My employees exercised stock options but the shares are locked in and non-transferable. Was I supposed to deduct tax on the market value less what they paid?
No, on the law as it stood before 1 April 2000. The Supreme Court dismissed the Revenue's appeals and held that the company was not an assessee in default. The shares were locked in for five years, held by the trust, stamped non-transferable and notified as such to the stock exchange, and had to be returned if the employee left. They had no realisable value on the date the option was exercised and there was no cash inflow, so any benefit was notional and its value unascertainable. Section 17(2)(iiia), which supplied the missing valuation mechanism from 1 April 2000, was held not to be clarificatory or retrospective.
Decided by the Supreme Court (Supreme Court of India - S.H. Kapadia and B. Sudershan Reddy, JJ; judgment by S.H. Kapadia, J) on 2008-01-04, reported as AIRONLINE 2008 SC 364; Civil Appeal No. 3725 of 2007 (Supreme Court of India). It bears on section 17(2), section 192, section 201(1), section 201(1A) of the Income Tax Act 1961, in Salary & Perquisites and TDS Defaults matters.
The valuation reasoning outlives the provision it was decided under. The Court applied B.C. Srinivasa Setty to hold that the charging section and the computation provision form an integrated code, and that a benefit whose value cannot be ascertained cannot be brought to charge; a mechanism supplying the missing valuation cannot be read back into earlier years unless the legislature says so. It is also the leading authority for the proposition that lock-in and non-transferability are not presentational details but go to whether any realisable benefit exists at all, and for the point that estimation of tax deductible under section 192, in the absence of clear valuation provisions, cannot support a default order under sections 201(1) and 201(1A). The Court expressly said nothing about the law after 1 April 2000.
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To run its employees stock option scheme the company created the Technologies Employees Welfare Trust and allotted 7,50,000 warrants to it at Re 1 each, each warrant entitling the holder to apply for one equity share of face value Rs 10 for a total consideration of Rs 100. In assessment years 1997-98, 1998-99 and 1999-2000 the trust offered warrants to eligible employees at Re 1 each on the basis of performance and other criteria. A warrant had to be held for at least twelve months, after which the employee could pay the balance Rs 99 and take the shares, the option being exercisable up to five years. The allotted shares were locked in, remained in the custody of the trust, were non-transferable, could not be pledged or hypothecated, and had to be re-transferred to the trust at Rs 100 a share if the employee resigned or was terminated within five years. The Bombay Stock Exchange was told that 734,500 shares were non-transferable and would not constitute good delivery, and until 13 September 1999 the shares were stamped non-transferable. For 1999-2000 the Assessing Officer took the market value of the shares at Rs 171 crore against Rs 6.64 crore paid by the employees, treated the difference of about Rs 165 crore as perquisite, and held the company in default under section 192 for tax of Rs 49.52 crore, with similar orders for the two earlier years. The Commissioner (Appeals) confirmed them. The Tribunal and the Karnataka High Court held there was no perquisite.
The appeals were dismissed with no order as to costs. The Department erred in treating Rs 165 crore as the perquisite value for the three years. No perquisite accrued when the warrants were granted, a warrant being a right without obligation to buy, nor when the options vested after twelve months, since there was no certainty the option would be exercised and the employee was free to resign. During the lock-in the shares had no realisable value and there was no cash inflow, so any benefit arising on exercise was notional and unascertainable. Section 17(2)(iiia), inserted with effect from 1 April 2000, is not clarificatory and does not operate retrospectively. It followed that the company was not an assessee in default under section 192 and that sections 201(1) and 201(1A) were wrongly invoked. The Court recorded that this was not a case of tax evasion, the trust having been floated because of genuine buy-back problems where employees left, and expressed no opinion on the law after 1 April 2000.
The Court started from Govind Saran Ganga Saran, which identifies four components of a tax - the character of the imposition, the person levied on, the rate and the value to which the rate is applied - and holds that ambiguity in any of them makes the levy fail. Only the fourth was in issue. To that it added the principle that a benefit or receipt must be made taxable before it can be regarded as income. During the three years there was no provision specifically taxing an employees stock option benefit. On the facts, none of the earlier stages could give rise to a perquisite, and on exercise the shares were locked in, held by the trust, unmarketable, unpledgeable and liable to be returned on resignation, so the employee could not convert them into money and could not foresee their future value. Applying B.C. Srinivasa Setty, the charging section and the computation provision are an integrated code; until the Finance Act 1999 explained cost to mean the amount actually paid, and nil where nothing was paid, the value of the option was not ascertainable. Nothing in the memorandum to that Act made the new mechanism retrospective, and a mechanism of that kind cannot be read back unless the legislature says so; the definitions of specified securities and the words allotted or transferred were also new, and clause (iiia) was itself deleted with effect from 1 April 2001, which the Court took as an indicator of an ineffective charge. Finally, requiring an employer to estimate tax under section 192 in the absence of clear provisions on valuation cannot justify treating him as in default.
if the shares allotted to the employee had no realizable sale value on the day when he exercised his option then there was no cash inflow to the employee.
