I-T - TDS liability does not arise at time of vesting of ESOP with employees but only when employees exercise option and shares are allotted to them: ITAT
By TIOL News Service
JAIPUR, OCT 10, 2018: THE ISSUE IS - Whether liability to deduct tax at source does not arise at the time of vesting of ESOP with the employees but it arises when the employees exercise the option and the shares are allotted to them. YES IS THE VERDICT.
Facts of the case
The assessee company engaged in the business of website development, e-commerce and online sale/purchase of used cars under the domain of 'cardekho.com', had filed return of income for relevant year. During the course of spot verification conducted at the business premises of the assessee, it was found that the assessee had debited various expenditures in the Profit & Loss account and had credited these expenses as provisions in the books which were in the nature of perquisites but had not deducted any TDS on these perquisites. The AO in the proceedings u/s 201(1)/201(1A) of the Act was of the view that as per the Act, TDS was to be deducted on credit or payment, whichever was earlier. Thus the AO observed that as soon as the credit entries were passed and the expenses were booked, the assessee should have deducted TDS. The AO accordingly proposed to held the assessee as assessee in default in respect of the Employees Stock Option Plan (ESOP), leave encashment, gratuity and bonus. The assessee objected to the action of the AO and submitted that as per the provisions of section 192 of the Act, the TDS obligation arise only on the payment and not at the time of accrual or crediting the provisions. The AO did not accept the contention of the assessee and held the assessee as assessee in default for non deduction of TDS. On appeal, CIT(A) upheld the order of AO.
Tribunal held that,
++ the AO has not disputed the fact that the assessee has made provision of Rs. 1,09,84,200/- in the books on account of Employees Stock Option Plan. However, until and unless the option was exercised by the employees, it will not be an income accrued to the employees. The contention of the assessee is right that at the time of option vested with the employees, the provisions of section 192 are not attracted for deduction of TDS and only when the employees exercised this option and finally the shares are allotted in pursuant to the option exercised by the employees the liability to deduct tax at source would arise. The AO has not examined the fact whether during the year under consideration the option was exercised by the employees or it was exercised in the subsequent years. Further, how many employees have exercised the option and the crystallization of the expenditures depends on the number of employees exercised the option. Accordingly, when the AO has not contradicted the fact as asserted by the assessee that there was no credit given to the employees during the year under consideration on account of employee stock option plan as it was subject to the exercise of option by the employees and final allotment of shares, therefore, the provisions of section 192 are not applicable on this expenditure. Thus it was held that for attracting the provisions of section 192 the accrual of payment and actual act of making the payment must both exist. Though subsection (1)(a) curves an exception in the provisions of section 192 of the Act regarding the perquisites which is not provided for by way of monetary payment as referred in clause (2) of section 17, the tax on such perquisites is required to be otherwise deductible as per the provisions of section 192(1) of the Act. However, when the employees stock option was not finally exercised by the employees then the question of deduction of TDS as per section 192 does not arise.
(See 2018-TIOL-1773-ITAT-JAIPUR)
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