Ramamoorthy Sridharan, Hyderabad vs Assessee

2. Briefly stated, assessee is an employee of Microsoft India (R&D) Private Limited, filed his return of income for A.Y 2004-05 on 1.11.2004 under the residential status of 'Resident and Ordinarily Resident' as per section 6(6) of the Act. In the return of income, he disclosed the income earned globally during the said year. He disclosed capital gains from sale of microsoft shares acquired by him by exercising the stock options granted to him under Employee Stock Option Plan ('ESOP') by his

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erstwhile employer Microsoft Corporation, USA. The shares sold during A.Y 2004-05 were acquired by exercising a part of the stock options on 05.11.1996 (A.Y 1997-98) and other part on 30.06.1999 (A.Y 2000-01).

3. For A.Y 1997-98 and A.Y 2000-01, assessee was a resident of the USA as per its tax laws and was not present in India. At the time of exercise of the stock options, i.e. during A.Y 1997-98 and A.Y 2000-01, the income being the difference between the fair market value (FMV) of the shares as on the date of exercise and the grant price was taxed in the USA as salary income as per the tax laws of USA.

4. In the return of income filed for A.Y 2004-05 for the purpose of computation of the capital gains from the sale of shares acquired through exercise of Stock Options in A.Y 1997- 98 and A.Y 2001-01, assessee had considered FMV as cost of acquisition of such shares.

5. AO in the assessment order passed u/s 147 r.w. 143(3) of the Act recomputed the long term capital gains from sale of shares acquired under ESOP by considering the grant price as cost of acquisition as against FMV that was considered in the return of income, thereby increasing the amount of long term capital gains by Rs.4,35,17,306.

6. Being aggrieved by the aforesaid order u/s 147 r.w.s. 143(3) of the Act, assessee preferred appeal before the ld CIT (A) and before the ITAT Hyderabad. The ITAT had held that unless

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the income being the difference between FMV and grant price of the shares has been recognized under sub section (2) of section 17 of the Act, one cannot consider the FMV as cost of acquisition as stipulated in section 49(2AA) of the Act.

7. Against the order of the ITAT, assessee has filed appeal before the Hon'ble Andhra Pradesh High Court and the Hon'ble High Court has admitted the assessee's appeal on this issue.

8. The AO in the meantime, passed penalty order dated 28.02.2011 levying penalty of Rs.95,73,807 u/s 271(1)(c) of the Act, being 100% of the tax impact of increase in the amount of long term capital gains on sale of Microsoft shares acquired under ESOP by alleging that the assessee had furnished inaccurate particulars of income in respect of capital gains computed in the return of income.

9. Before the CIT (A), the assessee furnished all facts and material to computation of capital gains and explanations offered being bonafide, the penalty proceedings u/s 271(1)(c) of the Act are not applicable.

10. In the instant case, assessee was granted 20,285 stock options under ESOP on 17.11.1988 at grant price of US$ 0.3194 per share and 17,450 stock options were granted on 25.07.1989 at grant price of US$ 0.3611 per share. Assessee exercised 20,285 stock options on 5.11.1996 and 17,450 stock options as on 30.06.1999. The prevailing fair market value (FMV) of

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Microsoft shares on 5.11.1996 was US$ 8.8087 per share and on 30.06.1999 was US$ 4,49,063 per share.

11. At the time of exercise of stock options on 5.11.1996 and 30.06.1999 respectively the assessee had paid federal taxes in the USA on the difference between FMV of share and grant price of share. The fact of payment of taxes by the assessee in the USA at the time of exercise of stock options was accepted by the erstwhile CIT (A) (in context of allowing foreign tax credit) in the modified appellate order (dated 06.05.2008).

12. Later on the exercise shares were sold by the assessee during the relevant A.Y on 26.08.2003. While computing the long term capital gains from sale of said shares, the assessee had considered the FMV on the date of exercise of shares as cost of acquisition of shares. The prevailing FMV on the date of exercise of stock options was considered as cost of acquisition of the shares on the basis of assessee's bonafide understanding of the provisions of the Act applicable during the relevant A.Y and the fact that federal taxes were already withheld/paid in the USA at the time of exercise of stock options on the difference between FMV and grant price.

