ESOP transfer (prior to exercise) chargeable to tax as capital gains – Bangalore ITAT


N.R. Ravikrishnan v ACIT [IT APPEAL NO. 2348 (BANG.) OF 2018 dated 31.10.2018] (Bangalore ITAT)

Background

  • Assessee, an employee of Infosys BPO Ltd, was granted ESOP options, of which 6000 options vide Option Transfer Agreement dated 07.02.2007 were transferred to/bought back by Infosys Technologies Ltd., with Infosys BPO Ltd., as a confirming party.
  • 6000 options comprised of 1250 options granted on 28.02.2003; 2500 options granted on 02.02.2004 and 2250 options granted on 01.06.2005. The options granted on 28.02.2003 and 02.02.2004 were held for a period of more than 3 years before their transfer on 07.03.2007.
  • For the AY 2007-08, the assessee filed his return of income declaring Long Term Capital Gains (‘LTCG’) arising on transfer of above 3750 ESOP options amounting to Rs. 20,41,672.
  • Assessee’s case was selected for scrutiny and the Assessing Officer (‘AO’) treated the said capital gains as Short Term Capital Gains (‘STCG’) instead of LTCG. The AO held that the options have no value without their exercise and the gains derived by the assessee by transfer thereof, essentially represents the exercise by the assessee of the rights that the options had rendered to him.
  • The assessee filed an appeal against the assessment order. However, the CIT(A) held that as prior to the date of vesting the assessee himself could not have exercised right, the gains were short term in nature i.e., ‘STCG’.

HELD:

  • It is seen that both the authorities below have ignored the important fact that 3750 options were sold to Infosys Technologies Ltd., without any exercise of option.
  • If ESOP options had been exercised, and the shares allotted thereby would have been sold after their allotment, then undisputedly the gains arising therefrom would have to be treated as STCG. In the case on hand, however, the 3750 options have been transferred as such, without any exercise of options.
  • In the absence of exercise of options, no shares were allotted to the assessee. It is a case of buy back of ESOP options by Infosys Technologies Ltd., with Infosys BPO Ltd., the assessee’s employer, as a confirming party.
  • It is not in dispute that ESOP options provided valuable right to the assessee to exercise and have allotment of shares. They were thus ‘capital asset’ held by the assessee from the date of grant i.e., 28.02.2003 and 02.02.2004 for which a consideration was paid to the assessee under the option Transfer Agreement. The contention that the assessee cannot exercise option in the absence of vesting is not relevant as the options were transferred without any exercise in the case on hand.
  • Reliance was placed on following decisions:
    • Abhiram Seth v. Jt. CIT [2013] 58 SOT 1 (Delhi – Trib.)
    • Gopi G. Nambiar [IT Appeal No. 1083 (Delhi) of 2010, dated 27-6-2013]

Note:

Transfer of ESOPs is currently prohibited under the SEBI regulations. However, the Buy-back rules of options are not clearly stipulated under the SEBI regulations.
Further, the question of applicability of perquisite taxation vis-a-vis capital gains is not discussed by Hon’ble Bangalore ITAT.

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