The Supreme Court has held that the Income Tax Department has erred in treating IT major Infosys Technologies as defaulter for not deducting TDS on ESOP for the assessment year 1997-98, 98-99 and 1999-2000.
"The Department had erred in treating the respondent (Infosys) as an assessee in default for not deducting the TDS at 30 per cent as stated in the order of assessment (of Assessing Officer and CIT-Appeal). This is not the case of tax evasion," a Bench comprising Justice S H Kapadia and Justice B Sduershan Reddy said.
The court was hearing an appeal filed by Commissioner of Income Tax, Bangalore challenging the order of Karnataka High Court and Income Tax Tribunal, which had ruled in favour of Infosys, saying that right granted to the employees for participating in the scheme (ESOP Scheme) was not a perquisite.
The court was examining whether tax had to be deducted on the amount earned by employees from exercise of stock options granted to them by the company.
The Assessing Officer (AO) treated Rs 165 crore as "perquisite value" for the assessment year of 1999-2000 on which TDS was charged at 30 per cent and held that Infosys was a defaulter for not deducting TDS amounting to Rs 49.52 crore on above perquisite value.
While calculating the perquisite value, the AO held that the total amount paid by the employees consequent to the exercise of option was Rs 6.64 crore, whereas the market value of those shares was Rs 171 crore. It passed similar orders for 1997-98 and 98-99.
The apex court said during the assessment years 1997-98, 98-99 and 99-2000 there was no provision in the Income Tax Act, 1961 which made the benefit by way of ESOP taxable as income specifically.
It became specifically taxable only with effect from April 1, 2000, the Bench said.