13. It was submitted before the CIT (A) that in the return of income filed for relevant A.Y the particulars of computation of long term capital gains arising from sale of ESOP shares on 23.08.2003 was adequately disclosed by the assessee byenclosing a statement. The cost of acquisition of shares were considered as under:

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S.No No. of shares Date of FMV on date Cost of sold exercise of exercise of acquisition of shares shares (in of shares (In US$) US$) 1 20,285 05.11.96 8,087 1,78,603 2 17,450 30.06.99 4,49,063 7,83,615

14. During the course of assessment proceedings, assessee submitted the transaction detail statements vide submission dated 17.12.2007 as documentary proof of FMV of US$ 88,047 on 5.11.1996 and FMV of US$ 4,49,603 on 30.06.1999 respectively. In the said statements, the details of federal taxes withheld/paid by the assessee on said dates on the difference between FMV and grant price were also given. The transaction detail statements contain all details which are required to compute the capital gains and there is no allegation from the AO that there are any incorrect particulars/facts submitted by the assessee.

15. During the course of proceedings before the CIT (A), assessee reiterated his bonafide understanding/explanation, vide submission dated 24.12.2007 to explain as to why FMV on the date of exercise was considered as cost of acquisition for the computation of long term capital gains in the return of income filed for the relevant A.Y. The ld AR submitted that the issue whether the difference between grant price and exercise price is to be subjected to tax as employment/salary income or as capital gains on subsequent sale of shares has been controversial and the provisions in respect of the same has been different for different A.Ys. Upto A.Y 2000-01 there was no specific provisions in the Act to deal with this issue. However, the general view then

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was that the difference between grant price and exercise price should be treated as taxable perquisite under the head 'salary'.

Therefore, if the assessee would have been 'Resident' in India, such income in respect of stock options exercised in A.Y 1997-98 and A.Y 2000-01 would have been taxed under the head 'salary'. However, as the assessee was 'Non Resident' in A.Y 1997-98 and A.Y 2000-01, he was not liable to Indian Income Tax, but was subject to taxation on the difference between grant price and exercise priced based on FMV on the shares in the USA and accordingly paid US federal taxes.

16. It was submitted that the above concept of taxation between grant price and exercise price of ESOP as perquisite under the head 'salary' and corresponding computation of capital gains by adopting cost of acquisition as FMV on the date of exercise was brought into force by an amendment to section 17(2) and section 49(2AA) by the Finance Act, 2000 w.e.f. A.Y 2001-02. In It was stated that assessee was of the bonafide view that for computation of long term capital gain, FMV on the date of exercise is to be considered as cost particularly when the assessee had already been subjected to taxation of difference amount between grant price and exercise price as salary income in the USA. Therefore, it was argued that the explanation offered by the assessee is bonafide and cannot be rejected.

17. It was pointed out by the ld AR before the CIT (A) that the penalty provisions of section 271(1)(c) of the Act can be invoked, if the assessee had either 'concealed' or furnished 'inaccurate particulars of its income'. In the penalty order, even the AO has

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not alleged concealment of income by the assessee. As per explanation (1) to section 271(1)(c) of the Act, in case the assessee had disclosed material facts to the income and the explanation offered by him is bonafide, the disputed addition cannot be treated as furnishing of inaccurate particulars of income and therefore, provisions of section 271(1)(c) of the Act will not apply.

18. It was again stressed that the assessee has not furnished any inaccurate particulars of his income as regards long term capital gains arising from sale of ESOP shares in the return of income filed for relevant A.Y. Also there was no failure on the aprt of the assessee to offer any necessary bonafide explanations in respect of the said transaction before the AO during the course of assessment proceedings. In this regard reliance was placed on the judicial pronouncements of Hon'ble Supreme Court in the following cases:

• Reliance Petro Products (P) Ltd (322 ITR 158), it has been held as under:

"the assessee had furnished all the details of the expenditure as well as income in its return, which details, in themselves were not found to be inaccurate nor could be viewed as concealment of income on its part. It was upto the authorities to accept its claim in the return or not. If we accept the contention of the revenue, then in cae of every return where the claim made is not accepted by the AO for any reason, the assessee will invite penalty under section 271(1)(c). That is certainly not the intendment of the Legislature"

• In the case of Cement Marketing Company of India Ltd vs. Asstt. CST (124 ITR 15 (1980) it has been observed that:

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"where the assessee does not include a particular item under a bonafide belief that he is not liable so to include it, it would not be right to condemn the return as a 'false' return inviting imposition of penalty".

• In Hindustan Steel Ltd vs. State of Orissa (83 ITR 26 (1972) it has been observed that:

"the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act, or where the breach flows from a bonafide belief that the offender is not liable to act in the manner prescribed by the statute".

