ITA Nos.1341/Bang/2011 & 235/Bang/2012

N.V. Vasudevan, Judicial Member - ITA 1341/Bang/2011 is an appeal by the revenue and ITA No.235/Bang/2012 is an appeal by the assessee. Both these appeals are directed against the order dated 31.10.2011 of the CIT(Appeals)-V, Bengaluru.

2. The assessee is an individual and is a qualified software engineer. He is a M. Tech from IIT, Mumbai. The assessee was deputed to USA in the year 1995 by his then employer Aerospace Systems Private Ltd., India, ["ASPL, India" for short] as an independent Consultant to SIRF Technology Inc., USA ["SIRF, USA" for short]. He served in USA in aggregate for nearly six years, initially from 1995 to 1998 as an employee of ASPL, India; and later as an employee of SIRF, USA, from 2001 to 2004. Thereafter, the assessee returned to India and became an employee of SIRF, India.

3. SIRF, USA granted certain Stock Options to the assessee on 04.10.1996 ["grant date"] i.e., while the assessee was an independent consultant, which gave the right to the assessee to buy/acquire 35,000 shares of the common Stock of SIRF, USA, at an Exercise Price of USD 0.08 each, pursuant to a Stock Option Plan ["SOP"] CALLED "1995 Stock Plan". The assessee exercised his right under the Stock Option Plan on 2nd and 3rd of March, 2006 ("Date of Exercise") and received 5000 and 2000 shares respectively of SIRF, USA. Since such shares were sold by the assessee on the same day of exercise in a 'Cashless Exercise', the net consideration of USD 204786 and USD 78,820 aggregating to USD 283606 (Rupee equivalent Rs.1,27,62,295) was considered by him as capital gains arising on transfer of Stock Options. According to the Assessee, he held the Stock Options for nearly 10 years i.e., from the date of grant date or in event from the date of vesting of the stock option. According to the Assessee the net consideration received upon exercise of his right, being the value of the shares, was an income in the nature of 'long term capital gains' under the Income Tax Act, 1961 ('the Act"), inasmuch as the Stock Options were his valuable right and conversion thereof for the consideration in the form of shares was "transfer" of his valuable right.

4. The return of income for the A.Y. 2006-07 was filed by the assessee declaring the entire net consideration of Rs.1,27,62,295 as long term capital gains. In the return, the assessee also disclosed the salary income of Rs.33,08,188 and interest income of Rs.4,86,229. The assessee invested part of such consideration in the construction of a residential property at NOIDA and claimed deduction of Rs.62,38,598/- u/s 54F of the Act from the Long Term Capital Gains declared by him in the Return of Income. On the balance consideration of Rs. 65,23,697/-, the tax due amounting to Rs. 13,04,739/- was paid by way of tax deducted/withheld at source by SIRF, USA, and by way of self assessment tax along with the applicable interest. SIRF, USA, withheld tax at source on the USD equivalent of the consideration and issued a letter dated 03.08.2006 to the assessee, which indicated that the consideration was treated as Capital Gains in USA.

5. In the Assessment proceedings u/s.143(3) of the Act, the AO vide show cause notice 17.10.2008, proposed to levy tax on the consideration received on Stock Options as below:—

(a) The difference between market price and exercised price on the time of acquisition i.e. on the date and time of exercise and considered such benefit as 'Income from Other Sources'.

(b) The capital gain or loss owing to the difference in sale consideration vis-a vis the market price of the shares when the acquired shares are sold i.e. the date and time of sale of the shares, which was treated as Short Term Capital Gains.

6. The AO also proposed to reject the assessee's claim for deduction u/s 54F of the Act because the benefit of deduction u/s.54F of the Act will be available only if the gain on sale of shares is considered as giving raise to a Long Term Capital Gain, i.e.,