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Handle my notice → Ask a CA on WhatsAppNo, on the law as it stood before 1 April 2000. The Supreme Court dismissed the Revenue's appeals and held that the company was not an assessee in default. The shares were locked in for five years, held by the trust, stamped non-transferable and notified as such to the stock exchange, and had to be returned if the employee left. They had no realisable value on the date the option was exercised and there was no cash inflow, so any benefit was notional and its value unascertainable. Section 17(2)(iiia), which supplied the missing valuation mechanism from 1 April 2000, was held not to be clarificatory or retrospective. This was decided by the Supreme Court (Supreme Court of India - S.H. Kapadia and B. Sudershan Reddy, JJ; judgment by S.H. Kapadia, J) and bears on section 17(2), section 192, section 201(1), section 201(1A) of the Income Tax Act 1961. It is reported as AIRONLINE 2008 SC 364; Civil Appeal No. 3725 of 2007 (Supreme Court of India). The valuation reasoning outlives the provision it was decided under. The Court applied B.C. Srinivasa Setty to hold that the charging section and the computation provision form an integrated code, and that a benefit whose value cannot be ascertained cannot be brought to charge; a mechanism supplying the missing valuation cannot be read back into earlier years unless the legislature says so. It is also the leading authority for the proposition that lock-in and non-transferability are not presentational details but go to whether any realisable benefit exists at all, and for the point that estimation of tax deductible under section 192, in the absence of clear valuation provisions, cannot support a default order under sections 201(1) and 201(1A). The Court expressly said nothing about the law after 1 April 2000. If it applies to you, the first step is this: Where a perquisite is asserted, ask first whether the Act supplies a mechanism to value it; without one the charge fails, and a later mechanism does not apply to earlier years unless made retrospective.
To run its employees stock option scheme the company created the Technologies Employees Welfare Trust and allotted 7,50,000 warrants to it at Re 1 each, each warrant entitling the holder to apply for one equity share of face value Rs 10 for a total consideration of Rs 100. In assessment years 1997-98, 1998-99 and 1999-2000 the trust offered warrants to eligible employees at Re 1 each on the basis of performance and other criteria. A warrant had to be held for at least twelve months, after which the employee could pay the balance Rs 99 and take the shares, the option being exercisable up to five years. The allotted shares were locked in, remained in the custody of the trust, were non-transferable, could not be pledged or hypothecated, and had to be re-transferred to the trust at Rs 100 a share if the employee resigned or was terminated within five years. The Bombay Stock Exchange was told that 734,500 shares were non-transferable and would not constitute good delivery, and until 13 September 1999 the shares were stamped non-transferable. For 1999-2000 the Assessing Officer took the market value of the shares at Rs 171 crore against Rs 6.64 crore paid by the employees, treated the difference of about Rs 165 crore as perquisite, and held the company in default under section 192 for tax of Rs 49.52 crore, with similar orders for the two earlier years. The Commissioner (Appeals) confirmed them. The Tribunal and the Karnataka High Court held there was no perquisite. The matter was decided on 2008-01-04 by the Supreme Court (Supreme Court of India - S.H. Kapadia and B. Sudershan Reddy, JJ; judgment by S.H. Kapadia, J). On those facts the Supreme Court held as follows. The appeals were dismissed with no order as to costs. The Department erred in treating Rs 165 crore as the perquisite value for the three years. No perquisite accrued when the warrants were granted, a warrant being a right without obligation to buy, nor when the options vested after twelve months, since there was no certainty the option would be exercised and the employee was free to resign. During the lock-in the shares had no realisable value and there was no cash inflow, so any benefit arising on exercise was notional and unascertainable. Section 17(2)(iiia), inserted with effect from 1 April 2000, is not clarificatory and does not operate retrospectively. It followed that the company was not an assessee in default under section 192 and that sections 201(1) and 201(1A) were wrongly invoked. The Court recorded that this was not a case of tax evasion, the trust having been floated because of genuine buy-back problems where employees left, and expressed no opinion on the law after 1 April 2000.
