ESOP Employee Without Any Contractual Obligation is , Perquisite', Taxable As Salary U/s 17(2) : Madras High Court
Pankaj Bajpai
19 Aug 2024 11:43 AM IST
While pointing out that the payment by FPS was not made towards the ESOPs as the Assessee continues to hold the ESOP (Employee Stock Option Purchase) even after the receipt of the compensation, the Madras High Court held the receipt in hands of Assessee qualifies as perquisite and taxable under the head 'Salaries'. Hence, the High Court refuses to allow 'Nil' certificate of tax...
While pointing out that the payment by FPS was not made towards the ESOPs as the Assessee continues to hold the ESOP (Employee Stock Option Purchase) even after the receipt of the compensation, the Madras High Court held the receipt in hands of Assessee qualifies as perquisite and taxable under the head 'Salaries'.
Hence, the High Court refuses to allow 'Nil' certificate of tax deduction u/s 192 in reference to such compensation, which is to be treated as perquisite in lieu of 'salary'.
Section 192 of Income tax Act states that tax shall be deducted at source at the time of actual payment of salary to the employee. Thus, when advance salary and arrears of salary have been paid, the employer has to take the same into account while computing the tax-deductible.
Further, Section 17(2) of the Income Tax Act provides for the valuation of perquisites for tax purposes, which is equal to the cost which has been incurred by the organization/ employer for/ on behalf of the employee.
Whereas, an ESOP is an employee benefit plan that enables employees to own part or all of the company they work for. ESOPs are most commonly used to facilitate succession planning, allowing a company owner to sell his or her. shares and transition flexibly out of the business.
Singh Judge Bench of Justice SenthilKumar Ramamoorthy observed that “If payments had been made by the petitioner in relation to the ESOPs, it would have been necessary to deduct the value thereof to arrive at the value of the perquisite”. (Para 40)
Since the petitioner did not make any payment towards the ESOPs and continues to retain all the ESOPs even after the receipt of compensation, the Single Judge observed that the entire receipt qualifies as the perquisite and becomes liable to be taxed under the head “salaries”.
Facts of the case:
The Assessee is an employee of Flipkart Internet Private Limited (FIPL), a company incorporated in India, and a subsidiary of Flipkart Marketplace Private Limited (FMPL), a company incorporated in Singapore that is a subsidiary of Flipkart Private Limited Singapore (FPS). During the relevant year, FPS implemented Flipkart Stock Option Scheme, 2012 (FSOP, 2012) whereby stock options were granted to option grantees that were employees or any other persons approved by the Board and to whom such options were granted. In view of divestment of Phone-Pe business, FPS announced a compensation per ESOP even though no such legal or contractual right existed under FSOP, 2012. Accordingly, the Assessee was vested with 2137 ESOPs, that were not exercised and 3787 that were not vested, resulting in compensation of Rs 2.09 Crores for 5924 ESOPs, after deducting TDS u/s 192 and treating the same as 'Salary'. Assessee, claiming the compensation received as capital receipt, applied for 'Nil' tax certificate u/s 197, which was rejected. Hence, the assessee approached the High Court.
Observations of the High Court:
The Bench noted that according to FSOP 2012, all Group employees as defined under the Scheme were eligible for grant of Stock Options and the Assessee being a permanent employee was also granted the said Stock Options.
The Bench also noted that FSOP, 2012 is a typical stock option scheme that provides for grant of stock options and confers on an Option Grantee, the right to exercise the option upon Vesting, and thereafter receive shares of the issuing company, i.e. FPS at a pre-determined value.
Pointing out that only in case of breach of obligation by issuer, the Assessee would have the right to claim compensation that is to sue for specific performance, the Bench stated that contractual rights may qualify as actionable claims in action in certain circumstances only.
The Bench highlighted that 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 and cannot be monetised, whether by transfer or otherwise, until shares are allotted.
Finding that the compensation by FPS was not paid out any under legal or contractual obligation, but on account of loss in value of ESOPs triggered by divestment of PhonePe business, the Bench noted that no non-existent right was relinquished in the absence of a contractual right to compensation for diminution in value.
The Bench clarified that ESOPs do not fall within the ambit of the expression “property of any kind held by an assessee” u/s 2(14) and consequently, the said receipt cannot be termed as capital receipt.
Observing that provisions of Section 17 define salary to include 'perquisites' that cover value of specified security, the Bench explained that ESOP granted to Assessee fall within the scope of Explanation (a) to clause (vi) of Section 17(2).
The Bench also observed that Assessee received the substantial monetary benefit at pre-exercise stage by way of discretionary compensation for diminution in value of stock options, and no payment was made towards ESOPs and Assessee continues to retain all ESOPs even after receipt of compensation.
Hence, the High Court concluded that the entire receipt qualifies as the perquisite and becomes liable to be taxed under the head “salaries” and therefore not entitled to 'Nil' certificate of deduction.
Therefore, the High Court dismissed Assessee's petitions.
Counsel for Petitioner/ Assessee: Senior Advocate Tarun Gulati along with Advocates Kishore Kunal, Ankita Prakash, Karthik Sundaram
Counsel for Respondent/ Revenue: Dr. B. Ramaswamy.
Case Title: Nishithkumar Mukeshkumar Mehta vs. Deputy Commissioner of Income Tax
Citation: 2024 LiveLaw (Mad) 318
Case Number: W.P.No.26506 of 2023
