Is compensation for the fall in value of stock options taxable as salary if I keep the options?
Yes, on this decision. The Madras High Court held that where the employee paid nothing for the options and kept all of them after receiving the compensation, the whole receipt was a perquisite taxable under the head Salaries, and refused the nil-deduction certificate sought under s.197.
Decided by the High Court (High Court of Madras - Senthilkumar Ramamoorthy, J. (single judge)) on 2024-07-31, reported as [2024] 165 taxmann.com 386 / [2025] 475 ITR 614 (Mad); W.P. No. 26506 of 2023 with W.M.P. Nos. 25911 and 25912 of 2023 [assessment year 2024-25]. It bears on section 17(2), section 192, section 197, section 15, section 2(14) of the Income Tax Act 1961, in Salary & Perquisites and TDS Defaults matters.
This is the decision the department cites against Sanjay Baweja on identical facts. The distinguishing feature the Court fixed on is that the employee parted with nothing: he had made no payment towards the options and still held them after being compensated, so the money was not a return of any cost.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The petitioner was an employee of Flipkart Internet Private Limited, a wholly owned subsidiary of Flipkart Marketplace Private Limited, itself a wholly owned subsidiary of Flipkart Private Limited, Singapore. Under the Flipkart Stock Option Scheme 2012 he held 5,924 options on the record date of 23 December 2022, of which 2,137 had vested and 3,787 had not; he had exercised none of them and had made no payment under the scheme. On 21 April 2023 the Singapore parent announced compensation of USD 43.67 per option on the divestment of the PhonePe business, describing the payment as made although there was no legal or contractual right to it under the scheme. Tax was deducted under s.192 on the footing that the receipt was salary. He applied under s.197 for a nil deduction certificate for financial year 2023-24 on the footing that the receipt was a capital receipt, and the application was rejected by order of 12 July 2023, which had held that a right to sue was a capital asset transferred by him so that the receipt was chargeable as capital gains.
The writ petition was dismissed and the rejection of the nil-deduction certificate affirmed, though on a different basis from the one the Assessing Officer had adopted. The Court held that stock options are contractual rights to receive shares, not capital assets: they do not fall within 'property of any kind held by an assessee' in s.2(14), so the receipt was not a capital receipt (paras 27 to 29). Because the options had not been exercised and no shares had been issued or allotted, the assessee neither received nor transferred a capital asset, so the impugned order's route through capital gains was wrong (para 30). On perquisite, the Court held that 'specified security' in Explanation (a) to s.17(2)(vi) is not confined to allotted shares but includes securities offered under the plan, and that clause (vi) is wide enough to cover discretionary compensation paid to option holders for diminution in the value of the option (paras 35 and 36). Since the assessee made no payment towards the options and continued to retain all of them after receiving the compensation, the entire receipt qualified as the perquisite and became taxable under the head salaries (para 40). The Court recorded that the matter could have been remanded but that the assessee, on instructions, confirmed the relief claimed extended to a direction for a nil certificate, so a remand would not suffice (para 30). Its final conclusion is that although the basis of the impugned order was flawed, the rejection is affirmed (para 41).
The Court reasoned that options confer a right, not an obligation, to receive shares at a pre-determined price, subject to vesting, cancellation and transfer conditions; they may be actionable claims or choses in action, but they are not a source of revenue or a profit-making apparatus because they cannot be monetised until shares are allotted, and even then the benefit is notional until transfer (para 27). The authorities the assessee relied on all concerned compensation for relinquishment of rights in revenue-generating capital assets such as a managing agency or a tea factory; here the compensation was not for loss or sterilisation of a profit-making apparatus but a discretionary payment for diminution in the value of contractual rights, as the payer's own communication of 21 April 2023 confirmed (para 28). Because the plan contained no representation that nothing would be done to impair the value of the options, there was no contractual right to compensation and so no relinquishment of any right; the assessee retained all his options (para 29). On the perquisite limb the Court noted that Explanation (a) to clause (vi) uses 'includes the securities offered under such plan or scheme' rather than 'allotted', and that 'includes' is not exhaustive (para 35), so that the fact that the valuation mechanism in Explanation (c) does not fit neatly does not put the receipt outside the sub-head, provided the benefit can be ascertained (para 36). Since no payment had been made under the plan, there was nothing to deduct and the whole receipt was the benefit (paras 37 to 40).
Since the assessee did not make any payment towards the ESOPs and continues to retain all the ESOPs even after the receipt of compensation, the entire receipt qualifies as the perquisite and becomes liable to be taxed under the head 'salaries'.
