One-time compensatory payments for diminished value of stock options, not exercised, are capital receipts and not taxable as income or perquisites under the Income Tax Act.

ORDER :

S.R. Krishna Kumar, J.

This petition takes an exception to the impugned order dated 02.08.2023 passed by the 1^st respondent, whereby the request of the petitioner for issuance of ‘Nil Tax Deduction Certificate’ for Income Tax in favour of the petitioner for the financial year 2023-24 was rejected and for consequential directions to the respondents to issue the said ‘Nil Tax Deduction Certificate’ for Income Tax under Section 197 of the INCOME TAX ACT , 1961 (for short ‘the I.T. Act’)and for other reliefs.

2. Briefly stated the facts giving rise to the present petition are as under:

Petitioner is an Indian Citizen and a salaried employee of Flipkart Internet Private Limited (FIPL) which is an Indian Subsidiary of Flipkart Marketplace Private Limited (FMPL), a Company incorporated in Singapore which is further a wholly owned subsidiary of Flipkart Private Limited, Singapore (FPS). In addition to FMPL, FPS has many other subsidiaries including PhonePe which had a wholly owned subsidiary in India known as PhonePe India Private Limited.

2.1 In the year 2012, FPS introduced the Flipkart Stock Action Plan, 2012 (FSOP), pursuant to which the petitioner was granted 2232 stock options with a vesting schedule of four years from 01.01.2016 to 31.03.2023 amongst which 955 stock options were vested, 249 were cancelled and the unvested stock options were 1028, resulting in the total number of stock options held by the petitioner being 1983 as on 31.03.2023. Meanwhile, on 23.12.2022, FPS announced separation/divestment of PhonePe resulting in reduction and diminishing of the value of the stock options issued in favour of the petitioner. Under these circumstances, FPS announced a one time compensatory payment of USD 43.67 per option as compensation towards loss in value of FSOPs due to divestment/separation of PhonePe from FPS. In pursuance of the same, a sum of Rs.71,01,004/- i.e., 1983 x 43.67 x 82 (USD Conversion rate) was paid to the petitioner towards the aforesaid one time compensatory payment due to reduction/diminishing of the value of the stock options issued in favour of the petitioner as stated supra.

2.2 The petitioner filed an application dated 29.04.2023 under Section 197 of the I.T. Act seeking ‘Nil Tax Deduction Certificate’ in relation to the aforesaid one time compensatory payment made to him. Since there were certain errors in the said application, petitioner withdrew the said application dated 29.04.2023 and filed a fresh/modified application dated 20.05.2023 under Section 197 of the I.T Act. The respondents raised certain queries which were clarified by the petitioner vide reply/response dated 24.07.2023, pursuant to which, the 1^st respondent proceeded to pass the impugned order rejecting the application filed by the petitioner, who is before this Court by way of the present petition.

3. Heard learned Senior Counsel for the petitioner and learned counsel for the respondents and perused the material on record.

4. In addition to reiterating the various contentions urged in the petition and referring to the material on record, learned Senior Counsel for the petitioner submitted that the 1^st respondent committed an error in coming to the conclusion that the compensation of Rs.71,01,004/- received by him for reduction/diminution of the value of FSOPs was taxable as a perquisite under the head ‘Income from Salary’ and that the profit or gain on sale/transfer of stocks exercised under FSOPs is liable to be taxed under the head ‘Income from Capital Gains’. In this context, it is submitted that the compensation received from the petitioner does not fall under the definition “Income” and the same was a capital receipt which did not contain any element of income and hence, not chargeable to tax. It