If the payment for the fall in option value is not salary, is it capital gains?
On this decision, neither. The Karnataka High Court held that compensation for the diminution in value of stock options that were never exercised is a capital receipt not chargeable under any head, and quashed the order rejecting the employee's application for a nil withholding certificate.
Decided by the High Court (Karnataka High Court — S.R. Krishna Kumar J (single judge)) on 2025-06-02, reported as [2025] 175 taxmann.com 778 (Karn); Writ Petition No. 20212 of 2023 (T-IT) [assessment year 2024-25]. It bears on section 17(2), section 197, section 192, section 45, section 2(14) of the Income Tax Act 1961, in Salary & Perquisites, Capital Gains and TDS Defaults matters.
It is the third answer to the same facts. The Delhi High Court took the payment outside s.17(2)(vi); this Court went further and put it outside the charge altogether, on the footing that nothing was transferred because no option was exercised and no share was ever allotted. For an employer running payroll for option holders in more than one state, the three decisions cannot all be applied.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The petitioner was a salaried employee of Flipkart Internet Private Limited, an Indian subsidiary of Flipkart Marketplace Private Limited, a Singapore company which is itself a wholly owned subsidiary of Flipkart Private Limited, Singapore. Under the Flipkart Stock Option Plan 2012 he was granted 2,232 options on a four-year vesting schedule running from 1 January 2016 to 31 March 2023; 955 had vested, 249 were cancelled and 1,028 remained unvested, so that he held 1,983 options as at 31 March 2023. On 23 December 2022 the Singapore parent announced the separation of PhonePe, which reduced the value of the options, and it then announced a one-time payment of USD 43.67 per option as compensation for that loss. He was paid Rs 71,01,004, being 1,983 options at USD 43.67 converted at 82. He had exercised none of the options and no shares had been allotted or transferred to him, and the payer was under no legal or contractual obligation to pay. His application under s.197 for a nil deduction certificate was rejected by order of 2 August 2023.
The writ petition was allowed, the order of 2 August 2023 quashed, and the revenue directed to issue a nil tax deduction certificate to the petitioner with all consequential benefits within six weeks (para 9). The one-time voluntary compensation is a capital receipt not exigible to tax: it was paid against the fall in the value of stock options that constitute the petitioner's profit-making structure. It cannot be treated as salary under s.15 or as a perquisite under s.17(2)(vi), because taxability under that clause arises only when the option holder exercises the option, and here no option was exercised and no share was allotted or transferred. It cannot be brought to tax under any other head either: a capital receipt not chargeable under s.45 is not chargeable elsewhere, the cost of acquisition of the options cannot be determined so s.48 cannot be applied, and the charging and computation provisions form an integrated code. Tax cannot be deducted at source on a payment that is not income, and the power under s.197 arises only where there is income chargeable to tax. On maintainability, a revision under s.264 is not an equally efficacious alternative remedy where the impugned order was passed with the Commissioner's approval and no appeal lies, so Article 226 was available (para 7).
The Court set out the stages from issuance of options through vesting, exercise, issuance of shares and sale, and held that options are taxable at two points only: as a perquisite under s.17(2)(vi) on exercise, on the difference between fair market value and the exercise price, and as capital gains under s.45 when the allotted shares are sold. Here only vesting had occurred, so no income could be computed. It applied B.C. Srinivasa Setty for the proposition that where the cost of acquisition cannot be ascertained the computation provisions fail and the charge cannot be sustained, and Padmaraje R. Kadambande and the Shaw Wallace line for the meaning of income as a periodical return excluding a windfall. It then followed the Delhi Division Bench in Sanjay Baweja as squarely applicable to the identical plan and the identical payment, listing the six propositions it took from that judgment, and set out at length, at para 7(viii)(a) to (n), why it did not agree with the contrary single-judge decision of the Madras High Court in Nishithkumar Mehta — among other things that the definition of capital asset in s.2(14) is extremely wide and covers rights in assets, that Explanation 1 to s.2(14) was misconstrued, that options are a profit-making structure, that 'specified security' as defined does not include options, and that the computation ingredients in clause (vi) were all absent.
