Compensation Received From Flipkart for Diminution in Value of ESOPs Is Taxable as Perquisite | HC
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Case Details: Nishithkumar Mukeshkumar Mehta vs. DCIT - [2024] 165 taxmann.com 386 (Madras)
Judiciary and Counsel Details
- Senthilkumar Ramamoorthy, J.
- Tarun Gulati, Sr. Adv., Kishore Kunal, Ms Ankita Prakesh & Ms Karthik Sundaram for the Petitioner.
- Dr. B. Ramaswamy, Sr. Standing Counsel for the Respondent.
Facts of the Case
The petitioner was an employee of Flipkart Internet Private Limited (FIPL). Flipkart Private Limited Singapore (FPS) implemented the Flipkart Stock Option Scheme, 2012 (the FSOP 2012). Under the FSOP 2012, employees’ stock options (ESOPs) were granted to the petitioner as an Employee. Subsequently, FPS announced compensation in view of the divestment of its stake in the PhonePe business, and described such payment as being made although there is no legal or contractual right thereto under the FSOP 2012.
Such compensation was paid to the petitioner by deducting tax at source under Section 192 of the I-T Act by treating it as falling under the head “salary”. On the basis that the amount received as compensation was a capital receipt, which is not liable to income-tax, the petitioner applied for a ‘nil’ tax deduction certificate under Section 197 of the I-T Act for financial year 2023-24. However, such application was rejected.
Aggrieved by the order, the assessee filed a writ petition before Madras High Court.
High Court Held
The High Court held that section 2(14) of the Act defines capital asset. It means property of any kind held by an assessee, whether or not connected with his business or profession. Further, explanation 1 specifies that “property” includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever.
ESOPs, by contrast, are rights in relation to capital assets, i.e. rights to receive capital assets (shares) subject to the terms and conditions of the ESOP scheme. Since the petitioner has no rights in the Indian company of which he is an employee (other than as an employee), Explanation 1 is also not attracted. ESOPs are, therefore, contractual rights that may qualify as actionable claims or choses in action in certain circumstances.
ESOPs are not a source of revenue or profit-making apparatus for the holder because these actionable claims are, intrinsically, not capable of generating revenue (notional or actual) and cannot be monetised, whether by transfer or otherwise, until shares are allotted. Even at the time of allotment, there is notional but not actual benefit. Actual benefit accrues only upon transfer provided there is a capital gain.
In this case, the compensation was not towards the loss of or even sterilization of a profit-making apparatus but by way of a discretionary payment towards – potential, as regards Unvested Options, or actual, as regards Vested Options – diminution in value of contractual rights.
Therefore, ESOPs do not fall within the ambit of the expression “property of any kind held by an assessee” in Section 2(14) and are, consequently, not capital assets. As a corollary, the receipt was not a capital receipt. Since it was concluded that a capital asset was transferred, the conclusion that the compensation qualifies as a perquisite and not a capital receipt is affirmed.
List of Cases Referred to
- Sanjay Baweja v. Dy. CIT [2024] 163 taxmann.com 116/299 Taxman 313 (Delhi) (para 6)
- Kettlewell Bullen & Co. Ltd. v. CIT [1964] 53 ITR 261 (SC) (para 10)
- Karan Chand Thapar & Bros. Pvt. Ltd. v. CIT (‘Karan Chand Thapar’), (1972) 4 SCC 124 (para 10)
- Oberoi Hotel (P.) Ltd. v. CIT [1999] 103 Taxman 236/236 ITR 903 (SC) (para 10)
- Godrej & Co., Bombay v. CIT (‘Godrej & Co.,’) (1970) 1 SCR 527 (para 10)
- Senairam Doongarmall v. CIT [1961] 42 ITR 392 (SC) (para 10)
- CIT v. Saurashtra Cement Ltd. [2010] 192 Taxman 300/325 ITR 422 (SC) (para 10)
- CIT v. Bombay Burmah Trading Corp., Bombay (1986) 3 SCC 709 (para 10)
- Pr. CIT v. Pawa Infrastructure (P.) Ltd. [2022] 145 taxmann.com 518/[2023] 291 Taxman 297/457 ITR 392 (Delhi) (para 10)
- Khanna & Annadhanam v. CIT [2013] 30 taxmann.com 322/213 Taxman 347/351 ITR 110 (Delhi) (para 10)
- CIT v. B.K. Roy (P.) Ltd. [2003] 127 Taxman 507/[2001] 248 ITR 245 (Calcutta) (para 10)
- CIT v. M. Ramalakshmi Reddy [1981] 131 ITR 415 (Madras) (para 10)
- CIT v. David Lopes Menezes [2010] 8 taxmann.com 18/195 Taxman 131/[2011] 336 ITR 337 (Bombay) (para 10)
- Siemens Public Communication Network (P.) Ltd. v. CIT [2017] 77 taxmann.com 22/244 Taxman 188/390 ITR 1 (SC) (para 10)
- Vodafone India Services (P.) Ltd. v. Union of India [2014] 50 taxmann.com 300/[2015] 228 Taxman 25/[2014] 368 ITR 1 (Bombay) (para 10)
- CIT v. Deutsche Post Bank Home Finance Ltd. [2012] 24 taxmann.com 341/209 Taxman 313 (Delhi) (para 10)
- Cadell Wvg. Mill Co. (P.) Ltd. v. CIT [2001] 116 Taxman 77/249 ITR 265 (Bombay) (para 11)
- CIT v. Vazir Sultan & Sons [1959] 36 ITR 175 (SC) (para 11)
- CIT v. B.C. Srinivasa Setty [1981] 5 Taxman 1/128 ITR 294 (SC) (para 12)
- Baroda Cement & Chemicals Ltd. v. CIT [1986] 25 Taxman 324/158 ITR 636 (Gujarat) (para 12)
- Padmaraje R. Kadambande v. CIT [1992] 62 Taxman 456/195 ITR 877 (SC) (para 12)
- Vijay Ship Breaking Corpn. v. CIT [2008] 175 Taxman 77/[2009] 314 ITR 309 (SC) (para 12)
- CIT v. Infosys Technologies Ltd. [2008] 166 Taxman 204/297 ITR 167 (SC) (para 39).
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