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HIGH COURT OF MADRAS
Honourable Mr Justice SENTHILKUMAR RAMAMOORTHY
NISHITHKUMAR MUKESHKUMAR MEHTA – Appellant
Versus
DEPUTY COMMISSIONER OF INCOME TAX – Respondent
Taxation - Income Tax Act - Section 197, Section 2(14), Section 45, Section 17 - The court analyzed the nature of compensation received under the ESOP scheme and its classification as either a capital receipt or a perquisite, ultimately concluding that the payment is taxable as a salary perquisite rather than a capital gain, impacting the petitioner's application for a nil tax deduction certificate.
Fact of the Case:
The petitioner, an employee of a subsidiary, challenged the rejection of their request for a nil deduction certificate for compensation received from an ESOP scheme, which was taxed as salary.
Finding of the Court:
The court determined that the compensation receipt did not constitute a capital gain because no capital asset was transferred, concluding instead that it was a taxable perquisite under salary.
Issues: Whether the compensation received from the ESOP should be treated as a capital receipt or taxable as a perquisite under the Income Tax Act.
Ratio Decidendi: The court ruled that since the ESOP rights had not been exercised, the compensation was not from a transfer of a capital asset and instead qualified as a perquisite, leading to tax under the head of salaries.
Final Decision: The rejection of the application for a nil tax deduction certificate was affirmed.
O R D E R
Background By this writ petition, an order dated 12.07.2023 rejecting the petitioner's request for the grant of a certificate of 'nil' deduction of tax at source is challenged and the petitioner seeks a consequential direction to the first respondent to issue a certificate of 'nil' deduction of tax at source under Section 197 of the Income-tax Act, 1961 (the I-T Act).
2. The petitioner is an employee of Flipkart Internet Private Limited (FIPL), which is a company incorporated in India and a wholly owned subsidiary of Flipkart Marketplace Private Limited (FMPL). FMPL is a company incorporated under the laws of Singapore and is a wholly owned subsidiary of Flipkart Private Limited Singapore (FPS).
3. FPS implemented the Flipkart Stock Option Scheme, 2012 (the FSOP
2012). Under the FSOP 2012, employees' stock options (ESOPs) were granted to option grantees, who are either employees or any other persons approved by the Board and to whom stock options were granted. The expression 'employee' was defined in the FSOP 2012 as meaning a permanent employee of a Group Company working in Singapore or outside Singapore; or a director or officer of the Group Company, whether a full time director or officer or not. The expression 'subsidiaries' was also defined in FSOP 2012 as meaning all companies owned and controlled by FPS, including the four entities expressly enumerated in the definition.
4. On 21.04.2023, FPS announced compensation of US Dollar (USD)43.67 per ESOP 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 payable to all option grantees as on 23.12.2022 (the record date), whether current or former stakeholders, in respect of vested options, whereas in respect of options that had not vested, compensation was payable only to current stakeholders. As on 23.12.2022, out of the above mentioned ESOPs, 2137 had vested in the petitioner as per the terms of the FSOP 2012 and 3787 had not vested, thereby aggregating to 5924 ESOPs of FPS under the FSOP 2012. The petitioner had not exercised the option in respect of the vested ESOPs.
5. FPS determined the compensation by valuing each option at about USD 189.10 prior to the divestment and at about USD 165.83 upon divestment. As the grantee in respect of 5924 ESOPs, the petitioner received USD 258,701.08 which is equivalent to INR 2,09,54,787.48/-. 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 on 09.05.2023. Such application was rejected by impugned order dated 12.07.2023. The present writ petition was filed in the said facts and circumstances.
Counsel and their contentions:
6. Oral arguments were advanced on behalf of the petitioner by Mr.Tarun Gulati, learned senior advocate, assisted by Mr. Kishore Kunal, Ms.Ankita Prakash and Mr.Karthik Sundaram. The respondents were represented by Dr.B.Ramaswamy, learned senior standing counsel. Both parties submitted written submissions. After orders were reserved, learned counsel for the petitioner placed on record the judgment of the Division Bench of the Delhi High Court in Sanjay Baweja v. Deputy Commissioner of Income Tax TDS Circle, 77(1), Delhi and another ('Sanjay Baweja'), [2024] 163 taxmann.com 116 (Delhi).
7. Mr.Tarun Gulati commenced his submissions by providing an overview of the facts. He pointed out that the petitioner was an employee of FIPL when the compensation was paid and that the said entity is a step down subsidiary of FPS. He next submitted that ESOPs are rights in relation to the shares of the entity - in this case, FPS - issuing such optio
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