It is well settled that TDS cannot be deducted if payment does not constitute income and the power of the respondents-revenue to direct deduction of tax under Section 197 of the I.T. Act can be exercised only if there is an income chargeable to tax.
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Handle my notice → Ask a CA on WhatsAppOn this decision, neither. The Karnataka High Court held that compensation for the diminution in value of stock options that were never exercised is a capital receipt not chargeable under any head, and quashed the order rejecting the employee's application for a nil withholding certificate. This was decided by the High Court (Karnataka High Court — S.R. Krishna Kumar J (single judge)) and bears on section 17(2), section 197, section 192, section 45, section 2(14) of the Income Tax Act 1961. It is reported as [2025] 175 taxmann.com 778 (Karn); Writ Petition No. 20212 of 2023 (T-IT) [assessment year 2024-25]. It is the third answer to the same facts. The Delhi High Court took the payment outside s.17(2)(vi); this Court went further and put it outside the charge altogether, on the footing that nothing was transferred because no option was exercised and no share was ever allotted. For an employer running payroll for option holders in more than one state, the three decisions cannot all be applied. If it applies to you, the first step is this: Record that no option was exercised and no share was allotted, which is the basis on which both the perquisite and the capital gains charge were held inapplicable.
The petitioner was a salaried employee of Flipkart Internet Private Limited, an Indian subsidiary of Flipkart Marketplace Private Limited, a Singapore company which is itself a wholly owned subsidiary of Flipkart Private Limited, Singapore. Under the Flipkart Stock Option Plan 2012 he was granted 2,232 options on a four-year vesting schedule running from 1 January 2016 to 31 March 2023; 955 had vested, 249 were cancelled and 1,028 remained unvested, so that he held 1,983 options as at 31 March 2023. On 23 December 2022 the Singapore parent announced the separation of PhonePe, which reduced the value of the options, and it then announced a one-time payment of USD 43.67 per option as compensation for that loss. He was paid Rs 71,01,004, being 1,983 options at USD 43.67 converted at 82. He had exercised none of the options and no shares had been allotted or transferred to him, and the payer was under no legal or contractual obligation to pay. His application under s.197 for a nil deduction certificate was rejected by order of 2 August 2023. The matter was decided on 2025-06-02 by the High Court (Karnataka High Court — S.R. Krishna Kumar J (single judge)). On those facts the High Court held as follows. The writ petition was allowed, the order of 2 August 2023 quashed, and the revenue directed to issue a nil tax deduction certificate to the petitioner with all consequential benefits within six weeks (para 9). The one-time voluntary compensation is a capital receipt not exigible to tax: it was paid against the fall in the value of stock options that constitute the petitioner's profit-making structure. It cannot be treated as salary under s.15 or as a perquisite under s.17(2)(vi), because taxability under that clause arises only when the option holder exercises the option, and here no option was exercised and no share was allotted or transferred. It cannot be brought to tax under any other head either: a capital receipt not chargeable under s.45 is not chargeable elsewhere, the cost of acquisition of the options cannot be determined so s.48 cannot be applied, and the charging and computation provisions form an integrated code. Tax cannot be deducted at source on a payment that is not income, and the power under s.197 arises only where there is income chargeable to tax. On maintainability, a revision under s.264 is not an equally efficacious alternative remedy where the impugned order was passed with the Commissioner's approval and no appeal lies, so Article 226 was available (para 7).