• Hyderabad Bench of the Tribunal in the case of HOE Leather Garments Ltd (2010) in ITA No.38/Hyd/07 observed as under:

"Whenever income returned by the assessee is enhanced by the AO, the penal provision is not automatically attracted. The penal provision is applicable only if the enhancement is on account of some income with the assessee is found to have earned and concealed".

19. The ld AR relied on circular No.14(XL-35) dated 11th April, 1955 wherein it was stated that the Income Tax Officer must not take advantage of ignorance of an assessee.

20. As regards payment of federal taxes by the assessee in the USA, at the time of exercise of stock options on 5.11.1996 on 30.06.1999 respectively on the difference between FMV and grant price, attention was invited to the report of OECD on "Cross border income tax issues arising from employee stock option plans" where it has been stated that the difference

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between the market value of shares at the time of exercising of options and the amount paid by the employee to acquire them should be considered as employment income.

21. It was submitted that at the time of exercise of stock options during A.Y 1997-98 and 2000-01 respectively, the assessee's residential status in India was that of a "Non Resident" as per section 6(6)(a) of the Act. Accordingly, any income accruing or arising to the appellant outside India was not liable to be taxed in India as per section 5(1)(c) of the Act. Therefore, the benefit arising from the exercise of stock options in the USA being the difference between the FMC and the grant price, was not taxable in India in the hands of the assessee.

22. It was submitted that aggrieved by the Tribunal's decision the assessee filed an appeal on this contentious matter (i.e. substantial question of law) before the Hon'ble jurisdictional High Court and the appeal has been admitted by the Hon'ble High Court on 10.08.2011.

23. In view of the above, it was submitted that admission of an appeal by the Hon'ble jurisdictional High Court confirms that the matter whether the cost of acquisition of shares in the instant case should be either FMV on the date of exercise (as considered by the assessee based on his bonafide understanding) or the grant price (as considered by the AO) has two debatable view, which will be adjudicated by the Hon'ble High Court eventually.

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24. It was further submitted before the CIT (A) that no tax sought to be evaded by the assessee in the instant case for levy of penalty u/s 271 (1)(c) of the Act.

25. In view of the above and without prejudice to the assessee's contention for non levy of penalty, it was submitted that after considering the relief u/s 90 of the Act r.w. Article 25(2) (a) of the DTAA between India and USA, in respect of foreign tax credit of federal taxes paid by the assessee at the time of exercise of stock options on 5.11.1996 and 30.06.1999 respectively, the tax sought to be evaded for levy of penalty u/s 271(1)(c) of the Act is nil. In other words, as per the explanation 4(e) to section 271(1)(c) of the Act, there is no difference between the tax on the assessee income (after giving foreign tax credit) and the tax on the returned income (wherein no foreign tax credit was claimed). Accordingly the tax sought to be evaded as Nil.

26. The CIT (A) held as follows:

"6. I have carefully considered the submissions of the appellant, ITAT's order referred to above and the assessment order. In this case, the AO reopened the assessment u/s 147 and completed the assessment on 31.13.2007 and after considering the submissions of the appellant, determined the long term capital gains at Rs.4.35 crores adopting the 'grant price' as the cost price of 37735 shares allotted to the appellant by his employer, M/s. Microsoft Limited under "Stock Option Scheme" instead of Fair Market Value adopted by the appellant as cost price of 37735 shares. Aggrieved by the order of the AO the assessee preferred appeal before the CIT (A)-II Hyderabad on account of sale of

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Employees Stock Option Shares. The CIT (A)-II Hyderabad, after examining various details submitted by the assessee upheld the addition made by the AO. On further appeal, the Hon'ble ITAT A Bench, vide its order dated 30.6.2010 in the appellant's own case for A.Y 2004-05 has dismissed the grounds of appeal of the assessee against the validity of reopening of assessment u/s 147 and determination of long term capital gains. The Hon'ble Tribunal in Para 13.1 held that for the purpose of capital gains 'cost' to be taken was 'Actual Cost' and not the Fair Market Value and since the 'actual cost' incurred by the assessee was 'grant price', only this 'grant price' has to be taken as cost with reference to the computation of capital gains and dismissed this ground of the appellant".