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Handle my notice → Ask a CA on WhatsAppYes, on this decision. The Madras High Court held that where the employee paid nothing for the options and kept all of them after receiving the compensation, the whole receipt was a perquisite taxable under the head Salaries, and refused the nil-deduction certificate sought under s.197. This was decided by the High Court (High Court of Madras - Senthilkumar Ramamoorthy, J. (single judge)) and bears on section 17(2), section 192, section 197, section 15, section 2(14) of the Income Tax Act 1961. It is reported as [2024] 165 taxmann.com 386 / [2025] 475 ITR 614 (Mad); W.P. No. 26506 of 2023 with W.M.P. Nos. 25911 and 25912 of 2023 [assessment year 2024-25]. This is the decision the department cites against Sanjay Baweja on identical facts. The distinguishing feature the Court fixed on is that the employee parted with nothing: he had made no payment towards the options and still held them after being compensated, so the money was not a return of any cost. If it applies to you, the first step is this: Work out first what the employee actually gave up - if he retains every option and paid nothing, this decision is against him.
The petitioner was an employee of Flipkart Internet Private Limited, a wholly owned subsidiary of Flipkart Marketplace Private Limited, itself a wholly owned subsidiary of Flipkart Private Limited, Singapore. Under the Flipkart Stock Option Scheme 2012 he held 5,924 options on the record date of 23 December 2022, of which 2,137 had vested and 3,787 had not; he had exercised none of them and had made no payment under the scheme. On 21 April 2023 the Singapore parent announced compensation of USD 43.67 per option on the divestment of the PhonePe business, describing the payment as made although there was no legal or contractual right to it under the scheme. Tax was deducted under s.192 on the footing that the receipt was salary. He applied under s.197 for a nil deduction certificate for financial year 2023-24 on the footing that the receipt was a capital receipt, and the application was rejected by order of 12 July 2023, which had held that a right to sue was a capital asset transferred by him so that the receipt was chargeable as capital gains. The matter was decided on 2024-07-31 by the High Court (High Court of Madras - Senthilkumar Ramamoorthy, J. (single judge)). On those facts the High Court held as follows. The writ petition was dismissed and the rejection of the nil-deduction certificate affirmed, though on a different basis from the one the Assessing Officer had adopted. The Court held that stock options are contractual rights to receive shares, not capital assets: they do not fall within 'property of any kind held by an assessee' in s.2(14), so the receipt was not a capital receipt (paras 27 to 29). Because the options had not been exercised and no shares had been issued or allotted, the assessee neither received nor transferred a capital asset, so the impugned order's route through capital gains was wrong (para 30). On perquisite, the Court held that 'specified security' in Explanation (a) to s.17(2)(vi) is not confined to allotted shares but includes securities offered under the plan, and that clause (vi) is wide enough to cover discretionary compensation paid to option holders for diminution in the value of the option (paras 35 and 36). Since the assessee made no payment towards the options and continued to retain all of them after receiving the compensation, the entire receipt qualified as the perquisite and became taxable under the head salaries (para 40). The Court recorded that the matter could have been remanded but that the assessee, on instructions, confirmed the relief claimed extended to a direction for a nil certificate, so a remand would not suffice (para 30). Its final conclusion is that although the basis of the impugned order was flawed, the rejection is affirmed (para 41).
The Court reasoned that options confer a right, not an obligation, to receive shares at a pre-determined price, subject to vesting, cancellation and transfer conditions; they may be actionable claims or choses in action, but they are not a source of revenue or a profit-making apparatus because they cannot be monetised until shares are allotted, and even then the benefit is notional until transfer (para 27). The authorities the assessee relied on all concerned compensation for relinquishment of rights in revenue-generating capital assets such as a managing agency or a tea factory; here the compensation was not for loss or sterilisation of a profit-making apparatus but a discretionary payment for diminution in the value of contractual rights, as the payer's own communication of 21 April 2023 confirmed (para 28). Because the plan contained no representation that nothing would be done to impair the value of the options, there was no contractual right to compensation and so no relinquishment of any right; the assessee retained all his options (para 29). On the perquisite limb the Court noted that Explanation (a) to clause (vi) uses 'includes the securities offered under such plan or scheme' rather than 'allotted', and that 'includes' is not exhaustive (para 35), so that the fact that the valuation mechanism in Explanation (c) does not fit neatly does not put the receipt outside the sub-head, provided the benefit can be ascertained (para 36). Since no payment had been made under the plan, there was nothing to deduct and the whole receipt was the benefit (paras 37 to 40). In the words reproduced by the source cited on this page: "Since the assessee did not make any payment towards the ESOPs and continues to retain all the ESOPs even after the receipt of compensation, the entire receipt qualifies as the perquisite and becomes liable to be taxed under the head 'salaries'."