The Court set out the stages from issuance of options through vesting, exercise, issuance of shares and sale, and held that options are taxable at two points only: as a perquisite under s.17(2)(vi) on exercise, on the difference between fair market value and the exercise price, and as capital gains under s.45 when the allotted shares are sold. Here only vesting had occurred, so no income could be computed. It applied B.C. Srinivasa Setty for the proposition that where the cost of acquisition cannot be ascertained the computation provisions fail and the charge cannot be sustained, and Padmaraje R. Kadambande and the Shaw Wallace line for the meaning of income as a periodical return excluding a windfall. It then followed the Delhi Division Bench in Sanjay Baweja as squarely applicable to the identical plan and the identical payment, listing the six propositions it took from that judgment, and set out at length, at para 7(viii)(a) to (n), why it did not agree with the contrary single-judge decision of the Madras High Court in Nishithkumar Mehta — among other things that the definition of capital asset in s.2(14) is extremely wide and covers rights in assets, that Explanation 1 to s.2(14) was misconstrued, that options are a profit-making structure, that 'specified security' as defined does not include options, and that the computation ingredients in clause (vi) were all absent. In the words reproduced by the source cited on this page: "It is well settled that TDS cannot be deducted if payment does not constitute income and the power of the respondents-revenue to direct deduction of tax under Section 197 of the I.T. Act can be exercised only if there is an income chargeable to tax." The decision followed or applied Sanjay Baweja v. Dy. CIT (2025) 474 ITR 376 (Delhi).
It was decided by the High Court on 2025-06-02 and is reported as [2025] 175 taxmann.com 778 (Karn); Writ Petition No. 20212 of 2023 (T-IT) [assessment year 2024-25]. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 17(2), section 197, section 192, section 45, section 2(14), 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 writ petition was allowed, the order of 2 August 2023 quashed, and the revenue directed to issue a nil tax deduction certificate to the petitioner with all consequential benefits within six weeks (para 9). The one-time voluntary compensation is a capital receipt not exigible to tax: it was paid against the fall in the value of stock options that constitute the petitioner's profit-making structure. It cannot be treated as salary under s.15 or as a perquisite under s.17(2)(vi), because taxability under that clause arises only when the option holder exercises the option, and here no option was exercised and no share was allotted or transferred. It cannot be brought to tax under any other head either: a capital receipt not chargeable under s.45 is not chargeable elsewhere, the cost of acquisition of the options cannot be determined so s.48 cannot be applied, and the charging and computation provisions form an integrated code. Tax cannot be deducted at source on a payment that is not income, and the power under s.197 arises only where there is income chargeable to tax. On maintainability, a revision under s.264 is not an equally efficacious alternative remedy where the impugned order was passed with the Commissioner's approval and no appeal lies, so Article 226 was available (para 7). It arises in Salary & Perquisites, Capital Gains and TDS Defaults matters, on section 17(2), section 197, section 192, section 45, section 2(14) of the Income Tax Act 1961, and was decided by Karnataka High Court — S.R. Krishna Kumar J (single judge). 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. Apply under s.197 rather than leaving the employer to withhold and the employee to claim a refund. Where the employee is outside Karnataka, treat this as persuasive only and check the position in the High Court that binds him. Keep evidence that the payer was under no obligation to make the payment, which the note records as a fact the Court relied on.