27. Aggrieved, the assessee is in appeal before us.

28. We heard both the parties and perused the records. Penalty Proceedings are independent proceeding and the matter is to be considered afresh: It is an undisputed position that penalty proceedings are independent proceedings and the matter has to be looked into again as the assessment order is not the final word in the penalty proceedings. The decision of the Supreme Court in the case of Anantaram Veerasinghiah vs. CIT reported at 123 ITR 457 is the main decision on this issue. It is thus possible for the assessee during the course of the penalty proceedings for concealment to file documents as well as to give explanations which were not given in the assessment proceedings. Merely because an addition has not been contested, it cannot be presumed that the addition represents concealed income. It has been held by the Supreme Court in the case of Sir Shadilal Sugar & General Mills Ltd. reported at 168 ITR 705 that from the assessee agreeing to additions to his income, it does not follow that the amount agreed to be added was concealed income. There may be a hundred and one reasons for such

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admission. Hence in the present case, even though the Hon'ble ITAT has confirmed the appeal on merits (though admitted by the Hon'ble High Court) the penalty proceedings stand under a different footing and is not automatic.

29. Penalty for concealment is not imposable where there are two views on the issue: If the issue is a debatable one and two views are possible, penalty for concealment cannot be levied. It was held by the Rajasthan High Court in the case of CIT vs. Harshvardhan Chemicals & Minerals Ltd, reported at 259 ITR 212 that where the wrong deduction has been claimed by the assessee but the issue is debatable, it could not be said that there was concealment of income. Similar view has been expressed by the Madras High Court in the case of CIT vs. Chaplin Point Laboratories Ltd reported at 293 ITR 524. Further the decision in the case of Malabar Industrial Co. Ltd vs. CIT (243 ITR 83 (S.C) and CIT vs. Max India Ltd (295 ITR 282 (S.C) support this view. In the present case, two views have been expressed with respect to the computation of capital gains from the sale of shares acquired through exercise of stock option in AY 1997-98 and 2000-01.

30. Unless there is deliberate default, penalty for concealment cannot be levied: It has been held by the High Court in the case of CIT vs. Sidhartha Enterprises reported at 322 ITR 80 that for penalty for concealment to be levied, there must be some element of deliberate default. Penalty cannot be levied where a wrong claim is made by mistake. Similarly it has been held by the High Court in the case of CIT vs. Shahbad Co-operative Sugar Mills Ltd. reported at 322 ITR 73 while dealing with a wrong claim of

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deduction that penalty cannot be levied for a claim made which is not allowed. The claim of deduction made by the assessee can be described as inaccurate computation of income for which penalty for concealment cannot be levied. The above decisions are in line with that of the Supreme Court in the case of CIT vs. Reliance Petroproducts Ltd. reported at 322 ITR 158 where it was held that where the claim of deduction of interest was disallowed, it would be insufficient for levy of penalty for concealment as an incorrect claim does not amount to furnishing inaccurate particulars. Where a claim is made in the return of income it is up to the authorities to accept the claim when all particulars had been furnished.

31. To conclude in the present case, the assessee has disclosed all the material facts before the AO and also the explanation offered by the assessee as to why FMV on the date of exercise was considered as cost of acquisition for the computation of long term capital gains in the return of income filed for the relevant A.Y.is bonafide. The decision of Kanbay Software India Ltd vs. DCIT (ITA No.300/PN/2007) support our view and we shall extract the relevant portion as follows:

"65. Be that as it may, even assuming that deeming fiction under Explanation 1 to Section 271 (1)(c) can be triggered by a wrong legal claim, it cannot be the case that merely because there is a wrong claim, even if that be so, penalty under section 271(1)(c) can be imposed. This deeming fiction under section 271(1)(c) only shifts the onus of proof on the assessee, as this Explanation itself provides that a penalty can only be imposed (a) when there is no explanation by the assessee, (b) when the explanation given by the

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assessee is found to be false, and (c) when the assessee provides an Explanation which he fails to substantiate and he fails to prove that the explanation was bonafide and that all the facts necessary for the same and material for computation of income have been duly disclosedby the assessee".

32. We allow the assessee's appeal.

33. In the result, assessee's appeal is allowed.

Order pronounced in the Open Court on 17th April, 2015.

Sd/- Sd/- (P.M. Jagtap) (Asha Vijayaraghavan) Accountant Member Judicial Member

Hyderabad, dated 17th April, 2015.

Vnodan/sps Copy to:

1. Shri Ramamoorthy Sridharan, Plot No.1060 A, Road No:52 Jubilee Hills, Hyderabad

2. Income Tax Officer Ward 12(45) Hyderabad

3. The CIT(A) - V Hyderabad

4. The CIT -I Hyderabad

5. The DR, ITAT, Hyderabad

6. Guard File By Order

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