ORDER

S.K. Yadav, J.M.

1. This appeal is directed by the assessee against the order of the CIT (A) pertaining to the asst. yr. 1998-99 on following grounds:

The learned CIT (A) has erred on facts and in law in upholding the following additions made by the Jt. CIT, Special Range 9, New Delhi in the present case:

(a) Rs. 1,53,067 being enhancement in the Indian rupee value of the salary due to difference in rate of exchange.

(b) Rs. 10,02,084 and Rs. 1,10,505 being non-pecuniary reductions from the base salary on account of housing contribution and auto norm on the averment that the same are in the nature of concessions and while doing so, he has failed to appreciate that no income actually accrues or arises to the appellant in this regard.

(c) Rs. 5,51,719 being the amount computed as the perquisite value of furnished accommodation after reduction of housing norm of Rs. 10,02,084 treated as income and while doing so, has grossly erred in not accepting that the perquisite value of the residential accommodation should be limited to Rs. 7,80,000 being the actual rent paid since the fare rental value was less than 10 per cent of the salary.

(d) Rs. 1,20,000 being maintenance charges incurred by the employer.

(e) Rs. 39,79,815 being the amount of net gain on sale of exercised stock options even though the learned CIT (A) had accepted that the AO is incorrect in holding that in business, any taxable income arising at the time of exercise, the gain of sale can be treated as income under the head salaries.

(f) Rs. 1,16,130 being the amount of corporate club membership paid by the employer for the purposes of its business.

(g) Rs. 50,000 alleged to be the perquisite value of electricity on estimated basis even though no amount was actually incurred by the employer and therefore no amount could be attributed as perquisite in view of the provisions of Rule 3(d) of the IT Rules, 1962.

2. The learned CIT (A) has omitted to adjudicate upon ground No. 12 in the assessee's appeal before him against the charging of interest of Rs. 12,39,208 under Section 234B even though there was no direction for charging the same in the assessment order.

2. During the course of hearing, the learned Counsel for the assessee has opted not to press ground Nos. 1(a), 1(d) and 1(f). As such, these grounds are dismissed being not pressed.

3. Apropos ground No. 1(b), it is noticed from the orders of the lower authorities that during the course of assessment proceedings, the AO has observed from the monthly pay disbursal details that the housing contribution and auto norms were deducted from the assessee's salary against specific amenities i.e. accommodation and car plus driver provided by the employer and he formed a view that the aforesaid amenities have not been provided to the assessee free of charge as shown in the return of income. In other words, these perquisites have been provided at a concessional rate.

4. The assessee preferred an appeal before the CIT (A) with the submission that the above deduction on account of housing contribution and auto norms from the base salary are notional amounts effected by means of book entry and are on non-pecuniary account and the benefits/amenities of housing and conveyance as provided are duly offered for tax as salary as per the prescribed law. It was further contended before the CIT (A) that it is an established practice worldwide that the salary of employees sent on overseas assignment vis-a-vis the other employees in the home country, is structured so as to ensure economic equity in the compensation of the employees. This parity in compensation is maintained through a book entry mechanism whereby, the amount an employee would have reasonably incurred on housing and conveyance in the home country, is estimated and reduced from the gross salary. Further, in lieu of housing and conveyance deduction, the expatriate employee is provided housing and conveyance benefits in the host country and the value thereof is included as income. He has also placed reliance on a decision of the CIT (A) in the case of Whirlpool Holding (India) Ltd., the employer, wherein it was held that deduction made by the company from the salaries of expatriate employees on account of hypo tax, housing norms and auto norms did not result in application of income. In support of his contention, the assessee has relied upon the order of the Tribunal in the case of Jaidev H. Raja v. Dy. CIT which has been followed by the learned CIT (A) in the aforesaid case of Whirlpool India Ltd. The CIT (A) re-examined the issue in the light of assessee's contention and finally held that deductions made from salary in respect of hypo tax, housing norm and auto norm are definitely linked up to these benefits provided in India at concessional rates and not free of charge as claimed by the assessee. He, accordingly, upheld the view of the AO.

5. Now, the assessee has preferred an appeal before the Tribunal and reiterated his contention raised before the lower authorities. Learned Counsel for the assessee Mr. M.S. Syali, senior advocate, has emphatically argued that in accordance with the policies, annual base salary of the assessee was reduced by US $ 27218 equivalent to Rs. 10,20,084 on account of housing and US $ 3000 on account of auto norms and the assessee was entitled to receive only the net amount of salary. In lieu thereof, the assessee was provided housing and conveyance benefits in India and an aggregate sum of Rs. 8,12,661 (Rs. 7,80,000 + Rs. 32,661) which was duly included as perquisite for rent-free accommodation and furniture and Rs. 13,200 towards conveyance at the value prescribed under the IT Act r/w IT Rules. He further reiterated that the amount in fact is in the nature of deductions from the salary and the assessee does not have any right to receive these amounts in the first place. He further invited our attention to the remand report made to the CIT (A) in the case of Whirlpool India Ltd. in which the AO has accepted the claim of the assessee.

6. In oppugnation, the learned Departmental Representative has submitted that the assessee, an Australian national, has been working with Whirlpool as MD and President. The learned Departmental Representative further submits that from the documents available on record, it is quite clear that the assessee has been provided with the facility of housing, accommodation and auto norms over and above accommodation and car, etc. in India and thus are not deductible from his salary and foreign service premium, etc., and if for a moment it is presumed that these facilities have been withdrawn by the employer, then what about the base salary, foreign service premium, etc. have been received by the assessee remained the same i.e. no deduction on account of housing contribution and auto norm. Learned Departmental Representative further contended that while recomputing the salary of the assessee, the AO has taken into account similar type of cases of other expatriates in which they have voluntarily shown these perquisites in the IT return. Besides, learned Departmental Representative placed heavy reliance upon the findings of the CIT (A).

7. Having considered the rival submissions and from a careful perusal of the record, it is noticed that during the course of assessment, the AO has observed from the month-wise break-up of the assessee's salary disbursed in US $ in USA that every month deductions were made from salary on account of housing contribution and auto norm in accordance with the terms of employment and the total amount deducted as housing contribution is US $ 27218 and the auto norm US $ 3000. On these specific deductions from the salary against specific amenities provided by the employer as evidenced from monthly pay disbursable details, the AO observed that these amenities have not been provided free of charge as shown in the return of income and he formed a view that the perquisites have been provided at a concessional rate. He accordingly invoked provisions of Section 17(2)(ii) and Section 17(2)(iii) of the IT Act and valued the perquisite in accordance with the mechanism provided in Rule 3 of the IT Rules. He, therefore, added back the housing contribution and auto norms deducted from the salary, to the salary income of the assessee. Now, the question posed before us is whether the housing contribution and the auto norms initially reduced from the salary of the assessee can be termed to be as part of the salary in order to determine the taxable income of the assessee. The main thrust of the argument of the learned Counsel for the assessee is that the salary of employees sent on overseas assignment vis-a-vis other employees in the home country is structured so as to ensure economic equity in the compensation of the employees and this parity in compensation is maintained through a book entry mechanism whereby the amount the employee would have reasonably incurred on housing and conveyance in the home country is estimated and reduced from the salary. It was also contended by Mr. Syali that the housing norm and auto norm represents the amount the expatriate employee would have paid towards housing and conveyance had he continued to render service in his own country. These amounts are reduced from the salary payable to the employee and in turn, the employer undertakes to provide housing and conveyance to the expatriate employee in the host country. From these arguments of the assessee, it has become clear that the assessee was supposed to pay towards housing norms and auto norms had he continued to render service in his home country against the housing accommodation and conveyance provided to the assessee by its employer. Similar is the position here that according to the terms of employment, the assessee has been provided free housing accommodation and conveyance by the employer against deduction of the housing norms and auto norms which were supposed to be deducted had he continued to render service in his home country against residential accommodation and conveyance provided by the employer. The assessee has placed heavy reliance upon the judgment of Mumbai Bench in the case of Jaidev Raja in ITA No. 2021/Mum/1998 in support of his contention that whatever deductions were made in his home country, they were never accrued to the assessee. As such, these cannot be considered to be a part of the salary to ascertain tax liability.

8. I have carefully perused the order of the AO and find that he has examined the present claim of the assessee in the light of Jaidev Raja's case on the issue of deduction of hypo tax by the home country. The relevant observations of the AO in this regard are extracted hereunder:

3.2 The first point to be noted is that the above submissions refer to a TDS survey and consequent order in the employer's case, which was subsequent to the employment contract/letter of the assessee. The employment contract of the assessee (Appendix 2) which is the primary document in his case clearly shows that certain recoveries are going to be made by the employer for providing the amenities. In fact, the employment letter does not refer to anything called 'auto norm' and this term has been used only after the survey. The pay disbursal details (Appendix I to this order) further show that each month recovery was being made on these accounts. On going through the order of learned CTT (A)-XXV, Delhi in the case of Whirlpool India Holdings Ltd., relied upon by the Authorised Representative, it is seen that in this order reliance has been placed on Tribunal Mumbai Bench order in case of Jaidev Raja on the issue of hypo tax. In its order, Tribunal Mumbai Bench was mainly guided by the fact that reduction of hypo tax from the salary does not make any difference to the overall taxable salary because of adding back the tax borne by employer as a perquisite. This was the main argument advanced by Mr. Dastur, the counsel of Mr. Jaidev Raja in that case as well as clear from para 5 of the Tribunal judgment. In order to demonstrate that reduction of 'hypo tax' salary and later inclusion of 'tax borne by employer' as a 'perquisite' does not affect the taxable income. Mr. Dastur gave the following illustration (Ref. : para 6 of the Tribunal decision). If the employer pays out Rs. 1000 towards a benefit and the employee contributes Rs. 300 then employee's benefit was only Rs. 700. This according to Mr. Dastur is the principle to value a perquisite. If as per Section 17(2)(iii), payment of Indian tax was benefit, then the value of the benefit should be determined as per this principle. According to Mr. Dastur, whether it was salary or perquisite, it made no difference to the quantum. The Tribunal agreed with removal of element of hypothetical tax from the salary only because tax borne by the employer was subsequently included as a perquisite and it really did not make any difference in the salary taxable in India. This is evident from para 8 of the Tribunal's decision:

What we are concerned with is whether the assessee is paying due taxes on income earned by the assessee in India. Really speaking, it does not matter much as to whether the impugned amount is treated as perquisite or salary.

In paras 11 and 12 of its decision, the learned Tribunal has taken pains to remove any confusion on the issue by taking up illustration, which shows that the reduction of hypo tax from the gross salary really does not make any difference to the taxable salary in India because of addition of tax borne by the employer as a perquisite. The final conclusion on this point in para 13 of Tribunal order is also noteworthy:

In any case, the conclusion one arrives at is that the tax liability to be met by the assessee is out of his salary, but assessee is not claiming deduction thereof and reducing his tax liability arising on a salary of Rs. 77 lakhs. In the result, we uphold the contention of the assessee and approve the computation of income done by the assessee.

3.2 In view of above, it is very clear that the guiding thought for the learned Tribunal in its decision has been that there is no effect on the taxable income in India in the two situations, viz.

(i) where the hypo tax is reduced from salary and alter tax borne by the employer is added as a perquisite

(ii) Where the hypo tax is not reduced from the salary but offset later against the total tax in order to compute the tax perquisite.

The learned Tribunal in this decision has only concerned itself with 'hypo tax and not 'housing contribution' and 'auto norm'. It needs to be noted that unlike 'tax perquisites' which is valued at actuals (i.e. the actual tax borne by the employer), "accommodation" and "vehicle provided by the employer" perquisites need to be valued using Rules framed in this regard under the Indian statute often at a much lower figure that the actual amount spent by the employer towards these amenities. The observation of learned Tribunal that whether it was salary or perquisite; it made no difference to the quantum is thus applicable only to the case of hypo tax. The argument of Shri Dastur, Shi Jaidev Raja's counsel as reproduced above shows that even he has offset the 'hypo tax against the full tax liability to determine the 'tax perquisite'. The illustration by Shri Dastur and illustrations by the learned Tribunal itself at several places in its order leave no doubt that they had no objection to treating the case as of 'concessional tax perquisite' as an alternative solution. The finding that hypo tax can be reduced from the salary, being salary which has not accrued cannot therefore be extended to cover 'housing contribution' and 'auto norm', without keeping in view learned Tribunal's concern regarding the impact on overall tax liability in India. Further, in cases before Tribunal and learned CIT (A), the only issue was deducibility of hypo tax, hosing contribution and auto norm as a permissible deduction from salary income under the IT Act. The AO's in those cases had perhaps added back these amounts to the salary without taking into account the corresponding effect in calculation of perquisites. The assessee's reliance on learned CIT (A)'s order in employer's case is therefore not correct, as the entire context and full facts are different in his own case.

3.4 In assessee's case, if the 'housing contribution' and so-called 'auto norm' are reduced straightway from the gross salary, it results into a significant less tax liability in India. This shall be clear form workings in paras 4 and b of this order. Thus, the concern of learned Tribunal in Jaidev Raja's case about the overall tax liability in India becomes very relevant in assessee's case and hence it would not be correct to consider the housing contribution and auto norm as 'salary not due' just on the basis of Jaidev Raja's decision. The employment contract clauses in assessee's case (Appendix 2 to this order) show that the gross salary is decided first (see Clause 1 'base pay' and Clause 2) and housing and car in India is to be provided after deducting sums mentioned therein. In fact, the 'car' clause is unambiguously worded (without any reference to any "neutrality" principle) that for 'auto norm' there is no case for even examining whether it was salary not due. If 'housing contribution' and 'auto norm' represent salary not due, there was no need to deduct these sums from each month's salary and reflect it in each month's payslip. If for a moment, one assumes that the employer withdraws the facility of accommodation and car, then obviously the base salary etc. would remain the same, as agreed upon in the employment contract but the deductions on account of 'housing contribution' and 'auto norm' would stop. In other words, these deductions are directly linked to the provision of corresponding amenity. It would therefore be not proper to deduct 'housing contribution' and 'auto norm' from the taxable salary. They would instead be treated as the cost borne by the assessee for these amenities. There are other expatriate cases in this charge, where the housing norm has been corrected adjusted against the perquisite in the tax return filed by them, voluntarily. Tax equalization is a concept common to expatriate contracts and principles are the same. It is, therefore, held that 'housing norm' and 'auto norm' cannot be reduced from the salary. They do form part of gross salary and instead need to be considered for valuation of corresponding perquisite.

9. Heavy reliance is also placed on the tax equalization policy of the company but the same has not been placed before us to ascertain the intentions of the parent company while deducting housing norms and auto norm at a particular figure Nothing has been placed on behalf of the assessee to establish that the assessee had been provided some additional accommodation or conveyance in his home country besides the housing and conveyance facilities provided in India for which the parent company has deducted the housing norms and the auto norms. As observed by the AO, it is also quite evident from the appointment letter which is the only document which contains service conditions of the assessee that the company would bear the housing expenses after deducting the US housing norm (about US $ 16000) based on survey figures. Likewise, company would also provide automobile after a car deduction of US $ 3000 per year. It means housing and conveyance facilities were provided to the assessee at a concessional rate which brings the assessee's case within the purview of Section 17(2)(ii) of the Act. We have also carefully perused the order of the Tribunal in the case of Jaidev Raja and we find that the ratio laid down in that case by the Tribunal cannot be applied in the instant case because here we are dealing with the deduction of housing norms and auto norms which cannot be equated with the hypo tax. The hypo tax was deducted by the parent company to meet the tax liabilities if accrues in the home country. But deductions on account of housing norms and auto norms cannot be called to have been made to safeguard any statutory liabilities accrued in the home country.

