JUDGMENT:

KAPADIA, J. - Leave granted.

2. Respondent-assessee is public limited IT company based in Bangalore. To implement Employees Stock Option Scheme ( ESOP ), the assessee created a Trust known as Technologies Employees Welfare Trust and allotted 7,50,000 warrants at Re. 1/- each to the said Trust. Each warrant entitled the Holder thereof to apply for and be allotted one equity share of the face value of Rs. 10/- each for total consideration of Rs. 100/-. The Trust was to hold the warrant and transfer the same to the employees of the company under the Terms and Conditions of the scheme governing ESOP.

3. During the assessment years 1997-98, 1998-99 and 1999-2000, warrants were offered to the eligible employees at Re. 1/- each by the Trust. They were issued to employees based on their performance, security and other criteria. Under the ESOP Scheme, every warrant had to be retained for a minimum period of 1 year. At the end of that period, the employee was entitled to elect and obtain shares allotted to him on payment of the balance Rs. 99. The option could be exercised at any time after 12 months but before expiry of the period of 5 years. The allotted shares were subject to a lock in period. During the lock in period, the custody of shares remained with the Trust. The shares were non-transferable. The employee had to continue to be in service for 5 years. If he resigned or if his services be terminated for any reason, he lost his right under the scheme and the shares were to be re- transferred to the Trust for Rs. 100 per share. Intimation was also given to BSE that 734500 equity shares were non- transferable and would not constitute good delivery. Till 13.9.1999 all the shares were stamped with the remark non- transferable . Thus the said shares were incapable of being converted into money during the lock in period.

4. For the assessment year 1999-2000, the AO held that the total amount paid by the employees consequent to the exercise of option was Rs. 6.64 crores whereas the market value of those shares was Rs. 171 crores. He held that the perquisite value was the difference between the market value and the price paid by the employees for exercise of the option. He, therefore, treated Rs. 165 crores as perquisite value on which TDS was charged at 30%. It was held that the respondent-assessee was a defaulter for not deducting TDS under Section 192 amounting to Rs. 49.52 crores on the above perquisite value of Rs. 165 crores. Similar orders were also passed by the AO for assessment years 1997-98 and 1998-99. These orders were confirmed by CIT(A). No weightage was given by both the authorities to the lock in period. Both the authorities took into account the perquisite value as on the date of exercise of option.

5. Aggrieved by the aforesaid decisions, the respondent- assessee carried the matter in appeal to the Tribunal, which took the view that the right granted to the employee for participating in the scheme was not a perquisite under Section 17(2)(iii) of the Income Tax Act, 1961 ( 1961 Act ). This decision of the Tribunal stood confirmed by the impugned judgment delivered by the Karnataka High Court on 15.12.2006. Hence, these civil appeals by the Department.

6. Whether tax had to be deducted under Section 192 of the 1961 Act, by the respondent-assessee, on the amount earned by its employees from exercise of stock option granted to them by the company through the Trust, is the question which arises for determination in these civil appeals.

7. In the case of Govind Saran Ganga Saran v. Commissioner of Sales Tax and Ors. [(1985) 155 ITR 144 (SC)] this Court held that there are four components of tax. The first component is the character of the imposition, the second is the person on whom the levy is imposed, the third is the rate at which tax is im