Cost of acquisition as FMV of ESOP shares regarded as perquisite unsustainable
Facts and Issues of the case
The assessee is an individual and employed as general manager in M/s Microsoft India (R&D) private limited. During the course of assessment, learned Assessing Officer noticed that the assessee had acquired 2,274 shares of M/s Microsoft Corporation in the financial year 2001-02 with a grant price of $ 5.97 and 735 shares during the financial year 2003-04 at the 0 cost under ESOP. Assessing Officer further noticed that the assessee sold such shares during the financial year 2007-08, but failed to offer the capital gains in the assessment year 2008-09. Assessing Officer noted the details of the shares in his order and called upon the assessee to explain why the income of Rs. 28,90,037/-shall not be added to the income of the assessee.
Assessee explained that he used the fair market value (FAIR MARKET VALUE) of the shares prevailing at the time of stock option to compute the capital gains as he had paid the federal taxes in US for the same and believed that the capital gains have to be computed considering such fair market value. He further submitted that he filed the revised computation of long term capital gains wherein the grant price was considered as the cost of acquisition of such shares acquired by exercising stock options granted by Microsoft Corporation to him.
Assessing Officer, however did not accept the contention of the assessee, and brought the amount of Rs. 28,90,037/- to tax in the hands of the assessee.
The assessee further claimed an amount of Rs. 30,19,013/- as the tax credit as per article 25 (2) (a) of the Double Taxation Avoidance Agreement between India and USA (DTAA) read with section 90(2) of the Income Tax Act, 1961. Observing that the assessee has not produced the proof in respect of the same in the shape of transcripts, learned Assessing Officer disallowed the same. Learned Assessing Officer further decline to grant credit of taxes that were deducted on the shares vested under ESOP stating that no proof was submitted at that time and such a request will be considered on the production of proof.
Observations by the Court
It is clear that when the capital gains arise from the transfer of sweat equity shares which were treated as perquisite in the hands of the employee, the cost of acquisition of such shares shall be the value under that clause. However, in case of sweat equity shares which were subjected to fringe benefit tax for the purpose of computing capital gain on the transfer of such sweat equity shares in future, the cost of acquisition of sweat equity shares shall be the fair market value, which has been taken into account while computing the value of fringe benefit under section 115WC(1)(ba) of the Act.
In this case, according to the assessee, he paid federal taxes on the difference between the fair market value and the grant price. It is not his case that the employer paid the fringe benefit tax in tune with the provisions under section 115WA of the Act while taking into consideration the fair market value in accordance with 115WC(1)(ba) of the Act. This fact clearly establishes that it is a clear case of assessee paying tax treating the value of shares as perquisite, but not the employer paying the fringe benefit tax on the difference between the fair market value and the grant price. According to us, to this scenario, provisions under section 49(2AA) of the Act, but not section 49(2AB) of the Act are applicable. When section 49(2AB) of the Act has no application to the facts of the case, the argument of the learned AR basing on the applicability of Article 26 of the DTAA falls to ground.
Conclusion
The payment of federal taxes on the different between FMV and the grant price establishes that assessee is paying tax treating the value of shares as perquisite. Accordingly, provisions of section 49(2AA) are applicable. Cost of acquisition of share cannot be FMV.
Anil-Bhansali-Vs-ACIT-ITAT-Hyderabad