10. If the impugned issue is examined in the light of these propositions, one would certainly find that the lower authorities were justified in treating deductions of housing norms and auto norms as part of the salary in order to determine the tax liability accrued in India. We, therefore, find ourselves in agreement with the findings of the CIT (A) in this regard. Accordingly, the order of the CIT (A) is hereby upheld on this count.

11. Apropos ground No. 1(c), it is noticed from the orders of the lower authorities that the assessee has been provided rent free residential accommodation which was obtained by the employer on lease at a monthly rent of Rs. 65,000 i.e. of Rs. 7,80,000 per year. While obtaining this residential accommodation which is a farmhouse located at Rajokri, the employer has also given a refundable security of Rs. 1.6 crores without interest to the lessor for performance of lessee's obligation under the lease agreement through a separate security deposit agreement of the same date. The assessee has shown this annual rent of Rs. 7,80,000 as perquisites but the AO did not accept the same and observed that this rent of Rs. 65,000 per month does not reflect the actual amount of rent as true consideration for letting out the property and the same has been reduced through colourable device of huge interest-free deposits. He further observed that this apparent rent of Rs. 65,000 per month is not the fair rental value for the purpose of rent-free accommodation in the light of huge interest-free deposits. He, accordingly, invoked the provisions of Rule 3 of the IT Rules to determine the fair rental value of the aforesaid accommodation. In case of farmhouse accommodation, it is very difficult to pinpoint similar accommodation in the same locality since the premises due to their size are quite limited in number in a particular locality and no two farmhouses are exactly similar due to the variation and landscape and other amenities. The AO, however, took assistance from a monthly rent of another farmhouse accommodation at Meera Farm, Vasant Kunj, New Delhi, measuring 2.89 acres which was leased out at a monthly rent of Rs. 1,75,000 w.e.f. 4th Nov., 1997 to another company for its CEO along with interest-free refundable security of Rs. 6,75,000, in order to determine the fair rented value of the impugned residential accommodation. He, accordingly, worked out the perquisites on account of residential accommodation at Rs. 5,51,719 after allowing a credit of housing contribution deducted by the parent company. The assessee preferred an appeal before the CIT (A) with the submission that the fair market rent can never be more than the standard rent and the standard rent has to be worked out as per the provisions of Delhi Municipal Corporation Act, 1957. In determining the rental data, the committee appointed by the assessor and collector has placed consideration on the prevailing rent in the same locality and based on the same, the rental value of the residential accommodation is Rs. 70,000. Since the assessee himself has offered the actual rent at Rs. 7,80,000 which is higher than the standard rent of Rs. 3,19,601, as such, the claim of the assessee cannot be rejected. The CIT (A) has carefully examined the contentions of the assessee and finally upheld the order of the AO after making the following observations:

I have carefully considered the contentions of the AO and the submissions of the Authorised Representatives, and I am of the view that valuation of perquisite of a rent-free accommodation as provided by Section 17(2)(ii), as already directed by me above, should be in accordance with the prescribed Rules of the IT Rules, 1962. The applicable provisions have already been adopted by the AO at 10 per cent of the salary. The arguments taken by the appellant and various case laws relied upon by the appellant have no relevance with the appellant's case even remotely. The appellant has been provided a palacial farmhouse worth several crores of rupees. These farmhouses earn a fortune as marriage houses in Delhi. No owner will rent them on the amount shown by the appellant unless compensatory amounts are given to them as deposit so that they can compensate the lower rent with the earnings of the deposits. The earnings are always in proportion to the investment in view of Court rulings. The land cost alone of a farmhouse is more than ten to fifteen crores at the current going. The cost of construction is another four to five crores. Thus, on an investment of rupees fifteen crores, the return at 10 per cent will be about one and a half crores. No owner will expect a return less than this. The owner of the appellant's residence has taken 1.6 crores as deposit which would have fetched him about 30 lakhs from interest. He has charged rent at Rs. 65,000 p.m. which comes to 7.8 lakhs. Thus, the landlord must have earned in all at least 37.8 lakhs as income from the farmhouse. Further, no valuation can apply on two different farmhouses even in the same locality as they are so different from each other No municipal valuation of fair rental value or standard rent, can match the value or return on these farmhouses. These terms become irrelevant under the abnormal cases of farmhouses of Delhi. These are farmhouses only in name; otherwise these are palaces outside the municipal limits in order to avoid the municipal laws. If someone tries to value them on the basis of ordinary residential accommodation within the municipal limits, then he is simply going to compare gold with the brass and he is totally divorced from the actual realities on earth. In the result, the AO's action for adopting the perquisite at 10 per cent is upheld. Thus, the value the AO cannot exceed under the rules. The argument of the appellant that the AO has to give reasons for adopting this value has no legal force. It is the assessees who claim a lesser value are required to prove that the fair rental value is less than 10 per cent. The IT Rules are very clear in this regard.

12. Aggrieved, the assessee has preferred an appeal before the Tribunal with the submission that while adopting the perquisite value of residential accommodation provided to the assessee, the AO has followed Expln. 2 to Rule 3 which provides that fair rental value of an unfurnished accommodation shall be the rent which a similar accommodation will realize or the municipal valuation in respect of the accommodation, which is higher whereas in fact it is indeed trite law that the rent which a similar accommodation shall fetch cannot exceed the standard rent. In support of his contentions, he has relied upon the judgment of the apex Court in the case of Dewan Daulat Rai Kapoor v. New Delhi Municipal Committee and Anr. and also in the case of M.A.E. Paes v. CIT in which the ratio laid down by the apex Court in the case of Dewan Daulat Rai Kapoor (supra) was followed. The learned Counsel for the assessee further submitted that in view of the above decisions, before coming to the conclusion whether the rent paid is the fair rent, the Revenue authorities should have examined as to what would be the standard rent of the impugned property. The impugned property is in the nature of a farmhouse, falls within the municipal limit of Municipal Corporation of Delhi and therefore, the provisions of DMC Act, 1957 are applicable to it. Accordingly, the ratable value as computed according to the provisions of DMC Act would be the standard rent. The learned Counsel for the assessee accordingly worked out the ratable value at Rs. 3,19,607 against annual rent paid at Rs. 7,80,000. The learned Counsel for the assessee further submitted that since the assessee itself has shown more actual rent paid than the standard rent which is a ratable value, the perquisite value should have been taken as actual rent paid and not as 10 per cent of his salary.

13. The learned Departmental Representative, on the other hand, has submitted that admittedly, annual lease charges of Rs. 7,80,000 was paid to the lessor, besides interest-free security of Rs. 1.6 crores. Fie further relied upon Expln. 2 to Rule 3(a) which determines the fair rental value of the residential accommodation, according to which fair rental value is the rent which a similar accommodation would realize in the same locality or the municipal valuation in respect of accommodation, whichever is higher. In order to determine fair rental value, the learned AO referred to lease rent of a farmhouse in Vasant Kunj which has been taken by another foreign company for its CEO on 4th Nov., 1997 at a monthly rent of Rs. 1,75,000 with interest-free refundable security at Rs. 6,75,000. Thus, on comparison it is found that the fair rental value of the property given to the assessee was not only Rs. 7,80,000 but is substantially higher than that when adjusted by the notional interest loss by the employer on the security deposit of Rs. 1.6 crore and hence and perquisite value under Rule 3(a) has been taken at 10 per cent of the salary and after adjustment the value of furnished accommodation at concessional rate has been rightly determined at Rs. 5,51,719. He also placed heavy reliance upon the observations of the AO made in this regard. To buttress his contention, learned Departmental Representative has relied upon the judgment of the Bombay High Court in the case of CIT v. Ashraf-Ur-Rehman Azimullah wherein it is held that the assessee being a director if occupied a flat of a company to whom interest-free deposits were advanced, at a lesser monthly rent, for determining the perquisite value of accommodation, interest foregone be taken into consideration. In the present case, the employer of the assessee is deemed to have paid rent in excess of Rs. 65,000 per month as notional interest loss on the interest-free security of Rs. 1.6 crores.

14. Having considered the rival submissions and from a careful perusal of record, it is noticed that the residential accommodation which was given to the assessee was taken on lease by the employer at the monthly rent of Rs. 65,000 per month with interest-free security deposit of Rs. 1.6 crores. For determining the perquisite value of the residential accommodation provided to the assessee at free of cost or at a concessional rate, a specific procedure has been laid down in Rule 3 of the IT Rules and according to its sub-Rule (a) Clause (iii) the value of rent-free residential accommodation which is not furnished shall ordinarily be a sum equal to 10 per cent of the salary due to the assessee in respect of the period during which the said accommodation was occupied by him during the previous year but it is subject to the two provisos. The first proviso says that where the fair rental value of the accommodation is in excess of 20 per cent of assessee's salary, the value of perquisite shall be taken to be 10 per cent of the salary increased by a sum equal to the amount by which the fair rental value exceeds 20 per cent of the salary. The AO, however, may, having regard to the nature of accommodation, determine the sum by which 10 per cent of salary is to be increased, as percentage of the amount by which fair rental value exceeds 20 per cent of the salary. The second proviso further says that where the assessee claims and the AO is satisfied with the sum arrived at on the basis provided above exceeds the fair rental value of the accommodation; the value of the perquisite to the assessee shall be limited to such fair rental value.

15. The fair rental value is explained through Expln. 2 according to which fair rental value of accommodation which is not furnished shall be the rent which a similar accommodation would realize in the same locality or the municipal valuation in respect of the accommodation whichever is higher. The Revenue authorities have worked out the value of the perquisites in accordance with the provisions of Rule 3 of the IT Rules. The main thrust of the argument of the learned Counsel for the assessee is that in the light of judgment of the apex Court in the case of Diwan Daulat Rai Kapoor v. NDMC (supra) and M.A.E. Paes v. CIT (supra), the fair rental value cannot be more than the standard rent payable under the Rent Control Act. Now, the moot question before us is whether in the instant case, fair rental value shall be worked out as per Rule 3 of the IT Rules by taking a rent which a similar accommodation would realize in the same locality or fair rental value cannot exceed the standard rent payable under Rent Control Act or the ratable value determined by the municipal authorities in the light of the aforesaid judgment. We have carefully examined the aforesaid judgment of the apex Court and of the Bombay High Court and we find that the judgments were rendered in respect of those properties to which Delhi Rent Control Act applies and are building on which house tax was charged by the municipal authorities after determining the ratable value but in the instant case, the residential accommodation given to the assessee is not a building to which Rent Control Act applies. It is rather a big farmhouse containing sprawling lawns besides residential accommodation with various facilities and to these farmhouses, Rent Control Act is not at all applicable. As such, there is no question of determining a standard rent as per Delhi Rent Control Act. For determining the fair rental value, one cannot lose sight of the interest-free security of Rs. 1.60 crores. We have also carefully perused the order of the Bombay High Court in the case of CIT v. Shri Ashraf-Ur-Rehman Azimullah (supra) in which it has been held that the assessee being a director if occupied a flat of a company to whom interest-free deposits were advanced, at a lesser monthly rent, for determining the perquisite value of accommodation, interest foregone be taken into consideration.

16. In the light of aforesaid judicial pronouncements, we have examined the facts of the instant case and we find that ratio laid down by the apex Court in the Dewan Daulat Rai Kapoor (supra) and followed by the Bombay High Court in the case of M.A.E. Paes (supra) cannot apply in the instant case as it was not an ordinary building to which the Rent Control Act applies. In these type of residential accommodations, the fair rental value should be determined as per Rule 3 Expln. (2) of the IT Rules and from a careful perusal of the order of the AO, we find that he has properly worked out the fair rental value in order to determine the perquisites in the hands of the assessee. We have also examined the order of the CIT (A) who has rightly upheld the value of perquisites in the hands of the assessee determined by the AO. Since we do not find any infirmity in the order of the CIT (A), we uphold his order on this count.

17. Apropos ground No. 1(e), it is noticed from the orders of the lower authorities that during the course of assessment proceedings, the AO observed that as per the employment contract of the assessee with Whirlpool Corporation, USA, the assessee was "eligible to be nominated for stock options annually". Accordingly, the assessee's counsel was requested to inform whether any stock options have been received and exercised during the financial year 1997-98 relevant to the asst. yr. 1998-99 and vide letter dt. 20th Sept., 2000, it was submitted on behalf of the assessee that it exercised stock options granted to him by the employer during the financial year 1997-98 of which details are as under:

S.No Date Grant/ Basis of No of Date of Price at of Grant Exercise Grant stock exercise & which sold Price Exercise Options sale (in US$) (in US$) Price

1. 21.6.1994 53.38 Average of high 1000 11.3.1998 68 & low price at

New York Stock

Exchange on the

date of grant

2. 15.8.1995 55.81 -do- 3200 -do- 68

3. 18.6.1996 50.44 -do- 2300 -do- 68.3125

4. 18.6.1996 50.44 -do- 500 12.3.1998 68.4375

18. From these details, it was noticed by the AO that the date of exercise of option and the sale of the shares is the same and the assessee was asked to clarify as to why the difference between the sale price and the grant/exercise price, (whichever is lower than the market or the sale price), be not treated as perquisite. In consequent, the assessee has submitted before the AO that the stock options were granted to the assessee by his employer at the average of low and high market prices prevailing on the New York Stock Exchange on the date of grant. Since there is no appreciable difference between the offer price and the prevailing market price on the date of grant, there cannot be any income arising therefrom. Whatever gain is realised on sale by the assessee, it is in the nature of capital gain which is not taxable in India. The claim of the assessee was examined by the AO in the light of definition of perquisite and salary given in Section 17(2) and 17(1) and 15 of the IT Act and the judgment of the Bombay High Court in the case of CIT v. D.R. Pathak and the decision of

Authority for Advance Rulings (AAR) reported at XYZ, In re (1998) 150 CTR (AAR) 504 : (1999) 102 Taxman 74 (AAR) and finally held that such a benefit flowing from the employment contract is obviously a perquisite within the meaning of Section 17(2)(iii) and 'salary' taxable under head A of Chapter IV of the IT Act by virtue of Section 17(1)(iv) r/w Section 15(b) of the Act. Since the value of perquisite is ascertainable only on the day option is actually exercised, which coincides with the day of sale of shares; the perquisite or the 'salary' is taxable in the year in which the date of exercise/sale of shares falls. He accordingly worked out the perquisite on exercise of the stock option as per Rule 115 of the IT Rules at Rs. 39,79,814.5 and the same is added to the salary income of the assessee. While making the addition, the AO has also observed that the assessee has not filed a return of income for this period in this regard in any country including USA other than India, as this fact is evident from the assessee's letter dt. 13th Sept., 2002, which shows that the assessee has also treated this income as arising in India and not in USA as capital gain.