It was decided by the High Court on 2024-07-31 and is reported as [2024] 165 taxmann.com 386 / [2025] 475 ITR 614 (Mad); W.P. No. 26506 of 2023 with W.M.P. Nos. 25911 and 25912 of 2023 [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 192, section 197, section 15, 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 department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The writ petition was dismissed and the rejection of the nil-deduction certificate affirmed, though on a different basis from the one the Assessing Officer had adopted. The Court held that stock options are contractual rights to receive shares, not capital assets: they do not fall within 'property of any kind held by an assessee' in s.2(14), so the receipt was not a capital receipt (paras 27 to 29). Because the options had not been exercised and no shares had been issued or allotted, the assessee neither received nor transferred a capital asset, so the impugned order's route through capital gains was wrong (para 30). On perquisite, the Court held that 'specified security' in Explanation (a) to s.17(2)(vi) is not confined to allotted shares but includes securities offered under the plan, and that clause (vi) is wide enough to cover discretionary compensation paid to option holders for diminution in the value of the option (paras 35 and 36). Since the assessee made no payment towards the options and continued to retain all of them after receiving the compensation, the entire receipt qualified as the perquisite and became taxable under the head salaries (para 40). The Court recorded that the matter could have been remanded but that the assessee, on instructions, confirmed the relief claimed extended to a direction for a nil certificate, so a remand would not suffice (para 30). Its final conclusion is that although the basis of the impugned order was flawed, the rejection is affirmed (para 41). It arises in Salary & Perquisites and TDS Defaults matters, on section 17(2), section 192, section 197, section 15, section 2(14) of the Income Tax Act 1961, and was decided by High Court of Madras - Senthilkumar Ramamoorthy, 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. Do not assume the Delhi High Court view travels; check which High Court binds the employee before advising the employer not to withhold. If withholding is unavoidable, get the perquisite value and the year of taxation right in Form 12BA rather than arguing about it after the return is filed. Keep the plan documents showing whether the option holder paid anything, since that is the fact the two High Courts split on.
Under appeal, and the appeal has not been decided. No decision applying, following or affirming this judgment was traced. It has not attained finality: the Karnataka High Court recorded at paras 7(viii)(b) and (d) of Manjeet Singh Chawla v. Dy. CIT (TDS) [2025] 175 taxmann.com 778 (Karnataka), 2 June 2025, that the assessee has appealed against it and the appeal is pending. That Court also disagreed with it at length, at para 7(viii)(a) to (n), preferring the Delhi Division Bench decision in Sanjay Baweja, which it recorded had not been challenged by the revenue and had attained finality. This judgment for its own part said at para 40 that the opinion of the Delhi High Court in Sanjay Baweja could not be endorsed, and its case review records that decision as distinguished. It is the minority side of a live conflict on the identical transaction. 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.
This is a s.197 proceeding, so it decides what the payer had to withhold and not an assessment. Read it for what it actually decides on two separate questions. First, that stock options are not capital assets within s.2(14) — they are contractual rights to receive capital assets — so the receipt was not a capital receipt; on that footing the Assessing Officer's own reasoning, which had treated a right to sue as a transferred capital asset chargeable to capital gains, was held to be flawed. Second, that the receipt is nonetheless a perquisite, on a construction of Explanation (a) to s.17(2)(vi) under which 'specified security' includes securities offered under a plan and is not confined to allotted shares. The Court noted at para 30 that it could have remanded the matter but did not, because the assessee confirmed on instructions that he sought a direction for a nil certificate and not a reconsideration. The date is 31 July 2024, the judge is Senthilkumar Ramamoorthy J sitting alone, the petition is W.P. No. 26506 of 2023 with W.M.P. Nos. 25911 and 25912 of 2023, and the assessment year is 2024-25. One point of care: at its para 34 the judgment describes the Delhi decision in Sanjay Baweja as having concluded that the one-time payment was a capital receipt; the Delhi judgment held that it was not a perquisite under s.17(2)(vi) and did not characterise it as a capital receipt in terms. The judgment has now been read in full. It does not tell you the outcome of the assessee's appeal, which was recorded as pending before a Division Bench of the same Court as at 2 June 2025, and it decides only what the payer had to withhold on a s.197 application, not the assessment. It says nothing about the position where the options have been exercised, and the Court expressly noted at para 38 that it could not discern the exercise price from the record. 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 dismissed and the rejection of the nil-deduction certificate affirmed, though on a different basis from the one the Assessing Officer had adopted. The Court held that stock options are contractual rights to receive shares, not capital assets: they do not fall within 'property of any kind held by an assessee' in s.2(14), so the receipt was not a capital receipt (paras 27 to 29). Because the options had not been exercised and no shares had been issued or allotted, the assessee neither received nor transferred a capital asset, so the impugned order's route through capital gains was wrong (para 30). On perquisite, the Court held that 'specified security' in Explanation (a) to s.17(2)(vi) is not confined to allotted shares but includes securities offered under the plan, and that clause (vi) is wide enough to cover discretionary compensation paid to option holders for diminution in the value of the option (paras 35 and 36). Since the assessee made no payment towards the options and continued to retain all of them after receiving the compensation, the entire receipt qualified as the perquisite and became taxable under the head salaries (para 40). The Court recorded that the matter could have been remanded but that the assessee, on instructions, confirmed the relief claimed extended to a direction for a nil certificate, so a remand would not suffice (para 30). Its final conclusion is that although the basis of the impugned order was flawed, the rejection is affirmed (para 41).
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