High Courts differ on this point. Nothing applying, following or doubting this judgment has been found, and no record of an appeal or special leave petition against it is disclosed, so it cannot be certified either way. Read it as a single judge's decision in a live conflict rather than as a settled position; the status recorded here is that the High Courts differ, and that is what a client should be told. It follows the Delhi Division Bench in Sanjay Baweja v. Dy. CIT [2024] 163 taxmann.com 116 / 299 Taxman 313 / [2025] 474 ITR 376 (Delhi), which it records at para 7(viii)(a) was not challenged by the revenue and has attained finality. It squarely rejects the contrary Madras decision in Nishithkumar Mukeshkumar Mehta v. Dy. CIT (TDS) [2024] 165 taxmann.com 386 / [2025] 475 ITR 614 (Madras), which is itself under appeal before a Division Bench of that Court, as this judgment records at para 7(viii)(b) and (d). So there are three positions on the same facts: the Delhi Court took the payment outside s.17(2)(vi), this Court went further and put it outside the charge altogether, and the Madras Court held it taxable. Two limits on how far the decision can be pressed. It is a single judge's decision in a writ petition arising out of a s.197 application, so what it settles is what the payer had to withhold, not the recipient's liability on assessment. And it turns on the finding that no option was exercised and no share was allotted or transferred; where options have been exercised the reasoning does not apply at all, and the judgment does not consider s.56(2)(x). 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 judge is S.R. Krishna Kumar J sitting alone, the petition is Writ Petition No. 20212 of 2023 (T-IT), the judgment is dated 2 June 2025 and the assessment year is 2024-25. A QUOTATION THAT IS NOT IN THE JUDGMENT. The sentence previously carried here as the key quote, beginning 'The one time voluntary compensation paid to the petitioner also cannot be treated as a salary under Section 15', does not appear in the judgment at all; it came from a professional firm's tax alert and not from the Court. Nor does the phrase 'when there is computational impossibility' appear anywhere in it. Anyone who has seen either sentence attributed to this judgment should not repeat it. The quotation now used is sub-paragraph (i) of paragraph 7, which is the Court speaking in its own voice and is unique to this judgment. TWO CORRECTIONS to what the secondary notes about this case say. The Court did not merely quash the rejection of the section 197 application: it directed the revenue to issue a nil tax deduction certificate with all consequential benefits within six weeks, in an operative order of three unnumbered clauses. And the payment is described in the judgment as compensation for the reduction or diminution in the value of the options, not as consideration for their surrender — the petitioner retained his options, none had been exercised, and no share had been allotted or transferred to him. That distinction is the whole of the reasoning, so a note that describes the payment as surrender consideration describes a different case. A LOCATOR WARNING. The paragraph references in this entry to 'para 9' for the disposal and to 'para 7(viii)(a) to (n)' for the disagreement with the Madras decision in Nishithkumar Mehta could not be confirmed. The judgment runs to 66 pages and the copies available break off around page 36, and one transcription places B.C. Srinivasa Setty at item (xii) of counsel's list of authorities rather than in the Court's own reasoning. Those locators have been left as they stand and need checking against a full copy before they go into a submission. Finally, on citations: the (2025) 479 ITR 1, 347 CTR 566 and 256 DTR 33 references reported elsewhere do not appear on the citation line consulted here and are not carried in this entry. Remember throughout that this was a section 197 proceeding: it decides what the payer had to withhold and does not decide an assessment. It does not consider s.56(2)(x), and it does not decide the position where options have been exercised or shares allotted. Being a s.197 proceeding it decides only what the payer had to withhold. Nothing in it records an appeal or special leave petition against it. 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 writ petition was allowed, the order of 2 August 2023 quashed, and the revenue directed to issue a nil tax deduction certificate to the petitioner with all consequential benefits within six weeks (para 9). The one-time voluntary compensation is a capital receipt not exigible to tax: it was paid against the fall in the value of stock options that constitute the petitioner's profit-making structure. It cannot be treated as salary under s.15 or as a perquisite under s.17(2)(vi), because taxability under that clause arises only when the option holder exercises the option, and here no option was exercised and no share was allotted or transferred. It cannot be brought to tax under any other head either: a capital receipt not chargeable under s.45 is not chargeable elsewhere, the cost of acquisition of the options cannot be determined so s.48 cannot be applied, and the charging and computation provisions form an integrated code. Tax cannot be deducted at source on a payment that is not income, and the power under s.197 arises only where there is income chargeable to tax. On maintainability, a revision under s.264 is not an equally efficacious alternative remedy where the impugned order was passed with the Commissioner's approval and no appeal lies, so Article 226 was available (para 7).
TaxSphere, “Manjeet Singh Chawla v Dy CIT (TDS)”, https://taxnotice.vittsphere.com/caselaw/case/manjeet-singh-chawla-v-dcit-esop-diminution-capital-receipt/ (validity last checked 2026-08-23)
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