19. Against this addition, an appeal was preferred before the CIT (A) and the CIT (A) re-examined the issue in the light of Circular No. 710 of the CBDT and the ruling of AAR in the case reported at (1998) 150 CTR (AAR) 504 : (1999) 102 Taxman 74 (AAR) (supra) and upheld the additions made by the AO after making the following observations:

I have carefully considered the rival contentions of the AO and the Authorised Representatives and submissions and I am of the view that in the given case, the point regarding deliberation is the essence of the benefit arising to the appellant consequent to entitlement of stock options and their subsequent exercise and sale especially in view of the absence of a direct provision in the Act governing stock options during the year under appeal. Accordingly, I am of the view that in the absence of specific provisions, the nature of transactions and the implications thereof must be considered in light of the available provisions of law. Therefore, in the present case, there is no dispute that the stock options accrued to the appellant by virtue of his employment. There is also no dispute that the exercise price was same as the grant price hence resulting is no gain/loss on exercise. There is no dispute regarding the taxability of the gains on sale of such shares as acquired by exercise of the stock option entitlement. In my view, the only question is whether such gains on sale are taxable as income from salaries, as contended by the AO or as income from capital gains, as contended by the appellant. Considering that there are clearly two points of tax incidence, one on exercise and the other on sale, and each determining the head of income under which the same is to be taxed, the AO is incorrect in holding that in the absence of any taxable income arising at the time of exercise, the gains on sale can be treated as income under the head salaries because originally the shares so sold came into the possession of the appellant by virtue of his employment. I am of the understanding that in case of salaried employees having income only from salaries, investments and any purchase are necessarily made from income from salaries, which is by virtue of employment. Accordingly, the action of the AO is upheld and the income from the stock option is held to be income from salary.

20. Aggrieved, the assessee has preferred an appeal before the Tribunal with the submission that the grant price was the actual fair market value of the shares on that date and the right granted to the assessee to exercise the option was also at the same price of US $ 55.38 per share. Thus, the assessee had an option to take the granted share only at the fair market value of the shares. Since there was no difference between the grant price and the exercise price, no perquisite accrued or arose to the assessee. Learned Counsel for the assessee Mr. M.S. Syali, senior advocate, further submitted that the assessee acquired and sold share on 11th March, 1998. On this date, the assessee could receive sale price of US $ 68 per share and the cost of acquisition of share was US 55.38. This resulted into gain on sale for the difference between US $ 68 and US $ 55.38. This gain is in the nature of capital gain since it arose on sale of an asset and not in the nature of perquisite as the perquisite has actually arisen on 21st June, 1994 on which date the assessee acquired right to the share. Since there was no difference between the fair market value and the price at which right had been acquired, no perquisite has accrued to the assessee.

21. Learned Counsel further submits that during the year under appeal i.e. asst. yr. 1998-99, there was no express provision in the Act for taxation of the stock options granted by the employer to its employee. However, Section 17(2)(iii) r/w Circular No. 710, dt. 24th July, 1995 provides for taxability of the shares issued to the employees at less than the market price. Other than this, the aforesaid circular which covered allotment of shares at below market price, there was no provision in the Act, Rules or the Board's Notification/Circular in respect of taxability of any perquisite whatever arising on any grant and/or exercise of stock option by an employer to his employee. With reference to definition of perquisite given under Section 17(2)(iii) of the IT Act, Mr. Syali contended that the benefits in terms of a 'concession' to an employee shall arise when an employee is given the option to take the shares of the employer company at a value which is below the market value of the shares. In the present case, the employee was given no such concession and he was simply entitled to the shares at the fair market value as per the stock option scheme. The assessee did not derive any benefit or amenity granted or provided free of cost or at "concessional rates" as set out by Section 17(2)(iii). Mr. Syali further contended that peculiarity in determination of incidence of tax and the character of income, if any, regarding stock options is twofold; firstly, whether there arises any income at the time employee is granted the option, if yes, the nature of quantum thereof. Secondly, whether the income on the sale of shares opted for is income chargeable under the head salary or capital gain. During the financial year 1997-98, the applicable provisions existing then i.e. Section 17(2)(iii), Section 17(1)(iv) and Section 15(b) of the Act did not seek to expressly tax perquisite, if any, on exercise by an employee of stock option granted by an employer unless the same were obtained at a concessional rate. A more specific provision i.e. sub-Clause (iii)(a) of Clause 2 of Section 17 was introduced de novo by the Finance Act, 1999 w.e.f. 1st April, 2000 whereby the income represented by arising an exercise of stock option was exigible to tax as perquisite under the head 'salaries' at the value represented by the excess of fair market value over the exercise price and the excess of the sale price over the cost price equal to exercise price arising on sale of the shares, was liable to tax as income from 'capital gains'. This sub-Clause (iii)(a) was deleted by the Finance Act, 2000 w.e.f. 1st April, 2001 and a new proviso to sub-Clause (iii) of Clause 2 of Section 17 was inserted according to which the legislature expressed their intention not to tax the benefit accrued on exercise of stock option granted by the employers as per stock option scheme. Thus, the stand of the assessee is in accordance with the legislative mandate.

22. With regard to the ruling of AAR reported at (1998) 150 CTR (AAR) 504 : (1999) 102 Taxman 74 (AAR) (supra), the learned Counsel for the assessee submits that this ruling would apply only in those cases where the employees of the Indian subsidiary were granted shares by the parent foreign company at a lower value. Since the assessee was granted shares at the fair market value only and hence no perquisite arose. The learned Counsel Mr. Syali has placed heavy reliance upon the judgment of High Court of justice Chancery Division in the case of Abbott v. Philbin Inspector of Taxes (1962) 44 ITR 144 (HL) in support of his contentions that difference between the option price and the middle market value constituted a taxable perquisite at the time of grant. Accordingly, the gain on sales of shares can only be regarded as income under the head capital gain.

23. In oppugnation, the learned Departmental Representative, besides relying upon the order of the CIT (A), has emphatically argued that judgments quoted by the assessee in the case of Abbott v. Philbin (supra) was analysed in detail by the Authority of Advance Ruling in its judgment reported at (1998) 150 CTR (AAR) 504 : (1999) 102 Taxman 74 (AAR) (supra) before arriving at a conclusion that the benefit has accrued to the assessee in those years in which the assessee has exercised its option and not in those years in which the grant of share was done. Fie further submitted that though the stock option was offered on different dates and there was no difference between the offer/grant price and the prevailing market price but the value of perquisites is to be determined when the offer/grant was accepted/exercised i.e. the difference in the offer/grant price and the prevailing market price on the date of acceptance/exercise of the option which are 11th March, 1998 and 12th March, 1998. This gain has arisen to the assessee just because of his employment contract. Had there been no employment contract, there would have been no offer of stock option and there would be no gain. Learned Departmental Representative further contended that in order to avail a gain to be capital gain, there should be a capital asset and it must be owned by the assessee. A capital asset always carried with it the fear of loss attached. In the case of stock option, there is no risk of loss attached to it because no one exercised the stock option if it is resulting in loss on the date of exercise of stock option. In stock option, there is no possibility of loss being incurred by the exerciser of the option because this option has been given to employees to be exercised on or before a certain date. On a particular date, within the stipulated period when the employee sees that he is at gain, he exercises that option and earns money on it, otherwise he does not exercise that option. Thus, a stock option in all cases is meant to give benefit to the employee over and above what he is getting from the employer and hence, it is perquisite as per Section 17(2)(iii) of the IT Act.

24. Having considered the rival submissions and from a careful perusal of the orders of the authorities below and documents placed on record in the light of judgments referred to by the parties, we find that the assessee was appointed as managing director and president of Whirlpool Asia Team T.W.L. located in Madras in India. This appointment letter was issued by the vice president and the managing director of Whirlpool South East Asia PTE a foreign based company and in its appointment letter besides base pay and other incentives, the assessee was made eligible to be nominated for stock options annually. It means that whatever benefit accrued to the assessee on account of grant of stock option, it was accrued on account of employment. Now, two questions posed before us are : (i) In which year benefits are accrued to the assessee, on account of stock option, whether it was the year in which the stock option was granted or the year in which the stock option was exercised; (ii) whether the benefit accruing to the assessee is in the nature of perquisite and forms part of the salary or a capital gain.

25. It is also an admitted position that this stock option was granted to the assessee during the financial years 1994-95 to 1996-97 by his employer at the prevailing market price on the date of grant. Since the assessee did not exercise the option on the date of grant, the grant remained an offer of stock option to the assessee and the assessee did not enjoy the status of ownership of these shares. As such, there is no question of any benefit accrued to the assessee at that time. Admittedly, the assessee exercised his stock option on 11th March, 1998 and 12th March, 1998 and by doing so, he enjoyed the status of ownership of these shares and became entitled to deal with these shares in any manner as he liked. Now we have to examine whether some benefit is accrued to the assessee at that moment when he exercised the option and became the owner of the shares. If benefit is accrued, we have to further examine whether it is a perquisite and forms a part of the salary of the assessee or a capital gain. At the time of exercise of option, the price of shares was higher than the price of shares at the time of grant as the difference in price has already been quoted in foregoing paras. After having exercised his option and becoming the owner of the shares, the assessee has acquired certain pecuniary benefit. The assessee has sold the shares on the same day at the same rate and at the same market price resulting into no capital gain because whatever pecuniary benefit has been earned by the assessee while exercising the option of shares, it was of different nature other than the capital gain. We have also carefully examined the appointment letter and we find that besides other incentives, the assessee was given annual stock option of shares.

26. We have also carefully perused the provisions of Sections 15 and 17 which deal with the definition of salary and perquisite. According to Section 17(2)(iii), the value of any benefit or amenity rented or provided free of cost or at a concessional rate by a company to an employee who is the director thereof is a perquisite and forms part of the salary as per Section 17(1)(iv) of the Act.

27. Turning to the case in hand, we find that the assessee has been granted a stock option without fixing a period of exercise as one of the incentives of his employment as per appointment letter appearing at page No. 27 of the compilation of the assessee. No doubt, the stock option was granted at the prevailing market price but the assessee was not under any obligation to exercise the same on the day of grant. He kept the offer with himself alive and exercised it when the market price of these shares has been increased to avail the pecuniary benefit. So, we have to see how much pecuniary benefit has been accrued to the assessee when he exercised the option because at the time of exercise, the assessee was only liable to pay market price of the shares on the date of grant. It means that the assessee has been given the shares at a concessional rate and the assessee derived a pecuniary benefit on account of his employment and this benefit certainly falls within the definition of perquisite, forming part of the salary.

28. We have also carefully examined the judgment of the High Court of Justice, Chancery Division in the case of Abbott v. Philbin (supra) and the judgment of AAR reported at (1998) 150 CTR (AAR) 504 : (1999) 102 Taxman 74 (AAR) (supra) and find that similar type of question was referred to the AAR and while dealing with that question, the learned authority has examined the judgment in the case of Bentley v. Evans 39 Tax Cases 132, Abbott v. Philbin (1960) 2 All ER 763 and State of UP v. Renusagar Power Co. very minutely in the light of relevant provisions of the Act and has held as under:

The applicant-company, incorporated in USA, set up another company in India, which is a fully owned subsidiary of the American company. It has made a proposal to enter into a stock option agreement with the employees of the Indian subsidiary with a view to give encouragement and pecuniary incentive to them. Under this agreement, the employees of the Indian company shall have the option to subscribe to the shares of the US company at a predetermined price called the option price which will be lower than the ruling market price of the shares. The employees will have the option to subscribe and become the owners of the shares on any date of their choice. As and when such option is exercised, the employees will have to sell the shares in the open market in the USA at the ruling stock market price. The applicant-company sought advance ruling on questions whether money received by the employees of its Indian subsidiary, by exercise of stock option granted to them constitutes income from salaries and whether tax has to be deducted under Section 192 by the applicant company on the amount earned by the employees from exercise of stock option granted to them by the company.

The sum and substance of the scheme is that an employee of the Indian company by exercising the option to subscribe will be able to get share in the ' parent company (the American company) and immediately sell the same at the ruling market rate in USA. If this scheme had been evolved by the Indian company, this would have constituted additional remuneration to the employees. The only difficulty is that the stock option is being offered not by the employer, the Indian company, but by the American company which is the parent company of the Indian company.

It is nobody's case that mere receipt of the option is perquisite and taxable in the year in which offer is received. Since the shares are to be issued and sold simultaneously, it is common ground that the amount will be taxable only when the option is exercised. If the option is never exercised, there would be no profit nor any accrual of benefit because the right of stock option given to the employees cannot be transferred.

Therefore, the taxability of the amount to be gained by exercise of the option cannot be in doubt. It is a perquisite or profit arising out of employment. The only question is whether the amount will be taxable under the head 'salaries'. In this connection, it has to be noted that 'perquisite' and 'salary' have been specifically defined in India. Sections 15 and 17 are couched in very broad terms. But, however broad the language may be, unless the relationship of employer and employee exists between the payer and the payee, the amount received by the payee cannot be taxed as salary. The amount may be profit or gain arising out of employment but if the payer is not the employer or the payment is not being made for and on behalf of the employer, the amount cannot be brought to tax as salary but will have to be brought to tax as income from other sources under Section 56. This, in short, is the case of the applicant.

But salary includes perquisites or profit in lieu of or in addition to any salary or wages under Section 17(1)(iv); any benefit or annuity received by the employee including the benefit of purchase of shares of the American company at a concessional rate will have to be treated as perquisite under Section 17(2)(iii). But then such perquisite will have to be given by the employer as laid down in the given definition.

If the definition of 'salary' as given in Sections 15 and 17 is examined, it will be seen that any salary paid by an employer to an employee as well as salary paid 'by or on behalf of an employer or a former employer' have been brought within the ambit of 'salary' chargeable to tax under Section 15. In this case, stock option is being given to the employees of the Indian company. It is true that the American parent company is making this offer. This is with a view to give an incentive to employees of the Indian company. There would have been no problem had the stock option been offered by the Indian company. But the position in law will not be different only because the stock option is offered not by the Indian company but by its parent company. If the 'salary' is paid for or on behalf of the employer that will also have to be included in the 'salary' income by virtue of Clause (b) of Section 15.

In this case, stock option has been offered to the employees of Indian company. If and when the option is exercised by the employee, share will be allotted and thereafter sold. The resultant profit will be taxable in the hands of the employee. The amount that the employee will receive will come to him in addition to the salary which the employee will get from the Indian company. It is something more than what is due to him under the contract of employment. Therefore, this additional amount will clearly come within Section 15(b). The stock option scheme will enable them to get something in addition to their remuneration. This addition will clearly come within the definition of the expression 'salary'. Whether it is paid by the employer or by somebody else for or on behalf of the employer will not make any difference. This has been made clear by Clause (b) of Section 15.

