/2000-2001. After considering the case, learned CIT (Appeals), vide order dated 28.03.2002, dismissed the appeal of the Respondent after comprehensively discussing the taxability of the alleged amount and upholding the Assessment Order passed by the Assessing Officer.d. Being dissatisfied, the Respondent carried the matter before the 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 both preferred cross appeals before the High Court of Gujarat at Ahmedabad.f. At the same time, consequent to the decision of the Tribunal dated 27.06.2003, the Assessing Officer started the proceeding side by side to give effect to the order dated 27.06.2003. Vide order dated 15.09.2003, the Assessing Officer held that the difference being sum of Rs 6,80,40,649/- paid to the Respondent by P&G, USA shall be treated as capital gains on transfer/redemption of shares, and hence, the Respondent is liable to pay tax on capital gains. Being aggrieved with the order dated 15.09.2003, the Respondent filed an appeal before the CIT (Appeals) being No. CAB/V- 37/04-05 which was upheld by learned CIT (Appeals) in favour of Assessing Officer while dismissing the appeal of the Respondent.g. Being dissatisfied, the Respondent further preferred an appeal before the Tribunal. The Tribunal, vide order dated 24.09.2010, dismissed the appeal. The decision of the Tribunal dated 24.09.2010 was not challenged further.h. The Division Bench of the High Court, vide judgment and order dated 23.12.2004, allowed the appeal filed by the Respondent while dismissing the appeal of the Revenue.filed by the Revenuebefore this Court.

Court's reasoning:
The word Perquisite in common parlance may be defined as any perk or benefit attached to an employee or position besides salary or remuneration. Broadly speaking, these are usually non-cash benefits given by an employer to an employee in addition to entitled salary or remuneration. It may be said that these benefits are generally provided by the employers in order to retain the talented employees in the organization. There are various instances of perquisite such as concessional rent accommodation provided by the employer, any sum paid by an employer in respect of an obligation 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 of term perquisite. On the other hand, the word Capital Gains means a profit from the sale of property or an investment. It may be short term or long 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 the capital assets takes place. In the instant case, the fundamental question which arises for consideration before this Court is with regard to the taxability of the amount received by the Respondent on redemption of Stock Appreciation Rights (SARs.)10. It is a matter of record that the Respondent was employed as the Chairman-cum-Managing Director of the (P&G) India Ltd. at the relevant time and the said company is the subsidiary of (P&G) USA through Richardson Vicks Inc. USA and that (P&G) USA owned controlling equity. It is an undisputed fact that the Respondent was working as a salaried employee. The (P&G) USA was the company who had issued the Stock Appreciation Rights (SARs.) to the Respondent without any consideration from 1991 to 1996. The said SARs were redeemed on 15.10.1997 and in lieu of that the Respondent received an amount of Rs 6,80,40,724/- from (P&G) USA. However, when the Respondent filed his return, he claimed this amount as an exemption from the ambit of Income Tax12. It is apposite to note here that, particularly, in order to bring the perquisite transferred by the employer to the employees within the ambit of tax, legislature brought an amendment under Section 17 of the IT Act by inserting Clause (iiia) in Section 17(2) of the IT Act through the Finance Act, 1999 (27 of 1999) with effect from 01.04.2000, which was later on omitted by the Finance Act, 2000.13. The intention behind the said amendment brought by the legislature was to bring the benefits transferred by the employer to the employees as in the instant case, within the ambit of the Income Tax Act, 1961. It was the first time when the legislature specified the meaning of the cost for acquiring specific securities. Only by this amendment, legislature determined what would constitute the specific securities. By this amendment, legislature clearly covered the direct or indirect transfer of specified securities from the employer to the employees during or after the employment. On a perusal of the said clause, it is evident that the case of the Respondent falls under such clause. However, since the transaction in the instant case pertains to prior to 01.04.2000, hence, such transaction cannot be covered under the said clause in the absence of an express provision of retrospective effect. We also do not find any force in the argument of the Revenue that the case of the Respondent would fall under the ambit of Section 17(2) (iii) of the IT Act instead of Section 17(2) (iiia) of the IT Act. It is a fundamental principle of law that a receipt under the IT Act must be made taxable before it can be treated as income. Courts cannot construe the law in such a way that brings an individual within the ambit of Income Tax Act to pay tax who otherwise is not liable to pay. In the absence of any such specific provision, if an individual is subjected to pay tax, it would amount to the violation of his Constitutional 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 in Infosys 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 the person is taxable as income? In our view, it is not so. Unless the benefit is made taxable, it cannot be regarded as income. During the relevant assessment years, there was no provision in law which made such benefit taxable as income. Further, as stated, the benefit was prospective. Unless a benefit is in the nature of income or specifically included by the legislature as part of income, the same is not taxable. In this case, the shares could not be obtained by the employees till the lock-in period was over. On facts, we hold that in the absence of legislative mandate a potential benefit could not be considered as income of the employee(s) chargeable under the head salaries…..16. Circular No. 710 dated 24.07.1995 which was issued by the CBDT deals with the taxability of shares issued at less than the market price.On a perusal of the above, prima facie, it appears that such Circular dealt with the cases where the employer issued shares to the employees at less than the market price. In the instant case, the Respondent was allotted Stock Appreciation Rights (SARs.) by the (P&G) USA which is different from the allotment of shares. Hence, in our opinion such Circular has no applicability on the instant case. Moreover, a Circular cannot be used to introduce a new tax provision in a Statute which was otherwise absent.On a first look of the said provision, it is apparent that such benefit or perquisite shall have arisen from the business activities or profession whereas in the instant case there is nothing as such. The applicability of Section 28(iv) is confined only to the case where there is any business or profession related transaction involved. Hence, the instant case cannot be covered under Section 28(iv) of the IT Act for the purpose of tax liability.18. To sum up, the Respondent got the Stock Appreciation Rights (SARs) and, eventually received an amount on account of its redemption prior to 01.04.2000 on which the amendment of Finance Act, 1999 (27 of 1999) came into force. In the absence of any express statutory provision regarding the applicability of such amendment from retrospective effect, we do not find any force in the argument of the Revenue that such amendment came into force retrospectively. It is well established rule of interpretation that taxing provisions shall be construed strictly so that no person who is otherwise not liable to pay tax, be made liable to pay tax.