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Delhi ITAT Reignites ESOP Taxation Debate

The Delhi Bench of the Income Tax Appellate Tribunal has delivered an important ruling in the case of Abhiram Seth - 'taxpayer'. The ITAT stated that 'right to exercise an option to sell stock' will qualify as a capital asset. Such a capital asset is said to be acquired on the date when the employee accepts the grant offer. Therefore, the ITAT held that gain on transfer of such capital asset where the underlying asset was held through a company created trust is a Long Term Capital Gain. Taxand India summarises the facts of the case and the ruling of the ITAT.

Facts of the case
The taxpayer, an employee of Pepsico India Holdings Ltd, was granted valuable rights in shares of Pepsico Inc, USA (parent company of PIHL) between FY 1995-1996 to FY 1999-2000 under the Employee Stock Option Plan scheme of the parent US company. The shares were encashable over a period of ten years after lapse of the initial period of three years from the date of acceptance of the ESOP stock offer. As a part of the scheme the employees were given the option on the date of their eligibility, to sign and own it on such date and keep the same till they reach their optimum time in the eyes of the employee to sell / liquidate. The trust acted as a custodian of shares on behalf of the taxpayer and sold them upon receiving instructions from the taxpayer. On sale of such shares in FY 2003-04, taxpayer claimed the gains as LTCG and further invested such gains in accordance with Section 54F of the Income Tax Act, 1961 ("the Act"), thereby claiming an exemption of such amount.

Appellate Commissioner's ruling
Aggrieved by the AO's order, the taxpayer filed an appeal before the Commissioner of Income tax (Appeals) and contended AO's order. CIT, however, upheld the order of the AO holding that the case was squarely covered by Delhi ITAT ruling in Shri Jaswinder Singh Ahuja.

Taxpayer's contentions
The taxpayer was of the view that the valuable right (to exercise an option to sell stock) acquired by him as a consequence of acceptance of the grant offer qualify as a long term capital asset.

Taxand's Take

The Delhi Tribunal, in line with Hyderabad Tribunal's judgement in the case of Dhurjati Gupta, has given a favourable judgement, upholding the taxpayer's view that date of acceptance of grant of stock option should be treated as the date of acquisition of the capital asset. The fact that payment of purchase price was deferred to a subsequent date, does not mean that no right accrued to the taxpayer. The mere fact that separate agreements were signed at an earlier date is indicative of the fact that a right accrued to the taxpayer.

This conclusion may have far reaching implications as it may exert persuasive value in case of other tax payers with similar facts.

Your Taxand contacts for further queries are:
Shrey Jain
T. +91 124 339 5010

Nitin Baijal

Taxand's Take Author