As regards the question whether the amount is paid for or on behalf of the employer, the object of making such offer can only be the desire to give a benefit to the employees and at the same time to enhance their interest in the company. The parent company has made such an offer to the employees of the subsidiary company only because it regards its subsidiary and itself as the same concern. It wants to reward and encourage the employees of the subsidiary company. Even if the subsidiary is treated as a separate juristic entity, the stock option offered by the American company must be treated to have been made for and on behalf of the Indian company. Otherwise, there is no reason why an independent and altogether separate American company will try to give encouragement to the employees by paying salary and giving other benefits. If some other company pays additional benefits to the employees, then it must be held to have been done for and on behalf of the employer.

Moreover, in a case like this the corporate veil will have to be lifted to see the real nature of the transaction. The only possible explanation for the offer to stock option by the American company to the employees of the Indian company can be that it regards its business and the business of the Indian company as one. There is no difficulty in law in recognizing the reality of the transaction and treating the benefit to be given to the Indian employees as one by the employer himself or by the American company for or on behalf of the employer.

In either view of the matter, this additional remuneration or profit will have to be treated as income from 'salary'.

In the instant case, the American company has floated an Indian subsidiary. It has devised a scheme to give encouragement and pecuniary incentive to the employees of the Indian company by offering to them an option to purchase its own shares at a pre-determined price. This sort of transaction is not possible unless the parent company treats its own business and the business of the Indian company as one:

As regards the question whether there should be a deduction of tax at source by the American company in respect of the income arising on account of stock option, the gain made by an employees after exercise of the stock option may be taxable as salary. The American company has taken upon itself the responsibility of paying this salary. The provision of Section 192 will be clearly attracted. It will have to deduct tax at source before payment of any salary to the employees of the subsidiary company. By devising the stock option scheme, the American company has taken upon itself the responsibility for paying, what must be regarded as 'salary' to the employees of the Indian company? They are under obligation under Section 192 to deduct income-tax at source on the amount payable to the employees.

29. We have also carefully examined the contentions of the assessee that from time to time amendment was made under Section 17 of the IT Act and the assessee has taken a stand in accordance with the legislative mandate but it is a settled position of law that we have to deal with the issue in accordance with the relevant provisions of the Act prevailing at the relevant point of time. The subsequent amendments cannot be taken into account unless and until the subsequent amendments are brought with a retrospective effect including a period which is in dispute. We are, therefore, of the view that the impugned issue should be examined in accordance with the relevant provisions of Section 17 of the IT Act. If the facts of the impugned case are examined in the light of aforesaid judgment of the Authority of Advance Rulings and relevant provisions of Section 17(2)(iii) of the Act, we would find that stock option was granted to the assessee by virtue of employment contract as part of composite package. At the time of grant of option it was the offer to the assessee and the benefit only accrues to the assessee as and when he accepts/exercises the offer/option. Admittedly, the option was exercised in the financial year relevant to the impugned assessment year and at the time of the exercise; one has to work out the pecuniary benefit accrued to the assessee. In the instant case, assessee was benefited with the pecuniary benefit of Rs. 39,79,814.5 as worked out by the AO as per Rule 115 of the IT Rules inasmuch as at the time when he exercised the option and became the owner of the shares, the assessee was required to pay a price of shares prevailing at the time of grant. Since the shares were acquired by the assessee at a concessional rate, this pecuniary benefit accrued to the assessee is a perquisite and forms part of the salary. Having exercised the option of shares, assessee became the owner of shares, which is a capital asset of which value is market value prevailing on the date of exercise. As such, when these were sold at the same rate, assessee did not acquire any capital gain. Whatever benefit is earned by the assessee, it was only in the nature of perquisite and forms part of salary. We, therefore, do not find any infirmity in the order of the lower authorities who have treated this pecuniary benefit as part of the salary. Accordingly, this issue is decided against the assessee.

30. Apropos ground No. 1(g), it is noticed from the order of the lower authorities that the assessee is entitled to free electricity and water charges and these charges are to be borne by the employer. The AO, therefore, treated this benefit as perquisite under Section 17(2)(iii) of the Act and estimated its value at Rs. 50,000 and made addition of the same. The assessee preferred an appeal before the CIT (A) with the submission that the effect of free electricity/water is governed by provisions of Rule 3(d) of the Rules. Rule 3(d) provides," the value of the benefit to the assessee resulting from supply of gas, electricity, and water for his household consumption free of any charge shall be determined as a sum equal to the amount paid on that account by the employer to the agency supplying gas, electricity and water. The learned Counsel for the assessee, therefore, pleaded that in view of the provisions of Rule 3(d) and the absence of any amount of bill actually paid due to non-receipt of bill from DESU, the benefit of free electricity, water cannot be considered on estimate basis. The CIT (A) has examined the issue but confirmed the addition after making the following observations;

12.3 I have considered the rival contentions and I am of the view that the AO is correct in holding that in the present case, the said benefit is a perquisite under Section 17(2)(iii) being a benefit/amenity provided free of cost or at concessional rate by the employer to an employee in respect of an employer rent-free residential accommodation. Also, where Act or the Rules clearly prescribe method of valuation, the same must necessarily be adopted. Accordingly, since Rule 3(d), governing the value of the benefit of free electricity/water, clearly stipulates the value as the amount actually paid, there is no room for discretion for making estimates of such expenses and including the same in the income of the appellant.

12.4 I have considered the arguments of the appellant carefully. It appears that the premises have no power connection or the same has illegal connection. It is also possible that the premises is maintained on a separate personal generator. In the circumstances, the AO has been quire reasonable in estimating the power cost are Rs. 50,000. The action of the AO is upheld

Now, the assessee is before us and reiterated the submissions. In support of his contention, he has also placed reliance upon a certificate issued by the employer.

31. Learned Departmental Representative, on the other hand, has relied upon the order of the CIT (A).

32. Having considered the rival submissions, we are of the view that it is not a case of the assessee where no electricity or water is provided to it by the employer. Once the facilities are provided to the assessee through any means, some perquisites are to be determined and added in the hands of the assessee.

33. We have carefully perused the order of the CIT (A) and find that he has properly adjudicated the impugned issue. We, therefore, uphold his order.

34. Apropos ground No. 2, it is noticed that this ground has not been adjudicated upon by the CIT (A) though a specific ground to this effect has been raised before him. Since the CIT (A) has not adjudicated this ground, we are of the view that the matter be restored back to him for re-adjudication of this ground. We, therefore, restore the matter to the file of the CIT (A) with the direction to adjudicate the issue by passing a speaking order.

35. In the result, the appeal of the assessee is partly allowed for statistical purposes.

Keshaw Prasad, A.M.

November, 2003

1. I have perused the order authorized by my learned brother and am in agreement with the findings given by him on all the grounds of appeal except ground No. 1(b) and No. 1(e). In spite of my best efforts, I have not been able to persuade myself to agree with the findings of my learned brother on these grounds, hence the following note of dissent:

2. This ground agitates the grievance of the appellant on being taxed on the sums of Rs. 10,02,084 and Rs. 1,10,505 being housing norm and auto norm reduced from the base salary in the pay slip. The appellant is an employee of US Co. deputed to its Indian counterpart. As noted by the AO and CIT (A) to infuse economic parity, the employees' salary was reduced by a notional sum equivalent to the provision of house and car with driver according to US Standard, as if the employees had continued to work in the home State. In other words, had he continued to work in US, house and car would not have been provided by the employer, but, was to be arranged by himself. Since, he was deputed to another country, and a house and car provided, notional reduction of sums attributable to his input were reduced from base salary to bring in economic parity. According to the AO, the said sums reduced from the salary are a part of the salary, and hence have to be added back and taxed accordingly. The AO held (para 3.5 of his order) that these amounts borne by the employee, are to be reduced from the perquisite value determined as per Rule 3(b) and Rule 3(c)(v) of the IT Rules of the accommodation and car with driver provided in India.

3. To effectuate, the AO added the amount of housing contribution and auto norm to the salary depicted in the salary slips, but considering the same as a reimbursement by the employees to the employer in the valuation of the perquisites of accommodation, car with driver provided to the appellant in India (refer para 4 par 5 of the assessment order). The AO rejected the stand of the appellant that the amounts reduced were not a set off against the perquisites provided in India, but were an ad hoc reduction towards what would have been due had the employee continued to work in the home country.

4. The AO took note of the fact that in cases of other expatriates coming from USA, housing norm has been adjusted against the perquisites provided in India voluntarily. According to him (refer para 3.4 last lines) "tax equalization is a concept common to expatriate contracts and principles are the same. He, therefore, held that housing norm and auto norm are a part of salary and a contribution by the employer towards perks provided. In effect, the AO holds that the amounts of auto norm and housing norm reduced from the salary in the first place have accrued to the appellant and were actually given up as the employee's contribution towards perquisites provided to him in India.

5. The CIT (A) upheld this argument in para 6.7 of his order, which has been challenged before us.

6. The matter was initially heard by the Bench on 11th Sept., 2002, 13th Sept., 2002 and 16th Sept., 2002. Therefore, at our instance written submissions from the appellant, were filed on the 18th Feb., 2003 and in response to which, the Department filed their submissions on the 3rd of March, 2003.

7. In these submissions as well as in the submissions filed before the CIT (A) (copy attached at pp. 1 to 28 of the paper book, relevant to this ground at pp. 3 to 6), the main thrust of the appellant was that the amounts reduced on account of housing norm/auto norm never accrued to the appellant. As a term of employment, his monthly base salary is reduced by these amounts (though notional). In other words, the gross salary de hors the perquisites to be provided in the country of posting is to be reduced by that figure. The deduction from gross salary accords with the economic parity in case of an employee posted in USA and the one posted outside. The reduction has no link to the perquisites provided in the country of posting.

8. Reliance was placed on the order passed for the same year in the case of employer, M/s Whirlpool Corpn. where on examination of the salary slips, the corporate policy and other decisions on the issue, it was held that auto norm and housing norm were not includible in the base salary, and hence, tax was not to be deducted at source on such amount. Since the amounts had not accrued in the first place, the same cannot be treated as a contribution towards perks provided in India. It was also pointed out, that, in the very next financial year i.e. financial year 1999-2000, a remand report has been sought by the CIT (A) before following the order of his predecessor for the financial year 1995-96 to 1998-99, and, in the said remand report, it was admitted by the AO that the appellant is correct in submitting that the amounts of housing norm and auto norm are actual reductions from the base salary and not an appropriation of an amount which have already accrued to the appellant. In the remand report, it is categorically observed vis-a-vis the earlier orders on the issue that "it appears that the AO made a mistake in observing the true nature of these reduction".

9. Besides, reliance was also placed on the decision of Mumbai Bench of Tribunal in the case of Jaidev Raja (attached in paper book) which deals with the issue of hypo tax, but, was submitted to apply in principle to housing norm and auto norm as well.

10. The existence of the remand report as well as the order in the case of the employer have been duly noted by the Hon'ble JM. Vide para 7 (p. 5) of his order, the Hon'ble JM rightly formulated the question as follows:

The question posed before us is whether the housing contribution and auto norm initially reduced from the salary of the assessee can be termed to be a part of the salary to determine the taxable income of the assessee.

11. However, while deciding the issue, certain assumptions, not borne out from records have been made. The notional reduction of amounts towards housing and auto norms indicates that:

the assessee was supposed to pay towards housing norms and auto norms had he continued to render services in his home country against the housing accommodation and conveyance provided to the assessee by its employer

12. The supposition that, had the employee continued to stay in USA the employer was to provide the housing accommodation and conveyance does not emerge from either the order of the AO or the CIT (A) or the paper book or the written submissions. It appears that on this erroneous promise, brother JM supposed that "according to the terms of the employment, the assessee has been provided a free housing accommodation and conveyance against deduction of housing norms and auto norms, which was supposed to be deducted had he continued to render service in his home country against residential accommodation and conveyance provided by the employer."

13. It is this supposition, which has led the Hon'ble JM to feel that the reduction of auto and housing norms do not emerge out of any notional sum but represents a liability, which instead of being given to the employee in the home country, is being given in the country of his posting. The very fact that, the amounts were to be reduced from the salary indicates that it was not an obligation of the employer to provide such perquisite. Even the AO does not hold so. He agrees on the contrary, and holds, that, it is a contribution by the appellant towards the perquisite provided to him by the employer, which clearly establishes that the original liability was never of the employer. The factual presumption thus has led to an erroneous decision.

14. Further, why the effect of matter having been accepted in the hands of the employer has no relevant bearing on the present conclusion is entirely missing from the order. Once it is accepted that the amounts were a notional reduction and that, the salary due to the appellant was only the gross, as reduced by the notional amount, and, that, tax was not deductible on the 'gross' as having accrued to the appellant, but, only on the net amount, its taxation in the hands of the appellant obviously loses force. This decision in the case of the employer having been accepted by the Department tilts the matter in favour of the appellant conclusively.

15. The Hon'ble JM has further distinguished the decision of the Mumbai Bench relied upon by the appellant on apparently erroneous grounds. The analysis of the decision by the AO in his order has been picked up as the base. The AO has only reproduced some of the paras of the decision out of context and drawn his conclusions. The decision of the Mumbai Bench has been furnished by the appellant in the paper book at pp. 43 to 54 thereof. To indicate the incorrectness of the quotes picked up by the AO, a reference may be made to that decision at p. 39. The conclusion of the Mumbai Bench are recorded at p. 46 of the paper book, (para 8). The question posed to itself by the Bench was, "what is the income earned by the assessee in India"? The tax equalization policy, which, according to the AO himself, is common to all expatriates coming from USA, was considered by the Bench in para 10. It is held, that, if the total tax on the salary (in the context of hypo tax) comes to say Rs. 1500, then as per tax equalization policy, the company will compensate the assessee (employee) for his tax liability in India not on Rs. 1500 but at Rs. 1000 (1500-500). The Rs. 500 being the tax that the employee would have borne had he continued to work in the home country. The Bench went on to observe that it is not proper to say that Rs. 1500 has accrued to the assessee, the exchequer will no doubt receive Rs. 1500 as tax but, only Rs. 1000 has accrued to the assessee as salary. Hence, it was perfectly justifiable to remove the element of Rs. 500 from the total income as it never accrued to the assessee.

16. In para 11 of the decision at p. 50 of the paper book, it is observed:

What perhaps misled the Departmental authority is, the way it was presented to them. The assessee in his computation has added Rs. 50,00,000 as income and deducted Rs. 15,00,000 from the income. Thus, the Departmental authorities thought that the assessee is claiming a deduction of Rs. 15,00,000 from the total income. In fact, he is not claiming deduction of Rs. 15,00,000, but he is only showing that out of the total tax liability of Rs. 50,00,000, Rs. 15,00,000 will be made by him out of his salary of Rs. 77,00,000.

17. It is indeed erroneous to presume that the Mumbai Bench decided the issue on there being no loss of revenue. What the AO reproduced in his order are the arguments of the counsel for the appellant, which do not find mention in the conclusion drawn by the Bench. In fact, the Bench was pleased to observe in para 8 beginning p. 46 of the paper book that "in our opinion, the issue has been complicated for no reason". It is indeed trite that to appreciate the applicability of a decision, the principles emerging from the ratio need be applied. In crux, the question was whether, the hypo tax and in akin circumstance the housing norm or auto norm accrued to the appellant in the first place. The Mumbai Bench held that the hypo tax in that case did not accrue. To distinguish that ratio on the ground that housing norm and auto norm cannot be equated with hypo tax, because, hypo tax is a statutory liability, whereas, housing and auto norm are not, will indeed be sidetracking the issue. The distinction is of no avail and one, which is invalid in law.