The Court started from Govind Saran Ganga Saran, which identifies four components of a tax - the character of the imposition, the person levied on, the rate and the value to which the rate is applied - and holds that ambiguity in any of them makes the levy fail. Only the fourth was in issue. To that it added the principle that a benefit or receipt must be made taxable before it can be regarded as income. During the three years there was no provision specifically taxing an employees stock option benefit. On the facts, none of the earlier stages could give rise to a perquisite, and on exercise the shares were locked in, held by the trust, unmarketable, unpledgeable and liable to be returned on resignation, so the employee could not convert them into money and could not foresee their future value. Applying B.C. Srinivasa Setty, the charging section and the computation provision are an integrated code; until the Finance Act 1999 explained cost to mean the amount actually paid, and nil where nothing was paid, the value of the option was not ascertainable. Nothing in the memorandum to that Act made the new mechanism retrospective, and a mechanism of that kind cannot be read back unless the legislature says so; the definitions of specified securities and the words allotted or transferred were also new, and clause (iiia) was itself deleted with effect from 1 April 2001, which the Court took as an indicator of an ineffective charge. Finally, requiring an employer to estimate tax under section 192 in the absence of clear provisions on valuation cannot justify treating him as in default. In the words reproduced by the source cited on this page: "if the shares allotted to the employee had no realizable sale value on the day when he exercised his option then there was no cash inflow to the employee."
It was decided by the Supreme Court on 2008-01-04 and is reported as AIRONLINE 2008 SC 364; Civil Appeal No. 3725 of 2007 (Supreme Court of India). Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 17(2), section 192, section 201(1), section 201(1A), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeals were dismissed with no order as to costs. The Department erred in treating Rs 165 crore as the perquisite value for the three years. No perquisite accrued when the warrants were granted, a warrant being a right without obligation to buy, nor when the options vested after twelve months, since there was no certainty the option would be exercised and the employee was free to resign. During the lock-in the shares had no realisable value and there was no cash inflow, so any benefit arising on exercise was notional and unascertainable. Section 17(2)(iiia), inserted with effect from 1 April 2000, is not clarificatory and does not operate retrospectively. It followed that the company was not an assessee in default under section 192 and that sections 201(1) and 201(1A) were wrongly invoked. The Court recorded that this was not a case of tax evasion, the trust having been floated because of genuine buy-back problems where employees left, and expressed no opinion on the law after 1 April 2000. It arises in Salary & Perquisites and TDS Defaults matters, on section 17(2), section 192, section 201(1), section 201(1A) of the Income Tax Act 1961, and was decided by Supreme Court of India - S.H. Kapadia and B. Sudershan Reddy, JJ; judgment by S.H. Kapadia, J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Document lock-in and non-transferability properly - custody with a trust, stock exchange intimation, a non-transferable stamp on the certificates and a buy-back on resignation were all relied on here. When resisting a section 201 order, argue separately that even if a benefit exists, an employer cannot be a defaulter for failing to estimate a perquisite the Act gives him no means to value. Do not carry this case forward to years governed by the perquisite and fringe benefit provisions that followed; the Court expressly left the position after 1 April 2000 open.
Still good law. A citator search on the judgment returns 264 later decisions citing it. It was followed by the Bangalore Bench of the Tribunal in NXP India Pvt Ltd v Deputy Commissioner of Income Tax (27 April 2020), which decided the point 'respectfully following the judgment of the Hon'ble Supreme Court in the case of CIT v. Infosys Technologies Limited', and it is relied on by the Karnataka High Court in Herbalife International India Pvt Ltd v CIT (20 May 2025). The Bangalore Bench in Deputy Commissioner of Income Tax v Algonomy Software Private Limited (19 January 2024) reads it as a decision on a proceeding under section 201. Nothing overruling or doubting it was found. Its own limits remain the real constraint: it is confined to assessment years before 1 April 2000 and expressly expresses no opinion on the law after that date, and clause (iiia) was deleted with effect from 1 April 2001. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The batch line lists section 17(2)(iiia) among the sections the judgment turns on; the Court held that clause inapplicable to the years before it, so it is left out of the sections field although it is central to the reasoning. The Tribunal decided the case under section 17(2)(iii) and the Supreme Court did not rest its decision on that clause. The judgment records the amount paid by employees as Rs 6.64 crore in one place and Rs 6.46 crore in another; the difference treated as perquisite is stated throughout as about Rs 165 crore. The Karnataka High Court judgment of 15 December 2006 was not read. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were dismissed with no order as to costs. The Department erred in treating Rs 165 crore as the perquisite value for the three years. No perquisite accrued when the warrants were granted, a warrant being a right without obligation to buy, nor when the options vested after twelve months, since there was no certainty the option would be exercised and the employee was free to resign. During the lock-in the shares had no realisable value and there was no cash inflow, so any benefit arising on exercise was notional and unascertainable. Section 17(2)(iiia), inserted with effect from 1 April 2000, is not clarificatory and does not operate retrospectively. It followed that the company was not an assessee in default under section 192 and that sections 201(1) and 201(1A) were wrongly invoked. The Court recorded that this was not a case of tax evasion, the trust having been floated because of genuine buy-back problems where employees left, and expressed no opinion on the law after 1 April 2000.
TaxSphere, “CIT v Infosys Technologies Ltd”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-infosys-technologies-ltd/ (validity last checked 2026-08-29)
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