18. The Hon'ble JM further has observed that the tax equalization policy of the company has not been placed before the Bench hearing the appeal and that nothing has been placed on behalf of the appellant to establish that the employer had provided some additional accommodation or conveyance in the home country beside the housing and conveyance facilities provided in India. It was never argued before the Bench that any additional accommodation or conveyance was provided in USA (the home country), and, the reductions pertains to that. In fact, it was emphasized throughout that the reduction was notional and to provide economic parity and to bring at par with an employee who would still have incurred this amount had he continued to stay in his home country. The scheme, the tax equalization policy, is referred to by the CIT (A) in his order and after considering the policy, the decision has been arrived at. If there was any doubt on the terms of the tax equalization policy, a specific mandate could have been issued to furnish the same when the matter was refixed for filing written submissions. Further, it is not the case of the Revenue that what is stated by the appellant as tax equalization policy is incorrect. They, in effect, agree that it is a reduction, but seek to appropriate that reduction towards the perquisites provided in India. On the other hand, the appellant submits that there was no compensation, given to the employer towards perquisites provided in India. He has actually received less by virtue of employment contract, which admittedly is on record. Hence, his salary is a net amount after reduction of the aforesaid amounts. This, precisely is the dictum of the Mumbai Bench. Factually, nothing survives once the Department accepts the stand of the employer, which is nothing but a mirror image.

19. Following the decision of the Mumbai Bench and keeping in view the fact that the Department has accepted the stand of the appellant in the hands of the employer after further examination, the order of the CIT (A) in the case of the employer having become final, the reduction of housing norm and auto norm only result in the base salary being reduced. It does not represent sums accruing to the appellant first, which in turn have been appropriated towards perquisites provided to the appellant in India. Accordingly, addition sustained by the CIT (A) is deleted.

Ground No. 1(e):

20. The appellant was granted a stock option in accordance with a scheme formulated by the employer. The stock option scheme was duly furnished before the AO and is also a part of the paper book before the CIT (A)(p. 20 of the paper book filed before him, evident from his order).

21. The broad facts emerging from the scheme are that on 21st June, 1994 an offer was made to the appellant to purchase 1000 shares at a price of 55.38 US $ per share. Similarly, on the 15th of August, 1995 as well as on the 18th of June, 1996, an identical offer was made to purchase 3200 and 2300 shares respectively at US $ 55.81 and 50.44 per share. An offer was also made on the 18th of June, 1996 for purchase of 500 shares at 50.44 US $ per share. The appellant accepted the offer and agreed to purchase at the price at which the stock option had been offered.

22. According to the scheme, the appellant had ten years time from the date of offer to purchase the shares. It was for the appellant to see when, within the span of ten years to purchase the shares and how much, so that, he could benefit to the maximum depending upon the price at which the shares will be quoted. As such, before the end of ten years, the appellant on the 11th and 12th of March, 1998 exercised the option accruing on acceptance of the offer and sold the shares on the same day at prices ranging from 68 to 68.3125/68.4375 US $ per share. In the process, the appellant gained a sum of Rs. 1,01,733.5 US $, the equivalent of which was worked out by the AO at Rs. 39,79,814.5 @ 39.12 per US $). The entire amount of Rs. 39.79 lakhs was added back as perquisite under Section 17(2)(iii) r/w Section 17(1)(iv) and Section 15(b) of the IT Act.

23. Aggrieved, an appeal was filed before the CIT (A). The CIT (A) held as under:

I have carefully considered the rival contentions of the AO and the Authorised Representatives and submissions and I am of the view that in the given case. The point regarding deliberation is the essence of the benefit arising to the appellant consequent to entitlement of stock options and their subsequent exercise and sale especially in view of the absence of a direct provision in the Act governing stock options during the year under appeal. Accordingly, I am of the view that in the absence of specific provisions, the nature of transactions and the implications thereof must be considered in light of the available provisions of law. Therefore, in the present case, there is no dispute that the stock options accrued to the appellant by virtue of his employment. There is also no dispute that the exercise puce was same as the grant price hence resulting in no gain/loss on exercise. There is no dispute regarding the taxability of the gains on sale of such shares as acquired by exercise of the stock option entitlement. In my view the only question is whether such gains on sale are taxable as income from salaries as contended by the AO or as income from capital gains, as contended by the appellant. Considering that there are clearly two points of tax incidence, one on exercise and the other on sale, and each determining the head of income under which the same is to be taxed, the AO is correct in holding that in the absence of any taxable income arising at the time of exercise, the gain on sale can be treated as income under the head salaries because originally the shares so sold came into the possession of the appellant by virtue of his employment.

24. On appeal before us, the mainstay of the argument before the Bench was the decision of the House of Lords (and not of Chancery Division as noted by the Hon'ble JM) in the case of Abbott v. Philbin Inspector of Taxes (1962) 44 ITR 144 (HL). The point of issue was whether the taxable perk results at the time of grant and acceptance of the offer, or when the shares are acquired on exercise of the option accepted earlier. In allowing the appeal, the House of Lords held that there arose a taxable perquisite in the year of grant of the option.

25. In that case as per the decision of Lord Reid:

The company offered to its executives options to buy a number of its unissued shares at 68s. 6d., which was then the market price. The options were not transferable and were to endure for ten years if the purchaser remained so long in the company's service. The price of the option was Pound 1 per 100 shares, and in October, 1954, the appellant acquired an option on 2,000 shares for which he paid Pound

20. The market price rose and in March, 1956, when the price was 82s., the appellant exercised his option to the extent of 250 shares and acquired them at 68s. 6d., If he had immediately sold those shares he would have made a profit of Pound 166, and he has been assessed on this sum under Schedule E in the year 1955-56....

Appellant says that the option was the perquisite, and he admits that he was liable to be assessed for the year 1954-55 in respect of the value of the option when it was granted, minus the price he paid for it. He maintains that the subsequent appreciation of its value is not taxable. On the other hand, the crown maintains that he received no perquisite in 1954, the perquisite being the shares which were allotted to him when he exercised his option : if that is right, the shares when allotted were worth Pound 166 more than he paid for them and he has been properly assessed.

The first observation which I would make is that on the crown's view, the granting of the option in 1954 might result in ten different perquisites being received by the appellant in ten different years if he chose to exercise his option piecemeal. He was entitled to do this and in fact in 1955-56 he only exercised it to the extent of 250 out of 2,000 shares, and the company retained no control over the times at which, or the extent to which, he might exercise the option. If he did not exercise the last of his option until 1964-65 he would then, in the crown's view, receiving a perquisite taxable in that year in consequence of an irrevocable act of grace of the company ten years earlier. If in 1965 he held 2,000 shares which he had acquired in ten different parcels under his option, he would have made precisely the same profit on each share - the difference between 68s. 6d., the price under the option, and the then market price. But he would have been taxed very differently in respect of each parcel, the tax depending on the market price at the date when he had acquired it, for it is not suggested that further appreciation after shares have been allotted can be taxed. Moreover, let me suppose that the option had been exactly the same except that it was to last for ten years whether the appellant remained in the service of the company or not. It could hardly be that change so completely altered the nature of the option as to change the basis of taxation and make the granting of the option, and not the issue of the shares, the perquisite. If, then, it was exercised years after the servant had retired, what would the position be : would the issue of shares then be the perquisite, and for what year of assessment would it be a perquisite? There would be no assessment under Schedule E for the year in which the shares were issued because the servant had retired. I realize that one ought not to be surprised at anything that happens, under the IT Act, but nevertheless all this does seem a little strange.

26. In other words of Lord Viscount Simonds:

My Lords, I cannot entertain any doubt that, when the company granted the option to the appellant, he acquired something of potential value. I do not think that it matters whether it falls into the category of proprietary or contractual right or into some dim twilight that divides those juristic conceptions....

How, then, can it be said that an option to take up shares at a certain price is not a valuable, or at least a potentially valuable, right? Its genesis is in the desire of the company to give a benefit to its employees, and at the same time, no doubt, to enhance their interest in its prosperity. It is something which the employee thinks it worth his while to pay for : not a large sum, truly, but Pound 20 deserves a second thought. And it is something which can assuredly be turned to pecuniary account.

This was challenged because the option was itself not transferable, but this objection is without substance. There was no bar, express or implied, to a sale of the shares as soon as the option was exercised, and there could be no difficulty in the grantee arranging with a third party that he would exercise the option and transfer the shares to him....

The test is whether it is something which is by its nature capable of being turned into money : Nor is it relevant that it is "unvalued". I have little doubt that, if the Revenue authorities had addressed their minds to the proper question, they could have ascertained whether it had any, and what, value. My Lords, as I have said, the argument for the crown appeared to demand for its success that the grantee of the option did not acquire a perquisite at the date of the grant and a second perquisite when the shares were taken up. Therefore, the crown's case, in my opinion, fails at the initial step. But there are other grave difficulties in the way of its success. The taxable perquisite must be something arising "therefrom", that is, from the office, in the year of assessment. I do not want to embark on the notoriously difficult problem as to the year to which, for the purpose of tax, a payment should be ascribed if it is not expressly ascribed to any particular year. But I do not find it easy to say that the increased difference between the option price and the market price in 1956 or, it might be, in 1964, in any sense arises from the office. It will be due to numerous factors which have no relation to the office of the employee, or to his employment in it. The contrast is plain between the realized value, as it has been called, of the option when the shares are taken up though the realization falls short of money in hand and the value of the option when it is granted. For the latter is nothing else than the reward for services rendered or, it may be, an incentive to future services. Unlike the realized value it owes nothing to the adventitious prosperity of the company in later years. On this ground also I should reject the claim of the crown.

27. By majority view comprising Lord Reid, Lord Radcliffe and Viscount Simonds, the House of Lords held that the difference between the option price and the market value on the date of offer of option constituted a taxable perquisite at the time the option was accepted.

28. In the present case, it is not disputed by the AO and has been accepted by the CIT (A) that the grant/exercise price was the average of the NYSE as on the date of grant. Therefore, in view of the ratio in Abbott's case (supra), the difference between the option price (viz., grant/exercise price) and the fair market value is taxable as a perquisite in the year of grant. In the assessee's case, the option price is equal to the fair market value and hence there arises no taxable perquisite at the time of grant/acceptance of the option. Accordingly, the gain on sale of shares is only attributable to sale and the increase in value is assessable as income under the head capital gains.

While recording the conclusion (p. 24 para 28), the brother JM has held as follows:

(a) Since, the appellant did not exercise the option on the date of the offer/grant, the grant remained an offer of stock option and the appellant never became the owner of the shares, as such, there is no question of any benefit having accrued to the appellant at that time. The benefit accrued only at the time stock option was exercised and the shares so acquired on exercise sold;

(b) The benefit of exercise of stock option and sale of the shares so acquired do not result in capital gain, but are inextricably linked with the employment;

(c) Since, the appellant was granted the stock option without fixing a period of exercise, the appellant was under no obligation to exercise the same on the day of grant. It was only an offer which was kept alive to be encashed as and when the market price rises or not to exercise at all if it results in a loss;

(d) The decision of Abbott v. Philbin may be in favour and negating the above stands, but all legal contentions raised in that case have been examined at length in the Advance Ruling reported at XYZ, In re (1998) 150 CTR (AAR) 504 : (1999) 102 Taxman 74 (AAR) and the later decision squarely applies to decide the issue against;

(e) Subsequent amendments cannot be taken into account unless and until they are made retrospective, which is not so;

(f) Thus, the benefit having been accrued only on the exercise of the option, i.e. acquisition and sale, the surplus is liable to tax as salary. Having exercised the option of shares, the assessee became the owner of the shares, which is a capital asset of which value is market value prevailing on the date it is exercised, as such, when these shares were sold at the same rate, no capital gain results.

29. The issue, therefore is, having agreed to buy the shares at the price at which it was offered, whether the appellant acquired any right which could be taxed as a perquisite at that time. It is not as if an offer was made, there was no acceptance on behalf of the appellant and yet, the offer continued to be available. The offer had to be accepted. Once the offer is not accepted, the appellant or any other employee, for that matter, ceases to participate in the stock option scheme and cannot later avail the shares at the price offered. Thus, the appellant acquired a tangible right in the shares on the date he accepted the offer.

30. Whether this acceptance is a perquisite and what will be its value is no more res integra. The answer is evident in the decision of Abbott v. Philbin (supra) cited before the Bench. The decision categorically affirms that acceptance/vesting of the offer is a perquisite and the value thereof is the difference between the market value as on the date of the offer as reduced by the value at which it has been offered. It further holds that only the difference between the market value and the value at which the option vests emanates from employment. Later accretion cannot be related back to the employment. Even though, an interregnum exists between the acceptance of option and actual acquisition of shares on exercise thereof, offer is not valueless or something which can be ignored for determining perquisites.

31. The question still remains is whether this decision of Abbott v. Philbin has been adversely commented upon by the decision of Advance Ruling Authority at XYZ, In re (1998) 150 CTR (AAR) 504 : (1999) 102 Taxman 74 (AAR) (supra) (quoted in extenso by the brother JM). The answer is clearly in the negative. The decision of Abbott v. Philbin and Bentley v. Evans have been cited but only to be distinguished on the premise that the issue raised therein has not been raised before the Advance Ruling Authority. This is apparent from the portion reproduced in the order of the brother JM. In the matter being considered by the Advance Ruling Authority shares had been offered and the offer accepted at a value less than the market value of the shares as on the date of offer. There was no question before the Advance Ruling Authority as to whether any part of the consideration received on sale of shares could be taken to fall within the head capital gains and not salary. In the extract reproduced by the Hon'ble JM at p. 27 of the decision para 28, the Advance Ruling Authority is said to have observed that:

it is nobody's case that mere receipt of the option is perquisite and taxable in the year in which the offer is received. Since, the shares are to be issued and sold simultaneously, it is no ground that the amount will be taxable only when the option is exercised.

32. Thus, the issue raised in the present appeal was not before the Advance Ruling Authority and there is no question of the Advance Ruling Authority, therefore, being contrary to the stand of the appellant.

33. The dictum of the Abbott v. Philbin (supra) stands accepted by the legislature when specific provisions were enacted to deal with the situation. Difference in the price between the offer and the market value is stated to be a perquisite and the difference between the cost of acquisition and its sale price is stated to be capital gains. A word of caution is also essential when one refers to the decision of the Advance Ruling Authority. The decision deserves respect but may not constitute a binding precedent. Facts have to be carefully scrutinized as the decision cannot have universal applicability. They are binding only inter parties and not in rem.

34. Moreover, it is not as if the appellant will altogether escape taxation. The difference between the cost at which it has acquired and the sale price is liable to capital gains tax. There is no necessity of comparing the market price as on date of exercise with market price as on the date of sale to hold that there are no capital gains. Capital gains have to be worked out on the sale consideration less the cost of acquisition and cost of acquisition in this case is a price at which the offer was accepted.

35. Thus, there being no impediment to acceptance of the dictum of Abbott v. Philbin (supra) the appellant deserves to succeed on this ground.

REFERENCE UNDER SECTION 255(4) OF THE IT ACT, 1961

1. Whether deduction on account of housing norm and auto norm made by the employer from the base pay of the assessee in lieu of free housing and transport facility provided in India as per the terms of employment, falls within the definition of perquisite enshrined in Section 17(2)(iii) of the Indian IT Act and forms part of the base pay and is exigible to tax?

2. Whether a profit or benefit earned/acquired by the assessee on account of exercise of stock option, earlier granted, in terms of his employment on subsequent dates and its sale is a perquisite as per provisions of Section 17(2) of the Indian IT Act or capital gain?

M.A. Bakshi, Vice President

25th Oct. 2005

1. In consequence of the difference of opinion between the learned JM and learned AM of the Division Bench, the Hon'ble President, Tribunal has nominated me as Third Member of the Bench, on the following points of difference:

1. Whether deduction on account of housing norm and auto norm made by the employer from the base pay of the assessee in lieu of free housing and transport facility provided in India as per the terms of employment, falls within the definition of perquisite enshrined in Section 17(2)(iii) of the Indian IT Act and forms part of the base pay and is exigible to tax?

2. Whether a profit or benefit earned/acquired by the assessee on account of exercise of stock option, earlier granted, in terms of his employment on subsequent dates and its sale is a perquisite as per provisions of Section 17(2) of the Indian IT Act or capital gain?

2. I have heard the parties and perused the records.

I will first take up the first point of dispute for consideration.

3. Though the facts of this case have been described by the learned Members of the Bench, I, for the sake of coherence, would like to refer to some of these facts, which are considered to be of relevance for a decision on the points of dispute.

4. The assessee, an Australian citizen, was appointed as managing director and president by Whirlpool Corporation, USA (the terms and conditions of appointment are available on pp. 27 to 29 of the paper book). As per the offer of appointment, the assessee was to join the US based company as an employee on an international assignment. In view of the same, the compensation, benefits and other working conditions of the assessee were covered by the company's US expatriate policies. In respect of the residential accommodation, the terms of offer provided that the assessee would be entitled to company paid housing after deducting US housing norm of about US $ 16,000. Likewise, the company provided free car facility (minor expenses whereof were to be paid by the assessee) after a car deduction of US $ 3,000 per year. The assessee filed the return of income on the basis of salary drawn by him in US dollars. The tax was also to be paid by the company and, therefore, the assessee also included the tax paid by the assessee-company as part of his assessable salary.

5. There was a dispute about the conversion of US dollars into Indian rupees. Whereas assessee had converted the salary at the average exchange rate, the AO calculated the salary drawn in Indian currency at the exchange rate prevalent on the date of payment. The issue relating to conversion has been decided by the CIT (A) in favour of the Revenue. This fact would be relevant in computation of the perquisite value at the rate of 10 per cent of the salary, if applicable. The assessee had also offered the perquisite value in respect of the free residential accommodation as well as free car provided to him in India. The assessee worked out the value of perquisite in respect of residential accommodation as under:

Salary Rs. 1,16,92,572 Rent paid Rs. 7,80,000 10 per cent of salary Rs. 11,69,257 60 per cent of salary Rs. 70,15,543 Taxable value taken is actual

rent paid i.e., Rs. 7,80,000

being lower.

It is noteworthy that the assessee has calculated the salary of Rs. 1,16,92,570 on the following basis:

Net salary drawn Rs. 78,44,971 Tax paid by the employer Rs. 38,47,601 __________________

Rs. 1,16,92,570

10 per cent of the same has been taken at Rs. 11,69,257

The AO has worked out the perquisite value of residential accommodation at Rs. 15,53,803 as under:

Salary for the purpose of Rule 3 Rs. 79,98,038.1 Salary as per Appendix I Rs. 79,98,038.1 Acid : Housing contribution Rs. 10,02,083.6 Auto norm Rs. 1,10,505.0

____________________

Rs. 91,10,626.7.

Add : Tax perquisite (as computed

in the assessment order) Rs. 61,00,796 ____________________

TotalRs. Rs. 1,52,11,423 10 per cent of above Rs. 15,21,142 60 per cent of the salary Rs. 91,26,854 "Fair rental value" Not ascertainable Rs. 15,21,142 Perquisite value as per Rule 3(a)

Add : Furniture provided : Rs. 32,661 10 per cent of cost) ________________ Rs. 15,53,803

Less : Housing contribution Rs. 10,02,084 i-e. Rs. 5,51,719

It is evident from the above that the AO has deducted Rs. 10,02,084 being the amount reduced from the salary of the assessee on account of housing norm from the perquisite value. The net perquisite value in regard to residential accommodation has thus been worked out at Rs. 5,51,719. On the other hand, the assessee has offered the perquisite value of the residential accommodation at Rs. 7,80,000 on the basis of actual rent paid by the employer. It may thus appear that the working made by the AO is beneficial to the assessee insofar as the perquisite value assessed by the AO is less than the perquisite value disclosed by the assessee. So, however, as a result of the working made by the AO, the assessee has been asked to pay tax on the amount of Rs. 10,02,083, i.e., the amount reduced from assessee's gross salary on account of housing norm. Moreover, the said amount has also been taken into account in working out the salary received by the assessee for the purposes of computation of perquisite value at the rate of 10 per cent. Therefore, the real controversy involved in this appeal is as to whether the deduction made by the employer on account of housing norm is includible in the taxable salary of the assessee for intents and purposes including determination of perquisite value of the residential accommodation and free car facility.

6. In respect of the car, the assessee had offered the value for taxation at Rs. 1,100 per month. On the other hand, the AO calculated the perquisite value at Rs. 1,10,505 under Rule 3(c)(ii) but assessed it at nil by giving credit for the reduction made by the employer in the salary of the assessee. The working is given by the AO in para 5 of the assessment order which is reproduced hereunder:

5. Valuation of car with driver : The relevant clause in the employment contract and the discussion in paras 3.2 and 3.3 of this order make it very clear that the car has been provided by employer at a concessional rate after deduction of US $ 250 per month totally to US $ 3,000 for full year. Recovery at the rate of 250 US $ per month has been made from Appendix 1. Rule 3(c)(ii) lays down that the value of motor car provided by the employer for use by the assessee partly in performance of his duties and partly for his private or personal purposes shall be determined to be a sum equal to that part of the amount actually expended by the employer on the maintenance and running of the motor car during the relevant previous year and including remuneration, if any, paid by the employer to the chauffeur which can be reasonably attributed to the use of the motor car by the assessee for his private or personal purposes; or where the motor car is used by his employer, the aggregate of such sum and of a sum equal to that part of the amount representing the normal wear and tear of the motor car which can reasonably be attributed to the user of motor car by the assessee for his private or personal purposes; however, that where a determination on the basis mentioned above presents difficulty, the value of the perquisite may be determined on the basis of the Table.

5.1 Details as under were ascertained from the assessee and Whirlpool Holdings India Ltd. through specific queries under Section 131, which are on record:

(i) Assessee was provided with one car; Mercedes Benz (purchased on 13th Nov., 1995) (letter dt. 22nd Aug., 2000 of Authorised Representative).

(ii) Company did not maintain any log book. The car was provided exclusively to the assessee for his official as well as personal purposes. The car was not used as a pool car of the company (letter dt. 13th Sept., 2000 of the Authorised Representative). Driver's salary was Rs. 5,000 per month.

(iii) No depreciation on this car has been claimed by the assessee in its own assessment as it was a foreign car and in accordance with Clause (a) of first proviso to Section 32(1) of IT Act. (letter dt. 6th Oct., 2000 of Authorised Representative).

(iv) The cost of import duty, registration charges and insurance of the Mercedes Benz was Rs. 16,80,903 paid by Whirlpool Holdings India Ltd. Cost of the car was borne by Whirlpool Corporation, USA and hence not supplied (letter dt. 20th Oct., 2000 of Whirlpool India Holdings Ltd. in response to summons under Section 131). Rs. 1,13,307 and Rs. 70,869 have been incurred on petrol and maintenance expenses by Whirlpool India Holdings Ltd. on this Mercedes car during financial year 1997-98. There were 16 cars owned by the company during the year 1997-98.

The above facts show that the total expenditure on this car, which is exclusively for official and personal use by the managing director Mr. Garrick D'Silva is:

Petrol and maintenance expenses Rs. 1,84,1760

Driver's salary Rs. 60,000

________________

Rs. 2,44,176

In addition there would be wear and tear which can be estimated to be at least Rs. 3 lakhs per annum assuming straight line depreciation over 10 years. Since no log book is said to be maintained, it is not possible to work out the exact amount attributable to personal use. However, Rule 3(c)(ii) requires a 'reasonable attribution' and not 'exact attribution'. In view of the fact that the assessee has agreed in the employment contract for a deduction of US $ 3,000 per annum on a monthly basis it is clear that the benefit derived from this amenity can never be below this, i.e., Rs. 1,10,505 (see conversion in para 2 for auto norm). Considering the overall expenditure on this vehicle, this sum is only about 1/5th of the actual running, maintenance expenses and estimated wear and tear. There are total 16 cars with the employer and the assessee being managing director of the employer-company was definitely in a position to utilize any other car for official purposes as well. The reasonably attributable personal use can never be, therefore, less than Rs. 1,10,505.

5.2 The Authorised Representatives on being asked to explain as to why the minimum perquisite value of the vehicle provided by the employer be not taken at US $ 3,000 furnished their written submissions vide letter dt. 20th Sept., 2000. Their interpretation of Rule 3(c)(ii) is that it does not leave the determination of perquisite value to the discretion of the AO. Further US $ 3,000 being deducted from salary is a hypothetical amount and not the actual expenditure of employer-company. This amount, according to Authorised Representatives cannot be considered for the purposes of valuation of the perquisite of motor car provided by the employer.

5.3 As discussed in paras 5 and 5.1 what is required to be done under Rule 3(c)(ii) is a 'reasonable attribution' and there is no compulsion to adopt the Table, if such reasonable attribution is possible. In view of the figures in para 5.1 and the fact that this 'reasonable attribution' can never be less than the amount deducted from assessee's salary, i.e., US $ 3,000 or Rs. 1,10,505 (no prudent person would agree for a deduction which is more than the actual benefit), the value of the car plus driver perquisite provided by the employer, for the purposes of Rule 3(c)(ii), is taken at Rs. 1,10,505. This is on the ground that it is the minimum amount that can be 'reasonably attributed' to the personal use. Assessee's case is covered by Rule 3(c)(v), i.e., he is allowed use of motor car at a cost/concession. The perquisite value in this case is as under:

Valuation done under Rule 3(c)(ii) Rs. 1,10,505

Less : Amount deducted from Rs. 1,10,505 assessee's salary Perquisite value _______________ Rs. Nil

In this case the value under Rule 3(c)(ii) has been taken to be equal to the amount recovered by the employer, i.e., the auto norm'. However, if the value were taken at Rs. 13,200 as in the return, the perquisite value at a concessional rate under Rule 3(c)(v) would still be nil. This is due to the fact that no prudent person would agree for recovery from his salary at an amount higher than the benefit derived.

As already pointed out, the CIT (A) has upheld the order of the AO in working out the perquisite value and in including the reductions made by the employer on account of auto norm and housing norm as part of the salary.

7. Whereas learned Counsel for the assessee sought to support the view expressed by the learned AM, the learned Departmental Representative sought to support the view expressed by the learned JM. At this stage I am tempted to say that the view expressed in regard to the first point of dispute appears to be attractive at first sight but it loses its lustre when one peeps deep into the employment agreement and the provisions of the Act.

It has been pointed out earlier that in this case the value of perquisites determined by the AO in respect of free residential accommodation and free car facility provided to the assessee is less than the value disclosed by the assessee. Therefore, before I consider the correctness of the method adopted by the AO in determining the perquisite value of rent-free accommodation and free car, it is more important to determine the component of salary for the purposes of taxation. The amount of salary, which has been paid to the assessee or to which the assessee is entitled to depends upon the contract between the assessee and the Whirlpool Corporation, USA.

8. In order to appreciate as to whether housing norm and auto norm reduction made by the company is includible in the taxable salary of the assessee, it will be relevant to refer to Section 15 of the IT Act, 1961. Section 15 reads as under:

15. The following income shall be chargeable to income-tax under the head 'Salaries'-

(a) any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not;

(b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him;

(c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to income-tax for any earlier previous year.

Section 17 of the IT Act, 1961 defines 'salary'. The said definition is an inclusive definition and provides the salary to include wages, annuity, gratuity and any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages. Section 17(i) is quoted hereunder:

17. For the purposes of Sections 15 and 16 and of this section,-

"Salary" includes-

(i) wages;

(ii) any annuity or pension;

(iii) any gratuity;

(IV) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages;

(v) any advance of salary;

(va) any payment received by an employee in respect of any period of leave not availed of by him;

(vi) the annual accretion to the balance at the credit of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax under Rule 6 of Part A of the Fourth Schedule; and

(vii) the aggregate of all sums that are comprised in the transferred balance as referred to in sub-Rule (2) of Rule 11 of Part A of the Fourth Schedule of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax under sub-Rule (4) thereof;

(viii) the contribution made by the Central Government in the previous year, to the account of an employee under a pension scheme referred to in Section 80CCD.

9. In Stroud's Judicial Dictionary, Fourth Edn., the expression 'salary' is explained as "where the engagement is for a period permanent or substantially permanent in character and is for other than manual or relatively unskilled labour, the remuneration is generally called a salary". In the case of Gestetner Duplicators (P) Ltd. v. CIT , their Lordships of the Supreme Court held that in ordinary parlance, salary connotes remuneration or payment for work done or services rendered.

10. It may be pertinent to mention that the Whirlpool Corporation, USA is an employer-company in the case of the assessee. It has a tax equalization policy in respect of its employees assigned to overseas location. The policy is so designed that the employee is neither put to any disadvantage or advantage as a result of his posting outside USA in respect of payment of income-tax. The policy and scope being relevant is reproduced as under:

Policy and Scope:

When an employee is assigned to an overseas location, the company policy is designed so that the employee should pay a similar income-tax to that which he/she would have paid had the employee remained in the US.

To achieve this objective, the company has adopted a tax equalization programme under which an employee's compensation will be reduced by an amount similar to the tax he would have paid had he/she remained in the US ("hypothetical tax") and the company will reimburse the employee for all US and foreign taxes actually payable. In addition, to the extent the hypothetical tax is dissimilar, there is generally an offset relating to hypothetical housing.

This policy covers US citizens who are transferred from the US to a foreign post of assignment or from one foreign post of assignment to another. It also includes all income of US citizens including company compensation and personal investment income.

It has been given in writing before me that the auto norm and housing norm of the company are in consonance with the above policy of the employer-company. It has further been stated that the assessee is not entitled to any free accommodation or free car on his posting in USA and accordingly deduction is being made from his salary to put him on par with the employees working in USA.

11. Proceeding on the basis that the assessee was not entitled to free accommodation or free car had he been posted in USA, the company having provided free accommodation and free car in India and reduced the salary of the assessee to put him at par with the employees working in USA. Therefore, there is no doubt in my mind that the intention of the employer to fix the basic salary at a higher level and then reducing the same on account of hypothetical tax, housing norm and auto norm, etc. was for the purpose of equalization of pay and other facilities of the US employees and the employees assigned to overseas location. It is also interesting to note that the AO has not included the hypo tax deduction made by the employer as part of salary of the assessee. The amount has been deducted on account of tax equalization policy and the AO has rightly deducted the same from the gross salary but included the actual tax component paid by the employer-company as a perquisite for the purposes of determination of the salary received by the assessee. In my considered view, there is no reason for taking a different view in regard to deduction made on account of housing norm and auto norm. As pointed out earlier, the intention of the employer-company appears to be abundantly clear that there is no confusion on the assessee's right to receive the salary in USA after completion of the assignment in India or overseas location. It may be pertinent to mention that as per the terms and conditions of employment, the company had assured the assessee that after completion of three years' working in India, he would be considered for assignment outside India. In my considered view the treatment given by the AO to the deductions on account of housing norm and auto norm is not justified more so when different treatment has been given to the deductions on account of hypo tax. In my view, deduction on account of hypo tax and housing norm and auto norm deserves same treatment.

12. Apart from the facts stated above, another factor which assumes importance is that in the case of Whirlpool India Holdings Ltd. (the employer-company), the dispute was raised by the AO for the purposes of provisions of Sections 201 and 201(1A) of the IT Act, 1961 claiming that there was short-deduction of tax from the salary paid to the assessee. The AO had invoked the aforementioned provisions of the Act in the case of Whirlpool India Holdings Ltd. on the ground that in working out the tax deductible at source, the deductions on account of hypo tax in respect of housing norm and auto norm had not been included by the company. A demand of Rs. 19,36,629 for the financial year 1999-2000 relevant to asst. yr. 2000-01 was created under Sections 201 and 201(1A) accordingly in the name of Whirlpool India Holdings Ltd. vide order dt. 28th Feb., 2001 by the Dy. GIT, TDS, Circle-XXVII, New Delhi.

13. When the matter came up before the CIT (A)-XXX, New Delhi, he had called for the comments of the AO on the written submissions filed by the assessee. The AO vide his comments dt. 26th Nov., 2002 reported to the CIT (A) that as per the facts on record, the hypo tax, housing norm and auto norm have actually been reduced from the salary of expatriate employee under the tax equalization policy. It was also pointed out that since the above reduction finds mention in the pay slips issued to the expatriate employee, the TDS officer has wrongly concluded that these were actually disbursed to the employee and the AO reported to the CIT (A) that it appears to be a mistake. The CIT (A) vide order dt. 6th May, 2003 accepted the appeal of the assessee and held that the company, namely, Whirlpool India Holdings Ltd., was not a defaulter in terms of Sections 201 and 201(1A) of the IT Act, 1961 with reference to the housing norm and auto norm. In other words, the opinion of Whirlpool India Holdings Ltd. that hypo tax, housing norm and auto norm are actually reductions from the salary and, therefore, do not constitute part of the salary has been confirmed by the CIT (A). I have been informed by the learned Counsel for the assessee that no appeal has been filed against the said decision of the CIT (A) and that the order has become final. Therefore, the controversy at this stage appears to be unnecessary insofar as the Department is not at liberty to take a different view in the case of the company and in the case of the assessee without assigning any reason. The principle is applicable in this case insofar as the Revenue has accepted the view taken by the CIT (A) in the case of the employer-company and, therefore, it would not be open to the Department to take a different view in the case of the employee on the same issue. The observations of the Hon'ble Supreme Court in the case of Berger Paints India Ltd v. CIT , may be relevant. These are as under:

If the Revenue has not challenged the correctness of the law laid down by the High Court and has accepted it in the case of one assessee, then it is not open to the Revenue to challenge its correctness in the case of other assessees, without just cause.

14. Another factor for deciding the issue is the treatment of perks in the form of residential accommodation and car facility in India. The AO having held that deduction of pay on account of housing norm and auto norm was part of salary received for the purposes of taxation in India further held that the residential accommodation and car facility have been provided to the assessee at concessional rates. The AO has accordingly calculated the perquisite value on the same basis. The question that requires to be considered is as to whether the perquisite value is to be determined on the basis of free residential accommodation and free car facilities or on the basis of such facilities having been provided at a concessional rate. It has been pointed out earlier that in this case, the value of perquisites determined by the AO in respect of the residential accommodation and car facility provided to the assessee is less than the value disclosed by the assessee. So, however, the determination of the perquisite value of the aforementioned facilities is dependent on the treatment given to the reduction on account of housing norm and auto norm. As per the terms of the contract of employment, copy of which is on record, it is abundantly clear that assessee is entitled to free residential accommodation and free car while posted in India. The provision of free residential accommodation and free car is with the condition of reduction in salary on the basis of norms of the company. The effect of the terms of the agreement is that assessee is entitled to free residential accommodation and free car facility in India to which he was not entitled to in USA. Since he was not entitled to free residential accommodation and free car facility had he worked in USA as per company's policy, it would entail the deduction in his salary to be calculated on the basis of norms of the company. Though the agreement provides for estimated reduction by US $ 16,000, however, as per the certificate, more reduction has been made. For the free car facility, a reduction of salary is US $ 3,000. As per the above terms and conditions of agreement of employment after the reduction of salary, assessee has been ensured free residential accommodation and free car facility in India. In my considered view, the fixation of salary at US $ 15,000 per month to the assessee was for the purposes of employment in USA and the terms and conditions of the agreement clearly stipulate that the salary receivable by the assessee in India would be after reduction of hypo tax, housing norm and auto norm. The agreement does not stipulate that assessee would be entitled to residential accommodation and car in India at concessional rates. On the other hand, the agreement makes it abundantly clear that the assessee would be entitled to rent-free accommodation and free car facility while in India. Therefore, the application of the rules for determination of the perquisite value on the basis of residential accommodation and car provided at concessional rates is not warranted. Rule 3(a) of the IT Rules as applicable for the relevant assessment year provides for computation of perquisite value in respect of rent-free accommodation. On the other hand, Rule 3(b), which has been applied by the AO provides as under:

3. For the purpose of computing the income chargeable under the head "Salaries", the value of perquisites provided by the employer directly or indirectly to the assessee (hereinafter referred to as employee) or to any member of his household by reason of his employment shall be determined in accordance with the following sub-rules, namely:....

(b) The value of residential accommodation provided at a concessional rent shall be determined as the sum by which the value computed in accordance with Clause (a), as if the accommodation were provided free of rent, exceeds the rent actually payable by the assessee for the period of his occupation during the relevant previous year.

As a result of this decision, in my view, the AO will be required to redetermine the perquisite value of free residential accommodation and free car facility provided to the assessee. The application of Rule 3(c)(ii) and Rule 3(b) by the AO by treating the provision of residential accommodation and car facility as having been provided to the assessee at concessional rates is not justified insofar as in the terms of employment it has been clearly provided by the employer-company to the assessee that the latter would be entitled to free residential accommodation and free car facility in India. Since the assessee was not entitled to the free residential accommodation and free car facility while working in USA, the deduction in salary has been provided. It is also pertinent to mention that the deduction on account of free residential accommodation is more than Rs. 10 lakhs as against the actual rent paid of Rs. 7,80,000. I am therefore, of the considered view that the AO was not justified in treating the deductions made from salary on account of housing norm and auto norm as part of the salary. I, therefore, agree with the view expressed by the learned AM in regard to this issue.

15. Now, I take up the second point of dispute involved in this appeal. The point of difference may be stated as under:

Whether a profit or benefit earned/acquired by the assessee on account of exercise of stock option, earlier granted, in terms of his employment on subsequent dates and its sale is a perquisite as per provisions of Section 17(2) of the Indian IT Act or capital gain?

The relevant facts relating to this issue are that during the course of assessment proceedings it was observed by the AO that as per the employment contract of the assessee with Whirlpool Corporation, USA, the assessee was entitled to be nominated for stock options. The AO, accordingly, made inquiries about the exercise of any stock option by the assessee in the previous year relevant to asst. yr. 1998-99. In response, the following information was furnished by the assessee in regard to grant, exercise and sale of stock options:

S.No Date Grant/ Basis of No of Date of Price at of Grant Exercise Grant stock exercise & which sold Price Exercise Options sale (in US$) (in US$) Price

1. 21.6.1994 53.38 Average of high 1000 11.3.1998 68 & low price at

New York Stock

Exchange on the

date of grant

2. 15.8.1995 55.81 -do- 3200 -do- 68

3. 18.6.1996 50.44 -do- 2300 -do- 68.3125

4. 18.6.1996 50.44 -do- 500 12.3.1998 68.4375

From the details furnished by the assessee it was observed by the AO that there was a difference between the sale price of shares and the purchase price, and that the assessee had not disclosed any perquisite value in respect of the gains on exercise of stock options. When asked to explain as to why the benefit derived by the assessee by exercise of stock option may not be assessed as a perquisite within the meaning of Section 15 r/w Section 17 of the Act, it was claimed that the right to purchase the shares was granted to the assessee at the average of high and low price at New York Stock Exchange on the date of grant and, therefore, there was no difference between the grant price and the market price. Accordingly, there was no benefit derived by the assessee by the grant of stock options. It was pointed out that the profit derived by the assessee on the sale of shares granted to the assessee was on the sale of capital asset resulting in capital gains which in the case of the assessee was not taxable in India. The AO rejected the claim of the assessee with reference to the provisions of Sections 15, 17(1) and 17(2) of the IT Act, 1961. The AO referred to the decision of Bombay High Court in the case of CIT v. D.R. Phatak , and the decision of the AAR in P. No. 15 of 1998, XYZ, In re , and held that the benefit flowing from the

employment contract was a perquisite within the meaning of Section 17(2)(iii) and taxable under the Act. The AO further held that the value of perquisite was ascertainable only on the date the option was actually exercised by the assessee and since in this case the date of exercise of the option and the date of sale of shares coincided, the profit derived on the sale of shares was liable to tax. The AO worked out the difference at Rs. 39,79,814 which was brought to tax.

16. On appeal, the CIT (A) upheld the view of the AO with particular reference to the Circular No. 710 of the CBDT (1995) 127 CTR (St) 1 and the decision of the AAR in P. No. 15 of 1998 (supra).

17. On further appeal before the Tribunal, the learned JM upheld the view of the Revenue authorities by relying upon the decision of the AAR in P. No. 15 of 1998 (supra). It has been pointed out by the learned JM that the issue involved in this appeal was similar to the issue decided by the AAR in P. No. 15 of 1998 (supra) and, therefore, the difference between the market price on the date of exercise of option and the price paid by the assessee was chargeable to tax. It has been held by the learned JM that the assessee had acquired the shares in the year under appeal at concessional rate as a result of which a pecuniary benefit accrued to the assessee in the form of perquisite which is taxable under the head 'salary' under Section 17(2)(iii) of the IT Act, 1961.

18. The learned AM has differed with the learned JM mainly on the ground that the issue was covered by the decision of the House of Lords in the case of Abbot v. Philbin Inspector of Taxes (1962) 44 ITR 144 (HL), wherein it was held that taxable perk results at the time of grant and acceptance of the offer and not at the time the shares are acquired on exercise of the option accepted earlier. The learned AM has expressed the view in para 31 of his order on the ground that there was no question before the Advance Ruling Authority as to whether any part of the consideration received on sale of shares could be taken to fall within the head 'capital gains' and not 'salary'. The learned AM has further held that in this case the difference between the cost at which the assessee has acquired the shares and the sale price is liable to capital gains tax.

19. Before me, it hardly needs to be mentioned that the learned Counsel for the assessee sought to support the view expressed by the learned AM and the learned Departmental Representative, on the other hand, sought to support the view expressed by the learned JM in regard to this issue.

20. I have given my thoughtful consideration to the rival contentions. The assessee derives income from salary and it is not disputed that it is by reason of his employment with Whirlpool Corporation, USA that the assessee is entitled to the stock options scheme. All employees of Whirlpool Corporation, USA are not entitled to stock options but the company through its human resources department provides the list of employees who are eligible to the grant of stock options from time to time. It is not in dispute that assessee was eligible to the stock options which were granted in the years 1994, 1995 and 1996. It will be relevant to refer to the scheme of stock options copy whereof is placed on record. As per the said scheme, the shares are granted to the selected employees as an incentive to promote continuity of management and increased incentive and personal interest in the welfare of the company. The plan objectives of the scheme are as under:

Whirlpool Corporation shareholders and the board of directors adopted in 1989, 1996 and 1998 Omnibus Stock and Incentive Plans (the "Plans") to enable the company to attract and retain superior talent and to link the interests of participating employees with the interests of the company's shareholders. It is the intent of the Plans to promote continuity of management and increased incentive and personal interest in the welfare of the company by those who are responsible for shaping and carrying out the long-range plans of the company and securing its continued growth and financial success.

To encourage such employees to secure or increase, on reasonable terms, their stock ownership in the company, the board of directors may, from time to time, award options to purchase shares of the company's stock. The exercise and retention of stock options is a way for you to share in the company's future growth. There are various methods to achieve stock ownership through the Plans.

The stock options as per the scheme are described in the scheme to represent the right to purchase the company common stock at a future time at a price set at the time the option is granted. Option price is set at the time the Human Resources Committee approves the grant and is the average of the high and low market price for the day. As per the scheme, the value of stock option is described as under:

The company's stock options can be used as a valuable tool to build an estate either through direct purchase at exercise or through a process termed 'swapping', where currently owned stock can be turned into the company to pay for option exercises. Because there are so many variables that may reflect your personal status, we encourage you to consult a financial planner or stock broker to review your personal financial strategies and how stock options may best fit into those strategies.

The methods of exercise options have also been given as under:

To exercise an option means to buy a share of stock. There are various methods to achieve stock ownership through the Plan; payment with a personal check, by a wire transfer, a bank or broker loan, use of presently owned company common stock to exchange or 'swap' for additional shares, or a short-term loan.

Vested options may be exercised at any time by contacting the stock option administrator at 800-446-2574, ext. 3973, or 616-923-3973. The option exercise cannot be processed until Whirlpool receives both payment and a completed exercise form. You may be required to pay taxes in addition to the option price, depending on the country you reside in. The stock option administrator will calculate the amount of taxes due in addition to the option made. The exercise form may be faxed to the administrator.

As is evident from the scheme of stock options, as indicated above, there are three stages for acquisition of the stock options - one is the eligibility, second is the grant of option and the third is the exercise of the option. Once the option is exercised by an employee, he acquires the shares at a predetermined price. There is a fourth stage in the scheme of stock option, i.e., the sale of shares, which according to my understanding of the scheme, is not compulsory. The question that is involved in this appeal is the stage at which the benefit derived by the assessee by the stock option is taxable under the provisions of the IT Act, 1961. As already pointed out, the learned AM has referred to the decision of the House of Lords in the case of Abbott (supra), where a similar issue had been decided by majority opinion in favour of the taxpayer. It will be relevant to point out that Lord Keith (of Avonholm) and Lord Denning had given a dissenting opinion in the aforementioned decision by the House of Lords, which is quoted hereunder:

An option is not itself a perquisite or profit. It is on the exercise of the option that the benefit accrues and if capable of being valued in terms of money is assessable to tax.

This decision by the House of Lords has been taken notice of by the AAR in P. No. 15 of 1998, XYZ, In re (supra) wherein it has been held that the value of the benefit derived by the assessee at the time of exercise of stock option is liable to tax under Section 17(2)(iii) of the Act in the year of exercise of the option. The issue before the AAR was as to whether the benefit received by the employees of Indian company by exercise of option to purchase shares of the parents foreign company constitutes additional remuneration and perquisite taxable as income from salary. The Hon'ble AAR held that the gain made by an employee after exercise of the stock option is taxable as salary. It has further been held that a foreign company selling its shares at concessional rate to the employees of its Indian subsidiary has to deduct tax at source under Section 192 since the gain made by the employee after exercising the option would be taxable as salary. The Hon'ble AAR has taken the conscious decision on the basis of provisions of Section 17(2)(iii) of the Act. The learned AM has preferred to rely on the decision of the House of Lords in the case of Abbott (supra) and has not followed the decision of the AAR in P. No. 15 of 1998 (supra) on the ground that the issue involved in this appeal was not before the said authority. In my considered view, as pointed out earlier, the issue involved in this appeal was before the AAR in P. No. 15 of 1998 (supra), and a conscious decision has been taken to hold that the value of the benefit granted to the assessee by way of stock option is a valuable perquisite assessable with reference to exercise of the option on the basis of the difference in the market price on the said date with the price paid by the employee. In my considered view, the decision of the House of Lords though deserves utmost respect yet when there is a decision of AAR in P. No. 15 of 1998 (supra), directly in respect of Section 17(2)(iii) of the IT Act, 1961, and even if one were to choose between the two decisions, the decision of the AAR shall have to be preferred to the decision of the House of Lords. Moreover, the provisions of the IT Act, 1961 are not pari materia with those of provisions of United Kingdom. In any case, as pointed out earlier, it is not a matter of choice between the decision of the House of Lords and the decision of AAR insofar as the provisions of Section 17(2)(iii) of the IT Act, 1961 were not the subject-matter of decision before the House of Lords. On the contrary, the Hon'ble AAR has decided the issue relating to the taxability of the benefit derived by an employee in respect of the stock options on the basis of provisions of Section 17(2)(iii) and, therefore, in my considered view, the decision of the AAR is required to be followed in preference to the decision of the House of Lords.

21. It is also pertinent to mention that the Finance Act, 1999 had inserted Section 17(2)(iiia) to bring clarity about the taxability of the benefits arising to an employee as a result of allotment of shares under the Employees' Stock Option Plan. The said Section 17(2)(iiia) and Explanation below Section 17(2)(iiia) was deleted by the Finance Act, 2000 w.e.f. 1st April, 2001. There is an Explanatory Note by the CBDT vide Circular No. 794, dt. 9th Aug., 2000 reported in (2000) 162 CTR (St) 9 : (2000) 245 ITR (St) 21 in regard to the omission of Section 17(2)(iiia) and insertion of proviso to Section 17(2)(iii) as under:

19. Taxation of securities received under Employees Stock Option Plan:

19.1 The Finance Act, 1999, inserted certain provisions in the Act to bring clarity about the taxability of benefits arising to an employee as a result of allotment of shares under Employees Stock Option Plan. The existing provisions provide that the difference between market price on the date of exercise of the option and the price paid by the employee for acquiring the shares will be regarded as perquisites and the difference between the fair market value on the date of exercise of option and the actual sale price in the event of transfer of shares by the employee shall be regarded as capital gains.

(Emphasis, italicised in print, supplied)

19.2 The Act makes a departure and provides that no perquisite shall be charged to tax in the hands of the employee in respect of benefits derived as a result of allotment of shares/debentures or warrants directly or indirectly under the employees stock option plan or scheme. This is sought to be done by deleting Section 17(2)(iiia) and providing an Explanation below Section 17(2)(iii). Sub-Section (2B) in Section 49 inserted by the Finance Act, 1999, has also been deleted. Under the amended provisions, such shares will only be subjected to capital gains tax at the time of sale by the employee. The difference between the consideration and the cost of acquisition will be regarded as the amount of capital gains under normal provisions of law. However, the new provisions shall be applicable only in respect of options exercised or allotments made after 31st March, 2000. The taxability of shares in respect of which option has been exercised by the employee prior to 31st March, 2000, shall continue to be governed by the old provisions.

The above Explanatory Notes make it abundantly clear that the insertion of Section 17(2)(iiia) by the Finance Act, 1999 was to bring clarity about the taxability of the benefits arising to an employee as a result of allotment of shares and, therefore, the insertion was clarificatory in nature. It has also been made abundantly clear that the omission of Section 17(2)(iiia) will be applicable only in respect of options exercised or allotments made after 31st March, 2000. In other words, the amendment made in Section 17 does not go in favour of the assessee but the intention of the legislature as explained by the CBDT is to the contrary. The intention of the legislature not to tax the benefit w.e.f. 1st April, 2000 being clear, such benefits are taxable as having accrued to any salaried employee before 1st April, 2000. The very fact that Section 17(2)(iiia) was inserted to bring clarity regarding the taxation of stock options also supports the view expressed by the Hon'ble AAR that the benefit accruing to the salaried employee on the date of exercise of the stock option was assessable to tax as a perquisite under Section 17(2)(iii). Section 17(2)(iii) may be quoted hereunder for the sake of ready reference:

17. For the purposes of Sections 15 and 16 and of this section,-

(1) 'Salary' includes-

(i) to (viii)...

(2) "perquisite" includes-

(i) & (ii)...

(iii) the value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases-

(a) by a company to an employee who is a director thereof;

(b) by a company to an employee being a person who has a substantial interest in the company;

(c) by any employer (including a company) to an employee to whom the provisions of paras (a) and (b) of this sub-clause do not apply and whose income under the head 'Salaries' (whether due from, or paid or allowed by, one or more employers), exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds fifty thousand rupees.

With effect from 1st April, 2001 (to be ignored for the year under appeal):

Provided that nothing contained in this sub-clause shall apply to the value of any benefit provided by a company free of cost or at a concessional rate to its employees by way of allotment of shares, debentures or warrants directly or indirectly under any Employees' Stock Option Plan or Scheme of the company offered to such employees in accordance with the guidelines issued in this behalf by the Central Government.

22. It is pertinent to mention that stock options have been granted to the employees to derive benefit with the sole purpose of promoting continuity of management and increased incentive and personal interest in the welfare of the company. Section 17(2)(iii) brings the benefit derived by the employee within the ambit of perquisites taxable as income from salary. As per the scheme of stock options, the assessee is given the right to purchase stocks at predetermined price. At the time of grant of the option, there is no benefit derived by the assessee insofar as the price fixed for the grant of shares is the average of the market price (high and low) for the day on the date of grant of the option. Therefore, no benefit in monetary terms is derived by the assessee on the date of grant of option. The employee has been given the right to exercise the option after one year and two years period but not exceeding ten years. When the assessee exercises the option, he pays the consideration for the acquisition of shares to the company at the price fixed at the time of the grant. In my view, this is the stage at which the benefit is derived by the assessee by way of difference in the predetermined price and the market price. When the market price is higher and the assessee acquires the shares from the employer by reason of the terms of employment at a lesser value, the benefit given to the employee is by reason of his employment and such benefit is liable to tax under Section 17(2)(iii) upto 31st March, 2000. It may be pertinent to mention that assessee has the option of purchasing the shares after the expiry of one year from the date of grant. The assessee may acquire the shares at a particular time and may hold the shares in order to derive more benefits as a result of an appreciation of the value in the market. If the employee after exercising the option of purchasing the shares holds the same for a particular period, the gain on the sale of shares on subsequent dates will result in capital gain (difference between the sale price and price on the date of exercise of the option). The benefit accruing to the assessee on the date of exercise of the option would be taxed under Section 17(2)(iii). (The difference between the price on the date of exercise of the option and the predetermined price). The confusion that appears to be created in this case is that the date of exercise of the option and the date of sale is same and there is no difference between the price prevalent at the time of exercise of the option and the sale of shares. Therefore, there is no capital gain that accrues to the assessee on the sale of shares allotted to the assessee. The gain derived by the assessee by exercise of option and not by the sale of shares is assessable as perquisite within the meaning of Section 17(2)(iii).

23. A question which appears to be pertinent may arise as to with the omission of Section 17(2)(iiia) w.e.f. 1st April, 2001, the old provisions of the Act are restored and, therefore, if the interpretation of provisions of Section 17(2)(iii) as advanced by the Revenue is accepted, that would be against the intention of the legislature insofar as the profits arising as a result of stock options are not intended to be taxed as a perquisite w.e.f. 1st April, 2001. It is also the claim of the assessee in written submissions filed before the Tribunal that Section 17(2)(iiia) having been incorporated by the Finance Act, 1999 w.e.f. 1st April, 2001 and the same having been deleted by the Finance Act, 2000 w.e.f. 1st April, 2001, the difference between the price at the time of exercise of the option and the grant price of shares are taxable only in the asst. yr. 2000-01 and not in earlier years. This contention of the assessee is not well-founded. Section 17(2)(iiia) was inserted by the Finance Act, 1999 which reads as under:

17(2) 'perquisite' includes-

(i) the value of rent-free accommodation provided to the assessee by his employer;

(ii) the value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer;

(iii) the value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases-

(a) by a company to an employee who is a director thereof;

(b) by a company to an employee being a person who has a substantial interest in the company;

(c) by any employer (including a company) to an employee to whom the provisions of paras (a) and (b) of this sub-clause do not apply and whose income under the head "Salaries" (whether due from, or paid or allowed by, one or more employers), exclusive of the value of all benefits of amenities not provided for by way of monetary payment, exceeds fifty thousand rupees:

Explanation. - For the removal of doubts, it is hereby declared that the use of any vehicle provided by a company or an employer for journey by the assessee from his residence to his office or other place of work, or from such office or place to his residence, shall not be regarded as a benefit or amenity granted or provided to him free of cost or at concessional rate for the purposes of this sub-clause.

(iiia) the value of any specified security allotted or transferred, directly or indirectly, by any person free of cost or at concessional rate, to an individual who is or has been in employment of that person:

Provided that in a case where allotment or transfer of specified securities is made in pursuance of an option exercised by an individual, the value of the specified securities shall be taxable in the previous year in which such option is exercised by such individual.

Explanation. - For the purposes of this clause,-

(a) 'cost' means the amount actually paid for acquiring specified securities and where no money has been paid, the cost shall be taken as nil;

(b) 'specified security' means the securities as defined in Clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and includes employees' stock option and sweat equity shares;

(c) 'sweat equity shares' means equity shares issued by a company to its employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called; and

(d) 'value' means the difference between the fair market value and the cost for acquiring specified securities;

This provision was deleted by the Finance Act, 2000 w.e.f. 1st April, 2001. It may appear that the law relating to taxability of stock option was incorporated only w.e.f. 1st April, 2000 by insertion of Section 17(2)(iiia). I have earlier quoted the Explanatory Notes of the CBDT to clarify that the Section 17(2)(iii) was incorporated to bring clarity in the provisions relating to the taxability of stock option benefits. Moreover, a proviso has been added to Section 17(2)(iii) with the omission of Section 17(2)(iiia). If stock options were not taxable under Section 17(2)(iii), there would have been no necessity of inserting a proviso to Section 17(2)(iii) when the legislature intended to exclude the same from the purview of taxation. The said proviso reads as under:

Provided that nothing contained in this sub-clause shall apply to the value of any benefit provided by a company free of cost or at a concessional rate to its employees by way of allotment of shares, debentures or warrants directly or indirectly under any Employees' Stock Option Plan or Scheme of the company offered to such employees in accordance with the guidelines issued in this behalf by the Central Government.

Thus, the intention of the legislature to grant exemption in respect of the benefit derived as a result of stock options provided by the company to its employees is manifestly clear to be applicable from 1st April, 2001, i.e., the date from which the proviso to Section 17(2)(iii) has been inserted. As pointed out earlier, Section 17(2)(iiia) was inserted for the sake of clarity and therefore, with its omission, the taxability of stock option benefit did come out of the taxable net. That is why there was necessity of incorporating a proviso to Section 17(2)(iii) to give effect to the legislative intent of granting exemption in respect of such benefits. For the above stated reasons, I, therefore, agree with the view expressed by the learned JM that the Revenue was justified in assessing the difference between the market price on the date of exercise of option and the price paid by the assessee for the acquisition of shares as a benefit assessable under the provisions of Section 17(2)(iii).

24. In the final analysis, whereas I agree with the learned AM in regard to the first point of difference of opinion, I agree with the learned JM in regard to the second point of difference of opinion. I render my opinion as a Third Member on both these points of difference as under:

First point of difference:

The deduction on account of housing norm and auto norm made by the employer from the base pay of the assessee in lieu of free housing and transport facility provided in India as per the terms of employment is in fact a reduction in the pay and, therefore, not liable to tax in India. The said reduction from the base pav will also not form the base for determination of the perquisites.

Second point of difference:

That the profit/benefit (difference between the price of shares at the time of exercise of the option and the predetermined price) derived by the assessee on account of exercise of stock options granted to the assessee in terms of his employment is liable to tax [as perquisite under Section 17(1)(iii), of the IT Act, 1961] and that there was no capital gain derived by the assessee on the sale of shares as the sale price and the price on the date of exercise of the option was same.

25. The matter may now be placed before the regular Bench for passing an order in accordance with the majority opinion.

S.C. Tiwari, A.M.

9th Dec., 2005

1. This appeal has been filed by the assessee on 19th Feb., 2002 against the order of the learned CIT(A)-XXX, New Delhi dt. 29th Jan., 2002 in the case of the assessee in relation to assessment order under Section 143(3) for asst. yr. 1998-99. This appeal was heard on 3rd March, 2003 by the Division Bench. However, there being difference in opinion on certain points between the two members, the matter was referred to the Third Member for his opinion. Hon'ble Third Member has made his order on 25th Oct., 2005 and now the matter has been placed before us for disposal of the assessee's appeal in accordance with the majority opinion. Accordingly, we decide the assessee's appeal in the following manner.

2. In relation to ground of appeal No. 1(b), we hold that the deduction on account of housing norm and auto norm made by the employer from the base pay of the assessee in lieu of pre-housing and transport facility provided in India is, in fact, a reduction in the pay and, therefore, not liable to tax in India.

3. In relation to ground of appeal No. 1(e) we hold that the profit/benefit derived by the assessee on account of stock option granted to the assessee in terms of his employment is liable to tax as perquisite under Section 17(1)(iii) of the Act.

4. All other grounds of appeal are decided as per the order of Hon'ble JM, Shri S.K. Yadav.

5. In the result, this appeal filed by the assessee is partly allowed.